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1993 Report of the Auditor General of Canada

Assistant Auditor General: Richard B. Fadden
Responsible Auditor: Alan Gilmore

Main Points

24.1 In 1989, we reported to the House of Commons on our attempt to audit ministers' travel expenses, including the Administrative Flight Service (VIP Challenger Fleet) of the Department of National Defence. We could not conduct an audit because we were denied access to certain information.

24.2 In October/November 1989, the House of Commons Standing Committee on Public Accounts reviewed our report. With respect to the Service, the Committee concluded that it was "not adequately assured that such costs are accurately disclosed to Parliament."

24.3 This year we reviewed the accuracy of the information on the cost of the use of the Service for 1990-91. We found that the information provided to Parliament on the cost to transport ministers and other VIPs was inaccurate and incomplete.

24.4 For 1990-91, we estimate that the total cost of operating the Service was about $54 million. The Department reported in Part III of its Estimates that the total was about $27.5 million. We estimate that the total cost per flying hour for 1990-91 was about $19,650. The Department reported an incremental figure of $3440 and a standard total estimate of $6735.

24.5 For 1990-91, we estimate that the total cost for transporting ministers was at least $24.5 million. The Department's Part III Estimates reported a total cost of about $9.6 million and a total incremental cost of $4.9 million. The Department's monthly reports show the total incremental cost as $4.1 million.

24.6 We recommend that the Department provide complete and accurate information to Parliament on the full cost of using government aircraft to transport users such as the Prime Minister, ministers, and other VIPs.

24.7 Further, the Department, in co-operation with other appropriate departments, should conduct a review of the economy, efficiency and effectiveness of providing government aircraft to transport such users.

Introduction

24.8 In 1989, we reported to the House of Commons on our attempt to audit ministers' travel expenses, including the use of the Challenger aircraft of the Department of National Defence Administrative Flight Service, commonly known as the VIP fleet. We indicated that we were not able to conduct an audit because the government would not provide us with receipts and specific reasons given by ministers for their use of the VIP fleet.

24.9 In October/November 1989, our report was reviewed by the House of Commons Standing Committee on Public Accounts. With respect to the costs of the Administrative Flight Service, the Committee concluded that it was "not adequately assured that such costs are accurately disclosed to Parliament."

24.10 The Eighth Report of the Standing Committee (December 1990) recommended that the Auditor General conduct a comprehensive audit of the Administrative Flight Service of the Department of National Defence (DND).

Audit Scope

24.11 In response to this recommendation, and in the absence of information on specific reasons for the use of the aircraft, we decided to review the accuracy of the travel cost information for 1990-91 reported by the Department in the following documents:

  • "Use of Administrative Flight Service Challenger Aircraft" (issued monthly);
  • Part III of the Department's Estimates.
24.12 The monthly reports on the use of the Administrative Flight Service Challengers were initiated in 1990. The reports provide details on each trip and the cost of the use of the Service's Challenger aircraft. The Department does not report, and is not required by Treasury Board to report, on the use of its other aircraft by ministers and other VIPS. In addition, other departments are not required to report on the use of their own aircraft for similar purposes.

24.13 The first report, in October 1990, covered the months of April to September 1990. These monthly reports, along with a semi-annual report on ministerial travel, were part of the government's response to our 1989 Report.

24.14 The reports contain certain information on costs and passengers for each trip, but only two generic descriptions of the purposes for the trips: government or departmental business. The Department uses these descriptions because they are specified as the ones to be used, in the Treasury Board's Administrative Practices - Guidelines for Ministers' Offices.

24.15 The reported costs of operating the Administrative Flight Service are based on estimates developed by the Department from historical cost information, which is updated every two to three years as part of the Department's overall costing system.

24.16 Where practical, we verified the accuracy of the cost information reported by the Department, by identifying and costing the Challenger passenger transport activities and the activities that exist to support this function. Where it was not practical to use actual costs, we used departmental estimates. We used this information to calculate the total cost per flying hour for ministerial travel.

24.17 We did not review the cost of the use of other Department of National Defence aircraft to transport VIPs. As stated above, the Department is not required by Treasury Board to report on ministers' use of its other aircraft. However, these costs could be significant. For example, reports are not published on the use of Boeing 707s to transport VIPs. The Boeing 707s have been replaced with five used A-310 Airbus aircraft. According to the Department, one of the aircraft has been permanently configured for both VIP use and regular passenger use.

