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37th PARLIAMENT, 2nd SESSION

Standing Committee on National Defence and Veterans Affairs

EVIDENCE

CONTENTS

Tuesday, April 29, 2003

0905

The Chair (Mr. David Pratt (Nepean—Carleton, Lib.))

Mr. Alan Williams (Assistant Deputy Minister, Materiel, Department of National Defence)

0910

0915

0920

The Chair

Mr. Alan Williams

The Chair

Mr. Leon Benoit (Lakeland, Canadian Alliance)

Mr. Alan Williams

Mr. Leon Benoit

0925

Mr. Alan Williams

Mr. Leon Benoit

Mr. Alan Williams

Mr. Leon Benoit

The Chair

Mr. Leon Benoit

The Chair

Mr. Leon Benoit

Mr. Alan Williams

Mr. Leon Benoit

The Chair

Mr. Alan Williams

The Chair

0930

Mr. David Price (Compton—Stanstead, Lib.)

Mr. Alan Williams

Mr. David Price

Mr. Alan Williams

Mr. David Price

The Chair

Mr. David Price

Mr. Alan Williams

Mr. David Price

Mr. Alan Williams

0935

Mr. David Price

Mr. Alan Williams

Mr. David Price

The Chair

Mr. Alan Williams

The Chair

Mr. Alan Williams

The Chair

Mr. Alan Williams

The Chair

Mr. Claude Bachand (Saint-Jean, BQ)

Mr. Alan Williams

Mr. Claude Bachand

0940

Mr. Alan Williams

Mr. Claude Bachand

Mr. Alan Williams

The Chair

Mr. Claude Bachand

Mr. Alan Williams

0945

The Chair

Mr. Dominic LeBlanc (Beauséjour—Petitcodiac, Lib.)

Mr. Alan Williams

0950

The Chair

Mr. Dominic LeBlanc

The Chair

Mr. Bill Blaikie (Winnipeg—Transcona, NDP)

Mr. Alan Williams

The Chair

Mr. Bill Blaikie

Mr. Alan Williams

0955

Mr. Bill Blaikie

The Chair

Mr. Bill Blaikie

The Chair

Mr. Joe McGuire (Egmont, Lib.)

Mr. Alan Williams

Mr. Joe McGuire

1000

Mr. Alan Williams

Mr. Joe McGuire

Mr. Alan Williams

Mr. Joe McGuire

Mr. Alan Williams

Mr. Joe McGuire

Mr. Alan Williams

The Chair

Mr. Gerry Ritz (Battlefords—Lloydminster, Canadian Alliance)

1005

Mr. Alan Williams

Mr. Gerry Ritz

Mr. Alan Williams

Mr. Gerry Ritz

Mr. Alan Williams

Mr. Gerry Ritz

Mr. Alan Williams

Mr. Gerry Ritz

Mr. Alan Williams

The Chair

Mr. David Price

1010

Mr. Alan Williams

Mr. David Price

Mr. Alan Williams

Mr. David Price

Mr. Alan Williams

Mr. David Price

Mr. Alan Williams

Mr. David Price

Mr. Alan Williams

Mr. David Price

Mr. Alan Williams

The Chair

Mr. Claude Bachand

1015

Mr. Michael Slack (Director, Canada-U.S. Materiel Cooperation, Department of National Defence)

1020

The Chair

Mr. Joe McGuire

Mr. Alan Williams

Mr. Joe McGuire

Mr. Alan Williams

The Chair

1025

Mr. Alan Williams

The Chair

Mrs. Cheryl Gallant (Renfrew—Nipissing—Pembroke, Canadian Alliance)

Mr. Alan Williams

1030

Mrs. Cheryl Gallant

Mr. Alan Williams

The Chair

Mr. David Price

Mr. Alan Williams

Mr. David Price

Mr. Alan Williams

Mr. David Price

Mr. Alan Williams

Mr. David Price

Mr. Alan Williams

Mr. David Price

Mr. Alan Williams

Mr. David Price

The Chair

1035

Mr. Alan Williams

The Chair

Mr. Alan Williams

The Chair

Mr. Leon Benoit

Mr. Alan Williams

Mr. Leon Benoit

Mr. Alan Williams

Mr. Leon Benoit

The Chair

1040

Mr. Alan Williams

Mr. Leon Benoit

Mr. Alan Williams

Mr. Leon Benoit

The Chair

Mr. Alan Williams

The Chair

Mr. Dominic LeBlanc

Mr. Alan Williams

Mr. Dominic LeBlanc

The Chair

Mr. Claude Bachand

1045

Mr. Michael Slack

Mr. Claude Bachand

Mr. Alan Williams

Mr. Claude Bachand

Mr. Alan Williams

1050

Mr. Claude Bachand

Mr. Alan Williams

Mr. Claude Bachand

Mr. Alan Williams

Mr. Claude Bachand

The Chair

Mr. Alan Williams

1055

The Chair

Mr. Alan Williams

The Chair

Mr. Alan Williams

The Chair

Mr. Alan Williams

The Chair

CANADA

Standing Committee on National Defence and Veterans Affairs

NUMBER 023

2nd SESSION

37th PARLIAMENT

EVIDENCE

Tuesday, April 29, 2003

[Recorded by Electronic Apparatus]

¿ (0905)

[English]

The Chair (Mr. David Pratt (Nepean—Carleton, Lib.)): I call this meeting of the Standing Committee on National Defence and Veterans Affairs to order.

We're very pleased to have with us today Mr. Alan Williams, Assistant Deputy Minister, Materiel, for the Department of National Defence, and Mr. Michael J. Slack, Director of Canada-U.S. Materiel Cooperation.

Gentlemen, as you know, we've been looking at the whole issue of Canada-U.S. defence cooperation in the course of our study of Canada-U.S. defence relations. We're very pleased to have you here, Mr. Williams. You're a fairly regular visitor to this committee. This is old hat for you, but we're pleased to see you again.

Perhaps we could get things under way with your statement, Mr. Williams. We look forward to hearing your comments.

Mr. Alan Williams (Assistant Deputy Minister, Materiel, Department of National Defence): Thank you very much, Mr. Chairman. Good morning, ladies and gentlemen.

Notwithstanding Hugh Winsor's comments yesterday, I really am happy to be here. I don't know if that has something to do with the kind of life I lead, but it is very important for us to discuss how to maintain an open and cooperative relationship with the U.S. It's a critical element in helping my organization meet the materiel requirements of the Canadian Forces and it is absolutely essential for the current and future viability of Canada's defence industry.

In order to save a little bit of time, and because I notice that my speaking points are being distributed, I will skip over the history of the last 40 to 50 years in terms of agreements and allow us more time for questions and answers. Instead, I'll highlight some of the more prominent cooperative programs that fall under my orbit of responsibility, discuss the benefits of cooperation, and, finally, address some of the current challenges and opportunities associated with Canada's most important defence industrial relationship. I'll turn to the bottom of page 3 and continue from there.

While National Defence has over 300 agreements with the U.S. Department of Defense, let me focus today on three very current, active, and distinct agreements that exemplify the type of defence materiel cooperative activities currently under way between National Defence and the U.S. Department of Defense.

[Translation]

Since taking on my responsibilities at DND as Assistant Deputy Minister, Materiel, I have placed a premium on developing a constructive, open and workable relationship with the U.S. DoD. Since 2000, my staffs have concluded three agreements that I feel can act as the cornerstones of a new, more vibrant period in Canada-U.S. defence industrial cooperation. These agreements are the North American Technology and Industrial Base Activities Memorandum of Understanding, the Canada-U.S. Test and Evaluation Program and the Joint Strike Fighter program. Let me start with the NATIBO agreement.

[English]

The North American Technology and Industrial Base Organization has existed since the late 1980s. However, no formal mechanism existed under this consultative body to undertake cooperative projects. This is rectified in 2001 with the signing of the North American defence technology and industrial base activities memorandum of understanding.

The key objective of the agreement is to effectively leverage resources and reduce redundant efforts through bilateral cooperation on studies and projects relating to the defence technology and industrial base of the United States and Canada. Already six projects have been initiated under this agreement, ranging from cooperation on light armoured vehicles to gas turbine engines.

The second agreement I would like to highlight is the CANUSTEP. The first Canada-United States test and evaluation program came into existence in 1983 and allowed the U.S. access to National Defence's testing and evaluation facilities and ranges.

In 1993 the agreement was renegotiated and was made reciprocal. Canada was granted preferential access to the vast and sophisticated network of U.S. facilities and ranges in exchange for U.S. access to Canadian facilities.

Over the nearly 20 years of this agreement, 68 tests have been conducted in the U.S. and Canada for a cost saving to National Defence of over $7 million U.S. As the agreement was set to expire in 2003, I instructed my staff to renegotiate the MOU and expand its scope. The resulting agreement was signed in September 2002 and now allows for preferential and cost-effective access by National Defence to the full range of U.S. facilities for the next 15 years.

In addition, we have expanded the scope to allow for cooperative test and evaluation and the loan of equipment for test purposes. These enhancements have resulted in a surge of activity under the MOU and the more timely and cost-effective performance of equipment testing for the Canadian Forces.

Finally, let me turn to the joint strike fighter program. In 2000 Canada was formally invited to participate in the $200 billion joint strike fighter, JSF, program. On February 7, 2002, I had the privilege of joining the Under Secretary of Defense, Mr. Pete Aldridge, in Washington to formally sign Canada on as a partner to this very important program.

The primary benefits for Canada of participating in JSF include providing Canadian industry with access to the largest U.S. defence program in the history of the Department of Defense, providing DND with access to the full range of technical data flowing from the JSF program, reducing the purchase price of the JSF should Canada elect to buy this aircraft, and finally, providing the Government of Canada with royalties from the sale of the joint strike fighter aircraft to non-partner nations.

To date the JSF program has delivered. DND is receiving information across a wide range of areas, from better business practices to technical details regarding the aircraft, to military requirements, to interoperability issues. In terms of the Canadian defence industry, I am pleased to report that in the first 12 months of this program, Canadian industry has proven extremely competitive.

Over the last year Canadian industry has received a total of 87 opportunities to compete for JSF contracts and has won 36 contracts, with a contract value of about $125 million. Currently we estimate the Canadian industry already stands to gain from these contracts an additional $3.5 billion over the production phases of this program.

Companies that have received contracts include Magellan, Pratt & Whitney, Honeywell, Mindready, MDS, Bombardier, and FAG Bearings, to name a few. Later in my closing comments I will note one of the key elements to our success.

The results of this half-century of evolving defence industrial cooperation have offered economic and security benefits to both countries. For Canada the importance of cooperation with the U.S. cannot be overstated. Currently over 60% of National Defence's major airspace equipment is of U.S. origin and approximately 75% of the Canadian industry defence exports are destined for the U.S. on an annual basis.

In 2000, for example, Canadian industry exported approximately $1.6 billion to the U.S. military market, making Canadian industry the 19th largest supplier to the U.S. Department of Defense, following such firms as Lockheed Martin, Boeing, and Raytheon.

Canadian defence industry could not survive on the basis of DND procurement alone. Our privileged access to the U.S. market affords Canada the ability to have many more sources of supply, critical to our national security, than could economically be maintained through National Defence acquisitions alone.

DND is also a good customer of U.S. industry. As I have just noted, many of DND's major systems come from the U.S. In 2001, for example, Canadian defence purchases in the U.S. amounted to approximately 23% of purchases made by DND and have averaged 12% per year over the last 12 years.

¿ (0910)

Indeed, since the late 1950s Canada has represented an extremely significant market for the U.S. defence industry and is one of the largest buyers of U.S. defence equipment among all of the United States major allies. Additionally, in the aerospace and defence electronic sector, for example, the majority of top Canadian firms supplying the U.S. are U.S.-owned. Sales of these seven companies account for approximately 50% of the revenue in the sector.

In addition to the economic benefits, the U.S. has also benefited from access to a broader and stronger defence industrial technology base, enhanced military interdependence with Canada, including active Canadian participation in North American defence, greater standardization and interoperability with a close military ally, and cost-effective and reliable alternative sources of supply. In the event of a national emergency, Canadian firms our positioned to augment the U.S. industrial base to raise items critical to the sustainment of U.S. forces. For example, during the Gulf War, 35 Canadian companies supplied some $107 million in critical defence supplies to the U.S., responding promptly to DOD surge requirements.

