Procurement Report Card

will it get a passing grade?

By David Pugliese

It’s been just over a year since the Conservative government launched its new Defence Procurement Strategy (DPS) with great fanfare. The results, so far, have been — not unsurprisingly — limited. Part of that is due to the need to set up a system to support the DPS. The other part is that bureaucracy and government tend to move slowly at the best of times.

A year into the process and the government are making repeated promises that the procurement system will improve. Red tape will be cut. Acquisitions will move faster. Government officials have spoken about their extensive engagement with the defence industry before procurements are begun. The Department of National Defence has also produced its Defence Acquisition Guide outlining future equipment projects; it has updated that document once already.

The bureaucracy to implement the new processes has been put in place.  The government has established a Defence Procurement Secretariat (DPS) whose job is to “expedite military procurement while achieving better economic outcomes for Canada.” It is the job of the secretariat to focus on determining which key industrial capabilities Canada wants to stimulate and identify work that can and should be done in the country. A panel whose job is to provide a third-party challenge function for military equipment requirements has also been established.

One of the more significant developments of the DPS, for industry, will be the push to improve the overall quality of the industrial benefits that emerge from defence equipment projects. Foreign defence firms wanting to share in the billions of dollars in new Canadian military equipment contracts have been told they must be willing to turn over intellectual property and help domestic firms get a foothold in international markets. Canada will no longer be willing to accept any industrial benefits in exchange for giving a company a major defence contract, says Public Works Minister Diane Finley. Work provided to Canadian firms must provide expertise to allow those companies to make international sales.

Finley clearly outlined the government’s position in her May 28 speech at the CANSEC 2015 defence trade show in Ottawa. She noted that the government intends to apply the DPS to all new procurements. The Canadian Surface Combatant (CSC) project was provided as a prime example of how the process would unfold: “This is the largest shipbuilding program currently underway anywhere in the world,” Finley explained. “It is a once in a lifetime opportunity for government, in partnership with industry, to facilitate significant, long-term investments in Canada.”

Still, Finley says the federal government wants to manage expectations. The DPS, she noted, was never intended to create new capability in Canada when the global market is not big enough and the cost of doing so would be prohibitive. The goal instead is to support or create a domestic capability that is sustainable in the long term.

She pointed out that the focus will be on key areas. For the CSC, for instance, Finley listed a number of areas where Canada has a strong presence already and would be prime for further work. They include:

• Sonar, acoustics and antisubmarine sensor systems;
• Navigation and communications systems;
• Control systems;
• Combat systems management, integration and testing;
• Training systems, learning environments and courseware;
• Integrated logistics support and life cycle management; and
• Maintenance, repair and overhaul.

The bottom line for the DPS, as Finley explained, is that, “Companies that demonstrate a willingness to invest in Canada through the transfer of intellectual property (IP), the creation of skilled jobs, innovation-related activities and export and international business development, will now have a competitive advantage when bids are evaluated.” Emphasis will be also placed on those firms which offer export opportunities for Canadian firms.

Finley’s advice to defence companies is to look for “strong export-ready partners that can contribute to the Canadian economy beyond the end of the project and whose value chain benefits will remain in Canada.”

The stakes for improved industrial benefits are high, both for Canada and defence companies. Future procurement for the Canadian military will run in the tens of billions of dollars, particularly in the acquisition of ships and maritime equipment. If companies can’t meet the government’s goals with their bids, they’ll be shut out of procurement wins.

The DPS has been a long-time coming. Concerns about industrial benefits from defence procurements had been building for years among domestic firms. In January 2009, the Aerospace Industries Association of Canada called for an independent review of the defence procurement system, amid mounting concerns about the lack of work for domestic firms on the multi-billion dollar purchases of the C-17s, Chinooks and C-130Js for the Royal Canadian Air Force. Raising such an issue was highly unusual for the aerospace association; it’s not known for rocking the boat when it comes to the federal government.

In November 2012 former Conservative government cabinet minister David Emerson produced a report calling on the Harper government to push for more relevant industrial benefits (i.e. offset work) from foreign firms if it wanted to shore up the country’s military industrial base and create jobs.

Emerson, who was asked by the Conservatives to review the state of the nation’s aerospace industry, found that domestic firms had not been seeing quality industrial regional benefits or IRBs over the last number of years. Companies that are awarded Canadian defence contracts must provide an amount of IRBs to Canadian firms that are usually equivalent to the total amount of the contract. But Emerson warned that the IRB process was falling short. The system did not provide enough direction on how those IRB commitments should be fulfilled to the best advantage of developing Canadian industry.

Emerson’s concerns about IRBs were echoed by the defence and aerospace firms his team heard from during the review process. “The IRB program is not achieving the desired results,” the Canadian Association of Defence and Security Industries stated in its presentation to Emerson’s review panel. “The program, as currently structured, is not really stimulating the kind of technology and [intellectual property] transfer to create innovation and export prowess.”

