Public Accounts Committee on April 26th, 2012

[Michael Ferguson]

Again, really, all I can respond to that question is that those budgets were approved. They went through the normal process, but I certainly don't have with me. I don't think I would even have access to information about who saw what when, other than to say that it went through normal process and it was approved. Those questions, in terms of specifics, are better addressed to the departments.

[Malcolm Allen, NDP, Welland, ON]

Sir, you've indicated that this, indeed, went before cabinet, as you said in the chapter, in the sense that it's a budget approval process and it went before cabinet. I believe that's what you're saying. You're not sure who actually saw it at cabinet. I accept that.

Can you tell me when, indeed, the $25 billion was authorized by the cabinet?

[Michael Ferguson]

Paragraph 2.69 does state that, for example, “in 2008, a budget of CAN$16 billion was established to operate and sustain the F-35 over 20 years.” Again, I think that paragraph of the report indicates the amounts that were approved, that they were established budgets, and the timeframe of those approvals.

[Malcolm Allen, NDP, Welland, ON]

So you've used the amount $16 billion. Wasn't there another amount there as well, sir? Is there another amount that gives an actual total of approval?

[Michael Ferguson]

Yes, the other amount was a budget of $9 billion for the acquisition of the fighter jets.

[Malcolm Allen, NDP, Welland, ON]

So it gives a total of $25 billion, if my arithmetic is correct.

So that was in 2008-09. Not that long ago, the PBO, Kevin Page, actually came up with a number of $29 billion, and the government responded that the number was wrong and that it was $15 billion.

In your experience, sir, would the government have known that it was actually $25 billion since they passed their own budget?

[The Chair, NDP, David Christopherson]

Thank you.

Again, please be brief, Mr. Ferguson.

[Michael Ferguson]

Thank you, Mr. Chair.

The number of $25 billion was a number that was established by Defence that included both the purchase and the maintenance cost, and the budgets were approved through normal process.

[The Chair, NDP, David Christopherson]

Very good. Thank you, Mr. Allen. Your time has expired.

Now over to Mr. Kramp. You now have the floor, sir.

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

Thank you, Chair, and certainly welcome to our guests here today. Mr. Allen asked to be on the record, and I think we should also go on the record that we've been trying to facilitate this meeting for the past three weeks, and of course, had a motion on the floor to do just that. It was unfortunately blocked and grandstanding took place. The bottom line is you're here now, and thank you very kindly for appearing. Certainly that was the government's intention, as our motion illustrated, from day one.

What I would like to do is to talk about some of the challenges or discrepancies that your audit found. I think it's important that we deal with them.

A significant portion of your report related to the disagreement with the consistency of the costing methodology between PBO, between the Auditor General's office, and between DND. As always, it's crucial that we compare apples to apples, oranges to oranges. We have some differences here, clearly. I see that as problematic. You certainly saw that as problematic, sir. I think we do need some clarification on that. As an example, DND appeared to calculate their amortization over a 20-year period, and your office used 36 years. That is only one of the differences.

So I'm wondering, can you explain to this committee why we did not have the consistency here in the costing methodology from each party in the process. Was there not a process clearly established? Where did this break down, and how could we improve it in the future?

[Michael Ferguson]

Thank you.

The documents that we saw, which were prepared by National Defence, indicated that they understood the need to do life cycle costing, and for the most part, indicated that they understood that the life cycle of these aircraft was going to be at least 30 years. I think that is probably the way that it was phrased. Doing life cycle costing is something that is good practice. It's part of National Defence's normal practice. It's part of Treasury Board's practice for large capital acquisitions.

Really we would have felt that because this was life cycle costing—the way to do life cycle costing is based on the estimated life of the particular asset to sort out what all those costs were going to be and then to include those costs over that full life cycle, rather than choosing a period of 20 years. I think that was where the first primary discrepancy came in. It was the fact that National Defence chose to present this information on a 20-year basis rather than on the full life of the assets, which they knew to be longer than 20 years.

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

Did you ask DND for an explanation of why they did this, and did they provide one to you?

[Michael Ferguson]

I think the question would be best posed to the department. I can't really speak for the department. However, my understanding is that using 20 years was the normal practice of the department.

