NDVA Committee Meeting

STANDING COMMITTEE ON NATIONAL DEFENCE AND VETERANS AFFAIRS

COMITÉ PERMANENT DE LA DÉFENSE NATIONALE ET DES ANCIENS COMBATTANTS

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, May 6, 1999

• 0901

[English]

The Chairman (Mr. Pat O'Brien (London—Fanshawe, Lib.)): I'd like to call to order the meeting of SCONDVA, the Standing Committee on National Defence and Veterans Affairs.

We have two groups of witnesses, followed by a couple of important procedural matters, which we'll move to the end when we have quorum. But we can begin to hear—

Mr. David Price (Compton—Stanstead, PC): Do you want to do it now?

The Chairman: I'd be happy to do it now, but only the five of us are on time. We won't mention which parties from the west are not on time, but anyway....

Let's welcome Mr. Bill Matthews, vice-president of Bristol Aerospace. Mr. Matthews, welcome. Thank you for joining us. I'm sure you have some opening remarks. Then we'll take some questions from the members.

Mr. Bill Matthews (Vice-President, Market and Contract, Bristol Aerospace Ltd.): Mr. Chairman, good morning. Thank you for inviting me to appear before this committee.

I'm from Bristol Aerospace Ltd. in Winnipeg, which is a key member of Magellan Aerospace Corporation, Mississauga. Within Magellan, Bristol and our sister company, Orenda Aerospace, have the vast majority of dealings with Canadian government procurement and also in government procurements abroad.

I will start with a brief overview of Magellan and then highlight three areas of Canadian government procurement that we believe require significant improvement. In discussing these areas, I will fall back primarily on my experience with Bristol.

Magellan Aerospace Corporation is a diversified supplier of products and services to commercial and defence aircraft manufacturers and operators worldwide. Magellan manufactures high-quality aero-structure and aero-engine components, as well as providing repair and overhaul services from operating facilities in Canada and the United States.

Manufactured products include high-performance composite and metal structures, critical rotating and non-rotating engine components, space and defence rocket systems, and unmanned target systems. Magellan applies its engineering expertise to the design and development of products and the provision of services, including complex repair and overhaul of jet engines and industrial engines, as well as air engine components and aircraft structures.

Our customers include companies such as Boeing, NASA, General Electric, Pratt & Whitney, Bombardier, Rolls Royce, Allied Signal, operators such as Southwest Airlines, Airbus, Bell Helicopter, and so on—the who's who in the aerospace industry—as well as defence organizations in Canada, the United States, and throughout the world. Magellan is a publicly traded company on the Toronto Stock Exchange.

I would like to discuss only three areas this morning, and they're shown on the first slide: alternate service delivery, the profit policy, and procurement and politics.

Alternate service delivery was launched with great fanfare a few years ago. Preceding that, industry had put forward I think a number of initiatives that were along the same lines.

• 0905

I think if we set aside one or two success stories, it's been largely disappointing. It's been a frustrating exercise. It's been a non-profitable exercise, in that industry has spent a lot of money trying to meet the government's stated requirements, only to find that really wasn't what they wanted after all, or they decided not to go ahead.

I think it's fair to say we feel somewhat used. We were used to generate the ideas that the department then implemented on their own, with no compensation back to industry for the literally millions of dollars spent responding to the government's requests.

It boils down, in a large degree, to two things, I think. First, it's not entirely clear that there was the political will to make it happen. Maybe even more important, and certainly more frustrating, was that not only did the procurement documents state what, but as you went further and further and spent more and more money, you were told how at every turn. The how essentially was, do it exactly the way we do it and charge us less. So for us that was a frustrating thing.

I still think it's the right thing to do, but the process has to define what has to be done and let industry use its experience and its capabilities to decide how to do it efficiently.

The second point is the profit policy. The profit policy is cost based. So the lower the cost, the lower the profit; the higher the cost, the higher the profit. It's not exactly the kind of environment that generates savings for the government. In fact, everybody loses. The government loses, the taxpayers lose, industry loses—everybody loses in this profit policy.

I used a simple example to try to explain it. If something costs $100, the profit policy allows roughly $8 profit, so 8%, giving the price of $108.

Option B is that somehow the supplier finds a way to reduce the cost by $20 to $80. He also suffers then a reduction in profit, and the price would be $87. That looks quite attractive. But because there's no way to recover investment to reduce the cost, and in fact you get doubly penalized by having less profit at the end of the day, where is the incentive, and who is going to make this investment?

A more reasonable approach would be option C, where industry can find that $20 reduction by maybe retooling or investing in some new technology and can recoup that investment, and the government would still receive roughly a 16% reduction in price.

The Chairman: Mr. Matthews, this profit policy you're referring to is the government's profit policy.

Mr. Bill Matthews: This is the government's profit policy, yes. If you contract with the government, you are subject to this profit policy.

The Chairman: Thank you.

Mr. Bill Matthews: If you look at the second set of numbers, it shows that the savings in the process are exactly the same. In case A there's zero; in case B it's $20; in case C it's $20. It's just the distribution of the fruits of the labour that is at issue.

A third point that I would bring forward to the committee is that in preparation for coming here I did read all 250 pages of the testimony that preceded me, and I noted—

An hon. member: And you stayed awake?

Mr. Bill Matthews: First of all, I'd have to say it's an excellent course on government procurement, to start with. That's the positive. I saw a lot of brave words in there about how wonderful the procurement system is as it is right now. In particular there were some specific references that there is no way that any politics is involved, etc., and there is no way that industrial benefits rule the day at the end of the day, and so on.

• 0910

Well, here's what we see. The technical requirements normally are well defined to being over-defined, so it's not an issue of being unclear. The commercial terms are all well spelled out. The national objectives, which you'll recall are one of the selection criteria, are ill-defined to secret. These are the areas where it causes industry to spend a lot more money. All of those expenses, of course, are added to the bill. It's also the area that causes the most delays, because you're shooting in the dark. You know what the technical requirements are, what the price ought to be, and how you're going to be contracted, but you have no idea what the real criteria are once it leaves the individual departments.

We can live with the idea that there is a strong role in a democracy for the elected representatives and the government of the day to make decisions. That's not at issue; we're not challenging that. We would just like to know the criteria on which those decisions are going to be made before we spend $3 million or $4 million to compete for a program.

So if it's going to say there must be 10% in the west, why don't we say that up front? If you have to put 50% in Quebec, say it up front, so we know and can plan and actually do it. But to know that after you've lost is an unacceptable situation, from our point of view.

The Chairman: For clarification, when you're talking about national objectives are you talking in terms of the specific contract or the overall defence policy?

Mr. Bill Matthews: The government-stated procurement objectives in ranked order from previous testimony were operational requirements; best value; long-term industrial and regional benefits; other national objectives; and assist Canadian firms. I think we understand the operational part, but on the combination of industrial and regional benefits and other national objectives, who knows what those are? They're virtually never defined, but they can be quite persuasive in the final decision.

The Chairman: So you'd like to know about those as they relate to any contract you're bidding for.

Mr. Bill Matthews: Exactly.

The Chairman: Okay. I just want to be clear. Thanks.

Mr. Bill Matthews: Just in summary then, if I may be so bold as to make recommendations, and they're not particularly specific, particularly in reference to the alternate service delivery, there needs to be a more complete and clearly defined big picture up front. If all existing workers must be employed, it should say that, and so on. If we must use the existing facilities it should say that, if that's going to be the selection criteria at the end of the day.

In the cost reduction area, it would be very easy to incentivize cost reduction. Currently it's not.... It's an exception to the policy under the current rules.

Finally, it's difficult to operate in a competitive environment where only some of the rules are known.

The Chairman: Thank you very much.

I want to go to the members. We have a motion we could deal with now, and then go to our second group of witnesses and to questions. As it relates to the questioning process of the committee, maybe I'm inclined to deal with it now. We have a quorum. We're not normally in this room. We hope to avoid this as much as we can but we couldn't today, so it's understandable that some members were a little late.

I thank Mr. Matthews and just ask the Sikorsky people to hold on for a moment.

Let's go to the motion Mr. Pratt gave notice of a week ago. I'll give him the floor.

• 0915

Mr. David Pratt (Nepean—Carleton, Lib.): Thank you, Mr. Chair.

The purpose of the motion is to get us to a situation where we have a more equitable distribution of time between the opposition and the government. As it stands right now, in the first hour of questioning for any meeting, the opposition has 45 minutes and the government has 15 minutes. That's three minutes of opposition time for every minute of government time. I think a number of us, especially on this side of the table, feel that is inequitable in the extreme and has to be adjusted.

The proposal I've put forward is really a fairly modest one, in terms of the ultimate effect of the time allocation between the opposition parties and the government party. But I think it is more equitable in the sense of getting us to rounds of questions where the opposition and the government each has five minutes.

I've noticed in other committees—and I'm thinking particularly of my other experience on the environment committee—where the chair provides for five-minute rounds to begin it tends to move the meeting along quite crisply from the standpoint of questions. We don't have long speeches and preambles. There's a good back and forth flow in the meeting.

So I think my motion is pretty self-evident. It is fairly modest in its proposal to reduce the first round by three minutes to seven minutes. In terms of a full two hours of meeting time the result, if you do the numbers, is the opposition still gets 75 minutes to roughly 45 minutes for the government side.

The Chairman: That's good.

Mr. David Pratt: Thank you.

The Chairman: Thank you.

