Thank you and good afternoon, Mr. Chair, and committee members. My name is Lisa Campbell. I am the assistant deputy minister of defence and marine procurement at Public Services and Procurement Canada.
I am accompanied by Patrick Finn, assistant deputy minister, materiel, from the Department of National Defence; and by Jeffery Hutchinson, deputy commissioner, strategy and shipbuilding, from the Canadian Coast Guard.
Governments around the world expend significant resources on goods and services to meet the needs of their citizens, and the Government of Canada is no exception. Federal procurement spending contributes close to 1% of Canadian GDP annually. Over the past decade, the federal government has issued more than 460,000 contracts, on average, per year, worth more than $18 billion annually. The spending is used to acquire a vast array of goods and services, ranging from vaccines, nuclear facilities and bridges, to military equipment such as ships, tanks, and aircraft.
At Public Services and Procurement Canada, we ensure that federal procurement is fair, open and transparent, and that it provides best value to Canadians.
In total, all levels of government in Canada spend about $100 billion a year on the purchase of goods and services. The federal government accounts for just under 20% of this amount—about $18 billion—as I said earlier. Half is spent on defence and marine procurement, and the other half goes towards the wide range of acquisitions needed to run a country, such as bringing in new Canadians through the Syrian refugee relief effort.
PSPC's acquisition program focuses on high-value, complex procurements that require the skills of our specialized workforce.
Canadian federal procurement is based on core principles of fairness and transparency. Our laws, regulations, and international trade agreements generally require that government purchases be put to the open market for public bids. Competition promotes innovation and best value.
There are some exceptions to this provided for in the government contracting regulations, such as when only one supplier exists or there is a robust justification to source a single supplier. This may occur mostly in the defence context, where interoperability with allies and national security are factors at play.
Like other governments around the world, the federal government also aims to achieve a variety of socio-economic objectives through procurement, leveraging the public spend for the industrial benefit of Canada. Canada has, for some time, leveraged defence procurements for industrial benefit, and recent changes have brought both broader application and more rigour to that work.
A core element of the industrial and technological benefits approach is a rated and weighted value proposition. As part of the overarching goal of getting the right equipment and services for the Canadian Armed Forces, this is a powerful lever for the government because it requires bidders to compete on the basis of meaningful economic benefits to Canada associated with each bid. It is a weighted and rated assessment, so bidders who provide quality value propositions will stand out.
We know as well that sustained spending over time not only strengthens the industrial base, but it also supports research and development, as well as innovation and export capacity. Innovation, Science and Economic Development Canada, or ISED, recently published the list of industrial offset obligations. Since 1986, companies promised to deliver $37.7 billion, and $24 billion of those obligations have been fulfilled, with the rest under way. Current industrial benefit obligations stand at about $30 billion, of which $16 billion have been completed, and $9 billion are under way, with $5 billion to be determined.
What we're seeing through all of this is that when we apply this lens to major procurements, with sound knowledge of our industrial base and do it in a targeted way, it helps us tailor procurement strategies to maximize the federal spend while achieving best value for Canada.
These efforts work in concert with other mechanisms to strengthen the Canadian industrial base, including providing access to global markets through trade agreements, and efforts by Global Affairs Canada and other federal departments to promote Canadian companies and skills abroad.
For example, Canada's infrastructure projects are covered by trade agreements. Therefore, government cannot specify a requirement for Canadian steel. However, our trade agreements greatly expand the global marketplace for Canadian goods and services, including Canadian steel.
The importance of the work we do has been underscored by the recent renaming of our department, along with the mandate for our minister and to modernize procurement policies and practices so that they are simpler and less administratively burdensome, and to deploy modern comptrollership and include practices that support economic policy goals. We welcome this new emphasis because it aligns with our own business imperatives. Changes are already under way, in collaboration with other government departments and central agencies, to modernize our procurement practices and processes. We're reviewing our contracts to make them simpler and shorter, as well as reviewing standard contract terms to ensure that they incentivize the business behaviour we want to see. Ultimately, we're working to make it easier for government departments to buy, and for suppliers to sell to us. We're also actively engaging industry, and we conduct industry engagement as part of all major procurements. We have industry advisory groups for both the defence and the non-military sectors.
