Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 4 - Evidence - November 3, 2011
OTTAWA, Thursday, November 3, 2011
The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:45 a.m. to examine the present state of the domestic and international financial system (topic: financing growth capital for SMEs).
Senator Michael A. Meighen (Chair) in the chair.
[English]
The Chair: Good morning, colleagues, and I will call this meeting of the Standing Senate Committee on Banking, Trade and Commerce to order.
[Translation]
I would like to welcome you all very warmly to our meeting on the present state of the domestic and international financial system.
[English]
My name is Michael Meighen. I am a senator from Ontario, and I have the honour to chair this committee. For the benefit of our witness and those watching on CPAC or on the World Wide Web, I should introduce the senators present. We have a full turnout this morning. We have Senator Oliver from Nova Scotia, Senator Tkachuk from Saskatchewan, Senator Stewart Olsen from New Brunswick, Senator Greene from Nova Scotia, Senator Smith from Quebec, Senator Gerstein from Ontario, Senator Ringuette from New Brunswick, Senator Harb from Ontario, Senator Moore from Nova Scotia and Senator Massicotte from Quebec. You can see the interest that your presence today, Mr. Jenkins, has generated among our colleagues.
Colleagues, on October 14 of last year, 2010, the federal government appointed a six-member, independent expert panel to review federal research and development initiatives. Our witness this morning, Mr. Thomas Jenkins, chaired this panel. The panel released a report entitled Innovation Canada: A Call to Action, on October 17, 2011.
We thought Mr. Jenkins could possibly assist us in our study on financing growth capital for small- and medium- sized enterprises, and we are pleased he agreed to appear this morning. Mr. Jenkins is the Executive Chairman and Chief Strategy Officer of OpenText, and he clearly has had great deal of experience in this area.
Mr. Jenkins, I think you have an opening statement that you can take us through, following which I know the senators will have all kinds of questions.
Tom Jenkins, Chair, and Executive Chairman and Chief Strategy Officer of OpenText, Expert Review Panel on Research and Development: Thank you. I brought a brief slide deck, just to guide us through the major points, but in case you have not had the opportunity, I also brought around the final report as well as the executive summary. There is a variety of materials here. I would also add that there is an enormous amount of information on the website as well. As we will see in the slide deck, there was a tremendous amount of submissions and a great deal of interest in this, and we published everything to the web. The working documents are all available for your review.
Turning to the slide deck, as was mentioned, this was launched a year ago by Minister Goodyear. It was very much motivated by a conundrum for public policy in this area of research and innovation. The panel composition, which is on slide four, were members from the various parts of the innovation chain within Canada, so in addition to myself there was Bev Dahlby, Arvind Gupta, Monique Leroux, David Naylor and Nobina Robinson, and all represented various elements of the innovation chain, as we will get into in a minute.
The mandate was really to answer three questions. What federal initiatives were the most effective in increasing business R & D? Is the current mix and design of tax incentives and direct support for business R & D appropriate? What if any gaps are evident in the current suite of programming, and what might be done the fill the gaps? That perhaps is the area that we might spend the most time on.
For completeness, let me give an idea of the scope and overall recommendations, to give you context for this. The scope was really surrounding tax incentive programs. As we will discuss, the SR&ED program, as it is known, has been an important source of capital for small emerging firms that are R & D intensive.
There is also a suite of programs around business innovation support, and there is a variety of funding for business focused R & D, at universities, polytechnics, colleges, non-profits and federal agencies, so all the various actors involved.
The process itself took about a year, but it was very comprehensive in its consultations. There were 32 round table sessions, with 164 participants in nine cities across the country, and 228 written submissions were received. As I mentioned earlier, these are all available on the web.
We also went to seven countries that we thought were pretty innovative in their own right in various aspects of this topic area. We also had extensive bilateral discussions with the provinces. The provinces have done a lot of innovation in this area, and we wanted to hear what they had to say, especially from the point of view of coordinating.
We also did some comprehensive research, not so much about the fundamental problem as about what we can do about it. The research was focused on applying some of the previous reports that have been generated in this area, which led to a survey of about 1,000 R & D performing firms, as well as analysis from a range of experts from within Canada and from outside.
Slide 9 addresses the policy conundrum we have in the country in that Canadian business R & D expenditures are stalled. That is despite, as you see on slide 10, a substantial amount of government support. The conundrum was such that on OECD rankings, from a government support point of view, we would regularly rank first, second or third over the past couple of decades, and yet rank in the middle to end of the class when it came to business R & D investments themselves. One could say these are related or not related. That is what the panel was charged with to get to the bottom of.
Slide 11 gives you an idea of the composition. One of the questions the panel was given was with regard to mix. Our mix in what is so-called indirect support, or the Scientific Research and Experimental Development Tax Credit, or SR&ED, represented the bulk of government support, and that was unlike most other countries. We looked into that in terms of what would be a good direction going forward.
Slide 12 gives you an idea of the complex array of small direct-support programs and in fact led us to one of our conclusions. It was best described as a myriad of support programs.
Of course, not surprisingly, given a whole bunch of small sub-scale programs, in slide 13 we see that in our survey, at least half of the firms surveyed did not even know the programs existed. It was a classic issue of many small, well- intentioned programs, effective in their own right but, in the continuum of the whole collective across the country, generally regarded as sub-scale. That is a problem not unique to Canada, as we studied and as is in our report.
The gap in the demand-side support on the input side, as well as the gap on public-private R & D, this is especially where we focused on the role of the NRC.
Finally, and maybe more pertinent to our discussion today, slide 16 speaks about the gaps in risk capital in the country. We are not unique in that regard. Many countries have this conundrum about what is the appropriate level of risk capital support throughout the continuum. You will see where we specifically identified gaps in angel and late- stage capital.
This leads us to the recommendations, of which there are six.
Slide 18 starts with the first recommendation, which is an attempt to consolidate the myriad programs and create a council that is focused strictly on business R & D. We have done this many times in the past in this country. It is how we created things like NSERC and SSHRC. We thought that with the billions of dollars being spent it was high time we created something that was focused, that would give business a so-called national concierge service, and that would focus the effort. We have many small, well-intentioned programs, but they are not focused on a national level.
The second recommendation was to simplify the SR&ED. Part of the issue we found with the SR&ED was that it is a well-intentioned program but perhaps too complex for small- and medium-sized enterprises, and that if we were to simplify to a labour-based approach — which is the approach used in the province of Quebec, but also internationally — we thought we would get greater efficacy and more bang for our buck, and that more of the dollars would in fact go towards the intended purpose, which is R & D for small- and medium-sized enterprises. We found that perhaps too much of that money was being put into administering what was perhaps an overly complex program at the small- and medium-sized level.
We did not find an administrative issue at the large company level. In fact, when SR&ED programs are implemented internationally, they generally make that demarcation between large and small firms.
Slide 20 is one for which we heard a lot of feedback from corporations, that they really wanted government to be their first customer, their first reference. They did not want this as a handout; they wanted to compete for it. However, they wanted it to be based on innovation. They wanted a customer from government as opposed to perhaps a subsidizer, and we heard that loud and clear.