[Translation]

For its part, Canada has also benefited substantially from the defence economic relationship. Canada has benefited through its more economical acquisition of sophisticated military equipment, and through the maintenance of a Canadian logistical and defence industrial infrastructure. In terms of the latter, Canadian companies have developed technology and expertise in certain product areas critical to the national security requirements of both Canada and the United States. Examples include simulation, navigation systems, STOL aircraft, gas turbine engines and equipment suited for Arctic conditions.

In short, the high level of defence industrial interdependence which has developed between Canada and the United States has contributed greatly to the economic viability of the Canadian defence industrial base and has provided DND with access to the most sophisticated and cost-effective supply of major military equipment in the world.

[English]

Let me now briefly conclude with, as I see it, the current challenges and opportunities associated with Canada's most important defence materiel cooperative relationship.

The challenges facing this relationship, in my opinion, are fivefold. First is the threat from non-tariff barriers. As you are no doubt aware, the U.S. Congress has passed legislation that ensures to restrict Canadian industry access to selected areas of U.S. military procurement. These measures are often added to defence authorization appropriation legislation as amendments.

The Byrnes-Tollefson Amendment, for example, prohibits the acquisition by the U.S. Armed Forces of any vessel from foreign sources as well as the subcontracting of major components of naval ships hulls or superstructures to foreign yards. The Barry Amendment restricts procurement by the U.S. of food, clothing, textiles, specialty metals, and hand-measuring tools and by-products that are not grown, manufactured, or reprocessed in the United States.

While these measures mostly impact Canadian industries' ability to access the U.S. market, these barriers can also have an indirect impact on National Defence. For example, a Canadian company may not attempt to build selected products in Canada for DND that it cannot readily export to the U.S.

Second, export controls. Until recently National Defence and Canadian industry had access to a wide range of controlled unclassified information without the burden of licensing through the U.S. Department of State. In 2002 this changed. As a result of changes to the international traffic in arms regulations, the ITARs, the U.S. State Department approval is now required for a vast range of technical data that used to enter Canada without a licence requirement.

Without doubt, these changes have impacted DND and Canadian industry. Given the importance of U.S.-controlled unclassified information to the operations of the department, we thought it was essential that we take decisive action to ensure that U.S.-controlled information is properly dealt with from receipt to destruction.

Within ADM(Mat) I have established the controlled goods office. The mandate of the office is to ensure 100% National Defence compliance with all export control restrictions agreed to by the Government of Canada. Since its establishment, every item and technical drawing in our inventory has been catalogued for releasability and National Defence personnel have been trained in release rules. These actions serve to demonstrate the importance National Defence attaches to our export control obligations to the U.S. and other allies.

¿ (0915)

[Translation]

Third, the problems associated with the consolidation within the North American defence industrial base. What was once roughly 50 major defence suppliers in the U.S. in the 1980s has become five highly consolidated, cross-service, cross-platform prime contractors. This produces competitive issues for DND and Canadian industry. For DND, we are challenged getting competition from fewer and fewer suppliers. For Canadian industry they are getting competition from larger and larger U.S. and internationally-based suppliers.

Fourth, the timely identification of the opportunities associated with participation in selected U.S. programs. This is not easy and requires dedicated and experienced staff and resources. One of the lessons learned from our JSF involvement is that early participation and a proactive approach can yield significant benefits for both DND and Canadian industry. As we move to transforming the Canadian forces, I, as the purchasing manager for the CF, will be required to constantly find new equipment that will respond to constantly changing requirements. This will be a challenge and our relationship with the U.S. will help.

[English]

Finally, and this is perhaps the greatest challenge, Canada needs to work harder at maintaining its special relationship with the U.S. It should be stressed that our relationship remains special, but it is no longer unique.

Since the mid-1990s, other countries, in particular the U.K. and Australia, have been granted many of the same benefits that were, up to recently, the exclusive domain of Canada. For example, since the mid-1990s, both have signed reciprocal defence acquisition MOUs and both are negotiating Canada-like exemptions to the U.S. export controls.

These developments send a clear message that neither National Defence nor Canadian industry can afford to be complacent. In the future we will need to work harder on the special relationship than perhaps we had to in the past. While the challenges are many, the future opportunities for National Defence and Canadian industry are enormous.

One of the most obvious opportunities is that the U.S. defence budget is large and growing rapidly. In 2003, the U.S. will spend approximately $380 billion U.S.--over twice what the rest of NATO will spend together. This increase will no doubt result in a spike in U.S. procurement activity in Canada, especially in subcontract work over the next couple of years and the development of new capabilities National Defence may require in the future.

Homeland security and the defence of North America will also afford opportunities for National Defence in Canadian industry. From biometrics to border security to chemical-biological detection, many new areas for cooperation are emerging that we need to identify and exploit, both for the national security of Canada and to the benefit of our industrial sector.

In closing, let me say that the defence-economic relationship between Canada and the U.S. has evolved out of more than five decades of continuous defence-economic interaction between the two governments. Arising out of a shared perception of the growing military and economic independence between the two countries, the Canada-U.S. defence-economic relationship has matured into the most comprehensive defence-economic relationship in the world. From Hyde Park to the present, Canada and the U.S. have pursued a course of cooperation that has served to uniquely merge economic and defence interests.

This merger of interest has over time been complemented by a unique set of arrangements and agreements, which together have provided an effective process of defence industrial cooperation.

Thank you very much.

¿ (0920)

The Chair: Thank you very much, Mr. Williams.

Could I maybe ask a member of the committee to move that we include the full text of Mr. Williams' remarks in the official record?

Mr. LeBlanc.

(Motion agreed to)

The Chair: Thank you again, Mr. Williams.

Statement by Mr. Alan Williams: INTRODUCTION

Good morning, ladies and gentlemen. I am extremely pleased to be here today as the maintenance of an open and cooperative relationship with the U.S. is a critical element in helping my organization meet the materiel requirements of the CF and is absolutely essential for the current and future viability of Canada's defence industry.

My remarks today will start with a brief history of the special Canada-U.S. materiel relationship. I'll highlight some of the more prominent cooperative programs and for a under my orbit of responsibility, discuss the benefits of cooperation, and finally address some of the current challenges and opportunities associated with Canada's most important defence industrial relationship.

BRIEF HISTORY

As you are no doubt aware, over the past five decades an extensive and formalized pattern of defence materiel cooperation has evolved between Canada and the United States. From the Second World War to the present, the two countries have recognized and encouraged extensive cooperation in terms of defence production and trade and the formal incorporation of the Canadian defence industrial base into an integrated North American base.

Although the special Canada-U.S. defence industrial relationship dates back to the early years ofthe Second World War, the real cornerstones of the current relationship are the agreements concluded between our two countries in the 1950s and 1960s.

The first Canada-U.S. agreement that propelled our countries toward greater post-war defence industrial cooperation was the 1950 Statement of Principles for Economic Cooperation. The statement involved an exchange of notes on defence industrial mobilization and an agreement that the “economic efforts of the two countries be coordinated for the common defence and that the production and resources of both countries be used for the best combined results”. As a consequence of these measures, and the increased pace of rearmament in the 1950s, reciprocal military purchases sky-rocketed and the post-war drift toward greater defence industrial integration had begun.

The next significant step came with the conclusion of the defence production sharing arrangement, DPSA, of October 1, 1956, and a set of associated arrangements in following years, especially 1959-60. The DPSA and associated arrangements resulted in the expansion of defence economic cooperation between Canada and the United States.

Another agreement that has had a significant impact on Canada-U.S. materiel cooperation was the defence development sharing agreement, DDSA. The 1963 DDSA was established to provide for joint funding by the two governments, with the U.S. contribution being at least 25% in each project, of research and development projects. The program has promoted the use of Canadian industry for U.S. DOD R and D projects and has generated greater equipment standardization and interoperability.

What is significant about all these agreements is the impact they had on the structure of the Canadian defence industry and the pattern of Canada's defence trade. Taken together, the agreements signed in the 1950s and 1960s served to create a pattern of North American defence industrial activity that involved Canada purchasing major equipment from the U.S. and the U.S. companies buying major subsystems and components and technology from Canada. Not surprisingly, this pattern of defence industrial interaction has spawned an extremely unique and special relationship that neither party shares with any other country in the world.

CONSULTATIVE FORUMS AND MAJOR MOUS

I would now like to briefly describe some of the more important consultative mechanisms and MOUs that reinforce the current Canada-U.S. defence materiel relationship. As one might expect, DND and DOD have a very close working relationship on defence industrial issues. In addition to regular bilateral meetings with my colleague, the Under Secretary of Defense, Acquisition, Technology, and Logistics, Mr. Pete Aldridge, DND has one main forum for discussions on bilateral defence industrial matters--the Armaments Cooperation Management Committee.

The ACMC was first established in 1998 with the aim to provide a regular forum for the discussion of all issues related to defence materiel cooperation between DND and DOD. TheACMC meets on an annual basis and has a mandate to monitor the activities of cognizant DOD and DND organizations to ensure coherence and consistency in the armaments cooperation area. While DND has over 300 agreements with the U.S. DOD, what I would like to do today is focus on three very current, active, and distinct agreements that exemplify the type of defence materiel cooperative activities currently under way between my department and the U.S.Department of Defense.

Since taking on my responsibilities at DND as assistant deputy minister, materiel, I have placed a premium on developing a constructive, open, and workable relationship with the U.S. DOD. Since 2000, my staff have concluded three agreements that I feel can act as the cornerstones of a new, more vibrant period in Canada-U.S. defence industrial cooperation. These agreements are the North American technology and industrial base activities MOU, the Canada-U.S. test and evaluation program, and the joint strike fighter program.

Let me start with the NATIBO agreement.The North American Technology and Industrial Base Organization has existed since the late 1980s. However, no formal mechanism existed under this consultative body to undertake cooperative projects. This was rectified in 2001 with the signing of the North American defence technology and industrial base activities memorandum of understanding. The key objective ofthe agreement is to effectively leverage resources and reduce redundant efforts through bilateral cooperation on studies and projects relating to the defence technology and industrial base of the United States and Canada. Already six projects have been initiated under this agreement, ranging from cooperation on light armoured vehicles to gas-turbine engines.

The second agreement I would like to highlight is the CANUSTEP. The first Canada-U.S. test and evaluation program came into existence in 1983 and allowed the U.S. access to DND's test and evaluation facilities and ranges. In 1993, the agreement was renegotiated and was made reciprocal--Canada was granted preferential access to the vast and sophisticated network of U.S.facilities and ranges in exchange for U.S. access to Canadian facilities.

Over the nearly 20 years of this agreement, 68 tests have been conducted in the U.S. and Canada for a cost savings to DND of over $7 million U.S. As the agreement was set to expire in 2003, I instructed my staff to renegotiate the MOU and expand its scope. The resulting agreement was signed in September 2002 and now allows for preferential and cost-effective access by DND to the full range of U.S. facilities for the next 15 years. In addition, we have expanded the scope to allow for cooperative test and evaluation and the loan of equipment for test purposes. These enhancements have resulted in a surge of activity under the MOU and the more timely and cost-effective performance of equipment testing for the Canadian Forces.

Finally, let me turn to the joint strike fighter program. In 2000, Canada was formally invited to participate in the $200 billion JSF program. On Feb 7, 2002 I had the privilege of joining Mr.Pete Aldridge in Washington to formally sign Canada on as a partner to this very important program. The primary benefits for Canada of participation in JSF include providing Canadian industry with access to the largest U.S. defence program in the history of the DOD, providing DND with access to the full range of technical data flowing from the JSF program, reducing the purchase price of the JSF should Canada elect to buy the aircraft, and finally, providing the Government of Canada with royalties from the sale of the JSF aircraft to non-partner nations.

To date, the JSF program has delivered. DND is receiving information across a wide range of areas, from better business practices to technical details regarding the aircraft, to military requirements, to interoperability issues. In terms of Canadian defence industry, I am pleased to report that in the first 12 months of the program, Canadian industry has proven extremely competitive. Over the last year Canadian industry has received a total of 87 opportunities to compete for JSF contracts and has won 36 contracts with a current value of $125 million. Currently, we estimate Canadian industry already stands to gain an additional $3.5 billion over the production phases of the program. Companies that have received contracts include Magellan, Pratt and Whitney, Honeywell, Mindready, MDS, Bombardier, and FAG Bearings, to name a few.

BENEFITS OF COOPERATION

The results of this half-century of evolving defence industrial cooperation have offered economic and security benefits to both countries.

