Public Accounts Committee on Nov. 24th, 2016

[The Chair, Conservative, Kevin Sorenson]

Thank you, Mr. Chen. We're out of time.

Mr. Godin, you have five minutes for this second round.

[Joël Godin, Conservative, Portneuf—Jacques-Cartier, QC]

Thank you, Mr. Chair.

Honestly, I am scandalized by what I am hearing today; that is how I feel. I think we are making fools of ourselves and Canadians are being made fools of.

Mr. Finn, you just said you want it to be effective in the next ten years. How can we believe you? Today you presented a plan for 2016, with a deadline that will be extended. The steps in the 2013 and 2016 plans do not match and are postponed to a later date.

My colleague said earlier that private companies manage their inventory, what is going out and what is coming in. Depending on the company size, part of their inventory remains on the shelves, of course, but it is recorded.

We are in 2016. With the systems that exist today, I do not understand how National Defence cannot maintain a proper inventory of its equipment.

It is very simple. There are three kinds of stock. Stocks from the past can be recorded. Determine their value based on expert calculations, whether it has increased or decreased, but at least we would have an indication. For the current stock, the value is not hard to determine: it equals the purchase price. As to the future stock, you have to decide how you will manage it and then harmonize it all after that.

Does National Defence not have trade services that who could do this? If you truly intend to find a solution, you can use departmental staff. But is there the will to do it?

That is the question I have to ask myself. I do not feel the will. You are full of good faith, and I do not mean you personally. That said, I do not feel you are taking the necessary steps to achieve your objectives.

My comments before the committee are always the same. The Auditor General conducts audits and you testify about them. Mr. Forster, I am not sure that you will be relieved at 5:30, because you will simply postpone it to another meeting. The fact that you are taking part in this exercise is a step in the right direction, but that is not what I want. In fact, I do not want to see you. It would be a good sign if I didn't see you because that would mean the Canadian Forces' inventory was being done properly, and the committee could then focus on something else.

NATO is now calling on Canada to invest more money. How will we as parliamentarians vote when, in 2016, we cannot track our inventory properly?

I am not very comfortable or assured. How can you reassure us and give Canadians confidence in the management of your inventory? We know that National Defence has a huge budget in Canada. We have to respect Canadian taxpayers who invest in this department with their taxes; that is the minimum. I am asking you to reassure us today so we can move forward in the right direction.

You are saying things, but I am having trouble believing you. I am willing to give people a chance. Can you reassure us and confirm that you will take the necessary steps?

[The Chair, Conservative, Kevin Sorenson]

Go ahead, Mr. Forster.

[John Forster]

Thank you for your question.

I guess I'll come at it like this. We have two issues, I think, one going forward and one dealing with the legacy. Going forward, we want to make sure we have a modern information system that can collect the financial and inventory information and put it in one place. That's being done. Two, we want to make sure going forward that all of the people buying and entering inventory information into the system are well trained, have clear policies, and have clear practices. We have the accountability in place that they're to do this and take this seriously. This is going forward. That's being done.

We want to make sure going forward that we're putting in the inventory and it's clear and correct, and I think even the Auditor General acknowledges that in terms of quantity, we made significant progress and it's in not too bad a shape, but there's still more to do on quantity—how many of this and how many of that.

I think where the Auditor General has signalled a problem is on the value of that inventory. What we're trying to do with the technology project, with the information systems, with the accountability and with the policies and practices for things we're buying now.... It's going in, and it's relatively clean and accurate.

Now we have a legacy problem. Before 2003, nobody worried that much about what the value per se was. We needed to know how many pairs of boots were in the warehouse and how many bullets were in the warehouse. The systems weren't designed to track their value so that we could report it. We have an issue with what we do with the legacy of material that's there. To go back to Mr. Chen's earlier comment, that's why we have two tracks: first, going forward, let's not create any more problems. Let's get good information and not create more problems. Then, how do we clean up what's there? We still need some of that inventory. It may be 20 years old, but we still need it because we're using that equipment.

We're trying to do it in a number of ways. One, every year we go in and do a stock-taking on a portion of it. We're doing a billion dollars worth of parts every year. We've done $4 billion to date.

Two, we're trying to get rid of the old obsolete material that we no longer need. We should get rid of it and we should take it out of the system.

