Public Accounts Committee on Nov. 24th, 2016

[The Chair, Conservative, Kevin Sorenson]

I call the meeting to order.

Good afternoon, everyone. This is meeting number 35 of the Standing Committee on Public Accounts, on Thursday, November 24, 2016.

I will remind all the committee members as well as the audience that today we are televised. I would encourage you to mute your phones or to shut them off.

Today we're conducting a review of the plan of the Department of National Defence to record and value inventory.

Appearing before us from the Department of National Defence are Mr. John Forster, deputy minister; Mr. Patrick Finn, assistant deputy minister, materiel; and Claude Rochette, assistant deputy minister for finance and the chief financial officer.

We will begin with Mr. Forster's comments.

I invite the deputy minister now to bring those comments forward. Thank you.

[John Forster, Deputy Minister, Department of National Defence]

Thank you, Mr. Chair.

I have prepared some remarks, which I think the committee has, but I know you'd like to leave as much time as possible for questions, so perhaps I could leave them with the committee members to read through and I'll make a few brief opening remarks.

First, we understand the importance of this issue. We know we are 86% of the Government of Canada's inventory, some $7 billion. What we do has a significant impact on the government's public accounts. We know it's an important issue and we're committed to succeeding.

Second, we have made some progress, and I think both the comptroller general and the Auditor General have acknowledged that. However, we know we still have a significant amount of work left to do, and we're managing this as an important priority for the department.

I think a key milestone for us was developing an integrated and automated system. Previously, our inventory information was disaggregated, decentralized. The engineering information was in one place, the financial information in another, and the purchasing information in another. A key thing for us to really break the back of how we're going to improve our inventory was to bring this all together in an integrated system, which will give us real-time information, and we're starting to do that.

Third, I would say that this is a very large and complex problem. Believe me, if it was easy, we would be finished. We have about 640 million items in our inventory, and over 450,000 different codes.

In respect of ammunition alone, we have over 5,000 different items, and they're stored in warehouses and bases across the country and around the world. Some of the inventory goes back decades and predates the government's starting to value this and put it on its accounts. Sometimes it's a challenge to put a value on it.

Sometimes we're asked, “How hard can it be? Why can't you be like Canadian Tire?” That's true to some extent, and I asked the same question when I first arrived, but there are some key differences.

First, most businesses acquire inventory to use it, sell it, and replenish it, so they're always able to update the value of their items. In defence, it's a bit different. We actually often acquire inventory and hold it to ensure that we have inventory and parts in readiness and for emergencies. Sometimes we need to make sure we have a stockpile of older equipment because it may be hard to get parts anymore.

We take items out of our inventory to repair them, to fix them, to use them, and then we put them back in. Sometimes it's hard to put a value and a number on it. For example, we bought a large number of parts for the submarines from the United Kingdom. We paid a bulk price for those, and now we have to go through them as we enter them into our inventory and put a price on each one of them, even though we bought them as an aggregate, in bulk.

These aren't intended in any way as excuses. It's just our reality. Our inventory is large. It's spread out close to our operations, and it involves tens of thousands of people who are either purchasing, stocking, or using those items and who put in our inventory information.

As I said, I think we've made some progress. We have a lot of work to do. We sent the committee a report with a proposal and a six-point action plan.

First, on those six points in the action plan, number one is governance. We are making this a priority for the department. Our associate deputy and vice-chief, through a defence renewal committee, oversee it. Our senior leadership have it on their agenda, and a directive from the deputy and the chief have gone out on this.

Second, we do want to implement an automated identification technology. That's bar codes and radio frequency identification. We're doing the options analysis. This will be a big change and a big project, and we'll have to look at how fast we can do it and what we can afford.

Third, we're changing the accountability of our senior managers. They have to sign attestations each year that they're following our processes, and we do an annual stock-taking. We're trying to work our way through it. To date, we've done about $4 billion worth of our inventory, and we'll do another $1 billion this year, to recount.

Fourth, we're trying to modernize our inventory management. We're removing obsolete items and outdated items. We go through some of that every year to get out-of-date codes on stock and write that stock down. It's kind of like cleaning out your attic. We're trying to get through some part of it each year.