For Canada, the importance of cooperation with the U.S. cannot be overstated. Currently, over 60% of DND's major aerospace equipment is of U.S. origin and approximately 75% ofCanadian industry defence exports are destined for the U.S. on an annual basis. In 2000, for example, Canadian industry exported approximately $1.6 billion to the U.S. military market, making Canadian industry the 19th largest supplier to the U.S. Department of Defense following such firms as Lockheed Martin, Boeing, and Raytheon. Without the U.S. market, the Canadian defence industry could not survive on the basis of DND procurement alone. Our privileged access to the U.S. market affords Canada the ability to have many more sources of supply critical to our national security than could economically be maintained through DND acquisitions alone.

Indeed, since the late 1950s Canada has represented an extremely significant market for the U.S. defence industry and is one of the largest buyers of U.S. defence equipment among all of the United States' major allies. Additionally, in the aerospace and defence electronics sector, for example, the majority of the top Canadian firms supplying DND are U.S.-owned. Sales of these seven companies account for approximately 50% of the revenue in this sector.

In addition to the economic benefits, the U.S. has also benefited from access to a broader and stronger defence industrial technology base; enhanced military interdependence with Canada, including active Canadian participation in North American defence, greater standardization and interoperability with a close military ally, and cost-effective and reliable alternative sources of supply. In the event of a national emergency, Canadian firms are positioned to augment the U.S. industrial base to produce items critical to the sustainment of U.S. forces. For example, during the Gulf War, 35 Canadian companies supplied some $107 million in critical defence supplies to the United States, responding promptly to DOD surge requirements.

For its part, Canada has also benefited substantially from the defence economic relationship. Canada has benefited through its more economical acquisition of sophisticated military equipment and through the maintenance of a Canadian logistical and defence industrial infrastructure. In terms of the latter, Canadian companies have developed technology and expertise in certain product areas critical to the national security requirements of both Canada and the United States. Examples include simulation, navigation systems, STOL aircraft, gas turbine engines, and equipment suited for arctic conditions.

In short, the high level of defence industrial interdependence that has developed between Canada and the United States has contributed greatly to the economic viability of the Canadian defence industrial base and has provided DND with access to the most sophisticated and cost-effective supply of major military equipment in the world.

CHALLENGES AND OPPORTUNITIES

Now let me briefly highlight what I see as the current challenges and opportunities associated with Canada's most important defence materiel cooperative relationship. As I see it, the main challenges currently facing the relationship are fivefold.

First is the threat from non-tariff barriers. As you are no doubt aware, the U.S. Congress has passed legislation that serves to restrict Canadian industry access to selected areas of U.S. military procurement. These measures are often added to defence authorization or appropriation legislation as amendments. The Burns-Tollefson amendment, for example, prohibits the acquisition by the U.S. armed services of any vessel from foreign sources as well as the subcontracting of major components of naval ship hulls or superstructures to foreign yards. The Berry amendment restricts procurement by the U.S. of food, clothing, textiles, specialty metals, hand measuring tools, and by-products that are not grown, manufactured, or reprocessed in the United States. While these measures mostly impact Canadian industry's ability to access the U.S.market, these barriers can also have an indirect impact on DND. For example, a Canadian company will not attempt to build selected products in Canada for DND that it cannot readily export to the U.S.

Second are export controls. Until recently, DND and Canadian industry had access to a wide range of controlled unclassified information without the burden of licensing through the U.S. Department of State. In 2000, this changed. As a result of changes to the international traffic in arms regulations, State Department approval is now required for a vast range of technical data that used to enter Canada without a licence requirement.

Without a doubt, these changes have impacted DND and Canadian industry. Given the importance of U.S.-controlled unclassified information to the operations of the department, we felt it was essential that we take decisive action to ensure U.S.-controlled information is properly dealt with from receipt to destruction.

Within ADM(Mat), I have established the controlled goods office. The mandate of the office is to ensure 100% DND compliance with all export control restrictions agreed to by the Government of Canada. Since its establishment, every item and/or technical drawing in our inventory has been catalogued for releasability, and DND personnel have been trained in release rules. These actions serve to demonstrate the importance DND attaches to our export control obligations to the U.S. and other allies.

Third are the problems associated with the consolidation within the North American defence industrial base. What were once roughly 50 major defence suppliers in the U.S. in the 1980s have become 5 highly consolidated, cross-service, cross-platform prime contractors. This produces competitive issues for DND and Canadian industry. For DND, we are challenged getting competition from fewer and fewer suppliers. For Canadian industry, they are getting competition from larger and larger U.S. and internationally based suppliers.

Fourth is the timely identification of the opportunities associated with participation in selected U.S.programs. This is not easy and requires dedicated and experienced staff and resources. One of the lessons learned from our JSF involvement is that early participation and a proactive approach can yield significant benefits for both DND and Canadian industry. As we move to transforming the Canadian Forces, I, as the purchasing manager for the CF, will be required to constantly find new equipment that will respond to constantly changing requirements. This will be a challenge, and our relationship with the U.S. will help.

Since the mid-1990s other countries, in particular the U.K. and Australia, have been granted many of the same benefits that were, up to recently, the exclusive domain of Canada. For example, since the mid-1990s, both have signed reciprocal defence acquisition MOUs and both are negotiating Canada-like exemptions to the U.S. export controls.

One of the most obvious opportunities is that the U.S. defence budget is large and growing rapidly. In 2003, the U.S. will spend approximately $380 billion U.S., over twice what the rest of NATO will spend together. This increase will no doubt result in a spike in U.S. procurement activity in Canada, especially in subcontract work over the next couple of years and the development of new capabilities National Defence may require in the future.

Homeland security and the defence of North America will also afford opportunities for National Defence in Canadian industry. From biometrics to border security to chemical biological detection, many new areas for cooperation are emerging that we need to identify and exploit, both for the national security of Canada and to the benefit of our industrial sector.

In closing, let me say that the defence economic relationship between Canada and the U.S. has evolved out of more than five decades of continuous defence economic interaction between the two governments. Arising out of a shared perception of the growing military and economic independence between the two countries, the Canada-U.S. defence economic relationship has matured into the most comprehensive defence economic relationship in the world. From Hyde Park to the present, Canada and the U.S. have pursued a course of cooperation that has served to uniquely merge economic and defence interests.

This merger of interest has over time been complemented by a unique set of arrangements and agreements, which together have provided an effective process of defence industrial cooperation.

The Chair: Mr. Benoit.

Mr. Leon Benoit (Lakeland, Canadian Alliance): Thank you Mr. Chair, and good morning, gentlemen.

In talking about Canada-U.S. military cooperation, of course the naval cooperation is key, and when it comes to naval interoperability, the lack of reliability of the Sea King helicopters and their equipment is a concern.

I want to ask some questions about the Sea King replacement project--you're totally surprised by that.

Mr. Williams, when you were here on June 5, 2001, you stated that taking any approach other than the current lowest-price compliant procurement strategy would be irresponsible, because there's no need for you to spend one dollar more of the taxpayers' money than you have to, to get what you want. You said if you were buying a car in the Arctic and someone offered you air conditioning for one dollar more, it might be a great value, but it would still be unnecessary.

Do you think increased protection from small arms fire, the ability to stay in the air when an engine fails, the ability to carry two torpedoes instead of one, in any weather, a loud-hailer, a cargo hook, and a second life raft are all as useless as air conditioning in the Arctic? Would it be irresponsible, in your view, to spend one dollar more for all of those capabilities? That's the way your lowest-price compliant process works. None of these features is required for compliance; therefore, even if they could all be purchased for one dollar more, you wouldn't do it.

Mr. Alan Williams: Thank you very much. I'm pleased to tell you that I don't equate those to air conditioning in the north. I'm also pleased to tell you that every one of those things you highlighted is in fact required as part of our specifications. So we will not have to spend a dollar more, because if people do not provide it, they will not be compliant, and unless they're compliant, they won't be considered.

So I'm very pleased that you noted those things.

I will just be very specific, if you want. With regard to a cargo hook, if you look at the specifications, you will see that it says the maritime helicopter shall be equipped with a slinging capability and capacity of not less than 5,000 pounds. That's in section 3.12.8.2.3.1. With regard to a spotlight, you will see in section 3.11.5.1.1.1 that the maritime helicopter shall be equipped with a controllable and retractable search light. In fact, there's a second, more high-density one that may also have to be provided.

In the case of small arms fire protection, if you look at section 3.5.4.1 and subsequent paragraphs, you will see we specify the kinds of protection we need--for NATO armour-piercing projectiles, for flight controls, for engines, for fuel tanks, for dynamic components, for protective measures for the crew. Each one of these things is specified as being absolutely necessary within the specifications.

I will point out that there are a number of things we have called role fitable; in other words, the companies have to provide them. We trust the ability of our men and women who use these weapons systems in that where necessary, some of these things can in fact be role fitable.

But all of them are mandatory as part of our specifications, and we will not have to spend a dollar more for any of them.

Mr. Leon Benoit: You know, Mr. Williams, we're talking about two different things here, and in fact any benefit that isn't in the statement of requirements, even if you could purchase it for a dollar more, with the process you've chosen to use, will not be of any importance at all. Both the Treasury Board guidelines and the Auditor General insist that best value is the key principle and must be upheld in any government procurement process.

A letter sent to you from Assistant Auditor General Hugh McRoberts on February 25 said that in order for best value to result from giving the maritime helicopter replacement contract to the lowest-price compliant bidder, the department would have to be able to demonstrate that there's no value in any capability beyond those required for the bid to be compliant and that there would be no value in additional capabilities during the life of the helicopter.

So how can you put so little value on other features that may be provided by one contractor for one dollar more that would be of great benefit to our military personnel?

¿ (0925)

Mr. Alan Williams: Thank you for the question.

My answer to your first question was specific because you indicated that some particular capabilities would not be there, and my point was simply to inform you they would be there.

With regard to other things now--

Mr. Leon Benoit: We're talking, though, about a different requirement on those capabilities. I think there's a bit of a word game here.

Mr. Alan Williams: Well, I don't think so. It's clear to me these are precisely defined as necessary for anybody who wants to be compliant.

Getting to your second question, there is absolutely no question in our mind that in this procurement, perhaps more than any other in the history of National Defence, we will be getting something in terms of best value.

Now, why do I say that? If you look at subsections 9.1.1, 9.1.2, and 9.1.3 in the Treasury Board guidelines, you will see they make three points with regard to best value. First, they say it should encompass the full life-cycle costs of the acquisition. This is the first time in the history of National Defence where we're going out and asking someone to bid on something for the full life cycle. Whoever wins this competition will have to in fact be the winner not just for the initial front-end acquisition of the systems and the frame, but for 20 years' support. We will not be in the middle of haggling as to who's responsible for what three or four years down the road.

Mr. Leon Benoit: Mr. Chairman, I don't ask specific--

The Chair: Mr. Benoit, Mr. Williams is in the process of answering the question. I think most of the members of the committee are very interested in his answer, and I would ask that he be allowed to proceed.

Mr. Williams.

Mr. Leon Benoit: Mr. Chair, if I could--

The Chair: There will be other opportunities, Mr. Benoit, for you to interject.

Mr. Williams, could you continue, please?

Mr. Leon Benoit: I just want him to respond to the question, and the point was made, if I could, Mr. Chair. There is very limited time. On the point--

Mr. Alan Williams: I think I'll be answering your question in full, but you are questioning whether or not we're doing best value.

My point is that best value encompasses three things, according to the Treasury Board regulations: Look at full life-cycle costs, and we're doing that; second, make sure you have rigorous requirements--our statement of requirements is as rigorous as it gets, and we have ensured that the statement of requirements prepared by the military, for the military, has not had one comma changed in it in terms of what we're asking the department to perform; third, provide significant planning and back-up documentation. From our statement of requirements, you will note that it is supported by wide-ranging operations research studies, to justify exactly what we said. So there's no question in our mind that by buying exactly what we need and not spending any more, we are in fact getting best value.

You asked what happens if someone can give us a lot more for a dollar more. My answer would be twofold. First of all, if they can give us all of that for a dollar more, then they can give us all of that for a dollar less and win the thing anyway. But the more realistic scenario is not that we can get all that extra value for one dollar more, because chances are it's going to cost us a lot more. Even if you figure 1%, which is a ridiculously low number to consider as an incremental cost.... For the acquisition alone, 1% equates to $20 million. I would argue that it would be irresponsible of me to take $20 million of taxpayers' money and buy things I don't need, rather than reallocate them to other things. I can say that precisely because we have in this procurement--

Mr. Leon Benoit: Mr. Chairman, I don't--

The Chair: I'm just allowing Mr. Williams to finish his answer, and then we have to go to the Liberal side.

