NDVA Committee Report

On 11 February 1999, the Standing Committee on National Defence and Veterans Affairs (SCONDVA) heard testimony from representatives of the Office of the Auditor General of Canada with regard to Chapters 3 and 4 of the Auditor General’s 1998 report — Equipping and Modernizing the Canadian Forces and National Defence —Buying Major Capital Equipment, respectively. During the course of that meeting, the Auditor General suggested that SCONDVA might wish to examine the numerous challenges facing the Department of National Defence as it pursues procurement. (The House of Commons Standing Committee on Public Accounts issued a brief report on the subject in October 1998 after two meetings with the Auditor General and National Defence officials, but had not held in-depth hearings.) On 18 February 1999, SCONDVA agreed to study the issue further. On 2 March 1999, the Committee began hearings involving officials from the various federal departments involved in defence procurement, industry representatives and interested members of the public, including academic experts. Meanwhile, in its 1999 report, the Auditor General’s office completed two further audits related to defence procurement — one on the use of sole-sourcing and one on the practice of Alternative Service Delivery (ASD). SCONDVA concluded its hearings on 21 March 2000.

The Minister of National Defence has described equipment as one of four pillars that are "crucial to the success of our military in terms of both capability and morale." At any given time, the Department of National Defence (DND) manages some 20 major crown projects in addition to about 81 other approved capital projects. In fiscal year 1999/2000, the Department will spend approximately $4.4 billion on capital acquisitions, close to half the Government of Canada’s procurement spending. Given the magnitude of defence procurement in Canada, it is of significant importance that this process be well managed and result in good value-for-money and produce the most effective force posture in the most cost-effective manner. Without compromising the priority of cost-effective procurement, the process should, where possible, seek to contribute to Canada’s industrial development and the economic well-being of Canadians. This is in the interest of both fiscal responsibility for the Canadian taxpayer and the provision of appropriate equipment in a timely manner for our armed forces.

As the prime example of why the procurement process must be reformed, the Committee notes that a replacement for the Sea King helicopter — an operational need first identified almost 25 years ago — has yet to be delivered to the Canadian Forces. In fact, no contract has been let to fill this capability deficiency. The government should address this outstanding priority immediately.

This study has illustrated that two principle factors are critical to the acquisition and maintenance of defence equipment. First, the Department of National Defence must have some form of a stable and predictable budget in order to plan effectively equipment purchasing with a view to preserve the capability of the Canadian Forces. Second, the procurement process itself, including the environment in which it takes place, must be managed properly. This report examines these factors according to themes that emerged during the course of the hearings and provides recommendations accordingly.

Although many of the issues raised in the course of this study dealt with the defence procurement process as a whole, the Committee focused primarily on major capital equipment acquisitions. This in no way detracts from the importance of properly managing smaller goods purchases and service contracts. Rather, it assumes that modifications to the defence procurement process at the level of larger, more-complex acquisitions will have inevitable positive effects on the former. A final caveat: although SCONDVA’s study and this report seek to improve defence procurement, much of the following analysis and recommendations extend beyond the Department of National Defence’s practices to address the government-wide processes as, at present, there are no rules in Canada to differentiate defence procurement from government procurement.

The Department of National Defence has been a key contributor to the government’s efforts to control spending and cut costs through downsizing, reorganizing and re-engineering. Between 1990 and 1998, DND’s overall budget fell by 33%, the largest reduction of any NATO nation. As a result, it would seem that the

The budget has been defining the Canadian Forces’ equipment priorities, rather than the other way around, resulting in the adoption of a "design-to-cost" strategy. Inevitably, insufficient funds remain to maintain existing equipment, let alone upgrade or replace what has become obsolete and unreliable. This jeopardizes an armed forces’ capability. Thus, matching the availability of funds with capability requirements is a fundamental challenge currently facing the Canadian Forces (CF) in the realm of equipment acquisitions.

As a consequence, the Auditor General is concerned that the CF is procuring "low-end capability" — that is, purchasing partial capabilities or equipment that does not meet the original military operational requirements — or "less equipment" than was originally required. A useful analogy raised in the course of this study illustrates well the dilemma facing procurement officials:

The Auditor General concedes that determining how far to take this approach can be a somewhat subjective exercise. Nonetheless, his officials stress that DND needs to study the various options, determine the cost difference between procuring equipment that meets all operational requirements at the outset and procuring lower-priced equipment requiring later modifications to meet those same requirements, and decide accordingly.

The Committee agrees that this is a prudent manner in which to proceed and thus recommends:

1. That the Department of National Defence incorporate into its procurement approach the concept of performance-based specifications, including direction to defence contractors to provide precise cost information related to pre-determined levels of operational performance achievable.

The Committee notes with dismay the main finding of Chapter 3 of the Auditor General’s 1998 report: that "DND’s capital budget could not support the multi-purpose combat force being planned by the department." Ultimately, the Auditor General predicts a $30 billion deficit in funding for equipment by 2012 and has reported to the Committee that DND’s own estimate of the shortfall was in the range of $20 billion. In the last fiscal year, the capital projects portion of the defence budget was down to about 18%. While the Department’s Strategy 2020 indicates a goal of increasing this to 23%, some witnesses have suggested that "30% … is the magic figure estimated by a number of western militaries as the figure that procurement ought to be at as a part of your defence budget." Regardless, the Auditor General states that "the need to address the disparity between the defence capital budget and the department’s acquisition plans is an urgent and pressing necessity."

His report details three options to address this challenge: (1) maintain the status quo, (2) secure additional funding or (3) restructure the forces. For obvious reasons, the Committee does not consider the first "option" to be viable. The most recent federal budget responds positively to the second option and will alleviate the situation in some way: the Department of National Defence will receive about $1.7 billion more over the next three years and has identified equipment as a priority area. However, this alone may still be inadequate. Funding is not always stable, particularly in a democratic environment where departments must convince each government that a program should continue. If funding constraints continue to be an issue, the Department will need to consider restructuring the Canadian Forces. The Committee is aware that defence officials have already begun to consider various possibilities to this end. While SCONDVA members hope this is not ultimately necessary, they believe that the exercise is useful nonetheless, as it encourages the CF to evaluate its priorities carefully.

With these facts in mind, the Committee recommends:

2. That the Department of National Defence clearly identify its estimated deficit in the area of equipment procurement and communicate this, with supporting rationale, to SCONDVA and the Department of Finance for consideration in the planning of future budgets; and

3. That the Department of National Defence provide to SCONDVA and the Department of Finance a clear strategy, including a proposed timeline, for increasing the capital projects portion of its budget to a minimum of 23% within a defence budget that is adequate to accommodate such an increase. In other words, this exercise should neither affect personnel levels negatively nor occur at the expense of any other area under the defence budget.

A. Give Credit for Assets

It has come to the attention of the Committee that, in the event that DND divests itself of property, the profits are currently not designated back to the Department. Rather, they go into the Consolidated Revenue Fund. While there were changes to the regime regarding the receipt of revenue from the disposal of surplus material assets in the early 1990s (which now allow departments to spend 100% of the amount deposited), there is a separate regime for "real property assets." This is currently under review.

