Associate Deputy Minister Public Works and Government Services Canada ADDRESS TO THE WORLDWIDE SECURITY COOPERATION CO

1. Associate Deputy MinisterPublic Works and Government Services CanadaADDRESS TO THE WORLDWIDE SECURITY COOPERATION CONFERENCEALEXANDRIA, VIRGINIA OCTOBER 17, 2002 PERSPECTIVES OF A FRIEND AND ALLY

2. I am delighted to be here today to give a Canadian perspective on the highly topical theme of today's conference, "Security Cooperation in a post 9-11 World". While the strong foundation of cooperation that the United States and Canada have enjoyed over the years is not news, it is still important to celebrate. Looking at geography, and the length of our common border, it is a great reassurance - to both countries - that, in the words of Tom Ridge, at the June meeting in Niagara Falls between himself and Canadian Deputy Prime Minister, John Manley, "the cooperation in public safety between our nations is a model for the world." While we agree on the same fundamental values, the importance of democracy, human rights and the free market, we do not always adopt the same strategy to meet our goals. With respect to national security, however, there can be no disagreement that both countries are inextricably bound. This strong foundation was most evident in the wake of the terrorist attacks of September 11. You know the story so I will only summarize. Canada provided immediate support in terms of making its airports available to accept hundreds of international flights on no notice. Since then, the two countries have been working together to strengthen border security and transportation safety, to share intelligence and to expand law enforcement cooperation. Canada has introduced a new Anti-terrorism Act and, while not a direct result of 9-11, we have also put in place a Controlled Goods Program, designed to strengthen North American defense trade controls through the regulation of access, possession and transfer in Canada of controlled goods. Last, but not least, we have contributed significant military assets to the coalition in Afghanistan. I am delighted to be here today to give a Canadian perspective on the highly topical theme of today's conference, "Security Cooperation in a post 9-11 World". While the strong foundation of cooperation that the United States and Canada have enjoyed over the years is not news, it is still important to celebrate. Looking at geography, and the length of our common border, it is a great reassurance - to both countries - that, in the words of Tom Ridge, at the June meeting in Niagara Falls between himself and Canadian Deputy Prime Minister, John Manley, "the cooperation in public safety between our nations is a model for the world." While we agree on the same fundamental values, the importance of democracy, human rights and the free market, we do not always adopt the same strategy to meet our goals. With respect to national security, however, there can be no disagreement that both countries are inextricably bound. This strong foundation was most evident in the wake of the terrorist attacks of September 11. You know the story so I will only summarize. Canada provided immediate support in terms of making its airports available to accept hundreds of international flights on no notice. Since then, the two countries have been working together to strengthen border security and transportation safety, to share intelligence and to expand law enforcement cooperation. Canada has introduced a new Anti-terrorism Act and, while not a direct result of 9-11, we have also put in place a Controlled Goods Program, designed to strengthen North American defense trade controls through the regulation of access, possession and transfer in Canada of controlled goods. Last, but not least, we have contributed significant military assets to the coalition in Afghanistan.

3. GENESIS OF THE CONTROLLED GOODS PROGRAM Up to 1999 - controlled goods and technology destined to Canada were �exempt� from much of the licensing requirements under the US ITARs April 1999 - exemption significantly reduced October 1999 - the Prime Minister and President agreed in principle to re-establish the ITAR Canadian Exemption On the subject of defence trade controls, let me take a minute to share with you an initiative of which my Department is particularly proud, our new Controlled Goods Program. Some of you may not be aware that in 1999, Canada's exemption from much of the licensing requirements under the US International Traffic in Arms Regulations (ITAR) was significantly reduced. Further to an agreement between our heads of government, negotiations were launched between US officials and representatives from our Department of Foreign Affairs and International Trade. On the subject of defence trade controls, let me take a minute to share with you an initiative of which my Department is particularly proud, our new Controlled Goods Program. Some of you may not be aware that in 1999, Canada's exemption from much of the licensing requirements under the US International Traffic in Arms Regulations (ITAR) was significantly reduced. Further to an agreement between our heads of government, negotiations were launched between US officials and representatives from our Department of Foreign Affairs and International Trade.

