Government Operations Committee on Nov. 1st, 2011

[The Chair, NDP, Pat Martin]

Good afternoon, everyone. I call this meeting to order.

Welcome to the 14th meeting of the Standing Committee on Government Operations and Estimates. Today we're going to continue the study we have under way on the effectiveness of the Office of Small and Medium Enterprises and the Canadian innovation commercialization program.

Today we're very pleased to welcome witnesses to give testimony.

From Canada's Venture Capital and Private Equity Association we have Mr. Tom Hayes, the president and chief executive officer of GrowthWorks Atlantic. Welcome, Mr. Hayes.

From the Canadian Information Technology Providers Association we have Mr. Herman Yeh, president. Welcome.

From the 2G Robotics Inc. we have Mr. Jason Gillham, the director of operations.

Welcome to all of you. We expect you'll have an opening presentation of 10 to 15 minutes, and then we'll have questions from the committee members.

Will one or all of you give a joint presentation, or how do you wish to handle this, Mr. Hayes?

[Tom Hayes, President and Chief Executive Officer, GrowthWorks Atlantic, Canada's Venture Capital and Private Equity Association]

I believe we're all giving individual presentations, Mr. Chair.

[The Chair, NDP, Pat Martin]

Very good. If you'd like to go ahead, the floor is yours.

[Tom Hayes]

Thank you.

I'm here today representing Canada's Venture Capital and Private Equity Association in my capacity as a member of the board of that association.

Richard Rémillard, who is the executive director, is out of the country; otherwise he would normally make the presentation on our behalf. However, I am also involved in a private venture capital fund, so I have some familiarity with the program.

CVCA represents the majority of players in the private equity and VC industry in Canada. We have over 1,800 members in the association, managing about $75 billion in assets under management.

When the CVCA was asked to appear and comment on the Canadian innovation commercialization program, our executive director took an informal survey of the members to ascertain their knowledge of the program and to get input leading up to today's presentation.

Surprisingly, or not so surprisingly, other than myself, knowledge of the program among CVCA members was practically non-existent. In my case, I read about it in some publication over the past year--I'm not sure where I saw it--and passed on the information to the CEO of one of our portfolio companies in the venture fund that I manage, a company called Virtual Marine Technology, based in St. John's, Newfoundland. Based on that, they subsequently made use of the program.

I take from this experience among the CVCA membership that the program is not widely known and more should or can be done to publicize it. In general, the CVCA supports the use of government procurement programs as a tool to enhance industrial innovation among Canadian firms. We note the support this program has received through the Jenkins committee and report; I think it was recommendation 3: “Make business innovation one of the core objectives of procurement, with the supporting initiatives to achieve this objective”.

One of the policy initiatives the CVCA has been advocating is to encourage major defence contractors to meet their IRB obligations by investing in venture capital funds in Canada that focus on investing in early-stage technology companies. Accelerated credits could be given to these contractors if they agree to invest in VC funds, similar to the credits that are given to university-based research by these same contractors. In the case of universities, I understand they get a five-to-one leverage if one of these contractors does work through a university.

We think that would be of major assistance to the issue in Canada today, which is really the issue of dearth of available venture capital for emerging and early-stage entrepreneurs. This would be one measure the federal government could take to address this important issue.

Let me go back to the program at hand, the Canadian innovation commercialization program. I was in St. John's yesterday. We were closing another investment over there, so I took the opportunity to speak to the CEO of an existing portfolio company we're involved in--BMT--and asked him about the program. Obviously he spoke favourably of it, in that they've used the program to sell a marine simulator to the Canadian Coast Guard. However, he did make a couple of observations that I'll pass on to the committee. In his view, the application process was lengthy and fairly complex, and while that wasn't an issue for his company, because they're used to dealing with these types of contracts, from the perspective of early-stage companies this might be a challenge, given the level or the lack of depth within the management teams.

As I understand it, if a company sells a prototype to a government department and the department wants to buy an additional unit, a second or a third unit, then the full-blown tendering process is required. That can be fairly lengthy and involved.

The other comment he made—and I'm not sure I particularly understand this—is that if the original purchase by a government department was based on specs provided by the initial supplier, then the original supplier is excluded from subsequent purchases by government. How that makes any sense, I'm not sure. In any event, I'm sure there are others here who understand that better than I do.

Just as a general comment, any barrier to selling to your own government, to the Canadian government, is always seen as a negative when you're out trying to sell to foreign companies and foreign governments. And sometimes in fact it is easier to sell to foreign companies than it is to sell back here at home. We find this is quite common among many early-stage companies. We have to prove the technology and the service outside of Canadian markets before folks here will adopt the technology.

