:
Good afternoon, everyone.
Pursuant to our agenda, to Standing Order 108(2) and the motion adopted by the committee on Wednesday, May 13, 2009, we are going to review chapter 5 of the 2009 Spring report of the Auditor General of Canada entitled “Financial Management and Control—National Defence“.
We are privileged to have with us Ms. Sheila Fraser, the Auditor General, accompanied by Hugh McRoberts, Assistant Auditor General, and Dale McMillan, Principal.
Ms. Fraser, you have between eight and ten minutes to make your presentation. Thereafter, the members of the committee will ask you questions.
You have the floor.
[English]
We thank you for this opportunity to present the results of chapter 5 of our spring 2009 report, entitled “Financial Management and Control at National Defence”.
As you mentioned, I am accompanied by Hugh McRoberts, Assistant Auditor General, who is responsible for our audits of National Defence, and Dale MacMillan, principal, who worked on this chapter.
At the time of our audit, National Defence had an annual budget of almost $19 billion and managed assets of more than $33 billion in equipment, inventory, and real estate. It is one of the largest government departments in terms of expenditures, personnel, and assets. In recent years the department has experienced real growth in funding, a trend which is expected to continue.
The department needs sophisticated financial management to allocate and monitor its resources to meet its objectives and priorities. In this audit, we looked at how National Defence's financial management practices support financial decision-making, resource management, planning, and the management of risks. We focused on the activities of senior management, who are responsible for deciding how the department's funding will be allocated and what major investments it will make.
We found that National Defence has some elements of good financial control. The department complies with legislative and government requirements for financial reporting and has kept its annual spending within authorized funding limits.
[Translation]
However, we found that, in 2007-2008, the department did not know until too late in the fiscal year that it had a surplus of about $500 million. While most government departments can carry up to 5% of unused funds into the next fiscal year, National Defence has a much lower, fixed limit on how much it can carry forward. It must manage its expenditures within a defined $200 million ceiling, or roughly 1% of its annual operating budget. Since only $200 million could be carried forward into the next fiscal year, the department was unable to spend $300 million of the resources that had been allocated to it.
We found that National Defence's two key senior management committees responsible for providing strategic and operational oversight and advice for financial management were not sufficiently focused on this role. In addition, the roles, responsibilities and accountabilities for financial matters between the three senior managers—the Deputy Minister, the Vice-Chief of the Defence Staff and the Assistant Deputy Minister, Finance and Corporate Services—were not consistent with the new Treasury Board policy on financial management.
[English]
Mr. Chair, we expected National Defence to have a corporate business plan that linked defence strategy, corporate priorities, objectives, and risks with short-, medium-, and long-term planning. We found that National Defence does a lot of planning but has no overall corporate business plan. The result is a series of operational plans for each service that are not well integrated from a strategic perspective. Further, these short-term operational plans do not take into account the long-term capital plan that is currently being developed under the Treasury Board Secretariat's investment plan pilot.
A key element of good financial management is the ability to produce accurate and reliable data for reporting. We found that the senior managers in the department do not have timely and accurate information for decision-making. Furthermore, financial information is often derived from operational systems designed to support operational requirements, not financial management. As such, senior management does not have good, high-quality information necessary to support the kinds of corporate decisions that must be made in this complex, decentralized department.
Finally, while the department has started to introduce integrated risk management, it has not been applied consistently in financial and resource management activities. We found inconsistent risk-ranking systems and risk ratings. Further, we could not find evidence that senior decision makers are routinely briefed on the status of key risks across the organization; therefore, this critical information is lacking as plans are being made and resources are being allocated across the organization.
[Translation]
Mr. Chair, I am pleased that National Defence has agreed with our recommendations and has recently announced measures to strengthen financial management in the department. For example, the department has recently established a Defence Finance Committee to provide a formal, strategic structure to provide oversight on resource matters and provide advice to the deputy minister in support of his accountabilities under the Financial Administration Act.
