National Defence Committee on April 29th, 2010

[The Chair, Conservative, Maxime Bernier]

Thank you very much.

I will now give the floor to Mr. Martin.

[Keith Martin, Liberal, Esquimalt—Juan de Fuca, BC]

Merci beaucoup, monsieur le président.

Thank you very much for being here today.

This is for Ms. Thorsteinson. On the risk issue in contracts, should it be on the shoulders of the private sector, the government, or both, in terms of the risk once you purchase a product?

[Janet Thorsteinson]

I don't think there's one answer to that, unfortunately. It depends on what you're buying; whether that product is in a development stage; whether it's a mature product that you're buying off the shelf, in essence a commodity; and that it can shift during a very long program.

For instance, if one were going to buy some helicopters and they were in production, then you might say the risk should be placed on the contractor who has a production line and proven design. However, if you then say you would like your helicopter to have five rotors instead of four, and to have more gas tanks and carry more equipment and fly farther, then you have changed the structure of your requirement in such a way that you're now into a development cost. At that point I think the government should be in a position where they are taking on more risk.

[Keith Martin, Liberal, Esquimalt—Juan de Fuca, BC]

Thank you for that.

On the national shipbuilding strategy that we discussed, we've had a number of meetings in my riding. I have CFB Esquimalt. We've had some great meetings with industry, and they've done a fabulous job of articulating a vision forward. I believe this could be a good pilot project to perhaps get a national shipbuilding strategy in action and use that as a way to get the cogs out, if you will.

Is that something that CADSI would entertain, to try to develop that national shipbuilding strategy, the pilot project upon which we could see how we might streamline the procurement process?

[David Stapley]

I think the short answer to the question is yes. We anxiously await the emergence of the shipbuilding policy. We did contribute, in part, to a very detailed study and analysis that we did on the maritime industry.

On the second part of your question, there is a relationship between what we're alluding to in the defence industrial strategy argument as it relates to technologies and systems that go on ships, as distinct from what I'll call the hull of the ship.

If we can get the national shipbuilding policy out, to begin with, to deal with the very difficult shipyard question--it's very difficult politically, and we recognize that--and aligned with what we're doing through the more electronics-based defence industrial strategy, we will have a world-class and efficient ship capability in the fullness of time.

We very much want to be part of both pieces of that process and to make sure this convergence happens to the benefit of all parties: our customers to begin with; taxpayers right behind them; and somewhere down the line, industry.

[Keith Martin, Liberal, Esquimalt—Juan de Fuca, BC]

Thank you.

When looking at Public Works, Industry Canada, and DND--and I think Mr. Hawn alluded to this question, as did Mr. Harris--you have some of those solutions in your document. Basically it's a structure based on best practices you've seen internationally that Canada could adopt to streamline that process across government to remove obstacles and be able to implement a streamlined process that would enable us to achieve this objective.

[Janet Thorsteinson]

I think there are a number of factors in what you're talking about. I would separate out the idea of whether it's the play between the departments. I would definitely start with the issue of the performance specs that I addressed before. I won't go into that in depth now.

I think the government has an investment strategy, and for its own reasons that investment strategy is not a public document. The more that Canadian industry can know what is coming down the pike, the better they will be able to respond to the government's needs, and the better the government will be able to get better value.

[Keith Martin, Liberal, Esquimalt—Juan de Fuca, BC]

Thank you very much.

We had DND representatives here, and I posed the question to them about having a better relationship. You mentioned the joint industry-government advisory council. They say they meet four times a year, and they say that's good enough. Is it good enough or not?

[David Stapley]

It's never good enough, I think is the answer. We take responsibility for that as well. That's not something we can just throw back to our government colleagues.

There is a body called DIAC, the Defence Industry Advisory Council. It's at the senior official level. It does meet regularly and it tackles some of these issues in a very non-political sort of way. So it covers a spectrum of the government, a spectrum of the country, and by and large does a good job.

I would also say personally--as opposed to with my chairman of CADSI hat on--that industry could do a better job contributing to that process. This is not a situation where the government officials involved deserve any criticism; they deserve kudos for trying to do it.

I alluded to the fact that it doesn't cover the full spectrum of government interests, and that's what we're talking about here. How do we get--I'll use the words probably wrongly--a more enlightened top-down view of these issues that includes a political level? So when we get these very good questions, like the one you asked on shipbuilding, there's an informed opinion from across the broad spectrum of interest. There's industry and all levels of government, including political.

We think there needs to be dialogue in that regard. There is no real venue to do that. We do it bilaterally and ad hoc with Mr. Hawn and other interested parties. For sure it's to their credit, but there's no formal mechanism beyond DIAC that I'm aware of to have that discussion in a defence-industrial context.