Fifth, we're reviewing how we price and value our inventory. We want to make sure going forward that we have the right prices. We still have to deal with some of the original legacy prices that were in there, so that's the sixth element.

Our system now looks for anomalies in how we've priced items in our inventory so that we can change them, fix them. For example, we had 20,000 detonators that were purchased for $158 each, but in our system they were recorded as 20,000 detonators for $158. When you find that, it's a $3-million undervaluation. That on its own is large enough, but when the Auditor General does his audit, if they sample that item, they then extrapolate that to the entire stock, and that has a very large effect on the public accounts. That's why we're going back as quickly as we can to look at our legacy pricing for items that may be 10 years old, 20 years old, that pre-dated when the government started to value this inventory.

Mr. Chair, that will conclude some opening comments. We know we have made some good progress. We know we have a heck of a lot of work still left to do.

Both my colleagues and I look forward to your questions this afternoon.

[The Chair, Conservative, Kevin Sorenson]

Thank you, Mr. Forster.

I appreciate your comments, but we need to make very clear that you've been invited back to a public accounts committee. We've had the department here earlier. In 2013, again you released a report. Part of that report said you were going to follow certain guidelines, certain dates. You had the dates there. Then you said that to ensure the proper stewardship of public resources, it was important that you follow the plan. Then this year, some of those dates were completely changed around. Some of the guidelines that said you would accomplish this in 2016-17 became 2026-27. I guess that's the reason we wanted you back.

Our role as a committee is to hold departments to account after the Auditor General has filed a report. You came and said what you were going to accomplish in this timeline, and then almost unilaterally changed the timelines after you appeared. That's why we're inviting you back.

I'll turn it to Madam Mendès to begin, but I wanted to lay out some of the concerns that the committee has as a whole.

[Alexandra Mendes, Liberal, Brossard—Saint-Lambert, QC]

Thank you, Mr. Chair.

To follow up on your introduction to the issue, what is very worrying for us is that we went from an action plan that gave us some dates for 2016-17, and now they're 10 years later.

First we'd like to know why there is this big change. What is considered a step, and what will be considered the end point of this process of improvement and change in the department?

[John Forster]

Thank you for the question.

We have one item in the action plan that has been pushed out to 2026-27, and it is a long time frame. That is the automation technologies. That's the bar coding, the radio technology chips. It requires changes to our IT systems. It's going to require Wi-Fi in all of our warehouses and bases.

Clearly it is a transformative change, and it will be a big change, so we're doing the options analysis work on that now. As we look at it, it could be quite expensive, so we're trying to break it down and scale it as best we can. What we have given you is the end date, but that doesn't mean nothing will happen for 10 years. However, some of the cost estimates could be over $1 billion. It is a big item for us. We're going through the options analysis, and we hope to finish that work and have a way to phase it in and manage it to get that one piece of the six done.

On the other elements in our action plan, we are making progress now. As I mentioned, we're doing stock-taking every year. Every year we're going through legacy items to correct pricing. The change in the integrated system, with inventory, purchasing, engineering, and financial information all integrated, is what is starting to give us a real picture of the inventory.

We're trying to make progress on all fronts. The one item that will be longer than expected is this technology piece, just because it's larger and quite expensive.

[Alexandra Mendes, Liberal, Brossard—Saint-Lambert, QC]

I agree that it will take a certain amount of time to get that one correct, but there are other elements in the action plan that have been extended. Our question, as a committee, was “Why?” What were the reasons that required this extension in timelines? Is it just because you didn't foresee certain problems? Is it because some things are more difficult to achieve? For us it's important to know it and be aware of it, and that's why we invited you back.

[John Forster]

Okay. I'll ask Mr. Finn to provide some more detail on each of the elements, and where we're at.

[The Chair, Conservative, Kevin Sorenson]

Go ahead, Mr. Finn.

[RAdm Patrick Finn, Assistant Deputy Minister, Materiel, Department of National Defence]

Thank you very much for that question.

