Foreign Affairs Committee on May 4th, 2021

[Yan Cimon]

That all depends on what Azerbaijan might have used them for. We have to highlight that problem of the re-export or loan of military equipment to third parties, because that could be a discussion in the context of defence relationships with other countries, like Ukraine. We know that that country wants to obtain the drone system in question, but we do not know officially whether the electro-optical equipment will be Canadian.

[Stéphane Bergeron, Bloc, Montarville, QC]

You raise an interesting point, in that unilateral measures do not amount to much, because, if you leave a market, other countries will often become involved and try to occupy the space left vacant. In that situation, I assume that we must look at more multilateral mechanisms.

Could we foresee the establishment of mechanisms like that with the countries of NATO, for example?

[Yan Cimon]

We can certainly foresee that. NATO's structure is quite decentralized, but the structure has committees that operate across disciplines and across agencies. It allows that kind of mechanism to be put into place.

A mechanism of that kind can also be put into place voluntarily by a group of countries wishing to use it to ensure that sales of military equipment live up to the values of the countries selling that equipment. Of course, we are never sure of the use to which it will be put. But, in a group of friendly countries whose behaviour is demonstrably ethical, we can have a relatively high degree of confidence that the equipment will not be used inappropriately or re-exported to dubious destinations.

[Stéphane Bergeron, Bloc, Montarville, QC]

We can be all but assured of that with friendly countries whose sense of responsibility and of ethics is relatively high. Can we expect the same degree of responsibility and of ethics when the time comes to sell the arms that have been sold to them?

Countries like Switzerland or Germany have a verification process not only before the arms are sold, but also afterwards. That is not the case for most western countries. There are really no mechanisms to verify arms, either before or after the fact.

Can we expect all countries in an alliance like NATO to show the same degree of responsibility and ethics when the time comes to suspend arms sales, thereby penalizing themselves financially and in the knowledge that countries like Russia or China will quickly want to move in?

[Yan Cimon]

Most liberal democracies have that kind of mechanism and that kind of concern.

You are right to say that it is important to be part of the countries' supply chains to ensure that you have control over the equipment that can or cannot be sold. As soon as a rival, or potentially rival, power takes a share of the market, we no longer have any control over problems of that kind.

[The Chair, Liberal, Sven Spengemann]

Thank you, Mr. Bergeron and Mr. Cimon.

The final round goes to Mr. Harris or Ms. McPherson. We have both on screen.

Mr. Harris, will you lead off?

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

Thank you very much, Chair. I'll look after this. Ms. McPherson has just arrived, so I have the advantage.

Professor Cimon, I'm interested in the question of the responsibility that the exporters themselves have with respect to end use and what happens to their equipment once it has been exported. In this case, we're talking about Turkey, and we're talking about a very substantial-sized company here with operations, of the parent company certainly, in 100 countries with $18 billion in revenues. They're supplying very high-end equipment and they typically know where its going.

GAC suggests in a question and answer document that was prepared that exporters and brokers must conduct “post-shipment verification as part of their due diligence”, and also that they are required to inform GAC if it comes to their attention that the originally stated end use has not been respected.

Can you say what kind of expectation or what kind of responsibility a company such as L3Harris Wescam would have in respect to these sensors ending up being gone to a third party, or I think “diverted” is the word used in the trade?

[Yan Cimon]

There could be an audit system set up. Companies are very familiar with technological and other types of audits, so that could be one way of doing it, but you have to realize that it's really complicated for a company to go beyond the other company's boundaries. For example, in the case we're talking about, going to the Turkish company and then doing an audit there, a supplier audit or a final client audit would be doable.

However, once the product is in the hands of government agencies, it becomes harder to do that unless you have a service contract or a provision where you give the right to check the material from time to time and do periodic maintenance or activate or deactivate features, depending on what the contract says and the uses that the material is intended for.

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

In this case, Professor, it was well known that Azerbaijan was being armed and was building up arms, and everyone knew about their previous conflict. However, it was announced by Turkey that they were selling drones or providing drones to Azerbaijan as well, and Wescam would have had to know that. The Government of Canada didn't seem to know.

Should Wescam not have a responsibility of telling Canada that something is going on?

[Yan Cimon]

One thing is....

You are quite right to mention that concern; it is important in this issue. Companies certainly have the moral responsibility to raise flags if ever there is a problem with the use of their equipment. However, beyond that, if there is no contract between a defence company and a state, Azerbaijan in this case, it is very difficult to ask that company to take, or not take, any action.

