NDVA Committee Meeting

STANDING COMMITTEE ON NATIONAL DEFENCE AND VETERANS AFFAIRS

COMITÉ PERMANENT DE LA DÉFENSE NATIONALE ET DES ANCIENS COMBATTANTS

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, March 25, l999

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[English]

The Chairman (Mr. Pat O'Brien (London—Fanshawe, Lib.)): I'd like to call to order the meeting of the House of Commons Standing Committee on National Defence and Veterans Affairs. We have enough of our members that we can begin.

Today, as you know, we are welcoming the Canadian Defence Industries Association, the Aerospace Industries Association of Canada, the Shipbuilding Association of Canada, and the Armed Forces Communications and Electronics Association of Canada. Several gentlemen have joined us: Mr. Fischer, Mr. Smith, Mr. Cairns, and Mr. Leech. Am I correct in that?

Mr. Peter Smith (President and Chief Executive Officer, Aerospace Industries Association of Canada): Mr. Cairns is not with us.

The Chairman: Mr Cairns is detained at the moment, is he? All right.

We received all the briefs ahead of time, and I'm sure you've had a chance to look at them. They were distributed to your offices some time ago now.

We have been meeting on the—I guess “sensitive” is the word I would use—issue of the merchant marine and possible compensation, but we're breaking from that today. We're trying to juggle two important topics, one being procurement and the other being the merchant marine. So today we return to the issue of procurement.

We thank you gentlemen for joining us. Who is going to start? Mr. Fischer, I see you in the middle seat. Does that mean you're going to lead?

Mr. Robert N. Fischer (President, Canadian Defence Industries Association): I think we had agreed that Mr. Leech was going to start.

The Chairman: Mr. Leech is going to lead? Fine. Very good. Thank you.

Mr. John Leech (General Manager, Armed Forces Communications and Electronics Association of Canada): Thank you, Mr. Chairman. I'm presumably going first because I have the fewest words to say.

AFCEA Canada is pleased to have been invited to participate in your hearings this morning. I've provided a short written brief on our association and our current interests, which I believe are relevant to your work rights now. Permit me to summarize the basics of who we are and to amplify our current interests.

I'll describe briefly who we are and what we do in case AFCEA, the Armed Forces Communications and Electronics Association, is not as well known as some of our colleague associations.

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We are the Canadian branch of an international association with origins in the U.S. just after World War II. We have individual members from the public and several government departments, especially those whose focus is national security—I'm talking about DND, the RCMP, Public Works, etc.—as well as corporate members, mainly from the high-tech industry.

Our purpose is to provide a forum for professional development and the exchange of information between government and industry in the fields of communications, electronics, command and control, intelligence, and information systems. We have volunteer-operated chapters across the country that provide this forum by sponsoring meetings, presentations, seminars, expositions, and professional development training. AFCEA publishes an international journal and administers a scholarship fund to encourage academic achievement. AFCEA is a non-profit, non-lobbying organization. We are seeking increased knowledge and understanding among our members in these complex areas.

Insofar as the current interests go, in addition to the all-consuming task these days of learning about and fixing the notorious Y2K bug, our members have continued to hear and discuss topics that have been directly addressed in your recent hearings.

Last December, at the invitation of DND, a number of our members participated in a symposium on Canadian defence beyond 2010, particularly contributing to the workshops that dealt with the government-industry interface in the future and the so-called revolution in military affairs. In an environment where many points of view could be explained and debated, there's an opportunity for understanding and determination by all parties of the best way ahead.

Our members, both individuals working in the government and the industries that provide the goods and services, are keen to make the best use of the government acquisition process. To that end, in the past year we have heard from Pierre Lagueux in DND and from Alan Williams in Public Works in order to get a better understanding of the efforts being made to facilitate the provision of information systems to our government. Such measures as the improved IT management framework and, lately, benefits-driven procurement have provided progress. It's clear that the acquisition of information systems is not the same as that of some other commodities. The preparation of standard government purchasing agreements can save time. And there's a desire to move towards more cooperation and less confrontation in the contracting environment.

Recognizing the challenge of developing a process that ensures the protection of the government purse and all that entails and, at the same time, results in needed capabilities at a fair profit to the people who are providing it, AFCEA's aim is to achieve understanding, stability and fairness in order to advance the security of Canada.

Thank you, Mr. Chairman.

The Chairman: Thank you very much, Mr. Leech.

Mr. Cairns, you're with us now. Are you next?

Mr. Peter Cairns (President, Shipbuilding Association of Canada): Yes, sir.

The Chairman: Okay.

Mr. Peter Cairns: Good morning, sir, ladies and gentlemen. To begin with, it's a distinct pleasure for the Shipbuilding Association of Canada, which I represent, to be present here this morning.

I won't read my statement. I will just hit some of the high points of it.

Essentially, the objectives and aims of what we do for a living in the Shipbuilding Association are the promotion and development of Canadian shipbuilding, ship repair and the associated marine industries. We were formed in 1995 to fill the void that was left with the demise of the Canadian Maritime Industries Association, which ceased operation about six months before. Today we represent some 25 companies in the shipbuilding and marine industry. We represent them from coast to coast, and we are a growing organization.

The shipbuilding industry worldwide is fiercely competitive. It is overwrought with subsidy. It is an industry worldwide in which a level playing field does not exist. Free market forces are lacking. The industry is manipulated internationally, nationally and regionally by various subsidy programs, whether they be direct, indirect, or hidden.

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Our Canadian government does provide us with good assistance in this way. We think there are other things the government could do to assist this industry, particularly in the commercial international shipbuilding field.

For the industry part, we went through a government-assisted rationalization in the mid-1980s. The shipbuilding capacity in this country today is 40% less than it was in 1986. The yards, through a lot of their own investments—some $150 million in the last five to six years—have been modernized. We've initiated flexible labour contracts. Our manufacturing processes have been overhauled and streamlined, and automation and robotics are the order of the day in most of the bigger yards.

Unlike a lot of shipbuilding industries, particularly in NATO nations—and I use France, England, and the United States as examples—we do not have a federal shipbuilding program for the federal fleets that we can rely on to sustain this industry and to sustain its expertise while it competes commercially.

Shifting quickly to procurement policy, we believe the procurement policies within DND and government in general are extremely bureaucratic and complex. They are designed to protect the taxpayers' money, and we appreciate that, but in so doing they have become excessively bureaucratic. They are not responsive to the operational need. As a consequence, particularly on the marine side, fleets are replaced infrequently, 25 to 30 years at least.

These are wasteful practices, we believe. If you look back at the last 40 years, the government invested—I don't even know what it would be in today's dollars—a significant number of dollars in 1954 to start the St. Laurent frigate program. There were many companies set up in this country. Forty years later, virtually no vestige of that government investment remains.

We have an intensive government investment in building the navy's Canadian patrol frigate in Saint John, New Brunswick, and in Davie Industries in Quebec, and we are very much in danger of losing that expertise as that program is now finished, and the expertise we have in this country is now migrating to the United States.

We would contend that there is a place for some sort of continuous building program in this country. We think it would certainly make sense from an industry point of view, because when we only have major capital programs in this country every 20 to 25 years, we have a tremendous ramp-up cost and a tremendous run-down cost at the end. It's inefficient for the industry, and we also believe it's very wasteful to government. If we had some sort of continuous building program whereby one could replace a federal government ship every two years or so, on a 16-ship fleet you would always have new ships coming into the bottom every two years, and when they got to be 30 or 32 years old, they'd go out the top.

There would be less demand for gigantic megaprojects from the government, and one could tweak those building programs as you go along. You could also change the design on a case-by-case basis as it happens throughout the life of this program, because it would always be continuing. The government would know how much money it's going to spend, and the industry would know approximately what kind of revenue it could expect. I think everybody would be a lot happier and certainly a lot more efficient and a lot more productive.

The only other point I'd like to talk about is alternate service delivery, and I know that my colleagues here will discuss that probably in more detail than I will. But to say the least, I don't believe alternate service delivery is a significant success story at this stage of life, particularly within DND. There are significant success stories. The problem is there are not enough of them.

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When the government duplicates industrial facilities, that's wrong. We don't believe that's efficient for the government. Why not take advantage of the facilities that exist in industry? We believe government should shed those facilities, as a general rule. One cannot make 100% rules here, but there are a significant number of government commercial facilities that I believe should belong to industry.

There has been a lot said about innovative solutions. Government departments must come forward with innovative solutions to solve the funding crisis and to solve the fact that everybody has less money, less time, and less people.

The long and short of it is that we need to have a partnering program with industry where not only the risks but also the rewards are shared. We also have to have a structure that will enable that. Regardless of how hard a young military officer will work and a department will work to produce an innovative program, unless the structure is there through Treasury Board and the finance department to allow that to happen, we're just wasting time and spinning our wheels.

In 1994 when I retired from the military, the amount devoted to the capital program in the DND budget was 27%. I understand that today it's officially 17%, but I think if you talk inside, it's closer to 14%. That's a situation that has to change. It can change with adequate partnering with industry.

Thank you very much for your attention.

The Chairman: Thank you, Mr. Cairns.

Mr. Fischer, perhaps you'd like to present now.

