Strategic Aerospace and Defence Initiative (SADI)—Program Highlights 2013–2014 (00922)

1. Introduction

Canada's aerospace, defence, space and security (aerospace and defence) industries are major contributors to our nation's economy and important global players. In 2010, Canada's aerospace manufacturing sector was ranked 5^th among OECD countries in terms of revenues and GDP, with $22.8 billion in direct revenue and more than 700 companies across the country.^{Footnote 1} This industry supported more than 170,000 direct, indirect and induced jobs in the Canadian economy in 2012, including approximately 73,000 direct jobs.^{Footnote 2} In 2011, the defence industry generated $9.4 billion in revenues, and supported 64,000 full-time jobs across the country^{Footnote 3}.

In the global marketplace, research and development is a key driver of economic growth, and innovative companies are more likely than others to be part of that growth. Research and development allows Canada to compete in new markets and industries, and helps Canadian businesses offer their customers new or improved products, processes and services. With annual research and development investments of more than $1.6 billion each year^{Footnote 4}, the aerospace sector is the second most research-intensive industry in Canada.^{Footnote 5}

Research and development benefits individual Canadians too, through economic development, employment opportunities, and the potential environmental and safety benefits of new or improved technologies (for example: better fuel efficiency, reduced emissions, and enhanced emergency communications capabilities).

The 2013 report by the Canadian Council of Academies, The State of Industrial R&D in Canada, identified aerospace products and parts manufacturing as one of Canada's industrial research and development strengths.^{Footnote 6} Canadian companies must continue to invest aggressively in research and development to remain competitive and on the leading edge of new innovations.

The Strategic Aerospace and Defence Initiative (SADI) accelerates innovation by Canadian aerospace and defence companies which results in economic, technological and social benefits for Canadians. The program provides repayable contributions in support of strategic industrial and pre-competitive research and development. SADI was launched in 2007 and is delivered by the Industrial Technologies Office (ITO) of Industry Canada.

This report highlights developments in 2013–2014.

2. Supporting the Government of Canada's Science and Technology Strategy

On December 4, 2014, the Government of Canada launched the newly updated Science, Technology and Innovation Strategy: Seizing Canada's Moment: Moving Forward in Science, Technology and Innovation 2014, which builds on the foundation laid out in the 2007 Science and Technology framework, but goes further to ensure that Canada remains well positioned in the global arena for research excellence, talent and wealth.

This updated strategy leverages the expertise and resources of post-secondary institutions, industry and government to translate brilliant theories and ideas into applications that will improve the day-to-day lives of Canadians and generate economic growth and jobs across the country. It is guided by four core principles: promoting world-leading excellence, focusing on targeted priorities, fostering partnerships and enhancing accountability.

Since 2006, the Government has provided more than $11 billion in new resources to support basic and applied research, talent development, research infrastructure, and innovative activities in the private sector, including more effectively aligning federal support for research with business needs^{Footnote 7}.

SADI is an important part of the federal government's commitment to research and development and to encouraging strategic partnerships and collaboration among companies and research institutions. These commitments are key components of Industry Canada's mission, which is to foster a growing, competitive, knowledge-based Canadian economy.

By making repayable contributions in strategic industrial and pre-competitive research and development projects, SADI helps create a supportive environment in which Canadian companies can develop advanced products, services, processes and technologies. These efforts benefit not only the company conducting the research and development, but also other companies throughout the aerospace and defence supply chain and the Canadian economy as a whole, through technology transfer and other spill-over benefits.

At the same time, by nurturing private sector research and development at home, SADI helps Canadian companies of all sizes remain competitive in the global economy.

Figure 1. How SADI relates to the Government of Canada's Priorities

Economic Action Plan Priorities 2014 Beyond the Border Regulatory Cooperation Council Responsible Resource Development Jobs, Growth and Prosperity

Industry Canada Strategic Outcomes The Canadian marketplace is efficient and competitive Advancements in science and technology, knowledge and innovation strengthen the Canadian economy Canadian businesses and communities are competitive

Industrial Technologies Office Mission Statement To accelerate innovation by Canadian industries through support of research and development that results in economic and social benefits for Canadians

Strategic Aerospace and Defence Initiative Program Objectives To encourage strategic R&D that will result in innovation and excellence in new and improved products, services and processes To enhance the competitiveness of Canadian A&D companies To foster collaboration between research institutes, universities, colleges and the private sector

3. SADI Overview

SADI provides repayable contributions to support strategic research and development among Canadian based aerospace and defence industries. By sharing in the risks and rewards of research and development, SADI supports innovation by Canadian aerospace and defence companies. The program also encourages private sector investment in research and development by increasing the amount of capital available for eligible projects.

