March 10, 1939

LIB

Ian Alistair Mackenzie (Minister of National Defence)

Liberal

Mr. MACKENZIE (Vancouver):

To munitions entirely.

136. We do not propose to undertake the task of formulating specific methods for the restriction of profits in peace time. No doubt it is fraught with technical difficulty.

137. We do not think it 'would be sufficient for the purpose we have indicated to insure that the defence departments are themselves satisfied that the profits allowed to private manufacturers under particular contracts are

Defence Purchasing Board

fair and reasonable. Nor do we believe that a measure of taxation, such as the excess profits tax which was enforced during and after the last war will prove satisfactory to meet the essential object in view ... It should, in our opinion be an essential characteristic of whatever system of control be adopted that, while providing reasonable remuneration on a scale sufficient to insure the cooperation of private industry in the service of imperial defence, it shall be such as shall prevent excessive profit and at the same time satisfy the public that it does so.

138. But the control of profits in peace time is not enough. '

139. We believe that if it were known that in the^ event of this country being involved in a major war, industry generally would be conscripted, and that everyone in the country would be required at once to put himself at the service of the state, a considerable part of the objection to the private manufacture of arms would disappear. If the state could choose the staff they wished to keep in industry and those they required to join the forces, and if, in addition, everyone from the head of a business down were given similar positions and pay, according to the work they were doing, to those serving in the forces, it would make it still more unlikely for those engaged in supplying the requirements of the state in peace time to agitate for war.

Just one or two comments on these various paragraphs. With reference to paragraph 136, it is to be noted that even the British royal commission, after extensive study, did not undertake to recommend specific methods for the restriction of profits in peace time, neither did the United States senate committee. Both commissions went on record, as would the ordinary man on the street, to the effect that profits on the production of peace time requirements of departments of defence should be restricted. The British royal commission considered that the practice was fraught with technical difficulty. With regard to the specific problem that has confronted the Department of National Defence, neither of these two formidable inquiries produced concrete suggestions that were of assistance to the minister or the government or departmental officers. What has been accomplished has been done as a result of the foresight of the government itself and the earnest devotion of the public officials who had to deal with the problem.

With reference to paragraph 137, it is suggested that it is not enough for the defence departments themselves to be satisfied that profits allowed are fair. This was recognized in Canada when steps were taken to set up an interdepartmental finance committee to consult with and advise the department on this very problem. Since early in 1937, all contracts placed other than those where competitive bids were available, have been taken up with the interdepartmental committee; all possible advice and suggestions from that committee have been obtained for the guidance

of the department, and valuable suggestions emanating from the committee have found their way into the text of the contracts let.

With reference to paragraph 137, the last sentence refers to the necessity of assuring the public that excessive profits are prevented; and this was the desire and policy of this government. At the last session more than one offer was made to refer all these contracts for complete analysis by the standing committee on public accounts, and when public controversy developed in regard to one contract, only two or three days elapsed before a royal commission was established to ensure that all the facts were made available to the public of Canada.

In regard to paragraph 139, the royal commission here calls for a declaration that more drastic regulation will be enforced in time of actual war, holding that if this were done a considerable part of the objection to the private manufacture of arms would disappear. The Prime Minister emphasized the same point, speaking in this house on April 2, 1937, as reported at page 2501 of Hansard. He said:

The line upon which we have been proceeding is to attempt to draw a distinction between war materials produced in times of peace and what may be necessary in times of war. Unquestionably special legislation would be required in time of war.

Then, in regard to the general argument with reference to private manufacture of armaments-and I am not stating my own opinions here-may I point out that appendix No. 1 of the British royal commission's report summarizes the arguments of those who are in favour of retaining private manufacture. They say:

It has been claimed,-

(1) That to prohibit private manufacture would deprive the country of an essential part of its war potential which could not be entirely made good in other directions even were the country prepared to face the considerable additional expense that would be involved;

(2) That under the existing system reserve equipment is maintained by the private firms and a reserve of skilled labour is available that can be utilized immediately to augment existing supplies of war material on an outbreak of war;

(3) That the export trade maintained by the private films in peace time provides a reserve for war purposes and meanwhile reduces the overhead cost of reserve maintenance;

