Shipbuilding: IRB Policy and the Benefits of Public-Private Consortia

Background

In October 2011, the National Shipbuilding Procurement Secretariat awarded Irving Shipbuilding Inc. a $25 billion contract to build combat vessels for Canada.  To ensure high value-added business activity for Canadian industries, the Industrial and Regional Benefits (IRB) Policy requires companies who have won government defence and security contracts to undertake business activities in Canada equal to 100% of the contract value. This policy is intended to provide Canadian companies with opportunities to develop and sell innovative products and services to companies with IRB obligations. It is also a way to ensure that money spent on major procurement programs benefits Canadian industries directly.  One mechanism to leverage these opportunities and benefits is through Public-Private Consortia.

Public-Private Consortia

Public-Private Consortia exist within the IRB Policy to encourage innovative research and development in defence and related sectors. Through these Consortia, IRB contracts have the potential of generating both short-term and long-term benefits, not only for IRB Contractors and their Canadian company counterparts, but for Canadian post-secondary and public sector research institutions.

A Public-Private Consortium consists of an IRB Contractor or its eligible party, a minimum of one Canadian company and a minimum of one Canadian post-secondary or public sector research institution. Eligible parties include a Contractor’s parent corporation and all its subsidiaries, divisions and subdivisions.  Non-Canadian companies are permitted to join a Consortium; however, the combined total investment from foreign sources may not exceed fifty percent of the Consortium value.

By joining a Public-Private Consortium, Canadian researchers have the opportunity to collaborate with top companies to develop innovative solutions. They also have the opportunity to benefit from significant investments, as well as stronger relationships with industry experts. IRB Contractors, on the other hand, may enjoy the following benefits:

(i) The 5:1 Multiplier

Contractors can benefit from a 5:1 multiplier. As an incentive for the creation of Public-Private Consortia, a 5:1 multiplier is applied to the initial value of cash investments. The initial value being the sum of:

• The value of cash contributions from the Contractor to the Consortium; and
• The value of cash contributions from other eligible participants, leveraged by the Contractor’s participation in the Consortium, up to a maximum value equal to that of the Contractor’s contributions.

Thus, Contractors can benefit from their own cash contributions in a Consortium, as well as the cash contributions made by the partners they attract to a Consortium, up to a maximum value equal to that of their own contributions.

The contributions from post-secondary institutions, public research institutions and direct cash contributions from all levels of government into the Consortium are not eligible for IRB credits.

(ii) Additional IRB credits

Contractors may also receive IRB credits for the goods and services they procure from the Consortium.  The purchase of such goods and services will be considered as a separate IRB transaction eligible for IRB credits.

The future sales of products developed through a Consortium are not eligible for IRB credits.

(iii) Combining Multipliers

In addition to the benefits received from investing in and procuring the goods and services of these Public-Private Consortia, Contractors may also benefit from other IRB multipliers. For example, in addition to the 5:1 multiplier discussed above, Contractors may also benefit from the 5:1 multiplier associated with the investment in venture capital funds for small businesses. Investing in a Public-Private Consortium does not exclude a Contractor from involvement in more than one level of multiplier.

Conclusion

The Irving Shipbuilding contract will generate both short-term and long-term benefits for the region. The creation of Public-Private Consortia will open many doors for Canadian companies, post-secondary institutions and public sector research institutions, allowing them to become involved in the region’s shipbuilding projects. There are many benefits to be gained from the shipbuilding contract and Cox & Palmer can assist companies and institutions leverage those opportunities.