Evidence of meeting #41 for Public Accounts in the 41st Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was costs.

A recording is available from Parliament.

On the agenda

MPs speaking

Also speaking

  • Robert Fonberg  Deputy Minister, Department of National Defence
  • André Deschamps  Commander, Royal Canadian Air Force, Department of National Defence
  • François Guimont  Deputy Minister, Deputy Receiver General for Canada, Department of Public Works and Government Services
  • Simon Kennedy  Senior Associate Deputy Minister, Department of Industry
  • Michelle d'Auray  Secretary of the Treasury Board of Canada, Treasury Board Secretariat
  • Kevin Lindsey  Assistant Deputy Minister, Chief Financial Officer, Finance and Corporate Services, Department of National Defence
  • Dan Ross  Assistant Deputy Minister, Materiel, Department of National Defence
  • Tom Ring  Assistant Deputy Minister, Acquisitions Branch, Department of Public Works and Government Services

8:55 a.m.

Deputy Minister, Department of National Defence

Robert Fonberg

I'm trying to balance between speed and—

8:55 a.m.

NDP

The Chair David Christopherson

I understand, and we appreciate those efforts.

8:55 a.m.

Deputy Minister, Department of National Defence

Robert Fonberg

Would the member like me to dial this back at all? Do you want me to go back to something?

8:55 a.m.

NDP

The Chair David Christopherson

No, no.

8:55 a.m.

Deputy Minister, Department of National Defence

Robert Fonberg

Fine.

On the matter of costing, Mr. Chairman, there are three key components: acquisition, sustainment, and operating. For the F-35 the acquisition envelope has been set at $9 billion. Sustainment and operating costs are estimated at $5.7 billion and $10 billion respectively for 20 years, beginning when the aircraft would be acquired later in this decade.

I would note that the approach we took for costing the F-35 is exactly the same approach—and the same 20-year timeframe—that has been taken with all our air asset procurements going back at least to 2004: for the maritime helicopter project, the Chinooks, the Hercules J models, and the new C–17 Globemasters.

In each case, announcements and communications focused only on the costs of acquisition and sustainment. Never did we talk about operating costs, Mr. Chairman.

On operating costs, the Vice Chief of the Defence Staff oversees a rigorous business planning process every year to ensure that the departmental costs of operating all of our fleets are affordable within our base budget.

The operating costs for the next generation fighter program would be included in the department's base operating budget—as are the operating costs of all other fleets—and debated in Parliament annually as part of the estimates process.

For decision-making purposes, we have assumed that the operating costs of the F-35s will be similar to those being incurred in our base budget for operating the CF-18 fleet.

Our approach to costing has never been characterized as “full-life cycle”. Our approach has been consistent and compliant with Treasury Board policy and guidance.

In this regard, in posting a comparison of the department's estimates and the Parliamentary Budget Officer's estimates on our website, we used the same average price per aircraft as all nine partners are using and have received from the joint project office, and, on a good-faith basis, we presented our estimates on the understanding that the Parliamentary Budget Officer did not include operating costs in his calculations.

As stated in the chapter, Mr. Chairman, we accept the Auditor General's recommendation on life-cycle costs, and within the context of the seven-point plan set out by the government, we will report annually on cost estimates through the new national fighter secretariat.

I will now turn my remaining time over to the Commander of the Royal Canadian Air Force, Lieutenant-General André Deschamps.

8:55 a.m.

Lieutenant-General André Deschamps Commander, Royal Canadian Air Force, Department of National Defence

Thank you, Deputy.

Mr. Chairman, members of the committee, ladies and gentlemen, bonjour. Thank you for this opportunity to contribute to this important discussion on replacing Canada's fighter jets.

As mentioned in the Canada First Defence Strategy, the Canadian Forces need to replace our aging CF-18 fleet with new fighter aircraft to help our military personnel defend our sovereignty, to remain a credible partner in the defence of North America and to give Canada efficient and modern air capacity for international operations.

Following the announcement of that strategy in 2008, we analyzed the current and future operating environments and associated threats. We assessed current and emerging technologies and derived capability gaps that would be a reality in the 2020 era and for the follow-on 30 years. What became clear to us is that many nations are actively engaged in developing and fielding advanced technologies that will seriously challenge current fighter capabilities.

We also expect to see these advanced technologies proliferate in ways that will be difficult to anticipate and control. This is what formed the basis of our operational requirements for the next-generation fighter aircraft. Requirements focused on mission success and aircrew safety. This analysis led to a statement of operational requirements, including mandatory capabilities that clearly pointed toward a fifth-generation fighter.

The bottom line is that tomorrow's operating environment will require stealth, the ability to sense and process vast quantities of information in a very short time, and the ability to operate with others, starting with our closest allies, anywhere around the globe.

Based on our analysis and my responsibilities as the commander of the RCAF, I recommended the only aircraft available that could effectively deliver operational success and optimize the safety of our crews.

While the next generation fighter procurement process continues, I am going to provide the National Fighter Aircraft Procurement Secretariat with the information it requires to assume its coordination and oversight responsibilities. With my staff, I am confident of the successful transition to the next generation fighter aircraft, while discharging my accountability to deliver the operational capacity that our country requires.

