PACC Committee Meeting

STANDING COMMITTEE ON PUBLIC ACCOUNTS

COMITÉ PERMANENT DES COMPTES PUBLICS

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, April 30, 1998

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[English]

The Chairman (Mr. John Williams (St. Albert, Ref.)): Good afternoon, ladies and gentlemen. I'd like to call this meeting to order, pursuant to Standing Order 108(3)(e), for consideration of the April 1998 report of the Auditor General. We received from the Auditor General his comments on the report, which he tabled earlier this week.

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We have as witnesses today Mr. Denis Desautels, the Auditor General of Canada; Mr. Michael McLaughlin, the deputy auditor general, corporate services; and Mr. David Rattray, the assistant auditor general, audit operations. Welcome, gentlemen.

Mr. Desautels, we'll turn the meeting over to you.

Mr. L. Denis Desautels (Auditor General of Canada): Thank you very much, Mr. Chairman. My colleagues and I are pleased to have this opportunity to meet with the committee to discuss the report that we tabled on Tuesday of this week.

Once again, this report reflects the enormous challenges faced by the government as it seeks to redefine its role while reducing expenditures. It's my role, as Parliament's auditor, to determine if public funds were spent with due regard, in accordance with the wishes of Parliament, as well as to ensure that financial information provided to Parliament and Canadians is complete, useful and credible.

In this regard, many issues raised in this report are highly significant. For example, in chapter 6 I urge the government to provide parliamentarians with long-term financial projections that capture the potential impact of the aging baby boom generation on future government finances. I also raise matters of significance related to the Department of National Defence in chapters 3 and 4.

While the Department of National Defence assures Canadians that it would never take on military commitments it could not fulfil, I am concerned that the portion of the defence budget that is available to modernize equipment is decreasing due to fiscal restraints and rising operational costs. In particular, this means that the army and the air force are having difficulty in keeping pace with technology. We are at the stage where hard choices may have to be made. I believe it is important that Parliament be better informed as to what the Canadian Forces can do, and I am concerned about the slow pace of progress in providing this kind of information.

Also, billions of dollars worth of military equipment could be spent more wisely. Due to affordability concerns, several projects examined have resulted in the purchase of equipment that cannot completely perform the missions that justified its purchase. I am also concerned that the departmental management did not conduct adequate analysis to justify its spending decisions for most of the projects we examined. The lack of rigorous risk analysis and testing and evaluation create additional concerns, even if serious problems have not resulted so far.

The department has responded that it has a major initiative under way to improve its capital acquisition process. With major new acquisitions just announced, the department is at a critical point. An implementation plan is needed to direct the re-engineering effort and to ensure the prompt resolution of these problems.

I would hope that the Standing Committee on National Defence and Veterans Affairs will deal with these issues, even though they may be of interest to this committee as well.

Knowing that the committee cannot deal with all of the subjects raised in our report, I've kept the list of proposed priorities relatively short. The four areas proposed for early consideration deal with (1) downsizing of the public service; (2) economy issues and lessons learned in constructing a major capital project; (3) results reporting and the provision of information to Parliament; and (4) reporting government financial results.

[Translation]

I will deal first with reductions in the Public Service covered in chapters 1 and 2 of the report. The good news is that the latest round of cuts has achieved the government's desired objectives. Ministers and senior officials played a key role in making sure departments met their targets for spending cuts. Personnel costs have actually declined and there have been no significant labour disruptions. From March 1995 to March 1997 alone, over 30,000 employees benefited from departure incentives.

But the departments did not focus enough on the costs of providing incentives for employees to leave or retire, or on finding less costly alternative ways to reduce their workforce. The program cost is more than anticipated and the break-even date is later than planned. Frameworks and guidelines were designed to keep on top of costs, but these measures were not well understood and were communicated too late, after departments had approved incentives for a significant number of employees.

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In terms of workforce viability, there are some questions as to whether the remaining workforce will be able to cope with the existing workload and meet program objectives. We raise questions about the management of workforce reductions for critical groups where surpluses may exist in some departments but where shortages may exist in others. In paragraph 2.121, the Treasury Board Secretariat has agreed to report comprehensively at the end of the Program Review, scheduled for March 1999.

It is important for Parliament to be aware of the significant impacts of workforce reductions. As usual, lessons learned can be useful in that they can be applied to future initiatives. Downsizing initiatives will end by March 1999. A review by the committee now, at this point in the program, would support clarifying the accountability of the departments and central agencies for the management of workforce reductions—both their cost and impacts.

Next, Chapter 7 deals with the federal government's newest laboratories located in downtown Winnipeg. They are the first in Canada to handle the most dangerous viruses known. The facility will be used by Health Canada and the Canadian Food Inspection Agency, and I am satisfied that the departments have taken appropriate measures to ensure that this building is safe for both employees and the community. However, the project could have been delivered for $5 to $10 million less. There is built-in overcapacity and no strategy to optimize the use of the excess space.

[English]

Mr. Chairman, some of our previous audits of major crown projects have identified a range of deficiencies in the approval and management practices. These deficiencies persist. Existing policies are in need of review. Improvements are needed in project management practices.

The committee might wish to review the roles played by Health Canada, Agriculture and Agri-Food Canada, the Canadian Food Inspection Agency, Public Works and Government Services Canada and the secretariat as a way of providing an incentive for corrective action.

Chapter 8 deals with effectiveness measurement and reporting by the Department of Finance. The department's 1997-98 planned expenditures of $66 billion represent 43% of planned federal expenditures, and its responsibilities include federal tax policy and therefore tax expenditures, as well as programs such as the management of the public debt and federal-provincial transfer payments.

The department should address gaps in reporting to Parliament on its objectives and on the effectiveness of its policies and programs. Your committee may wish to review how the department plans to provide such information to Parliament in the future.

Chapter 9 addresses the government's recent departure from both objective accounting standards of the CICA and its own stated accounting policies for certain transfer payments. We have discussed this matter with you on a number of occasions.

Our chapter provides important new information that we would ask you to consider. This might seem like a simple disagreement between accountants, but it's much more serious. The method of accounting proposed by the government represents a significant departure from objective accounting standards recommended by the CICA's public sector accounting and auditing committee. These standards have been developed principally by people in government to strengthen the credibility of government financial statements across Canada.

With the significant improvements since 1980 in accounting policies used to prepare the government's financial statements, which were encouraged in part by this committee, I see these departures as a step back in time. Your committee's review of and support in this matter would help in maintaining the credibility of government-reported financial results for the Government of Canada.

Mr. Chairman, this concludes my statement. My colleagues and I would be very happy to answer the committee members' questions.

The Chairman: Thank you, Mr. Desautels.

Since the committee was a little late in getting started, I think we'll dispense with the eight-minute round. We'll just move straight into the four-minute round.

So, Mr. Grewal, you have four minutes, please.

Mr. Gurmant Grewal (Surrey Central, Ref.): Thank you, Mr. Chairman. Four minutes are too little, but I will try to cover this in four minutes.

I will begin with commending the Auditor General and his staff for a job well done.

