Principles of Defence Funding

Transcription

1 ASSISTANT DEPUTY MINISTER (FINANCE) Principles of Defence Funding Briefing to Financial Management Institute November Werner Liedtke Chief Financial Management/ Deputy Chief Financial Officer

2 Outline 1. The Financial Context 2. The Defence Funding Model 3. The Impact of Strong Secure Engaged 4. The Investment Plan

3 Strategic Financial Context Defence requires a sustained commitment of resources to maintain required level of flexibility and responsiveness to meet assigned missions and tasks Operating funding is used to sustain current capabilities and conduct military operations. Acquiring new capabilities and maintaining core existing capabilities is necessary to avoid risk of capability degradation. The majority of Department s lapses are planned and the Department is working with central agencies to improve processes to reduce these planned lapses in spending from year to year. 3

4 Defence Funding Model Multi-year reference levels approved by the Treasury Board each year through Estimates process Includes Defence Escalator Incremental Strong Secure Engaged funding Includes costs of increased salary and benefits associated with the collective bargaining (except for increases during freezes) May include Incremental costs of major deployments Funding set aside in the Fiscal Framework to finance capital requirements associated with Strong Secure Engaged but requiring Treasury Board approval to be accessed (Capital Investment Fund) 4

5 National Defence vs Vote Vote Description Main Estimates Main Estimates Change 1 Operating Expenditures 14,201,614,868 15,237,553,800 1,035,938,932 5 Capital Expenditures 3,102,710,864 3,761,023, ,312, Grants and Contributions 164,695, ,719,317 12,023,909 S Statutory 1,193,046,094 1,202,283,005 9,236,911 Total 18,662,067,234 20,377,579,955 1,715,512,721 5

6 Department of National Defence Final Authorities and Future Supply ( to ) (Cash Basis) Final Authorities Final Authorities 35 Forecasted Defence Budget Pre-Defence Policy Review Forecasted Defence Budget with Defence Policy Review 30 ($ Billions) in Budget Year (BY) dollars 25 Afghanistan Combat Mission End Reductions fully implemented Fiscal Year

7 Lapses over Time 7

8 Need for Change Element Current Process Proposed Process Acquisition New Accrual Envelope Accrual Envelope Acquisition Replacement A-base Capital Accrual Envelope Incremental Sustainment/Operating New Accrual Envelope Operating Budget 1% escalator Incremental Sustainment/Operating - Replacement Operating Budget 2% escalator Operating Budget 1% escalator CF Growth/Sustainment Funding ($51B) Accrual Envelope Operating Budget Depreciation of existing assets Fiscal Framework Accrual Envelope Write-offs, write-downs, losses and work in progress Fiscal Framework Accrual Envelope Management of Future Investment Plan Acquisitions Incremental Sustainment/Operating All expenses related to capital assets All acquisitions funded through the accrual envelope. Flexibility to seek additional funding through Budget decision All incremental operating and sustainment costs funded through the 1% escalator Expenses related to capital assets reflected in the Departmental financial statements will be charged to the accrual envelope 8

9 Aim of New Funding Model Focus has been on improving openness and transparency Requires improved governance and clearly established rule-sets for the use of accrual envelope funding (i.e. impact on departmental financial results) Vote 1 Vote 5 project underway to align with TB policies Implement in two phases: Phase 1 conversion of A-base capital and historical depreciation Phase 2 conversion of write-offs, write-downs, losses and work in progress 9

10 Capital Investment Fund (CIF) The National Defence Capital Investment Fund (CIF), formerly referred to as the Accrual Envelope, is a dedicated source of funds in the Fiscal Framework defined on an accrual basis that established a ceiling for the accrual profile of DND s existing and planned tangible capital assets. The CIF is defined on an accrual basis and comprises a baseline of accrual space (BAS) within the Fiscal Framework; Established with Strong Secure Engaged, has an aggregate level of accrual space of $108B over a 20 year period; The BAS will be reset with a new 20 year period every three years, coinciding with the Investment Plan approvals, through a funding decision by the Minister of Finance and the Prime Minister. 10

11 Capital Investment Fund Eligible Investments The source of funds for the following Vote 5 transactions: The development, acquisition or construction of tangible capital assets; Land acquisition; Advance Payments; Interdepartmental transfers of capital assets; and Interdepartmental transfers of vote amounts; Not an eligible source of funding for operating and noncapitalized expenditures. 11

12 Capital Investment Fund Affordability* DND must manage its capital investment portfolio within the allocated BAS over the planning period; DND will have the flexibility to allocate funding to projects within it capital investment portfolio in order to reprioritize investments; CIF forecasts may exceed the BAS by up to 5% in any given year but, the aggregated expense cannot exceed the total accrual space of the 20 year period; Any project affordable within the 20 year period is considered fully funded within the fiscal framework even if its expenses extend beyond the 20 year period. *Affordability comments are still pending approval by the Minister of Finance 12

