Contractors Slam Ottawa’s Industrial Policy for Systemic Flaws
As Ottawa prepares to ramp up its defence spending, industry members say a policy designed to bolster economic development in the sector is being stunted by unnecessary rules and bureaucracy, limiting its ability to support small-to-medium-sized Canadian businesses.
The Industrial and Technological Benefits (ITB) Policy, part of Canada’s defence procurement strategy, is meant to ensure that companies awarded contracts by the federal government are investing equal amounts into Canadian industry. Yet those who have spent time navigating it say a cap on long-term investments in small-to-medium-sized businesses (SMBs) and lengthy transaction timelines are nullifying the ITB’s usefulness in a world of rapidly evolving modern warfare.
“The original concept was delightfully simple,” said John Wright, the chairman of defence consultancy firm JPOM Canada Inc., adding that it was essentially designed so every dollar Canada spent on defence procurement would see a dollar reinvested in its domestic industry.
The ITB policy applies to most defence procurements of more than $100-million and some between $20-million and $100-million. Companies bidding on contracts to which the policy applies must submit a proposal outlining how they will invest an equal amount back into Canada. This can be done directly, by employing Canadian firms to work on the procurement at hand, or indirectly, by investing in research and development at SMBs working on new technologies, for example.
Bureaucracy got in the way
At its core, the policy is designed to incentivize innovation, research, skills training and the economic development of Canada’s defence sector.
However, in a 2024 report, the Auditor-General of Canada said the circumstances under which Innovation, Science and Economic Development Canada (ISED) was applying the ITB policy to procurements was unclear, adding that its specific benefits and full costs were unknown.
Between 2014 and 2023, the federal government awarded 99 contracts worth at least $39-billion that included ITB obligations worth more than $36-billion. During the same time frame, out of 60 eligible procurements of more than $100-million that the Auditor-General assessed, in 10 cases the policy was either not applied or a company’s obligation was less than 100 per cent of its contract value.
When done right, the ITB policy can be a promising accelerator for Canadian SMBs with dual-use technologies – products with both commercial and defence applications. Take Canadian UAVs, a drone company that specializes in ground-based radar systems, for example.
In 2019, the company received a substantial investment from prime contractor Arcfield Canada as part of the U.S.-headquartered company’s obligations under the ITB policy. That five-year funding stream allowed Canadian UAVs to build out its Sparrowhawk ground-based radar system, which helps unmanned aerial vehicles such as drones track and assess their surroundings in flight without having to carry a large sensor. It’s made-in-Canada technology that is now operational in four countries.
Canadian UAVs vice-president John Molberg said this investment gave his company consistency, autonomy and the ability to graduate from being a subcontractor to a prime contractor.
This was possible thanks to what’s called an investment framework, an ITB tool prime contractors can use to incentivize R&D and commercialization in Canadian SMBs. In return, companies receive multiplied credits to reflect their investment’s anticipated future economic benefits.
Investment frameworks are particularly relevant now, given the government’s interest in developing dual-use technologies. That’s why Larry Glenesk, Western Canada vice-president at JPOM Canada, and others in the industry, are frustrated by the 25-per-cent cap on how much of their contract value prime contractors can claim in credits for using this tool.
The limit exists to help “balance indirect investments with direct, contract-related work,” wrote Riyadh Nazerally, a spokesperson for ISED, in an e-mail.
But Mr. Glenesk said companies should be allowed to decide for themselves how they divvy up their ITB obligations. “It’s kind of like shooting ourselves in the foot,” he said.
Another concern is timelines. According to the Auditor-General’s report, delays in procurement negotiations have directly conflicted with the federal government’s ability to deliver equipment to the Canadian Armed Forces in a timely and effective manner.
Companies contacted for this article said an ITB transaction can take a year or more – a wait that can be difficult to endure for an SMB trying to make ends meet. (ISED did not respond to questions about the average length of transactions.)
Even if a company can endure the lengthy process, Mr. Molberg said, its technology could become obsolete in the time it takes an ITB transaction to complete.
Fixing Canada’s ITB policy won’t elevate the country’s defence sector to the heights it needs to fulfill Prime Minister Mark Carney’s fresh spending targets. But it is one mechanism in the federal government’s toolkit that it could be using more effectively to bolster a domestic defence industry, Mr. Glenesk said.
“It should be able to generate more than it’s generating.”
This article was first reported by The Globe and Mail