It is the opinion of this Committee that the Department should be allowed to keep or at least share profits generated by divestiture of its assets, material or other. As in its "Quality of Life" report, SCONDVA again recommends:

Government of Canada guidelines require that procurement be conducted "in a manner that will ensure the pre-eminence of operational requirements, stand the test of public scrutiny in matters of prudence and probity, facilitate access, encourage competition, and reflect fairness in the spending of public funds." The process consists of three separate and distinct actions: (1) a make or buy analysis, (2) a call for bids, and (3) the actual buy or contract entry.

For capital project approval, a minister can approve up to $30 million and Treasury Board, over $30 million. All major crown projects (typically over $100 million) are subject to approval by the Cabinet as well as by the Treasury Board. There is presently no role for parliamentary committees in the procurement process, with the exception of reviewing the Department’s Estimates and Report on Plans and Priorities. (In the case of services, all ministers have the authority to contract services up to $2 million if electronic bidding is used, up to $400,000 if traditional competitive tendering is used, and up to $100,000 on a non-competitive basis. Beyond $2 million, the Treasury Board must approve a service contract.)

Defence procurement in Canada currently falls under these government-wide procurement policies and procedures. Several departments are involved and sustained ministerial action is required on many fronts to ensure the successful completion of a given procurement initiative. Consequently, initiatives to improve defence procurement will be dependent in some cases on the progress of higher-level government-wide reform and key decision-makers must be involved along the way to ensure "buy-in" and transparency. The cost of equipment can be greatly affected by the expediency and decisiveness of these procurement decisions and acquisition processes.

It is the opinion of this Committee that the procurement process could be expedited by simplifying the project approval process described above. Therefore, SCONDVA recommends:

5. That the Treasury Board Secretariat examine options to increase approval authority levels (to allow greater departmental control over budgets and create a streamlined approval process) and that the government make the necessary modifications to the Financial Administration Act and Treasury Board guidelines to accomplish this.

At the same time, the Committee believes that the defence procurement process must be more transparent. The Department of National Defence and the government are accountable to the Canadian public, via Parliament and its committees, for the responsible administration and disbursement of taxpayers’ money. Consequently, SCONDVA recommends:

6. That all major crown projects (valued at more than $100 million) proposed by the Department of National Defence be brought before SCONDVA for public scrutiny.

A. Ensure Coordination Between Federal Government Departments

SCONDVA has heard that the complexity imposed on the process by the involvement of so many government departments contributes to lengthy and cumbersome defence procurements.

Under the Financial Administration Act, Treasury Board is authorized to make procurement policy, which governs departmental procurement in turn. Public Works and Government Services Canada (PWGSC) has the mandate to ensure the integrity of the purchasing process by applying policies and procedures which are fair, transparent and competitive. It has been the supply organization for the Department of National Defence for almost 60 years and acts as a separate centre of authority on contracting. The Department of National Defence, as the sponsoring department, is responsible for defining operational requirements and the day-to-day management of its procurements. Added to these is Industry Canada, which administers the government’s industrial and regional benefits (IRBs) policy in concert with the regional agencies — the Atlantic Canada Opportunities Agency, Western Economic Diversification, and Canada Economic Development for Quebec Regions (Addendum: and the Federal Economic Development Initiative for Northern Ontario. March 15, 2001) The Department of Foreign Affairs and International Trade (DFAIT) oversees the trade agreements that frame procurement within a liberalized international trade regime. Interestingly, all defence weapon systems and support for the same are exempt from the North American Free Trade Agreement (NAFTA) and the World Trade Organization (WTO). (Generally, 25% or less of DND’s procurement is covered by those agreements in any given year.) Still other departments can be involved in a single procurement, depending on the government’s strategy. For example, if aboriginal business were a priority, the Department of Indian Affairs and Northern Development (DIAND) would also have a say in how to proceed. An interdepartmental procurement strategy committee set up within government ensures that each interested department with its own agenda to pursue is represented, each answering to "a different master."

In the "evaluation" part of the procurement process, once various companies have submitted their bids, the technical, price, and IRB parts of the bid packages are separated to ensure that one does not unduly influence another. The Department of National Defence completes the technical evaluation; PWGSC, the price; and Industry Canada, the IRB package. Once all three parts are evaluated, they are combined to determine which contractor has the best technical and price proposal, accompanied by an "acceptable" industrial and regional benefits package (detailed below). In most instances, any contractor who is displeased and believes that the process was unjust has the option of challenging the results before the Canadian International Trade Tribunal (CITT).

The Auditor General of Canada has told the Committee that the Department of National Defence is responsible for pushing many reforms to the procurement process. SCONDVA is pleased to hear this and, wishing to see these initiatives continue, recommends:

7. That all federal government departments and agencies involved in defence procurement — Treasury Board, Public Works and Government Services Canada (PWGSC), Industry Canada, Department of Foreign Affairs and International Trade (DFAIT) and others —

(1) facilitate the reforms necessary to increase the efficiency and effectiveness of defence procurement by addressing policies and procedures needing reform within their own areas of responsibility, which inhibit the regular government procurement process; and

(2) continue to improve coordination between departments to eliminate redundancy in the procurement process.

Many witnesses identified the separation of procurement responsibilities and authorities between elements of the federal government as a major challenge facing defence procurement in Canada. Historically, as is called for under the principles of the Financial Administration Act, the separation of authority for contracting in Canada has been considered "crucial to help ensure not only that the process is fair, but that it is seen to be fair." However, the result of involving so many "fingers in the pie" is that there is no single, clear line of authority. Furthermore, the fact that a separate department controls the contracting function means, in the opinion of several witnesses, that streamlining the process will be difficult at best:

SCONDVA has been told that the current structure perpetuates overlap in terms of resources and duplication of tasks. These can add time and, consequently, increase the cost of procurement.

Although there would be trade-offs involved, the process could be streamlined by eliminating duplication. Such a move could also yield significant human and financial resource savings. Thus, the Committee recommends:

8. That the Government of Canada, in consultation with SCONDVA, examine the defence procurement practices of NATO and Allied nations with a view to examine the feasibility and desirability of developing and implementing specific rules tailored to the needs of defence procurement, including consideration of the increased efficiencies that might result from the integration of Public Works and Government Services Canada (PWGSC) contracting functions directly into the Department of National Defence.

A related claim heard by the Committee is that the involvement of so many priorities from diverse departments inflates the end cost, distorting the "real" cost of defence procurement.

The (then) Assistant Deputy Minister, Materiel, from DND ranked government objective priorities in the following order:

i. to meet the operational requirements through a competitive, fair, and accessible approach — that is, the best value for money;

ii. to promote long-term industrial and regional benefits;

iii. to achieve other national objectives: small business, environmental concerns, aboriginal business, official languages, international treaties; and

iv. to assist Canadian firms in becoming competitive in domestic and world marketplaces.

