- Attracting Investment in Canada
- Encouraging Prime Contractors to Increase Partnerships with SMEs
- Investment Framework Transactions
- Eligible Party
- Reducing Red Tape
- Incrementality and Causality Eligibility Criteria
- Compliance Monitoring
- Increasing Accountability and Transparency
A number of enhancements to the ITB Policy are being made to align the Policy more closely with the overarching goals of the Defence Procurement Strategy: deliver the right equipment and services to the Canadian Armed Forces, leverage economic benefit for Canada and streamline the procurement process.
The enhancements outlined below respond to a commitment made in the Value Proposition Guide to review the ITB Policy features and administrative processes that were carried over from the previous Industrial and Regional Benefits (IRB) Policy. The goal is to ensure that the ITB Policy leverages high-quality, long-term investments in Canada that support the growth of the defence sector and other sectors of the Canadian economy.
Industry engagement is a core principle of the Defence Procurement Strategy. Immediately following the release of the Value Proposition Guide in December 2014, Innovation, Science and Economic Development Canada launched consultations with members of the Canadian Association of Defence and Security Industries and the Aerospace Industries Association of Canada to identify workable measures that will maximize economic benefit to Canada from defence procurements.
The following enhancements are expected to attract earlier investment in Canada, encourage prime contractors to give more work to small and medium-sized companies (SMEs) across Canada, significantly reduce red tape, and increase the accountability and transparency of the IRB and ITB Policies.
Attracting Investment in Canada
Created in 2009, the banking policy allows companies to undertake business activities in Canada prior to a procurement and “bank” these investments for credit against their IRB/ITB obligations later, when they secure a defence contract. The goal is to encourage bidders to engage Canadian companies early and invest in Canada well ahead of securing a defence contract.
The banking policy also allows companies that achieve more than their contractual obligations and bank up to 10% of the overachievement for future credit. This encourages prime contractors to fulfil their obligations ahead of schedule and continue investing in Canadian suppliers with which they have successful relationships.
The following changes to the banking policy will significantly enhance the attractiveness of investing in Canada in advance of a contractual requirement and motivate prime contractors to extend successful business relationships with Canadian suppliers above and beyond their contractual requirements:
- The lifespan of a banked activity is extended from 5 to 10 years.
- Depreciation of a banked activity's value is eliminated.
- Contractors that wish to bank an overachievement (during the achievement period) are no longer subject to a 10% cap on the value of the overachievement.
- Companies are no longer required to identify at the outset which future procurement they wish to bank against.
- Annual reporting, verification and crediting will begin while activities are in the bank, instead of waiting until an activity has been withdrawn from the bank and applied to a project.
These changes are effective immediately and apply to past banked transactions under the IRB Policy and future transactions under the IRB and ITB Policies. As before, banked transactions may be used to fulfil up to 50% of a contractor's overall IRB/ITB obligation, thereby ensuring that at least one-half of a company's obligation comprises new investment commitments. Banking guidelines and information are available here.
Also created in 2009, the pooling policy allows companies to divide credit for large investments they make in Canada (investments over $100 million) against their IRB/ITB obligations related to more than one procurement contract. For example, a company is able to invest $100 million and apply $50 million to satisfy an ITB obligation on project A and $50 million to satisfy an ITB obligation on project B. When these investments do not scale perfectly to a particular procurement, companies are unsure that they will be fully credited for their investments in Canada.
The following changes to the pooling policy will encourage companies to make more large-scale, high-value investments in Canada.
- The minimum threshold for a pooled activity is reduced from $100 million to $50 million.
- All companies may access the pooling policy, whether or not they have submitted a Strategic Plan to Innovation, Science and Economic Development Canada.
- The portion of an eligible transaction (i.e. over $50 million) not immediately applied to an obligation may be banked and applied to one or more obligations when withdrawn.
The enhanced pooling policy is effective immediately and applies to new activities going forward under the IRB and ITB Policies. Pooling guidelines are available here.
Encouraging Prime Contractors to Increase Partnerships with SMEs
Investment Framework Transactions
The Investment Framework incentivizes prime contractors to invest in research and development as well as commercialization undertakings by SMEs in Canada by crediting their investments in SMEs at multiples of their face value.
Investments in SMEs will be encouraged at bid time through Value Propositions and yet are constrained after contract award through the imposition of cap equal to 5% of contract value for the purposes of awarding multiplied credits. In addition, costly third-party valuations of in-kind contributions and an unduly complex application process dis-incentivize this important activity.
The following changes will be made to ensure that the IRB/ITB Policies provide a clear and consistent incentive to prime contractors to enhance the participation of SMEs in their supply chains:
- The cap on investments in SMEs that qualify for multipliers under the Investment Framework is raised from 5% to 25% of contract value.
- Bidders will be permitted to submit Investment Framework transactions at bid time as part of their Value Propositions. Scoring will be consistent with the evaluation framework for Value Propositions identified in Requests for Proposals. Approved transactions will be multiplied after contract award at rates previously established in the Investment Framework.
- The valuation of in-kind contributions may be performed by a third-party or through other arrangements deemed acceptable to Innovation, Science and Economic Development Canada.
- The application process for the Investment Framework will be streamlined and simplified.
These changes are effective immediately and apply to new activities going forward under the IRB and ITB Policies. An Investment Framework guideline is available here.
