NDVA Committee Meeting

STANDING COMMITTEE ON NATIONAL DEFENCE AND VETERANS AFFAIRS

COMITÉ PERMANENT DE LA DÉFENSE NATIONALE ET DES ANCIENS COMBATTANTS

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, December 14, 1999

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[English]

The Chair (Mr. Pat O'Brien (London—Fanshawe, Lib.)): I would like to call to order the meeting of the Standing Committee on National Defence and Veterans Affairs.

Colleagues, we have two witnesses, first from the Auditor General's office, followed by the Conference of Defence Associations. I'll forewarn you that this happens every time we get to the end of a session, or just before we recess for any reason. We had an additional situation last week that backed up meetings.

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This will either become quite a long meeting, or we may have to carry over some of this testimony to Thursday. One is not certain for sure when the House will rise for the Christmas break, but the likelihood is it will not be before noon on Thursday, at the earliest. We'll see how we proceed on that basis. If we finish with the witnesses today, fine; if not we'll possibly have to carry over to Thursday's meeting, or the members may want to stay longer today. We'll just see how that evolves.

With that, I'd like to welcome the officials from the Auditor General's office. Welcome, Assistant Auditor General David Rattray. We welcome your opening comments.

Mr. David Rattray (Assistant Auditor General, Audit Operations Branch, Office of the Auditor General of Canada): Thank you, Mr. Chairman.

I would like to thank you for your invitation to appear again before this committee. With me today are Peter Kasurak, the principal responsible for national defence matters; and Mr. Hugh McRoberts, the principal responsible for the audit of Public Works and Government Services Canada.

Last year we discussed our 1998 chapters on equipping and modernizing the Canadian Forces and the procurement of major capital projects. In response to these audits and Parliament's continuing interest, the department has begun to undertake reforms in both budgeting and management of capital.

[Translation]

Today, I would like to provide an overview of what the department has achieved and bring you up to date on two of our more recent projects related to procurement: the Alternative Service Delivery audit at National Defence and the government-wide audit of sole-source contracting for professional services.

I would also like to provide a brief overview of other audit projects we have completed, such as our chapters on the management of hazardous materials and the proper conduct of public business.

[English]

First let me touch on the department's acquisition reforms. Our views are not based on audit work, but on less-than-formal ongoing contact with the department. We intend to do a full follow-up on capital acquisitions, and report to Parliament in about a year.

The Standing Committee on Public Accounts held two hearings on defence capital procurement and reported to the House of Commons in October 1998. The Standing Committee on Public Accounts called for DND to strengthen its requirements and options assessment process, including making them prominent elements in the department's acquisition reform guide; conduct operational testing of off-the-shelf equipment before entering into full contracts; develop and implement a framework for reporting project performance to senior managers; and facilitate parliamentary scrutiny and allow Parliament to be made aware of the department's acquisition plans, inclusion in the annual fall performance review of a comprehensive defence review and assessment, and indicators that show performance in attaining capability goals.

While the government said it agreed with these recommendations, there is much to be done before reaching these objectives. Little or no real performance information for Parliament to judge whether the department is improving or falling behind has been published in its fall performance report and the CDS's annual report.

A review of the most current draft of the acquisition reform guide indicates there has been little priority given to options analysis and front-end tactical requirements in the reform guide itself. Nevertheless, the department has addressed at least the options analysis guidance through its computer network desk book. We were unable to ascertain the status of guidance on threat analysis prior this meeting.

While we have not followed up on equipment testing, we note that the department made no specific commitment to the public accounts committee.

According to “Defence Planning Guidance 2000”, an initial set of performance measures for operational forces, key support areas, and resource management will not be launched until April 1, 2000, with results of the indicators in place for fiscal year 2001-2002. A complete package is to be in place by February 2001. Since the department has been attempting to develop valid performance measures since our 1994 audit report, the target dates should be respected.

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Performance measurement of capital, on the other hand, seems to be progressing quite well. The department's system has been developed in cooperation with Public Works and Government Services Canada, and is based on standards set by the Project Management Institute. When fully implemented, this system will meet all our original expectations and could also form the basis for reporting to Parliament.

[Translation]

Overall, some progress has been made, but we hope to see more before we table our follow-up report in the fall of 2000. Peter Kasurak will now take over the presentation.

[English]

Mr. Peter Kasurak (Principal, Audit Operations Branch, Office of the Auditor General of Canada): Thank you, David.

Turning to our more recent work on defence procurement, the audit of alternative service delivery at the Department of National Defence repeated one of the themes of our audit of major capital projects: business cases and options analysis were often poorly done.

In the capital project audit, five of the six projects we examined had not undertaken adequate options analysis. In the more recent alternative service delivery audit, five out of fourteen projects fell short. While this indicates some improvement has occurred, there is still much to be done.

We note in our report the department has already recognized this problem and has taken measures to address it, especially for very large projects, such as the supply chain project.

From the results of our audit and testimony before this committee by members of the department, we concluded there was still a lack of experienced staff to undertake sophisticated business analysis demanded by complex ASD projects. The department recognized this problem in 1997 and decided to concentrate on fewer projects. It responded to our audit by saying it would provide more in-service training to staff, but this problem will likely persist over the next three or four years.

This is also the case for the cost information necessary to make business decisions. Three of the twelve projects with business cases had inadequate baseline costing to support them. There were also problems with establishing the service levels that underpin management's goals for in-house or contract services. Service levels were established prior to the alternative service delivery project in only three of fourteen service areas. Half the business cases we examined were deficient in this area.

Like training, both cost and performance are being improved by the department, but these deficiencies are likely to persist for two or three more years. Parliament can help by encouraging the department to develop these three technical areas more quickly, and by requesting the department to provide measurable plans for accomplishing this.

The ASD audit also brought to light a significant problem regarding the contracting of major service contracts, like the $2.8 billion 20-year NATO flying training in Canada project. Such a project differs from typical service contracts in two significant ways. They are very large, thus limiting the number of Canadian firms that are likely to be available to bid on them. Secondly, they create a partnering relationship with a contractor over a very long period of time, during which other firms may be shut out of a major government market and the government may become highly dependent on an external source for a vital service. Nonetheless, they also offer very attractive possibilities for reducing costs and importing technology.

Our audit concluded that the NATO flying training in Canada project had not followed government policies for sole-source contracts. In addition, we found the profit markup awarded was not consistent with existing Public Works and Government Services Canada guidelines. In part, this is evidence of overall compliance problems we will discuss later, but it is also an indication that the existing contracting framework for major service outsourcing is not adequate. It does not provide adequate guidance to officials for addressing competition problems when there is a limited market.

I believe this is a vital component for large ASD projects, to ensure that value is received. It is also necessary to assure industry that all firms have an equal chance at competing for the government market.

The existing framework also does not appear to provide sufficient guidance to officials for evaluating risk and analysing and documenting risk transfers to the private sector. In the NATO flying training contract, there was a substantial transfer of risk and a significant award of profit markup because of it, yet we found there were inadequate studies underlying these important decisions.

The Treasury Board Secretariat and Public Works and Government Services Canada have both responded positively to our recommendations that these areas should be addressed by continuing work on procurement reform. Parliament could help by asking officials to clarify their philosophy regarding competition for these major projects, and provide a timetable for the achievement of their planned reforms.

Hugh McRoberts will now explain his work on sole-source contracting.

Mr. Hugh McRoberts (Principal, Audit Operations Branch, Office of the Auditor General of Canada): Thank you, Mr. Chairman.

In our second procurement audit on the use of advance contract award notices, or ACANs, in sole-source contracts, we found significant problems that endangered value for money and other important principles. This audit was government-wide: we audited three departments other than National Defence. We reviewed over 500 contracts let using ACANs and randomly selected 50 for in-depth audit.

