Finance Committee on Sept. 21st, 2016

[Doug Zolinsky, Acting Assistant Deputy Minister, Saskatchewan Region, Department of Western Economic Diversification]

Thank you, Mr. Chairman. It's a pleasure to be here today.

Good afternoon. My name is Doug Zolinsky. I am the acting assistant deputy minister for Western Economic Diversification's regional office in Saskatchewan. My colleague James Meddings is our ADM of policy and strategic direction. Rhonda Laing is our director for policy, planning and external relations for the Saskatchewan region.

I will speak to the economic conditions in Saskatchewan, but I should first note that Western Economic Diversification Canada, or WED, has a strong presence in Saskatchewan and close ties with provincial counterparts, Saskatchewan's business community, indigenous organizations, and other stakeholders. This supports the department's role in providing regional intelligence and strategic advice, convening regional stakeholders, and supporting regionally sensitive economic development.

Let me tell you a bit about Saskatchewan. Saskatchewan has a total population of 1.14 million. The population is young, and it has been growing since 2007, reversing a decade-long decline and breaking away from relatively flat population growth since the 1930s. Saskatchewan has a large indigenous community. As of the last census count in 2011, 15.6% of Saskatchewan's population was indigenous, and first nations children aged 14 and under represent one-fifth of all children in the province.

Saskatchewan has a diverse range of natural resource endowments, including oil and gas, potash, and uranium, and Saskatchewan is also Canada's largest agrifood producer. Natural resources are key economic drivers. The province's largest industry is the oil and gas sector, which accounts for roughly 15% of Saskatchewan's GDP. Collectively, primary resource production accounts for roughly 27% of the province's real GDP, which totalled $58.5 billion in 2015.

Saskatchewan has undergone significant changes in the past decade. Until recently, Saskatchewan was enjoying particularly strong economic growth due to a commodity boom starting around 2002. This was related to rapid industrialization in China and other developing countries, which increased demand for raw materials and Saskatchewan's resources. A number of factors, including slowing growth in China and other emerging economies and strong global supply, have since put downward pressure on the price of a number of key commodities for Saskatchewan, including oil and potash.

Lower commodity prices pose a real challenge for Saskatchewan. In 2015 Saskatchewan's real GDP declined by 1.4%, largely as a result of low oil prices. From 2014 to 2015, capital expenditures fell 17.3%, with the largest decreases occurring in the mining and oil and gas sectors. Compared to two years ago, there are fewer than half as many drilling rigs active in the province, with 27 now compared to 68 in 2014, and strong supply has resulted in hundreds of layoffs in the mining sector, where prices are down from pre-recession highs.

Saskatchewan's unemployment rate is currently 6.3%, compared to 7% for Canada as a whole. While Saskatchewan's unemployment rate remains relatively low, it has increased substantially over the course of 2015 and 2016 from just 3.8% in 2014, largely as a result of low crude oil prices. As of August, there were 42,000 unemployed individuals in the province, compared to 31,000 at the same time two years ago.

Due to continued low oil prices, growth is expected to be constrained in 2016. However, Saskatchewan's diverse resource portfolio has helped to limit somewhat the impact of oil prices on the province's economy, and Saskatchewan is expected to experience the shortest and least severe recession among the oil-producing provinces.

Saskatchewan is heavily reliant on exports, and access to markets is critical to Saskatchewan's well-being. In 2015 Saskatchewan's merchandise exports totalled $32.6 billion. On a per capita basis, Saskatchewan has the highest exports among all the provinces, with nearly $29,000 in exports for every Saskatchewan resident in 2015.

The United States accounts for the majority of Saskatchewan's merchandise exports, but exports to developing markets, including China and India, are growing in importance. Between 2005 and 2015, China's and India's share of Saskatchewan's exports more than doubled. Collectively, these two countries received 16% of Saskatchewan's exported goods in 2015.

