OGGO Committee Report

However, the central difference between the SBA and the OSME is that the SBA is a stand-alone government agency wholly responsible for programs and policies for SMEs, while the OSME is just one of several federal programs for SMEs, and is a sector within a department.  As Ms. Miller noted, the services and programs that the SBA provides to SMEs are indeed all covered by various federal departments and agencies in Canada, but their decentralized nature may lessen their effectiveness to SMEs.  Mr. van Wachem  suggested that the SME programs and services provided by the OSME, regional development agencies and Industry Canada should be absorbed into one area that would have powers to create policies and processes related to SMEs.^[31]

GOAL 2: The federal government’s services and programs for SMEs must be coordinated in such a way as to actually assist SMEs in their ability to access federal contracts.

The Committee recognizes that the current system of federal programs and services to SMEs is unsatisfactory.  Small business owners should not have to navigate through several departments’ websites to find information on applying for government contracts.  As the Committee learned over the course of this study, the procurement process does not happen in isolation: before a SME can bid on a federal contract, it must be a well-run business.  Therefore, all of the services the federal government provides to assist SMEs in becoming well-run businesses should be considered together when assessing how to improve the ability of SMEs to access federal contracts.   Among the ways that PWGSC could ensure effective and efficient delivery of federal programs and services to SMEs are

• Give the OSME a stronger mandate that includes advocacy on behalf of SMEs with respect to  procurement;
• Ensure the OSME has the appropriate funding for the tasks that are necessary to improve the level of service it provides SMEs; or
• Establish the OSME as a single-window entity that can coordinate all the federal government’s services and programs for SMEs.

Goal 3: Ensuring access by small and medium enterprises when smaller contracts are bundled into larger contracts

The Committee’s study of the ability of SMEs to access federal contracts was motivated by testimony it heard in June 2008.  The Canadian Business Information Technology Network (CABiNET) appeared before the Committee to express its serious concerns about the moves it saw PWGSC taking to bundle information technology (IT) service contracts with professional service contracts.^[32]  According to testimony provided by CABiNET, the government was proposing to bundle IT products and IT professional services together in a contract that could exceed $1 billion annually for a period of up to 20 years through the Government Enterprise Network Services (GENS) initiative.^[33]  After discussing this issue during the June 2008 meeting, the Committee unanimously adopted a motion that stated

The Standing Committee on Government Operations and Estimates recommend that the government bring forward its plan prior to the implementation of its policy aimed at bundling the procurement of IT products and services.

PWGSC released its business rationale on the GENS initiative on 7 May 2009. (The Committee, not seeing a full business case for the GENS initiative, believes that PWGSC understands the Committee’s concerns highlighted by the testimony heard regarding the initiative.  The Committee hopes that PWGSC will take these concerns into account when dealing with any future bundling of contracts.)  The business rationale for the GENS initiative confirmed that contracts for IT products under GENS will not be bundled with IT professional services.  However, the IT industry was not the only industry the Committee heard from on the issue of bundling.  The GENS initiative will be discussed further after a general discussion on the perceptions surrounding bundling and an examination of the testimony heard from the furniture and ship-building industries.

Many of the witnesses that appeared before the Committee on this issue believe that the federal government is consolidating contracts into larger sizes with the effect of creating barriers to SMEs who wish to bid on those contracts.  They also believe that bundling contracts can lead to the loss of jobs.  Ms. Pohlmann, from the CFIB, stated that “recent attempts by Public Works to amalgamate federal contracts into fewer very large contracts” have made it very difficult for SMEs to access federal contracts.^[34]  Mr. van Wachem stated that

In the past, and at the present time, the government has implemented procurement policies that favour large multinational companies in the shipyard and marine repair industry to the detriment of SMEs.^[35]

In addition, Mr. Rapier from furniture industry noted that the government’s move from 36 to five standing offers for office furniture suggests that PWGSC is moving toward a consolidation policy on standing offers.^[36]

Mr. van Wachem explained that the expectations of the SME shipyards were raised when the government announced federal shipbuilding and vessel life-extension projects.^[37]  Small and medium shipyards are capable of building many types of small vessels.  However, the contracts were consolidated into large projects, which meant that small shipyards were shut out of the projects because of the high cost of bidding and bonding. 

