Great Debates on IRBs
JOHN J.D. READ
© 2007 FrontLine Defence (Vol 4, No 2)

Many of the contributors to the “Great Debate on IRBs” (FrontLine, issue 1, 2007) spoke of a new strategy, in one way or another. Alan Williams said that we need to bring our defence industrial strategy into the 21st century, unfortunately begging the question of what exactly we would be updating – for there is really no such strategy in place now.  Susan Brownrigg-Smith noted the need for more cooperation between the government and industry, with emphasis on investments for the long term. Peter Boag of the AIAC talked of industry and government being aligned and focused on a common agenda that includes both military requirements and the competitive interests of industry. And in the context of his association’s quest for more government-industry cooperation, Tim Page of CADSI noted the strategic value to Canada of a viable defence and security industries sector.

All of these highly experienced writers, and others, have concluded that you cannot achieve effective industrial development if the starting point – in fact the whole approach – is the often uncertain world of major military procurement.  

Think about it. Over the short while, Canada will replace just about all of its major military assets – strategic and tactical aircraft, medium-to-heavy lift helicopters; trucks; and the joint support ships. What’s left? Of course, the oft-delayed and yet-to-be-issued Defence Capability Plan may tell us – but once we get past the likely replacement of destroyers and frigates, and one assumes the acquisition of capabilities to replace the CF-18s, it is difficult to see just how the government expects to stimulate and support our defence and security industries directly from new equipment acquisitions. How can any Canadian company – large or small – plan in such an environment?

Here is where the views of Ken Rowe of IMP Group come into play. Ken sees Canada’s approach to IRBs in the current acquisitions of aircraft as a significant change from the past, to the detriment of Canada’s long-term ability to maintain its own military equipment.

I mention Ken’s comments last, because they are an effective lead into what this article is all about – the need for a clear defence industrial strategy.

Arguing for such a new strategy is like arguing against history. I discussed this with a colleague recently, and found that we share the same basic views – but he expresses them differently. “A strategy to achieve results of any kind is inherently a good thing,” he starts. “However, experience has shown that so-called national industrial strategies driven by government normally result in a plethora of cash subsidies, transfers, trade barriers, tax policies, and other market intrusions by government. Rather than producing significant and sustainable benefits, many believe that the damage such intrusions have on the natural disciplines of a free and competitive marketplace are a waste of taxpayers money – and that they typically result in a large number of unintended, unforeseeable (and usually negative) consequences for the broader economy.”

Seeking to further rebut my views, he continued: “In our increasingly global economy, it is hubris for governments to continue to operate under the illusion that by developing an activist strategy, they can have any kind of tangible effect on real and/or sustainable economic growth and prosperity. To the contrary, this does more harm than good (in real economic terms). Government should stop trying to achieve specific outcomes and would be better off focusing their efforts on creating an investment and taxation environment that provides market-oriented economic incentives, a stable monetary policy and competitive rates of taxation.”

Hoping to land a mortal blow to my position, he concluded with: “It is NOT the place of government bureaucrats to ‘pick winners and losers’ in an open and competitive economy, as this typically results in wasted resources, the sending of false signals to the marketplace and the propping-up of uncompetitive and unsustainable industries, turning these companies into corporate welfare bums dependent on public policy for their bottom-line, as opposed to the needs of their customers.”

He thought he had me – until I agreed with him. We did not disagree on the basics, however, he saw something in my proposal for a defence industrial strategy – the often-heavy and overly directing hand of ­government – that, in fact, is not there.

So, what is my view? It is one element of a three-pronged approach, in which there is clear and effective interplay between a Defence Capability Plan (DCP); the Defence Industrial Strategy (DIS); and specific program development plans (PDP).

The Defence Capability Plan is a statement of the capabilities that Canada will require of its armed forces. In its simplest form, it answers the questions: what must our armed forces be able to do; within what planning context; how often and in what strength; and what will be needed to enable them to do that.

These mission objectives can then be translated into equipment, troop and other requirements with some degree of precision. Such a plan alerts the potential supplier community – existing or new entrants; prime or sub-contractors; Canadian or international – to required defence acquisitions within a fairly well defined time frame. This then becomes a corporate planning horizon, and a basis for investing in R&D etc.
 
As important, it also identifies what Canada is NOT interested in acquiring.