24.18 However, the Department did conduct a special survey to provide us with information on the use of its other aircraft to transport VIPs. The information provided indicated, for example, that four ministerial flights were made using Cosmopolitan aircraft stationed at Canadian Forces Base Ottawa (412 Squadron).

24.19 We tested the accuracy of the information on the use of the Cosmopolitan aircraft stationed at Canadian Forces Base Ottawa. We found that other departmental records showed that there had been nine ministerial flights using these aircraft. As a result of this test, we decided we could not rely on the information provided to us on the use of other departmental aircraft. To verify the use and the associated costs of other departmental aircraft for ministerial travel would require a check of the records of all aircraft. We did not consider this to be practical.

24.20 We also could not readily identify trips taken by ministers in aircraft owned by other government departments.

24.21 Further, we did not review whether expenditures on the Service have been made with due regard to economy and efficiency. We also did not review whether the Service was used in compliance with legislative and government authorities. These examinations could not be done for the flights subsequent to January 1991. As of January 1991, ministers are no longer required by Treasury Board to provide the Minister of National Defence with specific reasons for using the Service. They simply note that it is for either departmental or government business.

24.22 The matters reported in this chapter have been thoroughly discussed with officials of the Department of National Defence over a lengthy period of time.

Observations and Recommendations

Incomplete and Inaccurate Information

24.23 The information provided to Parliament by the Department of National Defence, on the cost of the use of the Department's Administrative Flight Service aircraft to transport ministers and other VIPs, is inaccurate and incomplete.

24.24 We think that parliamentarians and Canadian taxpayers should be able to understand easily how much it is costing to operate the Administrative Flight Service as a whole and to transport specific users. One of the ways of achieving this is to report the full annual costs of operating the Service, the full costs per flying hour, and the full costs per trip by individual users.

Why does the Administrative Flight Service exist?
24.25 A June 1990 report to the President of Treasury Board on the Service, subsequently provided to the House of Commons, stated that the Service ". . .was established first and foremost, as a national and international air transport service for the Royal Family, the Governor General and the Prime Minister." It also stated that "a secondary use was for ministerial purposes", and that the Department uses the aircraft for VIP transport, medical evacuations and demonstrations. Part III of the Department's Estimates contains a similar statement of the objective of the Service.

24.26 The Department of National Defence has a fleet of 16 Challenger aircraft, 12 of which are passenger aircraft. Seven of the 12 aircraft normally are used by the Administrative Flight Service.

Costs were greater than reported
24.27 We estimated that the total cost of operating the Service in 1990-91 was about $54 million. The Department of National Defence reported in Part III of its Estimates that the total for 1990-91 was about $27.5 million.

24.28 The incremental and standard total costs per flying hour for the Service as reported by the Department for 1990-91 were $3440 and $6735, respectively. Based on our estimate of total operating costs and hours of use, the total cost per flying hour for 1990-91 was about $19,650.

24.29 We found that the flying hours in 1990-91 for each user and for training and maintenance purposes were as follows:

24.30 Travel by ministers was the single largest passenger use of the Challenger aircraft assigned to the Service. During 1990-91, National Defence records indicate that travel by ministers constituted about 29 percent of the use. The next largest group of users were VIPs, for example, heads of foreign countries and provincial premiers. They accounted for about 13 percent of the use. About 32 percent of the hours flown were for training and maintenance purposes related to users of the Service.

24.31 Using our cost data, the total cost for transporting ministers in 1990-91 was at least $24.5 million. This amount is much higher than the total of about $9.6 million reported by the Department in Part III of its Estimates. It is also much higher than the total incremental costs of $4.1 million shown for ministers' trips in monthly reports for 1990-91, or the $4.9 million shown in Part III of the Department's Estimates.

24.32 In part, our cost estimate is higher than the Department's because the Department's figure does not include a number of costs. For example, the Department shows costs of training and maintenance flights as a separate operational category. We allocated these types of costs to the users of the Service on the basis that the costs are incurred to enable the Department to provide the service for them.

Reasons for Differences between the Department's and Our Estimates of Costs

24.33 The reasons for the difference between our estimates and the Department's include: the Department's use of incremental costing; its non-allocation to users of training and maintenance flying costs; its exclusion of certain costs such as the cost of training courses and the cost of capital; its use of inaccurate cost factors; different estimates of depreciation; and unreported flights.

