Public Accounts Committee on Dec. 7th, 2010

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

You did not review that acquisition. So you did not know what was listed on MERX. You did not audit that.

[Sheila Fraser]

No we did not audit that.

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

I still have a minute? Fine.

The delivery of the Cyclone aircraft was delayed twice. The first two times the notices of non-delivery were issued, why did you not impose the fines under the contract?

[François Guimont]

Mr. Chairman, on the first amendment....

Regarding the first amendment, there was a difference of opinion with regard to certain aspects of the contract. What we use in the terminology is called "excusable delays". In our opinion, there was a reason for the delays which were requested by the company, and these reasons were acceptable. That is the first reason.

The second one is that we did not agree with the company on a certain number of elements. I'm still referring to the first amendment. It totalled about $100 million and we put the matter to arbitration. In the contract, there is a provision which calls for arbitration when there is a difference of opinion regarding the interpretation of certain elements in the contract.

Therefore, after more dialogue and consultation with our colleagues at defence, we made an additional and separate investment for additional motor and transmission capacity, which was reported on in detail by the Auditor General.

[The Chair, Liberal, Joe Volpe]

Thank you, Monsieur Guimont.

I have given you a little more time because I wanted to finish off the answer and because we had some delays in responses initially.

Before I go on to the NDP, let me note that there have been a couple of references to Treasury Board.

Mr. Ossowski, I think you indicated that you are prepared to provide the documentation that provided rationale and justification for that particular acquisition. The committee will look forward to receiving that through the chair in a timely fashion.

[John Ossowski]

I can't provide the cabinet confidences, but I can provide the other stuff that pertains to or is allowed for under the agreement that we have in place with the Auditor General.

[The Chair, Liberal, Joe Volpe]

I appreciate that. I think the committee is aware that you can't share cabinet confidences.

I'm going to go to the NDP.

Mr. Harris, welcome to the committee.

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

Thank you, Mr. Chair, and welcome to all of our witnesses.

It seems we have all of the people, save the Auditor General, who made these decisions, so it's a good place to ask, first of all, a general question.

We are looking at the acquisition of what turns out to be $11 billion worth of military hardware and support, and it's worth asking the question. For example, the Cyclone project--the project that in 2003 was estimated to cost $2.8 billion--is now going to cost $5.7 billion and is seven years too late. Indeed, the first 19 of the 28 will not be able to be used. According to the Auditor General, they'll only be suitable for testing, evaluation, and training, and will not be able to be deployed on operations.

She also said in her remarks this morning that the “...process was not fair, open, and transparent”.

I want to ask the people responsible for making these decisions and delivering on these projects how it can be acceptable to the Canadian public that we have doubled the cost and are seven years late on the Cyclone project, in a process the Auditor General calls unfair, not open, and not transparent. Why is that acceptable to the Canadian public? What is the succinct explanation that I and all of us can take home to our constituents as to how this happens?

[The Chair, Liberal, Joe Volpe]

Go ahead, Monsieur Guimont.

[François Guimont]

Mr. Chairman, I will address the issue of openness, fairness, and transparency, and I'll let my colleagues from DND speak to the issue of cost, if that's okay with you.

First, on the acquisition of the Sikorsky Cyclone helicopters, we had a fairness monitor who oversaw the bidding process from inception to delivery. We have a clean opinion on that procurement, and I think the Auditor General also believes that we followed due process.

The issue of fairness, openness, and transparency is tied to the use of the ACAN, or advance contract award notification, and that issue is tied to the Chinook acquisition.

Frankly, the answer to your question stems from the answer we gave to the recommendation by the Auditor General. We recognize that there is a need to clarify terminology. We have a view of how to carry out an ACAN, a directed procurement using a formal notification on the MERX system. We have a view of that. We've been using it for years, in conjunction with Treasury Board and other departments when applicable.

The Auditor General has had a different view on a number of topics, which I can elaborate on if required, or she'll certainly make the points. That divergence of opinions creates this dichotomy between my saying that we feel the process was open, fair, and transparent and the Auditor General having a different opinion, but we do recognize, as a result of our action plan--which has been filed with the committee--that we need to clean up terminology in our manuals and in the general guidance provided to our staff in order to increase precision in certain areas related to the use of an ACAN. We acknowledge that.

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

Are there any other takers here?

[The Chair, Liberal, Joe Volpe]

Go ahead, Mr. Ross.

[Dan Ross]

Thank you, Mr. Harris. I just want to address the issue of cost.

You made the comment that the costs have doubled. When the Department of National Defence went to Treasury Board in June 2003, they estimated the cost to be $3.116 billion, and at effective project approval in November 2004, followed by contract signing, the cost was $3.174 billion. It was almost exactly the same number. At that time the detailed in-service support estimates were finalized, which gave us a total of $5.52 billion over the entire life of the aircraft, and that has not changed, so there was no significant increase in cost.

The two amendments to the contract are within the effective project approval number of November 2004. There has been no increase over that number.

