Evidence of meeting #53 for Public Accounts in the 42nd Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was defence.

A video is available from Parliament.

On the agenda

MPs speaking

Also speaking

Michael Ferguson  Auditor General of Canada, Office of the Auditor General of Canada
John Forster  Deputy Minister, Department of National Defence
Ron Lloyd  Acting Vice Chief of the Defence Staff and Commander of the Royal Canadian Navy, Department of National Defence
Rear-Admiral  Retired) Patrick Finn (Assistant Deputy Minister, Materiel, Department of National Defence
Werner Liedtke  Director General and Deputy Chief Financial Officer, Department of National Defence
Gordon Stock  Principal, Office of the Auditor General of Canada

3:30 p.m.

Conservative

The Chair Conservative Kevin Sorenson

Good afternoon, everyone. This is meeting number 33 of the Standing Committee on Public Accounts, on Monday, May 1, 2017.

I remind everyone today that we are televised, so I would encourage all members and all those in the audience to please put your phones, your communication devices, on airplane mode or mute. That would be much appreciated.

Today we're conducting a hearing on report number seven of the Auditor General, “Operating and Maintenance Support for Military Equipment—National Defence”, from the fall 2016 reports of the Auditor General of Canada.

Appearing as witnesses today, we have Mr. Michael Ferguson, Auditor General of Canada; and Gordon Stock, principal. Welcome.

From the Department of National Defence, we welcome back Mr. John Forster, deputy minister; Vice-Admiral Ron Lloyd, acting vice chief of the defence staff and commander of the Royal Canadian Navy; Mr. Patrick Finn, assistant deputy minister, materiel; and Brigadier-General Werner Liedtke, director general and deputy chief financial officer.

The Auditor General and deputy minister have opening statements. We would invite Mr. Ferguson to begin.

Welcome here, and thank you.

3:30 p.m.

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

Thank you.

Mr. Chair, thank you for this opportunity to discuss our 2016 fall report on Operating and Maintenance Support for Military Equipment.

Joining me at the table is Gordon Stock, the principal responsible for the audit.

In our audit, we examined whether National Defence managed equipment support in a cost-effective manner. We selected six types of major military equipment: the Globemaster strategic airlift aircraft, the Cyclone maritime helicopters, the Chinook medium- to heavy-lift helicopters, the 130J Hercules aircraft, the Victoria class submarines, and the tactical armoured patrol vehicles.

Overall we found that National Defence didn't adequately manage support for the selected equipment in a cost-effective manner, and it made some initial planning assumptions that underestimated support costs, overestimated equipment use, and under-resourced personnel requirements. Consequently, National Defence paid for a higher level of service than it used.

We found that National Defence assumed that the cost to support the 130J Hercules aircraft and the Cyclone maritime helicopter would be no more than the cost to support the replaced equipment. This assumption was not realistic because both the Hercules 130J and the Cyclone maritime helicopter have increased capabilities, their systems are more complex, and consequently they cost more to support.

We also found that National Defence did not use the selected equipment as much as it had originally planned due to delays in equipment delivery and a lack of personnel and funding for operations and maintenance. For a number of years, the funding and personnel allocated for the Victoria class submarines, the 130J Hercules aircraft, the Globemaster aircraft, and the Chinook helicopter were significantly below what was required to meet operational and training requirements.

The equipment support contracts included fixed minimum payments, but not using the equipment as planned meant that National Defence paid for a higher level of service than it used. National Defence has since renegotiated one of its equipment support contracts to improve its value for money.

Furthermore, National Defence assumed that maintenance personnel for new equipment would come from crews operating and servicing existing equipment, but it did not happen.

National Defence also did not have enough trained pilots, technicians, weapons systems managers and contracting staff. Without the right complement of personnel, equipment cannot be made available and used at the planned level of operation and training.

National Defence created new oversight bodies to improve its resource management. However, we found that these oversight bodies focused on acquiring equipment and did not give as much attention to equipment support.

