OGGO Committee Report

Introduction

Federal government procurement is big business in Canada.  The government buys approximately $14 billion worth of goods and services each year from thousands of suppliers.  Small and medium enterprises (SMEs) are big players in the Canadian economy.  SMEs account for 45% of gross domestic product (GDP), much of the economy’s growth, 60% of all jobs in the economy, and 75% of net employment growth.^[1]  SMEs are an integral part of the country’s economic fabric and are important to federal procurement, accounting for 65% of the number of procurement transactions in 2007-2008.

The Standing Committee on Government Operations and Estimates held five hearings on the subject of the ability of SMEs to access federal contracts.  What began as a study on the bundling of information technology (IT) contracts became a study on the conditions surrounding SMEs as they try to access federal contracts.  The Committee was impressed by the strong desire of SMEs to do business with the federal government and therefore it would like to address the concerns raised by SMEs with respect to procurement process.

After introductory sections describing a snapshot of SMEs today and the procurement process administered by Public Works and Government Services Canada (PWGSC), this report will outline goals it believes the federal government should incorporate in the procurement process when establishing procurement policies that involve SMEs.  These goals are:

• Improving the procurement process for small and medium enterprises to facilitate their awareness of and access to federal contracts.
• Coordinating federal programs for small and medium enterprises.
• Ensuring access by small and medium enterprises when smaller contracts are bundled into larger contracts.
• Offering fairness instead of reserving a certain percentage of contracts, or “setting-aside” contracts, for small and medium enterprises.
• Allowing innovation and quality to be key selection criteria.

Small and Medium Enterprises Today

About 98% of all businesses in Canada fall into the SME category.  According to Industry Canada, a small business is one that has fewer than 100 employees, and a medium business is one that has fewer than 500 employees.^[2]  Statistics provided by Industry Canada show that 74% of SMEs have fewer than 10 employees and 57% have only one to four employees. 

SMEs employ 5.1 million people, almost half of the private sector work force.  They accounted for 80% of the net job creation between 1993-2003.  Large businesses actually shed jobs during that period.  According to John McConnell from Industry Canada: “the long-term trends that we’re seeing are a lot more heavy lifting, a lot more job creation by small business.”^[3]

According to data submitted to the Committee by PWGSC, SMEs have been accessing a greater value of federal contracts since 2004-2005.  Table 1 details the trends in SME federal procurement since 2004-2005.

Table 1: Volume of federal contracts awarded to small and medium enterprises

Source: Public Works and Government Services Canada.  “PWGSC-AB Trends – Small and Medium Sized Business vs Overall AB Business Volume.” Submitted to the Standing Committee on Government Operations and Estimates, 4 June 2009.

As Table 1 shows, though the number of transactions with SMEs has been decreasing over the past four years, when foreign suppliers are removed from the equation the percentage of total contract value awarded to Canadian SMEs has increased from 34% in 2004-2005 to 49% in 2007-2008. 

Federal Government Procurement Policy and Process

Federal government policy requires that federal contracting be conducted in a manner that will:

• Stand the test of public scrutiny, increase access, encourage competition and reflect fairness; and
• Comply with Canada’s trade obligations under the North American Free Trade Agreement (NAFTA), the World Trade Organization Agreement on Government Procurement (WTOAGP), and the Agreement on Internal Trade (AIT).

Federal procurement is currently carried out within a framework of more than 15 Acts of Parliament and more than 35 policies. The Treasury Board sets government-wide procurement policies and limits on the project and contract approval authorities of ministers; it also approves projects and contracts above those limits. The Treasury Board Secretariat ensures government-wide overview of policy implementation.

Individual federal departments and agencies, which deliver programs and services for Canadians, must develop operational requirements for goods and services. Within prescribed limits, they can directly contract for goods and services. In other cases of procurement, the departments will utilize the services of PWGSC.

Other departments also play a role in fashioning procurement policy. The Departments of Foreign Affairs and International Trade and Industry Canada negotiate federal government procurement provisions as part of Canada’s trade agreements. Departments are expected to identify socioeconomic programs or objectives that could be supported by government procurement activities. The Department of Justice provides legal advice on procurement transactions and issues.

