National Defence Committee on April 29th, 2010

[The Vice-Chair, Liberal, Bryon Wilfert]

Good morning, ladies and gentlemen.

This is the Standing Committee on National Defence, meeting number 13.

We have today witnesses from the Canadian Association of Defence and Security Industries. With us is Timothy Page, president; Janet Thorsteinson, vice-president, government relations; and David Stapley, chairman of the board of directors. We welcome you.

We would appreciate a short presentation. We have your material. We look forward to asking you a number of questions. And we appreciate your attendance today.

[Timothy Page, President, Canadian Association of Defence and Security Industries]

Thank you, Mr. Chairman, for inviting us to appear before the committee. I am pleased to have this opportunity to introduce our association and my colleagues to the members. I appear before you with David Stapley, the newly elected Chairman of our Board of Directors, and Janet Thorsteinson, our venerable Vice President for Government Relations. Previously, Janet Thorsteinson has worked for several years in the federal government as a procurement officer for the Department of Public Works and Government Services.

We have an opportunity, I hope, over the next few minutes to present the report you have before you on military procurement.

Before beginning formal remarks, I want to make sure I have situated you with respect to who we are as an organization. The Canadian Association of Defence and Security Industries, otherwise known as CADSI, because it is shorter and easier to say, is a membership-driven, not-for-profit corporation. It is run by an elected board of directors who serve in a volunteer capacity.

We have some 800 corporate members that pay a membership fee to be a part of our organization, and those companies have operations in some 177 different federal ridings. They collectively employ 90,000 Canadians, mostly knowledge-based workers, generating $10 billion in direct military sales per year to both domestic and international customers. There is 50% of the industries' revenue that is earned from the export marketplace.

As we undertook this study on military procurement we thought it was important to look at the context within which our consultation of industry was taking place. That context included the federal government being at the front end of a 20-year, $240-billion commitment to rebuild Canada's military across its land systems, aerospace, and maritime requirements. This is the most significant investment in a generation. It will define not only the capability of the Canadian Forces, but also the shape and viability of Canada's defence industrial base for the next 20 years. Defence spending can leverage knowledge-based jobs in Canada, thereby contributing a robust and globally competitive economy. Canada needs both a strong defence industrial base and a strong economy for our security and sovereignty.

I will now dive into the report. I will speak to the three principal sections of the report in order. First is the section dealing with defence and the economy and the principal findings from the consultation exercise. Some 450 industry experts and academics contributed to our understanding and to our report. First among the findings in the section dealing with defence and the economy is that defence and the economy are both critically important to Canada. They are interdependent. They're not mutually exclusive.

Defence trade is not free trade. Foreign governments the world over are intervening to protect and promote industrial capabilities that support their defined national interests. Canada's defence market requires proactive defence procurement strategies to enable and ensure domestic industrial participation. R and D and export markets are key drivers of industrial-based competitiveness in Canada. ITAR is a critical impediment to our industrial competitiveness.

Finally, under our findings in the section on defence and the economy: among its allies Canada is unique in not having a defence industrial strategy that helps to guide the relationship between government and its industrial base and to formally align economic objectives with military procurement priorities.

In the section in our report dealing with the defence procurement process itself, our principal findings included that more effective program delivery can be achieved through improvements to the procurement process. The procurement model should be structured to acquire required kit and optimized Canadian content and jobs.

Defence procurement strategies should include defined industrial objectives, but they don't seem to be at play today.

Requirements should be performance-based and should not be overly prescriptive. Risk-averse behaviour and practices merely serve to increase program costs and timelines, and they limit Canadian content possibilities.

Finally, an overly thin layer of procurement professionals within the system contributes to weaker transparency and accountability and to a lack of consistency in the procurement process.

With respect to our findings in the area we refer to as governance, we found a need for a political champion for the defence industrial base in Ottawa. We found that government policies, programs, and procurement strategies need to be better aligned to achieve optimal economic advantages for Canada. And we found that the absence of a formal communications mechanism decreases transparency and increases misunderstanding between industry and government.

Based on those findings, we came up with the following recommendations, again, in each of the three blocks.

First, related to defence and the economy, our overriding priority is our call for the creation and implementation of a defence industrial strategy, one that would nurture and support critical domestic industrial capabilities. It would default to Canadian solutions when they meet the defined military requirement. It would commit 5% of DND's capital budget to a private-sector-led R&D program. It would be one in which Canadian industry would enjoy a first-customer relationship with the Canadian government--when the government identifies a military requirement and wants to go to market to acquire that requirement, it would buy what it has co-invested in with Canadian industry.