From my own personal experience, when introducing a new program there is always learning and there are always challenges and improvements that can be made over time, based on practical experience, and I suspect that's the case here. Again, we, as an association, and I, being in the venture business, are always supportive of programs that support Canadian technology and innovation, and we would recommend that you do whatever you can to improve and strengthen the programs for future implementation and for the benefit of Canadian entrepreneurs.

Thank you.

[The Chair, NDP, Pat Martin]

Thank you, Mr. Hayes.

Mr. Yeh, would you like to give your presentation? Thank you.

[Herman Yeh, President, Canadian Information Technology Providers Association]

Yes, thank you, Mr. Chair.

My name is Herman Yeh. I am president of Canadian Information Technology Providers Association, CITPA, and the owner of Northern Micro Inc.

CITPA was formed in 2005, and it is an affiliation of Canadian-owned companies that provide information technology solutions to Canada's public sector. Currently we represent over 40 SME companies in the Canadian IT sector. The combined annual sales volume from our members is well over $400 million a year in providing computer hardware, software, and professional services.

Northern Micro Inc. is a privately held Canadian company and has been serving the Canadian federal government IT market for the last 26 years. Based in Ottawa, we currently have over 70 employees, and annual sales of $60 million.

From the CITPA members' point of view, OSME has been helpful and creative. The creation of buyandsell.gc.ca is the best attempt at using current technology in providing information for SMEs to navigate through the PWGSC procurement jargon. It is light-years ahead compared to previous efforts. I’d like to congratulate OSME on this project, and I hope they can continue investing in this website.

However, the question remains whether OSME is an effective advocate on behalf of SMEs in federal procurement, and if OSME has been able to meet its goals. If I can provide my answer to this question, I’d like to use this opportunity to examine the current SME involvement with PWGSC in the IT hardware market segment and the challenges facing our member companies. Once that is explained we can better address the question of OSME’s effectiveness.

It is estimated that the annual Government of Canada IT hardware spending is $452 million, and $296 million of that was procured through various national master standing offers, or NMSOs, all from the services and technology acquisition management sector, STAMS group at PWGSC. There are 24 contracts listed in those NMSOs, 13 of which are held by SMEs. Most of the NMSO holders assign hundreds of SME resellers from coast to coast to fulfill orders. A conservative estimate of the SME market share for IT hardware can be as high as 75%, or $335 million out of the $452 million total.

Overall, PWGSC awarded over $11 billion in contracts last year. Of this amount, $4.73 billion, or 43%, was awarded to SMEs. So the above data show that SMEs provide a higher percentage of IT hardware as compared to the entire bundle of goods and services purchased by the Government of Canada. It is worth taking a deeper look into why the IT hardware segment is so different from the general set of goods and services.

The STAMS group at PWGSC actively engages SMEs. Currently they have over 50% of the suppliers coming form SME-sized firms. STAMS goes to the client departments and suppliers to solicit additional value-added services to fill in client requirements.

The informatics and technical services division, ITS, of the STAMS group is the technical authority for the IT hardware NMSOs. ITS has been partnered with the computer hardware division, the EJ division, by providing technical and environmental requirements and strategic advice on technology trends and issues. This partnership reduces the communication gap between technical and contract authorities and shortens the procurement cycle. The EJ division allows contract holders to assign their contracts to their SME resellers, and in turn allows SMEs to provide services to the Government of Canada from coast to coast.

The above clearly demonstrates that a positive result can be delivered when PWGSC consults with both its departmental clients and SME suppliers, even while working within the limitation of a lack of a policy framework specifically targeting SMEs.

CITPA believes OSME can achieve its mandate in two ways. First, the existing base of SME firms already selling to the Government of Canada could be assisted to sell more to the Government of Canada and occupy more market space than the current piece of the total procurement pie.

Second, OSME can contact, educate, and energize additional SME firms to do business with the federal government and grow the total SME market share in this fashion.

Clearly, the lowest-hanging fruit is to protect the established market share with the existing players, as shown by the bottom left quadrant in the diagram attached in your briefing notes. Finding new markets for the existing players, shown in the top left quadrant, and finding new players, the bottom right quadrant, and doing both at the same time, top right quadrant, requires added resources.

