Government Operations Committee on June 5th, 2008

[Dan Ross]

That is a very broad question. It is obviously somewhat out of my lane, in terms of being responsible for military procurement and working with my partners in the Department of Public Works. We had a fairly clear defence policy with the previous Liberal government, and we have had a very powerful statement by the current government about its long-term commitment to the resourcing of defence in readiness, equipment, personnel, and infrastructure. I believe in the near future it will produce a clearer policy articulation of the “Canada first” defence strategy.

I understand the issue you're talking about, and I'll give you the example of Afghanistan. I spend about half my time worrying about trying to provide our soldiers in Afghanistan with the absolutely best equipment. To be very frank with you, whether I have a crystal-clear policy framework or not, I test every piece of equipment we send. I blow up--destructively test the vehicles we use. I bring forward to government the right solutions that our soldiers need. I would do that regardless of which government were here, as long as that government was committed to our soldiers being in Afghanistan.

[Diane Bourgeois, Bloc, Terrebonne—Blainville, QC]

I certainly agree with you, we must save soldiers' lives. However, we have no planning, we have no policy. So we buy what we can, where we can, without having any specific objective.

My second question is to Ms. saint pierre.

I have looked at all the documents, and I think you are making a genuine effort to support the requests that come from the Department of National Defence. However, we found out on March 28 of this year that we have purchased more than 100 used tanks from the Netherlands, and that some of them would be ready in 2011.

Why is it going to take so long? First of all, why do we purchase used tanks from the Netherlands? We should be thinking in terms of cost-effectiveness. In my opinion, when we buy new equipment, it is more expensive, but it is better quality. Furthermore, these tanks will not be ready until 2011. Can you explain that to me?

[Dan Ross]

I could respond to that, Madame Chair.

The tank program was initiated urgently to replace our existing Leopard 1 tanks that we were in the process of taking out of service because the army had the view they would never need them again. Our Leopard 1s were not sustainable in terms of technology, spare parts, and survivability. They would not take the IEDs and bombs of the Taliban.

The tank project has two parts. One was a loan at no cost to Canada--not a penny--for 20 German Leopard A6s, which have the mine blast protection. With tremendous support from the German government, we deploy those directly to Afghanistan. Also, we have purchased 20 Leopard A6s, which are the best, most upgraded level, from the Dutch, plus 80 of an older upgraded version of the Leopard 2 tank from the Netherlands.

Because we immediately got the equipment, our efforts after the delivery then had to be in working with the Department of Public Works to get the spare parts to do upgrades for certain pieces of armour for the tanks in Afghanistan. That has been our top priority. My entire team has been focused on that for almost six months, to sustain the German tanks in Afghanistan.

We have completed the purchase with the Dutch. We are going to bring those tanks to Canada this summer. They will be brought back by our lease chartered roll on, roll off ships to Montreal. They will be put into preservation and storage in Montreal as we set up a repair and overhaul capacity early in 2009. Because they have been in storage and some electronic components will have to be replaced, in 2009 we'll gradually put those tanks through a refurbishment program. We'll take the engines out, if they need to that, to go through a normal engine rebuild process, etc. Through 2009 until 2011, the 80 Dutch tanks will be refurbished and upgraded if necessary and brought into the training system for the army regiments in Canada.

So 2011 is an end-state; it's not a beginning. We will have them all in Canada, in Montreal, this fall. And early next year, once Treasury Board has given effect to project approval, we will begin a repair and overhaul program and we'll start delivering those to army training facilities.

Madame Chair, did that give you a sense of that?

[The Chair, Liberal, Diane Marleau]

Yes.

Yes, Ms. saint pierre?

[Liliane saint pierre]

I would like to add a very important point, madam Chair. The Department of Public Works and Government Services began the process at the end of March by issuing a letter of interest. We will be holding a competition to find companies that can repair and update these tanks in Canada.

[The Chair, Liberal, Diane Marleau]

Thank you.

We're going to go with Mr. Kramp.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Thank you, Madame Chair.

Welcome to our guests.

In your opening statement, Mr. Ross, you stated something that I think most people are aware of. Regardless of whether you're political or not, for a significant number of years in the past both policy and planning was definitely uncertain, with no clear sense of direction. Without that it's difficult to be able to operate efficiently and effectively. In my own opinion, quite frankly, I think that lack of long-range policy and planning was disastrous. We obviously had to make some changes.

