Public Accounts Committee on May 3rd, 2012

[The Chair, NDP, David Christopherson]

I now call this 42nd meeting of the Standing Committee on Public Accounts to order.

We have with us today Mr. Alexander, Parliamentary Secretary to the Minister of National Defence, who returns. Welcome.

Mr. Hawn, welcome back again.

We're also joined by Mr. John McKay, my former colleague on the national defence committee, who is the national defence critic for the Liberal Party. Welcome, sir.

And the Honourable Bob Rae, interim leader of the Liberal Party, is here with us also. Welcome, Mr. Rae.

With that, folks, today will be a regular two-hour meeting. The first hour will be with the Parliamentary Budget Officer. The second hour will be a resumption of our discussions and questions with the deputy ministers.

Are there any questions, comments, or concerns about the agenda as I've outlined it?

Very well, we'll move forward.

Mr. Page, welcome, sir. I would ask you to introduce your delegation and present your opening remarks. Then we'll begin our questions and comments, in rotation.

Colleagues, I want to remind you that with one hour we won't quite make the regular rotation. I'll leave it with you whether we will just exhaust it as far as we can or if some members have some creative idea they'd like to approach. Notwithstanding that, we'll begin the regular procedure. When we run out of time, we run out of time. Then we'll start the second hour of our meeting.

Agreed? Very good.

Mr. Page, you now have the floor, sir.

[Kevin Page, Parliamentary Budget Officer, Library of Parliament]

Thank you, Mr. Chair.

By way of introduction, I have Peter Weltman, one of the principal authors of our F-35 work. Tolga Yalkin, senior analyst, is another principal author of our F-35 work. Mr. Sahir Khan is the assistant parliamentary budget officer for expenditure and revenue analysis. And Dr. Mostafa Askari is our assistant parliamentary budget officer for economic and fiscal analysis.

Good morning, Mr. Chair, vice-chairs, and members of the committee.

Thank you for inviting me and my colleagues to speak to you today.

I have provided you with a deck which tracks my opening remarks. I would be happy to discuss the slides in greater detail.

Broadly speaking, I have three points to make. I will attempt to be as brief as possible. All points concern the PBO and the information provided to it or the information it has provided in relation to the proposed acquisition of the F-35 fighter jets.

First, over the last few weeks it seems that some confusion has surfaced as to whether or not the PBO included operating costs within its estimate provided to Parliament in March 2011. I'm here to reconfirm that it did; the PBO estimate includes operating costs.

When the PBO provides operating and support costs in its report, it tracks the language of the Department of National Defence costing guide, second edition, 2006. In chapter 2, page 2, that guide provides the following:

Operating costs include: personnel costs such as the activation of reserves, overtime cost of civilian employees, and the cost of any other personnel hired to provide service; rations, quarters, temporary duty, travel and transportation; variable and step variable operations and maintenance costs of equipment; total operating costs for facilities and materials consumed. The cost of capital assets purchased by the Department for the purpose of providing the service may also be included.

This definition of “operating costs” is consistent with the U.S. Department of Defense Cost Analysis Guidance and Procedures, published in December 1992. Furthermore, inclusion of operating costs within a life-cycle cost estimate is consistent with Treasury Board policy. Given this, it seems difficult to understand how there could have been any confusion as to whether or not the PBO included operating costs within its estimate.

Second, over the past few weeks, it has become clear that the Department of National Defence provided the PBO with figures that did not include all operating costs. The PBO understood that it had been provided with full life cycle costs from DND as required by the House of Commons Standing Committee on Finance in its November 1, 2010 motion. That motion required the provision of:

…All documents that outline acquisition costs, life cycle costs, and operational requirements associated with the F-35 program and prior programs (CF-18)…

In March 2011 the PBO provided Parliament with an independent life-cycle cost estimate for the F-35A. As part of that report, it compared figures provided by DND, obtained as a result of the motion, to its own estimates.

After publication of the PBO report, DND compared on its website, side by side, its figure of $5.7 billion and the PBO's figure of $14 billion, labelling both as operating and support costs. While the PBO's cost estimate was complete in this regard, it has since become evident that the government's public figures did not include all components of full life-cycle costs, as required by the House finance committee motion of March 2010.

Third, it might now be observed that the figures found in the Auditor General's report, confirmed as accurate by the Minister and Deputy Minister of the Department of National Defence, bring that department's life-cycle cost figures into the same order of magnitude as the PBO estimate. Furthermore, DND's figures and the PBO's estimates are in line with those found in the United States Department of Defense December 2011 Selected Acquisition Report, released last month.

Thank you again, for inviting us here today. We would be happy to take your questions.

[The Chair, NDP, David Christopherson]

Thank you, Mr. Page.

Colleagues, we'll now turn to questions and comments in rotation in the prescribed manner.

Mr. Saxton, you now have the floor.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you, Mr. Chair.

Thank you, Mr. Page and colleagues, for coming here this morning.