(4) That nationalization of armament production would involve the government in responsibility for the maintenance of this reserve, a reserve moreover which, under national ownership, would be largely maintained in idleness having regard to the objections that would be raised against the entry of the government into an export trade in armaments or the manufacture of alternative non-armament products in competition with private industry;

Defence Purchasing Board

(5) That maintenance of reserve manufacturing capacity by the government would be costly even mating allowance for the fact that under the existing system the government already pay for it, to some extent in the prices paid to the armament firms and by reason of certain direct subsidies paid to ensure the maintenance of plant which could not otherwise be maintained by the private firms;

(6) That maintenance of reserve capacity by the government would still not ensure the availability of the essential reserve of skilled labour which the private firms are able to retain by the utilization of their employees on export orders and non-armament work;

(7) That in many branches of armament work, e.g., in the chemical and aircraft industries, experience gained on civilian work of a similar category is beneficial; and

(8) That to deprive the aircraft firms of experience in the manufacture of military aircraft would prejudicially affect the development of civil aircraft.

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CCF

Thomas Clement (Tommy) Douglas

Co-operative Commonwealth Federation (C.C.F.)

Mr. DOUGLAS (Weyburn):

Before the minister goes on, may I ask what statement he has read? Is it the statement of the British war office?

Mr. MACKENZIE (Vancouver); It is appendix I of the British royal commission's report.

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CCF

Thomas Clement (Tommy) Douglas

Co-operative Commonwealth Federation (C.C.F.)

Mr. DOUGLAS (Weyburn):

And is the minister reading it because he supports it, or agrees with it?

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LIB

Ian Alistair Mackenzie (Minister of National Defence)

Liberal

Mr. MACKENZIE (Vancouver):

No-and I distinctly said so. I am trying to give the two sides of the case as fairly as I possibly can.

I now come to the report of the United States senate committee. As I mentioned in a former debate in the house, the majority report was for the extension of the principle of nationalization. It recommended the nationalization of manufacture of certain large items. But there was a very strong minority report as well. I wish briefly to place it on record, as well as the general findings of the majority of the United States senate committee.

The committee minority (Senators George, Vanderberg and Barbour), supporting all other findings of the committee, questions the complete nationalization of certain defence commodities, because it doubts the advantage from the standpoint of

(1) its effect upon disarmament,

(2) its effect upon essential national defence, and

(3) its effect upon government costs. The committee minority believes that if large government plants are erected to provide these commodities, there will be inevitable local, political pressure to maintain these plants at full capacity production regardless of actual defence needs, and the result will be to encourage armament rather than disarmament. The committee minority believes that if all production be thus concentrated in government plants, furthermore, there will be no adequate corrolary reliance, through private manufacture,

in the event of a war emergency unless the nationalized facilities are maintained at a needlessly extravagant and dangerous rate during peace time.

The committee minority believes, on the other hand, that unless these facilities are kept on a full-time production, basis during peace years, the unit cost of production will increase to a point which will create higher costs to the government than would be available through normal, private purchase. This could be another impulse to armament rather than disarmament through anxiety to maintain maximum arms production in order to maintain minimum costs. In other words, the committee minority believes that the public welfare, from the standpoint of peace, defence, and economy, can be better served by rigid and conclusive munitions control than by nationalization except in a few isolated instances.

That was the minority report of the United States senate committee.

I come now to the committee set up in Canada by the present government. It was known as the Skelton committee, and was under the direction of one of the ablest and most brilliant civil servants in any country of the world to-day. That committee had before it, in the first place, the report of the royal commission in Great Britain, secondly the report of the United States senate committee, to which I have just referred, and, thirdly, information with respect to the difficulties already experienced at that time by the Department of National Defence, and special measures already taken by that department in connection with the problem.

May I at this point refer briefly to the findings of the Skelton committee. In the first place, with reference to the placing of the manufacture of armaments in the hands of the state, it said:

1. The committee are unable to support such a proposal as bein'* practicable under present conditions in Canada. Whether, putting aside the idea of a complete state monopoly, there might be a case for some moderate extension of present government arsenals, in order to produce, e.g., a certain limited selection of articles for which the government would be the only purchaser and might need a continuous supply, and for which no private manufacturing equipment now exists in Canada-is a matter which the government' might wish to consider as a matter of policy.

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CON

Grote Stirling

Conservative (1867-1942)

Mr. STIRLING:

What committee is this?

