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, February 10, 2000

• 0900

[English]

The Chair (Mr. Pat O'Brien (London—Fanshawe, Lib.)): Can I call the meeting to order, please? It being 9 a.m., I invite people to take their seats.

I'd like to welcome several visitors to our committee today.

First, we're going to hear from the Defence Associations National Network, Admiral Dan Mainguy.

Welcome. It's nice to see you.

I also welcome both Paddy O'Donnell—that's a pretty familiar name to all O'Reilly and an O'Brien—who's vice-president of the strategic plan for the Canadian Defence Industries Association and the Joint Defence Procurement Council representative, and Robert Fischer, president of the association.

I'm sorry, I didn't....

Rear Admiral Michael Saker (Ret.) (Member, Defence Associations National Network): Mike Saker, and I'm with DANN.

The Chair: Very good. I didn't know you were joining us, but you're welcome as well.

To all of you, we're looking forward to coming to the end of our study on procurement. We have a few more witnesses to hear from. You're certainly witnesses that we do want to hear from, after which the members will have questions.

Admiral Mainguy, are you going to lead off? Okay.

Maybe you've been here before or know how we work, but I'll mention that normally we have introductory comments of ten to fifteen minutes from the witnesses, if they wish, and then we go to questions from the members.

We'll turn it over to you, sir.

Admiral Dan Mainguy (President, Defence Associations National Network): Mr. Chairman, I want to thank the committee for inviting us to appear before you.

I am president of the Defence Associations National Network, a small organization that advocates appropriate armed forces for Canada. We're a national organization. We have two bases, one here in Ottawa, DANN East, and one based in Victoria, DANNPAC. I guess we split at the Lakehead, basically,

We have members all across the country, from coast to coast. We're funded entirely through contributions from our members and occasional donations from well-wishers. We've been going for over 11 years.

We address defence policy issues by publishing a newsletter. I've brought along some copies to show you. I'm the editor of the newsletter. All members receive a copy of it. We send out free copies to parliamentarians, selected members of Parliament, Senators, journalists and others. You're supposed to get them, but they may hide in your offices.

An hon. member: No, I've seen the newsletter.

Adm Dan Mainguy: We also run occasional seminars to discuss defence policy issues. Our members write letter to editors, op-ed pieces, and stuff like that.

In making up this paper that I'm reading, I have perforce learned about one of the buzzwords of modern procurement, “just-in-time ” delivery. This is up to date as of 5 o'clock this morning.

Admiral Saker and I both have been involved in defence procurement from different points of view. My own experience was basically staff work to formulate requirements for equipment at various levels. Admiral Saker has had extensive involvement in engineering aspects of procurement, also at various levels.

We propose to make opening remarks and then try to answer questions.

Incidentally, I didn't realize until about five minutes ago that this gentleman, Paddy O'Donnell, is in effect one of my descendants. He was vice chief of the defence staff three or four removed from myself, so it will be interesting to see what he says. I thought it would be useful for you to hear the views of somebody like the vice chief of the defence staff.

I've read the previous testimony. You've had a lot of stuff on the nuts and bolts of procurement. I regarded the procurement business, as vice chief of the defence staff, as very difficult. From what I have been reading, I don't think it's getting any easier.

Most of the examples I'll mention in the next few minutes involve ships, for three reasons: they are by far the most complex pieces of equipment we purchase for defence; we've traditionally designed and built them in Canada; and I have a more intimate knowledge of them than I do of other pieces of equipment.

I have to say, though, it's not as if military procurement difficulties are a new problem.

I'm indebted to Marc Milner and his recent book, Canada's Navy, for much of the following.

The Naval Service Act was introduced by Sir Wilfrid Laurier in January 1910. It called for a Canadian navy consisting of eleven ships—five cruisers and six torpedo-boat destroyers—all to be built in Canada over a period of three years with a capital budget of $3 million. Neat idea.

• 0905

The opposition wanted to spend the money on expanding the Royal Navy rather than creating a Canadian navy. Nonetheless, the act passed in May 1910. However, by May 1910 the heyday of Canadian shipbuilding had passed, and there was no yard in Canada capable of building warships. The government solicited bids from British firms that would find Canadian partners to build the ships, accepting the extra cost this would incur.

The prospect of a federally funded naval program caused different reactions. The cruisers were too big to be built in the lakes because there was no seaway at that time, so there was no spinoff for Ontario. Basically, Ontario was against the program.

The Prime Minister, who was the member of Parliament for Quebec East, encouraged the British firm of Vickers to establish a yard in Montreal. The new shipyard, Canadian Vickers, was established in 1911.

By this time, the construction period of the ships had been extended to six years. The range of bids that came in to build the ships was between $8.5 million and $13 million, with a certain amount of uncertainty, because the shipyards were to be built during the shipbuilding program.

The government was keen on free trade, called “reciprocity”, with the United States, and called an election in 1911 to get a mandate for free trade with the U.S. It was roundly defeated by the Conservatives.

Rear Admiral Walter Hose, who led the navy through its very early lean years, related how Mr. Mackenzie King told him years later that it was not reciprocity that had defeated the Laurier government but the naval question. In any event, the new government's platform had included cancelling the shipbuilding program, which they did. So the problems of today in this country with helicopters, for example, are not unique.

As I said earlier, defence procurement has always been difficult. It was difficult in my time. The vice chief of the defence staff is responsible for allocating the resources of DND to various approved programs. He does this through chairing boards that have on them all the interested parties, trying to get them to agree. So he's always juggling, always anxious to carry out these programs at as low a cost as possible.

If he's doing his job properly, he infuriates the promoters of individual projects by insisting on an affordability element. He endlessly repeats the mantra “Better is the enemy of good enough”, ruthlessly eliminating any tendency to gold-plating and so on. His difficulties stem from what he sees as impediments against doing things at least cost. I think it is fair to say he is normally frustrated.

He's a man with a mission to use the resources of DND to maximize the operational capabilities of the armed forces. He's been trained that for any project, you should have one aim, and maintain it, but he's faced with an almost ludicrous panoply of aims for government procurement and is continually being forced to spend money on things that detract, at least in his opinion, from the achievement of his aim to maximize the operational effectiveness. He is faced with the problem that there are no special rules for defence procurement. The system treats it as just another type of government procurement.

I looked at the aims listed by Pierre Lagueux in his testimony to you. The first is to meet the operational requirements through a competitive, fair, and accessible approach, obtaining best value for money. That's good. However, the second one is to promote long-term industrial and regional benefits. The third aim is to achieve other national objectives, including industrial benefits; protection of the environment; official language considerations; international treaties; trade agreements; and a procurement strategy for aboriginal business. Finally, the aim is to assist Canadian firms in becoming competitive in domestic and world marketplaces.

All of these aims carry a price. As someone said to you in earlier testimony, “If you say you give DND $2, in fact you give them about $1.50.” I doubt if anyone knows the cost of these multiple aims.

• 0910

Two major difficulties in defence planning are the excruciatingly long timelines involved in major equipment programs and the instability of funding. Defence tries to look at a time horizon of around fifteen to twenty years, while governments tend to look at a horizon of three to five years.

Just as an example, the Canadian patrol frigate was conceived in the very early seventies in the form of the major capabilities it should have, which, in a very small nutshell, consisted of a reasonable capability against submarines, surface ships, and aircraft. That was a step towards general purposefulness and away from specializing in antisubmarine warfare.

I personally became involved in 1975 as chief of maritime doctrine and operations. The “new” frigate, which turned into the Canadian patrol frigate and then became the Halifax class, was our main project but by no means the only one. We had good support within DND to go full blast to develop it. It took us until early 1977 to get it into a form where it could be discussed with other departments.

When they'd all had a go, our minister, who was Mr. Barney Danson, gave his support and agreed to take it to cabinet, which he did in December 1977. It took us about another six months to refine our capability to get a detailed statement of requirements and another six months to get ready to go for proposals to industry, which was more complicated than I just said.

I then left to go elsewhere in mid-1978, and returned in 1980 to find we still had another two and one-half years before we had a contract to build the ships. It seems to me there were a couple of elections in there, and we had to re-convince each government that the program should continue.