Mr. Rapier from the Business and Institutional Furniture Manufacturer’s Association (BIFMA) described for the Committee the effects on his industry of the process used by PWGSC when the number of manufacturers of office furniture were reduced in number from 36 to five.  He noted that the vast majority of the unsuccessful companies in this process were SMEs, and that “each of these companies would have expended tens of thousands of dollars to test their products for compliancy and prepare and submit a bid.^[38]  The Chair of the Committee was particularly concerned with the reduction in standing offers.  As he noted:

Somebody in Public Works, a very well-meaning public servant, managed a process that reduced the number of suppliers of furniture from around 30-something to five ... Not even the Japanese Imperial Army in the Second World War could have hoped to destroy a government supply chain to that extent.^[39]

The end result of the cutback in furniture standing offers was that competition had been reduced in that product category which could lead to increased costs to the government.^[40]

However, not all witnesses who testified on this study were against the federal government bundling contracts.  The Information Technology Association of Canada (ITAC), represented by Louis Savoie, Hicham Adra and Linda Oliver, stated that using shared services can avoid the duplication of services, save in the hundreds of millions per year, allow Canadians to have easier access to government services and reduce security risks.^[41]  In addition, in the opinion of Mr. Savoie, the GENS initiative, the goal of which is to increase the amount of shared services in the area of networks, will not reduce jobs in the IT sector: 

Depending on who wins the contracts, the jobs might move, but the jobs are required to deliver this … we have an ecosystem of SMEs that we leverage to deliver our service across Canada, and this won’t reduce the volume of SME business.^[42]

Mr. Savoie further reassured the Committee that jobs would not be lost if the GENS initiative went forward, saying that 30% to 40% of the actual contract work that large companies receive goes to SMEs.^[43] 

The Canadian Advanced Technology Alliance (CATA), represented by John Reid and Charles Duffett, stated that there are really only three or four major companies that can do the work of creating a shared government network.  SMEs cannot be involved in this sort of work because they do not have the capital infrastructure in place to establish large government networks.^[44]  CATA supported the bundling of contracts, and especially encouraged the government’s IT shared services project and the GENS initiative.  However, as Mr. Duffett noted, professional services should not be included in the GENS imitative because SMEs are very effective in their work in this area.^[45]

John Rath-Wilson, from the Information Technology Services Branch at PWGSC, confirmed that only a handful of companies that can provide the kind of infrastructure the government needs across the country can deliver the networks, telephony services, Internet protocol, and video conferencing at a reasonable cost.^[46]  In part for this reason, PWGSC went ahead and drafted a business rationale for the GENS initiative.  Citing input received through consultations with SMEs, PWGSC has changed how the GENS initiative will be tendered.  Professional services contracts will not be bundled with the larger network contracts. 

The attention that was placed on the issue of bundling contracts before the Committee in June 2008 undoubtedly forced PWGSC to consider the implications of bundling for SMEs with respect to the GENS initiative.  The struggle faced by small IT professional services businesses, along with small shipyard and furniture businesses described in the Committee’s hearings, should show PWGSC that SMEs are indeed profoundly affected by its procurement policy decisions.  Though the Committee heard that not all SMEs take issue with the idea of bundling, it does believe that there should be a system in place for SMEs’ concerns to be heard on the bundling of contracts and standing offers.

The U.S. Small Business Administration, for example, has Procurement Centre Representatives who are placed within federal procurement centres and are responsible for reviewing contracts to ensure that unjustified contract bundling is not happening and that small businesses have opportunities to bid on contracts.^[47]¨ The SBA defines contract bundling as the consolidation of two or more requirements which were individually performed, or could be individually performed, by a small business. A bundled contract is one in which the demand for supplies, services, or construction is of a quantity, estimated dollar value, or magnitude that makes it unlikely that a small business could successfully compete for the prime contract.

If a Procurement Centre Representative sees a contract that is over a specific size, and it looks as if the contract is a bundling of a number of small buying activities that small businesses either did in the past or could do, the SBA will protest.  The SBA will have discussions with the procuring agency about how it will either break the contract apart or create appropriate subcontracting plans so that the small businesses get a fair share of that procurement.  However, sometimes bundling is allowed if the agency can demonstrate a measurably substantial benefit or if there is another unique but valid reason. But in the vast majority of cases, the SBA will review and put a hold on that contract until it has worked out a satisfactory solution between the agency and the small business needs and concerns.^[48]

GOAL 3: The federal government must ensure that due consideration is given to small and medium enterprises when considering the bundling of contracts and standing offers.

