Proceedings of the Standing Senate Committee on
National Finance
Issue No. 78 - Evidence - October 30, 2018
OTTAWA, Tuesday, October 30, 2018
The Standing Senate Committee on National Finance met this day at 9:30 a.m., in camera and in public, to study on the processes and financial aspects of the Government of Canada’s system of defence procurement; and, in public, to study the processes and financial aspects of the Government of Canada’s system of defence procurement.
Senator Percy Mockler (Chair) in the chair.
(The committee continued in camera.)
(The committee resumed in public.)
The Chair: Welcome to this meeting of the Standing Senate Committee on National Finance.
My name is Percy Mockler, senator from New Brunswick and chair of the committee. At this time, I ask the senators to introduce themselves, please.
[Translation]
Senator Forest: Éric Forest from the Gulf Region of Quebec.
Senator Pratte: André Pratte from Quebec.
[English]
Senator C. Deacon: Colin Deacon, Nova Scotia.
Senator M. Deacon: Marty Deacon, Ontario.
Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.
The Chair: Today, we begin the committee’s special study on the system of defence procurement, authorized by the order of reference adopted by the Senate of Canada on October 4, 2018.
For this first meeting in public on the topic, we welcome two key stakeholders: from the Department of National Defence and the Canadian Armed Forces, Patrick Finn, Assistant Deputy Minister (Materiel), Department of National Defence and the Canadian Armed Forces, and from Public Services and Procurement Canada, André Fillion, Assistant Deputy Minister, Defence and Marine Procurement, Public Services and Procurement Canada.
Welcome to the witnesses. Thank you very much for accepting our invitation. There is no doubt that you will be sharing your vision, your professionalism and your experience, of which we are aware.
You are here this morning to open the special study on procurement process, as mandated by the Senate of Canada.
Mr. Finn, the floor is yours.
Patrick Finn, Assistant Deputy Minister (Materiel), Department of National Defence and the Canadian Armed Forces: Thank you for inviting us here today to talk about what is a very key subject.
As Mr. Fillion and I are very interested in your questions, our opening remarks will be very brief. We are also very committed to defence procurement as a key system that provides the equipment our military needs to make sure the Canadian Armed Forces remain operational and effective in everything that they do.
For us, a key enabler in actually achieving what we need to around defence procurement was the Strong, Secure, Engaged defence policy issued last year.
On behalf of my colleague and myself, I can absolutely say that a lot of work is underway in looking at how we are streamlining and better improving defence procurement to make sure that we actually deliver on that requirement.
[Translation]
With that, we would be happy to take your questions.
The Chair: Mr. Fillion, do you have any comments?
[English]
André Fillion, Assistant Deputy Minister, Defence and Marine Procurement, Public Services and Procurement Canada: We are in a fairly interesting period of time with our marching orders in terms of national shipbuilding strategies and the Strong, Secure, Engaged policy that was just discussed.
As we are delivering, we have a duty to continue to improve the processes, to learn from our good procurements and some of our mistakes, and to engage with our allies to continue to improve.
It’s an equal duty in terms of making sure that we don’t only deliver the capabilities but that we do so in an improved fashion as we go forward.
I am looking forward to your questions. Thank you very much.
[Translation]
The Chair: Thank you.
Senator Pratte: When it comes to the fighter jet issue, how have the initiatives you have taken to improve the procurement process been implemented in practice? You know the subject much better than we do. From the outside, the public looks at the situation and wonders where we have been going for several years. The cost of the F-35s have increased significantly. Then the process was modified. Then, we decided to buy “used” Australian planes. There seems to be a lot of false starts in the process.
Mr. Fillion: Thank you for the question. The distribution of the draft solicitation documents to potential suppliers was announced last week. It was an important step after several months of work. A lot of work has been done in consultation with suppliers, which is very important for an acquisition of this size and cost. At the beginning of the year, on February 22, a list of suppliers was established, which reduced the number of commitments to the five main suppliers, the government-led teams that operate and build these fighter jets.
Since then, several discussions have been held with suppliers to inform them of what was produced and issued last week, to ensure that we fully understand what they can provide us, and also to adapt the method of supply to the fighter jet environment. Buying a fighter plane isn’t like buying a compact car, and the role of the governments is very important. We had to adapt our method of supply to the context of fighter jets.
We have recently learned our lessons with surface combatants. Also, a few weeks ago, we took a major step forward in identifying a supplier who is a preferred bidder.
It is by moving forward with fighter jets that we have incorporated some of these lessons learned, which will allow us to use a very flexible approach and to have a dialogue during the bid solicitation process. We have several projects, contracts and acquisitions under way, and we have learned many lessons from our allies.
