THE STANDING SENATE COMMITTEE ON NATIONAL FINANCE
OTTAWA, Tuesday, April 9, 2019
The Standing Senate Committee on National Finance met this day at 9:30 a.m., to study the processes and financial aspects of the Government of Canada’s system of defence procurement.
Senator André Pratte (Chair) in the chair.
The Deputy Chair: Honourable senators, I now call the meeting to order. I am Senator André Pratte, the deputy chair of the committee. Today, I am filling in for Senator Mockler, the chair, who is travelling with another committee.
Our committee is continuing its special study on military procurement, which we started on October 30, 2018. Today we welcome one informed observer and one academic. Both have expressed undeniable interest in the issue. They are Mr. David Perry, Vice President and Senior Analyst, Canadian Global Affairs Institute; and Mr. J. Craig Stone, Associate Professor and Deputy Chair, Department of Command, Leadership and Management at the Canadian Forces College.
Each gentleman will have about nine minutes for introductory comments.
J. Craig Stone, Associate Professor and Deputy Chair, Department of Command, Leadership and Management, Canadian Forces College, Department of National Defence and the Canadian Armed Forces, as an individual: Thank you, chair and senators, for the invitation to appear before you today and to be part of your study on processes and financial aspects of Canada’s defence procurement system. I’m aware your time is valuable, so my intention would be to limit my remarks to a couple of issues in order to leave more time for you to ask questions. I’m a firm believer that answering questions is a better use of your time rather than me telling you what I think I know or think you want me to tell you.
I have reviewed the testimony from the three previous sessions and, based on some of the questions you have asked during those sessions, I thought I would address two specific issues: the utility of a single procurement agency and the utility of industrial benefits, both of which are somewhat related.
Let me begin by noting that the Public Accounts last year indicate Defence spent $3.8 billion on procurement or vote 5 activities, and most of that spending proceeded on time, on budget and without attracting any attention. The difficulty with defence procurement, as all of you are aware, is with the large expensive items like ships, airplanes and armoured vehicles. They are expensive, complex, invariably become political and attract criticism from a variety of sources. All of our traditional allies have the same problems.
This brings me to the issue of a single procurement agency. I have written in the past that it would not actually solve the three things that generally go wrong with large procurements: cost overruns, delays in production and not meeting operational requirements. These three issues happen with our allies regardless of whether they have a single organization responsible for procurement or multiple branches of government responsible. The causes for delays are generally not straightforward and not easily fixed.
Political interference, changing budgets, changing requirements and multiple objectives are generally all contributors when complex projects go astray. When I wrote about this particular issue, my views on a single agency were that it might shorten the time somewhat because the government would be able to leverage the workforce available in DND and what was then Public Works and Government Services Canada. I’m less supportive of the notion made by some that there needs to be one minister accountable for procurement and consequently accountable to Parliament.
My views are based on our system of cabinet decision-making, where the Prime Minister is ultimately accountable and ministers serve at the Prime Minister’s pleasure. If the Prime Minister is not happy with a minister’s performance, the Prime Minister will make a change.
Today I believe the process in place that forces ministers and deputy ministers to meet on a regular basis to make decisions is working effectively. I believe some of the workforce issues around experience with complex projects is better than before, because people now have four to five years of experience since the Defence Procurement Strategy was implemented.
I do not believe the turmoil that would likely be caused by trying to create a new agency, amend the legislation and create new processes would be worthwhile. In addition, it would likely result in some delays, since creating a new organization will take time and resources. This additional time would invariably result in increased costs and, depending on the time delay, perhaps adjusted requirements, which would also result in increased costs.
I know past testimony to the committee noted that defence procurement is not conducted in a competitive marketplace but, rather, a managed market with one buyer and, more often than not for the large weapon systems, one or two suppliers. As a defence economist, economic theory would have me argue that industrial benefits have no place in the acquisition of defence capability. The military should be acquiring the most capability possible based on the budget available.
Theory is nice, but the reality is most nations have some sort of industrial benefit or offset policy requirement. Pragmatically, Canadians would not accept our government spending billions of taxpayer money in some other nation without some economic benefit in Canada.
I would also note that the academic literature on the utility of offsets is mixed in part because it is difficult to measure correlation and/or causality when making arguments about the benefits to the nation’s industrial base. There is a cost to offsets because the large prime contractors have to manage the obligations. The cost is part of the price.
Nevertheless, Canada’s current Industrial and Technical Benefits Policy is, in my view, a significant improvement over the earlier Industrial and Regional Benefits Policy. It forces industry to be much more deliberate about how and where they will invest in Canada based on what is articulated in the request for proposal documentation and how the ITBs will be scored and weighted. That is an improvement over the previous policy where it was a pass/fail metric.
If I connect these two issues, the question is whether or not the new policy is going to add to the length of time for procurement. Others have indicated to you that it will not, but I believe it is too soon to tell. Many of the 2014 Defence Procurement Strategy initiatives were created because there was a trust issue with DND and the Canadian Forces around the validity of requirements. Many of the new initiatives and policies are designed to get earlier engagement and validation with industry and the bureaucracy, with a view to avoiding challenges and delays later in the process.
The friction that currently exists with the shipyards demonstrates to me that industry is still going to challenge government decisions when they are not selected, regardless of the transparency of the process upfront.
In my view, large complex defence procurement projects will always end up in the political space with governments trying to balance multiple objectives. Our history indicates that more often than not the issue will be how much political engagement — some might say interference — will occur and how that will add to the time and cost of the outcome. This is not to say that there is no room for improvement, but there is no silver bullet that will remove all of the complexity that exists.
Again, thank you for the opportunity to be here and I look forward to your questions.
The Deputy Chair: Thank you, Mr. Stone.
David Perry, Vice President and Senior Analyst, Canadian Global Affairs Institute, as an individual: Senators, I’d like to thank you for the invitation to appear before you today on this beautiful Ottawa spring day.
In March, having looked at the testimony, I know you heard from some of Canada’s shipbuilders about the consequences of boom-and-bust cycles in the shipbuilding industry. There’s a comparable cycle of boom and bust that’s played out over the last 30 years in Canadian defence procurement writ large regarding the availability of funding and the capacity to spend it.
We are witnessing today the results of those booms and busts. While these major shifts in the availability of funding don’t explain all the particularities of particular projects, they help frame some of the difficulties Canada has had with defence procurement overall in the last couple of decades. As such, I thought discussing these booms and busts might be a useful way to help link this study with the committee’s wider mandate.
A stable supply of procurement funding is critically important in terms of providing a foundation for a well-functioning procurement system. This is the case because even a relatively fast procurement process is very slow, stretching well over a decade, and it takes years to ramp up procurement spending in a way that will balance Canada’s objectives of maximizing capability and the timeliness of delivery, creating domestic economic benefits, and achieving procedural fairness.
Canada has been moving since 2008 towards an increasingly stable funding base for defence procurement, but we’re still dealing with the consequences of major fluctuations in funding, which created a prolonged bust and two boom cycles in the last three decades.
From roughly 1989 until the mid-2000s, the supply of procurement funding dried up and few major projects were approved. As a result, the volume of activity dropped and the workforce atrophied. During this period, much of Canada’s military equipment and infrastructure needed to be replaced, but wasn’t, and therefore still needs to be replaced today.
In the mid-2000s, both the Martin and Harper governments made major reinvestments in defence, funding a significant program of recapitalization and creating the first procurement boom since the 1970s and 1980s. Within three years of the Martin government announcing this recapitalization, annual procurement spending had increased by 40 per cent in real dollars. This occurred without a major influx of human resources and with lower levels of procurement experience than had existed historically, in part because this coincided with Canada’s Afghan military operations. Much of the procurement was war-related and most was helped by multiple government support for the military during the war.
At the same time, though, some of the non-war-related procurement, much of which was seeking to replace equipment that should have been replaced in the preceding 15 years, was problematic. Project costing, requirement-setting, economic benefits and adherence to process all came under scrutiny. In response, in 2014 the Defence Procurement Strategy was launched with the objectives of delivering better domestic economic benefits and preventing catastrophic problems from arising.
The result of this change was to increase the level of rigour in these earlier aspects of procurement and shift significant work even earlier in the procurement phase. The Independent Review Panel for Defence Acquisition, some of whose members you spoke to a few weeks ago, was one of the results of that effort.
These changes were made on the assumption that they would help projects complete all of the required work involved in procurement faster, an assumption that may prove true but has yet to be validated. A side effect of these changes, however, was to add more work to the earlier phases of a project’s life. This means it takes comparatively longer today to complete the early phase of a defence project than it did five years ago.
