In July 2000 the last of the Royal Canadian Navy’s 1960s vintage Oberon Class submarines was retired from service when it could no longer be operated safely and effectively. This had significant national security and sovereignty implications because the submarine is by far the most effective platform for patrolling, defending and deterring unwelcome intrusions into Canada’s surface and sub-surface maritime approaches. As the Oberon fleet aged and finally expired we became increasingly blind to what our adversaries, and for that matter our friends, were doing in and under our waters.
While a replacement fleet of four used British Upholder Class submarines was belatedly purchased in 1998, they were not in good condition after ten years tied up to a Scottish jetty. It was not until 2006 that the renamed and refitted Victoria Class achieved Initial Operational Capability with one submarine ready for operations. Since then, availability of the fleet has been uneven and the navy is still working to reach a steady-state with two submarines ready for operations.
Unfortunately for Canada, this is not a unique case. In 2016 the last of the navy’s replenishment ships was similarly retired due to rust-out, leaving another critical capability gap still not adequately filled, and in 2017 the last of its four Tribal Class destroyers was decommissioned and will not be replaced before the Canadian Surface Combatant Project eventually starts delivering new warships.
Further, this rust-out phenomenon does not necessarily create such a visible capability gap. Neither the protracted process begun in the 1990s to replace the Royal Canadian Air Force’s aged Sea King helicopters with the CH 148 Cyclone (still not at Full Operational Capability nearly twenty years after contract award) nor the extended foot-dragging over the replacement of the CF 18 fighter aircraft resulted in the forced removal of these legacy fleets from service. However, the delays necessitated their continued operation despite the increasingly limited range of missions they could be effective in due to maintenance challenges and the ongoing modernization of potential adversaries’ capabilities. Expensive upgrades had to be undertaken to keep them as operationally relevant as possible.
The Numbers Don’t Lie
That these rust-out events are not isolated cases is clear – not only at sea, on the ground and in the air but also in the Public Accounts of Canada. Under the accrual accounting principles they apply, the current value of an asset is calculated as a function of its original acquisition cost and planned life expectancy, also factoring in investments in extending the life or adding betterments. For example, if a system has a planned service life of ten years then its calculated current value is reduced by one-tenth of the original acquisition cost each year, adjusted for life-extension or betterments investments.
Over the two decades since the government’s introduction of accrual accounting, the total net value of National Defence’s capital equipment holdings has been declining and it is now less than one-third of cost. If proper recapitalization of these assets was being consistently planned and executed, total net value should be closer to fifty percent. As a system approaches the end of its life (and a net value of zero) plans should be in place for either a life-extending investment or replacement. Except where it has been decided that the capability will not be replaced at all, there should be little or no gap before the follow-on system becomes operational and appears on the books at full value.
Why we are in the Rust-Out Trap
Planning for these kinds of investments is not “rocket science.” Every major defence system has a predicted end-of-life date and a known lead time by which a decision should be made whether to invest in a life extension, acquire a replacement or divest the capability.
The recurring nature of the rust-out problem is therefore not a result of any inherent difficulty in how individual investments are scheduled and planned. Rather, it is a clear symptom of a short-sighted transactional approach to the overall management of defence capabilities. A major contributor to the problem is chronic constipation in government decision-making about large defence investments, and another is the uniquely complex Canadian business architecture for executing acquisitions. Both of these can cause substantial and costly delays in acquisition programs, which erodes the efficiency with which available funding can be turned into fielded capability.
However, there is a more fundamental factor at play: an imbalance between successive governments’ policy direction about the size and structure of the Canadian Armed Forces (CAF) and the level of funding they have allocated to the defence budget.
The Strategic Budget Imbalance
The CAF is remarkably adept at coping with obsolescence and has become expert at “making do” with what they have. However, there are limits to what is possible and the forced continued operation of ageing platforms continues to undermine the nation’s defence capabilities and constrain what they can be called upon to do. This problem is too pervasive to be attributable to mismanagement of individual procurement files. Rather, it is a direct consequence of the military being forced to operate its equipment much longer than most of its peers, which in turn is the result of consistent underfunding of recapitalization.
For example, whereas most advanced nations will plan on replacing a major platform like a fighter aircraft after a thirty to thirty-five year life cycle, Canada’s CF 18s are already forty years old and will be approaching fifty years in service before they are retired. Similar issues affect other equipment fleets and there is a constant effort inside National Defence to decide which looming obsolescence of old systems will become the most critical first – and that’s where the priority for money goes. Others have to continue waiting.
The solution for this can be found in a NATO guideline first approved by national leaders in 2014, and reconfirmed at every summit meeting since then. It calls for member states to spend at least twenty percent of their defence budgets on major equipment acquisitions in order to maintain an adequate scale and pace of capability modernization.
Canada typically falls short of this minimum level. The 2022-2023 defence budget allocated only about eighteen percent of its funding to equipment acquisition, although the government subsequently added some funding and brought the percentage closer to twenty percent for that year. The spending plan for 2024-2025 does allocate twenty percent of the National Defence budget to procurement of capabilities, but this is not sufficient to reverse the long-term trend. Not only is the accumulated investment deficit too great, the NATO guideline is a general one covering all members regardless of the composition of their armed forces. Nations like Canada, with its very large airspaces and maritime areas to cover, have different capability needs from smaller and more land-locked geographies.
Navies and air forces are more capital-intensive than armies, which are personnel-intensive. Canada needs proportionally larger naval and air forces than most European allies and therefore should be spending more than the NATO average on equipment acquisitions and upgrades. Facing roughly comparable defence challenges to Canada, the 2023-2024 Australian defence budget allocated nearly thirty-five percent of funding to equipment acquisitions, roughly in line with what the US typically spends. Canada may or may not need quite that level of recapitalization investment, but it certainly needs more than twenty percent.
Regardless of how much or how little the nation chooses to spend overall on defence, the CAF’s force structure needs to be scaled to ensure that personnel costs do not squeeze out spending in other essential areas. In particular, adequate funding must be earmarked for both equipment recapitalization and operations and maintenance if the nation’s defence capabilities are to be kept viable. Whether through new funding or force structure reductions to free up money, or some combination of the two, the only effective way to get the CAF out of the rust-out trap is for the government to move to a consistent long-term annual funding level for equipment acquisitions of at least twenty-five percent, and preferably more, of the defence budget. Funding for operations and maintenance must also be appropriately scaled to need.
Conclusion
Certainly, the government could do much to reduce acquisition program costs and get more defence capability for taxpayers’ money if it were to better discipline its own political decision-making about investments – and eliminate the chronic delays inherent in its complex defence procurement business architecture – but correcting the budget imbalance is the central element of any real solution.
It would take years to build the institutional capacity to actually deliver a larger capital acquisition program, and decades to begin to emerge from the rust-out hole the CAF is currently in, but this is the only way to enable National Defence to plan and execute a long-term recapitalization program that could, in time, consistently maintain its equipment asset inventory at adequate levels of operational effectiveness and serviceability.
