Prime Minister Mark Carney’s government is committed to a Canadian defence industrial strategy (DIS), although the final shape and scope are still unknown.
When it is released – and it’s promised “soon” – Canada will be joining close allies such as the United Kingdom, Australia and the Netherlands, which are using the rapidly deteriorating geopolitical, economic and security environment to rebuild national resilience, secure key supply chains and leverage defence dollars to grow both their respective economies and armed forces.
Implementing the new Canadian strategy will not be without its challenges, however. The secret to success is reforming the defence procurement system to ensure that all spending delivers timely and necessary capabilities.
To do that, the Carney government proposes the creation of a defence procurement agency, similar to what existed in previous times of war or international conflict. Key goals of this new agency would be to reduce or eliminate both existing duplication in procurement management and lapsed spending that leads to losses or higher costs.
The defence industrial strategy is one of several major economic initiatives of the new Carney government designed to pivot Canada from overreliance on the United States amid an unprovoked trade war and to prepare the country to confront the possibility of other great power threats and conflict.
In the last six months, the new federal government implemented the One Canadian Economy Act to remove internal trade barriers and fast track projects deemed in the national interest, set up a major projects office to vet them and announced a new $13-billion housing agency.
A historic shift in spending
In this vein, the forthcoming defence industrial strategy mirrors the type of state-directed industrialization boom undertaken by Mackenzie King’s government during the Second World War. In fact, the Carney government references the 1939-45 era as a model for how the federal government can tackle a series of deep economic and social challenges, such as housing, as well as grow new technological sectors such as quantum and AI.
Like its mid-20th-century predecessor, today’s federal government views the defence and civilian industrial bases as interconnected. The prime minister’s single mandate letter to each of his cabinet members calls for a defence industrial strategy that “secures Canada, fulfils our responsibilities to our allies, and helps build our economy.”
A spate of defence spending commitments in the month of June only attracted more attention to what the government hopes to achieve in this area.
IRPP study: How Industrial Policy Can Strengthen Canada’s Economy and Sovereignty
More than $2 billion in DIS-related initiatives, albeit vaguely defined, were announced as part of the prime minister’s decision to hit in this fiscal year – instead of 2032 as promised by Justin Trudeau – the longstanding NATO target of allocating two per cent of annual GDP to defence.
A follow-up NATO commitment of hitting five per cent of GDP by 2035 only increased the focus on the industrial dimensions of military spending. Under the five-per-cent plan, Canada will need to spend $150 billion annually on defence within the next decade, of which 3.5 per cent is on direct military spending and 1.5 per cent is on multi-use infrastructure such as ports, roads, railways, and information and communications technologies.
This planned spending “won’t just build our military capacity – [it] will build our industries and create good, high-paying jobs at home,” Carney says.
This is a degree of military spending not seen since the Korean War and the Cold War buildup of the 1950s – a time when Canada undertook ambitious projects such as the CF-105 Avro Arrow; mass-produced nearly 1,200 fighter jets under licence (most for export); and revolutionized naval small warship design with the St. Laurent class.
Such expenditures will transform the Department of National Defence and the Canadian Armed Forces into the de-facto industrial funding government entities in Canada.
Fixing a broken procurement system
Yet it will not be easy to reform the defence procurement system to ensure all that spending delivers timely and necessary capabilities. For example, it typically takes 15 to 16 years to deliver a new large capital fleet to the armed forces.
The prime minister is seeking to tackle this dilemma by resurrecting a 2019 Liberal platform idea to create a single, centralized defence procurement agency to overcome Canada’s uniquely split tri-department procurement model.
The current system, in place under various guises since the 1970s, sees statutory and policy authorities shared between National Defence (which develops the requirements and uses the equipment), Innovation, Science and Economic Development Canada (which oversees industrial offsets) and Public Services and Procurement Canada (the contracting authority).
Numerous parliamentary reports, internal reviews, scholarly assessments and former senior officials have identified this split as generating duplicative processes, weakening accountability and failing to leverage institutional knowledge and experience. When efforts to speed up the process have been attempted, such as the 2014 defence procurement strategy, the result was incrementalism with more governance layers.
How this same procurement system is supposed to deliver on such large defence budget increases is also a problem.
Between 2017-22, about $12 billion in procurement spending lapsed and was reprofiled for future use, due mostly to delays in project schedules. That those lapses occurred when defence spending averaged 1.3 to 1.4 per cent of GDP, not the planned five per cent of the future, highlights a significant risk requiring prompt fixing.
Federal money not spent is money not going to Canadian businesses that need to make their own investments in people and capital to meet government demands.
For National Defence and the armed forces though, reprofiled money means lost purchasing power because of defence-specific inflation. Spending delays also lead to recruitment and retention issues as aging equipment is unavailable for training and operational deployments. Spare parts eventually become in short supply, pushing personnel to cannibalize equipment or even seek replacements in a museum.
The result is that our armed forces’ capacity to meet today’s operational, readiness and training requirements is severely depleted. In 2025, just 45 per cent of the Royal Canadian Navy’s fleet was available for use. The Royal Canadian Air Force and Canadian Army were no better at 49 per cent. Waiting 15 to 16 years for a replacement or lapsing billions in new money does not foretell a promising future.
Fortunately, there are positive signs. New maintenance techniques that allow the rapid integration of emerging technology into existing fleets are being rolled out across the military this year.
Learning from past experience
Efforts at training a larger cadre of procurement specialists are underway in addition to a review in 2023-24 on streamlining the defence contracting process. One outcome of that review was to exclude contracts with a national security exemption from standard competition requirements, enabling more use of the faster sole-sourcing approach, if required.
The move to a defence procurement agency – be it a department, Crown Corporation or special operating agency, such as the Canadian Coast Guard – represents the most ambitious effort to reform Canada’s defence procurement system since the Department of Defence Production (the last centralized defence procurement office) was abolished in 1969. Canada remains an outlier among its allies in not having a centralized entity.
Bulldozer or bystander? Canada’s stakes in the new global economy
Only targeted industrial policy will fulfil Canada’s value-adding potential
Restructuring government organizations is a time-consuming effort as people, processes and competing organizational cultures are repackaged – all while having to deliver on multi-billion-dollar projects such as a dozen new submarines.
Implementing the new defence procurement agency could very well exacerbate the problems it seeks to address. Or not.
In both world wars and the early Cold War, Canadian governments moved to a centralized defence procurement entity to meet the urgency of the time, only to dismantle it once the conflict ended and defence spending decreased.
In implementing its new defence industrial strategy, the Carney government may well have to turn to that history to help guide its procurement reform ambitions.
