[Recorded by Electronic Apparatus]
Tuesday, February 11, 1997
.1537 
[Translation]
The Chairman: Order, please.
Good afternoon all. The Standing Committee on Public Accounts is meeting pursuant to Standing Order 108(3)(d) for consideration of Chapter 23 of the November 1996 report of the Auditor General and more particularly considering materiel management in the federal government.
I would ask the witnesses to please introduce themselves and tell us which organizations they represent and what their duties are.
We'll start with you, Mr. Desautels.
Mr. L. Denis Desautels (Auditor General of Canada): Mr. Chairman, with me today are Mr. Shahid Minto, the Assistant Auditor General of Canada and Mr. Reno Cyr the principal for Audit Operations. They are both responsible for the chapter we're discussing today.
[English]
Mr. Al Clayton (Executive Director, Bureau of Real Property and Materiel, Government Operations Sector, Secretariat of the Treasury Board of Canada): I'm the executive director at the Bureau of Real Property and Materiel at Treasury Board Secretariat. I'm here representing Peter Harder. With me is Norman Beaudry. In our organization, he is the director with the specific responsibility for materiel management policy.
[Translation]
Ms Louise Fréchette (Deputy Minister of National Defence): Mr. Chairman, I'm Louise Fréchette and I'm the Deputy Minister of the Department of National Defence. With me is Mr. Pierre Lagueux, the Assistant Deputy Minister in charge of the Materiel Group in the department of National Defence.
The Chairman: Thank you. We'll hear Mr. Desautels first.
Mr. Desautels: Mr. Chairman, thank you for this opportunity to present the results of our audit of materiel management in the federal government, as reported in Chapter 23 of the November 1996 report.
In my remarks to your committee last November, I spoke of three recurring themes. The first was the need for better accountability; the second was the required improvement in the quality and extent of information provided to Parliament and Canadians on the results of programs and services; the third was that government departments often lack key information needed to properly manage their programs. I also noted that significant cost savings can still be achieved by the federal government even after the restraint measures that have already been taken.
These themes apply to the report in general, but they apply in particular to the subject we are discussing today. I expressed concern in our November meeting about the seriousness of the current state of materiel management in government and I am pleased that your committee has chosen to consider this chapter without delay.
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[English]
Chapter 23 discusses many of the long-standing problems we have reported on since 1980 relating to the government's materiel management policies and practices. We have reported on ineffective accountability; lack of incentives to manage materiel economically and efficiently; inadequate information for decision-making; inadequate performance measurement; lack of economy and efficiency in acquiring and managing inventory; and too much inventory. The chapter in the 1996 report provides details on the nature of the current problems, as well as the serious consequences of these deficiencies, using specific examples from various departments.
The Government of Canada has an estimated $50 billion invested in a broad range of materiel items. There are an estimated 17,000 employees involved in managing materiel, and managing the governments annual materiel purchases of approximately $8 billion. The government conservatively estimates that it holds up to $10 billion worth of materiel in warehouses, which annually cost over $2 billion to maintain. The size of these numbers indicates the importance of sound management of this aspect of government operations.
This audit examined the Treasury Board Secretariat's role in materiel management. It also examined the policy in management framework and materiel management practices of the Royal Canadian Mounted Police, Natural Resources Canada, the Department of National Defence, and the Department of Fisheries and Oceans, including the Canadian Coast Guard. These organizations accounted for about 60% of the government's expenditures on materiel in 1994-95.
[Translation]
There are four key areas of concern that I would like to touch on briefly in these remarks; the first deals with the accountability framework for managing materiel.
Treasury Board policy requires departments to acquire and manage materiel in a way that supports departmental operational and program requirements in an economical and environmentally safe manner. The Treasury Board Secretariat is currently responsible for knowing and understanding the results and effects of Treasury Board policies and programs, including reviewing key policies and programs and using performance information to make them more cost effective.
The audit found that some of the key elements of this accountability relationship were lacking. Departmental policies and statements of roles and responsibilities were either out of date or not clearly articulated and little review of performance was done either by departments or the Treasury Board Secretariat. We noted inadequacies in departmental costs and performance information and we have concerns that the Secretariat does not have enough information to discharge its responsibilities. All of this prevents measurement of performance against expectations. We concluded that an effective accountability relationship for materiel management does not currently exist.
It would be very useful to clarify the expectations of members of Parliament with respect to the role of the Secretary of the Treasury Board as it relates to departments. This clarification would be of immense value for my work because it would give me a reference point to better evaluate the accountability of the Secretary and the individual departments.
Your Committee may wish to seek the views of the Secretary on the current and future roles of the Secretariat, and the accountability relationships between the Secretariat and departments related to managing the government's materiel.
[English]
Our second area of concern deals with the adequacy of information for decision-making. Departments need information to ensure that materiel meets their operational requirements for effective program delivery, and that value for money is achieved in acquiring, using and disposing of materiel. Departments need management information - including information on all relevant costs of operations - at an appropriate level of aggregation and detail, and they need to analyse this information and measure performance to identify where improvements are necessary.
Treasury Board policy requires that the full cost of inventories be visible and distributed to the end user. The consequence of inadequate cost information is that not all relevant materiel costs, including inventory holding costs, are considered when making purchasing and inventory decisions. This has resulted in poor value for money and excess inventory. Our audit found that departmental information systems for managing materiel are generally inadequate. Key deficiencies are the variety and incompatibility of systems, and the lack of adequate cost and performance information.
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Except for National Defence, none of the departments we examined had a comprehensive, organization-wide asset and inventory management system. Even in National Defence, the aggregate information provided by the Canadian Forces supply system is deficient, and a $295 million system upgrade is under way. Your committee will review our audit of this upgrade project in the ``Systems under Development'' chapter on March 11.
The absence of aggregate department-wide information could result in one region buying an item when another region has excess or is disposing of an identical item as surplus. Significant savings are possible when inventories are made visible. For example, for the past five years one region in the coast guard has made its spare parts inventory available to other ships and regions. The savings to the coast guard from not purchasing spare parts it already owns and is not using has been over $16 million.
After materiel has been purchased, it must be managed efficiently to maximize its contribution to meeting program requirements. To protect government assets and fulfil program responsibilities, departments need accurate, complete and timely information on the quantity, cost and location of materiel in inventory. We found department records that covered a whole range of possibilities, from records well maintained and verified for accuracy, to no records whatsoever. When no records of inventory are kept, over time ownership becomes unknown, potential users do not materialize and the items deteriorate.
[Translation]
My third area of concern is that of excessive inventories being held by departments.
Most of the officials we interviewed believed that their departments had too much inventory. They were holding excessive quantities of items that had to be stocked, and were stocking items that were commercially available and did not have to be stocked.
Since the items had been paid for and little consideration was given to holding costs, there was little incentive to dispose of excess inventory. However, annual inventory holding costs are significant. The government estimates its holding costs are 25% of the purchase price. Indeed, a 1995 government study estimated that the potential annual cost savings from eliminating unnecessary inventory could be as high as $1.25 billion. While departments have reduced inventories and closed warehouses since the study, significant potential for additional savings remains.
Our fourth and final area of concern deals with the mechanisms for disposing of surplus materiel.
