Preserving capacity, General Tom Lawson, Chief of the Defence Staff, Keys to Canadian SAR
Issue link: http://vanguardcanada.uberflip.com/i/1001288
Long-term contracts, required to incen- tivize private sector to invest in use-specific assets crucial in defence, may also reduce contractual or transaction costs of con- ducting business by progressively develop- ing trust between partners to successfully negotiate the contractual problems arising from unforeseen circumstances, such as new technologies emerging or cost-reduc- tions from scale or scope economies due to private partners' portfolios of projects. Trust or built-up reputation is a business asset and, as such, may overcome the con- tractor opportunism to exploit grey areas in the contract and reduce transaction costs. Besides, this relational contracting envi- ronment must be carefully framed in the original contract by clearly specifying the sharing of potential benefits through regu- lar payments or shortened odds of contract renewal from successful solutions to those unforeseen issues. Since PPPs generate a complex contrac- tual environment, transaction costs range from costs generated by source selection and contract management with potential disputes arising from unforeseen circum- stances and imprecise contractual clauses, to performance measurement and dispute resolution whereas similar costs will arise within hierarchies, such as the military, in the form of management and monitoring of personnel, and the contractual costs of procurement of inputs and equipment. Thus, while lower transaction costs and weaker internal capacity favour outsourc- ing, whether equipment or whole capa- bilities, hierarchies are favoured by high transaction costs and strong internal capa- bilities. A careful consideration of contractual costs, managerial efficiencies and econo- mies of scale and scope that the private sector enjoys by running other similar op- erations, and issues related to probity in command and control is required for a sat- isfactory decision in outsourcing defence capabilities. These are summarized in the table below. While the southwest and northeast cor- ners of the table generate clear-cut cases, a rigorous comparison is required to justify outsourcing or opening-up defence mar- kets. The UK practice uses the so-called public comparator, i.e. the cost of the capa- bility in question if it is kept in the public sector. There are two criteria to this com- parison. The technical efficiency criterion consists of comparing the public and pri- vate costs of a capability of given size (or expected levels of output) which is typically specified by the military planners. The al- locative efficiency criterion relates to the size of the capability (or expected output levels) and requires that the best level be chosen upon a benefit-cost evaluation. The Voyager program has seemed to satisfy both criteria. However, Strategic Sealift (see below), an- other combat-close PPP, where six roll-on/ roll-off (RORO) ships had been acquired, whereas the first criterion seems to be satis- fied, the number of ships proved to be in excess of what was needed, thus failing by the second criterion. Yet this simply means that further efficiencies can be realized. www.vanguardcanada.com JUNE/JULY 2018 19 in serViCe sUpport For more information, please contact Heather Pilot: hpilot@pilothill.ca | 519-851-9848 November 5 & 6, 2018 London Convention Centre London, Ontario Registration open bestdefenceconference.com Nominate a company for the Tech Showcase Get a fi rst-hand look at some highly innovative technologies from across Canada BEST DEFENCE CONFERENCE London, Ontario November 5 & 6, 2018 High ? In-house TransacŸon Costs Low Outsourced ? Weak Strong Internal Capacity