National Defence Committee on Oct. 20th, 2016

[Cmdre Eric Lerhe]

That's an incredibly complex question requiring expertise beyond my skills.

However, I have visited HDW, Howaldtswerke Deutsche Werft, a submarine builder next door to ThyssenKrupp, the other builder and exporter. It is incredibly proud to say its assembly line is lean, and it exports submarines or it will export its assembly line so people can build them themselves.

You look at the French, who often.... With India, it's a “we build one, you build one” sort of thing. I think the argument is that, yes, it's capable of being done; and I've heard equally expert opinions say we shouldn't go down that route at all, be it because of cost or technology. So this really requires detailed research. My personal view is yes, we can.

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

What do you think, Professor Hansen?

[Ken Hansen]

Yeah, we are getting into areas here of industrial policy, what we see as the vision for the future of the industrial base.

I think for surface ship construction, there's no difficulty here. We are quite capable of exploiting the capabilities we currently have, those that we're importing from other countries at Irving Shipyard and Seaspan, and taking it much further because the policy is based on the strategy of continuous building of ships. The minute that's gone [Technical difficulty—Editor] will collapse just as it has done in the past and we will lose the gains that we make. That's to be avoided at all costs.

Submarine construction is difficult because of the numbers we currently have and could possibly envision. Even if we went to eight submarines, doubling the size of the submarine fleet, it's unlikely that we could sustain a steady, continuous building program at a single shipyard for submarines.

So my point earlier about where the emphasis goes and what the fleet composition of the future should be is a pretty complex one. It does need research. The government needs policy advice on this, but it involves multiple departments: education, employment, and industry.

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

As you both know, the surface combatants could be announced in requests for proposals as early as today. Do you have any ideas as to what your wish lists would be on how these ships would look and what type of capabilities they'd have?

[Ken Hansen]

Do you want to go, Eric?

[Cmdre Eric Lerhe]

You start, Ken, please.

[Supt Ken Hansen]

I'm looking for a ship that has a fairly good size and what's called low design density. The more complexity you pack into the hull, the higher the complexity goes, which makes it more expensive to maintain, repair, and upgrade. I want a fairly big ship that's got reserve space for future expansion and one that can exploit this concept of modular technology, so that you could improve it without taking the whole ship out of service. You could put it to lesser tasks, you could have it doing things that are not principally naval missions: supporting the Coast Guard for example or doing health service provision to remote communities. All of these kinds of things are in the realm of the possible. I'm looking for an out-of-the-box solution when it comes to the future combat ship.

[Cmdre Eric Lerhe]

I'm a huge fan of the national shipbuilding procurement strategy and I've written on it. Right now, we have seven bidders who have a very strong probability of providing a ship that meets probably 95% of what Ken Hansen has just outlined. These are mature shipbuilding countries with mature navies who don't build crap. We wouldn't let them bid anyway if they did.

I must applaud the current Minister of Public Services and Procurement, who didn't get cornered on the issue of how much money is she going to spend. We all know they budgeted $26 billion 10 years ago. We all know that every day inflation is stripping $1 million out of that project. She has correctly said, “we are going to wait until this project completes project definition”. That's approximately two years from now before we commit to a bill. That is critically important because three arrows will meet in about two years. Do you want 15 ships? Do you want 10 ships that are absolutely super-capable? Do you want 10 ships that have exceedingly high Canadian content?

Don't forget, we said we want military off-the-shelf designs. Very few people build anything with significantly high Canadian content, even though there are at least four firms with superb capabilities, that are selling literally hundreds of them overseas. The issue is what is it going to cost to change your French, Germany, British, Italian, or Spanish design to insert exceedingly high-grade Canadian content into it.

You will have competing ideas. In two years, there will be a huge debate. How much are you willing to spend and do you want more ships, more high-capability ships, or ships with the optimum benefit for Canadian high-tech industry?

[The Chair, Liberal, Stephen Fuhr]

Thank you for that.

Mr. Garrison, you have the floor.

[Randall Garrison, NDP, Esquimalt—Saanich—Sooke, BC]

Thanks very much, Mr. Chair.

Having asked a bit about research and development, I want to ask a bit more about maintenance. This is in terms of the declining capacity of the Canadian navy to do its own maintenance and the question of maintenance of the new ships that come into service. What we're seeing is a tendency for some of the companies that build equipment to say that they must do the maintenance. What I've heard a lot, especially on the west coast, is that we are going to be dependent on private contractors and, in some cases, foreign companies to do the maintenance of our key naval facilities.

