Government Operations Committee on April 23rd, 2009

[John Gamble]

If I can just clarify a couple of points, one is we did not write InfraGuide. The FCM and the National Research Council wrote InfraGuide, just to be clear on that point.

We are not contractors. We are professional service providers. We are licensed under provincial statutes, like doctors and lawyers and others, and we have an obligation. Our lifeblood is customer satisfaction. We're not looking for blank cheques. For projects to work we have to have our objectives aligned. That's the same for any professional service. You want to make sure you and your lawyer, you and your doctor, have the same outcome in mind. We work better under those circumstances. Our contention is that what we need to do at the very beginning of the procurement process, very early on, is to make sure our objectives are aligned, and then we can have fees that are both fair to the taxpayer but commercially viable to the firm. We're looking for sustainability in our industry. We're looking for a fair return on both our investment and the risk, because one of the motivations for the public sector to hire consulting engineering firms is to transfer risk. That's fine, as long as the return on investment is there.

The truth is we have a lot of case history in the United States. A report is being printed, literally as we speak, and it validates what the infrastructure or the InfraGuide committee has always suspected but couldn't quite put numbers around. We're seeing less price creep, less schedule creep. We're seeing better innovation. We're seeing better customer satisfaction and we're seeing a better business case for the firms, and I think that's a win all around, because then we can improve our capacity, we can provide better service, and we can grow as an industry, as you said.

You've talked about large firms, and, yes, we have very large firms, but again I want to emphasize that one-third of my members are firms that employ 15 or fewer employees. As I said earlier, as evidenced by awards juries and as real evidence on projects, they can deliver high-quality projects as well.

The industry is uniform. We like this document. We're surprised, because when a public agency says they're going to write a procurement document, we usually hide under the desk and hope it passes over, but we were quite pleasantly surprised by the outcome of this document because it was prepared by the public sector for the public sector. I probably shouldn't tell you this, but we had a contingency plan as to how we were going to discredit this document if it came up with an answer we didn't like, and lo and behold there it is.

We can live with this. There are other things we'd like, and unapologetically we want to be commercially successful, but this is a good proposition for us because it allows us to provide you and other clients with service we can be proud of with a fair and reasonable return, and I think that's the win all around.

[The Chair, Liberal, Derek Lee]

Mr. Warkentin, you have five minutes.

[Chris Warkentin, Conservative, Peace River, AB]

Thank you, Mr. Chairman.

Thank you to all our witnesses coming today. We appreciate your testimonies and your discussions on things that are important to the issue of procurement.

I think we've probably got a broader topic today than we have any ability to decipher down, but I just want to focus in on ITAC for a number of minutes.

It's my sense we're going to have to take a couple of steps back here. We, as a committee, have not spent a lot of time understanding the reasons the government has been pursuing GENS or shared service initiatives. It's something I think we might have to take a step back from.

Now, my understanding is that right now there are 120, plus or minus, networks that government agencies and departments rely on. The idea, the thought, is that by moving to a single shared service network there would be quite significant efficiencies created within government, on the capital side and also in terms of the ability to facilitate the business of government. Right now there seems to be a significant amount of spending that's focused on things that are not necessarily supplying the core business of government or supplying the services government is responsible for. Instead there's a lot of money and a lot of time eaten up by government departments focusing on their systems.

Now, it's important for me to put things into layman's terms just for my own understanding. My understanding is that essentially what government is suggesting is they are going to replace 120 separate houses with a skyscraper that has the same square footage but is a single building. With that there are obviously a lot of tensions, because right now there are a number of different companies that are supplying a single repairman for every single one of those 120 houses. When there is a single building that will replace those 120 structures...obviously, to fix the windows on the 120th storey of a skyscraper is going to be quite a bit different from somebody from a local window supply store replacing a piece of glass in a single-floor building.

I know I'm dragging in an analogy that may or may not be appropriate, but I'm wondering if that's generally the initiative. I think it's important that we then understand why small businesses are concerned. Small businesses that may just be supplying a single individual to repair something on a smaller structure have no capacity to be involved in possibly putting on the 120th floor of a 120-storey skyscraper.

Have I convoluted the initiative even further, or are we getting to a point where that's possibly an analogy that works?

[Louis Savoie]

It's an interesting analogy. I think it's close, but it's not quite the right analogy.

Let me start by suggesting that, I think I'll say, although there are maybe 120, plus or minus, networks of varying sizes, depending on the size of the department, I don't kid myself in that I don't expect the Department of National Defence to be part of this or expect some of the departments that might not want to come onto the shared service. So the Government of Canada might end up having 20 networks as opposed to 120. It will be a smaller number. I don't think it will ever be one actual network.