[Keith Martin, Liberal, Esquimalt—Juan de Fuca, BC]

Thank you.

[The Chair, Conservative, Maxime Bernier]

Thank you very much.

Now I will give the floor to Mr. Braid for five minutes.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Thank you, Mr. Chair.

Thank you to our witnesses for being here this morning and for the recommendations outlined in your report as well.

I think clearly as we consider your recommendations, and as we make further progress on aligning economic objectives with procurement and a defence industrial strategy, the benefits to our economy and to Canadian business are quite clear. Could you provide us with a concrete recommendation and example of how we can use defence procurement to spur innovation in Canada and create these important knowledge-based jobs?

[David Stapley]

My colleague here is asking me whether I want to repeat a black box story that I shared last night as an example of a response to your question. I'm not sure it's the right one, but I'll do it very briefly.

It goes back to Mr. Hawn's earlier remarks that we have had an IRB policy for a long time. The company I worked for was a beneficiary of that some years ago in a major defence procurement that resulted in a black box in which European governments invested tens of million of dollars being put in Canadian industry as part of the offset requirements for that particular program. It didn't sound very sexy to begin with. It was a built-to-print job, which is a parlance we use in industry, as opposed to an engineering-intensive job. But very quickly, because products become obsolete, what happened was that here in the Ottawa Valley we had some very smart engineers who redesigned that black box, drove out costs, improved performance, and today every one in the world is produced 30 miles west of here. It was an example of where the policy worked. We created a world-class capability, and the most important thing is we moved from a manufacturing role to a very significant design and engineering role, so we owned the market going forward. That's an example.

If we were looking at programs before us now, the one that crosses my mind is the armoured vehicle programs. There were decisions made twenty years ago that we were going to be a world-beater in land vehicles, and we actually did it, as a small country, with a company called General Dynamics Land Systems, in London, Ontario, which, no question, is a world leader.

Very difficult procurement strategy decisions lie in front of us. Do we go to the international market and compete at the design level and build in Canada? That's one option. The second option is, do we do that and say that you will build it with our national instrument, an industrial centre of excellence, which is GDLS, or do we go to full and open competition, winner take all, which could mean we lose that ability in Canada? These are the types of tough decisions the government has, and I don't think there's a magic bullet. We have to look at each one of them on its merits and see how we get the best capability for the brave men and women in the forces and the best economic return.

It takes some pretty smart, dedicated, and frankly gutsy people to make those decisions at the end of the day.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Thank you for that, and thank you for those two examples.

Mr. Page, in your presentation you mentioned that one of the things that government should be doing is buying what we have already co-invested in. That would strike me as a no-brainer. Why isn't that happening as much as it should?

[Timothy Page]

This is speculation on my part. I'm sure my colleagues will have specific examples.

In an era when competition at all costs seems to be the mantra, you lose sight of how you got to the point where you've identified a requirement, and sometimes that's through a co-development that DRDC and S&TR and DND may have developed with industry.

The irony, not only of going to competition for a requirement that you've already co-invested in, is that you may also disqualify the industrial partner you've done the co-development with because they'd find they'd be deemed to be in a conflict of interest.

Our suggestion is that the government should be deciding earlier on in its R and D phase whether it wants to establish a long-term relationship with that industrial partner that would succeed, if you like, beyond the R and D phase. And should that program go to market, it would then commit to buying from that industrial partner.

[The Chair, Conservative, Maxime Bernier]

Thank you very much.

Mr. Bachand, for five minutes.

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

Thank you, Mr. chair.

I would like to come back to the issue of a defence industrial policy. I have before me a document titled “The Report of the CADSI Marine Industries Working Group” which contains some interesting things. In your own report that you've tabled today, you did not try to identify the possible architecture of an industrial policy. However, in the document I have just referred to, from the Marine Industries Working Group, you went much further in defining your specifications and your vision of a marine industrial strategy.

Let me read to you what struck me in this report. Unfortunately, I will have to read it in English:

“That Government establish a Marine Industrial Strategy that maximizes the direct participation of Canadian Marine Industries in the design, build, and support of government ships by requiring that, in addition to ship construction, the following critical functions be carried out in Canada by Canadian companies: Prime Contractor, Project Management, Platform and Mission System Integration, Management and Control of Ship Design, and In-Service Support.”

I would like to know what are your ideas relating to the marine sector. Is that how you see a future defence industrial policy?

Let me explain myself. I believe that the Marine group has the required expertise in Canada to do what you expect. However, do we also have the required expertise in the aviation field? I do not think so.

If you are in favour of an industrial policy, would you want it to be structured on the basis of the present defence environments? Do you go as far as saying that the industrial policy, apart from basic principles, would apply differently to the Navy, to the Army and to the Air Force? Would you go that far? One cannot build a broad industrial policy based on basic principles only. One has to take account of what Canadians can and cannot do. We cannot ask Canadians to build a C-17 from A to Z for strategic transport since we do not have that capacity.