When we examined other countries throughout the world, we found that they, in fact, invest an enormous amount of time in this area to drive innovation. Innovation is generally regarded as being driven by two things: employees and customers, not programs and so forth. If we want to drive innovation and productivity, we need to introduce competition and make meaningful demands as a customer. That was the procurement recommendation.
Slide 21 is with respect to the NRC. The NRC has a rich history of spinning off programs. It has been a fantastic incubator for policy ideas. The IRAP program is excellent. We recommend that it be spun off into that industry council and that some of the other industry-focused areas in the NRC also be spun off. It has been 23 years since we have spun something. The NRC gave us the Canadian Space Agency, NSERC, and so forth. It has a rich heritage of doing that. However, for some reason, we have not evolved NRC further for 23 years. That is our recommendation there.
The fifth recommendation is on risk capital. We were very much taken by both ends of the spectrum. Many actors in this area — and perhaps we can talk about this — have different views of this, depending on where you are coming from in the innovation chain. Of course, the providers of capital would like less competition and the consumers of capital would like lots of competition, and we tried to navigate among all that input.
We were struck by the Israeli model, the Yozma fund, in terms of how they de-risked risk capital. We spent some time in the report and in some of our working documents on that. We thought that was a clever way to balance the public policy of wanting to be market driven but, at the same time, ensuring those incremental dollars are invested in our country as opposed to other uses.
On the risk capital side, we have made two recommendations. Quite frankly, we felt that BDC was the method to implement, with an emphasis that this be market driven but that BDC be a facilitator. That is an important distinction, namely, that the BDC itself should not necessarily be a direct actor, but it should be a supporter of the other actors in this area. Maybe we could talk about that some more.
Finally, on this topic overall, we felt that this was a whole-of-government issue. Innovation productivity is not really any one department or any one minister within cabinet, yet it required a central whole-of-government approach. We were encouraged by some of examples we saw, whether in Singapore or Finland, et cetera, where the senior leadership of the country took an active role, not a full-time role but a strategic role. We thought it would be a great idea to take what is the current stick council and have it provide whole-of-government advice publicly, and to do that to a single lead minister.
Those are the recommendations of the report. Thank you for your attention.
The Chair: Thank you very much, Mr. Jenkins. That was very helpful. I think it set the table for a feast for the next hour and a quarter.
Senator Ringuette: Welcome, Mr. Jenkins. I appreciate your comments.
I briefly went through the real report — not the executive report — and I see that since 2008 or 2007 we have been reducing the level of innovation funding, which is now less than the average in the OECD. The average of the OECD is 1.6, and we are at an average of 1 per cent of GDP, so that is a concern.
I look at your slide on page 10 comparing different countries with Canada. It confirms what we have been all thinking, namely, the fact that the indirect government support through tax incentives is a lot higher in Canada than any other country.
We have been talking to different witnesses. In order to get a tax credit, you need to have the capital to do the R & D and then claim the tax credit. We seem to be lacking on the first impediment, which is the capital. You have confirmed this.
Then I look at your slide. Starting with Sweden, Germany, Iceland, Finland, Luxembourg, Italy and so forth, all their funding is in direct funds, direct cash to do the R & D.
I would like you to give us your opinion about these two extremes, going from Canada with the tax incentive to Germany, where it is strictly cash up front for R & D.
Mr. Jenkins: I think one has to be careful when making nation-state comparisons because the structures of the economies of those countries are, in some cases, very different. We certainly found that with the German economy, the Korean economy, namely, high degrees of centralization and concentration around certain industries and certain national mandates. We were struck by that. We were persuaded that countries like Australia, the classic countries that we would normally compare to, were the ones that were compelling for us.
One has to get into a sectoral analysis to understand. R & D in pharma is very different than R & D in software, ICT, or forestry. One has to be careful about the sectoral mix.
Having said that, we were struck, especially in our meetings with the OECD, that when you look at the chart that you are referring to, the countries on one end of the spectrum were looking across at the other countries, wondering whether they need to be doing more SR&ED type programs as opposed to the SR&ED countries who were looking across, and perhaps, like everything else in life, probably a happy medium is needed.
The effectiveness of an indirect program is that it is market driven. The attribute of the SR&ED program is that it is left to the market to decide, as opposed to direct programs that put an enormous amount of stress on the granting bodies to be effective and truly market driven. We have many examples that direct programs struggle to be current, and so a mix was very attractive to the panel.
In our recommendations, which I neglected to mention at the beginning, part of our charge from the minister was to have a balanced approach, that if we were to give to one program, we would take from another. We thought that by simplifying the SR&ED program, the savings generated from that could go further into more of the direct programs and try to rebalance that.
We did hear directly from many other countries that are in the blue, that they are considering moving more into the red, especially when it comes to competition for the incremental research dollar of the large companies, for the multinationals. That has become a competitive sort of attribute for a nation-state. We have corporate taxes and so forth, but it was thought that incentives for R & D would attract those innovators that would then create GDP for that host country.
One should always look at these statistics as in motion, and that the blue may be coming to the red and the red coming to the blue. We are conscious of the fact that there was some fluidity to this.
Senator Ringuette: I guess we need to do a lot of work on the direct government support to come to a happy medium that you indicate.
In regard to risk capital, you talked about the involvement of the BDC to allocate a larger proportion of its portfolio to start-up stage financing. Could you elaborate on that?
Mr. Jenkins: We are speaking now to the two ends of the spectrum of risk capital, and I would draw your attention to the chart that we provided on slide 16.
I must emphasize that depending on where you are on this debate, you have a very strident view that is in opposition to the other view. Entrepreneurs want lots of capital available and providers of capital want a smaller pool available, so one must always be aware of that when hearing testimony from the various actors.
We were persuaded by angel investment, which is family and friends moving into angel investing prior to traditional venture capital. At that stage, there is a strong grassroots effort across the country. Some of the provinces we detailed in the report, like British Columbia and Quebec, have worked to foster or to allow that market-driven angel, but they were lacking a coordinating function. That is what we were referring to in the early start-up, that BDC could play a role to coordinate these angel groups better, to give them a self-help place.
It is not so much the provision of funding because the angels themselves provide the funding. I would hasten to add what we found and, I think, would appeal to anyone's common sense, is the angels brought more than money. The angels brought their experience, and that was far more valuable.
To foster and encourage that and act as a linking mechanism between the angels and those that need the financing would be a tremendous boost for the country and not necessarily a lot of capital but rather leadership and coordination.
Senator Harb: Thank you for the report; it was very well thought out and comprehensive.
You mentioned "sectoral'' in your presentation. When we talk about small- and medium-sized business, you talked about different sectors.
In my opinion, the high-technology needs all the attention, but you probably could disagree with that. Out of all of those sectors in the small- and medium-sized enterprise that we need to do something as a government to help, which sector, in your view, needs the most attention?
Mr. Jenkins: The sectoral analysis and the sectoral debate is an emotional one because it sort of implies that we pick winners and losers by sector. I think we have to be very careful not to do that. The simple answer to your question is they are all important. We have to create a macro environment so that all those sectors, depending on the speeds with which they consume R & D and innovation, can be helped.