In fact, we're at an important point in our modernization efforts: we're about to buy an electronic procurement system that's going to help us streamline procurement processes and allow us to capture real-time data about the federal spend. This data will in turn allow the government to make informed policy decisions, allocate resources, and set strategic goals. This change is going to be critical to our organization as we're currently, to be frank, working with outdated systems that create significant gaps in our ability to perform our function in an effective and efficient manner.
As part of our modernization, we are also reviewing our contracting practices. This initiative is focused on enhancing the Government of Canada's relationship with its suppliers and, therefore, aims to increase the ease of doing business with the federal government. This review will simplify, streamline and standardize procurement processes, and that is a key consideration for successfully adopting an e-business environment.
In addition, in response to concerns that Canada's pricing framework is dated and contributing to a rise in costs of defence programs, we engaged a third-party expert to review PSPC's cost audit and profit policy, as well as our methodology for determining contract pricing, particularly in the sole source context where competitive drivers aren't present to drive down prices.
The third-party report made several recommendations, including a call for substantive updates to the Government of Canada's practices, and a comprehensive action plan is underway. Third-party reviews are part of our ongoing efforts to improve the way we do business. We also conduct audits to confirm whether our procurement approaches maximize value for Canadian taxpayers' money and optimize performance.
We're also applying modern contract approaches, such as the two-step bid evaluation process that allows correction of minor omissions or errors after an initial review of bids. This more flexible approach maximizes competition and innovation as evidenced by a recent defence procurement. Initially, only one bid was found compliant. After the second step, however, five bidders were found to be compliant, and the winning bid was selected on the basis of best overall value, considering price, technical merit, and socio-economic benefits. This two-step evaluation not only led to greater competition, but it also sped the process up by several weeks. I wish some of those stories would make the news.
Another key element pertaining specifically to defence procurement is the sustainment initiative, a joint project with the Department of National Defence along with Innovation, Science and Economic Development Canada. I was pleased to participate with Mr. Finn in the official launch of this initiative yesterday, after a number of years of effort by our respective departments in its development. It's a new model of contracting for in-service support and maintenance of military fleets and equipment, which focuses on collaboration, international best practices, and strong business cases, instead of a one-size-fits-all approach.
Four principles are going to guide us: performance, value for money, flexibility, and economic benefits. Beginning in October 2016, these principles are going to become a mandatory element for all decision-making for sustainment solutions valued at more than $20 million. We have pilot projects ongoing right now in land, sea, and air, and we anticipate that this will improve defence equipment readiness by leveraging the combined capabilities of government and industry.
Unlike the regular goods and services we procure, defence equipment is rarely standard. Even equipment described as off-the-shelf may need to be customized to meet the military's needs. Armoured and other non-armoured military vehicles, for instance, carry sophisticated equipment and must be able to withstand weather conditions and circumstances that are unlike those encountered in the civilian world.
Here in Canada, particularly in the defence sector, we have seen how sustained funding and support for innovation can be transformative for Canadian companies. With government contracts, the companies are able to contribute to Canada's safety and security, develop skilled workforces, seek export markets and participate in the global supply chain. They can also reap benefits from their investment in research and development.
One of the key priorities identified in mandate letter was the national shipbuilding strategy. As part of this commitment, on May 26, Minister Foote released a status report on the NSS, which we've tabled today for your reference. The report provides an update on the state of the strategy as a whole, the projects and the economic benefits, from the signing of the umbrella agreements with the shipyards in 2012 to December 2015. The minister has indicated her commitment to report regularly on the NSS. In the fall she will table an annual report in Parliament, which will be followed by quarterly reports.
Much has been written on the strategy, so we welcome the opportunity to be here today to discuss our accomplishments and our challenges.
In the last three years, our shipyards, Irving and Seaspan, have essentially demolished and rebuilt their yards, at no cost to the Government of Canada. This modernization effort has cost the shipyards over $500 million. The transformation is impressive, and we are currently building vessels on both coasts.
Esteemed members of the committee, if you would like to visit the shipyards, our offices could organize a tour.
Thank you for your time and, again, I appreciate the opportunity to appear before you today.
