National Defence Committee on April 17th, 2007

[The Chair, Conservative, Rick Casson]

I call the meeting to order.

Ladies and gentlemen, thank you very much for convening so quickly. As we do some further work on our procurement study, we would like to welcome a couple of guests today.

Before I do that, I'd like to remind everybody that we'll have a vote. The bells will start ringing at a quarter to eleven, and the vote is at a quarter after eleven. So if we're out of here at eleven o'clock, we'll all have time to get there.

Today we'd like to welcome Kenneth Rowe, chairman and chief executive officer of I.M.P., and Allen Conrad, vice-president, business development, in the aerospace division.

Gentlemen, we appreciate very much your being here. We had an article circulated previously that has been published. We look forward to your comments, and then we'll have questions. There's a seven-minute round from each. If that's all we have time for, that'll be it, but if we have more time, we'll keep the questions going until 11 o'clock.

The floor is yours. We look forward to your presentations.

[Kenneth Rowe, Chairman and Chief Executive Officer, I.M.P. Group International Inc.]

Good morning. Bonjour.

Mr. Chairman and honourable members, as you've heard, my name is Ken Rowe. I am the chairman and chief executive officer of I.M.P. Group International, Canada's largest military aircraft in-service support company, with an international reputation of being a centre of excellence for maintaining certain types of military aircraft and helicopters.

We employ nearly 4,000 Canadians, with nearly 1,000 in Quebec, 2,000 in Nova Scotia, and the rest in other provinces. We have been in business for 40 years. Fifty percent of the military aircraft in our hangars are foreign-owned, and our expertise has been built on competitively-won Department of National Defence contracts issued by the Government of Canada.

I wish to thank this committee for the opportunity to speak to you today about what I feel is a very serious national issue, the security of Canada.

Last summer the Government of Canada announced its intention to purchase a strategic airlift capability of four C-17 Globemaster aircraft, a tactical airlift capability of 17 C-130J Hercules aircraft, and a medium- to heavy-lift helicopter capability of 16 CH-47 Chinook helicopters. These announcements were welcomed and show a strong government commitment to the revitalization of our Canadian Forces.

Those of us in industry who pride ourselves on providing aircraft and helicopter maintenance support to the men and women of the Canadian Forces were alarmed at the government's new approach to contracting in-service support. Our domestic aerospace in-service support industrial base is a vital component of Canada's economy and provides Canada with a means to exercise maximum sovereignty control over its aircraft fleets throughout the many decades that this equipment serves our Canadian military, irrespective of where it was manufactured in the world. This strategy is common in ail developed countries throughout the world, for the obvious reasons: national security and jobs.

The announcements last summer revealed the government's intention to contract future in-service support directly with the aircraft manufacturer in the United States for both the Hercules fixed-wing and Chinook helicopter fleets. This will give those U.S. companies control over what is a Canadian independent world-class industry employing thousands of Canadians, which has taken decades to build, for the nebulous reason of “one point of control”.

Having been in the ISS industry for nearly 40 years, I was dismayed when I heard this, as I know of no other developed country in the world that compromises its security and sovereign control of military assets by giving the management of them to foreign commercial companies that are subject to their own governments' foreign policies and controls, as we are currently experiencing with I.T.A.R.S. despite our friendly relations.

My company has provided our comments to PWGSC in response to the Chinook ACAN, outlining our concerns over their approach to in-service support. This was followed up with key cabinet ministers and the Prime Minister.

Mr. Harper was interested enough to telephone me in September of last year. He requested I provide more information about the issues related to providing in-service support contracts directly with a foreign aircraft manufacturer. We responded to his request on September 13, and in that response we provided a paper on the subject. This paper was subsequently printed into an article that appeared in the January-February 2007 edition of FrontLine Defence magazine. I have provided a copy of this article to your clerk as my brief to this committee.

When certain Quebec-based aerospace companies raised the same concerns with Minister Fortier, I understand he excluded them from the cabinet decision so that they can be contracted directly with the Government of Canada. While we applaud the minister's recognition of these Quebec-based companies as world-class in training and simulation, we have not seen the same recognition of other centres of excellence for in-service support across the country.

To date, we have not received a satisfactory response to our Nova Scotian or regional concerns, and we are not aware of any move by the government to change its new procurement approach for in-service support for these aircraft fleet acquisitions. In fact, according to testimony before this committee on February 20 of this year, Minister Fortier has now elevated this approach to become one of his department's pillars of procurement reform. I quote:

We have worked in concert with the Department of National Defence to implement a number of initiatives aimed at streamlining the process. Some of these are, for example...adopting a single point of accountability concept within performance-based procurement, where a single prime contractor is responsible not only for the acquisition of the equipment, but also the long-term, in-service support of that same equipment.

