Government Operations Committee on May 10th, 2022

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

I call the meeting to order.

Thank you to everybody for bearing with us while we had the votes, and to the witnesses for staying with us, which is much appreciated.

Welcome to meeting number 19 of the House of Commons Standing Committee on Government Operations and Estimates.

Today the committee will be continuing its study on defence procurement projects and its study of the national shipbuilding strategy. The committee will be considering each study separately. The study of the national shipbuilding strategy will be discussed during the first hour, and the study of air defence procurement projects will be discussed during the second hour.

Those witnesses discussing the national shipbuilding strategy will make an opening statement of five minutes maximum at the start of the first hour. After that, the rest of the hour will be taken up with questions from the members.

Those witnesses appearing as part of air defence procurement projects study will have an opening statement of five minutes maximum at the start of the second hour. After that, the rest of the hour will be taken up with questions from the members.

The committee has the expectation that all witnesses will be open about any potential conflict of interest they may have. This is to ensure that the committee can fully understand the context of the testimony it is about to receive. If you feel your testimony may be coloured by a previous or current interest, I invite the witnesses to disclose this during their opening statements.

Today’s meeting is taking place in a hybrid format, pursuant to the House order of November 25, 2021. Members are attending in person in the room or remotely by 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 participating virtually or in person.

I would like to take this opportunity to remind all participants in this meeting that neither screenshots nor taking photos of your screen is 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 to all those attending the meeting in person:

Anyone with symptoms should participate by Zoom and not attend the meeting. 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 at the room entrance. Committee rooms are cleaned before and after each meeting. However, to maintain this, everyone is encouraged to clean surfaces, such as their desks, their chairs and their microphones, with the provided disinfectant wipes when vacating or taking a seat.

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

I would like to welcome the witnesses and invite them to make their first opening statements.

We’ll start with the Canadian Association of Defence and Security Industries and then hear from Irving Shipbuilding.

[Christyn Cianfarani, President and Chief Executive Officer, Canadian Association of Defence and Security Industries]

Good afternoon.

Thank you for having me. In my opening remarks, I would like to give you a Canadian defence industry perspective on the national shipbuilding strategy, or NSS.

When the government unveiled the NSS over a decade ago, the core principle was that the recapitalization of the Royal Canadian Navy and the Canadian Coast Guard would be carried out in Canada. The objectives behind the principle are twofold.

One is to bring predictability to federal vessel procurement, and the other is to end the boom-and-bust cycles that have characterized Canadian shipbuilding in the past. Together, the result should be a sustainable, long-term shipbuilding plan that benefits the Royal Canadian Navy and Coast Guard, the Canadian marine industry and the Canadian economy.

CADSI, the Canadian Association of Defence and Security Industries, and I, as its CEO and president, fully support the basic principles and objectives of the NSS, and we have done so since its inception.

Canada is a maritime nation with the largest coastline in the world, at over 243,000 kilometres, including mainland coasts and offshore islands. That is six times Russia’s coastline, 12 times the United States' coastline and 16 times the coastline of China. It's therefore a matter of common sense from a national security perspective that Canada needs a sustainable domestic naval and coast guard shipbuilding industry.

The economics of shipbuilding in Canada are also sound. Innovation, Science and Economic Development Canada has an economic model for the marine industry based on established Statistics Canada input-output multipliers. On average, $1 million of signed NSS contracts contributes $1.3 million to the GDP and 12 jobs to the Canadian economy.

In the most recent Statistics Canada-ISED survey of the state of Canada’s defence industry, we see meaningful growth in the defence industry in 2020, during the pandemic, a good portion of which is attributable to the NSS work really starting to take off.

There are those who say that Canada shouldn't be in the naval shipbuilding industry and that we should buy our vessels offshore and off the shelf. There is no such thing as “off the shelf” in this business. Canada will be buying tailor-made ships, as we have done in the past and as other countries do. Moreover, Canada has a long history in naval shipbuilding. The last two major Canadian naval vessel procurements, the Iroquois-class destroyer program of the 1960s and early 1970s and the Halifax-class frigate program of the 1980s and early 1990s, were carried out in this country at Canadian shipyards and by the Canadian marine industry.

Then as now, there were controversies over these programs, particularly with the Halifax-class frigate with respect to cost, schedule, and the ability of Canadian industry to deliver, yet Canadian industry delivered an impressive capability with the Halifax class that has served Canada and the Royal Canadian Navy for 30 years and has led to significant exports of high-value systems and technologies developed in Canada.

