Government Operations Committee on Oct. 25th, 2011

[The Chair, NDP, Pat Martin]

I'm calling the meeting to order. Welcome, everyone, to the twelfth meeting of the Standing Committee on Government Operations and Estimates.

We're convened today to deal with the study of the effectiveness of the Office of Small and Medium Enterprises and the Canadian innovation commercialization program.

We'd like to welcome our witnesses today. Present with us is the Canadian Federation of Independent Business, Corinne Pohlmann, vice-president of national affairs, and Louis-Martin Parent, policy analyst.

With us by video conference from Quebec City we have, from the National Angel Capital Organization, Michelle Scarborough, co-chair.

Welcome, Michelle. Can you hear me?

[Michelle Scarborough, Co-Chair, National Angel Capital Organization]

I can hear you just fine. Thank you.

[The Chair, NDP, Pat Martin]

Very good. All our technical stuff is connected and working.

We'll begin with a presentation from the CFIB and then we'll go to questions—actually how would committee members like to handle this? Do you want to hear both of the presentations first?

[An hon. member]

Yes.

[The Chair, NDP, Pat Martin]

That's what we'll do then. In order of presentation, we'll have the CFIB first, then we'll ask Michelle Scarborough to give her presentation, and then we'll open it to questions from the floor.

Corinne, the floor is yours.

[Corinne Pohlmann, Vice-President, National Affairs, Canadian Federation of Independent Business]

Thank you.

Thank you for the opportunity to be here today. CFIB is a not-for-profit, non-partisan organization representing more than 108,000 small and medium-sized businesses across Canada that collectively employ more than one and a quarter million Canadians and account for $75 billion in GDP.

Our members represent all sectors of the economy and are found in every region of the country.

With me here today, as you mentioned, is Louis-Martin Parent, who will assist me with the question and answer period of this presentation.

First, almost all businesses in Canada are small or medium-sized. They employ 64% of Canadians and they produce half of Canada's GDP. As a result, in this Year of the Entrepreneur, addressing issues of importance to them can have a widespread impact on job creation and the economy.

Now, you should have a slide deck in front of you that I'm going to be walking you through over the next few minutes, so if you could pull that out, that would be great.

As you may be aware, CFIB surveys its members regularly on a wide variety of issues that help us formulate policy positions on their behalf. In 2009 we did a survey on federal procurement and released a report based on that data earlier this year entitled, Big Opportunities, Bigger Challenges--and you all should have received a copy of that report as well.

Over the next few minutes I want to share some highlights from that report. First, who are these small federal government suppliers? As you can see on slide 2, they are a good mix of businesses that sell goods and services, or both, and the vast majority have been selling to the federal government for more than five years.

As you can see on slide 3, three-quarters of them sell to government as sole contractors, while one in five works as a subcontractor, mostly in the construction industry. Only 5% are selling to the federal government as part of a joint bid or partnership with another company.

What was really interesting to us were the reasons that small businesses did not sell to the federal government. Now, the most common reason was that the government simply does not buy the business's product or service, as you can see on slide 4. However, almost all the rest relates directly to the federal government procurement process itself. One in four stated that the government's tendering and bidding process was too complicated and that they had no means of knowing what the government wants. One in five stated there was just too much paperwork or found the inability to contact the actual user or purchaser as a key deterrent.

But it's not only those who do not bid on contracts that find the whole process confusing, but also those who have had experience in bidding and even winning federal contracts, as you can see on slide 5. Almost half of them rated the simplicity of forms, the clarity of the steps necessary to sell to the federal government, and access to contract opportunities as poor, meaning there is lots of room for improvement in these areas.

Overall, many of the frustrations of smaller firms engaging in federal procurement were based on the fact that the overall process is too complicated and too different from how they normally do business--for example, not being able to discuss the bid with the actual user or purchaser of the goods or services, using an electronic bidding process such as MERX, which may seem simple at first but becomes more complex, with lengthy forms that often require unnecessary and duplicative information. A good rule of thumb should be that if it takes longer to apply for a contract than it is to fulfill the contract, it's unlikely you're going to get many small businesses applying for it.