In addition, National Defence has named a chief financial officer in compliance with the new Treasury Board Secretariat policy. These measures were taken after the completion of our audit work, so we cannot comment on them. Your committee may wish to have the department report on its progress and the results it is achieving.
Mr. Chair, that concludes my opening statement. We would be pleased to answer the committee's questions.
Thank you.
:
As we note in the audit, we looked for evidence that the senior committees at National Defence were actually discussing and were monitoring the financial management of the department. We found very limited discussion in those senior committee meetings about financial management. One of the findings of the audit is that we really think they should be spending more time on that.
I am and I think we all are aware that they have a lot of other priorities and a lot of other things going on. But with the size of the budget and the complexity of the operations they have to manage, we would have expected to see more discussion at a strategic level. As well, we found that some of the key documents and some of the key pieces of information—for example, the corporate business plan, the integration of risks, and analysis of those risks across the organization—were not in place. There are a number of plans and a number of risk identifications at an operational level, but it all needs to be brought up to a corporate or department-wide level.
One example of key risks that we mentioned in the report is that there are a number of plans done for which there's no assessment around some of the risks to those plans. A major one in all of this is capacity. It's all very well to be planning at an operational level, but does the department as a whole have a capacity to do all of these things? That's the kind of discussion we would have expected to see at a senior level.
I think the section you're talking about is the element on what's called “capability-based planning”, whereby you develop a series of scenarios—essentially anticipated situations that the department's going to find itself in—then assess the capabilities you need to bring to bear to deal with those, and then what the resources are, financial and material, that need to be brought to bear on them.
What we found is that the department has begun doing this. It has developed eight out of possibly eighteen scenarios that they've more broadly identified as developable, and they are working on developing capability-based planning for those. But they are a long way from being complete and from integrating the results of that work with operational plans and capital plans.
I too would like to welcome Ms. Fraser and her team.
Ms. Fraser, I have in front of me the overall budget for the Department of National Defence, which is about $19 billion. I have looked at the way in which it is broken down. On page 7 of the French version, operational and maintenance costs take up $6.4 billion, or 34% of the pie. Personnel costs are $8.2 billion, or 40% of the pie. Capital costs are $21 billion. My discussion with you is about that last point.
I asked the translators and they told me that comptabilité d'exercise is translated as “accrual accounting“. Several people tell me that there is a problem in the department, at deputy minister level. Currently, of the $4 billion that has to be spent on procurements, much too much money is being spent on the air force. The first contracts that have been announced—the C-17s, the C-30s, the Chinooks...It looks like the accrual accounting curve on the $4 billion is so high that there is nothing left for the navy and precious little for the army. That is what makes people say that the department's planning is bad.
Do you agree with me? Should the minister be saying that things are moving too fast with the air force and that they have to save some room for the navy and the army? Are my figures and my thoughts correct?
:
Thank you, Mr. Chairman.
Welcome to our committee. It's a pleasure to meet you.
I'm new to this committee and new to Parliament, at least this time around, so I'm going to ask a naive question.
In paragraph 5.74 of your report, you referred to past audits. In fact, you say that since the early 1990s you've identified financial management and controls as areas requiring attention. You refer to corporate-level planning being inadequate in regard to resource allocation, information not being available to decision-makers, a lack of identified results and performance data, and progress on data warehouses being slow. It goes back over a period of 15 years or more, and some of these problems seem to be related to the same kinds of problems you're raising in this report today.
In your view, is that unusual in government, that you can identify these things again and again and we're here 15 years later saying they need better management controls?
:
I can understand why the limit is much lower, because 5% would be $1 billion. It could significantly impact the fiscal framework, so I think there was a good reason for putting that lower limit in place.
I am concerned, though, because as the department goes into many more capital acquisitions on some of these very large purchases or projects, $200 million from one year to the next could happen very easily. So maybe the department and the government should look at how to carry forward for capital projects--perhaps not the operational ones.
