Proceedings of the Standing Senate Committee on
National Finance
Issue No. 87 - Evidence - February 19, 2019
OTTAWA, Tuesday, February 19, 2019
The Standing Senate Committee on National Finance met this day at 9:30 a.m. to study the processes and financial aspects of the Government of Canada’s system of defence procurement.
Senator Percy Mockler (Chair) in the chair.
[English]
The Chair: I would like to welcome all the senators, their staff and all our employees to our new home. I am told that it is the most modern facility in the G7 countries, not to say the G20 countries. Welcome home.
My name is Percy Mockler, a senator from New Brunswick and chair of the committee. I wish to welcome all those who are with us in the room and viewers across the country who may be watching on television or online.
[Translation]
As a reminder to those watching, the committee hearings are open to the public and also available online at sencanada.ca.
[English]
Now I would like to ask the senators to introduce themselves.
Senator Boehm: Peter Boehm, Ontario.
Senator Pratte: André Pratte, Quebec.
Senator Klyne: Marty Klyne, Saskatchewan.
Senator M. Deacon: Marty Deacon, Ontario.
[Translation]
Senator Forest: Éric Forest from the Gulf region in Quebec.
[English]
Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.
Senator Neufeld: Richard Neufeld, British Columbia.
[Translation]
The Chair: I would also like to recognize the clerk of the committee, Ms. Gaëtane Lemay, and our two analysts, Alex Smith and Shaowei Pu, who team up to support the work of the Standing Senate Committee on National Finance.
[English]
Honourable senators and members of the viewing public, the mandate of this committee is to examine matters relating to federal estimates generally as well as government finance. Today, our committee is continuing its special study on military procurement, which we started on October 30, 2018.
[Translation]
During our first hour, we will hear from the Acting Chief Financial Officer of the Department of National Defence and the Canadian Armed Forces, Ms. Julie Charron. Thank you for having accepted our invitation, Ms. Charron.
[English]
She is accompanied by Werner Liedtke, Acting Associate Assistant Deputy Minister (Finance), Department of National Defence and the Canadian Armed Forces.
Welcome to both of you.
At the beginning of December, the department offered to brief the committee on defence spending and defence policy, which is named Strong, Secure, Engaged costing. Honourable senators, we saw it as a good opportunity to complement the follow-up information the department sent us after its most recent appearances and also a great opportunity for the committee, for the more recent members and all the members of the committee, to have additional information.
I would like to thank the department for their official, Madam Charron. We trust you will be more informative on the subject matter as to the order of reference from the Senate of Canada. I have been informed by the clerk that you will make comments, to be followed by questions from the senators.
[Translation]
Ms. Charron, you have the floor.
[English]
Julie Charron, Acting Chief Financial Officer, Department of National Defence and the Canadian Armed Forces: Thank you very much, chair and senators, for the invitation to present a technical briefing on the National Defence funding model. This model was a key element in how we developed the affordability assessment of our new defence policy, Strong, Secure, Engaged, referred to as SSE. It is an honour to meet with distinguished members and colleagues before the committee.
Today, I am joined by Mr. Werner Liedtke, my deputy chief financial officer responsible for financial management.
[Translation]
As we implement SSE, it is important for all stakeholders to have a clear understanding of our processes. I am pleased to be here today to discuss the flexibility that Defence has in its funding model, and how that model will influence the implementation of SSE over the next 20 years. As part of that discussion I would also like to provide you with some background on how we do costing for projects, the governance that we use to manage departmental funding, and how we report on results.
[English]
National Defence is a large and complex department, with an authorized strength of 71,500 regular force personnel, 30,000 reservists and approximately 25,000 civilians. In addition, we manage an infrastructure portfolio of approximately 21,000 buildings, 2.2 million hectares of land and 13,500 works such as jetties, airfields, training areas and roads.
To meet Canada’s defence needs at home and abroad, annual defence spending on a cash basis over the next 10 years is forecasted to grow from $18.9 billion in 2016-17 to $32.7 billion in 2026-27, an increase of over 70 per cent. The funding planned for fiscal year 2018-19 is approximately $21.7 billion. Over the next 20 years, SSE includes new funding for defence of $48.9 billion on an accrual basis, or $62.3 on a cash basis.
Overall, we spend approximately $9.1 billion on personnel and related benefits, $8.2 billion in operating and maintenance, $4.2 billion in capital, and approximately $200 million in grants and contributions. If you flip to slide 3, you will see a graph, outlining what I just mentioned.
[Translation]
National Defence funding is comprised of three votes and statutory funding. The votes are Vote 1 Operating, Vote 5 Capital and Vote 10 Grants and Contributions.
[English]
The defence funding model is comprised of three components. The first two are operating, and grants and contributions, funding that is earmarked in reference levels, which is similar to other departments. Operating funding includes salaries, equipment operating and sustainment, training, IM/IT, infrastructure, military operations, et cetera. Grants and contributions are principally funding related to our contributions to NATO.
[Translation]
The third component is capital investment funding, which is also accessed fromreference levels; however, even more importantly, this capital funding is earmarked separately in the fiscal framework. Capital funding is to procure assets —equipment and infrastructure — that will be used over multiple years. Historically, the focus on the National Defence budget has been its size, which has resulted in the perception that there is sufficient flexibility to mitigate new demands. The view of the Defence budget depicted on this slide provides a different perspective by dividing the budget into its principal elements, which can be categorized as fixed in the short-term.
[English]
You will note the categories of grants and contributions, infrastructure, statutory, national procurement, salaries, capital and other operations and maintenance. I would like to highlight the bottom category on the chart that depicts $3.8 billion by 2023-24 in other operations and maintenance funding. This category represents the department’s discretionary funding that would be used to address any program restrictions or offset requirements. This is also the segment of DND’s budget that funds operational training, travel, and fuel for aircraft, ships and vehicles.
[Translation]
SSE provided an opportunity to introduce some important changes to how the capital budget is planned and managed. The planned investment in capital assets accounts for the project development and acquisition costs on an accrual basis over the life of the asset.
[English]
The government committed significant funding to National Defence over the next 20-year period of SSE. On a cash basis, $553 billion has been earmarked in the fiscal framework, which is comprised of $389 billion in operating funding and $164 billion in capital funding.
[Translation]
The Fall Economic Statement 2017 confirmed that the funding for SSE that was announced in June 2017, including $108 billion on an accrual basis over 20 years for capital projects, has been set aside in the fiscal framework.
[English]
The accrual envelope simply means that the total impact of the usage of capital asset acquisitions, and dispositions where appropriate, over the next 20 years cannot exceed $108 billion. The accrual impact reflects the cost of usage of an asset over its useful life. For example, if you acquire an asset for $10,000 and you use this asset for 10 years, you would have an accrual impact of $1,000 per year over 10 years. We only start recognizing the impact of the asset once we start using the asset. These costs will be recorded in the National Defence financial statements balance sheet and amortized as an expense in the operating statements over the useful life of the asset.
This is different from the funding needed to acquire these assets.
From a cash perspective, we will seek funding through appropriation based on the forecast provided by the project implementer.
As part of the planning for the acquisition of capital assets, the operating and sustainment costs for the equipment will also be earmarked in the operating budget as part of the planning process to ensure that the long-term budget requirements for DND have been identified. This was a significant step forward in the affordability for a capital project, and it’s now measured in terms of both acquisition and sustainment over the planned life of the asset.
National Defence has a robust governance framework to approve and manage its capital investments. It ensures that DND has the flexibility to manage the investments required to meet defence priorities and deliver programs. The defence capability board approves the capabilities required by the Canadian Armed Forces. Once the capability is approved, the program management board will review the project requirements and recommend project funding from the capital investment fund. The deputy minister, as chair of the investment and resource management committee, approves funding for the project.
[Translation]
Project approval is based on the project complexity. Treasury Board Secretariat has identified processes that determine which projects are to receive Treasury Board approval, with the remaining projects being approved by the Minister of National Defence or a delegated official. Projects requiring Treasury Board approval undergo additional review and scrutiny by them as part of the approval process.
[English]
The governance model allows for new priorities or projects requiring additional funding to be sourced through the reallocation of cost savings or by the cancellation of lower priority activities. These adjustments are approved through the same governance process used for project approvals. It should be noted that a capital investment fund governance model has been negotiated between National Defence, the Department of Finance, Treasury Board Secretariat, and the Privy Council office to provide flexibility in the management of the capital program.
As we execute the long-term plan, we recognize that things will not always go as planned, particularly for projects that extend over many years or projects in their very early stages. In order to ensure that the long-term plan has the agility to reflect changes in planning assumptions, National Defence has the flexibility to realign the planned cash funding to reflect the adjusted changes. For example, the completion of a project below the approved budget will allow the remaining funds to be used for other requirements, such as funding pressures related to cost increases in another project.
I would now like to turn to how our defence policy was costed.