Incremental and total costs
24.34 On a monthly basis, the Department reports the incremental costs but not the total cost of flights. According to the Department, incremental costs are defined as the costs that would not have been incurred had the goods and services not been provided. These include the costs of petrol, oil, lubrications, spares, repairs and overhaul, food, incidentals, ground handling fees and air crew temporary duty. In 1991, the incremental cost figure used by the Department was $3440 per flying hour.

24.35 Although the Department does not report total costs by user on a monthly basis, Part III of its Estimates does allocate costs to users. However, even this amount does not include all costs. The Department defines total flight costs as including incremental costs, direct labour costs of servicing and minor maintenance, capital costs (depreciation and attrition), air crew costs (air crew salary and benefits only) and base support costs (air crew only). In 1991, the total cost reported by Department was $6735 per flying hour.

24.36 The Department's definition of total costs excludes certain costs, such as those of maintenance-related flying hours, training, air operations, passenger and baggage handling, and the cost of capital.

24.37 The Department does report training and maintenance flying-hour costs of the fleet's Challengers under the category "Others" in Part III of its Estimates. However, we note that the meaning of this category is not explained in Part III and the costs are not allocated to users.

24.38 Review of non-incremental costs and the primary purpose for the service. The major costs the Department classifies as non-incremental include: air crew, in-service maintenance, base support, and depreciation. We reviewed the relationship between these costs and the primary purpose for having the Service.

24.39 As stated in paragraph 24.25, the Service exists primarily to transport the Royal Family, the Governor General and the Prime Minister. The Department could not provide us with an analysis supporting the need for the number of aircraft used by the Service.

24.40 We found that the Service Challenger personnel and aircraft resource levels at the 412 Squadron are well in excess of what would be reasonable for transporting the Royal Family, the Governor General and the Prime Minister. For example:

  • Crew costs : During 1990-91 there were approximately 11 Challenger crews assigned to the Service at Canadian Forces Base Ottawa. If crews were there to service the Royal Family, the Governor General and the Prime Minister on 87 flights, the personnel levels would have been one air crew for every eight flights.
  • In-service maintenance : During 1990-91, approximately 88 person-years at the Ottawa base were used to provide service and minor maintenance to the Challenger aircraft. If these resources were there to service the Royal Family, the Governor General and the Prime Minister on 87 flights during 1990-91, the resource levels would have been about one person-year of maintenance for each flight.
This analysis underscores the fact that the resources dedicated to this service are in excess of what is really needed to transport the primary users and that the costs are also incurred, consciously, to transport ministers, who are the largest single user group. Therefore, it seems logical to us to allocate to ministers their proportionate share of the full cost and report these rather than what the Department defines as incremental costs.

Training and maintenance flying-hour costs
24.41 We found that the training and maintenance flying-hour costs are significant. The training program focusses on training air crews to transport passengers on 9- to 12-seat Challenger aircraft and to fly in and out of commercial airports. We found that the total cost of the 1203 training flying-hours for users of the Service in 1990-91 was $14.7 million. Further, about one third of the training hours involved flights to foreign countries.

24.42 The maintenance of Administrative Flight Service planes involves flights to transport crews to repair the aircraft, to test aircraft after repairs and to ferry aircraft for major repair and overhaul work. In 1990-91, the number of hours used for these purposes was 214. This cost was about $2.7 million.

Indirect and overhead costs
24.43 The Department does not include the cost of purchased and departmental training courses provided to flight crews in its calculation of total costs. In 1990-91 this cost was $548 per flying hour.

24.44 It also does not include such indirect and overhead costs as passenger and baggage handling, the operation of the ministerial terminal, base air operations staff and contract management. The Department's explanation "for excluding these costs is that they are not part of the standard costs that it develops in support of its normal operations."

24.45 We reviewed the costs and, although we did not calculate all of them, we found that indirect and overhead costs were significant - at least $1000 per passenger flying-hour. For example, the per flying-hour cost of passenger and baggage handling and the operation of the ministerial terminal was $831.

