Accrual accounting – For Canada First only?

Mea Culpa. This article by Murray Brewster points out what I should have picked up on before - the much ballyhooed tank acquisition announced in April DIDN'T include an amount for in-service support. Apparently, so far as I can determine, (a query has been forwarded to local Public Affairs, and is awaiting response) nor did the previous two Conservative defence purchases, the Heavy Truck acquisition and the Expedient Route Opening Capability (EROC). That's interesting. So, instead of a tank purchase being paid for directly out of existing money for the MGS, in fact, only the actual acquisition came from that source. Now, as the Torch points out, the MGS project didn't have any in service support either. BUT, the way this purchase was announced, it appeared to be revenue neutral in that it fit neatly under an existing capital budget that could be easily shifted.

The real crux of this issue was, somewhat ironically, captured recently in an article by Dr. J.L. Granatstein in the Spring 2007 issue of the Canadian Defence and Foreign Affairs Institute Newsletter, Dispatches. In "What's Gone Awry at NDHQ?" Dr. Granatstein makes note of the almost $17B in defence procurement announced by the Conservative government, a significant portion of which directly supports the Afghan mission. He notes, however that "no one is cheering" in part because of the accrual system of accounting. As he elaborates:

In the past, Canadian governments bought a thousand toasters for $25,000 and charged that sum to a department's budget. The costs of maintenance five, ten, and twenty years down the road were charged to future budgets. In accrual accounting, much more reasonably, say the government auditors, the costs of purchasing and maintaining the toasters twenty years into the future are announced as one figure, and those $25,000 worth of toasters now become $50,000, and that's the figure that sticks in the public's mind-and craw. Obviously, this matters very much in shaping public response. Consider the four C-17s the Harper government has agreed to purchase. In rough terms, each of the huge transport aircraft costs $250 million. The accrual cost, again in round numbers, is $850 million each or $3.5 billion all told. Many observers and citizens remain unaware of the change in accounting methodology, and government rules (or, more likely, practice) do not appear to permit much explanation. So a $1 billion purchase of essential equipment appears to much of the public as a $3.5 billion boondoggle. It's not, but it's a hard sell to all of us whose eyes glaze over at the mention of accountants' rules. In fact, I have had exchanges of correspondence with senior businessmen who are genuinely outraged that C-17s should cost almost a billion dollars each. If the people who can draw up and actually read budgets don't understand what is going on, the government-and the Canadian Forces-have a real public relations problem. The answer, of course, is to explain defence purchases (and purchases in every other department of government as well) by making clear what is included in the announced sum.

It goes without saying that the total package cost matters to government too. The Prime Minister is said to have been told that the cost of getting the Canadian Forces up to speed is $100 billion all in. Not a chance. If the figure had been presented to the PM as a purchase price of $35 billion with $65 billion in costs down the road, the chances might have been better.

Now, what Granatstein says makes sense; instead of only accounting for the cost of the purchase itself, a much smaller number, the government is being honest about what the REAL cost will be. This number is obviously larger, and thus harder to swallow for the politicians and public. (The other side of this coin, presented well here, is that accrual accounting spreads the costs over the entire lifespan of the equipment, in a far more logical manner, thus permitting the acquisition of multiple platforms at one time)

The admission by Minister Gordon O'Connor that the tank purchase announced in April failed to include the $650M cost of in-service support, and resultant press story, seems to suggest that DND has picked up on the same vibe as Granatstein. In fact, an examination of the procurement announcements made by the Conservatives (provided below) reveals an interesting trend: accrual accounting only seems to apply to "Canada First" defence announcements. The Canada First purchases: strategic and tactical lift; medium lift helicopters; JSS and Medium Sized Trucks ALL include an amount for in service support in their announcements. In stark contrast, however, are the three acquisitions mentioned above, plus (if one goes back far enough) the extra 25 Nyalas obtained in May 2006. None of these purchases included an amount for in service support, at least as originally announced.