Our audit identified widespread concern in departments over the existing mechanisms for disposing of surplus materiel. In 1992, the government brought in amendments to the Surplus Crown Assets Act to allow departments to dispose of surplus Crown assets either through Public Works and Government Services Canada or directly, subject to terms and conditions to be established by Treasury Board. A limited number of pilot projects of disposals directly by departments was established to assist the Secretariat in developing these terms and conditions.
In 1993, the Secretariat evaluated the disposal pilot projects and, notwithstanding some data limitations, identified several positive results. However, at the time of our audit, the Crown Assets Distribution Directorate of Public Works and Government Services Canada remained a mandatory common service for the disposal of materiel.
Our work would suggest that, in certain situations, departments would benefit from having access to alternative disposal mechanisms. However, the government must balance these opportunities for increased benefits to departments with the need to ensure prudence and probity in all disposal transactions, and the need to ensure mechanisms to accommodate the disposal of the full range of surplus materiel. There are many dimensions to this question that need to be considered. However, it appears that considerable study has already taken place over the years, and it is perhaps time now to make a decision. I am advised that the Treasury Board Secretariat and Public Works and Government Services Canada recently agreed to study the cost of in-house disposals compared with outsourced disposal operations. Your Committee may wish to encourage the participants to bring about a timely conclusion to this latest study and to commit to a timetable for the resolution of this sensitive issue.
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[English]
Mr. Chairman, while my comments thus far have emphasized the more pressing problems identified in materiel management, I would like to conclude my remarks on a more positive note.
A recent change to the supply policy on shipbuilding was announced in December 1996 by the Minister of Public Works and Government Services Canada. The policy change, developed jointly with the Shipbuilding Association of Canada, is intended to promote greater competition in federal ship-repair contracts. In future, when evaluating competitive bids for ship repair and refit work, vessel transfer costs will be included. These changes would therefore remove the circumstances that gave rise to our concerns in exhibit 23.6.
I'm encouraged by the recent departmental efforts to improve materiel management in government, and I have a sense that senior management in departments have accepted the need for change and that real change is now under way. The potential for real and significant savings to the government makes it imperative that departments follow through with the changes they've begun, many of which we have noted in our chapter.
Hundreds of millions of dollars will be at risk if departments do not achieve the cost-saving objectives to which they have now committed. Your committee may wish to obtain departmental status reports and timetables for completion of these ongoing improvement initiatives.
[Translation]
Thank you very much, Mr. Chairman. We would be happy to answer any questions.
The Chairman: Thank you, Mr. Desautels. You have the floor, Mr. Clayton.
Mr. Clayton: Ladies and gentlemen, members of the committee, good afternoon. I would like to take this opportunity to make some opening remarks concerning the Auditor General's recent audit of materiel management in the federal government, with particular emphasis on the role of the Treasury Board Secretariat.
[English]
The government materiel management community is currently in the middle of a historic overhaul and revolution of its operations. Most of the changes resulted from initiatives of individual departments. You will hear today about some of these from National Defence. Other organizations have similar stories to tell, although obviously less massive in scale.
The prime accountability for materiel management rests with those individual departments and agencies of the federal government. The Auditor General recognized this reality and made specific reference to the accountability framework in place within federal departments and agencies in his report. However, the Treasury Board Secretariat, on behalf of the Treasury Board, has responsibilities and accountabilities within the materiel management system.
First, we develop and articulate government policies, continually assess their impacts on departmental programs, and then revise polices as appropriate. However, the Treasury Board Secretariat is not in the business of monitoring the materiel management performance of individual departments and agencies. That is the responsibility of the heads of each institution.
Secondly, we provide support and assistance to the materiel management community so that they are aware of and able to adopt the best practices in the field. Included among the many tools developed by Treasury Board Secretariat is a monitoring guide, which provides assistance to the departments in carrying out their assessments. That guide was developed and published in 1994.
We carry out our responsibilities to develop and monitor polices in many ways. In recent years we have tended to count less on large-scale audits and evaluations and replace them with shorter reviews of system-wide issues, and then move directly to action. In fact, the Auditor General's report referenced six of these reviews as background information.
A good example of how we see carrying out our role can be seen in how we have dealt with the question of government holdings of inventory. As the Auditor General noted, the secretariat uses a rule of thumb that the holding costs of inventory is 25% of the cost of inventory. Since this figure has been quoted freely, I would like to explain what it encompasses.
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The 25% is the total economic cost to the crown. It includes the cost of borrowing money, depreciation costs of buildings and equipment, the write-off and loss of obsolete items and costs of operating facilities, including labour. Under the government's current accounting practices, about 8% to 10% of inventory costs, not 25%, is attributable to the budget of any given government department. Each department, however, would then have a different actual cost based upon the nature of its particular operations.
Regardless, a lot of taxpayers' money is at stake. So we conducted reviews on the government holdings of inventory to see the extent and causes of the problem. It was no great surprise that there were excess inventory holdings, but it was not because the managers were making illogical decisions. They were acting logically in the environment in which they operated. We had to change the environment.
The resulting reforms have had three main thrusts. First, departments held excess inventory because they were uncertain of their ability to acquire goods when they were needed. If a manager is uncertain of the procurement system, the prudent action is to stock inventory, not to use the ``just in time'' management we would all prefer.
The government increased the delegated goods procurement authority from the Minister of Public Works and Government Services Canada to program departments over a period from $500 to $5,000. A further increase in delegation authorities has been announced to assist in effective management of operations. This delegated authority has in most cases been passed down to local managers. To further simplify procurement, the secretariat has led the process for departments to proactively adopt acquisition cards in electronic commerce, in concert with their delegated procurement activities.
A second reason for holding excess inventory was the lack of good management information at the departmental level. The Auditor General noted this weakness, and we agree. The secretariat created the common systems initiative, which initially grouped the many existing departmental materiel management systems into several clusters. This has permitted better management and sharing of systems among departments.
In the past year the government has gone to the next generation of adopting integrated financial and materiel management systems, provided off the shelf by private sector firms, which will provide solid information to materiel managers. These systems are now operational in a few departments and will be implemented in the other major materiel management organizations over the next several years. The quality of materiel management information will be further enhanced in future years as the government adopts accrual accounting toward operations.
The third reason departments were holding inventory was because they did not receive revenue from disposals of surplus items. The government was both paying for holding unneeded inventory and losing disposal revenues. The President of the Treasury Board sponsored legislation that permitted departments to receive 100% of net sales revenue, and that arrangement is now in place.
As departments became recipients of this revenue, they began to express dissatisfaction with the service provided by the central Public Works and Government Services disposal services. The secretariat sponsored pilots to test the reforms of the system. As reported by the Auditor General, there is currently a Public Works and Government Services and secretariat review under way on revising the system. All the major inventory-holding departments are members of the review panel. The review is near completion and recommendations will be presented to ministers in the near future.
With each of these initiatives, the secretariat has a responsibility to follow up whether the changes are effective. We have already done this in areas such as delegated procurement and acquisition cards. We expect to conduct a more general review of the impact of changes on inventory holdings in 1998, when many of the reforms will have had time to mature.
Reforms to inventory management practices would not be effective if not combined with good communication. Another secretariat role deals with training and education of the materiel management community. Staff receive training from many sources - educational institutions, professional certification courses, private sector courses and training within departments.
Another key source is the Material Management and Institutional Services, which is a non-profit organization established and operated by members of the federal community itself. This institute operates training seminars, publishes newsletters and best-practices materials, and conducts research. The secretariat makes extensive use of this institute to deliver programs to highlight best practices and management reforms. We find it a more effective method than the traditional mode of the secretariat issuing directives. The best type of communication is that in which the community has taken ownership.
