Implementing the Defence Procurement Strategy

15 May 2014

Next Steps

On 5 February 2014, Ministers Finley and Nicholson announced the Defence ­Procurement Strategy (DPS) to guide future military acquisitions. When fully ­implemented, the measures contained in the DPS will improve Canada’s defence procurement system so that the men and women in Canada’s armed and security forces can get needed equipment with more predictability and in a manner that confers greater economic and sovereignty-related benefits to Canada.

Common Goals
The DPS launch event was a fitting opportunity for the Canadian Association of Defence and Security Industries (CADSI) to recognize the Government of Canada and to reflect on the long road traveled together over a number of years in pursuit of three common objectives: to streamline and simplify the procurement process; to increase the predictability and probability of successful procurements so that the men and women in Canada’s armed and security forces get the equipment they need to do the jobs asked of them in increasingly complex and varied environments; and to do so in a way that strengthens its industrial capacity to bolster the national economic and national security interests.

In short, the DPS can be expected to enhance defence procurement success and level the playing field with other NATO and allied nations.

Many FrontLine readers have lived and shared the experience of failed and disappointing procurements that have merely underscored – to government, the Canadian military and industry – the need for substantive change to the way defence procurements are managed, if a change in outcomes is to be expected. Going forward, three things seem certain:

  • change is required;
  • change is unlikely to happen overnight, and unlikely to be picture perfect the first time out, but must begin immediately; and,
  • change will require the considerable efforts of a number of people from multiple departments, and from industry.

Effective implementation of the DPS, based on a continuation of the open and fruitful government-industry collaboration that has existed to date, is essential to the success of the initiative. As the government enters the critical implementation phase of the DPS, much work remains to be done. The following seven considerations and recommendations, in order of priority, may help inform next steps.

1. Value Proposition Implementation Date and Application
The Government accepted CADSI’s key ­recommendations related to the concept of weighted and rated value propositions. The DPS stipulates that procurements valued at $100M or more will require a value proposition as part of a comprehensive Industrial and Technological Benefits plan; those valued between $20M and $100M will be reviewed for the application of a value proposition; and procurements valued between $25k and $20M will be assessed for their economic potential, with a revised Canadian Content Policy applied to realize this potential.

This is a positive and significant step forward. What is required now is clarity as to when the DPS will be applied to all defence procurements (perhaps as of 5 February 2014, when the DPS was launched). Absent such clarity, neither officials nor industry will know where the start line is and whether the policy applies to their project, meaning officials and industry may spend time preparing for an opportunity that may never come, or that key opportunities are missed.

The Government should also clarify if value propositions will apply to NSPS non-shipyard, marine industrial work. Failure to apply value propositions to the 70% of the estimated value of the non-shipyard, marine industrial work of the Canadian Surface Combatant project would represent losing one of the most significant leveraging opportunities on the horizon.

2. The Defence Procurement Secretariat
The expeditious establishment and operationalization of the Defence Procurement Secretariat is essential to the integrity of the DPS and the effective implementation of value propositions. The oversight and analytical functions we expect the Secretariat to exercise are critical to effectively execute the leveraging regime.

At the core of the National Fighter Procurement Secretariat (NFPS) is the Independent Review Panel, an innovative concept that provides the NFPS with critical independent advice and expertise from outside government and gives stakeholders more confidence in the integrity of the process. The Defence Procurement Secretariat should also have an independent advisory function within it, that has deep knowledge of and expertise with the Canadian defence industrial base, and private sector experience in defence procurements.

Like the NFPS Independent Review Panel, this will promote stronger analysis and advice and thereby promote better Government decision-making. It would also give the Secretariat added credibility in the eyes of industry, particularly in the early phase of the application of the DPS and leveraging.

3. Key Industrial Capability (KICs) Market Segments
The Government should move forward with value propositions utilizing the Jenkins interim KICs until such time as the more detailed KICs Market Segments that Industry Canada has been working on are finalized. This important work will inform value proposition decisions, criteria and evaluation weightings. It is reasonable to assume that substantially more analytical work and/or industry consultation might remain to be done on these market segments before they can be operationalized. Utilizing the Jenkins KICs to inform value propositions in the interim is a reasonable bridge to this.