Thus, while the primary objective of any procurement action undertaken by the federal government is to provide the purchasing department with quality goods and services at the lowest possible cost to effectively carry out its operations, defence procurement is frequently used as an instrument to promote non-defence national objectives. Several witnesses have told the Committee that this has real costs for DND, both in terms of finances and time.

SCONDVA does not doubt the importance of non-defence national objectives, but is concerned that these could impose a burden on the defence budget’s buying power. Consequently, the Committee encourages the government to recognize this fact, that the cost of defence is often inflated to accommodate other objectives; if the defence budget were used solely to fund the "real" costs of defence, the Department of National Defence would have greater buying power.

B. Identify Operational Needs First

During the course of this study, witnesses emphasized to SCONDVA that responsibility for defining the equipment needs of the Canadian Forces rests solely with the Department of National Defence. At present, this is done in consultation with all three branches of the armed forces — army, navy and air force.

Effectively, the first phase of capital procurement is one of identification. Operational staff must identify a capability deficiency resulting from "equipment aging, changes in operation, technological advances, strategic analysis of future requirements, and changes in government policy." Time and again, the Committee heard that force structures are based on strategies developed to address conflict scenarios in which means are matched with ends. Before you can establish what you need to operate effectively and appropriately, you must define the potential environment of operations and assess and identify potential threats. An official from the Office of the Auditor General observed that

These combat scenarios, prepared independent of the three services to ensure objectivity, would serve as the foundation for planning Canada’s armed forces, identifying deficiencies and setting priorities. Once established, these scenarios would be reviewed within the Department on an annual basis to ensure that they remain valid. This should not be as intensive an undertaking as a full-fledged white paper review, but rather a critical and central ongoing responsibility of the planning elements within the Department.

The Committee agrees that combat scenarios are a fundamental tool for defence planning. It further endorses the view that such scenarios are of particular use in identifying equipment deficiencies, the first step in effective procurement. Accordingly, SCONDVA recommends:

9. That the Department of National Defence finish and make public its combat scenarios, which will provide an objective means of evaluating both the procurement objectives for and the operational readiness of the Canadian Forces, as soon as possible; and

10. That the Department of National Defence review its combat scenarios on an annual basis to ensure they remain relevant to current geostrategic realities.

On a related note, one witness raised the issue of DND/CF’s capacity to complete the operational research necessary to establish the above combat scenarios. Currently, only two offices — the Directorate of Defence Analysis (DDA) and the Director General of Operational Research (DGOR) — are dedicated to develop the force planning scenarios and threat assessments that are so crucial to all three armed services branches. Unfortunately, both these offices have limited staff following reductions since 1990 and, in the witness’ opinion, cannot actively keep up with the duties delegated to them. Consequently, he recommended that, as a means of providing direction to the procurement process, funding be increased to these operational research areas to ensure adequate capacity to "create a viable and autonomously crafted strategic vision in the form of threat assessment, force planning scenarios, and joint warfare doctrine." Staff from these offices could also serve as critical members of integrated project teams. SCONDVA recommends:

11. That the Department of National Defence assess whether the Directorate of Defence Analysis (DDA) and the Director General of Operational Research (DGOR) personnel levels are adequate to complete the important operational research that serves the entire Canadian Forces, including the completion and ongoing review of combat scenarios.

i.   Create Policies that Match Expectations with Capability (and Vice Versa)

One point emphasized throughout the hearings was that, while defence policy is important, the reality is that, without equipment, one cannot even begin to implement that policy. However, on repeated occasions, SCONDVA members heard witnesses speak of the policy environment in which our procurement processes take place: without clear policy direction, one cannot determine equipment needs.

Priorities are defined based on what sort of force a government wants within the current geostrategic context. As one witness aptly described the situation: "Governments can pick where they want to be able to operate on [the security] spectrum and can make appropriate decisions for equipment, spending, force size, training, and so on to meet that policy." Clearly, it would be inappropriate for the Canadian government to pretend that its armed forces can "do everything everywhere under all conditions." On the equipment procurement front, the Department (and the government that guides it) must choose carefully and recognize that "as soon as [it] start[s] eliminating key parts of [Canada’s] defence capability, then [it] start[s] eliminating [its] ability to play in [the security] environment."

Several witnesses suggested that the 1994 Defence White Paper no longer provides adequate clear direction in this area and, consequently, that Canada lacks an adequate policy to guide procurement. In this context, it would be useful to undertake a top-down review of policy-level decision-making regarding the purpose of the Canadian Forces. SCONDVA thus recommends:

12. That the government consider initiating a review of Canadian defence and security policy with a view to update the 1994 Defence White Paper. This review should incorporate the new combat scenarios developed by the Department of National Defence and clearly detail the government’s expectations of and intentions for its armed forces.

Another suggestion proposed to the Committee was that the government create a permanent national security advisory agency, coordinated at the highest level (the Prime Minister), to oversee all security and defence issues. A witness lamented the fact that there is presently no defence specialist in the Prime Minister’s Office. The Committee further notes that the Prime Minister and the Chief of Defence Staff do not meet on a regular basis. SCONDVA members believe that it would be appropriate to consider this suggestion during the course of the policy review recommended above. In addition, the Committee intends, in the future, to hold hearings on the possibility of creating such a permanent advisory body and will offer its recommendation at that time.

ii. Cooperate and Coordinate with Allies

Alliances can be a useful source of efficiency and cost reduction in equipment procurement on two fronts.

First, Canada (as is the case with most countries) can rely to a certain point on its allies to cover-off areas in which it is weak. This can be a useful strategy for bridging capability gaps in the short term. However, beyond that certain point, the Canadian armed forces would become a liability to our allies. The desirability of "having Canada along" could become an issue and interoperability would be jeopardized. The Committee believes that the Department of National Defence is keenly aware of this reality and should continue to be appropriately vigilant.

Second, procuring equipment jointly with allies offers many advantages, particularly when the equipment is developmental in nature, such as the Joint Strike Fighter. For a small price, Canada can gain access to technology that would otherwise be beyond its reach. Again, the SCONDVA is confident that DND is aware of this and will continue to pursue initiatives of interest to Canada.

SCONDVA is currently holding hearings on the Revolution in Military Affairs (RMA), in which the issue of interoperability figures prominently. The Committee intends to make specific recommendations on this and related issues in its forthcoming report on RMA.

iii. Plan for the Long Term

Once the Department has clearly identified its operational needs, it must establish a preliminary list of potential solutions, including an estimate of the costs. A project can then be entered into the long-term capital plan, which "signifies agreement at a departmental level to address this deficiency, and … to proceed with the next phases of this project." The Committee has learned that predictability in the timeline of this long-term capital plan, especially for major crown purchases, is critical to the procurement process. According to the Canadian Defence Industries Association, "the impact of delays in decision-making can be severe for industry. Money and people skills are often wasted when government does not act in a timely manner during the procurement process." In many instances, this waste is passed on to the Canadian Forces, as it diminishes industry’s ability to respond quickly to the Department’s needs. SCONDVA recommends:

13. That the Department of National Defence determine and make public the Canadian Forces’ long-term equipment requirements for goods and services along a clear timeline, and provide SCONDVA with updates of this requirements’ plan on a regular basis.

