Procurement
May 5, 2015

Leveraging defence acquisition for Canadian innovation

The release of the Defence Procurement Strategy (DPS) in February 2014 has significantly transformed the way equipment is acquired by the Canadian Armed Forces. For Industry Canada, the goal is now to leverage the major recapitalization effort underway across the Army, Navy and Air Force to help Canadian companies and innovators grow, conduct R&D and find new markets. Among the department’s new tools are an industrial benefits policy focused on technological opportunities and Canadian-content weighted value propositions on which to assess the bids of prime contractors. Philip Jennings, Assistant Deputy Minister for Industry Canada’s Industry Sector, recently sat down with associate editor Chris Thatcher.

Conventional wisdom says the state can best foster innovation by getting out of the way, that it doesn’t do well at creating or shaping markets. Yet there has been a significant public sector role in many technological breakthroughs. What is your larger role in fostering innovation and Canadian entrepreneurs?

Innovation and entrepreneurship lie at the core of Industry Canada’s mission. Some people actually refer to our department as the Innovation Department. It is really about trying to strengthen Canada’s ability to compete in the global knowledge-based economy, and the department’s role in these areas is multifaceted and spanning a multitude of policy and program areas. Part of my sector’s function is to provide an industry lens to other departments as they develop policies and programs in order to fully understand the potential impacts on industry from what they are proposing to do. It’s been a successful model and we have a lot of interaction with other departments.

With respect to innovation more broadly, Industry Canada is active on a number of fronts. We have developed economic framework policies that encourage private sector investment in science, technology and innovation. We are responsible for setting the strategic direction for government-wide innovation policies and programs. In this respect, the Prime Minister recently released the renewed Science, Technology and Innovation Strategy, which builds on the foundation laid out in the 2007 framework, but goes further to ensure that Canada remains well positioned in the global arena for research excellence, talent and wealth. The renewed strategy will leverage the expertise and resources of post-secondary institutions, industry and government to translate discoveries and ideas into applications that will improve the day-to-day lives of Canadians and generate economic growth and jobs across the country. And we also work with arms-length partners on programs and initiatives that support research, development and innovation.

In terms of entrepreneurship, we do direct assistance through something called Future Entrepreneur Canada, where we support the next generation of small business leaders through financing and mentoring services. BizPal offers single point of online access to information entrepreneurs need to establish and grow their business. The Business Development Bank of Canada is managed to support SMEs and entrepreneurs. And the National Research Council’s Industrial Research Assistance Program recently established the Canadian Accelerator and Incubator Program to support outstanding incubators and accelerators that help early-stage firms and entrepreneurs, and promote a higher output of SMEs that are investment-ready and able to develop into sustainable, high-growth businesses.

Is there a larger vision for the defence and aerospace sector or is the DPS more about improving processes that people have been critical about for many years?

There is absolutely a larger vision for the defence and aerospace sector in Canada, one whose long-term competitiveness is grounded in innovation, a focus on global markets, and a shift to higher-value knowledge work. The sector has been a priority for the government, with direct programs and a formal offset policy since 1986. The government has recently transformed the offset policy to motivate companies to make higher quality investments that have a longer-term impact. In his report, Tom Jenkins references the fact that we have a window of investment that the Canadian Armed Forces and the Canadian Coast Guard would be making, and what you want to do is build and leave behind a legacy of strong Canadian capabilities that will outlast the life of those procurements and create an industrial base that will continue to grow and access opportunities both domestically and globally. Of course, improving processes under the DPS is one of the ways we will achieve that vision.

There is a vigorous debate in the U.S. over a perceived loss of a military technological edge. Is that factoring into how you look at defence capability for Canada?

We realize that for firms in Canada to remain competitive, they have to continue to invest in R&D and be at the cutting-edge of technology. So our tools are always focused on supporting that type of innovation. The Strategic Aerospace and Defence Initiative and the recently announced Technology Demonstration Program are really focused on supporting that R&D and innovation investment and making sure that we support an ecosystem. For example, the Technology Demonstration Program by definition requires larger companies to partner with smaller companies, as well as research institutions, and it’s really about trying to create an innovation cluster that supports the growth of the sector.

Canada’s offset policy has always had a focus on innovation. Under the Industrial and Regional Benefits (IRB) Policy, we had what we called multipliers – enhanced credit – for firms who made investments in R&D, including in public/private consortia. That remains in place, but now under the Industrial and Technological Benefits (ITB) Policy, strong R&D investments are further incented in Value Propositions that are rated and are a weighted element in the bid selection.

You now have a deeper knowledge base. Do you also have a greater “match making” role, advising SMEs and OEMs of possible connections they might not have picked up on?

