NDVA Committee Meeting

STANDING COMMITTEE ON NATIONAL DEFENCE AND VETERANS AFFAIRS

COMITÉ PERMANENT DE LA DÉFENSE NATIONALE ET DES ANCIENS COMBATTANTS

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, November 30, 1999

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[English]

The Chair (Mr. Pat O'Brien (London—Fanshawe, Lib.)): We'll call to order the Standing Committee on National Defence and Veterans Affairs. I'm pleased to welcome Mr. Bill Pettipas, who is executive director of General Motors' Diesel Division and vice-president of General Motors.

I'm proud to note that General Motors Diesel is in the great riding of London—Fanshawe. You've heard me speak of that a couple of times, as we all like to highlight some of the good things that are happening in our ridings.

I think many of you have had the chance to meet Mr. Pettipas or to be out to GM, but for those who haven't, you have a standing invitation from me to come. I know if I called GM they'd be very welcoming in receiving any of us.

With that, I'd like to turn it over to you, Mr. Pettipas, and ask you to make your opening comments. Following that, we'll go to questions from the members. You're welcome here today. Thank you, sir.

Mr. William Pettipas (Executive Director, Diesel Division, and Vice-President of General Motors, General Motors of Canada Ltd.): Thank you, Pat. Thank you, members of the committee.

In developing the presentation for the committee, I wanted to accomplish two objectives. The first was to give you some information on Diesel Division, our product's history, and our future direction. The second was to use this opportunity to provide my thoughts on a specific aspect of defence procurement. I am pleased that in putting this together I think I can accomplish both with the same information.

I'd now like to address the Canadian government's procurement of Diesel Division armoured vehicles as a catalyst in our success in the export market. Our history can be divided into four phases: getting started, increasing our capability, global leadership, and preparing for the future.

I've used an overhead as an aid in guiding you through this.

The first part is getting started. In the mid-1970s the Canadian military was in the market for a wheeled armoured vehicle. As there was no domestic source at the time, a worldwide competition was held. MOWAG, a Swiss company with a vehicle called the Piranha, felt that licensing a Canadian company to manufacture the vehicle would not only make business sense, it would also enhance their bid. After surveying a number of Canadian companies, they selected Diesel Division to be a licensed producer of their vehicle for Canada. This choice was based principally on our technology for production of locomotives and off-highway trucks, in particular our ability to fabricate steel and assemble large locomotive products and automotive products on a high-quality, custom-built, low-volume basis. In 1977 that culminated in a contract to Diesel Division for 350 vehicles, an order that eventually grew to 491, known as the armoured vehicle general purpose, or AVGP. These were the first armoured vehicles being produced by Canadian plants since the Second World War.

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This particular contract established a new plant with a state-of-the-art capability in cutting, welding, and machining ballistic steel, in addition to the capability of assembling and testing the vehicles. However, because the program itself was fairly straightforward, with a small program office and limited logistic support requirements, we were still able to handle this order on a commercially based structure.

The second phase was increasing our capability. We realized that this AVGP order would carry us into 1982. If we wanted to sustain the business, we knew we had to crack the export market. We tried to sell a number into international markets, but were unsuccessful.

It turned out that our best opportunity lay south of our own border. It started out with a demonstration of the new AVGPs by the Canadian Forces at the U.S. Marine Corps base in Quantico and the U.S. Army base in Fort Belvoir. This led to a formal request by the Marine Corps to borrow six AVGPs to undergo a year-long test in the hostile desert environment of the Marine Corps base in Twentynine Palms, California.

With the successful completion of the test, the concept of a deployable wheeled armoured vehicle was considered feasible, thereby launching the light-armoured vehicle, or LAV, competition, which we won against worldwide competition. Originally a joint U.S. Army-U.S. Marine Corps program, the army backed out, leaving the marines to go forward on their own. However, their requirement for almost 800 vehicles still made this, at that time, Canada's largest defence export contract.

To meet the requirements of our new customer, we had to dramatically change how we were organizationally structured. We had to move from our traditional commercial organization to one specifically structured to run a defence program. New disciplines, such as program management, system engineering, configuration management, and integrated logistics support, all working to the U.S. government's stringent procurement regulations, were now an integral part of our defence organization.

In addition, we had to make substantial capital investments in our facilities, adding an X-ray booth, test track, water tank, and a robotic welding capability. We were now well positioned to move forward and capture emerging opportunities in other parts of the world.

We do not underestimate, however, the value of the initial exposure of the Canadian AVGPs in getting us to this position. Two valuable lessons we have learned in our export market are, one, you must first sell to your own military, because you will always be asked by your prospective customers whether your own military has bought your product, and secondly, soldiers are our best salespeople. The endorsement of your product by the Canadian soldier provides instant credibility to the foreign military.

Now, on to global leadership, which is our third phase. With a Marine Corps contract captured, we spent enormous time and resources in pursuing other export opportunities. However, despite the potential of billions of dollars worth of business, we were subject to the vagaries of our potential customers' defence priorities and budgets. With the continuing delays we were experiencing in securing these contracts, we were now facing a production shutdown that could last as long as two years. Thankfully, there was a Canadian militia requirement for almost 200 armoured vehicles for training purposes. It was a contract for these training vehicles that provided us the bridge to get to these export orders. These export orders, two in Saudi Arabia and one in Australia, were so significant that once they were signed, we became the number one producer of wheeled armoured vehicles in the world.

The Canadian militia order in itself was also significant. The vehicle that was developed from this contract became known as the Bison. Now a regular-force vehicle as well, the Bison has seen extensive service in peacekeeping missions, in addition to playing a very significant role in the disaster relief operations for the Winnipeg flood, the Quebec ice storm, and the Toronto snow storm. In a very short period of time, the Bison became a very popular vehicle in the Canadian Forces.

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In addition to our export orders, our production line this decade has been sustained by two additional orders for Canada. The first was for 203 Coyote reconnaissance vehicles and the second was for 651 LAV III armoured personnel carriers. Both are the best of their type in the world and both are gaining a lot of attention around the world. The Coyote, with its high-technology suite of surveillance sensors, has proven to be a very valuable asset in Kosovo, and hasn't escaped the notice of the media as well as the British and U.S. forces.

The LAV III, even though it has not yet been fielded by the Canadian military, has already caught the eye of the New Zealand Army as well as the U.S. Army. Although we are very optimistic of winning a contract for up to 150 LAV IIIs for New Zealand in early 2000, it is the interest shown by the U.S. Army that has us really excited.

In a speech last month, the Association of the United States Army's annual meeting, U.S. Army Chief of Staff General Eric Shinseki outlined his vision of an army that was more flexible and agile. In moving towards this vision he wanted to establish, as soon as possible, two prototype medium-weight brigades equipped with off-the-shelf weapon systems with a definite bias towards wheeled armoured vehicles. The LAV III will be a leading contender to equip these brigades as well as many follow-on brigades. Once again a Canadian army procurement has positioned us to capitalize on an emerging huge potential in the United States.

Now to the final phase, which we're in today, and that's preparing for the future. Over the past three years we have made two significant acquisitions. The first was the purchase of Delco Systems Operation from Goleta, California. Delco has been a long-time supplier of 25-millimetre turrets for our vehicles. With the acquisition of Delco, this now gave us a turret system capability and an operating base in the United States. The second purchase occurred only a few months ago and that was of our licensor, MOWAG, of Kreuzlingen, Switzerland. This now provides us with a design and a research and development capability that has been fundamental to the success of our business to date.

With these acquisitions and some very significant opportunities in the marketplace, we are now very optimistic about our future.

In talking about benefits to Canada, in going over our history, I've shown you how DND procurements have been a critical factor in our export success. In fact, I can honestly say that without the DND procurements, this capability would not exist in Canada today. The benefits to Canada are substantial and can be summarized as follows: a light-armoured vehicle fleet that is the best in the world; interoperability with allied forces; the sustainment of a world-class high-tech Canadian capability; a Canadian success story in the difficult defence export marketplace; a high level of Canadian content in our product; and the participation of over 200 Canadian companies from nine provinces.

I appreciate the opportunity to address the standing committee on the importance this domestic procurement has had and will continue to have on our business and export success. We deal in a niche marketplace that at times has exciting opportunities, but is also unpredictable and not without its share of strong foreign competitors. Canada's domestic procurements, in combination with our export orders, have provided us with the ability to stabilize our workforce. In addition, Canada seems to have an unerring ability to specify a vehicle that also has relevance to foreign militaries, thereby allowing us to pursue those export opportunities.

Because Canada lacks a defence industrial-based policy against which strategic defence procurements can be measured, I felt it was important that the committee understand the linkage between domestic procurement and export sales. I trust that as the standing committee moves forward in making its recommendations on defence procurement policies and procedures, it will also take into consideration the impact of other broader issues such as Canada's jobs and growth agenda, international competitiveness, and national security.

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That concludes my formal presentation, which was submitted as a brief, and hopefully I kept within the 10 minutes allotted. Most of it probably sounded like a commercial for doing business with Diesel Division.

