ASSISTANT DEPUTY MINISTER (FINANCE AND CORPORATE SERVICES) SOUS-MINISTRE ADJOINT (FINANCES ET SERVICES DU MINISTÈRE) Investment Planning Financial Management Institute Jonathan Hood Department of National Defence Director Corporate Submissions and Financial Arrangements 22 Jan 2015

Outline What is investment planning? Roles & Responsibilities IP Process Governance Sources of Funds Evolution and Way Forward Challenges Assistant Deputy Minister (Finance and Corporate Services) Sous-ministre adjoint (Finances et services du Ministère) 2

What is Investment Planning? Departmental investment planning is the function of allocating and reallocating resources to new and existing assets and acquired services that are essential to program delivery and is influenced by and supports departmental strategic planning In DND, the highest level policy driver of investment planning is the Canada First Defence Strategy (CFDS) CFDS envisions modern, combat-ready forces with the necessary equipment and infrastructure to make them effective and sustainable in the performance of their missions Effective departmental investment planning considers the roles, mandate and the four pillars of the CFDS. Assistant Deputy Minister (Finance and Corporate Services) Sous-ministre adjoint (Finances et services du Ministère) 3 Supports Achievement of Strategic Outcomes

What is Investment Planning? Carrying value of department’s non-financial assets in 2013 financial statements ($39B) was over six times that of the second largest, Public Works ($6B) Vast real property portfolio including government-owned and leased buildings, works and land IP 14 covers an investment portfolio over the next twenty years of $80B Largest and most complex capital program in government Assistant Deputy Minister (Finance and Corporate Services) Sous-ministre adjoint (Finances et services du Ministère) 4 Quantifying DND’s IP Context

What is Investment Planning? The ongoing investment challenge is to strike the balance between achieving the military capabilities necessary to achieve the desired strategic outcomes with the realities of limited resources Deliberations on investment proposals are informed by distinct elements: –the capability requirements; –The funding required to acquire, sustain and operate; and –the resource envelope available for investments based on existing defence funding levels. Departmental investment planning must ensure that the investment decisions taken today are affordable and sustainable. Assistant Deputy Minister (Finance and Corporate Services) Sous-ministre adjoint (Finances et services du Ministère) 5 Military Capabilities vs Affordability

Roles and Responsibilities DM is responsible for the management of the IP. CFO is responsible for the development of the IP. The CFO advises the Deputy Minister on resource allocations, financial risk and the ongoing affordability of the IP Vice-Chief of Defence Staff has responsibility for the development of programme and capability requirements within the IP Assistant Deputy Minister (Finance and Corporate Services) Sous-ministre adjoint (Finances et services du Ministère) 6 Key Players

Assistant Deputy Minister (Finance and Corporate Services) Sous-ministre adjoint (Finances et services du Ministère) 7 IP Process Step 1 New Investments CIPPR Process Policy guidance Prepare investment proposals to address capability gaps, proposals for capital projects over $5M proceed to CIPPR Identify gaps between required capabilities & operational state of CF.

Assistant Deputy Minister (Finance and Corporate Services) Sous-ministre adjoint (Finances et services du Ministère) 8 IP Process Derive Investment Planning insight through data exploration Develop integrated portfolios to include equipment, infrastructure and informatics projects within multi-dimensional constraints Appreciate the impact of decisions and opportunity costs Provide responsive, defendable, and understandable input to the decision making process P ORTFOLIO G ENERATION D ECISION P ROCESSES I NVESTMENT P ORTFOLIO D ATA CIPPR IRMC

CIPPR Algorithm: Relative Project Value Project Value National Policy Departmental Impact Sponsor Priority National Defence Act Other Legislation Speech from the Throne Canada First Defence Strategy Ministerial Announcements Treaties Operational Impact Capability Based Planning Institutional Impact Program Alignment Architecture Report on Plans and Priorities Defence Renewal Initiatives Sponsors allocate a pool of points among their projects 9 IP Process Assistant Deputy Minister (Finance and Corporate Services) Sous-ministre adjoint (Finances et services du Ministère)

10 IP Process Banking Day at IRMC Review Process IP Change Impact Analysts assessing the following: capability requirements cost concurrence affordability & source of funds project management capacity human resource issues Senior Programme Committee evaluates impact of submitted projects VCDS & CFO give an update on CIPPR results IRMC evaluates impact of authorizing submitted projects Based on IRMC decision: Investment space is booked IP is amended Authorized projects move forward with submissions to MND or TB Project sponsor receives cost concurrence & submits Investment Plan Change Proposal

Banking Day … From “First In First Out” to Bundling The aim of the semi-annual banking day is to avoid considering proposals in isolation and allow allocation to highest priority IRMC will be provided with updated information semi annually including:  IRMC exceptional decisions since last banking day  revised project forecasts with variance analysis including contracted information and actuals Assistant Deputy Minister (Finance and Corporate Services) Sous-ministre adjoint (Finances et services du Ministère) 11 IP Process