The focus on the costs of the NSS project to date has tended to be on the visible part of the ships, namely the hull. While this is obviously important, hull construction typically accounts for only 35% of the cost of a warship. Half of the value is in the platform and mission systems, and roughly another 15% is in the design and systems integration. These jobs pay, on average, 60% more than the average manufacturing wage. These are the jobs that employ high-wage engineers, technicians, and technologists. They make up 30% of the defence industry’s workforce.

According to studies on the Canadian marine industrial base carried out by ISED and Statistics Canada, Canada has significant capability in the areas of shipbuilding, such as naval ship-borne mission systems and components, maintenance, repair and overhaul, and simulation. Our strength in these capabilities is in part a legacy of previous naval vessel construction in this country. Foreign military buyers are less likely to purchase from Canada when our own government does not buy from our own industry. Decreasing domestic buying opportunities decreases our export potential.

We should not lose sight of the possibilities to drive innovation, high-wage employment and exports in the less visible parts of naval recapitalization. The initial acquisition phase of a contract is a small proportion of the costs in the life cycle of a platform, which include mid-life upgrades, technology insertions and long-term supportability. It's in these areas that Canadian industry can achieve the greatest return on investment.

Cost and changing cost estimates are an ongoing issue that have been documented with NSS projects in various studies and reports over the years. This is to be expected in a strategy of this scale, complexity, and duration. The government needs to be a bit more flexible to adjust cost estimates over time as assumptions alter due to changing circumstances. Neither industry nor government has much, if any, control over the price of steel, foreign exchange rates, other input costs or technological advancements.

Two years ago, no one would have predicted that a pandemic-induced global supply shock and a war in Europe would drive inflation in Canada above 6%, its highest level by far in 30 years; and in some of the commodities and technologies used in advanced shipbuilding, inflation is now many times higher than the CPI. It is uncertainties like these that require governments to have built-in flexibilities for a project whose duration is measured in decades.

It is also incumbent on the media, academics, other experts and parliamentarians who comment on these programs to educate Canadians about these uncertainties rather than offering knee-jerk criticisms of the strategy. To abandon the NSS after a decade in would be, in my view, reckless on economic and national security grounds.

In conclusion, as a country with three coastlines, a significant continental shelf, plus new challenges to its sovereignty in the Arctic, having a first-rate navy and coast guard, along with a sustainable domestic naval shipbuilding industry, should be considered a basic requirement of our sovereignty that is not up for debate. It is the price of admission for a G7 economy and NATO membership. The NSS, while far from perfect, provides a road map to that end state.

Thank you.

[The Chair, Conservative, Robert Gordon Kitchen]

Thank you, Ms. Cianfarani. I hope I pronounced that properly.

[Christyn Cianfarani]

Yes, you did. Thank you.

[The Chair, Conservative, Robert Gordon Kitchen]

Now we'll go to either Mr. Young or Mr. Mooney for five minutes, please.

[Kevin Mooney, President, Irving Shipbuilding Inc.]

Good afternoon, Mr. Chair, and members of the committee. Thank you for the opportunity to speak to you today on behalf of our over 2,000 employees at the Halifax shipyard.

With me today is Kevin Young, senior vice-president of the Canadian surface combatant program.

I'm a shipbuilder with 35 years of experience, including 14 in the NASSCO shipyard in San Diego, where I participated in delivering 40 ships through eight different programs. My colleague, Kevin Young, has senior leadership experience in nuclear submarine construction programs at BAE in the United Kingdom. We have chosen to live here in Canada because we were drawn to the great inspiration of the national shipbuilding strategy.

I want to take this opportunity to personally invite the committee to visit the Halifax shipyard. I am confident that you will be pleased with what we are getting done for Canada.

I know I have limited time, so my remarks will briefly address three main areas: first, the economic impact of the NSS; second, the COVID impacts on the AOPS program; and third, the preparation for the construction of the CSC.

Since 2011, Irving Shipbuilding has invested over $500 million into building one of the most modern indoor shipbuilding facilities in North America. In terms of core capability, the Halifax shipyard compares quite favourably to most shipyards in North America. We have recruited and trained a world-class workforce here in Canada, and since 2012, the size of the workforce at the shipyard has more than doubled. We are now the largest employer of trade apprentices in Atlantic Canada.

Positive economic impacts are being felt across the country. According to a study conducted by PricewaterhouseCoopers, for every one dollar spent in Canada on shipbuilding, up to $1.3 is achieved in benefits to the national economy. These benefits are in addition to ships acquired through this investment. Another study by the Conference Board of Canada shows that the work at the Halifax shipyard will increase Canada's GDP by $9.8 billion from 2013 to 2024.

