Subcommittee on Canadian Industrial Sectors Committee on May 14th, 2009

[Peter Brenders]

That's exactly right. On the credit side, Canada's scientific research and experimental development or SR and ED tax credit program is by and large a good program. It's a very good program for emerging companies that are Canadian-controlled private companies, CCPCs. The reason it's very good for them is that they get a refundable credit of 35% of their expenditures: they get cash back, and that helps feed into maintaining it.

The problem with that program is that it's only CCPC companies that get it. Many companies have gone for foreign direct investment, so they lose the CCPC status. They may have gone public and have done an initial public offering, a small IPO for a couple of million dollars; they lose that credit. In exchange, when they lose it, they only get a 20% future tax credit. Well, these companies aren't paying taxes; they want to get to that stage.

So our recommendation is to change this to make that money refundable to all companies in that same stage, no matter who owns them. You only get that credit if you do the work in Canada, so it's Canadian jobs that it's focused on. It gives the incentive to do work in Canada.

That's a nice change. It will take a little longer to see that money track back into companies, but they can apply for loans against it, because they know it's going to come, and they can get an advance. That helps.

The second recommendation we had is about how to give companies.... Traditionally, as Bernard mentioned, companies don't go to banks for loans; they rely on venture capital markets. Our point is that they're sitting on a lot of tax losses, so instead of having some multinational buy them for those tax losses and the government paying for nothing, really, why don't we give them an advance, a loan against those tax losses, and hold them as collateral? That way, we'll put the money quickly into companies, today. They can keep spending it—we give them a requirement that they spend it on R and D—and it keeps them going as we get through this credit crisis and allows them to capture other R and D credits later.

This could be very quick, because the companies all have their audited statements. The CRA, the revenue agency, knows what everyone's accumulated tax losses are. You basically can figure out exactly how much of a loan a company would qualify for. There's a way you can administratively make it very quick to put some cash in. You can't get any more “shovel ready”, because those jobs are still here; we just want to keep them.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

Mr. Courtois, you talked about emerging countries. You said that there are countries that are investing heavily. Is Canada losing ground in the field of technology you represent?

[Bernard Courtois]

Yes and no. With regard to innovation and productivity, we are losing ground vis-à-vis the United States, and this has been the case for twenty years. People are confused but this is widening the prosperity gap between Canada and the United States. Given what is happening throughout the world and the fact that the crisis we are experiencing is transforming the global economy, there will be a difference between those countries that will come out stronger and those that will not. The weakness with regard to innovation is very worrisome.

With regard to technology in our industry, our Canadian businesses have remained excellent and strong as far as the quality of the technology is concerned. However, in the case of the smaller companies that should be moving into their phase of stronger growth, there are weaknesses in the areas of management, marketing and business development. We are very solid on the technology side, but less so on the marketing side.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

Thank you very much.

[Hicham Adra]

If I may add to that, I do agree that we have a lot of advantages in this country, and we do have leadership, in many cases. I think we tend probably to underpromise and overdeliver, as an industry and as Canadian corporations across the world. But this is a race without a finish, so if you are not advancing every day, you will end up losing; we will end up lagging.

So we see some differences in how other jurisdictions or countries are adopting technology, how they are taking risks, and how technology is driving productivity. When you look at other sectors in the U.S., for example—manufacturing, financial services, and all sectors of the economy—there is greater use of technology. So it is not a coincidence that they do have higher productivity, which drives a better and stronger economy higher.

We really do have huge potential. It is an industry that's basically brains-based. It is not a polluting industry, as such. It's our strength: it's education; it's people; it's talent. We have a huge opportunity, but we are missing, I believe, this opportunity to really be a leader.

The opportunity for us, I think, as a country is to say that we will have a policy stating that we will lead in this area. We will have a ICT strategy that is national one and that says, this sector is an important sector for us, and this is our strategy for attaining and sustaining leadership in this area. We will have a policy that says, we, as government, will be leaders in the adoption of technology to drive our own transformation, to drive our own efficiencies, to ensure that we do become effective, and that in our services to our citizens and our businesses—government to citizen, and government to business—we are leaders in innovation.