But I think the department will have increasing challenges. It doesn't take much to move costs from one fiscal year to the next, and when you're into multi-billion-dollar long-term capital investments, that's an issue the committee might want to explore.
Thank you, Ms. Fraser, and your team for being here.
I have a couple of quick points. The JSS project was not cancelled; it was postponed due to lack of compliance. It's still part of the Canada First defence strategy.
The carry-forward is actually not 1% fixed; it's $200 million fixed. As the budget grows that percentage goes down, and that's where I think it's become a problem for the department at this point. Is that fair?
On the over-programming we've talked about, $500 million is a big figure but it's only 2.6% of the annual budget. Do you have any frame of reference with other departments for similar over-programming? Is 2.6% high, low, or normal?
The devil is in the details. For sure, when we are talking about billions of dollars, people do not necessarily understand. When you say that there is a problem with financial management, I sometimes have the feeling that the left hand does not know what the right hand is doing, that it seems like an “open bar”, that there is no control at all. You would certainly not be satisfied with a pat, vague answer like: yes, we agree with you and we are going to take care of it.
Earlier, you mentioned personnel specifically. When 44% of the budget goes to personnel, it is important to check whether or not there are abuses and to compare what was done two or three years ago with what is done today.
It seems that a common practice is for a number of the regular forces to take early retirement as soon as they are eligible. So they retire one day and then, the next day, they are doing the same job but as reservists, in the “full-time” category. According to my information, between 3,000 and 4,000 military personnel could have done this, with ranks from corporal to colonel. The result is a cost to taxpayers of almost one and a half times a regular military salary.
Are you able to tell me about this practice?
:
It is for operations. One of the people in charge said in the Senate that it was not capital money, but operations money.
How do you explain that there is a crying need in the services area? That money could have been used for equipment, or for services, in the true sense of the term. The military has specific needs because of its specific realities.
For everyone’s benefit, how do you explain, in concrete terms, the fact that they were not able to fill in the documents and provide enough information that would allow the money to be used, when we have the minister coming to us and saying that he needs extra money, specifically for operations?
Allow me to extend my welcome to our guests.
As I read through the report, Ms. Fraser, I was wondering how you are recommending a design that is different from what is currently in place. It seems to me we don't have a CFO, so that may be the top block. Then, do you see two arms coming off from that--operational and capital on one side, and likewise operational and capital on the other side? Would it be one onshore, one offshore?
Perhaps you could help us kind of understand, in a diametrical kind of fashion, how you see the changes that will help the whole operation become much smoother.
:
Certainly we think that naming a CFO is important, and that has been done. As well, there is a finance committee that has been established.
I really don't see separating it out more, because I think one of the issues we're trying to get at here is that there needs to be much better integration and more of a corporate business plan. There's a lot of planning down at the operational level; it just needs to be pulled together.
The other thing is that I think the department has started many of the things that we would expect to see in place. For example, there are the risk strategies or the capability modelling. It just hasn't completed it. So it needs to get on with doing that. I think, basically, senior management has to pay more attention to financial management and the risk, and to some of these perhaps more sophisticated management tools. Hopefully by establishing this new finance committee they will be able to do that.
Ms. Fraser, the Bloc Québécois has always felt that, in terms of equipment purchases, the cart was being put before the horse, as they say. Since 2006, the government has announced a series of major procurements that do not reflect our view. We have been asking for a defence policy, developed as the result of a foreign affairs policy, since national defence is often the result of the approach to foreign affairs. Normally, with the foreign affairs policy set, and the defence policy set, the next step is a capability plan, the things that are possible. That is where we ask ourselves what we want to buy so that we can conform to the new foreign affairs policy and the new defence policy.
Do you agree that the government has gone about things backwards? It made purchases, it announced that it was going to, and the “Canada First“ strategy was announced right afterwards. Is that not a major strategic error? What do you think?
