National Defence Committee on June 16th, 2023

[The Chair, Liberal, John McKay]

I call this meeting to order. It's 8:45 and I see that we have quorum.

Before I call upon our distinguished guests, I want to make a good news announcement to the committee.

It appears that we now have everything in order to travel. The budget passed without amendment and last night, the report of the committee was tabled without objection, so it appears that we'll be travelling. That will feed what we do on Tuesday. I'd like to set aside an hour on Tuesday to talk about a number of items of committee business. In the first hour, we'll deal with the external monitor and in the second hour with committee business.

Keep that in mind and if we have more meetings.... Well, we do live in the age of miracles.

With that, I am going to call upon Mr. Perry and Mr. Williams for their opening five-minute statements, in no particular order.

Mr. Perry is listed first.

Mr. Perry, president of Canadian Global Affairs Institute, the floor is yours for five minutes.

[Dr. David Perry, President, Canadian Global Affairs Institute, As an Individual]

Thank you, Mr. Chair and members, for the invitation to appear before you today.

In my opening remarks, I'll touch on three things. I'll make a couple of observations about our procurement system, make two suggestions for issues that you might want to study and then offer two recommendations.

The first observation I'd offer is that the problems we are experiencing with our procurement system are systemic, persistent and now a decade and a half old. Most projects, upwards of two-thirds, are delayed by at least a year and many by more than that. As a result, we continue to spend significant numbers of billions less on capital expenditures than intended year after year after year. I saw that you recently heard from the Parliamentary Budget Officer that last fiscal year we underspent relative to what “Strong, Secure, Engaged” had intended by about $4 billion. It's important to note that this underspending is chronic and dates back to 2007.

This means that we aren't just struggling to implement the procurement plans in “Strong, Secure, Engaged”, which we are, but we're still working on procurements from the 2008 Canada first defence strategy, and in some cases from earlier than that. That's the case despite a range of previous efforts of procurement reform, which have simply not been sufficient to keep pace with the intended expansion of our procurements and procurement system to deliver on current policy. Without major changes, you should expect that the implementation of the NORAD modernization announced last summer and the defence policy update, whatever comes with that, is going to fall well short of expectations, because we've been falling short of procurement expectations for over a decade. Further incremental improvements to our procurement system are probably only going to produce incremental improvements in output. If we want a dramatically better output, which is what's needed to deliver on defence policy and meet the current strategic environment, then we need to have dramatic change in the system.

The second observation I'd make is that there is no detectable sense of urgency in our procurement system at all, which is problematic for at least two reasons.

First, the current interest and inflation environment means that the financial impacts of procurement delay are now much more significant than they were only a year and a half ago. The impact of failing to move forward in a timely manner on procurements is much more consequential in terms of lost buying power.

The second reason for urgency is the strategic environment. What seems to be a largely business as usual approach is just not sufficient to equip Canada for the return of great power competition that we're now seeing. The fact that we're struggling to equip troops in Latvia with everything from earplugs to air defence simply isn't good enough in the current environment.

Let me switch gears and suggest two areas for the committee to study: service contracting and infrastructure.

Service contracts are fundamentally important to the department and to the Canadian Armed Forces, which spends far more on this line item than any other department in government does. The budget 2023 announcement of a 15% reduction in service spending will amount to about a $750-million annual cut for the Department of National Defence, if fully implemented. In my analysis, it will be very difficult to implement this without serious impacts to the Canadian Armed Forces. Roughly half of what DND spends on this area goes towards engineering and architectural services. A significant share supports the direct delivery of the capital equipment and infrastructure programs or provides for aircraft, vehicle and ship maintenance. The committee may wish to better understand the procurement implications of these planned budget cuts.

Regarding infrastructure, most of the money provided for NORAD modernization is funding for infrastructure upgrades. Separately, DND has aggressive net-zero commitments, and achieving them will require, basically, an overhaul of DND's infrastructure holdings. This means we're planning a massive increase in infrastructure spending, another form of procurement, over the next several years. It's not clear to me that much has been done to ensure that the exact same problems we've experienced with buying capital equipment—missed deadlines and lapsed funding—aren't about to happen with respect to tens of billions of dollars in infrastructure spending.

Finally, I'd offer two broad recommendations.

First, it's going to take significant time to make the dramatic changes to our procurement systems that are needed. In the meantime, much greater prioritization would be beneficial to ensure that the very limited and insufficient resources that currently exist can be focused on the projects that need that attention and those resources the most.