Another industry association has raised a related issue with the Committee as follows:

Indeed, SCONDVA received comments from several witnesses on this issue and consensus seems to be that the Department would be well served to consider how it can make procurement of equipment a less "bulimic," more sustainable and regular "rolling" process. Such a process has the potential to eliminate procuring equipment not currently required (resulting in less "mothballing"). It could also allow more continuous upgrading as new equipment is phased in.

An example raised by a witness from the Marine Workers’ Federation is that Canada is "looking at possibly mothballing a half a dozen or so of the coastal defence vessels that [were just] built. [… He suggests that] we should have built them at a time [when … ] we could … put personnel on them" and actually have them operational. Another independent witness described the benefits of spreading out major equipment deliveries as follows:

However, he cautions that this sort of procurement is contingent on ongoing support from the government. In a democratic system, this can be problematic, as "the government of the day is in effect committing the government of future years to keep that program running," something for which there is no guarantee.

Other witnesses observed that, while this might work for some platforms, such as ships, it may not be an appropriate approach for others. In addition, there is the Auditor General’s concern that the Canadian Forces are procuring only partial capabilities. Nonetheless, the idea of adopting a "rolling" procurement strategy in some instances may have merit. Defence officials would have to evaluate the desirability of the approach on a case-by-case basis to avoid the danger of procuring a platform without necessary kit or inadequate numbers of a particular piece of equipment. Thus, SCONDVA recommends:

14. That the Department of National Defence determine the value of adopting a "rolling" approach to major capital projects and develop its strategy accordingly.

SCONDVA notes that the Department is already experimenting with the concept of "total package procurement," whereby an initial acquisition and its future "total life-cycle support" are bundled together. The approach speaks to the importance of knowing the full cost of operating a system over its life. One industry representative observed that "the support side of the procurement continuum … is the area most neglected in any end-item procurement, and … holds … the biggest potential return if reformed."

Department officials have also told SCONDVA about efforts to examine the desirability of a "technology demonstration program" that would allow for continuous upgrades through a system’s lifecycle. The Committee has heard that the secret to effective procurement is "to buy a platform with a long-life expectancy and continue to upgrade it."

SCONDVA welcomes both these initiatives and encourages the Department to continue its efforts in these areas.

C. Complete Adequate Analyses Prior to Making a Decision

The second phase of defence procurement, as described by the (then) Assistant Deputy Minister, Materiel, is development. Within the Department of National Defence, a senior review board (which will approve a project charter identifying the what, how, who, when and why of that procurement) is formed. The Department names a project manager and establishes a project office. It is at this point that the Department is to complete option analysis, feasibility studies, and risk assessments, and refine the cost estimates against various options.

This is also the point at which the Auditor General’s report levels its main criticism against DND’s management of the procurement process. The 1998 audit established that the Department had made inadequate use of analyses in a variety of areas — options, testing and evaluation, risk management — to support its decisions. The Auditor General further argues that, in certain cases where analyses were completed, they were not done prior to procurement decisions; things were done out of order.

When the Auditor General’s staff reviewed the most current draft of DND’s acquisition reform guide, they found that "little priority" had been given to options analysis and front-end tactical requirements, although the Department "has addressed at least the options analysis guidance through its computer network desk book." Audit officials also noted that the Department made no specific commitment in response to the Standing Committee on Public Accounts’ report with regard to testing equipment before a final selection is made.

However, none of this critique is to negate the fact that, since the 1998 audits and with Parliament’s sustained interest in defence procurement, DND has begun to undertake many reforms. The Treasury Board has also been active in pursuing reforms. In cooperation with several government departments, the Board is currently establishing a basic framework for improved risk-management government-wide.

The Committee supports that objective decision-making is based on such studies and analyses, against clear requirements. At the same time, SCONDVA members understand that these analyses add time to the process and can lead to what one defence official referred to as "paralysis by analysis." The defence department must strive to find a balance between ways to expedite the process and the need for proper analyses to guide decision-making. The Committee asks:

15. That the Department detail its plans to strengthen analysis prior to decision-making, particularly in the area of testing and evaluation, and provide the Committee with a clear timetable for implementing these plans.

i. Commercial-Off-The-Shelf (COTS)

Since there are little to no developmental costs involved in purchasing off-the-shelf and additional costs beyond the established price are limited to specific modifications, COTS procurement often means a lower price tag. The Committee acknowledges that purchasing off-the-shelf can provide great value to the Canadian taxpayer. However, to ensure that such equipment is appropriate to the needs of the Canadian Forces, it should be tested in the operational environment in which it will be used prior to purchase. To facilitate this, the Committee recommends:

16. That Treasury Board establish a clear policy on the testing and evaluation of commercial-off-the-shelf products, with a view to gain every benefit possible from this interesting alternative to developmental procurement.

ii. Alternative Service Delivery

Alternative Service Delivery is based on the assumption that industry can administer some portions of national defence activity more efficiently and at a lower cost than the military and public servants. To this end, the Department of National Defence is currently working on contracting out its supply chain (the request for proposals is to be finalized in May 2000) and seeking industry support for operational missions (to be implemented by fall 2000). However, during the course of hearings, concerns about such initiatives were raised on several fronts.

First, the Auditor General has noted that "the audited savings … all were considerably less than what defence ministries both expected and claimed." Although the use of alternative service delivery has resulted in savings, these are harder to secure than originally expected. Nonetheless, the auditors noted that this is a common experience among defence forces around the world and is not limited to the Canadian Forces.

A second concern involves the need for more complete and clear definitions of expectations at the outset, including the need to establish whether ASD is indeed the best way to proceed. One industry representative emphasized that the Department must establish clearly that it cannot itself complete a task efficiently before it goes to industry. In the event that the government determines it can do so, it should waste neither its nor industry’s time and resources by pursuing an unnecessary process that will never come to fruition (as has happened in the past). In sum, government must make these cost determinations well in advance and act accordingly. To facilitate this, SCONDVA recommends:

17. That the Department of National Defence use the Treasury Board Secretariat’s "make-or-buy" analysis guide as a means to evaluate and justify its decisions to use commercial-off-the-shelf products or resort to Alternative Service Delivery rather than pursue developmental projects or utilize in-house services.

Third, the use of alternative service delivery may run the risk of undermining military functions if the armed forces become dependent on outside suppliers for certain logistics. DND has approached this issue by identifying some services as "core services" and arguing these are of such a nature that they can only be conducted by the military. Identifying what is a core service is a somewhat subjective decision and must be done with care. In truth, many of these limits will only become clear through testing in real operations.

Finally, the Auditor General has commented on the need for staff trained in proper business analysis and the Committee is pleased to note that the Department has now prepared standard business cases to begin to address this concern. (Professional development of staff is discussed further below.)

D. Preserve Competition

It has been said that "competition makes contractors sharpen their pencil." Indeed, without reservation, witnesses before SCONDVA endorsed competition as the primary method for procurement, as does the Committee.

