National Defence Committee on June 13th, 2023

[Lindsay Mathyssen, NDP, London—Fanshawe, ON]

Go ahead, Professor Kimball.

[Prof. Anessa Kimball]

I would say for sure that the people who are drafting these contracts with the defence sector need, before the negotiations, to have a better understanding of how these risks arise. The fact is that they can actually integrate appropriate responses within these agreements themselves, for example, with penalties, cost sharing and flexibility.

The French have something very interesting, which is pre-contractual risk assessment. There's a financial obligation under which the government and the contractor agree that they're both watching for overages and they're both going to take responsibility if there are overages.

You really have to have a shared sense of responsibility and transparency for this to work, but it can work and it's actually helped them streamline their defence procurement and prevented overages on some major projects.

Canada can do some little things. It needs the defence sector to be more open to designing better contracts. It's about the fact that those contractors have private information. How do you get over those structural issues? You need better design contracts. Solutions are available, but Canada just doesn't put those into practice.

[Lindsay Mathyssen, NDP, London—Fanshawe, ON]

In terms of that transparency, an argument could be made by other countries that if you go with a sole source—even if you're open about that and provide explanations as to why—they may be disillusioned by that entirely and just not want to bid at all. Is that a potential concern?

[Prof. Anessa Kimball]

I think the other thing is that the public doesn't understand that the defence market is not a normal, classic market, according to Adam Smith, in which prices are based on supply and demand. We have this very bizarre market.

When we talk about all these things, our abstract conceptualization is of a market that doesn't exist with respect to defence. We need to change our thinking so we understand this market and we can react appropriately to it. Frankly, a lot of the recommendations we see are based on this perfect market that is not the one that in defence procurement we actually work in.

That's another thing: Frankly there's not very much reflection about what that means. Economists have thought about this quite a bit.

[Lindsay Mathyssen, NDP, London—Fanshawe, ON]

In the previous panel, I asked the Auditor General about the Americans going through the investigations on exorbitant costs. There's the fact that certain overcharges have been made by companies that would be within that streamlined system—which, I think, you were talking about, Professor Kimball—and would be trusted defence contractors. Some of those profits are hiked up from 40% to 4,000%.

How do we ensure that we avoid that?

[Prof. Anessa Kimball]

I just want to be clear: What I was talking about in that instance was not the large defence contractors that are changing the market. Those changes to OTA authority were about small businesses.

This is the market Canada wants to be in. We're not Raytheons or Boeings. We don't have any of those. That's the essential thing. Those changes were about permitting access for the level and size of firms that we expect Canada to have competing in the market.

The issue in the United States is that you have these huge monopoly actors that shape the market in ways that are not normal. You can react to this with better contracts and more responsible ways to engage those actors.

Maybe I wasn't clear. For sure, there's more and increasing attention paid to the fact that there are major players distorting the markets. Frankly, some countries like France and Australia are a bit more clear and transparent on how they deal with these things than Canada is. There's been a bit of ignoring that it's going on.

[The Chair, Liberal, John McKay]

You're pretty well out of time. Thank you.

Mr. Bezan, go ahead for five minutes.

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

Thank you, Mr. Chair.

I want to thank both Professor Lagassé and Professor Kimball for their recommendations. I think having recommendations come forward from witnesses is important. I just ask that you provide those in writing to the committee, along with your reasoning. They're something we can actually take a hard look at.

Both of you are saying, in some cases, the same thing but in a different way. It's on being nimble versus being too rigid on procurement and contracts.

Professor Lagassé, you talked about having more of that senior management that we're missing out on. Are you talking about having that skill set within CAF itself, having it within National Defence or having it be inter-agency?

[Dr. Philippe Lagassé]

Let me break it down. Within the CAF, one of the challenges you have is that the requirements are being written by people who are cycling through postings fairly rapidly. The staying power of those people, given the CAF rotation system and how they are reposted after a certain period of time, removes the memory even from individual projects and often in the past has resulted in situations where there isn't that good understanding of how the project is tracking over time. That's something to be aware of in terms of how the CAF sets requirements.

At the upper levels in terms of the matériel group, you simply need people who are experts in this, and you need to hire more of them. As we all know, any sector of the economy is the same. These aren't people you take off the shelf and just put into a position. It takes years to train these individuals. As some of the members mentioned earlier, you're competing with many other industries. To be frank, this isn't simply a procurement problem; this is a cyber problem. This is going to be a problem when it comes to training personnel, maintenance personnel. Whatever it is, we are facing a wall when it comes to the human resource challenges in defence, senior management, technicians and project officers, even within the CAF.

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

There is some of that we can go and hire. For big projects, we're going to need some really good skill sets, so there should be somebody riding herd on surface combatants and somebody riding herd on the F-35 purchases. These are long-term procurements. We just can't have the deputy minister looking at this on a Friday afternoon and saying we'll keep proceeding. We need somebody making those decisions slightly lower down but on it 24-7.

[Dr. Philippe Lagassé]

I'm not worried about those big projects. CSC and future fighter have tons of people dedicated to them. I can tell you only how many years the air force committed to future fighter and the resources that were put in it.

The bigger problem is the smaller projects that don't get the same level of attention. Those projects are ones you may never have heard of, like GBAD, DRMIS and some of these other projects in the system. You want to be sure that you have people there to shepherd them through the process, and that they have the time and dedication to make them happen.

The big rocks—

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

On those smaller ones, if we want to drill down and make sure they move through more rapidly but still have that skill set, should we then make sure that certain...? Right now I think the threshold is that DND can spend up to $50 million without having to go through Treasury Board.

