PACC Committee Report

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INTRODUCTION

BACKGROUND

OBSERVATIONS AND RECOMMENDATIONS

CONCLUSION

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

EIGHTEENTH REPORT

The Standing Committee on Public Accounts has considered Chapter 4 of the September 2002 Status Report of the Auditor General of Canada (National Defence — NATO Flying Training in Canada) and has agreed to report the following:

INTRODUCTION

The NATO Flying Training in Canada program (NFTC, the Program) is delivered by the Department of National Defence (DND, the Department) in partnership with the private sector under the terms of a 20-year, $2.8 billion contract. The fundamental purpose of the Program is to address the Department’s need for trained pilots in a cost-effective manner.

Due to the cost of the contract and the importance of ensuring that Canada’s armed forces have skilled pilots, the Committee decided to review the results of an audit of the NATO Flying Training in Canada Program. Accordingly, the Committee met with Mrs. Sheila Fraser, the Auditor General of Canada who was accompanied by Mr. Hugh McRoberts (Assistant Auditor General) and Mrs. Wendy Loschiuk (Principal) on 26 February 2003. Mr. Alan Williams (Assistant Deputy Minister, Materiel), Mr. Jim Richardson (Director, Major Service Delivery Procurement), Brigadier-General E.G. Cloutier (Director General, Air Personnel), and Col. Robert Bertrand (Director, Air Comptrollership and Business Management) represented the Department of National Defence.

BACKGROUND

The high cost of maintaining modern armed forces coupled with fiscal restraints have led western governments to search for ways of reducing military budgets while maintaining military effectiveness. One solution has been to identify support services whose delivery can be contracted out to, or shared with, the private sector. In Canada, such efforts fall under the general label of Alternative Service Delivery or ASD.

In the early 1990s, the Department of Defence was faced with the need to replace its aging fleet of training aircraft. It determined that it could not afford the replacement costs of the aircraft of approximately $700 million. In the fall of 1994, Bombardier Canada proposed that it work with the Department to offer pilot training to Canada and NATO. Bombardier submitted an unsolicited proposal in December 1994. In 1996, Cabinet approved the Department’s request to enter into a 20-year, $2.8 billion[1] sole-source contract with Bombardier to provide support for the NATO Flying Training in Canada program. Bombardier would provide and maintain the aircraft, DND would provide students and instructors, and other NATO countries would help offset the costs by purchasing training for their student pilots.

Under the Program, Bombardier is the prime contractor for the NFTC. It is responsible for providing and supporting aircraft, simulators, classroom training systems, maintenance services, and ground school training for some phases of the Program. Bombardier provides the aircraft by leasing them for the life of the Program from Milit-Air, a not-for-profit company. The Department is responsible for overall program management including operational control of training, providing instructors for flight training, infrastructure and military flying training areas. The Department and Bombardier share responsibilities for the design of ground school training, scheduling of student facilities and aircraft, and the provision of operational and base support services.

Milit-Air is a not-for-profit corporation with no share capital or assets, incorporated on 12 March 1998 under Part II of the Canada Corporations Act. It was established for the sole purpose of the flight-training program and its role was to acquire and make available aircraft, flight simulation devices and other ancillary capital assets to Bombardier for use in the Program. Milit-Air issued bonds in order to raise the $720 million needed to purchase the aircraft that it leased to Bombardier. Milit-Air’s ability to raise the money through a bond issue was based on the federal government’s unconditional lease payments for the aircraft. Accordingly, the money paid to Milit-Air was not for training, but for the bonds. As a result of delays in delivering the aircraft to Milit-Air, Bombardier was unable to provide the training by the date called for under the contract. In large measure, this created the problem identified by the Auditor General but the government was obliged to make annual payments to Milit-Air by virtue of a contract that could not be cancelled.[2]

OBSERVATIONS AND RECOMMENDATIONS

The Assistant Deputy Minister, Materiel, informed the Committee that the Department of National Defence accepts the Auditor General’s report on the NATO Flying Training in Canada. Mr. Williams went on to state that

The information [in the Report] is factual, logical, and well presented. We agree with the conclusions and are acting on the recommendations.

