National Defence Committee on June 1st, 2009

[The Chair, Conservative, Maxime Bernier]

Good afternoon, everyone.

Pursuant to our agenda, to Standing Order 108(2) and the motion adopted by the committee on Wednesday, May 13, 2009, we are going to review chapter 5 of the 2009 Spring report of the Auditor General of Canada entitled “Financial Management and Control—National Defence“.

We are privileged to have with us Ms. Sheila Fraser, the Auditor General, accompanied by Hugh McRoberts, Assistant Auditor General, and Dale McMillan, Principal.

Ms. Fraser, you have between eight and ten minutes to make your presentation. Thereafter, the members of the committee will ask you questions.

You have the floor.

[Sheila Fraser, Auditor General of Canada, Office of the Auditor General of Canada]

Thank you, Mr. Chair.

We thank you for this opportunity to present the results of chapter 5 of our spring 2009 report, entitled “Financial Management and Control at National Defence”.

As you mentioned, I am accompanied by Hugh McRoberts, Assistant Auditor General, who is responsible for our audits of National Defence, and Dale MacMillan, principal, who worked on this chapter.

At the time of our audit, National Defence had an annual budget of almost $19 billion and managed assets of more than $33 billion in equipment, inventory, and real estate. It is one of the largest government departments in terms of expenditures, personnel, and assets. In recent years the department has experienced real growth in funding, a trend which is expected to continue.

The department needs sophisticated financial management to allocate and monitor its resources to meet its objectives and priorities. In this audit, we looked at how National Defence's financial management practices support financial decision-making, resource management, planning, and the management of risks. We focused on the activities of senior management, who are responsible for deciding how the department's funding will be allocated and what major investments it will make.

We found that National Defence has some elements of good financial control. The department complies with legislative and government requirements for financial reporting and has kept its annual spending within authorized funding limits.

However, we found that, in 2007-2008, the department did not know until too late in the fiscal year that it had a surplus of about $500 million. While most government departments can carry up to 5% of unused funds into the next fiscal year, National Defence has a much lower, fixed limit on how much it can carry forward. It must manage its expenditures within a defined $200 million ceiling, or roughly 1% of its annual operating budget. Since only $200 million could be carried forward into the next fiscal year, the department was unable to spend $300 million of the resources that had been allocated to it.

We found that National Defence's two key senior management committees responsible for providing strategic and operational oversight and advice for financial management were not sufficiently focused on this role. In addition, the roles, responsibilities and accountabilities for financial matters between the three senior managers—the Deputy Minister, the Vice-Chief of the Defence Staff and the Assistant Deputy Minister, Finance and Corporate Services—were not consistent with the new Treasury Board policy on financial management.

Mr. Chair, we expected National Defence to have a corporate business plan that linked defence strategy, corporate priorities, objectives, and risks with short-, medium-, and long-term planning. We found that National Defence does a lot of planning but has no overall corporate business plan. The result is a series of operational plans for each service that are not well integrated from a strategic perspective. Further, these short-term operational plans do not take into account the long-term capital plan that is currently being developed under the Treasury Board Secretariat's investment plan pilot.

A key element of good financial management is the ability to produce accurate and reliable data for reporting. We found that the senior managers in the department do not have timely and accurate information for decision-making. Furthermore, financial information is often derived from operational systems designed to support operational requirements, not financial management. As such, senior management does not have good, high-quality information necessary to support the kinds of corporate decisions that must be made in this complex, decentralized department.

Finally, while the department has started to introduce integrated risk management, it has not been applied consistently in financial and resource management activities. We found inconsistent risk-ranking systems and risk ratings. Further, we could not find evidence that senior decision makers are routinely briefed on the status of key risks across the organization; therefore, this critical information is lacking as plans are being made and resources are being allocated across the organization.

Mr. Chair, I am pleased that National Defence has agreed with our recommendations and has recently announced measures to strengthen financial management in the department. For example, the department has recently established a Defence Finance Committee to provide a formal, strategic structure to provide oversight on resource matters and provide advice to the deputy minister in support of his accountabilities under the Financial Administration Act.

