Government Operations Committee on March 29th, 2022

[The Chair, Conservative, Robert Gordon Kitchen]

Mrs. Vignola, you have six minutes.

[Julie Vignola, Bloc, Beauport—Limoilou, QC]

Thank you very much.

Mr. Perry and Mr. Leuprecht, what you are saying about the need for qualified labour is of great concern to me. In 1994, I was a student in Rimouski, and the Institut maritime du Québec, which is located there, was overflowing. There wasn't even enough space in the institute's residences. Students had to come to the Cégep de Rimouski residences.

In 1994, a former prime minister of Canada made cuts to the armed forces' budget. I remember that. I was not in the forces, but my friends were there when the announcement was made that their services were no longer required and that they could go. That slowly emptied out the Institut maritime du Québec, which is now looking for students, while it used to refuse them.

So, in my humble opinion, what you are saying is actually true. There is much work to be done in recruitment and training.

That said, Mr. Williams, I was also really concerned when you said that industry was deciding, and not the client, the Government of Canada. I am really wondering about that. It seems to me that, usually, when a client makes requests or asks questions, industry manages to answer them and is accountable to the client.

What is happening now for industry to be deciding?

I would like you to elaborate on that for us.

[Alan Williams]

This issue is, in my experience, unique to the Canadian surface combatant project.

Essentially, the government said that, in order to build these ships, they were going to pre-select a yard that everybody was going to have to bid with, and they selected, in the case of the large combat ones, Irving. That forced anybody who wanted to bid on this to work with Irving, and that in itself destroyed the typical way of doing business, in which you allow the consortiums to structure themselves and pick their own yard.

Having done that, they made it worse by saying that, now that Irving is going to be the yard, it is also going to be the company that will make these decisions on the statement of requirements: who the integrator will be and which design will be chosen. They're the ones who picked the Type 26 design, which wasn't a proven design. They're the ones who chose Lockheed Martin. They're the ones who are deciding on the statement of requirements.

It's no surprise that the costs have escalated from $26 billion to $77 billion, and it's no surprise that the weight has gone up by 44%, because there are no constraints. There is no budget constraint. All the basic controls that you typically see in a procurement program have been discarded.

I think we're now facing a very serious situation: How do we move forward? I don't think the government is ever going to sign a contract for 15 of these ships under the current rubric. Something is going to have to be done, and I've made my suggestions on how I think it should go forward.

[Julie Vignola, Bloc, Beauport—Limoilou, QC]

Thank you.

I am in no way reproaching Lockheed Martin, but I am wondering about the decision-making process.

Gentlemen, are you concerned to see that Lockheed Martin will be responsible for building our aircraft and that it is also involved in ship design?

Don't you find that the company is being given a lot of control and too much decision-making power? Don't you think that certain aspects should be in the hands of strictly Canadian interests?

[Alan Williams]

Let me separate the two.

In fairness to the F-35, the government is in charge, not the private sector. Lockheed Martin is not in charge. The government selected that plane. It is the government and its officials that will be monitoring the development of the program as it goes forward.

I have no reason to suspect anything. Lockheed Martin is a well-reputed company and is very capable. In this particular program, of course, they've already sold 700 or 800 of these. They're producing 3,400 in total and about 2,400 A versions. They are very capable and very competent.

With regard to the ship program, it's not so much that I'm concerned about Lockheed Martin. I'm concerned that Irving Shipbuilding, Lockheed Martin and BAE are able to sort of, without any budgetary constraints, take the taxpayer for a ride. It is unbelievable to me that we're going to be spending more than a quarter of a trillion dollars, more money than we have to buy things for the army, navy and air force, and no one is waving the red flags and screaming from the top of buildings. I don't understand how we've gotten this far without that being recognized.

You can debate it, you can argue with me and you can say that I'm totally wrong, but this should be subject to huge scrutiny before it becomes too late.

[The Chair, Conservative, Robert Gordon Kitchen]

Thank you, Mr. Williams.

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

[Gord Johns, NDP, Courtenay—Alberni, BC]

Thank you.

I'm going to go back to Mr. Williams.

I really appreciate your comments. You talked about the different things that are contributing to the cost of the Canadian surface combatant: ship design costs, developmental systems, allowing industry to modify and expand the statement of requirements, the lack of budgetary controls, and devolving accountability for their procurement process to the private sector.

Can you speak about what other countries are doing to ensure they don't have this out-of-control cost? To what extent should industry be able to contribute to the statement of requirements for large defence procurement projects?

[Alan Williams]

In my note, you will see that I make reference to the U.S. FFG-62 frigate program, in which they did everything the way we ought to do things. They demanded a proven parent design. The Type 26 was not even considered—you were non-compliant if you proposed that. They demanded off-the-shelf, highly developed systems. That doesn't mean they're not going to be modified, as Christian said. Everything is modified—you're not buying a Chevy off the car lot—but the degree of modifications is minimized, and then the integration risk is minimized.

