OTTAWA — Foreign defense companies wanting to share in the billions of dollars in upcoming Canadian military equipment contracts have been told they must be willing to turn over intellectual property (IP) rights and help domestic firms make sales in international markets.

Canada is no longer willing to accept just any offsets in exchange for awarding a foreign company a major defense contract, government officials said. Work offered to Canadian firms as part of offsets associated with a winning bid must provide new technology or expertise to help those companies make international sales.

The changes in how Canada approaches defense procurement have been slowly put in place over the past year.

But Diane Finley, the minister in charge of procurement, says the ruling Conservative Party government will emphasize the new process as it unveils major equipment projects in the coming year. Those include the purchase of new fixed-wing search-and-rescue aircraft as well as a fleet of next-generation warships dubbed the Canadian Surface Combatant.

The aircraft project is worth CAN $3.1 billion (US $2.9 billion), while the surface combatant program is valued at $26 billion. The vessels will replace the Royal Canadian Navy's Iroquois-class destroyers and Halifax-class frigates.

In the case of the Canadian Surface Combatant, Canada has already identified specialty areas where its companies can play a major role, said Finley, minister of Public Works and Government Services Canada. Those include sonar, acoustics and anti-submarine sensor systems, navigation and communications systems, and maintenance, repair and overhaul, among other areas.

Finley also took her message to defense company executives attending the CANSEC trade show May 28.

"Companies that demonstrate a willingness to invest in Canada through the transfer of intellectual property, the creation of skilled jobs, innovation-related activities and export and international business development will now have a competitive advantage when bids are evaluated," she said.

Foreign companies intending to bid on upcoming Canadian programs are already preparing to deal with the new process.

One of the first was France's Dassault Aviation, which last year promised significant offsets that would meet the new policy if Canada purchased its Rafale fighter jet as a replacement for the Royal Canadian Air Force's current fleet of CF-18s.

Dassault has promised a transfer of intellectual property associated with the aircraft. That would include software codes needed to upgrade the fighter's computer system throughout its service life. In addition, Canadian firms would gain work building major components on the Rafale, noted Yves Robins, a senior vice president with Dassault.

BAE Systems is intendsing to bid on the Canadian Surface Combatant with an offer based on the Type 26 Global Combat Ship design. Anne Healey, BAE's general manager of group business development for Canada, noted the company has a successful track record of bringing Canadian firms into its global supply chain. She also noted that over the past five years, BAE has worked with 270 Canadian firms and invested more than $250 million with domestic companies.

Pablo Molina, head of Airbus Defence and Space (Military Aircraft) Canada, which will bid on the fixed-wing search-and-rescue aircraft project, said the transfer of intellectual property and technology "is one of our main pitches in our proposal."

"We are ready to transfer the necessary rights to Canada to ensure that our aircraft will operate in the best possible manner throughout the contractual time frame, and of course the companies who are part of our team will be part of our future successes of our platform" in international markets, he explained.

Steve Lucas, the former head of the Canadian Air Force who is now an adviser for Alenia, said the Canadian push for such value-added offsets makes sense. He noted it is designed to ensure Canadian firms maintain their lead in aerospace and defense technology.

Alenia will also be bidding on the fixed-wing search-and-rescue aircraft project, offering its C-27J. Lucas said in that case, most of the intellectual property transferred to Canada is expected to come during the long-term in-service support contract for the planes.

That would allow Canadian firms to maintain the search-and-rescue aircraft on their own.

Lucas also noted that Alenia will try to boost its bid with value added offsets; it is using a flight management system made by Esterline CMC of Saint-Laurent, Quebec, on all C-27Js worldwide. That would help meet the government's requirements to foster exports of Canadian-made equipment.

Concerns about industrial benefits from defense procurements have been building for years among Canadian companies.

In January 2009, the Aerospace Industries Association of Canada called for an independent review of the defense procurement system amid mounting concerns over the lack of work for domestic companies on multibillion-dollar military aircraft purchases. At the time Canada had ordered new strategic and tactical transport aircraft.

In November 2012, former Conservative Party government Cabinet Minister David Emerson produced a report calling on the government to push for more relevant offset work if it wanted to shore up the country's military industrial base and create jobs.

Emerson, who was asked by the government to review the state of the nation's aerospace industry, found that domestic firms over a number of years had not been seeing quality offsets, known in Canada as industrial regional benefits.

Email: dpugliese@defensenews.com

David Pugliese is the Canada correspondent for Defense News.

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