Government Operations Committee on March 25th, 2022

[The Chair (Mr. Robert Kitchen (Souris—Moose Mountain, CPC)), Conservative, Robert Gordon Kitchen]

I call the meeting to order.

I'd like to welcome everybody to meeting 10 of the House of Commons Standing Committee on Government Operations and Estimates.

Today we will continue our study on the national shipbuilding strategy. We will also discuss committee business during the last 30 minutes of the meeting.

Today's meeting is taking place in a hybrid format pursuant to a House order of November 25, 2021. Members are attending in person in the room and remotely using the Zoom application.

Regarding the speaking list, the committee clerk and I will do the best we can to maintain a consolidated order of speaking for all members, whether participating virtually or in person.

I would like to take the opportunity to remind all participants at this meeting that taking pictures of your screen is not permitted.

Given the ongoing pandemic situation and in light of the recommendations from health authorities as well as the directive of the Board of Internal Economy on October 19, 2021, to maintain a healthy and safe atmosphere, the following is recommended so that we can continue to do so.

Anyone with symptoms should participate by Zoom and not attend the meeting in person. Everyone must maintain two-metre physical distancing, whether seated or standing. Everyone must wear a non-medical mask when circulating in the room. It is recommended in the strongest possible terms that members wear their masks at all times, including when seated. Non-medical masks, which provide better clarity over cloth masks, are available in the room should you require them.

Everyone present must maintain proper hand hygiene by using the hand sanitizer at the room entrance. Committee rooms are cleaned before and after each meeting. To maintain this, everyone is encouraged to clean surfaces such as their desk, their chair and their microphone, with the provided disinfectant wipes when vacating or taking a seat.

As the chair, I will be enforcing these measures for the duration of the meeting, and I thank members in advance for their co-operation.

I would like to welcome our witnesses today.

Mr. Crosby and Mr. Page are back again this week.

Vice-Admiral Baines, it's good to see you.

I believe we have Mr. Smith as well. Welcome.

I understand you have an order of presentation. With that, I will ask PSPC to start, followed by DND and then the Canadian Coast Guard.

[Simon Page, Assistant Deputy Minister, Defence and Marine Procurement, Department of Public Works and Government Services]

Thank you, Mr. Chair.

I am Simon Page, assistant deputy minister, defence and marine procurement branch at PSPC.

Good afternoon, Mr. Chair and committee members.

Thank you for inviting me to appear before you today to discuss the national shipbuilding strategy, or as we often refer to it, the NSS.

More than a decade ago, the Government of Canada launched the NSS as Canada’s long-term plan to renew the fleets of the Royal Canadian Navy and the Canadian Coast Guard, and it is helping rebuild a domestic marine industry and create sustainable jobs in Canada.

Since then, we have seen five large ships and numerous small vessels delivered to the Royal Canadian Navy and the Canadian Coast Guard, as well as the completion of dozens of ship repair, refit and maintenance projects at shipyards across Canada.

Between 2012 and 2021, contracts awarded under the NSS have contributed an estimated $21.2 billion to Canada's gross domestic product for an average of nearly $2 billion annually. Over the past decade, these contracts have also created or maintained more than 18,000 jobs a year, through the marine industry and its Canadian suppliers.

This past year, construction and design work continued on a number of vessels. Deliveries of completed vessels included new search and rescue lifeboats to the Canadian Coast Guard and a second Arctic and offshore patrol ship delivered to the Royal Canadian Navy.

Several repair, refit and maintenance contracts were also awarded on behalf of the Canadian Coast Guard and the Royal Canadian Navy, generating hundreds of jobs and significant economic benefits to communities across Canada. We also made progress towards selecting a third shipyard under the NSS to build icebreakers for the Canadian Coast Guard. We hope to have more to share on this in the coming months. These are important achievements, but despite the successes, the NSS continues to face significant challenges.

As indicated in the Auditor General's 2021 report, shipbuilding is highly complex and challenging work.

