Public Accounts Committee on May 1st, 2012

[Malcolm Allen, NDP, Welland, ON]

To be clear, you're telling me you were telling the minister $25.1 billion and you were telling the Canadian public $14.7 billion. Is that correct to assume, sir?

[Robert Fonberg]

What we told the Canadian public was exactly what the government has told the Canadian public—

[Malcolm Allen, NDP, Welland, ON]

Excuse me, Mr. Fonberg, I don't need an explanation. I just need to know if the report of $25.1 billion was to the public or to the minister. You've said it was to the minister. I want to know if you ever reported to the general public and to Parliament that it was $25.1 billion, or did you maintain that it was $14.7 billion? You went at it quite often and told us about how it was different. But you said you only had one book.

One book is one book, in my view. So you either had a book that said $25.1 billion or you had a book that said $14.7 billion. You can't have two unless you had two books, but you said you only had one. I'm going by that that you had one book. So why didn't you give the same figures from the same book to two different groups of people—the cabinet and the Canadian public?

[Robert Fonberg]

There was one book. The column on the left-hand side went to cabinet for decision-making purposes. The government decided to communicate exactly the same way they have communicated since 2004 on the acquisition of major airframe assets—acquisition costs and sustainment costs. We were not seeking incremental funding from cabinet at the time for operating costs, nor do we expect to seek incremental funding for operating costs.

[Malcolm Allen, NDP, Welland, ON]

Thank you. I appreciate that clarification.

So you're saying you told cabinet it was $25 billion, and cabinet told the Canadian public it was $10 billion less. Thank you, sir.

Mr. Ross, you said earlier that we are in the options analysis stage of the F-35. Although I may disagree, I think we're actually further along in the timeline, but I will take you at your word. Does that mean, if we're at that stage, we are now going to look at other planes besides the flying piano dubbed the F-35?

[Dan Ross]

I think I will return to my deputy colleagues or the Chief of the Air Staff going forward.

[LGen André Deschamps]

Thank you, Mr. Chairman.

On the best way to frame the answer here, the F-35 is the aircraft we assessed in 2010 as the platform that met our needs and all of our requirements. The fact that it's still going through testing and development is certainly what's occupying a lot of our attention right now, and any issues of cost.

[Malcolm Allen, NDP, Welland, ON]

I understand that you are going to take me through that. I'd love to talk to you for an hour about it, but I only get five minutes.

Basically you're saying we are not looking at other options. Is that fair to say?

[LGen André Deschamps]

Currently, from an air force perspective, we are focused on delivering the transition to the F-35.

[Malcolm Allen, NDP, Welland, ON]

Thank you.

Mr. Fonberg, it was said earlier under testimony that the costs are up by 13% on the F-35. We know the budget is frozen. The Prime Minister has told us that the envelope is $9 billion. Costs are up by 13%—that's testimony from the end of the table, not from me—and 65 was the number we could procure for $9 billion. If the costs are up by 13%, how many can we buy now, knowing you have a frozen envelope?

[Robert Fonberg]

I actually didn't do the math, Mr. Chairman.

I said $75 million. Now it's around $85 million. If that's 13%, that's fine. That is manageable within the context, if you go back to exhibit 2.6, Mr. Chairman, of the allowance for contingency and inflation.

[The Chair, NDP, David Christopherson]

Time has expired.

We'll go over to Mr. Dreeshen. You have the floor, sir.

[Earl Dreeshen, Conservative, Red Deer, AB]

Thank you, Mr. Chair.

Mr. Allen was attempting to put a few words in your mouth, Mr. Fonberg.

I was just wondering if you would like to, first of all, take an opportunity to clarify where you were going there.

[Robert Fonberg]

Mr. Chairman, thank you for that opportunity. I was going to say that I don't think the government was trying to put any other words in anybody's mouth.

We worked off the left-hand column. The right-hand column was how we responded to the Parliamentary Budget Officer, in the exact same categories. We were trying to demonstrate that the Parliamentary Budget Officer, as far as we could tell, also did not use operating costs. The Auditor General picked it up from decision-making documents and laid it beside what we responded to the Parliamentary Budget Officer. The Auditor General could just as easily have put in the Parliamentary Budget Officer's column, and there would have been much more clarity on that issue.

Thank you, Mr. Chairman.

[Earl Dreeshen, Conservative, Red Deer, AB]

Thank you very much.

My second question is to Defence. I wonder if you could expand on the validity of using a weight-based comparison for assessments for estimating costs.

[Robert Fonberg]

That's a very interesting question, because as far as we could tell, the Parliamentary Budget Officer based his $148 million per aircraft estimate on the actual weight of the aircraft.

I would turn either to the ADM Materiel or perhaps to the CFO on the methodological question of the appropriateness of using that to build a price on the aircraft.

