Evidence of meeting #44 for Government Operations and Estimates in the 45th Parliament, 1st session. (The original version is on Parliament’s site, as are the minutes.) The winning word was industry.
A recording is available from Parliament.
Conservative
The Chair Conservative Kelly McCauley
Good afternoon. We are in session.
Witnesses, thank you for your patience with us.
Welcome to meeting number 44 of the Standing Committee on Government Operations and Estimates.
Mr. Shimooka, welcome back to OGGO. We'll start with you for a five-minute opening statement.
Then we'll go to you, Dr. Fry, for your opening statement.
Again, I'm sorry for the wait. I appreciate your patience.
Go ahead, please.
Richard Shimooka Senior Fellow, Macdonald-Laurier Institute, As an Individual
Thank you, Chair.
I really appreciate the opportunity to speak to this committee about the topic of buy Canadian provisions, with a specific focus on my own research, the defence industrial base. I'll keep my remarks short, as I'd like to maximize the amount of time for the members to ask questions with regard to their specific interests.
On the whole, increasing the scale of domestic defence production is a laudable goal, but caution must be taken in how it is applied and where. Certainly, there have been notable successes in our history. The industrial buildup during the Second World War was a critical component of Allied war efforts and proved transformational for our country's economy. At the same time, care must be taken to avoid some of the less inspiring outcomes. We must avoid the temptation to develop highly specialized capabilities that are designed for bespoke Canadian requirements or tailored purely for domestic jobs. Our history is littered with examples of high-cost, low-capability orphan fleets, colloquially known as “unicorns”, that have not realized sustainable industrial outcomes. They consume scarce defence resources and have led to a less effective military. Rather, what should guide defence industrial development are strategic and military considerations that will determine the demand and need for capabilities. This is a call that a number of other expert witnesses have repeated across various parliamentary committees over the past six months.
Being able to produce capabilities at large scale has become a hallmark of a modern defence strategy. As is evident in Ukraine today, militaries must be supported by an industrial enterprise that can provide thousands of drones, artillery shells or other consumables daily to ensure victory. Herein lies a significant challenge. Contemporary defence supply chains, like their civilian counterparts, are highly complex and can span dozens of countries, hundreds of suppliers and tens to hundreds of thousands of components. While specialization can increase efficiencies, it can also be highly vulnerable to disruption due to conflict or changing geopolitical dynamics. Many have argued that through reshoring supply chains, Canada might be able to develop resilience from such events. However, if the process of developing sovereign supply chains results in systems that are produced at low levels and high costs, it can have negative consequences that are similar to supply chain disruption.
Many different approaches can manage these issues and bear examining. There are no clear right answers. There are just different approaches to managing cost, risk, capability and industrial development, which I hope we can discuss today.
Thank you for your time. I look forward to your questions.
Conservative
The Chair Conservative Kelly McCauley
Thank you very much. Again, it's wonderful to have you back with us.
Dr. Fry, welcome to OGGO. The floor is yours for five minutes.
Dr. Noah Fry Killam Postdoctoral Fellow, Department of Political Science, Dalhousie University, As an Individual
Thank you, Mr. Chair.
I want to thank the committee for the opportunity to share my thoughts on the buy Canadian policy here today. I am a post-doctoral fellow in the department of political science at Dalhousie University. My research centres on Canadian policy responses to a changing global economy.
In my view, buy national procurement is an example of a mature response to this context. It offers new, good-paying jobs for Canadians while mitigating our supply chain vulnerabilities. It also has precedent. Our trading partners—namely, Australia, Mexico, the United Kingdom and the European Union—are doing the exact same thing. Through my own interactions with civil society actors, I know our partners are studying what we're doing very closely.
On this front, I have good news and bad news. The good news is that the buy Canadian policy may be the most ambitious of its kind in Canada to date. The bad news is that buy Canadian is limited. Our free trade commitments leave little room for buying national. This is compounded by a small supplier pool. On average, we receive less than two bids for a given tender. In turn, the delta between the status quo and buying Canadian is not as large as either advocates or critics will claim. My own investigation found roughly nine original 2025 contracts that could have been impacted by a national supplier preference. That's nine of 56,000.