Should those thresholds be increased, and should those still be capsulized within the Department of National Defence rather than spread out over Treasury Board or Procurement Canada?

[Dr. Philippe Lagassé]

Raising those thresholds and, similarly, delegating some decision-making to lower-level individuals within the procurement process is the only way you're going to speed up. It's the only way you're going to be able to meet the pace of change that's being set.

Again, that comes with risk. We need to be able to accept that some mistakes will be made, and we can't allow every mistake that's made in good faith to blow up; otherwise, we end up back with the future fighter, and we end up back with those scandals. We're always going to get back to step one with every change in government if every single small problem that occurs leads to scandal. We have to accept, if we want CAF to take risks and we want them to go faster, that on occasion there will be—

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

I agree with you.

Professor Kimball, you were talking about comparing our procurement system to those of the United States and other countries.

If you look at what we have here in Canada, are we using all the tools in our tool box, like the Defence Production Act? You've already mentioned contracts, but how do we go forward to streamline the process? What role does our domestic industry play in making sure that we have sovereign capability during times of conflict, so that we aren't getting moved to the back of the line?

[The Chair, Liberal, John McKay]

Answer very briefly, please.

[Prof. Anessa Kimball]

Canada needs to do a bit of prioritizing in terms of what its essentials are. We talked a little about the types of projects that get a lot of focus, these big end projects like joint strike fighters, but other things, like equipping the soldier, don't get very much focus.

I don't know how long I've listened to female forces members complain about how poorly the uniforms fit and how they're really lacking the various necessities they need to do their job. That's readiness. Readiness means we have to go out in the field.

I think that's one thing that's very important. There needs to be a reconceptualization when we look at procurement, to say, “Okay, if we want the soldier to fight, they need this kit, and this is how we need to prioritize it. When we do NATO and NORAD, these are the capabilities that are required.”

I know that there is some thinking going on about what different packages would look like for crises and missions in a more systematic, conceptual way. I think it's important that Canada think about that when it thinks about procurement down the line.

[The Chair, Liberal, John McKay]

We're going to have to leave the answer there.

Thank you very much.

Mr. May, you have five minutes.

[Bryan May, Liberal, Cambridge, ON]

Thank you, Mr. Chair.

My first question will be for Professor Kimball.

Previously, it was noted that since Canada has a relatively small industrial defence base, procurement may be challenged by focusing too heavily on purchasing domestically. Do you agree with that?

[Prof. Anessa Kimball]

Yes. There's a bit less focus on purchasing, but I think one of the things Canada doesn't do well enough is thinking about how it can go into R and D with other countries in a collaborative way and how it can work in the line towards producing those things that are sold. If you look at what Canada does, it does not do very much R and D that leads to its own projects.

What is interesting now is we have Finland and Sweden joining NATO. These are countries that share Arctic space with Canada and that will definitely have some of the same needs for procurement. This is where I would say, yes, these are countries that have better and more efficient procurement systems. These are ways Canada could get more by putting in less of an investment, but also secure a future line of assets. This is the type of stuff I think Canada can do better and should do better in the next five to 10 years.

[Bryan May, Liberal, Cambridge, ON]

You kind of touched on my next question.

Maybe you can elaborate a little on what you were talking about there, but how can Canada take steps to better balance that need for efficient, agile procurement with the goal of increasing domestic capacity?

[Prof. Anessa Kimball]

I think it comes down to looking at the types of defence industrial sectors where Canada right now has key capabilities and deciding that these are the ones we want to foster, these are the ones we want to develop. We can look around and say, these are sectors that are maybe complementary to sectors that other partners might have, and really think a bit more transversely about what it can do with others to find a niche in a market where it can say, look, Canada and X countries do this very, very well, and these are going to be the go-to countries.

Right now, Canada doesn't really have an identity like that, though it probably could, because when people think about Canada, they think about the Arctic; they think about the north and they think about the cold weather equipment. Why are we not on those lists and the Swedes and Norwegians are? These are questions that have a lot to do with how Canada has organized itself and how it's prioritized the types of things it invests in.

[Bryan May, Liberal, Cambridge, ON]

Thank you, Professor.

Professor Lagassé, with several departments involved in defence procurement and layers of policies and process, do you have any recommendations for how procurement can be more streamlined, agile and responsive to emerging military requirements? More specifically, can you identify where regulations and process may be doing more harm than good?

[Dr. Philippe Lagassé]

You're all familiar with the difference between vote 1 and vote 5 money. As soon as something engages vote 5 spending, it engages all the processes that are required for a capital acquisition. That means when you're trying to buy something—let's say like a new computer system—you're trying to go through a 15-year process. You're setting the requirements within the first five years, and then you're buying something 10 years later. That's not going to work.

You need something between vote 1, which is like everyday spending, and vote 5, which is investment spending, for high-level technologies and things that have to be procured on a rapid basis. You need almost a middle category of money where it is understood that it is spent with rapidly developing requirements and spiral requirements, such that every year or every time you're buying something, you can buy the latest thing when you need it. Right now, this categorization that we have between vote 1 and vote 5 doesn't allow for that flexibility.

[Bryan May, Liberal, Cambridge, ON]

Professor Kimball, I'll ask the same question to you. Do you have any thoughts on that?

[Prof. Anessa Kimball]

In terms of the details of the process, I would not have much to add other than what my colleague said, because he understands the process on the inside far better than I do in terms of timing. I would say, like I said, comparatively it's a long process for things that we see produced more quickly in other countries. As somebody who looks at these things more broadly, in terms of internationally, I keep having questions and not finding very many responses.