National Defence Committee on Oct. 5th, 2010

[Bryon Wilfert, Liberal, Richmond Hill, ON]

If that's the message you're getting, I would say that it's the wrong message. The message should be that you can compete with the best in the world. The question is whether the guarantees that normally have been there in the past and should be there now aren't there. And will that put you at a disadvantage?

You're indicating that you're able to compete. That's tremendous.

[Bill Matthews]

I think we should recognize that in most cases when we've had IRBs, we buy something, it's already in production, and it's been in production for x number of years. There are some exceptions, but generally that's the case. What's left over to take is not the best stuff, and very few people really want it, to start with. And if they do want it, they just stay where they are, because it's old stuff.

We've had 10 years to get ready for this. Much of our industry has taken that seriously. We did not sit around and say that we're just going to wait for it to come. We said that we were going to go and get it. And with 80 companies already under contract, or having had contracts in this, we've done a fabulous job. Now, that was assisted by the various governments that were in power for those 10 years, and we think it's one of the very best approaches we've seen. If you have the time and you can get ready, that's a far better solution than having it dropped on you or having pressure to take on this work that you really don't want.

[The Chair, Conservative, Maxime Bernier]

Okay. Thank you very much.

Thank you, Mr. Wilfert and Mr. Matthews.

Our last member is Mr. Braid. You have the floor for five minutes.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Thank you, Mr. Chair.

Thank you very much to our witnesses for being here this afternoon.

Mr. Matthews, if I could, I'll start with some questions for you, please, sir. You mentioned in your presentation and in some responses to questions that in fact you've been engaged with this project for 10 years. Like a moth drawn to a flame, I'm intrigued by that and want to ask if you could just elaborate on how and why and when the arrangement and the connection with this project initially came about.

[Bill Matthews]

Sure. Let's say it was the turn of the last decade, so 2000 or perhaps 2001. We evaluated what we were doing inside Magellan on the F-18 and we calculated the life of that aircraft and the volume of work we'd be doing, because we were making new bulkheads and so on for the aircraft as it was in production and we were supporting the engines in service, so that adds up to a certain amount of money.

We took that per aircraft value and we multiplied it by the 3,000 aircraft that were the potential--I think we cut it in half thinking they'll never need 3,000 airplanes, but now it looks like they might--and we came to a dollar figure that was impressive enough that we said this is an opportunity that won't come again, and it's for the benefit of our shareholders as well as ourselves in terms of satisfaction and getting onto an excellent program. So that was the initial part.

I was one of those who came up here under the auspices of the AIAC meetings and spoke with government officials to say, “Look, if you're not already in on this, you should be looking at getting in on it.“ As it turned out, the government was already monitoring the program, had people involved in it, and, especially on the DND side, had people actively stationed I think in Washington, but in the U.S., working on the program.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

What year was that approximately?

[Bill Matthews]

That would have been before it was awarded. It was awarded in October 2001, so it would have been early 2001, perhaps, or maybe in late 2000.

Then we had a selling job to do internally, of course, because everybody thinks what you're doing now will last forever and you have to realize it doesn't, and we started working on it. We had acceptance, primarily on the Canadian side. Some of our U.S. guys accepted it, some of them didn't. They thought they'd get the work anyway and didn't want to put the extra work in perhaps.

As it turned out, though, the corporation came together and sold the idea to our board and to our chairman, and we've had excellent support ever since. We've done well, but we haven't done exceptionally well. I think any company of our size--we're a mid-sized company now--putting their mind to it could have done the same thing.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

How many jobs have been created thus far at Magellan specifically related to the F-35?

And I'll ask my second-part question: in terms of the possible upside, how many additional jobs do you see being created if we proceed?

[The Chair, Conservative, Maxime Bernier]

A short reply, please.

[Bill Matthews]

Okay.

