Canada’s Industrial and RegionalBenefits Policy

3rd International Seminar on Off-Sets and Industrial Cooperation

May 8, 2007

Leah ClarkDirector General, Aerospace, Defence & Marine Branch

Industry Canada

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Industry Canada – Mandate

• Industry Canada’s mandate is to help make Canadians more productive and competitive in the knowledge-based economy, thus improving the standard of living and quality of life in Canada.

• Strategic Objectives:- a fair, efficient and competitive marketplace;- an innovative economy; and,- competitive industry and sustainable communities.

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Canada’s aerospace and defence industry is an important economic driver…

• €14.4 billion in 2005: - €1.59 billion in space, - €2.98 billion in defence

• Well-integrated into the global aerospace and defence industry, with 77% output exported

• Gross Domestic Product (GDP) of €6.1billion (5.2% of mfg. GDP) for aerospace and defence

• Over 400 firms with over 75,000 employees- 12,000 engineers & scientific employees,

20,000 technicians and technologists

• Major industrial R&D performer- €79.5 million in R&D spending in 2005,

13% of all Canadian industrial R&D

Canada’s Aerospace IndustrySales and Number of Jobs by Province, 2004

0

5

10

15

Quebec Ontario WesternProvinces

AtlanticProvinces

Bil

lio

ns

$ E

UR

O

0

10

20

30

Th

ou

san

ds

Revenues Employment

Source: Aerospace Industries Associations of Canada* AHSI Vertiflight Vol 52, No.1 – adjusted to civil turbine market share

22.8

14.4

12.1

2.7

Canada's Aerospace and Defence Industry

0

5

10

15

20

2000 2001 2002 2003 2004 2005

Bill

ion

s $

EU

RO

Export Sales Total Sales

Source: Aerospace Industries Association of Canada

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…and a Strong International Competitor.

• Ranks 5th in world aerospace sales and employment after US, UK, France, and Germany

• Ranks 3rd in world civil aircraft production after US and France

• Small domestic market, relatively modest defence and space programs

• Highly oriented to commercial markets- 80% of industry output for civil use, as

compared with 44% in the US

• Significant foreign ownership (40% of revenue versus 52% in manufacturing (1999))

- Several major foreign firms established in Canada

• Has 6% share of both global aerospace sales and employment

Regional Aircraft

Small gas turbine engines

Visual simulation equipment

New large aircraft landing gear

Global Leadership (% of global market share)

Aircraft environmental control systems

47%

34%

70%

60%

60%

Source: Aerospace Industries Associations of Canada* AHSI Vertiflight Vol 52, No.1 – adjusted to civil turbine market share

Civil Helicopters 23%*

Canada's Aerospace and Defence-Related Products (2005)

Source: Aerospace Industries Association of Canada

Other34%

Systems Integration

1%MRO10%

Aircraft Engines &

Parts8%

Avionics7%Space

5%

Training & Simulation

4%

Aircraft & Parts31%

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• Approved by Cabinet in 1986, the policy provides the framework for using federal procurement to lever long-term industrial and regional development

• Contractual commitments to place work in Canada as a result of successfully bidding a Canadian defence program. 100 percent of contract value.

• Mandatory for projects over C$100 million (€66.3 million) (Major Crown Projects), and discretionary in the C$2million - C$100 million (€1.3-66.3 million range).

Canada’s Industrial and Regional Benefits (IRB) Policy

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IRB Objectives

• Long-term industrial and regional development

- High quality and high technology

- Lasting economic value

- Provide opportunities and access to export markets for Canadian industry

- Expand Canadian company participation in global value chains

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What the Policy Does Not Do

• Compromise operational requirements

• Contravene international and nation agreements

• Force Prime Contractors into certain regions of Canada or to work with specific firms

• Focus exclusively on defence technologies, or development of defence industrial base

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Causality• Benefits must be brought about due to IRB obligation to Canada

- The work would not have been placed in Canada otherwise.

Incrementality• Must be NEW work in Canada

Timing• Benefits must be completed within the contract period Begins after release of

LOI or RFP and ends with final delivery.

Canadian Content Value• Only Canadian Content of work is counted towards the IRB obligation

- Only Canadian Labour and Canadian materials.• Benefits must be high tech and sustainable in nature.

- Same level of technology as the platform being procured by the Government.

IRB Eligibility Criteria

No: banking, trading, pooling, swapping (except in very special cases)

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Special Issues

• Technology list: may require a percentage of work to be done in specific technology areas key to Canada’s future

• Limited use of multipliers: up to 5 times where market cannot value transaction

• Limited use of Venture Capital funds: limited to small percentage (2.5-5%) of total

• Investment: only counted once sales materialize

• Mix of direct/indirect: will vary from project to project

• For In-service support: focus on high directs to ensure long-term service support is done in Canada

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Process - 1

• Industry Canada, develops strategies specific to each procurement project

• The IRB obligations are outlined in the initial contacts with industry, Letters of Interest and draft Requests for Proposal

• Bids by Canadian companies must also comply

• As part of each proposal, bidders are required to identify plans to achieve benefits equal to 100% of contract value, with plans for regions and small businesses

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Process - 2

• Industry Canada and provinces help bidders identify industry partners that make good business sense to them, across Canada, prior to bid submission

• There is no communication between the bidders and Industry Canada once the RFP is released

• IRB proposals are evaluated by a team led by Industry Canada; results are combined with technical (procuring department) and price factors (contracting department) in bid evaluation roll-up

• IRBs are a mandatory requirement, but they are not rated. Either pass or fail

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The Contract

• Contract award includes:- Specific IRB commitments- Annual reviews of achievements- Liquidated damages for non-compliance

• Annual reviews of achievements are performed by Industry Canada during the performance period.

- Prime Contractor reports achievements annually.- Industry Canada verifies achievements

• Substitutions allowed on approval of Industry Canada. Must be of equal or better quality, and in same designated region

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Current Projects

• Current portfolio - €6.6 Billion

• More than doubling between June 2006 and December 2007

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Sample Requirement: Tactical Airlift

Acquisition:

• 100% of contract value• 60% of business transactions identified up front• 50% in Aerospace and Defence industry• 30% in Key Technologies List• 15% designated for Small and Medium-sized Enterprises (250 employees

or less)• 10% with target of 15% or more in Quebec, West, Atlantic (regional

safeguard)

In-Service Support:

• 100% of contract value• 75% in direct transactions• 60% of business transactions identified up front• 15% designated for Small and Medium-sized Enterprises (250 employees

or less)

QUESTIONS?