Seven-Point Plan: Status Report
National Fighter Procurement Secretariat

December 2012

A message from the Chair

I am pleased to introduce the first report on implementing the Seven-Point Plan launched in response to the Auditor General's Spring 2012 Report on Replacing Canada's Fighter Jets.

The Seven-Point Plan was put in place to assist the government in making the best possible decision on replacing Canada's fleet of CF-18 fighter aircraft. It is a significant undertaking that will revisit work already done, address outstanding gaps, and pick up on new areas of work aimed at restoring public confidence. But for many Canadians it is more than that, it means getting the right fighter aircraft to do the job at the best value for tax dollars.

That is why the Deputy Minister Governance Committee, the decision-making body charged with overseeing the Seven-Point Plan, is committed to due diligence, third party oversight, and public transparency. To achieve these objectives, we have opened up the process by including two independent members from outside the public service and we are committed to open communications through regular reports to Parliament, a dedicated Web site, and status reports on the implementation of the Seven-Point Plan – such as this one.

This report is intended to provide Canadians with an overview of the significant amount of work that has been done since the Seven-Point Plan was launched back in April. A thorough evaluation of options to replace the CF-18 is underway and the Terms of Reference for this important piece of work can be found on the National Fighter Procurement Secretariat Web site. In addition, three reports are being released that focus on one of those options: a Department of National Defence Annual Update on the cost estimate for the F-35 Joint Strike Fighter, an independent review that not only looks at those cost estimates, but how they are produced, and an Industry Canada report on the industrial opportunities provided by Canada's participation in the Joint Strike Fighter program.

Through the work of our Committee, and the Secretariat which helps bring it all together, Canadians can be confident that once the Seven-Point Plan is complete, and our conclusions are presented to Ministers, the government will have the best possible information and supporting analysis it needs to make a decision on a replacement for our CF-18s.

Michelle d'Auray
Chair, Deputy Minister Governance Committee

Introduction

The Seven-Point Plan was launched in response to the Auditor General's Spring 2012 report on Replacing Canada's Fighter Jets. The report identified concerns with the way key information was being developed and presented to Canadians.

The Seven-Point Plan is about getting the Canadian Forces the tools they need to do their job at home and abroad, but it is also about being thorough, credible and open with Canadians along the way. That is the driving principle behind the Seven-Point Plan, and it is the core mission of the National Fighter Procurement Secretariat.

National Defence has launched an extensive evaluation of the options available to replace the CF-18. National Defence is meeting the commitment to provide annual updates to Parliament including refined cost estimates for the F-35. Industry Canada, for its part, will provide updates to Parliament on the industrial opportunities associated with the Joint Strike Fighter program. The Secretariat is reviewing the acquisition process in detail to make sure that what needs to be done for a major purchase like this is thorough and complete.

The bottom line is that Canada will not sign a contract to purchase new aircraft until the Seven-Point Plan is complete.

The National Fighter Procurement Secretariat

The National Fighter Procurement Secretariat was put in place to co-ordinate the implementation of the Seven-Point Plan. Since being launched in early June 2012, the Secretariat has staffed-up, found a home within the Public Works and Government Services Canada, and put in place all the necessary procedures and protocols. The Secretariat has become the clearinghouse for all things related to the Seven-Point Plan, which means reinforcing the key attributes that lead to success: strong governance, third party oversight, and a commitment to public communications and engagement.

Due diligence through strong governance

Canadians need to have confidence that the process used to replace the CF-18 is thorough and ultimately done right. Through the establishment of Deputy Minister-level and Assistant Deputy Minister-level interdepartmental committees, the Secretariat has established a series of checks and balances, which will ensure proper due diligence throughout the implementation of the Seven-Point Plan.

These committees meet regularly and include the direct participation of central agencies, as well as independent members from outside the public service. But the work of the Secretariat is about more than getting the right expertise around the table, it is about challenging assumptions, assessing risks and developing mitigation strategies, and working through key documents from the development of initial drafts to the release of final products.

Third party oversight

By using non-governmental, independent third parties throughout the implementation of the Seven-Point Plan, the Secretariat is bringing fresh perspectives to the table that both improve the end product and enhance the credibility of the process. That is why the Secretariat invited two independent members from outside the public service to provide their unbiased support and advice. It is also why the Secretariat is engaging the private sector, exploring international best practices and encouraging third party participation in key elements of the Seven-Point Plan, including an independent review of the cost estimates to replace the CF-18 and a review of all the steps taken to date in the acquisition process.