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

Thank you very much.

I have another question. To me it's a challenge, but it's important that we differentiate the allocation of costs between fixed costs and operating costs. As you know, in our standard process, in our estimates, we approve various operating costs. How can we be consistent and how do we ensure that a certain portion of operating costs should be allocated to an acquisition?

As an example, if this plane requires further runway expansion, is that then considered a part of the acquisition cost or is that just a cost that would be attributed to normal operating costs that DND and/or the government or Public Works would face in the normal process of their operations, which we would approve in estimates?

[Michael Ferguson]

The question, I guess, is sort of one of general practice. Certainly I would say that the best practice, particularly for a purchase of this size, would be to say, what are the full costs of the actual acquisition of the jets, what are the costs of running and operating the jets, and then, what are any other ancillary costs that may be caused by the purchase of the jets. For example, if government is being asked to acquire one asset and the purchase of that asset requires a significant expansion to another asset, that is information that the department should be putting together and making sure that the cabinet is aware of it.

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

Fine. Thank you very much. I appreciate your forward answers.

[The Chair, NDP, David Christopherson]

Thank you, Mr. Kramp. Your time has expired.

We now move on to Monsieur Ravignat.

You have the floor, sir.

[Mathieu Ravignat, NDP, Pontiac, QC]

Thank you, Mr. Chair.

Thank you, gentlemen, for being here, and of course, for the important work that you do for Canadians.

What is clear to anybody who looks at this file is that there has been mismanagement after mismanagement after mismanagement. If there are regulations in place, those regulations were not been followed from the beginning, and that is the nature of my questions to you this morning, Mr. Ferguson.

In your report you outlined very clearly Treasury Board policies when it comes to acquisitions. You clearly state that Treasury Board policies consider all relevant costs over the useful life of equipment, not just initial acquisition or basic contract costs.

The Minister of Defence, on April 8, 2012, contradicted you and said that it was an accounting difference.

My first question to you is, is it or is it not a difference in accounting?

[Michael Ferguson]

Thank you.

The need to do life cycle costing on significant acquisitions of assets is, as we state in the report, normal practice of Treasury Board. In fact, it's normal practice of the Department of National Defence. So the full life cycle costing, understanding what an asset is going to cost beyond the initial acquisition, is certainly an integral part of understanding the impact of an acquisition, Mr. Chair.

[Mathieu Ravignat, NDP, Pontiac, QC]

Is somehow the Department of National Defence not held to the rules of Treasury Board, in your knowledge?

[Michael Ferguson]

As a general answer, Treasury Board policies need to be followed by every department.

[Mathieu Ravignat, NDP, Pontiac, QC]

That's our understanding on this side of the table as well, Mr. Ferguson.

Let us move on to another mess, and that is the relationship between DND and Public Works.

Mr. Ferguson, you point out in your report on more than one occasion—in fact I've cited three times—that Public Works was not properly consulted at various points throughout this process.

I have a very specific question for you. Did Public Works at the time just simply sign off on this project without any due diligence?

[Michael Ferguson]

We certainly saw instances where Public Works was trying to get the information from National Defence. Public Works was trying to do due diligence. However as we state in the chapter, they were hampered by the fact that they were brought in late to the process. But then also, even though they had been asking National Defence for information around operational requirements and hadn't been receiving it, at the critical point, they did sign off on the sole source on the basis of a very short letter.

In terms of whether they exercised any due diligence, yes, they exercised some due diligence, but we deemed it was not sufficient.

[Mathieu Ravignat, NDP, Pontiac, QC]

Thank you for that.

May I ask you about the solution, now that the government has been caught, to pass the puck back to Public Works? Have you seen the details of that seven-point plan, and do you think it's satisfactory?

[Michael Ferguson]

We haven't gone through the plan in detail. We haven't done an audit on the plan. I think the critical starting point in anything moving forward—and I think it is very important to get this right from here on in—is that the organizations charged with managing this process are given a very clear statement of purpose, a very clear direction about what is expected of them, and I think if that is provided, then the organizations involved will be able to carry out their task.