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LIB

Ian Alistair Mackenzie (Minister of National Defence)

Liberal

Mr. MACKENZIE (Vancouver):

The committee set up by the Prime Minister in January of 1937, and presided over by Doctor Skelton.

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CON

Henry Herbert Stevens

Conservative (1867-1942)

Mr. STEVENS:

Was it known as the interdepartmental committee?

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LIB

Ian Alistair Mackenzie (Minister of National Defence)

Liberal

Mr. MACKENZIE (Vancouver):

No. This was the committee which recommended the formation of the committee we now know as the interdepartmental committee. It was

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a committee set up primarily to discuss the theories and general principles of profits control.

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CON

Howard Charles Green

Conservative (1867-1942)

Mr. GREEN:

Could that report be tabled?

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LIB

Ian Alistair Mackenzie (Minister of National Defence)

Liberal

Mr. MACKENZIE (Vancouver):

Certainly; I see no objection to its being tabled. It was part of the evidence taken before the Davis inquiry. I see no reason why it should not be placed on the table of the house-in fact, I am informed it has already been tabled. It continues:

2. It is considered impossible to generalize a rule or rules of conduct in statutory form.

That is in reference to legislation.

The range of articles needed for the forces is so wide, that to attempt such legislation, would amount to an attempt to regulate the profits of a great part of the ordinary industry of the country. The problem appears to be essentially an administrative one.

The control of profits and prevention of excess can, it is believed, be most effectively sought by means of appropriate administrative practice on the part of the departments responsible for the placing of government contracts and orders involved in the defence program.

Where a really competitive market exists, the practice long pursued of calling for competitive tenders, appears to afford an effective safeguard against undue profits. For special articles, or work where the government will be the only or the main purchaser, other methods are required. In the one or two contracts of this type which have recently been placed, the Department of National Defence have taken special steps to guard against unreasonable profits arising.

This is early in 1937.

(3) Re special contracts: While the committee do not believe that any single hard and fast rule can be laid down* it is reasonable to assume that by careful study certain useful financial principles and safeguards might be evolved for each type of contract which may arise. It is suggested that there be instituted a standing interdepartmental financial committee to assist the officials charged with the placing of contracts under the defence program, the committee to be representative of the contracting departments and the Departments of Finance and National Revenue, and others, if considered desirable.

Such a committee might study and classify the requirements of the defence program from the financial point of view, and formulate and advise upon the financial principles or safeguards to be observed in placing contracts of various types, and as to rules of procedure. It might also be available for consultation upon the financial aspects of any unusual specific cases or conditions arising from time to time. It would be limited to this function of assisting in the prevention of undue profits.

Re Special considerations. The commissioner of income tax attached a separate report dealing with certain technical provisions, recommending that as a result of certain defects in the Business Profits War Tax Act of the last war, certain precautionary measures, with regard to capitalization and set-up of companies receiving armament contracts, be taken.

The committee recommended that there be referred to the interdepartmental committee,

(a) Mr. Elliott's special recommendations.

(b) The advisability of inserting in all contracts not awarded through competitive tendering, a stipulation granting to government inspectors or auditors, complete access to the contractors' books and records.

(e) The extent to which costing principles established in government arsenals or factories might be effective, in facilitating the control of the costs and profits of private manufacturers.

Re Publicity. The committee believe it important not only to ensure that contractors will be limited to reasonable profits, but also to satisfy the public that safeguards in this sense are being provided. It is, therefore, suggested that on some appropriate occasion, the House of Commons be informed in this regard.

Just a comment or two on these findings. As suggested in No. 1, the government is making the maximum use of its own arsenal plants. I say that deliberately. The advice given me by the officials of the Department of National Defence and by the highest ranking officers, those who are in favour of the principle of public ownership, in regard to the development of the Lindsay arsenal is that until we proceed with the filling group and the ammunition group at Valcartier, until we have made Quebec available, we should not proceed with the development of the Lindsay arsenal as planned for the manufacture of small arms ammunition. It must be kept in reserve. However, since this government came into office the production of our necessities at the arsenals at Quebec and Valcartier has been increased by four, six or seven times. We have made a modest beginning at the arsenal at Lindsay and it is my fervent desire that as soon as possible we should proceed with the further development of the facilities at Lindsay.

