National Defence Committee on Dec. 2nd, 2010

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

What guarantee can you give us that the content will be Canadian? I have some concerns in that regard.

For example, a very large company in Quebec by the name of Héroux-Devtek, I believe, has opened a production plant in Texas. Am I right to be concerned that, if a contract were to be awarded to that company, it might decide subsequently to transfer its parts production to Texas?

Are my concerns warranted in that respect? That may apply not only to this particular case, but to the other companies that have plants in the United States. If there not a risk that, if you sign a contract with Héroux-Devtek, production could be transferred to the United States?

[Tom Burbage]

I know Héroux-Devtek well and they do very important work for us on the F-35. One of their facilities is in Texas, but they have additional facilities here in Canada that are actively engaged in the program right now.

We have a very definitized industrial plan. It has 206 different projects in it today, with more to come. They are identified by company and by time. We review that plan once per quarter with the Ministry of Industry here to show how we're tracking that plan. There is no plan to take work that's been identified for Canada from Canada and move it anywhere else. If a Canadian industry has difficulty meeting the best-value objectives, we will look to place that work in Canada with another supplier, always as a first choice. Only if industry can't perform the work would we have to move it somewhere else. That's the only reason.

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

We are constantly being told that Canada has to abandon its industrial regional benefits policy, in exchange for which we will have access to the complete Lockheed Martin assembly line. The figure that's often mentioned is 12 billion dollars. Is that amount based on projections of 3,000, 4,000 or 5,000 platforms? How can the government say there will be 12 billion dollars in spinoffs? Do you acknowledge that under the memorandum of understanding, the regional industrial benefits policy will not apply?

[Tom Burbage]

The industrial plan for the F-35 was dictated by the nine nations, including Canada, to not be an offset program. In our terms, offset and IRBs are the same. It was required to be a best-value program, but it was also required that industries in all the partner countries be allowed to compete to build the U.S. airplanes. That was a fundamental requirement and that was the trade.

Our estimates today project the value of the industrial plan for Lockheed Martin's portion of the airplane to be about $9.5 billion U.S. The engine contractors and sustainment are not included in that. I know—I just talked to the Pratt & Whitney guys within the last day or so—that their value takes this to well over $10 billion and close to $10.5 billion.

There's quite a bit more coming with sustainment, but we haven't defined the sustainment plan yet. Canada's requirements have not been made known to us yet. As airplanes come into service here, the infrastructure to maintain, support, and overhaul them will also come with that.

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

We were talking about Israel a little earlier. I have a statement here by the Prime Minister of Israel, Ehud Barak, where he reports that Israel will purchase 20 aircraft at a cost of $2.7 billion, resulting in 4 billion dollars worth of economic spinoffs.

I know that this isn't connected to the memorandum of understanding, but I asked Lieutenant General Deschamps whether it would have been preferable for Canada not to sign the memorandum of understanding and simply do what Israel has done—namely, pay $2.5 billion for 20 aircraft and receive the equivalent of $4 billion worth of spinoffs.

You seemed to be saying that this article might not be accurate. Do you think we're talking about the same article?

[Tom Burbage]

We're talking about a misunderstanding or a misrepresentation by the media on the Israeli program. The Israeli program is much bigger than the first phase. It's a three-phase program, or possibly a four-phase program. The first phase is for the 20 airplanes you're referring to, but the industrial package that we've been working with Israel on covers the entire program, which is many more airplanes than 20.

None of the work that we've talked to Israel about had any destination for any of the partner countries. It's work that's being saved for the countries that come on behind that.

Now, I'd like to comment just for a moment on why it's not in the best interests of Canada to buy airplanes through that route and it's better to be a partner. There are only a limited number of countries that were allowed to become part of the partnership. One year from the time the contract was awarded, the partnership closed. Australia was the last country to join, making it nine nations.

Some of the benefits are that each country gets to have representatives in the joint program office. Each country gets to integrate their requirements into the U.S. The countries only pay a pro rata share based on number of airplanes for tooling and for future upgrades to the program. That's a very significant issue, because you're paying 65 divided by 3,200 airplanes' worth to take the airplane to another configuration in the future. The partners who are contributing to the development of the program get a rebate. They get to collect money back from countries like Israel that come in after the fact because they have to repay part of that development cost. If you go through the foreign military sales channel, you get a foreign military sales premium that comes with the airplane and makes it more expensive than the U.S.

There are a number of benefits associated with being a partner country that are not there if you go through the foreign military sales channel. The foreign military sales channel also does not allow any industrial participation in advance of the contract. Canada has been involved in this program industrially since 2001 and the contract won't occur till 2014.

[The Chair, Conservative, Maxime Bernier]

Thank you very much.

Merci, monsieur Bachand.

Now I will give the floor to Mr. Harris.

[Jack Harris, NDP, St. John's East, NL]

Thank you, Chair.

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

Maybe Mr. Bachand has me confused here. The $9.5 billion U.S., plus engines, plus sustainment, what program is that for? Is that the Israeli program or is that our program?

[Tom Burbage]

It's the Canadian F-35 industrial projection.

[Jack Harris, NDP, St. John's East, NL]

Industrial projection?

[Tom Burbage]

Correct.

[Jack Harris, NDP, St. John's East, NL]

That's based on your figures.

[Tom Burbage]

It's based on figures that are coordinated with the Ministry of Industry and reviewed once a quarter.

[Jack Harris, NDP, St. John's East, NL]

So that's the projection of work.

I read a report that was produced by the U.S. defence department in 2003. In it, they mentioned the fact that Canada is regarded as a domestic supplier under U.S. defence contracts. Is this program an exception to that particular rule? In other words, Canada would not be considered a domestic supplier.

[Tom Burbage]

I'm not sure what the definition of a “domestic supplier” is in that term, sir.

[Jack Harris, NDP, St. John's East, NL]

Well, that allows Canadian defence contractors to participate on the same level as U.S. defence contractors.

[Tom Burbage]

Canadian defence industry is participating right alongside U.S. suppliers.

[Jack Harris, NDP, St. John's East, NL]

I'm talking about the pre-existing rule that allows...this program is participating, because we're a part of the MOU, right?

[Tom Burbage]

That, and because your intentions are to eventually procure the airplane, yes.

[Jack Harris, NDP, St. John's East, NL]

Yes. But the MOU and the participation up to now...you said there won't be a contract till 2014. But that participation is based on the MOU?

[Tom Burbage]

That's correct.

[Jack Harris, NDP, St. John's East, NL]

Yes, and we've seen the benefits of that so far.

I guess the question I have to ask is this. If Canada delayed a decision to purchase the F-35 for another year or two or three, at what point would Canadian contractors cease to be able to participate in this program?

[Tom Burbage]

Well, the program was founded under good faith principles. There are industrial benefits that are being enjoyed by all the partners and the assumption is that there's going to be participation in the program. If at some point Canada decides not to participate, that's a Canadian decision. That's completely Canada's.

At that point in time, we would look for nations that are interested in buying the airplane, because we obviously have to use the industrial work towards building the airplane with parties who are interested in flying it.

[Jack Harris, NDP, St. John's East, NL]

Why is that?

[Tom Burbage]

Because that's the way all programs are constructed.