Industry Committee on April 1st, 2008

[Raymond Simard, Liberal, Saint Boniface, MB]

I'd like to propose a motion immediately that we invite the Canadian Space Agency to return to this committee. My feeling is that it should be prior to the appearance of other witnesses that were on the list. I really do think the two groups that are here today are probably the two most important groups we're going to be speaking to on this issue.

[The Chair, Conservative, James Rajotte]

You want to have them instead of the witnesses we have scheduled for Thursday? We have eight.

[Raymond Simard, Liberal, Saint Boniface, MB]

Or we can set up additional meetings or have an additional hour.

[The Chair, Conservative, James Rajotte]

Okay, just hold on a minute.

Mr. Simard, I'm going to ask you to speak to your colleague, Mr. McTeague. We had a subcommittee meeting this morning at 10 a.m. at which I thought all parties agreed to the agenda. Your motion changes that agenda again. I don't know why we have subcommittee meetings and then make changes later on, but perhaps we can deal with this at the end.

We do have MDA here, and I know all members want to hear from them. Why don't we hear from MDA, and let's deal with--

[Raymond Simard, Liberal, Saint Boniface, MB]

Fine. Let's move on to MDA, but I do want to address the issue at the end of this meeting.

[The Chair, Conservative, James Rajotte]

We'll address it at the end of the session with MDA.

Okay. We'll suspend for a few minutes, members, and we'll ask MDA to come to the table. Thank you.

[The Chair, Conservative, James Rajotte]

Okay, members, I'll ask you to find your seats, please. We are starting the second panel. We have one witness with us here for the second panel.

We have with us the president and CEO of MacDonald Dettwiler and Associates Ltd., Mr. Daniel Friedmann.

Welcome, Mr. Friedmann. We will allow you time for an opening statement, and then we'll go to questions from members.

Please begin at any time.

[Daniel Friedmann, President and Chief Executive Officer, MacDonald Dettwiler and Associates Ltd.]

Thank you.

Mr. Chair, members of the House Standing Committee on Industry, Science and Technology, I am Daniel Friedmann, president and CEO of MDA. I have been with MDA for 29 years, involved with our systems business throughout that full period in various capacities.

Thank you for providing me the opportunity to discuss the proposed sale of MDA systems business to ATK. I have time until 3 p.m., and I am here to answer your questions.

I would like to provide facts around certain issues that have been raised and to summarize the reasons for the sale and the benefits to all parties, especially Canada.

Issue number one is RADARSAT-2 control. RADARSAT-2 is a Canadian satellite operating under a licence granted by the Government of Canada in accordance with Canadian law and regulations. This licence provides the government with control over operation of the satellite and the use and distribution of the data received from the satellite.

It is important to note that this control is not dependent on corporate nationality of the licensee. Nonetheless, I understand that concerns have been raised that a sale to a corporation with foreign ownership could restrict or eliminate the ability of the Canadian government to control the operation and use of RADARSAT-2.

I believe the Government of Canada has all the necessary powers and authority to ensure that in future it will continue to exercise full control over RADARSAT-2 as it now does.

What MDA has, which will be passed on to ATK, is the right to market to other customers data not purchased by the Canadian government. This right to sell the data is subject to Canadian government agreements, Canadian laws, and Canadian control and priority of the satellite.

For that right, MDA and ATK have to and will pay, which effectively means a reduction in the cost to the taxpayer.

Issue number two is the control and ownership of Canadarm2 and Dextre. The Canadarm2 and Dextre were purchased from MDA under standard Canadian government contracts. They're owned by Canada. Canada decided what logo would go on them. Canada named them. Canada negotiated the contracts with the U.S. government to contribute these robots to the international space station.

The operations being sold by MDA to ATK have built these robots and will continue to maintain them and the contract to the Canadian government, and hopefully will have an opportunity to build more robots in the future.

Issue number three is the taxpayers' investment in MDA and their right to see something back for that investment. The investors in MDA are the shareholders of MDA, the very majority of whom are Canadians. These Canadian shareholders include over 1,000 MDA employees. Government and private pension funds from many provinces, including Quebec, Ontario, and B.C., representing many thousands of Canadians, and the Ontario teachers' pension fund are our largest shareholders.

The Government of Canada has certain space and defence requirements. The government procures systems to meet these needs just as it procures ships, planes, uniforms, roads, and bridges.The government has a policy to ensure that the work is, to a maximum extent possible, carried out by Canadians in Canada. This policy does not discriminate by ownership, and many Canadian requirements are met by Canadian subsidiaries of foreign corporations.

In the space area, MDA has won these procurements both in Canadian ownership and U.S. ownership--and, by the way, we were 100% owned by Orbital Sciences at the time of RADARSAT-2. I do not know where the 67% confusion came from.

