:
Good afternoon, everyone. This is meeting number 33 of the Standing Committee on Public Accounts, on Monday, May 1, 2017.
I remind everyone today that we are televised, so I would encourage all members and all those in the audience to please put your phones, your communication devices, on airplane mode or mute. That would be much appreciated.
Today we're conducting a hearing on report number seven of the Auditor General, “Operating and Maintenance Support for Military Equipment—National Defence”, from the fall 2016 reports of the Auditor General of Canada.
Appearing as witnesses today, we have Mr. Michael Ferguson, Auditor General of Canada; and Gordon Stock, principal. Welcome.
From the Department of National Defence, we welcome back Mr. John Forster, deputy minister; Vice-Admiral Ron Lloyd, acting vice chief of the defence staff and commander of the Royal Canadian Navy; Mr. Patrick Finn, assistant deputy minister, materiel; and Brigadier-General Werner Liedtke, director general and deputy chief financial officer.
The Auditor General and deputy minister have opening statements. We would invite Mr. Ferguson to begin.
Welcome here, and thank you.
[Translation]
Mr. Chair, thank you for this opportunity to discuss our 2016 fall report on Operating and Maintenance Support for Military Equipment.
Joining me at the table is Gordon Stock, the principal responsible for the audit.
[English]
In our audit, we examined whether National Defence managed equipment support in a cost-effective manner. We selected six types of major military equipment: the Globemaster strategic airlift aircraft, the Cyclone maritime helicopters, the Chinook medium- to heavy-lift helicopters, the 130J Hercules aircraft, the Victoria class submarines, and the tactical armoured patrol vehicles.
Overall we found that National Defence didn't adequately manage support for the selected equipment in a cost-effective manner, and it made some initial planning assumptions that underestimated support costs, overestimated equipment use, and under-resourced personnel requirements. Consequently, National Defence paid for a higher level of service than it used.
We found that National Defence assumed that the cost to support the 130J Hercules aircraft and the Cyclone maritime helicopter would be no more than the cost to support the replaced equipment. This assumption was not realistic because both the Hercules 130J and the Cyclone maritime helicopter have increased capabilities, their systems are more complex, and consequently they cost more to support.
We also found that National Defence did not use the selected equipment as much as it had originally planned due to delays in equipment delivery and a lack of personnel and funding for operations and maintenance. For a number of years, the funding and personnel allocated for the Victoria class submarines, the 130J Hercules aircraft, the Globemaster aircraft, and the Chinook helicopter were significantly below what was required to meet operational and training requirements.
The equipment support contracts included fixed minimum payments, but not using the equipment as planned meant that National Defence paid for a higher level of service than it used. National Defence has since renegotiated one of its equipment support contracts to improve its value for money.
[Translation]
Furthermore, National Defence assumed that maintenance personnel for new equipment would come from crews operating and servicing existing equipment, but it did not happen.
National Defence also did not have enough trained pilots, technicians, weapons systems managers and contracting staff. Without the right complement of personnel, equipment cannot be made available and used at the planned level of operation and training.
National Defence created new oversight bodies to improve its resource management. However, we found that these oversight bodies focused on acquiring equipment and did not give as much attention to equipment support.
National Defence needs to use an integrated resource management approach that incorporates all aspects of the equipment's life cycle, including acquisition, materiel, support, and personnel, from a cost and operational perspective.
While it is difficult to forecast how much it will cost to support major military equipment, the decisions that National Defence makes today about which equipment to buy and how it will support that equipment will have significant financial impacts for decades to come.
We made eight recommendations in our audit report. National Defence has responded that it will address each recommendation.
[English]
Mr. Chair, this concludes my opening statement. We would be pleased to answer any questions the committee may have.
Thank you.
:
Thank you, Mr. Chair and members of the committee. We appreciate the opportunity to be here today to discuss the Auditor General's fall 2016 report on operating and maintenance support for military equipment.
On behalf of all of us at this table and at National Defence, we'd like to acknowledge the work of Mr. Ferguson and his team, including Mr. Stock, in preparing the report. His recommendations will help us improve an area that is of critical importance to National Defence.
[Translation]
Indeed, there are few areas more important to us than operating and maintaining our equipment. There are fighter aircraft and unmanned aerial vehicles to frigates and submarines to modern tanks and weapons systems. There is also operational clothing and personal protective equipment.
The Canadian Armed Forces need it at their disposal and ready for deployment at a moment's notice if they are to fulfil their mission to protect Canada, defend North America, and contribute to international operations. They need equipment they can depend on so that when the unpredictable happens, they can respond, just as they did when a typhoon devastated the Philippines in 2013, killing more than 6,300 people.
