Jenkins Report: Procurement
Mar 15, 2013

The Jenkins report on defence procurement, released in mid-February, sounds an alarm – if the federal government wants to use Canada First Defence Strategy (CFDS) spending to create high quality work for Canadian companies and better jobs for Canadians, time is running out. Of the potential $48 billion in defence spending that could be decided over the next three years, the report claims “the unique window of opportunity to obtain maximum leverage for defence procurement is closing rapidly.”

“Canada First: Leveraging Defence Procurement Through Key Industrial Capabilities”, the report from a panel led by Tom Jenkins, a high-tech businessman and advisor to Minister Ambrose, was produced in a ­limited time and with a limited mandate. Jenkins’ assignment from the Minister of Public Works and Government Services in late September 2012 was “to help improve Canada’s Defence Procurement process to better support the competitiveness of Canada’s defence-related industries” and “help develop criteria and a supporting process to inform the identification of key industrial capabilities.”

That may look like a narrow foundation on which to build a defence industrial strategy, but the Jenkins report certainly tries. Key industrial capabilities, it suggests, are the key. “With few exceptions, the Canadian defence market has historically been open to foreign suppliers in the interests of achieving ‘value for money’ (i.e. lowest cost)” Jenkins wrote after the report’s release. “Looking forward, the challenge for Canada, as a niche player in defence markets, will be to balance these competing objectives by focussing on a few key areas where Canada can achieve high-value, intellectual property-driven, world-class excellence. The concept of Key Industrial Capabilities (KICs) provides the basis for that focus.”

The panel set three criteria for identifying KICs – they have to meet Canadian Forces operational requirements, they must be able to succeed in world markets, and they must have innovation potential. ­Further refining the definition, the panel excluded CFDS areas where Canadian companies are not prime contractors, and commodity areas with little potential for innovation. What remains are “Canadian scale programs, like IP-intensive In-Service Support”, “specialized supply for prime contractors operating in Canada or abroad, like weapons control systems” and “specific niche solutions, like ‘modelling and simulation’”. That amounts to about $48 billion, in the panel’s estimation, of the spending planned under the CFDS.

The panel surveyed various definitions and categories of key defence industry capabilities, and ultimately rejected an approach based on technologies. Instead, they selected what they called a ‘systems’ approach, and suggested Arctic and Maritime Security, Protecting the Soldier, ­Command and Support, Cyber-Security, Training Systems, and In-Service Support as Canadian KICs.


February 2013 – CC-177 pilot, Major Bart Harbour briefs the flight crew prior to takeoff during JOAX 13 (the 2013 Joint Operational Access Exercise) in Fort Bragg. Involving military personnel from the United States and Canada, this readiness validation exercise also included tactical and strategic airlift platforms from both countries. (Photo: Cpl Owen W. Budge, 8 Wing Imaging)

Foreign prime contractors bidding for major Canadian sales would need to show the benefits to Canadian industry using technology transfer and IP retention, in-country innovation, global product mandates, development of specific skills and training, and future overall economic impact, suggests the report. Accordingly, where Canada had identified KICs, there would be preferred sourcing from Canadian suppliers. “To ensure the best possible outcome for these investments, we recommend that the government adopt a KICs-centric approach to its defence procurement policies,” Jenkins wrote in an op-ed published after the release of his report. In a clear understatement, he noted “This may require significant changes in procurement policies and programs for KICs areas.”

One Ottawa-based defence industry executive points to the vague definition of KICs as a potential problem. “There will be a real challenge to implement the Key Industrial Capabilities identified due to the need for further definition. If you’re a staffer at Industry Canada working with IRBs, what will you be doing differently a year from now or two years from now,” he asks. “Unless there is some policy that says that person has to give special consideration to a company that says, ‘we protect the soldier’, that they will get an advantage or evaluate them differently, unless you do that, you haven’t accomplished much at all,” he asserts.

IN-SERVICE SUPPORT
Proponents of a strong Canadian In-Service Support (ISS) capability were cheered by the Jenkins report’s insistence on preference for the sector. (David Emerson’s 2012 Aerospace Review also called on the government to insist that foreign contractors partner with domestic ISS companies.) Along with other KICs, Jenkins sees it as central to Canadian sovereignty.

However, rating In-Service Support in bid evaluations raises a warning flag for another defence executive. When it comes to protecting the soldier, he believes that insisting on ‘Canadian only’ creates the possibility of not getting the best kit for the sake of enhanced industrial benefits.
Nevertheless, the report argues that Canada should have a strong defence industry “that goes well beyond the basic capability of maintenance and repair to the actual ­sovereign production of key goods and services. In particular, this would be the case in areas where Canada has specific requirements that may not be met adequately by foreign contractors in terms of timely or secure supply.”

Pointing to the Arctic, Jenkins asks, “Who is going to build an Arctic capability for us? There are very few countries that have that. We cannot go to countries that don’t have snow. So when you start to think of yourself as a sovereign nation, if we’ve got to build that capability, then let’s get the biggest bang for the buck out of it, so that is why for example, Arctic and maritime security is one of those KICs, because let’s have a strategy where, once we have built it, we can sell it to other allied countries.”

To justify the expansion of Canadian sourcing, the report points both to the National Shipbuilding Procurement Strategy and its implicit assumption of support for Canadian shipbuilding, and to the program that, for decades, guaranteed a ‘stand alone’ Canadian supply of ammunition.

