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

4:30 p.m.

Conservative

Phil McColeman Conservative Brantford—Brant, ON

Okay, that's fair enough. I interpret that as meaning anything under $20 million isn't going to be under the rigorous costing models.

My next point is, how will National Defence update—

4:30 p.m.

BGen Werner Liedtke

No, sir, that's not correct.

4:30 p.m.

Conservative

Phil McColeman Conservative Brantford—Brant, ON

Okay. It said you will do these things. I quoted it based on everything over $20 million.

4:30 p.m.

BGen Werner Liedtke

No. Within the investment plan, we would identify as a specific item those contracts over $20 million, but we apply the same rigour to all contracts.

4:30 p.m.

Conservative

Phil McColeman Conservative Brantford—Brant, ON

Okay, thank you for that.

How will National Defence update and monitor the life-cycle cost at key decisions points? How will you do that?

4:30 p.m.

BGen Werner Liedtke

The key decision points usually are when a project hits the development and implementation stage. That's when we go from an indicative cost estimate to a substantive cost estimate—that's the time that we'll update the planning assumptions and apply the rigour necessary for a decision.

4:30 p.m.

Conservative

Phil McColeman Conservative Brantford—Brant, ON

Okay, let's go back to where my colleague Mr. Christopherson was going. In view of the Auditor General's scathing report as summarized here in an executive summary today, is there any reasonable expectation that we could get a response from you about what's been learned through all of this poor management?

4:30 p.m.

Deputy Minister, Department of National Defence

John Forster

Well, I think I would make a couple of points. It's a very good question. One, as we've indicated, we're going to always want to continue to improve our contracts for maintenance and support. There was a previous government policy on how to do this in 2006 or 2007. It gave us a lot of flexibility, but it did not give us the value for money that it should have. We've now evolved a new form of support contracts we hope to use. This new form gives us the ability to make sure we have the support we need to make sure the equipment is available, while allowing us to control and manage our costs better.

The lesson learned on costing is the full life-cycle costing. That's why we've stood up a defence costing centre and are implementing full life-cycle costing. Performance measurement is still going to be a good challenge for us. We're going to have to take to Treasury Board for approval a performance framework this year. The minister will have to present it and get it approved. Then we're going to have to make sure we can monitor and collect the data to do that.

In monitoring full life-cycle costing, we're still going to have a challenge. If I have a maintenance technician and he's part-time on one piece of equipment and part-time on another piece of equipment, we're going to have to figure out how we're going to monitor and track that, because the Auditor General has asked us to to compare those. I think there's continually going to be lessons learned. There's always going to be improvements we want to make. We're making some good improvements, but we have a lot more work to do and we'd be the first to acknowledge that.

4:35 p.m.

Conservative

The Chair Conservative Kevin Sorenson

Thank you very much.

Mr. Chen.

May 1st, 2017 / 4:35 p.m.

Liberal

Shaun Chen Liberal Scarborough North, ON

Thank you very much.

To be honest, I don't know where to begin because there's so much in this report. Let me just start off by saying that at National Defence you have the task of purchasing, you have the task of supporting, and then you have the task of staffing. Based on the Auditor General's report, it looks like in three areas you've gone wrong.

On the first, in terms of purchasing, you've overestimated equipment use, you've over-purchased. With respect to support, you have underestimated the cost of providing that support to the equipment. Then in terms of staffing, you have under-resourced the personnel requirements.

Let me just pick one. I'll go to the support of equipment.

Mr. Forster, you said earlier that while some costs, such as the purchase price of a piece of equipment, are relatively easy to track, others, such as the development and disposal cost and the operating and maintenance costs over a 20- to 30-year period, are not. As reasonable people, we can certainly appreciate that type of explanation.

However, in the Auditor General's report, it was also pointed out, with respect to the use of incremental funds, that money that was specifically allocated for particular purposes was not used for that purpose. There's an example the Auditor General gave in his report that $115 million was provided in the 2014-15 fiscal year to support the Chinook helicopter, and $137 per year thereafter. Part of that money was not spent for that purpose. What's worse is that there wasn't any monitoring from National Defence.

My question is in two parts. First, to the Auditor General, beyond that finding were you able to provide any type of assessment in terms of how this happened? Was this a blatant disregard of what is expected by the Treasury Board, which is that when incremental funds from the government are allocated for a specific purpose, that money be used for what it was allocated for?

My second question is to Mr. Forster. What happened there?

4:35 p.m.

Conservative

The Chair Conservative Kevin Sorenson

Mr. Ferguson, please.

4:35 p.m.

Auditor General of Canada, Office of the Auditor General of Canada

Michael Ferguson

In the report, we reported what we found. Obviously, we are not party to any conversations that may have gone on around this. Fundamentally, Treasury Board, as we say in paragraph 49, requires that these types of funds be tracked. We looked to see how the money was spent.

We talk about the case of the Globemaster aircraft, where we found that “National Defence was allocated $140 million a year in incremental funding for Globemaster aircraft support, but spent only $79 million in the 2015–16 fiscal year.” Then we talk about trying to track money that wasn't spent.

Based on our understanding there was an expectation from Treasury Board that these earmarked funds would be tracked and that the department would be able to report on them, but in a number of the examples we cite here, we found that we couldn't see where the money was spent on that equipment and we couldn't see what else it was spent on. Essentially, that's simply the situation as we found it.

4:35 p.m.

Conservative

The Chair Conservative Kevin Sorenson

Mr. Forster.

4:40 p.m.

Deputy Minister, Department of National Defence

John Forster

Maybe I'll ask Werner to answer.

