Industry Committee on May 13th, 2008

[The Chair, Conservative, James Rajotte]

I will call to order the 38th meeting of the Standing Committee on Industry, Science and Technology. Pursuant to Standing Order 108(2), we are continuing our study of Canadian science and technology policy.

We're supposed to have four organizations with us here today. We have three with us, and I believe the fourth is on the way.

We have, from the Networks of Centres of Excellence, Mr. Jean-Claude Gavrel, who is the associate vice-president; from Precarn Incorporated, Mr. Paul Johnston, who is the president and CEO; and from the University of Waterloo, Mr. Tom Corr, the associate vice-president for commercialization. We are expecting to have the Ottawa Centre for Research and Innovation, which I will introduce if they are able to arrive in time.

Witnesses, we have up to five minutes for an opening statement from each one of you, and then we will go to questions from members.

We'll go in the order of introduction. Mr. Gavrel, we'll start with you.

[Jean-Claude Gavrel, Associate Vice-President, Networks of Centres of Excellence]

Thank you very much, Mr. Chairman, for the opportunity to speak to you today about the networks of centres of excellence, and specifically about the centres of excellence for commercialization and research and their role in the government's science and technology strategy.

We have provided, I believe, copies of the brief, as well as copies of additional material, so I will probably skip a few parts of my written remarks in order to stay on track and on time.

I will begin my presentation with a brief overview of the mandate and history of the Networks of Centres of Excellence, or NCEs. I will then describe in greater detail the Centres of Excellence for Commercialization and Research (CECR) program, including its mandate and selection criteria. I will end by giving a few examples of specific commercialization activities and projects that will be undertaken by the 11 new Centres over the next few years.

The networks of centres of excellence program was launched in 1989 to mobilize research excellence for the benefit of all Canadians by bringing together partners from the academic, private, public, and not-for-profit sectors. We are a partnership between Industry Canada and the three federal granting agencies: the Natural Sciences and Engineering Research Council, the Social Sciences and Humanities Research Council, and the Canadian Institutes of Health Research.

The program currently funds 16 networks across the country. They operate in the areas of health, advanced technologies, the environment and natural resources, and engineering and manufacturing. The committee members have been provided with the list and a description of the current networks.

From the start, these networks have proven that they can take bright ideas and turn them into tangible benefits for Canadians. In terms of numbers, over 2,000 organizations, Canadian and international, are participating in the program, and 800 of those come from the private sector.

Over a typical seven-year cycle, the NCEs secure nearly $500 million in cash and in-kind contributions from their partners. In 2006-2007, the Networks filed 100 patents and 20 licences.

And they have launched over 80 spin-off companies since 1997.

In budget 2007 the government announced nearly $350 million of additional funding to expand the NCE mandate. With this additional funding, the program now includes three major new programs: the centres of excellence for commercialization and research, which we call it the CECR; the business-led networks of centres of excellence, NCEs; and a national industrial R and D internship program. I will focus the rest of my remarks on the CECRs.

The CECR program's goal is to create world-class centres to advance research and facilitate commercialization of technologies, products and services. These centres operate in the priority areas mentioned in the S&T Strategy: health, information and communications technology, environment, and energy and natural resources. The program funds the Centres' operating and commercialization costs. Research and infrastructure costs must be covered by other federal programs, or through initiatives such as those run by the granting agencies and by the Canada Foundation for Innovation.

The first CECR competition was worth $165 million and was launched on June 26, 2007. The response from the community was exceptional: 110 eligible letters of intent were received during the first phase of the competition and 25 groups were invited to submit full proposals.

Proposals were evaluated on the potential benefits to Canada, the strength of their business plan, and the team track record. In addition, close attention was paid to two criteria related to commercialization: the ability to create, grow, and retain Canadian companies that can capture new markets with breakthrough innovations; and evidence that the proposed centre would accelerate the commercialization of leading edge technologies, goods, and services in the areas of priorities.

A private sector advisory board assessed the economic and commercial benefits and opportunities of each proposal and provided recommendations to the NCE steering committee.

The NCE steering committee is composed of the presidents of the granting agencies, the deputy minister of Industry Canada, and, as an observer, the president of the Canada Foundation for Innovation.

On February 14, eleven new CECRs were announced, and we have provided a full list of these. These eleven centres join the seven that had been previously announced by the government in budget 2007, which are located in Halifax, Vancouver, Montreal, Quebec City, Toronto, and Calgary.

Included in the brief I have indicated a number of examples of some of the breakthrough technologies and some of the commercialization expectations that these centres have put forward. In the interest of time, I will not read this part of the document.

