Will there be innovation in the Innovation Budget?

Tuesday, March 21, 2017

 

To grow our economy, government’s concept of what it means to invest in knowledge industries must change, says LSO President and CEO Jason Field

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The Trudeau government, Toronto Star columnist Paul Wells noted, came out of the gate hell-bent on consulting us.

And consult us they did. The Liberal’s election in October 2015 created renewed optimism for science and knowledge-based industries. They appointed a Minister of Science and shunted “science” into Industry Canada’s nomenclature. Minister Navdeep Bains launched a broad consultation to develop an Innovation Agenda for Canada.

Things were looking up.

Fast-forward 16 months and the question is, can they live up to the hype? Can they deliver? We’re about to find out. The Federal Budget drops on March 22; it’s rumoured to have heavy emphasis on the innovation economy.

Undoubtedly, this phase of open dialogue has been a stark and welcome contrast to the previous government. The challenge with broad consultations is how to achieve consensus and narrow down the ideas to those that are practical and impactful.

In simple terms, Canada has a wealth of brain power but has failed to capitalize on its full potential, primarily due to limited access to capital. But it’s more complicated than just money.

Governments look at the access to capital issue through a different lens than industry. While the early-stage entrepreneur seeks investment to fund the next step for their business wherever they can find it, finance ministries are entrusted to spend public tax dollars to the benefit of all citizens. Government budgets must be carefully scrutinized and investments made with a high degree of rigour, accountability, and fairness. This last one often creates the perception that government budgets are spread too thin — often called the “Peanut Butter Approach.”

The bigger issue is what government considers as an economic investment in knowledge industries. Nearly half of Ontario’s provincial budget goes to public healthcare. This is not an economic investment in life sciences companies or innovation; it is simply the cost of delivering a public health system.

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In an ideal world, the province would leverage market access as an economic tool, but that hasn’t happened yet. The result is that the perception of public healthcare as an investment in life sciences leaks into other funding programs. Of the more than $1B invested through the Ontario Jobs & Prosperity fund, over 90% went to two sectors: ICT and Automotive, leaving mere scraps for life sciences and agri-food companies.

If we follow this trail of crumbs, we get into the argument of direct versus indirect government funding.

A popular OECD report released several years ago showed Canada’s support programs are skewed toward indirect funding. Does it matter whether a program is considered direct or indirect? Shouldn’t the focus be on its effectiveness? Take for example the SR&ED tax credit — indirect funding, but considered by many to be the most successful support program for startups. By this logic, Canada should be adopting even more indirect funding supports if these are the programs working to advance our knowledge economies, regardless of what is considered the OECD norm.
 
The counter-argument, of course, is the Peanut Butter Approach described above: we should instead be picking our best assets and investing heavily in them. It’s a valid argument, but one that has a few practical problems in terms of policy implementation.

Who is picking the winning horses? Should it be government?

Let’s just utter a firm no to that rhetorical question.

How about academics? Surely our brightest minds can pick the winners Nope. Not happening. Move along. Regardless of how smart we are, predicting the future is impossible, especially in the fast-paced environment we live in.

And, should government be footing the bill for all these private corporations? Again, the answer is obvious.

Luckily, there is an innovative, proven, made-in-Canada, policy solution: Flow-through shares.

Decades ago, the Canadian government recognized our rich natural resource assets and the main barrier to capitalizing on them: significant access to investment capital. To address this, they created the flow-through share mechanism which allows junior resource companies to pass exploration and development tax credits on to shareholders.

And it worked. Today, the TSX is the largest natural-resource-based stock exchange in the world. From a policy perspective, public investment is an incentive to leverage investor dollars and the decisions are market driven. Why not use the same model for innovative industries?

We have heard every argument as to why the program cannot or should not be extended. “It’s a different industry and there is higher risk of abuse,” “It would be too costly,” etc.

The real crux of the issue is that once the cat is out of the bag it cannot be put back in. Do junior resource companies still need flow-through shares? They will definitively say ‘yes.’ Others will argue that we have a robust capital market with knowledgeable investors to sustain these firms. To remove that tax incentive would be a difficult and likely unpopular political decision.

The result? Whether intentionally or unintentionally, the government has created a Canadian public market that favours investment in natural resource sectors over knowledge industries.

This brings us back to the impending innovation budget. I expect that we will see some existing programs refunded — perhaps even some new programs that support our “strongest clusters” (whatever those may be, chosen by whomever).

But will it contain hard-hitting policy measures like those mentioned above? We’ll soon find out.

The real signal that Canada is serious about its innovation economy will come when we finally fix the imbalance that exists in the public capital markets — specifically the disparity created through the flow-through share program.
 
Until that happens, everything else is just jelly.  


 

Dr. Jason Field is the President and CEO of Life Sciences Ontario (LSO), a not-for-profit, member-funded organization advancing the success of Ontario’s life sciences sector.

 

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