National Defence Committee on Jan. 28th, 2015

[The Chair, Conservative, Peter Kent]

Colleagues, as you know from the notice, we're here pursuant to Standing Order 108(2) to continue our study of the defence of North America.

We have two witnesses with us today who I hope will be understanding of the unpredictability of events on the Hill, which may shorten our time today.

We have from the Conference of Defence Associations Institute, Mr. David Perry, senior analyst, security and defence. As an individual, we have with us Ugurhan G. Berkok, professor, department of management and economics, from the Royal Military College of Canada.

Mr. Berkok, I understand you're prepared to go first as you have an electronic presentation. Please go ahead. You have 10 minutes.

[Prof. Ugurhan Berkok, Professor, Department of Management and Economics, Royal Military College of Canada, As an Individual]

I wanted to draw your attention to three points, the first three you see on your screen, and then if time permits we can touch on comparable countries.

I don't know what the committee expected, but the first point is that currently we're spending about 1% of GDP on national defence. As you can see, about 10 years ago, the chief of the defence staff, General Hillier, was saying that the 1990s were the dark ages of defence because we cut everything—the wrong argument, definitely the wrong argument. Because it was post-Cold War, we were expecting not only a peaceful world, perhaps wrongly, but also we were cutting everything in the 1990s. Once you cut every department, you cannot leave National Defence intact. It's just a fiscal argument.

Second, along the same lines, about a week ago—

[The Chair, Conservative, Peter Kent]

Excuse me for just a moment.

Madam Michaud, I understand you were asking for the screens to be switched from English to French—

[Élaine Michaud, NDP, Portneuf—Jacques-Cartier, QC]

I would like to have access to the French version and have it in my hands. I have the English version now, which doesn't really help me. I have the documents, but they are not arranged in a very logical order.

I guess my comment is for future consideration.

[The Chair, Conservative, Peter Kent]

I understand.

I understand that technically it would delay the meeting.

[Élaine Michaud, NDP, Portneuf—Jacques-Cartier, QC]

For the next meeting just keep it in mind, please. Thank you.

[The Chair, Conservative, Peter Kent]

We will see what we can do for the next meeting.

That's quite a reasonable request. Thank you.

I'm sorry—

[James Bezan, Conservative, Selkirk—Interlake, MB]

But it is in French on the screen here. We do have French and—

[Élaine Michaud, NDP, Portneuf—Jacques-Cartier, QC]

On your side, not here.

[The Chair, Conservative, Peter Kent]

To change it would delay the meeting, so let's proceed for this one.

I thank you for your consideration.

[Prof. Ugurhan Berkok]

The first point was that there are three examples to that kind of view. Currently we're spending around 1%, down from 1.4% maybe seven or eight years ago.

The first example is General Hillier's famous statement—everybody knows it—about the dark ages in the 1990s, but we were cutting everything. Defence cannot be exempted from cuts. They cut across the board.

Second, diplomats Burney and Hampson about a week ago in The Globe and Mail made the wrong comparison. They said Australia is spending 2%. Well, everybody in this room knows where we're sitting in the world. It's incomparable. Just look at the map. Australia has to spend more money on national defence than Canada does. That's very clear, because defence is an instrument of foreign policy, but it's a threat-based service the government provides.

Third, and this is an explosive dossier in the Canadian context, is the F-35s. Many people came out and gave us examples. The most prominent was Japan. Japan again is sitting in a place in the world. Of course they have to buy 100.

The criticism was why are we buying 65 aircraft whereas Japan and Australia are buying more than we are. Of course that is threat-based. If we're going to replace our fighter aircraft, there has to be some number, but those countries are not good examples.

Proceeding to the current situation regarding the navy shipbuilding and army equipment, there have been many cancellations and postponements in terms of army equipment and procurement process slippages in the case of navy shipbuilding. We are again in a situation post-Afghanistan in which I see really no urgency. It's not a carte blanche for the current government, but again I understand there may not be any urgency.

If you go further into the political argument, perhaps some of these have been sacrificed to balance the budgets.

This is the issue of demand for defence: how much do you want to spend on defence and when?

I'll pass to the next slide. The second point is on the governance of defence procurement. We seem to have settled on a sort of unsettleable governance form. Nobody else in the world has this. The process for the selection of the shipyards in Halifax and Vancouver in the huge navy shipbuilding strategy was applaudable. Everything went well, but nothing has been built yet. The secretariat is like three boxes, and perhaps if you add the Treasury Board, it's like four boxes side by side. For anything to go ahead, every box has to give you a green signal, which will delay the process.