The Committee welcomes the Department’s positive response to the audit and is pleased to see that it is acting on the recommendations, which the Committee firmly supports. Nevertheless, several issues arising from the Committee’s review of the report and its hearing with witnesses remain of concern.

The audit found that due to restrictive terms in the contract and start-up problems, the Department had paid approximately $65 million in training costs for training that had not yet been received. Mr. Williams assured the Committee that the contract required Bombardier to make up any training shortfall over the life of the contract and that the Department and Bombardier are working together to schedule this additional training into the contract. He also indicated that if all of the shortfall was not made up, the Department would “get equal compensation in order to equate that with the value of the lost [training] slots.”

While the Committee accepts Mr. Williams’ assurances, it would like to see these assurances presented in a more concrete form. The challenges involved in scheduling the additional training should not be underestimated and finding a resolution will involve careful planning. It is significant that although Mr. Williams provided assurances, he was not able at the time of the meeting to demonstrate precisely how the problem will be eliminated. The Committee expects that the details will emerge as work with the primary contractor progresses, and therefore recommends:

RECOMMENDATION 1

That the Department of National Defence work closely with the prime contractor for the NATO Flying Training in Canada program to produce an action plan that will demonstrate how and when unused training that has been paid for will be made up. This plan must include milestones and target implementation dates, and be tabled with the Committee no later than 31 October 2003.

The Department and its prime contractor may find that it is not possible to schedule the additional training into the contract. It was prudent, therefore, for Mr. Williams to raise the possibility that payments made for unused training could be recouped. The Committee believes that the Department should not wait to see if all unused training could be rescheduled and accordingly recommends:

RECOMMENDATION 2

That the Department of National Defence begin immediately to explore opportunities to recoup part of monies paid for unused training, and table a status report on this effort at the same time that it produces an action plan for scheduling additional training.

The NATO Flying Training in Canada program is innovative in many respects and is virtually without precedent. While the Department is not to be faulted for developing an alternative to purchasing its own aircraft and providing the training itself, the Committee believes that suitable guidance would have eliminated many of the shortcomings associated with the present contract. It is noteworthy that following the 1999 audit, the previous Auditor General recommended that the Treasury Board Secretariat develop training for large service contracts for multi-year terms. It is therefore equally disappointing to learn that progress in implementing this recommendation has been limited. In the meantime, Mr. Williams predicted that there are going to be “more and more long-term contracts with industry.” Given that the use of this type of contract will become more widespread among government departments and agencies, the Committee recommends:

RECOMMENDATION 3

That the Treasury Board Secretariat establish a timeline to develop and implement guidelines and training for negotiating large service contracts covering multi-year terms and communicate this timeline to the Committee no later than 31 December 2003.

The Committee is concerned that the Department may move ahead without fully identifying and assimilating the lessons to be derived from its experience and sharing them with others. Consequently, the Committee recommends:

RECOMMENDATION 4

That the Department of National Defence immediately initiate a lessons-learned exercise based on the NATO Flying Training in Canada program and contract, that it not begin negotiations on, or enter into any large, multi-year service contracts until this exercise has been fully completed and steps taken to share the results with Treasury Board Secretariat and Parliament.

The NATO Flying Training in Canada program bears some resemblance to major Crown projects. Major Crown projects display two defining features: they are valued at $100 million or more, and they represent high risk. [3] Mr. Williams argued that the Program was not designated a major Crown project because it is a service contract rather than a contract for the purchase of goods. Government policy does not make such a distinction but, as Mr. Williams pointed out, the Department “essentially managed [the Program] in many ways consistent with” major Crown projects. Similarities included “the same kind of Treasury Board involvement” and the presence of certain internal review mechanisms.

Major Crown projects must undergo a special approval process with Treasury Board. Two forms of approval are required: a preliminary project approval, followed by an effective project approval. Mr. Williams may have been referring to this process when he indicated that the Department of National Defence “had two Treasury Board submissions” concerning the NATO Flying Training in Canada program.

