Government Operations Committee on March 29th, 2022

[The Chair, Conservative, Robert Gordon Kitchen]

Thank you, Mr. Williams.

With that, we have come to the end of our questions on air defence procurement.

The doctor in me says that everybody should just sit back for a second and do a quick stretch. We don't have to bring in any witnesses, so we're all set. We will have the same witnesses we have right now.

We will now go to the study of the national shipbuilding strategy.

Just so that our witnesses are aware, the opening statements you provided to us have been distributed to our members, so they do have them, although we have agreed to allow you up to three minutes if you feel you need to just quickly touch on those. We'll stick with the three minutes so we can abide by the times.

With that said, I will start again with Mr. Leuprecht. You have three minutes.

[Dr. Christian Leuprecht]

Thanks for the opportunity again.

The NSS is emblematic of the extent to which defence procurement is highly politicized, especially by opposition parties looking to score points, and of how politicians prioritize spreading largesse to industry in targeted ridings over effective and efficient procurement.

Challenges that plague air defence procurement and the NSS are mere symptoms of a system that has to contend with vexing problems that are not of its making. Central agencies and Parliament have imposed procedures and controls that make it increasingly impossible for DND and the Canadian Armed Forces to deliver on the operational effects that governments and taxpayers are looking for.

As long as opposition parliamentarians look to score political points by going after the Clerk of the Privy Council and others over jet fighters and shipbuilding, central agencies are going to exercise enhanced due diligence, which ensures that the pace of progress will be glacial and costs will escalate accordingly. As a result, procurement projects either end up in a death spiral or result in the military getting much less for the money spent than government could have gotten had projects stayed on track.

The AOPs are a good example. Take the F-35s and compare the estimated costs of the purchase that was announced with the original costing over a decade ago.

A partial solution would be to make major votes on defence policy and expenditures all-party votes, as is done in Australia. Endorsement by all removes some of the incentive to politicize defence procurement.

Similarly, is the aim to enable the Canadian Armed Forces to acquire the required kit in the most efficient manner possible, or to spread political largesse across the country? If the objective is the latter, then it is disingenuous for parliamentarians to promise the military that it will get the kit that it needs on time and on budget. Both jet fighters and shipbuilding are caught up in this. The problem is not the military improperly defining the requirements, but government trying to maximize return for industry in specific ridings.

[The Chair, Conservative, Robert Gordon Kitchen]

Thank you, Mr. Leuprecht.

We'll go to Mr. Perry for three minutes.

[David Perry]

Thank you, Mr. Chair and members of the committee, for the invitation to keep talking to you, now about shipbuilding.

I'll start off by saying that the three concerns I outlined earlier about air defence procurements apply to shipbuilding as well: insufficient prioritization, and both capacity and scheduling issues.

With the first, broadly speaking, the national shipbuilding strategy had two objectives: rebuilding the domestic marine industry and building actual ships. To date, the first component of that equation seems to have received much more consistent government attention than the latter. If we want to see our ships built faster, their delivery needs to be prioritized more than it has been.

Beyond this, the same general staffing shortfalls that are impacting other procurement projects are also hampering shipbuilding, but so, too, are two unique capacity issues. The availability of skilled labour in the marine sector, especially at a time when many of Canada's allies are undertaking comparable projects of their own, is an issue that needs to be rectified to ensure the success of Canada's fleet renewal. At the same time, in the Government of Canada, the lack of specific subject matter expertise on shipbuilding continues to be a limiting factor. If we want our shipbuilding efforts to succeed, we need to start thinking about a national marine sector human resources strategy to address this collective problem.

Lastly, all NSS projects have experienced scheduling difficulties, with most projects having failed to meet more than one major schedule milestone. The repeated inability to meet those project timelines suggests that we have a systemic problem that needs to be fixed with shipbuilding specifically.

