Proceedings of the Standing Senate Committee on
National Finance
Issue No. 91 - Evidence - April 2, 2019
OTTAWA, Tuesday, April 2, 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 Percy Mockler (Chair) in the chair.
[English]
The Chair: My name is Percy Mockler, senator from New Brunswick and chair of the committee.
I wish to welcome those who are with us in the room and viewers across the country who may be watching on television or online. As a reminder to those watching, the committee hearings are open to the public and also available online at sencanada.ca.
[Translation]
I would now ask senators to introduce themselves, starting on my left.
[English]
Senator Klyne: Marty Klyne, Saskatchewan.
[Translation]
Senator Forest: Good morning. Éric Forest from the Gulf Region, Quebec.
Senator Pratte: André Pratte from Quebec.
Senator Forest-Niesing: Good morning. Josée Forest-Niesing from Ontario.
[English]
Senator M. Deacon: Marty Deacon, Ontario.
Senator Boehm: Peter Boehm, Ontario.
Senator Neufeld: Richard Neufeld, British Columbia.
Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.
Senator Eaton: Nicole Eaton, Ontario.
The Chair: Thank you, senators.
[Translation]
I would also like to thank the committee’s clerk, Gaëtane Lemay, and our two analysts, Alex Smith and Shaowei Pu, who also support the work of the Standing Senate Committee on National Finance.
[English]
Mr. Davies and Mr. Lagueux, with your collective experiences, there is no doubt that you will be informative and educational. Thank you very much for accepting our invitation to look and discuss the order of reference that the Finance Committee received from the Senate.
Today our committee is continuing its special study on military procurement which we started on October 30, 2018. The committee is studying the processes and financial aspects of the Government of Canada’s system of defence procurement.
We held three meetings on this topic. Today, we wanted to hear from informed and experienced observers and former senior departmental officials who have expressed undeniable interest in the issue across Canada.
[Translation]
We are pleased to have with us today Mr. Pierre Lagueux former Assistant Deputy Minister, Materiel, National Defence and the Canadian Armed Forces.
[English]
We also welcome Colonel Charles Davies, former Logistics Officer and former Senior Director responsible for materiel acquisition and support policy, procedures and standards, National Defence and the Canadian Armed Forces.
As per our order of reference, this study is comprised to incorporate mechanisms to ensure value for money and Canadian economic benefits are achieved, utilize cost-effective, timely and efficient procedures, clearly and transparently report on planned and actual expenditures, compare processes and costs from other markets from around the world and other related matters to the military procurement.
[Translation]
The clerk has informed me that our witnesses will make an individual presentation, followed by questions. I would now ask Mr. Lagueux to make his presentation. He will be followed by Colonel Davies. Mr. Lagueux, the floor is yours.
Pierre Lagueux, former Assistant Deputy Minister, Materiel, National Defence and the Canadian Armed Forces, as an individual: Thank you, Mr. Chair, and thank you for the opportunity to appear before your committee this morning.
[English]
I am very happy to share my thoughts on the topic of defence procurement, a topic which has been very close to my heart for many years. By way of background, I served in the DND Materiel Group starting as a young major in 1979 until my retirement from the public service as the ADM(Materiel) in 1999.
Following that period, I spent almost 17 years as a senior and managing partner of a local consulting house, advising industry on how to successfully navigate the Canadian defence procurement system, not an easy consulting task, I assure you.
Over the years, I have seen and experienced many charges to the defence procurement process. The most significant, of course, occurred way back in 1972. I refer to that because it’s important because that was the creation at that time of National Defence Headquarters, and with that, the formation of the DND Materiel Group.
This group centralized and provided for a single point of accountability within DND for all defence procurement and lifecycle management of equipment. Only the actual contracting process was left outside DND, with what was then called the Department of Supply and Services.
Since that time, I have had the opportunity to provide input into several procurement reform initiatives over the years. For example, the 1992 Conservative government statement on Canadian Defence Policy; the 1994 Liberal government budget impact statements; the 1999 SCONDVA parliamentary committee review; and the 2008 Standing Committee on National Defence, report on Procurement and Associated Processes. Your interest is not the first of government in defence procurement. I was not involved in the 2014 Defence Procurement Strategy.
As Bernard Gray, who led an extensive study of the British defence acquisition process in 2009 said, and I quote:
Acquisition reform . . . is a subject only about 5 minutes younger than the acquisition of military equipment itself.
Five minutes younger. After pointing out in his report that the procurement problems across the world were, as he said, endemic and widespread amongst all of the U.K.’s allies, he then opined, and I quote again:
If the resolution of the problem were easy, then surely someone, somewhere would have solved it by now?
Why in 2019 do we still continue to be frustrated by a system which still seems to be unable to deliver equipment smoothly, efficiently in a timely manner?
In an article I wrote which appeared in the January 2016 issue of Policy Options, I tried to explain why defence procurement is a unique undertaking, very different from commercial or industry procurement. Why is that?
For example, the commercial marketplace tends to have many buyers and many sellers. The defence market, however, has very few sellers and very few buyers. Procurement opportunities tend to occur on an irregular basis, so each opportunity is critical to the sellers. This gives the buyers considerable leverage over the sellers. Being naturally risk-averse, the government buyers often impose unrealistic particular demands on the sellers who, in order to win the contract, often agree to those demands hoping to sort it all out later.
As well, commercial buyers tend to look for well-defined, proven products. But the military, having to buy equipment that will last and be in service for many years and potentially face an opponent for 20 or more years, often tend to push the limits of available technology.
Unlike the commercial world, most governments tend to attach several secondary objectives to military procurements. Most common are industrial objectives, but there are often many more. While very laudable and understandable, they add complexity to the process.
Lastly, there exists what I believe to be a continuing cultural difference between the government buyer and industry sellers. This lack of understanding and appreciation of what drives the private sector vis-à-vis what drives the public sector often leads to a lack of trust between the two and an inability to cooperatively solve issues.
As a previous ADM(Mat) once told me: If you have a competition with three bidders and declare a winner, the two losers are immediately angry and the winner ecstatic. A year later, the two losers are still angry but now the winner is equally upset.
It’s very true. These differences and others tend to make military procurement a very messy process. Industry is dependent on a few government clients, often with fluctuating schedules, unrealistic budgets and technology-demanding requirements.
Governments, dealing with a finite pot of money, and being naturally risk-averse, put in place time-consuming, elaborate processes, including several approval levels.
It is amazing, then, that the system delivers anything. But it often does deliver, especially in extraordinary times, as it did during, for example, the war in Afghanistan. But that was an extraordinary time.
So, as Bernard Gray implied in 2009 — there is no easy solution — are there things we can do here in Canada to at least improve the process? Of course, there are, and there is no lack of people who have lots of ideas, including Chuck and I here this morning.
Let me mention just a few. First, the current accountability structure for defence procurement, I and many believe, is dysfunctional. I personally believe the genesis for this current dysfunctionality rests with the significant defence budget cuts of the early 1990s. This resulted in a severe gutting of the DND Materiel Group and the loss of its civilian procurement expertise. This naturally led to the blurring of responsibilities between DND and what was then Public Works and Government Services Canada. The concurrent retirement of many of the senior procurement officials at the same time further aggravated the resulting accountability vacuum.
In my experience, prior to this time of severe budgetary cuts in the 1990s, the responsibilities and accountability between departments were well understood and respected by officials of each department.
I know the Defence Procurement Strategy of 2014 aimed to clear up some of the accountability issues. However, I am not sure how adding several overlapping coordinating committees helped to streamline the process. I was particularly dismayed to see that the chairmanship of those many committees rest with PSPC and not DND. I always said that as the owner of the requirement, the funding department and the organization that must live with the outcome of the procurement, DND was in the past and must again be today the lead department for defence procurement.
As an aside, I recall when I briefed Prime Minister Chrétien on the results of the search and rescue helicopter competition in the fall of 1997. I remembered he had taken out his pen and said, “I will take out my pen and write zero helicopters” — Chrétien, the EH101. We told him we had the competition and selected the EH101 again, the same the helicopter he had cancelled when he came to power a few years ago. Obviously, the Prime Minister was not pleased. But I do not recall any other department standing by my side asking to share accountability for that decision, nor should they have; accountability was quite clear. It was mine as the ADM(Materiel).
While I agree with many others who say the accountability structure needs fixing, I disagree, however, that the solution is to undergo a massive organizational change to a single procurement agency. What is needed is not organizational change but a process change — such a dramatic and disruptive organizational change that, as Professor Stone argued in 2012, would:
. . . not fix the underlying problems that all developed nations experience with large complex military projects that seem to me to be more akin to simply rearranging the deck chairs on the Titanic.
Indeed, accountability existed between departments prior to the decade of darkness, and it can be so again.