[Translation]
All cost estimates were prepared in accordance with Treasury Board guidelines and existing National Defence costing frameworks and procedures.
[English]
Cost estimates were produced by a joint costing team consisting of National Defence personnel supplemented by contracted resources from Deloitte.
[Translation]
In addition, staff from the Office of the Comptroller General Costing Centre of Expertise, Treasury Board Secretariat, Department of Finance and Privy Council Office provided oversight functions.
[English]
Finally, DND engaged five firms to review the application of the costing methodology.
National Defence produces a number of public reports that include financial information. Examples include the departmental plan, the departmental report, estimates, public accounts and the defence investment plan. In order to ensure consistency of financial reporting, I am responsible for ensuring the accuracy and timeliness of all financial information.
[Translation]
The Defence Investment Plan highlights the planned investments and notably demonstrates National Defence’s commitment to affordability and effective resource management. This information is updated regularly.
[English]
Fiscal prudence requires Defence to appropriate from Parliament only the funding that it requires to deliver the capabilities and acquire the capital and equipment required by the women and men of the Canadian Armed Forces and the Department of National Defence. There are and will continue to be periods in which National Defence does not use all the funds allocated in a given year as initially planned. Cash lapses occur when the final cash expenditures for the year are less than the total cash authorities approved by Parliament. Contributing factors to a departmental cash lapse can include a change in forecasted operating budget expenditures, such as delays in hiring personnel, changes in planned training, changes in estimated costs of goods and services. National Defence has the ability to carry forward up to 2.5 per cent of its operating budget to the next fiscal year. Since 2015-16, the department has been successful in monitoring operating expenditures and remained below the targeted 2.5 per cent.
[Translation]
Cash lapses may also be created due to less than forecasted capital spending. When planning a complex capital budget, changes to the plan could result in the need to adjust the timing of the investment profile of the project and consequently the capitalization date and amortization profile of the asset. This is why we will not always request the funding originally planned in SSE but will sometimes move funding to earlier or later years to ensure that the money is available when we need it.
Examples include: funding set aside for project risk not being required, contractor delays in executing the work, efficiencies in contracting, and finally, internal delays.
[English]
It’s important to understand that these sorts of changes do not represent a budget cut, nor a budget increase. We are simply changing when we spend the money. In this way, National Defence does not lose any of its capital funding; instead, it is realigned into the years when it is required.
Over the last 10 years — what you see on the graph — there has been a downward trend in capital lapses, and over the last four years, in particular, there has been minimal to no lapses as a result of an improved cash forecasting process. This represents the top red part of the graph at the bottom. What is red is what has been lapsed. On the right-hand side, you will see that there is no red for the past two years. That means that DND did not lapse money.
[Translation]
My colleague and I would be pleased to address any questions or comments that you may have.Thank you.
The Chair: Before we continue, I would ask the senators who have not had a chance to introduce themselves to do so now.
Senator Moncion: Lucie Moncion, senator from Ontario.
Senator Forest-Niesing: Josée Forest-Niesing, senator from Ontario as well.
[English]
Senator Marshall: Thank you for that excellent presentation.
I am looking at the capital in your slide 3 — the capital of $4.2 billion. In SSE, based on the information we’ve had, it was anticipated that $6.6 billion would have been required, so it looks to be approximately 60-odd per cent that you will use this year. When you compare the projects that were anticipated in the $6.6 billion in SSE to the $4.2 billion that you’re going to spend this year, what projects didn’t progress as well as you’d anticipated?
Ms. Charron: Thank you for your question, senator. In fact, the $6.6 billion was planned, as you mentioned, and we’re planning on drawing $4.4 billion.
There are four reasons why we don’t draw the money. Most of this money that’s not been drawn, about $760 million, is related to contingencies that we had set aside in case of a need in that project, so it —
Senator Marshall: What project would that have been?
Ms. Charron: I don’t have the details of all those projects but, when we do the costing, all of the projects have a line called “contingency,” because, as you know, there could be cost increases. So we always plan for a certain contingency in our project. Depending on where we are in the stage of the project, the contingency could be higher or lower.
If we’re at the very beginning of a project, as you know, we have a very rough order of magnitude when we cost those projects. As we get into definition and we have a better idea of the type of capabilities we will need, we are able to refine the costing for those projects. So depending on which projects we are talking about — we have 333 projects in SSE, of which 125, I believe, have been completed so far.
A lot of activities have occurred since the implementation of SSE. All of our projects have contingencies.
Senator Marshall: Which would have been the largest project that would have impacted the contingency amount?
Ms. Charron: Senator, I do not have this information at this point. I would have to get back to you. But I would like to point out that the contingency is not money that we’ve lost. It means that we did not need that money this year, and we need to keep the contingency in the cost of the project until the project is closed. Depending on the progress of a project, we may need the contingency in one year but not in another year. So we’re just moving this funding to a future year until the project is closed.
Senator Marshall: Could you provide the information to the clerk as to what is in that $760 million?
What else would there be? There’s a difference of 2.2 or 2.4 billion. So 760 would be contingency that you did not need for whatever reason —
Ms. Charron: That’s right.
Senator Marshall: — either the project didn’t need it or the project’s been deferred and you therefore didn’t have to access it. What else would there be?
Ms. Charron: There are also delays caused by DND or by the industry. Also —
Senator Marshall: Could you give us an example of what projects?
Ms. Charron: I do not have this detail with me today regarding the projects. I would have to get back to you.
Senator Marshall: Could you get back to us with the projects that were delayed and the 2.2 billion as a result of delays?
Ms. Charron: I can provide you with some information. The delays caused by the industries for 2018-19 amount to $593 million.
Senator Marshall: Do you have the projects there? What projects?
Ms. Charron: I don’t have the projects here, unfortunately.
Senator Marshall: So there’s still a billion left there; that’s a difference.
Ms. Charron: We also have internal delays caused by DND. It could be that our projects were not ready to go forward. So we have a total of $804 million there, 37 per cent —
Senator Marshall: Do you have those projects there?
Ms. Charron: I do not have those.
Senator Marshall: Can you provide those to the clerk, also?
Ms. Charron: We have also set aside some money for intellectual property payments that we thought we would probably have to incur on some projects. Sometimes, it does not occur. In this case, we had a project where we had set aside $800 million for intellectual property, and it was not needed.
Out of the $2.1 billion that we did not draw down, we attribute that $758 million is related to contingencies that were not needed for the project, which brings us down to $1.3 billion that we didn’t draw down.
If we compare that to previous years, it demonstrates that we have actually pushed through more projects. There are more activities related to SSE and more spending related to SSE that is occurring. We find that to be very positive news, because we’re happy to see that we don’t always need the contingencies. Sometimes the costs are less than what we had planned. Just like when we build a house, we will plan for a contingency and we don’t always need that contingency. So we’re very pleased to see that we don’t use all the contingencies, but we set it aside to the next fiscal year until the project is closed. To our view, this represents prudent fiscal management as well, because we have set aside this money.
Senator Marshall: For the Arctic and offshore patrol ships, for supplementary supply, you’re requesting $159 million. Was that in the original $6.6 billion that was earmarked for SSE, or is that something else? Was the 159 in the 6.6 billion?
Ms. Charron: Yes, ma’am, it was.
[Translation]
Senator Pratte: Good morning. Our chair put questions to the Department of Defence about the principal causes of delays and the increase in the cost of large-scale projects. I only have the English version of the reply he received, unfortunately, but in both cases, the explanation remains the same: “overly optimistic schedule” and “overly optimistic budget”.
What measures have been taken, if any, in the context of the Strong, Secure, Engaged (SSE) defence policy to ensure that cost forecasts and projected time frames will be more precise? You know as I do that this has a very important impact on the government and public opinion. When you announce a $20-billion project and when, finally, six years after the planned completion date, it costs $33 billion, those are two very different things.
Ms. Charron: Thank you. With respect to budgets, the Department of National Defence presented a draft budget covering the project from beginning to end. Within the budget components we included project acquisition costs, of course, but also maintenance costs, as well as costs for repairs, salaries, and project disposition.
As I mentioned in my presentation, costs vary according to the status of the project at the time when we prepare the budget. If the project is just beginning and concerns equipment to be acquired over the next 10 or 15 years, the information at our disposal will be much more limited than if the project were in the definition phase. At that point we would have defined the necessary capabilities of a ship or a plane, for example. As the project progresses, we regularly update our estimates to determine whether planned expenditures need to be adjusted.
We are currently updating all of the projects listed in the Strong, Secure, Engaged policy in order to review the impact of certain delays. We can sometimes predict delays, and sometimes not. Inflation and additional customs tariffs, for instance, are out of our control and it is very difficult to plan for such expenses. That is why, in preparing the budget for a project, we must include a contingency plan to take risk factors into account, because changes can occur in the exchange rate or the cost of metals, for example. There is a rigorous internal process in place which allows us to review costs and do updates. In fact, Treasury Board and the Department of Finance have given us some flexibility with regard to the investment fund, since we must offset cost increases or decreases.