Given the testimony the Committee heard both for and against the notion of bundling contracts, the Committee believes some process  must be put in place within PWGSC to ensure due consideration is given to SMEs when it considers bundling contracts.  It is the view of the Committee that failure to establish such a process could lead to increased barriers to SME participation in procurement, a hollowing out of the number of SMEs, and harm to existing Canadian supply chains for both services and products.  Among the ways that PWGSC could ensure due consideration is given to SMEs when considering bundling are

• Provide ample opportunity for SME consultation about contracts that are to be bundled;
• Require any department or agency who wishes to put a bundled contract up for tender to submit a business case justifying the need for bundling that responds to the Treasury Board Secretariat’s definition of business case and as requested by the Office of the Auditor General in its November 2006 report; or
• Establish contract size limits wherein a SME subcontracting plan for the life of the contract must be submitted as part of the bid.

Goal 4: Offering fairness instead of set-asides to small and medium enterprises

There was much discussion during the Committee’s hearings on the ability of SMEs to access federal contracts about whether there were concrete ways to help SMEs win contracts.  One idea that was often raised was a set-aside system in the federal procurement process for SMEs.  A SME set-aside system would ensure that a percentage of all federal contracts would be awarded to SMEs. 

Set-aside programs are not new in Canada.  The federal government already has in place a Procurement Strategy for Aboriginal Business (PSAB) which has a set-aside component.  The PSAB is a strategy that was launched by the federal government to increase the number of Aboriginal suppliers bidding for, and winning, federal contracts.^[49]  Under the PSAB the government reserves, or “sets aside”, certain contracts exclusively for competition among Aboriginal businesses. There are two kinds of PSAB set-asides: mandatory and voluntary.

A mandatory set-aside policy applies to all contracts that serve a primarily Aboriginal population and that are worth more than $5,000.  Voluntary set-asides may be applied to other contracts by federal buyers whenever practical.  When a contract is reserved for Aboriginal competition, the department indicates in its advertisement or RFP that the requirement is set-aside for Aboriginal suppliers in accordance with the PSAB.  Bids are prepared and submitted by Aboriginal businesses, and are evaluated in keeping with the principles of federal government contracting: fairness, openness and best value for the Canadian public.

The existence of a set-aside program for Aboriginal businesses could mean that a set-aside program for SMEs might not be difficult to implement.  The U.S. has a goal-based system to encourage government departments and agencies to award contracts to small businesses.  As Mr. Jordan explained to the Committee:

In terms of creating goals for small business participation in federal contracting, the federal government has statutory goals for small business participation: achievements measured in the percentage of dollars spent by the government. The government-wide goal for small business dollars is 23%, with several sub-goals for certain socio-economic categories.^[50]

The Small Business Administration is responsible for negotiating these individual goals with each agency, keeping the statutory government-wide goals in mind. Results of each agency's small business spending are reported every year in the Small Business Goaling Report, which is released to Congress and then to the public.

Mr. Jordan stressed that the 23% government-wide goal is just that, a goal.  It is not a set-aside target in the sense that 23% of government contracts must go to small businesses.  However, the SBA does administer set-asides for targeted groups:  5% for women-owned small businesses, 5% for small and disadvantaged businesses, 3% for service-disabled veteran-owned small businesses, and 3% for historically underutilized business zone businesses. The set-asides for the minority groups is a tool the SBA uses to achieve its small business contracting goals. According to Mr. Jordan, “the set-asides are not compulsory in that there is no specific punishment for not achieving them. They are goals we would like to achieve and exceed, but that is not always the case.”^[51]

Though the Committee did hear that the Nanaimo Shipyard Group would like to see the introduction of set-asides for SMEs, the majority of the witnesses were not supportive of set-asides.  One reason for not wanting set-asides is that the industry could see them as limiting.  Mr. Duffett from the Canadian Advanced Technology Alliance stated that “it could be that if you set 20%, well, maybe they could do 80%.  To me setting a limit seems to be the wrong thing to do.”^[52]  In addition, establishing set-aside limits could go against Canada’s international trade obligations.  Gilles Gauthier, Director General of the Department of Foreign Affairs and International Trade’s Multilateral Trade Policy Group noted that:

Important trading partners of Canada, such as the European Union, do not retain a set-aside exception for small businesses.  In fact, the European Union has been and continues to be a vocal opponent of any such programs.^[53]

In a submission to the Committee, CABiNET stated that it was not looking for special treatment for SMEs: it just wants fair and equal access to the opportunities that federal government can provide. 

