Public Accounts Committee on May 25th, 2021

[The Chair, Conservative, Kelly Block]

I call this meeting to order.

Welcome, colleagues, to meeting number 33 of the Standing Committee on Public Accounts. The committee is meeting in public today and is being televised.

Pursuant to Standing Order 108(3)(g), the committee is meeting today to study report 2, “National Shipbuilding Strategy”, of the 2021 reports 1 to 5 of the Auditor General of Canada. Today's meeting is taking place in a hybrid format, pursuant to the House order of January 25, 2021; therefore, members may be attending in person in the room and remotely using the Zoom application.

I would like to extend a special welcome to my colleagues, Mr. Paul-Hus and Mr. Van Bynen, who are not regular members on the committee. We appreciate having you join us today.

I have a few reminders for our participants. Interpretation services are available for this meeting. You have the choice at the bottom of your screen of floor, English or French audio. Before speaking, click on the microphone icon to activate your mike. When you are done speaking, please put your mike on mute to minimize any interference. When speaking, please speak slowly and clearly. Unless there are exceptional circumstances, the use of a headset with a boom microphone is mandatory for everyone participating remotely. Should any technical challenges arise, please advise the chair. Please note that we may need to suspend for a few minutes, as we want to ensure that all members are able to participate fully.

Now I'd like to welcome our witnesses, and we have quite a list.

Joining us today from the Office of the Auditor General are Casey Thomas, assistant auditor general; Nicholas Swales, principal; and Chantal Thibaudeau, director.

From the Department of Fisheries and Oceans we have Timothy Sargent, deputy minister, and Andy Smith, deputy commissioner of shipbuilding and materiel for the Canadian Coast Guard.

From the Department of Industry we have Simon Kennedy, deputy minister, and Mary Gregory, associate assistant deputy minister.

From the Department of National Defence we have Jody Thomas, deputy minister; Vice-Admiral Craig Baines, commander of the Royal Canadian Navy—he hails from Saskatchewan, so I'm very glad to see him on our panel today—and Troy Crosby, assistant deputy minister of the materiel group.

From the Department of Public Works and Government Services we have Bill Matthews, deputy minister; Simon Page, assistant deputy minister of defence and marine procurement; and Michael Vandergrift, associate deputy minister.

I welcome you all.

We'll turn the floor over to Ms. Casey Thomas for five minutes.

[Casey Thomas, Assistant Auditor General, Office of the Auditor General]

Madam Chair, thank you for this opportunity to present the results of our audit of the national shipbuilding strategy. Joining me is Nicholas Swales, the principal responsible for the audit, and Chantal Thibaudeau, the director who led the audit team.

The Royal Canadian Navy and the Canadian Coast Guard operate fleets of large vessels to support Canada's participation in security operations around the world, to support marine science, and to ensure that Canada's waterways are safe and accessible. This audit examined whether these vessels were being renewed in a timely manner. Timely renewal is important because of the need to replace aging fleets and introduce new capabilities.

In 2010, the government launched the national shipbuilding strategy to renew these fleets in a timely and affordable manner, as well as to create and support a sustainable marine sector and generate economic benefits for Canada. The strategy also calls for the building of at least 50 large vessels over about 30 years.

Overall, we found that the strategy was slow to deliver the combat and non-combat ships that Canada needs. We found that only two of four ships scheduled for delivery by January 2020 were delivered, and both were late. We also found that the delivery schedules for many ships were getting longer.

We identified three areas of management weaknesses that contributed to the delays. First, we found that schedules were often not effective in terms of managing projects' timelines. For several projects, government officials relied on production schedules to understand expected progress and monitor performance. These schedules underestimated the time needed to accomplish different tasks and they weren't provided in a timely manner by the shipyards.

Second, we found that the risk management tools were inadequate to properly assess, mitigate and monitor the risks of the strategy.

Third, Public Services and Procurement Canada had not confirmed whether the shipyards had met target state. Target state refers to the facilities, people and practices needed to enable the shipyards to efficiently build vessels at the required rate. This expectation was part of the agreements that the department signed with the shipyards in 2012.

During the audit, government organizations made key decisions that improved the prospect of timeliness in future deliveries. For example, in 2019, the government changed the order in which ships would be built at Vancouver Shipyards in an effort to improve the shipyard's efficiency.

