Defence Procurement in Canada: Major Actors and Approaches to Risk - Canadian Government Executive
AccountabilityPolicyProcurement
February 28, 2018

Defence Procurement in Canada: Major Actors and Approaches to Risk

With Canada facing significant and enduring challenges to its defence procurement system, understanding the interest held by the major stakeholders and their approaches helps clarify some of these issues.

Over the past decade, major Canadian procurement projects have encountered increasing difficulties, ranging from multi-million dollar cost overruns, decades-long delays, and lackluster capabilities. Military programs, partly due to their large capital outlays, are particularly vulnerable (albeit, by no means unique, as the Phoenix pay system debacle illustrates). Potential causes for these issues include the increasing technical complexity of projects, inconsistent funding and insufficient staffing.

One interesting aspect of military procurement in Canada is the dynamics of interest among the major stakeholders, and how each handles risk. It can provide insight into why policies unfold. In most major procurements today, four major actors can be identified: the government, the civil service, industry and the military. Each group has subtle differences in objectives and tolerances of risk that alter how programs unfold. Examples from major acquisition programs will be used, including the Heavy Lift Helicopter program, the Canadian Surface Combatant and the various iterations of the CF-18 replacement program.

The Actors:

The Political Leadership

The government, or more specifically, the political leadership, obviously plays a disproportionate role in any major procurement: they can shape the program’s features and have ultimate authority on its progress through the system. They can expedite a program, slow it down, or even cancel it if it suits their political need. All of this can change dramatically based on their circumstances.

Rarely do governing parties see a political advantage in defence activities; rather, their primary concern seems to be avoiding controversies on the file. Controversy may be generated by delays, cost overruns, impropriety in the selection process (whether real or imagined), and inadequate equipment for the Canadian Armed Forces (CAF). The relative importance of these concerns is rarely static between successive governments. Even within a single term, a governing party’s priorities and objectives may shift upon circumstances.

For example, upon entering into office, the Conservative Party was concerned about the threat faced by the CAF in Afghanistan and their inadequate equipment. It rushed through a number of major procurements projects, such as the 2007 Tank Replacement program (Leopard 2) and the C-17 Strategic Airlift acquisition program. However, the Conservatives’ policies were short-lived and outside the norm of Canadian politics. Governing parties since the 1960s have tended to see defence as a political liability, rather than an opportunity. Indeed, as its time in office progressed, the Conservative Party adopted a more conventional outlook and, by its final years, it was actively slowing major procurements in order to meet its deficit reduction efforts.

Considering the government’s limited interest in this area, it should not be a surprise that there is little appetite for risk, especially in the areas of cost overruns, delays and process failure. One way this has manifested itself is the wider application of competitions to resolve procurement programs, which are viewed as delivering better outcomes with more integrity than sole-sourced programs. As we will discuss later, this has become an issue for many programs.

The Civil Service

This largely refers to members of Public Services and Procurement Canada (PSPC), as well as some civilian members of the Department of National Defence. They are primarily tasked with overseeing management of the government’s procurement policies and ensuring that all procurement activity meets the established legal and policy guidelines, in a fair, open and transparent manner. Framed a different way, the implementation and administration of the procurement process is their primary concern. Taken together, this gives the impression amongst some other stakeholders that the civil service prioritizes process above outcomes.

The civil service’s approach to risk is significantly different from the political leadership. Rather than avoid it altogether, it attempts to mitigate it completely through a process. Conventions, experiences and precedents from previous efforts help to improve new programs. In practice, however, the strict adherence to regulation and process, despite its obvious defects, often result in poorer outcomes. In many cases, policies implemented ostensibly to minimize risk may actually exacerbate it.

One example can be seen in the prequalification of potential competitors before a Request for Proposal is issued. In some cases for a very large and complex project, such as the privatization of the Atomic Energy Canada Limited’s facilities, an extensive prequalification effort can ensure that bidders are able to meet all of the varied requirements. However, for most major procurements within DND, multiple pre-qualifications needlessly delay projects to little benefit and subsequently delay what should be a straightforward acquisition and the introduction into service of an important capability.

The Military

The most significant difference between defence procurements and ones undertaken for the civilian arms of government is the involvement of the Canadian Armed Forces. While other procurements also feature strong stakeholder presence, they do not possess such a unique culture as the CAF. The military ethos prioritizes service to country above self, as well as loyalty to superiors, peers and subordinates through the principled and (at times) courageous discharge of their duties. This brings a very different dynamic to how procurements unfold. Furthermore, the military has a critical role in the process, due to their responsibility to set requirements for procurements. This often incorporates highly technical and classified information, which only Canadian Forces members can effectively handle.

The CAF’s primary focus is to ensure that personnel in the field are properly equipped for the missions they are tasked to execute. One potential problem with this approach is that its representatives may pursue this objective above everything else, a circumstance which became a problem in the immediate post-WWII era. However, various reorganizations since the 1960s, austere fiscal environments, and changing technical and strategic considerations have drastically altered how the CAF culture deals with programs. Consequently, affordability has become a key focus; a program that is too costly is unlikely to be approved or will draw resources from other programs in an austere budget environment.

