Defence Procurement Changes in Canada Announced

Written By Duncan C. Card

Despite the unusually well-frozen environs of Ottawa this winter, Canada's defence procurement machinery has been extremely active recently and there are several important developments to report.

Canada's New Defence Procurement Strategy

On February 5, 2014, Canada's Ministers of Public Works and Government Services (PWGSC) and National Defence (DND) announced Canada's new Defence Procurement Strategy (DPS). The three stated objectives of the DPS are to: deliver the right equipment to the Canadian military in a timely manner; leverage Canada's purchases of defence equipment to create jobs and economic growth in Canada; and to streamline the defence procurement process.

Of interest to the defence industry, the three key elements of Canada's new DPS can be broken down into the following constituent features, with some explanation:

1. To deliver the right equipment in a timely manner, Canada will:
   • Ensure early and continuous industry and client engagement in the procurement process;
   • Starting in June 2014, publish an annual Defence Acquisitions Guide (DAG) that will outline DND's procurement priorities; and
   • Help DND to define its military requirements through the establishment (within DND) of an independent, third-party "challenge function" for developing military requirements.
2. To leverage procurement expenditures for Canada's economic benefit, Canada will:
   • Use a weighted and rated "Value Proposition", to assess bids for all defence procurement;
   • Implement an enhanced Export Strategy to support international sales opportunities and "participation in global value chains";
   • Identify and apply Key Industrial Capabilities (KICs) to better inform the potential economic benefits of individual procurements so that they meet the military's needs and increase the competitiveness of Canadian defence firms in the global marketplace; and
   • Establish an independent, third-party Defence Analytics Institute which will provide expert analysis to support the objectives of the DPS and its evaluation.
3. To streamline the defence procurement process, Canada will:
   • Adopt a new regime to ensure streamlined and coordinated decision-making for defence and major Canadian Coast Guard procurements;
   • Establish a Defence Procurement Secretariat within PWGSC; and
   • Review the current National Defence delegated authority to purchase goods with a view to increasing the level from the current $25,000 to achieve more efficient procurement practices.

The following DPS features will be of particular interest for those companies who currently, or intend in the future to, sell defence related goods and services to Canada's military:

• The DAG will be published annually (with the inaugural edition in June 2014) to identify the list of procurement projects expected to be developed over 5-, 10-, 15- and 20-year timeframes, and will include projects over $100 million and those of lower value that (in the words of the Canadian government) "have leveraging potential for Canadian Industry".
• The new "Value Proposition" for vendor selection is really not that "new" but it appears to be much more focused and acute. The Canadian government is clearly announcing its aggressive interest in the nature and quality of each proposed vendor's "industrial plan for Canada" where a vendor's economic or industrial contribution to Canada will directly factor into procurement scoring to determine "which bidding firm wins the contract" – where the percentage weight of such variable will be determined on a procurement-by-procurement basis. In particular, Value Proposition ratings will favour proposals that lead to improved economic outcomes through: investments that strengthen Canadian Key Industrial Capabilities (as originally identified by Tom Jenkins in his report Canada First: Leveraging Defence Procurement Through Key Industrial Capabilities); investments that support enhanced productivity in Canadian firms; and, broader industrial and technological high-value activities, such as a "technology transfer."
• As a complement to the previously stated industrial objectives of promoting and expanding Canada's domestic defence production and services sector, Canada will enhance its export strategies to help domestic defence contractors penetrate promising foreign defence markets. In turn, such assistance will drive revenues and improved R&D capabilities within Canada's defence industry. Almost as a reward for direct investment in the Canadian defence industry, the proposed "Export Strategy" will be designed and implemented by the Canadian government to:
  1. strengthen institutional collaboration at the federal level to ensure that government support meets industry expectations for international business development;
  2. marshal Canada's international diplomatic network, including defence attachés, on behalf of Canada's defence industry;
  3. improve outreach strategies to small and medium-sized enterprises and leveraging existing relationships in the defence and security sectors;
  4. enhance coordinated support for Canada's presence at key international events;
  5. strengthen access to and relationships in markets where Canada already has major trade interests while opening new markets for defence trade with Canada; and
  6. streamline the administration of export controls while continuing to fully respect Canada's established foreign, trade and defence policies.