Why might this be?

The "Canada First" announcements happened to coincide with the thrust of the Conservative's much awaited defence strategy, an (arguably) public-friendly defence policy focussed on securing Canada. The tanks, on the other hand, have been contentious, and are certainly not plausible in terms of defending Canadians at home. In this case, it makes more sense to advertise to full advantage what you are spending on a popular program, and to downplay the cost of an acquisition that is less popular, and seen by some to directly support the escalation of a war that is unpopular with some segments of the population. Now, in fairness, in no way was DND misleading about the costs of the purchases. Rather, they seem to have selectively omitted information that some people (yours truly included!) should have been sharp enough to ask for when the announcement was first made.

Renewing the Canadian Forces' Heavy Truck Capability
BG-07.015 - May 10, 2007
"The successful bidder was DaimlerChrysler AG, and they have been awarded an $87 million contract for the provision of 82 armoured heavy support vehicles."

News Release
Canadian Forces Get New Vehicles to Enhance Protection Against Improvised Explosive Devices
NR-07.034 - May 7, 2007
"The acquisition of the vehicles, along with two years of integrated logistics support, training and field service support will cost approximately $29.6 million."

Renewing the Canadian Forces' Tank Capability
BG-07.012 - April 12, 2007
"The total project cost of the loaned tanks, the acquisition of 100 surplus tanks from the Netherlands, the requisite upgrades and enhancements to this new Leopard 2 fleet, and an initial acquisition of spare parts is $650 million, which will be funded from existing departmental allocations."

"Canada First" Defence Procurement - Contract Awarding for Strategic Airlift
BG-07.001 - February 2, 2007
"The estimated total projectcost for the acquisition phase is $1.8 billion, including the cost to purchase the aircraft. An additional $1.6 billion has been estimated for 20 years of in-service support."

"Canada First" Defence Procurement - Tactical Airlift
BG-06.019 - June 29, 2006
"The estimated total projectcost for the acquisition phase is $3.2 billion, including the cost to purchase the aircraft. An additional $1.7 billion has been estimated for the 20-year in-service support. "

"Canada First" Defence Procurement - Medium-to Heavy-Lift Helicopters
Government of Canada - Gouvernment du Canada - June 28, 2006
"The estimated total projectcost for the acquisition phase is $2 billion, including the cost to purchase the aircraft. An additional $2.7 billion has been estimated for 20 years of in-service support , for which a separate contract will be competed by the prime helicopter manufacturer through a request for proposals."

"Canada First" Defence Procurement - Medium-Sized Logistics Trucks
BG-06.016 - June 27, 2006
A competitive procurement process will select the contractor for new trucks for the Canadian Forces with requests for proposals being released to industry for all elements of the project. The acquisition contracts will also have full economic benefits for Canadian industry - this means that for every contract dollar awarded, the contractor will commit a corresponding dollar in economic activity in Canada.

The in-service support contract for the standard military pattern vehicle will include support for an initial period of 2 - 3 years. A follow-on support contract for the remainder of the 20-year total life of the vehicles will be negotiated or competed separately. The estimated in-service support cost is $100 million, representing a substantial income for Canadian industry.

"Canada First" Defence Procurement - Joint Support Ship
BG-06.015 - June 26, 2006
"The overall project cost is $2.9 billion. This includes a base cost of $2.1 billion, plus an estimated $800 million in contracted in-service support over 20 years. "

News Release
25 New Armoured Patrol Vehicles Heading to Kandahar
NR-06.024 - May 31, 2006
"This $31 million option to buy is in addition to an existing contract valued at $ 64 million, originally awarded to General Dynamics Land Systems - Canada in October for the Canadian Forces in Afghanistan. The original contract for 50 vehicles included an option for the contractor to perform 'in-theatre' operator and maintainer training, with the follow-on training to be carried out by military instructors."