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37th PARLIAMENT, 2nd SESSION

Standing Committee on Public Accounts

EVIDENCE

CONTENTS

Wednesday, February 26, 2003

1540

The Chair (Mr. John Williams (St. Albert, Canadian Alliance))

Ms. Sheila Fraser (Auditor General of Canada, , Office of the Auditor General of Canada)

The Chair

Mr. Alan Williams (Assistant Deputy Minister, Materiel, Department of National Defence)

1545

1550

The Chair

Mr. Alan Williams

The Chair

Ms. Sheila Fraser

The Chair

Ms. Sheila Fraser

The Chair

Mr. Alan Williams

The Chair

Mr. Alan Williams

The Chair

Mr. Philip Mayfield (Cariboo—Chilcotin, Canadian Alliance)

1555

Mr. Alan Williams

Mr. Philip Mayfield

Mr. Alan Williams

Mr. Philip Mayfield

Mr. Alan Williams

Brigadier General E.G. (Gaston) Cloutier (Director General Air Personnel, Department of National Defence)

Mr. Philip Mayfield

Mr. Alan Williams

Mr. Philip Mayfield

Ms. Sheila Fraser

Mr. Philip Mayfield

Ms. Sheila Fraser

Mr. Philip Mayfield

Ms. Sheila Fraser

Mr. Philip Mayfield

Ms. Sheila Fraser

1600

Mr. Philip Mayfield

Mr. Alan Williams

Mr. Philip Mayfield

Mr. Alan Williams

The Chair

Mr. Odina Desrochers (Lotbinière—L'Érable, BQ)

Mr. Jim Richardson (Director, Major Service Delivery Procurement, Department of National Defence)

1605

Mr. Alan Williams

Mr. Odina Desrochers

Mr. Alan Williams

Mr. Odina Desrochers

Mr. Alan Williams

Mr. Odina Desrochers

Mr. Jim Richardson

1610

The Chair

Ms. Sheila Fraser

The Chair

Mr. Alan Williams

The Chair

Mr. Alan Williams

The Chair

Mr. Alan Williams

The Chair

Ms. Sheila Fraser

Mrs. Wendy Loschiuk (Principal, Office of the Auditor General of Canada)

The Chair

Mr. Steve Mahoney (Mississauga West, Lib.)

Mr. Alan Williams

Mr. Steve Mahoney

Mrs. Wendy Loschiuk

Mr. Steve Mahoney

Mr. Alan Williams

Mr. Steve Mahoney

Mr. Alan Williams

Mr. Steve Mahoney

The Chair

Ms. Sheila Fraser

1615

Mr. Steve Mahoney

Ms. Sheila Fraser

Mr. Steve Mahoney

Ms. Sheila Fraser

Mr. Steve Mahoney

Mr. Alan Williams

Mr. Steve Mahoney

Mr. Alan Williams

The Chair

Ms. Sheila Fraser

1620

The Chair

Mr. Jim Richardson

The Chair

Ms. Judy Wasylycia-Leis (Winnipeg North Centre, NDP)

Mr. Alan Williams

1625

Ms. Judy Wasylycia-Leis

Mr. Alan Williams

Ms. Judy Wasylycia-Leis

Mr. Alan Williams

The Chair

1630

Mr. Alan Williams

The Chair

Mr. Alan Williams

The Chair

Ms. Val Meredith (South Surrey—White Rock—Langley, Canadian Alliance)

Mr. Alan Williams

Ms. Val Meredith

Mr. Alan Williams

Ms. Val Meredith

Mr. Alan Williams

Ms. Val Meredith

Mr. Alan Williams

Ms. Val Meredith

Ms. Sheila Fraser

Mrs. Wendy Loschiuk

The Chair

Mr. Roger Gaudet (Berthier—Montcalm, BQ)

1635

Mr. Alan Williams

Mr. Roger Gaudet

Mr. Alan Williams

The Chair

Mr. Alan Williams

The Chair

Mr. Roger Gaudet

Mr. Alan Williams

Mr. Roger Gaudet

Mr. Alan Williams

Brigadier General E.G. (Gaston) Cloutier

The Chair

Ms. Sheila Fraser

1640

The Chair

Mr. Tony Tirabassi (Niagara Centre, Lib.)

Ms. Sheila Fraser

The Chair

Mr. Alan Williams

Mr. Tony Tirabassi

Ms. Sheila Fraser

Mr. Tony Tirabassi

Mr. Alan Williams

The Chair

Mr. Alan Williams

The Chair

Mr. Tony Tirabassi

Mr. Alan Williams

1645

The Chair

Mr. John Finlay (Oxford, Lib.)

The Chair

Mr. Steve Mahoney

The Chair

Mr. Steve Mahoney

The Chair

Mr. Steve Mahoney

The Chair

Mr. Steve Mahoney

The Chair

Mr. Alan Williams

The Chair

Mr. Alan Williams

The Chair

Mr. Alan Williams

The Chair

Mr. Alan Williams

The Chair

1650

Ms. Sheila Fraser

The Chair

Ms. Sheila Fraser

The Chair

Ms. Sheila Fraser

The Chair

Mr. Alan Williams

The Chair

Mr. Alan Williams

The Chair

Mr. Alan Williams

The Chair

Mr. Alan Williams

The Chair

Mr. Alan Williams

The Chair

Mr. Alan Williams

The Chair

Mr. Alan Williams

The Chair

Mr. Alan Williams

The Chair

Mr. Alan Williams

The Chair

Mr. Alan Williams

The Chair

Mr. Hugh McRoberts (Assistant Auditor General, Office of the Auditor General of Canada)

The Chair

Mr. Hugh McRoberts

Mr. Alan Williams

Mr. Hugh McRoberts

The Chair

Mr. Hugh McRoberts

The Chair

Mr. Hugh McRoberts

The Chair

Mr. Alan Williams

The Chair

Mr. Alan Williams

The Chair

Mr. Alan Williams

1655

The Chair

Mrs. Wendy Loschiuk

The Chair

Mr. Alan Williams

The Chair

Mr. Steve Mahoney

The Chair

Mr. Steve Mahoney

The Chair

Mr. Alan Williams

The Chair

Mr. Philip Mayfield

Ms. Sheila Fraser

Mr. Philip Mayfield

Mr. Alan Williams

Mr. Philip Mayfield

Mr. Alan Williams

1700

Mr. Philip Mayfield

Mr. Alan Williams

Mr. Philip Mayfield

Ms. Sheila Fraser

Mr. Hugh McRoberts

Mr. Philip Mayfield

Mr. Hugh McRoberts

The Chair

Mr. John Finlay

The Chair

Brigadier General E.G. (Gaston) Cloutier

Mr. John Finlay

Brigadier General E.G. (Gaston) Cloutier

Mr. John Finlay

The Chair

Mr. Odina Desrochers

1705

Mr. Alan Williams

Mr. Odina Desrochers

Mr. Alan Williams

Mr. Odina Desrochers

Mr. Alan Williams

Mr. Odina Desrochers

The Chair

Mr. Odina Desrochers

Mr. Alan Williams

The Chair

Mr. Steve Mahoney

1710

Mr. Alan Williams

Mr. Steve Mahoney

Mr. Alan Williams

Mr. Steve Mahoney

Mr. Alan Williams

Mr. Steve Mahoney

Mr. Alan Williams

Mr. Steve Mahoney

Mr. Alan Williams

Mr. Steve Mahoney

Mr. Alan Williams

The Chair

1715

Mr. Alan Williams

The Chair

Ms. Sheila Fraser

Mrs. Wendy Loschiuk

The Chair

Mr. Alan Williams

The Chair

Mr. Alan Williams

The Chair

Mr. Alan Williams

The Chair

Ms. Val Meredith

Mrs. Wendy Loschiuk

The Chair

Mrs. Wendy Loschiuk

Ms. Val Meredith

Mrs. Wendy Loschiuk

Ms. Val Meredith

The Chair

Ms. Sheila Fraser

Ms. Val Meredith

Mr. Alan Williams

1720

Ms. Val Meredith

Mr. Alan Williams

The Chair

Ms. Val Meredith

The Chair

Mr. Roger Gaudet

Mr. Alan Williams

Mr. Roger Gaudet

Mr. Alan Williams

Mr. Roger Gaudet

Ms. Sheila Fraser

Mr. Roger Gaudet

Ms. Sheila Fraser

Mr. Roger Gaudet

The Chair

Mr. Tony Tirabassi

Brigadier General E.G. (Gaston) Cloutier

1725

The Chair

Brigadier General E.G. (Gaston) Cloutier

The Chair

Mr. Philip Mayfield

The Chair

Mr. Philip Mayfield

The Chair

Ms. Sheila Fraser

The Chair

CANADA

Standing Committee on Public Accounts

NUMBER 018

2nd SESSION

37th PARLIAMENT

EVIDENCE

Wednesday, February 26, 2003

[Recorded by Electronic Apparatus]

¹ (1540)

[English]

The Chair (Mr. John Williams (St. Albert, Canadian Alliance)): Good afternoon, ladies and gentlemen.

The order of the day is, pursuant to Standing Order 108(3)(e), consideration of chapter 4 “National Defence--NATO Flying Training in Canada” of the September 2002 report of the Auditor General of Canada.

Our witnesses today from the Office of the Auditor General are Ms. Sheila Fraser, the Auditor General of Canada, Mr. Hugh McRoberts, the Assistant Auditor General, and Wendy Loschiuk, principal. From the Department of National Defence we have Mr. Alan Williams, Assistant Deputy Minister, materiel;, Mr. Jim Richardson, director, Major Service Delivery Procurement, Brigadier General Gaston Cloutier, director general of air personnel, and Robert Bertrand, director, Air Comptrollership and Business Management.

Without further ado, we will have the opening statement by the Auditor General.

Ms. Fraser, please.

Ms. Sheila Fraser (Auditor General of Canada, , Office of the Auditor General of Canada): Thank you, Mr. Chair.

We thank you for the opportunity to meet with the committee today to discuss our September 2002 status report chapter on the NATO flying training program in Canada. As you mentioned, I am accompanied by Hugh McRoberts, Assistant Auditor General, and Wendy Loschiuk, a principal, who are both responsible for our audits of National Defence.

We first reported on this program and others in our 1999 report in chapter 27, entitled “National Defence--Alternative Service Delivery”. While we followed up on most of that chapter in 2001, the size and nature of this particular program warranted separate attention.

