5801246.1

Issues in Military Procurement

Presentation to the 5th Public Procurement Law Course

Elisabeth S. Preston

Agenda

1. Special Characteristics of this market 2. New Canadian Procurement Regime 3. Special Issues

Quick Primer on ITAR and why it impacts us The Controlled Goods Program

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Special Characteristics Procurement environment

– specialized programs and bespoke rules – sub-contractors to large primes – IRB (Industrial Regional Benefit)

Programs – Government relations/advocacy may be

needed

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Market - Canada

(Source: Canada First Defence Strategy)

Market – U.S.

(Source: U.S. Department of Defense)

Market - Global

(Source: 2012 Stockholm International Peace Research Institute (SIPRI) Yearbook)

Canada’s exports

Scale of Economic Impact

– Planned investment by industry in Alberta's oil sands over 25 years:

• $364 billion

– Planned investment by Canadian government in Defence over 20 years:

• $490 billion

Sources: Conference Board of Canada Fuel for Thought: The Economic Benefit of Oil Sands Investment for Canada's Regions and the Canada First Defence Strategy.

Key Canadian Industrial Capabilities

– Arctic and Maritime Security – Protecting the Soldier – Command and Support – Cyber-Security – Training Systems – In-Service Support

… represent approximately a quarter of Canada's total

defence procurement related to equipment and readiness, or approximately 10 per cent of total planned spending

New Canadian Procurement Regime History – Canada First Defence Strategy released in 2008 – Budgets 2011 and 2013 commitments – ensure defence

equipment procurement creates economic opportunities and jobs for Canadians and improves defence procurement outcomes

– Informed by extensive engagement with industry and the recommendations found in the government-commissioned Jenkins and Emerson reports

– Defence Procurement Strategy launched February 5, 2014 by Minister of Public Works and Government Services Diane Finley and Minister of National Defence Rob Nicholson

Objectives for the Defence Procurement Strategy – Deliver: the right equipment to the

Canadian Armed Forces and the Canadian Coast Guard in a timely manner;

– Leverage: Canadian purchases of defence equipment to create jobs and economic growth in Canada; and

– Streamline: defence procurement process.

Objective One:

– Deliver the Right Equipment to the Canadian Armed Forces and the Canadian Coast Guard in a timely manner – Early and continuous engagement – Defence Acquisition Guide – Challenge function for military

requirements

Early and Continuous Engagement – Establishes a framework for ongoing two-way

communication between industry and government: – Annual publication of the Defence Acquisition Guide; – Procurement-specific engagement to inform

development of the associated Value Proposition (described later);

– Regular review of Key Industrial Capabilities, and the ongoing analysis of Canada's defence industrial capabilities; and

– Review progress of the Defence Procurement Strategy and opportunities for improvement.

Defence Acquisition Guide – To be Published in June 2014 in first annual edition

– Objectives:

– To better position Canadian industry to deliver equipment and services for the Canadian Armed Forces;

– Help Canadian industry to be better positioned to compete for future Canadian and international defence procurement opportunities; and

– Enable Canadian industry and potential bidders to make informed R&D investments and strategic partnering decisions.

– Description: – Procurement projects, expected over the next 5-20 years, valued over $100M

and those of lower value with leveraging potential for Canadian industry; – Published annually, in consultation with Industry Canada and PWGSC.

Challenge Function for Military Requirements – Objective:

– To improve transparency and ensure requirements are clearly understood.

– Description: – The Deputy Minister of National Defence chairs the Department's newly

established Investment and Resource Management Committee (IRMC), which exercises authority over the Department's financial and resource allocations;

– National Defence will strengthen its existing internal project challenge function processes and boards; and

– National Defence will establish independent expert third-party reviews of high-level mandatory requirements on projects over $100 million and selected others. An Internal Review Panel, chaired by a prominent civilian from outside the government and reporting directly to the Deputy Minister, will bring together the necessary expertise to coordinate third party reviews.

Objective Two:

– Leverage Canadian purchases of defence equipment to create jobs and economic growth in Canada – Value Propositions – Key Industrial Capabilities – Industrial and Technological Benefits – Defence Analytics Institute – Export Strategy

Value Propositions to Improve Economic Outcomes – The Value Proposition is the primary instrument that will be used to improve

economic outcomes from defence procurements. – Requests for Proposals may include requirements for Value Propositions, which

will be weighted and rated in the bid evaluation process, along with technical and price elements.

– Value Propositions are intended to enhance the quality and focus of investments in Canada - including supporting and developing KICs - to support and increase the competitiveness of Canadian industry going forward.

– Evaluation of Value Propositions will focus on key competitiveness factors for Canada's defence sector such as:

– enhanced productivity in Canadian firms; and – broader industrial/technological high-value activities, such as technology

transfer – Increased/enhanced participation of Canadian firms in global value/supply

chains.

