National Defence Committee on March 29th, 2007

[The Chair, Conservative, Rick Casson]

I call the meeting to order.

We have a packed schedule today. We want to get started and keep to the schedule. We are splitting the meeting into two sections this morning. For the first hour we have Pierre Lagueux, former assistant deputy minister, materiel; and from the Center for Defense Information, the Hon. Philip E. Coyle, senior advisor.

I understand, Mr. Coyle, that you'll start with your remarks, and then we'll have Mr. Lagueux's. Then we'll open it up for questions.

We'll have to be fairly strict on time, committee, for questions and make sure we're done at 10 so we can get the other group in.

Gentlemen, go ahead. The floor is yours.

[Philip E. Coyle, Senior Advisor, Center for Defense Information, World Security Institute]

Thank you, Mr. Chairman and members of the Standing Committee on National Defence. I very much appreciate your invitation to appear before you today to support your study of military procurement and associated processes.

I'm currently employed as the senior advisor to the Center for Defense Information, a non-profit organization, a division of the World Security Institute, which is a Washington, D.C.-based national security study centre. To help ensure our independence, the World Security Institute and the Center for Defense Information do not accept any funding from the federal government, any other government, or from any defence contractor.

In my current capacity I'm called upon sometimes to provide independent expertise on various defence matters. I have about 30 years of experience involving U.S. defence systems and equipment. My remarks today will be based on those experiences and may not apply to the situation in Canada, which may be quite different from that in the U.S.

I want to note from the outset that many U.S. military acquisition programs work very well. You never read about them in the newspapers. They provide the user with the intended capabilities and they work just fine. However, in some recent years there have been some disturbing trends. For example, in some recent years, 80% of U.S. army systems did not achieve 50% of their required reliability in operational testing. Not long ago, two-thirds of U.S. air force systems had to halt operational testings because they weren't ready for it. Going back a little farther, the navy has also had to deal with its difficulties. In 1992 there was a period where only 58% of navy systems undergoing operational testing to support a Milestone III decision were successful. The navy instituted several changes and a few years later their success rate was up to about 92%.

More generally, today there is concern about finding ways to reduce technology risk in U.S. defence acquisition programs, which too often overrun their costs and schedules.

When such problems arise, it's usually, I feel, because of a general lack of realism, which manifests itself in four ways, the first being unrealistic requirements. While we all want our soldiers, sailors, airmen, and marines to have the very best equipment, and they also of course want more capable systems, that can translate into multi-mission systems, and this can lead to more complicated, multi-functional systems, often with computers and sensors working together for information fusion. These days, practically everything has a computer in it, as we see in our everyday lives.

For example, the cancelled Crusader howitzer program had roughly a million lines of code in its computer. Some people would be surprised that a howitzer would need that sort of computational power, not unlike what you might have on a modern jet fighter aircraft.

So in the United States today, what often happens is the technical challenges that must be overcome to achieve effective multi-function systems are regularly underestimated.

It's also not uncommon for the U.S. Department of Defense to have unrealistic expectations for costs and schedule as well as performance. Sometimes this originates in proposals first put forward by industry. To make new proposals attractive, the U.S. defence industry may overstate what can be delivered and how inexpensively.

But whether it's driven by contractors or by the government itself, this can lead the contractors to buy-in, as the phrase goes, in order to be competitive. This often is caused by a failure by both the government and the contractor to fully understand and address the technical challenges in a program early. When the technical challenges have not been candidly identified, the cost of schedules to solve these problems can overrun by billions of dollars and many years of delay.

Also, with the intent of saving time and money, sometimes the military departments or defence contractors turn to commercial off-the-shelf or non-developmental items, so-called COTS/NDI. Usually these items are really not on the shelf, in the normal sense of the phrase, commercial or otherwise, and if they are, often the designer of these equipments never contemplated that product would be put to military use in a harsh military environment.

I feel a third area of unrealism is that too often the U.S. Department of Defense goes into highly complex technical programs expecting the contractors to deliver under firm, fixed-price contracts. Even if they are not firm, fixed price, many contracts are structured with little or no incentive to continue development to improve the system and every incentive to get into production as soon as possible. Also, the contractual environment for these contracts often requires defence companies to make unrealistic bids simply to be competitive. You've heard the phrase “you can make it up in production”. Later, if production quantities are cut, which they often are, that further reduces the prospects for profit.

