Fixing Defence Procurement
ALAN WILLIAMS
© 2014 FrontLine Defence (Vol 11, No 2)

By any objective measure, this government’s management of defence procurement has been a disaster. Under its tenure, it has squandered an estimated $3 billion dollars by unnecessarily relying on sole sourcing contracts while simultaneously increasing the length of time to acquire goods and services by about 66%. In fact, it, the government’s actions have been so consistently flawed, it’s as if it knows exactly how to address the weaknesses in the system and chooses to do the exact opposite. This article is divided into 4 sections. First, I will outline the actual performance measures under the government’s tenure. Second, I will outline the major problems with the procurement process and present appropriate solutions. Third, I will discuss the horrific impact of the government’s Jenkins report. Fourth and lastly, I will summarize steps necessary to fix the procurement process.

PERFORMANCE MEASURES
Two commonly used performance measures are the timeliness and cost of procurement.

Timeliness
During my tenure as assistant deputy minister materiel (ADM Mat), I was fortunate to have worked with strong, capable vice chiefs of the Defence Staff — people such as Admiral Gary Garnett, General George MacDonald, and highly capable ADM’s like Jane Billings in PWGSC and John Bannigan in Industry Canada. Together we recognized the need to streamline the defence procurement process. Early in my career at DND I undertook a procurement cycle time study. It revealed that it was taking, on average, 190 months – nearly 16 years – from the time a procurement need was established until the good or service was delivered.

We undertook a number of initiatives to reduce these times and, despite some overlap and duplication between DND and PWGSC processes, significant reductions were achieved between 1998 and 2004. The overall procurement time was reduced from nearly 16 years to approximately 10 years.

Sadly, these results were not sustained. By fiscal year 2010/2011 the total cycle time to complete a project rose to 199 months. Today, it is taking longer to define our requirements and to complete an acquisition than it did in 1999.

Cost
Governments that have little to no understanding of defence procurement will most easily resort to sole-sourcing their purchases. Of course there are instances where sole-sourcing is appropriate (such as an “unforeseeable situation of urgency”) But these situations are relatively rare. Everyone understands that when you tell someone you intend to buy his or her product, you lose all bargaining power. It is no different with defence procurement. Sole-sourcing is bad for the taxpayer, bad for industry and a double disaster for the military. Sole-sourcing can increase the sticker-price, up to 20% more than through a competition. Not only are they an additional burden on taxpayers, the extra costs come out of the limited National Defence capital budget, thereby eroding its purchasing power. Industry loses as there is no incentive for the seller to provide high quality jobs, as are required when a purchase is undertaken via a competition. But perhaps the biggest drawback to sole-sourcing is the fact that, without an open, fair and transparent competition, we can never be certain that we are providing the best product to our military.

So what is the government’s record with respect to sole-sourcing? The table below compares the performance between 2000 and 2009 and shows a stark increase in sole-sourcing.

TIMEFRAME Number of Non-Competitive Contracts ($25,000 & above) Value of Non-Competitive Contracts ($25,000 & above) Average % of Non-Competitive Contracts ($25,000 & above)
2000-2004
2005-2009
2274
5983
$4.76 billion
$8.98 billion
17.4%
27.4%
Difference (%) +163% +88% +57%
       

While the average increase in percentage of sole-sourcing is dramatic (57%), the annual change is far more troublesome. Prior to this government coming into power, less than 9 cents of every dollar was spent via sole-sourcing. By 2009, 42 cents of every dollar was being spent by sole-sourcing – a 400% increase! Combining the incremental $4 billion from the above table along with the de facto sole-sourcing of the Strategic Airlift, Tactical Airlift and Medium to Heavy Lift Helicopters, the estimated impact of this excessive sole-sourcing is upward of $3 billion dollars.

PROCESS PROBLEMS

Lack of Accountability
At the present time, the overlap and duplication between DND and PWGSC with regard to defence procurement guarantees that neither minister is solely accountable for its process. The government does not dispute this obfuscation of accountability. Standing before the Standing Committee on National Defence in 2007, Gordon O’Connor, then Minister of National Defence, said “There is no final responsibility on defence procurement. Each of us has our own area of responsibility. The cabinet is the final say on defence procurement. Everything ultimately gets approved at the cabinet level.” Three years later, to this same committee, Peter MacKay, then Minister of National Defence, noted his “personal frustration that the process has been sidelined at times” and that he too had “faced the reality that this involves more than just one department[…] DND does not go out and negotiate the contract for equipment. That is left to the Department of Public Works.”

That lack of single-point accountability can be changed if there is the will to do so. Unless and until this muddied accountability regime is fixed, defence procurement will never be as efficient and effective as it could and should be.

