Foreign Affairs Committee on April 23rd, 2012

[The Chair, Conservative, Dean Allison]

Pursuant to Standing Order 108(2), we are continuing our study on the role of the private sector in achieving Canada's international development interests.

I want to thank our two witnesses....

Do you have some news for us?

[Hélène Laverdière, NDP, Laurier—Sainte-Marie, QC]

Thank you, Mr. Chair.

I just have a quick point of order.

I submitted the following motion:

That the committee devote at least one public session to study Canada's position at the United Nations' arms control treaty negotiations, scheduled for February 2012; that the meeting(s) take place before the House rises for the winter break, so the study can be carried out prior to the negotiations; that the witnesses invited to appear at the meeting(s) include representatives from the Control Arms organization and the Department of Foreign Affairs; and that the committee's findings be reported to the House of Commons before it rises for the winter break.

Mr. Chair, when will we be able to discuss this motion?

[The Chair, Conservative, Dean Allison]

I suggest we debate it in our second hour.

[Hélène Laverdière, NDP, Laurier—Sainte-Marie, QC]

Thank you very much.

[The Chair, Conservative, Dean Allison]

Okay. Thank you very much.

Back to the other business we're here for today, I want to thank our two witnesses. We have Mr. Raymond Baker, director of global financial integrity for the Center for International Policy, via video conference from Washington, D.C.

Mr. Baker, welcome.

[Raymond Baker, Director, Global Financial Integrity, Center for International Policy]

Thank you, Mr. Chairman.

[The Chair, Conservative, Dean Allison]

From Canadian Economic Development Assistance for Southern Sudan, we have David Tennant. He is the executive director.

Sir, welcome to you as well.

[David Tennant, Executive Director, Canadian Economic Development Assistance for Southern Sudan]

Thank you, Mr. Chairman.

[The Chair, Conservative, Dean Allison]

Mr. Baker, why don't we start with you? We'll give you 10 minutes. You can give us your opening presentation. We'll then move over to Mr. Tennant. After that we will open it up to discussion and questions.

We'll turn the floor over to Mr. Baker.

[Raymond Baker]

Thank you, Mr. Chairman.

I'm delighted to have an opportunity to appear again before the Standing Committee on Foreign Affairs and International Development. I have for many years greatly admired the work of CIDA and the objectives embodied in CIDA's pursuit of development. We are delighted to have CIDA in the task force on financial integrity and economic development, which we direct.

I'm also pleased to be here with Christopher Lawton, who is an intern at GFI and a graduate student here in Washington. He previously worked in the Canadian government for several years and will be returning there in June.

If I may, Mr. Chairman, I'd like to begin with a story.

I lived for 15 years in Nigeria, buying companies and building a group. In the late 1960s, in the midst of the Nigerian civil war, I had my eyes on a company that I wanted to purchase. It was a company that was owned by an expatriate family. It was a company that had been losing money every year for five years. I offered ten times the book value to buy that company.

Harvard Business School students later studying the case voted unanimously that this was a bad acquisition: I shouldn't buy the company; it was a dog. I had the pleasure of coming down to the front of the class afterwards and saying that not only did we buy it, but we paid off all of its debts in the first year and generous dividends to ourselves for years thereafter.

How did that happen? We purchased raw materials at world market prices. The previous owners of the business had been inflating the cost of their imported raw materials in order to take their profits out of Nigeria. We bought our raw materials at world market prices, earned our profits in Nigeria, and paid taxes on them. Ever since that experience, and many other similar experiences, I've been fascinated by the harm that is done to the capitalist system and to the process of development by the mechanisms through which we shift money across borders.

Now, I don't want anyone to think that I am anti-business. On the contrary, I believe in the free market system. I believe in free trade, free currency convertibility, and free movement of capital. I do add a proviso to that: provided it's legal. It is the illegal components of these financial flows that have fascinated me for many years.

After 35 years in international business, I segued into the think tank community of the Brookings Institution, wrote a book on this subject matter, and then formed Global Financial Integrity. In GFI, we analyze illicit money flowing across borders—illicit financial flows. Our estimate is that approximately $1 trillion a year comes out of developing countries and moves into the richer countries. This money moves through three different means. Some of it is corrupt, that is, it is the proceeds of bribery and theft by government officials. Some is criminal—the proceeds of drug trafficking, racketeering, counterfeiting, and so forth—and some of it is commercial tax evasion.