Beyond those general issues, shipbuilding projects would further benefit from two additional changes to the way they are being managed. First, we continue to manage the national shipbuilding strategy and the projects in it as a series of individual navy and Coast Guard projects rather than as an interdependent program of work. As all of those projects have to move through physical construction at each yard more or less sequentially, decisions on one project inevitably impact others. Similarly, making purchase and design decisions on a project-by-project basis, or worse, ship-by-ship basis, is precluding Canada from achieving commonality across its fleet or any cost efficiency we might gain by making bulk orders for systems and equipment. Canada would be better served by managing these projects as a collective program of work, from the cabinet level down into the bureaucracy.

Second, to return to the issue of prioritizing the actual delivery of ships, the governance of the national shipbuilding strategy and our individual projects should be re-evaluated. Given the significant cost escalation that occurs with shipbuilding projects, the enormous amount of money committed to our fleets, and their importance to the navy and the Coast Guard, we need a governance structure in place to ensure timely decision-making that can enable expeditious capability delivery.

The current complicated web of multiple Canadian government departments and industry stakeholders—and, in the case of the Canadian surface combatant, the American government, through its foreign military sales—could be better structured. It does not appear that the current arrangements bring these stakeholders together often enough, at the right levels of seniority, to ensure that the many tough decisions required to build new ships are made fast enough or with sufficient consideration being given to the impacts on the entire program of work.

[The Chair, Conservative, Robert Gordon Kitchen]

Thank you, Mr. Perry.

We'll go to Mr. Williams, for three minutes, please.

[Alan Williams]

Thanks. I'm glad you've read the comments, because that will save me a lot of time and, frankly, heartache.

This program is going to cost a quarter of a trillion dollars. People should realize that it is financially incapable of being done the way we're doing it. Just about every tenet of proper procurement has been squandered, neglected and not followed, and the weight has gone up by 44%.

The statement of requirements, rather than being finalized within the department, was left to industry to decide what they wanted to do. The government abdicated its accountability to the private sector—that ISI, Irving Shipbuilding Inc., make all the decisions. What else can we expect when the prices continue to escalate when we don't have oversight? This isn't complicated. When you abandon basic principles of accountability and transparency, you get the kind of disaster we're in.

No one seems to be reacting to the full life-cycle cost. We have about $240 billion, over 30 years, to buy and maintain stuff. This one project is larger than all of what is needed for the army, navy and air force. People should be absolutely up in arms about this, but people are still talking about whether it's $60 billion or $56 billion or $77 billion, without understanding that it represents only 30% of the costs.

I have explained this. There is no way, in my mind, that this will ever be done. Someone is going to wake up and understand that it can't be done.

What I have recommended, notwithstanding the huge overspending in costs, is to do three this way, and then do the right process the right way, including competing a shipyard, for the other 12. Your costs will be cut between one half and one third of the current costs, and there's ample evidence to support that.

[The Chair, Conservative, Robert Gordon Kitchen]

Thank you, Mr. Williams.

Now we’ll go to questions, and we’ll start with Mr. Paul-Hus for six minutes.

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

Thank you, Mr. Chair.

Regardless of our political party, I think all of us here have the same interest, which is to improve things. With the war in Ukraine and NATO's demands, the message is pretty clear. Although we had already planned these meetings before all that happened, it has now become clear that we must be much more efficient.

Mr. Williams, I will come back to the creation of a department dedicated to military procurement. Mr. Leuprecht, you also mentioned this in your notes.

In 2019, the mandate letter for the Minister of National Defence—at the time, Mr. Sajjan—clearly stated that he should work with the Minister of Public Services and Procurement to create a department called Defence Procurement Canada. In 2021, that disappeared from mandate letters.

Why did the government change its mind? We felt that this was a very good idea. It is also in line with what you said.

[Dr. Christian Leuprecht]

There is a pretty clear answer: it is a matter of political ideology. In other words, the more complicated government procedures, bureaucracy and accountability become, the more difficult it will be to buy anything or to complete projects that are underway.