There also seems to be a real lack of awareness of small business realities. For example, a one- or two-week delay in a payment can seriously affect cashflow in a small business operation. They do not have specialists to help them secure, much less manage, a bid, and therefore they have to adapt their entire operations to fit into the government's expectations. We would suggest that the government start to look at their procurement processes and practices through maybe a small business lens, which has being suggested by the red tape reduction commission, as a means of starting to address some of these issues.

Now, to their credit, Public Works did recognize that there was a need to address some of these concerns after extensive lobbying from CFIB and other groups, and they created the Office of Small and Medium Enterprises about five years ago. CFIB supported the idea of an office like OSME, which was to provide assistance to small firms on the bidding on federal contracts and to be an internal advocate for the needs of small businesses within Public Works. But as you can see on slide 7, OSME is not that widely known within the small business community.

Now, this level of awareness compares to about two-thirds of our members who were aware of the procurement ombudsman, though very, very few of them ever used their services

Now, slide 8 is a chart that was not used in our report due to its low sample size. We only share it with you today for information purposes. And it should not be interpreted as being statistically valid; however, we thought it might be interesting.

Of the 32 respondents who said they did know OSME's role, results were mixed on the service provided. They did relatively well on providing timely responses to questions, but could improve on assistance on how to bid and understand procurement procedures. This survey was conducted prior to the launch of the buy and sell website that OSME had created as a one-stop source of practical information and advice on federal procurement.

This kind of tool would be well received as it does provide useful information and direction on what the process is all about, something that was severely lacking prior to the buy and sell website and to OSME. However, we believe that OSME may be suffering from being within Public Works and therefore not necessarily seen as independent by small businesses looking for information to navigate the system and help them solve procurement problems.

Also, OSME's role as internal advocate is an important part of their mandate, but it's not always clear how influential they are within government to bring change that will benefit Canadian small businesses.

Moving to the Canadian innovation commercialization program, we have less experience with this because we haven't had any members contact us about it. We're still learning ourselves about the usefulness of the program and are pleased that it's in a pilot phase so that the government can learn about what works and what doesn't before it dedicates more funds to it.

CICP has long advocated using federal procurement as a means of promoting innovation. So many small firms have great ideas and alternative approaches that could prove valuable to government, but they can often be stifled if they are unable to fulfill pre-established requirements or address prescriptive needs. If this program helps to break down some of those barriers, that would be progress.

From what we know about the program, we like that it seems to encourage interaction between the supplier and the end-user and that it seems to promote some flexibility within the actual procurement process. However, we worry about any program in which government picks winners and losers. We wonder how success will be measured, given the long lead time sometimes needed to get a product to market.

[Mathieu Ravignat, NDP, Pontiac, QC]

I'm sorry to interrupt, but the translators are asking for you to slow down. We're having some problems with the translation.

[The Chair, NDP, Pat Martin]

If you wouldn't mind then, Corinne, please slow it down a little. There isn't any real rush. We'll give you ample time to finish your report.

Thank you.

[Corinne Pohlmann]

I don't know where the translation was at, so I'll just go back to where I was.

Finally, we would also suggest following the recommendation from the recently released report of the R and D review panel, namely, to consider not just a push approach to the project, where the firms go to the government with an idea and they determine whether it can be used, but also a pull approach, whereby government expresses a need and a desired outcome without getting too descriptive and allows firms to provide their suggested solutions without restrictions.

Our interests in federal procurement go well beyond OSME and CICP, and there's still work that needs to be done to make federal procurement more accessible to smaller firms. We hear repeatedly from small companies that government focuses only on lowest cost, which can be more difficult for smaller firms, given their smaller economies of scale. In the private sector, many have been able to compete effectively with their larger counterparts, not so much because of price but more because of other factors, such as quality of service, reliability, and reputation.

Some emphasis on the value of the product or service would be welcome. Government may pay more up front, but in the long run they may pay less as the value of the product or service increases and becomes more reliable.