[Translation]

Our follow-up audit in 2002 focussed on the management and implementation of this $2.8 billion program during its first two years of operation. We expected that military pilot training would be delivered as specified in the contract and in a cost-effective way.

We reported that National Defence had used about 41 percent of the training it had paid for. The difference between what was paid for and what was used was about $65 million. The Department views this, in essence, as a prepaid expense. Therefore, we believe it is important for the Department to demonstrate to Parliament that this expense is accounted for and value recouped.

Better contract management up front may have helped prevent some of the problems encountered later. Even though this program had many characteristics of a major Crown project, it was treated as a service delivery contract. No risk management process was set up and no system to assess performance. However, we were glad to see by the end of our audit that Public Works and Government Services Canada was making some changes that were consistent with managing a major Crown project.

Putting in place a solid governance arrangement would be a good first step towards resolving some of the management issues. At the time of our audit, the Department was considering changes to the program's management and accountability framework. We would like to see a plan that guides the management of this program from a focus on start-up to a focus on steady-state operations.

[English]

We did find that National Defence, Public Works and Government Services Canada, and the contractor were working to find solutions to outstanding problems. While the Department of National Defence and the contractor have stated that all concerns about unused training will be resolved in the future, we remain to be convinced. During our audit it was not clear when National Defence would get the remaining training or if it would get it without some additional costs. We believe Parliament should be given clear explanations as to how these concerns are being resolved.

Long-term contracts like this one should have some flexibility to accommodate changes when and if they happen. It's hard to imagine that needs will not change by 2019. One cannot be certain that the air force will have the same pilot training needs in 10 years that it had in 1998, when the contract was signed. Nevertheless, that's what the department is committed to, and if changes are needed down the road, all parties will have to sit down and renegotiate the contract.

The committee might want to consider asking National Defence questions such as these. Is there an agreement in place with the contractor to draw down the $65 million in prepaid training expenses? How will the department ensure that all future training it has paid for will be used? How will it report on the program's performance? Has the Department documented the lessons learned from this program and prepared an action plan, as it indicated it would in response to our recommendations?

Mr. Chair, that concludes our opening statement . We would be pleased to answer any questions the committee might have.

The Chair: Thank you very much, Madam Fraser.

Now we'll turn to Mr. Williams on behalf of the Department of National Defence.

Mr. Alan Williams (Assistant Deputy Minister, Materiel, Department of National Defence): Thank you Mr. Chair, honourable members, Auditor General, ladies and gentlemen,

I am pleased to be here today to talk about the NATO flying training program, NFTC, in the observations of the Auditor General. I am always pleased to talk about NFTC, because it is an innovative, exciting program that demonstrates how industry and government can collaborate, overcome risks, and successfully implement a first-class military pilot training program that is the envy of other nations.

Let me first say that we accept the Auditor General's report on NFTC. The information is factual, logical, and well represented. We agree with the conclusions and are acting on the recommendations. I'd like to thank the audit team of Hugh McRoberts, Wendy Loschiuk, Richard Delano, James Harris, and Chris MacDonald for their contribution to this excellent report.

[Translation]

As the Auditor General has pointed out, NFTC is an innovative program. It features significant collaboration, risk taking and risk sharing between industry and government. It also represents a tremendous advance in training technology and training concepts. NFTC's modern military aircraft, high fidelity simulators and computer-assisted training are essential for training today's military pilots. Matched with the vast airspace at Moose Jaw Saskatchewan and Cold Lake Alberta, this training package has become very attractive to other nations. As an indication of NFTC's success, Canada has sold about $1.1 b in training to the United Kingdom, Denmark, Italy, Singapore and Hungary. Even more countries are interested in joining the program, so there is indeed a very bright future for NFTC.

¹ (1545)

[English]

In addition, NFTC will provide significant economic benefits to Canada, the western region in particular. For example, Bombardier committed themselves to the creation or maintenance of over 5,600 person years of employment over the duration of this contract.

I'd like to comment on the Auditor General's conclusions and recommendations. As I've indicated, we concur with them, but we feel that further explanation is useful to fully understand the program. Specifically, I will address the issues of training, governance, and lessons learned.

First I would like to address the concern that National Defence paid $65 million for training not received in the first two years of the program. The principal cause of this training shortfall was late production and delivery of the Harvard aircraft, one of the two aircraft types used in NFTC. Once they were delivered, there were technical problems that reduced the number of Harvards we could use for training. These problems have been resolved. The aircraft is now performing well, and we have steadily increased the number of students starting training from 42 in 2000 to 96 last year and 142 in 2002. Since October of last year Bombardier has been providing sufficient Harvard aircraft to meet our daily training needs.

For the training paid, but not yet received--and I stress the word yet--our contract requires Bombardier to make up any training shortfall over the balance of the 20-year program. Bombardier has committed itself to this. We are working with them to schedule this additional training. I can assure you that Bombardier will make up any shortfall by providing extra training or adding equivalent value to the program.

While we will receive the value of this undelivered training, it can be asked why the contract requires payment even if the full training is not delivered each year. The answer has to do with an understanding of the unique risk situation of the agreement. From Canada's perspective, to make NFTC the best option, we had to recoup at least $140 million in offsets from foreign participants. I am pleased to note that to date we have already recouped approximately $412 million. When Canada signed the contract with Bombardier in 1998, Bombardier had a risk that was $250 million to $300 million, twice as great as ours. They needed far more sales than just the initial contract with Canada. In fact, they needed far more sales than we did in order to make their bottom line. It is quite remarkable that Bombardier accepted this risk, because only Canada could agree to expand NFTC. Bombardier put its future in our hands. The officers at Bombardier showed great faith in Canada and the potential of NFTC. They accepted the need for risk-taking to make NFTC successful. With the initial sales to the UK, Denmark, and Singapore, Canada has made its business case, and we are in the black. Even with the additional sales to Italy and Hungary, Bombardier is just now starting to break even.

With this level of risk assumed by Bombardier, we can't expect that normal contract control mechanisms would apply. Innovation and risk-taking were considerations in setting up the contract, and the contract reflects this. Nevertheless, all training value will be delivered. We have the contractual obligation and the commitment from Bombardier that they will make it up. But I think even more importantly, we have their demonstrated cooperation and integrity in moving NFTC to its world-class status.

[Translation]

The Auditor General expresses concerns with the governance of the NFTC program and the needs for an appropriate management framework at the outset of projects.

There is no doubt that the NFTC is a complex program and has presented from the start significant governance challenges. It is important to keep in mind that the program involves numerous organizations in DND and the private sector, is delivered at multiple sites (Moose Jaw and Cold Lake) and has program management oversight responsibilities centred in Mirabel and Ottawa. To overcome these complexities, we formed a dedicated project management team to oversee its implementation.

We consulted extensively with other government departments to ensure all issues were well addressed. We hold regular management and review sessions with all stakeholders in industry, the air force and the government. There are regular contract and performance reviews at each level right from the on-site staffs up to reviews with myself, General Campbell, the Chief of Air Staff, and the President of Bombardier Aerospace Defence Services.

As a result, as NFTC continues to evolve towards a steady-state training operation, so too does our management and governance structure.

¹ (1550)

[English]

We agree with the Auditor General that the lessons learned from NFTC should be documented and shared. We are completing this activity, and by the end of March will post on line the lessons learned from this project. We have already begun using these lessons in other projects. The Auditor General recommends that contracts similar to NFTC have payment tied to performance. We agree with this principle and will apply it where it makes sense.

In summary, we all recognize that NFTC has had start-up problems on the road to success. We have noted the concerns expressed by the Auditor General and are acting on them.

Thank you very much.

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

Before I open it up to questions, I just want to get something straight in my mind. Bombardier were supposed to supply the planes, but they didn't. DND were buying training slots, and you were obliged to start paying for these training slots from a certain date. So you are now paying Bombardier for training slots, even though Bombardier have not supplied the planes so you can use these training slots. Is that conceptually the problem?

Mr. Alan Williams: That is factual. There are reasons that we can get into, but those are facts.

The Chair: Yes, I'm sure the members will want to get into the reasons.

Do you agree with that, Ms. Fraser?

Ms. Sheila Fraser: Yes, essentially, Mr. Chair. There were many reasons the training slots were not used.

The Chair: But because the planes weren't there.

Ms. Sheila Fraser: In part because the planes weren't there.

The Chair: You say, with this level of risk assumed by Bombardier, we can't expect a normal level of contract control mechanism. Why were you concerned about Bombardier's risk? Aren't you just looking after the government?

Mr. Alan Williams: This is a deal between the government and Bombardier. In order--

The Chair: They can speak for themselves. You speak for the government and you strike a deal.

Mr. Alan Williams: Absolutely, and the deal would not have been struck if we had wanted to put in place the typical stipulations of any contract where the risk is far less for the private sector than it is in this case.

The Chair: Well, I still don't know why you're concerned about Bombardier's risk. Maybe somebody wants to ask these questions.

We'll turn it over to Mr. Mayfield for eight minutes.

Mr. Philip Mayfield (Cariboo—Chilcotin, Canadian Alliance): I'd like to begin with the Auditor General's report 4.66, in which is quoted an internal departmental study released in April, 2002:

National Defence identified many of the issues being reviewed in this audit, specifically: no single point of accountability for the program; poorly defined roles and responsibilities with no person or position clearly responsible for dealing with unique governance issues; lack of communication between all levels and slow response to local base concerns; disjointed or non-existent business planning; lack of understanding of prime contractor responsibilities; a limited number of personnel who understand the terms of NATO Flying Training in Canada contract; lack of skilled personnel to address contracted service problems; lack of succession planning; and poor Air Force control over the pilot production process.

Mr. Williams, I had hoped we might discuss these issues in a way that would allow the committee to assist you and the department to deal with what the Auditor General describes as a serious concern, and what we have, in my mind, is an absolute whitewash you have brought to this committee, and I'm offended by this. As you were talking about the great improvement of numbers, Esprit de Corps, the favourite reading of so many military personnel, says, and I think this is the October 2002 issue:

Without enough qualified candidates enrolled in their pilot program, this year DND simply gave away spots on the course to any RMC student who wanted to sign up. Many of these cadets who earned their wings this year in Portage La Prairie, Manitoba, will never again sit behind the controls of an aircraft. The majority will, in fact, fulfil their obligatory post-university service in either army or navy uniforms.

I would like to know how many of these spots were given away in such a manner, simply to add to the numbers, it would seem to me.