In addition to the required change in accountability, in 1997, when I appeared before the Commons Committee on National Defence, I presented that committee with 10 suggestions on how to improve the existing procurement process. These 10 suggestions were then the basis of the committee’s first recommendation, which was passed to government. I am pleased to note that some of my suggestions have indeed been implemented since then through, for example, the creation of the Independent Review Panel for Defence Acquisition — and you met with Admiral Larry Murray — and the new Industrial Technological Benefits Policy. Other suggestions — for example, that DND must have a realistic and stable funding line — also seem to be have been addressed in the Strong, Secure, Engaged policy.
I would be pleased to elaborate on some of my other suggestions, which I think are still relevant today, should committee members be interested.
In closing, as I said in 1997, none of these suggestions were especially radical, but I was advocating a more consistent and more predictable procurement process. That, in itself, would be a major improvement.
Mr. Chairman, thank you for your time. I would be pleased to elaborate on anything I said or answer any questions the honourable members may have.
The Chair: Thank you. The chair will recognize Mr. Davies, please.
Colonel (Ret’d) Charles Davies, former Logistics Officer and former Senior Director responsible for materiel acquisition and support policy, procedures and standards, National Defence and the Canadian Armed Forces, as an individual: My remarks will match with Mr. Lagueux in some respects, and in some respects, they will provide a different perspective, which I hope will be useful. I will focus my prepared remarks on selected aspects of the objectives set out in your order of reference. I’d like to begin with two short observations.
First, some see defence procurement as being broken, but there is a contrary view, as Mr. Laguex said, that it is functioning exactly as intended, with the right checks and balances in place to make sure that national objectives are considered in these great decisions. I see merit in both sides of the argument, but on balance, I believe reform is needed. I will come back to that a couple of times.
Second, it is important to understand that defence procurement is not a stand-alone activity. In effect, it is a recurring do loop, if you are into computer programming, in the life-cycle management of defence equipment and in the conduct of operations. It’s a mission-critical enabling process that needs to be well integrated with those other activities.
With that as context, I’ll turn to the first of the issues that you are studying. I view ensuring value for money and obtaining wider economic benefits as being two different objectives. Value for money is a complex calculation in a public policy context. One of the more important considerations is how well the expenditure fulfills the purpose for which Parliament has appropriated the funds; in this case, the establishment, sustainment and employment of defence capabilities. This means not only a qualitative and quantitative measure of those capabilities but also taking a full life-cycle view of the costs. To illustrate what might be considered a good decision to buy something that could be delivered on time and budget could be a bad decision from a full life-cycle cost if another option with higher upfront cost had been significantly cheaper to operate and therefore have a lower lifetime cost of ownership.
With respect to economic benefits, Canada’s practices are generally consistent with those of most Western democracies. However, many countries guide their decisions with a defence industrial strategy designed to deliver long-term value to the nation by connecting economic development, technology development, defence-related export, foreign policy and defence policy objectives. Canada has never articulated such a strategy, and in my view, this is one reason why our record on getting lasting benefits out of our major procurements is spotty at best. Recent changes to the Industrial and Technological Benefits Policy may help, but I view it as being a partial solution.
Turning to your second area of inquiry, in my view, Canada’s defence procurement processes and machinery merit serious examination by Parliament. While the current business model does deliver results, and it can’t be denied that it does, many studies on defence procurement have been published over the past several decades, and virtually all of them have identified problems of some kind. In addition, both the Auditor General and DND internal auditors routinely identify specific procurement-related issues, indicating problems with the basic machinery. While none of these reports has comprehensively examined the system from end to end, they clearly make a case for some form of change.
Part of the problem is that Canada’s business model is more complex than most other nations’. It’s committee-managed across multiple departments, but the focus is mostly on individual projects, and nobody is responsible for optimizing the system end-to-end in terms of its processes, the regulation of its machinery or managing system performance. Further, the model obscures accountability for results, be they good or bad, something that is inconsistent with the stated policy objectives of multiple governments and also the expectations of Canadians, I believe. No private-sector enterprise could succeed with this kind of business model.
Your third area of inquiry is reporting on planned and actual expenditures. Here, I think National Defence has recently made substantial improvements and continues to work on that. I would caution, however, that no one should expect it to achieve perfection. Depending on the maturity and technological complexity of the systems involved, estimating program costs can be either very difficult or very easy. If you’re buying a mature system already in service, costs and schedules are very easy to define. This was the case, for example, with the original acquisition of the C-17 strategic airlift fleet, which was completed on time and on budget within 18 months of the original decision to buy.
On the other hand, a complex system in development requires very different risk-managed approaches, and the process of turning a rough cost estimate into an approved budget is a very difficult one.
This brings me to the fourth area of your inquiry, comparisons with other nations. A number of other nations have undergone major reform of their defence materiel organizations over the years, including the procurement function. They are aiming to manage those programs much better. Most countries have adopted models that integrate equipment acquisition and support within an end-to-end life-cycle management framework consistent with international best practices reflected in the NATO’s Systems Life Cycle Management policy and ISO Standard 15288.
To offer two examples, the creation of the Australian defence Capability Acquisition and Sustainment Group and the U.K. Defence Equipment and Support agency were significant undertakings that took perhaps a decade to implement and optimize. It is a difficult job.
The unified model does not by itself guarantee success in complex acquisitions because of the other factors I mentioned. However, it provides a sound framework for standardizing and optimizing business processes, systems, tools and training; and for ensuring consistent approaches are applied to meeting the wider national policy objectives. In other words, the unified model makes it easier to get the machinery right. Despite the implementation challenges, I think it is a business model Canada should consider.
I will close by mentioning the government’s Defence Procurement Strategy launched in 2014 by the previous Conservative government and which continues with few changes under the current Liberal administration. It was an effort to make the current business model work better, and I was a supporter of giving it time to demonstrate results. However, five years on, it is now time to recognize that it is not delivering the kinds of outcomes we’re looking for, and a more fundamental reform should be considered.
I’d be pleased to answer any questions honourable senators may have. Thank you.
The Chair: Thank you very much. For the record, before we move on to questions, I would ask newcomer senators to introduce themselves.
[Translation]
Senator Dalphond: Senator Dalphond, independent senator from the senatorial division of De Lorimier, Quebec.
[English]
Senator Andreychuk: Raynell Andreychuk, Saskatchewan.
The Chair: Thank you, honourable senators.
When I look at the number of senators asking to put questions to our witnesses, if we could agree to have six minutes in the first round each, and then we’ll go to a second round.
Senator Eaton: Welcome. They were very interesting comments from both of you.
Mr. Lagueux, you talked about how efficient we became in extraordinary times. Are there shortcuts we can learn from extraordinary times? Why did it work so well in extraordinary times but it doesn’t work so well in ordinary times?
Mr. Lagueux: Thank you, senator. Yes, I think the Afghan war was an extraordinary time, as all of us will agree, in Canada’s history and in the history of the Defence Department.
Without being too blasé about this comment, things worked well during that period of time because a lot of factors were at play. The most important was, as I said, that the government, when it comes to defence procurement, is always very much risk-averse. It doesn’t like to have procurement spending a lot of money going bad, being an embarrassment to the government and so on.
In a nutshell, I think during the Afghan war that the government had a greater fear of body bags than they had a fear of procurements going bad. They gave Defence a lot more latitude in doing things, and there were a lot less overlapping committees, reviews and so on occurred during that period of time.
I was an outsider at that time. This is my opinion looking in that I’m giving you here.
As a result of that, things were able to move quickly. Defence was able to bring things forward, and there was very little opposition from other government departments or extensive review periods. There was a sense of “we need to get this and we need to get the best equipment to the troops in the field. We don’t want body bags coming back.”
A lot of equipment they bought were off-the-shelf equipment at the time, as Chuck said. The C-17s were there. The C-130J, the other aircraft, was there. The Chinook aircraft were there. A lot of things were done quickly. There was a lot of unified government support behind it. Things were essentially off-the-shelf.
Senator Eaton: Another thing you talked about is that there are a lot of secondary objectives — both Industrial and Technological Benefits Policy — that can sometimes overtake the primary objective.
Would you say that’s what happened in the F-35s, or was that simply political? I’m not trying to put you on the spot; I’m trying to learn for future procurement. Should we pay so much attention to technological and industrial benefits?
Mr. Lagueux: There’s two parts to your question here. The F-35 is a little bit different.
Certainly, with respect to other government objectives that are tied to the defence procurement, when I was within the Department of National Defence, there was an objection that many senior military — uniform people — always had a lot of difficulty accepting: “Why can’t we just buy the best trucks and buy them in Korea? Get them and get on with it.”
My approach has always been that the Department of National Defence is a department of government; it is not an island unto itself. Therefore, it must be seen to be and be participating in all government objectives. Government objectives include industrial objectives; bilingualism, for example; environmental concerns; diplomatic concerns — all these things come into play.
