PACC Committee Report

HOUSE OF COMMONS
CANADA

Introduction
Observations and Recommendations
Conclusion

Pursuant to Standing Order 108(3)(e), the Standing Committee on Public Accounts has the honour to present its

The Standing Committee on Public Accounts has considered Chapters Three and Four of the April 1998 Report of the Auditor General of Canada (Department of National Defence: Equipping and Modernizing the Canadian Forces, and Department of National Defence: Buying Major Capital Equipment) and the Committee has agreed to report the following:

The Department of National Defence (DND, the Department) spends almost $1.4 billion annually to modernize and equip the Canadian Forces and to ensure that it is capable of fulfilling Canada’s defence policy as set forth in the 1994 Defence White Paper. The White Paper calls for a modern, multi-purpose force. The Department’s capital program is the largest in government; over the next five years, it plans to spend almost $6.5 billion to buy new equipment.

In his Report of April 1998, however, the Auditor General of Canada, called into question the Department’s ability to use the funds available to it to modernize its capital equipment in the most effective manner.

Due to the large sums of money involved, and the necessity that it be well spent to protect the safety of the men and women in the forces and to achieve Canada’s defence policy, the Committee decided to examine Chapters Three (Department of National Defence: Equipping and Modernizing the Canadian Forces) and Four (Department of National Defence: Buying Major Capital Equipment) of the Auditor General’s April 1998 Report. Accordingly, the Committee met with Mr. David Rattray, Assistant Auditor General, and Mr. Peter Kasurak, Principal of Audit Operations Branch, on 28 May to discuss the results of the audit reported in Chapter Four. Mr. Jim Judd, Deputy Minister, General Maurice Baril, Chief of Defence Staff, and Mr. Pierre Legueux, Assistant Deputy Minister, Materiel, represented the Department of National Defence. The Committee met again with the same witnesses on 2 June 1998 to review Chapter 4. Mr. Denis Desautels, the Auditor General of Canada, joined the other witnesses at that meeting.

The Department of National Defence is faced with numerous challenges as it endeavours to modernize and equip Canada’s armed forces. Reduced funding combined with the rapid technological change and high costs make the task difficult. In addition, the Auditor General reports that increasing personnel, operation and maintenance costs are further eroding the portion of the Department’s budget that is available for capital equipment. (3.4, 3.60 - .66)

These pressures emphasize the need for careful planning and priority setting to ensure that the funds available for capital equipment are spent effectively. The Auditor General found, however, that Department lacks an adequate policy framework to guide equipment modernization. The results are manifested in equipment deficiencies and shortages uncovered by the audit which limit the capabilities available to implement defence policy. (3.23) The Auditor General warns, "if the status quo persists, the Department’s available capital funding may not be sufficient to equip and modernize the force that National Defence is currently planning." (3.3)

In response to the observations made by the Auditor General, Mr. Jim Judd, DND’s Deputy Minister, indicated that the Department is taking steps to address problems identified by the audit. He informed the Committee that these steps include the development and implementation of:

• a new financial system that will be in place in the year 2001;
• a set of conflict scenarios, slated to be in place during 1998, that will be used to guide the acquisition of equipment;
• a set of performance measurement indicators, due in 1999; and
• a new business planning process intended to match defence resources with defence policy objectives.

Mr. Judd also told the Committee that he wants to develop a "more encompassing priorities setting exercise that cut[s] across all the services, deal[s] with all the equipment issues, … able to balance off all requirements and trade-offs within them." (1650) He envisaged this exercise taking place on an annual basis.

