Response to the Review of the Acquisition Process to Replace Canada's CF-18 Fleet

December 2014

Context

In Chapter 2 of his 2012 Spring Report, the Auditor General recommended that the Government refine its estimates for the full life-cycle costs of the F-35 and make those estimates public. The report also made several observations about the acquisition process to replace Canada's fighter aircraft fleet and potential benefits to Canadian industry.

Immediately following the Auditor General's report, the Government announced a Seven-Point Plan to replace Canada's CF-18 fleet which fulfilled and exceeded the Auditor General's recommendation. The National Fighter Procurement Secretariat was established to implement the Seven-Point Plan following the principles of due diligence through strong governance, third-party oversight and transparent communications. The Terms of Reference for the Seven-Point Plan, which define the governance structure and expectations for the work to be performed, state that a “validation of all the steps taken to date in the acquisition process will be conducted and independently verified.”

Samson and Associates (Samson), a private sector consulting firm, was awarded a competitive contract to undertake the independent review of the acquisition process. The objective of the review was threefold: first, to determine whether the shortcomings identified by the Auditor General in the acquisition process have been addressed; second, to ensure that the steps taken up to June 2012 were in accordance with government policies, procedures and regulations; and third, to provide lessons learned and propose recommendations for future acquisitions of a similar nature. To meet these objectives, Samson conducted interviews with current and former government officials involved in the acquisition process and reviewed documents prepared by government departments for senior decision makers. Samson was provided access to all relevant documentation that was available for release.

Background – Military Procurement

To ensure the security and prosperity of Canada, the Canadian Armed Forces (CAF) regularly undertake challenging tasks. The Canada First Defence Strategy, announced in 2008, provides the CAF with clear direction concerning their three roles: first and foremost, to defend Canada; second, to defend North America; and third, to contribute to international peace and security. In today's complex and dangerous environment, the CAF need modern and capable military equipment to help them achieve their objectives. As a result, the Government has committed to making sure that it has the equipment to respond to a range of threats and challenges facing Canada and Canadians.

Canada's current CF-18 fleet was introduced in 1982 and was originally scheduled to be in service until 2003. However, a proactive fleet management program and structural repairs have ensured that it will continue to be operationally relevant well into the 2020s. The Canada First Defence Strategy provides for the replacement of Canada's CF-18 fleet with 65 next generation fighter aircraft.

Buying major defence equipment is a complex and unique activity, given the few suppliers and products and the complex nature of advanced weapon systems. Typically, up-front research and development investments are required to produce military equipment for testing and evaluation, and some of the equipment is eventually deemed as ineffective or unaffordable. Major defence purchases also require careful consideration since it is common to operate a fleet for 40 to 60 years and the costs to acquire, maintain, and operate a fleet are significant.

Buying major defence equipment is subject to decision-making and project management processes that aim to ensure that decisions are well-founded, projects are managed effectively, and goods and services are acquired in a way that enhances supplier access, competition and fairness. In the case of defence equipment, the following departments are involved: the Department of National Defence (DND) and the Canadian Armed Forces (CAF), Industry Canada (IC), Public Works and Government Services Canada (PWGSC), Treasury Board Secretariat (TBS), the Department of Finance and the Privy Council Office (PCO).

The accountabilities for acquiring new equipment are shared between the Minister of National Defence, the Minister of Public Works and Government Services, and the Minister of Industry. These separate accountabilities help ensure that three complementary objectives of the Government of Canada are met: getting the military the equipment they need while ensuring best-value for taxpayers and maximizing economic benefits to Canadian industry.

The military is expected to perform a variety of roles in a range of challenging environments which are often unique to Canada. Major defence equipment is therefore often built for specific purposes and is not always available “off-the-shelf”, as is the case with more common supplies. At the same time, it is not unusual for the base model of a weapon system to be common between multiple users, with only minor differences based on the unique need or circumstance of each user.

