Foreign Affairs Committee on Dec. 13th, 2011

[The Chair, Conservative, Dean Allison]

Good morning, everyone.

Welcome to meeting 17 of the Standing Committee on Foreign Affairs and International Development, as we look at Canada's international development interests and the role of the private sector.

I want to welcome Dr. Mintz. It's an honour to have you here today. I know you were here on the Hill a little while ago and filled up the parliamentary restaurant, with lots of people waiting, so we're glad we have you all to ourselves in committee for at least 40 minutes.

To all my colleagues, I'm going to try to keep things really moving today, because we have three witnesses and only 40 minutes with each, so we're going to be pretty tight with time. I'll just warn you right now that we will hold you to your time today.

Dr. Mintz, we're going to let you start off. As I said, we've been studying the role of the private sector in terms of helping Canada's international development interest, so we're looking forward to what you have to say. You have ten minutes and then we'll start with our rounds of questioning.

Dr. Mintz, I'll turn it over to you, sir.

[Dr. Jack Mintz, Palmer Chair, Public Policy, School of Policy Studies, University of Calgary, As an Individual]

Thank you very much. It's my pleasure to be here.

In fact it's a bit of fun for me, in the sense that I spent a number of years working on developing-country issues with the World Bank and the IMF. I toted up the number of countries I worked on during the late 1980s and in the 1990s, and a few in the past decade, and there have been 18 countries worked on, particularly on tax reforms in various countries.

As part of that work, of course, not only do you end up spending time dealing with government officials on some of the issues they have to deal with in trying to move their countries forward, but you also end up spending a lot of time talking to private investors about some of the issues they face in terms of their foreign direct investment.

The overall point I want to make is that the real success in where the private sector can help contribute to growth and prosperity in a country depends very much on the strength of the public institutions and public policy in those countries. I'm going to tell you a couple of stories based on my personal experience, but I think it's a very important point, and I'll say a couple of things just at the very end in terms of things Canada can do with respect to that.

Let me first tell you what I would call a sad story, and then another one that is a very good story.

I worked quite a bit at one point in the early 1990s in Guyana. Guyana at that time was--and I think still is--the second-poorest country in the Americas, after Haiti. It's a country with very good resources, a very well-meaning public service, and the people really wanted to do much better than the way the country was moving. Unfortunately, they didn't have the right public policies in place.

One of the saddest stories I found was that the government had allowed Malaysian forest companies to come in and cut down large sections of forest. The government got very little in the way of royalties or tax revenues out of their operations. The regulations, of course, were very poor. And the public, in the end, were very angry, mainly at the foreign direct investors, who they felt were taking advantage of them. But frankly, it was really the bad public policies that were in place.

There was a need to have much better work and advice on the kinds of tax systems you put in place and the kinds of regulatory systems you have for various projects. I was in Guyana to help with corporate tax reform, basically trying to get away from the special preferences--the tax holidays, some of the things that were done in order to attract investment but that ended up being poorly administered, with very little revenue yield for Guyana.

In the end they did make a number of changes, but they had a lot of challenges. They lost so many of their top people to New York and Toronto. It was a real challenge for the people who remained and who were trying to do their best in order to grow the economy--and that's a story in itself.

The key point is that if you have better public policies in place, people will see the value of foreign direct investment in some of the things that do take place in the private economy, because they'll get the benefits and the spinoffs associated with them.

The second story is with respect to Bulgaria. Frankly, of the 18 countries I worked on, this is the one where we probably had the biggest success. In 1997 Bulgaria went through a very severe devaluation and inflationary period. It was a very difficult time for the Bulgarians. They had not a lot of foreign direct investment. Their growth was very poor.

They had IMF and World Bank missions come in on various public policy issues, including improving their monetary policy and a number of other public policies, such as education. And of course I was brought in with a team to work on tax reform. What we suggested was to get rid of the tax holidays and undertake some significant changes in the tax system--basically lowering rates and broadening tax bases, the usual mantra you would typically hear from tax policy experts.

I remember the investment promotion agency head who told me if we get rid of tax holidays we won't attract any foreign direct investment into the country. I said no, actually, if you get the rate low enough.... You've had so many generous tax holidays in place, but if you get the rate low enough you'll find you'll get foreign direct investment coming in. And Bulgaria actually succeeded. They had a government that was very motivated to try to improve things.

