NDDN Committee Report

Mr. Rick Casson
Chairman
Standing Committee on National Defence
House of Commons
Ottawa, Ontario
K1A 0A6

Dear Mr. Casson,

Pursuant to Standing Order 109 of the House of the Commons, and on behalf of the Government of Canada, I am pleased to enclose the Government Response to the recommendations contained in the Standing Committee’s Second Report entitled Procurement and Associated Processes.

Your Committee’s Second Report provided the Government with an opportunity to update Parliament on its ongoing efforts to make defence procurement more efficient, transparent and responsive to the current and future needs of the CF while ensuring prudence and probity in the expenditure of public funds.  The Response emphasizes the interdepartmental approach involved in defence procurement by making reference to the roles of the various departments and regional development agencies involved in defence procurement.  The Response specifically addresses each recommendation and explains the actions taken in recent years to improve the efficiency of defence procurement, identifies areas where further improvements are required and offers practical solutions to address the remaining issues. 

We would like to thank you and the other Members of your Committee for the useful perspectives you provided on the defence procurement and associated processes.

 

Yours Sincerely,

 

 

Peter G. MacKay, P.C., M.P. 

Introduction

The Government of Canada has carefully considered the Report of the Standing Committee on National Defence on Procurement and Associated Processes, and has taken note of the nine recommendations it contains.

This Response provides an overview of the Government’s position with respect to each of the recommendations.  As the Committee has made clear, this is an area of considerable complexity and importance.  Military procurement must both acquire the right equipment for the Canadian Forces and support the maintenance of an open, fair and transparent competitive process.  Given the considerable costs often involved in the acquisition of military equipment, the procurement process must also ensure that taxpayers’ money is invested appropriately and diligently.  It is therefore essential that decisions be taken with a full understanding of the context and potential impacts, and in this regard the Committee’s work has contributed useful perspectives.

The Government of Canada would like to thank the members of the Standing Committee on National Defence for their work on this issue.

Recommendation 1

These ten points (proposed by a Committee witness) also be used by the Government as fundamental guiding principles in the reform of the defence procurement system.

The Government acknowledges and appreciates the Committee’s suggestions for reforming defence procurement.  As noted in the Committee’s Report, considerable progress has been made in this direction, and indeed many of the concepts put forward already underpin the reforms that have been, and continue to be, implemented.  Much work remains to be done, however, and the Government intends to continue reforming the system in a manner that responds effectively to the need for change, ensures fair, open and transparent procurement processes, and ensures prudence and probity in the expenditure of public funds.  Specific responses to the ten proposed principles are as follows:

• Statements of Requirement.  DND has a well-established process for defining capability deficiencies, which it refines and improves on a regular basis.  In most cases, Statements of Capability Deficiency and Statements of Operational Requirement, once approved, are “frozen”.   However, as a result of evolving operational needs or detailed analysis during the definition phase of a project, it may sometimes be necessary to amend them.  The Department will continue to ensure that requirements documents accurately reflect valid current and known future needs to the extent possible, consistent with the imperative to ensure that defence acquisitions are executed in a fair, open and transparent manner.
• Early Industry Involvement. The Government supports early industry involvement where appropriate, and uses a variety of mechanisms to seek industry advice and ideas for responding to new requirements.  The program to modernize the Halifax Class frigate is a good example of productive collaboration with industry.  The Government will continue to explore innovative ways to ensure early industry engagement in defining solutions considering the establishment of a Government-Industry Centre for Capability Analysis (based on successful Australian and UK models) that would provide a more structured mechanism for bringing industry scientific and technical expertise to bear early in the development of technology solutions to defence requirements, while protecting Intellectual Property Rights and preserving an environment conducive to competition.
• Integrated Project Teams.  The use of integrated interdepartmental project teams, with clearly defined accountabilities, to deliver large, complex projects is a long-standing practice and will continue where appropriate.  Other innovative approaches, such as the grouping of projects for management purposes and to share specialist resources are also being applied.   It must be noted that the severe constraints on defence spending throughout the 1990s significantly affected the training and professional development of defence procurement professionals in DND and PWGSC (within a wider context of Government restraint).  As indicated by the Auditor General in her testimony to the Committee, aggressive workforce reductions and reduced recruiting created a large experience gap, leaving few experienced intermediate-level leaders and managers ready to replace more senior people who are retiring.  In addition, cuts in professional development programs and the absence of significant capital spending over the period have left few trained and experienced project management experts able to deliver an expanding and highly complex defence capital program.  Over the past two years, the Government has instituted programs to rebuild an experienced, well-trained defence procurement workforce and these programs are beginning to bear fruit.  However, it will take time to fully renew the government’s procurement workforce. 
• ¸ Risk.  Risk identification, characterization and mitigation have always been required elements for any defence acquisition project.  The Government continues to improve its management of risk, and in support of the Treasury Board-led policy renewal initiative, is implementing a new policy on the management of projects that establishes the requirement for deputy heads to consider the risk and complexity of projects and the capacity of the organization to manage project risk.  The policy is currently being piloted by four departments, including DND, and is expected to be fully implemented across the Government of Canada by 2011-2012.
• Performance Specifications.  The Government agrees with the recommendation to rely more on performance specifications rather than detailed technical specifications, and has been doing so whenever possible.
• Vendor Performance Assessment.  The current PWGSC Vendor Performance Policy was introduced in 1996.  It has recently been reviewed and a draft revised policy will be made available later this year for consultations with the key stakeholders such as other federal government departments, industry associations and individual vendors.  The policy announcement is currently planned for fall 2008.