This does not mean that we cannot do more. In that spirit, I'd like to focus my comments on the leakages question. For a buy national policy to succeed, it must address four loopholes that enable foreign entities to siphon contract value from Canadians. Here, prime contractors can send value upstream to a foreign parent company, which is the origin loophole, cross-stream to a foreign joint venture partner, which is the joint venture loophole, or downstream to foreign suppliers through subcontracting or sourcing, which are the subcontracting and sourcing loopholes, respectively.
As written today, the policy effectively addresses two of those loopholes. First, the policy eliminates the joint venture loophole by requiring all parties to meet the definition of a Canadian supplier. Second, the policy navigates the sourcing loophole reasonably well through content and material requirements.
Third, however, the subcontracting loophole needs clarity. The policy defines a Canadian supplier as one that does not subcontract “in a manner that results in minimal value-added activities being performed within Canada.” This is too vague. Subcontracting varies by the sector. The policy must explicitly define what excessive subcontracting is. We must also follow our partners, like the United Kingdom, and have stronger public disclosure around subcontracting.
Last, the origin loophole remains wide open. While it is an improvement over what we had before, our definition of a Canadian supplier still allows foreign-controlled suppliers to pass through. We need stronger criteria. No doubt the committee may hear different ideas on what those criteria should be. Some see potential in IP, while others prefer control and others yet prefer employment. Ultimately, this is a normative question. My own view is that Canadian employment is a better indicator of origin than others, but these are not necessarily mutually exclusive. We can and should have multiple pathways for suppliers to establish their country of origin.
Beyond these loopholes or leakages, I want to draw the committee's attention to three other items very quickly.
First, the success of this policy hinges on better data collection and public disclosure. It is not sufficient for PSPC to tell us that auditing is being done independently.
Second, the policy is ambiguous over its waiver system. As I understand it, policy exceptions will be at ministerial discretion. This can lead to inconsistencies. In the United States, by contrast, the Biden administration created a “made in America” office to scrutinize waiver conditions under buy America. Canada may be wise to do something similar. This idea is not mutually exclusive with the procurement ombud's recommendation to create a chief procurement officer position.
Third, and last, it is not a secret that manufacturing workers are disproportionately bearing the brunt of American trade actions. I believe our procurement has a role to play in offsetting this struggle. Here, I am especially favourable to a buy union policy, as a follow-up to buy Canadian, that can play this role without the spectre of trade disputes.
I will end there. Thank you.
Conservative
The Chair Conservative Kelly McCauley
That's great. Thank you very much.
Before we start with Mr. Patzer, I want to bring up a point that came up in the last couple of meetings about the speed at which we are talking to help out with our translation. I think we'll be fine today, but just keep it in mind, please.
Mr. Patzer, go ahead.
Conservative
Jeremy Patzer Conservative Swift Current—Grasslands—Kindersley, SK
Thank you very much, both of you, for joining us today. I appreciate your testimony.
I'll start by offering a few extra minutes, if you have any other gaps in the policy that you would like to highlight. I think you both targeted a few, but if there are any other gaps you'd like to address, go ahead.
Mr. Fry, I'll start with you.
Killam Postdoctoral Fellow, Department of Political Science, Dalhousie University, As an Individual
That's a good question. I'm a bit of a policy nerd, so I love talking about policy and what could be.
I really want to fixate on the role of a centralized office in creating transparency around this policy. A lot of my comments in my opening remarks were fixated on data gaps. Subcontracting is the most obvious gap, in my view, but sourcing is as well. Without this data, it's very difficult for an independent person like me, or even the attentive public, to draw conclusions on what buy Canadian can do, or even...the delta between the status quo and buy Canadian, going forward.
We'll see a lot of big numbers. This is not a problem unique to the Canadian federal government either. We're seeing this with provinces as well. They've listed some really massive and attractive contract values going to domestic suppliers. The issue is that they're defining “domestic supplier” by address, which doesn't go far enough. I focus a lot on the leakages question, because I think it's the big issue here. We can quibble over the thresholds being quite high.