We recognize that we have been in an enviable position within the defence community in Canada, and after winning our first competition back in the 1970s, we were subsequently chosen for three more contracts on a sole-source basis. We also recognize and are appreciative of the support our government has given us over the years in helping us win those export orders.

I'd like to make a few recommendations that I hope will generate comments or questions that will help your committee achieve your aim of ensuring that a sound procurement process is put in place and to be a catalyst for the voicing of interdepartmental and public concerns and suggestions.

Using an overhead—and I apologize that we don't have it in French; I just returned from an overseas trip and put it together rather quickly—I want to give you a little more meat in this particular presentation, and then you can ask questions or make comments.

Essentially, the first bullet in “Recommendations” says we really need a defence industrial policy, which is lacking. Our past programs with Canada were a result of our capabilities and having the right product to meet the requirement. I'd like to mention that without the right product, you can't continue to be successful. You'll eventually fail. You can get a contract, but you probably won't get a second or a third one if you don't have the product. So it's really important that you have the product, and we were very fortunate in the 1970s to have been able to team up with that Swiss company, MOWAG, which had such a great product, and still has a great product today.

There was no policy against which those decisions were made at the time, and if you think back, had there been a policy of what actually happened, it would have been a very good policy; that is, when you have a competition to introduce a new product, the winner of that competition should be supported domestically and exploit the export market. It happened anyway in that we were able to get additional contracts, but each one was a stand-alone effort, to get each of those following three orders.

Such a policy would bring clarity to areas such as alternate service delivery, which we're talking about a lot today. That's by providing the context for industry's role and define what is core and non-core. Most businesses today are going through that anyway, and if it's non-core, you don't pay a lot of attention to it.

By providing the conditions placed upon industry in fulfilling that role, what are the rules? A policy would also allow a framework in which the necessary cultural changes within the government can be made. I talk about cultural changes. The Department of National Defence would have to and will have to go through a cultural change, in that if they give a lot of things to industry that they manage today, there will be a lack of confidence that industry will be there when they really need it. But I can assure you that all governments are going through that today.

Interestingly enough, being in the locomotive business, we entered that particular aspect about 10 to 15 years ago where the railroads concluded that their business was not fixing locomotives; it was hauling freight. We regularly support all the locomotive fleets in a number of our customers' inventories.

Recently you may have heard of a significant order we received from Union Pacific in the United States for 1,000 locomotives. Those are all leased locomotives—leased for five years. We hope they won't turn them in in five years, but that's the risk we take. However, we will provide power by the hour, as they tend to call it.

Moving down to the part on the industrial and regional benefits, we say the present policy doesn't address the issue of defence capability. What I mean by that is, interestingly enough, in Australia they insist that we put defence capability in as an industrial benefit as opposed to an offset of indirect.... It could be anything; we could buy more wine or other items in order to fill the requirement. So again, many years ago it used to be focused on how much you would do in the defence industry, but now it's kind of free floating, and you can do almost anything as long as you meet the requirements.

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The other one is it's primarily focused on bringing capability from outside of Canada as opposed to retaining and exporting current capability.

Again, it's interesting. We were in a program years ago and were almost penalized because we were in Canada. You got more credit and points if you brought another capability in, even though it may have been in competition with an industry that was already here. So it was focused on bringing something in, which in itself is not wrong, but it's recognizing what already exists and how that fits into the overall strategy. I guess that leads you back to having a defence industrial strategy.

The bottom bullet is that to develop the policy would not be an easy task. Why? There are four departments, and they all have a position. They have different agendas, and they're not necessarily very well coordinated, because there is no leader, and as you all know, without a leader or a chairman, you don't achieve an awful lot. So there's a lot to be done there.

Our experience has been that as you get down into the departments, everybody is trying to do the best they can based on the direction received from their departmental heads, but it lacks coordination across the board.

That concludes my formal and informal presentation. I'd certainly welcome any comments or questions you may have.

The Chair: Thank you very much, Mr. Pettipas.

First of all, given the amount of business your corporation does, I think the overview is very interesting for our deliberations. Then to break out specific recommendations on how we might improve our procurement process is really what this committee is trying to do in terms of putting together a report in the not-too-distant future for the minister. So I think your suggestions will be quite useful, and I appreciate the overview.

Bill, I imagine you've been at a committee before, but what we do now is go to a first round of questions, with seven minutes for each member, starting with Mr. Hart from the official opposition, the Reform Party.

Mr. Hart.

Mr. Jim Hart (Okanagan—Coquihalla, Ref.): Thank you very much, Mr. Chairman, and thank you, Mr. Pettipas. It was very interesting, and I, as I think all committee members do, appreciate very much the recommendations you brought before the committee as well. So thank you for that.

I do have a couple of questions, though. One of them relates to your suggestion that alternate service delivery should be broken down into core and non-core elements.

One of the things we've seen is that since 1994 the defence budget has been reduced by about 25%. Alternate service delivery was supposed to make things more efficient in order to catch the shortfall. I think, though, we all know that hasn't happened. It hasn't been able to keep up with the reduction in the budget itself.

Do you have anything more specific that you could recommend the government look at as far as the core and non-core elements are concerned?

Mr. William Pettipas: Yes. Let me give you some personal thoughts. I should tell you that I'm a former military officer. I spent 28 years in the military before I joined General Motors, which was 16 years ago. There is a legitimate concern on the part of the military as to who's going to be there when they really need them.

So when I talk about core and non-core, they have to figure out what is absolutely essential so that they can continue with their missions, but if they do it in the context of the overall policy—for instance, I don't think Canada is ever prepared to send more than a brigade overseas, say 3,000 to 5,000 people as a unit. The thinking is almost more in the cold war era than it is on deploying overseas, joining an allied force, and trying to operate as a Canadian brigade.

Since they will never send more than a brigade—it's an unwritten policy. It's not policy; they couldn't send much more than that anyway. If they had the capability to always support that brigade when they deployed, then you shave back from there and look at the bases in Canada. There's no need to have a lot of activity done by soldiers on those bases that could be done by contractors, because it's on a base, it's in a city, it's in the towns and the villages, and that could actually be done quite easily by contracting that out.

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There's also a way you can integrate the military into that workforce—with their uniforms on, moving in and out—so that they can keep up that skill set. There's a certain level that I don't think the military would ever give up, what's referred to as “first line”. That's the immediate support. But third lines and fourth lines and depot repairs and such—these mostly could go to industry.

I think there's a nervousness about the cost, in the end. Do they really save that money? What they're trying to do is buy that support and then turn the soldiers they have into fighting soldiers, be they air force, navy, or army. I think that's feasible to do.

When I talk about core and non-core, then, I mean they have to get down to what is absolutely essential and to what they will not hand over to someone else to do because they can't count on them.

Mr. Jim Hart: One of my concerns is that labour disputes, for instance, may prevent a unit from actually moving, which affects their combat capability. If something were to happen when they were responsible for a piece of gear....

Mr. William Pettipas: Interestingly enough, the people we use today to provide support to our products are all non-union. In fact, many of them are ex-military. The union workers tend to be the workers in the plant who make the product. Let me give you an example.

Recently we were asked to “up-armour” the six-wheeled vehicles I referred to, and some of the Bisons in Bosnia and Kosovo, and upgrade the recce vehicles to get them ready for both Kosovo and Bosnia. So we took a core group of people who worked the Diesel Division, non-union, and recruited about 40 people from close to the bases. One was in Edmonton. They were mostly ex-military. We brought them to London. We trained them and we sent them back out. They actually did the modifications at those bases. Some of them are in fact in Kosovo today, modifying those vehicles.

That was where it was a great advantage to us. They were contract employees. They came in and did the job. When the job was finished, they went back to whatever they were doing before. Interestingly enough, we're still calling on those people to do work for us.

In that context, then, it works. I would agree that if you had union workers who were critical to your success, yes, you would be subject to disruptions.

Mr. Jim Hart: I'm very pleased to see that you've suggested that combat capability be considered more part of regional offsets. I think that should be the first and foremost consideration in any procurement policy Canada has.

I was wondering if you could tell the committee which you feel should come first, the operational needs of the Canadian Armed Forces or the regional offsets and benefits across the country.

Mr. William Pettipas: I guess I have to speak with two voices here. As a former soldier, I would say the operational capabilities absolutely have to be first. Speaking as a defence manufacturer, I would echo those same words. I think they have to be first.

If not, if we end up providing a product that doesn't meet the capabilities of the military, two things will happen. One, they will be really annoyed and won't buy any more from us, and two, we will not sell to anyone else. So it's in our best interests that the equipment meet the operational requirements.

Mr. Jim Hart: Aren't the two issues almost at odds with each other, though? You have combat capability and then regional offsets almost pulling away from combat capability.

Mr. William Pettipas: Not really, or not in our experience. We first got introduced to regional industrial benefits with the Bison program. Prior to the Bison program we had the AVGP. We'd simply build the product and get it delivered. We built it under licence. It was an assembly operation.

The next program was the Marine Corps program. As I said, we grew into the defence business. When the Bison program came up, since the government was sole-sourcing they wanted to be sure they had a good plan. Part of that plan was that you must spread the business around.

