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1998 April Report of the Auditor General of Canada

Main Points

3.1 A modern, multi-purpose, combat-capable force able to "fight alongside the best, against the best" is necessary to fulfil Canada's defence policy commitments, although the policy does not require the Canadian Forces to possess every component of military capability.

3.2 According to Department of National Defence officials, Canada's White Paper commitments are defined by the defence capabilities of the Canadian Forces. We found many equipment deficiencies that limit capabilities.

3.3 If the status quo persists, the Department's available capital funding may not be sufficient to equip and modernize the force that National Defence is currently planning. Officials told us that they expect to be able to increase the capital portion of the budget. Nevertheless, they anticipate that hard choices may have to be made.

3.4 Personnel, operations and maintenance costs are rising, which is further reducing the portion of the budget available for capital equipment.

3.5 We found that the Department does not have an adequate policy framework to direct the almost $1.4 billion it spends each year on equipment modernization. It does not yet have in place fully developed operational scenarios to guide planners, or performance information that identifies gaps.

3.6 Some other countries - notably the United States and New Zealand - have taken the lead in the way their government budgeting and management systems actively manage defence policy and resources.

Introduction

A Multi-Purpose Force Is Required

3.7 In 1994, the federal government released its Defence White Paper to "guide the work of the Department and the Forces into the next century." According to the White Paper, the Canadian Forces are to be multi-purpose and combat-capable, able to fight alongside the best, against the best. It recognizes that Canada cannot cover the entire military spectrum, but the Canadian Forces must be capable of defending Canada as well as defending North America in co-operation with the U.S. military, on land, at sea and in the air. They must also be able to contribute to international peace and security. (see photograph)

3.8 The army is to consist of three brigade groups, adequately equipped to carry out their tasks. The navy must provide two naval task groups for a fleet balanced between Canada's two open-water oceans. The air force must maintain capabilities for domestic and international operations, including fighter and transport aircraft, search and rescue, and maritime and tactical air support.

3.9 The 1994 defence policy announced cuts in most areas of defence. In response, the Department cut planned spending on equipment by $15 billion over 15 years. Some equipment projects were eliminated, reduced or delayed. The government wants National Defence to extend the life of its equipment, where cost-effective and prudent, and to buy new equipment only if it is essential to maintaining core capabilities. Resources are to be transferred "to where they are most needed - mainly to land combat and combat support forces."

3.10 In 1994, the Special Joint Committee of the Senate and the House of Commons on Canada's Defence Policy recognized that "less money means less equipment or less capable equipment". It warned, "Budget cuts mean that the Canadian Forces may not have the capability to undertake tasks which the government would like them to take on."

3.11 The Committee concluded that the Canadian Forces could not make do with less. It said, "Our present [1994] military forces are barely adequate." In the Committee's opinion, National Defence required a "significant refocussing of mission and reallocation of resources to do the job we are asking them to do today."

3.12 The Committee called upon Parliament to play an increased role in defence issues. It saw the need for regular review of defence policy and budgetary and procurement issues, involving both the Senate and the House of Commons.

Funds for Equipment Modernization Are Declining

3.13 Re-equipping the Canadian Forces has been a priority in defence policy since the 1970s, but recent defence budget reductions have slowed the pace of equipment modernization. The defence policy of 1987 recognized that years of declining spending on new equipment were causing a significant gap in the military's ability to meet its commitments. To fix this problem, the government announced in its policy that it would alter some commitments and begin a long period of "steady, predictable and honest funding".

3.14 In the late 1980s, spending on equipment, adjusted for accounting changes to Research and Development and Ammunition, accounted for about 20 percent of the defence budget. The government saw that "even this funding is insufficient to overcome the bow wave built up since the 1960s." Nevertheless, spending for equipment modernization has fallen to about 14 percent of the defence budget today (1998-99), which is lower than the historical targets set to ensure that modernization continues for the Canadian Forces.

3.15 In 1996, following a series of budget reductions, the Department made a commitment to avoid repeating the experience of the early 1970s when "rust-out" became a serious problem. Rust-out refers to deterioration in the condition of equipment that develops as old or obsolete equipment is not replaced. Although the Department did not expect reductions to affect the Canadian Forces' ability to fulfil its tasks and missions, it recognized that a higher level of spending on equipment would be needed over the longer term. Despite this commitment, Long-Term Capital Plans and the Defence Services Program currently forecast a decline in equipment spending over the next five to 15 years.

Concerns Raised in Our Previous Audits

3.16 Since 1984, we have been reporting our concerns about spending for equipment modernization. We have commented on the Department's inability to set priorities, develop adequate cost information or ensure that equipment plans were affordable.

3.17 In 1984, we found weaknesses in the Department's process for linking policy to the equipment needed to fulfil the policy.

3.18 In 1992, we noted that the Department lacked a system for setting priorities in the Defence Services Program. The Department told us then that by mid-1993, reforms to the Defence Program Management System would provide the basis for full documentation of priority setting.

