Public Accounts Committee on Oct. 28th, 2010

[The Chair (Hon. Joseph Volpe (Eglinton—Lawrence, Lib.)), Liberal, Joe Volpe]

I call the meeting to order.

Pursuant to Standing Order 108(3)(g) and the motion adopted on Thursday, October 21, 2010, we are considering the report of the Auditor General of Canada referred to the committee on Tuesday, October 26, 2010.

I am pleased to have with us again today, from the Office of the Auditor General, the Auditor General, Madam Sheila Fraser.

Good morning, Ms. Fraser.

We also have the assistant auditors general, Jerome Berthelette, bonjour et bienvenue, and Mr. Ronnie Campbell. Good morning. It is good to have you with us.

Madam Fraser, you probably know that I am still relatively new in this spot and am fascinated by the reports, as are all Canadians, that say we operate in a system where there are rules, that we follow the rules, and that we revise the rules and then have the Auditor General comment on whether we have observed everything. So I am just dying to hear what you have to say.

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

Mr. Chair, we are pleased to be here today to present our fall 2010 report, which was tabled this past Tuesday.

As you mentioned, I am accompanied by Assistant Auditors General Jerome Berthelette and Ronnie Campbell.

This report covers a broad range of programs and activities that are important to Parliament and have an impact—whether direct or indirect—on the lives of Canadians.

We are reporting on the first of two audits of Canada's economic action plan. This first audit took place while the plan was being rolled out, and it focused on how programs were designed and projects were approved.

Our second audit, which will be reported in the fall of 2011, will look at whether the approved projects were completed as intended.

The Economic Action Plan is a huge undertaking, involving some $47 billion in federal money and a further $14 billion from the provinces and territories, within a two-year timeframe.

Departments and central agencies worked hard to accelerate their selection and approval processes and put in place the appropriate controls. We are pleased to see the important role that internal audit played.

In 2007, we began a program of auditing the management practices of small federal entities. This year, we looked at the Canadian Forces Housing Agency, the Canadian Pari-Mutuel Agency, and the Pension Appeals Board. We are pleased to report that management practices in the areas we examined are sound.

The federal government delivers a broad range of services that have a direct impact on the well-being of Canadians. To achieve and maintain high-quality service, organizations must define service standards, monitor performance, and take action to make improvements when they identify service issues.

We are pleased to note that the Canada Revenue Agency and Human Resources and Skills Development Canada have set service standards and are using them to improve service delivery.

Citizenship and Immigration Canada has been working since 2007 to improve its service delivery. However, it has established service standards for very few of its major programs. We encourage Citizenship and Immigration to complete the work it has begun towards a comprehensive set of standards for its services.

This report also looks at the way conflict of interest is managed in the public service. We found that the Treasury Board of Canada Secretariat has yet to put in place the new policy required under the Public Servants Disclosure Protection Act of 2007 and to provide related guidance.

Avoiding situations that could lead to conflict of interest is key to maintaining the public's confidence in an impartial and objective public service. Public servants need to be able to recognize potential conflicts and know how to deal with them.

Departments need to do a better job of determining the areas where they are most exposed to conflict of interest and of taking the required action when conflicts are identified.

We also looked at how the federal government regulates and supervises Canada's six largest banks. We found that the Department of Finance and the Office of the Superintendent of Financial Institutions have appropriate practices in place. Banks play a key role in just about every economic transaction and are major sources of credit. Canada's economic well-being depends on the health and stability of its banking system.

Experts have linked Canada's relative success during the recent global economic downturn to its approach to regulating and supervising banks. Rapid changes in financial markets present an ongoing challenge.

Chapter 6 of my report presents the findings of our audit on the acquisition of the Chinook and Cyclone military helicopters. We understand that acquiring complex military equipment like these helicopters presents unique challenges. Nonetheless, the results of this audit are troubling. National Defence did not follow its own rules in managing and overseeing the acquisition projects. We identified several gaps with respect to the completeness of information presented to decision-makers as well as approvals and oversight by senior boards at key decision points.

We found that National Defence and Public Works and Government Services Canada generally complied with the policies and regulations regarding contract management with respect to the acquisition of the Cyclone helicopter. However, this was not the case with the advance contract award notice used by Public Works and Government Services Canada to procure the Chinook helicopter. As a result, it is our conclusion that the contract award process was not fair, open, and transparent to potential suppliers. Public Works and Government Services Canada disagrees with this conclusion.

