Defence Procurement Putting the cart before the horse?
KEN POLE
© 2010 FrontLine Defence (Vol 7, No 6)

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The dogfight over Canada’s next-generation fighter aircraft is fraught with a lot of hot air turbulence as the political conflict escalates. Few question the need for a successor to the CF-18 Hornets, which began entering service in 1982 and are currently scheduled for retirement in the 2017-2020 timeframe. However, the Conservative government’s decision to sole-source the new aircraft will likely be an issue in the next federal election.

Prime Minister Stephen Harper’s admin­istration doggedly defends the mid-July announcement that the government had signed an agreement with Lockheed Martin for 65 F-35 Lightning IIs despite earlier assertions by Defence Minister Peter MacKay that there would an “open and transparent” competition. The Depart­ment of National Defence (DND) has recently been waging a cross-country ­publicity campaign in support of the F-35, and various industry executives and ­lobbyists have added their voices.
 
There is no shortage of critics on this issue. Alan Williams, a former senior federal procurement procurement official, is equally determined that the government is wrong to have opted out of competitive bids to replace the updated but ageing ­Hornets. Mr. Williams was Assistant Deputy Minister (Materiel) at DND from August 1999 until his retirement from the public service in April 2005. His signature is on the 2002 Memorandum of Understanding (MoU) with the United States that resulted in Canada’s participation in the second phase of the Joint Strike Fighter project that has yielded the F-35.
 
Mr. Williams can trace his involvement in procurement processes back to the early 1970s when he was at the then Department of Supply & Services. He is among an array of witnesses who have testified before the House of Commons Standing Committee on National Defence since mid-September. Chaired by former Foreign Affairs Minister Maxime Bernier, the frequently combative committee has been examining the F-35 proposal at the instigation of Bloc Québécois MP Claude Bachand. The hearings are ongoing, don’t expect a report until sometime next year. Nor are there likely to be any surprises, except in any dissenting report by Opposition members.
 
Williams, who pointed out in FrontLine nearly five years ago that “defence procurement is critical to defence capability,” remains deeply engaged. In his 2007 book, Reinventing Defence Procurement: A View from The Inside, he made a persuasive argument for streamlining what has become, at best, a cumbersome process. At worst, it has frustrated and subverted defence priorities and even capabilities.
 
When he appeared before the defence committee in early October, Mr. Williams testified that open competition, backed by a policy framework that reflects Canadians’ expectations of their military, is the best procurement approach. “We put the cart before the horse,” he said, inferring that long-term policy goals can fall victim to short-term priorities. “An open, fair, and transparent process,” he says, “limit[s] the likelihood of … buying something that isn’t consistent with the role you’ve foreseen for the Forces.”
 
 
16 July 2010 – The Honourable Peter MacKay, Minister of National Defence, announces that the CF will receive 65 fifth generation Joint Strike Fighter F-35 aircraft, beginning in 2016, as a replacement to its current fleet of CF-18s.
 
Alberta Conservative MP Laurie Hawn, a retired CF-18 pilot and member of the of the Standing Committee on National Defence voiced concern over what would happen to the F-35 contracts currently held by Canadian companies if Canada withdraws from the government-to-govern­ment MoU.

Mr. Williams acknowledged such contracts could be at risk when the program moves to the production phase. “Whether they would lose it [current contract work], that’s quite possible. Whether they’d be still given attention because they’re producing this good or product in such a cost-effective way, that’s also possible.”
 
Mr. Hawn predicts that Canadian companies would be shut out of opportunities for work on the “global supply chain,” but Williams dismissed that as untrue. “The agreement basically says that … contractors have to ensure that their companies have full access to all contract opportunities.” Also, he added, “no one is suggesting that you withdraw from the MoU.”
 
When Dan Ross, the current ADM (Materiel) appeared before the committee, he agreed that withdrawal from the MoU would involve penalties. If Canada did withdraw and yet went on to buy F-35s, that would come under the rubric of ­”foreign military sales” which involves higher sales fees.