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ACANs are electronically posted notices that are intended to inform suppliers that a sole-source contract is about to be let and to allow a challenge to the decision.

Our sample contained 20 projects managed by National Defence. While our sample was not designed to draw a statistical conclusion about National Defence's track record vis-à-vis the other departments in the sample, National Defence's performance was not exceptional, and this committee may wish to consider this government-wide problem in its deliberations over procurement at National Defence.

We found that for these smaller service contracts, the overall policy is essentially sound but that officials either do not understand it or simply ignore it. Only 11% of the contracts we examined complied with government policy regarding the letting of sole-source contracts. Failure to compete government contracts is not only inequitable to the business community, but it also endangers value for money to the government.

We also found that almost half the contracts we audited had inadequate statements of work. In about one-third of the cases the statement of work in the contract was substantially different from the way the work was described in the ACAN. Departmental managers could provide little evidence they had received the best possible price or highest value to the government from these contracts.

Other than general non-compliance and poor business practices, our concern is that ACANs are becoming a fifth exception to regulations requiring competitive tendering. Officials appear to believe that if an ACAN is posted and no challenge is lodged, then the decision to sole-source is justified. We noted that this was not the case in nearly 90% of the cases we audited. We also found that challengers were not treated fairly. Challengers appeared to face a higher burden of proof than the suppliers whose selection was being appealed. There was a lack of independence in the process in that the same managers who had awarded the sole-source contracts also judged the appeals against their own decisions.

Our report makes several recommendations to the Treasury Board Secretariat on how to address these findings. The key points are the need to follow the rules and to enhance accountability for doing so and to realize that sole-sourcing is a serious decision that deprives others of economic opportunities. There is also a need for some form of independent due process for those who wish to challenge these decisions.

We are disappointed in the secretariat's response. It flatly rejected our recommendation that sole-source decisions, which are based on claims that the services of a unique supplier are required, should be reviewed and approved by an independent senior manager. We are also discouraged by the secretariat's refusal to support mandatory audits of a sample of contracts in departments that frequently use sole-sourcing.

With all due respect to the secretariat's concern for the use of audit resources, the tide of non-compliance is so high that it can no longer be ignored. We believe measures must be taken now, and we do not believe costs would outweigh benefits.

National Defence also responded to our chapter by saying that in the last calendar year they had denied about one-fifth of their departmental managers' ACAN requests and had cut the number of ACANs by half. They said they had established a contracting advisory committee to review selected sole-source decisions, analyse trends, and advise managers.

Parliament can help by reaffirming its support for the rules and the principles of competition, fairness, and best value that lie behind them. It can indicate that it views violations of these rules as serious and encourage the government to do the same. Specifically, there is a need for ongoing assessment of contracting performance, a review function in departments that requires senior officials to take or concur in the decision to sole-source and to be accountable for it, and an independent dispute resolution mechanism to deal with contracts that lie outside the purview of the Canadian International Trade Tribunal.

Thank you.

Mr. David Rattray: Finally, I would like to mention the other audits we have completed since our last appearance. The hazardous materials management audit concluded that compliance with laws and policies designed to protect employees and the environment had not improved since the department completed its own audit in 1993. Almost half the individuals at the ten bases we audited who handled hazardous material had not received the appropriate training. In addition, although the department says that it conforms to provincial and municipal standards where appropriate, we found that it never defined what this meant. Air and water emissions from Canadian Forces bases were not adequately monitored and often did not meet federal guidelines.

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Our proper conduct of public business audit examined the framework supporting ethical conduct across the department. We found that the National Defence ethics program, intended to support good conduct, was well designed but not completely implemented. Compliance audit checking of financial transactions and of base administration in general appeared to have fallen below prudent levels. Below the national headquarters level, compliance audit was not targeted with adequate risk analysis. Finally, the department's follow-up on complaints of abuse made to National Defence headquarters was often weak. About half of the 66 cases we examined met all our criteria; 12 of the 66 cases were not adequately assessed; inadequate corrective action resulted about one-fifth of the time; and nine of 74 cases took three years or longer to resolve.

[Translation]

These chapters show that National Defence is capable of designing good management systems, but often does not follow through in the implementation. The pattern of repeatedly breaking rules, including contracting, financial administration, and health and safety regulations is troubling.

Mr. Chairman, that concludes our opening statement. We would now be pleased to answer the committee's questions.

[English]

The Chair: Thank you very much, gentlemen.

We will go directly to questions, starting with Mr. Hanger of the Reform Party for seven minutes.

Mr. Art Hanger (Calgary Northeast, Ref.): Thank you, Mr. Chairman, and thank you, gentlemen.

I have something I would like to receive a comment on, and there's also a request that follows. I'm going to briefly read the outline so that you understand it. It wasn't part of your presentation here this morning, but it does deal with your office. It involves veterans from the Second World War:

Veterans returning from the Second World War with no immediate family and judged incompetent or incapacitated had their estates and possessions confiscated by DND and put in trust.

[Translation]

Mr. René Laurin (Joliette, BQ): Mr. Chairman, would it be possible for Mr. Hanger to read a little more slowly, since the interpreters do not have a copy of the text and cannot repeat as rapidly as he is reading?

The Chairman: Yes, thank you.

[English]

Mr. Art Hanger: I can do that.

Despite regulations to the contrary, these veterans did not receive any interest on this money. Only in 1990, with the passage of the Department of Veterans Affairs Act, did these veterans begin receiving interest on these funds. The amount of back interest due these veterans is estimated at from $1 billion to $1.3 billion.

The Auditor General in his 1986 report recognized that a relationship of financial trust existed between the government and the affected veterans in paragraph 13.6.

So my question, and certainly my request, is does the Auditor General's office still believe the same, and would the Auditor General's office release the documents it had in 1986 that clearly demonstrate this was a relationship of trust?

Mr. David Rattray: Mr. Chairman, if we wrote that in 1986, I would have to check with people from the current veterans affairs audit team to see whether or not that is in fact still the same. I would presume it is. Secondly, I would have to seek counsel with the Auditor General's office in terms of the release of documents. I'd have to determine what constitutes working papers and what's privacy. But I can certainly take the member's comments back to the Auditor General's office and prepare a response back to the committee if that's appropriate.

The Chair: It would be very good if you could do just what you said and report to the clerk if and when you have something.

Mr. David Rattray: Thank you.

Mr. Art Hanger: Okay. Thank you.

I'll ask my next question, and then I'll turn it over to my colleague, Mr. Chairman.

In reference to the NATO flying contract as being sole-sourced, I know that a number of guidelines were not followed, but was there any definite breach in law when that contract was let the way it was?

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Mr. Peter Kasurak: Mr. Chairman, our report only comments on what we felt was non-compliance with the government contracting regulations. We didn't report any breaches of law or illegal activity.

Mr. Art Hanger: Okay. There's obviously some contract law involved, then. Did the government violate its own contract law?

Mr. Peter Kasurak: Its own regulations, yes.

Mr. Art Hanger: Its own regulations—and what specific regulations?

Mr. Peter Kasurak: I would have to go back and look at our notes for the exact citation, but the government contracting regulations provide only four exceptions for sole-source contracting. The first is urgent and pressing necessity; it gives an example of, say, a building that's going to collapse and you need somebody to come in very quickly. There are also national interest, which is linked with security concerns; a unique supplier, which is very stringently defined...

And the fourth one, Hugh, is what?

Mr. Hugh McRoberts: Urgent emergency—

Mr. Peter Kasurak: Under $25,000.

This contract didn't meet any of those, in our minds, nor did the department's representations satisfy us that they were within the regulations.

Mr. Art Hanger: Following on the heels of that particular contract being let and its subsequent revelation to the media, to Parliament, and to the public, there was another contract about to be let, and that was the one that dealt with the DEW line. It was maintenance, almost of the same character or nature as far as being sole-sourced went, with little or no opportunity for others to complain.