Finally, fourth, in the sense of preparing for a realistic operational environment, sometimes defence acquisition programs underestimate the importance of the operational environment, such as bad weather, the stresses of battle, or operational loading. For example, computer systems may be loaded much more heavily in battle than in the laboratory. Sometimes acquisition programs do not prepare adequately for operational testing, which by definition will be operationally realistic. Complex systems that have done well in the laboratory sometimes do not perform well in realistic operational tests.

With these issues in mind, I have laid out ten solutions for you, ten things you may already be considering or you might want to consider. I don't think I need to go through each of those ten things. I think they're pretty self-explanatory. They range from increased parliamentary oversight and review, competition in contracting, to making sure you pay attention to the technical details. I won't take your time by going through those ten things, but I'd be happy to take questions when the time comes.

As I said at the outset, not all my suggestions will be appropriate for the Canadian government. For one thing, the scale of most Canadian military procurements is different from that in the U.S. However, the trend in defence procurement worldwide is toward larger, more complex, and more costly systems that involve advanced technology, computers, and software, and these big systems are difficult to manage.

Thank you, Mr. Chairman.

[The Chair, Conservative, Rick Casson]

Thank you very much, and I'm sure there will be questions.

We will move on now to Mr. Lagueux.

[Pierre Lagueux, former Assistant Deputy Minister (Materiel), Department of National Defence, As an Individual]

Mr. Chairman, thank you.

Mr. Chairman, ladies and gentlemen of the committee, thank you very much for inviting me to participate in a review of the government procurement process.

As some of you know, prior to retiring from the Public Service in 1999, I spent almost three and a half years as the Assistant Deputy Minister (Materiel) in DND (the post currently occupied by Mr. Dan Ross, who previously appeared before you on February 8).

Prior to that I spent over 30 years, as both a military officer in the Canadian Forces and a senior civilian in DND working exclusively in the field of logistics, materiel management, and procurement.

I have appeared before this committee or its previous iterations on several occasions to answer questions on defence procurement. The last time I appeared before your committee, just prior to my retirement, was just over eight years ago, to be exact, it was March 2, 1999.

At the time, I provided a detailed overview of the defence procurement process, including the extensive actions we were taking to reform the process. Committee members might wish to look at that presentation of eight years ago, as many of the reform initiatives I spoke about then are similar to those still being talked about today.

For example, several of the previous witnesses have mentioned buying more off-the-shelf equipment as a way to shorten the procurement process. This is not a new concept. In a statement on Canadian defence policy of April 1992, the Conservative government of the day stated that in future defence procurement it would:

- avoid unique Canadian solutions that require expensive and risky research, development or modification of existing equipment.

Shortly after that, in a budget impact statement on national defence in April 1994, the then Liberal government stated that DND would:

…emphasize the purchase of equipment ‘off the shelf’, the use of commercial standard technologies, and unless absolutely necessary, the avoidance of military specifications…

In my presentation in March 1999, in outlining those things we did to reform the acquisition process, I noted our move to use more commercial off-the-shelf procurement. I cited the purchase of the Bell 412 helicopters as one of several examples. So in fact, buying off the shelf has been advocated and used very successfully by DND for many years.

In spite of concepts like these, there is still a very real sense that there is something wrong with defence procurement at the Department of National Defence—that it needs to be fixed.

Not just here in Canada—you can read about attempts to reform defence procurement in the U.S., U.K., Australia—in fact in most major western defence departments. Judging by the amount that has been written and talked about, it is evident that procurement reform is and has been a very high priority in defence departments for many years now.

Why haven’t we found the solution? As I said, the problem is not just in Canada. For example, a Jane's Defence Weekly article in October 2005, in reference to procurement reform in the U.K., had the following headline: “Smart Acquisition still not working, says committee”. A BBC News headline in February this year read: “Armoured vehicle delays condemned”. And here's a quote from the U.K.'s Commons defence select committee, which stated that a requirement identified nine years ago still remained “nothing more tangible than a concept”.

So while some progress has been made in recent years, everyone still seems to want to totally reform the system.

In my opinion, the system is not totally broken. I do not agree, for example, with one of your previous witnesses, Mr. Alan Williams, that a radical new organization has to be created. The existing procurement system can, however, be significantly improved, and unless we take decisive action now, in ten years' time, potentially we may still be pointing to buying more off-the-shelf equipment as the latest reform.

Last year, the Conference of Defence Associations Institute published a paper entitled "Creating an Acquisition Model that Delivers".

In English, that's “Creating an acquisition model that delivers”.

Indeed, the President of the CDAI, General Manson, was one of your previous witnesses.

Chapter 2 of the paper, which I wrote, presented some suggestions as to how the acquisition process should be changed to make it more consistent, timely and less costly. The chapter is only six pages long and I, of course, recommend that your committee read it.

