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CDR recently sent Ottawa Bureau Chief, James Careless, to interview Canada's newly re-appointed Minister of National Defence, and with a number of high profile capital projects, such as CSC and FFCP currently in play, there was a lot to talk about. Sajjan is now a veteran in this portfolio and he spoke candidly about international missions, defence policy, procurement, and Canada's role in NATO. There were some surprises too. Here is our in-depth conversation with the Minister. CDR: Minister, it's good to speak with you again for, what's become, our annual chat. Can we start by looking what progress is being made on major capital projects like Future Fighter, and as a corollary to that, what new procurements do you think we'll be seeing in 2020? Minister Sajjan: When it comes to procurement projects and our defence policy, one of the things that Canadian defence industry asked us to do is to provide predictability. We've done that. Even though the defence policy is a 20 year program, we have put out a 10 year defence investment plan to industry. This gives them an idea of where we're at – and we're updating that. Obviously, we've got major procurement projects that are ongoing, but within that there are multiple projects. I'm happy to say that the vast majority are in implementation. Some are already closed and, and there's only a few that still have to be started. The Canadian Surface Combatant ship has been selected, while the Future Fighter is obviously an extremely important one that is under way. But there's a lot of other projects happening that are just as important. STARTING LAV PROJECT SOONER CDR: What role has your ‘Strong, Secure, Engaged' defence policy played in speeding up defence procurement? Minister Sajjan: One of the things about our defence policy is that it gives us authorization to move money around. This allows us to do projects faster when opportunities make this possible. The LAV support projects that we just announced in the summertime was a great example of that. We're going to be getting those five years sooner, because we can start these projects five years sooner. So we were able to move money quicker and get that going. Because we're learning and creating a lot more efficiency in our procurement system, we're able to save money. When we save some of that money, we're able to use it in other projects. As you know, procurement is extremely complex; especially on larger projects. There's going to be times where you're going to have to make some changes. Because we have that flexibility, we're able to provide a lot more efficiency to the system. When we created the defence policy, it involved a thorough consultation where every part of the policy had to be approved by cabinet. Now when projects go through, they know that we've already had really good discussions on the capabilities that we want to bring in. So when we bring those projects to Treasury Board, the policy discussions have already been done. So then we just focus on, “do we have the right process in place?” The nice thing about it – just like the current LAV projects – is we're able to streamline things when a competitive process is extremely important and we can get the best equipment at the best price. But there are some times when going for a sole source is more efficient and better for the Canadian Armed Forces. CDR: Many ofCDR's readers are small and medium-sized defence contractors (SMEs), and they're always concerned about getting their fair share of procurement contracts. So what steps has the government taken to make sure that their share doesn't just go to the big players? Minister Sajjan: Depending on the size of the project, we've actually taken a lot of time to consult our defence industries; not just the big companies, but the small and medium size businesses as well. One thing we've done as we build the requirements, is to ask, “how does it benefit Canadian companies?” So now the bids that come in have much greater Canadian content to them. Just for example, when you look at the AOPS (Arctic and Offshore Patrol Ships) that are being built by Irving: The systems integration on the bridge is actually (being done by) a company that is working out of the Lower Mainland (B.C.). That's just one company; a lot of companies are able to benefit from this. So when we look at a project, I tell people, “don't just look at the hull or the plane, look at all the systems that need to go inside it. The LAV project has a massive impact on indirect jobs across the country as well. The final thing I say to this is the IDEaS (Innovation for Defence Excellence and Security) program. The IDEaS program is something very unique that is having a really good impact on small and medium-sized businesses; as well as universities and individuals who have great ideas. It allows us to throw challenges out to suppliers, where we get to compete the ideas. That's something that industry has been asking for, for a very long time. Imagine trying to guess where DND is going, and then having to spend all this money and time only to find out that's not the direction that we're going. So due to the defence investment plan that we lay out, or the challenges that we throw out, they know exactly what we're looking for. They get to compete early, and we get the benefits of their ingenuity. BATTLE GROUP IN LATVIA CDR: NATO recently celebrated its 70th anniversary, and President Trump used the occasion to once again pressure member countries to increase defence spending up to 2% of their GDP, as they have promised to in the past. Given that Canada's defence spending is only about 1.3% of GDP, where does the country stand in terms of meeting this 2% target? Because, I'm sure our readers in Canada's defence and aerospace industries would be more than happy to see Canada increase defence spending as much as it can. Minister Sajjan: I think we should go back to even before Trump. Many U.S. administrations have been asking NATO member nations to step up when it comes to their defence spending. When we formed the government in 2015, we looked at this. This is one of the reasons why the prime minister asked me to do a thorough defence policy review, because it's only then you're going to find out what is the appropriate defence investment that's actually needed -- not just for us, but for our allies. I think many people don't know that this is probably one of the first defence policies that's actually has come with all the money attached to it. That allows us to do a thorough analysis about which capabilities are important; not just a shopping list of things we need to buy. If you focus on the capabilities, you're able to evolve what's needed. What that has allowed us to do is look at how do we need to be Strong in Canada, Secure in North America, and Engaged in the world; investing in the right capabilities with a 70% increase in spending. That's the way it just turned out, based on our plan. But more importantly, it allows us to make appropriate contributions internationally. If you look at the number of operations our government has authorized, it's quite significant. Just for NATO alone, it includes a battle group in Latvia; plus a naval task force that, from one ship that was being consistently