Mr. Finn: I thank the Senator for his question. On the defence side, we want to make sure we are managing a competition that brings long-term capability to the Royal Canadian Air Force. It is still an aircraft that will be in service for decades. This is why it is necessary to provide the required capacity while respecting the needs of aviation, at a reasonable price and according to established schedules.
The needs contained in the tender we are working on are very much performance-based so that we can, once again, ensure a more strategic approach to needs.
We have engaged all our allies who, in recent years, have made purchases in the same area, in order to benefit from the lessons they have learned and from other acquisitions that have been made here in Canada.
Senator Pratte: With respect to the Australian F-18s, you’ve probably heard that Canada has been short-changed in the past with submarines and will continue to be short-changed with the Australian F-18s. Actually, what is the difference between the two?
Mr. Finn: I would tell you that there are different aspects. As for submarines, there were only four. In the United Kingdom, some work had been done, but the submarines had not entered service. So the last submarines were never put into operation. They completed what was supposed to be a larger purchase. Also, all this was done with a support service that was very limited.
On the Australian side, there are 18 aircraft, including 16 aircraft that we still have. These are aircraft that we know very well. Over the years, we have worked closely with Australians on the structure and other systems.
In our opinion, Canada has the best expertise related to this type of aircraft. Some companies in Montreal do maintenance for the United States and other countries because they have the necessary knowledge.
This aircraft will really increase our fleet, and it is not the number of aircraft that counts; it is rather the hours of use in the future. We are looking for an aircraft that will remain in service for another 14 years. What is needed is enough hours on the structural side. We will be able to use these aircraft until the entire fleet is no longer in service.
[English]
Senator Eaton: I understand, gentlemen, that the procurement process is not just finding the right equipment for the Armed Forces. It is creating jobs and economic growth in Canada and streamlining. It is also part of something called a value proposition, which measures industrial and technological benefits to Canada of a bid.
Do you ever find yourselves torn between this would be wonderful but it doesn’t benefit Canadian jobs or innovation? Is there ever a tug-of-war?
Mr. Fillion: When we develop procurement strategies and evaluations plans, in particular, we obviously develop the specifications and the requirements for the various capabilities we have to acquire.
We take into consideration three things, and Mr. Finn can expand on them. First is the capability that will be acquired. Next is whether or not it meets the non-negotiable requirements of the army, navy and air force. Then it is rated in terms of how good it is, and usually a fairly high score is given to it.
We also look at costs and establishing value for money. We also look at what we call the value proposition and the quality of it economically.
[Translation]
Senator Eaton: I understand all this, but what I’m asking you is whether you’re being pulled in one direction or the other.
[English]
I am asking you which takes precedence. Is it speed, cost and delivery of a first-rated thing that the military needs, or is it, gee whiz, we could create more jobs in southern Ontario, Quebec and out west if we went this route?
Mr. Fillion: We communicate our priorities to the suppliers in terms of what we reward most in a capability, cost and value proposition. Then we let them propose to us.
I would say that for us each procurement is different.
Senator Eaton: How do you prioritize your demands?
Mr. Finn: I think it’s important that we not treat these as distinct buckets, as you will hear from us all the time.
Senator Eaton: It is for you to make a decision.
Mr. Finn: For us, the issue is that we have to maintain these things in service. This is the key piece.
A lot of the value propositions and what we get from the offset policy drives not just jobs from an economic perspective in Canada. It is the capability to support our military, which is really critical.
We have vessels and we have aircraft that, by virtue of the technology on board, cannot be exported for maintenance. We would actually have another country determining where we would send equipment for maintenance.
It is not that we don’t care about jobs or that somebody else worries about that. We actually worry about having the through-life support. Having industry in Canada that can maintain these highly complex military systems is actually part of the defence of Canada.
It becomes important, so they don’t get prioritized in the context of one always takes over from the other. It is, as my colleague was saying, a discussion that we have to say that the level of value proposition will ensure we deliver through-life support for the system in Canada and what we can do.
Senator Eaton: I understand what you are saying about maintenance and ongoing support, but do you feel we are building our own arms industry through these procurement processes? Do we have an arms industry in Canada, so to speak?
Mr. Finn: We certainly have a defence industry. It does a lot of systems. Do we do a lot of weapons systems? Not necessarily, but we have a lot of really first-tier combat systems, integrators, systems providers, software developers, light-armoured vehicle developers, and other things of that nature.
We have, the last time I looked through the associations, about a $12 billion a year industry. We at Defence spend about $6 billion a year, so you could imagine it’s leveraged about 50/50.
Senator Eaton: That is very interesting. I think you had a budget this year of $6.3 billion for SSE in 2017-2018. Is that correct?
Mr. Finn: SSE is the broader piece.
Senator Eaton: You had about $6.3 billion for a budget to spend this year.
Mr. Finn: This would be for our chief financial officer, I apologize. I know the budget that I control.
