Public Accounts Committee on Feb. 28th, 2013

[The Chair, NDP, David Christopherson]

I now declare this 79th meeting of the Standing Committee on Public Accounts in session.

Colleagues, you'll know that we are holding a televised hearing today. I would like to ask the indulgence of colleagues. I'm assuming that unless things go completely haywire today, which they always can, but I'm not expecting it, there should be some time at the end of the meeting for us to do some committee business. I would suggest that when we conclude the hearing, we move into committee mode and do some of that business.

Also for today, Mr. Warawa will be joining us in place of Mr. Aspin.

I'm also pleased to advise colleagues that Lindsay McGlashan has returned to us as an analyst and will be with us for the foreseeable future. Welcome back, you did a great job before. We're looking forward to your good work going forward. Thank you.

With that, colleagues, seeing no interventions, we'll move to the hearing. We are holding this hearing on the Fall 2012 Report of the Auditor General, chapter 6, Transfer Payments to the Aerospace Sector—Industry Canada.

With us today we have Mr. Ronnie Campbell, who is the assistant auditor general. Welcome, Ronnie. It's good to have you back with us.

As well, we have Ms. Morgan, who is representing Industry. She's the associate deputy minister.

We'll start with Mr. Campbell.

I'd ask you to introduce your delegation and then present your opening remarks, Mr. Campbell. You have the floor, sir.

[Ronnie Campbell, Assistant Auditor General, Office of the Auditor General of Canada]

Thank you, Mr. Chairman. I'm joined today by Glenn Wheeler and Nadine Cormier, who worked on this audit. With that I'll begin my opening statement.

Mr. Chair, thank you for this opportunity to discuss chapter 6, Transfer Payments to the Aerospace Sector—Industry Canada. Joining me at the table are Glenn Wheeler, Principal, and Nadine Cormier, Director, who were responsible for the audit.

The Government of Canada sees the aerospace sector as crucial to Canada's economic development, sovereignty, national security, and public safety. Since 2007, Industry Canada has managed two programs that provide repayable assistance to support industrial research and development in Canada's aerospace sector.

The strategic aerospace and defence initiative, SADI, is the federal government's second largest program of direct spending on research and development. Under this program the department has authorized assistance of just under $825 million since 2007. The program was created to support private sector industrial research and pre-competitive development in Canada's aerospace, defence, security, and space industries through repayable project contributions. At the time of our audit, the department managed repayable contribution agreements for 25 individual projects with recipients.

The Bombardier CSeries program is intended to encourage research and development that will result in the development of new commercial aircraft technologies. The department authorized assistance of $350 million to the Bombardier CSeries program in 2008. Industry Canada manages two repayable contribution agreements under this program.

Mr. Chairman, we examined whether Industry Canada had sufficient information to determine if the transfer payments were meeting the programs' objectives. We also looked at whether the department managed these programs according to the key requirements of the Treasury Board's policy on transfer payments as well as the terms and conditions of the programs. In addition, we examined whether Industry Canada collected repayments from recipients for contributions that are repayable under two previous transfer payment programs.

The work on this audit was completed in July 2012 and we have not audited actions taken by the department since then.

When funding for the Strategic Aerospace and Defence Initiative was approved in 2007, Industry Canada agreed to report publicly each year on contribution recipients as well as on program results and accomplishments. This reporting is in response to its commitment to set new standards for transparency following the end of its predecessor program in 2006—Technology Partnerships Canada.

We found that Industry Canada has yet to report publicly on the results of the Strategic Aerospace and Defence Initiative, as required by the funding approval it received in 2007. This means that both Parliament and Canadians do not know whether a program is meeting its objectives.

Before 2010, Industry Canada had inadequate performance information to determine progress being made to achieve the program's objectives. This information was needed to meet its requirement to report publicly each year on overall program results and accomplishments. Since 2010, the department has made improvements and now collects and consolidates sufficient information to allow it to determine progress against the program's objectives.

However, Industry Canada has delayed and cancelled some of its evaluation commitments, potentially missing out on early improvement opportunities. The department will need to follow through on commitments to collect additional performance information so that it can complete its planned evaluation of the program in 2016-17.

Similarly, the department needs to complete the final evaluation of technology partnerships Canada's longer term technological, economic, and societal outcomes. It may then be in a position to integrate lessons learned from this evaluation to potentially improve performance measurement for the strategic aerospace and defence initiative.