As to project delays, I invite you to put the question to my colleague Mr. Pat Finn, or to those responsible for the implementation of the process, as this aspect is beyond the scope of my duties.
Senator Pratte: My next question is about the overly optimistic budgets. Why are the contingencies in place? Inflation? The exchange rate? For a ship or a plane, you must plan for production costs that may be higher than anticipated. The first projections are usually optimistic; the bill is rarely pessimistic, it is always optimistic. In your contingency plans, do you take into account the probability that the project, for all sorts of reasons, may cost more than initially projected?
Ms. Charron: Yes, the contingency plans do include the inflation rate. Inflation may also be higher for defence-related projects, since some are very advanced from the technological standpoint, and there are few competitors. We have observed that inflation in these fields is higher than the inflation a normal consumer experiences. Consequently we have included this factor in our budgetization models.
Predictions are difficult. We will never be able to predict costs with 100 per cent accuracy. However, we do plan for contingencies. We also look at the history of projects. Some costs have increased considerably and we take all of these factors into account. An optimistic budget could, for instance, include a reserve set aside for IP intellectual capacity. We have no way of knowing, when we prepare a budget and project costs, what that amount will be. So we can’t forecast an amount. In a competitive process, the amounts can vary up or down, so we make adjustments accordingly.
We believe it is better to set cost estimates a bit higher. Otherwise, for consumers and taxes, we would have to come back for more funding, and we could not guarantee that the men and women of the Canadian Armed Forces will have the resources they need.
Senator Pratte: In connection with this defence policy, the government has made important commitments regarding transparency. You say that you are reviewing cost estimates for the investments planned in the context of this policy. Will the results of this reassessment be made public in one way or another?
Ms. Charron: Yes, absolutely. The Department of National Defence produces an investment plan that is released publicly. We produced it last year toward of the end of May or beginning of June. In that investment plan, for all of the projects underway we indicated a range of projected costs and also a status report on the projects, as to whether they are in the identification, definition or even implementation phase. When the contracts are awarded, we indicate their amount in the investment plan.
Also, when we project financial requirements in the main estimates or even the supplementary estimates, we indicate the revised amount we will need. We know that we have to manage an envelope of $108 billion over the next 20 years. Consequently, certain choices have to be made, sometimes internally, to determine which projects will go forward or, in some cases, to reduce what was originally forecast and be able to manage all of that within our envelope.
Senator Forest: I will try to be concise. The governance framework established in partnership with National Defence, Treasury Board and the Department of Finance seems quite solid. Do you reevaluate some of the choices that were made originally? Do you say that you had decided on certain options, but after a few years you realized that the results were not what you had expected, and that consequently you want to make changes? That is in fact a feature of any strategy. You have to adjust it along the way to optimize it based on actual experience. Do you reassess your strategic choices in the context of your governance?
Ms. Charron: Yes, absolutely. Certain committees review things internally, and it is their work to discuss things with project managers and those who implement them to determine necessary capacities. In some cases, choices have to be made and we decrease or increase the necessary functionalities.
Senator Forest: What is the status of the National Shipbuilding Strategy? Is it being reevaluated? In light of the delays, and mandates that were granted to various shipbuilders, is that policy being reassessed?
Ms. Charron: The National Shipbuilding Strategy does not fall under the purview of the Department of National Defence; it is a national policy. The department works with the various parties involved to ensure its implementation.
Senator Forest: It orbits around the government apparatus and no one monitors it nor reassesses the relevance of the choices made, or its effectiveness? It exists in a void?
Ms. Charron: It is a matter of governance and of policy. Unfortunately, I cannot speak to this.
Senator Forest: Who is responsible for this policy, from the perspective of governance?
Ms. Charron: The government is responsible for this policy.
Senator Forest: So everyone and no one.
Treasury Board is one of your partners. It requires that departments take all costs into account, including acquisition costs, maintenance and even infrastructure costs to receive equipment. I can point to the Cyclone helicopters as an example where the maintenance costs were three times higher than the acquisition costs.
Did the department implement the Defence Resource Management Information System? Is that system in place currently? Our acquisition program is going to be very important in the years to come. It would be essential that the Defence Department have this analytical capability at its disposal.
Ms. Charron: Indeed, the Department of National Defence has a management information system. That allows it to monitor the cost of projects. We are always adjusting and adding functionalities to that information system. I don’t have the information on the Cyclones, but when we work with Treasury Board, there is a centre of excellence for costs, and certain projects that go forward are chosen by Treasury Board, which ensures that the cost projections of the department are accurate and complete.
Senator Forest: You guarantee that the costs are not going to spiral, as in the case of the Cyclone, correct?
Ms. Charron: There are always factors that are beyond our control, such as the imposition of additional tariffs or major effects due to the exchange rate. There can be cost fluctuations. Unfortunately, I don’t have all the information available for the project you are referring to.
Senator Forest: I have one last technical question. In your projections, the item “Other Operations and Maintenance” totals $3.8 billion; in 2010-11, it was $4 billion. If I understand correctly, this item includes every type of fuel, and those are some very inflationary elements. I am really surprised to see that you expect this item to be less capitalized in the end than it was in the beginning, because these are probably some of the most inflationary products on the market. I am simply trying to understand.
Ms. Charron: In the fourth item, “National Procurement”— unfortunately I don’t have the slide in French — part of the costs are included, such as inflation, for example. If you look to the right, it continues to increase, as you can see in the blue box where it says $12.2 billion.
Senator Forest: The capitalization?
Ms. Charron: The capitalization. The figure is 4.1 in the rust-coloured part. This includes maintenance and inflation costs.
Also at the bottom, for the $3.8 billion, this covers all travel expenditures, training for our military and a certain margin for inflation or for increases; we have to maintain a certain leeway.
Senator Forest: I had understood that fuel and gas were included in this item.
Ms. Charron: Yes, some of it is. But certain contracts are also included in the $4.1 billion. For instance, we may secure a maintenance contract for a fleet of aircraft and that will be part of the $4.1 billion — at the fourth line starting from the top.
Senator Forest: So inflation is absorbed into the rust part of the diagram? It includes increases due to inflation? And increases due to products are in blue?
Ms. Charron: There is a certain leeway included in the blue part. I’m going to ask for my colleague’s help.
[English]
Werner Liedtke, Acting Associate Assistant Deputy Minister (Finance), Department of National Defence and the Canadian Armed Forces: There is a bit of inflation in all of those categories. The governance process that Ms. Charron briefed is also used for operating and sustainment. As we go through the years, if this year there is an increase in estimated costs for fuel, then we’ll make a trade-off decision and monitor that throughout the 20-year window, and the deputy and the minister will have the ability to actually move money within those categories, particularly the 3.8. It’s the non-discretionary one. Sometimes there is a non-discretionary piece, and they will make the same trade-off, and the same governance process will go through that.
[Translation]
Senator Forest: You will admit that this is not easy to understand for a simple politician like me.
[English]
Senator Neufeld: Thank you for being here. A question came up in your last response. You actually estimate what the fuel costs are going to be 20 years from now? How do you manage that?
Mr. Liedtke: I’m not suggesting that we estimate the long-term 20 year, but where we have flexibility in the model is that we will look within the next year, and we have the capability within the governance model to adjust for those changes.
Senator Neufeld: I maybe just misunderstood you, but okay. I was going to talk to you about how you magically do that.
On page 2, you say that National Defence, over a 20-year period, has a cash base of $553 billion earmarked in the fiscal framework. It comprises $389 billion in operating funding and $164 billion in capital funding. That $164 billion, does that include new aircraft for the air force? If it does, how much?
Ms. Charron: Thank you for the question. Yes, in the $174 billion that we had planned, and this is on a cash basis, there was an estimate for future fighters. I would like to double-check the figure. I don’t have the details of all the projects with me, but we have included, and I will be pleased to provide you with the range that we had identified in SSE for the future fighters, but we do have a cost estimate in there.
Senator Neufeld: If you provide that, please provide it in the years that you anticipate the purchase of those aircraft. Hopefully it’s not 20 years from now but relatively soon. Could you do that, please?
Ms. Charron: Yes, I will.
Senator Neufeld: Thank you.
On page 11, you showed us something about lapsed funding. I’m a little confused by the graph and, pardon me, I’m not an accountant. What is the blue? What does the blue represent? I get the lapsed funding is the orange colour, but what does the blue mean?
Ms. Charron: Thank you for the question. We have three colours of blue. We have a very pale blue line at the top, which is our grants and contributions, the vote 10. This is our contribution to NATO. Then we have the darker blue, the one at the top if we go to the right-hand side of the graph, and this represents the capital funding, the vote 5 money. That’s the money we have drawn down, so money that we took from government. Then we have the pale blue, which is the operating funding that we have.