Senator Eaton: Skip that question.
Mr. Finn: I have about $6 billion this year, half of which is acquisition and half of which is in-service support. We are on track to spend all of that.
[Translation]
Senator Forest: I have two brief questions. Following the call for tenders that was issued, The Globe and Mail is informing us that the contract is estimated at more than $26 billion, depending on your industrial technological benefits model.
The question I have is that you are putting out a call for tenders while remaining in the consortium responsible for developing an F-35 aircraft. Doesn’t staying in this consortium put you in an awkward position? And are there any costs associated with staying in the consortium that has the mandate to design the F-35 aircraft?
Mr. Finn: Thank you for your question. The F-35 is still a model that we have been involved in developing since the beginning of the partnership. Participation provides the option and best price for the aircraft if it wins a competition and, at the same time, allows the Canadian industry to access the various contracts across the fleet.
At National Defence, we have created a completely separate team that participates in F-35 meetings. The team reports to me but works independently of the other teams working on tendering and competitions to try to establish independence. Because of the investments that have been made so far — and you’re right, we pay about $30 million every year, an amount that changes from year to year, depending on the percentage — we have access to this aircraft at the best possible price.
We want to bring the best value to the competition and be sure to have the best possible access if the aircraft wins the competition, while still creating independence within the department so that those working on the aircraft or project in the United States do not communicate with the team preparing the tender.
[English]
Mr. Fillion: The draft request for proposal that was shared with suppliers last week was the result of many months of consultation on all five potential options.
It is based on the requirements of the RCAF specified in those documents. There has been a lot of back and forth over the last several months to make sure that what we are asking meets the requirements of the air force and ensures that we do not inadvertently limit the competition.
I feel very confident that what we’ve put together is fair, open and transparent to all the potential suppliers.
[Translation]
Senator Forest: On this subject, you will admit that, for the ordinary citizen who does not have your competence and experience, it may seem unusual for you to issue a call for tenders while participating in the creation of one of the products included in the call for tenders. This isn’t a common situation.
Mr. Finn: I understand this perception, but the reality is that there are several companies involved. I’m in ongoing bilateral discussions with my French colleagues on fighter projects, among other things. The call for tenders for the projects wasn’t issued. Once it is, the communications will stop. In the meantime, we are in dialogue with all suppliers. We do our best to ensure that the dialogues on the F-35, and the knowledge we have of the project and the aircraft are exactly the same as those of other suppliers, meaning the same dialogues, discussions and knowledge of their products.
We have Canadian aviation pilots flying in the United States on aircraft other than the F-35 who also have knowledge in this area. Due to the commitments with the various large companies, there is a dialogue, but we do our best to maintain equity with all our suppliers.
Mr. Fillion: Sharing the draft of our request for proposals as we did last week gives suppliers the opportunity to provide feedback before we release the final version of our calls for tenders next spring. If there are, again, things in these documents that have the effect of excluding certain suppliers for unjustified reasons, either by error or omission, we have the opportunity to be informed.
[English]
Senator Marshall: I want to talk about the committees involved in military procurement. Are they all departmental committees?
Mr. Fillion: A lot of the decision making on defence procurement is happening within the interdepartmental committees formed at various levels to deal with various sizes of procurement. Those have membership from the core departments involved in defence procurement: PSPC, National Defence, and Innovation, Science and Economic Development, with participation from central agencies.
They are truly interdepartmental committees with various levels of representation from director, to director general, to deputy minister and to assistant deputy minister, depending on the size of the decisions involved.
Senator Marshall: I take it from what you are saying that they aren’t all of equal status. There must be some committees of equal status. They must report to one committee. Maybe it is a committee of deputy ministers. How is it set up?
Mr. Fillion: Again, it depends on the size of the transaction. For example, the director-level committees have dollar thresholds where they can actually make decisions on procurement strategy, industry engagement plans and the release of solicitation documents.
Above the threshold of $100 million, director generals get involved and have authority for making decisions. For the very large and complex, we get involved at our level and make decisions. Obviously, the chapeau overall is the deputy minister of governance that monitors all of this and is involved in some of the bigger, more strategic-level decisions.
Again, depending on the size and complexity, the decisions on those milestones are made by these committees.
Senator Marshall: Would there be a formal mandate? Would each committee have a formal mandate?
Mr. Fillion: There are terms of reference for each of these committees which boil down to the same kinds of things.
Very early on in the procurement process they have responsibility to gather and make decisions on how industry will be engaged in formulating the procurement strategy, on how they will approve the procurement strategy once the engagement has been done, on the kinds of decisions needed for each, and on the participation of which department, with the chairmanship in PSPC using a consensus-based decision approach.
Senator Marshall: Can we get the organization chart of the committees, along with their mandates?
Mr. Fillion: No problem.
