INVESTING IN DEFENCE The funding commitment is composed of two separate components, capital investments and operating funding, further sub-categorized as follows: • Capital Investments – Acquisition – Costs related to the procurement of capital assets. Capital assets include equipment, infrastructure and information management/information technology-related equipment. • Operating Funding – Operating and Sustainment – Costs include: personnel (Regular, Reserve and defence civilians); operating, including operating and sustainment costs for capital assets, both those currently in service and future acquisitions (training, domestic and deployed operations and other activities); and infrastructure (including maintenance, utilities and Payment in Lieu of Taxes (PILT)). • Operating Funding – Additional Personnel – The incremental salary and operating costs attributed to the planned growth of 3,500 Regular Force personnel, 1,500 Reserve Force personnel and 1,150 defence civilians. • Operating Funding – New Initiatives - Each initiative had a unique cost model created based on existing Defence costing frameworks and procedures. Four specific initiatives have been included in this policy: Defence Engagement Program Expansion; the Innovation for Defence Excellence and Security (IDEaS) initiative; Reserves – Enhanced Roles, Capability and Benefits; and the Total Health and Wellness Strategy. ENSURING EFFECTIVE MANAGEMENT OF THE DEFENCE BUDGET National Defence is responsible for the largest capital budget of any federal institution and its budget process is complex. As a vestige of history, National Defence effectively had two separate budgets. 1. Like all federal departments, National Defence is allocated funding on a cash basis through the Parliamentary Estimates process. While National Defence does have visibility on the level of funding that it would receive in the future, this budget could be affected based on yearly budget decisions, the level and number of international military missions, and changes to costs and timing of equipment acquisitions. This funding was used to pay annual operating costs (salaries, administration, building costs), the purchase of some capital equipment and infrastructure, and the costs of operating and maintaining this equipment. 2. In 2005-06, a new and separate part of National Defence’s budget was created using the accrual basis of accounting – a standard and accepted accounting method for the management of capital assets. This new source of funds was intended to be the long-term, predictable source of funds to be used for the acquisition and operation and maintenance of major new equipment, as well as force expansion. Under this old model, the planning of the capital program was managed on both a cash and accrual basis. Further, some operating costs were covered by the cash budget, while others were sourced from the accrual budget. This introduced significant complexity in planning for major equipment projects, which was a fundamental challenge of large procurements of the past. Funding was announced for the purchase of new equipment such as aircraft and ships, but the life-cycle costs, including operating costs, were not adequately planned for in the procurement of equipment. This new policy introduces some important changes to how the defence budget is managed to ensure that the Defence team has the flexibility to effectively manage key investments in defence capability. With this change, the Defence team and Canadians will have a full 20-year view of capital investments under a single, consolidated defence budget. A simplified process will be put into effect for the management and planning of capital expenditures. For the first time, the management of all funding related to the acquisition of all capital assets will be on a purely accrual basis, which accounts for the project development and acquisition cost of the equipment over the expected life of the asset. In addition, the operating and sustainment 44