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Reforming Government Purchasing

Canadian Apparel Magazine recently published a detailed opinion piece by Hillwatch Principal Michael Teeter on why the apparel industry needs to take action now to reform Government Procurement.

The apparel industry needs to take action now!

By Michael Teeter

Throughout the world, the government procurement market is one market that is dedicated to domestic industry. For the most part, it nurtures the industry, helps it invest in new technologies and helps to develop industrial sectors that then sell product to the world. Despite the enormous investment needs of Canadian apparel manufacturing, the government apparel market is not sufficiently dedicated to Canadian production and investment. This is because the Canadian apparel industry appears not to care. The Canadian industry is not paying attention and is not investing in industry-government relations. With a little effort, this small investment now could payback for years to come.

The government procurement market is growing and dynamic. The new investments in Canada's military and para-military forces create tremendous opportunities to leverage government contracts for technology, growth and exports. At the same time as government is investing in new purchases, so too are the rules changing. Governments are seeking larger suppliers that take more of the integration risk. Because of these reforms, if the apparel industry does not take action NOW, this enormous opportunity could pass us by. What a loss this would be to Canadian manufacturing and Canadian apparel and design technology!

A change in the rules framework is necessary in order to take advantage of this important and growing market. The apparel industry needs to take action NOW. This paper addresses some of the things that need to be done.

The government purchasing environment today

Canadian governments are significant purchasers of apparel and related soft-goods. The customers and types of apparel purchased are many and varied. From the military to police forces, to penitentiary services, to parks and recreation employees, to customs officers, governments can be an important market for Canadian manufacturers.

Projections are that this market is growing and will continue to do so in the near future. The Canadian military is engaged in an active recruitment campaign as are many police forces. Government security roles and related functions are growing rapidly. Additionally, the types of apparel purchased by governments are changing. Technology and design are playing a larger role in clothing requirements, particularly for active military and police roles. As new technology and designs are developed and introduced, governments can play a catalytic role in research and development and the evolution of new products and new services for Canadian manufacturers. Not only can these new developments differentiate Canadian goods from imported products, but they can also create export opportunities. Leveraging government contracts for business development can be an important success factor for Canadian manufacturers.

Governments in Canada are reforming their procurement processes in an effort to drive costs out of the system. Increasingly, contracts are being consolidated and multi-year purchase agreements are being struck. This means that governments are relying on apparel "system integrators" to source the components, make up the garments, and supply the delivery and distribution systems (including the information technology to deliver effectively to thousands of people).

When contracts are consolidated, governments can lose control of decisions that used to be important — for example, decisions about where components and made up products are made. Additionally, consolidation means that contract sizes are enormous and can, in effect, "make or break" Canadian suppliers.

A good example of this is the Department of National Defence (DND) Consolidated Clothing Contract. This multi-year contract will be re-tendered in the next 12 months and it is expected to be valued in the hundreds of millions of dollars. With consolidation comes the potential for concentration of supply, thereby reducing opportunities for smaller companies or new entrants and enhancing the potential for low cost imports to penetrate a market that should be reserved for domestic manufacturing.

There is nothing inherently wrong with government's desire to reduce costs and increase efficiencies through consolidated purchasing. However, if public policy objectives, such as mandatory Canadian content, competition and fairness, and adherence to standards are to be put into effect, the rules of the game must be clear and enforced.

Unfortunately, this is not the case today.

What other countries do

Most developed nations and major military powers use government purchasing to seek and develop competitive advantage for domestic manufacturing. The United States is the biggest and most successful proponent of the power of government purchasing. The WTO and NAFTA recognize the legitimacy of domestic preferences by exempting defence and related security procurement from international trade rules. For non-military and security contracts, only larger contracts are subject to any rules that give foreign suppliers access to the market. What this means is that governments can legally grant domestic preferences in large defence and security procurements and in all smaller non-military procurements. Determined governments can always give domestic preferences, particularly if they also require performance standards or specifications that only domestic manufacturers can meet.

Some countries consider domestic apparel and textile supply a matter of national security. Just as a country would not want to sacrifice its military or food production capabilities to another country, so too do some countries consider a viable textile and apparel supply capability as essential to national sovereignty. Where governments do source from outside their borders, they sometimes require compensating benefits in return (e.g. what are known as "offsets").

What Canada does

Canadian governments have a spotty record of domestic sourcing for apparel. DND (Department of National Defence) is a notable exception that prides itself on working closely with Canadian manufacturers and that recognizes the mutual advantages of doing so. Other large government purchasers seem to be more concerned with low-cost supply than they are with supporting domestic manufacturing.

