Industry Committee on Oct. 17th, 2006

[The Chair, Conservative, James Rajotte]

I call the committee to order.

We are continuing our study of the manufacturing sector, and we have two sessions today. The first session is with the Food and Consumer Products of Canada, and the second session is with officials from the Department of Finance. For the first hour, from 3:30 p.m. to 4:30 p.m., I would like to welcome the Food and Consumer Products of Canada. We have Gemma Zecchini, senior vice-president in public policy. We also have Blake Johnston, vice-president of government affairs.

You're the only witness for the first hour so you have the full hour. We usually allow a ten-minute opening statement, so you can take up to ten minutes for your opening statement and then we'll have questions from members.

I believe, Ms. Zecchini, you will be starting the presentation at this point.

[Gemma Zecchini, Senior Vice-President, Public Policy, Food and Consumer Products of Canada]

Thank you, Mr. Chairman.

I was joined by a few members before we started to entertain you today. I'm not sure that my entertainment skills are up to the occasion, but I certainly hope in some small measure to inform you about some of the challenges that are facing the food and consumer products industry in Canada, and I hope to have a genuine dialogue with members of the committee.

I'll start off by thanking you for inviting us. It's a great pleasure to be here. The issues you are exploring are of a great importance to our industry.

By way of a short introduction, the Food and Consumer Products of Canada is an industry association. We are the largest trade association representing food and consumer products in Canada.

In 2005, to give you some small measure of the scope of our industry, it employed about 325,000 Canadians, making it the largest employer in the manufacturing sector. We contribute about 12% of Canada's manufacturing GDP, about 6% of Canada's GDP overall.

I essentially want to do four things today. One is to give you a little bit of an overview, a snapshot, of some of the trends in our industry today and how the industry is faring. In sharing that information with you, I hope you will come away sharing some of our concerns about what the future holds for food manufacturing in Canada. What I would then like to do is focus on one key barrier to growth and productivity that we're facing in our industry. The good news about that key barrier to growth is that it is very much in the government's purview to be able to do something about. It's not something that is sort of monetary policy, international trade, or any of those things that bedevil governments but a lot of governments can't do anything about.

The third thing is a review of some specific asks that are germane to our own industry, the food industry in particular, and that represent in our view some low-hanging fruit for action.

The fourth thing I will do is end with an urgent recommendation to follow the advice of the OECD, which reported in 2004 that Canada should look to renewing and revamping its regulatory environment.

I hope after that we can answer some questions and have some dialogue about my presentation.

I think everybody has a copy of the brief in front of them, beginning about halfway down. I won't read everything through, but there are a few trends taken from the Conference Board of Canada's most recent industrial outlook. These are some of the trends that I think are most troubling in the food manufacturing sector.

As of the winter of 2006, as you can see, our investment is lagging in this sector. It lags behind manufacturing as a whole. It's about 1.9% of nominal investment, which is the value of goods and services produced, versus 2.7% in manufacturing. The ability to commercialize innovation is a key factor here, and I'm going to talk more about that as we go on.

Capital intensity in this sector is also lagging. In manufacturing as a whole, you have about $85,000 of capital stock per employee. In the food manufacturing sector, we have about $54,000 in capital stock per employee. As a result of that lag in investment in capital intensity, we have, unsurprisingly, labour productivity also down. Again, profits this year are expecting to climb marginally, about 2.6%, after having dropped about 20% last year.

These are some of the trends that bracket our industry. That, of course, raises some real concerns about the viability of the industry overall and whether or not the future of the sector is secure. Some of you around this table probably are aware of industries that have sort of gone the way of the dodo, Canada Textiles being one of them. Obviously, today, pulp and paper is also under threat.

Traditional food manufacturing is a low-growth industry. Natural areas, where it usually grows...it is because of population growth. We have a fairly stable population in Canada. We have an aging population, which also affects how much traditional food you can actually produce from growth.

When reviewing the transcripts from this committee, I noted you heard from a number of witnesses, including the Governor of the Bank of Canada, David Dodge, and he outlined for you a number of challenges that I will not repeat that are facing the manufacturing sector. A lot of those challenges were well beyond your control.

However, there are certain important levers of productivity and competitiveness that domestic governments do retain and that this committee can directly influence. While fiscal policy is important, equally important is a flexible and responsible regulatory system. That's a powerful instrument governments can use to put Canadian manufacturers in a better position to innovate and grow.

Mr. Chair, is there a problem following the text?

[The Chair, Conservative, James Rajotte]

No, no problem at all. It's very good, thank you.

[Gemma Zecchini]

When Governor Dodge was asked what role the federal government had in helping the manufacturing sector, one of the things he cited was a flexible regulatory regime. He said that was going to be critical, and we couldn't agree more.