Canada was recognized as a leader in government, but are we sustaining that advantage? Are we making further investments to stay a leader?

[The Chair, Conservative, Dave Van Kesteren]

Mr. Lake.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Thank you, Mr. Chair.

Thank you so much for being here today. It is really interesting to hear what you have to say.

This last little bit of discussion has been particularly interesting. As governments, we have choices that we have to make, just as your members do in terms of the investments they make, which I think one of you touched on in your opening statement.

There are several focuses of this government, not only on the industries and issues that you represent, but on the overall economy as well. We've made a fairly significant investment in science and technology. We have the science and technology strategy. We have the STIC council that, I think, is a big step forward. They came out with their report, which one of you referenced. There are significant dollars flowing within the infrastructure program to university infrastructure, and also to the Canada excellence research chairs, Vanier scholarships, and programs like those.

At the same time, we have a fiscal situation in this country that is really the envy of most industrialized countries in the world. We're the only G8 country that ran a surplus in each of the last three years; every one of the other G8 countries ran deficits in every one of those three years.

There's a lot of reference made to the American situation. I'm not sure if this is still a valid number, but I think the number that I've heard for the American deficit is $1.75 trillion. If you were to equate that in Canadian terms per capita, we'd be running a $175 billion deficit this year. Obviously we are substantially lower than that; I think $34 billion is the number that we're talking about in regard to our programs here.

Those types of things have led to some long-term stability, I think, for Canada moving forward, as we move through this situation that other countries don't have. We're able to move, for example, to get our corporate tax rate down to 15%. We've been talking about trying to get the overall tax rate down to 25% across the country, putting us in a much better position in terms of Canada's long-term benefit and ability to host successful, growing companies, and all of the high-paying jobs those companies offer, which we are in a much better position to do because of the many steps we're talking about.

Maybe you could again comment a little bit on the importance of that long-term stability. We've talked about the structural versus cyclical challenges, and both of the industries you represent are what I would characterize as structurally strong. Moving forward, there will be tremendous opportunities in both industries you're talking about.

How important is that stability here in Canada? How important is a favourable tax structure, keeping the taxes down generally and creating that competitive environment? And how important to your organizations are the changes we've made to the foreign investment and competition laws?

[Bernard Courtois]

Those are all elements that position Canada well to develop a strategy to improve its game, improve its position as the world digs itself out of this recession.

As you pointed out, the U.S. is going to face very serious fiscal challenges that will affect its ability to treat taxation on investment and on individuals, that affect its ability to spend in the right way to strengthen its economy.

We like the government's Advantage Canada strategy. We like the very notion of focusing on advantages. We have to look very hard at capitalizing on our advantages and aggressively pursuing them so that something fundamental is changing now in this year. It's a good time to ask, with these changed circumstances, how can we wrap together the various things we are doing?

We're investing in science and technology. We have a good capacity in technology. We're lowering our taxes on investment quite significantly, both at the federal level and the provincial level. We're now much more competitive on that. Our fiscal position is a fundamental advantage, as are the stability of our society, the attractiveness of our quality of life, the stability and quality of our legal and regulatory regime, even though we have to re-think it again. The world is changing so much. We have a lot of our regulatory regime that's based in the pre-Internet era, and that kind of thing.

What we have is a lot of very good things that we've been doing, and an extraordinary opportunity to look at that in a period of tremendous change. How do we wrap that together in a package now that reflects the future and innovation-based recovery that will really...? Let's capitalize, let's use this crisis to step ourselves up in the global situation.

We know, for example, that people say sometimes that Canada is not well known for innovation and technology. Well, we just need to dig out our BlackBerrys to know. And there are many other examples. Our reputation around the world in e-government is there. It's getting a little thin, because we have not been driving that as an explicit goal for our government. There are all kinds of things we can do now to wrap these things together in a strategy. That's why we've been raising the issue of an ICT strategy that is not so much about our industry but about capitalizing on technology and innovation to drive Canada's future success.

[Peter Brenders]

If I may, I'll just echo Bernard's comments.

