I now call this 42nd meeting of the Standing Committee on Public Accounts to order.
We have with us today Mr. Alexander, Parliamentary Secretary to the Minister of National Defence, who returns. Welcome.
Mr. Hawn, welcome back again.
We're also joined by Mr. John McKay, my former colleague on the national defence committee, who is the national defence critic for the Liberal Party. Welcome, sir.
And the Honourable Bob Rae, interim leader of the Liberal Party, is here with us also. Welcome, Mr. Rae.
With that, folks, today will be a regular two-hour meeting. The first hour will be with the Parliamentary Budget Officer. The second hour will be a resumption of our discussions and questions with the deputy ministers.
Are there any questions, comments, or concerns about the agenda as I've outlined it?
Very well, we'll move forward.
Mr. Page, welcome, sir. I would ask you to introduce your delegation and present your opening remarks. Then we'll begin our questions and comments, in rotation.
Colleagues, I want to remind you that with one hour we won't quite make the regular rotation. I'll leave it with you whether we will just exhaust it as far as we can or if some members have some creative idea they'd like to approach. Notwithstanding that, we'll begin the regular procedure. When we run out of time, we run out of time. Then we'll start the second hour of our meeting.
Agreed? Very good.
Mr. Page, you now have the floor, sir.
By way of introduction, I have Peter Weltman, one of the principal authors of our F-35 work. Tolga Yalkin, senior analyst, is another principal author of our F-35 work. Mr. Sahir Khan is the assistant parliamentary budget officer for expenditure and revenue analysis. And Dr. Mostafa Askari is our assistant parliamentary budget officer for economic and fiscal analysis.
Good morning, Mr. Chair, vice-chairs, and members of the committee.
Thank you for inviting me and my colleagues to speak to you today.
I have provided you with a deck which tracks my opening remarks. I would be happy to discuss the slides in greater detail.
Broadly speaking, I have three points to make. I will attempt to be as brief as possible. All points concern the PBO and the information provided to it or the information it has provided in relation to the proposed acquisition of the F-35 fighter jets.
First, over the last few weeks it seems that some confusion has surfaced as to whether or not the PBO included operating costs within its estimate provided to Parliament in March 2011. I'm here to reconfirm that it did; the PBO estimate includes operating costs.
When the PBO provides operating and support costs in its report, it tracks the language of the Department of National Defence costing guide, second edition, 2006. In chapter 2, page 2, that guide provides the following:
||Operating costs include: personnel costs such as the activation of reserves, overtime cost of civilian employees, and the cost of any other personnel hired to provide service; rations, quarters, temporary duty, travel and transportation; variable and step variable operations and maintenance costs of equipment; total operating costs for facilities and materials consumed. The cost of capital assets purchased by the Department for the purpose of providing the service may also be included.
This definition of “operating costs” is consistent with the U.S. Department of Defense Cost Analysis Guidance and Procedures, published in December 1992. Furthermore, inclusion of operating costs within a life-cycle cost estimate is consistent with Treasury Board policy. Given this, it seems difficult to understand how there could have been any confusion as to whether or not the PBO included operating costs within its estimate.
Second, over the past few weeks, it has become clear that the Department of National Defence provided the PBO with figures that did not include all operating costs. The PBO understood that it had been provided with full life cycle costs from DND as required by the House of Commons Standing Committee on Finance in its November 1, 2010 motion. That motion required the provision of:
|| …All documents that outline acquisition costs, life cycle costs, and operational requirements associated with the F-35 program and prior programs (CF-18)…
In March 2011 the PBO provided Parliament with an independent life-cycle cost estimate for the F-35A. As part of that report, it compared figures provided by DND, obtained as a result of the motion, to its own estimates.
After publication of the PBO report, DND compared on its website, side by side, its figure of $5.7 billion and the PBO's figure of $14 billion, labelling both as operating and support costs. While the PBO's cost estimate was complete in this regard, it has since become evident that the government's public figures did not include all components of full life-cycle costs, as required by the House finance committee motion of March 2010.
Third, it might now be observed that the figures found in the Auditor General's report, confirmed as accurate by the Minister and Deputy Minister of the Department of National Defence, bring that department's life-cycle cost figures into the same order of magnitude as the PBO estimate. Furthermore, DND's figures and the PBO's estimates are in line with those found in the United States Department of Defense December 2011 Selected Acquisition Report, released last month.
Thank you again, for inviting us here today. We would be happy to take your questions.
Thank you, Mr. Page and colleagues, for coming here this morning.
My first question is to ask you to please describe the pricing model that you used in the first report on the aircraft, and also, please explain the limitations of this model.
Thank you, sir, for the question.
The model that we used in the report, which is actually described in some detail—certainly the model and the assumptions—is what we would call a cost-estimating relationship model. We're historically extrapolating costs on fighter planes.
We used this extrapolation of 30 years of history of previous fighter planes, indexed, based on a per-kilogram kind of basis, to project forward an estimate of acquisition costs. Then we derived sustainment costs based off that estimate of acquisition costs, based on historical estimates for different cost categories.
