issue 00)

Elinor Sloan notes that despite its detailed costing and encouraging commitments to a wide range of investments, the failure to sufficiently address weaknesses in the military procurement system marks a significant shortcoming of the 2017 Defence Policy.

02 Oct 2017

Canada’s defence policy, released in June 2017, includes a sound assessment of the international security environment, commitments to properly size and equip the Canadian Forces for likely missions, and a detailed costing arrangement. But Strong, Secure, Engaged: Canada’s Defence Policy is also marked by a significant shortcoming that could be its undoing: a failure to sufficiently address weaknesses in the military procurement system.

The policy states squarely that “major power competition has returned to the international system” and that Canada needs capabilities to help deter near-peer conflict. It highlights state-to-state competition, including threats posed by rogue states like North Korea, even as the challenges of failed states and terrorism continue unabated. And it raises crossover linkages between state and non-state actors, in the form of hybrid warfare and external troop involvement in intrastate conflicts.

The new policy also commits to a wide range of investments that would produce the most powerful Canadian military force since the 1950s. Some are welcome but largely expected, such as a full fleet of Canadian surface combatants, future fighter aircraft, and upgraded light armoured vehicles. Others represent critical capabilities that past governments have largely ignored and are thus a pleasant surprise, like ground-based air defence systems, armed unmanned aerial vehicles, next-generation long-range patrol aircraft, and a submarine life-extension program. The policy also promises to increase the size of the Canadian Forces by 3,500 personnel (including 600 Special Forces) for a total of 71,000.

In the wake of the policy’s release, the most vocal criticisms have been twofold. First, can we afford the program? Annual defence spending is set to progressively increase from about $19 billion in fiscal year 2016-2017 to 32.7 billion in fiscal 2026-2027, and then to fall back to around $27 billion per year in fiscal 2031-2032 and for five years thereafter. Over 20 years, the delta between what Canada would spend, if today’s budget stayed steady, as compared to the newly committed program is about $62 billion. This is indeed a huge sum. However, according to high-ranking officials involved, the program has been extensively and painstakingly costed, year by year, line by line, across 52 projects. Moreover, the costing was done both internally within DND and externally by several well-known accounting firms.

A second criticism is that Canadian governments make a habit of announcing grandiose defence plans without following through. What makes this time any different?

Despite this widespread perception, promises of substantial new defence spending have, in fact, only happened twice in the past 30 years. On both occasions, dramatic and unforeseen global changes derailed the programs. The end of the Cold War and the most severe economic recession since the Great Depression stopped in their tracks the promises of the 1987 Defence White Paper and the 2008 Canada First Defence Strategy, respectively. The 1994 Defence White Paper made it clear the government of the day would cut defence spending, while the 2005 Defence Policy Statement contained strong words but not a marked funding increase. Barring an unforeseen geopolitical or geo-economic shift, it is possible that programs identified within the 2017 Defence Policy have a fighting chance.

Lest this sound like too rosy a story, there is at least one significant weakness in the government’s policy: the failure to go far enough in tackling shortcomings in the military procurement system. The document highlights a number of initiatives designed to smooth the progression of projects through national defence, including growing the defence procurement workforce, seeking a higher dollar value contracting authority, and improving internal co-ordination. But these “within DND” solutions do not address the tri-departmental defence procurement structure (defence, public services and industry) that has so often proven to be the source of huge bureaucratic delays in advancing major capital acquisitions.

The requirement is for a marked organizational structure change in Canada’s military procurement system. Absent this, the strongest words and fullest coiffeurs will not be enough to implement Strong, Secure, Engaged: Canada’s Defence Policy.

– Elinor Sloan is a Professor of International Relations in the Department of Political Science and a former defence analyst with the Department of National Defence, and currently a CGAI Fellow.

Read more on defence procurement by Elinor Sloan

issue 4)

A persistent theme in the defence procurement debate is the lack of a single point of accountability. With shared decision-making, responsibility for achieving success lies “everywhere and nowhere”. Can we learn from our allies on possible steps forward?

In the ongoing debate surrounding Canada’s military procurement system, a persistent theme is that the many delays are at least partially due to there being no single point of accountability for defence procurement in Canada. With decision-making shared among the Department of National Defence (DND), Public Services and Procurement Canada (PSPC), and Innovation, Science and Economic Development Canada (ISED), responsibility for achieving a contract award lies “everywhere and nowhere”, thereby resulting in substantial delays. This hurts both the Canadian military, which must do without a platform or piece of equipment, and industry, which must wait for the business on which it depends. How did we get to this point? What are some solutions? And what can we learn from our allies on possible steps forward?