Mr. Leon Benoit: [Inaudible—Editor]

Mr. Alan Williams: Well, I think I'm answering specifically what you've asked. Your last question was how could I say there's no value? I'm telling you that for this procurement, the fact is that we have deemed that anything in excess of our compliant line is not something we value. We have said that; it is our position. If industry wishes to provide that to us, so be it. But we know that we can live with the requirement specified by the military for the military, and we're not going to attach a value to anything else.

The Chair: Mr. Benoit and Mr. Williams, I would like to try to maintain some decorum at this committee.

Mr. Williams, Mr. Benoit is well over his time, so I'm going to go to Mr. Price.

Mr. Benoit, we have an hour and a half left in this committee, so I'm sure there are going to be lots of opportunities for you to ask lots of questions.

Mr. Price.

¿ (0930)

Mr. David Price (Compton—Stanstead, Lib.): Thank you, Mr. Chair.

Thank you, gentlemen, for being here today.

I'll just continue to try to clarify things a little bit. We keep seeing the terms “lowest-price compliant” and “best value” coming up.

From what you just said, Mr. Williams, what I'm gathering is that as far as you're concerned, lowest-price compliant with the SOR that you have ends up being best value for the full life cycle. Is that correct?

Mr. Alan Williams: That is right, but I think the emphasis should be on the word “compliancy” to start with. No company can be successful unless they meet the specific, rigorous requirements that our military specifies. Only those who do will be entitled to bid, and of those, we naturally would select the one who provides at the lowest price.

Mr. David Price: The next thing I'd like to get clear for everybody here, and for a lot of people out there who seem to get mixed up a lot of the time, is how the whole bidding process works. I think it's pretty clear up to the point where the SOR comes out of DND, but could you just lead us down the line on how the bidding process goes from there on?

Mr. Alan Williams: Essentially, the military determines on its own the statement of requirements. It is a document reflecting exactly what they think they need to meet their operational requirements and the safety needs of the men and women who will operate those weapon systems. The military turns it over to my organization, and it's my job to liaise with industry and to translate the requirement document into the kinds of specifications they need to understand in order to bid.

These more detailed specifications are what we have spent the last couple of years on with industry, making sure we get it right. We have had hundreds and hundreds of responses from all industries, informing us that what we're asking for isn't doable, or that there's a smarter way of doing it, or “Why don't you look at this?” From my perspective, all of this is done with the full intent of ensuring that this will be an open, level playing field for all bidders to be able to compete. Frankly, this consultation is critical to me, because it provides me with a quality assurance program. You can be certain that if a company feels there's something in there that's in their best interests, they'll let me know. The fact that it's not in their best interests may or may not modify my views. If it's in my best interests, and it's still fair to everybody, that's okay. But if something were prejudicial, then I would consider it.

So we spend a great deal of time developing that statement of qualifications. Once that's prepared, we work closely with our colleagues at Public Works and Government Services Canada to take those specifications and develop the request for proposal documentation to industry, to allow them to bid. We work closely with Public Works on developing the evaluation methodology and strategies.

Mr. David Price: Mr. Chair, can I just interject?

The Chair: Yes.

Mr. David Price: There's just one line that is slipping away here. Once the SOR team has left the room, do you bring them back in along the way?

Mr. Alan Williams: The SOR team really have done their jobs. The only time we will consult with them is when we go ahead and work on the specifications. We will always want to ensure there's nothing in our specifications that we have done that may unduly modify, change, or impact on the statement of requirements. That is done all the time.

As a second check to that, we have twice had independent people come in, an independent firm called MITRE Corporation, which is an arm's-length organization from the U.S., so there can't be any conflict of interest, and it has attested to us twice that in going from the statement of requirements to the DDS specifications we did not inadvertently raise or lower the bar.

So from our perspective today, the detailed specifications that are linked to the statement of requirements are linked in a fair way. We have started the pre-qualification phase of that, and to date there are four potential consortia that we have felt and they have felt are able to proceed through the process.

So far, we think we've got it right. We have four major players in the world willing to bid on our specifications. Once the evaluation criteria are all prepared, the RFP is out, the companies usually have about three months to submit their bids. These will be evaluated from a technical standpoint by the Department of National Defence and from a financial and cost and basic terms and conditions standpoint by Public Works. We both need to sign off before a winner is chosen, and then Public Works and Government Services Canada signs the eventual contract.

Mr. David Price: In that process, you mentioned that you do go back at one point to have DND sign off. The group or the team at DND at that point, is it still part of the original SOR group, or would it be another...?

Mr. Alan Williams: It would probably be a combination, depending on what you want or the technical experts who know this. In our team, we have people both from the materiel organization and from the e-organization working hand in hand.

¿ (0935)

Mr. David Price: What would be roughly the timeline then? We're at one point now. Where do we go from here?

Mr. Alan Williams: The current expectation is.... We're doing a pre-qualification phase, which is unique to this process and maybe is worthy of a moment.

We do not want to be surprised. In our determined rules, once you set out the request for proposal, the RFP, nothing can change. We do not want anybody, because of an inadvertent glitch, to submit something that they would later kick themselves for, for having gotten it wrong.

So we have a pre-qualification phase that is designed to get each of the bidders through the technical specifications, if you want, and at the end of it we would give each one a good housekeeping seal of approval. If they take that technical bid, and when the RFP comes out they submit that without change, they know they can be assured of not being ruled non-compliant for technical reasons.

In that case it becomes basically a situation of price. So if four get through the pre-qualification phase, we will likely have a rigorous competition among the four consortiums based on their prices, knowing that each one of them will deliver at least what we've asked for.

Mr. David Price: Coming down the line, we've had a couple of SORs come out because of the change, the way the whole thing has been set up. This particular SOR that you're working on, compared with the last one, have there been any major changes in the weapons systems?

The Chair: Could you give a quick answer to that, Mr. Williams?

Mr. Alan Williams: Probably not.

The Chair: Well, we're going to enforce the rules here.

Mr. Alan Williams: This statement of requirement was developed by the military to meet the needs of today and tomorrow. It has nothing at all to do with the SORs that may have been done a decade earlier, nor should it. And while there's been a lot of...I'll leave it there.

The Chair: I'm sure we'll have an opportunity to come back.

Mr. Alan Williams: Right.

The Chair: Monsieur Bachand, sept minutes.

[Translation]

Mr. Claude Bachand (Saint-Jean, BQ): Thank you Mr. Chairman.

I greatly appreciate your description of all the stages of the process. I imagine that you have to make a public call for tenders when certain sums of money are involved.

Mr. Alan Williams: We asked our suppliers if, in order to meet our goals in terms of systems, sensors and helicopters, they could provide those systems, helicopters, for approximately $1.9 billion. They said they could. To comply, the cost must be low.

[English]

How low? I'm not sure. That's what the competition will drive. But we know that the maximum amount for the mission system and the frame will be about $1.9 billion.

How much they're going to bid for the 20-year support is also something we don't know right now.

[Translation]

Mr. Claude Bachand: I'm wondering if the whole process that you have just described, starting with a request from the military and your team's and Public Works' involvement—for example the Sea King, and the change in the SOR, the statement of operational requirement—is completely free of any political influence on the part of the government. For example, could a minister or even the Prime Minister not say that an SOR had been kept for 10 years, that it then became apparent that it no longer made any sense and that it was now going to be changed now that any political storm regarding the cancelling of the EH-101 contract had probably passed? Can you say that you are completely free of any political influence?

¿ (0940)

Mr. Alan Williams: I'm going to answer in English because this is a very, very important question.

Mr. Claude Bachand: Delicate.

Mr. Alan Williams: Delicate perhaps, but that is not my point because the answer is very clear.

[English]

Let me say it in English to make sure my intonations are appropriate.

There is absolutely no question in my mind, zero, that there has been any political interference with regard to the statement of requirements.

Frankly, to suggest that anybody outside the detailed technical people could even try to modify it is difficult to fathom, because none of us are technical people the way the people are who develop it. Even more than that, and I think this is really critical and I'm not saying you're suggesting this at all, to suggest that the military heads, the Chief of Defence Staff, the head of the navy, the head of the air force, would compromise on the military requirements or on the safety requirements for their men and women for political expediency is, I think--I'm not saying you're saying this, but for those who might say it, not only is it without foundation, but it's insulting. I mean, these are men and women with the highest degrees of integrity, and there is absolutely no way--no way--that they would compromise in any way, shape or form on what they think they need for their people because a politician is telling them to do so. I know this firsthand, from working day in and day out with these people.

[Translation]

Mr. Claude Bachand: However, Mr. Williams, everyone agreed that the first SOR was a request for a Chrysler frame with a Ford system. Everyone was saying that it made no sense. So why justify it? Do you not think that it could be tempting for us to in fact believe that an embarrassing situation for the Prime Minister had to be avoided by getting the best value for the best price and by purchasing the EH-101, when the decision had already been made to cancel the contract and the cost already amounted to a billion dollars? Even if that's not what is being said, the temptation to think it is certainly there, would you not agree?

[English]

Mr. Alan Williams: Obviously, because it is there. But it's my job to try to make you aware of what I think is reality, notwithstanding all of the allegations that are out there and all of the innuendoes.

The fact is that we now have four bidders that are in. We don't know if they'll all come through the end of the process, but these four bidders are bidders that are working together to provide us with a holistic, combined frame and systems that work well together. All the major frame players in the world are basically in the competition with the major systems integrators in the world. And they have picked their own partners. So at the end of the day, I think what we have seen is developing specs, working with industry, and now we are in the enviable position to have the major world players recognizing that they've got something they can bid and compete on.

I will say this also: in contrast to many competitions world-wide, in many of the major Nordic programs, for example, the countries accepted not what they asked for but what industry felt they could get closest to. We are determined, we are absolutely determined, not to sign a contract with anybody who doesn't give us exactly what we want. We are not going to compromise on our requirements.

The Chair: You have a couple of minutes left, Monsieur Bachand.

[Translation]

Mr. Claude Bachand: The question I am now going to ask you won't come as a surprise. I know that you have come prepared; it is about Canadian content.

First, you'll agree with me that the contract award process that you described to us... If I ask you this, of course you'll tell me that it is the best system, but you surely know that there are other contract award processes used. I would like to know whether or not Canadian content is an important factor in your analysis of a contract. I want taxpayers to get the best value for their money, the best value and the best price. However, if a contract—and I'm not talking about a difference of $1 but rather a difference of $100,000, for example—is awarded to an American company when it could have been awarded to a Canadian company, which would be much more profitable to Canada and to Canadian taxpayers, how important a factor is Canadian content?

[English]

Mr. Alan Williams: I attribute great importance to it. Let me elaborate a little bit on it, because I think it's important. My primary responsibility as the ADM for materiel is to get what our military needs at the best possible price, but I know I have to keep an eye on what Canadian industry provides, because if I don't have the capability in Canada, in the long term, our national security could be compromised. So what do I do?

In the MHP program, for example, we have set very rigorous requirements for industrial regionalbenefits, work that must be done in Canada. We have gotten feedback from industry that they were comfortable that most, if not all, will be able to meet those.

My answer is that we will rigorously try to demand the kind of return to Canada and Canadian industry and Canadian jobs where we can.

The two basic criteria I use are the following. As long as it doesn't negatively impact on competition, I'm happy to demand that work be done in Canada, and as long as it doesn't dramatically increase the price, I'm happy to do it. Typically, industry is smart enough that when we ask for IRBs, they will look for the Canadian companies that could supply them without having to invest $50 million in their own plant. Those are the two general guidelines.

¿ (0945)

The Chair: I think we're going to have to cut you off there, Mr. Williams, so that we can get on to our next questioner.

Thank you, Mr. Bachand.

Mr. LeBlanc.

Mr. Dominic LeBlanc (Beauséjour—Petitcodiac, Lib.): Thank you, Mr. Chairman, and good morning, gentlemen.

Thank you, Mr. Williams, for your presentation.

You talked about innuendoes and misunderstandings in one of your earlier answers. Let me follow up on what I think is one of the most common ones.