As you rightly point out, it is sort of intuitive that the high-tech sector has the highest per revenue investment. Usually high-tech firms are in the 10 to 15 and sometimes even 20 per cent of their revenue investing because of the volatility and the change.
For Canada, in our long-term productivity and innovation, we have to look at this high-tech issue as one that affects forestry, oceans and mining. One does not have to go very far to look at the incredible wealth creation that has occurred by innovations in shale oil and shale gas. For Canada, that is a very smart, strategic play. However, if we do not have mechanisms to help them make those innovations and do the R & D, we will harm the country in the long term.
I think we have to look at this and take a sort of objective view of the strengths of the country and where we need to instil that R & D. I found in going with the panel across the country, this was perhaps the most misunderstood point — that our innovation and productivity issue is right at mining, oil and gas and oceans. That is exactly where we need it. Everyone gets the high-tech one; it is just the subtlety of needing that innovation. If you look at what Finland and Norway have done with their classic sectors that are similar to ours, they have focused on innovation.
Senator Harb: You outline the dilemma in your own report when you said what we have learned. You have two contradicting statements that reflect exactly that. You say that we have learned the government should be more focused on helping innovative firms to grow, and particularly on serving the needs of small- and medium-sized enterprises, SMEs.
Then you go down a bit in order to show the other side of it. You say we also learned that innovation support is too narrowly focused on research and development. More support is needed for other activities along the continuum of ideas to commercially useful innovation. I think you outlined the dilemma you are faced with, that you have this camp here and another camp here.
I want to go back to the point that what we wanted to do as a committee was cut through the politics in a sense, and go to the government and say these are the specific things we want you to do to help — not necessarily the winners or the losers, but the ones that have a hard time to raise the necessary funds to bring innovation and bring the product to the market. I suspect it is probably easier for a small start-up mining company to go on the stock exchange and raise money than OpenText when it first started.
Those are the kinds of things we are looking at. Having said that, you alluded to it in recommendation No. 5, risk capital, when you said you wanted to see the government indemnifying the Business Development Bank to allocate a large part of its portfolio to start-up. That is perfect. That is good. We wanted to know from you is a percentage — how much, just a little idea.
In your second recommendation, you also talk about the new capital for the development of larger scale, later stage ventures, which is also important. Can you quantify that?
Mr. Jenkins: I will try and first deal with some of the conundrum in the conflicting statements.
It is important to realize that in our country, we do rather well creating start-ups — in fact, exceedingly well. Wherever we went across the world, people would remark on how good Canada was at that. Where we have a conundrum and where the conflicting statements come is that the growth of those start-ups becomes apprehended later; they are taken out by a foreign venture capital firm or a foreign entity.
That is fine in an open market, but our conveyer belt of creation of those small companies to get them to be global players is broken there. That is why we talked about the late stage of the start-ups. We are in a continuum, so we can get confused on the wording. We felt we needed pools of capital that would allow those firms that were just hitting the point where they could become global players, to give them the capital available. The specific mechanisms we were not really concerned about, rather that the market be incented. That is why we were taken by the Yozma fund.
De-risking that pool of capital for the pension funds in the country and other actors that would like to come in by basically protecting their downside, sharing in the downside, but giving them the upside beyond a decent return was pretty compelling to us. We found that other countries are studying this as well, and would probably want to implement that.
We have a unique issue in the sense that we are a small country right beside a really big country. As our firms grow up and are poised to become globally significant, we seem to be losing them disproportionately. If you study the OECD statistics, you will see that as firms start to get $50 million or $100 million in revenue, they start to drop off disproportionately compared to our generation of small firms.
That is why the statements are conflicting; that is what we were speaking to.
Senator Harb: That is why the committee is interested in that. One of my colleagues raised this exact point. You get to the point where you almost want to give birth and someone shows up on the scene saying "This is my baby.''
Mr. Jenkins: We have to be careful when we say it that way. People hear this debate and think it means we need to do more for the start-ups. No, we need to help them grow bigger. That is a subtlety that is missed in the debate in this country.
Senator Harb: That is what I am saying. When you are almost starting producing a good, you shift and go elsewhere.
Mr. Jenkins: On a global scale, because these firms are producing products and services and they are attaining $40 million, $50 million, $100 million in revenue; but before becoming a $1 billion global player, they are generally being acquired.
Senator Harb: That is why you said the first customer is important. If we have a success story and they have a good product, it is good for the government to turn around and say provide me with your goods or services so they can put them on that list.
Mr. Jenkins: To add to that, the activities of a nation-state on procurement, being a first customer, does not show up in these OECD numbers. You have to be careful when you look deep into the statistics because those statistics are not recognized here. When one is procuring a product or a service, that does not show up in the OECD stats as supporting R & D. However, implicitly, it is the greatest driver of innovation.
We refer in the report to things like the DARPA program in the United States, the ARPA-E program, the SBIR program — a variety of programs that are enormous in scale. Not surprisingly, the American economy is innovative because they institutionalized that post-Second World War. That is part of the dilemma.
Senator Harb: I know the chair will want to ask this question but I will ask it on his behalf.
You went to over seven countries; you saw the good and the bad, the things that work and do not work and you came back. If you were to tell us one thing out of all of those different visits in terms of best practices, what struck you the most that should and could be replicated here in Canada?
What should the committee do in terms of recommendations in its report to specifically bring the fruit of that particular identified initiative that you think is really good and will work and help us out?
Mr. Jenkins: Procurement, absolutely; government as the customer because it drives innovation. It is very cost effective because when government procures innovation, it is good for the taxpayer. It provides that first customer, and it is probably where we are the greatest laggard in all the aspects that the panel reviewed.
Other panel members may have a different view, so I would say for me personally. I know all the panel members were persuaded that procurement was a major gap. One could equally argue some of the other recommendations here, but for me personally, procurement answered why some of these countries were so innovative.
Senator Stewart Olsen: I have a supplemental question. You go in and support businesses at their medium stage of growth. I have a suspicion that this is happening not just in Canada and that multinationals gobble them up but perhaps worldwide. I am not sure that you can stop it. You go in at the medium stage, but is it not a global issue for them to compete on the world stage against multinational companies that come in? If we go in at that medium stage of development, how do you prevent the same thing happening at a later stage?
Mr. Jenkins: That is a great question. One must always be humble about intervening on a market failure. If history serves us, we have to be very careful. I am in an open market, I have lived my entire life in the private sector, I am a capitalist, et cetera. At the end of the day, we have to recognize that everyone acts as a rational actor. If you are an entrepreneur and have run your company for 10 years and have run it up to $50 million in revenue, you have an incremental decision in front of you. Do I incrementally seek more capital or do I get taken out by an MNE? We simply need to recognize that on the overall basket of all the sectors for our country, for our GDP, we are performing way lower than other countries of an equivalent size.
We do have a market failure there. Those options are in front of those business people who are disproportionately choosing the MNE takeout or the venture capital takeout. That is fact. What we have to think carefully about is how we want to intervene or how we should intervene.