Treasury Board policies require departments to report the following types of information on their major Crown projects to Parliament each year:

·       A description of the program,

·       The leading and participating departments and agencies,

·       Total expenditures to date and planned expenditures for future years to the completion of the project,

·       A list of prime and major sub-contractors,

·       Major milestones, and

·       Progress reports and explanations of variances.

This specific information does not appear in the Department’s performance reports with regard to the Program, although other forms of information do. It is the Committee’s belief that the Program fits the definition of a major Crown project and would benefit from the higher level of scrutiny and management regime attached to such status. Above all, status as a major Crown project would ensure that Parliament receives the kinds of information listed above. The Committee accordingly recommends:

RECOMMENDATION 5

That the NATO Flying Training in Canada program be deemed a major Crown project.

Major Crown project status should go a long way towards ensuring that Parliament has the financial and performance information it needs to scrutinize this area of the Department’s activities. Regardless of this, the Committee notes that the current information being provided to Parliament by the Department make it difficult to fully understand and assess the Program.

In the Department’s performance report for the period ended 31 March 2002 (its most recent) the Program is described in a table of Alternative Service Delivery (ASD) initiatives. Readers are given a description of the Program, its objectives and results, and an Internet link. The three objectives of the Program do not include what might be seen as its most important one: meeting the Canadian Air Force’s needs for trained pilots. Results are presented in a positive light: no mention is made of difficulties identified by the audit. The link leads to a dedicated Web site for the NATO Flying Training in Canada program, which consists of promotional material that offers little insight on actual performance. This is in marked contrast to directions contained in Guidelines for Preparing Departmental Performance Reports 2001-2002 issued by the Treasury Board Secretariat. The Guidelines inform departments of an “emphasis on the need to discuss risks and challenges your organization faced in delivering on your commitments” as well as a need for “balanced” reporting.[4]

The Committee believes that reporting information in ways that conform to the guidance supplied by the Treasury Board Secretariat would greatly assist Parliament in its ongoing efforts to assess the value of, and the outcomes delivered by the Program. The Committee therefore recommends:

RECOMMENDATION 6

That the Department of National Defence, in line with the guidance provided by the Treasury Board Secretariat of Canada, take steps to improve its performance reporting with regard to the NATO Flying Training in Canada program beginning with the Department’s performance report for the period ending 31 March 2003. Reports must reference the Program’s performance in meeting the needs of the Air Force for trained pilots.

CONCLUSION

Canada has the fortunate reputation of having among the best-trained pilots of any air force in the world. These pilots have given admirable service to this country and to the ideals for which it stands. These are traditions that must be preserved well into the future.

In developing the NATO Flying Training in Canada program, the Department of National Defence has found an innovative way of training its pilots. This program promises to showcase the talents of Canadian air force instructors and the skills and ingenuity of the private sector participants. Every effort should me made to ensure that this program succeeds in all of its dimensions including that of saving money for the Canadian government and Canadians.

Provided that the Department of National Defence acts quickly and decisively to implement the Auditor General’s recommendations as well as those put forward in this report, the Committee believes that the NATO Flying Training in Canada will surpass all of its objectives.

In closing, the Committee notes that the audit report on the NATO Flying Training in Canada was contained in a series of follow-up audits forming the first status report issued by the Auditor General of Canada. These follow-up audits closely resemble full‑scale audits and form an important new accountability tool available to Parliament. Status reports should also assist departments and agencies in assessing their progress towards fulfilling audit recommendations that they have accepted. The Committee wishes, therefore, to congratulate the Auditor General and her staff on this innovative step, and looks forward to future status reports.

Pursuant to Standing Order 109, the Committee requests that the government table a comprehensive response to this report.

A copy of the relevant Minutes of Proceedings (Meeting Nos. 18, 33 and 34) is tabled.

 

Respectfully submitted,




JOHN WILLIAMS, M.P.
Chair