While maintaining the relevant principles of the existing policy, the draft revised policy provides enhancements for much more effective performance management, as highlighted below, by establishing a rigorous and well defined evaluation process that:

• ensures that performance evaluation is done "as a rule" for all applicable PWGSC-awarded contracts rather than by exception, using standard evaluation forms and universal criteria;
• ensures that the information reported against individual contracts will be collected into a central data store for global management and oversight;
• requires the participation of the requisitioning authority and the contracting authority;
• engages the vendor in the process which should result in the rehabilitation of a significant number of poor performers;
• addresses documented performance problems through the imposition of vendor performance conditions;
• screens out of the procurement process proven poor performers through a much more effective bid rejection clause and the imposition of more severe corrective measures such as debarment; and
• establishes a Secretariat at PWGSC for central coordination and support to ensure the policy is applied in a consistent manner, for monitoring vendor performance centrally by systematically collecting individual performance evaluations, tracking contract terminations, reviewing vendor performance history and taking action, where necessary.

DND is also developing a Vendor Performance Assessment Policy to complement the revised PWGSC policy.  It is intended to be ready by the end of the year. 

• Procurement Strategy.  Procurement strategies for all projects are defined through formal interdepartmental consultations.  The procurement strategy is approved by PWGSC as part of its checks and balances role.  All projects designated as Major Crown Projects are required to convene a Senior Project Advisory Committee, with membership consisting of senior representatives of departments participating in the project.  The role of the Senior Project Advisory Committee is to advise the project leader on all aspects of the project and to carry out the procurement review function for the project.  Similarly, all procurements over $2 million are reviewed by standing interdepartmental Procurement Review Committees.  It is the view of the Government that this well-established process provides the best assurance of consistency and effectiveness in the selection of the right procurement strategy for each requirement.  The full involvement of PWGSC, Industry Canada and the federal regional development agencies ensures that industry concerns are appropriately addressed while at the same time preserving a fair, open and transparent competitive environment for all companies interested in bidding on the requirement.
• Defence industrial strategy.  DND, Industry Canada, PWGSC, Foreign Affairs and International Trade Canada and other departments are working together to build a better alignment between Canada’s defence industrial capability and Canada’s military requirements.  The first stage of this process is the development of a series of guiding principles and best practices.  Subsequent stages of work will establish renewed or new strategies, policies and programs aimed at achieving defined outcomes.  This process will serve not only to strengthen our national ability to provide the Canadian Forces with essential capabilities in a timely and cost-effective way, but will also aim to maximize other benefits to Canada in terms of economic growth, skills development, employment, and exports, in line with the Government’s long-term economic strategy – Advantage Canada.

The Canada First Defence Strategy will also strengthen Canada’s industrial and technological advantages by setting the foundations for a new relationship with industry.  A stable, predictable and long-term investment program will create new, significant and long-term opportunities for communities and businesses across Canada.  Canadian industry will have the opportunity to position itself as high-tech leaders, invest proactively in research, and develop technologies that can be used at home and exported to foreign markets.

