Today’s presentation of Tom Jenkins’ report, Canada First: Leveraging Military Procurement Through Key Industrial Capabilities, signals yet another effort to stimulate a restructuring of Canadian procurement process. Today’s report provides strategic recommendations that, if implemented, should position Canada’s defence industry for long-term success.

In September 2012, Public Works Minister Rona Ambrose tasked Special Advisor Tom Jenkins with examining the Canadian procurement system and requested he provide recommendations on enhancing the competitiveness of Canada’s defence industrial base.

Canada First calls for the federal government to take a proactive approach at promoting Canadian industry by developing causal linkages between government procurement policy and long-term industrial capacity.

The report makes eight recommendations that call for Canada to encourage industrial growth by: establishing Key Industrial Capabilities (KICs); positioning Canadian-based firms for success in the In-Service Support (ISS) component of contracts; and restructuring the balance of industrial regional benefit (IRBs) in procurement bids. As a means for managing these proposed changes, the report further recommends the appointment of a senior official accountable for procurement.

These recommendations echo the proposals put forth by the Hon. David Emerson in his November 2012 report, Beyond the Horizon: Canada’s Interests and Future in Aerospace. Emerson called for Canada to loosen export restrictions; foster industry and academic cooperation; finance long-term research and development (R&D); and, most significantly, include a requirement for weighted IRB commitments in proposals by prime contractors.

What the proposed recommendations mean for your business

If the recommendations outlined in Jenkins’ report are implemented, there are a number of potential implications that Canadian and foreign firms should consider. A KICs-centred procurement strategy may guide Canadian industry’s investments and position industry to better predict growth opportunities, while proposed changes to life-cycle ISS investments and IP transfers will greatly expand Canadian innovation.

KICs-centred strategy and procurement agency

Jenkins’ report makes that case for developing a KICs-centred procurement strategy to promote niche specialization of Canadian firms that supply critical capabilities to export markets. The report recommends a set of six KIC “clusters” form an interim collection of defence investment priorities: + Arctic and Maritime Security + Protecting the Solider + Command and Support + Cyber-Security + Training Systems + In-Service Support

The six identified KICs remain interim priorities, with the process of establishing new KICs intended to remain iterative. Indeed, the report recommends establishing a more robust analytical base for identifying and assessing KICs. These specific KICs, however, were identified based on the acquisition requirements outlined in the Canada First Defence Strategy (CFDS), as well as additional considerations based on operational requirements, success in accessing export markets and innovation potential.

The report’s focus on KICs is complimentary to the Emerson report’s recommendations on developing priority technologies for investments. The implementation of these recommendations could result in the following changes:
+ Though either a KICs-centred approach or a priority technology approach, firms at all levels may have increased financial incentives to collaborate on these defence priorities
+ For Canadian and foreign original equipment manufacturer (OEM) and small and medium enterprises (SMEs), if these recommendations are implemented, the establishment of focused KICs enable industry to predict growth opportunities and focus business development efforts
+ Policy changes in the procurement process may also occur, as the report calls for the appointment of a senior official to be accountable for a KICs-centred strategy

Canadian and industry stakeholders will want to monitor developments here, as the development of a point of government accountability may signal the establishment of a procurement agency or more substantial procurement secretariat. The spring 2013 budget may articulate the government’s intentions regarding the establishment of a senior official in charge of procurement or a larger procurement agency. If these recommendations are implemented, major Crown procurements that are scheduled go to tender will likely be subject to these new policies.

In-service support, single point of accountability and Intellectual Property

Jenkins highlights the significance of ISS that, when spread over the life-time of a program, can be four to five times the value of the equipment acquisition. ISS can include services ranging from routine Operations and Maintenance to sophisticated work that is dependent on Intellectual Property (IP) owned by the prime contractor.

The Jenkins report compliments the Emerson report’s recommendations on ISS investments, but also considers the adverse impact of DND’s previous approach of bundling ISS and other life-cycle elements through a “single point of accountability” (SPA) with the OEM. Noting that the intent of this approach was to mitigate risk, the Jenkins report highlights unintended consequences such as inhibited competition and restricted investment in Canadian industry. The Jenkins report, though not identifying a specific alternative, proposes changing this approach to ISS. Furthermore, the report also called for Canadian firms to receive access to IP, but did not specify whether IP would be transferred to any subcontracting Canadian firm, or a subsidiary firm of the OEM.

If the recommendations of both the Jenkins and the Emerson reports are implemented, industry can expect the following changes:
+ ISS will be decoupled from other life-cycle requirements, such as operational training. Canadian firms can expect increased partnership from prime contractors for life-cycle program requirements
+ Canadian SMEs may find increased international partnership opportunities, as international OEMs will be increasingly required to partner with Canadian firms for ISS over the life-cycle of an acquisition
+ Foreign prime contractors may be required to transfer IP to Canadian subcontractors, and Canadian firms may find increased opportunities for innovation through access to IP from international OEMs

The future of IRBs, value propositions and Canadian partnerships

Underpinning both the Jenkins and the Emerson reports is a critical consideration about how policy can influence foreign prime contractors to invest long-term in Canadian industry. The Emerson report described this commitment as “post-sale activities,” and highlighted a requirement for IRB proposals to be weighted in bid evaluations. While the Jenkins report does not go to this length, it does note the limited utility of IRBs as a revenue source and investment tool for Canadian industry. Jenkins highlights the array of alternatives for balancing investment, including proposed KICs and value proposition approaches.

The National Shipbuilding Procurement Secretariat (NSPS) required the inclusion of a “value proposition” in program bids, which required OEMs to make commitments to improve the health of Canadian industry over the long-term, including investments in skills capacity and expansion, infrastructure and SMEs.

Though a thorough recommendation on the restructuring of IRBs was beyond Jenkins’ mandate, the mention of this topic highlights the intensifying turbulence regarding industrial investment policies in Canada. This has clear impact for Canadian industry and foreign investors who will bid on major capital projects. Potential impacts include:
+ Detailed IRB requirements for procurement proposals could be weighted in the ranking of bids
+ Preference may be given to bids with strategies that go beyond time-of-purchase offsets and provide investment obligations in Canada over the life-cycle of the program

Conclusion

Tom Jenkins’ report, which was presented today to the Minister of Public Works, builds on recent recommendations by the Hon. David Emerson. Together, these recommendations go towards restructuring the way Canadian industry engages with federal procurement policy. The extent of which recommendations will be implemented remains unknown. However, with a number of high-risk and high-value capital programs in DND’s pipeline—including CF-18 replacements, FWSAR, MSVS and ISSP—any changes to the way the Government of Canada purchases will necessarily impact these programs.

Canadian and foreign defence firms should continue to actively monitor policy updates regarding IRB and alternative investment approaches. Firms should place increased attention on IRB strategies as they consider pursuing major Crown program opportunities, as the government is clearly considering options for restructuring the Canadian approach to levering procurement investments domestically.