SADI's three objectives

1. encourage strategic research and development that will result in innovation and excellence in new or improved products, services, and/or processes;
2. enhance the competitiveness of Canadian aerospace and defence companies; and
3. foster collaboration between research institutes, universities, colleges and the private sector.

Eligibility Criteria

• The applicant must be a for-profit corporation incorporated under Canadian law.
• The project must comprise research and development that takes place in Canada.
• At least one percent of total eligible project costs must be allocated to post-secondary institutions in Canada.
• The project must comprise industrial research or pre-competitive development.
• The project must include strategic research and development activities that support the development of next generation aerospace and defence products, services and/or processes, build on Canadian strengths in aerospace and defence technology development, enable Canadian companies to participate in major platforms and supply chains, and/or assist the aerospace and defence industries in achieving Canada's international obligations.
• The applicant must demonstrate that SADI funding is essential to the location, scope and/or timing of the proposed project.

Project Approval Process

Submission of the Application: SADI applications are accepted throughout the year using an on-line application form. There are no submission deadlines, nor contribution minimum/maximum amounts. Once the on-line application form is complete, it becomes the applicant's project proposal.

Eligibility and Completeness Screening: ITO screens each proposal to ensure that the project meets the eligibility requirements and that the proposal contains adequate information upon which to start a due diligence review.

Due Diligence Review: ITO evaluates the company's capability to achieve the economic and social benefits that it expects will result from the research and development activities, through an assessment of financial resources, management expertise, the business plan, technical feasibility, etc.

Project Approval: Final project approval rests with the Minister of Industry. Funding requests for more than $10 million require Treasury Board approval. Funding requests for more than $20 million require Cabinet and Treasury Board approvals. Once a project receives approval, a contribution agreement is signed by the recipient and the Crown outlining the legally binding obligations and responsibilities of both parties and the conditions under which payments will be made.

Repayment Terms

The SADI program provides repayable contributions, as opposed to loans, covering up to 40 percent of the total eligible project costs. Repayments are unconditional or based on the recipient's gross business revenue, begin two years after the completion of the research and development, and are typically repaid over a 15-year period. The maximum amount repayable is based on risk as calculated by ITO during the due diligence review.

SADI also supports projects under the Defence Development Sharing Agreement (DDSA) with the United States Department of Defense and the Joint Strike Fighter (JSF) program. SADI supports up to 40 percent of eligible project costs. The nominal amount (100 percent) of the contribution is payable over 15 years for DDSA and over 20 years for JSF projects.

Monitoring Process

Annual site visits, monthly or quarterly progress reports, annual financial statements and annual benefit reports allow ITO to monitor the progress of each project, with greater oversight in cases of large and higher risk projects.

4. Financial Framework

SADI's program funding comes from appropriations made available through the estimates process, and an authority to access repayments collected from SADI and the program that preceded it, Technology Partnerships Canada (TPC), which ended in 2006. In addition, for fiscal year 2013–14, the program budget included funding from the $200 million over four years (2010–11 to 2013–14) announced in 2009. The budget for 2013–14 was $234 million.

As of March 31, 2014, a total of $1.16 billion in authorized assistance had been approved under SADI, of which $748 million^{Table note I} had been disbursed against eligible claims.

ITO's operating expenses for the management of SADI and TPC were $5.6 million in 2013–14. Operating expenses cover salaries, audits, site visits, employee training, outreach and other administrative program requirements.

5. SADI Project Portfolio

As of March 31, 2014 the SADI portfolio was comprised of 34 projects (with 27 recipients) and a combined authorized assistance of $1.16 billion. The authorized assistance ranged from $276,000 to $300 million per project. Many projects are still in the research and development phase and have yet to enter the repayment phase.

SADI provides contributions to companies of all sizes

Of the 34 SADI projects, small companies with less than 100 employees accounted for 15 projects and four percent of the authorized assistance; medium-sized companies with 100–500 employees accounted for 11 projects and 11 percent of the authorized assistance; and large companies with more than 500 employees accounted for eight projects and 85 percent of the authorized assistance.

SADI Projects by Firm Size (Number)

SADI Projects by Firm Size (Percent)

SADI supports the aerospace, space, defence, and security sectors:

Of the 34 SADI projects:

• 15 projects supported the aerospace sector accounting for 87 percent of the authorized assistance;
• 13 projects supported the defence sector accounting for 10 percent of the authorized assistance;
• three projects supported the space sector accounting for two percent of the authorized assistance; and
• three projects supported the security sector accounting for less than one percent of the authorized assistance.

