Public Accounts Committee on April 26th, 2012

[John Reed]

Thank you.

Yes, that letter, but also just general knowledge of participation in the U.S. joint strike fighter program. There were a number of problems, and well-known cost increases. The technical review was under way.

So there was a lot of information available that spoke to potential delays and cost increases.

[Matthew Kellway, NDP, Beaches—East York, ON]

Okay. Thank you, Mr. Reed.

When it says, in 2.64, that “National Defence received formal communication”, does this indicate that it's a letter that went to the Minister of Defence?

[John Reed]

I believe the letter was addressed to the assistant deputy minister of materiel, but I'll have to get back to you and confirm that.

[Matthew Kellway, NDP, Beaches—East York, ON]

That would be much appreciated.

It's interesting, your comment about the kind of wealth of information about cost increases. I've made the point before that these things are publicly available, but certainly as per the report, the joint strike fighter office in the States was providing Canadianized figures to National Defence about costing. We know that those indicated cost increases year over year.

I know, Mr. Ferguson, in my last round of questioning you said it's better to direct it to other folks, perhaps, but because we have you here today, I'd like to know what you know, or Mr. Reed knows, about where those JSF cost estimates were going into our department and who was aware of those.

[Michael Ferguson]

I don't have the details of that. I will ask Mr. Reed to tell you what he might know on that.

[John Reed]

Again, we're referring to what's known as the bilateral cost breakdowns. Every partner, after the U.S. Department of Defense produces their selected acquisition report, receives a bilateral report specific to their purchase profile. That would have been received by, I'm sure, a number of individuals in National Defence, certainly at the level of assistant deputy minister of materiel, who was managing the acquisition at that point.

[Matthew Kellway, NDP, Beaches—East York, ON]

Thank you.

In your report, one of the concerns expressed is that these budgets have been “treated as a maximum by National Defence”. You expressed concerns about this being a developmental project and yet the absence of risk mitigation to deal with escalating costs.

This brings me to my great curiosity about this report. In the conclusions, and the fact that both National Defence and Public Works disagree with the conclusions of the report, you set out, in my view, a scathing report on the absence of due diligence within those departments.

How are we to reconcile the facts as laid out in this report with the fact that National Defence and Public Works are saying, “It's not our responsibility; it wasn't us”? Where do we go with that? Whose responsibility is it, then?

[Michael Ferguson]

What we did was we conducted an audit that was looking at the question of whether due diligence was applied. We defined what we meant by “due diligence”. We went through that process, and we came to the conclusion that there were enough weaknesses in what occurred—and we lay those out in the chapter—that we had to come to the conclusion that due diligence was not applied.

[Matthew Kellway, NDP, Beaches—East York, ON]

I'm sorry to interrupt, but.... No, I appreciate that, but let me put it this way, then. In terms of the response from the departments to your conclusions, did they set out reasons saying “it's not us”?

[Michael Ferguson]

I was getting to it. It's simply that to find out their exact reasons why they disagree, you need to ask the department for that—what their reasons were and why they disagree. We felt that we laid out in the chapter enough rationale that you would conclude they did not exercise what they needed to do for us to conclude that due diligence didn't apply—

[Matthew Kellway, NDP, Beaches—East York, ON]

Do you know, Mr. Ferguson, what their reasons are? Did they express those reasons in response to the report?

[The Chair, NDP, David Christopherson]

Very briefly, Mr. Ferguson.

[Michael Ferguson]

Again, Mr. Chair, I think it's best if the departments respond to that. Simply, they concluded—

[The Chair, NDP, David Christopherson]

No, no, sorry, Mr. Kellway.

I'm sorry, Mr. Ferguson. You may continue.

[Michael Ferguson]

Simply, they sent us a letter saying they disagreed, and I don't remember any further details of it right now.

[The Chair, NDP, David Christopherson]

Very good. Thank you.

We're moving on to Mr. Alexander.

I understand that you'd like to split your time with Mr. Hayes.

You have the floor, sir.

[Chris Alexander, Conservative, Ajax—Pickering, ON]

Thank you, Mr. Chair.

I want to begin by commending Mr. Ferguson on the quality of his French. We heard you say you were determined to become fluent in the language of Molière, and today we see you have made great strides. On behalf of all of us, congratulations.

On life cycle, you described the reasons for selecting 36 years as opposed to the previous DND standard of 20 years. Has the Auditor General's office used this longer life cycle framework in previous audits or was this the first time?

[Michael Ferguson]

Thank you.

The 36 years is not our number and not our estimate of the life cycle. It was in fact National Defence's estimate of the life cycle. Therefore, by definition, to apply life cycle costing we felt that it should include the whole 36 years, since that is the estimated life cycle.

[Chris Alexander, Conservative, Ajax—Pickering, ON]

So in fact National Defence had two life cycle projections—one for 20 years and one for 36 years?

[Michael Ferguson]

My understanding is that National Defence does have the numbers for 36 years, but the numbers that have been brought forward for decision-making purposes and used, for example, in response to the Parliamentary Budget Office numbers, were based on 20 of those 36 years.

[Chris Alexander, Conservative, Ajax—Pickering, ON]

But would you agree, Mr. Ferguson, that the operational costs on a yearly basis, on an annual basis, whether it's a 20-year projection or a 36-year projection, are similar to the costs of our current fleet of CF-18s, as reflected in annual budgetary exercises?

[Michael Ferguson]

Certainly, we have seen testimony in the United States where there was one estimate that the cost of operating the F-35 would be more than the cost of operating the CF-18, simply because of the technical sophistication. I don't know specifically, and I think that's again something that National Defence needs to explain, but there are some estimates that would indicate that the F-35 could be more costly to operate.

[Chris Alexander, Conservative, Ajax—Pickering, ON]

I was asking about our estimates made so far, though. They are similar to the annual budgetary commitment made for the purposes of operating the CF-18 fleet. Am I not right?

[Michael Ferguson]

Again, for clarity, I think it's best if the department answers that question of how they develop those numbers.

[The Chair, NDP, David Christopherson]

Mr. Hayes.