May 31, 1976

?

Some hon. Members:

Agreed.

Topic:   GOVERNMENT ORDERS
Subtopic:   CRIMINAL CODE
Sub-subtopic:   MEASURES RESPECTING PUNISHMENT FOR MURDER AND OTHER SERIOUS OFFENCES
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ROUTINE PROCEEDINGS

VETERANS AFFAIRS


Eleventh report of Standing Committee on Veterans Affairs, in both official languages-Mr. Parent. [Editor's Note: For text of above report, see today's Votes and Proceedings.]


PROCEEDINGS ON ADJOURNMENT MOTION


A motion to adjourn the House under Standing Order 40 deemed to have been moved.


SUPPLY AND SERVICES-LOCKHEED CONTRACT-DEPARTMENT'S KNOWLEDGE OF FINANCING DIFFICULTIES

PC

Ramon John Hnatyshyn (Deputy House Leader of the Official Opposition; Progressive Conservative Party Deputy House Leader)

Progressive Conservative

Mr. Ray Hnatyshyn (Saskatoon-Biggar):

Mr. Speaker, while the Minister of National Defence's (Mr. Richardson) handling of the LRPA purchase can hardly be termed competent, his colleagues in cabinet have shown no great skill either, except in attempting to put all the blame on the Minister of National Defence's shoulders.

In interviews over the Victoria Day weekend, and again in the House on Tuesday, May 25, and Friday, May 28, the Minister of Supply and Services (Mr. Goyer) let it be known that he did not think much of a process whereby multi-million dollar contracts were agreed to on the basis of nothing more than a verbal agreement between two individuals that financing would be available.

At the time the deal collapsed the Prime Minister (Mr. Trudeau) also indicated that the source of the problem was that cabinet had been told Lockheed could provide the money. Each conveniently forgets that not only did the Minister of National Defence believe in the verbal agreement, but the whole cabinet apparently believed in it too.

Adjournment Debate

Not one cabinet minister, least of all the Minister of Supply and Services, has said he looked for a written assurance before Lockheed was authorized on December 2 to start work on the contract.

In addition to all the blame for the verbal agreement being pushed on the Minister of National Defence and "a general" whom one assumes is General Allan, the manager of the LRPA project office, we also have the interesting spectacle of the Minister of Supply and Services saying he did not know the Department of National Defence was short of funds, nor that Lockheed had agreed to provide these funds when he authorized work to begin. I refer to Hansard of March 29 at page 12217. Later he said that officials in his department were not aware of these facts either which, given the relationship of the project office to the Department of Supply and Services, is surely asking too much of our credulity.

The story, as it has emerged so far, is that the project office negotiated a contract for 18 LRPA's. Though the project manager was General Allan from the Department of National Defence, the deputy project manager, with principal responsibility for negotiating the terms of the contract, was L. H. Stopforth, an official from the Department of Supply and Services. As Mr. Crutchlow, the assistant deputy minister of the Department of National Defence explained to the Standing Committee on External Affairs and National Defence on March 23, at page 33:30:

-the contract has been negotiated by the contract office. That office, as the minister has said, is led by General Allan as the project manager, but his deputy is a member of the Department of Supply and Services, a senior officer of that department. He is primarily responsible for the actual composition of the contract, along with his line branches that work in the DSS.

The project office negotiated with Lockheed a contract based on Lockheed's most cost-effective schedule and based also on the premise that there would be more money available in the defence budget. As it turned out this was a mistaken premise, for it was only in November that cabinet gave consideration to the long term budget, and it was only at that time it became apparent there would be shortfalls in 1976-77 and in the two subsequent years. I refer to General Allan's evidence to the standing committee on April 13, 1976, at page 35:9.

General Allan said that when it was realized there would be a shortfall "we" contacted both suppliers, Boeing and Lockheed, and asked whether they could finance the shortfall, and both replied in the affirmative. It was on this basis that cabinet documentation was prepared. I refer to General Allan's evidence to the standing committee on April 13, 1976, at page 35:7. When asked about this on Thursday, May 27, General Allan told the standing committee that he personally made the phone calls to Boeing and Lockheed, and the results of these conversations were reported to his deputy, Mr. Stopforth.

