PACC Committee Meeting

STANDING COMMITTEE ON PUBLIC ACCOUNTS

COMITÉ PERMANENT DES COMPTES PUBLICS

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, February 17, 2000

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[English]

The Chair (Mr. John Williams (St. Albert, Ref.)): Good afternoon, ladies and gentlemen. I call this meeting to order pursuant to Standing Order 108(3)(e), consideration of chapter 18, Public Works and Government Services Canada - Alternative Forms of Delivery: Contracting for Property Management Services, of the September and November 1999 Report of the Auditor General of Canada; and also pursuant to Standing Order 108(3)(e), consideration of chapter 27, National Defence - Alternative Service Delivery, of the September and November 1999 Report of the Auditor General of Canada.

Our witnesses today are Mr. Denis Desautels, the Auditor General of Canada; Mr. Peter Kasurak, a principal of the audit operations branch; and Mr. Hugh McRoberts, also a principal of the audit operations branch. From the Department of National Defence, we have Mr. Jim Judd, the deputy minister; Vice-Admiral Gary Garnett, vice-chief of the defence staff; Mr. Alan Williams, assistant deputy minister, materiel; and Mr. James W. Richardson, director, major service delivery procurement. From Public Works and Government Services Canada, we have Mr. Michael Nurse, assistant deputy minister, real property services branch, and Mr. Hank van der Linde, director general, property and facilities management, real property services branch.

Good afternoon, everyone. We're going to start with the opening statements, and hopefully after that we will have a quorum. We have a quorum at the moment to conduct hearings but not to conduct business, and I would hope that we will have a quorum to conduct business.

Mr. Mac Harb (Ottawa Centre, Lib.): We have nine.

Oh, I'm sorry, this one Reformer doesn't count.

The Chair: A counted quorum, is it nine?

The Clerk of the Committee: A quorum is a majority, including the chairman.

The Chair: Do we have quorum, Mr. Clerk?

The Clerk: No.

The Chair: The clerk says we don't have quorum.

Mr. Mac Harb: Come on.

The Clerk: There are 17 members on this committee.

Mr. Mac Harb: So nine is a quorum. We have nine here.

Mr. Hec Clouthier (Renfrew—Nipissing—Pembroke, Lib.): No, we have eight.

Mr. Mac Harb: There's a gentleman at the far end.

The Chair: Yes, but he's not a member of Parliament, unless you want to swear him in.

Now we know why the government is in trouble. They can't count.

Anyway, we hope to have quorum. After the statements we will have a break. We'll conduct the business, which hopefully won't take a couple of minutes, and then we'll get into the questions and answers.

We'll start with the opening statements.

Mr. Desautels, would you like to start with yours?

Mr. L. Denis Desautels (Auditor General of Canada): Thank you very much, Mr. Chairman.

As you said, I'm accompanied by Mr. Kasurak and Mr. McRoberts. Mr. Kasurak has been responsible for the work we've carried out at National Defence, and Mr. McRoberts has been responsible for our work at Public Works and Government Services Canada and in contracting in general.

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We appreciate the opportunity to discuss chapters 18 and 27 of our 1999 report. Both chapters focused on departmental initiatives to find new and better ways of providing support services and performing non-core activities. Chapter 18 looked at the process used by Public Works and Government Services Canada to contract out the operation and maintenance of 300 government buildings. Chapter 27 examined 14 alternative service delivery projects at National Defence, which involved contracting for the delivery of services.

Both departments pursued similar objectives. Public Works and Government Services Canada wanted to contract out non-core activities that could be carried out by the private sector more cost-effectively and allow the department to concentrate on its core roles. National Defence wanted to get the best value in its spending on non-core activities.

The objectives of our audits were to determine whether the departments, first, maintained the integrity of the contracting process by preserving openness, fairness, and value for money; secondly, saved money as a result; and thirdly, had an appropriate management framework.

The first aspect of these initiatives I would like to discuss with you today is savings. Savings are usually a major factor behind such initiatives, but it can be a challenge for managers to tell whether they actually save money. It was no different this time.

As indicated in chapter 18, we found it too early to assess whether Public Works and Government Services Canada will save annually 10%, or $20 million, on its property management costs. We could not reconcile baseline costs that the department used to calculate expected savings, nor could we ascertain whether the department will receive the quantity and quality of services it is paying for.

The property management services contracts, however, contain features that should promote innovative business processes and help to produce savings. Based on the department's extensive consultation with industry representatives, the 10% target seems realistic. Whether the initiative will yield intended savings depends on how well departmental personnel monitor the performance of the contractor.

Public Works has designed a good performance evaluation framework for the initiative. But at the time the contractor took over operations, some important monitoring and control features, such as assessment criteria of building conditions and performance indicators on customer satisfaction, were not in place. This was partly because of tight deadlines. The committee may wish to get assurances from the department that it has fully implemented the framework to evaluate performance and that it has closed all the loops.

National Defence claims savings of about $68 million a year. In 1996, the department projected that annual savings would reach $200 million by 1999. The department has since revised this projection to $175 million a year by 2004. We found that other countries that have undertaken ASD projects are also finding it hard to achieve their initial savings targets. In light of its situation, National Defence's projections seem ambitious. The department is likely saving money, but the amount is open to question.

We were unable to verify the department's actual savings in the projects we audited. Most projects had not been established long enough to measure savings. Baseline costs had not been set for a number of the projects, and for the other projects, we were not convinced that the estimates of baseline costs were complete or accurate.

[Translation]

Mr. Chairman, the best tool for selecting the best available option and estimating savings is the business case analysis. At National Defence, we found that business cases were completed in only 8 of the 14 projects we audited. We also found that existing service levels had been established in only three projects. Baseline costs were set inadequately in 3 of the 12 projects we could assess. Without cost and performance measures, ASD projects cannot be properly managed.

Problems with business cases show that departmental staff lack the skills to assess complex projects. Business case analyses are unlikely to improve until staff acquire these skills. The Committee may wish to ask National Defence that it present its plan for developing or acquiring the appropriate resources and setting completion dates.

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The second common theme of these two audits is the management of human resources. How well the effects of changes to jobs and on the people concerned are managed is a critical success factor in these initiatives. Both departments showed consideration for displaced staff.

PWGSC established the best possible protection for affected employees as a key guiding principle for its initiative. It received the support of employees and union organizations. This contributed to the smooth transition of operations to the private sector.

Overall, National Defence also adequately consulted employees, and the unions participated in all the Department's ASD projects.

There was one exception where human resource aspects were not handled well. In the Goose Bay initiative, the Department underestimated the impact of change on human resources. Because staff was extremely dissatisfied, the Minister had to resolve matters. In addition, National Defence did not obtain a timely legal opinion on the possible application of successor rights. The total cost related to the application of successor rights will reach almost $38 million at the end of the five-year period of the contract. This additional cost will reduce savings by about half the expected amount.

National Defence has recognized many of its problems and is focussing on fewer projects that are receiving more attention from senior management. It has also made several improvements in how it develops business cases.

[English]

My last point will be a topic I've discussed on several occasions before this committee: contracting.

To contract out property management services, Public Works and Government Services Canada used a bidding process that was open, transparent, and fair. However, we found that some ASD projects at National Defence did not follow these same principles. In fact, five of nine Defence contracts were awarded without competition, and two in particular had problems.

Current contracting policy demands competitive contracting. However, we believe it would be beneficial to go even further and insist that departments work to create a competitive business environment.

In the audit of Public Works and Government Services Canada, we noted that the department took several measures to promote competition and open access. It held extensive consultations with the industry, sent early formal requests for expressions of interest, and gave contractors the time to make alliances or other arrangements to better compete. Furthermore, it broke down the portfolios of buildings into smaller geographical sections so that large real estate companies and smaller regional entrepreneurs could bid. The successful contractor was a joint venture that was created specifically to bid on the alternative forms of delivery contracts.

It was not a unique case. In a previous audit, we reported the proactive approach to encourage competition in the construction of the Confederation Bridge in P.E.I. In that case, extensive consultations were held with a number of potential contractors before the contract was structured.

We would encourage the committee to recommend that departments not only use the competitive process wherever possible, but also work to create conditions that will intensify competition in the marketplace.

A significant feature of Public Works and Government Services Canada's contracting process was the use of fairness monitors to provide independent assurance that the process was conducted fairly and in accordance with the rules. This review mechanism was a key success factor of the AFD initiative and helped to prevent litigation and complaints. The department used fairness monitors in a few other successful initiatives before, such as the privatization of the Canada Communication Group. We would encourage the committee to endorse the use of fairness monitors for all large and complex transactions.

National Defence and Public Works and Government Services Canada are implementing additional projects and developing more. Our results show the federal government has much to do before realizing the full advantage of contracting services. Some projects have been successful, but the departments concerned need to address the deficiencies we have identified in these two chapters.

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That concludes my opening statement. My colleagues and I would be pleased to answer the committee's questions.

The Chair: Thank you, Mr. Desautels.

Before we move on to Mr. Judd from the Department of National Defence, I mentioned earlier that we were going to conduct a little business. The clerk has distributed the third report of the subcommittee on agenda and procedure of the Standing Committee on Public Accounts, which met on Wednesday, February 16, 2000, and agreed to recommend as follows.