With the publication of Strong, Secure, Engaged, Canada is currently entering into a second and much larger defence procurement boom. In my analysis, DND is pursuing the most ambitious slate of recapitalization since the Korean War and the first peacetime procurement boom since the late 1970s.
So far, capital procurement spending has increased for two consecutive years in inflation-adjusted dollars. This is the first time that has happened in almost a decade, and we have not spent this much on procurement as we are spending now since we were at war in Afghanistan.
However, DND is struggling to meet the extremely high expectations established with Strong, Secure, Engaged, as it is only spending about two thirds as much on equipment and infrastructure as it indicated it would.
The shortfall between the policy and reality is attributable to the policy having outlined an overly ambitious pace of procurement spending increase. Whereas under the Martin/Harper boom it took three years for spending to increase by 40 per cent, under Strong, Secure, Engaged, spending was supposed to double in the first year alone. While Strong, Secure, Engaged is meant to cover a 20-year spending plan, most of the procurement activity was supposed to occur within four years of the policy’s release and virtually all of it within the first 10. This is, I think, driven by DND’s desire to make up for that decade-and-a-half-long period of procurement bust and replace rapidly aging equipment and infrastructure as soon as possible.
However, most of the roughly 50 new projects approved by the policy had multiple years of work to complete following its publication before they would start spending procurement funds. Until these newly approved projects complete all of the required work in the early phases of the procurement system, spending won’t catch up with the defence policy. And while Canada’s procurement workforce has gained experience in recent years, its size has not been substantially increased. That workforce has to do more, and more detailed work, earlier than previously required in a project’s life to get the money flowing, and it is trying to move more projects all at one than it has before.
In sum, the last 30 years of Canadian defence procurement has illustrated the crucial importance of stability in both financial and human resources, and the negative impacts of boom and bust cycles. When funding is scarce, human capacity erodes and a backlog of needed replacements begins to build, compounding demand over time. When funding is made available again, the system is left with a reduced capacity to move significantly more demand than it can and it takes years to get new funding out the door.
With the recent changes made to DND’s funding structure to create the Capital Investment Fund, which I know defence officials spoke to you about a few weeks ago, the funding mechanism now exists to smooth out that boom-and-bust cycle. Unfortunately, it will take several years to work through the backlog of procurement demand before the benefits of the Capital Investment Fund can be realized, and DND can hopefully adopt a more continuous pace of procurement with fewer big fluctuations.
In the meantime, although real progress has already been demonstrated, it will take a considerable amount of additional time for Canada’s procurement system to ramp up to the very high demand established with the publication of Strong, Secure, Engaged.
The Deputy Chair: Thank you. Senators, we’ll move on to questions. Like we did in earlier meetings, we will limit the time for each senator on each round to four minutes.
Senator Eaton: Mr. Perry, when you briefed Senator Marshall and I last year, I think you worked through 35 decision gates. One of our witnesses in previous weeks was talking about how to stop the secondary priorities taking over with 35 decision gates and five departments involved. That’s one part of my question.
The second part of my question is this: Another witness explained to us that you have this birth-to-death cycle for each piece of equipment. The airplanes will come on stream then, and by 40 years down the line, they’re dead and gone. But it doesn’t ever seem to include the procurement process in this life-to-death cycle. The procurement process isn’t there. For instance, I think we have two submarines as the most coasted country in the world, when you have the Japanese developing supersonic submarines.
Do you have thoughts on those questions?
Mr. Perry: Yes. In terms of the first issue of balancing secondary priorities, my colleague was speaking to this a little bit. The key is to strike the right balance. I think it’s unreasonable to expect, as some people do, that Canada will only have a focus on buying military equipment at the expense of anything else, such as value for money and domestic economic benefit.
Countries are always going to have a balance of priorities. The Department of National Defence is a department of the Canadian federal government and has to exist within that framework. The key objective is to try to get the right sort of balance between the different objectives and not unduly have the actual acquiring of capability in a relatively timely fashion be downgraded in pursuing economic benefit or something else.
Senator Eaton: When Seaspan was here — and they agreed with the five departments — they kept saying they get together with the five ADMs and, if they don’t agree, then it goes to the DMs. You can just see the time stretching out before you get this consensus.
Should there be somebody within those five, whether it’s DND or Foreign Affairs, that has the upper hand, so there is priority as to which ministries have what say in the procurement process?
Mr. Perry: I think it would be beneficial to have someone in a position of authority and held accountable singularly. My colleague was talking about one framework for doing that within the wider cabinet system. I think it’s also possible to do that within a ministerial line or, for instance, put one deputy as a lead on some projects, which I think has been done in the past.
I think the key is that the government has to collectively decide what its objectives are in procurement. If you just change the institutional and authority structures, without changing the balance of priorities or assessing the relative weights you place on those different sets of priorities and objectives, you’re not necessarily going to address any specific problem.
Senator Eaton: In other words, it should be done so that for airplanes, you can decide it’s DND or you could decide whatever, but the Prime Minister or Cabinet should decide which to prioritize?
Mr. Perry: I think it should set out the balance it wants to seek between those different potentially competing objectives and then articulate which ministry and officials within the system it makes most sense to have led the process.
Senator Eaton: Mr. Stone, do you have any comment to that?
Mr. Stone: I’m going to disagree a bit, only in the context that I think the government does articulate what its priorities are when they articulate how industrial technical benefits will be measured, in terms of where they want the weight for the assessment, whether it’s against the 15 KICs, the Key Industrial Capabilities the government now has or something else.
The difficulty is when there’,s a disagreement — and I’m not sure that it’s a disagreement so much as whether or not that level can actually make the decision that needs to be made at the ADM or the deputy minister level — when you’ve got competing priorities.
Senator Eaton: That’s what I’m saying. Shouldn’t cabinet decide?
Mr. Stone: Cabinet ultimately will decide when it gets to ministers.
Senator Eaton: So it shouldn’t be top-down. In other words, we have five deputy ministers. The cabinet shouldn’t say, “Guys, when you get together and you’re doing the ships and the surface combatants, this is our priority.” You think it should go from the bottom up. In other words, they should argue amongst themselves and, when they get to the top, then they can decide the priority?
Mr. Stone: No. I think if cabinet decided to articulate its priorities and guidance from the top down, that would help. But I don’t think that would stop the fact that there would be friction as the process went through establishing what are the detailed requirements and who actually gets the say for when departments disagree because there are competing requirements.
Even if you had one minister accountable, at cabinet every other minister will still voice their opposition or support, which can derail the process just as much.
Senator Forest: Thank you for being here. You’ve examined best practices, comparing Canada’s procurement policy with Australia’s. Given your expertise, wouldn’t you say we could do better in terms of the practices we have in place? I’m realizing that one of the factors that helps keep procurement spending on budget—and I know staying on budget is no easy feat—is the developing of specifications for major equipment procurement projects, combat ships, aircraft and so on. When it comes to the the supplier and changing information, aren’t there best practices we could adopt to build more clearly defined specifications and thus stay on track budget-wise?
Mr. Stone: I would say that the issue of costing has been identified in the past with some of the procurements that went astray. I would say that there has been progress to improve our ability to do costing. DND has increased the number of folks that actually have that expertise. I would point out that all of those folks existed in the 1980s, when we were buying lots of stuff, and in the 1990s, when we reduced the size of Defence by 20,000 folks, those were the types of folks we let go.
Treasury Board now has a costing centre of excellence. But the difficulty is when are you actually doing the costing? There are two stages. There’s a rough order of magnitude cost at the very beginning of the process, and then there’s a cost once you’ve identified what the detailed requirements are. The challenge in Canada historically is people get focused on the rough order of magnitude cost, which could be five years before we actually get to the detailed costing, and it could change by 30 or 40 per cent.
The second issue for costing is we’re asking people to make assumptions about what we are going to do with equipment for 20 years, and any of those assumptions could be wrong. Ultimately, everyone has to agree on what the assumptions are and often there are disagreements about what some of the assumptions are. We don’t buy cars planning to figure out what the cost of the car is and what it’s going to cost us to drive it for the next 10 years. We’re asking, in the military context, to buy an airplane and what is it going to cost you to use it for the next 20 years, without being really sure what the government is going to ask us to do with it. We have an idea, but we’re not 100 per cent sure.
Mr. Perry: If I understood that, you’re basically looking at the length between costing and how you actually do contracting and how project budgets and cost are reflected in contracts and the different structures to set that up.