If we achieve our $3 billion objective, you would calculate that 30% of that is the cost of people, and if you run that over 20 years you'll have 9,000 jobs. That breaks down to a standing group of 450 a year, so 450 people in new or saved jobs, and they continue throughout the whole 20 years. If the 30% is low, then it's more than that. If we look at what Canada would gain, $12 billion instead of $3 billion--that's four times that. So it's a significant number of jobs.

Will they all be brand-new jobs? Maybe not. When the F-18 stops flying, some jobs there will transfer over. When the F-404 engine stops being run, some jobs will be transferred from that over to the new ones. But otherwise, those jobs would be lost. The way most governments count jobs, that's exactly as I've described it.

[The Chair, Conservative, Maxime Bernier]

Thank you very much, Mr. Matthews.

Thank you to all of the witnesses for being with us.

We are going to interrupt our work for three minutes to enable our next witnesses to take their places at the table. Thank you very much.

[The Chair, Conservative, Maxime Bernier]

We are resuming the 26th meeting of the Standing Committee on National Defence.

This afternoon we have two witnesses. Mr. Daniel Verreault from General Electric Canada Inc., and Mr. Bruce Lennie, vice-president of Rolls-Royce. Good afternoon, and thank you for being with us.

Thank you for being with us.

I'll give you the floor. You have about five to eight minutes to make your presentation, and after that members will be able to ask questions.

The floor is yours.

[Daniel Verreault, Country Director for Canada , GE Aviation, Military Systems Operation, General Electric Canada Inc.]

Mr. Chairman, my name is Daniel Verreault. I represent General Electric in Ottawa. I would like to thank you for the invitation to appear before you.

GE has a long and proud history in Canada. The company has been established in the country since 1892, and its five divisions are present here. In 2009, our 8,000 employees generated nearly $6 billion in revenues, from our 12 plants and hundreds of sales and service centres.

As the major supplier of engines to the Canadian military, we power eight aircraft fleets and the navy patrol frigates.

Since the 1980s, we have generated more than $2 billion in industrial and economic benefits, thus creating thousands of jobs and transferring leading-edge technology. In addition, we continue to invest in Canada while several new industrial initiatives are being proposed in order to emphasize our presence in the manufacturing sector in Canada.

With the selection of the F-35, the government now has an opportunity to save hundreds of millions of dollars in the manner it selects its engine. In addition, it can request from engine companies industrial plans regarding how these engines would be maintained over the life of the program and decide on which one it prefers.

The JSF competitive prototype launched in 1996 was powered by an engine manufactured by Pratt & Whitney of Connecticut. For the next 10 years, the U.S. DOD also funded a competitive engine program. Congress believed it was important for the U.S. forces and its partners to have a choice of two engines and to create a competitive environment in the fighter engine market. We will be submitting shortly to the committee a more detailed description of the history of the program.

In 2002, General Electric and Rolls-Royce created the Fighter Engine Team with a view to developing and building a new engine: the F136. Designed specifically for the F-35, our engine uses leading-edge technology which enables us to get ahead of our competitor.

We are currently in the final stages of development, and our engine will be certified and available once Canada has chosen its engine, in September 2012.

The MOU that Canada and its partners signed in 2006 states that the partners can choose either the Pratt & Whitney F135 or the Fighter Engine Team F136, or both. For Canada, being able to choose from two engines has several important benefits. It will create greater possibilities for Canadian firms as opposing teams attempt to maximize the effectiveness of their proposals. Most important, it will save money.

According to the independent U.S. government accountability office, and based on the great engine war, engine choice would save the program a total of $20 billion over the life of the program. For Canada, for the same period, we estimate that over $400 million in savings will be generated. The engine represents an estimated 50% of sustainment costs of the overall aircraft.

The Fighter Engine Team is so confident that the F136 will achieve its technical and financial objectives that we recently offered a fixed price to the U.S. joint project office for engines purchased in 2012, followed by further price reductions in the subsequent two years.