4. GENESIS OF THE CONTROLLED GOODS PROGRAM - CONT�D Harmonization of US Munitions List and Canada�s Export Control List Amendment of Part 2 of the Defence Production Act to create the Controlled Goods Program May 31, 2001 - Canadian and US regulation came into effect - exemption partially restored Canada agreed to : Amend the Defence Production Act Enact the Controlled Goods Regulations Create the Controlled Goods Program Amend the Export Control List and Export Permit Regulations. The US in turn agreed to amend Part 126.5 of the ITAR to reflect a partial reinstatement of the Canadian Exemption.Canada agreed to : Amend the Defence Production Act Enact the Controlled Goods Regulations Create the Controlled Goods Program Amend the Export Control List and Export Permit Regulations. The US in turn agreed to amend Part 126.5 of the ITAR to reflect a partial reinstatement of the Canadian Exemption.

5. BENEFITS OF THE CONTROLLED GOODS PROGRAM Help maintain the exemption for Canada Enhance Canada�s competitive position relative to other partner countries and promote viability of Canadian industries Maintain confidence in Canada�s ability to protect controlled goods and technologies The Controlled Goods Program was mounted very rapidly; it was basically up and running within nine months. However, maintaining our current level of exemption and even increasing it, is of great importance to Canadian companies. My department is committed to continuing our work to refine and improve the program and assisting the US Department of State in making the current exemption better known to US defence companies. A strong Canadian security image, along with a clear commitment to increase security by industry, increases Canada's chances of maintaining and increasing the current exemption. The program will help the Canadian government and its partners, including industry, to create a climate that will encourage US industries to use the exemption. Finally, the program increases national and international security in the area of defence materiel.The Controlled Goods Program was mounted very rapidly; it was basically up and running within nine months. However, maintaining our current level of exemption and even increasing it, is of great importance to Canadian companies. My department is committed to continuing our work to refine and improve the program and assisting the US Department of State in making the current exemption better known to US defence companies. A strong Canadian security image, along with a clear commitment to increase security by industry, increases Canada's chances of maintaining and increasing the current exemption. The program will help the Canadian government and its partners, including industry, to create a climate that will encourage US industries to use the exemption. Finally, the program increases national and international security in the area of defence materiel.

6. COOPERATION WITH THE US Secure North American perimeter Facilitate transfer of goods between US and Canada Canada a possible model for ITAR exemption with other countries (UK and Australia) Outreach with US government to US companies to promote the use of the exemption The Controlled Goods Program (CGP) and our Department of Foreign Affairs had a very constructive meeting with US Department of State on September 10, 2002. DoS pointed out the importance of the war on global terrorism, especially homeland security, and remarked that the CGP is playing an important role. Canada is the only country in the world that benefits from such an ITAR exemption as a destination country. Discussions have been taking place for two years and are progressing slowly with respect to some form of ITAR exemptions for the UK and Australia. DoS may be looking to use the Canadian Exemption as a model. Bilateral commitment for continuing outreach to US companies, to promote the use of the Canadian exemption instead of licensing: It has been agreed by Foreign Affairs, Public Works and Government Services and US Government officials that outreach activities will take place this fall to promote the utilization of the Canadian Exemption by American companies. These activities will consist of presentations in 6 major American cities; the presentations will outline the benefits of using the Canadian exemption (126.5 of ITAR's) for American and Canadian companies sending technologies to Canada. The benefits are: reduction in costs of doing business by suppressing the need to obtain export permits; gain in productivity by reducing the time delays involved in some exports; creation of partnerships between American and Canadian companies; increased opportunities for Canadian firms to access DoD bid documents; and, as a consequence of all the above, increased profitability. The Controlled Goods Program (CGP) and our Department of Foreign Affairs had a very constructive meeting with US Department of State on September 10, 2002. DoS pointed out the importance of the war on global terrorism, especially homeland security, and remarked that the CGP is playing an important role. Canada is the only country in the world that benefits from such an ITAR exemption as a destination country. Discussions have been taking place for two years and are progressing slowly with respect to some form of ITAR exemptions for the UK and Australia. DoS may be looking to use the Canadian Exemption as a model. Bilateral commitment for continuing outreach to US companies, to promote the use of the Canadian exemption instead of licensing: It has been agreed by Foreign Affairs, Public Works and Government Services and US Government officials that outreach activities will take place this fall to promote the utilization of the Canadian Exemption by American companies. These activities will consist of presentations in 6 major American cities; the presentations will outline the benefits of using the Canadian exemption (126.5 of ITAR's) for American and Canadian companies sending technologies to Canada. The benefits are: reduction in costs of doing business by suppressing the need to obtain export permits; gain in productivity by reducing the time delays involved in some exports; creation of partnerships between American and Canadian companies; increased opportunities for Canadian firms to access DoD bid documents; and, as a consequence of all the above, increased profitability.