there, were actually taking rotation commanding the naval task force there. We have started air policing again in Europe. We're back in the AWACs program. We have increased our common funding to NATO for a second year. We're taking command of the NATO training mission in Iraq as well. So, when you look at that alone, that's just NATO Operation Artemis, which is this counter-terrorist interdiction in the Arabian Gulf. Plus, we're also doing Operation NEON, which is the sanctions monitoring against North Korea. Then there is the capacity building work that we're doing at different times of the year; including Africa. For the first time, we actually had our submarines deploy for training; one in the Pacific and the other in the Atlantic. So when you look at all the things that we're doing, defence spending has led to something. So that contribution piece is extremely important. Our increased spending is being driven by a national plan that's bringing unity into DND. This allows us to make those contributions in a very meaningful way; not just to NATO, but to coalition partners and the United Nations. CONTRIBUTIONS TO NATO CDR: Given this, do you think NATO should stop focussing on 2% of GDP and instead focus on tangible contribution to international security? Minister Sajjan: I would say that we shouldn't be having strictly a conversation about 2%. That's why the NATO Secretary General has always talked about the three Cs: Cash, capabilities and contributions; because if you need all three of them to be effective. The plan that we have proposed to NATO is something that they welcome. They know that we're going to be investing in types of capability, and what kind of impact that it actually can have. For example, when it comes to the ships that we provide, they know that our Cyclone helicopters are also very good at working with our aircraft when it comes to submarine detection. So it's not just about one ship, it's about what capability we're bringing in. And when you have capabilities from different nations, you're able to look at what type of NATO work that we can do; especially when it comes to our readiness. It is not just us offering up things that we have. These are capabilities that are plugging into a much wider system at NATO that can have an impact and ultimately send a very strong message of deterrence to any adversary – which is why NATO is there. CDR: In last year's interview with CDR, you spoke about the importance of retaining Canadian armed forces members and trying to do better for them and their families. What have you been able to do in the last year and what are you hoping to do going forward? Minister Sajjan: The Number One priority has always been to look after our people and their families. We have made a lot of policy changes in how we support our people. The biggest one that we did right when we launched the defence policy was to make every authorized international operation tax-free for our members. This sends a very strong message to the families. People think that this is about CAF members but it's actually about their families. Now the family can have more flexibility on choices. If their family is younger, they can have more daycare opportunities; making sure a spouse can continue with their career. Relocation has been a significant challenge. A year and a half ago, we dealt with the 10 Biggest Dissatisfiers to relocation and there's a little bit more work needs to be done with that. We've also now been working on what's called Seamless Canada, working with the provinces and the territory to look at where families get posted. For reserve members, their base pay is now equivalent to the regular force. So there's all these things that are happening. One focus that I'm putting more emphasis on this year is infrastructure across Canada. Do we have the right infrastructure for our people; especially when it comes to military family resource centres, health care clinics and accommodations for people? And we have to look at it differently now than we did in the past, because things have significantly changed. We know that in Comox, there is a challenge for people to actually find housing because the vacancy rate is so low. So we're looking at a project to build apartment-style complexes there, and I'll be working with the deputy minister on this. In other places, we are looking at how PLD (Post Living Differential) changes need to be made. The study is almost complete with a much wider analysis. My thought going into this was instead of just looking at the immediate fixes which we have been doing to ease the burden on our members -- like, for example, in places like Cold Lake -- we need to do a thorough analysis done so that, when we make a much wider decision, it can actually last longer. The PLD decision that was made a long time ago is not as relevant today, because it is based on how people live here in Ottawa. Those are the aspects that we're putting a lot more focus into. I think because we're putting a lot of emphasis on looking after people and their families, it's having an impact on retention. How we move people around is also something that the Chief of Defence Staff has been looking at very closely. MORE EMPHASIS ON CYBER SECURITY CDR: You've been Minister of National Defence since 2015. You're now very well versed with the requirements of the job and long past getting to know the ropes and dealing with immediate crises. What do you want to achieve going forward? What do you want your legacy to be at DND? Minister Sajjan: It's not about legacy. We spent a lot of time and very extensive consultations with experts, key people, and more importantly, civilians at the department and the Canadian Armed Forces to come up with the plan for the Defence Policy. And because it comes with money attached, this plan has enough focus and flexibility to adjust to any situation that we have to deal with around the world. My goal is for us to be thinking long-term about how we look after people, how we look at threats and where we need to be to make sure that we have a very strong deterrence. This is one of the reasons why we're putting a lot of emphasis on cyber-security. I'm working very closely with CSE as well. One aspect that I'll be driving home a little bit stronger this time around is going to be innovation. We have such great ingenuity inside the Canadian Armed Forces, but we also have absolutely brilliant people across the country. I want to take a greater look at innovation in the long-term; how we look after people, how we do logistics, and how we keep a technological edge against adversaries. There's a lot of interesting work that's happening. Making sure that we're set up for the future is something that I'm going to be putting a lot more emphasis on. WORKING OUT TO TRANCE CDR: Finally, on a more personal note, we've heard that you do a mean workout to the beat of electronic music, is that correct? Minister Sajjan: Yes! I listened to a lot of a particular type of electronic music known as Euro Trance and I've evolved it a little bit. DJ Markus Schulz is somebody I listen to, and there's a number of other deejays there as well. (Editor's Note: DJ-mixed club music known as Euro Trance is often very uplifting, it is usually around 140 - 145 bpm and has a lot of big rifts. It emerged from the 1990s German techno and hardcore scenes. Leading proponents of this genre have included DJs Armin Van Buuren and Tiesto.) It drives my wife crazy. But I love working out and getting into a high energy pace; it just keeps me motivated. I know it sounds nuts, a 49 year-old listening to Trance. People think I should grow up, but I can't knock everything out of me from high school. CDR: How did you get into this music? Minister Sajjan: I've always liked the mixes and I went to a lot of clubs in my younger days. Then when I was in the UK, they had a really good Euro mix and I used to listen to that a lot. When I was in Germany, I realized that they have a lot of different ways of doing it as well. So, I would try to find that music, which wasn't that popular back then. But now it's everywhere. And, it's easy to download that music. My wife always says, “it's the same beat.” I say, “exactly!” CDR: Thank you very much, Minister. http://www.canadiandefencereview.com/Featured_content?blog/161