There is one little change here. We had intended to make our report to the House regarding the DND issue on alleged gratuities and/or kickbacks, but the clerk advises me that we request the report; we don't do it through the House. Therefore, I have amended the report, as you have in front of you, to read:

That the Committee order the Department of National Defence to submit to the Committee the report of the Canadian Forces National Investigation Service respecting its investigation on the allegations of fraud regarding alleged gratuities and/or kickbacks from service stations as soon as the report is completed;

The second item is that we have been advised that there is to be a delegation coming from Bangladesh, and they've asked to meet with the committee, therefore the steering committee is recommending:

That the Committee meet with a delegation from the Parliament of Bangladesh on February 29, 2000 from 4:30 p.m. to 5:30 p.m.;

The third issue is that I, as the chair of the public accounts committee, received a letter from a member of the HRDC committee to hold hearings at this time into the issues surrounding HRDC. But as everyone knows, the Auditor General is going to be reporting on the issue, and therefore the steering committee recommended:

That the Committee hold meetings on grants and contributions when the issue is reported on by the Auditor General in the fall of 2000.

So that's the report of the steering committee. Would somebody care to move that report, as amended?

Mr. John Richardson (Perth—Middlesex, Lib.): I so move.

(Motion agreed to [See Minutes of Proceedings])

The Chair: Now we'll turn to Mr. Judd for his opening remarks.

Mr. Jim Judd (Deputy Minister, Department of National Defence): Mr. Chairman, ladies and gentlemen of the committee, I appreciate this opportunity to discuss National Defence's alternative service delivery initiative, and in doing so, let me begin with a bit of background to put ASD in context.

Over the course of the past six years, the defence budget has been cut by some 23% or, when inflation was accounted for, about 30% in real terms.

In the 1994 defence policy white paper, the government stated clearly that those reduced resources would be focused on combat capabilities and away from administration and support services. We could no longer conduct business the way we had traditionally done it if we were to meet our reduction targets and still deliver the defence policy laid down by the government.

[Translation]

To meet the challenge, the Department developed a comprehensive renewal strategy. Alternative Service Delivery - ADS, if you will - is an important element of that strategy in the area of service support.

We focussed on service support for a number of reasons. First, it's big business. Service support, everything from food services to equipment maintenance, is an activity that consumes about one- third of DND's budget every year. Second, notwithstanding its importance, service support is still secondary to the Department's core mission of defence.

That's why we have concentrated a great deal of effort on finding new ways to provide that much-needed support to the Department and the Canadian Forces in a manner that maintains operational effectiveness, but costs less.

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[English]

There are two more general points I should make about our alternative service delivery program. First, this has to be seen very much as a long-term program, and as such, it may not be realistic to expect dramatic and fundamental changes overnight, particularly since we're talking about changing business practices that have in some cases been around for decades. The second point I want to make in this regard is that, generally speaking, what we're engaged in in the way of alternative service delivery initiatives is very much in keeping with what a number of other western military establishments are doing, most notably our colleagues in the United States, the United Kingdom, and Australia.

Relatively speaking, ASD is still in its early stages. Getting it right is a process that has to some extent elements of trial and error, but I think it's fair to say that we are learning and improving quickly. ASD projects are being implemented more effectively today than they were at the beginning, thanks to improvements we've introduced along the way.

[Translation]

We have developed better methods and tools for business case analysis and we have provided better training for the people involved. We have also sought outside know-how, where necessary, to fill in any gaps in our approach. The Supply Chain Project, now under way, is a good example of where we have applied lessons learned and done things differently than earlier on.

We have also learned a lot about the people issues that are such an important part of any ASD project. We have developed new strategies to better meet the needs of both the ASD program and the members of our military and civilian workforces directly affected by it.

[English]

For civilian employees, our aim is to improve the number and quality of job opportunities. Similarly, for members of the Canadian Forces, we aim to do our utmost to ensure that anyone declared surplus will be able to remain in the forces. This in turn may mean transferring someone to another military unit or, in some cases, to a different occupation.

Another important lesson we have learned has to do with the application of successor rights, notably in the case of the Goose Bay project. We now have a better understanding of how this issue fits into the tendering process and in the transition to the new service provider.

I should add that we are also moving to implement what we call the “most efficient organization” concept. In essence, this means that local management could work closely with union representatives and propose an internal redesign of the work now carried out that would produce the kinds of savings and other benefits we would expect to achieve if the work were turned over to a new service provider. If this route were chosen, the local organization would have the opportunity to submit such a proposal before we decided whether or not to launch a competition.

A common thread running through all the lessons learned is the need to strengthen our consultation with all those who have a stake in the ASD initiatives, and we must and are involving our human resources specialists very early in the process

[Translation]

Let me turn now to the Auditor General's analysis. The AG's report on the first phase of our ASD initiative is an important independent benchmark and is a useful point of reference as the ASD program continues to evolve.

The report notes that National Defence and the Canadian Forces have already put improvements in place and that we are taking action to address all of the AG's recommendations.

[English]

It is also worth pointing out that some of the projects mentioned in the Auditor General's report actually began before we started ASD. That is the case with the contracts—

The Chair: Excuse me, Mr. Judd. We don't have translation at this point in time. When you were speaking en français, everything was in French, and now that you're in English, I think everything is in English.

Mr. Mac Harb: So, Phil, you don't understand what he's saying.

The Chair: I understand perfectly.

Mr. Philip Mayfield (Cariboo—Chilcotin, Ref.): I understand English very well. What I said was that the English translation wasn't coming through on the French.

The Chair: Mr. Judd, you can continue from where you left off. My apologies for interrupting you. Let's see if the translation is now working properly.

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Mr. Jim Judd: It's also worth pointing out, Mr. Chairman, that some of the projects mentioned in the report actually began before we started ASD per se. That's the case with the contracts for the Canadian Aviation Training Centre in Portage La Prairie and the Meaford Area Training Centre. Personnel reductions and shifts in our force posture after these contracts were signed led to these centres being underutilized. We now realize that we must build greater flexibility into those kinds of contracts to allow for potential changes in departmental priorities.

I'd like to say a few words now about expected savings, a point the Auditor General touched upon in his comments and in his report. When we first embarked on the ASD initiative in 1995, we believed we could save upwards of $200 million a year by 1999. The Auditor General noted in his report that so far ASD is delivering about $68 million in annual savings. In fact, due to the recent ruling on successor rights for civilian employees in Goose Bay, the figure is closer to about $62 million a year. That's certainly not as much as we had initially expected, but $62 million is still a large sum of money.

Why the difference between this number and our original forecast? The answer lies in the fact that we were setting out on completely new terrain. Many of our ASD initiatives were among the first launched by the government and certainly the first by National Defence. As the Auditor General has pointed out in his report, the United States, the United Kingdom, and Australia have also embarked on their own ASD programs, and they also were unable to meet their original savings estimates.

Perhaps our original scope was too ambitious, for it proved impractical to include at the outset all of the projects we had in mind. As it turned out, the total number and value of projects actually selected was much smaller than originally conceived on paper. The total savings were correspondingly lower. So we now are hoping to save something in the order of $175 million annually by 2004.

Nevertheless, the percentage savings through alternative service delivery remain relatively constant. At the beginning we had hoped to be able to save on average between 20% and 30% through ASD. To date we've achieved 30%, which is about $62 million annually on activities worth just over $200 million. It is this percentage savings that gives us confidence the program will deliver the $175 million a year in savings by 2004.

Looking to the future, we are now much better placed to improve the ASD process. Senior managers in our organization are devoting more attention to key ASD projects, and staff are becoming better trained to deal with the complexities of ASD.

Let me sum up. National Defence must make the most effective use of its budget if more resources are to be devoted to the core mission. This is beyond discussion. Alternative service delivery is a key element in our overall renewal efforts. We have already seen substantial savings. Resources have been freed up. As a result, we can continue to put greater emphasis on those tasks that only National Defence can deliver.

We've learned a great deal from the early phase of this initiative, and the ASD process will continue to evolve. However, our goal remains constant: to use the resources entrusted to us wisely, to give the Canadian taxpayer the best value, and to ensure that we carry out the tasks the government assigns us.

I'd be pleased to answer any questions you may have, Mr. Chairman.

The Chair: Thank you, Mr. Judd.

Now we will turn to Mr. Michael Nurse, the ADM of the real property services branch of Public Works and Government Services, for his opening statement. Mr. Nurse.

[Translation]

Mr. Michael Nurse (Assistant Deputy Minister, Real Property Services Branch, Public Works and Government Services Canada): Thank you, Mr. Chairman, for providing me with an opportunity to meet with the committee to discuss Chapter 18 of the Auditor General's November 1999 Report entitled "Alternative Forms of Delivery—Contracting for Property Management Services".

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[English]

Public Works and Government Services Canada, PWGSC, is the custodian of about 350 buildings valued at more than $6.2 billion. The department administers over 1,800 leases and provides office accommodation for 160,000 public servants and parliamentarians working in more than 2,000 locations throughout Canada. To maintain these facilities, Parliament votes PWGSC approximately $1.5 billion annually.

In 1995 the real property services branch of PWGSC, of which I am the assistant deputy minister, clearly identified its principal role as the real property adviser to the Government of Canada. In 1996-97 we undertook a comprehensive review of our services to determine which ones we needed to do ourselves to be able to fulfil our role and which ones could be best delivered by the private sector.

As a result and in a move to improve efficiency and cost-effectiveness as well, PWGSC entered into a major outsourcing agreement for the operation and maintenance of many of its office buildings. This was to be the department's first experience with what is commonly referred to as alternative forms of delivery, or AFD.