For the government, it’s important to note that the biggest discretionary pot of money they have is defence. If you want to do things, you need to look where there’s money to be able to do those things. Defence has a large discretionary pot of money. You load on other objectives where you have money to be able to do it.
The other thing is that Canada is not unique in this. You look at almost any other Western country around the world, and they always have industrial objectives tied to their defence procurement. They also have small business and regional objectives. It’s not unusual. It’s natural and a good thing.
Senator Eaton: That segues very nicely into my question to Colonel Davies.
You were talking about consensus — where five ministries have to have some kind of consensus. We heard from other witnesses, “Oh, yes, the ADMs get together, and if they don’t agree, then it goes up to the deputy ministers and so on.” You can just see what a nightmare it would be.
Should National Defence be weighted more heavily in what they want than the other two? Don’t take out innovation, business, technology or even public procurement, but should they have the same weight as DND? Could you weight it differently?
Col. Davies: It’s an interesting question. The problem becomes related more to the politics within cabinet, because the decisions ultimately go to cabinet.
It’s fine for a committee of ADMs and deputy ministers to have a first-among-equals sitting at the table. If that’s not reflected in the cabinet deliberations, then you won’t achieve anything by smoothing the road at the lower levels. For example — and I was not directly involved with this project, but while I was still in government I observed it from fairly close range from a policy perspective — the fixed-wing SAR project was delayed for years because of disagreements over what the priorities were among the departments. Innovation, Science and Economic Development Canada — then Industry Canada — had one view, PSPC — previously PWGSC — had another view and DND had a third view.
That project didn’t go anywhere simply because the administrative staff could characterize the issues, but when it got to the political level, it becomes a problem for cabinet to arrive at a decision.
I don’t know how you would structure a decision process that would have impact at the political level. I can see it working at the bureaucrat level, but I don’t see how you could make it work at the political level to overcome that basic problem.
That’s why I believe that we should give some consideration to the alternative of a single accountable minister for delivering the whole package.
Senator Pratte: Thank you both for your presentations. You both mentioned problems regarding accountability. Mr. Lagueux, you talked about an accountability vacuum, and Colonel Davies, you said that there was a problem of obscured accountability. Would you care to elaborate a bit on this? Of course, with these amounts of money, accountability is crucial.
Would you care to elaborate? What is the problem with the lack of accountability of the procurement process?
Mr. Lagueux: Accountability is obviously an issue which has bedeviled DND for quite some time.
As I said back in 1972, when the Materiel Group was first created, the idea then was to centralize the accountability within the Department of National Defence and the Canadian Forces. You created this integrated Materiel Group which had accountability for all procurement as well as the follow on lifecycle of the equipment, so it was pretty well centralized and the ADM(Materiel) at the time had full accountability.
The only function not under Defence was the actual contracting and that was in the Department of Supply and Services which became the Department of Supply and Services Canada which became Public Works and so on. It is today with PSPC.
Over the years, however, you had an issue of accountability that became dispersed because other things were added to it such as industrial and regional benefits. That became industrial and technological benefits. The government wanted to be able to carry out these other objectives. Up until the late 1990s, I believe that the accountability was still fairly strong. National Defence was the lead department.
You asked if one department should have more responsibility than others. When I was ADM(Mat) dealing with the issue of the H11 helicopters, going back to Prime Minister Chrétien — and believe me, that was not one of the most fun times in my life — it was clear that DND was the lead department. As I said, other departments weren’t up there clamouring to say they were also responsible for that. It was clear that we were the lead department. There were interdepartmental committees to sort things out, but DND was the lead department because it was our money; government money, but DND money paying for the procurement. It was our requirements that were being stated there. It was DND, the Canadian Forces soldiers, who would live the outcome. We may not have done the procurement well, but at least we were responsible for it, and other departments were there in a supporting role.
Obviously there is a ministerial function here, as Chuck said. While I was heading the lead department, I could not go forward without having other departments on board because their ministers in cabinet had a role to play. They had to be on board. We had coordinating committees, but always with DND’s lead. In the end if the other departments didn’t want to get on board, we just didn’t proceed. We had the lead.
What has happened over the years is that accountability has become greatly diffused. When I read the transcript of one of your previous witnesses, when they talked about PSPC, the government that does the contracts, having the lead and being the chair of those committees, clearly now you have diffusion of responsibility. DND has the requirement, DND has the money, DND lives with the requirement, but another government department chairs the committees plus there are several levels of committees which takes time and effort.
My sense — and I say this as an outsider and because I am fully retired and I have no fear of getting back into the departments — is that in 2014, the Defence Procurement Strategy was put in place to add all those layers of government, not to clear up accountability, but to further diffuse it and further slow down the process to make sure that no one was embarrassed. I apologize, but when you look at it, that almost seems to be what they are doing. They’re not trying to clear up accountability. They’re trying to make it more diffused.
Col. Davies: I agree with Mr. Lagueux. In 2014, when the Defence Procurement Strategy was put in place, there was at the time a working group of four ministers. The Trudeau government created a full cabinet committee of eight ministers, and I think it went to nine at one point. More recently it has been folded into a subcommittee or subgroup of Treasury Board.
But under all of those models, whether you have four, eight, nine or 12 ministers at the table, then everyone is in charge and no one is in charge. That’s where I think accountability falls flat, thus my comment was that no commercial enterprise could operate that way. It simply would not work. I understand why governments structure themselves and operate differently. At the end of the day, maybe that is the way it has to be, but I think it is worth trying to untangle the accountability knot, both for government, government ministers and for Canadians, by looking at the viability of other solutions.
Senator Marshall: Thank you very much. I wanted to talk about the defence policy that was released a couple of years ago. Colonel Davies you wrote an article at the time. How does it measure up? Mr. Lagueux, you have had a lot of experience with defence policies. We’re two years in now. Would you have any comments with regard to how the government is doing delivering on its policy?
I will tell you the reason I’m asking. The policy provided that the department would have access to $6 billion last year and this year. They’re not spending the funds that were proposed in the defence policy. There is something happening there. We don’t know quite what because there is not much information being provided by the department. Maybe they are getting better prices than they thought or maybe some projects are being delayed or not going ahead. I’d be interested in your views. Probably Colonel Davies you could start.
How do you think the government is doing with regard to its new defence policy now that we’re two years in?
Col. Davies: Thank you, senator. I’m reasonably encouraged. The spending of money does not follow the track that was proposed or set out in the policy, but as far as I understand it, in most cases, certainly the capital expenditures, that’s basically reprofiling the money in order to align it better with the way the programs are developing. You’re correct that there have been some programs which have come in under budget and that has allowed a little more flexibility to move money around as well.
Overall, the policy was generally good and is generally being implemented well. The main gap that concerns me in the Strong, Secure, Engaged is the lack of the initiation of a plan to replace one of the most important capital assets that the nation has, which is the submarine fleet. Those submarines are now about 30 years old. They have not had 30 years of service. They were sitting alongside so there is some flexibility there. In 10 years’ time they will be 40 years old. That’s a long time for any vessel, especially for one as complex as a submarine. The interior weapon systems are all modern. They’ve all been upgraded, but at some point that hull, the basic systems in the thing, start to become problematic. You don’t want to have problematic systems on something that goes under water.
Senator Marshall: We have officials from DND appear quite often at the committee level, and the impression being left with me is that there is a general reluctance for transparency; so if you’re trying to follow the money from what’s provided under the defence policy to what’s actually been spent and the reasons for the differences, the information is not there. There is a reluctance to be transparent.
Why would a third party get that feeling? Would they be reluctant to provide it because of national security? What would be the issue or issues?
Col. Davies: I’m not an expert on financial management within DND or even within my own household — my wife looks after that — but I will say that DND is a very complex organization. The expenditure of funds is moving a very large, complicated beast forward. There is no easy way to portray where all the money goes all the time. You can structure your financial reporting to look at it horizontally, vertically or sideways, but you’ll get a different picture each time you do that.
The financial reporting on results to Parliament has changed a couple of times over the last number of years. It’s reflective of, first of all, DND has to adapt to the reporting requirements set out for the government as a whole. Those requirements don’t always mesh well with the nature of the programs that DND operates. For anybody who has a question about where this money went and how and why, it’s very difficult to come up with a way of portraying that. We struggled for years. We had activity-based costing 20 or 30 years ago. We tried three, four, five different ways of doing that, and it’s very hard.
Senator Marshall: They have recently changed again, and because you’re changing over to another system it makes it even more difficult to follow.
Mr. Lagueux, you were internal to the department. Would you have any views on the new defence policy and how the government is doing?
Mr. Lagueux: Senator, I’ve been fully retired for three years. I promised myself, when I retired, I would never have anything to do with defence procurement again, but here I am. I haven’t followed that new policy in great detail, unfortunately, so I can’t comment on it.