Lévis, Qc, Février 2020 : Drone Vision International de Lévis, Qc, est heureuse d'annoncer à la communauté aéronautique des drones qu'elle a été sélectionnée par le Service Correctionnel du Canada afin de présenter sa technologie de détection de drone en preuve de concept possible et adaptable à un système de prévention de livraison d'objets interdits par voie aérienne et terrestre. À cet effet, à l'aide de ses partenaires canadiens et français, dont entre autres le leader de la détection par radiofréquences, la société CerbAir, Drone Vision International a obtenu le mandat de présenter un rapport qui constitue la première phase d'un programme multi-étapes en recherche de solutions à un défi technologique formulé par un organisme fédéral canadien. Le Service Correctionnel du Canada (SCC) est à la recherche d'une solution technologique majoritairement canadienne, novatrice et économique visant à détecter, à surveiller et à empêcher l'introduction d'objets interdits dans le périmètre au moyen d'un véhicule aérien non habité (appelé communément drone) ou d'un lancer au-dessus d'une clôture. Drone Vision International, une entreprise émergente canadienne, présentera une preuve de concept démontrant la faisabilité technologique et commerciale de sa solution novatrice. Pour donner suite à cette étape, l'équipe de Drone Vision International pourrait recevoir un autre contrat afin d'élaborer et livrer un prototype répondant aux attentes du Service Correctionnel du Canada. Gr'ce à l'expertise et aux compétences de l'équipe de Drone Vision International, un organisme fédéral pourrait résoudre une problématique qui inquiète bien des citoyens. C'est avec enthousiasme que l'équipe de l'entreprise de Lévis, Qc, envisage ce défi ! Pour plus d'informations, contacter la société Drone Vision International jac@dronevisioninternational.com www.dronevision.ca . Source et référence : https://buyandsell.gc.ca/procurement-data/contract-history/21120-200233-001-SI

« En ce moment tout le monde regarde [...] le passage du CSeries à l'A220 chez Airbus », a déclaré, le 2 mars, le président du GIFAS, Éric Trappier, lors d'un point de presse en marge d'un événement réunissant 250 représentants du secteur des deux pays, France et Canada, qui se tenait à Montréal, dans le cadre de la mission industrielle du GIFAS au Canada. « C'est un métier difficile [où il faut savoir concilier les facteurs] techniques, commerciaux et financiers, a-t-il poursuivi. Ce n'est pas tout d'avoir des succès techniques. Il faut aussi pouvoir les financer. Et pour les financer, il faut pouvoir les vendre. » La mission du GIFAS espère notamment convaincre le gouvernement fédéral de ne pas toujours seulement regarder du côté des États-Unis lorsque vient le temps de faire ses dépenses militaires.

Saab today confirmed the four corporate partners that will be part of its bid for Canada's Future Fighter Capability Project (FFCP), which aims to replace the Royal Canadian Air Force's ageing fleet of CF-188 Hornet's with 88 new-generation fighters. Saab is leading one of three supplier teams currently involved in the procurement competition, which centres around the Saab Gripen E, Boeing F/A-18 Super Hornet and Lockheed Martin F-35 Lightning II fighter jets. Branded as Gripen for Canada Team, Saab's corporate team members for the bid include IMP Aerospace & Defence, CAE, Peraton Canada and GE Aviation. “We have assembled a dynamic roster of innovative leaders within Canada's aerospace industry, across multiple regions to offer the best solution for Canada's future fighter,” said Jonas Hjelm, senior VP and head of Business Area Aeronautics. “Saab is committed to securing long-term relationships in Canada that will create a significant number of highly skilled, sustainable jobs for Canadians within domestic and international supply chains.” Canada's evaluation criteria for its Future Fighter procurement is based on technical merit (60 per cent), cost (20 per cent) and economic benefits (20 per cent). In late-February 2020, the federal government announced it would extend the FFCP submission deadline from March 30 to June 30, but maintained its schedule to choose the winning bid in 2022 and have the first aircraft delivered by 2025. The 20 per cent weighting toward economic benefits is ultimately defined by dollar-for-dollar obligations – meaning, the fighter supplier provides Canadian companies with revenue opportunities equal to value of the purchased fighters. Defence Investment: Strong, Secure and Engaged Saab explains IMP Aerospace & Defence would contribute with in-country production and in-service support for the life of the Canadian Gripen fleet. CAE would provide training and mission systems solutions, while Peraton Canada would provide avionic and test equipment component maintenance, repair and overhaul, and material management. GE Aviation would provide and sustain the fighter's engines in Canada. https://www.wingsmagazine.com/saab-partners-for-canadas-ffcp-bid/

Par Maryse Jobin Le Groupement des industries françaises aéronautiques et spatiales (GIFAS) est en mission industrielle de trois jours au Canada pour renforcer la coopération franco-canadienne dans ce secteur. Durant cette mission, 60 sociétés industrielles françaises participent à des rencontres d'abord à Montréal, ensuite à Toronto et Ottawa. La coopération entre la France et le Canada dans les domaines de l'aéronautique et de l'espace existe depuis 70 ans. Une trentaine d'entreprises de l'Hexagone sont d'ailleurs implantées au pays. En 2016, le GIFAS choisissait Montréal pour installer son bureau de représentation pour l'Amérique du Nord. 405 sociétés, dont des maîtres d'œuvre, des équipementiers et des PME font partie du GIFAS. Par voie de communiqué, Éric Trappier, président du GIFAS et PDG de Dassault Aviation, a dit vouloir « renforcer davantage les liens qui unissent nos deux industries ». Selon lui, les compétences de haut niveau et le poids mondial de l'industrie canadienne « sont reconnus de tous ». Parmi les entreprises participant à cette mission, on retrouve Airbus, Dassault Aviation, Safran et Thales. Sept membres du conseil du GIFAS accompagnent son président Éric Trappier. Tous les deux ans, ce regroupement organise le Salon du Bourget à Paris, le plus grand salon aérospatial du monde. La filière française d'aéronautique, spatiale et de défense, est le premier secteur d'exportation de ce pays d'Europe. Son chiffre d'affaires en 2018 s'élevait à 65,4 milliards d'euros. https://www.rcinet.ca/fr/2020/03/02/gifas-eronautique-spatial-mode-seduction-montreal/