I guess my question would be more the seeking of an opinion from you in this regard. Why do you think other contractors would not complain openly and vehemently against such a process?

Mr. Peter Kasurak: I think Mr. McRoberts commented on that in his chapter on sole-source contracts.

Mr. Hugh McRoberts: I am not aware of the specific circumstance.

Perhaps, Mr. Chairman, I could just answer an earlier question as well. The specific reference the member was seeking is in the government contracts regulations, section 6(d). This is the particular reference on the uniqueness criterion or uniqueness exception for sole-sourcing.

In terms of the specific contract the member is raising, I'm not familiar with it. When we looked at the challenge process for the ACANs, however, what we saw was a situation in which... To mount a challenge, first of all, requires doing so in a very limited period of time. Most of these notices are posted for 15 days—and 90% of the cases we looked at were posted for a lesser time. So as a firm you have to be prepared to make a significant investment to prepare a proposal against unknown criteria and to be judged by an unknown standard.

There is no real means of appeal unless the procurement falls under one of the trade agreements, either the AIT—agreement on internal trade—NAFTA, or the World Trade Organization agreement on contracts. Over and above that, in discussions with many of these people it is also mentioned that there is at least a sense that this often involves, in addition to a monetary investment, an investment of goodwill.

Our suggestion, based on the smaller contracts we looked at, is that when you add up all of that it amounts to, for most firms, a most unattractive investment.

The Chair: Thank you, Mr. Hanger.

We'll have to get to Mr. Hart on a second round.

[Translation]

Mr. Laurin, you have the floor for seven minutes.

Mr. René Laurin: Mr. Kasurak, in paragraph 8 of your submission, you allude to a lack of experienced staff. You say, and I quote:

From the results of our audit and the testimony before this committee by members of the department, we concluded that there is still a lack of experienced staff to undertake sophisticated business analysis...

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I am wondering whether your statement is a veiled one, or whether it should simply be read as it is worded.

When you say that there is still a lack of experienced staff, are we to understand that the current staff is not competent enough? I am asking this because the comment could be interpreted in two ways. If the current staff were better trained, would it be competent enough to fulfil the tasks expected of it, or is that staff already competent, but insufficient in terms of its numbers? What are we to understand?

[English]

Mr. Peter Kasurak: In reality, Mr. Chairman, I think both are true, although what we were trying to communicate in this particular statement is the actual skill base of the people who were doing the work. One of the reasons the business cases tended to be poorly done was that the people doing them lacked the experience in doing this sort of business analysis.

But as the member has suggested, throughout the department there is also a shortage of people who are capable of doing complicated business analysis. This is one of the reasons why the department, in 1997, decided to try to concentrate its efforts on fewer alternative service delivery projects—so that it could concentrate its expert staff on fewer things and hopefully do them better.

[Translation]

Mr. René Laurin: The question may seem academic, but it goes further than that.

As we know, the department has been the object of huge budget cuts. A motion was even tabled at this committee's last meeting, asking the Minister of Finance to increase the armed forces' budgets. When I see a statement such as this one, I think that before getting additional money, the armed forces should first properly manage the money that they already have.

You say there is a lack of experienced staff, this for two reasons: the current staff is not adequately trained and there is a shortage of personnel. The department might be tempted to solve these problems by hiring new competent employees. It could keep its current employees who are not competent. It could also shelve them or take some other measure. If this were the case, this could result in useless spending. Therefore, it is important to know where the problem is. Should we lay off those employees who are not competent? If there is a large enough number of them, we should either help them develop their skills or lay them off and hire new people. On the other hand, if everyone is competent, but the department is understaffed, then we must hire more employees. But we must first know what the real problem is.

[English]

The Chair: Just before you answer... My colleague has mentioned the motion. It has actually now been passed by committee. Indeed, the first report to the House was calling for the five-year plan and the increased funding that Monsieur Laurin made reference to.

Mr. Peter Kasurak: Thank you, Mr. Chairman. That had been drawn to my attention prior to this hearing.

In reality, I think the department is struggling to deal with a number of levels of problems all at the same time. Last year when we appeared before you, we talked about the global budget problem, and I believe this is what the House's motion is intended to address.

Indeed, as the Chief of Defence Staff has acknowledged, the department is going to have to make some hard choices on how it's going to use the funding it has, whether it's increased or not. So it has a global budget problem to deal with, and certainly more funding would mean fewer hard choices. But at a lower level, I think you're quite right to imply that before the department undertakes a large number of new projects, it does need to get its house in order in terms of its management processes and get the expertise on board to manage some of these very large projects.

Although things are improving, the ASD projects we looked at are slightly newer than the capital projects we discussed with you last year. There is improvement between those two groups. It's still falling short. There is quite a bit more that needs to be done.

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So I think both are true. Very obviously, management processes need to be strengthened at the same time as any increase in funding would occur.

[Translation]

Mr. René Laurin: In paragraph 12 of your submission, you indicate that your audit concluded that the NATO Flying Training in Canada Project had not followed government policies for sole- sourced contracts. I would like you to elaborate.

What puzzles me is that apart from Bombardier I cannot see who could have made such a bid to the government for a $2.8 billion project. What other options did the government have? You made that statement, but one would think that Bombardier would be the only bidder for such a project. There is no point in splitting hair. We know we have to go with Bombardier, because it is the sole provider. Why should we have followed another procedure to arrive at the same result? Had the other procedure been followed, the government's procedure, what savings might have resulted from it? We do not really understand why you are raising this issue.

[English]

Mr. Peter Kasurak: In reality, I think there are two problems. One problem is that the government's contracting regulations set up an overall philosophy and regime that depend on competition to provide value to the crown. It's the cornerstone. If there isn't competition, then we can't be assured that the lowest price to the crown was attained.

[Translation]

Mr. René Laurin: I apologize, Mr. Kasurak, but I only have seven minutes and I would ask you to be very clear.

The Chairman: I am sorry, Mr. Laurin.

[English]

Actually, the seven minutes are just about over, so if you could be very brief...

Mr. Peter Kasurak: I'll be very quick.

[Translation]

Mr. René Laurin: I will finish my question, even if I get your answer only the second time around. In this case, what should have been done to make the process better?

[English]

The Chair: Either be very brief or we'll catch it on the second round.

Mr. Peter Kasurak: Dave.

Mr. David Rattray: Perhaps there could have been action started to enter into a competitive process much sooner than what in fact occurred. There was early discussion, but time ran out, and it seemed that one of the constraints imposed on the contract then required it to go sole-source.

[Translation]

The Chairman: Thank you, Mr. Laurin.

[English]

Mr. Wood, please, for seven minutes.

Mr. Bob Wood (Nipissing, Lib.): Thank you, Mr. Chairman.

I have a couple of comments. First, obviously, in going over this, you see a lot of criticism of the defence department in your report, which I guess is your job. What I don't see is any suggestions or solutions offered, which maybe was what Mr. Laurin was saying.

Do you communicate your findings to DND while you're conducting your investigation? Do you offer anything beyond criticism, like suggesting ways to correct some problems?

Mr. Peter Kasurak: Yes, we have extensive discussions that go on for several months in discussing and finalizing an audit report. So our results are fully discussed with the department.

At the moment, it's the policy of the office to put forward only fairly brief general recommendations. We don't wish to insert ourselves into the management process. Certainly for other audits, there have been a lot of informal staff discussions about how the department could best implement some of our recommendations, and this can go on over a fairly long period of time. But at the moment our recommendations tend to be at a very general high level so as to not tie management's hands.

Mr. David Rattray: I would say that throughout the audit, in many cases, a lot of action is started before the audit is actually concluded.