I don't see it as one skyscraper; I see it as houses, five-storey buildings, and ten-storey buildings right across the country because of where the government operates. We're talking about infrastructure where the government operates, and the government doesn't operate in one location; it operates right across the country. You need people to cover that infrastructure in all those locations. So if I take a tall Government of Canada building here in Ottawa today—or it could be anywhere; it could be in Montreal or in Vancouver, but where there are multiple departments in that building that is being served today, the carriers are bringing multiple connections into that building, multiple separate connections into that building.

[Chris Warkentin, Conservative, Peace River, AB]

And that's the important point, I think, that you draw a picture of what that looks like right now, because that helps us, as a committee, to understand the efficiencies that are being promoted by the single new system, the GENS system. Go further, but I want you to elaborate on that point a little bit.

[Louis Savoie]

As an example, if we as a carrier provided all those connections and every floor was a different department, and it was a different network connection, and each one sold at a different price, we would ultimately consolidate that onto our backbone network and bring the connections to where the department needs those communications to go.

In terms of us and you, if we brought in one higher-speed connection, separated it out, and virtually connected all those departments onto that single infrastructure, it would bring savings to you, but we would still have to serve all those floors and all those connections in that building, whatever the number. If your location is on one floor, one storey, with 10 people, chances are there is only one connection going in there and there will still need to be one connection going in there. The support required for that connection doesn't change.

There are some efficiencies in terms of delivery, especially in large buildings, and in the overall service management around that unified infrastructure, but you still need all those people to support that infrastructure, wherever it is we need to deliver it.

[Chris Warkentin, Conservative, Peace River, AB]

Yet you've identified that there would be significant efficiencies resulting and significant savings for the government.

[Louis Savoie]

That's right.

[Chris Warkentin, Conservative, Peace River, AB]

In your submission today there is a suggestion that there would be a saving of 15% to 20% of $3 billion per year. Obviously 15% to 20% of $3 billion is a big chunk of money. It then could be redirected into other initiatives or into other core businesses of government.

When the committee has brought struggling agencies or government departments before it, the number one necessity we've identified is to move towards more efficient high-tech systems. We see this in the payroll sector, and we've seen this--not so much now, but in prior months and years--in the Passport Canada sector. We saw that it was the number one issue in a number of other departments. They wanted to upgrade those programs so that they could more efficiently supply the real core business of government.

I see this, and I think we have a larger picture, but I have one concern.

I think we understand that a large company would be required to supply this new infrastructure or this replacement or whatever it is. My concern is that after the first contract expires, after, say, a duration of five or ten years, all of a sudden the government is committed to a single large company. I have the same concerns as my colleagues in this regard: we don't want to create golden handcuffs that require the government to continue to engage in business with one single large company because the government has already invested in an infrastructure, and replacing the provider would be much more costly than just continuing at an exorbitant rate that the large company might require to continue the service.

Is there some assurance you can provide to us? What should we, as members of Parliament, recommend the department do to ensure that after the first contract expires, somebody else would actually be able to come in and compete? My biggest concern is that we not have issues of intellectual property rights, or any of the other kinds of issues that limit the ability to have some competition down the road for that contract.

I'm running late, and I apologize, but please answer.

[Louis Savoie]

I think it's a fair concern. The same concern would be shared especially in the outsourcing industry, which involves companies or organizations turning part of their business out to another company to run more efficiently.

From a contracting perspective, there are ways to mitigate the risks you've just outlined in competing and migrating from one contractor to another. I've seen it happen a number of times successfully. I've seen it happen unsuccessfully, because people have not anticipated what would happen at the end of the contract and how long it would take to migrate and to consider an alternate service provider at some point in time, but I think it's feasible to address the issue you've raised through an appropriate contracting and tendering process.

[The Chair, Liberal, Derek Lee]

Thank you.

I have one question in relation to the GENS project.

In the construction of this concept, either in government or the private sector that would have been bidding or helping to design it, was there ever any reference to set-asides for SMEs, or a trickle-down concept for SMEs, built into the design of this project? That is a trickle-down of projects or set-asides for SMEs, not of personnel augmentation, to use Mr. Adra's term.

[Louis Savoie]

I don't recall it, and I can't say I've seen it in the draft documents that have been issued over the last few years. But there have been discussions about that as a possibility of inclusion in the tender process.

As I think I stated earlier today, we've said that if the government chose to add other conditions, whatever they are, to help respect other policy considerations you might have for the broader benefit of the Canadian economy, we'd be happy to support that in whatever manner. The expectation, of course, might be that the service providers bidding on that may have a situation where they're less effective or less efficient than they would be without those conditions. It would be an issue.