We believe that the whole process of procurement must be rethought, and we are hopeful that the business lens approach cited by the red tape reduction commission and mentioned in the last budget will be applied to federal procurement so that the realities of small businesses are better reflected in the overall process. This would include allowing more flexibility within bids, reviewing larger contracts and splitting them into smaller contracts if it makes sense, and addressing issues raised during the red tape review .

Government needs to do a better job of paying small businesses on time. Our survey found that 80% of SMEs waited more than 30 days for payment, and most did not receive any interest for those late payments.

Finally, improving communications with SMEs is also critical. The OSME and the buy and sell website are steps in that direction, but more needs to be done, as neither is that well known to small firms.

A key finding of our research was the inability of small firms to contact the end-user. While we understand why there needs to be some distance between them, there has to be a better approach if an SME is not getting a technical question answered properly by the assigned procurement officer.

There continue to be sector-specific issues in procurement that are threatening the livelihood of small firms. Recently, there have been some significant concerns among those in the temporary health services and translation services. There needs to be a better way for those sectors to address these issues directly with Public Works.

We also believe that more data is needed to better understand procurement activities. It seems there is quite a bit of a data already, but it's not always well used or understood.

This year small firms continue to face challenges in trying to do business with the federal government. The same issues that have been raised for years for the most part remain. The launch of the buy and sell website was a positive development, but small firms continue to find it difficult to manoeuvre through the process. Others have actually given up trying, while still others that have traditionally sold to government have found that the rules are changing and it's having dire consequences on their businesses.

We recognize that these are issues beyond the scope of the current study. But they remain issues in the view of Canada's small firms. We hope your committee will continue to question and study these issues.

Thank you.

[The Chair, NDP, Pat Martin]

Thank you, Ms. Pohlmann.

Now we'll move to the next presentation, from the National Angel Capital Corporation, Michelle Scarborough.

Welcome, Michelle. You have the floor.

[Michelle Scarborough]

Thank you very much. Bonjour. Thank you for having me today.

I'll keep my comments brief. Unfortunately, because of the timetable, we were not able to provide you with documentation in both French and English, although that is on its way. The standing committee should receive that information shortly.

To give you a little background on the National Angel Capital Organization, we are a member-driven organization whose vision is to knit the angel capital community together across Canada, facilitating knowledge transfer, developing best practices, and co-investment with an end goal to invest in high-potential companies across the country to build that small or medium-sized enterprise and take those companies to the global stage. Our mission is to support angels as they foster the growth of the next generation of innovative Canadian companies at all levels. We do that through four key areas, including: professional development; communication; networking events, such as the National Angel Capital Summit, which is taking place this November in Ottawa; and advocacy-related activities. We have a member base of approximately 2,000 angels, composed of both groups and individuals.

I want to give you a definition of what or who an angel is. An angel is a person who provides risk capital to innovative start-up companies, building a bridge between their idea and their commercial viability. Again, we are looking at how we invest in early stage companies and people with early stage ideas, and we help drive those ideas to a commercial entity, a company formation, and then take them all the way through the market. They are also typically individuals who have been successful entrepreneurs in a variety of sectors, so they're sector agnostic. Some are in technology, some are in other industries, but all are able to provide not just the capital required but also vast knowledge of how to build a business, typically from the start-up phase right through to growth. They are mentors for companies at the early stage and they provide vast experience and expertise as well as a network to help those entrepreneurs get to the next level of their business.

We, as angel investors, are accredited. We follow the SEC regulations, so accredited angel investors, for your background, are those who have $1 million in assets, if you don't include their residences, and those who have approximately $200,000 or greater in income. Typically, they are providing not just the capital but mentorship in a variety of other activities.

To give you some stats to put it into the Canadian context, before I dive into some of the details around what we're here to talk about, there are approximately 1,500 angels that represent angel groups in the country, which is a very large mass. That number is growing quite rapidly. We estimate a doubling of that over the next two years as angel capital begins to form itself as an asset class, differentiated but complementary to venture capital.