I think there is a lack of will in Canada to spend money on defence or on major replenishment projects for the Canadian Armed Forces. That approach worked for some 20 years, when there weren't really any demands. We could rely on spending done in the 1990s and prior. Now we have nothing, so it is increasingly difficult to meet the needs related to the deployment of Canadian Armed Forces.

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

Your statement that the problem is ideological in nature is pretty loaded. In addition, the idea came from the government in power, which dropped it two years later.

Although I would like the issue to be resolved, I have no choice but to do politics, as we are also here for that.

It is clear to you that, up until a month ago, before the war in Ukraine, the Liberal government had no intention to invest in defence, and that is why everything has been dragged out. It is pretty serious.

We also talked about cost overruns. At the time, when the Conservative government implemented the naval strategy, it did so to greatly improve efficiency. It adopted that strategy to enable shipyards to build equipment, plan and get budgets, so that progress would be made.

We could say there is now a perverse effect to all that. Mr. Williams talked about it. There are cost overruns, and there seems to be no control over those overruns. For instance, the first five Arctic and offshore patrol ships, the famous AOPSs, cost $400 million each. The government ordered a sixth one, which cost $800 million. There were costs associated with that additional $400 million, but we don't know what they were. The total came up to $2.8 billion. Yet we recently learned that the cost at that shipyard has come up to $4.3 billion. The only answer we are being given is that COVID-19 is to blame.

Mr. Leuprecht, is this not an example of abuse?

[Dr. Christian Leuprecht]

One of the issues in defence procurement has to do with the fact that, the longer projects take, the more costs escalate. In public sector procurement projects, costs increase by 6% per year, but in defence procurement, the increase is about 12%. The longer it takes for a project to be completed, the costlier it becomes.

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

I was in Halifax, where the metal for the first AOPS was cut; I think it was in 2018. If we know that we have five ships to build and that a sixth will be added, we can know how much time it will take. The first is the most complicated to build, but the process becomes easier for the others.

How can we explain that a ship's building cost is increasing exponentially when a first ship has already been built?

[Dr. Christian Leuprecht]

Maybe I'll defer to Mr. Williams. I'm sure he has some insights to offer on this.

I have my own views, but I've said enough on this.

[Alan Williams]

Obviously, I am speaking as someone with experience in procurement and in your bureaucracy.

My contention is that this program in particular suffered extraordinary incompetence. People devised the process as if they knew nothing about how procurement should work. This has nothing to do with politics. This is bureaucrats devising processes that are unworkable.

This process started in 2012. This is now another decade. People don't understand. The SOIQ—the solicitation of interest and qualifications—came out in 2012. The Americans are building a set of frigates. It took them three years to do the front-end stuff and make their decision, and another five or six years until they get their first one, at a third of the cost. Now, it may not turn out to be exactly a third of the cost, but—

[The Chair, Conservative, Robert Gordon Kitchen]

Thank you, Mr. Williams.

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

[Parm Bains, Liberal, Steveston—Richmond East, BC]

Thank you, Mr. Chair, and thank you to our witnesses who are joining us here today.

My first question is for Mr. Leuprecht.

Two joint support ships have been commissioned as part of the national shipbuilding strategy, which are to be built by Seaspan's Vancouver shipyards.

You talked about the various regions that have been chosen to build these ships. This is important for me. My questions are coming from Richmond, British Columbia. It's an important industry for our marine sector sector here in British Columbia. I'm curious about your thoughts on the capability and shipbuilding abilities of Seaspan's Vancouver shipyards. I believe them to be among the best in the world.

What are your thoughts on that?

[Dr. Christian Leuprecht]

There are some elements that we knew the shipyard wouldn't be able to deliver, which National Defence now has to build at Esquimalt in order to deliver on some of these components.

I don't want to comment on who is qualified or not, but there are always political trade-offs in the decisions that governments make when they award procurement contracts.