I will conclude my remarks here, thanking again the committee for inviting us to answer your questions on this and any other programs we are currently managing.

Merci, monsieur le président.

[The Chair, Conservative, James Rajotte]

Thank you very much, Monsieur Gavrel.

We'll go now to Mr. Johnston, please.

[Paul Johnston, President and Chief Executive Officer, Precarn Incorporated]

Thank you, Mr. Chairman and members of the committee, for the invitation.

The paper we submitted was subtitled “Commercialization of the Results for the Benefit of Canada”. In other words, rather than taking on science and technology broadly written, we wanted to talk about the commercialization process. I'll concentrate my remarks on the commercialization aspects today.

Precarn Incorporated is a not-for-profit national company that supports collaborative research and development in advanced technologies. The unique aspect of our model is that we insist that every one of our research projects include the end user; that is, the organization, company, hospital that has a need that can be filled with a technological solution.

Another name we use for that end user is first customer; therefore, we are very proud of the fact that our whole research and development philosophy builds commercialization right into the process of the research and technology development.

The basic premise of the issue facing Canada is well understood, and it's been discussed for a number of years. We are among the world leaders in supporting publicly-funded research at our universities and research hospitals and so on, but at the same time we lag—behind other OECD countries, principally—in the commercialization of the products that result from that research. Another way it's expressed often is that our industrial sectors do not contribute as much to research and development in this country.

My submission is that one of the reasons for this is that we as a country do not give enough support nor provide enough incentive to what I'm referring to as the middle. In the paper, I refer to the fact that there is the “stuff” we're talking about, and that has three different aspects; the stuff is science, technology, and product. Those are the three results, if you will, the three creatures we're trying to achieve.

Underneath that, there are three processes, and the processes are research, which often or most commonly relates to science; development, which relates to technology; and commercialization, which relates to a product.

Underneath that, broadly speaking, and I'm obviously over-simplifying, there are organizations or processes that facilitate those things. Universities and research hospitals do research that creates scientific knowledge. At the other end, private companies—commercial enterprises—do commercialization that sells products around the world.

In the middle there are organizations like Precarn that support the technological development that bridges the gap between scientific research and the commercialization of products.

The government has taken a number of steps to promote the bridging of that gap and to promote the application of science and technology. The science and technology strategy, entitled “Mobilizing Science and Technology to Canada's Advantage”, included programs such as the CECR program that Jean-Claude just referred to, the business-led networks of centres of excellence, which are attempts to recognize that the issue is that we do really well at science and scientific research but are not so good as a country at commercialization of products.

The paper itself recognizes that gap. It talks about there being a place in the middle of the continuum where there are both public good benefits and private benefits to be achieved. The paper says that at that point in the spectrum, government and private sector should collaborate, as long as the private sector is willing to put in money to try to bridge the gap. That's the issue.

For example, the United States has a small business innovation research program that is a competitive process, much like the process we operate. It's money taken out of R and D departments in the United States government—eleven of them, I believe—and it's supposed to be designed specifically to promote technological innovation in small companies. In their own description of the program, they say SBIR funds the critical start-up and development stages, and it encourages the commercialization of technology products or services, which in turn stimulates the economy.

But they make a specific point in that document to say that they do not fund the commercialization activity; that is for the private sector. What they're funding is the space in the middle between the scientific breakthrough and the technology development.

As I say, government has made progress in all of these areas. We would submit that there is still room in the middle for the government to support, on a competitive basis, technology development.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Johnston.

We'll go to Mr. Corr, please.

[Tom Corr, Associate Vice-President, Commercialization, University of Waterloo]

Good morning.

It's great to be in Ottawa today representing the University of Waterloo and the Waterloo Accelerator Centre.

As the funding and facilitation of science and technology is in part the subject of today's meeting, I'd like to give you a snapshot overview of the success and challenges of our commercialization efforts in the Region of Waterloo and in Canada's technology triangle, which makes up the cities of Kitchener-Waterloo, Cambridge, and Guelph, Ontario. My perspective comes from the other Silicon Valley North.

Waterloo is considered to be one of North America's leading concentrations of technology players, commercialization expertise, technology transfer, venture and early-stage capital, and of course innovation. If you broaden the Waterloo region definition to include the city of Guelph, we are referred to as Canada's technology triangle, or CTT , and we're recently described in the British journal Regional Studies as one of the most dynamic sources of high-technology activity in North America.

Waterloo's information, communication, and technology sector is going from strength from strength. In 2004 we were home to 327 high-tech companies, and by 2008 we have grown to 514. The ICT sector alone employs 13,000 people, or 10% of the region's workforce, and generates $13 billion in revenue annually.