The delivery of ships has been slower and more costly than originally anticipated. During the early years of the strategy, expertise both at the shipyards and within government was still developing as new workforces in modernized shipyards were building entirely new classes of ships.

This has led to ongoing challenges with respect to planning, management and oversight of projects and related activities. Canada had limited recent experience in the planning of shipbuilding projects when original delivery schedules and budgets were established more than a decade ago.

Much has changed since then, and preliminary budgets did not fully consider refinements in build requirements and plans, inflation costs, changes in exchange rates, or labour rates and material costs—all of which have risen significantly over the last decade.

The marine industry is also facing challenges with attracting and retaining a workforce, as well as developing skills and capabilities. Of course, industries around the world have experienced added challenges due to the pandemic, and Canadian shipbuilding is no exception. COVID has put immense pressure on workforces, working practices and supply chains and has resulted in rising costs of materials as well as delays in building projects.

Although we are still assessing the full impact of the pandemic on our projects, we anticipate further adjustment to project schedules and budgets will be required.

These are serious problems that several industries are facing at the moment. It is true that we have made some progress since the inception of the NSS, but we know we need to apply lessons learned now so we can keep delivering in the future, especially as global challenges persist.

I can tell you that the government continues to work closely with shipbuilding partners to do just that, and now that the shipyards in Canada have gained the experience required to set more realistic schedules, we are better positioned to tackle emerging challenges and manage risks.

To address these challenges we have made significant enhancements over the past number of years in how we manage the strategy. This includes strengthening risk management tools and processes so that we can make more informed decisions. We are actively working with the shipyards to address issues related to overall performance using proven tools such as earned value management and actively managing specific risk registers through a rigid governance system.

We are engaging with the marine sector to develop an HR strategy that aims to support industry in its ongoing work to recruit new workforce talent.

The strategy relies on the active involvement of the marine sector, including the large shipyards, and relies on a common understanding of the challenges to be tackled and the joint development of solutions.

We know that the strategy is a decade-long initiative and ongoing enhancements will be required.

That concludes my remarks. I would be pleased to answer the committee's questions.

Thank you.

[The Chair, Conservative, Robert Gordon Kitchen]

Thank you, Mr. Page.

Now we'll go to DND.

[Troy Crosby, Assistant Deputy Minister, Materiel Group, Department of National Defence]

Mr. Chair, members of the committee, I'd like to thank you for the invitation to appear before you to discuss the national shipbuilding strategy.

I'm Troy Crosby, assistant deputy minister, materiel, at the Department of National Defence.

It is my responsibility to outfit the Canadian Armed Forces and its members with operationally relevant and safe equipment and services, so the Canadian Armed Forces can accomplish the missions assigned to it by the Government of Canada.

Today we are discussing the national shipbuilding strategy and what it means to the recapitalization and in-service support of the Royal Canadian Navy.

As a reminder, in the shipbuilding strategy it's planned to deliver six Arctic and offshore patrol ships, two joint support ships and 15 Canadian surface combatants to the Royal Canadian Navy. This is an immense undertaking spanning decades of work and involving billions of taxpayers' dollars. For context, one of the projects, the Canadian surface combatants, will be designed and then built over a 30-year duration and will be the backbone of the navy for four-plus decades. Construction of these 15 ships is currently forecast to require some 60 million person hours of labour.

Shipbuilding has many stakeholders. Internally, it involves interdependencies with departments such as Public Services and Procurement Canada, or PSPC, and Innovation, Science and Economic Development Canada, or ISED, and is supported by a broad web of policies and authorities. Externally, it involves our prime contractors, their subcontractors and a complex supply chain.

You have heard from my colleague at PSPC how we have made significant strides towards satisfying the objectives of the national shipbuilding strategy. You have also heard that there have been significant challenges faced, the global pandemic being but one of them.