In the next slide or two, we're going to see that many countries, such as Australia and Britain, which we can understand because we have similar types of governments, have moved away from this kind of governance structure.

Treasury Board, PWGSC, Industry Canada, and Defence: everybody has to say yes for this process to continue. I'll skip the details. Just imagine if one of the ADMs is replaced. It's going to take another six months for the new ADM to understand the process, the file. Delays will arise out of this structure of governance. That is a warning. In fact something has to be done. Perhaps somebody might listen to what I have to say.

Coordination is a need, so the secretariat is a coordinating mechanism. However well the coordination can be performed, the fact is you have four boxes in line. Moreover the secretariat doesn't change anything. The secretariat just tries to coordinate the four departments.

The first point was about how much you spend. The second point is on the structure of the governance in defence procurement. The third one is actually a significant sticking point in terms of how much money you spend. This is a buy Canadian policy. However much we complain about the buy American policy, which recently flared up....I don't recall.... In Vancouver, they are building the—

[A voice]

[Inaudible—Editor]

[Prof. Ugurhan Berkok]

Right, but we are doing the same thing. It costs our taxpayer in the region of an estimated 20% extra on every major procurement.

[A voice]

That's right.

[Prof. Ugurhan Berkok]

Now, there is no hard-core study on this. The Parliamentary Budget Office had some numbers concerning the ships. Historian Granatstein had some estimates; I don't know how he obtained them.

As for the way we work in terms of economic benefits, and this is a very advanced economy, our policy seems to be to buy domestic whenever domestic is available. It can be available, but it may be very costly. The Australians completely gave up this policy.

This is a luxury for us because we don't have immediate threats, so we may be relaxed about it, but the Australians have no room to manouevre. They buy for their defence something worth a hundred bucks by paying a hundred bucks. We are paying $120 because we want to have some things produced here, however much more they may cost.

Our economic benefits program is designed for domestic consumption rather than defence, for domestic constituencies, so it's absolutely inefficient. Regardless of the governments for the past 35 years, this has come down from all governments since the 1980s and maybe the late 1970s. There is no political undertone to this.

To remain within my time, I will show you here these comparable countries in terms of development, as well as our industrial structures. Sizes differ, but the similarities arise because we are all in NATO—Australia, sort of. We are small and developed and we have narrow ranges of defence industries.

There is one mistake on page 7 that I have to draw to your attention. In the second row in the table, in the far right column called “JSF”, you have to put a question mark. We are in the reset process. As for what they do, I'm talking about economic benefits, and we are using so-called offsets, the Canadian expression being “industrial and regional benefits”. Australia said no. The Dutch are moving away. The Norwegians have to move away because the whole European Union is moving away from these offsets.

Offsets mean that when the defence contractors sell us something, we impose a certain value, which at the moment is 100%, that they have to invest here, but then we are in a sense forcing them to do things. There are a lot of escape mechanisms. It creates a lot of inefficiencies. For example, there are the so-called multipliers. Let's say they have to invest $10. If they come and give me a dollar at Queen's, it counts as $5, so immediately we're not enforcing anything.

Shown here is what we do in the world. As you can see, Australia is on the very liberal end of it in the sense that they say to the Australian firms that if they do it as well as anybody else, they'll get the contract. In our case, we say that there is a firm doing it and at whatever the cost it will be done here. That summarizes the policy. We stand where you see the red arrow there. That's my fault. I—

[The Chair, Conservative, Peter Kent]

One minute, Professor, if you could wrap up.

[Prof. Ugurhan Berkok]

One minute? In that case, my last point will be on the F-35 project.

As opposed to all other economic benefit programs, the F-35 is incomparably better. I cannot say the same thing for other dimensions of the F-35 in terms of the strategic value, etc., but economically, all the Canadian companies that were part of this consortium...because the government intervened and opened the gates for Canadian companies to bid on the project. You had to be a member of the consortium so that Canadian companies could bid. All those Canadian companies that bid and won the contracts won them fair and square in world markets, so they are good.

If you're going to have an economic benefits program, you have to follow the lead of the F-35 project. That is, if you're going to support the Canadian industry, you have to open up the path in front of them by levelling the field rather than saying “This company will”; you're not supposed to pick winners.

At any rate, if I maybe have a second here, Germany moved away....

That's it? Thank you.

[The Chair, Conservative, Peter Kent]

Thank you, Professor Berkok. One hopes that we'll come back and have a chance for committee members to question you.

Mr. Perry, could you please make your opening remarks. You have 10 minutes, please.