Bulgaria undertook a lot of major reforms at that point, including corporate tax reform. They pretty well followed through with a lot of the recommendations we made. Happily, I can say they started attracting an overwhelming amount of foreign direct investment after that point. It rose to 8% or 9% of GDP about five years later. I guess the investment promotion agency was a bit out of work because they no longer had much to do in that sense. Bulgaria's growth rate improved quite significantly over that period. Because they put better public policies in place, they were able to attract not just foreign direct investment but improve their education systems and do a number of other things that I think were very important to the country. They certainly had a much better period after 1997 compared to what happened prior to that period, when their public policies were failing and not doing their job in terms of growth and other things they needed.

What struck me the most in 1998 was seeing pensioners in Bulgaria on fixed incomes and there was very high inflation. They really suffered a lot. Over the next number of years, with much better public finances in place, the country has improved quite a bit. That is a lot of the work the IMF and World Bank try to do in various countries.

I think Canada can contribute to that, especially in areas where we're very strong in terms of our own leadership and in terms of the economy and the sorts of things we do well. Those are of course in two areas: one is in finance and the other is in extractive resource industries, mining and oil and gas. I think we have an opportunity as a country to try to work with countries to try to improve their public policies. In the extractive resource sector, as an example, we often talk about the importance of training and education and things like that. These large projects do have a very significant impact on various countries that are rich in resources.

Handling that is a critical issue. Some of the civil strife that evolves because of the lack of public policies that try to engage the community as a whole I think is very important. When working in these various countries, if you put the right fiscal policies in place, regulatory policies and community development policies, that works very well. It's amazing how good Canadian companies are at understanding the importance of doing these things, as well as American companies, I should add. We have a very good record as a country.

I think over time we should look at how we can leverage the strength of our own private sector in certain areas as they work in various countries and how we can help various governments improve their public policies so they can achieve much better economic growth. None of this is simple, but I can tell you it's really important to get the right conditions in place. This includes making sure the public gets the benefits that come from various investments that do take place in their jurisdiction and helping them along.

I think that's a good place to stop, Mr. Chairman.

[The Chair, Conservative, Dean Allison]

Thank you very much.

We're going to start with the NDP. Ms. Sims, the floor is yours for seven minutes, please.

[Jinny Sims, NDP, Newton—North Delta, BC]

Thank you very much for your presentation. I think what I'm going to take from your presentation is the importance of establishing a relationship with the country we're going into and making sure we're assisting in building capacity and setting up public policy and making sure the communities are engaged so there isn't that backlash.

Do you also see within that a role for the public sector to play here in Canada when you do your international work?

[Dr. Jack Mintz]

Actually, I should that say in a number of missions I was involved in, the Canada trust funds that were given to the World Bank or to the IMF were used to help pay for the consultants who would work in various countries. That's done at the minimum. But I think more than just that should be the public sector contribution. In the case of Canada, we should think of this as really in a sense being a part of our overall foreign policy objectives, working with countries to try to achieve better growth and a better distribution of income in those countries. This of course goes to the importance of education and a number of elements to achieve that. There's a broad framework of issues that have to be dealt with. I think where the Canadian government could play a much more active role than just simply provide funding to the World Bank and IMF is to establish those institutions in Canada that can work with the private sector and governments in relating to a particular country.

Just to give you an example, at the University of Calgary School of Public Policy, we've already been doing some of that. We had Mongolian tax officials over recently for training on how to devise the right royalty system for their mining. When we had them here, we were able to use people from KPMG and a retired Alberta civil servant who worked at Alberta Energy. We have a number of very good people just on faculty at the school, such as Ken McKenzie and J.F. Wen--I could go through the names. We did sessions that were built on both theoretically what is the right system, and then in practice how you implement these things. For example, on the royalty side, some of our royalty systems in Canada are some of the best rent-based royalty systems that have been developed anywhere, particularly with respect to the oil sands, which is an Alberta government one.

[Jinny Sims, NDP, Newton—North Delta, BC]

I'm going to pass it over to Sadia.

[Sadia Groguhé, NDP, Saint-Lambert, QC]

Thank you, Mr. Chair.

Mr. Mintz, you spoke of the importance of having a clear and broad local tax policy, if I may use those terms.