Let me just make a couple of comments, as chair. Then I'll go to any other comments before we deal with the motion.

First, I've been chairing this since October, and I've found it to be a very good committee. I've served on four or five committees and was vice-chair of a previous committee. With a few exceptions that you could almost predict, we've been pretty non-partisan. Being partisan will come out sometimes, but I think it's been at a minimum in the committee. I've been impressed by that and certainly want to try to facilitate that, as chair.

Bob led this committee right up to the stage of clause-by-clause, when I then took over as new chair and presented the report. I thought the committee did tremendous bipartisan work on the quality of life report. It's been accepted that way by almost anybody who's looked at it. The government putting some money behind it showed that. So I think we've been operating on a pretty good non-partisan basis and I hope we can continue to do that.

One of the frustrations I've had as chair, though, comes from.... And I want to be sure everybody's clear. The chairman of a committee doesn't decide how long the round of questions is, and I know you're not suggesting that. Even some of my own colleagues thought I was out of order a couple of meetings ago. I was not. After the first round, the rules of this committee say you go back and start with the opposition party again—the Reform Party, the official opposition, and so on.

If you recall, a couple of meetings ago I gave out the order that was decided by a majority vote of this committee, I think unanimously, some time ago now, on October 30, 1997. So it's not for the chair to come in today and decide whether he wants to have five-minute rounds or two-minute rounds, except for times when the chair may say we only have fifteen minutes left, we're just starting a round of questions, the fair way is to go to three minutes of questions, or something.

So with that flexibility of the chair, the chair of a committee has to follow the rules as the committee has decided them. That's exactly what I've been doing. Now there's a proposal to change those rules and you have it in front of you.

Mr. Pratt, if I just might say this to all members, and I'm guilty of it myself sometimes as a member, the members come in, they may be late, they may not realize there are seven or eight names ahead of them. And they're frustrated when the chair doesn't get to them, particularly on the government side, where there are a lot more members. They're the seventh or eighth member on the list, and they're just not going to be gotten to unless the members on that side decide to share their time a little more effectively. So that's a frustration of being a member on that side, which I've experienced.

• 0920

I have seen a situation where members—and as I say, I'm also guilty of it—go into a long preamble and barely get their question out. Now, the chair is supposed to allow the rest of that member's time for the question, which is sometimes literally a few seconds. So a few members have felt that their answer didn't come. It's because they took the full time to ask their question after a long, long statement. So I would just sort of reinforce that point for all of us.

There's another trick. There are some veteran members—I won't name who they are—from the various parties who are very good at this. They use a whole bunch of their five minutes to ask fifteen questions, and if the chair will let it go, the witnesses will try to answer all those fifteen questions. So the person hasn't had five or ten minutes; they've had fifteen or twenty minutes. I've tried to avoid that. I may have fallen into that a couple of times.

As chair, I'm going to try to be very vigilant about that from now on. It's a set amount of time for your questions and your answers. If you ask 10 questions and you leave 30 seconds, you'll be lucky to get a brief answer from the witness to the first question. I think we've all seen some of the parliamentary tricks we all try to employ from time to time.

So just with those comments, to put it into a fuller context, the committee made a decision on October 30, 1997, to go with the rules I've been using. There is now a proposal to change those rules. It has been explained by the mover.

Are there any questions or comments before I call the vote? Mr. Price, followed by Mr. O'Reilly.

Mr. David Price: There's one thing that's just a little technical. The last line of the motion says “from Opposition Party”. It should be “parties”. Apart from that, surprisingly enough, I don't have any problem with it.

I tend to agree with the way this committee has worked. We have had a good back and forth, and I will even agree on the government's side that the questions have been good. I like to hear the questions coming out. There have been solid questions coming up. But there is a problem, and I do have to aim—

Mr. Bob Wood (Nipissing, Lib.): I have a point of order. I don't think this is the time to do this. I think the time to do it is when we have finished our meeting and we can do it in house. It's not fair to Mr. Matthews and Mr. Haddock to hash out our differences in front of them. It's none of their business, and I'm sure they don't want it to be their business. Let's get on with answering questions, and we'll deal with this later. I don't think this is the time to do this.

The Chairman: Mr. Wood, I disagree with you. Five us were on time for this meeting. I brought to the attention of the members of this committee before that it's frustrating for the chair for some members and the witnesses to be on time but not all members. I'm not singling out any individual members. But the point is that the plan was to deal with this first, and it was not dealt with first because we didn't have a quorum. It's on the table now, and I'm ruling that we're going to finish with it now.

Mr. Price.

Mr. David Price: I think quite a few of us around the table came out of municipal politics, where we dealt with things a little differently. When you have somebody in front of you, you ask them a question and you don't do a five- or ten-minute preamble to go along with it just to get some stuff on the record. I think we're here to ask the witnesses serious questions in order to clear up something we're not clear about or to get to the bottom of something.

Having said that, I'm sorry, Mr. Chair, but I have to aim at you on this. I think the chair should be holding down the preamble time on questions. I think with a seven-minute timeframe, we should have something like two minutes of preamble and then that's it. Get your question out so that the witness has time to respond.

The Chairman: Perhaps I might react to that, since you did direct it to me. I've been on both sides of the situation, and municipally as well. It really isn't for the chair to tell the member what he or she can say in the time allotted to them. Frankly, the strategy for some members for their own political agenda is to use up the whole time on purpose. They really don't want an answer. They want to make a statement. I think it would be beyond the powers of the chair, as I understand them, to do what you're saying.

• 0925

I've tried to encourage members by saying la question, s'il vous plâit, or question, please, but if that members wants to drag it all the way out, you have no real—

Mr. David Price: In that case it's really unfair to the witness, because the witness should really be cut off.

The Chairman: I agree with you, David, and we're going to be more rigid on that. Then you say to the witness, “I'm sorry, sir, but because we're in five-minute questions and because of a four-minute-and-forty-second preamble and question, the member now left you a grand total of 15 or 20 seconds”. That's why I'm going to be more strict on that. We've tended to give a little flexibility, but I think we have to be a little more disciplined to do what you're suggesting. So let me go to the other members and then we'll call the vote.

Mr. O'Reilly, and then Monsieur Laurin.

Mr. John O'Reilly (Haliburton—Victoria—Brock, Lib.): Just a point of clarification. Part of the questioning process included if we were interrupted by a vote or by something outside, and if the witnesses were interrupted, if we had to go and vote in the House and come back. We were supposed to go then to straight five-minute rounds. Correct me if I'm wrong, but I thought that was the.... The motion reads that if the witness cannot be available for a full period of questioning, the chair will divide the time between all parties on a pro rata basis. That was part of that other motion. Is that part of this? Does that change?

The Chairman: No. I think that's the intention of the mover, as I understand it. I think the chair has to do that. We were stuck with a situation recently where I had to go to a three-minute round of questions because of the compressed amount of time we had left. I think if the chair is trying to be fair to both sides, he's going to have to make that judgment. That's what that clause really calls on the chair to do. I accept it as implicit in this motion.

Mr. John O'Reilly: Thank you.

The Chairman: Monsieur Laurin.

[Translation]

Mr. René Laurin (Joliette, BQ): Mr. Chairman, I don't quite understand the spirit behind this motion. If it passes, the role of the opposition parties in committees will be further diminished. The opposition already finds itself in a minority position on committees and the government party is free to adopt all of the recommendations and motions it cares to because it has a majority. The opposition parties do not have this luxury.

In all committees, it is traditional for the opposition members to be recognized first during questioning because they do not have as great of an opportunity to gather information, other than in the committee setting. Government members can more easily get the information they want from departments, ministers and so forth.

If during the first round of questions, the opposition parties are allotted only seven minutes instead of ten, assuming there will only be two rounds of questions, I would only have 12 minutes in total, instead of 15. I'd be losing three minutes. I understand that my Liberal Party colleagues occasionally don't get a chance to ask questions, but that's because there are so many of them on the committee. That's because they have a majority. They could exercise some discipline and split their time, instead of taking 10 minutes each. One member could use up seven minutes, and give the remaining three to another member. They should settle that among themselves.

If this motion is adopted, the opposition would have less time for questions. That would be unfair, given that we are already at somewhat of a disadvantage.

[English]

The Chairman: Monsieur Laurin, the researcher has done some math for me here, which isn't my forte. Currently, in a first round of questions the opposition in total has 45 minutes and the government has 15 minutes, in the first hour of questioning, as Mr. Pratt pointed out. His change would mean that the opposition would go from 45 minutes of questions to 43 minutes of questions in total. The government would go from 15 minutes of questions in total to 17 minutes of questions in total in the first hour.

I won't say what I think is obvious. I hear your point, but there's the math of it to give you the mathematical calculation.

Mr. White has absented himself. So no one else has indicated...? Mr. Hart.

Mr. Jim Hart (Okanagan—Coquihalla, Ref.): Mr. Chairman, I think we should give this a try. I think in the spirit of fairness and cooperation among committee members we should see how this works. Let's try it.

The Chairman: It's not cast in stone. We can always change it back.

I'm going to call the question.... Mr. Bertrand.

[Translation]

Mr. Robert Bertrand (Pontiac—Gatineau—Labelle, Lib.): Mr. Chairman, point 8 of the motion states "from Opposition Party to Liberal Party for the remainder of the time". Are we talking about five minute blocks of time?

• 0930

[English]

The Chairman: Five minute blocks, yes. And the friendly amendment is opposition parties. That was intended.

