Public Accounts Committee on May 25th, 2021

[The Chair, Conservative, Kelly Block]

Thank you, Monsieur Paul-Hus.

We will now move on to Mr. Fergus, for five minutes.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

Thank you, Madam Chair.

I would once again like to thank the witnesses appearing today.

I do not come from a region of the country where ships or icebreakers are built. However, as a member from the National Capital Region, I am very familiar with governance and project management issues.

I will read to you recommendation 2.36 from the Auditor General's report on the national shipbuilding strategy:

The Canadian Coast Guard, National Defence, and Public Services and Procurement Canada should implement mechanisms to:

– obtain complete, current, and reliable schedules to support shipbuilding projects

I see that the department has accepted that recommendation.

My question is for Mr. Matthews or Ms. Thomas, from National Defence.

Are you sure that you now have the tools needed to manage the schedule and carry out the tasks related to the building of those ships?

[Bill Matthews]

Thank you for the question.

I would say two things. First, we are almost certain that we do, but we have to continue to improve our tools. We have already talked about the software used to improve risk management. We are currently implementing it, but we are still not finished.

Second, we have started to use the earned value management method, which is a best practice used around the world.

Even with the most experienced shipyards in the world, if you look to South Korea or the U.S., there is always risk and there is always challenge.

We're in a better place. We're implementing the recommendations and we're moving, but don't ever think shipbuilding will not be complex and will be risk-free. That's just not the nature of the business.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

I understand.

Ms. Thomas, go ahead.

[Jody Thomas]

I would just echo what Mr. Matthews has said.

In our project budgeting, at the early stages, we account for some of this risk. Delays cost money, so there is a significant contingency attached to each project in the early days, and it's pegged down over the years as we know exactly what we're buying and the schedule firms up.

We will continue to monitor that contingency as we see things like the impact of COVID on both of the current projects under way, the AOPS, which are in construction, and the Canadian surface combatant, which is still very much in the design stage.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

Ms. Thomas, I recognize that there are delays in all the shipyards of the world, given the complexity of processes. However, do you think our system for awarding contracts is inadequate? Do you think it does not take into account the complexity of the process and the probability of it causing delays that will cost us money?

Could best practices be adopted?

As Mr. Paul-Hus mentioned, instead of awarding a $400-million contract, and then another contract twice that value for the same vessel, is there a better way to take that into account when contracts are awarded?

[Jody Thomas]

Madam Chair, I would suggest that every country that is building ships at this complexity and has a program this large is struggling with many of the same issues we are.

We are the third country, for example, to build the type 26 surface combatant. We are learning from the U.K. and from our colleagues in Australia.

The national shipbuilding strategy set out to do more than one thing. Of course, we wanted to resupply and recapitalize the navy and the Coast Guard, but we're also building an industry. Those two objectives, both critical for us as a country, added to the complexity.

I would say the other complexity is that we build ships once every 30, 35 or 40 years, for both the navy and the Coast Guard. We're leaping generations of technology in one program and in one project, and that adds to the complexity, because the last time we built ships was in the eighties and nineties for the navy, and before that, really, for the Coast Guard. A more regular process of building ships would, I think, reduce the complexity.

[The Chair, Conservative, Kelly Block]

Thank you very much, Mr. Fergus.

We will now go on to our next round of questioning, which is a two-and-a-half-minute round, starting with Monsieur Blanchette-Joncas.

[Maxime Blanchette-Joncas, Bloc, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Thank you, Madam Chair.

I would like to continue with my question for Mr. Matthews.

Mr. Matthews, my colleague Mr. Paul-Hus asked you earlier who was managing the national shipbuilding strategy. No one answered. That means leadership is currently lacking.

If no one is in charge of implementing the entire strategy, where do orders that govern the awarding of contracts come from?

[Bill Matthews]

I thank the member for his question.

I don't agree with the statement that no one is managing the strategy. It is true that three or four departments are playing a role in its management.

At Public Services and Procurement Canada, we run the program. We're responsible for managing the program.

If it's a question of which departments figure out what the required capabilities are, what ships are required and what budget they have, that would be National Defence for the navy, and Fisheries and Oceans and the Coast Guard for the coast guard.

For the industrial benefits piece, which is an important part of the strategy, my colleagues at ISED are led by the deputy minister, Mr. Kennedy, but the overall coordination of the program is with PSPC. When we're sitting on what type of competitive process we should run to award a contract, or what's the strategy, obviously there are lots of inputs, but it's PSPC that chairs that table and then manages the execution of the actual contracts.

