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Innovation Canada: A Call to Action
Special Report on Procurement

Views Expressed to the Panel on the Use of Procurement

In responding to the Panel's consultation paper, some 88 submissions commented on procurement. Many of the views were positive on government as a first user, especially from the business community. On the other hand, a significant number of stakeholders had a negative or guarded view, expressing concerns about government buying unproven technologies or products that it did not really need, with the initiative becoming a grant by another name and skewing market drivers. Some stakeholders suggested a middle road, focussing only on specific areas such as SMEs or technologies that involve high capital cost and risk.

The industry associations most enthusiastic about the greater use of procurement to promote business innovation were the Canadian Association of Defence and Security Industries (CADSI), the Aerospace Industries Association of Canada (AIAC), which saw opportunities for early-stage industry involvement in meeting government's future technology needs and consequent building of the defence industry base, and the Information Technology Association of Canada (ITAC), which saw opportunities for greater partnering and pilot projects that could lead to government as a reference customer.

Overall, there was broad support in principle for the use of procurement to spur business innovation. However, there was no clear consensus on how best to implement the principle.

With respect to defence and security issues, there was little specific input through the general consultations. Accordingly, the Panel undertook a supplementary series of consultations with Canadian business leaders involved in various aspects of the defence industry base, focussing on the question of how the federal government could more effectively leverage forthcoming major defence and security procurements to promote innovation, productivity and sustainable employment.

Some twenty-six business people, broadly representative of that community, were involved in round-table and bilateral discussions. The following is a composite of views expressed at these events as well as through written submissions.

The starting point for most participants was that defence procurement is "managed trade," with many of our competitors engaging in highly restrictive practices, excluding foreign suppliers and nurturing domestic suppliers with sole source procurement and strong technological support. Even where Canadian companies could bid, examples were provided in which they lost contracts in NATO partner countries after heavy lobbying by less competitive local firms. It was acknowledged that Canada's lack of size and scale precluded wholesale adoption of such an approach, but significant improvements over the status quo were possible.

Such improvements would be very timely in light of the unprecedented opportunity of the planned $240-billion defence and security procurement. Although participants were not unanimous on details, there was a clear consensus that the federal government needed to seize the opportunity with a more aggressive "Canada first" set of policies and programs, not necessarily with legislative change but smarter use of existing instruments.

The common vision centred around the need for a strategy implemented over a ten-year time frame that would steadily build the defence industry base to the point at which an increasing number of Canadian companies, particularly SMEs, could become world-class suppliers in the global value chains of large foreign prime contractors.

The general view among business stakeholders was consistent with the 2009 report by the Canadian Association of Defence and Security Industries (CADSI 2009, Canada's Defence Industry: A Vital Partner Supporting Canada's Economic and National Interests — Industry Engagement on the Opportunities and Challenges Facing the Defence Industry and Military Procurement [available online at:
]), which was sponsored by PWGSC. This report's main recommendation was for the creation of a "defence industrial policy [that] would define the industrial capabilities Canada holds to be essential to its strategic defence and economic interests" providing "a roadmap for industry to make R&D investments, build new capabilities, establish human resource strategies, establish partnering relationships and plan strategies to win business internationally."

In terms of translating the vision into specific policies and programs, the consultation participants envisaged starting with a pragmatic assessment of Canadian capabilities, possibly through a sorting into three broad categories: areas of existing world-class capabilities, areas of strong potential and areas of "not-being-inthe-game." Each of these categories would have its specific set of policies and programs.

Although the first category may currently be limited, examples such as remote sensing and light armoured vehicles highlighted the importance of government as "first user" as a critical entree to export markets. The success of Canada-first munitions procurement was cited as an example of long-term payoff in terms of military readiness and export sales.

Many participants pointed out that they were kept out of foreign defence markets by sole or domestic sourcing in areas where they were highly competitive but needed to compete with foreign companies for Canadian government procurement, suggesting a "boy scout" attitude on the part of decision makers. They noted further that defence procurement is "trade proof" and that in this area the Canadian government should adopt reciprocity as its operating principle.

The second category, strong potential, was not explicitly defined, but examples came up in discussions. Perhaps the most notable was the National Shipbuilding Procurement Strategy (NSPS). This was seen as a good prototype for a Canada-first approach, involving competitive designation of Canadian shipyards for military and non-military construction, and the first ever rated requirement for a "value proposition" in competitors' bids as a spur to broader, longterm Canadian technology development. Other areas cited as having strong potential were soldier systems and in-service support. The latter area is often a major life cycle cost element of defence equipment procurements, which arguably could be Canadianized over time through negotiations with foreign original equipment manufacturers, including the transfer of intellectual property.

The third category, namely technologies beyond Canadian capabilities such as weapons systems, would be left to foreign original equipment manufacturers, and the main policy instrument in leveraging economic value would be a more engaged IRB policy.

Indeed, with respect to policy instruments, the most criticized was IRBs. Although it was acknowledged by some that "build-to-print" offsets were suitable for SMEs starting up the value chain, there is still little real incentive for foreign original equipment manufacturers to promote innovative technological capacity among Canadian suppliers and their subsequent integration over the long term into global value chains. The approach favoured by many participants was for the government to identify areas of priority capability interest, provide serious incentives to respond to those priorities, evaluate the quality of IRB packages as part of the overall bid consideration process and then actively monitor compliance.

Participants also broadly agreed on the need for tailored programs to help build the defence industry base as a necessary but insufficient element of success, noting that initial procurement from Canadian companies was more important than direct support in providing the incentive to invest in innovation. Indeed, direct support programming needed to be better coordinated, with procurement driven by specified priority capabilities. Suggestions for support programs ranged from establishing precompetitive centres of industrial excellence to codevelopment and subsequent fixed-price sole sourcing to enhanced technology demonstration programs. In addition, various practical suggestions were made, such as formal training programs for federal defence contracting personnel and placement of military personnel on secondment with industry.

One issue highlighted repeatedly was the difficulties faced by SMEs. Major defence contracts tend to be bundled, giving SMEs little opportunity to participate in niche areas where they excel, often at lower prices than primes will charge. Further, after contracts are awarded, primes have little incentive through IRBs to nurture Canadian SME suppliers. Contracts are also periodic, thereby creating gaps and straining capability continuity in smaller companies.