Open and effective communications

Canadians have been provided with a lot of information about fighter jets from a variety of sources. Some of this information has been inaccurate or conflicting, resulting in a strong call for the best possible information to address this confusion. That is why, when the decision was made to push “reset” on the process to replace the CF-18, the Secretariat made public transparency and effective communications a top priority. The Secretariat is committed to coordinating timely and transparent communications through ongoing briefings with stakeholders, a dedicated Web site to post and share information, regular updates on the status of implementing the Seven-Point Plan, and regular reporting to Canadians and Parliament.

The Secretariat is reaching its first key milestone since the Seven-Point Plan was launched with the release of three reports to Parliament: a Department of National Defence Annual Update on the cost estimates of the F-35, an independent review that not only looks at those cost estimates, but how they are produced, and an Industry Canada report on the industrial opportunities provided by Canada's participation in the Joint Strike Fighter program. However, these reports provide an update on only one of the options being looked at to sustain a fighter capability, with a thorough evaluation of options currently underway.

Evaluation of options to sustain a fighter capability

The Seven-Point Plan is ultimately aimed at ensuring that the Royal Canadian Air Force has the right tools for the job: equipment that allows Canada's men and women in uniform to not only respond to today's challenges, but tomorrow's threats as well.

That is why the Seven-Point Plan calls for a thorough evaluation of all available options to replace the CF-18. Getting the analysis right involves reviewing and assessing the capabilities, costs risks of each option, including bridging and fleet options.

This approach will differ from the review of options that was previously completed. The Statement of Operational Requirement will be set aside and not used as part of this new evaluation of options, and any effects on it will be assessed once the Government has had the opportunity to consider the options analysis work.

The process will be methodical, comprehensive and fully documented. It will include an assessment of current and longer-term threats facing Canada and our mission needs as outlined in the Canada First Defence Strategy. Further, this work will consider all available fighter aircraft against the missions required to be fulfilled by the Canadian Forces. The Secretariat, in collaboration with National Defence, will be seeking capability and pricing information directly from industry in support of the market assessment of fighter aircraft. Each option while respecting commercial sensitivities, will be informed by the independently developed Life Cycle Cost Framework.

Concurrently, a thorough examination of Canada's fleet of CF-18s will be conducted, including the cost of any upgrades necessary to maintain safe and effective operations beyond their current life expectancy.

All of this information will be gathered together and analysed to assess the capabilities, costs and risks associated with each option. This work will result in a detailed and comprehensive report that will inform recommendations on the way forward. This exercise is guided by a commitment to make a decision based on full and complete information and it will show Canadians how that information was used to reach a conclusion.

This exercise is being led by the Royal Canadian Air Force, informed by a variety of subject matter experts from across government and supported by the National Fighter Procurement Secretariat. To strengthen third-party oversight, the work will include the participation of independent reviewers from outside government. The Terms of Reference that will guide this work can be found on the National Fighter Procurement Secretariat Web site.

Annual update on the F-35

Given the criticism at the heart of the Auditor General's report, one of the first things that needs to be addressed is cost estimates.

That is why, when the Seven-Point Plan committed National Defence to provide annual updates to Parliament on the cost estimates of the F-35, it understood the need for a straightforward and complete report on those cost estimates – one that addresses the Auditor General's concerns and one that speaks clearly to Canadians.

One important caution in reporting on the cost estimates of the F-35 involves recognizing that these estimates will change as more information becomes available. While some aspects of the cost estimates are becoming more certain as the design and development of the aircraft advances, others are less certain, such as the aircraft maintenance program, which is still in early development, as well as variables such as exchange rates and inflation which could have a significant impact on cost.

The Secretariat, and the committees charged with overseeing the implementation of the Seven-Point Plan, is seized with ensuring that National Defence's cost estimates report responds to the recommendation laid out by the Auditor General and meets the test of full disclosure as set out in the Seven-Point Plan. This is why the Secretariat recommended that the Annual Update be delayed to the fall in order to complete an independent, third-party review that not only examines those cost estimates, but how those estimates are developed and reported back to Canadians.

Independent review

KPMG, a leading private sector consulting firm, has looked at best practices for how cost projections are calculated both in government and internationally to develop a life-cycle costing framework. This framework takes a comprehensive and principle-based approach to life-cycle cost. One of the tangible benefits resulting from the Seven-Point Plan will therefore be a new and better tool for determining the life-cycle costs to acquire, sustain and operate a replacement to the CF-18.

In addition to providing its recommendations for life cycle costing, KPMG has verified the assumptions and cost estimates in the Annual Update by National Defence. This report has been made public and is available on the Secretariat’s Web site.

