Public Accounts Committee on May 15th, 2012

[The Chair, NDP, David Christopherson]

I now call this 45th meeting of the Standing Committee on Public Accounts to order.

Colleagues, you will know, as per previous direction of this committee, that we've asked the Auditor General to return once again. The order of the day in the first hour and normal rotation of questions and comments is regarding chapter 2 of the spring report. The second half will be on estimates.

With that, I will welcome Mr. Ferguson. I understand you've fully recovered, sir. It's good to have you back, and I'm glad you're back in the pink of health.

If there are no interventions in terms of procedure, I will move us along.

I understand you want to do some opening remarks. Very good. With that, sir, you have the floor for your opening remarks. Please begin, Mr. Ferguson.

[Michael Ferguson, Auditor General of Canada, Office of the Auditor General of Canada]

Good morning, Mr. Chair.

I am pleased to be here again to discuss chapter 2 of my spring report. I am accompanied by Assistant Auditor General, Jerome Berthelette.

We have followed the committee's deliberations and will be pleased to answer your questions.

I would like to take this opportunity to address a few points that have come up in the course of this committee's work.

To begin with, I would like to address the issue of life-cycle costing for the acquisition of goods and services. Life-cycle costing is required by Treasury Board policies and is also included in the Department of National Defence's own project approval directive. This directive states the following:

The life-cycle cost estimate includes estimates of the total cost of the resources needed to complete project activities and deliver the product system infrastructure, i.e., project acquisition costs, as well as the cost of the resources needed to operate, maintain, and dispose of the product system infrastructure, i.e., ownership costs.

While we believe in and support life-cycle costing, it is not a requirement established by the Office of the Auditor General.

As illustrated in exhibit 2.6 of the chapter, life-cycle costing includes two main categories. The first is capital costs. The second is the cost of personnel, operating, maintenance and contracted sustainment. All figures appearing in exhibit 2.6 are National Defence's estimates and not those of the Office of the Auditor General.

As described in the chapter, we believe that the Department of National Defence did not include some significant cost elements in a testament of life-cycle costs. In addition, many of the costs are not yet known or cannot be reliably estimated. These are itemized in paragraphs 2.71, 2.72, and 2.73 of the chapter.

The estimated life of the F-35 is about 8,000 flying hours per aircraft. The estimated life of the aircraft is calculated in years, based on the number of anticipated flying hours per year per aircraft.

Working from estimates of contracted sustainment costs over 36 years provided by the joint strike fighter program office, National Defence is able to estimate costs over 36 years.

Mr. Chair, I am concerned with suggestions that accurate estimation and the inclusion of personnel, operating and maintenance costs are not important, since they would be incurred regardless of the aircraft selected to replace the CF-18. National Defence states that its $16-billion estimate is already within its base budget. It is important for decision makers and parliamentarians to understand National Defence's estimate for personnel, operating and maintenance costs even though these estimates are already within the existing budget allotment.

National Defence currently assumes that the F-35 fleet costs will be similar to those related to the CF-18 fleet. We reported on a similar situation in chapter 6 of our fall 2010 report on the acquisition of military helicopters. Specifically, we noted that National Defence initially assumed that the personnel, operating, and maintenance costs for the new Cyclone maritime helicopter would be the same as those for the legacy Sea King it was replacing. National Defence later realized that these costs would exceed those associated with the Sea King by $1.1 billion over 20 years.

Finally, Mr. Chair, I would like to state for the record that we stand behind all of the facts presented in the chapter, and note that these facts were accepted by the department.

This concludes my remarks. We would be pleased to answer any questions the committee may have.

Thank you.

[The Chair, NDP, David Christopherson]

Very good. Thank you, Mr. Ferguson. You did have an opening statement, didn't you, sir?

With that, we will begin the rotation, as is normal procedure, with Mr. Saxton.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you, Mr. Chair.

Thank you, Auditor General and Mr. Berthelette, for being here today.

Chapter 2 of your spring report is different from most other reports, in the sense that it was audited before the actual purchase took place. It's an audit of procurement.

What are the benefits of examining a purchase such as this before the procurement actually takes place?

[Michael Ferguson]

We decided to do this audit primarily because of some of the other work we had done in National Defence. We felt that we could provide the most value by doing the audit before the purchase was completed in order to identify any weaknesses that could be rectified during the process, rather than at the end of the process.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you.

The government has taken action and implemented a seven-point plan designed to address the issues you flagged in your report. It has gone even further to ensure that the process to replace Canada's fighter jets is robust, fair, transparent, and accountable.

Do you believe that the government's response to your report provided a measured and adequate response to your findings?

[Michael Ferguson]

We presented the report in April. We came to our conclusions, our observations, and made our recommendation. As I understand it, the government has put forward its position.

We haven't gone in and audited that response in any way on its adequacy. We certainly acknowledge that the government has responded to the report and has indicated it will take action.

[Andrew Saxton, Conservative, North Vancouver, BC]

I appreciate that you haven't actually audited the response, but in your opinion does the response adequately address your concerns?

[Michael Ferguson]

In the chapter we made a recommendation that the full costing information should be brought forward. We also felt that there were existing policies and procedures in place that needed to be properly followed to see the procurement through to the end.

Without specifically going through the government's response and assessing it against criteria, I can't give you a yes or no answer as to whether it's adequate. We certainly acknowledge that the government has responded. We are glad to see that the government has responded. But we haven't done any work on trying to assess the adequacy of the response.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you.

The government has committed to tabling annual cost estimates in Parliament and providing regular briefings. Do you believe these measures will be useful in making sure Parliament is kept informed of the ongoing process?

[Michael Ferguson]

The recommendation we made in the report was about making sure that financial information was brought forward. The critical thing is to ensure that the financial information is complete and any assumptions in that financial analysis or information are clearly articulated.