3.19 In 1994, we reported that the policy planning and force development process needed improvements to resolve gaps and make plans affordable. The Department did not have conflict scenarios to provide guidance to force development planners. The Department agreed to provide greater detail in its policy documents about the kinds of situations the Canadian Forces would face; it said affordability would continue to be a major priority. Program or policy changes would be made if appropriate.

3.20 Most recently, in 1996 we found that some equipment for the army, particularly for peacekeeping, was deficient for the missions and tasks being undertaken.

Focus of the Audit

3.21 The present audit was intended to determine how well the capital equipment program of about $1.4 billion each year is doing at maintaining the modern, multi-purpose forces required by the government's policy. It was conducted in concert with the audit reported in Chapter 4, which examined how well the Department manages its projects to buy major capital equipment.

3.22 Further information on our objectives, scope and criteria can be found at the end of the chapter in the section About the Audit .

Observations

The Canadian Forces Are Trying to Cope with Equipment Deficiencies and Shortages

3.23 The Canadian Forces must maintain their core capabilities in order to be able to meet their commitments. The army, navy and air force each have roles that are essential to the success of the Canadian Forces in defending Canada and North America and contributing to international security. However, equipment deficiencies and shortages limit the capabilities available to implement the 1994 Defence White Paper. According to Department officials, the capabilities that are maintained define what Canada will accept as defence commitments.

3.24 In December 1997, the Deputy Chief of the Defence Staff asked the army, navy and air force to review their present ability to deploy Main Contingency Forces as called upon in the defence policy. This staff analysis is to be based on current capabilities and is to be completed by April 1998. While the review is intended to define the current state of the Canadian Forces, it does not attempt to forecast their future effectiveness. In addition to this review, Mobilization Plans are being developed as directed by the defence policy and are also expected to be completed by April 1998. Finally, the Department informed us that it is also reviewing its Defence Planning Guidance document to address affordability and future force structure issues.

3.25 We examined the current deficiencies in equipment capability that the Canadian Forces have identified, and their assessments of how these deficiencies affect operations. We then reviewed equipment modernization plans and the time frames for correcting the deficiencies.

Naval task groups need better support
3.26 Defence policy requires the navy to have a balanced fleet able to deploy on both coasts. A balanced fleet means the navy can operate effectively on, above and under the ocean surface. We examined the navy's own assessments of its fleet and maritime air assets on the east and west coasts as well as for Canada's international obligations.

3.27 At the time of our audit, the navy stated that although it is well served by its surface fleet of modern warships, concerns remain about its helicopters and replenishment ships, which provide support, and its submarines. There are gaps in strategic surveillance and only a very limited capability to exert national will in the very demanding environment of Canada's Arctic.

3.28 The Department reported in 1997 that "critical deficiencies exist in the maritime helicopter and submarine fleets." The navy relies on the air force to provide air support for its naval task groups and to conduct maritime surveillance. In order to be effective at sea, the naval task groups require shipborne helicopters to operate with destroyers, patrol frigates and support ships. The Department has planned a project to address maritime helicopter deficiencies, but they will continue until new helicopters are delivered. (see photograph)

3.29 Lack of submarines has meant that the navy's ability to meet its obligations on the west coast has been limited since 1974 and it does not expect to have current deficiencies resolved until sometime after 2005. The navy has three submarines to protect Canada's coastline but in Maritime Command's Naval Vision, the Chief of Maritime Staff calls for up to six submarines to properly meet defence policy requirements. The existing vessels are over 30 years old and are becoming obsolete. Submarines are currently a defence priority.

3.30 According to the Naval Vision, the naval task groups call for four support ships for the east and west coasts to support operations and provide adequate strategic sealift capability. The navy is currently operating with only three support ships, and the planned retirement of HMCS Provider in 2001 will add to existing limitations. A project to replace the support ships has been put forward for future consideration.

The army has difficulty keeping pace with technology
3.31 The government expects the army "to fight in joint, combined and coalition operations in all types of environments." It must be able to respond with existing resources to operations other than war and must also be prepared to mobilize should Canada have to fight a major war.

3.32 In the 1994 Land Force Development Guide, the army stated that operationally it had not kept pace with technology to modernize its equipment, leaving it vulnerable to threats in low-level and mid-level operations. Its infantry and armour could be detected, engaged and defeated long before it was known that an enemy was present. Canadian artillery could not fire effectively because of limitations on its ability to locate and identify targets. The army was struggling to acquire the 1970s and 1980s technology to fight air/land battles even though the next-generation "information battlefield" had already arrived. Our review of departmental documents confirms that many of the 1994 Land Force concerns are still concerns today.