National Defence needs to use an integrated resource management approach that incorporates all aspects of the equipment's life cycle, including acquisition, materiel, support, and personnel, from a cost and operational perspective.

While it is difficult to forecast how much it will cost to support major military equipment, the decisions that National Defence makes today about which equipment to buy and how it will support that equipment will have significant financial impacts for decades to come.

We made eight recommendations in our audit report. National Defence has responded that it will address each recommendation.

Mr. Chair, this concludes my opening statement. We would be pleased to answer any questions the committee may have.

Thank you.

3:30 p.m.

Conservative

The Chair Conservative Kevin Sorenson

Thank you, Mr. Ferguson.

We'll now move to the deputy minister, Mr. Forster.

Welcome here. We look forward to your comments.

May 1st, 2017 / 3:30 p.m.

John Forster Deputy Minister, Department of National Defence

Thank you, Mr. Chair and members of the committee. We appreciate the opportunity to be here today to discuss the Auditor General's fall 2016 report on operating and maintenance support for military equipment.

On behalf of all of us at this table and at National Defence, we'd like to acknowledge the work of Mr. Ferguson and his team, including Mr. Stock, in preparing the report. His recommendations will help us improve an area that is of critical importance to National Defence.

Indeed, there are few areas more important to us than operating and maintaining our equipment. There are fighter aircraft and unmanned aerial vehicles to frigates and submarines to modern tanks and weapons systems. There is also operational clothing and personal protective equipment.

The Canadian Armed Forces need it at their disposal and ready for deployment at a moment's notice if they are to fulfil their mission to protect Canada, defend North America, and contribute to international operations. They need equipment they can depend on so that when the unpredictable happens, they can respond, just as they did when a typhoon devastated the Philippines in 2013, killing more than 6,300 people.

Within days, Canadian Armed Forces personnel were on the ground delivering more than 230,000 pounds of food, and more than 10,000 pounds of shelter and building materials. The operation took a CC-144 Challenger, a CC-150 Polaris, three Globemasters, and three Griffon helicopters; and that's just in air support.

It is hard to predict what equipment our military will need next, so we err on the side of caution. We must ensure that our readiness levels are high, our stocks of spare parts are sufficient, and our women and men in uniform have access to the equipment they need, when they need it. We must also balance the needs of the forces, and flexibility, with the need to ensure value for money and economic benefits for Canadians.

The Auditor General acknowledged this in his report, noting that, “There is inherent complexity and unpredictability in forecasting equipment support that cannot be eliminated. National Defence must plan above minimum needs, so that its equipment is ready to respond to changing circumstances.” He concluded, however, that we can do better, and we certainly agree.

We welcome the Auditor General's recommendations on how we can move forward. We're committed to implementing all eight recommendations. Our plans to do that are in the management action plan that we tabled with the committee last week. We'd be pleased to answer your questions specific to any of the eight recommendations.

I'd like to spend just a couple of minutes, Mr. Chair, on three of the main themes that run through his report. The first pertains to planning assumptions and our need to make them stronger. On this front we're making some progress.

In 2016 we started rolling out a new sustainment initiative that replaced the previous policy for sustainment contracts. We now bring together procurement experts from National Defence, from Public Services and Procurement, and from Innovation, Science and Economic Development. These experts work in close co-operation with industry to identify the best approaches for in-service support for our equipment. The benefits of this collaboration are many, not the least of which is that we can obtain the information necessary to determine, by fleet, what kind of life-cycle maintenance is required, what industry can offer at what cost, and how the federal departments can leverage their collective resources and know-how to make it happen.

Through the sustainment initiative, we are able to work with industry partners from the outset to ensure that the contracts we sign give us flexibility to change our requirements. As a result, going forward an increasing number of our contracts include provisions to enable us to adjust to changing circumstances, which is our reality—provisions that will make the armed forces more agile and responsive and deliver greater value for money.