MDA has executed that work with great diligence and pride and has provided outstanding value to the crown. MDA has levered some of these contracts and has built an international export operation that today accounts for more than half of our systems business. This has created jobs across Canada and has certainly been good for Canada.

MDA employees under any ownership, and in future under ATK, will continue to provide the crown with value for money, win contracts competitively, and export aggressively. Canadian taxpayers have received and will continue to receive full value for the contracts they award to MDA.

In the case of RADARSAT-2, it is worth remembering that MDA won an open competition to design and build a complete system. No doubt you have heard from the CSA that RADARSAT-2 is a world-class system meeting or exceeding the operational needs of the Government of Canada. This so-called investment by the Government of Canada in the RADARSAT-2 satellite is a prepayment for data to be delivered to the government over the next seven to ten years. The Government of Canada's rights to this data will continue to be protected under this transaction, and taxpayers will get their money's worth as contemplated.

Issue number four is Canadians' future in space after this sale. Canada's past and future in space was and will be up to the Government of Canada. It was Canada that decided to join the U.S. space program with the Canadarms. It was Canada that decided to be a leader in RADARSAT satellites, and Canada's future as a space nation depends on what Canada decides to do. The role of industry is to support Canada by providing cost-efficient solutions and building what the government requires. To that end, MDA has been there for Canada for many years. Irrespective of ownership, we have delivered value for money, and ATK is committed to continue to do so in the future.

Canada's future as a space nation is not foremost dependent on the ownership of its space industry, but rather on the vision, initiative, and space budgets of the government. If these are in place, the Canadian space industry, under any ownership, will continue to prosper and reach new technological feats, as it has in the past.

Now let me address the reasons for the sale and the benefits of the sale.

For our company to be a strong Canadian operation, with state-of-the-art capability to perform Canadian government contracts when and if required, we need top-notch, world-class employees and state-of-the-art work that keeps them challenged and provides them with opportunities for personal growth. In fact, we do enough state-of-the-art work to employ 1,500 people in Canada at the moment. A portion of this work is available in Canada, but only up to the level Canada decides to support at any given time. Therefore, we have and we must continue to grow our export business.

By far the largest growth opportunity for exports is represented by the U.S. space and defence market. To gain the required access to this market, we need a partner, a partner with proven capability to win U.S. government procurements, a partner that can and will lever our technical excellence, but without the duplicate capability that could render ours redundant, a partner that employs U.S. citizens with government access and security clearances. Without this partner, we cannot get the work.

We have tried non-ownership-related partnerships, and although they could satisfy our shareholder return, they would not provide a long-term sustainable solution for our employees. This is because a partner who is a non-owner always wants to duplicate the capability in the long run to reduce dependence, while an owner is focused on levering the purchased asset. The sale to a complementary company that undertakes to keep and nurture those jobs and technologies here in Canada, as our previous owner did, does achieve all the benefits to Canada and our Canadian employees. That is why we have chosen this path. It is the best path.

Mr. Chairman, I want to thank you and the committee for giving me the opportunity to explain how Canada's interests are taken care of and why this proposed sale of the MDA systems group to ATK is a particular win-win situation for everyone. Canada retains a viable systems company capable of meeting national needs. Our employees are ensured access to the largest international market, virtually guaranteeing exciting career growth in the space field, and ATK attains access to a world-class capability as the core of its new space systems business.

It is the brilliant work of Canadians who, over the years, have created the symbols of national pride and technology prowess that have captured the imagination of all of us. They are the ones who have pushed the frontiers of Canada's space capability avidly, whether owned by Canadians or Americans, whether governed by Conservatives or Liberals. It is these Canadians who deserve the opportunity to expand their horizons and play a role in the international frontiers of space technology. With this sale, the business and Canada are positioned to advance into the next league of the world's stage.

I'll be glad to answer your questions.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Friedmann. I want to thank you for your willingness to stay past one o'clock if there are further questions by members.

We will start with Mr. Brison for six minutes.

[Scott Brison, Liberal, Kings—Hants, NS]

Thank you, Mr. Friedmann, for joining us today.

Previously, on February 4, we met with Mr. Iskander, president of MDA's space division. He indicated at that time that U.S. security laws, in particular ITAR, made it very difficult for a Canadian company to compete successfully for U.S. space agency business. Those same laws have a tremendous impact on companies outside of U.S. borders, like MDA's space division. They have an even greater level of control over American companies.

How can you provide long-term assurance that the technology developed by MDA's space division with Canadian tax dollars and Canadian expertise will not be used against Canadian interests by the American government through the access of those images during times or issues where there is a conflict--for instance, on the Northwest Passage?

How can you provide that absolute assurance?

