National Defence Committee on June 9th, 2023

[The Chair, Liberal, John McKay]

We are commencing a study. We welcome the Parliamentary Budget Officer, Yves Giroux, and his colleague, Christopher Penney, to launch our study. It is pursuant to a motion taken by this committee on April 21 that we will begin studying the impacts of Canada's procurement process on the Canadian Armed Forces. I'm looking forward to the PBO's analysis.

We appreciate your appearance here today. With that, you have five minutes, sir.

[Yves Giroux, Parliamentary Budget Officer, Office of the Parliamentary Budget Officer]

Thank you, Mr. Chair.

Good morning, members of the committee. Thank you for having invited us to testify before you today.

We are looking forward to telling you about our analysis in connection with your review of the impact of Canada’s procurement process on Canadian Armed Forces preparedness. With me today is Christopher Penney, our eminent defence advisor-analyst.

In accordance with the PBO's legislative mandate to provide impartial, independent analysis to help parliamentarians fulfill their constitutional role, which consists of holding the government accountable, my office has published the following recent reports related to your study: “The Life Cycle Cost of the Canadian Surface Combatants: A Fiscal Analysis”, “Canada's Military Expenditure and the NATO 2% Spending Target”, “The Industrial and Technological Benefits Policy: An Analysis of Contractor Obligations and Fulfillment”, and “Planned Capital Spending Under Strong, Secure, Engaged—Canada's Defence Policy”.

In the coming weeks, we are also planning to release an independent cost estimate of the F-35 fleet as well as an analysis of the defence force structure model.

Christopher and I would now be pleased to respond to any questions you may have regarding our defence analysis or other PBO work.

Thank you.

[The Chair, Liberal, John McKay]

Thank you.

Witnesses should always be this economical with their opening remarks.

Ms. Kramp-Neuman, you have six minutes, please.

[Shelby Kramp-Neuman, Conservative, Hastings—Lennox and Addington, ON]

That's excellent.

Thank you for your brief testimony. I'm sure we'll get into some questions from all of the respective parties.

With regard to my first question, in the PBO's 2022 report entitled “Planned Capital Spending Under Secure, Secure, Engaged—Canada's Defence Policy: 2022 Update”, it states that the capital spending from 2023-24 through to 2027-28 “potentially raises questions regarding the ability of the Government to manage increased procurement activity.”

Could you speak of any recent progress that the government has made towards ensuring that procurement problems do not arise from the dialled-up defence spending over this period?

[Yves Giroux]

When we released that report, we indicated that the government was underspending compared to its planned capital expenditure under strong, secure and engaged, to the tune of about $8 billion over a four-year period, which led to a shortfall of about $2 billion per year. The government, at the point when we released our report, had revised its capital expenditures to make up for that shortfall.

With respect to whether we have more information, I'll let Christopher answer that part of the question.

[Christopher Penney, Advisor-Analyst, Office of the Parliamentary Budget Officer]

The only thing I would add is that we know that in 2022-23, there was a shortfall, as compared to planned SSE spending, of about $1.5 billion in capital. In 2023-24, the present fiscal year, the main estimates suggest that the shortfall will be about $4 billion.

There was over $10 billion planned spending under SSE for 2023-24, and only $6 billion was asked for in the main estimates.

[Shelby Kramp-Neuman, Conservative, Hastings—Lennox and Addington, ON]

Thank you.

For my next question, I understand there are excessive project specifications and that they're a major factor with regard to the timeline we see for many defence procurement projects. Would you be able to explain how we could speed things up by eliminating unnecessary specifications?

[Yves Giroux]

It's a delicate issue. We're not military experts when it comes to the needs of the Canadian Forces and it's difficult for us to determine whether these specifications are excessive or not. However, we can provide general statements or general observations when it comes to defence procurement.

There's clearly no single point of accountability that may explain the delays. For example, there are at least two ministers in two departments involved in major procurement processes. Major procurements are ultimately resting upon political decisions. There are also contracting approaches that favour industry partners and tend to cede control from the federal government.

When it comes to the specification aspect, there are obviously unique specifications required due to Canadian-specific characteristics, land-mass size and climate. However, there could probably be improvements, when it comes to specifications that would benefit from being clearly delineated from the get-go, as opposed to changing the specifications once the procurement process is launched.

[Shelby Kramp-Neuman, Conservative, Hastings—Lennox and Addington, ON]

Okay, perfect.

Just to take further your response to that, if the dispersion of responsibility is across several different government departments and agencies, do you agree with the diagnosis that having a single point of ministerial responsibility would contribute to a faster and more efficient procurement process?

[Yves Giroux]

It would certainly be a contributing factor and something that would favourably enhance the speed of procurement and the efficiency of the procurement process to have one single minister and one single senior official responsible.

[Shelby Kramp-Neuman, Conservative, Hastings—Lennox and Addington, ON]

Okay. Thank you.

Further, with regard to reassignment of authority, it's often been said that the defence procurement is its own beast and therefore it may not be appropriate to assign a responsibility over to PSPC.

Do you agree with this characterization? If so, what department or agency would be most appropriate for managing it and why do you think that?