Some people have maintained that the Auditor General, in various correspondence, has said it is her belief that best-value contracts are preferable to the other low-cost compliant process. Some people advanced the idea that the process that the Departments of Defence and Public Works are undertaking somehow does not meet the preference of the Auditor General. I'm wondering if you can give us your view of that innuendo.

I have a second question. I'll put the two together, and perhaps you could respond to both of them. The second issue surrounds the decision of the government to bundle the two contracts together. You had referred to the systems contract and the airframe. I'm well beyond my competence technically, but the government made a decision to put the two contracts together. I'm wondering if you can explain to us why, in your view, that was preferable, and what benefit we get from rolling the two contracts into one.

Thank you.

Mr. Alan Williams: I'd be happy to do that.

With regard to the Auditor General, I don't know if you've seen the letter, but I certainly have a copy here, and perhaps it would be useful if this were sent to all the members of the committee, if they haven't already seen it.

The way you phrased your question in fact is a reflection of the problem, because the comment or the observation was not to suggest that best value is preferable to lowest-price compliant at all. The issue is the following. It has been our contention that by looking first at compliance and then taking the lowest price and making sure we're looking at the price of the full life cycle, that in fact will provide to the Canadian taxpayers best value. In our view, that is consistent with the Treasury Board guidelines in section 9.1.

The Auditor General made comments a year or two earlier that I thought could be construed as being contrary to what I was saying, so I asked the AG's office if we were taking different views. Were we going to sit before this committee, side by side, with different views, or was our approach--once you understand it, AG--potentially consistent with best value? The letter Hugh McRoberts sent back to me from the AG's office essentially said, “Alan, I understand what you're doing”.

Let me relate, from my perspective, two key points he made. One is, there is more than one way to get best value, and if we did what we said we were going to do, that could achieve best value. The AG didn't say it would. They said they'll wait until the end of the process and see if we did what we promised to do. They also said--and I think this is what Mr. Benoit was referring to earlier--it presupposes that you set a zero opportunity cost for anything above the compliance line. Mr. Benoit and others asked, how can you do that? I say, how can we do that? Because we did do that. We in fact determined that this is what we need, and while anything else is nice to have, it's not nice enough to have for me to spend more money on it at the expense of other military requirements.

With regard to bundling, we, as bureaucrats, presented to ministers options as to whether or not the frame and the systems should go out in one competition together or whether they should be separate, with pros and cons. Initially the government decided they would like it separate, probably because they felt that it gave more opportunity for Canadian industry to participate on the system side if that were separate from the frame, because the frames, as you know, basically come from out-of-country consortia.

After two years of discussion it became clear that time was an imperative, and so bundling would save time. But more important than that, from our discussions with industry, it became clear that even by bundling, major Canadian participation was essentially there in the consortia. So, in a sense, we were able to have our cake and eat it too. We bundled to save time, clear up accountability, and at the same time we were ensuring major Canadian participation in the program.

¿ (0950)

The Chair: Is there anything further?

Mr. Dominic LeBlanc: No.

The Chair: Okay.

Mr. Blaikie, you have seven minutes.

Mr. Bill Blaikie (Winnipeg—Transcona, NDP): Thank you, Mr. Chairman.

I was interested in the assistant deputy minister's comments about the alleged lack of political interference in the SOR. What struck me was your sort of blanket statement about how incredulous you found this notion that there might be political interference in an SOR, or for that matter in the awarding of defence contracts, when the history of the awarding of defence contracts is rife with political interference going right back to the Ross rifle in the First World War.

I look around the table, and I guess no one else was here, but I was here in 1986 when the CF-18 contract was awarded to Montreal over and against a better bid from Winnipeg.

So for someone to suggest that, heaven forbid, politics should have anything to do with the awarding of defence contracts...I admire your idealism or your naïveté, or your ability to defend the government come what may, but I have to register a caveat based on the historical evidence.

Mr. Alan Williams: May I comment on that?

The Chair: Only if Mr. Blaikie is finished his question.

Mr. Bill Blaikie: What I'm saying is let's put it in the larger context of the maritime helicopter. I was here in 1993 when the original debate about the EH-101 took place. Surely to goodness, there has to have been some political dimension to the fact that we are now 10 years later and we still don't have a replacement for the EH-101. I'm sure that if they'd known that 10 years later we would be talking about when we were going to replace the helicopters, some of the people who were instrumental in killing it would have had some misgivings about whether or not that was the right decision. It's not just 10 years later, but 10 years plus. As somebody who was here at that time, I certainly feel that way. I had no idea that if we killed EH-101 we would be sitting around in 2003 at the defence committee grilling the assistant deputy minister on which consortium will finally respond to the RFP.

Is the department so incompetent that it takes it 10 years to do this, or has there been some kind of political interference?

Mr. Alan Williams: Thank you for the question.

I may be a little bit naive too, but let me make it very clear about why I made the statement. There's a dramatic difference between the post- and pre-1995 and 1996 worlds. When the government in fact passed NAFTA and the AIT, in particular, the AIT was and is the only international agreement encompassing defence procurement. NAFTA does not encompass such procurement and the WTO does not. When you have the AIT and include defence procurement, the AIT basically says that unless you have these kinds of exceptions, you have to compete. Once you start a competition, that's the end of it.

On the CF-18 contract, for example, which wasn't encumbered by that, you can comment on whether it's ethical or moral or not, but you can't comment that it's illegal. It would not have been illegal to do what they did, but now it is illegal. It now violates interference by the government and it violates the Agreement on Internal Trade, which is why they won't do it. And that is why we, as bureaucrats who are put in place to uphold professionalism, wouldn't countenance it either. So there's a clear understanding that in today's world, it's much different from the pre- or mid-nineties world when those agreements were passed.

As for why it's taken so long, there's a big difference between intervening or interfering in trying to modify a statement of requirements and taking your time in terms of elections, changing ministers, discussions with industry, and giving us the go-ahead--for which I don't have any valid explanation. All of these things cumulated over a long time, but there's a difference between taking time to manipulate or twist a statement of requirements and taking time just because you sit on your hands. I'm not saying that's what anybody did, but I'm saying there's a basic difference between those two scenarios.

¿ (0955)

Mr. Bill Blaikie: Perhaps we can just let the case rest with there being no valid explanation, Mr. Chairman.

Some hon. members: Oh, oh!

The Chair: Fair enough, Mr. Blaikie. So you have no follow-up to make?

Mr. Bill Blaikie: No, let the case rest.

The Chair: Mr. McGuire, you have seven minutes.

Mr. Joe McGuire (Egmont, Lib.): Thank you, Mr. Chair.

I'll ask you the same question I've asked just about everybody else who has appeared before this committee on this topic of the interoperability of our military systems with those of the United States.

Given our respective budgets, how can we ever expect to compete? How can we ever cooperate in these various advanced technological schemes that the Americans are continually coming up with, whether it's a missile defence system, or super fighters, or whatever? How can we be a player at all? I can see us being a bit player, but how can we be a partner, given the meagre resources that we have at our disposal, and cooperate with the United States?

Mr. Alan Williams: Because we're good. Let me elaborate a little bit. I go to a lot of NATO meetings, including bilaterals and trilaterals and plenary, and I have to tell you, whether I'm bilateral with the U.S., or U.K., or France, or Germany, whomever it happens to be, I never have to be defensive about how we spend the money we have. We may not have as much money as everybody else, but I think we're pretty smart about how we use it, and we don't have to buy everything everybody else buys, but what we do buy has to be the right equipment to meet the needs of our forces in the kinds of environments the government puts us in.

Let me make a couple of clear observations. We are in fact leading naval Task Force 151 in the Gulf. We are leading that with U.S. and other international partners because our navy is interoperable with theirs. We loaned to the U.S. our LAV III personnel carriers, light armoured vehicles. They copied it into the Striker. We were ahead of them in terms of that kind of a platform.

When we go ahead now and look at opportunities to acquire, we look at what they're doing. We don't necessarily replicate it, but where appropriate we will make sure our systems are interoperable with them so that we have a place for ourselves in operational theatres. We can't be everything to everybody, but what we do, we do well with the right kind of equipment, and whether I talk about LAV IIIs, or I talk about our Coyotes, or I talk about upgrading our CF-18s so they're leading-edge, all those things make a difference.

Also, you mentioned joint strike fighters; here we are, and Michael here is the architect of the joint strike fighter initiative. Canada is being held up as a model worldwide as to how to integrate itself in this huge international program. Our industry has done better than anybody else.

We in fact are going to be in a position, should we so desire, to acquire this leading-edge aircraft in 2017 and 2018, if that best suits our needs. So with what we have, we do really well. The $800 million influx is going to help a great deal. The minister's reallocation of another $200 million gives us a total of $1 billion, a lot of which is going to go towards new equipment acquisition and new equipment support.

So that will help us, but I don't think we have to feel defensive for ourselves. We're on the right track with the money we're getting.

Mr. Joe McGuire: Given the years you've just mentioned, the fact that we haven't ordered any of these planes, or given any indication we're going to buy them, and yet we're participating in the development of them, really it's too early to say, or too early to make any definitive decision, on what we're going to do that far ahead in the future.

À (1000)

Mr. Alan Williams: Sure. We need to replace them by 2017 or 2018, so I would imagine in a couple of years from now the air force will begin looking at its requirements, and that certainly will be a major, if not the leading, contender at that time. But even in the interim, and this is why it's important, we are availing ourselves of all the studies, the key studies, that you need in order to make those kinds of decisions.

We're getting financial rebates on R and D should we decide to buy them. In our industry we're talking about $3.5 billion worth of work coming down the chute based on a $100 million investment. This is very good for Canada and Canadians.

Mr. Joe McGuire: So at that time, Dominic LeBlanc could be Prime Minister and be ordering all kinds of aircraft for Canada.

Going back to the surveillance and the new security measures that the Americans are demanding of themselves and their neighbours, especially in regard to maritime surveillance, are we doing anything differently, or anything new, in assuring ourselves and the U.S. that our maritime surveillance on our three oceans is improving? Are there new investments being made to the space-based infrared systems, for instance, and stuff like that? How are we assuring ourselves and the U.S. that we are doing a good job of surveillance in the maritime area?

Mr. Alan Williams: It's a tremendous challenge. We have a huge border to worry about vis-à-vis Canada and North America. Certainly some of our acquisitions are submarines that are going to come on board--I was wondering whether I should raise that topic--the upgrading of our Aurora platforms, our maritime helicopters. All of these are weapons systems designed to provide us both surface and subsurface kinds of surveillance.

So I think we're looking ahead with our American allies. There are a lot of bilateral discussions between our navies, our air forces, and our armies about how to better ensure the safety not just of Canada but of North America, and I think as the deliberations continue, should there be certain technologies or weapons systems that we feel can assist, those would certainly be looked at, at that time.

Mr. Joe McGuire: Is anything happening right now?

Mr. Alan Williams: I would say there are things like getting our subs ready, upgrading our Aurora platforms, and the MHP--these are all surface and subsurface things. These are all the weapons platforms we're talking about that are happening today in order to protect ourselves for the future.

Mr. Joe McGuire: The RCMP were recently saying in the press that these people who go out fishing for cod, tourists, are instrumental in helping us to protect our maritime waters. We're a far cry from doing a job with relying on tourist operators to intercept strange boats or different boats. Can you get a little closer to what we're actually doing to intercept the drug trade, or terrorist threats? We have a ship out in Halifax harbour with suspected anthrax. How thorough are our systems for intercepting problems?

Mr. Alan Williams: From my perspective, I can comment on the kinds of weapons platforms we've put in place. The really specific answer is an operational one, and to that I think the head of the navy, for instance, or the CDS, would probably be in a better position to give you the specifics about their capability of delivering with the weapons systems than I am just in terms of providing them.

The Chair: Thank you, Mr. Williams. Thank you, Mr. McGuire.

Mr. Ritz, five minutes.

Mr. Gerry Ritz (Battlefords—Lloydminster, Canadian Alliance): Thank you, Mr. Chairman. Mr. Williams, thank you for your interventions here today. They're quite interesting.

In response to Mr. Price's question about the statement of requirements now and what was specified 10 years ago, you said they are two different animals; we're calling for different things. I'm wondering, when we're back in war zones now, why we're not upgrading our statements of requirements again. You must have a lot better crystal ball than I do in a 20-year procurement program when you're dumbing down the requirements, or softening the requirements, as to what's happening in the world and this war on terrorism. We're part of it. Our frigates are over there without helicopters and with helicopters that can't fly at night.

