March 10, 1939

CON

Robert James Manion (Leader of the Official Opposition)

Conservative (1867-1942)

Mr. MANION:

From whom was the

minister quoting?

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

Ian Alistair Mackenzie (Minister of National Defence)

Liberal

Mr. MACKENZIE (Vancouver):

I was quoting again from the British royal commission.

The United States senate committee dealt mainly with the export of arms. With respect to national requirements it merely recommended expansion of the principle of state ownership. Requirements in a great country like the United States or Great Britain are such that a state arsenal is a much more economic operation than it would be in a country like Canada, whose requirements of some very costly and technical items are strictly limited. May I say I hope they will remain so.

In the United States they had a drastic reorganization recently in the army to improve purchasing methods. Very wide reforms were made, but I noticed, in an article on this subject in Liberty the other day, this significant sentence:

No way around the old cost plus plan has been found.

The Skelton committee reported that profit control was essentially an administrative problem and advised that they were unable to recommend legislation which would cover all contingencies. They did make one important and valuable step forward-they recommended a court of review to advise the department directly concerned on the form of its contracts.

I want to say here that the interdepartmental committee, whatever criticism may have been offered concerning them, rendered magnificent and devoted service to the government and the country in the work they have done in the last two years.

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

Abraham Albert Heaps

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

Mr. HEAPS:

If the legislation foreshadowed in this resolution is passed, will the interdepartmental committee go out of business?

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

Ian Alistair Mackenzie (Minister of National Defence)

Liberal

Mr. MACKENZIE (Vancouver):

I think it might be reasonably assumed that that would be the case. But I should be very glad if my hon. friend would wait until the bill comes down. He will then have an answer to his question.

Defence Purchasing Board

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

Abraham Albert Heaps

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

Mr. HEAPS:

I think it is important that the minister inform the house whether this proposed new body will supersede the interdepartmental committee.

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

Ian Alistair Mackenzie (Minister of National Defence)

Liberal

Mr. MACKENZIE (Vancouver):

If my

hon. friend waits a little longer, I believe he will find before I conclude my address that his inquiry will have been answered.

In the proposals now offered to the house under this resolution, and to be elaborated in detail in the bill consequent upon it, I believe that we have gone further than any other government, in the United States, in Great Britain or any other democratic nation which believes in upholding the institution of competitive industry. The bill that is to be submitted to this house consequent upon the adoption of the resolution I am now discussing provides that maximum profits upon defence contracts shall not exceed five per cent per annum on working capital actually utilized in the performance of the contract, and this is to be achieved by the simple, clear and definite process of taxing away the excess. May I therefore explain the procedure that is contemplated in its logical sequence. The purchasing board will consist of a permanent, salaried chairman who will give his full time to this work, and the other three members will be paid a per diem allowance for attending meetings, and their actual travelling and living expenses. The board will make all purchases and let all contracts for the Department of National Defence where the amount involved exceeds $5,000. The procedure will be for the Department of National Defence to requisition the purchasing board for each requirement. Full information must be imparted as to the reason for the requisition, stocks in hand, and also in regard to other matters. The board may vary the requisition but not without the consent of the Minister of National Defence. The board will then have a completely free hand in negotiating the contracts and in the supervision of their execution. Each contract must be recommended to council and approved by council before being let. This, in my judgment, gives even a closer degree of government control than under the war purchasing commission during the last war. The war purchasing commission had power to enter into contracts without any reference whatsoever to council. This act requires that every contract shall be approved by council and therefore the principle of ministerial responsibility is regarded. The government is thus given a threefold check upon these contracts: through the Minister of National Defence, who makes the recommendation; the Minister of Finance, who, subject to the consent of council, gives

authorization; the Minister of National Revenue, who, when profits are made in excess of five per cent, is responsible for the taxation of excess profits.

The bill lays down as a cardinal principle that where competitive bidding is practicable there shall be competitive bidding by advertisement in the public press. The bill also lays down that as far as possible the purchases shall be made in the Dominion of Canada. If it is considered necessary to purchase outside of Canada the board, must report to the government, giving its reason therefor. If, after competitive bidding, the board deems it not in the public interest to award the contract to the lowest bidder, the act requires that it shall report to council giving its reason therefor. Then there comes the type of contract where competitive bidding is not possible. These conditions arise with respect to arms and munitions contracts more often than in ordinary business, for two main reasons: first, there are sometimes secret specifications which it is not in the public interest to distribute among miscellaneous contractors for bidding purposes; and, second, there are especially in a small country like Canada, which has had no past experience in arms manufacture, sometimes undertakings of an involved and technical character with which industry in this country has had no past experience and on which there is no sound basis for estimating costs in advance. In such cases firms tendering have a tendency to allow very wide margins for unforeseen hazards.

