Public Accounts Committee on April 5th, 2012

[The Chair, NDP, David Christopherson]

I now call the 37th meeting of the Standing Committee on Public Accounts to order.

Yes, Mr. Saxton?

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you, Mr. Chair.

Before we get started with our witnesses this morning, I'd like to introduce a very brief motion that I'd like to read to the committee at this time. It is:That, pursuant to S.O. 108(2), the Standing Committee on Public Accounts begin a study of the Spring 2012 Report of the Auditor General, beginning with Chapter 2 (Replacing Canada's Fighter Jets), and that the committee hold a planning session at the meeting of April 24th, to determine the witness list and agenda for the study, and that when the study is completed the Committee report its finding to the House of Commons.

[The Chair, NDP, David Christopherson]

Okay, thank you.

Are there any other notices of motion?

Go ahead, Mr. Byrne.

[Gerry Byrne, Liberal, Humber—St. Barbe—Baie Verte, NL]

Thank you, Mr. Chair.

This is further to discussions held with you, the Chair, on my motion, which was tabled on Tuesday. I had tabled a motion that I hope we'll be able to get to today. I'd like to offer to pursue the motion at the end of the meeting rather than chew up the valuable time of our Auditor General and his officers, but I would like to read into the record the motion I tabled on Tuesday, if I may.

[The Chair, NDP, David Christopherson]

You may.

[Gerry Byrne, Liberal, Humber—St. Barbe—Baie Verte, NL]

Thank you, Mr. Chair.

It reads as follows:

That, pursuant to S.O. 108(3)(g), the Committee immediately begin a study of Chapter 2, Replacing Canada’s Fighter Jets, of the Spring 2012 Report of the Auditor General of Canada, and that the witness list include, but not be limited to:

Michael Ferguson, Auditor General of Canada

Kevin Page, Parliamentary Budget Officer

Dan Ross, Assistant Deputy Minister (Materiel), National Defence

LGen J.P.A. Deschamps, Chief of the Air Staff, National Defence

Michael J. Slack, F-35 Project Manager, Director of Continental Materiel Cooperation, National Defence

Col D.C. Burt, Director, New Generation Fighter Capability, National Defence

Tom Ring, Assistant Deputy Minister, Acquisitions Branch, Public Works and Government Services Canada

Johanne Provencher, Director General, Defence and Major Projects Directorate, Public Works and Government Services Canada

Richard Dicerni, Deputy Minister, Industry Canada

Craig Morris, Deputy Director, F-35 Industrial Participation, Industry Canada; and

That the Committee report its findings to the House of Commons.

Mr. Chair, I would suggest my motion be dealt with in the last 15 minutes of this meeting, since it was tabled on Tuesday, as per our normal conventions.

[The Chair, NDP, David Christopherson]

Thank you.

That would be my suggestion—that we hold the meeting we are convened for. The normal rotation should take us until about 15 minutes before the end of the meeting. That should be enough time for us to deal with committee business, and since that motion was received first, we will deal with it first and then with Mr. Saxton's motion. We will do all of that at the conclusion of our discussions with the Auditor General.

Is that agreed?

[Some hon. members]

Agreed.

[The Chair, NDP, David Christopherson]

Mr. Kramp, you had asked for the floor.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Just briefly, I think that is a great idea. Obviously the government is highly supportive of the study, and it is important that we go forward. The Auditor General has raised some serious concerns that we need to address, and the government is definitely willing to look at that.

We don't want to waste time here, so at the end of the prescribed time according to the Chair, let's discuss the issue so that we can set the process in place to begin the study on the F-35.

[The Chair, NDP, David Christopherson]

Very good. Thank you.

Are there further interventions? Hearing none, we'll move to the order of the day.

Mr. Ferguson, welcome again, sir. This would be your first major public appearance. We had you here two days ago, in camera, when you tabled your report, and we are here now to formally receive your report and have our first go-round on the chapters.

Following that, sir, as is our procedure, we will make a determination of how many of your chapters we will hold hearings on and then advise you and your office at the appropriate time so that you can prepare for those and be present for those hearings.

At this moment, sir, you now have the floor to present your report.