The whole organization of the project office makes it appear very unlikely that the Minister of Supply and Services did not know of the financial problems of the Department of National Defence. General Allan explained to the standing committee on May 13, as reported at page 39:6, that he was responsible to the deputy ministers of four departments; Defence, Supply and Services, Industry, Trade and Commerce, and DREE. He reported to the deputy ministers through a senior management board,

May 31, 1976

Adjournment Debate

which had representation at the assistant deputy minister level from the four departments concerned. This senior management board was chaired by Mr. Crutchlow, assistant deputy minister of the Department of National Defence.

When asked whether the Department of National Defence's lack of money and Lockheed's verbal commitment to provide financing were communicated to this management board, General Allan said:

Yes, the senior management board was aware of that, as were the cabinet and the Treasury Board, that we had a shortfall between the funds that were available to the Department of National Defence and the cash flow that was required in the contract which had been negotiated in this case with Lockheed, in our judgment.

When asked whether cabinet also was aware of Lockheed's verbal commitment, General Allan said:

Yes, our judgment in the recommendations we made up the line was that this we could negotiate with Lockheed to solve this shortfall in the cash between what was available and what was required in the contract.

On Thursday, May 27, General Allan was even more specific about who knew about the shortfall and the verbal promise that financing would be available. He said:

The phone calls to both Boeing and Lockheed were made by myself. The results of those conversations were reported back into the project office to my deputy. The gist of the conversations were put in the submission to cabinet; they were put in a submission to Treasury Board; the cabinet submission was dated November 14 and was considered by cabinet on November 27; the Treasury Board submission was briefed on the basis of a draft document on November 27; the formal Treasury Board submission for the program was on December 1. The shortfall was pointed out in all these documents. There was a briefing prepared for the Department of Supply and Services on November 30 to ... my understanding was that the Deputy Minister of Supply and Services briefed the Minister on December 1.

Topic:   PROCEEDINGS ON ADJOURNMENT MOTION
Subtopic:   SUPPLY AND SERVICES-LOCKHEED CONTRACT-DEPARTMENT'S KNOWLEDGE OF FINANCING DIFFICULTIES
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PC

Donald W. Munro

Progressive Conservative

Mr. Munro:

Including the shortfall.

Gen. Allan: Including the shortfall.

The Minister of National Defence intervened here to support General Allan. He said:

To confirm what Brigadier General Allan has said the fact that cabinet approved interest payments and which as I said are in the blue book, indicates that cabinet knew there was a shortfall. If they were not going to finance anything then they would not need interest payments. So, I am just confirming what General Allan has said. This was known to the cabinet and certainly known to any minister who was at cabinet.

This comment is interesting in view of the Minister of Supply and Services' repeated statements that he negotiated on the assumption that since DND placed the order it had the money available. Though one does not know whether the Minister of Supply and Services was actually at the cabinet meeting on November 27, is it not very unusual that he was not informed of the results of that meeting, either by a colleague, or through circulation of the minutes? In other words, even if one ignores General Allan's testimony that officials from DSS, including Mr. Stopforth and the Deputy minister, knew these facts, how was it possible for the Minister of Supply and Services not to know that DND was short of funds?

General Allan's comments bring into sharper focus the contrast between what DND says, and what DSS says. Given the organization of the project office, one would assume that the whole project team, not just those members from DND, knew about the shortage of funds, and General Allan has indicated he did tell Mr. Stopforth.

Certainly Mr. Stopforth knew about DND's shortfall in the previous year since he wrote the letters to Mr. Heppe of Lockheed inquiring about alternatives, and there appears to be no reason why he would not have been told about the 1976-77 shortfall and the attempts to overcome it.

However, the Minister of Supply and Services claims that Mr. Stopforth did not know about the shortage of funds for 1976-77 and Lockheed's verbal assurance that it could provide financing; he told the House on Tuesday, May 25, in answer to my question, that he did not know whether the information had been deliberately kept from Mr. Stopforth but,

... be that as it may, the representative of my department on the management committee of that project was not advised of the possibility of that financial arrangement.

The Minister of Supply and Services did not answer the second part of my question, which is whether his deputy minister knew of the shortfall problem. Again because of the structure of the project office, and General Allan's testimony, it seems to me that the deputy minister of Supply and Services must have known.

The misunderstanding with Lockheed, as the Minister of National Defence likes to call it, arose in the period from December 2 to December 22, when Lockheed told General Allan that it could not provide the financing after all.