Inaccurate cost factors
24.46 The use of inaccurate cost factors by the Department also accounts for some of the differences between its costing calculations and ours. The Department uses cost factors based on projecting historic cost information adjusted by inflation factors. We do not disagree with the use of inflation factors.

24.47 The Department's costing system makes use of multi-year averages of actual expenditures, which are updated every two to three years. Certain costs are not reflected in the cost factor until after the factor is updated. Thus, significant additional and increased costs associated with the aging of the aircraft, especially repair and overhaul costs, are not included in the cost factors until they are updated. For example, a requirement for overhauling engines commenced in 1990-91, costing $2.5 million annually. This cost was not included in the Department's cost factors until the factors were updated for 1992-93.

24.48 In addition, the cost factors are based on bulk purchases of fuel and in-flight meals. However, a significant percentage of these items are retail purchases. For example, over 60 percent of the fuel used by the Service is from primarily retail sources, rather than bulk purchase. We estimate the average per-litre fuel cost to be 40 cents rather than the Department's bulk price of 29 cents.

Depreciation and attrition
24.49 The Department's standard total cost includes the cost of depreciation and attrition. Depreciation is the allowance made for the loss in value of the Service's aircraft due to use. Attrition is the allowance for aircraft lost prior to the end of their normal useful life. Part III of the Department's Estimates reported that in 1990-91 these costs totalled $5.1 million.

24.50 To calculate depreciation and attrition, the Department uses replacement cost rather than the historic costs. In our opinion, the use of historic costs is preferable since they relate to current users, whereas replacement costs relate to future users. Historic costs identify the cost of the consumption of an asset, while replacement costs identify the funding that will be required to replace the portion of the asset being consumed. Using replacement costs rather than historic costs, our estimate of the hourly cost of flying the Challenger would be $20,354 rather than $19,650.

Cost of interest on capital
24.51 The Department told us that it cost $96.3 million to buy six aircraft for the Administrative Flight Service. However, the Department does not include the cost of interest on capital in calculations of total standard costs, and it does not report it in Part III of its Estimates. In addition, we note that there are seven aircraft normally used by the Service, rather than six.

24.52 Our estimate of the cost of interest on capital for the Service in 1990-91 is $9.7 million.

Unreported flights
24.53 We found that some Challenger flights were not reported. Our review of 412 Squadron records indicates that seven flights in support of the Prime Minister and twelve other ministerial trips had not been included in the Challenger report.

Comparison with Private Sector

24.54 For 1990-91, we compared the costs of using the Department's aircraft to transport ministers with the costs of private sector aircraft. We compared departmental costs of completing a return flight from Ottawa to Vancouver with the costs of three charter airplane companies that use a similar-size passenger aircraft and have similar flying hours.

24.55 Using our approach to estimating costs, in 1990-91 the cost of using a Department of National Defence Challenger for such a flight was about $197,000. If the Department had reported the costs using its method of calculation, it would have reported a total cost of about $67,000 and an incremental cost of about $34,000.

24.56 The use of a private sector aircraft to transport ministers would be much less expensive. The high estimate in 1993 for such a flight, from the three companies we contacted, was about $38,500, including GST; the lowest was about $24,000.

Recommendations

24.57 The Department should provide complete and accurate information to Parliament on the full cost of using government-owned aircraft to transport users such as the Prime Minister, ministers, and other VIPs.

24.58 The Department, in co-operation with other appropriate departments, should conduct a review of the economy, efficiency and effectiveness of providing government aircraft to transport users such as the Prime Minister, ministers, and other VIPs. Such a review would address questions such as these:

What government-owned and commercial aircraft are being used to transport the Royal Family, the Governor General, the Prime Minister, heads of states, ministers and other VIPs?
What are the full costs of providing these services?
What types of planes and levels of service are required to transport specific users?
Are the standards of availability, maintenance and security for such flights appropriate?
Do ministers need to use the Administrative Flight Service and other government aircraft or can they use regular commercial or charter aircraft?
To what extent do ministers already use regular commercial or charter aircraft?
Why is the cost of contracting out maintenance for the Administrative Flight Service aircraft so high, and why does it take so long to perform the maintenance?
Why is 28 percent of the Administrative Flight Service flying time used for Service training purposes?
Why are the costs so high for pre-flight and post-flight servicing of the Administrative Flight Service aircraft?
Department's response:

(24.23) The Department agrees that its use of standard costs does not capture and allocate all of the costs in the same manner as identified in this audit. The Department is prepared to make an exception in its cost accounting practices by reviewing the full range of cost elements that comprise the direct and indirect, or overhead, costs of operating the Administrative Flight Service and building a revised cost-allocation model. This will bring the DND annual cost of fleet operations much closer to the OAG calculations. It should be noted, however, that many of these additional costs would be incurred whether or not there is an Administrative Flight Service.

