Finance Committee on Sept. 22nd, 2016

[The Chair, Liberal, Wayne Easter]

I call the meeting to order.

This is pursuant to Standing Order 83.1, on pre-budget consultations in advance of the 2017 budget, continuing our series of meetings with the regional development agencies across Canada.

We're pleased to have here today, from the Department of Western Economic Diversification, Mr. Salembier, who is the assistant deputy minister of the British Columbia region; and James Meddings.

I wonder, James, what your riding is. You've been here every day this week. It's good to see you again.

[James Meddings, Assistant Deputy Minister, Policy and Strategic Direction (Ottawa) , Department of Western Economic Diversification]

Thank you.

[The Chair, Liberal, Wayne Easter]

Finally, we also have Mr. Sutherland, the director of policy, planning and external relations.

Mr. Salembier, you have the floor, and then we'll go to questions. Thank you for coming.

[Gerry Salembier, Assistant Deputy Minister, British Columbia Region , Department of Western Economic Diversification]

Thank you very much, Mr. Chairman. It's my great pleasure to be in front of the committee today.

I'll be talking to you about the state of the B.C. economy and some of the challenges and opportunities therein, as well as giving you a bit of a thumbnail sketch of what we do in Western Economic Diversification in British Columbia.

Let me start with some of the basics of the structure of the B.C. economy.

B.C. hosts a dual economy. The Lower Mainland and Southern Vancouver Island’s broadly diversified service economies contrast with rural areas that largely depend on natural resources.

B.C.’s service sector accounts for 76% of GDP. The sector comprises industries such as finance, shipping, engineering, education, film production—which is very important—tourism and high-tech. B.C. has a relatively small domestic market, and wealth creation depends heavily on exporting natural resources, which account for about 75% of the province’s merchandise exports.

The U.S. remains B.C.’s largest customer, consuming 52% of export sales in 2015. However, exports to Asia have grown quickly recently. Asia now accounts for 38% of the province’s export sales.

Another key shift in B.C.’s economy relates to job creation. The province’s high-tech sector employs 87,000 workers, more than the province’s once dominant forest industry at 58,000 workers.

Public sector capital investments in major projects play a really important role in anchoring and driving expansion in the B.C. economy. Major projects in play include the site C clean energy project, port expansion proposals in Prince Rupert and at the Roberts Bank container terminal, the so-called T2 project in the Lower Mainland. There are of course energy projects that have been in the news: the Pacific NorthWest LNG proposal and the Trans Mountain pipeline expansion; and then there are transit proposals like the Massey Tunnel replacement and the Evergreen Line between Coquitlam and Vancouver.

With that economic context in mind, let me shift to talk about the performance of the B.C. economy. Our economy gained momentum significantly in 2015, posting 3.0% growth in real GDP. This is forecast to lead all provinces both this year and next.

That upswing is driven by a surging residential real estate market, which drives record-setting construction and renovation activity in the province, strong consumer spending, rising exports, that expanding tech sector which I mentioned earlier, a couple of really banner years in tourism, as well as shipbuilding under the national shipbuilding strategy.

Our economy in B.C. has been relatively less affected overall by the decline in oil and gas prices compared to the other western provinces.

Our employment growth is forecast to increase by 2.8% in 2016. In fact, so far we've already seen 87,000 new jobs created in the year to date in B.C. The unemployment rates in B.C. hover around 6% province-wide, relative to a national rate of about 7%. It's important to note, however, that those job gains have been concentrated in the Lower Mainland and in southern Vancouver Island. It's a very different situation in the rest of the province, where unemployment rates have crept up in recent years.

That increase in exports that I mentioned is driven mostly by wood products, as well as agriculture and agrifood products. Those have been partly offset by declines in natural gas and in metallurgical coal shipments.

Notwithstanding that relatively bright picture, B.C.'s economic outlook shows some increasing risks. In 2015, household debt in Canada was at a record level of almost 170% of disposable income. That's well in excess of historical norms.

A recent study by my good friend Mr. Jock Finlayson at the Business Council of B.C. estimated that the housing sector is responsible for somewhere between 35% and 40% of the recent economic growth in B.C. So that 3% economic growth, without the housing sector, would be less than 2%. That concentration of activity related to housing presents a real risk.

There's also a real risk associated with the uncertainty relating to the expiry of the Canada-U.S. softwood lumber agreement, as well as the reductions in timber available to harvest due to the mountain pine beetle infestation. We have rising skilled worker shortages across the province in many sectors. Final investment decisions on some of those major energy projects remain pending.