SADI Projects by Sectors (Number)

SADI Authorized Assistance by Sectors (Percent)

SADI supports Canada's international objectives

Of the 34 SADI projects, five are developing new technologies for the Joint Strike Fighter (JSF) program and three are developing technologies for the government of the United States under the Defense Development Sharing Agreement (DDSA), a testament to the strength of Canadian companies in their respective niches.

• The five JSF projects account for 15 percent of SADI's portfolio and six percent of authorized assistance.
• The three DDSA projects account for nine percent of SADI's portfolio and 0.1 percent of authorized assistance.

6. SADI Results

SADI's Performance Measurement Strategy identifies performance indicators for each of the program's three objectives: innovation, competitiveness and collaboration. This section reports on the overall progress of recipients in meeting program objectives. For descriptions at a project level, please see Annex A.

Innovation

By March 31, 2014, 27 out of 34 projects resulted in the development of new or improved products, services, processes and/or technologies. In some cases, the entire project was not completed, but an element of it was completed and efforts had begun to commercialize or put into use the new technology. Many projects are in the research and development phase and are making good progress in achieving the activities outlined in their Statement of Work, as defined within each contribution agreement and summarized under Annex A.

In terms of the overall reporting^{Footnote 8} portfolio, 100 percent of projects being undertaken by large companies have resulted in the development of a new or improved product, service and/or process, 80 percent by medium-sized companies and 92 per cent by small companies, demonstrating that the majority of companies have been successful to date in significantly advancing their research and development work, regardless of the company size.

Strategies for protecting the technological developments enabled by SADI projects differ from company to company. Formal intellectual property protection, such as patenting, was used by a little more than a third of funding recipients while most companies relied on trade secrecy to protect the outcomes of their SADI research projects. To date, among those companies which did make use of formal intellectual property protection, on average, companies applied for nearly four patents (and were granted one),with the exception of one company which had a heavy focus on patenting.

As of March 31, 2014, $748 million of approved funding has been disbursed against eligible claims since the program's inception, leveraging over $1.4 billion from other sources to accelerate innovation in Canada, or $1.89 per SADI dollar disbursed (against a program target of $1.60).

Competitiveness

As of March 31, 2014, 19 out of 34 projects resulted in the successful commercialization of new and improved products, services, processes and/or technologies.

As described in Annex A, companies are progressing well in their early days of exploring new market opportunities. They are beginning to generate economic benefits to recipients and broader economic and other benefits, including environmental benefits.

An important indicator of competitiveness is the ability of a Canadian subsidiary of a multinational corporation to maintain or establish a research and development or production mandate^{Footnote 9} in Canada. When this occurs it demonstrates that the research and development work related to the SADI project has in part enabled the subsidiary to maintain or improve its leadership in its area of expertise.

Seven SADI recipient companies are subsidiaries of multinational corporations. As a result of their SADI project, 71 percent reported being able to maintain a current research and development or production mandate. Further, 43 percent of these subsidiaries reported being able to establish a new research and development or production mandate. In many cases, if a subsidiary obtained the research and development mandate, it also obtained the production mandate for the resulting product, service, process or technology.

Most recipient companies also reported other outcomes, as a result of their SADI project(s), that had a positive impact on their ability to compete. Companies reported an average of six positive competitiveness outcomes per project. The top four reported outcomes were: the ability to invest in training and skill development; the ability to penetrate new markets or sectors; an increase in number of customers; and the ability to invest in machinery, equipment and information and communications technologies.

Environmental advancements have also been achieved. As of March 31, 2014, twenty-five SADI projects have resulted in environmental efficiencies in areas such as energy consumption, production and material usage.

Collaboration

When companies undertake collaborative research and development with universities and colleges, the benefits extend beyond the goals of the specific project, resulting in a stronger alignment of research interests, training of the next generation of researchers and engineers, acceleration of innovation, improved access to research infrastructure, and increased student employment. By March 31, 2014, 28 out of 34 projects resulted in collaborations with various universities, colleges and affiliated research institutes. The target over the research and development phase of each project is to have all recipients engage in meaningful collaboration.

Some key collaboration results to date include:

• 23 projects have resulted in students being temporarily employed in the company (for the duration, or part of the duration, of the project).
• 17 projects have resulted in hiring students on a permanent basis as employees of the company.
• Seven projects have included supporting research chairs at universities.
• 10 projects have included supporting research laboratories.