Madame Bourgeois mentioned that there is really no long-term commitment to defence procurement. I would state unequivocally that this is absolutely wrong. It's my understanding that the government has made a long-term predictable commitment to the procurement in the defence quarter.

Could you elaborate a bit more on the size of the commitment and the length of the term? And could you also give us an idea of how this long-term commitment will potentially be of benefit in the way you do business?

[Dan Ross]

Madam Chair, the Prime Minister announced about a month and a half ago, I think, a fundamental departure from a defence policy foundation that we defend Canada, we contribute to international commitments, and so on--and that will obviously be articulated as part of that--but, more fundamentally, a long-term commitment to the finance, to the funding, with an accrual budgeting component that's extremely important, a commitment to 1.5% real growth, and from 2011-12 another 0.5%, which is compounded. Obviously, if you do the math, this will arrive about a decade from now at about $30 billion in a defence program.

As part of that planning, we clearly needed to look at the major platforms: the frigates, the fighters, the armoured vehicles, search and rescue aircraft, etc., all those major platforms in the Canadian Forces. There has been some preliminary planning about what those indicative costs of those major platforms would be, and that is beginning to be finalized in a long-term investment plan.

To answer the member's question, that is enormously helpful to me, because I can look at a 45-year accrual plan. We have to manage the accrual space. It's like a set of mortgages when you pay your mortgage payments. You get $1 billion to buy aircraft and you pay back that commitment from the Department of Finance in 30 payments over the life of those aircraft.

Now I can look at a 45-year plan where that accrual space is and all those lines and major platforms; put a project management team in at the right time; take a program request to the minister, cabinet, or Treasury Board at the right time to get definition authority; do a procurement contracting process working with Public Works and Government Services; and go for final approval and contract approval at the right time to replace that aircraft at the right time. That has never been possible in National Defence. I've been in this business for 30 years. I came to National Defence for the first time as a major in 1985. In my experience, this is the first time we've really been able to have that foundation of predictability for the financing of these investments.

In terms of how, I think I've covered that. I would just comment, if I could, on accrual budgeting, where—

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

I'm glad you're going there, because that is leading into my next question.

[Dan Ross]

People discuss that very rarely, but to me that is an enormous change in our ability to acquire major platform.

In the past in DND, someone had to save enough money to have a big bag of gold to pay a contract. And as you all know, in our lives, with our own salaries, how do you save $250,000 to buy a house in three years? Accrual budgeting is a mortgage process. Without that mortgage process and accrual budgeting we would not be where we are. We could not be launching the major platform replacements that we are.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

As you're probably aware, the good work of this committee recommended unanimously, of course, that we not only take a look at accrual accounting, but obviously endorse the principle so that better, more intelligent, more capable decisions could be reached.

We're pleased that the Department of National Defence has been a bit of a spearhead in leading the way. The confirmation that it has worked well through the procurement process in defence, would that almost be an understatement?

[Dan Ross]

It's a huge understatement, sir.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Thank you.

I live right next to CFB Trenton, the air transport capital of Canada, unequivocally. I have seen the new C-17 personally, up front and in service, and I've talked with the men and women who operate them, who fly them, who participate, who load, who structure. I can honestly say this is absolutely an unqualified level of support, not just a feel-good morale booster, but absolutely really, really effective.

Now, this was an off-the-shelf purchase, one of these situations where we went down dramatically from our 108 months. Did you see an obvious advantage to going off the shelf and going through the process with ACAN on this? Could you elaborate on that?

[Dan Ross]

I'd be happy to.

We stated a very simple, performance-based requirement in terms of payload, range, and manoeuvrability, that sort of thing, with our C-17s. We posted an advance contract award notice with Public Works and Government Services Canada where we stated to the whole world that this is our basic requirement and invited anyone who felt that they could meet that requirement to inform us. If such a competitive alternative proposal had been made, we would have entered into a full request-for-proposal process.

We didn't receive any alternative solutions. We're then able to go directly to Boeing and negotiate a price and a delivery schedule and the minimum unnecessary bureaucratic process. Often we have a lot of baggage that goes with a formal request-for-proposal process to cover the risk to the Government of Canada. In this case, we could go and deliver the minimum; that was really results and nothing else.

Our price was world-competitive. We know exactly what our allies pay for a C-17 aircraft, and the price was as good as or better than anyone's. We received amazing support from the United States Air Force. Without the support from the United States Air Force, they would not be in service and operating the way they are, because we get some maintenance support, off-loading equipment, spare parts, and so on, on an interim basis from the United States Air Force.