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With respect to chapter 9, since business forms cannot depart from objective accounting standards, Canadian taxpayers expect no less from the government. The Auditor General has noticed that a trend has developed. For three years in a row, government has begun departing from its own accounting policies, presumably for political reasons.

In 1996, $961 million was spent on harmonization of GST and PST; in 1997, $800 million was spent on the Canada Foundation for Innovation; and this year, $2.5 billion will be spent on the Canada Millennium Scholarship Foundation.

My first question is, does the Auditor General have any expectations or any assurances from the government that they will correct this situation in the future and not repeat what they have done?

Second, government is losing credibility by deviating from the accounting standards. Does the Auditor General think Canada can lose esteem in the international arena, scare away potential investors, and probably adversely effect the Canadian dollar?

Very quickly on another topic, chapters 3 and 4, “National Defence—Buying Major Capital Equipment”, the department doesn't have an adequate policy framework to direct the $1.4 billion it spends each year on equipment modernization. For example, the Griffon helicopters cannot meet the army's original lift and communication requirements. There are many examples. Another example is that the maritime coastal defence vessel is acquiring two sets of mechanical mine-sweeping gear for 12 ships and has not acquired some of the equipment necessary to patrol effectively and in dark and poor visibility.

So my question is what are the reasons for the incompetence the Auditor General has found out, and is the Auditor General satisfied with the rigour and initiative to correct this situation of the policy framework?

The Chairman: I think there were about four questions in there. Do you have them all written down?

Mr. Denis Desautels: I think I remember them, Mr. Chairman.

First of all, there were two questions dealing with chapter 9. I think the essence of the first question was did I have any assurance that the practice we are criticizing will stop, and in the future, will we be faced with the same situation? All I can say is that at this point in time we and the Department of Finance have agreed to disagree. At this point there is no agreement between us either on the current year or on future years. I would hope, however, that we will not be faced with a similar situation in the future, that we will be able to avoid that kind of situation in future years.

In terms of the credibility of the government's financial statements, particularly on the international level and with international institutions, I would hope that what has happened so far has not hurt our credibility. As I mentioned on previous occasions, the sophisticated financial institutions have a way of reading our financial statements and adjusting them according to their own way of calculating. So I'm not so worried about the sophisticated international investor. I'm more concerned in my criticisms about making sure the information we give to Canadian taxpayers and members of Parliament is as clear and accurate as possible.

The Chairman: Perhaps, before you move on to the Department of National Defence questions, we could leave that to another round. Were you moving on to that point now?

Mr. Denis Desautels: That's right; I was.

The Chairman: We'll leave that, because we have taken up all your time, Mr. Grewal.

Now we'll go to Mr. Desrochers for four minutes.

[Translation]

Mr. Odina Desrochers (Lotbinière, BQ): I congratulate the Auditor General on his report.

Each time we have the pleasure of reading his recommendations, we note the existence of certain problems within government. I support his comments about problems associated with planning and efficient management. At times, the government's performance seems somewhat amateurish. Chapter 9 illustrates once again that this government is trying to, quote unquote, fudge the numbers.

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This is the third time that you have made the same observations we find in Chapter 9. The title of this chapter is quite clear: "Reporting Government Financial Results: The Importance of Complying with Objective Accounting Standards". Again, you caution us that we face serious problems if the government continues to report in its financial statements sums of money which have not been spent.

As part of your research, have you looked at whether this approach was used in other countries?

Mr. Denis Desautels: Mr. Chairman, we have a fairly clear idea of how other countries report their financial results. For your information, we sit on a number of international standardization committees and we are directly involved in exercises of this nature.

In fact, the standards that the Canadian Institute of Chartered Accountants recommends our governments adhere to are very similar to those found in other countries that have equivalent standards, namely Australia and New Zealand.

The appendix to Chapter 9 of our report provides a few details on the practices followed in Canada and elsewhere in the world. The practices that we are critical of are not supported by accounting standards in other countries. Therefore, I would assume that other countries do not follow these practices.

Mr. Odina Desrochers: Could the persistent use of these practices ultimately damage the credibility of the Canadian government and even lead to a lowering of its credit rating? If the numbers continue to be off, what consequences could this have for Canada internationally?

Mr. Denis Desautels: Mr. Chairman, as the title of the chapter suggests, it is clear that if the government continues to prepare financial statements which are not consistent with objective accounting standards, the credibility of these financial statements will suffer in the long-term.

However, as I stated earlier in response to Mr. Grewal's question, financial institutions are as a rule fairly sophisticated and tend to interpret our financial statements their own way. Our main objective in making these comments is to ensure that the interests of Canadian taxpayers and members of Parliament are served and, since they are not as well equipped as financial institutions, that they are provided with fair information that is consistent with objective accounting standards.

Mr. Odina Desrochers: Could this approach prompt the private sector to behave in a similar manner, considering that the Canadian government is theoretically supposed to serve as a role model?

Mr. Denis Desautels: Mr. Chairman, I don't believe the private sector could adopt the same accounting practices. Private sector companies are required to follow accounting standards established by the Canadian Institute of Chartered Accountants and set out in the organization's accounting manual. These companies are required by law to comply with the standards. If they fail to do so, they are breaking the law. At the same time, they would be seriously jeopardizing the credibility of their financial statements, as well as their ability to secure financing from markets or from financial institutions.

Mr. Odina Desrochers: Thank you, Mr. Chairman.

[English]

The Chairman: Thank you very much, Mr. Desrochers.

Mr. Pagtakhan, four minutes, please.

Mr. Rey D. Pagtakhan (Winnipeg North—St. Paul, Lib.): Thank you, Mr. Chair.

We had earlier discussed this, Mr. Auditor General. I certainly thank you for your report.

With respect to the accounting procedure, in your presentation you indicated that the government is even departing from its own stated policies. In the exchange of communications between your office and the office of the government, the government obviously has stated a change in policy. Does it not follow, then, that to say it is departing from its own stated policy is no longer a valid argument at this time?

Mr. Denis Desautels: The government has in fact, I recognize, announced that it will change its accounting policy, and certainly that might happen. I recognize that. But as far as I know, it hasn't been officially done. This will be done, as far as I'm concerned, when the government in fact finalizes its financial statements for the 1997-98 financial year, which will occur I presume some time this summer.

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Certainly, if we go back to the previous two years where we were critiquing the Canada Foundation for Innovation payment as well as the harmonization, it was quite clear that the policies were still as we know them at that point.

It's a moot point as to whether or not we should no longer say this, but for those two years certainly that was the case. For 1997-98, as far as I am concerned, I know they've announced the intention to do that, but it won't be, in my mind, final or official until the statements for that year are put together.

Mr. Rey Pagtakhan: Mr. Chair, paragraph 9-21 of the report of the Auditor General quotes the government as stating, “Transfer payments are recorded as expenditures when paid or when the recipient has fulfilled the terms of a contractual transfer agreement”.

