Blue Ribbon Panel for Defence Procurement
RON BUCK
© 2013 FrontLine Defence (Vol 10, No 2)

Canada is paying a high price for failed and failing defence procurements. Canadian industry is losing efficiency and international competitiveness. Elected officials are losing political capital. Bureaucrats are losing credibility. Most importantly, our armed forces will not have the equipment they need to carry out their assigned missions.

Delayed equipment acquisitions ultimately cost the taxpayer much more money as inflation and contract resets push prices ever upwards while capabilities are reduced to meet the available funding – potentially putting the men and women of the Canadian Armed Forces at greater risk than necessary.

A clear, concise problem statement is most often the real key to any solution. In the case of Canadian defence procurement today, clarity and concision may be difficult but not impossible to achieve. Breaking out and examining the moving parts inside each of the major institutional actors can isolate individual challenges. Rolling up the conclusions can lead to a solution.

DEFINING THE REQUIREMENT
Canadian Armed Forces/ Department of National Defence
The Department of National Defence and the Canadian Forces define the kind of equipment they need, but too often these requirement definitions turn into more of a “wish list” than an operational requirement. There is a clear need for a challenge function for establishing operational and technical requirements.

We have seen procurements fail because they have been overburdened with far too many mandatories – sometimes hundreds, sometimes thousands. Project management and requirements planning are both expensive, but current practices load much of this cost into the projects themselves. The corrosive impact of this, and the realities of planning and managing procurements need to be recognized and costed into budget estimates.

At different times in the past, there was a formal internal challenge system, which generated healthy debates about equipment specifications. Today, the nominal capability to challenge requirements is in the office of the Vice Chief of Defence Staff (VCDS), but because that organization is not staffed for it, the required analyses are done by the Army, Navy and Air Force. This lends credence to the optics that certain solutions can be influenced internally. Worse still, it is not apparent that the Navy, Army and Air Force understand or accept that they need to challenge their staffs, as opposed to simply signing off on Statements of Requirement (SOR). As Commander of Maritime Command, I considered this one of my key roles. For example, when the ORCA training vessel SOR arrived on my desk, it was in almost all respects a miniature patrol frigate. Because I needed to be able to defend it and make sure it was affordable, I only signed it after many hours of questioning and many adjustments.

ASSIGNING RISK
Public Works & Government Services Canada
The Terms and Conditions imposed on contracts by Public Works and Government Services Canada (PWGSC) places virtually all risk on industry. In this respect, Canada is probably the most demanding of western nations, but some risks should be shared and others taken on by the Government.

Industry readily accepts responsibility for performance risks for the products and services they provide. On the other hand, the risk of excessive currency fluctuations or excessive commodity inflation, over which industry has no control, should be shared with the Government.

Catastrophic risk, such as the failure of a major sub-­contractor, is a risk that should be held by Government. Forcing Industry to add such catastrophic risk insurance costs to its bid pricing serves to increase prices even though past experience shows that when such an event occurs, Government has always realized that it must financially ­contribute – thus taxpayers are effectively paying twice.

Currently Canadian defence procurement processes effectively demand zero risk to Government, but this policy is very expensive and often results in major delays, more cost, and/or less delivered capability. If Canadian governments are not willing to accept any risk at all, cost comparisons with other nations simply do not make sense because apples are not being compared to apples, as no other western nation refuses to accept some element of risk. This has been articulated to Governments many times and in many forums (such as in the 2009 CADSI Marine Working Group) but, while seemingly understood, is considered ‘too difficult’ to do.

During a procurement, PWGSC also operates on the premise of avoiding any risk of public challenge, in part because of the perceived danger of being accused of being unfair, and in part because of the danger of opening the Government of the day to political/media attack. Even though it has wide freedom to communicate with bidders to openly and transparently adjust or modify the process, the default, “safe” position is to avoid use of discretion and terminate procurements instead.

For example, in the past five years, the Joint Support Ship, Coast Guard Midshore Patrol Vessel, Medium Support Vehicles, Close Combat Vehicle and Integrated Soldier System projects have all been terminated – largely because no discretion was used. Although not a sound “business” decision, it is considered by the government to be ‘safer’ to terminate an acquisition and start again than to work with ­bidders to solve the problem. Such action causes years of delay, puts the men and women of the Canadian Forces at risk, and costs Industry and Government (really, the taxpayer) tens to hundreds of millions of wasted dollars.