Basically this shows that, if we go to 2017-18, our funding authorities were $23.5, $23.6 billion. We have requested or we spent $22.9 billion. The $490 million — the second to last from the bottom — that’s the amount we have been able to reprofile. It means we have not used it. We have drawn the money but we have not used those funds. We’re able to reprofile 2.5 per cent of our budget, so we will be able to use those funds in 2018-19. Because we are within the 2.5 per cent that is allowed, it means that we’re not losing money. We are not leaving any money on the table. This money will be available for the department in future years.
Senator Neufeld: So the spending is actually decreased a lot from, let’s say — even though there was a lapse in funding in 2010-11, the spending on national defence — if I understand what you are explaining, the total funding has decreased dramatically?
Ms. Charron: If you go to 2010-11, the funding at that point was $22.7 billion, and in 2017-18 its $23.6 billion. What it means is that, if you look at the line underneath actual expenditures, that’s how much we have consumed of the money that was available to the department. In 2010-11, we had consumed $20.3 billion. We were only allowed to keep $492 million, which is vote 1, at the bottom — 492,115. The rest of this money, which is in red at $950 million, means that the department had drawn down the money. We had the money, but we could no longer use it because it was above the percentage that was provided to the department. This money was returned to the fisc; it was no longer available to DND. So this graph shows that we have improved, because we are fiscally responsible by asking for only the money we need to be able to pay for the expenditures during a year.
Senator Neufeld: I would assume that in past years, you asked for only the money you needed also. I know my time is expiring, but it surprises me you would say that now, today, you only ask for the money you need. In 2010-11, you didn’t ask for the money you needed, or you asked for more? It’s confusing, but I know my time is short, so I give it to you.
[Translation]
Senator Forest-Niesing: I thank both of you for your excellent presentation. My questions are related to the topic that was just discussed. I am particularly interested in how you calculate contingencies and other unforeseen eventualities. Do you assign a fixed percentage to each project and include the inflation rate and other factors, as you indicated in response to a question from Senator Pratte? I’d like to know what mechanism you use, and more specifically I’d like to know if this is indicated in one way or another for each project, or whether it is a general mechanism.
Ms. Charron: Thank you for the question. There are two important factors here. The first is that depending on the status of a project, our costs will be more or less precise, because we have more or less information to determine those costs. As these details become more specific, we look at the field of the project. For example, if it is an acquisition project for heavy machinery, our details, our margin or our contingency rate will be lower than if it were a project where technological progress is a factor. In that case, the information is less precise and the contingency rate is always much higher. This methodology is well documented, and you can find it on our Intranet site and at Treasury Board. According to the field of expertise and depending on the status of the project, the contingency rates will vary.
Senator Forest-Niesing: I can see that this is very prudent. I have some concern, however, with regard to what I call the development of a pattern. From year to year, large amounts allocated to expenses go unused. In 2017-18, that amount was $1.8 billion, and according to what I understand, you anticipate that in 2018-19, close to $2 billion will not be spent. If the funds are not used as they were intended to be for two years running and if this pattern continues to develop, it’s all well and good to carry over to the next year, but are you not concerned that at some point you will have to return the lapsed funds to the Treasury?
Ms. Charron: Thank you for the question. As I mentioned before, we are now reviewing the costs for all projects. We are also examining the status of these projects. What is important is to understand what phase the project is at, in order to release certain funds or not. When the projects are completed, we release the funds. The possibility of using those funds always exists. If they are not needed, we will release them. However, we must be prudent and keep a certain leeway depending on the phase the projects have reached.
We are currently in the third year of implementation of the Strong, Secure, Engaged policy. It is too soon to release certain funds. However, when certain projects have been completed, we will release funds.
Certain projects extend over several years — seven, eight, nine or ten years. It would not be prudent for the department to release those funds. However, please understand that our internal governance process allows us to closely monitor all of these projects to see whether the costs or time frames are appropriate. Do we, in some cases, have to request more funding? When that occurs, we contact the Department of Finance to secure the funds.
Senator Boehm: Thank you for your presentation, Ms. Charron.
[English]
My colleagues have really asked most of the questions, but I would like to take it into a bit of a different direction on the question of transparency. As the CFO at DND, you must talk sometimes to your counterparts from other countries. I’m thinking particularly about others who may be involved in military procurement practices who have similar governments and governance structures to our own, particularly Australia and New Zealand, where the wish for greater transparency is probably as evident as it is here in Canada. The Australian auditor general releases an annual report on the status of major defence equipment projects, and in New Zealand, something similar is done in that there is a major projects report that can give parliamentarians and citizens a view on whether a project is on track, whether contingencies are being used or whether there are cost overruns of one kind or another. Are you talking to others about best practices, or are you open to looking at some of these newer practices at a time when there is greater scrutiny?
Ms. Charron: Thank you for your question. This is a great question. We are. We are working closely with some other countries — Five Eyes nations and countries. In fact, when we produced last year for the first time the public investment plan, we looked at what other nations had produced. Australia, for example, has a similar investment plan. We are here to be transparent and to be providing the information.
To your point about what has changed and what is the status of the project, in the investment plan, there is an electronic tool called the defence capability index. In there, you have all the projects that we have; the phase at which they are; if they have not started, when we think we are going to go into identification and project definition; as well as the expected cost range. When a contract has been allocated, we also disclose how much the contract is for and who is the recipient of the contract.
In our view, we disclose a lot of information. This tool is refreshed annually. It’s a new tool we have implemented. It was planned in SSE as well. The minister had planned to publish that. The next one will be published in the spring/beginning of summer.
Senator Boehm: Is this tool useful, also, at the time of midterm review? So in September, if you are projecting out to the end of the fiscal year, what tools are you using? Are you using this as well?
Ms. Charron: Internally to the department, we have tools that allow us to monitor every project, but we refresh our investment plan twice a year. We report to Treasury Board as well. The tool in which you have the public investment plan is a tool that we refresh annually.
Senator Boehm: Thank you.
[Translation]
Senator Moncion: My question concerns the catch-up. We often get the impression that National Defence is perpetually catching up because of obsolete equipment and important time frames. In your accounting system, after making your acquisitions, do you plan funds for eventual replacements? If a ship has a 30-year operational life, for example, do you plan funds for maintenance and repairs to that ship over time?
We get the impression that you do not have a long-term vision and do not take replacements into account. Do your cost projections include the fact that equipment will become obsolete?
Ms. Charron: Thank you for your question, senator. The cost projection model we have under Strong, Secure, Engaged (SSE) is a 20-year model, and we made a list of all National Defence equipment needs for the period during which the equipment will be used. For instance, if a boat has a lifespan that will end during that 20-year period, we have noted that we must take replacement costs into account, and the model will include the need for new investments for the period to come.
Obviously the Department of Defence cannot put funds aside. The funds come from the Treasury and the centre. Our task is to assess our requirements, to make them transparent and to make them known to the Department of Finance. However, with the current envelope, and accrued liability accounting, the $108 billion indicate the use of the funds and the assets we will need over a 20-year period.
[English]
Senator M. Deacon: Thank you for being here today. I am building on Senator Boehm’s comments and questions. I look at all the materials we have today, the SSE, the real intent, the meaning of that, talking about your National Defence budget on page 2, and also the governance structure, having seven layers and the committee, so a lot of diligence, a lot of transparency and I’m sure a lot of collaboration and communication and hoping to get projects done on time.
Have you had a chance to be in this long enough, when we look at the pie slide of $21.7 billion at the beginning of this document and building on all of this information, that you see trending in those areas? Is this what it needs to be? When I ask if this is what it needs to be, if we have $21.7 billion and we’re seeing that 19 per cent is going into this area and 36 per cent going over here and 38 per cent there, so you see where we need to be with all of this, really tightening it up and getting better at what we’re doing with this percentage pie shifting and some priorities need to change from what we see today in moving forward, or do you feel that these numbers and percentages are going to be pretty static in the time ahead? Is it a fair question?
Ms. Charron: Thank you. If you look at slide 4 of the presentation, we have at the bottom the total budget for National Defence until 2023-24, and you can see that there is growth to the budget, increasing to $31.7 billion. I don’t foresee that there will be a major shift overall in the percentage. There could be a couple of points of difference, but we always have to pay for CAF, for personnel and for maintenance. The graph on page 4 indicates how much we’re going to invest. As you can see, the more we go to the right, the more this slide increases, because it’s on an accrual basis. It also means we’re going to use more assets. The assets that we’re purchasing will be used at that point.
Senator M. Deacon: Thank you.
The Chair: Senator Marshall, we don’t have a second round, but do you want to state your question and maybe Ms. Charron could bring the information through the clerk?