7. CANADA�S PARTICIPATION IN SECURITY ASSISTANCE US national interests in Security Assistance/Foreign Military Sales and Canada�s interests - a win-win situation Role of Public Works and Government Services Canada in defence procurement The Canadian procurement system and how Foreign Military Sales fits within this system FMS is a key element of the Canadian defence support strategy Canada continues to provide a military contribution to peace and security around the world with an intent of protecting democracy and human rights. My Department, as the Canadian government organization charged with defence procurement, is challenged to ensure that we play our part in building the capability of our armed forces by getting the best value in the equipment, technology and services that we acquire for our largest client, the Department of National Defence. I should note here that in Canada we do defence procurement somewhat differently from other countries, whose ministries of defence normally do the contracting for their requirements in that area. Above certain thresholds, PWGSC handles the full range of government contracting, including defence. The objectives are to consolidate scarce procurement resources and expertise, ensure the effectiveness and integrity of our procurement system and achieve economies of scale. We have a total business volume of $11 billion CDN and 40,000 contracts a year. FMS is a key element of the Canadian defence supply strategy. It allows us to tap into the significant R&D investments that the US makes in the field of defence and offers a means for both our countries to leverage a higher rate of return on investments and consequently achieve a better result for our troops. Two current examples are the modernization of the F/A 18 aircraft and upgrading shipboard communication. Canada relies on FMS to support major systems and to offer a special supply alternative when urgency or availability eliminate normal competitive procurement. FMS served us well in the campaigns in Afghanistan and Kosovo. For Enduring Freedom, DSCA put in place an accelerated process, that saw Letters of Offer and Acceptance that used to take 120 days, issued in less than a week.Canada continues to provide a military contribution to peace and security around the world with an intent of protecting democracy and human rights. My Department, as the Canadian government organization charged with defence procurement, is challenged to ensure that we play our part in building the capability of our armed forces by getting the best value in the equipment, technology and services that we acquire for our largest client, the Department of National Defence. I should note here that in Canada we do defence procurement somewhat differently from other countries, whose ministries of defence normally do the contracting for their requirements in that area. Above certain thresholds, PWGSC handles the full range of government contracting, including defence. The objectives are to consolidate scarce procurement resources and expertise, ensure the effectiveness and integrity of our procurement system and achieve economies of scale. We have a total business volume of $11 billion CDN and 40,000 contracts a year. FMS is a key element of the Canadian defence supply strategy. It allows us to tap into the significant R&D investments that the US makes in the field of defence and offers a means for both our countries to leverage a higher rate of return on investments and consequently achieve a better result for our troops. Two current examples are the modernization of the F/A 18 aircraft and upgrading shipboard communication. Canada relies on FMS to support major systems and to offer a special supply alternative when urgency or availability eliminate normal competitive procurement. FMS served us well in the campaigns in Afghanistan and Kosovo. For Enduring Freedom, DSCA put in place an accelerated process, that saw Letters of Offer and Acceptance that used to take 120 days, issued in less than a week.