Many people, particularly in the western press, think this problem is all about corruption in those countries over there. In our analysis, in the cross-border flow of illicit money, the corrupt component is about 3% of the global total. The criminal component is about 30% to 35% of the global total. The commercial tax-evading component, in which we are certainly involved, is about 60% to 65% of the global total.

Now, this reality needs to be taken into consideration when we think about the role of multinational corporations in developing countries. This reality is a key element in our thinking about policy coherence. Policy coherence, of course, is a term that has been around for some years, and what it suggests is that we need to be consistent in the way we promote the activities of our multinational corporations and the way that interfaces with other parts of the policies of governments.

In order to progress policy coherence, I would like to suggest two steps that perhaps impinge upon the hearing we are involved in today.

First, we would urge that extractive industries publish their contracts with developing countries. Whether this can be done retroactively for contracts that are already in place would be problematic, but it certainly is possible to do it with new contracts. With such publication we can avoid a great many of the problems we experience, with strains between multinational corporations and developing countries.

I'll give you an example. There was a copper contract in Zambia under which Zambia received only 3% of the world market price in royalties. A very brave individual named Eva Joly went to Zambia and worked with Zambian officials to declare this contract void, because it was so one-sided. It was such an egregious contract that the contract was upset and renegotiated, and the Zambian government got a much higher percentage.

The second thing we would like to suggest that is relevant to today's hearings is greater transparency in the accounting by multinational corporations for their sales, profits, and taxes paid in developing countries. This really goes beyond the current publish-what-you-pay movement, which is aimed at extractive industries publishing what they pay to governments in royalties, fees, taxes, and so forth.

When we talk about country-by-country reporting, we're talking about something we think should be relevant to all corporations functioning in the developing world. By country-by-country reporting we mean reporting, in each jurisdiction, your sales, profits, and taxes paid. If this were to be required right now, what we would find are many corporations reporting losses or break-even points or very modest profits in a great many developing countries where they operate and at the same time reporting large profits in tax-haven entities where they don't operate. How does this happen? How do you report losses or extremely minimal profits where you have heavy investments and considerable staff and at the same time report high profits in places where you have no facilities and no staff? Of course, it is by taking advantage of the mechanisms available for moving money out of developing countries that this can be accomplished.

Those are just two of the steps that we think can be taken, not only by Canada but by other countries, to improve the relationships of multinational corporations in working with developing countries.

In Global Financial Integrity we are currently undertaking a three-year study, together with a Norwegian research institute and three institutes in the global south—one in Brazil, one in Nigeria, and one in India. We are seeking to analyze the whole of the external equation for economic development for poorer countries. That includes total money into developing countries, total money out of developing countries, and what's left over for developing countries, taking into consideration all licit and illicit flows, such as foreign direct investment, portfolio investment, remittances, hawala transactions, and more. We are seeking to come up with an estimate of the total external equation for development.

Our preliminary data indicates that we will be able to demonstrate quite credibly that the developing world is a creditor to the rest of the world and that there is in fact a net transfer from the developing world to the richer world. This case has already been made quite convincingly concerning Africa. We believe that we will be able to demonstrate it for the developing world as a whole.

This presents the 21st century with a rather large problem: the necessity to curtail illicit money flowing out of developing countries. These illicit funds do not present us with the way to build a secure and growing global market. Our ultimate objective must be to set the conditions for growth and prosperity for all of the world's people.

Thank you, Mr. Chairman.

[The Chair, Conservative, Dean Allison]

Thank you very much. Very interesting thoughts.

We'll look forward to some questions as we move forward.

We're going to now turn it over to Mr. Tennant.

Welcome, sir.

[David Tennant]

Thank you, Mr. Chairman.

Mr. Chairman and members of the committee, on behalf of my organization, Canadian Economic Development Assistance to Southern Sudan, the acronym being CEDASS, I thank you for the opportunity to appear before you to provide our perspective on private sector involvement in developing nations.