We chose a three-step procurement process for our initiative. The first stage involved extensive consultations with the industry from across the country. In the second stage, which we called requests for qualification, we provided industry with the opportunity to demonstrate their ability to meet our minimum thresholds and to obtain feedback on their draft proposals. The third stage was the official request for a proposal. We felt this type of procurement process was called for in such a comprehensive initiative, as this was where both we and the industry lacked significant experience.

The process was overseen by an independent fairness monitor, who we retained to ensure that the bid evaluation and selecting activities were conducted in a fair, open, and transparent manner. We wanted to ensure the integrity of the AFD procurement process, and I can tell you, Mr. Chairman, that the industry welcomed the openness of the process. Its success can be measured by the fact that we did not receive a single complaint from any of the bidders. As the Auditor General stated, we won the cooperation of our employees and unions as well.

It was in May 1998 that PWGSC transferred its property management services in the majority of its national building inventory to the private firm of Brookfield Lepage Johnson Controls, BLJC. In the fall of 1998, PWGSC also reached agreements with two provincial real property organizations, British Columbia Buildings Corporation for properties outside the lower mainland in B.C. and Saskatchewan Property Management Corporation for assets in Saskatchewan.

In total, our AFD initiative represents more than $200 million a year in service delivery, including property management, project delivery, and retail letting of services. Incidentally, virtually all PWGSC employees who were previously doing this work were offered a job with BLJC.

This alternative forms of delivery initiative offers the following benefits. It reduces operating maintenance and repair costs by 10%, saving more than $20 million annually; it helps maintain or improve services with high measurable service standards; and it strengthens the real property services industry in Canada. This, in our view, is a good news story with a win-win for taxpayers and the private sector.

Contracts with PWGSC service providers are performance-based, and some of the compensation is tied directly to client and PWGSC satisfaction with the quality of service. An extensive evaluation system, which includes some 32 performance indicators divided into the three categories of asset integrity, client satisfaction, and financial performance, is used to assess the work done on behalf of our department.

The contract sets in place a gain-sharing continuous improvement regime to encourage the contractor to enhance the service and performance of the buildings as well as reduce the cost by means of a management value incentive program. With this approach, our department is able to manage the contracts diligently, accomplish its strategic objectives, and fulfil its due diligence obligations.

We transferred the delivery of the service, Mr. Chairman, not the accountability for the service. Our tenants still look to our department to ensure that they have a productive workplace.

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Before our initiative, Mr. Chairman, few companies were capable of delivering property management services on a national basis for a large portfolio such as this. Our initiative has helped push the industry to create larger, more competitive organizations that can operate and compete nationally. This is positive in today's business environment.

Mr. Chairman, PWGSC welcomes the Auditor General's observations. We were pleased to note that the Auditor General reported that the bidding process for the BLJC initiative was open, fair, and transparent, the contracts were well designed, and the handover of the contract went smoothly. As a department we have worked hard to achieve those outcomes. By using alternative ways of delivering certain services, the department is fulfilling its commitment to employing modern, cost-effective, efficient, and responsive ways of serving government departments and Canadians.

The Auditor General's report contained one recommendation. It concerns the need for an action plan to respond to outstanding transition issues that have an impact on performance management. Mr. Chairman, our department has accepted the recommendation, and for the most part the items identified as outstanding by the Auditor General have already been addressed. Other small items are included in our action plan, which we recently finalized. A copy of the plan has been provided to the Auditor General.

[Translation]

Mr. Chairman, PWGSC is committed to providing the best value for taxpayers' dollars in delivering common and central services to the Government of Canada, with due regard for the important values of prudence, probity and transparency.

This initiative to outsource most of PWGSC's property management activity is consistent with the Government's desire to “get government right” - which means letting the private sector do what they do best so that we can focus on essential government operations.

Mr. Chairman, we are pleased that our first experience with Alternative Forms of Delivery has been such a success.

Thank you.

[English]

I would be pleased to take any questions, if you have them.

The Chair: Thank you, Mr. Nurse.

Now we'll turn it over to questions. Mr. Mayfield, you have the first round for eight minutes, please.

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

I'm pleased to be here today to listen to the comments of the Auditor General and members of the Department of Public Works and the Department of National Defence. Thank you very much for being here today.

As I have spent a bit of time looking through this material here, I'm not sure in my mind that the main reason for taking this path through the ASD projects is simply to save money. There are other components to this as well. I'm wondering whether you could discuss that very briefly in the presence of the committee here. What are the main reasons for doing this besides saving money?

The Chair: I would like the answer to be kind of brief.

Mr. Philip Mayfield: Yes, I would too, because I have other questions I'd like to put to the committee.

Mr. Jim Judd: Let me give you an initial answer, sir, and I'll ask Admiral Garnett to supplement it, if he would.

Cost saving is one. Cost avoidance in the future is another. Third is the question of getting people whose principal business it is to deliver a service or a good on the assumption that they can deliver it better and more efficiently than we can. As I said in my opening remarks, I think you're seeing a fair degree of emphasis on this sort of activity for all of those reasons, not just in our military but certainly in the other NATO militaries.

Vice-Admiral Gary L. Garnett (Vice-Chief of the Defence Staff, Department of National Defence): I think that covers the range. We talked about core and non-core activity. That's where the deputy minister said that a national supplier may do that business better than we can do it because it is their principal business.

The only one I would add is with respect to all the downsizing and the number of managers. If you can have one contract for a service versus a great number of contracts, then you can focus more on your own core activities. In other words, you don't have to do a disparate variety of activities.

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There are also some other ASD initiatives, or near-ASD initiatives, that relate to the quality of life of the combat forces, as well. We're doing something new and actually looking to contract Canadian industry to provide support services in the Balkans in the future. Therefore, fewer Canadian Forces members would have to rotate on a less frequent basis in and out of the Balkans. So there's a variety of those activities as well.

Mr. Philip Mayfield: I understand that you have a large organization and many responsibilities, one of which is business and perhaps the other is defence. I'm not sure, but when DND comes to this committee, we often hear about the culture of DND and the difficulty of penetrating that culture and changing it to accept the business realities of the present-day world. I guess one of the things I was hoping to hear you say was that perhaps this new venture into ASD would be a means of modifying that culture, to help your business management of the operation here.

The difficulty is that we get into this, but it seems to be too complicated, in depth, and long term, and the plans don't seem to reach fruition for the full benefits to come out. A number of things come to my mind as I say that.

As the Auditor General has said, do you have a plan for developing or acquiring the appropriate resources and setting completion dates?

As you make savings, what is it costing you in terms of performance? Are these true savings, or are there fewer services and benefits and less value for the money? I think we need to talk about not only savings but what you're getting. Are you saving money and getting everything you want, or are you saving money because you're not getting all of the services you need?

I'd like you to first of all deal with the issue that was raised by the Auditor General as to whether you would be prepared to present your plan to the committee. What are you getting for the money you're spending, in light of the savings you're making?

Mr. Jim Judd: We'd be happy to give the committee an outline or a survey of everything we have underway now, with some rationale as to why it's being pursued and what the expectation is in terms of saving.

On the level of service that has been provided in the activities that have been dealt with this way, my sense is that the service has been pretty good, by and large.

One of the very controversial programs that was undertaken under ASD was the privatization, or the alternate service delivery, of food services at Trenton Air Base. Food services, for most people, including the military, is getting very close to home in terms of care about quality. It's very much a quality-of-life issue. Certainly everyone I've ever talked to who has been on the receiving end of the new food services system in Trenton has been very positive about it.

I do think, though, to be honest, there are somewhat intangible costs that have to be factored into all of this. The process of going through alternative—

Mr. Philip Mayfield: The chairman is going to cut me off, but I have to get back to you just briefly. You've raised the issue of food services, but what about the area of training, for example? I think there were some instances of that raised in the report as well.

Would you like to comment on the difficulties with inflexible contractual arrangements, what you've learned from that, and where you're going?

Mr. Jim Judd: I'll ask Mr. Williams.

Mr. Alan Williams (Assistant Deputy Minister, Materiel, Department of National Defence): My comments will be based on my experiences at Public Works and Government Services, where I was accountable for contracting, and the contract Mike was talking about.

In terms of contracting, like most best practices areas, as a government we have dramatically modified our contracting procedures. We have a new framework called benefits-driven procurement. It is, I think, recognized as being one of the leading methods of procuring anywhere.

• 1615

It allows us to do some of the things we employed in Mike's contract, i.e., working earlier and with more involvement with industry to make sure we get it right; building it on business cases; adapting in risk analysis, not just on the particular contract, but on the project's likelihood of success, so if you don't think it can succeed, you don't start committing the taxpayers' money; making sure there are very clear accountabilities on the part of the client, contractor, and the contract manager, i.e., Public Works and Government Services Canada; and building in the kinds of incentives to increase the kind of performance the client wants to get, while at the same time penalizing industry if they can't deliver.

I think a lot of lessons have been learned and continue to be learned. Together, both Public Works and its client departments—we being their primary client—are constructing contracts that better meet our needs and better allow industry to succeed as well.

The Chair: Thank you, Mr. Williams.

[Translation]

You have eight minutes, Mr. Sauvageau.

Mr. Benoît Sauvageau (Repentigny, BQ): Welcome, sirs, and thank you for your presentations.

I have a very simple first question for Mr. Judd. What is DND's approximate annual budget?

Mr. Jim Judd: Approximately $10.5 billion.