Saab is bidding for Canada's Future Fighter Capability Project (FFCP) and today announced that leading Canadian aerospace companies IMP Aerospace & Defence, CAE, Peraton Canada and GE Aviation are the ‘Gripen for Canada Team'. Saab is offering Gripen E, with the support of the Swedish government, for Canada's future fighter requirement of 88 new aircraft to replace the Royal Canadian Air Force's existing CF-18 Hornet fighter fleet. The Canadian Request for Proposal requires companies to deliver high-quality industrial and technological benefits, such as Saab has demonstrated with Gripen for Brazil and is offering for Finland and India's fighter requirements. Saab's bid to the Government of Canada will include a comprehensive proposal to deliver those benefits, with high quality jobs and technology, adding greater economic value and knowledge across Canadian industry coast to coast. Today's announcement is the first step toward achieving this offer with IMP Aerospace & Defence, CAE, Peraton Canada and GE Aviation as the ‘Gripen for Canada Team'. “Over the past two years, Saab and the Swedish Government have been encouraged by Canada's open and transparent competition to replace its fighter fleet. Today, we are delighted to announce the ‘Gripen for Canada Team'. We have assembled a dynamic roster of innovative leaders within Canada's aerospace industry, across multiple regions to offer the best solution for Canada's future fighter,” said Jonas Hjelm, Senior Vice President and head of Business Area Aeronautics. He further stated that, “Saab is committed to securing long-term relationships in Canada that will create a significant number of highly-skilled, sustainable jobs for Canadians within domestic and international supply chains.” IMP Aerospace & Defence will contribute with in-country production and in-service support for the life of the Canadian Gripen fleet. CAE will provide training and mission systems solutions, while Peraton Canada will provide avionic and test equipment component maintenance, repair and overhaul, and material management. GE Aviation will provide and sustain the fighter's engines in Canada. The ‘Gripen for Canada Team' presents a genuine ‘Made in Canada' solution and looks forward to demonstrating how Gripen is the best value for Canada's aerospace industry and taxpayers in terms of life-cycle costs and sustainment throughout the FFCP competition. Saab's Gripen fighter meets all of Canada's specific defence requirements, offering exceptional performance, advanced technical capabilities, future-proof upgradeability and NATO interoperability. For further information, please contact: Saab Press Centre, +46 (0)734 180 018 presscentre@saabgroup.com www.saabgroup.com www.saabgroup.com/YouTube Follow us on twitter: @saab Saab serves the global market with world-leading products, services and solutions within military defence and civil security. Saab has operations and employees on all continents around the world. Through innovative, collaborative and pragmatic thinking, Saab develops, adopts and improves new technology to meet customers' changing needs. https://saabgroup.com/media/news-press/news/2020-03/saab-announces-gripen-for-canada-team/

David Pugliese, Ottawa Citizen The federal government is requesting information from industry on which shipyard has the capability to build the Canadian Coast Guard's new Polar Class icebreaker. It's a strange request in some respects. Last year the Liberal government took away the Polar Class icebreaker project from Seaspan shipyards on the west coast and instead provided that company with a deal that will see it build 16 new Multi-Purpose Vessels for the Canadian Coast Guard. Irving on the east coast is running at full speed handling the combat ship portions of the National Shipbuilding Strategy. It has already fallen behind on the delivery of the first of the Arctic and Offshore Patrol Ships and it still has much work to do on the Canadian Surface Combatant program. It was expected that Davie, the largest shipyard in Canada, would receive the contract to build the Polar Class icebreaker. Yet the news release issued Friday from Public Services and Procurement Canada noted that, “the Government of Canada issued a Request for Information (RFI), open to all Canadian shipyards, seeking information on domestic shipyard capability and capacity to construct and deliver a Polar-class icebreaker. This follows standard procurement practices, and the information gathered will help the government determine how best to proceed so that the polar icebreaker is delivered in the most timely and efficient manner.” Companies, however, only have two weeks to respond to the request for information. The whole exercise has the feel of a government checking the boxes off before awarding the contract to Davie. Or it could be a measure to head off any legal challenge from other shipyards who would complain that a “fair, open and transparent” competition was not run. Cecely Roy, press secretary to Procurement Minister Anita Anand, said in an email to this newspaper that as “a significant amount of time has passed since the last commissioned studies on the capacity of domestic shipyards, this RFI was initiated to provide updated information to inform the government's decisions on the procurement process moving forward.” The polar icebreaker, the future Canadian Coast Guard Ship (CCGS) John G. Diefenbaker, will replace Canada's current largest icebreaker, the CCGS Louis S. St-Laurent. The current fleet of heavy icebreakers, including the CCGS Louis S. St-Laurent, remain in good condition and will be in operation until the polar icebreaker is delivered, according to the federal government. The Polar Class project was announced by the Conservative government in 2008 and has faced delays ever since. The ship had been expected to be in service in 2017. That date changed to 2021. Now there is no known date for the vessel to be operating. “The delivery date for the polar icebreaker will be identified as the project gets underway,” the federal government added in its news release. “At this stage, we are exploring options to ensure the Polar Icebreaker is built in the most efficient manner to meet the needs of the Coast Guard, but a decision was not been made on the contract award, nor will this RFI result in that decision,” Roy said in an email to this newspaper. https://www.thechronicleherald.ca/news/canada/government-checks-another-box-on-the-long-long-road-to-building-a-polar-icebreaker-417217/

