Indigenous Procurement: Too Important to Fail

In other jurisdictions from the United States to Australia, government procurement is leveraged as an economic development tool for communities traditionally hindered by discrimination, including Indigenous businesses. After an election campaign during which the Liberal Party adopted a 5 percent Indigenous procurement target in its platform, entrepreneur and investor Chand Sooran lays out what the government’s Indigenous procurement policy could look like.  

Chand Sooran 

The federal government looks set to announce a substantial policy on procurement from Indigenous-owned businesses. It is a high risk-high reward strategy for all stakeholders. A successful outcome can transform economic development for this beset community. Failure would mean the ossification of the obstacles that this policy ostensibly seeks to overcome.

What would an effective policy look like?

In the 2019 election, the Canadian Council for Aboriginal Business (CCAB) was successful in lobbying for the inclusion in Liberal Party policy of a 5 percent set-aside of federal procurement spending with its Supply Change initiative:

“Federal procurement spending through the Procurement Strategy for Aboriginal Business (PSAB) has accounted for an average of less than 1 percent (0.32 percent) of total annual federal procurement spending since 1996,”  the Council noted in a campaign statement, adding: “Now that a realistic and more than achievable 5 percent Aboriginal procurement spending target has been adopted in the Liberal Party platform, CCAB encourages other political parties to do the same or even better.”

The Prime Minister’s 2019 Mandate Letter to the Minister of Public Service and Procurement Canada follows through with this commitment instructing her to “work with Minister of Indigenous Services and the President of the Treasury Board to create more opportunities for Indigenous businesses to succeed and grow by creating a new target to have at least 5 per cent of federal contracts awarded to businesses managed and led by Indigenous Peoples.”

This parallels the policy the Trudeau government announced in the 2018 Budget in which they announced a 5 percent target of federal procurement spending from businesses owned by women.

These policies are an expression of a global phenomenon called “social procurement”. The City of Toronto, for example, defines social procurement as: “The achievement of strategic social, economic and workforce development goals using an organization’s process of purchasing goods and services.”

Toronto’s definition of supplier diversity is consistent with that of other buyers:

“A diverse supplier is a business that is at least 51 percent owned, managed and controlled by an equity-seeking community or social purpose enterprise. These communities include, but are not limited to, women, Aboriginal people, racial minorities, persons with disabilities, newcomers and Lesbian, Gay, Bisexual, Trans, Queer, Two-Spirit (LBGTQ2S) community.”

These set-asides are consistent with international experience.

The European Union’s public procurement directives permit the allocation of some portion of public procurement budgets to “disadvantaged persons”. 

In the United States, support for social procurement goes back to the civil rights movement of the 1960s. Martin Luther King Jr. delivered his famous “I Have a Dream” speech at the March on Washington for Jobs and Freedom. Its primary organizer, the bold activist Bayard Rustin, writing in the event’s organizing manual, cited the “twin evils of racism and economic deprivation” as motivation for the march. 

The Small Business Administration sets out a government-wide statutory small business contracting goal of “not less than 23 percent of the total value of all prime contract awards for each fiscal year.” Further minimum targets include 3 percent for small businesses owned by service-disabled veterans, 3 percent for HUBZone small businesses, 5 percent for small businesses “owned and controlled by socially and economically disadvantaged individuals,” and 5 percent for small businesses owned and controlled by women.

State governments also have versions of their own targets. New York State has been in the vanguard of social procurement. Governor Andrew Cuomo aims to have 30 percent utilization of what Americans call “MWBEs” (Minority and Women-Owned Business Enterprises) in state contracts, a target the state came just short of hitting in the fiscal year 2018-2019 at 29.13 percent. When he was first elected to office in 2011, Cuomo’s target for MWBE contracting was 20 percent.

The focus on empowering businesses owned by members of historically- disadvantaged communities cascades in the U.S. into private sector purchasing activities. Large corporations that sell to different levels of government are encouraged and, in some cases, required to purchase from disadvantaged businesses. Organizations like the National Minority Supplier Development Council certify, mentor, and advertise MWBEs to corporate buyers.

What is the public policy problem?

Set-asides are a novel concept in Canada. Cities like Toronto, seeking to benchmark themselves against global contemporaries, have embraced the concept, with mixed success. Governments have resisted the push for set-asides from communities like the First Nations, preferring instead non-binding guidelines with limited effect.

In the United States, when a company advertises the status of its ownership or control as a minority-owned business, or a women-owned business, the general understanding is that this is just another facet of their marketing. The supplier can provide a non-pecuniary benefit to the buyer who can demonstrate his commitment to meeting self-imposed or external thresholds for social procurement.

In Canada, in the absence of government leadership on the topic and data showing the performance of these firms, buyers may tend to view companies who identify as Indigenously owned as sub-par, as if to say that these firms require special treatment. 

Divergent public policy in the two countries leads to different perceptions of supplier risk for the same company. It may be easier for Canadian Indigenous businesses to sell in the U.S. than at home. The public spillover effect is that economic development is slowed, leading to more government transfers.

Buyers (in government or the private sector) want “value-for-money”: buying the right thing from the right supplier at the right price, with the least risk. 

There are three classes of risk for buyers:

• Capacity and Capabilities: Do these firms have the capacity todeliver at sufficient scale and the capability to deliver complicated goods and services? Have they been shut out of so much business previously that they have not been in a position to mature commercially?

• Bona Fides: Are these firms really owned by Indigenous people, or are they just trying to game the system?

• Access to Capital: Is there something about the disadvantage these firms face that makes it more difficult for them to finance themselves, making them riskier as suppliers? For example, Indigenous-owned firms may not be able to obtain credit because of the inability to use property or contracts located in First Nations territory as collateral.

The most competitive Indigenous firms may either end up concealing their provenance or deciding to compete outside of Canada.

With the right policy, Ottawa can help mitigate these risks.

• Capacity and Capabilities:Make data available about the performance of Indigenous businesses on set-aside government contracts. Connect buyers to one another to share market intelligence. Make available a platform for government and commercial buyers to find, engage, and mentor Indigenous-owned suppliers. Connect
Indigenous suppliers to one another for teaming.

• Bona Fides: Set a standard byhaving the federal government impartially verify the Indigenous ownership, control, and management of these suppliers, and vet their commercial qualifications, while sharing this information with buyers. Without a credible, disinterested, and enforceable mechanism for certification, there remains the possibility of buyer skepticism. American law enforcement is rigorous in prosecuting procurement fraud. 

• Access to Capital: Establish working capital financing for contracts into which the government enters with Indigenous-owned firms. Guarantee real property lending to this community by third-party financial institutions. Encourage private
sector sources of working capital finance. Link financing to performance on government contracts.

Ideally, whatever solution the federal government chooses will be extensible to other disadvantaged groups. 

Presumably, there has been pressure on government and commercial buyers to purchase from disadvantaged groups for some time. Their disappointing performance points to the fact that historical approaches, essentially Yellow Pages directories of putatively relevant suppliers vetted opaquely, have been profoundly inadequate. 

Our hypothesis is that buyers have been kept at bay by worries about supplier risk, perceptions that have been exaggerated in a way that government is uniquely positioned to mitigate. 

Failure to deal with these factors after an optimistic, idealistic announcement without material improvement in actual procurement from Indigenous businesses may cement misperceptions of risk for years to come.  

Chand Sooran is the Founder and CEO of EdgeworthBox, which seeks to make it easier for SMEs to sell to corporations and governments. He is a graduate of RMC, Queen’s, and the Massachusetts Institute of Technology