I wonder whether you share those concerns that I'm hearing locally.

[Cmdre Eric Lerhe]

I've had the privilege of reading a lot of the Canadian surface combatant documentation. When you read into it, you find that the designers say, yes, we'll bid your design and we'll incorporate it, but we insist on an incredibly high level of intellectual property transfer, so we can do the maintenance. There's apparently been blood on the floor on this topic. You read about it in the press.

Throughout my reading, the intent has been that Canadian firms will be doing the maintenance and I'm sure there must be some small element that might not be. That certainly is the tenor of the documents and I applaud them for it.

Outsourcing of defence capability to commercial firms is happening all over the world. I applaud the navy. I think it's probably, of the three services, one of the last ones to insist on a large government workforce doing direct maintenance on ships but at the end of the day, it's a cost factor. For example, a ship now will have six different radars. Are you going to train six different technicians to be able to address each one because they're probably fundamentally different or are you going to say, I'll accept a commercial guy doing work on three of them. It's simply a factor of dollars and cents. If the navy had a choice, I'm sure it would want all of its work done in-house.

Ken, I think probably has some strong views here too.

[Ken Hansen]

Actually, I do.

The history of the navy shows that the fleet maintenance facilities are vitally important in the maintenance of the fleet, keeping it ready, rectifying short-notice deficiencies, things that have to be fixed if the ship is going to get out on time to do the assigned task.

This is irrefutable. Those facilities are vitally important. Just do the simple math. With a fleet of 12 frigates, if one of them suddenly goes down, what's the percentage of your lost capability as the ship sits there and waits for a commercial contractor to show up, do an assessment, during business hours, by the way, and then send off his report of findings to the head office, which may be a European company?

I have a son who is a naval reservist and is working on one of the reserve ships. They're now well into their twenties in terms of age. They are a maintenance nightmare. The contracted service support people have less and less interest in meeting their contractual obligations to keep those ships repaired and operating, simply because the effort that's required to maintain old ships escalates very rapidly.

I highly recommend a SPAR study—a company out of Annapolis, Maryland—that shows in the last three or four decades of life, the maintenance costs for old ships escalating by about 400% a year. You can understand why contractors will back away from those kinds of ships and not be interested in doing that work, whereas the navy absolutely must maintain the capability to handle it at short notice.

[Cmdre Eric Lerhe]

I had contractor support for six of those MCDVs. While it's news to me that it's gone to hell, when I was there the support was superb. The company that we hired would fly its technicians all over the world to repair them.

I will acknowledge Ken's point. Certainly based on the Athabaskan, a 47-year-old destroyer, once you start hitting age 30, your maintenance costs go through the roof, as you can all imagine what it's like maintaining a 30-year-old car.

[The Chair, Liberal, Stephen Fuhr]

Thank you.

We have enough time to circle back to you, Ms. Romanado. You have the floor.

[Sherry Romanado, Liberal, Longueuil—Charles-LeMoyne, QC]

Thank you so much. Actually, this was really a fantastic segue to what my colleague Randall is talking about. I wanted to speak a little about education, and in terms of our maintenance and so on.

Regardless of whether we're talking about naval equipment, air force, or Armed Forces, our biggest spend is going to be in military procurement. On the question of intellectual property, sovereignty issues, our capacity to actually keep the jobs here in Canada is vitally important in terms of our economic growth and so on and so forth.

I have a question in that regard. We currently have the capacity to maintain our frigates and so on, and we have multiple companies bidding on these projects. In your opinion, should we be focusing more and more on keeping this capability here in Canada, in terms of our long-term growth strategy, in terms of creating those jobs, in terms of our sovereignty, our capacity to grow that industry? I will give the example of our aeronautic industry. We should be focusing on keeping that intellectual property.

I was looking at the briefing that we received for our Royal Canadian Navy, and it's even our training that we're looking at now, possibly even outsourcing that. What should we be doing in terms of keeping that capacity here? Of course we have to have that interoperability with our NATO allies and so on. But if we're able to invest in Canada, of course, I think that would be most ideal. Could you elaborate a little more in terms of our education, in terms of our training, in terms of our procurement, and of course, the supply.

The procurement of the asset is one thing, but then it's our capacity to maintain that asset for multiple years. As you know, we keep our assets longer than their lifespan, unfortunately. Could you elaborate a little more on that?