Opting out in favour of another aircraft would involve compensation to the eight other JSF partners. “We have committed … to contribute $550 million over the entire length of the Joint Strike Fighter program; they have programmed our contribution into the development costs, the set-up costs, tooling, etc.,” said Mr. Ross. Some of those commitments are contractual in nature and would involve penalties. While he could not give the committee a figure, he advised it would “not be insignificant.”
 
Mr. Bachand, who is vice-chairman of the defence committee and who has displayed a keener knowledge of the defence sector than many of his committee colleagues (albeit with a distinct Québec focus) pointed out that the MoU states that the cost of withdrawal could not exceed $550 million in Canada’s case. Exposure to date, however, is $168 million and Mr. Ross said Canadian companies have benefitted to the tune of $850 million.

Partially offsetting any MoU-related penalties would be royalties that Israel must pay the JSF partners because it has ordered F-35s despite not being on the original team, which in addition to the U.S., includes Australia, Britain, Canada, Denmark, Italy, the Netherlands, Norway and Turkey. Commensurate with the partners’ individual commitments, the royalties in Canada’s case could amount to some $150 million.
 
 

Mr. Ross confirmed that while current contracts would be honoured in the event of a withdrawal, future opportunities would likely “stop dead … and new competitive opportunities for the aerospace industry members would not materialize.” Nor did he think it would be possible to continue within the MoU and also hold a bid competition.
 
Moreover, if Canada withdrew from the MoU, it would be forced to negotiate a smaller IRB package covering only its own aircraft rather than the more than 3,000 that Lockheed Martin evisages worldwide.
 
“If you evaluate the contenders for the essential characteristics we need for protection, survivability, affordability, etc., in the future for 30, 40 years, you’re going to come back to probably one solution, which is the F-35,” Mr. Ross suggests.
 
This begs the question, put by Alberta Conservative LaVar Payne, about whether an MoU withdrawal would limit or deny Canadian companies’ access to technologies needed to improve their international competitiveness.
 
“I don’t think we could … say they would never have any,” Ross replied. “Canadian companies have some technology niches that are very good. Perhaps some Joint Strike Fighter multinationals would still come to Canadian companies for some work. Most of the current contracts would probably peter out… . Nevertheless, there are several components on a Joint Strike Fighter for which Canada is virtually the only source of supply.” Industry Canada officials told FrontLine that the current list of “sole providers” on the JSF comprises: Honeywell International of Ontario for the power thermal management system; Avcorp of B.C. for the carrier variant’s outboard wing; and Héroux-Devtek for the flight door uplocks on all models. However, they represent only a few of the dozens of Cana­dian companies doing work on the JSF.
 
Amid the often acrimonious debate for and against sole-sourcing, it fell to Tim Page, President of the Canadian Association of Defence & Security Industries, to come up with a useful middle ground, befitting CADSI’s status as non-partisan entity whose more than 860 member companies with 90,000 employees obviously represents diverse and sometimes competing interests.
 
“We do not take a specific position on any given defence procurement,” he told the committee. Nor would CADSI comment on defence requirements, which were the government’s prerogative.
 
“That said, in general we believe that defining a requirement should not be used as an opportunity to define a specific ­platform. We believe that procurement strategies should be chosen in part so as to optimize Canadian industrial participation at the R&D, production, and sustainment phases of a project.”

During a presentation last April to the same committee, Mr. Page called on the government to create and implement a defence industrial strategy as part of a ­general reform of defence procurement. Had it existed at the time, he suggested, questions about the benefits from any ­specific procurement such as the JSF would be easier to evaluate.
 
In his latest appearance, Mr. Page said CADSI liked the F-35 procurement model because it included characteristics of a defence industrial strategy, such as government-industry cooperation, the commitment of government-supported industrial R&D from the outset, and access to intellectual property and global supply chains.
 
“Participating in the development of capital defence programs from the ground up provides Canadian industry with the time horizon to invest in plant, process, R&D, and human resources, and to find partners to enable it to compete successfully,” he said. “It also creates an important window of opportunity for government to act strategically to nurture and develop Canada’s defence industrial base in areas of sovereign, security, and national economic interest.”
 