The other thing I didn't mention in my statement is this: We're clearly trying to play through exceptions within trade agreements with national security language. I think this is a fairly astute approach, going after larger-value contracts while provinces go after low-value contracts. There's more to be gained here, providing we get it right in terms of the data.
Thanks.
Conservative
Jeremy Patzer Conservative Swift Current—Grasslands—Kindersley, SK
Mr. Shimooka, do you have a few more thoughts?
Senior Fellow, Macdonald-Laurier Institute, As an Individual
My focus, generally, is on the CAF, our international security environment and providing the military with the capabilities it requires in both peacetime and, potentially, wartime.
One of the issues, as I see it and as I alluded to in my remarks, is that having the capacity to produce munitions, arms or whatever at scale is a challenge that not only Canada is facing. If you look to allies like the United States, the United Kingdom, NATO countries and Asian countries, they are very focused on their ability to produce at scale.
One of the areas I somewhat worry about, due to some of the language and thinking behind it, is wanting to completely replicate some of these productive systems or approaches completely within Canada. However, if the intent of this policy is to look at what is required in wartime and the needs of the forces, and to build out a system that is flexible enough to deal with multiple challenges—because the international environment is quite unstable and we don't know where a conflict may be—I think it would really serve us well. As it currently exists in the defence industrial strategy or how it is being foreseen, our approach doesn't make that easy. It's often done through existing.... Let's say you have to procure something—the Canadian patrol submarine project. You do that through ITTs and...what's coming out of that, rather than a more proactive approach that says, “No, these are requirements.”
Maybe we should partner with countries proactively in order to work together. Then, instead of having a domestic-only supply chain, we build one that is flexible and can engender greater demand internationally, because they could utilize the same system through interoperability and whatnot.
Conservative
Jeremy Patzer Conservative Swift Current—Grasslands—Kindersley, SK
We've heard some claims about a potential contract with Saab creating 10,000 jobs. Industry experts have questioned that.
What do you make of this?
Senior Fellow, Macdonald-Laurier Institute, As an Individual
I wrote a report in January about this topic, looking at the history of the Canadian defence aviation industry. Saab's proposal is largely going to be for licensed domestic production of the Gripen fighter. Most countries have moved away from this model. If you look at our allies, they are going towards joint production, as with the Eurofighter and the F-35.
My view is that, with licensed production, the quality of job you get is not very high. It's usually an approach that doesn't really engender a lot of follow-on production, because you're only producing it to your standards. Some of the quotes out there say that it's...somewhere between 6,000 and 10,000 jobs. I don't think that is credible at all. If you look at the production Saab does at Linköping, which is where they produce fighters, it's around 4,000 or so. If you look at Brazil, which is doing assembly on the Gripen, I think only several hundred jobs are currently there.
I don't take those as credible numbers.
Thank you.
Conservative
Jeremy Patzer Conservative Swift Current—Grasslands—Kindersley, SK
Mr. Fry, you wrote a different article, in which you talked about the “administrative overload” that would come as part of some of the flaws of this program.
Do you want to highlight that a little more?
Killam Postdoctoral Fellow, Department of Political Science, Dalhousie University, As an Individual
Buy Canadian is generally considered to be a positive discrimination approach to social procurement, if you're thinking about it in terms of the literature. Oftentimes, scholars will cite “buy national” as an easier approach than altering bid assessments. You limit competition from the start. Then, from there, you adjust bid assessments.
That's not what we're doing here. We're allowing competition and international suppliers, providing they have an agreement with Canada to still participate. Then, we are introducing additional bid assessment components thereafter. We lose the benefit commonly associated with positive discrimination approaches to social procurement. As a result of that, there's going to be a bit more administrative overload.
Conservative
Conservative
The Chair Conservative Kelly McCauley
Thanks, Dr. Fry.
Mr. Danko, go ahead, please, for six minutes.