They said, “We want all of these systems. We want a proven design. Here is the budget. Now, go ahead and organize yourselves the way you want, and we will choose.” That whole process was launched and decided on in a three-year period between 2017 and 2020. That's how you do it. That's how we should have done it, and that's how we should do the next 12.

[Gord Johns, NDP, Courtenay—Alberni, BC]

I've bought some lemons in my day, but I've never had a lemon come in at four, five or 10 times the amount of money when I've driven it off the lot.

Can you talk about the drawbacks in terms of devolving accountability for procurements to the private sector? You've been on the inside of this. What's changed since you were on the inside, or have things just gotten out of control here?

[Alan Williams]

I think so. I could never have imagined such obfuscation and, I'm going to say, incompetence in terms of designing this kind of a process. There is no justification for it. I don't know how it ever got approved, and we're all paying the price for it right now.

This thing started in 2012. It's mind-boggling. I talked at the beginning about the waste of time and money in conducting business this way. Your committee has to be provided with more information in order to challenge and question bureaucrats who suggest that this is how we should be doing things.

We select systems that are highly developmental. We pick a frame that's highly developmental. We don't have any control over anything. There's no transparency. There's no insight. I don't think anybody knows what's going on within the Irving-Lockheed Martin-BAE corridors. Nothing is open for us. We'll find out when the final design is set, but that's too late. That is too late. We should be challenging it and questioning it right now.

[Gord Johns, NDP, Courtenay—Alberni, BC]

Thank you.

Mr. Perry, you talked about capacity, and I was really appreciating that.

I live in Port Alberni. We have the only deep-sea port on the west coast of Vancouver Island. They've been trying to get a dry dock built on federal port lands, and Transport Canada has come back and said that it doesn't have a program for floating dry docks. In the meantime, I was at the Pacific NorthWest Economic Region conference, and they cited that there's about $3 billion in dry dock refurbishment done annually and there's no dry dock space. It's pretty much at capacity from Oregon to Alaska.

Can you talk about how the procurement process is flawed, in that we can identify...? The PBO said the same thing. Because we haven't had a robust shipbuilding sector for years, costs are through the roof compared to those in other countries.

Can you speak about the need for cross-departmental collaborative work to invest in opportunities to expand the shipbuilding sector?

[David Perry]

That part of the shipbuilding strategy—building a national sovereign asset and source of supply—shouldn't be lost here. One of your counterparts asked earlier about Canada buying Javelins. As we've seen with the conflict in Ukraine, the degree of your national industry significantly limits the options available to your government.

We are in the process of building a national shipbuilding sector that could build ships for us or potentially other people in the future. We underplay the potential advantage to Canada of developing exactly this type of industrial capacity.

I'll take a quick moment to respond to some of the things Alan said. I agree with the part where he said people would have a different view about lots of that. I fully disagree with lots of aspects about how he has characterized the arrangement, but I totally agree about the lack of transparency and the fact that we should be able to argue about this based on an understanding and articulation from government about how they think these arrangements for shipbuilding and for CSC, and more broadly the relationship with the shipyards, are supposed to work.

This includes what status will exist between Canada and the respective shipyards—particularly as we move to having potentially three of them—and how the relationships between the government and the yards and all the companies working below them are supposed to work, because I don't think we've heard enough of that articulated so far.

[The Chair, Conservative, Robert Gordon Kitchen]

Thank you, Mr. Johns. Again, you lost five seconds here.

We're now into our final round, and we will go to Mr. McCauley for five minutes.

[Kelly McCauley, Conservative, Edmonton West, AB]

Thanks, Mr. Chair, and gentlemen.

Mr. Williams, thanks for incredibly depressing me.

I have a copy of the Congressional Research Service report. They've put out a report on the Constellation class. It actually shows that the U.S. are quite heavily modifying the ship, making it quite a bit larger than the FREMM parent, but still doing it at about $1 billion a ship, so about one-fifth of the cost that we're going to do.

Mr. Perry and Mr. Williams, I want to get your feedback on the issues with the Type 26 ships. We've seen the reports of our Australian allies struggling with it. Britain has pulled back from their commitment on how many they're going to do. They will do a few Type 26s and a lot more of a smaller, less expensive frigate.

When we had the navy in last week, we spoke about this issue and the weight issues, and their comment was that maybe they'd scale back some parts of the ship in order to reach the weight and the speed requirements. I'm going to express my horror at the fact that we could be cutting back perhaps on weaponry or other needed items on this ship, to meet the originally stated speed and other requirements from the RFP. The navy seems to be perhaps willing to throw away items in order to achieve this weight.

I wonder if you could both chime in on our allies' experience with the Type 26 design and what we are running into.