We live in a particularly large country and we don't procure a lot of these things. When we procure them, we then customize them. We do a series of customizations for the Canadian surface combatant. I think many of these are prudent customizations for the particular needs that Canada has.

That's why I find Mr. Williams' comparison a little bit unfair, because the scale on which, for instance, the Americans build their ships or the way, for instance, the French do naval procurement is somewhat different from the way Canada does it. We need to make sure that in the end, this is equipment that will actually serve Canadian interests and the needs of the Royal Canadian Navy. That will always require some bespoke modifications, as we are seeing with the Canadian surface combatant, for instance.

[Parm Bains, Liberal, Steveston—Richmond East, BC]

What are your thoughts on how much the pandemic affected the construction of these ships?

[Dr. Christian Leuprecht]

I cannot judge to what extent individual companies were affected, but when we talk about defence procurement, we potentially have to be able to do it under very challenging circumstances. Imagine if we had to do this in a situation where Canada was at war or in an adversarial conflict with another country.

We can see that now, when our allies are coming to us and asking what we are going to contribute, not only are our cupboards bare, but we have processes that cause the Department of Commerce in the United States to deem Canada among the most difficult and convoluted places in the world to do defence procurement. I think that is a badge of honour we do not want to be wearing. It means that federal governments are not in a position....

A fundamental function of any government is to defend the country, defend the continent, and defend our allies. Our procurement system is not able to deliver on those fundamental basic obligations that a government has for its citizens.

[Parm Bains, Liberal, Steveston—Richmond East, BC]

Moving forward, we were expecting the first ship to be delivered in 2023. Let's say that we have the delivery of these ships. How do you think they'll contribute to the capability of the navy and the Coast Guard?

[Dr. Christian Leuprecht]

Mr. Bains, you're asking an extremely important question, because I actually think the greatest challenge, regardless of what my colleagues have said, is not the actual equipment; it is the people.

The greatest shortfalls currently that the Canadian Armed Forces have are with regard to specific trades related to the Canadian navy. We can buy all the planes and ships we want. Regardless of what the cost overruns are, if we can't provide the bespoke people for trades and occupations, if we can't provide the pilots, it doesn't matter what plane in the world.... We've put a lot of emphasis on procurement, but there are significant challenges, and I'm testifying next week before the national defence committee on the recruitment and retention side.

The armed forces have to do three things. They have to be able to regenerate. They have to be able to maintain and sustain themselves, and they have to be able to operate. We have, for years, put so much emphasis on operations that we haven't been able to regenerate and maintain the force, so now we are having significant challenges on the regeneration side. It is going to compromise the ability of the Canadian Armed Forces to maintain and definitely to operate if we can't fix those regeneration issues.

I think there needs to be a much more concerted emphasis on making sure the organization can actually regenerate itself in light of the significant challenges that it faces on regeneration.

[Parm Bains, Liberal, Steveston—Richmond East, BC]

Thank you for that.

Do I have any more time?

[The Chair, Conservative, Robert Gordon Kitchen]

You have 40 seconds.

[Parm Bains, Liberal, Steveston—Richmond East, BC]

Moving forward from that question, whatever systems are going to be implemented in these ships, how compatible are they with our allies and their systems?

[Dr. Christian Leuprecht]

Interoperability is absolutely critical because, when it comes to international, multinational operations, Canada rarely does things on its own. We always go places with allies, but our needs are also somewhat different from those of our allies.

For instance, French frigates are not designed to be able to stay at sea for six months at a time. Given where we are located geostrategically, we need to make sure that the equipment we have can deliver on the specific Canadian needs that we have, which are somewhat different from those of several of our allies.

Yes to interoperability, but we also need to focus on the particular Canadian contribution and how we have used national defence, I think, in a very politically savvy way over decades as a force maximizer for Canadian foreign policy. We need to understand that when we talk about national defence, when we talk about the Canadian Armed Forces, we are talking about an instrument of foreign policy and argument, the single most important instrument of foreign policy that a federal government has at its disposal.