[Translation]

Mr. Robert Fischer: Thank you, Mr. Chairman. Good morning ladies and gentlemen. I would like first of all to thank the committee for the opportunity to speak to you this morning on behalf of the Canadian Defence Industries Association.

[English]

I'd like to give you a little bit of background about who CDIA is. We were formed in 1983 as a non-profit organization, which currently represents about 270 defence companies or companies that are doing business in the defence arena.

It might interest you to know that a survey we conducted in 1997 indicated that the entire defence market—that is to say, Canadian companies that supplied commercial and military goods and services—involved about 1,500 companies across Canada. These were companies that by definition did business in excess of $100,000 that year. In aggregate, that translated into sales of over $5 billion, and it represented about 25,000 direct jobs in supporting that activity across the country. We also learned from that survey that less than 30 of those 1,500 companies are exclusively dedicated to pursuing the defence market, which I think is an indication of the extent to which the Canadian defence industry has succeeded in diversifying itself.

In keeping with the nature of the defence industrial base in Canada, membership in our organization is composed of a few large international firms—I happen to work for one of them—and many indigenous small to medium-sized enterprises, or SMEs, with niche defence capabilities across the country. Some examples of successful niche players include Vector Aerospace in Prince Edward Island, which repairs and overhauls aircraft; Hypernetics in the Ottawa Valley, which produces electromagnetic displays; and Andrew Canada in Whitby, Ontario, which designs radars and radar equipment. The list goes on and on. As I said earlier, we have 270 members.

As president of the Canadian Defence Industries Association, I'd like to raise two issues of concern to our membership. The first one is of importance to government and industry alike, and it's the need to move ahead with major capital projects. The second issue is really a grab bag of a lot of different activities, which we collectively describe under the heading of procurement reform.

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In the 1994 defence white paper the government reiterated the need for Canada to have fully combat capable maritime, land, and air forces. Since then, as you well know, the men and women of the Canadian Forces have honoured their commitment to Canada by participating in international missions in Bosnia, Haiti, and most recently in the Kosovo operations, and as well by answering the distress calls of those Canadians who have been besieged by floods, ice storms, and other disasters.

The Department of National Defence's budget has undergone a significant decline in spending for major capital equipment over the last decade, from 24% or 25% of the overall budget to less than 17% today, as Mr. Cairns has just reminded us. That figure is debatable as to whether it's somewhat less than 17%. In any case, we've seen capital expenditures as a percentage of the total defence budget drop from in the order of 25% to something in the order of 16% or 17%.

According to the Auditor General, the Department of National Defence needs $11 billion over the next five years to carry out its current re-equipment program. However, based on current projections, the government plans to make $6.5 billion of that $11 billion available. As a consequence, there's a real possibility of returning to the rust-out era of the 1970s. As a result, equipment is rapidly aging, and there has been limited action by the government to fulfil its 1994 white paper promises to modernize the forces.

For example, the Aurora aircraft, which patrols our vast ocean space and helps Canada meet its NORAD obligations, is sorely in need of major overhaul and modernization. As well, only about one-third of the required number of light armoured vehicles for the army have been ordered from the diesel division of General Motors, while old and increasingly unreliable vehicles continue to be used.

Perhaps the most glaring example, one which my colleague Mr. Smith will address, is the long overdue requirement to replace Canada's aging Sea King shipborne maritime helicopter fleet.

Canadian industry continues to be ready to work with DND and the government to meet the 1994 white paper major capital project objectives. Therefore I would encourage parliamentarians to lend their support for these projects before even more serious erosion in equipment capability occurs.

In the area of procurement reform, DND should be congratulated for adopting some of industry's acquisition reform suggestions. While these initial steps are encouraging, there remains more that can be done in this area. For example, much work remains to be done to achieve a less bureaucratic, more streamlined acquisition process. As one who has made the transition from government to industry in the last three years, I can tell you that from the perspective of industry, the acquisition reforms that have been undertaken in the department certainly have not percolated down to the level of those of us doing business with the government departments—not as yet, anyway.

Additionally, our membership is becoming increasingly frustrated at the lack of progress in the area of alternative service delivery, or ASD. While NATO flying training at Moose Jaw and the Goose Bay project are considered successful, we and industry regard these as really only the tip of the iceberg, and the potential for extracting savings from this approach has yet to be fully realized.

What is important are the advantages ASD can bring to the Canadian Forces and the Department of National Defence. As the U.S., the U.K., and Australia have discovered, close partnership with industry is a less expensive and more effective way of managing defence resources.

The Ministry of Defence in the U.K., for example, has recently introduced something called “Sponsored Reserves,” a program that enables the government to legally call up members of industry to serve alongside soldiers in crisis situations. Consequently, the military benefits from the industry's technical expertise on specific weapons systems.

Similarly, the Department of Defense in the United States has relied extensively upon industry since the end of the Cold War and the decline in defence spending. Contractors were present during Operation Desert Storm and have also been used recently in peacekeeping missions in the Balkans. As has been the experience of our allies, the long-term benefits of ASD will mean a better utilization of military resources, leading to reduced costs overall.

Our association feels that the government must move forward with the growing list of major defence capital projects. There's a growing inability across the three services for the Canadian Forces to do their job properly because of inadequate and increasingly unserviceable equipment. Furthermore, Canadian forces are quickly becoming incompatible with our NATO allies and UN multinational forces. If the government expects the Canadian Forces to give substance to the 1994 white paper, then they need to be properly equipped to fulfil their jobs.

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In conclusion, I'd like to congratulate the committee on its quality-of-life recommendations, and I hope you have the same positive influence in bringing about much-needed change in the area of procurement reform.

Thank you very much for allowing me to present the concerns of our membership, and I look forward to responding to your questions.

The Chairman: Thank you, Mr. Fischer. I can assure you that we hope to produce, what should I say, a candid and hard-hitting report on procurement. We're going to tell it the way we hear it and see it, as this committee did on the quality-of-life report. So I appreciate your remarks.

Are you going to speak as well, Mr. Smith?

Mr. Peter Smith: Yes, Mr. Chairman.

It's my understanding that the committee members have a copy of my text, so to avoid repetition I will simply reiterate a few points to add reinforcement to the issues that were raised by my colleague Mr. Fischer, particularly in relation to those issues the committee has been addressing on procurement reform.

In addition, I would like to take a few minutes to talk about procurement predictability, as Mr. Fischer had indicated, and what happens when the predictability does not come to pass, and also perhaps to leave with the committee a few messages as to what is happening in the global marketplace in respect to defence and aerospace business.

The Aerospace Industries Association of Canada represents the interests of 250 companies nationwide. Our sales last year exceeded $15.3 billion, employing over 67,000 Canadians from coast to coast. Our exports exceed 80% of sales, and today we are the fifth largest aerospace sector in the world. Our success has been due to many factors, not the least of which has been the support of the federal government, which has embraced aerospace as one of several key strategic sectors upon which Canada's knowledge-based economy can thrive and prosper.

As successful as Canada's aerospace industry has been, there are some troublesome issues on the horizon, which if not properly addressed will have a tremendous negative impact on the industry, making our target to become the fourth largest aerospace sector in the world by the turn of the century even that much more of a challenge.

Notwithstanding the fact that defence-related goods and services represent only 20% of the overall sales, defence is an important issue to our members because of the natural spinoffs such work has for both civilian application, which we refer to as dual technology, as well as for the opening up of markets abroad for Canadian military endorsement of indigenous defence-related technology. The association's defence procurement council is the vehicle that provides our board with the guidance to its directors on this priority area. The council did address a number of the issues this committee is addressing and tabled it with the Minister of National Defence in July 1998.

If I might comment on alternative service delivery, it is our considered opinion that DND could realize still further savings from a much more concerted application of alternative service delivery within the department. We feel that these savings could be redistributed to make affordable those all-important equipment replacement decisions.

We received mixed feelings about ASD within the department, based on the successes of some programs and the controversies associated with others. Notwithstanding that, AIAC is still advocating this as one of a number of measures that should be exploited by the Department of National Defence. We strongly recommend that a senior independent industry team be formed, reporting to the highest levels within DND, and be charged with the responsibility of identification and implementation of these potential ASD projects. In the interim, we also recommend that the Department of National Defence avoid rigidity in requirement specifications and long-term employment guarantees in ASD projects. Finally, we feel that DND should insist on sound commercial practices for in-house bids. I'll be prepared to answer any questions related to this, because I know the committee is and has been interested in this particular aspect of DND's business.

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With respect to procurement reform, we too have been consulted by the Department of National Defence, and we applaud those initiatives that have been taken to date. Our only concern is it is taking too long to implement. We have noted their initiative with respect to the release of acquisition reform guides. We applaud their intention to implement total package procurement, integrated project teams and promoting partnering with industry. Our only hope is that these reforms will be implemented and that they will begin to see more flexible definition requirements that are performance rather than design driven.

Finally, AIAC supports DND's endorsement of the principle of commercial, off-the-shelf procurement. We recommended more industry involvement in the requirements definition phase of the procurement cycle, which we feel would help in determining not only the best possible but also most cost-effective solutions being made available to the department.

As many of you know, AIAC concentrated on four priorities last year. In addition to increasing the technology partnerships program, addressing the shortages in certification resources in Transport Canada, and bringing a stop to the illegal foreign subsidies such as Proex, AIAC urged the government to address the predictability of procurement.