More on Value Propositions

– Value propositions have not yet been tightly designed. – The High Value Work in Canada annex for Fixed Wing SAR

has been referenced as an example of how a Value Proposition may work. This annex requires that work and IP be placed in Canada.

– This is a rated requirement written by National Defence specialists and Industry Canada.

– Value Propositions will likely focus on direct work available to Canadian companies on procurement policies.

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Threshold for Application of Value Propositions – Value Propositions will be applied as follows:

– All eligible defence procurements with contract values of $100M and above will require a comprehensive Industrial and Technological Benefits Plan, including a Value Proposition; and

– All eligible defence procurements with contract values of $20-100M will be assessed for the possible application of a Value Proposition.

– In addition, all defence procurements with contract values of $25K-20M will be subject to the revised Canadian Content Policy (CCP).

– Default weighting of Value Propositions is 10%, but will be determined on a procurement-specific basis, together with the technical and price elements.

Key Industrial Capabilities – Key Industrial Capabilities, or KICs, will be a significant factor

in the design, rating, and weighting of Value Propositions. – KIC criteria proposed in the Jenkins Report serve as a

framework for analyzing Canadian defence industrial capabilities and their potential for growth: – Canadian Armed Forces' need; – Innovation potential; and – Export potential.

– Interim KICs in Jenkins' Report are being refined into more precise market segments (see earlier introductory slide)

– Continue to engage with defence experts and stakeholders to further refine KICs and identify how best to apply them to improve economic outcomes from defence procurement

Industrial and Technological Benefits – Industrial and Technological Benefits (ITB) plans will be required to

provide flexibility to improve economic outcomes from defence procurement projects

– Activities identified in bidders' Value Proposition proposals will be included in the resulting ITB obligations

– ITB plans will continue to require bidders to propose transactions that: – Are equal to the contract value; – Ensure Canadian Content; – Ensure Causality and Incrementality; and – Regional Plan.

– Though there will be ongoing focus on small business and regions, investments in technology and commercialization will be the new focus of the policy.

Significant change to the old IRB practice with the introduction of ITBs – ITBs now override IRB policy, transforming the offset aspect of procurement

from simply a pass/fail requirement to one that is rated with Value Propositions that leverage High Value Work in Canada.

– The revised policy will see a mix of mandatory and rated requirements, which will be determined on a case-by-case basis.

– Bidders must outline Value Propositions—namely, undertakings to bring High Value Work to Canada—that will be rated for quality and strategic value and assigned a weight in the bid evaluation alongside requirements and cost.

– Value Proposition commitments will be reported publicly, unlike the current IRB process where information is not disclosed.

– The bottom line is that ITBs will be assigned a weight in bid evaluations alongside requirements and costs.

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Independent Defence Analytics Institute – The government will establish an independent, 3rd party Defence Analytics

Institute (DAI) to support its objectives for the DPS and its evaluation. – The DAI is envisioned to provide:

– Expert analysis to help inform aspects of the defence procurement process and the development/assessment of KICs;

– Research/perspective on the state of the Canadian defence industrial base, including its capabilities, and its strengths, weaknesses, and opportunities for growth;

– Information on global export market opportunities, including trends and issues related to foreign defence markets; and

– Insights on technological trends in global defence markets and Canadian industry's capacity to meet or develop new technologies in those areas.

– Interim Institute Board of Directors was recently announced. – Location – University of Calgary.

Export Strategy – Some key elements:

– Marshalling Canada's international diplomatic network, including defence attachés, on behalf of Canada's defence industry;

– Enhancing coordinated support for Canada's presence at key international events;

– Streamlining the administration of export controls while continuing to fully respect Canada's established foreign, trade, and defence policies; and

– Contribute to the development of Value Propositions by assessing trade considerations, including capacity development, Canadian direct investment abroad, foreign direct investment, impact on exports, and penetrating international supply chains.

Objective Three:

– Streamline defence procurement processes

– Streamlined and Coordinated Decision-making

– A new Procurement Defence Secretariat – Review National Defence delegated

authority

Streamlined and Coordinated Decision-making – A permanent Working Group of Ministers:

– Focused on ensuring shared accountabilities for defence procurements are exercised in a more efficient, joined-up manner; and

– Acting as a forum for discussion, advice and to resolve issues in the implementation of major procurement projects.

– A mirror Deputy Minister Governance Committee (Chaired by the DM, PWGSC): – Key decision-making body for implementation of the DPS; and – Provides guidance for defence and major Canadian Coast

Guard procurements and ensure timely and balanced decision-making.