¹ (1555)

Mr. Alan Williams: The points you just raised are factually incorrect. We are not talking about the NFTC program at all, we're talking about some slots that RMC cadets were given in what we call the CFTS program, which is not part of NFTC. That program--

Mr. Philip Mayfield: Are these pilot training programs we're talking about?

Mr. Alan Williams: This is a front-end to NFTC that includes some particular areas one does not have to be a pilot for.

I turn to the General for specifics, but the comments made that seem to suggest we gave away slots on the NFTC program, which we're talking about here today, are factually incorrect.

Mr. Philip Mayfield: So you are saying categorically none of this money went to any of those students who are not qualified to fly.

Mr. Alan Williams: That is correct. Those students to whom he is referring were participating in the front-end CFTS part, not NFTC.

General, if you want to elaborate a bit on that, please go ahead.

Brigadier General E.G. (Gaston) Cloutier (Director General Air Personnel, Department of National Defence): The only thing I'm going to say on this is that the statement is incorrect. Anyone who graduates with wings on their chest from the NFTC program proceeds to operational training units and then to squadrons.

Mr. Philip Mayfield: Well, if things are going so smoothly, how can there be such a shortage of pilots that there are bonuses being paid to those who would enrol to entice them to come back? Yet there are not the candidates coming through this training program. Why is that?

Mr. Alan Williams: Let me talk about the program, and then I'll let the general talk about the air force and pilots.

I never claimed things are going perfectly. What I have said, which I stand by, is that there have been dramatic improvements over the two years since the program was launched. I quoted some statistics at the beginning on the number of Canadian students--

Mr. Philip Mayfield: I certainly got the impression that all that was lost is being regained. I think that's what you said, that what was lost at the front is going to be regained at the back, which is certainly in contradiction with what the Auditor General said. The Auditor General said the only way she could see to regain this money was to threaten termination of the contract, which is a pretty serious measure, and frankly, may be warranted. Am I correct when I quote you that way, Madam Fraser?

Ms. Sheila Fraser: That's a bit of a misinterpretation.

Mr. Philip Mayfield: You did use the words “termination of contract”.

Ms. Sheila Fraser: We did discuss termination of contract, because the contract was established in such a way that it gave no mechanism to adjust, and the only mechanism that was available was termination of contract. We were concerned that the government had paid for spots it had not been able to use and that there needed to be management of the program to establish what had been paid for and not received, and then to deal with how we were going to recover those sums of money.

Mr. Philip Mayfield: In your mind, has the process for recovering those sums of money been explained satisfactorily?

Ms. Sheila Fraser: We are not aware of what the process is. Today you might want to ask the department what process has been established and what the plan is to recover those sums of money.

Mr. Philip Mayfield: I'm not sure how far down the road I can go, with the time I've got left, but, Auditor General, in paragraph 4.60 you write that although the NFTC program bore many of the characteristics of a major crown project, it was not managed like one. What difference would it have made if the program had been managed as a major crown project, and is it too late to have it managed in this way?

Ms. Sheila Fraser: I think we're all going to become quite familiar with major crown projects, unfortunately. One of the issues, of course, is the reporting and the rigour of oversight given by Treasury Board and others on projects like this. These are projects, generally, that are over $100 million and are deemed of high risk. As we mentioned, this program has many of those characteristics, but was not designated a major crown project.

º (1600)

Mr. Philip Mayfield: Then I'd like to go back. Since when has the loss of $65 million been an acceptable start-up challenge? Why wasn't this project managed like a major crown project? It sounds as if we're talking some of the same language as in the Monday meeting on gun control. Could you answer that please, Mr. Williams?

Mr. Alan Williams: I wasn't there at that meeting on gun control.

Mr. Philip Mayfield: I'm sure you weren't.

Mr. Alan Williams: But I can talk about this.

There are a couple of key points to understand. I am not in any way, shape, or form minimizing the fact that we spent $65 million for which we did not get the training. What I have said is that we have contractually and in writing confirmed their commitment to make it up. We're currently working on a plan that will ensure that we get the extra training we require over the duration of the program.

Second, the Auditor General is quite right in saying this was not officially designated a major crown project, but I would argue that's a question of definition, because it is by definition a service contract. Major crown projects by the Treasury Board, as she has stated, for $100 million with complexity are typically goods you deliver; when you're buying something, that is typically designated a major crown project. Having said all that, I would argue that we have essentially managed it in many ways consistently with that. We have had the same kind of Treasury Board involvement, we've had two Treasury Board submissions, so ministers have known what's going on, at the outset and shortly thereafter, we have structured the internal review mechanisms--

The Chair: I think we're getting your point there, Mr. Williams, and we're going to move on.

Thank you, Mr. Mayfield.

[Translation]

Mr. Desrochers, please, you have eight minutes.

Mr. Odina Desrochers (Lotbinière—L'Érable, BQ): Thank you, Mr. Chairman, Ms. Fraser and Mr. Williams.

Once again, we are faced with issues on the use and management of several billions of dollars in federal government money. My first question is for Mr. Richardson. Let's look at this 20-year contract that represents a $2.8 billion commitment for the Canadian government. What were the criteria, what specifications did you receive from the Department of National Defence that required you to grant a 20-year contract worth $2.8 billion, and that, within the first two years of the contract, had already led to problems with compliance by the service provider as to what was to be delivered to National Defence?

[English]

Mr. Jim Richardson (Director, Major Service Delivery Procurement, Department of National Defence): The NATO flying training contract, as Mr. Williams has said, is a collaborative arrangement with industry. We worked with industry to meet a NATO requirement. That required the development of a syllabus, a training program, and the development of the support structure and the cost for that support structure. So we worked very closely with Bombardier in developing our requirements. The air force determined the training requirements, the number of students, the type of training, the courses that were required, and those were integrated into the contract. NATO was looking for a 20-year program, and that was the driving force behind the length of this particular contract. We went in great detail in the contract into the specifications, what the contractor's requirements are. In setting up the structure, we found the most economical way to deliver the training was for industry to acquire the assets, to acquire the aircraft. That involved some financing and, in effect, using the contract as as security for the investment. You have to get the program up and running before it's completely attractive to foreign nations, and it was crucial that we had foreign nations in the program to make this cost-effective. So there was some start-up investment required, and that involved putting the contract in place and setting the financing arrangements in place, which, in part, generated the need for some of the fixed payments.

So as Mr. Williams has said, the payments were made. You could consider those an investment in the program, and we're now in a position where Bombardier is meeting the contractural requirements.

º (1605)

Mr. Alan Williams: I'd like to add one comment about the 20 years. I think you're going to find more and more efforts to have long-term contacts with industry, and providing you have the right off-ramps and performance measures, having a longer-term contract with industry allows them a sufficient time to make a reasonable return on their investment for their shareholders.

[Translation]

Mr. Odina Desrochers: I understand that you may have faced restrictions or constraints due to NATO requirements, but that does not explain that only 41% of the training was paid for. Where did the money go? The contract, the agreement, the difference between the client and the supplier, where does this $65 million go? Is it common practice to give money to a supplier before the supplier even delivers the services?

[English]

Mr. Alan Williams: Let me again try to elaborate. In order to make this a viable deal, the private sector was borrowing the money to acquire the assets. Part of that deal required them, of course, to have a reasonable guaranteed income stream to pay for it. So our payment structure has a number of elements to it. One of them is what we call our fixed firm payments. Those amount to about $62 million a year, to ensure that the assets are paid for and covered off. We started paying those when the assets started to arrive. The assets started to arrive before the students started to come, because one had to start up the program. It was compounded by the problems with the aircraft. So for both of those reasons, you had a payment structure that preceded the actual delivery of training.

[Translation]

Mr. Odina Desrochers: Okay, I fully understand that. It is possible that the contract contained amounts that were set aside for fixed assets with your supplier. But how is it that the Department of National Defence went to a supplier even before it knew...? I imagine there must be a waiting list for pilots. So how did you end up with a shortage of students, if you spent so much time planning and you gave so much thought to making this program something big for the Department of National Defence? Was there not a lack of planning somewhere?

[English]

Mr. Alan Williams: I don't think there's any lack of planning, but when you're talking about a multibillion dollar deal, with new syllabus and new training, a new turbo prop, and a new jet airplane, the issues were anticipated. We think, as a government, we have adequately covered ourselves to make sure there is value at the end that covers all our costs. We know as of this time that the alternatives for providing training to us are all more expensive than NFTC. In other words, any other offer to train pilots would have cost us about $700 million more than the status quo and about $300 million more than any of our best options at the time.

[Translation]

Mr. Odina Desrochers: Then I will go back to Mr. Richardson. If you were telling me that the amounts exceeded your forecasts, then how did you break this down over 20 years? Was there an amount set aside for training, and an amount set aside for fixed assets? Did you provide guarantees too? It's not clear.

[English]

Mr. Jim Richardson: You asked about specifications in the contract earlier. What we specified were numbers of student slots, numbers of students who had to be trained in a variety of courses, in a variety of phases over 20 years. That's largely the basis upon which the contractor is paid. There are four cost components of each of those phases. That's programmed in the contract. It's very clear, very specific. When aircraft aren't available at the beginning of the program, obviously, you can't train the number of students you had programmed, but the contract allows for that training to be made up, it allows for the fact that if you make these payments and the training isn't delivered, it will be delivered later on at no additional cost to the Crown. So it's completely within the context of the program, and I believe it's logical, when you consider the fact that you have to start the program and often on a program of this complexity, with new aircraft systems, it is difficult getting them up and running at the beginning.

º (1610)

The Chair: Excuse me, Mr. Desrochers.

You made a statement saying the training can be made up later on. Is that correct, Madam Fraser?

Ms. Sheila Fraser: At the time we did our audit we saw no evidence that the training would or could be made up. There are clauses in the contract such as “excusable delay”, and there was no definition or agreement on that. So this is one of the issues we brought up, that the contractor and the department had to work together to come to an agreement as to how much training would actually be recovered, how it was going to be recovered, and how it was going to be built into the program.

The Chair: So, Mr. Richardson, while you now have an opportunity to catch up the training later on, this sounds like an agreement made subsequent to the audit by the Auditor General. Am I right?

Mr. Alan Williams: No, that's not correct.

The Chair: Then the Auditor General was wrong.

Mr. Alan Williams: What I am saying is that section 20 of the contract provides for the recouping of the training--

The Chair: At a later time?

Mr. Alan Williams: At a later time. This is subsequent, and we do have a letter from Bombardier confirming this and committing themselves to make this up over the duration of the program.