3.33 The army is introducing new technology as funding permits, but acknowledges the difficulty with the current pace of technological change. Since 1994, the army has initiated several projects to upgrade its equipment. For example, reconnaissance vehicle deficiencies are to be addressed by 1998-99; the Leopard main battle tank is being fitted with a thermal sight ; and the army has received government approval to replace 240 of its armoured personnel carriers. It is also working on implementing a Land Force Command communications system by 2001, which, the army has informed us, will be fully interoperable with other Canadian Forces command and control systems. (see photograph)

3.34 But the army continues to face other ongoing deficiencies. Its armour combat vehicle has been considered unsuitable as an operational vehicle since 1981, and is particularly inadequate for peacekeeping. Although the thermal sight on the Leopard tank is being added, other upgrades to improve its firepower and armour have been delayed. The army is planning to replace only about one third of its armoured personnel carriers and to upgrade the remainder. Departmental documents dated from 1994 to 1996 state that these vehicles could put troops at unacceptable risk when used on assigned missions. However, officials told us that the army's equipment rationalization program should go a long way to reducing the risk that troops could be exposed. Once implementation is complete, front line troops will be equipped with the most up-to-date light armoured vehicles while other troops will have upgraded armoured personnel carriers.

3.35 The army relies on the air force for tactical transport. The Griffon utility helicopter recently acquired for the air force is able to provide troop transport and conduct limited reconnaissance operations. It is capable of lifting the army's lightweight artillery only very short distances. With its Griffon helicopters, the air force cannot provide direct fire support for the land troops. However, trained aircrew can communicate with ground forces and co-ordinate fire support by using binoculars and following artillery procedures. (see photograph)

The air force is facing obsolescence
3.36 The air force faces "a serious risk of obsolescence and capability degradation in a number of key areas", as it reported in the National Defence 1997-98 Estimates. Defence policy calls on the air force for seven key capabilities - fighter capability, strategic transport and air-to-air refuelling, tactical transport and air-to-air refuelling, support to the navy, support to the army, search and rescue and Arctic surveillance.

3.37 The air force currently believes it is not fully capable in all its core areas, but in some of its key capabilities it is better able to meet commitments than in others. For example, the strategic and tactical transport aircraft are able to provide airlift for passengers and cargo, and its tactical transport aircraft can do some air-to-air refuelling. The tactical transport aircraft need avionics updates to ensure that they remain effective until 2010, when they may be retired. A project is under way to have aircraft upgrades completed by 2000. (see photograph)

3.38 However, deficiencies in helicopters and other capabilities are of immediate concern and place real limitations on the ability of the air force to provide support to the navy and army. The air force has identified five areas in which capability deficiencies need to be fixed to maintain the minimum standard needed for interoperability with allies and for Canada's fundamental security needs - search and rescue helicopters, shipborne maritime helicopters, life extension of the Aurora patrol aircraft, systems life extension for the CF-18 fighter aircraft and region/sector operations control centres.

3.39 Buying new search and rescue helicopters has been a departmental project for over 10 years. The deficiencies of the current Labrador helicopters have recently been addressed by the government and new helicopters for search and rescue could be in use by 2003.

3.40 The Aurora maritime patrol aircraft was acquired in the early 1980s and now needs upgrades to address and update its limited maritime surveillance capability.

3.41 The CF-18 fighter aircraft is required for the defence of Canada and to meet international commitments to NATO and NORAD. It was acquired in the early 1980s and now lags behind advanced technology available in other aircraft that represent a potential threat. While the CF-18 now has precision-guided munitions and associated delivery systems, other components are reaching the limits of their capability. System upgrades to the CF-18 fighter aircraft are a priority for the Department. However, plans to implement them have been deferred. (see photograph)

Money for Capital Spending Is Shrinking

The Department cannot afford all the equipment forecast to fully modernize the Forces
3.42 The National Defence budget is divided into expenditures for personnel, operations and maintenance, some statutory payments as well as grants and contributions, and capital. Capital funding includes money to modernize equipment for the Canadian Forces.

3.43 In 1987, the government became concerned that the gap between defence capabilities and policy commitments had become too great. It stated its intent to re-equip the military and prevent impending rust-out.

3.44 Despite recognition of the problems facing National Defence, like other departments it has had to cope with shrinking budgets. In 1988-89, at the end of the Cold War, the Department was spending about $11.4 billion - about $14 billion in current dollars. This year, it will spend about $9.7 billion (1998-99), 30 percent less in real terms than a decade ago.

3.45 The internal demand for funds for personnel, operations and maintenance is growing. Each year as operating costs increase, less and less funding is available for capital expenditures. In 1988-89, National Defence spent $2.2 billion on capital equipment, or about 20 percent of its budget, which in current dollars is about $2.8 billion. Today its capital equipment spending has dropped by 50 percent in real terms to about $1.4 billion (1998-99), or 14 percent of the defence budget.

3.46 In 1996, the Department stated that it was "committed to avoid repeating the experience of the early 1970s when funding restrictions led to a rust out of major equipment. Over the longer term, the Department will have to address the need to return to a higher level of capital spending in order to prevent rust out."

3.47 We examined forecast capital funding over the long term and found that unless significant adjustments are made, it could decline to a very low level. Although the National Defence budget is expected to increase to compensate partially for inflation, within the next 15 years - if current trends continue - spending on capital could approximate 1970s levels (Exhibit 3.1) . Our analysis found that in the worst case, capital expenditures could drop as low as 9 to 12 percent of the defence budget by 2012-13.