OSME is to be congratulated for trying to do all of these activities both with limited financial resources and in what remains at least an unclear and generally unhelpful policy vacuum on this subject matter at Treasury Board Secretariat. OSME has opened regional offices and made good strides to communicate with additional SMEs and bring awareness to new SMEs. Where OSME could use some help is to protect the existing base in the next few years and help that base and the newcomers to gain new ground. This will require new policy support and that policy is probably best based within the Treasury Board, and that would meet the OSME objectives.

I foresee increased challenges for CITPA member firms and for OSME to just protect its existing base, much less make headway. It is easy to see how some new management trends and the advent of the new Shared Services Canada, SSC, could potentially apply opposing pressures to what has already been achieved to date. Specifically, there is a sort of “assumed conventional wisdom”, in some quarters, that savings and efficiencies can always be found through simply increasing the scale of procurements. Experience has shown that there are often diminishing returns to ever-increasing scale.

At some point, for some activities, scale can cross over from being of benefit to become a negative and create its own set of new risks. Since 2005 there have been strategies circulating within the Treasury Board and PWGSC to consolidate procurement. The strategy is essentially to reduce the number of suppliers and hold larger, bundled contracts, under the theory that larger purchases will increase buying power and may be able to produce larger savings. However, there is no empirical data showing these savings hold true for all commodities. In fact, in the overall IT operation, the IT capital cost is around 15% to 20% of the total IT operation. The major savings opportunities are not in capital spending but rather within the operating and support costs of the IT operation.

Here are the two recommendations regarding OSME.

First, it’s very difficult to evaluate the success of OSME because of the lack of data. OSME should have solid data upon which to manage and evaluate its activities and there is little available. It’s not OSME's fault.

Second, OSME also suffers by operating in essentially a policy vacuum or, even worse, operating within a series of unresolved conflicting policies or strategies. Prime among these is the unresolved question as to how SMEs are to be promoted in an environment where ever larger bundled contracts are being promoted and ever fewer suppliers are being sought.

Due to the lack of SME procurement policy and, specifically, an SME IT policy framework from the Treasury Board, CITPA found it is extremely difficult to work with PWGSC in resolving conflicting policies within the Government of Canada. The required SME procurement policy, which would properly enable OSME, should contain an authority for data collection from Government of Canada contracts that would enable OSME to develop a series of key performance indicators, KPIs.

With such a policy in place, OSME will be able to work with its client departments including SSC to design a functional procurement strategy to achieve a win-win for both SMEs and the Government of Canada. With such a policy in place, OSME can put in place tighter KPIs to measure its efficiency and effectiveness. OSME and PWGSC, right now, are having a difficult time pointing out their success in the past five years other than some evidence that they have done a good job in listening to their community and trying their best in providing information to SME with their limited budget.

This just is not good enough, and it’s not OSMEs fault. The failure here lies with the absence of a proper clear enabling policy framework for SME IT procurement at the Treasury Board.

By simply issuing a few large bundled contracts, the Government of Canada would just be performing a risk transfer and cost transfer to private sector contractors. It would have no guarantee that very few and very large bundled contracts would be successful. In fact, if the contractor failed, the whole IT transformation and modernization project could become a large failure. The risk factor could become unbearable, and it could potentially be a political embarrassment to the government.

Today, the SME IT sector is being challenged by many new threats, most importantly by the misguided notion that SME procurement is expensive and inefficient. There are several management trends that are being used to apply pressure to SMEs, such as consolidated procurements that focus on large multinational manufacturers and cut out SMEs in the sometimes misguided search for savings.

As currently constituted and funded, OSME can do little to assist its SME clients today. If you want my advice, you would look to the success story of IT procurement and the opportunities it has provided for the growth of Canadian IT SMEs. It has provided the very necessary political push to create an enabling national policy framework within Treasury Board policy that would support OSME and PWGSC in achieving its combined goals of strengthening SMEs and the associated economic development benefits for Canadians, while at the same time achieving procurement savings for Canadians.

CITPA would be very pleased to help this committee and the relevant civil servants to develop the road map to broaden and deepen this existing success story.

Thank you.

[The Chair, NDP, Pat Martin]

Thank you very much, Mr. Yeh. That was very interesting.

Next is Mr. Gillham, with 2G Robotics Inc. Do you have a presentation, sir?

[Jason Gillham, Director of Operations, 2G Robotics Inc.]

Yes, thank you.

2G Robotics is one of the companies that worked with the CICP program and it was successfully selected for that program.

I'm the founder and CEO of 2G Robotics, a small start-up company based in Waterloo, Ontario. We provide solutions for companies interested in high-precision measurements in an underwater environment.