At this time, however, let me highlight the recommended ten-point plan in that chapter.

First of all, no acquisition should start without a clearly understood and accepted statement of the capability deficiency that is to be rectified. Equally important, it should be limited by a clear understanding of what it is not intended to do. “SOR creep” is a major contributor to added time and complexity in procurement.

Secondly, there must be early industry involvement in identifying possible solutions to the capability deficiency. In many cases the solution to the capability deficiency may, in the end, not even be an equipment procurement.

The process should employ well-trained, knowledgeable, experienced, cross-departmental integrated project teams as soon as the requirement has been identified.

Procurement strategies must not just identify the risk, but strategies that inherently minimize risk need to be adopted.

Contracting processes that support greater use of performance specifications as opposed to overly detailed technical specifications, should be encouraged. However, there will still often be occasions where there is a need for detailed technical specifications.

In awarding contracts, potential suppliers' past performance should be very much a considered factor.

Procurement strategies will vary from project to project, but the rationale for selecting a particular strategy, whether it be competitive, sole source, or use of an ACAN, must be consistent and be clearly understood. The process must also recognize industry as a partner in the process with legitimate expectations and costs. Too often they are viewed as the adversary in the process.

Very importantly, underpinning the whole of defence procurement there should be a government-stated defence industrial base strategy, such as the U.K. and Australia have each recently published.

There should be greater use of positive contractor incentives, and not just penalties.

Lastly, DND must have a realistically stable future funding line. Before being allowed to proceed, each project should present a realistic cashflow profile. Projects should be “gated” under specific cash/timeline targets, subject to cancellation for failure to meet the agreed “gates”.

I will be the first to admit that there is nothing especially unique or even radical in the above suggestions. I'm not calling for a major reorganization. What I am advocating, however, is a more consistent and predictable procurement process.

As I stated in the conclusion to the chapter, too often large, complex acquisitions are handled in what amounts to an ad hoc manner. Compromises are made as necessary along the way to make sure the project continues to advance, often with little consideration to the downstream risks or the time and cost implications.

Mr. Chairman, as the Auditor General said a few weeks ago, the process of defence acquisition is complex and will always be so. And I would opine that the political environment in which it exists makes it even more complex. But we should be able to do better.

Mr. Chairman, I would be happy to answer any questions that committee members may have.

[The Chair, Conservative, Rick Casson]

Thank you very much.

We'll start our round of questions. It's a seven-minute round.

Mr. Coderre.

[Denis Coderre, Liberal, Bourassa, QC]

Colonel Lagueux, Mr. Coyle,

Thank you for being here.

Colonel Lagueux, I am always somewhat nervous when the political environment is mentioned and you talk about "creep". I don't know if it is because your past life as an official makes you break into a cold sweat when politicians take responsibility for certain things, but I think that accountability is essential, because this is about taxpayers. To my mind, it is important.

In that regard, I fully agree with Mr. Coyle when he says that parliamentarians must be involved in a process that has a watch-dog role to ensure that money is spent properly. Just remember how exorbitant costs were at the Pentagon, at one point. If the obligation to be accountable had not existed, the price of toilet seats might well have gone from $4,000 to $20,000; who knows?

Colonel Lagueux, don't take the questions I'm about to ask you personally.

You are currently a senior partner at CFN Consultants. Can you tell me who your current clients are?

[Pierre Lagueux]

First of all, Mr. Coderre, no one has called me Colonel in a long time; thank you.

[Denis Coderre, Liberal, Bourassa, QC]

I have a great deal of respect for that.

[Pierre Lagueux]

As you mentioned, I am a senior partner at CFN Consultants here in Ottawa. We have several clients, including Canadian and foreign companies. We have over 50 clients. I don't know if you want me to name them all.

[Denis Coderre, Liberal, Bourassa, QC]

Do you have specific files?

[Pierre Lagueux]

I have several files.

I know what you are getting at. So, to be very specific—I have nothing to hide—our clients include Lockheed Martin Aeronautics, Alenia North America, Bombardier and several others.

[Denis Coderre, Liberal, Bourassa, QC]

Okay.

I see that there are an ever-increasing number of colonels or generals who go directly from the Department of National Defence to your company. You spoke a great deal about "creep" and political involvement.

I know that you organize—and I see nothing wrong with that—Hawk and Eagle meetings with clients and representatives from the Department of National Defence. I have heard that these meetings take place at certain golf clubs.