Amanda Connolly GlobalNews.ca WATCH: Canadian fighter jets intercepted two Russian bombers travelling near the North American coastline. While they were in international airspace they entered an area patrolled by the Canadians. The two American aerospace firms that want the Canadian government to buy their fighter jets say they did not request an extension on the deadline for bids. At the same time, defence experts say the decision to grant the extension reflects the bigger challenge facing a government that has repeatedly insisted a competition is the only way to move forward with the $19-billion procurement, despite there being a limited pool of options. “The government believes it needs to run a competition, but there're many situations where, in reality, there's only one or two competitors that can actually meet the needs of the Canadian Forces,” said Richard Shimooka, a senior fellow at the Macdonald-Laurier Institute and an expert on defence. “So the government's put in a bit of a pickle by its rhetoric where it wants to portray that ‘yeah, we're having a competition or we're providing value for money and all these kind of important things for Canada', but in fact knows there's really only one competitor.” On Tuesday, the government announcement that the March 30 deadline will be pushed back three months, to June 30 instead. READ MORE: Canadian fighter jet replacement project hit with another delay In a press release on the decision earlier in the week, the government had said this extension was being granted “at the request of industry.” “Procurements of this magnitude are complex, and submission of a good proposal is important for suppliers and for Canada,” the government said in the press release. “This extension allows eligible suppliers to address recent feedback on their security offers, ensuring that Canada receives competitive proposals that meet its technical, cost and economic benefits requirements.” Global News has since been told that feedback included specific assessments about whether a firm would be able to meet the Canadian government's requirements for inter-operability with key allies, including the U.S. and the Five Eyes, and whether allies would be comfortable with them. Because the government is using a process known as phased bids for the fighter jet procurement, bidders get the chance to address any findings of non-compliance with those requirements before submitting their final proposals. And because of how closely Canada and the U.S. work together on issues ranging from intelligence sharing, continental defence and others, inter-operability – or the ability for jets to work seamlessly across various areas where Canadian and American systems overlap – is considered key to this contest. “We've got to buy aircraft that can be completely and seamlessly inter-operable with the U.S.,” said Dave Perry, vice president of the Canadian Global Affairs Institute and an expert on defence procurement. “They've asked the bidders to put forward a proposal on how they're going to make that work.” Perry noted that in the past, questions around how aircraft will operate between Canadian and American systems hasn't been relevant because Canadian fighter jets have always been American. Now, with foreign bidders like Sweden's Saab, the onus is on them to demonstrate their jets can actually do the work. “Saab is the only competitor that is not part of either Five Eyes or Two Eyes and as a result, it would have the greatest amount of work in order to meet the requirements of the Royal Canadian Airforce,” said Shimooka. “Right off the bat, it requires the greatest amount of work for this.” While the government wouldn't say which firm asked for the deadline extension, both Lockheed Martin and Boeing offered statements saying it wasn't them. “We did not request the extension,” said Boeing spokesperson Stephanie Townend. A spokesperson for Lockheed Martin offered a similar response. “We have not requested an extension of delivery for the FFCP preliminary proposal,” said Amanda Hauck, strategic communications lead for the firm. A spokesperson for Saab was less clear. “While Canada's FFCP competition prohibits bidders from commenting publicly on confidential elements of the RFP process, Saab was prepared, and remains prepared, to submit a bid based on the Government of Canada's schedule,” said Patrick Palmer, executive vice president of sales and marketing for Saab Canada. “Saab will continue to finalize its response to all stated requirements of the RFP and can confirm that we will submit a fully compliant response to the Future Fighter Capability Program RFP. We are confident that our offer will provide the best value and best solution for Canada, industry and Canadians for generations to come.” Global News followed up with a request for Palmer to clarify whether the bid Saab said it was prepared to submit by the March 30 deadline would have been a fully compliant one. The company has not yet clarified its response. Saab is offering its Gripen fighter jet in the contest while Lockheed Martin is offering its controversial F-35 and Boeing is offering its Super Hornet. Two other European firms – Airbus and Dassault – dropped out of the contest over the past year-and-a-half, citing security requirements and associated extra costs for the suppliers if chosen. The competition is complicated though by questions and past concerns about both of the American offerings. Boeing brought a trade tribunal complaint against the Canadian aerospace firm Bombardier in 2018 which resulted in Bombardier being forced to pay steep duties on imports of its C-Series plane to the United States. Innovation Minister Navdeep Bains said shortly afterward that the government would weigh a company's “economic behaviour” and that those who had caused economic harm to Canada would be at a disadvantage in the fighter jet competition. That clause still exists in the criteria being used to assess the projects. But Prime Minister Justin Trudeau also promised during the 2015 election campaign not to buy the F-35, the planned procurement of which under the previous Conservative government had been dogged with accusations of hidden costs and sole-sourcing. Since the launch of the competition, the F-35 has become widely-viewed by military experts as a frontrunner in the contest. A government source speaking on background insisted the extension will not impact the expected decision date. The result of the contest are due in 2022 with expected delivery of whichever jet is chosen beginning in 2025. https://q107.com/news/6600416/canada-fighter-jet-competition/

by Vern Kakoschke February 2020 Introduction Defence procurement in Canada has had some well-known challenges in recent years. Many commentators have suggested possible strategies for fixing the defence procurement system. The identified problems include overspending on defence programs, unnecessary and undue delays in re-equipping Canada's fleet of aircraft, ships and ground transport, and defence budgets that remain unspent. The problems also include procuring authorities experiencing a shortfall in manpower and expertise, the inability to execute on defence procurements, unjustified sole-sourcing without a proper competition, political interference in selection issues, and the list goes on. The proposed solutions often address process-related matters: establish a single agency responsible for defence procurement or perhaps a cabinet secretariat to manage the involvement of three of four government departments who are often not on the same page. To date, not much has been written or discussed in public policy forums on a critical question: How should the necessary capital assets be financed? At one extreme, Canada could simply write a cheque and pay for them up front, thereby placing