Subcommittee on Canadian Industrial Sectors Committee on April 28th, 2009

[Claude Bachand, Bloc, Saint-Jean, QC]

In fact, 55% of that activity is concentrated in Quebec.

[Claude Lajeunesse]

True.

The message is clear. I think that my colleagues will be delighted to work with the caucus and answer any requests that the chair and its members want to put to us.

With regard to the military equipment purchase program, I have already commented on that subject. I think that improvements could be made to it. In my opinion, it is a matter of fostering greater job creation in Canada and the ability of our industries to export their know-how outside the country. We have met with the three ministers involved. They told us that they were prepared, that they recognized that transparency was important in the development of government procurement policies and that consultations with the industry needed to be held. Earlier, I mentioned the FWSAR.

Clearly, such consultations need to be continuous and predictable. Furthermore, we need to be well ware of the Canadian industry's capabilities. In my opinion, these two points need to be discussed now, in order to improve the government procurement policy and ensure that taxpayers benefit from the very significant investments that the government has decided to make in the defence industry.

[J. Richard Bertrand]

Good day, Mr. Bachand.

Yes, the caucus is extremely important. As was mentioned earlier, the aerospace industry in Canada is a real masterpiece. There are some delicate elements. Nathalie referred to them earlier. Federal support is essential, but we must not forget provincial support. Quebec is investing heavily in this industry. It is extremely important.

With regard to the C-17 plane, you may know that it contains a Pratt & Whitney motor manufactured in Hartford, U.S.A. With the Flight Operation Centre, which is moving to Mirabel, and with Bombardier, with our new Pure Power Geared Turbofan motor, that we bring in from Hartford, Canada can benefit from significant spinoffs. There will be spinoffs concerning the C-17 planes at the very least.

With regard to the aerospace caucus, I would say that it is becoming increasingly important. Even if governments change, we need to be clear that there will be a policy and that it will continue to apply over the coming years, that it won't change each time. The uncertainty in the market is becoming a problem, in our opinion. It might be much easier to find the necessary support in other countries. You are no doubt aware that the major companies don't wait too long before deciding to go elsewhere if they find themselves in a chronic situation. Fortunately, things are different in Canada. Our governments want to help us. They have done so in the past and want to do so now as well as in the future. It is important to have long-term, concrete measures.

[Nathalie Bourque]

I agree with regard to the aerospace caucus. We are all extremely pleased. We really like the members of this caucus and we know that they are knowledgeable about this sector. We have been monitoring these issues together for a long time, Mr. Bachand.

I would like to briefly talk about the ACAN contracts. I'm not here to talk about government decisions concerning the urgency of the situation. However, we are talking about very, very long-term contracts. We want to benefit from spinoffs from such contracts, which are supposed to be dollar for dollar. We all need to be extremely vigilant in ensuring the quality of what comes out of that. Companies do what they can, but they rely heavily on government assistance. The team at Industry Canada does a good job of following up, and both the current government and the opposition parties need to continue to support it. I would repeat that these contracts are spread out over 20 years and we need to give ourselves some time. We always want things to happen fast, but these are long-term contracts.

[The Chair, Conservative, Dave Van Kesteren]

Mr. Lake.

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

Thank you, Mr. Chair.

Thank you all for being here today.

I'm tempted to ask how all of you got here today, but when the guys in Washington asked that question, I think it was worse for your industry than the auto industry.

[A witness]

I drove.

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

I've done this a few times here, but I want to start with a little bit of global context, if I could. There are several quotes from organizations around the world talking about the situation in Canada.

In the U.K., the Daily Telegraph in London has written:

Some will regard it as alarming that, in current times, world leadership should rest with Canada. But the Canadian Tories are a model of how to behave during a downturn.

They have kept spending in check and reduced taxes.

....If the rest of the world had comported itself with similar modesty and prudence, we might not be in this mess.

And The Economist in the U.K. states:

...in a sinking world, Canada is something of a cork.... The big worry is the fear that an American recession will drag Canada down with it. Mr. Harper says, rightly enough, that his government has taken prudent measures to help Canada weather a storm it cannot duck....