When we first were introduced to that, we weren't very pleased or excited about it, because it was doing business in a different way. Interestingly enough, it turned into a success story.

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At the time Industry Canada introduced the concept to us, we decided to counter with some of our desires—namely, you can tell us the percentages where you want certain activity by the dollar, or the percentage of the contract, but don't tell us who to use. We will decide that. We're in the business.

Let me also tell you that in our own company there was a lot of resistance to it. There was a lot of resistance from the buyers who were comfortable within just their areas of operation. They weren't familiar with the rest of Canada.

As a result of that, we put teams together and went across Canada visiting different centres. We invited companies to come in. We showed them our product and all the bits and pieces. If they had interests we gave them the drawings, and they responded to us. We looked at it and decided whether we would give them a formal request to bid on that component.

One very successful story is in Newfoundland, where Newtech ended up building the instrument panel for our vehicle. They still build the instrument panel for our vehicle. We have competed a number of times just to be sure, but they have stayed with us in the export market.

For example, there's the propeller that drives the vehicle in the water. We used to buy it in Windsor, Ontario. For the Bison program we bought it in British Columbia—same quality, better price, same delivery. So we've learned some lessons from that.

We haven't had many bad experiences. Some companies have gone out of business, but companies do go out of business anyway. It hasn't been a problem for us.

I will qualify that, however, in that we have said this: You can't tell us exactly what to do. Don't get down to ridings, don't get down to towns, and don't get down to specific industries. Give us a geographical area.

Basically, it has been the Maritimes. It falls in place with the portfolios—Western Diversification, Atlantic Canada Opportunities, Quebec. Even northern Ontario was there for a while; I'm not sure if it's still considered an area now or not.

The Chair: Oh, oh. That's right.

Colleagues, just before we go to Mr. Mercier, when we're through with Mr. Pettipas we'll later need a motion to approve this trip to the States on our RMA study. If you hang in there for that, the clerk will pass around the information he has.

Mr. Pettipas, we have your recommendations. That's very important. They're useful recommendations, and we'll have them for the record.

[Translation]

We will now hear Mr. Mercier from the Bloc Québecois. He has seven minutes.

Mr. Paul Mercier (Terrebonne—Blainville, BQ): Mr. Pettipas does NATO or NORAD have standardization criteria requiring identical vehicles in the various NATO and NORAD countries? If so, does it have an impact on your commercial policy? Is the fact that all NATO countries should hypothetically have the same type of vehicles a disadvantage or an advantage?

[English]

Mr. William Pettipas: For years NATO had tried to standardize within NATO, using the term “NATO-standard”. They have not been very successful at that, although an example of where they have been successful is with small-arms ammunition, 7.62 mm. They tried it with tanks and they tried it with airplanes, but essentially national policies always interfered with trying to get a common procurement. What they now tend to do instead is to try to be interoperable so that they can operate with each other but not necessarily use the same equipment.

Interestingly enough, along with NATO there is ABCA, the quadripartite organization of America, Britain, Canada, and Australia, with New Zealand as an associate member. I think we are going to be able to be totally standard with our product, because I think those four countries will eventually have our product. However, although they come up from time to time with policies to standardize, they have not been very successful.

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They're trying more and more to be standard in terms of logistical support so that in the multinational forces they can depend on that logistical support with regard to handling the equipment, handling supplies, moving them on vehicles, and getting them to the soldiers in the front lines.

So I'm not very optimistic that we'll get NATO standardization on many products, but they will be interoperable.

[Translation]

Mr. Paul Mercier: I believe that, at the moment, the European Union is trying to revive the idea of a single European force, which would by necessity be rationalized since it would be a single army. Would your company be interested in having a potentially unified client from the European community?

[English]

Mr. William Pettipas: Absolutely. In fact, as part of our growth strategy, when we acquired MOWAG, selling into the European Community....

Yes, I recently was briefed on that same effort by particularly the French and the British to cooperate in what is, I think, a multinational force of 40,000 or 50,000. Again, we have great interest in that. We have sold into Sweden, Denmark, and Switzerland, and at this very moment we are bidding into France, with a French company, with our product. We see an opportunity, particularly with the U.S. Army now looking very favourably on buying equipment from us, where this same equipment would be almost identical to that used by the Europeans. So that's a big market that we're very interested in.

It's rather confusing in Europe, because there's a new armoured vehicle program that has been growing for years. It's still about six years away. It's called the “multi-role armoured vehicle”. They don't exist yet, but they will be similar to what we have today, to what we're selling in Canada. It started off with seven countries within NATO. It went down to four and then down to two. The French withdrew recently. It's now only the British and the Germans.

While that's going on, where they're trying to cooperate in having a wheeled armoured vehicle as a standard that they hope to spread throughout NATO, you have this other European force that is basically being driven by the Brits and the French.

If you follow all of that, you conclude, or at least we conclude, that the multi-role armoured vehicle program isn't going to happen. That's good news for us, but what I'm trying to show is that within the NATO and European environments it's very confusing. It's very nationalistic, as we all are. I mean, we're always looking out for ourselves.

So that's what you find there. When you get to the point where you finally have to spend money, the best plans start falling apart.

[Translation]

The Chairman: Thank you, Mr. Mercier.

[English]

We now go to the government side of the table. We'll start with Mr. Pratt.

Mr. David Pratt (Nepean—Carleton, Lib.): Mr. Pettipas, thank you for being here. I found your comments to be very interesting and helpful.

I'm wondering if you could give us some indication of the value of these contracts over the years to your company. How many jobs have been created? I'm not just thinking of Diesel Division. I'm thinking of your suppliers as well.

Do you have any idea at all of the value of these contracts to the Canadian economy?

Mr. William Pettipas: I can give you some idea, but Ken Yamashita, in fact, who's here somewhere, can help me out. Ken is our manager of industrial benefits. He's also our government relations manager. He has more details than I do.

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On the program we're on right now, the LAV APC III, I think it's about 45,000 jobs.

But if you don't mind, Mr. Chairman, I wouldn't mind having Ken comment on that so we're accurate.

The Chair: No.

Would you like to take a seat, sir?

Just for the record, because all of our meeting deliberations are recorded and then printed, could you introduce yourself and tell us your position at GM? I'm happy to know you.

Mr. Kenneth Yamashita (Manager, Canadian Government Relations and Industrial Benefits, Diesel Division, General Motors of Canada Ltd.): As Bill was saying, I'm the manager for government relations and industrial benefits at Diesel Division. Just to give you an idea of the industrial benefits program at Diesel Division, we've had three of them so far, the first one being the Bison. Then there was the Coyote program, and now there's the APC.

With each of the programs, from a Canadian content point of view, we were able to accomplish...now, this is going to sound funny, because in some cases it was 100% and in other cases it was 115%. That doesn't sound possible, except that when you break it down there are two aspects to Canadian content. One is what you directly do on the vehicle. In all of these programs, our direct content was high. Somewhere between 50% to 60% direct content was Canadian content. Now, the rest being foreign content, we were then able to offset that with other transactions we were able to do.

One of the major things we do in terms of the industrial benefit program is when we go into the export market we try to take our companies with us. So in regard to these 200 Canadian companies we were talking about, we try to take as many of those companies into the export market as we possibly can. I guess you could look at it as our own little Team Canada as we go forward. We see that as increasing the benefits to that company and we also see it in terms of sustaining a relationship there.

Value-wise, with each contract, we've given back at least a dollar for every dollar out of the contract value. Also, there has been the regional distribution aspect, which Bill was talking about before. Our commitments in each of the programs have been anywhere from 30% to 35% of the contract value committed to the various regions. In addition, we make commitments to small business.

Bill's right in terms of the 45,000 person-years of employment that the APC contract is going to create once the full 651 are realized. That includes the 1,100 people at Diesel Division itself, keeping our plant going there.

We're very proud of our IRB program. It's one that we focus on very heavily. Just to reinforce something Bill said before, why we feel it can be a very positive aspect for us is that the Canadian government has been allowing us to do things in ways that make business sense, and that's the key thing to us. When we got the objectives we had to make, we were then allowed to decide on what kinds of transactions, which kinds of companies, to use to best deal with the strengths in those various regions.

Mr. David Pratt: You wouldn't want to say that again for the benefit of the opposition, would you?

Some hon. members: Oh, oh!

The Chair: We're usually pretty non-partisan here.

Mr. David Pratt: I'm only kidding. Sorry to interrupt.

Mr. Kenneth Yamashita: Because it's allowed to make business sense, we're able to sustain it. If you're forced to do things that don't make business sense, it's not going to last. Companies are going to end up failing because they're not doing the right things.

The whole secret is for us to find the right capabilities in the right regions, and that's what we've found. That's one of the things about the industrial benefit program, even though, as Bill said, when you start into it you're naturally reticent, because you're moving into areas that you haven't been in before and you're worried about distances and all of that. What we've found is that there are certainly excellent capabilities right across Canada. We feel we've found all the right fits for our product.

