Feasibility of Budget for Acquisition of Two Joint Support Ships

Abstract The mandate of the Parliamentary Budget Officer is to provide independent analysis to Parliament on the state of the nation's finances, the government's estimates, and trends in the Canadian economy, and, upon request from a committee or parliamentarian, to estimate the financial cost of any proposal for matters over which Parliament has jurisdiction. The PBO received requests from the Member from St John's East and the Member from Scarborough-Guildwood to undertake an independent cost assessment of the Joint Support Ship project. This report assesses the feasibility of replacing Canada's current Auxiliary Oiler Replenishment ships with two Joint Support Ships within the allocated funding envelope. The cost estimates and observations presented in this report represent a preliminary set of data for discussion and may change subject to the provision of detailed financial and non-financial data to the Parliamentary Budget Officer by the Department of National Defence, Public Works, and Government Services Canada, and the shipyards. The cost estimates included reflect a point-in-time set of observations based on limited and high-level data obtained from a variety of sources. These high-level cost estimates and observations are neither to be viewed as conclusions in relation to the policy merits of the legislation nor as a view to future costs. Acknowledgments The authors would like to thank the members of the independent Peer Review Panel for their comments and guidance. The authors also wish to thank Eric Wertheim, Andy Nicholls, and numerous naval experts for sharing their expertise; Peter Weltman, Sahir Khan, Mostafa Askari, and Jason Lee for helpful comments; and Pat Brown, Jocelyne Scrim, and Adam Pennell for their assistance in preparation. Any errors or omissions are the responsibility of the authors. Please contact Erin Barkel (E-mail: erin.barkel@parl.gc.ca) for further information. Notes 1. DND briefing provided two estimates: $2.533 billion for new design and $2.518 for Military Off the Shelf. PBO presents the average of these. Of note is that these estimates fall below DND's 2008 estimate of $2.96 billion for two Canadian AORs. DND, “Preliminary Cost Analysis for PROTECTEUR Class Replacement,” dated 29 August 2008. Using DND's escalation rates, this would bring this estimate in line with the PBO's at $3.2 billion. 2. Government of Canada, Umbrella Agreement Between Vancouver Shipyards Co Ltd and Seaspan Marine Corporation and Her Majesty the Queen in right of Canada, as represented by the Minister of Public Works and Government Services (Ottawa: National Shipbuilding Procurement Strategy, 2012) at s 6.9. 3. The project has four main deliverables: (1) design of a new class of ship; (2) construction of two ships, with an option for a third; (3) provision of the necessary infrastructure and other logistics support to facilitate the transition of the new ships into service; and (4) in-service support contract to provide maintenance, repair and overhaul, long-term spares, and technical support for the life of the ships. National Defence and the Canadian Forces, Joint Support Ship (JSS) (8 August 2011), online: National Defence and the Canadian Forces <http://www.forces.gc.ca/aete/jointsupportshipjss-projetdunaviredesoutieninterarmeesnsi-eng.asp>; National Defence and the Canadian Forces (12 May 2008), supra note 7. 4. An advanced contract award notice is a contracting vehicle used by the Government of Canada to expedite the procurement process typically used when it is believed that only one supplier is capable of meeting the procurement requirements. Notice is posted for no less than 15 calendar days to allow other parties to indicate if they would be able to meet the requirement. In this case, presumably, an ACAN was used to confirm that only two NATO ship designs met the requirements for the JSS. Refer to: Treasury Board of Canada Secretariat, Guide for Managers—Best Practices for Using Advanced Contract Award Notices (ACANS) (January 2004), online: Treasury Board of Canada Secretariat <http://www.tbs-sct.gc.ca/pubs_pol/dcgpubs/contracting/acan_guide01-eng.asp>. 5. Public Works and Government Services Canada, Joint Support Ship (JSS) Project (25 May 2011), online: <http://www.tpsgc-pwgsc.gc.ca/app-acq/stamgp-lamsmp/nsi-jss-eng.html>. 6. Ibid. 7. Including the SOR, documentation for the Protecteur, and data relating to similar AOR ships that include a range of potential mission solutions. See Appendix B: JSS High Level Requirements. Confidential data was obtained by information requests. 8. See Appendix C: Model Inputs. 9. Technology represents the impact to all of the component's manufacturing operations including material, labor, process, equipment, etc. 10. During any manufacturing operation, there will be some components or sub-assemblies that may have to be reworked or scrapped, requiring additional material and labor resources. This is more predominant in prototype than in the production ship. For example, if the yield is 50% in prototype, it means the builder would need to spend twice more on material and labor. 11. See list of ships in Appendix E: List of Replenishment Vessels. 12. Note that it is possible that using old designs may actually result in more design effort being required as a result of trying to adapt an existing design ill-suited to new requirements. Note as well that subject matter experts familiar with TruePlanning® confirmed that they have never come across a new ship that requires no new design effort. 13. For example, TKMS would have to change the existing design of the Berlin Class's electrical system to accommodate North American standards for voltage and amperage, add two goalposts (refueling masts), and adapt its design to modular construction significantly smaller than those used in Germany. This will require significant new design effort. 14. The WBS revealed that approximately 22% of its elements could be taken from existing design libraries. This results in 78% of design being created from scratch. That does not mean, however, that the 22% would require no redesign effort. Adapting these designs to ensure they comply with Canadian operating requirement and can be executed in a Canadian shipyard will require additional design effort. 15. For more information, please consult Capacity Analysis of the Vancouver Shipyards. This analysis was published as an annex to PBO's original report and is available online at: <http://www.pbo-dpb.gc.ca/files/get/publications/252?path=%2Ffiles%2Ffiles%2FJSS_EN.pdf> 16. See 2.2.6 MCPLXS Calibration Process. 17. While 85% new structure is reasonable and reflective of the work that needs to be undertaken, it is possible that that figure may be lower. In order to enhance the defensibility of its range, PBO adopted a conservative figure for the low end of percent of new structure. This increases the likelihood of the simulation returning results with a lower cost. 18. Here, 20% represents a pessimistic outcome, but one that nonetheless seems within the range of possibilities given the different systems the ship may ultimately contain. 19. The main platform for considerations is the 2009 SOR, while the two excursions are to reflect the original (2006) SOR and the minimal AOR requirements. The necessary model calibrations were made to reflect the Canadian shipbuilding environment. 20. Unit production cost data is assumed to exclude program-level SE/PM. Thus, the calibration file included a Hardware component only, and excluded a System Cost Object. However, the Hardware Cost object does include equipment-specific SE/PM. 21. In this case, there will be three active locations (i.e., the client (DND), the designer (TKMS or BMT), and Seaspan). Federal procurement rules put certain restrictions on the ability of contractors to communicate with federal employees. Since the Government must facilitate communication between the shipyard and the designer, delays or restrictions are likely. Where the communication between three active locations is characterized as poor, TruePlanning® ascribes a value of 2.5. 22. The Department of National Defence has approved Version 5.6 but no longer shares the document with outside parties. Government officials have indicated that small adjustments were made to the requirements, most notably to indicate that the essential requirements were subject to design to budget constraints. 23. Knot (kt) is one nautical mile per hour. 24. See Appendix D: Current Project Schedule. 25. Ibid. 26. Laid down: The term laid down was originally used to mark the beginning of construction on a ship's keel. Since many modern ships are now constructed in modules, the term laid down is now more generally used to mark the beginning of the construction of a ship. 27. Launched: Once the hull of a ship is completed, it may be launched from the shipyard into the water. 28. Commissioned: A ship is commissioned when it is deemed ready for service.

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