We also found that National Defence underestimated and understated the complexity and developmental nature of the helicopters it intended to buy. The substantial modifications to the basic models resulted in significant cost increases and project delays. After lengthy delays and significant cost increases, National Defence still has not completely estimated what it will cost to operate these helicopters. Without this costing information and sufficient funds, National Defence may have to curtail planned training and operations. This is cause for concern.

Let's turn now to the chapter on registered charities. We examined how the Canada Revenue Agency encourages registered charities to comply with the Income Tax Act. Canadians donate millions of dollars to Canada's 45,000 registered charities each year. We are pleased to note that the agency is doing a good job of administering the Income Tax Act as it relates to these charities.

Turning to the Canada Border Services Agency, we found that the agency's practices facilitate the flow of imported commercial goods into Canada. This is important when you consider that Canada imported over $440 billion of commercial goods in 2008. The agency is now working to ensure that it has the information it needs to effectively assess risks and to collect the revenues owed by importers. It is important that it complete its plans and strategies to achieve this objective.

The last chapter of this report looks at whether the Canadian Food Inspection Agency has planned for and responded to animal disease emergencies. Animal disease outbreaks are particularly costly in terms of lost production—not to mention the threat to animal health, and in certain cases, human health. The agency must be ready to act quickly when such emergencies arise.

We are pleased to note that the agency has learned from its past experience and has put a lot of effort into improving its capacity to respond to emergencies. We encourage it to complete the remaining work that it has identified.

I thank you, Mr. Chair. This concludes my opening statement. My colleagues and I would be pleased to answer any questions that committee members may have.

Thank you.

[The Chair, Liberal, Joe Volpe]

Thank you very much, Madam Fraser.

We're going to go to Mr. Bains first.

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

Thank you very much, Chair.

I'd like to take this opportunity to thank the Auditor General and her office again for all the hard work you have done in preparing these reports. It's greatly appreciated and it is very important for us in the committee as well.

I'll be talking about chapter 6, “Acquisition of Military Helicopters”, this morning, and focusing my comments on the mismanagement that you raised, which equates to the billions of dollars in cost overruns.

You mentioned in paragraph 6.59 of your report that, “In 2006, the project was described by National Defence internally and to Cabinet and the Treasury Board as an off-the-shelf procurement”, and then you further stated that, the “Risks were generally assessed as 'low' to 'medium'....”.

First of all, do you believe that is accurate? Secondly, why is this description important? Then, thirdly, I have a follow-up question with respect to comments you made with respect to the F-35s as well.

[Sheila Fraser]

Thank you, Mr. Chair.

As we note in the report, we disagree with the description of these helicopters as being off the shelf. There were significant modifications that were needed to the Chinook. In fact, at that time, even in 2006, National Defence itself recognized that there would be modifications that would be required.

I doubt, at the time, that they realized the full extent of the modifications because they actually didn't define the full set of requirements until three years later. During those three years, they continued to look at design, their requirements, and I guess request additional modifications.

Obviously, rating this project as low risk to medium risk would not have adequately informed decision-makers about the potential risks, both to increasing cost and to project delays that subsequently occur.

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

Are these same lessons, in your opinion, applicable to the current F-35s that are being purchased by the government as well, the same lessons with respect to the description of low risk to medium risk, and the comments we hear from the minister and the government with respect to that acquisition? Do you see the same challenges with those purchases?

[Sheila Fraser]

Mr. Chair, we have not looked at the acquisition of the F-35s. From what I do understand, it would appear that, again, this is an aircraft that is not off the shelf. One would expect that there will be risks involved in this project. We would expect National Defence to document what those risks are and the mitigation strategies they are putting in place.

It's really about informing the decision-makers about what their commitments mean and what the projects are actually getting into.

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

One risk that I think gets overlooked but is important to note is the operational expenses in these projects. You've been quoted as saying:

After lengthy delays and significant cost increases, National Defence still has not completely estimated what it will cost to operate these helicopters. Nor has it put in place all the elements, such as personnel, needed to maintain them over the long term.

You said this is a cause for concern. In your opinion, what are the additional costs? Is this normal practice for the department, and why weren't these costs included? Again, do you see the same challenges with respect to this particular process, and also with the unique elements of the F-35, as you described?

[Sheila Fraser]

Thank you, Mr. Chair.

