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Innovation Canada: A Call to Action
Special Report on Procurement

Annex: Text of Procurement Recommendations

Recommendation 3

Make business innovation one of the core objectives of procurement, with the supporting initiatives to achieve this objective.

The Vision of the Panel

The government's procurement and related programming must be used to create opportunity and demand for leading-edge goods, services and technologies from Canadian suppliers, thereby fostering the development of innovative and globally competitive Canadian companies while also stimulating innovation and greater productivity in the delivery of public sector goods and services.

Getting There

To realize this vision, the government should incorporate the following practices in its procurement initiatives.

3.1 Innovation as an objective — Make the encouragement of innovation in the Canadian economy a stated objective of procurement policies and programs.

In practice, this broad recommendation requires the government to regard any significant acquisitions of goods and services as opportunities to build SME innovative capabilities, and thus to strengthen both the base of suppliers for future procurement and, more generally, the innovation capacity of the Canadian economy. This will require the government over time to undertake a comprehensive review of procurement policies and activities to ensure that they are supporting innovation and that departments have the flexibility to work with private sector solution providers and then acquire and deploy the resulting solutions. As first steps for action, the Panel further makes the following recommendations.

3.2 Scope for innovative proposals — Wherever feasible and appropriate, base procurement requests for proposals on a description of the needs to be met or problems to be solved, rather than on detailed technical specifications that leave too little opportunity for innovative proposals.

The use of procurement to foster the innovation capacity of Canadian companies requires a revised approach to value-for-money based on outcomes-oriented specifications. Procurement on the basis of the outcomes desired sets a challenge for industry and thus motivates innovative solutions from potential suppliers. This has the dual benefit of bringing forward better products for the buyer and developing an innovation-focussed mindset in the supplier communities. The use of an outcome-oriented procurement specification does not need to be an invariable rule, since there will be cases where more detailed technical specifications for a particular procurement would be clearly appropriate and would not be inconsistent with the intent of this recommendation.

3.3 Demand-pull — Establish targets for departments and agencies for contracting out R&D expenditures, including a subtarget for SMEs, and evolve the current pilot phase of the Canadian Innovation Commercialization Program (CICP) into a permanent, larger program that solicits and funds the development of solutions to specific departmental needs so that the government stimulates demand for, and becomes a first-time user of, innovative products and technologies.

Federal departments and agencies, including those of major industry relevance, such as the Department of National Defence, undertake most non-regulatory R&D internally. According to Statistics Canada (2010, Federal Scientific Activities 2010/2011. Cat. no. 88-204-X. Table 1-7, p. 16 [available online at: http://www.statcan.gc.ca/pub/88-204-x/88-204-x2010001-eng.pdf]), federal in-house R&D is projected at $1.9 billion in 2010–11, while R&D contracted to businesses is projected to amount to $272 million (Statistics Canada 2010, Table 1-9, p. 17) or only about 15 percent of the in-house R&D total. More than 80 percent of the amount of R&D contracted to businesses is accounted for by two agencies—the Canadian Space Agency at $167 million and the Department of National Defence at $59 million (Statistics Canada 2010). Setting specific department-by-department targets for external R&D contracts would promote business innovation while potentially improving outcomes for contracting departments and strengthening their ability to deliver on their mandates.

The current CICP pilot is "supply-push" in the sense that the applicants submit proposals to provide innovative solutions for trial and testing, though not as responses to explicitly identified needs of a particular department or agency. A new pilot element is needed that would provide incentives for solving operational problems identified by departments. Making the revised CICP a permanent program, once performance of a revised pilot can be evaluated, would help change the procurement culture.

3.4 Globally competitive capabilities — Plan and design major Crown procurements to provide opportunities for Canadian companies to become globally competitive subcontractors.

The currently planned procurement of defence and security-related equipment and services presents a significant opportunity to greatly increase the technological readiness of Canadian industry. There is a need for the Department of National Defence to be more proactive in promoting a defence industrial capability domestically. The key is to implement a long-term technology capability plan for each major procurement, jointly developed by government and industry and supported by tailored programs. For the Department of National Defence, this would mean accelerating its Project ACCORD with industry as well as Defence Research and Development Canada's Technology Demonstration Program. As the experience of other countries has shown, even concerted efforts to promote global supply chain participation take many years to produce results. Canada therefore needs to start immediately. It is emphasized that incremental investment for such improved long-term capability is scalable. Decisions on amounts should be relative to opportunities.

While the recent Industrial Research Benefits (IRB) policy enhancements — with multipliers for investments in innovation — are largely untested, an additional incentive to invest in technology commercialization would help increase global value chain participation for forthcoming defence purchases, especially by SMEs. (The commercialization model developed by Sustainable Technology Development Canada might be emulated.) There is urgency in this since, if Canadian capabilities were to remain underdeveloped at the time of contracting, IRB offsets would be directed more toward traditional "build-to-print" work, rather than leading-edge technology development and commercialization. In order to achieve critical mass quickly, the government could consider some form of matching formula with the prime contractors. It is emphasized that taking full advantage of Crown procurements depends on government and business investments early on, in order to get the desired innovation capacity-building leverage from an IRB, whose costs are borne by prime contractors. This might involve sharper focus of existing programs, rather than additional resources.

3.5 Working collaboratively — Explore avenues of collaboration with provincial and municipal governments regarding the use of procurement to support innovation by Canadian suppliers and to foster governments' adoption of innovative products that will help reduce the cost and improve the quality of public services.

Annual procurement by provinces and municipalities across Canada substantially exceeds federal procurement because of their responsibilities for health care, education and transportation infrastructure, among other public services. All orders of government should collaborate to develop and share best practices in the use of procurement to foster innovative Canadian companies and, where feasible, to develop joint strategies to enhance the leverage of public procurement in certain sectors.