In the States you have The Wall Street Journal saying:

Canada is connected at the hip to the world's largest market, and collateral damage coming from the housing and financial meltdown in the U.S. can't be ducked. Tax cuts in 2007 softened the blow and kept Canada out of recession.

And Newsweek says:

If President Obama is looking for smart government, there is much he, and all of us, could learn from our...neighbor to the north.

There's more that I could read, but I won't.

There are other organizations, though, that have spoken about Canada's relative strength. Admittedly, we're going through a difficult time, and Canada is affected by that, but the World Economic Forum has ranked our banking system number one in the world. I think the U.S. is 40 and the U.K. is 44. The IMF and OECD have both talked about Canada coming out of the recession sooner and stronger than other countries—which is really important, of course. We're the only country in the G-8 that ran a surplus in each of the last three years; every other country in the G-8 ran deficits in each of the last three years.

So it's a very different circumstance here in Canada from that in other countries. I would think that yours is the very type of industry that would benefit from this stable, relatively strong environment, especially in the long term. Of course, we're going through a very difficult situation in the short term right now, but in the long term, Canada is positioned very, very well. How important is that for the long-term stability of your industry?

[J. Richard Bertrand]

It is extremely important. We talked about long-term issues today. We talked about long-term procurement policy. We talked about long-term investment policy. For instance, there was DIPP and then the TPC and the SADI. The fact is that at some point in time, someone has to realize that there has to be a coherent program over the long term, whatever it's called.

George and Nathalie mentioned very well the EDC issue. The fact is that while you may see it as sort of stability and so on, EDC also has to look at its investments, and its investments are to our clients. If our clients are supported and helped through EDC, then we're able to continue with our business.

You started off, though, with a comment relating to how we got here. But let me tell you that after that disastrous committee hearing, the estimates are that there are over 3,000 corporate aircraft for resale in the United States and North America as a result of that comment. The National did a report on that a couple of weeks ago. This is critical. If government can play another important role, it would be to remove that stigma that was all of a sudden on corporate travel. Corporate travel really was created fairly heavily after 2001 because of the dangers of commercial flying at the time, and so on. The other thing is that it's a very important part of the transportation process around the world. It's a very important business for Bombardier and us.

So while we look at some of the stability you're mentioning, let me also say that we, as corporations and as companies, have to act in advance of what's going to happen out there. I think next year, 2010, is going to continue to be a difficult challenge, and maybe beyond that, so continued government support and understanding is extremely important.

Just as a final comment, recently we had to lay off people, about 10% of our workforce equally around the world, but we came right here to HRSDC and asked for help, and they brought in a team for a work-share program overnight. They flew down to Mississauga and helped work with some of our team and our players, and I congratulate them for that, because they turned around very quickly. I just wish the Province of Ontario turned around as quickly, but it was focused on other industries at the time.

[George Haynal]

I'll take my turn.

I apologize, Mr. Bachand, for not having answered your questions, but I think that my colleagues covered the matter more elegantly than I could have done so.

You ask a critical question, Mr. Lake. I don't have a coherent single answer to your question, but I have pieces of an answer.

This is an industry that is uniquely global. In other words, the Canadian environment is important, but I would say that it's not overriding. It's not determining, because our problems are not here. Thank goodness they're not here. We're very grateful for that. Our problems are with the rest of the world. It's like that old headline in one of the London papers in the 1950s that said “Fog in Channel, Continent Cut Off”. Well, that's kind of the environment we're in. If the global system isn't working, the strength of the Canadian system can't compensate, if I can put it that way.

I will go concretely to the issue of the banks. Yes, our Canadian banks are healthy. They're doing well. They're stable. They don't do much lending in our business in the first place, which is another story, but even if they were totally enthusiastic and engaged, they couldn't possibly compensate for the lack of liquidity in global markets. Their stability is an advantage, but a mitigated one. I guess that would be, in a sense, my bottom-line comment.

I want to say something else, though. If we can exploit the stability we have managed to attain here, the relative strength of the economy and of the financial sector—all five of our banks are now among the 50 largest in the world, whereas none of them were last year, which is an interesting change in relative position—to attract investment into this country, including into the aerospace sector, that would be a huge asset. The question is how you leverage that strength and stability to do so. I think Richard covered it, in a sense. You need stability in policy. You need long-term staying power. You need commitment and a commitment to partnership that obviously is reciprocal.