In your thinking, would this industrial policy be as refined as taking account of each environment separately? If not, how do you see it being developed?

[Timothy Page]

Thank you for the question.

We obviously had our boots filled with answers to the question you have just put to us during the consultation, and we recognize that Canada is a relatively small market. Therefore, Canadian industry can't be all things to all people across the military requirement--whether it be soldier system, aerospace, land, or naval systems. The value of the defence industrial strategy is to choose what capabilities are important for the country per defence environment and across environments--because there are many capabilities in defence electronic systems integration that are as applicable on the land side as they are to the air and sea side--and to figure out from across that industrial base of expertise what the key capabilities are that are going to serve to meet the national requirement and where there are market opportunities internationally.

The report we wrote attempted to clearly lay out that vision, if you like. It's that vision that we're looking to the government to adopt. We're happy to work in consultation to populate that defence industrial strategy with the capabilities that the government identifies to be of importance for sovereign reasons or security reasons or economic reasons. They will differ, depending on the defence domain they're being applied to.

I would just encourage you not to lose sight of those capabilities that cross platforms--that are used in an armoured vehicle but when slightly modified can also be used in a modern warfighter or in a modern naval vessel.

[The Chair, Conservative, Maxime Bernier]

Thank you very much.

Mr. Boughen, you have the floor.

[Ray Boughen, Conservative, Palliser, SK]

Thank you, Mr. Chair.

I add my voice of welcome, folks, and thank you for taking time out of your busy day to share your expertise with us.

I have a couple of questions. According to the open-source information we have available to us, in 2006 about 42% of all U.S. Department of Defence contracts, representing some 68% of their total value, were single-source contracts. There were 402 contracts valued at $231 million to Canadian companies alone.

In Canada, we see the average of 80% of the value of contracts awarded by PWGSC on behalf of DND was the result of competitive processing. Should we be doing more or less on the single-source issue when it comes to procurement?

[David Stapley]

Perhaps I may start and my colleagues will jump in.

Again, I don't think there's a single answer. It depends on a set of circumstances. You talked earlier about the situation where you may have competition very early on in the process. Pick your R and D partner, if you will, government and industry, get the money on the table of the joint investment of the public and private sector, and then, provided everything works out well, you would probably not want to compete and throw the baby out with the bathwater. That would be one scenario. Where there are commodities and multiple sources, I think we should compete it to the hilt to get the best price and the best product.

It depends on what's in the pipeline, in the procurement pipeline, to look at each one of these on their merits and ask, how do you get the best deal for the country, all factors in? Unfortunately, buying pencils would be much easier than buying sophisticated military systems. So whether it's 80-20 or 20-80 on any given day, I don't know.

The U.S. model does take into account whose blood is on the table, but if there's significant private sector investment, it is taken into account in terms of the eventual selection process. This is true of most countries. I think the pendulum has perhaps swung a little overboard, as you've heard in our report. Competition for the sake of competition doesn't necessarily give the best value in every case.

[Timothy Page]

I would add, if I might, that it's an expensive undertaking to respond to a request for proposal. Spending millions of dollars, months of time, depending on the program, and then to run a false competition is not appropriate. It costs both government and industry time and money that could be better spent elsewhere.

It could be argued, and certainly members within our association have expressed this view, that the government's pursuit of a sole-sourced approach, an ACAN approach, if you like, is perhaps in some way a recognition of a more fundamental problem with the procurement process itself, in that they're looking for a way of bypassing, in the interest of getting the kit needed by the men and women in uniform as quickly as possible to serve the mission--no argument with that. But perhaps it points to a systemic problem within the procurement process that doesn't allow for that type of procurement other than through a sole-sourced approach.

[Janet Thorsteinson]

I think there's another factor, and that is that the way in which those sets of statistics are kept is quite different. One of the things is that in the Canadian system an ACAN procurement is deemed to have been competitive. It's a bit like one of those “How many angels can dance on the head of pin” questions. First, you must have a sole-sourced reason, then you post a notice, and then it magically becomes competitive. The United States doesn't have that same issue.

[Ray Boughen, Conservative, Palliser, SK]

I enjoyed your report very much. Congratulations; it's a very thorough report. As I read it, though, I thought of the fact that the report is dealing with operational research production, but I didn't see anything in the report that talked about disposal. What's going to happen with $12 billion a year for 20 years, $240 billion, with machines, various implements, and various pieces of equipment that are obsolete or non-functional? Is there some thought as to what will happen in terms of disposal of that material?

[Timothy Page]

We didn't look at that. What we did look at, however--