Some federal departments and agencies exist to ensure that rules and regulations are followed. The Canadian International Trade Tribunal reviews complaints about individual government procurements for compliance with trade agreements. It also issues findings, recommends remedial actions, and may award costs and other compensation. The Office of the Auditor General reviews government operations to ensure compliance with policy and value for money. It also recommends remedial action to the government. In addition, the Office of the Procurement Ombudsman ensures the fairness, openness and transparency of government procurement.  It reviews the procurement practices of federal departments and agencies, reviews any complaint respecting the award of a contract under certain limits, reviews any complains respecting the administration of contracts and ensures that an alternative dispute resolution is provided.

PWGSC has the greatest role to play in procurement. It  is the government’s largest public  purchasing organization: it manages procurement for over 100 federal departments and agencies.  It administers approximately 60,000 contracts totalling $10 billion annually.  PWGSC can also delegate the authority to procure goods to individual federal departments. It develops government-wide methods of supply. Generally, PWGSC is responsible for determining how services will be provided, while the individual departments are responsible for determining what they need, as well as where and when they need it. Any procurement, which includes market research, product planning and the soliciting, evaluating, selecting, negotiating, issuing and administering of contracts, is the responsibility of PWGSC, which must ensure that contracts are successfully executed in accordance with the agreed terms of time, cost and performance.

Figure 1 below depicts the standard process PWGSC uses to procure goods on behalf of federal departments and agencies.

Figure 1: Standard PWGSC Procurement Process for Federal Contracts

• Step 1 –  Requirement Definition: The contracting department defines its contract requirements, obtains project approval, internally certifies the availability of funds and sends the contract requisition to PWGSC. 
• Step 2 – Procurement Strategy:  PWGSC, in collaboration with the contracting department, develops the way it is going to approach the procurement.  It examines international trade obligations, the evaluation criteria and methodology, and the selection methodology. 
• Step 3 – Bid Solicitation:  PWGSC determines whether the contract will be competitive or sole-sourced.  For one-stage solicitations, it issues Request for Proposals (RFPs), Requests for Standing Offers (RFSOs), or Invitations to Tender (ITTs).  For multi-stage solicitations, PWGSC first issues Solicitations of Interest and Qualifications or Letters of Interest, and then proceeds with issuing RFPs, RFSOs or ITTs.  The details of the contract are listed on MERX, the internet-based tendering system used by the government to advertise contracting opportunities.
• Step 4 – Evaluation of bids:  The contracting department conducts a technical evaluation of received bids and PWGSC conducts a financial evaluation.  PWGSC then applies the selection criteria and methodology.
• Step 5 – Contract Approval:  PWGSC conducts third-party reviews as appropriate to ensure that the contract is compliant with all trade agreements and that due diligence has been carried out.
• Step 6 – Contract Award:  PWGSC posts the results of the contract solicitation on MERX.  Unsuccessful bidders are notified and offered a debrief as to why they were not awarded the contract.

Goal 1: Improving the procurement process for small and medium enterprises to facilitate their awareness of and access to federal contracts

The Committee heard overwhelming testimony that SMEs are frustrated with the federal procurement process.  From cumbersome and expensive-to-complete RFP processes to the government not paying interest on overdue accounts, many SMEs “have just given up” trying to bid on federal government contracts.^[4] 

The Canadian Federation of Independent Business (CFIB) is a not-for-profit, non-partisan organization that represent the interests of Canada’s independent businesses and develops its policy positions through survey research.  The CFIB conducted a survey in May 2008 of more than 8,000 SMEs to assess how many SMEs conduct business with the federal government.  The study found about 20% of its respondents have sold goods or services to the federal government during the past three years.  The study also found that SMEs with more than 100 employees were more likely to have conducted business with the federal government during the past three years. 