Mr. David Pratt: Have you had any difficulty with or have you felt constrained at all by the controls we have on exports of certain defence products?

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Mr. William Pettipas: Last time I appeared before committee, many years ago, it was on the issue of the export of automatic weapons. That cost us about a year of effort to get straightened out, but it got straightened out.

Other than that, we have had, recently over the ITAR things...it hasn't affected us that much because we've always been in the export business, not just in exporting to the United States, so in many cases we've had to get all those licences in place. We had some difficulties where it was being held up in Customs longer because of that, but overall we weren't affected that much by the ITARs. They're a nuisance.

We were pleased that it got reinstated, that it makes it a little smoother, because the material is passing back and forth across the border many times; there are so many suppliers making little bits and pieces, and sometimes you'll put it together and it will be shipped somewhere else. We all try to rationalize that as best we can, and you can do that as you work with companies, but it still moves back and forth a lot.

We were not affected by it in a major way—only because of our experience. I think the companies that were really being affected were smaller Canadian companies and U.S. companies. U.S. companies were really hurting too because they'd never done that before. You require a lot of staff and expertise for that. Being a large company, you have that as part of your operation, but it's an added expense for small companies.

Mr. David Pratt: Do I have more time, Mr. Chair?

The Chair: You have a minute and a half, Mr. Pratt.

Mr. David Pratt: It seems to me that in terms of your description of hitting a niche in the market, there has been a past niche there, but it's a niche that continues to build, it would seem to me. I'm thinking here of the whole human security agenda and the need to get forces into places and have them highly mobile in order to deal with a particular problem, whether it's in Kosovo, in Bosnia, in East Timor, etc. Do you feel there's a sort of convergence of events here that is going to help you in terms of the exports as well?

Mr. William Pettipas: Absolutely. We are very fortunate that we happen to have the right product at the right time. Prior to the end of the cold war, the tank was the leading vehicle and we were way back there somewhere. Now we're up here and there are jeeps back here, and that type of thing, to give you a perspective of the requirements. We're very fortunate in that we happen to have the right product.

Part of it wasn't just happening to have it. As for this vehicle we have today, which we're still just starting to deliver—it's not fielded yet for Canada—we didn't have that product when Canada came looking for their next program. We tried to sell them a 10x10, a vehicle with 10 wheels, because they wanted more capability. They insisted that they didn't want 10 wheels, that 8 wheels was it. We had different technologies with MOWAG and in our overall organization, which we had to build into one vehicle. We did that in consultation with them, and we have come out with a great product. It just happens to be what the U.S. Army wants today.

Had we not been able to do that, we wouldn't have that product today and we wouldn't be able to capture that market. So yes, the way the world is unfolding has been very good for us and our product.

The Chair: Thank you, Mr. Pratt.

Now we come back to the opposition side with the NDP and Mr. Earle for seven minutes.

Mr. Gordon Earle (Halifax West, NDP): Thank you, Mr. Chair.

I want to thank you for your presentation. I found it very informative and very helpful. In your presentation, when you talked about the benefits to Canada, you talked about the participation of over 200 Canadian companies from nine provinces. I was wondering which province was not involved.

Mr. William Pettipas: Well, first of all, let me tell you that I'm from Nova Scotia. I'm a Maritimer. In the early days I used to spend all my summers in P.E.I., and we do not have a contract from P.E.I. We tried real hard, but we just haven't been able to get anything in P.E.I.

The Chair: If you'd only stayed in my riding—

Some hon. members: Oh, oh!

A voice: But we are getting close.

Mr. Gordon Earle: You mentioned that you take these companies into the export market with you. A brochure produced by the Department of Foreign Affairs and International Trade's Export Controls Division states that Canadian defence policies rely on imports. Have you found this to be the case? Is it an accurate description of the Canadian defence procurement, that it relies largely on imports?

Mr. William Pettipas: Overall?

Mr. Gordon Earle: Yes.

• 1620

Mr. William Pettipas: Oh, yes. Every army in the world needs the same things, and very few countries can provide all of that. Even the United States now is recognizing they cannot support all their industry, and they're trying to expand and invite—now this is a big step for them—more international companies to bid into their environment.

The problem with that is most companies don't really believe that. Now, we don't have that problem. Being basically part of the North American defence industrial base, we've always had a privileged position. But I deal a lot with the Europeans, and unless they have the only product, they feel they can't win in the United States. As a result of that, we get a lot of European companies coming to us wanting to team with us to try to bid into the United States through Canada.

I don't know what the numbers are, but Canada would be pretty dependent on imports in order to fulfil all their needs.

Mr. Gordon Earle: You mentioned also that there's a need for a defence industrial-based policy, that we don't really have that as such, and that such a policy would define alternate service delivery.

Now, the ASD is an interesting concept. The Auditor General just released his report today, and he had some criticism or some comments around the ASD as it relates to defence. Unfortunately, I haven't had enough time to really study that in any depth, so I'm just going by a quick glance at it. But he did take a number of projects and analyzed these and did some comparisons. It seems from my quick look at it that of the projects he looked at, there were two particular projects that met all the criteria, and these were in-house contracts. The ones that went out to external contractors seemed to fall short in terms of accomplishing the kinds of standards that were expected.

In other words, it seemed to support that there's a good case to be made for doing things in-house when possible. Is that what you're referring to when you talk about the core and the non-core process?

Mr. William Pettipas: Yes, precisely. I haven't seen that report, but just listening to what you had to say, I suspect...well, let me go back a bit. We bid on a program in Meaford years ago. We didn't win it. And we didn't go as a prime; we just went with another company, and all we wanted to do was provide the support to vehicles. It could be all vehicles, not just our vehicles. But that's all we wanted to do. We didn't want to do the toilet tissue and the food and all of that stuff. So we went with another team and we bid into the program, and I don't know how that program has gone. After you lose something, you don't pay any attention to it.

However, they were talking about Base Borden, which is just outside Toronto by about 60 miles, and at the time I was listening to a briefing by DND and Public Works about how they were going to give the base an opportunity to bid on that as well—in other words, internally and externally. And at the time, I said, well, that doesn't make sense because you should be able to determine whether it can be done efficiently inside. If it's not being done efficiently now, put it out to the industry. If it is, don't put it out at all; just carry on.

The issue with industry in trying to determine whether that is really being handled well is whether they really know what it costs. See, in our business, we pay for everything. We know exactly what it costs and the less business we have, the higher the price for every item that goes out. The more business we have, the lower the price, because the burden overall is shared whether you have any business or not. I'm not sure in many cases if the government—I think they're working on it—really know yet what it really costs to do something.

So we felt we really weren't interested in bidding against an inside bidder because it would be too difficult to know whether you were competing on a level playing field.

Mr. Gordon Earle: There has been a concern presented to me by workers within DND over what's currently being looked at now as the supply chain project—I guess the government is looking at it—as you say, the toilet paper and the foods and all those basic items being contracted out. One of the concerns that has been expressed is that if you got, say, a Wal-Mart type of organization or some one centre winning this contract and supplying these items, then you could find in a case of an emergency or some situation that might develop that you couldn't readily acquire those things in the same manner you could if they were being provided in-house.

• 1625

Let's say, for example, the company was on strike or there's some catastrophe with a particular monopoly that might get this bid.

I guess some of the things the Auditor General points out are in terms of cost, that the costs that were anticipated as being saved were not quite as great as what was initially anticipated. All of these things make you wonder if there's a lot of merit to the contracting out and the ASD principle.

The other aspect too is that when we talk about original benefits and then side benefits, quite often if you end up losing the business internally and then you end up downsizing your force, you also lose a spinoff effect of those people spending into the community. There's a community effect that is there as well.

I'm just wondering if you have any comments along those lines.

Mr. William Pettipas: Well, we actually go through the same thing. You know, years ago we outsourced all our printing to Xerox and a lot of our employees were pretty unhappy. It had nothing to do with the jobs; nobody lost their jobs. We put that out and we reshuffled people into other jobs that maybe had been contract jobs before. The issue was service. For a while we had a lot of unhappy people. We're over that now and we're saving a lot of money.

We see that in our locomotive business, for instance. In our whole business in Diesel Division now, we've stabilized the workforce. What we wanted to do was guarantee the jobs without writing down the guarantee. You've got a job today, you're going to have a job tomorrow, next year, next 10 years, 20 years. What we did is a thing called parallel sourcing. So now, for instance, we make traction motors in London, but we make traction motors in Mexico. As the business goes down, we draw in the outsiders, we close them down, and bring the work back into the plant.

In fact, we had just about everything consolidated back into London before we got this new order for locomotives. The order for 1,000 locomotives is over three years, maybe four years. We can't build that many in that timeframe without expanding the facilities, expanding the workforce. So we again put it out.

That's a little different. While you were talking I kept thinking—I'm just thinking out loud now about that kind of concept. What I see more is maybe one base would try something while the other base doesn't change it, just to experiment as to what the savings are. It certainly could be true that there is no saving. I think one has to examine that.