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LIB

Thomas Bruce McNevin

Liberal

Mr. McNEVIN:

Did the minister subscribe fully to the suggestion of the committee that the further development of the Lindsay arsenal be not proceeded with until the filling group at Valcartier had been gone ahead with?

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LIB

Ian Alistair Mackenzie (Minister of National Defence)

Liberal

Mr. MACKENZIE (Vancouver):

I do

not pretend to be an expert on military affairs. That information was given to me by the highest ranking officers, and naturally I accepted their opinion at the time. I say this to my hon. friend, that the production of small arms and ammunition has been increased so much in the other arsenals at our disposal that in my judgment the old objections with regard to Lindsay have disappeared completely.

The second conclusion of the Skelton committee, that the problem must be solved by administrative means, appears to coincide with

Defence Purchasing Board

the conclusion of the British royal commission, which admitted that the problem was fraught with difficulty. The problem is a new one, at least so far as Canada is concerned, and we can hope for progress only by experience. The department welcomes every constructive suggestion, but those emanating from outside the department have so far not been very constructive.

With regard to the third suggestion, the interdepartmental committee was set up and has cooperated with the department for the past two years. In that time this committee has passed upon contracts totalling in the neighbourhood of $10,000,000. In regard to the fourth suggestion, Mr. Fraser Elliott's recommendation that the capitalization of companies be closely watched, this is reflected in the provisions of one contract which restrain the company from selling shares without the consent of the minister. This is the first time in the history of Canada that any such provision has been incorporated in a government contract. With regard to No. 5, which dealt with publicity, both the Prime Minister and the Minister of National Defence explained the situation very fully to the house in 1937.

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CON

Robert James Manion (Leader of the Official Opposition)

Conservative (1867-1942)

Mr. MANION:

Could the minister tell us offhand the name of the company to which he refers that was limited with regard to the sale of stock?

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LIB

Ian Alistair Mackenzie (Minister of National Defence)

Liberal

Mr. MACKENZIE (Vancouver):

I was referring to the John Inglis Company.

I do not think I shall take the time of the house to deal fully with the machinery which has been adopted to give every possible safeguard by the Department of National Defence. I shall refer only to one contract which was let before the interdepartmental committee was established. I shall outline the precautions which were taken by the department before the committee was set up and which I think were commented upon by the Skelton committee in the extracts which I have submitted to this house.

The special provisions introduced in this contract were numerous. It was stipulated that in the event of emergency the crown could diminish or increase the number of aircraft covered by the contract. It was stipulated that the crown could take over the plant and require that, in substitution for aircraft, other articles capable of being manufactured by the contractor be supplied. Under a supplementary agreement it was provided that if orders at a lower price were accepted from others for similar aircraft, the price to the crown would be reduced proportionately. It was provided that to the extent that the 71492-1X1

cost of any special machinery, tools, dies, et cetera, was included in the purchase price of aircraft covered by the first contract, the purchase price of similar aircraft in any succeeding contract would be reduced accordingly. It was provided that in the event of the company entering into any other contract, the crown should have the right to have its aircraft manufactured in priority.

These were safeguards of an entirely new type devised by the department itself to protect the public interest. To my mind, which may be prejudiced, they indicate that the department, in pioneering a new field and in seeeking to develop for the security of this country an entirely new industry, was using its utmost ingenuity to keep strict control over the industry. It should be stated that in negotiating the price of the aircraft, both the government and the company had the advantage of knowing the costs in the old country where the parent airplanes were being manufactured, and it was possible to arrive at an approximate estimate of the extent to which these costs would be varied by Canadian conditions.

Then, as to national ownership, I wish to say a word or two as to some of the difficulties which might confront the Department of National Defence should we accept the principle of national ownership. In the old days it was the practice of the Department of National Defence to procure most of its technical equipment by purchase from the war office, the admiralty or the air ministry. During the war of 1914-18, Canada, as we all know, produced large quantities of munitions, but it is sometimes not realized that although the quantity was large the varieties were within a very narrow range. Canada employed her industrial resources in the production of shells, and to some extent, explosives. Weapons were not manufactured in Canada, and, with the exception of the Ross rifle, never have been.