the assets on Canada's balance sheet. At the other extreme, Canada could drop the financing obligation into the laps of private-sector bidders and let them worry about the most efficient way of raising the necessary capital. A middle-ground solution could involve a public-private partnership (P3) structure, a model which seeks to balance the interests of the public and private sectors in a manner that leads to a better solution for all parties. Any public policy discussion often begins with first principles. What is the government's policy objective? It is to procure the best available equipment, with the most benefit to the Canadian economy or local interest groups and at the lowest possible cost. All three goals must be balanced in a manner that is politically acceptable, meets budget constraints and withstands public scrutiny. In major procurements, capital can be the largest single cost of a defence procurement. Conventional wisdom is that Crown debt is by far the cheapest financing alternative for any new program that requires the acquisition of capital assets. The Crown issues Government of Canada (GoC) bonds for a term that matches the expected useful life of the capital assets and the interest rate does not include a risk premium or credit spread (often called “Canada's flat”). Canada purchases the capital assets and then, if necessary, makes them available for use by a private-sector operator under a lease or loan arrangement as government-furnished equipment (GFE). The fixed-wing search and rescue (FWSAR) program is an example of a procurement in which Canada simply paid for the aircraft up front with the related maintenance services (in-service support) for the assets being funded over a long period of time. The government ownership model is simple, straightforward and enjoys the lowest capital cost. But it has two serious drawbacks. First, the GoC bonds are consolidated on the Crown's balance sheet with other Crown debt. This brings them to the attention of the major rating agencies. If the total Crown debt increases beyond acceptable rating norms, rating agencies will typically downgrade Canada's credit rating with the result that the interest rate on future GoC bond issuances will rise. Increased Crown debt may also lead to a politically unpalatable higher budget deficit. Second, the Crown typically selects the appropriate capital assets, a decision that is fraught with risk and intense public scrutiny. Politicians likely dread having to make such decisions. In a scenario where the capital assets can be bundled with required services, the Crown may prefer to procure only the services and leave the related asset selection up to the successful proponent. If the service provider bears the debt service costs and they are simply embedded into the price for services, then the program's cost can be booked in the Crown's operating budget and not its capital budget. Capital budgeting decisions tend to receive a much higher level of public scrutiny than changes to the annual operating budget. Milestone payments made to the successful proponent that are tied to the delivery of a portion of the capital assets can be buried in operating budgets. Relatively low milestone payments may not attract public scrutiny whereas higher payments in a material amount likely would. Historical Perspective The financing for the NATO Flight Training in Canada program (NFTC) can offer some historical perspective. In 1994, Bombardier made an unsolicited proposal to provide contractor-supported jet pilot training in Canada.1 The proposal contemplated certain novel economies of scale for the high fixed cost of establishing a training program. The acquisition costs and non-recurring charges would be amortized over trainees from the Canadian air force and from the air forces of participating NATO nations, thereby resulting in a lower cost per student. Less well-known was the proposal's financing package: the program's entire capital cost would be financed in a manner that was “off-balance sheet” to Canada and to Bombardier. It became known as the Milit-Air financing as it involved the establishment of a special purpose entity (SPE) called Milit-Air Inc., a not-for-profit corporation. In 1997, the Canadian government awarded Bombardier a 20-year service contract for the NFTC program, valued at $2.85 billion. Under the service contract, Bombardier was responsible for providing fully serviced aircraft, flight simulators, training content, and airfield and site-support services to the Department of National Defence (DND). Milit-Air financed all the capital assets pursuant to a bond issue to institutional investors and then leased them to Bombardier. The Milit-Air financing was completed in two tranches: the first tranche in the amount of $720 million of amortizing secured bonds was issued in 1998 and the second tranche in the amount of $106 million was issued in 2002.2 The financings coincided with the obligations to pay equipment suppliers such as Raytheon for the T-6A aircraft and British Aerospace for the Hawk 115 aircraft that were required for the training program. The SPE purchased the capital assets and leased them to Bombardier who in turn provided services to Canada in exchange for firm fixed fees and variable fees. The fixed portion of the service contract payments were “hell-or-high-water” obligations of Canada and were assigned by way of security to the SPE so that it could service the debt on the outstanding bonds. The complex financing structure is described in detail in a 2002 decision of the Ontario Securities Commission.3 The OSC concluded that the distribution of the bonds was exempt from provincial prospectus requirements even though the financing did not fall within an exemption for government debt: “the arrangements do not constitute a direct obligation of Canada to make payments on the bonds or a collateral obligation of Canada in the nature of a guarantee.” In other words, Canada did not guarantee the payments to bondholders and hence under then-applicable accounting principles, the total debt of $826 million was not consolidated with Crown debt.4 The Milit-Air financing was widely considered in financing circles to be an innovative and cutting-edge transaction well ahead of its time. Why was it admired? Standard & Poor's (S&P) rated the Milit-Air bonds. S&P rated most financing transactions involving a service contract structure and an SPE as an accommodation party at one or more notches below the then-current rating of the sponsoring government.5 Milit-Air was a rare exception. S&P awarded the Milit-Air bonds a AAA rating, the same rating as GoC bonds.6 In other words, Canada and the procuring authority for the NFTC capital assets could have its cake and eat it too: the Milit-Air bonds were not shown in the consolidated accounts of Canada as Crown debt and yet the interest rate on the bonds was the same as what Canada would have paid if it had issued GoC bonds. This was an impressive result that likely resulted in interest cost savings over the full term measured in the millions of dollars. Unfortunately, the auditor general of Canada did not see it that way. In his 1999 annual report, the AG found that the decision to award a sole-sourced contract to Bombardier (which contract was assumed by CAE