Industry Committee on Nov. 20th, 2006

[Jim Irving]

To operate ships in the world market today, if you're going to be a long time out of the country you'll fly a foreign flag, because it's a competitive issue. It's not a nationalistic issue. Domestically, though, you'll fly the Canadian flag, use Canadian crews, and so on, which is the right thing to do. It's not politics. It's just straight business.

On the second question, regarding employee health, we firmly believe that as an employer, we can't rely on the government to look after employees' health costs. Those burdens eventually are going to come back on us, and we have to be proactive. I think the Government of Canada has to get more proactive in encouraging employers through specific programs to encourage their employees. I'd say there should be a tax rebate if you want to spend $500 a year per employee for five years on health care issues, whether it's for cardiovascular health or whatever it might be. I think we need to be more proactive as a nation on this one. I think we're asleep, and we should get going and encourage employers. The employer sees these people every day. Create a workplace that says yes, let's do something about our health care costs. Be proactive and not reactive.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Masse.

[Brian Masse, NDP, Windsor West, ON]

Thank you, Mr. Chair.

You're not that far off, Mr. Irving. Just last week the U.S. auto makers put billions of dollars aside to support health care costs to compete with the public health care system we have in Canada, which gives us a competitive advantage. So they're actually addressing that in the U.S.

Very quickly, though, to both delegations, I have just one quick question. If you had a choice between a general corporate tax rate reduction and a sectoral strategy in which you would have a series of different incentives you could pull off the shelf to deal with your initiative, which one of those measures would you choose?

[Jim Irving]

From my perspective, I think--

[The Chair, Conservative, James Rajotte]

You can choose both if you want.

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

That's a politician.

[The Chair, Conservative, James Rajotte]

Mr. Irving.

[Jim Irving]

The world's changing at a tremendous speed. I don't think we can grasp how fast it's changing. So if you look to the long term, and given that we have to reinvest in this country with technology, my sense would be rather than just cut taxes let's take the depreciation rate down and spend the money in Canada and rebuild our manufacturing sector in particular. Because the profit might go someplace else; it might just move to another part of the world and benefit another part of the world. Let's benefit Canada. If there's no subsidy, there's nothing free about this. You have to invest your own money, so you'll do it wisely. But you'll do it in Canada if you're going to qualify for the depreciation.

[Brian Masse, NDP, Windsor West, ON]

Mr. MacLeod.

[Don MacLeod]

I'd be happy if they'd just leave us alone--

[Voices]

Oh, oh!

[Don MacLeod]

--and not try to improve things for us.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Masse.

I want to thank you for coming in today, witnesses, and I want to thank you for your excellent presentations. We certainly heard a lot on EFTA. It's true, as members have said, that this is the first time it's been raised with the committee, so we thank you for raising it with us. The other issues you've raised--procurement policy, power regeneration, labour, and capital depreciation--have been raised by pretty near every witness we've had before us to date.

Again, thank you for your presentations. If you have anything further you'd like to get to the committee before we do our report, then I encourage you, please feel free to send it to me or the clerk. We'll ensure that all members get it.

We're going to suspend briefly to allow the other witnesses to come to the table and to allow members to perhaps get a cup of coffee.

[The Chair, Conservative, James Rajotte]

Order. We'll get started with the second half of our meeting this morning and continue our study of the manufacturing sector.

We have three witnesses before us for the last hour and a half. I would like to welcome today, from the Nova Scotia division of the Canadian Manufacturers and Exporters, Ann Janega, vice-president; from the Atlantic Institute for Market Studies, Charles Cirtwill, acting president; and from the Maritime Steel and Foundries Limited, Robert Durdan, executive vice-president.

I believe we have presentations of up to ten minutes each. Obviously the briefer you are, the more opportunity for questions from members.

Ms. Janega, we'll start with you. You have ten minutes for your opening statement.

[Ann Janega, Vice-President, Nova Scotia Division, Canadian Manufacturers and Exporters]

Thank you very much, Mr. Chairman.

Bienvenue à Nouvelle- Écosse. I'd like to thank you very much for coming to Halifax. I really welcome this opportunity to share some of the perspectives of manufacturers in Nova Scotia, in this region.

I think the committee would be very familiar with the work generally of the Canadian Manufacturers and Exporters, or CME. You'd be familiar with the 20/20 consultation initiative that started a few years ago. Our senior vice-president, Dr. Jayson Myers, appeared before this committee and provided input into your interim June 2006 report.

