Government Operations Committee on Nov. 3rd, 2011

[Dr. Geoff Hayward]

Not much. Services are not as important for us. Nevertheless, we do believe that we've gained a lot of expertise through the collaboration with Shared Services Canada. There are some very talented people there, and we've benefited from those collaborations.

[Bernard Trottier, Conservative, Etobicoke—Lakeshore, ON]

Thank you, Mr. Hayward.

[The Chair, NDP, Pat Martin]

For the New Democratic Party, Denis Blanchette or Mathieu. You're going to split your time, I understand.

[Mathieu Ravignat, NDP, Pontiac, QC]

That's right.

I share your worry about what you were referring to as institutionalized large suppliers that seem to have an advantage with government procurement. I'm trying to understand why that is. There are a lot of factors. OSME, for example, defines small and medium-sized business as 500 employees and less and doesn't take into consideration numbers of business or the chiffre d'affaires, profit and so forth.

I was wondering if both of you might be able to share your thoughts on what an ideal kind of definition would be for the federal government to be using.

[Capt Anthony Patterson]

In some other places they talk about micro businesses, which are 20 or less. I think when you're looking at brand-new products that are coming out, that's generally where they are--in that really small industry. They either have to make it or they fail. It's a really short life cycle for those folks.

I would say that there probably needs to be a special definition around that type of group, because as Geoff has mentioned, obtaining capital in this country is almost impossible. If you have revenues coming from government procurement, which is targeted at these really small companies with new things, I think that would help those companies kind of bridge that gap and attract capital after they're successful.

[Dr. Geoff Hayward]

I have nothing to add.

[Denis Blanchette, NDP, Louis-Hébert, QC]

Mr. Patterson, you said you would like the program to be available to companies who sold on the market only a few units of an innovative product. To me, this means you need more than just help for the commercialization of new products.

What would be your recommendations and Mr. Hayward's on an improved program that would support innovation in our SMEs?

[Capt Anthony Patterson]

I think this is critical. There is a lot of program support, whether it's SR and ED or IRAP or whatever, to bring you up to the end of the prototyping stage. That's not where the problem is. Getting those prototypes into products takes about three years of experience out in the marketplace with a few crazy customers who are going to take a chance on you.

The CICP has to recognize that, that just because you've sold a couple of units to somebody doesn't mean you're finished your development work. You have an awful lot of work and investment left to go before you can say you have the final product. I would say open the gate wider.

On the oil and gas side it would be technology better than level 6. I'm not sure what that is in the NASA scale, but it's just that one step.

[Dr. Geoff Hayward]

There are two directions one might be inclined to go in. One might be to continue the helping hand a little bit further down the path, and that means that once you've done this pilot and you've gone through this pilot program and you've established that you've had a successful pilot, it's to have some assistance in moving to the next step in entering the mainstream with a procurement program. I'm certainly not going to argue that that is not needed; no doubt it is needed.

I would put a lot of emphasis, though, on trying to equalize the playing field. I don't think I particularly am looking for an unfair advantage. I do want a level playing field, though, and I feel that we don't have one right now. If you look at the procurement process and getting registered for procurement opportunities with the federal government, there are all sorts of financial risk assessments. There are steps that we need to go through that filter us out, and understanding that financial risk is a natural thing for the federal government to examine, I would invite you to examine ways to try to equalize the playing field so that small businesses are not necessarily pre-selected out of the process.

[The Chair, NDP, Pat Martin]

Thank you, Mr. Hayward.

That concludes the time for that round.

For the Conservative Party, Mike Wallace.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Chair.

I want to thank our guests for coming today. Often I'm asked who I meet that impresses me the most, and I often answer entrepreneurs. I want to thank you both for taking the risk and having the vision--much more vision than I have, to be perfectly honest with you, on lots of things. It is organizations such as yours that are driving the economy and will make the difference for us in the long run.

I have a couple of questions for you. I appreciate your comments. The recent report on whether we're getting bang for our buck on innovation was mentioned, and it looked at IRAP and SR and ED. It looked at this program, and it looked at the sustainable technology development corporation. It probably doesn't fit into either one of your organizations, but there are models that we are using. At the end of the day, the report said maybe we'd be better off doing more of a direct subsidy to businesses than offering tax credits, because you're not sure what you're going to get, the bang for the buck.

My question for you two, because you are involved, which I've asked of others is this. What do you believe the role should be for the Government of Canada in picking winners and losers in that? Is that a problem or not?

The overall concept of this report--I'm not sure you've had a chance to see it, as I know you're busy doing other things—basically is that maybe we should be moving away from the SR and EDs and the IRAPs, particularly SR and EDs because it's the tax side, to a more direct subsidy, such as sustainable technology development, for which you would need a business plan and we'd help you. We're angel investors, in a sense, to get you to commercialization. I know this is a one-off program, and I want to come back to that, but how do you feel about the Government of Canada being involved in picking winners and losers?

I will start with you, Captain.

[Capt Anthony Patterson]

I think you should stay away from it, to tell you the truth. I don't think subsidies are a good thing. We can all stand on our own feet. We can compete with anyone.