Regulatory modernization has to get on the Government of Canada's economic and competitiveness agenda. We've heard this now from the OECD in 2004 in their report. We heard it from the External Advisory Committee on Smart Regulation in 2005. We've also heard it from various sectors in manufacturing who, while they all have different specific regulatory issues...overall the problems with regulatory frameworks are similar.

This represents for us the most significant barrier to innovation and growth, and an outdated and poorly functioning regulatory system is what stands in the way for most of what we as an industry would like to see in the future.

We're by no means alone in this regard. There are many barriers an inflexible system puts in our way. Just to name a few, we have complex and lengthy product approval procedures and processes. Sometimes the time it takes to get a product approved will be anywhere from two to four years. The window of opportunity for that product may only be 18 to 24 months, so the complex and lengthy approval process procedures are a real barrier.

We have unresponsive regulatory departments, through no fault of their own. The pace of innovation is much different today than it was when government departments and certain regulations were promulgated, so we're now facing thousands of product approvals, for example, and regulatory departments just cannot cope with the sheer volume.

We have a lack of jurisdictional and departmental cooperation. In some cases we have regulatory voids, in the sense that there is no regulatory framework to go through to be able to get a product to market. This frustrates the product launches and creates a drag on our competitiveness, our productivity, our investment, and our growth.

And it's going to be critical for the new global economy for us to have a flexible governance regime where we are not plagued by the tyrannies of small regulatory differences between trading partners, where we have an inability to adopt international standards and scientific evidence when they meet Canadian policy standards and objectives. At the same time we have regulatory multi-jurisdictional and multi-departmental processes that are not coordinated that are in need of being streamlined to keep pace with better and more rapid product innovation. In our sector alone, there have been significant advances in food technologies. These are creating unprecedented opportunities for product innovation, and our regulatory system is just not set up to meet them.

One of our CEOs commented recently that if, twenty years ago, he had been able to anticipate the state of Canada's regulatory approval system for food today, he would not have invested in Canada. And this is not a CEO from a multinational corporation; this is a CEO from a Canadian corporation.

We will need a modernized system that is results-focused and transparent, that minimizes the regulatory differences between trading partners, and that eliminates costly delays. This is going to be absolutely essential for our industry.

Without it, our sector will continue to languish, and it will leave Canadians without access to new products and, without that, without access to manufacturing jobs and economic prosperity.

One of the key things to remember is that while consumer expectations of our industry have evolved in step with product innovation elsewhere in the world, the Canadian regulatory system that governs food manufacturing hasn't. This is despite the fact that government is preoccupied with rising health care costs. There's a desire everywhere to embrace prevention, to give consumers the tools to manage their own health, and also--and I think this will be familiar to many of you--to help our farmers grow higher-value crops. That's something we hear. The inability to commercialize food innovation represents a barrier.

When the Food and Drugs Act was promulgated in the 1960s, you had maybe a few hundred products making their way to the market in Canada every year. It was a fairly negligible amount if you track that through the statistics provided by A.C. Nielsen. Today that numbers in the thousands, and in some cases the many thousands. So what you have is a regulatory system that was set up to deal with a couple of hundred products a year now dealing with a barrage of new products.

I'll just give you one example. In the natural health products area, there was an expectation that when the new regime was launched there might be somewhere between 2,000 and 4,000 applications for natural health products. The expectation is that there are probably 15,000 at the moment, with 10,000 in a backlog and perhaps as many as 45,000 to 50,000 products that might have to go through the process. The regulatory system is just not set up to respond to that.

I'll give you some specific examples of lost opportunity, since we're talking about health and the need to help consumers manage their own health. Food fortification is one. Most countries around the world have policies and regulatory frameworks for the discretionary fortification of food. Canada currently lacks such a policy. We started working on one in 1997 and 1998. It took five years to give birth to the policy. That was in 2003. The policy was born in 2003 and regulations were promised. Those regulations have yet to surface. So that's three years of waiting for regulations for food fortification. Our major trading partners have such frameworks. In Canada alone, if we take only the beverage manufacturing sector, we're estimating about $400 million of lost opportunity every year.

It is the same story with respect to health claims. If you want manufacturers to invest in higher value-added products, if you want them to invest in products that help manage consumers' health, you have to allow manufacturers to market those products accordingly and make claims about their health-enhancing benefits. Currently in Canada there is no regulatory framework for health claims. We have about five. Our closest trading partner has eighteen and twelve more in the pipeline. So we are still waiting for a process, and we are told that consultations are going to begin later in the year. We are just hopeful that the consultation process for health claims doesn't take as long as it did for fortification.

[The Chair, Conservative, James Rajotte]

Ms. Zecchini, we are over your time. Can you perhaps wrap up with a review of your recommendations?

[Gemma Zecchini]

Will do.