In the report, in exhibit 6.6, we lay out the various costs and their estimates that National Defence has prepared to date. You will note in there that the estimate of personnel and operating costs has not been completed. This is important because the Chinook is a new helicopter for National Defence. They need to put in place about 500 people to maintain and support it. These are new technical requirements. They have to put those people in place, and the costs of all of that have not been fully been estimated at this point.

We can recognize that at times it may be difficult to do estimations early, but there should be some indication, again, given to decision-makers. If the department doesn't know what those costs are and doesn't receive proper funding, they themselves have indicated that they will have to go back and either reduce operations or reduce training, or look to other areas to obviously find the funds for these operations.

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

Because the F-35s are not off the shelf, as you mentioned, because of the unique elements to them as well, what are some of the challenges you see with the operational costs that you've come across in the discussion taking place around that, and some of the challenges and the parallels with the helicopter purchase process and the operational costs estimated with the F-35s?

[Sheila Fraser]

I really hesitate to get into a discussion about the F-35 because we have not looked at it. We will be, of course, doing some work on that issue going forward. Again, it really comes back to trying to assess what the risks are, what the requirements will be, and a range of costs that would be required to maintain and operate these helicopters or planes.

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

Ms. Fraser, following the release of your report and the comments on the F-35, the Minister of Industry stated that the scathing report that you released about cost overruns in a previous Ottawa procurement contract for the helicopters “actually adds to our position that we should go full-steam ahead”.

Do you agree with the conclusion of the minister, in light of the fact that you keep mentioning that they need to have all the information—that the decision-makers need to have all the information—on the costs and the unique elements of the purchase before they make sound decisions regarding value-added and, more importantly, operational requirements?

What have your thoughts been on the minister's comments based on what you said in this report, that their position is to go full steam ahead? Do you agree with that statement?

[Sheila Fraser]

I will not comment on comments by the minister. I think that would be inappropriate.

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

I have a very quick question on transparency.

In paragraph 6.95 in your report, you indicate:

...we were unable to conclude on this aspect of our audit. For six of the eight Treasury Board submissions requested, we received almost no documentation.

Then you mention that there were verbal submissions as well.

How did this particular process cause challenges or problems in your audit?

[Sheila Fraser]

This is an issue that has been outstanding since about 2005--issues around our access to cabinet confidence. At one point the Treasury Board Secretariat had classified all of their analyses, and documentation around analysis of submissions, as being a cabinet confidence of a nature that we could not access. We raised this issue in a report in the fall of 2005.

Subsequent to that, a new order in council was agreed to by the government that gives us access to those documents. Then in this audit there was a very strict legal interpretation that again limited our access. We went into some fairly vigorous discussions with officials and were able to resolve the issue, and new direction has been given to public servants.

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

These were verbal?

[Sheila Fraser]

I'm just saying that's why we received it. There were two reasons. One is that the e-mail and information we received were heavily redacted, because they were based on this legal opinion that has now been corrected. Treasury Board Secretariat also indicates that much of their challenge is an iterative process and is not documented. This is also an issue that we raised previously, where we believe there should be documentation on file as to the nature of the analysis and challenge, how it was carried out, and the kinds of responses. The Treasury Board Secretariat does not agree with us on that. There was a previous hearing that dealt with that issue.

[The Chair, Liberal, Joe Volpe]

Thank you, Madam Fraser.

Madam Faille.

[Meili Faille, Bloc, Vaudreuil—Soulanges, QC]

Thank you.

Good morning, Ms. Fraser. I am pleased to be seeing you once again this week.

I will be focusing on chapter 4. My colleague here is our defence critic. He will be looking at chapter 6 with you, and he will do so capably and in detail.

Chapter 4 deals with conflict of interest, and you seem to be less than satisfied with the measures taken since the beginning by Treasury Board in this area. I undertook a little exercise: I went back over the reports published over the past 10 years where you identified conflict of interest situations. I have the impression we have seen this all before and are getting bogged down. Nothing seems to be moving forward on this issue. I am really wondering why. I would be tempted to give you a long list of the conflict of interest situations that have been identified over the past 10 years. As you know, I am interested in the relocation file. I have looked into a number of cases where a conflict of interest was reported, as well as the investigation reports.

The Michel Genest report, for example, showed that all members of the selection committee for the procurement bids were in a conflict of interest situation. I also learned about the work done by the Department of Justice on this issue. They defined what constitutes a conflict of interest and a serious conflict of interest situation. A Justice Canada report talks about “[...]bribery, influence peddling, accepting benefits from persons dealing with government, accepting secret commissions, fraud, self-dealing, selling or influencing appointments and breach of trust.”

