Quarterly Financial Report (QFR) for the Quarter Ended September 30, 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 September 30, 2020, and the results of the same period last year.

2.1 Statement of authorities

When referring to the Table 1: Statement of authorities for 2020–21, it should be noted that the total budgetary authorities include 75% of the voted appropriations in the Main Estimates for 2020–21, whereas for 2019–20, the full amount of the Main Estimates was received.

When compared to those of the same quarter of the previous year, the department's year-to-date budgetary authorities available for use have decreased by $3,163.7 million. As reflected in Table 1: Statement of authorities, the total budgetary authorities decreased from $22,318.2 million in 2019–20 to $19,154.5 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 155.3 668.4 n/a n/a n/a 6.2 829.9
Implementation of SSE 128.9 (35.7) 1.6 n/a n/a 31.6 126.4
Pay administration – Federal public servants and Canadian Armed Forces 43.5 n/a n/a n/a n/a 14.5 58.0
Miscellaneous departmental requirements (262.3) 328.0 (25.9) n/a (4.8) 13.8 48.8
Federal Contaminated Sites Action Plan (FCSAP) (49.1) n/a n/a n/a n/a n/a (49.1)
Incremental funding for deployed operations 136.2 5.3 n/a n/a (233.5) 10.8 (81.2)
Service Income Security Insurance Plan (SISIP) n/a n/a n/a (117.9) n/a n/a (117.9)
Operation and sustainment (fleet maintenance) of military capabilities and operating requirements (932.8) n/a n/a n/a n/a n/a (932.8)
Baseline funding (2,735.1) (310.7) n/a n/a n/a n/a (3,045.8)
Cumulative variance in authorities available for use (3,515.4) 655.3 (24.3) (117.9) (238.3) 76.9 (3,163.7)

*A positive variance indicates an increase in authorities available for use in the second quarter (Q2) of 2020–21 compared to Q2 2019–20 and a negative variance indicates a decrease in authorities available for use in Q2 2020–21 compared to Q2 2019–20.

The year-to-date net decrease in authorities of $3,163.7 million over the second quarter in 2019–20 can be explained by variances in funding for a number of initiatives.

  • Major capital equipment and infrastructure projects (increase of $829.9 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, Armoured Combat Support Vehicle, and Fixed-Wing Search and Rescue Aircraft Replacement projects.

  • Implementation of SSE (increase of $126.4 million)

The net increase in funding represents incremental demands required to execute the overall SSE policy commitments, 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.

  • Pay administration – Federal public servants and Canadian Armed Forces (increase of $58.0 million)

The increase is due to adjustments made to terms and conditions of service or employment of the federal public administration in various collective agreements as well as adjustments made to the rates of pay and allowances as found in the Compensation and Benefits Instructions for the Canadian Armed Forces.

  • Miscellaneous departmental requirements (increase of $48.8 million)

The net increase is mainly due to increases in contributions to employee benefit plans for military members and civilians as well as an increase in the operating budget carry forward from 2019–20 to 2020–21.

  • Federal Contaminated Sites Action Plan (FCSAP) (decrease of $49.1 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 in addition to only receiving 75% of full supply in June 2020.

  • Incremental funding for deployed operations (decrease of $81.2 million)

The decrease in funding is mainly due to the timing of the requirements for renewing Canada’s Middle East Strategy (Operation IMPACT), which is expected to be requested later in the year.

  • Service Income Security Insurance Plan (SISIP) (decrease of $117.9 million)

The decrease is mainly due to only receiving 75% of full supply in June 2020 for payments with respect to the long-term disability and life insurance plans for members of the Canadian Armed Forces.

  • Operation and sustainment (fleet maintenance) of military capabilities and operating requirements (decrease of $932.8 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 decreased as a result of only receiving 75% of full supply in June 2020.

  • Baseline funding (decrease of $3,045.8 million)

The decrease in funding is related to the department only receiving 75% of full supply in June 2020.

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 $199.0 million. As reflected in Table 2: Departmental budgetary expenditures by standard object, the expenditures decreased from $9,672.0 million in 2019–20 to $9,473.0 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 5,125.8 4,902.5 223.3
Professional and special services 1,420.1 1,361.7 58.4
Acquisition of land, buildings and works 168.5 155.4 13.1
Other subsidies and payments 173.0 161.0 12.0
Transportation and communications 194.0 389.6 (195.6)
Utilities, materials and supplies 333.9 454.6 (120.7)
Repair and maintenance 530.3 594.3 (64.0)
Acquisition of machinery and equipment 1,442.9 1,500.3 (57.4)
Rentals 196.3 218.1 (21.8)
Transfer payments 27.8 31.8 (4.0)
Other expenditures 7.7 8.6 (0.9)
Revenues netted against expenditures (147.3) (105.9) (41.4)
Total net budgetary expenditures 9,473.0 9,672.0 (199.0)

The year-to-date net decrease in budgetary expenditures of $199.0 million can be mainly explained by the variances detailed below.

  • Personnel (increase of $223.3 million)

The increase in spending is primarily due to a change in reporting for the SISIP, an increase in the strength of Regular Force members, and an increase in the number of reservists on full-time contracts to support Operation LASER’s response to COVID-19.

  • Professional and special services (increase of $58.4 million)

The increase in spending is primarily due to an increase in engineering services contracts for the Canadian Surface Combatant, Joint Support Ship, and Halifax Class Point Defence Missile System Upgrade projects.

  • Transportation and communications (decrease of $195.6 million)

The decrease in expenditures is primarily due to the delayed execution of 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 $120.7 million)

The decrease in spending is primarily due to the department activating its business continuity plan in mid-March 2020 in response to COVID-19, sending 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 training was reduced; and utility costs, as many buildings had reduced occupancy.

  • Repair and maintenance (decrease of $64.0 million)

The decrease in expenditures is due to the work cycle timing difference for repairs and maintenance to Her Majesty’s Canadian Ships and delayed executions of various infrastructure-related repairs and maintenance activities due to COVID-19.

  • Acquisition of machinery and equipment (decrease of $57.4 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 the delivery and the close-out of various projects. The decreases are partially offset by an increase in expenditures for the Challenger Aircraft, Fixed-Wing Search and Rescue Aircraft Replacement, Maritime Helicopter and Manned Airborne Intelligence Surveillance and Reconnaissance projects.

  • Rentals (decrease of $21.8 million)

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

  • Revenues netted against expenditures (increase of $41.4 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 resumption continues across the department, specific measures and protocol have been put in place to mitigate risks in a COVID-19 environment. 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. Also, as a result of COVID-19 and the move to work from home, there have been modifications to certain controls (i.e. increased use of electronic signatures for approvals) which the department continues to evaluate the impact. 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 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.

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.

In July 2020, the Chief of the Defence Staff General Jonathan H. Vance announced his intention to relinquish command of the Canadian Armed Forces in the months to come. The selection of a new Chief of the Defence Staff and subsequent change of command date will be determined by the Government.

On July 15, 2020, Lieutenant-General Mike Rouleau assumed responsibility as the new Vice Chief of the Defence Staff following the retirement of Lieutenant-General Jean-Marc Lanthier. Lieutenant-General Mike Rouleau had been the commander of Canadian Joint Operations Command since June 2018.

 

 

Approved by:

 

// Original signed by //

Jody Thomas

Deputy Minister

 

// Original signed by //

Cheri Crosby, CPA, CMA

Chief Financial Officer

 

Dated: November 24, 2020

Ottawa, Canada

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