Secondly, all the reports we are referring to here contain numerous boldfaced recommendations with departmental responses. By and large, there's concurrence with promised action by the department against each and every one of those recommendations.

Mr. Bob Wood: I guess that leads to my next question. What sort of lag is there between when you conduct your investigation and the release of your reports?

Mr. David Rattray: If I take one example, in the case of the November chapters we did on National Defence, for example, discussion was still occurring in terms of the clarification of the facts and the material right up until late September.

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So there's a point at which we have to stop and then translate the material and have it printed and ready for tabling. But it's fairly current, as current as one can get, given that we have to translate and print and table it.

Mr. Bob Wood: Yes.

Mr. Rattray, what I'm really getting at is my concern that you're raising issues that DND is already tackling aggressively. For instance, I understand that the department has taken some strong action in recent months to deal with at least a couple of issues you raised, specifically the proper handling of hazardous material. Also, they've been working hard to address the ethics difficulties. Are you aware of these efforts, and do they alter the accuracy of your report?

Mr. David Rattray: No.

In trying to respond to that, I would say that a lot of the audits take 12 months, or slightly longer than that, from the day we announce to the department we're going to study a particular area and write a report for Parliament. As I said, as we start these audits, in many cases the department is also being briefed by us in terms of where we intend to look or what we intend to do, and generally they are starting to try to do corrective action rather than wait for the final report. As you would see in many of the reports, we try to reflect action taken in the reports themselves.

In terms of hazardous materials, for example, we reported on studies they had done six years before, and very little action had been taken. It seemed it wasn't until our audit had started and was close to being completed that we saw some very vigorous action being taken, and there again, we reflected it in our report at the conclusion.

Mr. Bob Wood: A couple of weeks ago I had the opportunity to ask the DND ombudsman about the alleged secret commissions and kickbacks concerning diesel fuel. When you uncover information like this, do you communicate it to the defence department or to the military police?

The impression I got from the ombudsman was that DND only became aware of your investigation after it appeared in your report, even though they were conducting their own parallel investigation at the same time. Should you not be sharing the information you gather? Obviously, something happened here.

Mr. David Rattray: In fact we do share that information. If the committee so wishes, I have a chronology of the events that occurred around that investigation. Rather than read the dates and who we spoke to on individual occasions, I'd be more than happy to make that available to the committee. For example, as far back as January 10, 1996, we did discuss matters with the defence department and the military police and we kept in fairly close contact right through, up until the tabling of our report in November.

The Chair: If you would table to our clerk a copy of that chronology, either now or when you have a chance, I think that would be useful for us. Thank you.

Mr. David Rattray: I think that will clarify the misunderstanding.

The Chair: Right. Thank you very much.

Mr. Wood, do you have any more questions?

Mr. Bob Wood: No, that's fine.

The Chair: Okay, there's a minute and a half. Who wants to start that?

Mr. Bertrand, do you want to start it and come back?

[Translation]

Mr. Robert Bertrand (Pontiac—Gatineau—Labelle, Lib.): Yes, Mr. Chairman.

[English]

I have a question for Mr. Rattray regarding the NATO flying training centre. You had mentioned a while ago that it was because of the constraints imposed that DND had to go sole-source. Did I understand you correctly when you said that?

Mr. David Rattray: What I was trying to say, and may not have done so clearly enough, was that we believe they could have taken earlier action in terms of a decision to go with a contract and go competitive rather than sole-source. There were discussions that had occurred with respect to NATO flying, but it wasn't until there was, time-wise, an urgent need to move to a sole-source contract because the competition with the United States for the flying training centre had become more pressing. We felt that there was perhaps an opportunity to have moved a little quicker on this contract and then had the option of going to competitive bidding, but one will never know at this point.

[Translation]

Mr. Robert Bertrand: Mr. Rattray, what other Canadian company had the financial and technological resources to provide the necessary equipment and know-how to the Department of National Defence? What other Canadian company had that expertise?

[English]

Mr. David Rattray: I'll ask Mr. Kasurak. He's prepared to answer that.

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Mr. Peter Kasurak: Well, as a matter of fact we'll never know if there was another company that had some preliminary discussions with the department. It's quite possible as well that other consortia could have formed, including foreign firms, that might have resulted in a better deal for the government. Our points on this one are two: the department broke the rules; and without competition, you'll never really know for sure you got the best possible price. So whether there was a specific firm that was better, it's hard to say.

The Chair: Thank you, Mr. Bertrand. I'll come to you again on the second round.

Now we go to Mr. Earle for seven minutes.

Mr. Gordon Earle (Halifax West, NDP): Thank you, Mr. Chairman.

I'd like to touch upon the alternate service delivery audits. I noticed that one of the themes that came through was that business cases and option analyses were poorly done. Then you touched upon the fact that five of fourteen projects that were recently looked at fell short of the criteria when it came to the business case analysis.

When I look in your report at the chart that describes this situation, I guess what's noticeable to me is that the five cases are all contracts out to industry. I notice that there were two cases where practically all the criteria were fully met, and those were situations that involved in-house bids. So it says to me that perhaps there's some merit, rather than contracting out, to maintaining service from within.

The reason I raise this is that I know a number of people in my riding are quite concerned about a supply chain project that is currently being looked at. They've made a strong bid to me that they feel that their in-house bid should be considered for these projects, but they seem to feel there's an indication that's not going to be done in the upcoming project.

I would just like you to comment on that, because I noticed you say here that the department has already recognized the problem and has taken measures to address it, especially with respect to large projects such as the supply chain project. So how does that correspond, if the department is not giving consideration to in-house bids?

Mr. Peter Kasurak: I think the measures we observed were first of all to concentrate their more senior and more skilled cost-and-business analysis people onto these few large projects, like supply chain. They also used a better-defined risk analysis methodology, and they had their cost analysis reviewed by an external auditor. We saw those as positive steps.

I think that while what you point out here is an interesting relationship, we've only a very few number of cases here, and I'd be hesitant to say that one thing caused another or was strongly related to it. We were thinking specifically of those three things in terms of improvements, rather than what the department calls the most effective organization step, which it's applying to most other projects.

Mr. Gordon Earle: And when you do an analysis or an audit of these ASD situations, do you also audit or take into account the kinds of external factors that are involved as well? Because if these projects don't go out in isolation, particularly when they're contracted out, then you also have a situation, perhaps a spinoff effect, that is there for maintaining a certain level of service within—people are employed and spending in communities, and so forth—and that all fits into the economy. So do you do the analysis from the point of view of the overall impact of contracting out upon not just the military itself, but also the surrounding community?

Mr. Peter Kasurak: When we do the audit, we don't actually redo the analysis. We look and see that the department has fairly and adequately performed its own analysis. We don't actually do that.

Mr. Gordon Earle: How much time do I have?

The Chair: You have about four more minutes.

Mr. Gordon Earle: Okay, I want to turn to another subject, and this concerns the pre-licensing use of—and I may not pronounce this correctly—mefloquine—that audit.

• 1615

Now, in that situation, we understand that defence officials told your office that it is DND's policy not to seek written informed consent when preventative drugs or vaccines are prescribed for CF personnel during deployment, and I quote, “since such consent is often not compliant or compatible with operational requirements.”

Also, we know that CF members may be subject to discipline under the National Defence Act if they refuse to submit to drug or vaccine treatment when ordered to do so. There's a case that's going on now about that.

Did the department explain to you during the audit how written informed consent is not compatible with the operational requirements? And does the department now—since your audit of 1992-93—require a written informed consent before CF personnel receive preventative drugs or vaccines? For example, was this required during the Persian Gulf War with respect to the anthrax vaccine?

Mr. David Rattray: Mr. Chairman, I'm just looking for someone who did the audit last April.

To your first question, our understanding is that it was explained to us quite clearly in terms of the signatures and the defence requirements.