It would be a strategy that would ensure that IP is obtained when buying defence equipment so that it can be supported domestically throughout its life cycle.

It would be a strategy that would inevitably include export programs and strategies, including an ITAR fix and the IRB program, among other federal policies and programs, as vehicles for implementing the defence industrial strategy.

With respect to our recommendations in the area of procurement processes and practices, our report calls for the alignment of the defence industrial strategy with defence procurement priorities, the Canada First defence strategy, and market opportunities.

Articulate domestic industrial objectives as the requirement is being defined and before the procurement strategy is chosen. Assign program business and contract risk to the party best suited to managing that risk. Require performance-based specifications, and reduce the number of mandatory requirements in favour of rated requirements. Increase administrative transparency and consistency. Develop a cadre of procurement professionals.

Finally, in the area of governance, our report recommended the following measures. First, create a defence industrial advisory council. It would report at the ministerial level to provide active and ongoing advice vis-à-vis the defence industrial strategy and Canada's defence industrial base. Second, create a joint industry-government defence procurement advisory council. It would report at the assistant deputy minister level to improve understanding, communications, and management of procurement issues on an ongoing basis. Third, create a single point of accountability at the cabinet level for both defence equipment and the defence industrial base.

Mr. Chairman and members of the committee, our report concluded that political leadership and commitment is essential in this area and that we need to act strategically to support both the Canadian Forces and the Canadian economy, because Canadian Forces' capability will be stronger with a viable defence industrial base. We also concluded that as a consequence of these consultations, expectations have been raised within our industry for government action in these areas. Bold and urgent political action is required to build the report's findings and recommendations into Canada's defence procurement objectives and processes before the Canada First defence strategy has been spent and the opportunity lost. CADSI remains committed to assist the government and this committee in a constructive way to achieve these objectives.

Finally, if I might, Mr. Chairman, next steps.... In its report, CADSI has concluded that DND's acquisition program should not be considered in isolation from the impact the acquisition program could have on the Canadian economy, if effectively managed in concert with a defence industrial strategy, and the benefits that would accrue to the Canadian Forces of having a strong Canadian defence industrial base nurtured by a defence industrial strategy.

Ladies and gentlemen, if the committee agrees with this view, then we encourage you to ask the government to create a defence industrial strategy. Should the committee want to look at this matter in greater depth, my colleagues and I and our organization would be delighted to assist in that respect.

Thank you for your time. Thank you for your attention. We look forward to your questions and a discussion.

[The Chair, Conservative, Maxime Bernier]

Thank you very much, Mr. Page.

Now I will give the floor to my vice-chairman, the Honourable Bryon Wilfert. You have seven minutes.

[Bryon Wilfert, Liberal, Richmond Hill, ON]

Thank you, Mr. Chairman.

Thank you for coming.

I want to first of all congratulate you on an excellent report. I think it is a wake-up call. In particular, I was very interested in the methodology you used.

I know the report has gone to the government. There's not very much I can say about the report that I disagree with. I think the need to streamline, the need to have a national defence industrial strategy is absolutely critical. When you have a report on the Canada First defence strategy it's very nice, but then how do you implement it in an effective and cost-effective way, looking at what a number of our allies are doing?

The first question is, what is the status of the report in terms of the government? Have you had any indication?

[David Stapley, Chairman, Board of Directors, Canadian Association of Defence and Security Industries]

Yes. Briefly, if I may, there's been considerable discussion with government officials since the report was filed some weeks ago. There's also been discussion with some of the key ministers as late as yesterday, when we had the better part of two hours with Minister Mackay, Minister Clement, and Minister Ambrose. I think to their credit there is engagement in the discussion on this. There's perhaps some recognition that there's a bit of a void between the Canada First defence strategy and the actual implementation of procurements, which is what we're focusing on, as you rightly point out, through the language of a defence industrial strategy.

I think it's safe to say there's some agreement that we will move this discussion forward to see if we can find some chewable chunks, if you will, that we can bite off and actually make progress. The government is engaging with us on this discussion.