The Chair: Madam Fraser, I wonder if you could take a look at section 20 of the contract and confirm these details for us.

Ms. Sheila Fraser: I could perhaps ask one of my colleagues, Wendy Loschiuk, to respond to that.

Mrs. Wendy Loschiuk (Principal, Office of the Auditor General of Canada): When we looked at the contract, the department did point out section 20, that there would be an option at some point in the future to talk about making up training. It was quite clear to us, and we reported that in the audit. What was not clear was how this was going to happen. During our audit we could not get explanations as to when it was going to occur or how the program, once it was fully staffed, was going to take on extra capacity to run through more students. That was something we reported as needing to be worked out.

The Chair: Okay.

Mr. Mahoney, eight minutes.

Mr. Steve Mahoney (Mississauga West, Lib.): Thank you. You can see by some of the theatrics that there's something in the water at the public accounts committee. People should be calm, like me.

What I'm hearing is that section 20 of the contract provided the opportunity for negotiation for the training to be made up, it didn't lay out the methodology or any specifics. It was simply a clause in the agreement was signed by both parties that would provide for that to be negotiated. Is that right?

Mr. Alan Williams: Yes.

Mr. Steve Mahoney: Thank you, but I'm more interested in a yes from the audit team.

Mrs. Wendy Loschiuk: Yes.

Mr. Steve Mahoney: So there seems to be much ado about nothing.

This is a $2.8 billion program in total, is that correct?

Mr. Alan Williams: It's actually $3.3 billion now, because subsequent to the initial contract, we have been successful in bringing in foreign participants.

Mr. Steve Mahoney: Over $3 billion, all in training, and $65 million of that was not used--

Mr. Alan Williams: As yet.

Mr. Steve Mahoney: --from the first contract. So it's a lot of money, but it's quite a small percentage of the overall contract. It's not lost. I heard Mr. Mayfield say $65 million has been lost, but it's simply recovered under the new agreement with Bombardier that they will provide that additional training.

The Chair: The Auditor General wants to make a comment, Mr. Mahoney.

Ms. Sheila Fraser: I'd just like to point out that we are pleased that since our audit there has been an agreement reached. At the time we did our audit the department did not know the value of the training, did not know the number of spots that had not been used, hadn't gone through the management of that, hadn't done the calculations, and had only, I think, begun discussion with the contractor. So we were trying to say they had to manage this. It would appear that since then they have reached some agreement, and I guess our question now is how that training is going to be recouped without any additional costs and whether there are going to be extra slots put in. How is it going to happen?

º (1615)

Mr. Steve Mahoney: You would agree that this money is not lost, the $65 million.

Ms. Sheila Fraser: I don't know how it's going to be recovered.

Mr. Steve Mahoney: Perhaps Mr. Williams will tell us how it's going to be recovered, but when you say recovered, that implies that it's lost, and I don't see any evidence that the money is lost. The training was not utilized to the full extent. What we need to know is how that training will be utilized?

Ms. Sheila Fraser: That is correct. We have paid for services we have not yet received. How are we going to receive those services?

Mr. Steve Mahoney: That's fair.

Mr. Williams.

Mr. Alan Williams: The process is a straightforward one. We're now working with the company and the air force, trying to get a close handle on the rate of pilot training that's needed. We will factor that into a schedule. Also, we have additional flexibility within the program that allows for us to use slots or sell slots to foreign countries, as appropriate. Of course, we are going to be doing a defence review, and the air force is going to be continuing to look at their needs. I think the Auditor General quite properly pointed out that over 20 years a lot can change, so we will be building into our forecasts that additional flexibility to make sure we either get the $65 million back in additional training or recoup in consideration in the event that those numbers vary over the next 15 to 20 years.

Mr. Steve Mahoney: I guess part of the concern is, and the Auditor General has raised the point, that you're designing a training program for today, when 10 years down the road there could be dramatic changes to technology and equipment.

As a bit of an aside, in meeting with the head of the NORAD department in Winnipeg, who happens to be an American general--he's the 2IC there, and we have a Canadian who is 2IC in NORAD in Colorado Springs--and he told us, given the same equipment, recognizing that Canadian jets are being upgraded and are not at the same level as the Americans', he would take a Canadian-trained pilot any day over an American-trained pilot. That was quite a compliment, I think, to this training regime. Hopefully, we'll get all our equipment upgraded to the level where it will be satisfactory.

But how do you design the training programs? You can have all kinds of changes. I assume you have to train with different types of weather, a desert scenario, a winter scenario, different kinds of problems, war, peace, all of that. How do you do it 10 years down the road? Is there a danger that there could be an overrun in the next level of the contract, where there's money that needs to be recouped?

Mr. Alan Williams: Let me make a few comments, and then I'll leave it to my colleagues to amplify.

The strength of the contract is that it does provide us with the flexibility and option to adjust for the training as it goes on, either by increasing the number of slots, as appropriate, or by selling slots to other countries, if that is in our best interest. So given the fact that this is a very complex deal, we have structured it with a company that is world-class to make this thing work. We are comfortable from that perspective.

I'd like to turn to the General and to Jim to elaborate a little on the nature of the training itself and the kinds of training one provides to the air force to make sure they get the high-quality pilots.

I would just make one comment first. I can't comment about Canada versus the U.S., but I can say, objectively, we have continued to see this program grow for one reason and one reason only. The pilots from foreign countries are telling each other that this is superb training and they should come on board. We would not have recouped $412 million for Canada had this not been the case. We have received over $1 billion of sales from foreign countries that are continuing to laud the success of the training provided in this program. That is objective evidence I can speak of.

The Chair: The Auditor General wanted to make a comment.

Ms. Sheila Fraser: I'd just like to bring a couple of elements to the discussion. As we note in our report, in paragraph 4.39, the contract sets a limit on the number of spots that can be sold. To date they have gone over and that has been waived, but there is a limit in the contract to the number of spots that can be sold. As well, I think it's important to recall that this program was designed to address the shortage of pilots, and so selling spots is not addressing that concern. And the billion dollars is obviously gross revenue; it is not clear to us if that covers the costs associated with it.

º (1620)

The Chair: Mr. Richardson.

Mr. Jim Richardson: I would just like to add a comment that the training provided by NFTC is modern, it uses digital equipment. This provides training for pilots well into the future, but it still has to be followed by operational training on specific aircraft. This training can lead to training on helicopters or multi-engineered craft in other programs. So it isn't necessarily the end in itself, but it provides a lot of the basic flying training that's required, regardless of the aircraft type.

The Chair: Thank you very much.

Ms. Wasylycia-Leis, eight minutes.

Ms. Judy Wasylycia-Leis (Winnipeg North Centre, NDP): Thank you, Mr. Chair.

I'm not an expert in this area, and I'm new to the committee, but based on what I've heard in the last half hour, it strikes me that something smells. I didn't hear any clear answers to the Auditor General's question about how $65 million worth of service will be recouped. I've heard long answers about sometime in the future being about to provide this training, which we're not certain will be needed, nor do we know how it will be needed and when it will be needed. We've heard from the Auditor General that this was for a specific purpose, it has a beginning, it has an end, but there's $65 million missing. All I'm hearing is that the services will be provided sometime in the future. I don't know if we're ever going to know. Based on this kind of accounting, this kind of reporting, how are we ever going to know that $65 million was couped? That's what I want to ask. Can you be more precise in regard to the Auditor General's very specific question. Unlike Steve Mahoney, I would suggest this is a lot of money. It's not nickels and dimes we're talking about. We're talking about a huge part of a program for which there should be accountability, and I don't get a sense that you've answered those questions or the Auditor General's recommendation.

Mr. Alan Williams: Let me very precise and as clear as I can. As I think we have said, $65 million is a very significant number, and I don't trivialize it, but if you think you can take a 20-year complex program like that and have it go year by year on schedule, you're wrong. That just won't happen. You are ordering sophisticated aircraft, sophisticated simulation equipment, you're bringing in a whole new syllabus, and you're starting to train people. If you expect us to be able to deliver a 20-year program like that and not have any deviations from year to year, I'm can tell you point blank, that will stifle any kind of innovation you ever want to achieve for the government.

Second, you can disregard this if you like, but the fact remains that as of today we have the most cost-effective training for our pilots, some $700 million less cost than had we kept with the status quo, even about $300 million less than had we done something different.

To get back to your problem with the $65 million, what I have said is that we have the mandate, we have the contractual obligation, an opportunity, and the commitment from the company to address it. We are currently working out balancing capability of the program delivery in respect of the flights with the air force's needs, in order to have a plan that'll extend from this year onward to recoup it. How the balance is going to play out, I don't know.

As to slot selling, which the Auditor General mentioned, she's quite right, there is a maximum, but that maximum is about 52 a year, something of that sort. To date I think we have sold 28. That 52 is nowhere near what we're going to need.

So from our perspective, if you give us the chance to take the program we have now brought back into ongoing working condition, we're now in the process of addressing the history. Our primary responsibility at the start was to get this thing going. Now we are delivering the right number of sorties, the right number of courses, we're about 70% filled, whereas at the beginning we were at 30% to 35%. So we are clearly moving on track to make this program what it's designed to be, and the commitment from us is that we're going to do it. We will report back on all these parameters on an annual basis, through our report on plans and priorities. And I welcome the Auditor General in regularly to see how well we're doing.

º (1625)

Ms. Judy Wasylycia-Leis: Well, fair enough, but I guess one of the questions we have to ask you today is, why is this happening again? According to the research we've been provided with from the Library of Parliament, this is not a new problem. You've had the problem of unused training capacity before. We've been given information on the Meaford Area Training Centre operating under a $40 million, five-year fixed-price contract and using only 43% of the capacity. The Canadian Aviation Training Centre operates under a $165 million contract, and has been consistently underused during the first six years of operations. But what you're saying is that the same problem still exists. You're still making miscalculations and signing contracts you should know you probably can't utilize in full. So we end up thinking this is a lovely lucrative contract to Bombardier, a company very close to the Prime Minister, and the public starts to wonder about all the issues here. You need to explain to us why you haven't learned from all your experiences, what lessons have been learned, and why this keeps happening again.

Mr. Alan Williams: I think it would be a gross mistake to equate Meaford or Goose Bay with this. Each one has its own dynamics. We can spend a great deal of time debating what happened in each one. NFTC isn't like anything else we've ever done. We have never gone into a program of this complexity, where the assets are owned by the private sector and there's a huge commitment by both parties to try to bring in foreign sales. It's a whole different ball game.