[Alan Williams]

I have a few comments.

First, with regard to America, they've only increased the length of their ship by 23.6 feet and only by 500 tonnes. From a physical standpoint, that's relatively minor. If you read the reports on it, they do not presume that there are going to be significant cost increases just because of that. Remember that their design is proven; all of their systems are off the shelf.

With regard to the Type 26, I would just say, take a quick look at what's going on in Australia, where in fact the weight increase has blossomed up. Apparently, now they have only about a 3% margin left. They've done a complete review. They've now delayed it by 18 months. The weight increase, according to their audit, has dramatically impacted their power. They feel that they've now lost range, they've lost speed, and they're going back to the drawing board in terms of design. They expect the delay will be 18 months in total. I'm not—

[Kelly McCauley, Conservative, Edmonton West, AB]

Mr. Williams, let me interrupt you quickly, because I want to give Mr. Perry some time.

Do you think we're at the point where we're going to have to go back to the drawing board on our design? I asked the navy and said, we're way down the process and we may have to throw it all out and start afresh.

[Alan Williams]

My recommendation in my notes is very clear. We should buy three of this kind. We have economies of scale and we have costs of nearly $1 billion. Let's get three this way. At the same time, in parallel, we can do the process the right way and get a decision on another design, potentially, but with costs more like what Fincantieri propose and what the FFG-62 propose, and still have deliveries in the same time frame that we are considering right now.

[Kelly McCauley, Conservative, Edmonton West, AB]

Right.

Mr. Perry, go ahead.

[David Perry]

I will start by saying that it's important to keep in mind that the American program is still just at the theoretical or intent stage, and it hasn't actually delivered anything yet.

With respect to the American Navy, its track record on delivering large surface ships on time and on budget isn't great, unless they've already made three or four or five dozen of them first, which is the case with the Arleigh Burke class destroyers.

That's also an important consideration, if you think about that Constellation class as a potential alternative for Canada and that Canada does not have a plan to keep buying Flight III Arleigh Burkes like the United States does. We don't have aircraft carriers. In making analogies to other programs elsewhere, it's important to try to understand the differences between what we're looking to do with our one program of acquisition versus what other countries are doing in acquiring multiples of them.

There are actually a fair number of similarities, though, in terms of the basic approach that the Americans have taken and what we're doing. Some of those Congressional Research Service reports, as an example, point to them being inspired by the DNA of that ship, but they are extensively modifying it. As Mr. Williams pointed out, they are changing it along three dimensions, and they're also basically changing out all of the combat systems that go into it, which is where the real key risk and the real integration challenges come on a project like this. Canada is doing a version of the same thing.

[The Chair, Conservative, Robert Gordon Kitchen]

Thank you, Mr. Perry.

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

[Anthony Housefather, Liberal, Mount Royal, QC]

Thank you very much.

Thank you to all three witnesses. I think you've all been very informative, and I think Professor Leuprecht in particular has brought out the inherent tension that exists between different demands that are put on our procurement process. There's a desire to do things fast, but the faster you do things, the greater the risk that you don't do things competently and coherently and with a rigorous assessment process. There's a desire to do things cheaply, but if you do things cheaply, then you can't be insisting on Canadian content and Canadian jobs being created and doing things here when you could buy something off the shelf from abroad more cheaply.

A lot of the constraints that are being complained about today are ones that are actually being imposed on us by going through these models. For example, in the case of creating jobs in Canada, I'm sure there's a way of dealing with the ships that wouldn't have created as many thousands of jobs in Canada but would have procured off-the-shelf ships more quickly.

I was just wondering, Professor Leuprecht and Mr. Perry, if you could each perhaps comment on that, because I think that's what I'm most getting out of today.

[Dr. Christian Leuprecht]

I would simply comment that I'm not as disenchanted with the NSS as Mr. Williams is. I actually think it provides perhaps better trade-offs on the Canadian benefits and the results that the Canadian navy is going to get from it.

I would also like to point out—and I don't know if Mr. Williams disclosed this in his notes—that of course he provides consultancy services for organizations that stand to benefit from the proposal he's suggesting as an alternative, and he has been disenchanted with some of the acquisitions that have not benefited the companies for which he has been consulting. I'm not suggesting that this is what's motivating his interventions today. I would simply state that we also require that full disclosure.

[Alan Williams]

That's not true. I can't allow that to stand. That's an accusation—

[Anthony Housefather, Liberal, Mount Royal, QC]

Mr. Williams, I appreciate that and I heard that, and I'm sure the chairman will give you time to respond, but I have only five minutes and I don't want him to take it out of my time. If the chairman allows you to respond now without taking it out of my time, that's up to the chairman.

Mr. Chairman?

[The Chair, Conservative, Robert Gordon Kitchen]

I'm sorry, but can you—