Of course, in attempting do their jobs, public servants in these departments will do their best to work around the myriad limitations, but a process this crucial should not be dependent upon personal relationships. For a government that came into power on a mantra of strengthening accountability, there is no excuse for allowing billions of dollars to be expended each year without being able to hold one person accountable.

The benefits of creating a single procurement organization go beyond the strengthening of accountability.

First, the process would inevitably experience a streamlining effect. At present, the process only moves as fast as the slower of the two organizations permits. As ministers, deputy ministers or even assistant deputy ministers change, the process stops for new briefings. With two departments involved, twice as many potential interruptions occur. Also, decisions need to go up each organizational structure – answering to different goals, different cultures, and different approval processes. Bottom line – many months can be lost due to briefings and approvals through multiple organizations.
 
Second, considerable cost savings would result from the elimination of overlap and duplication. While these figures should be updated, the analysis I conducted in 2006, conservatively estimated annual savings of between 48 and 125 person-years or annual savings of approximately $4.8 to $12.5 million. Equally important, both organizations suffer from staff shortages and often hire from each other. These staff shortages hinder the speed with which procurements can be pursued. With the amalgamation, not only are savings found but also, the staff shortages are eliminated and experienced staff can be retained.

Third, until one minister is vested with overall accountability for defence procurement, it will be difficult if not impossible to introduce system-wide performance measures. Such measures are crucial in identifying bottlenecks, cost and quality issues and in determining appropriate measures for improvement.

So what is the government’s response to the accountability muddle? Does it decide to streamline the process by eliminating the overlap and duplication between PWGSC and DND and finally putting one minister in charge? To the contrary. It decides to add more bureaucracy to the process. Under the new Defence Procurement Strategy (DPS), a new Permanent Working Group of Ministers was established, supported by a new, permanent Deputy Ministers Governance Committee. The government also plans to introduce independent, unaccountable outside experts to challenge specifications. Through this maze of committees and advisors, it will be even more difficult to pinpoint the minister accountable for defence procurement.

One could argue that outside advisors are required to adequately challenge the requirements, to ensure they are achievable and fair to all bidders. However, these kinds of checks and balances are already built into the system. The ADM (Mat) plays a particularly important role in this challenge function, ensuring there is no bias in the requirements and that industry is well positioned to deliver a product that meets those requirements. If the existing officials are not doing the job, replace them. Don’t add more bureaucracy.

The need to establish one point of accountability was a key recommendation in my book, “Reinventing Canadian Defence Procurement: A View From The Inside”, published in 2006. It was also a recommendation in the Canadian Association of Defence and Security Industries’ (CADSI) report, published in December 2009. In its report, CADSI recommended that, “overall accountability for the combined responsibilities of defence equipment and the defence industrial base should reside at the Cabinet level in one Minister.”

Long-term Capital Plan
Today, no such long term, Cabinet-approved capital plan exists. The benefits from such a plan would be clear and far-reaching. From a purely communications standpoint, all Canadians would have a better understanding of what and how their money was being spent. Members of Parliament and the media could more readily question and challenge the government on how these capital initiatives would support the military’s role and mandate. Finally, industry would be a huge beneficiary of such a plan. Understanding future capital priorities would allow industry to form consortiums and to ­position themselves to compete at the appropriate time.

Why has the government not prepared such a plan? The reason is simple. Such a public plan approved by the government, makes it extremely difficult to randomly add or remove planned capital programs. If a strategic lift program were nowhere to be found in the plan, a government would have to publicly defend its position to suddenly make it the number one priority. Similarly, a government would have to defend the removal of a CCV program, a program that had been strongly defended and justified in the plan for many years.

Best and Final Offers
The need to modify the governance structure is a necessary but not sufficient step to improve the defence procurement process. Continuous effort must be placed on introducing best practices. One such best practice is the introduction of BAFOs.

In government contracting, BAFO refers to a supplier’s last and most attractive bid to secure a contract for a particular project. Best and final offers are submitted during the final round of negotiations. In other words, multiple bids are permitted from a supplier. With respect to defence procurement, this method of evaluating bids is common practice in most of the world. However, in Canada, it is not an accepted practice. In Canada, vendors are provided only one opportunity to respond to a request for proposal (RFP). Vendors are not allowed to “repair” or modify their technical solutions or their financial proposals. (Under certain circumstances, vendors can make changes, but for “clarification” purposes only.) There is a long list of bids that were deemed non-compliant for “minor” errors. Canada has lost out on potentially excellent products due to this scenario. Allowing BAFOs would be one solution to this issue.

Why does Canada not utilize BAFOs? What are its benefits and limitations? Should Canada consider modifying its position?