Specific to the shipbuilding strategy objective of satisfying the requirements of the Department of National Defence,

my colleague, the commander of the Royal Canadian Navy has expressed that he is pleased with the performance to date of the two Arctic and offshore patrol vessels that have been delivered. The historic passage through the Northwest Passage, while circumnavigating North America, is evidence of the capability this new ship brings to Arctic sovereignty.

Ships four and five of this class are well under construction in the Irving shipyard in Halifax and steel cutting on the sixth ship is planned to occur later this year.

The very visible progress on construction of the first joint support ship in Vancouver is also most welcome. Vancouver shipyards is planning to cut steel on the second joint support ship in the coming months.

There has also been significant progress on work accomplished on the Canadian surface combatant design with a goal of cutting steel in the 2024 time frame.

Improvements in implementing the shipbuilding strategy are required, however, and investments in our collective capacity, including industry, are needed. Simply put, ships are not being built fast enough and are costing more as a result.

A recent PBO report on the NSS underlined the time value of money on a project of the magnitude of the Canadian surface combatant. By their calculations, one year of ship schedule slippage could equate to $2.2 billion of lost buying power. At the same time, we need to keep in mind the cost and collective ability to keep our Halifax class frigates in service and at the required operational level while bridging to deliveries of the Canadian surface combatant.

The required security in shipyards where warships are built and maintained, as well as their supply chain, limits options as to where this type of work can be done. Having the domestic capability and capacity to support our existing and future fleet allows sovereign control. Events in the world today have reinforced the importance of this ability.

The national shipbuilding strategy is crucial to National Defence. Collective focus is required to continue across the various stakeholders, including industry, to bring the new fleet into service in the time that it is required.

I will be pleased to take your questions.

Thank you.

[The Chair, Conservative, Robert Gordon Kitchen]

Admiral, do you have anything or are we okay?

[Vice-Admiral Craig Baines, Commander, Royal Canadian Navy, Department of National Defence]

I do have some opening remarks, if that would be okay, Mr. Chair.

[The Chair, Conservative, Robert Gordon Kitchen]

Admiral.

[VAdm Craig Baines]

Mr. Chair and members of the committee, thank you for inviting me to speak with you today about the national shipbuilding strategy.

Before we discuss the national shipbuilding strategy, I would like to provide a brief overview of my mandate as the commander of the Royal Canadian Navy and my priorities for ensuring that Canada has combat capable maritime forces that are ready to deploy when called upon by the Government of Canada to meet the wide variety of taskings that can come our way through the spectrum of conflict.

As head of the navy, I am responsible for producing globally deployable maritime forces. In this role, I lead an organization that takes the required capability and combines it with trained sailors to prepare ships and submarines for Government of Canada missions both domestically and internationally.

A somewhat unique feature of the naval force is that it can be used for humanitarian assistance, disaster relief, naval diplomacy, deterrence or combat, depending on the situation.

This means ensuring that the required sailors and ships are ready to deploy in various circumstances according to the Government of Canada demand signal, which includes responding to international crises, such as supporting NATO in light of the Russian aggression in Europe, operating in the Arctic in support of Canadian sovereignty, combatting drug trafficking in the Caribbean or responding to humanitarian disasters such as earthquakes or floods. However, it should be noted that I am not responsible for leading deployed operations. That responsibility falls to Vice-Admiral Bob Auchterlonie, commander of the Canadian Joint Operations Command.

As I command the navy, my top priority is people. Without the sailors and public servants that crew and support our fleet, we cannot be operationally effective through the spectrum of activity in which we are asked to operate. Part of focusing on people is ensuring that we have an organizational culture that meets the needs of both our people and our institution. This means continuing to develop an inclusive and diverse navy that is reflective of Canada's values and ethics and is based upon a foundation of respect.

Systemic problems require systemic solutions, which is why we are working closely with the commander of professional conduct and culture to ensure that we keep culture change on the agenda and that we lean in to correcting past wrongs while enabling an operationally effective navy for the future.

