[Recorded by Electronic Apparatus]
Tuesday, November 28, 1995
.1108 
[English]
The Chairman: I call the meeting to order.
Good morning, ladies and gentlemen. I would like to welcome and thank the Department of National Defence for appearing before the committee today. Colleagues, I would particularly like to introduce to you Mr. John McLure, the associate deputy minister; Mr. Pierre Lagueux, the assistant deputy minister; and Mr. Rick Burton, the general manager of materiel control and business management. Jean Boyle is not coming.
Colleagues, as we know, small businesses are the future of this country. We, as a committee, are committed to assisting them.
This committee has undertaken a study of government contracting, with specific reference to amendments and sole-sourcing. A number of issues are responsible for this study. The number of contracts awarded under $30,000 has increased by 53,000 contracts over the last three years, and the number of amendments has risen dramatically by $519 million. Furthermore, while the number of contracts over $30,000 has decreased, the amendments have increased significantly by $735 million. I think we all share that this is an alarming rise in cost overrun and is the trend that this committee wishes to focus on.
The purpose of this committee, however, is not to point fingers or to delve into the past, but to focus on the future and what we can do to facilitate and improve the relationship between small and medium-sized businesses and government.
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At the end of the day, we as a committee wish to propose options to the government that will foster improved opportunity, access, fairness, competition and transparency in government contracting.
With those opening remarks, colleagues, I would invite Mr. McLure to begin his presentation.
Mr. John McLure (Associate Deputy Minister, Department of National Defence): Thank you, Mr. Chairman. I appreciate the opportunity to be able to brief the committee and try to answer any questions you may have on the way ahead on this very important subject.
DND, as you know, spends a very large amount of money annually through contracts. Spending on contracts in 1994-95 through our operating and capital votes, votes 1 and 5, was over $5 billion.
Those contracts numbered some 70,000 with a value in excess of $30,000 for goods and services. There are an estimated 50,000 contracts annually with a value of less than $30,000. This number can be expected to grow in the future.
Personnel-related service contracts let by National Defence totalled about $19 million, involving some 1,400 contracts at all dollar levels.
[Translation]
DND must rely heavily on contracting for goods and services if we are to meet the needs and operational requirements of the Department of National Defence and the Canadian Forces. DND's primary objectives in the management of procurement is, first, to satisfy valid operational requirements through contracting procedures which are fully compliant with government policy, and second, to ensure value for money.
[English]
We are living in times of downsizing and of restraint. We are in an era when we want to be sure value for money is on the mind of every manager during the course of every decision. We are interested in transparency in the contracting process and in obtaining best value for money.
[Translation]
Having provided the committee with an idea of the value and volume of contracting raised by DND, I would next like to explain to the committee the manner in which contracting authorities are vested in DND and then how those authorities are administered in the Department of National Defence. I will speak to the delegations from the point of view of contracts for goods and services, and contracts for personnel related services.
[English]
DND's delegation for contracts for goods and services is $2,500. This delegation has recently been increased to $5,000 and the department is in the process of putting the new delegation in place.
For contracts over this amount, DND must go to the Department of Public Works and Government Services. That is to say, for goods and services, about $120 million is contracted by DND and the balance, approximately $5 billion of expenditures, is contracted through Public Works and Government Services. In general, sole-source contracts over $2 million and those over $10 million if competitive are approved by the Treasury Board.
[Translation]
The Department of National Defense therefore does relatively little contracting on its own. Canadian Forces bases, for instance, are currently restricted to a $2,500 limit for goods in accordance with DND's delegation.
[English]
Although Treasury Board policy permits sole-sourcing for these low dollar value contracts, departmental policy encourages procurement officers to obtain more than one quote for any requirement over $1,000.
For personnel-related services contracts, DND's authority goes up to $400,000. These contracts may be sole-sourced up to $30,000 or $50,000, provided there is adequate justification to exceed the $30,000 limit.
DND processes $19 million in personnel-related services contracts direct with industry, and the balance, about $700 million, is contracted through PWGSC or through the standing offers established by them.
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[Translation]
The policies and procedures that we have established promote the use of a competitive process. As mentioned to you last week by representatives from the Treasury Board Secretariat, there must be specific reasons for the competitive process to be by-passed. DND regulations require that competitive bids be sought for all requirements except where:
[English]
first, if the need is one of pressing emergency in which delay would be injurious to the public interest; second, if the estimated cost of the requirement does not warrant the expense of soliciting and submitting competitive bids, and we have established that level at $1,000; third, if the nature of the work is such that it would not be in the public interest to solicit competitive bids; or fourth, if there's only one source capable of meeting the requirement.
DND relies heavily on Public Works and Government Services Canada to contract on its behalf. Their open bidding system, on which I understand the committee has already been briefed, is both an open and transparent system. Even proposed contract awards on a sole-source basis are advertised to industry via PWGSC's system to permit suppliers to register objections should reasons for sole-sourcing be in error.
[Translation]
DND's departmental policies emphasize the desire for a competitive approach to contracting. Any requests to Public Works and Government Services Canada for a sole-source contract award must be fully justified.
Notwithstanding the desire for a competitive approach there are legitimate reasons why this approach cannot always be adopted. Perhaps the single largest reason for sole-sourcing relates to the nature of our requirements.
[English]
The materiel being procured to meet operational requirements is unique. Weapons systems and spares, ammunition and armaments, repair and overhaul, research and development and many other materiel requirements do not lend themselves to a competitive situation. Often such requirements are only available from one source of supply. Certainly, the nature of our requirements plays a major role, but so do certain day-to-day operating needs such as utilities.
[Translation]
Despite these constraints, every effort is made to maintain a competitive and open contracting environment. Our unique role often makes this difficult but, in terms of numbers, whether by value or the number of contracts, we are generally able to put about the same proportion of our contracts to competitive tender, as the government as a whole.
