Public Accounts Committee on April 26th, 2012

[John Reed]

No, during the course of the audit we did not have any direct communication or engagement with ministers or deputy ministers. We did review a large number of briefing materials that were provided to ministers, deputies, and others. But there was no direct contact.

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

If you didn't have contact with the deputy ministers or ministers, did you have contact with the offices, for example, the office of the director of the new generation fighter capability within National Defence, the office of the director general of defence and major projects directorate within Public Works and Government Services, or let's say, the office of the F-35 project manager, the director of continental materiel cooperation within National Defence? Was it at that level the audit occurred, in those offices, as opposed to the deputy ministers' and ministers' offices?

[John Reed]

Yes. Definitely during the course of the audit, we would have met with a large number of officials representing different branches in National Defence, Public Works, and Industry Canada. That's the standard way of doing audits.

We conducted something in the order of 140 interviews during the course of the audit. Interviews are one form of evidence, but a lot of the evidence supporting the audit would be documentary.

[The Chair, NDP, David Christopherson]

Thank you.

Sorry, time has expired. I know—time flies when you're having fun.

Mr. Hayes, you have the floor, sir.

[Bryan Hayes, Conservative, Sault Ste. Marie, ON]

Thank you, Mr. Chair.

Welcome, gentlemen.

There was a distinct budget established for the joint strike fighter program, and there was a distinct budget for the procurement and sustainment of the F-35s.

The joint strike fighter budget was for a design and development program. So that was completely separate. It's my understanding, according to the report, that budget was $710 million. To date, according to your report, $335 million has been disbursed from the joint strike fighter program budget.

Can you please confirm that this $335 million disbursement was not a part of the procurement budget, and in fact, that no money has been spent on purchasing F-35s?

[Michael Ferguson]

Thank you.

The answer to that question is yes. I agree with that statement.

Perhaps I could just take the opportunity quickly, Mr. Chair, on the last question, to simply say, for the committee's record, that at the end of this audit I did have two brief meetings with the deputy minister of National Defence, one of which also included the deputy minister of Public Works. That's just to clarify, with regard to the previous member's question of who we talked to.

[Bryan Hayes, Conservative, Sault Ste. Marie, ON]

Sticking with the joint strike fighter program, it's my understanding that there were some pretty significant industrial benefits to Canada's involvement in this program. Can you elaborate on that? Do you have a sense of our return on investment?

[Michael Ferguson]

Certainly throughout this whole program towards the replacement of the CF-18, industrial participation was given a lot of focus. We indicated in the chapter that there were a number of estimates regarding the potential industrial benefits. We were concerned that those estimates did not include a potential range. They included what really seemed to be just the best estimate of industrial benefits.

There were some significant amounts attached to the industrial benefits that were brought forward. However, as I said, we had some concerns that those amounts did not include a range to provide some sort of sensitivity around how much could be expected in industrial benefits.

[Bryan Hayes, Conservative, Sault Ste. Marie, ON]

Are you aware, or were you aware at that time, of actual benefits that had occurred to that point in time? There are projected benefits and then there are actual benefits.

[Michael Ferguson]

In paragraph 2.30 we say that “By 2006...companies had received 150 contracts valued at approximately CAN$157 million.”

[Bryan Hayes, Conservative, Sault Ste. Marie, ON]

I'll question the officials when they come as to what the current status is.

In terms of the MOU in 2006, you believe that DND should have engaged Public Works and Government Services Canada and central agencies before and after signing the MOU, and I certainly understand your position. DND did not do that, and I expect it will have an explanation as to why not. But that being said, that process has certainly started now.

In consideration that nothing has been purchased to date, what are the implications of—for lack of a better word—this delay in terms of starting a process that is more transparent and effective? What does that delay cost the taxpayers? Has there been any cost to taxpayers considering we haven't actually purchased anything yet?

[Michael Ferguson]

I think the outcome of that is what we identified in the chapter where, in 2008, National Defence indicated that it would be exceedingly difficult to hold a competition that included the F-35 because of National Defence's participation in the joint strike fighter program. So even two years before they actually brought Public Works into this process, they recognized at that point in time that it would be exceedingly difficult to do a competition.

