Defence Contracting
Jan 15, 2014

Canada’s military procurement machinery is being shaken up yet again with the government’s announcement of a new Defence Procurement Strategy (DPS) and subsequent confirmation that an independent Defence Analytics Institute (DAI) will have a key role to play in fixing the often tortuous process marked by delays and even cancellations of major programs.

On 5 Feb 2014, nearly six years after the government rolled out its ambitious, though still largely unfulfilled, Canada First Defence Strategy, the DPS was unveiled by Public Works & Government Services (PWGSC) Minister Diane Finley in a presentation to an Economic Club of Canada audience in Ottawa. Defence Minister Rob Nicholson, who spoke briefly before Finley, reiterated the importance of giving the Canadian Armed Forces (CAF) “the right equipment” to carry out their “vital and fundamental role” at home and abroad.

Public Works and Government Services Minister Diane Findley speaks to audience about Defence Procurement issues.

Finley described the procurement overhaul as a “once in a century” opportunity to redress years of “darkness” for the CAF as well as the Canadian Coast Guard (CCG). She took the opportunity to scotch the notion of a new central procurement agency, saying that her department “will be more involved in ensuring things stay on track – and when they’re not.”

Tim Page, president of the 1,000-member Canadian Association of Defence & Security Industries (CADSI), in introducing Finley and Nicholson, cited a series of “failed and disappointing” procurements, adding that while a new strategy was unlikely to be “picture-perfect the first time out”, there is a demonstrable need for “substantive change in the way defence procurements are managed.”

Finley pointed out that a review process set in motion by her predecessor, Rona Ambrose, had yielded a seminal report 13 months ago by a private sector panel headed up by Tom Jenkins, executive chairman of OpenText Corp, the country’s largest independent software firm. In its report, the panel urged the government to foster “Key Industrial Capabilities” in sectors of proven excellence. While acknowledging that these KICs currently account for a small proportion of overall defence procurement, the report concludes that focusing on them would mitigate short-term costs and risks while offering “the prospect of significant gains in innovation and competitiveness over the long term.”

2013 – Rob Nicholson (left), Minister of National Defence, and Peter MacKay, Attorney General of Canada, address the fifth annual Halifax International Security Forum, in Halifax, Nova Scotia.

Drawing nods of agreement from her audience, Finley said the panel’s recommendations constituted a “convincing” approach to dealing with a process in which government’s stated requirements have been routinely criticized for being too complex and costly as well as often having predetermined outcomes. She agreed with Page that more industry engagement is critical to long-term success.

The recent rash of abrupt program resets or outright cancellations, which laid waste to the outlay of millions of dollars by industry during the bidding and testing process, was not addressed during this presentation. Defence industry executives can only hope that engaging industry will result in a better appreciation by government of the fiscal realities that govern industrial decision-making.

Fundamental to the overhaul is a requirement that bidders for contracts to supply the CAF and CCG must include a “Value Proposition”, which will be used to weight their proposals along with the usual technical and pricing elements, reflecting the desired KICs. Finley suggested that the intent of such changes is to increase taxpayer confidence that when the government spends billions of dollars, their money is being spent fairly.

Major contracts will still require suppliers to spend 100% of their value within Canada, and they will have to show how work would be apportioned regionally. The Value Props component will no doubt mean more paperwork as the government tracks and measures success in delivering the intended benefits.

Promising to make companies “publicly accountable” for their IRB commitments, Finley pointed out that fully a quarter of $23 billion in IRB obligations were unfulfilled. Industry Canada subsequently told FrontLine that many of the IRB commitments, some of which extend to 2038, “have been identified and will occur.”

This new system will transform Industrial & Regional Benefits (IRBs) into Industrial & Technological Benefits (ITBs). Finley said that factoring Value Props into the ITB equation would give the government “more flexibility to improve economic outcomes from defence procurement.” The default weight of a Value Prop will be 10%, but the actual percentage will be decided on a case-by-case basis. While they could be optional in procurements in the $20-100 million range, they will be obligatory on more expensive programs. Fundamentally, that 10% “can make the difference and affect the outcome of the bid,” Finley said.

Some wonder if the National Shipbuilding Procurement Strategy will be affected. The June 2010 NSPS requires shipyards to “reinvest the equivalent of 0.5 percent of the value of any contract back into the Canadian marine industry.” They also must include “commitments to continuous improvement; investment in skills and human resources, capability and infrastructure reinvestment, as well as partnerships with provinces and other enterprises; long-term supply chain development (outsourcing and sub-contracting to small and medium enterprises); and increased commercial work.” It is unclear if the DPS might change the NSPS, or how.

As called for by VAdm Ron Buck in a recent FrontLine article (2013 #2), the Department of National Defence (DND) will include an independent, third-party challenge function for its equipment requirements. The goal is to ensure that specifications are not so specific as to thwart any realistic competition. This function would involve “fairness monitors”, but unfortunately will be restricted to the contracting machinery rather than assessing DND Statements of Requirement.

DND says this challenge function will result in “greater up-front clarity in the procurement process and help validate military requirements, enabling more timely resolution of contract letting.” It will include internal reviews by a panel of military, scientific and policy experts of the mandatory requirements in all projects budgeted at more than $100 million as well as selected other projects with a lesser value. Involved at the early stages of procurements, the panel will have full access to all available information used in the development of the project documentation, including cost estimates, and report to the Deputy Minister.

An overarching Defence Procurement Secretariat within Public Works is being tasked with coordinating the new strategy across all departments. Among other things, it would “use the principles of early and frequent engagement” while drawing on “independent advice” and developing Value Props and integrating them into the procurement process.

Backstopping it all is the DAI, a concept proposed not only by the Jenkins panel, but also by CADSI, the Aerospace Industry Association of Canada, and others. Two weeks after unveiling the DPS, Finley announced the members of an interim DAI board, chaired by Jenkins. The DAI is to be put on “a permanent footing” next year.

The other board members are CADSI’s president Tim Page; Christyn Cianfarani, director of government programs, research and development and intellectual property at CAE Inc; AIAC Executive vice-president Iain Christie; Peter Gartenburg, vice-president Canada operations at L-3 Communications; Craig Stone, director of academics at the Canadian Forces College; David Bercuson, director of the Centre for Military and Strategic Studies at the University of Calgary; Janice Stein, director of the Munk School of Global Affairs at the University of Toronto; and Louis Bélanger, director of the Quebec Institute for Advanced International Studies.

The DAI mandate includes development and sustainment of the KICs, research on Canada’s defence industrial base, insight on technological trends, and information on export market opportunities – the latter highlighted by Finley.

An exports component of the DPS reflects the fact that half of Canada’s defence production goes to foreign markets, and Finley said that high-level “economic diplomacy” would underpin the efforts of Canada’s trade commissioners and defence attachés at its embassies and high commissions. “Nearly every other western nation already has a strategy such as this in place,” she said.

Implementing the DPS begins immediately, and once the government has finished “initial engagement and information sharing”, it plans more targeted information sessions with details and schedules posted on PWGSC’s website. In addition, the first edition of an annual Defence Acquisition Guide to DND Procurement Priorities is scheduled to be released in June.

Ken Pole is a Contributing Editor at FrontLine Defence magazine.
© FrontLine Defence 2014