Evidence of meeting #31 for National Defence in the 42nd Parliament, 1st session. (The original version is on Parliament’s site, as are the minutes.) The winning word was terms.
A recording is available from Parliament.
Liberal
The Chair Liberal Stephen Fuhr
Welcome, everybody, to our continuing study of the Royal Canadian Navy and naval readiness as it relates to the defence of North America.
I'd like to welcome Christyn Cianfarani from CADSI, who is here to speak to us today.
Before we get started—and I apologize, as we're a bit late due to votes—Ms. Romanado has something she wants to say.
Liberal
Sherry Romanado Liberal Longueuil—Charles-LeMoyne, QC
Thank you, Mr. Chair.
I'd ask that the members of this committee join me in honouring two members of the Canadian Armed Forces who we've lost in the last week.
[A moment of silence observed]
Thank you.
Liberal
The Chair Liberal Stephen Fuhr
Thank you for coming, Ms. Cianfarani. You have the floor for your opening remarks.
Christyn Cianfarani President, Canadian Association of Defence and Security Industries
Thank you very much for having me here today. It's a very interesting version—and a privileged version—of a hot seat this morning.
Thank you for inviting me to speak to you today.
In my opening remarks, I'd like to give you a Canadian defence industry perspective on the recapitalization of the Royal Canadian Navy and Canadian Coast Guard.
Six years ago, the government unveiled the national shipbuilding procurement strategy, which is now called the “national shipbuilding strategy”, or NSS. The core principle of the NSS is that this historically large recapitalization of the Royal Canadian Navy and the Coast Guard will be carried out in Canada. The objectives behind the principle are twofold: first, to bring predictability to federal vessel procurement; and second, to end the boom-and-bust cycles that have characterized Canadian shipbuilding in the past. Together, the result can be a sustainable long-term shipbuilding plan that benefits Canadians and the Canadian marine industry.
CADSI fully supports the principle and objectives of the NSS. One of the strengths of the NSS is that, from day one, it received strong all-party support in Parliament. I say this because it's a common-sense proposition. Spending tens of billions of taxpayers' dollars over two or three decades on recapitalizing the navy and Coast Guard presents a rare and achievable opportunity. The opportunity is to revitalize Canada's shipbuilding industry, increasing high-wage employment throughout the country and bolstering innovation.
Moreover, at a time when the federal government is trying to jump-start the Canadian economy out of its slow-growth rut, the projects that comprise the NSS are poised to have significant short- and medium-run economic impact, effectively functioning not unlike the infrastructure stimulus that the current government is investing in.
According to government estimates, for example, the large vessels portion of the NSS is estimated to contribute, based on contracts to date, nearly $4.4 billion to GDP and to create or maintain up to 5,500 jobs per year between 2012 and 2022. This economic impact stands to grow as new contracts are signed. One estimate suggests that if capital, personnel, operations, in-service support, and maintenance costs over 25 years are added together, the total estimated cost of the large ship construction program is more than $111 billion.
It's worth mentioning that Canada is a G7 country. Every G7 country has a significant domestic naval shipbuilding industry, some of which—or some of whom—will be actively bidding on the design and build of the Canadian surface combatant.
If you hear someone trying to convince you that they can offer an alternative approach to the NSS and that Canada's industrial benefits requirements should be relaxed, then it's very likely too good to be true. This is one of those very few industries that is seen as being truly strategic and vital to the economies, if not the national defences, of the world's leading countries.
That said, there are those who would argue that Canada should be recapitalizing the Royal Canadian Navy by buying offshore and off the shelf. They'd say that Canada has no business in the naval shipbuilding industry because we don't do this well. The claim doesn't hold water, so to speak.
President, Canadian Association of Defence and Security Industries
Canada has a long and impressive history in naval shipbuilding. The last two major Canadian naval vessel procurements—the Iroquois class destroyer program of the 1960s and 1970s, and the Halifax class frigate program of the 1980s and early 1990s—were carried out in this country at Canadian shipyards and by the Canadian marine industry. I know that you've recently heard of the success of the recent modernization program for the Halifax class frigate. This was, in part, due to Canada's marine industries.
Then, as now, there were controversies over these programs, particularly over the frigates, chiefly with respect to cost, schedule, and the ability of Canadian industry to deliver. Does it sound familiar? Yet, in the final analysis, Canadian industry delivered an impressive capability with the Halifax class, which has served Canada and the RCN well for a quarter century and has led to significant exports of components and technologies developed right here in Canada.