The larger the company (in terms of employee size), the larger the number of students, research chairs and research labs supported. However, companies of all sizes benefitted from collaboration. More than 75 percent of all companies reported hiring students temporarily as part of their SADI projects. A higher proportion of large and small companies, as compared to medium-sized companies, hired students on a permanent basis as employees of their company.

To date, 73 percent of companies with projects that have completed the research and development phase have reported continuing with the collaborative relationships established during the SADI project. This demonstrates that companies are steadfast in their commitment to engage the research community and others beyond the SADI project.

7. 2013–2014 Highlights

Aerospace Review: Beyond the Horizon: Canada's Interests and Future in Aerospace

In 2011, the government launched a review of the aerospace and space sector. On November 29, 2012, David Emerson, head of the review, publicly released his reports, Beyond the Horizon: Canada's Interests and Future in Aerospace and Reaching Higher: Canada's Interests and Future in Space. These reports made recommendations to government to improve the long-term competitiveness of the sector.

Reflecting extensive consultation with industry, the report concluded that SADI is an essential tool in the government's tool box for helping companies finance research and development in Canada at levels they would not otherwise be able to justify given other demands on their resources. In the case of multinational companies, the report noted that SADI encourages research and development to be performed in Canada when it might otherwise be undertaken elsewhere.

The report recommended that the government maintain SADI funding at current levels and that modifications be made to improve the effectiveness of the program.

In response to the review, Economic Action Plan 2013 announced stable funding of almost $1 billion for SADI over the next five years and that a review of the SADI program would be undertaken to improve its effectiveness.

To enhance the incentive for the private sector to invest in research and development and reduce administrative burden, the government announced changes to the SADI program in December 2013. These changes included:

• Delaying the start of repayment for new SADI projects by one additional year to give companies approximately two years to tap into markets instead of one. This will better align repayments with the recipient's ability to realize project benefits, standardize the approach for all SADI projects, and increase repayments to the crown.
• Establishing a shorter service standard for companies with less than 100 employees and projects applying for contributions of less than $2 million. A shorter service standard will reduce the administrative burden of the program, result in more applications from small businesses, and enhance support for small business innovation in Canada.
• Increasing Industry Canada support to 40 percent of eligible project costs. This increase will provide greater risk sharing, standardize the approach for all companies, and incent more companies to undertake R&D.
• Supporting overhead at a rate of 75 percent of direct labour. This will reduce administrative burden, standardize the approach for all companies, and result in more support for the direct cost of innovation.
• Requiring recipients to make contractual commitments to locate high-value activity in Canada over the 15 year repayment period. This will generate significant benefits to Canada in terms of securing high skilled and high paying jobs.

The aerospace review also recommended the creation of a program to support, on a non-repayable basis, large-scale aerospace technology demonstration projects conducted by groups of collaborators.

Technology Demonstration Program (TDP)

In keeping with the Emerson report recommendation, on September 4, 2013, the Minister of Industry launched the TDP, fulfilling a key recommendation of the Aerospace Review.

The program supports large-scale technology demonstration projects conducted by groups of collaborators and will leverage other investments of sufficient scale to accelerate innovation in the aerospace, defence, space and security sectors. Projects funded through TDP are expected to be the basis for the next-generation of manufacturing and services in Canada, and bring long-term benefits to Canada.

Demonstration activities involve moving new technologies out of the laboratory in order to test them to ensure that they fulfill their intended use in a safe and efficient manner. This is a critical phase in the pre-commercial development of technologies for new aerospace and defence products. Companies often find it difficult to finance this step in the technology development process, limiting the speed and scale with which innovation is advanced.

The program will align the research agendas of industry and academia, giving students relevant study/work experience and accelerating the diffusion of knowledge. The program will also provide for a technology development environment where project members have the opportunity to share resources and prove their technologies simultaneously, thus accelerating technology development and minimizing development costs.

The TDP uses a two-stage competitive process to solicit applications from industry in order to award a non-repayable contribution to one or more large scale projects per year, up to a maximum of $54 million. Companies are first invited to submit a Statement of Interest. Those successful through this process are then invited to submit full proposals. Applications are evaluated against seven criteria: Economic Benefits to Canada, Broader Benefits to Canada, Collaboration, Innovation, Management and Technological Capability, Financial Capability, and Post Project Commitment. Together with an in-depth assessment of each proposal by subject matter experts, an interdepartmental and multi-disciplinary review is performed at each stage.

In September 2013 the first call for Statements of Interest under the TDP was announced. The proposals submitted are currently in the due diligence phase, with project announcements expected in Winter 2015. The second call for Statements of Interest was issued June 2, 2014.