Notably, 250 of these companies are University of Waterloo spinoffs. Our region boasts more than 150 research institutions, including the Perimeter Institute for Theoretical Physics and the Institute for Quantum Computing. As of 2006, these institutes accounted for $344 million in private sector research and development. Also, at a time when venture capital is difficult to raise, in 2007 we saw over $300 million invested in local startups.

I am bombarding you with these facts and figures today because we like to think that the University of Waterloo has played a role in the success of Canada's technology triangle and Waterloo region's technology cluster, and we think the intellectual property ownership policy at the University of Waterloo has had something to do with it.

Basically, what we tell our faculty and students is that we don't own their brains, and if they develop intellectual property, they own it. It's a pretty simple policy: if you create it, it's yours. Inventors own their inventions and are free to commercialize and profit from them. We believe that inventor-ownership attracts the kinds of entrepreneurial researchers who have made Waterloo region and the University of Waterloo successful.

I come before you today armed with a few examples.

Since the sale of Cognos Inc. to IBM last year, Open Text Corp., a University of Waterloo spinoff, is now Canada's largest independent software company, with more than 3,000 employees worldwide. Research In Motion, the BlackBerry company, has over 5,000 employees within a few blocks of the University of Waterloo. They are great examples of what successful commercialization can do for a community.

Other successful spinoffs such as DALSA, Descartes, Virtek, and Northern Digital employ more than 1,600 people in Waterloo, and our region is hungry for more. At any given time we are looking for about 2,000 highly skilled workers, and at this point RIM alone are looking for 500 employees in Waterloo.

The University of Waterloo is also actively involved in incubating entrepreneurial startups, with our Accelerator Centre located in the university's research and technology park. By this September, we will have 35 companies in the Accelerator Centre, which speaks well to the entrepreneurial activity in Waterloo.

Our system of cooperative education has produced students who are finely tuned to the needs of our high-tech enterprises in Waterloo, and their efforts have attracted the attention of heavyweights, such as Sybase and Google, who have gone on to establish large offices in the research and technology park.

The University of Waterloo is known as the national leader in technology transfer from the classroom to the marketplace. We believe our creator-owned intellectual property policy, along with fostering an environment where collaboration is encouraged, has resulted in our success as a university and as a community.

Waterloo has shown that if you can create an environment where venture capitalists are comfortable with injecting funding into an entrepreneurial project, you can open the floodgates to economic activity, job creation, and innovation. The university is a big part of this environment, but so is the government at all levels.

At Waterloo, we believe that an environment that actively promotes and fosters research and its commercialization, coupled with an environment that facilitates commercialization through organizations such as the Accelerator Centre, provides tangible results in terms of commercialization of research and the resulting economic activity of our spinoff companies, which create jobs in order to commercialize the research.

What we need from the various levels of government in order to maintain these levels of research commercialization and the resulting economic development that has been seen in Waterloo can be summarized as follows:

Number one is policies at the federal level that provide for protection of the intellectual property that is developed by our researchers, so that we can attract investment capital.

Number two is continued funding at the federal and provincial levels for university research.

Number three is federal and provincial programs and tax incentives that provide incentives for investors to invest in high-risk, early-stage university spinoff companies.

Thank you for your time today. I look forward to your questions.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Corr, for your presentation.

We have two witnesses who have joined us during the other presentations. From the Ottawa Centre for Research and Innovation, we have the president and CEO, Mr. Jeffrey Dale, and the vice-president of investment and commercialization, Michelle Scarborough. Welcome.

Mr. Dale, will you be presenting on behalf of the organization?

[Jeffrey Dale, President and Chief Executive Officer, Ottawa Centre for Research and Innovation]

Yes, I will.

[The Chair, Conservative, James Rajotte]

Okay. You have up to five minutes for an opening presentation.

[Jeffrey Dale]

Thank you.

I apologize for being late. We went to the wrong building.

[A voice]

We all do that.

[Jeffrey Dale]

Good morning, and thank you for the opportunity to present to you today on the topic of commercialization.

OCRI, or the Ottawa Centre for Research and Innovation, was established 25 years ago as a facilitator of commercialization between our federal labs, our universities, and the emerging technology industry. We have grown since then. Right now, OCRI itself has more than 700 members, and we represent about 120,000 people, because we combine the business, education, and research sectors. We are continuing in that tradition of being the link between the education, research, and industry sector. In our region right now, we have 1,819 technology companies employing about 82,000 people.

Today, though, I would like to highlight a number of challenges with the Canadian commercialization process.