To ensure that contracts are in the best interests of the forces and taxpayers, all of our larger in-service support contracts are now subject to a rigorous sustainment business case analysis. This includes a thorough review of possible options, to ensure that the solution chosen balances equipment performance, flexibility, value for money, and economic benefits. The sustainment initiative is still in early days, but it is producing some promising results.

As part of a pilot that was under way while the Auditor General prepared his report, we negotiated new long-term contracts for the engines of the CF-18 Hornet, the CP-140 Aurora, and the legacy Hercules aircraft fleets.

Another recent example cited in the report relates to the Hercules aircraft. We did award the original contract to support that aircraft's maximum projected use in Afghanistan. At the end of that operation, a number of factors had resulted in the fleet spending less time in the air than planned. Consequently, our sustainment requirements also changed. We've since renegotiated the contract to better reflect our revised needs. In doing so, we've introduced more flexible pricing based on fleet usage. More to the point, we guarantee greater fleet availability at lower cost. We're confident that our new approach under this sustainment initiative will start to address some of the main concerns raised in the Auditor General's fall report.

A second theme in the report relates to costing. Doing complete life-cycle costing for military equipment is challenging. While some costs, such as the purchase price of a piece of equipment, are relatively easy to track, others, such as development and disposal costs and the operating and maintenance costs for a 20- to 30-year period, are more difficult. For instance, the life-cycle cost requires that we project the salaries of people who operate the equipment and those who support the equipment, be they military or civilian or our industry partners. We must also account for the amount of fuel required to operate a fleet and its cost in any given year. Tracking some of these costs, such as an operator's time, and tying them to a specific piece of equipment will be challenging. Trying to estimate these costs is difficult, but we are making improvements since consolidating a number of our information systems into a central one, the defence resource management information system, DRMIS.

Over the last 18 months we've made improvements in our costing. Cost estimates for all planned and ongoing acquisitions have been reassessed and validated, as part of our defence policy review, including incremental maintenance costs over the life of the equipment. We also now have a much more robust costing model. We have projected costs on a life-cycle basis for projects, such as the future fighter capability project, our fixed-wing search and rescue aircraft, and our Arctic offshore patrol ships. We're also working on a full life-cycle costing of the Canadian surface combatants, the new ships for the navy. We've increased the number of costing specialists in defence from 30 to 80, the largest in the federal government. We've instituted a rigorous program to train them. These internationally certified costers have the expertise to ensure that the information is available to support the development of our departmental investment plan.

Finally, the third theme of the Auditor General's report is performance measurement. We're in the early stages of developing a departmental results framework. Among other things, the framework will have to establish standardized rules for entering our performance data, and validating and reviewing information systems. This means we'll be able to better access data on how we manage our in-service support, and with better data comes a better understanding of results. By this time next year, the framework will enable us to begin establishing benchmarks against which we compare our performance. It will tell us whether we're meeting our expectations with respect to equipment availability and condition, and it will highlight where we can improve. Developing performance measures and indicators now will enable us to do much more than just report on performance. It will allow us to turn data into information, and information into business intelligence.

As we discussed with you in January, we've also been working on amalgamating several data sources into our resource management information system, and we use that system to greater effect in several areas. Building on our work to date, we'll use DRMIS and other analytics tools to implement the management action plan for this audit. For example, we'll use DRMIS to track fleet availability in a way that is more conducive to measuring the effectiveness of our in-service support contracts, and that will enable us to refresh and measure through-life cost information.

More than 20,000 defence members use the system across Canada, on ships at sea and in locations around the world. We want to expand its reach ever further. Vice-Admiral Lloyd can talk to you about the navy, which is the most advanced in this area. We hope to roll this work out into other platforms in the air force and army, which is the direction we're headed.

I recognize that the challenge before us is sizable. We are making progressing in addressing it, but we acknowledge that we have much more to do. Again, I'd like to thank the Auditor General for helping us. We agree with his assessment and are at work implementing his recommendations.

Thank you. My colleagues and I will be happy to take your questions.

3:45 p.m.

Conservative

The Chair Conservative Kevin Sorenson

Thank you very much Mr. Forster.

