Government Operations Committee on Nov. 22nd, 2012

[Denis Blanchette, NDP, Louis-Hébert, QC]

Mr. Ring, Canada doesn't have only two world-class shipyards—it has three of them. There is another one in Quebec City that has unfortunately not done well.

My colleague talked about suppliers in Canada. That brings us to the issue of ships' Canadian content. What efforts have you made to encourage Canadian content in those ships?

[Tom Ring]

Thank you for the question.

At its heart, the NSPS is a Buy Canadian policy: the ships must be built in Canada. So I'm not sure....

Maybe your question was a little different, though, sir.

[Denis Blanchette, NDP, Louis-Hébert, QC]

That's actually good. They will be built in Canada.

However, a ship is not just a steel shell. Today, a ship is also a high-tech machine. A major part of those ships' value comes from that. So I would like to know what your objective is regarding that.

[Tom Ring]

As part of the NSPS process, we have required the shipbuilders to demonstrate best value to Canada. There is also an IRB policy; there's no colleague here from Industry Canada to speak to the IRB program.

There are incentives built into the shipbuilding process for both shipyards to ensure that they maximize the investments they need to make, or to buy in Canada, both through the IRB policy and also through the requirement that they demonstrate to us that it is best value. So there are two particular ways in which we can ensure that these investments are maximizing the value to Canada.

[Denis Blanchette, NDP, Louis-Hébert, QC]

Do you ensure that kind of follow-up? Do you intend to do so?

[Tom Ring]

Yes, sir. The IRB policy managed by Industry Canada has a very specific follow-up process for ensuring that the IRB commitments that are contractually included in the contracts themselves are followed up. I don't have the specifics of how the follow-up is done by Industry Canada, but I'm sure we could provide the committee with that information in terms of this process.

[Denis Blanchette, NDP, Louis-Hébert, QC]

Thank you. That would be appreciated.

[The Chair, NDP, Pat Martin]

Thank you very much, Denis.

Next, for the Conservatives, Costas Menegakis.

[Costas Menegakis, Conservative, Richmond Hill, ON]

Thank you, Mr. Chair.

Thank you to our witnesses for appearing before us today.

This was clearly a unique process. On the one hand, it was very open and transparent, with considerable broad consultation. On the other side of the equation, it was also very confidential. In my opinion, it was the third party involvement—the involvement of the fairness monitor, KPMG, and Pricewaterhouse—and that confidentiality that contributed considerably to the integrity of the process.

Given that, as I believe my colleague Peter Braid said earlier, this is a model that will be employed in the future for other procurement projects, could you share with us some of the practical administrative methods or the model that was employed to gather the information, evaluate the submissions, and follow up with the bidders?

I believe I read in the quite excellent presentation on the video that there were seven separate teams assessing nine areas. How was that done? How was that all coordinated?

[Scott Leslie]

Do you want me to speak to that?

[Tom Ring]

Yes.

[Scott Leslie]

Thank you for the question.

Yes, it was quite the exercise. The evaluation teams were composed of public servants. They were advised by some third party experts, but the evaluators themselves were all public servants. They were drawn from Canadian Forces, coast guard, Industry Canada, PWGSC, and Justice Canada.

There were, as you mentioned, seven teams evaluating the nine different areas within the evaluation plan that had been published and was available to all the bidders, so they were aware of exactly the relative importance of all the evaluation criteria.

The main thrust of the evaluation was around assessing the current state of the shipyard facilities, which was done by a third party, First Marine International of the U.K., which is an internationally recognized expert in shipyards. There are plans to close the gap between their current status and the target date that had also been identified and defined by FMI.

They were also evaluated with respect to the costs that would be borne by Canada for those infrastructure upgrades, their financial capability, and the value propositions, which was another unique element of the NSPS process, where we were requiring the successful shipyards to invest a portion of their own profits in certain key areas that would benefit the overall marine industry within Canada.

That process was conducted over a period of about July, August, September of last year, resulting in the announcement. All the results by the evaluators were done in isolation. They evaluated their team but did not see the results of any others. They were coded going up, as was mentioned in the video, and literally at the end of the process the only two people who knew the results were the leaders of the evaluation teams overall.

I was the chair of the evaluation oversight committee. I knew only that bidder A had this score, bidder B had that score, and bidder C; I did not know who was who. It remained like that as we bid up through the governance structure of the NSPS, right up to the deputy ministers, who weren't aware either.

It wasn't until the day of the announcement, when that envelope was opened revealing who was bidder A that had been successful, and who was bidder B. When Mr. Ring phoned the shipyards, told them, and then informed the minister and the deputy minister, the announcement was made at the National Press Gallery.

[Costas Menegakis, Conservative, Richmond Hill, ON]

Thank you.

Moving forward, what can you tell us about the organizational structure that will be in place to monitor the progress over the life of this project, including the management of the ancillary suppliers? Is that going to be managed through some central group, or is that going to be managed by the two different shipyards?

[Scott Leslie]

The shipyards will be managing their own supply chain. We will be overseeing, ensuring that we are obtaining value for money throughout that process. So they'll be responsible for that.

As to the secretariat, as mentioned before, it does continue to exist. It is continuing to be an integrated team of National Defence, coast guard, PWGSC, and Industry Canada. The governance structure around that, the ADM level and deputy minister, governance committees...continues to exist and meets very regularly to review progress and issues as they arise.

