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 cost.

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

9:15 a.m.

Parliamentary Budget Officer, Library of Parliament

Kevin Page

Sir, we have certainly read reports that there are benefits with respect to the industrial benefits program. We really saw this as beyond our report, so we haven't commented on it in our report.

9:15 a.m.

Conservative

Daryl Kramp Prince Edward—Hastings, ON

Okay, but I think it is important, because it was noted in the Auditor General's report, which of course you'd be oh so familiar with, in which he lauded, of course, the success of the program in acquiring industrial benefits.

Would you agree with the Auditor General's assessment, or do you find some difficulty with it?

9:15 a.m.

Parliamentary Budget Officer, Library of Parliament

Kevin Page

Sir, we don't really have a comment on that. I'm sure that Industry Canada officials are much better placed to comment on that program.

9:15 a.m.

Conservative

Daryl Kramp Prince Edward—Hastings, ON

Okay, but my suggestion would be that it's very important to investigate cost—there's no doubt about that—but it's also imperative that we base cost-benefit analysis on this, and that's why I think it would be reasonable to expect your department at some point....

Given the fact that we have the fifth-largest aerospace industry in the world, the third-largest aerospace industry among all of our allies, do you not think it would be reasonable to expect that there might be significant potential long-term benefits to Canada?

9:15 a.m.

Parliamentary Budget Officer, Library of Parliament

Kevin Page

Sir, I think it's reasonable that there could be significant long-term benefits for Canada, but again, it was outside the scope of our report.

9:15 a.m.

Conservative

Daryl Kramp Prince Edward—Hastings, ON

Okay. So then you've never had an opportunity to talk to any of our industry partners across the country?

9:15 a.m.

Parliamentary Budget Officer, Library of Parliament

Kevin Page

Actually, sir, we have read reports on what these benefits could be, and at some point—there is some context in the paper we provided—we thought this would eventually be compared with the total life cycle cost estimate. Our job, we thought, was to look at one side of that equation, to look at the life cycle cost-benefits and get good estimates of what these benefits are, then provide an overall comparison to Parliament. But we focused on only one side. If I need to apologize for that, I apologize.

9:15 a.m.

Conservative

Daryl Kramp Prince Edward—Hastings, ON

No, there's no apology necessary; we're just trying to get some clarification. In any business, and of course in the business of running the country, there are expenses and there is income. I'm certainly not going to suggest that we extrapolate the success we've had today in the industrial benefits across the entire acquisition and suggest that we're going to make money on it; far from it. But it is my understanding that Parliament has budgeted approximately $700 million during the developmental stage, they have spent something in the neighbourhood of $300 million in the developmental stage, and in industrial benefits already we have in excess of $435 million.

So there have been some tremendous successes, particularly due to the fact that we have a vibrant aerospace industry that quite frankly performs a very significant role in our economy. We're very proud of that, and obviously we don't believe it should be minimized to any particular extent, particularly when we look at an acquisition cost and at our being a participating partner in this entire program, not only as one of the originating partners.

I think you can see where I'm going on this. When the U.S. Air Force alone is going to build 2,400 of these just for their use alone, there can be some significant benefits down the road to Canada.

So I understand that cost is very important, but I would suggest very strongly, sir, that I think.... I'm not going to suggest that you do another study now, but what I am suggesting is that we could certainly be mindful of this story. I think this is a story that Canadians should hear. At that point.... I'm hopeful that at some point, you or your department or officials will start to ascertain the regional benefits from this from across the country.

I know we can ask industry for that, and they'll give us that information, but for security purposes, right now a lot of these companies cannot even be identified; I think we can all understand that. But you have the privilege, sir, and the means with which to do some preliminary investigation, because of your security clearance. Have you done that?

9:20 a.m.

Parliamentary Budget Officer, Library of Parliament

Kevin Page

Sir, no, and it was never our intention to minimize this. I thought we were quite clear in the report we released in 2010 that we saw this as beyond the scope of our paper, but we did highlight it as being very important.

9:20 a.m.

Conservative

Daryl Kramp Prince Edward—Hastings, ON

Okay. Thank you very much.

9:20 a.m.

NDP

The Chair David Christopherson

Thank you, Mr. Kramp.

