By Debbie Lawes

Canada is doing a poor job of exploiting exemptions in trade agreements that would give homegrown technology companies — particularly small and mid-sized businesses (SMEs)— preferential treatment on government contracts, concludes a second report by an expert panel reviewing federal support for R&D. Released November 4, the special report on Procurement in Support of Business Innovation tackles many longstanding industry grievances over public procurement, which the panel concludes is one of the best policy instruments available to stimulate business innovation.

International trade agreements tend to favour open competition over any bias towards domestic suppliers, but there are exceptions, notably defence and security, R&D contracts, prototype development and set asides for small businesses. The report notes that other countries, including middle powers like Australia, are far more aggressive in exploiting these opportunities.

"We do not appear to be constrained by international agreements providing for Canadian preference or providing incentives for Canadian firms over international firms, so the question is why aren't we doing it?," asks Dr Adam Holbrook of the Centre for Policy Research on Science and Technology at Simon Fraser Univ.

The problems are particularly acute in the defence sector, where over the past 30 years Canada has largely relied on offsets (Industrial Research Benefits) to grow its defence industry. Other countries rely more on procurement. Canada has taken recent steps to change with a Canada-first approach to its Joint Strike Fighter aircraft program and National Ship Procurement Strategy, and a commitment in Budget 2011 to develop a defence procurement strategy to leverage jobs, innovation and economic activity in Canada.

But the expert panel says Canada needs to go further: "Notwithstanding recent changes, Canada is generally an outlier internationally with respect to the use of defence procurement to promote an industrial base. This results in a unlevel playing field internationally," it states.

Tim Page, president of the Canadian Association of Defence and Security Industries (CADSI), applauds the report's recommendations and says he's getting positive signs that the government is willing to act on this issue. He notes that Public Works minister Rona Ambrose specifically asked the expert panel for a separate report on procurement, with an emphasis on defence spending.

"(Panel chair Tom Jenkins) didn't make up this stuff. He's responding to the government's request for advice which tells me that the government is concerned about the leverage it's currently getting from defence procurement and wants to improve," says Page.

While optimistic, he says the report will mean little unless government moves quickly. "It's a moment of promise but it's a fleeting moment if the government isn't able or willing to act quickly in order to optimize the opportunities that will come from a defence industrial strategy and the leveraging of that through defence spending."

At a time of across the board government cutbacks, defence and security represent the biggest contracting opportunities for Canadian technology companies, particularly innovative small companies. The government has stated that it plans to spend $240 billion on defence and security investments over the next 20 years.

Ensuring Canadian companies get the biggest bang from these contracts will depend on several things, the report notes. One is the development of a defence industry strategy that involves domestic companies early in the process, and promotes SME participation in global value chains.

To start, it says government must make innovation a core objective of procurement. Departments are given considerable leeway in defining their procurement objectives, yet many travel the path of least resistance, choosing large foreign companies who come in with the lowest price.

"Governments have become excessively risk averse so they tend to prefer to have the IBMs and HPs of the world leading these contracts," says Michael Turner, VP systems strategies at investment and holding company Wesley Clover International Corp.

The government describes this approach as "value for money". Turner describes it as the "lowest price at any cost." While governments may save money in the short-term, he says they lose in the long-term by weakening the capacity and capabilities of Canada's industrial base.

"It's extremely difficult, verging on the impossible, to sell technologies in Canada to our own government, particularly in the IT and telecom space," says Turner. "And when a client asks you if you have sold this to your government at home, and you say no, there's an automatic black mark against you compared to the competition."

contract research

The report identifies contract research as another underutilized tool for stimulating innovation. Of the federal government's $2.7 billion in intramural R&D in 2009-10, less than a third ($0.8 billion) was contracted to business, with three agencies awarding the lion's share: Canadian Space Agency ($250 million), National Research Council ($150 million) and DND ($100 million). It points out there is no government-wide policy mandating or even promoting contracting out, even though trade agreements exempt R&D contracts and "first product or service" and prototype development from open bidding.

The panel recommends that departments and agencies be given targets for extramural R&D, including a sub-target for SMEs. Holbrook says such a move would likely result in a downsizing of existing government research operations. "It wouldn't really increase R&D spending as much as transfer it," he says. "Still, contracting out more is probably a good idea, but more from the ‘D' than the ‘R' side."

The report also says greater efforts are needed to ensure that departments grant intellectual property rights to companies that carry out the research.

The procurement report is supplementary to the expert panel's main report — Innovation Canada: A Call to Action — released October 17 (R$, Oct. 31/11).

R$