Economic Security & Supply Chains

Plus another government program that has some major issues.

Happy Monday! Today, I take a look at a recent report on supply chains and Canadian policy responses before turning to another Auditor General report on the Strategic Innovation Fund’s Net Zero Accelerator.

Supply Chain Resilience in an Age of Uncertainty

Photo by CHUTTERSNAP on Unsplash

I’ve written a little over recent weeks about the need to take economic security more seriously. As Canada is buffeted by a range of geopolitical, climatic and other threats, not least from the incoming administration south of the border, federal and provincial governments need to get smarter about our economic security and the vulnerabilities of our supply chains. In the recent report The Recongifuration of Global Supply Chains: Threats, Opportunities and Policy Options for Canada, Daniel Schwanen and Ari Van Assche from the C.D. Howe Institute help shine a light on this.

As the COVID-19 pandemic and subsequent crises amply illustrated, secure and well-functioning supply chains are an essential part of the modern global economy. Given this, Schwanen and Assche highlight that enabling supply chains to operate efficiently and de-risking supply chains should be major policy objectives —two objectives that create some tradeoffs. While it can be comparatively easy to measure the efficiency of supply chains, their resiliency is a harder target to pinpoint. What is the right level of resiliency? What threats are worth extensive efforts to de-risk, even if that imposes other costs?

These are things that need grappling with. Yet Canada has been behind the curve, with the federal government still not having released a National Supply Chain Strategy. While it has launched a National Supply Chain Office that sits with Transport Canada, Schwanen and Assche rightly point out that the complexity of the issues raised by supply chains exceeds Transport Canada's mandate —creating more siloing of policy impairs effective responses.

I appreciate that the authors set out strategic goals and policy recommendations. The goals are:

1. Maintain the economy’s ability to supply essential goods and services – notably food, medical and health, energy, and other essential supplies – to Canadians and Canadian industry in the face of plausible geopolitical, climate-related, health- related or other disruptions.

2. Ensure that, in the ordinary course of business, both our exports (including between Canadian jurisdictions) and imports, on which so much of Canadians’ living standards depend, can move competitively and safely to markets.

3. Ensure that firms located in Canada play a role consistent with Canada’s comparative advantage within the supply chains that support emerging global and Canadian public needs and objectives, while strengthening Canada’s relevance in global value chains.

I especially like the last one. As I've argued previously, that lens should be applied to other areas, such as Canada’s AI strategy.

The five policy elements that flow out of these goals are then:

1. Building competitive, resilient, and safe infrastructure and foster a cooperative regulatory approach to infrastructure and transportation.

2. Do not assume domestic production is a sufficient – or even necessarily good – defense against supply chain disruptions.

3. Reinforce trade alliances and economic diplomacy with trusted partners.

4. Position Canada as an essential partner for security.

5. Respond more selectively to pressures for “strategic” industrial interventions.

Each of these then includes much more detail. However, even at a high level, these recommendations make a lot of sense as a scaffold for a whole-of-government approach to economic security.

The Net Zero Accelerator Initiative - Lacking an Overarching Strategy

Last week, I wrote about a recent report from the Office of the Auditor General of Canada on ISED‘s Industrial and Technological Benefits Policy. Today, I want to highlight another report on the Strategic Innovation Fund’s Net Zero Accelerator Initiative, which is also run by ISED.

SIF is one of the government’s landmark innovation programs and potentially the most notable initiative that moves Canada’s R&D and innovation policy toolkit in a more demand-side and intentional direction. The Net Zero Accelerator Initiative, at $8 billion, is the biggest piece of that.

Given that, how this program runs matters a lot both for Canada’s innovation outcomes and the fight against climate change. However, yet again, the Auditor General found significant issues with how the program was run. These included:

• A lack of tracking of the Accelerator’s overall value for money in reducing greenhouse gas emissions

• An absence of an overarching industrial decarbonization policy that involved all relevant government entities

• An incredibly lengthy and complex application process - taking an average of 407 hours to complete the application and 20 months to sign the contribution agreement.

In my interactions with industry, I have repeatedly heard that the “long maybe” that comes with lengthy funding processes like this is often the worst of all worlds. It leaves firms in limbo, unable to pivot to other decisions. That is problematic for any business, but even more so when we’re talking about the very pressing time horizons that come with reaching Net Zero. As the report points out, “Given large emitters already have little incentive to decarbonize their operations, efforts should be made to better attract large emitters and review applications quickly to increase Canada’s opportunities to reduce emissions”.

We simply have to get better at designing programs that can deliver on clearly articulated goals, with rigorous evaluation and at the pace that our challenges require.