Finance Committee on March 12th, 2020

[Peter Julian, NDP, New Westminster—Burnaby, BC]

The chair hasn't fully understood all of the ramifications of this project. There's no business case. The private sector walked away. The federal government came up with $4.5 billion—overpriced—to buy the existing assets.

The construction costs are escalating now. The shippers are now backing out, which means you have to subsidize the shippers to try to even maintain the fiction of this being a viable business, so $17 billion, given the $150 million that was lost on the existing project last year, is probably a minor part of what the overall costs will be to the Canadian taxpayer, and it's all done to fuel companies that aren't willing to do their upgrading and refining in Canada. The companies that do upgrading and refining in Canada receive a price differential that is to their advantage.

I would ask both of you this, and anyone else who wants to answer: Do you think it's a good use of taxpayers' money to throw tens of billions of dollars onto the Trans Mountain development?

[The Chair, Liberal, Wayne Easter]

Go ahead.

[Dr. Jack Mintz]

Well, I'll start on that one.

First of all, I think we need to go back to history a little bit. The project itself would make a lot of money. There's no question that it would have been able to charge a toll that many shippers were interested in. Why? Because it was an opportunity to sell oil to either California, where there was a need for more heavy oil, or Asia, where the margins were sufficient enough. From the financial side, there was no need for government subsidies whatsoever, because both the proponent at that time, which was Kinder Morgan, and the shippers themselves could have easily handled the costs associated with it.

As we know, we've had a regulatory system that keeps moving the goalposts when it comes to approvals. As soon as you start changing the goalposts all the time, and the length, and the delays and everything else, the costs start rising. Kinder Morgan, quite intelligently, said they'd had enough, that there's too much political uncertainty in this country and there was no point in making an investment when these goalposts are continually changing. They said, “We're going to get out of this.”

At that point, because the government said it does believe in responsible energy development, it said that it would support this project because it thinks it's important for it to get built, from the point of view of responsible energy development. The government has now bought the project. It is an asset. It might make enough money to cover it. There might be a loss. We'll have to see.

However, I think we have to ask the more serious question. It is on our regulatory system in Canada, which is absolutely throttling the energy industry right now. Is that something we want to have in this country? It's one of the biggest assets we have. That can be done in a responsible way.

In fact, there were all sorts of very interesting carbon analyses done. I really enjoyed the presentation done by your friend from England, sitting in England. I do know that one technology that people are thinking about in climate change is just actually drawing the carbon, the CO2, out of the air. That could actually be a far better approach than trying to go through a huge energy transition, with huge costs. It also means that we could also continue to develop our resources, which create huge benefits for the country as a whole.

[The Chair, Liberal, Wayne Easter]

Does anybody else want in? The floor is open.

We'll go to Mr. Morantz. We're down to five-minute rounds, but we'll stretch it a little.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

Thank you, Mr. Chair.

Thank you all for being here. It's been a very interesting discussion.

Dr. Mintz, I want to start with you. You touched on this already a little bit today. I have been going back and reading some of your past comments.

I know in the past you've talked about how these types of programs can be ripe for political meddling. In one of your interviews you talked about how SIF—the strategic innovation fund—was the sort of fund that could be mishandled. This is from an article back in 2018 in the National Post, written by Jesse Snyder.

Sorry. I just want to go back to my notes.

Interestingly about SIF—and we had this discussion the other day—there's a large regional disparity in terms of how funds are allocated in that program. For example, my home province of Manitoba received $30 million, or about $22 per capita, out of the over $2 billion in funding in that program. In Ontario, it was well over $60, as well as in Quebec and British Columbia.

If you were to advise us or if you were hired to advise government on what measures could be taken to reduce the likelihood of political meddling in these sorts of situations, what types of alternatives could government adopt to make these types of programs more arm's length and credible in the eyes of the public?

[Dr. Jack Mintz]

I think one of the first things is to make very clear what the criteria will be for awarding the money. I know there was a competition that went on, although it was amazing how it was regionally distributed across Canada in the end, which kind of asks the question whether the criteria included a regional factor behind where the money was going to be spent.

That has to be done. I think you also need to have more of a separate board or a separate Crown corporation or whatever that would be less influenced by the funding. The criticism of the ACOA—the Atlantic Canada Opportunities Agency—over the years was that it was very much politically driven. In fact, a paper that was done by Michael Smart showed that a lot of the money went to the constituencies of the government that was in power at that time. They tended to get more of the money. Obviously, that is not a process that's going to work very well.

Again, there was a lot of criticism of ACOA that the money wasn't necessarily being used for innovation and supporting innovation. There is an argument for being part of an innovation ecosystem to do that sort of thing. Instead, it was money that was being used to fund another little craft company that, frankly, wouldn't do that much for economic growth in Atlantic Canada.

If one is running these strategic funds, I do think it can be done in a way that takes the decision-making out of the hands of the politicians. If that's not done, it's always going to be a problem. That's where I would go with it.

I want to add one other thing. We keep talking about some of the good things here around the table, as our colleagues here are at this table, but there are a lot of subsidies that aren't working and aren't good, and we don't have anyone here to talk about those.