[English]
I recognize statistical data suggest the number of contracts being let below $30,000 is increasing. This should not be construed as an indicator that the competitive process is being circumvented. The shift to procure materiel on a just-in-time basis, coupled with the increased delegation of authority to bases to procure commercially available materiel, is contributing to an increase in the number of small dollar-value contracts. Budgetary considerations and the move towards electronic commerce may also lead towards more low dollar-value contracts.
The role of National Defence is unique and necessitates that certain activities be maintained in-house. Certainly, the operational aspects of our activities fit into this category, but I would also include certain related support functions.
Given the current economic climate, budget reductions and announced military and civilian reductions in the defence white paper, it is clear contracting out will continue to be an important consideration. I would like to emphasize, however, that a methodology for assessing alternative service delivery, or ASD, as we call it, has been developed to ensure the department is adopting the most cost-effective option.
[Translation]
That concludes my opening remarks. We would be happy to try to answer any questions the committee may have on the subject of contracting in DND.
[English]
The Chairman: Thank you very much.
Mr. Gilmour, would you like to lead us off today?
Mr. Gilmour (Comox - Alberni): Certainly.
You spent a fair portion of your opening remarks commenting that the competitive bidding process is in fact alive and well. Yet 32,000 of the 1993-94 contracts were non-competitive compared to 37,000 that were. So nearly half of the contracts let by DND were on a single bid or non-competitive basis. Why is that?
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Mr. McLure: It has to do with the volume. In contracting the $5 billion, when you do a profile of the size of the contracts, in fact small items that are procured locally - and there are many of those every day - constitute a contract just as a very large dollar item does. Because of the way we do business in that regard, that tilts the statistics.
Mr. Gilmour: The numbers would question that, because $1.4 billion is not, in my mind, a small item compared to $1.7 billion, which is contracted. Again, nearly half of the value of DND's contracts are not small items. It just does not fit to say they're small items, and I'd like to know what the reasons are that they don't go out to competitive bids.
Mr. McLure: Maybe Mr. Lagueux, who is closer to the actual management of this, can speak to your question.
Mr. Pierre Lagueux (Assistant Deputy Minister, Equipment Program Management, Department of National Defence): That is correct. A large number of National Defence contracts, when you look at the dollar value, are in fact non-competitive. That is because of course when you look at the types of commodities we buy, a lot of the commodities do not lend themselves to competition. For example, we spend a large amount, several hundred million dollars a year, in ammunition, for example, and there is only a limited number of ammunition suppliers in Canada. So we buy from the ammunition suppliers in Canada.
Similarly, a lot of the equipment spares we buy, if we're going to buy spares for sophisticated weapons systems, cannot be competed amongst a variety of suppliers. We tend to go with the manufacturers of those weapons systems to buy our spares.
There are a lot of areas in terms of repair and overhaul capabilities for sophisticated weapons systems where we have only one supplier established in Canada to provide those. Large weapons systems purchases in the past, for example, have been bought from single suppliers in Canada. They have not been competed.
A large off-the-shelf buy we've done in the recent past, for example, is helicopters from Bell Helicopters of Montreal. These large projects, which are hundreds of millions of dollars worth of contracts, tend to skew those numbers. They're a relatively small number of contracts, but a high dollar value will tend to show a large portion of our money is non-competed.
It's very much the nature of the military goods and services we buy that those things - when you're talking about spare parts, about repair and overhaul of military equipment, about munitions, about equipment and spare parts, we buy through foreign military sales, through the United States, for example - are not competed. So they tend to skew the absolute number of dollars towards indicating a lot of dollars are non-competitive. It's largely because of the nature of the goods we buy.
Wherever we can, we do look at increasing the competition. For example, in areas such as spare parts, we have followed the lead of the U.S. Navy, which instituted a program called BOSS - the acronym means buy our spares smarter - and what is called ``break-out''.
In effect, instead of going back to the original equipment manufacturer of a piece of equipment and buying your spare parts from him, you determine from where he's getting those subsystems and look to them to try to buy your spare parts. So instead of buying a spare part for a vehicle from, as an example, the maker of the vehicle, if it's an engine part, you go to the engine supplier. We're looking at breaking out this type of thing and going there.
This is simple in terms of commercial vehicles. It is much more difficult in terms of sophisticated weapons systems because you then get into the responsibility of who has responsibility for the weapons system should it not perform since you didn't buy the spare parts from him. It's the nature of the weapons systems.
Mr. Gilmour: During your opening brief you mentioned DND in fact doesn't contract out a large portion; it's Public Works. When you're talking about weapons systems and military hardware, I question why it would be someone else in another department who doesn't, in my mind, have the expertise or understanding to get the best deal for the taxpayer. Why is there this crossover in departments?
.1125
Mr. McLure: They have been given the responsibility by the government to be the contracting agency for the government. I guess there would be a view that because that broader contractor responsibility is vested in one organization, indeed they could develop expertise that would be more cost effective in spreading across a large number of government departments.
It is concentrated there. We find the service to be of good value. They do the largest share of our contracting relationships by far. On more complex acquisitions, we actually form joint teams with them and team up with individuals to make sure they clearly understand what our requirements are as they go about their actual contracting responsibilities.
Perhaps Mr. Lagueux can add to that.
Mr. Lagueux: We need to understand that the Department of Public Works and Government Services Canada is the contracting agent for the Government of Canada. It is the contracting agent for all departments, not only National Defence, but we always retain technical expertise and technical responsibility in terms of any procurements we do.
We have the technical expertise, which you referred to as the expertise on the weapons systems, so we write up the statement of works and the performance specifications. We are part and parcel of the evaluation of any request for proposals or any bids that come in from a technical point of view. They are there to provide the expertise in contracting, legal contracting, terms and conditions and those things.
Mr. Gilmour: Thank you.
The Chairman: Thank you, Mr. Gilmour.
Mr. Duhamel, you're next.
Mr. Duhamel (St. Boniface): Thank you, gentlemen, for your presentation.
There are two questions I wanted to raise. First I want to confirm what I've just heard with respect to the Department of Government Services and Public Works. They are there to provide the expertise with respect to contracts and related matters. You retain, in the final analysis, the decision about whether or not this particular product - the specifications you provided - is in fact going to do what it is that you want it to do. Is that correct?