Nonetheless, navy and coast guard vessels are aging. When this strategy was launched, several ships had already reached their expected service lives. Measures have been implemented to extend the service lives of vessels, and other ships were chartered or leased to maintain some capabilities. However, interim capabilities are limited and cannot be extended indefinitely. Further delays could result in several vessels being retired before new vessels are operational.

Most ships to be built under the strategy are yet to be built. This means the federal government has an opportunity to further improve how it manages risks and contingencies, so future shipbuilding projects are delivered in a timely manner.

We made three recommendations as a result of this audit. Public Services and Procurement Canada, National Defence and Fisheries and Oceans Canada agreed with these recommendations.

Madam Chair, this concludes my opening remarks. We would be pleased to answer any questions the committee may have.

Thank you.

[The Chair, Conservative, Kelly Block]

Thank you very much, Ms. Thomas.

We will now go to Mr. Sargent for five minutes.

[Timothy Sargent, Deputy Minister, Department of Fisheries and Oceans]

Good morning and good afternoon, everyone. Thanks for the introduction.

I'm pleased to be here to address the Auditor General's report on the national shipbuilding strategy. I'm here with Mr. Andy Smith, who is the deputy commissioner of shipbuilding and materiel, and my colleagues from Public Services and Procurement Canada, the Department of National Defence, and Innovation, Science and Economic Development.

As you know, this is the second Auditor General's report on the strategy, and it was focused on a relatively short period of time in its implementation. The audit period from January 1, 2018, to January 30, 2020, was, however, a very exciting time for the Canadian Coast Guard, during which we made significant progress with the renewal of the fleet under the national shipbuilding strategy. Two of the Coast Guard's new offshore fisheries science vessels were delivered during the audit window, with the delivery of a third ship in October 2020, so we have taken delivery of the first class of ships completed under the national shipbuilding strategy.

In March 2021, Seaspan's Vancouver Shipyards cut steel for a fourth Coast Guard ship. This offshore oceanographic science ship will be the replacement for the CCGS Hudson and is on track for delivery in 2024. While this milestone is acknowledged to be outside of the audit period, it serves to demonstrate the momentum that has been building for the renewal of the Coast Guard fleet.

In 2019, the Government of Canada announced the most significant investment in Coast Guard history, with 24 new large vessels to be built under the national shipbuilding strategy. As a result, funded replacement plans were in place for 29 large ships at the time of the audit. One of those 29 ships was a polar icebreaker that was funded at the time of the audit but did not have a procurement strategy. Since that time, a government investment decision has been made for a second polar icebreaker, bringing us to a total of 30 new large ships for the Canadian Coast Guard under the national shipbuilding strategy. Also in 2019, an additional $2 billion was announced for a comprehensive vessel life extension program that would take our existing fleet to the limit of its technical life expectancy.

We think we're taking steps in the right direction. As noted by the Auditor General, interim measures are being implemented to sustain operational capabilities until the new ships are delivered, and the Coast Guard has started vessel life extensions for its fleet, with the first investment made in 2012. In addition, three medium icebreakers have been acquired to backfill while ships are out of service for vessel life extension work, and there's a competitive process under way to acquire a light icebreaker. This suite of interim measures will provide sufficient on-water capability until new ships are delivered under the national shipbuilding strategy.

The Auditor General noted the continuing risk of delay for shipbuilding projects and recommended that the Coast Guard implement mechanisms to obtain current and reliable schedules to support shipbuilding projects, and to ensure that scheduled targets and delivery timelines are monitored to support timely decision-making. I welcome this recommendation and consider it to be a foundational element of both project and program management. Scheduled monitoring and oversight is something we have been managing very closely with the shipyards and with Public Services and Procurement Canada, and we are making progress.

In the 10 years since the national shipbuilding strategy was initiated, we have learned a number of important lessons and look to continuously fold these lessons into follow-on projects. However, even the most experienced shipbuilders will caution that the process is never without risk. The bottom line is that Canadians can rest assured that we will take any action necessary to maintain delivery of critical Coast Guard services. At the same time, we will continue to work with Public Services and Procurement Canada to ensure the timely delivery of the new ships we need to renew the fleet.

I want to thank the Auditor General for her recommendations. We're committed to addressing them to ensure the success of both the national shipbuilding strategy and the renewal of the Canadian Coast Guard fleet.

Thank you.