Having a choice will minimize costs and maximize benefits, while being entirely consistent with Canada's procurement policies. When products of an equivalent nature are offered on the market, Canada tends to favour a competitive procurement process, in order to maximize the economic, technical and industrial benefits, and to ensure the best product at the best price. A choice of engines is therefore the best option for the men and women of the Canadian Forces, taxpayers, and the government.

For the past 15 years, the F136 engine has received consistent support from the U.S. Congress, with investment funding approvals exceeding $3 billion. This amount represents more than 75% of the total cost of the development program. Unfortunately, in response to short-term fiscal pressures, the program has now been threatened with termination by the Department of Defense.

The GE Rolls-Royce Fighter Engine Team urges the Canadian government to press the U.S. government to maintain funding for the F136 engine so as to ensure that Canada can select which engine is best. This is a contractual right that Canada received under the terms of the MOU.

Thank you for your attention. I look forward to your discussions.

[The Chair, Conservative, Maxime Bernier]

Thank you very much.

Mr. Lennie, you have the floor.

[Bruce Lennie, Vice-President, Business Development and Government Affairs, Rolls-Royce]

Mr. Chair and members of the committee, on behalf of Rolls-Royce and our GE Rolls-Royce Fighter Engine Team, thank you for inviting me here today. It is an honour and a privilege to have this opportunity to personally explain our involvement with the F136 engine on the F-35 JSF program.

Rolls-Royce has been a proud member of the Canadian high-technology landscape for more than 60 years. Our Canadian operations are headquartered in Montreal, and we currently employ 1,750 highly skilled Canadians in eight provinces, from St. John's, Newfoundland, to Vancouver, British Columbia. We are also an integral part of the global company that operates in four complex global marketplaces: civil aerospace; defence aerospace; marine, both commercial and naval; and energy. Each of these Rolls-Royce global businesses is fortunate to have world-class Canadian suppliers that help us compete in a fiercely competitive business environment. One such Canadian company, Magellan Aerospace of Toronto and Winnipeg, a substantial Rolls-Royce supplier for the F136 engine, also presented to you today.

Rolls-Royce is a long-standing and trusted supplier to the Canadian government and the Department of National Defence. As you may be aware, there are four Rolls-Royce engines on each of the 17 C-130J aircraft that are currently being delivered to the Canadian air force. Rolls-Royce also powers all of the air force's C-130 legacy aircraft, the CP-140 Aurora aircraft fleet, and the Hawk trainer fleet.

GE and Rolls-Royce together have developed the F136 engine for the F-35 aircraft, the aircraft recently selected by the Canadian government. From the engine perspective, we are currently in a competitive situation with the F135 engine produced by Pratt & Whitney of Hartford, Connecticut. The GE Rolls-Royce F136 engine has been designed solely for the F-35 aircraft and is a fifth-generation fighter engine utilizing the most advanced jet engine technology in the world today.

A number of key Canadian companies are partners on our F136 program, and we have a significant partnership with Canada's world-class National Research Council. This is all part of our F136 Canadian industrial participation plan, which we continue to develop. All Canadian partners will benefit from all of the F136 engines produced and sold for the global marketplace, not solely from those engines potentially sold to Canada.

However, the engine situation for the F-35 aircraft is more complex than I have just summarized. As a result of the near-term budgetary pressures faced by the U.S. administration and Congress, the funding of our F136 engine program is threatened for the fifth consecutive year. This is in spite of the fact that the majority of the F136 engine development program is now complete--and the many well-understood benefits that engine choice would produce.

Canada, together with the eight other JSF partner countries, signed the international production, sustainment, and follow-on development memorandum of understanding in late 2006. This MOU specifically stated that a choice of engines, the F136 or the F135, would be available to all partner nations. Customer countries could choose one or the other or both engines.