Industry welcomed the government's decision to proceed last year with the search and rescue helicopter replacement program. Our concern, however, lies more in the fact that notwithstanding the 1994 white paper and several subsequent budgets mentioning the government's intention to proceed with major capital equipment programs, there is yet to be a decision taken respecting the shipborne helicopter program. Industry's concern in this regard is the cost of maintaining competent technical staff in place to respond to a government decision that has been anticipated now for years. We fully appreciate that there have been many conflicting demands on such a reduced budget, not the least of which were the costs to address the quality-of-life issues within the department.

However, now that the government has seen fit to provide additional funds in the most recent budget for quality-of-life issues, it is hoped that the way is now clear to articulate its intentions to procure a shipborne helicopter. Failure to do so quickly will not only add to industry's cost of maintaining project offices to respond to such an opportunity, but as every day goes by the operational capability of the military is diminished due to the continued use of such aged equipment.

The aerospace and defence industry in Canada has been privileged for many years to have a special status with the United States, in that the defence production sharing agreement and the defence development sharing agreement were designed to allow Canadian suppliers to be considered as part of the North American defence industrial base for the purposes of U.S. military procurement. Over the years Canada's privileges have been diminishing as a result of actions or sanctions disguised behind the mask of U.S. national security, small business set-asides, or other “made in America” provisions as evidenced by recent U.S. practices. There is no doubt that U.S. protectionist sentiments have been increasing in recent years due to market conditions and the suspected imposition of retaliatory measures against some Canadian and/or foreign trade policies.

Recently we have been most vigilant pending implementation of revised international regulations with respect to the shipment of arms, which if allowed to be interpreted without explicit exchange of underlying principles could have a very negative impact over time on our ability to continue to sell close to $1 billion worth of Canadian advanced technology products to the United States. We have been monitoring this situation closely as DFAIT and DND officials have been meeting with their U.S. counterparts over the past few weeks in an attempt to rectify this situation.

The conclusion, Mr. Chairman, is that this Standing Committee on National Defence and Veterans Affairs can be a significant force toward increasing the defence budget to a level more commensurate with Canada's obligation to contribute to international peace and security. The Department of National Defence needs to aggressively pursue alternate service delivery options to enable it to maintain its operational roles and afford to re-equip or even extend the life of its equipment, because the current budget is woefully inadequate to cope with these demands. DND needs to adopt performance specifications and aggressively pursue commercial, off-the-shelf solutions to reduce costs and technical risks. Reform to the procurement process must be accelerated, because the cost involved in further delays will just exacerbate an already serious budget constraint.

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Having addressed the quality-of-life issues within the department, the aerospace industry beseeches the government to proceed immediately with the intentions set out in the 1994 white paper to start the procurement process to replace the aging Sea King fleet of shipborne helicopters.

Unless the Canadian government provides much more concrete evidence of intervention to combat increased protectionism south of the border, our indigenous capability will evaporate over time, resulting in major job losses in high-technology industries and leaving our Department of National Defence no choice other than to depend on foreign sources of supply for the entire equipment requirement of its department.

Unless Canada finds a workable solution to satisfy the WTO observations on the use of the technology partnerships program, the Canadian value added of the aerospace industry in Canada will diminish even further. Over the past four years alone the value added has dropped from 66% to 54%.

Canada's support to the aerospace industry is probably one of the most transparent programs in support of aerospace compared to many of our competitors. The size of this TPC program, at $300 million per year, pales in comparison to the U.S. R and D budget, which even after a $3 billion cut this year is only $37 billion U.S. for the coming year.

These, ladies and gentlemen, are the realities in which we operate.

The aerospace sector has grown at three times the rate of the gross domestic product, has contributed approximately $25 billion to the trade surplus in the last four years alone, and employs, as I mentioned, 67,000 men and women coast to coast.

We produce world-class products in fiercely competitive marketplaces, as you can see, but unfortunately the playing field is not always level. We need your help to sustain this growth. That is why this committee's support of defence procurement reform, acceleration of capital acquisitions, and continued support of our opposition to unfair trade practices is welcome.

I thank you for this opportunity.

The Chairman: Thank you, Mr. Smith, and all of you gentlemen for your remarks.

Before we go to a round of questions, for the record, the S in SCONDVA is “standing”, and I think there's an important difference between standing and special committee: we're not going away; we're going to be here on a permanent basis. On both sides of the table we have some very serious questions we are continuing to pose, and we hope to come up with a report that, as I said earlier, puts forth some very important recommendations to improve the situation of procurement in this country. So we are undertaking what we hope will be a pretty intensive look at this, and your remarks today have helped a lot.

I wanted to note that this is an ongoing Standing Committee on National Defence and Veterans Affairs. I know we've discussed this with the minister on a number of occasions informally, and he's certainly looking forward as well, and I feel we have his full support in producing a very useful report.

I would note that our colleague, the parliamentary secretary for national defence, Bob Bertrand, has just left. It's very timely, given what we just heard from you gentlemen. He's just left to table at 10 a.m. in the House of Commons the government's response to SCONDVA's report on quality of life, and then later on today the minister will be holding a press conference on that.

So it ties in directly with what almost all of you said in your remarks. That has been our priority matter, if you will, an area for increased defence spending, and we were pleased, for the first time in 12 years, in this last budget to finally see an increase in money to defence, new money. We hope that's the first of several increases over future budgets and there's more money to follow. It's timely, with your remarks about the quality of life and the need to upgrade our military equipment, that in just a few moments we'll be having the tabling of that report.

I tell my colleagues here on committee that about 10 o'clock, or shortly after 10 o'clock, each of us will be given a copy of the government's response to our SCONDVA report, and I believe you will be pleased with the format. I understand each of our 89 recommendations is going to be clearly addressed, if I'm told correctly, with what action is being taken or is planned to be taken on our recommendations. We'll look forward to that in a few minutes. When it becomes available, we'll just pass it around, and we'll break briefly if we need to.

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With those remarks, I'd like to go to colleagues for a first round of questions, starting with the Reform Party's Mr. Hart, for ten minutes.

Mr. Jim Hart (Okanagan—Coquihalla, Ref.): Thank you, Mr. Chairman.

Thank you, gentlemen, for a most informative presentation, each and every one of you. I think we could spend a full session, and maybe we will be calling you back.

With respect to the chairman's comments regarding quality of life, I noted that you also made reference to the fact that we experienced a period of rust-out in the Canadian Forces in the 1970s. With the quality-of-life issues that we're facing, I think this committee and others have to also keep in mind that the capital budget was reduced in the Canadian Forces to its lowest level ever—I believe by 7% to 9%—during that same period of time. Although we had the highest-paid sailors and service personnel in the world, we were experiencing this period of rust-out, so when we look at our quality-of-life issues we also have to be mindful that we have to find creative ways to make sure we don't experience that same rust-out again.

I would like to turn to Admiral Cairns for a few minutes. Being an old navy type myself, and being interested in the shipbuilding in this country when it comes to our fleet, I found your comments very interesting. With the frigate program right now, I believe we're probably looking pretty good as far as the navy is concerned, although I think you raised an interesting point. Again, if we don't look at a constant rebuilding program for our ships, soon we will be in a situation in which we have old ships, with a major capital expenditure required to replace all of them at one time.

Again going back to the 1970s, I remember quite clearly when the ship management team came out to the west coast to talk to the sailors about the new frigates that were on the horizon. Like I say, that was in the mid-1970s, and I think we took delivery of the last one last year. It takes quite a long time. Maybe you could talk about that a little bit right now with respect to the new frigates, and also our sea lift capability that is disappearing, if we have one at all any more. What should be done there?

Mr. Peter Cairns: Thank you very much, Mr. Hart.

Let's begin with the frigates. To build a ship in general, there's a gestation period of about eight years from the time someone gets the idea, until the time it goes through various approvals, until the time you find the design or you design it yourself. You go through all the hoops and whistles, and it's about eight years before you cut steel. That's an historical figure that can be improved on, I'm sure, but the point is that it's a long gestation period.

From the navy point of view, the navy has been fortunate, perhaps. They were on the cusp of an issue. There was some money. Funding has come, and there seems to be a traditional feeling that while the navy has done okay, we can forget about them now, and now's the time to go and look after the air force and the army. Personally, I don't think there's anything wrong with that thinking. You have to look after the air force and the army, and I'm all for that. But the fact of the matter is that our problems stem from that kind of thinking, which is in fact based on the idea that we put a multimillion dollar program in place and we have twelve new frigates, so we don't have to worry about that for thirty years. Thirty years from now, it will be another government's problem. It will be somebody else's problem, and we're going to have to fund another multi-billion-dollar program to replace the naval frigates.

What we're saying in this association is that perhaps we should be looking at some way of trying to alleviate these tremendous peaks and valleys. If there is interest in any sort of defence industrial base as it pertains to maritime things, there has to be some way to keep that expertise.

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Earlier I made comments that it is a very competitive commercial industry. We are behind the power curve in relation to the folks we deal with in the global marketplace. There are a lot of myths out there about the capability of the Canadian shipbuilding industry. We are not in competition with the Japanese, we're not in competition with the Koreans, but we can build small, very sophisticated vessels. The fact of the matter is whether or not we can maintain the expertise to do it commercially. If that's an issue, how are we going to do it when we only get a major military program every thirty years?