Senator Marshall: Yes, I’ll raise an issue I raised at our last meeting with the Department of National Defence when they testified. I believe it was in November. Some of the information I’ve been requesting, we haven’t received. I find when the witnesses come, they don’t have the information that we need. Even now, after today’s meeting — and I know Senator Boehm asked about transparency, and so did Senator Pratte — I still don’t have a good handle on where the major projects are at. I find that there seems to be a reluctance for the Department of National Defence to provide the detailed financial information that we need in order to track the projects, especially the major projects.
To refresh what happened in November, the steering committee was going to take a look at this issue. I just wanted to bring it forward again. I would like steering to take a look at the issue because the information that I’d like to see — I know Senator Boehm talked about Australia, and I read material on that. I do not feel that our Department of National Defence is being transparent.
I’ve read the SSE document many times. I’ve read the investment document many times. The detailed information that we need as a committee is not in there. I would appreciate it if steering could look at it and determine what our course of action is to get the information that we need.
The Chair: I think this is appropriate. The chair will accept your comments.
To the officials, you have mentioned that you would be providing additional information to the questions that were asked previously. There’s no doubt that the clerk will be monitoring that particular issue. Yes, in the past, we have not received sufficient information on the questions that we have asked. We intend to follow it up through you, Ms. Charron.
Senator Marshall, steering will be looking at it.
Honourable senators, for the second hour of our meeting, we welcome, from the Independent Review Panel for Defence Acquisition, Mr. Larry Murray, Chair. With him is Mr. Philippe Lagassé. Thank you for accepting our invitation. As information, the review panel has three other members.
The second set of witnesses for this last hour is from Innovation, Science and Economic Development Canada. We welcome Eric Dagenais, Assistant Deputy Minister, Industry Sector; and Jeff Waring, Director General, Industrial Technological Benefits Branch.
Mr. Murray, you will make your presentation, to be followed by Mr. Dagenais. Then questions will be asked by the senators. The floor is yours.
Larry Murray, Chair, Independent Review Panel for Defence Acquisition: Thank you, Mr. Chair, for the invitation to appear before you today. It’s a privilege to be here to answer your questions about the Independent Review Panel for Defence Acquisition.
The creation of the panel was a core element of the defence procurement strategy announced by the government in 2014. At that time, the military procurement process faced several challenges, including a perception that military requirements were crafted in such a complex manner that they complicated the approval process. This, in turn, undermined industry, central agency and ministerial confidence in the credibility of military requirements.
One key initiative of the defence procurement strategy, therefore, was the creation of a third-party challenge function that would provide independent advice to the Minister and the Deputy Minister of National Defence on the validity of the military requirements of major projects. The panel’s advice is also shared with the Chief of the Defence Staff.
My opening remarks will focus on the panel’s mandate and role.
In addition to my colleague Philippe Lagassé, who accompanies me today, and me, there are three other members on the panel: Martin Gagné, Margaret Purdy and Christine Tovee. We each bring our own experience, expertise and perspective to our reviews, and we are capably supported by a small office of dedicated public servants.
Put simply, our objective is to ensure that military requirements are appropriate and clearly stated for decision-makers. We look at their logic, sufficiency, traceability and comprehensiveness. The mandate of the panel does not include analysis of the procurement approach, although our work on mandatory requirements may inform procurement decisions that will come in the later phases of the procurement process.
The panel’s review is most frequently triggered when a project’s budget is greater than $100 million. There are other criteria that can lead to a review by the panel, as noted in our terms of reference, which have been provided to you. The panel exercises its review early in the procurement process prior to key government decisions and the expenditure of significant funds. This enables the panel to identify problems early in the process so they can be addressed in a timely manner.
The panel’s review of every project involves at least two formal engagements with senior representatives from the Department of National Defence and the Canadian Armed Forces.
[Translation]
The first engagement takes place when a capability gap has been validated and the sponsor has developed the project’s high-level mandatory requirements. These high-level mandatory requirements have been previously approved by the Defence Capabilities Board, the internal governance body chaired by the Vice Chief of the Defence Staff and responsible for endorsing the future capabilities of the Canadian Armed Forces.
I should note that high-level mandatory requirements define the essential outcomes to be delivered by a project; in other words, the core elements of the capability meant to be delivered. I also want to emphasize that high level mandatory requirements take into account the government’s existing defence policy, as well as Canada’s alliance and treaty commitments. They are also informed by the rigorous capability-based planning process that assesses what the Canadian Armed Forces require to accomplish the missions assigned by the government.
At this stage, the panel review is focused on understanding the capability gap and ensuring that the high-level mandatory requirements are complete and sufficiently specific to validate options. The panel uses key questions reflecting its core mandate to guide its engagement on each project. These questions are shared with the project team in advance, and I believe that you have received copies as well.
[English]
At the end of this first engagement, the panel submits its recommendation to the project team and may ask for a supplementary discussion to address outstanding questions.
The second formal engagement takes place after the sponsor has received the endorsement of the defence capability board on a full business case analysis and the preliminary statement of operational requirements. The panel examines whether the business case analysis and the preliminary statement of requirements are complete, only include essential requirements and that the preferred option is credible. It is only after the second formal engagement that the panel prepares its written advice to the minister, covering the panel’s observations, based on the engagements and submitted through the deputy minister.
Since it became operational in June 2015, the panel has reviewed projects that cover all elements of National Defence as well as the full spectrum of cost, complexity and risk. As of February 2019, the panel has reviewed 48 projects — a number of those several times — and submitted 25 pieces of advice to the Minister of National Defence. The panel bases its reviews on existing documents and aims to work quickly, usually submitting its written advice on a project a few weeks following the second formal engagement.
I wish to highlight the excellent cooperation and support the panel has consistently received from National Defence since our inception in June 2015. Simply stated, it would not be possible to effectively execute our mandate in a timely manner without the ready access to all required documents and key personnel that National Defence has always provided to the panel.
On our side, we regularly evaluate our performance and try to ensure our approach is achieving the required results. We also issue you progress reports, the latest of which will be finalized soon.
We also routinely take steps to preserve our independence. For example, before we review any project, we confirm that none of the panel members has a conflict of interest. Panel members have also sought advice from the Office of the Conflict of Interest and Ethics Commissioner on at least three occasions to ensure that other professional obligations do not interfere with our role on the panel.
In the interests of time, I will conclude our opening statement here. Philippe and I would be happy to comment further on the panel’s mandate or review work. We look forward to the discussion and your questions. Thank you.
The Chair: Thank you, Mr. Murray.
[Translation]
Éric Dagenais, Assistant Deputy Minister, Industry Sector, Innovation, Science and Economic Development Canada: Thank you for the invitation to be part of your study on the processes and financial aspects of the Government of Canada’s system of defence procurement. My name is Eric Dagenais and I am Assistant Deputy Minister for the Industry Sector of Innovation, Science and Economic Development. I am here today with Jeff Waring, Director General of the Industrial and Technological Benefits Branch.
In partnership with the Department of National Defence and Public Services and Government Procurement, we are responsible for delivering on the second objective of Canada’s Defence Procurement Strategy, namely leveraging the purchase of defence equipment to support economic growth in Canada.
[English]
Canada’s primary mechanism to achieving this objective is industrial and technological benefits, or the ITB policy, which looks to support the long-term sustainability and growth of Canada’s defence industry. A strong domestic defence industry is important, not only for national security but also as a driver of innovation, an engine of economic growth for defence-related products and services, and broader commercial applications.
Canada’s defence industry comprises more than 660 companies. It contributed close to 60,000 jobs to Canada’s overall economy in 2016. These companies include large Canadian-owned firms, Canada-based subsidiaries and small- and medium-sized enterprises.
As goods and services related to defence contracts are typically exempt from the provisions of international trade agreements for reasons of national security, many governments globally seek to leverage their investments in defence-related goods and services to generate broader economic benefits to their nations.
[Translation]
For more than 30 years, the Government of Canada has sought to leverage broader economic benefits from defence procurement through the Industrial and Technological Benefits Policy, formerly the Industrial and Regional Benefits Policy, which changed names four years ago. It requires contractors to undertake business activities in Canada at a value equal to the contract.
In June 2017, Strong, Secure, Engaged: Canada’s Defence Policy reaffirmed the Government of Canada’s commitment to grow defence spending over 10 years from $18.9 billion to $32.7 billion in 2026-2027. This significant recapitalization presents opportunities to leverage broader economic benefits to our economy.The ITB Policy seeks greater opportunities to advance innovation, the development of competencies and training, and the capabilities that meet the current and future needs of the Canadian Armed Forces, ensuring their readiness.
