Finance Committee on Sept. 26th, 2017

[The Chair, Liberal, Wayne Easter]

We'll call the meeting to order.

Pursuant to Standing Order 83.1, we are undertaking pre-budget consultations in advance of the 2018 budget.

I want to thank all the witnesses for coming and also to thank those of you who sent in submissions prior to the middle of August. That's very helpful as well, and those submissions are on people's iPads.

Before we start, let me say that we have a vote at six o'clock. I'm not sure whether we were able to notify everyone in panel two, but I wonder whether we could try to do both panels and be complete at 5:55 p.m. If we started the second panel at 4:45 instead of 5:00, we could do that, because we're not far from the House; otherwise, we're going to have panel members sitting here waiting for half an hour or longer.

Would it be okay to try to do that?

[Some hon. members]

Agreed.

[The Chair, Liberal, Wayne Easter]

I know members are always concise and keep their comments short—not panellists, but members—but maybe they could be a little more concise during this panel. That way, we could make up the time.

Welcome again, and thank you.

We'll start with the Macdonald-Laurier Institute and Mr. Philip Cross, who is a fellow of it.

[Philip Cross, Fellow, Macdonald-Laurier Institute]

Thank you. I'd first like to thank the committee for inviting me back, this time to address the very important question of how to boost innovation in the Canadian economy.

There are as many ways of measuring innovation as there are of defining it, but rather than dwell on how there is no accepted theory or measurement of innovation in economics, I will start by accepting that by almost any measure the Canadian economy lags in innovation.

Just listing the most innovative large companies in the world shows that they are the exclusive domain of the United States: Google, Amazon, Apple, Facebook, Tesla, Microsoft, and so on. These companies dominate and drive the accelerating pace of technological innovation in today's world. This list does not even take into account U.S. dominance of new industries based on fracking and additive manufacturing techniques.

The dominance of American firms partly reflects features unique to American culture—the embrace of entrepreneurship, risk-taking, and the idea that change is inevitable and desirable—that the rest of the world, including Canada, needs to emulate.

Instilling those values, however, will take time. I will instead talk about what Canada can do in the short term to encourage innovation in our economy and our society.

It is worth reflecting on the fact that over half of our economy is either part of the government or is directly regulated by the government. In itself, government spending, including that on health and education, directly accounts for 44% of GDP. On top of this, another 10.5% of the economy is regulated by government, notably by limiting competition in four large industries that account for over 80% of the regulated sector: agriculture, in areas with supply management; finance, in which foreign bank operations in Canada are tightly restricted; telecommunications and broadcasting, with its control on telecom providers and Canadian content rules; and large parts of transportation, notably urban transit, taxis, and the post office. This list does not include sectors of the economy that are insulated from external competition by geography, notably the construction industry.

In a 2014 study for the Macdonald-Laurier Institute, I found that the rationale for regulation in these industries was increasingly outdated. Technological change alone is bypassing regulation in finance and the culture industries. This reflects a persistent weakness in government intervention, which rarely re-examines the rationale behind regulations for its ongoing relevance decades later.

Not very surprisingly, the government and heavily regulated sectors of the economy are not leaders in innovation. This situation reflects the way in which regulation has changed from direct oversight of prices to insulating industries from competition. Recall the list of the leading technological firms. All of them began by challenging or disrupting the conventional business model in their industry. Statistics Canada found that regulation creates barriers to entry and reduces the incentives to innovation and investment, while observing that industries that were deregulated in the 1980s and 1990s posted higher productivity growth than the rest of the business sector.

Some sectors of the Canadian economy have achieved high levels of productivity and hence are competitive on the world stage, notably manufacturing, natural resources, and some parts of retail and wholesale trade. It should not be surprising that export industries, which have to be productive to compete on the world stage, are rarely hampered by government regulation. Each of these industries has seen multifactor productivity growth of 5% to 10% over the past decade alone and has at least doubled productivity since the 1960s. Conversely, productivity has fallen in both transportation and construction, while a small rebound lately in finance still leaves its productivity at almost half its 1960s level.