The reason we decided that we should intervene on that market failure — and anyone in business will tell you this — is the so-called winners that get to $50 million or $100 million. The creation of wealth for the country actually accelerates at that point. After all this hard work and all these start-ups and all this R & D funding, at that inflection point we are having a lot of the wealth creation apprehended by another nation-state. We cannot stand in the way of rational actors making rational choices, but, perhaps like the Israelis, we can provide incentes for some of those incremental dollars to be invested in Canada when they hit that inflection point. If we do that, we could potentially create a lot of wealth for the country.
Senator Stewart Olsen: Thank you for your indulgence.
The Chair: I hope someone will ask more questions about that Israeli scheme and the risk in the process because I thought that is what you were going to say in answer to Senator Harb's question.
Mr. Jenkins: It was a close number 2.
The Chair: You opted for procurement, which also raises questions in my mind and perhaps the minds of some of my colleagues as to how you run that without trying to pick winners and that sort of thing.
Senator Oliver: I have a question about structure. I guess it would follow into recommendation 6, leadership. Throughout your report, you have talked about the executive or ministers. Right now, you are appearing before a parliamentary committee or the legislators, so there is a legislative branch and an executive branch. Your entire emphasis has been on the executive. There are a number of major Bretton Woods type organizations in the world — WTO, IMF, World Bank, and so on — who recognize the importance of parliamentarians in the makeup and development of good public policy, but nowhere do you talk about a role for parliamentarians. It seems to me that may be a fatal flaw.
For instance, in the U.K., they have a number of organizations with companies like yours involved on a regular basis with members of the House of Lords and members of the House of Commons meeting, analyzing procurement issues, and talking about new public policies for this sector and other sectors, but it is lacking in this overall report. I think it is a failure. Am I missing something, or have you said it in another way? How will you recognize the importance of the people who represent the people of all of Canada and who are involved in passing and making the laws that will put these things into effect if they are not included in your architect on it?
Mr. Jenkins: First, I apologize that we did not make this more obvious in the way we wrote it because we did intend to do so. If I could say it in sort of my own words, from a private sector point of view, what we are speaking to in my terminology is strategic and tactical, or operational.
We saw the last recommendation, number 6, to be a strategic one. We studied countries like Israel and Singapore and even the United States at a very large scale. We were very taken by the smaller scale countries in that they had a very strategic focus, right from the prime minister of their country through to the cabinet and the CEOs of the various organizations. They would have a strategic review once a year or once every few years. That is what we were speaking to with recommendation 6.
On our first recommendation, what we felt was the most important and tactical operational recommendation was the creation of a council. That council could then become the focus for those discussions. Today, we do not have a body of government that focuses this debate. Where do we have these discussions about business R & D, productivity and innovation that are focused and where the legislators, together with an agency and the private sector, can come together?
If you think of education in the country, that generally occurs at NSERC because we have a body built around a president of NSERC and a council, and that can be a group that can then brief legislators and does. We lack that. Our first recommendation was to engage that public policy element. Perhaps there is a better way to do it, but we were trying to model off of things that we could readily grab onto. When we saw the voice of academia, and what have you, being expressed through NSERC or SSHRC or CIHR, we felt that was the best way to achieve it.
Going beyond the limitations of our recommendation, I would agree with you that that kind of dialogue needed to occur. That was our answer.
Senator Oliver: Even today in Canada, in the current government, there are very few things decided by what you call the executive branch, the ministers, and so on, without first referring to ministerial advisory committees that are made up of ordinary parliamentarians; that is, people who represent the people in the Senate and the House of Commons. They are a very important factor.
As I said before, many of the Bretton Woods organizations recognize this. The United Nations even has a parliamentary wing or branch from which they get that kind of advice. I would hope that as you go forward, you will not forget the parliamentarians. The legislators, the people who make the laws, are an important element of that as well.
For instance, in terms of education, you probably know that I hosted an educational luncheon for OpenText a year ago. I invited senators, and their response was overwhelming, to learn more about it. The educational component is also important for parliamentarians. I suppose you could say that can be done by your council.
Mr. Jenkins: That was our intent. Having an ongoing dialogue with some kind of standing structure, agency, et cetera, only benefits the country on this point.
That was the number one thing that we found. We studied over 60 programs. Every program was well intentioned and, by all of our examination, effective within the very narrow confines, but there was not this national dialogue.
Senator Oliver: I am extremely interested in what you have said and what other witnesses who have appeared before us have said about angels. In terms of venture capitalists, angels are probably the most important group for money, advice and support for our SMEs in Canada today.
What types of things can we do to encourage more angels to come forward? Your recommendation is to go to BDC and let them be the coordinator and provide the leadership to bring angels from various parts of Canada together. Are there any other details that you would like to see the BDC do in order to enhance the input of angels in Canada's SMEs?
Mr. Jenkins: At our level, we were limited to basically recommend that a body of government be charged with moving the angel's file forward, if you will. We heard lots of testimony — that is, once one had a coordinating function — about what one would then to do further the cause and whether it is treatment of capital gains arising from angel activities.
Many other countries do that. They disproportionately incite that because that creates so much wealth for the country. We did not go into that detail with our panel; we simply recognized the fact that there needed to be that kind of conversation in the country, that they needed a concierge service and leadership, and that that leadership and dialogue could then lead to better policies.
The Chair: I think we had some testimony another day that one way of doing what you suggested is matching funds, which removes the element, to some extent, of picking winners and losers. There is already, presumably, some proof in the marketplace that this startup has some traction. Does that concept appeal to you personally?
Mr. Jenkins: Yes, absolutely. As we were examining some of the programs internationally, as well as some that exist at the provincial level, the matchups made a lot of sense. The Israeli fund is, effectively, a matchup.
That way, you get the best elements of something market driven, but at the same time you are de-risking and encouraging certain aspects within the economy that you would like to see more of. As a lever, I think it is a very, very effective one.
Senator L. Smith: We are your customers and you have just delivered a fantastic report, Mr. Jenkins. We would like to buy in. How will you set it up and involve the government? There has been so much positive feedback, and so many people reading the report and discussing it. What is the next step? We are the buyer, and we say it is great. If we look at an example of mining, most of our programs have been for extracting minerals. What about the recycling business with the tailing ponds in Western Canada? This could be huge business. You are the guy who has come up with the great ideas from a macro perspective. How do we set some of these things up?
Mr. Jenkins: To keep myself within your nomenclature, I think my role is as a consultant.
Senator L. Smith: That is what I said; you are our consultant. We buy what you are saying.
Mr. Jenkins: The panel had a one-year lifetime, and it has now expired. The panel members have moved on, and this will be the last time I actually speak publicly about this.
Senator L. Smith: As an entrepreneur and a citizen, you are a business guy. You want to do something.
Mr. Jenkins: As a business guy, I run my business. Clearly, this is a report delivered to government, to Minister Goodyear. It is really up to the federal government to take this on now.
We, as an expert panel, have certainly given our views. The way it works, generally, with panels is that that is where our responsibility ends.
I would hope that we would take some of this on board, but we took 30 years to get to this point. I think we have to respect the fact that this is a trend over 30 years. I do not think there is a quick fix here. I think there are some obvious things to do that we have recommended, but we on the panel are quite satisfied to leave the timing of that to the government.