[English]
The ITB policy does this in a number of ways to support both defence and dual-use technologies, as well as other areas of the economy. First, the policy supports the growth of both the Canadian operations of firms bidding on contracts, as well as their Canadian suppliers. This includes many small- and medium-sized enterprises in all regions of the country. SME’s represent 90 per cent of firms in the Canadian defence industry. Secondly, the policy enhances innovation through research and development in Canada. Thirdly, as an export-intensive industry, the ITB policy looks to increase the export potential of Canadian-based defence firms. Finally, the ITB policy recognizes the importance of a highly skilled workforce in the defence industry and seeks to promote skills, development and training to advance employment opportunities.
Leveraging economic and defence procurement isn’t new. We’ve been doing it since 1986. First it was through the IRBs. In 2014, the ITB policy succeeded the IRB policy. This is also when we introduced the value proposition. We think it’s a smarter way of conducting defence procurement, for ITBs at least. Simply put, the value proposition is the economic commitment that a bidder makes to Canada at bid time, at the outset, and which a winning bidder must follow through on. The value proposition is now a weighted and rated component of the bid that is generally at least 10 per cent of the overall bid score, but can sometimes be higher.
This has been a game changer since its introduction. Prior to this, bidders were scored solely on the basis of price and technical merit, and their industrial benefits commitments were rated on a pass/fail basis. Decisions on the design of the value proposition, including the weight of the overall bid, are informed by extensive industry engagement at the outset as well as in-depth market analysis of Canadian industrial capabilities.
The ITB policy and its value proposition made the strength of a company’s commitment to Canada’s economic development a key factor in determining the award of contracts. It has done more than that.
[Translation]
What we have seen in the past four years is that supply chain partnerships are being formed at an earlier stage between prime contractors and their Canadian suppliers; small and medium businesses or SMBs are scaling up with the requirement to direct a percentage of contract value to these firms; firms are making earlier commitments to R&D investments with postsecondary institutions and SMBs.
Over the course of the last 30 years, Canada’s overall portfolio of defence procurement has consisted of 144 contracts with a total value of nearly $44 billion. That means that $44 billion is the value of the economic leveraging that has accrued to Canada and Canadians. As of January 2018, about 90 per cent of that economic activity is already complete or currently underway. This figure will be updated presently as part of our annual public report. Looking forward, we anticipate that there are an additional 70 projects in the current pipeline which represent new capabilities for the Canadian Armed Forces and significant investment opportunities for Canadian businesses. The ITB Policy and its Value Proposition are not meant to be static. We are committed to continuous improvement to maximize the economic benefits to Canada.
[English]
Another significant enhancement of the ITB policy was the publication in 2018 of a list of 16 key industrial capabilities, or what we call KICs. This fulfilled a long-standing request of the defence industry. KICs are a more strategic approach to leveraging economic benefits in industry areas. They are innovating and have growth potential in Canada. The Canadian Armed Forces’ upcoming technical needs were also a significant influence on the development of these KICs, as were the existing and nascent capabilities of Canadian industry. The implementation of KICs through the ITB policy provides industry with greater predictability in how we will be developing and evaluating value propositions.
Another change was the introduction of a distinct skills and training pillar to the value proposition in 2018. The addition of this fifth pillar affirms ISED’s agreement with industry that investment in skills and training are paramount to continued economic successes. This pillar may also be used to motivate specific skills, development and training opportunities, and already has been used for under-represented groups, for instance, Indigenous Canadians, women in the defence industry and economic sectors.
[Translation]
In terms of the economic impact of the policy, looking at the period from 2012-2016, the ITB Policy has contributed $4.6 billion annually to Canada’s GDP and created or maintained 46,000 jobs annually. More than 700 companies across all regions of the country were able to access opportunities and over $190 million was invested in collaborative innovation, skills development and technology transfers.
Beyond simply the numbers, ISED is more firmly integrated than ever in the defence procurement process. We have established a strong defence analytics capability. I’m encouraged by the progress we’ve made in such a short time and excited to see where we will go in the future. Continuous and regular engagement with the industry and our federal colleagues has been key to establishing, administering, and enhancing the ITB Policy over the past four years, and is the only way to insure its continued success.
[English]
We are happy to address any questions you may have for us.
[Translation]
The Chair: Thank you very much, Mr. Dagenais.
[English]
Senator Marshall: I’d like to start off with a general question for Mr. Murray and Mr. Dagenais. When we’re looking at military procurement, the impression I’m getting is that it’s a very slow process. I’m not questioning the merits of the work that you do, but do you think that the involvement of your respective organizations slows down the process? If so, could you give us some ideas what impact it does have on that process?
Mr. Murray: Thanks for the question, senator. I think part of my answer has to be a bit anecdotal and subjective. The panel was established to try to establish greater confidence at a strategic level with central agencies, ministers and industry. It’s a bit early in the process to know whether we actually are achieving that, quite frankly. We do have performance measurement, and it works pretty well internally, but because there was a freeze on major projects moving forward during SSE, a number of projects are just starting to move forward now.
I would say the thesis that if there’s a greater confidence in the military requirements, that should mitigate questions or analysts on the board sending them back. I was a little bit from Missouri at the beginning, to be honest, but I said yes because it seemed worth doing.
The reality is that it is having a positive effect. The only major project we know we did have a positive impact on and did establish confidence on, although the navy did great work on it, was the CSC project, which was kind of early on, and I think the panel review there, we understood anecdotally but fairly solidly anecdotally, was quite useful. I understand — anecdotally again — that a number of projects, though it’s a small number at this point, the officials are saying we know that the former president of the Treasury Board wanted to see our advice before he would deal with major projects. Again, anecdotal.
Internally, though, I would say that we’ve had a huge impact. That kind of surprised me. We have sponsors now asking for supplementary engagements and things like that, because two three-hour sessions where we’ve read all the documents, and we’re five human beings, well supported by a small staff, and we just asked really basic questions, but it is very helpful. In fact, looking at my former life, I probably would have used a model like that from time to time. It works. It’s not magic and what we’re asking is simple.
I think the quality of the documents coming forward is better. The capability gaps are relying more on their capability-based planning. At the beginning, going from defending Canada to 2,343 things of a particular type was a little hard. Now, that mushy middle is being addressed fairly consistently.
So I would say that should help the process move forward, but I can’t categorically — I mean, that’s one of the questions that if you were to ask some major, they would say, “Yeah, that’s great, interesting, go to the panel, and so what,” at this juncture. We’re hoping it will have that impact.
Senator Marshall: If I have time, I have a question on the CSC project.
Mr. Dagenais, could you answer?
Mr. Dagenais: In my view, the ITB policy doesn’t contribute to delays in the procurement process, especially since 2014. The way we are integrated with the entire defence procurement means that we are there at the very front with a value proposition. We are very well integrated, and companies know exactly what we’re looking for. It has been over four years that the value proposition has been in place. Companies know what we are looking for. We have a value proposition guide that we proposed and we consult widely, and people know what to expect. At the end of the day, if you provide certainty, you avoid delays.
Senator Marshall: You mentioned the CSC project. I did read your annual report for, I think, 2016-17, because I could not find the one for 2017-18. However, what is in there is very general. You mentioned the CSC project, and I think your reports would be more informative if you could put in more detailed information. I find the information on the individual, large projects is very informative. Is that something you could do in your annual report, or is that not something you could include, for confidential reasons or whatever?
Mr. Murray: The challenge we have is that the advice is all cabinet confidence, so we get into that. We do have permission now to at least share the project names. So we now have the authority to share the 48 project names.
What we need to try to do, because many of the lessons learned are not project-specific, is probably work harder to bring out some of the issues without attaching them to a project. I agree, it would be more useful. We are about to pump out our next report.
The other point, which was the basic answer to your last question, is as far as we know and from a scheduling perspective, we have not impacted any project’s speed at which they would have moved if the panel hadn’t been created. I’m not sure if that will be the case forever, if the SSE actually ramps up, but to date we have not done it, although we have added work, obviously.
Senator Marshall: When will we see the 2017-18 report?
Mr. Murray: You should see it in the next few weeks. We will definitely send it to this committee.
Senator Pratte: Mr. Murray, my questions are addressed to you.
In the latest annual report that we have, 2016-17, there are two things that the panel observes. I would like to know if these observations are still valid or if they are outdated.
The first one is with regard to the high-level mandatory requirements. You mentioned in your annual report that the panel has observed that the development of appropriate HLMRs continues to challenge project teams. For example, the panel still occasionally sees very broad HLMRs that are not useful for screening potential options or HLMRs that are not measurable. That was in your annual report two years ago. Is this still the case, or has that improved?
Mr. Murray: It has improved, but it continues to be a work in progress. It maybe always be at some level a work in progress. The good news is the forces brings in their brightest operators and brings them into National Defence headquarters around equipment requirements. They can’t spell “Treasury Board” when they get here, but they are great operators. To some extent, it’s a learning curve.
I thought, when we got established, that the panel would work itself out of business, but the reality is because of the flux and because of the nature of five non-experts just asking basic questions.