The CFIB study highlighted some troubling opinions of the federal procurement process.  According to the testimony given during the hearings, almost half of those SMEs who conducted business with the federal government heard about those contracts through business associates: only 14% of the SMEs surveyed used MERX to find federal contracts.  In addition, the survey found that among those SMEs that sell to the federal government, many were concerned with “issues such as the amount of paperwork, difficulty in contacting purchasers, and not being able to determine why their bid was unsuccessful.”^[5] 

The survey concluded that many SMEs seem to have little trust in the federal procurement process because they

• Cannot access the purchaser to clarify RFPs: SMEs found that the officials assigned to the contract do not often have a full understanding of the technical aspects of the bid and therefore cannot answer questions;
• Believe that they cannot talk to purchasers about alternative approaches that may be effective: if SMEs try to incorporate an alternative approach into their bids, they may be rejected as they do not follow the exact process outlined in the RFP;
• Experience difficulty finding contracts very easily: some SMEs stated that they had to go to 20 to 30 different websites to find RFPs; and
• Feel that the federal government does not always pay quickly: SMEs found that this could cause serious cash flow problems.

For these reasons, the CFIB survey found that there “seems to be a growing sentiment among SMEs that it is not worth the effort and investment to bid on federal government procurements.”^[6]

Charles Duffett, the Senior Vice-President and Chief Information Office from the Canadian Advanced Technology Alliance, provided the Committee with an example of a SME that found the federal procurement process overly slow and complicated.  Liquid Computing, an Ottawa area technology business, developed a powerful computer that reduces the space and the electricity used by current data centres.  According to Mr. Duffett, the board of directors at Liquid Computing gave instructions to Liquid’s Chief Executive Offer not to sell to the federal government:  “in their view, it’s a waste of time.  It takes up too much energy, and nothing goes anywhere.”  In the two to three years it tried to sell its computers to the Canadian government, Liquid sold four units to the United States government.^[7]  Pat DiPietro, managing partner at VG Partners’ Technology Fund, the major investor in Liquid, stated:

I encourage all my companies not to talk to the federal government.  I never hold out any hope.  It’s so impossible to deal with, it just sucks so much effort out of the company.^[8]

According to Mr. Duffett, the current federal procurement process limits the ability of Canadian SMEs to showcase their talents to the federal government.

The Committee also heard testimony detailing other barriers in the procurement process that SMEs face when trying to bid for federal contracts.  The Business and Institutional Furniture Manufacturer’s Association (BIFMA) is an organisation that leads, advocates, informs and develops standards for the North American office and institutional furniture industry.  In testimony before the Committee, Greg Rapier from BIFMA stated that his industry has perceived that PWGSC has “moved from a historically inclusive procurement process to a more exclusive process.”^[9]  Mr. Rapier told the Committee that following a recent Request for Standing Offer (RFSO), the government process led to was a reduction in standing offer suppliers from 36 manufacturers to only five manufacturers.^[10]  Though the number of manufacturers was reduced to five, there were 10 standing offers issued, five of which were offers as part of the Procurement Strategy for Aboriginal Business.^[11]

Mr. Rapier explained how the bidding process for that RFSO differed from past bidding processes:

Historically in the RFSO process, Public Works provided opportunities for bidders to clarify bids and submit additional information as required, but during this RFSO process, very few bidders received communication of any kind from Public Works and, again, received little, if any, opportunity to provide clarifications for their bid submissions. The end result was that some bidders were disqualified for simple typographical errors in their bid submissions and others for issues that easily could have been clarified had the opportunity been provided by Public Works.^[12]

According to Mr. Rapier, the majority of the unsuccessful companies in this RFSO process were SMEs.

The Committee heard similar testimony from the shipbuilding industry.  Ron van Wachem represented the Nanaimo Shipyard Group, a small shipbuilding and ship repair business.  The company is mainly engaged in refits, conversions and repairs to all kinds of vessels. It employs approximately 150 people in four locations across the country: Halifax in Nova Scotia and Nanaimo, Port Alberni and Victoria in British Columbia.  In a submission to the Committee, the Nanaimo Shipyard Group expressed concern about current government procurement policies.  In addition to expressing concern about the perceived move to the consolidation of contracts by PWGSC, Mr. van Wachem described for the Committee changes PWGSC had made to shipbuilding contracts.  PWGSC had, according to Mr. van Wachem, shifted the responsibility for the design of ships from ship designers to shipbuilders.[13]  This negatively affected the SMEs involved in shipbuilding by increasing the costs of bidding on shipbuilding contracts.  Mr. van Wachem noted that large multinational companies can afford the overhead costs of incorporating design into their shipbuilding bids because of their greater volume of work.

