OTTAWA — The Department of National Defence is considering scaling back a $65-million annual commitment to fund innovation and buy from startups, acknowledging it’s never come close to meeting its spending obligations under the program, The Logic has learned.

Small firms have long complained about the difficulty of selling to the government, arguing that the procurement process favours major multinationals. In the March 2017 federal budget, the Liberals promised Ottawa would act as “a first customer to test and validate Canadian technologies” via a new program called Innovative Solutions Canada (ISC). 

Launched that December, it requires 21 federal departments and agencies to spend one per cent of annual procurement and R&D expenditures on “challenges”—open calls to firms to propose fixes for the government’s problems. The Department of National Defence and Canadian Armed Forces (DND/CAF) have a joint yearly ISC target of $65 million, money they’re not allowed to spend on anything else. It’s by far the largest allocation in the $113.8-million program.

But “DND/CAF has not been meeting its ISC commitments since the ISC roll out,” according to an August 2023 briefing note prepared for associate deputy minister Natasha Kim, which The Logic obtained via an access-to-information request. The closest it’s come was spending $11 million in the 2022–23 fiscal year. The memo outlines “options and considerations on reducing DND/CAF’s funding” to ISC, although the details are redacted in the version released to The Logic.

Others in the defence sector questioned the move. “At a time when budgets are being tightened and there’s significant desire for more innovation, it’s really curious to be leaving innovation money on the table,” said David Perry, president of the Canadian Global Affairs Institute and co-director of its Triple Helix academia-industry network focused on technology. 

The Defence Department says it hasn’t met its ISC requirements because it instead prioritized an in-house initiative called Innovation for Defence Excellence and Security (IDEaS). Established in June 2017, the program is challenge-based, too, although, unlike ISC, it’s open to large and foreign firms. The department has spent about $330 million on 664 projects over the five years of IDEaS, said spokesperson Andrée-Anne Poulin

In both programs, chosen firms typically use the initial funding to build a proof of concept of their solution, with some receiving further funding to deliver more advanced designs or prototypes. But there’s a key difference between the two. As The Logic reported in October, IDEaS has no mechanism for the Defence Department to procure the products and services participants develop. By contrast, ISC has a “pathway to commercialization,” allowing departments and agencies to buy technology they’ve sponsored or tested via the program. 

The military isn’t going to procure a major new weapons system through ISC or IDEaS, Perry noted. But the programs offer a way to solve problems faster than the regular, years-long buying processes, and to keep pace with the rapid evolution of technology in the commercial market. They also help support the country’s defence industrial base. “You could use a program like [ISC] to target R&D funding towards Canadian solutions and to develop particular national competency and some cutting-edge technology that the military values,” Perry said.

Last month, Calgary-based Tacteris delivered to the Defence Department a software system that lets agencies pool and coordinate resources when they’re working together on large-scale disasters like wildfires. “It’s a completely innovative piece of kit,” said Sandeep Kharey, Tacteris’s vice-president of business development. It’s also one sponsored by ISC, which has awarded the eight-person firm around $1.2 million over two project phases since December 2019. 

Tacteris has also been through an IDEaS challenge, receiving $1.38 million to develop logistics-planning tools. “It’s not easy to get into the conventional procurement process” as a small Canadian defence company, said Kharey. Participating in ISC and IDEaS has allowed Tacteris to “show our capabilities, build technology that was useful and get an audience with DND stakeholders.”

Challenge-based procurement programs can work, said Michele Lajeunesse, senior vice-president of government relations and policy at Technation, which represents multinational, scale-ups and small IT firms. She cited the lobby group’s initiative with Shared Services Canada, designed to offer contracting opportunities to businesses owned by members of underrepresented groups. 

But ISC is “failing miserably” because the program’s sponsor—Innovation, Science and Economic Development Canada—isn’t set up to market successful firm’s products and services to other departments and agencies, according to Lajeunesse. She said the program should ensure participating firms get a first contract they can then show to other potential buyers.

The Defence Department has issued only 10 challenges to date, according to the ISC website, with all but one in the 2018–19 fiscal year. The most recent was an ask for a better alternative to current 3D-imaging systems, which closed in April 2023. 

The department has not made a decision on whether to reduce its participation in ISC, said Poulin, adding that officials have been analyzing gaps in military capability and figuring out which funding mechanisms are right to address them. The Liberal government recently signalled plans to rein in expenditures, promising $15.4 billion in cuts over five years in the March 2023 federal budget. Diana Ebadi, a spokesperson for Defence Minister Bill Blair, said he is looking at “where our dollars are best spent when it comes to using innovation to further the capabilities of the Canadian Armed Forces.”

Kharey said both ISC and IDEaS have been valuable to Tacteris. “The whole reason we are doing business in Canada today is largely thanks to these programs.”