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Evidence of meeting #42 for Public Accounts in the 41st Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was cost.

A recording is available from Parliament.

On the agenda

MPs speaking

Also speaking

Kevin Page  Parliamentary Budget Officer, Library of Parliament
Sahir Khan  Assistant Parliamentary Budget Officer, Expenditure and Revenue Analysis, Office of the Parliamentary Budget Officer, Library of Parliament
Peter Weltman  Senior Director, Expenditure and Revenue Analysis, Office of the Parliamentary Budget Officer, Library of Parliament
Michelle d'Auray  Secretary of the Treasury Board of Canada, Treasury Board Secretariat
Robert Fonberg  Deputy Minister, Department of National Defence
Dan Ross  Assistant Deputy Minister, Materiel, Department of National Defence
François Guimont  Deputy Minister, Deputy Receiver General for Canada, Department of Public Works and Government Services
André Deschamps  Commander, Royal Canadian Air Force, Department of National Defence
Simon Kennedy  Senior Associate Deputy Minister, Department of Industry
Kevin Lindsey  Assistant Deputy Minister, Chief Financial Officer, Finance and Corporate Services, Department of National Defence
Tom Ring  Assistant Deputy Minister, Acquisitions Branch, Department of Public Works and Government Services

9:20 a.m.

NDP

The Chair NDP David Christopherson

Thank you, Mr. Kramp.

Next is Mr. McKay. You now have the floor, sir.

May 3rd, 2012 / 9:20 a.m.

Liberal

John McKay Liberal Scarborough—Guildwood, ON

Thank you, Chair.

Thank you, Mr. Page and your colleagues, for trying to bring some reconciliation to the numbers.

I think at this point DND, AG, and PBO essentially agree on the core numbers. The real issue has been whether the $10 billion gap has been communicated to Canadians, and for whatever reason the government chose not to do so.

Moving beyond that point to trying to stay all on the same page, I think you make a very valid point when you say that the handbook is the Canadian handbook, the U.S. handbook, the Queen's handbook, the Pentagon's handbook, and the intellectual framework for cost analysis is what is agreed by all parties: there can't be much variation going forward.

The question then becomes, as we are price takers and not price makers for this particular asset, how you reconcile Mr. Fonberg's numbers earlier this week, in which he said that he thought the plane was going to be about $75 million to $85 million—and I think he's using the $85 million number—when in fact the selected acquisition report of December 31, 2011, says it's going to be $137 million. That's $85 million versus $137 million. Even given that we're getting the cheaper version, if you will, how do we reconcile those two numbers?

The second issue was raised earlier. It has to do with the costs of flying this asset, which seem to be significantly higher than for the F-18s. The F-18s, I understand, cost somewhere in the range of $18,000 to $20,000 an hour, whereas this one costs $32,000 an hour. Are we in a situation wherein you can buy it but you can't fly it? The government seems stuck on this notion that the only amount they're going to spend is $9 billion.

I'd appreciate some reconciliation of how we get from $85 million to $120 million to $137 million, and how we reconcile using legacy costs for projected future costs.

9:20 a.m.

Parliamentary Budget Officer, Library of Parliament

Kevin Page

Thank you, sir.

I think with respect to the cost of acquisition, this is a complicated area where there are many different definitions. I think that in some cases this is just a question of comparing apples and oranges, unfortunately.

Again, the numbers we've seen from DND represent what we see as something called unit fly-away cost, which is usually the lowest number generally provided with this plane. I think those are the numbers in the range of $70 million to low-$80 million coming out of the selected acquisition reports.

The number you also referred to, in the range of $138 million a plane, is something called the average procurement unit cost. It includes different elements of costs. It's a more fulsome kind of cost. I was thinking about this. If I say to my wife that I want to buy a brand-new BMW motorcycle, and the price at the top of the sheet is $15,000, but when I walk away it's going to cost $20,000, but I only tell her it's $15,000, it's a bit of a problem.

So it is important, I think, going forward, which I think is the spirit of your questions, that we come to a common definition. If the average procurement unit cost seems to be the common definition used for a procurement basis in the United States, and we can get comfortable with that, I think, for the secretary going forward, we would all benefit. But to start, it's an apples and oranges question.

On your other point, about the cost of flying and the different costs, certainly coming out of the latest SAR, with respect to the F-35 having a higher operating and support cost per hour, I think this highlights the importance, in a full life-cycle model, of including the full operating and support costs. But certainly the models, which are parametric models, used by the project office to provide these estimates suggest higher costs for the F-35 on an operating and support basis.

Perhaps Mr. Khan could just add quickly to that.

9:25 a.m.

Assistant Parliamentary Budget Officer, Expenditure and Revenue Analysis, Office of the Parliamentary Budget Officer, Library of Parliament

Sahir Khan

Let me just add, and Mr. Hawn has said this in the past, that if you actually take the total acquisition pie and divide it by 65, you are actually looking at $138 million allocated per aircraft. If you keep quoting the $75 million, which is a fly-away cost, it risks understating. There's actually a really good paper from the Pentagon's acquisition unit covering why it's important to use the more fulsome cost number.

When you compare that to the latest selected acquisition report, you get a figure of $137 for all variants. So you want to do a little bit of discounting—some experts suggest 10% or 12%—to get to the A variant.

Again, as you note, on page 84 of the selected acquisition report, over the long term, there is a delta, based on current estimates, between the F-35 and the legacy aircraft it replaces. This is the issue that will have to be considered from a fiscal point of view.

9:25 a.m.

Liberal

John McKay Liberal Scarborough—Guildwood, ON

So when Mr. Fonberg—

9:25 a.m.