THE BENEFITS OF BENEFITS
Under the current defence procurement system, the majority of work to Canadian companies under CFDS would flow through Industrial and Regional Benefits – the ‘spend in Canada’ policy that requires ­successful bidders to spend an equivalent of the full contract amount on Canadian goods and services. Today, there is roughly $23 billion in IRBs available to Canadian companies and, according to Jenkins, “the reality is there is another $58 billion of inflow. This is a scale that we as a country have not seen before. Not for three generations, so one has to pause and think about what that scale of change means and how do we go about taking advantage of it?”

Jenkins sees the IRB ‘overhang’ as an opportunity, but at least one Canadian expert sees it as a serious potential liability because Canadian industry simply may not have the capacity to fulfill them. “The IRB problem is getting worse by the day,” he said “and it could result in non-compliance situations. Industry Canada does not seem to care.”

The Jenkins report, in one of its few references to the F-35 acquisition, points to the Joint Strike Fighter model of product co-development as a possible alternative to IRBs, because “It is attractive from a defence industrial development perspective as the impetus for KICs (and from a broader portfolio perspective as not involving IRBs). In cases where a defence product is developed using an incremental, modular approach, KICs could be built up over time to supply future generations of a product in global markets.”

CHALLENGE OF CHANGE
Last May, to a CANSEC audience, Public Works minister Rona Ambrose expressed her frustration with existing procurement processes and said the status quo was “not an option.” Speaking at the release event for the Jenkins report, Ms Ambrose said, “to properly sustain the KIC strategy I am very keenly aware there must be changes in the process of purchasing military equipment at Public Works.”

Perhaps the biggest change necessary is the Public Works procurement mindset that sees safety in numbers – the lower the number the better. As the Jenkins report notes, improvement will “require a change in PWGSC’s prevailing interpretation of value for money from a focus on lowest short-term cost to greatest long-term economic benefit to Canada.” The unfortunate result of concentrating solely on the ‘lowest-cost that meets requirements’ is that, apart from IRBs, Canada has failed to take advantage of all options that could create advantages to Canadian businesses.

A single defence procurement agency has been held out as the answer to Canada’s defence procurement problems but, given the urgency of the situation, some people in the defence industry worry that the establishment of a single agency would simply halt any momentum that has already gathered and put everything on hold for at least two years. The Jenkins report sidesteps the question by calling for “a senior official to be accountable, through a supportive governance process, for the implementation of a KICs-centred strategy from policy through to operations, with the objective of achieving a set of cohesive ‘whole of government’ outcomes that maximize economic benefit to Canada.”

Ms Ambrose said that the creation of secretariats for shipbuilding and the CF-18s replacement “provides a level of transparency at the highest level which is key to ensuring that these projects continue to move forward appropriately, so that is a model I advocate.” However, in the real world, this is seen not as transparent but as an easy method of deflecting and deflating criticism. As a senior executive commented: “Every time we have a failed project, I guess we just form a secretariat – Band-Aids for programs that got screwed up so badly they had do something to paste them together again.”

If the secretariat model works for some procurements, would it not work for all procurements? And if the generic knowledge scattered around different secretariats is joined up in one place, does that amount to a defence procurement agency?

SKEPTICISM
The level of skepticism among industry executives about defence procurement in Canada is difficult to exaggerate. One industry professional points to the fact that as of mid-February 2013, there were still no contracts under the National Shipbuilding Procurement Strategy, and speculated that the government might not even want to spend money on defence procurements right now.

The same observer believes that Public Works will not pay attention to the Jenkins report. In fact, he says, “it is not up to them anyway,” because Industry Canada should be the lead department on industrial strategy. “The fact that [Public Works] is leading this, as far as there is leadership, is not encouraging.”

Further contributing to the cynicism around military procurement, the government of Canada may not even understand the challenge sufficiently well to make any change in direction with confidence.

The Jenkins report includes a tacit admission that when it comes to the defence industry, Canada simply doesn’t know what it is doing. One recommendation calls for “the establishment of an independent, third party defence analysis institute or network,” because the Canadian government and Canadian industry decision makers do not have enough information to make important decisions. “We once had that in this country,” Jenkins said, and Canada again needs “one common source of the so-called truth, one common set of numbers that everyone can agree to because that gives us a common nomenclature.” The lack of solid numbers is a serious obstacle to a government that wants to spend defence dollars, and an excellent excuse for one that doesn’t.

On March 21, the 2013 Federal Budget endorsed the Jenkins report. In future, all major procurements will need a plan for Canadian industrial participation before going forward, and the government will work with industry and groups like the Canadian Association of Defence and ­Security Industries (CADSI) to highlight areas where domestic companies can ­compete and win.

Key industrial capabilities will indeed be key, according to budget documents, “as a means of fully leveraging defence procurement projects to support economic opportunities for Canadians.” The government will analyze the Jenkins report’s list of KICs this spring and develop a more refined set of key industrial capabilities for the long-term.

By 2027, the budget pointed out, $49 billion in IRB obligations could be supporting “high-skill and high-value opportunities and jobs in Canadian industries." For years, industry has been pointing to the opportunity, through studies like CADSI’s 2009 procurement report and last year’s Aerospace Review.

Now, through the budget, the top political leadership has affirmed the way ­forward. The remaining challenge is the federal bureaucracy, where a risk-averse culture and skills shortages could block progress until the opportunity is gone.

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Richard Bray is FrontLine’s Senior Writer.
© FrontLine Defence 2013

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