NDDN Committee Report

We fully recognize that there is a system of checks and balances in place that governs the procurement process.  Thus, it is Treasury Board which, under the Financial Administration Act, is authorized to make procurement policy.  It is this policy that, in turn, governs departmental procurement.  Public Works and Government Services Canada (PWGSC) is responsible for ensuring the integrity of the purchasing process.  PWGSC has been the supply organization for the Department of National Defence for almost 70 years and acts as a separate center 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.  The Department of Foreign Affairs and International Trade oversees the trade agreements that frame procurement within a liberalized international trade regime.  However, 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).

In the evaluation part of the procurement process once the 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.  A 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).

This separation of authority for contracting has been considered crucial in ensuring that the process is not only fair but it is also seen to be fair.  At the same time there are those who lament the fact that this separation leaves one without a single clear line of authority – without that one individual or agency that bares ultimate responsibility and can therefore be held directly accountable.  It is also important that both industry and DND share clear performance measurements for deciding between competitors.

While this committee believes that the current system of splitting the procurement process and functions between departments has many excellent qualities, including acting as a check and balance between departments, we understand there are strong arguments to the contrary, including timelines, a clearer line of ministerial accountability, and a simpler process.  The Committee therefore recommends that:

6. The Government of Canada investigate ways of changing Department of National Defence procurement processes with the aim of substantially reducing procurement wait times for major defence capital projects necessary for national security.  This reevaluation should include investigating an “in-house” departmental procurement process (i.e. a Defence Department procurement agency), an open and transparent sole sourcing process where appropriate, and a heavier reliance buying “off the shelf” equipment when suitable.

There still remains public perception that the defence industry is too closely linked to the department through lobbyists who at one time were senior ranking CF officers.  We are not suggesting that former CF personnel not work for defence lobby firms or defence contractors, but, are concerned that the public’s understanding of the procurement process be an accurate one.  We therefore recommend that:

7. When large capital projects are awarded the Department of National Defence provide a clear public accounting of why certain contractors were chosen over others, with the obvious exception of classified and proprietary information.

A further issue that raised some concerns was that of the application of the United States International Traffic in Arms Regulations (ITARs).  In the post 9/11 era, the major irritant has been the increasingly restrictive application of the ITAR on U.S. exporters as it relates to access for Canadian citizens with another nationality.  The U.S. Department of State began limiting access to ITAR controlled material to Canadian citizens, and denying access to Canadian citizens who possess dual nationality with a U.S. proscribed country.  Compliance with these restrictions would be incompatible with the Canadian Charter of Rights and Freedoms and human rights legislation, which prohibit discriminatory treatment of Canadian citizens, regardless of their country of origin or nationality.

Talks between the Department of Foreign Affairs and International Trade (DFAIT), DND and the Department of State has led to an arrangement whereby access to defence articles and services exported under ITAR will be granted to DND personnel who are Canadian citizens, including dual nationals, who have a need to know and a minimum secret-level security clearance.  DND personnel include Canadian Forces members, civilian employees, embedded contractors, and employees of other government departments working within DND. 

While we are encouraged by this initial step we firmly believe more needs to be done to ensure that the rights of Canadian workers are protected.  Included in the arrangement should be any Canadian citizen or landed immigrant working for government or industry and possessing the requisite security clearances as set by Canadian standards and procedures.  We therefore recommend that:

8. The Department of National Defence and the Departments of Foreign Affairs and International Trade continue discussions with the U.S. Department of State to put in place a system that can be considered just for all Canadian citizens and landed immigrants.

It is not our intention here to revisit the entire debate over industrial and regional benefits; we accept them as part of the procurement process and as beneficial to our economic and industrial interests.  Given that they are an accepted part of doing business it is important that they are played to our advantage to the greatest extent possible.

On this issue the Committee heard from Mr. Ken Rowe, Chairman and Chief Executive Officer, I.M.P. Group International Inc., who shared his concerns over recent practices relating to in-service-support (ISS) for future aircraft acquisitions.  These include four C-17 Globemaster aircraft, a tactical airlift capability of 17 C-130J Hercules aircraft and 16 medium to heavy lift CH-47 Chinook helicopters.  Mr. Rowe was concerned with the effects that recent changes in policy regarding the provision of ISS would have on the Canadian aerospace industry.  He argued that the decision to contract future ISS directly with the manufacturer in the U.S. for the Hercules fixed wing and Chinook helicopter fleets would significantly hurt Canadian companies in such an enterprise.^[6] This decision was, of course, based on the new principle of single point accountability whereby the contractor is responsible both for the provision of the equipment and its long term operation, i.e. maintenance.

Previously, the practice had been for the Government to negotiate license agreements for engineering and data separately – thereby allowing Canadian companies to provide ISS directly to DND without relying on the manufacturer. According to Rowe this practice allowed aerospace companies, such as IMP and Spar, to leverage their ISS capability, generate foreign business and create thousands of jobs in different parts of the country.

While equipment manufacturers are required to provide a dollar value amount of industrial offsets to Canadian industry, this, according to Rowe will not be as beneficial as having Canadian companies directly and independently supporting DND.  This loss of advantage will also make Canadian ISS companies less competitive with respect to getting foreign contracts. ^[7]

Our Committee takes Mr. Rowe’s cautionary warning seriously.  Yet, it will take some time to see exactly how these matters will work themselves out.  We therefore recommend that:

9. The Government continue to evaluate the new practice, taking into consideration the intention to sustain, promote, and enhance Canadian regional industries and their participation.

Finally, we would like to note that we very much appreciate the fact that the Auditor General has accepted the essence of a motion passed by our Committee on March 1, 2007 and will proceed with an audit of major capital projects, including the procurement process at National Defence.