I won't go through the approvals for novel foods and food additives. The story is very much the same there. There's an example here of a Canadian company that lost over $5 million in revenue just waiting for an approval, which speaks to the issue of why Canada can't accept international standards for scientific evidence.

I'll just move quickly to the recommendations.

I think as a sector we can very much support the recommendations on fiscal policy with respect to corporate tax rates and capital cost appreciation made by some of the manufacturing sectors that spoke before us. But I think our most urgent priority as a sector is to make regulatory modernization a key component of the economic and competitiveness agenda of Canada. That requires pursuing a long-term, focused, government-wide initiative. And again, I'll just make the point that we are by no means alone in requiring that in order to move forward.

The two recommendations I will end with are specific to some of the issues I've raised from my sector alone, and they are to urge the government to move forward with regulations on food fortification and to develop a responsive regulatory framework for health claims.

That's where I'll end my remarks, Mr. Chairman.

[The Chair, Conservative, James Rajotte]

Thank you very much.

Mr. Lapierre.

[Jean Lapierre, Liberal, Outremont, QC]

Thank you, Mr. Chairman.

Welcome, ladies and gentlemen.

I've read through your brief quickly and on listening to you speak, aside from the general demands of the manufacturing sector, our sense is that you're experiencing a particular problem because of regulatory structure that has not kept pace with growth in your sector.

I read somewhere that you are governed by 442 separate pieces of legislation. How many federal and provincial departments are you required to deal with, if you look at the research, development, product manufacturing and marketing side of your operations?

[Gemma Zecchini]

From a regulatory standpoint, the short answer is that it's Health Canada that regulates food. In terms of how many departments we deal with on a policy level, I would say that in addition to Health Canada's food directorate, we deal most closely with Agriculture and Agri-Food Canada. Of course, we also deal with provincial governments, as you pointed out.

There are over 400 pieces of legislation that apply to our industry, and some 4,000 regulations, and these are not coordinated. Oftentimes, the policy direction that Agriculture and Agri-Food wants to take and the regulatory priorities of Health Canada are not necessarily aligned.

[Jean Lapierre, Liberal, Outremont, QC]

This sector is important and it creates jobs. Often, whether we're dealing with Industry Canada or with another agency, efforts are focussed on trying to help either the aerospace industry or the forest industry. Have there ever been attempts made in your sector to bring all of the players together and adopt some semblance of a policy, so that the right hand knows what the left one is doing?

[Gemma Zecchini]

There have been several failed attempts to try to get that on the agenda.

To your point, despite its economic clout, the industry is very much an orphan when it comes to a champion that coordinates all of its efforts. We don't have a home in Industry Canada. There is nobody at Industry Canada we can go to that will be a champion. Agriculture and Agri-Food Canada is often a champion, but they are typically very preoccupied with the issues around producers, so they're further up the supply chain, and that's what takes up a lot of their time. And then you have the regulator, of course, which is Health Canada.

In many respects, trying to get this issue on the political agenda in the last ten years has been very difficult, because the political agenda in health over the last ten years has been very much preoccupied with wait times and other health issues that in many cases are largely of provincial jurisdiction but that also have a national dimension. So getting on the radar has been very difficult, and that has eroded the industry. The industry has not grown, and that's why you're seeing some of the leading indicators that I've presented to you. I think what you've said and what you've suggested would very much help if we could coordinate the efforts.

[Jean Lapierre, Liberal, Outremont, QC]

Given the rate of growth of the Canadian population, we don't have the impression that the demand for food is about to increase. Potential growth is somewhere in the order of 1.7 per cent or thereabouts. Since the population is aging, demand should be more or less stagnant.

Aside from the fresh food sector, does the food processing sector have a lot of potential in terms of exports to the US and elsewhere? That might help us reduce our dependency on the Americans, which currently is in the order of 85 per cent.

[Gemma Zecchini]

There's quite a bit of opportunity there. Of course, that requires investment. For a lot of our companies, one of the routes to trade is to compete for North American product mandates.

I'll start by saying that you're absolutely right about pointing out that growth in this sector, from a natural perspective, is stagnant. So where is the opportunity for growth? The opportunity for growth here is in health. Health is the future of food.

In the next ten or fifteen years, I think we will see tremendous changes in the food supply and in the foods that manufacturers produce or can produce. If you want to export that food, if you want to make it available to your population, you are going to have to compete for a North American mandate to produce it. If you can't commercialize the innovation, your chances of winning a North American mandate are unfortunately very slim if you're a company operating in Canada.

[Jean Lapierre, Liberal, Outremont, QC]

In conclusion, I'd like to discuss labour with you. You talked about 325,000 workers. We know it's hard to find workers to pick fresh fruit and vegetables. Generally speaking, are you having labour problems, or is there only a problem in the case of seasonal fruit and vegetable pickers? Understandably it's difficult. Pickers are brought in from Mexico and elsewhere. Elsewhere within your industry, is it easy to find workers?