Within days, Canadian Armed Forces personnel were on the ground delivering more than 230,000 pounds of food, and more than 10,000 pounds of shelter and building materials. The operation took a CC-144 Challenger, a CC-150 Polaris, three Globemasters, and three Griffon helicopters; and that's just in air support.
[English]
It is hard to predict what equipment our military will need next, so we err on the side of caution. We must ensure that our readiness levels are high, our stocks of spare parts are sufficient, and our women and men in uniform have access to the equipment they need, when they need it. We must also balance the needs of the forces, and flexibility, with the need to ensure value for money and economic benefits for Canadians.
The Auditor General acknowledged this in his report, noting that, “There is inherent complexity and unpredictability in forecasting equipment support that cannot be eliminated. National Defence must plan above minimum needs, so that its equipment is ready to respond to changing circumstances.” He concluded, however, that we can do better, and we certainly agree.
We welcome the Auditor General's recommendations on how we can move forward. We're committed to implementing all eight recommendations. Our plans to do that are in the management action plan that we tabled with the committee last week. We'd be pleased to answer your questions specific to any of the eight recommendations.
I'd like to spend just a couple of minutes, Mr. Chair, on three of the main themes that run through his report. The first pertains to planning assumptions and our need to make them stronger. On this front we're making some progress.
In 2016 we started rolling out a new sustainment initiative that replaced the previous policy for sustainment contracts. We now bring together procurement experts from National Defence, from Public Services and Procurement, and from Innovation, Science and Economic Development. These experts work in close co-operation with industry to identify the best approaches for in-service support for our equipment. The benefits of this collaboration are many, not the least of which is that we can obtain the information necessary to determine, by fleet, what kind of life-cycle maintenance is required, what industry can offer at what cost, and how the federal departments can leverage their collective resources and know-how to make it happen.
Through the sustainment initiative, we are able to work with industry partners from the outset to ensure that the contracts we sign give us flexibility to change our requirements. As a result, going forward an increasing number of our contracts include provisions to enable us to adjust to changing circumstances, which is our reality—provisions that will make the armed forces more agile and responsive and deliver greater value for money.
To ensure that contracts are in the best interests of the forces and taxpayers, all of our larger in-service support contracts are now subject to a rigorous sustainment business case analysis. This includes a thorough review of possible options, to ensure that the solution chosen balances equipment performance, flexibility, value for money, and economic benefits. The sustainment initiative is still in early days, but it is producing some promising results.
As part of a pilot that was under way while the Auditor General prepared his report, we negotiated new long-term contracts for the engines of the CF-18 Hornet, the CP-140 Aurora, and the legacy Hercules aircraft fleets.
Another recent example cited in the report relates to the Hercules aircraft. We did award the original contract to support that aircraft's maximum projected use in Afghanistan. At the end of that operation, a number of factors had resulted in the fleet spending less time in the air than planned. Consequently, our sustainment requirements also changed. We've since renegotiated the contract to better reflect our revised needs. In doing so, we've introduced more flexible pricing based on fleet usage. More to the point, we guarantee greater fleet availability at lower cost. We're confident that our new approach under this sustainment initiative will start to address some of the main concerns raised in the Auditor General's fall report.
A second theme in the report relates to costing. Doing complete life-cycle costing for military equipment is challenging. While some costs, such as the purchase price of a piece of equipment, are relatively easy to track, others, such as development and disposal costs and the operating and maintenance costs for a 20- to 30-year period, are more difficult. For instance, the life-cycle cost requires that we project the salaries of people who operate the equipment and those who support the equipment, be they military or civilian or our industry partners. We must also account for the amount of fuel required to operate a fleet and its cost in any given year. Tracking some of these costs, such as an operator's time, and tying them to a specific piece of equipment will be challenging. Trying to estimate these costs is difficult, but we are making improvements since consolidating a number of our information systems into a central one, the defence resource management information system, DRMIS.
Over the last 18 months we've made improvements in our costing. Cost estimates for all planned and ongoing acquisitions have been reassessed and validated, as part of our defence policy review, including incremental maintenance costs over the life of the equipment. We also now have a much more robust costing model. We have projected costs on a life-cycle basis for projects, such as the future fighter capability project, our fixed-wing search and rescue aircraft, and our Arctic offshore patrol ships. We're also working on a full life-cycle costing of the Canadian surface combatants, the new ships for the navy. We've increased the number of costing specialists in defence from 30 to 80, the largest in the federal government. We've instituted a rigorous program to train them. These internationally certified costers have the expertise to ensure that the information is available to support the development of our departmental investment plan.