Everyone is welcome in the Royal Canadian Navy and should feel safe there, regardless of their gender, ethnic origin or sexual orientation. Our corporate culture must reflect the values of Canadians, and it will.

Another important priority, which brings us together here today, is fielding ships and submarines for operational employment. The Royal Canadian Navy's primary role in the national shipbuilding strategy is to provide the right maritime requirements to ensure that our fleet is positioned to meet the challenges of both the current and future threat environments.

In this regard, the navy team works closely with Mr. Crosby's team in ADM materiel to set the requirements in order to meet the missions assigned to the Royal Canadian Navy by the Government of Canada.

After setting this requirement, the navy team coordinates closely with ADM materiel and Public Services and Procurement Canada as they deliver the necessary and effective capability to meet Canada's maritime needs.

That is why today's meeting is so important to the Royal Canadian Navy. The national shipbuilding strategy is the mechanism through which the future fleet will be delivered, and we need to make sure the strategy is well positioned to do it as effectively as possible.

Thank you.

[The Chair, Conservative, Robert Gordon Kitchen]

Thank you, Admiral.

We'll now go to the Canadian Coast Guard.

[Andy Smith, Deputy Commissioner, Shipbuilding and Materiel, Canadian Coast Guard, Department of Fisheries and Oceans]

Mr. Chairman, thank you for providing me with the opportunity to speak with you and the members of the committee regarding the national shipbuilding strategy.

My name is Andy Smith, and I am the deputy commissioner of the Coast Guard in charge of shipbuilding and materiel.

The Canadian Coast Guard's on-water missions, including aids to navigation, icebreaking, search and rescue, environmental response, fisheries conservation and protection, and ocean science, are fundamental to enabling the Canadian maritime economy, facilitating northern community resupply, supporting northern Arctic sovereignty, advancing the stewardship of our oceans and promoting maritime safety.

To effect this wide-ranging mandate, the Canadian Coast Guard operates 123 ships, including 26 large ships over 1,000 tonnes. The average age of these large ships is 40 years, and although they are safe and well maintained, a generational and comprehensive renewal of the Canadian Coast Guard fleet is needed to ensure that we continue to be able to serve Canadians and promote Canadian interests.

The Coast Guard fleet renewal plan has been in existence since 2005 and has accelerated significantly with the introduction of the national shipbuilding strategy.

Over the last four years, the government has approved the renewal of the non-combatant fleet, including the construction of 30 large ships.

The Canadian Coast Guard is a core member of the national shipbuilding strategy and is engaged in all aspects of the strategy, namely, large ship construction, small ship construction for ships less than 1,000 tonnes, and ship repair and maintenance.

More specifically, the Canadian Coast Guard had either construction or repair contracts in every major yard in Canada over the last six years and is currently progressing the design or construction on three new classes of vessels, including the polar icebreaker.

Subject to the conclusion of the current process to select a third shipyard, we anticipate having contracts for large ship design and construction in the three major Canadian shipyards. A key element of our fleet renewal program is keeping the current fleet safe and operational until the arrival of new ships, and in this regard, we are engaged in repair and vessel life extension work for the entire fleet.

With the launch of the national shipbuilding strategy in 2010 and the commitment of long-term government program funding, the Canadian shipbuilding industry underwent a renaissance following a fallow period. This long-term commitment resulted in the modernization of two major shipyards, the regeneration of the Canadian marine supply chain and the reconstitution of the government's program and project management expertise in the shipbuilding domain.

With respect to the large ship fleet renewal, the Canadian Coast Guard cut steel on its first large vessel in 2015. The first large ship and the first class of ships to be delivered under the national shipbuilding strategy were the offshore fisheries science vessels built at Vancouver shipyards and delivered in 2019 and 2020.

These ships, with their advanced technology and laboratory capabilities, will enable fisheries science research on both coasts for decades to come.

