Organizing for Defence Procurement
ELINOR SLOAN
© 2017 FrontLine Defence (Vol 14, No 4)

In the ongoing debate surrounding Canada’s military procurement system, a persistent theme is that the many delays are at least partially due to there being no single point of accountability for defence procurement in Canada. With decision-making shared among the Department of National Defence (DND), Public Services and Procurement Canada (PSPC), and Innovation, Science and Economic Development Canada (ISED), responsibility for achieving a contract award lies “everywhere and nowhere”, thereby resulting in substantial delays. This hurts both the Canadian military, which must do without a platform or piece of equipment, and industry, which must wait for the business on which it depends. How did we get to this point? What are some solutions? And what can we learn from our allies on possible steps forward?

Single Agencies and Departments

Canada did not always have a tripartite military procurement decision-making structure. For most of the three decades after the outbreak of World War II, a single federal government department controlled military procurement. Responsibility lay solely with the Department of Munitions and Supply from 1940-1945; the Department of Reconstruction and Supply from 1945-1948; and the Department of Defence Production (DDP) from 1951-1969. The Defence Production Act of 1951 created the DDP and spelled out specific powers for carrying out defence procurement in Canada. During this period there is one example of responsibility being assigned to a separate agency: from 1948-1950 military procurement was the purview of the Canadian Commercial Corporation, a crown corporation reporting to the Minister of Trade and Commerce.

In 1969, the Trudeau government created a Department of Supply and Services (DSS) as a centralized location for government contracting. Its creation was a direct outcome of the Glassco commission report of 1962, which recommended amalgamating all federal government purchasing into one department in order to achieve efficiencies. During the Pearson minority governments of 1963-1968 DDP carried out this function on an interim basis, in addition to its defence procurement portfolio. With the arrival of the new government in 1968, the DDP was disbanded and its functions, including its powers under the Defence Production Act, were transferred to DSS.

A Multi-departmental Approach

In 1972, the government amalgamated the Department of National Defence and Canadian Forces Headquarters into one National Defence Headquarters. The reorganization included the creation of an Assistant Deputy Minister of Materiel position responsible to the Deputy Minister of National Defence as the focal point for defence acquisition in DND. ADM(Mat) was mandated to work closely with DSS on defence procurement projects. However, as Martin Auger described in The Evolution of Defence Procurement in Canada, while DSS remained the department charged with federal government acquisitions, “each organization [DSS and DND] was made responsible for specific aspects of the defence procurement process.” Thus was born the multi-departmental approach to defence procurement. In 1986, the Mulroney government took this a step further, introducing an industrial and regional benefits policy (IRB) requiring companies that won a defence contract to create jobs in Canada equal to 100% of the contract’s value. Industry Canada (now ISED) was given responsibility for implementing the new policy, working closely with DSS and DND.

Today DSS, in its current guise as PSPC (formerly PWGSC), continues to have exclusive authority under the Defence Production Act to negotiate and buy military equipment. The department is responsible for buying all federal government goods and services, but when it comes to those designed “to military specifications” DND and PSPC have agreed to a division of responsibilities, with DND responsible for establishing the requirements for new weapon systems and military equipment. PSPC’s Supply Manual details the specific roles of the two departments in the defence procurement process, as well as that of ISED with regard to IRBs (now Industrial Technological Benefits).

Problems and Solutions

Many entities are involved in this system, and authority does not culminate in one person until we reach the Prime Minister. Both documented and anecdotal evidence suggests this bureaucratic structure negatively affects the efficient progress of defence procurement projects. A 2009 report by the Canadian Association of Defence and Security Industries (CADSI) found that “the fragmented departmental approach to defence procurement slowed defence program delivery and produced sub-optimal industrial outcomes.” Former Assistant Deputy Minister of Materiel Alan Williams notes that “Unless and until this muddied accountability regime is fixed, defence procurement will never be as efficient and effective as it could and should be.” His successor, Dan Ross, argues the defence procurement system is “risk-adverse and incredibly slow” because three departments are involved, with no minister solely accountable for the progression of a weapon system or platform through to cabinet. The Canadian Senate highlights a situation of too many players and too little focus on progressing major capital acquisitions on time and on budget. And in 2017 no less than a former Minister of Public Works, Rona Ambrose, identified departmental “silos” in the defence procurement process as posing “a major roadblock to progress.” This, despite the fact that the Harper government’s much-touted Defence Procurement Strategy of 2014 created a process whereby the Deputy Ministers and Ministers from each of DND, ISED, PSPC and Treasury Board meet regularly to discuss military procurement projects, formalizing a previously ad hoc practice.