In the reply of the government on the basis of accounting on page 9-22, it indicated it proposed to state, in addition to that statement, the following clause:

or in the case of non-recurring transactions which do not form part of an existing program, when the government publicly announces the decision to make a transfer, provided enabling legislation or authorization for payment receives parliamentary approval.

In other words, a public announcement appears to be—and we have to recheck that...certainly has happened on these programs of the Canada millennium scholarship fund, for example.

Would you not agree that at least if this were indeed to be the stated policy, it is consistent with the policy of the government?

Mr. Denis Desautels: Well, certainly, Mr. Chairman, if the government changes its accounting policy as it is suggesting on page 9-22, in fact, the current transaction or the one dealing with the millennium fund will be consistent with a new policy.

But that, I must say, does not settle the problem, as far as I am concerned, because that new policy will not be in my view consistent with the policy or the recommendations of the Public Sector Accounting and Auditing Board on such transactions. The Government of Canada will be out of step with the standards promulgated by the CICA.

Mr. Rey Pagtakhan: The last question, Mr. Chair.

The Chairman: Briefly, Mr. Pagtakhan.

Mr. Rey Pagtakhan: Yes. Page 9-23 of your report cites the government's position, which in turn cites various provisions indicated in the handbook of the Canadian Institute of Chartered Accountants. It would appear, to my reading, that certainly the provisions are persuasive in providing a rationale for the government approach. Am I wrong in understanding this, which is reported as an appendix to your report?

Mr. Denis Desautels: Mr. Chairman, we don't agree with the arguments that are put forward in that letter of March 12, 1998, and we state why in our letter of response of March 18. We believe that the arguments raised by the government are either not applicable to this situation or are not meant for the kinds of transactions we are talking about here.

The treatment of government transfers to other organizations is quite clearly dealt with in the CICA handbook for public sector organizations.

The Chairman: Mr. Nystrom, four minutes, please.

[Translation]

Mr. Lorne Nystrom (Qu'Appelle, NDP): Welcome, Mr. Desautels.

[English]

I wanted to ask questions in the area of the questions about auditors. I've met with some government auditors who feel there's a shortage of auditors, and that we may be letting some money through the cracks in terms of proper auditing of the Canadian government books.

I wanted to ask you about the impact of that. What are we losing? Do we have a shortage of auditors? Is there a valid argument that there should be more? Certainly they claim they should have more help, and I just wonder whether or not there is some merit to that argument.

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The Chairman: Is this actually relevant to the report, Mr. Nystrom?

Mr. Lorne Nystrom: I think it could be relevant to the report.

The Chairman: Okay. Well, does the Auditor General have an answer on this one?

Mr. Denis Desautels: Well, Mr. Chairman, in chapter 1 we did deal with downsizing and incentives offered to people to retire. One of the things we do say has happened is that we have ended up with certain shortages in areas in certain occupational groups, and auditors, particularly at Revenue Canada, are one example where there has been, we note, shortages of occupational skills.

So yes, there is evidence through the work we've done in chapters 1 and 2 that there are some shortages. If you recall, in previous reports we presented to this committee on some of the Revenue Canada audit programs, we noted that in some specialized areas there were also staffing problems.

Mr. Lorne Nystrom: Do you have any idea how much money may be lost because of a shortage of auditors in certain areas? Some of them claim that there are tens of millions of dollars, perhaps hundreds of millions of dollars, that are being forfeited because it is not being picked up by the auditors. Do you have any idea, or can you give us any advice in that area? They seem to be pretty perturbed about all the downsizing that's going on.

Mr. Denis Desautels: All I can do for the committee on this particular question is to quote figures coming from Revenue Canada itself. I believe there have been estimates of 400 to 500 unfilled positions in those kinds of jobs at Revenue Canada. One can multiply that, let's say, by the average number or value of assessments each auditor brings in during the course of a year, and come up to a figure. I can't tell you offhand what that average is, but that would be one way for the committee to find out what that might amount to.

Mr. Lorne Nystrom: Yes, you take the 400 to 500 positions that are not there. I met with some of these auditors in terms of what each auditor generally tends to collect, or the value of their assessments. It works out to tens of millions of dollars, according to them.

I just wondered whether or not we could get some help in this area. I would appreciate any other advice you may have, or any estimate as to what numbers of dollars we are being short-changed.

I'm sure it would be enough to keep an awful lot of hospitals open, and perhaps offer some funding to the other victims of hepatitis C, which is of concern now to people right across this country. There might be all kinds of money that large corporations aren't paying that should be being paid at this time. There was a statement in the press just yesterday about that.

Those are the reasons why I'm asking the questions. Do you have any further comment on that?

Mr. Denis Desautels: Well, Mr. Chairman, obviously I don't want to engage in that kind of discussion. All I can do for the committee is obtain the information that Mr. Nystrom is asking for from Revenue Canada, and supply that to the committee.

The Chairman: Yes, and I think we did deal with some of these issues before in the committee. The committee has tabled some reports on the issues of Revenue Canada and the effect of auditors and so on.

Mr. Nystrom, you still have some time. No?

Mr. Herron, four minutes please.

Mr. John Herron (Fundy—Royal, PC): Thank you, Mr. Chair.

I'm just going to speak to one particular reference you made during your opening statement, and I think it is a progressive and very necessary approach. You referred to your comments in chapter 6, where you urge the government to provide parliamentarians with long-term financial projections that capture the potential impact of the aging baby boom generation on future government finances.

It is essentially a fact that since the, for lack of a better word, beginning of the baby boomer generation, that's really driven our economy in different aspects over the last 50 years.

I have some very specific concerns about the long-term ability of our economy and our tax base to sustain some of our national programs. Do you have any red flags that you'd like to speak about with respect to the amount of expected cost per capita on a health care perspective for the baby boomer generation, and with respect to whether or not we will have the tax base to actually cover that? Even, to some degree, the recent amendments to the Canada Pension Plan are to ensure that we will still be able to address the unfunded liability of $600 billion in that regard. Are there some red flags there that you would like to speak to?

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Mr. Denis Desautels: I think the chapter itself is meant to raise...I would not necessarily call them red flags yet, but some of the signals that we have to think about today about things that will happen as a result of the changing demographics. And we are suggesting that, as is done in some other countries, it would be helpful to provide to parliamentarians and to Canadians at large a better picture of the various options or the various scenarios that we might be facing.

So our chapter in fact does project, for purposes of illustration...but using what I think are very realistic figures and reliable projections about what will happen to health care costs, what will happen to productivity and what will happen, therefore, to tax revenues. We do that for exactly the purpose Mr. Herron is mentioning, to illustrate that it's important to have an idea now of how these various scenarios might evolve so that members of Parliament can take that into account as they are debating options that have to be decided upon today.

We cite, as a good example, the kind of information that was put out recently around the Canada Pension Plan. I think that kind of information was instrumental in feeding an informed debate on that single issue. What we're suggesting is that it would make sense to provide forward-looking information covering a wider spectrum of financial projections.

The Chairman: That's fine. Thank you. You've had your four minutes, I'm afraid. We're trying to move things along this afternoon.

Mrs. Barnes, four minutes.