The first ship was delivered in 1991 and the last in 1996; six years from cabinet approval to contract, and another thirteen years to obtain delivery.

Because of the twenty-year-plus length of time from receipt of the last Tribal class ship in 1972 to the planned delivery of the CPFs, we had to do what was called the “destroyer life extension” in order to keep up our defence commitments. This added another whack to the capital investment in the navy, which we wouldn't have done if we'd been a bit speedier.

I guess the current overhaul of the Sea Kings is in that category. They're having to do some major overhauls to keep them flying until they can get something else.

Incidentally, in the Canadian patrol frigate we got first-class ships, which I understand are operating admirably, demonstrating their excellence daily in operations. But the necessity to keep the forces properly capitalized is inexorable. I hope DND has some other projects bubbling away in all fields.

So much for timelines.

Our system is certainly open and honest. From what I've read in the testimony you've already received, it appears that for the bulk of defence procurement, which consists of contracts less than $25,000, it's much more streamlined than it was 15 years ago. Purchasing has been delegated way down the line through such things as acquisition cards.

But as far as major capital procurement is concerned, we seem to be absolutely hypnotized by process to the extent that the purpose of the exercise can easily be forgotten. It looks as though we are complicating the system while drastically cutting the staff available to make it operate.

Pierre Lagueux said:

There are no special rules that differentiate DND procurement from government procurement. That is quite different from what you'll find in many other countries around the world, such as the United States, Great Britain, and so on, where their department of defence has specific procurement authorities and specific rules. Here it is government procurement that applies to all government departments, including DND, and therefore the Treasury Board contracting policy applies to what we do, just as it does to any other government department.

Along with downsizing of technical staffs, as I understood it, was supposed to go empowerment of those who were left. But it doesn't look as if that's been done, so clearly downsizing has paid off rather less than it could have.

But I guess this is not a good day to be discussing delegation of natural authority in terms of what's going on in some other place.

• 0915

I guess the biggest new factors since I left the service are the trade agreements, notably the Agreement on Internal Trade, which applies to defence procurement. I have no direct knowledge of it, but it seems this act, while full of good intentions, and the challenge mechanisms available through the Canadian International Trade Tribunal, have stopped progress on simplifying processes and facilitating speedier procurement decisions.

The possibility of being challenged has led to holding costly and time-consuming competitions where they don't make any sense. These so-called competitions have often resulted in only one bidder, who in fact was the only likely supplier.

Not so long ago we tried to establish centres of excellence, with the expenditure of considerable amounts of DND money, that would allow a well-trained workforce to be maintained in whatever field and that could expect to be called upon to carry out work within their expertise. That didn't last long. Presumably, the temptation to use defence for regional purposes was irresistible. We now seem to have abandoned that as a good idea and accepted the great increase of money it likely will cost to implement a program.

I think I'll stop there. It's my opinion that we diffuse our aims so much in procurement, take so long to make up our minds, and have sufficiently unstable funding as to make the bang for the buck far less than it could be.

Thank you, Mr. Chairman.

The Chair: Thank you very much, Admiral.

I'll let you pass the baton as you've worked out, but I do want to recall to you that we're going to have a bell at 10:30 a.m. or so. The members are hoping to ask questions. I just hope each person is not going to take 15 minutes or we won't get to many questions.

That's all. I'll leave it with you. We usually get about 15 to 20 minutes total from the group. I'll just give you that heads-up. Because we have your written submissions, we find it's often through our chance to ask questions that we are able to probe what we're looking for.

Carry on.

RAdm Michael Saker: Thank you very much, Mr. Chairman.

Unfortunately, my text was not available to you beforehand. I will try to speak quickly, although I understand that affects the translation as well.

I don't envy you your task. It's a very complex business. Everybody agrees on that, and that's about where the agreement ends. After that, you hear wide-ranging views and testimonies from various people, which of course you have received.

I spent the better part of 20 years of my military career deeply immersed in engineering and procurement. Over the past three years I've been out assisting industry in trying to sell their goods and services into DND. So for the next few minutes, I just wanted to give you my perspective on this subject from both sides of that fence.

I'd like to start by noting the continuous struggle that goes on between industry and the government bureaucracy. It seems that industry is constantly critical of the bureaucracy—too complex, too slow, out of touch with modern business practices. I'll deal with the first two criticisms in a minute, but first a word about business practices.

There's a whole industry out there that is continually developing new business practices. Most of the leading defence and aerospace companies try to enhance the latest trends to get ahead of their competitors.

By its very nature, government is always slow to embrace change. Thus, government departments will always lag behind the newest business practices and therefore are easy targets for criticism. Of course, the bureaucracies eventually attempt to change, but by the time they do, inevitably they're out of step with the latest business thinking. Thus, the criticism continues.

Since business management developments are usually cyclical in nature as opposed to linear, the two sides can often find themselves out of phase. Just witness the business trends over the past few years to increased centralization, whereas government departments are still struggling to implement the previous trend of devolution and decentralization.

The bottom line? Government bureaucracies will never be in line with the business trends, and don't expect them to be.

• 0920

My next comment is with regard to the complex procurement processes. Most processes are put in place to respond to errors or mistakes of the past. The perceived procurement fiascos of the late 1960s—for example, the Bonaventure refit and the hydrofoil procurement—led to a set of Treasury Board-directed project management and defence contracting procedures being implemented.

By and large, these were necessary and positive steps. However, over the decades they've undergone continuous development and refinement—read “growth”—responding to the latest policy change or the latest perceived loophole.

Seldom have there been any efforts to reduce or streamline these procedures, and where efforts were made a few years ago to shorten or bypass some of the steps in an effort to speed up procurement timelines, the bureaucracy and government were roundly criticized by the Auditor General and other critics, including the political opposition. I refer here to the utility helicopter project, the maritime coastal defence vessel, and more recently the NATO flying training centre.

Of course, the part of industry not included in these projects often takes a shot at these streamlining attempts as well. As you have all heard, in the past few years DND and Public Works have embarked on a number of initiatives to reform procurement, but in my view the jury is still out on whether these changes will have any significant effect and whether some of these changes won't themselves introduce problems of their own.

Another reason for growth of process...is lack of funding. In a situation where the demand for defence capital expenditure far outstrips the supply of money, bureaucracies tend to invent processes to resolve priorities and determine readiness. This explains in part the frustration that Admiral Mainguy referred to in his comments.

As I used to explain to the DND project management course, and only half in jest, the processes were instituted to deter all but the most determined project proponents—a rather perverse form of priority setting: increase the funding and the processes of necessity will become streamlined.

Downsizing of the defence budget impacted both capital spending and personnel. Unfortunately, as I left the forces in 1995, the writing was on the wall with the oft-heard comment, “Why do we need all these people in project management?”—never mind that their salaries were paid from the capital budget as a necessary part of doing the business.

Personnel reductions ensued, and project management personnel were affected like everyone else, and probably more so. I believe this has had a profound effect on the department's ability to progress projects through the system. Lack of experienced personnel is a major reason for some of the procurement reform that's under way today.

Government downsizing and program reform of the past five years also carried with it a professed willingness to accept greater risk. As I mentioned, much of the process growth of the prior two decades stemmed from a profound aversion of the senior level of the public service and the government to accepting risk. However, the promise of the late nineties never materialized, beginning with the very unfortunate situation in Somalia and all the allegations of improper management elsewhere that ensued. The senior bureaucracy, the government, and the citizens of Canada—or should I say the media—have demonstrated a profound unwillingness to accept the mistakes that will occur. Just pick up the newspaper on any given day for the latest revelations.

The bottom line is that the bureaucracy has far fewer people trying to manage the same very complex processes with little latitude to reduce process and accept greater risk.

My last comment, which will be in the text, concerns the CITT. I'll defer, since Admiral Mainguy talked about it.

Let me conclude by saying that procurement is a very complex business. No one gets thanks for the vast majority of good work that is done. For every procurement, there is only one happy winner, and sometimes downstream he is not even happy.

The Canadian procurement process is arguably the most open system of its type in the western world and becoming ever more so. I question whether this is in the best interests of DND and the Canadian taxpayers. Here I'm referring to the trade agreements in CITT, which the admiral referred to. Both DND and the Canadian taxpayers should be interested in obtaining the best value for their hard-earned tax dollars.