[Kevin Lindsey]

Mr. Chair, there is a fair amount of historical data that demonstrates that at the very early conceptual stages of an aircraft there is a correlation between the anticipated weight of the aircraft and a rough order-of-magnitude estimate of its cost. That is the basis upon which the PBO estimated the acquisition cost of the aircraft.

The methodology they used, which derives from a private sector company and which the database derives from a private sector company in the U.K., led them to use an assumed acquisition cost of $148.5 million U.S. This was at a time when the joint project office in the United States provided us its best estimate of an acquisition cost of $75 million for the aircraft.

The rest of the PBO's analysis is really quite simple, basic arithmetic. In order to arrive at logistics costs, it multiplies the acquisition cost by a factor by the number of aircraft. It does the same for operating costs.

The key is that if you have the acquisition cost wrong, you're going to wind up with an estimate that is far off the mark. If you get the initial acquisition cost way wrong, your total estimated cost is going to be far off the mark.

Given the assumed acquisition cost in the PBO report of $148.5 million versus the $75 million.... If the PBO had used the $75 million number and had kept all other variables in his methodology constant, he would have arrived at an estimate of $17.2 billion, which is remarkably close to the estimate we had for acquisition and sustainment. That is part of the reason we were led to believe that the PBO's numbers did not include these operating costs.

[Earl Dreeshen, Conservative, Red Deer, AB]

Next, could you explain how the access point to the cost acquisition curve gives you confidence in that $75 million to $85 million you were talking about versus some of the numbers we hear? As time goes on, the date you plan on accessing this particular asset is I think what's critical to all of this.

[Robert Fonberg]

Dan, you must have the convergence of the cost curves over the various SAR reports.

[Dan Ross]

Yes. Thank you, Deputy.

Mr. Chair, thanks for that opportunity.

The joint strike fighter program office work is based on hundreds of thousands of hours of detail work by experts, project managers, engineers, test experts, and costers. It is also based on actual contract expenses that have gone into the 40 or so joint strike fighters that have been produced. The estimates going forward are called selected acquisition reports.

The 2010 decision was based on the SAR 2009 acquisition report. That was at about $75 million per aircraft. In the 2010 report it grows slightly to about $83 million, and in the latest it is about $85 million.

What we're seeing is the curve, which has the very high cost to build the first prototype sinking downwards to the most efficient point of production, where we're going to buy, becoming very tight. The variation is becoming very small year to year, because their degree of understanding of what the costing would be is getting very high. And the fixed inputs to setting up production have been done. Testing has well progressed. The remaining technical issues are being resolved. So confidence is becoming much higher.

Thank you, sir.

[The Chair, NDP, David Christopherson]

Thank you.

Time has expired, so I thank you for that.

That takes us once through our speaking rotation, colleagues. We still have 15 minutes on the clock. I would draw your attention to the fact that, as of right now, given the decision by this committee in its wisdom to eliminate the steering committee, we're not as well planned going forward as we have been. However, we do manage.

At this point, however, we have nothing scheduled for Thursday. I see your hand, Mr. Saxton. I see a number of hands shooting up, and that's good. That's what I was hoping for.

I have a suggestion for you. There has been some questioning around PBO numbers. There has been some questioning about Auditor General numbers. Whether this committee wants to have a further hearing is, of course, in the hands of this committee, and that can be scheduled for Thursday if we wish, or we can schedule a continuation of this for a week from now. On Thursday we could meet to do report writing, and we could do any forward planning that you'd like after that. I'm in your hands, but we do need to make a decision within the next 13 minutes as to what we're going to do at the next meeting or there won't be one. I'm in your hands.

After we've decided that, if there's time, we can decide what we want to do for the balance of this meeting, for the few moments that may remain, although I have a hunch they may evaporate pretty quickly. We'll see.

Mr. Saxton, I will recognize you first.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you, Mr. Chair.

I agree with your comments, and we do need to plan ahead. In that spirit, I would like to propose a motion to the committee at this time. That motion would read that on May 3, 2012, the committee hear from the Parliamentary Budget Officer for its first hour, and from the witnesses here today from the departments of DND, PWGSC, TBS, and Industry Canada for its second hour, as part of its study of chapter 2 of the Auditor General of Canada's spring 2012 report.

[The Chair, NDP, David Christopherson]

Let me just throw this at you. Would it be helpful to bring the AG for the PBO part, since there was a question about his numbers?

[Andrew Saxton, Conservative, North Vancouver, BC]

I think we'd take it one step at a time. I would put this motion forward.

[The Chair, NDP, David Christopherson]

All right. I'll take that motion then.

Again, the motion is to continue Thursday. The first hour would be the PBO; the second hour would be a continuation of our guests today. That's the motion. It's in order. I'll now put that before the committee.

Go ahead, Mr. Allen.