4:40 p.m.

BGen Werner Liedtke

With respect to bringing in money from the fiscal framework, generally in the past the in-service support has been an average amount throughout the life of the asset. There is a clear understanding with Treasury Board that in some years the amount will be below the average, and we will retain the money and retain it within the in-service support envelope. In other years there will be more, where again we would manage it within the envelope, and if it gets higher....

To overcome this issue in the future, we're now mapping out the actual estimated cost over the life of the asset and we're profiling it year over year, to move away from using averages.

The other thing we've done is that in the past the amount was based on the overall average, where now we're actually phasing it in slowly. For example, with the MHLH helicopter we phased the amount in over a number of years to get to the steady state of the $137 million that's identified in the report.

4:40 p.m.

Conservative

The Chair Conservative Kevin Sorenson

You have 20 seconds.

4:40 p.m.

Liberal

Shaun Chen Liberal Scarborough North, ON

I was going to split my time with my colleague, but I guess I've taken it all.

4:40 p.m.

Conservative

The Chair Conservative Kevin Sorenson

The clock didn't recognize, though, that you were going to split. We're going back to Mr. Christopherson. Fear not, we will get back to you.

Mr. Christopherson.

4:40 p.m.

NDP

David Christopherson NDP Hamilton Centre, ON

Thanks, Chair.

To go back to the chart on page 9, at some point even our discussions will turn the corner and look forward, but we have to do an adequate job of looking at where we've been.

I pointed out earlier that on the costs for new equipment, the assumption was that the support costs for new equipment would be the same or less, and it ended up being three times as much. I also want to bring to your attention the third part of that chart, where it says that the “level of effort for support activities is predictable.” That was the assumption. They assumed that the level of effort for support activities would be predictable.

When we see what actually happened, we see that the level of effort for submarine maintenance was significantly more than expected, and that's putting it mildly, given that “National Defence estimated that in-depth maintenance would take less than one year per submarine, at a cost of $35 million each”. As stated, “Although the in-depth maintenance period was reduced from 6 years to 4 years for each submarine, the most recent one cost”—hang on—“$321 million.” We went from $35 million projected to $321 million.

I mean, we can all understand a near miss, but wow. Please help me understand how we got here from an assumption that basically said, “Hey, don't worry, everything will be predictable, it all looks good, and we will be able to do this.” You thought that was going to be about $35 million, and you ended up at $321 million. Help me with this, please.

4:40 p.m.

Conservative

The Chair Conservative Kevin Sorenson

Mr. Forster or Mr. Finn, who can help him?

4:40 p.m.

NDP

David Christopherson NDP Hamilton Centre, ON

You must be ready for it. I'm sure you are.

4:40 p.m.

RAdm Patrick Finn

I can.

We have a number of factors, some of which you point at, rightfully so, and that the Auditor General points at.

On historical costs, are they the best indication of future costs? The answer is no. At times when we're doing some of these things—and again, in a period without the “costers” we have today—the only data we have is historical costs. That's part of it. That's something that we've been working on and improving.

I'll just point out, though, for the $35 million to the $321 million, if I can call it the “contractual costs”, that part of it is lessons learned in that contract on how we're doing maintenance. For example, it's not an overall increase. It's what we've brought into the contract. It includes other maintenance that we were doing as heavy maintenance, through other contractual vehicles that we found to have the economies of scale, bringing it all into the Victoria in-service support contract. That accounts for some of the increase, which again is not a cost increase, but an increase in the use of that contract.

A lot of it is capital improvements. That is not maintenance. We do this. In particular, in a ship or a submarine, when you have it taken apart to do maintenance, if you're going to change sonars, periscopes, torpedoes, and communications, the time to do that work is while you're doing the maintenance. Again, capital projects are approved separately, and the contract becomes the vehicle by which we do the installation, so it's not entirely an increase in maintenance costs.

The other thing is that we relooked at the approach to maintenance. As it says here, again, we acquired the Victoria class submarines with very little time at sea and not a good understanding of what is an extremely complex platform, which has dire consequences if you have major system failure. At first, we looked at about a four-and-a-half-year cycle and then about a year and a half in heavy maintenance. What we've been able to do is bundle together a lot more of the heavy maintenance. Now we've evolved all the way to a nine-year cycle and then putting the boat into maintenance for three years.

Certainly, it is an indication of some of the things you're pointing at, sir, some of which is an underestimation of maintenance and that, but there are other factors at play here, which include bringing more maintenance into the contract from elsewhere, capital investments that are occurring in this, and the periodicity of the maintenance, which is to say that we're doing more in-depth and deeper maintenance less often, sir, but it's taking longer.

4:45 p.m.

Conservative

The Chair Conservative Kevin Sorenson

Mr. Christopherson, you're a minute and a half over. I'll give you a summary, or we can come back to you in the next round.

4:45 p.m.

NDP

David Christopherson NDP Hamilton Centre, ON

How about I just ask one quick question with that, Chair? Then I'm ready to move into another area the next time if I get a chance.

I'm just curious. Did you give that explanation to the Auditor General? It looks like apples and apples here, and you're suggesting that part of the answer is apples and oranges. Did the Auditor General's office know that?

I get what you're saying. Something has to explain it, but it would also seem to me that that you would have explained that to the Auditor General, who would have reflected that in the report.

4:45 p.m.

RAdm Patrick Finn

I can't speak to the specifics of it. We had many engagements. I engaged several times with some of the principals and others. We went through some of these areas.

The point is that the $35 million did not include a lot of the capital costs, capital improvements, so we went through a fair bit of this.