Our organization, which has been working in South Sudan since 2006, is 100% populated by volunteers. They receive no stipend for their involvement, and they pay their own travel and accommodation expenses when they travel to the Republic of South Sudan.

The majority of our members are from the business and farm community. Notwithstanding that we are a humanitarian organization, we operate deploying a business model that strives for economic viability and sustainability. The simple answer to the question of private sector involvement is that it is imperative. We should assist countries such as the Republic of South Sudan to build their nation and strive for economic independence, while avoiding the well-intentioned mistakes of the past whereby many developing nations have become dependent on international aid.

Although the answer appears simple, the application is not. Allow me to expand on that, Mr. Chairman.

When I appeared before the committee in 2008, I described a project that we intended to set up, which involved the creation of one of the first mechanized farms in South Sudan. As the committee is aware, the Republic of South Sudan became the newest nation in the world in July of 2011, following a referendum that resulted in over 90% of the South Sudanese population voting for independence from Sudan.

The challenges we have faced would take too much of the committee's time to explain. We have faced everything from tribal violence resulting in our compound being attacked, transportation costs and the existence of no roads, environmental challenges, bird infestations, and funding. Basically, when challenges have existed we have faced them, and more importantly, Mr. Chairman, we have overcome them.

In 2011 we achieved a yield of two tonnes of corn per acre, the highest yield of any farm in the country. This year we are targeting 2.5 to three metric tonnes per acre. If we are able to achieve this, we'll have attained one of our main objectives: economic viability. We will then be able to build on this and increase acreage and yield.

One of our volunteers, Mr. Stu McCutcheon, who farms approximately 2,000 acres in southwestern Ontario, is one of our volunteers who spent four months in the Republic of South Sudan last year. He will return again this year. Mr. McCutcheon believes that with the proper application of pesticide, fertilizer, and the proper seed, we can attain three to 3.5 tonnes per acre, which would then be close to, and in some cases equal to, Canadian standards.

Our other objectives are to train the people in the practical application of mechanized farming using Canadian methodology, provide humanitarian aid to the local population with the construction of a health clinic, and expand the training of the local community using a curriculum developed in Canada and with the approval of local educational authorities.

Our organization has called on the advice of Ridgetown College, for example, with some of our past challenges. We envisage a closer partnership with Canadian and Republic of South Sudan educational institutions to provide the foundation in the agricultural economy. Many of the training programs that exist do not recognize the need for long-term involvement by the student and applying the classroom to the farm.

We have developed a good relationship with the World Food Programme over the past several years. The World Food Programme purchases our harvest through its Purchase for Progress program. They will purchase all we can produce, and have approached us to jointly venture in the construction of a storage facility. This would not only assist us but would serve to protect the crops in the region of Jebel Lado, where we are located.

The challenges we have overcome and the successes we have attained have not been easy, but it is the application of the fundamental business principle of striving to achieve economic viability that has focused us to continually re-examine all aspects of our operation and make changes as required. With economic viability, coupled with these principles, we believe we will achieve another main goal, which is sustainability.

It is worth noting some of the achievements of our operation.

Our tractors and combine harvester have been in Sudan since 2008 and 2009. The tractors and combine were used equipment, sourced and shipped from Canada. As a result of our planned maintenance programs, they are still in good working order. By comparison, new tractors brought in to South Sudan in the past had a failure rate as high as 85% in the first year.

We have developed a pesticide program, which is successfully combatting what one farmer described as the most intrusive weeds he has come across.

We've sourced a Canadian seed that complements a complete nutrition management and fertilizer program.

We've developed a fertilizing program that provides this virgin land with the nitrogen and phosphates required to achieve economically viable yields and to prepare additional acreage for cultivation.

We've trained key people in South Sudan in Canadian farming methods and equipment maintenance. Starting this year, there will be training on budgeting. We're in the process of creating an incentive program for our key in-country people. It will be based on accomplishing targeted yields, maintaining equipment, training members of the local community, and achieving cost budgets. The purpose is to provide them with knowledge of the business aspects of farming. We want to inspire them to develop their entrepreneurial spirit and we want to encourage a private sector mentality. This will again assist us in achieving sustainability.