Canada is unique in the world in that we have legislation encompassing defence procurement. This piece of legislation is called the Agreement on Internal Trade (AIT), passed in 1995. While two other trade agreements have an impact upon federal public sector procurement (the North American Free Trade Agreement and the World Trade Organization-Agreement on Government Procurement), they both apply only to non-military products. Only the AIT includes products for military purposes, and it is binding upon the Canadian federal government, provinces, and territories. Since its passage, if the procurement process is not conducted in an open, fair and transparent manner, in accordance with the rules of the AIT, or if politicians are found to have inappropriately intervened, there are severe legal consequences.

The controversial political decision by the federal government in 1986 to move the F-18 support contract from Bristol Aerospace in Winnipeg to Canadair in Montreal could not be made today without huge financial penalties. In fact, the full import of the AIT was likely first felt with the selection of the Cormorant helicopter in 1997 to meet the military’s search and rescue requirements. It is no secret that multiple legal opinions were sought to determine the government’s flexibility in awarding the contract. All opinions were similar: should the government depart from the selected supplier it would incur a huge legal liability. The government stayed with the Cormorant.

Given the potential for severe financial consequences in the event the government is found not to have conducted a procurement in an open, fair and transparent manner, it is not surprising that the BAFO practice is not utilized. Allowing BAFOs complicates the evaluation process. Under the present system, it makes no difference whether a bidder is ruled non-compliant over a relatively trivial oversight or due to a major technical deficiency. In either case the bid is disqualified. Allowing for one bid and only one bid from a supplier places all the risk on the supplier to comply with the terms and conditions of the RFP. In today’s competitions, bidders must often respond to proposals containing hundreds of mandatory requirements. It’s easy to say that they have no one to blame but themselves if they mess up (either in filling out forms or with requirements) – but is this in the best interest of the military, the taxpayer and industry?

One can only theorize what would have resulted had BAFOs been employed in both the search and rescue and maritime helicopter competitions. In the former case, would Eurocopter have resubmitted a compliant bid and won the competition instead of Agusta Westland? In the latter competition, would NH Industries or Agusta Westland have been the successful bidder? There is no way of knowing for certain. However, there can be no doubt that, from a procurement perspective, increased competition would have benefited the military and the Canadian taxpayer.

As mentioned above, introducing BAFOs significantly complicates the evaluation process. There is an increased risk of legal challenges as the ability to maintain an open, fair and transparent process becomes much more difficult. A myriad of questions need to be carefully thought through. Does the AIT need to be amended? Do you permit some changes or all changes? If not all, then which are permissible and which are not? Should changes be limited to price proposals, to technical changes or to “clerical” errors in responses to terms and conditions? How many times do you permit a bidder to modify a bid? Answers to these and many other issues must be explored before allowing BAFO’s to become an accepted practice in the defence procurement process. I believe it is the time to begin this exploration.

THE JENKINS DISASTER

The recommendations in the Jenkins report are a disaster from a defence procurement standpoint. While I’m all in favour of doing what we can to enhance the growth and competitiveness of our defence companies, it should not be attained on the back of the military. I have three fundamental problems with the report. First, by imposing industrial requirements on defence procurement, you reduce the buying power of each capital dollar in the defence budget. Second, there should be only one reason to make military purchases – because it is necessary to meet the military’s needs. The Jenkins report suggests that industry’s needs should be used to “inform pending decisions”. To acquire a suboptimal product simply because a vendor commits to adding industrial value would be a huge mistake. Third, the Jenkins report undermines contractual accountability. It recommends a review of “the practice of having the prime contractor as single point of accountability (SPA).” Implementation of this recommendation would be horrific from a contractual management standpoint. If Canadian industry feels it is being disadvantaged with respect to obtaining its fair share of in service contracts, there are much smarter ways of addressing this issue.

SUMMARY

If the government truly wishes to improve defence procurement it should:

  1. Create a defence procurement organization with one minister in charge. Today, there is no single minister responsible for defence procurement. Unless and until, we address this governance issue, defence procurement will never be as efficient and as effective as it could be.
  2. Develop and publicly promulgate system-wide performance measures (not possible today due to the fractured and fractious nature of the multi-faceted system).
  3. Encourage the introduction of BAFOs and other best practices.
  4. Create a cabinet-approved, long-term capital plan. Such a plan would be based upon the government’s articulation of its defence policy and would be made public. Obtaining Cabinet approval is vital to ensuring priorities are not whimsically changed by the government of the day.
  5. Ensure there is an open and respectful bureaucratic-political relationship. It is vital that political, military and civilian accountabilities are understood and adhered to.
  6. Abandon the Jenkins report.

We have an obligation to the men and women in the military to get this as right as we can. It is easy to voice support for the military, but it is the government’s actions not words that truly reflect its commitment to our troops.

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Alan Williams was ADM(Materiel) from September 1999 to April 2005.
© FrontLine Magazines 2014

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