[Translation]

Mr. Laurin.

Mr. René Laurin: Mr. Chairman, there's been a miscalculation. When all opposition and government members are present, the time is calculated differently, but if, as is the case today, only one representative of each opposition party is present, if each person was allotted only seven minutes during the first round of questioning, clearly the opposition parties would be at a disadvantage. My party is entitled to two representatives, but I'm here alone today. If my colleague were here, we would each be entitled to seven minutes, according to the proposed new system. However, if I'm the only one here, then someone on the other side gets a turn.

The Chairman: I'm sorry, Mr. Laurin, but that's not right.

[English]

It's for the party. It's seven minutes, René, for the party. So if you're alone you get the full seven minutes for the Bloc time. If you and your colleague were here you would still only get seven minutes total in the first round. It's not seven minutes each. I think that's a misconception even some of my colleagues on this side have had. It's not seven minutes to each member; it's seven minutes for the party. If one member uses it all, you may have five or six other frustrated government members who don't get a chance. They're mad at the chair maybe, who's also politically on their side but has to be objective up here.

Mr. René Laurin: Okay.

The Chairman: All right. Ça va?

Mr. David Pratt: Mr. Chairman, can I make one concluding comment on this motion? I'm responding to Mr. Laurin's comments about having less access to the minister of the department.

The fact remains that in 90% of the meetings we have in this committee, we're not hearing from the minister and we're not hearing from the department. We're hearing from independent witnesses like Mr. Matthews and others who are experts in their particular area. So what we object to on this side is not having the opportunity to ask questions of witnesses like that. And certainly I think what I'm trying to do in terms of this motion is to uphold the principle that all MPs are equal and that some are not more equal than others.

The Chairman: I hear a pretty good consensus. There are some concerns expressed, and we're going to try it. I think I hear that direction, and if we don't like it we will change again. I hear the concerns of some of the members.

(Motion agreed to)

The Chairman: Mr. Matthews, thank you for your indulgence. We had a disagreement about whether this was appropriate, but I thought it was. It's done.

Let me welcome forward the Sikorsky group. I think we'd be better to deal with all the witnesses and then go to questions. Is that all right?

Let me welcome Mr. Haddock from Sikorsky Canada Inc. And are you going to join him, sir? No. All right. Mr. Haddock is going to make some opening comments and then we'll go to a round of questions.

Welcome, sir.

Mr. Joseph Haddock (Director, International Business Canada, Sikorsky Canada Inc.): Thank you.

I'll read my prepared remarks, with your indulgence.

I'd like to thank the committee for affording me the opportunity to present my views regarding this very complex and important topic.

As you may have read in the biography I provided, I'm a veteran of nearly 29 years of service in the U.S. Navy. Three of those years were served in HS 443, which is a Sea King squadron, at the time based at Shearwater. I flew about 750 hours in Sea Kings during that tour. Interestingly enough, it was this posting that provided me with the experience needed by the U.S. Navy as we embarked upon our efforts to emulate Canada's success in operating large helicopters from the decks of relatively small ships.

When I was detached from 443 Squadron I was ordered to Air Test and Evaluation Squadron One at Patuxent River Naval Air Station to oversee the operational testing of our then brand-new frigate-based helicopter, the SH-60 Seahawk. That was 1980, and for the next 17 years I held various positions relating to the defence procurement and testing.

I have seen first-hand the successes and failures of U.S. defence procurement and I have lived through the fads and experiments levied upon us in the name of reform. I can tell you that most U.S. political leaders share your frustration with the cumbersome and inefficient process of defence procurement. I offer the following views based upon my extensive experience with the U.S. system as well as my first impressions of the process here in place in Canada.

This is a serious business and it's extremely complex. It can't easily be compared to the dynamics in a commercial marketplace, although there are those who profess to do so. We can, however, draw some valuable comparisons to the commercial marketplace, which might help to revamp some parts of the process. These areas primarily reside, in my opinion, on the support side of the procurement continuum, as my colleague pointed out, in the alternate service delivery area. I might add that this is the area most neglected in any end-item procurement, and which holds, in my opinion again, the biggest potential return if reformed.

• 0935

I believe your entry into alternate service delivery concepts holds a promise of large returns, but it must be implemented broadly, boldly, and fairly. In the interest of time, however, I'd like to defer discussion on support concepts until such time as this subject is raised during questions. It's procurement and contracting reform on which I'll concentrate the rest of my remarks.

First, on a positive note, Canada's process appears to me to be simpler than the U.S. system with regard to the budgeting process. In the U.S. the multitude of congressional reviews and political manipulation of planned budgets wreak havoc on planning and execution, both from the government's perspective as well as industry's. Add to that the division of funds into colours that differentiate moneys that can be spent on development, procurement, support, modification programs, and operations, with each colour being given a specific lifespan, after which it can no longer be spent, and one can get an idea of how programs are always financially unstable. This budgetary complication guarantees bad decisions and even worse contracts.

Both Canada's and the U.S. budget systems, however, fall prey to wishful thinking, in that budget estimates are almost always lower than actual cost. This guarantees financial stress, which can in turn drive requirements redefinition, such as what may be taking place with the maritime helicopter program. It's convenient and politically palatable to blame the changing world for requirements review, but in reality it's usually driven by economics.

Unfortunately, affordability discussions relating to requirements downscoping go down hard on both sides of the debate. While difficult to do so, if the government wants to downscope a requirement to meet a budget, it should just say so. Then prioritization based upon the balance of cost and operational need could take place objectively.

I would like to close with some radical comments about competition. I've been in this business 17 years, and I've yet to be convinced that competition for a complex weapon system really saves money. It certainly doesn't save time. The reason I say this is that in today's downsized defence agencies there are insufficient human resources to create a request for proposal adequately detailed for a full and open competition, unless a very radical departure to a pure performance-based request for proposal is chosen. Then in that instance the same personal shortfalls will plague the review process when contractors are given the latitude to propose a full spectrum of solutions to the generically stated requirement.

So what is the answer? Industry continues to hear the mantra espousing partnership, but also continues to be subjected to the right of competition, which really limits and strains partnership before, during, and after competition takes place. I submit that there are alternate ways to compete. Your purchase of Griffon helicopters is a case in point. You made a rational decision based upon a combination of political and operational considerations in partnership, I believe, with Bell Helicopter. How was that decision made? Were there interviews, plant visits? Did you fly it before you bought it? Did the contractor make some guarantees? I submit that possibly a small cadre of experienced users with the aid of career procurement specialists could form an opinion, brief it up the chain, and induce a fair decision. Radical, yes, because it assumes trust, ethics, and honesty in the process.

Certainly the U.S. Navy has learned painful lessons with regard to reliance upon competition to get a system for which it had inadequate funds, inadequate definition, and overstated requirements. The A-12 Avenger, which was a replacement jet aircraft for our aircraft carriers to replace the aging A-6E Intruder, shows the tragedy of competition gone awry. The result is a loss of a deep attack mission that the U.S. Navy really wanted to keep, and worse, the expenditure of $4 billion for nothing but legal bills. The U.S. Navy basically spent a majority of its budget for nothing.

One might make the comparison with the NSA program, born of competition, deemed too expensive, cancelled with the attendant $500 million in legal fees. I do believe competition makes contractors sharpen their pencil, but it also forces them to bid to exactly what is asked, nothing more, nothing less, with the overriding effort to come in at lowest cost. Where is the room for innovation in that context?

Finally, I have a comment about the most influential and important person in the process, and this is my commercial. It's the program manager. Although way down the chain, this person knows more about the program, its attributes, and the contractors involved than anybody. He lives and breathes the program every single day and night. Get your facts from him or her directly.

• 0940

I'll stop here. I hope you can see how impassioned I am about this topic. While some say good government will never be good business, I believe it is true that good government will always seek to improve itself for the good of the people.

I wish this committee all the success in its important task. Thank you very much.

The Chairman: Thank you, Mr. Haddock and Mr. Matthews. I found both of you to be very direct in your comments, and that's exactly what this committee needs to hear. We'll pursue it now with a round of questions.

The first round will be seven minutes, questions and answers in total. I'll start with the official opposition, Mr. Hart for the Reform Party.

Mr. Jim Hart: Thank you, Mr. Chairman.

Thank you, gentlemen. Aren't you glad we're not building airplanes?

My first question is to Mr. Matthews. You stated that national objectives are often not even known—they're secret, in fact. After a project is completed, what have you found out about those national objectives? What was it that stood in industry's way?

Mr. Bill Matthews: Mr. Chairman, I think the fact that they were not stated in the procurement documents and were perhaps only discussed closed-door in the decision process makes it difficult to fully define what criteria were weighed in the final analysis.

We would just like to see these objectives outlined in a bright light so that everyone can decide whether or not they can meet them. If they cannot meet them, then they know they ought not to compete. If they can meet them, then they can use innovative ways to meet them and everyone wins.

Mr. Jim Hart: Were some of those objectives regional industrial benefits?

Mr. Bill Matthews: I guess it's been our experience that although those are seldom defined in hard numbers in the procurement documents, there is a lot of persuasion that goes on from Industry Canada regarding what would be favourably seen.

I don't think that's the best way to do it. I think it's still better to put it down in black and white. Generally there's an agreed, I think, formula for where industrial benefits ought to go, and they may vary from project to project based on the capability of the regions to support it. That should be easy enough to define.

