Public Accounts Committee on May 3rd, 2012

[Robert Fonberg]

Mr. Chairman, ADM Materiel Dan Ross actually has the technical details on that—

[Malcolm Allen, NDP, Welland, ON]

I'm not looking for technical details.

[The Chair, NDP, David Christopherson]

That's a fair deferral.

[Malcolm Allen, NDP, Welland, ON]

I understand, Chair. I'm not going to pursue it any longer. I simply asked to explain how we got more or less. Mr. Fonberg actually said it was the same. Mr. Ross says that the F-35 is actually going to cost more to fly than the CF-18. I accept them at that, so we'll move along.

Mr. Fonberg, you said in testimony on Tuesday that the PBO didn't use operating costs when they came up with these numbers. The PBO was here today, Kevin Page. He said he absolutely did use operating costs. We may not agree on this number, and that's okay, but do you now agree that the PBO did actually use operating costs to come up with the number?

[Robert Fonberg]

Thank you for the question.

Mr. Chairman, I may actually ask Dan Ross to speak again to some of the correspondence recently and over time with the PBO. What we asked for clarification on, about two weeks ago, was for the schedule of operating costs that we used to build our operating cost numbers. Mr. Ross can walk through that: personnel salaries and allowances, fuel and lubricants, base support services, and on and on.

We are unable to identify any of that in his report. We have asked him for clarification and we have received no firm clarification whatsoever that any of those items are included, other than a statement by him that they are included.

Dan, would you like to...?

[The Chair, NDP, David Christopherson]

I'm sorry, Mr. Fonberg; we're a minute over now. I just do not have the time. Mr. Allen's colleagues are quite welcome to pick up from that if they wish, but we do have to call the time now.

I will now move over in rotation to Mr. Kramp. You have the floor, sir.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Thank you, Mr. Chair.

Welcome to our guests again.

I have a quick question to Mr. Fonberg and then I'll be going to Mr. Kennedy.

Mr. Fonberg, there was a statement made today by the PBO that quite frankly is a little bit alarming. I would like some confirmation one way or the other and/or some explanation for that statement. The PBO claimed that you did not fully respond to his requests. Is that true? And would you care to respond to that in some particular manner?

[Robert Fonberg]

To the best of my knowledge, we fully responded to the PBO's request, Mr. Chairman. I have the timelines of all the correspondence back and forth, starting in November 17, 2010, and ending with his report on March 10, 2011. I don't believe that he raised issues with us on the substantive response, including the latest one of March 3. I'm not sure what conclusion he was drawing, Mr. Chairman.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Okay, thank you very much.

Mr. Kennedy, you alluded to some of the industrial benefits going forward, and I think it is important. There's no doubt that the major focus of this committee hearing and our examination of the issue from both the Auditor General and the PBO has obviously to ascertain, as close as possible, given the nature of this acquisition, the expenses, the cost of this aircraft, the cost of operation acquisition, development, etc. I also know, from being a person in business for many years, that your expenses are of course crucial. You have to control them. You have to know what they are. But also, if you have any potential income you have to factor that into it as well. A government has to factor in all of the potential possibilities going forward.

I would like to expand a little bit on the industrial benefits. We have close to a hundred companies, I'm led to believe, across this country that are regionally spread out and that are participating in that. Can you confirm that?

[Simon Kennedy, Senior Associate Deputy Minister, Department of Industry]

At the moment, 70 companies have won work on this particular project. I have some information I could share with the committee. They are spread all across the country.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

I can understand for reasons of security and particular sensitivities that you're not able to identify those companies, but I do think it is important to recognize that there is a potentially significant level of income with this. Would you accept that fact?

[Simon Kennedy]

The estimate right now for the potential opportunities for Canadian firms is $9.85 billion U.S.; that's for the production of the aircraft and does not include sustainment and some of the service. For the actual manufacture, if we have the 3,100 or so planes that are estimated to be produced, it's just under $10 billion in terms of opportunities for Canadian companies.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

How would you come to that?

As an example, when the PBO took the costing and then extrapolated that over the next 20 years, have you done a similar process based on the success to date, the fact that we've spent close to $300 million in upfront costs and yet we've received $435 million in contractual guarantees and contractual programs that are a benefit to Canada?

Did you extrapolate from these numbers? How did you come to that figure?

[Simon Kennedy]

Mr. Chair, I could say two things to that.

The first is if you look at the current contracts for work on production of the JSF, and you assume that the Canadian companies that have won those contracts will continue to be successful and will continue to be part of the supply chain—in other words, they won't lose the work they've already won—if you extrapolate the work they're already doing to the full run of the aircraft production, that amounts to just under $7.5 billion U.S.

In a sense, of the just under $10 billion that has been identifed as potential opportunities for Canadian companies, if the Canadian firms that have already won work continue to keep that work through the production of the aircraft, that's about 75% of the identified opportunities that would be locked up.

We think that Canadian companies have done very well to date.

Twice a year we get detailed information from the prime contractors on the available opportunities and all the Canadian firms that they feel stand a good chance to participate. We sit down with the prime contractors and we validate all that information. We also have regular meetings with major Canadian suppliers to do some triangulation, in a sense.

We talk to Canadian firms who are vying for business and we can ask them questions about whether or not what we're hearing from the prime contractors matches up.

To date we haven't had any reason to experience concern.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Approximately $9 billion, give or take a little....

[Simon Kennedy]

Just under $10 billion U.S.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Thank you.

On the asset side, coming through with potential contractual opportunites for Canadians, might there be some intangibles too? What about sharing of technology, sharing of research, R and D, investment, other opportunities, collaborations? Is that included in this, or would this be over and above that?

[Simon Kennedy]

That is one of the significant differences with this approach. We're not using traditional IRBs, industrial and regional benefits, but we're involved in a consortium to develop the technology, because the Canadian firms are in on the ground floor on the development of that technology.

I'll give you one example: a firm here in Ottawa that, as part of the JSF work, has developed a sensor for the engines. They've now been able to turn around that technology and are selling it for civilian use. This has nothing to do with the F-35, but because they are part of the F-35 program, they have been able to develop this technology, which is now going to be sold to Airbus and Bombardier and others on a commercial basis.

The technology being developed is in some cases very advanced technology, and these companies have been able to use that in their other lines of business.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Thank you very kindly.

[The Chair, NDP, David Christopherson]

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

[Mathieu Ravignat, NDP, Pontiac, QC]

Thank you, Mr. Chair.

My question is for Ms. d'Auray.

If the CF-18s are operational for 40 years, why do you say that 20 years is a reasonable estimate when it comes to calculating full life cycle costs for the F-35 fighters?

[Michelle d'Auray]

Thank you, Mr. Chair.

For the purposes of presenting a procurement project to Treasury Board, we use a 20-year cycle to predict costs, especially for maintenance contracts. As I pointed out, it is difficult to calculate maintenance costs for more than 20 years.

So the life cycle of an asset can be calculated for a longer term for planning purposes, but for procurement purposes…

[Mathieu Ravignat, NDP, Pontiac, QC]

Is there a difference between maintenance costs and full life cycle costs of a procurement?

[Michelle d'Auray]

Full life cycle costs are used at different stages of planning.

[Mathieu Ravignat, NDP, Pontiac, QC]

So you are saying that the 20-year period is for maintenance. It is not necessarily the aircraft's full life cycle. Is that right?