Quarterly Financial Report (QFR) for the Quarter Ended December 31, 2020

2. Highlights of fiscal-quarter and fiscal-year-to-date results

This section provides financial highlights and explanations for differences between the fiscal-quarter and fiscal-year-to-date results for the quarter ended on December 31, 2020, and the results of the same period last year.

2.1 Statement of authorities

When compared to those of the same quarter of the previous year, the department's year-to-date budgetary authorities available for use have increased by $2,356.4 million. As reflected in Table 1: Statement of authorities, the total budgetary authorities increased from $22,824.2 million in 2019–20 to $25,180.6 million in 2020–21. Major reasons for the changes are outlined below.

Year-to-date variances in authorities available for use

(in millions of dollars)

Initiative Operating Capital Grants and contributions Payments in respect of the long-term disability and life insurance plan for members of the Canadian Forces Items voted in prior Estimates Budgetary statutory authorities Total variances*
Major capital equipment and infrastructure projects 244.5 1,259.0 n/a n/a n/a 4.5 1,508.0
Incremental funding for COVID-19 related activities 234.7 21.3 n/a n/a n/a 36.4 292.4
Operation and sustainment (fleet maintenance) of military capabilities and operating requirements 276.1 n/a n/a n/a n/a n/a 276.1
Miscellaneous departmental requirements (218.6) 439.0 19.2 n/a (4.8) 12.1 246.9
Implementation of SSE 92.7 78.5 7.7 n/a n/a 14.0 192.9
Inuvik Airport Runway Extension project n/a n/a 30.0 n/a n/a n/a 30.0
Service Income Security Insurance Plan (SISIP) n/a n/a n/a (12.1) n/a n/a (12.1)
Pay administration – Federal public servants and Canadian Armed Forces (18.0) n/a n/a n/a n/a (0.8) (18.8)
Federal Contaminated Sites Action Plan (FCSAP) (34.2) n/a n/a n/a n/a n/a (34.2)
Incremental funding for deployed operations 94.1 5.3 n/a n/a (233.5) 9.3 (124.8)
Cumulative variance in authorities available for use 671.3 1,803.1 56.9 (12.1) (238.3) 75.5 2,356.4

*A positive variance indicates an increase in authorities available for use in the third quarter (Q3) of 2020–21 compared to Q3 2019–20 and a negative variance indicates a decrease in authorities available for use in Q3 2020–21 compared to Q3 2019–20.

The year-to-date net increase in authorities of $2,356.4 million over the third quarter in 2019–20 can be explained by variances in funding for a number of initiatives.

  • Major capital equipment and infrastructure projects (increase of $1,508.0 million)

The net increase in funding is due to modifications to the multi-year spending profile of major capital equipment and infrastructure projects. These adjustments serve to align financial resources with project acquisition timelines. This increase in cash requirements is mainly due to funding to support the Joint Support Ship, Canadian Surface Combatant, Fixed-Wing Search and Rescue Aircraft Replacement, Light Armoured Vehicle Reconnaissance Surveillance System Upgrade and Point Defence Missile System Upgrade projects.

  • Incremental funding for COVID-19 related activities (increase of $292.4 million)

The net increase in funding is related to National Defence’s support to the Government of Canada’s emergency and safety responses to COVID-19. Beginning in winter 2020, National Defence and the Canadian Armed Forces have played a significant role in Canada’s large-scale response to COVID-19, including through Operation LASER.

  • Operation and sustainment (fleet maintenance) of military capabilities and operating requirements (increase of $276.1 million)

In order to provide ongoing support for operating and capital requirements, the department receives additional funding to offset sustainment growth and the inflationary impact on the defence budget.

  • Miscellaneous departmental requirements (increase of $246.9 million)

The net increase in funding for miscellaneous departmental requirements is mainly related to an increase in the operating budget carry forward from 2019–20 to 2020–21. Additionally, in 2020–21 the department requested a vote transfer from Operating to Capital in support of the implementation of a common definition of the Capital expenditures vote. The transfer resulted in a decrease in Operating funding and an increase in Capital funding in 2020–21 compared to 2019–20.

  • Implementation of SSE (increase of $192.9 million)

The net increase in funding represents incremental demands required to execute the overall SSE policy commitments including funding requirements for minor capital investments, the expansion of the Canadian Armed Forces and civilian support and the realignment of the primary Reserve Force remuneration and benefits with those of the Regular Force.

  • Inuvik Airport Runway Extension project (increase of $30.0 million)

The increase in contribution funding is to support the Inuvik Airport Runway Extension project that will extend and modernize the Inuvik Airport runway. The project will extend the existing runway by 3,000 feet in support of the Royal Canadian Air Force and NORAD operations.

  • Service Income Security Insurance Plan (SISIP) (decrease of $12.1 million)

The decrease is mainly due to receiving less funding for payments with respect to the long-term disability and life insurance plans for members of the Canadian Armed Forces as no contingency funding was requested in 2020–21.