(24.24) The Department agrees that the costs incurred in the provision of the Administrative Flight Service should be complete and easily understood. The Department therefore agrees to expand and clarify the information on the annual operations and costs of the Service in its Part III of Main Estimates. However, the Department believes that the fixed costs that have been incurred because of the decision to operate the Service cannot be meaningfully allocated to users and should be categorized as annual fleet costs. Therefore, for the flying hours of individual flights in the monthly report and user categories in the Part III Estimates, DND considers it appropriate to use the incremental costs.

(24.25) As specified in Treasury Board Guidelines, the Department of National Defence operates an Administrative Flight Service for members of the Royal Family, the Governor General, the Prime Minister, former prime ministers travelling for purposes relating to their former office, Cabinet ministers, foreign dignitaries visiting Canada, parliamentary committees or delegates on official business and, when authorized by a minister, senior federal officers on government business. Priority on the use of the Service is given to the Royal Family, the Governor General and the Prime Minister, but the Service exists and is resourced to support all user categories.

(24.26) Only six Challenger aircraft are on the establishment of 412 Squadron and dedicated to the Administrative Flight Service. The seventh aircraft was made available to the Service pending its refitment and has been returned to its home squadron for use in the Electronic Support and Training role.

(24.27) Based on its review of cost allocations, the Department estimates that the annual cost of providing the Service in 1993-94 is $38.2 million.

(24.28) In paragraph 24.27, the auditors indicate that the total annual cost of operating the service was about double the amount reported by DND. In paragraph 24.28, the auditors indicate that the total hourly cost was about three times the amount reported by DND. The reason for this apparent anomaly is that the auditors, in fact, calculated the total cost per flying hour at $13,640. When they reallocated costs of training and maintenance hours to other users, the cost increased to $19,650 per hour flown with users of the fleet actually aboard. The Department believes that the hourly costs for training and maintenance should be identified and reported as a component of the annual fixed or overhead costs and not reallocated to users on an hourly basis.

(24.31) The Department estimates, using its modified costing methodology, that of the $38.2 million annual cost to operate the fleet, the fixed costs are $27.4 million. Since these fixed costs have been incurred because of the decision to operate the Service and do not vary with the level of user activity, the Department believes they should be categorized only as annual fixed fleet costs. In addition to the fixed costs, the annual incremental costs of fleet operations are estimated at $10.8 million for all users of which $5.1 million are for ministers' trips.

(24.32) This matter is addressed in our response to paragraphs 24.28 and 24.31.

(24.34) Based on its revised costing approach, the Department estimates that the incremental cost in 1993-94 is $4,639 per hour.

(24.35) Based on its new costing approach, the Department believes that it would be misleading to report a total cost per user flying hour since the fixed costs will be incurred whether or not user flights occur.

(24.36) Comments on this observation are provided in the related paragraphs below.

(24.37) The Department will clarify the reporting of annual training and maintenance hours in its Part III of Estimates. As stated in our response to paragraph 24.28, the Department disagrees with the practice of allocating these costs to users on an individual flying-hour basis.

(24.39) The Service's approved establishment of aircraft is the result of the government's decision in 1989 to reduce the fleet from eight to six aircraft. With these resources, the Service is mandated to operate throughout the year seven days a week, 24 hours a day. The AFS will normally provide up to four aircraft per day for government use. On days when air crew operational training is required, the AFS will provide three aircraft. Depending on maintenance schedules, additional aircraft may be available.

(24.40) The Department notes the observation that the personnel and resource levels are in excess of what would be reasonable for transporting only the Royal Family, the Governor General and the Prime Minister. However, as explained in the response to paragraph 24.25, the Service is mandated for other users as well who, as indicated in paragraph 24.29, account for almost 82 percent of user flying hours. The Department can see no logical basis for allocating the total Service costs to the Royal Family, the Governor General and the Prime Minister. The Department does not believe that the hypothetical cost accounting in paragraph 24.40 contributes to the audit in a meaningful way.