Three, we need to look at how we put a price on it in 2003, because some of it would have just been estimated, and they may not have had the records of what they bought. That's the work we're doing on pricing. We're going in and saying, “Hmm, that thing's only valued at $10, but it's actually worth $1,000.”

We're trying to track it in two ways going forward, first in systems, technology, policies, accountability, and then cleaning up the legacy. I think the Auditor General has recognized that we've done some good work and made some good progress on quantity, and, yes, we've got to deal with the value and the price we want to put on that material. It's mostly for the older legacy material, not the newer stuff coming in, and that's the part we're trying to do.

[The Chair, Conservative, Kevin Sorenson]

Thank you very much.

We'll now move to Ms. Shanahan for five minutes, please.

[Brenda Shanahan, Liberal, Châteauguay—Lacolle, QC]

Thank you, Chair.

Thank you very much to the witnesses for appearing before us today.

I think what really triggered our questions about how National Defence was managing its inventory was the fact that the Auditor General had signalled this problem for the last 13 years. I too noticed that there was a thumbs-up on the improvements that had been made by National Defence in regard to quantity. I think that can't be understated, because we can understand. Many of us have had experience dealing with inventory. I've certainly dealt with clients who have had that issue, and we can appreciate the size of the problem.

I would like to return to the Auditor General's remarks and get your comments on the fact that again this year the Auditor General found that National Defence's inventories were overstated by hundreds of millions of dollars. I just want to understand where that's coming from. Can we attribute that purely to legacy evaluation problems, or is it still a problem with the input that you mentioned in your remarks, and people are making mistakes with the input? That's worrisome, because why isn't somebody checking that? How can an error of that magnitude be made?

On the quantity as well, talk to us a little bit about how the improvements were made on the quantity. Here the Auditor General remarks, “Inventory is counted through a cyclical, risk-based approach.” Just talk to us a little bit about that.

For me personally, the thing that I get concerned about is that when we're not sure where everything is and so on, what is the risk of loss and, of course, of stolen items? Where do you feel you are in the security of the inventory?

[The Chair, Conservative, Kevin Sorenson]

Thank you for that, Ms. Shanahan.

Go ahead, Mr. Forster.

[John Forster]

I will ask Monsieur Rochette to talk about the Auditor General's work on the financial aspect, and then I can speak to you about the quantity and loss parts.

[Colonel Claude Rochette, Assistant Deputy Minister (Finance) and Chief Financial Officer, Department of National Defence]

Thank you very much, ma'am, for your question.

On the pricing, you're right. We have two problems. The first problem, of course, is legacy information. We have also a problem with the pricing of new items coming in.

If I may take two minutes, I just arrived as the deputy minister in 2015 and I too was wondering why it was taking so much time and why we were having problems with our pricing.

We have thousands of people, in fact, who have an impact on inventories and on entering information into the systems. We have to keep in mind that often.... I've done a bit of survey to look, because when I deal with the comptroller general when they do the audit, they keep referring to 2003, so I wanted to know what was done and why, 13 years later, this is where we are. We referred before to accrual accounting; it started in 2003. Just to have the Minister of National Defence change our financial system to an accrual basis meant that to be able to do our financial statement was a challenge.

When we entered all the information—and we combined between 2003 and 2013—it was to bring the defence financial management system and the materiel system together. We have done that, and now we have a new system called DRMIS, defence resource management information system, that has connected the materiel and the financial systems.

However, we have a lot of legacy information that came from the previous system that still has to be downloaded, and we are cleaning that up right now.

You will note, probably, that the comptroller general and the Auditor General both made reference to an allowance. For the first time, we have been working on suggestions from the auditors last year. Over the past year, we have developed a new process with an allowance to be able to at least find and evaluate the potential errors that we may have.

Right now we have started the first initiative. We are doing ammunition, because this is the most important part for us and it is where we have many items. The value is $3.5 billion, and we have 17,000 stock items. We are looking at the items by stock item—for example, ammunition. We have a three-way point, and we try to find a purchase order to be able to match the price so we can come back with a proper evaluation for the ammunition.

By the end of this fiscal year, we will finish the ammunition, and the plan is to do the consumable items over the next two years, but again, we are talking about $2.5 billion and 400,000 stock items. It is taking time, because we have people looking line by line in the system. At the same time, they are developing and working with our engineers to try to automate that system. We are getting there now, at least for ammunition. We have been able to automate that system so that when we enter the price, it will check it to make sure it's the right price.