There are benefits and certainly limitations for this model. First of all, when we look at these top-down models, sir, we see them as tests of reasonableness of where costs may be. So we were actually pleased to see today—or actually earlier than today, when we saw the release of the full life-cycle cost estimates from the Department of National Defence—that our numbers are roughly in line on a total life-cycle cost basis.
But again, you're using high-level data and you're extrapolating forward using broad-based assumptions. You're assuming that history will repeat itself. So there are always limitations in that sense.
Yes, I think these sorts of models should be complemented by much more detailed, bottom-up models to provide real confidence. We hope, going forward in that context, to work with the new secretariat, or they could conduct some of this work themselves. I think it would add a lot to this debate in Parliament.
That's a very good question, sir.
When we started this project in 2010, we went to different people to look at what our choices were with models. We were also looking at the history of this particular fighter plane from the early 1990s to present day. We looked at more bottom-up, more detailed parameter models where you literally cost component by component—the engine, the airframe, stealth components, etc.—and then we looked at these cost-estimating relationship models.
We actually invested in proprietary models in both cases. We chose this one, sir, primarily because it looked like history was repeating itself in this case. The costs were providing significant overruns. Even when we were doing our work, already just in the research and development phase, there was already 60% cost overruns. It looked, in that sense, like history was repeating itself, and we became comfortable with this high-level estimate.
I repeat, to your very good first question, these are high-level models, and they should be complemented by the work of DND and other officials, more bottom-up detailed models.
Mr. Saxton, you're not starting out in the greatest way. You're pushing. I had asked you to come to order. At that moment, if somebody wants to say something, I'll listen to them, but you went in after the wire.
The question will stand. Your colleagues can pick up on it later, but your time has expired.
It would also be appropriate for everyone to follow the rules so that we could have a fair hearing for all involved.
I allowed Mr. Saxton, as I do.... If it's after the time, I allow what's happening to be concluded. It had concluded a few moments after the time limit, and Mr. Saxton then put his question, which was over the time. If you noticed, I actually sat back a bit and let it go on, and then we started getting something over here. That's what happens when I get too flexible.
I think the request for the information is valid, but I would ask if one of the government members would reiterate that very quickly; it will only take a moment. Mr. Page can respond in the way he will, and then I can still go about trying to make sure that every member is treated equally.
Thank you, Mr. Chair. I didn't think it was my turn yet, but thank you so much.
Thank you, Mr. Page and your associates, for being here.
I want to go back to the previous question. In your report on the costs of fuel, salaries, and other operating costs, as was attempted to be asked a few moments ago, can you provide the committee with all that methodology and all the information you used in your report, including any correspondence with consultants and so on?
You had the DND costing handbook here. Just to be clear, when you talk about operating costs, is that talking about personnel costs, activation of reserves, overtime costs for civilian employees, and so on? And there are other things listed. Is that total costs, or is that delta for the new piece of equipment, over and above what is already being spent--i.e., for people who are already on salary, and so on?
Now, in terms of the 20 years, you're saying that DND used 20 years. DND has always used 20 years, in my experience with DND. We certainly used that for the CF-18 when that came out. We've used it I think for every capital air program I'm aware of.
The reason for that is, I suggest, in asking you the question, do we know what it's going to cost to operate the CF-18 for 40 years? I think the answer is no, because we're not there yet. The closer we get, the smarter we get.
So as for projecting ahead to operate the F-35 for 20, 30, or 40 years, do we know what the cost of fuel is going to be in 20 years, 30 years, or 40 years?
Yes, I understand that, but what I'm getting at is that the reason DND has used 20 years, in my experience, is because.... I mean, even that is an estimate. Someone called it the wag—to a certain extent, the closer you get, the smarter you get.
But I would suggest that it's not hiding anything or anything else. It's just a matter of there's no confidence at all beyond 20 years, and there's a limited amount of confidence even up to 20 years, because of all the unknowables—the cost of fuel, the missions the airplane will do. When we bought the F-18, we didn't know we'd be in Kosovo, Kuwait, or Libya, for example. There are so many unknowables. So I'm suggesting.... I'm not arguing with you on the technical number and so on, but is it a very useful number?
Sir, if I just may say, we're principally trying to respond to our report and our methodology. So your point is well taken. There may be other approaches. But we used 30 years for very specific reasons: because it's the estimated service life based on the U.S. Department of Defense and it also happens to correspond to the useful service life of the F-18.
The other issue is that if you take the service life estimated by Lockheed Martin for the aircraft—8,000 hours divided by the average flying hours—it also gives you a number over 30. A lot of the methodology.... To go to Mr. Saxton's very good question, we consulted with a wide range of experts, including the peer reviewers, the Congressional Budget Office, Queen's University, and the Australian Strategic Policy Institute. This was the advice we got about what's conventional.
When we can appeal to an authority like the U.S. Department of Defense Selected Acquisition Report, we use things that are most conventional, so definitions that come out of the cost analysis guidance procedures, which is the basis of our engagement with our consultants. So we tried to stay as close as we could to those standard practices, in particular since it was U.S. procurement with the U.S defense department's practices.
