Title: Is Canada’s defence procurement system broken?

Sub-title: Project delays, specification challenges and tight budgets means that the Canadian Armed Forces are not always getting the equipment they need, when they need it.

 

With Canada fighting what is essentially an undeclared war in Afghanistan, it should come as no surprise that defence department officials are working as hard as they can to get their Armed Forces the equipment they need.

 

However according to a broad range of defence industry analysts, stakeholders, suppliers, academics and political staffers, numerous key defence sector projects, initiatives and procurements are either on hold, running behind schedule or vastly over budget.

 

At a time when Canada’s defence spending has been ramped up, major equipment purchases are being almost consistently bogged down in controversy. The list of troubled projects ranges across all combined forces. They include the Navy’s Joint Support Ships and Coast Guard mid-shore vessels initiatives, the Army’s armoured tank and truck purchases and the Air Force’s strategic lift and helicopter acquisitions. 

 

Yet according to informed observers the challenges that DND personnel face are formidable. “Canada’s legal and policy procurement framework is more complex than that of any other nation,” says Janet Thorsteinson, vice-president government relations at the Canadian Association of Defence and Security Industries. “This is making it very challenging for the government to acquire equipment in a timely and cost-effective manner and for industry to participate in a meaningful way.”

 

Capital purchase initiatives are far from DND’s only problem. Many Canadian companies worry that, even for procurements that on paper are going well, that they may be being short-changed in the industrial and regional benefits work that forms a clear component of maintaining strong domestic capabilities.

 

However, while many of the issues are easy enough to identify, pointing the finger at who is responsible is much tougher. “By now it is pretty clear that we have procurement problems,” writes Alan S. Williams, author of Reinventing Defence Sector Procurement, a book that describes the gory details of how the Canadian government acquires goods and services for the armed forces. “Yet the bureaucratic process can work rather quickly. While it does have areas that need to be steamlined, a main cause of frustrating and even harmful delay is obtaining approvals from cabinet.”

 

Douglas Bland, chair of the Defence Studies Management Program at Queen’s University agrees. “The (procurement) process is slow, overburdened by non-defence considerations, overly bureaucratic and shot through with political interference,” writes Bland in the book’s introduction. The irony is that Department of National Defence budgets have never been bigger. Yet these extra dollars are not translating into efficiency and effectiveness in its purchasing systems.

 

Sea King replacements

To get a grasp of Canada’s defence sector procurement challenges, one need look no further than DND’s attempts to upgrade its aging 30 to 40 year old fleet of Sea King multi-purpose helicopters. The program’s original troubles were political. These started when the Liberal administration was forced to pay a $500 million cancellation fee after promises were made during the 1993 election campaign to cancel the original initial Sea King replacements, which were described as over-budget “Cadillacs”.

 

Ironically the government soon came back and bought 15 Cormorant helicopters that were almost identical to those cancelled. Then in 2004, the government decided to acquire Sikhorsky H-92 Cyclone helicopters to use in maritime operations, despite the fact that critics say it is an unproven model that was designed for commercial use. However even those Sikhorskys will not be delivered until 2010, by which time the Afghanistan deployment is slated to be winding down.

 

Adding to the debacle is the fact that some experts say that the Cormorant EH-101s (which DND already had in its fleet for search and rescue applications) could have also filled the maritime role. More aircraft would have been needed, but the commonality of parts service between the two fleets would have provided significant savings over the life of the aircraft.

 

Joint Support Ships

A more recent casualty of the Canada’s defence sector procurement process has been the derailment of the $2.9 billion Joint Support Ships program. Under initial JSS specs, three new multi-purpose ships were slated to be bought in order to replace ageing auxiliary oiler replacement (AOR) vessels. The program was announced with great fanfare, but the implementation does not appear to be going so well. While details are sketchy, it appears that DND was not satisfied with either of the $12.5 million design proposals put forward by the two finalists in the bidding process, consortiums headed by ThyssenKrupp Marine Systems AG and SNC-Lavalin Profac Inc.

 

Part of the problem in the Joint Support Ships program says one expert is the fact that despite the fact that ever since the Paul Martin administration, DND funding has been increasing under both Liberal and Conservative governments, forecasting and budgeting procedure improvements have not kept pace. The result: continued understaffing at DND coupled with ongoing weaknesses in its project management system.

 

“The initial budgeting for the JSS program turned out to be unrealistic,” says Brian MacDonald, a senior analyst with the Conference of Defence Associations. “There were major changes made to the original ships’ designs so that they could transport Leopard Tanks, which are much heavier than carrying LAVs, which were their initial specifications. Furthermore the price of iron ore has doubled in the past 12 months. Yet budgets for the JSS were not adjusted to account for these changes.” (Department of National Defense officials declined to comment on key elements of this story).


According to CADSI’s Thorsteinson, companies that bid on DND initiatives are often wary, due to the exigencies and the criteria of its bidding procedures. "Part of the problem is that by relying excessively on the fixed-cost as opposed to cost-plus pricing, the government is not properly apportioning risk. The result is that many companies that would otherwise bid on certain projects are declining (the opportunity)."

 

Ongoing needs

While it is hard for outsiders to glean a completely clear picture of the inner workings of Canadian Defence procurement what is evident on dossier after dossier is two things: a clearly defined need coupled with few tangible results in filling that need.

