Government Operations Committee on May 3rd, 2022

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

Good afternoon, everybody. I call the meeting to order.

Welcome to meeting number 17 of the House of Commons Standing Committee on Government Operations and Estimates. Today we will be continuing our study on the national shipbuilding strategy. We will also discuss committee business during the last 60 minutes of the meeting.

Today's meeting is taking place, as you know, in a hybrid format, pursuant to the 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 our best to maintain a consolidated order of speaking for all members, whether they're participating virtually or in person.

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

Given the ongoing pandemic situation and in light of the recommendations from public health authorities, as well as the directive of the Board of Internal Economy on October 19, 2021, to remain healthy and safe, the following is recommended for all those attending the meeting in person.

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.

Everyone present must maintain proper hand hygiene by using the hand sanitizer that you may have seen at the entrance when you came in. Committee rooms are cleaned before and after each meeting. We thank the staff for doing that. To maintain this, everyone is encouraged to clean the surfaces such as the desk, the chair and the 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. I thank members in advance for their co-operation.

With that, I would like to welcome our witnesses. We're going to hear from Mr. Fulfaro and Mr. Padulo.

Greetings and welcome to Mr. Fulfaro, who is with us from Italy.

Mr. Fulfaro, I invite you to go ahead with your opening statements, please.

[Achille Fulfaro, Senior Vice-President, Sales, Fincantieri]

Thank you.

I'm Mr. Fulfaro. I'm really happy and it's a honour. It is my pleasure to be with you today representing Fincantieri.

Fincantieri is one of the most important shipyard groups in the world. We are really honoured to be here today to discuss our capabilities with you. We are also open and ready to answer any type of questions you may have regarding the future programs.

If you agree, we can have a brief overview of our company or we can open the discussion directly through your questions. It's up to you.

[The Chair, Conservative, Robert Gordon Kitchen]

Thank you, Mr. Fulfaro.

If you have a two- or three-minute presentation that you'd like to make to the committee, that would be appreciated. Obviously, with time restraints, getting to those questions would be helpful, but if you have a quick presentation, that would be appreciated.

[Achille Fulfaro]

Sure. It's my pleasure and honour to introduce Fincantieri.

Fincantieri is one of the most important shipyard groups in the world, with the background of over 250 years of history and more than 7,000 ships built. We are not only involved in the military field, but also in cruises, offshore and new technologies. We also have important structures and capabilities going over the shipyard group including infrastructure, cybersecurity capabilities, new technology and also advancing the capability for service and service support.

We have about 20,000 employees and we create around 90,000 [Technical difficulty—Editor] all over the world. Our capabilities not only relate to Italy, but as you know, we have spread to four different continents, activating different important international programs.

In the Fincantieri portfolio, we have each type of travel vessel, including submarines, cruise, offshore and even mega-yachts, so we can have a cross-fertilization from different fields and different ages of technology in order to act as a global player.

We're also active in Canada in different important activities with important subsidiaries. We're aiming to act as an important strategic partner for this country.

For these reasons, Fincantieri is really interested in discussing the future programs of the combatant ships, starting from what we proposed in the past, which are the FREMM multi-mission frigates.

We are also able to discuss with you the different concerns, questions or points that you may raise in order to clarify exactly what our proposal could be and what our understanding is in order to have a strategic approach with Canada.

[The Chair, Conservative, Robert Gordon Kitchen]

Thank you, Mr. Fulfaro. I appreciate that.

Just so you are aware, we did receive your brief that you presented to us, and that has being distributed to the committee members, so they do have that in advance. Thank you.

We'll go to Mr. Padulo. Greetings, and thank you.

You have a couple of minutes, please.

[Shaun Padulo, President, Heddle Shipyards]

Thank you very much.

Bonjour and good afternoon, everybody. I would like to begin by thanking the chairman and members of the committee for allowing me to speak here today.

My name is Shaun Padulo, and I'm the president of Heddle Shipyards, which is the largest Canadian ship repair and construction company on the Great Lakes. I'm proud to say that we are 100% Canadian-owned.