Related to the lack of innovation in Canada is persistently low levels of business investment. Investment is important, since it embodies the latest technologies and gives our workers the tools to be more productive. Investment in Canada lags behind that of almost all the OECD region. Measured by the share of GDP allocated to investment, Canada invests less than every other country except the United Kingdom, despite the burst of investment in our energy sector—notably the oil sands—over the past decade. This reflects abysmally low levels of investment in machinery and equipment. Canada fares just as badly in the amount of capital each employee has to work with, as its average of almost $9,000 U.S. was third last in the OECD and 50% lower than that in the U.S.

Instead of encouraging more in business investment, Canada seems to be doing everything possible to discourage it. Even as large investments in the oil sands are winding down, there is no offset from pipelines in eastern Canada or LNG terminals on the west coast as regulators dither over approval. Governments across the nation are raising the cost of doing business through higher taxes on everything from carbon to employees to capital.

Taken in isolation, none of these measures may seem significant, but taken together they send the message that there is little understanding in government circles of how the financial performance and reserves of the business sector in Canada have declined in recent years. In such an environment, it should not be surprising that firms are reluctant to invest in Canada. This reduces our ability to innovate and to sustain a high standard of living in the future.

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Cross.

We'll turn now to the Canadian Association of Social Workers and Sally Guy, director of policy and strategy.

Go ahead.

[Sally Guy, Director of Policy and Strategy, Canadian Association of Social Workers]

Thanks very much.

On behalf of our board, and of course the social workers whom we represent across Canada, thank you for inviting the Canadian Association of Social Workers to this consultation.

Social workers know that when people are supported out of poverty, they're happier and healthier, but it's reflected in the economy, too. Dollars in the pockets of Canadians mean more spent on small businesses and in local economies. That's why our first recommendation is the adoption of a universal basic income guarantee—what we call the UBIG—which we think has the potential to be the next leap forward for Canada.

The cost of current income support programs in Canada is close to $200 billion per year. However, these are piecemeal, onerous, and stigmatizing, and they vary from province to province. Ultimately, they are unsuccessful at breaking the cycle of poverty. We know that right now there are 1.2 million children living in poverty in our country.

Until this point, basic income plans in North America have been built around the negative income tax model, which can create the so-called “benefit trap” by making work unattractive. In the model we're proposing, the benefit trap doesn't exist because everyone is awarded the same benefit, with wealth redistributed through progressive taxation. A UBIG model would support the social determinants of health and alleviate administrative burden in the long term. This government has demonstrated that it knows income is important, for instance with the Canada child benefit, and we know lifting people out of poverty helps keep them healthy. It reduces costs in health care and improves mental health, which could in turn help address the absenteeism and presenteeism that are big issues for workplace productivity.

Of course, careful design and implementation that involves all levels of government and includes first nations is going to be crucial, but we believe a UBIG is a cost-effective and socially responsible mechanism through which Canada can ensure dignity for all.

We recommend the federal government take a leadership role in researching and implementing a UBIG. This would move us from a safety net to a floor on which all Canadians can stand, and it's also how we can grow Canada from the inside.

In fact, a recent macroeconomic study by the Roosevelt Institute in the U.S. found that a universal basic income benefit of $1,000 per citizen per month would grow the U.S. economy by $2.5 trillion. As an aside, in November we are releasing a paper on UBIG that outlines more of this, and I would be happy to share that with the clerk once it's published.

We propose that the UBIG be delivered through the lens of our second recommendation, which is the adoption of a new social care act for Canada. This would be made up of 10 principles—not conditions, but principles—similar to those of the Canada Health Act, and could include, for instance, public administration, fairness, and portability, to name a few. This would help guide the Canada social transfer and future social investments.

Again, this government has demonstrated that it cares about equity and accountability, through its bilateral agreements for instance, including the “Common Statement of Principles on Shared Health Priorities”. The act we're proposing will help create the kind of accountability the government is looking for. It would also help guide the provinces and territories in developing policies that best fit their unique needs, while helping the federal government to understand where the dollars are actually being spent in the provinces. It would help foster dialogue around shared issues and best practices, and help produce comparable outcomes across the country.

Our final recommendation is specific to the profession. We recommend that social workers in rural and remote regions be eligible for the Canada student loan forgiveness program. A 2012 CIHI report on rural and remote care in Canada showed that of 11 countries, Canadians waited the longest for care. In light of Canada's particular context, in which indigenous communities are often located in rural and remote areas, already underserved populations are made even more vulnerable.