I guess what I can share is a little bit about the perspective of manufacturers and exporters here in Nova Scotia. I will start by stating probably the obvious, that this is not Ontario or Quebec when it comes to manufacturing, and for that reason it's a little bit of an untold story. Even with our own stakeholders here in Nova Scotia we find that many people are not aware of the impact and the contribution offered by the manufacturing sector to the province.

We have less than one million people, and yet 55,000 jobs, really high-paying, good jobs with excellent benefits, are provided by manufacturers, including by my colleague here at the table and by other presenters today. This is a big chunk of our economy. It represents about 10% of our economic activity in Nova Scotia. On a percentage basis, that's comparable to the impact of manufacturing in Alberta and in British Columbia, so it's important. Our challenge is trying to keep that on the radar for all of our stakeholders, including government, so thank you for asking us here today.

Getting back to our regional differences, I'd like to highlight the fact that manufacturing in Nova Scotia, and I think this may be true in other areas of the Atlantic as well, is very much rural-based. Although we have excellent representation here in the Halifax urban area, our manufacturing is very solidly placed in the rural areas. It's an important part of the economy for those municipalities and for the province as a whole. Our challenge, again, is to make sure that all decision-makers are aware of that.

With the CME, one of our main goals, of course, is to track the interests and concerns of our members. We do that in different ways. I will be referring to a document here, which, sadly, with only three days' notice to be here, I could not provide in French, but I really do recommend for the later consideration of the members. It's entitled Balancing Business in Global Markets. I think you would be familiar with it. It's the annual management issues survey that CME conducts.

The document is very comprehensive. It includes approximately 1,000 survey results from manufacturers across the country. You'd probably be interested in some of the latest results. It may give you a bit of an update on your June report, for example.

You won't be surprised to know that rising business costs are considered to be the number one challenge facing the manufacturing sector. Of course that would include taxes and that would include energy; that's not unusual. The volatile Canadian dollar is an issue for our manufacturers across the country, and here too, of course.

The lack of skilled workers is a major concern that's been identified across the country, but it's a particular issue here in Nova Scotia. Our particular demographic, an aging workforce, is a serious issue. Our members tell us they're having difficulty accessing even unskilled workers. In the east we have a further challenge here in that the booming economy in Alberta has become very attractive to our skilled workers and to our unskilled workers. This is an issue that all of my colleagues in Atlantic Canada are coping with.

If we have a chance later, I'd like to speak to you about how the CME is addressing this through a couple of initiatives. One is called “icosmo”, which is an online opportunity to match up our businesses here with Alberta's. The other initiative is with a very targetted buyer-seller forum that we will be supporting in Alberta. Again, the mission for us here, and for me in particular, is to keep our manufacturers prospering here and to give them more opportunities elsewhere in Canada.

Getting back to that list of challenges, which is your number one concern, the cumulative effect of taxes is a big problem. Of course this drives up the cost of labour. So you can see that's a particular issue for us. Like all other manufacturers in Canada, we are concerned about the possible slowdown of the U.S. economy, because that's a big impact for us.

Another item I'd like to share with you is a collaboration, which is always worth celebrating, among 21 manufacturing-related industry associations and the CME. These groups represent every major sector of manufacturing, including automotive, aerospace, mining, forestry, and consumer products. This group has prepared a submission to the Prime Minister. That was done on November 7 in a letter from the coalition. I did provide an English and French version of that letter. I hope the members will be seeing it.

I'll just quickly run through some of the recommendations in that letter. One will be familiar from our earlier presenters, and that is a two-year writeoff for the capital cost allowance for investments in new manufacturing, processing, and the associated information, energy, and environmental technologies with that.

Another recommendation is that government should maintain its commitment to lower the federal corporate tax rate to 18.5% by the year 2011, and also undertake to reduce it by a further 1.5%, to 17% by the year 2012.

The group is asking for an improvement to the scientific research and experimental development program, which is universally referred to as the SR&ED or SRED tax credit system, so that the credits would be refundable and exclude them from the calculation of the tax base, to provide an allowance for international collaborative R and D and to extend the tax credit to cover the cost for patenting.

Another recommendation of the collaboration is to introduce a training tax credit that would be creditable against employment insurance premiums.

The final recommendation is to effectively enforce the federal user fees act to increase accountablity and to require departments to set internationally competitive regulatory process standards. This would be an initial step towards a more effective, timely, and cost-effective regulatory regime.