DND has made a strong commitment to "soldier systems" that combine state-of-the-art textile and apparel technology with anti-ballistic, telecommunications and other technologies so the Canadian soldier is fully equipped for 21st century military functions. In many respects, Canada is seen by other militaries as being in the forefront of modern "Clothe the Soldier" initiatives.

The Canadian textile industry has invested considerable time and effort in building its relationships with DND and is now a key part of the Canadian military global excellence in the soldier system program. Some apparel companies and apparel system integrators are also a key part of these exciting developments at DND. With a small effort and focus, a larger number of Canadian apparel manufacturers and apparel integrators could derive benefit from Canadian military research, development and procurement.

Canadian procurement rules today

As already mentioned, international rules permit domestic sourcing preferences for government procurement. In order to enforce these preferences, the Canadian government has rules of origin which determine what is Canadian and what is not. For most procurement, Public Works and Government Services Canada (PWGSC) — the procurement arm of the federal government — use a standard 80 percent or more value-added test.

Textile and apparel procurement is anomalous as the NAFTA rules of origin provide the basis for determining Canadian origin. We all know the complexity of the apparel and textile triple transformation rules and their various exemptions. Additionally, as the bases for textile and apparel origin rules are "weaving and cutting and sewing," this has the effect of eliminating many valuable Canadian inputs from consideration in the origin test.

For example, in some technical garments, closures can provide 20 percent or more of the value of a finished product. And yet, the origin of these closures has no bearing on the origin of the finished garment. Additionally, as contracting is increasingly consolidated and government no longer sources components on its own, without a change in these rules, the irreversible trend will be towards imported, low-cost imports.

Another factor in government procurement is the requirement that three or more Canadian suppliers be able and willing to bid on any one contract. If the three-or-more test is not met, then government purchasers may open the tendering to imports. In other countries, governments work with their domestic suppliers to develop a competitive bidding environment. In Canada, the trend is to open up the tenders to foreign competition. The government justification is the perceived need to reduce costs, combined with a seeming lack of interest or concern on the part of the industry itself.

Contract specifications can be very important where the purchaser is attempting to ensure high quality, unique characteristics or to support domestic manufacturing. As contracts are increasingly consolidated to apparel integrators, and the government is no longer involved in the purchasing, there is a growing need to ensure that contract specifications are enforced. Without effective enforcement, it is increasingly possible to substitute inferior imported components for higher priced and higher quality domestic components.

Reforming Canada's rules and apparel procurement

The government market presents significant opportunities for Canadian apparel manufacturers. Through effort and vigilance and a reform in the apparel procurement rules, Canadian apparel manufacturers can derive significant benefits from the government market.

We recommend the following reforms in the procurement rules:

  • Change the origin rules to an 80 percent value-added test: The NAFTA rules of origin are not appropriate for a consolidating government market. They are also not appropriate for high value-added and technical apparel. Convert to the 80 percent Canadian content rule and enforce it;
  • The three-or more bidder rule is also not appropriate to a consolidating- integrator market. The government and the integrators should be aggressively assembling a list of qualified Canadian suppliers and they should be actively developing this domestic capability;
  • Technical and quality standards should reflect the competencies of Canadian industry. Where in place, these standards should be rigorously enforced;
  • As contracting consolidates, stringent Canadian benefit tests should apply to the winners of these contracts;
  • Government and the Canadian apparel industry should be working together to use government purchasing as a means to support Canadian research, development, service and export capabilities.

What could the apparel industry do to get the ball rolling?

  1. Gather together interested companies and suppliers that could form a Government Business committee under CAF. Make sure current sellers and suppliers are involved.
  2. Put together a marketing program to engage the key buyers particularly at DND. Work together with CTI if possible. Engage on DND research programs whenever and wherever possible.
  3. Focus on rules of origin and the technical standards. The technical standards need to be carefully expressed and enforced. The rules of origin should be revised. I am recommending that the industry advocate a change to the 80% value added test. Engage with Public Works and Government Services Canada on these points.
  4. Get involved at the highest levels now. Once the industry has crafted its objectives and its strategy, bring those concerns to the Minister of Public Works and Government Services. There is a great deal of pressure in the government to consolidate contracts with fewer and fewer large suppliers. This may not be in the interests of the Canadian apparel industry.

Hillwatch Inc., 45 O’Connor St. Suite 1150, Ottawa ON K1P 1A4 tel: (613) 238-8700 fax: (866) 310-4955