Finally, the third theme of the Auditor General's report is performance measurement. We're in the early stages of developing a departmental results framework. Among other things, the framework will have to establish standardized rules for entering our performance data, and validating and reviewing information systems. This means we'll be able to better access data on how we manage our in-service support, and with better data comes a better understanding of results. By this time next year, the framework will enable us to begin establishing benchmarks against which we compare our performance. It will tell us whether we're meeting our expectations with respect to equipment availability and condition, and it will highlight where we can improve. Developing performance measures and indicators now will enable us to do much more than just report on performance. It will allow us to turn data into information, and information into business intelligence.
As we discussed with you in January, we've also been working on amalgamating several data sources into our resource management information system, and we use that system to greater effect in several areas. Building on our work to date, we'll use DRMIS and other analytics tools to implement the management action plan for this audit. For example, we'll use DRMIS to track fleet availability in a way that is more conducive to measuring the effectiveness of our in-service support contracts, and that will enable us to refresh and measure through-life cost information.
More than 20,000 defence members use the system across Canada, on ships at sea and in locations around the world. We want to expand its reach ever further. Vice-Admiral Lloyd can talk to you about the navy, which is the most advanced in this area. We hope to roll this work out into other platforms in the air force and army, which is the direction we're headed.
I recognize that the challenge before us is sizable. We are making progressing in addressing it, but we acknowledge that we have much more to do. Again, I'd like to thank the Auditor General for helping us. We agree with his assessment and are at work implementing his recommendations.
Thank you. My colleagues and I will be happy to take your questions.
I thank all of you for being here this afternoon.
[English]
In reviewing this matter again, it's always interesting how data comes up, certainly with the Canadian Armed Forces collecting the data, and now what to do with that data. Clearly the auditor has been in your offices many times, and again we see this theme of data management being a challenge. I hear your comments, which are positive, that this time we're doing more with the data that is being collected and about how we can certainly improve services to Canadians with the equipment support for the Canadian Armed Forces.
Again, in your comments, I'm very glad to see that, and as concrete measures, that is great, but I'd like you to turn to page 13 of the report, at paragraph 7.41. As we say in French sometimes,
[Translation]
“the more things change, the more they stay the same.”
[English]
That's what I'm concerned about right now, that even though we're saying we're going to do things, this is not the first time that this has been brought to the forefront.
Paragraph 7.41 of the Auditor General's report says, and I'll read it:
In our 2011 audit, we recommended that National Defence develop a means of monitoring overall and equipment-specific total cost information for maintenance and repairs. In response to our recommendation, National Defence stated that by December 2013, it would use its financial and materiel information system, the Defence Resource Management Information System (DRMIS), to record and monitor overall and equipment-specific total cost information for its maintenance and repair activities, such as personnel, contracted services, spare parts, maintenance equipment, and infrastructure costs.
Paragraph 7.42 says:
We found that National Defence did not use DRMIS as the source of information on overall and equipment-specific costs for maintenance and repair.
And it goes on.
At that time, the department had said they would use the system. The Auditor General said they did not use its capabilities fully. Here we are in 2017, and you're telling us again that you will use this system.
How have things changed so basically now that we should be confident that the system will be better used? At the end of the day, we all agree that we're not getting value for money and we're all concerned about that. What specific measures can you tell us about today that we can rely on to be done?
:
Thank you very much, Chair.
Thank you to all our witnesses for being here today.
You all know how long I've been around here. The more we get into this, the more I think we need a separate, stand-alone public accounts committee for defence and aboriginal affairs, because we just never seem to turn the corner. Every time the department comes in, it's always, “we got it right this time.” I share Mr. Lefebvre's sentiment. Why should we believe that this time it's going to be different? I also agree with Mr. McColeman that this is an incendiary report.
Really what is problematic is not the part where we're finding new problems, and what are you going to do about it? It's these ongoing problems that keep happening time after time after time.
Let's go through it again.
On page 22 of the Auditor General's report, paragraph 7.85 is on National Defence's performance. These are the words of the Auditor General:
In response to the questions about our 2011 audit, National Defence told the House of Commons Standing Committee on Public Accounts that it would develop performance measures on its maintenance and repair activities and its financial and materiel information system by December 13.
This is an example of how there's a problem, and there's an offer to fix it, and you tell us you're going to do this and everything's fine. And what does the next paragraph, 7.86, say?