2G Robotics developed the world's first easy-to-deploy underwater laser scanner. Using our laser scanner, underwater inspection companies can generate digital 3D models at specific locations of interest on their underwater structure. These 3D models are typically of defects in the structure. Engineers can then use this information to assess the integrity and/or performance of an asset to ensure continued safe operation of the asset with minimal budget maintenance allocation. Typical applications for the technology can include municipal water infrastructure, offshore oil and gas systems, and nuclear and hydroelectric power systems. Additional industries include scientific, archeological, and military security.

In addition to benefiting from the Canadian innovation commercialization program, 2G Robotics has benefited from a number of other funding support programs through the technology development phase of the company. These have included support from the Ontario Centres of Excellence, Canadian Youth Business Foundation, Precarn, Canadian Institute for Photonic Innovations, Mitacs, Maars, and Communitech.

Regarding the Canadian innovation commercialization program specifically, I was made aware of the program through Communitech. We submitted an application for purchase of our system though the program under the public safety category, and in December 2010 we were selected to be matched with a testing agency. Over the following months, we were matched with DRDC Atlantic and completed the various stages of the contract completion and approval.

In August 2011 we delivered an underwater laser scanner to DRDC for testing and provided facility personnel with system training. In the coming months the project will be completed, as DRDC will compare the performance of our technology for assessing targets against the existing technologies.

When 2G Robotics applied to the program, we had not yet sold any systems. Over the past year a total of six systems have been sold, and numerous rentals of the technology have taken place. Our technology has been used around the world, from Antarctica to the Arctic, from the Persian Gulf to the Gulf of Mexico. It has been used for everything from assessing the growth and structure of microbial organisms in a lake bed to the inspection of offshore oil platform structures.

The CICP program has provided us with a significant reference customer, a critical first step for any new technology looking to disrupt an industry. We have doubled our full-time staffing and we are seeing significant interest in the product, pointing towards continued success.

In addition to the direct and indirect financial benefits for 2G Robotics, we have learned a lot about government process and the skill set required for working with large organizations.

I would like to take this opportunity to thank the CICP administrators for selecting us, and we look forward to seeing how the program will continue to benefit 2G Robotics.

[The Chair, NDP, Pat Martin]

Thank you for your presentation, Mr. Gillham.

We'll now go to committee members for rounds of questioning. We start with, first of all, on behalf of the NDP, the official opposition, Denis Blanchette.

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

Thank you, Mr. Chairman.

My first question is for Mr. Hayes.

In your presentation, you discussed the fact that it is important for businesses to establish ties with the university community. How can the government benefit from the synergy among university circles, innovating businesses and venture capital businesses?

[Tom Hayes]

Some years back we were asked.... The fund I work with, GrowthWorks, manages funds across Canada, about $500 million in assets under management. We were asked by the deputy of Industry Canada what percentage of the companies that we funded in our portfolio were the result of R and D based at a university. We went back and did a scan of all the funds we manage. We were a bit surprised, frankly, to find that 40% of the companies that we eventually fund had their origins in universities.

This was important, because when you collectively look at the significant investment that the Government of Canada, coupled with the provinces and other organizations make, I think it was something in the order of $25 billion annually that goes into R and D. However, unless there is linkage to commercialization of much of that R and D, many of the potential benefits, in our view, are lost.

I know the other members of the CBCA would agree with me when I say this, but it's critically important for folks in our business to be always working with the universities and trying to find out and identify young and up-and-coming investment opportunities that have been the result of work done at a university setting.

Out east we have an organization called Springboard, which is supported by ACOA and which represents the 19 universities, including the community colleges, throughout Atlantic Canada. We're working as an organization very closely with them. Some universities, frankly, are more inclined towards this area than others. Out east it would be Memorial in Newfoundland, Dalhousie, and UNB. Two of the best VC deals in Canada in the last 12 months came out of an engineer from UNB, who created about a billion dollars worth of value in terms of two companies he started that were eventually sold.

That's the kind of impact you can have in the local economy. In both those cases significant employment was created and continues to be created by the two companies that he founded. In our view, universities are an extremely important part of the continuum.

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

Thank you very much, Mr. Hayes.

Mr. Yeh, you mentioned that large purchases may be disadvantageous in certain conditions.

Can you give us more details on that point?

[Herman Yeh]

I didn't get the question, sorry.

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

You mentioned that it was not necessarily an advantage for the government to award only large contracts. In your view, it would be preferable for it to retain a significant portion for SMEs. You contended that excessive procurement concentration may be a disadvantage for Canada.