Assistant Deputy Minister (Finance and Corporate Services) Sous-ministre adjoint (Finances et services du Ministère) 12 Governance Projects <$5M approved at ADM level Program Management Board can approve projects between $5 and 50M. It reviews projects >$50M and makes recommendations to IRMC. The Investment and Resource Management Committee (IRMC) was established to ensure effective allocation and management of financial resources IRMC to approve inclusion in the IP of projects >$50M based on the advice of PMB 12 Assistant Deputy Minister (Finance and Corporate Services) Sous-ministre adjoint (Finances et services du Ministère) 12 Governance Framework

Assistant Deputy Minister (Finance and Corporate Services) Sous-ministre adjoint (Finances et services du Ministère) 13 Sources of Funds The Investment Plan has two distinct sources of funds Reference Levels  Traditional source of funding  Cash based expenditures The Accrual Envelope  Funding set aside in the Fiscal Framework for Defence but requiring TB approval to be accessed  Investment Cash is provided to purchase assets (Vote 5) in the year they are purchased  Cost is amortized over life of asset in departmental financial statements  Source of operating funds to implement CFDS and sustain capital investments that provide new capability

Vote 5 A-Base (Cash Basis) Assistant Deputy Minister (Finance and Corporate Services) Sous-ministre adjoint (Finances et services du Ministère) 14

Uses of the Accrual Envelope The accrual envelope can be used to finance: Equipment and infrastructure acquisitions, with a priority to major equipment / capability acquisitions announced in Government policy (CFDS or equivalent); and Incremental operating and sustainment costs associated with acquisitions that establish new capabilities for National Defence Assistant Deputy Minister (Finance and Corporate Services) Sous-ministre adjoint (Finances et services du Ministère) 15 Sources of Funds

Assistant Deputy Minister (Finance and Corporate Services) Sous-ministre adjoint (Finances et services du Ministère) Investment Cash 16

Assistant Deputy Minister (Finance and Corporate Services) Sous-ministre adjoint (Finances et services du Ministère) 17 Sources of Funds Projects have secured source of funding over life of the project Will enable recapitalization of assets (or replacement capabilities) to be scheduled at end of equipment useful life Source of new operating funds to implement CFDS and sustain new capital investments Facilitates better fiscal planning and management by central agencies Advantages of the Accrual Envelope

Assistant Deputy Minister (Finance and Corporate Services) Sous-ministre adjoint (Finances et services du Ministère) 18 Sources of Funds No escalation or inflation factor No carry forward Ceiling is set Disadvantages of the Accrual Envelope

Evolution and Way Forward Treasury Board approved the first DND Investment Plan in 2009 for a three year period This plan was part of a policy pilot and the scope and reporting requirements have evolved considerably since this time IP 2013/14 to 2017/18 was approved by Treasury Board on 17 June The Plan, and the governance framework it promotes, are aligned with evolving policy objectives and requirements Assistant Deputy Minister (Finance and Corporate Services) Sous-ministre adjoint (Finances et services du Ministère) 19 Heightened Policy Requirements

Assistant Deputy Minister (Finance and Corporate Services) Sous-ministre adjoint (Finances et services du Ministère) 20 Communicate implications of new IP Develop change management processes including monitoring and reporting of changes Improve integrity of cash flow forecasts Develop and implement performance measures Strengthen life cycle costing Strengthen visibility of Acquired Services 20 Assistant Deputy Minister (Finance and Corporate Services) Sous-ministre adjoint (Finances et services du Ministère) 20 Evolution and Way Forward IP approval is a beginning…not an end

Operationalizing the IP Assistant Deputy Minister (Finance and Corporate Services) Sous-ministre adjoint (Finances et services du Ministère) 21 Evolution and Way Forward Implement a fully operational IRMC Process Improve resource and investment management information Enhance the use of life cycle costing Improve the IP information base Improve strategic analysis of budgets and investments Improve strategic analysis of budgets and investments with a particular emphasis on medium and long range affordability Enhance the use of the new Program Alignment Architecture Continued Improvements to Investment Planning and management Strengthen on-going monitoring and oversight of the IP Improve on post-implementation assessment of the benefits realized from investments Renew the internal project approval process Enhance internal budget management practices

Challenges Assistant Deputy Minister (Finance and Corporate Services) Sous-ministre adjoint (Finances et services du Ministère) 22 Evolution and Way Forward In service support costs are increasing and will put increasing pressure on departmental budgets. May be difficult for project sponsor to find a source of funds Increasing demands on CFO org for cost concurrence Need to rationalize governance to include infrastructure projects and incorporate approvals made at ADM Level (<$5M) Need to understand impact of project approvals on operating budgets over time. Using the business planning process to address pressures is not optimal Organizational Project Management Capacity Assessment is currently a 2. Getting a 3 would potentially reduce number of TB submissions Need to develop performance measures to evaluate processes and overall efficiency and effectiveness