For the Bombardier CSeries program, Industry Canada has not collected all documents required by the two contribution agreements to determine progress toward the program's objectives. Therefore, it has a more limited picture of the program's performance. Again, this means that both Parliament and Canadians do not know whether the program is meeting its objectives.

Industry Canada has managed most aspects of these transfer payment programs appropriately, by using a reasonable control framework. For example, it reviews recipients' claims and progress reports before issuing payments. Also, the department funded only recipients that met program eligibility requirements. It also undertook a detailed review of proposed projects before signing contribution agreements with recipients.

In cases where contributions under two previous transfer payment programs—the defence industry productivity program and technology partnerships Canada—were repayable, the majority of repayments we examined were obtained by Industry Canada on time.

Industry Canada agreed with our recommendations and made commitments in its responses, several of which were to be implemented by the end of 2012. Mr. Chairman, the committee may wish to explore the progress made by the department to date in addressing our recommendations.

Mr. Chairman, this concludes my opening remarks. We would be pleased to answer the committee's questions.

Thank you.

[The Chair, NDP, David Christopherson]

Very good. Thank you, Mr. Campbell.

Now over to Ms. Morgan. You can introduce your colleague and present your opening remarks, please. You have the floor.

[Marta Morgan, Associate Deputy Minister, Department of Industry]

Thank you, Mr. Chair and committee members, for allowing me to provide you with a brief overview of Industry Canada’s response to chapter 6 of the Auditor General’s 2012 fall report.

Accompanying me is Mitch Davies, who is the associate assistant deputy minister of the science and innovation sector at Industry Canada.

As you know, Canada is among the leading aerospace nations in the world. Our aerospace manufacturing industry is the fifth largest in the OECD in terms of revenues. This industry generates $22 billion in annual revenues, employs a workforce of almost 70,000, and exports 80% of its output. Canada has the world's third largest commercial aircraft manufacturer and a wide range of global leaders in helicopters, landing gear, simulators, engines, aero structures, and maintenance, repair, and overhaul services.

A sustained effort over decades has contributed to Canada's success in building an internationally competitive aerospace industry. Fiscal, monetary and tax policies have established a supportive business environment. Programs provide complementary incentives to invest in research and development in order to foster economic growth and competitiveness.

No one feels the benefits more than the Canadians directly employed, often with high-skilled and high-paying jobs in everything from design to manufacturing, marketing and servicing. Employees earn 37% more in the aerospace sector than the average for all industries, and 23% more than those working in other manufacturing sectors.

As you know, our future prosperity depends on innovation. Business investments in research and development are central to our ability to introduce new and improved products, services, and production processes. Moving up the value chain is the key to succeeding in a global knowledge-based economy.

That's why the government’s science and technology strategy, which was released in 2007, focuses on using the levers available to government to encourage more private sector innovation. It's in this context that the federal government has supported the aerospace and defence sector since 1959, starting with the defence industry productivity program, then through technology partnerships Canada, and now with the strategic aerospace and defence initiative, SADI.

Many companies have benefited from SADI and its predecessor programs over the years—large companies like CAE and Pratt and Whitney Canada; medium-sized companies like Ultra Electronics Canada and GasTOPS; and small companies like NGrain and Integran.

Many countries have research and development programs to encourage innovation in the aerospace and defence sector. Like Canada, they have renewed their programs as a result of their success in supporting the competitiveness of a sector that generates significant employment, technical, environmental and other benefits to their nations.

The department is pleased that the Auditor General concluded that Industry Canada is managing its aerospace programs in a sound manner. Detailed due diligence is completed before signing contribution agreements; new projects meet eligibility criteria; claims are carefully reviewed before issuing payments; appropriate steps are taken to obtain repayments; and sufficient information is collected to determine progress against objectives.

The Auditor General’s report also made recommendations in areas where the department can improve. We fully agree with the findings and are committed to continual improvement in the following areas: We are ensuring that monitoring and reporting requirements are fully met and documented. We are continuing our best practice of including objectives and anticipated benefits in contribution agreements. We will evaluate Industry Canada’s transfer payment programs in keeping with our multi-year plan.

We have put more information on our website on SADI results and accomplishments, and will continue this practice.

We have documented our approach to monitoring and reporting on SADI projects commensurate with their risk and size.

We are implementing a plan to document that our policies, procedures and processes meet the Treasury Board policy on transfer payments.

We have amended our claims service standard to include all claims.