By involving the private sector in the development of that framework, how it is applied, and a thorough review of the numbers, Canadians can be confident that they are getting the best available information on the cost estimates to replace the CF-18.

Industrial participation report

Canada's involvement as a partner in the Joint Strike Fighter Program creates significant opportunities for the aerospace and defence industry. Canadian companies can bid on contracts that non-partner countries do not have access to. The Auditor General's report noted that “early efforts to promote industrial participation were successful.”

However, there are no guarantees under this model of “industrial participation”; companies in all partner countries must offer competitive technologies at competitive prices to successfully win contracts. For this reason, the Auditor General noted the need to be very clear about the uncertainties and limitations around projections of industrial opportunities.

To support greater transparency, the Seven-Point Plan required Industry Canada to provide a status update on industrial opportunities. As a result, Industry Canada's report provides an overview of the contracts won so far, as well as an estimate of future opportunities for which Canadian industry could compete, should Canada continue its participation in the Joint Strike Fighter program. While expanding on the potential benefits, the report also clearly describes the risks and uncertainties related to this approach.

Review of the acquisition process

Finally, the Seven-Point Plan calls on the Treasury Board Secretariat to review the acquisition and sustainment costs of the F-35 and to ensure full compliance with procurement policies – standard practice prior to approving any new project.

However, before this can be done, the National Fighter Procurement Secretariat is contracting a third party to review in detail the acquisition process to date and applying lessons learned so that the government can look to improve the way it conducts similar acquisitions in the future.

This review will allow the Secretariat to determine whether the shortcomings identified by the Auditor General have been addressed, confirm whether the steps taken to date were in line with policy guidelines and provide lessons learned.

This review is another example of how the Secretariat is involving independent third parties in its work and, in the interest of transparency, making its conclusions public.

A key part of any successful review process involves looking back at how things were done in the past and learning from it – that is the objective behind the acquisition process review, which will inform similar acquisitions in the future.

Conclusion

The Seven-Point Plan was launched in response to the Auditor General's Spring 2012 report on Replacing Canada's Fighter Jets. Despite the fact that the sole recommendation stemming from that report centered on refining the estimates for complete costs related to the full life-cycle of the F-35, the Seven-Point Plan set about not only clarifying those cost estimates, but also conducting a thorough evaluation of options to replace the CF-18, as well as a review of the acquisition process to improve the way it conducts similar acquisitions in the future.

The government established the National Fighter Procurement Secretariat to lead this work by challenging assumptions and, soliciting third-party participation. For the Secretariat, this means taking the work that was done in the lead up to July 2010, when the government announced its intent to replace the CF-18, and reviewing it to ensure the government, Parliament and Canadians are confident that they have the best available information.

Even when the Seven-Point Plan is complete, the results of each item will need to be pulled together, analysed and assessed in a comprehensive way. Only when that process is complete can those conclusions be presented to Ministers and a decision made on the replacement of Canada's fleet of CF-18s.

Annex: Seven-Point Action Plan (as announced April 2012)

The Government of Canada is taking the following seven steps to fulfill and exceed the Auditor General's recommendation:

1. The funding envelope allocated for the acquisition of the F-35 will be frozen.
2. The Government of Canada will immediately establish a new F-35 Secretariat within the Department of Public Works and Government Services Canada. The Secretariat will play the lead coordinating role as the Government moves to replace Canada's CF-18 fleet. A committee of Deputy Ministers will be established to provide oversight of the F-35 Secretariat.
3. The Department of National Defence, through the F-35 Secretariat, will provide annual updates to Parliament. These updates will be tabled within a maximum of 60 days from receipt of annual costing forecasts from the Joint Strike Fighter program office, beginning in 2012. The Department of National Defence will also provide technical briefings as needed through the F-35 Secretariat on the performance schedule and costs.
4. The Department of National Defence will continue to evaluate options to sustain a Canadian Forces fighter capability well into the 21^st century.
5. Prior to project approval, Treasury Board Secretariat will first commission an independent review of DND's acquisition and sustainment project assumptions and potential costs for the F-35, which will be made public.
6. Treasury Board Secretariat will also review the acquisition and sustainment costs of the F-35 and ensure full compliance with procurement policies prior to approving the project.
7. Industry Canada, through the F-35 Secretariat, will continue identifying opportunities for Canadian Industry to participate in the F-35 Joint Strike Fighter global supply chain, as well as other potential benefits for Canada in sustainment, testing, and training, and will provide updates to Parliament explaining the benefits.