When the present government took office the dominion arsenal at Quebec was equipped for the manufacture of small arms ammunition and of some of the components of certain limited types of light artillery ammunition. The Lindsay arsenal had been closed down since the war. The department had on order from the old country a number of articles of technical equipment, but the present government was advised that the delivery date would be several years in the future. The practice of the department being to order its requirements from the old country, we speedily learned that this was not going to be possible or practicable with regard to any speedy

Defence Purchasing Board

measures of improving the defences of Canada. Great Britain, as we all know, had embarked on a heavy rearmament program and was utilizing the full resources of her own industrial capacity.

The department was faced with the necessity of developing sources of production within' Canada for articles of military equipment never before produced in this country. The question whether production should be by expansion of the government's own arsenal plants or by the utilization of private industry was very carefully and very seriously considered. As I suggested in my remarks before the royal commission, there were two schools of thought in the Department of National Defence. Certain senior officers were strongly in favour of the development of government arsenals. Others of equal senior rank pointed out that the capital cost of constructing and equipping the several plants advocated would fun between $30,000,000 and $35,000,000. These officers considered that having regard to the probable funds available the cost and delay involved in proceeding by state manufacture would be prohibitive.

The matter was then considered at great length by the government. I think I am safe in saying that on principle the government favoured state manufacture. However, at that time we were faced with a most serious financial problem. There had been a long series of heavy budgetary deficits in Canada between 1930 and 1935, and there was at that time the utmost necessity of restoring public finance at least to a state of approximate equilibrium. The funds made available for the Department of National Defence in each of the years 1937 and 1938 totalled approximately $35,000,000.

The decision made then was to proceed with the expansion of the dominion arsenal with respect to the production of commodities for which a fairly constant demand over the years might be anticipated. This ensured that full use would be made of any expenditures on capital account and that continuous employment would be afforded to skilled labour assembled for the purpose.

With regard to the very large scheme of erecting plants for the manufacture of small arms, artillery guns and other costly technical equipment for which the total requirements of the country were limited, this is best illustrated by the results of the decision reached. Had we, Mr. Speaker, adopted the suggestion made by some hon. members of the house at that time when the estimates were before it, of state production along the lines suggested by those who were advocating

this grand arsenal scheme in the dominion, that entire $30,000,000 during the past three years would have been required to construct and equip the necessary plants. What would we have lost? Instead of that we have acquired:

1. Four new destroyers and four minesweepers for the navy, and

2. Two hundred new aircraft.

3. We have established a system of fortifications on the Pacific coast, to be completed next year.

4. We have doubled the strength of our naval and air forces.

5. We have purchased a great deal of miscellaneous equipment for the militia.

6. We have increased the training of our militia forces in Canada.

7. We have developed new air stations and have augmented the facilities at the stations already established.

8. We have greatly increased the production of munitions, and we have augmented our supplies of all kinds of ammunition and other necessary military equipment.

Had we used our money on the construction of arsenals, we should have had none of this equipment with the funds at our disposal. I leave it as a cold business proposition to the fair and unbiased judgment of hon. members of this house.

9. During the last three years we have increased the output of the Quebec arsenal from four to six or seven times what it was in several commodities when we took office.

10. The government's own plants have been used for assembling anti-gas respirators, an operation never before undertaken in Canada.

11. We have begun the utilization of the Lindsay arsenal after twenty years of idleness, and propose that that development shall be continued and extended.

I come now to another point. I have been criticized in this house and outside with reference to not calling for competitive bids. I wish for a moment or two to compare the records of the two governments. The first instructions I gave to my officials in 1935 when I assumed the office of Minister of National Defence were that tenders were to be invited by advertisement wherever possible in regard to contracts over $5,000. Contracts, Mr. Speaker, in the Department of National Defence, may be handled in five ways:

1. By public advertisement.

2. Through selected bidders.

3. Through the war office, admiralty and air ministry.

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4. Through sole manufacturers. This is usually for the replacement of parts.

5. Through submission to the interdepartmental committee in certain circumstances where competition is considered unavailable.

Where the department has to deal with sole competitors or with a particular manufacturer, there is no choice. There was no interdepartmental committee to review contracts in the days of the previous administration, so that method can be left aside for comparative purposes. But where competition is possible it is desirable that the widest possible competition be obtained, and the present government decided, having regard to the record of the previous administration, that there should be a change of practice.