Mr. Jim Hart: Either one of you could answer this one. Do you feel that regional benefits add to the cost of the procurement process?

Mr. Bill Matthews: As I indicated earlier, we produce a lot of product for export, and in the countries that demand industrial offset from us, it definitely increases our cost. We're not in the business of charity, so it increases their cost as well.

Mr. Joseph Haddock: I would agree with that.

Mr. Jim Hart: Mr. Matthews, you also mentioned incentives for cost reductions. How can you do that in the government procurement process? Can you give us some details of how that would work?

Mr. Bill Matthews: I can tell you how we do it in a commercial environment. If we're producing product for one of the major engine primes, for instance, and we can apply a new process to it that reduces the cost, we will approach them for the engineering authority to go ahead and make the changes. We will share some of the benefits with them, and that will be agreed up front before we spend our money to make it better.

I would think that although there's clearly less flexibility on the government procurement officer's part to make deals, we ought to give some credence to the fact that he knows as well as anyone how to get the best deal for the government, and again agree up front that this is how much we're going to invest, this is the return you're going to get, this is the return we're going to get, and if that's good enough, let's go.

Mr. Joseph Haddock: This area is one that has received a great deal of attention in the States.

• 0945

I'll give an example of how the government could in fact incentivize a contractor. One could make a long-term arrangement for support. For example, there's a program called “power by the hour” for engines. If you agree to pay an engine manufacturer a certain amount of money per hour of engine operation, you agree to keep that cost stable for a period of time, and you stress to the contractor at the very beginning of the contract.... You do some analysis and find out how much you are paying by the hour for current engine operation, and if you wicker that number down by 10%, 15%, you incentivize the contractor, because he'll lose money in the first year or so of the agreement, but he'll find ways to make money. He'll find ways to be more efficient. He'll find ways to lower the cost of operation of that engine, to the point where he may start making percentage profits over time that are fairly large. But the government wins, because it's paying less than it paid before, and the contractor wins by being allowed to wicker down the cost of operation of the engine. We're trying to do that on the V-22 program today.

Mr. Jim Hart: Mr. Haddock, you mentioned that the ultimate service delivery should be implemented broadly and boldly. Can you give us some fine-tuning on that? Exactly what do you mean by that?

Mr. Joseph Haddock: I'm a little bit familiar with the effort in Goose Bay as an alternate service delivery initial attempt, and I'm a little bit familiar with the political and the union ramifications of trying to control that, from a political standpoint, to make it palatable to everybody.

I guess “boldly” means if you're going to have the contractor do the service, then have the contractor do the service, and don't.... Find a way to eliminate the complications that perhaps history and the past may create. “Broadly” means the more areas where you can see fit to create a support organization that will take the place of a government agency, the more returns you'll get. It's not everywhere that industry will do a better job than government, so it does take a certain amount of analysis to find out where those places are.

I believe your experience with the Griffon support concept with Bell Helicopter is a positive one. Bell Helicopter—and I hate to be an advertisement for Bell Helicopter—has a worldwide customer support network that we at Sikorsky emulate as a model. If you can get parts to an operator who is in a profit-making situation quicker than his competitor, then you're dollars ahead in the game. And you make the jump and leap of faith, not that your operational forces are in for profit, but that they're in for time in the air and availability. The government profits by reducing some aspects of the support chain.

Mr. Jim Hart: Thank you.

[Translation]

The Chairman: You have seven minutes, Mr. Laurin.

Mr. René Laurin: Thank you, Mr. Chairman.

My first question is for Mr. Haddock. You stated the following in your opening remarks:

We can however draw some valuable comparisons to the commercial marketplace, which might help to revamp some parts of the process. These areas primarily reside on the support side of the procurement continuum.

What exactly do you mean by "procurement continuum"?

[English]

The Chairman: Joe.

Mr. Joseph Haddock: Every product has a procurement life cycle. I'll just make the comparison that's near and dear to my heart, and that's the maritime helicopter program.

You have a requirement being written, you have an acquisition strategy being devised, and you're going to perhaps tender a request for procurement. In terms of a procurement continuum, you might call that pre-procurement. Then when you get into the procurement, you have a development phase, sometimes, where you will modify certain attributes if you're procuring something commercially off the shelf, as you did in your Griffon. There were certain things you had to do to that to make it adaptable to a military environment.

• 0950

So we would call that either a prototype or a development phase. Then there is usually a test phase, where you make sure the aircraft is suitable and operates in accordance with the contractor guarantees. Then there is the life-cycle phase or the support phase, where the aircraft is delivered and it will operate, in the case of your Sea Kings, for up to 50 years. If you look at where concentration is given by government, it's in the acquisition cost. How much will this cost me today? On a percentage basis, that is probably 25% or less of the total cost of the life cycle of a weapons system when you have to support that aircraft or system for the next 10, 20, 30, 40, 50 years, and since that period of time is longer, you can deal with a larger amount of money. Although the time horizon—and governments are notorious in having very short time horizons—is that long, you have a greater ability to cost reduce in that time horizon by—and I'll go back to my statement about long-term contracted arrangements for support from industry or long-term views within government. It's that area that is—forgive my vulgarity—the non-sexy part of procurement. No one pays much attention to it because it's not exciting. It doesn't fly off and drop bombs and do loops and things like that, but it's very important just to know the cost of operation.

I would say I hope you know the cost of your Sea Kings today. I have my doubts that anyone can collect the cost of what it costs to keep a Sea King in the air today, but I would venture, having done a little bit of research, that it's $6,500 an hour. There are helicopters out there today that are in the range of $800 to $1,000 an hour. The government is used to paying $6,500 an hour times 500, which is basic aircraft flight hours per year times the number of aircraft you have. Do the arithmetic, and then take that number down by a factor of six and do the savings. Those are returns right back into the government's pocket.

[Translation]

Mr. René Laurin: I'm interested in hearing your views on the procurement system in the United Kingdom. Apparently, their system is such that the company ultimately purchasing the piece of equipment is involved with drafting the specifications or blueprints. Is this an acceptable process, in your opinion, and do you see any advantage to it?

[English]

Mr. Joseph Haddock: I have a bit of experience with the system. I like it. I like it because while it seems to be very difficult to start a program—the planning, the preparation up front—once the program is launched, the budget tends to be very stable. It's not voted on year to year as it is in the States. The partnership between the military establishment and the contractor is very strong, and I think that's a positive note.

The one downside with the British system that tends to give me pause—and we can see this with the EH-101 entry into British naval service—is that what you buy from the government and the contractor is brought right to production prior to test. In the States we can't get production approval for funds until the system passes an operational test—a very rigorous operational test. That is fraught with political issues as well.

The end result is that the user, the operational flyer in Great Britain, may have to cope with deficiencies in that system until they're fixed later on down the line. I like to think of this as managing expectations. If the contractor-government team manages the expectations of the fleet flyer through communication well enough, this won't be an issue, but it could be. And it could be an expensive one if the government-contractor team missed a rather glaring operational aspect, perhaps that the aircraft won't fit in the hangar or the aircraft can't move on the deck.

• 0955

[Translation]

The Chairman: Briefly, Mr. Laurin.

Mr. René Laurin: In your opinion, does the system in the U.K. allow for equally effective competition?

[English]

Mr. Joseph Haddock: I'm familiar with the competition that Lockheed Martin went through for the Merlin program.

I'll make a bold personal opinion: I think in certain aspects it does, but in the case of Great Britain, the competition is more politicized than probably anywhere.

The Chairman: That's an interesting comment. I think Mr. Matthews wanted to add briefly, and then we're going to go to the next—

Mr. Bill Matthews: We at Bristol have recently gone through a major competition in the U.K. where we were a team member to a number of big helicopter producers for the British army attack helicopter program, which Boeing's Apache eventually won. We provide a subsystem for that aircraft that generates for us about $100 million of benefit. So we followed it very closely, and I'd have to say from our perspective, dealing around the world, it's the most open, most clearly defined, and least subject to backroom changes of mind of any procurement system we've dealt with. While there's a lot of political posturing, we didn't see any impact of that political posturing. In fact, a non-British company won, and I think that speaks for itself.

The Chairman: I would inform the witnesses that some on this committee, if not all, hope to go to the U.K. at some point to pursue their experience with them.

Thank you, Monsieur Laurin.

Now I'll go to the government side. I have three names so far: Monsieur Bertrand, Mr. Pratt, and Mr. O'Reilly. Mr. Bertrand.

Mr. Robert Bertrand: I have a couple of questions for each of the witnesses, Mr. Matthews first of all. Maybe what I could do is state those questions to both of you and then you can each take your turn at answering them.

First, what do you think of the defence procurement process since 1993? Secondly, has Bristol ever received a sole-source contract from DND? Thirdly, is your company working on any defence projects right now?

Mr. Haddock, we heard Mr. Matthews state that industrial and regional benefits play a very influential role in defence procurement. I believe Sikorsky was in the competition for the search and rescue helicopters. How were your benefits evaluated? I've heard that no points in the competition were awarded for IRBs.

The Chairman: Mr. Matthews.

Mr. Bill Matthews: Perhaps I could defer the comment on the overall process since 1993, and I'll talk about sole source.

We have two contracts in-house currently that are sole-source development. They're both armament programs. They both have to do with rocketry. Bristol is the only company in Canada that has the capability for the rocketry, and I guess that was one of the criteria in Public Works' decision to go sole source. If there's only one viable capability, then that can be done. Unfortunately for us, while it's sole source, it's also constrained by the profit policy. So in fact if it were open competition we could probably make some money on it, but we won't make any money on a sole source—or we won't make very much.