Let me point out a couple of key features that I think are important to distinguish B.C. from some of the other western provinces. I like to point out continually to my colleagues that B.C. is different. In addition to being the least rectangular of the western provinces, it is also, I would say, a bit more of a patchwork than other places in the west are. We're fragmented geographically, obviously, by mountains and rivers. There are seven very different economic development regions within the province. When it comes to the metro Vancouver region, as some of you might know, metro Vancouver has 22 separate municipalities. Of course B.C. is home to 203 first nations bands, which is about one-third of the national total.

In my opinion, there are couple of other salient features that make working in B.C. interesting. The province’s geographic position makes it Canada’s Pacific Gateway, a role of great national importance. While not a likely source of future growth, the forest sector is still a mainstay for many rural communities. Vancouver has a reputation for being one of the most Asian cities outside of Asia. It is also the province with the least coverage of final treaties with First Nations.

Now let me turn to what WD is up to in B.C. Firstly, WD is actively involved in delivering on a number of recent federal budget commitments. In particular, we have just completed a review of some 450 B.C. applications received under the Canada 150 Community Infrastructure Program, CIP 150, for 2016. We are working with other RDAs to double our joint investments in clean technology under a 2016 federal budget commitment to increase spending on clean tech to $100-million annually. Finally, we are supporting federal work aimed at engaging Canadians in consultations to define Canada’s innovation agenda.

Also, we are delivering on our core departmental funding and policy responsibilities against our four departmental priorities of innovation, trade and investment, indigenous economic growth, and defence procurement. The core funding also supports our western innovation program, or WINN, as well as a province-wide network of service delivery partners, including 34 community futures development corporations. We also serve as a delivery agent in support of some other federal initiatives. We're participating, for example, in the Department of Indigenous and Northern Affairs' strategic partnerships initiative that targets indigenous participation in economic development.

Last, from time to time over the years, WD has taken on the delivery of some large federal programming, things like temporary adjustment programs or infrastructure initiatives.

Going forward, there are some challenges that we're responding to in B.C. In innovation, a lack of capital is constraining commercialization of new products and services. Our response, the WINN program, is well oversubscribed, meaning that we have to turn down quality projects in industries like clean tech, life sciences, space, oceans, and information and digital technologies. As well, we have a real challenge in our traditional resource industries which are facing technological challenges. We're trying to increase the linkages between innovative small and medium-sized enterprises, for example, in the clean tech sector, to help address some of those issues in the resource industries. In trade and investment, only 3% of businesses in B.C. export at all. Among small and medium-sized enterprises, only 1.3% of B.C.'s businesses export.

We have an opportunity there to help firms become more export ready and position them to capitalize on opportunities presented by our international trade agreements.

In terms of indigenous economic growth, we know that capacity constraints limit participation of many first nations in the economy, and that leads to missed opportunities. We've worked successfully with first nations to support skills development and entrepreneurial training in preparation, for example, for opportunities in resource development and energy, as well as shipbuilding.

We've advanced clean energy projects in communities through the B.C. indigenous clean energy initiative. This is one of those projects that was financed through Indigenous and Northern Affairs' strategic partnerships initiative, SPI, funding. We're in the middle of going through those projects now, in partnership with the New Relationship Trust. We've received 51 applications for assistance under that program, including 14 from off-grid communities. Our budget there is only $4 million, so that's going to limit the extent to which we can respond to those opportunities.

Last, in defence procurement, we play a role in trying to match small and medium-sized enterprises in the west, in B.C., with the prime contractors, under Canada's industrial and technological benefits program. We help position those SMEs as suppliers to those prime contractors through events like our western innovation forum that is coming up this November in Vancouver.

So in closing, I would like to thank the Committee for letting me brag a bit about the great things that the WD team is doing in BC.

I will be glad to answer any questions that you have today.

Thank you, Mr. Chair.

[The Chair, Liberal, Wayne Easter]

Thank you very much.

Thank you for spelling it out as it is, both what you do and some of the points that may not be so wonderful. We appreciate that. I'm wondering, with all those things going on, what you do with your spare time.

Mr. MacKinnon, you have five minutes.

[Steven MacKinnon, Liberal, Gatineau, QC]

Thank you, Mr. Chair.

I would like to thank you for being here, gentlemen. Congratulations on your excellent French, Mr. Salembier. I am sure the francophones of British Columbia really appreciate it.