We found that while National Defence had established performance measures in support contracts with private firms, it did not develop similar measures for its own performance.
Help me understand how telling us in 2011 that you're going to deal with this issue effectively, and you're going to put the measures in place....and then we find out it was only a half-measure, that it was done for the private sector, but not on your own. Is there a good reason for that?
To be honest, I don't know where to begin because there's so much in this report. Let me just start off by saying that at National Defence you have the task of purchasing, you have the task of supporting, and then you have the task of staffing. Based on the Auditor General's report, it looks like in three areas you've gone wrong.
On the first, in terms of purchasing, you've overestimated equipment use, you've over-purchased. With respect to support, you have underestimated the cost of providing that support to the equipment. Then in terms of staffing, you have under-resourced the personnel requirements.
Let me just pick one. I'll go to the support of equipment.
Mr. Forster, you said earlier that while some costs, such as the purchase price of a piece of equipment, are relatively easy to track, others, such as the development and disposal cost and the operating and maintenance costs over a 20- to 30-year period, are not. As reasonable people, we can certainly appreciate that type of explanation.
However, in the Auditor General's report, it was also pointed out, with respect to the use of incremental funds, that money that was specifically allocated for particular purposes was not used for that purpose. There's an example the Auditor General gave in his report that $115 million was provided in the 2014-15 fiscal year to support the Chinook helicopter, and $137 per year thereafter. Part of that money was not spent for that purpose. What's worse is that there wasn't any monitoring from National Defence.
My question is in two parts. First, to the Auditor General, beyond that finding were you able to provide any type of assessment in terms of how this happened? Was this a blatant disregard of what is expected by the Treasury Board, which is that when incremental funds from the government are allocated for a specific purpose, that money be used for what it was allocated for?
My second question is to Mr. Forster. What happened there?
To go back to the chart on page 9, at some point even our discussions will turn the corner and look forward, but we have to do an adequate job of looking at where we've been.
I pointed out earlier that on the costs for new equipment, the assumption was that the support costs for new equipment would be the same or less, and it ended up being three times as much. I also want to bring to your attention the third part of that chart, where it says that the “level of effort for support activities is predictable.” That was the assumption. They assumed that the level of effort for support activities would be predictable.
When we see what actually happened, we see that the level of effort for submarine maintenance was significantly more than expected, and that's putting it mildly, given that “National Defence estimated that in-depth maintenance would take less than one year per submarine, at a cost of $35 million each”. As stated, “Although the in-depth maintenance period was reduced from 6 years to 4 years for each submarine, the most recent one cost”—hang on—“$321 million.” We went from $35 million projected to $321 million.
I mean, we can all understand a near miss, but wow. Please help me understand how we got here from an assumption that basically said, “Hey, don't worry, everything will be predictable, it all looks good, and we will be able to do this.” You thought that was going to be about $35 million, and you ended up at $321 million. Help me with this, please.
We have a number of factors, some of which you point at, rightfully so, and that the Auditor General points at.
On historical costs, are they the best indication of future costs? The answer is no. At times when we're doing some of these things—and again, in a period without the “costers” we have today—the only data we have is historical costs. That's part of it. That's something that we've been working on and improving.
I'll just point out, though, for the $35 million to the $321 million, if I can call it the “contractual costs”, that part of it is lessons learned in that contract on how we're doing maintenance. For example, it's not an overall increase. It's what we've brought into the contract. It includes other maintenance that we were doing as heavy maintenance, through other contractual vehicles that we found to have the economies of scale, bringing it all into the Victoria in-service support contract. That accounts for some of the increase, which again is not a cost increase, but an increase in the use of that contract.
A lot of it is capital improvements. That is not maintenance. We do this. In particular, in a ship or a submarine, when you have it taken apart to do maintenance, if you're going to change sonars, periscopes, torpedoes, and communications, the time to do that work is while you're doing the maintenance. Again, capital projects are approved separately, and the contract becomes the vehicle by which we do the installation, so it's not entirely an increase in maintenance costs.
The other thing is that we relooked at the approach to maintenance. As it says here, again, we acquired the Victoria class submarines with very little time at sea and not a good understanding of what is an extremely complex platform, which has dire consequences if you have major system failure. At first, we looked at about a four-and-a-half-year cycle and then about a year and a half in heavy maintenance. What we've been able to do is bundle together a lot more of the heavy maintenance. Now we've evolved all the way to a nine-year cycle and then putting the boat into maintenance for three years.
