Subcommittee on Canadian Industrial Sectors Committee on April 23rd, 2009

[Richard Paton]

There are several areas.

We really don't have any energy policies in this country. We are woefully inadequate in regard to energy policy, so you have a lot of energy policy driven by environmental policy, which is not a bad thing except that it has consequences.

Just as an example, if you want to shift to natural gas as a vehicle for producing electricity because it has a lower environmental footprint, that is our feedstock. Natural gas is our feedstock. That shift means the price of natural gas would go up, because an electricity generating facility can consume one heck of a lot of natural gas. So it would be in short supply. Natural gas is the key feedstock for our plants in Alberta.

So we have to think more broadly about electricity policy and energy policy in terms of maximizing the potential for the economy. Nuclear is an example of that. Also, energy policy is an area where you have a lot of balkanization between provinces and the federal government, with federal government playing a small to non-existent role, which is a result of the NEP fiasco, I guess. That's one area.

Secondly, there are regulatory issues. Increasingly, there are major overlaps and duplication between federal and provincial governments. A good example of this is that the Ontario government right now is pursuing a toxic chemicals management program, which is fine—we have to manage these things—but they've designed the program to basically ignore the federal program.

This is going to put our plants and our companies in a situation whereby one province will have one set of rules for managing toxic chemicals and another will have another set of rules. At some point, this adds costs, significant costs. You don't know what the rules are, what the signals are, what the thresholds are, or whatever, so you have tremendous difficulties in regulatory areas.

The climate change area is another one. Right now, B.C. has a carbon tax, Quebec has a carbon tax, others are involved in the western climate initiative, the federal government's doing this, and Ontario thinks it should be ahead of everybody else. We have to harmonize with the U.S., and while I totally agree with Mr. Prentice's direction on that, the fact is that we have a pretty mixed bag right now.

On rail policy, we think improvements can be made. There is rail service review that needs to be done. Rail is critical to our industry. We think there is a need for better competition in rail and better service.

So you can go through a lot of areas, including infrastructure and border issues. I think a lot of progress has been made on the border issues, but the border is so big an issue. With just a little hiccup at the border, our economy suffers hugely. So a lot of work needs to be done on the border. I think the government has done some of that with infrastructure and the speedier movement of goods, but more needs to be done.

There are a lot of policy areas where, if we put all these things together with tax and trade, we could increase the efficiency of our economy quite substantially and improve the possibility of manufacturing being able to compete globally.

[The Chair, Conservative, Dave Van Kesteren]

Mr. Lake.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Thank you.

I'm going to focus this round on Mr. Paton and probably stick with that energy and environment conversation. I will go back to the carbon tax question first. You've talked about energy costs and I know that transportation costs are a big deal for your organizations.

I think it's fair to say that a carbon tax is probably going to be an issue again in the next campaign, because it was the cornerstone, of course, of the present Liberal leader's leadership campaign and the cornerstone of the party's campaign during the last campaign. Maybe you can speak to the effects of a carbon tax on your industry.

[Richard Paton]

I'm going to give you an answer that may not be as simple as you would like. Generally, the business sectors, including the Canadian Council of Chief Executives, have argued that we need some way to price carbon. That doesn't necessarily mean the carbon tax.

Emissions trading, cap and trade, is a kind of way of pricing carbon. Certainly, Mr. Prentice has talked about how we have to align with the U.S., and the U.S. is moving down towards a kind of cap and trade regime. Although we thought Mr. Dion's scheme was a little complicated and not workable—that would be our view of it—we also think the same is true of most of the various proposals that are out there right now.

Permit me a little thought here. People talk about things like cap and trade as if it's like, “Okay, we'll just do cap and trade”. Just think about what it means to do cap and trade. What it means, basically, is that to cap something, you have to make a decision on a number. That means I have 200 plants in this country, and of those 200 plants, maybe 30 or 40 would come into a threshold that would require greenhouse gas mitigation. Somebody has to make a decision as to what the greenhouse gas number should be for those plants.

Who's going to make that decision? A government official? We ourselves can barely understand our plants. Every plant is different, with a different feed stock, a different technology, and different history. Even in Joffrey, which you probably would be familiar with, there were some built in the 1970s, some built in the 1990s, and some built in 2005. They're totally different plants.

The knowledge that you must have to make a decision on the cap is huge. The amount of government bureaucracy you need to make a decision on a cap is huge. Multiply that times the American economy.

So somebody has to make a decision. Then you have to get a differential between the number and the ideal number. Then you have to make that available either for punishing people or for rewarding people. Well, now we're talking about allocating money, serious money. This is going to make the mortgage meltdown look easy. There are going to be a lot of very difficult issues involved in setting caps that will affect industry dramatically.

The amount of intervention you would have in the economy would be huge, and I have a very simple principal policy: do no harm. I'd like to know just how we're going to design this and do no harm.