[David Perry, Senior Analyst, Security and Defence, Conference of Defence Associations Institute]

Thank you, Mr. Chair and honourable members.

lt's a real privilege to be asked to appear before you today as part of your study on the defence of North America. In my opening remarks, I'll be drawing from a study, “Putting the 'Armed' back into the Canadian Armed Forces”, which was recently published by the Conference of Defence Associations Institute and the Macdonald-Laurier Institute. My remarks here will focus on the findings of the paper, but I'd be happy to expand into other areas in the discussion.

Almost a year ago the defence procurement strategy was announced to reform the way Canada acquires military equipment. Its objectives were threefold: delivering the right equipment to the Canadian Armed Forces in a timely manner, leveraging those purchases to create jobs and economic growth, and streamlining defence procurement processes. The implementation of this strategy remains a work in progress. Those aspects that are focused on streamlining procurement appear to have advanced the least.

More change is needed in this area because DND is facing a historically unprecedented problem in actually spending its procurement funds. Since 2007-08 an average of almost a quarter of DND's available vote 5 authorities haven't been spent as intended. Prior to this period, dating back to the 1970s, the historical average for this underspend was around 2% a year. This inability to use the available resources has meant that over $7 billion earmarked for procurement wasn't spent on procurement projects as intended.

lt's important, I think, to recognize that defence procurement is a problem around the world and that it has never been easy in Canada. This recent inability to spend money points to a relatively new set of problems that have significantly impeded defence acquisitions. These are attributable, I think, to five interrelated factors.

First, the procurement workload has expanded significantly over the last decade. Budget increases beginning in 2005, built upon in 2006, and then overlaid with the Canada First defence strategy provided the funding and policy coverage for the largest recapitalization process since the Korean War. Much of this funding increase earmarked for procurement specifically took effect in 2007-08, the same year DND started to significantly underspend its capital budget.

Since 2000, as a result of this increase in funding, the number of major crown projects reported by DND has increased threefold. As a result, there are currently 13 projects worth a billion dollars or more, and many of these, including shipbuilding, are significantly more complex than those we've done in recent history. At the same time, the amount of staff work required to ensure that projects comply with Treasury Board and other reporting requirements has increased significantly.

A second factor is that while this workload has increased, the acquisition workforce has not. The key departments—DND, Industry Canada, and Public Works and Government Services Canada—were all downsized substantially during program review in the 1990s. This left behind a much smaller and much less experienced workforce by the early 2000s. While procurement plans and budgets to fund them have increased since then, simply put, the workforce has not. As a result, the ADM (Mat) group at DND is now managing essentially twice the workload that it was managing 20 years ago.

A third set of factors contributing to the recent problem is program affordability and budgeting difficulties. The budget outlined in the CFDS was too small to acquire all the capital acquisitions outlined in the document, and since its release, much of this funding has been reduced and delayed. A lack of articulated strategic priorities has made resolving this gap between funding and capabilities a problem. In particular, a change to the accounting practices for capital projects means that project budgets are now eroded with each year of delay due to lost purchasing power in a way that they have not been historically. Therefore, procurement delays have resulted in significant capability decreases to keep projects within budget.

Fourth, DND's process of generating military requirements has come under significant scrutiny. While historically there have been concerns about the military seeking to gold-plate its equipment or wiring specifications to obtain particular platforms, the level of difficulty that these issues are now creating is different. Simply put, there's an issue with DND generating its requirements and then effectively communicating those to the rest of the acquisition workforce, the government, you, and the public. Because of this, several major projects have faced significant delays due to questions regarding the appropriateness of the requirements specified by the military, most recently with respect to the acquisition of new fighter aircraft.

Finally, all of these factors have led to a serious erosion of trust in the procurement process which has exacerbated these other problems. While this isn't the only cause, these trust issues are amplified by the F-35 project, which worsened relationships that were already strained. Because of this, trust in the bureaucracy, between departments, and between the bureaucracy and the defence industry has suffered and in turn has contributed to delay-inducing increases in reporting requirements, committee-based governance structures, and extensive use of third parties.

All of these five factors remain prevalent today, but I should note that there have been some promising signs of improvement, most notably with the Halifax class modernization and frigate life extension project, which has proceeded on time and on budget.

To further improve these processes and ensure that National Defence can make best use of its available resources, the paper identifies 10 recommendations. I'll highlight three of them briefly.

First, the review of the Canada First defence strategy must be completed. As part of that review, DND should establish geostrategic priorities to direct future procurements, resolve the mismatch between funding and capabilities in its defence plan, and prioritize planned defence acquisitions.