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

Does anyone else want to comment on that?

[Claude Lajeunesse]

You've described, of course, winning conditions, and those are important to the success of an industry. The only point I would add to the comments that have been made with regard to the rest of the world and its impact on what happens in Canada is that we also have a very strong civil service within Industry Canada, with whom we work constantly. This is a very big plus also for the industry: to have people who understand the needs and who work very hard at responding to these needs. That's what I would like to add as a comment.

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

All right; thank you.

[The Chair, Conservative, Dave Van Kesteren]

Thank you, Mr. Lake.

Mr. Thibeault.

[Glenn Thibeault, NDP, Sudbury, ON]

Thank you, Mr. Chair.

Thank you for coming today.

As the representative from Sudbury, I always talk about mining. I was trying to figure out how I could talk about mining today, but I realized that we have such great robotics in automation development in Sudbury that we can mine the moon, but we have no way of getting there. Hopefully, your engines and your planes and stuff will be able to get us to the moon someday.

There's one thing that comes up that I'd like to ask a question on. I'll open it up to everyone, but maybe I'll start with Mr. Lajeunesse.

You talked about the CAW seeing the aerospace industry as the jewel. One of the things we heard is “polish”. I'd like to know what specifically we can do as parliamentarians to ensure that we continue to see this industry shine, so to speak. I've heard a little bit about long-term future and those things, but I'd like to know what you think the specifics are.

I'll start with you, and then maybe open it up.

[Claude Lajeunesse]

Thank you.

It's not easy to answer in the amount of time given, but let me just make a few points.

First of all, to be successful the industry needs to have stable, predictable, comprehensive support from our governments. The industry needs to have stable, predictable, comprehensive financing, available not only to the industry as it wants to invest in developing, for example, their capacity to produce, but also for the customers who will purchase the goods we produce.

The second point that's clearly needed for the industry is a solid understanding of the impact of the procurement process. We've already gone into this, but clearly the Government of Canada, in this case, spends a considerable amount of money for defence. Let's make sure that money has the maximum impact in creating industries in this country, in creating jobs, and in making sure that we continue to develop our export capabilities.

I could go on and give you more, but I think those are the two key messages: stable, predictable, comprehensive funding and a procurement policy that is a winner for the Canadian taxpayer.

[Nathalie Bourque]

I totally agree. I will add two more.

One is innovation. Without innovation, our industry is going nowhere. This is a business in which you have to dream and have to come up with new solutions, either for us to better train people, or for Pratt & Whitney to have engines that will not cause people to complain that they're too noisy or too dirty or whatever it is, and a new aircraft that is so light that it will help on the energy side and everything else. Innovation is key.

And how do we do innovation? We have an incredible base. CAE has the biggest base of engineers in one place in Canada, which is Montreal; we have 1,250 on the spot in the same place. Constantly they look at how they can improve in our business. I know my colleagues have the same situation.

By the way, for innovation—we've stressed this point many times—we need government support to do R and D, because our colleagues somewhere else around the world get military contracts to do it, non-repayable; we repay. We're fine with this, but we have to have the government support.

The other one is that when we start talking about new military programs, in whatever it is—but let's take the example of the JSS—we have to be at the table from day one. If you want us to get good IRBs, if you want us to have technologies that are developed in Canada, we must be there from the beginning, be part of the discussion with DND and with all the suppliers around the world.

These are the two points I would add to those of my colleague Claude.

[J. Richard Bertrand]

If I could take a moment and pick up about the trend for the future population that's going to populate our companies, what we're very worried about--and as a matter of fact in Montreal Aéro Montréal is working on an analysis of this as well--is the future population. If you're a young student right now going into engineering on one side of the equation you have a lot of money being spent on infrastructure so you might say, I guess I should go into civil engineering because there's a lot of money going into that area. But the engineering population for us is extremely important. For these three companies that are here right now, engineering is the core of what we do in research. The reason we invest close to $20 million a year in 16 to 18 universities is because we have to work with these students. If there's one message that the aerospace caucus could work on, it's to help the future population of workers understand that this is important. It's not only at the university level but at the colleges, the training, and so on. I just want to emphasize that.