Now, I see that tax offsets and all this stuff to encourage innovation are good. It's going to generate revenues and employment over the long run. Where the federal government can really help is to help remove the barriers for the technologies to be implemented, whether it's internal procurement or to help facilitate government to government procurements with other countries.

If a company is making revenues, they can attract investment. Let the investment community take the risk of putting in the investment. Let them pick the winners and losers.

[Mike Wallace, Conservative, Burlington, ON]

Okay.

Mr. Hayward, do you have a...?

[Dr. Geoff Hayward]

Yes. I don't disagree with anything the captain said. I would point out that the SR and ED and IRAP programs--that money is tied to research and development. SR and ED obviously is directly tied to R and D efforts. Similarly, the grant you receive from IRAP is for R and D. Yet our companies frequently have very strong technology and are missing in the sales and marketing expertise—the commercialization expertise—to bring that technology successfully to market.

I don't want a subsidy, no, but I would point out that the way in which we reward innovation puts undue emphasis on just the research and development portion of innovation and not the commercialization portion of it. That's one gap that the CICP program is effectively filling. We probably have much more of a gap than they can possibly fill here. Yes, I would invite you to all consider other options than just funding straight core engineering or research and development, because it leads to companies with unequal balance--far too much technical expertise and not enough in sales and marketing.

[Mike Wallace, Conservative, Burlington, ON]

My second and final question is regarding.... My NDP colleague across the way brought up the issue of free trade. We fundamentally disagree.

My question to you, as entrepreneurs—as someone who has been developing a company, knowing the size of the marketplace here in Canada and knowing what the potential marketplace is worldwide—is this: do you, in your long-term business plans, have a vision for your company to be able to sell your products duty-free in other countries around the world? Are you mostly, when you start up—because I've never started up a company—just looking at the domestic market, or do you have a vision for being a world competitor, competing in markets around the world? I'd appreciate your answer to that question.

[Capt Anthony Patterson]

There are going to be two dominant simulation companies in the world: CAE and VMT. We are looking at world domination. We have to have 95% of our revenues coming from export. It's impossible to make the money in Canada. In fact, we have already started to export. We have venture capital in our company because our venture capital people believe we can be successful in export.

Trade barriers are a bad thing. We're looking at this thing in the United States. This is very bad because that's a potential market for us. Our business plan would fail if all of the trade barriers went up and we could only sell to Canada.

[Mike Wallace, Conservative, Burlington, ON]

Thank you very much.

Mr. Hayward, do you have anything to add?

[Dr. Geoff Hayward]

Yes. We definitely aspire to be a global company. Absolutely. Whether or not we will be is very much in the balance.

One of our closest competitors—I'm going to leave the name out—is much less mature than we are. They don't even have a product yet. They have no revenue. We have three-quarters of a million in revenue and very soon we'll have more than $2 million in revenue. Yet they have been able to raise, within Silicon Valley, $22 million of venture funding. We have been able to raise nothing in venture capital. Again, if you look at the technology, ours is demonstrably superior and more mature.

That is the core problem that needs to be addressed. Without financing and investment of a scale that's competitive with what you're seeing in Silicon Valley, it will be difficult for Canadian companies to become global. We will continue to exit early, as we do, for pennies on the dollar, being acquired by big U.S. corporations.

[Mike Wallace, Conservative, Burlington, ON]

Thank you.

[The Chair, NDP, Pat Martin]

Thank you, Mr. Hayward. Thank you, Mr. Wallace.

Sean, thank you for being so patient. It's your turn again.

[Sean Casey, Liberal, Charlottetown, PE]

All of my questions have been asked and answered.

I commend both of you for what you're doing and how you are developing your companies. I have nothing to add.

Thank you.

[The Chair, NDP, Pat Martin]

Thank you, Sean.

[Mike Wallace, Conservative, Burlington, ON]

We're done.

[The Chair, NDP, Pat Martin]

Okay.

Given that few minutes of opportunity, I have two questions of my own, if the chair can take the liberty to ask two brief questions here.

First of all, two things that both of you identified are the bundling factor and trying to compete as a small competitor, to elbow your way into government procurement with such dominant large actors. The United States' office of small and medium-sized enterprise, or the counterpart, actually has a mandate to compel government to unbundle contracts, to the greatest extent possible, in order to enable the greatest number of smaller entrepreneurs to get a foothold and grow their companies to be big actors some day. Our Canadian office has no such mandate to recommend to government that they do that.

Would you recommend that there could be a secondary benefit in government procurement if it could facilitate more small entrepreneurs to incubate and grow and become large actors? That's my first question, the unbundling.

The second is that both of you have identified venture capital as an issue. Something I was working with in my past life, and we've had witnesses here representing venture capital funds whose source of money is the labour-sponsored investment funds.... The GrowthWorks organization that Tom Hayes represented here I believe was one of the venture capital firms that worked with you. Is that not right, Captain Patterson?

[Capt Anthony Patterson]

That's correct.