[The Chair, Conservative, Kelly Block]

Thank you very much, Mr. Sargent.

We will now go to Mr. Kennedy, for five minutes.

[Simon Kennedy, Deputy Minister, Department of Industry]

Thank you, Madam Chair, for the invitation to be here today.

My name is Simon Kennedy. I'm the deputy minister of Innovation, Science and Economic Development Canada.

I'm joined here today by my colleague, Mary Gregory, who is the associate assistant deputy minister of the industry sector at ISED.

As you may be aware, ISED is responsible for carrying out one of the three objectives under Canada's defence procurement strategy, which is to leverage defence and security procurement to create highly skilled jobs and economic growth in communities across Canada.

A primary tool to achieve this objective is the application of the industrial and technological benefits policy, otherwise known as the ITB policy, which requires contractors to undertake economic activities in Canada equal to the contract value.

In addition, the national shipbuilding strategy value proposition requires that large vessel shipyards, including the upcoming third shipyard, invest 0.5% of the value of their national shipbuilding strategy contracts into the greater Canadian marine industry to ensure its long-term sustainability. Those investments are designed to support human resources development, technology investments and industrial development.

I can report that the national shipbuilding strategy shipyards are meeting their economic leveraging obligations to date, and my department will continue to work with these yards to ensure that their economic benefits obligations are met. For example, national shipbuilding strategy contracts issued between 2012 and December 2020 are estimated to contribute close to $20.1 billion, or $1.8 billion annually, by 2022, to Canada's gross domestic product, and to create or maintain more than 16,900 jobs annually, through the marine industry and its Canadian suppliers.

Between 2016 and 2018, marine sector sales increased by 16% to $4.1 billion, with export growth of 33%, to a value of $1.1 billion in 2018. Canadian companies are having demonstrable success in the global market, with over 80% of Canadian-developed naval systems present on global fleets. This success can be attributed, at least in part, to the ability to leverage experience on domestic projects to pursue work internationally.

I'll conclude my remarks there, Madam Chair, but would be pleased to answer your questions as part of today's appearance.

Thank you very much.

[The Chair, Conservative, Kelly Block]

Thank you very much, Mr. Kennedy.

We will now go to Ms. Jody Thomas for five minutes.

[Jody Thomas, Deputy Minister, Department of National Defence]

Thank you, Madam Chair.

I'm pleased to be here with my deputy head colleagues to discuss the Auditor General's report 2, “National Shipbuilding Strategy”.

I am joined by Vice-Admiral Craig Baines, commander, Royal Canadian Navy; and Troy Crosby, assistant deputy minister, materiel.

First off, I'd like to thank the Auditor General and her team for their very important work. The NSS is a key element of our work at National Defence and, indeed, throughout the entire Government of Canada, to ensure that Canada can be strong at home, secure in North America, and engaged in the world.

National Defence agrees with the report's findings as they relate to our defence team, and we accept its recommendations. We agree that complete current, reliable schedules are absolutely essential for decision-making in the management of the shipbuilding projects. The review and insights highlighted in the AG report are timely and useful.

As with any massive and long-term capital procurement project, we knew we would need continuous review and likely hone our approach as the NSS progressed. That's a very typical reality of major procurement. As the report notes, DND was already in the process of implementing key improvements as the report was being produced.

Additionally, since the report was released, we at DND have coordinated with our colleagues at PSPC and Fisheries and Oceans Canada on our different management action plans to ensure they achieve an integrated outcome. These action plans will outline how, with what milestones, and by when we will achieve the outcome of the recommendations.

At National Defence, we expect that Q2 of fiscal year 2021-22 is when we will be in receipt of shipbuilding schedules that are complete and reliable.

I would also like to address the fact, noted at the end of the report, that we cannot yet know the full impacts of COVID on shipbuilding timelines. This is another difficult reality of COVID. Until we are over the pandemic, we will not have a complete and accurate picture of what the full impact has been, including anticipated delays on major procurement.

However, I want to reassure the committee and Canadians that we have firm contingency plans in place to ensure that the Canadian Armed Forces has the ongoing capability required to conduct operations, including in relation to the navy's work.

Work continues on the Canadian surface combatant project, with the first of 15 ships expected to be delivered in the early 2030s, and the last ship to be delivered in the 2040s. While we develop these modern, capable ships, we will extend our current Halifax class ships as long as is required. Until the arrival of our joint support ships, we've engaged a third party to help provide those interim services, and we can extend that contract if required in order to keep that capability going.