Thank you, Mr. Chair.

May 1st, 2012 / 9 a.m.

François Guimont Deputy Minister, Deputy Receiver General for Canada, Department of Public Works and Government Services

Good morning, Mr. Chair.

I am François Guimont, the Deputy Minister of the Department of Public Works and Government Services Canada. I would also like to introduce Mr. Tom Ring, who is the Assistant Deputy Minister for Acquisitions in my department.

Thank you for the opportunity to appear here today to explain the role of my department in the replacement of Canada's fighter jets. With respect to military procurement, my department is responsible for the acquisition of defence supplies for the Department of National Defence in support of their responsibilities.

Our colleagues in the Department of National Defence are the program and technical authority and as such have duties that include, for example, the definition of operational requirements, the preparation of technical evaluations, and the responsibility for associated budgets.

With regard to PWGSC, the Defence Production Act provides the minister of Public Works and Government Services with the exclusive authority to buy or otherwise acquire defence supplies required by the Department of National Defence. As such, the department is the contracting or acquiring authority for these types of acquisitions.

For ease of reference, the respective responsibilities of the technical authority as outlined by the Auditor General are appended to my speaking points today.

I would like to address the issue of due diligence with specific reference to my department's role in the replacement of Canada's fighter jets.

In that respect, we engaged in discussions with DND, the Technical Authority, to understand the high level mandatory capabilities. We consulted on the high level mandatory capabilities with the technical experts at DND, to determine if a competitive process could be conducted. These mandatory capabilities shaped the resulting procurement strategy. If more than one product can meet the mandatory requirements, then a competitive process should be held.

We considered the DND market analysis. Moreover, we met with another potential aircraft manufacturer to discuss its ability to meet mandatory capabilities set forth by the technical authority. We determined that the procurement strategy was in accordance with the Treasury Board's contracting policy and that this acquisition met the requirement of paragraph 6(d) of the government contracts regulations for a sole-source acquisition. In accordance with our department's supply manual, we requested written confirmation from DND, the technical authority, that the F-35 is the only aircraft available to Canada that has fifth-generation capabilities and that meets the high-level mandatory capabilities of the Royal Canadian Air Force.

Mr. Chair, it is on that basis that Public Works and Government Services feels that it exercised due diligence commensurate with the current stage of the project. In fact, in his appearance here last week, the Auditor General noted that we did exercise some due diligence. However, he deemed it insufficient.

While no recommendation was directed at PWGSC, we use every opportunity to continually improve our due diligence actions for complex and unique procurements.

The government action plan announced on April 3 clearly frames how due diligence will be applied as we move forward with replacing Canada's fighter jets. These seven action points identify the respective roles of key departments, including my department. A secretariat will be led by Public Works and will ensure the delivery of the government's seven-point action plan.

The terms of reference governing the committee structure are being drafted, and we are also active in staffing and defining priority tasks for actions.

The secretariat will focus on the following outcomes: first, governance and coordination through collaborative arrangements with the key departments involved; second, strengthened due diligence through increased oversight and third party involvement; finally, openness and transparency through clear articulation of timelines, expectations and timely communications.

The deputy minister governance committee, which will be a key component of a new governance structure, recently met and began its work in support of the action plan. Public Works and Government Services Canada is committed to playing a lead role in both coordination and oversight of the process in a manner that meets the expectations of Parliament and citizens.

Thank you.

I will be happy to reply to your questions.

9:05 a.m.

Simon Kennedy Senior Associate Deputy Minister, Department of Industry

Mr. Chair, I will be very brief in my remarks.

9:05 a.m.

NDP

The Chair David Christopherson

Thank you.

9:05 a.m.

Senior Associate Deputy Minister, Department of Industry

Simon Kennedy

Good morning, my name is Simon Kennedy and I am the Senior Associate Deputy MInister at Industry Canada. Thank you for inviting me to speak here today.

Industry Canada's mandate is to help make Canadian industry more productive and competitive in the global economy. This includes leveraging major investments in military equipment to encourage long-term industrial development and significant economic activity in Canada.

The F-35—or joint strike fighter—program is unique, as is its approach to industrial participation. All JSF partner countries agreed to forgo offset programs, like our industrial and regional benefits policy, which would normally be applied to military procurement. Instead, work on the JSF program is awarded on a best value basis, meaning that companies are given the opportunity to compete for F-35 work.

While we forgo the guaranteed minimum amount of economic activity that would come with an IRB approach, the industrial participation model being pursued through the F-35 consortium offers other important benefits for Canadian companies.

First, these companies have the opportunity to be involved in the early development of a very advanced fighter aircraft, allowing them to develop cutting-edge technologies that can be applied elsewhere in their businesses. Second, these companies can bid on contracts involving the production of a global fleet of over 3,000 partner aircraft, not just those planes that are directly associated with Canada's purchase. Finally, Canadian firms that are involved in the production of the JSF are well positioned to maintain and repair the equipment they make over the decades to come.