I must apologize, I'm not sure what the present situation is. I'd have to get back and get more details on that one.

Mr. Gordon Earle: Is that something you would revisit in a subsequent audit to see if any recommendations you may have made around that issue are being complied with?

Mr. David Rattray: Not normally. We would be tracking it, and I know we would have the answer to that. What we normally do is do a report back to Parliament two years after a full value-for-money chapter is done. This is what we call an audit note, which is a much shorter piece of work. We normally track those for a period of time, but we don't have a formal two-year reporting follow-up. I could get the answer for the committee once I check with someone who was more intimately involved with that particular note. It will involve Health Canada and National Defence—

The Chair: We would request that after you carry out your consultations you table a response with the clerk, please. We'd appreciate that.

Mr. Earle, you have one more question.

Mr. Gordon Earle: As a result of your audit, the Department of National Defence established a single position with responsibility for all regulatory issues related to unlicensed medical products. Does the creation of this position adequately address the Auditor General's concerns? What other measures, if any, has the department taken to address this situation?

Mr. David Rattray: Mr. Chairman, I probably would like to include that response with the original one I just said. I do apologize, but the principal responsible for that audit is in fact travelling on an audit, and with rescheduling he couldn't be here today. I would have asked that person to come forward and give you a specific answer, but he would be more than happy, I'm sure, to work on one to table.

Mr. Gordon Earle: Thank you.

The Chair: Thank you. I will recall, for all of us, that unfortunately we had to reschedule this particular meeting. Anyway, we'll go on from here.

Mr. John O'Reilly (Haliburton—Victoria—Brock, Lib.): Oh, is he on a coast guard boat?

The Chair: Mrs. Wayne, for seven minutes, please.

Mrs. Elsie Wayne (Saint John, PC): Thank you very much, Mr. Chairman.

Mr. Chairman, I have to say that I find it shocking to hear that there has been sole-source contracting in the defence department.

I want to ask a question, and I don't know whether you can answer it or not. Would this have anything to do with politics and the fact that when they're doing sole-sourcing, it goes to companies that have contributed to the party? Is that what this is all about?

Mr. David Rattray: Mr. Chairman, that really wasn't the specific focus of our audit by—

Mr. John O'Reilly: Which party, Elsie?

Mrs. Elsie Wayne: I mean, I love you guys, but I tell you, this is a serious situation. I've done tendering for 25 years, and by God, we never did it this way, I'll tell you.

Mr. David Rattray: Mr. Chairman, it wasn't specifically directed at that in terms of political interference or political direction. However, both the alternative service delivery chapter on National Defence and the ACANs chapter do put forward a number of observations that are of concern to us in terms of the process, the lack of effective challenge to the process, and the definition of sole source or ACANs being then considered as sole source without proper efficient challenge.

Mrs. Elsie Wayne: Did you do an assessment when you were looking at the 20 projects managed by National Defence? You said that while your sample was not designed to draw a statistical conclusion about National Defence's track record vis-à-vis the other departments, National Defence's performance was not exceptional, and this committee might wish to consider the government-wide problem in its deliberations on procurement at National Defence.

Certainly I think we had better, when we come to this, because when you look at it... Did you have any assessment as to what kinds of dollars and cents we may have been able to save if we'd used a proper tendering program?

• 1620

Mr. David Rattray: Mr. Chairman, I'll ask Mr. McRoberts, who authored that chapter, to respond.

Mr. Hugh McRoberts: In general, no, we didn't. In the case of service contracts, particularly where they've been sole-sourced, it's very difficult, in the absence of a market-based process such as a competition, to really determine what the price should have been. It's not like comparing typewriters to computers. It's much more difficult.

We have, however, you will note, in some of the cases that we write up in the chapter, pointed out specific instances where the combination of sole-sourcing and lack of attention to value for money in setting the contract up led to what we believe were excessively large amounts being paid to individual contractors.

Mrs. Elsie Wayne: Right.

Mr. Hugh McRoberts: But in the nature of things, we could not systematically assess that.

Mrs. Elsie Wayne: Also, in paragraph 19 of your brief, you say your report makes several recommendations to the Treasury Board Secretariat. You say the key point is the need to follow the rules and to enhance accountability for doing so, and so on. Then you say:

We are disappointed in the Secretariat's response. It flatly rejected our recommendation that sole-source decisions, which are based on claims that the services of a unique supplier are required...

Do you mean the secretariat refused to take a look at this and make changes?

Mr. Hugh McRoberts: That is correct.

I'll just back up. Treasury Board's policy guidance suggests departments should have a senior contract review committee that reviews all contracts with respect to a number of things, including, in the case of sole-source contracts, the justification for sole-sourcing. We observed that none of the departments we looked at had such a committee.

Mrs. Elsie Wayne: That's right.

Mr. Hugh McRoberts: These decisions were often being taken by quite junior officials. Remember, these are decisions that are depriving people of economic opportunities as well as compromising best value to the government. So we recommended that such a committee or such a review process be required.

Treasury Board's response was simply that their policy encourages departments and agencies to establish contract review mechanisms; however, they do not agree that a policy requirement is necessary.

Mrs. Elsie Wayne: That's from Treasury Board?

Mr. Hugh McRoberts: Yes.

Mrs. Elsie Wayne: Oh, Mr. Chairman, we have work to do.

Voices: Oh, oh!

Mrs. Elsie Wayne: Yes, dear, we have a lot of work to do, eh? As much as I love some of these Liberals, Lord God of hosts!

Do I have a minute?

The Chair: You have a couple of minutes.

Mrs. Elsie Wayne: The other one is the kickback system that was in place. In chapter 33 of your report, paragraph 33.28, you state:

We also determined that National Defence had received a similar complaint about diesel cash rebates being paid to DND military personnel prior to the Office of the Auditor General receiving a complaint. DND military police investigated the complaint but closed their investigation file as being unsubstantiated.

What I want to know is, did your office receive a comment from the minister specifically dealing with the statements made in paragraph 33.28 on page 33-10 of the Auditor General's report of November 1999? If so, did those comments discuss the difference between the internal financial audit and the military police investigation, as alleged? Because they're saying a police investigation took place and they closed their files; they didn't find anything wrong with the kickbacks. Now we're getting a report that there are kickbacks and have been.

Mr. David Rattray: First of all I'd like the opportunity to correct the record. I made an earlier statement from memory that it was January 1996 when we approached the department. It was in fact January 1997. So I'd like to correct that.

Mrs. Elsie Wayne: It was January 1997. Okay.

Mr. David Rattray: The chronology of events that I will make available to the committee lays out the timing on this. In January 1996 allegations were made to Defence in regard to a cash rebate being provided to DND military personnel. That same month, a complaint was referred within DND to the military police. Then four months later, in April 1996, the military police closed their investigation into the matter.

• 1625

Then in December 1996 we received a telephone complaint from the same complainant who had contacted Defence in January 1996, making similar allegations. That's when we started the contacts with the department, in December 1996 with the chief of review services and in January 1997 with the military police, to find out if they were in fact doing any more. We found out they had closed the file, and we started our investigation.

The rest of the dates I have here. I won't take the committee's time, but it follows fairly clearly from there.

Mrs. Elsie Wayne: Thank you very much.

The Chair: Thank you, Mrs. Wayne.

Now we go to a second round of five minutes, starting with Mr. Hart.

Mr. Jim Hart (Okanagan—Coquihalla, Ref.): Thank you very much, Mr. Chairman.

The people of Canada thank the Auditor General for his hard work in bringing these deficiencies to light, although we know the Liberal side doesn't appreciate it. And if we dug deep enough, I'm sure the Conservative member wouldn't like the results of years of Conservative rule in this country either, when it comes to awarding of government contracts.

Voices: Oh, oh!

Mr. Bob Wood: Have you missed any?