For our Arctic offshore patrol ships, this vessel offers a new capability. There are other means by which we can and do achieve the same outcome, including having vessels escorted by helicopter or icebreaker. Of course, the first AOPS, HMCS Harry DeWolf, is already conducting training and operations.

In addition to shoring up capabilities, we have other means to ensure our operations are supported, up to and including working with our allies to resource-share if an extenuating circumstance arises.

As with so much else in the federal government, cross-departmental collaboration and timely information-sharing are key, both for overall efficiency and increasingly to manage Canada's evolving threat environment.

National Defence will continue to work with our colleagues in other government departments and in Canada's shipyards, as well as with our industry partners, to keep the strategy moving forward.

This concludes my opening statement, Madam Chair. I'm happy to answer any questions from the committee.

[The Chair, Conservative, Kelly Block]

Thank you very much, Ms. Thomas.

We will now go to Mr. Matthews for five minutes.

[Bill Matthews, Deputy Minister, Department of Public Works and Government Services]

Good morning and thank you, Madam Chair. I am pleased to join my colleagues to speak to the committee as it studies the Auditor General's 2021 report on the national shipbuilding strategy.

Despite the global pandemic, Public Services and Procurement Canada continues its important work to serve its clients. The national shipbuilding strategy work is one such example.

The national shipbuilding strategy is a multi-decade commitment, launched in 2010 with three objectives: to renew the fleets of the Royal Canadian Navy and the Canadian Coast Guard, to create a sustainable marine sector, and to generate economic benefits for Canadians.

With the projects already undertaken, the shipbuilding industry is now growing in Canada, and there will be sustained work on this front for many years to come. In all, work from the strategy is contributing more than $1 billion to Canada's gross domestic product every year, and it is sustaining thousands upon thousands of jobs. Most importantly, Madam Chair, the work being done here is helping to support the brave members of the Royal Canadian Navy and the Canadian Coast Guard.

So far, the strategy has produced four large vessels and a number of small ships. Many more ships are currently under construction across the country. We are making important progress, but shipbuilding is complex, and we acknowledge the need to continuously improve. This is why we welcome reviews and recommendations, such as those from the Auditor General.

Madam Chair, to fully understand the Auditor General's report and the important observations therein, we must go back to the time when shipbuilding nearly ceased to exist in Canada.

When the national shipbuilding strategy was conceived over a decade ago, in 2010, Canada was still caught up in the boom and bust cycle of shipbuilding that has historically plagued the industry. Over the years, experience and expertise in shipbuilding had weakened. In those very early days, work and cost projections were not yet informed by actual build experience in our Canadian shipyards. Specialized marine supply chains also needed to be re-energized.

Expertise in Canada was nascent at a time when entirely new classes of ships were set to be built in completely revamped and retooled shipyards. This has led to challenges in planning and schedule delays. We have openly acknowledged these, and several key risks are being managed. The government has made real efforts to better streamline the work required under the national shipbuilding strategy. Indeed, the Auditor General highlights that during the period covered by the audit, the government made key decisions to put the national shipbuilding strategy on a more viable path.

Over the years, both the shipyards and Canada have gained valuable shipbuilding experience. We now have a much more reliable understanding of the time, effort and expenditures required to build world-class vessels. We are applying this knowledge every day, particularly as we closely monitor and manage the work of our shipyard partners.

Madam Chair, we have tabled with this committee our detailed action plan to help ensure shipbuilding schedules are more evidence-based, to improve our risk-management tools and to develop approaches that build on our lessons learned, specifically as we engage a third shipyard in the national shipbuilding strategy. As you will see, we plan to address all of the Auditor General's recommendations within this fiscal year.

Before I close, I will make brief mention of the replacement of polar icebreakers. With so much of our coastline located in the Arctic, icebreakers are an essential part of the Canadian Coast Guard and Royal Canadian Navy fleets.

Earlier this month, the Government of Canada announced plans to construct two polar icebreakers at two different shipyards, in order to ensure that they are built in the most timely and efficient manner. Following a rigorous evaluation of all available options, the simultaneous construction of two polar icebreakers in two shipyards was chosen, as it offers four key advantages: the fastest delivery of icebreakers, optimized economic benefits, minimal disruption to other projects and reduced production gaps.