Mr. Robert Bertrand: I was just going to write that down.

• 1000

Mr. Bill Matthews: As Mr. Haddock had pointed out, it focuses our minds on how to reduce the costs.

On the defence projects we're working on, again, as late as 1993-94 we were probably about 65% dependent on the Canadian government defence budget. This year, even with significantly increased sales over that period, we will be less than 10% dependent on the Canadian government—only about half of that for defence, the rest for the space agency. So we have overcome that reduction in the defence budget and also in the reduction of the programs that we were pursuing by exporting and by doing more commercial work.

The Chairman: Did you want to defer totally the 1993 question?

Mr. Bill Matthews: I don't know what the significance of 1993 is, but—

The Chairman: There was a change in government—

Mr. Bill Matthews: Oh.

The Chairman: —just to refresh our minds.

Mr. Bill Matthews: There's your answer.

The Chairman: I was going to say “happily,” but I'm the chair.

Mr. Bill Matthews: Let me put it this way: I think the actual process that's run by the departments has been relatively consistent. Really, when the bureaucracy officials were here earlier, they professed the purity of the process. I guess that's true, and we don't have any task to take with them on that.

Has the introduction of undefined criteria been any different? I don't think so. I think that's the nature of the beast. All we're asking for is not to eliminate that but simply to state what they are up front.

The Chairman: Mr. Haddock, we have about two minutes for you to deal with this.

Mr. Joseph Haddock: Okay, I'll talk fast.

The Chairman: Thank you.

Mr. Joseph Haddock: As far as the procurement process since 1993 goes, I started living here in 1997, so I really am not qualified to answer that. I do know about the process for the search and rescue helicopter, and I can make some comments on that if it's appropriate.

We don't have any sole-source awards. In terms of the question about IRB points, once again, I was not employed by Sikorsky at the time of the CSH competition, but in the few discussions we've had about the outcome of that, I would tell you that I think our IRB plan was very highly regarded. It may not have received any points, because our proposal failed to receive any points, because we were deemed non-compliant. As a matter of fact, our cost wasn't even looked at, which is what we thought we would win on.

The Chairman: If you've finished, Mr. Bertrand, I'll go to the next Liberal.

Mr. Robert Bertrand: Yes, I've finished for now.

Mr. David Pratt: I'll give my time over to the opposition, then. I don't think we can get a good discussion here.

The Chairman: Thank you, gentlemen.

I'll go to Mr. Earle for seven minutes.

Mr. Gordon Earle (Halifax West, NDP): Thank you.

With respect to the CF maritime helicopter project, there have been different methods suggested as to what would be the most effective way of procuring these helicopters. I've heard views of perhaps kind of an off-the-shelf acquisition of a shell and then contracting out for a mission system, and so forth. I've heard the suggestion that to keep Canadian content perhaps a group of companies could provide the mission system and then they would contract out for the shell, and so forth.

I would ask either or both of you gentlemen, in your view, what do you feel is the most effective way to acquire those helicopters? Given that a clearer understanding of what the government wants is put forward, what would then be the most efficient way of acquiring these?

Secondly—if there's any time left—would you comment on the defence production sharing agreement and the defence development sharing arrangement and the fact that some have suggested that these agreements favour United States industry over Canadian companies? I'd like your view as to whether this is true and whether cross-border trading under these agreements has benefited your companies. If so, give us some examples.

Mr. Joseph Haddock: With regard to the MHP procurement strategy, I'll try not to be biased. Obviously I work for Sikorsky, and I think we should get the whole job and just be done with it.

A voice: That's not biased.

Mr. Joseph Haddock: Having said that, I'll put on my navy hat and give you a brief synopsis of my experience when I was the program manager for the navy Seahawk program. We bought basically a shell from Sikorsky and a mission system from Lockheed Martin in Owego, New York. That concept worked pretty well.

• 1005

The main issue was that by doing so, the government.... I, as a program manager, was the prime. I was responsible for the operational success of that machine. It worked out okay. We partnered and did the right things. But that was a very difficult position for a government person to be in, because you really had no hammer, other than looking in a mirror and beating yourself up.

I believe you should have a prime contractor responsible for everything—the mission suite, the airframe, the engines, the support. That way you have one single entity with which to deal and you have some leverage. In that context, I believe if you compete for one portion, let's say the airframe, and then you want to work with that contractor to select a Canadian group of industries to either have that entity run a competition and have the government have right of first refusal, there are ways to do that. I have done that before.

You can keep the contractor identities transparent to the process and just focus on whether it meets the requirement and is the best value for the customer. Then the government says “I like consortium B”, and the prime or the airframer says “Aye, aye, sir” and off we go. That would be my choice of the way I think a government should go, in terms of procuring a very complex and important weapons system.

I'd like to defer your second question to my colleague here, since I have no knowledge about what you are talking about.

Mr. Bill Matthews: Mr. Chairman, can I be refreshed on the second question?

Mr. Gordon Earle: Basically, some felt the defence production sharing agreement and the defence development production sharing agreement with the United States favoured the United States industry over Canadian companies. I'd like your view on that.

Secondly, have those agreements benefited your company? If so, give us some specific examples of how this came about. If you have any thoughts on any changes that required those agreements, that will be fine, as well.

Mr. Bill Matthews: From Bristol's perspective, and from my perspective as a member of Bristol, both the DPSA and the DDSA were good opportunities for Canadian companies. If in the end they favoured U.S. companies, the fault lay in underfunding from the Canadian side. It's always difficult to secure the funding in Canada for our share. So the way the programs work is there's a share of the funding and a share of the work, and if you don't put any money in the front end, you don't get any work for your companies.

In most cases Canada has underfunded participation in these programs where there were opportunities, and that's perhaps a reflection of the pressure on the budget. Nonetheless, we have some success stories. One that is recent and also significant, I suppose, is approximately five years ago we entered into DDSA a program called Hokum-X. The sponsors were the United States Army and the Canadian government. The contractor was Bristol Aerospace as a prime contractor, and our subcontractor was Boeing. Talk about the tail wagging the dog.

The concept was to take an out-of-service helicopter, transform it to look in every way—from IR signature, radar signature and visually—like an entirely different helicopter. So there was a lot of good electronic signature modification work there.

This has been a very successful program. It has been run on schedule and on budget, and has now entered into a follow-on option phase, where additional units are being procured, all for use in the U.S. So a Canadian company is getting benefit here, even though the funding was relatively modest on Canada's part, and involved only the development side.

The Chairman: Thank you, Mr. Earle.

Mr. Price for seven minutes.

• 1010

Mr. David Price: Thank you, Mr. Chairman.

I'll start with Mr. Matthews. You started talking about ASD in the beginning. As you say, we've heard success stories, but we don't hear about the failures quite as much. If we look at Goose Bay, it's really too new. We still don't know yet what the results will be there. Maybe you could mention a couple of particular cases in ASD.

Mr. Bill Matthews: We were involved as a major team player on a program led by Lockheed Martin for the provision of support services to the aerospace engineering and test establishment at Cold Lake. The process proceeded with a target budget that DND had specified. The contractors were asked to show how they could deliver the specific level of service within that budget. As a team we put a lot of effort into it. At the end of the day, because we were going to use fewer of the people in place there than they wanted us to, even though we were taking the risk of getting the job done, they simply did not go to contract.

Mr. David Price: They stopped the whole process.

Mr. Bill Matthews: They stopped the whole process after we had spent our money. So that left a bad taste in our mouths.

Mr. David Price: Yes, I can well imagine.

Mr. Bill Matthews: Again, it was not only the what, it was “We don't want you to do it that way. You have to do it the way we did it.”

Mr. David Price: So we're not going to do it at all.

Mr. Bill Matthews: Right.

Mr. David Price: Was there just one case, or have you had other cases too? I imagine after that particular experience, if you were involved in another one, I'm sure you'd put that up front—“Look what we did here and what you've done to us. What happens this time?”

Mr. Bill Matthews: I think we'd be very reluctant to enter into another competition for ASD unless the whole environment were much different.

Mr. David Price: What types of changes would you like?

Mr. Bill Matthews: We'd like a clearer indication of what the rules are going to be at the end of the day, not at the beginning of the day.

We understand it boiled down to issues—as there probably were in Goose Bay, although I must say I'm not familiar with them—with the incumbent people, union agreements, and rice bowls, if you like. There were all kinds of issues that came up at the end of the day. They showed maybe there was a lack of clarify of thought at the beginning of the day, in terms of how they were going to address those issues before they launched into an expensive competition.

Mr. David Price: Had you gone through any other ASD type of experience with another country, for instance?

Mr. Bill Matthews: We do support work in some other countries, but I don't think they are valid comparisons, because we fill a total void and don't replace government-provided services. Where there is total lack of services, it's usually quite straightforward to go in and provide them. But where the government is providing services and you're now competing with essentially your customer, the rules get quite grey.

Mr. David Price: Okay.

Mr. Haddock, you said you came in rather at the end of the SAR program, but I'm sure you heard a lot. Obviously you're leading into the new maritime helicopter operation. You were also a program manager. If we compare what you've been through on the American side with the Canadian side, where does a program manager come in on the Canadian side? Is he right at the very beginning too?

