Public Accounts Committee on May 1st, 2017

[John Forster]

—and the Minister of Innovation and Science in a whole-of-government effort to look at whether the government should acquire 18 interim aircraft.

[Matt Jeneroux, Conservative, Edmonton Riverbend, AB]

I don't think there is any “should”. According to the minister's comments, you are acquiring them, so—

[David Christopherson, NDP, Hamilton Centre, ON]

I have a point of order.

[The Chair, Conservative, Kevin Sorenson]

Mr. Christopherson, go ahead on a point of order.

[David Christopherson, NDP, Hamilton Centre, ON]

Chair, I'd ask you to rule. I do this reluctantly, because they are close colleagues, but to the best of my knowledge there is nothing in here about what is being asked in the Auditor General's report. Questions like that properly belong at the defence committee. That's why we have that committee. This is about the report, and I'd ask my colleague to keep his....

It's not fair to our witnesses. They came in prepared to address the report, and now we're getting into active politics. It's almost like question period. That is the antithesis of what we should be doing here.

Chair, I'd ask you to step in, please.

[The Chair, Conservative, Kevin Sorenson]

I think Mr. McColeman earlier quoted the area in the report where the Super Hornet could fall under question.

I would remind all colleagues to try to stick to the report. I tried to give as much leeway on other issues as on this one, and I tended not to say that it was out of order, but I will point us to the report.

I think your questioning is in order, but make sure that you stick a little closer to the actual report.

[Matt Jeneroux, Conservative, Edmonton Riverbend, AB]

These are fair comments. I appreciate that, Chair.

I am addressing page 3 of the deputy minister's report here, where he talks about “the need to ensure value for money, flexibility and economic benefits for Canadians”, and at the bottom of it he says, “what kind of life-cycle maintenance is required”.

Trying to get to the bottom of exactly what's happening at the minister's office and what's happening at the deputy minister's office, I find there is a complete disconnect here. We are just looking for the economic estimates of what this will cost: the training, the new technicians and pilots, the maintenance, and so on.

I'll end my comments with that. If you have anything to add, go ahead, Mr. Forster.

[John Forster]

Mr. Chair, I think I've answered the question. I've explained the government's position. All of that analysis and work is being done and will be done before the government decides whether to purchase an interim fleet.

[The Chair, Conservative, Kevin Sorenson]

Thank you, Mr. Forster.

We'll now move back to Madame Mendès and Mrs. Shanahan on the split.

Mrs. Shanahan, go ahead. You have five minutes.

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

Thank you, Mr. Christopherson, for your interjection earlier, because I too am more interested in looking at the situation now, and how we're improving it going forward. I am distressed with the fact that we had a previous Auditor General's report in 2011, that improvements were not made adequately at that time, and that we have to come back at this time. That was the past; this is the present.

In reading the Auditor General's report, what hit me as a former commercial banker, who did finance large pieces of equipment, was the fact that the basic business assumptions hadn't been made. There were no proper costing estimates being made. There seemed to be a lack of training, both on the costing side and then on the support side. I remember well, both as a banker and certainly with the entrepreneurs that I dealt with, that this was thoroughly studied, often over months if not years, before major pieces of equipment were indeed purchased. I am heartened and encouraged to hear that this is indeed what is going on now.

I would like to ask Mr. Forster to expand a little bit on, first of all, the personnel that has been engaged to do that kind of independent costing, because that is critical. Then I'd like to hear a little bit more about the value-for-money contracts, because that certainly concerned me. There was sort of a fixed-cost service contract arrangement before, now we're going to a flexible process. The defence department, obviously, is a major purchaser, and businesses want to do business with us.

[John Forster]

I'll touch a little bit on the costing, and then ask Pat to speak to the contracts.

I totally agree with you on costing. A lot of the work of national defence had originally been more in the acquisition costs. Looking at the previous work of the Auditor General, particularly around the F-35, showed that we need to do better work on life-cycle costing. That is what we do now.

As I said, we've developed a much expanded centre of defence costing that's gone from 30 to 80 people, and international certification as part of the defence policy process. We've looked at all the costing of our projects. We've done that with international expertise, and we've had accounting firms come in and review that. That is the way we go forward on all major purchases.

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

Can you expand on that a little bit more? Let's face it, when you're in a certain encadrement, it's hard to get that independent information. Where are you going to get that independent costing information? Are you working with outside suppliers? Are you working with allies?

[John Forster]

Exactly. We're working with a firm that's done costing work with our allies as well, so that we're benefiting from the global experience to enhance our costing. We have a very robust in-house large team, probably the largest costing team within the federal government. We're using outside experts and consultants who have worked in that field to draw on their knowledge, their costing experience with some of our closest allies, and getting information as well from other countries. All of that is now going in.

