Finance Committee on Oct. 27th, 2016

[The Chair, Liberal, Wayne Easter]

I call the meeting to order. This meeting is called pursuant to Standing Order 83.1 in regard to pre-budget consultations in advance of the 2017 budget. This morning, with us from Seoul, South Korea, is Dominic Barton, chair of the Minister of Finance's advisory council on economic growth.

Mr. Barton, thank you for appearing. I understand you have an opening statement. We are, as I indicated, doing our pre-budget consultations, and I think you know that our theme is how to achieve better economic growth in Canada. Your testimony should be very helpful to us. Welcome. The floor is yours.

[Dominic Barton, Chair, Advisory Council on Economic Growth]

Thank you very much, Mr. Chairman.

If it's okay with you, I thought I would, for a maximum 10 minutes, do a bit of an overview.

It is a pleasure to be with you today.

I should also tell you that my French is not very good.

I thought in my opening remarks that I would say four things. The first is a little bit about the council.

The council started in May of this year, so we've been at it for nearly six months. The council is made up of 14 members from a range of different areas—academia, business, and some people from outside and inside Canada. Our mandate from the minister was to look for ways to significantly increase inclusive growth in Canada. With that as our background, we spent time trying to make sure we have a good understanding of the context.

The context or the situation for Canada is pretty tough as we look forward. We have a lot of great strengths and weaknesses but we've enjoyed about a 3.1% GDP growth rate for the past 50 years. As we look ahead over the next 50 years, unless we do something significant, we will see a growth rate of about 1.5%. It will be cut by more than half. On the GDP growth rate side, it's even starker. It goes from 1.9% GDP growth rate to about 0.08%. A big chunk of that is driven by demographics. We have literally one of the most rapidly aging populations and therefore one of the most diminishing workforces of any OECD country. That is just to put it into context. There are many other elements to be looked at—our share of global trade and what's happening on that front, and the quality of our workforce in terms of education, and so forth.

The big message for us is that we are going to need to do something substantive to be able to change the trajectory from a significant shift down to upwards. That was the context. Basically, we think we should have a target. With that target, we want to force ourselves to think boldly and raise that GDP growth rate, which has been going down to 0.08%, up by a percentage to 1.8%. In terms of the median household pre-tax income, that would mean we would see a $15,000 shift versus what the trajectory would otherwise be out to 2030. We're trying to use that as a target, if you will, to force us to look for ideas that are going to really shift it. We also have the view that we don't want to have 95 different ideas. We'd actually like to have fewer than 10, but have them really have a jolt or a push to them. We wouldn't be sort of spreading the peanut butter across multiple things; we want to make some choices. That's just the background in focus.

We then picked four streams to look at. First was infrastructure and capital, because they're among the biggest levers for improving productivity over the long term in an inclusive way. We looked at market competitiveness and trade, because they're also big drivers for growing GDP and GDP per capita. We looked at labour markets and skills, and then we looked at innovation. We then looked for the ideas within those four buckets.

Last week we released the first wave of ideas. There were three of them. The first is around infrastructure and establishing an infrastructure bank. Underneath that is having an infrastructure strategy, and this basically would be what municipalities and provinces would be servicing. But we should have a view about where productive infrastructure could be developed, and that includes everything from the transportation sector to technology, 5G, and also our electricity grids. Being able to transfer our green energy to different parts of North America, as well as in country, would be good.

Having an infrastructure bank that would have an infrastructure strategy, and the notion, too, that there would be.... I'm just going to stop at that. The infrastructure bank is the main one.

Our view there is that we want to leverage private capital, because we see the infrastructure gap being about $500 billion in Canada. There is no way public money can fill that gap—the deficit would be too significant—but we think there is a way by matching, if you will, the public funds with those of private sector investors. We think it could be at a ratio of 1:4—for every dollar of public funds, we could get four dollars of private. It would really help us close the infrastructure gap and provide a significant jolt to productivity growth for the country. That was the first bucket of recommendations.

The second was on immigration. There were a number of pieces to the immigration side. The first was around high-skilled labour. A lot of businesses are concerned that they can't get the talent they need from outside to fill key positions. It takes way too long to do that. It's a very arduous process, and we want to simplify and speed up that process.

The one that seemed to get more attention was to actually increase the amount of immigration significantly, by about 50%. We said we wanted to flange that in over five years. It wouldn't just be a jump up, because we have to make sure the absorption systems are in place, but basically we would be going from 300,000 to 450,000 over five years. That talent would be very targeted. It would be younger people with particular skills that we are looking for. We think we can leverage the great universities we have in Canada in terms of attracting more talent to come to the country. We think that's actually quite essential, given the significant drop we are going to have in our workforce over the next 10 to 15 years.