If you want to see a jewel in Canada, by the way, right now you can go to the British Columbia Institute of Technology, which is just a five-minute cab ride from the airport in Vancouver. You'll see an absolutely state-of-the-art facility that is phenomenal. It's got aircraft given by Bombardier. It's got engines given by Pratt & Whitney. It's got investments by Honeywell and others. It's got a control room for air traffic controllers, etc. So that's the future population. One of the things we fear, and we fear very much, and I'm sure for the auto sector it's the same thing.... The auto sector is down, so somebody who's studying is saying they're not going to go into that area, the aircraft repair or whatever it is, and that's not the case.

The fact is, and Claude Lajeunesse said it very well, that the long term looks very good for our industry, and it's an industry that's very important. If you look at the average salaries in the industries and that sort of stuff, it's about $82,000. That's about the average salary of those in the aerospace industry. That's a lot of very skilled labour. I don't want to extend that too much more than to say an important role for the political process, in the speeches and so on, is to really help the students understand that there is a future. In 2001 Pratt & Whitney invested with the government at $400 million a year. We came out of that as the leading producer of engines in the small to medium-size engines because we looked at it from the future. This is what we're doing now as an industry. This is what the companies with me are doing.

[George Haynal]

I'll start with two acronyms, and then a long clause, if I can put it that way. The acronyms are HR and R and D.

I couldn't agree more with what our colleagues said about the absolutely critical nature of the human factor here. This is not an industry where labour is a commodity. Everybody in this industry works at a level of sophistication that is above the norm, and I'm not talking just about engineers. I'll come back to the engineering side, since it's an interesting illustration of the point.

The fact is that the people who work on the shop floor—and you're familiar with the CAW—are people from whom an exceptional level of sophistication is demanded each and every minute that they're working, because it's on their capacities that the security of these airplanes relies. Developing the human resources, developing the labour pool from which to draw, is an absolute precondition to this industry thriving.

Though the industry is cyclical, you can't just say, “Well, actually, next year we're probably going to need 1,000 more people”, and then create them out of thin air. The management of this human resource base is hugely important, and the development of the base is spotty, if I can put it that way.

In Montreal, the cluster has in fact come together and has invested heavily in having a polytechnic institute, if you like, for developing the labour force that the industry requires, and even there, it's tight. But it's absent elsewhere. Toronto doesn't have such a facility, and it would make a huge difference.

I can tell you that we're building a plant in Mexico that is making components for aircraft. The federal government and the state government where we're established built a separate polytechnic institute even before our plant went up, because they saw that as the key not just to attracting our company but to attracting every other company in this business from around the world. Without insisting too much on it--no, I should say it's impossible to insist too much on that subject. This is a role for governments, federal, provincial, and municipal.

On R and D, we've talked about it, but it's critical. Investing in R and D requires government participation for two fundamental reasons, and maybe three.

One is that these investments are always huge. Before you start to enter into this domain, you're dealing with the highest state of technology in the world. It has to be globally competitive, so it has to be done at a global level, and we're competing against giants that have very strong partnerships with other industries. Also, innovation is critical, as Nathalie said. It's absolutely the key to succeeding in this business. And the risks are huge. Banks simply won't bankroll risk that can only be compensated over 30 years. That's critical.

The last thing I want to say is that you're asking what you as parliamentarians and other decision-makers can do to help sustain this industry. Let me suggest a novel approach, a sort of back to the future approach. Industrial policy had a bad name, but in this sector, actually, industrial policy was critical in creating this global success. The focus on this sector, with the sustained partnership and the in-depth understanding by the public service that was mentioned, is absolutely critical to being able to manage.

I think it is critical for decision-makers in this country to understand this sector for what it is. It is a Canadian-based industry, but it is a global industry. Our competition isn't domestic. Our inputs aren't all domestic. Our sales are largely international. In order to understand that, it has to be understood as a sector that is unique. I guess all sectors are unique, but in this instance, it is unique in the international nature of its activities, its supply chain, its human resource issues, and everything else.