4. Export Strategy
Exports account for roughly half of the Canadian defence industry’s revenue. The defence field is unique because it operates in a managed global market where governments act often as the only customer. The export strategy dimension of the DPS is thus critical to the success of the overall initiative to strengthen the sector’s ability to penetrate and grow exports in both traditional and emerging markets.

The Government’s intent on defence exports is revealed at a broad level in the Global Markets Action Plan with the explicit identification of the defence and security sector as a priority, and in the DPS. What is required now are more precise details on the measures to be taken – such as, what role will Defence Attachés and CAF personnel play in defence export promotion and foreign market analysis? – and when those initiatives will be implemented.

The Government’s ability to implement its export strategy will rely, in some measure, on the resources available to ­officials to deliver on the stated objectives, including the level of commitment provided to Canadian firms at major defence trade shows overseas, and to support ­foreign delegations at major events here in Canada, including CANSEC, Canada’s premier defence trade show.

5. Integration of Value Propositions and Industrial Technological Benefits (ITB) Within Procurements
The DPS effectively replaced Industrial Regional Benefits with Industrial Technological Benefits. While the DPS makes clear that value propositions are to be weighted and rated, ambiguity remains on whether ITBs within those Value Propositions will be weighted and rated. This needs to be clarified.

Public statements made by the government to date signal the use of both Value Propositions and ITBs within the same procurement. There is, however, ambiguity on how the two mechanisms will be applied in concert. For example, if a 10% value proposition weighting had an equivalent monetary value of $10 million in a $100 million procurement, would ITB requirements then be reduced to $90 million?

This is one aspect of the DPS implementation – in keeping with the Government’s stated intent of early and frequent engagement with industry – where a working group involving industry would be helpful, to provide advice on how best to integrate value propositions and ITBs, and thus communicate the policy to industry as soon as possible.

6. Increased Delegated Financial Authorities for DND
The DPS indicated that National Defence’s delegated financial authorities for the procurement of defence goods would be increased in an effort to streamline the procurement process and expedite decision-making. Given the significant number of small- to medium-size purchases at DND, this change would be welcome.

Efficiencies associated with increasing DND’s delegated authorities above $25k would be beneficial to the operational readiness of the Canadian Armed Forces, the objectives of the government, and the health of the defence sector, if implemented in the short-run. That said, along with increased delegated authority must come an effective challenge function that increases confidence that the government’s objectives, as defined in the Defence Procurement Strategy, are being met.

7. DND Budget Restraint and Defence Renewal
National Defence is currently making difficult decisions on priorities in the effort to implement both the government’s budget restraint measures and defence renewal. These decisions have a real and immediate impact on Canada’s defence industrial base, particularly given the emphasis on cuts to operations and maintenance budgets, which have already resulted in lay-offs in the industry.

While the DPS is focused to a large degree on capital procurement, it is important to recognize that O&M contracts are also critical, especially for sustaining work within the sector in between major capital programs. The Canadian defence industrial base is a globally competitive industry that needs the playing field leveled, not protected. It can survive alternations in the defence budget, but by not sufficiently feeding the O&M pipeline and smaller capital projects, capability and capacity could take longer to establish or re-establish when larger capital programs are delivered.

Enhanced industry engagement is central to the DPS, and the appointment of an experienced defence industry representative to the Defence Renewal external advisory committee would be in order.

Effective, timely implementation of the DPS is as important to success as the policy intent and details that the government announced on 5 February and also in Budget 2014. Providing greater clarity at this juncture will remove ambiguity, shorten time frames to adopt and implement the DPS policy measures, and thereby increase the return on investment for the government, the CAF, and the economy.

The Canadian defence industry recognizes that the DPS is a major shift in policy for the Government. It is therefore understandable that the implementation details have not all been worked out, the mechanisms not all established. In fact, staff training is also ongoing, to realize and embrace the full DPS ambitions. That said, after years of discussions and deliberations to get to this point, there is a real urgency to clarifying for industry the remaining outstanding questions in order to realize the full benefits, economic and otherwise, of a DPS that is a transformational approach to how our military and Coast Guard will be equipped and supported.

Tim Page is the president of the Canadian Association of Defence and Security Industries. CADSI represents more than 1,000 member companies and as such, is the national voice of a sector that employs 109,000 Canadians and generated more than $12.6B for our economy in 2011, more than half of which for the export market.
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