As the ADM responsible for materiel, I oversee all the aspects of the inventory, including location and value, etc. One of the things we're trying to do with this plan, and I'm going to call it a cultural change as well....

I've been in the department 38 years, 36 years in uniform, and have been involved with this for most of my career. When I was a junior officer, when we were a larger military, we had more people who were heavily involved with inventory and stock-taking and those sorts of things. In the mid-nineties, we got out of that game. We've been spending our time not just trying to fix today's problem, but looking at whether we can we localize it all. Can we count it all? Can we put a value on it all? To some extent we can, but it's a very large undertaking. Our fear is if we just stop and try to do that, the problems will reappear. Every time we do data entry of a new stock code, of a new system that we get, we risk recreating the same problems that we've had.

When we really started down this path of improvement, we had a previous plan. I would say it's proven to be optimistic. We've talked about these three big systems, all of which are enterprise systems, but there were many more than that. Every fleet that we got came with its own inventory system, which was a mirror of what the original equipment manufacturer would provide to us. We brought them together into one system and we dealt with all of the legacy issues and problems with that. We only landed that in 2015. Since 2015, we've had one system that does the financial, procurement, and inventory aspects of it. We now have, frankly, what some of my colleagues have called a “richness of data”. We have, in fact, almost more data than we can handle.

For us, it's really about changing the culture at the same time, to make sure that we're not back here in three or four years if we've cracked it, we've looked at it, we've valued it all, but it's gotten away from us again.

In some of the automated technology we're looking at, and even within the systems we have, we're bringing in some algorithms, some procedures, some things that we can do to find the issues. The deputy gave an example of it not being the dollar amount or the number, but rather the units that were entered improperly. We've had situations when a lot of bullets were acquired, and the unit cost of the bullet was put against the whole lot when somebody entered it.

We have tens of thousands of people who interact with this system. Getting them all sufficiently aware and trained to make sure that we understand it.... I'm heartened to see all of my colleagues at level one—the commanders of the army, navy, air force, special forces—are also all personally engaged in this to understand that we have to get back the culture of understanding what we have and where it is and what state it's in, not just for the purposes of public accounts but also for operational reasons. If we don't understand our inventory, it affects us operationally, and it actually triggers overbuys and excess buys. Something we're trying to do—and we've made some pretty important progress, to the tune of tens of millions of dollars annually in savings—is to actually deal with those as well.

We recognize that we have more to do here, but what we're trying to do is transform the organization around inventory management as we do it.

[Alexandra Mendes, Liberal, Brossard—Saint-Lambert, QC]

If you'll allow me in my seconds left—

[The Chair, Conservative, Kevin Sorenson]

No, no.

[Alexandra Mendes, Liberal, Brossard—Saint-Lambert, QC]

No? No seconds left.

[The Chair, Conservative, Kevin Sorenson]

No, your seconds are up. Sorry. We'll come back to you, though, Madam Mendès.

Thank you very much for the answer.

We'll now move to Mr. McColeman, please, for seven minutes.

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

Thank you, Chair.

When I look at the timelines that we're given and then the timelines that were restated, I see all of them are extended. You mentioned the 2026-27 change in the earlier comment, but if you look at all of the categories, the initiatives, they were all bumped up, some to 2020, some to 2019. I make that comment. When I was reviewing the materials for this meeting, frankly, it really struck me as gobbledygook in terms of what was trying to be said. I'll read you a section. This is your response to governance. I'll quote:

While Defence has implemented robust governance, this governance has been managed by functional authorities. Moving forward and beginning in 2016-2017, National Defence will reinforce its existing inventory management governance by ensuring more consistent senior leadership visibility, accountability and direction, using the existing departmental corporate governance structure. This will facilitate senior leadership oversight and reporting on inventory management improvements at National Defence.

What does that really mean? I'm going to be quite blunt about this. This seems to me like a dog's breakfast that you're trying to explain to us—the people who are supposed to be holding the organization to account—and you're saying things like “functional authority”. What is that a euphemism for? It suggests there is dysfunctional authority somewhere. Could you answer that for me, please? What does that term mean, “functional authority”?