Mr. McLure: That is correct.
Mr. Duhamel: Now I want to come to my main question. As I heard the presentation, it seemed to me that with few exceptions, if any, there was a good account given as to what is happening. From that particular perspective there do not seem to be any particular problems. But there is a problem.
While some people may have exaggerated somewhat some of the increases, there are increases, and we can't always determine why and whether or not the reason for that is such that it would be acceptable to whoever would scrutinize it. There's some discomfort, if you wish, at the very least. I understand some of the points that have been made. It's quite clear that there are certain products you buy that you can't go and buy just everywhere. That may be a large part of it; that may be one of the problems inherent in your department.
I guess there are two questions that come from my first statement. It could be that most of the policies are not necessarily inappropriate and the various authorizations are okay, but there are still problems. Do you have any insights as to what it is we could do as a committee, as parliamentarians, in order to clear that up? That's a question of some great interest to me.
The other question of some significant interest to me is whether it is possible that within your particular department, because of its very nature, it's going to be extremely difficult to change those numbers in any significant way. Is that one of the issues here?
The final point is this. If one looks at numbers and where they appear to be going, unless we do something, this is going to become increasingly problematic. If it's a concern today, it's going to be a real problem tomorrow, or the day after or next year. I'd like some reaction to those particular points that I've raised, if you will.
Mr. McLure: If I can read into what has been said in the opening remarks by the chairman and what has just been said here, the focus really is on the growth in the number of contracts, particularly non-competitive contracts in the smaller numbers. Is that the focus you are concerned about?
Mr. Duhamel: It's part of the problem. The other problem is growth overall that cannot easily be explained.
Mr. McLure: In the number of contracts overall?
Mr. Duhamel: Yes, if one juxtaposes them to the policies and the authorizations in place.
The Chairman: And the amendments.
Mr. Duhamel: Yes.
Mr. McLure: I'll try to speak to some of that.
.1130
In past years, and I'm talking primarily about goods and services, we tended to contract in bulk and volume. We would buy in bulk and volume, put that into warehouses - we had a number of warehouses across the country - and then as individuals had a need, they would draw off that. By and large that was bought either on a standing offer or a competitive tender, warehoused by us and then drawn down through our internal supply system. That incurred major overhead costs for us, and I think other departments are probably finding that as well. Other countries that have operated their internal supply systems for the military have found that.
We're not getting into the special-to-need and unique requirements of the military, but the wide range of commercial, off-the-shelf items, particularly the smaller items - those will be bought more on a just-in-time basis. In other words, you eliminate the overhead of the large procurement, storage and the transportation to get them to the place. You will try to buy those from a local supplier.
Mr. Duhamel: Will that depress the numbers?
Mr. McLure: That will increase the numbers because you will be buying them one off or in very small lots. The trend as well is to use more EDI - that is, acquisition cards. In our own department, for example, we are trying to move these delegations out. The procurement officers in the smaller locations have much more authority to buy with a procurement card and have the item delivered just in time.
Mr. Duhamel: But there are three variables here, as I understand. Please correct me if I'm wrong. One is the number of contracts, the other is the number of adjustments, and then there are the overall dollars. What you have just said, if I've followed you correctly, is the number of contracts would increase by virtue of that. The number of adjustments might increase as well, but how would the overall dollars increase? Or would they?
Mr. McLure: I think the number of dollars DND will be spending through contract will go down. Our overall budget is decreasing. There are some things that we will do through alternative delivery mechanisms, alternative service delivery, that we will be contracting out. That will then lead to a contract; otherwise we would be doing that in-house. The overall item wouldn't be a contract, but you may have many little contracts associated with that function.
I don't know if Mr. Lagueux or Mr. Burton have a perspective on the trend in terms of the dollar value, but the overall dollar value in our budget as against the items we contract for is certainly decreasing, so the dollar value will be decreasing. However, that is not to say that there will be an exact correlation with the number of contracts within that overall financial envelope.
Mr. Lagueux: I agree that it is a concern among Canadian suppliers that the amount of money in the defence budget will be going down in future years. The amount of money to spend on new equipment, to replenish our bins and buy spare parts, to buy common, everyday commodities, will be decreasing. We are downsizing as a department and as a military force, so I expect the overall amount of money that we will be spending will be less.
How that correlates to contracts is a different thing. The amount of money that we spend in any given year, and the amount of contracts, varies with the size of the contracts. In past years we had some very large contracts awarded, whether for the patrol frigates, new helicopters, light armoured vehicles or the command and control radio system. The TCCS project was $1.6 billion, while the frigate program was a $9 billion project. These tend to skew the contracts awarded in any particular year, whereas the cashflow has to stay within the amount of money the department has in any given year.
As the amount of money we have goes down, so too does our ability to let these large contracts. However, as we move toward delegating more to the field and get away from stocking large amounts in depots and allowing users to deal with acquisition cards or standing offers that were put in place locally, there are more transactions going on for lower dollar values. We think that's good because it gets us out of stocking and holding a bunch of material, as well as the cost of transporting it and so on.
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Mr. Duhamel: That's useful to me.
I have no difficulties with the points you've raised - I think they make a lot of sense - but that does not resolve one of the problems I've raised. What do I say to people who ask why it is that the number of these contracts has increased, and the other problems? Do we provide them with the explanation that you've given? Will that be satisfactory to them? Is there something else we need to do?
Mr. McLure: Mr. Chairman, if the number of contracts is ballooning - and I think if all government departments used acquisition cards and if every acquisition was counted as a contract you would see the numbers. If that got tracked, those numbers could start to look like they're growing.
We have a number of bases and units located right across the country. The only word of caution I would offer as to what changes you might put in place is to be sensitive to the fact that if a base is going to be buying - particularly on smaller or routine supply items that they buy on demand and just in time.... If you want to see that be more competitive, you should respect that there is an area there that would be responsive.
Indeed, we tried to contract with local suppliers. Many of these bases are located in remote areas. I think you would get pressure the other way if you were going to big tenders, which would be very expensive, and you had the supplies coming in from 400 or 500 miles away and the locals felt they were qualified to supply those themselves.