I will say that your question with respect to following the money in defence is not easy. I read the transcript of when the Defence CFO was here a few months ago, and I had difficulty following and understanding what she was saying; so I can imagine senators must have had some frustrations.
Senator Marshall: We are challenged also.
Mr. Lagueux: Luckily, I left before they implemented the accrual accounting process. It was a cash basis back then, and it was much easier.
[Translation]
Senator Forest: Thank you for your presentations and for being here. It is a very complex subject, with many ramifications. My first question is about accountability and the development of estimates. First, the cost overruns are not 5, 10 or 15 per cent, but often double that. When it comes to preparing a quote — which is, after all, quite specific enough to allow an analysis from the point of view of quality, not just of the best product, but of a suitable product at a reasonable price — it seems that no one is really responsible and that our dynamic is to award contracts. As the estimate is not entirely accurate, we go from increase to increase, which allows suppliers to have bigger profit margins and substantially increase the purchase cost of the product itself. Are tighter estimates to more accurately analyze the calls for tenders a major challenge, in your opinion? When you talk about responsibility, who is responsible for preparing these estimates?
Mr. Lagueux: Thank you very much. By the way, congratulations. Your hockey team, the Oceanic, is on the verge of winning. If you don’t mind, I will answer your question in English. It’s easier for me to talk about this issue in English.
[English]
Senator, what you’re saying is who comes up with the requirements, who defines the requirements, who sets the specifications. The Defence Department is the lead technical department in all procurements. As I said before, they are the ones who will live with the equipment when it is produced and delivered. They come up with the requirement and technical specifications.
If you’re buying something off the shelf — such as, again, the example that Colonel Davies used, the C-17 aircraft — it’s not very difficult to be fairly precise with respect to the price. The equipment is there, it is being developed, it’s on the shelf and you buy it.
Something which is more developmental, of course, is much harder. Some people use parametric modelling to try to come up with an idea of the cost. Others look at similar equipment from the past. But when you’re pushing technology — and defence pushes technology because they are looking for equipment that will last 20 or 25 years — meet an opponent whose technology is also improving, you have a lot of unknowns. When you have unknowns, you need to deal with those. Clearly the way that we dealt with that when I was there is you have contingencies in your budgets. You know what you don’t know, but you don’t know what you don’t know; so you add contingency money to ensure you are within the budget.
The process within defence has several steps to it, and as you go through those steps you refine the budget before you go to final approval. As you refine the requirements, you refine the budget that goes with those requirements. Then you can reduce the contingency amounts in the budgets.
If there are completely unknown events that happen, whether there are delays in industry, whether there are strikes in industry or other things that happen, those can come out of the blue and hit you. I don’t think that it’s impossible to have a budget without overruns. It’s a question of making your contingencies big enough. If you make your contingencies big enough, you can meet the budgets.
Unfortunately, for a period of time, people were trying to reduce the contingency as much as possible; and, therefore, you ended up with some over-budget programs.
The idea is to refine your budgets as you go along, make sure you have the appropriate contingencies to take care of that, and very clearly manage the budget.
There has to be an understanding between yourself and industry — as I said before, a previous ADM of mine — who said a year later that everyone is upset — there has to be a clear understanding what you’re contracting for, from a Department of National Defence or government point of view, and a clear understanding from the industry what they’re supposed to deliver.
Quite often there isn’t that clear understanding. One of the best examples was the Maritime Helicopter Project, the S-92, the Cyclone, and again, from the outside, what I saw from that was there was a clear mismatch between what the government thought they were contracting for and what Sikorsky thought they were delivering. You ended up with a very long contracting and delivery process with additional money having to be added for things which were clearly not well understood on both sides. Therefore, no amount of contingency could cover that.
[Translation]
Senator Forest: Usually, the prices which determine the outcome of the acquisition are compared, including the estimate or budget, and also include amounts for contingencies. There are still significant differences.
I’m not sure whether Colonel Davies wants to add any comments about national naval policy.
[English]
Col. Davies: Yes, thank you, senator. It’s important to understand it’s really only in government that we talk about the initial estimate being the budget for a project. An initial estimate is simply an estimate. Typically, in industry, the budget is only fixed when you are coming to the point of signing a contract. Prior to that, it’s an estimate of what I think it’s going to cost. We’ve seen that locally in the City of Ottawa with light rail costs.
It is important to realize that the best you can provide at the front end of a definition of a requirement is a ballpark. “I think it’s going to cost something like that.” As Mr. Lagueux pointed out, it’s really only as you begin drilling down and driving out the uncertainties in the program that you’re able to refine costs and get better quality cost estimates.
The other point that I would offer for consideration is, in a procurement model where you are putting all the risk on the contractor, you will pay for the risk that the contractor is taking on. There is some body of research in other countries that points to the need for the purchaser and deliverer and supplier to share that risk in an equitable way if you want to keep your costs down. We’re not good at that because that’s not politically attractive. We want to hammer the guy because he didn’t deliver on time and on budget.
It may be useful to give this some deeper thought: In government, what is the right model for sharing risk? It might be different for each program.
Senator Andreychuk: You talk about the complexity of all this. No one mentioned the fact that we’re also part of NATO and NORAD. Interoperability is a factor. We don’t always drive the next phase of procurement. Would you care to comment on how that compounds the problem, or does it?
Mr. Lagueux: Joint development projects, for example, within NATO, were very much in vogue many years ago. Amongst the European nations, they’re still trying to do things, but intergovernmental or joint development projects often are very difficult to pursue. They often have a lot of difficulties — the French, the Germans and, I think, the Spaniards, as well. The A400M transport aircraft has now been successfully delivered but it took many years to develop with many difficulties. Such projects take a long time. There are competing interests and, clearly, when you talk about accountability and who has the lead, it becomes very difficult.
Was it Senator Marshall who mentioned earlier the F-35? When the F-35 Joint Strike Fighter Program originally started, it started seemed to be exactly that — a joint international development project, led by the Americans who were looking to have a single aircraft to meet the needs of the air force, the navy and the marine corps. The British Royal Air Force was on board. The idea was to look for more countries to become involved, primarily to share costs, development and to have interoperability. As you know, Canada participated in that project. In our first level of participation, I was the one who pushed very hard for that in the Defence Department for Canada to participate. At that time, it was fairly simple. It was $10 million U.S. for the first phase. No one in the department wanted to pay for it, so we took the money out of grants and contributions. Even the air force wasn’t interested at the time, but we participated. I thought it was important because a joint program for interoperability was the way to go. You’ve seen how that program has evolved. I will be happy to talk more on that, if you wish. It didn’t go anywhere. We have had all sorts of problems with that.
To your question, while interdepartmental, intergovernmental and joint development projects have had some success in the past, there have been a few we can point to. Many have not been successful because of competing interests and the need to quite often share the industrial benefits between countries, and to come to a common agreement and common standards.
It would make sense to share costs and benefits and to reduce costs for everyone. That was the idea behind the joint strike fighter.
Senator Neufeld: Thank you. You led into a question that I have about the F-35. Is that in service anywhere and for how long?
Col. Davies: It’s in service with the U.S. Air Force; it has several squadrons in operation. The Marine Corps has received some of their aircraft. The Royal Australian Air Force is now receiving them.
Senator Neufeld: How many years has it been in service?
Col. Davies: I think it’s coming up on a couple of years from first deliveries.
Senator Neufeld: It amazes me. I think Canada participates in the development. I can’t remember the dollar amount, but it’s a fair-size dollar amount.
If the F-35 has been in service for a couple of years in the U.S. and Australia, and if we participated in the initial building of that aircraft, why would that not be the choice of aircraft for Canada, instead of used CF-18s which are falling apart? At least, I understand they are falling apart from some of the information I’ve been given. And in reading that information, it seems we can’t even keep pilots around because they don’t want to fly that stuff that actually should have been put into the desert. Those airplanes were retired from another country, Australia, for a reason, I think. I don’t think they said, “Hey, we have lots of these CF-18s; you can have a few and they are in good shape and able to fly for a long time.”
Is that another issue about too many cooks in the kitchen? No one can really decide? Is it political? Is that decided within the departments? Who makes those final decisions? Somebody must be getting some advice from somewhere.
Col. Davies: That’s an entirely political question that demands a political answer, senator, I’m afraid. I can observe that the Liberal Party, prior to the last election, made a commitment not to buy the aircraft and subsequently decided to do a competition. They are doing a competition. It remains to be seen which aircraft will be ultimately selected.
I have confidence. I’m an old, former army officer, but I have confidence in our air force; they will not fly an unsafe aircraft. They may be old aircraft. We flew Sea King helicopters for 50 years.
Senator Neufeld: We know the problems there.
Col. Davies: They know how to do that.