The company was founded in 1987, and today, we own and operate three of the largest shipyard facilities in Canada and fluctuate between 150 and 400 people, which is due to the seasonal boom-and-bust cycles. Since 2012, we have performed over 70 projects for the Canadian Coast Guard, totalling over $80 million, and we are currently on schedule to complete the CCGS Amundsen vessel life extension project at our shipyard in Port Weller. If we stay on course, it will be the first vessel life extension, VLE, in the history of the Canadian Coast Guard that has been completed on time.

Given the delays in building new ships, the VLE program is incredibly important, because it will ensure that the coast guard's current fleet remains operational. As a result, the government has allocated $2.1 billion for the upcoming VLE II program.

In terms of our business activities, we offer a full gamut of vessel life-cycle services, which include construction, repair and maintenance overhauls, and recycling.

Despite our success we are still hampered by the inconsistency of work, and the boom-and-bust cycles that inconsistency creates. The worst part of my job is overseeing layoffs on a seasonal basis because of what it means for my people, their families and retaining hard-won skills, experience and knowledge.

We are here today to discuss the national shipbuilding strategy, NSS. For me and all of my people, the NSS represents hope. It is potentially the solution to the boom-and-bust cycles that have crippled shipyards in Ontario for generations. At its core, the NSS is an important industrial and defence policy that can unite Canada and Canadians, while bringing a vitally important capability back to our country. There have been challenges, to be sure, but the challenges were inevitable in order to accomplish the enormous task of rebuilding the industry.

I'm incredibly proud of the large ships that are being delivered on the east coast by Irving, the west coast by Seaspan and in Quebec by Davie. It is important that all three regions are active in the NSS, because our country needs the capacity and more. The motto of Canada is A Mari Usque Ad Mare—“From Sea to Sea”. Canada is a maritime nation whether we like it or not, and we can't ignore that fact. Given current geopolitical events around the world, the NSS is more important than ever.

I've heard previous witnesses talk about the geostrategic importance of the NSS in terms of defence and sovereignty, but I would also like to raise awareness of its importance for economic security. The merchant fleet operating on the St. Lawrence Seaway moved 231 million tonnes of cargo in 2018—that's over $100 billion in value. Prior to Heddle reopening the Thunder Bay shipyard and Port Weller dry docks in 2016 and 2017 respectively, many of those merchant ships were dry docking in the United States. Those ships are now being repaired and maintained in Canada at our shipyards. The government work made available through the NSS is contributing to the revitalization of our shipyards and is therefore important to the commercial sector, which is vitally important to our nation's economy.

Ultimately, the NSS is a bipartisan issue developed and altered by both Conservative and Liberal governments, and it should be recognized for its significance as one of the most important industrial, defence and economic policies in the history of our country.

Although there have been many successes in the NSS, especially recently, there is room for improvement. I've heard repeatedly in previous committee meetings that there is not enough capacity in Canada to deliver ships on time and on budget, and that delays are the main driver of the cost overruns.

Ontario shipyards have the largest untapped capacity in Canada. Heddle's six dry docks constitute over 30% of the dry dock capacity in Canada, yet in 2020 and 2021, our average dry dock utilization was less than 40%. At peak employment, our facilities had 4,200 people, and today we have fewer than 200. Ontario has the largest manufacturing capacity in Canada, and we have two shipyards based in the industrial core of the province. We are currently building a ferry for the Ministry of Transportation Ontario, and the methodology we have adopted relies heavily on our southern Ontario supply chain, as well as suppliers all across Canada.

Heddle and Ontario are here to support our country. We have a solution for this committee to consider, but most importantly, though, our message to the committee is that Ontario should be included in the NSS in a meaningful way.

Much of the national shipbuilding strategy's benefits to Ontario have actually sailed through corporate boardrooms to real jobs in other jurisdictions. Our solution is to have Heddle Shipyards become a strategic partner for Canada to execute the VLE II program and construct vessels of less than 1,000 gross registered tonnes.

By partnering with Heddle, Canada will bring Ontario's industrial complex and manufacturing capacity to bear on the NSS. The partnership will provide a continuity of work for Heddle and Ontario, which will eliminate the boom-and-bust cycles and allow Heddle to continue to be a supplier that Canada can have to deliver projects on time and on budget.

In closing, I would like to thank the committee for allowing me to speak here today. It's been an honour and a privilege.