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In conclusion, speaking on behalf of the Treasury Board Secretariat, I welcome the observations and insights of the Auditor General audit of materiel management as a constructive, value-added contribution to the ongoing improvement efforts under way within the federal government's materiel management community.
We are optimistic that the good work already under way within departments and agencies will continue in the weeks and months to come. At the Treasury Board Secretariat we will continue to work towards the objectives of accountability and efficiency in the management of government assets and materiel.
Thank you.
[Translation]
The Chairman: Thank you, Mr. Clayton. Ms Fréchette.
Ms Fréchette: I would like to thank you for inviting me to respond to the comments made by the Auditor General regarding materiel management in the Department of National Defence.
I've already sent the clerk a copy of my detailed remarks, and I understand that it has been distributed to committee members. As a result, I will merely highlight some of the main points of our longer brief.
[English]
Materiel management is the largest support function in DND. It permeates and has an impact on every other activity and it is critical to the success of our military operations. It is big business, rivalling the largest corporations in Canada in scope and complexity.
I'd like to make two points regarding the context within which we are operating.
First, when considering materiel management in DND, it must be remembered that there are factors unique to our department that differentiate it from the private sector and indeed from other parts of the public sector. First and foremost is the need to support the operations of the Canadian forces. They have to be ready to go anywhere at any time, and we must be able to support them when they do.
Second, it should also be remembered that DND is beginning the third year of a five-year downsizing and restructuring program that is probably the largest of any organization in Canada. Our goal is to preserve the operational capability of our forces by focusing maximum resources on the operational sharp end while reducing resources devoted to support functions.
Our budget has been cut from over $12 billion in 1994 to $9.2 billion in 1999 - a 23% reduction. In 1999 we will have a combined strength of 80,000 military members of the regular force and civilian employees. That's a reduction of 45,000 since 1989.
[Translation]
I would like to mention a point I consider quite important. Ideally, the major changes being made by the Department of National Defence should occur in the following order: first, review in depth of processes and procedures, then change our management policies and framework, and finally reorganizing and reduce our staff.
Unfortunately, we have not been able to proceed in this order. We had to quickly reduce our staff and change our structures to meet the budget cuts imposed by the government, with that to be done before we could complete reviewing our procedures and changing our management policies and framework. We are now working on these issues very hard, and are doing so with reduced staff. At the same time, we are stepping up our support to missions throughout Canada and around the world, in places such as Bosnia, Haiti and the Middle East.
This period of change is not an easy one, but I would like to leave you with the following message: we have developed an action plan, and we are doing everything necessary to implement it.
As far as materiel management goes, we have begun to restructure in-depth our materiel procurement and support methods. But adopting the best practices of the private sector or other departments and by implementing suggestions made by our own employees, we are reducing the resources required to perform this activity. Since 1994, the staff in materiel management has been reduced by 40%. We are eliminating stocks and are making greater use of the private sector to meet our needs.
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[English]
Let me mention a number of specific actions we have taken and the benefits that will result.
With respect to the question of cost visibility, we are not starting at ground zero. We do have systems in place that provide us with cost information. The systems were state of the art when we acquired them, but they have been outpaced by the rapid changes in technology. These systems are being upgraded and refined with a higher degree of integration, which is consistent with Treasury Board's ``common systems'' initiative.
We are also taking dramatic steps to reduce our inventories. Let me first clarify the DND definition of ``excess inventory''. The $1.7 billion figure taken from our own internal study represents the amount of inventory beyond four years' usage. This does include inventory that is truly surplus to our needs, and it should be disposed of, but it also includes materiel purchased on the basis of lifetime buys, long-lead time items, and operational or contingency stock. None of this should be considered surplus inventory.
We estimate that more than 60% of the $1.7 billion figure falls into this category. In other words, when determining optimum inventory holdings, one must take into account our need to hold ``just in case'' inventory for military preparedness and emergencies. Our quick response in providing clothing, food, water, and shelter to the victims of the Saguenay floods last summer and our support to operational deployments such as the Gulf War or UN peacekeeping missions illustrate the critical importance of this capability.
That being said, we are taking a number of steps to address the current large holdings and prevent the build-up of inventory. For example, we have negotiated contractual agreements with the private sector for their ``just in time'' delivery of clothing items and for maintenance spares for major equipment such as the A-310 Airbus and the maritime coastal defence vessels.
At Canadian Forces Base Esquimalt we found that contracting out the local procurement of commercial goods resulted in major savings. Supply staff at the base have been reduced from 76 to 29 and overall annual savings will be about $5.2 million. That's a major success that we are working to duplicate across the system.
[Translation]
Our overall objective is to reduce our stocks by at least 30% over the next three years. In order to do this, we will take a thorough look at all the inventories in the supply system. Since last September, as part of an on-going stock rationalization project, we have already eliminated from our supply depots the equivalent of $50 million worth of stock.
Unifying supply depots is another area in which the Department of National Defence has demonstrated its interest in reducing overhead. We have just merged our four depots and have only two left: one in Montreal and one in Edmonton. This was done one year before the target date. This initiative will allow us to save some $30 million a year.
One of the first issues I heard about when I arrived at the Department of National Defence was the Canadian Forces Supply System Upgrade Project. Our risk management procedures had indicated some problems, and, as a result, we took certain steps. We abandoned the idea of developing our own software and chose rather to adopt a new commercial software that will provide the functions we need. We also decided to implement the project in stages, rather than trying to introduce such a complicated system all at once. When the Auditor General reviewed the project, we were still in the process of modifying our approach. We are now confident that we will soon have an integrated information system for materiel procurement and support. This system will be delivered on time and within budget.
The Auditor General concluded his report on materiel management as follows:
- the potential for real and significant savings to the government in its materiel management
practices makes it imperative that departments follow through with the changes they have
begun.
Thank you, Mr. Chairman. Mr. Lageux and I will be pleased to answer your questions.
The Chairman: Thank you, Ms Fréchette. We will begin the first ten-minute round. Mr. Brien.
Mr. Brien (Témiscamingue): My first question is to the Auditor General.
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I listened to the officials from Treasury Board and National Defence, and I think you have noted problems they already knew about, and that corrective measures are in place. Do you think that additional corrective action is required, in addition to those you mentioned at the time of your report?
Mr. Desautels: Generally, the problems we mentioned in our report may have been known about for a long time. Indeed, we have been talking about them since 1980, as I mentioned in my opening remarks. However, the important fact is that steps have finally been taken to correct the major problems.
I noted in my statement that some of the steps taken in recent months are encouraging. We think that if these efforts are maintained, they may finally produce some benefits. On the other hand, we should not be too quick to think the problem has been solved; many things could still happen. In the case of some problems, we see no immediate solution. These should be discussed.
One of the problems I mentioned that falls into that category is the distribution of responsibilities between the central agency, in this case Treasury Board, and the departments. I don't think this matter has yet been resolved to my satisfaction.
Mr. Brien: Both Treasury Board and the Department of National Defence somewhat challenge your assumption that the cost of holding surplus stock amounted to 25% of its purchase price. The Department of National Defence mentions a figure of 6.6%, while Treasury Board mentions 10%. Are your figures overstated and spectacular, or do they have some basis in reality? These are the figures people are bandying about at the moment.
