CFDS Cracks Appearing?
BLAIR WATSON
© 2011 FrontLine Defence (Vol 8, No 1)

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In 2008, the federal government produced the 20-year Canada First Defence Strategy (CFDS). Prime Minister Stephen Harper called it “a comprehensive, long-term plan that will provide the Canadian Forces with the people, equipment and support they need to carry out their core missions in Canada, in North America and abroad.” However, despite the government’s effort to formulate and implement the CFDS, it is not feasible in its ­current form due to insufficient and inappropriately allocated financial resources. A major rework is required.

New Major Fleet Replacements
The CFDS indicates that $20 billion will be spent on “New Major Fleet Replacements” (NMFR) between Fiscal Year 2008/9 and FY2027/28.

Destroyers and Frigates: DefenseNews reported (Feb. 1/11) that “Britain is in talks with Canada about a possible joint program to develop a frigate for their respective navies.” Reported cost is $400-$800M.

In his paper Naval Gazing: The Canadian Navy Contemplates its Future, Commodore (ret) Eric Lerhe of the Centre for Foreign Policy Studies at Dalhousie University states: “$15 billion is the amount rumoured for 15 destroyers and frigates. Yet the 12 most recent of these 15 vessels each cost $1 billion to build 20 years ago. Defence inflation has likely made the direct replacement cost closer to $1.7 billion each.” (Note: the bill for each new Royal Navy Type 45 destroyer has been GBP$1B/CAD$1.6B).

Because of new technologies, increased construction material and labour costs, and other factors, weapons systems cost more – considerably more, usually – as the years pass. Canada’s three destroyers entered service in 1972-1973 and the 12 frigates in 1992-1996. It is not unreasonable to think that replacing the ships during the next 17 years would cost in excess of $10 billion.

Navy Supply Ships: Not mentioned in the CFDS, either as an NMFR item or “Previously announced equipment purchases,” but worthy of mention here, are new Navy supply ships (the current Protecteur-class supply and oiler ships are more than four decades old). Reportedly, a signed contract for the Joint Support Ship Project is two years overdue and the estimated cost, as of July 2010, was $2.9 billion.

Maritime Patrol Aircraft (MPA): To replace the Aurora fleet, the CFDS calls for 10-12 new MPA beginning in 2020 as part of a surveillance system involving crewed MPA, unmanned vehicles and satellites to “keep Canada’s maritime approaches safe and secure, including in the Arctic.” There is no mention of armaments which is usually the differentiator between surveillance (unarmed) and patrol (armed). If the replacement is a mere surveillance aircraft, a much cheaper solution could be chosen, however, if it is supposed to patrol, it must be armed and that’s where additional cost comes in. MPA variants range from fuel-efficient turboprop surveillance aircraft to multi-engine, armed patrol jet airplanes. The Indian government committed to buy eight jet-powered Boeing P-8A Poseidon MPA for US$2.13 billion in 2009. The U.S. Coast Guard received the medium-range EADS/CASA CN-235 twin-engined Ocean Sentry surveillance turboprop at approximately $40M in 2008, not including spare parts, training and other forms of support. The USCG also operates long-range C-130 Hercules Multi-Mission Aircraft that fly up to 21 hours (cost: US$87M each, including radar, surveillance and communications systems). Realistically, the bill to replace the Aurora fleet would be least $600 million.

Fixed-wing Search and Rescue Aircraft (FWSAR): “17 fixed-wing search and rescue aircraft to replace the current ageing fleet of Buffalo and Hercules aircraft,” are called for in the CFDS. The program, fast-tracked in 2004, has been a source of political embarrassment due to inaction. Intent on determining where the stumbling blocks lay, Defence Minister Peter MacKay sent the Statement of Requirements for an independent review by the National Research Council, which has recently been released. With these recommendations, the SAR community is optimistic that the program will finally get back on track. Since 2008, reports have estimated the cost of the FWSAR program to be as high as $3 billion.

Fighter Aircraft: The federal government announced in July that it would sole-source a fleet of 65 F-35 Lightning II Joint Strike Fighters (JSF). The latest information indicates, as David Pugliese reported in The Ottawa Citizen, that the CF “does not have the ability to conduct aerial refuelling of the F-35 fighter jet.” He noted that options being examined by DND include modifying the stealth jets or “purchasing a new fleet of tanker aircraft that can gas up the high-tech fighters in mid-air.” At a minimum, an F-35 fleet for Canada that can be refuelled midair would cost $9 billion, the government’s acquisition figure.

Tanker Aircraft: The CF’s two CC-150 Polaris refueling tankers may need to be replaced by 2020 due to age (they are not listed in the CFDS). Using the U.S. Air Force’s numbers for the KC-X aerial tanker program, two similar aircraft could cost $400 million.

Land Combat Vehicles (LCV) & Systems: Minister MacKay announced a $5.2 billion investment to upgrade the current LAV III and acquire three new fleets of LCVs.