I'm concerned about what would induce a young Canadian engineer to go into the marine industry today. It is a greying industry. The average age in a couple of shipyards is 40. There is a requirement here to look at maintaining this industry. The industry is trying to help us out. Don't get me wrong, we're not trying to look for subsidies and handouts here. What we are looking for are some innovative planning processes whereby the industry would benefit—and I also believe the government would benefit—from a more stable cashflow and outlay in the procurement program.

So I think that's where we are with the frigates. Our frigates, as I understand it, are fine ships. They have done everything they have been asked to do. They've gone all over the world, and people love them. We're not able to sell them though. Why can't we sell them?

The Chairman: Mr. Smith.

Mr. Peter Smith: If I could just comment on Mr. Hart's observation with respect to the Canadian patrol frigate, I think Canada should take great pride in the development of this particular vessel and the software that it has with respect to the sophistication involved.

To comment on Mr. Cairns's concerns with regard to the retention of skilled labour and officers within the navy, I think it also has an indication related to the aerospace industry and the complementarity of the vessel. It was developed in Canada as one of the state of the art warships that was capable of being looked at by many countries in respect to complementarity of ability between the shipborne helicopter and the suite that was in the ship. Unfortunately, it's one of the problems that we see.

It may seem to be self-serving, but there is a very serious concern in the aerospace industry about the maximization of the ability of that ship to do what it has been designed to do. Canadian technology is just wasting until such time as we have an ability to be able to communicate and maximize the use of the technology that was developed in the late eighties in order to have capable shipborne helicopters that could communicate and be used for military purposes. We feel it really is a waste of Canadian opportunity, and it's one of the reasons—

Mr. Peter Cairns: I would agree with that. We tend to look at the maritime helicopter and the ship as two separate entities. What you are looking at here is a weapons system. That weapons system includes a helicopter. Without the helicopter, the ship is wasted. Without the ship, the helicopter is wasted. The helicopter is as much a part of that ship as is a gun or a missile, a sailor or a cook, or a fire pump. It's part of that ship, it's not a separate entity. I think that's a philosophical thing that we all have to understand.

Mr. Jim Hart: I think we're all anxious to see the shipborne helicopter, and to see the Sea King replaced. I know I am. I was wondering about something, and maybe you can help me out. How long should it take for an SOR to be completed? If you look at it with respect to the replacement of the Sea King, how long should that take?

That one's to anyone at all.

The Chairman: I think Mr. Fischer would like to respond to that.

Mr. Robert Fischer: Mr. Hart, I'll attempt to address that, but I wanted to comment on your initial observation and question that my colleagues responded to, both in the case of long-term support for the CPFs, and what you alluded to about the lack of sealift capability and the aging state of the two AORs that the navy operates. I think those are two good examples of potential for exploiting the ASD concept.

In the United States, the USN has chosen to operate its strategic sealift capability on the basis of a platform leased by the navy but operated by commercial operators. Essentially, that capability floats around the world. When the navy needs it, it simply calls the contractor and says it wants the contractor to be at a certain port at a certain time.

• 0950

So when the navy looks at replacing its sealift capability, I think it ought to be looking at in a totally different way. This means not building ships in the traditional fashion, but looking at an arrangement whereby industry can bring the capability to the navy.

Mr. Jim Hart: We might even use those fast ferries in British Columbia.

Some hon. members: Oh, oh!

Mr. Robert Fischer: There you go.

But on the question of the SOR for the MHP, I can't help but feel that the SOR has to be extremely well polished. There have been a lot of people working on it for a lot of years. If anyone were to tell us collectively today that they need another year to develop it, I'd be embarrassed. It is there. The more time is spent at it, the more they will exacerbating the problems we're here to talk about.

The Chairman: Thank you, Mr. Fischer.

[Translation]

Mr. Laurin, you have 10 minutes.

Mr. René Laurin (Joliette, BQ): First, I would like to ask a few questions to Mr. Smith to get more information on a few things which are new to me because I have not been a member of this committee for very long. Talking about procurement predictability, you mention illegal foreign subsidies such as Proex. I would like you to tell me what Proex is and what an illegal foreign subsidy is.

[English]

Mr. Peter Smith: The predictability issue of procurement relates to the past practice of the Department of National Defence declaring, in concert with industry, what its ambitions were with respect to capital requirements. It has been quite a normal practice up until recently. We would have the intentions of the Department of National Defence for about five years in advance. As was mentioned, that's because to either develop an aircraft or develop a ship, or to modify or upgrade those, the time required can be five to fifteen years, depending on the sophistication and equipment.

We felt that what we were experiencing in the past in terms of the department's intentions versus the government's expectations on budget—

[Translation]

Mr. René Laurin: Mr. Smith, I want to stop you here because I only have 10 minutes and I would like you to give me a short and concise answer. My question was: what is Proex and secondly what is an illegal foreign subsidy?

[English]

Mr. Peter Smith: Proex is a subsidy program used by the Brazilians, accompanied by the name of Embraer and supported by the Brazilian government. It has been part of a challenge at the World Trade Organization, and has now been declared illegal. The illegal subsidy issue that I refer to involves things that do not conform to the World Trade Organization's regulations on making it improper or illegal to operate under their particular rules and regulations. Proex was found to be one.

[Translation]

Mr. René Laurin: Thank you. In the same section, you say that the industry is concerned with the cost of maintaining competent technical staff in place to respond to a government decision which has been anticipated now for years; you are talking about helicopters. What do you mean by the cost of maintaining competent technical staff in place? What is that staff doing at the present time?

[English]

Mr. Peter Smith: Since the 1994 white paper, it was intended by the government to purchase shipborne helicopters. All competitors have had project offices up and running in anticipation of the expectations of the government being put to the industry. No competitor would withdraw interest until such time as it was absolutely clear that the government would not purchase the helicopters. There can be staffs of five to a hundred people in place, waiting to respond to the government's requirements, because it is a very sophisticated aircraft. It's one for which you can say it's the cost of doing business, but it costs millions of dollars to keep project offices of this nature in place in Canada to respond to the government's needs. That's what I was referring to.

• 0955

[Translation]

Mr. René Laurin: You were not talking about government employees.

Mr. Peter Smith: No.

Mr. René Laurin: Those are employees of the defence industry.

[English]

Mr. Peter Smith: Right.

[Translation]

Mr. René Laurin: Next page, when you say that it will add to industry's cost of maintaining project offices to respond to such an opportunity, you are talking about the same thing. Since no orders were placed to these industries, is the staff working on some other thing or is it being paid doing nothing now?

[English]

Mr. Peter Smith: You have to understand that in many cases there isn't the Canadian competence to build the helicopter entirely in Canada. Many of these companies are foreign-owned companies that have to have a presence in Canada. What they are doing is consulting with the Department of National Defence in relation to the requirements that they know of today, and they are adjusting whatever needs to be done so that they can respond in as a quick a portion of time as possible. They are doing technical work, they are dealing with the Department of National Defence, but they are not getting paid for that work, because there has been no expression of interest or a request for proposal on the street from the Department of National Defence.

[Translation]

Mr. René Laurin: Thank you. I will now turn to Mr. Fischer. He gave us some interesting statistics although I didn't have time to examine them thoroughly. If one could make some statistical comparisons, one might draw interesting conclusions from that. Could you tell me if your association is concerned with spreading the market as equitably as possible between the various provinces of Canada?

Mr. Robert Fischer: Would that be a concern of our association?

Mr. René Laurin: Yes.

Mr. Robert Fischer: I think that such a question should be asked to the government. On our part, we are responding to the government request for spreading the industrial benefits across Canada. It's a government policy that asks for a spreading of the economic benefits, as much as possible, for such an important acquisition as the shipborne helicopter. It is roughly a $2 billion project; the government will certainly want, as much as possible, to spread those benefits throughout Canada. The industry responds to government requirements.

I will give you an example. The company to which I belong, Computing Devices Canada, was awarded a contract for approximately $1.2 billion, at the beginning of the 1990s, for a tactical communications system for the army. Part of the contract involved implementing in western Canada part of this $1.2 billion. We therefore created a new company in Calgary; the decision was made not because Computing Devices Canada wanted to settle in Calgary, but because it had to do part of its contract in western Canada. We were responding to government requirements that there be economic benefits in that part of the country. This is not a concern of the industry.

Mr. René Laurin: Does that mean that, for you, this is not a concern if the government does not set precise terms in the contract asking for a fair spreading of the benefits between the provinces?

Mr. Robert Fischer: The company might well have settled in Calgary all the same, or even in Quebec or Toronto if that made sense commercially. Industries in general, when they are not guided by government policies, will settle where—

Mr. René Laurin: Where it is interesting for them.

Mr. Robert Fischer: Exactly.

• 1000

Mr. René Laurin: I did not have time to work out the amount in dollars, but I can see that out of 1,372 companies, 651 are in Ontario for the domestic market, that 123 out of 210 are in Ontario for the United States market and that 52 out of 102 are in Ontario for the rest of the world. So, almost as a general rule, Ontario has at least one half of the companies. Is it pure chance or is there an expressed intent? Is it only the market forces that play in favour of Ontario? How could you explain that Ontario generally has an advantage over the other provinces?