Although COVID undeniably is impacting our operations, our workers have maintained momentum on AOPS while also conducting critical maintenance on the Halifax-class frigates. Since the pandemic started, we delivered two AOPS, with a third coming later this summer. We are well into production on AOPS four and five as well.

HMCS Harry DeWolf was the first new ship delivered to the navy since 1999, and last summer marked the navy's first transit of the Northwest Passage since the 1950s.

Last year we completed a major ship repair project on HMCS Charlottetown, followed immediately by the dry-docking of HMCS Ville de Québec. This sustained tempo at the Halifax shipyard is critical to Canada in maintaining reaction forces able to respond to serious threats to global peace and security.

These successes did not come easily. For over two years, with the impact still ongoing, COVID caused a full shutdown of production work on three separate occasions. To date, on AOPS, we have lost over one million production hours and about 15 months of scheduled progress. Like most employers, we are suffering from the COVID-induced “great resignation”. Our trades attrition rate has nearly tripled, causing a loss of learning and leaving us with a workforce that is less experienced today than it was several years ago, but we are responding. We are actively recruiting highly skilled workers, both here in Canada and worldwide, to achieve the resource levels required for increased AOPS production, increased repair workloads and CSC.

The disruptions in our global supply chain have also been significant, with increased costs and delays in procuring raw materials, finished goods and logistics. Steel, copper and shipping costs have skyrocketed. Shipbuilders are feeling the impacts of inflation, just like everyone across Canada and the world.

Turning our eye to the future, we are ready to meet the challenges on the horizon with our full energy and lessons learned from the last few years. Through Canada's program leadership, we are closing in on an agreed technical baseline and a refined design solution for the Canadian service combatant.

In 2011, Canada was looking at a notional CSC of similar size and scale to the current Halifax-class frigates. Since that time, the actual CSC has grown in size and complexity to satisfy the navy's operational requirements. We need a ship that will protect the nation's interest and the sailors who will take it in harm's way.

We should keep in mind that shipbuilding programs, particularly the CSC program, are a truly national endeavour and bigger than any single company or government department. We encourage the government to apply a single point of accountability for the execution of shipbuilding. This role will consolidate authority and enable difficult decisions and complex trade-offs to be made more effectively.

In closing, I do hope you take me up on the offer to visit our Halifax shipyards soon, so that you can see the work under way and meet the Canadians working on this important project. There is a real sense of purpose at our shipyard. We are proud of our work in building first-class warships for Canada.

Thank you.

[The Chair, Conservative, Robert Gordon Kitchen]

Thank you, Mr. Mooney. We appreciate that.

Thank you for the offer. We are in discussion along those stages, so we will be in touch.

With that said, 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.

Good afternoon, Mr. Young and Mr. Mooney. Thank you for joining us. Welcome to the committee.

I have visited the Irving shipyard. It's a large company. I was there when its workers were starting to cut the metal that would be used to build the first Arctic and offshore patrol ship, AOPS, of that series. I was able to see how it worked.

I would like to ask a very direct question. Why does Irving have exponential shipbuilding costs, much more so than other shipyards around the world?

I understand that some problems are related to COVID-19, but the pandemic has hit every part of the world. We are not talking about a cost increase in millions of dollars, but rather in billions of dollars. So it becomes a very important question.

What is the main reason Irving's shipbuilding costs are higher then anywhere else?

[Kevin Mooney]

I would comment first of all that the complexity of shipbuilding and starting up a new industry cannot be underestimated.

We've actually been building ships now for approximately six years. We had to bring in shipbuilders from all over the world to help us get started. We see a turnover in those people. Our focus now is on building a team that is going to stand the test of time. Despite the pandemic, as I mentioned earlier, we did deliver two ships, and we have more coming. We are seeing the incremental labour hours that it takes to produce ships continue to go down.

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

I understand, Mr. Mooney, but, at the outset, five ships were ordered at the price of $400 million each. For the first ship, and maybe even for the second one, it was normal for costs to be higher because experience was still lacking, but after that, it should have been like a series. The government ordered a sixth ship, which cost $800 million. Instead of costing less, it cost twice as much.

We recently learned that the total cost has increased from $2.8 billion to $4.3 billion. So we are talking about $1.5 billion more for a series of ships that should cost less in principle, given the experience the shipyard's workers gained from one ship to the next. That's incomprehensible to us.

Is a labour problem behind that change?

[Kevin Mooney]

Regarding your specific mention of the $800 million for the sixth ship, we should keep in mind that $800 million was a true-up of the cost that was expected to complete all of the six ships. That was not $800 million for one ship.

Regarding the comment about the total cost number that you put there, that is not a number that I'm familiar with. That may be the total cost that Canada has assigned to all the various aspects of the program, but that is not a number that is familiar to me.