One objective of any private sector involvement in developing countries must be, first, to create a business that makes money. This sounds obvious. However, we are all aware of businesses in the developed world that fail. The opportunity for failure in developing countries is exponentially higher; therefore, the opportunity for higher returns must be present to encourage investments.

Second is to establish training programs for the indigenous people, with no glass ceiling, so that the opportunity to progress through corporate ranks and/or to start businesses is not only allowed but encouraged. This will require that the host government insist on this type of activity.

Third is to be allowed to operate with a minimum of government interference but with government cooperation in cutting red tape.

Fourth is to target a percentage of the profits of the operation to community programs that benefit indigenous people.

Fifth is to recognize that the long-term benefits, and this is most important, have to be directed to the indigenous people.

The private sector does exist in the Republic of South Sudan. However, in many cases, the international involvement is discouraging. The local personnel are not given the opportunity to be trained. There appear to be no management programs. I am concerned that when the international companies have exhausted their involvement, they will exit with no long-term benefit to the indigenous people.

The potential for an agriculture industry in the Republic of South Sudan is huge. In a country where people are literally starving to death, it is ironic that their country contains thousands upon thousands of arable acres of land capable of sustaining a full range of crops. One only need think of Canada's agricultural industry, which was started by individuals planting small areas, to realize the potential if you have fertile land, rain, and heat.

In our watershed, which runs parallel to the Nile, there are 20,000 acres of arable land. Imagine if in the future we were able to farm this area and yield three tonnes per acre. The Republic of South Sudan's deficit in food this year is estimated to be 450,000 metric tonnes. This area alone could yield 60,000 metric tonnes. The climate allows for the potential of double-cropping, potentially increasing the yield even further.

When you have an economically viable and sustainable industry, it creates many other related jobs and companies that support it.

The traditional form of international aid, while in many cases essential, can keep the local communities from being entrepreneurial. They're at risk of developing a dependency on aid and having the urgency of developing their own industry diminished. We have seen an increase in this attitude since the end of the war and since their own country was established. We are seeing an unfortunate trend towards demanding from the international aid community that they provide their essentials and to provide wages based on their desires, not work performance, that are higher than what other nationals living in the Republic of South Sudan, such as Ugandans, Somalis, Eritreans, and Kenyans, will work for. There are many businesses being started by members of these other communities. We would sooner see the South Sudanese develop these small businesses.

Corruption is a major problem in developing countries, and it is present in the Republic of South Sudan. Many South Sudanese feel that the way to wealth is through government, which can provide opportunities to benefit from corruption. To the credit of the Republic of South Sudan, they have appointed an anti-corruption minister. Their stated policy is to bring those who participate in this activity to justice.

It can, however, be a problem, not only for the private sector but for donor countries. From our limited involvement and experience in this area, we believe that a middle class can be established. Local businesses that are seen to be successful without the use of corruption will then diminish this practice, and ordinary people, just like Canadians, will not tolerate corruption in their political leaders. We need to recognize that corruption is present in all countries, developed and developing alike.

We should not take the self-righteous attitude of using the existence of corruption as an excuse not to help. Rather, we must help to build a legitimate, viable, and sustainable economy that will itself help to control corruption. We have many South Sudanese who yearn for this, and we should do all we can to encourage it.

In the agriculture sector, governments are establishing policies that may inhibit the growth of a viable industry. Some countries have a reluctance to use seeds that are targeted to handle problems specific to geographic locations and on-site problems. As the committee knows, the North American agricultural industry has used hybrid seeds for many, many years, and that contributes to our farmers producing some of the highest yields in the world.

While we do not advocate enforcing our policies on host countries, we should by persuasion be convincing host nations of our proven and accepted methods. Not advocating this and recognizing the yields that exist in these host countries is providing an unsustainable subsidy to the agricultural industry.

The World Food Programme, which encourages local production, is all too often approached by local farmers needing $900 per acre to cover their costs. Our sale price to the World Food Programme last year was $400. The difference is simply yield. If the donor country is providing funds for the creation of a viable and sustainable agriculture, it should not be supporting policies that diminish this potential.

In the last 25 years the international community, to its credit, and as a testament to its generosity, has provided billions, if not trillions, of dollars to this continent. I ask you, has it worked?