While the idea of holding the original aircraft manufacturer accountable throughout the life of the aircraft sounds good in principle, in reality it ignores the fact that the prime contractors that we are talking about are located in the United States. It also ignores the fact that Canada has established world-class companies capable of delivering full in-service support for these future fleets, as has been done in the past with negligible recourse to the OEMs when the necessary technical data is purchased with the original equipment.

It's bad enough that we cannot economically design and build these aircraft in Canada, but it is a travesty to fragment and decimate our domestic support industry, which has taken decades to build and is now competing successfully in the world, sometimes against the same OEMs. This export growth will become more difficult and will encourage Canadian-owned aerospace companies, such as I.M.P., to sell its business to United States buyers.

It appears that bureaucratic convenience takes precedence over a sound Canadian industrial strategy, which our aerospace industry has been seeking for some time. We are proceeding down the road where foreign corporate and foreign policy interests will be able to compromise our own Canadian industrial and sovereignty interests. Canadian taxpayers will be paying millions of extra dollars to inject American contractors between Canadian industry and the Government of Canada and the very troops that we are proud to support.

These very substantial ISS—in-service support—sole-source contracts placing our Canadian industry under the direct control of U.S. commercial companies are a threat to thousands of our highly skilled workers, and they reflect the lack of research and understanding of our industry by government officials before they've received approval from cabinet. We need the Government of Canada to urgently debate and reconsider this policy change in order to avoid disruption of our successful aerospace industrial base and the obvious compromise to Canada having maximum direct control over the use of our military assets for the security of Canada.

I would welcome your questions and discussion on this matter.

Thank you.

[The Chair, Conservative, Rick Casson]

Thank you, sir.

We'll start our first round with Mr. Coderre, for seven minutes.

[Denis Coderre, Liberal, Bourassa, QC]

Thank you very much, Mr. Chairman.

Mr. Rowe, thanks. It's an honour to have you here.

We think this government has abdicated our Canadian sovereignty. We also believe they have abdicated our industry.

I'd like you to expand a little bit more on the importance of owning our intellectual property in those acquisitions.

You'll notice that through the C-17, we gave them a blank cheque of $1.3 billion for the ISS that we will never own. They're still negotiating on ITAR. They don't even have a deal for our own people who are working at DND right now, and the issue of dual citizenship is clearly a problem. I'd like you to talk a little bit more about how the industry will go if we don't own those kinds of intellectual properties.

Secondly, I have a very concrete question, but I don't want to put you on the spot. You have some people working for you who have dual citizenship. You will have to make a choice. How do you react to those contracts if they ask you to make a choice between the employee or the contract itself? How do you feel when you have to face those questions?

[Kenneth Rowe]

Those are major questions that you're asking, sir.

One is concerning the ITAR and how we would handle employees who don't meet the requirements that need to be met in order for them to have access to the technical data being provided to us so that we can do our work. As you know, we cannot discriminate against employees in Canada. It's against the Constitution. On the other hand, if we try to protect the contracts, we are fined heavily or end up in litigation disputes with the employees, through the various recourses that they will have against the company.

It's a very difficult situation, and I only hope the government can be successful in going down the road along security clearances and areas like that, so that we can manage our businesses economically without having to discriminate against employees. But if we have to make a choice, I'm afraid we'll have to reject the contracts.

The second point is on technical data. We've always bought technical data—intellectual property, as you call it—sufficient for the successful contractor, since it's usually put out to competition among Canadian companies by the Canadian government. The successful contractor has a licence to use that technical data to maintain the aircraft.

Only in one instance in the last forty years have we not done so. That was for the search and rescue helicopters. They decided to buy the technical data incrementally instead of paying for it up front with the aircraft. There have been tremendous costs, delays, and difficulties for the ISS contractor managing that fleet without the full set of intellectual property. I think that has been a lesson to everyone, as an example.

They can buy the equipment and buy the sufficient technical data with it in order to maintain it. Then there's no reason why they can't continue to hold a competition in Canada, by the Government of Canada, with Canadian companies, to maintain it and have maximum control over those assets.

In any event, the Government of Canada may want the military to do something with that equipment, under our own foreign policy, that may be contrary to that of the country or countries we bought the equipment from—in this case, the Americans. On two occasions now, we've modified Sea King helicopters for the use of the army. One was for the Red Sea affair, and there was one recently for troop carriers. We could not have done that had we not had the technical data. If we had tried to get permission through perhaps a foreign government like that of the U.S., they might not have wanted us to do that. We would have then been restricted in our own security and sovereignty, in terms of decisions you people are tasked to make on behalf of the people of Canada.