Liberal
John-Paul Danko Liberal Hamilton West—Ancaster—Dundas, ON
Thank you, Chair. I'm really glad to be part of this conversation this afternoon.
I really appreciated the opening comments here. I think there's a lot to dig into on this topic. Buy Canadian is a very important priority for our government, and I think it's something that Canadians are talking about quite a bit as well. If I'm being completely honest, it's perhaps a bit overdue.
My first question is for you, Mr. Shimooka. In your opening statement, you talked about supply chains, different alliances and also the importance of building up our own national Canadian capabilities in industrial manufacturing. From your expert research, are there specific sectors that we should focus on?
Senior Fellow, Macdonald-Laurier Institute, As an Individual
Yes. I think these aren't too surprising in terms of the sectors you were going to talk about. Aerospace, given the size of the Montreal and Winnipeg hubs—and in Toronto as well—I think is an area. Also, for some of our maritime areas—Halifax certainly, with the NATO DIANA— there is a reason it's such a core area. I'm from British Columbia, and the west coast has many sorts of firms that work really well in these areas. I think that to some degree we don't want to reinvent the wheel in a lot of these areas. We want to really build on the existing capabilities.
I think what's really interesting now with military capabilities is that we are seeing a transformational period in capabilities. There are a lot of good on-ramps because of AI and a sort of autonomy, and a sort of new...what we call “attritable systems”. We don't have to have this huge overhead of having a manned capability that requires a lot of testing and all of that to ensure we can have a system that we put into service. If it's lost, we replace it with a new iteration. You see this in Ukraine. You see this in the current conflict in the Middle East.
I think those are the areas that we should focus on, but I would argue that it's still going to take Canada time to build up the engine and get the traction to get it moving forward. Given some of the challenges we have right now with our lack of military capability and the delayed modernization that we've had for 20-some years, we really probably realistically have to look at a two-stage approach. Maybe we can even partner with some allies or buy foreign systems, but also while funding some of these underlying areas and giving them opportunities, certainly, with our capabilities, but also funding that. There's a bit of a mismatch with where their maturity is versus our current need for capabilities as well.
Liberal
John-Paul Danko Liberal Hamilton West—Ancaster—Dundas, ON
Thank you.
Dr. Fry, I was listening closely to your introduction in talking about Canada's free trade obligations and agreements. I spent a lot of time in the private sector writing procurement contracts, and then at the municipal level, and one of the frustrations, especially with the public sector, is low bid and having very little flexibility about who that contract can be awarded to.
You talked about some challenges with the current buy Canadian policies with those areas of “leakages”, as you called it. Also, then, you talked about some of the other jurisdictions around the world that are doing this well. I'd ask you if you can maybe talk about some of those other best practices, particularly with our free trade partners, with our allies, and if there's anything that Canada can learn from what's working well around the world.
Killam Postdoctoral Fellow, Department of Political Science, Dalhousie University, As an Individual
That's a big and important question.
First and foremost, I agree with you that while there are cases where lowest price is a factor, that's obviously not always going to be the case. Introducing additional considerations to best value is natural, and I tend to be very supportive of national considerations and domestic content requirements, where they are also appropriate.
It so happens that Canada is not independent in this re-evaluation or recalibration of best value to match the moment. Obviously, the United States has done this since 1933. They also had “buy American” nine years before we did, so we have some catching up to do on that front. That has been evolving with each administration. I would say that if you really want to look at a jurisdiction, they're not always the best case on policy, but in this case, when it comes to buy national, the United States has one of the better approaches, especially when it comes to small business set-asides, which I believe is an intention for the policy down the line. I would look to the United States there. Their data regime is also fairly sophisticated as well.
The United Kingdom has taken an interesting approach. It's very possible that they're actually drawing inspiration from the Canadian government's approach as well. They're allowing ministers to have the discretion to use national security exemptions within trade agreements to potentially reserve contracts for national suppliers. There's some similarity there. What I really like with the United Kingdom is that for larger contracts—and this isn't universally the case—they require prime contractors to advertise subcontracting opportunities on the government portal. It's imperfect, and it may slow down the procurement process, but it does provide a bit more transparency to subcontracting, which you may not get in other bids.