If Canada could achieve a state where major elements of this Plan are clearly agreed to by all of major political parties, there would be a solid foundation for committing long term funding to the armed forces. Such funding would do much to eliminate the ‘stop and start’ approach to military programs that has been one of the root causes of lengthy acquisition timelines. It would also reassure the supplier community that there will be stability in the Plan: once an item appears, it is likely to remain and come to fruition.

The Defence Industrial Strategy addresses the key issue of where/from whom Canada will meets its needs for equipment and services.

Canada could say that it will buy the best, regardless of from where – or from NATO or other allies (to maintain compatibility in joint operations) – or that it has sufficient justification to use ‘Made in Canada.’ This level of information would let industry refine its forward planning, because everyone in the business could take a calculated guess as to who they will be competing against for the new requirements. Like the DCP, the DIS would serve as a stimulus and a focus for R&D and other investments.

Crucial to an effective DIS, at least from the perspective of Canadian firms, are government decisions as to which equipment and service acquisitions are essential to Canada’s national security interests. Under the Agreement on Internal Trade (the only trade agreement that applies to major acquisitions for the armed forces), Canada cannot easily require that any equipment be made in Canada, or work be carried out in Canada unless it is essential to meeting our national security requirements. This comes from the decision of the Canadian International Trade Tribunal in the Rolls-Royce case, CITT reference PR-99-053. Thus, an early declaration of the national security dimensions of a major program would alert potential suppliers that there might be a requirement for production or service delivery by domestic sources.

The role of various PDPs is to provide details about specific acquisitions or service programs. For every major acquisition, PDPs map out what the armed forces will be doing – also identifying programs and activities that are funded, or where resources are still to be acquired. This provides yet another and more detailed planning base for industry (in addition to helping DND allocate resources.)

The PDPs provide a clear and specific definition of what the government needs, when and why. That ‘why’ is important as it provides a huge incentive for companies to invest in R&D, which has strong potential for leveraging into international markets.

These PDPs would likely be more effective if they deal with broad program needs rather than individual projects. In this way, potential suppliers can see how individual projects fit into a larger whole – again, a potential driver for innovation.

Putting it All Together
So, we have three parts of a triangle – an inherently strong structure. With knowledge of what Canada will need, why and when, potential suppliers could plan with greater certainty – where and when to invest. Paraphrasing my colleague, the government would “…create an investment and general business environment that provides a realistic set of market oriented economic incentives… a stable defence policy and competitive context for innovation.”

If Canada supported this with a renewed IRB Policy, in which potential suppliers could bank their IRB investment credits against possible future procurements, the business community could do what it does best – decide where and when to invest in a sustainable way.

We must not underestimate the challenge facing Canada to develop this approach. We are not particularly used to long-term plans that have substance sufficient for the business community to plan and invest significant sums with confidence that the government will stick largely to its path. We have become overly dependent on plans, reports and public commentaries that stick to the tried and true, with little substance.

One of the best lines in the Great Debate edition was from Alan Williams, who noted that in the recently released Industry Canada National Aerospace and Defence Strategy Framework, “The section on procurement states that the government commits to developing a framework…” Isn’t that just great – a Framework that promises another Framework? Hard for anyone to be accountable for the results of that wonderful process.

And, of course, there would be the inevitable turf battles between the various departments involved. National Defence likely believes that it is its job to decide what sort of defence industrial base Canada has and needs – and Industry Canada would certainly guard its industrial development mandate zealously. Interestingly enough, the department that has the actual legal mandate to build a defence industrial base – Public Works and Government Services Canada – devotes virtually no time or resources to that function – and if it tried, the bureaucratic wars would almost certainly ­proceed apace.

Still, it can be – and has been – done. Interested readers should take the time to examine the U.K. approach through the Ministry of Defence web site (www.mod.uk). There is a July 2006 status report on the U.K.’s DIS at www.mod.uk/DefenceInternet/ AboutDefence/People/Speeches/MinDES/DefenceIndustrialStrategySixMonthsOn.ht.

Perhaps the time is right to start ­saying, to Ministers and to bureaucrats, “this is what we pay you to do – so do it.” If you listen to the words in the Great Debate on IRBs, “it” is the development of a real Canadian Defence Industrial Strategy.
 
====
John Read has just retired from his position as Senior Director, Military Procure­ment, for PWGSC. Prior to that, he was the Senior Director, Acquisition Policy and Process.
©  FrontLine Defence 2007

RELATED LINKS

Comments