Topic:   PROCEEDINGS ON ADJOURNMENT MOTION
Subtopic:   SUPPLY AND SERVICES-LOCKHEED CONTRACT-DEPARTMENT'S KNOWLEDGE OF FINANCING DIFFICULTIES
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LIB

Gérald Laniel (Deputy Speaker and Chair of Committees of the Whole of the House of Commons)

Liberal

Mr. Deputy Speaker:

Order, please, I regret having to interrupt the hon. member but the time allotted to him has expired.

Topic:   PROCEEDINGS ON ADJOURNMENT MOTION
Subtopic:   SUPPLY AND SERVICES-LOCKHEED CONTRACT-DEPARTMENT'S KNOWLEDGE OF FINANCING DIFFICULTIES
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LIB

Walter Bernard Smith (Parliamentary Secretary to the Minister of Supply and Services)

Liberal

Mr. Walter Smith (Parliamentary Secretary to Minister of Supply and Services):

Mr. Speaker, the LRPA project has a significant involvement for four departments: DND which as the user of the defence supplies is responsible for funding the requirement and defining the specification, DSS which as the procurement authority in the government negotiates and administers the contract, ITC which determines and evaluates Canadian industrial benefits, and DREE which applies its concern to realize opportunities for regional economic development that might flow from a major procurement such as the LRPA. Accordingly, because of the multi-departmental interests a project office was established to ensure good management among the four departments directly involved. Staff from the concerned departments were co-located in one office to do the job in a unified and effective manner, taking into account the responsibilities of their respective department. Because DND has the main involvement and interest, the project leader was selected from that department.

The organization of the project office reflected the functional interests of the four departments and contained the following elements: operational; technical; logistical; contractual; industrial development; regional economic development. These six elements worked together in the one office to administer the project.

The LRPA project had three phases to it. In Phase I starting November 1, 1972, five contractors submitted proposals for an Argus replacement. This phase was unfunded. Phase II commenced on May 6, 1974, but only included two, not five, contractors. During this phase Boeing and Lockheed were funded in the amounts of $5.5 million and $5.7

May 31, 1976

million respectively to define the LRPA requirements. This phase was completed in November, 1975. Phase III covering the design, development, production, test and delivery by the successful bidder was to commence when a definitive contract was placed.

DND has always been responsible for funding all contract demands or requisitions sent to DSS or its predecessors for procurement of defence goods and services. This responsibility lies within their internal delegation of authority for program funding. It is not or never has been a DSS responsibility.

The LRPA project was duly approved by Treasury Board and cabinet and was ready to proceed to the contract stage. The Department of National Defence was responsible for providing the necessary funds out of their capital budget. Because of a non-recorded conversation which the project manager had with an official of Lockheed, it was assumed that DND funding would be supplemented by some financing from Lockheed.

As things developed, this possibility did not materialize, and this is why Lockheed proceeded to attempt to interest a Canadian bank consortium to make the funds available through the assignment of the contract.

Officials of DND are responsible for managing their capital budget and this was entirely their responsibility. The question of a shortfall of cash to be financed by Lockheed did not become known to the minister and to the senior management of DSS until January.

The reason for issuing a telex on December 2 was to preserve the price, deliveries, and industrial off-set benefits contained in the Lockheed offer before the offer expired on December 2, 1975. This is normal procedure until all the clauses of the contract have been finally developed in legal terms and are agreed fully in detail by both parties. Up to the time the financing problem arose there was reasonable assumption that the contract could be signed in the middle of January.

As it turned out, considerable delay was involved in the negotiations between Lockheed and the Canadian banks as to the possibility of financing and, while these negotiations were going on, it was essential to protect the price, deliveries and off-set conditions on a week to week basis.

Eventually, an option agreement was signed with Lockheed when the possibility of Canadian bank financing appeared reasonably certain.

Topic:   PROCEEDINGS ON ADJOURNMENT MOTION
Subtopic:   SUPPLY AND SERVICES-LOCKHEED CONTRACT-DEPARTMENT'S KNOWLEDGE OF FINANCING DIFFICULTIES
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LIB

Gérald Laniel (Deputy Speaker and Chair of Committees of the Whole of the House of Commons)

Liberal

Mr. Deputy Speaker:

Order, please. I regret to interrupt the hon. member. His speech is very interesting, but I have to interrupt him.

Topic:   PROCEEDINGS ON ADJOURNMENT MOTION
Subtopic:   SUPPLY AND SERVICES-LOCKHEED CONTRACT-DEPARTMENT'S KNOWLEDGE OF FINANCING DIFFICULTIES
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LIB

Walter Bernard Smith (Parliamentary Secretary to the Minister of Supply and Services)

Liberal

Mr. Smith (Saint-Jean):

I have only about 15 seconds left.