So it is almost a poster child of how to do performance-based procurement, if you have an off-the-shelf solution, and in this case only one vendor. If you have more, it's still effective. It still allows you to cut years from the process when you talk performance and not 100,000 pages of a technical specification telling a Boeing or a Sikorsky or a Thales how to build something that they know how to build and we don't.

We have spent years writing specifications and have gotten no results from those years of specifications. Nor could I ever explain to a cabinet committee or a parliamentary committee what those specifications meant.

[The Chair, Liberal, Diane Marleau]

Mr. Angus.

[Charlie Angus, NDP, Timmins—James Bay, ON]

Thank you very much for coming today and helping our study on procurement and the processes.

I think your involvement is crucial, because certainly some of the biggest tickets that will ever be purchased by the federal government will be coming through the Department of National Defence. I think that's why we really need to have a sense of how these procurements are done, to ensure taxpayers' interests are completely looked after.

We know the Prime Minister has announced a 20-year multi-billion-dollar strategy for ensuring that the armed forces have the tools at hand that are necessary. I suppose what was surprising about that announcement was that it didn't come with any white paper. It didn't come with a document that showed us where this road map for 20 years was.

The media says:

In a highly unusual move, the Conservative government will base its entire future rebuilding of the Canadian military on Mr. Harper's 10-minute speech and Mr. MacKay's 700-word address.

No actual strategy document has been produced, nor will be produced, according to government and defence officials. Neither speech went into any specific details about equipment purchases, costs or timelines or how the future strategy will unfold. Both speeches presented more broad-brush approaches to defence.

Mr. Paxton, who is Mr. MacKay's press secretary, said, “ It is not a 'document' like a white paper”.

This vision is in the speeches. That's the strategy.

I guess that's for public consumption, but surely the Department of National Defence would have an internal white paper of how this money is going to be spent over 20 years, would it not?

[Dan Ross]

The department has done an enormous amount of work in analyzing those investment requirements, not just for equipment but for the personnel levels of 70,000, and 30,000 civilians, rebuilding our infrastructure, what resources are required to raise readiness levels so we are prepared both to respond domestically—have excellence at home—and to play a leadership role overseas.

My understanding is that the policy part of the department has significant work achieved in that regard and will announce and make available to the public relatively shortly that type of document.

[Charlie Angus, NDP, Timmins—James Bay, ON]

Well, that would be helpful. We know that the Canadian Forces produced a 39-page Canada-first strategy paper last year. I understand that it was rejected because it was too specific. At the same time, DND has increased the secrecy and security aspects around the bidding for projects, what the projects cost and how they're being done. What we're hearing is that this does not pertain as much to security aspects as to controlling what the media might think, because the issue is that if the government doesn't deliver on a promise, people will start to ask questions.

So how are we to have confidence if we are not sure what the plan is? I understand from you that a plan will be released, but we're being told that specifics are something this government is looking specifically to avoid.

[Dan Ross]

Perhaps I'll let my colleague talk to the notion of secrecy and bidding and costs, and those issues, because there are very specific government contracting regulations that apply, which are obviously a framework in which we have to live.

In terms of not releasing the detailed specifics—from my point of view—of the major platforms, some of those requirements are still in the broad option definition phase, and we may have initial indicative estimates of what they might cost. But a significant amount of more work will have to be done.

We will openly consult with industry, whether for shipbuilding or armoured vehicles, and so on, and have been doing so in recent major procurements, much more so than in the past. We have had many events where we've sat down with the shipbuilding companies, for example, on our Halifax-class upgrades, understanding what they can do, when they can do it, and what costs it would entail.

So I think each major platform will go through this process and there will be open, transparent, and competitive events that will make it clear to industry and to Canadians what that requirement is. And as we state them in performance terms, Canadians will actually be able to understand them for a change. And industry will have had a lot of opportunity to contribute to the articulation of that and to compete to deliver that.

In some cases, obviously, they will not necessarily be Canadian primes. We do not build major platforms in this country, but we do build really, really excellent components of major platforms in this country.

[Charlie Angus, NDP, Timmins—James Bay, ON]

I just want to ask you about the whole issue of how you define costs. In 2006 we had the JSS project announced for $2.9 billion. I think it was $800 million for maintenance and $2.1 billion for purchase. Now we're hearing that those figures are low-balled, perhaps by tens of billions of dollars, and that we're simply not going to be able to get the ships for that price.