[John Forster]

Thank you, Mr. Chair.

Functional authority usually means that one of your senior leadership is responsible for an area but doesn't necessarily have direct accountability for it. Pat, for example, would be a functional authority about inventory materiel management, but at the same time some of that work is being done by people in the army who report to a base commander. Defence, in itself, is a bit of a matrixed organization, because we have both a civilian workforce and a military workforce.

I don't disagree with you that perhaps that wording isn't as clear as it could be. I think what we're trying to get across here in terms of governance is, first of all, we have—

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

I'm going to stop you here. You answered my question and I have another question. I have limited time, sir.

Can you quantify in what ways this quote, “consistent senior leadership visibility, accountability and direction”, has been ensured thus far? Again, the words would suggest that there is something inconsistent, not very visible, and not very accountable.

[John Forster]

I think it gets back to my earlier comment that inventory originally was very disaggregated, decentralized, in the department, so base commanders who will play a role in that inventory. We have parts in warehouses across the country and around the world. All of those people are buying and entering information into an inventory system. It's not like we have one room with 25 people and all they do is inventory. I will have a base commander and he will be buying supplies. He will be entering that information into an inventory system. Through a committee that's co-chaired by my associate and the vice-chief, we've tried to put it on their agenda to have regular monitoring. We've issued a directive from the chief of defence and the deputy to all of the senior executive that makes this much more clear in their accountabilities. Every year they, the senior leadership, have to attest that they have followed the procedures and policies about inventory and how we record materiel in that system. We're trying to make sure, going forward, that the information going in is accurate and complete, and we're trying to work to clean up a legacy.

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

Okay. I understand. You perhaps were handed the dog's breakfast, but the reality is this looks like a system.

I come from business. I know inventory management. I've seen it happen in fairly large companies. This looks like chaos to me. It appears, from what Mr. Finn described, that when procurement happens, you do not specify the exact type of inventory management system you need for the additional parts that you're buying. They're all different. That's what your comments suggested to me. In other words, you're always trying to fit a square peg into a round hole. I'm just new to this committee, but, frankly, from where I come from, with 25 years of my own business, it just blows me away how dysfunctional...and how this looks to me to be a system in chaos. Can you react to my perceptions?

[RAdm Patrick Finn]

Thank you for the comments.

A system in chaos.... Did we wind up there particularly in the context of, I'll say, some of the valuation of inventory? Perhaps.

I was talking about all the procurements. We have inventory that goes back 50 years that is still inventory that we need and use. It's very different from a business, where the inventory is about the bottom line and the profits. As I often say to colleagues who talk about going into a store and how stores may do it, if I walk into a large retail business that doesn't have inventory, they give me a raincheck that allows me to come back later. For military operations, the inventory has to be there. We have decades of inventory that has come in at different times.

To your point about whether we now specify the format, we do. In fact, part of the evolution of our enterprise system is that we've gone now to an electronic information exchange. However, we are dealing in some cases with large multinational corporations that have customers all over the world, and they don't always want to bend to our standards. We work at that now as we go forward. Part of what we've done to improve and why it's taken us some time is that as we've merged this one enterprise system, we've included a means by which we now do automatic exchange.

Going back to equipment that we acquired 50 years ago, in some cases we're disposing of it, but frankly, that didn't come with that kind of option. It's not inventory we just dispose of. In some cases, we're moving through the disposal of it, but a lot of our inventory is also controlled goods. We've acquired it under international agreements, and in the case of the U.S., under international trade agreements and arms regulation. That means we have to be very careful about who sees it and what it's exposed to. Some of our inventory is classified, so there's a complexity to what we do that, in my experience, is not like the private sector, although we are co-operating internationally and with the private sector for best practices.

[The Chair, Conservative, Kevin Sorenson]

Thank you, Mr. Finn.

We'll now move to Mr. Christopherson.

Mr. Christopherson, you have seven minutes.

[David Christopherson, NDP, Hamilton Centre, ON]

Thank you very much, Chair, and thank you for being here today.