As for solutions, CADSI recommends creating a single point of accountability at the cabinet level by establishing a separate defence procurement agency reporting to a minister, or a new department like DDP, or by consolidating the three functions of industry, contracting, and defence into a single (unidentified) pre-existing department. Williams suggests combining the defence-specific contracting aspects from PWGSC (now PSPC) with DND’s procurement resources into a new organization called Defence Procurement Canada. Ross proposes reassigning the Defence Production Act to a Minister of Defence Materiel and creating a Department for Defence Materiel that would have the Assistant Deputy Minister of Materiel organization at its core, incorporating the contracting authority of PSPC. Ambrose suggests creating a “defence procurement secretariat” within DND, headed by a Deputy Minister reporting to the Minister, and including people from ISED (to focus on IRBs and the value proposition), and PSPC (for contracting). Along similar lines, the Senate proposes a major military procurement agency within DND. By contrast, scholar Craig Stone questions whether these sorts of major organizational changes would resolve problems inherent in major defence acquisitions.

The Allied Experience

Looking at possible steps forward, Canada can learn from its allies. The British experience indicates that a separate agency reporting to the Minister of National Defence is not as straightforward a solution as might immediately be thought. In 1999, Britain created a Defence Procurement Agency as an executive agency of the British Ministry of Defence led by a Chief of Defence Materiel (broadly equivalent to Canada’s Assistant Deputy Minister of Materiel) and reporting to the Minister of Defence Procurement, a junior minister to the Secretary of State for Defence. Merged with Britain’s Defence Logistics Organization in 2007 and renamed Defence Equipment and Support (DE&S), the agency had sufficient difficulty delivering capability on time and on budget that in 2009 it was the subject of an independent audit commissioned by the Defence Secretary. The study, by Bernard Gray, found that on average a wide range of programs were 80% or five years overrun, and 40% over budget. Noted one commentary at the time: “There is something fundamentally wrong with the procurement process inside the MoD, which seems impervious to attempts down the years to make it more efficient and professionally run.”

Part of the problem, according to Gray’s study, was that DE&S belonged to “core” MoD and as such did not have the operational flexibility to carry out its mandate efficiently. The report recommended placing the agency at arms-length to the ministry, and introducing market principles by establishing the agency at minimum as a Trading Fund or, ideally, as a Government-Owned, Contractor Operated (GOCO) entity. After the government appointed the report’s author, Sir Bernard Gray, as Chief Defence Materiel in charge of DE&S it pursued the GOCO idea, but Britain ultimately abandoned the initiative late in 2013 as concerns grew over the sovereignty implications of, in effect, privatizing defence procurement.

In April 2014 the British government established DE&S as a “bespoke trading entity” of the MoD. In UK legislation, trading funds are different from normal government departments in that they are self-financing, can carry over funds from year to year and therefore have incentive to create efficiencies, and are flexible in human and financial resource management. By establishing DE&S as a trading entity – billed as “DE&S plus” – the agency is able “to offer the salaries needed to attract people from the private sector with the kind of commercial, engineering and financial skills needed to handle big projects and negotiate complex contracts.” The idea is to improve DE&S’s performance through organizational changes that bring freedom from civil service pay rules and the ability to harness private sector skills. DE&S continues to report to the Minister of Defence Procurement, who is responsible for the agency’s “performance, including its strategy, operation, delivery outcomes and the effectiveness of government arrangements.” Perhaps to drive home the market principles approach, the Chief of Defence Material position, which continues to head up DE&S, was renamed Chief Executive Officer in 2015.

Three years into the “DE&S plus” experiment it is as yet too early to assess whether this is a model that is more effective in delivering defence capability. But the path Britain has travelled can be instructive for Canada. In thinking about alternative institutions for defence procurement it suggests an appropriate structure may be an agency that, while reporting to a government department, incorporates market principles, particularly incentives for budget efficiency and flexibility in human resource management. In the recent past Australia, too, has come to the conclusion that its military procurement agency needed to become “more business-like and outcome driven.” Australia’s newly created Capability Acquisition and Sustainment Group operates within the Department of Defence and is to adopt an enterprise approach to delivering military capability.

A Way Forward

The Canadian situation where military procurement is not the purview of an agency operating at arm’s length to government, an agency operating within government, or even a single government department but rather several government departments is three steps removed from what our close allies have assessed to be the most effective structure for defence procurement. The Canadian defence policy statement released in June 2017 promises reforms within DND to streamline the procurement process but does little to resolve the external dynamic among departments.

Canadian crown corporations are government agencies that report to a minister but operate according to market principles. Many are successfully in the black. Mindful of CCC’s brief experience as procurement lead in the late 1940s, and learnings from our allies, Canada should explore the idea of a crown corporation reporting to DND or PSPC as a core component of any future defence procurement reform.

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Professor Elinor Sloan teaches International Relations at Carleton University.

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