With the kind permission of the Naval Association, Vanguard is publishing excerpts of the recent NAC strategic analysis entitled “Canada in Extremis: Rebalancing the Canadian Armed Forces and Rebuilding the Canadian Navy” – Canadian Naval Association Strategy Paper (April 2024). Moreover, to better inform industry attending the forthcoming annual CANSEC defence and security forum, an excerpt from this analysis, related to defence procurement, is reproduced below. The full report is available at the Naval Association of Canada website at https://www.navalassoc.ca/naval-affairs/.
The recent announcement of the long-awaited policy update to the 2017 Defence Policy – Strong, Secure, Engaged – entitled Our North, Strong and Free: A Renewed Vision for Canada’s Defence – coincides with the release of the Naval Association of Canada’s (NAC) strategic analysis of evolving maritime threats facing Canada, which also addresses budgetary considerations and needed operational reforms. While the updated policy reflects some concerns articulated in the analysis paper, there are a number of areas where a more definitive statement on fleet procurement intentions, notably replacement submarines, was expected. Furthermore, while the fiscal plan commits to a large increase in defence spending projected to meet 1.76% of GDP by 2029/30, it fails to set a timeline to reach the NATO-agreed minimum threshold of 2% of GDP. Nonetheless, the defence policy update is a step in the right direction, particularly its emphasis on the defence of North America (including the Arctic) which underscores the priority for recapitalization of credible naval and aerospace forces.
All that said, notwithstanding this promising update, the defence procurement system itself must change significantly to meet these commitments in a timely manner. Simply put, the status quo is not acceptable.
Rebuilding the Royal Canadian Navy will require not only significant resources, but a new approach to procurement. One of the most damaging structural flaws in Canada’s approach to defence has been to tie (and even subordinate) vital questions of security to more politically saleable matters of industrial development and employment. Rarely does an announcement of a defence contract cite operational requirements or address the military necessity for delivering new capabilities. The focus is jobs (employing inflated numbers), economic benefits (with similarly inflated dollar values), and regional development equity. Each of these elements increases the costs and time to reach decisions, and the complexity of the procurement. While this is an unavoidable political reality, the urgency of the current security environment demands that governments begin to rebalance their priorities, placing more emphasis on results and deliverables, and less on the optics of spending.
Efforts to make procurement more efficient should also lead to radical shifts in Canadian purchasing rules and requirements. While Public Services and Procurement Canada (PSPC) is mandated to ensure procurement is fair and competitive, history has shown that its traditional approach does not work on complex warships, comprised of sophisticated weapons, sensors, and power generation systems, that demand total system of systems integration. Rather, history has shown that a great deal of time and expense can be saved by purchasing Military-Off-The Shelf (MOTS) systems that are identified by the end-user. This process breaks with established government practice since many of these systems may not be the lowest-priced solution, though their immediate availability and established supply chains offer lower risk, guaranteed price, and deliver solutions quickly – often leading to lower costs in the long run.
Improving defence procurement also means prioritizing speed. In March 2024, former National Security Adviser Richard Fadden made the point that public servants should be encouraged to recommend that certain procurement projects be exempt from some or all the procurement red tape that typically governs government purchasing.1 This suggestion best addresses the conundrum of the current offset policy of Industrial, Technical Benefits (ITB) which should, at a minimum, be critically reviewed and radically downscaled. ITBs were designed to leverage defence and security procurement to create jobs and economic growth, in very specific areas called Key Industrial Capabilities (KICs). Notably, they were not designed to procure the best equipment and services in a timely manner. The Industrial and Technological Benefits (ITB) policy mandates that companies receiving defence contracts must conduct business in Canada equivalent to the value of their contracts. This requirement plays a crucial role in bid assessment, alongside technical evaluation and costing. However, because Canada has a limited military industrial complex – as the national demand is insufficient to support this industry – that means high-tech military equipment, prominent in warship design and construction, is necessarily procured from outside Canada.
The offset policy, administered by Innovation, Science & Economic Development Canada (ISEDC), is further complicated by Canadian Content Value (CCV) calculations that are part of the policy, whereby a smaller Canadian-owned and operated company can only offer a maximum of 100% in CCV. While larger corporations, particularly those from abroad, can leverage cash investments (with multipliers) to significantly boost their offset contributions in bids, merely bidding 100% of the contract value is inadequate for competitiveness. The ITB portion often constitutes 20% of the overall bid assessment and frequently serves as the decisive factor in winning bids. Bids reflecting offset commitments as high as 500% of contract value are not unheard of, which essentially requires the engagement of corporations with substantial financial resources, not the Canadian Small Medium Enterprises (SME) the policy was supposed to champion.2
The travesty for Canadian companies supposedly supported by this policy is that, from the ISEDC perspective, this is a win for Canada as they are “achieving” multiples of the contact value in investments. The fact that this policy delays the procurement process and significantly inflates the cost of the goods and services being procured – as industry must recover costs – is simply not a concern for ISEDC. This sad state of affairs demands immediate corrective action.
Even with a reformed set of requirements and priorities, the Department of National Defence (DND) will need to enhance its ability to move programs quickly and efficiently through the system. To begin with, DND must expand the ranks of procurement experts, which are currently depleted.3 This procurement capacity must be strengthened outside of DND as well, since defence procurement in Canada is a whole-of-government process, with three key departments – DND, PSPC and ISEDC – effectively having an equal say.
In this process, DND is represented by both the military and civilian branches of the department. In naval procurement the Commander RCN sets the requirement as the Project Sponsor and the Assistant Deputy Minister (Materiel) conducts the procurement as the Project Manager, normally through a dedicated project management office (PMO) for large capital projects. PSPC supports the PMO as the contracting authority for Canada and is mandated to obtain the best price for goods and services by using a competitive bid process whenever possible. Finally, ISEDC is tasked with ensuring the winning bidder commits to conducting business in Canada equal to the value of the contract. This process is lengthy and involves significant coordination by the DND PMO, as all three departments must agree for a project to proceed.
In 2014, with considerable fanfare, the Government of Canada announced the Defence Procurement Strategy (DPS), a government-wide initiative to improve defence procurement involving four federal departments (National Defence, the Canadian Coast Guard, Public Services and Procurement Canada, and Innovation, Science and Economic Development Canada). Many specific objectives were established – but in the main, most have failed to advance. There have been challenges in bringing projects to fruition, no improved understanding of available industry solutions, unrealistic defence industrial objectives, an absence of meaningful dialogue with industry, and the failure to create a true risk sharing framework.
References:
1. Richard B. Fadden and Guy Thibault, “Three ways to improve defence procurement in Canada,” CDA Institute (April 6, 2022).
2. Albert Kho and Christopher Penney, “The Industrial and Technological Benefits Policy: An Analysis of Contractor Obligations and Fulfillment,” PBO (May 12, 2022).
3. “Military procurement chief wants defence firms to stop overpromising, underdelivering,” CBC (April 19, 2023).