Thank you.

The Chair: Thank you very much.

Mr. O'Donnell.

• 0925

Lieutenant-General Patrick (Paddy) O'Donnell (Ret.) (Vice-President, Strategic Plan, Canadian Defence Industries Association; Representative, Joint Defence Procurement Council): Mr. Chairman, bearing in mind the limits on our time and the fact that you are reaching the end of your scheduled meetings, I don't know whether there would be an opportune moment for Mr. Fischer and I to come at another date.

We're representing the Canadian Defence Industries Association and the Aerospace Industries Association of Canada. We have the Joint Defence Procurement Council. I know you're anxious to ask questions. I guess I can ask the clerk whether there is another opportunity. Failing that, we can do just a quick run-through of the key points in our paper.

The Chair: Well, the problem we have is that our lives around here are run by these bells. It seems we're going to have a vote, which we had no way of....

We have time for you to make your submission. All I was indicating was that we did have an interruption we didn't know about.

LGen Paddy O'Donnell: I understand.

The Chair: The other thing is that if you submit something in writing, then it's not necessary to read the whole presentation. You can highlight the points you want to highlight, and then we can ask questions.

You go ahead, because I think it would be useful to hear you today.

Mr. Art Hanger (Calgary Northeast, Ref.): Mr. Chairman, I would really like to have more of an in-depth discussion with these gentlemen. I think they have a lot to offer. The only way we could do that, really, is not be totally controlled by the bell. If it would be possible, I would like to see them back.

The Chair: I have no....

We'd be happy to have you back if you're available.

Mr. Art Hanger: If this is the will of the committee, I'd certainly appreciate it.

The Chair: Sure.

First of all, are you gentlemen Ottawa-based? Are you able to come back easily?

LGen Paddy O'Donnell: Yes.

The Chair: Okay.

What's the will of the committee? Do you want to hear from Mr. O'Donnell and Mr. Fischer?

Mr. George Proud (Hillsborough, Lib.): Let's hear from them now and then get them back again.

The Chair: How about we hear from them now, begin questions, and if we need more time, ask them back for more questions?

Some hon. members: Agreed.

The Chair: Go ahead, then, sir.

LGen Paddy O'Donnell: Thank you.

Mr. Chairman, committee members, on behalf of my colleague, Bob Fischer, and the members of our two associations, I thank you for the opportunity to be here.

You will note from our biographical data—you probably have these scripts in front you—that Bob and I bring a mix of military and business perspectives to this defence procurement issue in addition to our understanding of the challenges currently confronting DND.

The member companies of our two associations have a major interest in defence procurement, both the policies and the process, to the extent that we operate a combined defence procurement council. I'm on the CDIA's executive committee, Bob is president of the CDIA, and I'm a member of the Joint Defence Procurement Council.

This brief will not dwell at length on industry statistics. Instead, we have included with your copies of the presentation current data on the scope and dollar value of our defence business. In overview, and referring to Dr. Bernie Grover's statistical analysis, which is enclosed, the products and services provided by defence firms operating in Canada generate revenues in excess of $5 billion annually.

You will also note from the analysis that between 1996 and 1998, total defence industry revenues declined by almost 8%. The principal reason for the decline was an almost 15% reduction in domestic business, which was partially offset by a 7% increase in exports. As will be discussed later, the defence industry is concerned that further deterioration could occur quite rapidly unless specific policy issues are addressed.

The defence industry does, then, contribute significantly to the Canadian economy. Moreover, although generally unappreciated or ignored, the capability of our defence industry impacts national security and sovereignty. National procurement policies that enhance Canada's defence industrial base improve our domestic capability to equip and support the Canadian Forces and advance our national North American force-generation potential. It's because these defence procurement policies and practices directly affect our defence industrial performance that we consider your review to be so important.

In order to address this complex subject in only a few minutes, I will comment in abbreviated terms on the key issues.

The framing element in this defence procurement analysis is the simple fact that DND is substantially underfunded to deliver even the relatively modest operational commitments contained in the current white paper. You have heard varying estimates on the shortfall. Our estimate is 8% to 10% annually, with an urgent need for additional supplementary capitalization in the near term.

Of major importance is our support for the operational capability defined in the white paper. A fundamental change in policy is not required, although periodic refining and updating is necessary.

• 0930

In quantity and quality of operational capability, the levels defined for our forces in the white paper are at the low end of what Canada requires for its range of domestic defence requirements and for what we ought to contribute to international peace and stability.

The validity of the current policy is not the issue. What we witness is a lack of will to implement even this modest commitment. The much-delayed maritime helicopter acquisition is a case in point.

Such delays in approving major acquisitions are damaging to DND's operational capability and compound its budget management problems, as more and more dollars are spent to support aging equipment fleets. These delays are also highly damaging to those defence companies that leverage Canadian development and production into export markets.

We applaud the work of the members of this committee who have been actively promoting increased budgets for DND. We look forward to a positive result in the upcoming budget.

A second major issue in this procurement analysis is the degree to which DND is obtaining maximum benefit from each dollar it spends. Undoubtedly, we are all familiar with anecdotal examples of apparent wastage or questionable financial management within DND. However, the evidence does suggest that DND's value-for-dollar performance continues to improve as their procurement reform initiatives and financial control processes evolve.

I would also note, as was mentioned by Admiral Mainguy, that there are constraints on expenditure efficiency that result from factors beyond DND's effective control. First, significant underfunding invariably results in such economic inefficiencies as small batch orders, deferred and/or prolonged acquisition cycles, and phased equipment updates. These result from cashflow realities induced by underfunding rather than by negligence or ineptitude.

In addition, as is the case in all government departments, DND must abide by federal financial policies and processes that constrain speed and innovativeness in procurement. Thus, while adopting business standards and procedures, DND is denied access to commercial procurement and accounting practices that could mitigate their funding problems.

While it is unlikely that DND would receive significant dispensation from such federal regulation, DND and government efficiency would benefit significantly by granting DND special flexibility in financial administration, in recognition of the scale and nature of DND's unique procurement situation. For example, less rigidity in cash management cycles would permit better resource utilization. Again, the granting of increased flexibility is relatively straightforward if the will to do it exists.

Having acknowledged DND's progress on procurement performance, our defence companies believe emphatically that DND could quickly and markedly improve their overall defence productivity by aggressive acceleration of their reform initiatives, and especially by engaging industry earlier and more directly in procurement planning and delivery. For the defence industry, we would define and measure defence productivity in terms of operational performance criteria—navy days at sea, army days in the field, and air force flying rates.

The objective of more extensive integration within industry is to increase the percentage of DND's budget being dedicated to operations through better procurement decision-making and delivery.

Further engagement with the defence industry would enable us to jointly build on proven partnering models, such as our Canadian Forces primary flight training, smart procurement in the U.K., and a myriad of other U.S. and foreign experiences. Again, we acknowledge and support DND's increasing pursuit of industry participation, as reflected in their procurement reform initiatives and the growing list of alternative service delivery activities that utilize business-based processes and invite more commercial support.

The defence industry simply wants to move deeper and faster. We are convinced that we can help expedite the procurement reform process; add value to options analysis for equipment and service requirements, such as participating in the examination of potential solutions to DND's strategic air and sealift requirements; shorten procurement cycles; and reduce support costs without compromising operational readiness.

To this end, we will solicit DND's concurrence with the establishment of a standing DND-industry board or committee with the mandate to maximize the mutual benefits of improved partnering between the department and the defence industry. This forum is not intended to be a lobby organization for specific firms. Rather, we are seeking a membership and procedures that will enable DND to continually and directly tap industrial expertise while providing industry with early and accurate procurement forecasting.

Mr. Chairman, we seek the support of your committee for this proposal.

I will now ask my colleague, Bob Fischer, to complete the presentation.

Lieutenant-General Robert (Bob) Fischer (Ret.) (President, Canadian Defence Industries Association): Thank you, Paddy.

Mr. Chairman, ladies and gentlemen, the final portion of our brief will focus on some specific issues of concern to the Canadian defence industry. Some are directly related to DND procurement levels and practices, others are more strategic.