I hope the members will have a chance to look at that submission and give it some consideration.

One area that is of interest right now to CME nationally relates to some initiatives the government has taken on the west coast in announcing the Asia Pacific gateway initiative. CME nationally feels that this is a great initiative to help Canada to achieve global competitiveness in trade. Our national president, the Honourable Perrin Beatty, has spoken in favour of something that would kind of tag on to this, and that's the idea of a comprehensive national logistic strategy. We feel that would allow Canada to become a pivotal player in an integrated North American logistic system, so that it would include not just the more obvious players, but the manufacturers, shippers, ports and airports even, as well as rail and road transportation, the warehousing facilities, telecommunications, and border security. So again the idea is towards a national logistics strategy.

Here in Atlantic Canada we see marine transportation as an enabler of regional economic development. When you have your later tours on this visit I guess you'll see some of the advantages we have here in Atlantic Canada. Obviously the ice-free ports are an advantage, and you'll hear about costs and transit time advantages for our ports over New York and over the rest of the northeastern seaboard. We have the ability to expand container rail transfer and direct barge transfer here in Halifax. And elsewhere in Nova Scotia there's a potential for a dedicated container water transfer terminal; that's in Port Hawkesbury.

So there are a lot of advantages here, and we see marine transportation as something that can really boost the regional economy.

[The Chair, Conservative, James Rajotte]

Ms. Janega, we're well over ten minutes, so we would ask you to wrap up.

[Ann Janega]

Okay. Sorry about that.

I'll close by saying that the concept of an Atlantic gateway corridor is something that we feel could focus on the benefits I mentioned as well as the need for a national logistics strategy and at the same time tie in with the initiatives on the west coast.

In conclusion, we do have a lot of challenges here in Atlantic Canada facing our manufacturers and exporters, but you'll notice that I also highlighted a number of opportunities. You'll find that the CME on this coast is not asking for any particular handouts, but we're looking for an even playing field and for the chance to be competitive at a global level.

Thank you for the opportunity to present.

[The Chair, Conservative, James Rajotte]

Thank you very much.

We'll go now to Mr. Cirtwill for a ten-minute opening statement.

[Charles Cirtwill, Acting President, Atlantic Institute for Market Studies]

Good morning.

I want to thank the committee for the invitation to appear today. I'll try to be brief, probably seven minutes or so, with any luck.

I would start with the question around the number one challenge facing almost every industry in Canada today, and that's the labour shortage. It's something I don't think we've experienced in our lifetimes, and it's time to start getting serious about it.

Ten years from now in Nova Scotia our unemployment rate is going to be zero. Today in Prince Edward Island we've got guest workers working at fish plants. Today in New Brunswick we've got guest workers being brought in from Europe to drive long-haul vehicles.

This is a reality we face and a challenge we have to address today. Immigration is not the solution. Certainly done right, immigration can help address the problem, but it is certainly not going to be a be-all and end-all.

Our current immigration pattern sees immigrants that look a lot like us already in terms of age, skill sets, composition, and place in life. We need younger entrepreneurial immigrants along an older model. We also need to take a serious look at guest workers along the lines of the recent invitation to enter into a guest worker program with Mexico, a ready labour pool, already inside NAFTA at a time when Canada and the United States are facing severe labour shortages.

We need to make those kinds of things easier, not harder. We also need to consider the long-term benefits of efforts to increase the domestic birth rate along the lines of the things that Quebec has done successfully. But more immediately and most urgently for this committee, we need to adjust the myriad of federal and provincial policies designed to mop up surplus labour of the 1970s.

For example, we still have employment insurance with benefits that probably outweigh the need. We have access to rotating benefits so EI can still become a lifestyle. We have regionally differentiated benefits that ensure that people stay in places of low unemployment and are not as productive as they possibly could be. We need to take a look at our public services. They're far too large. They're keeping people who could be used in the private sector out of that employment. We have to take a serious look at our universities and the post-secondary sector. They often take too long to instill skills into our youth, and they take an awful lot of labour to do that kind of training, so they take both of those groups out of our labour pool.

We also have to remember that not everyone needs a university degree. Not just software engineers can make $100,000 a year any more. The other thing we need to take a serious look at is our continued focus on job-based subsidies and forgivable loans. What we need are productive enterprises, not make-work projects. Maybe we need to consider rewards for eliminating jobs or focusing our tax credits based on the highest production per employee, as opposed to simply having employees.