13 Capital Investment Fund Reporting DND will provide a forecast of funding requirements for its capital investment portfolio at least once per year by 15 Oct. Investments will be categorized as Major Investments and Minor Investments; Major Investments will be reported as individual projects greater than $100M; Minor Investments will be reported on an aggregate basis for all projects less than $100M. 13

14 Transition to New Capital Investment Fund Prior to the approval of the SSE policy the Department had a dual funding source for Capital consisting of Accrual based funding and normal A-Base reference levels. Post the removal of the $50.9B already transferred to Vote 1 reference levels the department effectively had $73.3B available for capital investment Post restatement the $24.5B was converted into: $10.5B for the future amortization expense of existing A-Base projects; and $14.9B to account for amortization expense for assets previously purchases using A- Base funding Furthermore, as per the SSE policy, The Government has approved an additional $33.8B in new investments for the CAF. The accrual envelope from to was valued at $99B (post Budget 2016). $50.9 of Accrual funding has already been brought into our Vote 1 reference level for operational readiness, force sustainability and force expansion. Moving to a full accrual view required a restatement of our Vote 5 A-Base of $24.5B into accrual. The $48.8B of accrual envelope funding remains post conversion to a full accrual model Total increase in accrual funding equates to $59.2B $10.5B Existing A- Base $14.9B Legacy A- Base $33.8B New SSE 14

15 SSE - Cash View Incremental Capital Capital Baseline Baseline Operating SSE was not a zero-based review SSE affordability based on a comparison between demand (baseline operating, new initiatives, ISS, capital) and previously approved funding supply 15

16 Vote 5 Capital Update ($M) Not spending cash may not have an impact on the accrual funding for a project The table below reflects $2.2B in funding that was not requested through the Estimates process No lapse created Will only have an accrual impact if delivery of the assets is delayed SSE Forecast Less Main Estimates Funding Not Requested at Main Estimates Plus/(Minus) Planned Funding Requests: Demands/Pressures at First Quarter Review Identified Opportunities Major Capital Minor Capital Vote1/Vote 5 Adjustment - Capital Leases Funding to be Requested Through Supplementary Estimates/Internal Funding Not Requested After Planned Funding Requests 6,554.9 (3,761.0) 2, (180.0) (424.4) (70.0) (674.4) (636.1) 2,157.7

17 Projects - Cash Not Requested Through Estimates $2,292.5M $2,157.7M 17

18 SSE - Accrual View Operating recorded in the year the expenditure is made Capital cost of acquiring and developing asset spread over its useful life 18

19 Cash Versus Accrual Acquisition Cost - $1.5B Operating Costs - $30M/yr, $1.5B over life of asset Sustainment Costs - $150M/yr, $4.5B over life of asset Disposal Costs - $50M in year 37 Ship enters service in year 7 Estimate life of asset is 30 years Operating and sustainment costs start in year 7 Total cost on a cash basis - $7.6B over 37 years $1.5B expended for acquisition in first 7 years Average cash budget charge is $200M/yr for remaining 30 years Total cost on an accrual basis - $7.6B over 30 years Average accrual budget charge is $250M/yr 19

20 Comparison Between Cash and Accrual 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,

21 The Investment Plan The output of the investment planning process through the filter of affordability is the Investment Plan (IP) which: is both a planning and management tool for the department provides an overview of the departmental investment portfolio to departmental management and central agencies provides a platform for considering the overall alignment of investments to governmental and departmental priorities facilitates ensuring that the department s spending plans, both short and long term, are affordable sets out the investment planning processes and structures 21

22 Roles and Responsibilities External Finance identifies the funding available for Defence to acquire capital assets over a 20-year period TBS provides oversight of the Investment Plan and plays role in the accessing of cash appropriations Internal Vice Chief of the Defence Staff - responsibile for the development of capability and programme requirements within the Investment Plan CFO - responsible to the Deputy Minister for the development of the Investment Plan. The CFO also advises the Deputy Minister on resource allocations and re-allocations, financial risk and the ongoing affordability of the Investment Plan 22

23 Governance Framework 23

24 Long-Term Management of Investment Space Defence Policy Baseline (Funded Projects in Capital Investment Fund) Investment Plan Projects Delivered Under Budget Investment Choice (Remove Funded Project from Investment Plan Internal sources of funds for additional investment decisions New Funding (Budget Decisions) Accrual Budget Available For Allocation New Projects Cost Adjustments for Currently Approved Projects Capital Investment Program Plan Review (CIPPR) for prioritization 24

25 Important Context to Remember Cost Estimates Mature over Time Example: 50 to 90% chance early cost estimates will be exceeded* Accountability Traceability Transparency Consistency Cost ($) A B C D Traditional cost estimates provide a single cost estimate (points A to D) Risk and Sensitivity analysis allows for the establishment of best and worst case scenarios Options Analysis Definition Implementation Disposal The use of Monte Carlo simulation generates a range of possible outcomes within an upper and lower cost estimate boundary * Peter R Garvey, Brian Flynn, Peter Braxton & Richard Lee (2012), Enhanced Scenario Based Method for Cost Risk Analysis: Theory, Application and Implementation, Journal of Cost Analysis and Parametric s, 5:2, pg

26 Questions?