To conclude, I don't think the issue is carbon tax versus emissions cap and trade; I think the issue is design. That's essentially what the round table report said just recently. You have to design this to get a price on carbon to incent new technology. We agree with all of that. We are totally a sustainable development association, but you have to do it in a way that works. I personally have not seen any indication that anybody knows how to make this work. The European experience is a disaster on this. There's a lot of work that needs to be done.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

There's a question that follows with that, I guess: how important would it be? Because one of the things the Prime Minister has said right from 2006 until now is on the importance of making sure that there's a global solution on climate change and that everybody needs to be a part of it. Canada can't implement certain restrictions and not have the Americans, the Chinese, or India implement similar restrictions. Would you agree with that concept?

[Richard Paton]

I totally and absolutely agree. Well, just think about that. Look at the numbers. The Chinese are going up like this; all our growth's going over there. So essentially if you don't do that.... Because our business is price per pound, and a cent per pound changes where the business goes. If you add a tax, either directly or through cap and trade—because it'll end up being more or less the same thing—and that affects the product by a cent or two or three per pound, production will move, and it'll move to countries that probably have more of a footprint than we do. In fact, in terms of this issue, which is a very unique global issue, you actually make the problem worse.

So yes, I totally agree with the views of the Prime Minister and Mr. Prentice on this. We have to align with the U.S., and China, India, and the Middle East have to be in.

[Fiona Cook]

I would just add that there's the issue of getting the price for carbon right, but underlying this is that substitutes have to be available. I would say, too, that we had a good case study on this when we had that rapid increase in energy prices about a year ago. We saw what kind of impact that had. There weren't any substitutes available, so people cut back. Manufacturing operations shut down and moved elsewhere. Places like China and India subsidize their energy costs, so they didn't suffer the same increase.

That was sort of a good study of what putting on a carbon tax would do. In the short term, it wouldn't really do anything. It wouldn't reduce our consumption of carbon to move to more sustainable options, because they're not available. That's why technology really is the key, I think, to moving away from a carbon-dependent economy.

[The Chair, Conservative, Dave Van Kesteren]

Thank you, Ms. Cook.

Monsieur Bouchard.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

Mr. Paton, you referred to the Rajotte report and its recommendations. You also said that there is an urgent need for action. One of your priority solutions seems to be the accelerated capital cost allowance on investments.

I would like to hear your opinion on loan guarantees in manufacturing. Do you think that loan guarantees should become a priority? I would also like to hear your opinion on any other priorities that you would like to see.

[Richard Paton]

Our industry has never advocated loan guarantees. The chemical industry has never asked for a loan guarantee, and it probably never will.

However, one has to recognize that the situation faced by some sectors, like the auto sector, is, although partly their own doing, also partly the result of a crisis brought to us through other sectors--the mortgage sector, the financial sector, etc. I don't have any specific concerns about loan guarantees for industries. I'm just happy that they're loan guarantees and not grants.

Given the situation, a repayable loan is not an inappropriate response to the situation, given the effect on jobs, communities, and industry.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

Fine.

You said that some sectors are in difficulty and that involvement is needed to help them. Are you able to identify the sectors that are in a worse position than others? Manufacturing or forestry, perhaps?

[Richard Paton]

I'm not sure I can do that for you. I think all sectors are affected. Obviously, some are more visible than others, like auto and forestry. But forestry, like us, has had continuing issues, particularly related to the softwood lumber issue with the U.S. It's hard to distinguish between sectors. I think all sectors are faced with issues because liquidity demand is affecting all parts of the economy, but only some sectors are managing to do well.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

Thank you.

Mr. Nordenstrom, you said that, as orders dwindle in the railway industry, people have to be laid off and let go, meaning that jobs are lost. You even said that those employees would be called back to work eventually. We know that this situation could last several months, maybe years.

Do you see a problem with workforce renewal? If so, have you given any thought to measures that the government could take to make sure that, when the recovery comes along, your workforce will be able to respond to the needs of the railway industry?

[Jay Nordenstrom]

Thank you very much for your question.

The industry in our sector is very aware of and understands the need for succession, especially with the changing workforce and folks coming to retirement age.

But also we're seeing some challenges in getting the folks coming out of colleges, universities, and trade programs into our sector. We're very technology driven; however, we also have mechanical and plant production areas and need to fill those capabilities.

If we position ourselves with the support of government, we believe we can grow our businesses. We believe we have a bright future, should we come out of this not completely economically crippled or, in some cases, not having gone elsewhere or not just selling our technology, our IP, to another competitive company elsewhere, out of Canada.

I believe the government again has a role to play in encouraging young people and maybe people outside of work with new skills development. As I said, we have an opportunity not only to repatriate some of our lost jobs, but to help absorb the lost jobs from the automotive and the steel sectors, because they're not completely out of line with our capabilities and our needs within our production plants.

But we certainly could use some support from government to make sure that rail is a priority, that rail is a growth sector. There are a lot of technologies being developed out of our sector; it's not just aerospace doing it. We see a lot of engineers coming out of universities and wanting to go into aerospace. They have their own issues and I believe you're going to hear from them later on in the committee hearings, but we want to make sure that government recognizes rail as a sustainable mode of transport and a growth industry in Canada.