Social workers are highly trained professionals capable of offering many of the same services as other professions, but often at a lower cost. With their broad skill sets, they provide great value. They can provide casework, assessment, and therapeutic counselling. Additionally, many communities struggle to retain their mental health professionals as they experience that cycling in and out of service providers.

In light of that, eligibility for student loan forgiveness would support social workers to practise in, to stay in, and often to return home to rural and remote communities.

Thank you for your time, and I look forward to questions.

[The Chair, Liberal, Wayne Easter]

Thank you very much, and yes, we'd appreciate that document when it's done.

We're turning now to Canadian Construction Innovations with Mr. Boucher, who is the president, and Mr. Hudock, who is a business development manager. Welcome.

[Pierre Boucher, President, Canadian Construction Innovations]

Thank you, Mr. Chair and members of the committee for giving us this opportunity to provide feedback on federal measures that could make the industry more productive and competitive.

My remarks today will focus on question number two, as it relates quite nicely to the goals that CCI is mandated to accomplish.

At the outset I'd like to underscore that CCI is a multi-stakeholder organization, including all the stakeholders during a construction project, from construction owners all the way to suppliers, manufacturers, and allied industries. This ecosystem that we have put together gives us the strength and the ability to work together and look after the industry so that it realizes its full potential.

By way of background, I think it's important for this committee to understand that historically this industry has an intensity in R and D that is very low—0.06% of GDP. You should also know that its productivity level over the past many years has remained quite stagnant.

There are leaders in the industry. They have their own labs and they do tons of research. There are others that do not hesitate to adopt technologies and processes to stay ahead of the game. The problem in this industry, however, is that systematically there are major impediments that limit their ability to do better. This is where we believe the government can play a significant role. I will speak about those impediments, because they are the source for our guidance concerning where we need to go with those measures that need to be considered.

We have silos in the construction industry. You may have heard about this. The procurement process, together with codes and specifications and contract documents, isolates the members of the value chain and encourages them to work in silos whereby each party focuses on its own scope of work with regard to the project's complexity, rather than on the complexities of the project as a whole. There is a lack of integration. Given that each project is unique and may involve teams that have never worked together or have had little experience working together, it is difficult to create synergy, common platforms, or systems within which all stakeholders are comfortable working together as a group toward one common goal, which is a project.

The traditional method of procurement, which is based on the concept of the lowest qualified bidder being awarded the project, is a major impediment as well. It means that the winning team often does not have the necessary financial margins to face unforeseen conditions that are prevalent in the construction industry. Low bids equate to low-cost, cheaper materials that meet code requirements, and code requirements are the lowest denominator in design performance. Low bids also mean lower wages, and whenever possible, avoiding overtime and premiums, and also aversion to risk, as there's no money available to handle it.

When it comes to risk aversion, the art of submitting a bid in construction is risky enough in itself. There are many factors, such as delays, that can significantly affect a project. Adding risk without proof of concept or means to mitigate it is something the industry is not comfortable with.

Speaking of delays, the World Economic Forum states that worldwide and on an annual basis, delays in issuing permits alone in the construction sector equates to $1.13 trillion a year. Delays cause a significant amount of frustration and at times animosity among the stakeholders, each trying to deliver their scope of work on a very tight schedule. This impacts the availability of tradespeople, material services, cash flow, and the date of completion of the work. This is an area in which improvements are warranted.

Canadian governments have historically made substantial investments in R and D, primarily related to higher education. The Jenkins report suggests that R and D money spent in Canada does not produce the expected return on investment.

The current government has pledged to review the programs in place and has notably increased R and D spending. We hope that revisions will take place with respect to those programs. The uptake of R and D dollars available through various government programs has been low in construction; however, this is changing rapidly because of the involvement of CC Innovations.

The industry stakeholders need proof of concept to mitigate risk and demonstration projects to acquaint themselves with products, materials, processes, and practices. The industry also needs to modernize itself, increase its productivity, and remain competitive, given the flocks of foreign competition coming to our country. The Canadian construction industry can do better on the world stage, but the export of its services starts at home in a favourable environment that is conducive to innovation.

What are the measures that the federal government needs to introduce and implement in support of these desired outcomes?

The World Economic Forum states that Canada ranks 15th out of 144 countries for business competitiveness, 23rd in business sophistication, 27th in corporate R and D spending, 26th in its capacity to innovate, and 30th in being an early adopter of technologies and processes.