I dispute with you that it was mismanaged or we made huge mistakes or we're not learning. We're learning a great deal, but if you expect me to say, because we learned, everything is going to run absolutely perfect, I would defy anybody to do that.

The fact is that Bombardier's success in this program has been noted. They, in fact, are a serious contender for a program the U.K. wants to start up, probably within the next decade--which, by the way, doesn't hurt us at all. The success with National Defence translates into opportunities internationally. I can also point to General Dynamics, which built us radio systems for $1 billion, and was successful last year in doing the same thing for the U.K.

I'm not trivializing the $65 million, but I am saying, if you expect senior officials in government to try to make best use of the taxpayers' money, you have to understand that there's going to be some flexibility in how we go about doing our business. But we will account for every penny. We will make sure value for every penny of the taxpayers' money is delivered appropriately. It just may not happen in the rigorous, specific timeframes people would perhaps prefer to have.

Ms. Judy Wasylycia-Leis: Fair enough again, but there are other examples in your department that point to a disturbing trend. I'm not the expert in this, but from speaking to others, I understand there are issues with a $125 million satellite system, a $10 million loss because we couldn't close a contract dealing with supply chain, another $23 million dealing with another airplane--the list goes on. So it looks to us as if this department has some serious problems in fiscal management. Would you not agree that there should be a complete review of the Department of National Defence, so that we can clear the air, understand the depth of mismanagement, and start to redirect some of this money to the needs of the armed forces in respect of living and working conditions?

Mr. Alan Williams: The only comment I will make is that I would be very pleased if the committee wanted to examine each one of these, because I am not defensive or hesitant to explain what happened in each one of these cases. I would certainly make the comment that to infer from these kinds of cases that somehow things are out of control is grossly misleading. If you compare our performance against any government, we have nothing to be ashamed of or embarrassed about.

The Chair: Thank you very much, Ms. Wasylycia-Leis.

Mr. Williams, you did mention that the assets are held in the private sector. Am I correct in saying that?

º (1630)

Mr. Alan Williams: That's correct.

The Chair: You consider a non-share, not-for-profit corporation to be the private sector?

Mr. Alan Williams: It's certainly not government.

The Chair: Well, it's certainly not private sector either.

Ms. Meredith. Now we're into the second round, so it's four minutes.

Ms. Val Meredith (South Surrey—White Rock—Langley, Canadian Alliance): I'm going to follow up on a lot of the comments that not only the chair has made, but others. It's quite clear to me that a sweetheart deal was reached with Bombardier. I'd like to know whether or not it was an open competition that allowed other people to get involved?

When the government fronted up financing for a private corporation, was there not any talk about getting interest on the money? In any corporate dealings banks usually don't give free money away. Why would the government give free taxpayers' money away to get a project up and going? If that was the understanding, as I gather from your comments it was, that because of the technology, because of digital training, it was a collaborative project with industry, why wasn't there protection of tax dollars, some return on that front-end money?

Mr. Alan Williams: First, if you're the chairman of the board of Bombardier, this is anything but a sweetheart deal. In fact, I can envision--

Ms. Val Meredith: A 20-year contract with money up-front is not a sweetheart deal?

Mr. Alan Williams: A 20-year contract wherein, unless the government does something, you're going to lose $250 million to $300 million is anything but a sweetheart deal. We can debate it if you want, but I would certainly argue that unless other players were brought in to this extent, they were going to lose a lot of money for their shareholders. We didn't have that risk at all. Our risk was much less. Frankly, we could have sat on our hands and said, we've broken even now, we don't need to get any other players in; for the next 20 years, we'll pay you as promised, and at the end of the day, you can tell your shareholders you lost $200 million.

Ms. Val Meredith: I would suggest to you that there was a risk to the taxpayers, and that risk is precisely what has happened. The government invested taxpayers' dollars in a program with the understanding that we would receive training for it, and we didn't. If this program didn't get off the ground and went belly-up, we wouldn't have got any training at all in the next 20 years. So to say there wasn't as much of a risk I think is underestimating the fact that with any business venture, there are no guarantees.

Mr. Alan Williams: That is correct, we did have a $140 million risk at the beginning. I didn't say it was risk-free to the Crown, but I did say we've more than recouped it, while Bombardier is just breaking even right now. I would also point out that we had parental guarantees and performance guarantees. In addition, if the company did go under, we were entitled to take over the assets and deliver the programs, so we could protect ourselves in respect of training. So you can look at the glass as half empty, I'm trying to reflect the reality in the case.

Ms. Val Meredith: The reality is that you have a private company that is just now breaking even. That's pretty good after two years of a brand new program developing equipment. There are a lot of companies, and I can name a few, who don't break even for five or ten years when they're developing something. So to have a 20-year contract with the government guaranteeing money, whether or not you get the training programs, is a sweetheart deal, no matter how you cut it.

Mr. Alan Williams: Excuse me, that's not right.

Ms. Val Meredith: I want to go back and talk about something you said about there being flexibility and options for changing this. Did I not understand, Ms. Fraser, that you said there wasn't flexibility written into this contract?

Ms. Sheila Fraser: That is correct. I could perhaps ask Wendy Loschiuk to give us a little more detail on it, but there are limits as to what can be done, and there are fixed payments that have to be made over 20 years.

Mrs. Wendy Loschiuk: It was explained to us that in the contract the payments were fixed, the training levels that were to be received were fixed, and if there were to be any changes to that, there would have to be renegotiations.

The Chair: And there's a subsequent letter.

Thank you very much, Ms. Meredith.

[Translation]

Go ahead Mr. Gaudet, you have four minutes.

Mr. Roger Gaudet (Berthier—Montcalm, BQ): Thank you, Mr. Chairman. We are going to keep the interpreter at the back busy, because not many people here speak French.

Is the contract worth $2.8 billion or $3 billion? According to what was read earlier on, it was $2.8 billion, and then someone said that another $200 million had to be added. Is it $2.8 billion or $3 billion?

º (1635)

[English]

Mr. Alan Williams: I indicated that the value of the contract has now risen to $3.3 billion, because we now have added in all the former sales.

[Translation]

Mr. Roger Gaudet: Are you making money with these sales?

[English]

Mr. Alan Williams: As I indicated, of the $1.1 billion that has been paid in by the foreign countries Canada has recouped $412 million to meet our needs; the balance goes to the company. Part of the payment that comes in we keep for ourselves directly, because we provide some services those foreign companies paid for, and the other chunk of it goes to pay for the fixed assets, as we are obliged to do. So it lowers our fixed asset payments as new companies come in. That's how we have reduced and eliminated our $140 million risk.

The Chair: If I could just address some confusion here, you keep referring to “we”, Mr. Williams, and the member seems to think sometimes you're talking about Bombardier, sometimes you're talking about the government. Are you always talking about the government?

Mr. Alan Williams: I'm always talking about the government.

The Chair: My apologies for interrupting, Mr. Gaudet.

[Translation]

Mr. Roger Gaudet: Earlier on, you said that 60 percent of the slots were already taken. When do you expect to reach a 100 percent?

[English]

Mr. Alan Williams: Depending on the phase, it varies from about 70% to 90%. We have phases 2, 3, and 4. Now that the sorties have risen, I would expect that through the course of this year we would be able to fill up the courses close to 100%.

[Translation]

Mr. Roger Gaudet: How are you going to account for program performance to the department and to the House of Commons? How are you going to show us that performance has been good, that it has been effective, and that this was a good contract for the Canadian government?

[English]

Mr. Alan Williams: There's a wide range of performance measures we're going to use. The General can talk about the effectiveness of the training, but we are now measuring very clearly the number of courses delivered, the number of sorties provided on a daily basis by the private sector, the number of students and slots used, course by course. So we'll be able to monitor all the specific quantitative measures in the program to make sure the contractor is delivering what he committed to deliver.

The other aspect, which is a key aspect, is, how we are sure the training itself is what it's designed to be. We do have one clear objective measure, the advent and take-up by other jurisdictions, other countries, but in addition, the air force measures the effectiveness of the program, and I would ask the General to comment a little on that as well.

[Translation]

Brigadier General E.G. (Gaston) Cloutier: Thank you, Mr. Chairman.

In terms of training quality and standards, the only point I am going to add is that our pilot-training system is one of the best in the world, if not the best in the world. That is my personal opinion. One of the reasons why it is one of the best training systems in the world, in my opinion, is that the instructors are very well trained. We have very rigorous instructor training courses. I think we already mentioned that we have high-quality simulators for the Harvard II and the Hawks which provide training in a realistic environment. Moreover, we can train our students using desktop computers. So in terms of pilot training, I think performance is very good and that our system is excellent.

[English]

The Chair: Ms. Fraser wishes to make a comment.

[Translation]

Ms. Sheila Fraser: Mr. Chairman, I would just like to add some clarification. In our chapter, we explained that we assessed the amount charged to foreign countries to be $65 million. That cost was based on the assumption that the program was operating at full capacity.

On page 11 of the report, we also did a calculation that shows that there may obviously be a difference between actual costs and capacity actually used. We estimated that for the first two years, there was a cost of $25 million that was not recovered, which was absorbed by Canada, and which would, if you will, be the start-up investment for the program.

º (1640)

[English]

The Chair: Merci beaucoup, Monsieur Gaudet.

Mr. Tirabassi, for four minutes.

Mr. Tony Tirabassi (Niagara Centre, Lib.): Thank you, Mr. Chair.

Ms. Fraser, when you go in to do an audit in a case like this, is it the principle of paying ahead of time a fee for service in trust that is not a good practice, or is it the way in which this particular $65 million was accounted for that is of concern to you, given the unique nature of this whole program?

Ms. Sheila Fraser: As I mentioned, we first audited this contract and issued a report in 1999, and the concerns were largely the way the contract had been awarded and the evaluation of the risks associated with the contract. Of course, at that point, it was just at the very early stages, so we were not able to look at how it was actually operating. It was almost policy in the office to go back after two years to do a follow-up on it, and given that this was a very large contract, we had already identified it, if you will, as being of a higher risk, because of concerns we had in the 1999 audit. We went back in to see how it was being managed.

The major concerns to come out of this were the management of the contact, how the fixed-price contract was not linked to performance, so it meant the government was paying for training it had not received, how that was going to be received, and how the project was going to be managed from then on. We strongly suggested that the department do a lessons-learned and look at its management framework, which it has done since then, to ensure that the issues that were there in the first two years did not continue. We are also recommending, with the move to accrual accounting, prepaids, and all the rest of it, that this amount of $65 million be recorded over the amount that can be recovered, be recorded as an asset in the government's financial statements, and that there be a formal tracking and accounting year by year of how this amount is being recovered.