• 0935

Earlier, reference was made to the negative impact on Canada's defence industry of reduced and delayed procurement spending by DND. The obvious direct result is lower revenues and fewer defence jobs. Moreover, since DND's procurement requirements are too low to sustain most defence companies in Canada, the norm is to leverage DND sales into the U.S. and other international markets.

In general, it is enormously easier to export goods and services that are being used by the Canadian Forces. Conversely, without Canadian demand, export opportunities diminish and the defence industry shrinks further.

This is not a plea to create artificial demand; it's simply a very strong practical argument for timely acquisition approvals by government.

As you've undoubtedly heard from other witnesses, there is a series of procurement policy issues the federal government is urged to address on a priority basis.

First, clarification and enforcement of federal procurement policies would benefit government, taxpayers, and the defence industry. Your text will show you some examples, which I will not read out to you.

Second, government and industry need to jointly address the requirements for and dimensions of a defence industrial policy for Canada. Do we need or want a domestic industry in Canada, or are we content to assume that the provision of our defence needs will be left to the international marketplace, whatever the ramifications on assured supply and national industrial growth? Lacking a clear policy and bearing in mind the relatively limited size of domestic defence requirements, our defence industry is vulnerable to deep and rapid contraction.

The status and relevance of our defence relationship with the United States emphasizes the urgency of this industrial-base policy issue. The U.S. is the principal marketplace and source of technology for our domestic industry. In recent months, the U.S. State Department has effectively eliminated most of the remnants of our unique privileged access to U.S. sources and customers. I refer specifically to the April 1999 unilateral changes to the International Trade in Arms Regulations, or ITARs, which are severely prejudicial to our defence industry.

It is our view that we must act rapidly to address the potentially severe impact on our defence industry by introducing policy initiatives that aim to re-establish our previous special status in a North American defence trading zone. In addition, in our procurement decision-making we should make broader use of national security provisions in order to support our domestic industrial base.

I emphasize that we're not here seeking policies to prop up non-competitive Canadian companies. Rather, we're looking to government to recognize that Canada's defence industrial base is in jeopardy and that it is essential to put into place policies suited to our national interests. Our associations intend to directly engage government ministers in support of defence industrial policy initiatives.

In summary, Mr. Chairman, I restate the following points. Underfunding is no doubt DND's most crucial procurement issue. Second, accelerating procurement reform will increase the benefit to DND of each dollar it spends. Third, immediate fuller partnering with industry would be enormously beneficial to DND as well as industry. I believe you heard that in spades from Mr. Taylor two days ago. Finally, federal focus on defence industry policies is urgently required.

Thank you very much, Mr. Chairman. We'll take your questions.

The Chair: Thank you very much, gentlemen, for your presentations. I'm sorry we have a bit of a time constraint, but if you want to submit anything else in addition to your verbal comments, we'd be happy to receive it.

We'll start with questions. If the members have still more questions when we have to leave, we can certainly invite you back.

We'll start with Mr. Hanger of the Reform Party.

Mr. Art Hanger: Thank you, Mr. Chairman.

Thank you very much, gentlemen.

I was quite impressed yesterday, listening to the British concept of procurement ideals they want to introduce. I guess they're in the process of doing that. Industry is involved right at the very beginning, from the concept stage onward.

Would you be proposing a similar type of idea?

LGen Paddy O'Donnell: Mr. Chairman, it would be an approximation of that type of framework. We do have different financial protocols and government regulations that would make that leap very difficult, but at minimum, the establishment of a much closer integration of our defence expertise with the defence department would go a long way toward accelerating the procurement activity itself as well as introducing, I think, a better understanding of what's out in the marketplace to meet the service requirements.

• 0940

So the answer is yes, in part, but I would worry about attempting too dramatic a change to the whole procurement structure. We have historically seen that's very difficult to introduce. My own approach would be to do it incrementally.

Mr. Art Hanger: Okay.

I think it was Mr. Saker, or Mr. Mainguy, I guess, who informed our committee that it was somewhere in the neighbourhood of six years to deliver the frigates from the concept stage to the contract stage.

Adm Dan Mainguy: From 1977 to 1983.

Mr. Art Hanger: I have the figures on the last three frigates that were delivered in the British shipyards to the military. They cost £400 million for the three. Ours, by the time they were delivered, cost anywhere in the neighbourhood of £4.5 billion to £5 billion for the 12.

Now, my math isn't always the best, but it's £1.6 billion, if you were looking at 12 frigates on the British side, compared with £4.5 billion to £5 billion delivered on the Canadian side. That is three times the cost per unit.

Would a good portion of that additional cost be the length of time everyone was sitting around for the six years trying to put this thing forward and deliver those units?

RAdm Michael Saker: May I address that, please?

I was in the frigate project office for seven years. During a portion of our time there, this very issue came up about the cost of other people's ships. The problem in Canada is that we identify absolutely every single dollar spent on a project and relate it to the cost of the project, including, at the time, my salary and the salary of everybody else on the project team.

So we actually sat down and did a parametric study of the type 23 frigate, the M-class frigate, the F57, and the Canadian patrol frigate in terms of the size, the operational capability of the thing, the crew size, and so on and so forth.

Of course, you also have to bowl out what is “government-furnished” equipment, as the term is referred to in the States and elsewhere. In other words, it's equipment that comes in through a different program, gets put in the ship, and doesn't necessarily get counted.

The bottom line in all of that was that when we looked at it, taking into account, I think—and the admiral would probably agree—the increased operational capability of a Canadian patrol frigate over the type 23, it was, dollar for dollar, very close.

You have to look at sail-away costs, or the cost of adding one more ship to the program. In the case of the Canadian patrol frigate, it's about $470 million. You have to identify that cost in anybody else's as well. That includes everything, including fully stocked storerooms, munitions, and everything onboard the ship.

So it's a very difficult issue to deal with, and I think you have to be careful about the numbers you look at.

Mr. Art Hanger: Okay. That's good. I appreciate your answering that.

The Chair: Did you want to add something, Mr. O'Donnell?

LGen Paddy O'Donnell: Yes. I'd make just one other observation.

Clearly, having project offices running for that length of period of time does increase the cost, but in some cases the duration of the program is driven by cash phasing. You have only certain amounts of money to spend in certain years, and that in itself prolongs the process enormously in some cases.

Mr. Art Hanger: Okay.

The statement was made that you give DND $2 but you really give them $1.50. In other words, you lose about one-quarter of that $2 delivery.

What happens to it?

Adm Dan Mainguy: I said that, and I took it from testimony given to you earlier. I wouldn't like to stand by the exact difference.

• 0945

All this was to illustrate was that we have so many aims, and each aim for defence procurement has a price to it. One of your previous witnesses estimated that $2 funding to DND results in $1.50 in actual spending on the program itself. The rest is achieving other aims.

Mr. Art Hanger: And those other aims are...?

Adm Dan Mainguy: Well, I read them to you.

Mr. Art Hanger: Oh, okay. Yes, I understand now.

Under the proposal delivered by the United Kingdom, they were saying that from concept to assessment, 15% of their budget will be spent. That involves industry, or the possible main players that might end up bidding on this contract. They have set that figure in terms of about what it would cost.

Adm Dan Mainguy: I'm sorry, concept to...?

Mr. Art Hanger: To assessment. In other words, right to the point of where the bid is delivered.

Would you say that would be similar to what happens in the procurement process here in Canada, or are we losing more than 15% of the cost?

RAdm Michael Saker: I would say that's about right, yes.

Mr. Art Hanger: You say the same thing happens here, then.

RAdm Michael Saker: Yes.

LGen Paddy O'Donnell: Are we reading this correctly in that what we're referring to is, in that part of the cycle, 15%?

RAdm Michael Saker: From the day a government project team basically gets set up, 15%. This includes feasibility studies, project definition studies, potentially funded definition studies and the like. Yes, 15% would be a pretty reasonable number. It could be less.

Mr. Art Hanger: Okay.

RAdm Michael Saker: It depends on the project.