[Denis Coderre, Liberal, Bourassa, QC]

So the fact that we don't own the technical data on the C-17 may put us in some curious situations, if I can put it that way. If we need some parts and we need to go through the second and the third line of maintenance, and if, for example, we're in Cuba and we know the foreign policy of the United States is different from ours, then maybe they will say we cannot go there because of our situation, our own policies. Is that correct?

[Kenneth Rowe]

I wouldn't use the C-17 as an example, sir, because I think the military has more of a case for not buying the technical data on just four aircraft. For four large aircraft, it would be tremendously expensive. We've never done this before for just four aircraft. It's more applicable to fleets of aircraft, like the Hercules and the Chinook helicopters. For fleets, it becomes very cost-effective to do it in Canada and to have total control over it for security and sovereignty reasons.

It is not my role to comment on worrying about four large aircraft and whether we support them or not. On the technical data side, though, it would have been extremely expensive, and I think they would still most probably have had to go back stateside for major modifications or overhaul, for economic reasons.

[Denis Coderre, Liberal, Bourassa, QC]

Given that we don't own the technical data and that, more and more, we're at the mercy of these international companies, it will be pretty tough for our own industry. We have the situation in Quebec, of course. This government doesn't want to make sure we put the money where the industries are, and it's same thing in your case, sir, in your own region.

Do you believe that if we're not doing something and that if we don't have a government that intervenes to make sure there is some percentage going through every region, it will be the end of that industry, since it won't grow?

[Kenneth Rowe]

The risk we're running is that they're asking the Americans to hold competitions among Canadian companies to do as much ISS as we can in Canada. But chances are they will fragment those, that one company will get a piece of this and one company will get a piece of that. The company will never have, as we do, a total capability on one particular type of aircraft.

We've just modified the whole fleet of Sea Kings that are owned by the U.S. Navy, the government. We have P3s in there, similar to our Auroras, for the U.S. Navy and other U.S. government departments. We have the Norwegian air force, with P3s in there again. We have the Egyptian presidential fleet of Sea Kings in our hangars because we have the total package of tech data that was bought by the Canadian government when they bought the aircraft. So whoever wins that particular aircraft gets total technical support in documentation, and not only are they able to support our own department with virtually a single-point accountability, but they can then lever up their expertise and go after these international opportunities, as we've done, as Spar has done in Edmonton, and others elsewhere.

[The Chair, Conservative, Rick Casson]

Thanks, Mr. Coderre.

Mr. Bachand.

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

Thank you, Mr. Chairman.

I want to congratulate Mr. Rowe and Mr. Conrad on their presentation. I have to admit that since the committee began its hearings into the acquisition process, this is probably the one presentation...

Maybe I should start off in English.

I was going to tell you in French that it's probably the best presentation I've heard. I think I wouldn't have been able to write that...well, I would have probably written the speech you did exactly the same, because it's an issue that I've been working on for almost a year now.

Can you hear me?

[Kenneth Rowe]

Yes. You're doing quite well in English.

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

I won't bother repeating what I said in English.

I simply want to highlight some of the comments you made. You talked about bureaucratic convenience. I find that a little misleading. It's more a lack of political will on the part of the government. I can't quite understand how the government, that awards contracts with taxpayers' money, can do so virtually without setting any conditions. That's the fundamental problem.

The government signed a contract for C-17s. I believe it's too late to cancel the contract and to start the process all over again. We've seen what happens when contracts are cancelled. However, there are three more contracts pending, one for Chinooks, one for C-130Js and one for fixed-wing search and rescue aircraft.

I've met on numerous occasions with representatives of Quebec firms and I asked them when Canadian and Quebec industries will get together and send a message to the government that the current situation is intolerable. I always sense that industry officials are somewhat reluctant to act. I hear all sorts of comments such as “You mustn't bite the hand that feeds you”. That's all well and good, but as you know, Mr. Rowe, the window on aerospace contracts for the next 30 years will be closing.

As representatives of I.M.P. Group International inc., what are you waiting for to join forces with Bombardier, CAE and L-3 Communications to demand from this government some economic spinoffs and to get it to acknowledge that this situation is unacceptable? Can we expect any action on that front?

[Kenneth Rowe]

Nothing is holding me back. That's why I'm here. And I agree with you, industry should be more vocal. And I hope, finally, that our industry association will be more vocal in making known this position that we now all believe we have unity on--that it's Canada first. And we really want to keep the situation as it is. There are two points the government makes, a single-point accountability...and I believe they've had that.

