Opening Statement to the Committee on National Defence and Veterans Affairs
Chapter 4 - National Defence - Buying Major Capital Equipment (April 1998 Report of the Auditor General)
L. Denis Desautels, FCA
Auditor General of Canada
Thank you, Mr. Chairman, for providing us with the opportunity to meet the Committee and discuss Chapter 4 of our April 1998 Report. This chapter focusses on the purchase of major capital equipment by the Department of National Defence (DND). With me today are David Rattray and Peter Kasurak, respectively the Assistant Auditor General and Principal responsible for National Defence matters.
In Chapter 4, we reported that although the equipment projects we audited were likely to meet cost and performance objectives, affordability problems meant that low-end capability was being purchased, less equipment was bought than was needed, or both. We also found that management did not conduct adequate analyses to support its decisions, often considered only a single option, and did not meet our criteria for risk management.
As you will recall, we published another chapter on equipping and modernizing the Canadian Forces at the same time as this chapter on individual capital projects. The main finding of that chapter was that DND's capital budget could not support the multi-purpose combat force being planned by the Department. Consequently, the Department agreed that "hard choices" needed to be made regarding its policy, its equipment or both.
The Public Accounts Committee held hearings on both chapters and recommended that the Department take measures to correct shortcomings in its management processes. The Committee asked that the Department submit an implementation timetable by the end of March 1999.
The Public Accounts Committee also called on the Department to improve its annual Performance Report by including a comprehensive defence review and assessment this fall. In addition, the Committee requested that the Department include its long-term capital plan and demonstrate how well it is meeting its capability goals.
The recommendations of the Public Accounts Committee address the central points made in these two chapters. But more remains to be done. As this Committee knows from its own work on military conditions of service, the Defence budget is critically stretched and serious deficiencies exist in many budget items. This has had a ripple effect on capital projects, leading us to several concerns:
We would like to address each of these in turn.
Affordability
Overall, we found that the capital portion of the budget was too small to support the equipment program the Department had planned. The difference could reach $30 billion by 2012-13.
Affordability was a significant constraint for four of the six projects we audited. The Maritime Coastal Defence Vessel project, for example, could buy only two sets of mechanical sweeps for the 12 ships it bought for mine clearing. The Defence Estimates point out that quick mine clearing of the Halifax and Esquimalt routes is a key requirement.
Purchasing partial capabilities results in equipment that may not be usable when the need arises. The Department believes it can fix many of the deficiencies over time, but some - like the limited lift capacity of the Griffon helicopter - are built into the equipment itself.
This Committee may wish to review capital procurement when it considers the Defence Estimates. It may also wish to ask the Department if gaps it has identified are being closed.
Procurement Reform
Our chapter also reviewed the Department's efforts to reform the procurement process since 1994. However, DND's process is not unique to itself. It uses the government-wide process established by Public Works and Government Services Canada, the Treasury Board Secretariat and Industry Canada.
At the time of our audit, National Defence told us that it had concentrated its reform efforts on internal project management and had just begun to address interdepartmental processes. The Department had no implementation plan for reform when we completed the audit, but has since developed an Acquisition Reform Action Plan. This plan would finalize the Department's reform guide that presents "best practices". The plan also contains pilot projects to field test some of these concepts, but many of these pilots will not be completed until September 2000. Moreover, the pilots selected are relatively minor and the Department warns that its plan is "aggressive" and depends on resource availability and the progress of "higher-level government-wide reform."
This relatively modest program might be compared to the "Smart Procurement" initiative that was developed from the British Strategic Defence Review. The British review took about two years to unfold and was more or less equivalent to our own 1994 White Paper review. It has proceeded, however, to install extensive reforms to the capital acquisition process that may result in a much more integrated government/industry partnership. Rather than using minor projects as pilots for their reform, the British are using what are literally their flagship acquisitions - the future aircraft carrier, the future attack submarine and the Apache helicopter.
Our point is that the British appear to be moving with more energy to address their capital procurement problems. Solving Defence procurement problems involves several departments and requires sustained ministerial attention. The Committee may wish to examine this problem further and lend its weight to progress of the problem.
Management Practices
The audit did raise warning flags with respect to management practices overall.
We are concerned that the push to reduce steps in the procurement process, such as with some commercial off-the-shelf purchases, may produce expensive surprises in the future. The Griffon helicopter is one such example. It had problems with electrostatic discharge that could incapacitate soldiers rappelling from it. Even though this helicopter was in service elsewhere, it was not extensively tested by the Canadian Forces for the conditions in which they intended to use it before the contract was signed.
Other practices also require reflection and examination. The Upholder submarine purchase and the NATO Flying Training in Canada program involve "innovative financing". In the case of the submarines, Canada traded the use of its training facilities for these boats. Aircraft for the NATO Flying Training are owned by a non-profit corporation, financed by a commercial bond issue and leased to a second firm that sells services to the Department.
Innovative financing has only appeared since our 1998 audit. We therefore have not had the opportunity to audit projects using such financing. We do note, however, that it allows a cash-constrained department to acquire equipment it needs without large immediate cash outlays. In the case of NATO Flying Training, it may also allow the Department to access private sector services that may be cheaper than comparable government-delivered services. We have recently begun to audit some of these initiatives. Our audits will attempt to determine if these practices:
We will begin reporting on some of these projects next fall. The Committee may wish to consider these matters in its future agenda.
Conclusion
In conclusion, we think that the need to address the disparity between the Defence capital budget and the Department's acquisition plans is an urgent and pressing necessity. I would encourage the Committee to consider this question when it next reviews the Estimates. The Committee might also consider addressing in future hearings the Department's efforts to reform its acquisition process and related innovative financing initiatives.
Mr. Chairman, that concludes my opening statement. We would be pleased to answer the Committee's questions.