Mr. John O'Reilly: What about the officers when you were a midshipman?

Voices: Oh, oh!

The Chair: Order, please.

Mr. Hart, you have the floor.

Mr. Jim Hart: Do I still have five minutes?

The Chair: You still have five minutes—well, a little less.

Mr. Jim Hart: Mr. Chairman, I would like to ask a broad question to the gentlemen here today about my concern with the combat capability of the Canadian Armed Forces.

It would seem to me the deficiencies we've seen here today in fact do affect the combat capability of the Canadian Armed Forces.

In 1998 you reported that the CF had exceeded the planned budget by $4.5 billion for their capital equipment costs. Obviously little or nothing has been done in the way of increasing the budget for that particular area. So I would like to ask you what you think the implications for the Canadian Armed Forces are, given that these deficiencies haven't been fixed as yet. In your opinion as auditors, do you feel then it's going to require further reductions in personnel or mothballing of equipment for the Canadian Armed Forces?

Mr. Peter Kasurak: The department has a number of options facing it. It believes it can save considerable money through additional alternative service delivery projects. It's also stated that it will look at further infrastructure reductions to try to get money to transfer into capital. In addition, in its Strategy 2020 document, which is its most recent initiative to come to grips with this sort of problem, it also says it intends to look at doctrine-enforced structure issues. That means it could reconfigure the Canadian Forces, either in terms of equipment or even conceivably in terms of number of people, in order to be able to meet the goals the government has set for it.

At this point I don't think one can foreclose any particular outcome. There are real options available for the department to try to address these serious problems facing it, and it seems to be pointed at addressing them. However, as our audit points out, if expected savings don't materialize from alternative service delivery as quickly as possible, it could lead to compromises on the force structure side.

Mr. Jim Hart: I suppose one of the extreme measures they could take is to simply follow Treasury Board guidelines. Would that be a good idea? That's a rhetorical question. You don't have to answer it.

Mr. Peter Kasurak: Thank you.

Mr. Jim Hart: Since you brought up alternate service delivery, the department has again fallen short of their projected $200 million savings they anticipated. This amount has now been revised to $175 million by the end of the planning period 1999-2004. Do you believe the rationale the department has given you is an acceptable explanation for this shortfall?

Mr. Peter Kasurak: As a matter of fact, we believe the department is experiencing a very typical problem that all three of Australia, the United States, and the United Kingdom have experienced in realizing their original goals.

• 1630

The audited savings we relied on in our report all were considerably less than what defence ministries both expected and claimed. So where we've come out of the woods on this one, Mr. Chairman, is that there are savings there, but they are harder to realize than anybody originally thought. And it's not just the Canadian Forces; all defence forces are struggling with the same problem. They're all experiencing about the same rate of success.

Mr. David Rattray: I would add, Mr. Chairman, that the efforts under program review a few short years ago also realized a number of savings for the current program, and forecasts kicked in as well. So a lot of the easier savings or easier-to-reach savings had already been achieved before this program kicked in, effectively.

The Chair: Thank you very much.

Before we go to the other side here, gentlemen, you know the committee is about to produce in the very near future a report to the House on suggested improvements for our procurement process. I can assure you there are tough questions asked of our witnesses on both sides. I would hope the whole committee will be able to endorse that report enthusiastically. We're all interested in seeing the process improve. That's pretty clear when you come to these meetings.

I have two members on this side so far. Back to you, Mr. Bertrand, if you have more questions, and Mr. O'Reilly is next.

[Translation]

Mr. Robert Bertrand: Thank you very much, Mr. Chairman.

[English]

Mr. Kasurak, I'd just like to read you something out of your report. It's chapter 27, page 15, talking about the NATO flying training centre:

In addition to the primary objective of developing a cost-effective pilot training program, the NFTC is supposed to achieve a number of other benefits. These are: creating employment; keeping the base at Moose Jaw open; demonstrating the capabilities of Canada's aerospace industry; and making a significant contribution to NATO.

Can you tell me if one, two, or all of these criteria have been met so far?

Mr. Peter Kasurak: Mr. Chairman, the contract is barely getting into the implementation phase, as we all know, so making a definitive statement is difficult. But I would say all of these could easily be claimed by the department. It is a large contract. It is going ahead on schedule. So I would assume that these benefits are being gained.

Mr. Robert Bertrand: It's going ahead on time and on budget. Just for the information of the witnesses, the program is sold out. In my opinion, it's a great thing for Canada, and it's a great thing for Moose Jaw, because we were able to keep the jobs there and as a matter of fact increase them.

Mr. Peter Kasurak: Mr. Chairman, I guess our concern is not in the lack of benefits being obtained by this contract, but the fact that government had great difficulty in pursuing this contract within the existing set of rules.

Our other set of concerns was some of the homework on the government side didn't seem to be adequately done, especially in the assessment of the dollar value of the risk that was transferred to the private sector.

So our concerns are really on how the project's managed, rather than the outcomes being achieved by it. I think those will have to wait for some years. It's a 20-year contract. It is fully booked now for the first 10 years, which is very encouraging.

Mr. Robert Bertrand: It is very encouraging. And I think if we hadn't gone the way we did, we would have lost this contract. It would have probably gone to another NATO country and we would have closed Moose Jaw and we would have lost a lot of jobs out in that part of the country that desperately needs these jobs.

• 1635

Mr. David Rattray: I wouldn't dispute that at all. I think the point we were trying to make was that for this type of contract, there doesn't seem to be the proper framework to deal with something of this long-term nature—the magnitude of it, the sophistication of it. That's essentially our primary point here.

What we were looking for was a contract that would follow the normal contracting regulations set forward by the Treasury Board that would govern certain steps to be followed. This one did not follow that, and the answer given back by the departments was it was just so unique that they did their own contracting with this in their own unique way. We're saying that for any future ones of this nature there should be a different framework put in place. And the Treasury Board has agreed to lead the effort on this.

So we're not disputing the ultimate result; it's how you got there.

Mr. Robert Bertrand: But I think everybody agrees it's been good for Canada and it's been good for Moose Jaw and it's been good for that area.

Mr. Art Hanger: I don't.

[Translation]

The Chairman: Is that it, Mr. Bertrand?

Mr. Robert Bertrand: Yes.

[English]

The Chair: Okay.

There are a few seconds left. Mr. O'Reilly, I'll get you on the next round.

[Translation]

Mr. Laurin, you have five minutes.

Mr. René Laurin: Mr. Chairman, I go back to my earlier question about the contract relating to NATO flying training in Canada. Who was awarded that contract?

[English]

Mr. Peter Kasurak: Who was the vendor to the government—the commercial firm?

[Translation]

Mr. René Laurin: Yes.

[English]

Mr. Peter Kasurak: It's a consortium led by Bombardier.

Mr. John O'Reilly: Oh, in Quebec. Oh my goodness. Say it isn't true.

The Chair: Order.

[Translation]

Mr. René Laurin: You mentioned that some procedures were not followed. What procedures were not followed in that respect?

[English]

Mr. Peter Kasurak: Well, there were two sets of procedures we found that weren't followed. One was our regulations regarding letting of the sole-source contract. The other was internal procedures by Public Works and Government Services Canada involving award of markup for sole-source contracts, called profit policy.

So it was the government contracting regulations and profit policy.

[Translation]

Mr. René Laurin: Could you give me an example?

[English]

Mr. Peter Kasurak: Well, the departments said they had to pursue this deal sole-source because they would have needed ten months to tender it and they only had about five. That doesn't meet the government contracting regulations' definition of what an urgent, pressing necessity is.

The fact that there's a good deal being offered, as a matter of fact maybe an excellent deal being offered, is not a reason for a sole-source contract within the regulations. That's one example.