Thank you.

[The Chair, Conservative, Robert Gordon Kitchen]

Thank you, both of you, for your presentations.

With that, we will now go into questions. You can appreciate that we are within a time frame. We will try to stay as strict as we can on that.

We're going to start with Mr. Paul-Hus for six minutes.

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

Thank you, Mr. Chair.

Good afternoon, gentlemen. Thank you for being with us today.

My first question is for Mr. Fulfaro.

You made an offer to the government to build 15 European multi-mission frigates, or FREMMs, at a fixed cost of $30 billion. You stated that there would be 15 frigates for $30 billion and that there would be no cost overruns. These frigates would have been built by Irving.

Can you explain how you can tell a government that there will be no cost increase when all the other contracts are still ballooning?

[Achille Fulfaro]

The point is that we feel also through our international experience that what we are doing in the different important programs is that we are aiding all over the world—in Italy, but also in the U.S., Indonesia, Egypt and other important countries in which we are offering a multi-mission frigate, the FREMM—in that experience you are gaining through either the transfer of technology or through the capability to be acting as a global player from the initial profile analysis up to the end of life. It is to manage the program, starting as a prime contractor and acting from the beginning in trying to clarify all the points and the terms and conditions, including the price.

When we originally presented the proposal in the international market for a program like FREMM, we were considering these very complex ships where we need just to assist the user, then use the requirements analysis up through the different processes of this program. It is very important to fix from the beginning, in a clear way, all the terms and conditions.

One of the key points that we consider a basic point is having a fixed price. A fixed price is a sort of a clarification in the matter. It is a way through which we can define the scope of work in a clear way from the beginning. We can define the time plan from the beginning. We can define the quality of the product from the beginning in order to just have a fixed way to fix a price. This is the best practice in order to act in the proper way. This does not mean that we are not flexible enough in order to modify, to have amendments or to change the prices during the course of the program, but a fixed price is one of the key issues in order to maintain the optimal solution in the best way.

Considering the way we are proposing regarding the fixed price for the FREMM, let me say that we are confident about this. We are talking about a product that is a well-proven product. We are talking about a product that is under our complete control in acting generally as the prime contractor in the different international programs so we can manage everything in the proper way in order to reduce and optimize the price—

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

Thank you. I have to interrupt you as we have very limited time.

I fully understand what you are telling me. Given that your proposal was very interesting to the government from a financial point of view, can you tell us why it was refused?

I don't think it was because of the price. Were there any other grounds for refusal?

[Achille Fulfaro]

We cannot say what was refused.

There was a tender. You know the story. We were out of the tender because in the terms and conditions of the tender the scope of work was unclear. There were many points that were not fixed in the right way, so we proposed, with our solicitor, the way that we considered was the best way in order to reduce the risks to the program in managing quality and, in time, the ship. We proposed also a fixed price.

We also were very clear regarding the capability of Fincantieri to make a transfer of technology and also to have a completely local supply chain, because in that Fincantieri proposal we were also very clear on the details regarding all the suppliers, but it was not refused—it was not considered. That is different, from our point of view. The reason why it was not considered cannot be addressed by Fincantieri. You will have to ask in another way.

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

In October 2016, you warned the minister at the time, Minister Foote, that procurement for the surface combatant frigates was problematic.

Is it correct that you provided Minister Foote with a detailed outline of why the procurement process was in trouble?

[Achille Fulfaro]

That's correct. We wrote a letter saying in detail the reason why we felt it was not the proper way. If you go through that letter, you see today that we were right. We say there is a high risk when you consider—not in a proper way—the scope of work between the bidder and the selected shipyard. We saw through our experience the reality, because, of course, this was really a big problem. The first aspect of a very complex international program is to fix the role, the responsibilities and the scope of work.

First of all, you need just to define in a clear way all your end-user requirements. This is very important. In the letter we wrote clearly about our concern regarding the program. We wrote of the high level of risk in the scope of work. We wrote of the problem regarding the IP, the intellectual property, and the management of this important issue in the different phases of the program. The different phases of the program, and the responsibility inside each of these phases, was very unclear. We were also very clear regarding the opportunity to have a fixed price, instead of running the risk to discuss and discuss, with the result that we would have a higher price year by year. So whatever we proposed was clearly what we saw in the following years.