We're all looking at British Columbia. I know this committee has taken an interest and will take up the issue of housing in the not too distant future. The provincial government has obviously taken measures to cool off the housing sector, I think it would be fair to describe it. That will have run-on effects on the rest of the economy.

How do you evaluate them, and how do you keep British Columbia growing in the context of deliberately trying to cool off a housing sector?

[Gerry Salembier]

Thanks very much for the question. As you correctly identified, it's one of the major issues facing B.C. right now.

I should probably start by saying that I've lived in British Columbia for eight years, and you are looking at an eight-time loser in the British Columbia housing market. Each one of those eight years would have been a really good time to buy a house, and I haven't, so you should probably take what I have to say with a grain of salt.

As I said, it is a real risk to the economy and it's not just the direct impacts on home sales and construction. The run-up in housing prices has had a number of other really important effects. For example, house renovations now actually outpace new home construction in terms of contribution to B.C. That's at risk.

The wealth effects that are associated with a run-up in housing prices would also be at risk. The wealth effects occur when your house is, as is the case for many people I know in B.C., worth three times what you paid for it, and you feel a lot wealthier and you're likely to decide to go to Cactus Club rather than to Tim Hortons. Your house prices come down and that's going to unwind seriously. It's those kinds of effects that were behind that estimate I gave that more than one-third of recent economic growth is at risk.

Regarding the measures that have been taken to cool off the B.C. housing market, honestly, it's too early to say whether those have had an effect or not. The volume of house sales in B.C. was dropping before the recent tax on foreign property transfers was put in place. It may accelerate that trend. It will be difficult to say, and of course, the mayor of Vancouver has been talking up the idea of a vacant home tax that could have much the same effect. But I will say this as well, that the business community is starting to view the run-up in housing prices as a serious break, or a serious mitigating factor, in the overall investment climate in British Columbia. There are increasingly few places in the world from which Vancouver looks cheap—in places like Singapore, Hong Kong, and L.A., Vancouver housing still looks cheap—but that list is growing shorter.

WD has no direct role, obviously, in housing policy or in the housing sector, but the housing affordability problem is at the root of the impact on the investment climate. People in B.C. are now faced with devoting something like 88% of their median income to a home purchase, which is far in excess of even the next hottest housing market in Canada, which is Toronto.

I mention that because the housing affordability problem has both a numerator and a denominator. It's house prices, yes, but it's also income, and B.C. has lower median incomes than the rest of the country. The kinds of projects we are working on, things like the wind initiative, which is aimed at increasing jobs in high tech start-up firms that have technology commercialization potential, that sector pays well above median wages, as much as 40% to 60% above median wages. When a company we fund succeeds, we're contributing to the denominator of the housing price problem.

[The Chair, Liberal, Wayne Easter]

A quick question, please.

[Steven MacKinnon, Liberal, Gatineau, QC]

When I think of British Columbia, I also think, as you have alluded to, clearly to some major energy infrastructure projects, and obviously, the possibility of pipeline and LNG development, but I also think of downward pressure on things like coal production.

I am just wondering about your thoughts in a world where we're looking for growth and innovation on how you plan diversification around the eventuality of possible energy development on one level, and then the probability of decline, if you will, in things like coal production.

[Gerry Salembier]

If I may comment on the latter, on the decline in coal production, it is palpable how it has affected the economy in B.C., and not only the direct extraction activities of companies like Teck resources. Teck is one of the biggest mining companies in Canada, and they have had to cut shifts at many of their mines, if not most of their mines, over the last couple of years. It has had a really direct impact in the regions of the province where there is extraction activity taking place at their mine sites.

It has also had a direct impact on activity at the port of Vancouver, which is Canada's largest port and the second largest port on the west coast of North America. It is a real job generator. Coal shipment volumes are down quite sharply at the port of Vancouver, so it has had a fairly profound impact.

One of the things we are engaged in right now is a bit of a dialogue with some of the mining companies over the extent to which they are able to introduce small and medium-sized enterprises into their supply chains. That is one of the ways that.... Even in a declining price environment, and sometimes even more so in a declining price environment, companies like Teck or Goldcorp have a real incentive to become more efficient, and the small and medium-sized enterprises that contribute to that high-technology sector in B.C. can be really positive contributors to innovation in mining.

It is not true that.... People sometimes criticize the mining sector that it is not innovative and risk-taking. It is extremely risk-taking. When you open a mine, you are making a bet. You are going to spend hundreds of millions of dollars on something that isn't going to produce a dime of revenue for 10 years, usually, so they are used to taking risks. The problem is when the risks associated with innovation come on top of that basic risk they face.