Mr. Joseph Haddock: Sure. It's been my experience that the program managers I've met with up here have very similar responsibilities. They have a bit more experience up front, especially in MHP, because it has been up front for a long time.

That is both a blessing and a curse. The blessing is lots of experience, lots of history. The curse is lots of free time to do non-value-added things with the program—lots of paper being pushed around from one side of the desk to the other, lots of draft procurement documents that may find their way into the ultimate RFT that really don't need to be there. That's the curse. But they have a job to do, and they're very good at what they do.

• 1015

I like the organization that I see in the MHP office. I like the closeness between the requirements side of the house and the program manager side of the house. They basically live and breathe the same air.

In the States we used to have it almost close. The Pentagon and the procurement side for the navy were about an eleven-minute walk, and I made it many times, from Crystal City to the Pentagon. Now we're down in Patuxent River, and we're finding that we're being less efficient because of the distance. So I like the closeness with the requirements side of the house.

Mr. David Price: The set-up right now is rather blocked in as far as the process has been going on for so long and there have been an awful lot of technological changes as we moved along. Is there flexibility in the system to advance with these changes and to keep changing, say, the SOR? In comparison with the States, was there flexibility in the operations you had there as the process went along or were you locked in?

Mr. Joseph Haddock: The love affair with technology and government procurement rigours don't necessarily make for a good couple. I think the move to a commercial, off-the-shelf mindset is a good one. I think if you take it to the limit of commercial off-the-shelf, especially in mission system computers, and perhaps consider an alternative service delivery type of concept that says we're going to Windows NT or Windows 98 in our aircraft, then your updates are easy, because Bill Gates is in charge. This is taken pure and simple. It is a very good, very powerful mission system, which has that kind of capability.

Flexibility in the States with regard to the budget is awful. I go back to the budget, because that's the hardest thing to get your hands around down in the States. The program manager in the States in his execution year has virtually no control over money, none. The money Congress gives him is the money he gets. The contractor could walk into the program office and say give me $2 million today and I'll save you $50 million in three years, and the program manager can't do it. He doesn't have any flexibility.

The Chairman: Thanks, Mr. Price. We'll go to the second round of questions now, starting with Mr. Hart for five minutes.

Mr. Jim Hart: Thank you very much, Mr. Chairman.

I was wondering if either one of you could comment on the amount of money Canada dedicates to research and development as to whether it's adequate or there should be more. What's your feeling in the defence industry?

Mr. Bill Matthews: It's never adequate. I think in some areas Canada as a nation does reasonably well in R and D. I think we used to do pretty reasonable figures in R and D in the aerospace and defence industries. With the exception of companies such as Bombardier and perhaps Pratt & Whitney Canada, I think there are no companies big enough to provide the level of research and development required to maintain world leading products in the long term. As we know, the various areas of support for that kind of research and development are being restricted.

We believe the TPC program is the right approach, where it's really risk sharing to develop new technology and new processes and to be world leaders in whatever it is we've chosen to specialize in. That kind of risk sharing is necessary for industries of the normal size of Canadian industries. I speak of the aerospace industry. There are very few behemoths in Canada, and the rest of us are not able at this point to cover all of the risk involved in leading-edge products. It would be better if there were more.

• 1020

The TPC program is a good program from our perspective, and it's going in the right direction. It has suffered some underfunding, which has been rectified to some degree in the last budget. We would hope to see that trend continue.

Mr. Jim Hart: Do you have any comments?

Mr. Joseph Haddock: I would tend to agree that R and D funds are never enough. However, there's a little bit of a dichotomy in my mind about strict adherence to commercial, off-the-shelf technology and the application of R and D, especially in a DND situation. If you're going to do cuts, then in my mind you're turning the R and D over to somebody else. Programs such as TPC can take up the slack, but then you have to make sure that the money is where it should be and not being wasted in other places.

Mr. Jim Hart: Mr. Haddock, you mentioned that the Sea King is costing us $6,500 per hour just to keep it in the air. I assume that cost is going to escalate, because we're at least eight years away from the delivery of a new platform to replace the ship-borne helicopter. This isn't a comment about any particular government. I know we were trying to get comments about what has happened since 1993.

It seems that this problem goes much deeper than that, because we've heard witnesses tell us that at least four times there has been a replacement program for the Sea King, starting as early as the 1970s. It appears almost to be management by crisis when it comes to some pieces of equipment. What can we do to address that very real situation so that we're not replacing vital equipment when it's on its very last legs?

The Chairman: You have a minute to reply to that.

Mr. Joseph Haddock: I have just a minute.

The Chairman: Sorry, I know that's a pretty tough question to answer in a minute.

Mr. Joseph Haddock: That's a tough one. I think that gets right to the heart of political will. If it were up to DND, you'd have new helicopters. It's an issue of finding the money, sticking to your guns, and spending it.

Was the decision to cancel the NSA rational, in light of $5.8 billion for a helicopter? I would say it was. In today's world $5.8 billion is a pretty fair piece of change, and I would predict that you would come along with MHP for far less than $5.8 billion for a very credible machine.

So once again it's political will, where they're saying where is the enemy, the world has changed, do we really need this. We go through this in the States. I'm surprised the F-22 Raptor is still a going concern. We have the joint strike fighter program. If you look at the budget, there's a pig in the python and it's huge. I'm not sure the U.S. budget is going to be able to accommodate that either.

So political will, stick to it if you think you need it. I don't think there's a lot of public issues with the maritime helicopter. I think it's not a constituent issue.

The Chairman: Thanks, Mr. Haddock.

Mr. Hart, thank you. We'll now turn to Mr. Pratt for five minutes.

Mr. David Pratt: Thank you, Mr. Chairman.

I'd like to ask both of you about a phenomenon we've seen in the U.S. and Europe, and that is the consolidation of the defence industry. I'd like to know if you feel that eventually is going to have any impact on the procurement process in North America. Do you have any thoughts on that?

Mr. Matthews, we've heard a lot about the current controversy in terms of Canada's loss of the most-favoured-nation status with regard to defence companies and contracts going cross border. How do you expect that to impact your business?

To Captain Haddock, with regard to some of the reports we've had lately in terms of the static electricity problem on the Griffon helicopter, do you think that has been overblown in the media? Is it a fairly common problem? What are your thoughts on that?

Mr. Joseph Haddock: I might make a comment about the first part of your question, about consolidation and how it will impact.

• 1025

It will certainly create a political situation much more vivid than there is now, in that if you have a company that employs 250,000 to 500,000 people—which could possibly be the case if Lockheed Martin keeps buying everything—then you have a very strong political arm. I mean, they're employing people in every single state of the union. That will create political interest, and obviously, I would think, give them an advantage.

Another offshoot we've seen in the States is that with a company that big that has so many arms and tentacles and so many programs, if politicians decide they have to cut $200 million out of the F-22 program, and Lockheed Martin marches into Congress and says “Fine, but you know, this program over here and that program over there and this program over here are all going to go up, all prices are going to go up, because we have a big company here and we have overhead rates and it all depends on...” So that's another issue.

I think large consolidations in Europe.... And I may be making a stereotypical comment, but I would say you'll get even more political tampering. I mean, it's a very politicized process in Europe to begin with, and if the consolidation takes place, it's just like dealing with a house of Parliament or a body in Parliament instead of a defence contractor.

So is it bad? It doesn't have to be bad. I mean, everybody rues the loss of competition, but once again my thoughts on competition are in evidence, and if you have a single contractor with whom you're kind of forced to work.... Like, Newport News builds aircraft carriers. We still build them. I don't know if they're a bargain or not, but there's a whole lot of partnering going on between the government and Newport News, and I think that would be the positive aspect of that situation. So the scales I think are somewhat balanced in that regard.

The Chairman: Mr. Matthews, did you have a question?

Mr. Bill Matthews: Mr. Chairman, the question concerned the recent changes in legislation in the United States that impact our traditional rules of doing business there.

Specifically, I think the point of issue is the amendments to the international trade and arms agreements regulations, where Canada had enjoyed some significant exemptions to some of the more onerous elements that were imposed on foreign countries. With the latest amendments we have significantly lost some of those exemptions.

Now, the United States is still our biggest customer on the defence side and also on the commercial side. The immediate impact is rather small. Existing contracts are proceeding and so on. In the foreseeable future, the intermediate impact we don't think will be severe because they're programs we already are working on and so on; we have documentation and so forth.

Where it's likely to impact us most is, for instance, if we wish to bid to support Sikorsky in a program, Sikorsky may be constrained in delivering the required data that we need to bid against. They may be constrained to such a degree or for such a long time by the State Department's due process that the competition would be over before we ever saw any documentation. This will have a major impact on Canadian companies that are reliant, especially on the commercial side, to do business.

Maybe equally important, it applies to space and satellites and rocket products and things like that, on which we've had a very strong relationship between Canada and the U.S. through NASA and through the Canadian Space Agency. I would say that's in jeopardy as well.

We are very disappointed these changes were made, that for whatever reason Canada was not able to retain its advantages. We expect downstream there could be some negative impacts if we don't put in place some methodologies that will allow us to get the information on time, such as advanced application for the information, or whatever. It's definitely going to make our life a lot more difficult.

• 1030

The Chairman: Thanks, Mr. Pratt.

[Translation]

You have five minutes, Mr. Laurin.

Mr. René Laurin: While I ask my first question, I'd like us to come back, if possible, to the slide having to do with profit policy, because my second question relates to that issue.