(24.43) The costs of purchased and departmental training courses have been included in the revised annual costs of the Service.

(24.44) While these costs are not a part of DND standard costs, they have been included in our redevelopment of the annual costs of the Service.

(24.45) The Department acknowledges that the allocated indirect and overhead costs are significant and as indicated in the response to the two previous paragraphs, these costs have been included in the revised annual costs of the Service. It is important to note, however, that the Department would incur many of these costs even if the Administrative Flight Service did not exist.

(24.47) The Department maintains thousands of standard costs for its personnel, equipment and facilities and cannot possibly update all of them on an annual basis. For this reason, it updates them periodically, uses multi-year averages of historical spending and applies inflation factors to estimate costs in the current year. The Department believes this is a reasonable approach.

(24.48) Agreed. In the Department's revised methodology, the cost of fuel includes retail purchases.

(24.49) The Department has traditionally based its depreciation and attrition calculations on replacement cost because this was considered more appropriate for use in circumstances where full costs were being recovered from users of Departmental services. However, depreciation and attrition are imputed costs for which there are no expenditures until the equipment is replaced. Since the purpose of Part III of Estimates is to explain how the Department will use its annual appropriation of funds, depreciation and attrition costs will be excluded from the annual cost of fleet operations. In order to ensure full disclosure of costs related to the Service, the Department plans to identify the original procurement cost of the fleet aircraft in Part III Estimates.

(24.51) As indicated in the response to paragraph 24.26, the seventh aircraft was on interim assignment with the Service pending its refitment for use in the Electronic Support and Training role. This aircraft has been returned to its home squadron.

(24.52) The Department does not include imputed interest on capital in any of its cost estimates and believes that it would be inappropriate to make an exception for the Administrative Flight Service. The government displays its debt servicing costs separately in Estimates under the Department of Finance.

(24.53) The Department has issued instructions that will serve to ensure that reports on Challenger flights will be accurate.

(24.56) The Department believes that, compared to a charter airline, the Administrative Flight Service provides a higher level of responsiveness, flexibility, security and dependability and that these factors contribute to the differential in cost between the two. Furthermore, a significant portion of the total cost calculated by the auditors comprises imputed costs (as opposed to expenditures) and allocated overheads that would largely be incurred even if the Service did not exist. Therefore, for the purposes of comparing costs for a given flight, the Department believes that only its incremental costs would be relevant because only those costs would be saved if a user were to fly by charter instead of by Service Challenger.

(24.57) This recommendation deals with matters that are outside the authority of DND. As such, the Department's response will be confined to the reporting of the Administrative Flight Service, which was the subject of this audit.

The Department fully agrees that complete and accurate information should be provided to Parliament on the cost and use of the Administrative Flight Service. To that end, the Department reports monthly on ministers' use of the Service and annually on fleet operations in Part III of Main Estimates.

To ensure that the information provided is both clear and comprehensive, the Department is conducting a thorough review of the contents of its annual report on the Administrative Flight Service in Part III of Estimates.

In the spirit of trying to link resources to activities for the purposes of comprehensive cost reporting, the Department agrees that all departmental expenditures incurred in the provision of the Administrative Flight Service should be identified.

Since existing DND standard costs for the Administrative Flight Service do not include all overhead costs, the Department is prepared to tailor its cost accounting practices taking into account many of the suggestions and observations made during the audit. The Department will review the full range of cost elements which make up the total cost of operating the Administrative Flight Service.

However, the Department believes that the fixed costs that have been incurred because of the decision to operate the Service cannot be meaningfully allocated to users and should be categorized as annual fleet costs. Therefore, for the flying hours of individual users in the monthly report and user categories in the Part III Estimates, DND considers it appropriate to continue to report incremental costs.

Recognizing that the use of incremental costs does not provide visibility on the fixed costs of the Administrative Flight Service, the Department will recommend that the monthly report be amended to include an appropriate extract from the revised annual report in Part III Estimates.

(24.58) The Department is prepared to participate in any review carried out to address the first six of the suggested questions, but believes that such a review should be initiated and led from outside the Department. The Department agrees to a review of the last three questions, which relate specifically to the cost and efficiency of the Administrative Flight Service operated by DND.