Defence offsets exist around the world and vary from country to country. They are meant to bring and maintain industrial growth within a local economy through leveraging defence procurements.
In Canada, we have the Industrial Regional Benefits (IRB) program and the new Industrial Technological Benefits (ITB) policy, which aim to promote greater industrial participation through government defence procurements. Essentially, the offset policy works like this: when the Canadian government buys ‘big ticket’ items from a foreign contractor, that contractor then has a legal obligation to spend the equal value of the contract price back in the Canadian economy. There are a series of rules associated with the fulfillment of these obligations and various ways in which contractors can meet the requirements.
The change from the old Industrial and Regional Benefits to the new Industrial and Technological Benefits policy stems from the release of the Defence Procurement Strategy (DPS) in February of 2014. The new policy aims at prioritizing the long term growth of Canada’s defence sector, the growth of Canadian industry through engaging suppliers from across the country with specific focus on SMEs, encouraging innovation though R&D efforts, and increasing exports from Canadian firms.
Under this new policy, the major change is that bidders will now be assessed not only on the price and technical capabilities of their product but also on the economic benefit that will be delivered to Canada as a result of the contract – their Value Proposition. The Value Proposition describes how the contractor plans on bringing benefit to Canada and generally includes a company business plan, ITB management plan, regional development plan and SME plan, as well as an international export plan, and direct and indirect transaction commitments.
The Value Proposition is no longer a pass or fail system and bidder’s submissions are weighted and rated in their evaluation. Bids are evaluated and given a score based on the bidders ability to achieve the following:
Encourage Defence Sector Growth – Bidders are awarded points for engaging Canadian companies in direct work related to the bid. They can also be awarded points for indirect work in areas where the capabilities directly related to the contract in Canada are in short supply.
Canadian Supplier Development – Bidders can be awarded points for working with and investing in Canadian suppliers to increase their competitiveness. These opportunities do not have to be within the defence sector and points are awarded to encourage bidders to include Canadian suppliers across different lines of business.
Research and Technology Development – Points are awarded to incentivize bidders to encourage innovation by supporting R&D efforts and positioning Canadian companies to gain from the following commercialization of those efforts. Additional points are awarded for working with Canadian colleges and universities.
- Exports – If a bidder is required to include an export plan as a part of their Value Proposition, they will be awarded points based on their ability to leverage the future export potential of a product. This potential can be within the defence sector, or within either the prime or supplier’s other lines of business.
Although the policy has changed recently, both the IRB and ITB programs emphasize Canadian Content – that the value offset in Canada must equal 100% Canadian Content. Thus, your company’s Canadian content value is still very important to being included on prime contractor’s bids. For more information on Canadian Content, you can view our pages Understanding Canadian Content, and Calculating your Canadian Content Value (CCV).
All upcoming government procurements and those awarded after 2014 in Canada that fall under the National Security Exemption (NSE), and are worth over $100M (CDN) will be subject to the new ITB requirements. Contracts of smaller value, between $20M and $100M, will be reviewed for the appropriate application of a Value Proposition.
So why does the new ITB policy matter to your company?
As a part of the Value Proposition, bidders are required to identify 30% of their contract value up front in the bidding process. However, from what we have seen so far at OMX, this 30% value is a minimum starting point and many prime contractors are identifying much closer to 70 or 80% of their bid price up front, meaning that much of the work is assigned by the time the bid is submitted.
The process of identifying Canadian suppliers begins long before the official RFP is released in preparation for putting together the Value Proposition. As a supplier, this requirement means that you need to start getting noticed and building relationships with primes early on if you would like to be included in the opportunity.
Additionally, for most of these contracts, at least 15% of the ITB transactions must involve Canadian SMEs. If your company is a Canadian SME, you have an opportunity to leverage your position as a Canadian small business to gain a portion of these large contracts.
Due to the weighted and rated requirements of the Value Proposition, positioning your company to be included on a bid is more than just selling your products and services to the prime. It is also about marketing your firm as a good ITB recipient that could help the prime maximize points. For instance, how they could use your company to take advantage of investments, R&D efforts, and supplier development activities. As a prime, you will need to ensure that you have engaged Canadian industry and leveraged your partnerships to maximize the credits towards your obligation.
New weighted and rated Value Proposition
ITB commitments are legal obligations and there are stronger punishments for not following through on obligations
Suppliers need to build relationships with Prime contractors early on in the bidding process
Suppliers need to market their company as a valuable ITB recipient, not just the provider of a product or service
Less focus on regional development and an increased focus on developing high technologies and creating jobs