Given the exorbitant costs associated with helicopter maintenance, do helicopter or aircraft manufacturers provide warranties against operating or parts defects, as automobile manufacturers do?

[English]

Mr. Joseph Haddock: Helicopter manufacturers do provide the warranties. Senator Dan Quayle created a bill in Congress back in the 1980s that required all defence procurement to come with a warranty. I was the recipient of that direction, and it consisted of adding about 10% to the cost of equipment. You don't get something for nothing. It also created a huge logistics nightmare, when you had to have every part with a warranty sticker on it with whom to call should it fail, and then every part was an argument if it failed because then you would have to go to parts court to have a judgment on whether the user broke it or it broke on its own. So it was very complicated to use.

I think in this day and age, and I have actual experience in this, if a contractor builds a shoddy part, the world will know about it, because there are fewer customers for helicopter manufacturers. Helicopters haven't gone through the consolidation that other industries have, and it's a cutthroat world. So if you build an unreliable helicopter, the world will know and you will just go out of business. That's my personal opinion.

From the standpoint of exorbitant costs, I would respectfully object to the comment about exorbitant costs. The costs have been going down. I'll just mention, and I don't like to make commercials in this venue, but our new helicopter, the S-92, is designed for the commercial marketplace and it's designed to be able to make the commercial operator make money. Our part in that as a helicopter manufacturer is to make the aircraft as inexpensive to operate as it can be.

We have to be able to bid against other helicopter operators with other helicopters and beat them on price. To do that, we've learned from Ford Motors and we've learned from Japan. We've learned to build six sigma quality into the machines we have. We've learned to not make them leak. We haven't learned yet to not make them shake, but that's inherent in the design of a helicopter, and the shaking is even being minimized.

So I think there are ways to bring the cost down and I think there are ways the companies can, once again in partnership with a partner, government or a commercial operator, make a guarantee that if it breaks, just return it and we'll give you one free.

[Translation]

Mr. René Laurin: When the warranty policy has actually been invoked, has it been to the purchaser's advantage?

[English]

Mr. Joseph Haddock: I believe so. Once again, in a commercial.... I keep going to commercial because it's kind of fresh in my mind. The military would be the same way. Basically the aircraft is bought—

[Translation]

Mr. René Laurin: I'm sorry for interrupting you. I want to know if the warranty has ever been invoked. If the buyer is given a warranty but never actually uses it, then he pays more for this privilege. In essence, a warranty is being given on parts that never break. That's the gist of my question. Could you provide a brief answer, because I'd like to have some time left for the table.

[English]

Mr. Joseph Haddock: Yes. It's advantageous to the buyer and the buyer uses it; the military uses it less than the commercial buyers here.

[Translation]

Mr. René Laurin: In your table, you give three examples, A, B and C. Could you explain this to me again, because I didn't quite grasp it the first time around. I believe it was Mr. Matthews who explained it originally.

• 1035

[English]

Mr. Bill Matthews: Mr. Chairman, if we look at the top chart of the two, examples A, B, and C, current policy is $100 cost, $8 profit, and $108 price to the buyer. B shows if there were to be a reduction in the cost, there is also under the current policy a reduction in the profit—

The Chairman: A mandatory reduction.

Mr. Bill Matthews: —a mandatory reduction in the profit. Therefore, it's hard to understand where the incentive is for someone to reduce the cost, because they have no way to recover the investment they made to reduce the cost.

In the third example, there would be a sharing of that cost reduction, and the customer would still get a significant reduction, but the supplier would have a way to recover his costs and even perhaps do a little better as a reward for reducing the cost to his customer.

The bottom chart is simply a tallying of the results.

The Chairman: Thank you for clarifying that.

Now to Mr. O'Reilly for five minutes.

Mr. John O'Reilly: Thank you very much, Mr. Chairman.

I wanted to have a little more in-depth view into the A-12 program. I wasn't sure where that fit into the procurement we're talking about, and I just wondered if you could explain it in a little more detail.

Mr. Bill Matthews: The A-12 was a competition for a replacement carrier aircraft, a large, medium-attack, bomber-type aircraft. It was on the heels of the F-117, very stealthy, so the whole process was secret, and that was its first complication.

The second issue was that it was to be stealthy, it was to be a carrier aircraft, it was to carry a large amount of armament internal to the aircraft and still be able to land on board the carrier. It made extreme use of stealth technology and composites. There was competition among McDonnell Douglas, Northrop Grumman, Lockheed Martin; they all competed. McDonnell Douglas won and said they could do it. The budget was even classified and held very closely in Congress.

Basically, the fact that it was going to be the last carrier aircraft to be built for 50 years induced contractors to say, my God, I've got to get this business. They underestimated the task and they underestimated the cost. They went to work and found out they couldn't do it. The government didn't have the data it had promised, the cooperation with the air force and the 117 was not there. They briefed Congress that everything was fine. Mr. Cheney, Secretary of Defense at the time, briefed Congress that everything was fine. Then a day later, McDonnell Douglas executives went to Congress and said “We're a billion dollars out of bid. If you don't help us out we're going to go out of business.” Mr. Cheney said “I thought it was fine”. The navy looked a little dumb. He cancelled the program and fired two admirals and a program manager.

We went into litigation. The litigation is still going on, and the bill is going to be $4 billion. The courts have said we owe the contractors this amount of money, that we duped them, that we didn't have a valid requirement, or we didn't restate our requirements, and that the competition was all nuts. They said we should have known the cost of the aircraft. It was a very dark day—it happened in 1991, I think. It woke up the procurement side of the U.S. Navy to try to make some drastic changes to the process. And we've done so by.... The biggest thing was opening up to industry and iterating the process that ends up with a complex system.

If you'll note, the follow-on to A-12—we still needed a carrier aircraft—was the F/A-18, which was not warranting of competition. It just went to McDonnell Douglas as a modification to the F-18C/D. If you look at the two aircraft side by side, they are not the same airplane. So that's how the A-12....

• 1040

Mr. John O'Reilly: DND is currently developing an action plan for re-engineering its capital acquisition process. Are you aware of that? If so, can you comment on it?

Mr. Joseph Haddock: I'm aware of it only insofar as what you just said. I haven't seen any outward evidence of it, other than that the program office is very open and very involved with all of the MHP contenders and is gathering information and giving us some very useful assistance on the actual test program for the S-92.

Mr. John O'Reilly: I suppose our committee is generated by the Auditor General's report that indicated that improvements are needed. That's the purpose, I would think, of the committee, so that was why I asked that question. We always hear from DND that they're modifying and changing and that everything is going to be wonderful, but we want to find out if at the sword's end you're hearing the same thing or there are new processes being brought in.

Mr. Joseph Haddock: Alternate service delivery discussions about long-term support concepts are basically being bantered around. I can only go back to the experience of the SOR competition when seeing an RFP that was 1,200 pages long just kind of surprised us.

The Chairman: Thanks, Mr. O'Reilly.

Mr. John O'Reilly: Mr. Chairman, I have a point of order. On a related matter, I received a letter that I want to have translated and entered into the record so that all members of the committee could receive it.

The Chairman: If you forward that to the clerk, she'll make sure it's translated and distributed to the members and put officially into the record.

Mr. John O'Reilly: Thank you. It has nothing to do with you. It deals with another subject.

The Chairman: It deals with the merchant mariners and another view on that important issue, which we're talking about.

Now I'll go to Mr. Earle for five minutes.

Mr. Gordon Earle: Thank you, Mr. Chair.

The last comment about the 1,200-page SOR leads to my question. One thing I've learned since we started looking at this whole Department of National Defence procurement process is that it certainly is long and complicated and I think for everybody involved quite frustrating at times.

A number of government departments are involved in this process. We have the Department of National Defence, of course; the Department of Foreign Affairs and International Trade for the various international trade agreements; Industry Canada for the regional benefits and so forth; Public Works and Government Services Canada; and also Treasury Board. I'd like the witnesses to comment on how they see so many departments being involved and whether that in fact does complicate the process. Are your companies clear on the various roles of these different departments? In your opinion, do these departments adequately coordinate their efforts in this whole process?

Mr. Bill Matthews: First of all, the involvement of a large number of departments of course complicates the process. I'm not in a good position to judge whether or not it's a necessary complication.

If we do compare it to a commercial environment for similar products, in the commercial environment you would face a competitive process that would last perhaps three to six months, depending on the complexity of it, and maybe only 30 days if it were very simple. How are they able to do that so quickly? They have set procedures and buyers who are responsible for going out and getting the goods they require, and they're held accountable for it. If they don't make a good deal, they don't advance in the company, and they may even have to go and find a job somewhere else.

You compare that to five or six years for a similar process in the government, and I think there must be something that can be done to improve it.

It's one thing to agree from an operational point of view on what the requirement is. That is probably done reasonably quickly, given the size and importance of the requirement. So perhaps within the first year a reasonable requirement on a major program such as the maritime helicopter could be put together in pretty reasonable shape.

But then there's the process of satisfying each of these other government departments, including Treasury Board and perhaps even cabinet, that all of the P's and Q's are exactly as they should be. Because it will never go through the first time, that process adds, I think, several years to the process, and we end up with a process that just keeps feeding on itself to some degree. Then time passes by, the requirement may change slightly or the dollars will change, and then the program has to be rescoped and so on. So it's the longer it takes, the longer it takes.