Mr. Lagueux: Mr. Chairman, as we move more toward delegation and away from buying in bulk and storing in depots, I think that would favour small businesses. As we move more toward commercial, off-the-shelf type items and get away from mil-specing things, that will assist small and medium-sized businesses to participate more fully in satisfying National Defence needs. However, there will always be those large, unique military acquisitions where you can't go to Canadian Tire to buy your spare parts.
The Chairman: Treasury Board acknowledged that and gave us a preliminary explanation as to some of these amendments.
I don't think Dr. Duhamel's point was the number of the contracts. I think we can all accept the number of contracts increasing. I think it was the values and the amendments. Somebody else may pursue that question a little later.
Mr. Bryden (Hamilton - Wentworth): Mr. Chairman, my preoccupation is not with small business and small contracts. I like to see large numbers and understand what's happening with large numbers.
While you have presented us with some numbers in a presentation, I am surprised that you have come here without any lists or breakouts or data, without any numbers that I can get a grip on. I would like to see a list of the top 50 non-competitive bids or contracts that have been let in the last three years, broken out over three years, with any adjustments or amendments, plus some details on the original contract. I cannot get a grip on what's going on here without seeing some actual data on who's getting what, on what contracts are being let.
Treasury Board gave us this last June, which lists contracts, department by department, over a three-year period. It has been a very valuable tool. I would ask you to supply us with that. It'll be up to the chairman if -
Mr. McLure: We would be pleased to, Mr. Bryden.
The Chairman: Great. Perfect.
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Mr. Bryden: It's very important, because I'm a numbers man. I like to see numbers before me so I can understand what's going on and see trends for myself.
I'll go on a little bit. I'm also interested in whatever history you can supply me with on what's called the light support vehicle wheeled project, LSVW, which has been subject to some controversy over the past while. There are a series of contracts that have been in some difficulty. Perhaps you could give us some detail about that. You can comment on it, if you like. But again, that's the kind of thing I'd like to look at to see as a model for what's going on.
Here's the last question I'll put before you. I'm very concerned about what regulations and rules you have in place to monitor and control DND employees who leave DND and then go to work for private contractors. As you stated, even though Public Works may be the one that actually lets the contract, DND rules on the technical qualifications of whatever is being sought. It seems to me this gives an extraordinary power to DND employees who may leave DND to go to work for private companies.
I would like your comments on what controls you have and whether you have had problems in that field in the past.
Those are my three questions.
Mr. McLure: Mr. Chairman, I think on the first one, which is the top fifty non-competitive bids and any amendments to those, we will certainly provide you with that list.
The Chairman: When would that list be coming? Could we have it before the end of the week?
Mr. Lagueux: We can try.
Mr. McLure: The first of next week.
The Chairman: Terrific. Thank you.
Mr. McLure: I'll ask Mr. Lagueux to deal with the vehicle question.
Mr. Lagueux: Thank you.
Unfortunately, I didn't expect this question this morning. I didn't expect to get into specific projects this morning. I guess that's when you get your best answers, Mr. Chairman.
But let me try to deal with it. If I can't, we can provide you with additional information,Mr. Bryden, on the subject.
The light support vehicle wheeled, which is military jargon for a truck, is a project contracted with Western Star Trucks in Kelowna, British Columbia. I can't remember off the top of my head the exact number of vehicles that were contracted, unfortunately. You may have that.
Mr. Bryden: I do, actually. It's about 800.
Mr. Lagueux: Yes, it's 835, or something like that was the number of vehicles.
These vehicles are different. There are a variety of those vehicles, such as troop transporters, cargo transporters, and so on.
You mentioned that this project had several difficulties and troubles. I would suggest, sir, that this project...while it did have some initial difficulties with the product that was being procured, none of these difficulties were untoward or surprising. That is why we conduct what we called RMD testing on the vehicles: reliability, maintainability, durability.
It was a new vehicle that was based upon an Italian vehicle, but modified for Canadian purposes. So while difficulties were found with the vehicle, they were corrected. My understanding is that the vehicle is now in service and fully meets the operational requirements for which it was procured.
That doesn't mean that there are not people to whom you will talk who don't have complaints about the vehicle, but it does meet the specifications agreed to by the commander of the army and set by the army for what they required it to do.
I had the occasion to visit Western Star just a few weeks ago. From my perspective, the contract seems to have gone reasonably well.
We are now looking at terms of follow-on support for that vehicle and discussing that with Western Star in terms of looking at them. Again, it's part of our trend to go more to industry for support, as opposed to in-house support.
Western Star has a large network of dealers across the country, and we're looking to see what support they can provide to the vehicle, as opposed to setting up a support infrastructure within the Canadian Forces. We're looking to see what can be done in that area.
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I would say that while there were initial difficulties with the vehicle, these have been cleared up. At the moment, the vehicle fully meets the operational requirements as stated in the original specifications.
Mr. Bryden: Can you tell us about the cost threshold? Has it stayed within the original contract? Have there been adjustments? It was originally a $200 million contract, if I understand correctly.
If you can't answer that easily now, I'm quite happy to take an analysis at a later date.
Mr. Lagueux: Off the top of my head, I'm sorry, sir, I can't answer those questions, but just let me speak generally to that question in terms of large contracts and amendments.
Very frequently, you'll find that large contracts - these are major crown projects that we're talking about of several hundred million dollars - will often have follow-on amendments to them. For example, we will procure for the piece of equipment itself. Then we will follow on with an amendment to that contract once we know further information about the contract and once the logistics support plans have been put in place. Then we will contract for the initial spares that come with the vehicle as an amendment to the original contract.
Then we may also contract for the necessary training and support. In the case of aircraft, for example, a separate amendment can be made for the simulation capability. We need to have simulators, for example, with it.
Quite often, we will first contract for the main equipment, whether it's a truck, an airplane, a helicopter or whatever. Then subsequent amendments to get the spare parts and the rest of the things that come with it are negotiated afterward.