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

You talked about the Cyclone being a developmental aircraft that takes seven to 12 years to be in full service, to switch from civilian use to military, but did you not sign a contract whereby Sikorsky agreed to a project, defined with penalties and all of that, for four years, I believe? Was there not a 48-month contract for delivery? If the process was going to take seven to 12 years, how could they commit to a 48-month delivery, and how could you enter into a contract of that nature?

[The Chair, Liberal, Joe Volpe]

Go ahead, Mr. Ross.

[Dan Ross]

Thank you, Mr. Chairman.

Thank you, Mr. Harris.

The government of the day asked the bidders to commit to 48 months, which obviously was a very aggressive delivery schedule. The risk associated with that schedule at the time—and I was obviously not there at the time—was felt to be mitigated by taking a proven helicopter that was performing well in maritime missions in offshore oil rigs and adding proven mission equipment to it, which of course had to be integrated.

I think the difficulty that we've encountered—and to be fair, Sikorsky has done very good work on this—is the challenge of certification and testing. It wasn't the folding of the tail and rotor and the implementation of a mission system; it is the technical airworthiness certification that must be completed before it's safe to be flown by our crews and perform the missions.

We're at year six of a process that normally takes, as I said, between seven and 12 years. We will take our fully mission-ready helicopter at year eight. The schedule is challenging in these programs. They're complex, they're difficult, and the company cannot guarantee weather conditions, testing conditions, etc., which will affect their certification program.

[The Chair, Liberal, Joe Volpe]

Mr. Harris, the time has elapsed, but I'll give you a chance on the next round.

Go ahead, Mr. Saxton.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you, Mr. Chair.

Thanks to our witnesses for being here today.

My first questions are for the Department of National Defence.

There have been media reports over the years that the Canadian Forces lacked adequate air support. Are you confident that these new assets will provide the required air support that the Canadian Forces need?

[LGen André Deschamps]

Yes, we are. Clearly, the acquisition of these platforms is tied to the Canada First defence strategy, which lays out a vision of what the Canadian Forces should be able to do in the future. As we look forward to taking these capabilities on strength, we know full well that they will give us tremendous agility to conduct our missions, both at home and as part of international coalitions or undertakings under NATO.

[Andrew Saxton, Conservative, North Vancouver, BC]

These assets will be expected to last several decades. It's going to be with us for a long time, so is this the right equipment?

[LGen André Deschamps]

Clearly, what we buy has to last an awfully long time. I think it's acknowledged in our procurement process that we get the most out of our equipment, and therefore, as we procure equipment, we have that in mind. That's why the requirements are very robust: it's because we don't replace equipment often. Durability and sustainability are key factors in determining what equipment we should procure.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you.

One question Canadians might have is why we can't buy off the shelf. Do we really have specific needs that require non-off-the-shelf equipment?

[LGen André Deschamps]

We do buy off the shelf. There are recent examples of the capabilities that we were seeking existing in military form that we could buy directly; C-17s and the C-130Js are two examples of equipment that was bought off the line, basically as is.

In other cases, because of our particular environment, the equipment that comes off the line does not meet all our requirements. It requires modification to meet Canadian demands. We own probably the toughest geography in the world, as far as climatic conditions and distance go. We are the second-largest country and we have the most coast. Nobody else has that challenge, and certainly we don't have the resources that other nations do to cover their geography. When we look at what we need, we also have to consider what we expect it to do, both at home as part of that core mission and as it goes abroad. Because we don't have the layers and the density of resources that other big nations do, we have to take that into account, and therefore sometimes we have to modify the equipment so that it can cover more ground in terms of both capabilities and geography.

A good example is the Chinook Foxtrot. It is a fine airplane, but the baseline model has a very short range, and when you apply that in Canada, it would be an extreme limitation for us to be able to operate at home. The Chinook Foxtrot that we are procuring will have double the range, about 1,200 kilometres, which is significant when you're trying to do domestic response in the given times that we're normally expected to respond in. It's a tremendous advantage for us to have that capability at home, and certainly abroad, when we operate internationally in some very demanding environments where sometimes logistical support is not there. We will need that range to be able to do our mission.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you.

Can you explain why the procurement processes for these two different types of helicopters were different?

[Dan Ross]

Yes, Mr. Chairman.

The Cyclone program was a lowest-price compliant program with serious interest by three companies globally, based on a very detailed and specific specification, and that contract, as you know, was signed in December 2004.

The Chinook was at the time, according to our understanding, the only aircraft in the world in production at all that could meet a fairly basic set of transport helicopter requirements—sling the in-service gun of the Canadian Forces and carry a platoon of infantry—very similar to the requirements of the Australians, the British, and Americans. That process required us to go out and confirm on the market whether or not there was a single available machine that could meet our requirements, which is what led to posting on MERX our requirements in an ACAN.

In response to the confirmation that there was nothing in production or close to what the Chinook could do, the Government of Canada went into direct negotiations with Boeing to hammer out very specific details on acquisition price, the cost of survivability and self-defence modification to the aircraft, and in-service support costs through the life of the aircraft.

So one was a competitive bid in which you get all of those things given to you for a firm, fixed price, and the second was a tough, detailed negotiation process with the only supplier: for this one, you open the envelope and you get what you get; for this one, you have to hammer out the details.

Does that give you some sense?