Senator L. Smith: As a person who spent most of his life in business and as a person with some entrepreneurial interest, I can say that entrepreneurs like to move relatively quickly. The challenge with some of the government programs — and you outlined it — is that they are confusing. People are not aware of them. You have, then, one instance where there is a huge glacier moving and another where entrepreneurs are scrambling for cash and finding ways to finance their business growth.
You have mentioned putting a consultative group together. Would that be an opportunity to get business people to work with government to try to implement this, respecting that government has its job to do? Could there be a cross- pollination to help simplify some of the programs so that they can be put in user-friendly language?
Mr. Jenkins: We were struck by the fact that so much of the public purse, if you will, was being spent to spur on R & D and innovation by business, and yet there appeared to be a lack of governance of it to allow that feedback and that really quick, closed loop. This is why we referenced things like NSERC, SSHRC and CIHR. There is quick feedback; they meet every 90 days. All the different actors in that, vice-presidents of academic, or what have you, can give quick feedback to the president of NSERC or of SSHRC, etcetera. If we had such a mechanism, we on the panel thought this would go a long way to do what you are suggesting.
Senator Massicotte: Your report covers a lot of ground. As mandated, it reviews the current programs. You are saying, "You guys are all over the map. There is too much there. People do not know it is available.'' Like you just mentioned, we should go with governance. I suspect you had very good support, in a research sense, to do analysis on the world.
What did you learn? When you compare OECD reports, you look at mid-size countries like us, and you say that something is happening there. We are spending a lot of government money with little result. Is there simply a lack of appreciation by our businesses that these programs exist?
You identified one issue, in particular, and I want to make sure that is the right conclusion. You are saying we are pretty creative. There is no problem with education; our schooling seems pretty good. We are pretty creative and pretty good entrepreneurs, and we have a pretty good culture. However, once with get to the international scale — $1 billion in sales — we seem to have a lack of either confidence or money. We fail there. Is that really where the problem lies? Is funding what we should focus on? I want to ensure we get the right conclusions. Forget Silicon Valley or Boston. If you look at the comments about getting there, studies in England and many countries show they cannot get to an international scale. Is that where the problem lies?
Mr. Jenkins: I believe that is where our fundamental problem lies. You are right in pointing out that we are not alone in that regard. Other countries are facing this issue.
However, one must also take, perhaps, a decades-long view. We are faced with a global economy now. One could argue that the last really substantive round of public policy in this area was done about 30 years ago. It was a very different world. Our economic strategies need to reflect the world that we are in today, not the world that we were in 30 years ago.
Another report that we referenced here, the Wilson panel that reported three years ago on the nature of the global competition before Canada, reflected on the fact that global trade has really changed. Many other countries are grappling with this now. Before, if we wanted to create wealth in our country, and we viewed our country as somewhat of a closed system, then a company with revenues of $50 million would be pretty good for Canada.
As we went to NAFTA and continental trade, one could argue that we needed to step up. We did not. When one abstracts further to global trade, it is on an even larger scale.
That is the policy conundrum for this country. Whether or not we will convey wealth to the next generation depends on whether we organize ourselves to take advantage of this.
The Wilson report looked at our competitiveness and posture in some detail. Within the confines of this discussion, plugging the gap in financing has to do with giving an incremental incentive when that entrepreneur has a choice to continue on to the next leg or to sell out. That is the critical juncture many Canadians are facing right now. Statistics tell us that they are disproportionately choosing to sell out.
Senator Massicotte: If that is where the problem is, and you said personally that is your opinion, did your committee agree with that conclusion?
Mr. Jenkins: Our committee was in full consensus on everything in these reports. We are now speaking to the nuances and I am very respectful of other panel members who perhaps on the nuances may view it differently.
Senator Massicotte: That is where the problem lies. The whole problem is measurement, and you actually say, "Try this stuff but measure it.'' In other words, we have not measured it very much. We have been going for 30 years, they shell out billions of dollars, and we are not too sure it is effective. We do not like the result but we are not too sure where.
What you are saying is you think this will work but please measure it and change it constantly. If that is the case, though, if that is where the problem lies, it is not early stage capital where we have a problem and it is probably not angels. It is really mid-level firm financing because there is a customer base, but they are just not international in scope. BDC came to the same conclusion as well.
You are saying, "Mr. Government, leverage it with your own procurement, but leverage with new capital, probably with incentives such as co-partnering or credit.'' We talk a lot about SMEs. Senator Tkachuk will say that a job is a job. Why only small enterprise? Why medium? If that is where the problem lies, why not just make it applicable to all Canadian firms and not pick and choose? History has shown that "pick and choose'' has always failed.
Mr. Jenkins: We are not advocating picking and choosing. We are pointing out where we saw the data suggesting that there were market failures relative to other countries.
I would hasten to add something to what you said earlier, something we all should be aware of. When we went to other countries, and certainly when we sat in Paris with the OECD, Canada was regarded as a standard for measuring efficacy, such as it is, compared to other states. For example, we asked about the SR&ED program, how effective it is and if there are better ways to do it. They looked at us and told us we are already the best at doing this.
We should realize sometimes that although we are not happy with the situation, we are in fact the benchmark in the world in some of these areas. In the report, as you quite rightly point out, the panel encouraged us to do even more because we should be outcome-oriented and not perhaps input.
It is quite natural that on a policy level we would be input-oriented because that is easy to measure. However, outcomes are really what matter. As someone who comes from the private sector, we can have all the inputs we like in our firm, but if we do not generate profits and products for our customers and investors, we go out of business. Those are all outcome measures.
Senator Massicotte: This is an idiosyncrasy, but on your committee you have Ms. Leroux of Desjardins. Part of your approach is saying that there is a shortage of capital in that category — "Mr. Minister, please allow BDC to be much more active in that sector.'' I am always suspicious of someone saying somebody else should fund this thing, "somebody else'' being the taxpayer indirectly, BDC.
Ms. Leroux runs a very large firm and she is in the business of lending money. Why did she not say that all banks should be motivated to do so? Why government? Is it because it is not profitable enough?
Mr. Jenkins: Actually, we felt that the direct investor, the direct actor, should be the private sector, should be the banks, the pension funds, the other financial firms and, indeed, foreign firms that would like to come and invest in Canada. Our charge to the BDC was to facilitate that through the matching that you had mentioned before and the Israeli model. In the Israeli model they do not lead; they simply de-risk. We thought that the BDC should take that role of de-risking, not leading.
Senator Massicotte: What does de-risk mean? Is it to assume more risk than the others?
Mr. Jenkins: No. This is all publicly available, if you would like to dig into the way other countries do it. On a simplistic level, you pick a return, 18 per cent or 15 per cent, and above that you allow the private sector participant to buy you out at their option.
Let us say that you have a home run, like a RIM. You can buy out your de-risked partner at a return of 15 per cent or 18 per cent — a very healthy return — but if the investment does not work out, you both share it on a matching scale. That is the essence of the Yozma fund. That has proven to be very effective internationally. That incremental dollar incents the private sector people to put more money into your nation state as opposed to another.
Senator Massicotte: Again, we are not talking about small business or early stage capital; we are talking about growth capital.