  • Pay administration – Federal public servants and Canadian Armed Forces (decrease of $18.8 million)

The decrease is due to funding in 2020–21 that did not include the retroactive pay in comparison to funding received in 2019–20. In 2019–20, amendments were made to terms and conditions of service or employment of the federal public administration in various collective agreements and to the rates of pay and allowances as found in the Compensation and Benefits Instructions for the Canadian Armed Forces. During the last quarter of the fiscal year, additional funding will be sought for recently signed collective agreements.

  • Federal Contaminated Sites Action Plan (FCSAP) (decrease of $34.2 million)

The FCSAP program is a government-wide initiative to reduce environmental and human health risks from known federal contaminated sites and associated federal financial liabilities. The decrease in funding is a result of the reduction in the planned expenditures for remediation activities in 2020–21.

  • Incremental funding for deployed operations (decrease of $124.8 million)

The decrease is mainly due to the incremental funding for renewing Canada’s Middle East Strategy (Operation IMPACT) that will not be requested in 2020–21.

2.2 Departmental budgetary expenditures by standard object

When compared to those of the same quarter of the previous fiscal year, the department’s year-to-date total net budgetary expenditures have decreased by $449.6 million. As reflected in Table 2: Departmental budgetary expenditures by standard object, the expenditures decreased from $15,444.6 million in 2019–20 to $14,995.0 million in 2020–21.

Year-to-date variances in net budgetary expenditures (presented by standard object)

(in millions of dollars)

Standard object

2020–21

Year-to-date used at quarter-end

2019–20

Year-to-date used at quarter-end

Year-to-date variance
Personnel 7,676.2 7,604.0 72.2
Professional and special services 2,335.5 2,273.9 61.6
Acquisition of land, buildings and works 314.3 282.6 31.7
Transfer payments 123.9 94.4 29.5
Transportation and communications 313.2 555.0 (241.8)
Utilities, materials and supplies 559.0 729.8 (170.8)
Repair and maintenance 961.5 1,021.6 (60.1)
Acquisition of machinery and equipment 2,400.5 2,448.6 (48.1)
Rentals 322.1 356.6 (34.5)
Other subsidies and payments 200.5 234.0 (33.5)
Other expenditures 12.6 14.4 (1.8)
Revenues netted against expenditures (224.3) (170.3) (54.0)
Total net budgetary expenditures 14,995.0 15,444.6 (449.6)

The year-to-date net decrease in budgetary expenditures of $449.6 million can be mainly explained by the variances detailed below.

  • Personnel (increase of $72.2 million)

The increase in spending is primarily due to the number of reservists on full-time contracts to support Operation LASER in response to COVID-19.

  • Professional and special services (increase of $61.6 million)

The increase in spending is primarily due to an increase in engineering services contracts for the Canadian Surface Combatant, Joint Support Ship, and Point Defence Missile System Upgrade projects and architectural services for infrastructure projects in Canadian Forces Base (CFB) Gagetown and CFB Bagotville.

  • Acquisition of land, buildings and works (increase of $31.7 million)

The increase in spending is primarily due to the ramp up of existing projects to construct new operational training and vehicle facilities for the Royal Canadian Dragoons in CFB Petawawa, a new sports facility at Saint-Jean Garrison, and an upgrade of the roads and utilities at CFB Comox.

  • Transfer payments (increase of $29.5 million)

The increase in spending is primarily due to an increase in contributions and timing of payments to the North Atlantic Treaty Organization (NATO).

  • Transportation and communications (decrease of $241.8 million)

The decrease in expenditures is primarily due to a reduction in military members’ relocations and a decrease in travel due to restrictions imposed by the department in response to COVID-19.

  • Utilities, materials and supplies (decrease of $170.8 million)

The decrease in spending is primarily due to the department activating its business continuity plan in response to COVID-19 which imposed travel restrictions and sent all non-critical employees to work remotely from home. This resulted in decreases in: fuel requirements, as operations were suspended; food and supply purchases, as military operations and training were reduced; and utility costs, as many buildings had reduced occupancy.

  • Repair and maintenance (decrease of $60.1 million)

The decrease in expenditures is due to the work cycle timing difference for repairs and maintenance to Her Majesty’s Canadian Ships, the purchases timing difference of military equipment and repairs, reduced funding for aerospace equipment maintenance and slowdowns of various infrastructure-related repairs and maintenance activities due to COVID-19.

  • Acquisition of machinery and equipment (decrease of $48.1 million)

The decrease in spending is primarily due to a decrease in vehicles delivered from the Medium Support Vehicle System project, the completion of an aircraft lease for NATO Flying Training in Canada and a decrease in procurement for capital equipment projects. The decreases are partially offset by an increase in expenditures for the Challenger Aircraft, Fixed-Wing Search and Rescue Aircraft Replacement, Maritime Helicopter, Joint Support Ship and Manned Airborne Intelligence Surveillance and Reconnaissance projects.