In conclusion, Mr. Chairman, we wish to make it clear that we are a small organization with limited resources, but we have a group of very dedicated, passionate, and often stubborn volunteers, who have demonstrated that the private sector mentality, coupled with a desire to assist the people of Sudan in building a nation, can work.

Due to funding restraints we are limited in what we can do, but we know what we have accomplished has benefited the local community. If we had the financial resources available, we would do some of the following: accelerate the training and education programs with the establishment of an on-site training school; expand the acreage under cultivation; promote the potential of agriculture in the Republic of South Sudan to the Canadian agricultural community; and develop community-based programs for health and education.

We hope we will be successful to the point that the South Sudanese can take over the farm and continue to grow what we have started. Our ultimate objective, and may I say dream, Mr. Chairman, is to have the local Sudanese people thank us for our assistance in achieving viability and sustainability and tell us they no longer require our help.

I thank you for the invitation and your attention, and I'm happy to answer any questions.

Thank you, Mr. Chairman.

[The Chair, Conservative, Dean Allison]

Thank you very much.

We're going to start our first round of questions and answers with the opposition.

Madame Laverdière, for seven minutes.

[Hélène Laverdière, NDP, Laurier—Sainte-Marie, QC]

Thank you very much, Mr. Chair.

I also want to thank both of our witnesses for their extremely informative presentations. My first question will be for Mr. Baker.

I was especially struck by something you said.

I'll say it in English. If you don't mind, I'll switch from one language to the other. It's the poor translators who suffer, but my notes are in English.

When you're looking at money going in and out of developing countries and you say that developing countries are our debtors, in a way I think it's quite understandable. The first duty of private companies is to their shareholders, who are usually outside of developing countries.

It reminded me of a French official who was talking about the independence of a specific African country, which I won't name.

He said that had they known how profitable it would be, they would have given the country its independence much sooner.

I don't think we have any problems with private companies making profits and taking these profits out of developing countries, although we'd prefer that they left more.

What we are studying here is the role that private companies can play in development, and I wonder what you would see as the limits of this role. Some private companies build schools or hospitals, but it seems they're not able to build the infrastructure, what I call the legal infrastructure and management infrastructure, which will enable developing countries to provide a counterweight to that effect. This can only be done by a government-to-government kind of assistance.

Am I mistaken?

[Raymond Baker]

No, not at all.

Let me give an example of another company that pays no taxes in Africa. A study was recently done on SABMiller, which is a beer company. It has a number of factories around the world. A study of its activities in Ghana demonstrated that SABMiller reported no profits and paid no taxes in Ghana. This is despite the fact that it is a huge and successful business. How did it do it? It charged a royalty fee for the use of its brand names, which was extraordinarily large. It also charged a management fee to its subsidiary, and that money went to an entity that had no management inputs whatsoever. It was simply two mechanisms by which SABMiller reduced the profits of its entity and showed nothing.

I have no problem with a corporation paying dividends abroad. That's certainly to be understood. What I have a problem with is the use of mechanisms such as I have described to make either no profits or minimal profits or to indeed to have losses, while at the same time, vast amounts of money are shifted out of the continent. That is problematic, and that is the situation we address that needs to be changed.

To the second part of your question, I don't know how private corporations can contribute very much to the development of the legal structure within a country. Yes, they can encourage the development of the legal structure. But in the final analysis, it's not their function; it is the function of government-to-government exchanges.

Corporations run the risk of getting into trouble when their goals go too far beyond their responsibility to produce a product and make a profit. Now, there are some exceptions to that. During the apartheid days in South Africa, a number of corporations did encourage the government to move toward majority rule. In the worst of the HIV/AIDS epidemic in South Africa, many corporations set up their own health systems to help their employees last more than a year or two on the job. But those are things upon which you can attribute a cost-benefit analysis as a corporation.

There are some things that can be done, but I think all of the things corporations do have to be analyzed within that framework: what are the costs and what are the benefits to our primary mission, which is to produce a product and make a profit?

[Paul Dewar, NDP, Ottawa Centre, ON]

My question, Mr. Baker, is to you as well.

I only have a minute to ask a question, so I'll be very direct. Are you in support of the legislation in the States, the Dodd-Frank provision, and is this something you've looked at?

