No kidding. If the report struck such a chord with the defence industry, it may be because the defence industry more or less wrote it. Two of the panel’s five members are industry executives (a third is a retired army officer); their report, based on “extensive consultations” with CADSI, amounts to a large-sized cheque to domestic arms makers.
It is difficult to adequately express what a train wreck this report is. The panel, chaired by the technology industry executive Tom Jenkins, looks at the recent history of Canadian military procurement — politicized, crawling with lobbyists, beset by infighting over “industrial and regional benefits,” and generally concerned with just about everything except getting the best equipment for the least money — and diagnoses the problem as a shortage of political and bureaucratic meddling, an insufficiency of protectionism and pork-barreling.
Procurement policy, they write, has been obsessed with getting “value for money,” rather than using defence contracts as “leverage” to spur investment and job creation in Canada. The decades-long practise of demanding foreign defence contractors spend a dollar in Canada for every dollar they receive, to the tune of some $80-billion by 2027, is here dismissed as overly “market-driven,” inasmuch as the contractors get to choose which Canadian firms they work with.
That would cease if the panel has its way. Rather, contractors would be instructed where and how to spend the money the government had extracted from them, with a view to promoting a set of “Key Industrial Capabilities” (KICs) the government had selected. Bidders on defence contracts would be required to demonstrate in advance how their bids “add to Canada’s economy,” according to a shopping list of criteria, from technology transfer to global product mandates.
The military’s “operational requirements” would be just one factor among three in the government’s assessment, alongside the “market opportunity” and “innovation” perspectives. So whereas a “value for money” approach might suggest buying from a foreign manufacturer, if that were the lowest-cost bid, the panel sees this as just one of a “portfolio” of possibilities that could include developing and building a new one from scratch.
Amid all the pseudo-economic gobbledygook about “moving up the value chain” and “developing niche solutions” there is only the barest acknowledgement that what this amounts to is overpaying domestic suppliers, guaranteeing them a market they could not win in open competition. The report concedes at one point “there may be extra risk to supporting a home-based supplier of a sophisticated product, or some price premium relative to lowest cost globally” — one of just three references to “price” in the whole document.
The panel appears to believe Canada would be in a strong bargaining position with foreign contractors, given the deep cuts to come in U.S. and European defence spending. But these are companies in a globally competitive market, with shareholders to answer to: they are not in a position to subsidize the government of Canada’s ambitions out of dividends. Rather, the costs of the subsidy would be borne by the taxpayer.
Why on earth would we want to do this? Given the fiscal pressures we are already facing due to the aging population, why would we pay a nickel more than we had to for armaments? The report offers a number of rationales: because it’s there (“defence-related industries are unique in that governments are essentially the only customers”); because others do it (“many of the most highly industrialized countries have … strategies that promote their defence-related industries”); but mostly because it’s good for the defence industry.
The report is at pains to emphasize how crucially the industry depends on government, how many successful Canadian companies “got their start with a Department of National Defence contract.” I don’t doubt this so. It does not quite follow that every company that gets a DND contract will be successful. Neither does it explain why it should be government policy to promote the defence industry — why the national interest should be equated with the industry’s interests.
I’m going to let you in on a little secret here: there are other industries in Canada besides the defence industry. The subsidies government provides aren’t just a cost to the taxpayer, but to all those other industries: the capital and labour diverted into making arms at uncompetitive prices are capital and labour unavailable for other purposes. This basic insight of economics, opportunity cost — the growth that doesn’t occur elsewhere, the jobs that are never created, because resources are committed in one place and not the other — is nowhere present in the report.
Oh, there’s a bit of handwaving about defence industries being particularly effective “growth promoters,” on account of their being “technologically advanced and thus rich in opportunities for innovation and the development of leading-edge human skills.” But the report offers no evidence that they are superior in this respect to other technologically advanced industries, nor is there much reason to believe the people who brought you the F-35 are especially adept at assessing these sorts of tradeoffs. As opposed, say, to shareholders.
This is more than just a bad report. With some $48-billion in equipment purchases in the pipeline, most of it in the next three years — part of the government’s 20-year, $240-billion procurement plan — the consequences of following the panel’s recommendations would be catastrophic. The report calls it a “once-in-a-lifetime opportunity.” Indeed. For once in their lives, politicians should take the opportunity to say no.
Original Article
Source: canada.com
Author: Andrew Coyne
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