Seeking a defence industrial game plan

Since it submitted a report in 2009 at the request of the federal government, the Canadian Association of Defence and Security Industries (CADSI) has been advocating forcefully for a defence industrial framework that would leverage the government’s $240 billion, 20-year defence policy to maximize jobs, innovation and economic activity.

Though recent initiatives suggest elements of an industrial defence strategy, Canada has yet to create a whole-of-government approach to managing defence spending that links industrial capability and capacity with national sovereignty, security and the economy. Tim Page, the association’s president, spoke with Vanguard about what CADSI views as a generational opportunity to manage new procurement projects.

How is the health of the industry as a whole? Has it weathered the worst of the recession?

I would say that the industry is generally positive, at least up to December 31, 2011. That is our latest data point with the membership. They are very conscious that they operate in a global market and that market is facing turbulent times, due to two fundamental drivers: the prospect of deep cuts to the defence budget in the United States; and, European nations dealing with the sovereign debt crisis of a few countries. On the flip side, some emerging economies have stated their intention to invest heavily in the defence sector over the next 10-15 years, including Brazil, the UAE and India. Canadian defence companies require access to international markets to be competitive, given their relatively small domestic market. They are looking to maintain their relationship with existing customers in the U.S. and Europe while at the same time building new relationships in emerging markets. And they are looking for support from their government in terms of export support and, importantly, for their government to be the “first buyer” of their kit as an indicator to foreign governments of that support.

There is also reason to believe that the security market will continue to grow internationally in the coming years, and since there is a fair degree of commonality in the capabilities offered by defence contractors in the security environment, this too should provide good market opportunities.

However, for many Canadian companies the domestic market will remain their number one priority. Most companies in the defence sector are small and medium sized enterprises and most produce what we call dual use products and services – technologies and services for both the commercial market as well as, potentially, the defence and security markets. So how do we encourage innovation? How do we encourage commercially focused companies to adapt their capability to meet a national security or defence interest that the Canadian government might have? The answer, for us, is that you need a framework, a game plan. That means, in our view, an industrial strategy for the defence and security of Canada.

What would CADSI like the government to introduce that would help those SMEs and others?

We’ve said pretty clearly and consistently that the government should identify what sectors of the defence and security industrial base are of strategic national interest. And we’ve offered them some advice on what that might look like. Our domestic market is too small to be all things to all people – as a country we need to pick our spots. So what capabilities hold sovereign or security or economic value? Canada is alone in the industrial world in not having defined such capabilities and in not having established a policy framework at the national level to support them. Defence trade is managed trade specifically because nations protect capabilities that are of national interest to them. Canada should be no different. As a maritime nation, with an expansive common border with the U.S., growing opportunities in the Arctic, and a population centred in urban communities, there are any number of threats to our safety and security that indigenous technology, products and services should be expected to protect.

So step one is for the government to identify key industrial capabilities that are of sovereign, security or economic interest to Canada. And then, target procurement strategies around the nurturing and development of those key industrial capabilities. Federal R&D priorities, targeted industrial centres of excellence, whole-of-government export strategies and our industrial regional benefits program should all be focused around those key areas. At the same time, a strategy without the means to implement it through efficient and effective procurement processes and practices risks becoming just a product on a shelf. So Canada needs a game plan that includes both of an industrial strategy or a policy framework and a commitment to move swiftly on changes to procurement practices and processes.

The Canadian Innovation Commercialization Program is positioned to play a key role in supporting Canadian SMEs in the defence and security sector by being the critical “first buyer” that is so important if SMEs are to be successful in penetrating the export markets.

A recession is sometimes seen as a good opportunity to push through change. Do you see that happening?

There is no time like the present for sensible, logical, practical action. The government announced and has carried out with some fanfare its economic action plan. Our argument all along has been that the Canada First Defence Strategy is our sector’s equivalent of Canada’s Economic Action Plan and yet we’re still looking for some structure to be brought around that program from an industrial perspective.

Do initiatives like the Soldier System Technology Roadmap (SSTRM), Project Accord and the National Shipbuilding Procurement Strategy provide the initial steps of a framework?

We’ve been very involved in the SSTRM and in the discussions around a capability analysis centre that Canada is nominally calling the Accord project, and we’ve played directly on the NSPS, particularly in regard to the marine industrial piece. We’ve done so because we believe that those are all important component parts of an improved relationship between the customer and the supply base, and that each is an element of the strategic framework we’ve been calling for.

These are all good ideas. They all look and sound like a level of interaction that will help the military get the kit that it needs in a timeline that meets its operational needs. And industry at the same time doesn’t feel like it’s playing tennis in a fog – it’s got some visibility into what the government is trying to do and is being respected and trusted.