Mr. Jenkins: Quite frankly, that fund does not provide any restriction in the sense of it is really meant to be a free market investment.
One must be careful not to anticipate where the free market would like to take its next investment. Then we are in a game of picking winners and losers.
Senator Massicotte: Not only SMEs, how about big corporations, foreign corporations; is that okay?
Mr. Jenkins: Our ability to attract capital at the global level is quite good actually. What we found was the market failure was at the lower end. In fact, Canadian firms have got a great track record of being able to do that at the MNE level.
The Chair: We had a great deal of testimony from the BDC last spring, I guess, emphasizing how they see their role as being complementary to the banks, for example, in loans and many instances. Is that what you see as well?
Mr. Jenkins: Absolutely. I think their role should be a leadership one, a matching role and a de-risking role. The dilemma for the BDC is where they see gaps they may in fact be tempted to go fill that gap and become a direct actor. That would perhaps not be a good idea.
It is very understandable that they would seek to be a direct actor when they see a gap because they are trying to help the country. I think we should allow those gaps to be there and let the private sector fill those gaps, but that does require a certain amount of patience and a certain amount of foresight.
The Chair: That is why perhaps doing it jointly is a halfway measure — I do not mean a poor measure, but a halfway house that is leading to the ultimate.
Senator Tkachuk: Mr. Jenkins, you talked about firms $50 million to $100 million firms in Canada being apprehended by other countries or corporations from other countries. Do we have companies that apprehend other countries' firms?
Mr. Jenkins: Absolutely we do. The point of the comment was not to imply that it is an all-or-nothing situation, because we have many firms that are very active, especially at the MNE level, so-called hollowing out someone else's country, that kind of thing. The statistics show that when one looks at this in the complete continuum that we are disproportionately participating there. What is happening is that we could do better. Given the size of our GDP, we should have more companies jumping that gap. If you benchmark it against the other members of the OECD, we are a laggard. It is not that we do not have our MNEs actively doing that.
Roger Martin of the University of Toronto has studied a generation of global leaders, and this is more back to our discussion earlier about our response to the global economy. His research shows that we are in fact generating more global leaders every year. It is just that as a percentage of GDP against our competitors we are not moving as fast. We are doing this, but it is just that we are not doing it as optimally as the other countries.
Senator Tkachuk: Did you spend any time talking or discussing or studying what I would call pure research? I think what government should fund is labs where you do not tell them what to do. You have just a bunch of smart scientists; you give them money and say have fun, which, from what I have read in the past, has produced the most innovative and the most interesting inventions, where no one tells them what to do. Just because they are scientists, they are curious and they figure stuff out.
I think 3M is used as a great example where they do not say you have to do something specific. They have all their smart people in a lab and they just run around and figure stuff out.
The Chair: Excuse me, Senator Tkachuk, we heard testimony about that. Did we not hear testimony about that at Waterloo, where there are a bunch of pure research scientists who are left free?
Senator Tkachuk: Do we have a lot of those?
Mr. Jenkins: That was not part of our mandate. We were specifically waived clear of any basic science or anything like that.
Senator Tkachuk: What about the National Research Council? They have labs, do they not?
Mr. Jenkins: In our study of the NRC, our recommendation was to ask them to continue the work that their president had started with looking at all the different aspects of the NRC and focusing them into those areas. We listed off three areas, one of which was the national labs, which are an incredible asset for the country and should be preserved and enhanced.
There were other activities within the NRC that we thought if they did more partnership with universities or with other industry partners, they could actually generate more money and more wealth for the country and expand.
Yes, we spent an entire chapter on that, but in terms of basic science, that was not part of our mandate.
Senator Tkachuk: When we talk about all of these programs, and there are many of them, do we have programs because other countries have programs? In other words, is this a worldwide competition now for attracting scientists and researchers by developing programs and making them more attractive so as to have that company locate in this country as opposed to another country? Is that why we have these programs at all? What if we did not have any of these programs, would there still be research and development and innovation? The Wright brothers did not need programs.
Mr. Jenkins: There is no question that countries use direct programs as a competitive edge to attract. It is one thing out of the basket of things available to them. If you go through the spectrum, you can go from macro tax policy, et cetera, all the way down to the micro side of a direct program and incentive to locate your plant in this city.
Senator Tkachuk: Or state.
Mr. Jenkins: Yes. The OECD studied this, as we discussed earlier about the blue bars moving to red bars, and one of the great attributes of indirect support like the SR&ED program is it has been found by the OECD to be more effective. When they studied many small, subscale programs, they found they were the worst payback on the dollar.
When you get down to the detail of this or that plant, you are in fact trying to pick winners and losers. What the OECD found is that is very ineffective. They actually favoured the indirect programs because they were market-driven and they were free of individual guessing or individual decision making.
One has to be careful. We were persuaded that you need a balance because if we are competing on a global scale, we cannot be Boy Scouts about this; we have to realize that other countries are incenting different sectors in different ways. If we want to be competitive, we have to do that.
Generally speaking, if I had a dollar to spend, I would be persuaded to put it into an indirect program, either risk capital or the SR&ED program, that type of thing.
Senator Tkachuk: What we are doing by these programs is decreasing the amount of risk for that piece of capital, right?
Mr. Jenkins: I would agree with that. That is right.
Senator Tkachuk: Therefore, is it possible that we get the government out of it and use the financial institutions that are out there, all the way from credit unions to banks, and say, "If you set up this program for the following reasons, this is the way we will help you eliminate the risk''? The only thing the government would do is write a cheque when they lose money.
There should not be an application. Someone should go to a bank and try to sell the banker, the investor or some financial vehicle on his or her idea, and then there should be a program to alleviate risk, but let us not be cute about it. In the end, it is the government writing a cheque and the taxpayers supporting it.
Mr. Jenkins: What we are reaching for here, for the context of this panel, is the boundary edge of where we got to.
We were persuaded that an institution like the BDC or a minister's department would be the ones to figure out the mechanism. You are going beyond our boundary edge now; we did not get into the specifics of how to do it.
Senator Tkachuk: Are you suggesting that we get rid of all these programs we have here, which are myriad, and focus on one or two? Or are you suggesting we keep them all?
Mr. Jenkins: In our review of all 60 programs, we thought they should be consolidated. Many of these programs are across 17 agencies and departments, so there are many subscale programs that we thought were similar to each other, but you have to take the time context here. Over 30 years, this is how we arrived at it. We did not intentionally do this. There are many well-meaning, effective programs that were started 10 or 20 years ago that need to be gathered up now. If one were to think back 30 years ago with the impact of innovation and science on wealth creation as compared to today, it is quite different. Not surprisingly, we have funded many of these programs on a tactical basis, and we need to consolidate them now.
In terms of their overall efficacy, this is based on our discussion previously about governance. Bring the customer in — in this case, the business community — as part of the decision-making process, and they can determine that one program is not as effective as another. Get them involved in the decision making.
Senator Tkachuk: I agree. No matter how difficult it is to start a government program, people have no idea how difficult it is to close a government program. Thank you.
The Chair: Perhaps for my understanding, are these then to be grouped into the Industrial Research Innovation Council?