Further details on the TDP can be found at http://ito.ic.gc.ca/eic/site/ito-oti.nsf/eng/Home

New Agreements

AXYS Technologies Inc.

The government approved a $2 million repayable contribution to AXYS Technologies Inc. This Sydney, British Columbia-based company is developing a new maritime surveillance technology. This project will help the company develop applications that collect, analyze and display sensitive maritime data to enhance port and harbour security. Users will be able to monitor potential criminal threats in real time. Ultimately, the project will make ports and harbours safer around the world.

The full press release can be found at: http://news.gc.ca/web/article-en.do?nid=764959

Ultra Electronics Maritime Systems Inc.

The government approved a repayable contribution of $8.2 million to Dartmouth-based Ultra Electronics Maritime Systems Inc. The contribution will support a research and development project to develop next generation sonar technologies. The company will collaborate with research institutes at Canadian universities in carrying out this project, which involves building smaller, lighter versions of existing sonar systems, with improved capabilities and performance. The full press release can be found at: http://news.gc.ca/web/article-en.do?nid=768709

CAE Inc.

The government approved a repayable contribution of $250 million to CAE Inc. The contribution will support a research and development project to develop new simulation technology for its next-generation civilian and military aircraft flight simulators. This project will enable CAE to update and modernize its flight simulation software, which the military can use to simulate missions and train its forces at lower costs.

The full press release can be found at: http://news.gc.ca/web/article-en.do?mthd=tp&crtr.page=1&nid=819329&crtr.tp1D=1

Avcorp Industries Inc.

The government approved a repayable contribution of $4.4 million to Avcorp Industries Inc. The project will develop new technologies in metal bonding which it will use to manufacture new aircraft components, such as structural panels, rudders and wing parts. This multi-year project will help the company gain a competitive advantage through cost-effective, advanced manufacturing. The project will provide work for Avcorp's suppliers as well as valuable hands-on experience for the university students selected to work on the project.

The full press release can be found at: http://news.gc.ca/web/article-en.do?mthd=index&crtr.page=1&nid=840719&_ga=1.7402994.1111990948.1393513338

Dominis Engineering Ltd.

The government approved a repayable contribution of $544,500 to Dominis Engineering Ltd. The Ottawa-based company will perform research and development to create an innovative new production process for large naval propellers. The project will allow Dominis to expand the market opportunities for its state-of-the-art marine products and keep the firm at the forefront of marine technology advances, where innovation is essential for long-term competitiveness.

The full press release can be found at: http://news.gc.ca/web/article-en.do?nid=865189

Service Standards

ITO is committed to continual improvement with regard to service delivery standards. These standards are aimed at improving the quality and timeliness of its service. ITO staff work with clients to ensure that information requirements and processes are well understood so that these objectives can be met.

We aim to respond to requests for information from the public within one business day. This applies to requests received via phone or email (contact information is available on ITO's website). In 2013–2014, we achieved this target 89 percent of the time.

Our target is to process claims within 45 days, 90 percent of the time. In 2013–14, 117 claims were submitted and 100 percent of them were processed within the 45 day period.

While we strive to complete the processing of applications for under $10 million within the six month service standard, we do not compromise our due diligence and take the necessary time required to ensure an appropriate review. Out of the five agreements approved in 2013–14, four were under $10 million, of which three were approved within six months. More time was required to complete the appropriate review and assessment of the fourth project.

In 2013–14, ITO processed 43 percent of all amendments to existing contribution agreements within six months. Processing times for amendments in some instances exceeded the standards. In each case, the complexity of the project and/or negotiations necessitated additional rigour and time.

Service standards results are published annually on ITO's website at http://ito.ic.gc.ca/eic/site/ito-oti.nsf/eng/00734.html.

Recipient Audits

In 2013–14, ITO performed a total of 16 SADI and TPC project audits: two cost audits, thirteen revenue audits and one lobbyist audit. Projects were selected for audit based on risk and materiality. The projects audited are part of a multi-year audit plan which identifies audits planned for the period ending 2016–17. Recipients were found to be in compliance with the conditions of the contribution agreements and where audit issues were found, all were resolved satisfactorily.

8. Conclusion

SADI is fulfilling its key objectives: encouraging innovation through research and development excellence, enhancing the competitiveness of Canadian companies, and fostering collaboration between the private sector, research institutions and universities.

Although many SADI projects are currently in the research and development phase, significant progress is already being made toward achieving benefits to Canada.

Business priorities for 2014–15 include continued efforts to increase SADI program awareness and investments, and a continued commitment to service excellence.