These in many ways provide the communications piece; you’re still the missing much of the rest of the puzzle?

In fairness to different departments and different individuals within those departments, there is an effort being made to come to grips with how to leverage defence procurement to not just get the kit but also to achieve an economic return on taxpayers’ investment. I would suggest that to date it is still very much individual driven rather than system-wide. We think that a strategic framework would provide that system-wide connection that would improve the chances of success – that’s missing still in our view. Once that strategic framework is established, we believe that there needs to be a whole-of-government approach taken to implementing the framework.

CADSI strongly endorsed the Jenkins report calling for more action on innovation. How would you assess innovation in the defence sector?

Our sector is knowledge-based – lots of engineers, lots of technicians. If government is prepared to identify the key industrial capabilities that hold strategic value to Canada, then industry, both inside and outside of Canada, can invest in innovation in those areas and Canadian industry can be better positioned for success when defence projects come to market that require those capabilities and technologies.

We’ve talked a lot recently about the concept of clusters and centres of excellence. We think that if key industrial capabilities are identified by the government, there are a lot of tools at the government’s disposal to grow global champions from within the Canadian economy. For instance, you have government labs doing R&D in these areas, private sector enterprises that in some instances have grown up around those government labs, and larger corporations within Canada focused on those areas. This creates a certain synergy which can be enhanced if you take the existing and future industrial and regional benefits packages that are estimated by some to be as high as $44 billion dollars and you incentivize the OEMs who have those obligations to foster, enhance and create clusters where innovation can develop, not only for one corporation that may be involved, but for that whole group of enterprises, including the government labs and academia and a lot of SMEs.

Is the IRB policy structured to drive that sort of innovation?

There are tools within the IRB policy to drive innovation. We believe it should be used more strategically but right now it is being used transactionally. It’s a delivery tool for an industrial strategy, but it comes into the process late. We’ve been suggesting to government that it should be doing more up front thinking early in the procurement cycle to consider Canadian industrial participation in every defence procurement coming through the system. We’ve suggested that government push for a domestic industrial participation plan approved by Cabinet when DND comes to Cabinet with a request for pre-project approval, and that there be rated requirements so that companies responding to the RFP understand where the government is looking for consideration of Canadian capability. If there is early consideration in the RFP process that requires government and industry to think about how to leverage the domestic defence and security industrial base, then the IRB program becomes a more effective tool that has a better chance to achieve meaningful objectives.

There has been a lot of discussion about a separate defence procurement agency: from CADSI’s perspective, what would that offer?

There are many and competing views on this. And CADSI’s advocacy priorities today say that if you are able to articulate an industrial strategy or a strategic framework and develop and implement practical changes to the way you conduct your procurement, you will have achieved a great deal. And maybe the government will achieve a workable governance model as a consequence. But there is no unanimity around this issue as there is around the need for an industrial strategy and changes to the procurement process.

Have CADSI’s advocacy priorities changed in anyway for 2012?

We believe that we need to compliment that overall push for an industrial strategy with a more targeted focus around the cluster idea; more work around the IRB program to ensure that it is achieving the outcomes that the government is looking for; and ensure we have an export control regime that is not disadvantaging Canadian industry when it goes out into the international market place. We’re also going to contribute in a practical, supportive way to the aerospace review. We are going to pick our spots, if you will, with more targeted attention on certain key building blocks of an industrial strategy without losing the overarching push for the government’s acceptance of a key industrial capabilities framework in which the rest of this can take shape.

Was there anything specific you’d hoped to see in the 2012 budget?

We believe the budget contained many positive elements to encourage innovation and stimulate economic growth that can be good for our sector. Among the announced initiatives that caught the attention of our members were: a $5.2 billion, 11-year commitment to rebuild the Canadian Coast Guard as part of the shipbuilding strategy; the addition of a military procurement component to the Canadian Innovation Commercialization Program; the government’s focus on innovative R&D in key industrial capabilities through support to business-led technology networks and centers of excellence; the growth of direct support to SMEs through a doubling of support to the IRAP program; the interest the government is expressing to enable Canada’s aerospace industry to succeed, including with respect to defence acquisitions and sustainment; reference to the streamlining of defence procurement, contracting and the reduction of “back office” redundancy and inefficiency; and, a continuing commitment to the Canada First Defence Strategy with a planned program re-set for later this year. Together, these initiatives illustrate elements of an emerging industrial policy framework that is good for public safety and national security.

An interview with Tim Page

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