Mr. Jenkins: Yes, that was our recommendation, to take the 60-odd programs and charge the Industrial Research Innovation Council to start finding the common theme so the programs could become scale. Right now, with the 60 odd programs, most of them are subscale; firms do not know about them in the country. If we could gather them up, we could probably achieve a scale where the next time someone runs a survey of our thousand firms involved in R & D, they might find a higher percentage reporting. Our intent was to charge that council with consolidating them.
The Chair: For the customer, would it be one-stop shopping?
Mr. Jenkins: As well as have the customer be part of the decision-making loop as to what would be kept and what would not.
The Chair: Do you envisage in the formation of an IRIC a process of reassessment of the efficacy among the 60 programs?
Mr. Jenkins: Yes. We thought it very useful for the purposes of our panel. We would suggest to the council that the discipline of being given a zero-based budget — whatever you add you have to take away from somewhere — forces innovation and productivity. We appreciated having that as part of our mandate.
Senator Moore: Mr. Jenkins, you are the Chair and CEO of OpenText, and I am thinking it might be instructive to hear if and how OpenText went to any of these funding sources, and if so, what sources? Perhaps your company might have gone to the market or any of these programs. What benchmarks arose along the development of your company?
Mr. Jenkins: That is a great question and speaks to my personal experience.
I am involved with not just OpenText, but I have been an entrepreneur in Canada all my life. I was born and bred here, trained here as an engineer, an MBA, and I have been fortunate enough to be a participant with many of the fine venture capital firms that the country has produced.
Over that time, what I have found is that if you have a good idea and you have the business sense and discipline to run a budget and to satisfy customers, you can find capital in this country. I started off in the Toronto area, and for the last 25 years I have been in Waterloo, which is an absolute hotbed; I think we are averaging a start-up per week now or something like that. I think that in different parts of the country, the mechanism is working very well. Let me speak to my personal experience about the gap.
Senator Moore: It might be instructive for somebody watching in that they may think, "This is how I should be doing it or how I should be approaching things.''
Mr. Jenkins: Pounding the doors a lot. That is how we all started as entrepreneurs. As entrepreneurs, you have to be able to take "no'' for an answer sometimes and move on, but do not always take "no'' for an answer.
The other thing that is unique to the entrepreneurs in this country, and I was referring to this earlier, is we perhaps do not appreciate that the entrepreneurs in the country are constantly doubling down their personal wealth and literally rolling the dice each year. That is what I was trying to say before. We are reaching a point where we are seeing the statistics that a rational actor, at that $50 million, $100 million level, is choosing to cash out as opposed to double down. For myself personally, I have doubled down every year and have done so for 20 years.
About 10 years ago, when OpenText was at that $50 million, $100 million stage, we still had the rules — I mention this not to recommend that we reinsert these rules, but at that time pools of capital were available at that jumping-the- gap stage by the pension funds and the other financial institutions of the country because there was a domestic set- aside. For a whole variety of reasons, that set-aside was removed but we did not compensate for that removal. A lot of other countries are also coming to grips with this.
We removed the set-aside for pension funds about seven years ago, and virtually every other nation state has done this.
Senator Moore: Did you start out doing venture capital knocking on doors? Did you have to go outside of Canada? I want to hear some of that stuff.
Mr. Jenkins: No, Richmond Street in Toronto, Helix Investments, along with a variety of other firms, the venture capital companies of the day. Whether it was CPP or OMERS or Teachers or Caisse, they were those actors that happened at the $50 million to $100 million level. They were incented because they had to place the money in domestic investments. That was the history of OpenText.
Quite frankly, if that domestic set-aside had not existed and I was in the same situation today as I was 10 years ago, I probably would get taken out by an American firm. Statistics show that is what is happening. It was just a happy circumstance 10 years ago that, during that critical phase for OpenText, that capital was available.
Now, as a multinational, billion-dollar firm, it can participate equally on NASDAQ and other exchanges in the world, so it does not have that differential. At that critical stage, in my personal experience, those pools of capital were there but are not today.
I hesitate to add that if you were OMERS, CPP or Caisse, you would say that the pools of capital are there and that they are investing, it is just that they are looking globally. They are right to say that. It is just that the statistics are showing that it is not happening as much as we would want it to, compared with other countries. We have to be careful not to get into black-and-white statements on this, but certainly the stats show we can do better.
Senator Moore: We have to encourage that. Thank you.
The Chair: Thank you, Mr. Jenkins. We hope to have the opportunity to discuss these matters with some of the organizations you mentioned. We will take to heart your caution not to be black and white, but it would be interesting to know how they see the situation today and how they would suggest that, as a country, we address the gap to which you have referred on a number of occasions.
Senator Hervieux-Payette: I will make an exception and speak English today, since we are talking about a field where most people speak English.
Welcome. It is a pleasure to see you today, and I might see you later this week in Berlin.
We are talking about government procurement. What about a mechanism for procurement for Bombardier, Magna, telecommunications and so on? I know they are working with many suppliers and that they have supported their suppliers to develop innovation that would reduce their costs, but are we doing enough? Are some companies doing it and others not?
Is the private sector also playing a role in supporting SMEs with innovation so that they, as large organizations, can be more competitive worldwide?
Mr. Jenkins: That is a fantastic question because it gets into the fidelity of the issue. We have to be very careful that we are seeking simple answers, yet if there was a simple answer one would argue we would have found that simple answer and implemented it in policy.
Your question gets to the fidelity of where the answer is. As we studied the American procurement system, they engaged their MNEs in the procurement and the acquisition, both of the product line as well as the corporate entity itself. They did not do it in such a way that it was some orchestrated thing; it is fiercely competitive.
I will provide you an example. The American SBIR program actually has a venture capital component to procurement. By the way, this is all public; you can get it from the GSA. The Americans will say, "We have this problem, so please submit solutions.'' The solutions come from anywhere in the world. This is not meant to be only American.
In fact, Canadian firms actively participate in the SBIR or DARPA program. What they do is they have this long- term vision of all these small firms feeding into their MNEs. It is a very strategic and sophisticated approach that is highly competitive. The intensity of the competition is very strong. There is no picking winners or losers in that sense, but it is very competitive.
They have this view of a conveyer belt and the participation of their MNEs is absolutely an integral part. As they build these companies up, they are then acquired by their big global systems integrators. We would do well in Canada to encourage that same type of behaviour. I must emphasize that it not be exclusively to Canada, that any firm on a global basis can pick up our SMEs, but that the procurement system be very mindful.
The buzz word these days is "global value chains.'' When we do procurement, we should understand Canada's role within the global value chain, the role of Bombardier, the role of SNC-Lavalin. They have roles to play. If we had a cohesive strategy — not that favoured Bombardier or any particular firm — that allowed that mechanism to occur, perhaps we would start to gain some of the innovation and productivity numbers that the Americans have. You are getting to the essence of the issue.
Senator Hervieux-Payette: I was thinking we need to coach the large departments that do procurement for $35 billion for new vessels, for planes and everything. We will buy a lot of very high-tech items in the coming years. This is a good example of where we could help our small innovators to have access. They will have to have a model. I agree with you, we have to change the mindset of our machinery, and procurement is a difficult thing. I think this should apply to provinces as well.
