In July, the Canadian Association of Defence and Security Industries (CADSI) delivered a report at the request of Industry Minister Christian Paradis on the government’s industrial and regional benefits (IRB) program. Though Canada was among the first countries to adopt an offsets program, many in the defence industry believe that, despite changes made in 2009, the policy is no longer competitive with other nations.
The report contains 17 recommendations, divided into three broad sections. First, it renews CADSI’s call for an industrial strategy that not only serves the government’s primary purpose of equipping the Canadian Forces but also maximizes jobs, innovation and economic activity for Canada through defence spending. It then offers suggestions to improve measures introduced to the program in 2009. Finally, it invites the government to consider administrative changes that would result in a more flexible, less process driven approach to program management.
CADSI president, Tim Page, and vice-president of government relations, Janet Thorsteinson, spoke recently with Vanguard about the reasoning behind some of their recommendations. For the full report, please see: www.defenceandsecurity.ca
CADSI represents a wide range of companies with different needs and interests. Was there relative consensus on most of the issues raised in this report?
Page: There was remarkable consensus. We canvassed input from all of the principal industrial stakeholders, including: foreign OEMs (original equipment manufacturer), domestic OEMs, the domestic company recipient community, transactional agents – the brokers that help bring marriages together between those with obligations and recipients who help to satisfy those obligations. We created a working group, surveyed members and conducted a series of one-on-one interviews with our target population. Our report reflects input from that broad constituency. They are all seeing the same things. The program could be run more effectively for Canada with improvements to the IRB tools and more efficiently through administrative simplification and flexibility.
Thorsteinson: CADSI members expressed concern that the IRB changes announced in 2009 are not being implemented in a way that is attractive to companies with obligations. Since many other countries have offset programs, the best industrial outcomes will go to those with defined industrial policy objectives, appropriate incentives and relatively straight-forward administrative requirements. Canada can do better and if it does it will better leverage defence spending in Canada to our industrial advantage.
You are essentially calling for the IRB program to be used more strategically by the government. What’s been missing?
Page: Our view is that the IRB program is an important tool in the government’s ability to leverage defence spending to stimulate domestic jobs, innovation and economic activity in key industrial capabilities that hold national security and economic interest to Canada. Our research showed that CADSI members believe the program is producing short-term transactional results and is not enabling long-term, sustainable business relationships. Our report recommended banking and incentives for technology transfers among other tweaks to the existing policy in order to drive better outcomes for Canada. Our continuing emphasis on an industrial strategy that articulates where Canada has industrial interests for economic and/or national security reasons would then allow IRB objectives to be more prescriptive and its outcomes better able to measure.
Given that Industry Canada’s changes to the program are only a few years old, is it too early to evaluate their impact?
Page: If you ask government officials they’ll say it is too early. We’re trying to say to the minister, if you don’t change the way the changes are being implemented, you’re unlikely to change the results. That’s why we have recommendations on both how the government could improve the IRB tools and then, equally important, how changes to the management of the program could positively change outcomes.
Thorsteinson: We’re looking for the IRB program to be less transactional, less risk adverse and more strategic. To be of strong value to Canada the IRB system needs to be outcomes driven, not process driven. Risk adverse behaviour has grown significantly within the federal public service over the last few years. It must be tempered across the federal public service and within the IRB program by the tools to accomplish the business of government, which is why we have called for a defence and security industrial strategy for Canada.
You’ve called for cabinet approval of an industrial and economic development plan for major procurements at the options analysis phase. What would this do?
Page: CADSI believes that the IRB program would be more effective if domestic industrial participation were actively considered by the government at the front end of the defence procurement process. DND is often quick to say, don’t worry whether you’ve got the chance for meaningful direct industrial involvement in defence procurements because you have the IRB program, which they then damn as an unwelcome cost to them. Our view is that if the government asked questions and required answers at the front end of the procurement cycle as to domestic industrial participation, the Canadian economy would be better off, the IRB program would be used more effectively, and the military would still get the kit it needs to perform the duties asked of it by the government.
Is the current requirement for OEM’s to provide a strategic IRB plan not enough?
Page: It’s a good start and it could go farther. It applies to procurements over 100 million dollars only. Beneath that dollar value, you can if you want but there is no real incentive to provide a strategic plan because currently there is no rating of plans. We’ve called in this report for rated IRB plans, which if supplemented with an industrial strategy and, cabinet approval of a domestic industrial plan at the front end of the procurement cycle would provide clear guidance to industry on what the government of Canada expects to achieve economically from defence spending.
We want to encourage companies, as they are writing their IRB plans, to think about and be rewarded for how they meet the defined military requirement and how they intend to build and sustain economic activity in Canada.
You had some disagreement on rated IRB plans? How would a rating system work?
Page: There was a hung jury within our working group on the question of rated IRB plans but not within the CADSI board of directors which, in approving the report, also approved the rating issue. It seems to me net value to Canada should be a pretty good measuring stick. If the government articulates a defence procurement strategy that includes key industrial capabilities, a rating might well be related to how those industrial capabilities are brought into the companies’ response to an RFP.
Thorsteinson: The government has a policy that they seek best value in their procurements. To that end they assign points to the technical part of the proposal. Similarly, I think you could assign points to an IRB proposal whereby a proposal with more value to Canada would get more points, and then when you carry out your best value calculation you would factor in not only the best value of the technical proposal but also of the IRB proposal.
What’s the danger to ignoring your suggestions on banking, swaps, pooling, etc, of IRB credits?
Page: If you don’t allow that activity, you are constraining the normal functioning of the marketplaceand you are driving companies to design transactional work which, in our view, rarely if ever results in sustainable, meaningful work. Our advice was intended to support normal marketplace activity. More flexibility around banking, judicious use of multipliers on investments and technology transfers and the government’s willingness to consider, at least on a case-by-case basis, swaps and trading of IRB credits would better simulate normal business activity.
Could the IRB process be better connected to the government’s efforts to encourage more innovation?
Page: Tom Jenkins offered advice last year around improving innovation in the Canadian economy. I’m not sure where implementation of that report has gone. We know that DRDC has identified a limited number of critical technology gaps it sees in the global market place, and that Industry Canada, through its enhanced priority technology list, has stipulated that five percent of an obligor’s IRB requirements must be met in those areas. That is a good step. We think the list should be expanded, with input from industry. By targeting specific capabilities, the IRB program is encouraging innovation in Canada and DND might begin to see IRBs more as an investment for their future needs than a cost burden to their current procurement priorities.
What sets other countries apart?
Page: Our view is that other countries are using their tool more strategically. They have decided what is important to them from sovereignty, security and economic reasons and they are using their offset tool to deliver outcomes that address those priorities. Other countries have also worked hard to make the management of their offset programs as efficient as possible to parallel normal market and business operating practices.
An interview with Tim Page and Janet Thorsteinson