Trying to negotiate all that in one big package up front can be very difficult. Quite early on in the process, we don't have all the necessary information or everything we need, for example, to determine the range or depth of spares we want, so we'll contract for that later. Quite often, it's an amendment or, at times, we will go and do that separately.
It's not unusual to have amendments to these large projects is what I'm saying. It does not indicate that the cost of the original equipment has gone up.
Mr. Bryden: I thank you very much for that explanation, but I would like a numbers analysis of this that can serve as a model for me of how we do this kind of thing in a major contract, which is what you have said.
It sounds ideal in the sense that it has run into problems at one point, but the problems have been resolved. So we can see this as a model procedure, probably, if you supply the numbers.
Could you reply to the last question?
Mr. Lagueux: The last question concerns the Treasury Board policy on the code of conduct in post-employment. This is administered within the department. There are a number of stipulations laid down that govern what an employee may or may not do. We're talking about the more senior levels of employees out of designated areas and what they may or may not do upon leaving the department, particularly if they go to work for a party that is consulting or doing work with the department.
They're not allowed to switch sides on an issue. They are not allowed to provide the company with information that is not generally available to the public. They are not able to come back to have contact with the part or parts of the department with which they had substantial dealings while they were inside. Those are the sorts of issues that govern how we deal with each of these.
The individuals, if they wish to be employed in such a position, make an application to the committee in the department. The department reviews that, and, on occasion, we will seek the advice of the ethics counsellor in the internal administration, or sometimes the Treasury Board. That is the manner in which we administer that policy.
The Chairman: Which ethics counsellor?
Mr. Lagueux: The government's ethics counsellor, Mr. Wilson.
Mr. Bryden: I'm aware of what you just said, but this only applies to which rank? Below which rank do these rules not apply? Are we talking about captains and above or colonels and above?
Mr. McLure: Colonels and above are the key individuals we're dealing with, because of the broad scope they have.
Mr. Bryden: But I would take it that a lot of your procurement and assessment of contracts internally is done by people under the level of colonel who may be acquired by private industry on leaving the forces. Is that not so?
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It's one thing to have rules for those in the senior echelons, but those in the slightly lower echelons, who are probably actually in the business of hands-on dealing with contracting firms, are the ones I wonder about in terms of whether they are a problem. Are you aware of any problem with these people going out and having, shall we say, an unhealthy relationship with their colleagues back at DND?
Mr. McLure: Certainly, no problems in that regard have come to my attention. If there are problems there, I would certainly appreciate hearing about it. No problems have been brought to my attention.
The Chairman: Thank you very much, Mr. Bryden.
Mr. Bélair, please.
Mr. Bélair (Cochrane - Superior): Thank you Mr. Chairman.
First, I would like to make a comment by way of clarification, if you wish, on the document supplied to us by the Library of Parliament, entitled ``Government Contracting''. On page 1, paragraph 4, it says:
- 107,031 contracts out of a total of 186,970 were awarded to a single supplier without being
subjected to a competitive bidding process.
The Chairman: Mr. Bélair, we have witnesses here. I am advised that this information was given to us by Treasury Board. In fact, Mr. Bélair, this information is now about five weeks old. It was part of the letter that went to all deputy ministers. Wouldn't someone in your department have wanted to correct this at some earlier time than today?
Mr. Bélair: The point is that this is a public document, and it is misleading.
The Chairman: Then it was misleading five weeks ago. That's your suggestion.
Mr. Bélair: Yes, it still is today.
The Chairman: We got that number from Treasury Board, so perhaps your comment should be directed to them, sir. That's where we got that information, according to the researcher.
Mr. Bélair: So when will this be corrected in committee, then?
The Chairman: Do you have information that refutes it?
Mr. Bélair: Oh, yes, I've got it right here.
The Chairman: Can you provide the documents to the committee?
Mr. Bélair: I just said I wanted to explain the process.
The Chairman: Mr. Bélair, with no disrespect to what you're saying or whether or not it's valid, we are right now in the middle of examining these witnesses on the subject. Perhaps this is more of a point of clarification that you would like to bring up at the end of the committee.
Mr. Bélair: It is directly related to what these gentlemen have to say. It deals with the awarding of contracts. It will only take one minute.
The Chairman: Okay, go ahead. I don't object. I'm just trying to tell you where we got the information.
Mr. Bélair: In a general sense, all tenders are advertised on the open bidding system. Anybody can apply. In cases in which there is a sole source, there is a deadline to every tender. If only one applies and meets the requirements of any department, including National Defence, then this contract is temporarily approved. Because it is a sole source, it goes to the advance notice information system whereby any other supplier that does meet the same requirements can challenge. If there is a challenge, then both bids are studied again. Of course, the best bid will win.
Statistics do indicate that, at this point in time, sole-sourcing the awarding of contracts is seldom challenged. Therefore, during the past year especially, since the inception of the open bidding system and the advance notice in case of sole-sourcing, the system does work. This is the clarification I wanted to bring. There is an opportunity to challenge sole sources.
The Chairman: Perhaps the conflict here in information is that it also includes not just OBS. No one argues about the OBS system. That is not what the concern or question is regarding; it's that no one is questioning the OBS system, which is the number of all contracts. If you want to be a panel witness, then we'll put you forward to give some evidence. I would be happy to have you.
Mr. Bélair: No.
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The Chairman: I'm just saying that this is the information we're getting from Treasury Board.
I appreciate your clarification, which is to say that it's considered competitive once it's on OBS. I don't think any one of us misunderstands that. As soon as it goes on OBS, it's deemed to be part of a competitive process even if only one person were to bid. That's considered to be part of a competitive process. I don't think anyone is confused about that.
Mr. Bélair: But even then, before the contract is awarded, it is posted for thirty days. It can be challenged.
The Chairman: I understand that.
Mr. Bélair: This is what is missing here. So ``without being subjected to a competitive bidding process'' is wrong. That is absolutely false. That's the point I'm trying to make here.
The Chairman: Go ahead, it's your time. You can use it any way you wish. You've got one minute left.