Senator Neufeld: I’m not implying that they don’t, but I am implying that we bought something worn out. I don’t disagree; the military can fix it up to make it a flyable aircraft. It is not something that will last a long time. The next thing that could happen is that they may not be in government the next time around; then somebody else will decide. There is a problem with politicians looking at the long term: What’s better for Canada in the long term? What’s better for DND in the long term? And what’s better for me politically at the particular time?
Col. Davies: This is an extremely important point: Canada does a relatively poor job of managing its defence capabilities and, frankly, its other major capital assets. I would point to the Champlain Bridge replacement which should have been started probably 10 years before it was.
I think the work on the Parliamentary Precinct may be another example where we left things too long. And the navy is now operating with an interim commercial support vessel because we let the other ones rust out. In 2000, we lost our submarine capability for an extended period of time because we could no longer safely operate the old Oberon-class submarines.
There’s something intrinsically wrong in our democracy that doesn’t allow us to take these long-term views and come up with a political consensus around a way forward the way you see in Australia and most European countries.
Australia lives in a tough neighbourhood, so maybe there’s more to concentrate the minds there, but there is some work that I think can usefully be done by the Senate in terms of helping to build a better political consensus around the long-life management of these systems.
Senator Neufeld: That’s a good point and I appreciate that.
Mr. Davies you had recommended that it be under one single responsible agency to make all of those decisions. Would that help to get us through some of these?
Col. Davies: I can’t say that it would, because at the end of the day it’s still a political decision. In a change of government, there is a decision by the new government to pick a different path, then that will still be the case whether there’s one delivery agency or six.
Senator Neufeld: I have one more question.
Mr. Lagueux, you singled out the Sikorsky issue and all the problems with that. Was that political, or was that because the departments couldn’t figure it out? I don’t remember everything about it like you would, obviously. I just remember some of what was in the newspapers and being reported. I have a hard time believing that Sikorsky came to the table not knowing exactly what Canada wanted.
What did they do? Write it on the back of a piece of paper and say, “this is what we want, give us your best?” Where did that go sideways?
Mr. Lagueux: I was not in the department when the —
Senator Neufeld: Okay, we have that clear.
Mr. Lagueux: It was my successor who did that one. I did the one before that, the search and rescue helicopter, which resulted in the EH101 being bought.
Interestingly, on the whole topic of the helicopters, Aaron Plamondon wrote a book a few years ago called The Politics of Procurement that talks about the helicopter procurement.
I hope I have a few minutes, because I think it is important to discuss here what happened. At the time that we did the search and rescue helicopter, it is important to understand how that led into the Maritime Helicopter Project. Of course, a few years before that, the new Liberal government had cancelled the combined NSA/NSH procurement for helicopters that had both search and rescue and maritime roles. That was cancelled by Prime Minister Chrétien when he came to power.
A few years later, he said we can go back out. Those were “Cadillac” helicopters, as it was characterized at the time, and we can do the search and rescue helicopter, which we did. We proceeded in a procurement process which was similar to what we had done before. Primarily, governments were interested not in the outcome of a competition in terms of what equipment the defence department bought, but they were interested in the regional benefits, like the jobs and those kinds of things. They really didn’t care if we bought X helicopter or Y helicopter. They really had no interest in that process.
However, when we came forward with the results of the competition for the search and rescue helicopter and said we were going to recommend the EH101 again, all of sudden they had a very significant interest in the outcome because that’s the one they cancelled just before. They had so much interest that they started looking around as to how they could discredit the competition and start over again. Unfortunately, we did such a good job that they couldn’t discredit and stop the competition.
Finally, after looking at it every which way, they held their noses and told us to go ahead with that competition and announce the results, which we did on January 5, 1998. As I recall, on January 7, 1998, the ice storm hit, and luckily I was off the front pages of the newspapers. I had nothing to do with the ice storm but I always thanked the Lord for that ice storm.
As a result of that, the government was very upset with the fact that they were so-called blindsided by the Department of National Defence and bureaucrats that they had cancelled something and we had come back and stuffed it back in their faces to do again.
From that point on, governments became very much focused on the outcome. Before that, they didn’t really care. When you look at the Maritime Helicopter Project, yes, they were very focused on what the department would do and what the outcome was going to be. They very much got involved up front because now they realized they couldn’t get involved after the fact, because that is really political interference — it’s banana republic stuff — but they could get involved upfront.
Since that time, governments have been very focused on the definition of the requirement process and what that will lead to. You have all these committees and bureaucrats looking at this fully, which really slows the whole process down but ensures there are no surprises.
The Chair: Thank you.
Senator Forest-Niesing: The procurement process, as it is, involves a number of ministries. Both of you have made cases for the fact that we need to streamline that. We need a main lead.
Mr. Lagueux, I believe you said quite clearly that the Department of National Defence should be the lead department. It’s the user and it’s the one that holds the knowledge with respect to what is required and how it will be used.
Mr. Davies, I believe your argument is in favour of, perhaps, a longer-term and independent agency.
Why would we not consider the Treasury Board as a possible lead, given that it holds the spending power?
Mr. Lagueux: I think Treasury Board has a role to play. They have always had a role to play as the overarching agency responsible for all government departments’ spending. In the end, the approvals always go to Treasury Board’s ministers to approve the contracts and to approve the projects. They have an important role of managing the government’s money functions overall. They will always be there.
Whether Defence is the lead department, whether the government is assisting or whether it’s a single agency, it’s always a government function with several ministers and, eventually, with expenditures in the billions of dollars, a cabinet committee. It will never be just one agency doing whatever it wants because expenditures of such large funds are politically sensitive and of political interest.
From my perspective, as I have said before to people in the department all the time, ministers are elected to govern. They govern. The department follows the wishes of the government in power of the day. If, for example, they give direction, and, as has occurred in the past, Defence will go and buy this, I don’t view that as government or political interference. That’s their right as the government to tell the department what to do.
What I see as interference is if they get involved in the process once it’s started and then start interfering in the process. But up front, it’s up to them.
Treasury Board will always have a role to play, not only for DND, but for all government departments.
Col. Davies: It’s an interesting question, senator. There are a couple of problems I see. One is that Treasury Board, as it is structured and resourced right now, has no capacity to do that kind of orchestration of program delivery, nor do they see themselves as a program delivery organization.
I think they have recently stepped in to try and sort out Phoenix because, clearly, the department concerned couldn’t do it, but that’s not where they are. Frankly, I think it creates an accountability issue where one department of government is deciding, essentially, what material will be provided to Defence.
Under the statutes right now, that’s the responsibility of the Minister of National Defence, not the President of the Treasury Board. It’s section 36 of the National Defence Act.
That could be changed, and it could be structured a different way, but I think it then makes it very difficult to hold the Defence Minister accountable for achieving mission success if he or she has had no say in what equipment they’re provided.
Senator Forest-Niesing: Unless and until we arrive at an independent agency to deal with all of that, do I hear you agreeing with the suggestion that the Department of National Defence is the appropriate lead?
Col. Davies: I do. I don’t necessarily think it has to be a separate agency. It can be done within the structure of government. The Australians actually initially set up an agency, and they have just folded it back into the departmental structure of their defence department.
But that’s correct. In the absence of one belly button to push, then I think there needs to be some sort of a structure at least within the bureaucracy that gives the Defence Department the lead. As I said earlier, the political decision-making is going to be what it is.
Mr. Lagueux: Whether it’s a single agency or a hybrid type of agency, when you look around the world today, a lot of countries have this single accountability. Their procurement and defence is no better or worse than what we do. That is not the solution. The solution is clear accountability. In some way, it’s a process issue, not an organizational issue.
That’s what I’ve been saying right from the start. Clean up the processes, have a lead department, make sure the other ones understand that and work together. As I said, before the CSH project — the helicopter project — it was clear and it worked.
Senator Forest-Niesing: I have one quick question.
As part of cleaning up that process, many suggestions have been put forward. I was particularly interested in hearing further from you, Colonel Davies, with respect to the current inequality in the assumption of risk in that the risk is currently borne by the industry at the moment and that a laudable objective would be to equalize things.
Do you have any specific suggestions as to how that could be achieved?
Col. Davies: It’s difficult because each acquisition is going to be different and the risk profiles are going to be different.
I don’t have a silver bullet. I think if there is an attitude that we are going to work together with the service provider or the supplier in a partnership, and there is goodwill on both sides, then I think that works. The problem arises in this way: If you’re jumping from supplier to supplier, then you have to establish the relationship every time.
Where it works really well is in the Munitions Supply Program. There are four companies from whom we buy military ammunition on a recurring, consistent basis. That relationship is good. During the Afghan war, those companies weren’t sticking to contractual niceties and all of that. It’s a mature, stable relationship that worked. Whether the shipbuilding program will evolve in that direction, “maybe;” I don’t know. That is very complex. We’ll see how that’s going to go.
Mr. Lagueux: Could I make a comment on this?