Mr. Lefebvre, you have the floor for seven minutes.

3:45 p.m.

Liberal

Paul Lefebvre Liberal Sudbury, ON

Thank you, Mr. Chair.

I thank all of you for being here this afternoon.

In reviewing this matter again, it's always interesting how data comes up, certainly with the Canadian Armed Forces collecting the data, and now what to do with that data. Clearly the auditor has been in your offices many times, and again we see this theme of data management being a challenge. I hear your comments, which are positive, that this time we're doing more with the data that is being collected and about how we can certainly improve services to Canadians with the equipment support for the Canadian Armed Forces.

Again, in your comments, I'm very glad to see that, and as concrete measures, that is great, but I'd like you to turn to page 13 of the report, at paragraph 7.41. As we say in French sometimes,

“the more things change, the more they stay the same.”

That's what I'm concerned about right now, that even though we're saying we're going to do things, this is not the first time that this has been brought to the forefront.

Paragraph 7.41 of the Auditor General's report says, and I'll read it:

In our 2011 audit, we recommended that National Defence develop a means of monitoring overall and equipment-specific total cost information for maintenance and repairs. In response to our recommendation, National Defence stated that by December 2013, it would use its financial and materiel information system, the Defence Resource Management Information System (DRMIS), to record and monitor overall and equipment-specific total cost information for its maintenance and repair activities, such as personnel, contracted services, spare parts, maintenance equipment, and infrastructure costs.

Paragraph 7.42 says:

We found that National Defence did not use DRMIS as the source of information on overall and equipment-specific costs for maintenance and repair.

And it goes on.

At that time, the department had said they would use the system. The Auditor General said they did not use its capabilities fully. Here we are in 2017, and you're telling us again that you will use this system.

How have things changed so basically now that we should be confident that the system will be better used? At the end of the day, we all agree that we're not getting value for money and we're all concerned about that. What specific measures can you tell us about today that we can rely on to be done?

3:45 p.m.

Deputy Minister, Department of National Defence

John Forster

You will recall that we had a bit of this discussion when we were talking about inventory. I think it was before Christmas.

Previously in our information systems, we had one database for Mr. Finn's area of parts and equipment and inventory, financial records in a different system, and scheduling of work and repair work in a different system. The challenge for Defence has been in how to bring all of that information together into a common place. We want to be able to link parts with repairs with costing information and financial results. DRMIS is the system that doesn't replace all those, but it allows us to integrate the data. It allows us to take parts data from here, cost data from there, and bring it together to get an overall picture.

3:45 p.m.

Liberal

Paul Lefebvre Liberal Sudbury, ON

How long have you been using DRMIS, or how long has it been at your disposal?

3:50 p.m.

Deputy Minister, Department of National Defence

John Forster

When I came two years ago, DRMIS was partly advanced. It was a bit stalled. We've invested considerably more money in the last two years to solidify DRMIS and use it more aggressively as our main information system.

For example, the navy uses DRMIS for parts, repair scheduling, maintenance, inventory, and costing. They're the leader in the armed forces of how we pulled that together. Our next challenge, then, is to roll that out. Some of the air force is in, some of it is not. We want to roll that out across the organization.

Maybe Ron can speak to that.

3:50 p.m.

Vice-Admiral Ron Lloyd Acting Vice Chief of the Defence Staff and Commander of the Royal Canadian Navy, Department of National Defence

The challenge, as discussed before, is that you have data, but in and of itself it's not information. You need to take that data and you need to put it into a report. From that report you can then make hypotheses. You can go and challenge them or you can make evidence-based decisions once you have the data that conveys information and intelligence.

One of the challenges we've had with DRMIS is that in order to reformat one of those reports, you have to go into the system and do that reprogramming. In 2015 we introduced a suite of tools, business objects, which allow you to rapidly access the data and then configure it in a report such that you can then make evidence-based decisions. We're having success with respect to moving forward on that.

So it's the tools, I would suggest, that are going to enable us to use that data better and more effectively and make better decisions going forward.