How does that happen? Your department would have a clear sense of what those ships would cost. How is it that we can make an announcement, put a price on it, and then a year and a half later we're being told that we're going to run aground?

[Dan Ross]

There is a formal process in place.

Liliane?

[Liliane Saint Pierre]

Regarding the JSS, there is a current competitive process taking place. As such, we are not at liberty to discuss what is happening in relation to the bids that we've been receiving for the evaluation process, and this goes back to one of your earlier comments related to the secrecy of bidding issues in the competitive process.

One has to be reminded that the competitive process has to be done within the legislation that we must comply with and the trade agreement, and as such it's a legal process. Therefore, we are not privy to start to talk about and discuss specific proposals that we have in place until the process has been completed and the contract has been awarded. And even when a contract has been awarded, each company that has provided us with a bid is entitled to get feedback on the evaluation of their bid. But again, we won't start to talk about specific companies who are bidding and specific bids that we've been receiving. We will be discussing that with each company.

[The Chair, Liberal, Diane Marleau]

Thank you.

Mr. Holland.

[Mark Holland, Liberal, Ajax—Pickering, ON]

Thank you, Madam Chair.

Thank you to the witnesses.

I want to pick up again on the examples. Although I'm going to talk about some specific examples--and I appreciate that you may not be able to talk about the specifics of them--I want to get your reaction to how we fix the problem more generally, using the examples as an example of the problem, if that makes any sense.

Specifically, there was a promise to reform the procurement process because it was found that in many instances either the money allocated was inadequate or the process was such that you would start and stop. So there were a lot of disappointments. There was a statement that it was going to be revamped and revitalized. But we have several projects where we have major ongoing problems. In fact, two of the highest-profile major capital projects that are currently being undertaken have been wrought with a number of problems.

I'll start with the upgrade to Canada's 12 Halifax-class frigates, which is a $1.1-billion contract. Essentially, most of the bidders dropped out. One of them said that the contract was unviable in commercial terms and conditions. So that led to the exit of General Dynamics and others, leaving Lockheed Martin as the sole bidder. That puts us in a rather vulnerable position, if they're the sole bidder and they start demanding more money as the contract goes along.

I appreciate that you may not be able to comment on the specifics of that, but what are we doing to make sure we are adequately costing these projects and putting them in a place where they're competitive? We don't want people getting rich off them, but we want them to be able to make a fair profit. We want a competitive process where we're not left with one bidder that says they're willing to accept the conditions.

[Dan Ross]

Obviously I have to avoid any specifics about the Halifax-class modernization, because bids close next week.

Two members have asked questions about costing and how we determine reasonable cost estimates. It is a very rigorous process. DND historically has been very successful at estimating costs and not exceeding those costs and having to go back to government for additional money or authority to spend money. Some of our NATO allies have routinely had enormous problems with major programs that have been over budget and dramatically late. I'm not going to attribute any examples to my colleagues internationally, because I'm a national arms director and I deal with the other countries' national arms directors.

We normally determine the initial indicative costings through third-party analysis by engineering firms that professionally do this for a living . We look at similar projects that are being done or have recently been done worldwide, whether it's shipbuilding or aircraft. We talk to our allies to get a sense of what they have paid for transport aircraft. They will not give you a contract price because there are industrial confidences there, and they won't disclose that.

We add reserves for unexpected contingencies--for currency escalation or deflation. We add costs for our project management expenses. We cost down to the individual trip and the salaries of individuals in our project management teams. Our finance organization estimates inflation escalation factors by type of technology, and they do it very rigorously. However, it is a bit of a black art estimating or guesstimating where a certain piece of technology will inflate in cost, or not inflate in cost, relative to how GDP and other factors are changing. So it is a bit of an art; it's not a precise science.

We add a lot of contingency--normally 25% in the initial pass to Treasury Board. Then we go out and do options analysis. We put out letters of interest to industry. We get prices and availability from industry. We give them the requirements and ask them what they think it will cost. Then we go back to either run a formal request for proposal and get firm contract prices from industry, or ask Treasury Board for effective project approval up to a given limit, with a high degree of assurance that the bid prices will be within that limit.

Is it always perfect? I could give you a dozen examples where none of our projects went over. We're returning hundreds of millions of dollars back to the Vice-Chief of Defence Staff to reprogram for other requirements.

Occasionally market forces change very quickly and you get surprised. Industry may give you price and availability numbers, and then give you a bid price that's significantly different. That's their choice. They have played that tactic for a certain reason. So occasionally you do get surprised.