How Defence is Helping Drive Canada’s Aerospace Industry

After decades of neglecting its defences, Canada has embarked on a programme of increased defence spending to meet both growing threats to its sovereignty and the country’s newly-acquired global commitments. And the nation’s planned long-term increase in military expenditure should in turn create opportunities for aerospace companies.

Until recently, Canadian defence spending had been falling sharply for 50 years – from a peak of 6% in the early 1950s to approximately 1.2% in 2006. But this decade has marked a major change in defence policy. In 2005, when the annual defence budget stood at C$13bn, the then Liberal government promised a nearly C$13bn boost in military spending over the following five years.

NEW GOVERNMENT UNVEILS MAJOR PROGRAMMES

The election of a new government in January 2006 brought further defence budget expansion. The Conservative Party minority administration unveiled a defence strategy designed ‘to strengthen Canada’s independent capacity to defend our national sovereignty and security’.

In June 2006, the new government announced various new spending programmes valued at C$17.1bn. That figure included:

• C$5bn for strategic and tactical aircraft, with an additional C$3.3bn to be spent over the following 20 years on in-service support
• C$2bn for medium to heavy-lift helicopters, with an additional C$2.7bn to be spent over the following 20 years on in-service support
• C$1.1bn for medium-sized logistics trucks, associated components, and logistic and training support, with an additional C$100m to be spent over the following 20 years on contracted in-service support
• C$2.1bn for the design, construction and associated logistical and training support of three supply ships, with an estimated C$800m to be spent over the following 20 years on in-service support

This new-found commitment to the strengthening of the armed forces means that Canada’s defence spending in 2007–08 will reach C$18.24bn, a 9% increase over 2006–07. Military spending in 2007–08 will be 27% higher than at the beginning of the decade and is now at its highest level since the Second World War; moreover, the military budget will continue to rise, reaching C$19.418bn by 2009–10.

In addition, the Department of National Defence has asked for much bigger increases as part of a long-term plan. By 2025, the department hopes to boost spending to between C$26.9 and C$36.6bn.

9/11 AND IRAQ FORCE CHANGES IN CANADA’S MILITARY BUDGET

So what is driving these hikes in the military budget? Firstly, Canada’s defence spending has been rising since the terrorist attacks against the US on 11 September 2001 revealed that North America was no longer the safe haven that Canadians had always assumed it to be.

Secondly, the government has been eager to improve relations with the US, which had suffered a setback when Ottawa refused to commit forces to the US-led operation in Iraq. Consequently, Canada has committed a substantial force to Afghanistan, to encourage the USA once again to view its neighbour as a reliable defence partner.

RACE TO EXPLOIT THE ARCTIC’S RESOURCES

The new race to exploit the resources of the Arctic has also alarmed Canadians, particularly as global warming is facilitating exploration and drilling for oil and gas in its own backyard.

Under the UN Convention on the Law of the Sea, the five states with territory inside the Arctic Circle – Canada, Denmark (via its control of Greenland), Norway, Russia and the USA – have economic rights within a 200-mile zone around their northern coastlines.

However, the convention is open to appeal, and several countries are disputing the limits of this zone.

Russia in particular has adopted an aggressive approach. In August 2007, Moscow symbolically staked its claim to billions of dollars-worth of oil and gas reserves in the Arctic Ocean, when two mini-submarines had reached the seabed more than two-and-a-half miles beneath the North Pole. In a record-breaking dive, the two craft had planted a one metre-high titanium Russian flag on the underwater Lomonosov Ridge.

Russia believes that its Siberian shelf is directly linked to this ridge, an underwater mountain crest that runs 1,240 miles across the polar region. In 2001, Moscow had submitted research findings to the UN to back its claim, only to see them rejected. Russia is expected to resubmit its claim in 2009.

Canada in turn has tried to diminish the importance of such developments. “This isn’t the 15th century. You can’t go around the world and just plant flags and say: ‘We’re claiming this territory’,” Canadian Foreign Minister Peter MacKay had stated at the time, adding, “There is no threat to Canadian sovereignty in the Arctic, we’re not at all concerned about this mission. Basically it’s just a show by Russia.”

Yet the actions of Canada’s government suggest that it is worried. In July 2007, Prime Minister Harper announced a plan to procure up to eight Arctic patrol ships “to help reassert Canada’s sovereignty over the North”.

These vessels will be the first genuinely Arctic-capable Canadian naval vessels since the end of 1957. They will cost around C$3.1bn, with a further C$4.3bn required for operations and maintenance over their 25-year lifespan. Harper told reporters that “it is no exaggeration to say that the need to assert our sovereignty and protect our territorial integrity in the North on our terms has never been more urgent.”

CANADIAN FIRMS ENJOY BOOM

Ottawa wants to ensure that Canadian firms reap the rewards of its big military spending programmes.

Under the government’s ‘Canada First’ procurement policy, prime contractors are required to ‘deliver $1 in high-quality economic activity in Canada for every dollar they are awarded as part of these contracts’.

As a result, Lockheed Martin, which won the C$5bn contract for the supply of 17 C-130J strategic and tactical aircraft in January 2008, has two Canadian companies providing systems for these craft. Heroux-Devtek Inc. of Longueuil, Quebec, builds landing gear for the planes while CAE Inc. of Montreal provides the aircraft simulators.

Lockheed Martin officials have signalled that the aircraft painting and finishing could take place in Canada. The maintenance contract is also expected to go to a firm based in the country. In addition, under the requirement that foreign firms provide industrial benefits to Canada, Lockheed Martin could use Canadian firms for some of its other aerospace projects.

DEFENCE SECTOR RECORDS DRAMATIC OUTPUT GROWTH

Ron Kane, a senior official at the Aerospace Industries Association of Canada, points out that “increased defence spending in Canada is certainly having a positive impact on the Canadian aerospace industry, which is also benefiting from higher global defence spending, particularly higher US spending, since the Canadian industry is heavily skewed towards the US industrial base.”

Kane also points out that in the 1970s and 1980s, the defence sector accounted for about 25% of the aerospace industry’s output, with commercial products making up the remainder. In the 1990s and the early part of this century, the defence sector’s share of output fell to just 8%. But since 2004, Canada’s aerospace industry has recorded dramatic growth in terms of defence output. By 2006 (the latest year for which figures are available), the defence sector accounted for 20% of the industry’s production, and Ron Kane expects that figure to rise back to around 25%.

This is clearly good for the industry, which wants to have a healthily diversified customer base, Kane observes. Yet mere figures fail to convey the full contribution that defence projects have made to the industry.

As Kane points out, “much new technology is developed from military programmes that companies are then able to exploit in their commercial programmes. Having a robust and technologically-sophisticated, leading-edge defence sector thus contributes significantly to the overall dynamism of the industry.”