In terms of profit policy, profit policy only allows a certain level of markup for certain components of a contract. In this case the amount awarded exceeded that. The officials told us this was because of the risk transfer to the private sector, but they couldn't show us their calculations on how they did that. So we said this is not good enough for a large contract; you need to have a more orderly process.

We admit profit policy probably is not the way to handle this deal, but you still need a better management process.

Mr. David Rattray: On page 27-16, in the shaded area of the page to the right-hand side, we explain this in detail in terms of what our conclusions were around profit policy.

[Translation]

Mr. René Laurin: What other potential competitors were excluded because the normal procedure was not followed?

[English]

Mr. Peter Kasurak: Well, I don't think we can name firms. One of the things that happened was a large consortium was formed of most of the major vendors in Canada to approach the government for this contract. Now, we have some concerns about this as a long-term way for government to deal with industry, because it leads to no competition. The government didn't have any choices facing it. There was one firm, which we don't name, that expressed an interest earlier on.

• 1640

We really can't go beyond our report, Mr. Chairman.

[Translation]

Mr. René Laurin: Mr. Chairman, in order to have competition there must be more than one supplier. Here, we had Bombardier and its consortium. Which other group could conceivably have made a bid? Are there other ones? If there are no other ones, then we cannot talk about possible competition. If there can be no competition, then let us not get side-tracked. If it was possible to have competition, I want to know which company could have provided it. Whether we would have had a good price is another issue altogether. You are saying there must be competition. Does that competition exist?

[English]

Mr. Peter Kasurak: In the centre column on page 27-16, we report that one other firm had expressed an interest early on. We don't believe it would have been very onerous, early in the process, for the officials to at least ask for an expression of interest to see if there was anybody else out there or if the industry might have configured itself into competing consortia.

[Translation]

Mr. René Laurin: I go back to page 27.

In the same paragraph, you say there was a major transfer of risk and a significant profit margin was allocated for that reason. Who benefited from that profit margin? As for the transfer of risk, what was it and who benefited from that margin?

[English]

Mr. Peter Kasurak: In terms of the transfer of risk, both parties to the contract would presume benefit from it. The private sector accepts certain business and operating risks and benefits from being paid. The government benefits from having a fixed cost in the future, not having to worry about whether the planes are going to exceed their fatigue life or other operational concerns.

So there should be benefit on both sides, and our concern is that the government didn't adequately calculate the value of that to them before it awarded the fee to the private sector.

The Chair: Thank you.

Now we go to Mr. O'Reilly for five minutes.

Mr. John O'Reilly: Thank you very much, Mr. Chairman.

I want to go back to a couple of things that were said, just to make sure I got them straight. I know our duty is to try to find improvement, and the Auditor General's duty, or so I thought, is to check, balance, and advise. But I heard somewhere back there from Mr. Kasurak that it wasn't in his purview to give advice.

I wonder if I heard that right, first of all. I thought the Auditor General's job was to advise, not just to publish a critical report.

You know, when we have a former Department of National Defence employee all of a sudden now auditing the work they were doing, and publishing articles on civil-military relations, armed forces technology, and various management issues, I find it strange that you wouldn't publish something that would add to the...

You know, you have a PhD in military and diplomatic history from Duke University and you don't advise the military? Were you a civilian employee? You've written many articles about how the military should operate. Now you're auditing them. I just find that strange.

I've always criticized... I sat on the public accounts committee. No matter what department the Auditor General looked at, there seemed to be some balance, but when it comes to the military, there's bias.

Now, maybe that's my own reading of it, and maybe I'm trying to defend the military too much or whatever, but I just find there's hostility in the report. In the way it's worded, it's meant to be hostile. Maybe I'm wrong here; I don't know.

Did I hear you right, then, that your job is not to advise, and yet you write papers on advising? Did I miss something somewhere? Maybe you can fill me in on that.

Mr. David Rattray: Mr. Chairman, might I answer that, please?

The Chair: Whoever would like to answer it, yes.

Mr. David Rattray: Mr. Kasurak in fact worked as a civilian in the defence department some twenty years ago. I don't think that prohibits him from doing work for us in the Auditor General's office. Certainly the knowledge he has gained in his academic studies and through the work he's done in his previous career have served us extremely well in the Auditor General's office.

• 1645

In terms of advice, I would say the Auditor General's office has no mandate to comment on policy matters, but we do in fact comment on matters of efficiency, matters of effectiveness, matters of compliance, or failure to do compliance. We have written numerous audit reports on defence.

I myself have been involved with defence audit directly for twenty years. I, Mr. Kasurak, and other principals who have served before Mr. Kasurak have written numerous reports on how the management practices, compliance controls, financial controls, and so on of the Department of Defence can be improved.

If you went back over probably in excess of twenty value for money reports, I think you would see there are almost no, or very few, exceptions where the department has not accepted all of the recommendations to improve its management practices and taken action on many of those.

I would simply say that I would prefer that this not be a personal attack on Mr. Kasurak's credibility here.

The Chair: I can assure you—

Mr. John O'Reilly: Mr. Chairman, I don't—

The Chair: Just a minute, Mr. O'Reilly.

I can assure you, Mr. Rattray, with me in the chair, there won't be any personal attacks. I don't think anything the member has said, to this point, was out of order. I'm going to let him continue, because I think you've answered his question and I want to let him use his own time.

Mr. John O'Reilly: When I take my books to the auditor, I look for his advice. If my auditor says “Oh, I'm sorry, I can't give you any advice”, I think that would be strange. When I heard that you don't give advice, I found that strange.

Mr. David Rattray: Maybe I can ask Mr. Kasurak to comment on the word “advice”, because I took that as “policy”.

Mr. Peter Kasurak: I can't recall my exact words, but what I meant to convey was that our recommendations are stated in a very general way. Since I've been audit principal, we've made about 150 recommendations, which I think is a fairly tall pile of advice we've given the department.

What I wanted to convey was that we do give general recommendations because we don't wish to over-specify, to over-direct, or to in effect substitute ourselves for the role of the line manager. We say “We think you've got a problem here”, and a lot of times that's advice, because sometimes management doesn't know until we complete our audit that a problem exists. Then we make a recommendation on how we think they might go about solving it. But we rarely go into more specifics than that, because we do not wish to impose ourselves that much on line management. It's their job to carry out the reform initiatives.

The Chair: Thank you, Mr. O'Reilly.

Mr. Art Hanger: On a point of order, Mr. Chairman, I think it's important here to follow up a little bit on the comments by Mr. O'Reilly, a Liberal member.

The Chair: Mr. Hanger—

Mr. Art Hanger: I don't think he's expressing—

The Chair: —if you have a point of order, I'll hear it.

Mr. Art Hanger: —a point of view that is shared by this committee by any stretch of the imagination.

The Chair: Order.

Mr. Art Hanger: I think his comments have been rather antagonistic—

The Chair: It's not a point of order.

Mr. Art Hanger: —toward the auditors.

The Chair: That's not a point of order. I ruled Mr. O'Reilly's comments in order. They were in order. They probed the expertise of the witnesses and they probed their comments to the committee.

Those comments, whether you agree with them or not, Mr. Hanger, in my judgment were in order.

I'm going to go to Mr. Earle.

Mr. Gordon Earle: Thank you, Mr. Chair.

I want to come to the audit on the management of hazardous materials, chapter 13. In your report you state, in paragraph 13.25 on page 13-10, that:

National Defence is exempt from all or part of many federal laws governing hazardous materials... [and] is not subject to most provincial and municipal laws.

Later in your report, in paragraph 13.33, you assert:

As well as clean-up costs, financial liabilities from claims, fines or prosecutions can result from failure to implement legally required protective mechanisms.

• 1650

Furthermore, you report that DND headquarters estimates that remediation costs for the 530 contaminated sites on the ten bases you audited will reach some $17.3 million over the next five years. That's in paragraph 13.32.