In 1995, the Standing Committee on Government Operations heard a similar list of concerns from SMEs:

The government takes far too long to pay its bills. The contracting system is incomprehensible; it's bureaucratic, confusing, and complex. The paperwork for bids and contracts is excessive. It's impossible to get information on business opportunities. Bid specifications are written very narrowly and are often very complex. Identifying the user and/or the purchaser of the goods and services is often difficult, so it's very difficult to understand what the real need is. It is difficult to get on the bid list for local contracts. The government selection process seems to favour insiders. The automated systems are not user-friendly and are seen as very costly. It is difficult to compete with larger firms for contracts. Finally, decision-making seems to be arbitrary, and it is difficult and often impossible to find out the reasons why a bid was unsuccessful.^[14]

Indeed, the CFIB noted that in 1995 it found that around 40% of SMEs were selling to the government compared to the 21% that were selling to the government in 2008.^[15]  That the same concerns by SMEs are being raised 14 years later signifies systemic problems in the procurement process.  More must be done to facilitate the process SMEs must follow to access federal contracts.

GOAL 1:  The procurement process must be improved for small and medium enterprises to facilitate their awareness of and access to federal contracts.

The three industries the Committee heard from about the problems affecting the bidding process on federal contracts expressed frustration, discouragement and stress concerning the federal procurement process.  The Committee believes this highlights the need for procurement processes to assist SMEs in their access to federal procurement contracts.  Among the ways PWGSC could improve SMEs’ awareness of and ability to access federal contracts are:

• Improve MERX so that SMEs can get the information they need on federal procurement opportunities;
• Reduce the complexity in completing RFPs;
• Assist SMEs by reducing the costs of bidding on an RFP; or
• Assign a technical procurement officer to each RFP to answer questions from potential bidders.

Goal 2: Coordinating federal programs for small and medium enterprises

The Office of Small and Medium Enterprises (OSME) was created in fall 2005 to address the concerns of SMEs regarding the potential reduction of competitive opportunities for government business.  The OSME supports SMEs by working to reduce barriers to facilitate their access to federal contracts and by simplifying requirements for SMEs that want to do business with the federal government.  It currently receives between $5 million and $6 million in funding for its regional offices and its headquarters in Ottawa.

The OSME is housed within PWGSC.  It performs five activities in support of SMEs: it has a mandate to:

1. Provide information, counselling and training services to SMEs that want to do business with the government;
2. Help reduce competition barriers and simplify the government contracting process;
3. Identify and pursue opportunities that encourage the introduction of innovative new products and services;
4. Collaborate to improve procurement policies and best practices; and
5. Work closely with the SME community to ensure their concerns and views are brought forward and heard.

The Office has a network of six regional offices in Halifax, Montreal, Ottawa, Toronto, Edmonton and Vancouver.  According to Liliane saint pierre, Assistant Deputy Minister, Acquisitions Branch at PWGSC, the OSME has assisted more than 40,000 businesses and individuals across Canada, an average of 16,000 a year.^[16]

Under its mandate, the OSME assists SMEs as they navigate the government procurement system and works within the government to ensure the procurement system treats SMEs fairly.  One example of this support to SMEs can be seen in the OSME’s “10 Tips for Drafting Inclusive Procurement Strategies.”  This document is a guideline for procurement specialists to assist them in creating procurement strategies that give SMEs fair and equal access to federal procurement opportunities.^[17]

Despite what was said by PWGSC regarding  the work the OSME does to improve the ability of SMEs to access federal contracts, the Committee heard that some SMEs are dissatisfied with the work being done by the Office.  The complaints about the OSME ranged from it not having the power needed to fight for SMEs, to not conducting targeted research, from being an unknown entity, to its position located within PWGSC. 