To provide you with an example, if we were using that system do you think we would have spent money on just trying to have a functional electronic medical record system in place in Canada? We do not have one. We have probably spent, province wide and federally, over $3 billion and we still do not have electronic medical records.
How did we blow that up? Personally, I am frustrated because it is a huge amount of taxpayer money. We have not got the system. As Canadians, we should have, in a certain place, a chip so that wherever I fall sick in the country, I will have all my data available.
What would you do about having these things that are essential components for a country?
Mr. Jenkins: There are three levels to my answer because you are now going deep into part of the root cause in our country regarding our dysfunction in terms of productivity, innovation and overall R & D spending.
First, I would say that PWGSC, as we highlighted in the report, started a pilot program called the CICP, a $40 million program that Minister Ambrose announced two years ago. It was excellent. In our report, we said, "Do more of this. This is excellent. This is an initial pilot, but please do more.'' We had good interactions with PWGSC about this. One of our recommendations was to do more and make it more competitive and more SBIR-like.
The Chair: Could you spell out the acronym?
Mr. Jenkins: The Canadian Innovation and Commercialization Program, the CICP. There are lots of acronyms in the report. I apologize.
The second element of what you have suggested is the procurement itself, whether it be medical records or ships or aircraft. Our system of procurement right now is largely about the specification of a very specific requirement delivered at the lowest cost as opposed to an innovative way, which is the hallmark of the American way and the British way. They say, "I have this problem; give me a solution, and I will take the competitive bids and choose the solution. Perhaps I will ask you to co-invest with me in a public-private partnership.'' That will lead to greater innovation and productivity for the country, and it will replace government as just a blind procurer to one that is the leading procurer. That will give us what other nation-states have.
This is not without risk, of course. At the end of that procurement, we may have the best way in the world of doing medical records, which we could then sell to other nation-states. This is what other countries are doing. What you are seeing in this report and with some of the activities of the PWGSC is a recognition of that.
To the third part of your question, in our interactions with the provinces, be it Quebec or British Columbia, Nova Scotia, et cetera, all were taken exactly by your point, that surely to goodness there must be a better way. We discussed with them the American system. They have a different Constitution than us but are similar in the sense of having federal, state and local levels. The federal system run by the GSA becomes the leader of how to do procurement. Many of the other levels of government simply follow. They are not constitutionally obliged, but it makes good sense. It is a good investment of taxpayer dollars from their point of view. In fact, state and local governments will make use of many of the principles, forms and structures created at the federal level. If we were to do something along these lines, one could anticipate that the provinces would be able to participate, not because anyone told them to but because, acting as rational actors for medical records or whatever, they chose to do that.
Senator Hervieux-Payette: Do you think the financial institutions, those that have money, have the expertise, either in-house or from the outside, to assess the projects being presented to them? Is something lacking? I always mention to people in this sector that they might hire fewer MBAs but more engineers, which is okay with you, or more scientists. I think there is a lack of people knowing the fields that are in fact being developed, whether it is biochemistry or something else. They have to depend on scientists, but there is no continuity in terms of the expertise they get. They do not get to know each other very well. They have to outsource that. Do they have a working relationship with the scientists and those with the money?
Mr. Jenkins: That is another excellent question and a complex one. We received views that the venture capital and risk capital structures in Canada are in fact still growing up. We received several views that we have taken a step back in the past decade. We had so much capital chasing too few projects that the returns were so poor that many of the large institutions simply abandoned the asset class. Absolutely, there is that issue. However, from a public policy point of view, we cannot be satisfied with that rationale because that leaves the country without a facilitator on the financial side to invest in these projects.
You referred to MBAs and engineers. Let us describe them as content matter experts, people that actually know about a topic area. Stretching from the Wilson report through to this report, we found that we must be very careful about this issue. At one time, Industry Canada and Foreign Affairs had a tremendous amount of content matter expertise, and we moved to a more macro level, for lots of good reasons, but we lost something. When we now look at the financial institutions, they do not have the content matter expertise. In some sectors, one would argue Canada leads in that regard but, in other sectors of our economy, we do not. The dilemma we have to be very humble about is one of scale. The Americans are 10 times the size, so they can have content matter expertise in certain areas where we are sub- scale, even though it is part of our economy. We have to somehow bridge that gap. The best way to do it is partnerships with global financial players that have that content matter expertise.
Again, it comes back to that macro incentive. If we at the incremental dollar for that $50 million to $100 million decision, when they are at that revenue and incented to make that risky investment here and get that partner with the content matter expertise, then that would be the happy result. However, we have to be aware of the scale issue, and we have to be aware that if we want to have effective investments, we do need content matter expertise. It is a balancing act between the two.
Senator Hervieux-Payette: There is a shortage. That is what you just confirmed.
Mr. Jenkins: It depends on the sector. Generally speaking, the participants in this in terms of the testimony we received regard our risk capital system as "immature,'' that it does not have enough of it.
Senator Massicotte: You have dealt with Helix, a venture capital firm, quite a bit. We have asked ourselves the question. Right now, the amount of venture capital investment in Canada has gone down dramatically. People are complaining loudly and clearly that there is a shortage of pure venture capital. Some experts have said that is simply market. There was an excess of capital, they did not make money, and people will not invest if they are going to lose money; therefore, just allow things to take their course. What are your thoughts on venture capital feelings? Is there a problem? There is a shortage, but maybe it is natural.
Mr. Jenkins: I think they are all right. This is not a simple answer. I think the swing of the market is clearly true. The major institutions in this country made investments in this asset class and had very poor returns, disproportionately poor returns. Roger Martin has studied this in some detail and showed our returns. By the way, other countries had the same experience. Roger's thesis is that the reason the Americans had a larger overall return is, at the very end of the spectrum, they had the big wins, like Google, et cetera, and we did not have enough of the RIMs, if you read his analysis. We need to be careful when intervening in a market failure if in fact it is just a normal cycle. We have to be somewhat patient and allow the cycle to come back, and not intervene.
In the panel report, we were persuaded that, at either end of the spectrum, there was a market failure, at the angel side and at the takeout side. In our interactions in both New York and Washington with people that were observers of the Canadian system, they basically said we lacked the takeout pool. The American system did not have as low venture capital return because they had exits for those venture capitalists, which at that critical time seven years ago we removed from many of these VCs and late-stage firms. We were persuaded that there was a need for those pools. Right in the middle, we were not persuaded that there was an issue and that it is a market cycle.
The Chair: Mr. Jenkins, thank you. The fact that we have run over time indicates the interest my colleagues have had in everything you had to say. I think I speak for everyone in congratulating you on a thorough and provocative report. I am sure the government will study the recommendations very closely, and we may be able to get our word in there as well in terms of this Senate committee. You have told us that this is your last public statement. We are honoured that you would make it before us. We thank you for being here today on relatively short notice.
Mr. Jenkins: Thank you very much.
The Chair: Good luck as you grow your company even larger.
Mr. Jenkins: Back to the private sector for me.
(The committee adjourned.)