On Monday this week, we launched a document, a Canadian blueprint we called Beyond Moose and Mountains. We made the name on that one because we're tired of people not seeing Canada's innovation. We're tired of not being seen in terms of the technology and the footprint that we contribute out there. We're bigger than that, and it goes beyond that. As part of the board and part of the consultation we did last year with the industry, not only do we think as Canada we can be sold as more than that, we think Canada can be a leader in the bio-based economy. Biotechnology represents probably around 6.4% of GDP in Canada today, if you think of the industries that rely on it, use it, develop it, and whatnot. It's a little over 8.5% in the U.S., but we're better than some countries, and not as good as others.

We believe if we set ourselves a goal—a big, hairy, audacious goal, if you will—Canada can be the world's leading bio-based economy. We have the science, we have the research, we have the companies, we have the biomass. What we're missing is sort of the focus to actually want it, to achieve that, that whether it's core science and tech, as a nation we're going to be out there. As an industry, we believe we can do that.

So what does it take? It is the tax rate, it's the environment. We think it's three things. It doesn't matter what sector you pick on that one, it has to be globally competitive. It is that capital market—whether it's taxation to operate, it is the environment to generate new capital, the new investments. Are we the most competitive in the world in these areas? There are things we can change. It will take us time, but if we have a goal to get there, we win.

The second area is people. Do we have the best talent? We have some good talent out there, but we see people leave. Do they come in? How do we have the most competitive environment in the world to attract and retain talent, let alone build it? Are we changing our school programs to be innovative? We talk a good game, but do we really mean it and want to change it?

The third area is the operating environment. We have good regulatory structures that we've put in place for different reasons, but are they incented to spur on innovation, or are they more road blocks? There are changes we can make if we really want an innovative society. It's not just tax; it is tax, but it's also the operating environment and the people behind that one.

We need to align it all and to always be focused on that, asking the question, does this help innovation? If the answer is no, then why are we doing it?

[The Chair, Conservative, Dave Van Kesteren]

Your question will have to be really short.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

I do have one question in particular for the biotech folks.

You talk about the six-month and one-year cash on hand that companies have now. I would guess that in your industry in particular, there's sort of a normal situation in that area: people who are starting, drawing in money from family members and things, and eventually that becomes pretty tight.

[Peter Brenders]

Yes.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

So how much of that would be normal?

[Peter Brenders]

Normally you'd find about a quarter of companies, 25%, would have a year of cash on hand. That's a pretty normal operating environment to go through in an emerging stage, and they're always looking for that next round of financing. The difference here is not only do we have way more that are in those dire straits but the hope of actually raising new capital is much diminished. There isn't a typical market to go for.

[The Chair, Conservative, Dave Van Kesteren]

Thank you, Mr. Brenders.

Mr. Thibeault.

[Glenn Thibeault, NDP, Sudbury, ON]

Thank you, Mr. Chair.

Gentlemen, thank you for coming today. Your presentations were fantastic, especially for those who want to learn a little more about high tech.

Mr. Engelhardt, one of the things I found interesting about your presentation was how you talked about the high tech and it went from health to biofuels to food safety. I'd like to hear a little more about that. But at the same time, going into the question we just heard Mr. Lake speak about, we've got six months for many of these great organizations, great companies in Canada that may not be around by the end of 2009. What does that do to Canada on the world stage when it comes to our high-tech industry, and will we be seeing the loss of innovation when it comes to the things we all know we need, like biofuels or better foods? How is that going to impact us on the world stage and just as Canadians?

[Dr. Rainer Engelhardt]

Thank you. On the first question, biology is a knowledge base, a broad knowledge base in a modern context—generally speaking, molecular biology—that underlies development of products in those seemingly almost unrelated sectors. When you talk biofuels, there's a bio component, right? When we talk about alternative materials for Mercedes fenders, that actually is a biological product. Everybody understands the health one, and that's really our history as a sector within the country, and it continues strongly.

So it is just that: the science part is biologically driven, molecularly driven, biochemically driven science that underlies, no matter where that diversity of application happens, and Canada is active in all those sectors I've mentioned. What's on your plate? What's in your car? What is the pill you take in order to stay healthy? We've made major, major contributions in the world to that. The newer biotechnology, from a time perspective, is really the non-health side of biotechnology. Canada is actively engaged, broadly speaking, in having products that are ready to go into the market, or that are early in the market, or that will come into the market in the future.