• Contractor Incentives. The Government agrees with the recommendation to incorporate positive incentives into contracts, and continues to include such provisions in new contracts where appropriate.
• Funding Stability.  The Government agrees with the recommendation to establish stable funding lines for DND and has done so in each of the Budgets it has introduced.  More specifically, Budget 2008 provides the funding stability and predictability that will allow for the successful implementation of the Canada First Defence Strategy (CFDS) by increasing the automatic annual increase on defence spending to 2 per cent (from the current 1.5 per cent) beginning in 2011-12.  At the end of 20 years, the Canadian Forces annual budget will have increased by $12 billion.  The adoption of Accrual Budgeting across the Government has further enhanced the long-term financial stability of the Department.

As noted above, the Canada First Defence Strategy, by providing long-term funding to support the modernization and growth of the Canadian Forces, will be the foundation of a new relationship with Canada’s defence industry.  The long-term planning of the CFDS will allow industry to plan in advance, to invest pro-actively in research and development and to position itself for success within Canada and on international markets.    

Recommendation 2

The Department of National Defence investigate ways of making sole source contracting more transparent and accountable, with the aims of substantially reducing wait times for major capital projects necessary for Canada’s national security.

The Government acknowledges the sensitive nature of sole-source procurement and is committed to improving Parliament’s and Canadians’ understanding of this process.

While stipulating that competitive tendering is the norm, the Government Contracts Regulations (GCRs) recognize the legitimate need for the Government to sometimes enter into sole-source contracts.  This is to permit flexibility in the practical application of the policy to promote openness, fairness and access while permitting the Government to manage its affairs, particularly in unanticipated circumstances.  In fall 2007 the Government formally implemented an additional level of scrutiny to address the perception of a lack of fairness and transparency in some sole-source transactions. 

It should be noted that sole-source procurement is a widely used strategy around the world.  The defence sector – even in the US, which has the most diverse defence industrial base in the world – makes routine use of sole-source contracts.  According to open source information from the US Department of Defense (DOD), in 2006 over 42% of all US DOD contracts, representing some 68% of total dollar value, were awarded on a sole-source basis (402 contracts valued at $231M to Canadian companies alone).

Canada compares favourably with these figures, particularly given our more modest industrial base.  Over the five-year period 2002/03 to 2006/07, on average some 80% of the value of contracts awarded by PWGSC on behalf of DND was the result of competitive processes.  There are a number of circumstances that may require consideration of a sole-source contracting approach.  These include:

• Support, Upgrade or Repair of Existing Equipment.  The Government is legally bound to respect the Intellectual Property rights of the Original Equipment Manufacturers (OEMs) of the systems it operates.  In contracting for spare parts or other support, it must use suppliers licensed by the OEM.  The same restrictions apply, for example, to an airline selecting a new aircraft – they will have to rely almost exclusively on the OEM or its authorized agents for spare parts and support for most of the aircraft service life.   It should be noted that a significant proportion of sole-source defence procurements relate to the support, upgrade or repair of equipment that was originally purchased through competitive processes.
• Legislation or Policy.  The Government is required by law or policy to source certain goods or services from designated suppliers.  For example, Parliament has designated NAV Canada as the sole legal supplier of air traffic control services in Canada.  Also, by long-standing Government policy aimed at assuring supply, PWGSC is required to source much of DND’s ammunition from specified companies under the Munitions Supply Program.
• Single Source of Supply.  For some specialized requirements, there may only be one possible source of supply.  Generally, this happens in niche areas of technology or services, for highly specialized systems, or in situations where the operational requirement includes full interoperability with existing allied systems, for example secure communications.
• Additional Purchases of Existing Equipment.  If we are simply sustaining or expanding an existing capability it may not make financial or operational sense to go to anyone other than the supplier of the existing system.  An example would be the purchase of additional missiles for use with existing launchers and fire control systems.
• Best Price.  There are circumstances where a sole-source procurement can demonstrably offer the best price.  Combining a small Canadian procurement with a major ally’s large-volume purchase (which will often be as a result of a competitive process in that country) would be one example of this.

The Government is committed to continuing to make sole-source procurement processes transparent and accountable, and will continue make judicious use of this process when required, in accordance with GCR.

Recommendation 3

Out of concerns for transparency and accountability, the National Defence Capability Plan be made public and tabled with the Standing Committee on National Defence by the end of the current fiscal year.