To conclude, Madam Chair, in order to secure the future of Canadian shipbuilding and to ensure that we have a modern and effective Canadian Coast Guard and navy fleet for decades to come, the Government of Canada is applying lessons learned and putting to use the expertise that Canada has developed over the past decade.

Thank you, and I look forward to your questions.

[The Chair, Conservative, Kelly Block]

Thank you very much, Mr. Matthews.

Colleagues, we will now start our rounds of questioning.

Starting our first round, for six minutes, is Monsieur Paul-Hus.

[Pierre Paul-Hus, Conservative, Charlesbourg—Haute-Saint-Charles, QC]

Thank you, Madam Chair.

Good morning, everyone. My first question is for Ms. Thomas from the Office of the Auditor General.

The report on everything that happened over the past few years with respect to the national shipbuilding strategy is quite scathing. It shows that the government has real weaknesses and that the shipyards have their own shortcomings.

Can you tell us where the failures lie?

[Jody Thomas]

The first thing I would like to highlight is that the expectations, going back to 2010—

[Pierre Paul-Hus, Conservative, Charlesbourg—Haute-Saint-Charles, QC]

Excuse me.

Madam Chair, my question was for Ms. Thomas from the Office of the Auditor General.

[Jody Thomas]

I apologize. I'm happy to hear it's not for me.

[Casey Thomas]

Thank you for your question.

Ms. Thomas and I must pay close attention, since we share the same name.

We identified several issues during our audit. First, we noted persistent shipbuilding delays. The construction, design and development weren't necessarily managed properly when work began. Second, we identified schedule management weaknesses and inadequate risk management tools, and delays in confirming—

[Pierre Paul-Hus, Conservative, Charlesbourg—Haute-Saint-Charles, QC]

We know that. However, more specifically, the shipyards are having trouble building the ships and following the plans, and the federal employees have shown a lack of expertise. They didn't really have the tools. They were using Excel sheets. Were there qualified people? This isn't the first time that Canada has managed large contracts. Yet it seemed as though we were entering a totally new field, and this took several years.

Basically, it's a mix. There were weaknesses in terms of the shipyards, the federal employees and the people in charge. Is that right?

[Casey Thomas]

We looked at whether the fleet of vessels was being renewed in a timely manner. We identified some weaknesses in terms of human resources. The departments have a plan in place to determine whether these weaknesses persist.

[Pierre Paul-Hus, Conservative, Charlesbourg—Haute-Saint-Charles, QC]

Thank you.

We can see that your team analyzed certain issues by also working with external experts.

Should we be working with more people who have specific project management skills as part of the national shipbuilding strategy?

[Casey Thomas]

Since we focused on timelines, we didn't do much work with regard to the experts. I can't answer that question.

[Pierre Paul-Hus, Conservative, Charlesbourg—Haute-Saint-Charles, QC]

Okay.

In recommendation 2.49, you said that you'll consider the experience of Seaspan and Irving in order to provide guidance to Davie.

Given all the issues experienced by the shipyards, do you really believe that Davie should follow the guidelines that will emerge from this? Has anything really been learned from this?

Will advice based on the experience of the other two shipyards really help Davie do a better job, or should Davie be wary?

[Casey Thomas]

Excuse me. As a result of technical difficulties, I didn't hear which recommendation you referred to.

[Pierre Paul-Hus, Conservative, Charlesbourg—Haute-Saint-Charles, QC]

In recommendation 2.49, you said that the experience of Irving and Seaspan should be considered in order to provide information to Davie.

Do you really think that Davie should rely on what happened, given all the weaknesses?

Did these shipyards really gain any relevant experience?

[Casey Thomas]

We found that the shipyards and departments learned from this experience in the early years of construction. While we have concerns, we hope that the measures will work. It's still too early to comment on that.

[Pierre Paul-Hus, Conservative, Charlesbourg—Haute-Saint-Charles, QC]

Thank you, Ms. Thomas. I'm sorry to rush, but we don't have much time.

Mr. Matthews, you spoke about polar icebreakers. First, I want to know whether Seaspan is keeping the same model. We know that the work has been delayed for several years, but is the same model being used again?

Second, will Davie adopt the Seaspan model? Will the two vessels be the same, or does Davie need to start over?