[Bryon Wilfert, Liberal, Richmond Hill, ON]

In terms of slaying this three-headed dragon and getting it down to one, which head do you think we should be looking at? In terms of this reporting, there's been discussion about Public Works versus, say, Industry. What would you say would be the most effective? Since the Gomery commission we've had all these.... We always want to be so transparent and accountable, but we've added all these layers, essentially, which have actually slowed the process in terms of delivery.

The first part is, which minister should this be reporting to, which is the most effective? What about the issue of all these layers, which in fact have impeded the delivery, in many cases, of needed equipment?

[David Stapley]

Your first question was on which of the three buckets we should tackle if we only had one, and I think you ask that for very good reasons. There are a lot of findings, and there's only so much time, and some are more valuable than others in terms of the output and impact. We were asked that question quite recently: if there was only one outcome from this, what would it be? I'll share with you our answer, knowing that there's lots of work to do in a number of areas. Our answer was that on behalf of industry, we believe the country needs a defence industrial strategy. We can discuss what that means in terms of definition. Within the context of that number one priority, we believe it needs political leadership. I say this with no disrespect to the bureaucracy or officials, who are very knowledgeable on this, but it will require political leadership to move this forward. It's not our place to talk about machinery of government and which minister has the mandate. We leave that to higher powers than those of us in industry.

The third thing we would say in terms of that objective is a timeline. If we were doing this in the private sector, it would be a 30-, 60-, 90-day action, and we would come out of it, in that period of time, with something we could stand together with and move forward on and guide procurements from there on. That's a very ambitious schedule when we're dealing with the level of complexity and governments and so on. Our view is, if a year from now we could stand proudly and say that we have an industrial strategy, that we've filled this gap, that we will get a return into the economy through industry and create jobs, create technology, and so on, before a big portion of the investment plan is spent, we could all claim success. So if there were one thing we could focus on, it would be in that area.

[Bryon Wilfert, Liberal, Richmond Hill, ON]

In a 30- to 60-day turnaround, I know that's very ambitious, but do you get an indication that in fact there is that political will to move?

[David Stapley]

Not yet, sir.

[Timothy Page]

If I could add to your question, the Canada First defence strategy has identified a long-term spending plan to rebuild the military. As far as CADSI is concerned and our members are concerned, that is a clear demonstration of leadership from this government to achieve an objective that it has identified, and a gap in our current capability. What we're suggesting through our report is that without a companion document with the military plan, without an industrial plan establishing clear objectives and establishing clear priorities, how will the government know whether it has received an optimal return on investment, and how will it measure that return on investment?

It's rather like--and I apologize--that Alice in Wonderland story: If you don't know where you're going, any road is good. The government has manifested leadership in this area through the Canada First defence strategy, and we're simply suggesting that it needs a companion document in order to leverage defence spending, in order to sustain and develop knowledge-based jobs in the Canadian economy that, at one and the same time, will contribute to a robust economy, increase security for our country, and create greater sovereignty.

[Bryon Wilfert, Liberal, Richmond Hill, ON]

I certainly don't disagree with that, given that it may be a very ambitious plan that the government has set out, but without having the criteria that you outlined in your paper, particularly on the defence industrial strategy, which you need to have.... I don't know whether I'd call it a companion or I would have put that maybe first and then gone.... In terms of their proposals, we have all these announcements that go on but we don't get the delivery because in fact we don't even have the dollars or we don't have the capabilities to deliver at the present time.

[Timothy Page]

If I may, the creation of a defence industrial strategy would enable industry to make investments in production upgrades, in technology improvements, in human resource skills development, such that when programs come to market, Canadian industry will be well positioned to compete successfully for those programs.

The absence of an industrial plan leaves uncertainty in the mind of business, which typically will translate into a suboptimal investment in R and D, a suboptimal investment in plant and machinery upgrades and skills upgrades.

[Bryon Wilfert, Liberal, Richmond Hill, ON]

Thank you, Mr. Chairman.

[The Chair, Conservative, Maxime Bernier]

Thank you very much.

Mr. Bachand, you have the floor.

[Claude Bachand, Bloc, Saint-Jean, QC]

Thank you, Mr. Chair.