Nonetheless, government has recognized that in some instances sole-sourcing is a necessary procurement tool, for expediency and other reasons, although a tool that should be used selectively and not violate the spirit of competition. To this end, the Government of Canada created the Advance Contract Award Notices (ACANs), a system which the Auditor General believes is being used increasingly to circumvent competitive tendering, a sort of "fifth exception" to the government’s procurement regulations.

Furthermore, a representative from the Auditor General’s Office observed that none of the departments it examined, including National Defence, has a senior contract review committee "to review all contracts with respect to … the justification for sole-sourcing" as suggested by Treasury Board’s policies. The audit official also informed the Committee that Treasury Board had "flatly rejected [an audit] recommendation that sole-source decisions … should be reviewed and approved by an independent senior manager." In its testimony before the Committee, Treasury Board officials claimed that the Secretariat has taken action to improve implementation of its ACANs policy.

In response to these issues and in an attempt to underline its support for the value of competition, SCONDVA recommends:

18. That Treasury Board (1) clarify what actions it has taken to improve implementation of its Advance Contract Award Notices (ACANs) policy and (2) reconsider its rejection of the Auditor General’s recommendation to require independent senior review of sole-source decisions within departments; and

19. That the Department of National Defence consider creating a process that requires senior officials to take or concur in the decision to sole-source and to be accountable for it, for example, through the Auditor General.

E. Train Skilled Personnel to Administer the Process Properly

A lawyer who appeared before the Committee emphasized that, in many instances where procurement rules are broken, the source of the problem is "a deficiency [in] understanding about what policy and regulations require … within the departments themselves. At the line level, persons don’t seem to be aware of the obligations they’re under." Other witnesses also noted this apparent lack of knowledge among and training for many officials responsible for procurement. All suggested that provisions to address these deficiencies would greatly improve the process, as those in procurement administration would be better equipped to act with certainty and according to regulations. This could achieve a dual goal of reducing the length of the process as well as the number of grievances. In February 1999, Treasury Board ministers approved the creation of programs to train and certify departmental procurement professionals, including those at National Defence.

The Committee is encouraged that Treasury Board is addressing this important deficiency in the procurement process and recommends:

20. That Treasury Board report back to the Committee an implementation timetable and plans for monitoring the results (for example, baseline data, performance indicators, evaluation schedules, etc.) of its program to standardize professional development across the Government of Canada through training and certification for acquisitions and procurement staff; and

21. That the Department of National Defence ensure that all of its materiel and supply managers are well-informed about the purchasing procedures currently in place and, where necessary, certified in project management as soon as possible.

F. Acknowledge the Role of Industry

The Committee understands well the need for a defence industry infrastructure as a critical element of sovereignty and an essential pillar of national security. However, if the Committee heard one thing resoundingly clear, it was that the Canadian defence industrial base cannot be sustained by the amount of business generated within Canada. Our defence industries rely on exports for their continued existence and have indicated that the use of Canadian products and technologies by its domestic customer (DND) is a critical component for export success. Given these realities, the question remains: How can Canada best preserve and promote its defence industrial base?

Departments, including National Defence, have indicated that they are moving to bring industry into the procurement process much earlier. For example, industry is now invited to provide feedback on draft statements of requirements and requests for proposals before they are finalized. This is being done to ensure that the government’s procurement expectations are realistic and the results sought, attainable. It also perpetuates the fairness and openness of the process.

Industry representatives have advocated going even further to establish a formalized mechanism for consultation between itself and the government. The Canadian Defence Industries Association has indicated its desire that the Department create a "defence industry advisory board" to provide industry input into planning at the level of the Defence Management Committee. Similar relationships have been pursued in other countries, most notably under Smart Procurement in the United Kingdom and in Germany where the government recently required companies to enter into a formal agreement to collaborate on acquisitions initiatives.

However, some Canadian government officials have expressed reservations to this approach, asserting that, while it is desirable to cooperate to the greatest extent possible, a formalized partnership with industry could render fair competition difficult and undermine the objective management of contractual relationships. Nonetheless, the current ADM, Materiel at National Defence has expressed his intention to begin more frequent general consultations with industry "later this year."

SCONDVA believes the move to involve industry more closely in the early stages of procurement planning will have positive effects and encourages the Department to pursue these consultations. The Committee also recommends:

22. That the Department of National Defence evaluate Canadian Defence Industries Association (CDIA) request to establish a "defence industry advisory board" at the level of the Defence Management Committee and expand this concept to include stakeholders representing other industrial sectors in the process.

i. Acknowledge the "Cost" (and Value) of Industrial and Regional Benefits

A great deal of debate during these hearings sought to evaluate the merits (or lack thereof) of Canada’s Industrial and Regional Benefits (IRBs) policy, which was approved by the Cabinet in 1986 and impacts some 25% of Canadian government procurement mostly in the area of defence.

IRBs on defence procurement are allowed under NAFTA and the WTO, since defence issues are traditionally excluded from these, and indeed most, international trade agreements.

At the same time, the Agreement on Internal Trade (AIT) — signed by the federal government, the provinces, and the territories — prohibits the government from requiring a prime contractor to meet regional quotas in their industrial benefits plan.

Industry Canada officials observed that, because IRBs are applied in accordance with "best business sense" — that is, in a way that encourages sound business decisions by both prime contractors and potential subcontractors — there is no proof of a premium attached to fulfilling the requirements of the policy. For example, IRBs cannot typically be applied to COTS acquisitions: to force a contractor to change its existing supply network would effectively defeat the advantages of such procurements.

Witnesses from Industry Canada also emphasized the benefits of IRBs: their department estimates that, from 1986 to 2006, the IRB policy will create 35,000 jobs, based on a factor of $85,000 per job.

Furthermore, they noted that industrial and regional benefits are secondary to meeting the operational needs of the procuring department at the lowest cost possible. According to government officials, IRBs are never the deciding factor in a contractor winning a particular bid as they are evaluated only on a compliance level according to established thresholds — that is, they are not given a ranking or value, but rather pass or fail.

However, most industry representatives, including the CDIA, say that the IRB policy adds cost to procurement in terms of, for example, their personnel’s administration time, and that the process would be simpler without IRBs. One industry representative complained that IRB objectives are "ill-defined to secret." Yet another noted that the present policy fails to address the issue of developing a national defence capability, since its primary focus is "on bringing capability from outside of Canada as opposed to retaining and exporting current capability." He claims that his company has been almost penalized because it is located in Canada. A lone voice from industry countered that, if done correctly, industrial regional benefits are "a very good thing to do" and "in fact […do] not add cost."

In 1992, the Auditor General attempted to quantify the impact of IRBs on the cost of procurement. His office concluded that this was a subjective process at best and was unable to provide a definitive answer to the question. Costs ranged from the cost of simply administering industrial benefits in off-the-shelf purchases to up to 20% of the total project costs.

In an attempt to understand better these issues, Industry Canada recently contracted an

This seems to point to another witness’ affirmation that IRBs have "little downstream effect on the Canadian economy."