We have engaged in a series of dialogues with some of Canada's major mining companies about what kinds of barriers and obstacles small businesses face in accessing those supply chains, and what things we could do perhaps to change some of the policies and programs we have in place to better address that and to get them into a position where the private sector will actually take on the role of demand for innovation.

Around the energy projects, as I pointed out, there is—

[The Chair, Liberal, Wayne Easter]

I will have to cut you off there. Perhaps you could bring it in later.

Mr. Aboultaif, go ahead.

[Ziad Aboultaif, Conservative, Edmonton Manning, AB]

Thank you very much for the detailed presentation on the B.C. economy. It was very informative.

You represent about 10%-plus of the Canadian economy. It is the same in population. You have one-third of the Canadian indigenous community. You have most of the Canadian-used tidewater. You have the resources. You have the diversity of different economic spectrums, and only 3% of B.C. businesses are engaged in export. That is really concerning.

What is stopping you from improving that sector, and what else can B.C. do in order to boost that sector?

[Gerry Salembier]

On the small business participation in exports, we have fairly recently re-engaged with the Province of British Columbia. With the Ministry of International Trade and with Global Affairs Canada's regional office in British Columbia, we have participated in a sort of regional trade network, where we try to maximize each other's contributions to things like export missions abroad.

It is really difficult to coordinate federal, provincial, and in some cases even municipal activities in a calendar sense, but at least in terms of which sectors we are putting our emphasis on, that committee is a bit of a coordination mechanism for those export missions.

We also have, of course, through what we call our western Canada business service network—which includes Small Business BC, an organization jointly funded by us and the Province of British Columbia—as well as through our Community Futures development corporations—there are 34 of them across the west—an avenue where we can help small businesses become more export ready.

There are an awful lot of businesses that just don't consider export markets. I am a former businessman from many years ago in a business in computer software where it was absolutely natural to consider your market as the world, but many businesses don't operate that way, particularly businesses located outside the Lower Mainland and the southern Vancouver Island area.

There is actually quite a bit more that could be done in terms of export readiness for small businesses, and that is a role that we at WD could play. The extent to which we play it now, honestly, is pretty constrained by the amount of funding that we can devote to things like trade and investment—

[Ziad Aboultaif, Conservative, Edmonton Manning, AB]

On this topic, there are two things.

First of all, what's your target? The 3%, what is your target, either by dollar or by business engagement, on individual small businesses? How much are major projects going to play in that, without having to politicize the pipelines going through B.C. to the tidewater?

[Gerry Salembier]

I may ask my colleague here if he can dig out from our rather impressive binder of information here—as you can see, I brought it with me—some of the targets we have in our report on plans and priorities for our trade and investment activity.

Sorry, Martin, to put you on the spot.

We have targets associated with that element of our departmental framework, but when it comes to that 3%, we haven't adopted a target of increasing the proportion of industries that do export. That actually is something we might be well advised to take under consideration. It is one of the biggest problems in increasing exports in B.C. There's no specific target on that, although we do have some targets associated with that whole area of trade and investment, which might be reasonably close at hand, in our RPP.

[Ziad Aboultaif, Conservative, Edmonton Manning, AB]

I have a quick question. Attracting real estate investment into Vancouver and the Lower Mainland is not a surprise. I guess you mentioned some of the reasons. Will there be any policies to help those people who invest in real estate to invest in businesses and help the businesses? Could policies play a fundamental role in that fashion? Have we missed the boat?

[Gerry Salembier]

In fact, we have a project under way, which is jointly funded with WD, the Province of British Columbia, and the Business Council of B.C. It goes by the name of HQ Vancouver, headquarters Vancouver. It's aimed precisely at increasing the attraction to the Lower Mainland of headquarters offices of companies, mostly Asian companies. There is already a pretty good track record of companies that have been attracted by this initiative.

This is kind of interesting, and it speaks right to your point. One of the things we found when we started this HQ Vancouver initiative was that one of the best sources for increased investment is wealthy Asian individuals who are already resident in the Lower Mainland. In many cases, these are individuals who bought real estate and haven't actually invested in the local economy.

This is an initiative that would directly address, as I said, both the numerator and the denominator of that housing affordability equation, by getting wealthy Asian residents of the Lower Mainland to consider locating businesses in B.C. There's an avenue there that we found to be quite fruitful. I would say that as many as half of the headquarters that have been attracted to B.C. under this initiative have actually been of that sort. It's been via individuals who are resident already.