CFDS Numbers: Depending on the fleets bought, the NMFR bill is $8-11B more than the $20B allocated in the CFDS. The new supply ships, unmanned surveillance aircraft (as per the MPA section), and aerial tankers would cost an additional $3.1B (min.). Perhaps more telling is a Globe and Mail report in October 2010, “Tough choices for defence spending,” which said: “Under current projections, there will be $44 billion less than under the 2008 defence strategy – a shortfall greater than the entire sum of $35 billion the government set aside to replace and upgrade the major fleets of ships, planes and vehicles.” (Note: $35B is the sum of $15B for CFDS “Previous Announcements” – C-17 and C-130J transport airplanes, Arctic/offshore patrol ships, Chinook helicopters and trucks – plus the $20B for NMFR.)

DND/CF personnel cutbacks
Just before the new year, the Globe and Mail reported it had obtained DND memos that indicated the organization’s civilian workforce was too large by 3,500 employees. The same report quoted an October memo from the Vice Chief of the Defence Staff, Vice-Admiral Bruce Donaldson, which said: “The current civilian FTE [full-time-equivalent] count and level of Reserve full-time service is unsustainable over the long term and so needs to be rationalized.”

A CFDS chart shows that 51% of the DND budget is spent on personnel, Reducing the DND’s civilian workforce by 3,500 people would result in annual savings of at least $200 million, based on Treasury Board data. Details on personnel changes have not been announced.

International Assistance
The CFDS was crafted several months before the Harper government committed the CF to provide three years of training to Afghan security forces after the combat mission ends in July. And the cost? In an e-mailed response to a request for information, a DND spokesperson wrote: “It is expected that the military portion of our training mission will cost $500M/year. Financial details for that mission are in development and refined estimates will be presented early in 2011.”

Cdre (ret) Lerhe believes that with DND’s ­history of under-reporting deployment, costs and an annual amount approaching $900 million is more likely. At a minimum, “$500M/year” multiplied by three years equals $1.5 billion.

How will that expense be covered when the military’s budget is already stretched? Will CF training and operations in Canada be reduced further? Will the federal debt be increased even more?

Allies Reduce Infrastructure
The CFDS document shows that over the 20-year-period, 8% of DND’s budget is to be spent on infrastructure, and 12% for equipment. Lerhe comments that “from 1970 to 1998 the funds assigned [by DND] to infrastructure averaged only 2.5% of the defence budget and for one 10-year period (1980-1989) they averaged only 1.65%.” He suggests a 1.5 to 2.5% infrastructure allotment is closer to what Canada’s allies spend on real estate. The U.S. military, with bases throughout the world, “keeps infrastructure (less living quarters) to 1.8% of the budget. The British Ministry of Defence also has expenses in this range,” but more recently has sold off excess infrastructure, such as the Chelsea barracks in central London, which sold for £959M (CAD$1.92B) in 2008 (more than three times the estimated value). Surpluses can be diverted to other military priorities. Lerhe notes that France is attempting to follow this procedure by selling excess defence infrastructure in Paris to purchase new equipment. Thus “France and the UK [are] shedding and selling infrastructure when they already spend an acceptable 22-25% of their defence budget on new equipment.”

Lerhe also wrote that spending 8% of the defence budget on infrastructure over the CFDS period is “nothing less than bizarre.” He explained that “it is at least three times the rate we have spent in this area over the last 30 years and three times what Canada’s allies spend. I find it especially bizarre in light of the already dangerously low level it has assigned to equipment recapitalization. Thus, there is every possible reason to re-allocate some 6% of the 8% promised for infrastructure to equipment capital. The CFDS insists that the advancing age of DND’s 21,000 buildings requires an immediate increase in related spending without ever questioning why an armed force of some 65,000 persons [Regular Forces] requires this many buildings.” In an interview for this article, Lerhe wondered why DND maintains bases that do not house operational units.

Have other defence departments, with similar budgets as Canada, managed to get more ‘bang for the buck’? Possibly. Lerhe mentions a 2002 study by CF Colonel J.C. Collin that looked at how the Netherlands and Australia were able to field advanced military capabilities with lower defence budgets. Collin blamed excess infrastructure as part of Canada’s problem.

Tapping into Civilian Training Options
Lerhe points out that some CF positions involve training that could be accomplished partly or wholly outside of the CF, such as chaplains and cooks. Does it help the bottom line? Apparently so; the CF currently takes advantage of technician training ­provided at civilian schools for work on ­aircraft, ships and land vehicles. Prior to joining the Forces, applicants complete technical institute programs in aircraft maintenance, marine systems engineering or heavy-duty mechanics and later receive training specific to military equipment.

Time for “Transformation”
Lieutenant-General Andrew Leslie was appointed as the Chief of Transformation in April 2010 and assumed duties in June. In his new role, he is now responsible for increasing organizational efficiency and effectiveness of the CF. In order to save money, he can recommend adjustments in the four CFDS “pillars”: personnel, equipment, infrastructure and readiness. This is a monumental task, as cutbacks in some areas will affect the CF’s ability to perform its six core missions more than others. Achieving the right mix is crucial.