:
Certainly, we would like to see a link between operational plans, the corporate strategy, if I may call it that, and the national defence strategy. I feel that that would be ideal. That is what we would like to see, and clearly, that is our recommendation. The recommendation, in fact, is that there should be a plan at departmental and corporate levels to link the two.
We did not look at the reasons behind the procurements—perhaps that is something that is clear now—but there were plans before. I think elements of the Canada First strategy existed before it was officially brought together into one whole.
Perhaps also there were needs that clearly had to be met, because, even in our audits, we saw equipment that was at the end of its useful life and that needed to be replaced.
Yes, in the future, we would like to see a more direct link that could be traced from the strategy to the operational plan over a longer term.
:
The accountants would probably tell you yes. I'm not sure that's the right answer, though. I know we have issues every year when we do the financial audit at National Defence around things like inventories and fixed assets. The systems are just not designed for that.
It would be nice to have systems that respond to operational requirements but also provide the accounting information that is needed. There would be, I suspect, a fairly significant price tag attached to all of that to change these systems. How they bring this into place is something I think the department should look at, again over a longer term.
I know, for example, that we used the inventory example. They've spent three or four years trying to get better information just into the inventory system. It is a big challenge, and it can be very expensive to change these systems.
I have a quick point, Madam Fraser, on something Mr. Bachand said about foreign affairs policy, military policy, and so on. The length of all of these acquisition programs is very long. In fact, I was part of the F-18 program from start to finish. The SOR/75 was the last aircraft delivery in 1988. It was my squadron that took delivery of that last airplane. It was a huge program--138 airplanes--so it was going to take time.
The other point I really want to make and get your comment on is that there are basic elements that a military needs. Again, this may be outside your lane, but the military needs transports, helicopters of various kinds, fighters, a bunch of different things that we know, regardless of what foreign policy or military policy we have, we're going to need. So let's not delay; let's get on with buying the elements, because we know we're going to need them at some point.
Is that a fair statement?
:
Thank you very much, Ms. Fraser. We have really appreciated your cooperation. My thanks to you and the people who came with you. Good evening to you.
Now we continue with our agenda.
[English]
Committee members, I want to let you know that we have another meeting tomorrow at 214 Wellington, from eleven o'clock until one o'clock. We'll have lunch there. It will be pizza or something like that. We need to be at 214 Wellington because it has the technical facilities we require.
[Translation]
You also received a copy of the letter sent to the clerk by people in a firm called ARKTOS. They want to appear to talk to us about their products. They say in the letter that it could be useful for Canada in connection with the study on Canadian sovereignty. I do not know what members think of that.
Mr. Coderre, you have the floor.
:
I think that visits from some companies can be relevant. When the people from MDA came to talk about satellites, it was directly related to our study. But I am of the same opinion as Mr. Coderre.
I would like a guarantee that our trip will take place before the results of the study are tabled in the House. For me, it is closely related to the study. We are saving time, but I would not like us to write the report, to vote on it and table it in the House in a few weeks without having travelled.
I am not one who travels for heck of it, as my mother used to say, but when you are doing a study on the Arctic, you have to see how things are at the moment, even if you have already been there several times. I think it is vital for our study.
Mr. Chair, I would like to know if preparations are still underway for us to be able to make this trip.
:
Can somebody help me with this process? I gather from what you're saying that somehow or other the four party whips got together and collectively decided that this wasn't on. Are you sure that's what happened, or did the government say that they weren't making money available for this particular trip?
I talked to my whip, and my whip said yes, sure, no problem. I don't know about anybody else. This decision doesn't seem to me to be with the whips collectively. It seems to me that it's a government decision.
Can someone clarify that, please? I'm getting the impression that somehow or other if the Liberal, NDP, and BQ whips say yea, then we're going to the Arctic, but I'm not sure that's the case. Can someone straighten me out on that?