Mr. Benoît Sauvageau: In your speaking notes, you say that through ASD, you managed to save $200 million a year between 1995 and the year 2000. Although I don't have a calculator handy, $200 million a year multiplied by five years totals $1 billion. Is that correct?

Mr. Jim Judd: Yes.

Mr. Benoît Sauvageau: I'm not too bad in math. I think you've made a mistake, because in reality, you've only managed $62 million in annually savings. Multiplied by five, that gives us a figure of $300 million. The error is in the order of $700 million.

Let us suppose that DND was a company listed on the stock market, that you were the president of this company, that you presented these figures to your shareholders and admitted to them that you had made a mistake, even though generating annual savings of $62 million or $300 million over five years isn't too shabby. Would you be worried that the price of your company's stock might fall? What explanation can you give us for this $700 million discrepancy? If I were a shareholder, I'd want some clarification. That's my first question.

Mr. Jim Judd: First of all, let me say that we had planned to implement a service delivery program and that we subsequently made some changes. As a result, we had to revise our projected annual savings. Circumstances changed, and we strove to do our best despite the changes.

Mr. Benoît Sauvageau: You're telling me, a company shareholder, that over the next few years, the projected annual savings of $200 million will really only amount to $175 million. My immediate reaction would be to tell you that I planned to sell my shares because something wasn't right.

I have several other questions for you. In his report, the AG notes that five of the nine ADS contracts were awarded without going to tender and that two in particular had problems.

Perhaps I need to give you more information. Let me give you an example. Mention is made among other things of a $2.8 billion contract involving NATO. Can you tell us a little about the other four contracts and indicate to us why they were awarded without competition? What is the total value of these five contracts?

• 1620

Mr. Jim Judd: We've also read the report, but I must admit that I didn't see anything about the five contracts supposedly awarded without competition. I'd like to ask Mr. Williams to field your question of about the contract involving NATO.

[English]

Mr. Alan Williams: Merci.

There is probably nobody around who is more committed to trying to undertake competitive procurements than I am, in both this position and in my previous one where I was accountable for them. However, if there ever was an occasion where a non-competitive contract should have been followed and undertaken, it was in this particular case.

Thanks to the innovativeness and creativity of industry, we have come up with a solution that has saved the taxpayer, as of today, $56 million, with the potential to increase very shortly to over $200 million. So that's point number one.

Point number two, you should be aware that this initiative was undertaken in complete compliance with the applicable trade agreement, which is the Agreement on Internal Trade, as well as the government's contracting regulations. In terms of the Agreement on Internal Trade, if you looked at article 506, 11.(a), you would see that an unforeseeable urgency is a justifiable reason.

In this particular case, the unsolicited proposal from Bombardier came in December 1994. As a government and a department, we had only two months, in order to allow us sufficient time, to submit an offer to NATO to allow for NATO flying training. Had we decided to undertake a competitive procurement, there is absolutely no doubt we would have missed that opportunity.

It's also fair to point out that our legislative program clearly allows for redress on the part of industry, where they think they were not properly served. My experience tells me they will use that wherever they think there was a disservice. In this particular case, nobody came forward, to either us or the Canadian International Trade Tribunal, to say they could have done the job as well.

So in my view, without question, the right decision was taken. Certainly the Canadian government has benefited. Certainly the taxpayer benefited. The only one at risk right now is Bombardier. They are the ones that will hopefully find at the end of the day, over the 20-year period, sufficient profit to have warranted their innovativeness and creativity.

The Chair: Thank you, Mr. Williams.

[Translation]

Do you have a brief question?

Mr. Benoît Sauvageau: Mr. Desautels, could you possibly forward to Mr. Judd your assessment of the five contracts identified in your report? Do you agree with the answer given to us regarding Bombardier? You stated that this decision to sole source wasn't wholly justified. Was this decision in fact sufficiently justified?

Mr. Denis Desautels: Mr. Chairman, certainly we can provide Mr. Judd with information about the five contracts in question.

In response to your second question concerning the decision to sole source this contract, we continue to have some doubts as to whether the government was justified in taking this action. In my view, it's important to put contracts out to tender every time the opportunity to do so presents itself. I listened to Mr. Williams' explanations, but I believe that ultimately, it's a judgement call as to whether there is sufficient time to initiate the tender process. When possible, it's preferable to plan such projects well in advance, precisely so as not to be caught in a situation where there is no time to solicit competitive bids.

Each case must be assessed individually, even though we still believe that in this particular instance, a relatively major contract was involved. We have some lingering doubts which we have outlined to Parliament in our report.

• 1625

The Chair: Thank you very much, Mr. Sauvageau.

[English]

Mr. Harb. It's an eight-minute round, and you say you're going to split it with Mr. Richardson.

Mr. Mac Harb: Sure.

First I want to thank our witnesses today. I'm very encouraged by the comments I heard from the Auditor General as well as from Mr. Nurse and Mr. Judd and his delegate.

I have a little bit of a concern here, from what I have been hearing, with the whole notion of alternative service delivery, in particular in National Defence. I want to play the devil's advocate for a second here. The World Trade Organization is in the process of looking at this whole notion of services being open to any country that is a member of the World Trade Organization. In other words, if I am a businessman in mainland China and China becomes a member of the World Trade Organization, or a businessman in France or wherever and there is a contract you want to put out and go through this alternative service delivery.... Has any thought been put into place in order to ensure that you're not putting the security of National Defence, whether documentation or whether procedures and everything else, at risk by just saying “I want to go flat out, and every time I have a project I want to offer it to someone else to manage”? Is there any thought being put into place in order to deal with that?

Mr. Jim Judd: It's a legitimate question, sir. At present, defence-related business, if you will, is exempt from WTO and NAFTA. There are, however, instances where foreign companies may bid on contracts in Canada, whether it's for goods or services, foreign-made equipment, foreign-provided services. It works both ways, of course. We have had Canadian companies prove to be very successful in the United States, for example, on defence contracts. But as a general rule, the issue of security is dealt with in terms of the kind of activity or service that we would put up for alternative service delivery and, secondly, the kind of information that we would make available to potential competitors for a contract that was up for service to ensure that nothing untoward is inadvertently or otherwise made known when it shouldn't be.

Mr. Mac Harb: I presume that if there is no clause yet, there will be a clause put in place, so that whenever there's an issue of national security you don't open up the bidding for everybody and his sister, but you just limit it to Canadian firms or firms that have gone through a process of scrutiny and stuff like that.

Mr. Alan Williams: You're essentially correct. We can either not open it up, because these things are exempt or excluded from these other trade agreements.... The only one that would apply is the Agreement on Internal Trade, which is in fact unique to Canada. If we open it up in Canada, we still have the option of putting in all the security clauses we think are appropriate to make sure the certain security provisions that we find are necessary are in fact complied with before we enter into any contract.

Mr. Mac Harb: If that's the case, then.... My colleague Mr. Sauvageau asked a question about Bombardier, for example. I'm not going to use this particular example, but can that be a reason why in some cases you go to a single source, because some of these issues might come up?

Mr. Alan Williams: It could be. In my experience, I have not had one that I have sole-sourced for that reason.

Mr. Mac Harb: This is my final question, Mr. Chair.

Mr. Nurse in his presentation very nicely stated the advantages and benefits that came about as a result of the program he undertook in his department. The Auditor General made a number of comments through the audit of Public Works and Government Services, and Public Works has acted on many of those recommendations. I wanted to find out from Mr. Nurse, and as well from the Auditor General and the department, whether or not there is some sort of cooperation whereby, for example, if National Defence wanted to come in and learn from some of the experiences you have gone through, there is some sort of committee or some sort of coordination that has taken place? If that's the case, how far have you gone? If that's not the case, would you be willing to consider such a committee?

• 1630

Mr. Michael Nurse: The way we are organized as an organization is that basically, in the real property business, we provide and offer our real property services to all organizations. One of the very important organizations in this area is National Defence. In effect, I have what would be called client service units that are often located in the organizing department. As a result of the work we have done, we have actually had consultations in this area. We have offered our services. We have worked with Mr. Williams and other officials in National Defence.

Circumstances are often different when you do these projects. But my person on the front line in that area, supported by my people in my particular part of the department, have been there. They have worked with the folks and had a good exchange. Frankly, we have learned a lot from National Defence as well. So we do an awful lot of that communication. I believe we're encouraged by the Auditor General to do that as well.

So we have done that. We do it with other organizations as well, but Defence is a big client of ours. I will tell you that we have offered our advice and we have received a lot of good advice from National Defence as well, sir.

Mr. Mac Harb: Thank you.

Mr. Alan Williams: If I can add to that, we have within National Defence recently constructed an organization whose focus is totally on service delivery. One of their key mandates of course is building on best practices and learning from our colleagues. That's part of their key responsibilities, to piggyback on all ASD initiatives, not just the ones undertaken in PWGSC but those elsewhere in government so we can continue to learn together.

Mr. Denis Desautels: Mr. Chairman, there is at the Treasury Board Secretariat what is called an ASD steering committee on which we sit as an observer. The purpose of that committee in fact is to advise on revisions to Treasury Board's guidance on alternative service delivery. It's a very worthwhile initiative and we're quite happy to participate in that.

The other mechanism that's in place, as Mr. Williams knows very well, is the performance reporting initiative. I think there is—

The Chair: That's Mr. Williams, the chairman, by the way.