Next is Mr. McKay. You now have the floor, sir.

May 3rd, 2012 / 9:20 a.m.

Liberal

John McKay Scarborough—Guildwood, ON

Thank you, Chair.

Thank you, Mr. Page and your colleagues, for trying to bring some reconciliation to the numbers.

I think at this point DND, AG, and PBO essentially agree on the core numbers. The real issue has been whether the $10 billion gap has been communicated to Canadians, and for whatever reason the government chose not to do so.

Moving beyond that point to trying to stay all on the same page, I think you make a very valid point when you say that the handbook is the Canadian handbook, the U.S. handbook, the Queen's handbook, the Pentagon's handbook, and the intellectual framework for cost analysis is what is agreed by all parties: there can't be much variation going forward.

The question then becomes, as we are price takers and not price makers for this particular asset, how you reconcile Mr. Fonberg's numbers earlier this week, in which he said that he thought the plane was going to be about $75 million to $85 million—and I think he's using the $85 million number—when in fact the selected acquisition report of December 31, 2011, says it's going to be $137 million. That's $85 million versus $137 million. Even given that we're getting the cheaper version, if you will, how do we reconcile those two numbers?

The second issue was raised earlier. It has to do with the costs of flying this asset, which seem to be significantly higher than for the F-18s. The F-18s, I understand, cost somewhere in the range of $18,000 to $20,000 an hour, whereas this one costs $32,000 an hour. Are we in a situation wherein you can buy it but you can't fly it? The government seems stuck on this notion that the only amount they're going to spend is $9 billion.

I'd appreciate some reconciliation of how we get from $85 million to $120 million to $137 million, and how we reconcile using legacy costs for projected future costs.

9:20 a.m.

Parliamentary Budget Officer, Library of Parliament

Kevin Page

Thank you, sir.

I think with respect to the cost of acquisition, this is a complicated area where there are many different definitions. I think that in some cases this is just a question of comparing apples and oranges, unfortunately.

Again, the numbers we've seen from DND represent what we see as something called unit fly-away cost, which is usually the lowest number generally provided with this plane. I think those are the numbers in the range of $70 million to low-$80 million coming out of the selected acquisition reports.

The number you also referred to, in the range of $138 million a plane, is something called the average procurement unit cost. It includes different elements of costs. It's a more fulsome kind of cost. I was thinking about this. If I say to my wife that I want to buy a brand-new BMW motorcycle, and the price at the top of the sheet is $15,000, but when I walk away it's going to cost $20,000, but I only tell her it's $15,000, it's a bit of a problem.

So it is important, I think, going forward, which I think is the spirit of your questions, that we come to a common definition. If the average procurement unit cost seems to be the common definition used for a procurement basis in the United States, and we can get comfortable with that, I think, for the secretary going forward, we would all benefit. But to start, it's an apples and oranges question.

On your other point, about the cost of flying and the different costs, certainly coming out of the latest SAR, with respect to the F-35 having a higher operating and support cost per hour, I think this highlights the importance, in a full life-cycle model, of including the full operating and support costs. But certainly the models, which are parametric models, used by the project office to provide these estimates suggest higher costs for the F-35 on an operating and support basis.

Perhaps Mr. Khan could just add quickly to that.

9:25 a.m.

Assistant Parliamentary Budget Officer, Expenditure and Revenue Analysis, Office of the Parliamentary Budget Officer, Library of Parliament

Sahir Khan

Let me just add, and Mr. Hawn has said this in the past, that if you actually take the total acquisition pie and divide it by 65, you are actually looking at $138 million allocated per aircraft. If you keep quoting the $75 million, which is a fly-away cost, it risks understating. There's actually a really good paper from the Pentagon's acquisition unit covering why it's important to use the more fulsome cost number.

When you compare that to the latest selected acquisition report, you get a figure of $137 for all variants. So you want to do a little bit of discounting—some experts suggest 10% or 12%—to get to the A variant.

Again, as you note, on page 84 of the selected acquisition report, over the long term, there is a delta, based on current estimates, between the F-35 and the legacy aircraft it replaces. This is the issue that will have to be considered from a fiscal point of view.

9:25 a.m.

Liberal

John McKay Scarborough—Guildwood, ON

So when Mr. Fonberg—