[The Chair, Conservative, Dave Van Kesteren]

Mr. Garneau.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Thank you.

I'd like to focus on R and D at this time and on a couple of comments that were made previously by two of the speakers. I'll start with Monsieur Bertrand.

You mentioned a strong linkage. Obviously, Pratt & Whitney does a lot of R and D. You mentioned strong linkage with universities. I'd be interested in knowing a little more about that. You talked about hundreds of projects with about 16 universities. Could you tell me a little more about the mechanism that you have created? Is it one just between you and the universities or is the federal government involved in it?

[J. Richard Bertrand]

Most of them are our company with the universities. Some are projects that will work with, for instance, NRC and some of the projects in other organizations.

In fairness to the government, we take a portion of the R and D investment the government makes with us and we reinvest it in the universities. So as part of the commitment we make--and as a matter of fact, for my confrères here it is the same situation when they sign a contract with the government, and it is a contract and has all the commitments--we do that. In addition to that, the university investments for us are critical. They are critical, because we find a lot of technology.

To give you an example, right here at the University of Ottawa we invested $300,000 a couple of years ago. There are a couple of professors and students working on embedding particles at very high speed in metal to see if this could help in terms of the heat in the engine. What we do at Ryerson, where we have an actual institute, is actually go through some of the technologies related to combustion and the requirements of combustion. A lot of the work being done in universities now is in terms of the environment--how can we make these lighter, greener, and so on? That part of research is important.

In effect, when we work with the university, we work on commitments. We sign contracts with the university, and we have outputs, and then we monitor. Also, on an annual basis, we give out fellowships to deserving researchers to give them additional incentive. It is significant work. Our new 600 engine, which is the small engine of the future, if you will, and the very light jet market have activities in Montreal that are extremely important.

Finally, we invest through groups like CRIAQ, which we've talked about, in Montreal. We have a project going forward, hopefully with the government, on GARDM. And then there's the future major platform program, which we are working on to get Industry Canada investment to help us to go forward.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Thank you.

Ms. Bourque, you mentioned having recommended that R and D tax credits be fully refundable. That has been suggested by other industries too. In your own words could you explain to me why you feel it is important for them to be fully refundable.

[Nathalie Bourque]

Thank you, Mr. Garneau. Yes, you are correct. A coalition was created in that area a few years ago. It included people from the forestry sector, information technologies, the pharmaceutical industry and the aerospace industry. This coalition was easy to put together. People heard about it and they called us to be part of it.

In short, let us suppose that, now, $100 million in research and development work is being done. We get a $20-million tax credit. That is fine if we need to pay $20 million in taxes. The two amounts are equal and the company doesn't have to pay out any funds. The problem that a number of companies, perhaps even almost all companies, have experienced in the past, is that there are years when, despite a good financial situation, the tax credit amount and the tax amount are not equal. So, at present, the federal government has in its coffers—we don't have any official figures—$2 or $3 billion that should have been remitted, or that it didn't get, in taxes. I hope that you are following me. This amount varies for these companies from $2 million to, in one specific case, more than $1 billion.

We know that we will ultimately get the money in the short or the intermediate term. The government's response was to increase from 10 to 20 years the refund period and to move back the date when the credits were applicable. However, we are experiencing a unique financial situation. You need only open the newspaper or listen to any TV broadcast to learn that. There is money available, and it will be returned to us in three, five or seven years—at least so we hope—but we cannot access it. I think that if the federal government remitted those amounts, it would be a good way of investing in the economy.

For your information, the Quebec government has already done this. The investment tax credit amounts are fully refundable in Quebec. I think that it would be extremely advantageous to do this at the federal level and it would really help the Canadian economy. I will leave it to economists to give us the figures concerning the number of jobs that this could help maintain or save.

Thank you, Mr. Garneau.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Thank you.

When you talk about refunds, who is entitled to request the credit? Currently, it is Canadian companies with their headquarters in Canada. Do you think it's important to provide SR&ED to companies doing research in Canada but which are not Canadian companies?