[The Chair, Liberal, Derek Lee]

I understand. Thank you very much.

We have to take a break here. We're going to go to the Nanaimo Shipyard Group. I'll ask you to fasten your safety belts and get ready to go.

I want to thank the witnesses for being here. You're free to go at this time. There have been some significant issues raised. I thank the engineering group and the ITAC group. There may be need for further discussions, there may be other questions, and committee members are happy to engage in that and will be in touch with the clerk should something come up. I encourage you to do that.

Right now, I thank the witnesses. I will suspend the meeting.

[The Chair, Liberal, Derek Lee]

I call the meeting back to order.

We are now introducing ourselves to Mr. Ron van Wachem, who is the president of the Nanaimo Shipyard Group. He will be appearing as a witness on our federal government procurement study. We are looking at access by small and medium-sized enterprises to the federal government's procurement process.

Welcome, Mr. van Wachem. I presume you have an opening statement or a submission that you wish to present. So I'll turn the floor over to you now.

[Ron van Wachem, President, Nanaimo Shipyard Group]

Thank you very much.

You've received my past submission. I have further evidence in the document in front of me, which I will forward to the committee.

I would like to talk about some parts of this evidence, as I do not want to be long-winded, and I would like to entertain any concerns you may have about my past evidence and about what I am about to say.

SME shipyards are strategic to Canada's maritime defence, security, and life-saving capability, and they contribute to maintaining Canada's marine highways. Small businesses are the backbone of our economy, especially in small towns and cities, whether in Nanaimo, B.C., or Les Méchins, Québec.

In the past, and at the present time, the government has implemented procurement policies that favour large multinational companies in the shipyard and marine repair industry to the detriment of small and medium-sized companies. The chair of this committee expressed outrage at the fact that PWGSC destroyed an entire supply chain in the furniture industry. The fact is that PWGSC will soon have wiped out the small shipyards and marine repair companies in Canada.

When the economy slows down, things get tight. The problems in the forest, fishing, and other industries have had a negative impact on operations like mine. Government policies contribute to some of the problems we have. This is why we didn't expect the federal government to contribute to our woes in an unfair and uncompetitive manner by directing contracts to large multinationals and by ignoring SMEs. Especially in these times of economic turmoil, we need Canadian government contracts to be fairly tendered in order to compete. For us, this is a matter of survival.

The recently announced federal shipbuilding and vessel life extension programs, which amount to many billions of dollars, are looked upon as increasingly important to small shipyards to fend off the effects of the current recession. The expectations of the SME shipyards were raised when they heard that shipbuilding repair would be part of the current economic stimulus package. They have heard of large projects and of some small boats to be built, but there is literally nothing in between.

The problem is that large projects often mean that there are many small vessels that SME shipyards could build, but the government likes to package them in bundles, as they believe this to be the answer. What this means is that small shipyards are shut out of every government shipbuilding project because of the cost of bidding and bonding or because the project size is beyond their financial resources.

This is not in the interest of Canada, because the skills of the SME shipyards are not maintained, and if only multinationals get to build small boats, Canada's strategic defence capability will suffer. Essentially, what it means is that multinational shipyards do all the work, both big and small.

The recent FELEX contract is an example, with all the work on the west coast going to one company via named price and all the work on the east coast going to one company via named price. Taxpayers are not getting any kind of bang for their buck.

For your information, I see a parallel in the IT industry, after reading earlier OCG evidence.

The result is that small shipyards do not get to carry out any contracts greater than approximately $3 million to $5 million. In addition, contracts seem to be getting larger rather than smaller, as the government believes that bundling contracts saves them money. It has, and will, kill the SMEs soon if nothing is done.

You've received information on some of the large contracts that have been awarded in the past on the west coast. It is obvious that these numbers pale in contrast to the contracts small business could carry out on an individual vessel basis. An SME shipyard could participate if it were done on an individual vessel basis.

This is a direct result of past tendering practices, which need to be fixed. We cannot afford to take the gamble to bid these contracts, as it would eat up a year's income or more. In addition, SMEs are shut out because they are told they have no experience, which is absolutely not the case. If what I've stated were the case, my only argument would be to ask you to intervene just because we are SMEs. The fact is that this is not the case. I'm asking you to intervene and help us to change this mindset at Public Works and Government Services because we are innovative, flexible, more effective, and less expensive. These are qualities that allow us to win contracts against large multinationals when we're not excluded from the bidding process.

