Public Accounts Committee on May 1st, 2012

[The Chair, NDP, David Christopherson]

Thank you.

Ms. d'Auray, you have the floor.

[Michelle d'Auray, Secretary of the Treasury Board of Canada, Treasury Board Secretariat]

Mr. Chair, members of the committee, good morning. I am Michelle d'Auray, the Secretary of the Treasury Board.

The Treasury Board and its secretariat set policies to guide departments in a wide range of management and resourcing activities, including the acquisition of assets. The Treasury Board is also the committee of cabinet which provides ministers with expenditure and contracting authority, when an acquisition process reaches that stage. As a point of information, the F-35 project has not yet reached that stage.

Our guidance on costing and the elements to be considered in estimating costs are predicated on the purpose for the costing and the decisions for which the information will be used.

For example, if an entirely new program is being considered, relevant or appropriate costs would include: personnel and benefits; accommodation; grant or contribution funds, if that is indeed the nature of the program; administration or overhead, which includes a range of activities such as communications, legal services, financial and human resources services, etc.; and any asset or materiel required to deliver the program.

For the acquisition of an asset, relevant or appropriate life-cycle costs would include the purchase price of the asset and other one-time costs directly related to its acquisition, such as the project office to manage the process. They would also include the delivery and set-up required and any consequential costs related to maintenance, replacement, refit, and repair to keep the asset operational throughout its useful life.

Where relevant to the acquisition itself, and only in those situations, personnel and training costs would also be factored. In instances where such costs are not incremental and are covered by an existing program for which the acquisition is made, they can be provided for information but are not directly related to the acquisition.

But as our policies also indicate, costs are one factor among many that are considered in any major decision. The ultimate goal is to achieve an optimal balance of overall benefits to the crown and the Canadian people in relation to the objective sought and results to be achieved.

In the context of the audit on replacing Canada's fighter jets, as the Auditor General has indicated in his report and in testimony before this committee, the nature of the multi-country development program, the assessment of the requirements for Canada's defence and security, the setting of a budget for the replacement of a fighter jet capability, and the opportunities provided for Canadian companies are all unique elements that do not easily lend themselves to the normal sequencing of an acquisition process or the usual application of our set of policies and practices. In recognizing this, and in accepting the Auditor General's recommendation, the government has given us a clear direction on the way forward.

As part of the seven-point action plan issued by the government on April 3, 2012, TBS will commission an independent review of DND's acquisition and sustainment project assumptions and potential costs for the F-35, which will be made public. Prior to project approval, TBS will also review the acquisition and sustainment costs and ensure full compliance with Treasury Board policies.

I would be pleased to answer any questions.

Thank you, Mr. Chair.

[The Chair, NDP, David Christopherson]

Merci. Thank you.

Are there any other submissions? No. Okay.

Before we go on rotation, I have a couple of points. One is a welcome to Mr. Alexander and Mr. Hawn, who are both returning from the previous meeting and have interest and involvement in this file. We welcome them back.

I remind colleagues that non-members are eligible to speak, providing their caucus colleagues are prepared to give their time to them. I hope there will be no problems moving in and out of that process.

If I could mention this, deputies will know that when they come to the public accounts committee for a hearing, there is an expectation that they will provide a departmental action plan.

Mr. Fonberg, you made reference to a seven-point plan, but I don't actually see a plan tabled. Is there a particular reason why, sir?

[Robert Fonberg]

No, Mr. Chairman, we're working on the precise approach. We did agree with the Auditor General's recommendations on life-cycle costing. We are working with the Treasury Board and the Comptroller General on the precise methodology, which is work carried over from last year, and we thought we would be better to complete that work before we tabled the plan.

[The Chair, NDP, David Christopherson]

It's not necessarily so. The reason this rule was implemented—I was here when this rule was brought in—was to prevent exactly what you're saying, because by the time we get the action plan, we're pretty disjointed from the focus of the discussion.

I can appreciate that it may not be complete, but I would suggest in the future, sir, and other deputies, that you at least bring what you've done. It's almost like a teacher with homework. If you're not done, at least bring in something to show me you've made some effort, but don't show up with nothing.

So in the future, please, all deputies, that is a respectful request and requirement from this committee when you come before a hearing.

I'd ask you to honour that, sir.

[Robert Fonberg]

My apologies, Mr. Chair.

[The Chair, NDP, David Christopherson]

Not a problem. Thank you very much.

Hearing no interventions then, we'll begin in the rotation. We will start with Mr. Saxton.

You have the floor now, sir.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you, Mr. Chair.

Thanks to our witnesses for being here this morning.

My first questions will be for National Defence. The debate following the Auditor General's spring report has been primarily focused on the difference in accounting between the Department of National Defence and the Parliamentary Budget Officer.

Can you tell the committee how the Department of National Defence and the Parliamentary Budget Officer arrived at two different cost projections?