GOAL  4:  The federal government must establish a system of fairness to encourage departments and agencies to use small and medium enterprises.  However, set-asides, though useful in other policy areas, are not the preferred system of fairness.

The Committee agrees that set-asides for SMEs may not be the best way to improve the ability of SMEs to access federal contracts.  However, it believes that there should be some sort of policy to encourage federal departments and agencies to construct RFPs in such a way that SMEs are able to bid on them.  Some of the things the federal government could do to ensure a system of fairness in awarding contracts are:

• Establish goals for procurement with SMEs, such as the U.S. SBA system described above;
• When defining contract requirements, include a section to be filled out on whether SMEs would be suitable to fulfill the contract; or
• Offer training sessions to procurement sections of federal departments and agencies to advocate for SMEs.

Goal 5:  Allowing innovation and quality to be key selection criteria

The Committee repeatedly heard that SMEs can provide the highest-quality and most innovative goods and services today.  Unfortunately, the Committee also heard that the federal government’s procurement policies do not always take advantage of all that SMEs have to offer in terms of innovation and quality.

Some of the issues the Committee heard regarding PWGSC’s perceived lack of interest in encouraging innovation are as follows:

• If a business tries to incorporate an alternative approach into a bid for a contract, it will be rejected by PWGSC because it does not follow the exact process outlined in the RFP.^[54]
• Including the lowest cost as the principal consideration in the evaluation of a bid does not encourage innovation; it drives it out.^[55]
• The great number of rules and regulations have bogged down the procurement system and has created a risk-averse culture in the public service.^[56]
• High growth businesses are not as successful in securing debt financing as traditional businesses.^[57]

That there appears to be little room in federal procurement to foster innovative ideas and businesses is discouraging and could lead to an innovation stagnation in Canada.

The Committee recognizes that there is a chance of increased risk when encouraging innovation and that this may discourage the federal government from awarding contracts to innovative SMEs that offer innovative goods and services.  Mr. Jordan from the U.S. Small Business Administration noted that there is a risk aversion that can lead government departments to preferring to contract to large businesses.  One of the key functions of the  SBA is to help educate departments to assure them that they are not necessarily taking on more risk by contracting to a small business and that they may indeed get a much better product or service from the SME.^[58]

With respect to including quality as a selection criterion in federal government contracting, according to Normand Masse from PWGSC, “public procurement is not just buying something at the lowest price possible.”^[59]  Value and quality must also be taken into account.  However, the Committee heard compelling evidence from the Association of Canadian Engineering Companies (ACEC) that the lowest price often trumps quality as the key determinant when evaluating a bid.

Andrew Steeves from the ACEC introduced the concept of qualifications-based selection (QBS) as a system of procurement.  According to Mr. Steeves, the principle behind QBS is simple:

Professional engineers, architects, environmental scientists – those services should be hired based on qualifications, experience, competencies, and backgrounds they bring to a project, not on the lowest price.^[60]

QBS differs from  the usual process used by most federal departments and agencies, where price is often the determining factor in awarding contracts. 

Though QBS is relatively unknown in the federal government, it is used in other jurisdictions in Canada and the world.  The province of Quebec introduced legislation that requires its provincial agencies to use QBS.  The cities of Calgary and London use QBS.  In addition, in the U.S. QBS has been a legislated procurement practice since 1972.^[61] 

One of the risks of QBS is that it can raise the costs of a contract.  QBS though is not a blank cheque that allows contract winners to charge whatever fee they want.  According to Mr. Steeves, negotiating a fair fee is a key step in the QBS process: a fee agreement set within a QBS system can be based on a defined scope of work and yield better value for a client.^[62]  However, the value of QBS in terms of creating technologies and providing the best goods and services possible should balance out any increase in the cost of the contract.

GOAL 5:  The federal government must ensure that innovation and quality are key determinants in the evaluation of bids and the awarding of contracts.

