Canadian Defence Industry Policy

15 January 2008

Canada’s defence procurement situation is a good news / bad news story. The good news is that, according to DND’s Chief of Review Services, Canada ­currently has over $50 billion worth of defence projects underway – with Government promises of still more to come. The bad news is that the procurements are being conducted within a defence industry policy vacuum. Under these conditions, procurement strategies simply become instruments of political opportunism and victims of expediency. Canada suffers as a consequence.

Defence procurement is Canada’s largest discretionary expenditure. In terms of Government capital spending, it eclipses that of all other departments combined, multi times over.

For $50 billion, Canada acquires some level of defence capability (hopefully a high level), and some level of industrial and regional benefits, the latter being negotiated on an ad hoc individual ­contract basis, and always the subject of considerable behind-the-scenes political gerrymandering. 

Sgt Marylin Lemay of the National Supply Element hands out treats to the children in the Afghan city of Spin Bolduk. (PHOTO: Cpl Simon Duchesne, QG Afg Roto 4)

Most major countries have recognized that defence industry policy is a vital component of their overall defence policy. The United Kingdom goes so far as to produce Defence Industry White Papers. Australia’s 2007 Defence and Industry Policy Statement identified nine explicit objectives for defence procurement. These include concepts such as: developing a strategic approach; equipping and sustaining its Armed Forces; encouraging small and medium businesses; and driving innovation in defence technologies. The United States tailors its defence industrial policy to its position as the leading military power in the world, yet one becoming increasingly dependent on the global technology and industrial base. In each case, the country’s leadership recognizes that defence procurement spending can be leveraged to support not only defence, but other national _objectives. Canada has not yet recognized that: at least not in any formal, meaningful way. And $50,000,000,000 (plus) should enable a lot of leverage.
More importantly, there have been major changes in Canada’s defence procurement environment over the past decade. Individually, each change may not have been dramatic, but collectively, they pose major challenges – not just to Canadian defence, but to the country as a whole.

A major reorganization of Canadian defence industry has taken place over the last decade, reflecting the global trend to industry consolidation and concentration.
One by one, Canadian-owned firms have been absorbed into large, mostly American, global defence firms. Spar Aerospace, Bombardier Defence Services, Wescam, CAE Marine Controls Division, and Dy-4 are no longer Canadian entities, but foreign firms operating in Canada.

Is this good, bad, or does it make any difference? I do not pretend to know, but it merits debate, and it certainly merits a formal policy position.

The latest sale to a foreign firm was a big chunk of MDA, including the Canadarm and Radarsat 2 – both Canadian showcases of technological leadership, and both the recipients of hundreds of millions of taxpayers dollars. Should there be a line in the sand beyond which foreign inter­vention/ownership is no longer acceptable?

Canadian defence exports are at their highest level since World War II but, at the same time, protectionists in the U.S. are systematically making it more difficult to access that key market.

Capt Steve Winters (left) and MCpl Pierre-Alexandre Nadeau, of the CIMIC (civic-military cooperation) team, chat with villagers in Afghanistan. (PHOTO: Cpl Simon Duchesne, QG Afg Roto 4)

Led by U.S. Congressman Duncan Hunter, ranking Republican on the House Armed Services Committee on the political front, and by the State Department’s Director of Defense Trade Controls on the bureaucratic front, Canadian firms are simply being squeezed out of the U.S. defence market. One MDA senior mechanical engineer observed that the sale to Alliant Techsystems was necessary because “On our own, ITAR has been killing us,” by blocking access to NASA and U.S. defence contracts.

Again, does it matter?

Canada has taken an ad hoc approach in procuring intellectual property/technical data access for new, foreign-sourced procurements, often not bothering to address the issue until the equipment has been delivered and requires in-service support. Not addressing the issue up front can result in significant delays and additional project costs. The situation is further complicated when the foreign firms have to seek U.S. State Department authority to release the necessary data under various ITAR provisions. Yet, again, not very sexy maybe, but the stuff of a formal policy.