Second, the size of the acquisition workforce needs to be increased, with a particular focus on the ADM (Mat), major projects delivery organizations, Industry Canada's industrial and technological benefit branch, and the national shipbuilding procurement and defence procurement secretariats.

Finally, this should also be accompanied by corresponding increases in the capacity of the acquisition workforce by improving access to training opportunities, reducing the posting cycles for both public servants and military members into key acquisition positions, and linking staff rotations to key project milestones. Furthermore, I'd recommend that consideration be given to creating a dedicated non-command career path for procurement specialists in the Canadian military.

Thank you. I'll be happy to take your questions.

[The Chair, Conservative, Peter Kent]

Thank you very much, Mr. Perry.

We will proceed now with the first round of questions in seven-minute segments, beginning with Mr. Williamson.

[John Williamson, Conservative, New Brunswick Southwest, NB]

Thank you, Chair. I appreciate it.

Gentlemen, it's good to see you here today. Thank you for joining us.

Professor Berkok, I want to probe a little into the point you made about the decade of darkness and your statement that it was a period of restraint generally. I have a couple of comments about that, and then I'd like to hear your view.

I think you're right. The Chrétien government was engaged in balancing the budget. Whether or not other programs or departments were cut, I don't think there's much debate that it was an awful time for the Department of National Defence, particularly when you look at the spending levels or the restraint that existed in this country both in the 1980s and the 1970s. But not all departments were cut. Aboriginal Affairs, for example, was spared the axe under the Chrétien government. As well, most of the program cuts were in health and education. Provincial transfers were cut by 30%, whereas many departments in Ottawa got off relatively lightly. There were some, like Industry, which was cut in half—subsidy programs—but I would argue that an industrial subsidy program is altogether different from looking at long-term military procurement.

Maybe I missed the point of that, except that you're saying it wasn't so bad because it happened to all of them, when in fact it didn't. I think if you just look at it in isolation, the 1990s were a decade of darkness for the Canadian Forces. Are you disputing that? What was your point there?

[Prof. Ugurhan Berkok]

I am disputing that. Similarly, if somebody tells us that Australia is spending 2% and we're spending 1%, is it another dark age? The argument is that the amount of money we have to spend on defence is determined by various factors, two of which, the most important, are the threats—Australia—and the fiscal situation. When you don't have the money, you don't have the money. You can spare the axe for Aboriginal Affairs, fine, or the transfers can be reduced, but nobody can claim a special status, especially defence, given that Australia is always around very dangerous waters and we're not.

What I'm saying is that we cannot pick and choose what determines how much we spend on defence. There are two major determinants. One is threats...well, foreign policy and threats, obviously, plus the fiscal situation. Those are the most important. The third one, equally important but over which we have no control, is how much all the equipment will cost us, so that's sort of—

[John Williamson, Conservative, New Brunswick Southwest, NB]

Yes, although I would point out that at the end of that exercise, when we're sending our men and women to Afghanistan and they're going over in green combat fatigues and not desert fatigues, and when we're having to hitch rides from our allies, there's a significant impact on the capability and readiness of the Canadian Armed Forces as a result of the spending cuts. Again, Australia is interesting, but it's tangential to the point that the defence department took the brunt of the spending reductions under the government of the day.

Look, I agree with the broad strokes of their moving to balance the budget, but I find the argument you're making that.... You're right, in that it is based on what we need in capabilities, but I would say that the government left the forces in a position where effectively they weren't able to fulfill their mission or they went in unprepared. That's been altogether different under this government, where, if we send our men and women in uniform overseas, we give them the tools, the resources, and the capabilities to fulfill their mission.

[Prof. Ugurhan Berkok]

But as soon as we went in, then we realized—I think there was a sort of flagship signal—that we'd sent them in with those Iltis jeeps, and then we figured out that we were at war and we started spending. In fact, we were unprepared for that—that is true—but everybody was unprepared for 9/11 and what ensued.

What I've been trying to say is that there are conditions under which you cannot claim that we should spend more money. In the 1990s there was euphoria and everybody said the Cold War was over. So that was the time to cut. You can't call it the dark ages.

If you had made cuts during Afghanistan, that would have been the dark ages. We went in unprepared and we fully agreed, because we were just coming out of the cuts, and in a rush we started buying the air force equipment and the V-shape-bottom carriers against the explosive devices, and the bomb disposal equipment.

But you're right in a sense that at first we were unprepared, and then we started spending money.

[John Williamson, Conservative, New Brunswick Southwest, NB]

Right. Thank you.

How much time do I have, Chair?