In addition, National Defence has named a chief financial officer in compliance with the new Treasury Board Secretariat policy. These measures were taken after the completion of our audit work, so we cannot comment on them. Your committee may wish to have the department report on its progress and the results it is achieving.

Mr. Chair, that concludes my opening statement. We would be pleased to answer the committee's questions.

Thank you.

[The Chair, Conservative, Maxime Bernier]

Thank you very much, Ms. Fraser.

I am now going to give the floor to Mr. Wilfert.

[Bryon Wilfert, Liberal, Richmond Hill, ON]

Thank you, Mr. Chairman.

It's nice to see you again, Madam Fraser. Thank you for coming.

Can you offer some explanation as to why there seems to be a disconnect between DND officials and senior managers that has delayed the sharing of information?

Could you also then talk about the accountability aspects, in terms of senior management not being properly briefed and not providing routine reports on their progress? How are we supposed to make informed decisions, given that scenario?

[Sheila Fraser]

As we note in the audit, we looked for evidence that the senior committees at National Defence were actually discussing and were monitoring the financial management of the department. We found very limited discussion in those senior committee meetings about financial management. One of the findings of the audit is that we really think they should be spending more time on that.

I am and I think we all are aware that they have a lot of other priorities and a lot of other things going on. But with the size of the budget and the complexity of the operations they have to manage, we would have expected to see more discussion at a strategic level. As well, we found that some of the key documents and some of the key pieces of information—for example, the corporate business plan, the integration of risks, and analysis of those risks across the organization—were not in place. There are a number of plans and a number of risk identifications at an operational level, but it all needs to be brought up to a corporate or department-wide level.

One example of key risks that we mentioned in the report is that there are a number of plans done for which there's no assessment around some of the risks to those plans. A major one in all of this is capacity. It's all very well to be planning at an operational level, but does the department as a whole have a capacity to do all of these things? That's the kind of discussion we would have expected to see at a senior level.

[Bryon Wilfert, Liberal, Richmond Hill, ON]

Asking through you, Mr. Chairman, can I expect that we will get an update on this from the department?

[Sheila Fraser]

It's up to the committee, obviously, to ask the department what they are doing, but we have certainly seen from the department officials—the deputy minister, in particular—that they accept the recommendations. I think they're quite cognizant of the recommendations we're making. These are not issues that are going to be resolved in a few weeks or even a few months, but we get the impression from them that they are taking this very seriously and are working on it.

[Bryon Wilfert, Liberal, Richmond Hill, ON]

Infrastructure and personnel, as you indicated on page 8, have not adequately included long-term planning--in particular, “additional costs and requirements”. Could you elaborate on the potential challenges you see?

[Hugh McRoberts, Assistant Auditor General, Office of the Auditor General of Canada]

Thank you very much.

I think the section you're talking about is the element on what's called “capability-based planning”, whereby you develop a series of scenarios—essentially anticipated situations that the department's going to find itself in—then assess the capabilities you need to bring to bear to deal with those, and then what the resources are, financial and material, that need to be brought to bear on them.

What we found is that the department has begun doing this. It has developed eight out of possibly eighteen scenarios that they've more broadly identified as developable, and they are working on developing capability-based planning for those. But they are a long way from being complete and from integrating the results of that work with operational plans and capital plans.

[Bryon Wilfert, Liberal, Richmond Hill, ON]

How much more time do I have?

[The Chair, Conservative, Maxime Bernier]

You still have four minutes.

[Bryon Wilfert, Liberal, Richmond Hill, ON]

I have lots of questions, but I'll have one more, and I'll share my time with my colleagues here.

How many planned activities are currently susceptible to over-programming, and how much could that amount to over the next fiscal year? I refer to page 12 of your report.

[Sheila Fraser]

There is, in fact, over-programming in the department. I'm just trying to remember how much it was. It could be anywhere up to $500 million or $600 million of over-programming in a year, which I think could be an interesting question for the committee to explore with the department. While I think we can understand that in any department and any activity there is always a possibility that there will be some delay, you wonder, if you're over-programming to that extent, if you are in fact causing delay because you don't have the capacity to do everything you're trying to do.