In fact, that's why I mentioned this EY study. I think it would be worth it for you to get it, because you have to sit back and ask questions like whether we should be funding some of the stuff that we're doing, like refrigerators at Loblaws.

It's not to say that all business subsidies are bad. It's to say that some are good, particularly if they have huge innovation benefits, because that's where the economic argument is, but there are a lot of bad subsidies out there. Those are the ones that could do a lot of harm to the economy. Not only do they themselves hurt the economy, but the funding that goes into them hurts the economy because either the taxation for them has an economic cost or the money is taken from other important government expenditures that could have very important positive benefits.

That's why I'm particularly very concerned about the size of all these business subsidies. I can bet you that Phil's.... Was it $18 billion you mentioned from your estimate? It is hard to get an estimate of it. I tried myself and didn't see one that I liked very much. Of the $18 billion, I can bet you that not all $18 billion are worthy subsidies.

[Philip Cross]

There's not a lot.

[The Chair, Liberal, Wayne Easter]

Make it a fairly tight one. You're out of time, but be fairly tight, Marty.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

This is for Dr. Cross. You won't have a lot of time, but I wanted to circle back to the concepts of transparency and accountability, which have really become more than a talking point, one would hope, in government.

From an economic perspective, what is the more efficient use of capital—leaving it in the hands of taxpayers, or having government collect more tax and then granting those monies to enterprises selected by bureaucrats? That's really the crux of this study.

However, in order to make that determination, we really don't have the information we need. What kinds of steps could we take to make the process more transparent and accountable to taxpayers, so that we understand actually what the net cost to society is of taxing this money and centrally planning its expenditure?

[Philip Cross]

The brief answer—I know you're pressed for time—is to start with an accounting of all the subsidies made and then try as best you can to come up with the overall rate of return. As Jack suggested, some of these have clearly paid off. I noted some of the winners myself, but a lot of them haven't, and we need a full accounting of what the rate of return on average is on these. You can then compare that to the rate of return on private investments.

[The Chair, Liberal, Wayne Easter]

Thank you, all.

Ms. Dzerowicz is next.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thanks so much. I want to start off by just thanking everyone for their excellent presentations and give a special thanks for Mr. Oldham. I know you're about five hours ahead, so I know it's a special effort for you to be joining us today. Thank you.

My first question is to Ms. Paish. Ms. Paish, the superclusters were originally created because we wanted to take companies' creative ideas and investments already made in a fairly promising industry and we wanted to add government funding and investment so that we hopefully would create a world-class industry. We wanted to start anchoring and start investing in key industries that we thought not only would be great for the Canadian economy but also would create world-class sectors within Canada.

One of the criticisms that I've been hearing is that 22 months later, or two years later, we don't have very much to show for it. They say we haven't created any jobs and ask what the value is for money that Canadians are getting right now.

How would you respond to that? How has Canada invested thus far, specifically talking about the Digital Technology Supercluster? How have we benefited, and how are you evaluating success as we move forward? I believe it's a 10-year investment.

[Sue Paish]

Thank you for that question.

I'm going to focus my responses on digital. I'm not informed to speak on behalf of all the others.

Building an innovation ecosystem and seeing the results of these kinds of ecosystems is a medium- to long-term exercise. It doesn't happen overnight. I'm immensely proud of what we have done through our organization. We currently have 450 organizations involved, and those range from small entrepreneurial companies through to research organizations and national and international companies.

We have run three competitive calls. Our calls for expressions of interest are competitive. You don't just have to hit our criteria—and I'll come back to that in a minute—but you have to be better than anybody else in your call.

In our criteria, we include an assessment of the technology. Is this viable technology? What's the TRL? Does it have commercial application, and do you have a plan for commercial application? One thing we're not doing is investing in your strategic plan. We're investing in technologies that are going to solve big problems and put Canada on the world map.

We evaluate that in two stages. The first stage is your expression of interest. You have to file a written submission as well as give an in-person presentation by your entire team.

The second is at the full proposal stage. We have EOIs that come through. We evaluate those through an in-person presentation as well as a written submission, and then you go to a full proposal. Our full proposals are evaluated in three contexts. We have international experts. We have more than 50 experts from 11 countries in domain expertise, so if you're suggesting that you're going to build a data commons, a digital platform, then we're going to put that out to international experts. At least three international experts evaluate every full proposal. You then have to make a full presentation in person again—this is round two—as well as appear in front of our project selection committee, which is made up of internal as well as external experts.

We evaluate the technology readiness, the commercial application, and then—we've talked about business here—we look at the business elements. Do you have the right management team for your consortia? Do you have a business plan? We want to know about your budget and who's doing all this stuff, because we don't do that.

[Julie Dzerowicz, Liberal, Davenport, ON]

I hate to cut you off, but I have one more question that I'd like to get to Mr. Oldham.

My sense is that you're basically helping to select digital companies that show promise, that will produce results in the medium to long term.

[Sue Paish]

We're selecting technologies that are produced by a combination of companies, big and small.