I think there’s no simple answer that applies universally and it depends what kind of good you’re trying to buy and where you are in the process of buying it. On a spectrum between something we’re buying legitimately off the shelf and changing virtually nothing, you can have a lot more certainty in your costing and you can set up a contractual mechanism that can reflect that with a firmer mechanism for setting in a price through the duration of the procurement.
If you’re looking at obtaining a piece of developmental equipment — and most of what Canada buys tends to be closer to the developmental spectrum end of things than it is in terms of buying an off-the-shelf piece of equipment — the more development you have, the more uncertainty you have in the costing, the less precise it will be and the more difficult it is to set up a firm fixed-price contract at the beginning, without simply having a contractor price all that uncertainty and what they’re charging the Crown.
Senator Marshall: Could both of you make some comments on transparency over procurement? Because one of the issues I’ve been looking at and the committee, is to trace the funding that’s allocated under Strong, Secure, Engaged, trace it to what’s approved in the funding that’s provided throughout the year, and then to see where the money was actually spent. It’s quite a challenge. When you go into the department’s website and try to follow through the funding, it’s very challenging.
Both of you are experts on military procurement, so you must be getting your information somewhere to write your articles or to do your analysis.
For the Finance Committee, or someone who is just interested in following the numbers, where are the numbers provided? Could you comment on transparency?
I think, Mr. Stone, you alluded to it. I know, Mr. Perry, in an article you were just talking about the shipbuilding strategy, but you were saying that transparency around shipbuilding needs to be improved. I just extended that to all military procurement.
I’d appreciate both of your comments on the issue of transparency.
Mr. Perry: I think the transparency has been variable and parts of it have seen significant improvements over the past last several years, but that progress has been uneven. I would make a distinction between the transparency around the budgeting aspects of defence procurement and the spending aspects of it.
In terms of the budgeting, one of the things that struck me about this defence policy exercise is that there was no clear traceability between the funding underpinning the defence policy in a budgetary sense and having that reflected in actual budget documents in a way that was clearly easy to see the full profile and fiscal framework adjustments being set aside over 20 years.
When it comes to the spending plans, I think that’s been on the whole a case where there’s been significant improvement in terms of the transparency. For the first time that I’m aware of ever the government actually published a spending forecast for defence policy. That’s part of the reason why we can have a conversation about how the government is actually doing and basically achieving the plan that it laid out.
It’s also done a number of other things to increase the transparency around specific plans, so the Defence Capabilities Blueprint, which is available on the Internet, is a great resource to try to see with a reasonable degree of fidelity where the department is looking to spend its money and when.
Senator Marshall: Was that done by project? You mentioned the spending forecasts were pretty good. Is it there by project somewhere on the website?
Mr. Perry: It’s available by project in a rough order of magnitude basically in a financial band by project. It doesn’t have specific dollar values down to a single million and doesn’t have specific start dates, but you can use that to get a macro-level picture at when roughly the department is looking to spend money, on which things, and how much, roughly.
Senator Marshall: From your data, do you go in, extract from the website and use a best estimate?
Mr. Perry: Right. It’s all effectively time-phased.
Senator Marshall: Couldn’t the department provide more precise information?
Mr. Perry: Yes, absolute, the department can. Right after the policy, they did provide more information in terms of capital spending divided up between the different components of spending — personnel, capital and O&M — and they would have that information available today.
Mr. Stone: I agree with everything Mr. Perry has said. When I go looking for spending data, I go to the Public Accounts because that is the only place where you can find out what was actually spent by standard object, and from that you can figure out what was spent on capital, infrastructure, operations and maintenance, et cetera.
Senator Marshall: But can you tell by project?
Mr. Stone: Not necessarily, but there is for major capital equipment a part in what used to be the Report on Plans and Priorities and is now called the departmental plan in that estimates process. There is generally a link in that document to major capital projects that has information about what the planned spending is for those projects. It will have, depending on where that project is, what has been spent, what is yet to be spent, and where it is in that stage.
What I’m not sure of is whether that’s attached in the new departmental plan. It was in the previous Report on Plans and Priorities. I haven’t actually gone to look because I haven’t done any work in that space in the last while. For me, I get spending data from the Public Accounts.
Senator Forest-Niesing: I have a number of questions, but I’m going to do my best with the four minutes I have.
Professor Stone, in an article you published in April 2015, entitled Improving the Acquisition Process in Canada, you contextualize it by making reference to the Defence Procurement Strategy adopted in February 2014. You go on to analyze and suggest improvements.
I’m particularly interested in a comment that you made in that article when referencing the need for review, but, in particular and being the eternal optimist that I am, I would like to hear you now four years later tell us whether you continue to believe that Canada is implementing many aspects of the procurement process very effectively and how well we’ve done in pursuing the three very ambitious objectives of the strategy that was adopted in February 2014.
Mr. Stone: When I wrote that, Australia and the U.K. had both undertaken what I would call start-to-end reviews of their procurement process. Canada has done parts of reviews of parts of the system. We have not actually done a start-to-finish review and, in part, we need to determine what we do well and what we don’t do well. When we tinker with parts of it, we can improve parts of it without actually understanding necessarily what the second and third order effect of a change in that part has on another part of the entire process.
The Defence Procurement Strategy was intended to do a bunch of that, and we’re still doing stuff with parts of it. I know there have been improvements in the number of steps within DND through their own internal review process. I know that in the new governance structure there is more of a top-down direction of when they want things as opposed to the previous system in which, for example, when my project was done because I had done all my work, I could go to the Defence Capabilities Board, whether it was a priority or not, but I had done all my work and I could take it, because it was ready to be approved.
In the new governance structure, because of the time lines in Strong, Secure, Engaged, is going to a space where the investment resource management committee and the project management board are going to tell people that they want to see this project on this day in order to meet some of the funding lines identified in Strong, Secure, Engaged.
I don’t know whether doing an end-to-end review now would be worth the time it would take, because there has been so much done in and around it. I would have to actually look at that and think about it for a while.
Senator Forest-Niesing: Mr. Perry, in your 2016 report on defence procurement, you noted that the change in government led to delays and cost overruns, with the reversal of certain decisions.
Do you think contractual clauses could be built into the current procurement process to keep a similar situation from happening in the future? If so, what would those clauses look like?
Mr. Perry: I’m not sure it’s as much about putting in contractual clauses, although that’s potentially applicable if you have procurement efforts that are going to be in a contract phase that bridges a change in government that could conceivably be affected by the change. That would be projects where you have initial contracts and you have to go back to government for additional authorities and approvals, for example.
What I’m speaking to more there is that it’s important to note the system we have now when we have changes in government is that when the government goes into the caretaker convention, in my opinion, we’ve adopted a process of applying an overly cautious approach in some cases to how much decision-making can happen at the official level and, therefore, how much work can be done during the period between when the writ is dropped and when the government is fully back in action.
Based on the last change in government, I wouldn’t expect Treasury Board to be fully functional until February of next year. That’s a long time in a four-year cycle for the government not to be fully operational and effective. If you have projects that require decisions during that period of time and they can’t get them, then they have to wait until they can get access to governance making; or you have projects that are delayed intentionally to not plan to go back and get government direction until after the government is back; or I think what you get right now is this huge rush of activity in a sprint up to the writ being dropped, which is not necessarily the best way to smooth out the workload. It focuses the mind, which helps, but if everyone is trying to get in front of the government and Treasury Board in particular before this summer, that can potentially lead to conflict in terms of which projects are moving when they should.
Senator Klyne: Good morning, welcome, and thanks for the enlightening information so far.
I want to go back to the single agency, and I think you could probably both answer these questions, but we’ll start with Mr. Stone.
I look at this from a 100,000-foot level. When I do, it all seems not trite or academic, but rudimentary and fundamentally sound to have a good hard look at the single agency.
If in most processes the things that get flagged are the cost overruns, late delivery and meeting the operational requirements, it seems the one drawback for a single agency is the cost overruns. You have introduced some general thoughts around that of bringing in the industry earlier on in the process and also identifying that there are two steps or phases of costing. One is that rough estimate, and once we understand the full final requirements, we get more zeroed in on the costs of that.
One of your suggestions is that we should do an entire review of that whole process. Some pieces have been done already. I assume there is still some validity to them and they simply need to be reviewed. There are other pieces that haven’t yet been done.
It seems to me we should get on with that process, and thus enters the question of time; it could take a lot of time. Well, the time to have planted a tree was 20 years ago. We could be having the same conversation five years from now if we don’t do that.
There have to be lessons learned between Australia and the U.K., and lessons learned in terms of what are they doing right, what could they have done differently, and what else should they do?