We did a study in 2010 just to see where angel groups and angel individual investors were at in terms of the deal flow they were seeing, at what stage, and so on. We identified approximately 1,850 companies that were disclosed, seeking out angel groups specifically on an annualized basis. That translates into about 250 active portfolio companies in the angel groups. Angel groups realistically will invest in two to three, maybe four, companies on an annual basis at approximately $1 million into each of those companies annually. If you drive that number up, we're looking at—over the course of the last five years that we've been able to measure—about $1 billion in investment going into those very early stage companies and then driving those companies to small and medium-sized businesses that are playing at the global scale.

How do we make investments and why is it relevant to CICP and the work of OSME? We make investments based on a number of criteria. We look at the team. We identify the market size and the opportunity and who the competitors are in that space. We look at the sales pipeline and how we are going to assist in investing in the company from a dollar perspective, and how are we going to build that company? We look at how the company is going to operate now and as it scales.

Finally, and most importantly, who are their customers? How many do they have, if any? What are we going to do as angel investors to help drive that process of identifying customers, getting those first, second, and third customers in the door, and using those customers as leverage to then take the company out to the market in full force.

We're in a high-risk business. Angel investing is high risk by its very nature. Getting that first customer validation, that first customer attraction, is really important and key, oftentimes, to our first investment in a company. It's not just about the company getting its customer base; it's also about the fact that as angel investors we typically look for that first customer validation to make the case to make the investment.

What has been the impact of OSME and CICP, from our perspective? We have been involved in CICP and OSME across the country from a very small perspective. I did a quick poll of some of our angel groups just to see where they're interfacing with the agency and where they are not, and it varies in terms of who is interacting with whom. Overall, and I can speak more specifically to CICP, CICP is being seen as a win for angel-led companies that are looking to identify customer targets in the government, for a number of reasons, and I'll give them to you.

The first reason most people came up with, and certainly it's been my experience, was to provide that reference customer opportunity for the small business at the beta-customer stage. This is not just important for customer validation and for the validation of the technology. The Canadian government as a customer for a small enterprise carries a lot of weight when that company goes into the international marketplace for sales. It acts as a very good validator for the company as they're moving to identify their customer targets. Often there can be, in the case of convergent technologies, a cross-pollination between government agencies that can be facilitated by CICP. That, I think, will start to become a bit more enlightened as CICP actually begins to grow and gets over its baby steps.

The other thing this kind of program does is provide a gateway for a company at the early stages so that it can identify, learn, and de-risk its own pathway as it educates itself on how to sell into a complicated structure, a complicated organization. I know that OSME has been working hard at trying to fill that gap, and so has CICP. There is more work to be done there. There are a couple of things that are relatively straightforward, I think, that can be implemented that will solve that problem.

There are two other ways in which these programs currently are helping small and medium enterprises once they have an angel investment. One, again, is the early revenue, the early customer validation and market traction that becomes very attractive to both us, the angel investors, and the customers. Also, the validation of technology applications, and it was touched on by the earlier presenter, is very important, because validating the technology not just from a pull but also from a push standpoint is very important. Companies don't need to spend a lot of cycles guessing. If there's a mechanism by which we can draw those two together, the customer and the company, at the entrepreneurial level such that they can identify and work together on opportunities to solve real problems, that will make an enormous difference in how the procurement programs work, and ultimately in what kinds of companies can be generating massive growth for Canada and beyond.

My recommendation from the National Angel Capital Organization for OSME and CICP really is to continue to engage us, which they are already doing, on the selection committees for the procurement program and at the advisory board level. We're happy to play a role, and will continue to do so as long as we're asked to work with the government to identify opportunities for small and medium enterprises to find solutions to problems. As I said before, build the network such that it's not just the entrepreneur coming to the government with a solution that may or may not be an appropriate fit. What is on the wish list of some of these agencies and government departments, and how can technology companies and others around Canada work together through a network to build capacity and ultimately find solutions that are going to be beneficial for everybody and that win for everybody?

It was touched on again by the previous speaker that there is a need for better promotion and better public relations around what the OSME and CICP programs actually do. There have been some material steps made with respect to CICP that I think have been very good, as far as getting out and promoting in small ways. But some sort of partnership opportunity with agencies like NACO and others that can help get the word out in a very tangible format to members, who can then identify ways in which they can interface with these organizations and programs, will be an essential driver in identifying how we can find the right fits and build some capacity.

