Jenkins report calls for dismantling of National Research Council, less SR&ED and more direct support for business R&D

A long-awaited report being released today is calling for the complete dismantling of the National Research Council (NRC) and significant reductions in the federal R&D tax credit program with the savings shifted to programs that directly support business R&D. Commissioned by the Conservative government last year, the report's six main recommendations represent a massive rebalancing of federal support for R&D that would create new mechanisms for directly supporting business innovation to help grow innovative companies into large enterprises with global reach and muscle.

The Review of Federal Support to Research and Development - Expert Panel Report — a copy of which was obtained by RE$EARCH MONEY —also calls for government procurement to play a much larger role in support of business innovation, more federal funding of start-up and follow-on funding for early-stage and growing innovative firms, a ministerial champion with a mandate to position innovation as a central tenant of economic strategy, and greater collaboration with the provinces and business leaders. The panel also concluded that there were too many direct support programs and most are too small to have significant impact, leading to a call to reduce the overall number and create larger programs to "increase scale, reduce duplication, improve service delivery and create much greater awareness among potential business sector clients".

The report is being delivered to science and technology minister Dr Gary Goodyear, and is considered to be revenue neutral in that it doesn't advocate for an increase or decrease of current R&D and innovation spending levels. It will be up to the government to accept or reject the recommendations. It's estimated that federal R&D spending by more than 100 programs and institutes totaled $6.44 billion in 2010-11. The panel examined 60 programs with spending of $4.96 billion, including the scientific research & experimental development (SR&ED) program. Although the government is seeking to reduce federal spending by $4 billion to achieve its deficit elimination target, Goodyear has said that research funding is not on the chopping block.

"The Panel believes the government should rebalance the mix of direct and indirect funding by decreasing spending through the SR&ED program and directing the savings to complementary initiatives focused on serving the needs of innovative Canadian firms, especially … SMEs."

Known as the Jenkins Report after panel chair Tom Jenkins, executive chair of Open Text Corp, recommendations also include transforming the federal government source of S&T advice — the Science, Technology and Innovation Council (STIC) — into an external Innovation Advisory Committee with two sub-committees on business innovation and science and research.

But it is the report's call for disbursing the assets of the NRC and limiting SR&ED tax credits to labour-related costs that are likely to command the most attention — and controversy.

In what is described as an "evolution", the assets of the 95-year-old NRC would be disbursed over the next five years by transforming the individual institutes into "a constellation of large-scale, sectoral collaborative business R&D centres involving business, the university sector and the provinces" with its policy-related activities transferred to "appropriate federal agencies".

The NRC's Industrial Research Assistance Program (IRAP) would be transferred to a major new organization — the Industrial Research and Innovation Council (IRIC) — an arm's length funding and delivery agency that is a demand-driven organization with clear performance metrics and a government-wide orientation. IRIC would become the common service platform for a reduced number of larger, more flexible business innovation support programs that would ultimately be responsible for developing a federal business innovation strategy. IRAP's budget would be increased and a five-year "national commercialization vouchers pilot program" would be established.

NRC institutes engaged in business-related R&D (the majority) would be transformed into national institutes motivated by industry needs — industry-oriented, non-profit organizations mandated to undertake collaborative R&D and commercialization projects and services "funded by amounts drawn against existing NRC appropriations together with revenue earned from collaborative activities"

"The distribution of expenditure across the many direct spending programs is highly skewed … Only one program - IRAP - accounted for more than 15 percent of direct expenditure in 2010-11, while more than 50 percent of the programs each spent less than 1 percent of the $1.5 billion direct expenditure total."

Those with a more fundamental research focus would become affiliated with one or more universities, while NRC policy functions would be transferred to relevant government departments. Those institutes that do not fit into any of the above categories — those conducting "residual activities … or institutes that are unable to secure adequate funding would be would down according to an appropriate transition plan".

Equally contentious are the report's recommendations for changes to SR&ED — the bedrock of existing federal support for business R&D accounting for $3.5 billion or 70% of the funding covered by the review. While the report does not say by how what amount SR&ED should be reduced, it appears it will be considerable, allowing a re-allocation of funds to new and larger direct support programs that benefit SMEs in particular.

"In its present form the NRC has an overly broad — and therefore unfocused and fragmented — mandate … There is now the clear opportunity for the NRC to address Canada's large-scale collaboration gap by evolving the majority of its current institutes into a national network of institutes ... motivated by industrial needs."

"The Panel has concluded that the program should be simplified to reduce compliance and administration costs," states the report. "Moreover, the benefit should be restructured to generate savings for reallocation to other initiatives benefiting small and medium-sized firms."

Reducing the complexity of SR&ED by limiting it to labour-related costs will reduce the amount of money firms have to spend on consulting firms, the report says. It acknowledges, however, that the government should consider extending the labour-based approach to all firms over time, "provided it is able to provide compensatory assistance to offset the negative impacts of this approach on large firms with high non-labour R&D costs."

The Jenkins report builds on previous work by the Council of Canadian Academies and STIC, both of which have generated reports focused on the challenges of increasing the low productivity of the Canadian economy and the relatively low levels of R&D performed by the private sector. The panel's mandate is to advise on the effectiveness of federal business R&D support programs, the appropriateness of the current mix, program design and gap in the federal system of business R&D support and options for filling them.

In conducting its work, it developed and followed a set of guiding principles. Recommendations are based on the need for transformative programs that achieve a positive net benefit, favour national scope and application, build sector strategies collaboratively and require commercial success in regional innovation.

initial reaction

"I'd give it a B+ within the mandate it was given. This is a federal report that looks at a small piece of Canada's innovation system and it's revenue neutral," says Paul Dufour, a veteran of S&T policy in Ottawa and principal of PaulicyWorks. "And don't forget, this is a report to a junior minister. It needs buy-in from the higher levels of government like the PMO (Prime Minister's Office) and Finance."

Ron Freedman, an S&T consultant with The Impact Group and co-publisher of RE$EARCH MONEY, also rates the report as a B+ but cautions that the devil is in the details as the recommendations tread on many established interest and departmental responsibilities.

"There's a good understanding of the distinction between R&D and innovation but the report is more about how the world should be rather than what the government should do. There's also very little discussion of micro-economics," says Freedman.

Freedman also takes exception to the recommendation to reduce the eligibility of SR&ED.

"It does not address the core problem of SR&ED which is the definition of what is eligible. It's so tightly focused on on the OECD-Frascati guidelines that it's nearly useless," he says. "It should be more like the IRAP definition which is more catholic and focused on overall business innovation."

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