Mrs. Sue Barnes (London West, Lib.): Thank you, bienvenue. It's good to see you here again.

I would like, first, to touch upon the area of your report in chapter 9, page 9-16, “Government-wide Financial Reporting across the World”. I want to go into the accrual accounting, and I'd like you to give us an update on how you think that's going to affect the information that is available to the Canadian public. Explain, please, because I think it's important, if the objective is clarity, for people to understand this information when they get it, how will that change under an accrual system?

Mr. Denis Desautels: Mr. Chairman, as we note in our chapter, there has been a very encouraging evolution in government accounting standards over the last two decades, and there's still a way to go. Some of the things that have yet to be done involve moving to what we call “full accrual accounting”, which would mean better recording of your fixed assets and proper amortization of those fixed assets over time, and also recording of tax revenues as they're due to the crown as opposed to the current cash method.

Now the Canadian government is committed to implementing those two issues, those two principles, and this is being worked on now. It should be done over the next few years. The benefits of that are multiple.

Yes, certainly by doing that, I think we should be able to provide Canadians with clearer information on the financial results and financial situation of the Government of Canada. But I think what it will also do is result in a better measurement of the actual costs of government operations in a particular year, or a particular period.

I think right now, with what we might call something that's close to a cash basis, you see swings in results that do not reflect properly what has really happened. By moving to accrual accounting, I think you get a closer measurement of the real results.

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Mrs. Sue Barnes: So would it be fair to say that would be an openness in accounting giving more clarity, more reality?

Mr. Denis Desautels: Certainly these are moves in the right direction. Moving to full accrual accounting on both fronts would further improve the quality of our financial information.

Mrs. Sue Barnes: I imagine Canada is benchmarked in its accounting principles for governments. How would you say we are doing, say, relative to the provincial governments in this country and relative to other countries, say European countries that are economically as advanced as we are?

Mr. Denis Desautels: We're quite familiar with the kinds of accounting that other countries follow, and also even more familiar with what our provincial governments do. The Government of Canada has been at the forefront internationally on accounting standards and accounting disclosure. I very much wish for that to continue and actually for Canada to be the leader worldwide on these issues. Within Canada there have been some important developments among provinces. On occasion you see a province taking a particular initiative and jumping ahead on some aspects. For instance, I think some of our western provinces have been quite innovative in the last few years in terms of their reporting. They're setting the pace for—-

Mrs. Sue Barnes: So it's common for governments even in Canada to change the style.

Mr. Denis Desautels: It's a constant evolution.

Mrs. Sue Barnes: Thank you.

Mr. Denis Desautels: It's important, I think, to maintain that.

The Chairman: Mr. Mayfield, four minutes, please.

Mr. Philip Mayfield (Cariboo—Chilcotin, Ref.): I want to thank the Auditor General and his staff for presenting these reports. The chapter that I particularly found interesting to read—and rather than my discussing it with you, I'll say as little as I can to give you an opportunity to discuss it with the committee—is chapter 7 with regard to the federal laboratories. As I read this, I'm glad to hear there is certification that this is a safe facility, because the problems encountered in bringing this project to conclusion—and I guess it's not finally concluded yet—have been enormous.

We have here the departments of health and agriculture needing a laboratory facility. Of course, Public Works was involved as the prime contractor and the Treasury Board in the financing of it. We have cost overruns. We have completion targets not met by a substantial amount. We have, it seems to me, a lack of a clear concept of what the two departments were intending to do together and how it might be done. We have a lack of business plan about how some of the costs might be recovered down the line.

What I was wanting to do, sir, was to be quiet at this point and allow you to perhaps show how this could be something more than an expensive lesson. Perhaps you could give direction on how departments might crystallize their thinking and bring it to a completion on cost and on budget.

Mr. Denis Desautels: Mr. Chairman, I can give you a quick rundown of the actual picture and maybe a couple of observations on what lessons can be learned from that. First of all, let me say that on the positive side I think the Winnipeg labs are a first-class facility. In terms of bio-safety, we're satisfied that they've done all that's needed to be done or should be done to ensure safety of staff and the surrounding community. The commissioning of the facility has been carried out satisfactorily.

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On the less positive side, of course, it has run over the approved budget. The final cost should be around $176 million versus $142 million. Some costs could have been avoided, from $5 million to $10 million of costs. It is behind schedule by about one year. Very importantly, there is an overcapacity. This particular project provides capacity that exceeds the program needs, but on top of that there is an excess of labs across the country and so there is a need to optimize the use of this lab and rationalize labs across the country.

There are some reasons why this may have happened and therefore lessons to be learned. There were basically problems of project management that need not be repeated. These problems of project management, I must say, were mostly in the early stages of the project and were being corrected near the end.

The things that we noted were poor use of consultants, arguments over the use of consultants, excessive use of consultants, and the cost of consultants. There were problems of leadership on this project as to who was really in charge. There were also problems of chemistry amongst the various partners on this project, and problems of management on the day-to-day basis of certain aspects, particularly change orders. Essentially, there were weaknesses in project management that need not have happened. I believe the government authorities that are responsible for this kind of project agree with us on these deficiencies and agree that they should be corrected for future projects.

I will add one last little comment, that on this project, as we have seen on a few recent projects as well, there has been a tendency to build to budget. By this I mean that people feel that if they have a budget they will manage to spend the budget. I think there have to be incentives built in so that people don't necessarily spend the full budget, but that if there are savings to be made, those savings are in fact achieved and returned to the crown.

The Chairman: Thank you, Mr. Desautels.

Mr. Laurin, four minutes, please.

[Translation]

Mr. René Laurin (Joliette, BQ): Mr. Chairman, before I proceed to ask the Auditor General questions about Chapter 9, I hope he can enlighten us about something. It is my understanding that the Auditor General is appointed for a term of seven years and that his mandate is renewable. Is that correct?

Mr. Denis Desautels: No, that is not correct, Mr. Chairman. My term, which is not renewable, is for ten years.

Mr. René Laurin: How long have you been Auditor General?

Mr. Denis Desautels: I've just completed my seventh year in office.

Mr. René Laurin: My apologies then. You have already served seven years of your ten-year mandate, which is not renewable.

During your seven years as Auditor General, has the government always taken the same approach to reporting its financial results? You are critical of certain practices observed in the last three years. Has the government always proceeded in this manner or has it done things differently from year to year in order to achieve the desired results?

Mr. Denis Desautels: Mr. Chairman, the problems that we have identified in the last three years, including 1997-98, arise from specific transactions. The remainder of the government's financial statements or public accounts have been properly reported. In the past three years, the government has carried out some rather unique transactions and that is where the problems lie. We did not have these problems before.

Mr. René Laurin: To your knowledge then, you haven't come across these practices before?

Mr. Denis Desautels: We haven't dealt with anything quite like this before. Once, in 1992 if I recall, we observed in our report that we had some reservations about the government's financial statements, but that was in regards to something else, mainly pension plans.