A risk-averse government is well known. In my suggestions that I made in 1997 to the committee, I specifically made a suggestion about managing risk. My comment was that, as Colonel Davies said, right now, government tends to push all the risk on the contractors. We need to have a better sense of what the risks are in a particular procurement and who is best able to manage that risk, as opposed to pushing it all out on somebody.
Right now, the way the government manages risk is to give it all to the contractor. As Colonel Davies said, the contractor is quite willing to accept it, but you pay for that; you pay a lot for that. There are many things we push on the contractor to manage risk that they can’t manage. It’s government risk, but we try and push it on the contractor.
We need to do a better assessment of risk on the project, and that may be on a project-by-project basis. Who can best manage that risk and who then accepts that risk? Right now, the default is to push it all on the contractor and we’ll pay. When things go wrong, we blame him.
Senator Forest-Niesing: That’s helpful.
Senator Klyne: Welcome, and thank you for your full and concise answers.
You both mentioned the Industrial and Technological Benefits Policy, which was formerly the Industrial and Regional Benefits Policy, which I understand had a name to contribute to Canadian companies’ capacity and improve their ability to bid on contracts, domestically and internationally, while the aim of the Industrial and Technological Benefits Policy is more to leverage economic benefits.
The second edition includes bidders to submit a gender diversity plan. Do you know if Canadian defence currently uses a waiting criteria for gender and diversity plans being submitted?
Second, do you know if any Indigenous-controlled organizations are being successful — with a track record on that?
Col. Davies: I can give you some insight. I’m a little bit removed from the policy around that, but I have had some recent exposure to it.
I just qualified as a Gender-based Analysis Plus, GBA+, person for some contract work I’m doing for Defence. I can tell you that the GBA+ model is very active in Defence. They are insisting that any files going forward go through that analysis.
I suspect it’s still fairly early days. It’s going to be some time before the concrete impact on Canada and Canadians becomes clear, but the intent is there. They’re serious about it, I can tell you that.
Mr. Lagueux: Senator, first of all, I’m sorry I can’t congratulate you and your Regina Pats, but next year for sure.
In the past, when we had the Industrial and Regional Benefits Policy, the benefits were not rated; it was a pass/fail. Now, of course, you have a value proposition that is rated. Various things are included in that.
In the past, when we were looking at regional benefits, small business was part of that. Depending on the procurement, Indigenous companies and so on were part and parcel of that. It varied from procurement to procurement. It depended upon the nature of the procurement in industry and so on.
Back then, of course, it wasn’t rated; it was a pass/fail. Now they are rated, I think. The extent to which small business, Indigenous businesses and those things are fully involved — it’s been a couple of years with the value proposition they put forward, and that is rated. It’s not really the Defence Department that looks after that, but whatever the industry department is now called that really has the responsibility.
Senator Klyne: Thank you.
Senator Boehm: Thank you very much. This is a very interesting discussion today. I appreciate your perspectives.
I want to go to a comment that you made, Colonel Davies, about life-cycle management. This really would be seen, I suppose, as a gold standard if we could integrate a life-cycle management approach to avoid the rust-out of equipment.
You mentioned Australia and the U.K. moving in that direction. In my experience in the public service, sitting in ADM and DM committees, our reflex is not necessarily to check best practices with allies; our reflex is that when things go wrong, then you start looking at what others are doing.
Is there a mechanism of some kind — I know there are a few in the NATO context — to have ongoing discussion on best practices?
When I was sitting in Berlin for a few years, I noticed how the Germans were handling procurement issues. Mr. Lagueux, you mentioned the A400M. I saw a test flight and they said it was going to be flying next year. That’s seven or eight years ago.
In any event, on those issues, is there really a sense among allies and around the table that we should be looking at best practices? As Senator Andreychuk said, all countries are facing the same sorts of issues.
Second, in these conversations is there ever any discussion as to the benefits of purchase versus lease? I’m thinking in particular of Afghanistan. Once we were taking casualties, we discovered that leasing the Leopard 2 Tank was a much better option than using vehicles that we had?
Col. Davies: First of all, I want to clarify, within National Defence, the systems are life-cycle managed from cradle to grave. The Materiel Group went through a significant restructuring when Mr. Lagueux was there beginning around 1993-96 to do just that. We previously had separate engineering and maintenance organizations, procurement and supply management organizations. Those were put together.
Mr. Lagueux: They were all part of the Materiel Group.
Col. Davies: They are all part of the Materiel Group. Army, navy, Special Forces systems are managed by dedicated teams that look after it from acquisition through end-of-life disposal.
The piece that’s missing is the procurement. It’s the initial acquisition and the recurring procurements of support and spare parts and all that sort of stuff which is done separately, outside of that system of life-cycle management. The equipment itself is managed by defence on that whole-life basis.
Regarding lease versus purchase, we leased the tanks for Afghanistan because that was the fastest way to get tanks into Afghanistan that could operate in the summer desert. We initially put the Leopard 1 Tanks that we had into theatre because it was winter. When the spring came, we had to get tanks that could be air conditioned because the Leopard 1 Tank could not. That’s why we leased them as a bridge. Then the procurement went alongside that process and eventually our own tanks were delivered and we gave the leased tanks back to the original country.
You lease when you have to and not necessarily as a long-term strategy for owning equipment. If you only need the equipment for a short time, then by all means.
Senator Boehm: Are there ongoing discussions in terms of what other countries and allies are facing?
Col. Davies: Yes, sorry, I missed the first part of your question.
Yes, Canada does participate in the NATO Life Cycle Management Group. I chaired that for a couple of years. We have people having those discussions with our allies. In fact, there are many partner NATO nations that are not members of NATO who participate in that as well; Sweden and number of others. The Russians have been there from time to time.
There is ongoing consultation from the point of view of materiel acquisition and support policy. Then those best ideas and best practices get rolled out into DND business process, architecture.
When we were implementing the Defence Resources Information Management System, DRIMS, around the SAP platform, a lot of work had been done to try and ensure that those international best practices are built into the way that system is configured to support the equipment. Is it perfect? Probably not. Generally speaking, there is good alignment between the way DND manages life cycle equipment and our allies. The main gap is procurement.
Mr. Lagueux: With respect to your question, leasing versus buying, it’s always been difficult to justify leasing. The Government of Canada can get money cheaper than any leasing company. That’s always been shown. Therefore, in the long-term, it’s always more expensive if you’re going to lease unless it’s a short-term lease. There’s always that difficulty.
However quite often, rather than just leasing a piece of equipment, what you want to do is buy a service which includes equipment. That can be cheaper. Then we enter into the issue of what service can the department give to civilians to do as opposed to having military people do it? Believe me, that was a problem I faced at the time when we were trying to outsource maintenance, for example, because the Air Force in particular wanted to keep blue suiters doing maintenance. What I thought equipment wasn’t going anywhere, for example, search and rescue helicopters stay in Canada, why do we need to have blue suiters maintain search and rescue helicopters? However, obviously not being in uniform, I didn’t understand the rationale because I lost.
However, if you go and try and bundle service together, then the equipment as part of that service can be cheaper. A good example is a NATO flying training program out west right now where we train pilots. I was responsible to try and push that through at the time, but I had significant pushback from Treasury Board who said, “No, there’s risk in that and it’s more expensive than if we buy the airplanes.” But I had to show that you shouldn’t look at just the cost of the airplanes, you look at the whole cost of the program, providing pilot training, including the aircraft, and then that became cheaper than having a lot of uniformed people doing a lot of stuff.
The big pushback is always it’s cheaper if we buy because the Government of Canada can get money cheaper than leasing companies.
Senator M. Deacon: Thank you. I believe, through Senator Andreychuk and Senator Boehm my questions have been responded to. I think I have this sorted in my mind. Our recent shipbuilding witness really brought to me the need to better understand a number of things related to procurement.
Today I was very pleased how both of you started to speak, and that clarification, right from the grassroots of the difference in sector-to-sector and supplier and the supply chain which makes us very unique, which I appreciate.
My questions are around NORAD and the NATO support and agreements that Senator Andreychuk brought up. Australia was the country I focused on the last week or two and how they do business as one example. Are there any other learnings and efficiencies?
As senators, our role is to help get this right. The feeling right now is that we might have a process and a number of players in the process who are bogging things down. You’ve also been clear about the lead. Is there anything else — putting our caps on for a moment if you don’t mind — that we should be thinking about as we finish this meeting? You have both been really helpful. In the lineup of things we’re trying to work through, the timing of you being here is very important. I want to make sure no stone is left unturned while you’re here.
Col. Davies: I think we’ve covered the landscape fairly well. I think Australia is a pretty good example for Canada to look at. It’s not necessarily that they do everything right. They are particularly good at packaging what they say they’re doing, execution sometimes is a little different.