That's where the threat lies. In the whole world there is a greening going on, as we know and we all support for various reasons, and it is generally accepted in the world that a bio-based economy—that means a knowledge-based economy, not just growing more corn to sell off as a feedstock—is going to be the hallmark of an economically successful country in the future.

[Peter Brenders]

If I might add to that, to talk about “what happens if”, what we're seeing globally is that many nations of the world, formerly developing nations, are working hard to have what we have. They're investing billions of dollars to become competitive, because they can. You don't have to dig it out of the ground. You just have to train your people. Any country in the world can compete, and they're all trying to compete in this space.

The risk for us is that as we lose these companies, if they scale back or they go under or they leave the country for other jurisdictions that have funding to deal with that one, in a way we're kind of pushing...where we expect ourselves to be, worst case, is back 15 years. It's almost like rebooting the whole sector; we're going to start over again.

The difference this time, if we're starting over, is that 15 years ago when BIOTEC was getting going, there were a few developing nations. We had great science; we were it out there—us, the U.S., and Europe on that one. It's a totally different competition world today, and we'd be starting over in a much more competitive environment. It's going to be harder for us to recapture.

In other words, does that mean we'll never see these technologies come to Canada? No, they'll be developed elsewhere in the world, but it will be like everything else: we'll buy someone else's finished goods instead of capturing the value at home.

[Dr. Rainer Engelhardt]

We all know the expression “throwing good money after bad”. That is not what the situation is in biology. The good money that was spent and has been spent in support of research and development by the government through grant programs has led to good innovation. That needs to be captured. Our proposal is to spend more good money, ultimately.

[Glenn Thibeault, NDP, Sudbury, ON]

That leads to the statement you brought forward: recovery through innovation.

[Dr. Rainer Engelhardt]

Correct.

[Glenn Thibeault, NDP, Sudbury, ON]

We all know that we need to do something. You mentioned greening. We also know that we need to have a strong economy. As politicians, we sit around and we ask these questions, but ultimately, we're relying on the high-tech sector to make sure that 20 years from now, my daughter—who's five—won't have to walk around with an air mask to breathe. It starts to get worrisome. I think all Canadians should be worried if we're seeing that 50% of our high-tech companies will potentially be gone by the end of 2009.

I think you brought forward a three-point plan. But what else do you think we should be doing as parliamentarians and as a government to support the high-tech sector?

[Bernard Courtois]

I would say that we've touched on a number of aspects, but the big-picture one is perhaps the most important of all. Let's start with the most important.

The world will dig out of this recession, and the last thing you want is to look back a couple of years from now and say that Canada had all these assets, and we were complacent. Other countries really drove themselves to succeed, and others, who didn't, sort of fell below. We should be in a unique position to capitalize on our assets.

We know that we need to drive more innovation. We know that we're an underuser of innovation. Some of that is just focusing the national will on the issue. I would like to hear more industries talk like our biotech industry and say that we think we can lead on innovation; we think we can lead on technology. That's actually true of a whole lot of sectors in our country.

As far as the ICT sector is concerned, we'd be happy if the entire Canadian economy would focus on success based on technology, which we can do. It's a natural thing for us to do. Then we'd be happy to ride the coattails of that. We know we're a driver and an enabler of that, and we'd like to promote that.

Some of it is expressing leadership on your part. Some of it is business stepping up to the plate. Some of it is looking at all the good policy tools we have and wrapping them together more aggressively, in light of the current environment, to come out on top.

[Glenn Thibeault, NDP, Sudbury, ON]

Have we done enough right now to create that environment?

[Bernard Courtois]

You've done a lot of the very good pieces. What's needed now is to say, okay, if the future is innovation and the knowledge economy, even in our traditional industries, how do we take a fresh look at that and wrap that together as a package?

Little things will come up. Our talent strategy, commercialization, government as lead user—we were a little complacent there.... We should be in a great position. The things that need to be done are not humongous and do not need anywhere near the kind of money needed to deal with some of the major issues we have here.

There are all kinds of things Canada actually can and should take advantage of in its position.