Mr. René Laurin: Was your purpose in making these observations to caution Parliament that the government was using certain accounting practices in order to achieve specific results? Did the government comply with the continuity rule, a general accounting principle?

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Mr. Denis Desautels: Mr. Chairman, this has nothing to do with the continuity concept, since we are talking about practices that we had not seen before. In the case of the $960 in transfer payments to the Atlantic provinces, this was the first time that a transaction like this had been reported in this manner. We were seeing something totally new which was not consistent with the stated principles of the Canadian Institute of Charter Accountants governing transactions of this nature.

Of course, the government has in the past made other transfer payments. Governments always make transfer payments to one level or other of government or to certain organizations and in the past, they always complied with their own accounting standards or those of the Canadian Institute of Chartered Accountants. The transactions in question are somewhat different and the government chose to report them differently.

Mr. René Laurin: Considering the principle applied...

[English]

The Chairman: Pose a small question, Mr. Laurin.

[Translation]

Mr. René Laurin: ... by the government, if the Finance Minister decided next year that his surpluses were much too high and he wanted his financial statements to show smaller surpluses, could he resort to the same accounting practice used by the government? For example, using this practice, could he report a $10 billion rather than a $21 billion surplus?

Mr. Denis Desautels: Mr. Chairman, I wouldn't want to speculate about what the government intends to do this year or next year for that matter. Clearly, the purpose of adopting objective accounting standards established by an organization operating at arm's length from the government is to ensure that financial statements are prepared a certain way so that they accurately reflect the government's operations and the current situation.

We would like the government to follow the standards of the Canadian Institute of Chartered Accountants because these standards were established in an objective manner. This would lend credibility to the government's financial statements.

Mr. René Laurin: Thank you.

[English]

The Chairman: Thank you, Mr. Desautels.

Mr. Grose, you have four minutes please.

Mr. Ivan Grose (Oshawa, Lib.): Thank you, Mr. Chairman.

I wanted to welcome Mr. Nystrom to the committee, but I've been denied that chance so I guess I'll have to write him letter.

Mr. Desautels, the chapter that bothers me the most is chapter 6. If I might quote here:

6.1 Canada today is sitting on a very favourable demographic structure, with a historically low ratio of youth and elderly to the working-age population. In the coming few decades, this situation will be radically transformed. By the second decade of the next century, when the leading edge of the baby boom generation reaches normal retirement age, the growth in Canada's elderly population will accelerate while that of the working-age population will slow to a crawl.

Here's the worrisome part. This combination could put enormous pressures on our public finances when the full impact of this demographic change is felt by the second decade of the next century particularly—this is the part that really worries me—if Canada's debt burden and tax levels remain high.

I agree with you that this is a ticking time bomb. If it's not going to take place until after the second decade of the next century, I doubt I'll hear the noise of the explosion, but in any case, I don't ask you for an answer to this problem. But we're stuck with a debt burden, and we can't change that. The tax levels will have to remain high in order just to finance the interest and hopefully to reduce the debt burden.

So is there an answer? I don't ask you for the answer, but are we going to be able to do this?

Mr. Denis Desautels: Mr. Chairman, I don't want to get involved in a policy debate. I would enjoy it at another time, but I think what we're saying here is that those who are responsible for developing the policy, which is you, members of Parliament, and members of other Canadian legislatures, would be better equipped if we were putting forward that kind of more complete picture. I think you're all asked to make decisions today that will have some kind of impact on where we end up in 2010 or afterward.

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So I see this as part of my responsibility, to recommend improvements to the quality of information that we give you. I see this as one area where the government can do a better job at giving you the kind of information you need to make decisions today that will have a positive impact on that situation.

Mr. Ivan Grose: Thank you. That's what I wanted you to do, which was emphasize that we have to do it now, not 22 years from now.

Incidentally, I thank you for this very good report, as usual. It's got all kinds of meat in it that we can chew on. You seldom get anything here that you can chew on. You get to page 40 before you find out where the thing is going. So I do thank you for this most concise report.

Thank you, Mr. Chairman.

The Chairman: Thank you, Mr. Grose.

Mr. Myers, you have four minutes, please.

Mr. Lynn Myers (Waterloo—Wellington, Lib.): Thank you, Mr. Chairman.

I wanted to pick up a little bit on what Mr. Grose was asking relative to chapter 6. I think you rightly point out that the demographics are such that there will be enormous pressure on our medical and social security systems and such. I'm interested, though, in your comment about us as decision-makers being provided with sufficient information. At one point, in fact on page 6-24, you say that “government ought to produce long-term financial projections on the basis of status quo policies and alternatives”.

Earlier in the report, you actually indicate that this is very complex and difficult to do because there are a lot of factors at play here. So I would really like to understand what value those long-term projections would have if indeed the way we arrive at them would be somewhat perhaps faulty or wouldn't in fact be accurate. I would like to hear a response to that.

Mr. Denis Desautels: Mr. Chairman, this is an excellent question, and a very important point. I recognize that looking down the road or looking into the future for a fairly long period of time is not easy. Some will say it's a mug's game.

However, I think it's terribly important to try to do it within the means we have available by laying out quite clearly to the decision-makers what assumptions were used and on what basis these projections were made. I don't think you can make decisions without doing some of this kind of projection.

There are certain things that are easier to project than others. I'm not an expert in this myself, but I'm told that projecting demographics itself is fairly clear, fairly straightforward. So that part is fairly clear. Some of the results of the changing demographics are also predictable. What's less predictable, of course, would be growth in the rates of productivity and economic activity.

However, I think despite those difficulties, it's important to try to do that. The federal government and the provinces have done this recently—I think it was done fairly well—in terms of the CPP, the Canada Pension Plan. I think people started to realize that if we don't do something today about the CPP, we'll have problems down the road. There were projections put forward as to what might happen to the CPP under different rates of contributions and different rates of benefits.

So providing you with that kind of information has enabled members of Parliament to make a decision on that particular program. We're suggesting that it's possible to do it for other aspects of economic indicators or indicators of financial condition.

Mr. Lynn Myers: Further on the CPP, as you point out, the federal government and the provinces of course have made some changes with respect to that by outlining demographic realities and such. Of course, the 1996 budget also replaced the current old age security and the supplement system with the new seniors benefit.

Is that in fact now taking away the problem of your assertion that this could in fact be dangerous down the road? Is that ameliorating that concern and that problem?

Mr. Denis Desautels: Certainly, Mr. Chairman, taking care of one dimension of our pension system is helpful. But as we point out in our chapter, the CPP is not the only pension system we have. To that, you have to add old age security, the guaranteed income supplement, and you have also government-supported retirement plans such as RRSPs. So you've dealt with one aspect of the problem of changing demographics, but there's a lot more to be dealt with than just that one.

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The Chairman: Thank you, Mr. Myers.

Mr. Grewal, four minutes, please.

Mr. Gurmant Grewal: Thank you, Mr. Chairman.

One of the main reasons I'm in politics is the same as expressed by the concerns and findings of the Auditor General, so I tried to read all the chapters before coming to the committee, because they are interesting to me, and therefore I have more questions. But in the future I shall try reading only one chapter so I have fewer questions to fit into the allotted time.