So at this point in time, if a competition were in fact going to be contemplated again, the important thing would be to sort out how the playing field could be levelled to make sure that would be a fair process.

[The Chair, NDP, David Christopherson]

Mr. Hayes, your time has expired, sir.

Moving on rotation, we have Mr. Allen up next.

You, sir, now have the floor.

[Malcolm Allen, NDP, Welland, ON]

Thank you, Chair.

Mr. Ferguson, I'd like to refer back to the 2006 MOU, which is around the industrial procurement if you will, or the industrial piece of it, in chapter 2.33. At the end of that chapter, you say:

Projections made by the prime contractors were (and continue to be) extrapolated over the entire production period, and were based on a combination of opportunities related to...

and you list the three. The last and the third is:

potential contract opportunities that are available through competition to companies from partner countries.

There are some numbers bandied about; $12 billion is one of them according to the estimates from Industry Canada, and yet you seem to suggest that those are not validated. They're sort of perhapses, maybe's, could-be's. Is it fair to characterize these as hopeful and wishful rather than absolute direct benefit?

[Michael Ferguson]

Thank you.

In that particular paragraph, we do identify that the estimate of industrial benefits coming from the prime contractors included three components: contracts that were already awarded, potential contract opportunities offered exclusively to Canadian companies, and potential contract opportunities that are available through competition to companies from partner countries. Certainly each of those components has a different degree of certainty to it, and that's why we felt it would have been appropriate that the industrial benefit numbers coming forward should have included a range of the estimated industrial benefits rather than just an absolute number.

[Malcolm Allen, NDP, Welland, ON]

If I could take you to 2.45, about halfway through that piece, you talk about the same MOU of 2006 and point out that the MOU didn't commit Canada to buying the F-35; it was part of that MOU. That was communicated. But what you say is, sir, and I'm reading from your paragraph now:

We did not see evidence they...

and when you say “they”, you're referring to ministers,

...were told that retaining industrial benefits depended on buying the F-35 as a partner in the JSF Program.

So the $12 billion, which you just said to me is an absolute number that perhaps should have been a range—that may be the high end or it should be the lower end—am I correct in reading this that it says if we're not a partner, we don't get those benefits?

[Michael Ferguson]

Certainly it's my understanding that if Canada does not buy the jets, then obviously—other than contracts that are already in place—we would no longer be able to access those additional industrial benefits.

[Malcolm Allen, NDP, Welland, ON]

So if we don't buy the F-35, the $12 billion is literally smoke? My words—I don't suggest that you have to agree with that terminology.

[Michael Ferguson]

Again, I would just indicate that there have been some contracts signed. Some were already done, which I think obviously would not be reversed, but access to future industrial benefits does depend on Canada purchasing the F-35 as a partner.

[Malcolm Allen, NDP, Welland, ON]

Thank you.

I have a couple of really quick questions—one for Mr. Ferguson and one for Mr. Reed—because I'm going to run out of time.

Mr. Ferguson, you said earlier that there's a critical point going forward. It was really about managing, in that there needed to be a “clear statement” of what is expected and how to go forward. Could you tell us who needs to be the person communicating that message?

[Michael Ferguson]

That would be that the government—I guess probably represented by cabinet—needs to make sure that the group charged with taking this project from here on in has a very clear statement of purpose.

[Malcolm Allen, NDP, Welland, ON]

Mr. Reed, I believe you're the principal in the 2010 helicopter report. Is that correct? Chapter 6...?

[John Reed]

Yes, that's correct.

[Malcolm Allen, NDP, Welland, ON]

You were also the principal of this one. Sir, when you discussed this chapter with those individuals at the departments you were associated with, were any of those folks the same folks that you discussed 2010's chapter 6 with? I don't expect you to know the names off the top of your head right now, but sort of a yes or no, and then I'll ask a subsequent....

[John Reed]

Yes, at senior levels.