3:50 p.m.

Liberal

Paul Lefebvre Liberal Sudbury, ON

I see that. It's almost been a learning process with the data in terms of how to use it with the DRMIS system that you have.

Just quickly, how many different equipment support contracts do you have?

3:50 p.m.

Rear-Admiral Retired) Patrick Finn (Assistant Deputy Minister, Materiel, Department of National Defence

I manage well over 12,000 contracts.

3:50 p.m.

Liberal

Paul Lefebvre Liberal Sudbury, ON

What is the budget for these?

3:50 p.m.

RAdm Patrick Finn

Just within the materiel group, it's between about $5 billion and $6 billion a year. There are some funds that come from elsewhere in the department, so I don't have a complete number for you, but I would say it's in the magnitude of $6 billion to $7 billion a year.

3:50 p.m.

Liberal

Paul Lefebvre Liberal Sudbury, ON

We've had challenges, obviously, with the types of contracts that were signed. From some of the reports I read, basically we signed a $70-million contract for maintenance but we only used 35% of it, or 60% of it.

In the Auditor General's opening statements, it says that National Defence has renegotiated one of its equipment support contracts to improve its value for money. This is one contract out of 12,000 possible contracts. Can you maybe explain further where we're at with this?

3:50 p.m.

RAdm Patrick Finn

That specific contract is one of our larger contracts. We renegotiate all the contracts as they come due. We're introducing more of a performance base into all of them. There's a specific example; he's just describing one of the six, not only one in total. We've done a lot more. As they come due, we're introducing the principles that we've talked about here.

3:50 p.m.

Conservative

The Chair Conservative Kevin Sorenson

Thank you, Mr. Finn and Mr. Lefebvre.

Mr. McColeman, you now have seven minutes.

3:50 p.m.

Conservative

Phil McColeman Conservative Brantford—Brant, ON

Thank you, Chair.

I think I'll state the obvious. This is a staggering report of poor value for money, poor systems of acquisition, poor monitoring. But that's not really where I want to go. Where I really want to go is to the solutions.

One of the examples that is mentioned in both the Auditor General's report and your report, Mr. Forster, is this. I'll read from the Auditor General's point eight:

While it is difficult to forecast how much it will cost to support major military equipment, the decisions that National Defence makes today about which equipment to buy and how it will support that equipment will have significant financial impacts for decades to come.

Then I'll refer to your report, sir, just given to us, that projects costed on a life-cycle basis include the future fighter capacity project. So let's talk about that. Let's talk about improvements.

On the purchase, as introduced by the minister into the House, of Super Hornets without an open competition, what is the full life-cycle cost of purchasing the interim fleet of Super Hornets?

3:50 p.m.

Deputy Minister, Department of National Defence

John Forster

At the moment, we are developing the full life-cycle costs for that acquisition. As the government announced last fall, it's entering into discussions with the U.S. government and with Boeing to determine whether we can obtain an interim fighter with the capability we need, in the time frame we need it, and at the cost, so part of the work—

3:55 p.m.

Conservative

Phil McColeman Conservative Brantford—Brant, ON

Okay. That answers the question. Thank you so much.

You're telling me that we've committed to the purchase of fighter jets without knowing the full life-cycle cost.

3:55 p.m.

Deputy Minister, Department of National Defence

John Forster

No, I'm not telling you that.

3:55 p.m.

Conservative

Phil McColeman Conservative Brantford—Brant, ON

That's what the minister said in the House, sir.

3:55 p.m.

Deputy Minister, Department of National Defence

John Forster

No, he hasn't, sir. He has said that we've gone into discussions with the U.S. government and with Boeing to look at the purchase of those fighter aircraft.

3:55 p.m.

Conservative

Phil McColeman Conservative Brantford—Brant, ON

Sole-source contract—

3:55 p.m.

Deputy Minister, Department of National Defence

John Forster

We have not entered into any contract with Boeing or the U.S. government to purchase the aircraft.