[The Chair, Conservative, Robert Gordon Kitchen]

Thank you, Mr. Fulfaro.

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

Mr. Chair, I would like the witness to send us this letter.

[The Chair, Conservative, Robert Gordon Kitchen]

Mr. Fulfaro, if it's possible, can you submit that letter to the committee? If you would send that to the clerk, that would be appreciated, and he will distribute it. If that's available.

Thank you.

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

[Majid Jowhari, Liberal, Richmond Hill, ON]

Thank you, Mr. Chair.

I'd like to thank all the witnesses.

I'll be splitting my time with MP Thompson. My only question is going to Mr. Fulfaro.

You indicated there was a fixed-cost proposal submitted for 15 off-the-shelf frigates based on the FREMM design. You indicated you submitted that as an unsolicited bid. We also know it was rejected due to the misalignment with the official Canadian procurement process.

As you know, PSPC highly values its rigorous procurement process. Can you comment on why you felt the procurement process did not need to be followed and you submitted an unsolicited proposal?

[Achille Fulfaro]

As I said before, we wrote a letter regarding this. In this letter we wrote about the main issues and the areas that were unclear regarding this first level of bid, considering our experience in the international market and our experience in negotiating a very complex program with different end users.

We wrote in this letter that there was an unclear process for the transfer of technology in the different phases. For us, as you know, the transfer of technology is one of the key issues in order to allow the local capabilities and manage such a complex program, and this was unclear in the terms and conditions. There was a problem related to the risk in the share of work, because the role of the bidders was not clear. Considering the leading role of the shipyard, it was rather an important point. The other important point was related to the fact that the management of the IP was not clear.

We are not against, in principle, all of these issues, but we were in an unclear position about the risk for this program, and not only for Fincantieri. In the letter we wrote, “In our opinion, the contract structure proposed in the bidders' prime contractorship and in the RFP, request for proposal, does not serve well any of the parties, the prime contractor, the bidders, the Canadian authorities”. We exposed the details—

[Majid Jowhari, Liberal, Richmond Hill, ON]

Thank you. Let me a get a clarifying statement in less than 10 seconds.

You highlight a number of issues, project management, scope and IP, yet you submitted a fixed price for an off-the-shelf for $30 billion.

I have a problem reconciling this. I come from management consulting. I've done a lot of fixed bidding for solutions. If the scope is not clear on all of those things, I won't submit a fixed bid.

Why did you submit a fixed bid?

[Achille Fulfaro]

The fixed price we submitted was not $30 billion. I don't know the data you are using. This was not our proposal.

In the market capability of Fincantieri, we never proposed in international markets a frame for frigates for $2 billion, $3 billion, $4 billion or $5 billion per ship. I don't know how you can say that we proposed an unsolicited $30-billion proposal. This is not our market value. I repeat again, the value in the market of the frame is not $2 billion, $3 billion, $4 billion or $5 billion, as I heard time to time. This is not a market where you—

[Majid Jowhari, Liberal, Richmond Hill, ON]

Thank you.

I yield the rest of my time to Ms. Thompson.

[Joanne Thompson, Liberal, St. John's East, NL]

Thank you, Mr. Chair.

Mr. Padulo, Seaspan and Heddle Shipyards signed an agreement that the latter would construct modules for the polar icebreaker. The project is currently in the design phase, I believe.

When do you expect to begin construction on the polar icebreaker component in your facility?

[Shaun Padulo]

At the moment, I would say it's too soon to tell. As you mentioned, it's still in the design phase. We've had multiple meetings with Seaspan and are currently in discussions with them about when that will kick off. I think, unfortunately, right now there is still a lot of design work to be done.

[Joanne Thompson, Liberal, St. John's East, NL]

What are the benefits for Seaspan, in your opinion, of assigning the construction of this project to another shipyard?

[Shaun Padulo]

I think the collaboration that we were looking at would be beneficial to them from a capacity standpoint. The idea would be that we build smaller modules that can be sent to them by rail or by truck. It would help them, given some of the other programs that they have ongoing right now. It could help them accelerate capacity on the polar icebreaker.