Mr. Gordon Earle: I guess the difference in what your company did was you guaranteed to save the jobs. The concern in this situation is that people feel the outsourcing and the contracting out is a means of reducing jobs and acquiring saving.

Mr. William Pettipas: But that's a different issue. That's a totally different issue. If you're really trying to save the money, you have to look at how you're going to do that, Then if the job situation outweighs that, well, you're going to revert.

We had a one-day strike last year over that very issue. Nobody was losing their jobs in actual fact, but we had agreed we were going to outsource a warehouse, which was going to save us a few million dollars a year. The union said, “No, you can't outsource that, it's twelve jobs.” We said, “But the jobs aren't leaving; the jobs are staying. It's the activity that's leaving.” We lost that particular one. We walked away from it; we've since got it. We negotiated on the next renewal. So we're all happy right now.

Yes, you come across those issues. We knew for sure we'd save money, but then the issue came up on the employees themselves.

The Chair: Thank you. Thank you, Mr. Earle.

Now we go to a second round of five minutes for each member, and we go back to Mr. Hart.

Mr. Jim Hart: Thank you again. It's been very interesting this afternoon.

I'd like to come back to IRBs again. We're faced with a situation where we're losing capabilities, we're losing budget for the military, and as far as I'm concerned, I think we're in a critical position. I know some of the Liberal members don't agree with that, but I think we are losing our combat capability.

• 1630

You've stated that 30% to 35% of the contracts go to regional benefits. That's an interesting figure, but I'm wondering how much it actually costs. Instead of us purchasing off the shelf directly, we're trying to find companies that have capabilities. In the process, I believe we're losing our combat capability. That's my concern.

I also want to ask about sole-source contracting. The Auditor General said today that when they examined some of the sole-source contracts, the spirit of competitiveness wasn't upheld. He felt that some of those contracts did not meet the test of competitive bidding that the bidding process would have provided. In my view, this in fact then means we probably paid more than we should have, and the taxpayer isn't getting value for money.

I know those are big issues, but I'm really concerned about this. As a committee, we do have to look at this whole issue of the process and what we're spending the taxpayers' money on. Can we get a lot more value for our dollar if we simply purchase off the shelf?

Mr. William Pettipas: You have a few questions with implications there. Let me talk about the first one.

We have insisted that we will not pay a premium for fulfilling the regional industrial benefit aspect of a contract. That was part of our agreement with the government: Don't tell us where to go, don't tell us exactly what to do, and we are not going to pay a premium. The reason we won't pay a premium is because if we do we will drop that company as soon as we go to another customer. So it defeats the purpose.

Let's take the company in Newfoundland again that made the instrument panel for us. We bought that and paid a premium. As soon as we sold to Saudi Arabia, we would not be competitive any more. So we would drop them and we would go to whoever else could provide it at less cost.

So that's why we had to insist, because we were really dependent on the export market, not on the Canadian market. Now, the Canadian market has been much better than we were forecasting it to be ten years ago. As we looked forward ten years ago, we didn't expect Canada would buy as many armoured vehicles.

Part of it is the reason Mr. Pratt brought up, which is the shift globally as to what was going on and the requirement for those types of vehicles. Otherwise, they would have just keep using their old track vehicles for years and years and years. So it has shifted, and it's shifting in every army.

We wanted to be sure that as we entered the international market we would be competitive and we would win. We sell everything for the same price. In other words, we are obliged through the Canadian government and the Canadian Commercial Corporation to certify that this is as good a price as we sell to our best customer. The only changes are scope and configuration and things like that.

So we really don't accept a premium in the industrial benefit arena for those reasons. I think in most cases buying off the shelf is definitely the best thing to do if you can find what you need. We would do that. For instance, we would not go to a supplier in western Canada and have them develop something for us that existed in Quebec, Ontario, or the Maritimes. We just wouldn't do that.

I don't know if you have examples of that, but I'd be interested if it involves us.

Mr. Jim Hart: Okay. And sole-sourcing?

Mr. William Pettipas: Generally speaking, I think that with sole-sourcing you're probably going to pay more. At General Motors, we don't like to sole-source. We usually get three bids on everything, and we keep going back and testing to make sure. However, once we get a supplier that's reliable, we stick with them. That's when we do sole-source. We will test them every once in a while, but as long as they're producing.... You're really concerned that if they disappear, what do you do? You now have to find another supplier. It's a daily occurrence that you'll lose suppliers.

As I mentioned, in our case we've been sole-sourcing for three contracts. The only disadvantage we see in that to us is that we probably could have made more money if it weren't sole source, because we would bid in a competitive environment. We have the product. We'd probably win, and we'd win on our terms. In other words, we could put in whatever the market would bear, which is the normal commercial practice, as we all are exposed to, as we go into the Wal-Marts and such. But because we have worked with the government and they have decided to sole-source to us, this has really helped us in our export business.

• 1635

So as I say, as a strategy it would be very solid. It just happened to happen that way after our first contract, and it has really supported us in the export market. But generally speaking, I would say that with sole-sourcing you'd probably end up paying more. We have had cases, not so much sole-sourcing, when you have a company who has the only product and you have to buy from them, and that's when you tend to pay more, because they have all the cards.

The Chair: Thanks very much, Mr. Hart. If time allows we'll come back to you.

Now we'll go to Mr. Proud. Five minutes, Mr. Proud.

Mr. George Proud (Hillsborough, Lib.): Thank you very much. I only have a couple of questions.

In your answer to Mr. Pratt and Mr. Mercier you claimed to have the greatest light-armoured fleet in the world, and there's no doubt about that.

Mr. William Pettipas: None.

Mr. George Proud: And you sold in many countries throughout the world. But the problem, as I understand what you're saying, you're having in the NATO countries is the vicious competition in Europe between different countries. You said to Mr. Mercier that the consortium has gone down to two countries now, and there's a possibility that maybe you can get in there. If you can get into the NATO countries and supply your equipment, how big an operation would that be to you? That's my first question.

Secondly, when I went to Bosnia in 1994 one of the many tragedies we saw over there was the armoured personnel carriers' vulnerability when they came in contact with land mines. The driver was almost a sure thing to be killed or to be seriously injured. Has this problem been overcome on these new vehicles to some degree?

Mr. William Pettipas: On the NATO opportunity, we see opportunities there for sure because of the demand going up for wheeled armoured vehicles and the debates and arguments going on among the countries in Europe as to who is going to get that business.

As you know, the defence business has been consolidating. In North America it has pretty well happened over the last five years. It's just getting started in Europe, and there are acquisitions of different companies. They're splitting off. We are being invited to buy companies there, companies that just want to be bought by someone.

So I think that at this point we have established.... As I told you, we went through an acquisition route to grow the business, because General Motors says grow your business, and basically focused on our operations in North America. As we look overseas, we're doing it through partnerships. We're working with different partners around the world where we would license them to build our product, just as we've done with our locomotive business. So they would be licensees. There's a 500-unit order in France right now up for competition. We're bidding that through GIAT. It's a consortium: it's a U.K. company, a French company, a Swiss company, and a Canadian company, we being the Canadian company. We've all formed together and we're going to share that work.

It depends on which country.... For instance, when France buys, probably 75% of the work will be in France. When the U.K. buys, 75% will be in the U.K.—the same product, as we shift it around. In those agreements, we say when you buy in North America, all of it stays in North America, with Diesel Division. So that's the structure of the agreements we have.

Your second question was on mines. We're very pleased to say that with the mine hits that our vehicles have experienced, including the six-by-sixes, there have been no injuries. That wasn't by design; it just happens to work that way with the vehicle. The vehicle is fairly high, it's shaped like a cone, it's got the rubber tires, and it's got heavy inserts in there, so it happened to be shock absorbent. However, we are now addressing that issue, focusing on how we can exploit that design as it is to improve the land mine protection.

So that's going into the new vehicles. There is a limit of how much you can do, based on the weight and such. Right now we're pretty confident about the land mine situation, but they want protection for additional weapons, and that's driving up the weight of the vehicle. That's why we've ended up with a much bigger vehicle. We've gone from a 14-tonne gross vehicle weight to almost a 20-tonne gross vehicle weight in order to cater to those requirements.

• 1640

The Chair: Just on that point of my colleague's question, Bill, aren't there some people in Kosovo upgrading seats?

Mr. William Pettipas: In fact, in part of that package I mentioned, in which we're rushing over to fix up old vehicles, part of it is a seat you sit on. The seat is armoured so that if there's something that does come through, it gives you more protection as well.

The Chair: Thanks, Mr. Proud.

[Translation]

Do you have any questions, Mr. Mercier? No?

[English]

Mr. Earle.

Mr. Gordon Earle: Thank you, Mr. Chair.

One of the criticisms we've heard at this committee—and I suppose one of the reasons for why we're doing this study—is that the defence procurement process is very cumbersome, very awkward, and very time consuming. I suppose if we witness the length of time for the maritime helicopter project, it's been over thirteen years and we still don't have anything in place as a final product.

From your experience, though, it doesn't sound like you've experienced that since you've been sole-sourced on some contracts and things probably have gone much more smoothly. But even given that and given your overall experience with the process, what would be the one most important thing that you feel we could do to help streamline the process and make it more cost-effective and more efficient?

