Senate Standing Committee on National Finance
feat. David Perry
April 9, 2019
Mr. Chair, Senators,
Thank you for the invitation to appear today.
In March, you heard from some of Canada’s shipbuilders about the consequences of boom and bust cycles in the shipbuilding industry. A comparable cycle of boom and bust periods has played out over the last thirty years with Canadian defence procurement writ large regarding the availability of funding and capacity to spend it. And we are witnessing the results of those booms and busts today. While these major shifts in the availability of funding do not explain all of the particularities of individual projects, they do help frame some of the difficulties Canada has had with defence procurement overall in the last couple of decades. As such, I thought discussing these booms and bust might be a helpful way to link this study with the committee’s overall mandate.
A stable supply of procurement funding is a critically important foundation of a well functioning procurement system. This is the case because even relatively fast procurement processes are slow, stretching more than a decade, and it takes years to ramp up procurement spending in a way that balances Canada’s objectives of maximizing capability and timeliness of delivery, creating domestic economic benefits and achieving procedural fairness. Canada has been moving since 2008 towards an increasingly stable funding base for defence procurement, but we are still dealing with the consequences of a major fluctuation in funding which created a prolonged bust, and two boom cycles in the last three decades.
From roughly 1989 until the mid 2000s the supply of procurement funding dried up and few major projects were approved. As a result, the volume of activity dropped and the workforce atrophied. During this period, much of Canada’s military equipment and infrastructure needed to be replaced, but wasn’t, and therefore still needs to be replaced today.
In the mid 2000s both the Martin and Harper governments made major reinvestments in defence, funding a significant program of recapitalization, creating the first procurement ‘boom’ since the 1970s and ’80s. Within three years of the Martin government announcing this recapitalization, annual procurement spending had increased by 40% in real dollars. This occurred without a major influx of human resources and with lower levers of procurement experience than had existed historically, in part because this coincided with Canada’s Afghan operations. Much of the procurement was war-related and most was helped by multiple governments support for the military during the war.
At the same time, some of the non-war related procurement, much of which sought to replace equipment that should have been replaced in the 15 previous years, was problematic. Project costing, requirement setting, economic benefits and adherence to process all came under scrutiny. In response, in 2014 the defence procurement strategy was launched, with the objective of delivering better domestic economic benefits and preventing catastrophic problems from arising. The result of this change was to increase the level of rigour in these aspects of procurement and shift significant work earlier in the procurement cycle. The Independent Review Panel for Defence Acquisitions, some of whose members you spoke to a few weeks ago, was one of the results of this effort.
These changes were made on the assumption that they would help projects complete all the required work faster, an assumption that may prove true, but has yet to be validated. A side effect of these changes, however, was to add more work to the earlier phases of a project’s life. This means that it takes comparatively longer today to complete the early phase of a defence project than in did five years ago.
With the publication of Strong, Secure, Engaged, Canada is currently entering into a second, and much larger, defence procurement ‘boom.’ In my analysis, DND is pursuing the most ambitious slate of recapitalization since the Korean War and the first peacetime procurement boom since the late 1970s.
So far, capital procurement spending has increased for two consecutive years in inflation adjusted dollars. This is the first time that has happened in almost a decade, and we have not spent this much on procurement since the war in Afghanistan.
However, DND is struggling to meet the extremely high expectations established with Strong, Secure, Engaged as it is only spending 2/3 as much on equipment and infrastructure as it indicated it would.
The shortfall between the policy and reality is attributable to the policy having outlined an overly ambitious pace of procurement spending increase. Whereas under the Martin/Harper ‘boom’ it took three years for spending to increase by 40%, under Strong, Secure, Engaged spending was supposed to double in the first year alone. While Strong, Secure, Engaged is meant to cover a twenty year spending plan, most of the procurement activity was supposed to occur within four years of the policy’s release, and virtually all of it within the first 10. This is, I think, driven by DND’s desire to make up for that decade and half long period of procurement ‘bust’ and replace rapidly ageing equipment and infrastructure as fast as possible.
However, most of the roughly 50 new projects approved by the policy had multiple years of work to complete following its publication before they would start spending procurement funds. Until these newly approved projects complete all of the required work in the early phases of the procurement system, spending won’t catch up with the defence policy. And while Canada’s procurement workforce has gained experience in recent years, its size has not been substantially increased. That workforce has to do more, and more detailed work, earlier than previously required in a project’s life to get the money flowing and it is trying to move more projects all at once than it has before.
In sum, the last thirty years of Canadian defence procurement has illustrated the crucial importance of stability in both financial and human resources, and the negative impacts of boom and bust cycles. When funding is scarce, human capacity erodes and a backlog of needed replacements begins to build, compounding demand over time. When funding is made available again, the system is left with a reduced capacity to move significantly more demand than it can, and it takes years to get new funding out the door.
With the recent changes made to DND’s funding structure to create the Capital Investment Fund, which I know defence officials spoke to you about a few weeks ago, the funding mechanism exists to smooth out the boom and bust cycle. Unfortunately, it will take several years to work through the backlog of procurement demand before the benefits of the Capital Investment Fund can be realized, and DND can hopefully adopt a more continuous pace of procurement with fewer big fluctuations. In the meantime, although real progress has already been demonstrated, it will take some additional time for Canada’s procurement system to ramp up to the very high demand established with the publication of Strong, Secure, Engaged.
Under the practices DND has adopted in recent years to better manage its procurement funds, potential projects have been precluded from moving into the Options Analysis stage unless they had an identified source of funds, or were identified as a key project in the event that more funding became available.
DND’s internal planning guidance tells procurement staff to allot two years of work to both the Options Analysis and Definition phase of a procurement, both of which must be completed before projects start spending dedicated procurement funds. In reality, projects historically take longer than that combined four years before they reach the Implementation phase and start spending money.
Options analysis on all but 7 projects was supposed to be completed by 2021.
All but 12 projects are supposed to enter Definition after 2022. Only 4 projects are supposed to enter implementation after 20207.
When the policy was published, 135 capital projects covered by the policy still needed to enter the Implementation phase of their procurement cycle; 80 of those were supposed to enter that phase as early as 2021, and only four were slated to do so after 2027.