The “match-making” role is important and Industry Canada works in strong partnership with the Regional Development Agencies (RDAs), which are key partners in highlighting where Canadian capabilities exist. The RDAs play an integral matchmaking role, linking Canadian-based suppliers with prime contractors, setting up networking opportunities and keeping industry in their regions aware of what is going.

A tool from the IRB policy which we will retain is: companies had to develop “regional plans” as well as SME plans to demonstrate that they had sought out solutions from across the country to support the acquisition. In that process, the RDAs play an important role coordinating and working with the potential bidders to understand what Canadian solutions could support their bid. On top of that, we have a much stronger incentive in a sense; we now have a rated criteria for supplier development. So we do expect to have an even stronger role than in the past in terms of match making.

Are the RDAs engaged in a different way as well?

Just as Industry Canada has a much bigger role than we used to in and throughout the procurement process, I’ve seen the RDAs step up, recognizing the greater impact of the new policy. We now have a stronger tool to incent high-quality outcomes and now a number of regional agencies are starting to align some of their programming to support the defence sector. Western Economic Diversification, for example, has the defence sector as one of its priority areas. The RDAs have and will continue to have an important role in the evaluation of bids, evaluating the quality of the value propositions that come in. That role in the past used to be a pass/fail, which was easier than the rated system we are moving to. All the agencies have embraced this and see the potential to support the defence sector in their own regions.

Given that a number of spin-offs occur beyond the defence sector, is the intent to have indirect benefits also focused on the sector or are you open to investments in other sectors?

The IRB policy supported investments that have a technological value that is as high or higher than what is being procured. The ITB policy, with the release of the Value Proposition Guide, listed four criteria that are key to driving where we want to see investment take place: investments in the defence sector; investments in supplier development; investments in R&D and innovation; and investments in export potential. If an investment hits all four of those criteria, then that will score better than others, all things being equal. Our ultimate goal is to support economic growth, and the ITB policy does not eliminate the possibility of high-quality investments that are not in the defence sector.

The Value Proposition Guide is a flexible framework and the requirements will be determined on a procurement-by-procurement basis. We want to engage with industry early so that they can inform the procurement strategy decisions. If investments in other sectors make sense on a particular procurement, we want industry to let us know.

What aspects of the IRB policy do you intend to keep?

Most of the successful elements of the IRB policy will remain under the ITB policy. Policy features such as the Investment Framework will continue to be utilized to support investments in innovation and SMEs. The ITB policy will also continue to incentivize R&D activities in partnership with publicly funded research organizations by allowing prime contractors to receive multiplied credits for these types of investments.

Fundamentally, the ITB policy strengthens the successful attributes of the IRB policy by requiring bidders to compete on the basis of economic benefits that they can bring to Canada. In particular, whereas before bidders were selected on the basis of price and technical merit, under the DPS the government will now also assess the value propositions.

All of this is predicated on good metrics. Is a role for the Defence Analytics Institute (DAI) to help measure how well you are meeting those targets?

On behalf of Industry Canada, Statistics Canada performed a comprehensive survey of the sector in 2013 and it will conduct a more detailed follow up survey this year. So part of how we are going to get there is by establishing some solid metrics and we are well on our way.

When the DPS was in development, Industry Canada in parallel made sure we started setting up a baseline, and we are now deepening our analysis. Industry Canada has subscriptions to commercial sources of data and market intelligence, and we supplement this through consultations with industry and other government departments and agencies to ensure we have as comprehensive a picture of the sector as we can. The government’s key gap, therefore, relates not so much to gathering more data as it does to harnessing additional analytic capabilities to translate this data into policy relevant information and analysis. To that end, an external analytic function performed by an independent party could be beneficial.

You have said you expect ITBs to apply to about 15 procurements per year, up from about five per year. If you have to engage earlier and delve deeper with industry, do you have the workforce for that substantial increase?

This is definitely a significantly enhanced role for Industry Canada. It is one we embrace. I have said at a number of forums that having a tool as powerful as the ITB policy is something I wish I had to support growth, innovation and investments in other sectors. But as you mentioned, the transformation from the IRB to the ITB policy has expanded the scope of our work, not just in terms of our role in each procurement but now in every procurement over $20 million, so we do expect that this will almost triple the number of leveraged procurements than was the case under the IRB policy.

To fulfill our heightened role under DPS, there has been a realignment within the department and in my own sector to ensure we have the right structure and resources in place to support this. We have brought on some new people. We are also looking to other departments such as National Defence and Foreign Affairs, Trade and Development and the regional development agencies to contribute insights and expertise and support of our procurement-by-procurement market analysis. And we will also be tapping into third-party expertise to validate and supplement our internal analysis.

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