[Michael Ferguson, Auditor General of Canada, Office of the Auditor General of Canada]

Thank you.

Mr. Chair, I am pleased to present my spring report, which was tabled in the House of Commons last Tuesday. I am accompanied by Assistant Auditors General Jerome Berthelette and Wendy Loschiuk.

The first chapter in this report is about border controls on commercial imports. We found that, while controls are generally working, they need to be better monitored. We know that the controls are generally working because we tested them, not because the responsible departments were able to tell us so. The Canadian Border Services Agency and other departments need to be better at monitoring their controls at the border.

We found monitoring problems with controls reserved for higher-risk items, such as pharmaceuticals and pest control products.

Knowing whether border controls continue to work as intended will require better monitoring on an ongoing basis.

I would now like to turn on our chapter on replacing Canada's fighter jets.

We looked at the decision to replace the aging CF-18 fleet with the F-35 Lightning II. We found that National Defence did a good job of managing Canada's participation in the U.S.-led joint strike fighter program to design and develop the F-35. However, the department did not acknowledge that the decision to purchase the F-35 was well under way four years before it was officially announced. As a result, there were a number of significant problems with the decision-making process.

National Defence did not recognize and adequately address the risks inherent in this project. It did not cost the project adequately, omitting some important cost elements. Finally, the department did not provide Parliament with complete cost information or fully inform decision-makers about the risks of this program.

National Defence did not exercise the diligence that would be expected in managing a $25 billion commitment. It's important that a purchase of this size be managed rigorously and transparently.

The third chapter in our report looks at how the Department of Finance manages the government's interest-bearing debt.

Interest charges on the public debt limit the policy choices available to government. Last year, interest payments amounted to 11.4% of government expenses. Improved reporting on the interest-bearing debt not only helps managers manage but also helps Canadians understand what they can afford as a nation.

We found that Finance Canada has in place sound tools and practices to manage Canada's interest-bearing debt. However, it needs to provide more information to decision-makers and Canadians about how well the debt management strategy is performing.

We also found that while Canada is a world leader in recording public sector pension liabilities in its financial statements, the information needs to be easier to find in order to be understood by a broader audience.

Our fourth chapter is about the Canada Revenue Agency's non-filer/non-registrant program. Income tax is the single most important source of government revenue. The non-filer/non-registrant program is relatively small, but it assessed $2.8 billion in additional taxes, interest, and penalties in each of 2009-10 and 2010-11. The agency gets a good return on its investment from this program. Our chapter suggests ways the agency could improve that return with its current level of investment.

The fifth chapter of our report is on Transport Canada's oversight of civil aviation. Transport Canada has moved to an approach that puts the onus on aviation companies to develop safety management systems in accordance with regulations. Transport Canada then oversees the companies' compliance with the regulations.

Though Canada has an excellent aviation safety track record, Transport Canada needs to be diligent in its oversight of the safety systems of aviation companies.

We found that some aspects of surveillance are working well. But there are weaknesses in how Transport Canada plans and conducts its surveillance activities.

In 2010-11, it completed only about two thirds of planned inspections, even though only higher-risk companies are selected for inspection in a given year.

Transport Canada has made progress in moving to a new regulatory framework. Now it must resolve the significant weaknesses in surveillance that we identified.

My report also presents the main points of our special examination reports on three crown corporations, issued to the respective boards of directors throughout 2011. We found no significant deficiencies in the systems and practices of the Canadian Dairy Corporation, the Canadian Race Relations Foundation, and the Public Sector Pension Investment Board.

Mr. Chair, this concludes my opening statement. We will be happy to answer any questions you may have.

[The Chair, NDP, David Christopherson]

Very good. Thank you, Mr. Ferguson.

We'll now begin our usual rotation.

Mr. Saxton, you have the floor, sir.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you, Mr. Chair.

Thank you to the Auditor General and to the Deputy Auditors General for being here today.

I would first like to congratulate the Auditor General on his first report to Parliament, and also thank you for the good work you did in providing us with that report.

Chapter 2, “Replacing Canada’s Fighter Jets”, seems to be the chapter that's getting the most attention, so why don't we get right to it? The first thing I'd like to point out is that the government does accept the recommendation that you made on that chapter.