[Yves Giroux]

That's a question that I don't think I am in the best position to answer as to who should be responsible. I think as long as there is one organization or minister or senior official who is ultimately responsible with the right skill set and the right support structure behind them, that would be appropriate. Whether it be PSPC or National Defence or even somebody else, I don't think is material or matters that much, as long as they have the right skill sets and the appropriate structure to support them.

[Shelby Kramp-Neuman, Conservative, Hastings—Lennox and Addington, ON]

Thank you. I'll go to my next question.

In the PBO's 2022 report entitled “The Industrial and Technological Benefits Policy: An Analysis of Contractor Obligations and Fulfillment”, it stated that the “ITB policy affect the outcomes of competitive procurement processes” and “a supplier that proposes lower value-for-money, or a higher price, could still be awarded a multi-million dollar contract if it promises greater economic benefits to Canada.”

In your view, does the eventual ITB benefits generally exceed the extra costs?

[Yves Giroux]

Again, it's a value judgment that's a bit difficult to make or to decide upon because there are reasons why the ITB has been put in place. One would need to look at the counterfactual to determine in the absence of ITB what would be the price and what would be the economic benefits.

What we have found though, and what was surprising to us, is that even if there are a multipliers that reduce the dollar requirement for ITB investments for corporations in post-secondary education, for example, or research and development, very little of the value of these contracts go toward the higher multiplier effect. This suggests that the ITB may not be working fully as intended when it comes to multiplying the economic impacts in these high-value sectors such as post-secondary education and research and development.

[The Chair, Liberal, John McKay]

Thank you, Ms. Kramp-Neuman.

Mr. Fisher, six minutes.

[Darren Fisher, Liberal, Dartmouth—Cole Harbour, NS]

Thank you, Mr. Chair.

Thank you, gentlemen, for being here and the important work that you do every day ironing out all of the wrinkles in the way government works or sometimes doesn't work.

You may have touched on some of this with Ms. Kramp-Neuman, but I'm thinking of the layers of policies. I'm thinking about the layers of process, especially with defence procurement. I'm looking for specific recommendations. How do we streamline? How do we get more agile?

I know we can do procurement of a baseball hat pretty well, but when it gets to really big things and we have multiple departments within government all looking at defence procurement specifically, how do we streamline? How do we get more agile and responsive to our incredible military requirements?

[Yves Giroux]

It's an interesting question because we start from a base where there's a small defence industrial base in Canada compared to other countries. Right there, we are at a disadvantage especially if we insist on having Canadian-made major equipment. The government obviously for various reasons often insists on domestic production. That severely limits the competitive base on which the government can tap. A small industrial defence base, that's one disadvantage.

There are ways, I think, of overcoming at least in part this disadvantage, notably by having one single point of contact when it comes to defence procurement and not just a point of contact but a point of accountability. Right now there are at least two departments involved, Defence and PSPC. That would be one way to simplify things, having one person and one organization ultimately accountable for military procurement.

There are obviously ways to simplify the procurement process. I think specialists in procurement could be better placed to explain in detail how to streamline the procurement process.

[Darren Fisher, Liberal, Dartmouth—Cole Harbour, NS]

How do we balance competition while still seeking speed and also acknowledge that we have to be fiscally responsible?

[Yves Giroux]

That requires a delicate balancing act between cost and value for money versus.... It's that and also ensuring that there are significant or measurable economic benefits for the country while also ensuring, as has been the government's policy for some time now, the development of a domestic defence capability. As has been pointed out to me, it's one thing to procure major equipment from abroad, but in case of war, it doesn't guarantee us that we'd be first to be served. We'd probably be at the back of the queue.

There are intangible costs to procuring abroad in case of unforeseen needs. There is obviously value in having a domestic production capacity.

[Darren Fisher, Liberal, Dartmouth—Cole Harbour, NS]

Speaking strictly about democracies, not just in procurement but specifically in defence procurement, which democracies are doing it right? What are they doing differently?

[Yves Giroux]

It's difficult to provide a definite and clear answer to that. If you look at some countries, there are anecdotes that some military departments can buy pens and screws at prohibitively expensive prices, but on the other hand they're very efficient at producing and putting frigates in the water and so on.

We have some numbers here as to costs. They may not be comparable. The Arleigh Burke destroyers in the U.S. cost about $2.2 billion U.S. apiece, the South Korean destroyers cost about $1 billion apiece and so on. In comparison, the Canadian surface combatants are at over $5 billion Canadian apiece. However, it's not entirely sure that these numbers are fully comparable. The U.S. and South Korean numbers may not include all the costs that we include in our own estimates.

There are other countries that do well in some specific areas of procurement. In this case, it's warships.

[Darren Fisher, Liberal, Dartmouth—Cole Harbour, NS]

Do all democracies in defence procurement demand or expect a level of domestic production?

[Yves Giroux]

I don't know about that.

[Christopher Penney]

In my experience, it seems that almost every country levies some type of program that is similar to the industrial and technological benefits program. We generally refer to these as defence offsets. This is more the norm rather than the exception. It is something that we see. There is a favouritism toward domestic production, yes.

[The Chair, Liberal, John McKay]

Thank you, Mr. Fisher.

Madam Normandin, you have six minutes, please.