Evidence of meeting #42 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

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

8:45 a.m.

NDP

The Chair David Christopherson

I now call this 42nd meeting of the Standing Committee on Public Accounts to order.

We have with us today Mr. Alexander, Parliamentary Secretary to the Minister of National Defence, who returns. Welcome.

Mr. Hawn, welcome back again.

We're also joined by Mr. John McKay, my former colleague on the national defence committee, who is the national defence critic for the Liberal Party. Welcome, sir.

And the Honourable Bob Rae, interim leader of the Liberal Party, is here with us also. Welcome, Mr. Rae.

With that, folks, today will be a regular two-hour meeting. The first hour will be with the Parliamentary Budget Officer. The second hour will be a resumption of our discussions and questions with the deputy ministers.

Are there any questions, comments, or concerns about the agenda as I've outlined it?

Very well, we'll move forward.

Mr. Page, welcome, sir. I would ask you to introduce your delegation and present your opening remarks. Then we'll begin our questions and comments, in rotation.

Colleagues, I want to remind you that with one hour we won't quite make the regular rotation. I'll leave it with you whether we will just exhaust it as far as we can or if some members have some creative idea they'd like to approach. Notwithstanding that, we'll begin the regular procedure. When we run out of time, we run out of time. Then we'll start the second hour of our meeting.

Agreed? Very good.

Mr. Page, you now have the floor, sir.

8:45 a.m.

Kevin Page Parliamentary Budget Officer, Library of Parliament

Thank you, Mr. Chair.

By way of introduction, I have Peter Weltman, one of the principal authors of our F-35 work. Tolga Yalkin, senior analyst, is another principal author of our F-35 work. Mr. Sahir Khan is the assistant parliamentary budget officer for expenditure and revenue analysis. And Dr. Mostafa Askari is our assistant parliamentary budget officer for economic and fiscal analysis.

Good morning, Mr. Chair, vice-chairs, and members of the committee.

Thank you for inviting me and my colleagues to speak to you today.

I have provided you with a deck which tracks my opening remarks. I would be happy to discuss the slides in greater detail.

Broadly speaking, I have three points to make. I will attempt to be as brief as possible. All points concern the PBO and the information provided to it or the information it has provided in relation to the proposed acquisition of the F-35 fighter jets.

First, over the last few weeks it seems that some confusion has surfaced as to whether or not the PBO included operating costs within its estimate provided to Parliament in March 2011. I'm here to reconfirm that it did; the PBO estimate includes operating costs.

When the PBO provides operating and support costs in its report, it tracks the language of the Department of National Defence costing guide, second edition, 2006. In chapter 2, page 2, that guide provides the following:

Operating costs include: personnel costs such as the activation of reserves, overtime cost of civilian employees, and the cost of any other personnel hired to provide service; rations, quarters, temporary duty, travel and transportation; variable and step variable operations and maintenance costs of equipment; total operating costs for facilities and materials consumed. The cost of capital assets purchased by the Department for the purpose of providing the service may also be included.

This definition of “operating costs” is consistent with the U.S. Department of Defense Cost Analysis Guidance and Procedures, published in December 1992. Furthermore, inclusion of operating costs within a life-cycle cost estimate is consistent with Treasury Board policy. Given this, it seems difficult to understand how there could have been any confusion as to whether or not the PBO included operating costs within its estimate.

Second, over the past few weeks, it has become clear that the Department of National Defence provided the PBO with figures that did not include all operating costs. The PBO understood that it had been provided with full life cycle costs from DND as required by the House of Commons Standing Committee on Finance in its November 1, 2010 motion. That motion required the provision of:

…All documents that outline acquisition costs, life cycle costs, and operational requirements associated with the F-35 program and prior programs (CF-18)…

In March 2011 the PBO provided Parliament with an independent life-cycle cost estimate for the F-35A. As part of that report, it compared figures provided by DND, obtained as a result of the motion, to its own estimates.

After publication of the PBO report, DND compared on its website, side by side, its figure of $5.7 billion and the PBO's figure of $14 billion, labelling both as operating and support costs. While the PBO's cost estimate was complete in this regard, it has since become evident that the government's public figures did not include all components of full life-cycle costs, as required by the House finance committee motion of March 2010.

Third, it might now be observed that the figures found in the Auditor General's report, confirmed as accurate by the Minister and Deputy Minister of the Department of National Defence, bring that department's life-cycle cost figures into the same order of magnitude as the PBO estimate. Furthermore, DND's figures and the PBO's estimates are in line with those found in the United States Department of Defense December 2011 Selected Acquisition Report, released last month.