NDP

The Chair NDP David Christopherson

I'm sorry, Mr. McKay, your time has expired.

9:25 a.m.

Liberal

John McKay Liberal Scarborough—Guildwood, ON

Time goes so quickly.

9:25 a.m.

NDP

The Chair NDP David Christopherson

It just races by when you're having that much fun.

Mr. Aspin, you have the floor.

9:25 a.m.

Conservative

Jay Aspin Conservative Nipissing—Timiskaming, ON

Thank you, Chair.

I'm going to share my time with Ms. Bateman, but before I do, I have a couple of quick questions.

Welcome, gentlemen.

Mr. Page, you indicated that your model was based on $148 million per plane, and you used one model. Is that correct?

9:25 a.m.

Parliamentary Budget Officer, Library of Parliament

Kevin Page

That's correct. We provided an estimate of what we think would be kind of an average estimate over the delivery period. We also provided a total program cost estimate. We had $148 million as the average sustainment cost, and we had a total program cost of $128 million per plane.

9:25 a.m.

Conservative

Jay Aspin Conservative Nipissing—Timiskaming, ON

Thank you.

Why would you arbitrarily use conventional cost models, given that this project isn't unique in terms of its international appeal and in terms of there being eight to ten partners involved?

9:25 a.m.

Assistant Parliamentary Budget Officer, Expenditure and Revenue Analysis, Office of the Parliamentary Budget Officer, Library of Parliament

Sahir Khan

We spent a lot of time with people who worked with the F-22 Raptor—retired Pentagon officials, the GAO, the Rand Corporation—a lot of people who have a great deal of expertise over generations of fighter aircraft. In particular, one of the reasons we collaborated with the firm in the U.K. is that they actually provide similar advice to the U.K. National Audit Office and the U.K. Ministry of Defence, and they do this on a lot of fighter jet programs. What is interesting, actually, is that there is quite a bit of commonality associated with the program.

9:25 a.m.

Conservative

Jay Aspin Conservative Nipissing—Timiskaming, ON

You do agree that it was conventional modelling you used, even though this project is unique.

9:25 a.m.

Assistant Parliamentary Budget Officer, Expenditure and Revenue Analysis, Office of the Parliamentary Budget Officer, Library of Parliament

Sahir Khan

Actually, sir, a lot of the advice we got was in terms of the patterns, as Mr. Page said earlier, that were emerging in terms of development. There was a lot of expert advice that said that in fact it's not as unique as one might think. We've talked about different generations of aircraft, but in terms of a capabilities increase, there is a long history of aircraft, every generation having new.... They're larger, they're heavier, they have more capabilities. But in fact if you look at the time series in our report that was logarithmic, you'll see that the dispersion around the trend lines is actually very tight. It suggests that actually, as you go from generation to generation, these aircraft exhibit commonalities.

9:25 a.m.

Conservative

Jay Aspin Conservative Nipissing—Timiskaming, ON

That's fine. My time is limited and I apologize for interrupting.

The second thing that is curious to me is why you would use U.S. life cycle estimate of 30 years, Mr. Page, when you are a Canadian budget officer. Why would you do that?

9:30 a.m.

Parliamentary Budget Officer, Library of Parliament

Kevin Page

We were purchasing the plane from our American colleagues. I think the Auditor General suggested that perhaps even a better estimate would be 36 years. We thought 30 was appropriate. It's what other people were using.

9:30 a.m.

Conservative

Jay Aspin Conservative Nipissing—Timiskaming, ON

Why would you use one model and not a number of models? Why would you stick to just one model?

9:30 a.m.

Parliamentary Budget Officer, Library of Parliament

Kevin Page

As I said earlier, we'd prefer it. We would like to use multiple models. We started out looking at two different models.

Almost half of my team is sitting at the front of this table. We think it's important that DND also use multiple models. We use high-level models that test reasonableness and we come up with very similar numbers.

9:30 a.m.

Conservative

Jay Aspin Conservative Nipissing—Timiskaming, ON

Okay, that's fine, Mr. Page; I appreciate—

9:30 a.m.

Assistant Parliamentary Budget Officer, Expenditure and Revenue Analysis, Office of the Parliamentary Budget Officer, Library of Parliament

Sahir Khan

The result's quite important here. At the end of the day, while you have multiple approaches from the SAR, from DND, and from us, the interesting thing is they all end up in a similar result for the life cycle costs pro-rated for a 30-year period. We think this is pretty important.

When you do modelling, you test for reasonableness. We had a peer review panel, including the Congressional Budget Office, look at that—

9:30 a.m.

Conservative

Jay Aspin Conservative Nipissing—Timiskaming, ON

Okay, that's fine. I'd like to transfer my remaining time to Ms. Bateman.

Thank you.

9:30 a.m.

NDP

The Chair NDP David Christopherson

Ms. Bateman, you now have the floor.

9:30 a.m.

Conservative

Joyce Bateman Conservative Winnipeg South Centre, MB

Thank you.

I have four quick questions.

9:30 a.m.

NDP

The Chair NDP David Christopherson

You have one minute.

9:30 a.m.

Conservative

Joyce Bateman Conservative Winnipeg South Centre, MB

Fine, thank you.

First, thank you for providing this clarification and bringing us these figures. It is really necessary for all committee members.

My question is for Mr. Page.

I heard you in response to Monsieur Ravignat say that with a shorter life cycle you have lower costs. I'm not asking you to respond right now, but I am asking that we as a committee review the context of your comments. Perhaps you would like to clarify or if necessary correct your comments. My understanding is that the longer the life of an asset, the lower the cost.

In preparing your report, you reviewed the MOU that Canada signed as a member country. Can you tell us if Canada is on the hook for increases in development costs?