The Liberal government has signed a $500-million deal with IBM Canada Ltd. without any competitive bidding — a move being slammed by Canada's home-grown technology firms.

"This is yet another example of how the government's procurement process favours large, multinational companies and doesn't give highly qualified companies even a fair shot to bid for these projects," said Benjamin Bergen, executive director of the Council of Canadian Innovators.

The massive deal with IBM, signed in November and extending until 2021, includes $289 million in optional additional spending, putting the potential total cost at almost $790 million.

The troubled Phoenix payroll system, created under contract with IBM Canada, has created chaos for public servants. (CBC)

It's the largest sole-source deal ever signed by Shared Services Canada. It may be the largest non-competitive contract in federal procurement history.

The deal follows more than a year of controversy over the dysfunctional Phoenix payroll system, created through a separate contract with IBM Canada. The system has been criticized for paying some civil servants too much, some too little and others not at all, as well as mishandling vacation and retirement rolls. The original Phoenix deal has been amended 44 times, and increased in value this year by $36.5 million to $277 million.

The latest contract is unrelated to Phoenix. It tasks IBM with delivering 16 new mainframes, along with maintenance and support for existing hardware and software, to at least six federal departments. The $500-million deal consolidates four contracts that were to expire in 2017 and 2018.

"Owing to intellectual property issues relating to proprietary hardware and software, IBM is the only supplier capable of performing the work," says a November 2017 memo to Ron Parker, president of Shared Services Canada (SSC).

"The proposed contract is a legacy sustainment contract servicing existing infrastructure. SSC anticipates continued use of these products and services for the foreseeable future."

Deal called 'disappointing'

CBC News obtained the heavily censored memo under the Access to Information Act.

"It's definitely disappointing, even after all the issues with the Phoenix pay system, that the Canadian government opts to go with a foreign vendor," said Bergen, whose group represents the CEOs of dozens of Canadian technology firms.

The federal Chief Information Officer Alex Benay has suggested in the past that Ottawa's "IT procurement processes favour incumbents and don't foster enough new entrants into the process."

Alex Benay, Canada's chief information officer, has already suggested that federal procurement favours large multinational firms over smaller Canadian businesses. (CBC)

A study Benay ordered last summer found that IBM Canada was Ottawa's top vendor, with contracts valued at $3.1 billion in the 2016-2017 fiscal year.

"From the Top IT Vendors report, we see there is a large concentration (almost $10 billion) across a small number of large international IT companies," Benay said last August in a memo, also obtained under access to information.

IBM is fulfilling its obligations on the Phoenix contract, and the software is functioning as specified by the government - Carrie Bendzsa, IBM spokesperson

A spokesperson for SSC, Frederica Dupuis, defended the giant IBM contract, saying the agency "was able to stabilize pricing, avoid annual price increases and simplify contract management."

"These mainframes are super computers that process millions of transactions per minute which provide a reliable computing platform for Government of Canada mission critical applications and services," such as the Old Age Security (OAS) and Employment Insurance and Canada Child Benefit programs, she said.

An IBM spokesperson declined to comment on the latest deal with SSC and defended the firm's Phoenix work.

"As the Canadian government has repeatedly acknowledged, IBM is fulfilling its obligations on the Phoenix contract and the software is functioning as specified by the government," said Carrie Bendzsa.

Shirley Taylor wears a 'Burnt by Phoenix' sticker on her forehead during a rally against the Phoenix payroll system outside the offices of the Treasury Board of Canada in Ottawa on Wednesday, Feb. 28, 2018. (Justin Tang/Canadian Press)

She added that IBM Canada has invested more than $10 billion in Canadian research and development over the last decade.

"For the past 101 years, IBM Canada has been a deep part of the social and economic fabric of this country," said Bendzsa.

Sole-sourcing is rare

Ottawa has signed a few contracts larger than the latest IBM deal — typically for shipbuilding and defence — but only following competitive processes designed to get the best value.

Large, sole-source federal contracts — such as the current $296-million deal with Macdonald Dettwiler and Associates to provide engineering support for the mobile servicing system on the International Space Station — are rare.

Shared Services Canada also has a sole-source deal with Microsoft Corp. for licences for proprietary software and maintenance, currently valued at $343 million.

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