Mr. Bélair: Thank you, you're very generous.
My question to our witnesses would be in order to demystify this, because everything that surrounds the awarding of contracts is somewhat nebulous. Could you explain the auditing process to the members of the committee?
First, there is certainly an internal audit that is being done. Second, are there any independent audits that are being done, besides that of the auditor general? Are the results of those audits made public at some time?
Mr. Lagueux: Certainly, we have internal auditors within the department. We have a chief who reviews services and who is responsible for auditing within the department. He audits large projects, like the type of project Mr. Bryden talked about concerning the truck project, which is a major crown project. They undertake specific audits to review those large projects and look at them not only from a contracting and procurement view, but also for value added and whether the process was done. Those are specific audits that are done on these large projects.
Also, at our bases and stations, which is where a lot of the smaller procurements are carried out - we talked about this earlier - they go there to review the process to ensure that proper policies and regulations are followed.
Within DND, I should add that we have a contracting manual, which amplifies those policies and regulations put out by Treasury Board and Public Works and Government Services Canada. So we have our own policies and procedures that amplify that.
So we do have an internal audit function, which is carried out in concert very much with that of the auditor general. This is so we don't have our own auditor reviewing something if the auditor general is coming to review exactly the same thing two days later or a week later. So they are done in concert.
The auditor general has access to all of the audits that our chief of review services does. They can then follow up on any audits they wish.
They tend not to focus on transaction auditing, if I can call it that. They don't look at each particular transaction. They tend to look at specific areas. They will look at large projects, such as major crown projects like frigates, or whatever.
They will also look at particular areas of procurement. For example, they conducted an audit of repair and overhaul. We conduct a tremendous amount of business, several hundred dollars a year, for the repair and overhaul of airplanes and ships, and so on, with industry. They look at how that whole business is conducted, including contracting and ensuring value for money. So they tend to focus on areas as opposed to transactions.
We don't do a lot on transactions, which means the traditional auditor with the green eye-shade who goes transaction by transaction. We tend to focus on areas and determine it more in terms of systemic audits. We do some transaction auditing, but now it is more of a management-type audit that is done to try to look at those larger issues. Transaction auditing is mainly done at the local level.
Mr. Bélair: What about the results?
Mr. Lagueux: These results are made known to management for necessary corrective action as required. Certainly, as I said, any audits that are done by our auditors are passed by the auditor general so he has full visibility in the audits that we carry out internally.
Mr. Bélair: I should rephrase that. If anyone in the public would like to know the results of your audits, could they obtain a copy?
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Mr. Lagueux: Certainly, any audits are open to access to information. I guess there are audits that would be classified and audits that are not classified. Any audit that is not classified would certainly be available to the public. Audits of classified projects and so on would not necessarily be available to the public.
The Chairman: Mr. Bélair, I'm sorry I used some of your time. So perhaps you have another question you want to put before Mr. Bryden. Is it on the same point?
Mr. Bryden: I would like you to go a little bit further there and tell me the distinction between a classified audit and a non-classified audit. What is it I can't see? Can I see the audit of the LSVW?
Mr. Lagueux: If an audit was performed, I would expect it. But there are projects that procure classified material. Therefore, the audits of those projects would be classified.
Mr. Bryden: So it would have to be classified, like electronic equipment?
Mr. Lagueux: Yes.
Mr. Bryden: Ordinarily you would not use the Access to Information Act, shall we say, to block our ability to see a defence audit.
Mr. Lagueux: Sir, the access to information is that; it's an access to information.
Mr. Bryden: Oh no, it's not.
Mr. Lee (Scarborough - Rouge River): Mr. Bryden has referred to the Access to Information Act. That statue of course deals with access by the public to matters such as those that have been discussed by the witness. This has nothing to do with parliamentary access. I'm sure ifMr. Bryden or this committee requested access to a matter that was felt by the department to be classified, this committee would be provided that information in any event.
The Chairman: Let's not get....
Mr. Lee: I wanted the record to show the distinction between the Access to Information Act and access by Parliament.
The Chairman: Mr. Bélair had asked the question as it related to the public, I think.
Mr. Lagueux: That's how I understood the question, Mr. Chairman.
Mr. Bryden: MPs have no more access to information than journalists or the general public do, except in a standing committee such as this, and that's only in the sense that we can compel testimony. I do not believe they have to give us classified information. I believe it's quite the opposite.
The Chairman: Mr. Murray, please.
Mr. Murray (Lanark - Carleton): Mr. McLure, I'd like to go back to personnel-related services contracts and start off by asking you how broadly you define personnel-related services. For example, if someone was contacted to write a report, would that be seen as a personnel-related service, or are you talking about people who are actually brought on strength, on contract?
Mr. McLure: They're not brought on strength per se. They are contracted to deliver a product, which could be to carry out an analysis on an issue or a problem and write a report and submit that report, or to provide a service, for example, in the area of informatics by doing a specific activity. As you may be aware, in this whole question of personnel service contracts the issue of a master-servant relationship must be avoided. You have to be careful you're not allowing them to creep into the organization and essentially become a fixture.
Mr. Murray: I was really wondering, again - Mr. Bryden touched on this earlier - about former DND people going on contract after they've left the department. I want to ask you if you have any safeguards against repeating contracts under $30,000 over a time that end up essentially being full-time jobs, only on contract.
Mr. McLure: I wouldn't want to say it had never happened, but we are being quite rigorous now in terms of the management of those on a case-by-case basis to try to avoid that. A particular focus has been placed on personnel service contracts over the last two or three years. The administration of those is done by a single cell.
We try to watch very carefully to avoid either repeating contracts or contract stacking, as it might be called, or allowing these to creep into positions of master-servant relationships. These situations have been the subject of audits and observations in the past. That is not compliant with the regulations and we ought not to be doing it.
Mr. Murray: Do you know how many of those would be former DND employees typically?
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Mr. McLure: On personnel service contracts, I don't have the numbers at my fingertips, but I think that would be available if you would like the answer.