3.48 The Department recognizes that equipment modernization would be unsustainable at a spending level of only 9 to 12 percent and explained that it would take and is taking action to prevent this situation from occurring. Nevertheless, departmental officials told us that hard choices may have to be made involving several options that could be pursued, other than maintaining the status quo. Overall, the options are:

  • to continue the status quo, annually reviewing the cost of projects so that long-term capital plans are kept within capital funding limits;
  • to seek increased funding from government, some of which could be directed to capital, pursue additional internal efficiencies and reallocate some savings to capital; and
  • to strategically rethink, over the long term, the structure and operations of the Canadian Forces.
Option 1: The status quo
3.49 The Department has identified capital projects to correct deficiencies in its equipment. Projects in the army, navy and air force as well as information technology business plans represent an estimated demand of almost $11 billion on the capital budget over the next five years. However, the status quo would see only $6.5 billion available for equipment spending. To meet all the requirements for these equipment projects, the Department would need to almost double the amount of funding it has allocated from its budget for equipment modernization.

3.50 The Department develops a Long-Term Capital Plan for equipment to identify which projects it can afford to undertake with the available funding, when it can start funding these projects and how much it can allocate to each of them.

3.51 The Department cannot undertake all the projects it has identified in its business plans; it will have to reduce, eliminate or defer some projects or project phases to later years until funding becomes available. Over time, as more and more projects are delayed, the Department will experience a growing amount of deferred expenditures needed to fix capability deficiencies.

3.52 Defence is deferring more and more equipment projects. Growth in the number of deferred equipment projects is an indicator of whether the Canadian Forces can keep pace with demands to modernize aging equipment and avoid rust-out. The government referred to this backlog of demands in 1987, indicating then that it had become a serious problem.

3.53 With the status quo, the amount required to fund deferred equipment projects could reach as high as $5 billion over the next five years and we estimate between $20 billion to $30 billion by 2012-13. This is based on all the potential projects identified by the Department. Some of these projects could be reduced or eliminated as the Department reassesses its needs or finds less expensive ways to modernize equipment. At this point, however, the Department has not been able to say which projects could be redundant, or less expensive than now anticipated. As well, new projects could be added as other equipment modernization needs become apparent. As a case in point, we identified in current business planning documents almost $300 million in potential new demands.

Option 2: Identifying more funding for equipment modernization
3.54 In the near term, the Department is seeking to increase its reference levels and compensate for rising personnel costs funded by reducing capital. These adjustments could add almost $700 million to capital equipment funding over the next five years.

3.55 As part of its renewal efforts, the Department is adopting innovative business practices and identifying Alternative Service Delivery options that may result in significant savings. It is also targeting improvements in productivity to achieve savings in operations. For example, departmental officials told us they are considering reducing the frequency of personnel transfers; they estimate that this could save up to 50 percent of current moving costs, or about $100 million per year.

3.56 This increased funding for equipment could, at the end of five years, reduce the amount of deferred equipment spending to less than $4 billion. In addition, in the Department's opinion, current project cost estimates can and will be reduced, which could provide a less costly picture of deferred demand. However, as we note in the next section, some costs appear to be increasing.

Option 3: Long-term strategic rethinking of the Canadian Forces
3.57 Should funding prove inadequate to sustain the current force structure, re-examination would be required. The Department has already initiated a long-term examination of the Canadian Forces. Its plans include examining capabilities, future force size, force development priorities and new ways to support operations. The objective is to ensure that the Canadian Forces of the future can provide adequate defence capability.

3.58 This strategic rethinking of the military may require significant changes to the Canadian Forces in order to operate within funding limits. Department officials stated that it may be necessary to reduce the number of military and civilian personnel. Changes may be made to the force structure that would require less or different equipment than is currently needed. Readiness may be reduced to levels that would require longer notice than the current 90 days to be able to deploy, and might require a strategic warning period of several years. These options will be examined in context with the role the government expects the Canadian Forces to fulfil and the funding provided to maintain capabilities.

3.59 Overall, officials told us that the first option - maintaining the status quo - is the least likely to be selected.

Rising Costs of Operating Equipment Put Capital Funds at Risk

3.60 The decline in capital funding is partly due to growing pressure on the National Defence budget from the rising costs of operations and maintenance (O&M). As equipment ages, it reaches a point where labour and spares required for both upkeep and repairs make it increasingly expensive to maintain and it spends more time out of service. New, more technical equipment, while providing improved capability, can cost more than the old to operate and maintain. Keeping O&M costs within budget is an ongoing challenge. (see photograph)

3.61 In its 1996-97 Business Plan, the Department reported that it had introduced "changes to infrastructure, support concepts, operating tempo, equipment fleet mixes, as well as many re-engineering and information technology initiatives which will permit net operations and maintenance costs to be constrained to approximately 30 percent of available funding." Despite this effort, our analysis of expenditure plans shows that spending on O&M will exceed the 30 percent target by next year (1999-2000).