How can we go about ensuring that there is accountability, to the people, with regard to the contributions made and the projects funded by the private sector? How can we ensure that they are equipped with assessment mechanisms capable of validating that the targeted results and objectives are being reached, and in a transparent way?

[Dr. Jack Mintz]

I think that's a good question, and I hope I answer you well after hearing the interpretation.

In any of these things, I think it's really important that you engage the appropriate NGOs in a country that can help deal with that. For example, we had some tax officials coming from Mongolia to Calgary and we talked about royalty systems, but I think to really have more success in a country it would be good if people went over to Mongolia but then you bring together at some point industry, NGOs, and the government, and have sessions where they hear people talk and can ask questions. That helps bring people to the same page, in a sense, on what's the appropriate way.

One of the important things to be done is bringing various people together. Even on World Bank and IMF missions when I went over, we just talked to government officials, and then we personally went and talked to people in the private sector to hear what they had to say. There was never a meeting where you bring everyone together. It's amazing when you share these things how much impact that can have, because people start understanding what the right principles are, what the objectives are, and they start having a discussion about that. I think that helps a lot.

[Sadia Groguhé, NDP, Saint-Lambert, QC]

Mr. Mintz, more specifically, you also spoke of the importance for Canada of maintaining a leadership role with regard to these development matters.

I would like us to view the situation pragmatically. Concretely, could you point to one or two indispensable levers or mechanisms that could ensure that the intervention of these private companies delivers, as you have said, added value to the population? At the same time, these mechanisms need to ensure that the development in this area is sustainable.

[The Chair, Conservative, Dean Allison]

Dr. Mintz, we have about a minute left.

[Dr. Jack Mintz]

Just very quickly, I think part of it is bringing people to the table and part of it is long-term relations. I think Canada would need to focus on some countries. Working with different countries is a lot of work. Probably the best place is where we have a prominent role in those countries. Then it's to create the institutions in those countries that over the long run have the capacity to enact good public policy, both in the government and in the private sector.

[The Chair, Conservative, Dean Allison]

Thank you very much.

We're going to move over to Mr. Van Kesteren. You have seven minutes, sir.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Thank you, Dr. Mintz, for being here. It's a pleasure to have you here.

I travelled to Ghana last year. I can tell you--and you probably know this--that things are not much better. They do have a democratic system, but there doesn't seem to be the ability to move forward.

When we were there, we visited with the parliamentarians. We were travelling to Tamale, which is a northern community, and we asked those who represented that area what we could do as a government. Their response was that they needed help for infrastructure projects such as trains and roads, because they have the capacity for enormous potential in agriculture and other areas, but they can't get to the markets on the coast. They mentioned at the time that the Chinese were doing this. Interestingly, while we were there, we saw an incredible sports facility that the Chinese had built for them.

It seems to me that we're missing something here. The socialists are acting like capitalists, and we, as a capitalist society.... Some of us are of the opinion that the best thing for them is a free market and a free society, where they could experience and enjoy the benefits of those principles, but we need to build that capacity. You mentioned that.

Could you comment on that? Are we possibly missing the point? Should we be going into countries and telling them that we're going to help them build this, but that this is what we expect, that we expect these things...? Should we target those countries? Do you have a vision that you could share with us about those things?

[Dr. Jack Mintz]

First of all, infrastructure and education are probably the two most important capital-building types of expenditures that governments can undertake, and of course they can be very poorly done, as opposed to well done. What you want to do is get them well done.

Also, we know that governments must have a certain role in the infrastructure file, whether it's building roads or making sure there are port facilities. Some countries I have worked in had a very tough time with that, and it did hurt their trade a lot, and of course it's an area they have to improve on. But at times there was also a lot of corruption associated with various projects and other things like that, so that really hurt a lot. Rule of law is something that's really critical.

So sometimes, in regard to some of the things you need to do, it isn't to just have the program. It's also to get the other things done so that things move ahead well, and that's a story of Asia in terms of the growth. I worked in China through the 1990s and saw what they did. They did build their policy capacity during that period. They of course made the investments themselves to grow, but they also got a lot of help from the IMF and the World Bank--especially the IMF--on just getting the right public policy institutions in place.