That needs to change. We need new measures to change that. The current government wants us to be a world leader in innovation. It's not going to happen with those kinds of rankings that we have in Canada, unless the right measures are put in place.

We have five recommendations to make, Mr. Chair. One is that the government embrace the unique opportunity to partner with the construction ecosystems created by CCI. We have yet to find our home in this government. We are not a commodity. We are a service industry, and it's hard to find someone, somewhere who will champion what we need to offer, but within government. Another time we could give you examples of that.

We need collaboration through the development of industry-led incubators whereby we can identify with experts in the field what needs to be done for this industry to improve its performance. We did approach one department with the suggestion that we create those incubators, and that over a long term we identify projects that will resonate with the purchasers of construction services—that includes the federal government having billions of dollars in assets—and we were turned down.

Another recommendation is that the federal government recognize the funding made available by the provinces and municipalities as matching funds under the supercluster initiative. Again, given the fact that the government is the main beneficiary of innovation in construction, the matching funds required under the supercluster are targeted to industry alone. I think the provincial and municipal governments should be allowed and entitled to spend the money for the projects they want, and that can be attributed as matching funds.

We also suggest, Mr. Chair, that a small percentage of the capital investment of the infrastructure bank be redirected towards a specific fund focused on supporting innovation activities in construction.

The last recommendation is key. We would like the federal government, as a leader, to enable a more agile procurement process so the industry can better respond to the complexities of the projects being tendered. As is the case now, the traditional method of procurement provides very few opportunities to be innovative. The lowest bid—and I might say, some tax measures that we are currently looking at—will do nothing for innovation.

Canada has a unique opportunity to be a major global leader in modern construction practices and a significant exporter of construction services to rapidly developing nations around the world. To achieve this, it is of the utmost importance that we work together to address those challenges, and that we put new, disruptive government measures in place to make this happen.

[The Chair, Liberal, Wayne Easter]

Thank you very much. There are some intriguing ideas there.

We now turn to Mr. Rothschild, president of the Canada-Israel Industrial Research and Development Foundation. Welcome.

[Dr. Henri Rothschild, President, Canada-Israel Industrial Research and Development Foundation]

Thank you. We appreciate the opportunity to present our views to the committee as it prepares its recommendations to the Minister of Finance in the context of pre-budget consultations.

We're an organization established by a bilateral treaty between Canada and Israel aimed at promoting mutually reinforcing company-to-company collaboration in R and D. Our presentation relates to what Canada can learn from the success of Israel in nurturing the growth of one of the world's most robust economies on a platform of technological innovation.

Time limits don't allow for discussion of the fast and constant pace of change characterizing the digital economy and the enormous challenge that all governments face in designing the right innovation support programs relevant to the challenges faced by companies today, in reading changes as they occur, and in adjusting quickly and effectively so that they remain relevant to the challenges faced by companies tomorrow.

By all measures, the State of Israel has had tremendous success in this arena. How can we learn from it? We suggest not to pick and choose one or more of its many successful programs and test the programs' applicability to Canada, but rather to look at the essence of the Israeli approach to the challenge.

About 40 years ago the Government of Israel came to the realization that its main natural resource was the talent pool of its youth, and especially the particular talent that emerged from the specialized training that the brightest of them received in the course of their national service, this being complemented by its research-based universities, already judged to be world-class. That time also coincided with the early beginnings of the growing power of information and communications technology and the eventual major transformation it would bring to the global economy.

The result of that realization was the establishment of the Office of the Chief Scientist, now called the Israel Innovation Authority, a unique instrument dedicated to translating the technological brainpower of Israel into commercial strengths. Its uniqueness is attributable to the following.

Mr. Chairman, I'm going to use the word “serious” a lot, for reasons that I hope will be self-explanatory.

First, it was given serious funding. For example, over the last 10 years the annual budget has hovered around 2 billion Israeli shekels. Converting to Canadian dollars and multiplying by five to adjust on the basis of relative GDP, it would signify a Canadian equivalent of almost $3 billion annually.

By the way, I'm not recommending this for Canada; I'm just giving you a sense of the seriousness.

Second, it was given a serious mandate, in the sense that its core programs were enshrined in the law of the Knesset, the parliament of Israel.