[Gemma Zecchini]

I think our industry, like many others, has been challenged in recent years in trying to recruit the best and the brightest. It's not something that is unknown to us, and I think we'll continue to have some challenges moving forward.

Of course, the ability to attract the best and the brightest to the industry, particularly in the modern world, is going to largely depend on whether or not you are seen as a cutting-edge industry on the edge of innovation or whether you're seen as a sort of waning industry. That is one of the image issues our industry has when we go to the marketplace to recruit.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Monsieur Crête.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Thank you for your presentation.

Your testimony to the Standing Committee on Industry, Science and Technology is proving to be very interesting. There's only one problem. In your submission, you make some recommendations to Health Canada, but not to Industry Canada. You're making a plea for help, because there is no white knight defending the food processing industry.

Are you aware that today, the public looks upon the food and processing industries as two very unwieldy industries guilty of gross excesses?

Yesterday evening, I watched a report advising consumers that there was no guarantee the ground beef they purchased was free of E. coli bacteria. There's no question that these kinds of reports create problems. Two weeks ago, a warning was issued about spinach and last week, carrot juice was singled out. Consumers were advised to throw out any carrot juice in their refrigerators.

What are you asking? What can you as an industry do as well to rectify this situation?

The current situation is reminiscent of the situation faced by doctors. Consulting a doctors doesn't cost anything if one has medical insurance. However, people are prepared to pay $35, $50 or even $100 to consult a naturopath. That means that people don't have a lot of confidence in the traditional medical system. The same is true of organic food products. This sector has grown because people are turning away from the traditional industry. What can be done to reverse this trend?

[Gemma Zecchini]

What are we doing with respect to food safety or some of the image issues associated with our industry--is that your question?

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

If you believe that you are doing everything you can from a safety standpoint, then it comes down to image and perception. Do you believe that this is the real issue here? Or are we dealing with some other problem? We all have a vested interest in healthy food and processing industries and in ensuring that they are viewed in a positive light by consumers. Currently, the public is feeling rather uneasy. Industrial agriculture has resulted in some excesses which scare people.

What are you doing right now, or what steps would you like to take to rectify this situation?

[Gemma Zecchini]

I'm not sure I'm prepared to speak to the issue of the problems created by modern industrial agriculture. I think probably—

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

I'm not just talking about agriculture. I''m talking about the processing industry, which is also grappling with an image problem.

[The Chair, Conservative, James Rajotte]

We should give her a chance to answer. You asked her two questions.

[Gemma Zecchini]

I would say that when it comes to the food processing industry we don't duck our responsibilities, and we're certainly aware of some of our image problems particularly. We're also aware of some of the responsibilities we have to help not just correct image problems but actually be part of the solution.

As everybody on this committee will be aware, obesity is probably one of the great epidemiological issues in today's society: we live in a society of excess. The question, and I think I spoke to you folks a little bit about it, concerns the need for innovation. We are only going to get out of this problem if we innovate the food supply. Over a period of five, ten, or fifteen years, the food supply in Canada is going to change; it's going to undertake some remarkable transformations.

As I said, health is the future of food. The ability to take the innovation that's coming out through all of our great research institutions and commercialize it, so that we can help Canadians deal with a lot of the health issues they experience as a result of aging, as a result of obesity, is something our industry takes very seriously. If you're asking specifically what we can do about it, we can very much help be part of the solution.

When it comes to global supply chain issues, such as the spinach issue you talked about, BSE, or a number of others, those are things that are also going to require cross-jurisdictional cooperation. The BSE question is actually very apt.

I know one of my colleagues from the meat industry is in the audience. I hope I don't misrepresent, but I know that closer collaboration between Canada and the U.S, particularly on inspection practices and certain regulatory practices around food safety, would go a long way towards addressing some of those issues as well.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

I have a specific question for you. Yours recommendations 4 and 5 are directed to Health Canada. However, this is the Standing Committee on Industry, Science and Technology. Could you elaborate further on the meaning of these recommendations, to determine if we should speak with Health Canada or comment on this subject. What exactly are your asking for? It's not that clearcut, because of the somewhat specialized terminology used.

[Gemma Zecchini]

I'll try to clarify for you.

My brief refers to the fact that Canada does not have a regulatory framework for bringing fortified products to market. So, for example, if you wanted to add vitamin C or you wanted to add a vitamin or a mineral to a food product, right at the moment there is really no established regulatory framework in Canada to do it.

We have a policy in place that, as I said, was released in 2003. In order for food companies to commercialize their products and bring them to market, we require regulations; we need a regulatory framework for it. What I'm asking here is.... We've been three years trying to give birth to these regulations; it's probably time we did it.

The same is true for health claims. These are situations.... It's not that we want to undo regulation. We need regulation, and we need modern regulation that meets our ability to commercialize.