Canadian governments have historically demonstrated two aptitudes: Raising taxes and giving away grants without proper controls.
The latest spree involves the rush to join the ranks of technologically advanced nations. A worthy goal, badly executed by bureaucrats who are handing out billions of tax dollars a year – often without strings attached — to inappropriate and questionable people mostly on the basis of slick slide decks sprinkled with faddish words like “innovation”, “networks”, “clusters”, “tech ecosystem”, “accelerator”, “commercialization of tech”, “platforms”, “sharing economy”, “blockchain tech” and so on.
You get the picture.
The Americans have created an innovation economy without handing out cash. Silicon Valley has been built by entrepreneurs and investors with skin in the game and government involvement consists of tax breaks but only to those who have become profitable, such as Amazon Inc., which short-listed Toronto this week as one of its 20 possible locations for its second headquarters, or HQ2, in North America.
Here in Canada, government bureaucrats prefer the hassle-free Bombardier Model – simply throw billions of tax dollars in grants at a so-called “tech” entity and hope for the best.
For instance, tech players are aghast at the profligacy of Ottawa’s Industrial Research Assistance Program (IRAP) along with provincial and city programs.
Here’s how it works: If approved by a public sector IRAP representative, recipients receive grants covering up to 80 percent of staff costs and up to 50 percent of contractor costs. If the grant is requested in Atlantic Canada or B.C., where provincial agencies hand out money like Halloween candy, you may become cash-flow positive by double-dipping. Or go fishing.
Here’s how it should work: Governments should stick to tax credits for investors and owners who already have skin in the game. These people have to build a business and cannot afford to go fishing.
A Canadian friend, successful in Silicon Valley, said recently: “Canadian governments spend a lot of money on fake startup stuff — basically every agency, province, and city now has government funded accelerators or incubators doing fake stuff.”
Here are a few taxpayer concerns that should be addressed:
- IRAP grants are being handed out to create subsidized accelerators and consultancies that compete with taxpaying private-sector firms already fulfilling the need.
- One entrepreneur in Toronto said IRAP-funded accelerators are helping startups get more IRAP grants and, in return, taking a commission out of these funds along the way. All this builds is an infrastructure of grant-getters getting grants for more grant-getters. This won’t create wealth.
- There is double and triple dipping of grants for the same startups or accelerators and no coordination between levels of governments.
- IRAP should stick to funding pioneering research only, not to software development or to people building apps or websites that already exist, or have no market.
- Is there auditing and monitoring? One grant recipient said they report “job creation” figures that remain unchecked, based on an honor system.
Typical grants are $100,000 plus and this largesse entitles them to a free desk and services in a government-subsidized accelerator that is not-for-profit except for the excessive salaries and benefits scooped by their grant-rich executives.
Nobody should fund 100 percent of a startup, especially since these subsidies come from taxes paid by people and businesses that are actually creating wealth.
There are three rules for building a sustainable innovation economy:
1. Never give away money to people who have not put up their own cash.
2. Never give away lump sums but mete out installments tied to deliverables.
3. Let the market work. Grants did not build Canada and tech doesn’t deserve special treatment. Tech giants result when proven innovation join forces with risk-taking investors.
The various governments’ current tactics aren’t going to create Silicon Valley North. It will only spawn thousands of Bombardier boondoggles.
First published Financial Post Jan. 19, 2017