OTTAWA — Prime Minister Mark Carney’s budget promises to spend nearly $80 million to help smaller Canadian firms bid on government contracts. There’s a lot of ugly history to overcome.

“We will use the power of procurement to create jobs,” Industry Minister Mélanie Joly said in an Oct. 9 speech promoting the Liberals’ industrial strategy in Toronto. “What I’ve learned is companies would rather have contracts than subsidies from the government.”

She’s said it more than once. A new “small and medium business procurement program,” funded with $79.9 million over five years, is intended to help. Yet the government itself admits it has problems buying from small companies with new ideas. 

“Our procurement system is all defence, to make sure we get the best deal and make sure no one’s cousin gets a contract wrongly,” said Emad Rizkalla, founder and CEO of skills-training company Bluedrop. “But we’re just playing not to lose. We’re not playing to win.”

Selling to Canadian governments, both federal and provincial, has been a big benefit for Bluedrop, an Atlantic Canadian company (it has operations in Halifax, N.S and St. John’s, N.L., totalling more than 200 workers), that devises digital training for everybody from commercial truckers to military helicopter crews. 

The traditional, safe way to deliver a training program is with a virtual stack of PDFs, Rizkalla said. If you do it with virtual reality and other such tools, though, you not only get better results, you get export opportunities.

Rizkalla said programs Bluedrop created for New Brunswick and Nova Scotia got the attention of a client in New York City, which led to a meeting in the White House in the mid-2010s. The end of the Obama presidency also ended that prospect, but it shows what can happen when even a relatively small company has real live customers using its products, Rizkalla said.

Building one simulator for a Canadian military client got the attention of a European contractor that included Bluedrop in a major procurement bid that could include multiple simulators.

“We’re part of the bid—we’re waiting to hear,” Rizkalla said. “That’s potentially closing in on a $100-million opportunity from that one experience.”

Bluedrop has also been mired in bureaucratic mud, however. A senior military officer who wanted more of those Bluedrop simulators couldn’t buy them without a formal request for proposals from the wider market, Rizkalla said.

“It’s a silly thing, because we’ve already built it—a custom-built solution for this one application. So who are we trying to protect?” he asked.

Rizkalla thinks policymakers understand the deeper value of buying from smaller Canadian companies, but the culture of government procurement is stacked against it. “It’s all about the one stupid example that terrifies anybody from taking future innovations or taking future risks.

The Council of Canadian Innovators (CCI) published a report in April 2024 laying out problems in public procurements of cutting-edge technologies.

“Layers of bureaucratic approvals, while individually justifiable, collectively stretch the process beyond timelines that are reasonable for commercial entities,” the CCI report said.

Consider the painful case of Vaultie, a Toronto startup that makes technology to prove identities online and restrict access to data.

The company alleges it didn’t get a fair hearing when it answered a callout earlier this year from Shared Services Canada, the federal agency that handles internal government technology needs, for companies that could verify digital credentials. The call was meant to produce a shortlist of potential providers for later contracts; even it had more than one phase.

Vaultie ultimately made it onto that shortlist, but only after being disqualified twice, objecting twice and being reinstated twice.

The company alleges it was first cut based on a faulty understanding of its technology, to have been allowed back into the competition after an appeal, and then to have been improperly cut again because of the same lead evaluator it drew the first time.

Answering federal procurement calls demands resources a small company can’t afford to waste, Vaultie CEO Meyer Mechanic said in a written filing to the Canadian International Trade Tribunal.

“All we expect in turn is a fair chance to compete to serve Canadians and the ability to improve our understanding of our products through feedback. At the end of this process, we felt cheated,” he said in the filing.

Mechanic declined to elaborate on the complaint when The Logic contacted him, but the filing is extensive. Involving a trade tribunal might seem strange for a Canadian company saying the Canadian government mistreated it, but Vaultie argues the government’s conduct violates trade agreements that include specific promises about how procurements will be run. Companies as large as CAE, the Montreal-headquartered flight-training giant, have gone the same route.

The tribunal, which has taken up 20 procurement cases dating back to 2022, has decided Vaultie’s is worth further investigation.

Vaultie’s filing said the affair, up to the point of filing the trade complaint, had cost it $60,524.67.

“For what it’s worth, that’s 10 per cent of the average seed round financing in Canada,” Vaultie said. The expense of this one attempt just to qualify for a possible future bid “illustrates one of the many barriers Canadian startups face doing business with their own government,” its complaint said.

(Vaultie has raised about $740,000 through equity investments, according to PitchBook data, plus $410,000 through debt.)

Following the complaint, Shared Services Canada re-evaluated Vaultie’s proposal and discovered it met the government’s standards after all.

That makes the complaint “trivial and moot,” the agency said in a filing of its own. If Vaultie won’t withdraw it, the government will demand the company cover its costs for continuing to deal with it.

For its part, Vaultie wants a formal ruling in its favour and a token payment of $1,150 from the agency toward the cost of filing the complaint.

One challenge for smaller companies is simply that they’re small, said Evan Solomon, the minister for artificial intelligence and digital innovation.

“Government needs to make sure that they’re procuring from companies that have the capacity and the scale to actually do the job,” he told The Logic on a recent visit to Ottawa tech company Solink.

Solink makes software for monitoring security devices, like cameras, and responding to threats its system detects. It raised $60 million in its most recent investment round in 2023. Open government data indicates Solink has received nearly $6 million in federal subsidies over the years, but no contracts, incidentally.

Buying from startups and scaleups is hard because governments have to be careful with taxpayer money, Solomon said. “So [for] smaller companies with maybe shorter track records and higher risk curves, that’s been an impediment.” Which leads to a question: “How do we up government’s risk appetite?”

Solomon doesn’t have an immediate answer, but small companies might be better served by subsidy and support programs than by contracts, he said.

That said, the federal government has suffered “pilotitis,” Solomon acknowledged: pilot projects that go nowhere. It has had several innovation streams for procurement, where the point has been to buy from smaller companies with clever new products and services, but they’ve rarely scaled well.

Rizkalla said he understands concerns about corruption and impropriety and the need for the government to spend taxpayer money wisely, but the system is skewed away from the best results: “We have to get beyond ‘value for the Crown’ and look at ‘value for the country’ in certain sectors.”