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The federal government is opening up the acquisition process for its $26-billion contract for new fighter jets, responding to threats from the U.S. government that it would refuse to sell the stealth Lockheed Martin F-35 unless Ottawa scrapped its quota for aerospace spending.

The changes to the process were presented to potential bidders this week, after it emerged the U.S. government threatened to pull the F-35 from the competition if the requirement for industrial benefits was not modified.

Under the new process, Ottawa will no longer force all bidders to commit 100 per cent of the value of the aircraft’s acquisition and sustainment on spending in Canada. Instead, manufacturers will lose points in the scoring system if they do not make this commitment, but they will still be allowed to remain in the competition, said federal and industry sources to whom The Globe and Mail granted anonymity because they were not authorized to speak publicly on the matter.

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Before the changes were approved by the federal cabinet, the F-35 could have been automatically disqualified because the international consortium that builds the aircraft doesn’t allow for the provision of traditional industrial benefits. Instead, the F-35 program awards production contracts on a competitive basis in partner countries, without any formal guarantees of investments in those countries.

Ottawa has spent more than $500-million to be a partner in the program over the past 20 years, including $54-million last year. Canadian companies have secured $1.5-billion so far in contracts on the aircraft, according to the government.

The Liberals have promised to buy 88 new fighter jets through a competitive process to replace the Canadian Armed Forces’ fleet of CF-18s.

The government has delayed the release of the final request for proposal (RFP) to midsummer. According to the previous schedule, the final RFP was supposed to come out this spring.

The prequalified aircraft for the competition are the Lockheed Martin F-35; the Boeing Super Hornet; the Saab Gripen; and the Eurofighter Typhoon, which is made by a consortium that includes Airbus.

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Federal officials said they have made a series of changes to the requirements in recent months to accommodate concerns from all potential bidders.

For example, the requirements that called for a stealth aircraft are no longer mandatory, given the fact that the F-35 was the only fighter jet that could meet them. As well, the government has given additional time to bidders to achieve interoperability with the U.S. military, which is essential for European-built aircraft that are not in use by the U.S. military.

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The final bids will be graded according to three criteria: technological capabilities, cost and industrial benefits.

In the first version of the draft RFP, the government assigned 60 per cent of the points for technological capabilities; 25 per cent for cost; and 15 per cent for industrial benefits.

Under the new process, the government has kept a value of 60 per cent for technical requirements, but gave a value of 20 per cent for cost and 20 per cent for industrial benefits.

The new 60-20-20 formula means that the package of industrial benefits will be given more weight in the final evaluation of the bids than what had been originally contemplated. As such, the government will be giving more points to companies that commit to spending the entire value of the program in Canada, while allowing companies that offer a different type of benefits package to remain in the race.

The procurement is particularly complex as the government tries to design a process that will deliver a new fleet as quickly as possible, without getting bogged down in litigation from any of the bidders.

“Our government has been hard working to address as much of the supplier feedback as possible to ensure a level playing field and a fair and open competition with as many eligible suppliers as possible,” Ashley Michnowski, a spokeswoman for Procurement Minister Carla Qualtrough, said in a statement this week.

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On Monday, the Macdonald-Laurier Institute, a public-policy think tank, revealed that American officials had warned their Canadian counterparts that the F-35 might be pulled from the competition unless Canada’s requirements for industrial benefits were modified.

The U.S. government has been concerned by Canada’s Industrial and Technological Benefits (ITB) policy, which requires the winner of the contract to invest the equivalent of the acquisition cost in Canada.

In a letter to Canadian officials last December, Vice-Admiral Mathias Winter of the U.S. Navy said that Canada has received US$1.3-billion in economic benefits from its participation in the F-35 program since 2006.

“The F-35 supplier team will submit an F-35 offer only if (1) the ITB requirement is waived entirely and (2) there is no future ITB obligation arising from selecting the F-35,” Vice-Adm. Winter said.

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