Mr. Desautels: Our estimate of 25% is in no way overstated. This in fact was the estimate made by the government itself, by Treasury Board in particular, in a study it provided to us. The difference between what we mean and what we say is that the 25% figure includes the total cost of keeping a certain materiel in stock. Under the government's current financial management system, departments have to pay for only part of the 25%, the rest is covered by the government as a whole. For example, interest cost and real estate cost are absorbed elsewhere in government budgets. Individual departments are not required to include these costs in their own budgets. Consequently, I think the 25% figure is based in reality - it is the total cost. Departments only pay part of this cost out of their own budgets.
Mr. Brien: Treasury Board representatives tell us they are on the right track and that corrective action is planned. They say, however, that some problems have been around for some 15 years, and they back as far as 1980. Why should people be finally saying that they are confident that the problem will be solved? I'm sure that 15 years ago we would have been given the same answer you are giving us today. So why should I and the others seated around this table believe you this time and be quite sure that in four years, some other committee will not be asked to look into the same matters? What assurances can you provide that corrective action will be taken and that Treasury Board will have some control over each of the departments involved. In answering my question, the Auditor General expressed some doubts in this regard as well.
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[English]
Mr. Clayton: Unfortunately, I can't go back to 1980. I would like to be able to say that a lot of it is because the Treasury Board Secretariat is somehow smarter than it was 15 years ago, but the first and primary item is that departments have an awful lot less money.
It should be clear for you to understand that the primary driver in terms of the reform of the materiel management system - you heard about it from Madame Fréchette - is that under the reductions that are being made to departments' operating budgets, they are now in a business in which there is a considerable incentive to try to find ways to do savings in materiel management, and how you manage them is certainly one of the ways of doing that. Therefore, it has created an incentive.
But in addition to that, a lot of the pieces the Auditor General had noted back in 1980 that were disincentives in the system have either been fixed or are about to be fixed. That does include how we deal with disposal or revenues. It does include how we provide greater flexibility for procurement at the front end so that people are not warehousing. They are therefore doing just-in-time procurement.
I think it clearly has to do, in the last three or four years, with a revolution in how we are developing financial and materiel management systems within government in which there is a sharing among the community of departments so as not to duplicate systems. Also, there's a move to get private sector systems off the shelf rather than trying to reinvent the wheel ourselves.
There are, in the materiel management field right now, essentially four clusters or groupings of common systems. One of these is in place and now being used by Transport, the coast guard and Environment Canada. It's an integrated, modern financial and materiel management system.
Another one is called the SAP system, which through a public tendering process the government has just accepted as a shared system for materiel and financial management. Many departments, including the Treasury Board Secretariat, will be part of that system.
It gives me the confidence that we didn't have before that we're going to get the systems part of it right.
[Translation]
Mr. Brien: Yes, but there is a part that bothers me. It is when you say you are doing that now because we can't waste any money. If the government does get more leeway, will there be slacker management of public funds?
What assurance can you give us, parliamentarians, or what do you think your relationship is to Parliament in terms of accountability? How will you tell us about your intended action plan to follow every department involved in managing surpluses and inventories in terms of the points raised by the Auditor General? Do you plan to be much more transparent and report regularly, either to the committee or directly to Parliament, on your action plan and periodic progress report so that Parliament can see exactly what you are doing?
[English]
Mr. Clayton: I guess there are two elements to that question. For the first one, I'll go back to my presentation.
We see our accountability and responsibility as dealing with whether Treasury Board policies - these are not only materiel management policies, but financial ones like accrual accounting - are working in their impact on the system. We have conducted several studies and reviews on the system. Those studies are public. They are available to anybody who wants them. The fact is that they're sitting on the Internet now, so I guess people in China could actually look at them if they so wish.
In terms of what we see as our accountability, those reviews that we carry out and will continue to carry out are public and available to anyone who asks.
At the second level, which has to do with the specific initiatives of departments and what they are doing, as I said in my remarks, we see that as a responsibility and an accountability for the heads of those institutions and an accountability for those institutions to report to Parliament in whatever ways they report to Parliament. It's not a responsibility of the Treasury Board Secretariat.
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The Chairman: Mr. Silye, ten minutes.
Mr. Silye (Calgary Centre): Thank you, Mr. Chairman.
Mr. Brien touched on a topic that I'd like to continue with: the accountability and responsibility aspect. What is the role of the Secretariat of the Treasury Board with respect to the departments?
Here's the issue I'd like to touch on. There was a move to consolidate some military bases. That involves assets, materiel, or whatever. I don't want to get into the political aspect of it; I just want to stick to how are we monitoring this situation now. Who's in control? Who's responsible?
How is the Department of Defence going to defend the fact - maybe it's not a fact, but I have heard this - that the original cost, which obviously would have come from the departments, would be $26 million, for instance, to move CFB Calgary to Edmonton? I hear that the cost is in excess of $100 million already. If that is the case, then I'll proceed. If not, please correct me if my numbers are wrong. That's if you're aware of it or not.
This is all a part of the responsibility and accountability so that politicians know what the facts are and members of Parliament can fairly represent and debate the issues.
So here the Auditor General says that the Treasury Board is responsible for implementing the policies to make sure that the full cost of the inventory is divisible and distributed to the end user. In other words, the Treasury Board has a huge responsibility here in knowing what's going on in each department. Then in the submission by the Treasury Board, Mr. Clayton, you indicate that the prime accountability rests with the department heads. It's not you, but the head of defence. Defence says they're doing what they can.
I'd still like to have a clarification. As a politician, I'd still like to know how we track this down. Let's say we are now over the budget by $75 million on this move of materiel assets from one city to another. Who is responsible? Who's going to be held accountable? Is it the politician? Is it the deputy minister? Who is it? Who do we blame and how did this happen?
Ms Fréchette: The cost of the move from Calgary to Edmonton, the last time I had a chance to look at this question, was within the parameters that had been stated at the time.
I think there's confusion over the comparison of the costs. I would be very happy to send you detailed information on the costs involved in moving from Calgary to Edmonton. It is a question that has surfaced a number of times there recently, and I'd be happy to send you clarification.
Mr. Silye: You would have the original cost estimates plus the projected savings over a period time?
Ms Fréchette: Yes.
Mr. Silye: And you're saying you're within that budget?
Ms Fréchette: Yes.
Mr. Silye: Am I wrong in quoting the figure of the projected expenditure as $26 million? Now it's $100 million.
Ms Fréchette: I don't have the figures in front of me. I believe the confusion comes from counting different things. You have to count what was included in the estimates and what the actual cost was. I think when comparisons are made, we're comparing apples and oranges.
I think that's the answer to your question. I will provide you and members of the committee with detailed explanations if you'd like them.
Mr. Silye: So what you're saying is that if you include holding costs in all those components that make up the holding costs, it might be a higher number, but if you just actually include the physical cost of moving, it would be a lower number?
Ms Fréchette: I think the cost estimate provided for the move out of Calgary to Edmonton included the cost of the construction of some facilities in Edmonton. I think we are within that.
There were other moves that I think were taking place at the same time, but they've all been lumped up into a larger amount. But when you compare what we said the projected costs would be and what it is costing, my understanding is that we are within the budget.
Mr. Silye: So as for Treasury Board, how do you interface with what's happening there?