The Committee believes the government should work to foster innovation in Canadian SMEs.  In addition, the Committee holds that quality should be an important determinant in the awarding of a contract.  Given the testimony heard regarding these issues, the Committee would like to see that innovation be encouraged in the procurement process and quality be included in the evaluation of a contract bid.  Some of the ways the government could incorporate this goal into its policies are to:

• Consider the merits of legislating the use of QBS as the required procurement process; or
• Rework the RFP process to be less prescriptive and to allow for innovative alternatives from SMEs.

Conclusion

What began as a study motivated by the perceived move by PWGSC to bundle IT contracts for goods and services became a study of how SMEs are affected by federal government procurement policies and their ability to access federal contracts.  What struck the Committee during its hearings on these issues was the importance of SMEs to today’s economy.  As one witness pointed out, SMEs are generally the last industries to let workers go during an economic downturn.^[63]  And given that SMEs represent almost half of Canada’s GDP, they are significant economic drivers.^[64]

The Committee heard from witnesses from the IT sector, the office furniture industry and a small shipyard group.  In addition, the Committee heard testimony from PWGSC, the Department of Foreign Affairs and International Trade and from Industry Canada.  Each of the witnesses had a different perspective on the issues that govern federal procurement from SMEs.  Some industries wanted to see the creation of set-asides for SMEs, others thought such set-asides would limit SMEs.  Some witnesses wanted to see the creation of an office for SMEs similar to the U.S. Small Business Administration, others thought it would be better if the government focused the work of the Office of Small and Medium Enterprises.  Some saw bundling as a opportunity for SMEs, others likened bundling to the sound of a death toll for SMEs.

Throughout the conflicting evidence heard from the Committee, consistent concerns were raised stating that what the federal government is doing today in procurement with SMEs is not sufficient.  That some industries are concerned about the fractured nature of federal government services to SMEs, that some complain about the lack of flexibility in the procurement process, and that some believe the federal government is wary of working with SMEs shows that the government needs to take more care in conducting its business with SMEs.

This report has presented five goals it believes the federal government should pursue when creating any policies that could affect the ability of SMEs to access contracts.  The Committee believes that only one recommendation to the government is needed to ensure it acts on the concerns raised by the industry witnesses who appeared:

RECOMMENDATION:  The Standing Committee on Government Operations and Estimates recommends that Public Works and Government Services Canada review the goals contained in this report and submit a response to the Committee by 31 October 2009 indicating how it will implement the five goals described herein.

Goals and Suggested Actions

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

• Improve MERX so that SMEs can get all 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: The federal government’s services and programs for SMEs must be coordinated in such a way as to actually assist SMEs in their ability to access federal contracts.

• Give the OSME a stronger mandate that includes advocacy on behalf of SMEs with respect to  procurement;
• Ensure the OSME has the appropriate funding for the tasks that are necessary to improve the level of service it provides SMEs; or

Establish the OSME as a single-window entity that can coordinate all the federal government’s services and programs for SMEs.

GOAL 3: The federal government must ensure that due consideration is given to small and medium enterprises when considering the bundling of contracts and standing offers.

• Provide ample opportunity for SME consultation about contracts that are to be bundled;
• Require any department or agency who wishes to put a bundled contract up for tender to submit a business case justifying the need for bundling that responds to the Treasury Board Secretariat’s definition of business case and as requested by the Office of the Auditor General in its November 2006 report; or
• Establish contract size limits wherein a SME subcontracting plan for the life of the contract must be submitted as part of the bid.

GOAL  4:  The federal government must establish a system of fairness to encourage departments and agencies to use small and medium enterprises.  However, set-asides, though useful in other policy areas, are not the preferred system of fairness.

• Establish goals for procurement with SMEs, such as the U.S. SBA system described above;
• When defining contract requirements, include a section to be filled out on whether SMEs would be suitable to fulfill the contract; or
• Offer training sessions to procurement sections of federal departments and agencies to advocate for SMEs.

GOAL 5:  The federal government should ensure that innovation and quality are key determinants in the evaluation of bids and the awarding of contracts.

• Consider the merits of legislating the use of QBS as the required procurement process; or
• Rework the RFP process to be less prescriptive and to allow for innovative alternatives from SMEs.