Non-Canadian vendors of military goods and services to Canada are now determining the extent to which this new light shed on Canada's interest in expanding its defence sector (as a strong factor in procurement success) and Canada's increased devotion to providing export assistance to local defence contractors requires them to now go far beyond the scope of traditional IRB and offset expenditures (and other economic contributions) and into the realm of making substantial direct investments in Canada to build and directly operate production, assembly, manufacturing and/or service enterprise facilities in Canada – all with local governance and direct corporate engagement in Canada's national security interests. Many foreign vendors of military goods and services may interpret this "paradigm shift aimed at delivering successful procurement outcomes" (CADSI Press Release, Feb. 5/2014) as if Canada was assuring them – "… the greater your investment and participation in Canada's economy and defence industry, the greater the likelihood that you will sell to Canada and the more Canada will directly help you export your goods and services to foreign defence markets."

DPS Implementation: Defence Procurement Secretariat

After several high profile military procurement missteps, and after several related policy (and audit) reports, and after many months of deliberation, Canada has further announced that all future defence procurement projects will be managed and operated by a new and specialized department within PWGSC, to be called the Defence Procurement Secretariat. A working group of interested Ministers (PWGSC, DND, Industry, International Trade, and Fisheries & Oceans, which is aptly named the Working Group of Ministers) will be supported by a permanent committee of associated Deputy Ministers, to be known as the Deputy Ministers Governance Committee (DMGC). The DMGC will provide leadership and governance oversight for all major defence procurements, including ensuring that "timely and appropriate decisions among competing objectives associated with particular procurements" are made. The Defence Procurement Secretariat will report to the DMGC and will have the day-to-day responsibility for:

• Ensuring early engagement of the defence sector in the procurement process;
• Developing and integrating Value Propositions into procurement processes;
• Developing options to support decision-making, based on consideration of trade-offs involving capabilities, as well as cost and benefit to Canada;
• Using independent advice to strengthen the integrity of the procurement process;
• Ensuring a coordinated approach to implementation of the DPS across multiple departments, including PWGSC, DND, Industry Canada, Foreign Affairs, and Fisheries and Oceans Canada;
• Using an issue resolution approach to address problems quickly and effectively; and
• Assessing and evaluating the performance of the DPS.

Canadian Budget Announcement – February 11, 2014

Fast on the heels of the recent changes to Canada's defence procurement policy and administrative landscape, Canada's Minister of Finance announced in his 2014 Budget Speech on February 11, 2014, that $3.1 billion in planned capital spending by DND is being moved out into "future years". There can be little doubt that the realignment of capital expenditures by the DND will be the subject of clarification in June's issue of the promised DPG of procurement priorities. As well, the delay in those expenditures may also be directly related to the government's launch of the Defence Procurement Secretariat the previous week, which (one may assume) would benefit from some ramp-up time so that the deferred $3.1 billion can be spent under its enhanced and focused watch. Indeed, the actual words of the Budget in this regard are:

"To ensure that funding for vital National Defence equipment is available for planned requirements, the government is shifting $3.1 billion of National Defence funding for major capital procurements to future years in which key purchases will be made."

Canada has over 650 firms engaged in providing defence goods and services, generating $9.4 billion in revenue and with an estimated impact of $6 billion of GDP and employing 64,000 full-time workers. With half of those revenues arising from exports, and with a growing list of required (not simply desired) military goods and services that Canada must procure in the immediate years to come, the recently announced streamlining and coordination of defence procurement in Canada under the specialized and focused watch of a devoted Secretariat may allow the large scale military programs that Canada requires to ramp up and efficiently attract substantial investment to Canada.