Where is the pushback coming from in not doing the entire process with a view to going here? I have big faith in CPAs. I think with some of the general advice you have given, plus what CPAs can do, they could figure out how to operationalize it — a cost-control process that would not totally eliminate but mitigate the concerns around that. Where does the pushback come from in not doing this?
Mr. Stone: I would make two observations, the first one on the last point about costing. When the government had a third party look at costing — I use the example of the next-generation fighter. When the government had KPMG look at costing for the next-generation fighter, the costing methodology used in government was sound. It follows all of the best practices. The issue is all about what are your assumptions, both in terms of time and requirements. When you change requirements, that changes the costs. It’s a vicious circle, because the longer time you take, the more likely it is that the security environment will change and you are going to change the requirements, or the technology will be obsolete and you want something else that is more expensive.
On the second part, with the lessons and things, when I wrote about the single procurement agency, my point was that a single agency will not fix what generally goes wrong with complex procurements, and it happens with all our allies. Some of them have single agencies; some of them don’t. Australia has changed its procurement structure in the last decade, and so has the U.K.
The issue for me is not that we shouldn’t have the debate about whether we want a single agency. We just need to agree on what it is we are trying to achieve with a single procurement agency.
When I wrote that article, it was really to challenge a narrative that was out there that we needed one minister accountable, when the legal structure is the Minister of National Defence is responsible, under the National Defence Act, for identifying the requirements; the minister of PSPC is responsible, under the Defence Production Act, for actually buying stuff; and the Minister of Industry — ISEDC now — is responsible for a variety of issues in his space.
The challenge is that if you want to make a single individual accountable, then you need to change all of that legislation so that single individual is accountable. What benefit are you trying to achieve and how long are you prepared to wait for that to happen? Because while you are doing that, stuff will probably be delayed. Our experience with doing big shifts like that, if we think about Shared Services Canada and Phoenix — because governments want to do things for efficiency — has not been really successful.
That would be my concern: not that we don’t want to have that discussion or examination, but what is it we are trying to achieve with a single procurement agency?
Senator M. Deacon: Thank you for being here today. Just before I go to my question, as a follow-up to that, when you say, “What are we trying to achieve with this?” I also can’t help but wonder what is it we are trying to achieve in this large, collaborative, participatory leadership structure? When you have the groups working together to try to make decisions, there can be real strength with people working together and with accountability measures, but it feels — and we are also quite versed with the Phoenix experience — like a lot of people, a lot of complexity, and the reminder: Are we getting at what we want to get at? I bring that up as sort of the two ends of the previous senator’s comments and questions.
I’m wondering about a couple of things today. The comments that I think you made, Mr. Perry, around the money, and the money around procurement, and the intent that a good chunk of that money should have been spent in the first four years. I think about that in this complex cycle, if we want to call it, in need and demand and supply, and as that gets delayed, the problems become exponential, or very much larger layered — and in a number of ways, from physical and human capacity, risk, all those things — how do we get caught up, or what do you see from your perspective as the biggest risk or liability with this delay that, from other descriptions given this morning, there will be other delays in addition to those delays? I think about some of the obvious, but I would like to know what is the biggest cost of that to us before I ask a second question.
Mr. Perry: Related to where I started my opening remarks, I think the biggest risk to the policy plans that underlie Strong, Secure, Engaged is that the funding envelope in which they are working is changed at some point in the future. Right now there is a plan they are working towards and having difficulty executing, with some flexibility to make adjustments. But, given where we are in the business cycle, I think that it is certainly a possibility that Canada would enter a period when a future government would be looking to cut back on overall federal spending. I would have a lot of concern about what would happen to a lot of what is I think quite a strong policy document in Strong, Secure, Engaged if the funding environment in the federal government of Canada is changed.
If the funding is withdrawn and the certainty that exists right now goes away, a lot could be called into question because it’s not rolling out as fast as was intended.
To get into the specifics, a lot of activity with procurement was supposed to happen in the first four years, with spending to follow on a couple of years’ lag behind that. You basically have a dynamic where you have to do a lot of the work. If things go according to internal plans, a lot of the heavy lifting happens roughly four years before that project would actually be spending money. You have to do the work first before you can get to the point where the Government of Canada writes a cheque.
Senator M. Deacon: With that piece, as we’ve listened to different witnesses over the last few weeks, I continue to wonder — I think the term “buy off the shelf” was used earlier this morning — what skills and abilities we have as Canadians to develop, build and design on our own. I don’t have a sense of what the comparison of those two areas is, but that must make this even more complex, or streamlined in some sense of the word. I don’t have a sense of that.
Mr. Perry: I would agree. The third option, and one we do quite often, is to take what somebody else has built and then modify it.
In terms of what I said earlier, there is a continuum between genuinely buying things off the shelf and making a purpose-built piece of equipment. We tend to do something in between but closer to the modified end of that spectrum.
Most of the things we buy off the shelf are commodity-type items: socks, flak vests, that kind of thing. Most big, complex weapon systems that Canada buys, it modifies to some extent. How much depends on how close the fit is between what is available in the marketplace and the unique needs of the Canada Armed Forces. The only single piece of large equipment I can think of that we ever actually bought that was genuinely off the shelf was the C-17.
The Deputy Chair: I’ve always been wondering to what extent we really need to modify major equipment to fit our specific needs, and to what extent the Canadian Forces really does have needs that are so specific that we need to bring many adjustments to this equipment.
Mr. Perry: I think the answer would be that it depends on the specific piece of equipment you are talking about. That has been a concern over the last 20 years and, in large part, led to the creation of the Independent Review Panel for Defence Acquisition to effectively provide a mechanism where the rest of the government procurement system would have greater confidence that, by the time National Defence is formally articulating that requirement, everyone has confidence that what they’re asking for, if it involves a degree of change, the change implied has been validated and communicated in a way that other people are comfortable with.
Senator Boehm: Thank you for joining us today. I will take a few of the threads in the discussion and try to knit them together.
First, Mr. Stone, I don’t think you really pronounced whether you think a thorough procurement review is a good idea or not. I think you were a little cautious. You mentioned there were some elements reviewed in the past and I wonder in the case of the U.K. and Australia, and perhaps other countries that are comparable, whether they had gone through piecemeal bits of review before undertaking the big one. That’s one. In their experience, has it really worked? It’s a couple of years in and we see what they’re doing.
I’m aware that internally in the bureaucracy, having been a bureaucrat, we look to others and we also spend a lot of time talking amongst ourselves in trying to give the best possible advice to the political level. Other countries go through that, too. They have budgetary cycles as well. They have electoral cycles where things will slow down during campaigns and also again when governments are installed.
Can you be more precise in terms of the experience of others and whether that experience would lead us to wholeheartedly recommend undertaking a thorough review of procurement practice? I did hear you say you didn’t think a separate minister was required for that and that’s interesting, but how might that work?
Mr. Stone: I’ve looked at Australia in more detail than the U.K. and Australia did two reviews. The second review was a review on where they were with the recommendations on the first review and in the interim, over that period from the early 2000s to now, they actually changed their structure from having a single organization doing procurement to bringing it back in underneath the defence department, in a manner not identical to ours but similar to the system Canada has right now.
They made progress, and my cautiousness right now is it has probably been three years or so since I really looked at procurement with the same amount of detail to write something. I know there were a number of initiatives under way at that time, both inside the department and interdepartmentally. I would want to have a look at where they are and what kind of success they’ve had in reducing numbers of steps, reducing the timeline, those sorts of things, before I would want to say we should do this end-to-end review.
I was a fan of it four years ago because I thought it would be helpful. I’m just concerned about where we are with time and whether we would get the benefit out of doing that with all the other changes that would happen. I’m not sure because I haven’t actually looked at that issue.
Senator Boehm: There must be data available in terms of the practice and whether projects were disrupted. I was in Berlin for a few years and the Germans went through something similar with their customary efficiency and they identified gaps.
Mr. Stone: I know, for example, they were doing a project-approval process review inside DND and they have data on how many steps a project went through from start to end.
I know Pat Finn (ADM Materiel) would tell you one of our challenges is that we call something a project before it’s really a project. We have people working on stuff that will never see the light of day because it’s not funded but it’s a capability and efficiency that someone has identified. There is a space in there where that project approval process review was supposed to get at. I know they have data, because I have had a conversation with the individual leading that initiative, but I don’t know what the data is and I don’t know how successful they have been two or three years on because you can be successful in the first year and the inertia of the bureaucracy returns you to where you were two years earlier, when people are posted and those kinds of things happen.
That would be my concern. How successful have they been? What are the metrics they have now? I know the department is trying to deal with those issues, but I would have to do the research and have the conversations.