[Daniel Friedmann]

I'm hearing two questions--one to do with the technology itself and one to do with the images. I think it's mostly about images, so I'll address that first.

I am not an expert in all the Canadian government agreements and what they have, but I can assure you that as a Canadian running a Canadian company--and that's what will happen after the sale--you have to obey Canadian law.

We are under Canadian law, and that's what we do. The facilities to control the satellite are in a Canadian government facility. The control and access of the satellite is according to Canadian law, and there's no way to do anything other than what Canada says.

[Scott Brison, Liberal, Kings—Hants, NS]

That will cease to be the case if this company operates under the American security laws--not just ITAR, but other American security laws--which will exert their power over it. You're speaking as a Canadian company. That will not be the case if this transaction proceeds.

[Daniel Friedmann]

The government has licensed a Canadian company irrespective of who the owner is. I've worked five years under complete U.S. ownership as a Canadian citizen operating MDA. The government has licensed a Canadian company, and I can assure you they're not moving the licence to any U.S. company. It's still a Canadian company, operated by exactly the same people who operate it today. The company is owned by a U.S. company, but it operates under Canadian law--it can't do anything else.

[Scott Brison, Liberal, Kings—Hants, NS]

Sir, when did you begin negotiations to sell MDA space to ATK?

[Daniel Friedmann]

That's been publicly disclosed. It was early winter, late fall. I don't remember the exact date, but it's in the public record.

[Scott Brison, Liberal, Kings—Hants, NS]

According to the Ottawa Citizen, the deal actually took place on December 17, but you can't confirm when you started. Was it November? Was it October?

[Daniel Friedmann]

If you want me to take your six minutes, I'll look it up. I have it here.

[Scott Brison, Liberal, Kings—Hants, NS]

Well, no, come back to us. It's important, sir, because on October 25 there was a press conference participated in by the Minister of Industry, Mr. Prentice, where he said this satellite would help us vigorously protect our Arctic sovereignty. He wasn't aware of this sale at the time.

On December 14, there was a launch, but importantly, and according to MDA's annual report dated March 26, 2008, your company repurchased $25 million in common stock starting on November 2, 2007, and leading up to December 31, 2007. You proceeded with this stock repurchase during a time when there was a very important transaction being negotiated. In fact, your shareholders were not aware of that transaction.

Your company, and people like you.... You have 71,667 common shares worth $3.3 million. This transaction almost overnight increased your value significantly. Prior to the ATK deal announcement it was $42.50 and at close on March 27 it was $46.70.

Did you negotiate this deal--over a fairly long period of time--and actually increase value for yourself and other shareholders, but potentially at the expense of a lot of the shareholders who sold you their shares without awareness of this deal?

[Daniel Friedmann]

I'm not totally sure I understand the question.

[Scott Brison, Liberal, Kings—Hants, NS]

I think it's pretty clear, sir.

[Daniel Friedmann]

I'll try to answer what I understand.

First of all, there's a company purchase program that was put in place a long time ago. It's completely at arm's length and depends only on the price of the stock. It's run by our board of directors; I don't run it. I don't know when they're buying or selling shares. They inform us at the end. It's a stand-up procedure under the laws of Canada. That's the way the share purchase program works.

As far as my own share holding, I am demanded by the board of directors to own at least five times my salary in shares to make sure I represent the shareholders. I bought those shares and reinvested most of my salary in MDA in the last 10 years in shares. The shares go up and down and I benefit or lose, just like every other shareholder.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Brison.

We'll go now to Madame Brunelle.

[Paule Brunelle, Bloc, Trois-Rivières, QC]

We know that MDA owns the RADARSAT-2 intellectual property, and we know that you are going to sell MDA.

What guarantee has ATK given you to make you so confident that the Government of Canada will have access to RADARSAT-2 data under the terms of the contract between MDA and the Canadian Space Agency? Will the contract really be respected? Does the contract between MDA and ATK really contain provisions guaranteeing this?

[Daniel Friedmann]

We don't need a guarantee from ATK; we have a guarantee from our own government.

You cannot export anything our company makes out of this country without a Canadian export permit approval--and I mean anything. I cannot export even a one-page technical note without approval from External Affairs. Nothing can leave this country for any project for any company, including our parent company—and I lived under that regime for five years—without a Canadian export permit approval. Every single piece of paper, every single piece of hardware--everything that's produced by MDA within Canada that's in Canada today cannot be exported without the government's approval.

[Paule Brunelle, Bloc, Trois-Rivières, QC]

That was not quite what I was driving at with my question. The Canadian Space Agency currently has access to RADARSAT data. If this deal is completed, will the Government of Canada and the provinces continue to have access rights? RADARSAT provides data on natural resources, underground features, and so forth. Will we have such ready access to all of this data once the company falls into American ownership?