The Chair: Do you agree with that, Mr. Williams?

Mr. Alan Williams: I have no problem with that.

Mr. Tony Tirabassi: So the $65 million was always there, correct? It's not that the department wasn't aware that there was this large amount and that at some point the service had to be provided. Again, the debate is on how it was reported.

Ms. Sheila Fraser: The $65 million was our calculation. The department had not calculated that amount. We did that calculation and brought the number forward.

Mr. Tony Tirabassi: Mr. Williams, would you care to comment on that? Did you have any idea of what was outstanding, or was that something that needed to be pointed out by the Auditor General?

Mr. Alan Williams: She is quite correct in that she costed it, quite appropriately. We were totally aware, though, of the gap in respect of our training, and we recognized the need to do something about it. We weren't surprised at the number. We knew how many courses were delivered and how many pilots were being trained compared with what we had hoped for. We hadn't completing costing, multiplying to come to the number, which is what she did.

The Chair: Had you started the quantification?

Mr. Alan Williams: Yes, we had.

The Chair: Sorry to interrupt, Mr. Tirabassi.

Mr. Tony Tirabassi: That's fine.

I'm going to refer you to the statement from Canada's perspective, and this is your report, Mr. Williams: “to make NFTC the best option, we had to recoup at least $140 million in offsets from foreign participants”, and to date you've recouped approximately $412 million. Is that based on the first two years' performance?

Mr. Alan Williams: That's based on the commitment in foreign sales over the life of the program. We had costed at $3.44 billion back in the nineties what it would cost us to continue to train our pilots for the next 20 years. We had the problem in the nineties that our turboprops at the time were not going to be sufficient, so we knew we had to do something different. When we looked at different options, we found that our best option involved contracting out some of our front-end training. That option would have reduced our costs from $3.44 billion to $3.04 billion. When we put this program together, the cost of NFTC over the 20-year period would have been $3.18 billion were we not to get any foreign sales. So what I'm saying is, relative to the best option we could put forward at the time to train our pilots, we were putting at risk $140 million of the taxpayers' money. As of now, based on all the sales commitments we've got in each of the phases over the next 20 years, we have, in fact, more than recouped that. We have recouped $412 million. So over the duration of the program we have lowered the cost from about $3.4 billion.

º (1645)

The Chair: Thank you very much.

Mr. Finlay, four minutes.

Mr. John Finlay (Oxford, Lib.): Mr. Chairman, I apologize to the witnesses. I got snagged before I could get out of the House to do something else, so I'm really not prepared to ask any questions right now.

The Chair: Okay. If you indicate to the chair at a later time that you'd like to ask some questions, we'd be more than pleased to come back to you.

Mr. Steve Mahoney: Is it going to stay on this side?

The Chair: No, I'm going to ask some questions myself, and then we'll--

Mr. Steve Mahoney: But you were coming to this side.

The Chair: That's right, I offered Mr. Finlay his turn.

Mr. Steve Mahoney: He obviously passed his time on to--

The Chair: Then we go on to the third round. No, he didn't pass his time on.

Mr. Steve Mahoney: I think you did, didn't you?

The Chair: The chair's going to keep control here.

Mr. Williams, you said at the beginning--and I gave a simple conceptual example of what had transpired--Bombardier had the aircraft and the government was renting the slots to do the training. However, Ms. Meredith used the term “sweetheart deal”, I would put a capital s on the “sweetheart”, because stuck right in the middle was this non-share, not-for-profit corporation. Who set that up, the government?

Mr. Alan Williams: The private sector set that up.

The Chair: Okay, Bombardier set it up. You've got Bombardier selling the aircraft to this not-for-profit, no-share organization that has no capacity to raise any money. They record a sale of aircraft--very nice for Bombardier. The government signs a no-cut contract to pay $31.4 million every six months over 20 years, and in essence, with that income stream, this not-for-profit, no-share capital company goes out and borrows $720 million--off the government's balance sheet, by the way. So the Minister of Finance can stand up and say, what a wonderful job we are doing about managing our finances, but this $31.4 million every six months is a guaranteed, no-cut, even if we don't get the training contract, so that everybody wins. Isn't that it?

Mr. Alan Williams: No. At a minimum, the contract requires them to provide us with certain services.

The Chair: The point is that the $31 million you are paying every six months is not for training, it is to pay the bond, according to 4.47 in the Auditor General's report: “These payments are unconditional and irrevocable regardless of whether National Defence has the use of the aircraft.” It says the payments go “to cover the cost of the principal and interest on these bonds and its operating costs.” So the government is actually paying to cover the bond. You're not paying for training at all.

Mr. Alan Williams: No, that's not correct. You're taking one small slice of a whole puzzle. The contract requires fixed, firm payments to pay the mortgage, firm payments to pay for the services on the bases, as well as some variables and cost recovery. All of those costs are prescribed, and they're all required to be paid--

The Chair: To the non-profit company.

Mr. Alan Williams: No. Some go to Bombardier and some go to that company, but they're all required to be paid for services provided. If we don't get those services--

The Chair: Okay, let me ask the Auditor General. The $31.4 million every six months is to pay the interest on the bond, right?

º (1650)

Ms. Sheila Fraser: Yes.

The Chair: Yes. It is not to buy training, it's to pay the principal and interest on the bond used to buy the aircraft from Bombardier.

Ms. Sheila Fraser: In substance, it was a way to finance the acquisition of those aircraft.

The Chair: So the $720 million liability was stuck in this not-for-profit organization. Bombardier had the sale, and the government didn't have the liability, right?

Ms. Sheila Fraser: I do not know what happened on the books of Bombardier.

The Chair: Well, we can assume that they sold them, because the not-for-profit organization owned them. The not-for-profit organization owned the aircraft, so Bombardier must have sold them or given them or donated them, one of the three.

You mentioned the risk Bombardier took over. Were Bombardier prohibited from selling these aircraft to anybody else by virtue of this contract?

Mr. Alan Williams: Bombardier, in accordance with its contract, is required to provide us with the--

The Chair: No, I said, were they prohibited from selling this type of aircraft that they were manufacturing and building? Were they prohibited from selling that type of aircraft, as many as they could produce, to anybody else?

Mr. Alan Williams: They could buy as many of these aircraft as they wanted.

The Chair: They could sell as many as they wanted?

Mr. Alan Williams: They could do whatever they want as a company. What I am saying--

The Chair: So why were you concerned about their risk?

Mr. Alan Williams: What I am saying is that they are required contractually to provide us with a certain number of aircraft each and every day for a certain number of sorties.

The Chair: No, the not-for-profit company is.

Mr. Alan Williams: No, Bombardier is.

The Chair: But they don't own the aircraft, the not-for-profit company owns the aircraft.

Mr. Alan Williams: Bombardier is required to provide us with the services.

The Chair: But who owns the aircraft?

Mr. Alan Williams: Bombardier owns the aircraft.

The Chair: I thought you told me the not-for-profit organization owned the aircraft?

Mr. Alan Williams: Milit-Air owns the aircraft--

The Chair: Okay, Milit-Air owns the aircraft.

Mr. Alan Williams: --and Bombardier is required to provide us with those aircraft in order to provide us with the services.

The Chair: Milit-Air owns the aircraft, not Bombardier. They sold them to Milit-Air. Bombardier is perhaps providing servicing for the aircraft, but they don't own the aircraft and it's a not-for-profit company that is providing these slots to the government.

Mr. Alan Williams: No, that's wrong. That is not correct.

The Chair: Right, Mr. McRoberts?

Mr. Hugh McRoberts (Assistant Auditor General, Office of the Auditor General of Canada): Mr. Chairman, Bombardier did not sell the aircraft to Milit-Air. Milit-Air acquired the aircraft from their manufacturers, Raytheon for the turboprops in the U.S., and British Aerospace for the Hawk jet trainer. It bought them directly from their manufacturers using the money that was raised in the bond issue. It leases them to Bombardier to supply them to--

The Chair: Okay, just a second. Go over that again. I didn't quite understand it.

Mr. Hugh McRoberts: If I've got it correct--and Mr. Williams can help me there--

Mr. Alan Williams: That's exactly right.

Mr. Hugh McRoberts: --Milit-Air floats the bonds and gets $720 million. It uses the $720 million to buy the airplanes from Raytheon and British Aerospace.

The Chair: And Bombardier doesn't own these companies?

Mr. Hugh McRoberts: No.

The Chair: Okay.

Mr. Hugh McRoberts: At least not right now.

Milit-Air now has the airplanes. Those airplanes then are leased to Bombardier, which then maintains them and supplies them as working aircraft on the flight line every morning for National Defence.

Is that clearer?

The Chair: This is truly high finance, eh?

Bombardier has leased these aircraft from Milit-Air and now has the no-cut contract with the government. That's why Bombardier and the government are now dealing head-to-head, because Bombardier has leased the aircraft from the not-for-profit company and they have this no-cut contract. So where's Bombardier's risk? They didn't build the aircraft, they didn't design the aircraft, they just leased them, turned around, and had a no-cut contract. Where is the risk?

Mr. Alan Williams: The risk is dramatic, and it's in the following areas. It's very easy to say they get the aircraft from Milit-Air and provide them to us, but what happens if an aircraft doesn't operate appropriately or there aren't sufficient aircraft?

The Chair: You've got a no-cut contract. You're paying anyway.

Mr. Alan Williams: No, I have a no-cut contract for a fixed amount. They have a no-cut contract to provide me with a certain number of sorties. And if the Hawks--

The Chair: And you weren't even using them.

Mr. Alan Williams: If the Hawks or the turboprops do not provide us with the requisite number of sorties, they, at their own risk, have to go out and buy more aircraft. If they're destroyed or something happens to them, they're the ones who take care of it.

As to maintaining the bases--

º (1655)

The Chair: Let me just confirm that. Mr. McRoberts or Ms. Fraser, was there any clause in this contract that if these particular aircraft couldn't do the job and they leased something else, they were entitled to an extra payment?

Ms. Loschiuk.

Mrs. Wendy Loschiuk: Bombardier explained to us that if they needed more aircraft, presumably, another bond could be floated, so that these aircraft could be acquired, or if an aircraft was crashed, they had insurance.

The Chair: Okay. So where's the risk, Mr. Williams?