The third bucket of recommendations was around a foreign direct investment agency and having a fairly aggressive one that would target particular investments. This is with a bias towards greenfield investment, as opposed to brownfield—in other words, not trying to find companies to take over Canadian companies, but to find investors who want to invest in Canadian companies or Canadian infrastructure. That's an area where we think we could do much more. We punch way below our weight on that side in Canada. We've lost significant ground over the last 20 years. We are at about a quarter of the rate of countries like Australia, New Zealand, and others. Again, we think a targeted approach to finding the right capital and people would help boost it.

Those are three parts of the first wave. We are doing it in waves, because we are hoping this fits the digestive tract, if you will, of the government. We are working on a second wave, which is around skills. We are very concerned to make sure that the 18.1 million Canadian workers continue to be skilled up properly, given all the technology shifts that are going on. We think that about 50% of jobs can be automated over a 10-year period, so we are looking at the skills side of things and what we can do to improve that.

We are also looking at how we can improve the participation rate in the workforce from existing Canadians. How do we get more women into the workforce? That number has plateaued. How do we get more first nations into the workforce? That number is quite low. How do we reduce the frictional unemployment? There are a lot of unfilled jobs out there. We want to have a set of ideas or recommendations around that. The skills innovation area is one.

The second is innovation itself, how we can help more Canadian companies commercialize and scale at a higher rate. In Canada, we seem to be very good at inventions but not at translating the inventions into large commercial successes. We think there are things we can do on that front.

Finally, we think sectors are going to be important. Agriculture and food is a very underplayed sector. By being a global champion in agriculture and food, health care, and a number of other sectors, we could also boost growth as we look ahead.

I should probably shut up; I'm talking for too long. Those are the things we're working on now, and the plan is that we would release them at the end of the year. That's the thinking, and we're still debating and working on it. Forgive me for talking for so long.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Barton. Those are all good points.

We'll go to our first round of questioning.

Mr. MacKinnon.

[Steven MacKinnon, Liberal, Gatineau, QC]

Thank you, Mr. Chair.

Thank you, Mr. Barton. Thank you first of all for your service to Canada, and through you to the other members of the council, my thanks for your constructive suggestions. I know these things will be debated avidly in Canada. I had the opportunity to hear you speak at the Public Policy Forum, and I know you've been beating the drum around the country and the world. So thank you for that.

My colleagues will have other questions on the infrastructure proposals. We know the Caisse de dépôt et placement du Québec has proposed a pretty sprawling public-transit project in Montreal that would connect the West Island and Laval and the South Shore.

Is it public transit, or some other sorts of investments, that would attract pension funds and other wealth that, as you say in your paper, is now parked on the sidelines or garnering negative returns? What kinds of projects would attract returns that would interest this kind of capital?

[Dominic Barton]

There's a range, and they would include those transit examples you mentioned. I think we see this in a number of cities. Four of the ten most congested cities in North America are in Canada. So I think we need more of that in Montreal, Toronto, Calgary, Vancouver. There would definitely be a transit piece to it.

The second thing is around the gateways. We think agri-food is a big opportunity for Canada. We should be a global champion, but we don't have the capacity in the rail and in the ports to be able to deal with that. We haven't done the analysis on it, but I'm looking at the Emerson report, which we considered quite closely, and we think that there's infrastructure there and that there are investors who would love to invest in a port or in rail hopper cars. People would be interested in investing in any part of the infrastructure that's there. In that case, businesses in a sense would be paying the fee the investors would get.

We think electricity grids are another possibility. We're fortunate to have one of the biggest sources of green energy, but how do we transport that energy to different parts of the country, or to the U.S.? We think there's an opportunity there. There's a pretty standard fee-based approach we think we could build into that, which investors would see. Then there's the whole 5G broadband area, which we think is going to require investment across the country. This is one we believe can be structured. This has been happening in other countries, like India, where they're getting people to help pay for the infrastructure that's being laid down.

I don't know if that gives you the detail, but our sense is that ideas should also be coming from the municipalities and the provinces. This isn't a case of the federal government telling us what they want to do. The idea is that there should be some screening or criteria. For example, the project should be over $100 million. Institutional investors aren't really interested in investing in anything less than that, and we think it's necessary in developing that pipeline of the projects you're mentioning. I don't know if I'm being specific or not.

[Steven MacKinnon, Liberal, Gatineau, QC]

That's very good. Some of those categories include things for which private capital has traditionally underwritten the whole build-out, like electricity grids, with funds from private investors or from crown-owned utilities. Do you see a role for the federal government in underwriting, if you will, some of the returns and some of those categories of investment?

[Dominic Barton]

Yes, because I think private investors would like there to be a base level of investment with subordinated equity. It would be there to ensure that there is a participant for the long term to help deal with some of the regulatory issues that are in place and that there's a commitment from the Government of Canada that gives people more confidence that it's not going to be messed with.