Senator Marshall: There were a couple of changes. You were talking in response to Senator Boehm about changing the system and there is a possibility that you might destabilize the system.
Last year there were a couple of items in the media; one was that the deputy minister, Ms. Lemay, said she was doing some kind review of the procurement system, and then in August there was what I thought was a strange government announcement that said Treasury Board will now assume responsibility for key delivery challenges, including defence procurement and modernizing the public service pay system. It seems like those two things were lumped into one.
We did have the minister responsible for Treasury Board, Mr. Brison, when he appeared before us once. I asked him the question as to why this was done or to give us some information on it, but there wasn’t much information forthcoming.
Do either of you see any changes? From things that happened last year it sounds like they’re trying to do something within the system. Have you seen any evidence that there is something happening with regard to the procurement system?
Mr. Stone: The announcement on procurement moving to Treasury Board was really in the context of when the current government came to power they created an ad hoc committee of ministers to look at defence procurement. That became a permanent committee for a while and they made the decision that the decisions that committee was looking at were going to go to Treasury Board to be managed by the board when they make decisions, in part because we now have Strong, Secure, Engaged and there is a policy framework for what should be coming to Treasury Board for approval and that kind of thing. That was a machinery thing within the government, moving a function to Treasury Board.
I don’t think in that sense it was anything to do with trying to fix the process, other than probably limit the number of committees ministers have to sit on.
Senator Marshall: What about the information that was coming out about Ms. Lemay, who was doing a review of procurement? I think probably last June I saw something on that. Have you seen any signs of any changes?
I’m thinking about this now in the context of your comments about the system could be improved, but you don’t want to change it to destabilize the system. There might be problems now, but you might change the system and make it worse, not necessarily better.
Mr. Perry: There has been a huge degree of change just in the last five years, which is one of the reasons why you need to weigh whatever you think are the benefits of a systematic start-to-finish review of the system would be against how much has been initiated but you haven’t been able to fully validate the impact, and also the volume of activity we’re trying to work through now. There are a couple of ways to think about that.
If you look at the National Shipbuilding Procurement Strategy, which I think was the right thing to do, the studying and implementing of that, which is viewed in government to have gone lightening quick, took close to three years between the failure of some ship procurements in the 2008-09 time frame, the reassessment of what had happened, and a proposal to do a new initiative until the point when the contracts were actually awarded.
That was within one sector on a couple of particular aspects of government procurement, basically eight or nine projects. If you were looking to do a major initiative right now, you would be talking about potentially affecting, by my math, something like 130 big projects plus several dozen other infrastructure projects just at National Defence and leaving aside Coast Guard. That is if you were to do that right now. There would undoubtedly be a benefit to doing that, but you have to weigh that against what would happen in the interim with all those projects that are funded and in various places within their life cycle.
Specifically, in terms of things that have changed in the last five years, we have fundamentally revised the economic offset policy starting in 2014. There have only been a few dozen procurements which actually moved forward with that policy applying to them and I don’t believe that any of those have been fully completed. I think it’s too early to know whether the changes which were intended as part of that have actually been brought to fruition and there’s not enough data to validate what’s happened with that.
At the cabinet level, the government changed twice the committee structure which defence procurements enter government with a policy discussion. I’m not sure specifically what Ms. Lemay was talking about, but at PSPC there have been a number of changes in the way they are approaching contracts. They are making it a standard practice to go lists of prequalified vendors before they proceed in procurements. They have adopted procurement bid repairs, or cure periods, as a standard practice. They have looked at applying bid extensions, which happened on the surface combatant project and in the past tended not to happen. If you needed more time, the process would wind down and the thing would fail.
At National Defence there have been a number of changes that have gone on. I think they have had four or five different internal audits and assessments launched since 2012.
There is some discussion, as Craig said, depending on terminology, about how long you assess procurements to take on average, but a good ballpark is 15 years. The changes that were made, if you take 2014 as the basis point, for a new procurement they would only be five years in if they were going from a clean start in 2014 to this point in time. So they are not yet at the point where they have been fully completed.
If you were to look at projects that were in the back third of their life cycle when those changes were brought in, they probably had no effect, because they were already into contract and delivery.
In the middle third, they would have been affected by those changes in 2014 midstream. They may have had some deficiencies that were going to be addressed by a series of changes that couldn’t really fully take effect because they had started midstream.
It’s really difficult to assess all this, parsing out the data in a clean way that would allow you to get a sense of the changes is tough.
Senator Duncan: I thank the witnesses this morning. I am not an expert, or even close to it. Defence procurement is not my area of expertise. Change in the public service, however, I have had a bit of experience with.
What I’m hearing you say in your presentation is that, while the idea of a single procurement agency has some merit and is interesting and so on, there’s been too much change in terms of governments and in terms of what’s been going on in the departments. I highlight this point about significant turnover in the senior leadership of the Department of National Defence.
Do we have a number to attribute to that? Can you quantify that change?
Am I hearing you correctly in that the idea of a single procurement agency is just too much change on top of things like the Phoenix pay system and the significant turnover in the department? Am I hearing that correctly?
Mr. Perry: If I could start. I’d say it’s not a question that there’s been too much change, but there has been a lot of change and not enough time to see what the impact of all of that which has been enacted already has been to date. There hasn’t been an opportunity for the system to gel around all the different changes that have gone through and, because that’s been an iterative process, it’s difficult to get a sense of the full impact. A lot of these things have happened sequentially, and been rolled out piecemeal and applied to projects at different stages of their lives.
If you’re looking at some of the impacts of, for instance, the Independent Review Panel that you heard from a few weeks ago, you’re not going to actually know whether or not there’s more confidence in the process at National Defence of setting and articulating requirements until those projects are going for review at the Treasury Board. If they go through the Treasury Board process of granting expenditure authority at a faster rate, to me, that would be an indicator that it has worked. But we’re only just now — because that panel has only really been up and running for a few years — at the point where that’s actually happening, or knowing whether or not those projects have an easier time getting spending authority from the Minister of National Defence. It will take time to work through that.
The issue of turnover has been a major problem in the past. You could use many different metrics. By my count, in the last five years, there have been three deputy ministers and four vice chiefs of defence staff. The turnover is even more frequent when you get below that level and look at some of the key positions within the vice chief of the defence staff structure within the Chief of Programme office where we have had people go in and out on one-year rotations. I think that has been a factor that’s exacerbated some of the problems within DND specifically, because you don’t have continuity and stability. Although, I would say that the current deputy minister had mentioned a week ago that there have been efforts to try to address that by introducing some civilian counterparts to work with some of the military people to provide for better continuity.
Mr. Stone: I would be more cynical than David, because I don’t think in the context, for example, of Independent Review Panel that we will know if that process has been successful until something goes out for RFP and industry doesn’t come back when they lose to complain to the government and challenge the decision through the tribunal process. That’s essentially what was happening before we created that. I think it will be even longer than just “does it gets through Treasury Board.”
We have to see if industry is going to accept there were valid requirements and the process was transparent. My belief is that industry will challenge it anyway. It’s just what happens with the tribunal after that which matters.
Senator Forest: Mr. Stone, you said the government should review its procurement process to figure out what’s being done right and what needs improving. We’ve heard from other equally qualified experts. I wonder whether it isn’t too early to undertake an objective review of the defence procurement process. Should we wait? Much has changed in the past few years, in terms of both staff and the process. Would we not be better off to wait and assess the effects of those changes over a longer period of time to allow for an objective review and make any necessary improvements? Billions of dollars in taxpayer money are at stake so we should do things properly as far as improving the defence procurement process is concerned.
Mr. Stone: I don’t think it’s too early, but I would caveat that with: What’s the end state? What are you actually examining? Are you examining how we make this process shorter so that we can respond more quickly? Are we doing that so we can reduce costs?
I see nothing wrong with doing an objective review of the entire procurement process. I would just want to be clear about what it is you’re actually looking to fix. That would be the clarity of what is the end state.
Senator Forest: The ultimate goal would be to make better use of public funds, meet the objective, and procure equipment that will allow for greater efficiency budget-wise and operationally. As I see it, that should be the end state.
Mr. Perry: There are specific items you mentioned earlier that have been problematic in the past, requirement setting and costing, to take two of those. I don’t think those specific aspects would necessarily be affected that much by creating a single procurement agency.
It’s within National Defence to properly articulate military requirements. Where there have been problems before is when the other people in the procurement system or industry thought what DND was asking for wasn’t reasonable or achievable using current technology, or they didn’t believe it was necessary. There have been a lot of changes put in place. The Independent Review Panel was one way to get to that problem. Changing the institutional structure won’t help address that problem, similarly the issue of costing.