Mr. Murray: I would appreciate that. On another subject, you mentioned there must be specific reasons to bypass the competitive process and you listed four of them here. The first is that the need is one of pressing emergency in which delay would be injurious to the public. The third one is that the nature of the work is such that it would not be in the public interest to solicit competitive bids. Who decides that? What kind of group do you have established to determine whether something is such a pressing emergency or that it would be injurious to the public? Is there a double-check on that decision?
Mr. McLure: I'll ask Mr. Lagueux.
Mr. Lagueux: In effect, sir, it's the procurement officer within DND who has to make the judgment on that. If in fact the contract then goes through Public Works and Government Services Canada, they also have a check on that particular approach to contracting.
By and large, when we talk about it being injurious to the public health or public safety, we use that when we have immediate operational requirements - for example, a search and rescue aircraft that is down because of lack of spare parts or that type of thing - or when we have troops conducting exercises, and so on. That is normally when we use that type of clause.
Again, as I say, within DND, if we contract directly with the trade, our own rules for our own people say if it's over $1,000, they should go competitive. That doesn't necessarily mean they write out a statement of work and send out a request for proposals. But it means they at least obtain two or three telephone bids before they proceed. These are our own rules.
Again, if we go to Public Works and Government Services Canada, we're talking about a larger procurement. They are of course subject to those rules and must in turn justify when they contract. So they have to be convinced of the need by our own people before they will proceed with that.
Mr. Murray: Do you know how often that process has been overridden or bypassed when using these guidelines? Is it very common or is it very unusual?
Mr. Lagueux: When you look at all four of those conditions, in terms of dollar value - and on which I think we answered Mr. Gilmour earlier - in fact we do a lot of non-competitive procurement.
Mr. Murray: I mean using more public -
Mr. Lagueux: I don't have a percentage or a number for you but it is very low. By and large, most of our non-competitive procurement is where there is only one source existing or it is not in the public interest to do so. For example, we only have one source of ammunition suppliers in Canada. You don't buy spare parts for an F-18 at your local garage. You go to the manufacturer for that type of thing. Those are the main reasons that drive us to be non-competitive.
The urgent things occur from time to time. To be quite honest with you, we don't track those, but they are very closely vetted.
Contrary to what I think you'll find in most line departments of government, our procurement and contracting is done by professionals in that domain. Here in Ottawa we have a large materiel group of trained people in supply, procurement and contracting. It's the same way at our bases and stations, where we have base supply functions, who are people, mostly military, trained in supply, procurement and contracting.
So most of that is not done by your average person in the department. Most of it is done, particularly in large procurements, through a specialized group of people who do that on an ongoing day-to-day basis. That is their profession and the job they do.
That is not to say that for pencils, paper and common commodities we're not going through the acquisition process and letting people go out to do that. We don't need professionals to get that sort of stuff. But for other goods of a more technical nature we have a dedicated group of people whose business it is to do that, both as engineering maintenance specialists and procurement supply specialists.
Mr. Murray: Finally, we've been told there's a large and increasing number of amendments to contracts. I'm wondering whether any of these amendments are anticipated when the project's budget is being considered and approved. I don't know how you feel about replying to that. I'm interested in the reason for the increase.
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Mr. Lagueux: Yes, there are some cases where amendments are anticipated, sir. For example, let me give you a particular case. We are in the process of procuring the light armoured vehicle, LAV-RECCE, a reconnaissance vehicle from General Motors, Diesel Division, in London, Ontario. A contract is currently under way. At the time that was approved, we knew we were procuring the vehicle. We were also procuring a surveillance suite that would go with it, and that was a subcontractor to General Motors.
To ensure our position on the vehicle line in General Motors, we contracted immediately for the vehicles. Subsequent amendments came later for the surveillance suite and the rest of the package that went on the vehicle. These were amendments and it was known they would become amendments.
So in the numbers you have for some particular years here, you see a large jump in amendments. Those amendments were in the order of several hundred million dollars, those amendments alone in those particular years. They were known and were done.
The contracting approach was taken, as I said, to ensure our position on the line of vehicles so we would get the vehicles as required. It gave General Motors then the contract for the vehicles. The surveillance package, the turret and other parts were contracted for later. As I said earlier, I think to a question to Mr. Bryden as well, we will contract for the equipment and then contract for the spare parts and so on later. So amendments are common.
In small areas, to say we knowingly go into contracts, for example, I think it's a concern of the committee that we would then contract for $29,000 or a low number and then amend it later, knowing it's not the full requirement. That type of contracting, which is contract splitting essentially, is explicitly forbidden by our own contracting regulations, our own contracting manual, within DND.
Certainly, as I said, we tend to have a professional group of people within DND who do procurement and contracting. They go on formal training courses. They have the contracting manual available to them. As well, we have a course on ethics in acquisition that we run for our people, which we get our people through. Those types of things are all part of the course.
The Chairman: Mr. Bélair, we found the document. It's submitted to Treasury Board ministers, dated June 20, 1995, and to this committee. I wasn't your chair at the time. That document is available if you need to see it. That's where the numbers do come from, the 107,000 and the 182,000.
Mr. Bélair: That's not what I was challenging.
The Chairman: You were challenging the words ``competitive bidding process''. All we have are global numbers, and within those numbers - I don't want to use up a lot of time, but I want to give you clarification - are both OBS and sole-source. Not everything's in those numbers. This is the best information we have.
One of the problems we have as a committee is the lack of information that's out there. No one's being negative or accusatorial. All we're doing is drawing attention to the fact. I think you're saying there should be a clarification that some of it is obviously subject to OBS.
Mr. Bélair: Not some, all of them.
The Chairman: No, that's absolutely not true. It cannot all be OBS because it's a global number. So it's the global number. All we have is the non-competitive total and of that 107,000 contracts were let. Not all of those 107,000 contracts go OBS. There's no way. That's one of the problems. We haven't been able to separate what is OBS and what isn't OBS. That's one of the difficulties the committee has. Anyway, I just wanted to get that on the record.
