Section 5: Financial Information

Status of Financial Management Initiatives in the Coast Guard

In recent years, the Coast Guard has implemented a number of initiatives to improve financial planning, reporting and monitoring. The new financial management initiatives include:

• The implementation of Activity-based Management and Activity-based Budgeting which improves the link between our allocation decisions and Treasury Board’s Management, Resources and Results Structure (MRRS);
• Revisions to our Program Activity Architecture that allows us to clearly quantify the cost of providing an operationally ready Vessel Fleet for Canada;
• More timely and proactive planning cycle which affords managers the ability to begin the year with a finalized budget allocation, thus improving transparency and accountability for results;
• Improving our Capital management process in order to better integrate our operational requirements with our capital investments.

Operating Environment

Like all organizations, the Coast Guard has had to adjust to overall economic trends and government-wide decisions. The most significant have been:

• The need, over the past 2-3 years, to reallocate approximately $11M internally to cover increased fuel costs. Indeed, last year fuel prices were so high that the Coast Guard had to secure $25M from the Treasury Board over and above its fuel budget, including the internal reallocation, to cover costs. However, given current fuel forecasts, it is expected that CCG will be able to manage within its base fuel budget for 2009-2010. The volatility of fuel prices remains a significant risk.
• For 2009-2010 there has been a modest decrease in the Coast Guard operating budget of approximately $1M.  This is a continuation of government-wide budgetary reductions which stem from the Expenditure Review exercise outlined in Budget 2005.  Individual federal departments were tasked to reduce expenditure as a result of improvements in operations and a rigorous assessment of the relevance and effectiveness of programs. 
• The recent economic downturn has reduced commodity and labour costs that have taken some pressure off capital and vessel refit budgets.
• As the economy slows, it is widely expected that shipping in Canada will also diminish.  This will negatively impact the amount of revenue we collect for our ice-breaking and maritime navigation services.  Despite the falling revenue, we will still be required to maintain our advertised levels of service to Canadians. As a result, the decreased revenue will negatively impact our operating budget.

Coast Guard has been able to manage these adjustments without any noticeable reductions in advertised levels of service. As part of Federal Budget 2009, the Government introduced government-wide restraint measures for discretionary spending areas such as: travel, hospitality, conferences, and professional services. Coast Guard had previously adopted many of these measures as part of its budget planning to deal with some of the developments noted above.

Assets and Liabilities

With 11,500 assets worth $11.6 billion, CCG is a heavily asset-reliant and capital-intensive Agency which relies on a vast infrastructure to deliver on its program mandate. The overall asset base includes such assets as:

• Small, medium, and large aids to navigation;
• Communication systems and equipment;
• Helicopters;
• Vessels; and
• Waterways.

The replacement value of CCG’s assets has increased from the previously reported amount of $5.6 billion in 2007-2008 to $11.6 billion in 2008-2009.  The primary cause for this increase is due to a marked escalation in the replacement cost of new vessels. The realities of today’s shipbuilding costs were incorporated into pricing analysis undertaken as part of the Fleet Renewal Plan which has extensively measured the cost to replace each of the essential fleet vessels. Also, as the Polar Icebreaker is expected to cost in the neighbourhood of $800M for a single unit, an $11.6 billion replacement of the entire fleet is likely a more substantive estimate than that which previously reported.

Although CCG’s assets carry a replacement value of $11.6 billion, the depreciated book value of the entire asset base is $600M. This is the most resolute indication of the age of our deteriorating asset base. CCG’s assets are divided into two categories for planning and management:

• Approximately $10 billion in Fleet assets with a net book value of $463 million; and
• $1.6 billion in Equipment and Other Moveable Assets with a net book value of $137M.

In recent years it has become apparent that the inadequate recapitalization of our Fleet assets would result in the eventual inability of CCG to sustain its required levels of service. As such, there have been a number of financial infusions in recent Federal Budgets, such as the Mid-Shore Patrol Vessels and Polar Icebreaker, which will ensure that the book value of our Fleet asset base increases with time.

Unfortunately, the pace of recapitalization for our shore-based assets has not kept up with that of our Fleet. This is despite of an annual funding increase of $47.3M which was received in 2003 through the National Capital Spending Plan. While there have been improvements, there is still a continued reliance on outdated and fully depreciated shore-based infrastructure as recapitalization has not kept up with the rate of depreciation. As such, the condition of our shore assets continues to deteriorate and technological advances have rendered much of our existing equipment obsolete and more costly to maintain.

In order to better communicate our asset management and investment planning picture in a more holistic and integrated manner, CCG has embarked upon an initiative to update its overall planning process for capital investments. The new Integrated Investment Planning process will ensure that our investment decisions are based on a full assessment of risk, priority and capability requirements.

Impact of Recent Funding Injections

As previously referenced, the last three Federal budgets have brought forth significant increases to our capital budget, resulting in supplementary Government investments in the Coast Guard of $1.7 billion since 2005. 

The most recent capital infusion was a result of the Budget 2009 - Federal Economic Action Plan which will bring $175M to the Coast Guard between 2009-2010 and 2010-2011.

The additional funding for our Fleet assets will produce very tangible results for the programs we support and ensure that we are able to maintain the maritime service excellence that our clients rely upon.

Conclusion

The Coast Guard has implemented a number of financial management initiatives which have helped us organize our operations in a more business-like and rational manner. The improved financial management framework has helped us better communicate our capacity and funding deficiencies, resulting in significant infusions of capital funding.  The new funding will help stabilize our Fleet infrastructure; however, it is becoming increasingly evident that our shore-based infrastructure should also be addressed in the near term. 

CCG has taken several measures to ensure a more priority based allocation process, delivered through a strengthened planning, budgeting and reporting framework. This being said, we must continue to effectively manage our operating and investment budgets, ensuring that the most pertinent programs are properly funded.  By continuing to improve our financial management processes, CCG will ensure that it remains strong now and into the future.

Table 16: Derivation of 2009-2010 Budget Allocation

Table 17: Financial Allocations by PAA Sub-Activity, 2009-2010 (thousands of dollars)

* O&M includes fuel for FAM, Science & NAFO
** Excludes Vote-Netted Revenue (VNR)

Table 18: Financial Allocations by Region, 2009-2010 (thousands of dollars)

Table 19: Financial Allocations by Sub-activity by Region, 2009-2010 (thousands of dollars)

Table 20: National Programs by Sub-activity, 2009-2010 (thousands of dollars)

Table 21: CCG Vote-Netted Revenue Targets by PAA Sub-activity, 2009-2010 (thousands of dollars)

Notes:

1. Includes $100K reduction for 2009-10 related to temporary Arctic MNSF Remission Order
2. Contributions from the St. Lawrence Seaway Management Corporation (SLSMC) to Fisheries and Oceans Canada for the provision of CCG aids to navigation within the Seaway are not collected through any of the fees identified in this table. Rather, SLSMC contributions are attributed to the government's Consolidated Revenue Fund and are not re-spendable by the Department.
3. In 2009-2010 CCG will adjust the revenue target for the CCG College down by $2000K. This will result in an overall revenue target reduction for CCG of an equal amount.

Table 22: CCG Major Capital Budget & Planned Expenditure – Overview (thousands of dollars)

The following table summarizes Coast Guard’s planned Major Capital spending over a five-year period. The planned expenditures are organized by major investment category in order to outline the distribution of CCG’s long term major capital spending. (For additional information on individual capital projects see Annex A: CCG Capital Expenditures)