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Mr. Clayton: Go back one level. Treasury Board, in its budget office role with the Minister of Finance and eventually cabinet, established certain financial parameters for the budget for the Department of National Defence. Ministers approved certain types of changes, including the changes that are talked about.
From our perspective, the specifics of both carrying out and monitoring that particular move is purely a matter for the minister and deputy head of National Defence. We do not get reports on it, nor would we assume that they would report to us on such an issue.
Mr. Silye: But it's your responsibility to keep track of the finances and the cost of everything. It's visible, so why wouldn't you want a report? Why wouldn't you want to know what's going on if perhaps some things get out of line?
Mr. Clayton: The Auditor General can report on what it said, but I have said we have a responsibility to ensure that our policies are correct and working. We do not have a responsibility related to specific actions of departments in terms of the move from one place to another.
Mr. Silye: What does this mean? Treasury Board policy requires that the full cost of inventories be visible and distributed to the end user. Aren't you having to work with this particular department on this issue and verify what's being moved, how much it costs and be a part of that budgetary process, rather than just saying it's totally her responsibility and you don't even get updates or reports?
Mr. Clayton: You're talking about a specific move. We work on that issue through the work I talked about in getting the financial systems and software of government, so departments have that sort of tracking system in place. It isn't related to monitoring a specific project or activity.
Mr. Silye: Another point you make on page 5, Mr. Clayton, is the government was both paying for holding unneeded inventory and losing disposal revenues.
Mr. Clayton: Yes.
Mr. Silye: First, Treasury Board probably should have never allowed that to happen. Second, who was getting those revenues? For instance, some land is going to be freed up in Calgary that basically belongs to the federal government and is an asset of the Department of Defence. When it moves to Edmonton - I don't know if it had to buy more land, but obviously it's building new buildings - this land will be disposed of, one way or another. I know there's a plan in place. Who gets the revenues generated from that? Do they go into general revenues or to the Department of Defence?
Mr. Clayton: There's a distinction between how the crown disposes of land revenues and goods. For goods disposal, until 1992 or 1993 the money went to the consolidated revenue fund. Now it goes to the department in your formula. Land revenues historically went directly to the consolidated revenue fund. We are now working with departments like National Defence on sharing arrangements where it gets some and the central treasury gets some.
Mr. Silye: So, Mr. Auditor General, Mr. Desautels, do you feel we have a clear definition of the lines of accountability and responsibility along the lines Mr. Brien was pursuing?
Mr. Desautels: I think there's a need to clarify a little better what we're talking about. Some of the expectations Mr. Silye has raised are a little bit outside the subject of strictly materiel management. Our focus was on materiel management. What we would like to see clarified, if possible, with input from parliamentarians is the expected role of the various parties in all of this. The Treasury Board Secretariat definitely has responsibilities vis-à-vis materiel, because the very existence of a unit bearing that name in Treasury Board speaks to that.
The question is, how far does that role extend? Does it include monitoring of what happens in departments on materiel management? This is what I would like to see clarified to a certain extent.
.1630
Some of the documentation we have that emanates from the Treasury Board Secretariat speaks of monitoring, but maybe we don't have quite the same interpretation of what it means. Similarly, if you look at the description in Treasury Board's own estimates, in their part III, of their role, they talk about providing leadership, direction, advice to departments and agencies on expenditure management, regulatory affairs and property materiel management. They also talk about reviewing departmental plans and programs and providing advice.
Some of this work, as far as I'm concerned, is not purely monitoring, but it's difficult to do if you don't have a good understanding and good enough information on what is in fact happening out in the departments and in the field. So I would not suggest in any way - and this would run counter to my own philosophy - that Treasury Board start micro-managing what goes on in departments. Departments should have their own responsibilities. On the other hand, given the responsibilities we normally ascribe to Treasury Board, I'm wondering if they don't need a little more information that will enable them to monitor in some fashion what goes on in departments in order to actually carry out some of the things they state are their responsibility.
Mr. Clayton: Maybe I could help. I'll note that this subject is debated endlessly within the secretariat and it isn't an easy one. I don't think there's a cookie-cutter that says you do it the same way everywhere. Maybe if you don't mind, I'll spend a minute talking about how in the materiel management field we actually do it three different ways, based upon the situation.
I've explained our approach to general materiel management. For example, in our policy we get no reports from departments; that is, there are no regular reports. We go out and do audits or reviews on how our policies are working. There's a subset within materiel management that has to do with the implementation of the Alternative Fuels Act, which is the act passed by Parliament a few years ago related to government vehicles. Because of the nature of that particular initiative, there is a requirement for departments to specifically report to the Treasury Board, and we have set up the information systems to do it. So we have a different type of accountability relationship.
The reason that was done, in addition to a requirement in the legislation, was this tended to be a special initiative, a new area of activity where we saw a need to have that sort of central reporting. So that's another type of accountability relationship. We're not accountable in that system. It's the minister in charge of the RCMP or whoever buys the vehicles. But we are accountable for having the information system there and accurate, and that is an accountability.
There is a third level of accountability, and that is the one that took place in information systems software for materiel and financial management. The secretariat was the only organization that could actually put it together, and we got our hands dirty. We went right in there and became accountable for putting together the requirements. It was Public Works and Government Services that did the contracting, but we were responsible for actually bringing it together and saying this is how the government will do it.
So based upon the situation, within materiel management we have three different ways of dealing with accountability.
The Chairman: Thank you. Mr. Pagtakhan.
Mr. Pagtakhan (Winnipeg North): Thank you, Mr. Chair.
In essence, then, Mr. Clayton, not obtaining in your system is the ability to hold individual departments accountable to you. Is that correct?
Mr. Clayton: No. The individual departments are accountable to their ministers.
Mr. Pagtakhan: No, I realize that. You said that.
Mr. Clayton: They are not accountable to us.
Mr. Pagtakhan: Yes. So then you confirm that they are not accountable to you.
Mr. Clayton: No.
Mr. Pagtakhan: So in a sense, from my understanding of management, if you manage these goods, it is critical when you have delegated that responsibility, with your central information system and others, to hold them accountable so that they comply with those systems. I'm not a manager, but I would think this would require a performance appraisal of the performance of those departments, which to me is in essence monitoring. Would you not agree to that?
.1635
Mr. Clayton: I wouldn't agree, I guess, with your first statement. We have not delegated authority to departments. That authority rests naturally with the deputy heads of those institutions. We have, as a functional area in materiel management - and there are many other Treasury Board areas under the Financial Administration Act - set out certain general policies for departments to follow, and our accountability is to make sure those policies are working.
Mr. Pagtakhan: How do you ensure that those policies are working if you are not monitoring those polices to begin with?
Mr. Clayton: In an ideal world, to some extent we'd be monitoring the policies, because the information systems and departments were so good that we could go out and look at those information systems, and when they provide use.... As the Auditor General has noted, and I think we've all talked about, the information systems are not all that good. So instead of that we have done special reviews. That's how we do our monitoring, and I mentioned six of them that the Auditor General's office itself uses. That is how we've done the monitoring in terms of how policies are working.
Mr. Pagtakhan: So from time to time you do spot reviews because there are groups to be done. Would it not be good to do it on a regular basis?
Mr. Clayton: These are done on a fairly systematic basis. They are, again, monitoring how our policy is working. They're not monitoring whether National Defence is doing a good job.