My first question is to ask you to please describe the pricing model that you used in the first report on the aircraft, and also, please explain the limitations of this model.

[Kevin Page]

Thank you, sir, for the question.

The model that we used in the report, which is actually described in some detail—certainly the model and the assumptions—is what we would call a cost-estimating relationship model. We're historically extrapolating costs on fighter planes.

We used this extrapolation of 30 years of history of previous fighter planes, indexed, based on a per-kilogram kind of basis, to project forward an estimate of acquisition costs. Then we derived sustainment costs based off that estimate of acquisition costs, based on historical estimates for different cost categories.

There are benefits and certainly limitations for this model. First of all, when we look at these top-down models, sir, we see them as tests of reasonableness of where costs may be. So we were actually pleased to see today—or actually earlier than today, when we saw the release of the full life-cycle cost estimates from the Department of National Defence—that our numbers are roughly in line on a total life-cycle cost basis.

But again, you're using high-level data and you're extrapolating forward using broad-based assumptions. You're assuming that history will repeat itself. So there are always limitations in that sense.

Yes, I think these sorts of models should be complemented by much more detailed, bottom-up models to provide real confidence. We hope, going forward in that context, to work with the new secretariat, or they could conduct some of this work themselves. I think it would add a lot to this debate in Parliament.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you.

Now, is another name for this costing model that you used parametric?

[Kevin Page]

Certainly we're using parameters. Again, we're creating an index based on history for these costs. There are parameters we're looking at that deal with performance, deal with design, and deal with weight. But yes, sir, I'm sorry, we're using parameters.

[Andrew Saxton, Conservative, North Vancouver, BC]

Is that a yes, or—

[Kevin Page]

It's a yes. I apologize, sir.

[Andrew Saxton, Conservative, North Vancouver, BC]

That's a yes. Okay, thank you.

Now, it's generally understood and generally agreed that this type of a costing model is used very early on in the development stage. So my question to you, Mr. Page, is why would you choose to use this type of costing model when the jet had in fact already been built and was already flying?

[Kevin Page]

That's a very good question, sir.

When we started this project in 2010, we went to different people to look at what our choices were with models. We were also looking at the history of this particular fighter plane from the early 1990s to present day. We looked at more bottom-up, more detailed parameter models where you literally cost component by component—the engine, the airframe, stealth components, etc.—and then we looked at these cost-estimating relationship models.

We actually invested in proprietary models in both cases. We chose this one, sir, primarily because it looked like history was repeating itself in this case. The costs were providing significant overruns. Even when we were doing our work, already just in the research and development phase, there was already 60% cost overruns. It looked, in that sense, like history was repeating itself, and we became comfortable with this high-level estimate.

I repeat, to your very good first question, these are high-level models, and they should be complemented by the work of DND and other officials, more bottom-up detailed models.

[Andrew Saxton, Conservative, North Vancouver, BC]

So the fact is that this is a high-level model; it's based on assumptions and the information that comes out is only as good as the information that goes in. Is that correct?

[Kevin Page]

I think that's well said. I would add to that, sir, that these types of models.... Everybody is using these models. It wasn't hard to find them in the U.K. and the United States. They're well used. In the SAR reports that we're using now, we provide an estimate actually of O&S. It's based on a CER parametric kind of model. So these models are well used. They have limitations.

[Andrew Saxton, Conservative, North Vancouver, BC]

Okay. From a technical perspective, can you explain how your costing model differs from that used by the Department of National Defence?

[Kevin Page]

Actually, Mr. Sahir Khan will take that question. Thank you, sir.

[Sahir Khan, Assistant Parliamentary Budget Officer, Expenditure and Revenue Analysis, Office of the Parliamentary Budget Officer, Library of Parliament]

Sir, we actually made a number of requests after the finance committee motion to get additional details. We have these actually published on our website.

[Andrew Saxton, Conservative, North Vancouver, BC]

Can you explain the difference between your model and DND's?

[Sahir Khan]

Actually, sir, we have not been provided with the details of the modelling exercise. The response we had was that they were using information provided by the project office.

[Andrew Saxton, Conservative, North Vancouver, BC]

You don't know the difference between your model and their model?

[Sahir Khan]

We were not asked to.... Our request from Parliament was not to review their model, sir.

[Andrew Saxton, Conservative, North Vancouver, BC]

My request from me, today, is to explain the difference between your costing model and DND's costing model.

[Sahir Khan]

We don't know what their model is.

[Andrew Saxton, Conservative, North Vancouver, BC]

You don't know what their model is. Okay. Very good.

In your report, Mr. Page, did you mention fuel, salaries, and other operating costs?

[Kevin Page]

Sir, when we provided.... When we are working with proprietors in this sort of case, we work with standard definitions of operating and support. We are working from U.S. definitions, which map very closely, as we highlighted in our opening remarks in our text.

[Andrew Saxton, Conservative, North Vancouver, BC]

Did you include fuel?