NyRAD

Over the last ten years at NyRad, we’ve actively watched as the ITB Policy, and the use of Value Proposition specifically, has evolved. Having been a part of almost every major Crown procurement where Value Proposition has applied, we know, almost instinctually at this point, what works and what doesn’t when it comes to incentivizing the bidder and driving meaningful economic outputs. When Canada gets the framework right, the results are undeniable – we see bidders stretching in all the right ways and making commitments that serve an economic objective much broader than their own. When we get it wrong however, the results are not quite as tangible.

One area of the Policy where we’ve been questioning the tangible impact lately, is in the use of Key Industrial Capabilities (KICs). In our opinion, KICs have added another layer of complexity to the bidding process but have yet to function as a lever that drives new and/or more targeted investment, as intended.

At this stage, as a matter of prudence (10 years following the release of the 2013 report, Canada First: Leveraging Defence Procurement Through Key Industrial Capabilities), we ought to discuss what’s working and what’s not when it comes to the use of KICs. And while we acknowledge that conversation is much broader than the one we’ve started here, we offer up the following questions and/or issues for consideration:

1. Lack of Predictability: The application of KICs at bid time is supposed to increase predictability and transparency in the procurement process, but instead, it has been creating more uncertainty and complexity. KICs are determined on a case-by-case basis for each procurement, with input from industry stakeholders through the engagement process. This allows for lobbying and influence from different interest groups, which can undermine the objectivity and consistency of the policy. It can also leave bidders in the dark until the final RFP is dropped on what KICs will apply – leaving little, if any time, to prepare much less strategically position themselves. Furthermore, when bidders are successful in influencing the inclusion of KICs beyond the scope of a given procurement, it can and does lead to unfair advantages for those with larger, more diversified companies.

2. Additional Administration: The use of Direct KICs, which we’ve now seen on a number of recent procurements, increases the administrative burden and cost to both government and industry, as they both look (at bid time and in contract execution) to unnaturally align their project scope (PWS) and expenditures (CLINS) with the identified KICs, regardless of relevance or feasibility. Whether or not this work leads to increased direct Canadian Content in the desired areas is unclear.

3. Lack of Focus: There are currently 17 KICs that cover almost every aspect of the defence and security industry in Canada. They all exist on equal footing. This means that there is no clear focus or prioritization of the areas that are most critical or have the most potential for growth. Instead of fostering select innovative capabilities that characterize a world-class defence related industry, the policy continues to spread resources thinly across a broad (and growing) spectrum of capabilities.

4. Net New Investment? It’s unclear whether or not the use of KICs is generating new economic benefit for Canada. With the way KICs have been applied to-date, we see Industry simply being incentivized to re-label or re-allocate investment activities that would naturally have been leveraged under the ITB Policy (KICs or no KICs). Additional clarity is needed on if and where Canada is seeing an increase in investment or investment of a specific nature due to the application of KICs.

The original intent of identifying Key Industrial Capabilities for Canada was to identify areas where Canada’s defence sector could be globally competitive and areas where domestic capacity was essential to national security. By identifying key areas where Canada could be globally competitive, and applying these areas strategically to Canada’s offset requirements, the country could better leverage defence spending by incentivizing investment into targeted areas where Canadian Industry stands to grow and/or benefit. To be certain, the objective is a good one – “To enhance the sovereign control of our nation’s security and increase the economic return on our defence-related investments.” Our challenge is not KICs themselves but rather in their application. Have we lost our way? How can we do better? From NyRad’s perspective, we offer the following considerations:

• Apply all KICs to all procurements. If our list of KICs actually represents the 17 areas in which Canada wants to incentivize investment, then an investment in one is as important as an investment in another, no? Why not apply all KICs across all procurements? Is there any harm, for example, in applying the Artificial Intelligence (AI) KIC to each and every defence procurement? Arguably, this approach would result in more predictability for industry, and may even increase total/cumulative investment in the KICs.

• If applying all KICs to all procurements is out of the question, and only KICs directly tied to the scope of a given procurement will be considered, then let’s double down on this approach and further incentivize bidders to make investments that will directly impact and/or improve the delivery of the contract at-hand. Let’s be more direct about the type of investment Canada needs. If the contract is for ISS in the marine domain, for example, let’s heavily incentivize investment into Marine ISS specifically, not just ISS broadly. Furthermore, if qualified personnel is an issue, let’s leverage ITB crediting multipliers and further entice bidders to make investments into Skills Development & Training in marine ISS.

• Canada should consider limiting evaluation points to investments in the defence sector (proper). This will force investment in a more targeted way. If building Canada’s defence sector is the ultimate goal and the reason KICS were adopted in the first place, why incentivize investment in a KIC but outside the defence sector? Furthermore, protecting evaluation points for investment into Canada’s defence sector also helps create a more competitive playing field for defence-focused, less diversified companies.