We look after the Aurora fleet of aircraft. We have done since its inception. We won it competitively, as we did the Sea Kings--competitively. We can't change them every year; we've had those fleets. As I said in my notes to you, there's very little recourse they have to go back to Sikorsky or Lockheed Martin concerning those fleets. They have it.

Then the other thing is that they say performance-based is the other part of their pillar. In terms of performance-based, there's none that perform better than some of the Canadian companies who jump head over heels for DND because we're so proud to work for our own department and government. I don't know what more performance you can get there. But if there was a restriction put in place that our foreign policies ever diverged, going forward, I don't know where your performance would go then--against your national interests--and we'll be completely in the hands of the State Department and other directives that these commercial companies get at that time. If that's the position you want to put us all in, that's the route you're going down. And companies like ours may as well not just work for them, we may as well be owned by them.

So these are the risks out there that perhaps some of the government officials.... And they're all good people. I know many of them and I'm not here to criticize them. But as an industrialist and as an industry leader, I'm giving you a heads-up that this is the wrong road to go down. There are many hazards, and it's not all just over money; it's over security and jobs in Canada and having our own sovereignty decided in this city--policies.

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

Now then, what if I tried to convince you that it would easier to take a united stand if consideration were given to the distribution by region of economic spinoffs? Allow me to explain myself.

If I told you that by taking a united stand, you could fight the government on the issue of economic spinoffs because it's approach isn't the right one and the Canadian aerospace industry would like 10% of the spinoffs to go to Atlantic Canada, 60% to Quebec and perhaps 30% to the rest of the country. How would you react to that statement?

These aren't necessarily exact percentages. The margin of error is 5% or 10%. For the moment, Quebec isn't happy with the spinoffs and neither are you, I would imagine.

Would you go along with this, if we could take a united stand, based on geographic distribution that takes into consideration the importance of the industry to each region of the country?

[Kenneth Rowe]

Not necessarily. I don't agree with that approach. Because when you're talking about 60% in Quebec, you're really including Bombardier, and I don't know the last time Bombardier had offsets from the Government of Canada through IRBs. Their road has changed a lot since the early days when they were involved with defence contracts. They're a great company, and we do a lot of work with them. But I think percentages across the country have to be also tempered with the ability to find companies that can do the type of work that's available for IRBs. These are highly technical companies and they often can't give low-technical work.

You have to remember that we own Innotech-Execaire, Canada's largest general aviation company, with nearly 1,000 people working out of Montreal. But we never asked for special treatment for Innotech-Execaire. They're world leaders themselves and they are quite able to win contracts competitively and encourage people to allow them to bid on work that's most suited for them.

Obviously there's a large concentration of aerospace companies in Quebec, and that should be taken into consideration. But we are also world-class in Nova Scotia, where we have 2,000 people in our company alone, apart from others, and we should be given careful consideration about the type of work we're world-class in, too, to allow us to continue to build these high-tech, high-paying jobs, where we've been very successful in getting other countries to send their work to Canada. We're the first company that's ever had a military airplane from the United States of America sent to Canada for overhaul.

[The Chair, Conservative, Rick Casson]

Thank you, sir.

Ms. Black.

[Dawn Black, NDP, New Westminster—Coquitlam, BC]

Thank you very much.

I too want to thank you both for coming in and for your presentation. I found it very compelling.

I too lament the lack of a Canadian industrial strategy, and I think that fits into your presentation today. I fear a loss of autonomy and a loss of the ability of our government to have an independent foreign policy if we are reliant on foreign companies for maintenance and in-service support of our own military aircraft.

My colleague Mr. Bachand talked about a coordinated strategy with other industrial players, other companies. I know that in my province of British Columbia, jobs in the aerospace industry are above the level of the average industrial paying job. So I'm wondering if you've worked with or had any communication with the workers in your industry, and whether, when you are talking about a coordinated strategy, that would include the unions, which are potentially losing jobs in this field.

In British Columbia, some of the jobs for aircraft maintenance are leaving Air Canada. There are people who I know are well trained and who are unable to do aircraft maintenance work. So I fear a loss of family-supporting, well-paying jobs in Canada for Canadian people in this industry.

I wanted to ask you which DND aircraft--you mentioned the Aurora and the Sea King--you're currently contracted to work on. Are there more than that?

You talked about how many jobs depend right now on in-service support. I wanted to know if you could give us some estimate of how many potential jobs, Canadian family-supporting jobs, we may be in danger of losing through this contract that we've signed and by having in-service support done by U.S. companies. Can you give us an estimate of how many potential well-paying jobs are in jeopardy?

