Unspent Funds...Again
Jan 15, 2012

A familiar problem continues to plague the Department of National Defence – its inability to spend its budget in any given fiscal year due to contract complications and mismanagement, delivery delays or, most disturbingly, the government policy which complicates or eliminates options for carrying forward unspent funds.

This fact was acknowledged by Defence Minister Peter MacKay when he, together with Julian Fantino, Associate Minister (Procurement), and other senior DND officials appeared before the House of Commons Standing Committee on National Defence in early December to talk about supplementary spending estimates.

“The defence team remains acutely aware of the global economic realities faced by the government […] and our partners and our allies,” MacKay said. In that ­context, he suggested the supplementary estimates for the current fiscal year were “quite modest relative to the overall size of our mandate.”

Many large capital programs are problematic, such as the Maritime Helicopter Project. DND had “profiled roughly $250 million” for MHP aircraft. Without naming Sikorsky, MacKay would say only that since “a private company did not meet […] contractual agreements,” government policy prevented the department from carrying the funds forward to when they would be needed.

Minister MacKay answers questions from reporters at the 2011 Halifax International ­Security Forum.

Minister Fantino subsequently pointed out that when Sikorsky does begin delivery of the CH-148 Cyclones, DND would take “a double hit” – having lost the $250 million for this year, it would have to make room for it in a future budget. “That is an issue that compounds itself time and time again,” he said. “If those funds are not fenced in, and we become subject to the inability of suppliers to deliver the products on time and so forth, it becomes a huge issue for us to then be able to finance those same assets.”

Meanwhile, more than nine months after Sikorsky Aircraft Corporation delivered a Cyclone to Canadian Forces Base Shearwater in Nova Scotia for evaluation, the Royal Canadian Air Force has continued to decline formal acceptance of what DND is calling an “interim” maritime helicopter that can only be used for ground-based training.

Because Sikorsky has, according to a DND e-mail, “not yet met all of the delivery requirements,” that funding has again been sent back to pay down the national debt.

Factors such as this result in a significant funding dilemma that repeats itself each and every year. Is it really the fault of industry not being able to fulfill contract requirements? Sure, those happen, but they are few and far between. The real reason, say insiders, is (a) poor financial forecasting; and (b) an inability to manage contracts.

Recognizing this situation, and in an attempt to compensate, DND overprograms by 30% on each year’s budget – to account for contract slippage and other problems that inevitably occur. And yet, it also has a track record of underspending, as has been noted by the Office of the Auditor General. In one report to Parliament, the OAG’s team pointed out that DND had received nearly $19 billion in the 2007-08 fiscal year. “We found that the department spent within its funding authority for this year,” they said, adding: “We also observed that the year-end surplus of $500 million in 2007-08 was significantly larger than in most years.” Some $200 million was ­carried forward to 2008-09, however, DND subsequently lost $300 million by not spending it.

So, not only does DND regularly overprogram by 30%, it still ends up 10% short on expenditures – a patently unacceptable 40% forecasting difference.

“Good financial management is especially important given that the Department is allowed to carry forward surplus funds currently equivalent to only 1% of its funding, compared with the 5% allowed most other departments,” the auditors said. “Although its budget and carry-forward is large in real terms, DND must manage financially within tighter parameters.”

A review of Public Accounts files over the past decade highlights the challenge. While the proportion of unspent or “lapsed” funding has been as low as 0.2% of the department’s available budget (in 2005-06), and the percentage has been up and down over the decade, it reached 5.6% in 2009-10 before jumping to nearly 10.8% in 2010-11.

The government approves this funding after immense amounts of time, effort and taxpayer expense and announcements are made to great fanfare (in the high profile programs). But little more than 60% actually gets spent on defence needs, the rest gets dumped back to Treasury Board.

If a private sector company was repeatedly that far off on its annual forecast, its CEO almost certainly would be booted to the curb, with no remorse.

Industry representatives say the current cyclical review repeatedly advises DND managers to slow down their spends in the summer (fearing they may hit the max), only to ramp up again by fall because it looks like they will fall short (again), and then a frantic “spend out” alert regularly follows in the early winter months when it becomes obvious (as it does every year) that the annual spend is falling far short.

So what is the answer? Ministers MacKay and Fantino must stop listening to excuses from within. A few high profile contracts gone bad does not result in $300+ million in “lost” defence revenue year, after year, after year... even if there are provisions for carrying a small portion of the funding forward to subsequent years.

Standards for contract management need to be tightened; personnel must have a clear understanding of program requirements. And they must be able to forecast, with some degree of realism, their funding requirements.

Allowing DND an equivalent 5% carry-forward, as other departments have, would seem a fair policy change.

A quarterly review that flags programs in need of immediate attention and reports directly to the Minister would also be a useful step forward in resolving issues before funding is lost.

That being said, just how did the MHP get so far off the rails? By forcing a square helicopter to fit inside a round contract. Does anyone need to be reminded that the program called for a “proven” platform? Yet the “winning” helicopter was still developmental and had never flown! Additionally, standards for contract management need to be tightened; personnel must have a robust understanding of the requirements of the contract they are managing; and they must be able to forecast, with some degree of realism, their funding requirements. Without these capabilities, we are doomed to repeat the scenario again and again.

Ken Pole is FrontLine’s Contributing Editor
© FrontLine Defence 2012