Where competitive bids are not possible we have worked out, in my judgment, the most drastic system of profit control ever enacted, so far as we could ascertain. The key clause provides that the maximum profit shall be limited to an amount equal to five per cent per annum on the average amount of capital employed in the performance of the contract.

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

John Ritchie MacNicol

Conservative (1867-1942)

Mr. MacNICOL:

Will the minister be good enough to read that again?

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

Ian Alistair Mackenzie (Minister of National Defence)

Liberal

Mr. MACKENZIE (Vancouver):

Yes, with pleasure. The key clause provides that the maximum profit shall be limited to an amount equal to five per cent per annum of the average amount of capital employed in the performance of the contract. The bill then provides that a tax shall be levied on the contractor equivalent to the amount by which his net .profit exceeds the five per cent.. The actual amount of capital is defined as follows:

The actual cost less depreciation of the physical assets including plant, machinery, equipment and working capital which are employed in the performance of the contract.

Defence Purchasing Board

It is provided that where the assets were acquired for a consideration other than cash the board shall determine their fair cash value at the time of acquisition having regard to any sale or sales of such assets within five years of their acquisition or to any other circumstances which may indicate their fair cash value. It is also provided that in determining capital employed in the performance of a contract the board may take into account actual cash outlays incurred in the acquisition of patents, royalties, or licence to manufacture. The board is forbidden, however, to give any value to goodwill to the extent that such patents, royalties or licences are employed.

The bill declares that net profit shall be the aggregate amount received under the contract less such actual expenses, disbursements, allowances for depreciation and overhead charges as the board may find properly chargeable to the contract. It is stipulated, however, that interest on borrowed capital shall not be deducted. The board is given power to employ auditors, who shall be given access to all books and records of the contractor. The determination of the amount to be charged as a tax is to be made by the purchasing board, but there is provision in the act for appeal to the exchequer court. The collection of the tax will be made by the Minister of National Revenue under the machinery of the income tax division. The bill makes the logical provision that income which has already been taxed away under this act shall not be counted as income under the Income War Tax Act.

The scheme calls for a substantial staff. Provision is made for the transfer of officials from the Department of National Defence and any other departments. The rights of such employees under the Civil Service and Superannuation Acts are carefully preserved.

In my judgment this is the most drastic tax on arms and munitions profits ever imposed. It is stiffer than was the war measure of Lloyd George in England. It is a tax on the whole of the profits which exceed five per cent of working capital utilized, and hon. members will agree that five per cent is a relatively low return on any industrial undertaking. We are proposing to impose that tax now in our peace time expenditures in regard to our national preparedness.

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

Robert James Manion (Leader of the Official Opposition)

Conservative (1867-1942)

Mr. MANION:

Will it be imposed on the Bren gun contract? I ask for information.

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

Ian Alistair Mackenzie (Minister of National Defence)

Liberal

Mr. MACKENZIE (Vancouver):

That is a question of policy that I cannot answer at the moment.

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

John Ritchie MacNicol

Conservative (1867-1942)

Mr. MacNICOL:

May I ask a question? Mr. DUNNING: Wait until we get into committee.

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

John Ritchie MacNicol

Conservative (1867-1942)

Mr. MacNICOL:

I am interested in that. Has the department consulted those who would probably tender, as to whether they would accept five per cent? Five per cent might be set up by the interdepartmental committee but not accepted by those who might like to be called upon to tender.

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

Ian Alistair Mackenzie (Minister of National Defence)

Liberal

Mr. MACKENZIE (Vancouver):

I welcome the question of my genial friend. Immediately we hear the clamour; the first time this government has taken steps for the most drastic profit control, the suggestion comes from my hon. friend-

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

Robert James Manion (Leader of the Official Opposition)

Conservative (1867-1942)

Mr. MANION:

It is not a suggestion.

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

John Ritchie MacNicol

Conservative (1867-1942)

Mr. MacNICOL:

It is not a suggestion

but a question.

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

Ian Alistair Mackenzie (Minister of National Defence)

Liberal

Mr. MACKENZIE (Vancouver):

The

answer is, no.

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

John Ritchie MacNicol

Conservative (1867-1942)

Mr. MacNICOL:

Why did you not answer? You always try to drag politics into everything.

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

Walter Edward Foster (Speaker of the Senate)

Liberal

Mr. SPEAKER:

Order. The hon. member must take his seat.

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

John Ritchie MacNicol

Conservative (1867-1942)

Mr. MacNICOL:

The minister cannot

answer a question civilly.

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

Ian Alistair Mackenzie (Minister of National Defence)

Liberal

Mr. MACKENZIE (Vancouver):

I do

not desire to pursue any acrimonious argument at this stage.

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