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

Okay.

Those are figures we received in the report that I have in my files, which confirms that the government paid $4.3 billion for the six ships. In any case, there is a difference that must be explained.

When it comes to surface combatants, we put questions to a number of people in committee. The initial cost was between $56 billion and $60 billion for the 15 ships. Canada's Parliamentary Budget Officer mentioned that it would go up to $77 billion, but no one in the government can confirm this.

Do you, at Irving, have a better idea of the total cost of those 15 ships?

[Kevin Mooney]

At Irving we are only responsible for a component of the total cost of the Canadian surface combatant program. We periodically send our projections for estimates of the cost, but these are focused primarily on the construction of the ship and some of the combat systems. They do not include, for instance, infrastructure. They do not include equipment that is being purchased through a foreign military sales program. They do not include training. There are a lot of costs that are rolled in there that don't fall under Irving's responsibility.

In terms of the cost of a 15-ship program, that is a number that is extremely hard to estimate at this point in time. Every nation would perform that calculation differently. At Irving, we really have our focus on what it's going to cost to build the first three ships, and those are the estimates that we pull together for the government on a regular basis. I think it's very difficult—

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

You said you were sending in your estimates regularly.

How often does the government receive your reports?

[Kevin Mooney]

It's quarterly.

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

Okay.

You talked about the first three ships. Last week, we met with a representative of Fincantieri, an Italian company that made an offer to the government to build 15 ships for a fixed price of $30 billion. They were saying that the first three ships would be built in Europe and sent to Irving, which would then build the other ships for a fixed price.

What do you think about that?

[Kevin Mooney]

I would need to see significantly more detail on how those numbers were arrived at. I can't comment on numbers that were generated by another company.

We should also point out that the ship that they are providing that price for is a significantly different ship from the Canadian service combatant. It does not contain nearly the capability of the CSC, nor does it contain the customization that Canada requires for its crews, its missions and all of those things as well. It would be irresponsible for me to comment on how they came to that number.

[The Chair, Conservative, Robert Gordon Kitchen]

If at any time any of the witnesses feels that there is more you would like to contribute to an answer, because of our time constraints, you're welcome to submit that in writing. If you just give that to the clerk, then we'll distribute it to our members.

With that, we'll now go to Mr. Housefather for six minutes.

[Anthony Housefather, Liberal, Mount Royal, QC]

Thank you very much, Mr. Chair, and thank you so much to the witnesses for coming today. I really appreciate your participation.

Mr. Mooney, do you agree with the comment that the costs are exponentially greater than all other shipyards across the world in terms of building these ships?

[Kevin Mooney]

No, I can't agree with that comment, because it is very difficult to compare the cost of shipbuilding between one country and another country. Different countries apply costs in different ways.

[Anthony Housefather, Liberal, Mount Royal, QC]

One of the things that you are doing is starting shipbuilding essentially from scratch, and re-establishing a Canadian industry in a way that other countries have continued to build ships over generations. Is that correct? The costs at the beginning are higher.

[Kevin Mooney]

That's absolutely correct.

I'd like to say that my focus is on the improvement and the development of this workforce for the long term. I'm happy to say that we are getting better every day. We are developing Canadians to be shipbuilders for decades to come, and I think there's great hope in the amount of improvement we're seeing. That's why we'd love to have committee members come to the shipyard and see for themselves what we're doing.

Please don't ever underestimate the complexity of building ships and getting all the pieces of steel and outfit to come together into a finished product that's going to last for 30 or 40 years and protect the sailors inside her—

[Anthony Housefather, Liberal, Mount Royal, QC]

—and getting skilled labour to be able to do that.

I note that you're ramping up. We had testimony about programs in Atlantic Canada that allowed people to become skilled workers in the different trades that you use, and you guys are hiring them.

How have these contracts that you've received from the Government of Canada enhanced the economy of Atlantic Canada?

[Kevin Mooney]

I gave some numbers in my opening comments, but the actual numbers are over 8,200 jobs that will be created through the combat portion of the national shipbuilding strategy. These are high-quality, highly skilled jobs that a person can make a career out of with a skill that will last a lifetime. I think also that our presence there has contributed an economic impact across Canada, not just in Halifax.

[Anthony Housefather, Liberal, Mount Royal, QC]

There are spinoff jobs all over the place. About 20,000 jobs a year are created through the national shipbuilding strategy.

You talked a little bit about the challenges that you face, and it's clear that the industry faces challenges during COVID. You have additional challenges as a result of starting up a new program. How has the Government of Canada been of help in terms of partnership, and what can we do more of in terms of assisting you?