Taking only those cases, in contracts over $5,000, where competition is possible, the following is the record of the late administration during the four and a half years from April 1, 1931, to October, 1935.

Mr. MacNiICOL: The minister is starting something new. What is the use of rehashing what has been done prior to 19357

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LIB

Ian Alistair Mackenzie (Minister of National Defence)

Liberal

Mr. MACKENZIE (Vancouver):

I thoroughly appreciate and welcome the sentiment my hon. friend has expressed; if that is the attitude he is going to take I appreciate it. But we have been criticized for not calling for competitive bids, and I thought it only fair to put the essential facts upon the record so that they would be available.

The late administration during the four and a half years from April 1, 1931, to October, 1935, let contracts as follows:

1. By public advertisement, eleven contracts, totalling $736,874.

2. By selected bidders, from selected lists, 284 contracts, totalling $5,013,502. In other words, Mr. Speaker, of the contracts available for competition where the amount involved was more than $5,000, the late government let by public advertisement:

1. By number of contracts, less than 4 per cent (3-7 per cent).

2. By dollar value, only 13 per cent.

They gave to selected bidders more than ninety-six per cent of their contracts, representing eightv-seven per cent in value of those available for public tender. Altogether, of contracts available for bidding, they let 295, to the value of $5,751,377. In five and a half years, under the previous administration, only eleven contracts, representing $736,874 out of $5,751,377, were offered to public bidding in the dominion.

Now we, sir, have let in three years in office, by competitive bidding, contracts to the value of $12,677,367. In three years and two months, down to December 31, 1938, the present government let 135 contracts by public advertisement as compared with eleven contracts in five and a half years under the previous administration.

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CON

Henry Herbert Stevens

Conservative (1867-1942)

Mr. STEVENS:

Amounting to how much?

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LIB

Ian Alistair Mackenzie (Minister of National Defence)

Liberal

Mr. MACKENZIE (Vancouver):

I am

coming to that. In five and a half years, the previous government let contracts of a value of only $736,000 by public advertisement-

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CCF

Thomas Clement (Tommy) Douglas

Co-operative Commonwealth Federation (C.C.F.)

Mr. DOUGLAS (Weyburn):

Would the

minister give the amounts?

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LIB

Charles Avery Dunning (Minister of Finance and Receiver General)

Liberal

Mr. DUNNING:

Just be patient and

you will get it all.

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LIB

Ian Alistair Mackenzie (Minister of National Defence)

Liberal

Mr. MACKENZIE (Vancouver):

While

in five and a half years the previous government let only $736,000 by public advertisement the present government let $7,785,000 in just over three years.

Of contracts available for tender the previous government held 87 per cent, by value, for selected bidders, and threw open only 3-7 per cent for public advertisement. The present government has let 60 per cent, by value, by public advertisement, and only 40 per cent to selected bidders.

The present government let 135 contracts by public advertisement in three years, while the previous government let eleven contracts by public advertisement in five and a half years. The previous government threw open to public competition $736,000, or 13 per cent, while the present government threw open to competition $7,785,000, or 60 per cent.

But apart from the contracts referred to the interdepartmental committee, what is of special interest is this, that of the eleven contracts for which the previous administration invited public tenders through advertisement, no fewer than nine were in their first year of office, when they were fresh from the electors. After that first year, in four and a half years, the previous government only twice submitted defence contracts to public tender, for a total amount of $448,884. No public bids were invited in 1932-33; no public bids were invited in 1933-34; and only once in 1934-35, and again in 1935-36, did the previous government ask for public bids on defence contracts.

But what is the progressive record of the present government? This government let by competitive bids:

1. In the balance of 1935-36, 7 contracts.

2. In 1936-37, 31 contracts.

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3. In 1937-38, 38 contracts.

4. In 1938-39 (nine months only), 59 contracts.

Perhaps, therefore, Mr. Speaker, I may be forgiven if I am fairly sensitive when this government is accused of favouring pets and favourites when calling for tenders.

Topic:   NATIONAL DEFENCE
Subtopic:   CREATION OF DEFENCE PURCHASING BOARD TO ENTER INTO CONTRACTS FOR MUNITIONS, EQUIPMENT, MATERIALS AND SUPPLIES
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March 10, 1939