• 1045

Mr. Joseph Haddock: I think that's a great synopsis. The only thing I'd add is we in industry certainly understand that governments need to be fair, and I think the fairness of the process adds necessary time, but the balance of how fair you are in the process might be fruitful if you scrutinized it a little bit further.

The rest of the process.... I need to make one thing clear: the request for proposal for the CSH was 1,200 pages; the SOR was, we thought, pretty well stated at 30.

The Chairman: One more minute, Mr. Earle, if you want it.

Mr. Gordon Earle: Could either witness comment on what would be the primary thing that you would see as being important to improve this whole procurement process? I know that's a very general question, but can you nail down in just one minute what item you feel would be most important to streamline and make this process more effective?

Mr. Joseph Haddock: In my opening remarks I said that if there is a budget to be met, state it, and then let the requirement meet the budget. In the eighties budgets expanded to meet every requirement. In the nineties we have the narrower requirements.

The Chairman: Mr. Matthews, could you respond briefly on the same question? I think he wanted two opinions.

Mr. Bill Matthews: I can't think of a better one than that.

The Chairman: La même chose, as we say in English.

Mr. Bill Matthews: But I think upfront visibility and stability of the budget would be in everybody's best interest.

The Chairman: Okay, thank you.

Mr. Clouthier for five minutes.

Mr. Hec Clouthier (Renfrew—Nipissing—Pembroke, Lib.): Yes, gentlemen, before we got elected as members of Parliament all of us had a real job. Some were school teachers and business people. It's easy to tell that O'Reilly was a real estate agent, because he has that silver tongue about him and could sell ice cream to an Eskimo.

The Chairman: He'll sell you a car outside.

Mr. Hec Clouthier: Yes, right.

I come from the lumbering industry, and I want to go back to this procurement process and SORs and the requests for proposal. I could go to some of my local people, say if I wanted to buy four or five big logging trucks, which would be quite expensive, or a couple of bulldozers, and I'd say here's exactly what I want. Then some of them would come back to me and hopefully they'd give me what I want and say here's the price.

But you just said, Mr. Haddock, that the Sikorsky was ruled non-compliant before they even looked at the price. Quite obviously, it's because it didn't meet the requirements of what was stipulated. I find it very difficult to rationalize that, since I'm paying the money, and I know it's the government here. I know you had some difficulty with it, but why would Sikorsky or any other helicopter company want to go through very costly expenditures in getting ready when all of us know that here it is, here's the SOR or here's the RFP, and you're looking at it and saying no, we're not going to do what they want us to do, we're going to submit our own design and to blazes with the rest? And, sure, it's going to be cheaper.

One fellow came back to me and said “Hec, I can sell you this bulldozer $75,000 cheaper than the closest competitor.” I said “Yes, but here's the engine I want. You're giving me an engine that has 25 less horsepower, and that's not what I wanted.”

I know it's difficult coming from the field of business you're in, and maybe you'd say they don't need all these bells and whistles, and quite possibly you're right. So it comes back to why would someone bid on something they knew they weren't going to get?

Mr. Joseph Haddock: That's a good question. Not having not been a Sikorsky employee at the time, I asked myself, why would they do that if they can't meet it? They've been selling helicopters around the world for 50 years. The answer is we thought we met it.

There is some conjecture about that, and there is a point to be made in it. We're a helicopter manufacturer. We make a business of competing around the world for helicopters. Why did we think we met the requirement on this? Because it was hidden; because it was stated in a different set of statistics. Was it a desired factor, not a required factor? I don't know the answer to that.

• 1050

I do know that Sikorsky is not dumb. Something induced us to bid. It was thinking we could make it, just under—and we knew it was very tight. There were a couple of factors. One, we've got search and rescue helicopters everywhere. We just had a coast guard helicopter pick up people off the coast of Nova Scotia, with a Canadian pilot, I might add. So we thought, okay, we know how to do search and rescue; we practically invented it with helicopters. Number two, yes, it's close, but we think if we do some things with the fuel cell we'll make the cabin volume enough. Three, we're going to beat the price by 50%. We think maybe governments might be interested in paying 50% less for capability.

Now, we were wrong. I will make a comment—putting my uniform back on—that the requirements process worked. It worked very well. The requirements won the day. The SAR techs won the day. They have the helicopter this country needs to do what they want to do. Fine with us. Not an issue. But I don't think we were stupid in bidding. I just think you needed a competition, so you got one.

The Chairman: Mr. Clouthier.

Mr. Hec Clouthier: Do you think there should be some mechanism built into these requests for proposal—because we're talking about billions and billions of dollars—so that part-way through the process they could actually meet with, and maybe they did, the people who are supplying the helicopter and maybe explain their rationale, why they didn't really comply with the SOR, or say here's our rationale? Why would you want this bell or whistle, or why would you want this cabin space, why would you want this horsepower when you can do without it? Was there any consultation back and forth?

Mr. Joseph Haddock: I'll put my navy suit back on. Sikorsky had a reputation of doing that, of saying we know what you want better. That is not a very popular approach to take with a customer. No, no, we don't do that any more. We just basically say okay, here are the requirements. I would think if we had a question, we would say what is the cabin volume required? Give it to us in square feet, square metres, square yards, something. Give us a number, and then we'd measure, and if we couldn't meet it we'd not bid, period. This is easy. Why? Why was it? Why did we bid?

The Chairman: Mr. Clouthier, thank you.

We've got to finish sharp at eleven o'clock, colleagues, and we can just do that.

Mr. Price, five minutes.

Mr. David Price: We've been talking again about off-the-shelf, and I was wondering if you'd care to comment on the problem of interoperability with our NATO partners, with everybody we're dealing with today. So off-the-shelf tends to be a little more important. Does it reduce our cost, or does it add to the cost? Also, just to finish up on the question of the Griffon static problem that we didn't get to....

Mr. Joseph Haddock: I'll answer the static problem first.

Mr. David Price: Okay.

Mr. Joseph Haddock: Helicopters, rotoblades running through air, physics, equal static electricity. You can't get around it. So you have to ground the aircraft. And with maritime helicopters, when you're picking up somebody in the water the last thing you want him to do is to grab the hoist cable, because he'll get the shock of his life. So you put the hoist cable down, you ground the helicopter, drag it to the guy, and the guy gets in.

Griffon helicopters are going to build up a static charge. You have static wicks usually on the tail section, little pieces of fibrous material that flap in the wind and supposedly discharge the aircraft every now and then. But the bottom line.... I view this surprise about static electricity a little strangely, because if you do your physics 101, you're going to know there's going to be static charge on the aircraft. So they should land first, before people touch the airplane, and then they'll be grounded and they'll be fine.

Now, to answer the off-the-shelf question quickly, off-the-shelf should save money. Interoperability issues can be worked. There are certain interoperability issues that exist with any helicopter flying off any ship—and I'm keeping it to what I know, and that's maritime helicopters—the same gas, perhaps fueling fittings are the same, landing deck spots are virtually adaptable to most helicopters unless you get into the smaller frigates. So that's an issue. Parts availability—if you go with an existing aircraft that has been flying around the world in great numbers and there's a huge logistic chain, well, you're going to save money there by going off-the-shelf, for sure.

Mr. Bill Matthews: Mr. Chairman, could I just add something?

The Chairman: By all means.

Mr. Bill Matthews: I think commercial off-the-shelf is a proper concept, but you must clearly distinguish between what's reasonable to use commercial off-the-shelf and what is not reasonable. As we see in ongoing conflicts, there's some pretty specialized equipment there that has no role in commercial life. So it's not reasonable to expect that you can get even the majority of defence equipment commercial off-the-shelf, I don't think, but there are elements of it...where it's possible to substitute commercial off-the-shelf for specially built, we ought to do it. I think, again, as Mr. Haddock pointed out, having a prime contractor and charging him with that responsibility is one of the ways to make the best use of commercial off-the-shelf. So he is able to contribute to the decision of what can be adequately supplied as commercial and what must be done as defence equipment.

• 1055

The Chairman: Mr. Bertrand, we have time for one question, if you have one more—one or two quick ones.

Mr. Robert Bertrand: Just one quick one.

Mr. Haddock, I noticed in your resumé that you received your wings in 1971 and you received training on the Sea King helicopter. Can you tell me if the American forces still use the Sea King?

Mr. Joseph Haddock: Yes, I believe we still have Sea Kings in operation. We've taken them off all our ships. We operate them in a utility role basically for air station support and search and rescue.

Mr. Robert Bertrand: Are you aware of any plans to replace them?

Mr. Joseph Haddock: Yes. The U.S. Navy has a helicopter master plan that basically the next down, about eight...a different type model series of helicopters to two. Both, I might add, are made by Sikorsky.

Mr. Robert Bertrand: A coincidence.

Do I have time?

The Chairman: A real quick one.

Mr. Robert Bertrand: In your presentation you say the Canadian procurement process is simpler than the U.S. one. Could you just briefly describe for the committee the step-by-step American procurement process—in one minute or two?

The Chairman: If I might interject, would it be too much to ask you to send us a briefing note on that question?

Mr. Joseph Haddock: Sure. It will take me about a month to write it.

Some hon. members: Oh, oh!

The Chairman: I'm assuming you couldn't say it in a minute.

Mr. Haddock and Mr. Matthews, thank you very much for some very useful, direct testimony. It will be useful to us. I think the questioning was quite crisp. I like the new format, which was Mr. Pratt's idea.

So thank you very much, colleagues, and to the witnesses, we appreciate your time.

The meeting is adjourned.