Reflecting the importance of natural resources, Saskatchewan's exports are dominated by commodities. The province's top export products are: crude petroleum oils, potash, canola seeds, lentils, wheat, peas, and uranium. Together, these accounted for roughly three-quarters of total merchandise exports in 2015.

Saskatchewan's exports have been supported by advancements in Saskatchewan's traditional sectors, such as the adoption of advanced farming techniques and the development of new crop varieties. For example, Saskatchewan is now a key producer of pulse crops, which have become important exports and cash crops. In 2015 lentils and dry peas accounted for 23.9% of all crop cash receipts in the province.

Saskatchewan is also a leader in innovative sectors related to its traditional resource strengths. The province is home to a vibrant agriculture biotechnology cluster with expertise in crop development, vaccines, and the development of new bioproducts. This cluster helps to position Saskatchewan producers to address growing global demand for food and other products such as bioenergy. Saskatchewan also boasts a highly innovative energy cluster and is a leader in enhanced oil recovery and carbon capture and storage, helping to increase production and lower costs for producers.

In the agricultural sector, Saskatchewan has translated its traditional strengths and expertise into value-added manufacturing, including food processing and agricultural equipment manufacturing. Saskatchewan is also establishing leadership in other emerging sectors such as nuclear science, creating conditions for the province to capture more of the uranium value chain and to capitalize on opportunities related to medicine and power generation.

Saskatchewan faces a number of economic challenges.

Saskatchewan's economic reliance on natural resource development exposes the province to economic downturns and commodity price volatility, or boom and bust cycles. Saskatchewan exporters are highly dependent on the U.S. market despite growth in developing markets. Saskatchewan innovators face challenges in accessing the capital they need to get their ideas to market, and Saskatchewan has low levels of research and development compared to competing jurisdictions.

Saskatchewan's indigenous population is highly entrepreneurial. Private investment in indigenous economic growth in Saskatchewan is increasing. However, there are significant socio-economic gaps between Saskatchewan's indigenous and non-indigenous residents. Closing these gaps is critical, both to the well-being of Saskatchewan's indigenous residents and to the province's overall future economic prosperity.

WED's programs and activities are well aligned with challenges and opportunities facing Saskatchewan. Through the western diversification program and the western innovation initiative, WED makes strategic investments to grow and diversify Saskatchewan's economy. Through its support for the Western Canada Business Service Network, WED also provides access to services and capital, which helps small and medium-sized enterprises to innovate, grow, and create jobs.

It is important that Saskatchewan's firms are able to compete internationally and that they continue to increase their penetration of global markets. Through its investments, WED helps western Canadian small and medium-sized enterprises build their capacity to engage in international business opportunities and in emerging markets. WED also raises awareness of Saskatchewan and western Canada's key strengths and sectors in international markets to promote trade and attract foreign investment to the region.

Improving access to capital and increasing investment in research and development can help to support innovation and increase value-added production in the province. WED's investments support the development and commercialization of key innovative products and processes, and the department has helped to grow key emerging sectors in Saskatchewan, including biotechnology and value-added food processing.

Improving economic outcomes for Saskatchewan's indigenous population can help to improve economic output and provide broader community and societal benefits in the province. WED's support for indigenous skills and training and economic growth can help to increase indigenous labour market participation and improve living standards in Saskatchewan.

We are proud of our role in Saskatchewan and will continue to work with key partners in the province to help Saskatchewan seize economic opportunities and increase prosperity in the province.

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Zolinsky. I will admit that I have a soft spot for Saskatchewan. I don't think there's anywhere I haven't been in that province—probably places you haven't been. I've been in Elbow and Eyebrow, places that probably don't even exist now.

Mr. MacKinnon, please, for five minutes.

[Steven MacKinnon, Liberal, Gatineau, QC]

Thank you, Mr. Chairman.

Mr. Zolinsky, Mr. Meddings, and Ms. Laing, thank you for coming here today. We've had and continue to have very interesting presentations from regional development agencies across the country.