Mr. Denis Desautels: Yes, Mr. Chairman. That's a mechanism or a place where departments can report on their successes and share their successes with others on contracting out services in this manner.

Mr. Mac Harb: Thanks. I'm done.

The Chair: That was just over eight minutes, Mr. Harb, so we'll have to catch Mr. Richardson on the next round.

Mr. Mayfield, please. We're on the second round. We have four minutes on the second round.

Mr. Philip Mayfield: Thank you very much, Mr. Chairman. I'd like to turn to Public Works for a moment, if I could, Mr. Chairman.

As I go through this material, it seems as though, when the contract was signed, not everything was completed. Some of the monitoring and controls were not in place. I'm wondering, has that part of the arrangement been completed yet? Are all the contracts complete, everything done up to this point?

Mr. Michael Nurse: All contracts are in place. Some factors were not complete at the time with respect to the schedule, but we have followed up with the BLJC in our work plan.

Mr. Philip Mayfield: What company is the BLJC, please?

Mr. Michael Nurse: Excuse me, Brookfield Lepage Johnson Controls.

Mr. Philip Mayfield: That's fine.

Mr. Michael Nurse: My apologies. With the successful firm, Brookfield Lepage Johnson Controls, we have worked those items out. Some of the details that were not there are all in place now. We're very satisfied with the result of that.

Mr. Philip Mayfield: I understand the way the contract works is that this is a cost-plus remuneration. Is that correct? Is my understanding correct?

• 1635

Mr. Michael Nurse: I'll ask my colleague, Mr. van der Linde, to ensure the exact terminology. We call it a performance-based contract, in which there is certainly the ability of the company to receive remuneration based on performance, just as they could also not receive remuneration based on non-performance.

Mr. van der Linde, maybe you can react specifically to whether it's cost-plus or not. I just want to be sure of the terminology.

Mr. Hank van der Linde (Director General, Property and Facilities Management, Real Property Services Branch, Department of Public Works and Government Services): Yes, they produce a budget, which we agree to. They then work towards that budget and earn fees based on the work they do. They get fees for managing the inventory, they get fees for delivering the projects, and they get fees for the retail letting component that we have. So in a sense it is cost-plus, but only in the sense that they propose the budget, we agree to the budget, and then they work and deliver according to that budget.

Mr. Philip Mayfield: But their earnings would be a percentage of what it costs for them to provide the service, is that correct?

Mr. Hank van der Linde: Yes, depending on the portfolio, the inventory management fee ranges somewhere between 5% and 6% of the cost of managing the operations.

Mr. Philip Mayfield: Now, it may be commendable that the employees were protected in this. I understand that the benefits to the employees are at least as great as they were before the contract was signed, and perhaps in some instances they've improved. I'm wondering where the savings are being built in this when you're telling an employer they're going to take it over on your terms, they're going to do it on your terms and in the same way you were doing it, and they're going to save you money, while you're going to pay them—what is it?—15% in addition to that. Where are the savings coming in this?

Mr. Michael Nurse: One of the reasons we arrived at a 10% savings is the very reason you've identified, sir. We did put a lot of emphasis on the fact that the contract and the taking over of our employees was a big part of this. Also, we were looking to ensure that we had a solid company that would take care of our assets. It was for that reason that we went out to the private sector and indicated to them the kinds of percentages we were looking for. It was their feedback that indicated that, with all we were asking for, around the 10% mark was an acceptable savings that they would be able to incur. That was through valuable feedback from the private sector.

We didn't want to ask for an unfair amount, but we certainly did want to generate some savings from this. We felt we were able to get that mark plus the transfer in employees, and we could look for reputable firms.

The savings essentially comes from what I think are some of the principles that we're looking at. We have a private sector company that is taking on work that we believe a private sector company does very well. It's work that, while formerly done by public servants, does not have to be done so. There is work that is, I think, fundamentally public service work, and there's work that is not essential to the public service. Frankly, by giving it to the private sector, a lot of churn that does exist in operating a bureaucracy and operating a public service is eliminated in some cases. That does not take away from competitive principles or working with subcontractors, but the fact is that operating within a bureaucracy incurs some cost in terms of churn. They are able to eliminate some of that cost, and that is where much of the saving is generated in terms of the 10%.

So we've asked for a reasonable amount, not an unreasonable amount. I think that's where the savings are being incurred, and that's why we are benefiting from that while still being concerned that our employees have career opportunities.

The Chair: Thank you very much, Mr. Nurse.

Mr. Sauvageau.

Mr. John Finlay (Oxford, Lib.): Mr. Chairman, as a point of information, what is “churn”?

The Chair: We'll ask Mr. Nurse to explain.

Mr. John Finlay: I've done it with a cream separator.

The Chair: I know you've done it with a cream separator.

Mr. Michael Nurse: “Churn”, for me, basically means administrative processes followed in order to get work done within a bureaucracy. We are expected to ensure that we follow procedures and process. The private sector has the capability of accomplishing the same results, but within the form of the private sector. I've used the term “churn” on occasion, but for me it's just basically—

The Chair: I'm sure Mr. Finlay gets the message, sir.

Mr. Michael Nurse: Okay.

Mr. Philip Mayfield: Mr. Chairman, I'd like to suggest that another line be put in the budget, and that be the line—

The Chair: For “churn”.

Mr. Philip Mayfield: —designating “churn”.

An hon. member: Oh, oh!

The Chair: Okay.

[Translation]

You have four minutes, Mr. Sauvageau.

Mr. Benoît Sauvageau: Mr. Desautels, will you let us know when you have forwarded the information about the contracts to Mr. Judd?

• 1640

I'll come back to you in a moment, Mr. Judd. Mr. Nurse, your presentation was quite comprehensive and I don't think I have any questions for you. Please don't take it personally. Perhaps if you return at some point, I'll have some questions for you then.

Mr. Judd, the objective was to achieve annual savings of $138 million. I'd like to hear your comments on paragraph 11 of Mr. Desautels' opening statement in which the following is noted:

11. The basic tool for selecting the best available option and estimating savings is the business case analysis. At National Defence, we found...

—the we in the case being the Auditor General—

...that business cases were completed in only 8 of the 14 projects we audited. We also found that existing service levels had been established in only three projects. Baseline costs were set inadequately in 3 of the 12 projects we could assess.

We don't know if this is out of 500, 1,000 or 20.

Without cost and performance measures, ASD projects cannot be properly managed.

Do you see this as an early indication that it may be possible to recover part of the yearly $138 million shortfall?

If business cases were completed for only 8 of the 14 projects audited this means that in six instances, no business cases were completed at all. What is the total value of these projects, in millions or billions of dollars? Can you provide us with that information? Would you care to respond to paragraph 11 of Mr. Desautels' opening statement?

Mr. Jim Judd: With your permission, I'd like to ask Vice- Admiral Garnett to answer your question.

Mr. Benoît Sauvageau: By all means.

VAdm Gary Garnett: If you have no objections, I'll answer the question in English.

[English]

I think in Mr. Judd's opening remarks and in the Auditor General's report in other places he did state that many of the projects he had analysed started before the ASD program. I could sort out the numbers, but I don't have them at my fingertips.

In reality, some of the early contracting that was mentioned—Meaford, for example, and Portage la Prairie—was done before the ASD program. So it's not surprising to me that they did not have business case analyses, for example. To the Auditor General, I would say that regardless of when they started, one should have had a more businesslike approach to that contracting.

What I can say is that starting with the ASD program, and recognizing the deficiencies in the earlier contracting processes, a number of activities have taken place to produce training modules and workshops in business case analysis. I happen to have a list. Since 1996, we've had what's called ASD practitioners' workshops that go through the whole of the ASD process. We have training modules in business case analysis, contracting, and in-house bids that are taught in the CF Management Development School in Saint-Jean, Quebec.

In 1997, we pre-qualified certain consulting services, and they now have a standing offer under which they can come and provide independent analysis of ASD business case analyses. In fact, we're doing that right now with our most recent project, called the supply chain project. There has been a variety of guidance manuals produced since that time.

You would find in the Auditor General's report a recognition that after 1995 there has been an entire management change in approach to ASD, where it is more top-down driven. There are management committees chaired by me and Mr. Williams that have changed the process to a senior management process from the earlier days of the ASD process. All that's in various places within the Auditor General's report.

The Chair: Mr. Sauvageau, Mr. Kasurak would like to say something as well.

Mr. Peter Kasurak (Principal, Audit Operations Branch, Office of the Auditor General of Canada): Thank you, Mr. Chairman. I can clarify which projects are which, and I apologize for the vagueness in the report. Sometimes when we try to make reports brief, we leave out details.

• 1645

First, with regard to the business case analysis question, there are really three groups of projects. There are the eight that were completed. There are four where there was not a business case, but where we could find sufficient information on the file to analyse the project. Those four were Goose Bay; Meaford; the Aerospace Engineering Test Establishment, or AETE; and Food Services at Trenton. If I can direct the committee's attention to both exhibit 27.2 on page 9 and 27.3 on page 12, you can see whether these projects were rated by us as old projects or new projects and how we assessed the projects overall.

Turning to the previous question regarding the five contracts that were non-competitive, I would like to say that some of these were contracts, not competitions. They were NATO flying training, the Canadian air training program, the AATE program—my mind is going blank here on the acronym—the aerospace automated test equipment for the CF-18, the ammunition testing at Nicolet, and the National Defence Headquarters facilities management. Two of those were not new competitions. The Canadian air training program was a contract extension, but nevertheless we were still concerned because of the size of it, and the Nicolet contract was a contract amendment. In both of those cases there is no question of compliance in our mind. The department was quite within its rights. Nevertheless, we would have preferred to see competition in these cases.