3.62 The Department has considered reducing operations as one way of containing O&M costs but has concluded that little or no savings would result. A recent study by the US Congressional Budget Office also found that there was only a limited relationship between trends in O&M spending and operating activity. Similarly, we agree that National Defence is unlikely to contain O&M costs by reducing its activity levels. We found that such a large portion of O&M expenditures are fixed costs that it would be difficult to create short-term savings. About 15 percent of total O&M costs vary with equipment usage and the remaining 85 percent are either fixed equipment costs or are not related to equipment (Exhibit 3.2) . Therefore, reducing equipment use would create only a small amount of savings in O&M overall. For example, we estimate that a 10 percent reduction in air force flying hours would reduce aircraft O&M costs by only 3 percent. A 10 percent reduction in navy time at sea would reduce ships O&M costs by only 2 percent. Finally, a 10 percent reduction in the use of army vehicles would reduce their O&M costs by only 4 percent.

3.63 The Department identified several other actions it has taken to contain O&M by reducing non-equipment O&M spending like infrastructure and dependency support. However, the expected savings have yet to be fully realized. For example, O&M funds for the maintenance of vacant infrastructure and for dependency support are still being spent at army bases closed during the Infrastructure Adjustment Program, and overall army infrastructure has increased. The army noted in its Report on the Fundamental Review of Operating Budgets, "Infrastructure increases [are] cause for serious concern over the long term as available O&M funds are spread ever more thinly and as rust-out starts to impose its inevitable grip."

3.64 In the past the Department has reduced O&M allocations across the board rather than targeting specific areas. There is a risk that such reductions will not actually be realized. The army has already experienced difficulty keeping expenditures within targets. It estimates that the gap between its O&M needs and budgeted funding will grow to almost $140 million by next year (1999-2000).

3.65 Other commands have also forecast shortages in O&M funding. The air force is at a critical point: current funding is barely adequate. In its planning documents it states, "Because force structure and cost analysis planning tools are still under development, it remains to be seen whether CC3 [the air force] will be able to effectively meet the tasks and commitments called for by the Defence Planning Guidance 97 with the operations and maintenance resources provided." The navy has stated in its 1997-98 plans that the operations it can perform within the O&M funding available represent a very lean program for the navy and, although the navy will meet its assigned missions, this will not be to the standard preferred.

3.66 O&M is managed within the budgeted funding, but estimated needs often exceed the funds available. The Materiel Group has estimated the gap between the Department's O&M needs and its budgeted funding. The gap is currently forecast at $240 million during the first year of the current five-year planning period (1998-99) and $334 million the following year. We estimate that if the identified gaps could be addressed, O&M would approach 35 percent of departmental expenditures.

Buying new equipment puts more pressure on the budget
3.67 In order to maintain O&M costs at current levels, the Department is calling for the O&M saved on equipment being replaced to fund the O&M costs of the new equipment. However, new equipment may be more costly to operate and maintain than the old.

3.68 Indeed, new equipment could cost the Canadian Forces two to three times more to operate and maintain than the equipment it is now using. For example, the army's new reconnaissance vehicle, the Coyote, is expected to cost $15.4 million per year to operate and maintain - 275 percent more than the vehicle being retired. Operating and maintaining the new Griffon helicopter may cost the air force 20 to 40 percent more than the three helicopter fleets it is replacing, based on the data available at this time.

3.69 As new equipment is purchased, or more sophisticated equipment acquired, O&M costs are likely to increase. And as O&M becomes a larger share of the defence budget, less funding is left for capital purchases needed to replace other aging equipment. An analysis conducted by Dr. John Treddenick at the Royal Military College found that under current plans, the Department will experience increasing O&M and personnel costs, which demand greater shares of its budget. His analysis warns that within the next 15 years, little funding may be left for capital acquisitions (Exhibit 3.3) . Under these circumstances, the Department is facing increasing rust-out as its ability to purchase new equipment declines.

Equipment Modernization Needs Better Guidance

3.70 Weapon systems have a very long service life - often 30 years if upgraded throughout their life cycle - and can cost billions of dollars. Decisions on how a force is to be equipped are therefore very important and need to be part of a long-range strategic plan. We examined the Department's plans to determine if policy and doctrine were specific enough to guide major acquisitions; if there were operational scenarios in place to describe what equipment was supposed to be able to do; if performance information was sufficient to alert officials to areas where capabilities were declining and required renewal; and if there were clear priorities to guide investment.

Performance information is not yet available
3.71 The Department of National Defence has had some success in developing its performance measurement framework but less success in producing targets and measuring outcomes. The 1997 Performance Report provided information on expenditures that was much like the Part III Estimates, rather than reporting on how well key results expectations were met.

3.72 The Department has not yet fully developed performance measures that would enable decision makers to judge how well the Canadian Forces are operating and where to focus efforts. As one command has reported, "The absence of a credible performance measurement system remains a major impediment to the capability planning process."

3.73 The new departmental fall Performance Report and the Spring Report on Plans and Priorities replace Part III of the Estimates and are intended to provide Parliament with improved performance information. However, the Department does not have a financial system that allows it to report on its business lines - Defence of Canada, Defence of North America and Contribution to International Security. Financial and performance information, providing measurable performance expectations with a focus on outcomes, will not be available for two more years. Distinct from what our audit found, the 1997 Performance Report has not reported to Parliament that "hard choices" may have to be made.