Mr. Page urged a similar approach to other priorities outlined in the Canada First Defence Strategy. This is expected to be a key recommendation when the committee gets around to submitting its report early next year.


Jobs Trump Bluster
A measure of the political divide over the F-35 is how the House of Commons voted on the 23 November motion by Liberal Leader Michael Ignatieff calling for competitive bids. New Democratic Party support wasn’t enough when the Bloc Quebecois, clearly playing to their constituency base in an aerospace-dense province, sided with the ­Conservative minority.
     
The motion was defeated 170-100, but Industry Minister Tony Clement already had dismissed it as irrelevant gamesmanship. “The Liberals are playing … partisan political games,” he had told reporters a couple of hours earlier. “It’s really unfortunate because we’re … dealing with the lives and jobs of Canadian workers, and that should be foremost in our minds – and that’s how we’re going to vote.”


Timing, they say, is everything.
Opposition Leader Michael Ignatieff has vowed to cancel the Conservatives’ decision to sole-source Canada’s next generation of fighter aircraft and to put the program up for competitive bids if he manages to form a government out of the next election. There is a legitimate question of whether he could make good on that commitment.
     
When the Conservatives announced their commitment to Lockheed Martin in mid-July, they were effectively exercising an option set out in the multinational Joint Strike Fighter program agreement.
     
Canada was an early JSF participant, beginning in 1997 when the Department of National Defence signed on for the Concept Demonstration phase and put up $10 million. A further $150 million followed in 2002 when Canada signed on for the System Development & Demonstration phase, including $50 million for domestic technology investments. A Production, Sustainment & Follow-on Development Memorandum of Understanding followed in December 2006, at which time Canada committed to an additional $551 million, most of which is unspent, through to 2051.
     
The fact that first delivery from Lockheed Martin would be in 2016 – coupled with the lead times ­necessary for production line scheduling – suggests that time is fast running out on any options a Liberal government could exercise. A Conservative-driven law that came into effect in May 2007 means that the next election must be called for no later than 15 October 2012: the third Monday in the fourth calendar year after the last election, which was 14 October 2008.
     
While Harper could pull the plug earlier, that’s considered unlikely as opinion polls indicate that the next Parliament wouldn’t be much different from the current one.
     
Moreover, while the MoU with Lockheed Martin does provide for some cost recovery in the event of a Canadian withdrawal, there is no massive penalty clause, which would certainly be in any contract the Conservatives might sign as early as 2012. If that happened before the election, Ignatieff would be in an untenable position with regard to his promise.
     
Memories of a previous Liberal government’s decision to tear up a major helicopter contract signed by its Progressive Conservative forerunner at a cost of hundreds of millions in penalties still ­resonates politically.


Transparent?
Did Defence Minister Peter MacKay divulge the government’s decision to sole-source its new front-line fighters seven weeks before the formal July 16 announcement?
     
During the May 27 parliamentary debate on DND spending, he said the government was “well down the road” on its CF18 replacement program and that the “Joint Strike Fighter program … will see Canada participate in that.” Then he said the next gen fighter contract would be “an open, competitive, transparent process that will see us receive the best capability … in the world.”
     
Two hours later, Mr. MacKay compounded the confusion by talking about “eye-watering technology” in “a fifth generation fighter aircraft.” Another indication that the government had already decided on the JSF? He later demurred, saying he should have stuck with the generic “next generation aircraft” and that the JSF was still “one of the ... two main contenders.”
     
Even so, given Canada’s involvement in the JSF since 1997, a subsequent statement that the government had “already embarked upon investments” pointed at the JSF again.
     
And once more, again backtracking, Mr. Mackay sought “to be very clear on the record that the reference to the next generation of fighter aircraft does not preclude a competition, and an open and transparent one” – which ­history shows turned out not to be the case.

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Ken Pole is a contributing editor at FrontLine.
© FrontLine Defence 2010

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