Ethically speaking—and I am being philosophical—if politicians looked after too many aspects of procurement, do you think that there could be a perception problem? You are quite familiar with how things work on the inside. If people like you, who used to be a government official and became a representative of certain companies, go into industry, does that not lead to a little too much change in terms of the operational statement of requirements?

[Pierre Lagueux]

Mr. Coderre, I would like to say yes, but unfortunately, the answer is no.

[Denis Coderre, Liberal, Bourassa, QC]

It doesn't work like that?

[Pierre Lagueux]

No, it does not work like that.

First of all, CFN Consultants here, in Ottawa, has a very clear ethics policy. We are very careful, not only about what we do, but also about the perception of others with respect to what we do. We are very careful about that because, naturally, our credibility depends on it.

In light of our previous careers, we certainly do have good knowledge of the procurement process. I believe that is why we are offering a service that is in demand. The process is rather complicated here in Canada. It is different from the process in the United States, Australia, and elsewhere. Each country has its own process. So the service that we are providing to assist clients in understanding the system is in demand.

[Denis Coderre, Liberal, Bourassa, QC]

You are doing some advertising.

You know Dan Ross and General Hillier well. Do you meet with them directly, when you sing the praises of your clients?

[Pierre Lagueux]

I never participate in meetings with General Hillier. On occasion I meet with Dan Ross. I think it is normal for us to discuss the process and problems, given that I was one of his predecessors. We regularly discuss issues that occur within the department, how we dealt with the same problems and the solutions adopted.

[Denis Coderre, Liberal, Bourassa, QC]

What do you mean by "things that occur within the department"?

[Pierre Lagueux]

Matter such as reductions in staff, project approvals and the procurement process. Bear in mind too that Dan Ross has not spent his entire career in procurement.

[Denis Coderre, Liberal, Bourassa, QC]

You are paving the way for him to go to CFN Consultants, if I understand correctly.

[Pierre Lagueux]

No, I don't think so. We are not recruiting these days.

[Denis Coderre, Liberal, Bourassa, QC]

I am under the impression that some admirals are going to move... I find the staff recovery strategy you use quite aggressive.

Honourable Coyle, thank you for being here.

Lockheed Martin will be coming here. As you've been working with the Pentagon, I would like you to tell us about the C-130Js.

Out of $17 billion, we have had a tendency to have no bids in our country. So we'll spend $13 billion. And one of them is the C-130Js. If it's a good thing I don't mind, as long as taxpayers are okay. But how did it work? The Pentagon, and even Rumsfeld, sent letters on this. They said they had problems with that plane.

From an American point of view, would you explain how things are going with that plane? Is it good equipment?

[Philip E. Coyle]

The way the C-130J was first marketed in the United States was as a so-called commercial off-the-shelf piece of equipment. Because of that, the program bypassed the usual procurement rules that would have applied if it had been a major systems acquisition.

I'm going back a decade now, but as it turns out, the C-130J really wasn't commercial off the shelf. I was working with people in the U.S. Air Force at the time, who took the position, “We're just taking delivery of this thing. We don't have any requirement for it. There's no reason we have to go through the usual rules, because we're just taking delivery. Members of Congress are helping us afford it, so we don't have to deal with this piece of equipment in the way we would normally.”

But in fact, as the recent report by the Office of the Secretary of Defense, just last January points out--this is not me now--70% of the C-130J is developmental in nature. So even today, a decade after I first started to deal with the C-130J, there are still developmental issues.

[The Chair, Conservative, Rick Casson]

Mr. Coderre, I'm going to have to move on. Thank you very much for that.

Mr. Bachand, seven minutes.

[Claude Bachand, Bloc, Saint-Jean, QC]

Thank you, Mr. Chairman.

Welcome everyone. I have read two of our guests' resumes, and they are very impressive. These witnesses have been at the heart of some very important decisions.

All that is missing on your CVs is status as an elected official. I think that you would, indeed, be very useful in politics.

I want to start my introduction by talking about us, politicians. I have always felt that the role of parliamentarians was to watch over taxpayers' money. For that reason, I am very interested in parliamentary oversight and review. If the Bloc Québécois had not requested a study on procurement, we would be watching the government spend some $20 billion without being able to exercise any oversight.

I would like to hear your comments on that topic. I'm going to start with you, Mr. Coyle. I know that the role of the Committee on Armed Services, in both the Senate and the House of Representatives, is much more significant than the role of the Standing Committee on National Defence here in Canada.

Could you describe for me the role of that committee in the United States—in fact, there is one in the House of Representatives and one in the Senate—as regards the tendering process? They determine budgets, don't they? When you control part of the budget, you control part of the order. That allows for more adequate oversight and review than what is used here, in Canada.