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SUBMISSION TO HOUSE OF COMMONS STANDING COMMITTEE ON FINANCE

SEVENTH ANNUAL PRE-BUDGET 2001 CONSULTATION


Presented by the Partnership Group for Science and Engineering

August 10, 2001

The Partnership Group for Science and Engineering (PAGSE) is a cooperative association of more than 20 national organizations in science and engineering formed in June 1995, at the invitation of the Academy of Science of The Royal Society of Canada, to foster common interests and address issues concerning research and innovation for science and engineering in Canada.

Member organizations of PAGSE provide core support for its meetings and activities. These include defining the economic benefits of research in Canada and the effects of research budgets, analyzing intellectual property issues and other potential impediments to improving academia-industry symbiosis, examining the international dimensions of research projects and associations, and informing the public about science and engineering and their importance to Canada.

PAGSE represents an extensive resource that, through contracts, can hold events and undertake studies and assessments of benefit to government departments and agencies, to non-government organizations, and to the general public. The Royal Society of Canada acts as the agent for PAGSE for any contracts or agreements involving PAGSE projects. PAGSE has the Committee to Advance Research, a university-industry committee, which addresses issues of considerable importance such as the recently released study "Setting Priorities for Research in Canada". In addition, in partnership with NSERC, a monthly breakfast meeting is held on Parliament Hill known as " Bacon and Eggheads", to inform parliamentarians about recent advances in science and engineering. There are also presentations on science and technology policy related issues co-hosted with Industry Canada. Each fall a symposium is organized on science and engineering issues -for 2001 the theme is " Research; Key to Canada's Well-Being" a presentation on health research.

The Speech from the Throne included an ambitious plan to markedly increase the commitments to research and innovation in Canada so to enhance the quality of life of its citizens. We recommend that the government of Canada consider the following four issues in addressing its plan.

1. SCIENCE AND TECHNOLOGY POLICY FORMULATION

YEAR 2000

In 2000 PAGSE submitted a brief to the House of Commons Finance Committee recommending:

a) A Parliamentary Standing Committee on Science and Innovation

This would serve the purpose of " alerting the House and the country to new scientific and technological opportunities that have the potential to create dramatic economic and societal change", a quote from the history of the U.S. Congressional Committee on science.

b) A PMO Office of Science and Innovation

In the light of the practice existing in many other OECD countries, this office would play a leadership role in advancing our knowledge-based economy. A key element in its activities would be its interface with the House of Commons Standing Committee on Science and Innovation.

c) The Canadian Academies

These bodies will harness, and complement the contributions of the existing Canadian science organizations. The mission is twofold:

I. To provide a source for credible, independent expert assessments on the sciences underlying pressure issues and matters of public interest;
and,

II. To provide a strong voice for the sciences on Canada's behalf at the national and international levels.

YEAR 2001

For 2001 we reinforce our recommendations and, as well, add a new one, on establishment of a Ministry of Science and Innovation.

a) House of Commons Standing Committee on Science and Innovation

Recently, the House of Commons Standing Committee on Industry added Science and Technology to its title. While a welcome development, we suggest separate committees for industry and for science and innovation, as practiced in the U.S., U.K., and Japan. Industry is concerned with basic research but its main focus is developmental research leading to technology applied to a specific product or family of products and the ensuing development, manufacture, marketing and service of these products for shareholder return on equity. Industry is also concerned with many non-science issues appropriate for consideration by The Standing Committee on Industry.