Those are the five. I hope that clarifies the content of the report for the committee.

The Chair: Thank you, Mr. Kasurak.

We'll now turn to Mr. Richardson for four minutes.

Mr. John Richardson: Thank you very much, Mr. Chairman.

I'd just like to comment on something I heard from Admiral Garnett, and that was returning to rebuilding the expertise on the human side of National Defence. I was so pleased to hear about the schools of management and the use of the St. John's facility for that as well. I don't think you could have gone any further with a cut on your human side and not go back to develop them professionally so that they could come back in and be real human assets. That is on the administrative side.

But one concern I still have is that in our rebuilding of National Defence Headquarters, we dedicate ourselves to excellence on the human side of it. All of the people who are there are going to be counted on to be doing the job as professionally as they can, and then they have to look forward at some stage to seeking a promotion. In order to seek that promotion, they must bring along the capability and skills that are needed to do the job.

I just wanted a short period of time to make that comment about the human side. If you make your 10% target, we'll all be pleased.

VAdm Gary Garnett: Thanks, Mr. Richardson. We've been working hard at bringing more humans into National Defence. I'll leave it at that.

An hon. member: Let's get some rollbacks.

Some hon. members: Oh, oh!

The Chair: That's a good remark.

Mr. John Richardson: I'd like to see you get double the number of humans.

The Chair: Do you have any more questions, Mr. Richardson?

Mr. John Richardson: No, that's fine. Thank you.

[Translation]

The Chair: You have four minutes, Mr. Clouthier.

Mr. Hec Clouthier: Only four minutes?

The Chair: That's right.

Mr. Hec Clouthier: I thought I was entitled to six minutes

[English]

First of all, philosophically, I don't have a real problem with ASD. The only difficulty I would have—except in certain circumstances, and they'd have to be exceptional—would be where the people who are currently employed, whether it's on military bases or through Public Works and Government Services, would not be given the opportunity to bid. I know that initially there were a few instances when that did not happen or, for whatever reason, they weren't made aware of it. I know that on my particular base, CFB Petawawa, it has been handled very well, and I have no complaints whatsoever. The civilian people who work on the base are given the opportunity to bid on the contracting, whether it's cleaning, carpentry, electrical, or whatever.

• 1650

Having said that, now I want to get Mr. Desautels into the middle of an internecine battle between two departments. I did notice that in his statement Jim Judd said that there was about a 30% saving in ASD, and then when Michael Nurse made his dissertation, he said that there was about a 10% saving. Why, Mr. Desautels—or maybe they might have to answer—would there be a fluctuation of about 20% in savings in ASD. I know that they're different departments. Is that the reason, or is there something else that just jumps out?

Mr. Denis Desautels: If I may start answering the question, Mr. Chairman, the two departments are in different businesses, so it's quite understandable that with regard to the savings you might expect out of privatizing or contracting out, some activities would produce different results.

I'm glad the departments feel they can come up with both the 10% and the 30%. Whether you can explain the full difference between 10% and 30% is another question, but I don't think that's the main issue.

In our report we did question the savings. But the reason we were questioning it is that the cost base from which we're all starting is not that solid in some cases. You can calculate the 10% or 30% as a percentage of a current cost or what it was going in, but across government the cost systems are not that rigorous, so in our view it was difficult to isolate and estimate the actual cost of the operations you were contracting out. So that is the question we were left with.

Mr. Hec Clouthier: To both Mr. Judd and Mr. Nurse, in the case of both PWGSC and DND, would those savings have stayed within the department, or would Treasury Board get their grimy little hands on it and take it away?

Sorry, Lucienne.

The Chair: That was from a member of the government, by the way.

Some hon. members: Oh, oh!

Mr. Hec Clouthier: Treasury Board wants to get that money back, but I'd like to see that money stay, especially in DND because we are in desperate need of funds. Jim, if you said “We're saving $68 million a year”, would they say “You're not getting that?” How would it work?

Mr. Jim Judd: I have two quick answers to your question. The savings we achieve stay. In the spirit of corporateness, I would say that I've seen no evidence of Treasury Board having grubby little hands.

Mr. Hec Clouthier: Oh, you had better watch it.

Some hon. members: Oh, oh!

Mr. Hec Clouthier: I have one final question that will take 30 seconds.

The Chair: You have 30 seconds, Mr. Clouthier.

Mr. Hec Clouthier: I know Mr. Desautels did mention Portage La Prairie, where there was an extension of the contract. This is one of the initiatives that I believe was probably well done, although it didn't go to ASD because, as you know, our NATO flight training centre is really doing extremely well. We have the U.K., Italy, Denmark, and Singapore coming there now. That is one of the ones I have no difficulty with whatsoever, because it was very well managed. There's an old axiom in life that if something isn't broken, just don't try to fix the damn thing. That's just a statement.

The Chair: Did you want Mr. Nurse to comment on this issue as well?

Mr. Hec Clouthier: Charge on, big fellow, if you want.

Mr. Michael Nurse: I'll take all the churn out of my answer.

Very quickly, it is indeed a different organization. The feedback from the industry in looking at the way we are operating is that they felt 10% was as far as they could go without having to then actually reduce the work we do. So they identified the 10% because they felt our organization was already pretty efficient from that point of view. The 10% savings we identified go back into our assets. We put them right back into our assets.

Mr. Hec Clouthier: I have a specific question for him, but I'll wait until afterwards, because it's nothing new. Let somebody else go.

The Chair: We'll try to come back, Mr. Clouthier, if we have some time.

Next is Mr. Finlay, for four minutes.

• 1655

Mr. John Finlay: Thank you, Mr. Chairman.

I want to ask a general question that has to do with savings being not as great as projected and so on. I heard you say that when we went to this ASD, there was to be cost savings; future cost avoidance, although I'm not quite sure I understand what that is, using expertise we did not have; and as Mr. Nurse has said, getting rid of a certain amount of churn or wasted effort in checking and backing and filling and bureaucrats and so on, which is probably okay.

How much of that cost savings is on the backs of the people who are earning the wages? Has there been any effect on unions and their organization? With respect to the fairness monitors, are they primarily concerned with fairness to employees or fairness to the department from the ASD delivery people?

Mr. Michael Nurse: The fairness monitor and adviser are there to ensure that the process we followed was not associated with the treatment of the people. It was to ensure that we had a fair process and that we followed the procedures as they were laid out.

However, on the matter of people, I would say that when we went out to the industry, we laid down a very high bar in terms of our expectations of taking care of our employees. In effect, when industry bid, fully 35% of the measurements dealt with taking our employees and meeting certain requirements of salary. The result of that is that nearly 100% of our employees were hired and are now working for this company. From our perspective, we made that a very strong condition, and we did that in full negotiation with our union colleagues. It was very successful.

Mr. John Finlay: I'm very glad to hear that.

Can you make a comment on future cost avoidance? What does that refer to? Is it that because the buildings and so on are better maintained, you won't have to repair them as quickly, or what?

Mr. Jim Judd: I think I was the one who made the comment, sir. I guess what I was getting at there was that in our case there may be instances where alternative service delivery allows us to have the same service delivered but without our having to invest the money in a major capital acquisition, for example to purchase the equipment that's required to deliver the service.

NATO flying training, for example, saved us the cost of going out and purchasing a lot of aircraft that we could not have afforded in the circumstances. So NFTC was a cost avoider for us and a viable cost saver as well in that sense.

Mr. John Finlay: The matter of successor rights or something has cost about $6 million, I think you said, because you didn't get a timely enough decision from Justice or something. What's involved with the application of successor rights?

Mr. Jim Judd: Very briefly, sir, the issue arose in the case of the ASD initiative at Goose Bay, where I think it's probably fair to say we could have dealt with it better than we did in terms of handling the issue with respect to our union colleagues. In any event, I think in the final analysis we managed to rectify a number of the problems that arose.

Subsequent to the activity being ASD-ed, the people involved made a claim to the Public Service Staff Relations Board that they should be eligible for successor rights, which in turn meant essentially that their union rights and obligations when they worked with us would extend to the new employer. That in turn generated an additional cost to the employer and less of a saving for us.

Mr. John Finlay: Does that contradict somewhat what Mr. Nurse told me when I asked my question about wages and unions, or am I misunderstanding?

Mr. Jim Judd: I don't think so. In the case of Goose Bay, as I said, the decision by the Public Service Staff Relations Board came some time after the activity was already ASD-ed, and we had to honour the Public Service Staff Relations Board decision, as did the contractor in that case. The consequence of that was that there was a $6 million difference in terms of the salaries and benefits available to the employees.

• 1700

The Chair: Before we go to you, Madame Jennings, we have two quick questions, one from Mr. Mayfield and one from Mr. Sauvageau.

Mr. Mayfield.

Mr. Philip Mayfield: Just to clarify what Mr. Clouthier was asking, I'd like to know what these percentages are based on. As far as DND is concerned, I thought we were talking about $68 million on $3.5 billion, which is neither 10% nor 30% in my arithmetic. What are the numbers we're talking about here? What are these percentages based on, what numbers?