Certainly, it is an indication of some of the things you're pointing at, sir, some of which is an underestimation of maintenance and that, but there are other factors at play here, which include bringing more maintenance into the contract from elsewhere, capital investments that are occurring in this, and the periodicity of the maintenance, which is to say that we're doing more in-depth and deeper maintenance less often, sir, but it's taking longer.
:
Thank you very much, Mr. Chair.
My question is for Mr. Ferguson. In 2011, your office's report "Maintaining and Repairing Military Equipment " stated there was a lack of cost and performance information as well as a significant gap between the demand for maintenance and repair services and the funds available.
To your 2016 report, paragraph 3 of your outline here today says that National Defence made some initial planning assumptions that underestimated support costs, overestimated equipment use, and under-resourced personnel requirements. Back to point 6, National Defence did not have enough trained pilots, technicians, weapon system managers, and contracting staff to carry out maintenance work for new equipment.
With all that in mind, my question comes from the perspective of not only me as a member of Parliament, but also on behalf of constituents and taxpayers. These are, from an outsider's perspective and with hindsight in mind, simple mistakes that shouldn't have been made. But why are they made, not only with respect to what has happened in National Defence, but as I know this committee has heard before, with respect to other departments?
I know your office has written a number of reports over the years that outline mistakes that are made that led to the ineffective and inefficient use of funds. Again, from a taxpayer's perspective, these mistakes shouldn't be made, but all too often they are. What are some potential patterns that you've identified throughout all this? Is it the complexity inherent in this sort of work in terms of purchasing, a lack of communication, silos within departments, for instance? What sorts of patterns could you point to?
:
I think, perhaps, what I want to start with is just the why life-cycle costing, for example, is important. When you're dealing with this type of equipment, and we've heard about the complexity, we've heard about how much the equipment costs, how long the equipment's going to last, how many people are needed to support it, how many people are needed to operate it, all of the costs, fuel and other things that go into operating it, maintaining inventories, it's extremely complex. So whenever a significant piece of equipment is being purchased, that significant piece of equipment can have a significant impact on the budget of the department for many years to come.
The idea about life-cycle costing isn't about trying to tell departments they need to be able to figure out how much a replacement bolt is going to cost 25 years from now. It's about telling departments that they need to make sure they're doing a good job of understanding, when they buy a piece of equipment, what the impact of that will be going forward.
I think here, one of the things that we particularly identified—and I think this is a common issue in other large projects—goes back to the assumptions. One of the assumptions that we highlighted and has been talked about today a number of times is the assumption that the cost to maintain and support the new equipment would be no more than the cost to maintain and support the old equipment.
At the time, and I think one of the things that bothers me a bit about today is that the people who made the decisions and the people who made the responses to us in 2011 are not the people who are here today who are having to try to defend why the department said they would get some of these things fixed by now and they haven't gotten them fixed.
When you go back to some of these decisions, that the support cost for new equipment would be the same or less than the previous equipment—and I think I said it in my opening statement—that just was not a realistic assumption. It's important for these assumptions to be realistic so that the departments understand, when they're buying a significantly complex piece of equipment, that it may significantly change how many people you have supporting it, how many technicians there need to be, what the operations are even in terms of military personnel for the new pieces of equipment, because it's going to be different. Starting with an assumption, for example, that it's not going to be different, quite frankly, isn't a realistic assumption.
I think two things to draw from this are the importance of life-cycle costing, not down to the nuts-and-bolts issue but from the point of view of how it will impact long term, and in what pattern, the budget of the department; and the importance of having good planning assumptions that are realistic, to help you understand what that impact is going to be.
I'm also curious to see if there are any further comments.
Mr. Fragiskatos, I really liked your line of questioning in terms of pulling together a perspective on trends, on being able to use the collective knowledge for a more effective use of hard-working taxpayers' dollars, frankly.
When I sit here as a parliamentarian and I look at you, I don't envy the position you're in. We're pushing you hard. We're pushing you hard on issues of value, and the Auditor General is pushing you hard on issues of value. In your own personal lives, I suspect you're interested in getting value. When you see some of what's uncovered in an Auditor General's report like this, your perspective somehow gets a little lost. This should not happen, if we could all agree on that premise, and yet it's happened.
As an extension of my colleague's earlier comments—and I said it earlier in a different way—what is really learned here? Can we not apply the simple value propositions that each of us use in our lives to make sure these things don't happen? Is it unreasonable to ask that question, as a parliamentarian, as a person who's asking for scrutiny here in a very hard, difficult way? These seem to me to be elements that should be worked into every discussion of every procurement of every item, right down to the boots the soldiers wear.