Should engine choice not be maintained through continued funding of the F136, an estimated $100 billion global engine monopoly will be handed to a single company, with all of the associated risks, elevated costs, and other demonstrated negative ramifications for the customer nations. There is no question that engine choice will provide reduced overall procurement and long-term sustainment costs.

Dan Ross testified to this committee that engine sustainment costs are as much as 50% of the total sustainment costs of the fleet. The independent U.S. government accountability office has objectively determined that engine competition for the F-35 program will save $20 billion over the life of the program, a significant saving that will directly translate to all partner nations.

Engine choice for the F-35 is in the best interests of our Canadian men and women in uniform, the Canadian government, and our Canadian taxpayers. Other partner nations recognize this fact and are now advocating directly for engine choice with their counterparts in the U.S. Congress. We urge Canada, in its best interests, to do the same.

Thank you very much.

[The Chair, Conservative, Maxime Bernier]

Thank you very much.

Now I will give the floor to Mr. Dryden.

[Ken Dryden, Liberal, York Centre, ON]

I'm filling in today on the committee, so the questions I'll ask will relate to what I've heard from the previous three witnesses and from you yourselves.

Two of the previous three witnesses, when asked whether they would prefer guarantees to open global competition, said that of course that's what they would prefer. The third wasn't asked the question, so I don't know what their preference would be.

I'll ask you that question. What would your preference be?

[Daniel Verreault]

Mr. Dryden, this is a competitive world. The GE Rolls-Royce Fighter Engine Team is ready to compete for this business, ready to compete in all eight partner countries. In the U.S. the two engines will be purchased, by design, by the U.S. forces. It is not expected that the international partner countries will be buying both; therefore, there will be an engine choice made by each country, and we are prepared and are eager to do so.

[Ken Dryden, Liberal, York Centre, ON]

And Mr. Lennie?

[Bruce Lennie]

That's well stated. I would only add that in Canada, as I mentioned in my presentation, we are developing an industrial participation program with Canada. It's already significant, and we are looking at growing it. So we welcome competition.

[Ken Dryden, Liberal, York Centre, ON]

We've heard in other discussions about competition and about how all of your companies have competed well historically. I've been in a number of competitions and I know the importance of making sure that.... Everything is fine, as far as the playing field is level, when it's a real competition.

One of the things I would like to ask about is the memorandum of understanding and where this is open and without guarantees for all of the countries.

One question is, why is the agreement with Israel different from that? There are some guarantees there.

Second, just to be sure, is it your understanding that these contracts with all of the other countries—with the U.S. and Britain and all of the other countries—will in the end, after all the negotiations, absolutely be open and that there will be a level playing field? There will not be any guarantees, as there seem to be with Israel, with any of those other countries. Is that correct?

[Daniel Verreault]

The terms and conditions of the Israeli contract have not been finalized. They are under negotiation, and we would not be able to comment today on these terms and conditions.

Regarding the engine situation, it is the intent of the joint project office, on a yearly basis, for the two engines to compete, based on cost for that year, based on sustainment cost, and based on the industrial participation plan that you would propose. Therefore, from an engine viewpoint, it is deemed to be a constant series of competitions, as was the case for the F-16 and the F-15, when two engines were then made available for those fleets.

[Ken Dryden, Liberal, York Centre, ON]

Mr. Lennie, do you have anything to add to that?

[Bruce Lennie]

No, I don't.

[Ken Dryden, Liberal, York Centre, ON]

Here is one last, quick comment. There was some discussion earlier about the cost of the plane—the cost of sustaining it over a 20-year period—but the understanding that I think we heard from the other witnesses is that the plane really is assumed to have a 35-year life.

Just to ensure that we compare apples with apples when we're talking about the cost of sustainment, the earlier gentleman talked about how in fact sustainment costs would be at least as much as the plane itself, if not more, over what he anticipated as the life of the plane, and I would gather all of us anticipate that the life of the plane is not 20 years but significantly more than that.

Mr. Wilfert, if there's time.