Government Operations Committee on June 14th, 2011

[Robert Fonberg]

Yes, sir. I am deputy minister to both.

[Jack Harris, NDP, St. John's East, NL]

You are it.

[Robert Fonberg]

I have an associate deputy minister as well, Matthew King, but I am deputy to both ministers.

[Jack Harris, NDP, St. John's East, NL]

Thank you.

I ask because my question is somewhat related to procurement and has to do with the concerns about search and rescue. As you know, we just heard some news about changes in the coast guard facilities in Newfoundland and Labrador and in Quebec, and of course through the defence committee last year we were working on trying to have a look at search and rescue response times. One of the issues we encountered in our travels was that they didn't have enough Cormorants to service an increased need, and this was a very expensive idea.

I have some information, and perhaps Mr. Ross may be able to help me with this. The American government has a variant of the Cormorant known as the VH-71 Kestrel, which was in use for the presidential helicopter service, and I understand the government has purchased a number of “parts”, which in fact include nine airframes and considerable other parts that could be assembled into Cormorants or used for search and rescue.

Mr. Ross or Mr. Fonberg, I wonder if you could confirm that such a purchase from the Americans has taken place. I have a figure I received from American sources, but perhaps you can tell us what you know about it.

[Dan Ross]

Mr. Chair, earlier this spring we negotiated a purchase from the U.S. Navy of the entire remaining material from the VH-71 program, which included several hundred thousand spare parts, the majority of which are common to our version of the EH-101 Cormorant. There were nine aircraft in various states of completion that were in an excellent state of preservation. We inspected them. We purchased that package of spare parts with the primary objective of increasing our stock of individual spares and of major assemblies like transmissions and so on that we could feed into our repair and overhaul supply chain.

One of the key limitations to maintaining our Cormorants as serviceable is the length of time that a major assembly is away in the supply chain, and we had too few of those to feed the system.

We paid pennies on the dollar for those spare parts, and they are already having an effect on increasing the availability of our Cormorants.

[Jack Harris, NDP, St. John's East, NL]

I understand it was a very good deal. The figure provided to me was $125 million for this package of parts. Perhaps you can confirm that, and that if not all of these are delivered yet, they will be very shortly.

Given the fact that there are nine airframes involved, is there a possibility these airframes could form the basis of increasing the size of our Cormorant fleet? We did lose one of the fifteen that were originally purchased, and of course we've heard reports that the helicopters in use, the Griffons out of Trenton for example, are not the kind of aircraft you'd want to have for maritime rescue. Is there a possibility that these airframes could in fact be used as part of a project to increase the size of our fleet?

[Dan Ross]

Thanks, sir.

No, there is no intention. The airframes are not common in configuration to the SAR aircraft that we use. Extensive modification would be required. We made it clear in our purchase that there was no intention of bringing them into service.

The nine airframes will be cannibalized and de-assembled to access those spare parts, and eventually we will have nine bare shells.

[Jack Harris, NDP, St. John's East, NL]

I appreciate your intention, but I would see it as a potential opportunity. Has that been canvassed, the cost of doing that and the effect of doing that? Obviously there would be some differences with the existing fleet, but if you could, with the amount of equipment that's involved here, which to my understanding is very considerable, perhaps a group....

For example, I know there are four in Gander and five in Greenwood. If you had three or four or five made from those parts, it seems to me that you could have a relatively inexpensive project. And when I say “relative”, I mean relative to a new procurement plan where in fact we could acquire a useful addition to our helicopter fleet.

I recognize you say that there was no intention when you bought it, but has it been canvassed? Has it been considered? Has any study been done as to whether that could in fact take place?

[The Chair, NDP, Pat Martin]

Give a very brief answer, please. We're well over time.

[Dan Ross]

There was no analysis done of that. There's been no stated intention to do that. The current plan is to continue using Griffons, which have been configured for SAR out of Trenton.

[The Chair, NDP, Pat Martin]

Thank you.

I'd like to suggest that we need a few minutes at the end of the meeting to do the votes associated with the estimates, so I think we have time to do a Conservative, New Democrat, Conservative, Liberal, and then cap it off. So that would be two more Conservatives and one each for the opposition benches. If that's agreeable, that brings us to about 5:25.

Is that okay with everybody?

[Some hon. members]

Agreed.

[The Chair, NDP, Pat Martin]

Scott is next.

[Scott Armstrong, Conservative, Cumberland—Colchester—Musquodoboit Valley, NS]

Thank you.

I have three quick questions, and I want to go back to the carry-over first.

We learned today, and Mr. Martin actually confirmed it, that most federal departments, if not the rest of the federal departments, are allowed a 5% carry-over at the end of their budget year. We found out today that the Department of National Defence is only allowed a 2.5% carry-over. I think that's been increased in the last couple years from 1.5% or thereabouts, in that range.

We haven't heard a justification for this. Why is your carry-over percentage half of what it is for the other departments?

[Kevin Lindsey]

Just to recap the numbers, until fiscal year 2009-10 our allowable carry-forward was 1%--or $200 million, actually; the absolute dollar value ceiling was $200 million.