Priorities are not clear
3.74 In order to focus on their most pressing needs, the commands and the Department have stated their priorities for capital equipment acquisition. Each year the army, navy and air force plan how they will spend the resources allocated to them. However, as noted by one of the commands in its plans, "Without both a defence task priority model and activity based costing of all processes and sub-processes, we will continue to allocate departmental resources to capability components more on `gut feel' than `good management.'"

3.75 Annually, the Department issues its Defence Planning Guidance to all commands to provide strategic guidance. Using this guidance, the commands develop their business plans for the following year, and determine their equipment needs. In their plans they define their command equipment priorities.

3.76 Setting overall departmental priorities is the responsibility of the Defence Management Committee. We found no evidence to indicate what criteria the Department uses, other than statements in the White Paper that the Department is to emphasize equipment life extension and maintenance of "core capabilities". According to the Vice Chief of the Defence Staff, the process is adversarial and concludes with senior direction that balances requirements and affordability.

Scenarios to guide planners are not fully developed
3.77 In 1994 we commented that scenarios were necessary to describe the circumstances in which the Canadian Forces might be employed. These scenarios then would allow planners to select equipment. At that time the Department agreed with our assessment and, in 1996, stated that it was developing scenarios. Its Defence Planning Guidance 98 notes that while scenarios are still in the development stage, the Department remains committed to meeting the requirement and included the descriptions of 11 scenarios that are being more fully developed. The Department informed us that these scenarios are being used, in a limited way, to review force structure and capital equipment priorities. Nonetheless, capability assessments and decisions on equipment acquisition are currently being undertaken without benefit of fully developed and approved force planning scenarios to determine the needed levels of capability, readiness, sustainability and deployability.

A framework is needed to guide modernization
3.78 Defence policy defines national interests and objectives and states how defence capabilities contribute to them. The Special Joint Committee on Canada's Defence Policy stated, "It is the government's responsibility to balance Canada's security interests within a wider context of policy and national objectives." It went on to say, "Canada's military activities must be explained and justified as an essential instrument of government policy."

3.79 The White Paper calls for the Canadian Forces to be more than a constabulary force but does not clarify what this means. The government's intention is defined as being able to "fight alongside the best, against the best." According to departmental officials, the circumstances set out in the White Paper under which the Canadian Forces would be employed were determined by the capabilities that the Canadian Forces could provide.

3.80 In order to link policy expectations to defence capabilities, military forces develop doctrine that specifies the sort of operations they intend to conduct, how they will conduct them, and the kind of forces they will require. Using this doctrinal guidance, force planners identify the structure necessary to meet the commitments the government has outlined in its policy. This framework of policy/doctrine/force structure enables the military to plan strategically for personnel, equipment and readiness, and to determine whether deficiencies exist. In the Outlook on Force Development, on the Vice Chief of the Defence Staff Internet home page, officials state in a draft document that more work needs to be done to fully link policy with defence capabilities. It states, "Where the current system falls short is in the area of long-term development. The processes, systems and structures to ensure that the long-term development of the Canadian Forces as a whole is synchronized are not yet fully established."

3.81 In examining the Department's policy and planning framework, we expected to find clear statements of the military capabilities to be maintained, the force structure and posture to be adopted and the relative priorities placed on capabilities. To plan equipment requirements, the Department needs to be able to address fundamental questions about the nature of the capabilities that must be maintained, how much is enough, and the risks that the military will be called on to face. For example, should the Canadian Forces acquire equipment for mid-intensity operations or focus only on low-intensity operations? And if mid-intensity operations are to be conducted, how does the military intend to carry them out?

3.82 Guidance on the nature of missions and tasks is an important component of planning for the long term. As part of its Management Command and Control Re-engineering (MCCR) initiative, the Department developed an annual Defence Planning Guidance (DPG) document to serve as strategic-level guidance to commands. The DPG document allocates resources, states priorities and identifies the capabilities required by each command. However, it covers only a five-year planning time frame. It does not provide a long-term vision of how the military will operate. In its Outlook on Force Development, the Department notes that a drawback to using the DPG for strategic planning is that it is tied to a five-year budget cycle.

3.83 Strategic guidance is needed to govern the selection of priorities and to allocate resources accordingly. To review force planning effectively and link it with policy, the Department has found it necessary to examine its strategic-level doctrine. The army, navy and air force explained to us that they are reviewing or have recently reviewed their doctrines.

Some Countries Are Better Able to Match Defence Requirements to Resources

3.84 We examined the extent to which other countries could match defence resources to requirements. We reviewed the experiences of the United States, Australia, New Zealand and the United Kingdom.

Other countries are doing better
3.85 Like Canada, other countries have estimated that they need more funding than they have available for military equipment modernization. The United States Department of Defense estimates it needs about US$60 billion each year for modernization, but it spent only $45 billion in fiscal year 1997. New Zealand also determined that it could not adequately modernize its forces within its current budget; it received an increase for the next five years. Similarly, Australia and the UK are reviewing their capital spending and both have identified some gaps in capabilities. The Australian Defence Force intends to alleviate funding pressures in the short term by reducing overhead costs, but has identified significant funding deficiencies in the medium term that will require the Australian government to consider an increase in resource allocation. The UK defence policy is under review and resource levels are being assessed.