We also experienced good success with our small vessel fleet regeneration, which is realized via an open competition process with smaller Canadian shipyards. The channel survey and sounding vessels delivered by Kanter Marine, in St. Thomas, Ontario, and the search and rescue lifeboats being delivered by Hike Metal Products, in Wheatley, Ontario, and Chantier Naval Forillon in Gaspé, Quebec, bear testament to this success.

As concluded by the Auditor General in her February 2021 report, shipbuilding is a complex and challenging undertaking. We were pleased to take delivery of three large well-built ships, but we must acknowledge that these ships have taken longer to produce and have cost more than originally envisioned.

Additionally, in the last two years, the COVID-19 pandemic has had an undeniable impact on the shipyards and the global supply chain. Current production schedules have been adversely impacted. Moving forward, as we continue to work with the shipyards to monitor performance and incorporate lessons learned, there is an expectation that build duration and, by extension, costs will come down, particularly on long series runs of ships.

As the operator of the largest federal civilian fleet, the Canadian Coast Guard is heavily invested in the national shipbuilding strategy. The regeneration of the aging fleet is a top priority for us, and we continue to work with the entire stakeholder community to realize the goal of timely fleet renewal.

Thank you. I'll be happy to take your questions.

[The Chair, Conservative, Robert Gordon Kitchen]

Thank you very much.

We'll now go into questions.

We will start with Mr. Paul-Hus for six minutes.

[Pierre Paul-Hus, Conservative, Charlesbourg—Haute-Saint-Charles, QC]

Thank you, Mr. Chair.

Thank you for your opening statements, gentlemen.

I'm glad that all of you recognize the serious issues Canada has experienced in the past few years when it comes to shipbuilding. My biggest concern today is moving forward and doing better. Above all, the cost overruns have to stop; these projects are becoming completely cost-prohibitive.

Vice-Admiral Baines, my first question is about capability.

Is the Royal Canadian Navy worried that it will have a capability gap like the one faced by the Royal Canadian Air Force? The existing frigates are being adapted to extend their life, but will they reach the end of their lifespan before the new vessels arrive?

Does that worry you?

[VAdm Craig Baines]

Mr. Chair, thank you very much for the question.

The transition between the Halifax class and the Canadian surface combatant is one that we are going to monitor very closely. It is our expectation that with the right amount of investment in both maintenance and capability that the navy will be able to have a transition plan between the Halifax class and the Canadian surface combatant.

How that will all shake out will depend eventually on the schedule and how that plays out and the ships themselves.

[Pierre Paul-Hus, Conservative, Charlesbourg—Haute-Saint-Charles, QC]

Thank you, Vice‑Admiral Baines.

My second question is about the model of the vessels. The type 26 frigate was the model selected, but it turns out that Australia has had issues with the vessel. It doesn't deliver good performance and requires a lot of fuel.

Should the government have chosen the multimission frigate, which was previously considered to have good performance and a much lower price tag?

[VAdm Craig Baines]

Mr. Chair, the selection of the design went through a very rigorous and well-supervised process to ensure that the right ship was selected within a competitive process for Canada.

[Pierre Paul-Hus, Conservative, Charlesbourg—Haute-Saint-Charles, QC]

Thank you, Vice‑Admiral Baines.

Mr. Page, I'm trying to understand something about the Arctic and offshore patrol ships. The initial contract was for five ships, each costing $400 million. The government then ordered a sixth, but the price had doubled to $800 million. The increase is apparently due to the fact that Irving Shipbuilding is charging hundreds of millions of dollars in fees for various reasons. Now we are finding out that the project is going to cost $4.3 billion, with the pandemic and supply issues being blamed.

How is it possible that a billion dollars plus in additional fees is the result of the pandemic?

Is there a simple explanation?

[Simon Page]

Thank you for your question.