The request of the Standing Committee on Finance was quite specific. It asked for life cycle costs. It is important because, in the Department of National Defense guide, life cycle costs are defined. Receiving partial information makes things more difficult.
In the course of our analysis, we believed that the information that we and the committee had been given represented all the costs. Later, we discovered, after the auditor general's report appeared, that the costs submitted to Cabinet were not the same. We can now see how those two amounts were arrived at and we can see that they are quite similar, in general terms.
I welcome our guests here today. It's really important that you're here to try to provide some clarity, so that we as Parliament and we in government can all live and learn from doing things right. Occasionally, if there's an error in an assessment in a particular region, this gives us the opportunity to correct it.
We're really pleased, of course, as you are so well aware, that this is timely and that we have not gone to the expenditure or the acquisition stage yet, so decisions still will be reached as to whether we should spend money or should not. We're very comfortable with that, and I think this is a beneficial investigation that we're doing here.
It is very well known that we've had significant success in acquiring industrial benefits out of this. I want to put forward a little bit of a balance sheet for it—a balance of estimates versus cost versus income.
Do you agree that we've had some significant industrial benefits?
No, there's no apology necessary; we're just trying to get some clarification. In any business, and of course in the business of running the country, there are expenses and there is income. I'm certainly not going to suggest that we extrapolate the success we've had today in the industrial benefits across the entire acquisition and suggest that we're going to make money on it; far from it. But it is my understanding that Parliament has budgeted approximately $700 million during the developmental stage, they have spent something in the neighbourhood of $300 million in the developmental stage, and in industrial benefits already we have in excess of $435 million.
So there have been some tremendous successes, particularly due to the fact that we have a vibrant aerospace industry that quite frankly performs a very significant role in our economy. We're very proud of that, and obviously we don't believe it should be minimized to any particular extent, particularly when we look at an acquisition cost and at our being a participating partner in this entire program, not only as one of the originating partners.
I think you can see where I'm going on this. When the U.S. Air Force alone is going to build 2,400 of these just for their use alone, there can be some significant benefits down the road to Canada.
So I understand that cost is very important, but I would suggest very strongly, sir, that I think.... I'm not going to suggest that you do another study now, but what I am suggesting is that we could certainly be mindful of this story. I think this is a story that Canadians should hear. At that point.... I'm hopeful that at some point, you or your department or officials will start to ascertain the regional benefits from this from across the country.
I know we can ask industry for that, and they'll give us that information, but for security purposes, right now a lot of these companies cannot even be identified; I think we can all understand that. But you have the privilege, sir, and the means with which to do some preliminary investigation, because of your security clearance. Have you done that?
Thank you, Mr. Page and your colleagues, for trying to bring some reconciliation to the numbers.
I think at this point DND, AG, and PBO essentially agree on the core numbers. The real issue has been whether the $10 billion gap has been communicated to Canadians, and for whatever reason the government chose not to do so.
Moving beyond that point to trying to stay all on the same page, I think you make a very valid point when you say that the handbook is the Canadian handbook, the U.S. handbook, the Queen's handbook, the Pentagon's handbook, and the intellectual framework for cost analysis is what is agreed by all parties: there can't be much variation going forward.
The question then becomes, as we are price takers and not price makers for this particular asset, how you reconcile Mr. Fonberg's numbers earlier this week, in which he said that he thought the plane was going to be about $75 million to $85 million—and I think he's using the $85 million number—when in fact the selected acquisition report of December 31, 2011, says it's going to be $137 million. That's $85 million versus $137 million. Even given that we're getting the cheaper version, if you will, how do we reconcile those two numbers?
The second issue was raised earlier. It has to do with the costs of flying this asset, which seem to be significantly higher than for the F-18s. The F-18s, I understand, cost somewhere in the range of $18,000 to $20,000 an hour, whereas this one costs $32,000 an hour. Are we in a situation wherein you can buy it but you can't fly it? The government seems stuck on this notion that the only amount they're going to spend is $9 billion.
I'd appreciate some reconciliation of how we get from $85 million to $120 million to $137 million, and how we reconcile using legacy costs for projected future costs.
I think with respect to the cost of acquisition, this is a complicated area where there are many different definitions. I think that in some cases this is just a question of comparing apples and oranges, unfortunately.
Again, the numbers we've seen from DND represent what we see as something called unit fly-away cost, which is usually the lowest number generally provided with this plane. I think those are the numbers in the range of $70 million to low-$80 million coming out of the selected acquisition reports.
The number you also referred to, in the range of $138 million a plane, is something called the average procurement unit cost. It includes different elements of costs. It's a more fulsome kind of cost. I was thinking about this. If I say to my wife that I want to buy a brand-new BMW motorcycle, and the price at the top of the sheet is $15,000, but when I walk away it's going to cost $20,000, but I only tell her it's $15,000, it's a bit of a problem.
So it is important, I think, going forward, which I think is the spirit of your questions, that we come to a common definition. If the average procurement unit cost seems to be the common definition used for a procurement basis in the United States, and we can get comfortable with that, I think, for the secretary going forward, we would all benefit. But to start, it's an apples and oranges question.