[The Chair, Conservative, Dave Van Kesteren]

Thank you, Mr. Nordenstrom.

Mr. Lake.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

I want to chat a little bit here about value added, if I may.

Mr. Paton, you mentioned value added. You mentioned Alberta specifically. This is a big deal in Alberta; there's a lot of conversation around it, as you mentioned. You mentioned that the Alberta government is doing a good job.

One of the challenges, though, that we've had in Alberta isn't necessarily that government policy directly hurts value added; it's the simple demographics. It's the fact that up to this point the labour market has been incredibly tight in Alberta. If you want to set up operations to add value to bitumen, or whatever it might be that you want to add value to in Alberta, you'd have a hard time finding the workers, up to this point, to do it. I think most people are projecting that, once we come through this recession, this will be the case as well.

How have your members dealt with that labour situation? And how are they anticipating dealing with it as we move forward?

[Richard Paton]

Well, it definitely is an issue. We're faced with the same demographic issues that Jay is faced with. Fortunately, Alberta is a good place to work. Our plants are in places such as Prentiss and Joffrey, where our labour force is extremely stable. They're attractive communities to live in; they're relatively low-cost communities.

We don't employ huge numbers of people. A plant is a pretty high-tech affair, with engineers and operators who are very highly educated and very highly paid. As far as the skills problem is concerned, I know a lot of industries face an issue, but our members have not asked us to be involved in the skills problem. They think they can solve it without the need of an association.

Now, if you add the upgrader issue, that does add—

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

That was what I was getting at, actually.

[Richard Paton]

—a new set of pressures. We haven't felt that the skills issue would be the main determinant of whether upgraders happened; it would be more the tax things that Fiona mentioned, and simply the fact that the Alberta government does face quite a challenge in this area, because the incentive is just to take the bitumen, put it in a pipeline, and send it out of the country. Especially if the tax structure is the way it's been designed, then there's not much incentive to build upgraders.

I think that's the problem Alberta is facing. Even though they have their “bitumen in kind” policy, they need a bit of a breakthrough to get a couple of upgraders established. I know they're thinking about that issue, and they understand the constraints they're dealing with, but they are really thinking about how to deal with it.

[Fiona Cook]

I don't think labour is.... It plays a key role. Just remember that a year ago eight upgraders were on the books and that was at the height of a time when the economy was still going strong, and the labour supply issue was still tight. They were on the books then, but now we've seen them cancelled with the drop-off in energy prices.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Right, but those energy prices will rebound, although maybe not to where they were. Surely those companies are aware of that and will have plans to move forward once energy prices move forward, or even before that in preparation.

What we saw prior to this global slowdown were situations where we talked about tens of thousands of people moving into the Edmonton area to start working on these upgraders; they would have had nowhere to live. House prices went up so dramatically. I think it would be fair to say there were probably some projects, although maybe not the specific upgraders you're talking about, that didn't happen when things were good and these were projects that would be serving us very well right now. They didn't happen simply because the bodies weren't there; the people weren't there to work at them.

Again, moving forward, I'm not talking about what's happening in Joffrey and in the existing operations. I'm thinking more about if we're talking about a real downside in terms of missed opportunities for value added, naturally if we were to create those opportunities, through whatever government policies, we would need people to actually be working in those positions, and that would still be a challenge in Alberta. That is what I'm asking about. Looking forward, is there a plan to address that?

One of the things we talked about in the previous meeting with the Conference Board and the manufacturers' association was, for example, adding value, not necessarily in Alberta. We talked about situations where, to add the value, we could move product to where more people are out of work and there's a labour force that could do the work, and then transfer it from there.

Maybe you could speak to this, and maybe Jay could add something to this, coming from the rail side of things. That would be a big part of the solution. What steps might you and your members be looking at to facilitate that?

[Richard Paton]

Right now, we're not looking at that, but I must tell you it's very interesting that you add this insight. There are communities—Jay Myers is right—such as Sarnia and Varennes, Quebec, where considerable skill capacity essentially has had to leave the industry because of plant closures. I think there is some flex in our industry for those kinds of relationships.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Mr. Chair, could we go to Jay for a second?

[The Chair, Conservative, Dave Van Kesteren]

You're over time, but we'll go ahead.

[Jay Nordenstrom]

The simple answer is yes. Absolutely. We have that capacity and we have a commitment by some of our OEMs, our original equipment manufacturers, to go and do just that. Right now, you can hear the crickets in our plants. That's our reality. We need to change that and we need to change that quickly. We know the demand is there. The railways want to do this. I'm not talking just about the CNs and CPs of the world; I'm talking about CSX and UP, these guys in the U.S., too. They're still investing, but a lot of these things have been delayed, and we're getting hurt right now.

We need to make sure we're in a healthy position. We know absolutely that the growth in demand is going to be there, so when that happens, we have a commitment from our OEMs that they're going to bring these folks in. They want to deal with those demands and orders, so they will look to other sectors that have been hit in those communities, where they can at least drive out there or, better yet, take the train, get to those plants, and work, so we can beef up those plants and, hopefully, grow.