Previously, the issue with costing was that National Defence would try to assess how much something was going to cost early and then run into problems when you would set a fixed budget. Then, if a project took longer or there were changes to the cost estimate, they had to go back and seek additional financial authorities from government.
As long as you to continue to have some mechanism for effectively having an approval process to grant the expenditure of funds — whether or not that happens exclusively within National Defence or across government — if you move it to a single procurement agency, I don’t think that particular process is going to be expedited much, if you assume there’s always going to be some thorough process of assuring that the government is making good decisions to spend money wisely.
Other issues relating to schedule, if they involve interdepartmental conflicts, could be expedited to an extent by going to a single procurement agency. I think that is also what part of the changes to the governance strategies that have been put in place over the last five years have tried to do. Rather than having unpredictable times when problems would bubble up to a high enough level and then be addressed after problems were already known because you would run into stops, they’ve tried to set out a deliberate meeting schedule to have issues brought forward proactively and dealt with before they actually stop a procurement from going ahead.
Senator Eaton: Thank you. I think you said, Mr. Perry, that procurement, on average, took 15 years, and we should allow for that. Last week we had Colonel (Ret’d) Davies and Mr. Lagueux. Colonel Davies said:
. . . within National Defence, the systems are life-cycle managed from cradle to grave. The Materiel Group went through a significant restructuring when Mr. Lagueux . . .
So they’re all part of the materiel group; army, navy, special forces systems are managed by dedicated teams that look after it from acquisition to end-of-life disposal. The piece that’s missing is the procurement.
My question to you is this: We’ve known that our warships are 40 years old right now. When they reached their life cycle, say at 30 years or 25 years, why wouldn’t we plan or start the procurement process? Why do we wait until they’re kind of on the rocks and have to be refurbished and we’re spending money at refurbishment, before we think of the next group? If you have time, or I’ll go to round three, I want to know how we take the politics out of the system a bit.
Mr. Perry: The reason why we get equipment that lasts a decade or two longer than intended is fundamentally National Defence hasn’t had a consistent supply of money to do those replacements on a time cycle that would replace them before they’re 10 years too old. That was the dynamic around the frigate project. It was the early 2000s when the decision was made, because there was a lack of money to acquire new ones, that the department would go through a modernization and life extension. The exact same thing happened with our fighter force.
If you don’t have a consistent supply of funding, then you can’t actually go ahead and replace it. Under the rules that have been in place for several years now, departmental officials aren’t even allowed to do early project work, other than in a few cases where they identify key priorities which they’re going to address as soon as money becomes available.
Senator Eaton: That could be a recommendation, a steady money supply —
Mr. Perry: Yes.
Senator Eaton: — and department officials should be allowed to work on projects for the future.
Mr. Perry: There’s a double-edged sword that happens there. That’s what my colleague was talking about before.
What happened before the shift was put in place to preclude work on things that didn’t have money was that different sponsors — different services in the military and some other L1s — would have ideas for procurements they would like to move ahead on but didn’t have money to deliver on. If those happened to be projects that the particular commander at the time wanted to see come to fruition, staff time that could have been devoted to working on something that actually had money and therefore a chance of coming to fruition would be devoted to these pet projects. It’s a question of finding the right balance.
What they’ve done now, under the last several years, is move to having identified and agreed-upon list of a dozen to a dozen-and-a-half projects at any one time and, if money becomes available for any number of reasons, such as if some projects come in under budget, governments can always give more money to allow some measured and controlled amount of additional work to happen on some projects, but to constrain that and have more coherence in the program so effort isn’t being expended on things that will never see the light of day.
Senator Eaton: Professor Stone, do you have anything to add?
Mr. Stone: I want to make a comment about culture. If you were to ask most of the uniformed personnel in 101 Colonel By Drive how much faith they had that the funding that is in SSE is actually going to come to fruition, most of them would be less than 50 per cent. That’s in part because if you’ve spent any time in the Canadian Forces, you’ve been through iterations of governments promising long-term, stable funding; the fiscal environment changes, governments have to make decisions and that long-term stable funding disappears, which leads to the lack of consistent funding.
I don’t think you’ll ever remove that challenge for governments. It’s the best of intentions that we have Strong, Secure, Engaged, but if the business cycle — which has been kind of good for the last decade — changes and we get into a recession, the government will have to make some decisions about that. Invariably, DND is the biggest discretionary pot, so there will be cuts.
Even if we could get in Canada a multi-party agreement on defence issues, which the U.K. and Australia sort of have, we’d still have some of these challenges around that stable funding, because that’s the reality of the fiscal framework.
Senator Klyne: I have two questions. I wasn’t going to ask this question, but I’m going to come back to this again. It will be interesting reading the transcripts after, because I think there’s a little solution here and a little solution there. I’ll use the phrase of my colleague, “I’ll take those threads and maybe I can knit a sweater out of them.”
With cost-benefit or best intentions — and I understand double-edged swords — we need to do something, it would appear. In the interests of cost overruns, late deliveries, maybe not reaching the goal line to meet operational requirements, in the interest of moving closer to saying that we have made significant strides or improvements when it comes to the process of procurement for Defence and the Canadian Coast Guard, what recommendations of step or steps would you give to this committee to say that we need to do these things to say that we have, amongst our allies, the best? It may not be the ideal or the euphoria we’re looking for, but it makes those strides to say we have definitely made some positive strides in the direction of saying, amongst our allies, we have the best procurement that we could ask for, given all the extraneous variables for procurement and Defence and the Canadian Coast Guard. What steps or steps would you recommend to this committee?
Mr. Perry: I’ll start. I have one thing that I would make as a recommendation, but before saying that, in terms of the need to do something, I think right now, in the next couple of years, the biggest thing that the country as a whole needs to do about the implementation of this defence policy is to be a little more patient and expect the expectations that were set at a very high level with the publication of that policy to probably not be all met at once. Frankly I think they were unrealistic in terms of how quickly it was realistic to think — no matter what anyone did — how fast that money would roll out.
The one big thing that hasn’t been addressed in the past reforms is to try to fundamentally improve the human capital, the people working on procurement, most particularly within National Defence and the military people that work on procurement.
I go back to what my colleague said, I think it is a cultural issue. Procurement, I don’t think, is generally viewed to be a top priority. The focus, for a lot of good reasons, is placed on operational activity and we don’t spend enough time and effort trying to put the right people in jobs that are important to procurement and to enable them, through training and coaching and mentoring, to actually succeed.
Mr. Stone: I would agree about the HR issue. I still think it’s probably better now than it was four years ago in terms of people having some expertise, particularly in the materiel world. The challenge is to deal with that from the uniform side.
I spent 30 years as an Army officer, and the last place I wanted to be as an artillery officer was in the national headquarters doing a project. That’s not what you want to do when you’re an Army officer.
Having said that, I know that the leadership of our college has recognized some of those issues around the military being tactically and operationally proficient, and institutionally weak in terms of understanding how this town works and the interplay of all the different departments. We now have, starting at the major and naval lieutenant-commander rank level, part of the 10-month program that, for some of those officers, deals with institutional policy issues, force development, procurement and HR.
So the system has recognized some of that, but there is still an issue with the expertise of folks in uniform to understand that space.
It is particularly challenging at the senior officer level, where you spend, if you’re lucky, two years in a job before it’s time to move to another one. You cannot do that in the institutional space. You need to spend four or five years in a job to develop expertise. I know there are discussions ongoing inside the department about that issue and about the balance between having a military person doing a job that really should be a civilian, and what you really need the military to be doing. You need the military input into that space and to have people to do that. That’s kind of that space.
If I were to have this committee make a recommendation, it would be for the Canadian Forces to get a handle on its HR structure, to get people with the expertise and leave them in jobs longer in that space. It applies to more than just procurement; there are other areas in that institutional space to which it would also apply.
Senator Boehm: I wanted to follow up on a point made by Senator Eaton. How can one take the politics out of procurement?
With some of our allied countries, particularly the European ones in NATO, where there are coalition governments, it’s relatively easy, because the parties have to work together and they can set out broad policy lines. We don’t have coalition governments in our country, but that should not prevent the parties, or at least experts, getting together and then advising as to what these broad policy procurement lines could be, rather than stopping the clock or winding it back every time we have a change of government.
I’d be interested to know whether that makes sense in terms of a recommendation.
Second, I wanted to ask about the issue of risk. We’re all certainly risk-averse in government, but we’ve heard a little bit in our study on this that putting more risk on contractors can actually, of course, raise the costs; we get higher prices.