Mr. Jim Judd: The savings are based on our estimate of what the activities in question cost us and what they would cost us after alternative service delivery had been applied. In the case of a particular activity, if we estimated the cost to us to be $100 million per year and the new service delivery was going to cost us 30% less, it would subsequently cost us something in the order of $70 million per year.

Mr. Philip Mayfield: I'm wondering what the numbers are, though. You have come out with percentages of 10%, I think, in your instances. What are the costs you're basing this on? It's not $3.5 billion, obviously.

Mr. Jim Judd: No. The estimate of $175 million that we are currently working on is a level of savings that would be achieved by the year 2004 on a range of projects that have in some cases been initiated and in other cases have not yet been brought to fruition.

Mr. Philip Mayfield: What are the savings to date? Can you give us a percentage on that? I don't mean the projected savings. What are the actual savings?

Mr. Jim Judd: Right now we're estimating them at $62 million a year. They had been $68 million a year until the decision on—

Mr. Philip Mayfield: Can you put a percentage on that?

Mr. Jim Judd: Our estimate would be that it would be in the order of 20% to 30% of what the activities previously cost.

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

[Translation]

The Chair: Go ahead, Mr. Sauvageau.

Mr. Benoît Sauvageau: As I recall, Mr. Desautels, when you tabled your report in November, we met in the Centre Block and discussed informally the possibility of preparing a more general report on the Department of National Defence. I don't know whether you recall that meeting, but at the time, you informed me that you would likely be summarizing the latest reports after reviewing everything that had been written and said about the department. I would appreciate it if you could refresh my memory where this matter is concerned.

Before you answer the question, I'd like to ask Mr. Judd if he can tell me what the annual budget is of the Meaford Area Training Centre. If you've already supplied that information to the committee, then I apologize for asking the question. If you don't have an answer for me, I understand and I won't hold it against you because I realize that there are a great many programs out there.

Mr. Jim Judd: To be quite honest, I don't have the answer to that question, but I could get find out for you.

Mr. Benoît Sauvageau: Fine then. It's not a problem. This is just one of many programs.

Mr. Denis Desautels: Mr. Chairman, Mr. Sauvageau mentioned a project that I discussed with him and with other members. As I near the end of my term as Auditor General, I intend to do a retrospective of all of the reports prepared by my office since the beginning of my mandate. This retrospective would cover a number of important departments and would be fairly broad. DND was one of the departments that I intended to include in my report.

Mr. Benoît Sauvageau: Thank you. Do I have any time left?

[English]

The Chair: Yes, for a short question, Mr. Sauvageau.

[Translation]

Mr. Benoît Sauvageau: Do you now have an answer to my question concerning the Meaford Centre?

Mr. Jim Judd: The centre has an annual budget of approximately $8 million.

• 1705

Mr. Benoît Sauvageau: Has the Auditor General obtained any additional documentation since November. In his report, he made the following observations:

We could not find a formal business case analysis or any other supporting evidence to justify the ASD contract at Meaford Area Training Centre. The limited documentation provided to us did not indicate that any other options were considered.

The accompanying asterisk tells us that this is incomplete. Has the process been completed?

[English]

VAdm Gary Garnett: Meaford was a brand-new training facility, thus it was starting from nothing. The rationale to contract the entire support of the facility was based at the time on the logic that said it would be cheaper to contract that service than to start to provide it from inside the business.

[Translation]

The biggest mistake was the contract's lack of flexibility

[English]

because it was fixed price. The capacity for Meaford turned out to only be utilized at 43%

[Translation]

in light of the substantial cutbacks in armed forces personnel levels.

[English]

But the flexibility was not there. We still had to pay the $8 million a year. The contract is due after five years, next year, and will be renegotiated on a different basis.

[Translation]

Mr. Benoît Sauvageau: In conclusion, I suggest that you get a new negotiator.

The Chair: Thank you very much, Mr. Sauvageau.

You have four minutes, Ms. Jennings.

Ms. Marlene Jennings (Notre-Dame-de-Grâce—Lachine, Lib.): I'd like to thank all of our witnesses. I apologize for having to leave during part of your presentations, but let me assure you that I read the two chapters of the AG's September and November 1999 reports carefully and I had a pretty good idea of what you would be telling us today.

Last week, we heard testimony from witnesses concerning the new financial information strategy that the government is setting up in several departments. The new strategy is slated to take effect on April 1, 2001, that is in a mere 14 months' time.

When I see the problems that DND and PWGSC are having in dealing with alternative forms of service delivery, I have to wonder if the new financial information strategy will prove to be a useful tool for implementing effectively these alternative forms of service delivery, based on reliable data and fair comparisons.

I think you've done some good work up until now, but some problems persist. I'd like to know if this new financial information strategy will help you meet this challenge. If so, how? Exactly how far along are you in implementing the new FIS?

[English]

Mr. Jim Judd: We expect to involve up to 8,000 personnel of our organization in an extended training program for the implementation of the new financial information strategy.

• 1710

We also happen to be what is called the “pilot department” in the modern comptrollership initiative of the Treasury Board, and we've recently had what is called a “comptrollership capacity check” done on how we stand in that regard. It's our intention to use what we found on the comptrollership capacity check, plus the impending arrival of the FIS, to develop a program of learning for our staff, both military and civilian, who are involved in budgetary and resource issues, that is not just targeted to FIS but to modern management issues more generally. We expect that it's going to cost a fair bit of money, and we also expect that it's going to be very much an ongoing program that puts more emphasis on learning for our civilian and military personnel on an ongoing basis.

Ms. Marlene Jennings: Do you think that's going to assist you in meeting the challenges of ensuring that the alternative service delivery is in fact a success?

Mr. Jim Judd: We very much hope so. We've already put in, in the last two or three years, a series of learning programs related specifically to ASD, but our hope for the coming year and beyond is to broaden it out to a much broader management and comptrollership program for people involved in resource management.

Ms. Marlene Jennings: So National Defence is confident that April 1, 2001, the system will be in place. You will be sufficiently advanced in terms of the training of your staff to be able to utilize the system over a period of time to its full potential, not just on the accounting side but also on the analysis and management side of programs, determining which programs we should go forward with, which ones we should cut out, and which ones we should modify. You are confident that this is going to be sufficiently in place for April 1, 2001.

Mr. Jim Judd: We very much hope so, but there are still some substantive issues with respect to FIS that we have not sorted out with Treasury Board in terms of its coverage. Nonetheless, we are looking to put this program into place and to be ready on April 1, 2001.

[Translation]

The Chair: Thank you very much, Ms. Jennings.

[English]

Mr. Michael Nurse: Mr. Chair, I very quickly will say that it's the same situation for us. I do think we have been able to satisfy that information. What this system will do is provide a change in how the company provides input into us, and any development in that area will always help us. We can always improve in this area, and I think it will help us very much.

We will be ready.

Ms. Marlene Jennings: Mr. Chair, thank you for your indulgence in allowing me that extra question.

The Chair: I want to ask a few questions myself, but Mr. Richardson has a quick question too.

Mr. John Richardson: Looking at the varying makeup of the departments, some are capital intensive and some are labour intensive. When we measure the gains made in alternative service delivery, where you have National Defence, which is not only very labour intensive but very capital intensive, that's an offset that they have to carry that extra burden, unless we're going into a mode of depreciating tanks and artillery pieces, and so on, some of our ships and some of our airplanes.

Is it a bit leaning one way against National Defence and its measurements vis-à-vis other government departments that are very labour intensive? I ask that question because I was thinking about how we measure that. Sometimes National Defence comes up on the wrong end of the stick, because maybe the capital end of it is dragging it down.

The Chair: A brief response, Mr. Judd.

• 1715

Mr. Jim Judd: It's a very good question. We're not sure yet. As I said to Madame Jennings, one of the substantive issues that we haven't resolved yet with respect to the application of FIS is whether or not it would in fact apply to armaments, for example, which constitute the largest proportion of our capital assets.

Operating in this new system of accounting certainly is a brand-new world for us. None of us has ever done it, and it will certainly put everything in a quite different perspective. As for whether or not it will jeopardize us because of the degree to which we're capital intensive, I would certainly hope not, and we'd certainly want to guard against that eventuality.

Mr. John Richardson: I just wanted to ask that question while the Auditor General was here.

The Chair: Thank you, Mr. Judd.

I'm fairly critical of your department after having read the Auditor General's report. You started this program of ASD back in 1996, and by 2004 you're now expecting savings of $175 million, which might be 5% out of the $3.5 billion that is potentially serviceable through ASD. You run a big department, at $10 billion, give or take. You have a lot of personnel. As we've just heard, a lot of capital is invested in your department by the taxpayer.

I think what we're reading here in the Auditor General's report is significantly below a satisfactory level, because we're finding that you're trying to learn as you go along. I looked at the closing remarks of your own statement, where you say “We have learned a great deal from the early phase of this initiative and the ASD process will continue to evolve.” That's fine, but you're making a lot of mistakes and are losing a lot of money along the way.

I would hope you would get some consultants on board, that you would avail yourself of the skills of the Auditor General's office, if they are available to you, or those of Treasury Board or whomever, to ensure that such things as base-level analysis would be done before you go to ASD. Why weren't these things done beforehand?

Mr. Jim Judd: As has been pointed out in some of the earlier programs that predated the institution of the policy in the mid-1990s, Mr. Chairman, there were no business case analyses done, but there was documentation available to support a decision to go forward. I think we have—

The Chair: If I can interrupt, I'm looking at paragraph 27.31 of the Auditor General's report, and it says that even before ASD, business case analysis is a basic requirement. As a manager, you would say that before you go to ASD, you need this base-line study. That's what the AG is saying in chapter 27.31. In 27.32, he says business case analyses were done in only eight of the fourteen cases audited, and in two cases no information was available. Yet, with no information, you say ASD is the way to go. As a manager, I have a problem with that. Why are these things happening?