In fact, Canada has proven to be very capable at military shipbuilding in the past, and we will be again if we have the resolve to stay the course with the NSS and have the right perspective on things. We should also not allow ourselves to be seduced by the off-the-shelf bumper sticker. Our well-established military buying pattern tells us that in Canada there is really no such thing as acquiring complex programs off the shelf.
These so-called off-the-shelf solutions are frequently altered through multiple change orders, often significantly, to meet unique Canadian needs and requirements. We should, therefore, be building the industry in this country to satisfy those unique needs, as our allies do.
The fixation over the last couple of years as the NSS got going has been around cutting steel or, to be more precise, the work on the hulls of these vessels. This is actually the visible part of shipbuilding. It's being carried out on both the east and the west coasts, and it will create jobs and growth. Approximately 17% of the total defence sector employment was located in Atlantic Canada in 2014, even before the work of NSS began. That number stands to grow significantly in the coming years.
While cutting steel is obviously important and valuable work, we also need to consider that the hull typically accounts for only 35% of the cost of a warship. Fifty per cent of the value is in the platform and mission systems, and another roughly 15% is in design and systems integration. These are the jobs that, on average, pay 60% more than the average manufacturing wage, and these are the jobs that employ engineers, technicians, and technologists, which make up 30% of the defence industry's workforce.
According to studies on the Canadian marine industrial base that were carried out by Innovation, Science and Economic Development Canada and Statistics Canada, Canada has significant capability in some of these areas of shipbuilding, such as naval ship-borne mission systems, components, maintenance, repair, overhaul, and even simulation, and our strength in these capabilities is, in part, a legacy of previous naval vessel construction in this country.
Let us not lose sight of the possibilities to drive innovation, high-wage employment, and exports in the less visible yet more valuable part of naval recapitalization. The initial acquisition phase of a contract is a smaller proportion of costs than life-cycle costs that include things like the mid-life upgrades, technology insertions, and long-term supportability. It is in these areas that Canadian industry can achieve the greatest return on investment. If we lose sight of this potential because cutting steel for 15 ships is our only focus, we've missed the opportunity of a generation.
For our part, the Canadian Association of Defence and Security Industries, or CADSI, is actively engaged with Innovation, Science and Economic Development Canada, or ISED, on research on the Canadian marine industrial base. This work will improve the government's and industry's understanding of what leading edge marine capability exists in Canada. This helps ensure that capable Canadian companies get a fair shake on the systems, systems integration and other future work.
Finally, I would like to say a few words on budgeting. The recapitalization of the RCN has been estimated to cost approximately $30 billion over 20 years, but it's now conventional wisdom that those initial estimates, conducted in good faith years ago, are in need of upward adjustments. Warship inflation alone, which runs at 9% to 11% in the United States, has increased these numbers substantially. Furthermore, as any business person knows, the real cost of programs this complex becomes clear only when you get close to design and build, which we're only getting to right now in the project. This, by the way, is not at all unique to Canada.
Going forward, the government should be flexible to adjust cost estimates over time, as assumptions alter due to changing variables. Neither industry nor government have much control at all over the price of steel, foreign exchange rates, or any other input cost variables, and certainly not the pace of technological advancement. These costs alone will have changed since the outset of the project.
In conclusion, as a country that has some 58,000 kilometres of mainland coast on three oceans and a significant continental shelf, plus new challenges to its sovereignty in the Arctic, having a first-rate navy and Coast Guard should be bread and butter. Canada should be firmly committed to having a permanent and sustainable domestic naval shipbuilding industry, as do all of our G7 partners.
The NSS, while far from perfect, provides a road map to that end state. We should stick to it. It's a time for us to be bold, not nervous. It's a time to be resolute in the face of the challenges we're going to confront, not afraid of the decisions that we're going to need to make.
Once again, thank you for inviting me to appear before your committee today.
Liberal
The Chair Liberal Stephen Fuhr
Thank you for coming.
I noticed in your bio—I didn't know this, although I've met you before—that you were previously a MARS officer at some point in your life. Thank you for your service.
President, Canadian Association of Defence and Security Industries
Yes, I was.
Liberal
The Chair Liberal Stephen Fuhr
Just to set the tone for this committee session, we have to save some time for committee business. A bunch of motions have stacked up. There is one that we have to get sorted out for sure, which is to allow for the minister to appear in the next meeting, which we all want.
We have 61 minutes' worth of formal questioning. We can get through that if we're all very disciplined, or else we're going to run out of time and not everyone is going to get a question.
Ms. Gallant, go ahead.
Conservative
Cheryl Gallant Conservative Renfrew—Nipissing—Pembroke, ON
Instead of having seven and seven in the first round, to accommodate more people I'm wondering whether we could have five minutes.