You talk about these constantly changing requirements. Of your list of requirements, there are some 3,200 items listed, if I remember correctly. Less than 500 of them have to be adhered to, to be part of the tender process, to win the bid. So that leaves 85% of them that will be adhered to or compliant after the tender is let, which of course will add to costs.

So I'm wondering how the statement of requirements now in being lessened, if you will, is going to stand us in good stead over this 20-year life cycle when we see our forces called upon to do more and more.

À (1005)

Mr. Alan Williams: Thank you for the question, because there clearly has been some misinformation provided to you. The statement of requirements that was signed off in 1999--about which, by the way, the AAG commented very positively in her report back then--has not been changed. So when people keep referring to statement of requirements being changed, I wonder really what we're talking about here, point number one.

In terms of the pre-qualification, what we said to industry is there are a couple of thousand requirements and take them in a couple of tranches. In the first tranche, look at these first 500. They're the most critical. But you have to look at all of them over the course of the process, over the pre-qualification. They know what the 3,000 are; they've been talking about them with us for years. In the pre-qualification, though, in order to take it in bite-sized chunks, we said first look at these, then look at the balance. In fact, it's a three-phased approach. Look at the first chunk, look at the second, and then there's still stuff remaining that we have to give you the good housekeeping seal of approval for. There's a third phase allowed for that.

Mr. Gerry Ritz: And that will all be done by June 15? I think that was the date that was tossed around.

Mr. Alan Williams: The initial pre-qualification is designed.... We're always talking to industry to see if they need more time. We're hoping they don't because we want to keep this on track. But if they don't, then through the pre-qualification that will be signed off on and we will have assurance that they can meet all of the technical specifications.

Mr. Gerry Ritz: With the points that are now in this 1999 statement of requirements, 40-year-old Sea Kings with their capacity now would qualify and could actually win the bid.

Mr. Alan Williams: To the contrary, the Sea Kings today, equipped with this equipment, could not fly for more than 42 minutes. I'm not sure where people get this information, but if you were to take the Sea King today and put upon it the weight that's required for our systems, for our crew, for our spares, and everything in our stores and everything like that, they would not be able to fly for 42 minutes at temperatures of 15 degrees. At 30 degrees, they couldn't even get off the ground. So to suggest that the Sea Kings equipped with this equipment could now qualify is anything but correct.

Mr. Gerry Ritz: In your last page in your closing, you say, “For DND, we are challenged gettingcompetition from fewer and fewer suppliers.” We've seen 10 years of foot-dragging, whatever you want to call it, politics or not politics; we've seen a debundled, rebundled.... Has this 10 years of delay exacerbated that problem?

Mr. Alan Williams: To the contrary, in a weird kind of way, it's helped because--

Mr. Gerry Ritz: Then why the delay?

Mr. Alan Williams: Let me tell you how it's helped. Back in 1993, frankly, the kinds of equipment we thought we needed weren't on the marketplace. The reason that program cost so much was because much of the expense was developmental. We were having to pay for that development cost, and there wasn't much competition.

The reason why this is costing us less than it was going to--even when you add on the Cormorant costs to this whole package--is because there's more competition today, and in fact the products we're buying are off the shelf. So military off-the-shelf products, plus competition, equates to more competition and a lower price. So in a way, the delay, from that perspective, has helped.

The reasons for the decade of delay are many. There are many, but my only comment would be that none of them is because there has been interference in our statement of requirements.

The Chair: Thank you, Mr. Ritz.

Mr. Price.

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

I'd like to get back to the U.S., but the helicopter seems to stand back there. We'll go back to the helicopter then and talk about the systems in it--communications, weapons systems, and the radar systems.

In the original SOR that came out, let's say way back when, these were all modular units made to be very easily changeable as time went along and technology changed, and so on. I realize now there's no question we're looking at interoperable when we look at these systems, but are we still looking at modular and being interchangeable, particularly with our U.S. and/or NATO partners?

À (1010)

Mr. Alan Williams: Certainly the system suites we're putting in today are frankly bundled and packaged together by the different consortiums in a way that maximizes their capability and keeps their costs down. But if a particular sensor system--be it a particular warning system or a particular radio--needs to be changed, for sure it could be changed.

What you have to recognize is that when that happens there is usually extra cost to it down the road. So our challenge will be, as we bundle the 20-year life-cycle support contract in with this, to make sure we give ourselves enough flexibility to keep abreast of the times as the sensors do upgrade.

Mr. David Price: That's what I'm getting at. How much are we tying ourselves into a particular contract or supplier when we see the way the market changes today in the sense of companies coming and going? Down the road, 10 years from now, say we need a new radar system. How easy is it going to be? We know with the radar system, just as an example, that it is very much integrated into the airframe of the vehicle. How easy is it going to be to change? How tied are our hands going to be with a particular company?

Mr. Alan Williams: They're not going to be any more tied by our approach than by any other approach. That's one point.

Mr. David Price: All right.

Mr. Alan Williams: Secondly, there is no doubt in my mind that as technology advances we will be able to advance with it the same way we have with our F-18s or Auroras. That is one of the strengths of Canada: we're smart and we're able to do that well.

Mr. David Price: There's one other thing I'd like to clear up. We heard a lot of talk over the past couple of years. A company stated they couldn't bid because they were forced out by changes made, not by the SOR but by the pre-qualification. At that point they were forced out of bidding. It seems to have quietened down now. What's your take on that?

Mr. Alan Williams: Are you talking about this procurement or other ones?

Mr. David Price: No, this procurement.

Mr. Alan Williams: We just started pre-qualification about a month ago or something like that. Up until then we have had years of discussion with industry, trying to get an understanding of what they could and could not do, notwithstanding their marketing propaganda, to meet our needs.

Undoubtedly, some of them were concerned about being able to meet the pre-qualification. At the end of the day--and I think this is a very positive, constructive sign of the discussions--we've had four consortiums come in saying that after the years of discussion they now feel they can provide a bid to meet our needs.

We haven't lowered our needs. They have figured out a way to meet our needs, and I think that's exactly what we wanted, a vigorous, rigorous competition.

Mr. David Price: Great. In part of your statement you mentioned that there were once roughly 50 major defence suppliers in the U.S., and now we're down to roughly 5 altogether.

Mr. Alan Williams: Five big ones, yes.

Mr. David Price: Do you find that these companies are using much more subcontracting than they did before?

Mr. Alan Williams: They do, for sure. In fact, the joint strike fighter is a perfect example, because as you know, Lockheed Martin heads it up with Northrop Grumman as one of their main partners, as well as BAE. Two of the five I just mentioned are in the U.S., Northrop Grumman and Lockheed Martin, and much of the success of our industry comes not just from getting contracts from those two but from the subcontractors.

Mike, who has been sitting here quietly, I know is anxious to talk about the joint strike fighter, so maybe I'll let him elaborate a little on that.

The Chair: Actually, you may have to save this for another round, because Mr. Price is over his time at this point. But we'll come back to you, Mr. Slack.

Thank you for your response, Mr. Williams.

Monsieur Bachand, cinq minutes.

[Translation]

Mr. Claude Bachand: I'm going to give Mr. Slack an opportunity to speak because I would like to hear what he has to say. I read an article in The Gazette where Mr. Slack was quoted as saying: "Once it's perfected, it will be twice as lethal as anything out there". Those were your words, Mr. Slack.

I know that we are currently at stage 3, as there are several stages involved in the American process, and apparently $250 million to $500 million over 10 years are involved for the stealth fighter. I'm wondering how well the return on investment, to use financial terms, has been calculated. Obviously we would obtain a reduced purchase price should we elect to buy the JSF and, according to what I have read, we would obtain royalties from the sale of the aircraft to non-partner countries, who would pay the full price.

However, many are questioning this aircraft. I am one of those who are questioning this a great deal. One issue, among others, that has often been raised, is that of the airlift capacity, because we don't have any. Many people have also said that we may be more in need of patrol aircraft for Canada rather than this type of aircraft. Substantial research is also being done on drones, unmanned aircraft, and I'm wondering if we're not headed in the wrong direction with the JSF project, because I am not sure that Canadian taxpayers will feel that this aircraft represents the best value for money.

I won't say much more because I would like to give you the time to reply, but there's also the whole issue of National Defence policy. As long as there is no National Defence policy we can move in many directions, including that of the Joint Strike Fighter.

In his presentation, Mr. Williams stated that there has already been $125 million in economic benefits for our industry. But how much have we invested? If we've invested $200 million or $240 million and have received $125 million in return, I do not see the benefit to Canadian taxpayers.

I will leave you the rest of this time to explain the importance of the JSF program to me and the strategic decision to become involved in that program rather than in patrol aircraft or further research on drones.

À (1015)

[English]

Mr. Michael Slack (Director, Canada-U.S. Materiel Cooperation, Department of National Defence): That was a long question. Let's see where I can start in answering it.

First of all, let me give you, again, a little bit more detail about the awarding of contracts to Canadian industry. You're absolutely right: in the first 12 months of the STD phase of the JSF program, Canadian industry has received about $125 million worth of contracts. But I might add that this is in the very first year of a ten-and-a-half-year program. If we keep on the track we're currently on, we could be looking at well over $1 billion worth of contracts during the STD phase alone.

What we have been able to do is estimate that based on the contracts already awarded to Canadian industry as of today, we expect Canadian industry will receive about $3.5 billion worth of contracts over the life of the JSF program. This is through the low-rate initial production phase of the program, where 465 aircraft will be built, and over the production phase of the program, where 2,500 aircraft will be produced. You can't look at the $125 million in isolation from what it means down the road, when these things go into production. It's a very significant number.

As I said, this is the first year of our involvement in the program from an industrial perspective. Currently we're tracking over 200 opportunities for Canadian industry during this STD phase. These are future opportunities for Canadian industry.

As Mr. Williams noted, so far Canadian industry has competed for 87 contracts, and we've been successful 36 times. In fact, our success rate is second only to the United Kingdom's, and I think that's something we should be proud of as Canadians. Certainly our industry has proven very competitive in this particular program.

Right now there are about 38 contracts in competition, involving companies across the whole country. Just those competitions are currently worth $132 million.

So the opportunities are tremendous. We're in the first year of the program, and I think, based on our track record to date, we can expect significant economic return for the investment Canada has made in this particular program from an industrial perspective.

Let me add that there is another aspect you correctly identified, which is the third-party royalties. In our initial calculation we estimated that based on the number of expected sales to third parties of the JSF aircraft, the Canadian government could realize a return on investment of about $75 million--just based on royalty payments to the Government of Canada in the future. So in addition to what we're receiving on the industrial side, there's also a downstream opportunity for return on investment on third-party sales.

À (1020)

The Chair: Thank you, Mr. Slack, and thank you, Mr. Bachand.

Are there any further questions from the government side?

Mr. McGuire.

Mr. Joe McGuire: Thank you, Mr. Chair.

In your presentation on the challenges and opportunities, you're saying the first challenge is the threat from non-tariff barriers. You go through various acts, and I suppose you could add the Jones Act to that list. Then your final challenge--I guess the greatest challenge--is to work harder at maintaining our special relationship with the U.S.

On the one hand, they're saying, with the barrier agreement, which restricts the procurement of food, clothing, textiles, specialty metals, hand-measuring tools--a whole list of things--it's a wonder we can get into any of this stuff, with all the barriers they're erecting. You stated earlier in answer to a question that the NAFTA doesn't cover any military procurement, so that we have the challenge of cozying up to them, having a better relationship with them. How can you jibe these two challenges to give confidence to our industry that they can get involved more, not just in a very junior way, with American military expenditures?

Mr. Alan Williams: I guess that's why it's a major challenge; it isn't easy. But I will point out that Michael has just elaborated how we can do it: we can do it by being proactive and smart, knowing what's out there, getting in early, and getting in aggressively, because we have good companies.

We also do it by just further nurturing our relationship. There have been a number of times this past year, for example, when I have called my counterpart Pete Aldridge, or he has called me, saying “We've gotten wind that there's this competition, and somehow it doesn't seem as if”, in my case, “Canadian companies are able to compete”, or in his case, “U.S. companies are able to compete.” We look into it, and if we're right, we will change that, because sometimes things slip by. We do it a number of ways, but it isn't easy, and I think we have to be vigilant. We can't take it for granted. We have to recognize that even though they're our closest allies, we have to be there. We have to do what's best for Canada, but we have to nurture that relationship. It's isn't easy, but it's something that is so critical we can't afford to take it for granted.