It's hard to give a simple explanation for the additional fees that were charged. This strategy has a number of complexities, which we manage diligently. I mentioned a few of them in my opening statement. When the projects were initially developed, we had to seek out experience and expertise. Today, we have a better understanding of where we are headed in terms of cost and schedule.

As for the procurement of the Arctic and offshore patrol ships, we always had the option of purchasing a sixth ship. A few years ago now, the decision was made to exercise that option, and we are paying close attention—

[Pierre Paul-Hus, Conservative, Charlesbourg—Haute-Saint-Charles, QC]

Sorry to cut you off, Mr. Page.

Originally, under the terms of the contract, each ship was supposed to cost $400 million. When the government decided to purchase a sixth ship, the price tag was higher for various reasons. That put the bill at $2.8 billion. Now we are finding out that the cost of that same contract has hit $4.3 billion, while construction of the ships is under way, progressing well. Once again, it is taxpayers who are on the hook.

Aren't the additional costs being charged by the shipyard excessive? After all, construction of the ships is under way. I can understand that getting started on a project may bring some complications, but how is it possible to justify charging double to build the same ship? Each one is going to cost $750 million.

As a government institution, how can you allow shipyards to charge us this much for these ships?

Can they justify it?

[Simon Page]

Thank you for your question.

We work diligently with shipyards. Overall, I would say that we were on the right track with the construction of the Arctic and offshore patrol ships at the Irving shipyard, in Halifax. Unfortunately, just when the performance indicators were looking good, the pandemic hit and it hit hard. I'm not saying that the pandemic is responsible for all the issues, but it did not help the shipbuilding industry whatsoever.

We now have to deal with the additional costs shipyards are charging and the new schedules. We are working closely with third parties to review everything and make sure that, as you said, the costs are justified. We are working with them to ensure performance. It's not easy. The challenges are many, but I think we are making good progress.

[Pierre Paul-Hus, Conservative, Charlesbourg—Haute-Saint-Charles, QC]

With all the upcoming projects, such as the frigate project, isn't the scope of the work becoming too much for Canada's shipbuilding industry?

Shouldn't we consider using subcontractors?

I know we want to keep everything here, but at some point it becomes unwieldy and there are too many delays.

Isn't that a problem, currently, with the National Shipbuilding Strategy?

[Simon Page]

Thank you for the question.

We are very focused, globally, on getting the strategy right. As Canada and the world return to the pre-pandemic pace, we will need to evaluate all of this.

As you know, we're trying to build additional resources into the National Shipbuilding Strategy to manage all the requirements. There is a lot of work to do and we are aware of that. We have to accommodate the operational requirements of the Canadian Coast Guard and the Royal Canadian Navy. It's not easy to manage, but I think we do it well. If there are options that we need to consider that are not on the table, we will bring them forward.

[The Chair, Conservative, Robert Gordon Kitchen]

Thank you, Mr. Page.

We'll now go to Mr. Housefather for six minutes.

[Anthony Housefather, Liberal, Mount Royal, QC]

Thank you very much, Mr. Chairman.

I want to thank all of you for being witnesses here today, and for the great job that you do for our country. It is very much appreciated.

I want to come back for just one second to the AOPS.

Wouldn't it be true, Mr. Page, that the AOPS for the Coast Guard and those for the navy are not exactly the same? They're different, so it's not comparing apples to apples. There are obviously cost issues related to COVID, and there are cost issues related to the supply chain, but they're also not the same ships.

[Simon Page]

Thank you very much for the question, Mr. Chair.

You're very right. They are not the same ships. The AOPS that the Coast Guard will receive are different. We're working on this design now, and the design has generated the conclusion that you have just put forward. The designs are not the same. The ships will never be the same. Ultimately, they will look the same from the haul down, but up top, they will be quite different.

I'm sure Mr. Smith could give you some details in this respect.

[Anthony Housefather, Liberal, Mount Royal, QC]

Thank you.

Mr. Smith, I don't know if you want to intervene, or I can go to my next question. If you feel that you want to, please do.