A Defence Procurement Secretariat – Permanent Defence Procurement Secretariat operating within

PWGSC, that is expected to undertake or support the following activities: – Ensuring early engagement in the procurement process; – Using independent advice to strengthen the integrity of

the procurement process; – Ensuring a coordinated approach to implementation of the

DPS across multiple departments; and – Using an issue resolution approach to address problems

quickly and effectively. – Developing an evaluation framework to measure the

performance of the DPS.

Implementation Plan for the Strategy – Timing

– Industry engagement sessions – Departmental readiness (training,

orientation) – Interim Defence Analytics Institute structure – Initial use of Value Propositions – First release of National Defence's Defence

Acquisition Guide (June 2014) – Establish new governance regime

Special issues

– Export Issues – ITAR – Sanctions – Corruption – Industrial Security – Controlled Goods

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Adapting to Canada’s Evolving Security Needs

Shifting security landscape: Terrorism; ▪ Espionage; Sabotage; ▪ Intangible technology transfer; Home-bred extremism; ▪ Cyber crime, Wiki leaks; and, Proliferation of weapons ▪ Use of couriers to facilitate terrorist activities.

of mass destruction ;

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Export issues

– controlled goods in Canada, ITARs in US, UK MoD controls

– employment related restrictions (industrial security (Place of birth and nationality and clearances etc.)

– TAAs, MLAs, PIEAs all targeting national security issues

– Broker registrations required – Compliance programs, voluntary disclosures

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Industrial security

– Handling of restricted A and B, classified, secret, top-secret information

– Personnel related issues (and human rights issues)

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Sanctions and embargos

– Complying with rules both directly and indirectly

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Anti-Corruption and Anti-Money-Laundering – Industry plagued with highest fines in

this area ($100m’s) – Identifying risk, implementing

adequate compliance and training programs

– Investigations and Voluntary Disclosure

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WHAT IS ITAR?

U.S. Reexport and Retransfer of Military Goods – Arms Export Control Act, 22 USC 2778, et

seq. – Implemented by the Department of State

through the International Traffic in Arms Regulations, 22 CFR parts 120-130 (“ITAR”)

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International Traffic in Arms Regulations

– The ITAR Covers the Export of Defense Articles (Including Technical Data and Defense Services) from the U.S. or by U.S. Persons Wherever Located

– Defense Articles are Any Articles on the U.S. Munitions List (“USML”) at 22 C.F.R. §121.1

– Defense Services Cover the Furnishing of Assistance with Defense Articles, Transfer of Technical Data and Military Training

– Separate Restrictions for Brokering of U.S.-Origin Products by Non-U.S. Persons and Brokering of Non-U.S.-Origin Products by U.S. Persons

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U.S. Defense Articles

– Covers military items (“munitions” or “defense articles”) – Most space-based items (including civil space activities) subject to the ITAR – Regulates goods and technology designed to kill people or defend against

death in a military setting (e.g., firearms, armored vehicles, personal body armor, etc.) as well as space-based activities

– Any article, technical data or services specifically designed, developed, configured, adapted or modified for a military or space- based application may be subject to the ITAR

– Commercial items modified for military or space-based purposes can become subject to the ITAR after modification

– Strict regulatory regime – Purpose of regulations is to ensure U.S. security – No balancing of commercial objectives

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U.S. Defense Services

– Can Be Based Solely on Public Domain Information

– Does Not Require U.S. Defense Articles – Most Subjective and Open to Interpretation – Most Training of Foreign Militaries and

Military Training Subject to this Provision – Testing services, prototyping etc.

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Comingling of Products and Technical Data (ITAR Pit) – U.S. Jurisdiction Follows the ITAR-Controlled Item and Technical Data

Wherever Located – Adding an ITAR Component to a Canadian Item Will Require Continued

ITAR-Controls Over That Component – Similarly, Commingling U.S.-Origin Technical Data or Modifying a Canadian

Product Based on U.S. Defense Services Will Trigger ITAR Controls – Under Current Regulations, the U.S. Governemnt will “See Through” a dual-

use product or component to “See” the ITAR-Controlled Product Inside the Canadian-Origin Item

– Cannot Eliminate ITAR Jurisdiction Over Time or Because of Low Value

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Areas where Canadian companies or operations may face challenges: – Dual and third country national licensing – Recordkeeping – Security Assessments and the provision of

collected information to the U.S. Government upon request

– Reexport and retransfer requests under § 123.9(c)

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Canadian Exemption

– Detailed Provision at 22 C.F.R. s. 126.5 – Powerful Provision to Permit License-Free Trade but be careful

– Goods, Technical Data and Services Remain Subject to the ITAR When They Arrive in Canada

– If They Arrive Via the Exemption Canadian Persons May Not Know They are ITAR-Controlled

– Exemption Only Valid for Activities in Canada and the U.S. – Exemption Only Applicable for Exports for Use by Canadian

Government Entities in Their Official Capacity or Private Entities that are “Canadian-registered Persons”

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THE CONTROLLED GOODS PROGRAM

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Controlled Goods Program (CGP)

Established in 2001 to support Canada's ITAR exemption. Under separate legislation: Defence Production Act and Controlled Goods Regulation.