Mr. Joe McGuire: Is the Department of Foreign Affairs and International Trade, or is any government department besides your own, trying to reduce these non-tariff barriers?

Mr. Alan Williams: That's certainly out of our jurisdiction. I don't know if Foreign Affairs is or is not, and I won't comment about the likelihood of their being able to influence it.

Having said that, the U.S. is so big that notwithstanding all of these constraints, what is still left outside those constraints is a huge amount of opportunity for us, and that's what I think we have to focus on.

The Chair: Thank you, Mr. McGuire.

We have a bit of time left, so I'm going to fill it up with a question related to that, and that is in regard to the Agreement on Internal Trade, Mr. Williams.

In reference to Mr. McGuire's comments about the fact that there are impediments--they have thrown up these blocks in particular areas--it seems as though through the Agreement on Internal Trade we have in many respects fettered ourselves by focusing to the extent we have on competition and not necessarily looking at the broader view: where we can build niche capabilities in particular areas; what makes sense in terms of timing; getting products fairly quickly if they're needed for national security reasons. Can you also explain if it's possible under the AIT to sole-source a particular piece of equipment if it's needed on the basis of national security?

À (1025)

Mr. Alan Williams: Thank you, Mr. Chairman.

The answer to your last question is yes. There is a provision that allows you to invoke a national security exemption and as such take it outside the realm of that agreement. You have to be careful when you invoke it. This isn't a trivial kind of invocation. But where it does apply, where it is meaningful, the process allows us to recommend it, and it goes over to PWGSC, who in fact apply it. So we can take it out, should that in fact be a requirement.

You're quite right, the AIT to some extent does constrain us more than other jurisdictions are constrained. The bad news is that it constrains. The good news is, though, that it does constrain us in the sense that Canadian values are typically that we want to be fair, open, and transparent; we just don't want to be taken advantage of. And typically these are the kinds of questions I have: if I'm going to open up our opportunities to you in this country and this country, I want to see the same for ours. Having these bilaterals and these other kinds of forums for discussion gives me the opportunity to try to ensure that happens.

The Chair: Maybe we'll come back to a question on that a little later, but at this point we'll go to Ms. Gallant.

Mrs. Cheryl Gallant (Renfrew—Nipissing—Pembroke, Canadian Alliance): Mr. Chairman, the witness has claimed that requirements are as rigorous as any and that nothing has really been changed.

I'd like to bring the committee's attention to the fact that access to information has revealed that the French complained that a requirement in the Canadian specifications for the helicopter to be able to make a safe descent after losing one engine, as well as other flight criteria, limited the selection of the British-Italian EH-101. Shortly thereafter, after Raymond Chrétien made a note to Mel Cappe, they modified the requirements to a less-demanding controlled descent, among other scaled-back specifications. It's bad enough that France is dictating our foreign affairs policy, but now we have them dictating our procurement as well.

So we've seen that DND has reduced the requirement far below what the military initially identified as its minimum requirements.

The July 31, 2001, basic vehicle requirements review presentation given by the witness' officials to the operational officers at 12 Wing Shearwater states on one page that the BVRS 03 endurance requirements have proven too stringent for the marketplace. Only one competitor is compliant: Team Cormorant. Yet, as I understand it, currently all four contenders have stated that they are confident they are compliant with the current requirement specifications. So they would have had to have been scaled back.

In July 2001, only one contender was compliant. So what we want to know is, what happened between then and now to ensure that all the contenders are compliant? Have the bidders improved their aircraft, or have the requirements been scaled back?

Most importantly, if, as you have been directed to claim, there has been no political interference in the role of the MHP, how do you explain the ad hoc committee of cabinet led by Herb Gray, whose mandate was to examine how regional development--code word for favouritism--could be incorporated into the defence procurement process?

Mr. Alan Williams: Thank you. I hope I got them all, but I'll try.

Point number one, I have not been directed to claim anything. I have not discussed my words with anybody, and no one would even try to direct me--they know me too well. So no one has asked me to say anything. It's all coming from what I think is correct.

Secondly, you start off by talking about one engine failure and what happens there. Your comments are 100% incorrect. Nothing in our SOR and our BVRS has changed one iota, notwithstanding what anyone may have claimed to anybody about anything.

All you have to do is read the SOR, section 4.1.2.3.2.b., or the specifications 3.5.2.3.2.1.2 or 3.5.2.3.2.2 and the subsequent four paragraphs to see that they're clearly consistent with the requirement for safe recovery, both from a hover position and from a flying position. So whoever has said that has misinformed you. We have not changed it one iota.

In terms of Shearwater, I'm not accountable for what Shearwater says or doesn't say, but I am proud of the fact that throughout this whole process we have involved our bases and our wing, and they have a lot of ideas and a lot of impressions that they bring to us. They may or may not have thought certain things, and that will be brought to our attention. The fact that they allege sometimes doesn't make it right. What makes it right are the people who are accountable for the program.

So you can choose to believe what you want, but we are here to tell you--I am here to tell you--that we have not in any way, shape, or form modified our statement of requirements.

As I've said earlier on, to suggest that the heads of our military would do that for--

À (1030)

Mrs. Cheryl Gallant: I did not say that.

Mr. Alan Williams: With due respect, if the specs are changed unwillingly, you must be suggesting that we're being forced to change them. Why else would we? We're not changing them because we want to change them. You're suggesting that someone is forcing us to change them, and I'm saying to you that is insulting and impinging on the integrity of our Chief of Defence Staff, the head of our air force, and the head of our navy to suggest that they would put our men and women at risk in operations. As far as I'm concerned, that will never happen; that has not happened.

The Chair: Thank you, Mr. Williams, and thank you, Ms. Gallant.

We'll go to Mr. Price now for five minutes.

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

Mr. Williams, in the beginning you talked a little about testing facilities, back and forth between the U.S. and Canada. Let's say from September 11 up until now, have there been any changes as far as the U.S. accepting Canadian testing and back and forth? Have there been any changes in that relationship?

Mr. Alan Williams: If anything, our relationship has strengthened. The agreements I referred to, the CANUSTEP and TIBO, are all initiatives put in place over the last year or two that are really being used effectively. So I think we both realize the importance at this time of sharing facilities, reducing costs, and learning from each other.

While we're really relatively small, we talked about our LAV III, so there are opportunities with gas turbine engines and other kinds of tests. We have a great facility in Nanoose Bay for underwater testing. We do have some great facilities. So do they, in Aberdeen.

So I think, if anything, we're both utilizing our own capabilities to the betterment of both.

Mr. David Price: Right. You mentioned also sitting at the NATO table with your different counterparts. Right now, the U.S. and France are both working on the theatre missile defence system for the European partners, the NATO partners. Is there any involvement with Canadian industry in that project?

Mr. Alan Williams: I have signed off a letter last week to Pete Aldridge, my counterpart, who I referred to, agreeing to open technical discussions--if that's the right term; I'm always cautioned about using the right term--technical discussions with the U.S. on missile defence. This is separate and divorced from any decision the government may take about participating in the program.

But from an industry standpoint, we want to make sure, to the extent we can, we can involve our industry now in the huge opportunities that are going to arise. So we're beginning technical discussions on allowing our industry to participate in this massive program.

Mr. David Price: We're talking right now about the European theatre missile defence system as compared to our national missile....

Mr. Alan Williams: When you look at the U.S. plan--

Mr. David Price: They do tie together.

Mr. Alan Williams: --this is part of it. So it's too early for me to say this part or that part, but I am taking it in its most broadly reaching way that when we talk about missile defence, the European system is considered part of that. Certainly that will be part of our technical discussions.

Mr. David Price: I agree totally there, because actually if we're talking about a NATO theatre missile defence system, we can't just talk Europe; we have to talk North America too. It's totally unfair.

Mr. Alan Williams: What I want to emphasize again, so I don't get slapped when I get back, is that I'm talking about industry participation here, separate and divorced from government commitment on the program.

Mr. David Price: Yes, and that's what I was getting at.

Mr. Chair, I think you had a question.

The Chair: Just on that point, maybe I missed something here, but would it be possible, then, Mr. Williams, for Canadian industry to participate in aspects of national missile defence contracts without or in the absence of a political agreement between the two countries?

À (1035)

Mr. Alan Williams: I can't say for certain. These are what the technical discussions are going to be.

I don't know what position Canada is going to take, but I'm going to do my best to make sure we optimize the chances for industry to participate. Whether or not at the end of the day the decision impacts politically on our industry, I don't know. Notwithstanding that reality, we're pursuing the technical discussions to see how far we can push that envelope.

The Chair: Would you be prepared to venture a guess as to the value of contracts that might be available to Canadian industry? Has any assessment been done on that count?

Mr. Alan Williams: I'd like to leave it a little bit longer. We're just about to start. If we're back here six months from now, I'd probably have a much better estimate. Right now I think it's too soft for me to venture a number.

The Chair: Okay.

Thank you, Mr. Price, and thank you, Mr. Williams.

Mr. Benoit, you have five minutes.

Mr. Leon Benoit: Thank you very much, Mr. Chair.

Mr. Williams, you're very smooth in avoiding answering questions, I think, and I want to take you to task on that exactly.

In fact, in my question I asked you very specific things. I'm going to read it again because it was a written question. I asked: do you think that increased protection from small-arms fire, the ability to stay in the air when an engine fails, the ability to carry two torpedoes instead of one, in any weather, a loud-hailer, a cargo hook, a second life raft, are all as useless as air conditioning in the Arctic?

I had a very specific list. You responded very specifically that everything on that list is covered under the statement of requirements. Yet you've since said that in fact the ability to continue to fly, should you lose an engine, isn't a requirement, that the ability to have a safe landing is the requirement. But that's something quite different.

So I want you to respond to these one by one. When it comes to the ability to stay in the air, you said you put no value on things like a third engine. You say, and this is a quote, “We can live with the current requirements”. Well, maybe you can live with the current requirements, but our air crews will have a better chance of living in fact if they can continue to fly should one engine fail. The only helicopter that provides that, of course, is the helicopter that was procured and that this government cancelled, which is the EH-101, because it has three engines.

So why is it that you can live with having a helicopter that can only ditch safely should it lose an engine but our military people may not? You don't seem concerned about that.

Mr. Alan Williams: Let me make a few comments. Your argument would suggest that the only helicopter any country should ever buy would be that one because it has three engines, using your scenario.

Mr. Leon Benoit: No.

Mr. Alan Williams: Well, that's the only one that when you lose one engine, you have two left. So if we're worried about the life of our men and women, that's the only one we should procure.

What we have specified very, very clearly in our specifications is that if one engine fails, whether it's in a hover position or whether it's in an in-flight position, it has to be able to achieve a certain characteristic to ensure the safety of our people. We don't care about the aircraft, but we've insisted that there are specifications to ensure that when it's in forward flight, it has to be able to land on our frigates. When it's hovering with a sonar, it has to be able to cut the line, accelerate forward, and land safely. Or if it has to go into the sea, it has to be able to do it in such a way that there's sufficient time for our men and women to get out. So the last thing we should ever be accused of is doing anything to compromise the safety of our people.

We would never--

Mr. Leon Benoit: But ditching safely--

The Chair: Allow the witness to respond to the question.

Mr. Williams, please continue.

À (1040)

Mr. Alan Williams: To suggest that the head of our navy and our air force and our Chief of Defence Staff would put a specification out to tender that would compromise the safety of our people is, as far as I'm concerned--

Mr. Leon Benoit: Mr. Chair, can he answer this? He said that before.

Specifically, on that requirement, you've given an answer, but it isn't.... My question to you specifically was to have the ability to stay in the air. You said, “Oh, yes, that's all covered”. It isn't in fact. So that was an incorrect answer. You failed to answer the ability to carry two torpedos instead of one in any weather condition....

Also, there are a couple of other issues here. Under the current statement of requirements, the cargo hook and the searchlight are two things I specifically asked about. In fact, they only have to be capable of being fitted; they don't have to be attached for all use. What happens under certain operations, military operations, if the helicopter is fitted, say, for a particular military-type mission and it has to perform a search and rescue operation? It will have to return to the ship to refit to perform the search and rescue. Yet you're saying it's of no value to have the ability to go straight to the search and rescue mission without going back to the ship to re-equip.