Mr. Pagtakhan: Okay. Let me go to another subject just for clarification, and this is to the Auditor General and to Mr. Clayton.
Are we agreed, firstly, that we have to have a common ground? Is the 25% the total economic cost to the crown, as according to Mr. Clayton? According to the Auditor General, that is 25% of the total purchase. Are the two phrases not the same?
Mr. Clayton: I think we agree.
Mr. Desautels: I think we're using the 25% exactly the same way.
Mr. Pagtakhan: Okay. But Mr. Clayton went to some length to explain that.... I got the impression that under government accounting practices only about 8% to 10% of inventory costs, not 25%, are attributable to the budget of any government department, as though an explanation that the 25% was an overestimate of the report of the Auditor General. Am I now clear that the 25% is the total purchase, and the expression is the same as 25% of the total economic cost to the crown?
Mr. Clayton: I think that we agree that 25% is the economic cost to the crown.
Mr. Pagtakhan: And you agree, too, that that is the total cost of the purchase, or not?
Mr. Clayton: That's a total cost of.... That's a percentage of the inventory - that may be different - being held essentially in inventory.
Mr. Pagtakhan: Yes, but the Auditor General used the phrase ``total cost'' of the purchase.
Mr. Desautels: Mr. Chairman, I believe that what we said was that it costs the crown effectively 25% of the inventory that it holds in warehousing to keep that inventory in warehousing.
Mr. Pagtakhan: No, I know; I heard that in your subsequent explanation. But in the original presentation I thought I heard ``25% of the purchase''.
Mr. Desautels: We referred to the annual volume of purchasing in our opening statement, but not in relation to the 25%. The 25% is the cost of holding inventory, which by definition is what you have in storage in your warehouses.
Mr. Pagtakhan: Okay; I'm clarified now on that.
Mr. Clayton indicated it was no great surprise, when you made the review, that there would be excess inventory holdings. Just for my information, why was there no great surprise? Was it because it was anticipated to be the situation, or was it before the review, or was it because you had seen the report of the Auditor General?
Mr. Clayton: The review took place long before the Auditor General's report - at least, the most recent Auditor General's report. As part of our role in dealing with the materiel management community, we talk all the time, and it was quite known and evident.
I will note that the report that identified that surplus inventory was not commissioned in order to identify a number. It was commissioned to say ``What do we do about it?'' The number was created as sort of a background to the seriousness of the problem. ``Okay, what do we do about it?'' - that was the nature of that particular review.
.1640
Mr. Pagtakhan: So after some period of time, it became obvious that you had to do something about it.
Mr. Auditor General, in your presentation on page 5, items 23 and 24, you indicated that despite the new law in 1992, there was still the continuance of the old practice, insofar as disposal of surplus materiel, and that in 1993 there remained a mandatory common service for disposal of materiel. Was it because it was elected by the Treasury Board contrary to the law, or was it also an option allowed by the law?
Mr. Desautels: I'll ask Mr. Minto to elaborate on that.
Mr. Shahid Minto (Assistant Auditor General of Canada): Mr. Chairman, in answer to that question, it was allowed by the law. It was dictated by the law, as a matter of fact, that there had to be a mandatory common service.
Mr. Pagtakhan: Okay; I just wanted to be sure.
The report on the review of the disposal of holdings will soon be released, and you say in the very near future, Mr. Clayton. Can you give us an indication of how ``near future'' is to be construed - months or years?
Mr. Clayton: Months.
Mr. Pagtakhan: Less than 12 months, then?
Mr. Clayton: Yes. I'm a little cautious, because it is an item that requires approval of ministers before anything will be done, but the report is just about finished.
Mr. Pagtakhan: Mr. Chair, that's the extent of my questions at this time.
[Translation]
The Chairman: Before continuing with questions, I would just like to tell Mr. Clayton that it is kind of like a teacher who only realizes half his students have failed at the end of the school year. There are two possibilities: either the students were bad students, or the teacher was a bad teacher.
In this case, Mr. Clayton, I thought I was the only one to have trouble understanding your role and responsibilities. Messrs. Pagtakhan and Silye have both asked questions on that, Mr. Brien spent eight of his ten minutes doing so and I also have a question. Something is wrong. It reminds me of the show To Tell the Truth that was on the American television stations towards the end of the sixties and that was called Qui dit vrai in Quebec. I would put you in a situation that would reveal who was telling the truth.
In the middle of the first paragraph on page 3 of the French version of your notes, you say:
- The Treasury Board Secretariat is not in the business of monitoring the performance of
individual departments and agencies, that is the responsibility of the heads of each institution.
- Monitor the implementation and effectiveness of the materiel management policy.
[English]
Mr. Clayton: Again, I do not think there's an inconsistency with what I said in my speech, and what the Auditor General has said in exhibit 23.2, which is a statement essentially out of the Treasury Board policy, which has been approved by ministers.
The distinction is that there's a responsibility of the Treasury Board to monitor the implementation and effectiveness of the materiel management policy. Our responsibility as we see it is to look at that policy to see if it's the right type of policy and whether it's working. That's a quite distinctly different accountability from monitoring how National Defence is operating as a department within not only the materiel management policy but all other policies.
.1645
As I've noted, the way we tend to carry that out these days is by systematic cross-system reviews to see if the policies are working. If they're not working in the several areas I've noted, we get the system to do something about changing those policies.
[Translation]
The Chairman: Do you agree, Mr. Desautels, or am I the one who misunderstood again?
Mr. Desautels: I agree in part, but I would add some clarification to what Mr. Clayton just said. I am not suggesting that Treasury Board Secretariat handle the micromanagement of those departments; that is not our objective at all. However, we would like to clarify what type of information the Secretariat should have, for it to be able to monitor the implementation and effectiveness of its policies. That does not only affect materiel management; we are also dealing with that in other areas.
Treasury Board Secretariat's resources have shrunk over the past few years and has told us they were no longer able to monitor things as closely as in the past. It has therefore interpreted its role somewhat differently, which is to issue policies, but to essentially leave it up to the departments to follow them. We have noticed that the Secretariat is doing less monitoring than in the past. However, we think it should be doing monitoring on a more on-going basis.
In any case, I think it is important not only that the Secretariat define its mandate or its interpretation thereof, but also that parliamentarians inform the Secretariat of what is expected of them.
The Chairman: If you want to make babies, you have to sleep together, you have to see each other. Meeting the secretary would be in order.
Mr. Brien.
Mr. Brien: Mr. Desautels, you mentioned that not all inventories are necessarily recorded in the same way. So there's no consistency in inventory management among the various departments.
Should Treasury Board's role be limited to issuing guidelines saying that everything must be standardized, thereby leaving it up to the departments to determine whether their current procedures are acceptable? Is that the real problem? Did I understand that correctly? If so, I think Treasury Board should do a follow-up to see whether there is any standard regulatory monitoring.
Mr. Desautels: Mr. Chairman, I will ask Mr. Minto to clarify that in a moment. We are not suggesting that Treasury Board impose identical systems on every department. Each department can have its own needs and should be free to design the systems that would be best suited to it.
As Mr. Clayton said earlier, some departments might have the same needs as others and then it would be worth consolidating the effort or resources. But there are departments that have very specific needs and I don't think they should be imposed one or several standard systems.
I will ask Mr. Minto to clarify that.
[English]
Mr. Minto: Thank you, Mr. Chairman.