However, the consulting firm’s final report affirmed that the "Policy has been successful in increasing the visibility of companies in the western and eastern regions. The benefits of this are large compared to the relatively small value of the work that flows to these regions." It also noted that the distribution of federal contracts was not distorted by the application of IRBs in any meaningful way. Finally, the independent report concluded that "the Policy has had a minimal impact on the cost of procurement where there is an existing domestic capability" and "the administrative costs to contractors of managing their IRBs are […] small."

Given this debate, SCONDVA recommends:

23. That Industry Canada ensure that operational considerations remain the first priority of procurement and that Industrial and Regional Benefits (IRB) policies, which contribute to enhanced Canadian industrial capability, (1) ensure that companies already located in Canada have equal access to procurement opportunities and (2) are implemented in an efficient, cost-effective and timely manner.

ii. Preserve Ability to Export and Import Freely

As one witness observed, "[e]very army in the world needs the same things, and very few countries can provide all of that." Canada is not exception to this rule: our defence expenditures are simply insufficient to maintain an indigenous defence industrial capability that could fulfil all of the Canadian Forces’ procurement needs. The CDIA notes that "the cost of developing and sustaining such a capability would be exorbitant." Consequently, it is appropriate that Canada rely to some extent on imports to satisfy its defence needs.

Since early in the Second World War, Canada and the United States have maintained a unique defence economic relationship, embodied in the Defence Production Sharing Arrangement (DPSA) and the Defence Development Sharing Agreement (DDSA). This special relationship is founded on the concept of North American security and a common industrial base and "successive governments have recognized that the cooperative use of research, development and production resources is in our mutual defence and economic interest."

Of the Canadian defence industry’s total exports worldwide (some $1.8 billion), $1 billion — that is, more than half — goes to the United States. Many Canadian firms are dependent on access to American technology and the US market for their business. This access is critical to their survival.

Historically, Canada has been exempt from many of the provisions of the United States’ International Traffic in Arms Regulations (ITARs). Permits for the export of defence goods (or articles) and services from the United States to Canada were not required, except for a relatively narrow range of particularly sensitive items. On 12 April 1999, the US Department of State made changes to the ITARs, which significantly narrowed the Canadian exemption and required Canadian companies to obtain an export license for 11 (previously 5) of 19 categories, effectively ending special treatment for the Canadian defence industry. The new ITARs were to be made permanent in July 1999 after an original 120-day review, but US Secretary of State Madeleine Albright extended the review period indefinitely after talks between Canadian and US negotiators bogged down. On 8 October 1999, the Canadian government announced that an "agreement-in-principle" had been reached on the main elements required to resolve the issue and that officials would proceed immediately to resolve details with a view to implement the necessary regulatory changes. A recent article (3 February 2000) in the Globe & Mail revealed that these "final" negotiations were not resolving outstanding issues and, in the meantime, Canadian companies had already lost out on several opportunities. Representatives from industry have told the Committee that, if the situation does not improve, many Canadian companies will be forced to move to the United States in order to survive.

Consequently, SCONDVA recommends:

24. That the Department of Foreign Affairs and International Trade aggressively pursue the maintenance of privileged Canadian access to the United States market and information-sharing in keeping with our desire to ensure North American security through an integrated technological and industrial base.

The Canadian Commercial Corporation (CCC), a crown corporation established in 1946, is a mechanism to facilitate trade and contracting on a government-to-government basis. Although the CCC has no role in the internal Canadian procurement process per se, it does promote Canadian industry abroad. SCONDVA is pleased to recognize the CCC’s contribution to preserve and promote Canada’s national industrial base.

iii. Promote Innovation

Mr. Ron Kane, Director of Space, Electronics and Defence in the Aerospace and Defence Branch of Industry Canada noted that "Canada, as indicated by the OECD, has an innovation gap." From the testimony received in this study, one might conclude that a contributing factor to this is that the procurement system has not allowed Canadian industry to innovate. In the past, the definition of requirements has been unnecessarily prescriptive and rigid.

SCONDVA heard that government officials have effectively been telling industry how to do its job, in great, voluminous detail. One solution echoed by all witnesses is to allow industry flexibility to innovate. The procurement process should promote, or at least permit, innovation through broader requests for proposals (RFPs) that define requirements in such a way as to give the greatest latitude, by focusing on the operational end-use or capability sought. Make industry find the answers.

Linked to this is the very crucial issue of limiting the Statement of Requirements (SOR) in terms of length and detail. One witness raised the example of the recent Canadian search-and-rescue helicopter project. Apparently,

Since industry must respond to each and every point in a statement of requirements, it is obvious that such detail engenders a losing situation. Creating leaner SORs focused on performance is a win-win situation for both industry and the government.

The Committee notes that the Department of National Defence is placing greater emphasis on performance specifications as opposed to detailed technical specifications. SCONDVA recommends:

25. That the Department of National Defence focus its statements of requirements (SORs) on performance and capability and that it develop policies to ensure that defence requests for proposals (RFPs) are lean, clear and manageable.

iv. Provide Real Incentives for Reducing Costs

The focus of payment in the procurement system has not been oriented appropriately. It is poor business sense in equipment procurement to pay for time. Expenditures should award good products, timely delivery and meeting expected results.

One way to achieve this is to adopt the concept of paying for "power by the hour." Another is to create incentives, such as allowing industry to share in the benefits of cost reduction. SCONDVA has been told that, at present, the Government of Canada profit policy is cost based — the lower the cost to government, the lower the profit to industry; the higher the cost, the higher the profit. This environment fails to generate savings for the government.

SCONDVA is encouraged to hear that the Department of National Defence is examining ways to link compensation to performance. The Committee recommends:

26. That Treasury Board examine current Government of Canada profit policy and other procurement policies, make the necessary changes to ensure that results, not time, are rewarded, and develop appropriate incentives to reduce the cost of procurement; and

27. That the Department of National Defence incorporate such incentives into its procurement initiatives and provide SCONDVA with plans as to how this is being implemented.

v. Strengthen Assistance Programs

Technology Partnerships Canada (TPC) is one of the federal government’s innovation programs. Created in March 1996 as an integral part of Industry Canada’s Jobs and Growth Strategy, TPC replaces in part the Defence Industry Productivity Program (DIPP), which was eliminated in 1995. The objective of DIPP was to develop and maintain strong defence-related industries across Canada capable of competing successfully over the long term in domestic and export markets. This objective included the development and maintenance of a defence-related production capability and of an advanced defence-related technology capability.

A principal area for investments by Technology Partnerships Canada is the aerospace and defence sector, including defence conversion. Designed to comply with World Trade Organization and the North American Free Trade Agreement, the TPC partners government with the private sector through a cost-sharing approach to support:

• industrial research: planned search or critical investigation aimed at the discovery of new knowledge, with the objective that such knowledge may be useful in developing new products, processes or services;
• pre-production activities (including prototype, testing, qualification and demonstration); and
• technical feasibility and market studies leading to other TPC-eligible activities.