Topic:   PROCEEDINGS ON ADJOURNMENT MOTION
Subtopic:   SUPPLY AND SERVICES-LOCKHEED CONTRACT-DEPARTMENT'S KNOWLEDGE OF FINANCING DIFFICULTIES
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?

Some hon. Members:

Let him finish.

Topic:   PROCEEDINGS ON ADJOURNMENT MOTION
Subtopic:   SUPPLY AND SERVICES-LOCKHEED CONTRACT-DEPARTMENT'S KNOWLEDGE OF FINANCING DIFFICULTIES
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LIB

Gérald Laniel (Deputy Speaker and Chair of Committees of the Whole of the House of Commons)

Liberal

Mr. Deputy Speaker:

Fifteen seconds are long

sometimes.

Topic:   PROCEEDINGS ON ADJOURNMENT MOTION
Subtopic:   SUPPLY AND SERVICES-LOCKHEED CONTRACT-DEPARTMENT'S KNOWLEDGE OF FINANCING DIFFICULTIES
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LIB

Walter Bernard Smith (Parliamentary Secretary to the Minister of Supply and Services)

Liberal

Mr. Smith (Saint-Jean):

This is the letter of agreement the minister tabled on May 25 in the House, and I am sure this provides all the necessary information as to the undertakings of the government and the specific limitation of $16 million which was contained in this agreement.

Adjournment Debate

As to the specific point as to whether the minister was aware of the possibility that Lockheed had agreed to finance the shortage of cash in the early phase of the project, the minister has previously replied to this. This afternoon he also emphasized that his department was not responsible for financing.

Topic:   PROCEEDINGS ON ADJOURNMENT MOTION
Subtopic:   SUPPLY AND SERVICES-LOCKHEED CONTRACT-DEPARTMENT'S KNOWLEDGE OF FINANCING DIFFICULTIES
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TRANSPORT-INCREASE IN CONTAINER FREIGHT RATES- REQUEST FOR REVIEW BY TRANSPORT COMMISSION OR GOVERNMENT INTERVENTION

PC

J. Michael Forrestall

Progressive Conservative

Mr. J. M. Forrestall (Dartmouth-Halifax East):

Mr. Speaker, that was an awful lot of balderdash we just listened to, but my concern is the movement of container traffic out of the port of Halifax and Saint John into central Canada, and specifically the proposed freight rate increases on containers to be effective on July 1.

Within the United Kingdom and the continental area of northern Europe there is a freight conference of lines serving the east coast Canadian ports which permits shippers to charge the same ocean freight rates as those serving the ports of Montreal and Toronto directly. In other words, it does not cost any more to ship by way of Halifax than it does by way of Montreal or Toronto into those particular destinations.

This saving has been dependent upon the cost charged to the carriers by the CN system, which in fact is the captive shipper. Without getting into the difficulties which lay behind the questions we asked-the disastrous rate wars in the North Atlantic in 1972 and 1973, the resolution of these problems in 1974 by the introduction of agreements between the Canadian and American lines which permitted cargo to move freely to and from Canada by way of U.S. ports provided Canadian rates were charged, and again with respect to American lines which were permitted to absorb the inland trucking costs from Montreal and Toronto and their base ports in the United States-in spite of this the cargoes continued to flow by way of the United States for a substantial period of time. Indeed we are now looking at some 60,000 tons of cargo going by way of U.S. ports, and in a down period in the movement of containers in the North Atlantic conference we notice that while Canada's total number-and we will use the units, the 20, 35 and 40 foot units-has been down in the period of the last couple of years, probably reflecting trends in world trade, we notice that movement through U.S. ports has not been down.

There is a reason for this, and the reason, of course, lies in the fears that we on the east coast have with respect to the increase in the cost of moving containers, an increase of 7 per cent in the cost of moving containers from Halifax and Saint John into Montreal and Toronto. This increase has been imposed at a point in time when no similar increase is being imposed upon other movers.