The Committee welcomes these commitments and notes the Department’s willingness, as expressed throughout the meeting, to return within six months to discuss progress. The Committee also notes that witnesses from the Office of the Auditor General were generally satisfied with the Department’s responses. The Committee anticipates that the Department will act expeditiously on its commitments and looks forward to reviewing the progress that has been made. The Committee therefore recommends:

Both the Auditor General and DND acknowledge that the Department will have to make some hard choices as it modernizes and equips Canadian forces in the years to come. This reality, combined with the size and importance of the expenditures involved, provides a compelling argument in favour of close parliamentary scrutiny of the Department’s plans and performance. In order to facilitate scrutiny, Parliament must be given regular assessments of the status of the Canadian Forces. In addition, Parliament must also be kept aware of the Department’s plans for capital acquisition and receive performance information that shows how well the Department is meeting its objectives. The Committee therefore recommends:

In conjunction with his audit of DND’s efforts to modernize and equip Canada’s armed forces, the Auditor General looked at the Department’s management of six major capital projects with a total value of $3.3 billion.

Although the audit results indicated that all of the projects examined would likely meet their contract cost and performance objectives, the Auditor General expressed concerns about several of the Department’s management practices surrounding the projects that he observed.

The audit found that professional judgement alone, rather than a systematic threat assessment and tactical analysis was often used in making spending decisions. Options analysis, which identifies different ways of meeting requirements along with the relative cost and effectiveness of each alternative, was often inadequate. Operations research, the application of scientific methods to the solution of military problems, could have played a more prominent role in shaping important capital acquisition decisions. Risk management, which helps to identify and minimize project costs, schedule slippage, and products or systems that do not meet performance goals, was either absent or inadequate. The Department could have made more effective use of testing and evaluation of equipment prior to purchase and during acquisition. Finally, the Department lacked an adequate framework for reporting project performance to senior managers.

The Department indicates that it has taken a number of corrective measures in response to these observations. Steps include plans to reform the capital acquisition process (in concert with Treasury Board Secretariat, Public Works and Government Services Canada, Industry Canada, and private-sector representatives). As part of this effort, the Department has issued a draft Acquisitions Reform Guide and has developed an initial draft acquisitions plan which it has provided to the Auditor General. (1630) Mr. Judd indicated that the goal is to have a new process within the next twelve months (1615) and Mr. Lagueux stated that completion date will likely be towards the end of 1999. (1630)

The Department has also acted to improve risk management of its major capital projects. Mr. Lagueux testified that in 1993, the Department established a standard for the preparation of the statement of work. He indicated that this would result in contractors having a formalized risk management plan and risk management program as part of all bid proposals. (1600) Mr. Lagueux also told the Committee that beginning in 1996, the Department has revamped the project management training that it provides its staff, adding a new course dealing specifically with project risk management. (1605). He also informed the Committee that the Department has done a complete review audit of its testing and evaluation process approximately one year ago. (1705)

The Committee welcomes the Department’s efforts to improve management practices for its major capital projects. The Committee also notes the willingness expressed by Mr. Judd exchange ideas with the Office of the Auditor General on the Department’s management of major capital projects and where improvements can be made. (1720) Nevertheless, the Committee believes that a number of additional measures must be taken in order to ensure that these efforts produce the desired results.

In particular, the Committee is concerned that the audit discovered "significant gaps in the analysis of requirements and options before purchase decisions were made," (4.41) and a "significant gap" in tactical analysis. (4.47). Insistence that these elements of major capital projects be completed before purchase decisions are taken would help ensure that the Department acquires the right equipment at the best price. The Committee acknowledges Mr. Judd’s commitment to doing requirements and options analysis as a matter of principle (1710) and recommends:

The Committee is also concerned that adequate tests and evaluations be carried out prior to purchase and during acquisition to confirm that the right type of equipment is being purchased. As the Auditor General noted, tests and evaluations are particularly necessary in those instances in which the Department is purchasing commercial-off-the-shelf or military – off - the-shelf equipment and plans to use it in ways that have not been tried by commercial users or other military organizations. (1535) The Committee is in agreement and recommends:

Lastly, the Committee notes the Auditor General’s observation that there are "no established standards and predefined project performance indicators that can be used as a basis for monitoring and reporting" project status information. (4.131) The Committee is aware of the work being done by the Department with Public Works and Government Services Canada, Treasury Board Secretariat and Industry Canada to harmonize and implement various procurement reform initiatives across government. It believes that reforms are also necessary at the project management level within the Department. The Committee therefore recommends: