IRBs: Maximizing Benefits
BY PETER BOAG
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Jan 15, 2007

The $13 billion investment announced by the Government of Canada for the acquisition of new defence aircraft is significant by any standard of measure. Predictably, it has drawn the attention of government decision-makers, aerospace industry leaders, and the national media alike. Few dispute the need to upgrade the Canadian Forces’ airlift capability in support of a sovereign ‘Canada First’ foreign and defence policy, however, Canadians rightly expect prudent expenditure of their hard-earned tax dollars along with a maximum return on their investment. Regrettably, systemic weaknesses in Canada’s defence procurement process impede the very industrial development outcomes that will maximize the return on that investment by Canadians.

The Case for a Policy Framework
Of concern is the absence of a clear, ­consistent policy directed at drawing upon and strengthening the world class capabilities of Canada’s industrial base. A domestic bias of this sort is written into U.S. defence legislation and also reflected in the U.K.’s recent white paper on defence procurement.

Canada’s failure to follow suit is ­seriously eroding the business case for companies to serve global markets from here. This is particularly true of instances where access to the procurements of other nations favours or is restricted to domestic suppliers. Canada needs a policy framework that promotes a robust domestic industrial and technology base – one that protects our sovereignty and security while also fueling our economic development.

In the absence of a strategic, long-term vision, Canada’s approach to defence procurement is at best piece-meal and is destined to yield less than optimum results in both national security and ­economic terms.

The federal government would do well to formally recognize industry’s role as a strategic national asset to defence and security. However, too often, Canada’s procurements are all but signed, sealed, and delivered before senior decision-­makers fully appreciate the implications of different procurement approaches on the vitality and global competitiveness of Canada’s industrial base. This often spawns late-in-the-process anxiety and the revisiting of procurement strategies, leading to delay and increased costs for both government and potential bidders.

Allowing senior decision-makers and industry leaders to be more fully engaged earlier in the process to set clear outcomes – both defence and industrial – for Canada’s high value, complex defence procurements will pave the way toward a more timely, efficient and politically accountable procurement process.

Maximizing Canadian Industrial Benefits
Many of Canada’s major defence platforms – the three airlift procurements now underway are a case in point – are purchased from foreign sources. Like most other nations, Canada requires that prime contractors guarantee Canadian firms a pre-determined economic return on the investment. This is achieved either by sub-contracting Canadian companies directly or opening the door to their participation in the supply chains of prime contractors’ other programs. Canadian aerospace leaders believe current procurement processes inhibit rather than aid these objectives. In response, the Aerospace Industries Association of Canada [AIAC] has tabled with federal authorities several key recommendations aimed at boosting Canadian industry as a vital contributor to a “Canada First” defence and foreign policy. We see this as a means to launch leading-edge Canadian technological know-how into global supply chains across the defence, commercial and space sectors.

The government’s drive toward Canadian Industrial Benefits (CIBs) reflects a ‘quantity’ versus ‘quality’ bias. Typically, 100% of the contract value must be delivered within a relatively short time-frame. At present, no value discriminators are employed to incentivise contractors to build long-term, high value business relationships with Canadian partners. Good examples can be found in co-development of new technologies, technology transfer, or Canadian company involvement in the early stages of new programs. This drives the prime contractors to commit to short-term purchasing transactions related to their mature programs. A more strategic, long-term focus to procurement would ensure that CIBs enhance the long-term competitiveness and global market penetration of Canadian-based firms. Strategic opportunities could be sought on a platform/sup­ply chain or technology/capabilities basis.

Introducing change to Canada’s defence procurement system will take time and government/industry cooperation. Recognizing this, and having no desire to trigger further delays in the current airlift procurements process, AIAC has called on the government to adopt a series of measures aimed at maximizing the CIBs return of these airlift procurements. These include:

  • Achieving quality CIBs

    – provide the prime contractors with more specific guidance on the industrial outcomes sought;
    – employ discriminators to recognize the value of certain types of CIBs (such as technology
       transfers, or long-term supply arrangements on new programs);
    – allow flexibility in the eligible period for primes to discharge their CIB commitments;
    – manage a prime’s CIBs in a consolidated manner rather than on a project-by-project basis;
    – adopt the more traditional definition of a small & medium-sized enterprise (for example, a
       manufacturing firm of less than 100 employees, a service-based firm of less than 50 employees
       vs. any entity with less than 500 employees).

  • Strengthening Canada’s global ­aerospace leadership

    – target 100% of the CIBs to Canada’s aerospace industry (such as defence, commercial, space).

  • Maintaining a domestic in-service support industrial capability

    – perform 100% (except the provisioning of spare parts) of the ISS by the current Canadian-based
       ISS industry for the tactical and helicopter fleets being acquired by Canada;
    – ensure the value of the ISS for the strategic airlift component forms part of the prime’s CIB
       obligation to Canada;
    – specify the types of functions that must be performed by Canadian-based ISS firms (such as
       overall fleet management, engineering support, repair & overhaul, modifications, upgrades and
       life-extension).
 
To ensure that Canada will secure the most valuable CIBs from the airlift ­­procurements, we are calling for the establishment of a government/industry consultation forum to assist in several important areas:

  • defining the types of CIBs of highest attractiveness;
  • identifying areas of CIB placement;
  • assessing and evaluating CIBs proposed by the primes. 

By embracing these proposed changes to Canada’s defence procurements process, we believe that Canadians will look to the future with confidence, knowing that industry and ­government are aligned and focused on a common agenda that advances the globally ­competitive interests of industry while nurturing the fiscal and defence policy interests of government. We also see this as a sensible route toward assuring Canadians that their hard-earned tax dollars are being wisely spent.
 
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Peter Boag is the President of AIAC, the Aerospace Industries Association of Canada.
© FrontLine Defence 2007

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