Public Accounts Committee on May 15th, 2012

[Bev Shipley, Conservative, Lambton—Kent—Middlesex, ON]

Thank you.

I have had some questions, actually. I'm not saying we shouldn't be doing this. I'm just trying to understand.

In your comments at the start, you talked about the Treasury Board policies. Then I read that “the life cycle cost estimate includes...”, which seems to me to be more of a definition than a policy.

We had been told by Treasury Board that for a purchase of this type—and I think Treasury Board and National Defence had both been using 20 years all along—as you move beyond 20 years, speculation on the accuracy of costing becomes very difficult. I think it's very likely difficult to be accurate at 20 years, and more so since we now have 20 years, 30 years, and 36 years. For some of us it's hard to understand, because everyone thinks and says these are the true times in terms of a life cycle, whereas I understand the life cycle to be the time during which we own that acquisition.

Why do we have three timelines, and how do we justify each of those?

[Michael Ferguson]

I think there are a number of pieces to your question.

As I tried to indicate in the opening statement, the 36-year life was not our number. It was a number based on information National Defence was receiving from the joint strike fighter office. That information included 36 years' worth of sustainment costs. The life cycle of the aircraft is based on the total number of hours the aircraft is expected to be able to fly, which is 8,000 hours. You simply divide that by the number of hours they expect to fly the aircraft each year. You come up with the number. That was 36 years, and it wasn't our estimate. It was in the information.

[Bev Shipley, Conservative, Lambton—Kent—Middlesex, ON]

It was based on 8,000 hours and simple math.

[Michael Ferguson]

Right.

The other point, about the 20 years versus a longer life cycle, that, to me, is one of the defining things about this type of a program. This purchase was different. This was a development program. This was for a very complex asset. One of the things we identified that was not included in their life-cycle costing, for example, was the cost of attrition of aircraft. If the intention is to maintain 65 aircraft, then with attrition you would expect there would have to be some replacement of aircraft. That attrition and that replacement would have to be carried out over the whole 36 years, not just 20 years.

I think it was important in this one, because these are very long-lived assets, because they are complex, because you have issues like attrition, and because they had the information, that the parties involved recognize that they needed to go beyond just the normal 20 years for this particular acquisition.

[The Chair, NDP, David Christopherson]

Thank you, Mr. Shipley. Your time has expired.

We'll go over now to our second vice-chair, Mr. Byrne.

Welcome back, sir. You also are returning from a bit of an illness. We're glad to have you back with us, sir. You now have the floor.

[Gerry Byrne, Liberal, Humber—St. Barbe—Baie Verte, NL]

Thank you, Mr. Chair. My pneumonia is feeling top shape now.

Mr. Ferguson, you emphasized in your opening remarks the notion of life-cycle costs. This was a particular emphasis for you. During the course of your audit, which was concluded in the fall of 2011, were you able to confirm that the life-cycle costs of the F-35 were likely to be exactly the same as or similar to the life-cycle costs of the CF-18?

[Michael Ferguson]

We didn't try to analyze what the life-cycle costs would be. We didn't try to estimate whether they were going to be similar or not. We recognized that National Defence was saying they felt the additional costs beyond the contract for sustainment would be similar to those for the CF-18. We felt that was a pertinent piece of information that should have been disclosed. We didn't do an analysis ourselves on what the maintenance and operating costs would be.

[Gerry Byrne, Liberal, Humber—St. Barbe—Baie Verte, NL]

The Deputy Minister of National Defence, Mr. Fonberg, said to this committee just two or three weeks ago that he and the department are still of the opinion that the sustainment costs, the life-cycle costs, of the F-35 will indeed be a one-to-one ratio with the CF-18.

Do you have any information that may confirm or contradict that in an immediate or current context? I'll just give you the example of the Congressional Budget Office or other accounting bodies or other information that may have been received by the primary driving force behind this, which is the U.S. government. Have we received or should we be aware or consider that the costs may not actually be a direct one-to-one ratio with the CF-18?