As I'm sure you were informed, we're in a pre-budget process, and I think it's no secret that one of the things we're trying to get a handle on is how people see growth and innovation emerging from all of the regions of Canada, and how we best leverage our strengths and, in fact, create new strengths across the country.

Your presentation gave us a very interesting overview of the Saskatchewan economy. Certainly, I think it's fair to say Saskatchewan has been on a bit of a run over the past decade or so, largely driven by high commodity prices. However, not unlike Alberta and some other energy-producing provinces, such as Newfoundland and Labrador, it's not immune to these kinds of shocks. I know that potash prices have been lagging somewhat, based on competitor activity around the world, among other things, and food is one of those very volatile and obviously also cyclical things.

To start, where do you see diversification coming into the Saskatchewan economy? Where do you intend to place your emphasis in terms of programming dollars and in terms of your planning and strategy? How do we squeeze more growth out of an economy that, by your own description, is highly exposed to the vagaries of commodity pricing?

[Doug Zolinsky]

Thank you for that question.

First off, I'll note that Saskatchewan does see itself diversifying its economy, based on traditional strengths that already exist in the natural resource base.

First, I would note agriculture. There are significant chunks of infrastructure now in place in Saskatchewan, particularly around the University of Saskatchewan. We have Canada's largest investment in a science instrument with the Canadian Light Source.

As well, we have VIDO, the Vaccine Infectious Disease Organization, and VIDO-InterVac.

We also have the Global Institute for Food Security. That institute itself is also propped up by $35 million, I believe, or $25 million, from PotashCorp of Saskatchewan, to invest in companies, really, to do things in the ag-bio sector. We have organizations like Ag-West Bio present, promoting the biotech sector across the world globally, and WED has been supportive of Ag-West Bio.

The province has also recognized agriculture as a key sector that it's going to be supportive of. In fact, they refer to their food, fuel, and fertilizer trifecta as to where they're going to play. Certainly that's one area.

Also, in resource extraction there is beginning to be a recognition that there is value in the development of extraction of resources to enhance oil recovery methods in reducing costs. Water reclamation around drilling and mining sites is key. Recently, WED supported a mine recovery facility whereby they're testing how to reclaim old mine sites. That is another cost savings piece for the mining industry itself.

There are a number of initiatives like that. We could probably provide a pretty strong list, but certainly there are things that are occurring in recognition that the commodity cycle needs to be broken.

[Steven MacKinnon, Liberal, Gatineau, QC]

We have five-minute segments here, so I'm going to give you two topics and ask you to comment on both. I think that will probably eat up all of my time.

[The Chair, Liberal, Wayne Easter]

It's five minutes between you and the person who answers, so you have 40 seconds left.

[Steven MacKinnon, Liberal, Gatineau, QC]

The two topics are: carbon capture and storage and the possibilities of commercializing same, number one; and consolidation in the potash sector, which is obviously looming for reasons of merger and acquisition activity. Can you comment on those two things?

[Doug Zolinsky]

I'll do the best I can.

Carbon capture and storage, of course, is a huge $1.5-billion expenditure investment at Boundary Dam Unit 3. It initially ran into some technical glitches, but things are progressing at a much better pace right now and look much more promising. I will add that whether or not that particular technology will be expanded and moved outside the province for commercialization purposes remains to be seen. The IP is not actually owned by SaskPower; their sales plan, I think, is General Electric or somebody like that, some massive engineering firm. But they do point to the fact that China is going to continue to burn coal for a long time, and they're very interested in that type of technology.

With respect to potash, I'm only seeing what I'm hearing in the news, which is that there are good things and bad things about this. I think farm producers are concerned only in terms of having less competition in terms of where they're going to buy their nutrients and fertilizer. However, the rest of the province sees this as a positive move. If the merger were to occur, the head office would remain in Saskatoon for the organization. At present, that particular merger is viewed as a very positive thing and actually necessary in light of the new potash world we're in.