Second, if we want to see dramatic change that is meaningful, then we need much better data about defence procurement broadly, data about all types of projects to better understand what's working, what isn't and where the worst problems are, and to look for examples of instances where there are best practices that could be replicated and applied elsewhere. If we want to make effective change, then we need to have a much better understanding of the existing system we have today, and I don't think we have nearly as good an understanding as we want to think.

Finally, related to this, I'd echo calls from previous witnesses about the value of increased transparency. Far too many conversations about Canadian defence procurement occur in a near information vacuum, and that work is too important to be done silently, behind closed doors.

Thank you.

[The Chair, Liberal, John McKay]

Thank you, Mr. Perry.

Mr. Williams, you have five minutes, please.

[Alan Williams, President, Williams Group]

Mr. Chairman, members, it's a pleasure to be here. I really appreciate your taking the time to study this issue, which has been a passion of mine for decades now.

Bankruptcy. That is the simple, unvarnished result of the impact of Canada's procurement process on the capital account of the Canadian Armed Forces. The capital costs of Canada's new fighter jets and Canadian surface combatant ships will exceed $100 billion over a 10-year period. Unless there is an injection of new monies, these two programs by themselves will result in an annual $5-billion capital shortfall.

The procurement processes for both the F-35 jets and the Canadian surface combatant ships have been procurement disasters.

With respect to the jets, in 2010, the Conservative government tried to sole-source these jets without any legal authority, and spent years misleading the Canadian public as to why it wanted to do so. The Liberal government, after promising not to purchase the F-35, watered down the industrial and technical benefits policy to allow Lockheed Martin to participate, ruled Boeing's bid non-compliant and, earlier this year, 12 and a half years since the start of this program, awarded the contract to Lockheed Martin.

The costs have escalated from an initial estimate of $9 billion to acquire the jets and $18 billion to maintain them, to a current reported forecast of $19 billion to purchase and over $70 billion to maintain.

With respect to the ships, after violating every basic tenet of sound procurement, the government is on the cusp of acquiring 15 ships for two to three times their true cost. The CSC capital costs have risen from about $26 billion to $85 billion with a life-cycle cost now estimated at over $300 billion.

Fortunately, the prescription to significantly reducing the risks of future procurement process debacles is not a mystery. The three most critical deficiencies in the existing defence procurement process are the lack of ministerial accountability, the lack of performance measures and a lack of adequate reporting, much of which David just touched on as well.

Among our close allies, Canada stands alone with a system of dispersed accountability. The roles and responsibilities for defence procurement are shared between the ministers of National Defence and PSPC. Unless and until one minister is placed in charge of defence procurement, it will never be as efficient and effective as it could or should be. The benefits of creating a single procurement organization go beyond strengthening accountability.

First, the process would be streamlined.

Second, savings will emerge from the elimination of overhead and the duplication of functions. This is a benefit which is crucial at a time when national defence is suffering such significant staff shortfalls.

Third, without one minister accountable for defence procurement, it is difficult, if not impossible, to introduce system-wide performance measures. We need indicators that, at a minimum, measure timeliness and costs. If delays are occurring, where in the process are the bottlenecks? It's impossible to make improvements if we don't have a clear understanding as to where the problems lie.

With respect to costs, two fundamental questions need to be answered. The first is: What is the total life-cycle cost of a program? The second is: Can we afford it?

Today, both questions are inadequately addressed. To best answer these questions, a capital plan needs to be available that displays the full life-cycle cost for each project over a 30-year period, mapped against the projected available funds year by year. Such a plan would have shed much-needed light on the current CSC cost crisis and, frankly, greatly assisted this committee in fulfilling its role.

Defence procurement is a business. Let's begin to run it as such, with one minister accountable for results, with full disclosure of life-cycle costs, with appropriate plans and reports that measure performance, and with rigorous and timely oversight.

Thank you.

[The Chair, Liberal, John McKay]

Thank you, Mr. Williams and Mr. Perry. Thank you to both of you for staying within the time.

It's the first six-minute round and I believe it goes to Ms. Gallant.

You have six minutes, please.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

Thank you, Mr. Chairman.

Dr. Perry, do you believe that the institutional arrangement for responsibility over defence procurement should be changed to produce better outcomes, and how should it be reorganized?