Third, it was given serious flexibility, in the sense that it could, within its overall budget and adherence to the R and D law, reallocate and redesign its support for industrial R and D according to the changing scene.

Fourth, it ensured the recruitment of serious management at both the executive level and, just as important, at the level of technological and business assessment.

Finally, it benefited from constant political support over the long haul and across a very wide political spectrum. In Israel, innovation is not a sideshow, nor is it an occasional feature of a particular budget.

Through this office, Israel also addressed a major weakness. Recognizing that still today most trade is very regional, and also recognizing the reality of Israeli regional isolation, through this office Israel began to build a network of global alliances with the key economies of the world, alliances based on industrial R and D co-operation.

Because Israel has consistently been a world leader in key enabling technologies, co-operation with it was not a hard sell, with the result that Israel now has serious alliances flourishing with 30 to 40 countries. Of note is the surge in technological and resulting economic co-operation between Israel and China, South Korea, India, Japan, and Singapore, joining the already partnered European Union and the United States in this now truly global network.

No other country in the world has established such important and vital connections, and Canada, through our organization, is part of this program. Our record of resulting value to the Canadian economy is reflected in the brief we tabled before this committee.

The Israeli approach has thus delivered impressive results, including early support of their start-ups and mid-sized technology-based companies in conducting high-risk research, connecting them to partners in markets around the world. As a result, this has branded Israel as having a wealth of talent, attracting a glittering array of multinationals to establish important development centres. These include Intel, Microsoft, Google, Takeda, Mitsubishi, Dell, Deutsche Telekom, Apple, and scores more.

Despite Israel's being known as the “start-up nation”, these multinationals now account for 50% of the tech-based employment in Israel. This is reflected in the highest R and D per GDP globally. Through sound and serious innovation strategy, Israel has turned adversity into resilience and strength.

The lesson for Canada is to treat these matters with its own serious commitments that support dedicated instruments having secure finances and the organizational flexibility to manage and respond to the changing scene. The establishment of Innovation Canada is a very good start and augurs well for our country's ability to learn from Israel's successful experience.

Finally, given the enormity of the challenge and the value of the Israeli experience, we recommend that this committee recommend to the Minister of Finance that he support and encourage Innovation Canada to enter into a strategic partnership with the Israel Innovation Authority by building on the current bilateral co-operation platform. It would be a hugely cost-effective way to provide first-hand knowledge, insight, and invaluable experience for the design of Canada's future domestic and international innovation programs.

In the end, it will be Canadian tech-based companies that will benefit, as will our brand globally, not to mention our important bilateral relations.

Thank you very much.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Rothschild.

We'll turn to Ron Lemaire, president of the Canadian Produce Marketing Association. Welcome, Ron.

[Ron Lemaire, President, Canadian Produce Marketing Association]

Thank you, Mr. Chair, and thank you to the committee for inviting me to speak today about budget 2018.

The Canadian Produce Marketing Association is a 93-year-old trade association representing over 840 companies across the fruit and vegetable supply chain from farm gate to dinner plate. As an industry, we have an economic impact of $15.7 billion on Canada's GDP. We support over 180,000 jobs across the country, and our companies provide approximately $4 billion a year in taxes to the federal and provincial governments. We're proud to play a role in local communities, and in providing Canadian consumers with healthy, safe, and nutritious fruit and vegetables year-round.

Budget 2018 can capitalize on the momentum established by budget 2017 by making investments in critical areas that can bolster the productivity and competitiveness of the fresh fruit and vegetable industry in Canada. In particular, my comments today will focus on four key areas: labour, international trade, research and innovation, and financial risk mitigation.

Labour remains an ongoing challenge for agriculture as a whole, and it's particularly acute for horticulture. It is essential that the government implement innovative solutions to our labour shortage by improving the seasonal agricultural worker program, or SAWP.

We are asking the government to introduce the trusted employer program, which would expedite the hiring process for qualified employers who have maintained a good standing with SAWP over the years. This would greatly reduce red tape and the administrative burden on farmers who have proven themselves as high-quality employers, while addressing a major need for our industry.

Additionally, we are asking the government to improve SAWP by allowing employers who have SAWP placements approved by Service Canada to not need to reapply for their placement if the intended seasonal foreign worker is unable to complete the service.

