Canadian startups have long complained they’re shut out of federal contracts, with the public purse buying only from large corporations. A $100-million-a-year program the Liberal government unveiled five years ago to address the problem isn’t spending nearly as much as promised, The Logic has learned, and the department responsible for most of that shortfall appears to have all but abandoned the initiative.

The Liberal government announced Innovative Solutions Canada (ISC) in the March 2017 budget. The challenge-based program requires 21 participating federal departments and agencies to allocate one per cent of their annual procurement and R&D budget to ISC—a sum that now totals $113.8 million a year.

“This program is really about the government being a marquee customer to help Canadian businesses grow and scale,” then-innovation minister Navdeep Bains said at a launch event that December. ISC has “clear targets,” he said, describing the spending requirement for participating departments and agencies as a “bare minimum.”

But as of the 2020–21 fiscal year, the program’s fourth in operation, it wasn’t coming close to meeting that spending promise, according to financial information in a memo prepared by Innovation, Science and Economic Development Canada’s (ISED) ISC branch for deputy minister Simon Kennedy in April 2021. By March 2021, departments and agencies had put up just $102.6 million worth of total challenges, the document estimated—less in four years than they’re mandated to spend in one. The memo, which The Logic obtained via access-to-information request, projects the government will lay out just $43.2 million in the 2021–22 fiscal year. 

Those are disappointing numbers, said Michele Lajeunesse, senior vice-president of government relations and policy at Technation, a lobby group for IT providers. “This program should be of utmost importance, because our small- and medium-sized enterprises are flailing—they are shutting their doors.”

ISC is modelled on the U.S. Small Business Innovation Research initiative. Under ISC, departments and agencies post calls for companies to fill their needs, like systems to issue blockchain-based digital credentials or filter microplastics out of ships’ wastewater. Selected firms receive up to $150,000 over six months for a proof of concept, and can then get another $1 million over two years to build a prototype.  

“Launching challenges is a new model within the federal public service and we recognize it will take time to drive the required culture change,” ISED spokesperson Hans Parmar said, in response to The Logic’s questions. Some successful applicants to early calls are now entering the prototype phase, “where larger funding amounts occur and spending will increase.”

Much of ISC’s spending shortfall is down to the Department of National Defence (DND), which is mandated to spend $65 million annually. Its actual outlay was just $3.38 million for the 2019–20 fiscal year and $4.9-million in 2020–21, per the documents. DND has not publicly issued a challenge since February 2019, per the ISC website. Parmar said the program hasn’t granted DND an exemption to its spending requirement. 

Defence Minister Anita Anand “believes [DND] should continue to play an important role in supporting the defence solutions of tomorrow,” said her spokesperson Daniel Minden. The department and ISED “have had regular discussions on ways to increase DND’s participation in the program,” he said, adding Anand “will be discussing this matter with officials.”

Part of the issue may be that DND’s existing Innovation for Defence Excellence and Security (IDeaS) program performs the same function as ISC. The department paid out almost $12.5 million under IDeaS in 2020–21, according to the federal public accounts. 

“If I didn’t have any intel about government programs, they could functionally be from the same people,” said an executive at a startup that has participated in both ISC and IDeaS. “It’s a weird duplication, but the DND one is more effective.” The Logic agreed to withhold their name because the firm is continuing to work with the government. 

The government is trying to address ISC’s slow start. “Excluding DND, ISC departments are making progress in meeting their annual spending commitments,” the ISED memo states, noting that awards against the $48.8-million target have increased from $19.4 million in 2019–20 to a projected $40.4 million in 2021–22.

Starting in April 2020, the program launched a COVID-19 call for proposals and several challenges, which Parmar said has led to 81 awards worth a combined $47.2 million. Other Liberal government innovation initiatives that got off to slow starts, like the superclusters, sped up spending during the pandemic.

Ottawa is also soliciting more organizations to sponsor challenges, adding Innovation Saskatchewan last year. The ISC has also launched a new “pathway to commercialization,” which allows firms to sell directly to the government for three years, bypassing the typical competitive tendering process, if they successfully complete the program’s testing stream or prototype project and pass an assessment. 

That’s attractive to companies like the aforementioned startup. The executive said it applied to ISC’s COVID-19 stream to help the pandemic response. “But there’s only so much you can do at a tech company with six figures on a brand new thing in six months,” they said. “We thought it was a great opportunity for us to work with the federal government for the first time.”

ISC faces other issues. Departments and agencies had actually paid out only $29.8 million of awarded funding as of March 2021, according to The Logic’s analysis of the federal public accounts.

ISC “could work,” but “it’s housed under the wrong department,” said Lajeunesse. ISED is “not really in the business of procurement.” She suggested companies that progress through ISC be handed off to Public Services and Procurement Canada, which manages the bulk of the federal government’s $22 billion in annual buying power.