I will go back to the original question I had about the Department of National Defence. I was really concerned that the department doesn't have an adequate policy framework to direct the $1.4 billion it spends each year on equipment modernization. I gave two examples, the Griffon helicopters and the ships not having adequate equipment, because the visibility and darkness equipment cannot be used.

So I go back to the same question. What are the reasons for the incompetence the Auditor General has found out, and is the Auditor General satisfied with the rigour and initiative to correct this situation in the future?

Mr. Denis Desautels: Mr. Chairman, I'd like Mr. Rattray to answer Mr. Grewal's question.

Mr. David Rattray (Assistant Auditor General, Audit Operations, Office of the Auditor General of Canada): Mr. Chairman, at this point we've laid out a number of situations in the chapter that we say are far less than satisfactory in terms of how these projects were in fact delivered and the low-end capability that was achieved. At this point we recognize that it's a critical point in defence policy and planning and project acquisition.

A number of initiatives are currently under way that will address the policy framework. We make reference to several of those and say there's an important stage here for Parliament or parliamentary committees such as this or the defence committee to take an active role with respect to setting the policy framework to which you refer.

Defence has initiated a long-term review or examination of its policies and plans. The three services are completing currently a review of their doctrine, which is not quite finished. The defence department is setting forward its performance reports with respect to its policies and priorities for Parliament to review. It says it's working on them. Very shortly, probably within the next 18 months, they expect to have a better scenario for Parliament to work with against that policy framework backdrop.

Also, another major point we put forward here with respect to the policy framework is this whole re-engineering of the capital acquisition process. So we lay out five or six major initiatives, all hinging upon the policy framework that underpins them. We are at a point where we put them forward, and I think we're as anxious as the defence department and probably parliamentary committees to see that they are put into effective force.

The policy framework needs to be discussed; it needs to be set. The doctrine and guidance for the services need to be set in order to set the capital project plans in place.

So to try to be as brief as I can, we're at a point where an awful lot of initiatives have started, all predicated on that policy framework, and there's a role for parliamentary committees to play here in setting that.

Mr. Gurmant Grewal: Right.

I have noticed that the helicopter fiasco, which all Canadians are aware of—that was a troublesome issue as far as inefficient spending was concerned.... Over here we have so many examples listed, such as helicopters and vessels. This is the modernization of equipment where the problems are.

Are there are any other areas you've noticed where the dollar value has fallen off in investment because of the inadequate policy framework?

Mr. David Rattray: We've noticed that there are at least three equipment items that are not meeting the capability that was needed. Most of those were dealing with faster-track commercial applications or items that weren't affordable under the policy framework. But it's not really for us to state what the policy framework should be. It's not for us to set it. Ours is just to state that work needs to be done in this area.

I would say a lot of the inadequacies or the lower-end capabilities that are being procured are as much program management as they are rooted in policy. But the policy one I prefer to leave for parliamentary committees. As for project management and program implementation, we've certainly laid those out in the chapter.

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The Chairman: Thank you, Mr. Rattray.

Ms. Caplan, four minutes.

Ms. Elinor Caplan (Thornhill, Lib.): Thank you very much, Mr. Chairman.

I'm not going to get into the debate over the accounting standards. I once had a chance to look at the handbook. I told somebody that it was probably better than drugs as a cure for insomnia. I know there's a debate over the evolution of accounting standards. It's something that's worked on all the time.

I think we all—I speak for myself—believe in openness and transparency, and we also don't want to see Canada get too far ahead of the rest of the world, frankly, because our books are then compared with those of the rest of the world, and we know there are issues that arise about the international comparisons as well and how different things are treated.

What I really wanted to focus my questioning on was the concern you raised about the labs. I think that kind of audit is very helpful both for the government as well as for the ministry. You make suggestions to them as to how they can tighten up the management of construction projects and that kind of thing. So I take your comments as being very helpful. That's the sort of thing we look to the Auditor General for. In particular, it's to let all of us know that those kinds of practices are improving within the bureaucracy, and we all like to see that happen.

One point I'd like to talk about is the capacity. Now, the labs that were being built in Winnipeg are, as I understand it, of the highest level—perhaps I've heard of them as level four—so as to deal with the most dangerous substances, the most virulent viruses. They are an enormous benefit to the country and also to the community they're in because they attract world-class scientists and give us research capability. This not only protects the public interest in this country, but also gives us a capacity for safety, research, development, and so forth.

When we build something of that magnitude—you don't build it every day—it would seem to me to be prudent to build in a little excess capacity, especially because of the nature of these labs. For example, I'm aware of a level four lab that was built in Ontario, but because of community concerns that the lab was there, the lab was never opened and used for the purpose that it was originally built.

I thought that was an issue that certainly taxpayers in Ontario should be concerned about. For federal taxpayers, I know these kinds of labs serve a very important public purpose and that this capacity, especially as things change so rapidly, may come in very handy.

I'm wondering whether you've taken that into consideration. While you talk about capacity across the country, the specialized nature of this lab, I think, would make it unusual. I'm wondering whether I understand the significance of this lab.

The Chairman: That was an interesting comment there, Ms. Caplan, but it has left very little time for the Auditor General to respond. So I will ask him to be quite brief.

Mr. Denis Desautels: I'll ask Mr. Minto to give a brief response to Ms. Caplan.

Mr. Shahid Minto (Assistant Auditor General, Audit Operations, Office of the Auditor General of Canada): Thank you, Mr. Chairman.

Certainly we looked at that. As for the issue that was raised about having a lab in Ontario that was not used, there is a similar example. There is a lab in Winnipeg that is grossly underutilized. As a matter of fact, there's a whole section of this that hasn't even been commissioned. When they were designing and looking at the capacity for this lab, that was never taken into consideration. You raised a very important issue, and that's what we dealt with.

Ms. Elinor Caplan: What was the reason it was never commissioned? Was it public concern? Was it the Manitoba government?

Mr. Shahid Minto: No, it was just not commissioned. When they were designing this lab, they didn't look at their existing capacity, what other labs they had, or where else they could deliver the program. That was the concern.

I'll just draw your attention to section 7.47 very quickly. You'll find that notwithstanding the fact they allocated twice as much space per scientist there as they did here—as a matter of fact, the new lab in Ottawa has an average of 54 square metres per scientist, and in Winnipeg, it has more than 100 square metres—there is still overcapacity.

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At the end of the audit, they were below their positions by 70 people. So even when they fill those 70 positions, overcapacity will be there.

The Chairman: Thank you, Mr. Minto.

Monsieur Laurin, four minutes, please.

[Translation]

Mr. René Laurin: With respect to Chapter 4 of your report concerning National Defence, you state the following in paragraph 4.5:

4.5 We are concerned at the extent to which the Department relies on professional judgment in making complex purchase decisions.

You go on to say:

Tactical studies often did not reflect the way officials said they actually planned to employ equipment...

or that studies

... were undertaken by contractors who had an interest in the department's decision, or were not done at all.