Senator Marshall: That would be appreciated. Just give it to our clerk.
Mr. Fillion: I would be happy to do that.
Senator C. Deacon: Thank you for the conversation today. I like the fact that you are looking at lifecycle costs so clearly in building partners.
In 2011, Innovation Canada put out a special report on procurement. You likely both saw it. One of their strong recommendations was around using SMEs to make innovation an objective and to make sure that we spread that opportunity more widely in Canada.
Can you report on what you have been doing and what you view as key success measures that you are monitoring to make sure that small and medium enterprises across the country have the ability to bring forward highly effective and disruptive technologies that could be helpful to you and help to spread the economic development and opportunity across Canada related to procurement?
Mr. Finn: This is a strong area of interest for our minister who is very keen on the context of innovation.
In the “IDEaS” program of the Strong, Secure, Engaged defence policy there is significant investment in small and medium enterprises, academia and other places to try to bring forward ideas, solutions, disruptive technologies, and very innovative approaches that we can use and continue to develop. Not every one of them will go through follow-on phases. The idea is to take a very different approach to our going out in the traditional way, thinking about it and saying, “Here are our requirements; please develop a product that meets our requirements exactly.” That is a key area.
There have been a number of challenges, and a number of small contracts have now been let to continue its development. My colleague, the RAdm of Science and Technology, leads that program.
There is a number of other areas. Since 2014, there has been the Industrial and Technological Benefits Policy in Canada run by our colleagues at Innovation, Science and Economic Development. Most of our largest acquisitions actually have set-asides in the value proposition to enable small and medium enterprises for the very reasons that you indicate.
We see it all the time. We see some really impressive solutions coming in. Often they are in-service ones. The small and medium enterprises occur at the time of acquisition. Even though it could be a large international company or a large Canadian company, they are compelled in their value propositions to indicate how they will set aside a certain portion for small and medium enterprises and how they will report on that. Again, our colleagues monitor that very closely.
We see it in maintenance. We see it in new acquisitions. We have a number of programs. Our colleagues at ISED have Innovation Solutions Canada and some other programs of its nature to try to stimulate at that level what we can do and what we can bring forward.
Senator C. Deacon: Could I ask that you provide, through our clerk, a copy of what you are looking at as success measures and how you are reporting on your success in this regard over the past number of years and looking into the future?
I know you need quality as well, but I think we need to have confidence that this is a priority.
Mr. Finn: We will bring you some of the data on what we’re doing with IDEaS.
Our colleagues at Innovation, Science and Economic Development do very detailed studies on small and medium enterprises, the amount of money, the stimulus, et cetera. I believe they are coming to see you, but we will provide you what we have. They are a very important source of information.
[Translation]
Senator Forest: According to your procurement policy, Canada will invest more than $100 billion over the next 20 years in its fleet of ships. I note that one per cent of these investments would go to Davie, Canada’s largest shipyard. Quebec still represents 23 per cent of the Canadian population. Is my calculation good, based on what I have seen in your investment policy? I wasn’t able to assess this aspect, but in terms of investments in new equipment over $100 billion, about one per cent is for Davie.
Mr. Finn: Thank you for the question. Care must be taken to compare the percentage of contracts awarded to the value of projects in future years. The vast majority of the contracts within the $100 billion envelope — I think it’s a little less — have not been awarded. We are below $10 billion.
Once again, our colleagues at Innovation, Science and Economic Development, ISED, have very precise figures by province. As a result of the various projects under the National Shipbuilding Procurement Strategy, approximately 15 per cent of the envelope was allocated to various Quebec companies. As you mentioned, maintenance will change the equation significantly as ships are built.
Senator Forest: Could you give us those figures?
Mr. Finn: I’ll ask my colleagues at ISED to provide them to you.
Mr. Fillion: Since the strategy has just been implemented, there are many statistical distortions when a large contract is established. As Mr. Finn mentioned, the numbers are more like 15 to 17 per cent for contracts awarded in Quebec for the construction of small vessels and maintenance. Recently, some contracts have been awarded to Davie, particularly for icebreakers, and so on.
Senator Forest: It must be recognized, however, that for surface combatants, the contract is awarded to one supplier, and the contract for patrol vessels is awarded to another, which represents the bulk of the long-term investment.
Mr. Finn: They are intended for suppliers, but the subcontractors and economic benefits — As we saw in the past when the frigates were built in New Brunswick, everything related to combat systems was built in Montreal. It’s sort of the same thing. Everything related to the construction of a surface combatant represents about 15 per cent of the value of the vessel, and the rest comes from other subcontractors.
The Chair: Synergy must be national.
[English]
What are the main reasons for delays in defence procurement and for budgets being exceeded?
[Translation]
If you could provide us with information on this issue through the clerk, that would be very appreciated.
(The committee adjourned.)