OTTAWA Nov 26 (Reuters) - In the latest blow to Canada's crisis-hit military procurement process, the country's official spending watchdog said on Tuesday the government has underestimated how much a multibillion-dollar naval shipbuilding plan will cost.
As a result, said Auditor-General Michael Ferguson, Canada would either have to make do with fewer ships or settle for vessels with fewer capabilities than initially planned.
In 2010, faced with the need to replace ships that in some cases had been in service for 40 years, the Conservative government announced plans to build 165 vessels over a 30-year period at a cost of more than C$50 billion ($47.2 billion).
The new ships are designed to play an important role as Canada asserts its sovereignty claims in the Arctic, a disputed region rich in energy and mineral resources.
Ferguson said the budget for the ships was set early on and had not been changed despite signs that costs would rise.
"According to National Defence, there have been significant increases in cost elements, which are impairing the affordability of the military ships," he said.
One major element of the shipbuilding plan is the Canada Surface Combatant (CSC) project - C$26.2 billion to replace three destroyers and 12 frigates with 15 modern warships.
"The CSC project budget of C$26.2 billion is insufficient," Ferguson said bluntly.
"Cost/capability trade-offs need to be monitored and revisions made to project budgets, if necessary, to make sure Canada gets the military ships it that it needs to protect Canadian interests and sovereignty."
Another element of the plan is C$2.3 billion for two big supply ships, with an option for a third one. Ferguson said there is not enough money for a third ship.
"By acquiring fewer than three ships, Canada's ability to respond autonomously to crises and contingency operations will be significantly diminished when one ship is in maintenance," he said.
Various Canadian governments have had trouble buying new equipment since the early 1990s, when the then Liberal government scrapped a contract with Finmeccanica SpA's AgustaWestland unit for search and rescue helicopters.
A decade later the Liberals decided to buy helicopters from United Technologies Corp's Sikorsky unit instead. That C$5 billion contract has been so beset with problems that the Conservatives announced in September they might scrap the deal and look elsewhere.
In 2012, then Defence Minister Peter MacKay said the fiasco was "the worst procurement in the history of Canada" and blamed the Liberals.
MacKay, though, was at the center of a proposed C$9 billion deal in 2010 with Lockheed-Martin Corp for 65 advanced F-35 jets. Ottawa abandoned the plan and started again in 2012 after the Auditor-General said officials had deliberately downplayed the costs and risks of the deal.
At the same time, the government also stripped the defense ministry of responsibility for big defense procurement projects and put the public works ministry in charge.
Other procurement woes include a 2006 plan to buy military trucks that was scrapped in July 2012 just minutes before the final deadline for applications.
Canada has also had big problems with a fleet of four used submarines it bought from Britain for C$750 million in 1998.
Government ministers are due to react to the report at a news conference set for 12:30 p.m. EST (1730 GMT) on Tuesday.