U.S. economy and the CFDS connection
With 70% of Canadian exports going to the United States, the performance of the American economy significantly affects Canada which in turn impacts the tax base, and thus, funding available for defence. How well or poorly can the U.S. economy realistically be expected to perform over the remainder of the CFDS? The following information provides clues.

In December 2009, analysts predicted the U.S. economy would grow in 2010 by 3 to 3.5%. Actual growth was considerably lower at 2.6% – not enough to create sufficient jobs for the U.S. market. In late 2009, U.S. unemployment dropped to 9% by ­January 2011, the lowest level in almost two years. While economists predicted that 160,000 jobs would be added to the U.S. economy in January, media reports say that only 36,000 new jobs were created.

Since the late 1940s, the U.S. economy has never recovered from a recession without a housing market recovery. How is that market faring? Real estate reports show that two million properties in mortgage default; the ‘shadow’ housing inventory consists of seven million “distressed” residential properties; and 19 million homes were vacant as of April 2010. “Housing recovery may take five years-plus” was the headline of a CNBC report earlier this year.

In February 2011, FOX News reported that “Rising prices for food and fuel helped drive the uprisings racking the Middle East, now those uprisings are pushing prices higher still and threatening America’s economic recovery.” According to the United Nations, global food costs jumped 25% last year to an all-time high in December 2010.

During the past two years, the price of oil has increased two-and-a-half times to US$93 per barrel. The Organization of the Petroleum Exporting Countries recently increased its 2011 oil demand forecast by 190,000 barrels per day to 1.3 million. In January, the International Energy Agency warned in its monthly report that “recent price levels [US$70-$77] already pose a real economic risk […] of deep concern to producers and consumers alike.” Every 10-cent increase in gasoline prices in the U.S. takes $14 billion from Americans’ pockets.

Unprecedented debt
Even before the recent recession, Washington obtained loans of nearly $9.5 billion per week between mid-2001 and mid-2007. The U.S. sub-prime credit catastrophe (astute economists and financial experts issued warnings from 2004 to 2007) has ­catapulted Washington’s borrowing to its current rate of US$4.05 billion per day.

On 31 December 2010, the U.S. federal debt exceeded $14T (trillion). In the next five weeks, it increased by $75.2B, the equivalent of 3.5 years of DND/CF spending. The USA is technically bankrupt, a harsh reality that Republican Congress­man Ron Paul has been telling his fellow Americans for several months. President Obama has just acknowledged that the U.S. federal debt is expected to increase by $12T through the next decade. Between this year and 2020, the lowest amount of “red ink” over 12 months, a deficit of US$706B, will occur in FY2014, with deficits rising to US$1.003T in FY2020. Currently, 40 cents of every dollar spent by Washington comes from loans. Since August 2010, the projected U.S. federal deficit for this year has increased US$414 billion to US$1.48 trillion, the largest ever.

A Forbes.com article (December 2009), “Trillions of Troubles Ahead,” calculated the debt at all levels of government in the USA as exceeding $20 trillion. American corporate and household debt was an additional $60 trillion, and the unfunded portion of U.S. federal entitlement program spending – Social Security, Medicare and Medicaid, principally – put total U.S. indebtedness at $120 trillion, nearly twice the value of all economic activity worldwide. “A crushing burden of debt threatens to sap America’s growth for years to come” was the Forbes summary. Federal entitlement program spending is growing exponentially (up 25% in just four years) due to the greying demographic bulge of 76 million Baby Boomers.

In addition to federal fiscal woes, several U.S. states are close to bankruptcy. In ­January, the New York Times reported that “Policymakers are working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers.”

It is likely that the current tepid U.S. economic recovery will cool. Even Washington cannot continue to borrow US$46,930 per second indefinitely. International buyers of U.S. Treasury debt securities will not tolerate America’s lack of serious belt-tightening ad infinitum as the nation greys and stratospheric indebtedness goes even higher.

Is this affecting Canada? Parliamentary Budget Officer Kevin Page revealed at a press conference in November 2010 that the Harper government is adding more than $210 billion to Canada’s debt ($468 billion) and projected an 85% chance that deficit spending will last beyond 2015. A few weeks after Page’s report, Finance Minister Jim Flaherty said the government was “flexible” about balancing its books. His department’s data shows a significant rise in annual federal debt servicing costs – to $40.6 billion in FY2014/15.

Looking ahead
An ­historic ‘sea change’ has significantly affected Canada in less than a decade. The United States – Canada’s neighbour, NATO ally and NORAD partner – has become a debt-plagued superpower. Canada is linked to the USA more than to any other country and will continue to experience the consequences of that relationship economically and in other ways.

As was the case four years ago, when the U.S. sub-prime credit disaster began, Ottawa has not put on “body armour” in terms of protecting its revenues from the impact of inescapable fiscal and economic fundamentals south of the border. Without prudent risk management at a level higher than DND, it is probable that the CFDS will, in its current form, fall short. Cracks have already appeared, as noted. Transformative thinking and action is needed now more than ever.
 
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Blair Watson is a Contributing Editor at FrontLine Defence magazine.
© Frontline Defence 2011

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