[Kenneth Rowe]

If I can pick up on your last comment, these contracts have not yet been let on in-service support. We believe there was more concentration for the obvious reason of losing young people in Afghanistan right now. I can understand the leaders of the Department of National Defence wanting to get this equipment as soon as possible.

When it was passed through cabinet, I think the in-service support side wasn't properly researched or understood by the government officials, and it would be less expected that cabinet members would pick up on it. As I'm trying to explain to you as a committee today, there's been a lack of that. It went through to allow this without the types of repercussions and considerations being properly explained; otherwise it perhaps wouldn't have gone through cabinet.

The contracts have not yet been let. There's a window for cabinet to amend the decision to buy these fleets, which doesn't stop them being delivered and it doesn't delay them in any way. They can virtually be separate contracts, as they've always been, but order a review of the in-service support side to maximize Canadian jobs, as we've said, and to maintain the maximum security of Canada.

On your other question on jobs, there are thousands of jobs at risk, because over 20 years, for all sorts of reasons, they can gradually drift back to the United States.

What are we as companies to do? Do we keep running back to Ottawa saying they are in breach of the original intent of the contract back in 2007? It would be unmanageable. We'd be put back to where we were 30 or 40 years ago as a pretty minor industry, with old aircraft and no technical support, and it would all be done by the country where the aircraft came from.

It's not the case today. You're not only risking thousands of jobs for workers today. These are commercial companies, and their loyalty is to their own shareholders. They do it by selling man-hours, not by giving them away.

There is also the cost of over 20 years of in-service support. There's not a person in government, in this room, in this city, or in our industry who could really calculate what 20 years of in-service support on a fleet of aircraft is going to be.

What happens? It's like taking money. When you have a forward risk, you pay one hell of a premium for that risk, because you're asking the manufacturer to take the risk on what might happen, what might go wrong with the equipment, and what has to be covered in the cost.

There is performance. There are all sorts of exclusions going on, force majeure exclusions, for all sorts of reasons. In the end, commercially the government will be tied up, and for me as a commercial industrialist, I think we're going down a slippery slope. It's better to look after our own businesses and keep our own people working, with maximum control on our industry.

There are the thousands of jobs that you were talking about. In your case as parliamentarians, the security of Canada is having control of the maximum use of our military assets. We never know in today's world when we're going to need those assets for purposes that are different from the configurations we're already in.

It's my view. I'm not political, and I don't want to become political. Enough of that goes on. You understand that side. But I'm telling you as a simple industry person who has been in this business for a while, from the industry's point of view this is a terrible change to take.

It may suit someone to have one office, one OEM's office in Ottawa that they can keep calling up. But under this arrangement, we won't even be able to talk to our own Government of Canada as a contractor maintaining their equipment. We'll be isolated because we'll be under contract to someone else.

There are all sorts of areas that have never been researched or properly identified as risks and rewards.

[Dawn Black, NDP, New Westminster—Coquitlam, BC]

Thank you.

[The Chair, Conservative, Rick Casson]

Thank you.

Over to the government. Mr. Hawn, welcome back.

[Laurie Hawn, Conservative, Edmonton Centre, AB]

Thank you. It's good to be back.

Mr. Rowe and Mr. Conrad are probably better equipped to answer this.

It's been almost 27 years ago to the day that Canada signed the contract for the CF-18 with McDonnell Douglas, which is now Boeing-McDonnell Douglas. It's been 25 years this October since we flew the airplane. It was a company that owned the intellectual property and a government that owned the intellectual property.

I would ask Mr. Conrad this, since he has the most experience with this particular program. How would you assess the 25 years that we've been operating the airplane, the 25 years we've been operating with in-service support in Canada with McDonnell Douglas and now Boeing? Has it been successful?

[Allen Conrad, Vice-President, Business Development, Aerospace Division, I.M.P. Group International Inc.]

From my understanding of the program, having been in the military before, it was highly successful. The most recent success was the first phase of aircraft modernization.

I was part of the F-18 acquisition program in 1980, and at that time there was no question. We bought the intellectual property, and we positioned a company to do the things that we thought were of strategic interest.

Regarding a weapons platform, you have to be able to certify Canadian-unique weapons. We didn't want to carry nukes, so that meant we needed the capability to develop software. We invested in it. We need the capability to do flight testing. We invested in that in Cold Lake, and we built the extra—

[Laurie Hawn, Conservative, Edmonton Centre, AB]

Mr. Conrad, who owned the basic intellectual property for that airplane?

[Allen Conrad]

Canada.