8. CANADA�S PARTICIPATION IN SECURITY ASSISTANCE - CONT�D Enduring Freedom and G8 Summit Impact of FMS restrictions on US suppliers who wish to bid on Canadian competitive procurements During the G8 Summit held in Canada this June, the United States was able to provide substantial assistance through an expedited FMS case for the loan of specialized ground sensing equipment. This resulted in significant savings in time and cost over other acquisition alternatives. In short, we rely on the FMS system and the community of dedicated officials within it to define new approaches and scale efficiencies that help us to respond in an appropriate way to the threats that exists today. I did want to say a word, however, regarding some of the restrictions imposed on suppliers who sell through FMS, since these restrictions can conflict with our procurement system. Like many countries, we believe in a competitive approach to acquisitions as a means of ensuring the best value to our customers. However, in some instances, suppliers of controlled FMS products are prevented from bidding these products in a competitive procurement. Since FMS is not a contract, but rather a government-to-government arrangement, and since the US government does not normally respond to competitive solicitations, the result can be the early elimination of North American solutions. Having raised this issue, I must say that our Washington Office is working well with DSCA and the various implementing agencies to identify such cases and arrive at appropriate workarounds. However, overall, the FMS system today must be able to stand up to other procurement alternatives and must be adaptable to meet the needs of industry and other governments. Any restrictions that are applied should stand the test of common sense: be examined to ensure that they are justified and do not duplicate other control mechanisms.During the G8 Summit held in Canada this June, the United States was able to provide substantial assistance through an expedited FMS case for the loan of specialized ground sensing equipment. This resulted in significant savings in time and cost over other acquisition alternatives. In short, we rely on the FMS system and the community of dedicated officials within it to define new approaches and scale efficiencies that help us to respond in an appropriate way to the threats that exists today. I did want to say a word, however, regarding some of the restrictions imposed on suppliers who sell through FMS, since these restrictions can conflict with our procurement system. Like many countries, we believe in a competitive approach to acquisitions as a means of ensuring the best value to our customers. However, in some instances, suppliers of controlled FMS products are prevented from bidding these products in a competitive procurement. Since FMS is not a contract, but rather a government-to-government arrangement, and since the US government does not normally respond to competitive solicitations, the result can be the early elimination of North American solutions. Having raised this issue, I must say that our Washington Office is working well with DSCA and the various implementing agencies to identify such cases and arrive at appropriate workarounds. However, overall, the FMS system today must be able to stand up to other procurement alternatives and must be adaptable to meet the needs of industry and other governments. Any restrictions that are applied should stand the test of common sense: be examined to ensure that they are justified and do not duplicate other control mechanisms.

9. FMS BUSINESS VOLUME AND STATISTICS $2 billion (CDN) in active agreements 663 open FMS cases $120 to 150 million average renewal rate FY 2001/02 $185 million We are a medium sized player in comparative dollar terms to other FMS clients. The majority of our defence contracting is transacted on a direct basis outside of the FMS framework. We use FMS primarily for support requirements. The significance of the these statistics is probably in the number of cases managed more than in the actual dollar amounts. Canada buys more support than it does end items and the result is a large number of lower value cases. We are a medium sized player in comparative dollar terms to other FMS clients. The majority of our defence contracting is transacted on a direct basis outside of the FMS framework. We use FMS primarily for support requirements. The significance of the these statistics is probably in the number of cases managed more than in the actual dollar amounts. Canada buys more support than it does end items and the result is a large number of lower value cases.