The science and innovation community is represented more by the universities, government labs and to some degree industrial research with a strong focus on basic research or good science and engineering and the ensuing innovations and spin-off to industrial products. By separating these functions there will be a more concentrated effort in the respective committees and a better understanding of the issues in each sphere.

b) PMO Office of Science and Innovation

The establishment of an Office of Science and Innovation in the PMO would constitute a key government initiative to raise Canada from 15th to 5th in global R&D spending. To accomplish this will require a strong impetus directly from the PMO, and the supporting Office of Science and Innovation would provide the specialized knowledge and background to pursue such a comprehensive national goal. Canada will be competing with other leading OECD countries (e.g. U.S., U.K.), which have had the advantage of such a function for some time. It is noteworthy that Japan has recently consolidated its functions in such an office and so has Australia.

c) Minister of Science and Innovation
(upgrading of the current position of Secretary of State for Science, Research and Development)

PAGSE supports this initiative by the Secretary of State. Currently, each government department and agency has the responsibility to plan, manage and conduct whatever science activities pertain to the specific mandate. Those responsibilities with respect to science will not change with the creation of a Minister of Science and Innovation. The allocation of the available funds, in an objective manner and on a national basis, would be one of the key responsibilities of the Minister of Science and Innovation. A Ministry of Science and Innovation would also allow a clear division between policy making for industry with its short term perspective on applied technology and development of products to be marketed for profit vs. the much longer time frame for science policy and the funding of university and government research.

d) The Canadian Academies

PAGSE understands that this initiative is likely moving forward to Cabinet this fall with the strong support of the current Secretary of State for Science, R&D. We enthusiastically endorse the plan put forth by the The National Science Organization Working Group chaired by the Secretary of State.

Implementation of this four-pronged strategy will empower Canada with the best international practices in the governance of research and innovation.

2. GLOBALLY COMPETITIVE INDUSTRIAL RESEARCH

In light of the emerging enlargement of free trade blocs and the enhanced importance of the knowledge-based sectors (Telecom, Aerospace, Computing, Pharmaceuticals and Biotech) to the economic performance of countries, Canada must insure its future industrial competitiveness in a global market. A strong position today does not guarantee leadership tomorrow, as other nations also recognize the importance of investment in industrial science and technology to enhance the quality of life of their citizens.

Currently, Canada has four primary types of industrial production:

  • resource-based
    • high-tech extraction and processing
  • moderate-tech
    • automotive
    • appliances
    • equipment
  • knowledge-based
    • telecom
    • computers
    • aerospace
    • pharmaceuticals
    • biotech
    • environmental (Ballard Power Systems)
  • SME's
    • small to medium enterprises

The first three are usually large companies with a substantial number of Canadian owned organizations. Others are foreign owned, but doing significant R&D in Canada. Because Canada is still a world-class producer of resource products (forestry, mining, fishery, oil and gas, agriculture), we should ensure that these industries are supported with technology development and application to compete globally with lower labor cost foreign competitors.

In the knowledge-based sector the current industries are globally significant, particularly telecom and aerospace, occupying positions between first and fifth in the world. However, as the significance of high-tech in the future global economy emerges new players such as Brazil, S. Korea and Taiwan and the established OECD countries all support these industries either with direct R&D subsidies/grants, tax deferrals & incentives or special loan terms to buyers of their products. Canada, to its credit, has a competitive level of tax credits program for industrial R&D. In the sphere of R&D support Industry Canada's TPC program R&D support levels are in the 30% range and are repayable over time as production proceeds. This repayment applies to research as well as development. In the U.S., through the Department of Defence, and in Europe and Japan, through civilian agencies, support levels are much higher, in the 50 to 100% range i.e. mostly between 80 and 100% and are not repayable. This allows global competitors to be significantly more aggressive in financing their products, which can be critical when the company net worth is required for a specific product line. With this type of competition Canada's knowledge-based players may have difficulty in the future as the established foreign industries and new entrants continue to have significant support/investment advantage. In the knowledge-based arena emerging nations like India, with its developed aerospace industry, are competing in the contract R&D field and offering very attractive rates to OECD based industries. Already, General Electric, one of the largest global aerospace companies, has established a major aircraft engine R&D center in Bangalore, India. Others are following and this will impact Canada's aerospace industry. Similar moves are happening in other sectors. The net result could be a reduction in demand for knowledge-based professionals in North America. This will rebound on the universities in a reduced need for graduates and a corresponding shrinkage in the need for academic researchers. We recommend a review of the R&D support funding from TPC and other agencies for knowledge-based industries to reach a level approaching the key global competitors of the order of 50 to 60 %.