Combined, these recommendations will help address serious labour issues for our industry. Fundamentally, we can either import labour, or we can import produce that we can traditionally grow here in Canada. Importing produce would mean losing jobs and impacting rural Canada and our entire supply chain.

In the area of international trade, the CPMA and its members fully support the government's push for trade diversification and its goal of achieving $75 billion annually in agri-food exports by 2025, as outlined in budget 2017. To do so, we call on the government to fully implement all recommendations stemming from the May 2017 market access report released by the Standing Senate Committee on Agriculture and Forestry. These recommendations will strengthen the industry's position and provide it with the support it needs to grow and be competitive within international markets.

I'd like to turn now to research and innovation.

To better support the initiatives of the fresh produce industry, the government should defer to industry associations in establishing key research innovation priorities based on their expert knowledge of that sector. Ideally, industry associations should be able to provide letters of support for private-sector research innovation funding applications, outlining how the proposed initiative is aligned with pre-established priorities.

Furthermore, as part of its innovation agenda, the government should develop a commercialization funding strategy in order to help bring new products to market and grow the Canadian economy. While many funding mechanisms exist for initial-stage research and development of products, our industry has not been able to access the same kind of funding for the commercialization of research or innovation. Such a strategy would greatly benefit both the industry and consumers.

Finally, I'd like to touch on an issue that has been discussed for the past 35 years by governments of every stripe, including the current government: the creation of a PACA-like deemed trust in Canada and the restoration of Canada's preferential access to the U.S. PACA dispute resolution mechanism.

Prior to October 2014, Canada was the only country in the world whose fresh fruit and vegetable sellers could pay the same nominal amount as U.S. organizations to use the PACA dispute resolution mechanism in cases of no pay or slow pay by an American buyer.

The U.S. government revoked our preferential access since we lacked the reciprocity in terms of a deemed trust in cases of bankruptcy. Canadian sellers now using the PACA dispute resolution mechanism in the U.S. must post a bond totalling 200% of the total claim against the buyer. For many sellers, this is simply not financially viable, and they have had to write off the amount owed as monies lost.

The creation of a PACA-like deemed trust in Canada is a no-cost legislative solution that would benefit sellers in cases involving bankruptcy with a Canadian buyer, while also restoring Canada's preferential access to the U.S. PACA dispute resolution mechanism.

Indeed, this issue was thoroughly studied by the House's Standing Committee on Agriculture and Agri-food in June 2016. It unanimously called on the government to create a PACA-like deemed trust. Unfortunately, no action has been taken to date, but we remain committed to working with Minister Bains and Minister McCauley on creating such a trust in Canada to restore our industry's competitive advantage when trading with the U.S.

In closing, thank you again to the committee for inviting me to speak. The CPMA is committed to working with the government on all of these issues, and on others as they become relevant. We hope to see an outstanding budget in 2018, supporting our businesses and our future.

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you, Ron.

With respect to the PACA, have any organizations put forward that proposal to the NAFTA negotiators, by chance?

[Ron Lemaire]

Actually, we just came from NAFTA negotiations in the stakeholders room, and I was in Washington, D.C., last week speaking with allied partners in the U.S. We understand that the U.S. industry is strongly suggesting to their government that this should be part of negotiations. We haven't seen any significant text from the U.S. as of yet, but we understand that the U.S. industry is pushing strongly.

[The Chair, Liberal, Wayne Easter]

Okay. On a proposal that would be helpful to us and PACA as well...?

[Ron Lemaire]

I'm sorry?

[The Chair, Liberal, Wayne Easter]

You're saying that they are pushing strongly for something we're asking for, along the lines of PACA.

[Ron Lemaire]

We're in a unique position in that they're pushing strongly, we want something, and it can be a win-win for everyone. Especially within a NAFTA discussion in which the current administration south of the border needs a win, this could be seen very favourably within a political environment.

[The Chair, Liberal, Wayne Easter]

Thank you.

If we're going to be able to start the next panel at 4:45, we'll go to five-minute questions, starting with Ms. O'Connell.

[Jennifer O'Connell, Liberal, Pickering—Uxbridge, ON]

Thank you all for your submissions. I won't have time to ask you all questions, but I'm sure my colleagues will.

Mr. Rothschild, I've been intrigued by the Israeli success in innovation and investment. One area I want to talk about concerns the structures by which the investments—you said it was equivalent to about $3 billion Canadian—are made to start-ups or for firms, and how these structures and contracts work.