In some of our major platforms, we've also built in third-party challenge functions. Defence will do the costing, and then we're bringing in outside experts to challenge, review that costing, so the minister is getting an assurance that the work is done well. We're really trying to improve our costing. We invested a lot of money to do that, because we think it's absolutely critical.

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

Very good, and then on the contracts?

[RAdm Patrick Finn]

We don't have fixed-priced contracts for maintenance. Sometimes we'll have a fixed floor. A lot of what's been described here is, I'll say, a minimum payment. There's been an evolution of in-service support contracts. Twenty years ago, largely for time and materiel contracts, when we had a large workforce, we would break out the equipment, and we'd have well over 12,000 contracts. We'd send them out for time and materiel, which meant for companies that the solution to get more profit was to take more time or to do more materiel. We have evolved. We went through a concept. With regard to a lot of what you're reading about in this report, the in-service support contracting framework, we tried to turn a lot more over to the original equipment manufacturers. We have found that, given the size of our contracts relative to those of international allies, they don't always give us the power we want. So we have evolved yet again through the sustainment initiative to have a lot more of the flexibility that you describe.

A lot of the performance we're looking for, which we think has better value, involves not just how much we're paying for maintenance, but ensuring that we're not doing maintenance we don't need. We are incentivizing industry. I often ask people whether the maintenance we do on our cars is all the right maintenance, or whether, if we could go into a dealership and renegotiate and say we would pay them more for less maintenance, they would be prepared to do it. It's hard to do with a single car, but it's something that in a number of areas we feel we have the economies of scale to do. In our early pilots, we've seen some really good results here. The deputy talked about engines on which we've seen quite a significant return. The renegotiation of the C-130J, the Hercules, is talked about in the report. After the first five years, during which we built a degree of knowledge, as did our allies, we've now renegotiated that with a pretty significant reduction in price. But a lot of it, again, is the performance and saying to them, “If you reduce the amount of maintenance we have to do on these aircraft, we'll actually share the savings with you.” That's a lot of what we're after now, really changing the mindset of how we contract, but therefore, also, of our workforce in developing those contracts. There's a lot of complexity to it.

[The Chair, Conservative, Kevin Sorenson]

Thank you very much.

We'll now move back to Mr. McColeman.

Mr. McColeman, we're on the second round still. You have five minutes.

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

Thank you, Chair.

I'll go back to Mr. Forster.

Sir, could I refer you to page 5 of your verbal report today and the transcript you've given us of your report? I want to move down to the fourth paragraph. It reads:

Over the past 18 months, the cost estimates for all planned and ongoing acquisitions were reassessed and validated, including the incremental maintenance costs over the life of the equipment. Even more significantly, we now have a much more robust costing model.

Projects costed...

—past tense, “costed”—

...on a lifecycle basis include: the Future Fighter Capability Project, the fixed-wing search and rescue aircraft, and Arctic offshore patrol ships. We're also working on full lifecycle costing for the Canadian Surface Combatants.

Are the three mentioned in the first sentence costed or are they not?

[John Forster]

The fighter replacement project that refers to is the full replacement that the government has announced. Those were costed under the former government when the policy was to look at buying F-35s. That's not the interim fighter; that's the full replacement of the entire fleet. In November, the government, along with the interim, announced that it would be proceeding to a full, open, and transparent competition on those.

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

I can assume, then, from your sentence that all of these three mentioned, including the fixed-wing search and rescue aircraft and the Arctic offshore patrol ships, have all been costed.

[John Forster]

They have been fully costed. Yes, sir.

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

Was that using the new, more robust costing model?

[John Forster]

Werner, do you want to speak to that?

[Brigadier-General Werner Liedtke, Director General and Deputy Chief Financial Officer, Department of National Defence]

Yes, that would be correct, sir. As we've mentioned, we've instituted a more professionalized costing certification, and through that we've developed more robust standards, and those standards were applied on these costings.

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

Thank you.

Now, with regard to the department's response to recommendation 7.48 of the Auditor General's report, National Defence stated that by the end of 2017, it:

expects to deliver a plan that identifies individual acquired goods and services investments over $20 million as well as life-cycle costs on a program basis.

That was your response. In addition:

National Defence will update and monitor life-cycle costs at key decision points.

What is National Defence's rationale for choosing the threshold of $20 million?

[BGen Werner Liedtke]

Really, it's the magnitude and the volume of the contracts that we do. If we develop the investment plan with every single contract over a million dollars, it would just be cumbersome and burdensome to do. So we use the materiel threshold at this time. In the IP2014, we did not include acquired goods and services at all, so this would be the first major step forward and then we would look at that threshold as we move forward.