Is there a magic way to get really the best value for money in defence procurement?
Mr. Perry: I’ll start. To your last question, no. I agree with my colleague: There’s no silver bullet on any of these things. It all depends on the nature of the specific procurement, what you’re trying to buy and how you’re trying to buy it. There’s no single mechanism that will fix all your problems.
In terms of the political issue, my answer on that would be, no, you can’t remove the politics; these are inherently political activities. I don’t think it’s reasonable to expect that governments will spend tens or hundreds of billions of dollars and not become involved in that in some way.
I’ll also put a caveat on the rest of what I’m going to say by saying that I think, right now, the actual degree of partisan agreement on procurement is actually pretty good. If you set aside probably two files, to my mind — jet fighters, both interim and new ones, and supply ships — it seems to me that most of what’s in Strong, Secure, Engaged is one of two things: projects that were already in the Canada First Defence Strategy under the previous government, or capability investments that were identified by the Department of National Defence in the report on transformation in 2011, which the department at that time couldn’t afford because it didn’t have enough money. So the shifted deficit financing I think bridged that divide between the Canada First Defence Strategy and Strong, Secure, Engaged in terms of the actual capability investments.
The last thing is that I don’t think political involvement is always inherently a bad thing. There are lots of examples you can point to where political involvement has made projects move faster than they would have if their progress had been left to the fortunes of officials working within the system at the bureaucratic level.
Senator Boehm: Afghanistan, as an example?
Mr. Perry: In part, the Afghanistan example. Shipbuilding is an example where political involvement has helped pull that file along. A lot of the early air programs that the Harper government bought between 2006 and 2009 went as fast as they did because there was a high degree of political pull helping to move them along.
I don’t think it’s always the case that political involvement is inherently bad. It becomes quite bad if you get changes in government and commitments to simply not buy particular pieces of capability. That ends up stopping a process when it’s at the tail end of it, which can be catastrophic.
Senator M. Deacon: I’ll carry on to one area — we’re looking at politics, procurement — where the buck stops and the risk continues. One of the things we heard in the last few weeks in very candid conversations with witnesses in the room — suppliers and competing suppliers at the table here together — was that off-loading of risk. I’m trying to think about that this morning in the context of some of the conversations we’ve had. When we asked about risk and where it goes, we were reminded that the contractors pick up or take on a lot of this risk. With taking risk, you’re going to probably and likely have costs and quotes that might be increased to allow for some of that risk buffer.
I’m wondering how the government should manage these risks, or if there’s anything we could be doing or doing better that allows the best value for the money that’s actually being spent.
Mr. Stone: My view would be that the government is doing better now than it was. We were in a space where government’s view really was that industry was out to hose the government and rip off taxpayers. Industry’s view was that the government wants them to pay for everything and assume all the risk. Some of that is about trust. Trust is better. It’s still fragile in terms of government needing to follow through on some of the things it’s doing.
But risk has to be shared. Ultimately, if a military procurement goes off the rails, the government is assuming all the risk for that, anyway, because they’re not going to get a capability that they need. If you think about the Cyclone maritime helicopter project and how many instances of contract delays and issues have been with that file, the risk is to the government and to the navy and the air force that are still flying really old helicopters. They’re not now, but they were for a long period of time.
You have to share the risk, and you have to decide what is a reasonable amount of risk for industry to have, knowing that there are going to be costs associated with industry sharing that risk. They’re going to charge you for that risk.
Mr. Perry: I agree with all of that, and I’ll add that there are contractual mechanisms. Holding a contractor to a fixed price is one way of making them assume every unforeseen eventuality, and that doesn’t make a lot of sense, unless you’re talking about something that’s a totally known quantity and fully designed up front, where there’s a low potential to have inflation or exchange rate fluctuations affect the price.
It doesn’t make sense, for the exact reasons my colleague just outlined, to have the company be responsible for the price difference relative to the changing price of steel or the change in exchange rate between the Canadian and U.S. dollar, as examples.
Senator Forest-Niesing: Professor Stone, if I can ask you to clarify for me what an Indigenous in-service support, ISS, is and what its relevance is to the desired encouragement to procurement from qualified Canadian sources?
Mr. Stone: In-service support is supposed to be part of the contract. We are supposed to have a price for 20 years of in-service support when we do a major acquisition. What I’m not sure of in that context is whether Indigenous is that part of the government program which is supposed to encourage Indigenous activity versus Indigenous being inside the Department of Defence.
I know there is a space where the government assesses bids for: Are we providing opportunities for Indigenous, small/medium-sized businesses to participate and they get scored. That’s part of the bid evaluation process. It’s not a CAF decision. It’s something that comes out of Innovation, Science and Economic Development when they do that industrial technical benefits articulation.
Senator Forest-Niesing: Thank you for that.
There are some witnesses who have suggested that, despite the length of the procurement cycle, we should look beyond the delivery to the inclusion of service and maintenance, despite the obvious disadvantage of prolonging the cycle, which is not a desired consequence of that. What would be the advantages of including service and maintenance beyond delivery?
Mr. Stone: If you think back to when we were putting people in harm’s way in Afghanistan, we did a number of acquisitions where the view at that time was that it was going to be a single point of accountability. So we bought the C-17s, and Boeing was responsible to provide the in-service support.
By and large, industry in Canada hates that because there is no value and no opportunity for Canada to grow its own industrial sector to provide maintenance to that equipment.
In the context of the C-17 that might have made sense, but we did a number of other procurements during that timeframe which were also single point of accountability, which meant that Canadian industry got no opportunity to be part of the value-added in terms of that support. We have moved away from that as a part of the industrial technical benefits policy now, where industry has to articulate against whatever the requirements are. If it’s a key industrial capability where we want to establish capability or if it’s an area where we already have expertise, however ISED decides they are going to structure that, industry actually has to articulate how they are going to do that. That allows industry to then grow and export to other nations because the Canadian defence market isn’t big enough for most industries to sustain themselves. If you don’t have that ISS piece and that maintenance piece, because there is more value in that for Canadian industry or any industry for that matter in any nation in the world, when you are going to sustain something for 20 or 30 years, that’s way more money than the cost of buying that piece of kit up front.
Senator Forest-Niesing: Thank you very much.
Senator Marshall: Just listening to you this morning, I’m changing my perspective on procurement. It sounds like the department and the government are trying to bring in some changes that will speed up procurement or make it better, but there is still all this negativity out there with regard to procurement. I find that when departmental officials appear before the committee, they are very reluctant to provide additional information. I know in response to an earlier question, you seemed to give the impression that they are transparent and that the information is out there.
Now, I can’t find the information. I have been on the website, but to leave that aside, whether it’s out there or not, why do you think there is a reluctance for officials to provide additional information? Does it go back to the conflict between politicians and public servants? I know there is conflict there at times. But why is there reluctance for officials to provide information that sounds like, from what you are saying, it is readily available?
Mr. Perry: I guess I would say a couple of things. One is “readily available” is a relative term. I spend an unhealthy amount of time looking at government websites, so readiness of the availability there I think a lot of people would contest.
Why do we get that kind of behaviour? I think fundamentally there is not much that encourages most civil servants to want to take the risks of speaking about things that they might then be held accountable for. If they simply come in and don’t say all that much, there is not a whole lot of specifics that you can follow up on and ask them how they’re going.
If you come in and you speak at a very high level in a lot of generalities, there is not a lot to be held to there. Although, in fairness, there has been a shift in the last couple of years certainly that I’ve seen at the high level — particularly at PSPC and DND — where you have had senior officials that have been more willing to engage and in some cases have been more forthcoming, forthright and transparent than people that have previously been in those positions over the last 10 to 15 years. It’s not across the board and not every time, but there is a general shift overall.
Senator Marshall: It would seem to me, based on what you are saying in your testimony this morning, that the system, the department and defence procurement would be better served if the information was out there and more readily available. I think that that would encourage confidence in military procurement.
Dr. Stone, do you have any comments on that?
Mr. Stone: I think what you have is that they are obligated as a public servant to reflect government policy. They don’t really have an option in our system of government. They are obligated to reflect government policy.
Now I’m a public servant, but because I’m a university teacher, I actually have academic freedom which most public servants don’t have — as long as it’s an area where I research and publish — to actually come and do something like this. Otherwise a whole bunch of what I said would have been problematic if I was just a public servant.
Unlike the U.S. system where senior government officials, both in uniform and out, are obligated to tell committees what they think, and not necessarily reflect the views of the executive, our senior public servants are obligated to reflect the views of government. So you then get into the risk-aversion space of: How much leeway do I have? I would say that contextually some will be more forthcoming than others, but that will be a judgmental decision based on everything else going in the media with the government of the day.