Of course any mover of freight has to absorb the total cost of the particular piece of freight permitted under the rules of the North Atlantic Conference with no opportunity for movers on the east coast, for example, to absorb the 7 per cent increase in cost which must perforce come out of their ability to earn dollars. All the 7 per cent increase will do, particularly with respect to the 40 foot containers moving from Saint John and Halifax, is place

May 31, 1976

Adjournment Debate

them in a competitive position with the ports of Montreal and Toronto through the Port of New York which can in turn offer about a 1'A or 3 VS day advantage in time over the Port of Halifax. Time being dollars with respect to the movement of cargo, it will not go any other route than through the Port of New York. This is what we are afraid of if the government permits Canadian National to impose the additional 7 per cent.

The problem is compounded by the fact that it is the United States east coast ports that traffic out of Saint John and Halifax will move and not other east Canadian ports. There would be no advantage for large ships that use the ports of Halifax and Saint John to try to get into Montreal or Toronto because they would lose the advantage of the large size containers, which is part of the way that entrepreneurs moving containers in world traffic find the margin for profit.

I should like to see the government review this situation from the point of view of the movement of these containers through Canadian ports. For example, Dart, ACL, Hapag Lloyd or any other line are not in a position to take their customers and get an increase in rates. They cannot do that under the terms of the conference until some time next March or April. It is now the end of May and the increase faces us on July 1. If we are to ask the shippers of 40 foot containers from Halifax to absorb 7 per cent and take into consideration the fact that Dart Lines own about 60 per cent of the port facility at Port Elizabeth in New Jersey, they are not going to move through Halifax. They are going to move their 40 foot containers through their own ports into Montreal and Toronto. They can use the single rate based upon trail of usage.

We would like to get some kind of deferral of any increase until such time as the shipper is in a position to go to his customer and get the appropriate increase to absorb the increase in rail cost. Short of that it would only be fair if the government were to consider an increase in cost to those using the Port of Montreal or the Port of Toronto with respect to the movement of containers and the Con-rail service from New York into either Toronto or Montreal. Essentially those are the two points I wished to make.

It is unfair to the people of Halifax and Saint John to put shippers using the ports in the position in which they must absorb out of their own profits the full 7 per cent when a similar amount is not imposed on those using other ports directly and CN is not imposing such increases on movements from New York to Toronto and Montreal.

Topic:   PROCEEDINGS ON ADJOURNMENT MOTION
Subtopic:   TRANSPORT-INCREASE IN CONTAINER FREIGHT RATES- REQUEST FOR REVIEW BY TRANSPORT COMMISSION OR GOVERNMENT INTERVENTION
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LIB

Ralph Goodale (Parliamentary Secretary to the Minister of Transport)

Liberal

Mr. Ralph E. Goodale (Parliamentary Secretary to Minister of Transport):

Mr. Speaker, I thank the hon. member for Dartmouth-Halifax East (Mr. Forrestall) for the analysis of the freight rate situation which he placed on the record of the House this evening. I assure him that I will make certain that all the factors he brought forward this evening will be brought to the attention of the responsible authorities both within the Department of Transport and outside, and I hope they will conduct a full analysis of the important concerns he raised this evening.

Originally, when my hon. friend addressed his question to me in the minister's absence during the question period,

it had to do with the impact, if any, which the anti-inflation program might have on the specific freight rate increases to which he alluded. Essentially the hon. member asked me at that time whether the government intends to ensure that the Canadian Transport Commission will review the increase in container freight rates out of the ports of Halifax and Saint John into Montreal. The short answer is, yes.

I remind the hon. member that under the anti-inflation legislation the Canadian Transport Commission has responsibility for monitoring increases in freight, passenger, and express rates, and the increases in revenues to be derived therefrom. It is carrying out those duties which, among other things, require it to report to the governor in council where, in the opinion of the Commission, an action on the part of the railways is likely to lead to a breach of the guidelines.

I should like to confirm to my hon. friend that the commission is monitoring the recent increase in the container freight rates from Halifax and Saint John to Montreal and Toronto and has called on the railways to furnish it with all the information it requires in the pursuit of its anti-inflation duties.

As I said earlier, I will ensure that the important considerations my hon. friend described to the House are brought to the attention of responsible officials in order that his concerns may be alleviated.

Topic:   PROCEEDINGS ON ADJOURNMENT MOTION
Subtopic:   TRANSPORT-INCREASE IN CONTAINER FREIGHT RATES- REQUEST FOR REVIEW BY TRANSPORT COMMISSION OR GOVERNMENT INTERVENTION
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AGRICULTURE-NUMBER OF CATTLE AND SHEEP DESTROYED UNDER BLUE TONGUE CONTROL PROGRAM

May 31, 1976