Mr. Jim Judd: As I said, I think the Auditor General's comments with respect to the absence of business case analyses related to the very earliest projects that were undertaken before the current, more rigorous methodology that we now have in place was introduced.

The Chair: Then let me ask you, Mr. Kasurak, if you are aware of base-line analyses now being done on all the programs being considered for ASD.

Mr. Peter Kasurak: Mr. Chairman, the state of our knowledge is really limited only to the fourteen cases that we did. We haven't audited past those.

The Chair: What's the most recent of the fourteen cases that you've done?

Mr. Peter Kasurak: I would say military pay was probably the one that comes up on the department's list as a brand-new project, and it continued for some period of time. As we say in the chapter, it was well done. If you look at exhibit 27.3, we do say it was a well-analysed project. That is the newest project that we've looked at, and it's also one of the best.

The Chair: So can we be assured that this new standard is now going to be the standard, Mr. Judd?

Mr. Jim Judd: Yes, Mr. Chairman.

• 1720

The Chair: Okay.

When I look, there's no analysis for the Goose Bay support program and the Meaford Area Training Centre. The Meaford Area Training Centre, as Mr. Garnett pointed out, was a brand-new facility with a brand-new way of doing things, and you entered into basically a no-cut contract of $40 million a year. I believe it's 43% underutilized, and yet you're still paying for 100% utilization. I have a problem with the management that decides that on a brand-new program and a brand-new way of delivering the program, you get into a no-cut contract. Why do these things happen?

Mr. Jim Judd: As the admiral said earlier, the contract is up for renewal later this year, and it will be renegotiated to reflect a better business case from our vantage point.

The Chair: Is it going to go up for competitive bid?

Mr. Jim Judd: I don't even think we've gotten to that stage yet. I would suspect so.

The other point to bear in mind, Mr. Chairman, with respect to the Meaford case is that while I would acknowledge that the contract was too inflexible at the outset, the other significant factor is that the overall circumstances in terms of the anticipated demand for the facility changed greatly because of—

The Chair: I appreciate the change, but who changed it? It wasn't the contractor; it was your department that said “We want to enter into a no-cut contract”, and then you changed your mind after you'd signed the no-cut contract. And now you have 43% underutilization and you're paying for....

Also, for example, in 27.56 the Auditor General points out that after a sole-source strategy was decided upon, you took a look at the in-house financing option to see if that was perhaps better. But you'd already decided you were going to go with the sole-source strategy. In 27.56 he's talking about the NATO flying training program, which was fairly expensive. You decided to go on a sole source, no bids, and after you did that, you said “Well, can we do this cheaper in-house?” But it was too late.

Mr. Alan Williams: Can I comment on that?

The Chair: Yes.

Mr. Alan Williams: Not that I want to enter into a huge dispute with the Auditor General, but the reality is that back in 1993-94 the department did undertake an examination of the cost to provide training for its pilots. It was forced to do so, because it clearly was up against the problem of not having sufficient aircraft available to train the increasing number of pilots being envisioned.

Whether it was as rigorous or sophisticated as people would like in theory is for people to decide, but to suggest there wasn't a clear understanding of the cost of the existing program, which at the time was estimated to be $3.44 billion, or of the cost of two options it was proposing would be incorrect. We did have a good handle.

And as I pointed out at the beginning, the creativity of Bombardier to come in and marry up our own particular problem with one that existed in the NATO countries is one that could not have been anticipated. It was not a question of inadequate planning. It was a question of their marrying up our need with somebody else's need and proposing a proposal to solve everybody's problem.

The Chair: Yes, it was quite ingenious of Bombardier to do so, with a $200 million guaranteed profit built in. The Auditor General points out that $360 million to $460 million was at-risk investment by Bombardier, with a $200 million guaranteed profit built in, because of the $1.3 billion that was paid that would just flow through to purchase the aircraft.

Mr. Alan Williams: I'm not sure the Auditor General is saying that, but what you are saying is not correct. As of this point in time, as I said earlier on—

Mr. Mac Harb: [Inaudible—Editor].

Mr. Alan Williams: The facts are that at this point in time, should no further countries be added on—of which there is no guarantee at this present time—Bombardier stands to lose, over the 20-year period, $225 million.

The Chair: I'll have to ask the Auditor General.

Is my understanding of your comments correct or incorrect?

• 1725

Mr. Peter Kasurak: It's somewhat incorrect, Mr. Chairman. I'm sure it's our fault and lack of clarity in the chapter.

Let me explain our figures here. The $200 million—

The Chair: If I'm incorrect, Mr. Kasurak, I would rather that you explain or maybe we'll just reread the comments again. We're running out of time and I have one final question.

Mr. Judd, the Auditor General has pointed out that in contracting out there are four fundamental criteria you have to adhere to. If these criteria are there, you cannot sole-source a bid. The criteria are fairly simple, such as if it's over $25,000—$2.8 billion is a bit over $25,000—if it's not a national emergency, and so on. There are four simple criteria, and it has to go out for bids. Will you follow these criteria laid down from here on in?

Mr. Jim Judd: I cannot restrain Mr. Williams.

Mr. Alan Williams: Mr. Chairman, just to be absolutely clear, the four conditions you're talking about are part of the government's regulations.

The Chair: Yes, which have not been adhered to up till now.

Mr. Alan Williams: I wouldn't necessarily agree with that. Equally important or perhaps even more important is the legislative framework that surrounds the procurement. When you talk about WTO and NAFTA and AIT—

The Chair: I'm not talking about international bidding.

Mr. Alan Williams: Neither am I. But many procurements have to comply with all of those agreements, and each one has its own unique set of rules that say when you can sole-source and when you cannot. So even if you complied with those four in the government regulations, you would not necessarily be able to sole-source because those four are not necessarily equivalent in the different trade agreements.

The Chair: I'm not asking you to sole-source; I'm asking you to put it up for bids.

Mr. Alan Williams: But that's the point. If you sole-source you don't put it out for bid.

The Chair: I know, yes.

Mr. Alan Williams: Simply complying with those four comments does not entitle you to sole-source.

The Chair: Let me get clarification with the Auditor General. I have one final question to the Auditor General.

Mr. Williams is saying that even if you comply with the four criteria laid down by the Treasury Board, it still does not necessarily allow you to sole-source because of WTO and so on in the defence area. Are you aware of that? Would you agree with his statement?

Mr. Denis Desautels: Not only would I agree with that, Mr. Chairman, but what this is saying in fact is that it really further limits the opportunities for sole-sourcing. If you follow all that through, there should be less sole-sourcing than we are seeing across government.

A voice: Let's quit while we're ahead.

The Chair: Okay, we will quit here. Before we leave, Mr. Sauvageau has one small question.

[Translation]

Mr. Benoît Sauvageau: Mr. Desautels, in paragraph 27.32, you refer to 8 of the 14 projects selected for an audit. What kind of sample are we talking about here? You selected fourteen projects out of a total of how many?

[English]

Mr. Peter Kasurak: Mr. Chairman, there are 14 out of 40 projects. I refer to exhibit 27.2, which gives the projects and their global budgets. There's a description of each project in the annex to the chapter.

Mr. Benoît Sauvageau: Merci.

The Chair: We'll now turn to Mr. Desautels for closing remarks. Don't run away; we're going to have some closing remarks by the Auditor General.

Mr. Desautels.

Mr. Denis Desautels: Thank you, Mr. Chairman.

I note that there was a fair bit of discussion on procurement practices and I'm looking forward to future meetings of the committee when this will be discussed further. I believe one is coming up very shortly on that.

In terms of the two departments on which we reported in these two chapters, I simply remind the committee that we will be doing a follow-up of those two chapters in the normal timeframe that we usually do, in about two years. It seems to me that in both cases the department agrees with the recommendations we're making and in fact they are both on their way to implementing a number of these recommendations. Nevertheless, we will be following up very closely.

In the case of DND, I note that they plan to invest a fair bit of effort in training people and in improving some of their processes. We will be paying particular attention to that when we do our follow-up.

• 1730

There are two areas that are important to us and that have come through both in our chapters and in the discussion this afternoon. One is the use of fairness monitors. I think that's a very good practice and I think we should encourage the use of that whenever that makes sense.

Similarly, when it comes to contracting out large, complicated services, there are things that could be done to improve the competitive environment. I think Public Works had demonstrated that with its particular project, and there were others like that before. In addition to creating a better competitive environment, we think there's a need for better guidance from the Treasury Board Secretariat for certain of these unusual contracts, which are in a way partnerships with the private sector.

Thank you, Mr. Chairman.

The Chair: Thank you, Mr. Desautels.

I thank all the witnesses and the members of the committee.

Mr. Hec Clouthier: I have a point of order, Mr. Chair.

The Chair: Mr. Clouthier.

Mr. Hec Clouthier: Did you say two years, Mr. Desautels? Does it take two years?

The Chair: Normally the Auditor General does a follow-up to this chapter and he reports approximately two years from now.

Mr. Hec Clouthier: We're going to send you the report, because you won't be around here then.

Voices: Oh, oh!

The Chair: The meeting is adjourned.