Unfortunately, in this case, the action the company could take stops with its Turkish customer, a Turkish company. The grey area—and this is why we are having this conversation today—is when a government makes decisions for a company in its country and decides to sell or lend arms. The area then gets very grey and does not allow companies to have sufficient control over the use.

At that point, a multilateral framework governing that kind of situation could become very useful.

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

Thank you, Professor.

It's been raised on a number of occasions in this panel, as well as previously, that the permit process is the last of a big long trail of activities, and this is the last step. Yet, why is that not happening? Is there no possibility of pre-approval? Why do you wait until your contract is signed and you have 10 days to deliver a piece of equipment? Is there a possibility or any mechanism for pre-approval before you sign a contract and commit to a particular delivery date? Can that system be overlaid on our system here?

[Yan Cimon]

A system like that could certainly be put in place with the collaboration of industry, because it's in the interest of industry to streamline the process, as well as it is for the government that is bidding in the process, so it would be a win-win, and industry would know far faster whether the licence would be granted or not and would also be able to manage it financially. Such a system could be accompanied by financial incentives or risk-sharing mechanisms to account for temporary cash flow disruptions in the company's finances. That could also be done.

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

I'm just curious, because everybody complains about it, why would it not have been done already?

[Yan Cimon]

One issue may be the fact that if you do that in advance, you also....

If you do it in advance, you increase the uncertainty throughout the process.

The problem you are pointing out would be solved if the criteria were much clearer, as we were saying at the outset, and if the prior approval process matched the final approval process. The process would be somewhat similar to a person asking a bank for a mortgage, for example.

[The Chair, Liberal, Sven Spengemann]

Thank you very much, Mr. Harris.

Colleagues, that takes us to the end of round one. We have a bit of wiggle room this afternoon with House of Commons resources, so if you agree, I would propose that we try to at least partially get through a second round.

If that's the committee's wish, then I would ask Mr. Chong to continue with the next round, please.

[Michael Chong, Conservative, Wellington—Halton Hills, ON]

Thank you, Mr. Chair.

I'll cede the floor to Mr. Diotte. I think he has some more questions.

[The Chair, Liberal, Sven Spengemann]

Sure, very good.

Mr. Diotte, please.

[Kerry Diotte, Conservative, Edmonton Griesbach, AB]

That will work.

None of us wants to see any bad systems ending up in countries that are using them against people, but we heard from a previous witness that even so-called open countries like Australia are waiting four times longer for delivery of anything. First of all, I'm wondering if Mr. Agnew has any.... What's happening I guess is the pointed question; why is that? Australia's not seemingly a threat to anyone.

Mr. Agnew, do you want to chime in on that?

[Mark Agnew]

I think to the point about transparency that you've heard from other witnesses, I can't give you a perfect answer as to what's going on, because we don't actually know what's going on. We can speculate that additional criteria have been applied through the ATT and that innate caution has been injected into the system, but I'm not entirely sure what precisely is going on, and I can't answer that question with any precision.

[Kerry Diotte, Conservative, Edmonton Griesbach, AB]

Professor, do you have any comments on that?

[Yan Cimon]

I would only offer speculation, but one thing that you could say, though, is that in all liberal democracies, defence industries are under tremendous pressure regarding the social acceptability of their products and services.

[Kerry Diotte, Conservative, Edmonton Griesbach, AB]

Another witness has indicated that our competitive advantage is in jeopardy from slow permitting.

Mr. Agnew, would you like to comment on that? Obviously, it is possible that Canadian companies could lose work and that there could be layoffs and loss of money. Can you give some observations on that?

[Mark Agnew]

I think the observations you listed are the right ones. It is a competitive landscape. Yes, there will be companies that offer unique products and services, but there will always be a degree of substitutability for a large number of things. At the end of the day, if the buyer can't get what they're looking for on time and on budget, then they are going to look elsewhere for other options and there are other companies and countries that are happy to step into that void. We live in a free market, and that's the reality that companies face.

[Kerry Diotte, Conservative, Edmonton Griesbach, AB]

Go ahead, Professor.

[Yan Cimon]

If you examine the cost structure of companies, you see that there are a lot of costs for bridge financing while there's a delay. There are also the human resources-related costs of maintaining human resources that do not work on projects that bring in cash flows. You also have a lot of issues in dealing with the overhead that this necessitates, because you need to have buffer inventories of a lot of input. You have to think about how you're going to streamline your process and then interface with your clients.

Keep in mind that, as was said earlier, there may be penalties attached to such contracts, so the longer it takes, the more penalties you may suffer. It's a slew of costs that are incurred by businesses because of that.