10. NEW ACTIVITY AND ACHIEVEMENTS Canada�s participation in FMS reform Surcharges Cooperative logistics Performance measures and DSCA�s Security Cooperation Deputies� Forum Chairmanship of Foreign Procurement Group New signator to the Accelerated Case Closure Program Exploring new commercial banking arrangements Recognize the efforts of DSCA and its leader, General Walters to: make FMS as efficient and effective as possible, through business process reeingineering and automation; involve the foreign customer community in the reform efforts; and increase the transparency of FMS processes. One example is the working group on surcharges whose objectives are to make the surcharges for administering the program more visible and more tied to activities and performance. Canada currently chairs the Foreign Procurement Group, and hence, is also well aware of the partnership that DSCA has entered into with the foreign customer community. DSCA officials are welcome participants in the meetings, briefing the FPG on FMS issues and activities, actively seeking their feedback and championing their ideas and objectives.The Security Cooperation Deputies Forum is a tangible example of DSCA's outreach to the foreign customer community. FPG members, together with industry associations and DoD officials, are invited to comment on the measures and performance of all aspects of security assistance. Canada has recently joined the countries that subscribe to DSCA's streamlined FMS case closure process. Accelerated Case Closure seeks to limit the administrative burden associated with excessively long contract periods. The net result for Canada will - we hope - be lower costs through less administration and improved financial management. DSCA has also recently opened the door to commercial banking arrangements for FMS financing - in other words, the use of private banking facilities to allow a maximization of return on investment on FMS dollars held in trust.Recognize the efforts of DSCA and its leader, General Walters to: make FMS as efficient and effective as possible, through business process reeingineering and automation; involve the foreign customer community in the reform efforts; and increase the transparency of FMS processes. One example is the working group on surcharges whose objectives are to make the surcharges for administering the program more visible and more tied to activities and performance. Canada currently chairs the Foreign Procurement Group, and hence, is also well aware of the partnership that DSCA has entered into with the foreign customer community. DSCA officials are welcome participants in the meetings, briefing the FPG on FMS issues and activities, actively seeking their feedback and championing their ideas and objectives.The Security Cooperation Deputies Forum is a tangible example of DSCA's outreach to the foreign customer community. FPG members, together with industry associations and DoD officials, are invited to comment on the measures and performance of all aspects of security assistance. Canada has recently joined the countries that subscribe to DSCA's streamlined FMS case closure process. Accelerated Case Closure seeks to limit the administrative burden associated with excessively long contract periods. The net result for Canada will - we hope - be lower costs through less administration and improved financial management. DSCA has also recently opened the door to commercial banking arrangements for FMS financing - in other words, the use of private banking facilities to allow a maximization of return on investment on FMS dollars held in trust.

11. THE WAY AHEAD Build on the excellent relationships and rapport with DSCA and other USG officials Strongly support DSCA�s championship of increased customer involvement and visibility in FMS Need for a better definition of the business case value of Foreign Military Sales, so that FMS can be fairly considered as a viable alternative to other methods of supply Where to from here? First and foremost, we plan to build on excellent relationships and rapport - with DSCA and other US government officials. As clients for whom FMS is a critical program, we strongly support increased customer involvement and visibility into Foreign Military Sales and appreciate DSCA's championship of this objective. Last, but not least, we are looking for more information to weigh the FMS alternative against other methods of supply. Our procurement system, like that of most countries, is predicted on competition as a means of achieving best value. Because FMS is a government to government arrangement, requiring a decision to sole source on our part, we have difficulty comparing it on equal terms with commercial alternatives. I do believe, however, that DSCA recognizes this situation and is working hard to address it as a part of its overall efforts on FMS reform. As a result of all these efforts, the FMS process is more responsive now than ever before. It offers more visibility into the process, which in turn allows a client country to better recognize the value added in the FMS process. The value for money equation is improving. We are getting smarter at defining a reasonable rate of return for investment dollars and for industry. This is the result of greater teamwork that recognizes the interests of all parties without diminishing the importance of the ultimate client�the man or woman in the field relying on the availability of equipment that is suited to the job and a reliable logistics framework.Where to from here? First and foremost, we plan to build on excellent relationships and rapport - with DSCA and other US government officials. As clients for whom FMS is a critical program, we strongly support increased customer involvement and visibility into Foreign Military Sales and appreciate DSCA's championship of this objective. Last, but not least, we are looking for more information to weigh the FMS alternative against other methods of supply. Our procurement system, like that of most countries, is predicted on competition as a means of achieving best value. Because FMS is a government to government arrangement, requiring a decision to sole source on our part, we have difficulty comparing it on equal terms with commercial alternatives. I do believe, however, that DSCA recognizes this situation and is working hard to address it as a part of its overall efforts on FMS reform. As a result of all these efforts, the FMS process is more responsive now than ever before. It offers more visibility into the process, which in turn allows a client country to better recognize the value added in the FMS process. The value for money equation is improving. We are getting smarter at defining a reasonable rate of return for investment dollars and for industry. This is the result of greater teamwork that recognizes the interests of all parties without diminishing the importance of the ultimate client�the man or woman in the field relying on the availability of equipment that is suited to the job and a reliable logistics framework.