Mr. William Pettipas: I think the thing that would really help would be a very clear, distinct statement of the procurement strategy. Often the reason you can't get that is that we're back to the poor governments without a leader. They all have different views on what the strategy should be.

For instance, Mr. Hart was talking about the IBs. At Industry Canada, that's sometimes the only interest. Industry Canada is not interested in whether the customer is getting the right product or not. DND's only interest is getting the right product. That department doesn't really care what it costs, other than as is required in the budget that it already has to live with. It doesn't really care about industrial benefits. Those don't concern DND, because it just wants something for the soldiers. When you get to Foreign Affairs, Foreign Affairs is really interested in the potential for exports, so it's a great friend of ours. International Trade is very similar. When you finally get to Public Works, Public Works is just interested in value for money and what it's going to cost. They all form program teams. They may all be in the same building, the same office, but they're reporting to different masters.

That's the problem, but if there was a clear procurement strategy, something saying this is what the procurement strategy is, we could go out there and implement it. Part of that procurement strategy—I think we've recommended this before, particularly to DND—is that when they're developing a request for proposal, they should follow the system the U.S. uses, at least to some degree, anyway. Put it out as a draft to anybody who's interested and have them comment on it. As those comments come back in, they really tell you the art of the possible. They can then select who they should go to in order to offer the request for proposal and to receive proposals. That would help a lot, because often there are unrealistic expectations in an RFP that can't be accomplished.

It takes a long time to negotiate back and forth. When people are sometimes trying to find out more from the government, it takes a lot of effort. It's not necessarily secret; it just needs that effort. If they'd just put it all out and have everybody send a comment back in, they could then come up with a request for proposal that they think is reasonable. There are people out there to meet it, and really you're down to price and delivery.

The Chair: Thanks, Mr. Earle.

[Translation]

Now it is Mr. Bertrand's turn.

Mr. Robert Bertrand (Pontiac—Gatineau—Labelle, Lib.): I would like to add to Mr. Earle's question.

According to your presentation, you have experienced the Canadian, American, and, if I have understood properly, New Zealand defence procurement process. Which do you prefer and why?

• 1645

[English]

Mr. William Pettipas: We have not gone through one with New Zealand yet, of course. We're going to do that next month, we hope, or in two months' time. But we have gone through one with Australia. In fact, we're on our third program with Australia. We originally sold them 90-some vehicles, and then we sold them another 14. We're about to sell them another 150.

Interestingly enough, we were the sole source for all of them. In order to get the first one, we had to convince them that the program they were following, which was to develop a new vehicle, didn't make really good sense for the size of their military. It was actually a minister's decision to sole-source it. Since then, it has been sole-sourced for two more orders.

Between Canada and Australia, I would say the Australian system is simpler in that it's one department. One department does all the buying, and that's the department of defence. They do have the regional industrial aspects within that department, and they do have something like public works procurement people, but they're all part of one department. That makes it simpler. When you're dealing with a program office, there's only one chain to go up, and you can follow that chain quite simply. In Canada, though, we have to cater to all those departments, right up to the minister in many cases, to be sure that the minister is satisfied that this is all making good sense from his department's point of view. So here you're dealing with four departments and there you're dealing with one.

The U.S. is the same. The U.S. is very complicated because it's so big, but eventually the DOD does all of its own procurements. I'm not necessarily recommending that here, because I don't know whether that would work here or not. I'm just saying what happens elsewhere.

[Translation]

Mr. Robert Bertrand: An officer of the American army has already testified before this committee and told us that the system we have at the moment, which we find rather cumbersome, was still preferable to the American system. There, the process involves appearing before the various legislative committees.

I would simply like your impression or opinion on it. Thank you very much.

[English]

Mr. William Pettipas: I can assure you that the system in Canada is much better than the system in the United States from a contractor's point of view, the big difference being that it's very bureaucratic in the United States, although I think they're going to change that. Of course, it's very political as well, what with Congress and the senators. Of course, we're dealing from outside the country, but we have a lot of suppliers that we use there and who support us.

On the difference between the systems, you're better able to communicate with the users and the government in Canada than you are in the United States. Theirs is very rigid and it does not serve them very well, because often they cannot get the message across to industry about what it is they really want because they're so restricted.

Australia is very similar to Canada in that respect. We can talk to the customers. We can talk to the government people. We can talk to the bureaucrats. They will help you at any time. It's pretty informal, and they will tell you almost anything you want to know, because they'll tell everybody that. There are no secrets, so to speak. In the United States, they're very guarded. They're almost very scared, wondering if they're doing the right thing or not. I think it doesn't do them a good service in many cases.

The Chair: Thank you, Bill.

We'll have some more questions from members, but even the chairman gets a couple after two rounds.

I just want to ask Mr. Pettipas about the ITARs. The last time I specifically talked to the Minister of National Defence about this, he was pretty relieved that it looked like it had been worked through—and maybe the parliamentary secretary, Mr. Bertrand, might recall this conversation, too, because I think he was there. Minister Eggleton indicated that there were still a few t's to cross and i's to dot. Is that still the case from your point of view, or is the ITAR situation totally put to bed now?

• 1650

Mr. William Pettipas: I'm going to refer it to Ken again, because he follows that all the time. I don't think it has been put to bed; it was only put to bed for about a year. It's coming up for review again, and I think that year was maybe just used to put it off for a year.

Ken, do you have anything different on that?

Mr. Kenneth Yamashita: There are still details to be worked out.

One of the things that we took great encouragement in, in terms of what was being announced, in terms of the agreements—and we understand them as broad agreements—is that there are some details still to be worked out in terms of actual implementation. I think a lot of that is probably focused around creating a seamless border in this case. In fact, concerns out of the State Department were about ensuring that their requirements were being met when items were being exported out of Canada. From my understanding right now, we're coming to the agreement with the State Department as to how this is going to be implemented. So for us it's moving in the right direction, but we understand that there are still some details that have to be worked out.

The Chair: Thank you.

My second question is about the British study that they went through fairly recently in the process that they now call smart procurement.

As colleagues on the committee know, we've been strongly advised to go to London, England, in the course of our study in order to avail ourselves of some of the expertise there. The high commissioner and his military people have been quite useful to me as chair of the committee in terms of sharing their information. If there's any new committee member or anybody else who hasn't seen that, I'd be happy to share the information with you. The British went through a major review of their process.

That's all to ask you just this question, although it may not be totally something you're aware of: Do you know of any significant change they made in their procurement process as a part of their review? We hope to suggest improvements in our process for the minister. Then again, we're not going to redo the whole process either. Do you know anything about the British situation?

Mr. William Pettipas: No, we don't know a lot about the British process because we never do any business there. I do know it's very similar to Canada's, and it has been traditionally. I do know the military system is about the same. They have different words, but they start with a statement of requirements and build it up.

An interesting point, though, is that on this multi-role armoured vehicle program that I mentioned, which started in NATO many years ago and eventually evolved down into.... It did look like France, Germany, and the U.K. would participate, but then France withdrew and it's now down to two. They are moving ahead, and they're probably spending about $100 million in developing a product. We've followed this pretty closely, and in my view they have totally ignored the user, but they want to do something together.

I really see this as political. It's being driven by the politics of wanting to do something together, in cooperation, and I will forecast that it will fail. It might be an interesting subject that you might want to ask about, because the product is very similar to what we have today, and it's years away. I think they're looking at 2005 before they actually make anything.

The Chair: Thanks for sharing that. We'll ask our researchers to do some follow-up on that, too.

Now I'm going to go with a few more questions from members. Maybe we can ask any other members to ask a question, or maybe two at most, and we'll try to get a few more in. We'll have perhaps another 15 minutes or so with Mr. Pettipas and Mr. Yamashita, and then I want to deal with this motion so that we can continue our study across the border.

Let's go to Mr. Hart.

Mr. Jim Hart: Thanks again.

Actually, Mr. Pratt mentioned just last week that this committee has passed a motion urging the government to spend significantly more on defence. I thought I'd just mention that, because it did get the majority of the vote in this committee, and I think it's important for you to know that as industry. We are encouraging the government to put more money into our capabilities.

I did want to ask you about the Coyote light armoured vehicle. I have visited the DND web site, where you can sit in the virtual Coyote and look around at all the high-tech equipment. To the layperson, that would appear to be a very high-tech piece of equipment, but it has come under criticism from the Auditor General of Canada. He has found several deficiencies, including the fact that it's not armoured enough, that it really only should be used in a reconnaissance-type situation, and that it's undesirable for combat. Then you look at the record. I believe 12 of the Coyote vehicles broke down in Kosovo. One would question if what the Auditor General said...why would those vehicles be there in the first place? There's now information coming out that there are problems with the steering mechanism and the fire protection system.

• 1655

Is the Coyote really the right vehicle for a multi-purpose military such as Canada's?

Mr. William Pettipas: Absolutely.

Mr. Jim Hart: I knew there'd be a commercial.