The worry is that someone will come in and change the rules. Having the government participating in a minor way gives people more confidence that it will be stable for the long term.

It's a similar structure to what we've seen in Australia and in Chile for some of the infrastructure projects.

[Steven MacKinnon, Liberal, Gatineau, QC]

With regard to attracting foreign investment, I read with interest some of your comparative statistics about what other countries are doing in the area of foreign investment attraction and how easy, or in Canada's case difficult, it may well be not only to attract foreign investment but also to accompany foreign investors through a morass of regulations and other barriers. You also mention the Investment Canada Act as a possible impediment to investment.

I would like you to amplify your comments and your recommendations on foreign investment attraction.

[Dominic Barton]

Sure. As I think you were saying, I said at the outset, we're at around a quarter of the level of what we see with peers, and it's dropped.

We talked about the challenges with a number of people who invest overseas. First of all, there are multiple groups, so you have multiple provinces trying to attract, for example, a Japanese company to be based there. People find that confusing. They don't find that attractive. They think, “Are we going to insult someone if we go here or go there? Who's our counterpart to help us stickhandle our way through it?” The good news is that people are trying, but it's not coordinated. There's a sense of confusion that's there.

The other element is that we just don't talk to them. We're not at the table with them, and so people are investing in different parts of the world. Canada has many attractions, and we're seeing that people don't know where to go to. Often it's not only about getting the money, but it's also about having the people to go with it.

When a company is, for example, establishing a headquarters or a new plant, they want to also be able to move the people. How is that coordinated with immigration? That's where it's disparate. That's where people get confused and say it's too complicated and difficult.

[The Chair, Liberal, Wayne Easter]

Thank you both.

Mr. Deltell.

[Gérard Deltell, Conservative, Louis-Saint-Laurent, QC]

Thank you, Mr. Chair.

Good morning, everybody.

Mr. Barton, it's a real pleasure and honour for me to talk to you.

I would like to follow up on some questions from my colleague, Mr. MacKinnon, because like him, I'm from Quebec. Maybe you recognized that from my accent.

I would like to get back to the proposition and the new way of doing business by la Caisse de dépôt et placement for this famous project in Montreal, as it was so well described by Mr. MacKinnon.

Does that mean that this is an inspiration for you with your new proposal?

[Dominic Barton]

I think you have to ask Mr. Sabia about that. He's part of the group. Our sense is that there's this big infrastructure gap of at least $500 billion. We don't think the federal government should be trying to provide all the money for it. We should be looking for ways to get private money for it, and I think there are various ways, as you said.

I'm not as familiar with that project you're talking about. Our Canadian pension funds are some of the best known and best respected by foreign investors. I think about Chile or Brazil or Australia or the U.K. Those governments love having our pension money there, and I don't know why we can't figure out how to structure the projects we need here to attract our own money into them.

I'm also keen to try to attract money from outside of Canada that could help us, but it just seems odd that we don't do that as much. I'm sorry that I'm not answering you more specifically on that project, but I just don't know the details about it.

[Gérard Deltell, Conservative, Louis-Saint-Laurent, QC]

No problem. It's quite similar to what Mr. Sabia has done with the Caisse de dépôt et placement du Québec, and I'm sure we'll be pleased to explain it in detail to you.

I would also like to get back to your project about the federal infrastructure bank, with $40 billion of federal funding over 10 years. Does that mean that the government will have $40 billion less to invest directly in new projects for the next 10 years? Can you explain that?

[Dominic Barton]

I don't think so, sir. I think our hope is that this will allow even more money, if you will, to be put into the system. We do think that federal money is needed—in fact, they call it non-profit generating areas—in low-income housing areas. There's a very big infrastructure deficit with first nations, somewhere in the order of $25 billion to $40 billion. We think this $40 billion is going to attract a lot more money overseas to do more projects, which will therefore enable people to also have money to do these other projects. In other words, we think we're going to be increasing the size of the pie.

Another part—and I know this is a bit of controversy but I'll just put it on the table—is the asset-recycling notion. The view is that once we put money into a project—it may be a government project, a greenfield project—it then, over time, is sold to private investors outside, and that money is then used for other purposes. Again, I want to say I have no idea what the government's doing on this with airports and things like that, but this is the notion of creating an approach whereby we're investing, building a project, which then, if it's completely government-owned, is sold and that money is released for investment in other areas.

We think that following this approach will mean that the pie will be much bigger and we will actually be able to do more of these.

[Gérard Deltell, Conservative, Louis-Saint-Laurent, QC]

Thank you.

I have one last question, Mr. Barton. You're talking about a new foreign corporation, a new agency, to assist corporations wanting to invest in Canada. Basically, we can applaud that, but don't we have enough civil servants around the world working on that? Would this new agency be merging with other people, or would it be a brand new agency with new people, new red tape and all of that, instead of merging with what we have now?