[Dr. David Perry]

I think we should collect some data to figure out where the real problems are. Theoretically, it makes sense that having one minister might be part of the problem, but I'm not sure there's much evidence that would point to the dispersed accountability as actually being the problem or even a key problem that we need to fix.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

Do you think there should be a PCO secretariat responsible for defence procurement so we have that accountability?

[Dr. David Perry]

If you look at other models for trying to address systemic problems in government bureaucracy, something centralized and driven from PCO has been an effective approach in the past. I would support that, yes.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

Dr. Perry, do you think that the current Treasury Board guidelines contribute to the poor defence procurement outcomes?

[Dr. David Perry]

I think that's part of a wider mix. It's not just the guidelines, it's the way they're interpreted and whether or not there's an ability to adapt processes to work to the full extent of the guidelines, rather than sticking with a couple of preferred approaches, which I don't think take full advantage of the actual rules that exist today.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

With respect to your April comments to The Globe and Mail that the Liberal government's military spending levels are “limiting the options” for what we “can undertake and prompting allies to form new initiatives [like] AUKUS...without Canada”, why, in an increasingly dangerous and complex world, are these such serious problems from a national security point of view?

[Dr. David Perry]

The inability to spend the money means that we're not actually buying military capability—ships, planes, some of the things Alan mentioned, and a whole bunch of other capabilities. If you don't have that equipment and you don't have the options available to government to do any range of foreign policy initiatives, you can't send troops abroad.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

What are the benefits of a long-term strategy to build up a domestic defence industrial base in Canada?

[Dr. David Perry]

I think there would be a significant benefit to Canada, in a number of ways, as well as a contribution to the wider allied NATO defence industrial base. I think you see lots of evidence from the conflict in Ukraine that all of NATO's industrial capacity when it comes to national defence is insufficient. If Canada were to make an increase in our contribution, it would benefit not only our own country but our allies more broadly.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

In reference to your 2016 paper, “Fixing Procurement”, has the government put the measures in place to allow for effective project prioritization?

[Dr. David Perry]

Not that I'm aware of.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

With respect to your paper, you recommended that the government make a greater investment in “explaining major purchases in a manner that articulates the rationale behind their enormous financial outlays”.

Has the government successfully executed on this with the recent projects?

[Dr. David Perry]

No. I think government communications have actually gotten worse since I wrote that.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

Okay.

Mr. Williams, you mentioned that the government should begin by providing system-wide performance measures on acquisition cycle times.

Has the government succeeded in making this information available to the public?

[Alan Williams]

No. I don't think any member here has any idea of how long projects take and where the bottlenecks are, and that is a tragedy. Most other countries have these kinds of things.

As I said—and David and I may disagree on this—if you don't have one minister accountable for the whole kit and caboodle from end to end, you won't have system-wide performance indicators, which is what is demanded.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

How could this single point of ministerial responsibility be decided upon? Having been in the system, how do you see that it should be reorganized?

[Alan Williams]

I don't want to be prescriptive here. In my book, Reinventing Canadian Defence Procurement, I outlined a number of models. They're all easily doable legislatively. You can put that accountability with the Minister of Natural Defence or with the Minister of PSPC. You can create a third minister who is accountable for defence procurement. I don't really care. However, I do care about the fact that this is the only area where you're spending billions of dollars a year where the Prime Minister can't identify one minister and say to them that either they're doing a great job or they're doing a lousy job.

Using an example, if you have a number of children and you say to them “take out the garbage”, likely it won't be done. If you tell one child to do it, you have a better chance that they will do it.

This overlap and duplication means that no one is accountable. It becomes much less rigorous. You're not focused on the details and you have sloppiness. That's why you underspend. That's why you don't know where the bottlenecks are. That's why you have these huge cost escalations. It's because you can't hold one person accountable.

I think it's a fundamental flaw that can easily be fixed. It won't solve all of the problems—for sure, it won't—but I'll tell you that unless you do it, you won't get the system fixed. It's mandatory, in my estimation.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

Is it feasible to have a single project manager—one individual—who is responsible for marshalling a procurement from the time it gets past Treasury Board to delivery?

[Alan Williams]

Absolutely. Again, it's a question of accountability. Whether you're talking about the ADM or down to the director general or the directors, there is always one project manager who is held to account.

Now, the reporting has to be done properly. You have to have accountability all the way up the line, but any project in theory has someone accountable for delivering that project.