Mr. William Pettipas: Let me tell you about the Coyote vehicle. We love our Coyote vehicle.

In fact, I was having dinner not too long ago with the minister of defence from Australia and our own minister. The vice-chief of defence staff for Canada sat across from me. He had just come back from visiting Kosovo. He said he had visited the Canadian troops who had the Coyote, and of course they're under the command of a brigadier; he's the brigade commander. He said, “You know, he would like to buy every one of them, right on the ground, right now”. And we'd sell them to him. That's very complimentary.

Knowing the requirements, you compare that actually to a jeep, because that's normally what armies have been using for reconnaissance—Humvees or Hummers, that type of vehicle.

So it's quite a step up. However, it is lightly armoured. It was designed to prevent small arms, 7.62 mm, from penetrating the armour.

Since that, of course, we've up-armoured it. We've put a liner on the inside and we put armour on the outside. You can get different layers depending on your requirements. Once you do that, you take away some of the mobility. It's a balance as to what you want.

That has driven us to the new vehicle, because they want the same mobility but they want more protection. That's the evolution of the military vehicles.

But to look at the reconnaissance vehicle.... We had a report that after they were deployed to Bosnia and Kosovo, there was 100% availability. I couldn't believe that. That's unheard of. In military parlance, they use a term, vehicles off the road, VOR. What's your VOR rate? I just can't believe that. Sure enough, two weeks later we had problems with it, but the problems were fairly quickly corrected.

I think we're still working on the steering problem right now—in fact, I know a fair bit of the detail because it has to do with a spline going down into the steering column. No Bison—exactly the same item—have had a steering problem. We've had some Coyotes...and at this point we think it's a particular run of those steering columns, so we're replacing every one of them. I think that's been done and I think they're up and running again.

So that was a technical/mechanical problem that's been resolved. But overall the capability of that vehicle is just absolutely tremendous. There isn't anything like it in the world.

Next month, in December-January, we're going to Fort Knox, Kentucky, at the invitation of the U.S. Army. We're bringing six vehicles down there, and one of them, at their request, is the Coyote.

Mr. Jim Hart: And the halon system?

Mr. William Pettipas: They seem to go off by themselves at times. It's a relatively small percentage. I don't know what the percentage is. We're probably talking 1% or 2%, but even that's not good.

For those of you who don't know what a halon system is, basically if there's any kind of a fire in a vehicle, this thing goes off instantaneously and sucks up all the oxygen so the fire goes out. That's what the system is. We have them distributed around the inside of the vehicle as part of survivability.

We buy them from Santa Barbara Research, I believe, in California. We've been working with them on trying to find out what happens. It seems that each time the circumstances are a little different. The incident rates aren't high, but they're unacceptable regardless.

• 1700

The Chair: Mr. Hart, thank you very much.

Just before I go to Mr. Pratt, Mr. Pettipas, the Auditor General's defence comments in his report are available on the Internet now, but I've asked our clerk to forward you a hard copy of that.

Mr. William Pettipas: I appreciate that.

The Chair: I think it would be useful for follow-up discussions and so on.

Mr. Pratt, over to you.

Mr. David Pratt: Thank you, Mr. Chair.

Just to get a better idea of the size of your company, Mr. Pettipas, can you tell us what your annual sales are at this point and what the trend lines are?

Mr. William Pettipas: In defence I'd say we're usually around $250 million to $340 million U.S. a year. As Ken mentioned, we have 1,100 employees in London that are specifically defence. We have a couple of hundred in California, mostly engineers, high-tech type of people. I didn't include the annual sales of MOWAG—

Mr. David Pratt: I was just going to ask you about that.

Mr. William Pettipas: —but MOWAG has about 450 people. They are probably at about $100 million to $150 million a year.

Just to add to that, in our overall locomotive business as a whole, it's just over $2 billion a year.

Mr. David Pratt: In terms of purchasing MOWAG, would you have brought many of those people over to Canada, or what's the...?

Mr. William Pettipas: No. In fact, we just spent three days over there getting to know each other and trying to figure out how to work as a team. We were actually very pleased as to how much synergy there is between us. Fortunately, most of them speak English. They are German, but their managers speak English. We used interpreters to work our way through. There's an intent to do some exchanges, especially financial, because this was a private company for 50 years and now they are in General Motors, a large company that does things differently from a privately owned company.

So that's part of what we're trying to get through, and we're going relatively slowly because although all the good books tell you faster is better on acquisitions and amalgamations, we don't think it applies in this case because we have two cultures we want to cater to. We are both companies that have been doing well. Neither one of us was sick. Again, we want to move slowly in how we merge, so we're going to take a few years to finally merge the two together.

Mr. David Pratt: So you're not maintaining the separate identity of MOWAG.

Mr. William Pettipas: In fact, in GM now, within General Motors London, we're using the term GM Defence. You're going to see that more. It will be GM Defence London, GM Defence California, or U.S., GM Defence Switzerland. In fact, we're about to establish GM Defence Australia, a subsidiary of General Motors, and GM Defence Saudi Arabia. So you're going to see more and more of that, and that's part of our identity. But they will be using MOWAG.

Mr. David Pratt: My time is kind of limited here, so I want to....

The Chair: You can have another one and then we'll go around.

Mr. David Pratt: I'm just wondering if you could tell the committee if, based on your experience with the Canadian government in terms of selling abroad, there is anything more we can be doing to assist you in that pursuit. When I say “we”, I mean from a political standpoint as well as a bureaucratic standpoint.

Mr. William Pettipas: I don't think so. We have had tremendous support from the government in helping us sell abroad, whether it's the ambassadors or trade counsellors, or whether it's trying to get ministers to go over. They don't always do what we like to do at the time, but generally it's always been a positive response; they want to help. Military attachés have been tremendous, and they were restricted for a while and we were very dependent on the individual. You go to a liaison officer who is on a base in the United States and you're looking for some help. Normally you get the help, but sometimes they say “That's not my business. I'm not a salesman.” So you back off. However, a year or two ago, their terms of conditions were changed and it was to support industry.

Coincidentally, the U.S. would not do any of that until I think two or three years ago when Mr. Clinton issued a directive that they would support. That has hurt us, because the U.S. never had support from their embassies on selling.

As you move it up into the political arena in the U.S. you get support, but where you want it is down at the ground level where you're really trying to get the message across about what your product really is and where it fits their requirements.

• 1705

Well, here's the government relations manager.

Mr. Kenneth Yamashita: I have to concur. The assistance has been tremendous everywhere, be it Foreign Affairs and International Trade, DND, or the Canadian Commercial Corporation. Everyone's been very helpful.

What we try to do from our end is keep open communications with them to keep them updated on our programs so that they understand where we are, what we're doing, and what our objectives are. They appreciate knowing that.

With the open lines of dialogue we have with each one of them, it's very helpful for them and it's very helpful for us.

Mr. William Pettipas: I will add one thing. CCC is talking about levying charges. We'd prefer not to have any charges.

A voice: I'm sorry?

Mr. William Pettipas: The Canadian Commercial Corporation are wanting to collect money now for the work they do.

A voice: Oh, right.

Mr. William Pettipas: We'd prefer not to have that. I wouldn't want to make a big issue of it.

The Chair: Right.

Thank you, Mr. Pratt.

I'm going to give Mr. Earle a couple of questions, and if there are any final ones on this side, we'll hear them. Then we'll go on to the motion in a few minutes.

Mr. Earle.

Mr. Gordon Earle: Thank you, Mr. Chair.

I just want to come back to the industrial regional benefits concept again. Some witnesses who have been before this committee, and probably some committee members too, have expressed the view that there's a cost to industrial regional benefits. I thought I heard in your presentation that one can achieve the industrial regional benefits without additional cost, and that in the long run it's a beneficial thing to have overall. So I just want to be clear on that.

Do you feel industrial regional benefits are something we should really be encouraging to be a part of the procurement process, and can this be accomplished in a way that will be beneficial and not have added costs involved?

Mr. William Pettipas: I'll have to answer that in a couple of ways. One, if there are no regional industrial benefits, we're quite happy. That makes life simpler for us. I can get rid of half of this guy's job and a few other people. That's about what our costs are.

Having said that, I've already qualified that we have been driven to some things, and we found some pretty good suppliers, but that was many years ago. We're pretty clued in, and with the Internet now helping as to where all the suppliers are, they know us; they come to us. So we could get by without that.

So I'd leave it to the government to decide, because it's a government strategy, but it wouldn't bother us if we didn't have it. A lot of people would be happy without it, because it just makes their job a little easier.

Did I answer the question?

Mr. Gordon Earle: Yes, I guess. I was trying to get some feeling from you as to whether you feel that is a positive concept for the whole process.

Mr. William Pettipas: I'll tell you where it's been positive for us, and this goes back to sole-sourcing. Because we've been able to spread the business across Canada, I keep saying the federal dollars come to London, and then we send them out across the country. Those are all tax dollars. We're all paying out in taxes. That has helped us when decisions were being made within the government as to justification for sole-sourcing. That's been helpful, because we get support across the country.

