Ottawa unveils $3-billion in new spending on innovation to address Canada’s chronic weaknesses in productivity, R&D, investment

Finance Minister Chrystia Freeland answers questions after tabling the federal budget in the House of Commons on April 7.Adrian Wyld/The Canadian Press

Ottawa is again deploying arm’s-length interventionism to spur innovation in the Canadian economy, announcing two big, top-down programs in the federal budget similar in approach to the troubled Canada Infrastructure Bank and the superclusters initiative.

The federal government is also abandoning an election pledge to set up a body modelled on the famed U.S. Defense Advanced Research Projects Agency (DARPA) that fuelled the creation of such groundbreaking technologies as the internet and GPS.

On Thursday, the government unveiled $3-billion of new funds for innovation spending in a budget aimed at addressing the country’s chronic weaknesses in productivity, research and development, investment and improving economic prosperity.

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Tackling these issues is critical at a time of rising inflation, geopolitical upheaval and climate change, and with Canada needing to modernize its extractive-resource industries, a senior finance official told reporters. That, the official added, will require massive amounts of capital. The Globe and Mail is not naming the official because the government won’t allow the individual to be publicly identified, even though they were made available to media during the budget lockup.

“Canadians are the best-educated people in the OECD … but we are falling behind when it comes to economic productivity,” Finance Minister Chrystia Freeland told the House of Commons. “This is a well-known Canadian problem – and an insidious one. It is time for Canada to tackle it.”

The budget calls for the creation of two arm’s-length bodies it will bankroll and direct with targeted mandates. The first is a “Canada Growth Fund” that will be financed by $15-billion reallocated from monies already committed elsewhere in government. The other is a proposed innovation and investment agency, modelled after programs in Finland and Israel, that it will fund with $1-billion in new spending over five years.

The government is committing $750-million over six years for its superclusters program, whose initial five-year $950-million funding commitment was set to run out next March. The new money is half what the five supercluster agencies – which fund innovative collaborative projects that bring together academia and business – had requested. But the new funding comes with strings attached: They must compete among themselves for the money.

The budget also addressed long-standing criticisms of the government’s largest innovation funding program, the $3-billion Scientific Research and Development (SR&ED) tax-credit system that partly reimburses companies that spend on research and development in Canada. Critics have said the program is overly complex, lacks focus and too often funds chronically unsuccessful companies or those that don’t need the money.

The government promised to review SR&ED to ensure it is effective in encouraging R&D that benefits the country, and to explore how to modernize and simplify it. In addition, the review will look at how the government can encourage development and retention of intellectual property (IP) stemming from R&D conducted here. The budget also committed $97-million in new funding over five years to further support the creation and retention of valuable IP in Canada.

Other budget promises included $30-million in funding to encourage procurement of domestic technology by health care providers, and a financial-sector review focused on the digitalization of money.

The innovation measures in the budget disappointed observers.

Jim Balsillie, chairman of the Council of Canadian Innovators, which represents domestic innovative companies, said: “What we needed to see was capacity-building inside the civil service, not another ad hoc advisory panel or granting agency. Canada’s issue is not about new investments but rather its low or even negative returns from past taxpayer investments.”

Rebekah Young, director of fiscal and provincial economics with Scotiabank Economics, reflected similar concerns. “What we see today is hardly a growth agenda” but rather “a piecemeal approach with individual measures that don’t hang together in a broad big picture.

“It looks like they have dug into their existing tool chest and brought out a few things they’ve tried and tested in the past [modelled] around the Infrastructure Bank,” she said. “It borders on the idea that government is best at picking the winners.”

One of those things, the $15-billion superfund, will be managed at arm’s length by investment professionals and charged with meeting three policy goals: to reduce emissions and help Canada meet its climate goals; diversify the economy by investing in low-carbon industries and new technologies across a range of sectors; and to support the restructuring of supply chains including in the natural-resources sector.

Key to the strategy is to find alternative sources of investment to fill the gap left by an energy sector, whose share of overall business investment has collapsed to 11 per cent from 32 per cent in 2014, the finance official said.

The superfund will provide an array of funding instruments, the government said, including debt, equity, guarantees and specialized contracts. The goal is that every $1 invested by government will be matched by $3 in private capital. The finance official said the superfund would act like a pension-fund manager – but without the objective of maximizing investment returns.

The innovation and investment agency, meanwhile, will be set up to work proactively with new and existing Canadian industries and businesses ranging from technology vendors to forestry and mining stalwarts, helping them invest to innovate, grow, compete and create jobs, the budget said. The finance official said the “operationally independent” agency would be staffed by innovation experts, technologists and businesspeople. Further details are expected this fall.

One of the biggest surprises was the absence of a Canadian version of DARPA. The Liberal Party campaigned on a promise to introduce a “CARPA” with an initial endowment of $2-billion, and Prime Minister Justin Trudeau directed innovation minister François-Philippe Champagne to move forward with the program last December.

The senior finance official said DARPA was ultimately not the right model for Canada, as the U.S. program was designed to fund moonshot-type breakthroughs. Canada, the official said, instead needed a more practical program that would help innovative companies succeed in the market.

Ms. Freeland further explained to reporters that the government went from a “high-level commitment” to create a CARPA to “looking at where really is the innovation challenge in Canada. The innovation agency we outline in this budget is the answer.”

CARPA’s chief proponent, Robert Asselin, the senior vice-president of policy for the Business Council of Canada and former budget director for Ms. Freeland’s predecessor, Bill Morneau, said he was disappointed.

“I hope we don’t abandon the model. … I thought it would be perfect for our energy industry. … I really didn’t understand clearly what they are doing with this new agency.”

But Dan Breznitz, a past critic of federal innovation support efforts who now serves as a visiting economist with the finance department, praised the government for the new agency.

“There is finally a realization that the problem in innovation and engagement with new technology is not the lack of new ideas or human capital but the private market … this is a systemic problem.” He added that the agency “will need to experiment a lot” to help fix the problem.

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The Globe and Mail

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