IRB Changes Imminent?
Nov 15, 2009

The IRB (Industrial Regional Benefits) program, the cornerstone of Canadian military and security procurement, has been undergoing detailed scrutiny, a process that ends – and begins, in a sense – any day now. That’s when the Canadian ­Association of Defence and Security Industries (CADSI) presents a report to three federal cabinet ministers on an “engagement” with the defence industry and also the general public on the future direction of defence procurement. IRBs, which were instituted in 1986, are now a core element of the bidding process for government procurement contracts, and are used to lever long-term development while ensuring that procurements bring new business or technologies to domestic companies.

Industry Canada is responsible for IRB policy administration, which is why Industry Minister Tony Clement is getting a copy of the CADSI report. So, too, will Defence Minister Peter MacKay, whose department defines requirements and is the end-user, and Public Works & Government Services Minister Christian Paradis, whose department writes the contracts and signs the cheques.

In an attempt to create a win/win situation when a foreign-owned company has the best product, the IRB policy ostensibly ensures that the economy in all regions will benefit, regardless of who wins the contract. Prime contractors are “encouraged” to choose Canadian partners for sustainable strategic alliances, which ideally mean a more competitive Canadian industry.

The winning contractors must invest amounts equal to the value of their contracts, either directly related to the specific procurement or indirectly to the winner’s other product or business lines or other approved investments deemed eligible through domestic labour, goods and/or services content.

It is important to understand that Canadian companies are audited for IRB-applicable content. If an OEM (Original Equipment Manufacturer) chooses a product or service from a Canadian manufacturer, they can only claim IRB credits for the percentage that is wholly Canadian – from the bolts to the labour. This unmistakably complicates the process for foreign OEMs looking to fulfill Canadian IRB requirements.

While the program basically works, the aerospace and defence sector has evolved dramatically in the past couple of decades. Global supply chains are the norm, presenting a challenge for IRB managers in determining what is eligible for inclusion in an IRB proposal. To address these and other challenges, Minister Clement announced, in late September, a three-part plan to improve the IRB structure and procesess over the next year or so:

  • Some procurements would be leveraged to give Canadian companies access to work on global value chains by acknowledging the value of work on foreign assets as equivalent to work on the assets purchased by Canada. And, recognizing that industry planning and production cycles may not align with government cycles, limited banking of IRB credits in high-value procurements would be permitted;
  • Primes with major IRB obligations would be required to develop a strategic plan for meeting their commitments, more strategic and longer-term commercial relationships would be encouraged; and
  • More emphasis on innovation and commercialization to better reflect Canadian niche research and development activities.

13 November 2009 – (from left) During a visit to JTF-Afghanistan, The Honourable Pamela Wallin, Senate of Canda; The Honourable Tony Clement, Minister of Industry; and The ?Honourable Peter MacKay, Minister of National Defence, address the media in Kandahar.

The government’s Canada First Defence Strategy, is expected to see unprecedented military and security spending through the next decade despite lingering effects of the latest recession and the inevitability of a record budget deficit in 2009-2010.
Minister MacKay insists that a $60-billion plan to acquire new hardware – including aircraft, ships and armoured vehicles – is on track as the government moves to increase its annual defence budget from the current $19 billion to $30 billion by 2027. “The funding will be there,” he assured military and industry representatives at CANSEC 2009. “It’s locked in.”

But he acknowledged a need to convince Canadians “and their communities” that they will benefit from “high-value employment opportunities” and “sustainable economic benefits that accrue through domestic and global opportunities in and beyond defence and security.”

He also tried to address a long-standing industry concern that Canada’s procurement process is painfully and unproductively slow, often due to three-way internecine warfare between DND and Industry Canada and PWGSC.

In a letter to the minister early this year, the Aerospace Industries Association of Canada (AIAC) had complained that Canada was not benefitting from the billions of domestic tax dollars being given to mainly American defence contractors.