To sum up, I would reiterate that Industry Canada’s transfer payment programs are designed to support the strength and growth of the aerospace and defence sector. Industry Canada was pleased that the Auditor General concluded that its transfer payment programs are well managed, and we welcome the recommendations that will contribute to further administrative improvement to these important programs.

Thank you, Mr. Chair and committee members. We'd be pleased to respond to your questions.

[The Chair, NDP, David Christopherson]

Thank you.

Colleagues, we're ready to begin our questions in the usual rotation.

We will begin with Mr. Saxton. You have the floor, sir.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you, Chair, and thanks to our witnesses for being here today.

My first question is for the associate deputy minister of Industry Canada.

Madam Morgan, I'd like to just mention, in your opening remarks, you said and I quote, “fiscal, monetary, and tax policies have established a supportive business environment.”

Could you explain what those were and how they supported the business environment, please?

[Marta Morgan]

The government has made substantial progress over many years in terms of the corporate tax environment, in particular reducing the corporate tax rate in Canada to make it one of the most competitive in the OECD. Also, there is the elimination of the capital tax. As you would know, for an industry such as aerospace which requires significant investments in capital in order to remain competitive, these kinds of tax measures are very important to their future competitiveness. I would also note the sustained budget plans that have been announced over a number of years, the action taken during the economic action plan when all industries were challenged by the drop in the demand globally.

I think that for all industries a supportive tax and fiscal climate is a significant advantage, particularly in these uncertain times.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you.

Can the Office of the Auditor General explain why it's important, or why we need to support this particular sector?

[Ronnie Campbell]

That sounds like a question of policy, Mr. Chairman.

[Andrew Saxton, Conservative, North Vancouver, BC]

Let me be more specific then.

Is the strategic aerospace and defence initiative achieving its objective?

[Ronnie Campbell]

Thank you, Mr. Chairman, and thank you for the question.

We have observations around paragraph 6.38 and onward about the need to evaluate the extent to which these programs are meeting their objectives. On a number of occasions commitments were made to evaluate and they haven't been followed through.

As the associate deputy minister pointed out, we make a number of comments about things that are well managed in the program, but this is the one area where we think there needs to be significant improvement.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you.

I'll go back to the associate deputy minister of Industry. Perhaps you can tell us why we need to support this sector.

[Marta Morgan]

I'd be glad to.

First, let me say that this sector is an area where Canada is a real global leader. We have the fifth largest aerospace industry in the world. We have world-class Canadian firms in a number of areas, including regional aircraft. It includes Bombardier's small gas turbine engines; Pratt & Whitney is an example; CAE simulators; and landing gear by Goodrich and Héroux-Devtek.

It's an industry that generates considerable annual revenues and employs almost 70,000 highly skilled Canadians.

In this industry, projects have high development costs. They're high risk. They have long development lead times, and they have long payback periods. These factors, combined with the cyclical level of the industry, make it difficult for the private sector to fund R and D at levels that may be required to stay competitive.

That's why you would see that Canada and other countries with strong aerospace industries support these industries, because of the significant employment, and technical, environmental, and other benefits.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you.

Could you explain the difference between the strategic aerospace and defence initiative and technology partnerships Canada?

[Marta Morgan]

Yes, SADI is different from its predecessor, TPC, in a number of ways.

First, it's more narrowly focused on the aerospace and defence sectors.

Second, repayment expectations are higher under SADI, as we now apply a royalty to gross business revenues instead of product sales. There is a more standard and consistent approach to repayments, and the repayment period is shorter.

We've also tried to streamline the administration. There is a new online form so it takes less time for companies to submit their applications. We've improved the transparency. We publish information on our website on program criteria, results, audits, evaluations, and service standards. Once the repayments begin in 2013-14, we will post all company-specific repayments.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you very much.

[The Chair, NDP, David Christopherson]

Thank you.

Time has expired, and now over to the official opposition.

Mr. Allen, you have the floor, sir.

[Malcolm Allen, NDP, Welland, ON]

Thank you, Chair.

Thank you, folks, for being with us today.

Hopefully, Mr. Campbell, I won't ask you a policy piece, but I'm sure you'll let me know if I do; whereas, Ms. Morgan, you'll feel free to answer the policy piece if I ask.