Finley says the Conservative government has listened to those concerns and acted. The result is the DPS. The new process will be used for all upcoming major procurements, including the purchase of fixed wing search and rescue (FWSAR) aircraft for the Royal Canadian Air Force. Bids for that project close in September.

Steve Lucas, the former head of the Canadian Air Force, now an advisor for Alenia and the companies which form Team Spartan, said in the case of FWSAR most of the IP transfer is expected to come during the in-service support package for the planes.

“That’s where the technology transfer would be needed,” he explained. “[The RCAF] found that in the past where companies sold us aircraft and we didn’t have access to the intellectual property, then it became very difficult and expensive to do certain things at certain times. This is the government’s way of dealing with that and certainly our companies together have been looking at meeting government requirement.”

Alenia will be offering the RCAF its C-27J aircraft for the FWSAR project. Lucas said Team Spartan is confident it will meet the government’s technology transfer and intellectual property goals for FWSAR.

“We haven’t selected the final way of doing this,” he explained. “But in both cases we are looking at transferring the technology, intellectual property transfer and ability to use this to look after not only this aircraft but could lead to export possibilities as well.” Lucas called the government’s efforts in pushing for value added benefits from defence procurements “leading edge.”

“If you look at where we stand in terms of aerospace, at one point in time we were fourth largest in the world, and so we have tremendous capability here,” he noted. “It’s not like Canada is some country that really couldn’t do much of this work.”

Lucas pointed out that the policies outlined in the DPS will help Canadian industry maintain its standing in the world.

Under the Conservative government’s approach, the various IRBs will be assigned a risk component. That risk will be based on the likelihood of those promises being kept. For instance, if the bidding company already has an ongoing agreement in place that is creating export potential for Canadian firms, the company’s promise of producing such future benefits is considered a low risk, and thus ranked higher when proposals are rated.

As an example of how Alenia is dealing with such an approach, Lucas pointed out that Esterline CMC of Saint-Laurent, Quebec, is producing the flight management system for their aircraft. “On our C-27J aircraft we are in the process of installing a new flight management system,” he explained. “This flight management system will be in all future C-27J aircraft and it’s going to be a Canadian piece of equipment.” It’s the type of export potential the Canadian government wants to see.

Pablo Molina, head of Airbus Defence and Space (Military Aircraft) Canada said intellectual property transfer is one of the main attributes of his firm’s FWSAR bid: “What we are offering to the government and to Canadian industry is that as market leaders, the export opportunities we will be providing to our partners in Canada are really good in the future,” Molina explained. “We are ready to transfer the necessary rights to Canada to ensure that our aircraft will operate in the best possible manner throughout the contractual timeframe and of course the companies who are part of our team will be part of the future successes of our platform.”

That focus will not just be on the C295 aircraft the firm is offering Canada for FWSAR. “At the end of the day they (the Canadian companies) will be part of the global supply chain of Airbus,” Molina added.

Molina said Canada’s new system is one of the better ones that he has seen in his years in the global defence industry. “From my point of view the current defence procurement strategy that the government of Canada has in place is very good for Canadian industry,” he said. “It makes the different OEMs [Original Equipment Manufacturers] compete on the best co-operation plan. The second thing is that the government have already identified several segments which are key for Canada and they encourage the OEMs to focus on them.”

So what does this all mean for Canadian defence firms? For the next six months, not much. Companies will see a small flurry of contract announcements from the Conservative government in the lead-up to the federal election in October. The first phase of the Integrated Soldier System Project will be awarded. An announcement will also be made on the winning bidder for the Medium Range Radar project.

The main procurement announcement this summer will be the selection of a company to provide the Canadian Army with 1,500 medium support vehicles. The Conservative government originally announced the truck program in 2006; delivery was supposed to happen within two years. Unfortunately, the project has been plagued by delays and a bungled process ever since, which in part helped force the government to bring in the DPS.

The FWSAR appears to be the first major contract in which the DPS will have a major role to play. The winning bidder, however, won’t likely be announced until mid-2016. In the meantime, some companies are pointing out that they are laying off staff because of the lack of work and ongoing delays on equipment programs. They’re also already feeling the impact of the upcoming federal election.

Except for the FWSAR contract, approvals on major procurements are currently on hold. Ottawa’s bureaucracy slows down even further in the summer and the Conservatives are now largely focused on getting re-elected, rather than concentrating on moving equipment programs forward.

After the election in October, there will likely be another delay, as any new government, including a Conservative one, needs to orient themselves on their legislative agenda.

Christyn Cianfarani, president of the Canadian Association of Defence and Security Industries (CADSI), acknowledges companies aren’t happy with the ongoing delays,

“However, we’ve wrapped our minds around what’s happening,” she said. “What is really important for us is that we start to break down some of the roadblocks in the procurement system to streamline it for the future.”