Mr. Robert Fischer: I think it reflects the situation. You are talking about the defence market as it is defined here, but if you look at industry in general, besides defence, you would find that the situation is the same, that is that some major parts of Canadian industries are by force in the Toronto area, in the province of Ontario. I think that the ratios would be more or less the same. Maybe my colleague could answer for aerospace industries.

Mr. René Laurin: What I would like to know in fact is if product suppliers are all unique product suppliers. Are there more suppliers in Ontario? Are the products you buy made in Ontario and not in the other provinces? Is this one of the main reasons why we have that situation?

[English]

The Chairman: That's the final question from Mr. Laurin. I know Mr. Smith wants to get in too.

Mr. Peter Smith: Just to comment on the diversification of the aerospace industry, about 49% of the employees in the aerospace industry I referred to are in the province of Quebec, with 37% in Ontario, 9% in the prairies, and 2% in B.C. From the sales perspective, 46% are from Quebec, 41% are from Ontario, and the distribution east and west is similar to the employment figures.

To respond to your question with respect to suppliers, at this time it depends not so much on the location of the supplier, but more on the price, the quality, and the ability of the suppliers to cope with the extraordinary demand being placed on them now because of the success of the aerospace industry. So we're looking for suppliers all over the place, whether it's in Canada, Quebec, or the United States, in order to ensure our products can be delivered to their customers on time.

[Translation]

The Chairman: Thank you, Mr. Laurin.

[English]

I'll go to the majority side of the government side of the table. Mr. Peric.

Mr. Janko Peric (Cambridge, Lib.): Thank you, Mr. Chairman.

Mr. Fischer, page three, paragraph two, “Furthermore, Canadian forces are quickly becoming incompatible with our NATO allies and UN multinational forces”. Could you expand on that statement?

Mr. Robert Fischer: This is the statement I made with regard to the growing incapability of our forces with the UN. There's incompatibility, for example, if you look at it from the perspective of the Canadian army's equipment in terms of armoured vehicles. You have to look at it in terms of a few product-specific areas. But in terms of the Canadian army's armoured vehicles relative to those of the vast majority of the other UN members, our equipment is old and doesn't have the same degree of mobility. It is suffering from the point of view of protection.

If you take, for example, the Leopard tank, which the Canadian army operates, we have a fleet of about 125. These are vehicles that were introduced in the mid-seventies, and compared to similar equipment in other nations, these vehicles certainly lack in terms of mobility and protection.

• 1005

From the point of view of communications, as I alluded to in my answer to Mr. Laurin's question with respect to industrial benefits to the company I work for, we are currently in the process of delivering to the Canadian army a new combat data-voice communications system. When that system is delivered, the Canadian army will be equipped with a communications system that will be fully compatible with its NATO allies.

At the moment, it suffers from the point of view of security. It suffers from some of the technology other countries enjoy. I don't want to get technical, but there is something called frequency hopping, which is a technology that really protects communications. The systems our soldiers are currently using in Bosnia and elsewhere don't, for the most part, have that capability.

So when I speak of incompatibility, it's not that we can't talk to our allies, but when it comes to the need to communicate to the very complex hierarchy of headquarters, where security increasingly becomes an issue, Canada at the moment would have some difficulties.

I'm not an expert in it, but I would suggest to you that while the eight F-18s that are deployed in Aviano in current operations have for the most part been deployed with smart munitions, smart bombs, there are other aspects of the F-18 that certainly need modernization. It doesn't necessarily make them incompatible, in terms of operating with the allies, but it certainly puts them at a disadvantage.

I acknowledge that the department has an ongoing plan right now to upgrade the F-18. The first tranche, to give you an example of what they are concerned about, is to replace the mission computer in the F-18 aircraft. While the F-18 is a very high performance airplane, its mission computer can be likened to a Commodore 64, relative to the desk-top computer you have in your office. That's the kind of incompatibility I alluded to in my remarks.

Mr. Janko Peric: To your knowledge, are the other members of NATO and the UN progressing much faster than Canada?

Mr. Robert Fischer: Do you mean progressing in terms of equipment modernization?

Mr. Janko Peric: Yes.

Mr. Robert Fischer: I'd say for the most part they are. It depends on who you want to compare us to.

Mr. Janko Peric: I'm saying NATO members, especially new members.

Mr. Robert Fischer: If you are alluding to Hungary, Poland, and the Czech Republic, I think they certainly suffer from incompatibility in the very basic terms. If there's anything that needs to be done to bring them into NATO and ensure compatibility, the areas of communications, command and control are clearly priorities that need to be addressed. Now that they are full-fledged members, in order to be able to operate in concert with the rest of NATO, it is fundamental that they be able to communicate and operate within a common command and control system, both of which they sadly lack at the moment.

Mr. Janko Peric: Do you see opportunities for Canadian industries in those countries?

Mr. Robert Fischer: There are opportunities for Canadian companies in those countries. We've had dialogue with all three countries at the industry association level and the company-to-company level. My personal feeling is that the opportunities lie in the areas I alluded to of communications, command and control, and not so much at the platform level or vehicle level. They have capability in that regard.

There is also a certain concern on the part of industry that if we rush to do business with some of these countries, we will find them to be our competitors a few years hence, because they're very thirsty for some of the western technology that something like a T-72 tank lacks today. It's not impossible to visualize that four or five years down the road we will find our technology being marketed in competition with ourselves.

The Chairman: I think Mr. Smith wants to comment on this. Mr. O'Reilly is hoping to get a question too.

Mr. Smith.

• 1010

Mr. Peter Smith: Just to respond in part to your question on the aerospace side, I should bring to your attention that in 1990 the defence research and development budget was $250 million, and in 1998 it was slightly over $150 million.

Much of that R and D budget is dedicated to the things that were just referred to by Mr. Fischer, in the sense of communications capability and things of that kind. In comparison, for instance, I just picked out from Defence News and Aviation Week that the Germans this year will be spending $675 million in R and D, in aerospace alone; the French will be spending $3.1 billion, and I referred in my comments to the U.S. spending $37 billion.

These are the kinds of things Canada's air force and other forces are competing with, in the sense of the sophistication of the equipment that's being developed in the other nations. It's one of the things that's making them much more incapable of responding, because you have the pressures of R and D, plus the comparable pressures of capital equipment to respond to those needs.

Mr. Janko Peric: My last comment, Mr. Chairman.

The Chairman: Mr. O'Reilly hopes to get in here. All right, go ahead.

Mr. Janko Peric: I think you will admit that in some sectors, especially the aerospace industry, we are the leader, regardless of what the budgets of other countries are or will be. For instance, you are well aware of COM DEV products. They are the leaders in the world, right?

Mr. Peter Smith: The aerospace industry in Canada is the fourth-largest aerospace industry in the world, and we're aspiring to that. But please understand that only 20% of the Canadian aerospace industry today is dedicated to defence-related work or services. So with some of the things we're talking about, there's a disconnect in the sense we're very successful in the niche markets at the 100-seater and below in the commercial aircraft business. We're very successful in some of our defence-based industries, but as was indicated, our defence base is becoming very diversified, in the sense of the application of dual technology.

The Chairman: Thank you, Mr. Peric.

Mr. O'Reilly, you have about a minute or so if you wish.

Mr. John O'Reilly (Haliburton—Victoria—Brock, Lib.): Thank you very much, gentlemen.

This is very timely because we are studying procurement. In some of your comments, Mr. Smith, on page 2 on alternative service delivery, you recommend a senior independent industry team be formed, reporting to DND. You also indicate DND should insist on sound commercial practices for in-house bids.

I take it you feel—because you strongly recommend—they're not doing the job now and they are not capable of sound commercial practices. I wonder if you would expand on that and also give your thoughts on the Canadarm sale. Was it for superior technology in the U.S., or is there something further you could tell the committee about that?

Mr. Peter Smith: With respect to the recommendation on a senior industry committee reporting to the highest level in the Department of National Defence, whether that be to the minister, the chief of defence staff, the deputy minister, or a combination of them is still to be determined. We are concerned because we have reason to believe there are probably 10 or 12 major projects that could result in tremendous efficiencies within the department today and cost savings that could be redistributed.

The reluctance is a normal human reaction, in the sense of the determination as to what is core, what is non-core and what is a threat to their respective careers—either military or civilian. We're just saying we feel the minister or the deputy needs to have a sounding board from industry to be able to establish and give the confidence, so if that individual is going to receive briefings, perhaps it is not appropriate to do a certain piece of work or run the base in a different way. Then perhaps they will have the sounding board that has the experience to be able to deal with that.

The Chairman: Thanks, Mr. O'Reilly.

What about the Canadarm question?

Mr. Peter Smith: The marketplace determined that MacDonald Dettwiler had purchased that portion of Spar Aerospace that had developed the Canadarm. MacDonald Dettwiler has now consolidated under its expertise and won commercially the RADARSAT II program. We have a much stronger and consolidated space capability, now located on the west coast of Canada.

• 1015

The Chairman: Thank you.

Just before we continue with questions, colleagues, as I mentioned earlier, we are now having distributed the quality-of-life response. This is the government's response to the report of the Standing Committee on National Defence and Veteran's Affairs on quality of life, which I had the honour, on your behalf, to table last October in the House. This has now been tabled in the House by Mr. Bertrand, the parliamentary secretary, so it's now in our hands. It is public. There will be a press conference, to which all members of SCONDVA are invited. If you wish to attend at 11:30 at DND headquarters, the minister will be speaking to this.