[Raymond Baker]

We are in favour of the Dodd-Frank legislation, which is an extension of the publish-what-you-pay movement. Corporations should account for what they pay abroad. And I think there's a fair amount of agreement to that in many countries around the world.

The complexity in the Dodd-Frank legislation is that it calls for accounting on a project-by-project basis rather than on a country-by-country basis. That's a debatable point. The European Union has not yet moved so much toward project by project as toward country by country. But yes, I think the Dodd-Frank type of legislation and the legislation being considered in the EU Parliament is a step in the right direction.

[The Chair, Conservative, Dean Allison]

Thank you very much.

We're now going to move over to the government side. We have Ms. Brown.

[Lois Brown, Conservative, Newmarket—Aurora, ON]

Thank you very much, Mr. Chair.

Thank you, gentlemen, for being here. This is most interesting, and I think it's really helping us to formulate some of the conclusions that we are looking to put forward in our paper.

Mr. Tennant, you and I had the opportunity to talk in South Sudan, where I became acquainted with the work you're doing there. I want to say thank you. It's been amazing to learn about what you're doing.

That's really my role in my seven minutes. I'm turning this over to Gary Schellenberger, because I know he has lots of questions.

[Gary Schellenberger, Conservative, Perth—Wellington, ON]

Thank you.

Again, thank you for both presentations today. I'm always enlightened by the various views we have.

Mr. Tennant, I have a couple of questions for you. I do know about your project. It wasn't until I saw your name on the docket today that I reflected back to some of the meetings. One meeting, I know, was held around the time when you had I think a tractor that was all in pieces and was put into a crate to be shipped to South Sudan. We don't think about it every day, but it came to me all of a sudden: what has happened in mechanization since that first tractor got there?

I know those things all cost money, so my first question is, how is this project financed?

[David Tennant]

Well, it's very simple, Mr. Schellenberger. Thank you for the question. It is funded by generous Canadians. We raise money. My own company and my family have taken on CEDASS as their charity of choice, and we raise money. It's not easy, because in this world and this economy, there are a lot of calls on charitable dollars.

I think the important thing—and where we differ I think from the traditional form of aid, which I don't discount in any fashion—is that we believe the best way to help people is to give them the opportunity to help themselves. This is why mechanized farming is so important in South Sudan.

The last time we spoke we did move a tractor. Since then, we've moved another tractor. We've moved a combine harvester. We've moved I think about five containers of farming implements and equipment to South Sudan, and the farm is working and it's working well. We have other challenges, there's no question about it, but these trials happen in any business and you plan to re-examine and to overcome.

[Gary Schellenberger, Conservative, Perth—Wellington, ON]

What would it take to bring this project to the next level?

[David Tennant]

I think the next level we would like to see is one where we increase the acreage and develop a training program.

I was interested in Mr. Baker's comments and the question from the MP with respect to what happens in developing nations and the private sector. The reality is that if we can train indigenous people so that they can eventually take over these businesses, that has to be.... Any private sector company that goes into these developing nations must, either by moral persuasion or by legislation, realize that in the developing world the eventual beneficiary has to be the indigenous people.

With I think probably under $700,000 we can move this farm to the point where it is producing and farming 500 acres to 600 acres of land. We believe we can increase the yields to between three tonnes and five tonnes per acre, which is phenomenal, and we have the opportunity to double-crop.

That is what is needed. It is not easy. I spend about 30% to 40% of my day working on it.

[Gary Schellenberger, Conservative, Perth—Wellington, ON]

I do know one thing that happens a lot of times in some of the developing areas is that with the storage of the produce.... Just thinking back, I know there were some real problems with storage. Sometimes the crops are grown but spoil before they can all get to market. Has some of that been corrected?

[David Tennant]

Because of our relationship with the World Food Programme—and we have an extremely good relationship and work very closely with the World Food Programme—when we harvest, they are there within several days to take the produce into Juba, which, as you may know, is the capital city of South Sudan. So we don't have that problem, but the problem will arise.

This is why the World Food Programme has approached us. In a joint venture with us, they want to construct a storage facility that would be used not only for our farm but for other small and larger farms that will be created in the Jebel Lado area.