Can you give us more details on that specific point?

[Herman Yeh]

In the IT setting, you can go for very large contracts. All it shows is a single contract out. But any engineering principal will usually have to break down a large project into smaller pieces. Usually in the competition context, the SME is actually very competitive at the task level. It might not be as competitive because of the scale--they cannot raise enough capital to do one single large project at the same time.

That might answer part of your question.

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

How much time do I have left, Mr. Chairman?

[The Chair, NDP, Pat Martin]

You have about 20 seconds, Denis.

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

All right.

So tell us about the political void you talked about at length.

[Herman Yeh]

Essentially in the last 26 years, since I've been in business, we have never seen the government exactly have a policy on how to promote SMEs on the procurement side. We talk about it a lot. We have lots of data supporting SMEs as an important driving force in the economy, but we have never really had a full procurement policy in that sense.

Without that, the departments actually do not care, or they do not know why they have to deal with SMEs, until they go to PWGSC, but then it's often too late, because the procurement does not start at PWGSC, it starts at the department level when they have a requirement to resolve a project or a solution for a program they're supposed to run. None of the departments are really IT required shops.

[The Chair, NDP, Pat Martin]

Thank you, Mr. Yeh.

That concludes your time, Denis. Thank you.

For the government side, the Conservative Party, Kelly Block.

[Kelly Block, Conservative, Saskatoon—Rosetown—Biggar, SK]

Thank you very much, Mr. Chair.

I'd like to thank our witnesses for being with us today.

I'm going to direct my comments and questions to Mr. Hayes.

I'm looking at the document that was given to us regarding CVCA. I note that CVCA is a leading source for advocacy, networking, information, and professional development for venture capital and private equity professionals. It goes on to describe what the programs include. It also states—and I think you stated in your opening remarks—that you represent the majority of private equity companies in Canada, with over 1,800 members, and that venture capital is characterized generally by investment in early-stage companies, mostly in technology businesses.

I want to move over to what we know about OSME. It was created with the main purpose of giving SMEs access to government procurement in a number of ways: by reducing procurement areas, simplifying the contracting process, providing training and education, collaborating to improve procurement policies, and working to ensure that the concerns of SMEs are brought forward and heard.

It seems to me that there's an incredible opportunity for the role of CVCA to engage those individuals you are working with at OSME. Yet you've stated that it is not widely known. In fact, among CVCA, knowledge of the work of OSME is practically non-existent, and perhaps the CICP, more particularly. You also stated that more should and could be done to promote it.

I'm wondering what you think should be done in order to ensure that at least your members know about this program, and what your organization could do to help.

[Tom Hayes]

Maybe my statement wasn't a fair comment on reality, but it reflected the informal or not very scientific survey we did prior to this session to try to get a sense of what the knowledge level was among CVCA members. Certainly, as an organization, we speak to a group of folks who are funding at least on the VC side, but not necessarily on the private equity side, because they are doing deals with more mature companies. On the VC side, we're dealing mainly with earlier-stage companies, which would be the ideal clients, I would think, for the office and for this particular program we're talking about today.

We have many vehicles that we use quite effectively to communicate with our members. We have annual conferences and professional development sessions we run in the larger centres and nationally through video conferencing. We have a website and weekly e-mail blasts going out to our members. From the perspective of those groups that fund these early stage companies, we would be a great conduit to help promote the programs.

As I said, I'm not aware of attempts that have been made in the past to use the CVCA. Certainly the executive director, when he briefed me on this session, didn't appear to be that knowledgeable either. In fact, he wasn't even aware of the program. I raised it with him.

I think we could be used as a very positive force, at least in getting the message out to our own members. In turn, if you have companies in your portfolio that you think can benefit from this kind of a program, you're immediately going to pass the information on. In fact, that's what I did in the case of one company in Newfoundland and Labrador.

[The Chair, NDP, Pat Martin]

You have one minute.

[Kelly Block, Conservative, Saskatoon—Rosetown—Biggar, SK]

One minute--then I'm going to quickly ask a question of Mr. Gillham.

You may have mentioned this in your remarks. How did you hear about OSME and CICT?

[Jason Gillham]

It came to me through Communitech, which is sort of a local Kitchener-Waterloo-Cambridge-Guelph organization that supports small and medium-sized enterprises and connects them with a variety of things. They're not a venture capital organization, but are a not-for-profit organization with a combination of services, from mentoring to running events, to support the start-up community.