As well as streamlining procurement procedures to better meet military requirements, reforms to Canada’s defence industrial strategy are aimed at stimulating job creation and economic growth
In June 2008, the Canadian government announced the Canada First Defence Strategy (CFDS), the government’s comprehensive plan to equip the Canadian Forces (CF) to meet long-term domestic and international security challenges.
The strategy outlined a 20-year, CAD50 billion investment in new equipment, including 15 surface combatants, 17 fixed-wing SAR aircraft, 65 next-generation fighter aircraft, 10-12 maritime patrol aircraft, and a new family of land combat vehicles. This is coupled with an offset strategy designed to maximise the benefit of the CFDS to Canada’s defence industry in particular and the wider economy more generally.
The offset element is important because, according to CADSI, Canada’s defence industrial base comprises around 2,000 companies, most of them SMEs. This concentration of SMEs occurred in part due to extensive structural changes in business practices and regulatory environments during the 1990s, which affected Canada’s defence industry.
Shrinking domestic defence budgets, changing force structures and military requirements, as well as the overall contraction in the global defence market, made domestic and international sales more difficult.
This was compounded by procedural and regulatory changes at home and abroad. Changes to Canadian procurement procedures and international trade agreements, as well as discussions with Washington on Canada’s status under the International Trade In Arms Regulations (ITAR), created economic pressures and regulatory uncertainty. Despite this, Canada has been making greater efforts to align its export policy with the United States’ ITAR regulations in order to improve cross-border collaboration and re-export.
Another notable trend since the start of the 21st century has been the acquisition of Canada’s major defence companies by USAbased corporations. For example, L-3 Communications took over Spar Aerospace Canada in 1999, Wescam in 2002, Bombardier’s Military Aviation Services (MAS) in 2003, and CAE’s Marine Controls unit in 2005.
In 2003, General Dynamics acquired General Motors Defense.
Colt Defense bought small-arms manufacturer Diemaco in 2005. Curtiss-Wright took over Indal Technologies, the manufacturer of shipboard helicopter-landing systems, in 2005. Esterline bought CMC Electronics in 2007, and CoorsTek acquired DEW Engineering and Development in 2008.
As a result, the largest defence contractors in Canada are generally owned by US companies, although there is also a considerable European presence.
Therefore, most of Canada’s defence industrial strength lies in niche capabilities, which contribute to the production and support of larger military platforms and systems (Tier II, III, and IV companies) originating from foreign OEMs. This means that, for many in Canada’s defence industrial base, their main customer is the OEM or its principal subsystem suppliers.
Canada’s major industries cover shipbuilding; aerospace; the automotive sector; munitions; electronics; simulation and training; information and communication technologies; textiles; in-service support; and satellite and space technologies.
The Canadian government has since launched a Key Industrial Capabilities initiative, which will help to guide the country’s Industrial and Technology Benefits (ITB) offsets programme, which is replacing the Industrial Regional Benefits launched in 2009. Initial investigations have helped to define a number of key areas, including Arctic and Maritime Security; Protecting the Soldier; Command and Support; Cyber- Security; Training Systems; and In-Service Support.
Research and development
Military research and development (R&D) in Canada is the responsibility of the DND. The Assistant Deputy Minister (Science and Technology) is responsible for the Defence Research and Development Canada (DRDC) programme, established in July 2000 as a special operating agency within the DND.
The DRDC serves as a defence science and technology (S&T) centre of excellence for the CF, industry and academia. It is expected to strengthen the country’s S&T services.
The DRDC also aims to support the DND’s technology strategy, which will focus on emerging areas such as information and knowledge management, autonomous intelligent systems, and networking.
Acting as the unified agency of eight research centres across Canada, the DRDC spends around CAD300 million a year on defence R&D initiatives, and employed 1,400 people in 2015.
The DRDC also promotes military R&D by engaging in co-operative projects with other research agencies, and establishing partnerships and funding arrangements with industry and Canadian universities.
For example, the Defence Industrial Research (DIR) programme provides partnership arrangements and funding assistance to industries developing defence-related projects and technologies. The DIR programme, which is administered and funded by the DND and the National Sciences and Engineering Council, seeks to develop DND partnerships with industry and universities.