[Dominic Barton]

That's a great question, by the way. I'm taking notes from what you guys are saying on these things.

We have roughly 1,000 officers out there, and our sense is that only about 11 of them are actually focused on what we're talking about here, so there are not enough people doing this function.

We haven't gotten to the federal and then the provincial side of it. We've also seen, by the way, that there's also a group of people operating at the city level to try to attract.... I would hope there would be some opportunity to look at some rationalization, so that we're just not adding those to this. We think the numbers who are actually dedicated to this, if I can call it, marketing aggressively for Canada are very small right now, but we need to establish that.

The only other thing I'd say to your point is that Mark Wiseman, in particular, has what he calls the “stop-do” list. Not only should we be making recommendations about what we should be adding, we should also be looking at what we're taking away. For example, I think we see that on the innovation side.

Sorry, I'm probably talking too much.

[The Chair, Liberal, Wayne Easter]

No, that's fine.

Mr. Caron.

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

Good morning, Mr. Barton.

We talk a lot about pension funds, but the idea of leveraging public funds to get that private capital would also be open to private asset management and private equity. Is that right?

[Dominic Barton]

Yes, it would.

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

So we're basically talking about privatization, because obviously those investors, be it pension funds or be it private equity managers, will actually ask for a decent rate of return for them to invest. They won't just give the money for free. They'll ask for that rate of return. We heard actually from Mr. Sabia at some point in time that a decent rate of return would be between 7% and 9%.

If we're talking about that rate of return for projects over 30 years, that's a lot more than what government could actually do by itself by actually borrowing the money at 2% or 3% interest, at most. I'm trying to see how this privatization or this move will actually be to the benefit of the country, especially since most of the risk will be assumed by the federal government in any case.

[Dominic Barton]

I'd say a couple of things. First of all, I don't think you'll see too many private equity players investing in long-term infrastructure. The returns are too.... They get nervous after five years, and I think these projects, as you said, are more 30-year events. I don't think you'll see the likes of the Blackstones and the Bain Capital people. The time frames are too long for it. This is the pension fund money in particular.

Right now, $13 trillion worth of money is earning negative yields. I appreciate that Michael Sabia says he'd like to see 7%. I think that's a very high return in today's environment. I mean, he may be getting that; he's very good. I'm talking more in the order of 2% to 3%. Yields are just so low.

The other thing I want to say is that I also think this doesn't mean that government shouldn't look at borrowing. They can't borrow it all to close this gap, because then we'll have a very large deficit, which we don't think will be sustainable, because those rates will eventually move back up.

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

My point, I guess, is the fact that we're considering right now, and we hear the government musing about, asset recycling, which is basically privatizing public assets so that we'll raise the capital to actually fund the privatization of other public assets. We've never had this debate in this country. I don't recall the word “privatization” being said during the electoral campaign. Right now this is the direction we're going in too.

I would beg to differ with you that private equity would actually not be interested. Maybe they wouldn't be interested in those 30-year projects, but there are projects that won't take 30 years, which they might actually want to fund over five or 10 or 15 years. We're opening the door to this. At some point I'd like to understand how we can actually go in that direction right now, how we could be pushed in this direction as early as November 1 for the fiscal and economic update or November 14 when there will be that major investment meeting in Toronto, and not have the debate in the House by calling it what it is, which is privatization. Canadians have never been told that we're ready to actually provide either our pension funds or private equity asset management with those assets.

The way they will get the return is basically by tolls, basically by fees, and by other ways of getting back their investment. Where's that debate right now? I understand that you have been hired. I'm putting that on you right now, but you are basically the agent of government. At some point we'll need to have the debate in the House.

[Dominic Barton]

Can I just make one comment, Mr. Chairman? Is that all right?

[The Chair, Liberal, Wayne Easter]

Go ahead.

[Dominic Barton]

I think for us, asset recycling is one element. That's not on the critical path for this. I actually would say that's on the far end of the table. What's key is that there's so much infrastructure that needs to be built now in terms of greenfield—transit systems, ports; a big list is already being stacked up again. I just look at that Emerson report as one small example. It's in those areas that businesses can actually help pay for it. It's in their interest to be able to pay it and get pension funds to help finance it.

There's so much to be done that I think we have to get on with it, because we just have this gap. It also creates a lot of jobs and a lot of productivity improvement sustainably. All I would say on the private equity side is that there is a lot of money looking for returns. I think private equity will have a very difficult time competing with these. I honestly do. Japan Post has so much money earning negative yields that to be able to participate in something where they're going to get a positive yield over time in a country that's as safe as Canada, I think, is a serious opportunity and a benefit.

I'm obviously biased in how I think about it, but that's my view.