Inc. in 2015) “was not adequately justified”. The AG reviewed the financing arrangement and found it to be lacking, primarily due to the fact that Canada was on the hook for the debt servicing charges even if no services were being provided. The risks were not justified in the AG's view: “The main risk is that if Milit-Air Inc were ever to become insolvent, National Defence would face the drastic consequence of losing its access to the planes while continuing to pay the firm fixed fees.”7 Perhaps the AG did not appreciate that the SPE was designed to be bankruptcy-remote and that an insolvency of Milit-Air was highly remote. The AG would have much preferred if Canada had simply purchased the capital assets outright and supplied them to the contractor as GFE. The AG also failed to acknowledge that if Canada had used the GFE approach, it would have been responsible for the debt servicing charges on the GoC bonds in any event. On an incremental risk basis, it may be that the benefits of the financing in terms of lower interest costs outweighed the incremental risks. In subsequent years, the AG continued to criticize the NFTC program and its financing. In 2002, the AG concluded that the profit margin built into the NFTC contract was excessive and could not be justified. In 2006, the AG calculated that the Crown paid about $39 million for training that it could not use. In his 2006 annual report, the AG stated that the Crown was “less than successful in obtaining foreign student commitments”. The mandarins at Public Services and Procurement Canada (PSPC) likely got the message: they would probably never again attempt a highly structured financing such as Milit-Air in a defence procurement and risk incurring the AG's wrath. A chill fell on the procuring authority. In 2003, the pendulum in respect of defence procurement contracts swung in the opposite direction. Canada released a Request for Proposals (RFP) for a contract to provide long-term primary helicopter and multi-engine fixed-wing pilot training at Southport, Manitoba. The RFP incorporated the AG's recommendations that the next training contract should have payments tied to performance and value received. The AG reviewed the draft RFP for the primary training project and found that payments would be based on milestones: “If the contractor fails to achieve the milestones, this could result in payment holdbacks and forfeiture. Incentives are also in place for good performance.”8 In 2005, Canada announced that a relatively unknown Western Canada-based aerospace company was the winner and awarded the contracted flying training support (CFTS) contract, subject to confirmation that the winner (a relatively small private company) could raise the financing.9 Details of the CFTS financing are not publicly available, apart from the fact that a $137.5-million transaction was concluded at the time of contract award.10 The Enron Debacle The Enron scandal in 2001 changed the landscape for Milit-Air style financings.11 Enron filed for bankruptcy and its accounting firm, Arthur Andersen, was dissolved. The CFO of Enron went to jail. One of the causes of their downfall was Enron's use and abuse of SPEs that enabled the company to hide hundreds of millions in liabilities from its shareholders and lenders. Largely as a result of the Enron debacle, the U.S. accounting regulator (the Financial Accounting Standards Board) changed the accounting rules to make it more difficult, if not impossible, to use off balance-sheet financing structures.12 Most large Canadian corporations that had taken advantage of such financing structures promptly reversed course and consolidated their SPEs' debt. It is not clear from the public record whether the AG also responded to the change in accounting standards by adding the outstanding Milit-Air bonds to Crown debt in the Crown's audited accounts. Future Air Crew Training (FAcT) Program The competition for the next-generation training contract started in 2013. The Crown announced that it would combine the pilot training currently being provided under the NFTC program and the CFTS program together with air crew training for combat system officers and airborne electronic sensor operators into one massive procurement.13 A RFP is expected to be released in 2020 with a contract award expected in 2021. The Crown has made no mention in its public releases how the required capital assets are expected to be financed under the FAcT program. The four qualified bidders in the FAcT competition may be faced with uncertainty in bid preparation in that they may or may not be expected to provide the financing as part of the bidding process. The amount required to refresh or fund the FAcT program's capital assets will likely be significant: if the total capital cost of the two existing programs approached $1 billion over 20 years ago, the capital cost of a refresh could be well in excess of that amount. Such an onerous financing obligation could put smaller bidders at a disadvantage to larger multinational defence contractors. Public Private Partnerships (P3s) The P3 procurement model is an investor-friendly method of transferring risk for public infrastructure projects to the private sector and enabling a private-sector financing at an acceptable risk premium over GoC bonds.14 It is all about delivering value for money. Cash-strapped provinces have enthusiastically embraced the P3 model for the design, build, operation and maintenance (DBOM) of various projects in the health-care sector, social infrastructure such as hospitals, libraries and prisons, and transportation such as roads and bridges. Relatively few P3 projects have been completed at the federal level: the RCMP headquarters in Surrey, the Gordie Howe Bridge and the Communications Security Establishment Centre (CSEC) in Ottawa. It was unfortunate that the Liberal government in 2017 disbanded PPP Canada, a Conservative-created Crown corporation that encouraged P3s at the federal level. There is no reason why the P3 model could not be applied to defence projects, particularly if they involve a mix of capital assets and service delivery, as most P3s do. Security concerns can be overcome, as was evidenced in the CSEC project. There is no loss of government control over strategic assets in any P3 deal. Contracting practices for P3 deals have been well developed over the years and the investment community has accepted the risk allocation set out in commonly used P3 documentation. No need to reinvent the wheel with new and complex documentation when preparing a RFP. Other countries, such as the U.K. and Australia, have fully embraced the P3 model (known locally as PFIs or private finance initiatives) for defence procurement and yet Canada has not followed their lead, notwithstanding the demonstrable benefits that could be derived from such an approach.15 P3s are typically built on time and on budget as the risk of delays, cost overruns and non-performance are transferred to the successful proponent in the private sector. Lessons Learned When it is released, the RFP for the FAcT procurement will provide an interesting case study for whether Canada has learned any valuable lessons from the predecessor financings undertaken in the NFTC and the CFTS programs. Some shaping principles that could be helpful