On May 12th, 2008, the Government unveiled the Canada First Defence Strategy (CFDS), its comprehensive plan to ensure the Canadian Forces (CF) have the people, equipment, and support they need to meet Canada’s long-term domestic and international security challenges.  The CFDS emphasizes the three priorities of the CF: defending the country and protecting Canadians at home, fulfilling Canada’s responsibilities in the defence of North America, and making robust and reliable contributions to international security and humanitarian missions.  This announcement complements the significant steps already taken by the Government to strengthen the CF.  The CFDS will expand the Regular Force to 70 000 and the Reserve to 30 000, improve key CF infrastructure, increase the overall readiness of the CF and proceed with major fleet replacements projects: surface combatant ships, maritime patrol aircraft, fixed-wing search and rescue aircraft, fighter aircraft, and land combat vehicles and systems.  By providing long-term funding stability to the CF and by setting the foundations for a new relationship with industry, the CFDS will allow for greater transparency and accountability in the defence procurement process.

Recommendation 4

Further to the basic elements of the procurement process that the Defence Capability Plan be considered a foundation of that process.

To respond to ongoing and future requirements, the Canadian Forces are transforming and modernizing their maritime, land, air, and special operations forces to meet the challenges of the 21st century.  To this end a comprehensive investment plan is being written to implement the CFDS.  This plan will define resource allocation plans for equipment, personnel, infrastructure and other essential contributions necessary for the fielding of new equipment and capabilities over the next ten years.

• In addition, the formulation of the investment plan is being greatly influenced by the introduction of Capability Based Planning within DND.  The Department is currently completing a comprehensive comparison of current force structures and capabilities against the identified needs of the future in order to produce a new strategic capability roadmap.  The roadmap will describe a range of capability alternatives and options to address any identified gaps.  The alternatives and choices provided in the roadmap are expected to help decision makers to determine what the CF will need to meet the challenges of the evolving security environment.  Once agreed, these capability choices will be further articulated and funded in the investment plan.  The new roadmap is expected to be ready by mid to late 2008.  

Recommendation 5

All major crown projects valued at more than $100M proposed by the Department of National Defence be reported to the Standing Committee on National Defence for examination before the contract is awarded.

• ¸ The Government notes that the Committee has made this recommendation twice before, but remains of the view that its current reporting to Parliament on defence programs, operations and services, including its provision of information on major crown projects, is fully adequate.  In the vast majority of cases, information on these projects is provided to Parliament, and is therefore available to the Committee, well before the contracting stage. To inform Parliament, the Government relies on reporting mechanisms already in place such as the tabling of Main Estimates and Reports on Priorities and Planning, in which the details of major crown projects are provided.  At the request of committees, the Minister of National Defence, other Ministers and senior officials appear before Parliament to explain major crown projects proposed by the Department of National Defence. 

The release of the CFDS will provide Parliament and Canadians with further insight into the Government’s plans.  The Government reiterates its commitment to have Ministers and officials appear to discuss all procurement projects of interest to the Committee, and we will continue to cooperate with Parliament in its oversight of defence procurement.

Recommendation 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 on buying “off the shelf” equipment when suitable.

The Government continues to make improvements to defence procurement policies and processes, and appreciates the Committee’s acknowledgement of the successes to date.  We can and will do more to simplify and shorten processes while maintaining appropriate safeguards and controls to ensure that Canadians obtain best value from defence spending, and that defence acquisitions are done with as much transparency as possible and subject to adequate checks and balances.

The Committee has correctly assessed that the concept proposed by some to fundamentally restructure the present relationship between DND and PWGSC and create a defence procurement agency is a very complex issue with significant risks on both sides of the argument.  As the Auditor General noted in her testimony before the Committee, defence procurement is a complicated business involving many stakeholders, not just DND and PWGSC.  She also noted the very significant challenges associated with implementing such a major reorganization. PWGSC, DND and other partners are committed to improving the efficiency of the procurement process within the current structure.  A recent example to illustrate our efforts is the requirement for the strategic airlift aircraft announced in June 2006.  All four aircraft were delivered respectively on 8 August 2007, 18 October 2007, 7 March 2008 and 3 April 2008.  This represents a remarkable achievement and indicates the government’s commitment to procure military equipment quickly and efficiently.  The Government has decided to pursue its progressive improvement of defence procurement processes and will ensure the current construct is as efficient and effective as we can make it.   

Significant progress has been achieved in the last two years, through collaborative effort on the part of the departments and agencies involved, to reduce the timelines to procure military equipment.  In the past, it has taken an average of nine years from the identification of need to contract award.  The military projects announced since June 2006 are being implemented in a streamlined fashion, and incorporate many of the concepts proposed in the Committee’s Report.  The Government is well on its way to reducing the average time it takes to reach contract award to less than four years, and is committed to continuously improve the efficiency of military procurement.

As noted in the Government’s response to Recommendation 2, we are fully committed to open and transparent processes for both competitive and non-competitive procurements.