I'd like you to explain how you see no value in that. It's certainly a value to the crew having that, knowing they can be rescued without having to return to the ship to change equipment.

Mr. Alan Williams: I'm happy to comment.

First of all, your comment on the two torpedoes is absolutely incorrect. We have insisted that, ISA, it must be able to carry two. At ISA plus 15, it has to be able to carry--

Mr. Leon Benoit: But not in any weather condition.

The Chair: Mr. Benoit, let me refresh your memory in terms of the rules of this committee.

First of all, it's important that we treat our witnesses with courtesy and respect. It's in the Standing Orders. That means we don't interrupt our witnesses every time they attempt to respond. And it's not your job as well to determine whether or not the witness has answered the question to your satisfaction. It's my job, as chair, to maintain decorum and to keep the flow of the meeting going.

So I remind you of that. And I also remind you to direct your comments through the chair. That applies to both the witness and the questioner.

Mr. Williams, please continue.

Mr. Alan Williams: Thank you.

You were suggesting that somehow we only need one torpedo, not two--at least that's how I understood it--and I'm clarifying for your benefit that in fact at a temperature of ISA, which is 15 degrees Celsius, we are demanding two at all times. At a temperature of ISA plus 15 to 30, we've only demanded one, but our military have agreed that at that temperature they have the capability to move things in and out, so that if they do need two torpedos, from their perspective they have no trouble in putting in two and taking out other things they may not need.

That gets to the issue of “role fit”. You are quite correct; we have 11 different missions we could provide for, and we have not asked that everything be in there in the event that any of the 11 missions are conducted. That's not how we operate. When we send people on missions, they're sent on missions for certain things, and the helicopter will be equipped to carry the particular items they need. In the event they have to be role-fitted, we have stipulated that the role fit has to be done in less than an hour. We think that's a proper balance.

The Chair: Thank you, Mr. Williams.

Are there any questions from the government side?

Mr. LeBlanc.

Mr. Dominic LeBlanc: Thank you, Mr. Chairman.

Mr. Williams, this is just for clarity's sake, because in the discussion this morning I don't want there to be any confusion. Some people have suggested there has been political interference in various procurement projects. Cancelling the initial procurement in 1993 was certainly political interference, and it happened because the party that won a majority government campaigned on a promise to cancel it, and the party that had signed the contract ended up with two seats. That, in my view, was political interference, which is perfectly normal.

Some people have gone from that to suggest that political people, either ministers or officials directed by ministers, have told your staff--or, as I think you properly described it, senior officers of the military have been told--to adjust the statement of operational requirements, or tell you this searchlight is better than that one, or we need this kind of hook and not that one.

Am I correct in understanding that at no point has anybody--any political person or minister or his or her staff--directed you or the military with respect to the statement of requirements; that this document was prepared “by the military for the military”, to use your phrase, and has not changed since the process began?

Mr. Alan Williams: Yes.

Mr. Dominic LeBlanc: Thank you, Mr. Chairman.

The Chair: Thank you, Mr. LeBlanc.

I inadvertently in the last round skipped over Mr. Bachand.

Mr. Bachand, my apologies. I'm going to give you 10 minutes at this point.

Mr. Claude Bachand: Thank you very much. You should skip me more often.

[Translation]

Mr. Chairman, I would just like to tell Mr. Williams that I don't know what his salary is but I am pleased to see that he is truly earning it this morning because it is never a picnic to appear before the National Defence Committee. I know that we may sometimes put you in the hot seat, but you must realize that we are not here to insult you. I think that Mr. LeBlanc is perfectly correct in saying that when a government is elected with such a strong majority, as it was in 1993, and when it then decides to cancel a contract that was negotiated by the previous government, a contract that would have been very expensive for Canada, it is entirely within its right to do so. And I agree with that.

However we also believe, Mr. Blaikie and myself, that political power is often more subtle than that. They won't say that they want a 35 millimetre instead of a 25 millimetre gun; I don't think it works like that. But after having cancelled the contract, is it possible that the Prime Minister would not want to use the same company because, politically speaking, that would not be a good idea? That is what we are saying, and we do not mean to insult you in saying that.

For my part, I am also one of those who believe, without meaning to insult you, that even if the government had done that, you could not tell us. I also understand that game; one has to be subtle. But our role, that of the elected representatives, and especially that of the opposition, is to test you, and to ensure that voters and taxpayers are getting their money's worth. Usually our questions focus more on political issues rather than on the size of the guns or the number of rafts or torpedoes per helicopter. We leave that up to the military experts.

Now I'd like to come back to the JSF, the Joint Strike Fighter program. From what I have understood, Mr. Slack, Canada is investing in this program currently solely because of the economic benefits. I also understand that you remain open to future possibilities, such as purchasing these aircraft, if there were an opportunity. I would just like to warn you that if that ever is the case, we will not support that type of purchase because we feel we are more in need of patrol aircraft and we would like to see more investment in drones as well.

Am I correct in thinking that it is truly for the purposes of the economic benefits that you're considering purchasing these aircraft, but that the decision has not yet been made? I would like to hear your comments on that.

À (1045)

[English]

Mr. Michael Slack: That is correct. The decision to purchase the system has not been made yet and will not be made for some time. The information the military will receive from the JSF program in the United States can be used to evaluate the full spectrum of requirements in the future, whether it be tactical aircraft, potentially UAVs, or potentially some other system that is not yet considered by the Canadian Forces.

[Translation]

Mr. Claude Bachand: Fine.

Mr. Williams, you seem to believe that you have developed an infallible system, and I don't blame you, because when one develops procedures, one always thinks that they are the best. Earlier, I believe you also agreed that there are certainly methods that are just as infallible as your own, but that these are the ones you have chosen.

However some things are falling through the cracks. I'd like to give you an example. A few years ago, a satellite communication system was purchased at a cost of $140 million and it then became apparent that it was no longer useful. You know, when the cost is $140 million... The minister set up a committee to attempt to retrieve $200 million in all of this, as was his commitment with the government. I'd like to know if there are other examples besides the satellite system.

Are there any others? Can you tell me if there are other cases where the government has spent $140 million or $100 million right, left and centre only to suddenly realize that the purchase had to be disposed of, that it had to be set aside after having spent that money for nothing?

[English]

Mr. Alan Williams: Not surprisingly, I didn't come with a list of all the contracts that have fouled up--

[Translation]

Mr. Claude Bachand: Could you obtain that for us?

[English]

Mr. Alan Williams: --but if there are some, we can provide you with a list. I am personally not aware of many of these; I was aware of that one. But we could certainly look over the last couple of years to see if there's any equipment just sitting there that we haven't used.

I will say this. I hope I didn't say we're infallible, because we do make mistakes. But I think on balance the taxpayers' money is well.... I guess this is self-serving, but I think in the government in general we don't misplace a lot of the taxpayers' money.

À (1050)

[Translation]

Mr. Claude Bachand: And I imagine that when an example such as this one comes out of the Auditor General's mouth, a communication satellite system worth $140 million sitting in a warehouse, you must take some supplementary measures to ensure that that type of error does not occur again.

What is your reaction to that type of mistake? Do you take measures or do you perfect your own system so that, one way or another, that mistake does not occur again?

[English]

Mr. Alan Williams: With this program, as with most programs.... Each one you have to look at uniquely, so the simple answer is you've got to look at what happened in that case and make sure it doesn't happen again. When you investigate that case, you see there was a question of changing requirements internally, evolving requirements, shifting accountabilities and responsibilities, as well as huge technology advances.

I don't know how many years ago that was, but a number of years. I think we're managing jobs better now--not to say these things can't happen again, but I think we're more aware and have a more rigorous process in place now to preclude that kind of thing happening.

[Translation]

Mr. Claude Bachand: Are there policies in your department that deal with materiel cost overruns? There's a little trick often used by big businesses and even in the municipal sector. It's a well-known old trick. A contract is awarded to the person who offers best value for money and, coincidentally, during that contract, unforeseen expenditures arise. That is the sort of thing that I think makes the competition angry, because once a contract has been awarded, the beneficiary sometimes receives 20, 30, 50 per cent more. Can you tell me what the department's policy is regarding cost overruns in contracts?

[English]

Mr. Alan Williams: It really is a challenge, especially when you get to the multi-hundred million-dollar and billion-dollar programs that last many years, because requirements do change, technology changes, things happen. But there are safeguards--they're not perfect, but certainly there are safeguards departmentally. Typically, a program expenditure authorization is limited to a certain amount.

In our own department we have a fairly rigorous process involving senior review boards and program review boards that manage and monitor these kinds of programs internally. The Treasury Board itself provides us with program authority and provides Public Works with contract authority that can't be exceeded. Between ourselves and Public Works and the Treasury Board and our major programs, people are monitoring and getting reports on what's going on. When we get close to huge divergences between moneys that we thought and results we thought were going to come, we are forced to go back and either cut our losses at the time or explain what's going on and find a new way ahead.

Within our system today, it's very difficult to get far off track in terms of not just the cost but deliveries too, because keeping your moneys appropriate and not getting what you need is just as bad. From both a results and a cost aspect, there's fairly rigorous monitoring throughout the systems in order to make sure you can't go too far off base before someone brings you back in.

[Translation]

Mr. Claude Bachand: Just to wrap up quickly, is this common practice? Do countries guarantee their contracts with, for example, a major American company? I imagine that if there are problems regarding cost overruns or delivery dates, there are clauses in these contracts that provide for penalties. But in general, does, for example, the United States of America stand by or guarantee its delivery dates or cost overruns? Can one go as far as negotiating with Washington contract costs that have been higher than expected, so that then they deal with that at their end?

[English]

The Chair: Can we get a quick response?

Mr. Alan Williams: Our typical agreements aren't with the government--what we call foreign military sales with the U.S.--but with the companies. We do sometimes deal with foreign military sales through them, and that's usually for products that are coming not off the shelf but are part of an ongoing program. Most of our dealings are through industry to industry where you have the typical penalties and the clauses, as per any commercial venture.

À (1055)

The Chair: Thank you, Mr. Williams.

I have a quick question, two parts to it, going back to the AIT.

I think what we found over the course of the last number of years is that the legal challenges with respect to the AIT have increased in numbers. They're adding a lot of time to the process--some would say unnecessarily. I'm just interested in getting your comments as to whether or not it's time for us to review the application of the AIT as it applies to defence procurement.

Secondly, there have been a lot of rumours as well about possible legal action at the end of the MHP project. That's been out there. I think everybody recognizes that. You have been dealing with the suppliers over the course of the last number of years. What do you think the suppliers would say if they came before this committee, in terms of the process at this point? Can you provide us with some thoughts on that?

Mr. Alan Williams: First of all, with regard to AIT, the AIT does of course embody in it the Canadian International Trade Tribunal and its jurisdiction. I think it's been in operation now for a number of years, so it's worth a review to see whether or not its scope and its approach is best suited for today and tomorrow, without making any judgment about it. I think it's just time to have a re-look at it, relative also to what other jurisdictions are doing. It's always a good bet. We don't have to do exactly the same, but it's interesting to know how they fulfill their mandate, as opposed to other jurisdictions fulfilling theirs. Again, how much in balance do we want to be with the process in other countries?

What was your second question?

The Chair: The second question was really in connection with what the helicopter suppliers or contractors would say about the process. What do you think they would say about the process, based on the feedback you've received over the last number of years in terms of how the process has unfolded over the past few years?

Mr. Alan Williams: The prudent answer is for me to say that you would really have to ask them.

The Chair: I know. You don't want to go beyond that?

Mr. Alan Williams: No. I think you probably should ask them, and frankly, I welcome you to do that.

The Chair: Okay.

We only have a couple of minutes left. I think at this point we should probably wind up this discussion, Mr. Williams, Mr. Slack.

There is an item of business that I want to bring to the attention of committee. It has to do with Bill C-31, which is an act to amend the Pension Act and the Royal Canadian Mounted Police Superannuation Act, from the Minister of Veterans Affairs. To avoid the need for a steering committee meeting, I would just like to ask members if they would give me the authority to contact the minister so that we can bring the minister before the committee just as soon as possible to get this legislation dealt with. Is there concurrence that way?

Some hon. members: Agreed.

The Chair: Mr. Williams, I'd like to thank you for being here today.

Mr. Slack, your encyclopedic knowledge of the MHB program is certainly appreciated, and thank you for providing us with a wealth of information.

The meeting is adjourned.