In the DRDC’s 2013 S&T Strategy plan, public security was added to the DRDC’s list of research focuses, alongside collaboration with international partners and the equipping of the Canadian Armed Forces (CAF).
Other Canadian departments and agencies are also engaged in efforts relevant to defence R&D.
The Canadian Aerospace and Defence Technology Framework is a joint initiative between Technology Partnerships Canada and Industry Canada to encourage the development of technologies vital for the future of the aerospace and defence sectors.
Canada also operates an industry-focused R&D support programme called The Strategic Aerospace and Defence Initiative (SADI). The programme was established in 2007 to encourage strategic research and development projects, enhance the competitiveness of Canadian aerospace and space companies, and foster collaboration between research institutes, universities, colleges, and the private sector.
The Canadian government says that since its launch SADI has authorised CAD826 million in assistance to 25 projects. The 2013 budget extended the programme by five years, allocating around CAD1 billion to it over the period.
Use of contractors
The CAF has increasingly contracted out non-core military jobs to private industry. This not only provides companies with much needed stability between major procurement contracts, but has also expanded the industry by bringing in new players. For example, in May 2006, Cascade Aerospace in Abbotsford, British Columbia, won a six-year CAD423.4 million contract for in-service support of the CC-130 Hercules fleet. During the previous 45 years the contract had gone almost automatically to L-3 Spar and its predecessor companies.
In February 2015, it was reported that Canada’s Future In-Service Support programme, due for implementation from 2016 onwards, would likely involve the privatisation of some of the services of Royal Canadian Navy (RCN) Fleet Maintenance Facilities, although this has not been confirmed by the RCN.
Canada maintains a restrictive defence export list, regulated via the country’s Export and Import Permits Act, and controlled items (defined by the Criminal Code of Canada) can be exported only to countries that appear on the Automatic Firearms Country Control List (AFCCL). As of early 2015, countries for permitted defence exports included: Albania, Australia, Belgium, Botswana, Bulgaria, Chile, Colombia, Croatia, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Israel, Italy, Kuwait, Korea (Republic of), Latvia, Lithuania, Luxembourg, Netherlands, New Zealand, Norway, Peru, Poland, Portugal, Romania, Saudi Arabia, Slovakia, Slovenia, Spain, Sweden, Turkey, the UK and the USA.
Amendments to the controlled list are typically based on the stability and human rights record of the recipient country, although changes typically take place on a case-by-case basis when materiel export opportunities arise. The potential inclusion of Brazil and South Korea, therefore, may presage Canadian contracts.
Despite this, not all exports are governed by the AFCCL. Canadian firm Viking Air has also sold aircraft to the Vietnamese Navy for use in search and rescue and maritime surveillance, and other Canadian firms have sold helicopters to the Philippines.
The recently announced rise in the Department of National Defence’s annual ‘budget escalator’ from its current 2.5 per cent to 3 per cent in 2017 will increase Canada’s ability to stimulate its domestic defence industry, adding an extra CAD2.3 billion to the annual defence budget by 2026.
However, it will take several years of growth to reverse recent declines. The budget for 2012/13 was set at CAD18.9 billion; a CAD1.49 billion cut from 2011/12. This was followed by a further reduction in the 2013/14 budget, which set expenditures at CAD18 billion. In early 2014, the Canadian government announced that it would seek to make cuts of CAD3.1 billion from the defence budget over four years. IHS Jane’s forecasts indicate that Canada’s 2015 budget will authorise military spending that is USD3.6 billion lower in real terms than its 2011 peak. Procurement expenditure in 2015 is CAD2.8 billion – a small annual increase from 2014’s allocation, but still lower in real terms than 2011’s CAD3 billion equipment spend.
Despite these reductions in expenditure, which are expected to continue until 2017, Canada’s undertaking of a large-scale recapitalisation and modernisation programme means that several large scale military requirements remain unfulfilled.
Although delays and uncertainty have hampered many of these acquisitions, the expected return of the Canadian defence budget to significant real growth in 2018 will enable investment in these capabilities to resume.
In this context, reforms to extract the greatest value from defence procurement contracts gain even greater importance to the sustainment of the country’s defence industrial capabilities.
Source: IHS Jane’s Navigating the Emerging Markets Series. For more information please go to www.ihs. com/products/janes-emergingmarkets- intelligence.html