I just returned from a NATO Parliamentary Assembly meeting in Istanbul, Turkey, two days ago. I would like to reflect back to you the respect our allies have for the presence and the professionalism of the Canadian contribution to our common defence.

Today we're underscoring the fact that fiscal accountability is part of that professionalism, but make no mistake: that professionalism is recognized on the world stage. I was proud to be a Canadian and to see the Canadian presence there working with our allies on our common defence.

Having said that, I want to echo the Chair's comments and make it crystal clear that this is not just a regular meeting, nor is this just a regular public discussion, and it's not just a regular callback. You are being called back on the carpet because this issue has been going on now for at least 13 years, 12 of which I've been here for, so I know this issue.

I was here in 2012 when we got your first plan. As colleagues have said, one of our problems, and one of the reasons you're being called back on the carpet, is that the plan you gave us in 2013 is different from the plan you gave us in 2016.

Now, you may appreciate that historically, one of the goals of ministries when they are called in for a hearing is “one and done”. If you can get in here and get through the meeting, you're safe, because the committee really doesn't have the means or the ability to follow up on all the details and all the promises, so if you can just get through that meeting, you're good.

Those days are over, and have been for a while now, based on the Gomery inquest. It was this committee that uncovered the sponsorship scandal. One of the recommendations from Justice Gomery was that we increase our analytical abilities and our research abilities, so now we have more analysts than most people do on most committees. That's so that we can follow these kinds of things. Those days of “one and done” are over.

I want you to know we take this very seriously, and I want to get to the crux of the matter.

First of all, I want to point out that in your figure 1, the chart—I'm sure you have copies of the chart you sent us in 2013—what's interesting is that the words at the top of the chart are exactly the same.

It says:

Key Milestones and Deadlines of the Department of National Defence's 2013 Plan to Record and Value its Inventory.

Exactly the same words are at the top of the chart in 2016.

What's interesting and problematic is that it doesn't even use the same words after that. One could make the argument that it was meant to be a con job, which is why my friend was asking about the details of what you're saying.

It's tough enough to understand what some of this stuff means, but when we get a second report under the same heading using a new set of gobbledygook with longer deadlines, then it's easy. You will respect, I'm sure, that we could conclude you came in here with that first plan, and it was one and done. There they go. They got a plan. We put some stuff in there, and that's that. Oh, suddenly they asked us for another one in 2016. Well, we can't send the same thing. That wouldn't look very good, so you made up something new.

This is our problem right now, or at least I'll own my own words: this is my problem right now. Either it was deliberate, which is a huge problem, or you really didn't have a handle on it and you threw something together to get you through, and that's not acceptable either.

So what's the explanation, gentlemen?

[John Forster]

Thank you.

First of all, thank you for your comments regarding NATO and the respect they have for the Canadian Forces. I think that's very much appreciated. I agree with you that Canada is very well respected in NATO.

Let me start off by getting to the heart of your questions.

First of all, I don't consider this a one-and-done. I'm happy to come back here and report to the committee on our progress on this issue. I wasn't here in 2012 when that first plan was done. I was here when this one was resubmitted.

I'm happy to appear before this committee as often you would like, for me to update you on that. If you're finding our report back to you a bit difficult to understand, that's not our intent. I'm quite happy to clarify anything in here and provide an updated one if you feel it would make it easier to get a picture of what's going on. I'm happy to provide you with milestones. I'm happy to report on those milestones and come back to you as often as you would like to have us.

I don't see this a one-and-done and that if I can get from here to 5:30, I'm pretty much home free for another four years. That's not how I do my business or take my job.

We totally acknowledge this is an important issue.

[David Christopherson, NDP, Hamilton Centre, ON]

Can you get to the answer? We're running out of time.

[John Forster]

My apologies, sir.

In terms of the plan we've put in, I think we have made progress since the last plan. I talked about it somewhat at the beginning, in terms of going back and putting in the system, first of all. That's what was needed to help us break the back of it.

[David Christopherson, NDP, Hamilton Centre, ON]

Didn't you know that in 2012? Didn't you know you needed that system? And if you needed it, why didn't you tell us that?