So it's choosing the optimal amount of over-programming. That might be something that the committee would wish to explore with the department, how they actually would decide on the amount of over-programming, and whether that is being looked at as well from a strategic point of view.

[Bryon Wilfert, Liberal, Richmond Hill, ON]

Thank you for that.

A large number of baby boomers in DND, on the civilian side and in the Canadian Forces, will be retiring over the next few years. Could you comment on how this will impact the increased mandate of National Defence, particularly the effect this potential human resources deficit constraint will have on the objectives of the department?

[Sheila Fraser]

It is certainly a serious issue that the department has to look at. We did an audit of human resources about two or three years ago and found that they were facing a significant number of departures due to retirements and didn't have the backfill available. They found they had recruited some 20,000 people and ended up with an increase in strength of 500. This was in part because of people leaving and also because of the training period. They have, I think, put in much more active recruiting, but we haven't done any follow-up work to see if that situation has improved.

But certainly human resources is a major challenge, and many of our audits point also to shortages in certain technical and skilled-labour areas, where people need to have quite specialized training before they are operational. We've noticed that in some of the work we've done on various missions and things too, that there were challenges in that.

[Bryon Wilfert, Liberal, Richmond Hill, ON]

In terms of the joint support ship program, which was cancelled last year, can you explain the process of these types of large contracts at the financial management level, and how much longer you anticipate this kind of process will take to repeat, in order to put it out?

[Sheila Fraser]

I'm afraid we haven't looked at that specifically. We are beginning a series of audits on procurement in National Defence, so we can perhaps have some better answers after we do some of those.

[Bryon Wilfert, Liberal, Richmond Hill, ON]

I'm sure my colleagues will have lots of questions.

Can I get one more?

[The Chair, Conservative, Maxime Bernier]

Take 15 seconds.

[Bryon Wilfert, Liberal, Richmond Hill, ON]

On the issue of emergencies and setting financial resources aside for a crisis--for example, General Leslie has indicated the need for an operational pause in 2011--when it comes to the impact on our long-term strategies, is there any work on that?

[Sheila Fraser]

No, we didn't look at that specifically, but those are certainly some of the things that we would expect them to do on the risk management and in the whole strategic planning going forward--that those types of things would be taken into account.

[Bryon Wilfert, Liberal, Richmond Hill, ON]

Thank you very much.

[The Chair, Conservative, Maxime Bernier]

I now give the floor to Mr. Bachand.

[Claude Bachand, Bloc, Saint-Jean, QC]

Thank you, Mr. Chair.

I too would like to welcome Ms. Fraser and her team.

Ms. Fraser, I have in front of me the overall budget for the Department of National Defence, which is about $19 billion. I have looked at the way in which it is broken down. On page 7 of the French version, operational and maintenance costs take up $6.4 billion, or 34% of the pie. Personnel costs are $8.2 billion, or 40% of the pie. Capital costs are $21 billion. My discussion with you is about that last point.

I asked the translators and they told me that comptabilité d'exercise is translated as “accrual accounting“. Several people tell me that there is a problem in the department, at deputy minister level. Currently, of the $4 billion that has to be spent on procurements, much too much money is being spent on the air force. The first contracts that have been announced—the C-17s, the C-30s, the Chinooks...It looks like the accrual accounting curve on the $4 billion is so high that there is nothing left for the navy and precious little for the army. That is what makes people say that the department's planning is bad.

Do you agree with me? Should the minister be saying that things are moving too fast with the air force and that they have to save some room for the navy and the army? Are my figures and my thoughts correct?

[Sheila Fraser]

Mr. Chair, we did not specifically look at the distribution of capital expenses in the different services. But we do note in the report that planning for the three services together is not sufficiently long-term. Longer-term planning would let them see when capital expenses are going to be needed, for which services, and how those plans can be integrated, so that all capabilities of the Department of National Defence can be considered together.

The key is longer-term planning and a needs analysis in the context of the national defence strategy. The strategy, the long-term planning and the operational plans must be aligned.