The U.K. example is interesting, but perhaps because of historical and other cultural things surrounding their defence industries and institutions, it might not be the best example for us. But it is illustrative.
The Dutch model might be of some interest as well. It’s closer to our scale of things. They have some interesting relationships with the Dutch-Belgian cooperation in some of what they do. There are some other international models that might be worth looking at. You need to be selective because the conditions are so different, particularly in Europe where the history and the national relationships within Europe are very complex.
That led to things like the A400M project. I will give you a quick quote from the former Labour defence procurement minister, who called the program a “wanking disaster.” It was a very difficult program to co-manage because of the institutional challenges of working multinationally. I think the Dutch and the Australians are good examples for us to look at.
Mr. Lagueux: As I said before, defence procurement is a messy process. And as Bernard Gray said years ago, certainly, if there was a solution here, somebody somewhere would have found it by now.
You can look at Australia, and they do things one way. My experience with Australia is they do things one way for a while, and then when that doesn’t work, they switch it to something else, and when that doesn’t work, they switch it to something else. They have the flexibility to do that within their processes and their government. Be very careful of trying to adopt somebody else’s country, how they do things.
What we need to do here in Canada is sort out the accountability structure because I think it is dysfunctional right now with the Defence Procurement Strategy of 2014. It is overlapping committees, and the fact that DND is not in the lead, I think that has to be cleaned up.
Then there are some things you can do to improve the process. If you go back to the standing committee of 1998 where I put out 10 things that could be done, some were implemented. They were a review of the requirements by the independent committee, and Colonel Davies talked about a better industrial strategy. The ITB strategy has gone to some degree to do that. We need to have better educated and trained procurement people in National Defence. We need to have stable funding. These are all common sense things that can help make the process run at least more efficiently, more consistently, and I think that’s what industry is looking for, a consistent approach from government when the process works.
There is no silver bullet here. It is big, and, in the political eye. Anything which is in the political eye gets a lot of heat and light. You can do 99 things right and you do one thing wrong, which one is on the front of the paper?
That’s the big difference with industry. Industry can do 99 things wrong, they do one thing right, and the share price goes up — they’re heroes. I used to do 99 things right and do one thing wrong, and I’d be slammed. It’s a very different environment that they’re dealing with. You need to be aware of the politicization of the process, which is fair, because the government is elected to govern. It’s up to them, but they need to live with the results of their direction.
There are things we can do to improve the process, and that’s what I think senators should focus on: How do we improve the process as opposed to throwing the whole thing up in the air and trying to change it?
The Chair: To Mr. Lagueux, as Churchill would say, we call that democracy.
Honourable senators, we have time to complete a second round.
Senator Eaton: Thank you very much, again. One of you raised submarines. I think it was you, Colonel Davies, who talked about the life cycle management. Why wouldn’t life-cycle management include procurement, so that as they saw our submarines were coming to their life’s end, they could start ordering or organizing the purchase of new ones?
Col. Davies: In principle, life cycle management includes procurement.
Senator Eaton: You said before — I misunderstood. You gave me birth to end, disposal, but, of course, it doesn’t include life cycle.
Col. Davies: Correct, senator. In theory, life cycle management includes procurement. In Canada, it doesn’t include the contracting process, that part of the procurement process.
Senator Eaton: Or even the searching process? Has DND even started to look for new submarines or started the process of procuring submarines?
Col. Davies: I don’t know for certain. I’m in there every once in a while. I have a sense, but their primary focus is on an update of the submarines, and that has been announced by the government. DND cannot by itself initiate a major acquisition project, even early stages of analysis. It can’t go too far down the road without government saying yes.
Senator Eaton: Does somebody in the life cycle process go to the defence minister and say, “Would you take this to cabinet,” and if he gets cabinet approval, is that how it works?
Col. Davies: The commander of the navy, in collaboration with the assistant deputy minister (Material), would be having those conversations through the deputy minister with the minister and cabinet.
Senator Eaton: Then the process could begin if they got the okay.
Col. Davies: They have to get project definition funding approved by Treasury Board before they can put serious numbers of people to work to define what the requirement looks like.
Senator Eaton: To clarify, is that something we should put in our report, that long-term procurement should be a more important or a stronger part of life-cycle management?
Col. Davies: I very much believe that there should be a greater oversight by Parliament of the government’s management of defence capabilities. These capabilities all have planned life cycles. There’s a fairly well-determined lead time, for planning for replacements. It’s not that complicated or difficult to identify the top 10 or 12 major systems that take a long time to replace, and for Parliament to track: Government, why haven’t you started the replacement on this one, because you said the life cycle would take it this far? You either have to be extending the life cycle, starting to plan the replacement or starting to plan to get rid of it.
Mr. Lagueux: It is not just a question of life cycle; it’s a question of does the government want to replace those things? It’s nice that the submarine’s life cycle is coming to an end, but does the Government of Canada want a submarine capability as part of its defence policy in the future? When we bought the U.K. submarines, there was a big issue as to whether we should in fact replace the old ones. We knew they were going to die, but the government of the day was not sure they wanted to have submarines. It took a long time to convince the government that submarines were an important part of a total force.
Senator Pratte: You mentioned that in the case of Afghanistan one of the reasons that things went well is that we bought off-the-shelf material. Of course, that’s not always possible. I understand that.
I’m concerned by the fact that when we do major procurement, it appears from the outside that we’re trying to start anew and build a new service combatant, for instance.
Where there is a platform that exists, ships are starting to be built of the type 26 service combatant, but Canada decided to build its own ship. Isn’t that where some of the problems arise? There are many different requirements coming from many different places in DND. Suddenly this is a very different ship than the original design, and it’s going to cost more.
Mr. Lagueux: There are lots of things we can buy off the shelf, and where it makes sense to do that we do that and we tie to those procurements the industrial technological benefits so that industry does benefit from those, even though it’s not built in Canada.
With respect to ships, we did that, in fact, with the Canadian Patrol Frigate, which was built and designed in Canada and was probably the best and most advanced ship of its kind in the world at the time. We were successful in doing that back then. I’m not sure how we’ll do with the next one.
Sometimes there are just not capabilities that exist that meet Canada’s requirements. You can say: What’s so unique about Canada? Every country is unique in some ways, in terms of where and how it operates. In the case of the navy, the types of requirements that we tend to look at are not necessarily met by any other vessel we can buy off the shelf.
The other thing about ships in particular, senator, is a strong national concern to have shipbuilding capability in Canada. It is a very visible capability. As a country with three oceans, we want to have shipbuilding capabilities and there is the big demand for ships, unfortunately, within the government. That is what led to the National Shipbuilding Strategy, and you had the three shipbuilders here talking about that. The government used that pent-up requirement for ships for the Coast Guard and the navy to underpin a National Shipbuilding Procurement Strategy in Canada, which was really an industrial strategy, using the requirements of the Coast Guard and the navy and using the money of the Coast Guard and the navy to develop the shipyards in Canada.
Is it a good or a bad thing? Well, it maintains the shipbuilding capability in Canada that we wouldn’t have if we didn’t use the requirements of the government to underpin a capability in Canada. Has it been successful? It was in the past. We produced some of the best ships with the best capabilities in the world. What they tried to do with those ships is to not start with a completely blank sheet of paper. A lot of what goes in the ships, the systems and so on, are off-the-shelf systems. The key, of course, is integrating all the systems so they work together. In Canada we have a pretty good track record of doing that. We did that with the CPFs and others. It’s an existing platform, it will have different systems, but we are pretty good at integrating those systems. I have faith they will be successful again.
Col. Davies: We need to keep in mind the acquisition cost of a platform like even a warship is a relatively narrow slice of the total cost of ownership. Part of the cost of ownership is the in-service support. That can be as much as half the total cost of ownership of a complex system. If you’re outsourcing that work as well, then that’s a lot of money going offshore and that’s a lot of risk you’re taking as a nation in terms of being able to source that work offshore.
There is a national strategic benefit to building the ships in Canada and having the capability to provide that lifetime support for them in Canada. Whether it’s worth the money, you’d have to crunch the numbers and come to your own conclusion, but it’s not cut and dried, it’s cheaper to buy them offshore so buy them offshore.
Senator Pratte: I’m not talking about having the ships built outside Canada. For instance, for the service combatant the U.K. has used the same platform and designed their own ship. To what extent are our requirements so different from the British?
Col. Davies: We are buying basically that hull design; that ship design is what we are buying. It will have unique Canadian components and systems inside it, and the system’s integration will be different for the Canadian ships because the U.K. ships will have different systems on board that they will have acquired from other sources than the ones we’re buying. Basically, the ships will look pretty much the same and have many of the same characteristics.