On your other point, about the cost of flying and the different costs, certainly coming out of the latest SAR, with respect to the F-35 having a higher operating and support cost per hour, I think this highlights the importance, in a full life-cycle model, of including the full operating and support costs. But certainly the models, which are parametric models, used by the project office to provide these estimates suggest higher costs for the F-35 on an operating and support basis.
Perhaps Mr. Khan could just add quickly to that.
Let me just add, and Mr. Hawn has said this in the past, that if you actually take the total acquisition pie and divide it by 65, you are actually looking at $138 million allocated per aircraft. If you keep quoting the $75 million, which is a fly-away cost, it risks understating. There's actually a really good paper from the Pentagon's acquisition unit covering why it's important to use the more fulsome cost number.
When you compare that to the latest selected acquisition report, you get a figure of $137 for all variants. So you want to do a little bit of discounting—some experts suggest 10% or 12%—to get to the A variant.
Again, as you note, on page 84 of the selected acquisition report, over the long term, there is a delta, based on current estimates, between the F-35 and the legacy aircraft it replaces. This is the issue that will have to be considered from a fiscal point of view.
I'm going to share my time with Ms. Bateman, but before I do, I have a couple of quick questions.
Mr. Page, you indicated that your model was based on $148 million per plane, and you used one model. Is that correct?
First, thank you for providing this clarification and bringing us these figures. It is really necessary for all committee members.
My question is for Mr. Page.
I heard you in response to Monsieur Ravignat say that with a shorter life cycle you have lower costs. I'm not asking you to respond right now, but I am asking that we as a committee review the context of your comments. Perhaps you would like to clarify or if necessary correct your comments. My understanding is that the longer the life of an asset, the lower the cost.
In preparing your report, you reviewed the MOU that Canada signed as a member country. Can you tell us if Canada is on the hook for increases in development costs?
My thanks to our guests for being here.
Mr. Kahn, you were telling us why we looked at U.S. numbers and why we didn't look at Canadian numbers. Walk us down that path a bit more. Give us a decent overview of how that unfolds, why it's important, and why we end up basically at the same stop at the end of the day.
The program has had well-publicized cost overruns and delays. But one of the advantages is that we now have some useful reference points. We've recommended that parliamentarians at least consider that figures coming out of the selected acquisition report, plus reports from the U.S. Government Accountability Office, begin to illuminate the subject—providing estimates on both acquisition costs and O and S, long-term sustainment--in effect, life cycle costs.
There are now good reference points. A year ago when we did our report, there was not an independent estimate that you could pull out for the F-35A or for sustainment, of which operating support is the largest component. A year later now, you're seeing these numbers on a selected acquisition report and through the U.S. Department of Defense's CAPE unit. You're seeing average procurement unit cost numbers that are also important, because this is the basis of budgeting in the United States and appropriations, not recurring fly-away.
You'll see in the selective acquisition report that the same figures used here will be part of the defence department's submission for the budget process.
Sir, at this point that would be speculative. I think we can refer you to the fact that they've now done an estimate of the cost difference—their belief in the cost difference—using parametric models to look at the O-and-S cost, operating and support, per flying hour for the F-35. You'll see on page 84 that they actually give you the flying hours for the F-35A versus the other variant. We've provided a kind of illustrative calculation of that, and you can now start to see those indications.
To your first question, it is useful now to start using these reference points to look at what's reasonable. I think it's the same point about parametric modelling and the use of it: what's reasonable.
If points start to converge, then at least, from a parliamentary point of view, there's a richer planning environment. You can have a little more confidence going forward.
We caution that they're all estimates at this point. But to your first question, it becomes interesting when they start to converge. That's why we think the latest report published just five weeks ago from the U.S. Department of Defense is very handy in that regard.
No. Actually, sir, that's one of the reasons that when we looked at different models and we looked at the experience of the F-35 when we took on this project, we thought a cost-estimating relation of the kind of project that picks up these escalating costs....
There's a chart we have—I know you can't see it, but it's in our report—that looks at 30 or 40 years' worth of history. When you look at the cost of this type of technology, these sorts of systems, on a per-kilogram basis it's been growing exponentially, certainly 3.5%, or actually in the 4% range when you add in the weight itself. The costs have been going up.
Thank you. That's not a point of order, Mr. McKay.
I would appreciate it if colleagues would use points of order only when there is really something out of order, as opposed to trying to find an opportunity to make a statement you otherwise couldn't, not that you have done exactly that, but that has happened and I want to stop it right now.
I am also reinstating the time that Mr. Alexander lost due to a point of order that wasn't a point of order.
Mr. Alexander, you have the floor. Please continue.
Thank you, Chair. I'm very grateful for that.
My next question is for Mr. Page.
You are the Parliamentary Budget Officer of the Parliament of Canada. You know full well that the Department of National Defence, under Liberal governments and Conservative governments, has, as a standard for aircraft acquisitions, used a 20-year life cycle framework. You chose to use a 30-year timeframe, which has been used by the Department of Defense of the United States. Why?