3.86 Australia, New Zealand and the United States have all completed major assessments of the adequacy of funding for their defence policies. Each country has completed its own defence review to find the right balance of resources and commitments. The US Department of Defense conducted its Quadrennial Defence Review to examine how resources and requirements are connected. This followed its Bottom Up Review to look at the objectives of U.S. defence policy and the resources needed to meet them.

3.87 Canada last reviewed defence objectives and budgets during the 1994 White Paper exercise. At that time, Parliament was involved extensively through its Special Joint Committee on Defence Policy. The Special Joint Committee recommended higher force levels and budgets than those to which the government eventually agreed. Defence planners told us they had preliminary knowledge of 1995 budget reductions when they drafted the 1994 White Paper.

3.88 New Zealand and the United States have an advantage that the Canadian defence management system cannot currently provide - the ability to match outputs and policy goals to resources and to provide performance information on how well goals are achieved. New Zealand has an extensive government-wide process for matching resource inputs to program outputs. Its Chief of the Defence Force and the Minister agree on the deliverables of the Defence Force in a purchase agreement that provides financial statements for each deliverable. Performance reporting informs the Minister and Parliament whether goals have been met. In Canada, department-level performance measurement is close to implementation but is not yet in effect.

3.89 The U.S. Quadrennial Defence Review has been successful in measuring the gap between requirements and resources and proposes a step-by-step action plan its drafters believe will address the gap. Performance information on the readiness of the U.S. military is reported to both the Secretary of Defense and to the President. The U.S. process includes a structured challenge review by an independent panel of experts. This panel has contested the viability of some aspects of the Department's resource plan.

3.90 Canada, Australia and the UK have resource management systems that are not as well developed as those in the U.S. and New Zealand. Australia intends to adopt program budgeting and accrual accounting to track the resources needed to meet the policy requirements. Canada and the UK both intend to adopt accrual accounting in the next few years.

3.91 One commonality evident in the countries we examined was the high level at which outputs and the resources needed to achieve them are reviewed. Annual top-level guidance from the President and the Chairman of the Joint Chiefs of Staff is fundamental to the U.S. process. Reported results of U.S. military performance are challenged by Congress and the General Accounting Office. Congress has a strong role in the annual budget process and is provided with the program information it needs for decision making.

3.92 The system in New Zealand requires the Minister and the Chief of the Defence Force to come to an agreement on what can be accomplished with the resources provided by government; they are bound by that agreement to deliver. Performance is also reviewed by the Treasury. The Defence Force can then discuss with the Treasury the resource gaps that exist. Reports on what has been delivered are audited by the Comptroller and Auditor General, who has confirmed the reasonableness of the reported activities. His Office has advised Parliament that the systems used to collate and report the activities are "sensible, feasible and measurable".

3.93 Canada has recently instituted a new Expenditure Management System to help the government make responsible spending decisions by delivering the programs and services Canadians need in a way that is affordable. Key features of the new system include multi-year funding targets for all departments and annual Performance Reports to Parliament. At the time of our audit, the Performance Report of National Defence was still evolving and contained little performance information that could be used to assess the overall success of the program. Officials estimate that two more years will be required to complete the system.

3.94 The UK House of Commons Defence Committee traditionally reviews the Defence estimates as part of its role to examine the expenditure, administration and policy of the Ministry of Defence. The Committee receives copies of the Government's Statements on the Defence Estimates, Departmental Spending Plans and Departmental Reports, all of which are publicly available, and takes oral evidence from ministers and officials before making a report to the House of Commons. On this basis, it can assess the adequacy of resources and it has raised some concerns.

3.95 In Australia, as in the UK, there are limits on the extent to which parliamentarians can assess spending plans. The Joint Standing Committee on Foreign Affairs, Defence and International Trade is soon to report on its inquiry into the level of funding required by the Australian Defence Force.

3.96 In Canada, the Standing Committee on National Defence and Veterans Affairs reviews the Defence Estimates each year. The new Expenditure Management System is intended to improve parliamentary participation, but better performance information is required.

3.97 Overall, the United States and New Zealand systems appear to do the best job of explicitly linking defence policy or outputs to resources. Australia, Canada and the UK are at about the same stage in improving their top-level resource management systems. All of them are working on implementing accrual accounting, and Canada and Australia are developing performance budgeting or reporting systems. In both Australia and the UK, Parliament has played a more active role in the oversight of defence spending than in Canada.

Conclusion and Recommendations

3.98 While progress has been made in several areas, some of the problems we reported in the past remained unresolved at the time of this audit. National Defence has equipment deficiencies and shortages that limit how well the Canadian Forces can respond to government objectives. Not all the equipment required by the Canadian Forces to correct these deficiencies and to modernize is affordable within the current budget allocations for capital equipment acquisitions. In order to provide the resources required for force modernization, the Department will need to make some difficult choices regarding funding allocations. As other countries have already done, Canada must also ensure that the resources made available for defence match the capabilities that the Canadian Forces are expected to provide.