[The Chair, Liberal, Wayne Easter]

I'll have to cut you off there, Mr. Zolinsky.

Mr. Liepert, you have five minutes.

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

Mr. Meddings was here to hear my rant yesterday about the optimism that you have for Alberta. I'm from Alberta, not Saskatchewan, and an awful lot of the problems that I think potentially face Alberta also face Saskatchewan.

We've had a really good run for the last half a dozen years in agriculture, but a drought or something that could impact agriculture would have a significant effect on the economy of Saskatchewan. There are varying views on where the commodity prices are going to go. I think we all agree that it's going to be a slower climb back up than we had hoped.

I'd like to get your sense of what would happen in the event that we were to have a major hit to the agriculture sector of Saskatchewan. Have you done any reviews of what that would result in for the economy of Saskatchewan next year?

[Doug Zolinsky]

A hit to the agricultural economy in terms of crop failure, say, which I guess is what you're thinking about, in conjunction with the low commodity prices that are around right at this point in time obviously would be a blow to the provincial economy. Right now, the province is counting on fairly decent farm cash receipts to make up for the losses in other areas, such as oil and gas, because they're not going to make it up in uranium, or potash, or anywhere else, for that matter. There are some bright spots in some other minerals such as gold and zinc and rare earth metals, and now the talk about a potential new diamond mine is back.

There are some tiny bright spots. Whether that signals some help, I don't know.

In terms of agriculture, about a third of the crops in agriculture are lentils, peas, pulses, and such. They are able to withstand some of the vagaries of the weather and still produce some type of crop. Nonetheless, a bad crop year would not be good at this particular point in time, there's no doubt about it. That's one of the reasons why in Saskatchewan they were thinking that a bumper crop was on its way. The weather has tempered it a bit. Nonetheless, they're still hopeful.

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

What about infrastructure?

There are probably a lot of opportunities for infrastructure in Saskatchewan. What opportunities would you see? If the federal government wanted to inject money to create jobs in Saskatchewan, that seems to be one of the ways to do it. What might a couple of those opportunities be?

[Doug Zolinsky]

Saskatchewan exports 86% of everything it makes or grows, so a system that allows product, whatever that may be, to leave the province in a hurry and get to market quickly is vastly important. Highway systems that are perfect, especially the ones that account for the heavy traffic, and rail systems that allow for not only agricultural products but actual oil products to move—because that's the way they're moving right now—are key.

The other piece I would see is a greater infrastructure in the north. There are not a lot of roads in the north to allow access, even if it's just simple things like getting up there to fish. Everything is fly-in.

So yes, it would be rail, roads, and roads in the north.

[The Chair, Liberal, Wayne Easter]

Mr. Caron.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Thank you very much, Mr. Chair.

I will try to ask short questions.

Mr. Zolinsky, I asked your colleagues from Alberta this question. Could you tell me what Western Economic Diversification Canada's role in agriculture was after the activities of the Canadian Wheat Board came to an end?

There was a transition period, particularly in Saskatchewan. Clearly, there was an adjustment to this new reality. The adjustment probably required new investments and calls for involvement.

Could you tell me what the department's role was? How did you facilitate the transition? Can you comment on the current reality compared to the one before?

[Doug Zolinsky]

With regard to the change in the Canadian Wheat Board, WD did not play an active role in what occurred there. In my position, I did not actually see anything such as project applications to us, say, from any sort of producer associations anywhere that may have helped buffer the changes. We didn't see any sorts of applications.

Based only on our role on the ground as a pathfinder, convenor, and gatherer of the regional intelligence, I can say a couple of things. Especially in the news—you'll see this in the news occasionally—you'll see that the smaller producers seem to be struggling a bit with the disappearance of the Wheat Board. They may not have the capacity to do some of the marketing. Larger producers are quite thrilled with the changes.