My colleagues and I would be happy to take your questions.
Thank you very much for those questions.
There's no question that we have faced some challenges, from a Coast Guard perspective, in implementing the shipbuilding strategy. If we go back, I think it's important to note, as you have referenced, that starting in 2010 the national shipbuilding strategy was launched because there was recognition that Canada didn't have the strategic shipbuilding capacity that we want as a nation, particularly when we have two large government fleets that have to be supported, particularly when we note that Canada has the longest coast line in the world, particularly when we note that Canada is responsible for three ocean domains.
It's of unquestionable importance to the government and of particular importance to the Coast Guard. We went into shipbuilding recognizing very much that the shipbuilding industry needed to make a commitment. The yards were selected through the NSS, and as Lisa referenced earlier, they've made large investments out of their own coffers to build the infrastructure that they need.
Perhaps we on the government side—and I think it's particularly true for us on the Coast Guard side—didn't recognize how much our own capacity and experience had dissipated over time. We have certainly faced a challenge internally in rebuilding our own capacity in shipbuilding. We have developed a team of engineers who are now...you made the play on words about the plan of attack, so I'll call them a fit fighting unit of engineers who do really exemplary work, there's no question about that, and we're building our cost capacity on the government side and our leadership capacity.
At the same time, concerning the Vancouver shipyard, I think everyone involved suffered from what our external expert calls a conspiracy of optimism. Everyone thought it would move faster than it did, including the yard. They have taken a very measured approach, in my view. They have quite a mature approach to taking lessons from the rebuilding, the implementation of their shipbuilding capacity, and learning from these and improving as they go.
We have seen their capacity, since the first cutting of steel on the offshore fishery science vessel last June, really develop, grow, and mature. They've brought in world-class equipment. They have continued to develop their management team, and most important, they've continued to develop the processes in the yard that will lead to stable, predictable, and high-quality shipbuilding.
We have faced challenges; there's no question about that. Both the Coast Guard and the shipyard have taken steps to address them, and I think we feel the progress that is every day now being made on the shipbuilding.
We spend a fair bit of time learning from and sharing best practices with like jurisdictions. In some cases, they look to us, and in others, we look to them.
I think our e-procurement solution is going to do a lot for us. It's going to mean that a lot of things we are now paying people to do will be automated, and we'll be able to look at data in the aggregate to leverage the federal spend.
A little-known fact is that PSPC handles 12% of the contracts but 80% of the money volume. That's appropriate. It means that our workforce is focused on the really complex procurements.
As to your question about defence procurement, I would say that it's more similar than we would think to complex procurement. Buying a nuclear facility, vaccines, building bridges, many of these complex procurements have similar features in that there are unknowns. There are risks, and you have to plan for them. There are complex global supply chains. Managing that is the kind of work that we do.
As well, we're noticing that procurement life cycles are getting shorter and shorter. We're finding that more of the money we invest goes into in-service support rather than the original acquisition. Managing that aspect of procurement is increasingly important. In respect of the prime contractors we hire, we're noticing that keeping an eye on how their supply chain functions is as much interest to us as it is to them.
In regard to best practices, you're right that Canada has a bit of a distributed decision-making model. However, both our minister and the President of the Treasury Board have modernizing procurement in their mandate letters, and we are working closely with them on just that.
I've talked with you about our e-procurement solution. The other thing we're doing is streamlining our contracts. I am a lawyer by training, and I know that my profession can sometimes say that something is risk averse and that we therefore need to add a contract term or clause. The result, quite frankly, is that some of our contracts are a bit unwieldy. We hear this from business as well. Interestingly, they are also sometimes risk averse and will ask for long contracts. Increasingly, however, we're working with them to streamline where we need to and then agree on certain terms. Intellectual property is a thorny issue. Sometimes it can be used for competitive purposes by big incumbents. In other circumstances, the government needs to own some of it so that it can re-compete down the road and benefit from innovations.
We're doing a lot to modernize, to collaborate, and to really make this procurement function the most streamlined as possible so that the government of the day, whatever its policy priorities are, can leverage procurement for socio-economic benefit, whether it's green procurement, benefiting aboriginal communities, or leveraging the Canadian industrial base.