What conclusion should we draw from your observations? If the Department cannot rely on the professional judgment of its own personnel, whom should it rely on? Are you saying that departmental advisers rely too much on contractors who are not independent for decisions or recommendations? What should we think?

Mr. Denis Desautels: I'll ask Mr. Rattray to answer Mr. Laurin's question.

[English]

Mr. David Rattray: If I could make a short answer to a very complex question, what we see in many cases is essentially that military professional judgment is being given as the reason for certain project management or program management decisions. It's in lieu of or in place of what we would expect to be more rigorous risk management analysis, operations analysis, and tests and evaluations.

When one doesn't do all of the steps that would be expected to put proper rigour into good project management.... The answer given back to us when we could not find this was that they simply relied on professional judgment and went ahead. This at times we found resulted in capacity not being what we expected it would be. We felt that if test and evaluation or risk management techniques had been applied, some of these may have been avoided.

[Translation]

Mr. René Laurin: You make the following observation:

4.7 Only one project of the six fully met our expectations for a rigorous risk management process.

The projects in question were carried out over the last few years. To your knowledge, is the same approach still being taken? For example, when the Department recently chose between the Cormoran and Cougar helicopters, did it use this approach?

[English]

Mr. David Rattray: Obviously we only audited the six projects we have put forward here. We haven't looked at those projects that are coming onstream, more recent acquisitions.

But we have some concerns with respect to all six of these and some of the basic management practices. I would not want want to conclude that these practices or shortcomings are in those other projects without having looked at them, but certainly, if looking at those projects, we would be looking at the findings or the shortcomings we have here to see whether or not they belong in the other projects. But I cannot conclude on the other equipment buys, because we have not looked at them as we looked at these six.

[Translation]

Mr. René Laurin: One final question, Mr. Chairman. On examining the 1998-99 Estimates of the Department of National Defence, I was surprised to note that in the table showing personnel levels, of the 61,000 DND members in total, only 6,500 hold the rank of private. The remaining 55,000 members hold the rank of corporal all the way up to general. I'm surprised that this didn't catch your attention. These figures go back to 1995- 96. Our military is 61,000 members strong, and only 6,500 hold the rank of private. Add to this total 20,000 civilians. We're talking about quite a few chiefs and a relatively small number of subordinates. Didn't this strike you as somewhat odd?

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[English]

The Chairman: That was a brief question for Monsieur Laurin.

Some hon. members: Oh, oh!

The Chairman: We'll have a brief response.

Mr. David Rattray: I'm not sure, Mr. Laurin, if you're referring to chapter 2 and the work on workforce reduction or if you're referring to capital project management acquisition in terms of the—

[Translation]

Mr. René Laurin: I'm referring to Part III of the 1998-99 Estimates of the Treasury Board. I'm surprised that your audit did not uncover anything unusual. Perhaps it's because you find nothing unusual about this. Is that the case?

[English]

The Chairman: Thank you, Monsieur Laurin. We'll have a brief comment in response.

Mr. David Rattray: Mr. Chairman, our audit was not focused directly on part III of the estimates and the personnel classifications. The Defence work was focused primarily on the six capital projects and the findings we had on that.

I could probably try to leave it at that.

The Chairman: Thank you, Mr. Rattray.

Mr. Harb, four minutes, please.

Mr. Mac Harb (Ottawa Centre, Lib.): Thank you very much, Mr. Chair.

I've been in Parliament now for about nine and a half years, and year after year we see the reports of the Auditor General. I haven't yet seen a report looking at the federal government's spending in areas of provincial responsibility and/or in areas of joint responsibility. For example, we spend quite a bit of money in transfer payments to the provinces in social services, education, and health care. I don't know whether anything has been done in the area to look at the efficiency of that bureaucracy or the return on investment in terms of the money we are putting in. That's one.

The second thing is dealing with the justice system. We have I would say probably thousands and thousands of cases involving the Government of Canada either as the defendant or as the person who is taking someone to justice. As well, we have layers and layers of courts. We have the Federal Court, the Supreme Court, the appeal court, the lower court, the small claims court—we have all these courts. In some cases one would ask if it is fair game for the Auditor General to have a look at least at the federal side of things to see if there is any area of saving.

We could look at the system as a whole, the transparency of it, and the potential for saving, for example, if the government decides all of its cases have to go to alternative dispute mechanism before they proceed to court. I don't know whether you have had a chance to look at some of those things, which I call unorthodox, but Canadians are demanding now that we be a little more efficient and a little more creative in order to generate a little more savings for them and at the same time provide a transparent government.

The Chairman: Monsieur Desautels, that's a broad question that wasn't actually contained in your report, but I'll give you a chance to respond.

Mr. Denis Desautels: I would call that a challenging question, Mr. Chairman.

In terms of federal-provincial programs or joint program, yes, we did look at some of those in the not-too-distant past. One that comes to mind is a report we did last year on equalization payments, which I thought gave parliamentarians a very good description of how that program worked. We also did some work in the recent past on infrastructure and the infrastructure program, which was essentially a joint federal-provincial program involving municipalities as well. So there have been some already.

We plan to look in the not-too-distant future at the new labour market agreements. Agreements are now being worked out between the federal government and provinces, so we will be looking at how all of this is taking shape and is working out.

As to Mr. Harb's last question on the justice system, we've done a little bit of work in that area. As you may remember, we produced a special report at the request of the government and the Minister of Justice in particular. We looked at the Federal Court and the tax courts, and how they were operating and how they could in fact, by working better together, achieve some economies and also some efficiencies. And that report was tabled I believe in early 1997, about a year ago now.

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But as to whether or not we should go further in the justice system, so far these were strictly federal courts, and we were looking strictly at the administration of the courts themselves and leaving out the judicial part, because I think it's a very delicate area. We have to respect the independence of the judiciary, so we can only focus on how they administer the courts themselves and the support to the court.

But, Mr. Chairman, we could in the future delve further into justice administration systems.

The Chairman: Thank you.

Mr. Mayfield. Four minutes.

Mr. Philip Mayfield: Thank you, Mr. Chairman.

I would like to ask a question that occurred to me also as we were considering the millennium problem. We were looking at departments, some of whom were well ahead in fixing the problem with computers by the end of the decade, and others who were probably just getting around to thinking about it. And it occurred to me then that as the Treasury Board was leading this project, they really didn't have executive authority to direct a department to get on with the job or they're not going to be finished in time.

As we look at, I presume, some competition between the departments building the laboratory facility in Winnipeg, it seems that there really was a lot of difficulty in making very important decisions, and it's not clear to me if there was a project manager or an executive authority who could either make the decisions or insist that they be made in a timely manner.

The question I have is, as part of the lesson you have been pointing out that we need to understand, have these departments decided how they would do it better next time, or is there a mechanism within the federal government to insist that there is clear leadership; and if not, what in your opinion might this committee do to rectify that? Is it a matter of the politics, of the political masters needing to be aware or taking charge, or is it a matter of the politicians giving clearer directions to the departments? It seems to me that this is a problem that's going to be reoccurring unless we figure out who's going to make the decisions and who's responsible to do that.