[Costas Menegakis, Conservative, Richmond Hill, ON]

Thank you very much.

[The Chair, NDP, Pat Martin]

Thank you, Mr. Leslie.

Thank you, Mr. Menegakis.

For the NDP, Linda Duncan.

[Linda Duncan, NDP, Edmonton Strathcona, AB]

Thank you very much.

I want to follow up on the comments that Monsieur Vermette made about there not being a lot of shipbuilding expertise in Canada.

It's my understanding that one of the conditions in these umbrella agreements or contracts, whatever you call them, with the two shipbuilding entities is that for every dollar invested by the federal government, they will also invest dollars, particularly toward R and D and training.

I wonder if one or all of you can speak to that, if that's actually happening and whether a lot of that is being directed toward trying to ensure that Canadians' skills are being upgraded so they can actually participate in this industry.

I'm raising this because, of course, you have to abide by the IRB, and there are supposed to be regional spinoffs. This all sounds very familiar to a rather large industry in my jurisdiction, the oil sands. What we have also in Alberta is this boom and bust. That occurs because all of the permits are given out and they're all given out at once. This is something that former Premier Lougheed raised concerns about, that if you don't pace the industry properly you'll have this boom and bust because the costs escalate for the labour and competition to get the equipment and so forth. Then you start having to go offshore to get that equipment in a timely manner.

I am wondering what your strategy is to try to avoid the problems they've run into in that large sector, and whether part of your skilled expertise will include a complement of temporary foreign workers.

[Tom Ring]

Thank you for the question.

Mr. Chairman, if you don't mind, I'll begin and then see whether Mr. Vermette wants to add anything.

You're quite correct regarding the IRB program. That is one aspect, as I mentioned earlier, of ensuring that there is appropriate investment.

But more specifically to answer your question, you're probably more interested in what we included in the NSPS for the first time, which is a value proposition. What we actually included in there—the philosophy behind it, if I might—was if we're going to have a strategic sourcing arrangement with a supplier for 20 to 30 years, what are you contributing back to ensure that you have the skills development necessary to be competitive and competent over the life of that?

[Linda Duncan, NDP, Edmonton Strathcona, AB]

But is it binding? That's what I'm trying to get at.

[Tom Ring]

The value proposition commitments are binding. If that was your specific question, then the value proposition commitments are in fact binding—this is in the umbrella agreement—and their commitment to live up to their value proposition commitments will be written into each of the individual contracts. Fulfilment of those commitments will be conditions precedent to continuing with the contract.

So yes, it is binding.

[Michel Vermette]

The coast guard hadn't acquired a large vessel since the late 1980s. There had been no demand in Canada to build a large coast guard vessel since the Henry Larsen was turned out into our fleet.

When I speak to the issue of shipyard capacity, one of the biggest pieces of demand in Canada for those are government vessels. Similarly, the navy had not acquired a large vessel since the end of the frigate project. When we were looking at the age of our fleet, knowing the kinds of needs that we had, we needed to smooth the source of supply. It doesn't make sense to hire a welder to build one ship, lay that welder off, and then teach a new welder to build a new ship.

So partly—

[Linda Duncan, NDP, Edmonton Strathcona, AB]

Let me interject here, Mr. Vermette.

That's really good. What I'm trying to raise is that even within the oil sands sector they're having a hard time competing with each other to pay higher salaries to get these technical skills. I'm wondering whether you have also considered that. Do a lot of the skills overlap—welders and so forth? Do you have a strategy for how you're going to address the cost overruns? Are you going to have to turn to temporary foreign workers?

[RAdm Patrick Finn]

Again, thank you for the question.

The strategy at its heart, when we started to work on it—that was one of the key issues we were trying to deal with. Within the federal government, within National Defence and with our colleagues at the coast guard, we had a number of projects under way, which you now hear us talk about in the context of a strategy, that were not moving completely independently but certainly were not sufficiently integrated to understand the very issue that you're talking about, with a certain expectation that competitive requests for proposals would go to multiple shipyards across Canada. At one point we were talking about how we could be in fact in five different shipyards building ships, which meant that the government would be investing in five shipyards to build up capacity and that there would be competition for skill sets.

So at its core, the shipbuilding strategy was, amongst other things, established to exactly do what you're saying. It caused us to bring all of the projects together to impose a certain amount of schedule, a certain amount of flow. In reality, each of the projects has now been phased to deal with, amongst other things, the things you're talking about.

The complexity of shipbuilding today is not based on the labour-intensive approach it had 20, 30, or 40 years ago. It is now much more technologically advanced, even in the construction piece. What we want to do is invest in two shipyards that have a reasonable amount of skill. If we create massive shipyards, we will in fact return to the boom and bust.

This is very much a drumbeat, by international standards, into medium-sized yards with a medium-sized workforce to build one ship after the other, to try to deal with the very issue you're highlighting.

[Linda Duncan, NDP, Edmonton Strathcona, AB]

Am I done, Mr. Chair? Too bad; I enjoyed the conversation.

[The Chair, NDP, Pat Martin]

You're well over time. I'm sorry.

Next we have Ron Cannan, from British Columbia.