The fact that financial information will be brought forward is a good step. That's what we were looking for. The rest will be to make sure that information is fulsome and includes any explanations it needs so people can understand it.

[Andrew Saxton, Conservative, North Vancouver, BC]

Okay. Are there any other points that you would recommend for us to be aware of going forward to ensure that Parliament is kept informed of the process?

[Michael Ferguson]

As I think I said last time, in terms of moving forward I think the critical thing is that the people who are charged with moving forward on this have a clear statement of purpose so that they clearly know what is expected of them. If they have that, if they understand exactly what it is they are supposed to do, they have that clear statement of purpose, then I think the rest of the process will come out of that. I believe that's the fundamental basis for what needs to happen.

[Andrew Saxton, Conservative, North Vancouver, BC]

Okay.

Thank you, Chair.

[The Chair, NDP, David Christopherson]

Thank you very much, both of you.

Now we go to Mr. Allen. Mr. Allen, sir, you now have the floor.

[Malcolm Allen, NDP, Welland, ON]

Thank you, Chair.

Welcome back, Mr. Ferguson and Mr. Berthelette.

Sir, if I could start with your point 11 in your final statement, you said, “ Finally, Mr. Chair, I would like to state for the record that we stand behind all of the facts presented in the chapter”, referring, obviously, to chapter 2. So let me refer to two letters: one dated February 16, 2012, to you, Mr. Berthelette, from Public Works and Government Services Canada; and a June 1, 2010, letter from Mr. Dan Ross to Mr. Tom Ring.

Let me start with the first letter, which was to Mr. Berthelette. On page 3 it talks about your report, chapter 2, and concerns the implications of the Department of Public Works signing off based on an SOR, statement of operational requirements. In the letter, Public Works are inferring, and let me quote from the paragraph:

This implication is based on a concern raised by PWGSC staff to senior management that the Department had not reviewed the Statement of Operational Requirements. However, in the absence of the final Statement of Operational Requirements, we obtained written confirmation of the two key operational requirements that ultimately distinguished the F-35 from all its competitors. This confirmation was obtained from the Assistant Deputy Minister-Materiel, DND...

—who is not identified in here, but who I'll identify as Mr. Dan Ross—

who had intimate knowledge of the Statement of Operational Requirements.

The letter then states, “The intent of this letter is to confirm DND's requirement for a fifth generation fighter...”, basically asking Public Works to go ahead and sole-source.

Am I misreading these two, sir, in the sense that Public Works is saying they didn't read the SOR, they didn't see an SOR, but Mr. Ross is the expert, and since he told them it's okay to have a sole source then they should just go ahead and say go ahead and have a sole source, or am I just absolutely wrong about that?

[Michael Ferguson]

What we pointed out in the chapter was that we felt that Public Works did not have enough information or the information they should have had in terms of approving the sole-source request. So that's where we fundamentally identified that there was a weakness in the process: it was in that area that Public Works should have been provided more information from National Defence in their request for sole-sourcing.

[Malcolm Allen, NDP, Welland, ON]

Thank you, sir.

I would point out, to re-emphasize in that one paragraph of their letter to Mr. Berthelette, it says “in the absence of the final Statement of Operational Requirements”.

So to you, sir, clearly, your facts in the chapter are absolutely correct, and even though Public Works was disputing the facts, according to some of their correspondence they didn't actually see the statement of operational requirements when they made a decision, because it wasn't provided to them.

I'm not asking you to confirm that; I think you've actually said that, so I'll leave that to the side.

The other piece of action in this letter I would ask you to comment on--and I'm not sure that you can--is on the signed page of this document, again the same letter, where there's a handwritten piece that says:

P.S. At the request of the OAG, this letter was re-signed on the 17.02.2012 with the “Protected A” clearance as opposed to “Secret” as originally sent on 07.02.2012.

Can you tell us why that request was made and why they acquiesced to the request? If they thought it was “Secret” to start with, why did they change it to “Protected A”?

[Michael Ferguson]

The reason we requested them to reconsider the classification of the letter was in order that we could reflect information from the letter in the report. That's why we asked them to reconsider that classification.

They would have been the ones, obviously, that had to then make the assessment of whether it could be reclassified or not, and they did do that.

[Malcolm Allen, NDP, Welland, ON]

Well, sir, you should be commended for actually shining a light, because if they had been left alone and not asked, they would have kept it a secret and we'd never know.

But let me go back to what Mr. Fonberg described as the “definitions” versus “options analysis” phases.

[The Chair, NDP, David Christopherson]

Real quick, Mr. Allen.

[Malcolm Allen, NDP, Welland, ON]

Basically, what has happened, sir, is that they changed it last year, but I noticed that in their letter they actually said that they made the definitions phase start in 2010. Do you concur with that?

[Michael Ferguson]

Mr. Chair, that's not something I can give a very short answer to. I would have to look at that to determine whether I could agree with that or not.

[The Chair, NDP, David Christopherson]

Very well. Mr. Allen is out of time. What I'll ask Mr. Allen to do is have his colleagues consider putting the question.

Also, Mr. Ferguson, if it's appropriate to provide that information in the context of another answer, we'll give you just a little flexibility to do that, but time has expired for Mr. Allen.

I will have to move us now to Vice-Chair Kramp, who now has the floor.

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

Thank you, Chair.

We welcome you back. We do appreciate you coming back. We're glad to see you looking fit and healthy—maybe not ready to run a marathon, but certainly getting well.

Given the inherent uncertainties when we are embarking on a developmental program such as this, how can we ensure in our process that we maintain the flexibility that's needed to respond to the various changes that will occur in the process? What would you recommend? How do we maintain the flexibility, given the constraints and the partnerships involved?