I want to welcome the representatives of the Canadian Association of Defence and Security Industries. First of all, let me say that I recognize your great expertise and your vast experience in this field. I have known you for some time, Mr. Page, and I know that you are an excellent representative of this industry. I also used to know Mrs. Thorsteinson in her previous capacity as a public servant, where she was extremely competent. As for you, Mr. Stapley, I wish you great success in your new position. You have just been elected Chairman of the Board of CADSI, an 800-member organization. It is a very intelligent electoral college and your success in becoming primus inter pares of this group is similar to us being selected as MPs in our ridings. So, I take it for granted that you are the best person to do the best work possible.

Everybody agrees-- and MPs too--that the procurement system of the federal government in the defence sector is broken and does not work anymore. I believe that your participation and your report will contribute significantly to solving this problem. You have suggested excellent ideas and I do hope that the government will take this opportunity to act.

I would like to know how your recommendations would change the present process and what the process would be in the new approach that you suggest.

To start with, when we want to purchase tanks, airplanes or ships, National Defence launches the process by defining its specifications or requirements. I suggest that you take notes because I will ask several short questions. First of all, in the present situation, is there not a danger, when drafting specifications, that they will be deliberately drafted in order to get a preferred type of equipment or even a preferred supplier? That is my first question.

Would it not be better to do it like the Americans, on a mission basis? If we need a transport aircraft with a given capacity, for example, and let the best supplier win. The starting point for procurement is DND. It is when Public Works gets involved that problems appear. Once the specifications have been drafted, we ask Public Works Canada to procure the equipment. At that stage, there are two options. One can procure the equipment through letters of intent or through competitive bids, the famous ACANs that, to my mind, are negative. Even the Auditor General said that she does not like ACANs but, sometimes, it is the only solution available because our Canadian industries cannot build everything. We are not like the Americans. I would like to know if you have dealt with this issue in your new approach.

Then, Industry Canada inserts itself in the process with their economic benefits. I agree with your suggestion of creating a single responsibility center. However, would this single responsibility center deal with the whole of the procurement process? In other words, would National Defence have the mandate in the future to draft specifications as well as deal with letters of intent, competitive bids and also economic benefits? Would that be the new structure that you recommend?

[Timothy Page]

I will ask my colleague Janet to answer your first two questions. I will deal with the third.

[Janet Thorsteinson, Vice-President, Government Relations, Canadian Association of Defence and Security Industries]

Thank you very much for your question.

You start, quite rightly, with the issue of how requirements are specified and you hold up as an example the United States mission system approach. I would say that the Department of National Defence has made some efforts to move more toward mission system or performance specifications. It is a very difficult and challenging thing, to write a performance specification. If you haven't done a lot of military procurement for a long time—large systems—and if you don't have an internal expertise to be able to do that, you tend to revert to operational specifications or detailed specifications. Then you can indeed come to an answer whereby there is only one product.

A hundred years ago, when I was a junior procurement official in what was then the Department of Supply and Services, working out of a temporary building, I received a contract demand from the Department of National Defence for a piece of equipment, which said it must operate at this speed, it must process data at this rate—so far so good—and it must be painted IBM blue. Well, even as a junior officer, I could see that perhaps they had something specific in mind.

In our world, we are concerned with much larger systems than that. One of the things we've talked about in our proposed process.... First of all, we've encouraged the military to discuss in greater depth what it is they want to do. We'd like to have the opportunity to provide them with more information about our capabilities. And if there were a defence industrial strategy, which we'd most strongly encourage, Canadian industry could also position itself in advance to be able to meet the mission requirements.

In one of our later recommendations, we also say that within Canada we have some very competent what one might call centres of excellence. I think that when we have a centre of excellence, if it can provide the material or the service that is needed, then the government should look first at what it is that centre can provide. They should also consider, if they need to go offshore for that requirement, if there's some way in which the contract might be constructed so that we could have a transfer of knowledge and experience into Canada. That would grow within Canada the knowledge-based jobs and we would ratchet up the technological intensity process.

I agree that we can't do everything. We need to have more things that we can do.

You mentioned the issue of ACANs and letters of intent. Personally, I would rather put our focus on the issue that I discussed first, which is the performance specification. You're quite right that if the performance specification is wired to be IBM blue, then, illustrious though IBM is as a member of ours, if you wire that specification, then PWGSC is constrained in what it can do.

[The Chair, Conservative, Maxime Bernier]

You have only 30 seconds.

[Timothy Page]

Quickly, sir, to your question as it relates to machinery of government, we didn't deem it within our purview to predict how the government might respond to that recommendation. Clearly, questions around machinery are the prerogative of the Prime Minister.