[Robert Fonberg]

I can, Mr. Chairman. I will start by telling you that the department's work is based on a bottom-up approach that works through all of the information that's developed by the joint project office and the joint estimating team in Washington. It's very detailed work. My colleague can speak to that issue.

This is our understanding of the Parliamentary Budget Officer's methodology. I would say the Parliamentary Budget Officer was handed a very difficult task, asked to do an independent assessment of the costs, which we took to mean independent of the work of the joint project office and independent of our own work. But he did the best he could. He took a top-down approach. He used what is called parametric analysis, generally deemed to be not appropriate or suitable for a project in this state of development.

I could ask the chief financial officer to elaborate a little bit on those methodologies, if you would like.

[Andrew Saxton, Conservative, North Vancouver, BC]

Yes, please.

[Kevin Lindsey, Assistant Deputy Minister, Chief Financial Officer, Finance and Corporate Services, Department of National Defence]

Thank you, Deputy.

Mr. Chair, as the deputy has pointed out, the PBO used this parametric modelling, which is normally reserved for projects in the conceptual stage of development where there's very little cost data available to do a bottom-up analysis.

In doing so, the PBO estimated the acquisition price of the aircraft at $148.5 million each, and all of his subsequent costs derived from that. Because that acquisition price is significantly inflated above what we understand the cost to be from the joint project office at the time, all of the subsequent data and costs estimated by the PBO are similarly inflated, by significant amounts.

If the PBO had used what we understood the acquisition price of the aircraft to be at the time—that is based on SAR 2009, $75 million—then the PBO's estimate, other things being equal, would have been about $17.2 billion over his 30-year timeframe rather than the $29 billion.That difference is entirely attributable to the PBO's assumption about the acquisition cost of the aircraft.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you.

This government, in accordance with the recommendations of the Auditor General in his spring report, is implementing a new secretariat similar to the national shipbuilding procurement strategy. In your opinion, how will establishing this new secretariat bring more transparency and openness to the process of replacing the CF–18 fighter jets?

[Robert Fonberg]

I would start by saying, Mr. Chairman, that the secretariat will address many of the concerns and gaps that the Auditor General identified in his report.

I would turn to my colleague from Public Works, who will chair that committee, to spend a minute talking about some of the details and work plans of that secretariat.

[François Guimont]

Thank you, Mr. Fonberg and Mr. Chair.

There are two ingredients. First is a structural set of elements, which very much mimics the approach we took for the national shipbuilding strategy. There are three levels: coordination, oversight, and consensus decision-making.

The first level is a top-tier, deputy minister coordinating committee that I will chair. Colleagues here today will be with me on that committee. We also have ex officio members, which is not unusual—Treasury Board, Finance. This top tier will be supported by an ADM committee similar to what we did with the assistant deputy minister committee, similar to what we did for national shipbuilding. Mr. Tom Ring will chair that committee. These are colleagues who will be doing the tasking and pushing forward the agenda.

The actual working-level tier is the secretariat, people co-located from various departments who essentially carry out the work.

There is one point I would make about oversight and transparency. There is one variable, which is new for the secretariat, and that is the inclusion of two external members on the DM coordinating committee. We are in the process of selecting these individuals. This was not the case for the national shipbuilding strategy. I want to be clear, however, that we are going to use third parties throughout the work of that tiered structure. So third parties were used for national shipbuilding, and we will continue doing that, but the difference I'm making is that there will be two independent members on the DM coordinating committee as well.

That is a structure that will be superimposed on the actual seven-point action plan. We are now working at developing the terms of reference, which essentially will be the modus operandi of the committee structure, and from there we will move on to tasking and defining priority elements against the seven-point action plan.

At the macro level, this is where we are right now.

[The Chair, NDP, David Christopherson]

Thank you. Your time has expired.

Over now to Mr. Allen. You have the floor, sir.

[Malcolm Allen, NDP, Welland, ON]

Thank you, Chair.

Mr. Fonberg, how long have you been Deputy Minister of the Department of National Defence?

[Robert Fonberg]

I think about four years and seven months, Mr. Chairman.

[Malcolm Allen, NDP, Welland, ON]

So sometime in 2008 you would have been appointed, give or take a month or two.

[Robert Fonberg]

It was 2007, I believe.

[Malcolm Allen, NDP, Welland, ON]

Thank you.

You would have been around in 2010 for the Auditor General's fall report, chapter 6, on the Chinooks and the maritime helicopters. Is that correct?

[Robert Fonberg]

I would have been the deputy minister at the time, yes, sir.

[Malcolm Allen, NDP, Welland, ON]

Did you read the report of the Auditor General, chapter 6, in the fall 2010 report?

[Robert Fonberg]

I did, indeed.

[Malcolm Allen, NDP, Welland, ON]

Did you make note of the recommendation? It says that we should have full life-cycle costs involved when we bring estimates to government.

[Robert Fonberg]

Mr. Chairman, we tabled a fairly detailed management action plan—not this time but at that time—in response to that particular recommendation, and we are prepared to talk to the progress we've made in responding to that recommendation.