Senator Marshall: Will this information come back to haunt me? Thank you very much.
Senator Klyne: I’m going to build on something Senator Forest-Niesing put out there which had pretty much answered most of my questions, but I’m going to reframe this in another way. Going back to one of your earlier comments that Canadian industry should be favoured only when it makes sense to do so, I agree. I want to go back to the industrial regional benefits and the industrial technology benefits.
The IRB has kind of seen its day. I think it was well intended and there were some successes in terms of building that capacity so that Canadian companies could compete internationally but also see some growth in their respective industries. Then in 2014 industrial technology benefits came along and they were hoping to lever up these Defence and Coast Guard procurements with further economic benefits.
It seems to me that they may have thrown the baby out with the bathwater when they put the IRB aside. Couldn’t companies bid in association with Canadian companies if they were non-Canadian and could put some weight into that, recognizing that you are doing this in association with a Canadian company? While it may have been too large of a contract for the Canadian company to bid on, when in association with a larger, non-Canadian company they could realize some benefits of building capacity and experience, moving them closer to some growth potential and increasing or enhancing the competitiveness internationally. Does that take place already?
Mr. Stone: I would say that happens, particularly in a context of understanding the state of Canadian industry. We have some industries that are the recognized world industry leaders in certain capabilities but, for the most part, with the exception of light armoured vehicles, we don’t build complete weapons systems. We don’t build fighter airplanes; we don’t build tanks. All of the primes that would actually provide those items will have engaged with a variety of Canadian companies in order to put together a bid. If I were to use the next-generation fighter as an example, there are five qualified companies in that space. All of those companies will have made connections with Canadian industries to be part of that bid to demonstrate those benefits to the government.
If you understand the evolution of IRBs which started back in the early 1970s under Prime Minister Pierre Trudeau, where you just had to spend the $5 billion in Canada. You could buy blue jeans. It evolved over time to where we’ve incrementally made improvements to that space.
This latest iteration will force the big primes to get beyond it. So, “I have an obligation and, as soon as I have met that obligation, I have another one somewhere else and I will move on to that.” If they want the business, they have to think about how they will invest. It has articulated how that investment will be scored in terms of promoting R&D, promoting defence exports, and the Canadian defence industry. There is a set of articulations in the policy. That will make industry think and be more sophisticated about how they will invest in Canada to get that procurement.
It’s just another evolution in making that better. I actually don’t think it will get rid of some of regional benefits issue. The big primes know there is an issue that they have to meet as well. I think it’s just an improvement.
Mr. Perry: A lot of that change is designed to enhance particular types of economic activity in the domestic economy. Several targets were set out as part of that shift in policy, including an overall growth in the industry metric and an export target. There have been problems with consistency across government policy, certainly, to meet the export target because of the changes the government has made in the export review process. I’m not sure how much data there is yet on whether the other objectives are being met.
As a final note, my colleague mentioned the fighter file. It’s a potential example. You need to be careful. While you’re trying to incentivize domestic economic activity, it’s still important to make sure you are actually meeting the capability requirements that you are trying to get for the military. On that file in particular, we are a little bit worried that the dial has moved too far toward incentivizing economic offsets in one particular way at the expense of obtaining capability.
I think what Canada is trying to do right now is figure out some way to have Lockheed Martin submit a bid with an economic offset proposal within the Joint Strike Fighter memorandum of understanding which would violate the terms of the agreement signed by Canada. That might mean we wouldn’t be able to get a bid from that company, which, I think, has a very capable aircraft.
Senator Eaton: I want to go back to the political question. We learned last week from one of our witnesses that, up to the time of Prime Minister Chrétien, prime ministers were not that interested in the outcome. Obviously the money always was a factor, but it was over the helicopters that prime ministers actually became interested in the outcome.
Could we not go back to a system whereas once an item has been decided — say, the CF-35s, for want of a better example, or the armoured tank — it goes to cabinet? Cabinet votes on the money, but does not interfere in the actual recommendation of the article. How do we take that, really, when sitting around the cabinet table? I remember Scott Brison sitting in this committee as President of the Treasury Board saying, “I wish the Senate would do a study on this, because we really don’t understand anything.”
Cabinet ministers have ministries they need to understand and deal with; do they really know much about aircraft and fighter combatants? How do we get the politics out of it? They always have the money. That’s the ultimate yes or no on whether we get something or not.
Mr. Perry: I don’t think you could ever get all of the politics out, but it must be involved in the right way.
When the government set up the cabinet committee specifically to look at defence procurements, that was the right way to have some of the conversation. That allowed cabinet,I understood, to dedicate more time than it would have normally without the competing demands in a committee; they could actually understand and make decisions on an issue, having been fully briefed.
I don’t see a scenario where government can approve funding and then have full confidence that they don’t need to come back until you have operational equipment.
Senator Eaton: This is a nonpartisan question: When one government cancels something that another government has gone through the process of approving, how can we stop that or discourage that? Once something has been ordered, they can stop the money, but they can’t change what has been ordered. It could just happen over and over again. The next government could come and look at those surface combatants and say, “No, we don’t need those; we need submarines. Cancel.” How do we stop that?
Mr. Perry: I could add a couple of things. If you look at the last 40 or 50 years, that only happened in a few small although highly consequential scenarios. I’m not sure there is a good mechanism where you could ever effectively tie a government’s hands and withdraw that policy option.
There could be good reasons to cancel programs. Look back at the last time we were looking to buy surface combatants. Given the fiscal climate at the time, the purchase of frigates was curtailed from 18 to 12 units, in part based on fiscal decisions.
Senator Eaton: But that was a money issue. I’m asking about something that has been ordered. It is fine if it’s a money issue, but if it is not a money issue, should governments be allowed to cancel it just because they lost power? The next government can come in and say, “I don’t like those armoured tanks; let’s start the procurement process over again.”
Mr. Stone: I would say that’s the prerogative of the government. When Prime Minister Chrétien cancelled the EH-101s, depending on whom you believe, it cost the government $500 million.
Senator Eaton: Then they came back and, as you know, DND looked at the process again and came back with the same recommendation.
Mr. Stone: The project was “re-competed.” EH-101 won the search and rescue helicopter bid. I know the Prime Minister tried to prevent that from happening with the Maritime helicopter project. That is why they separated the file so that the electronics and operating system were different than the airframe. That is why the file has such challenges; it went from being commercial, off-the-shelf to a development project, with only funding for a commercial, off-the-shelf project. It came back through the tribunal process and the courts who said, “You actually can’t do that.”
If you take away the Maritime helicopter EH-101 thing, there actually have not been very many occasions where —
Senator Eaton: What about the CF-35s?
Mr. Stone: We had not contracted the F-35 yet. It was depending on —
Senator Eaton: But hadn’t we paid into it?
Mr. Stone: Again, we agreed in 2000 to be part of the consortium. There is a narrative space there; if you believe the Auditor General, we agreed to buy the plane in 2006. The government’s narrative is that we actually haven’t agreed to buy the plane yet. We have agreed to be part of the consortium and pay the $35 million a year to belong to it, knowing the Canadian industry is getting benefits and business from that. There is a space there, but we hadn’t actually signed a document with Lockheed Martin that said we are buying this number of planes for this amount of money. We have not done that very often, because it’s expense to cancel that contract.
Senator Eaton: As a Canadian, when I hear the Australians are taking delivery of F-35s and selling us their CF-18s, I feel there is something wrong with our procurement system or political system. So you don’t have any recommendations as to how we can improve that?
Mr. Stone: The difference is Australians live in a dangerous part of the world.
Senator Eaton: You’re quite right. We live in this lovely fairyland up here.
Mr. Stone: Contextually, all of their political parties agree on the defence space and what needs to happen. In the Canadian context, there is a whole bunch of folks who believe our neighbours to the south are going to look after us. Now, that may be naive, but that is the narrative for a lot of people in Canada. That perspective has probably changed in the last couple of years, but that has been the narrative, historically.
Senator Eaton: And they don’t demand anything in return for it. We are not going to agree on this. Thank you.
Mr. Perry: On the specific fighter file, no government in the last nine or 10 years has looked good and I don’t think that the system and the military in particular —
Senator Eaton: You sat there all morning and told us we shouldn’t look at our procurement system because it’s really working well.
Mr. Perry: That’s one file out of a couple hundred, although a very important one.
The Deputy Chair: Thank you, Mr. Perry and Professor Stone, for coming in this morning and answering all of our questions.
(The committee adjourned.)