LGen Paddy O'Donnell: I would add that I believe the 25% figure referred to earlier as the cost of the processes that were described would, in my view, be very high relative to how the competitive process is that we're now engaged in...and how effective government is in actually negotiating contracts. It's much tighter than that in this day and age.

I believe the government has a framing role to play. We have national interests that ought to be engaged. We certainly have national security interests. It's more how that role is played rather than the fact that the government has a legitimate role to play.

Mr. Art Hanger: Thank you.

The Chair: Thank you, Mr. Hanger.

[Translation]

Mr. Laurin, from the Bloc Québécois, you have seven minutes.

Mr. René Laurin (Joliette, BQ): Thank you, Mr. Chairman. My first question has to do with the statement on page four of Mr. O'Donnell's presentation. To my great surprise, it says that the objective that is being sought through greater integration with the industry is an increase in the percentage of the National Defence Department's budget. I would have rather expected that greater integration of the defence industry with the department would lead to a greater proficiency at a lower cost. When your presentation was translated, maybe your thoughts were not properly expressed. This statement leads me to believe that the department would be spending more. It's rare that such an objective is set out. Although that might be an objective for you, it certainly isn't in line with either the department's or the government's. However, I must admit that when it's necessary, the department might want to increase its expenditures. I'd like you to make your thoughts on this a little explicit.

LGen Paddy O'Donnell: I'll answer you in English, if you don't mind.

[English]

Again, the issue is to make more use of whatever money is available. The coupling of that increased efficiency with more money is what's required. You need both—more money for the program and higher efficiencies within the program.

• 0950

[Translation]

LGen Robert Fischer: Mr. Laurin, you put your finger square on it. The translation is at fault.

Mr. René Laurin: I figured that was the case and that's why I asked for clarification.

I'm just back from a conference in the US where there were 14 NATO countries participating and the discussion was precisely about the acquisitions of the European armies and the American army. The US seemed to say that it would be an advantage to have better coordination of purchases. It was even said that it wasn't quite understood why the European countries spend so much on national defence as all these countries should get together to ensure the integrity and the security of those countries making up the European Union. Is it an advantage for those armies to engage in joint purchasing or for the defence equipment purchased to be interoperable from one army to the other, for example, in case you have missions abroad?

Where would Canada's place be in that kind of rationalization? Canada is also a NATO country and it's even the USA's neighbour. I'd like to know what you think about that.

LGen Robert Fischer: I'll say a word about one of the elements in your comment having to do with what's called interoperability in English.

When the NATO countries decide to purchase their defence equipment independently, munitions or fuel, for example, they should ensure that the systems they choose are compatible and can work together. NATO has a whole slew of documents setting out the standards that should apply to that equipment.

For example, if Canada were to decide to purchase an armoured vehicle from General Motors in London, the vehicle's design should conform to a major portion of these standards even though the vehicle may have been designed in Canada for Canadians. It could be a bit different from an armoured vehicle you'd find in France or in England, but it would have to conform to the standards set for all NATO countries.

The second point you raised is perhaps more difficult to solve. Although it may seem logical for NATO countries to get together and purchase materiel in common, national interests generally mean that such a project is almost impossible. For three years now, the US and Great Britain have been thinking about acquiring an armoured recognizance vehicle. Canada has a minor share of this project in which the corporation I'm working for is engaged. The US and Great Britain still haven't managed to reconcile their requirements and, in my opinion, it's not very probable that this common project will ever come to anything.

There are many other examples of projects undertaken in the same perspective. Canada today uses the leopard assault vehicle because of efforts of countries like the US and Germany to come up with a common battle tank for NATO fell through. Such failures have led the countries to develop their own systems independently.

The initiative objective is certainly logical when it's examined with a view to the internal policies of some countries, in other words at the bilateral level. It's a very difficult objective for Canada which is not a European country and which, even though it would like to work with the USA, has to face a totally different scale of things.

Mr. René Laurin: Would there be any advantage to having the Canadian Armed Forces or the Canadian defence industry specializing in certain areas and buying more specialized products abroad?

• 0955

As Canada has extraordinary expertise in telecommunications, shouldn't the defence industry specialize in that area, amongst others, and purchase other materiel elsewhere? Would that lead to any major savings?

[English]

LGen Paddy O'Donnell: If I may, in fact that's quite consistent with how the acquisitions would actually occur. Externally, the countries to which we export our products and our services are using those products because they are state-of-the-art, plus the fact that we provide good labour rates. So there is a specialization that's more a consequence of the competitive process than a natural division of work amongst allies, by way of illustration.

So, yes, that specialization is a very important economic benefit, and it is occurring, but it is not occurring as a consequence of a specific formula whereby the nations agree that nation X will produce product Y, and we subdivide the shares that way.

[Translation]

The Chair: Thank you, Mr. Laurin.

[English]

Mr. Proud.

Mr. George Proud: Thank you, Mr. Chairman, and ladies and gentlemen.

I guess I can say on behalf of all of us that our main objective around this table is to get more funding for the Department of National Defence. It's been shown here recently by a resolution we passed. That's a very important part of the process, and I think it's a very important part of the process of procurement.

A brochure produced by the Department of Foreign Affairs and International Trade's export control division states that Canadian defence policy “relies on imports”. In your opinion, is this an accurate description, and what effect have such policies had on Canada's defence industries? In your opinion, is it appropriate to rely on imports rather than ensuring capability within our own borders?

As well, could the Canadian industrial base be used more effectively to promote a self-sufficient, autonomous Canadian defence industry? If the answer to this is yes, what changes need to be made to facilitate this?

LGen Paddy O'Donnell: I'll begin, just to help frame the issue. Practically speaking, it would be a wonderful objective, and it certainly would be for our industries. The Canadian requirement, and in industrial terms the actual demands of the forces and the department, would not be sufficient to sustain a full continuum of procurement of products and services. What we attempt to do is leverage the expertise we talked about a few moments ago in those areas where we do have a niche and a demonstrated world-class capability to export those particular products internationally.

Indeed, historically our relationship with the United States has been based on a North American industrial-based solution. It's simply reality that we don't generate enough demand within the country to support the full range of defence services.

Arguably, one of the major issues that would face any policy discussion has to revolve around the ramifications of globalization and the revolution in military affairs, etc. What we are arguing for is Canada's participation in these larger debates. Our concern about our relationship with the U.S., which is deteriorating from a defence industrial perspective, is that we haven't paid enough attention to the activities undertaken by the State Department. It has already cost us dearly. Our fear is that it could be even more severe as time goes on.

LGen Bob Fischer: Mr. Proud, you were quoting from an external affairs document—

Mr. George Proud: No, the Department of Foreign Affairs and International Trade.

LGen Bob Fischer: Okay. I understand you to have read that our policy relies on imports. That's certainly correct in the sense that our defence industrial base simply doesn't have the capacity to generate or to build or deliver the systems that DND requires.

• 1000

In fact, I would defer to my colleagues here to comment, for example, on the real Canadian content of the Canadian patrol frigate. We may have built the hull and we may have built a lot of the other systems, but I suggest the power plants and a lot of the control systems would all have been imported.

So when you look at the demographics, if I can put it that way, of the Canadian defence industry, in its broadest sense.... I include in that the defence aerospace sector. By the way, I would commend to you, if you haven't seen it, a supplement we inserted into last week's Hill Times to attempt to give you a feel for just that.

We simply don't have the wherewithal in Canada to deliver to the Canadian Forces a new fighter aircraft. We delivered the F-18—and perhaps my colleague, Paddy O'Donnell, can give you some insight into how much of that was Canadian content—but the fact is, Canadian defence industries today are niche players in a global market.

I mean, I'm not trying to make a commercial here, but the fact is, I'm with Computing Devices Canada. This company's been in Canada since 1948. We enjoy today the position of probably the first- or second-largest defence company in Canada, and yet in the grand scheme of things, in the United States we're not very much. We're the largest, arguably, in Canada, but even at that we are very focused on acoustic systems for the navy, on fire control systems for the army, and command and control systems, for example, for portions of the air force. We don't offer the full spectrum of capability.

When you add to that all of the other companies in the defence arena, directly or indirectly, that represents what we're here to talk about, the defence industrial base, and it ain't capable of responding to all of the requirements of DND. Clearly, DND gets systems that, at the root, have been designed elsewhere. For the most part, technology comes from the U.S.