[Maxime Blanchette-Joncas, Bloc, Rimouski-Neigette—Témiscouata—Les Basques, QC]

I want to make sure I understand, Mr. Matthews.

So Public Services and Procurement Canada is managing the awarding of contracts. Is that right?

[Bill Matthews]

It actually depends on what we are talking about. We manage contracts and the process, and we decide whether to launch a competition or not. The decision is often made by the government, but we, at Public Services and Procurement Canada manage the process and the contracts.

[Maxime Blanchette-Joncas, Bloc, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Mr. Matthews, you just said something that made me raise my eyebrows. You are saying that the government makes the decision. However, I am under the impression that influential cabinet members leverage all their political weight to further key regional political interests. Normally, the senior public service advises the government. You say that you do not lead the entire strategy. So you carry out political orders.

Is that true or false?

[Bill Matthews]

The government must make decisions to assign a budget officer—

[The Chair, Conservative, Kelly Block]

Thank you very much, Mr. Blanchette-Joncas.

We will now go to Mr. Green for two and a half minutes.

[Matthew Green, NDP, Hamilton Centre, ON]

Thank you.

We heard the deputy minister for the Department of National Defence, Ms. Thomas, state in earlier testimony that essentially time is money when it comes to delays. We know that the Parliamentary Budget Officer has already reported that each ship year that a project is delayed will see production costs increase potentially by tens of millions of dollars per ship.

Through you, Chair, when the deputy minister is doing costing and contingency, how much have they set aside for contingencies related to the surface combatant shipbuilding program and the 15 type 26 ships?

[Jody Thomas]

I'm going to ask my ADM of materiel to weigh in.

We have a very robust budgeting and cost-estimating function here at national defence. They work with various models to build that in. We may have to get you the exact number and give that to you after the meeting, but I'll ask Troy to weigh in on the answer.

[Matthew Green, NDP, Hamilton Centre, ON]

Before he does that, in speaking to your robust costing, would you perhaps go on the record today and just clarify all the confusion around how the estimates were different from the PBO's, setting aside the calculations around the weight and the size calculations they had there?

When you do procurement through the Department of National Defence, do you not include provincial sales tax in your overall estimates, as reported to Parliament?

[Jody Thomas]

Our costing is, as I said, based on models. We do not include tax. The PBO does, but the numbers have essentially been within a range of each other that I think is reasonable going into the design phase of the ship.

The difference the last time had to do with the amount of contingency and the emphasis that the PBO put on the weight of the vessel.

[Matthew Green, NDP, Hamilton Centre, ON]

It totally froze. I'll have to probably go back to the Hansard on that.

While we're here today, the original costing for—

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Chair, on a point of order, it not only froze for MP Green, but I think for everyone during that period of time, so I'm not too sure what the witness said. Obviously we'd like to give Mr. Green his full allotted time.

[The Chair, Conservative, Kelly Block]

Absolutely. We can certainly do that.

Mr. Green, can you advise as to what you heard in the response that was being given?

[Matthew Green, NDP, Hamilton Centre, ON]

Okay. Thank you for that grace.

I do want to get clear on this, because I'm still unclear how we go from $26 billion to $50 billion or $60 billion to what the PBO is reporting as $82 billion. That's on a program that would be on time. We now know that this potentially can have significant delays.

Rather than the modelling.... I guess it's a general question, back through you to Ms. Thomas. When you're doing procurement for other things—materiel and regular stuff—and you're doing estimates that would go into our estimates here at public accounts, do you or do you not include provincial sales tax?

[Jody Thomas]

I will defer to Troy Crosby to answer that question for you, as he is responsible directly for that budget input.

Our budgeting process and our costing process for every project is the same, regardless of the size. For details on the specific project, the project cost for “Strong, Secure, Engaged” was $62 billion when we fully costed and budgeted for it, and the ships will come in within that amount.

Troy.

[Troy Crosby, Assistant Deputy Minister, Materiel Group, Department of National Defence]

Thank you, Madam Chair.

The current estimate, as the deputy said, of $56 billion to $60 billion does not include an amount for provincial or federal taxes. Through agreements between the provinces, and because the federal tax would return to the federal government in any case, those tax amounts are not included.