Industry Committee on Oct. 31st, 2006

[André Arthur, Independent, Portneuf—Jacques-Cartier, QC]

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you.

Mr. Van Kesteren, do you have a brief question?

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

Mr. Chair, I have a brief question.

This is exciting stuff. Thank you for coming, by the way.

I was approached by an agricultural college in my riding. It wouldn't fall under the same jurisdiction, but I agree with you that this is the direction in which we must go. They're talking about integrating a host of different things, and different industries have already come to the table and said they are interested. We see the precedent has been set here, and we need to move that forward.

Mr. Shipley alluded to the fact that when we look at higher levels of education, there are so few colleges that the universities would dwarf them. What's going on? Why is that? Why are there so few colleges in relation to universities?

[Sharon Maloney]

You're probably talking primarily about Ontario, because Ontario is disproportionate to British Columbia and Alberta. It is fair to say that those two jurisdictions are leaders in this type of education and in wanting to raise their profile and also leaders in working very well with universities and being able to break those barriers that certainly continue to exist in Ontario.

Part of the reason there are more universities and fewer colleges is that the college system is much more accountable. It's a different system from the university system. They are not independent corporations as the universities are, so they are accountable to the provincial governments. As a consequence, the preference for a lot of the provincial governments is to be able to maintain the costs through accountability and not see more of these institutions morph into universities, as Ryerson has.

These institutions, or my members anyway, have no interest in becoming universities, because they don't see that as the answer to the type of pedagogy they want to deliver to their students.

[The Chair, Conservative, James Rajotte]

I know we're out of time, Ms. Maloney, but just briefly on investing in applied research, you mentioned Canada research chairs that could then fit the polytechnics.

Are you recommending that the government take existing programs like Canada research chairs, Canada Foundation for Innovation, and federal granting councils and expand them to apply to institutions like NAPE, or would you rather see separate funds, which are more directed toward these types of institutions?

[Sharon Maloney]

Ultimately, the only way we are really going to get in under this is to have separate funds. I think it's really difficult to take institutions that from an historical perspective have always operated in one way, because they're institutionalized, attitudes are in place, and it's very hard to move beyond that.

So if we are serious about kick-starting this type of research, the preferable route is to create independent funds that are dedicated to applied research and driven from a market perspective.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation and for being with us today.

[Sharon Maloney]

Thank you.

[The Chair, Conservative, James Rajotte]

If you have anything further you want to pass on to the committee, please feel free to give it to me or the clerk and we will ensure that all members get it.

[Sharon Maloney]

Thank you very much.

[The Chair, Conservative, James Rajotte]

Our third witness today is Richard Paton, president and chief executive officer from the Canadian Chemical Producers' Association.

Mr. Paton, welcome to the committee. Perhaps you can introduce your colleague.

[Richard Paton, President and Chief Executive Officer, Canadian Chemical Producers' Association]

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.

[The Chair, Conservative, James Rajotte]

Mr. Paton, you have about 30 seconds left.

[Richard Paton]

I'm almost done.

I'll conclude by saying that CCA has two major benefits. An accelerated CCA would result in significant investments by our industry, which would improve competitiveness and offset the impact of energy costs, the high dollar, and relentless competition from the Far East and Middle East. It would also lead to significant environmental benefit, estimated at about 5%, just on that, across the manufacturing sector.

If you combine those two things and look at an accelerated CCA, it would be an example, a concrete illustration, of the federal government linking environmental policy and economic policy to produce a benefit for the economy and the environment.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much.

We'll go to Monsieur Lapierre.

[Jean Lapierre, Liberal, Outremont, QC]

Thank you, Mr. Chair.

I would like to welcome you to this meeting, Mr. Paton, and your colleague as well.

Did I understand well when you said the next 100 plants are going to be built in Asia or somewhere else in the Middle East?

[Richard Paton]

That's right.

[Jean Lapierre, Liberal, Outremont, QC]

So if they're all going to be built in the Middle East, there must be some reason. What is the advantage of Asia and the Middle East in your sector? Is there still a Canadian advantage? Because the news is so depressing, are we talking now about a gradually dying industry?

[Richard Paton]

That's a good question.

They're slightly different. The Middle East has a huge what we call feedstock. When we talk about feedstock, our industry is largely natural gas. The price of natural gas in Iran at one point was $1.25 to our $8. That feedstock is about 75% of the cost of production, so you immediately see that we're talking huge differences here. I think right now in Iran there are 17 plants being planned or being built. Now, they're always delayed and they take longer to develop than they usually do.

China is quite different. China, right now, has some cost advantages, but I suspect in the longer term they're going to close both on labour and on environmental costs that they're going to have to deal with. They have unbelievable demand. If you take a look at any consumer product sector--DVDs, televisions, and so on--they're all being built in China. Hence, the inputs, which are largely chemicals, need to be produced there. So their huge demand, plus the shifts of those industries, means there's a big market there, and most of the global companies are building plants in China as a result.

Is there any hope? I think the idea of us exporting chemicals to China is probably not very realistic. Certainly we're not going to be selling much to the Middle East. There is hope in the sense of the North American market. In fact, we are about 30% more productive than our equivalent companies in the United States. We do have the Alberta feedstock advantage, which we're working very hard to keep, so there's a very good opportunity for Canada to still play a significant role within the North American economy. That's the question: how big is our market share going to be within the North American economy?

[Jean Lapierre, Liberal, Outremont, QC]

When you talk about the seven plants that closed, and then when we look at the things that matter to you, I don't think we can do much about the high dollar. The energy costs are probably not going to be different from the world market. I don't think we're going to have a made-in-Canada price. I don't think we're going that way.

[Richard Paton]

You could have some impact on electricity, with better electricity policy--not in Quebec, which has a pretty good advantage, but Ontario could improve.

[Jean Lapierre, Liberal, Outremont, QC]

So then what's left for us to help you on--regulations and depreciation, I guess?

[Richard Paton]

Yes.

[Jean Lapierre, Liberal, Outremont, QC]

Those are the two things that could make a difference in your life.

[Richard Paton]

You've got it.

I think there are only a few things that government can do. I totally agree. And we'll add that we don't believe in picking winners and losers. We don't believe in special industry programs for the chemical industry. That's not our philosophy. Just get the policy environment right, get the tax structure right, and make sure the regulatory structure works in favour of both the environment and the economy. Do that. There is a very limited number of tools, and CCA is probably one of the best.