On the HLMR side, we have seen progress. I think it will always be a work in progress. But the HLMRs were formally established with the creation of the panel because we needed that, and we needed a preliminary statement of requirement that was not 600 pages long in order to do our work. The discipline of establishing the HLMR — if we were as thick as this table, that would have been useful because the discipline that goes into those discussions and trying to figure out what they are is invaluable.
What we are doing now, as you will see in our next report, is we are trying to push the system to rely more on capability-based options for the same reason, as opposed to procurement options of buy, sell or lease, and the three options are really only one, and all the play happens in that one procurement option as opposed to having capability options. We think that a combination of HLMRs and the focus on capability-based options at the end will provide a useful intellectual — particularly when there is not always enough money at the end of the day to do everything. Knowing which capabilities you are really after and what the trade-offs would be early on would be useful.
Senator Pratte: Thank you. In the same report, you mentioned that the panel continues to find that some project documentation lacks detail on how a proposed project will address a capability gap from an operational perspective and the resulting impact should the proposed project not go forward. This information seems pretty basic if government wants to make a decision on a specific project. Again, has that situation improved?
Mr. Murray: That is actually improving. Phil, who is also a present, started this by saying, “Don’t tell me. Explain.” It is a combination of using capability-based planning more vigorously and actually explaining — the answer is invariably in the room. It’s not just on the documentation that people have to make decisions with. We have seen a significant improvement in that area.
Philippe Lagassé, Member, Independent Review Panel for Defence Acquisition: It comes down to being able to explain your work. Fundamentally, as Larry mentioned, a number of the project managers and directors are coming from an operational world, often from a specialized engineering background, a scientific background, and trying to explain to decision makers how that translates into actual capability requirements. For instance, why do you need to fly at the speed you need to fly at? Why do you need to achieve that level of nautical miles? How does that relate to your overall defence policy? Particularly, how does that relate to mission risk and the concept of operations? These details, which are taken for granted by the organization because it’s their business, end up having a material impact on the level of equipment being bought or the refinement of the capabilities. In the absence of that information, it’s difficult to know that you are acquiring precisely what you need or in the right quantities.
It gets back to the comment about the mushy middle. It has been extremely worthwhile to push project teams on those questions. After you have SSE, and it tells you to defend Canada, how does that lead you to 4,000 trucks or whatever it happens to be? There has to be a translation function that exists within the forces and within the department because they have the institutional knowledge, they have the expertise, but including that in a precise and clear manner in documents that are available for decision makers and fundamentally for us as well has been something that we have been working on and has improved.
[Translation]
Senator Forest: My first question is for Mr. Dagenais.
In 2014, an amendment was made to the industrial benefits policy; the word “regional” was replaced by the word “technological”. I support the objective of increasing the benefits and advancing knowledge and technology. You published a report in 2018. Would it be possible for you to break down the benefits by region? One of the Senate’s missions is to be aware of the realities of the regions and to advocate for them. This issue is particularly important to me.
Would it be possible, in your January report or in the next one, to break down the project benefits also by region?
Mr. Dagenais: We did break them down by region, but not at the provincial level. Generally speaking, the benefits align with the jobs in any given region, to a degree. In the defence sector, 38 per cent of jobs are in Ontario, 28 per cent are in Quebec, 20 per cent are in the West, and 14 per cent in Atlantic Canada. The industrial benefits generally align with the locations of the jobs in the country.
Senator Forest: So your report allows us to do more than simply establish the relationship between the two?
Mr. Dagenais: Yes, by region.
Senator Forest: It does break down the data by region?
Mr. Dagenais: By region, but not by province — I did ask for that in the past, but I was told it was impossible.
Senator Forest: And what if we made the request?
Mr. Dagenais: By province?
Senator Forest: Yes.
Mr. Dagenais: We don’t have a breakdown of the data by province. We do have a regional breakdown. We will include that in the report and we can pass it on to you.
Senator Forest: I don’t understand that you can have the figures by region, but not by province.
Mr. Dagenais: Perhaps Mr. Waring can explain why that isn’t possible.
[English]
Jeff Waring, Director General, Industrial Technological Benefits Branch, Innovation, Science and Economic Development Canada: A quick clarification in that regard is when we go out and include the ITB as part of the RFP process, we’ve always had a track record for the past 30 years to ask for those commitments or to provide the details by region as opposed to by province.
This is largely because even though a particular firm in one particular province may receive a contract or a purchase order, the economic benefit does spill out into the broader region within which it resides. There is a lot of crossover between work done in the Atlantic and it being subcontracted out to other firms in other provinces that are closely located to it.
[Translation]
Senator Forest: Your regions are the Maritimes, Quebec and Ontario. That is similar to a provincial breakdown. What about the West?
Mr. Dagenais: Yes, with the West, those are the four regions.
Senator Forest: Your objective, when you buy used equipment, such as was done with our British submarines or the Cyclone helicopters, or when you wanted to replace the F-18s, is to generate benefits, in addition to purchasing used materiel. We are not reaching this goal of having benefits that are equal to the investment in funding technological benefits, are we?
Mr. Dagenais: There will be benefits in connection with maintenance and support for the equipment. With regard to used equipment, of course we don’t have direct economic benefits, but we will see some with the maintenance and support of the equipment.
Senator Forest: It’s true that this could be significant, when you consider that for the Cyclone, the maintenance costs are three times higher than the cost of the aircraft.
Mr. Dagenais: Yes, it can be considerable, and often it is more than the initial purchase price.
Senator Forest: Mr. Murray, is that assessed? Your mandate involves project acquisition specifically, and not the more general strategies, correct? Do you look at these recommendations?
[English]
Mr. Murray: That’s really not part of our mandate, senator, so I’m not in a position to — from our perspective, we are interested strictly in the operational requirements. We do, as part of our questions, ask about the involvement of Canadian industry, but it is really below the line in what our focus is, so I’m not able to answer that question. I presume that Pat Finn or somebody —
[Translation]
Senator Forest: Since you have a mandate, some distance, and considerable perspective as to the analysis of specific projects, do you, under your mandate, examine more global strategies as to the relevance of reassessing the efficiency and effectiveness of strategic choices? I am thinking, among others, of the National Shipbuilding Strategy?
Mr. Lagassé: The board starts with the idea that the government’s defence policy is the defence policy. If you look at the questions that are asked about the projects, it seems it is taken for granted that the defence policy is the government strategy. This does not mean that we call into question the government policies. That said, if we notice that there is a gap between what the policy intends and what the project can deliver, then we may raise questions. That is a principle or aspect of our mandate that is quite important. We must ensure that the capacities that will be delivered are aligned with the defence policy. If they are not, we can ask questions. If there is a gap between what we want to do and what we can do, we focus our questions on that aspect.
Senator Forest: Do you ask for the reasons behind cost overruns or delays for each specific project?
Mr. Lagassé: You want to know if we are aware of them?
Senator Forest: I’m sure you are. Let’s take the example of a project manager who is responsible for project X and has cost overruns that exceed the contingencies that are in place. Do you require that he justify the delays and cost overruns?
Mr. Lagassé: We review the projects in the options analysis. The budget is not defined at that point. We may, however, notice that the estimated costs outstrip the budget and we can ask the manager what he intends to do to ensure that he complies with the defence policy, if he does not have the means or funds needed to meet his objective. We can also ask questions. It comes back to the definition of high-level requirements. Are your high-level requirements adequate or too elaborate? Are they the reason for your large budget? We can ask several questions to make sure that there is an analysis so that the budget aligns with the capacities. It has happened in a few cases that we determined that in order to reach the objectives of the defence policy, the budget might need to be increased. On those occasions, we can let them know.
Senator Forest: It’s an easy solution, but you have to get at the reasons behind those cost overruns.
[English]
Mr. Murray: The policy foundation, the area that we normally always check is, is there a policy foundation there? And there have been two or three occasions, usually around particular weapon systems, where we need confirmation that there is a government policy approving a particular weapon system. That’s our more normal thing. With the promulgation of SSE, that’s become less of an issue, obviously, because they have looked at all of that stuff.
The other thing that was reassuring to us, because we always wondered if something moves forward and there is not enough money and we have approved and provided advice on a particular project with a certain budget and the budget changes, would it come back? So we would have added an addendum, and that indeed has happened, so we are reassured that when the budget is inadequate to meet the capability that we have, in good faith, provided advice on, if it’s significant, it does come back to us and, as decision makers, reconsider it with an additional addendum. I think that is significant, and it was very reassuring to us that that happened.
Senator Klyne: Thanks to the members of the panel.
My question is more around the ITB policy and the fifth pillar. When I think that ITB policy replaced the industrial resources benefits policy and I look at that fifth pillar, IRB had a very focused outcome that was more inclusive in building capacity and skills and development for Indigenous peoples. The language that I see here is a little more that it could be and could motivate somebody to gravitate toward that. That gives me a sense that you don’t have any measured objectives in that regard, and you may, and if so, I’ll give you the opportunity to explain that. But do you collaborate — I don’t want to say consult, but collaborate — with those groups that you are talking about in terms of under-represented groups and specific to the Indigenous groups? And would you go beyond just skills and training development and also look at capacity building? There are some organizations out there that already bid on DND contracts, and through this ITB I see there is probably an opportunity to build some capacity.