Word on the street is that the signing of some recent defence contracts were delayed because Canadian industry lacked the capacity to absorb additional industrial and regional largesse. If that is so, and there is no reason to suspect it is not, it suggests that the current industrial and regional benefits program is not working as planned and should be, at the least, reviewed, and more appropriately, made part of a comprehensive defence industrial policy. 

Captain Guy Noury discusses concerns with the villagers in Zharey. (PHOTO: MCpl Bruno Turcotte)

It is not enough to have a policy on individual issues. The policies must be integrated into a balanced package – an overall defence industrial policy. For example, it does not make sense for the Government to yet again require DND to spend hundreds of millions of dollars to rebuild Canadian shipbuilding capability while at the same time signing a free trade agreement with Norway – one that opens the shipbuilding industry to unpre­cedented levels of foreign competition.

Importantly, there must be a commitment to meeting those policy objectives. I mention this because Canada’s performance in implementing many of its stand-alone policies has been less than stellar.

For example, in one of those rare cases where Canada has actually taken an explicit defence industry policy position, DND, Public Works, Industry Canada, and Foreign Affairs cooperated to develop the Munitions Supply Program, and the related Ammunition Acquisition Plan (AAP). These initiatives were specifically aimed at maintaining a domestic conventional ammunition base. However, even that small attempt at implementing an industry policy has, to a large degree, collapsed. In its March 2007 evaluation, the Chief of Review Services concluded that “The AAP has lost operational focus, and today is concerned exclusively with training requirements” (this at a time when the Canadian Forces were in need of more operational ammunition than at any time in the past half century or more). Further, CRS noted that there was “no clear centre to provide strategic direction,” and that “the planning process was characterized by informality, indecision, delays, and lack of accountability.” Hardly encouraging.
The other major case, where defence procurement was driven by an explicit industrial policy, involved the Canadian Patrol Frigate (CPF) and Maritime Coastal Defence Vessels. Canada’s shipbuilding policy requires federal government ships to be built in Canada. The CPF Project paid a premium (in the hundreds of millions of dollars) to develop a Canadian shipbuilding capability. Yet a decade after delivery of the last ship, and after more than $11 billion had been pumped into the shipbuilding industry, the Build In Canada policy had not created a single, self-sustaining new job. Au contraire, Davie Shipbuilding in Lauzon was in receivership, and St John Shipbuilding had permanently closed.

MCpl Nadeau hands out information pamphlets on CIMIC outreach programs. (PHOTO: Cpl Simon Duchesne, QG Afg Roto 4)

Could a more comprehensive policy – and commitment to that policy – have resulted in a more positive outcome? Let’s just say that is impossible to have a more negative outcome. In any case, with the upcoming JSS project, new arctic patrol vessels, and the eventual replacement of the navy’s destroyers and frigates, we have an opportunity to improve our performance the next time around. DND will again spend hundreds of millions of taxpayer dollars to re-establish a Canadian shipbuilding capability. Will the nation learn from its CPF failure?

Numerous other issues could be wrapped up in a defence industrial policy. For example, what is an appropriate division of capability and capacity between DND/CF and industry – at what point does the loss of internal expertise make DND an impotent buyer vice a smart buyer; what is an appropriate level, if any, of dependence on foreign capacity to ­provide in-service support to CF equipment, or; what is an appropriate position on the Canada/U.S. defence economic relationship, and how can it be more effectively managed?

These issues, along with the IRB program, are currently being managed piecemeal. Policy is being made and implemented as a series of ad hoc decisions, often in the name of expediency and often as a result of closed-door political negotiation. The outcomes are simply not consistent with the expectations of a $50,000,000,000 portfolio. Canada can do better, and a comprehensive defence industrial policy just might enable us to accomplish it. As a minimum, it is time to publicly debate the issue.
While a defence industry policy advisor in the Office of the Secretary of Defense, under Dick Cheney, Dr. Grover negotiated with Congressional committees on numerous defence industry issues. He also developed President Bush’s national security policy and directive on shipbuilding, repair & conversion.
© Frontline Defence 2008