Just pursuing this argument a little further, it seems to me that DND is the only outlier here. The U.S. accepts this formula; Canada, through Treasury Board, accepts this formula; the U.K.; Queen's University; pretty well any entity.
Am I correct to assume that the only entity that seems to go for only 20 years is DND, and they seem to be offside with Treasury Board guidelines?
I now declare the 42nd meeting of the Standing Committee on Public Accounts back in order for the second hour of our meeting.
I will welcome our deputies and staff here from our previous meeting. I know they've just been waiting and waiting to come back and continue the exciting discussions we've been having. Thank you all very much. We do appreciate it.
I believe every single person returned. I'm not sure whether that says a lot about how good you're doing or how ineffective some people here are, in leaving you still being able to walk. However, you're all here and we do appreciate it.
Colleagues, if you are ready, we will begin. As I mentioned at the beginning, we will do a fresh rotation and start from the beginning and again we will continue until such time as our committee time expires.
With that, unless there are any interventions from colleagues—I see none—we will then proceed with Mr. Saxton.
Mr. Saxton, you will kick off the rotation. You now have the floor, sir.
My first question is for the Treasury Board secretary.
In his remarks to our committee just before you arrived, the Parliamentary Budget Officer stated that he followed Treasury Board guidelines when he decided to choose a 30-year life cycle, and he implied that DND may not have followed Treasury Board guidelines when they chose a 20-year life cycle.
Could you please clarify what the Treasury Board guidelines are for the life cycle?
The Treasury Board guidelines are applied in different circumstances. When you are providing information for approval for a project, the life cycle refers to the life cycle cost of the materiel or the asset to be acquired. In the context of an aircraft or air weapons system or the air materiel that the Department of National Defence has procured even in the very recent years, the Treasury Board submission has always looked at a 20-year life cycle costing, especially with regard to maintenance, because beyond a 20-year timeframe, as I indicated in my previous testimony, it becomes very difficult. We consider it high risk to go beyond that timeframe for the purposes of costing for an acquisition.
The MOU was key to provide the opportunity for Canada to continue to have access to critical and detailed and highly classified information on the joint strike fighter program. We had verified prior to renewing that MOU that the F-35 remained a valid option going forward, even though there was no SOR and the air force had not stated any detailed requirement at that time. So that's one aspect.
The other aspect was that it kept the door open for Canadian industry to have opportunities in both design and early production industrial opportunities, contract opportunities.
Thank you, sir.
Thank you for the question.
Mr. Chairman, the OAG noted that the file up to this point had characteristics of a department working in a silo. So the first point I would make is that the secretariat would adhere to the structure that I described earlier and will bring people together. That's the first observation I would make.
Second, we will focus on the seven-point action plan. That is the mandate given to us by the government, quite clearly.
Third, we will draw from the experience we have gained through the national shipbuilding strategy. Interestingly enough, pretty much all the people around this table were involved in the national shipbuilding strategy, so I think we have a very good footing to cooperatively work together in coordinating, providing oversight, and working on a consensus basis.
Thanks for the question.
The vast majority of our acquisitions, because of cost, have been military, off-the-shelf, proven solutions that are already in existence and normally in service with another nation. That reduces our risks enormously. Costs are very specific, and there's proven in-service support performance there.
So this approach is very much different from that. In 1997 this was a blank sheet of paper. There was nothing. Four years later, Lockheed Martin, in competition with Boeing, demonstrated a prototype that took off in 500 feet, flew supersonic, and landed vertically. That was in 2011. We had joined that, for a $10 million contribution, in 1997, and then continued to monitor that over the past 15 years. That was obviously very early in any process of considering replacements for a CF-18, but the other alternatives out there, Eurofighters or Super Hornets, were also, even at that time, ten-year-old technology.
So the program is truly unique. Today there are 1,700 people in a joint project office supported by thousands in industry, supported by the nine partner countries. The aircraft is in production. There are large numbers flying, or about to be added to the fleet. Most of the technology issues are behind us. Costs for acquisition are stabilizing. We're gaining more and more specific insight into what it will cost to run the aircraft.
Thank you, sir.
It's nice to see you back, gentlemen and madam.
Mr. Fonberg, a document—actually, it was a Treasury Board Secretariat report—went to Parliament last year that talked about the F-35 and the $25 billion as being in “definitions” phase. So looking at the chart, on pages 12 and 13 of the AG's report in chapter 2, I noticed that just this year, that actual wording got changed to “options analysis”.
When I look at the chart, sir, under 2006, it says that “National Defence completed a preliminary options analysis of five...aircraft”. It goes through a series of steps, and then, when it comes to 2010, “National Defence provided letter to PWGSC to justify procuring F-35 without competition”.
Can you explain to me, sir, how “definitions” phase became “options analysis” phase eight months after it was reported to Parliament, when indeed you had decided to buy an F-35, or at least that was the letter you sent to Public Works?
Thank you for the question.