Mr. Alan Williams: The risk is--

The Chair: Point of order, Mr. Mahoney.

Mr. Steve Mahoney: How long is this round for the chair? Is this the Mr. Williams show?

The Chair: No, no.

Mr. Steve Mahoney: You've cut off this side of the House by not allowing my colleague to pass on his time. I want to know when you'll be done and when some of the rest of us can get our turn.

The Chair: This will be the last question by me, and then we'll start another round. We'll have the answer from Mr. williams.

Mr. Alan Williams: Wendy was quite correct when she said they can go out and float a bond. We're just not going to pay for it. That's their risk. They can spend another $25 million or $35 million to buy another Hawk, they'll have to go out and float that money, but that money is not going to be recouped or repaid by the Crown.

Further, when we signed up with them to maintain the base in Moose Jaw, they were covered off by only 62% of the cost of maintaining the base by the Crown. So they had a great risk of never being able to recoup the other 38% at the start, in that those costs we're going to pay for are fixed. What happens if the costs go up over time? What happens if there are labour issues, so that they have to pay more? What happens if the costs of gasoline and oil and other things go up? It's nice to say they had no risk, but when you have a fixed payment, the risk is that if the costs change over the 20 years, they have to pay out of their own purse.

So there are significant costs to both parties in this deal, and that's why I said at the outset this is unlike a typical deal; the risks to both parties were significant at the start, but it is proceeding in a way that's benefiting the Department of Defence, its pilots, and the Canadian taxpayers.

The Chair: Okay. I'm not convinced.

Mr. Mayfield, four minutes.

Mr. Philip Mayfield: Continuing, Mr. Chairman, with your line there, I'm looking at exhibit 4.6, which is the fee structure. According to the Auditor General, firm fixed fees “are used to obtain the assets such as aircraft, simulators” etc. Firm fees “are related to the cost of running the airport..., maintaining the program's infrastructure, operating the ground school and providing the simulator instruction, providing aircraft maintenance, and contractor program management, and insurance.” And then we have the other things, like variable fees and cost reimbursable fees. These are all paid by the government, is that not correct, Madam Fraser?

Ms. Sheila Fraser: Yes, that is correct.

Mr. Philip Mayfield: So I'm still asking where the contractor's risk is in all this. They get the aircraft, they get the maintenance, the insurance is paid, so if they're lost, the insurance pays for it. They pay for the whole thing. Tell me, what is the risk of the contractor in this?

Mr. Alan Williams: I'll repeat. While we're paying firm payments, as is indicated in there, those firm payments did not cover Bombardier's cost of running the base. They cover 62% of their cost. So yes, we have to pay, but they signed a contract knowing they would be in a deficit situation by 38%.

Mr. Philip Mayfield: But it says it's for running the Moose Jaw airport. And also, for the length of the program, there are adjustments for inflation and current exchange rates.

Mr. Alan Williams: That is correct. That is what it is for, but nowhere does it say that's the total cost of performing that function, and I'm pointing out to you that it doesn't cover their full costs for running bases. They're short 38%. That's the kind of risk I'm talking about when I talk about the $250 million to $300 million risk they started out with when we first signed the contract.

» (1700)

Mr. Philip Mayfield: Well, I hope the contractor did have some expenses for the amount of money that was paid to them, but I haven't figured out what they are yet.

Mr. Alan Williams: Well, I'm saying that 62% of their costs we covered. As to the firm fixed, it's nice to say they have insurance and that would cover them if something happened to an airplane, but they're required contractually to deliver a certain number of sorties, 85 a day, for our turbo-props, and if they do not, if the aircraft doesn't perform, they are liable for acquiring more aircraft to meet our needs. You can minimize that and say it's nothing, that's your prerogative, but to suggest that they didn't enter into this with a risk is wrong. In fact, as I said at the outset, from a cost standpoint, their risk in dollar terms was twice as great as ours.

Mr. Philip Mayfield: Ms. Fraser, Mr. McRoberts, can you tell me what the risk is please? I haven't understood that yet, I'm sorry.

Ms. Sheila Fraser: I'll let Mr. McRoberts respond to this, but I think it's clear. We audited the contract with the federal government, we did not audit Bombardier's, so we can't comment on any risk they might or might not assume.

Mr. Hugh McRoberts: We have no access to Bombardier's books, we don't know what their cost structures are, so essentially, we're not in a position to know whether or not they're making or losing money on this.

Mr. Philip Mayfield: But you must have had access to the contract, you must understand something of the obligations of the contractor, as well as of the Department of National Defence. Is none of this covered in the contract?

Mr. Hugh McRoberts: Not in a way that would allow us to determine, without access to Bombardier's financial information, what Bombardier's doing. We understand from the contract quite clearly what Bombardier is obliged to deliver to the Crown. We understand, I think quite clearly, what the Crown is obliged to pay Bombardier. But what Bombardier's costs are, how it accounts for those, that is Bombardier's proprietary business, and we have no access to that information.

The Chair: Mr. Finlay.

Mr. John Finlay: Many of us know there was a Commonwealth air training plan across this country during the Second World War that was highly touted and trained 80% or 100% of the pilots on our side of the struggle. Somewhere in here I read that Harvards were one type of aircraft used. I happen to come from a riding where we have a Canadian Harvard Aircraft Association, and they have about six of them they keep in flying trim. I wasn't aware that they were still a working aircraft for training, so I'm interested to know that.

The Chair: Brigadier Cloutier.

Brigadier General E.G. (Gaston) Cloutier: If I may, Mr. Chair, the Harvard you're referring to was a very successful training aircraft during World War II and trained thousands and thousands of pilots. The Commonwealth air training plan trained over 156,000 pilots in Canada. The Harvard II turboprop aircraft is a brand new airplane used by many nations to train pilots.

Mr. John Finlay: Can I ask you whether we could have some idea of what the cost of training pilots on Harvard I was for the Commonwealth air training plan and what the cost of training pilots is for the new aircraft? I presume it would be higher--everything has gone up over time. Maybe that would be some way of calming the fears of my colleagues over here. They don't think they got anything for their money.

Brigadier General E.G. (Gaston) Cloutier: I don't have those figures, particularly on the cost of training pilots on the original Harvards, but perhaps we would be able to provide that answer.

Mr. John Finlay: Okay. I'd be interested.

Thank you, Mr. Chairman.

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

Monsieur Desrochers, four minutes.

[Translation]

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

I want to go back to the contract, to the specifications. Normally, in a contract, the columns are very clear and the supplier must provide the client with very specific services. When you say that $65 million was paid out for training that was not received, are you taking the $65 million and incorporating it into the entire contract? How does that work?

» (1705)

[English]

Mr. Alan Williams: Very simply, we have in the contract a commitment to provide a certain number of training slots. As the Auditor General has commented, the amount of training not provided has been costed out at about $65 million. We're aware of that, we're monitoring it, and in the plan we're going to be developing with Bombardier we will recoup a number of slots equating to that over the duration of the program.

[Translation]

Mr. Odina Desrochers: Can you guarantee that the $65-million amount will be earmarked for training, or will it be used elsewhere in the overall contract envelope?

[English]

Mr. Alan Williams: I'm reluctant to guarantee anything other than taxes and death, but I will say, from a management standpoint, we certainly have made that commitment, both here and in how we do business, to work with the company to recoup the costs over the duration of the program. This money is not going to anything else. It's money owed to us, to the taxpayer, and we plan to get best value for it through the rest of the program.

[Translation]

Mr. Odina Desrochers: But what does the contract say, Mr. Williams? Is the company required to provide training? Where does that leave us if you say that $65 million of training will perhaps be provided in one, two or three years? You do not seem to be taking the $65-million shortfall very seriously. How are you going to manage the program, perhaps not right down to the last penny, but in order to provide Canadian taxpayers with guarantees that the money that was paid out under this contract will in fact be spent in accordance with the budgetary envelope for which it was granted? It seems to me that my question is simple.

[English]

Mr. Alan Williams: We know exactly how many training slots we have planned for both Canadian pilots and foreign pilots for the duration of the program. We know we have a certain extra number now we have to build in as well. We're looking at the capacity of the supplier, Bombardier, to provide incremental training, but as the AG has commented, the world is changing, so at the same time we're going to be looking at our own requirements and our training needs to try to balance all those off. Our commitment is either to get the extra number of slots, if that's what we need, or if we find that our requirements are changing, to get equal compensation for that, so that either with increased training or other considerations, the value of the $65 million to the balance of the program is recouped by the Canadian taxpayer.

[Translation]

Mr. Odina Desrochers: May I ask another question, Mr. Chairman?

The Chair: You have another 30 seconds.

Mr. Odina Desrochers: The $65 million—I want to go back to that—comes from pilots who are with National Defence, the Canadian Forces. You are telling me that with outside contracts, you will perhaps be able to recoup the $65-million training shortfall? Have I understood that correctly?

[English]

Mr. Alan Williams: What I'm saying is that we are working with Bombardier to build in the capacity. It may be one or two more students, of course, over the next numbers of years that will allow us to recoup, it may be that we'll put more courses in to recoup it, but one way or the other, the numbers of pilot training slots that have so far been vacant will be utilized over the balance of the program, or we will get compensation to the value of the lost slots. That's what we're working on with Bombardier, which has committed itself to doing that with us.

The Chair: Thank you, Monsieur Desrochers.

Mr. Mahoney, four minutes.

Mr. Steve Mahoney: I'm sure the 5,600 people involved in working for Bombardier as a result of this contract will be reasonably pleased that the risk at least has been mitigated somewhat, but if they are unable to deliver what they have committed themselves to in the contract, what would the recourse under the contract be, Mr. Williams?

» (1710)

Mr. Alan Williams: The extreme, of course, is to terminate and to take over and deliver it ourselves. We don't want to get to that stage. The reason one works with a company like Bombardier is that one knows one will never, frankly, have to get to that stage. The company, as I said in my comments, has shown nothing but integrity. We had no difficulty in getting from them the commitment for recoupment. I meet with their president, who unfortunately is fairly sick right now, and other senior officials on a regular basis. There is open communication, there is commitment, there is conmpetence, there is excellence.

Mr. Steve Mahoney: Okay, but to answer the question specifically, under the terms of the contract, could you suspend, could you cancel, could you withhold?

Mr. Alan Williams: There is provision, of course, to terminate, so we do our own training. If they do not meet obligations, there is a fixed amount each day of penalty we can impose as well.

Mr. Steve Mahoney: So it's a financial risk.