when designing a defence procurement involving significant capital assets (such as FAcT) include the following: Contemplate an investor-friendly financing for the capital assets. Unless Canada prefers to increase its budget deficit by a material amount, the RFP's terms should not scare off potential investors. By adopting best practices in the P3 industry, Canada could level the playing field when it comes to financing. Each bidder should have the same opportunity to raise the capital on the strength of the underlying service contract and not simply on the strength of its balance sheet. Unwind the Milit-Air financing. The Milit-Air bonds are nearing maturity but are still outstanding. The original purpose of the financing structure – off balance-sheet accounting treatment – has disappeared. The annual cost of maintaining a not-for-profit corporation cannot be insignificant. This cost could be avoided by unwinding the financing in a manner that involves Canada stepping up to assume the obligations under the bonds as a direct obligation of the Crown. This could well facilitate transition issues between the existing NFTC assets and the refreshed assets. Involve the auditor general in the RFP design process. The AG made numerous helpful recommendations in his reports regarding the NFTC program, many of which remain valid concerns today. Has the AG ever followed up and determined the current status of his recommendations? Better transparency would assist the bidders and their investors in risk assessment. Moreover, the expected accounting treatment for all parties concerned could usefully be reviewed by the AG and anticipated in the RFP. Reconsider the use of milestone payments. If Canada intends to partially contribute toward funding the capital cost in whole or in part, the contributions could take the form of progress payments rather than milestone payments. The former payments are considered to be earned when paid, whereas the latter are considered unliquidated advance payments (meaning the Crown could claw them back in certain circumstances). No investor will wish to invest in a project where the Crown has a prior claim on the same assets funded by an investor. The AG may also consider the accounting treatment of such milestone payments, as they may in some cases be treated as being on capital account rather than on income account and buried in a government department's operating budget. Provide certainty for bidders in the RFP process. Uncertainty is the enemy of a cost-effective program. If bidders are given advance notice of the essential terms of a procurement, they can plan accordingly, including preparing for a financing that will likely require substantial amounts of debt and equity from the investment community. Any necessary governmental approvals, including from Treasury Board, would be best sought at the start of a procurement process. Leaving the funding approvals to the end as an after-thought would not be helpful. Defence procurements are large and complex. Financing considerations should be taken into account as early in the procurement process as possible. The failure to consider the appropriate financing approach for major capital assets could well add millions to an already costly program. Conversely, a properly structured procurement and related financing could save the Crown many millions in terms of the cost of capital. End Notes 1 National Defence and the Canadian Armed Forces, “NATO Flying Training in Canada: An Innovative Solution for NATO Flying Training Requirements,” Sept. 7, 1998. Available at http://www.forces.gc.ca/en/news/article.page?doc=nato-flying-training-in-canada-an-innovative-solution-for-nato-flying-training-requirements/hnlhlxhd 2 Offering Memoranda dated May 5, 1998 and June 25, 2002 issued by Milit-Air Inc. and its financial advisor and underwriter, Scotia Capital Markets. 3 In the Matter of Scotia Capital Inc. and Milit-Air Inc. Available at https://www.osc.gov.on.ca/en/SecuritiesLaw_ord_200220628_2113_scotiacapital.htm 4 The auditor general concluded in his 1999 annual report that Milit-Air was an independent organization and not subject to the control of Canada or Bombardier. In the result, the debt appeared on the balance sheet of Milit-Air Inc., but not on any other party's balance sheet. 5 The reason for the lower rating is that the payment stream under the service contract could be caught up in a service provider's bankruptcy and hence the payment flows to the bondholders could theoretically be interrupted. 6 Standard & Poors Rating Direct Report (Oct. 11, 2007). 7 1999 September and November Report of the Auditor General of Canada – Case Study 27.1-NATO Flying Training in Canada. 8 May 2006 Report of the Auditor General of Canada. 9 National Defence and the Canadian Armed Forces, “Backgrounder on CFTS,” March 30, 2005. Available at www.forces.gc.ca/en/news/article.page?doc=contracted-flying-training-and-support-cfts/hnocfoke 10 McCarthy Tétrault LLP. Available at https://www.mccarthy.ca/ 11 Many corporations in capital-intensive industries were taking advantage of off balance-sheet financing structures at that time. In such financings, the debt was typically issued by a special purpose entity that was not controlled (de jure control) by the sponsoring corporation. Hence the debt that the SPE issued was not consolidated with the sponsoring corporation's debt even though the latter was indirectly responsible for the debt servicing, typically through lease payments to the SPE. As a result, the sponsoring corporation did not put any stress on its financial covenants with its lenders and it also avoided the payment of capital tax which was based on the corporation's stated liabilities. 12 In 2009, FASB issued Interpretation FIN 46(R) entitled “Consolidation of Variable Interest Entities”. If an SPE qualified as a VIE under a new substantive test (rather than control test), the VIE's debt would have to be consolidated with the debt of the primary beneficiary (i.e., the sponsoring corporation). The Canadian accounting regulator soon followed suit with the publication of Accounting Guideline AcG-15 (Consolidation of VIEs). 13 FAcT website: www.tpsgc-pwgsc.gc.ca/app-acq/amd-dp/air/snac-nfps/ffpn-fact-eng.html 14 Many P3 projects have been financed at interest rates based on the then-prevailing applicable GoC bond rate plus a credit spread of 150 -200 bps. 15 The benefits have been well documented by the Canadian Council for PPPs in numerous published studies. About the Author Vern Kakoschke is Managing Director of Gothic Strategic Solutions Inc. (www.gothicsolutions.ca). He provides consulting services in the aerospace and defence sector and advises on complex structured financings, including tax-advantaged financings. Vern has 30+ years experience practising law in Toronto and in the investment banking industry where he completed several novel financing transactions for major capital assets involving aircraft, rail, power and infrastructure assets. He retired last year from a senior management role at KF Capital (owner of KF Aerospace), including as a director of SkyAlyne Canada LP (one of the bidders for FAcT) and was formerly the finance lead on the SkyAlyne bidding team. https://www.cgai.ca/financing_capital_assets_the_missing_link_in_defence_procurement