One option available to Canada is to pursue partnerships with countries looking to acquire similar equipment. This is sometimes done through developmental programs that are managed through Memoranda of Understanding (MOU) between Canada and another country. DND participation in developmental programs provides a mechanism for ensuring that Canada has options so that it can acquire the goods and services that it needs, while at the same time ensuring other benefits. Recognizing the challenges of working in partnerships where other countries pursue their own unique interests, multinational developmental programs can also be beneficial to Canada for a number of reasons. First, they give Canada access to the latest technology that may otherwise be unavailable due to our smaller number of suppliers relative to other developed countries. Second, developmental programs that involve multiple partners and large volumes help achieve economies of scale. Under this model, the cost to research, develop and test the product is typically shared between partners and is relative to the size of each partner in the Program. Finally, participation in developmental programs sometimes provides the opportunity for Canadian industry to secure industrial benefits that would otherwise be unavailable. An example of such partnerships is the Sea Sparrow anti-aircraft and anti-missile weapon system. Canada's participation in the Sea Sparrow missile development program provided the CAF with advanced technology that would have otherwise been unavailable, and ensured Canadian interoperability within NATO.

The Joint Strike Fighter Program

Since 1997, Canada has been a partner in the Joint Strike Fighter (JSF) Program. Since that time, Canada has signed three consecutive MOU's to ensure continued participation in the Program:

• Concept Demonstration (1997 to 2001);
• System Development and Demonstration (2001 to 2018); and
• Production, Sustainment, and Follow-on Development (2006 to 2051).

Led by the United States and with eight international partners, the JSF is undertaking the concurrent design, development and manufacturing of approximately 3,100 Joint Strike Fighter aircraft, otherwise known as the F-35. Three variants of the aircraft will be produced: conventional takeoff and landing; a carrier version; and a short takeoff/vertical landing version. The JSF Program will eventually also include a long-term sustainment program.

The JSF Program was conceived to be a new model for development and acquisition of military equipment and has the following features, some of which are unique:

• concurrent development, testing and aircraft production;
• the ability of partner nations to secure contracts for the production and sustainment over the lifetime of all aircraft produced;
• the same purchase price for all JSF partners;
• input into aircraft requirements and access to technical data only granted to partners;
• a global sustainment setup for all partners for all aircraft; and
• a new approach to industrial benefits.

Under the terms of the third MOU, the Government of Canada makes an annual financial contribution to the Program. Participation in the 2006 MOU also required Canada to provide a notional number of aircraft and a delivery timeline.

Over time, the emphasis of the JSF Program moved from aircraft development to production. Early participation in the JSF Program presented Canada with a number of challenges from a procurement perspective. The JSF Program model meant that Canada was subject to the impact of decisions made by all partners, such as those relating to technical specifications, timelines and program management. In addition, the JSF Program model meant that developmental activities were taking place and procurement decisions were required at the same time, posing challenges with respect to the roles and responsibilities of departments. Under a partnership model such as the JSF, departments within the Government of Canada must effectively coordinate activities towards a shared objective while respecting separate accountabilities.

Samson's Recommendations

Recognizing the unique nature of the JSF Program and the context of military procurement, the Government commissioned a third party to review the acquisition process to help determine lessons learned for acquisitions of a similar nature moving forward. Samson's review of the acquisition process to replace Canada's CF-18 fleet provided recommendations and highlights lessons learned along three broad themes:

1. MOU involvement and project management;
2. roles and responsibilities between government departments; and,
3. enhancing oversight and the challenge function.

The Government has considered Samson's recommendations and commits to changes aimed at learning from the Joint Strike Fighter Program experience to improve acquisitions of a similar nature moving forward.

1) MOU Involvement and Project Management

The project to replace Canada's CF-18 fleet was put in place while Canada was already participating in the JSF Program through the use of MOUs. Although the two were closely related, they were separate activities. Samson observed that these two activities were not aligned and that the options analysis for the project to replace the CF-18 fleet should have been completed to provide the support needed to sign the Production, Sustainment and Follow-on Development MOU in 2006. The requirement for Canada to provide a notional production schedule through the 2006 MOU signalled the possible intent to purchase aircraft and resulted in senior decision-makers taking steps to keep that option open by making annual payments for continued participation in the JSF Program during the options analysis stage of the project.