Single Agencies and Departments

Canada did not always have a tripartite military procurement decision-making structure. For most of the three decades after the outbreak of World War II, a single federal government department controlled military procurement. Responsibility lay solely with the Department of Munitions and Supply from 1940-1945; the Department of Reconstruction and Supply from 1945-1948; and the Department of Defence Production (DDP) from 1951-1969. The Defence Production Act of 1951 created the DDP and spelled out specific powers for carrying out defence procurement in Canada. During this period there is one example of responsibility being assigned to a separate agency: from 1948-1950 military procurement was the purview of the Canadian Commercial Corporation, a crown corporation reporting to the Minister of Trade and Commerce.

In 1969, the Trudeau government created a Department of Supply and Services (DSS) as a centralized location for government contracting. Its creation was a direct outcome of the Glassco commission report of 1962, which recommended amalgamating all federal government purchasing into one department in order to achieve efficiencies. During the Pearson minority governments of 1963-1968 DDP carried out this function on an interim basis, in addition to its defence procurement portfolio. With the arrival of the new government in 1968, the DDP was disbanded and its functions, including its powers under the Defence Production Act, were transferred to DSS.

A Multi-departmental Approach

In 1972, the government amalgamated the Department of National Defence and Canadian Forces Headquarters into one National Defence Headquarters. The reorganization included the creation of an Assistant Deputy Minister of Materiel position responsible to the Deputy Minister of National Defence as the focal point for defence acquisition in DND. ADM(Mat) was mandated to work closely with DSS on defence procurement projects. However, as Martin Auger described in The Evolution of Defence Procurement in Canada, while DSS remained the department charged with federal government acquisitions, “each organization [DSS and DND] was made responsible for specific aspects of the defence procurement process.” Thus was born the multi-departmental approach to defence procurement. In 1986, the Mulroney government took this a step further, introducing an industrial and regional benefits policy (IRB) requiring companies that won a defence contract to create jobs in Canada equal to 100% of the contract’s value. Industry Canada (now ISED) was given responsibility for implementing the new policy, working closely with DSS and DND.

Today DSS, in its current guise as PSPC (formerly PWGSC), continues to have exclusive authority under the Defence Production Act to negotiate and buy military equipment. The department is responsible for buying all federal government goods and services, but when it comes to those designed “to military specifications” DND and PSPC have agreed to a division of responsibilities, with DND responsible for establishing the requirements for new weapon systems and military equipment. PSPC’s Supply Manual details the specific roles of the two departments in the defence procurement process, as well as that of ISED with regard to IRBs (now Industrial Technological Benefits).

Problems and Solutions

Many entities are involved in this system, and authority does not culminate in one person until we reach the Prime Minister. Both documented and anecdotal evidence suggests this bureaucratic structure negatively affects the efficient progress of defence procurement projects. A 2009 report by the Canadian Association of Defence and Security Industries (CADSI) found that “the fragmented departmental approach to defence procurement slowed defence program delivery and produced sub-optimal industrial outcomes.” Former Assistant Deputy Minister of Materiel Alan Williams notes that “Unless and until this muddied accountability regime is fixed, defence procurement will never be as efficient and effective as it could and should be.” His successor, Dan Ross, argues the defence procurement system is “risk-adverse and incredibly slow” because three departments are involved, with no minister solely accountable for the progression of a weapon system or platform through to cabinet. The Canadian Senate highlights a situation of too many players and too little focus on progressing major capital acquisitions on time and on budget. And in 2017 no less than a former Minister of Public Works, Rona Ambrose, identified departmental “silos” in the defence procurement process as posing “a major roadblock to progress.” This, despite the fact that the Harper government’s much-touted Defence Procurement Strategy of 2014 created a process whereby the Deputy Ministers and Ministers from each of DND, ISED, PSPC and Treasury Board meet regularly to discuss military procurement projects, formalizing a previously ad hoc practice.