Even for complex, developmental weapons systems, PWGSC will generally use a metric that relies solely on lowest cost, often trading off operational capability for lower cost due to complex weighting formulae. This means lowest cost acquisition, which is good, but does not allow much if any operational capability beyond the basic need – and certainly does not allow qualitative assessment of any operational capability beyond the minimum.

INDUSTRIAL BENEFITS
Industry Canada
The cost of Industrial and Regional Benefits (IRB) – as much as 10% of a weapon system/vehicle cost – needs to be factored into front end budget estimates. The current IRB policy satisfies the need for bureaucratic simplicity and political safety – a dollar out, a dollar in – but a more strategic defence industrial strategy could provide for a more creative and effective IRB strategy that would provide value added in enhancing a sustainable defence industrial capability. The present situation tends to deliver transactional results and often non-sustainable jobs.
 
BUDGET REALITIES
Treasury Board / Finance Canada
When Government decides on a major defence procurement, a dollar amount is established very early and is almost impossible to subsequently increase even though when set, the budget has not been in any rigorous way validated. There is allowance made for escalation, but it does not reflect the reality of defence inflation nor costs beyond the weapons system or vehicle and yet are deemed to be fully escalated. Generally speaking, when budgets are set there has not been any true assessment of the costs of contractual terms and conditions, project management, IRBs, nor any cost for the risk assigned to industry. As time goes by, and it can be 10 years or more, in the case of programmes like warships, the government’s buying power diminishes, in some cases precipitously because not everything was costed, and the escalation assumptions bear no resemblance to reality.

THE WAY AHEAD
The procurement system does not appear to be ‘learning’ from its failures. The system is incapable of repairing itself. The government has applied patches to the cracks in the form of Secretariats, a tacit admission that internal resources are incapable of dealing with some procurements. In fact, the Secretariat system has yet to prove itself, and it may actually generate ever more process and delay.

Reform is desperately needed. The ‘single agency’ solution has its proponents. Will consolidation within PWGSC, or the ­creation of an agency under PWGSC or a separate Defence Procurement Agency really work? How likely is it to succeed? PWGSC is already struggling with its own mandate today. Two of our Allies have ­created stand-alone Defence Procurement Agencies with very uneven success rates.

Operational requirements, although needing a challenge function, need to be set by military commanders who have accountability for the lives of the men and women in the CF. Bureaucrats, or worse still, politicians with no understanding of the operational risks should not set requirements. The potential would then exist for the acquisition of equipment inadequate to meet the demands faced by the men and women of CF resulting in injury and death. We have seen examples of such results in the past, including the Griffon helicopter and the Iltis vehicle.

The Canada First Defence Strategy, even in a revised version, will still call for large defence procurements in the years ahead. Major structural change in the machinery of government will take time, cost millions and not fundamentally change the two most major issues – aversion to risk, both bureaucratic and political, and the unrealistic approach to budget setting. Any bureaucratic solution will inevitably involve conflict over mandates. The simplistic solution of a single agency has limited likelihood of real success.

BLUE RIBBON PANEL
A non-partisan, blue ribbon panel has the best chance of delivering positive outcomes in future defence procurements. It would immediately remove politics from procurement. The method appears to be working for the National Shipbuilding Procurement Strategy, at least so far, and implementation is relatively simple.

The panel should report to a Cabinet Committee or to Cabinet, be composed of highly respected individuals and be visibly non-partisan. Canada is fortunate to have exceptional people to work on such a panel, and defence procurement is undeniably a challenge to their abilities.

The panel should not set requirements or budgets, but it could perform the all-important challenge function. The Department of National Defence would continue to set requirements and budgets while the panel would ensure they were realistic. PWGSC would build and manage the procurement and the panel would provide oversight of the process and provide ‘cover’ for or even direct PWGSC to exercise the discretion they already have available. In the case of Industry Canada, the department would continue to oversee IRBs while the panel could ensure the offsets provide maximum benefit to Canada.

In addition to its immediate task of moving procurements forward, a blue ribbon panel on defence procurement could provide impartial, common sense advice to all participants, including Industry, Government and politicians. Such a panel would not take much time or money to establish and it can begin delivering guidance, decisions and results now, when they are needed.

====
Vice Admiral (ret) Ron Buck, former Commander Maritime Command, and Vice Chief of the Defence Staff (2001 -2006), is currently the National President of The Navy League of Canada.
© FrontLine Defence 2013

RELATED LINKS

Comments