  • Rentals (decrease of $34.5 million)

The decrease in expenditures is due to reduced requirements for rentals of passenger carrying vehicles, aircrafts and accommodations due to the restrictions on travel and training exercises imposed in response to COVID-19.

  • Other subsidies and payments (decrease of $33.5 million)

The decrease in expenditures is due to the conclusion of the LGBT Purge class action settlement payments.

  • Revenues netted against expenditures (increase of $54.0 million)

The increase in revenues netted against expenditures is mainly due to the timing of payments received from foreign countries.

3. Risks and uncertainties

As business resumes, and the department adapts to the continued resurgence of COVID-19, specific measures and protocols have been put in place to mitigate ongoing risks. These measures have been implemented to protect employees and their ability to conduct operations, including support to the whole-of-government response to the COVID-19 pandemic. This holistic approach to protect the Defence Team is being employed to help preserve capabilities and operations by implementing the Layered Risk Mitigation Strategy (LRMS). The LRMS outlines clear direction on how to apply a number of pandemic risk reduction tools and is aimed at limiting the transmission of COVID-19. The strategy employed is determined by a conditions-based and locally-informed approach as long as Defence Team health is never compromised. Also, as a result of COVID-19 and the move to working from home, there have been modifications to certain controls, such as the increased use of electronic signatures for approvals, the impact of which the department continues to evaluate. Additionally, the department is prepared to reactivate business continuity plans should leaders determine that non-essential activities cannot be conducted without risking the defence community. In addition to the risks associated with COVID-19, the other risks discussed below are still relevant.

To fulfill its mission, the department purchases the goods and services necessary to train military forces, conduct operations at the request of the Government of Canada and acquire related infrastructure and equipment both domestically and internationally.

The department’s financial transactions are exposed to a broad range of external financial and economic risks such as inflation, foreign exchange and commodity price fluctuations. Depending on how these risks unfold, they could lead to higher- or lower-than-anticipated spending. For example, an appreciation of the Canadian dollar or a deterioration of commodity prices (oil in particular) could result in lower spending. Conversely, a depreciation of the Canadian dollar or an increase in commodity prices could result in increased spending.

The department continues to address the financial risks associated with the Phoenix pay issues through the implementation of new controls and the strengthening of existing ones. As part of the department’s Phoenix risk mitigation efforts, several initiatives have been implemented such as the establishment of a centralized data entry capability, the creation of data integrity, and training working groups to improve payment accuracy and to identify training needs across the department.

While the department considers key economic and financial risk factors (including defence-specific inflation and foreign exchange) in developing expenditure strategies, these risks are outside of the control of the department.

The department’s capital acquisition program includes a number of large multi-year acquisition projects. Delays in contracting and procurement activities or delays in deliveries by suppliers for individual projects can lead to reduced expenditures or budgetary surpluses.

Risks also flow from claims and litigations involving the department’s normal operations. When the department receives a claim or litigation alleging liability in tort or extra contractual responsibility to cover losses, expenditures or damages, it is analyzed and an appropriate position is developed, based on legal advice. Litigation or settlement may be pursued and they are tracked through the department’s reporting.

Additionally, significant unforecasted operational demands can occur at any time, requiring the department to respond anywhere on the globe. Depending on the extent of the operational demand, the cost of unforecasted operations would be mitigated either through internal reallocations or by requesting incremental funding from the government.

4. Significant changes in relation to programs, operations and personnel

The worldwide spread of COVID-19 has impacted Canadian Armed Forces operations across all regions, personnel and programs. Certain measures were also imposed on personnel to reduce the impacts of the pandemic situation and maintain operational capability and readiness to support Government of Canada objectives and programs. For example, the department incurred unplanned expenditures for Operation GLOBE to repatriate Canadians across the world and for Operation LASER to support federal and provincial agencies’ efforts. Operation VECTOR was launched in December 2020 to facilitate the Canadian Armed Forces’ support to the federal, provincial, and territorial governments for the distribution of COVID-19 vaccines. The Canadian Armed Forces have the unique ability to rapidly deploy anywhere in Canada to offer assistance to communities in need. This assistance complements and enhances federal, provincial and local resources with well-trained military personnel and specialized equipment. 

In an environment impacted by a global pandemic, the department continues to implement its various SSE initiatives such as the renewal of its major equipment fleets including fighter aircraft and maritime warships.

On December 23, 2020, Prime Minister Justin Trudeau appointed Admiral Art McDonald as the new Chief of the Defence Staff (CDS) replacing General Jonathan H. Vance, who announced his retirement in July 2020. Admiral Art McDonald had been the Commander of the Royal Canadian Navy since June 2019 as vice-admiral. He was promoted to the rank of admiral and a virtual change of command ceremony took place on January 14, 2021.

 

 

Approved by:

 

// Original signed by //

Jody Thomas

Deputy Minister

 

// Original signed by //

Cheri Crosby, CPA, CMA

Chief Financial Officer

 

Dated: February 24, 2021

Ottawa, Canada

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