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Innovation Canada: A Call to Action
Special Report on Procurement

A Potential Set of Procurement Initiatives

The creation of new initiatives that seek to make better use of procurement to stimulate innovation would signal that the federal government is aware of the potential opportunities to promote business innovation using this tool. There are also a number of possible complementary policy directions and potential improvements to the recent initiatives still in start-up mode (PWGSC's CICP, DND's Project ACCORD, and Industry Canada's revised IRB policy) that could be put in place. These initiatives fall under three areas: general procurement, strategic civilian initiatives and defence procurement.

General Procurement

The federal government's contracting policy could be made more supportive of innovation with a few changes. First, supporting innovation could be listed explicitly as an important subobjective of the overall value-for-money objective. Second, the policy could cite the use of performance specifications or outcomes as the first choice in developing requests for proposals, with justification required for the use of design specifications in other than housekeeping purchases.

Another area of unrealized potential relates to contracting out of R&D. In the 1970s and 1980s, a major push was mounted in the federal government to contract out R&D as a means of boosting business capacity. It floundered along with its chief proponent, the Ministry of State for Science and Technology, because government departments and agencies could ignore the optional policy. As outlined previously, that situation continues today to the extent that the large science departments conduct a majority of their R&D in-house.

The option of early adoption of a US-style SBIR program, whereby a percentage of extramural contracts is set-aside for small business, would be unlikely to bring about fundamental change in the Canadian context, because the underlying problem for most departments is an overall lack of contracting out regardless of business size. For systemic change to be brought about, the level of extramural R&D will need to rise, especially among departments and agencies with a business orientation. The use of annual targets would help catalyse this process.

Strategic Civilian Initiatives

A potential avenue for changing the procurement culture from one that is risk averse to one that seeks to manage risk for superior results is to undertake a series of pilot procurement initiatives in select areas. Highly selective initiatives by their nature would contain risk while demonstrating the benefits of an innovation-based approach. Areas could include health care (military hospitals, sharedfunding vaccine programs), ICTs (emerging federal requirements), environment (demonstration of SDTC technologies) and construction (federal "green" requirements). As new sectoral pilot initiatives are developed, there is also opportunity for existing innovation programs to be better aligned to provide support.

The fact that sectoral pilot initiatives would result in leakage to foreign suppliers because of trade rules should not constitute a deterrent to deploying them. Open competition stimulates innovation among all players in an industry, and the real long-term goal is to develop a state-of-the-art mindset among acquiring government departments and agencies.

Pilot programs along these lines would complement the CICP or could be incorporated into an updated and expanded program. They would be quintessentially demand-pull initiatives, promoting innovation in fulfilling existing government-wide and departmentspecific needs. The current CICP is arguably more of a hybrid initiative, with a supply-push from industry trying to create demand for future products through a brokerage process. It is actively being assessed with a view to making recommendations to government on future directions.

Defence Procurement

The government's existing suite of initiatives and potential augmentations in civilian procurement pale in comparison with the opportunities emanating from the sheer magnitude of forthcoming defence and related security procurement.

Many of the benefits to Canadian industry will be through industrial offsets, since the preponderance of major contracts will still be led by foreign prime contractors. The recently updated IRB policy has attempted to improve incentives to prime contractors to promote long-term innovation capacity in Canadian industry. It is not clear at this point whether those incentives will be sufficient to leverage activity designed to integrate Canadian companies into global supply chains over the longer term.

Although IRBs are set at 100 percent of the value of contracts (with only Canadian valueadded credited), the real issue on a go-forward basis is not quantitative but qualitative in terms of guiding foreign primes on specific desired industrial capabilities to support Canada's vital defence and security interests.

Part of the challenge is that IRB packages are evaluated as pass-fail rather than as a rated element of the overall contract. As such, their implementation is at the discretion of the prime contractor. The use of "value propositions," essentially a type of offset, in the NSPS as a rated element, could present a useful model for more widespread use.

For IRBs to be more oriented toward leadingedge technology development and commercialization rather than traditional build-to-print work, government needs to identify the industrial capabilities essential to Canada's defence and security. This suggests that Canada would be well served to emulate countries like Australia in defining "priority industry capabilities" and aligning its defence procurement practices and support programs to develop those capabilities in anticipation of emerging defence and security needs. The NSPS constitutes a step in that direction, and Canadian industry has no shortage of ideas on what other capabilities should be promoted. An important caveat, however, is that care must be taken to be highly selective in defining desired industrial capabilities, recognizing that such choices will alter the competitive landscape in Canadian industry, and also recognizing the potential trade-off between higher costs in the short-term and long-term security of supply and self-sustaining export capability.

At the present time, DND's main instrument in promoting long-term industrial capability, Project ACCORD, has only recently been launched and its potential therefore remains untested. What is clear, though, is that about 60 percent of DND's R&D requirements are still met internally. Contracting out an increasing proportion of R&D requirements should therefore be a feature of the evolving Project ACCORD.

Support for the commercialization of defence technologies developed directly and indirectly through procurement appears to be a missing link in the value chain. Such a commercialization mandate could be tied in explicitly to Project ACCORD's and the Technology Demonstration Program's priority technology areas, and it could be funded in part through further leveraging of offset packages amounting to billions of dollars in the coming years.