This is the government's response to what I think was an excellent report by this committee. And we hope to come up with something of the same calibre on procurement, so the information we will be receiving today will be quite helpful on that.

Perhaps we should continue with questions. I'll go to Mr. Earle of the NDP for ten minutes.

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

My first question is for Mr. Cairns. You mentioned that the shipbuilding capacity is about 40% less than what it was in 1986, yet we have modernized yards and we have a flexible labour force and contracts and so forth. Part of the reason it's been focused on for this drop in capacity has been because of a lack of a national shipbuilding policy.

Each time I've questioned on this issue I get the response back that we do have a national shipbuilding policy. I've yet to see it. I've requested it from witnesses from a previous meeting. Can you tell me whether you have in your industry seen anything you can refer to as a national shipbuilding policy?

Mr. Peter Cairns: There are policies put out by government that do address the shipbuilding issue. It's hard to find it in one document. As far back as the early 1990s, before my time in this job, the transport department, Industry Canada, and various other departments put forward issues that concerned maritime industry, shipping and shipbuilding in particular.

Since then we as an association have been looking at ways to help our industry commercially, not necessarily through dealing with DND but commercially, both domestically and internationally. We wrote a small paper about a year and a half ago in which we made four recommendations for consideration by government. Those recommendations are still ongoing.

We're still in dialogue with government, and I think that dialogue is progressing very positively. We have had a very interesting dialogue with the Export Development Corporation, for instance, and we see that there's light at the end of that tunnel. In fact this could be very beneficial to our industry in helping us export ships and in helping us compete on the international market.

We understand there is no way that money will be given to this industry in direct subsidies, as there is in a great number of nations in this world. So the question then becomes how can we deal with competitors who immediately have a 9%, 10%, 15%, or 20% price advantage right at the top? The way you do that is by attempting to make yourself more competitive and more productive. The 40% reduction in capacity is a good thing. We have an industry now that is essentially the right size for the country. I think most people would accept that.

There are generally a lot of myths out there. We have a wage scale now that is in fact very low. We are competitive with the Europeans, the Koreans, and with many nations when it comes to wages. There is a general feeling that the wage scale in Canada is too damned high so we can't compete. That is not correct. We have done a lot with regard to engineering processes, modernization, automation, the CAD/CAM technologies and so on.

We believe there is a general feeling in this country... Not everybody lives on the coast and not everybody sees the maritime issues. They don't live on the seaway, they don't see ships, but they are very used to getting on airplanes. Canadians understand airplanes; they don't necessarily understand ships. When you go home to your constituencies and your ridings you go on an airplane. You don't go on a ship; you don't go on a train. Most Canadians understand airplanes fundamentally because they ride in them every day. They see them as good things. They don't understand ships in the same way. They see ships as the Exxon Valdez, but they are in fact the least polluting.

• 1020

Mr. Gordon Earle: Thank you very much. You've answered my question.

I want to turn now to ASD, because two of our witnesses have mentioned alternative service delivery in a positive sense, that it's a good thing. We quite often hear on the other side of the coin that it's not so favourable and it often takes away from and reduces the jobs within the military.

Mr. Smith, you felt that DND should insist on sound commercial practices for in-house bids. Could you elaborate a bit on what you mean by that, please?

Mr. Peter Smith: When the industry is asked to put in a proposal obviously it has to have full-up costs and it is contractually bound to provide the services for the costs that are being paid for. Those costs include the costs of overhead and the salaries and benefits associated with the overall workforce that's going to provide the service.

We feel the government in-house bids are slightly advantageous over the private sector bids for the simple reason that for one thing alone, if I can cite this example, benefits of the government are not paid by the departments themselves; they're paid out of Treasury Board as a consolidated revenue fund. Therefore if they could bid without the costs associated with benefits, that's one issue.

There are a whole bunch of other examples I could cite where, for instance, in the government today the decisions associated with fundamental issues of spending require, depending on the size, the approval of the assistant deputy minister, a deputy minister, and perhaps even cabinet.

Those in industry are all built in as costs, but in relation to a bid for the Department of National Defence, in this particular case of alternative service delivery, those overhead costs or the salaries or portions of the salaries that are spent by the deputy or ADM are not costed in in what we're talking about, commercial practices.

Mr. Gordon Earle: Mr. Fischer, would you care to comment on that as well? You mentioned that it's a less expensive and more effective way of managing defence resources. Can you elaborate a bit upon why you feel that's the case?

Mr. Robert Fischer: My comments there were particularly focused on the fact that the Canadian Forces, the military... as you well know, they've been reduced to a total force of about 60,000 people. As they reduce, the forces have less and less a luxury of misusing, misemploying trained military. What I was alluding to was that ASD would potentially have the effect, yes, of impacting public servants within the department, but also uniformed personnel.

In this day and age I don't think it is appropriate to be employing soldiers, airmen, and sailors in functions that can correctly be performed by either the commercial sector or by public servants. That would be one of the impacts of ASD. It would remove a good portion of military, for example, in warehousing functions, supply functions, maintenance functions, and concentrate them on what we refer to as the sharp end.

Mr. Gordon Earle: Thank you.

Mention was made of commercial off-the-shelf procurement, that you feel that's a good method of proceeding. Can you elaborate a bit? I know I should know more about this. When you say “off-the-shelf procurement”, what exactly does that mean?

Mr. Peter Smith: If the question is addressed to me, I'll start off.

This is as opposed to military specifications. We are suggesting to you that there are products available. Perhaps a good example you might be familiar with would be the Griffon helicopter. It was a commercial off-the-shelf buy with very few modifications by the Department of National Defence of a helicopter built by Bell Textron.

• 1025

The difference we're speaking of is when you get into a development project, the non-recurring costs of the development of that project appear in the pricing. Therefore, by definition, it's going to be more expensive to develop it than to buy it off the shelf, because if it's already developed, then the amortization of those development costs have been spread through other procurements or other purchases. This is where we're saying that perhaps there are ways and means by which much of the equipment being used today by the military can be found as commercial off-the-shelf products.

Mr. Gordon Earle: On the bottom of page 3 and the top of page 4 of your presentation, Mr. Smith, you mentioned that U.S. protectionism sentiments are increasing and the effect that's having on Canada's foreign trade policies. Would you elaborate a bit on that issue, please?

Mr. Peter Smith: I'm referring to the fact that we do have a privileged position with the United States commercially and we have had that for many years in a military sense, or a defence sense, as I mentioned, as a result of the DDSA and the DPSA agreements.

What has happened is markets have changed dramatically, and within the United States today there is a growing sentiment of protectionism, a “built in America” sentiment. The most recent example we've used is in relation to a modification to regulations that would demand that if a Canadian company is to compete with an American company, it may require that company to get technical data that would be readily available to the Americans but would take some time for an export permit to be processed by a Canadian company. Therefore, there's a disadvantage occurring immediately because of the delays associated with their competitor having a time advantage.

These are being worked on, but it's just one example of a whole number of others that have been confronting our industry and that of the membership of CDIA. There is a growing sentiment, based in part on national security, but also based in part on a commercial advantage with respect to Congressmen and Congresswomen trying to ensure that jobs are retained in their respective communities and not going offshore, i.e. to Canada.

It's a very important issue for us. We are the best of trading nations, but we have these little irritants happening from time to time. And it's our job in the associations to ensure that we can smooth the water and bring these issues to the government's attention to have successful negotiations occur.

Mr. Gordon Earle: You mentioned that the capacity of the military is diminished due to the continued use of aged equipment. When we look at the maritime helicopter project and we look at the Sea Kings, we know they're over 35 years old. Is there a safety issue involved there?

Mr. Peter Smith: I can't comment on the safety issue, but I can comment on the operational issue in the sense that many of our members are working quite actively in maintaining the use of the Sea King helicopter, be it IMP, be it Spar, or a number of other companies. The issue there is the downtime to maintain the operational capability of that particular aircraft. The older it gets, like an automobile, the more maintenance is required. So the costs are increasing in maintaining it, and the downtime to ensure the repair and overhaul of it is increasing as well.

There's no question the military would not fly an unsafe helicopter or put their employees at risk in that regard. Both militarily and civilian-wise, you don't have a more regulated industry than the aerospace industry. The way in which the military takes great pride in ensuring that its particular men and women are guarded with that same type of regulatory control is certainly respected very much.

All I'm saying is the downtime is more costly to them than if there was new equipment there that could be readily used without the repair and overall requirements that there are today.

The Chairman: Thank you, Mr. Earle.

From the Progressive Conservatives, we have Mr. Price.

Mr. David Price (Compton—Stanstead, PC): Thank you, Mr. Chairman.

Thank you very much, gentlemen, for coming today. This is quite interesting. I wish we had a lot more time.

I wasn't going to start on helicopters, but since we're talking about them we might as well continue along. It was both Mr. Smith and Mr. Fischer who referred to them.

• 1030

We talked about how long it has been since we've started looking at a procurement process. Right now, as of this year, it has been twenty years since we started looking at buying something that was supposedly off the shelf. It had to be developed in order to make a product off the shelf that we were going to be able to sell to other countries. That has obviously changed quite a bit. Last year we were told that we had 21 civilians and six CF personnel working, not right at the SOR spot, I guess, but just before that spot, just before they were going to start doing that.