As for solutions, CADSI recommends creating a single point of accountability at the cabinet level by establishing a separate defence procurement agency reporting to a minister, or a new department like DDP, or by consolidating the three functions of industry, contracting, and defence into a single (unidentified) pre-existing department. Williams suggests combining the defence-specific contracting aspects from PWGSC (now PSPC) with DND’s procurement resources into a new organization called Defence Procurement Canada. Ross proposes reassigning the Defence Production Act to a Minister of Defence Materiel and creating a Department for Defence Materiel that would have the Assistant Deputy Minister of Materiel organization at its core, incorporating the contracting authority of PSPC. Ambrose suggests creating a “defence procurement secretariat” within DND, headed by a Deputy Minister reporting to the Minister, and including people from ISED (to focus on IRBs and the value proposition), and PSPC (for contracting). Along similar lines, the Senate proposes a major military procurement agency within DND. By contrast, scholar Craig Stone questions whether these sorts of major organizational changes would resolve problems inherent in major defence acquisitions.

The Allied Experience

Looking at possible steps forward, Canada can learn from its allies. The British experience indicates that a separate agency reporting to the Minister of National Defence is not as straightforward a solution as might immediately be thought. In 1999, Britain created a Defence Procurement Agency as an executive agency of the British Ministry of Defence led by a Chief of Defence Materiel (broadly equivalent to Canada’s Assistant Deputy Minister of Materiel) and reporting to the Minister of Defence Procurement, a junior minister to the Secretary of State for Defence. Merged with Britain’s Defence Logistics Organization in 2007 and renamed Defence Equipment and Support (DE&S), the agency had sufficient difficulty delivering capability on time and on budget that in 2009 it was the subject of an independent audit commissioned by the Defence Secretary. The study, by Bernard Gray, found that on average a wide range of programs were 80% or five years overrun, and 40% over budget. Noted one commentary at the time: “There is something fundamentally wrong with the procurement process inside the MoD, which seems impervious to attempts down the years to make it more efficient and professionally run.”

Part of the problem, according to Gray’s study, was that DE&S belonged to “core” MoD and as such did not have the operational flexibility to carry out its mandate efficiently. The report recommended placing the agency at arms-length to the ministry, and introducing market principles by establishing the agency at minimum as a Trading Fund or, ideally, as a Government-Owned, Contractor Operated (GOCO) entity. After the government appointed the report’s author, Sir Bernard Gray, as Chief Defence Materiel in charge of DE&S it pursued the GOCO idea, but Britain ultimately abandoned the initiative late in 2013 as concerns grew over the sovereignty implications of, in effect, privatizing defence procurement.

In April 2014 the British government established DE&S as a “bespoke trading entity” of the MoD. In UK legislation, trading funds are different from normal government departments in that they are self-financing, can carry over funds from year to year and therefore have incentive to create efficiencies, and are flexible in human and financial resource management. By establishing DE&S as a trading entity – billed as “DE&S plus” – the agency is able “to offer the salaries needed to attract people from the private sector with the kind of commercial, engineering and financial skills needed to handle big projects and negotiate complex contracts.” The idea is to improve DE&S’s performance through organizational changes that bring freedom from civil service pay rules and the ability to harness private sector skills. DE&S continues to report to the Minister of Defence Procurement, who is responsible for the agency’s “performance, including its strategy, operation, delivery outcomes and the effectiveness of government arrangements.” Perhaps to drive home the market principles approach, the Chief of Defence Material position, which continues to head up DE&S, was renamed Chief Executive Officer in 2015.

Three years into the “DE&S plus” experiment it is as yet too early to assess whether this is a model that is more effective in delivering defence capability. But the path Britain has travelled can be instructive for Canada. In thinking about alternative institutions for defence procurement it suggests an appropriate structure may be an agency that, while reporting to a government department, incorporates market principles, particularly incentives for budget efficiency and flexibility in human resource management. In the recent past Australia, too, has come to the conclusion that its military procurement agency needed to become “more business-like and outcome driven.” Australia’s newly created Capability Acquisition and Sustainment Group operates within the Department of Defence and is to adopt an enterprise approach to delivering military capability.

A Way Forward

The Canadian situation where military procurement is not the purview of an agency operating at arm’s length to government, an agency operating within government, or even a single government department but rather several government departments is three steps removed from what our close allies have assessed to be the most effective structure for defence procurement. The Canadian defence policy statement released in June 2017 promises reforms within DND to streamline the procurement process but does little to resolve the external dynamic among departments.

Canadian crown corporations are government agencies that report to a minister but operate according to market principles. Many are successfully in the black. Mindful of CCC’s brief experience as procurement lead in the late 1940s, and learnings from our allies, Canada should explore the idea of a crown corporation reporting to DND or PSPC as a core component of any future defence procurement reform.

Professor Elinor Sloan teaches International Relations at Carleton University.