One of Canada's challenges—we've heard it even on this panel—is commercialization and the risk-taking and funding of something that may succeed or may not. I understand that Israel has a much different culture in terms of risk-taking on the commercialization side.

Can you speak to the way the investments are made and how the structures are set up so that there is an acceptance by society, essentially, to make these investments even if they're risky?

[Dr. Henri Rothschild]

As you noted, there's a different culture in terms of risk-taking. The Office of the Chief Scientist, now known as the Israel Innovation Authority, typically, in the portfolio of thousands of Israeli companies that it supports.... Its core program, just to be clear, is to provide grants achieving up to 50% of the value of R and D. If the R and D is very risky but also has the potential to make sea changes in the positioning of that company, this is seen as the role of government. Clearly, most of those investments will fail, and that's because high-risk R and D is what it is. It does not achieve the intended objective.

The idea is that at any one time 5% of the investments of the chief scientist's or the authority's office are complete successes, meaning that the companies have been able to grow to the point that they reach the next level—from start-up to scale-up, or from scale-up to medium-sized companies, or whatever—or they have achieved some significant increase in market share and that sort of thing. That's only 5%.

Another 45% have failed, period, and 50% is work in progress, with most of the investments failing. The important thing, however, is that failed ones do not mean a failure, because the entrepreneur who is supported gets incredible experience, dusts himself or herself off, and tries again. The talent pool that is created by enabling this risk-taking by these entrepreneurs is what has attracted all these multinationals to Israel.

As Canada seeks to attract, for example, the next Amazon centre into this country, what is the main selling point for anyone trying to attract these large companies and create these high-value jobs in a country such as Canada? It's simple. It's the talent pool. You go where the best talent pool is.

It's this kind of sharing of risk, standing shoulder to shoulder, and accepting failure as not a failure in itself but as a failure in achieving the intended objectives that is one of the hallmarks of that organization.

In our country, too often we allow criticism of our programs and our program deliverers on the basis of those numbers. If we were to show those numbers, say five years from now, in our clusters strategy, most of the media in Canada would say it failed, yet it hasn't necessarily. We need to basically push back on this idea that a failure to reach the intended objective is a failure in advancing an innovation economy.

I don't know whether I have answered your question.

[Jennifer O'Connell, Liberal, Pickering—Uxbridge, ON]

I just want to follow up on this.

This is obviously a key part of the culture of entrepreneurs and commercialization and pushing innovation forward, but on the economic side, it's my understanding—correct me, if I'm wrong—that even for the 5% that are successful, there are structures built in. The government has received some of the benefit of the success, which then goes to fund the future grants and future endeavours.

[Dr. Henri Rothschild]

To a large degree, that's true but not totally. You're quite right that the government receives funding repayment in the event of success, but it is not a business, and if the refunding is too high, it means that the risk wasn't high enough. It's the role of government to share in risk. It's not to run a venture capital business. If it were to do that, it would get into the venture capital industry.

Having said that, the economic returns to Israel have been incredible. I want to cite just one example. About 20 to 25 years ago, this office, through its specialized antennae, realized that you cannot grow a digital economy without a robust venture capital industry. A venture capital industry, however, can't grow out of nothing, so the government took incredible risks in putting in $100 million U.S.—in those days—to help the VC industry.

Within five years, Israel had become the world's third-largest centre, in absolute terms—remember, it's a very small country—in venture capital investment. The return to the Israeli economy was thus enormous, far greater than simply retrieving its $100 million back, which it did, by the way.

[The Chair, Liberal, Wayne Easter]

Thanks, Jennifer.

Mr. Albas.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Thank you to all of our witnesses for your testimony here today. I always try to learn something new, and each one of you brings a lot.

I'm also going to start with Mr. Rothschild, with regard to building an environment in which businesses feel that they can take risks.

I've been talking to a lot of small businesses. There was a high-tech entrepreneur in New Brunswick. She could be anywhere, but she is being faced with new rules that basically make it more difficult for people such as her parents and in-laws, who provided her start-up capital. Obviously the tax changes that the government is proposing make it much more difficult for start-ups to capitalize.

Do you think it's going to be a challenge to seeing more venture capital work done with Israel, if we don't have a start-up community that feels supported?