Mr. Lagueux: I’m not a naval officer and never was but I have had a lot of dealings with the navy. The Canadian Navy is very much interoperable and works very closely with the U.S. Navy; the British less so. The system and equipment we have on board our ships are very much American and American interoperable. To take the British ship and have the same thing here would not work well in terms of our capabilities and interoperability with the U.S. Navy. That’s not the only issue but that’s an example.
Col. Davies: Interoperability is a key thing to understand. You can be interoperable at a low level that says you can talk to someone else and agree on how you will do something or you can be interoperable at the high end where there is seamless sharing of data, information, and system functioning between platforms. It’s really in dealing with the U.S., both in terms of air defence and defending our maritime approaches, that high level of integration is where Canada needs to be and the simpler levels are probably not going to be effective for what we need to do in terms of continental defence with our American friends.
Senator Marshall: I have a question but I want to make a point about what we were talking about earlier, that is who was responsible for defence procurement. As of last summer, the government announced that Treasury Board will assume responsibility for key delivery challenges including defence procurement and modernizing the public service pay system. It sounds like that change has been made.
My question relates to the role of the public servant. I’ve held both positions in the public service at the provincial level and also as an elected official. At times there has been a sense of distrust between politicians and public servants. Does that exist in the federal government and does that have an impact on defence procurement? Quite often the minister is put in charge of a department that is not their area of expertise and they have to rely on the public servants to guide them. As you were saying earlier, if something goes wrong it’s the minister’s face in the newspaper, not the public servant.
Does the element of distrust or the lack of confidence in the public servants exist at the federal level?
Mr. Lagueux: I can’t speak to today because I haven’t been there, but I can tell you that after the Canadian Search and Rescue Helicopter Project, which I brought forward to Prime Minister Chrétien, there was a huge amount of distrust with the Department of Defence. How could we have brought back the very helicopter that he cancelled and embarrass the government? I think since that time, and in the follow-up procurement as I mentioned, clearly the process was there was not a lot of trust in the Department of Defence by politicians and not a lot of trust by other government departments. We at DND were seen as the black sheep, almost on purpose embarrassing the government.
There is always this sense of a new minister coming to Defence that I found — and I went through lots of different ministers — that this is a big department, it has a lot of things that can go wrong, how do I stop things from going wrong? But through their time in Defence they got to appreciate more and more about the professionalism and the ability of the Department of Defence.
We’re not looking to have things go wrong either, but Defence is different because they have the uniforms and they have the civil servants. I was in uniform as well. I’m also a retired colonel. You see things in black and white. There is the objective, that’s the best way to go, let’s go get it, whereas the government process is much greyer. There is not right and wrong, not a left and right, there’s how do we get things done? What are the objectives we need to satisfy?
I found some capable military commanders arriving in NDHQ completely lost and unable to function, whereas they are probably the best commanders in the field but it’s a different world here in Ottawa. People would say, “you work in Ottawa, it’s not the real world.” I used to say, “no, it’s a different world.” It’s just as real as your world but different, and unless you understand that world you won’t be very successful.
The question of trust has always been an issue. There is the question of risk aversion, which comes back to trust. For a while I was being told, “you people have to be more entrepreneurial.” I said, “okay, we’ll do that.”
Are you prepared to accept the risk? Well, no, can’t accept the risk. “How can you be more entrepreneurial, if you can’t accept the risk?” The trust issue revolves around this risk and who accepts risk. In a Westminster style of government, the minister accepts risk for everything.
Col. Davies: That’s an interesting question. I have found that between departments, conversations are cross-cultural conversations. Departments have different cultures. They understand language in different ways. They have different frames of reference for any given issue. From the few times that I have dealt with ministers, I expect that it’s the same thing. They’re in a political environment. There is a political culture around it. They’re having a cross-cultural conversation between a political minister and a bureaucracy in the department. Those conversations are made complex because the minister’s colleague in the other department have that they have to collaborate with is also having a cross-cultural conversation and the two departments are having a cross-cultural conversation. I can tell from personal experience that it can take some time to build that cultural understanding between the two. Every time you have new people coming to a conversation, you have to start all over again.
Senator Marshall: My experience has been that it depends on the minister and sometimes time takes care of the problem. I was curious as to whether it actually impacts some of the decisions in that the minister — even with the current minister, I know what his background is — may not have a background necessarily in military procurement. You have to rely on public servants. Often, when something goes wrong, you no longer have that sense of reliability.
Col. Davies: One of the prickliest relationships I saw between a minister and Chief of the Defence staff was from a former general to a current general.
The Chair: Thank you, generals. With that, we will complete this session with Senator Forest.
[Translation]
Senator Forest: Yes, I think there are two dynamics, one that is longer term, in terms of the administration, and another that is shorter term, the political aspect. The challenge is to share the same objectives. My question is about the National Shipbuilding Strategy. Since 2014, I feel it is time to reassess it. I feel that we have created a monopoly environment. Contracts were awarded for 26 surface combatants to a specific yard. The estimates are changing as the project progresses. We are buying custom-made products, not things that are on the shelves. Do you think it would have been preferable for the organization and for Canadians to accredit three sites and call for tenders on each job, given that Canada’s objective is to maintain a significant production capacity, but also to optimize the spinoffs, while having equipment that is adequate to its needs?
In the decision-making process, are costs and benefits evaluated, or do we just decide to move to something where the needs change over time? Do we buy products that are on the shelves, but may not be state of the art in terms of technology? Are the costs and benefits of technological advancements evaluated? Could we not buy something that has proven its worth and is currently in service?
[English]
Mr. Lagueux: I think it was a Russian admiral who said, “better is the enemy of the good enough.” That’s exactly what you’re saying: How much further do you want to pursue that?
Going back to your question on the shipbuilding strategy, it was an industrial strategy. It was not based upon the procurement of ships at the time. It was based upon building a shipbuilding capability within Canada. Originally, it was felt there was only enough work from government to support one ship builder. Then, for whatever reason — probably political, but I’m not sure — it was decided to have two shipbuilding capacities.
A competition was held to see which two yards would be selected. Originally, there were six yards in the competition. Two of the smaller yards stepped out and they went with three yards competing. At the time, unfortunately the third yard was near bankrupt, so the competition selection was easy. There were only two viable yards at the time to select from. Interestingly, the competition had nothing to do with the specific ships being procured. It had to do with setting up the yards. The specific ship contracts would only come and be negotiated later, but only with the winning yards, of course. DND and Coast Guard had no say in the outcome of the yards. Their requirement was the basis for the whole thing.
The winning yards had to start from scratch to build up capability. There was a huge investment in facilities, people, engineering, supply chain and tools, but that was part of NSPS as far as the shipyard saw it. I’m not sure the Coast Guard or the navy ever saw it that way. They wanted ships but were forced, because of NSPS, to deal with the two winning yards. The allocation of work to the yards was not conducive to developing and maintaining steady work. In particular, Seaspan worked with three different ships — one of one kind, three of another kind and two of another kind different, all different yards. That’s not conducive to work flow or maintaining a workforce.
The main failure of the shipbuilding policy is that it was an industrial policy built on the backs and at the expense of the Coast Guard and the navy, who never really bought into this thing. They were forced into it. If you are serious about the shipbuilding policy, it should have been a more cooperative evolving process. Given that you said you wanted two shipyards to have capability in Canada, then you have to cooperatively work to support those yards. Unfortunately, when you went into the actual contract and building phase of the actual vessels, we went back to the old ways of putting the risk on the shipyards. We’ll blame them for stuff. There was not a cooperative approach. It was back to the old “we-they” approach. That’s why this process has had a lot of problems. Should it be relooked at and rethought? Perhaps. I think it could work. If we go back to first principles and say we’re doing this because we want to maintain a shipbuilding capability, then government should work to help the shipyards as opposed to taking the old adversarial approach with them as in the past.
It worked better with Saint John Shipbuilding. But, as we know, Saint John Shipbuilding, if you follow the Admiral Norman case, had some friends in high places, Irving. Their relationship with the government worked out better than with Seaspan though things are turning around with them now.
You have a disconnect now from the original strategy of the shipbuilding policy and how the actual contracting for the ships has occurred.
The Chair: We need to close. Colonel, do you have a comment?
Col. Davies: I’m not an expert on shipbuilding and the politics around it. However, for ships, aircraft, or anything complex, with the CPF we built nine ships in one yard and three ships in two other yards. That costs a lot of money because there is a learning curve for the workforce. You lose the benefit of the learning of the workforce when you start spreading the work around.
The other point is for this shipbuilding strategy to work, there needs to be a follow-up plan for what happens when you are finished what you’re planning to build right now. They have to be kept in operation. Otherwise, you will get the Saint John’s shipyard, which is an empty space right now.
The Chair: Witnesses, on behalf of honourable senators, you have been very informative, educational, enlightening, helpful and instructive. With that, thank you very much on behalf of the committee for your generous time. This shows Canadians that you were highly competent public servants.
(The committee adjourned.)