Canada has always been good at priming the pump and investing in discovery research at our federal labs, in our universities and hospitals, and through our national granting councils. We need to continue to invest in research, which fundamentally is an investment in people and in training. Ultimately, it is people who commercialize ideas.

The three main challenges I'd like to speak to you about are the need for clearer rules on intellectual property generated through publicly sponsored research; the development of a Canada-first procurement policy to support Canadian innovation by the government; and the crisis in the state of venture capital in Canada today.

On the first point, once research shows a promise, it has many paths by which to be transferred to a commercial company. This is one of the main challenges for companies looking to use intellectual property sourced through a research project. Currently there are no standard rules for transferring IP.

You've heard Tom talk about the University of Waterloo. There are probably as many universities as there are custom models that exist out there.

Our universities have their own rules. Our hospitals have their own rules. Our labs also have different rules. This is confusing for companies and poses a critical barrier for many of our small and medium-sized enterprises, as they look to find new intellectual property from our research-intensive institutions.

The government has an opportunity to demonstrate leadership by establishing clear rules around intellectual property generated by government-sponsored research. The Bayh-Dole Act of 1980 in the U.S. provided a very consistent approach to commercializing IP, and of course it gave preferential treatment to companies that were going to commercialize that IP in the United States.

My second point is about what happens when you finally do commercialize your first product and you're looking for that all-important first customer. We invest billions in research and millions more in supporting the transfer of technology and the development of start-up companies. These start-up companies develop products and services, but when it comes time to sell them, they cannot look to the government to be their first customer. We have a procurement system that does not quite support Canada-first right now.

We understand the challenges with our trade agreements and the need for a fully open procurement process. But we are letting our start-up companies struggle without referenced customers, while many of our trade allies are supporting their innovation-based SMEs through strategic procurement processes that allow them to gain a first customer to prove out the technology and to provide that all-important first reference as they go global.

Companies, especially start-ups, will gravitate to economies that show them some success in their first references. Many of our start-up companies are looking to other countries to find that reference customer today. If successful, we will see job transfers to those regions. After the billions we've invested in research, we are seeing our investments leave this country far too often.

We need to support Canadian-made innovation and establish a procurement process that would allow the Canadian government to buy new technology, assist our companies in commercializing our ideas, and start research projects that have global product potential.

ITAC, or the Information Technology Association of Canada, had proposed a strategic procurement program for the federal government a couple of years ago that would allow for Canadian innovation to have access to government business. We think now is the time to revisit that program to make sure we are supporting our own innovation.

My third topic is the crisis of the venture capital industry. In the last two years alone, Canada has seen a very alarming shift in our venture capital markets. We are taking less money every year into our investment funds overall, and we are now spending more, every year, than we bring in. And you don't have to be an economist to see that this is not sustainable.

There are several reasons venture capital is in trouble in Canada. Yes, we made bad investments in the late 1990s and early 2000s, and our funds lost a lot of money. We also lacked the experience to manage the growth and development of our companies from start-ups to strong, established companies.

We are a very young country with a very short history when it comes to high-risk venture capital. We fail in our first attempts. In fact, one of the measures of successful venture-backed companies is being able to grow from zero to $100 billion per year in revenue. It's a measure that many VCs state. In Canada, we have seen less than a half dozen companies make that milestone in the past ten years; in Ottawa, we have not seen any.

I will skip ahead to comment on two things. One is to congratulate the government on implementing removal of some barriers that existed with foreign capital, like cross-border mergers and acquisitions, the U.S. tax treaty, and more recently the removal of restrictions on the 116 certificates. All these measures are announced, and we want to make sure you proceed with the implementation.

I'll skip ahead, because I know I'm running out of time.

The government can look at removing other tax barriers that prevent the flow of venture capital into our country, and it can also play a critical role in reviving the Canadian domestic venture capital ecosystem.

At the seed and early-stage financing rounds, both the federal and provincial governments could provide incentive tax credits, flow-through tax deductions, and/or reduce capital gains taxes for investors.

At the first round of institutional venture capital funding, the federal and provincial governments could also improve retail venture capital programs, particularly for provinces where there are none, like Ontario and Alberta. At a later round of institutional venture capital funding, the government can play a pivotal role as a source of venture capital--directly.

I will leave that there, sir, so we can start the questions.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Dale.

We'll go to questions from members.

Members, I'll remind you that we do have two motions today, one from Ms. Nash and one from Madame Brunelle. I have to have some time at the end of the meeting for motions, meaning our time for questioning is limited. I'm going to ask you all to be as brief as possible.

We'll start with Mr. McTeague, for six minutes.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Thank you, Chair.

Mr. Corr, Mr. Dale, all the witnesses, thank you for being here today.