Mr. George Proud: Are our industries fully utilized by the niche markets they're in?

LGen Bob Fischer: Are Canadian companies in these niche markets? If you're very, very focused, very small, you might survive, as we've indicated, on DND business, but increasingly companies cannot.

Mr. George Proud: So export is their answer.

LGen Bob Fischer: Absolutely. I'll give you an example.

Again, referring to the company I'm with, in the nineties 70% of our revenue came from Canada. The reason for that is that we were prosecuting the army's largest communications project for eight years. We're going to deliver that, or conclude that, in 18 months.

Looking forward, we will rely on exports to produce 70% of our revenue—a direct needle flip. The major players in this industrial base have to be competitive, have to go and seek the revenue internationally, and that's costly. There's travel and everything else. It's riskier. You're not on the ground. You don't know the local environment, and you come up against the world players in this business.

So it's easy to say you should be international and aggressively seek these markets, but it's another thing to actually get the business.

The Chair: Thank you, Mr. Proud.

Mr. George Proud: Do I have time for another one?

The Chair: No, time's up. I'll put you on the list again.

It's Mrs. Wayne's turn.

Mrs. Elsie Wayne (Saint John, PC): Thank you very much, Mr. Chairman.

First, I'd like to just tell my colleague from the Reform Party that we do build the best frigates in the world and we build them right in Saint John, New Brunswick.

Voices: Hear, hear!

Mrs. Elsie Wayne: We have the most modern shipyard there is. We just need to grow, and we just need to have DND recognize it.

If you recognize it, too, Art, then everything's going to be okay—

Voices: Oh, oh!

Mrs. Elsie Wayne: —because we're going to turn things around. There's no question about that.

I was just down to the United States. I had an opportunity to meet with the ambassador there. You refer here to what happened with the ITARs, that there were decisions made there unilaterally. What, the United States made these decisions and just imposed them upon us? Could you just elaborate a little bit on that for me, please?

LGen Bob Fischer: ITAR, the International Trade in Arms Regulations, are United States regulations. They dictate not to us but to U.S. industry what it is they can actually export. It's concerned mainly with security issues.

• 1005

Quite correctly, they can modify those regulations, and on April 12 they did, with the effect that the exemptions Canada enjoyed for forty years or more were significantly reduced.

I don't want to go much further, but it was a U.S. regulation. They certainly had the authority to modify it. I would question both how it was done and why we didn't react maybe a little earlier and a little stronger to avoid this. Now we're into rearguard action to try to restore some of the changes legislated on that day.

Frankly, since Mr. Clinton's visit here, when we thought that visit had the result of reversing those changes, we're now caught up in a bureaucratic dance, which is suggesting to me that not only are we not going to get back what we had, we're probably going to end up with a regime that's even stricter than what we're working with now.

Mrs. Elsie Wayne: I was in the presence of Mr. Clinton as well, which my husband wasn't very much happy about.

Voices: Oh, oh!

Mr. John O'Reilly (Haliburton—Victoria—Brock, Lib.): You didn't dance, did you?

Mrs. Elsie Wayne: No, I didn't.

I will say that I've been very concerned. As you know, the Jones Act is there as well. In the United States they can bid on contracts to build ships. If we have a contract to put out to build ships that we need in Canada or around the world, and we can't....

I think, Mr. Chairman, we have an opportunity here. When we heard from Minister Taylor, he stated that Great Britain is looking at building more frigates. If we get the proper shipbuilding policy we need—and this committee here should go after it—we can turn things around and we can beat them in the United States. We can beat them, but I'll tell you, we have work to do.

Now, I don't know how you feel about this, but I was reading an article in the paper where in the United States they're looking at high school dropouts. They're taking them and putting them into the army, navy, or air force. They'll finish their education there, but they'll also teach them respect and responsibilities and so on. Here, I believe, you have to finish your education before you can be taken into the armed forces.

I think we have to look at that also, because I think we can turn society around. With DND it's people like you and this committee here who can turn it around, because none of the boys wearing a uniform are ever going to be up on the Hill with placards, telling us they need more.

So I thank you very much for being here, I really and truly do. I appreciate the information you've given to us. I think this committee has a job where we can probably assist.

I don't know if you agree or not with what Minister Taylor says in the committee that they've put together, but you're referring to a special committee where industry has a say as well, and they also refer to that.

The Chair: Thank you, Mrs. Wayne.

Mr. Hanger will now start off our five-minute round.

Mr. Art Hanger: Thank you, Mr. Chairman.

Just to go back to the arrangement Canada has with the United States and the changes to the ITARs, do you believe the Americans were justified in terms of what they did?

LGen Bob Fischer: Personally?

Mr. Art Hanger: Yes.

LGen Bob Fischer: No, I don't. I don't believe it was justified at all. I think it was as a reaction to their internal problems, such as the nuclear leaks or technology leaks they incurred in their own laboratories.

The examples they cited by way of pointing to a rather “leaky”—their word—Canadian export control regime were rather poor, to say the least. They were referring to vehicles that I personally was involved in selling through Crown Assets, I think back in the early nineties. The vehicles, which we purchased in 1965, were sold to a scrap dealer in Holland. Apparently, some of those vehicles found their way into Iran or Iraq. They pointed to that example as technology that leaked through Canada.

Well, there is no technology. These things were built in 1965, and represent technology of the fifties. But I don't want to make the story longer than it should be.

• 1010

In my opinion, it was part of a much larger political scenario, and I think we happened to be caught to some extent in the crossfire. If we want to restore this preferred position....

By the way, there's a piece of paper here that suggests, you'll be interested to know, that the U.K. and the U.S. have embarked on negotiations to in fact try to give the U.K. preferential access into the U.S., probably at the expense of Canada.

The U.K. is aggressively trying to obtain preferential access into the U.S., and obviously they have a strategic game plan in place to do so. If that gains momentum, I don't know why the Americans would spend much time worrying about us. There is potentially far more economic benefit in a U.S.-U.K. agreement than ours.

Ours is rooted in history, or has an historical basis. For years we've used that as the argument as to why it should exist, but I think the government and industry need to work together to say there's more to it than that: If you want us to participate in NORAD, then we need to feel that we're a preferred partner.

LGen Paddy O'Donnell: I would add the comment that it is important to underline that the fundamental premise, the justification, was national security from the U.S. perspective. The ITARs are owned by the Department of State. This may not have evolved if it had been a commerce issue, but it was the Department of State, and had security ramifications. They used this as the shield for the reduction in the previous arrangement.

Mr. Art Hanger: We are involved in NORAD, of course, but there seem to be rumblings in Canada that really don't reflect on the American concept of security where Canada is on board with some of their thoughts and ideals. Is that part of the problem the Americans might have with Canada? It seems they've been firing out a few warnings from time to time relating to security issues and Canada's position.

LGen Paddy O'Donnell: I think the particular issue that was raised just recently with respect to NORAD was principally our rejection of the U.S. weapons in space evolution. From our history and certainly from our defence industrial base, we would worry very much were our NORAD relationship to be dissolved or to decline, not only for the value it could provide to industries but also for the message it might be sending with respect to Canada's security role in the whole North American defence scenario. This ought to be something that worries us all.

The Chair: Thank you, Mr. Hanger.

Mr. O'Donnell, I'm not sure, but I thought I heard you say “our” rejection of the national missile defence. If I did hear you correctly, it's very important I put the record straight. The government has taken absolutely no position on that.

As a matter of fact, several of us just got back from Colorado Springs. Our official attempt to take the committee was turned down, which was very regrettable. I'm happy that some of us were able to go.

I think it's very important we put it on the record that Canada has not even officially been asked to participate yet, which came as a bit of a surprise given that we certainly have not taken any position as a government. As a matter of fact, I am hopeful that this committee in the very near future will begin to hold hearings on that.

But that assumption is floating around at Cheyenne Mountain.

LGen Paddy O'Donnell: Yes, it is.

The Chair: It's totally incorrect, totally inaccurate, but it's beginning to be.... We've brought that to the attention of the minister. He's not unaware of it, but he's now even more aware of it.