[Julie Dzerowicz, Liberal, Davenport, ON]

You mean companies that have the best chance of actually—

[Sue Paish]

Producing a result.

[Julie Dzerowicz, Liberal, Davenport, ON]

A result within the medium to long term.

[Sue Paish]

Yes, and you don't get investment from the supercluster until you deliver results. This is not upfront investment.

[Julie Dzerowicz, Liberal, Davenport, ON]

Okay, thank you.

I have a question for Mr. Oldham, very quickly.

One of the things that Professor Mintz mentioned is that in many cases corporate subsidies don't grow the economy but actually reduce productivity.

You've given us a wonderful example of your company. Are you able to articulate how your company has positively contributed to the Canadian economy and how it has improved productivity?

[Steve Oldham]

Sure.

It's early days for us, even though the business is 10 years old. We're trying to solve a massive long-term problem for society in climate change. So far, we've grown from 20 jobs to just under 100 today. We've attracted over $100 million of funding from outside the country, which is being spent in British Columbia and Alberta. We've provided a way forward on climate change.

As Mr. Mintz was describing, if you can decarbonize by pulling CO2 out of the air, you can continue to grow your energy and resource economy and all the jobs and prosperity that come with it and decarbonize at the same time. With regard to how you assess the economic benefit of that, we have probably hundreds of thousands of people employed in our resource sector, but we have to decarbonize.

Through the work that our company has done, we've provided a route for that. That's a long-term benefit that will impact many areas of the economy, as well as the near-term benefit of the money we've brought into the country.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you.

Mr. Cumming is next.

[James Cumming, Conservative, Edmonton Centre, AB]

Thank you to all of you for coming here today. It's been an interesting journey, listening to witnesses who are looking at this particular issue.

Canada has developed this subsidy program that filters through a lot of different departments and different areas. We're looking at early-stage companies, innovation, mature companies, cash-flowing companies and all over the map. It's a significant issue.

My question is to Mr. Cross or Mr. Mintz.

The government talks about this as an investment. I always think of investment as outside investment, where it's the private market and capital markets investing in countries, in businesses and technologies. This investment is borrowed—it's taxpayers' money—which we have already heard takes money out of the economy.

Is there a jurisdiction you can think of that has tried a different strategy, one that is lowering the general tax burden? Is there one that is less program-based, with a lower tax burden, to attract businesses and investment back into the country, rather than the government making those decisions?

We could maybe start with Mr. Mintz.

[Dr. Jack Mintz]

There are two places that I can think of. One is Hong Kong, which lately is having its own challenges, but if you look at the history of Hong Kong, it's had a tremendous amount of success. In fact, it moved away from manufacturing, because a lot of the manufacturing industry moved into China, to become a regional financial power instead. In fact, manufacturing jobs went from half the GDP in Hong Kong in the 1950s to, by the time you hit 1995-2000, down to only 5% of GDP in Hong Kong.

They did a very good transformation doing that. They had an amazingly strict policy about no business subsidies, no tax credits and no special concessions to any business; instead, they kept rates very low. In fact, they had a very low corporate income tax rate; I think it was 15% when I was there in the early 2000s. They had a very low personal income tax rate. They had no withholding taxes, and anyone who tried to suggest having a special incentive was immediately clamped down on, and this was a government with the full backing of the public, making it clear that this was not the way that we're going to go. It was, by the way, a very different strategy from what Singapore did, and Singapore grew quite a bit.

The other one that is close to that model is Ireland. Ireland started off with a 10% tax rate on manufacturing and certain financial services, and then they decided to broaden it to everybody, and they had a 12.5% corporate income tax rate, which is still there today. They did have some R and D tax credits, so there's a little support for innovation that way. I'm not sure about the grant side; they may have done some things on the grant side.

Generally, Ireland had a philosophy of getting their tax rates really low. Ireland is a remarkable story, because when you go back to 1960s, it was a poor cousin of Europe, and it had an immigration outflow. The best people were moving away to either the United States or to Great Britain. It had very poor growth, but they pursued the strategy on the tax side and put money into infrastructure—that was the other important thing—and education. They strongly believed in trying to get their population educated, because people only had educations up to high school. They not only made sure people had their high school education, but they actually had Bernie Sanders-type free tuition for all university and post-secondary education because they wanted people to get skills and broaden their skills.

What happened, of course, is that Ireland's growth was phenomenal. In fact, it became the fastest-growing country in Europe. Companies were flocking to Ireland, partly because there were good tax-planning strategies, but it wasn't just that. Pharmaceutical companies came to Ireland; all sorts of different ones came, and the strategy really worked. As a result, they reversed the immigration flow. They did go through a very tough time with a financial crisis, because the banks weren't as well regulated as in Canada, so they suffered from that, but they have come back. In fact, the interesting thing is that they have been one of the fastest-growing countries since 2010 in Europe and North America among OECD countries compared to a lot of others.

It has been a remarkable story, and it does show you that good macroeconomic policies, infrastructure, education—this is on the spending side—and a really smart tax system can go a long way in building a much better economy.