I was intrigued by your comments with respect to protection of intellectual property. This is something the committee has come to a decision on, on two occasions, and it will hopefully be the subject of further legislation in the not too distant future.

Perhaps I will begin with Mr. Corr. Could you give us an explanation of why you felt that was the first area of priority and recommendation for this committee?

[Tom Corr]

Sure. We've been successful in the Waterloo region in raising capital for start-up companies, in particular our university spinoffs. In fact the 15 companies we currently have in our Accelerator Centre have all managed to raise venture capital over the last 12 months.

But when you talk to the venture capitalists and the sophisticated angel investors, their number one concern is the ownership and protection of the intellectual property. If it's not clear to them who owns the IP, and if it has been protected through copyrights--or mostly through patents in our case, because we're dealing with technology, as opposed to a script--they simply won't invest. They will not make that first step to investing in something they know can be replicated elsewhere.

Without strong IP protection and the strong patent legislation that speaks to that, the chances of our raising capital for most of these companies would not have happened. Again, when the venture capitalists were surveyed, the number one issue was IP protection. That's why it's number one on our list too. Without it, we'd get nowhere.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

I'll ask Mr. Dale, if I could, Mr. Chair.

[Jeffrey Dale]

To add to what Tom was saying, you also have an environment right now where there's collaboration going on with researchers. So you can get researchers from multiple institutions working on it, and they each have different IP policies. Our concern is the varying differences between the IP policies that exist. If you have multiple researchers from two universities and a federal lab, you could have three or four different IP policies you need to deal with.

That scares away companies, as well as what Tom was saying. How do they protect that? When you go to an organization and they hand you their IP rules, and it's this thick, if you're a small company you don't have the time to hire a lawyer to review that policy and how you would interact with it.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

I'm also intrigued with the comments that have been made with respect to the overall challenges and barriers to commercialization. This is a country of great thinkers. You are churning out--day in and day out--individuals who are at the leading edge of a number of world challenges, and this is extremely critical for us.

I really want to get to understand the disconnect, Mr. Dale, that you talked about between the venture capitalists and investments. What, in your view, is the trigger? What is the problem there? Why are we seeing a decline in the number? You talked about unclear terms; perhaps you could explain that a little better.

[Jeffrey Dale]

To go into the troubles of the venture capital industry would take us more than the time allotted here. Suffice to say that what I was trying to get at is that we've made some terrible mistakes with the venture capital industry over the past ten years. We have. We invested in companies at higher valuations than we should have during the late 1990s. We're a young industry; we did not have the management potential to carry them through.

If you take a look at our venture capital industry overall, they have not seen a positive return, so many of the funds that are going out today are having a hard time generating new funds to start off with.

Combined with that, we've now seen the Canadian chartered banks almost completely exit the venture capital asset class. In my very limited discussions with them, a lot of this--as I understand--has to come with the new Basel rules, which state that if you have a high-risk investment--like venture capital asset class--you have a higher rate of reserves that you have to keep on that asset class. I understand the rules, but if our own banks aren't going to be investing in our innovation and putting the money in, we're in big trouble, because there are no larger pockets. Our pension funds aren't there yet either, and we need to create a climate. There needs to be some leadership to create a climate to have these large LPs invest in the venture capital asset class.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Do I have any time left, Chair?

[The Chair, Conservative, James Rajotte]

You have one and a half minutes.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

I won't be that long.

It seems to me that a lot of government priority tends to be on technologies evolving from the environment. That's certainly our position, as a government. I'm sure the current government is continuing that. This is perhaps to tous les témoins. Do you get the sense that there is perhaps a need to reconfigure the priorities to all science and technology with results, commercialization possibilities beyond the issue of the environment? Do you get the sense that the Canadian government is only heading in that direction, backing its best only in that sector?

I will leave that for all of you.

[Tom Corr]

I don't. We see a pretty good balance coming out from the federal and the provincial granting agencies of where the funds are to be deployed. Clearly, there is an emphasis on environmental issues these days, but there is no shortage on balance of funding for the other areas if you have something that is fund-worthy, if you will.

[The Chair, Conservative, James Rajotte]

Thank you.

Madame Brunelle, please.

[Paule Brunelle, Bloc, Trois-Rivières, QC]

Thank you.

Good morning everyone.

Mr. Gavrel, in a message contained in a report, the President of the Networks of Centres of Excellence observed that since the creation of the NCE program in 1989, 117 young research-minded companies have been launched. That is a very interesting statistic, given that we are looking for new, innovative companies.

Can you give us some examples of successes that have been achieved through the efforts of these companies?