Now, they've been working at that—and Mr. Laurin brought up an interesting point—but at the same time, through all of these years, several industries that were interested in quoting on this project have also had teams up and running. They've been spending a lot of time, and a lot of dollars have been spent here, just sort of waiting.

You mentioned that we should be ready to go almost at a moment's notice of what the SOR would be for that helicopter, and I agree with you totally. With the way technology is changing today, it's changing so fast that if we went with an SOR today, one of the questions would be whether or not there is a helicopter sitting out there that is off the shelf right now. If there is, how long would we have to wait to get this helicopter? I imagine that in the process, with technology changing so fast, there are probably going to be some changes along the way.

Along the way, these have always been planned as modular helicopters. In terms of the weapons systems and so on, the mindset was always that they would be flexible, that you could switch the helicopter from a weapons system to search and rescue, to a submarine detection system, and so on.

Mr. Peter Smith: I can start, and perhaps Mr. Fischer will comment.

First of all, in defence of the Department of National Defence, as I have mentioned, I think the issue of the delay has been exacerbated with respect to whether or not there was in fact a sufficient enough capital budget to purchase the helicopter that was intended and mentioned in the 1994 white paper. Certainly we commended this committee for addressing the issues of quality of life, and we were pleased when the government addressed it by putting some money toward that quality-of-life issue. That issue now aside, we feel there's now sufficient capital to proceed. That's why we're emphasizing this.

To answer your question about whether or not there's a helicopter available, the answer is yes, there is. But please understand as well that what we're talking about in the sense of the deliverability of that helicopter and whether it's off the shelf, would be the compatibility of that helicopter and the equipment that's in the helicopter to deal with the equipment that's in the frigate. That is not necessarily off the shelf. Some of it has to be developed.

So there certainly are helicopters available that we think are quite capable of addressing the operational requirements of the navy and DND in its entirety. But the fact of the matter is that until such a time when we see what the requirement definitions are, we won't be able to say competently that you can take 35 of those and put them on the frigates tomorrow and have them as operational. That is not realistic.

Mr. David Price: I'll clarify what I was getting at. With these people we have working on the pre-SOR for National Defence, and with the other industry groups working along with these people, whether it be lobbying or talking about different technologies, surely the industries themselves are already developing along these lines. Could I say that?

Mr. Peter Smith: Right now, there are probably six companies that I know of that would express an interest in providing those requirements to the Department of National Defence. Some were actively involved in providing the bids for the search and rescue helicopters. All of these companies are in the business of providing helicopters worldwide, so they may be in place today waiting for the Department of National Defence to express whatever its requirements are. On the other hand, what I think is important is that these project officers on the industry side understand what has been sold to Italy, Germany, Britain or whatever, and they are feeding that to the Department of National Defence, along the lines that we had described. So there's a two-way street going on.

• 1035

The issue is that we feel that adequate time has been surpassed, and now there has been enough money put to the Department of National Defence that perhaps the request for proposal could now be put on the street.

Mr. David Price: To go to the procurement part of that issue now, we're always talking about the spreading the industry across the country. If we're going off the shelf, what kind of problem develops there?

Mr. Robert Fischer: Can I take that one?

When you talk about the maritime helicopter project, I think it's important to distinguish that there are two major components. What people refer to as off-the-shelf helicopters are just that—the platforms, the helicopters, you know them as well as we do. They're all going to be built offshore. There may be some work done in Canada, but no one's going to sell 35 helicopters, make an economic package, and suggest we're going to build them in Canada. Whatever the government collectively decides that the platform is, it'll come from offshore. There's little Canadian content in that, and it represents roughly half the total cost of this project.

The portion that is really attractive to the Canadian defence industry such as it is, and that has the potential for exercising maximum amount of Canadian benefits, is what we call the mission system. That's what goes in the back end of the helicopter. It's what prosecutes the mission. It's what does the anti-submarine warfare. It's what does whatever role you want to give the helicopter, although I'm not an expert in that side of it. I use to be in the army, so my colleague Admiral Cairns can speak about the operational requirements much better than I can.

But it's important to appreciate that the off-the-shelf portion of the MHP project really talks to the choice of helicopter. The back end of a helicopter is where you can see Canadian industry participation, Yes, there have been a lot of companies—the company I work with is one—in which we have people spending time, at our expense, making sure that we're current with what's available, what the customer's looking for. When the word finally comes that there is a project, that there will be a competition, we will be in a position to respond with technical solutions that are appropriate for the circumstances.

We talked about Mr. Laurin's question on IRBs. That's where the government will want to look in terms of where all of that Canadian contribution will come from. When you look at the Canadian companies that arguably can play in the back end of the helicopter, you'll find them literally spread across the country. I think that augurs well for the project.

Mr. Peter Smith: If I could add one more comment, my colleague is referring to the direct benefits in the back end. If the airframe is bought from offshore, as he mentioned, there may be some assembly work here. As he also said—and rightfully so—there will be very little. Once again, our policies would require that particular vendor to provide offsets in a direct or indirect way, so that the total package could be directed in the sense of systems integration and development. The airframe would be bought offshore, but the amount of that airframe could be offset in other way. That's where benefits would occur right across the country.

Mr. David Price: We talked a little bit about the downtime of the current helicopter, which as of this year is now totally outdated. It should have been replaced by now, but we're looking to try to spread the life out just for another five years. I've been to Shearwater and have seen the rebuilding, and it is a total rebuild. I'm wondering what your thoughts are on this. Should this be a project that should have been contracted out totally just to get them up for the next five years? I'm saying five years because that's what they're talking about, but with the way procurement is going now for the helicopters, we could be talking about even longer than that.

Mr. Peter Smith: I don't understand your question about it being contracted out.

Mr. David Price: Right now, the helicopters are basically being rebuilt by CF people.

A voice: No.

Mr. David Price: They're not?

Mr. Peter Smith: No. An awful lot of work is being done by companies like IMP in Halifax. Spar Aerospace is another.

Mr. David Price: In the hangars themselves, the people we saw working on the helicopters were mostly CF people. In that case, it's contracting bits and pieces. It isn't an overall contract. Is that what you're talking about?

Mr. Peter Smith: Again, it's one of those issues that both Mr. Fischer and I have referred to. You may see uniformed people doing some of the repair and overhaul, much of which we still feel could be part of that alternative service delivery. There is a combination of both military and private sector work on the Sea King.

• 1040

The issue is what is determined as core or non-core, and the military has chosen to protect certain pieces of work that they feel, for legitimate reasons, should be done by uniformed staff. I don't think the issue is a matter of time and competence but a matter of cost, and we feel that industry can do it much cheaper than—

Mr. David Price: Well, I think that's what the Auditor General has been telling us too.

Mr. Peter Cairns: I would add that the significant portion of the major overhaul and refit of the Sea King helicopters is done by IMP Aerospace.

It depends what cycle you are at on the maintenance schedule, because at a certain cycle the CF does, there is a significant amount of tearing down and rebuilding of the airplane. But the significant real major overhaul and refurbishment of that airplane is done by IMP Aerospace.

The Chairman: Thank you, Mr. Price.

Colleagues, that's a 30-minute bell that we will have to respond to, but we can still pretty much finish the time we had planned for the witnesses.

Mr. David Price: Can I have one question?

The Chairman: Yes. Make it really brief, and then we're going to start a second round.

Mr. David Price: Mr. Cairns, how many SORs have you seen on the helicopter so far?

Mr. Peter Cairns: How many have I seen? Oh, gosh. There was the one that acquired the EH-101 in my time. I've been an operator most of my life, not a program man, but there has certainly been one. There's work on this other. So there has been at least one in my tenure, and there may well have been more.

I believe the real issue is when you talk about off the shelf. Let me give you an example. If you go out and buy a computer from Microsoft, you can take the software package that comes with that. If you say you really love that Office 98 software but you want to modify 14 parts of it, then it becomes kind of difficult off the shelf.

I think that is a discipline the Department of National Defence needs to ensure—that when they're dealing with off the shelf, they are willing to accept what comes with that helicopter as it is. If you decide you're going to put many modifications and all sorts of parts with it, then it becomes a significantly more expensive project. I think that's a discipline that has to be learned and practised, because everybody wants to get the best bang for their buck.

The Chairman: Thank you.

We're going to go to the second round.

Mr. Hart has suggested, and I agree, that there are some excellent written questions that we would like to pose to you gentlemen, and maybe we could make those available and ask you to give us some written response, if you have the opportunity. Would you be available to come back, perhaps one witness at a time, if we need to have you, if we request to have you?

Mr. Peter Cairns: Yes.

Mr. Peter Smith: Yes.

Mr. Robert Fischer: Yes.

Mr. John Leech: Yes.

The Chairman: That would be very good. Then we'll see how our deliberations unfold.

In the second round, you will have five minutes. Mr. Hart, we'll start with you.

Mr. Jim Hart: I have probably many more questions, but we'll try to make the five minutes stretch as long as we can.