Finally, it's kind of a dual-pronged answer, but it's really a rolling process for companies to apply for CICP. If that's successful, you will ultimately have knocking on the door to expand the funding into the CICP program beyond the $40 million that has currently been allocated to ensure that program continues.

Those are my remarks.

I'm pleased to take any questions now, and I'll refer back to the chair.

[The Chair, NDP, Pat Martin]

Thank you very much, Ms. Scarborough. That was very interesting and very clear.

We have members of the committee from both the official opposition and the government side who would like to question both of the presenters, I'm sure.

Beginning with the NDP, we have Mr. Alexandre Boulerice.

[Alexandre Boulerice, NDP, Rosemont—La Petite-Patrie, QC]

First of all, I want to thank the three organization representatives for being here. What you have to say is very interesting.

I'd like to address my first remarks to the people from the Canadian Federation of Independent Business. Thank you for being here. Please know that the official opposition shares your concerns as to the future of SMEs and the contribution they make to the Canadian economy and to job creation.

Last week, we heard from representatives of the Canadian Business Information Technology Network, who were also quite critical of the Office of Small and Medium Enterprises.

Allow me to quickly quote an excerpt from their presentation. I'd like to hear your comments in this regard.

Our members are interested in seeing the mandate of the Office of Small and Medium Enterprises (OSME) expanded to include a more ''activist'' role designed not only to act as a public relations agent but also to really protect SMEs' interests. CABiNET agreed with the Conservative Party when it announced in March 2010 that it would be ''creating a level playing field for open source IT in government procurement and open up government IT contracts to SMEs by breaking up large IT projects into smaller components.'' But that was the Conservative Party of the United Kingdom. We hope that the same is true for the Conservative Party of Canada.

According to you, should we broaden the mandate of the office? Should it be given greater means? In your opinion, should the office act essentially as a public relations office that provides information? Or should it have a more proactive role?

[Corinne Pohlmann]

First of all, it's not very well known at all. I'm not sure whether it has a PR office, because only 5% or 6% of members are even aware that it exists. These are the people who are actually involved in federal government contracts. I think one of the reasons might be that it is not perceived as being independent of Public Works; therefore, it may not be perceived as a place where small business owners can go to either get information or deal with the problems they may run into when it comes to procurement.

There is the ombudsman; however, the ombudsman has a very limited mandate in what it can look at. So where do you go when you have questions about the activities happening within a particular project or contract you're bidding on? Right now I don't think OSME is seen by them as being independent enough or capable enough to help them through that process.

The second piece touches a little on the comments from the previous groups that were here last week. We also believe it has an important role to play as an advocate internal to Public Works. We're not clear at this point whether that's being done effectively or not, again because I think it is seen as being part of Public Works, so we're sure how influential it can be within Public Works.

At this point we're not sure whether it needs to expand its mandate. We're loath to suggest you put more money into something until we understand the best way to use that money to effectively help small business progress when it comes to procurement issues. We recognize that there is the Office of the Procurement Ombudsman of Canada as well, and we need to make sure we're not duplicating efforts here and we're actually making sure that there is effective change happening within Public Works that is actually reflecting back what's happening with small businesses.

Is OSME doing that? There are elements of what OSME is doing that are helpful. The buy and sell website was a huge step forward in finally having one place to go to get all the information you need. It's too new for us to know if our members are using it or not. I do credit OSME with putting that together, but whether or not our members feel it's actually helping them to progress is debatable at this point.

[Alexandre Boulerice, NDP, Rosemont—La Petite-Patrie, QC]

Thank you very much.

I'd like to ask a question on your presentation, which was very well put together, as a matter of fact. Congratulations.

Several things surprised me, among them table 2. There is a nice pie chart there indicating how long the organization has been doing business with the federal government. However we see that almost 85% of the respondents from your federation stated that they had been doing so for more than five years. Only 3.5% of them replied that they had been dealing with the federal government for less than a year.