Ineligible activities include: start-up costs; capital assets to begin or increase production; acquisition of inventory, land or buildings; building projects; marketing projects; and Canadian demonstration or distribution of foreign technology.

On successful projects, the government investment is repayable and the government shares in any upside return. Investment and repayment conditions are negotiated on a case-by-case basis. In addition, all TPC repayments will be reinvested in the TPC program rather than being returned to the Consolidated Revenue Fund, thereby ensuring a degree of self-financing and allowing the potential for future growth.

One official from the Department of Foreign Affairs observed that "a lot of Canadian companies … have expressed some dismay that the old DIPP program … was also cut back in the early 1990s. It was somewhat replaced by Technology Partnerships Canada funding, but not to the same level." Whereas pre-developmental research used to be widely funded under the DIPP program, the mandate of Technology Partnerships Canada is to invest strategically in research, development and innovation in order to encourage private sector investment, and so maintain and grow the technology base and technological capabilities of Canadian industry. The Canadian Defence Industries Association suggests that "more [research and development] funding should be made available to industry in general. TPC may not be the vehicle to dispense it to industry, but partnership with other institutes such as [the] Industrial Research Assistance Program at the National Research Council should be encouraged." The Committee recommends:

28. That the government, in particular Industry Canada, examine this option to improve funding to research and development as part of its efforts to develop a defence industrial policy (see below), in a manner that promotes equitable industrial development and benefits across all regions of the country.

vi. Develop a Defence Industrial Policy

The Committee has heard that "federal focus on defence industry policies is urgently required" and that "government and industry need to jointly address the requirements for and dimensions of a defence industrial policy for Canada." Within this broader need, one particular industry sector has come to SCONDVA’s attention: shipbuilding.

a. Shipbuilding

According to Mr. John Banigan of Industry Canada, as of 1999, the shipbuilding industry in Canada comprised approximately 5,000 employees with some 12 companies in four regions of activity — British Columbia (1,300), Ontario (700), Quebec (1,000) and Atlantic Canada (1,900). Due to difficult market conditions, the industry underwent a process of rationalization. From 1986 to 1993, the federal government participated (via a contribution of some $198 million) in a number of industry-led rationalization programs to assist workers in yards to adjust. (Atlantic shipyards did not participate in this rationalization.) Ultimately, 7,200 jobs were eliminated and a smaller market emerged. Unofficial current estimates indicate that the Canadian shipbuilding industry has continued to decline to some 3,700 employees — 1,000 in British Columbia, 800 in Ontario, 800 in Quebec and 1,100 in Atlantic Canada — and further reductions are expected in all of these regions in the very near future. There is concern within the Committee that even these estimates may be high and that the numbers continue to decline.

Throughout the 1980s and into the early 1990s, industry employment in Quebec and in Atlantic Canada was sustained through several major federal defence procurements: the Canadian Patrol Frigate Project (CPF), the TRIBAL Class Update and Modernization Project (TRUMP), and the Maritime Coastal Defence Vessel Program (MCDV). However, these programs are now complete. A lack of federal procurement is the current reality in the industry and, with no new orders, many shipyards (including the largest in Atlantic Canada, at Saint John) face closing.

In the spring of 1999, there were about 2,500 ships on order around the world. Of the world market, Canada holds approximately 0.04%. (Japan, South Korea and China are expected to continue to dominate the market; currently, they have about 70% of the market share.)

During House debates on 14 April 1999, the Parliamentary Secretary to the Minister of Industry (Lastewka) reported that he and the industry minister had met with the representatives of the shipbuilding industry on 25 March 1999. At that meeting, they reportedly discussed the "generous package of measures the federal government currently maintains to support shipbuilding," in place since 1996. These measures include:

• a 33.3% accelerated capital cost allowance for Canadian shipbuilding;
• a 25% duty on most (some small fishing vessels exempted) non-NAFTA ship imports;
• domestic (restricted to Canadian sources) procurement on a competitive basis for all government shipbuilding and ship repairs;
• a favourable research and tax credit system; and
• Export Development Corporation financing for commercially viable transactions (extended from 8 to 12 years following discussions with the shipbuilding industry in 1998).

However, in testimony before the industry committee, Mr. Robert Chernecki (CAW Canada) argued that these are not the necessary tools to allow Canadian industry to compete. At the same time, he maintains that the industry is not asking for subsidies. Other critics of the current package have argued that it lacks necessary tax incentives (such as exemptions — partial or complete), grants and preferential loans.

According to information presented at the industry committee’s meetings, Canada neither has an industrial strategy for a shipbuilding policy (such as investment in shipyard development), nor provides subsidies to the industry, unlike many other countries. (Those named as examples in the course of the three meetings include Korea, Japan, China, the United States, Norway, the Netherlands, Germany, Italy, France, Britain, Spain, Australia, India, Romania, Poland, and Estonia).

One particular case of subsidization of the shipbuilding industry is that of the United States. Since 1936, shipbuilders in the United States have benefited from the "Jones Act," whereby all vessels leaving United States’ ports must be built, staffed and repaired by Americans. This precludes Canadians and others from accessing the commercial (or military) market in the United States. Although Canadian government officials have continuously sought to have these unfair market access barriers removed, the Americans aggressively defend the legislation (sometimes using national security provisions). For example, the previous Canadian government was unable to get the Americans to make a concession in the context of either the original Free Trade Agreement (FTA) or the NAFTA. The Committee notes with interest that, according to testimony, no country has ever challenged the Jones Act before the World Trade Organization.

Witnesses from the Marine Workers’ Federation (MWF) expressed great frustration to SCONDVA over what they perceive as an unfair international rule system for shipbuilding, as described above. The witnesses have made it clear that they are not seeking subsidies from the federal government. Rather, they would like to examine the feasibility of creating a financing package and other initiatives, such as allowing more favourable writedowns on the leasing of vehicles, that might "afford [the Canadian shipbuilding] industry the opportunity to play by the same rules" as other countries.

Representatives of the Marine Workers’ also perceived a lack of interest in or even acknowledgement of their plight on the part of the Canadian federal government. They noted that Canada is the only maritime nation in the world, with an active shipbuilding industry, that does not have a national policy on the matter. With this in mind, the MWF requested that SCONDVA recommend that the federal government convene a national roundtable to find a solution to the problems facing this industry and, ultimately, to establish a national shipbuilding policy. (This is in keeping with the broader defence industry policy described above, although the Committee acknowledges the particular urgency of the status of shipbuilding in Canada.)

Since that request was made, SCONDVA is pleased to note that Industry Canada has re-established a shipbuilding directorate to study shipbuilding in Canada. In addition, on 29 March 2000, the House of Commons successfully passed a private member’s bill (C-213) through a second reading. The bill is now before the House of Commons Standing Committee on Finance for detailed study, after which it will return to the Commons for a third reading and final vote before it can become law. Among other things, Bill C-213 seeks to enhance tax incentives and export financing for the Canadian shipbuilding industry. The Committee is encouraged by this progress and hopes the outcome will have positive effects for the shipbuilding industry in Canada. These initiatives are a step in the right direction. Still, SCONDVA recommends:

29. That the Government of Canada convene a national roundtable on shipbuilding in Canada with a view to establish a national shipbuilding policy.