In addition, the federal government has loaded their contracts with risks to the contractor by using design-build contracts, and so on. They should do the design, as they used to in the past, and tender it to the shipyards for a price to perform the work. The SME shipyards can't afford to carry the overhead of ship designers, so are left out of these opportunities. The multinational companies that can afford the overhead because of the volume of work they get use design-build to their advantage over small shipyards and SMEs.

Therefore, we talked to the federal government to see what could be done. OSME told us that this was not their file. They said it was up to Industry Canada. Industry Canada said they have no interest in seeing projects de-bundled.

OSME also said they do not set aside work for SMEs, yet PWGSC does it every day for the multinationals. In addition, PWGSC has a set-aside program for aboriginals. It is then logical--to me--that they could have a set-aside program for SMEs.

Not one department is acting in the interest of small business and the taxpayer. To me, it is obvious that the federal government needs to create separate SME policies inside the existing national shipbuilding policy framework.

I have given evidence here in the past about the SBA in the United States. Across our departments in the federal government there are many small business offices, such as Western Diversification; Industry Canada has a small business office; and we have OSME. These people should be absorbed into one area or one department that should have unyielding powers to change policies in tendering processes.

Contrary to what others have said about the IT industry, SMEs in the marine sector believe it is in the government's best interest to support them by awarding contracts directly--now. There is no way to restore competition and capability to the industry. We need immediate help, as their past practices have put us in a very tenuous position. At this point, the playing field is such an uphill climb for SMEs that they most likely will not survive.

Canada should pride itself on being one of the largest maritime nations in the world. There are many companies involved in this industry, with great technological innovations that are exported all over the world. Everything involving ships is produced in Canada and exported worldwide--except for ships. This is because of the importance other maritime nations place on their maritime industries.

Government likes supporting high-tech. High-tech is a buzzword. It exists in every industry sector. Some ships are more complex and high-tech than airplanes, yet the government doesn't seem to be able to wrap its mind around this; it calls it a traditional and sunset industry.

Travel to any coast, to the Arctic, etc., and you will see the importance of marine activity to our economy. We recently built ferries for British Columbia in Germany, a country with the highest labour rates in the world. A recent contract for a small ferry for the New Brunswick government was awarded to a Florida company.

The U.S. has a separate administration to deal with maritime issues, the Maritime Administration, known as MARAD. They award grants every year for small shipyards for infrastructure upgrade. The grants are used to help keep small shipyards competitive with large multinational companies. This year the amount was raised to $98 million as part of the stimulus program. One of last year's grants went to Ketchikan shipyard in Alaska for a new, smaller dry dock. This dry dock will service some of BC Ferries' northern vessel fleet.

We need such an administration that assists SMEs. There should also be more R and D and export support for shipyard SMEs.

Incidentally, that BC Ferries work for the northern fleet is work that we do normally in our work every year. Has Canada's government decided that it should abandon the thousands of people directly and indirectly employed by our SMEs in the shipyard and marine repair industry? Is that what this procurement policy means?

I have also talked in past evidence about the federal government doing their own work. The navy has spent hundreds of millions of dollars on both coasts, putting money into their facilities. Why shouldn't they be giving money for me to improve my facilities, if that's the case? This is work that the private sector SMEs can do and should be doing. The number of personnel in the navy's own repair division on the west coast has grown by well over 200% in the last four years.

My conclusions are as follows. Due to government policies, small shipyards have closed, and more will close during this recession. The industry is becoming extremely rationalized. Canada is close to not having enough capacity for its maritime defence security and life-saving requirements. We are now to a point where it is highly doubtful that there will be near the capacity to carry out the future shipbuilding work the government has tabled. Now is the time for small shipyards to receive infrastructure and contractual support for this work so that they become competitive players in an industry dominated by the multinationals.

The government is quite capable of negotiating sole-source contracts with small shipyards. They do it every day with the multinationals. This is done in other countries to keep competitiveness alive in the industry. It is in the public interest to do so.

I thank you for your time. I would like to advise you that all of the SME shipyards that I have talked to are 100% behind what I am saying, and they are looking for immediate solutions. One of these shipyards is in Mr. Roy's riding. Many of our locations are in smaller cities and towns, and we are very important contributors to our local economies. If something is not done immediately, the industry and the smaller cities' and towns' economies will suffer enormously, and an already fragile supply chain will be destroyed.

Thank you.

[The Chair, Liberal, Derek Lee]

Thank you, Mr. van Wachem. All four federal parties in the House of Commons were present for your presentation here.

Ms. Hall Findlay.