This leads me to think that those who know the rules of the game are skilful and that it is complicated to get into the system and that the door is almost closed, that is to say that you have to fight a little in order to get in there.

[The Chair, NDP, Pat Martin]

Could we have a short answer, please? There are about 30 seconds left in this time segment.

[Corinne Pohlmann]

Yes.

[The Chair, NDP, Pat Martin]

That was very succinct.

That's about it for your time, Alexandre.

On the government side, Mr. Jacques Gourde.

[Jacques Gourde, Conservative, Lotbinière—Chutes-de-la-Chaudière, QC]

Thank you very much, Mr. Chairman.

I thank the witnesses for being here with us this afternoon. Your comments are very important to us. They are very interesting, and especially very much appreciated on this side.

Ms. Pohlmann, in your presentation, you briefly referred to the Red Tape Reduction Commission the government set up to help small and medium businesses. Your federation had in fact suggested that. And speaking of suggestions, perhaps you could take this opportunity to tell us what you would recommend to the Red Tape Reduction Commission so that it could better assist small and medium businesses in being quicker and in achieving savings.

[Corinne Pohlmann]

Certainly when it comes to federal procurement, I think the issue we've been dealing with for years has been the paperwork associated with it. When I said earlier that if it takes you longer to actually apply for a contract than it takes to fulfill that contract, there's a problem.

I think during the red tape reduction commission hearings there were lots of small business owners who came forward to talk about that. There was even one who brought an actual proposal with him; it was this thick, and he said he had to fill it out every single time he tries to apply for a government contract--and the information is the same every single time. There are ways we can minimize this. A lot of the information is duplicated. Some of it's irrelevant. It's just making sure that everything is in there that has to be in there. There are lots of things that can be done to really simplify the process when it comes to government contracts that we don't think have been properly looked at.

One of the things the red tape reduction commission is looking at right now is this idea of a small business lens, whereby government departments are actually forced to look at new policies and programs and paperwork through the lens of a small business by asking a series of questions. We've seen this work effectively with the Government of British Columbia. It is working within a few government departments already within the federal government, but it's very, very specific.

We think something government-wide, and especially in federal procurement, would be very useful so that people who are developing the policy and developing the programs and developing the proposals understand that when you look at it from the lens of a small business, some of it just doesn't make sense. It needs to be rectified in order to make it simpler and easier for them to also have access to government contracts.

They're not asking for special handouts. They just want fair access to these types of contracts.

[Jacques Gourde, Conservative, Lotbinière—Chutes-de-la-Chaudière, QC]

You also said that in reviewing bids, people should not necessarily go to the lowest bids, but that the history of the business as well as other criteria should be taken into consideration as well. Can you give us more detail on that? This could lead to some interesting suggestions.

[Corinne Pohlmann]

This has been something we've been hearing about quite a bit in the last couple of years in particular, that often we're finding small businesses are being rejected right off the start because they are not able to come in at the lowest cost. But what's not being factored into the decision-making are the other factors, such as reputation, reliability, quality of service, after-sales service, and things like this that could potentially make it in the long run actually cheaper for the government to go with a slightly higher-cost contract.

Small businesses are often not necessarily competitive on cost because of their smaller economies of scale, but they can be competitive on value, and that's simply what we're trying to understand, if there's a way that we can better measure that. I think it does probably change from commodity to commodity and from service to service, and we need to sort of look at it for each one. But I think it's something that is important to recognize when trying to look at contracts. And it seems to us anecdotally that we are hearing more that small businesses are feeling shut out of the process, because it really comes down now to lowest cost, and that's the only factor that is being determined as to who gets the final contracts.

[Jacques Gourde, Conservative, Lotbinière—Chutes-de-la-Chaudière, QC]

Thank you very much.

[The Chair, NDP, Pat Martin]

There is still about one and a half minutes left, Jacques, if you or one of your colleagues would like to use it up.

[Jacques Gourde, Conservative, Lotbinière—Chutes-de-la-Chaudière, QC]

You said that people had trouble recognizing the office and were not necessarily aware of the services it offers. Does the federation promote the Office of Small and Medium Enterprises?