Mr. Denis Desautels: Mr. Chairman, this is a real problem, and we attribute to this particular problem some of the cost overruns and the time delays that took place in the Winnipeg lab situation.

We have recommended in our chapter 7, if you look at paragraph 7.85 in particular, that in future projects with more than one client department, Treasury Board Secretariat should ensure that a single authority is established as the lead authority. I think that's doable, but think it requires a specific decision made in that direction by Treasury Board Secretariat, and I believe Treasury Board is in a position to implement that kind of a requirement.

Mr. Philip Mayfield: Mr. Chairman, I would like to suggest to the committee, and if necessary I would make a motion at an appropriate time, that we consider this problem and, out of those considerations, perhaps make recommendations to the government. It seems to me that this is a problem that has the potential of recurring over and over again.

• 1720

Finally, sir, this research facility has been designated safe by external experts and I'm really glad to hear that. However, it is a large facility. It has not been staffed in the manner that was anticipated. There are about 70 positions still left to be filled. Does this facility have a clear idea of what it's going to do now that it's built and now that it's safe?

Mr. Denis Desautels: Mr. Chairman, I think there are some details along those lines that still need to be worked out. There are problems on two fronts, or two types of issues to be resolved. I think that, one, the mandate of that lab and the rationalization of lab space overall across the country has to be resolved or decisions have to be made along those lines. That's one area that I don't think is fully resolved. Secondly, I think the staffing has to flow from those decisions. I think they probably have an idea of what kind of scientists they want, but I think initially they've had difficulty because some of the Ottawa-based scientists, for example, have not accepted to transfer to Winnipeg. So there's a recruitment effort that has to be carried out.

In terms of the general overall use, I don't think it's worked out completely. I think there's a need for a comprehensive plan both for the Winnipeg lab and labs based across the rest of the country, and then the staffing can follow. But as far as I know, that's not completed at this point.

The Chairman: Thank you, Mr. Mayfield.

Mr. Desrochers. Four minutes.

[Translation]

Mr. Odina Desrochers: I have a question concerning Chapter 9. In paragraph 9.22, you observe the following:

9.22 Unfortunately, the government has not followed this policy when accounting for certain significant transfer payments in each of the past two years. Moreover, the 24 February 1998 Budget indicates that a similar departure will occur in 1998.

Have you taken this matter up directly with Mr. Martin?

Mr. Denis Desautels: Mr. Chairman, I have discussed with the Finance Minister about the way in which the Innovation Foundation was reported the previous year. Discussions about the health and social transfer have involved only the deputy minister.

Mr. Odina Desrochers: When you discussed the Innovation Foundation with the minister, did he give you any indication that quite possibly this would be the last time that he would use this reporting method in this case?

Mr. Denis Desautels: No, Mr. Chairman.

Mr. Odina Desrochers: And he made no commitment of any kind to do as you recommended?

Mr. Denis Desautels: Without getting into specifics, Mr. Chairman, I think we can infer from our discussions that we disagree on the approach that was used this year and that will be used in the future.

Mr. Odina Desrochers: Do you hold out any hope that this situation can be resolved?

Mr. Denis Desautels: I sincerely hope that it can and that the issue can be put to rest once and for all.

Mr. Odina Desrochers: Thank you very much, Mr. Chairman.

[English]

The Chairman: We'll just have a quick question from Mr. Grewal, then I'll have a couple of my own and then we'll wrap this up about 5.30 p.m.

Mr. Gurmant Grewal: Mr. Chairman, I'll give you my time so you can have some time today.

The Chairman: Thank you, Mr. Grewal.

I would like to first thank all the members of the committee today for being reasonably prompt and staying within the four-minute rule, because we had a late start.

I was concerned about the Department of National Defence in their procurement. It seems to me that they have a very convoluted system of trying to come to a decision, and because the system of trying to come to a decision is so convoluted they end up coming to a very simple decision of somebody just making it off the top of his head.

Why do they have a very long and detailed managerial process in order to arrive at a decision, find that it is not workable, bypass the decision-making, take a decision by the seat of their pants and end up with the wrong equipment? Why are our armed forces being put at risk because DND can't get their managerial processes put together properly?

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Mr. Rattray.

Mr. David Rattray: Thank you, Mr. Chairman.

I guess I would begin by saying that the process that is presently in place is a process for capital acquisition that's been around for many years. If I could venture a guess, it was likely before I was born, but it's certainly back two or three decades. It was used for a capital budget much larger than the one today. It was used for an armed force much larger than it is today. It hasn't recognized the impacts of information technology and the complexity of capital equipment.

The department is at a point now at which they realize that elements of the cumbersome process they do have often have to be bypassed in order to put projects in the services much faster than what the process would do. Therefore, one either bypasses controls that are there and uses other techniques such as relying on others to do risk management, or contracts out, or goes to commercial, off-the-shelf equipment to save time and steps in the cumbersome process.

The Chairman: Wouldn't it be better to take a look at the cumbersome process and say that surely this process has to go? We downsized our military. If we have now moved into the modern age of using computers—I presume DND has a few of them too—then they should use them to make proper decisions to protect our armed forces if and when they have to go into the field, rather than use this whole convoluted, constipated process that ends up coming up with the wrong answer.

Mr. David Rattray: It's part of a review that Defence has been undertaking for at least two years now. It's part of program review as well. It's looking at how it acquires not only major capital items, but spare parts and supplies, and smaller materiel items.

The first couple of years of this re-engineering process on acquisition has focused, as we mentioned in the chapter, primarily on the supplies, spares, and materiel. They are now at a point where they are trying to complete an implementation plan against quite a fundamentally revamped capital acquisition process.

So we say in the chapter that they need to finish the plan, get some real hard milestones in there, and bring on board all of the changes that they need in that capital acquisition program. It's something that we've highlighted for this committee or another committee to try to get more details in terms of how precisely they will revamp that cumbersome process into something that is far leaner, far more efficient, and a lot less costly.

The Chairman: I certainly hope they take the lead and initiative from the report you tabled, because when I read that we'll buy helicopters to meet specifications that say they have to lift a certain weight, yet we acquire helicopters that can only lift half that weight.... We'll buy armoured vehicles that are supposed to protect our troops, and we find out they won't withstand the bullets and shells coming from a potential enemy. It concerns me greatly that these people are sitting in their comfortable offices and are buying this equipment for people who are going to be out there defending our country. The ones who are going to be defending our country are going to be short-changed by these poor decision-making processes in DND.

Mr. David Rattray: I'd just refer you, Mr. Chairman, to paragraph 4.27. It talks about the implementation plan for the major re-engineering of the acquisition process. The implementation plan was supposed to be finished at the end of March 1998.

The Chairman: I hope you go back to take a look and see that it works.

Ladies and gentlemen, that brings to an end the meeting with the Auditor General on his report, which was tabled this week.

The next meeting will be next Tuesday at 3.30 p.m. We'll be discussing draft reports.

The meeting is adjourned.