[Martha Hall Findlay, Liberal, Willowdale, ON]

Thank you, Mr. van Wachem, and apologies from all of us for the delay in getting you on.

I'm quite struck by your commentary—what you said in your presentation and in your written submission. You cited the announcement by then Minister Fortier to support SMEs, but you said that since then there hasn't been much involvement. I'm noting in particular the comment that PWGSC held a procurement conference in Ottawa recently. You were in attendance but nobody from the OSME was there.

Clearly, there seems to be a disconnect between what you're saying and what we're hearing from the office, with respect to support for the SMEs. Can you give us some specific, hard-core recommendations, in point form, on what the OSME should be doing?

[Ron van Wachem]

I have read some of the evidence in the past that Shereen Miller has given. She talked about how a large percentage of contracts go to SMEs already. In the case of the shipbuilding and repair industry, I can tell you that on the west coast, one large multinational does about 80% of the work. That figure was before FELEX was announced and before the submarine program was announced. That figure will rise: 90% to 100% of the work will go to one multinational. OSME needs to have a mandate to look at where the government spends its money and where SMEs are missing out.

If you look at the west coast of Canada, or the east coast for that matter, there are large amounts of money spent in the defence industry, specifically in the navy. That is where OSME should be looking at where the government spends its money. If it spends a large majority of its money in one area, then they should be looking at whether SMEs are well represented. They're not. They're certainly not well represented in the shipyard and marine repair industry.

[Martha Hall Findlay, Liberal, Willowdale, ON]

The recommendation that they look to see where SMEs are represented is valid. But here's what I'm looking for: once they find out where SMEs are underrepresented, what could they do to make some of the federal contracts more accessible for SMEs? That's the more hard-core recommendation I'm looking for from you.

[Ron van Wachem]

It's very complicated. I shouldn't say it's complicated for them to do; it's very easy for them to do. But I think that because of the dollar values of the contracts and because of what you see now, with between 90% and 100% of the marine work going to one company on the west coast and similarly on the east coast, you have such an unlevel playing field. That's what I mentioned earlier, that they really need to look at basically getting the SMEs involved in contracts as soon as possible. That may be directly awarding contracts to them and giving the SMEs work.

FELEX was an example of where they were given the work. They're giving the work to multinationals. They seem to have a problem with trying to give it to SMEs, yet they have a mandate that Minister Fortier mentioned of 40%. How are they going to reach that mandate? I don't see it, when they have 90% to 100% of it going to a multinational right now. It's impossible, unless they award work directly to SMEs. That might have to be done through the local offices, to get their input.

Also, if you look at the Small Business Administration in the United States, they have set-aside programs, where they say 25% of any large contract that's given out—for instance, if FELEX was given out, then 25% would have to be given out to SMEs. I can tell you that if the multinationals were forced to give out 25% of the work to SMEs, they would not give it to me. They would give it to somebody else and make sure that I didn't get one dime of that money. That's why a set-aside program has to be a program that would award contracts directly to SMEs or look at getting the three SMEs that have their own facilities on the west coast involved in working together to build and repair ships together. That is another possibility. That could happen on the east coast as well.

Another thing with the SBA in the United States is that the contracts are enacted in Congress, as is the size of an SME. When Shereen spoke of the size of a small company being 100 people or less and a medium-sized company being 500 or less, those numbers are actually enacted in Congress in the United States and defined by Congress. They are looked at every year, and they are done specifically for each industry. In other words, shipyards and marine repair companies in the United States have an actual number that is used. Actually, it's 1,000 there, as that's how big their small shipyards are because of the large support for them. That is a number enacted by Congress, and it's specifically done for each industry.

You can't just say that it's 100 for a small enterprise when you're not talking about what industry that might be. With 100 employees, that's actually a fairly big shipyard in Canada now because of what's happened with past tendering processes. What the SBA also does in the United States is they say that projects of x dollars and under have to go to SMEs. They define what an SME is for that industry, and then, for example, contracts of $5 million, $10 million, or $20 million or less can only be awarded to SMEs and not to the large companies. That's another example of the way they do things.

We also need infrastructure support.

[Martha Hall Findlay, Liberal, Willowdale, ON]

Mr. van Wachem, my particular time is up, but I thank you very much for your participation today.

[The Chair, Liberal, Derek Lee]

Thank you.

We'll now go to Madame Bourgeois for a round.

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

Thank you, Mr. Chair.

Mr. van Wachem, can you hear me well? I believe that you are listening to the interpretation.

[Ron van Wachem]

Yes, I do.

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

Thank you.

Firstly, allow me to congratulate you on your submission to this committee. It is thorough, very understandable, and very well done. Bravo!