Strategic Procurement: Doing more without spending more

By Laurent Carbonneau
Director of Policy and Research

Canada is facing two concurrent challenges. On the one hand, we have been grappling with anemic innovation outcomes for years. And on the other hand, rising inflation and a challenging economic environment means that the government is operating under tightening fiscal constraints.  

Each challenge makes it harder to deal with the other. We can’t just throw money at innovation programs, and we won’t increase government revenue without the kind of economic growth that innovative companies provide.

We’ll have to get creative as a country about how to do more with less on the policy front until either of those challenges is addressed.

Last time here at Mooseworks, we talked about how to make cost-neutral changes to Canada’s single biggest innovation program, the SR&ED tax credit. Following up on the theme of doing more with less, we should take a hard look at how the government buys.

Public procurement in Canada makes up about 15% of GDP — about as much as the natural resources sector. One in four dollars spent by all governments across Canada goes to buying goods and services from private sector providers. It’s money we’re all collectively already spending. So how can we spend it better to drive innovation?

This is not particularly novel outside of the Canadian context. The global semiconductor and aerospace industries are essentially creatures of the mid-century American defence industry, though obviously by now they have dramatically grown past that.

Today, defence needs can still be a major driver of growth in strategically important sectors. As we touched on last year, Canadian cybersecurity companies have no problem selling to governments abroad but struggle to sell to the public sector at home.

Zooming out a bit to the policy level, Canada’s science and innovation policy have historically been almost entirely supply-side. Taxpayers fund basic and applied research through grants and tax incentives. But our governments don’t do much on the demand side to act as a validator and a potential market for new solutions to problems.

More than anything, innovators find that the public sector in Canada is totally unwilling to take risks with procurement. On the one hand, this makes sense. We want procurement to be ethical and effective. We don’t want the government to waste money. But the reality is that the status quo has its own risks – and it’s easy for people in the system to underestimate the risks of not addressing the broken status quo.

What do other countries do? The Americans, as is usually the case, smother the problem with cash under the auspices of maintaining global military hegemony. One element of this is the Small Business Innovation Research (SBIR) program. This program is essentially a competitive granting program based around pre-commercial procurement that requires every agency that conducts over $100 million in external research to set aside a portion of their budget for small businesses. SBIR-backed companies are three times more likely to have scientific publications and eight times more likely to patent. They are also five times more likely to subsequently attract angel or venture capital funding and three times more likely to pursue an initial public offering or be acquired.

While we can’t match the scale – SBIR costs the US government about $2.5 billion each year – there is really no reason we can’t mandate a structured set-aside for research through SMEs and scaling companies. The mixed experience of programs like Innovative Solutions Canada and the Department of National Defence’s IDeAs program shows that soft mandates aren’t enough on their own. There have to be teeth to these things and real consequences for departments that don’t meet their commitments.

But on the other hand, doing innovation procurement is genuinely hard. It’s hard to blame public servants for feeling under-equipped to define needs in ways the market will respond to and then find the right supplier for a product that doesn’t yet exist. The other piece that countries like Finland do is to create structures to build competence, expertise, and confidence within the public sector to undertake innovation procurement. Business Finland, for instance, is an arm’s length public entity that helps empower government departments and municipalities with funding and assistance to get through the first few stages of an innovation procurement process. That internal de-risking and competency development then goes a long way to making the next innovation procurement easier.

A twin approach using both mandates and supports could be the combination that Canada needs to break the public sector out of its risk-averse mold. This would help innovators develop solutions to public problems, find broader markets, and eventually become competitive exporters. Income from actual commercial contracts is worth a lot more than grants and tax credits – it’s bankable in a way that these other tools just aren’t.

CCI has been calling 2024 the Year of Procurement – it’s a huge unsolved challenge for Canadian innovators and it’s one that we need to come together to solve.

On that theme - we’ll have a fun new report for you to read (Buying Ideas: Procuring Public Sector Innovation in Canada) a little later this winter. If you’re a Mooseworks-reading policy wonk, you will probably greatly enjoy it.