Canadian aerospace industry welcomes 2013 Budget initiatives

Canada’s aerospace sector came away from the 2013 Federal Budget with more than $1 billion in cash and the Conservative government’s support for many of the recommendations contained in last year’s Aerospace Review panel, chaired by former Industry Minister David Emerson.

And, while the Department of National Defence struggles with deep cuts to its capital and operational budget, defence contractors got reassurance that on procurement programs, they’ll be given greater consideration. The government is looking at implementing other recommendations from another recent report spearheaded by Tom Jenkins, which examined supporting Canadian jobs and industry by maximizing military procurement.

We are also supporting Canadian manufacturers through important investments in key sectors like aerospace, forestry and military procurement, Finance Minister Jim Flaherty said as he released his eighth federal budget. With respect to military procurement, Canadian companies will be part of any plan to build equipment for our forces.

The initiatives were welcomed by Aerospace Industries Association of Canada (AIAC) President and CEO Jim Quick, who called the budget measures an excellent short-term response to the Aerospace Review report.

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Quick, whose organization represents about 700 aerospace companies in Canada, pledged that industry is keen to play its part by making strategic technology investments and creating even more highly skilled jobs for Canadians and that government support and programs are critical to making this happen.

One of the new aerospace initiatives in the budget was the creation of an Aerospace Technology Demonstration Program. The program will kick off in 2014 with $110 million over four years, with $55 million annually after that. The demonstrator program will provide a platform for different industry players to come together, using researchers at universities and colleges, to accelerate large-scale projects with good commercialization potential. The Demonstrator Program will provide access to simulation trials, systems integration testing and refinement activities. Emerson had asked for funding to be set at $45 million a year. The good news is that the program will eventually reach $55 million a year, but that will be on a gradual ramp-up. The first actual money for the program doesn’t flow until 2014-2015, and is only $11 million to start. And, when it hits its stride, $20 million a year will be redirected from the Strategic Aerospace and Defence Initiative (next point.)

The big money is going into the Strategic Aerospace and Defence Initiative (SADI). This program was launched in 2007 to fund research and innovation initiatives and research collaborations. Since then, more than $800 million has been committed to new initiatives. The budget extends SADI funding over the next five years with another $1 billion, while acknowledging that the program will undergo a number of changes recommended by the Emerson Aerospace Review to make it more effective, including better integration of post-secondary institutions in research collaborations.

On the surface that looks like a lot of new money, and in terms of meeting Emerson’s recommendation for stable funding, it is. When SADI was created in 2007, the plan was to invest $900 million over five years, and that was to peak at $225 million in 2012. As of this year, out of the $826 million earmarked for projects, only $411 million has actually been disbursed. At an average of $200 million a year over the next five years, SADI funding is actually dropping by 11 per cent a year from its peak. When the $20 million a year redirected to the Technology Demonstrator program kicks in, that will result in a 20 per cent cut to annual SADI funding.

Depending on the region of the country aerospace companies are in, they’ll also be able to apply for other funding aimed at helping manufacturing recover, such as the Federal Economic Development Agency for Southern Ontario, also known as FED-DEV, which got $920 million over five years to support a more productive, diversified manufacturing sector.

Emerson’s aerospace review took place throughout much of 2012, and undertook a comprehensive look at Canada’s aerospace and space sectors, with an eye to improving competitiveness and access for Canadian companies to global aerospace supply lines. The review stemmed from a government commitment in Federal Budget 2011, and the results have clearly guided many of this year’s announced aerospace-related budget measures.

Other Emerson recommendations translating into budget action include the launch of Industry Canada-led consultations into establishing a National Aerospace Research and Technology Network. The consultations will determine strategic technology areas which the network would support through collaborative research and development, bringing together industry, colleges and universities and government labs. The government expects to commence consultations later this year.

The cost of product certification may also be going up, an idea stemming from Emerson as a way to ensure that industry gets timely certification of an increasing number of aerospace products. The government said Transport Canada gets 1,500 applications for product certification annually and is constrained by budget, as only a small portion of the fees are covered by industry. It said in the budget that it will seriously look at Emerson’s recommendation that companies pay the full cost of certification by Transport Canada.

Emerson’s second volume on the space sector received a less concrete reception in the budget, with the government only saying with respect to policies and programs specific to the space sector … (the) government is currently examining these recommendations carefully.

Budget 2013 also didn’t provide any firm defence acquisition initiatives outside of those identified above. However, the Conservatives used the budget documents to signal that changes lie ahead in how the government will do military procurement, with Canadian companies appearing to be the beneficiaries. Their hands are clearly being guided on this by Tom Jenkins, CEO of OpenText Corp., who led a government procurement review and released a report in February entitled Canada First: Leveraging Defence Procurement Through Key Industrial Capabilities.

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In the budget, the government said it endorses Mr. Jenkins’ proposal to use key industrial capabilities as a means of fully leveraging defence procurement projects to support economic opportunities for Canadians.

The Jenkins endorsement was cheered by the Canadian Association of Defence and Security Industries (CADSI). “The government is boldly seizing the opportunity this spending represents to create jobs, especially high-end manufacturing jobs, in the Canadian defence and security sector, said CADSI President Tim Page. “The government’s commitment in the budget recognizes that it is in the national interest to have a strong, innovative, domestic defence-related manufacturing base that produces leading edge equipment, generates high-value exports, and supports knowledge-based jobs for Canadians.”

The key industrial capabilities or KICs (pronounced Kicks) are areas where Canada’s defence sector would result in significant gains in innovation and competitiveness with long-term job growth potential. Jenkins said Canada needs to promote export opportunities for domestic companies in these areas, and reform the procurement process to ensure Canadian companies stand to benefit from major military purchases. The $35 billion shipbuilding procurement process will be used as a template for future procurements to grow these capabilities.

The government said it will expedite the analysis of the recommendations made by Jenkins in the next couple of months, to impact both pending procurements and the longer-term procurement process.

One recommendation both Emerson and Jenkins made and which hasn’t been acted on yet is that in-service support programs – the lucrative multi-decade maintenance programs for defence acquisitions – be directed to Canadian companies. That may still come down the road in addition to a number of other recommendations that the aerospace and defence sectors hope will still be fulfilled.

Stuart McCarthy is a vice president at Bluesky Strategy Group Inc., an Ottawa-based public affairs firm. He is a consultant with a number of clients in the aerospace and defence sectors.

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