I'll try to simplify this a little. Let me go back to the materiel management policy issued by Treasury Board itself. Our perspective of the role of Treasury Board is really based on their own words, what they have said themselves.
Clause 5 lists policy requirements. Let me go to item D, because we talked about it a minute ago. It says:
- The full costs of inventories, purchasing and holding costs must be visible to and distributed to
the end user.
The next clause of this policy that talks of monitoring is clause 6. It says:
- Feedback on the implementation and effectiveness of this policy will be obtained from sources
such as the departmental monitoring system, internal audits, program evaluations, as well as
some periodic reviews by the Treasury Board Secretariat.
So the fact is that their role in setting out the policies and in monitoring is set out in their own materiel management policy document.
When we looked at the tools they had assigned for themselves - periodic reviews, cost information, internal audits, and program evaluations - we found only one of those tools, periodic reviews, was being used. We concluded they didn't have the information to fulfil the role they had assigned for themselves.
[Translation]
Mr. Brien: I have another question for Ms Fréchette, who was a little forgotten earlier. That doesn't bother you, does it, Ms Fréchette?
The Chairman: The best is yet to come, Ms Fréchette.
Mr. Brien: In your brief, you said you were not surprised at the shortcomings that were mentioned because your internal reviews had said the same thing. You say that in most cases, you have found solutions that have been implemented, and that has worked out well. You mentioned several. So there are still areas where no solution has been found. Are they still major problems? What do you mean when you say there are some cases for which you have not yet found a solution?
Ms Fréchette: I was referring to a more general process that is used at the Defence department. We have not fully reengineered the entire materiel management. Obviously, we still have pilot projects to find out which would be the best methods to use. We make comparisons with the private sector and other defence departments.
The general make-up and underlying principles of materiel management for the future are starting to become clearer at the Department of National Defence, which is not to say that there are many projects underway for which we have not yet found the best approach.
Mr. Brien: You also said that the Defence department was unique in certain respects. In the past, there was often talk of the Defence department's uniqueness; people said it was a special department that was unlike any other.
I would like you to give us specific examples of that in terms of its inventory. Surely, some of your inventory does not meet such specific needs. I can understand that military equipment would represent a major portion of your inventory, but another portion of the inventory must surely be similar to that of other departments.
Ms Fréchette: Absolutely.
Mr. Brien: In what proportion for each one?
Ms Fréchette: In my presentation, I referred to an internal study which had evaluated at $1.7 billion the inventory or goods on hand for which storage would exceed a period of four years. I tried to explain that everything which is stored for more than four years is not necessarily surplus inventory, at least not in our case.
For example, I mentioned certain pieces of equipment. When we buy a large piece of equipment, we can buy spare parts to cover the life of the equipment. We can have spare parts on inventory that we keep for 10, 15, or 20 years, or for the entire lifetime of the equipment.
We have, in certain cases, special needs, among them the need to respond to emergencies and to mobilizations. This does not mean that for anything which is not specific or particular to military needs, we need not, ourselves review our inventories. This is what we are doing now.
The same goes for military uniforms. We used to buy uniforms, store them, and have them on hand for years. We are now changing the system, and have made arrangements with a company that delivers them as they are required. We are also changing our habits in relation to office supplies. This truly represents a change in mentality.
Mr. Brien: You could perhaps discuss the matter of uniforms with your colleague, the deputy minister responsible for the RCMP which ordered some 107,500 hats. I don't have the exact number.
.1655
[English]
The Chairman: Mr. Silye.
Mr. Silye: Thank you, Mr. Chairman.
The more we go around here, the more discrepancies I see. They're becoming glaring. First of all, Mr. Clayton said the prime accountability for materiel management lies with the department heads and the agencies of the federal government. Mr. Minto, to contradict that, then says the Treasury Board's own policy requires a form of monitoring, and there are three or four ways to do it, of which they're only using one, which is the periodic audits. It's as if the Treasury Board wants to absolve itself.
Then we have both the Auditor General and Mr. Clayton, the executive director, saying they accept the industry standard of 25% as a ``holding cost'' number. Yet we have Madame Fréchette claiming it's not true, it's bogus and doesn't apply to her department. I don't accept that number on her page 6. She says this notional 25% doesn't really apply here. She claims it's only 6.6% or 10%, not 25%.
Everything is supposed to be good, but I see these discrepancies. It seems to me the Treasury Board doesn't want the responsibility or accountability. It just wants to lay out a program and then leave it there.
It's suggested by the Auditor General that he would like to see some clarification of the expectations of members of Parliament with respect to the role of the secretary board, as it relates. My first expectation is that I would like to see the board's own policy implemented, especially in terms of all the ways of keeping track of information and finding out what departments are doing.
Second, I would like department heads and Treasury Board to agree on what will and what won't be charged to departments with respect to the holding costs. People quote and throw around these numbers, especially politicians - we can be very flippant about it - and it would be nice if we were using more accurate numbers and knew what we were talking about. It's no wonder we sometimes don't know what we're talking about, because it gets very confusing. I'm trying to follow this here and I see discrepancies.
The discrepancies are obvious. And the more we get into it... I think the group here is past the kindergarten stage. I think we'd understand if we were told what was going on. I just see a discrepancy in what people think their roles are, and none of us understands whose role is what.
Mr. Clayton: Let me deal with the two issues. Let's talk about the 25%. I think we've all agreed the economic cost of holding inventory is 25% of the purchase price of that inventory.
Mr. Silye: Madame Fréchette, do you agree?
Ms Fréchette: Yes.
Mr. Clayton: If you look at the way government now does accounting - and it is changing that - where the cost of the Minister of Finance borrowing money with a cost of buildings is not charged to a department, the rule of thumb would be 8% to 10% in most departments. Then each department has to do it. National Defence has done a very specific study, and because it's bigger, its cost is 6.6%. So that's how you get those three numbers. I think we've looked at our numbers and we're entirely consistent in terms of it.
When accrual accounting gets put into place for government and the cost of DND warehouses is in there, its costs will go up, but they would never include the 8% to 10% cost to the Minister of Finance for borrowing money. So that's how it is.
Mr. Silye: That discrepancy is cleared up. But what about your own policy?
Mr. Clayton: I totally agree with what was explained there. We have a policy that says in the case with the end user, that is what should happen. We then say we have a monitoring system. The monitoring system does not say we should use all the tools; it gives the range of tools. We could do that monitoring. Ideally, if the accounting systems were in place, we could lean to those. Because they are not, we have tended to use one particular review technique. I wouldn't like that to be the only one.
As part of the review a few years ago that talked about the 25%, one of the issues they dealt with was the problem that end users are not there. So in effect we did review that particular issue on a system-wide basis.
.1700
Mr. Silye: My only question relating to the Auditor General's point is what the department head and the director would expect from politicians. Are you getting enough input or leadership from politicians? Is it just the cabinet ministers you get it from?
Ms Fréchette: If I may give a very candid answer to this question, I think the management of the public service is in a state of evolution, along with the management of public money. On the one hand, we have a system that is very regulated and expects very specific accountabilities for a large number of regulations and so on. At the same time, I think we are trying to introduce more and more flexibility in management and delegation of authority, while making the best financial decision that will get the best value for money for the public dollar.