Because of the unique nature of this program, Industry Canada has been actively engaged in educating Canadian companies about the program and in helping them position themselves to succeed. We've been doing so for more than a decade through the development and production phases of the program and, increasingly, the sustainment phase.

Canadian companies have done well. Since Canada joined the joint strike fighter program in 1997, 70 Canadian companies have received $435 million U.S. in contracts. Participation in the JSF program provides the opportunity to compete for billions more over the program's lifetime.

Canadian companies are well positioned to succeed. Canada has the fifth-largest aerospace sector in the world and the third largest within the JSF partnership. The globally competitive nature of our industry is a strong base from which to pursue opportunities going forward.

I would be pleased to answer any questions you might have regarding Industry Canada's role in this program.

Thank you.

9:05 a.m.

NDP

The Chair David Christopherson

Thank you.

Ms. d'Auray, you have the floor.

9:05 a.m.

Michelle d'Auray Secretary of the Treasury Board of Canada, Treasury Board Secretariat

Mr. Chair, members of the committee, good morning. I am Michelle d'Auray, the Secretary of the Treasury Board.

The Treasury Board and its secretariat set policies to guide departments in a wide range of management and resourcing activities, including the acquisition of assets. The Treasury Board is also the committee of cabinet which provides ministers with expenditure and contracting authority, when an acquisition process reaches that stage. As a point of information, the F-35 project has not yet reached that stage.

Our guidance on costing and the elements to be considered in estimating costs are predicated on the purpose for the costing and the decisions for which the information will be used.

For example, if an entirely new program is being considered, relevant or appropriate costs would include: personnel and benefits; accommodation; grant or contribution funds, if that is indeed the nature of the program; administration or overhead, which includes a range of activities such as communications, legal services, financial and human resources services, etc.; and any asset or materiel required to deliver the program.

For the acquisition of an asset, relevant or appropriate life-cycle costs would include the purchase price of the asset and other one-time costs directly related to its acquisition, such as the project office to manage the process. They would also include the delivery and set-up required and any consequential costs related to maintenance, replacement, refit, and repair to keep the asset operational throughout its useful life.

Where relevant to the acquisition itself, and only in those situations, personnel and training costs would also be factored. In instances where such costs are not incremental and are covered by an existing program for which the acquisition is made, they can be provided for information but are not directly related to the acquisition.

But as our policies also indicate, costs are one factor among many that are considered in any major decision. The ultimate goal is to achieve an optimal balance of overall benefits to the crown and the Canadian people in relation to the objective sought and results to be achieved.

In the context of the audit on replacing Canada's fighter jets, as the Auditor General has indicated in his report and in testimony before this committee, the nature of the multi-country development program, the assessment of the requirements for Canada's defence and security, the setting of a budget for the replacement of a fighter jet capability, and the opportunities provided for Canadian companies are all unique elements that do not easily lend themselves to the normal sequencing of an acquisition process or the usual application of our set of policies and practices. In recognizing this, and in accepting the Auditor General's recommendation, the government has given us a clear direction on the way forward.

As part of the seven-point action plan issued by the government on April 3, 2012, TBS will commission an independent review of DND's acquisition and sustainment project assumptions and potential costs for the F-35, which will be made public. Prior to project approval, TBS will also review the acquisition and sustainment costs and ensure full compliance with Treasury Board policies.

I would be pleased to answer any questions.

Thank you, Mr. Chair.

9:10 a.m.

NDP

The Chair David Christopherson

Merci. Thank you.

Are there any other submissions? No. Okay.

Before we go on rotation, I have a couple of points. One is a welcome to Mr. Alexander and Mr. Hawn, who are both returning from the previous meeting and have interest and involvement in this file. We welcome them back.

I remind colleagues that non-members are eligible to speak, providing their caucus colleagues are prepared to give their time to them. I hope there will be no problems moving in and out of that process.

If I could mention this, deputies will know that when they come to the public accounts committee for a hearing, there is an expectation that they will provide a departmental action plan.

Mr. Fonberg, you made reference to a seven-point plan, but I don't actually see a plan tabled. Is there a particular reason why, sir?

9:10 a.m.

Deputy Minister, Department of National Defence

Robert Fonberg

No, Mr. Chairman, we're working on the precise approach. We did agree with the Auditor General's recommendations on life-cycle costing. We are working with the Treasury Board and the Comptroller General on the precise methodology, which is work carried over from last year, and we thought we would be better to complete that work before we tabled the plan.

9:10 a.m.

NDP

The Chair David Christopherson

It's not necessarily so. The reason this rule was implemented—I was here when this rule was brought in—was to prevent exactly what you're saying, because by the time we get the action plan, we're pretty disjointed from the focus of the discussion.

I can appreciate that it may not be complete, but I would suggest in the future, sir, and other deputies, that you at least bring what you've done. It's almost like a teacher with homework. If you're not done, at least bring in something to show me you've made some effort, but don't show up with nothing.

So in the future, please, all deputies, that is a respectful request and requirement from this committee when you come before a hearing.

I'd ask you to honour that, sir.