Mr. Dagenais: We certainly talk to the defence contractors who bid on defence contracts, and there have been a number of examples, I think, in the shipbuilding space. Vancouver shipyards has a program where they work with Indigenous Canadians to teach them how to weld so they can then get a job in the Vancouver shipyards. Irving shipyards has a similar program in Nova Scotia. So there are instances whereby the skills pillar has actually motivated defence contractors to work with under-represented groups. Irving also has a program with Afro-Nova Scotians to bring them in and teach them how to weld and provide them employment with the shipyards, and also with women through the Nova Scotia Community College.
Specifically, whether we consult with underrepresented groups themselves, Jeff led the last round of consultations on the update of our value proposition guide.
Mr. Waring: When we first went out with the value proposition guide four years ago, we did a cross-Canada tour, and it was open to anyone, whether it was a company or just an interested party, to come. There were a number of different representatives there, whether it was Women in Defence and Security or Women in Aerospace, as well as a number of Indigenous groups that had an interest in better understanding how the ITB policy could potentially leverage work for them.
Your question was whether or not we could go beyond the skills and training for under-represented groups. We do work closely with PSPC and CIRNA with regards to the procurement tools they have access to, such as procurement set-asides for Indigenous companies. We work closely with them to understand what they are doing and to ensure we are all growing in the same direction in that regard. We have in the past looked at whether we could incorporate an Indigenous business plan, as an example. We can draw upon those kinds of tools. Through our engagements with industry, we discuss how best to target potential benefits for those communities.
Senator Klyne: IRB was very focused on the set-asides. Did that shift out of there?
Mr. Waring: We never had specific set-asides for Indigenous groups. We didn’t have set-asides for regional either. It’s market-driven. It’s up to the companies and prime contractors to determine how best to allocate that work. Now, under the ITB policy, we want to determine which levers we should pull in the value proposition and how to develop the evaluation framework to drive investments in certain areas such as skills and training.
[Translation]
Senator Forest-Niesing: This should be fairly quick, as one of my two questions has already been asked. Mr. Murray, you referred to your 2017-18 report, which will be released soon. Where will it be published? How will it be disseminated and made accessible to all Canadians?
[English]
Mr. Murray: It will go on our website. It will go out internally and to DND and across the force development community. On our website, it will be available to anyone.
Senator Forest-Niesing: To the general public?
Mr. Murray: Yes.
Senator Forest-Niesing: Thank you.
[Translation]
In the course of your review, you make recommendations, and if I understood correctly, in 2016-17, of the 14 projects you examined, you submitted advice to ministers regarding 7 of those 14 projects. Can you give us an example of the sort of advice you might give, and also tell us about the level of persuasion you use with the department? Do they generally agree with your advice? Do they follow it?
[English]
Mr. Murray: It’s hard to answer your last question because we send the advice and we know if the project goes forward. There were delays in Treasury Board approvals until CSC went forward, but there are a number going forward now. I have to underline that this is anecdotal but, in this coming year, we probably will have better opportunities to question folks externally. We do talk to Treasury Board officials and others. We have an anecdotal understanding that the officials at Treasury Board and PCO do like our advice and that the ministers who have seen it do appreciate it. For the Deputy Minister for Defence, we capture in five pages the story of a project from our perspective, based on all of us reading through the documentation twice and our staff preparing an analysis note before each session. We spend two to three hours internally meeting face to face, and then we have two to three hours of open discussion with the project sponsors. In the case of CSC, although we didn’t know it, the navy kept track of the time. They spent 50 hours — an abnormal amount, but a pretty rich exchange. As I said, the internal feedback is positive, but we have not been able to formalize the external feedback because only a handful of projects have made it through the system.
In terms of the annual report —
[Translation]
Mr. Lagassé: I’d like to add that the fact that we have two opportunities also helps. When we review a project for the first time, we can at that point make recommendations and indicate where we would like to see improvements. In certain cases, if necessary, if a project is problematic or encountering some difficulties, we can take another look later and again make recommendations. When our second engagement takes place, we can point out in our advice to the minister that certain aspects have not been sufficiently developed or that there are still gaps.
Senator Forest-Niesing: And has this occurred fairly frequently over the past year?
Mr. Lagassé: No, this is not frequent. Generally, project managers accept our recommendations and adjust their high-level requirements or certain aspects of the project, given that we are not there to manage projects; but I believe they understand that the advice and recommendations we provide help to improve things — not the military requirements, but the way in which they explain them to the minister.
[English]
Mr. Murray: We basically tell the story, and then we end up generally providing assurance, having outlined to the minister our review process, what changed around HLMR, high-level mandatory requirements, or whatever.
In response to your first question, though, if we do make a specific recommendation — which we sometimes do — it might be to suggest getting three items instead of two in a certain contract. We do get feedback on those kind of recommendations, actually.
[Translation]
Senator Moncion: I have one quick question. Alan Williams is the author of Three ways to improve defence procurement. He mentions that the first obstacle is the absence of clearly defined responsibilities. He believes there is overlap and excessive duplication between the role of the Minister of Defence and that of the Minister of Public Services and Procurement. Can you comment on that?
[English]
Mr. Murray: In my current role, the statement of operational requirements, up to the preliminary statement of operational requirements, is the only chunk of the process that is purely the responsibility of Minister of National Defence. In the area in which our panel works, prior to the Treasury Board’s or the ministry’s decision to move into definition, there isn’t an overlap. In other words, it is the minister’s responsibility.
Having said that, we in the panel do work with PSPC and Treasury Board officials. We keep them in the picture in terms of what is happening. In other words, I do brief a deputies coordinating committee a couple of times a year. But the overlap of responsibility happens after we leave the playing field, quite frankly.
Senator M. Deacon: Thank you for being here today. Mr. Dagenais, I have a question about your team — about its work and its purpose and the real goal of leveraging the purchase of defence equipment to support economic growth in Canada. It is very important to get that right. It is important to get the best equipment that we can find. Are there areas of Canada at this moment where we have almost an abundance of skills and equipment and the types of things we can get in an RFP — whatever your process is? Can we get them quickly and are they top of the line? Are there types of military equipment on which we lack expertise in this country? Is this something we really need to develop and to diversify to be able to supply and source things well in Canada? Could you comment on that first?
Mr. Dagenais: I think the answer is yes. There are areas where Canada is expert and we can build these systems domestically. There are others where we are probably better off getting them somewhere else because we don’t have the capacity to build them here.
I think one of the first things you would look at to determine what we’re good at is the KICs I was talking about earlier, the key industrial capabilities. After an exhaustive process, we identified the various areas where Canada has those skills, and we said these are the skills and the capabilities that we’re going to give preference to in the value proposition. So if people are investing and partnering with Canadian companies that have that kind of capacity, we’re going to reward that when they submit value propositions that have those proposals. The point is, through the ITBs, to develop those Canadian companies that have international capability, not to necessarily create capability that doesn’t exist.
When you look at the defence sector, it’s very export-intensive. Something like 58 per cent are being exported. That’s a pretty good indicator. When a Canadian company is able to export a system and sell it to another government, it’s usually a pretty good indication that it’s top quality. We have a pretty good defence sector. There is a lot of R&D, very innovative, good-paying jobs, and they export a lot.
Senator M. Deacon: When you’re looking in the area you’re talking about — the process is not meant to be static, it’s fluid, and we’re looking at continuous improvement as part of this whole piece with the policy and the value proposition — what are the kinds of questions you’re asking yourself as you’re looking for that continuous improvement?
Mr. Murray: We’re actually not involved in that.
May I just add something? I think it is important. When I said we’re not involved in procurement and so on, we are required, in every piece of advice that goes to the minister, to indicate what is in this for Canadian industry. There is definitely a priority assigned to knowing that.
Mr. Dagenais: The most recent examples are introducing KICs. This is something that industry has longed for. We said, after an exhaustive study, we would do it. I think the skills pillar is another example where we said, in the last year, we want to encourage defence procurement. We want to leverage defence procurement to make sure that they develop the skills and training for Canadians to make sure that all Canadians can actually benefit from this. Another recent example that we introduced is we’re going to ask defence firms to come up with gender and diversity plans, because we want to make sure that these firms are as representative as possible. These are the kinds of examples that we have evolved in the last three or four years, and we will continue to work in that vein.
Senator M. Deacon: Thank you.
The Chair: To Mr. Murray and his team, thank you very much. Mr. Dagenais, thank you. We have a lot of information. We might ask you to come back, if required.
(The committee adjourned.)