[Michael Ferguson]

There have been, I believe, some references in the U.S. to the fact that if you do some comparisons of the F-35 to an F-18, the cost of maintaining a particular aircraft might be higher.

What that does is it simply means that it raises the types of questions that need to be asked. National Defence may have a perfectly good reason for how that can be offset within their current budget envelope. The problem we have, I think, in terms of those costs is that National Defence for the most part has simply said those costs are in their budget, they're going to be the same, and they haven't provided enough information for people to understand whether that really is an appropriate assumption.

And that's what we feel they need to do: make it clear and defend that assumption that the costs are going to be the same.

[Gerry Byrne, Liberal, Humber—St. Barbe—Baie Verte, NL]

Thank you.

Would you be able to task officials within your office, if they have information assembled through outside sources concerning what the potential sustainment costs would be—such as information from the Congressional Budget Office or other sources—to provide that information to the clerk?

[Michael Ferguson]

We certainly could take a look and see what type of information we have. We wouldn't do sort of an exhaustive search of information.

[Gerry Byrne, Liberal, Humber—St. Barbe—Baie Verte, NL]

Understood.

[Michael Ferguson]

It would be whatever we had where there might be some references to sustainment costs. We could table them with this committee.

[Gerry Byrne, Liberal, Humber—St. Barbe—Baie Verte, NL]

Thank you.

Finally, on the notion of what are the life-cycle and sustainment costs that should be presented, not only to cabinet but to Parliament and to Canadians, we often talk in this committee about lessons learned. There have been lessons learned.

I'm approaching this from the point of view that there were lessons learned through the Chinook helicopter purchase. Chapter 6 of the Auditor General's report from a couple of years ago basically did say that the life-cycle costs should be complete and should carry forward the following types of information. That was agreed to by the government, I understand.

Also, the Standing Committee on Finance included specific references in a report that they prepared for Parliament indicating that full life-cycle costs should be included in the cost estimates, which were agreed...by the government.

[The Chair, NDP, David Christopherson]

Place your question, please, sir.

[Gerry Byrne, Liberal, Humber—St. Barbe—Baie Verte, NL]

If we were to use that as a basis of what we now should expect--recognizing that twenty years ago we probably did things differently, ten years ago we did things differently, and even three years ago we did things differently--if we were to use that as a basis point, that just a couple of years ago we had the Chinook helicopter purchase exercise, to say that this is how we will report—

[The Chair, NDP, David Christopherson]

Question, please, Mr. Byrne. You're way over.

[Gerry Byrne, Liberal, Humber—St. Barbe—Baie Verte, NL]

Should we have gotten different numbers for the F-35?

[Michael Ferguson]

Certainly some of the time period we were looking at in this audit was the same time period as the helicopter purchase, so the fact that we've identified that there were some similar issues in both cases was not particularly surprising.

But I think what this does indicate.... The fact that we are still talking about life-cycle costing and we are still talking about what's appropriate in life-cycle costing means that there needs to be some serious consideration about just how life-cycle costing is supposed to be applied. I don't know whether that is a Treasury Board responsibility or a National Defence responsibility, but the fact that there's still confusion about life-cycle costing and how it should be applied I think is indicative of the fact that it needs to be re-examined to determine the best way to apply it.

[The Chair, NDP, David Christopherson]

Thank you.

Madam Bateman, you have the floor.

[Joyce Bateman, Conservative, Winnipeg South Centre, MB]

Thank you very much.

Thank you so much for being here, sir. We appreciate the detail you're giving us on this and that you're here yet again.

We've been discussing this for some time, so bear with me, if you will.

At the start of my little time slot, I just want to, for the record, get your recommendation on this issue. What was the essence of your recommendation on this very important chapter?

[Michael Ferguson]

For the record, the recommendation is contained in paragraph 2.77. I can read that into the record, if so desired.

[The Chair, NDP, David Christopherson]

That's up to Madam Bateman. Would you like it read into the record, ma'am?

[Joyce Bateman, Conservative, Winnipeg South Centre, MB]

Will it be in the record without the Auditor General reading it?

[The Chair, NDP, David Christopherson]

Well, it's in the report.