Further to Mr. Murray's comments, in terms of concluding, colleagues, you talked about the fact that contract splitting is - I don't like to use the word illegal because it isn't illegal; it's inappropriate. Treasury Board says it's against Treasury Board guidelines, and you've acknowledged it's in your manual as a prohibited activity. What independent evaluation are you as a department carrying out when contract amendments are submitted for approval?
Mr. McLure: Independent on the personnel services contracts, I think, which is one area where this can potentially happen. There is literally a single focus for the administration of those. The numbers are not large. I think around 1,400 are done there at that desk a year. That goes through literally a keyhole and each one is scrutinized.
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The Chairman: You say it goes through a keyhole. What keyhole?
Mr. McLure: It's in our ADM Personnel shop.
The Chairman: It's approved by an ADM?
Mr. McLure: It's approved inside the ADM Personnel office. I'm advised that if it's over $30,000, you go back to the originator and tell them they have to go back to competitive if they want to split and go higher.
The Chairman: We're talking under $30,000.
Mr. McLure: Under $30,000 it can be sole-sourced.
The Chairman: That's the area that's problematic.
Mr. McLure: It is approved in the ADM Personnel shop in the Department of National Defence.
The Chairman: Is that for the whole country?
Mr. McLure: It is not decentralized.
The Chairman: That's under $30,000.
Mr. McLure: Yes.
The Chairman: Is it all approved in Ottawa, for the whole country?
Mr. McLure: I'm talking about personnel services contracts here. For the acquisition of goods and services, they are only entitled to go up to $2,500 at the bases anywhere, and that delegation has been increased to $5,000. We're in the process of putting that in place now. Over $2,500 we go to Public Works and Government Services.
The Chairman: You certainly know what we're about. You've read some recounts of this committee through the media. You've heard Treasury Board, and no doubt as an associate deputy minister you are aware of the fact that Treasury Board called all of you folks together recently, two or three months ago, to talk about this trend, which they're not happy about.
Happiness is obviously a state of mind. But certainly Mr. Little was here again, as recently as last Thursday, and acknowledged this is a problem. You've given us some indication about how you would attempt to respond to the problem.
Mr. Bryden isn't necessarily as focused on small business or the small numbers as I am. How would you respond if this committee were to recommend to Treasury Board and Treasury Board were to implement 50% of all government contracts, and that would transcend to your department as well, for certain levels and certain kinds of procurement to be with small and medium-sized business as we would define it? How would you respond to that?
Mr. McLure: At 50%?
The Chairman: All contracts, yes. So of the $3.5 billion, 50% has to go to small and medium-sized businesses.
We all understand Canadian Tire isn't going to make light armoured vehicles and there would be exceptions, but just as a general policy thrust of this government and of this committee we would push that forward. How would you respond to that? Could you comply?
Mr. McLure: This essentially is a set-aside.
The Chairman: That's exactly right.
Mr. McLure: I find the percentage extremely high.
The Chairman: What would you see as an appropriate set-aside for small business in Canada and for DND?
Mr. McLure: For me to give you a learned opinion, I'd have to study it a little more carefully than what I know to date.
The Chairman: Have you ever given it any consideration?
Mr. McLure: I was ADM of small businesses in the Department of Industry for a couple of years. Even there we were trying to come to grips with that and we never did come to a position.
The Chairman: That's part of the problem. No disrespect, but that's exactly one of the problems.
Mr. McLure: It is an extremely difficult issue.
The Chairman: That's one of the problems our Prime Minister has talked about in the red book - our commitment as a government to small business. If government is the largest consumer, then what are we doing?
Mr. McLure: You really do get into difficult territory of the definition of what a small business is, what a medium-sized business is.
The Chairman: Fifty employees and under.
Mr. McLure: But they could be owned by whom? The ownership and the tentacles are the difficulties we ran into when we were looking at this issue. We had a small business advisory committee back in those days who were trying to help us. It is very hard to find a fair and equitable solution to that issue.
The Chairman: Thank you very much. We'll have a last question from Mr. Bryden.
Mr. Bryden: It might be two but maybe only one.
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In your presentation you said in 1994 DND's operating capital vote was over $5 billion. That's $5 billion for contracting out?
Mr. McLure: Yes, procurement contracts.
Mr. Bryden: Do you know what the equivalent figure is for 1993-94? I have an inconsistency here that I'd like to clear up, or maybe it's not an inconsistency.
It's $5 billion for 1994-95. What was it for 1993-94?
Mr. McLure: Probably a little higher, but I'll have to get the number for you. I don't have the total on hand.
Mr. Bryden: Okay, well let me just point out there's a little problem here, because the Treasury Board has the figure as $3.2 billion, so I don't understand.
A voice: For which year?
Mr. Bryden: For 1993-94 it has $3.2 billion as the total for all contracts and you have $5 billion, so there's an inconsistency in information here. Either you have gone up in your spending by $2 billion in contracting out, which I don't think is the case -
Mr. McLure: We were very liberal in what we included here. We included votes 1 and 5, which are operating capital, and we included the standard object 04, which is professional and special services, through to 09.
Mr. Bryden: That's precisely my point. If this $3.2 billion figure that Treasury Board has supplied us only represents one vote, then I would like to see Treasury Board produce similar figures for the other vote, because it doesn't matter whether you're contracting out for capital or operating costs; it's still contracting out. So either Treasury Board's figures are deficient or there's some problem with your figures.
I would like a clarification on that when you can do it.
Mr. McLure: There's annual contracting activity. I don't know whether we're caught in a definition of what has been contracted and what was spent against those contracts, but we will try to rationalize against this.
Mr. Bryden: Can you get a copy of this report from Treasury Board, this break-out?
Mr. McLure: Someone just handed me a copy. I think I have it here.
Mr. Bryden: Okay, great, so we can rationalize this.
Mr. McLure: And I'll provide you with those numbers.
Mr. Bryden: Thank you very much.
The Chairman: Thank you, Mr. Bryden.
We very much appreciate your patience. We're all new with numbers. Mr. Bryden is the only numbers-cruncher on this committee.
Thank you very much. You may be hearing from us again.
The meeting is adjourned.