It is reasonable to expect that future military acquisitions for complex projects may follow a similar partnership model, given the large up-front costs, long lead-times and limited suppliers, as well as potential similar baseline requirements between multiple countries. These partnerships may pose challenges to the current expectations for how the government manages projects and the accountabilities of respective departments.

Government policies, guidelines and regulations set out the broad expectations to departments with respect to project planning and the acquisition cycle. The objective of Treasury Board policies, guidelines and regulations for asset management is to provide direction to departments while also ensuring that Deputy Heads have sufficient flexibility to manage resources, based on their unique needs or operating environment. Samson's review indicates that the existing policy framework is adequate for military acquisitions which follow DND's standard project life cycle. DND has a number of supplementary policies and regulations that are specific to its own operating circumstances. DND policies and regulations both align with Treasury Board policies and allow the department to respond to opportunities related to capital projects. Samson indicates that there is little policy direction covering participation in an international initiative such as the JSF Program that could lead to a potential acquisition.

• Moving forward, DND will ensure that the signing of MOUs with production components is done in conjunction with the project planning cycle.

Samson's review also indicates that similar projects would benefit from early and appropriate project management involvement. DND will continue to ensure that adequate project management capability is assigned to the project early in the process.

• Moving forward for acquisitions of a similar nature, DND will ensure that personnel with project management experience are assigned to the project sponsor during the identification stage and will be augmented until the project reaches the definition stage at a size and rate that is commensurate with the size, scope and complexity of the project.

Ensuring effective project management is critical to successful military procurement. As a result, existing policies and guidelines will be reviewed to ensure that the project management expectations are clear when there are related programs of a developmental nature. The current framework for military acquisitions is sufficient and the proper checks and balances are currently in place; however, guiding principles will ensure early involvement of PWGSC, and all implicated departments, in MOUs with production components prior to procurement decisions or activities.

• Treasury Board Secretariat is working with National Defence to update guidelines on the use of MOUs for the purpose of future acquisitions.

2) Roles and Responsibilities

The roles and responsibilities of decision makers for military acquisitions are outlined in government laws, policies and guidelines. Samson observed that there is dispersed accountability and responsibility for certain steps within the acquisition process and that this was more acute in the CF-18 replacement because of the unique nature of the JSF Program. The process to replace Canada's CF-18 fleet highlights the importance of informing key stakeholders early during the acquisition process to ensure that project management activities are coordinated and well-planned. The use of multinational MOUs covering both development and production components may continue to be used moving forward. When similar MOUs are used in the future, there may be opportunities to further define the roles and responsibilities of key stakeholders.

• Existing policies will be reviewed to clarify the roles and responsibilities of key stakeholders in one document to support officials in leading acquisitions of a similar nature going forward.

3) Oversight and Challenge Function

When pursuing new acquisitions, it is important to consider all available options. Senior decision makers need sufficient information to ensure that the procurement strategies being proposed are comprehensive and rigorous. Furthermore, the procurement strategy must appropriately balance three objectives: ensuring the military obtains the right equipment, value for money and maximizing economic benefits to Canadian industry.

Recent experience with military procurement has demonstrated the benefits of enhancing the challenge function through external oversight and regular industry engagement. This ensures that the objectives are appropriately balanced. Both early industry engagement and external review by relevant subject matter experts can help ensure that the Statement of Operational Requirement is objective and in turn enhances PWGSC's ability to assess proposed procurement strategies. Early engagement has the added benefit of ensuring that the acquisition process is open and transparent, which further supports better results for decision makers, industry stakeholders and Canadians.

• Moving forward, the development of the Statement of Operational Requirement for acquisitions of a similar nature will include external oversight and industry engagement.

Conclusion

In support of the Seven-Point Plan put in place to address shortcomings in the acquisition process identified by the Auditor General, Samson and Associates was contracted to review the process, draw lessons learned and make recommendations for the future. In its report, Samson notes that the issues identified by the Auditor General are being addressed through the implementation of the Seven-Point Plan. The Government is committed to acting on the lessons learned from this independent review. The changes proposed to policies and practices should ensure that future acquisition processes of a similar nature effectively achieve the Government's objectives in a manner that is consistent with Government policies and procedures.