I can tell you that on the tax side, which was of course the area I was brought in for, they had a horrible system in terms of the way they collected and audited taxes. They got a lot of advice from the IMF about how to separate out functions among collection, registration of taxpayers, and auditing. Before that, you had the same person doing all three, and it was really susceptible to serious corruption. The Chinese did listen. They thought it made a lot of sense. In fact, they liked to hear what other countries were doing, and then they thought it through as to how best to do it themselves.

But it's an example of how you also need to have the institutions in place. If you look at Canada just on the issue of tax administration alone.... The IMF works a lot with many companies to improve their tax administration. Why? Because that's one of the most important things they can do to help reduce deficits in countries, so that countries then have the money and the wherewithal to spend on things like infrastructure and education and to get it right.

We have great experts in Canada who go to all of these countries all the time in regard to trying to improve their tax administration, their statistical collection, and all of these other things. That's just one example of the kind of building of policy capacity that's really important. That includes the justice system, the court system, and a number of other things.

Some countries will respond better than others, but I think where Canada can have the most leverage is in those countries where we have a very active private sector operating, and along with the kind of expertise we have in Canada, I think we can actually help certain countries really improve themselves.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Should we possibly advocate for a tough love approach, where we look at countries that won't cooperate? You and I will agree, that's to their benefit. We could go into a country and say we can help you achieve this, but in order to do it you must do this, this, and this.

The last point I want to make is should we be looking at a public service corps, like the Peace Corps, where we could have people in place and say that we will send those people in and we will train them to build that capacity?

[Dr. Jack Mintz]

On the tough love, that's effectively what the IMF and the World Bank do on conditional loans. They say if you want the money, there are certain things that they require.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

We're not talking about loans here. We're talking about aid at this point.

[Dr. Jack Mintz]

It's aid too.

What I'm saying is that the conditional loan programs effectively are a bit of a tough love program, in the sense that the IMF and the World Bank work with a country. They try to work with the governments themselves, and it is a tough love approach in the sense that if you want the money there are some reforms you're going to undertake, but you have to tell us how you're going to move ahead with those reforms or what sorts of things you're going to do. Sometimes the countries actually welcome that, because they need to say, with their own public, that they must get these things done in order for them to deal with the financial problems that they have. In fact, it helps them when someone like a third party comes in and says this is the kind of direction you have to go in because of all of the politics that are involved.

In Canada I think it would be appropriate to think about some conditional aid programs in that sense, because I think that can be valuable.

The second question?

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

It's like the Peace Corps, a public service corps.

[Dr. Jack Mintz]

I'm not sure. I'd have to think through how successful that would be. I always like to look at the problem first and see what we need to get done and then figure out what kinds of resources you need in order to achieve that. To me, that's a much better approach than to try to say that we're going to start building a peace corps and other things.

What is good is that a lot of young people--and I see it in a number of students we have--are very interested in having some experience in working in developing countries.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

I'm talking about retired people; I'm not talking about young people.

[Dr. Jack Mintz]

Retired people, for sure, because they have tremendous human capital, could be used to help, to come in and bring up that public policy capacity. A good example of that is the tax administration side that I've seen where retired civil servants go in and help various countries. That's a very successful program.

[The Chair, Conservative, Dean Allison]

Thank you very much. That's all the time we have.

We're going to move back to Mr. Eyking. Sir, you have seven minutes.

[Mark Eyking, Liberal, Sydney—Victoria, NS]

Thank you, Chair.

Thank you for coming here today.

The front page of this week's The Economist reads “Africa rising”. There's a bunch of stuff in here. It states that over the last decade the six fastest-growing countries in the world were from Africa. It also says that one-quarter of the growth in Africa is from natural resources, but it also says that the average African earns two dollars a day. So how does this translate and trickle down to the average person?

It says that one of the many things that we can do to help Africa continue to improve is more trade than aid. It states a few things in here, such as lowering trade barriers for many goods coming out of Africa. But there's another one here:

Foreign investors should sign the Extractive Industries Transparency Initiative, which would let Africans see what foreign companies pay for licences to exploit natural resources.

You must be well aware of that. What are your comments on that? How are we doing as Canadian companies? Where does that all sit with that initiative?

[Dr. Jack Mintz]

My experience with Canadian companies is I've seen it on both sides, both as working with the government and also on the other side too. If the government has put in the right regulations and the right transparency, companies will comply. Canadian companies are very much used to that and they understand that.