3.99 The Department should complete its scenarios, force development framework and strategic assessments with a focus on future force development of the Canadian Forces and the resources it will need to do its job.

Department's response: This recommendation is being implemented. The Department is already using basic scenarios as a guide to planning, which will be expanded upon by the end of 1998. The Department has also developed a new Strategic Assessment document, which will be updated annually, to guide future defence planning and force development activities.

3.100 The Department should provide sufficient information on military capabilities, performance and resources to Parliament so that Parliament can better review the Department's Estimates. As in some other countries that are reviewing the performance of their defence forces, the Department should link its defence capabilities to the resources provided so that Parliament can examine whether National Defence's resources match Canada's defence objectives.

Department's response: The Department is implementing this recommendation. DND's Planning, Reporting and Accountability Structure (PRAS) has been submitted to Treasury Board. This framework clearly links defence activities and their associated resources to desired results.

Department's comment: While Canada requires modern, multi-purpose, combat-capable forces, government policy clearly requires the Department to be cost-effective. The responsible stewardship of Defence resources demands that the Department consider both quality and quantity for Canadian contributions to proposed military operations. The Department recognizes that the Canadian Forces do not always require the most sophisticated or the most modern equipment to fulfil the defence mandate and to provide a meaningful and effective response in support of Canada's defence requirements. The Department also recognizes that there are many program-related challenges surrounding efforts to develop and maintain a balanced Defence Services Program.

At paragraph 3.66, the Chapter indicates that a significant O&M funding gap exists and that addressing this gap could see some 35 percent of departmental expenditures dedicated to O&M. The Department has committed to living within the resources assigned by Parliament. One solution to the O&M challenge would be to allocate a greater percentage of the defence budget to this area. However, the Department has directed that all elements seek out and implement business efficiencies aimed at achieving more cost-effective use of available resources. In this regard, there has been considerable success and more is anticipated. Although more funds could be directed toward O&M, it is vitally important that balance be maintained in the program in order to satisfy other major cost-drivers such as capital expenditures and personnel.

Paragraphs 3.35 and 3.68 of the Chapter discuss the Griffon helicopter. The report states that the Griffon cannot provide helicopter-mounted direct fire support to ground forces and notes that there may be a significant increase in operating costs relative to the three helicopter fleets it replaced. Regarding helicopter-provided direct fire support, such support would be provided, if required, by other Canadian or Allied aircraft. The Griffon satisfies its intended role in Canada's defence strategy. With regard to costs, the data used by the Auditor General compare aircraft at the end of their useful service lives with a new platform. In view of this, the Department believes that this issue requires more study and an internal review has commenced.


About the Audit

Objectives

The overall objective of our audit was to determine whether the policy and management framework of the Department of National Defence provided long-term, strategic guidance for equipment planning. We specifically asked whether:

  • there is an effective framework through which government direction on commitments is translated into plans for equipment modernization for the next 15 years;
  • National Defence can achieve the level of equipment modernization necessary to allow the army, navy and air force to meet their policy commitments; and
  • the Department has been successful in addressing gaps between capabilities and commitments that have been of concern since the 1970s.
We also reviewed the experience of other countries to determine how well Canada's allies have coped with decreasing defence resources. We studied how the United States, Australia, New Zealand and the United Kingdom assess their defence policy commitments, modernize their armed forces and review performance.

Scope

Our audit focussed on National Defence plans to re-equip the Canadian Forces and ensure that the commitments called for in the 1994 Defence White Paper policy are met. We based our audit on the Department's own identification of equipment deficiencies and capability gaps.

We examined the Department's policy framework used to translate policy commitments into capital equipment plans. We reviewed the new management system employed to provide commands with planning guidance for the development of command-level business and long-term capital plans.

We also examined projects the Department has identified as needed to address capability deficiencies and gaps in meeting policy commitments. We reviewed the supporting documentation for approximately 80 major capital projects in which the army, navy and air force have reported limitations in the equipment they are using, shortages in equipment and risks they face if called upon to use the equipment in conflict situations. For our analysis, we reviewed authoritative departmental documents that had been approved by senior military officials.

Finally, we examined the funding for capital and the resources needed to meet policy commitments.

Criteria

We expected the following:

  • a framework in National Defence to link policy, doctrine and force structure to defence capabilities and to identify any capability deficiencies;
  • a long-term, strategic view of defence equipment requirements based on assessments of capability, readiness, sustainability and deployability;
  • performance assessments by the Department of its ability to meet its policy commitments, based on performance targets and key results expectations, and plans to resolve how targets and expectations will be met in weak areas; and
  • a visible priority-assessing and -setting system in place, based on missions and objectives, that allows senior management to choose, at the departmental level, between the competing priority needs of each command.

Audit Team

Assistant Auditor General: David Rattray
Principal: Peter Kasurak
Director: Wendy Loschiuk

Linda Anglin
Julie Erb
Pierre Hamel
Bill Johnson
Chantal Michaud
Haleem Mughal
Darlene Mulligan

For information, please contact Peter Kasurak.