Jeff Lynt, the Chair of the Canadian Business Information Technology Network (CABiNET), told the Committee that he found that the OSME had no power and could only act in an advisory role.  He continued by noting that the Office should have more clout to deal with the recommendations that the information technology industry has made on how to protect SMEs.^[18]  Mr. van Wachem from the Nanaimo Shipyard Group, suggested that the OSME should consider focusing its research on regional spending by the federal government: “if it spends a large majority of its money in one area, then they should be looking at whether SMEs are well represented.”^[19]  In addition, Ms. Pohlmann from the CFIB noted that though the CFIB supports the idea of the OSME, if it did not exist it would not make a huge difference because the Office is not very well known.^[20] 

Shereen Miller, the Director General of the OSME noted that the procurement process is not the OSME’s responsibility.^[21]  The Committee notes, however, that the OSME’s mandate includes simplifying the government contracting process and collaborating with SMEs to improve procurement policies.  Given this lack of direct involvement in the call for proposals and awarding of contracts, one witness recommended moving the OSME out of PWGSC to reduce the perception that the OSME is primarily focused on representing PWGSC’s procurement interests over SMEs’ interests.^[22]

PWGSC is not the only federal department charged with some responsibilities toward SMEs.  There are many federal departments and agencies offering services and programs to SMEs in the federal government. Table 2 describes what other federal departments and agencies do for SMEs.

Table 2: Programs for Small and Medium Enterprises offered by Federal Departments and Agencies

Table 2 illustrates the range of services provided by the federal government to SMEs.  However, it also shows that there is single department or agency that coordinates the services offered to SMEs.

Industry Canada has a team of about 140 people who conduct research and analyses on SMEs and develop policies for SMEs.^[23]  Mr. McConnell, the Director General of the Small Business Policy Branch at Industry Canada, stated that the SME file is a complicated horizontal file that is difficult to advance.  As he noted:

There are a lot of departments, a lot of agencies, that affect small business outcomes.  So small business policy tends to be horizontal, including procurement policy … Most departments will affect small businesses, so it’s a matter of choosing where the highest incremental opportunity is to shape business.^[24]

The fragmented nature of the programs and services offered to SMEs by the federal government was noted by some of the witnesses.  As one noted, “not one department is acting in the interests of small business.”^[25]  Several witnesses recommended that a centralized system of federal services and programs would best meet the needs of SMEs.  One example of such a system can be found in the United States Small Business Administration.

The U.S. Small Business Administration (SBA) was created in 1953 as an independent agency of the federal government to aid, counsel, assist and protect the interests of small business concerns, to preserve free competitive enterprise and to maintain and strengthen the overall economy of the U.S.^[26]  The SBA recognizes that small business is critical to economic recovery and strength and to helping the U.S. compete in today’s global marketplace. Although the SBA has grown and evolved in the years since it was established in 1953, the bottom line mission remains the same: it helps Americans start, build and grow businesses. Through a network of field offices and partnerships with public and private organizations, the SBA delivers its services to people throughout the United States, Puerto Rico, the U. S. Virgin Islands and Guam.

The SBA has an Office of Government Contracting that works to create an environment for maximum participation by small, disadvantaged, and woman-owned businesses in federal government contract awards and large sub-contract awards.  Joseph Jordan, the Associate Administrator of Government Contracting and Business Development in the SBA, explained to the Committee the five ways the SBA works to achieve its goals:

First, working with other federal agencies to ensure that their policies and procedures take small business concerns into account; second, working directly with small businesses on education and training to increase their marketability as government contractors; third, educating small business and government agencies on how best to work together; fourth, utilizing technology to foster and streamline these relationships; and fifth, promoting transparency within our programs and our data.^[27]

In addition, the SBA guarantees small business loans and participates in the processing  and approval process for the loans.  It also has the following offices:

• Office of Communications and Public Liaison:  conveys the stories of successful small businesses to inform the public that small businesses are innovative companies that provide a high quality of goods and services;
• Office of Entrepreneurial Development: helps new companies get the education, training, support and outreach they need; and
• Independent Office of Advocacy: voices the concerns and studies the needs of small businesses.^[28]

Moreover, the SBA has the standing to talk directly to other federal agencies about their procurement practices and has the ability to involve the White House if there are any disagreements.^[29]

Ms. Miller from the OSME commented on the differences between her Office and the SBA.  She noted that the SBA is governed by the Small Business Act, while the OSME only has a mandate under the action plan of the Federal Accountability Act; and the SBA has 1,000 field staff, while the OSME has 25 field staff.^[30]  In addition, there is no centralized system of procurement in the United States: each agency has its own procurement functions.  In Canada, PWGSC provides a centralized procurement function for the federal government