Enhanced in 2011 to meet the requirements of the new ITAR dual national rule and Canada's own threat assessments.

Regulates the access of controlled goods in Canada. Includes examination, possession, or transfer of controlled goods.

Designed to prevent risk of diversion and proliferation of articles and technologies which could assist in the creation of weapons of mass destruction

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Registration is Mandatory Anyone who accesses controlled goods in Canada,

must be registered with the CGP. All those wishing to access controlled goods in Canada,

must consent to a security assessment. Illegal possession, examination or transfer of controlled

goods is an offence under Canada’s Defence Production Act. Maximum penalty is $2,000,000 per day and/or

imprisonment for a term not exceeding 10 years.

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Metrics

4000 companies (across 5,000 sites) registered with the Controlled Goods Program

In 2011, the CGP: processed 2,036 registration applications (new, renewals,

amendments); completed 1,511 compliance inspections; security-assessed 1,530 exemption requests for foreign visitors

and temporary workers; and investigated 139 case files, including 2 criminal breaches sent to

RCMP

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CGP Procedures to Ensure Compliance Conduct compliance inspections of registered companies

(including security plans, record keeping, training programs, security breach reports, etc.)

Invoke suspension and revocation, and prosecution procedures as required (including seizure and detention of Controlled Goods)

Educate the public and Designated Officials (DOs) of companies, on the various legal and regulatory requirements

Train DOs and authorized individuals for certification regarding their legal responsibilities (including compliance coaching)

Pass on high risk security assessments to CGP security and intelligence (S&I) partners for further analysis

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Inspections and Compliance To assess and monitor compliance, companies must be ready for

inspection at all times. The CGP can: Enter and inspect any place at any reasonable time; Question any person; Require any person to produce for inspection any document believed to contain any

relevant information; Detain or remove any controlled good; Require any individual in charge to take corrective measures; Suspend and/or revoke for non-compliance; and Refer to RCMP for violation of the Defence Production Act.

When non-compliance occurs, it is the company’s responsibility to take timely and appropriate action to comply with legislative and regulatory requirements

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Legal Obligations if you Examine, Possess or Transfer Controlled Goods

Register with the CGP

Appoint a Designated Official who:

Conducts security assessments, for the risk of unauthorized transfer of controlled goods, on officers, directors and employees;

Develops and Implements security plans; Maintains records (e.g. security assessments, Controlled Goods transfers);

Trains employees, visitors and temporary workers;

Reports security breaches and any changes to the organization and/or persons accessing Controlled Goods;

Transfers all high-score security assessments to the Controlled Goods Directorate for additional evaluation with security partners; and,

Provides updated lists of employees accessing Controlled Goods every 6 months.

All DOs must be trained and certified within specific timelines

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Drivers for Enhancements to the CGP

Adapting to Canada’s evolving security needs Meeting the requirements of the new ITAR

dual national rule (section 126.18)

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Meeting the requirements of the new ITAR Dual National Rule – Conflict between Canadian human rights legislation and

former U.S. ITAR dual national rule was costing Canadian companies millions of dollars in lost business opportunities and settling human rights complaints

– Since the mid 2000s, Canada has advocated for a solution that focuses on security rather than nationality. The enhanced CGP embodies this solution

– Basis for an Exchange of Letters between the U.S. Directorate of Defense Trade Controls and the Canadian Department of Public Works and Government Services

– Ensures Canadian industry and U.S. partners that CGP meets both new ITAR rule and Canadian human rights legislation

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Enhancements to the CGP

Based on the Enhanced Security Strategy, some of the enhancements that have been implemented include:

More rigorous assessments A standardized tool to security assess employees

Conduct further assessments (e.g., due to criminality) with S&I partners as appropriate

Establishing information sharing agreements with S&I partners

Education and certification of company DOs

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Enhancements to the CGP (cont’d)

Standardized tools for DOs to use to risk assess for access to controlled goods. Four key risk indicators:

criminality, financial, travel frequency and duration; and, significant and meaningful associations

More robust assessments of security plans (e.g. relating to cyber-security risks) and other inspection activities

www. http://ssi-iss.tpsgc-pwgsc.gc.ca

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Questions? Elisabeth S. Preston Managing Partner, Ottawa McMillan LLP elisabeth.preston@mcmillan.ca (613) 232-7171 x 196

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