Opening Statement to the Standing Committee on Public Accounts

Replacing Canada’s Fighter Jets

(Chapter 2—2012 Spring Report of the Auditor General)

15 May 2012

Michael Ferguson, FCA
Auditor General of Canada

Good morning, Mr. Chair. I am pleased to be here again to discuss Chapter 2 of my Spring Report and am accompanied by Assistant Auditor General, Jerome Berthelette.

We have followed the Committee’s deliberations and will be pleased to answer your questions. I would like to take this opportunity to address a few points that have come up during the work of this Committee.

To begin with, I would like to address the issue of life-cycle costing for the acquisition of goods and services. Life-cycle costing is required by Treasury Board policies and is also included in National Defence’s own project approval directive. This directive states the following:

The life cycle cost estimate includes estimates of the total cost of the resources needed to complete project activities and deliver the product/system/infrastructure (i.e. project acquisition costs), as well as the cost of the resources needed to operate, maintain and dispose of the product/system/infrastructure (i.e. ownership costs).

While we believe in and support life-cycle costing, it is not a requirement established by the Office of the Auditor General.

As illustrated in Exhibit 2.6 of the chapter, life-cycle costing includes two main categories of costs:

  • the first is capital costs, and
  • the second is the cost of personnel, operating, maintenance and contracted sustainment.

All figures appearing in Exhibit 2.6 are National Defence’s estimates, not those of the Office of the Auditor General.

As described in the chapter, we believe that National Defence did not include some significant cost elements in its estimate of life-cycle costs. In addition, many of the costs are not yet known or cannot yet be reliably estimated. These are itemized in paragraphs 2.71, 2.72, and 2.73 of the chapter.

The estimated life of the F-35 is about 8,000 flying hours per aircraft. In years, the estimated life of the aircraft is calculated based on the number of anticipated flying hours per year, per aircraft. Working from estimates of contracted sustainment costs over 36 years provided by the Joint Strike Fighter Program Office, National Defence is able to estimate costs over 36 years.

Mr Chair, I am concerned with suggestions that accurate estimation and the inclusion of personnel, operating, and maintenance costs are not important, since they would be incurred regardless of the aircraft selected to replace the CF-18.

National Defence states that its $16 billion estimate is already within its base budget. It is important for decision makers and Parliamentarians to understand National Defence’s estimate for personnel, operating, and maintenance costs even though these estimates are already within the existing budget allotment.

National Defence currently assumes that the F-35 fleet costs will be similar to those related to the CF-18 fleet. We reported on a similar situation in Chapter 6 of our Fall 2010 Report on the acquisition of military helicopters. Specifically, we noted that National Defence initially assumed that the personnel, operating, and maintenance costs for the new Cyclone Maritime Helicopter would be the same as those for the legacy Sea King it was replacing. National Defence later realized that these costs would exceed those associated with the Sea King by $1.1 billion over 20 years.

Finally Mr. Chair, I would like to state for the record that we stand behind all of the facts presented in the chapter, and note that these facts were accepted by the departments.

This concludes my remarks. We would be pleased to answer any questions the Committee may have. Thank you.