The other piece is that, despite the Wheat Board's disappearance, we have seen that crop exports have grown significantly in Saskatchewan recently, and that includes the years following the end of the single-buyer status piece. Partly, I suppose, based on our knowledge, it's because the farmers are gaining significant experience and expertise in marketing their own crops as time goes on and are achieving success in the absence of that single-desk position.

The other thing that's occurring is that there are crops outside the Wheat Board's authority and are highly successful in Saskatchewan. The ones I mentioned earlier, like canola, lentils, and peas, weren't part of the Canadian Wheat Board mandate. I think I said that they're 27.3% of ag production in Saskatchewan now. That piece was beyond the CWB.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

I'll change domains. I want to refer to something you said in your presentation. You said, “Saskatchewan innovators face challenges accessing the capital they need to get their ideas to market, and Saskatchewan has low levels of research and development compared to competing jurisdictions.”

This brings forth the fact that Canada probably has one of the worst records in the OECD in terms of venture capital and investments. Basically, Quebec is bringing Canada a bit higher than it would otherwise be, but we're way behind. We don't seem to find a solution for accessing venture capital, and we don't seem to find a solution for research and development.

You seem to be in a good position to assess the problems that we see in Saskatchewan. Maybe your assessment would help us find a more pan-Canadian...I won't say a solution, but at least a path in this regard.

[Doug Zolinsky]

I wish I could solve that for you, because I wouldn't be here. I would be sitting with Bill Gates or Steve Jobs or whoever, in a different position.

[Voices]

Oh, oh!

[Doug Zolinsky]

Internationally, business expenditure in research and development in Canada are low, period. They're even worse in Alberta and Saskatchewan. BERD, in my province or in Alberta, is extremely low. There's been a recognition of that for a long period of time. Different types of programs have been put in place to try to accelerate business expenditures on research and development. Recently, through WINN, a WED program, we've decided to get back into the game of funding private sector businesses in the hope that maybe we could spur some of that. It's a new program.

It is difficult. In Saskatchewan, there is no lack of supply of ideas coming out of the institutes that are there, the research organizations. There's no problem there. It's just that there's no receptor capacity. The companies don't exist to pick up the ideas and run with them. The money doesn't exist to help them. In Saskatchewan, we have four venture capitalists. That's it. Even some of the highly entrepreneurial companies in Saskatchewan have to seek outside the province to grow their businesses.

I'll come up with something next year, and I'll be rich, and I'll let you know.

[The Chair, Liberal, Wayne Easter]

Thank you, Mr. Zolinsky.

Before I go to Robert on that question, because I hit it later, we do know that there are a lot of factors affecting the ability of regional development agencies to achieve greater economic growth, but on that very question, is there anything, and if there is, what areas can the federal government pursue to help with venture capital? Or what other policies or programs are needed that could help you achieve your goals as an RDA?

[Doug Zolinsky]

James just mentioned something that we talk about often, partly because our programming is very oversubscribed in both our programs, WINN and WDP, but on the WINN side in particular. In the types of technologies coming forward, what we're seeing the need for patient capital. Even our WINN program has timelines—three years to commercialization—and depending upon which sectors you wanting to invest in three years is not a long time. Patient capital is very important to achieve some of those commercialization results you're talking about.

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you. That's a good suggestion.

Mr. Ouellette.

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

Thank you, Mr. Chair.

Thank you, Mr. Zolinsky. I really appreciate you coming here today.

Could you give me an idea of how many indigenous companies or projects you've funded over the last number of years?

[Doug Zolinsky]

I can do that. In 2015-16, 12 CFs in Saskatchewan reported serving 450 indigenous clients out of a total of 3,444 clients served. In total, 101 loans supported aboriginal economic development and were issued by these 12 Saskatchewan CFs. In 2015-16 as well, the Aboriginal Business Service Network, funded by WED, reported the following results: 113 businesses were created, maintained, or expanded; 64 jobs were created or maintained; and there were 62 business training sessions, with 163 participants involved.