Thank you again, for inviting us here today. We would be happy to take your questions.

8:50 a.m.

NDP

The Chair David Christopherson

Thank you, Mr. Page.

Colleagues, we'll now turn to questions and comments in rotation in the prescribed manner.

Mr. Saxton, you now have the floor.

8:50 a.m.

Conservative

Andrew Saxton North Vancouver, BC

Thank you, Mr. Chair.

Thank you, Mr. Page and colleagues, for coming here this morning.

My first question is to ask you to please describe the pricing model that you used in the first report on the aircraft, and also, please explain the limitations of this model.

8:50 a.m.

Parliamentary Budget Officer, Library of Parliament

Kevin Page

Thank you, sir, for the question.

The model that we used in the report, which is actually described in some detail—certainly the model and the assumptions—is what we would call a cost-estimating relationship model. We're historically extrapolating costs on fighter planes.

We used this extrapolation of 30 years of history of previous fighter planes, indexed, based on a per-kilogram kind of basis, to project forward an estimate of acquisition costs. Then we derived sustainment costs based off that estimate of acquisition costs, based on historical estimates for different cost categories.

There are benefits and certainly limitations for this model. First of all, when we look at these top-down models, sir, we see them as tests of reasonableness of where costs may be. So we were actually pleased to see today—or actually earlier than today, when we saw the release of the full life-cycle cost estimates from the Department of National Defence—that our numbers are roughly in line on a total life-cycle cost basis.

But again, you're using high-level data and you're extrapolating forward using broad-based assumptions. You're assuming that history will repeat itself. So there are always limitations in that sense.

Yes, I think these sorts of models should be complemented by much more detailed, bottom-up models to provide real confidence. We hope, going forward in that context, to work with the new secretariat, or they could conduct some of this work themselves. I think it would add a lot to this debate in Parliament.

8:55 a.m.

Conservative

Andrew Saxton North Vancouver, BC

Thank you.

Now, is another name for this costing model that you used parametric?

8:55 a.m.

Parliamentary Budget Officer, Library of Parliament

Kevin Page

Certainly we're using parameters. Again, we're creating an index based on history for these costs. There are parameters we're looking at that deal with performance, deal with design, and deal with weight. But yes, sir, I'm sorry, we're using parameters.

8:55 a.m.

Conservative

Andrew Saxton North Vancouver, BC

Is that a yes, or—

8:55 a.m.

Parliamentary Budget Officer, Library of Parliament

Kevin Page

It's a yes. I apologize, sir.

8:55 a.m.

Conservative

Andrew Saxton North Vancouver, BC

That's a yes. Okay, thank you.

Now, it's generally understood and generally agreed that this type of a costing model is used very early on in the development stage. So my question to you, Mr. Page, is why would you choose to use this type of costing model when the jet had in fact already been built and was already flying?

8:55 a.m.

Parliamentary Budget Officer, Library of Parliament

Kevin Page

That's a very good question, sir.

When we started this project in 2010, we went to different people to look at what our choices were with models. We were also looking at the history of this particular fighter plane from the early 1990s to present day. We looked at more bottom-up, more detailed parameter models where you literally cost component by component—the engine, the airframe, stealth components, etc.—and then we looked at these cost-estimating relationship models.

We actually invested in proprietary models in both cases. We chose this one, sir, primarily because it looked like history was repeating itself in this case. The costs were providing significant overruns. Even when we were doing our work, already just in the research and development phase, there was already 60% cost overruns. It looked, in that sense, like history was repeating itself, and we became comfortable with this high-level estimate.

I repeat, to your very good first question, these are high-level models, and they should be complemented by the work of DND and other officials, more bottom-up detailed models.

8:55 a.m.

Conservative

Andrew Saxton North Vancouver, BC

So the fact is that this is a high-level model; it's based on assumptions and the information that comes out is only as good as the information that goes in. Is that correct?

8:55 a.m.

Parliamentary Budget Officer, Library of Parliament

Kevin Page

I think that's well said. I would add to that, sir, that these types of models.... Everybody is using these models. It wasn't hard to find them in the U.K. and the United States. They're well used. In the SAR reports that we're using now, we provide an estimate actually of O&S. It's based on a CER parametric kind of model. So these models are well used. They have limitations.

8:55 a.m.

Conservative

Andrew Saxton North Vancouver, BC

Okay. From a technical perspective, can you explain how your costing model differs from that used by the Department of National Defence?

8:55 a.m.

Parliamentary Budget Officer, Library of Parliament

Kevin Page

Actually, Mr. Sahir Khan will take that question. Thank you, sir.