7 December 1999
Richard Flageole, FCA
Assistant Auditor General
Madam Chair, thank you for this opportunity to present the results of our audit of the Industry Portfolio's grant and contribution programs that support innovation in the economy. I understand that the Committee is undertaking a study of productivity, innovation and competitiveness, and we hope this presentation and our testimony will be of use to you in your work.
I am accompanied by Peter Simeoni, the Principal responsible for industry, science and technology audits in our Office.
I will divide my remarks this morning into two parts. First, I will give you an overview of the policy issues underlying the programs we audited. Second, I will present the main observations of our report, along with additional matters that the Committee may wish to pursue with the government.
As we have discussed in previous reports to the House of Commons and in testimony before this Committee, the federal government has set out for itself a critical role in building our national and regional systems of innovation. By innovation systems I mean the sets of national and regional institutions and institutional linkages that generate, diffuse and apply knowledge for various purposes.
Accordingly, the government has made building a more innovative economy, and in particular improving the country's innovation performance, one of its major policy goals. A number of recent government reports have referred to an "innovation gap", meaning that Canada is not innovative enough compared with its main trading partners. These reports argue that weaker innovation performance is a problem that must be addressed since it lies at the heart of broader problems in the economy - particularly lower productivity in relation to the United States.
We decided to look at the information available on the so-called "innovation gap" since it is often mentioned in government reports to Parliament describing the programs we audited. What we learned is that although innovation is undoubtedly an important factor in economic growth, assessing the actual innovation performance of the economy is a complex challenge that has not been met as yet. While innovation can probably be measured, a balanced and informative assessment would require reference to a comprehensive range of indicators.
There is also evidence that Canada lags behind that of its major competitors in relation to several of the indicators. However, what these lags mean is unclear, and most of the existing information is on inputs to innovation (such as R&D spending) and not on innovation performance directly.
More importantly perhaps, recent studies identify a number of factors accounting for our relatively weak productivity performance in relation to the United States: slower adjustment to the two energy price shocks, a slower rate of capital accumulation, a slower rate of growth in R&D spending, and weaker competition in both product and factor markets. Other factors include relative tax rates, smaller scales of operation, and a falling dollar shielding less productive firms. Although smaller investments in R&D have some role to play, there is clearly no single factor that explains this productivity gap, and therefore no single solution.
While there are more questions about innovation than answers at this moment, several matters are reasonably clear:
With this in mind, I would now like to discuss the results of our audit work. Promoting innovation in the economy is one of the principal objectives of the Industry Portfolio. The programs we audited focus on supporting research and development by industry and account for the bulk of the grants and contributions made by the Portfolio toward that objective (over $1.3 billion was spent over the last three years).
We audited the following programs:
We looked at whether management had a strategy explaining what improvements in innovation performance were expected from the money spent on a program or project-by-project basis. We expected that these programs would be based on a sound understanding of innovation problems and opportunities since investing wisely in innovation is more than simply bringing money to the table. It means knowing how innovation systems work and what their strengths and weaknesses are, and it means making decisions on where and how to invest for best results.
We found that no such strategy or framework existed nor had management set out the specific results that were expected from these programs in terms that would explain the intended impact on innovation systems. Clear statements of expected results are prerequisites to sound program design and management, and to measuring and interpreting the actual results achieved.
We also sought to determine if these programs were well managed and if management knew whether value for money was being achieved. We concluded that there are significant opportunities to improve the exercise of due diligence in approving contributions under IRAP and grants under the Research Partnerships Program. In fact, we could not assure ourselves that many of the contributions and grants under these two programs were properly supported.
For both of these programs, we found important performance issues for which management had little information.
We concluded that due diligence had been exercised in the grants we audited under the Networks of Centres of Excellence program. A 1997 program evaluation concluded that the program had met all of its objectives and suggested that the program will provide substantial net economic benefits.
We also concluded that management of Technology Partnerships Canada had exercised due diligence in making the contributions that we audited, with some specific exceptions. Nevertheless, project and results monitoring need improvement and reporting to Parliament on expected performance needs to be clarified.
My final comment is that parliamentary oversight is key in ensuring that the government's investment in industrial innovation yields the greatest possible returns for Canada. With that principle in mind, allow me to suggest that the Committee, as it considers the important issues of productivity, innovation and competitiveness, seek answers to the following questions from the government:
Madam Chair, this concludes the Office's opening statement, and we would be pleased to answer questions from the Committee.