An Interview with Rod Story from the PBO on Costing for CSC
As part of its National Shipbuilding Strategy (NSS), the Government of Canada has outlined a long-term project to renew Canada’s federal fleet of combat and non-combat vessels. One group of ships within this strategy is the Canadian Surface Combatant (CSC). This program consists of building up to 15 ships to replace Canada’s 12 Halifax-class frigates and three Iroquois-class destroyers.
The original budget to build these 15 ships was set in 2008 at a total of $26.2 billion. Given the factors of inflation, rising cost of material, labour and other expenses, the original budget is not enough to construct the planned number of ships by the anticipated start year of 2020.
With a mandate of providing independent analysis to Parliament on the state of the nation’s finances and to estimate the financial cost of any proposal for matters over which Parliament has jurisdiction, the Office of the Parliamentary Budget Officer (PBO) prepared a report: The Cost of Canada’s Surface Combatants. This report which was released on June 1, 2017, was spearheaded by Rod Story, Financial Advisor – Analyst on the Expenditure and Revenue Analysis team at PBO.
Marcello Sukhdeo, editor of Vanguard spoke with Rod Story recently about this report and the methodologies used in arriving at an estimated cost for CSC../.
Q: The PBO report states that Canada would save 25 per cent, or $10.22 billion, if the ships are built at a foreign shipyard using an original ship design rather than in Canada. Can you elaborate further on that?
Just to be clear, the numbers we spoke about before are as-spent or nominal value. This one is based on 2017 dollars. If you spent all the money exactly today, the total budget for CSC would be $39.94 billion, not $61.82 billion. So, this $10.22 billion is in real numbers, or you can say 2017 dollars.
So two things are driving that cost difference. One, it’s built in a foreign shipyard that has already built at least nine of the ships. So they are no longer needing to go through a learning curve. In addition to that, the assumption is that there are no design changes; that is, we take the ship as it’s already scoped and designed and in operation. So, Canada is not going to go in and do a large number of changes. Basically, they’ve built nine ships, and we’re taking the 10th through the 24th ship.
You have two things driving the cost saving: one is the learning curve. When Irving starts to build in the Halifax shipyard, clearly they’re going to go on a learning curve. And they have two things affecting that learning curve. One is, any time any shipyard builds a new design, there’s a lot of churn in the first eight to nine ships. During that time, they learn how to build most efficiently.
The other aspect that’s driving this is: Irving has not built a surface combatant. Surface combatants are vastly different than what they’re building now in the case of the Arctic Offshore Patrol ships. They’re much denser, much more complicated, and again that also affects the learning curve. So, your first eight ships will be that much more expensive purely because you’ll have that much more to learn.
Q: So, it takes about nine ships to really get it right?
Well, to reach your maximum efficiency. Basically, theoretical analysis has shown that by the ninth ship, you’ve now reached that point. This is analysis done in the original 2006 RAND report. So yes, it takes nine ships before you get to that maximum efficiency...
Basically, learning curve is the primary challenge. We have not built surface combatants since the finishing of the Halifax frigates in 1996. All that knowledge has been lost; it has to be relearned.
The other challenge is the amount of changes that DND will want to make on the design. If they are to take a design from another country, how much are they going to change that design? It’s not like you change 5 per cent and expect the cost to increase by the same percentage. In fact, it multiplies. Once you’ve changed about 20 or 30 per cent, you may as well have redone the design from scratch. It’s one of those things – it’s very multiplicative. These ships are so dense in the sense of so many things are packed in so tightly and so dependent on each other. You make one change, it ends up propagating throughout the whole ship quite often. They have to be extremely careful. Managing those changes will be quite a challenge...
https://vanguardcanada.com/2017/10/16/an-interview-with-rod-story-from-the-pbo-on-costing-for-csc/