 

For example both former Chief of Defence Staff Hillier and Chief of Land Staff Leslie have indicated that the CF urgently needs new trucks to replace its ageing rusted-out fleet. Yet even with such strong support from the top, a simple request for proposal has yet to be issued.

 

Another example that Williams, who had a lengthy career in public service defence sector procurement, cites in his book relates to the Advanced Lightweight Anti-Armour Weapons System (ALAWS). DND was hoping to purchase as many as 140 off-the-shelf anti-tank units, along with ammunition, spare parts and training simulators.  

 

Since there were two reputable and tested systems available – Ratheon’s Javelin and Rafael’s Spike – “…the logical approach would have been to limit the number of requirements to allow a vigorous competition with price as the determining factor,” writes Williams. “Instead 480 mandatory requirements were specified in the requests for proposals.” According to Williams, by including so many mandatory requirements, it was almost inevitable that at least one would not have been met and thus the program was in a sense “structured for failure,” which is indeed what happened --- both proposals were ruled non-compliant.

 

Is Canadian industry losing out? IRBs and ACANs

According to another long time industry observer, an additional question surrounding Canada’s defence sector procurement practices related to the degree to which industrial regional benefits policy is being implemented.

 

“There is a perception right now that for various reasons regulators do not have enough teeth in this area.” says Allen Dillon, director of business development and government relations at XWave. “IRB policy needs to encourage innovation and effective maximization of intellectual property. But there are clear shortfalls in each of those areas.”

 

In fact XWave, which plans, designs, builds and operates complete IT solutions for the defence, security and aerospace sectors, is one clear Canadian innovator that is being hamstrung by the new regime, which saddens Dillon. “It’s all about innovation,” says Dillon. “We do a lot of work in C4-ISR solutions. But if that kind of investment is not supported in country, then Canada could lose capabilities in many areas.”

 

Another indication of possible procurement inefficiency relates to the government’s generous use of Advance Contract Award Notices (ACANs), a procedure that allows for no-bid purchases in certain special circumstances.  ACANs are a particularly valuable tool that can be really useful if material or equipment is needed fast. However experts calculate that at least $17 billion of recent uncontested purchases have been made including C-17 transports, Chinook Helicopters and many others.

 

According to Williams, widespread ACAN use raises numerous questions. “In many cases because there are no competitive bids, the products cost too much,” says the former procurement executive. “How can you be sure you are paying the best price if there is nothing to measure it against? And if there are no competitors, what incentives do sellers have to provide lucrative industrial regional benefits?”

 

Continued funding shortfalls

The elephant in the room that no one talks about when defence purchases come up for discussion is the continued and clear funding shortfalls that all sector players must deal with continuously. It seems like everyone in the industry needs to do more with less.

 

While industry stakeholders tend to have few doubts that Canadian defence sector procurement processes, methodology and systems can be streamlined and made more effective, the fact is that due to simple lack of cash, DND personnel are struggling to do their jobs with one hand tied behind their backs.

 

As the recent Report of the Standing Senate Committee on National Security and Defence noted: “Anyone who looks beyond occasional announcements of expensive equipment purchases, and beyond government promises of “stable” military funding into the future, will find a most unpleasant reality: chronic underfunding that is going to get worse rather than better under the current spending commitments.”

 

Experts say that funding challenges affect DND purchasing systems in numerous ways. For example, they force key players to delay needed capital purchases. In many cases this forces such huge investments in maintenance expenses that the long term savings are doubtful. Funding also affects hiring. For example lack of institutional memory in DND procurement staff and (and in industry sales staff) regarding capital acquisitions is cited by some as one of the reasons that these purchases can’t seem to move along. “It seems we haven’t been negotiating large capital equipment purchases for so long that everyone who has experience in doing so has retired,” joked one observer.

 

Moving toward the future

The challenge facing many defence industry veterans like Denny Roberts, country manager for Raytheon Canada, who spent 34 years in the industry including 12 at the Air Force’s procurement office, is that although many see and acknowledge systemic flaws, they too have their hands tied.

 

“We work with people in the defence sector procurement cycle all of the time. And many are among of the finest and best-informed that you will find anywhere,” says Roberts. “It is really in the systems, methodology and practices that need to be reformed. Australia, the United Kingdom and the United States and many other countries, have all made major changes to their practices. We need to do the same.”

 

One possible intermediate step that would iron out some of the lack of accountability that Williams recommends would be to centralize all defence purchases within one department. “Many large procurement moves involve including personnel from both the public works and defence departments,” says Williams. “You can just imagine what kind of overlap that creates.”

 

Reality though dictates that future improvements in the sector are likely gong to be incremental in nature for some time to come. Yet despite her central position in many defence sector procurement challenges during her long career, CADSI’s Thorsteinson remains optimistic.

 

"One positive step is that in its Canada First Defence initiative the government has recognized that they cannot get to where they want unless they start working closer with Canada's defense industry,” said Thorsteinson. “But to get there is going to require a lot of heavy lifting on all sides."

 

Peter Diekmeyer (peter@peterdiekmeyer.com) is Canadian Defence Review’s Quebec correspondent.

 

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