That said, there is also the tendency to “gold plate” programs: capability improvements that would allow a platform to undertake a greater role. In some cases, this is an attempt to more efficiently use resources by increasing the utility of an existing platform.

This is evident in the acquisition of 15 CH-47 Chinook helicopters. Originally, the program was intended to meet urgent operational needs in Afghanistan, where a heavy lift helicopter was required to deploy large numbers of soldiers to the battlefield. This was fulfilled by the lease of surplus U.S. Army Chinooks. However, for a long-term solution, Canada would acquire a number of newly manufactured airframes. At this point, military officials identified a series of potential modifications that would greatly increase its utility in domestic operations. This led to the funding of an exterior fuel tank and other options which significantly increased the unit cost. This unit cost increase without corresponding funding increase required a reduction of units procured to stay within the budget envelope.

This overall approach is typically known as best value and can be a source of contention between the military and other government actors. The CAF is unique in that it must purchase equipment that must respond to such a wide range of contingencies. Acquiring additional capabilities at an incremental cost can be a cost-effective approach to meet a wide spectrum of requirements. However, that must be balanced with cost considerations and process format questions, which complicate matters.

Industry

Considering its position outside of government, industry’s objectives are the least congruent to any other party in the process. Whereas the government, civil service and the military are focused primarily on providing a public good, firms are dedicated to a private one. Their primary responsibility is to ensure their own profitability and financial survival. Any activity must be profitable; otherwise, there is little incentive to actually undertake it. In that vein, industry is willing to accept greater risk but offsets it by increasing costs. In some cases, a firm may even determine not to participate, as the potential cost and risk are not worth the reward.

This has been a constant issue surrounding the Canadian Surface Combatant, particularly concerning intellectual property. In the program’s RFP, the government made the requirement for competing firms to hand over all data related to their entry. For government, this would allow the country to be able to maintain and modify the design without outside interference. However, a number of firms saw this as unacceptable and threatened to withdraw from the program if changes weren’t made. In particular, they were concerned that they would be giving valuable technical data and intellectual property to a potential competitor, Irving Shipyards in Halifax, who was actually building the vessels.

The nature of industry is changing as well. The sector has seen massive consolidation, leading to fewer and fewer potential options for any given program. Moreover, the rapid acceleration of technology means that industrial actors are often far more familiar with a particular sector than the government. Often they can provide unique solutions not apparent to the other actors if provided a format that encourages them to do so. Since 2010 however, government-to-industry relations as a whole have become increasingly stilted, in part due to a number of controversies and the desire to avoid the appearance of impropriety. This is unfortunate, given the potential that could be unlocked if properly harnessed.

Final remarks

Over the past ten years, procurement has undergone significant changes, in part due to several controversies. The failed acquisition of the F-35 from 2008 to 2015, the troubles with the Sea King replacement program and the National Shipbuilding Procurement Strategy, among many others, have loomed large over the procurement process. One of the most obvious consequences is how the process of sole-sourcing has fallen out of favour, and this procurement option has virtually disappeared from major acquisition projects. This is problematic, given that the consolidation of the defence industry noted above has decreased the number of potential bidders available for any particular contract. Moreover, there has been a more stringent application of existing regulations in order to avoid potential risks, sometimes ignoring the potential benefits of alternatives. Indeed, there are circumstances where sole-sourcing obliges the selected company to negotiate its profit margin on the sale and, subsequently, can increase value to Canada; this is completely overlooked in public debate.

With Canada facing significant and enduring challenges to its defence procurement system, understanding the interest held by the major stakeholders and their approaches helps clarify some of these issues. It is evident that procurement reform in Canada is focused on process and regulatory improvements as a path to avoid failures. Unfortunately, it is unlikely to achieve the aims desired. Although the political leadership and civil service seek to mitigate or avoid risks altogether, this is a nearly impossible objective. It results in other negative consequences, such as artificially high costs.

Moreover, the process-driven approach runs counter to trends in other states. The United States, for example, has begun to embark on a series of foundational reforms on its procurement system, involving Congress, the military and industry. Rather than attempting to add more regulations, the crux of these efforts has been to accept greater risk, while providing program officials more ability to manage it effectively. These efforts have started to bear fruit, despite the disruptive political effects on defence policymaking.

Achieving a better balance between risk and process is a difficult one, which may take decades and never be achieved. Nevertheless, it is a worthwhile effort, which may result in vastly better outcomes for Canada and the Canadian Armed Forces.

 

Richard Shimooka is a Senior Research Fellow at the Macdonald-Laurier Institute. His research focus is on comparative defence and procurement policymaking.

About this author

Richard Shimooka

Richard Shimooka is a Senior Research Fellow at the Macdonald-Laurier Institute. His research focus is on comparative defence and procurement policymaking.

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