National Defence Committee on Feb. 20th, 2007

[Michael Fortier]

That is not my responsibility, that is a matter for the Minister of Industry. The government was very clear about that: we will demand—

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

I wasn't asking whether it was your responsibility—

[The Chair, Conservative, Rick Casson]

Thank you, Mr. Crête. That's your time.

We are going to go over to Mr. Hiebert for ten minutes.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

Thank you, Mr. Chair.

Thank you, Mr. Fortier, for being here today. I appreciate your presence, giving us an opportunity to clarify some things that have happened in the past and hopefully to improve the way procurement is done in the future.

I'd like to start by talking a little bit about the advance contract award notice, the ACAN, that was used for the Boeing C-17. Is the ACAN the same as a sole-source contract? Can you elaborate a little bit about how the ACAN works?

[Michael Fortier]

Yes, I can, and I may ask Terry to complement my answers.

An ACAN is not a sole-source contract; it's an RFP with a twist, that's all it is. Once a client department on the Hill has identified a need for a particular asset--it's not just the military, it could be any other department--and that department is convinced that there's only one manufacturer of that particular asset, and we at Public Works feel they are right—we have a good understanding of the industry, and so does the client department in terms of the supply chain—then we issue an ACAN. This tells the world that we think that for these glasses, there's only one manufacturer, we believe this is the manufacturer, and unless we hear otherwise within the next 15 to 30 days, we're going to go into a negotiation to award a contract to the manufacturer of the glass.

It is a form of RFP, but it's one step further in the sense that you've already identified which manufacturer you believe is the only manufacturer to produce the goods in question.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

How do you negotiate with a company that knows it's the only provider of the product you want?

[Michael Fortier]

That's a good question. You need a plan B, like anything in life. That's an issue I quickly identified. You need a plan B, and the plan B is to change the type of glass you're going to buy or to go to something else. If you don't have a plan B, then you get hosed.

So you enter into negotiations with the supplier, although ACANs are used in fewer than 4% of procurement opportunities in government. And in that 4% of opportunities, if you look at those situations where ACANs were used, you'll find the government got good value for money, including for example these C-17s, where we paid less than 8% of what was initially proposed to us by the manufacturer and what we also thought was the sticker price, given what we knew about the industry.

So there is a way to negotiate and get a good price, but it's one of those situations where you have to tread carefully.

[David Marshall, Deputy Minister, Public Works and Government Services Canada]

I would just add something to what the minister has just said.

If you go out for requests for proposals, the more official process, knowing that there is likely only one supplier who can meet the need, you are then obliged to accept any bid that is put forward, which could be quite a rich one. In other words, you can't negotiate from that point forward, so you could end up paying a lot more than you need to.

If you know there's only one supplier, the answer is to scan the market first of all, as the minister has said, to find out if there's anybody else out there. In that sense, it is not a sole source, it is an open process. If somebody does come forward, you go into a full RFP. If nobody comes forward, you then have the opportunity to negotiate hard with that supplier, inasmuch as you can say you won't buy unless you get a good price, first of all. Secondly, you want to know what their profit margins are, how they compare with what other buyers are paying. So you have leverage because you don't have to sign the contract. If you go with an RFP and there's only one supplier, then you're just stuck with whatever they propose. That's why you would do this in this other fashion.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

You're saying that an ACAN allows you a better opportunity to get inside information, as opposed to an RFP, where they can just say this is the price, take it or leave it.

[David Marshall]

That is correct.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

I see, okay.

I also understand there are some spinoff benefits to Canadian corporations as a result of the contract with Boeing. There's the support side of things, and I'd like you to elaborate on that, but there are also opportunities for other Canadian corporations to work on other Boeing commercial contracts. Is that not the case?

[Michael Fortier]

It is. This is what I was discussing with Monsieur Crête.

When we announced the program last summer, we indicated that for every dollar provided to a non-Canadian manufacturer on a contractual basis, we would insist that manufacturer reinvest in Canada dollar-for-dollar in the aerospace industry, which was critical. I think most objective people would agree this is a unique opportunity for Canada to see several billion dollars reinvested in the aerospace and defence industry over a certain number of years. The industry has welcomed this. As I said to Monsieur Crête, Mr. Bernier's department is monitoring the regional benefits program. The objective is to make sure that if we're going to give these dollars to non-Canadian manufacturers, at the end of the day our aerospace and defence industry gets a direct and indirect benefit out of all this.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

I understand as well, though, that there are even non-related defence contracts that are going to be available to Canadian corporations working with Boeing on commercial products.

[Michael Fortier]

It will depend on the type of contract Boeing will be proposing to the Minister of Industry. You can ask Mr. Bernier when he appears. They will be monitoring and declaring that a particular contract is admissible or not under the auspices of the regional benefits for that policy they have.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

I'd like to talk a little about the maintenance for the C-17s. There's been a lot of discussion and I think some misinformation about where that maintenance is going to take place, how often, and that sort of thing. Could you explain to the committee where the C-17 maintenance is going to be occurring, how often it will be outside Canada, and how often inside Canada?

[Michael Fortier]

I'll turn it over to Terry, who is the right person to answer this question.

Terry.

[Terry Williston, Director General, Land, Aerospace and Marine Systems and Major Projects Sector, Public Works and Government Services Canada]

The maintenance will be handled under the Globemaster III sustainment partnership we're signing with U.S. Air Force. A large portion of that maintenance will be done right in Trenton. Every 120 days there's a station- or depot-level maintenance activity that occurs. It's only every five years that it returns to the U.S. for what's considered to be a major overhaul.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

Every five years?

[Terry Williston]

Yes, that's correct.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

But between the five-year periods, all the work is being done in Canada?

[Terry Williston]

That's correct; generally by uniformed personnel, or perhaps some contracted personnel with Boeing.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

How do you negotiate the “in service” report? There's the purchase price for the product—the sticker price—but then there's the on-going support.

You talked in your opening comments about having a sole point of responsibility. How does that process work? Can you elaborate on that?

[Terry Williston]

Once again, it's a foreign military sales arrangement that we have with the U.S. Air Force, whereby we indicate to them that we want to participate in the Globemaster III sustainment partnership. They provide to us an outline of all the costs and activities included for the next five years. We sign up to that partnership, which other nations have signed as well, as partners who are using the C-17.

At the end of the five years, any of the moneys we have included as part of that agreement that are over and above what the U.S. Air Force requires to sustain the aircraft are returned to Canada, subject to audit. All of the work done under the foreign military sales agreement is audited, and we pay only the actual cost that the U.S. Air Force incurs.

[David Marshall]

Let me add a little bit to what Terry has said. The U.S. Air Force is buying the C-17s as well and maintaining them, and we are participating in that program. Instead of buying the Boeings through the U.S. Air Force as well as the support, we simply negotiated with Boeing directly, in order not to pay the commission. After that, the process is all controlled from one overall manager, the U.S. Air Force.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

As you are obviously aware, this committee is looking at the procurement process and at the fact that in the past it's been quite slow. You commented that it had taken about fifteen years on average and said things have sped up a little to seven years.

I'm wondering how, from a higher level perspective, you are working to improve the system. There's been talk about needing to get Canadian taxpayers a greater value for money. What are you doing to increase the value for money for Canadians?