The other approaches that are evolving right now—the European Union with the Industrial Accelerator Act, Mexico with plan México, and Australia with the buy Australian plan—are still in very early stages. We'll see where they go in terms of their approach.
I would look to the United States and the United Kingdom as the first and second examples if you want some inspiration.
Bloc
Marie-Hélène Gaudreau Bloc Laurentides—Labelle, QC
Thank you, Mr. Chair.
That's really interesting, Dr. Fry. In fact, I'm going to go further.
The objective of this policy, if I'm not mistaken, is to develop our industrial capacity and Canadian industrial resilience. However, how can a procurement policy lead to the development of industrial sectors, such as research, training and capital? Is this policy necessary, or should we start by thinking about long-term actions for our industrial resilience?
Killam Postdoctoral Fellow, Department of Political Science, Dalhousie University, As an Individual
That's a great question.
I'm a firm believer that buy Canadian should not be done independently of other actions. It has to work in concert with several different strategies if you want to have an industrial strategy. The reality is that, while I'm very much in favour of buy Canadian, it is more of a middle to long-term strategy, especially in terms of outcomes.
There are a lot of firms, suppliers and businesses that are struggling right now. If you don't have those supports right here and now, then they won't be able to benefit from the buy Canadian policy down the line. I can also understand that there's some frustration with public procurement as a vehicle for industrial policy, because it's a bit more passive, especially on the supplier side of things, because you're waiting for suppliers to come and place a bid. Subsequent to that, there is some action, and not every corporation, not every firm and not every supplier has the in-house capacity to participate in bids in the first place.
That's part of what I was recognizing in my opening remarks. We don't actually have that much competition, because the transaction cost, the overhead, is so significant. If you're a firm that's struggling right now, that may not be sufficient in and of its own right now. I recognize that there are other policies out there that may help offset that.
Bloc
Marie-Hélène Gaudreau Bloc Laurentides—Labelle, QC
Is the fact that we were not proactive in dealing with our champions in the face of….
We were talking about aeronautics. There has been offloading, among other things, for certain businesses in the supply chain. They want stainless steel, but try to find stainless steel.
Should we consolidate upstream what we had before, and then deal with….
I am certainly proud of Quebec, because we have a lot of champions.
I would like to hear your opinion, Mr. Shimooka.
Senior Fellow, Macdonald-Laurier Institute, As an Individual
One of the big areas we can talk a bit about is the buy Canada provisions, because there's been a bit of a pendulum shift. In defence specifically, we made it difficult for Canadian suppliers to win Canadian contracts. We would, in some ways, fund a capability through its low levels of technological readiness and through the system and then force it to compete against a foreign option. It would lose, and then all the investment is gone. My worry is that we may go too far in the other direction. That can be discussed.
What I would say is that the reason you say, “Let's talk about Montreal and the aviation hub there” is that you've seen sustained investment. One of my concerns is that, right now, we're in a moment when defence seems very important because of some of the issues we've had south of the border. Obviously, the Canadian military needs much more capability and all that, but I worry that in two or three years' time, we aren't going to see that sustained investment.
I know that the Prime Minister has talked about how we're going to hit 3.5% according to the NATO guidelines, and with that level of funding, you can sustain, build and create new capabilities, especially if we identify the right ones and do that. If we don't get to that point, we've created a policy that's designed for 3.5%, but we only hit 2.5%. That delta is so significant that you just don't get the outcomes you want. You have high cost capabilities. Much more funding is put into sustainment, because the production line is too small, and we close it.
When I think about the history of how the Canadian aviation industry, let's say, came about, especially in the 1940s, 1950s and 1960s, you had that sustained investment. You had real identification of what the needs were and how the Canadian industry could effectively go there. Also, we looked at what our partners needed. The Sabre fighter was exported broadly because it was a NATO standard that was understood. It requires a lot of this smart thinking, but also sustained interest and funding for it.