“Our industry remains acutely concerned that major defence procurements are proceeding in a way that will not fully engage and strengthen capabilities resident in the domestic industrial base,” AIAC Chief Executive Officer Claude Lajeunesse said, waving a sovereignty flag.

MacKay’s staff said he was ready to listen to the defence and aerospace industry’s concerns directly and he eventually used CANSEC as a platform. “We understand… the frustration,” he said. “Given the complexity, the costs and what’s at stake, we need to have checks and balances in place to ensure best value for taxpayers’ dollars and the maximum benefit to Canadian industry and jobs.” That being said, he departed from his prepared text with a concession that “we need to flush out some of the plumbing of the bureaucracy.”

MacKay also took the opportunity to tell the industry to “lower the temperature” in the competition for contracts, because there was plenty of prospective business for all. “For example, there is enough shipbuilding contracts for every shipbuilding company in every port in the country over the coming years,” he said, citing the planned purchase of at least 40 new ships, including icebreakers.

While that isn’t expected to be the central theme of CADSI’s IRB report – which Janet Thorsteinson, the organization’s Vice-President of Government Relations, promised would be delivered on time, by the end of this month – it almost certainly will be referenced in the package.

While she doggedly declined to go into detail about CADSI’s recommendations, Thorsteinson did outline the intensity of the workup for the report – a process she preferred to call an “industry engagement” rather than “consultation.” The latter, she explained, invokes “a whole infrastructure within the government, including the Privy Council Office, on how things have to be done.”

The implication was that involving other elements of government would draw out the process unnecessarily and unproductively. CADSI commissioned an international comparison of military procurement and IRBs while inviting comment “from anyone who’s interested.” That was coupled with focus groups with academics and members of the defence community in eight cities, followed by one-on-one interviews.

Canadian companies are audited for IRB-applicable content, and only the 100% Canadian portion of any product or service from a Canadian manufacturer is eligible.

Thorsteinson explained that three main areas were addressed, including “linkage between the defence procurement environment and the Canadian economy,” specifically job-creation and how the government can get an economic return on its investment in military readiness. CADSI’s team also looked at current and potential capabilities in Canadian industry and then solicited views on what’s good as well as bad about defence procurement.

“We ran the full gamut … and people were very interested in participating,” she said. “As for what they said, I can’t tell you that. I can’t tell you what’s going to be in our report, I can’t you what the findings are and I can’t tell you what the recommendations are.”

Having spent 34 years in the public service, primarily in procurement and materiels management and latterly as Executive Director of Military Procurement at PWGSC, the Carleton University electrical engineering graduate is clearly used to keeping confidences (I wouldn’t want to play poker with her). Even so, when pressed further on possibilities for the CADSI report, she offered a “somewhat facetious” example of how IRB credit banking could be handled.

If banking was not allowed, a prime which has secured a contract with a Canadian partner would sever all ties with the partner even if “they’re highly competent and meet your needs.” Then, if a second contract is involved, “you can go back and have a causality for forming a relationship with that company again because you can count those credits.”

On the other hand, if banking was permitted and the prime met all IRB requirements on a first contract and sustained its relationship with the Canadian partner, it could apply credits against subsequent contracts. “That would be a good thing for Canada: that the relationship continued, that people went on getting employed in the IRB-related company all along.” Thorsteinson didn’t think companies actually did that. “I’m just saying that it would be, if you were managing IRBs, a smart thing to do.”

The bottom line is that IRB credit banking almost certainly will be an issue for the CADSI report, as will a preference for applying military IRB credits against defence contractors rather than indirect companies. “It’s a good thing if the IRBs help to build the defence-industrial base in Canada so that the base is prepared to meet the needs of national defence.”

Equally certain, however, is that CADSI won’t suggest in any way that IRBs be scrapped. “My sense is that that ship has sailed,” Thorsteinson said with a chuckle. “Maybe 100 years ago, when I was a young officer in PWGSC, it might have been ­possible to do that – but you can’t put that genie back in the bottle.”

Ken Pole is a freelance security, defence and aviation writer.
© FrontLine Defence 2009