Canada: Aerospace Review's Report: Recommendations On Export And Domestic Controls And Industrial Regional Benefits Policies

On November 29, 2012, the Honourable David Emerson released the Aerospace Review's report (the "Report"), a set of two volumes entitled Beyond the Horizon: Canada's Interests and Future in Aerospace and Reaching Higher: Canada's Interests and Future in Space.¹

The Report was mandated to produce fiscally-neutral recommendations on how federal policies and programs can be improved to help maximize the competitiveness of Canada's aerospace sector. In particular, the Report acknowledges that the aerospace industry is facing a critical juncture and that there is an urgent need for government, industry, academia and unions to adapt to the rapidly changing and highly competitive global environment.² The Report states that Canada's aerospace policies and programs must be assessed to reflect the international competition Canada faces. Today, China, Russia, India as well as other rising powers in Asia, in the Middle East, in Latin America and in Africa have specific strategic agendas and are eager to invest in building their aerospace industries.³

Among other strategic recommendations to improve the Canadian aerospace industry's competitiveness, the Report makes two sets of recommendations that may lead to legal and regulatory changes in the near future and will impact Canadian procurement processes. These sets of recommendations address the export and domestic controls regimes⁴ and the Canadian Industrial Regional Benefits (IRBs) policy⁵ and are summarized below.

The Report recommends that the government review export and domestic control regimes to ensure that they are not unnecessarily restrictive and that export permits are issued expeditiously.

The purpose of export and domestic controls is to ensure that sensitive goods and technology do not end up in the hands of countries or organizations that might use them in ways detrimental to national security or global peace and stability⁶ Some of these controls have been put in place in order to satisfy the United States' concern regarding the unauthorized transfer of items governed by the International Traffic in Arms Regulations (ITAR). The Report mentions that Canada's interpretation of export and domestic controls "may be unduly sweeping and rigid, even going further, in some instances, than is typical in Washington."⁷ Consequently, Canadian export and domestic control policies must be updated to keep up with the new players.⁸

The Report makes the following specific recommendations:

• That the Government of Canada revise the list of controlled goods and technology to ensure that trade in non-sensitive-technology is not unnecessarily restricted due to broad and inclusive definitions.
• That general export permits and permits that allow for sales to multiple rather than individual countries be used wherever feasible.
• That the government encourage the United States to continue reviewing its ITAR and export control regimes.

The first recommendation is consistent with one of the seven core recommendations submitted by the Canadian Association of Defence and Security Industries (CADSI) which describes the need to address the "excessively restrictive control of Controlled Goods."⁹ CADSI notes that Canada's Controlled Goods Program (CGP) was introduced in 2001 to address the US Government's request to protect goods and technology listed on the US Munitions List (USML). However, the Canadian list of "Controlled Goods" has remained static over the past 12 years, and now includes items that are no longer covered by the USML. The inconsistency of the two lists creates a situation that disadvantages Canadian companies compared to US-resident companies. It is therefore essential for the competitiveness of the Canadian industries that this situation be corrected.

The Report recommends that, when the government seeks to purchase aircraft and aerospace-related equipment, each bidder be required to provide a detailed industrial and technological benefits plan as an integral part of its proposal, and that these plans be given weight in the selection of the successful bid.

The Report suggests that the current IRBs policy, which depends upon firms that win government defence contracts to spend sums equal to the value of the contract in Canada, is ineffective.¹⁰ The Canadian IRBs policy has been greatly debated for several reasons, including its inconsistent implementation. Although the foreign manufacturers' and vendors' investment obligations are established at the beginning of the procurement sale contract, it often remains unclear how these obligations will be carried out. Consequently, contractors eventually make commitments to other countries, and their obligations to Canada become increasingly difficult to enforce.¹¹

The current IRBs policy includes a post-sale verification process as well as performance guarantees and contractual penalties. However, with insufficient clarity as to how the investment obligations should be satisfied at an earlier stage, the verification process can prove to be lengthy and problematic. Therefore, the Government of Canada must reassess its approach to procurement-based industrial benefits. The Report recommends that the Canadian IRBs policy be reviewed and require that each bidder provide a post-sale industrial and technological benefits plan as an integral part of their proposal. These plans would subsequently be given weight in the selection of the successful bid.¹²

The National Shipbuilding Procurement Strategy, which aims at renewing the marine industry in Canada, is a great example of a different approach to implementing the IRBs policy. This approach will involve extensive bidder consultation which will in turn shape the selection process, the requirements and the evaluation stage.¹³ The marine industry will not only benefit from the investment obligations, but Canadian companies in this sector and related sectors will also be recognized. A similar approach should be adopted for procurement processes for aircrafts and aerospace-related equipment.

The Report has been well received by the industry to date.¹⁴ The recommendations appear to reflect a certain consensus with respect to identified areas of improvement. Aerospace companies and key players will support the implementation of the recommendations. Should the Government of Canada fail to respond and adapt to the current changes in global circumstances, this will result in a loss of significant opportunities and a diminished share in the global market for our domestic industry. For that reason, changes in the export and domestic controls regime and in IRBs are to be expected in the near future and should be closely monitored.

Footnotes

1. Aerospace Review, vol. 1: Beyond the Horizon: Canada's Interests and Future in Aerospace and vol. 2: Future in Aerospace and Reaching Higher: Canada's Interests and Future in Space (Ottawa: Public Works and Government Services Canada, 2012)

2. Ibid., vol. 1, at p 1.

3. Ibid. at p 17.

4. Ibid. at p 44.

5. Ibid. at p 51.

6. Ibid. at p 44.

7. Ibid. at p 45.

8. Ibid. at p 39.

9. Canadian Association of Defence and Security Industries (CADSI), Submission of the Canadian Association of Defence and Security Industries to the Aerospace Review, CADSI at p 6.

10. Aerospace Review, supra note 1 at p 49.

11. Ibid. at p 51.

12. Ibid.

13. Shipbuilding & Industrial Marine Industry, National Shipbuilding Procurement Strategy, Industry Canada.

14. See Aerospace Industries Association of Canada (AIAC), Aerospace Industries Association of Canada welcomes Aerospace Review findings, AIAC.

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