What is the department's legal responsibility to comply—or not—with federal, provincial, and municipal laws governing hazardous materials? If the department is indeed exempt from these laws, how can it be held responsible for failing to implement legally required protective mechanisms?

Mr. Peter Kasurak: Mr. Chairman, while the department is exempt from certain federal laws, it's not exempt from all federal laws. For instance, the department must meet legislative requirements set out in the Fisheries Act, the Canadian Environmental Protection Act, and the Canada Labour Code, Part II. It has specific exemptions in other legislation, such as the Transportation of Dangerous Goods Act, but it's generally responsible otherwise. The department has legal responsibilities. These are quite complex and come from a number of pieces of legislation.

It is not exempt from everything. In essence, it is exempt from the regulations of junior governments, that is, provinces and municipalities, and it's not constrained from conducting military operations, but its civilian labour force is governed by the same regulations as all federal employees are, throughout the government. The department, as a matter of policy, says that it will “meet or exceed” all federal regulations and guidelines.

So those are the standards we used when we went forward with this audit, Mr. Chairman.

Mr. Gordon Earle: Is your office aware of any other sites that come under DND responsibility—other than the ten bases audited—where there's been contamination as a result of the mismanagement of hazardous materials? I'm thinking of a situation off the coast of Halifax West riding, for example, where a number of years ago there were a number of depleted uranium shells fired into the harbour. They now lie at the bottom there. We're told that they're not really causing any serious harm. That's a debatable point.

Anyway, if you're aware of any other sites, what is the department's liability for the remediation of those sites, and at what cost?

Mr. Peter Kasurak: We didn't specifically audit contaminated sites as part of this audit, but in general the department maintains a database of contaminated sites. It reports that with about 75% of its surveying work done, it has found over 500 of these sites. I wouldn't offer an opinion as to what its liability is overall, but in the past the department has taken two approaches to this, which causes the costs to vary a lot.

One is remediation, whereby they completely clean up a site, and that's quite expensive. The other is a containment policy, whereby they'll seal the site environmentally and just monitor it, which is less expensive. The expense and the liability would vary very much on which approach could be used and which is appropriate for which site.

The department hadn't completed its planning yet.

Mr. Gordon Earle: Thank you.

The Chair: Thank you, Mr. Earle.

Mrs. Longfield, five minutes.

Mrs. Judi Longfield (Whitby—Ajax, Lib.): I probably won't take five minutes, Mr. Chair.

I'm going to follow up with respect to recommendations made. You said that over the years you've given many general recommendations, and you said “general”. I'd like to know, generally speaking, how many have been acted upon. Have you been satisfied with the response?

Mr. Peter Kasurak: Mr. Chairman, we keep in touch with how the department is doing. Well over 50% of all the recommendations we've made have been completed, we feel... fully satisfactory performance. The balance is less so, sometimes because the department recognizes the problem but may lack resources to address it immediately. In general, I think we've had a pretty fair response over the years from the department in terms of actioning our recommendations.

Mrs. Judi Longfield: Of the 50% that are not fully resolved to your satisfaction, do you work with them to give more specific recommendations?

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Mr. Peter Kasurak: Sometimes there are other parts of the process that will drive this. For instance, we did a chapter on the reserves in 1992. Because of the policy process, although many of our recommendations, we felt, were not taken up, nevertheless, the department did make a strong effort on the reserves.

In terms of following up, we go back after two years and review what the department has done. We again discuss with officials what our expectations are and ways of meeting them. We also look in every year to the chief of review services, find out what is the status of all the outstanding observations, and again discuss those with officials. So yes, we do maintain a pretty continuous dialogue on these issues.

Mrs. Judi Longfield: I don't want you necessarily to rate one department against another, but in the grand scheme of things, with regard to the compliance rate or the willingness to act on the recommendations, do you notice any significant difference between this department and others? Is it lower? Is it about the same?

Mr. David Rattray: I would say that the Department of National Defence normally puts a very strong effort into responding to the recommendations. They often involve a very long time, and they are very complex. I would say that in relation to other departments, they are certainly one of the departments that works extremely hard at implementing the recommendations. I'd say they're one of the top departments. As part of our office's performance report, we also do a general tracking and reporting each year to Parliament on recommendations overall, and I'd urge the member to take a look at that as well. But they are, I'd say, quite good in terms of responding and implementing.

Mrs. Judi Longfield: Good. With regard to Y2K, you indicate that it's 99% in National Defence. Of the 1%, what's left? And are we prepared to meet any possible difficulty?

Mr. David Rattray: We've simply looked at the reporting by the department in terms of responding to the Treasury Board on its mission-critical systems. At this point we have written in our report to Parliament in November that we believe the government is prepared, and so is National Defence, to meet the Y2K challenge. But we did qualify that by saying that there may be small or minor glitches for which one can't plan to 100% but certainly 99%. We are encouraged by the Department of National Defence and others that they will achieve that target under the direction of and working with the Treasury Board.

Mrs. Judi Longfield: Thank you.

The Chair: Thank you, Mrs. Longfield.

Mrs. Wayne, please.

Mrs. Elsie Wayne: With regard to the kickbacks once again, in paragraph 33-28 you refer to DND military police doing an investigation and that it was closed. Was it the military police that did it, or was it an internal financial audit? Could you just tell me, Mr. Rattray?

Mr. David Rattray: We talked to the military police, and it was the military police who closed their investigation.

Mrs. Elsie Wayne: It was the military police. Okay.

Mr. David Rattray: It was on April 9, 1996, according to their conversation with us and our review of their files.

Mrs. Elsie Wayne: I was told by the minister's office that it was an internal one.

Mr. David Rattray: Another case was opened dealing with similar allegations, which the investigative services of the department are in fact currently looking at. There has been a press release. But that is not the military police, the original request, which was closed. The NIS has been doing a considerable amount of work on this.

Mrs. Elsie Wayne: Okay.

The Chair: I might just tell the members that there is a vote, but it's a 30-minute bell, so if we leave here about 5:25 we are—

Mrs. Elsie Wayne: I have just one other question.

The Chair: There's still lots of time. Unfortunately, it's going to maybe cause a problem with our next set of witnesses.

Mrs. Wayne.

Mrs. Elsie Wayne: My other question has to do with sole-source contracting. When I was mayor, at the local level we always had a tendering procedure, and if anyone involved with that tendering procedure in city hall went out to sole-source, they'd be fired.

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Have you gone back and taken a look as to whether the people are still doing this sole-source contracting? Has it changed? Have things improved? What have they done to correct it?

Mr. Hugh McRoberts: At this point it's really too early to know. We'll actually be going back a year from now to follow up on the recommendations on this matter from last year's report and two years from now to look at the response to the recommendations in this year's report. So at this point the departments have to be given some time to do something.

Mrs. Elsie Wayne: It would take me 24 hours, I'd have to tell you.

That would be it. Thank you very much.

The Chair: There's a last chance for this side.

Seeing that there are no more questions, I'd like to thank you very much, gentlemen, for your attendance and for your submissions. We look forward to your tabling the further responses you have.

We're through with questions for these witnesses, Mr. Hanger.

I want to just get a sense of the committee. This vote won't take place until about 5:30. For witnesses and anybody who is a guest or not here on a regular basis, one of the realities of this place is that those bells run the place. All members are expected to be in the House. Particularly given the last week or so, shall we say, and the fact that we're about to recess soon for Christmas, you never know how long these votes will go, anyway.

Am I correct in assuming that the committee would rather not have these witnesses hang around and try to do this on into the evening but to ask them to come back on Thursday morning? Is that the consensus? I think that is the consensus.

So apologies to the Conference of Defence Associations, but that's the reality we live with in this place. We look forward to seeing you on Thursday at 9 a.m. Thank you very much.

The meeting is adjourned.