Mr. Gordon Earle: Yes, okay.

Mr. Kenneth Yamashita: Can I add something?

The Chair: Sure.

Mr. Kenneth Yamashita: I feel a little compelled, because I am the benefits manager.

The Chair: Please do.

Mr. Kenneth Yamashita: Within our organization, I probably feel the strongest in terms of the policy itself. We support it very strongly. From my own personal view, I would encourage it to continue on, because I think we're a better company now for it, in terms of finding these capabilities across Canada—capabilities we wouldn't have found otherwise.

I can assure you that in fact it does not add cost, because through our purchasing people, we have a process called worldwide purchasing, in which we go out and compete. Before we choose a regional supplier, that person has competed against other suppliers, not only in Canada but from other parts of the world. That's one of the conditions. We will go out to the regions and look for suppliers, but it doesn't guarantee that they'll get the business. They have to earn the business, and they know they'll compete very hard for it.

• 1710

So the companies we have all do make business sense. They're companies that we, without hesitation, take into the export market, because they are that good. So if you do industrial regional benefits correctly and if you do it very much in a business sense, it's a very good thing to do.

The Chair: Okay. I'm going to give the last question to my colleague, Mr. Clouthier.

Mr. Hec Clouthier (Renfrew—Nipissing—Pembroke, Lib.): Mr. Pettipas, what would be your sales vis-à-vis Canada and the United States? Do you know?

Mr. William Pettipas: Well, it's been mostly Canada recently, because we haven't had much from the U.S., other than support contracts. Generally speaking, our export business is about 75% of our business.

A voice: It's about two-thirds now.

Mr. William Pettipas: Well, yes, it's two-thirds right now.

Mr. Hec Clouthier: So about 66% of your sales would be exports?

Mr. William Pettipas: Right, yes.

Mr. Hec Clouthier: To the United States?

Mr. William Pettipas: Not necessarily. The contract in Saudi Arabia is through the United States, through foreign military sales, so you can register it as Saudi Arabia or you can register it as the United States. We actually sell it to the United States through the Canadian Commercial Corporation.

Mr. George Proud: It's in U.S. dollars. That's the main thing.

Voices: Oh, oh!

Mr. Hec Clouthier: So basically you do not have a General Motors defence division in the United States per se.

Mr. William Pettipas: No, no, no.

Mr. Hec Clouthier: Just in London, in Canada.

Mr. William Pettipas: We are considered General Motors' defence operations worldwide.

Mr. Hec Clouthier: Okay.

Mr. William Pettipas: In fact we have a unique situation where Harry Pearce, the vice-president, is the chairman of our board.

The Chair: I told you guys we had a great company in our city of London.

Mr. Pettipas and Mr. Yamashita, I want to thank you very much, on behalf of the committee, for sharing all this time with us. As you heard, the members found the historical overview and your suggestions quite interesting and useful. We'll share with you, as time goes on, the deliberations of the committee, and we'll make sure you get those comments of the Auditor General in the near future.

Thanks.

Mr. William Pettipas: I thank you for the opportunity to come. As I hope you've determined, we're very proud of our company. We love our customers, particularly the Canadian customer.

I did note that you were planning to visit the United States. Just this morning at breakfast I read an article I think you'll find interesting, entitled “Pentagon seeks to manage competition”. It's a really good article that I think will be pertinent to your visit. I'll leave copies for you all.

The Chair: I appreciate that. Thank you very much.

Mr. William Pettipas: Thank you all very much, gentlemen and lady.

The Chair: Colleagues, we go now to one housekeeping item, but an important item. I believe everybody has a copy of this. These are the tentative dates we're looking at. We want to avoid the Reform convention at the end of January, which was mentioned by Mr. Hart, so we're looking at around 14 to 23 January.

We'll probably need ten days, Gene?

The Clerk of the Committee: That's an estimate. I think so.

The Chair: We're estimating a ten-day trip. It's pretty long, going from Washington and then working across the U.S. to the west. You see it in front of you.

Also there's a rationale. Monsieur Laurin said he would be asked for a rationale—probably all the parties will—for this trip. So there's a rationale for the trip.

So what I need from someone is just a simple motion that the committee adopt the budget proposed of $115,750.96 for its travel.

Do you have a question, Mr. Peric?

Mr. Janko Peric (Cambridge, Lib.): Yes, I just need some explanation here. On the first page you say there would be eight MPs and six staff. Could you explain? You have two interpreters and then administrative support, two researchers, and a clerk.

The Chair: You want a breakdown of the staff?

Mr. Janko Peric: No. Why do you need two interpreters?

The Chair: Why do we need two interpreters, Mr. Clerk?

The Clerk: Because the interpreter will be following—

• 1715

Mr. Janko Peric: I need further explanation. Are you talking about the whole committee or just eight members?

The Chair: Perhaps I should explain it. I assumed all the members had been on trips. This would include four government members and one member from each opposition party.

Mr. Janko Peric: Why not the whole committee?

The Chair: Because of the cost.

Mr. Janko Peric: What's the purpose of having two interpreters, then?

The Chair: You're asking a number of questions. Let's answer with regard to cost. We'll be lucky to get this approved. If we try to take the whole committee, they will laugh us right out of the room. It's as simple as that.

Your other question had to do with why we need two interpreters. I'll let the clerk explain that.

The Clerk: The interpreters will be whispering to the member from the Bloc Québécois, and they'll be there all day. There could be some 12-hour days, so they have to spell each other off.

The Chair: That's standard practice.

The Clerk: It's the same for the researchers, the clerk, and the administrative officer. Sometimes we take two clerks and two administrative officers.

Mr. Janko Peric: I cannot support that.

The Chair: You can't support six staff.

Mr. Janko Peric: No.

The Chair: Okay. You'll have a chance to—

Mr. Janko Peric: For me it's for the members, not for support staff.

The Chair: You'll have a chance to vote against the motion. But having been on some of these trips, I can tell you, as can my other colleagues, that if you try to do it without enough staff, you might as well stay home.

Mr. Janko Peric: Bon.

The Chair: But I respect your opinion. Mr. Hart.

Mr. Jim Hart: I agree that you have to have staff. There's no question about it.

One of the questions I have, though, is on the air transport. Is there no support we can—

The Chair: Do you mean DND flights?

Mr. Jim Hart: Yes.

The Chair: We can explore that, but we can't be sure.

Mr. George Proud: We had one the last time.

The Chair: We can take a stab at it. If we can get one, it certainly would take the cost down. But we can't be sure. We're going to recess in two weeks, so we'd have to get this approved before then. We could add a caveat that we are exploring every option, including a DND flight, that would save on the travel costs.

Mr. Jim Hart: It just might help when it goes to the House Leaders to show that we're looking at everything.

The Chair: I agree. That's a good point, Jim.

Are there any other questions? Ms. Longfield.

Mrs. Judi Longfield (Whitby—Ajax, Lib.): Obviously, the air travel is expensive. I'd like to see as many members as possible go, but I appreciate that this is a difficult time with regard to costs. I know the minister wants us to do this. We've spent a great deal of time looking at procurement policy. The installations we're going to be visiting are critical to our work here. I think we need to investigate very strongly the possibility of finding another way of getting down there. I think we should be saying very strongly that we'd like to take as many members as possible.

The Chair: I have no problem. I can just react as the chair and one member of the committee. My preference would be to take the whole committee. You can nod agreement and I nod agreement, too, but as the person who will be taking this to the budget committee for approval, I can tell you that over the last two years I don't know of any trip where they've tried to take their whole committee that has been approved. Am I wrong on that? I don't know of a case where the travel for a committee that tried to take the whole committee has been approved. Therefore, I said to the clerk that maybe we should put forward a little more scaled-down trip. But if you want to cost out a trip with the whole committee, I'll present it. I don't have a problem doing that.

Mrs. Judi Longfield: What about investigating members using points?

The Chair: Yes, that's a thought.

Mrs. Judi Longfield: I think we need to explore ways to help in that, and there may be some who can use points.

The Chair: Sure. What I would indicate, Judy, is that because we're not going to have much time to get this in, the clerk put it together this way. We'll certainly explore ideas, such as members using points or the use of DND flights, that will enable us to take more people or scale down the cost, but if we don't bring this forward to the committee right away, we'll run out of time before we recess. That's the problem. So we can put it forward this way and say that we'll try to explore all the other options in order to take as many members as possible.

Mr. Proud.

Mr. George Proud: I move that the committee adopt this budget and try to find accommodation for as many members as possible. I'd also like to see the whole committee go.

The Chair: Sure.

Mr. George Proud: We went in 1994. We had 16 members, and it was a big operation. I think we should look at taking all the members we can.

The Chair: Okay. So you're moving that we approve this budget for this many people with the idea that we would try to explore other ways—

• 1720

Mr. George Proud: Yes, whether it's points, as Judy said, or the Department of National Defence aircraft—however we do it. But you're still going to have to pay for accommodations.

The Chair: That would be the ideal.

(Motion agreed to)

The Chair: Thank you, colleagues.

The meeting is adjourned.