20 Mar 2017

Canadians were promised “open and transparent government” by the Liberal regime. This promise apparently does not apply to major defence programs that will burden the Canadian taxpayer for generations with hundreds of billions of spending.

To date, the Trudeau government has failed to disclose current cost estimates for their plans to sole source (meaning without a competition) 18 Boeing Super Hornet aircraft for an “interim” fleet, nor have they disclosed any current cost estimates for another high-profile procurement, the Canadian Surface Combatant (CSC) Program.  

The Super Hornet procurement will cost $5 to $7 billion, and the CSC program $100 billion (2013 estimate), and likely much more. Valued at over $105 billion, these two procurements represent the largest discretionary spending items for the Liberal regime and will burden Canadians for generations. As such, taxpayers should expect transparency – and a lot more information than has been forthcoming to date.    

Before these contracts are signed, Canadians are entitled to good faith estimates of the quantity, quality, and locations of jobs created by these massive programs. Innovation, Science and Economic Development Canada (ISEDC) administers the Defence procurement strategy (DPS) as the Industrial and Technological Benefits Policy (ITB). Its Value Proposition requires defence contractors to provide “100% of contract value” in “business activity in Canada”. Defence contractors have to file detailed reports that break down their ITB financial obligations and report progress to date until the program ends.

Irving Shipbuilding and Boeing, confirmed and proposed contractors (respectively) for the above programs, are notable for having large, outstanding ITB obligations on several recent procurements. Irving Shipbuilding have yet to identify how they intend to spend $1.5 billion (contract value of $2.5b) for the Arctic and Offshore Patrol Ship (AOPS) program, and so, it was a surprise to many that Irving feels it had to go off-shore to hire carpenters earlier this year. Similarly, Boeing has yet to identify how to spend $184 out of $264m still owing for the fifth C-17 aircraft.

It boggles the mind that the Government will accept and sign a contract from a supplier with 100% ITB obligations without requiring, a priori, a credible plan as to how those obligations are to be met.  

That is to say, Canadian suppliers pre-identified, pre- (or on pathway to) qualified, and ready to fulfill 100% offset obligations. “To be identified” suggests there is no plan in place prior to contract award.

No bidder will put forward a bid without having thought through how an ITB obligation will be met and have at least a rough plan to do so. Otherwise, what would be the consequences if the obligations cannot be met or the vendor has to invest considerable sums to bring Canadian suppliers up to code? Would this become another helicopter procurement fiasco?

At present, ITB program value proposition commitments made by vendors are not presently broken down by province and territory. Nor are these commitments made public before the contract is awarded. Moreover, no disclosure broken down by province or territory is made afterwards.

The lack of transparency as to who is getting ITB benefits, contracts, and spending may have been acceptable when it was generally the case that defence systems like airframes and vessel hulls are manufactured in factories that by their nature, have to be concentrated in a few or one location. That model of industry is now obsolete in the age of global sourcing when most major defence systems are manufactured by geographically dispersed contractors.  

The value added in high tech defence systems manufacturing is now mostly in software, services and other activities (such as modeling and simulation). These activities typically account for at least 50% and quite often more than 80% of the development cost of any major platform. Rather than having to be done at a factory, such activities can be dispersed, and the economic benefits distributed across widely separated areas geographically. In theory, it is possible to spread the majority of value added in any major defence program across 10 provinces and 3 territories with little impact on costs, quality etc. – if there is the political will and desire to do so.

Modern manufacturing in the information age have fundamentally changed the landscape. Boeing, for example, manufactures components for its 787-series aircraft in many nations, using a global supply chain. Lockheed Martin, likewise, did the same with the ALIS system for the F-35 program. Only the critical final assembly is undertaken in a traditional “factory”. These same principles apply to shipbuilding.

Shipbuilding no longer has to be all done at one shipyard. Modern shipbuilding techniques enable, and indeed require most large vessels to be built in sections and modules at dispersed locations.  

As long as a skilled labour force, machinery and transportation links are available; it is practical to disperse the construction of a vessel to widely separate geographical locations and only do “final assembly” or maintenance at a traditional shipyard like Irving’s facilities.

Spreading out the work for major Canadian defence programs like the proposed “interim” fighter and CSC program will enable work and economic benefits to be widely distributed to many provinces.   

Provinces that have excellent manufacturing centers, exceptional labour forces, with ready access to the Great Lakes like Ontario, Quebec, Newfoundland, etc. can readily become contractors for sections or modules of the CSC.   

Inland provinces like Manitoba, Saskatchewan, Alberta, Northwest Territories, Yukon and Nunavut can potentially produce components; or at the very least, produce software and services for both of these programs.

Despite the feasibility of distributing the work and spreading the economic benefits for these two major programs, there have been no announcements made public by either Irving Shipbuilding or Boeing to do so.  

Nor has the Liberal regime made any effort to ensure that the over $100 billion of spending they are committing Canadians to will result in the benefits being spread fairly and evenly to create middle class jobs all across Canada rather than concentrated in a few blessed provinces.

As mentioned, Irving Shipbuilding, in particular, has taken to recruiting workers in Poland rather than hire first in Canada, and to date, has created few jobs in provinces west of New Brunswick besides engaging a few defence subcontractors. In fact, the company has been criticized for a lack of interest in engaging with small Canadian companies. Boeing, similarly, has made public no plan to create jobs throughout Canada for the F/A-18 Super Hornet program.

ISED Minister Navdeep Bains has both an obligation and a mandate to demonstrate to Canadians that major defence programs will result in economic benefits to all Canadian provinces and territories prior to the contracts being signed with Boeing and subcontracts issued by Irving Shipbuilding.

He can start by making public a good faith estimate of the anticipated jobs and spending for each province and territory for every major contract prior to committing the Canadian taxpayer.

– Danny Lam