[The Chair, Liberal, Wayne Easter]

I will turn to Mr. Caron.

Did you find that number on targets? Could you let us have that first?

[Martin Sutherland, Director, Policy, Planning and External Relations, Department of Western Economic Diversification]

We're looking at WD from all four regions. We're looking at 509 SMEs that pursued a new trade opportunity as a result of global advisory services.

[The Chair, Liberal, Wayne Easter]

Mr. Caron.

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

Thank you, Mr. Chair.

Gentlemen, thank you for being here with us today.

I was struck by how different your presentation was from the others we have heard. It was not necessarily negative, it was just more specific.

You referred to four operational priorities, namely, innovation; trade and investment; indigenous economic development; and defence procurement. The latter is a very specific sector of industry. In general, we hear about innovation, exports or export policies, but rarely about priorities related to a specific industry.

When was this operational priority set? Why is it specific to British Columbia? What results have you achieved so far on this priority? In the other presentations we heard, there was nothing as specific about an industry.

[Gerry Salembier]

I will ask my colleague to look through the vast amount of information he has to find the figures and results achieved thus far in defence procurement.

Our role is to point out to SMEs where the major purchasing opportunities are in Canada's defence industry. We have played this role for several years.

Our efforts in this regard have increased greatly since 2013, as I recall, which is when Mr. Meddings joined the department. This industry is part of his portfolio. It is not just the defence industry. I am referring to major purchases in general. However, Canada's industrial and technological benefits policy, or ITB, applies primarily to the defence industry.

There are tremendous opportunities in this industry. That is why we are focusing specifically on it. Under the ITB policy, companies must spend an amount in Canada equal to the value of the contracts concluded. SMEs are not necessarily well-positioned to find the right contact point with big companies such as Lockheed Martin, Boeing and so on.

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

It seemed unusual that this is done almost exclusively in British Columbia. This specific priority could also apply in Quebec or Ontario, for example, or in the Atlantic provinces, but it is just in B.C. That is why it struck me as unusual.

That said, I would like to move on to another area.

The economy of several regions in B.C. has been hard hit by issues relating to the forestry sector, and in particular the closing of several processing plants, such as sawmills. The increase in the export market share relates to unprocessed timber rather than local wood processing.

Has WD looked into this in B.C.? Have you tried to determine how to revitalize the affected communities? In northern B.C., this has caused extensive damage and some communities have become economically depressed. Unfortunately, there do not appear to be any solutions. What can be done? Can the wood processing industry be revived or is that a thing of the past? Do we have to resign ourselves to simply exporting unprocessed timber without any hope of doing the processing here in Canada?

[Gerry Salembier]

You are describing a problem that is very serious in British Columbia and in the rest of Canada. We are talking about the future of the forestry industry.

If I may, I will answer in English. My softwood lumber vocabulary is somewhat limited.

I'm a former trade negotiator, and like everybody who has worked on trade policy in Canada, I've had my share of softwood lumber losses in the past.

In fact, just this morning I met with one of my colleagues at Global Affairs Canada, who is responsible for the softwood lumber file. It's fair to say that, with the way things are headed now, the expiry of the softwood lumber agreement is likely to lead to another round of countervailing and anti-dumping duties. That will have an impact on the forest sector, which will come on top of the impact of the mountain pine beetle infestation. If you overlay those two things in British Columbia, you have pretty serious impact for a lot of communities in the north.

My colleague Martin was recently in Quesnel, B.C., which is one of the communities that is really heavily forest dependent. He was there as a federal representative to a provincial government effort to help the community of Quesnel adapt and think about opportunities it will have as a community going forward, given the severe impact already of the decline in availability of fibre supply, as they call it, the annual allowable cut, or AAC.

The province will be declining drastically in that region. The products that it's able to export and the jobs associated with that are really at risk. The situation with the softwood lumber agreement will only come on top of that.

It's worth noting that in the past the federal government has allotted some serious consideration and resources to something called the community adjustment initiative. WD was given responsibility for administering that initiative, so it's at least conceivable that, unfortunately, we'll be in that same situation with the likely initiation of trade remedy actions in the United States over the next few weeks and months.

[The Chair, Liberal, Wayne Easter]

Thank you. I'll have to stop you there.

Just to clarify that, there is not in place at the moment a softwood lumber community investment initiative, right? Is it a program that was in place in the past? We should know that.