Just to repeat, there has been absolutely no request for us to participate, absolutely no Canadian decision, obviously, to respond to a request it hasn't yet had, and I hope in the near future this committee will be looking at the national missile defence system.

LGen Paddy O'Donnell: You're exactly right. I meant to have said something like “reported” or “reputed” rather than to state it as fact.

• 1015

What is worrying, as you say, is that it starts to become an accepted part of the theology behind our whole perception of what's necessary in defence. Then the linkages start to affect other areas of our defence relationship, and that is very worrying.

The Chair: That's right. It's a crucial question. I just thought I had to put the record straight on that because it is so important.

Mr. Hanger had just come to the end of his time, and I waited until he did to make that clarification. Now I'm going to move on.

Mr. Art Hanger: May I make one comment in reference to what you said, Mr. Chairman?

The Chair: Sure.

Mr. Art Hanger: I hear the same thing within political circles here, and I think it would be incumbent upon this committee to invite the foreign affairs minister as well to clearly substantiate his position in this matter. A lot of it, I believe, is circulating around him.

The Chair: Sure. It involves the departments of both defence and foreign affairs, obviously, but as I say, I personally have spoken to the minister, and people on the trip have. We hope in the near future to begin hearings on that.

Now that I've branched into that, Wednesday there will be a meeting of the steering committee. It's very important that each party have a representative at the committee, on Wednesday at 3:30 p.m. of next week, to discuss our future work, which hopefully will include this issue.

While I'm making announcements, the main estimates will be tabled on February 29, the budget being the day before. Shortly thereafter we'll have both ministers here to defend their estimates.

With those announcements and that clarification, I'll go to Mr. Clouthier.

Mr. Hec Clouthier (Renfrew—Nipissing—Pembroke, Lib.): Admiral Mainguy, in your presentation you mentioned that Canada has no special procurement policy for DND, whereas in the United States, Britain, and France they do. Could you just extrapolate from that and tell me what the difference would be between the two, what latitude their procurement policies in their own defence departments would have as opposed to ours, say?

I know ours can be slowed down or be rather pedestrian because we have to deal with Public Works or Treasury Board and DND. Could you explain to me what latitude the other procurement policies would have in those particular countries as opposed to ours? If there was a big-ticket item, would they still have to go to their own treasury board? I don't know.

Adm Dan Mainguy: As far as I understand it—and I should talk to my colleagues, because I'm pretty out of date on it—they have a central procurement authority that is devoted to defence. There's a secretary of state for procurement in Britain, a central authority for the procurement of defence that is separate from buying buildings and other things that governments buy. So they can adjust their priorities to suit their requirements of defence better, I would think.

Mr. Hec Clouthier: Would there be a certain amount of money set aside for procurement only out of their entire budget as opposed to buying buildings or whatever else, or pay, or quality of life proposals? Would there be a special percentage set aside?

I see someone nodding their head.

Adm Dan Mainguy: I'm talking about capital procurement for defence purposes. It's not the defence budget I'm talking about. I'm talking about the procurement of military equipment.

Mr. Hec Clouthier: But that is something we do not have, as we speak, in the Department of National Defence in Canada.

Adm Dan Mainguy: The authority is Public Works and Government Services for contracting....

Bob Fischer knows much more about this than I do.

LGen Bob Fischer: If I may, on the first question with respect to the differences, I had dinner with Mr. Taylor the night before he appeared before you. I found it fascinating that he did not realize that we in Canada have separated the contracting authority from the Department of National Defence, that there is a separate department with that mandate.

Realizing, of course, that in the case of the U.K., that's integrated within the MOD, I asked him, in the context of their smart procurement initiatives, how difficult he thought those initiatives or those changes would have been were they to be operating in the Canadian environment. “Very challenging,” I think were his words.

To me, this indicates that part of our problem in terms of streamlining process is the fact that this function is in a separate department.

• 1020

Second, I asked Mr. Taylor some of the latest numbers. In the U.K., they appropriate about 23% of their total budget for capital procurement. I would remind you that in Canada at the moment, depending on whose figure you want to read, it's in the order of 16%, maybe 17%. We at this table over the years have all recognized that unless you dedicate 23% to 25% of your budget on capital, you're headed for what we call a “bow wave” of equipment replacement. Eventually, you're going to be unable to replace the assets you have.

Mr. Hec Clouthier: Bob, you mentioned the U.K. How does our system compare with that of the United States of America? Would they have a different policy, again?

LGen Bob Fischer: No, the defence department in the U.S. does its own contracting. They don't go to the commerce department or whatever. They do it internally.

Most allies in NATO don't have the situation we have, of a separate department to do their contracting.

LGen Paddy O'Donnell: This is one of those flexibility issues that we were referring to with regard to the tidying up or to giving DND more control over their financial management processes. In fact, not more than six or seven years ago we did a very detailed analysis, carried to a remarkably successful extent, of whether or not we shouldn't take part of the PWGSC structure and incorporate it in DND. That idea went away in a flurry of other activities, but that's exactly the type of protocol change that would help DND enormously.

Mr. Hec Clouthier: Okay.

The Chair: Thanks, Mr. Clouthier.

Can you clarify, Mr. O'Donnell, whether that has always been the case in Canada? Has there always been this separation?

LGen Paddy O'Donnell: It certainly has in my experience.

Mike.

RAdm Michael Saker: Certainly going back 50 or 60 years, yes.

The Chair: So it's long-standing.

Thank you very much.

[Translation]

Mr. Laurin, you have five minutes.

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

How do the US and Canadian procurement processes compare? What are the positive and negative elements of that system and what are the strong points in the American system that we could use in our own system here to improve procurement?

LGen Bob Fischer: At the outset, it should be said that the Americans have a bit more money than we do and that is a help.

Mr. René Laurin: The fact that you have a lot more money does not necessarily mean you are improving your security.

LGen Robert Fischer: Let's say that in the area of human and financial resources, they enjoy an incredible advantage.

As I was indicating to Mr. Clouthier, the American Parliament has given its Department of Defence the power to sign contracts directly with industry without going through any other department.

Pierre Lagueux, who was then the Assistant Deputy Minister, Materiel, and Mr. Williams have appeared before you already. When I held that position from 1994 to 1996, not only did I have the responsibilities concerning procurement of materiel, but I also had other activities. In the US, a single person is responsible for procurement, research and development. In other countries like the US and Great Britain, those other functions that, in Canada, are handed over to the deputy minister, materiel, are taken on by another official. At headquarters level, more emphasis is put on the procurement aspect. It's that person's main role while here, it's just another among many.

There's a major difference as to the role played in the procurement process by the Canadian and American Parliaments as well as their members. Some people say that you should have more say in the decision-making process. In the US, it's quite normal for a project manager or a staff officer to go before Congress to defend and explain their projects. That's one of the differences, but I couldn't say whether it's preferable to the situation we have here.

• 1025

Mr. René Laurin: In Canada, 30% of the defence budget goes to expenditures for which there have been no calls for tender. This represents a huge amount of $3 billion a year. So 30% of the defence envelope is spent by people authorized to procure things without having asked for the price. Is this practice conducive to favouring the Canadian defence industry or does it actually play against it?

[English]

LGen Paddy O'Donnell: Perhaps I could make the first comment. The bulk of those sole-sourcing contracts, as we call them, without the competition are for relatively small amounts of money.

I would also suggest that this position is watched very closely by potential competitors to the people who receive these contracts. So there is a constant monitoring, in the normal competitive environment, of the types of contracts being let.

Is it prejudicial or favourable to Canadian industry? Because the bulk of the contracts are relatively small, I would suggest it's neutral. For larger programs, depending on the impact on our national industrial base policies, sole-sourcing for a large program could be justified for a whole series of reasons. Probably we would then seek to ensure that we can maximize the Canadian industrial content in this directed solution.

So there is no fixed, perfect answer, but I would suggest that for these large procurements, the government does have a role to play. In the smaller types of contracts, which would be the bulk of that 30%, my position would be it's not an impediment to industry.

The Chair: Admiral Saker.