Liberal
The Chair Liberal Stephen Fuhr
Yes, that's fine. Do you guys want to do that? Five minutes in the first round?
Conservative
Liberal
The Chair Liberal Stephen Fuhr
We'll stick to the plan. Please be disciplined.
That includes you as well.
Liberal
The Chair Liberal Stephen Fuhr
That said, we have to roll.
The first question will go to you, Ms. Romanado.
Liberal
Sherry Romanado Liberal Longueuil—Charles-LeMoyne, QC
Thank you very much.
I'd like to thank you again for coming. It's a great pleasure to see you again.
I enjoyed your presentation and its aspects. You said quite eloquently that “cutting steel for 15 ships” is not our only focus. I'd like it if you could talk to us a little about some of the work that you've done in a previous life with respect to simulation and training. We talk a lot about the acquisition of our capital assets, but there is a huge component of training, research, and so on and so forth that goes into some of those key acquisitions.
Could you talk to us a little about the importance of simulation and training for the Canadian Armed Forces when it comes to new acquisitions and so on? That needs to be factored in, I'm assuming, when we're looking at major capital purchases.
President, Canadian Association of Defence and Security Industries
That's right. At the end of the day, as I explained in my opening remarks, the total cost or the total life cycle of a ship includes many things other than just building the ship itself. We have the operation and maintenance, the training of the crews, and the long-term supportability. We are expecting all those things to add up to over $111 billion over the course of 20 to 30 years. Also, given that we keep our ships a very long time, there are probably additional activities that would go on there.
With respect to simulation and training, or at least what you would call training crews, crew rotations, and the like, the navy itself most likely—and this is me assuming—will be looking at how they're going to structure their crew loads, how they're going to train and whether it would be a virtual ship ashore, how many ships they need for training, and how many ships will be operational at any given time. I would defer to the RCN on that.
I can certainly tell you from an industry perspective that in this country we have some of the most world-leading training and simulation. I happened to be a part of that world for about 20 years. Not only do we have one company that does this, but we have many, and I imagine they are actively participating right now in the Canadian surface combatant competition in order to put those products and services on the table.
Liberal
Sherry Romanado Liberal Longueuil—Charles-LeMoyne, QC
I have a follow-up question.
A few years back, you were involved in the “Canada First: Leveraging Defence Procurement Through Key Industrial Capabilities” study. Now, in your capacity on the flip side, representing industry, can you talk to us a about our challenges in terms of our procurement cycle? We know that we've had a lot of issues in terms of the time it takes from the SOR to the RFP, and then to the acquisition and the actual combat readiness of our assets. What would you suggest in terms of improving that cycle so that for forecasting we can have that just in time and are not in a situation where we have a capability gap?
President, Canadian Association of Defence and Security Industries
For industry, although it sounds strange to say, the cycle isn't our biggest challenge. It's actually the predictability of that cycle. Generally speaking, industry makes investments in forward-looking research and development activities where it believes it's going to get a return on investment. That's business practice. If you're going to put money in leading-edge technologies, you want to understand when that acquisition is going to happen. That's when you're going to obtain your return on investment. Our biggest challenge is the stability of that funding.
Our second biggest challenge is that, as a nation, we don't do very well at signalling early enough in the cycle what capabilities we want. We do have a defence acquisition guide, which talks a bit about the capabilities that we want to generate for the forces, but having a plan and a strategy around where we would like to focus our priorities as a country will signal to business where to put its money. Once business makes the investment, it will start to understand that the acquisition will happen. Sliding to the right is no doubt a challenge, but understanding where we're going is the bigger challenge from an investment perspective.
Liberal
Sherry Romanado Liberal Longueuil—Charles-LeMoyne, QC
I'm assuming that CADSI did play a role in the DPR we conducted over the summer and will be making an announcement about in the new year.
In terms of industry's input, I know for a fact.... I personally met with the aeronautics industry in Montreal to get feedback for the DPR in terms of identifying what those capabilities are going to be in the long term. How important is it to you that industry is at that table?
President, Canadian Association of Defence and Security Industries
It's exceptionally important. I don't think you can build or design and execute on complex programs like this without industry at the table. It is highly unusual for a country not to have its defence industry at the table during these kinds of discussions.
Liberal
Sherry Romanado Liberal Longueuil—Charles-LeMoyne, QC
I have another question regarding our shipbuilding in terms of the Arctic. We've heard from our NORAD partners that with climate change and so on, the Arctic passageway is of interest, and we know that our colleagues, we'll call them, in Russia are interested in our northern passage.
