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Innovation Canada: A Call to Action
Special Report on Procurement

The Case for Leveraging Defence and Security-Related Procurement

The JSF program involves the development, production and support of a family of multirole fighter aircraft. Canada is one of nine countries partnering in the program, joining in 1997. In each phase, participant countries have made contributions to development. Canada's US$168-million contribution to date has resulted in $370 million in contracts to companies, research labs and universities. Under industrial participation plans, Canadian industry is positioned to compete for the production of goods and services currently valued at $12 billion.

The NSPS will establish a strategic relationship with two Canadian shipyards. One yard will be a lead source of supply for combat vessels, and the other yard will be a lead source of supply for non-combat vessels, such as offshore fisheries science vessels and a polar icebreaker for fisheries and oceans and the Coast Guard. Smaller ship construction and ship repair, refit and maintenance will remain subject to broader competitive procurement.

The case for preferential defence and securityrelated procurement is somewhat different. While it varies by country, there is often a perceived need by governments for some level of a domestic defence industry base, and this trumps the potentially lower cost of open competition in defence and security-related procurement. Accordingly, defence and security procurements are generally exempt from international trade obligations, and countries are able either to source domestically or seek industrial offsets for major procurements sourced from foreign suppliers.

Unlike other countries, including middle powers like Australia, Canada has not explicitly sought to develop a defence industry base through varying combinations of procurement restrictions and industry support. After several "Made in Canada" major defence procurements in the 1950s and 1960s, the federal government over the past 30 years has largely relied on offsets — industrial and regional benefits (IRBs) — for major equipment procurements from foreign prime contractors based in NATO partner countries.

This approach has been modified in recent years in the case of two specific procurements: the Joint Strike Fighter (JSF) aircraft acquisition whereby Canada joined a number of partner countries in codevelopment of the aircraft, with ensuing co-production opportunities; and the National Ship Procurement Strategy (NSPS), currently under way, which will designate two Canadian shipyards, one civilian and one military, as the bases for future ship procurement.

Notwithstanding recent changes, Canada is generally an outlier internationally with respect to the use of defence procurement to promote an industrial base. This results in an unlevel playing field internationally, Canadian-based companies do not have the explicit support of their government through guaranteed purchases or defence support programs while at the same time being excluded from many foreign markets by domestic procurement restrictions in those countries. Further, even in foreign markets that are open, the lack of "first buyer" support from the federal government hinders Canadian companies' marketing efforts against highly supported foreign competitors.

In light of the $240-billion opportunity, it is timely to revisit Canada's position on defence and security-related procurement.