So let me start with you, Ms. Morgan, since we are talking about a policy piece. I'm referencing paragraph 6.40 on page 12 in the English version of chapter 6 of the Auditor General's report. In reference to the CSeries program, it suggests that perhaps we should have done some review around the 2009-10 period, but the department decided not to. Rather than do an interim review to see if the program was working well, the decision was taken to do it at the end. It's like counting the horses after the barn door has closed and they've all run away. You have to figure out if you had brown ones or polka dot ones or exactly what you had. I could have had more polka dot ones because I like polka dot horses more.

Why was the decision taken to do it when we had finished rather than, as the Auditor General suggested, doing it partway through and learning some lessons? Indeed, you might have kept doing the same thing if you were doing such a great job. On the other hand, we don't always do great things and sometimes there are some pieces that perhaps we need to do better or could change. Why wouldn't we have said that we should probably do that interim review, if you will?

[Marta Morgan]

There is one Treasury Board commitment for the Bombardier CSeries program, which is to conduct an evaluation by 2015-16. This is reflected in our current evaluation plan.

The implementation review that I believe you're referring to was in the department's internal plans, but the contribution agreement was signed only in March 2009, and the rate of spending on the project was slower than expected because that was right after the recession. We found in general that with our program, with SADI, and also with the CSeries program, it was a time where demand in general slowed and R and D spending by companies slowed.

At that time, the department judged that conducting an implementation review would not provide us with enough information because the work was insufficiently well advanced for the work to be useful.

[Malcolm Allen, NDP, Welland, ON]

I guess the comment to Mr. Campbell would be that I could ask the direct question: do you actually agree with that? In looking at what you've said in paragraphs 6.38, 6.39, and 6.40, they seem to indicate that you may not necessarily wholly agree with the attitude, “Well, let's do it later; we were kind of slow, we didn't spend a lot of money...”. I'm not quite sure what “slow” means.

I'm assuming that we're not talking about how we only spent a hundred bucks last year or in the years you're referencing, Ms. Morgan. I'm sure we spent more than a hundred bucks. For Canadians, they're probably significant dollars, albeit it may be slow for your department, which is very large.

Mr. Campbell, you seem to indicate that these would be important. Do you still believe that's true?

[Ronnie Campbell]

Yes, certainly we believe it's important. I think the initial question was about one particular evaluation. For each one of those, there may be a practical or logical reason for putting it off, but I think our concern is broader than that; that is, there's been a series of evaluations that have not been conducted.

For example, the TPC final evaluation was to have been done in 2011, and it's now going to be in 2015-16. The SADI initial implementation review was to be done in 2009. It was done in 2010. On the CSeries implementation, there was no implementation review done. They had talked about doing it in 2009-10.

I think if there's anything that we think would really strengthen the management of these programs, it would be a greater commitment to evaluation and getting some good data on performance. I was very pleased to see in the department's response that they're committed to doing that, but I think it's something that they need to get on with, and I think it would help strengthen the programs.

Thank you.

[Malcolm Allen, NDP, Welland, ON]

Ms. Morgan, Mr. Campbell raised what obviously was going to be my next question. There's the issue about SADI, where we didn't do those reviews or we're going to put them off until later. Mr. Campbell actually has been helpful in outlining that there seems to be a pattern of “let's do it later”, which is in a sense procrastination, quite frankly.

To paraphrase Mr. Campbell's comments, and I'm sure you have a copy and I'm sure you heard him quite clearly, he said that this means the information going to Parliament and to Canadians isn't happening in a timely way.

By the way, we quite often see departments come in after the fact and say they agree with what the Auditor General said. But we're now talking about things you should have done a while ago. What confidence are we to have in your department that you're not going to continue to procrastinate, and that we're going to actually get these things done, so that the House and indeed Canadians—because we are spending direct dollars here in some of these programs—can find out whether these dollars will actually be spent well and effectively?

[Marta Morgan]

Industry Canada's audit and evaluation branch, Mr. Chair, has conducted a number of evaluations on these aerospace programs.

With respect to SADI, we conducted an audit of SADI governance in 2010, an implementation review in 2010-11, a collaboration review in October 2011, and an evaluation in 2011-12. The next evaluation is scheduled for 2016-17.

With respect to the CSeries, the Treasury Board submission requires that an evaluation be completed in 2015-16, and we are fully committed to implementing the action plan that we have agreed to and in response to the Auditor General.

[Malcolm Allen, NDP, Welland, ON]

I'm going to get cut off.

[The Chair, NDP, David Christopherson]

No, no, you are cut off. You're way over, Mr. Allen.