Partly as a result of the Auditor General's observations on DND and our own representations, in 2009-10 that carry-forward was increased to 2.5% on our operating and capital budgets. At the time it was increased, other departments had a 5% carry-forward ceiling on their operating budgets and a one-off provision for capital budgets to a maximum of 5%. What's happened in the interim is that the capital carry-forward provision for other departments has been increased in fact to 20%. DND continues to be at 2.5%.

As to the “why” part of your question, DND has a budget that is, quite obviously, as you know, larger than any other department's. It also has, as is evidenced in part by this discussion and by some of the numbers that Mr. McCallum has pointed out, a high degree of unpredictability.

With respect to the Department of Finance, one of whose concerns is fiscal forecasting, there's a high degree of fiscal risk attached to the DND budget. If we were allowed the higher carry-forward ceiling that other departments have, it would make fiscal forecasting and predictability a more difficult task. So that is one very serious consideration.

[Scott Armstrong, Conservative, Cumberland—Colchester—Musquodoboit Valley, NS]

It's the size of the budget, then; it's the immense size of your budget compared to that of some of the other departments.

[Kevin Lindsey]

And it's the unpredictability of the cashflows.

[Scott Armstrong, Conservative, Cumberland—Colchester—Musquodoboit Valley, NS]

Okay. Thank you for that.

I'm going to turn to the F-35 purchase. We've already invested a great deal in this project. I think over the last almost ten years we've invested money in this in the hundreds of millions of dollars. What would be the implications for the Canadian government if they were to try to suddenly pull out of this deal with the F-35s? I'm sure there would be a financial penalty for that. Could you elaborate on that a bit?

[Dan Ross]

Thank you, sir, for the question.

We have contributed about $200 million to the program through the memorandums of understanding with our eight partners. Just to be clear, it is a United States government program; we're not buying from Lockheed Martin. The only way to purchase them is from the Government of the United States. If you're not in the partnership, you must go through foreign military sales and pay all the fees associated with foreign military sales.

It is possible to withdraw from the MOU and eventually come back and try to purchase them through foreign military sales at that increased cost. If you withdrew, there would be some penalties that would have to be negotiated, because the cost-sharing agreement right now among the nine partners is based on the agreed contributions of the nine partners to the design, development, and testing.

Our current commitment is $551 million over 40 years. If we pulled our $551 million out of the partnership, that would have to be made up by our colleagues, and we would have to negotiate what portion of that--and it would probably not be a small number--we would have to pay.

The other dimension I would mention is that the number of industrial opportunities for the country is proportional to the number of aircraft you buy and the contribution you make to the MOU. The potential of $12 billion of direct Canadian participation in building them would not end instantly. The existing contracts and orders would stay, but they would not be renewed. For example, if you were buying 50 sets of landing gear from Héroux-Devtech in Montreal, there would be no follow-on order for landing gear from Héroux-Devtech. They would let that die. So there are two parts to that.

[The Chair, NDP, Pat Martin]

That concludes our time.

Thank you.

Matthew Kellway.

[Matthew Kellway, NDP, Beaches—East York, ON]

Thank you, Mr. Chair.

Mr. Ross, this is for you. In response to a question concerning the per-unit cost of the F-35, I think I heard you advise that $75 million or $80 million per unit cost is the current estimate and that revised estimates will be provided by the Pentagon at some point in the near future. Is the estimate of $75 million to $80 million what the $9 billion package is based on--that per-unit cost, the training, plus all the other things that come along with it?

[Dan Ross]

On the National Defence website there's a detailed cost breakdown chart. It is largely extrapolated from the unit price that's available at the time Canada or a partner purchases its aircraft. There are obviously estimates of how much a current price will decrease as it gets to the most efficient point of the production with the largest numbers being produced. We expect 2016-2018 will be the most efficient point at which to buy, and that's what we're scheduled to do. Right now, that estimate is $75 million to $80 million for the conventional takeoff variant. It's not for the other two, which are more expensive and have more developmental risk. Our variant has finished its development. It is in production, and the United States Air Force has taken its first production aircraft and will stand up its first squadron this year.

But to go back to your fundamental question, yes, that unit price is a very key factor that goes into the formulas for our detailed cost analysis. We also add on our infrastructure estimates, our contingency training simulators, and all the rest of it that goes into delivering a complete system.

[Matthew Kellway, NDP, Beaches—East York, ON]

Will the estimates you're expecting from the Pentagon change as the aircraft goes through production?

[Dan Ross]

We expect that the estimates, which are generated by a very detailed rigorous analysis right down to the component level by the global supply chain, will gradually change year by year. The trend is downward. All of the predictions that people have read about in the newspaper, the actuals of confirmed fixed-price contracts with Lockheed Martin, have been below those lines. We are expecting to watch those numbers gradually decrease. We will pick the most efficient point at which to place our order and purchase our aircraft. We have some flexibility, because our F-18s have been designed and maintained and their life has been extended to get us to 2020.

[Matthew Kellway, NDP, Beaches—East York, ON]

Similarly, the estimates may also go up. It sounds like a complicated process with global supply chains and that sort of thing. Is it possible that the estimates that come in as it goes through production will be going up?