The recommendation comes out, I think, from a general frustration within industry related to accountability and related to understanding what industrial objectives are being identified per defence program. For us, the key is to attract the government's attention around defence industrial strategy, key capabilities that the government believes Canada must have available to it, for either sovereignty, security, or economic reasons. The reference to machinery we reflected because we heard it on the road, but clearly, the single most important priority that we are trying to bring to your attention today is the desirability of a defence industrial strategy.

[The Chair, Conservative, Maxime Bernier]

Thank you very much.

Now I will give the floor to Mr. Harris.

[Jack Harris, NDP, St. John's East, NL]

Thank you, Chair.

Thank you for joining us today. It's extremely important that you have identified the rare opportunity that a country the size of Canada has to identify this level of program spending on a long-term basis, and a real opportunity to make it work for the country's industry.

First, could you tell us what's wrong with a policy that says we'll give 100% to industrial and regional benefits offsets, IRBs, as a backstop to a contract that perhaps goes offshore? What's wrong with that as a strategy? Although it's not necessarily an industrial strategy like you're talking about, it is a strategy that seems to be in vogue. What's wrong with that from an industry point of view, and why would the defence industrial strategy that you're talking about be better?

[David Stapley]

That's an excellent question, and the short answer is that if we were bankers and not industrialists, the one-to-one formula would probably be okay. But the real issue as we get into it is that it's an issue of quality over quantity when it comes to “offsets”—as they're known around the world—or IRBs here in Canada.

That gets us back to the industrial strategy argument very quickly, as every IRB or every offset is not equal. Without degrading in any way the industrial capacity that currently exists, if we manufacture rivets, for example—a very noble job if you're manufacturing them—versus spending the same dollar on a job creating software and source code for very advanced military systems, perhaps with commercial applications, I think one would conclude that the latter might have a greater and longer-term sustainable impact on the economy.

So while the 100% IRB requirement is a strategy, if we look around the world to India, Israel, the U.K., and Australia, just to name a few countries, they have moved away from purely quantitative strategy and have looked at the qualitative side. India, for example, has said that it wants 35%, not 100%, because the technologies involved are in the areas of the economy that are important to it. India is running the biggest international fighter aircraft competition in the world right now, and the whole issue is about what they will get for that 35% condition that the Indian government is placing on the bidders. That's where the battle is going to be won or lost, and it's very clear that they have very defined national interests in certain areas, such as strategic communications, surveillance, and so on. They have an industrial strategy and they have concluded, rightly or wrongly—and we believe rightly—that it has a much a bigger and longer-term, or longer-lasting, impact on the economy than the status quo.

[Jack Harris, NDP, St. John's East, NL]

Can I just put two more questions on the line? We only have limited time here.

First, there's was a suggestion by the Minister of Defence in the meetings held last summer that there is such a thing as an industrial strategy when it comes to the shipbuilding side of defence procurement. Would you care to comment on that? I'm assuming that the shipbuilders are possibly part of your organization as well. And do you believe the proper mechanisms for that are currently in place?

I guess the other question I have follows up on Mr. Stapley's answer. It's a shock to me, but perhaps not a surprise, that Canada is unique in not looking after its own industrial base first. But is there a country that is a model for what you're talking about here? I know you mentioned several countries that are doing certain things, but is there a country with a small defence market that you see as maybe the best example of what you are talking about?

[Timothy Page]

We wrote a report last year on the marine industrial sector, and in that report we expressed our support for an allocated long-term production schedule to rebuild Canada's naval fleet and coast guard fleet. We did so out of recognition that we have a national shipbuilding policy. We also have a marine industry, and to the extent that Canada is building ships in Canada, we get to trigger a supply chain of perhaps 700 or 800 companies in the marine sector that can help to fit those vessels out from the yards. It will be important to us to see how the government responds when it comes forward with its first rebuild of ships, to see the connections they have made between the shipyard--the production of the hull--and the fitting out of that hull with the sophisticated high-tech weapons systems and communications systems that are really the value added to the modern complex naval vessel.

CADSI's view is that both are required in order to ensure a viable industrial defence base in this country, and there is real capability and real capacity resident in Canada to assist in those areas.

[Jack Harris, NDP, St. John's East, NL]

Has that happened? We've heard announcements saying that is what they're doing, but is that happening, in your view?