RAdm Michael Saker: I would just add that in most cases, the contract, or the relationship initially, was through a competitive process. So in many cases you establish through a competition a supplier for a good or a type of service. Then what you're seeing two or three or four years down the road is a continuation of that process for most sole-source contracts.

In fact, through the issue of observing whether it's fair play or not, the trade agreements that now exist and the Canadian International Trade Tribunal, or the ability to challenge, more and more challenges are being made. Some companies are successful through those challenges.

So there now is a swing in PWGSC to competing more of these projects. I contend that is a retrograde step, because the cost of competition, especially for something relatively small, is significant. It's significant for DND and PWGSC and also for industry.

The Chair: Thank you.

That's a half-hour bell, so we certainly still have lots of time.

Mr. Proud.

Mr. George Proud: I have three questions here. I was chastized by the interpreter, so I had better slow down. I guess I asked too many questions too quickly the last time.

I'll go back to the Canada-U.S. agreements, if I might. Some have suggested that the defence production sharing arrangement and the defence development sharing agreement with the United States favours U.S. industry over Canadian companies. I have three questions on this.

In your opinion, is it true? Does cross-border trade under these two arrangements benefit Canadian companies? If so, could you be specific on it? As well, are there any changes to these bilateral international agreements that should be made?

The Chair: You didn't slow down much.

An hon. member: Whoa, boy!

The Chair: Who would like to begin, gentlemen?

LGen Bob Fischer: I'll attempt to kick it off.

I think as a general comment, in the last decade, or perhaps a little less, Canadian companies have made less and less use of these agreements.

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Frankly, for some of our members within the Canadian Defence Industries Association, were they asked their opinion as to whether or not we ought to perpetuate the agreements, they probably would say they couldn't care less. They don't use it. There has certainly been an indication of late that fewer and fewer companies make use of the agreements.

As for whether or not American companies are favoured over Canadian companies, providing you rationalize the relative number of companies competing for work under those agreements, I think you'll probably find it's treated fairly. The examples of the kind of work that has come to Canada under those agreements underscores the point we made earlier, that we are niche players in the business. It tends to be those companies that have something that one of the services in the U.S. would like to get, and therefore they would like that technology integrated in the project they're delivering. Canada tends to enjoy advantages on a niche basis, in some respects.

I would ask my colleague if he'd like to add to that.

LGen Paddy O'Donnell: On balance, I think the industry picture would suggest that they were generally favourable to Canada and not to the U.S. Over the course of the decade, as Bob as indicated, given the different approaches to defence and the idea that somehow or other extended mobilization of people and resources will no longer be the way that future conflicts are going to be defined, the whole concept of this North American industrial base is of much less interest in the United States than it has been previously. But I think we have benefited enormously from those arrangements.

Mr. George Proud: Thank you.

The Chair: Thank you, Mr. Proud.

Mrs. Wayne.

Mrs. Elsie Wayne: My understanding is that when we met with the Canada ambassador, he told us that about 87% of all of our exports were to the U.S. I really think this is a very serious situation when you have the U.S. acting almost like dictators when it comes to us. They almost see themselves as the parents and we're the child and they're going to tell us what to do.

When it comes to the ITARs, I think we should try to arrange a meeting with him. I was very impressed. There were certain areas, he explained to us, where he had taken certain issues that Canada wanted him to deal with in the United States, and he won on most of these issues. But when I brought up the Jones Act, that was something no one had asked him to deal with.

I think this committee and the minister should be dealing with this, and we should have our ambassador on top of this. This has not been good for Canada, what they have done.

As well, you state that we must act rapidly to redress the potentially severe impact on our defence industry by introducing policy initiatives. Have you drafted policy initiatives for us to look at and that you would suggest to us?

LGen Paddy O'Donnell: What we have is a set of ideas, and probably at the top of the list is the reintegration of our activities with the United States, clearly.

There are issues in support of a defence industrial base, such as when we are looking at different industrial benefit models for major acquisitions we would make, and we oblige a seller to us to actually help us develop our industrial base. That part of that industrial plan...would be related a percentage directly to defence industries.

So there is a series of those types of activities. I'm sorry, I don't have the list, but we can certainly have that made available to you in a short period of time.

Mrs. Elsie Wayne: Yes. We should have it so that we can deal with that.

LGen Paddy O'Donnell: I would make just one observation, if I may. The effect of the State Department initiatives—I'm being very polite—is that we are being subject to, but as Mr. Fischer pointed out earlier on, this was a completely legitimate process within the United States. They did not exceed their authority.

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The commerce people, or those defence industries that rely on Canadian industry to support them, were aghast, but they didn't have any impact—or minimal impact, in any event. It ended up prolonging the discussion period over the Department of State's security objectives. So if the issue is going to be tackled, that security issue is the framing.

Mrs. Elsie Wayne: Okay.

We should certainly take a look at it, Mr. Chairman, we really should.

The Chair: We can do that.

I might add—and I'm sure the gentlemen here know—it's not as through there haven't been a lot of representations on this issue for a long time now at the highest levels. Quite frankly, I thought the issue was more or less finished, as Bob said, but then, no, we find out it's not finished. There's been the Prime Minister, the President, the Minister of Defence....

But sure, if it would help us to hold a hearing on it, I'll talk with the minister and we can certainly look at that Wednesday in terms of our work plan.

Colleagues, we've had two full rounds of questions, which is very good. We're going to have to leave shortly. If there are other questions, we can certainly talk about whether we would like to invite these witnesses back, if they're available. If anybody has a pressing question now, there's still some time to put that. If not, we can leave it until Wednesday and discuss it at our steering committee.

Is there anything you want to get in, Mr. Hanger, before we finish?

Mr. Art Hanger: Just as a follow-up on the relationship between Canada and the United States, carried to its fullest extent in terms of the way you've envisioned these restrictions now being placed on Canada by the Americans relating to their defence industry, what is the total impact going to be? What's going to be the result?

Now, certainly it's diminished involvement in bidding maybe on contracts in the United States. I understand that's already reality. The Canadian defence industry now has a difficult time bidding on any American contract they might deem as high-security. But what else is going to happen here?

LGen Bob Fischer: Let me give you a scenario. I won't say it's a doomsday scenario, but it's not unrealistic.

When we described the Canadian defence industrial base, I alluded to the supplement to give you some sense of how big it is—or how small it is, I guess, or precarious. If you look at the top ten companies on our list of defence companies in Canada, let me just remind you that while we're called Computing Devices Canada, we belong to General Dynamics Corporation of Falls Church, Virginia. Lockheed Martin Canada: I don't need to tell you who they belong to, or Litton Systems Canada, or Raytheon. I'll stop there.

Those companies are all based in the United States. As they tighten the noose around us on ITARs, they're making it increasingly difficult for the corporate headquarters of those particular companies to continue rationalizing why they should have companies established in Canada. Frankly, if you were at the world headquarters of Lockheed Martin and you looked at their map, there probably would be a little flag in Ottawa to suggest where they're based, but relative to their full operation, it's a pimple on the elephant.

An annoyance factor will creep in. At some point in the corporate boardrooms, they will ask themselves this: What's the point? We don't really need to be there. We went there in the first place to participate in a project, but frankly, their defence expenditures are dropping. It's a pain in the you-know-what to do business with our own business unit in Canada.

I lead you to draw your own conclusions.

It could well be that a lot of these companies could eventually go back south of the border, which would seriously pull the rug from under the industrial base. As far as pure Canadian defence companies caught up in the same problem are concerned, the smaller the company, the bigger a pain in the butt this is because of the associated bureaucracy. Their solution? Move to Niagara, Rochester, Buffalo. Why not? And some are thinking about it.

The Chair: We can certainly look at Mrs. Wayne's suggestion on Wednesday next. I'll speak to the minister before that on whether it could be helpful for us to hold a hearing.

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Gentlemen, I want to thank you very much. You brought a lot of expertise to this table. Even with the threat of a bell looming over us, I think we had a fruitful discussion. I thank each and every one of you for being here and for sharing your expertise with us.

If there's a need for us to get more of your views, we'd appreciate it if you could be available.

LGen Paddy O'Donnell: We'd be delighted.

The Chair: Good. Thank you very much.

The meeting is adjourned.