Some of the errors we have.... Mr. Forster made a comment about, for example, receiving one item that costs $158. We may receive a box of 100 of them, but the clerk may enter into the system $158 for that box, so we have to have a system that can spot that and make the correction. This is what we are working on right now.

[The Chair, Conservative, Kevin Sorenson]

Thank you, Mr. Rochette, and thank you, Ms. Shanahan.

We'll now move back to the opposition side.

Go ahead, Mr. McColeman.

[Phil McColeman, Conservative, Brantford—Brant, ON]

Thank you, Mr. Chair.

Gentlemen, with regard to the automatic identification technology that you're referring to, the options analysis and definition phase of the project is expected to be completed during 2020-21. That's what you've presented.

When did the options analysis and definition phase begin?

[RAdm Patrick Finn]

There are actually two consecutive phases. We do the options analysis on all of our major projects to look at just that—what the options are, and how we should proceed. The options analysis for the automatic identification technology started a few years ago. We looked at it at the time, and it looked to be about $1 billion. We were sent back to look at it to scale it.

Within a few years, we will look to finish the options analysis and get a decision through the department, potentially through Treasury Board and others who could be involved. That would then allow us to enter the definition phase, which would mean requests for proposals, tendering, and all those sorts of things. The government's contracting regulations mean that we would seek a competitive process to find a supplier who could help us with this, with the idea—

[Phil McColeman, Conservative, Brantford—Brant, ON]

I'll stop you there, please.

By the sounds of what you have just described, it's a multi-year process, to say the least. It could be up to 10 years from start to finish.

[RAdm Patrick Finn]

It could be, from option analysis through definition, implementation, contract awards, and delivery. Yes.

[Phil McColeman, Conservative, Brantford—Brant, ON]

Do you personally find that an acceptable time frame to implement technology? Do you know what happens to technology over 10 years?

[RAdm Patrick Finn]

Yes. I think the point—

[Phil McColeman, Conservative, Brantford—Brant, ON]

I'm asking you that question. Do you find that acceptable from a management point of view?

[RAdm Patrick Finn]

From the context of inception and definition of the problem, we're not selecting technology. We're doing problem definition from a corporate perspective, if I can call it that. What was the budget? How does this fit? How does this fit in the overall defence budget? Where do we find ourselves?

We're years away from identifying the technological solution, so we're not saying we've identified the technological solution today and we want you to deliver that technology in 10 years. Frankly, we're in the problem definition mode—how does it fit with the corporate priorities, etc.?

[Phil McColeman, Conservative, Brantford—Brant, ON]

Okay.

How soon after completion of this phase do you intend to launch a competition for the technology?

[RAdm Patrick Finn]

Once we enter definition, that will be the time at which we launch a competitive phase, a request for proposal. Depending on the value, this will involve our colleagues at Public Services and Procurement Canada and elsewhere, such that we go out to the marketplace for the solutions.

[Phil McColeman, Conservative, Brantford—Brant, ON]

I know the process. Has an indicative estimate for this procurement been established?

[RAdm Patrick Finn]

Not an indicative, as of yet. As we approach definition, we'll have that from what we call a rough order of magnitude. Looking at scaled options, we've scaled some options anywhere from $300 million to $1.2 billion, again a rough order of magnitude cost, as we've talked to different suppliers to get different ideas.

[Phil McColeman, Conservative, Brantford—Brant, ON]

Is the end state in 2026-27, 10 years from now, defined as full implementation of this technology?

[RAdm Patrick Finn]

In this context, it would be full implementation of that technology. It might take some time, but our intent is to have it as a road map for continuous improvement.

As you indicated, it's a technology that's moving very quickly from RFIDs to satellites and other things, and we recognize we have to keep up with it if we want to continue to improve. Part of this solicitation and effort is not just to deliver us a solution and we implement it and we're done, but how we work on it in service for decades after that. For a lot of our complex equipment, that continuous technical refresh becomes key.

[Phil McColeman, Conservative, Brantford—Brant, ON]

In your work, are you aware of vendors or companies that handle inventory systems for other militaries in the world?