The MWF’s second request was that SCONDVA recommend that the Department of National Defence proceed immediately with the procurement of supply vessels. Defence equipment planning rightfully remains the duty of operational and technical experts within the Canadian Forces and the Department of National Defence, separate from the political wishes of any government of the day, and SCONDVA notes that DND’s 2000-2001 Report on Plans and Priorities does not identify new supply ships among its procurement priorities. However, Canada’s supply ships, which are over 30 years old and shortly to be decommissioned, play a critical role when Canadian military personnel are deployed on international peace support missions. Acquiring some form of afloat logistics and sealift capability is a critical requirement that must be addressed quickly. The supply ships as well as others, such as the 27-year old Tribal Class destroyers, will need to be replaced. Therefore, the Committee recommends:

30. That the Department of National Defence establish a procurement plan for Canadian ship construction (as per recommendation 14 above) and move quickly to acquire new Canadian-built supply vessels to replace the ageing ships currently in inventory.

This would avoid block obsolescence and rust out within Canada’s naval fleet and provide a more stable base for the shipbuilding industry.

G. Strengthen the Grievances Process

SCONDVA has learned that grievances against the procurement process typically arise because of three situations:

i. A potential supplier feels competent to bid, but is not invited. This is usually a result of the government’s decision to sole-source.

ii. A supplier is invited to bid but cannot, because the tender documents specify too precisely the sorts of requirements or qualifications a successful bidder must have. This effectively predetermines who will get the contract.

iii. A government department invites tenders on a competitive basis but the potential supplier perceives unfairness in the evaluation process. This is the most frequent complaint.

However, there is a lack of incentives for industry to seek redress in the event that they feel the procurement process has not proceeded according to established rules. Suppliers must "weigh the cost of the lost opportunity against eroding goodwill with probably its most important customer, the company time and energy a challenge will consume when it could be bidding on other contracts, the amount of money likely to be recovered in the challenge, and the cost of the challenge itself." As a result, despite their merits, most grievances do not proceed. It is estimated that only 10% of eligible grievances are actually adjudicated.

A lawyer who frequently represents industry before the Canadian International Trade Tribunal (CITT) maintains that the Tribunal requires greater authority to award damages for a breach of the rules of procurement. In particular, he recommended two principle changes: first, that departments be required to provide reasons or justifications for avoiding or bypassing "stop award issues" and, second, that in calculating lost opportunity costs, the Tribunal no longer use the practice of dividing the contract value by the number of potential bidders that might have been able to participate, whether they challenged the outcome or not.

Other witnesses observed that there is no form of independent due process for those who wish to challenge sole-source decisions. Apparently, they fall outside the purview of the Canadian International Trade Tribunal.

The Committee supports that check and balances against violation of procurement rules must exist in order to preserve the integrity of the process. It thus recommends:

31. That the government examine ways in which to strengthen the grievance process to ensure that challenges of merit may be assessed and the rules of procurement respected; and

32. That the Government of Canada establish an independent dispute resolution mechanism to deal with contracts that lie outside the purview of the Canadian International Trade Tribunal.

H. Implement, Monitor and Report on Reforms

SCONDVA understands that DND has, as a result its Acquisition Reform Action Plan, initiated a number of pilot projects, many of which are to be completed by September 2000, to field-test some of the revised procurement concepts. Follow-up on the lessons learned from these pilots is critical. The Committee thus recommends:

33. That the Department of National Defence include in its Annual Performance Report the procurement reform results of its pilot projects and, therein, identify baseline expectations and indicators, final outcomes, areas for further improvement and plans for future action.

The Committee has also learned that the government recently established a committee at the ADM-level to monitor reforms and determine what further improvements are required for procurement. It includes assistant deputy ministers from Public Works and Government Services Canada, National Defence, Industry Canada and three other departments that are involved in various types of procurement activity. SCONDVA members believe this is a positive initiative that will ensure that reforms are implemented as quickly as possible and continuously evaluated. Along that vein, this Committee recommends:

The need to replace the Sea King helicopters was first identified in 1975. Twenty-four years later, the government still has not put the contract to tender — that is, with the exception of the combined New Shipborne Aircraft/New Search and Rescue Helicopter contract awarded on 24 July 1992. When that contract was later cancelled, the process had cost the Canadian government at least $478.3 million, including $154.5 million for project administration, research and development, and the Canadian Forces were left without a replacement for the Sea King.

On 4 March 1999, the (then) Assistant Deputy Minister, Materiel, indicated that the Minister of National Defence hoped "to proceed with [the maritime helicopter] project [MHP] as quickly as possible." On 28 April 1999, the Minister, himself, told SCONDVA that "replacing the Sea King must be our short-term equipment priority. The government is actively engaged in examining its options for maritime helicopters and in putting the final touches on a procurement strategy." He hoped to be in a position "in the near future" — "a matter of weeks" — to announce the government’s strategy.

Finally, on 25 November 1999, the Vice-Chief of Defence Staff indicated to the Committee that he personally had signed off on the statement of requirements for the MHP in "late June or early July" of that year. Effectively, the process internal to the defence department, including a review by a joint oversight committee, has been completed. The statement of requirements has since passed to the stage awaiting government and senior bureaucrats, including a variety of departments, to develop its procurement strategy and proceed to a public announcement to tender the contract. More than nine months from the time the finalized SOR left the Department of National Defence, this has yet to occur. It is the opinion of this Committee that the failure to replace the Sea King helicopter epitomizes everything that is wrong with the procurement process.

SCONDVA is concerned that this outstanding procurement, which has been identified consistently as a government priority over many years, proceeds and recommends accordingly:

SCONDVA heard many positive things about Canadian defence procurement. The process is viewed, on the whole, as open, transparent and accountable. Industry representatives stated that:

• "Canada has earned an international reputation for the quality of its procurement process and the resultant openness and fairness;"
• The department works collaboratively with industry to shape requirements and communicates well with potential suppliers;
• "Canada enjoys a fairly unpoliticized procurement process within the Department of National Defence;" and, finally,
• "Evidence does suggest that DND’s value-for-dollar performance continues to improve as their procurement reform initiatives and financial control processes evolve."

An expert in procurement observed that:

Indeed, officials from the Office of the Auditor General of Canada told the Committee that "well over 50%" of its recommendations to DND have been implemented and the Department "normally puts a very strong effort into responding to the recommendations." They acknowledged that sometimes the Department might be slow to respond to a problem, because it lacks the resources necessary to address it immediately. Even during the course of this study, DND has been actively reforming its materiel acquisition and support processes.

Witnesses acknowledged that there is a trade-off between transparency and accountability and the speed (or lack thereof) in the procurement process. The Department of National Defence must work hard to balance analyses necessary to the integrity of the process with timely delivery of needed equipment. To determine appropriate trade-offs between capability, cost and time is its greatest challenge.