I'm sure, Dr. Lerhe, you have some comments, as well as Professor Hansen.

[Cmdre Eric Lerhe]

I can probably kick off. Yes, yes, yes.

Upon reading the documentation for the Canadian surface combatant, because it's in the news, there is a sustained effort to make it contingent that anybody who bids had better plan on transferring a huge amount of work to Canada, be it with equipment into the ship, or with investing in Canadian companies, or bringing manufacturing companies to Canada. That's the plan.

However, you also have to say that some Canadian companies, primarily because of the huge step-up that the Canadian patrol frigate gave them, have developed a massive worldwide market in the most sophisticated capabilities in the world. I speak of L-3 MAPPS, integrated platform management systems, the things that run your ship. They don't sell tens, they don't sell hundreds, they sell thousands to the most demanding customers in the world: the U.S. navy, the Israeli navy, the British navy. And ditto OSI, integrated bridge systems, again, hundreds of systems, and DRS Technologies, communications systems that are in the crown jewel of American shipping, the carriers, the nuclear carriers.... So we have the capability, and people can use something like the national shipbuilding strategy to lever themselves to, quite candidly, world dominance in those areas. Nobody is doing as well as we are in those areas.

However, when you decided to stop building CPFs in 1996 and start building AOPSs in 2015, a 19-year gap, how many companies have the capacity to live through 19 years of drought exclusively on export orders? It's a tough demand, ergo the national shipbuilding strategy's intent is to go to a continuous shipbuilding program.

[Sherry Romanado, Liberal, Longueuil—Charles-LeMoyne, QC]

Professor Hansen.

[Ken Hansen]

I'm in complete agreement with Commander Lerhe. The strategy's intent is to develop the national industrial base. I've been writing about the shipbuilding strategy, and the problem is that you get differing views on what the strategic priority is among the goals: develop the industrial base, provide high-quality employment, or, provide the equipment needed by the navy and the Coast Guard. Depending on which speaker talks, you get a different assessment of which of those three things has the priority. That's problematic when it comes to the kind of question that you're asking about Canadian benefit to the economy.

I was pretty disappointed, I have to be candid, about the decision to buy an off-the-shelf design, because that puts limits on the kinds of Canadianization that can happen by design. If we go with somebody else's design and it has that high design density I was talking about earlier, the costs of Canadianization will be spectacularly high. This is the situation we ran into with the Victoria class submarines. We didn't have the intellectual property rights, there was very tight design density, and they were extraordinarily expensive to modernize and Canadianize. The costs went through the roof. It is probably—it's not 100% certain—false economy to buy an off-the-shelf design if your intent is to provide maximum value for the Canadian industrial base. I see them as being at cross-purposes.

[Cmdre Eric Lerhe]

I will qualify that with one thing. Remember when I said our defence research spending has fallen to 1.2%? On the CPF, if was probably in the neighbourhood of 5% to 7%. All of those successful companies, I can almost be sure to 99%, were also matched by huge Canadian defence research to get SHINCOMs, DRSs—a very successful world model— IPMS, SHINMACS, again another defence research program, and the command and control system, all because we had a desire and we had the capacity. At the time, we had 13,000 people involved in the assistant deputy minister, materiel, group, which manages projects. Today we have 3,000, and, surprise, there are problems. When you cut your defence research budget by five times, the effect on the ability for the Canadian industry to come up with a product is dramatic. Therefore, I would say—and I wasn't in the room—perhaps the decision to go military off-the-shelf was inevitable.

[Sherry Romanado, Liberal, Longueuil—Charles-LeMoyne, QC]

I can guarantee you that we're not the people at the decision-making table, unfortunately.

I take your advice to heart. You mentioned that it's important that the members of Parliament understand the importance of defence spending and so on. Rest assured....

Professor Hansen, you mentioned that your son is in the naval reserve. I have two sons, and they both serve in the Canadian Armed Forces, so they call me the “force generator” here on the Hill.

Rest assured that the folks sitting at the table have heard you loud and clear. Quite frankly, I have trouble sleeping at night now, wondering how our sovereignty and our protection are going, but rest assured that we've heard you.

Thank you so much.

[The Chair, Liberal, Stephen Fuhr]

Is there anyone else who would like to ask a question before we say goodbye to our witnesses?

I want to thank you both for your service to the country and for coming today and for your frank and very detailed testimony. Thank you very much.

The meeting is adjourned.