I have a question more concerned with the Harvard aircraft. This is a turboprop, is it?

Mr. Alan Williams: Yes, it is.

Mr. Steve Mahoney: Has there ever been any thought given to actually manufacturing? Bombardier leased them, and they're manufactured by Raytheon and by British--

Mr. Alan Williams: Raytheon manufactures the turboprop, BAE manufactures the hov-jet.

Mr. Steve Mahoney: Well, here's my question. I recently had an opportunity to tour the Bombardier-de Havilland plant in Downsview, which is sitting, sadly, quite idle, and yet with the turbo-props, they have 50% of the world market. They're a leader in the quality of turboprops. Has there been any thought of having the equipment manufactured in Canada?

Mr. Alan Williams: I think one has to be very clear here on this issue of accountability. We hold them totally accountable contractually for delivering to us aircraft and core structure to meet our needs. Were we to try to impose our own constraints, that would, in my estimation, completely undermine our ability to hold them accountable. They had to find those aircraft to meet our needs, and if we were to say to them, no, we don't want you to pick this one, we'd rather pick that one, there would be a problem.

Mr. Steve Mahoney: No, you do it through either incentives or negotiation. We have an aerospace industry in the Toronto area that is suffering quite dramatically. I just wonder if there's an opportunity to work with them, not with a stick, but with a carrot, since they have the capability. It's one of the highest technologies and finest plants in the world, and at one point it employed up to 7,000 people. There was a layoff when we went through it. There probably weren't 25 people in the entire plant. They were calling the workforce back some time in February, so I assume they're back now, but I believe their numbers are below 2,000. I'm just wondering if there is an opportunity for DND to talk to them. What they need are, obviously, orders. I'm told there's a call in the marketplace for 80 aircraft worldwide, and they have potentially 50% of that market, which is down dramatically from what the marketplace was pre-9/11 particularly, when I think they were manufacturing 300 or 400 aircraft.

Mr. Alan Williams: I would only point out that when the program was first developed, it's my understanding there was no other aircraft. I know they looked around and there were some other ones they initially were interested in, but they couldn't make the deal to meet our cost requirements and their cost requirements. At this stage, of course, with the whole program structured around that, the likelihood is small.

We talked about Bombardier's risk, and it is interesting to note that since 9/11 the insurance premiums for the company have risen from $8 million to $45 million. That's a cost they had to absorb and are absorbing. I'm simply pointing out that it's a two-way street.

The Chair: You did mention that you absolutely hold Bombardier accountable for delivering the aircraft. I think I'm maybe paraphrasing a little bit, but that's what you said. They were late in delivering the aircraft, you couldn't use the slots, so in what way did you hold them accountable?

» (1715)

Mr. Alan Williams: There are provisions in there to withhold payments, which we did. We are able to hold back from them fixed amounts of payments should they not deliver the requisite number of flights.

The Chair: We know they didn't deliver, and the Auditor General's whole point was that we paid even though they didn't deliver. So Ms. Fraser, what penalty did Bombardier suffer, because, in the words of Mr. Williams, they absolutely hold them accountable for delivering the aircraft?

Ms. Sheila Fraser: As we mentioned in the report, there were some prepaid amounts that were returned, I think $2.5 million of $15 million advanced, of the variable costs. I don't know that at the time we did this audit there were any penalties or anything imposed. I could perhaps ask Wendy to clarify that.

Mrs. Wendy Loschiuk: As I understand it, the payments are made in trust to a holding company, which then makes out payments to the other recipients. We understand the payments were made. There may have been some withholding from the firms from whom we bought the aircraft.

The Chair: Mr. Williams, can you write me a letter telling me exactly how you absolutely held them accountable for the late delivery of the aircraft for which we paid?

Mr. Alan Williams: Absolutely.

The Chair: Thank you. Perhaps we will have you review that letter, so that you can agree with it as well, Ms. Fraser.

You are the ADM of materiel, Mr. Williams, you buy everything from soup to nuts and everything else for the DND, I presume. In how many other acquisitions have you concerned yourself about the vendor's risk?

Mr. Alan Williams: My focus is on Canada's risk and National Defence's risk.

The Chair: And Bombardier's.

Mr. Alan Williams: I'm not concerned about Bombardier's risk, except to the extent that I'm pointing it out to you, so that you can understand why the deal was structured as it was.

The Chair: Ms. Meredith, two minutes.

Ms. Val Meredith: I'm sure I'm not going to be the only one who leaves this room totally confused. I just found another thing where the payments are made in trust to a holding company. Is that holding company Milit-Air not-for-profit corporation? Is it Bombardier? What is the holding company the payments are made to?

Mrs. Wendy Loschiuk: There is a firm that receives the payments and makes payments out to Bombardier or to Milit-Air.

The Chair: Is there another holding company?

Mrs. Wendy Loschiuk: No, these payments are made out so that the bondholders can be paid or to cover off Bombardier's expenses.

Ms. Val Meredith: So to whom is this holding company held accountable?

Mrs. Wendy Loschiuk: I'd have to get back to you on that.

Ms. Val Meredith: Please do. Would you give us an idea of how they fit into the picture?

The Chair: Ms. Fraser.

Ms. Sheila Fraser: Perhaps, Mr. Chair, the department can explain better than the auditors how the arrangement actually works.

Ms. Val Meredith: Maybe while they're explaining that, they can explain to us, when the foreign countries buy slots--that's why I was confused about the “we”--to whom they pay the money. Does that money go into the holding company, which appropriates it wherever it goes? Does it go to National Defence, and if so, how come National Defence is getting paid for slots Bombardier is providing training for?

Mr. Alan Williams: Funds from the foreign countries are paid in to us. From the amount they pay us we take our share to cover our costs for doing our services. The balance goes into the collection trust that pays the bondholders for the fixed assets or pays Bombardier for the services they provide.

» (1720)

Ms. Val Meredith: So Bombardier, basically, doesn't get any money for this service other than from the DND.

Mr. Alan Williams: The firm fixed payments bypass them, because they go right to the bondholders. All the money comes through us to cover the services they provide both to us and to the foreign countries.

The Chair: Okay. I'm not sure we understood that, but we got the answer.

Ms. Val Meredith: Well, the question is why Bombardier is even in the picture then. Why don't DND run this for themselves?

The Chair: We're going to turn to Monsieur Gaudet.

[Translation]

You have two minutes, please.

Mr. Roger Gaudet: My question is simple : when will the first program performance report come out? Let's say it was approved in 1998; it is now 2003. Will we get the report in 2018, or will we have it a bit before that? It will have to be a progress report. I would like to see it every three, four or five years. Five years have already lapsed, and we have still had not a report? Will one be tabled soon?

[English]

Mr. Alan Williams: From our perspective, we would continue to report on this in our public documents, like the reports on plans and priorities, annually.

[Translation]

Mr. Roger Gaudet: Have you started working on the kind of performance report I am requesting?

[English]

Mr. Alan Williams: The report on plans and priorities coming up for next year will have a recap on NFTC.

[Translation]

Mr. Roger Gaudet: My question is for Ms. Fraser. Have you requested a report on how the contract will be carried out?

Ms. Sheila Fraser: Yes, Mr. Chairman, we have recommended that the department submit a report to Parliament on program development and how the department plans to recoup the $65 million. We feel it is appropriate for this to be included in reports that the department is already submitting to Parliament, in either the report on priorities or the report on performance.

Mr. Roger Gaudet: Will we have to wait 20 years to know if it was a good contract, or will we know that sooner?

Ms. Sheila Fraser: Mr. Chairman, these reports are produced each year. So it would be up to the department to discuss the program in its annual reports.

Mr. Roger Gaudet: Thank you.

[English]

The Chair: Mr. Tirabassi.

Mr. Tony Tirabassi: Thank you, Mr. Chair.

To talk about the continued viability of this program, our researchers have informed us that students have been waiting 18 to 22 months before starting their training. The department has said the waiting period declined to 14 months by July 2002 and will decrease further. I have three questions, and they're all interrelated. How many students are on the waiting list currently? What is the current waiting period? Because of the long waiting period, how many potential students have dropped out of the program, and is that a concern?

Brigadier General E.G. (Gaston) Cloutier: The pilot training program is a complex program. It's over a year and a half. Therefore, we need a minimum number of pilots awaiting training, so that those folks awaiting training can proceed with language training and survival training. We need a minimum--and I emphasize a minimum--of approximately 50 pilots awaiting training, so that those folks can feed the NFTC. You're quite correct, by September 2002 we had 130 pilots awaiting training, which is not far from the 50. The waiting period had decreased from 18 to 22 months down to 14 months. That situation has been improving since then.

» (1725)

The Chair: How many dropped out while waiting?

Brigadier General E.G. (Gaston) Cloutier: At this point in time I don't have that information.

The Chair: You can let the clerk know on that, and we'll pass it on to Mr. Tirabassi.

We've come to the end. We close always with remarks from the Auditor General--

Mr. Philip Mayfield: On a point of order, Mr. Chair, I realize there's not time to ask the questions and receive answers, but could I ask three short questions to have answered by letter?

The Chair: You may.

Mr. Philip Mayfield: With relation to 4.55 and 4.56 of the Auditor General's report, I would like to know what flexibility--I've heard some speculations, but I'd like to know specifically--you have in the contract that was not there initially? Could you list that point by point, please?

Second, in 4.66 there are the nine points I mentioned. I'd like to have you speak specifically about progress that's been made in dealing with each one of these points in a non-speculative way--what's actually been accomplished?

Finally, the budget of 2003 says that DND has to find $200 million in efficiency. I would like to ask if this will affect the planning of the NATO Flying Training program.

Thank you very much.

The Chair: Okay. Thank you very much. You can send these answers to the clerk, and we will distribute them to all members when received.

We'll have closing comments from Ms. Fraser. Mr. Williams talked about the fact that they have started building the record you say didn't exist, so you can perhaps tell us whether you found it.

Ms. Sheila Fraser: Thank you, Mr. Chair.

I think we can all appreciate from the testimony given today that these are very complex contracts. It was an innovative way of getting capacity for the government to train pilots. We are very pleased with the response from the department. They have accepted all the recommendations and had already started at the time of our audit to address many of our concerns.

We have not looked specifically at the reporting. We will be looking at that when the report on plans and priorities or the departmental performance report is published. I would imagine that we will come back at some point in future to see the improvements that have been made.

The Chair: I'm sure you'll be able to report lots of improvements.

The meeting stands adjourned.