If I may, on the specific question, which I believe is related to the report on plans and priorities from last year, on April 13 of this year my office was informed that there was an error in the supplementary tables on major capital projects in the 2011-12 report on plans and priorities.
Specifically, the RPP indicated that the next-generation fighter capability project status was in the definition phase. That was incorrect, and we apologize for that. In 2011-12 the project was in the options and analysis phase.
I could ask the CFO to speak to what that means. I would—
Thank you for the question.
Mr. Chairman, I may actually ask Dan Ross to speak again to some of the correspondence recently and over time with the PBO. What we asked for clarification on, about two weeks ago, was for the schedule of operating costs that we used to build our operating cost numbers. Mr. Ross can walk through that: personnel salaries and allowances, fuel and lubricants, base support services, and on and on.
We are unable to identify any of that in his report. We have asked him for clarification and we have received no firm clarification whatsoever that any of those items are included, other than a statement by him that they are included.
Dan, would you like to...?
Welcome to our guests again.
I have a quick question to Mr. Fonberg and then I'll be going to Mr. Kennedy.
Mr. Fonberg, there was a statement made today by the PBO that quite frankly is a little bit alarming. I would like some confirmation one way or the other and/or some explanation for that statement. The PBO claimed that you did not fully respond to his requests. Is that true? And would you care to respond to that in some particular manner?
Okay, thank you very much.
Mr. Kennedy, you alluded to some of the industrial benefits going forward, and I think it is important. There's no doubt that the major focus of this committee hearing and our examination of the issue from both the Auditor General and the PBO has obviously to ascertain, as close as possible, given the nature of this acquisition, the expenses, the cost of this aircraft, the cost of operation acquisition, development, etc. I also know, from being a person in business for many years, that your expenses are of course crucial. You have to control them. You have to know what they are. But also, if you have any potential income you have to factor that into it as well. A government has to factor in all of the potential possibilities going forward.
I would like to expand a little bit on the industrial benefits. We have close to a hundred companies, I'm led to believe, across this country that are regionally spread out and that are participating in that. Can you confirm that?
How would you come to that?
As an example, when the PBO took the costing and then extrapolated that over the next 20 years, have you done a similar process based on the success to date, the fact that we've spent close to $300 million in upfront costs and yet we've received $435 million in contractual guarantees and contractual programs that are a benefit to Canada?
Did you extrapolate from these numbers? How did you come to that figure?
Mr. Chair, I could say two things to that.
The first is if you look at the current contracts for work on production of the JSF, and you assume that the Canadian companies that have won those contracts will continue to be successful and will continue to be part of the supply chain—in other words, they won't lose the work they've already won—if you extrapolate the work they're already doing to the full run of the aircraft production, that amounts to just under $7.5 billion U.S.
In a sense, of the just under $10 billion that has been identifed as potential opportunities for Canadian companies, if the Canadian firms that have already won work continue to keep that work through the production of the aircraft, that's about 75% of the identified opportunities that would be locked up.
We think that Canadian companies have done very well to date.
Twice a year we get detailed information from the prime contractors on the available opportunities and all the Canadian firms that they feel stand a good chance to participate. We sit down with the prime contractors and we validate all that information. We also have regular meetings with major Canadian suppliers to do some triangulation, in a sense.
We talk to Canadian firms who are vying for business and we can ask them questions about whether or not what we're hearing from the prime contractors matches up.
To date we haven't had any reason to experience concern.
On the asset side, coming through with potential contractual opportunites for Canadians, might there be some intangibles too? What about sharing of technology, sharing of research, R and D, investment, other opportunities, collaborations? Is that included in this, or would this be over and above that?
That is one of the significant differences with this approach. We're not using traditional IRBs, industrial and regional benefits, but we're involved in a consortium to develop the technology, because the Canadian firms are in on the ground floor on the development of that technology.
I'll give you one example: a firm here in Ottawa that, as part of the JSF work, has developed a sensor for the engines. They've now been able to turn around that technology and are selling it for civilian use. This has nothing to do with the F-35, but because they are part of the F-35 program, they have been able to develop this technology, which is now going to be sold to Airbus and Bombardier and others on a commercial basis.
The technology being developed is in some cases very advanced technology, and these companies have been able to use that in their other lines of business.
For the purposes of presenting a procurement project to Treasury Board, we use a 20-year cycle to predict costs, especially for maintenance contracts. As I pointed out, it is difficult to calculate maintenance costs for more than 20 years.
So the life cycle of an asset can be calculated for a longer term for planning purposes, but for procurement purposes…
My next question is for the lieutenant-general.
Of course, thank you for being here.
The elephant in the room here is that on Tuesday you said that you were still working on the assumption that the F-35 was the plane that we needed. Now, apart from what the Americans need and apart from what Lockheed Martin needs, what domestic defence needs does Canada have in order to prefer the F-35s above all other planes?
Thank you for that question.
To go back to what I said on Tuesday, when we look at the needs of the future we have to look at both domestic and international environments where technology will cause us some significant challenges.
