Questions surround industrial benefits
Questions are being raised about the number of jobs that might come from a $70-billion program to buy new warships after a top defence executive involved in the project warned that firms were struggling to deliver on their promises.
Politicians and federal bureaucrats have stated the Canadian Surface Combatant project will create thousands of high-paying jobs. Innovation Minister Navdeep Bains has been told that Lockheed Martin Canada, which has been selected to design and integrate the high-tech systems on board the new ships, will provide significant long-term economic benefits to the country, according to 2019 Innovation, Science and Economic Development briefing documents obtained by this newspaper.
But industry executives point out that strategy has already run aground, noting that in November 2019 the Lockheed Martin Canada executive responsible for delivering on the commitments admitted the system has major problems.
Walt Nolan said the policy the Canadian government developed has prompted defence firms to significantly over commit on the benefits they claim they can deliver on the Canadian Surface Combatant and other programs. “This monster has got out of the box and has stayed out of the box,” Nolan told executives about promises of industrial benefits.
Bidders have committed to delivering to Canada more than 100 per cent of the contract value in those benefits. “Those (procurement) programs are in their infancy on the delivery of those obligations, and many of us are already beginning to struggle,” Nolan added.
Nolan’s comments were first reported last December by Countertrade and Offsets, a specialty publication. A Lockheed Martin source confirmed to this newspaper the accuracy of the statements and acknowledged the concerns Nolan raised are significant.
The decision on which consortium would be selected as the winning bidder for Canadian Surface Combatant (CSC) was based partly on the industry benefits they could deliver.
The proposed 15-ship fleet of Canadian Surface Combatants is the backbone of the country’s shipbuilding strategy and accounts for most of the federal money to be spent over the next several decades on new vessels. The national shipbuilding strategy, originally introduced by the Conservative government, is not only supposed to create jobs but lay a foundation for a domestic shipbuilding industry that will be set up to seek out international work in the future.
Asked to comment on Nolan’s concerns, Gary Fudge, vice-president of Lockheed Martin Canada RMS, noted in an email to the Ottawa Citizen that, “The value proposition requirements associated with CSC matched the level of complexity and sophistication of the program. Lockheed Martin Canada has fully embraced the policy and recognizes the incredible benefits it brings to Canadian industry — not just for today but for the future through enduring investments and returns to the economy.”
Fudge stated that the company has made significant progress and that CSC is positioned to deliver significant economic benefits to Canada.
Michael Byers, a University of British Columbia professor who authored a report analyzing the government’s shipbuilding strategy and the CSC, pointed out there is significant secrecy surrounding the industrial benefits for the program. In addition, he noted that there are no consequences for various companies if they do not meet job creation targets.
“Canadians will likely never know how many jobs were produced,” Byers explained. “Some jobs will obviously be created as workers will build the hulls in Halifax and install the foreign-made equipment, but we can’t be certain this will contribute actual value for the large amount of money taxpayers are spending.”
In some cases, the requirements for industrial benefits on CSC contracts are non-existent or limited. On Nov. 5, it was revealed by the U.S. government that Canada would be ordering $650 million worth of new missiles to be built by Raytheon in Arizona for the surface combatants. Hans Parmar, spokesman for Innovation, Science and Economic Development Canada, noted that Canada “will be exploring the applicability” of industrial benefits, known in the U.S. as offsets, for the purchase. Parmar did not provide any details on when industrial benefits discussions would take place, if at all.
But defence industry and DND sources say it’s highly unlikely there will be any significant industrial benefits related to the missile purchase because Canada didn’t specifically ask for them before deciding on Raytheon’s missiles. In addition, they say the DND did not make a public announcement about such a significant purchase for CSC for fear of drawing attention to the lack of industrial benefits.
Previous claims about federal job creation have also fallen short. In 2017, the Liberal government claimed its Innovation Superclusters Initiative would create more than 50,000 jobs over 10 years. The cost to taxpayers would be $918 million.
But a study by the parliamentary budget officer released in October of this year raised questions about such claims, noting that even if all the money was spent, only 27,000 jobs would be created. The PBO also pointed out that Innovation, Science and Economic Development couldn’t produce any records to support government claims about the impact of the program on the economy.
In addition, there has already been questions about the value of some of the industrial benefits linked to the federal government’s shipbuilding strategy.
Under the government’s policy, the prime contractors on such procurements are required to do work in Canada equal to 100 per cent of the value of the contract they receive. The industrial benefits program is also supposed to promote innovative work and research in defence and aerospace fields.
But in May 2019, the Globe and Mail revealed that on the program to build new Arctic and Offshore Patrol Ships for the navy the federal government allowed Irving Shipbuilding to claim a $40-million industrial benefit credit for work on a french fry factory in Alberta.
Irving officials say one of the core components of the industrial benefits policy is to create “indirect” transactions. They have argued that they were creating jobs by using Canadian companies for high-value work to create one of the most modern french fry facilities of its kind.
The promises of industrial benefits linked to defence contracts has had a checkered past. In the 1980s, some foreign companies would create assembly lines in Canada to meet their requirements, only to shut those down as soon as their products were delivered to the Canadian military.
In 2011, the Conservative government awarded a $274-million contract to Navistar to provide commercial trucks, modified for military use, to the Canadian Forces. Even as the government was awarding the contract to Navistar to build the trucks in Texas, the company was laying off employees at its Chatham, Ont., truck plant. Eventually 800 were laid off. Navistar closed the plant in 2011.
Then-defence minister Peter Mackay defended the awarding of the contract to the U.S. firm, saying there would be domestic work done on the military vehicles as Canadian mechanics would be involved in maintaining the trucks, and that gas and tires for the vehicles would also be bought in Canada.
Alan Williams, the former head of procurement at DND, said the government has lots of latitude to determine whether an industrial benefit can be linked to military purchases, and, like Michael Byers, warns that because the industrial benefits program is so secretive it is difficult to determine whether high-value jobs are actually being created.
Freedom of Information specialist Ken Rubin has already found that out in regard to the Canadian Surface Combatant. He requested background papers, briefings and reports from Innovation, Science and Economic Development, which would indicate numbers of jobs to be created by the mega-project. He specifically focused on material exchanged at the senior levels of government between 2015 and 2019. Rubin was told by the department it would take at least three years before it responded to his request, if at all.
“If jobs were really being created, then the government would be eager to make those records public,” Rubin said. “The fact they’re being withheld should be seen as a warning sign that maybe there’s not really a lot of jobs being created for the billions of dollars being spent.”
In May, Rubin appealed to innovation minister Navdeep Bains to release the documents, citing the Liberal government’s promise of openness and transparency. He received no reply.
Rubin faced a similar process trying to get details about industrial benefits linked to other defence purchases. Ten years after the purchase of Leopard tanks from Germany in 1976, he received government records that revealed that some of the muchvaunted industrial benefits the Canadian government claimed to have received from that deal were limited. Instead of creating high-tech jobs, Germany dealt with some of its industrial benefits requirements by purchasing canola, plywood and airline tickets from Canada.
But claims of high-paying jobs created by government programs can be good for public relations. Some of those advising Bains see the focus of the surface combatant project as a public relations exercise. In 2018 and 2019 briefings for Bains, obtained by this newspaper, the minister was told by his bureaucrats that there are “significant communications opportunities” available to highlight the link between jobs and the CSC.
The number of jobs and when they are to be created were censored from the documents.