Thank you very much, Mr. Chairman.
I have David Podruzny with me, who is vice-president of business and economics. He was just going to observe this meeting, but since I see you have so many good questions I'm going to need some help here to adequately respond.
Thank you very much for the opportunity to speak to the committee.
I will speak in English because it is easier for me and it will be clearer for you.
I want to congratulate you, the committee, for focusing on the subject of manufacturing competitiveness. As an association we've argued for many years that this is a serious issue we're facing as a country, but it was a little hard to get anyone's attention. It's great to see that you are focusing on it.
It is clearer every day, I think, that manufacturing is in trouble in Canada and that it is affecting the overall growth of the Canadian economy, particularly in Ontario and Quebec. It's affecting jobs and communities across the country. The committee is definitely focusing on a problem that is likely to become even more of an issue in the coming months.
Canada does have a strong manufacturing sector. It would be a serious mistake to miss the opportunity to address some of the issues manufacturers are facing and then realize 10 years from now that Canadians have lost one of the key building blocks of our economy, together with the jobs and investment in our communities that go with it.
I also want to commend the committee on your interim report. I think you correctly identified the major issues facing manufacturing. The high dollar, for example, has cost chemical manufacturers about 30% to 40% of their revenues, because 87% of our exports go to the United States and are paid for in American dollars.
Energy costs are another issue. Based on a study of our companies that Dave did with another consulting firm, energy is a serious impediment to new investment in Canada. For chemical producers in particular, the availability of feedstock and electricity costs are huge factors for investment. In fact, energy costs and feedstock availability have been the main reasons for the closure of seven plants in our sector in the past two years. Energy is an issue, and you correctly identified that.
The third issue you identified was the competition from Asia and the Middle East. Of the next 100 petrochemical plants that will be built in the world, none will be in North America; they're all to be in Asia or the Middle East. The reality of that competition is here and now, and it's affecting our businesses right now.
I see you also included regulatory issues. These issues continue to be a major problem for our sector, particularly in relation to environmental policy. I'll comment on that later.
I notice in your report that a lot of proposals are listed in the attachment on how to deal with the relatively unique manufacturing challenge that we're now facing in Canada. What I'm going to do today is focus on one proposal that has been mentioned by several other associations--by, for example, the Canadian Manufacturers & Exporters and the Forest Products Association of Canada. This is the idea of an accelerated capital cost allowance.
I've done that intentionally because it's something you may want to have more information on as you set your priorities and write your report.
At this point in time our association believes that this is the single most important change the federal government could make that would have an impact on the manufacturing industry and improve our competitiveness. Why is this so important? How would it work to improve the economic challenges facing manufacturers? To help the committee, we've handed around a chart that explains the difference between an accelerated capital cost allowance and our current structure.
The current structure, as you can see from the chart, is based on a 30% declining balance. What that means is the 30% just keeps going on your balance forever; “forever” is basically about 11 years. Compare that to the United States; their writeoff period is about four to five years.
When you're making a $100 million to $200 million investment, which is the average major investment in our plants--but some are about $1 billion--in the first two years of building that plant, you have no revenue. You have $100 million, $200 million, maybe even $1 billion at play until that plant is actually built. At some point you start to get revenue, but there's always a little start-up problem for a while.
Under this system, at that point you start to depreciate the asset under the tax system. You can see how it works. The white line shows you that in the case of an investment of $177 million, you have $17 million in the first year; then it's $48 million, then $34 million, and it keeps going down until you get to 2016. On average, including the construction costs and time, you're talking about 11 years.
With an accelerated capital cost allowance of two years, there's quite a bit of difference in the cashflow. And right now it's cashflow that is critical to business, particularly as a result of rising energy costs, which have eaten into cashflow; the high dollar, which has eaten into 30% to 40% of revenue; and this competition from Asia, which seems to drive the price down to kind of a commodity level. So cashflow is very critical.
When you look at the CCA level for a two-year period, in the first year, the kind of grey line...and it's not two years, it's really three years. Under the rules, you can only write off six months in the first year, so it effectively is three years, plus the construction period, which is probably going to be about two years. At any rate, you can see how quickly it goes--$35 million, $71 million, $71 million, and then it's gone.
Under an accelerated capital cost allowance, you gain that stimulus into capital investment. Governments keep arguing that productivity levels are important, that competitiveness is important. This would be a huge assist to industry, coping at this point in time with the high dollar, energy costs, and Asia competition.
I'm going to mention a second benefit of this that you might find a little bit unusual. The second benefit to an accelerated CCA could be environmental performance.
Now, normally when people think about environmental performance, they also think that's what you get from regulation. But I'm going to show you that actually you get it from CCA. The real driver for environmental performance is in fact capital stock turnover.
I want to mention that Monsieur Crête was at our parliamentary week last week, and he told us we should make sure that people know about our performance. So we put something in The Hill Times last week. You might be surprised--most of the fifty MPs we met with were very surprised--at our performance in environmental emissions.
For example, CCPA companies are 43% below Kyoto numbers right now, today. So if you're arguing for a hard cap, we'll take it. If you're going to cap us below Kyoto, fine. By 2010 we will be 56% below Kyoto. We've reduced emissions to water by 98% and emissions of key smog substances by 82% since 1992.
Why have we done that? Well, we're not that unique. In fact, manufacturing in general is 7% below the 1990 Kyoto levels, and large manufacturers are 20% below those levels. It's not widely known, but if you think about it, and ask the question why, the answer is investment—investment in capital stock turnover. Stimulating that investment drops emissions quite considerably.
The committee, quite correctly, also identified regulation as one of those challenges facing manufacturing. The reason regulatory innovation is so important to us is that, unfortunately, notwithstanding that performance level, the proposals made by the previous government to deal with greenhouse gases did not recognize any of that performance. In fact, that approach lumped all industry together, the ones that are growing exponentially and the ones that are not. It didn't take into account the performance level of manufacturing. It added a uniform level of improvement of something like 12%. It then said, basically, if you can't do it, buy credits.
All of that would have resulted in less environmental performance, in our view, than the other approaches. We hope the regulatory approach that happens under the clean air act will be more innovative and build on the success of the manufacturing sector.
I want to turn to the reason why capital stock turnover is so important for emissions performance.