It's important to remember that one of the things we're doing is buying a single fleet of fighters. To have, let's say, a home fleet and an away fleet is very expensive. We went away from that in the 1980s, with the F-18, and to go back that way would be even more expensive. So no matter what we consider as the future option, we have to look at a single fleet, multi-roled aircraft to meet all of Canada's needs.
With respect to some costs that were brought up, my understanding of sunk costs is they are things that are there for the F-18 and will be there for the F-35, whether it's pilots, technicians. I guess, Mr. Fonberg, is that what we're defining as sunk costs, or what DND is defining as sunk costs?
Okay. So it's here for the F-18 today and it will be there for the F-35 tomorrow.
There's obviously a lot of confusion around this. To go back to the operating costs for the F-18 versus the F-35, Mr. Lindsey, I don't know if you have the answer to this or not, but there are two figures for every airplane. There's one that's the sort of hourly operating cost in terms of POL, which is fuel, oil and lubricants, and so on, and then there's what we used to call—I don't know if we still do—the log guide figure, which is a much bigger number and includes salaries and pensions and the whole nine yards. That's the figure I think Mr. Allen was looking for—the log guide figure.
Do you have that off the top of your head for the F-18?
Right, which some people have termed sunk costs; but yes, yours is much more correct.
With respect to the F-35 program being a development program, going back to the F-18, there were far fewer F-18s flying at the time when we made the decision to buy that airplane than there are F-35s flying now. So I would suggest, maybe to Mr. Ross, that, yes, it's a development program, but we've been there with development programs before, which turned out just fine, thank you, meaning the F-18. Is that a fair statement?
Now, with respect to going back 20 years and so on, the reason we don't use more than 20 years is because it's so unpredictable. There are so many unknowables out there that it really becomes a meaningless number. But I'm not sure who I'd ask about this....
I'll ask Mr. Fonberg. You can pass it on.
You can take that number and extrapolate it to anything you want. You can extrapolate it to 30 years, 40 years, or 50 years, but for sound planning, you have to go with something that at least has some predictability to it. Is that a fair statement?
Mr. Fonberg, I'd like to ask you to look at the chart on page 27 of the Auditor General's report.
In that chart, that's the sort of I suppose now famous discrepancy between the number that the Auditor General says was your estimate used for decision-making in June of 2010, and the public response that the department gave to the Parliamentary Budget Officer's report in March of 2011, which I gather was on the DND website in 2011. Is that correct?
Well, in his testimony this morning.... If you multiply 65 by $85 million, you don't get $9 billion, you get under $6 billion. And that's the number that's also on that chart, the 5,580 number. And as my friend Mr. Hawn points out, if you divide $9 billion by 65, you get $138 million. So when the Parliamentary Budget Officer came up with his higher number, Minister MacKay said in the House on March 23 that his methodologies were flawed, his findings were flawed, his numbers were completely out of line and they bore no relationship to the numbers of DND. But in fact, with great respect, Mr. Fonberg, they do bear considerable relationship to the numbers you set out, with respect to the total 20-year costs, when the government made its decision in June of 2010.
My question is, why would you not have admitted to that number? Why would the government not have admitted to that number when it was engaging in the debate with the Parliamentary Budget Officer? Rather than attacking the Parliamentary Budget Officer, why would the department not have said, “Well, there are different ways of calculating this actual cost, but yes, it could be somewhere in the $25 billion to $35 billion range, if you include the full life cycle costs over a period of time”. And then if you add the period of time, you might get a different number.
But let's not get away from the fact that when Parliament was in the middle of a critical debate, the Department of National Defence seriously undercut the credibility of the Parliamentary Budget Officer, when for many outside observers you'd say the discrepancies are not in fact that huge. What's huge is the fact that $10 billion went missing when the debate with the Parliamentary Budget Officer started. Who made that decision?
Sorry, Mr. Chairman, just to clarify, there were no different accounts.
As I said on Tuesday, our last four major asset acquisitions have spoken to sustainment costs and acquisition costs, which is exactly what we did in the case of the F–35 and how we responded. Operating costs are within our departmental budget.
In fact, if you go back and look at the press releases for the last four major asset acquisitions, they all refer to sustainment costs and acquisition costs. So we communicated exactly the same way we've communicated over the last four major asset acquisitions.
And welcome, everybody.
Much has been made of the sole-source argument. Before you leave, gentlemen and lady, I'd like you to explain the process that led to the sole-source decision—I know it has a history of several governments, at least two—and how it played out here.
Mr. Guimont, can you address that for me, please?
Thank you very much for the question.
I will at some point turn to my colleague Mr. Ross, because he and I have worked together on this operation for some time and we share both elements of the decision-making process, if you will.
If you look at a government considering an acquisition, in the first instance one of the things we'll do is look at what is either the capability that you're trying to replace or new capability that you would look to acquire. We would then together look at what was the policy rationale for either buying a new capability or replacing an existing capability. I don't think there's been any debate on that particular issue with respect to the need to replace the CF-18 fleet.
We then go to a third phase of the procurement process. The Auditor General in some of his work has actually laid out quite extensively what the phases in the procurement process and the phases in the acquisition process are.
