National Defence Committee on Dec. 2nd, 2010

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

Tell me, then. You gave us an example of your best-value contracting principles. If a Canadian contractor was unable to deliver in accordance with the expectations that had been set out, if they had a contract and they couldn't follow through, you said that if that were to happen, you would look elsewhere in Canada to replace that contract before you went anywhere else. Why would you do that in particular, if all countries are entitled to bid on any of the contracts?

[Tom Burbage]

We have detailed plans. The one I mentioned for Canada has 206 projects identified today. Today, under contract, we have 54 companies and about $320-million worth of business with Lockheed Martin. That grows substantially as we get into the production rate of the program because they're making parts for airplanes.

As we go from building 12 airplanes last year to building 200 airplanes in four years, that increase in quantity comes to these companies in terms of orders. That's how the dollar value starts escalating as we go out to the future. We have a detailed project-by-project plan with each of the eight partner countries.

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

How does that differ from an industrial benefits plan? If you're saying you have an agreement with the Canadian industry or the Canadian government that Canada's benefits will be as follows, and that if this particular company can't follow through, you'll find another company in Canada—

[Tom Burbage]

The first choice—

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

Why would you make that the first choice? I'm not unhappy about that. I'm jut asking you. There's no legal obligation for you to do that—

[Tom Burbage]

There's no legal--

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

—and so on what basis would you do that? Couldn't other countries complain that they didn't have a crack at that particular aspect of the contract?

[Tom Burbage]

We feel that we have an obligation to the partner countries to execute the industrial plans we've laid out for every country. In the eyes of most of the people watching the program, that's based on the total value as opposed to a specific project.

You have multiple companies here that can do different kinds of work, and in many cases here in Canada, they've competed among each other for the work. If you have a supplier that suddenly can't deliver what he needs to deliver, it's the lowest risk to us to keep that work in Canada with somebody that's close by and not moving it to another country. It's best for us and best for you to keep that value in Canada. That's what we would attempt to do, okay? If we couldn't do that, then we would be forced to move it somewhere else.

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

One of the selling points of this contract—and I'm not going to go into this plane versus other planes, this particular contract, is that Canada is putting up a certain number of dollars to buy the planes, and $6.9 billion has been suggested. You're saying and industry in Canada has said that they expect to be able to participate with up to $12-billion worth of work in Canada.

I'm wondering how that affects the partnership. Wouldn't Australia or anybody else that is participating insist on having a percentage of the work equivalent to what they're spending? Or wouldn't they feel that somehow they're being hard done by, whether it be the United States, the U.K., or some other country?

[Tom Burbage]

Every country calculates a business case that they take forward to their decision-making bodies like this one. They have to justify the outlay of taxpayer dollars to buy the airplane, and they can only do that through an economic industrial value that comes along with the program.

Smaller companies will not buy any other equipment, or very little, during the years they're buying F-35s, so the only source of funding for their defence industry comes through the F-35 contract. That's why the industrial participation element of the program is so important to all the nations that are part of it.

The ground rules for industrial participation were adjudicated by the partner countries. It was insisted upon by the partner countries that we have this in the MOU; otherwise, they wouldn't sign the MOU. So every partner country is very intimately involved with the construct of the best-value model; it's not something Lockheed dreamed up.

It is important because all the countries also want to keep the price of the airplane under control and down, and that's how you do it with best value. If you don't, you would pay a premium for insufficient or poor work. And that's been our history with offset programs, because a premium is paid by the gaining country for the work that's exchanged in an offset program for the airplanes that are being built for that country. In this case, the industry is participating in the build of all the airplanes for all the countries.

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

In terms of costs, you mentioned—

[The Chair, Conservative, Maxime Bernier]

Mr. Harris, keep it short, because—

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

Yes.

On the costs, last March there was a Pentagon report saying the cost may double. Robert Gates fired their planner.

Your company said you didn't know where the Pentagon was getting its figures on doubling the cost. How can the Pentagon come up with statements like that if they're the ones actually paying for the program?

[Tom Burbage]

The Pentagon looks at the program through the eyes of the U.S. buy. It's a multinational buy, but the dollars that come through the partnership are different dollars. Your infrastructure to operate your airplanes and stand up your bases is different. The amount of training squadrons you need is different. The total amount of money being invested in the development of the program is different: Canada is at $150 million and the U.S. is at $50 billion.

Those numbers are all added into those numbers that were publicized widely in the June timeframe, so they weren't comparable with what Canada will pay for the airplane. These are not the numbers that were advertised in the June timeframe. They were done under a different set of budget rules. If you look closely, they're not the cost of the airplane; they're the cost of the airplane plus a considerable number of additional infrastructure or development costs.

[The Chair, Conservative, Maxime Bernier]

Thank you very much.

Now I will give the floor to Mr. Hawn.

[Laurie Hawn, Conservative, Edmonton Centre, AB]

Thank you, Mr. Chair.

My thanks to our witness for being here.

I just want to nail down a couple of things that were touched on over there.

First of all, there is no guarantee to Israel for industrial benefits. Correct?

[Tom Burbage]

That's correct.

[Laurie Hawn, Conservative, Edmonton Centre, AB]

Thank you.

We've talked about industrial participation for Canada. Again, just to make sure we're clear on that, the current contracts we have, assuming the Canadian companies that have those contracts continue to perform, will be worth $9 billion at the end of the day.

[Tom Burbage]

That's correct. Can I elaborate on that just a bit?

[Laurie Hawn, Conservative, Edmonton Centre, AB]

Sure.

[Tom Burbage]

The industrial participation comes in a couple of different categories. One is the category of work that's already under contract, extrapolated out through the production program.

The second category is work that has yet to be started but that we call “strategically sourced”. Those are large sub-assemblies, and there are very few companies in the world that can do them. They're specialized companies, and we match those companies up with those capabilities. In this case, we have two of them in Canada, the horizontal tail and the outboard wing for the navy airplane, and those will be done at Magellan. That's the second category of funding.

The third category is opportunities that will become available over the next...the lifetime of the production program and that Canadian industry will be allowed to compete for. Then there's a fourth and fifth, which is the propulsion and sustainment, which we haven't started quantifying yet.

But if you look at the breakdown within those categories, the amount of work that is Canada's to deliver could be vulnerable if Canadian companies don't perform because it's based on best value. But it's Canada's to deliver. It's approximately equal today to the purchase price of the airplane.

[Laurie Hawn, Conservative, Edmonton Centre, AB]

Okay. The $12 billion that we're talking about, the number that gets tossed out there...so that's $9 billion of that $12 billion. That $12 billion does not include the $7 billion of in-service support. Is that correct?

[Tom Burbage]

We're not talking about any sustainment costs at this point, and I'm not adding the propulsion industrial plan in there, and I know that's about $700 million over the production program.

[Laurie Hawn, Conservative, Edmonton Centre, AB]

So the in-service support is in fact...as you say, most of that will be done in Canada by Canadian companies. That's in addition to the $12 billion that we're predicting?

[Tom Burbage]

Correct. The requirements haven't been specified by Canada yet, so the sustainment infrastructure hasn't been identified yet.