Regarding Treasury Board's MAF, some, but very little, of the work has been provided. There is still nothing about the legal provisions expected since 2007. I would like to know whether, in the exchanges you have had with people at Treasury Board, you have had the impression that they are willing to address this issue once and for all. This is ridiculous. When we were working recently on the modernization issue, I raised the topic of the Interchange Canada program, which was criticized in 2006 and 2007, when human resources practices were audited. I am extremely concerned about the direction things are taking with that program. I do not know if you can comment on that.

[Sheila Fraser]

To begin with, Mr. Chairman, I would point out that we are not satisfied with the work done by the secretariat. We clearly indicated in our report that TBS needed to create a new values and ethics code under legislation passed in 2007. But the new code still does not exist. So the 2003 code has to be used. Of course, there are rules in the public service regarding conflict of interest situations, but beyond the rules and codes, the main thing is that the secretariat does not provide solid support to the departments.

In this chapter of our report, we looked at cases identified in earlier audits. We noted that the departments had reacted and had implemented mechanisms to deal with specific cases. But they need to do much more to make public servants aware of possible conflicts of interest and their obligations in those cases. I believe that ongoing attention and education are needed so that people can recognize conflicts of interest and know what they need to do.

It should be noted, I think, that just because a person is in a conflict of interest situation does not necessarily mean that inappropriate action is then taken. A conflict of interest can arise simply because of circumstances, such as knowing a certain person very well or having ties to someone through marriage. People need to identify these situations and be sure that nothing gives the impression that an inappropriate action has taken place.

[Meili Faille, Bloc, Vaudreuil—Soulanges, QC]

Yes, but certain cases have been clearly identified as problematic, like the one in front of me, which is the Royal LePage relocation contract. It talks here about a trip to the Caribbean with Royal LePage employees and a cruise in Alaska. It also says that National Defence officials did a tour in western Canada with Royal LePage representatives and accepted gifts, lodging, golf tournaments and luxury meals. All this is described in an investigation report. There have not been any consequences. The people involved are still working in the public service. The employee who was fired as a result of these dealings later came back into the public service.

We also have the case of someone named Scott, who was working as a CRTC employee and who took part in the Interchange Canada program at the same time as he was a registered lobbyist under the Lobbyist Registration Act. One way or another, the rules on conflicts of interest are not being followed. These people cannot plead ignorance or say that they did not know how to recognize a conflict of interest situation. I think that there have been too many examples of conflicts of interest in the public service for these situations to be ignored.

I am wondering what measures are put in place afterwards. Is there enough work being done to prevent the problems? You answered that question in part when you said that the departments have not done enough in this regard. The Treasury Board representative will be coming before the committee, and she will certainly be asked the same questions. I would like to know whether the enforcement measures imposed afterwards are inadequate and whether the efforts should be invested upstream.

[The Chair, Liberal, Joe Volpe]

There is not much time left, but Ms. Fraser has a few seconds to answer your question.

[Sheila Fraser]

Mr. Chairman, we did not look into how the departments dealt with these cases, except for the three that we have identified. And they did implement procedures to prevent those situations from recurring.

I want to come back once again to the idea of education. Moreover, the departments need to do risk assessments to determine the sectors where conflicts of interest might create the most problems. They need to make sure that procedures are put in place. Regardless, I honestly think that, in such a large federal public service, there will always be cases of this kind. At a future meeting, the committee may want to question deputy ministers about the steps they are taking to educate their employees and what action is taken when serious situations occur.

[The Chair, Liberal, Joe Volpe]

Thank you, Ms. Fraser.

Mr. Rafferty, you're up next. Do you want to just forgo the round? Do you want to pass?

[John Rafferty, NDP, Thunder Bay—Rainy River, ON]

No, I don't want to pass. Absolutely not. I certainly don't want to pass.

Ms. Fraser, thank you for being here. It's very nice to see you.

Mr. Berthelette and Mr. Campbell, don't feel left out. Feel free to participate in this discussion as we go along.

Ms. Fraser, this government has repeatedly suggested that it has created 420,000 jobs, and I will give you some quotes here. In the last week alone Mr. Menzies said, “I would love to repeat the number, and that is 420,000 net new jobs.”