Because we're not private business, I don't think we can ever see public sector management that will replicate exactly the same kind of private sector logic. Where guidance is required is in determining where that balance is. I think the discussion this afternoon over the role of Treasury Board - the amount of monitoring, the amount of control, as opposed to letting managers manage in terms of making the best decision where value for money is concerned - is where the balance has to be established. That's where guidance in the general sense is required, particularly at this stage, when they're changing management practices in the public sector.
Mr. Silye: It's not that I want people let go, but.... Go ahead.
[Translation]
The Chairman: Mr. Paradis, five or six minutes.
Mr. Paradis (Brome - Missisquoi): My first questions will be to the Treasury Board representatives.
I should first of all like to congratulate Mr. Harder, who appeared before us on November 5th. We had requested additional information, and this was supplied to us on November 28th. I would like to congratulate him for the speed with which he forwarded this information.
My first question will deal with the information supplied by Mr. Harder. I mentioned at that time that it was perhaps a little tiresome within the government apparatus, to note that as the end of the fiscal year approached, that is March 31st, expenditures increased in certain expenditure items. Last year, we suggested to the comptroller general that he send to various departments a notice telling them to pay attention to expenditures, and that it wasn't necessary to spend the entire budget during the final month.
I had asked to see the expenditures committed for March over the past years, for certain items. These items involved the subject we are discussing today since we are dealing with materiel, equipment, and machinery. The document that was sent to us in November dealt with the last four fiscal years, that is 1992-1993, 1993-1994, 1994-1995, and 1995-1996. I had a quick look at it with you and I paid particular attention to the special services category, for which we were given the average by quarter, and not for the final month. The data was grouped according to quarters; that is the first three months of the year were grouped together, April, May, and June, etc.
During the first three quarters of 1992-1993, 21% was spent, whereas during the last one, the proportion rose to 36%. The same applies for the following year: 21% and 36% during the last quarter. It's the same thing for the next year: 21% and 38% during the last quarter, as well as for the final year: 20% and 39% of expenditures made during the last quarter.
Let's move on to purchases of repair and maintenance services. The same phenomenon occurs: we go from 21% to 38 and 39% on average per quarter. The same phenomenon occurs again under the heading public utilities, and supplies, and under the heading construction, and machinery and equipment purchases.
.1705
In 1992-1993, it is 20% per quarter at the beginning of the year, which increases to 40% during the final quarter. In 1993-1994, it goes from 20% to 41% during the final quarter. In 1994-1995, it rises from 19% to 42% during the final quarter. Last year, there was an average of 19% during each of the first three quarters, and 43% during the final quarter.
It would seem that even if the controller general writes to various departments and recommends that they hold the line during the final month of the year, that is not effective. According to the figures that we have before, us, it appears obvious that a system requiring a 5% roll-over does not work.
What does Treasury Board intend to do to avoid having an abnormal number of expenditures during the final quarter of the year? In his comments, Mr. Harder says:
- This shows that some program managers are being careful, by maintaining some room to
manoeuvre in their budget up until the last quarter when operational uncertainties are not as
great...
- That is certain.
- ... and that the final decisions have been made to acquire the necessary goods and services.
My second question is also to Mr. Clayton and follows something that I found surprising in Mr. Harder's report.
The Chairman: It's unfortunate that Mr. Harder is not here. We could have asked him a number of questions.
Mr. Paradis: My final question is on accounting. Since he could not tell me how much was spent in March, Mr. Harder mentioned it in his text:
- We must point out that the government does not use the accrual accounting method. The item is
charged when it is acquired. Therefore, expenditures posted during March represent supplier
invoices processed by accounting service employees during the month; they do not necessarily
reflect the goods and services received during March.
The Chairman: A six minute preamble! You have ten seconds to answer, Mr. Clayton.
[English]
Mr. Clayton: I wouldn't want to give a different answer to the same question that Mr. Harder had previously.
The fact is that on an institutional basis, as noted, the government did institute a 5% roll-over to help with that situation. As somebody who for 25 years in the federal government has been in the business of dealing with my own budgets and talking to people about budgets, that is exactly how it works.
In discretionary items, which are the many items you talk about, you essentially do reserve - it tends to be a relatively small part of your total budget in most departments - a certain higher percentage of it until the post-Christmas period, because you don't know what's going to happen. I think that tends to be a pretty consistent pattern across most organizations, most departments, and most sub-organizations.
On the second one, on accrual accounting and how it works, as a failed accountant, maybe I'll turn it to the Auditor General, if he would talk about that particular point.
Mr. Minto: Mr. Chairman, I would refer you to paragraph 23.41 of the report, where we dealt with the issue.
The items raised by Mr. Paradis really deal with year-end spending more than the materiel management in the chapter we were discussing. I'm really not familiar with the response you got from Treasury Board.
I guess the principle behind the thing really is that you allocate your costs by the period, and you match them against something. Now if you have incurred the cost, you've incurred the commitment at the end of the year, that's where the costs would come in. I think in the materiel management context here, when we were talking earlier we were saying that the end users have to know the total cost involved with that particular asset - not just the cost of their own labour or the price they paid, but the financing costs, the cost of the warehousing, the cost of a whole slew of things. Once that cost visibility is there, they realize this is something that's been sitting in my yard here for three years and it's costing me so many dollars a month, just holding costs, so I'd better do something about it.
.1710
We've noted instances here where people have put things in warehouses and records haven't been kept, as you know. Because of the lack of cost visibility, in the end people don't even know who owns those. Departments have been reorganized, people have moved, and in the end the ownership is in doubt. Who owns this? Why are we still holding on to these things? But if you had cost visibility somewhere and this was coming out of somebody's budget or even showing up as a flag in somebody's budget, sure, you would have some action on it.
[Translation]
Mr. Paradis: In closing, Mr. Chairman, I admit that I am somewhat disappointed to see that, according to Mr. Clayton, nothing can be done. The same situation prevails everywhere, I am a little disappointed to realize that there are no positive measures to put forward. At the very least, may I suggest, as I did last year that, since it is now mid-February, and since there are only six weeks left before the end of this fiscal year, the Controller General find some way to advise all of the departments that it is not necessary to go on a spending spree?
The Chairman: Let those who have ears listen.
Mr. Paradis: Thank you Mr. Chairman.
The Chairman: Dear colleagues, it is 5:14. The bells will begin to ring in about one minute. Mr. Hubbard and our Vice-Chairman, Mr. Grose, would like to speak for the first time. Four of my colleagues would like to ask more questions. I have a few, some of them for Ms Fréchette who is bored and whom we must not forget. I suggest that we adjourn, and that we schedule another meeting to complete our work.
I believe that we have some interesting questions remaining. If you agree, this is what we will do. I will also ask the witnesses if they agree. Tomorrow at 3:30, we will reconvene for an information session on a chapter of the Auditor General's Report, which will last perhaps 30 or 45 minutes. In view of your usual availability, I would like to ask you if you can join us tomorrow from 1:30 to 2:15 at the latest.
[English]
Colleagues, is there a consensus that we continue for maybe 45 minutes tomorrow?
[Translation]
We had scheduled a meeting for tomorrow. Is one of you not available?
Ms Fréchette: We will be available.
The Chairman: We appreciate the response of the representatives of the Department of National Defence. What about the representatives of Treasury Board and of the Auditor General's office?
Mr. Desautels: That's fine, Mr. Chairman.
The Chairman: The meeting of the Standing Committee on Public Accounts is adjourned. It will reconvene tomorrow at 3:30.