General Fischer, one of the interesting things you mentioned in your presentation was that the Ministry of Defence in London has a program to legally call up industry officials to move into an area of crisis. I might even suggest, in the Canadian example, that maybe we should have members of Parliament move into an area of crisis so that we wouldn't have this difficult decision when we look at—

A voice: Which we're all in.

Mr. Jim Hart: Working in my career, it's certainly true.

[Editor's Note: Inaudible]

The Chairman: —

Mr. Jim Hart: Maybe we should travel across the country in Sea Kings.

I did want to hit on a couple of items that we really haven't touched on that much: the revolution of military affairs and where, in your opinion as a defence industry, Canada should be going. I guess that also touches on the area of core capabilities.

I'm also interested in hearing from you folks exactly what you think the percentage of budget should be for capital expenditures that the government should be looking at, and to get right into the area of acquisition and the processes we have now, recommendations of what you would like to see, as an industry, to streamline the process and cut out some of the bureaucracy.

I'll leave it at that.

Mr. Robert Fischer: May I take the easy one?

Mr. Jim Hart: Sure.

• 1045

Mr. Robert Fischer: On your last point, I will not burden the committee with the details, but a couple of years ago CDIA offered the Department of National Defence some very specific suggestions from an industry perspective on how to streamline business processes. Now, admittedly, it's from an industry perspective, but it is nonetheless... How you get there is a challenge, I recognize, but viewed from the industry perspective we offered 36 specific recommendations. I acknowledge in my remarks that some of those are embodied in the work we're seeing coming out of DND. As recently as yesterday DND issued the second draft of what they call the DND acquisition reform guide. What's encouraging to us is we recognize that some of the suggestions we offered are contained and elaborated on in this document.

The part that is less encouraging is, as I said earlier, from the perspective of somebody who is now on the industry side, seeing the employees of Computing Devices Canada, as an example, working with government and the difficulties of working with a project office and the frustrations of having to deal with all of the problems that need to be solved under the procurement reform guide—the fact that they aren't being solved at the coalface, although they're being talked about at the top.

I have a lot of sympathy with that, because I used to be head of procurement at DND. I was part of those who launched this reform back in 1994. It's frustrating and disappointing, to say the least, to be back here in 1998 to tell you from an industry perspective that I'm not seeing anything at the coal face.

I would cite the penultimate recommendation we made, which kind of captures industry's view of what needs to get done. Number 36 says: “Don't complicate reforms with jargon. Just do it.” Well, that's in essence what needs to get done. There's a lot of jargon here, a lot of words, but it isn't being done by the people who do the business.

I don't speak on behalf of my colleagues here, but I'm sure they would agree with me that as industry associations we want to be involved in making these reforms happen. I would gladly provide the committee with the list we've got here; I'm just reading from the very top: “use operational performance specs”. In other words, we're telling the government, don't tell us how to build a system; tell us what you want out of it. It's a hell of a lot easier to work that way.

The Chairman: That would be very useful for us, yes. Thank you.

Mr. Robert Fischer: That's my response to your last question. Perhaps you want to refresh your memory.

The Chairman: He's pretty much out of time. Part of my problem is to try to let the witnesses participate, but still...

Can you give a brief point, Mr. Smith?

Mr. Peter Smith: I think there was just one question that wasn't referred to, and that was the desirable size of the capital budget.

When you take a look at some of the things that were referred to in the seventies, eighties, and nineties, and now the replacement of those pieces of equipment at that particular stage—correct me if I'm wrong, Bob—the capital budget was in the vicinity of 30%, and now we're talking 17% or 14%, arguably. So I think we're talking about a serious problem here, in the sense that the age of the equipment that was referred to, be it light armoured vehicle, be it aircraft or ships... The ships may be into a mid-life refit by the time they become fully operational with respect to the shipborne helicopter that's required, which was originally part and parcel of the overall capability.

The Chairman: I will just make one comment from the chair and then go to my colleague.

I had a chance to sail on the Charlottetown last May. That's one beautiful piece of equipment. So I like your suggestion of not leaving it for twenty years to get at the problem again.

Anyway, it's not my turn right now; it's Mr. Clouthier's turn.

Mr. Hec Clouthier (Renfrew—Nipissing—Pembroke, Lib.): It could be your turn. You're the chair.

The Chairman: I'm being a democratic chair.

Mr. Hec Clouthier: First of all, far be it from me to excoriate a person who goes to the same barber as I, but Mr. Smith, when you were responding to Monsieur Laurin's question about his concern about where the money was going, whether it was Quebec or Ontario, and he was kind of indicating that Ontario was perhaps getting a few more dollars than Quebec, you made it very clear to him the difference in the spending. As a matter of fact, I guess it went actually more to Quebec, but you did say something at the end of your little dialogue; you said “Well, whether it is in Canada or Quebec”.

[Translation]

Mr. Laurin knows very well that Quebec is a province of Canada.

Some hon. members: Oh, oh!

[English]

Mr. Hec Clouthier: I just wanted to make sure we got this on. I know it was a Freudian slip.

[Translation]

Quite obviously, sir.

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[English]

It was interesting to note also, Mr. Smith—and it's not pick on Mr. Smith day, because my mother was a Smith—that you were talking about ASD. I know that you people from the industry would want to see the Department of National Defence run more efficiently, save more funding so we can spend more money in procuring items from your different industries. And I don't disagree with you on that. But with respect to my CFB Petawawa and alternate service delivery, I have been strongly encouraging the base commander and DND to work in concert with the civilian employees we currently have there. On occasion they're not helping their case, because they're picketing my office and making sometimes erroneous statements. I'm pointing at one aspect of ASD in my base of Petawawa where it actually happened about five or six years ago, and subsequent to that it has actually cost the base more money because of it.

I'm just wondering, Peter, do you have a ballpark figure on how much money it would save on ASD, since we're all talking about saving money here?

Mr. Peter Smith: Thank you, Mr. Clouthier.

First of all, I should say that we both go to the same barber because I came from Arnprior.

Mr. Hec Clouthier: We could be related. But you're a lot better looking than I am.

Mr. Peter Smith: Second, it certainly was a mistake if I was in the position of indicating Quebec or Canada. That was not the intention. But sincerely, it is an issue we have to take a look at, whether it's Ontario, Quebec, or any other part of Canada. The issue is that the availability of suppliers and the keeness with which they want to supply to the Canadian industry, doing so well, is something we have to watch out for at all times—and the availability of money, technology, etc.

With respect to your last question, on alternate service delivery, the concern I guess we have, Mr. Clouthier—and something that you've seen, I'm sure, in the various witnesses in this committee—is we feel the government should take considerable credit for addressing the fiscal problems they inherited when they came into office, certainly the $42 billion debt addressed, etc. That was achieved primarily through program review. Our concern is there seems to be an attitude that we have addressed that issue, so there's no desire to improve upon that. That's where our concern is.

The Department of National Defence's budget has just been devastated, and because of addressing that to the government as a whole, we don't feel there's the incentive inside to go any further than they have. We feel that perhaps with industry consultation, there are ways and means by which meaningful solutions can be found and more cost-effective ways of doing it. We're fully cognizant that industry is not perfect. There have been some pretty serious disaster stories in respect to the way in which either employees have been treated or the way in which expectations have been sold. And I can understand from Petawawa's situation and others that this may have occurred.

We can't overlook the responsibility of the unions in this regard to watch out for the rights of their employees. But I guess the concern I had raised in my comments was that it doesn't make any sense for the Department of National Defence to say that, yes, we will entertain alternate service delivery if in fact you hire all our employees at 100%. Well, excuse me, but there are no cost savings in that.

So the issue is how do you care and nurture for those people whose employment has been displaced? There are very, very innovative ways that have been used successfully in the industry that perhaps may not be possible to do within the government in the sense of bridge financing, in the sense of career development, in the sense of training, and a whole bunch of other things. I think the disconnect happens to have been where there is an intention on the part of the Department of National Defence to protect its staff. But on the other hand, perhaps they are distrustful of industry in relation to how they're going to treat those staff once it becomes an alternate service delivery aspect.

Mr. Hec Clouthier: I have perhaps more a comment than a question. Thank you very much, Mr. Smith, because I'm on record as opposing ASD coming to my military base until we exhaust all other avenues where we can actually save that money. So far it has been working very well.

• 1055

I did notice that you said something about being creative. That's why I really would like to see Mr. Fischer's report. I'm a firm believer in the idea that everyone should be involved in how we're going to save money, especially with the procurement of these things. Many times, it's into billions and billions of dollars, so if there are creative ways of financing, of repaying the debt, and also just the RFPs, I'm looking forward with great interest to see your report on that.

The Chairman: Thank you, Mr. Clouthier.

You know Mr. Clouthier is a shy, restrained fellow, but I know he has great interest in this issue. Obviously we all do.

Mr. Peter Smith: He's going to let me know who his haberdasher is so that I can have a hat like his.

The Chairman: That's right, there you go.

Gentlemen, I want to thank you all very much for being with us today and for sharing your expertise. I suspect we will want to have you back, and you have all indicated your willingness to come back. We appreciate that very much.

We have to run off to see why our presence is needed, but we do know it is needed.

Thank you very much.

Mr. Peter Smith: You made mention of providing the questions. Is the clerk going to provide those to us?

The Chairman: Yes, the clerk will provide them to you. He'll send them to you electronically or however you prefer.

Thanks very much. The committee's adjourned.