The next phase of the process is needs and options identification, and there are four or five different steps in that process that we went through. We worked collectively with our colleagues in the Department of National Defence.
Here I would ask Mr. Ross to speak to some of the preliminary work that was done in those phases that eventually gets you to a point where you ask if there is a competitive field that is available to you, and should you then seek a competitive procurement, as the Treasury Board guidelines suggest you should do, if one exists?
Dan, do you want to talk about the options there?
Effectively, in that early options analysis piece, before you go to government for approval in principle to begin a project, we ask, in this case the air force, to identify their high-level mandatory requirements, what they really need that particular platform to be able to do. We take that and we look out at the market, with our colleagues in Public Works, and identify reasonable solutions, and have preliminary estimates of cost, performance, availability, etc.
In this case, that examination came back with a view that in terms of technology, looking forward 30 years, there was only one solution.
Thank you for the question.
As I mentioned earlier, the secretariat at the working level will draw from the various departments, so they will be co-located. It's quite obvious to me that if people are together, instead of being separated in their respective departments, they're going to be working as a team. That's the first thing.
The second thing is Mr. Ring will be chairing and will be responsible for the assistant deputy ministers' committee, which will then report to the DMs' committee. In all cases, we are going to work together. I'll be calling regular meetings of the deputy ministers' coordinating committee. The frequency of those meetings is a function of decisions to be made. I've made reference to consensus decision-making, like we did for shipbuilding, and these meetings will draw, in terms of frequency and content, on the work done by the assistant deputy ministers' coordinating committee as well.
So the key characteristic is people working together and the use of third parties to validate, when need be and as required. There will be a clear effort to work on transparency, as we did for shipbuilding. And the terms of reference, which we are finalizing, will essentially expand on the seven-point action plan and show how we are going to operationalize the various elements that have been outlined by the government's seven-point action plan.
I will be sharing some of my time with my colleague Ms. Duncan, provided the committee agrees, of course. Thank you.
Mr. Kennedy, earlier in response to a question you said—I don't have the exact quote clearly, so I'm paraphrasing here—that when you signed the MOU in 2006, which is the industrial piece, your expectation was that we were actually going to sign on to buy an F-35. Is that a fair characterization of what you said?
Thank you, Mr. Kennedy. Thank you. I appreciate that.
Mr. Fonberg, we talked Tuesday, you and I, about $25 billion and $14.7 billion, etc. We do know that the , Minister MacKay, used the number of $15 billion. I'm not going to argue when and where and under what circumstances.
Did you give him that number, sir?
My question is to the Deputy Minister of Public Works. My concern is more a broad one rather than the specifics of the matter of the F-35.
The Auditor General was very clear in his determination that Public Works did not demonstrate due diligence in its oversight role in this matter, and the department has challenged that finding, as reported in the Auditor General's report. Do you continue to hold the view that you can rely on such short-circuited procedures as applied here, or would you follow in future, as the Auditor General has recommended, Treasury Board rules and the principles of good management and due diligence?
Thank you for the question.
I explained this Tuesday, when I was before the committee, that when the Auditor General came before the committee he stated, and I quoted him, that some due diligence had been applied by Public Works. I also explained that the reason we had a disagreement had to do with the fact that “did not demonstrate”, under recommendation 2.81, is an absolute, and I am comfortable with the fact that he has recognized that some due diligence has been applied. This, to me, was the position that we took with him in the course of the interaction we had with his office.
Now, in all fairness, this is a unique procurement process, no question about that. In retrospect, we collectively--but I'll speak for myself--if we were to look back, a different frame would have been put in place to carry out our responsibilities. And I would—
Thank you very much, Mr. Chair.
Mr. Fonberg, you were discussing the three kinds of costs, and my colleague Mr. Allen wasn't able to allow you to finish. I think it would be very useful to this committee if you could table the facts and the details of the composition of the costs for all the members of this committee.
What I'm hearing very clearly is that your analysis, right from the start, has included acquisition costs and sustainment costs for 20 years. Then you, as we did here, heard from the Auditor General, who is now suggesting that we also include operating costs. If you could table with this committee for our report the composition of those, that would be helpful.
Thank you, Mr. Chair.
I have a few quick questions, short questions, but I want to understand. Have we purchased any fighter aircraft to replace the fleet of CF-18s yet?
I'm glad, sir, that you mentioned the MOU, because I have a few questions. First, when did we first join the joint strike fighter program? Would you be kind enough to explain what the joint project office is, who runs it, and what it does?
In terms of the joint project office, it was created in the mid-1990s under the Americans, because they were pursuing a lightweight fighter replacement for a number of fleets, F-14, F-15s, F-16s, and their Harriers used by the United States Marine Corps. They stated the requirement for a stealthy supersonic aircraft that could meet all those roles.
The JPO, the joint strike fighter program office, has grown to 1,700 people: 1,600 Americans and 100 military and civilian personnel from the partner countries. It's composed of world-class experts in aircraft design, in technology development, testing, costing, and program management. We have five full-time members in the joint project office in Washington. Our first member joined in 1998.