Prime contractors are permitted to fulfill their obligations to undertake business activities in Canada equal to 100% of the value of contracts secured in partnership with their Tier 1 suppliers, parent corporation and related subsidiaries. In the case of Tier 1 suppliers with fewer than 500 employees, prime contractors must satisfy Innovation, Science and Economic Development Canada that the Canadian company is able to take on a portion of the obligation. There is no such requirement to demonstrate that a foreign Tier 1 SME is a capable donor.
With the introduction of the Value Proposition, there will be uncertainty at bid time over the Eligible Party status of smaller Canadian companies because the policy is not clear on what evidence to demonstrate that a company of this size is an eligible donor. This could have the effect of discouraging prime contractors from including smaller Canadian companies in their supply chains for the goods or services being procured.
The following change will ensure that the ITB Policy provides a clear and consistent incentive to prime contractors to enhance the participation of smaller Canadian companies in their supply chains.
- At time of bid, Eligible Party status will be granted to smaller Canadian companies (companies incorporated and doing business in Canada with fewer than 500 employees) if the company signs a certificate confirming that it understands its role as an Eligible Party and is able to take on this responsibility.
- After contract approval, prime contractors will continue to be required to demonstrate to Innovation, Science and Economic Development Canada that the smaller Canadian company has the capacity to undertake ITB obligations through certification or other means determined to be appropriate by the department.
This change is effective immediately and will apply to new activities going forward under the ITB Policy. A template of the new certificate will be published on the ITB website.
Reducing Red Tape
Incrementality and Causality Eligibility Criteria
All proposed business activities in Canada must meet four eligibility criteria in order to be credited against a contractor's IRB/ITB obligation. They must be undertaken during the achievement period by an Eligible Party, incremental (i.e new work in Canada) and causal (i.e. undertaken as a result of the IRB/ITB Policy).
Lack of certainty over how to demonstrate incrementality and causality results in a high administrative burden and slow approval process. Innovation, Science and Economic Development Canada will clarify the documentary evidence required to demonstrate that investments in Canada are incremental and causal.
The following changes will significantly reduce the administrative burden on companies, strengthen the evidence supporting these important decisions, and speed up the department's ability to review and award credits:
- Companies are now required to complete an incrementality checklist that clearly defines the circumstances under which investments are deemed to be incremental and the related evidence that must be provided.
- Companies will continue to be required to provide Innovation, Science and Economic Development Canada with a causality statement outlining the details and timelines of each proposed business activity and how these are linked to the IRB/ITB policy. In addition, a senior company official will now be required to certify that these investments are causal.
- Innovation, Science and Economic Development Canada retains the right to reject a transaction that does not meet eligibility criteria, with cause.
These changes are effective immediately and apply to new activities going forward under the IRB and ITB Policies. The incrementality checklist and causality certificate will be published on the IRB and ITB websites.
Contractors report annually to Innovation, Science and Economic Development Canada on their progress in meeting their IRB and ITB obligations. These reports include updates on specific investments in Canada which, upon verification by Innovation, Science and Economic Development Canada officials, are credited against outstanding IRB/ITB obligations.
Prime contractors, uncertain over the information required in annual reports, tend to provide more information than is required for the department to undertake due diligence. This is creating a high administrative burden and slowing the department's ability to complete the verification and awarding of credits in a timely manner.
Innovation, Science and Economic Development Canada increased staffing levels, developed new monitoring tools to track the timeliness of verification decision-making, and has significantly reduced the backlog of transactions awaiting verification. The following additional changes will eliminate unnecessary red tape and ensure that the department verifies new transactions in a timely manner:
- An electronic template for annual reporting is now available to prime contractors. It clarifies the information required, streamlines reporting and allows the department to automate record keeping.
- A service standard is now in place, requiring Innovation, Science and Economic Development Canada to undertake its due diligence in verifying transactions and awarding credits within six months of receiving annual reports and complete information on transactions.
- Individual transactions will be credited once verification is completed and no longer withheld until all transactions contained within an annual report are verified.
These changes are effective immediately and apply to new activity going forward under the IRB and ITB Policies. An annual reporting template will be made available on the IRB and ITB websites.
Increasing Accountability and Transparency
The department will report annually on companies' progress toward meeting their IRB and ITB obligations in a manner that respects commercially confidentiality. This will ensure that Canadians are more informed on the impact of the IRB and ITB programs and allow Canadian companies to more easily identify prime contractors that have yet to fulfill their obligations and that continue to explore partnerships and potential investments in Canada.
- Annual progress updates will be made available to the public on the size of prime contractor's IRB/ITB obligation, amount fulfilled, amount for which plans have been identified, outstanding obligation, and company contact information.
Public reporting will commence in fall 2015 once Innovation, Science and Economic Development Canada has fully cleared its verification backlog.
The Terms and Conditions of the ITB Policy have been adjusted to reflect these changes and will be included in future Requests for Proposals. In addition, Innovation, Science and Economic Development Canada is undertaking an administrative review of the Terms and Conditions to further streamline, clarify and simplify it and related documents. The department will post the updated version of the model terms and conditions on its website in 2016.
The ITB Policy is a powerful new investment attraction tool for Canada. The policy and administrative changes identified herein will further strengthen the program. In the spirit of continual improvement, Innovation, Science and Economic Development Canada welcomes ongoing feedback from industry stakeholders.
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