Can you please explain to us your recommendation in chapter 2 and how you came to that recommendation?

[Michael Ferguson]

Thank you, Mr. Chair.

The recommendation is contained in paragraph 2.77 of the report. Essentially what we are recommending is that National Defence prepare a complete cost estimate of the cost of acquiring the F-35 over the full life cycle of the jet.

As is pointed out in the chapter, one of the areas where we found there were some problems was with National Defence's estimate of the costs. We pointed out where we felt there needed to be some refinement in those estimates, and we've made a recommendation that they should come forward with what that full costing would be.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you.

As you probably know, the government has taken immediate action and addressed your concerns in that recommendation. We've established an F-35 secretariat. The government has also announced, in response to your report, that the Department of National Defence, through the F-35 secretariat, will provide annual updates to Parliament. The Department of National Defence will also provide technical briefings, as needed, through the F-35 secretariat on the performance schedule and costs.

Do these measures adequately address your recommendation?

[Michael Ferguson]

Without doing a full analysis of what the government is proposing, it's difficult for me to say. Certainly, though, what's important is to make sure that the government now puts in place a process that is going to be structured and is going to have the appropriate scrutiny. Because the government has made the decision to replace the CF-18 and because the actual replacement jets have not been acquired, it is critical to make sure that this process is handled well from here on in.

At first glance, some of the items that you have mentioned appear to be steps in the right direction, but of course we haven't done a full analysis.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you.

Now, as we all know, not a single aircraft has yet been purchased. Through your audit, did you find that any money was misspent?

[Michael Ferguson]

No, we didn't.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you.

Now, this is a complex issue. Can you tell us what the scope of your audit was?

[Michael Ferguson]

The scope of our audit was to look at whether due diligence was applied in the process for making the decision to replace the CF-18. Briefly, that's what we were looking at—that decision process.

We looked, really, at two aspects of the decision process. One was Canada's participation in the joint strike fighter program, the partnership program with the United States and other partners, but we were also looking at the decision process within Canada itself about how to replace the CF-18s.

[Andrew Saxton, Conservative, North Vancouver, BC]

Okay. Would you agree that this is a rather unique situation? It's a partnership with the United States and with other countries. Would you say that because of that partnership, the process may have been a bit more complicated than would normally have been the case?

[Michael Ferguson]

Certainly we felt that this was going to be an unusual type of project. That's why we felt that it would have been important for National Defence to bring in all of the potential departments, including Public Works, early on to set out exactly what the process would be to make this decision—so yes, we identified that this was not a normal type of purchasing process.

[The Chair, NDP, David Christopherson]

Thank you.

I'm sorry. Your time has expired.

Next is Mr. Allen. You have the floor, sir.

[Malcolm Allen, NDP, Welland, ON]

Thank you, Chair.

I thank the Auditor General for being with us today.

Auditor General, I'd like to talk a little bit about chapter 2 in the context of lessons learned, because I notice that when we do these reports, in all of the recommendations there's quite often talk about lessons learned and departments either accepting or not accepting. In this particular case, the department actually said it disagreed with your major recommendations.

Let me put it in context. In the fall of 2010, Madam Fraser's report, in chapter 6, dealt with helicopters. Let me go through the recommendations quickly:

National Defence should review and apply the lessons learned with these helicopter acquisitions...

primarily, and I'm now paraphrasing, “...in the assessment of risk, project timelines, and costs, and...procurement strategies [should be] tailored to the complexity of the equipment being acquired”.

DND agreed. They responded:

National Defence continuously strives to capture the lessons learned in undertaking complex acquisitions and, in this context, will undertake a specific review... “

on that one. The response goes on to state:

In addition, a review of the associated policies, procedures, and processes will also be conducted and they will be revised as required.

This was a report done 18 months before this one. We had a project that clearly had difficulty; the Auditor General pointed it out, and the defence department said that you were right, and that they'd make sure that as they looked at other projects, they'd learn the lessons and apply them.

In your opinion, sir, did they learn any lessons? If they did, did they apply them?