The small and medium sized enterprises are often suppliers to the large industries, both domestic and foreign. They usually develop foreign markets as a result of their domestic customers. SMEs operate generally in a low capital margin and cannot easily adapt to new manufacturing technology or design requirements due to a lack of risk capital. In the past few years the major industries have downloaded design and manufacturing improvement investments on their suppliers and, particularly, the requirements for full computer aided design and manufacturing to transfer such information directly through computers. In many cases SMEs simply cannot make the required investment and drop out of the circuit , thus diminishing their business base and particularly weakening their international competitiveness. In some cases major industries help their suppliers with investment and computer systems. In general, SMEs need external financial support and expertise to survive in the emerging global markets. Specialized support from agencies like TPC will be a continuing need separate from the support required by the knowledge-based sector and other large industries. This is important for high skill professional employment as SMEs are one of the fastest growing employers but not always sustainable.

In summary, there are three important issues regarding funding support of Canadian industry:

  • Insuring the high-tech advantage of Canada's resource industries to offset the low labor cost emerging countries.
  • Raising R&D support levels for the knowledge-based industries to globally competitive levels of 50 to 60 % through such agencies as TPC.
  • Providing funding and expertise to SMEs to allow them to make capital improvements to compete globally and supply major industries in Canada.

3. INDIRECT COSTS OF RESEARCH FOR UNIVERSITIES

PAGSE highly recommends that the government of Canada provide federal support to universities for the indirect costs of research. The international norm for OECD governments to fund such costs is 50%. Since we are starting from a base of 0%, and since there are pressing needs to support the granting councils, we recommend an initial level of 25-30% for FY 2002, gradually rising to 35 and 40% over the following two years.

PAGSE also recommends that the management of this fund along with additional resources be assigned to the granting Councils. It is important to insure that, in providing these funds for the indirect costs of research, the current operating funds not be reduced accordingly as this will only exacerbate the basic funding problem.

4. RESEARCH GRANTING COUNCILS

The research granting councils (NSERC, CIHR, SSHRC) are losing effectiveness due to funding limitations, cash flow and the lack of a committed multi-year funding profile. The limitation in funding arises from the universities' need for new professors and for all to be active researchers resulting in a 25% increase in first time grant applications in 2001 and an expectation of a similar increase in 2002. This cannot continue to escalate and maintain a balance between existing and new researchers. The other issue of a multi-year funding commitment is important because university research projects take a period of 2 to 5years. If the Councils have no multi-year profile, the researcher has no guarantee of funding over the life of the project and cannot make longer term plans for equipment availability or facility utilization or even their own salaries.

Therefore, we strongly recommend that a significant part of the government's announced plan to raise Canada from 15th to 5th place in global R&D funding be applied to remedying the granting Councils' funding and supply a multi-year commitment. Development and commercialization requires a strong research base. The granting Councils are the centerpiece for funding of the research base. Furthermore, the continued expansion of university research is important to the global economic competitiveness of Canada to supply future researchers, innovation and technological developments to industry. It is now common in the high-tech industries to attract a substantial number of advanced degree graduates to strengthen their advanced research capabilities. Thus, the universities can only respond by increasing their post-grad programs, leading to the foregoing increase in NSERC grants and a need for increasing indirect cost support for new equipment.

TOTAL INVESTMENT

As Minister Brian Tobin said to the Standing Committee on Industry, Science, and Technology: "Our objective is to be one of the top five countries for research and development performance by 2010. As its contribution, the Government of Canada will at least double its investment in R&D by that year. And we will invest an additional billion dollars a year by the end of this mandate." The recommendations represent a substantial portion of the actions required to accomplish this important national goal.