The Government agrees with the recommendation to purchase mature “off the shelf” solutions wherever appropriate and continues to follow this approach whenever possible.

Recommendation 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.

The Government already provides as much information as it can concerning the selection of contractors to meet both defence and non-defence requirements.  The Committee will understand that the Government is significantly constrained in its ability to publicly release details of contractors’ bids and the analysis of those bids by officials, as the bid documents and their contents are proprietary to the bidders.  PWGSC manages the bidding process and is responsible to ensure that solicitation documents clearly describe the bid evaluation process and all selection criteria, including terms and conditions, Industrial Regional Benefits, operational requirements and technical requirements.  Non-successful bidders are offered the opportunity to meet with PWGSC and DND representatives to review the evaluation of their bids and gain an understanding of how they were rated and why.  They are also advised of the independent redress mechanisms available to them if they feel that the bid process was flawed or unfair.  The Government views this system, which has been in place for many years, as providing the best combination of transparency of process and protection of bidders’ proprietary information or third-party confidential information.

The Department of Public Works and Government Services Act was amended in May 2008 to create the position of Procurement Ombudsman to ensure greater fairness, openness and transparency in procurement.  An Ombudsman has been appointed by the Governor in Council for a term of five years and will be responsible for four main functions:

• Reviewing the procurement practices of departments to assess their openness, fairness and transparency and to make recommendations to the relevant department for the improvement of those practices;
• Reviewing supplier complaints respecting compliance with any regulations made under the Financial Administration Act to which the Agreement on Internal Trade (AIT) would apply, but where the value of the procurement is below the threshold of the Agreement;
• Reviewing suppliers’ complaints respecting the administration of a contract; and;
• Ensuring the provision of an Alternate Dispute Resolution (ADR) process on the request of each party to a contract.

Recommendation 8

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

The Government agrees with this recommendation and is pursuing discussions with the US to this end. 

The United States’ International Traffic in Arms Regulations (ITAR), administered by the State Department, regulates the export of militarily sensitive defence articles and services from the United States.  For decades, Canada has enjoyed special status as the only country with specific exemptions under these regulations.  However, as discussed in the Committee’s Report, following the events of 9/11 ITAR provisions were applied more stringently to remaining licensable export authorizations, especially as regards restrictions on dual-nationality provisions.  In practice, this has meant that Canadian citizens born or with nationality from one of about twenty-four proscribed countries were generally denied access to ITAR controlled goods or information.  This dual-nationality restriction is inconsistent with the application of the Canadian Charter of Rights and Freedoms.

In spring 2007, National Defence, along with the National Research Council, Canadian Space Agency and the Communications Security Establishment, were able to negotiate an exchange of letter arrangement with the US State Department.  Under this arrangement, access to defence articles and services exported under the ITAR is granted on a need-to-know basis to personnel in DND and the above agencies who are Canadian citizens (including dual nationals) and possess a minimum secret-level security clearance.  These personnel include Canadian Forces members, civilian employees, embedded contractors, and employees of other government departments working within DND or these agencies. 

The priority of the Government of Canada is to continue discussion with the Department of State in order to find comparable long-term solutions for other federal government departments with similar requirements and Canadian industry.  The Committee will understand that the issue is complex and will likely take some time to fully resolve to the satisfaction of the Government and Canadians. 

Recommendation 9

The Government continue to evaluate the new practice ( single point of accountability contracting), taking into consideration the intention to sustain, promote, and enhance Canadian regional industries and their participation.

The Government acknowledges the concerns raised regarding “single point accountability contracting” and appreciates the Committee’s support for taking the time to properly gauge the potential impacts.  We will continue to evaluate all of our procurement strategies to ensure that they remain relevant to current national and international conditions, and deliver the best outcomes for the country.

The “single point accountability” or “total solution” procurement strategy has been adopted in certain acquisitions to address both the reality of a global trend towards tighter control by rights owners over the transfer and use of their Intellectual Property, and a number of cases where the separation of equipment acquisition and in-service support contracts has created costly and difficult problems for the Department of National Defence.  In some instances these have affected Canadian Forces operations. 

The Government will continue to leverage long-term, high quality work opportunities for Canadian industry through industrial and regional benefits (IRBs).  The IRBs associated with these in-service support contracts will provide opportunities for Canadian industry to participate on major defence procurements for at least the next twenty years.  This will assist in ensuring the long-term viability of the Canadian industry’s in-service support capability.