If we dropped the civil service in every province to the national average, we would add about 133,000 people to the national workforce. If we just got the five easternmost provinces to the national participation rate, we'd add another 156,000 people to the national workforce. And even in those kinds of efforts we also have to stop penalizing people who want to work. For example, retirees lose pension income for working. They have high effective marginal tax on any earnings they make after retirement. The same thing applies for people trying to transition from welfare to employment. They pay the highest tax rates in the country. In some instances the marginal effective tax is 100%, so every dollar they earn by going to work, they lose.

Getting beyond labour, we have to recognize that an aging population and a labour shortage is not the death knell for Canada. The answer is improved productivity. And we've been talking about productivity for over a decade, so the question becomes why are we not celebrating our foresight in having recognized that was what we needed to do?

The answer is quite simple. Capital drives productivity, and our policies right now drive capital away.

On average, our combined federal and provincial tax on capital is around 4% to 6% better than the U.S. They take roughly 40%. We take roughly 36% on average, but our effective marginal tax rate on the next dollar added in investment is higher than most other jurisdictions. Other jurisdictions encourage the next dollar of investment. We tax it. As a result, we have among the lowest return of tax receipts as a percentage of GDP on business. We have a 1% to 1.5% gap between Canada and the U.S. in actual investment and we have a similar gap in investment in R and D.

When capital flees and labour is in short supply, we get negative results. Our GDP per capita gap between us and the United States is widening, not narrowing.

With capital and labour in short supply, clearly, smart investment becomes the priority. Research and development, new technologies, new industries, all result from this focus. And we certainly have seen some progress in this area--or have we? According to one measure I saw recently, Canada offers the best tax treatment of R and D in the G-7: tax credits, accelerated tax deductions, and a broader definition of allowable costs. But the problem is that our R and D investment is heavily weighted to the government and academic sectors.

In 2003, government and academic R and D spending was effectively equal to that in the private sector. Now, contrast that to the United States, where the private sector is about three times the academic and government investment. Then consider that balance in the light of the regular admissions that universities are generally bad at commercialization. Certainly they've got better over the last few years, but they've improved primarily by working with the private sector.

We need to rebalance our R and D investment. R and D can happen in the private sector. In terms of swift, practical commercialization and broad application, it's often better if it happens in the private sector. Consider a recent approach suggested to me by a small manufacturer in rural Nova Scotia. He suggested that we not only look at increasing our R and D tax credits, but we match that with a tax credit for production. So, in effect, if you have an R and D tax credit that results in a product you bring to market, you get a second reward for doing that exercise. To put it in his words, “You do R and D into something new, you receive an incentive. You produce something innovative and you receive an incentive.” That's innovation. That's technology. That's manufacturing. The added benefit is you might see some of our existing manufacturers, even small manufacturers, start to invest in R and D capacity, driving even more innovation, more investment, and more production.

Now, even if we had the ideal balance with workforce and capital and the right incentives for R and D, we also still have the challenge of getting our products to market, and quite honestly in this region in many instances you simply can't. East coast ports, for example, have been the poor cousin of trade expansion as Asian trade has driven growth. But we have real opportunities on this coast with post-Panamax and post-Panamax plus and the even larger ships that are coming along to meet that demand on both coasts. Again, it's about markets.

A twinned highway from here to central Canada takes us away from our markets, not toward them. CN has recognized this by increasingly expanding its rail service in the Midwest. We need to follow suit with expanded road and air capacity and improved, consistent regulations that allow traffic to move across provincial boundaries and across provincial, national, and state boundaries in the same manner. To use one example, we need to be able to load a road train--which is a truck with a couple of trailers attached to it--either in Yarmouth or Halifax and move it across roads into Buffalo without having to go 500 or 1,000 miles north to avoid roads that are either poorly serviced or on which those vehicles aren't allowed to operate. Here in Atlantic Canada, for example, the only stretch of road you can operate those vehicles on is between Moncton and Saint John.

[The Chair, Conservative, James Rajotte]

You have one minute.

[Charles Cirtwill]

That's good, because I have three paragraphs.

In closing, some advice. First, we need to remember the impact on government spending. Government spending in the U.S. is roughly two to one on consumption versus investment, and the ratio's getting smaller. Here in Canada, we're close to three to one, and the ratio's getting wider. Government consumption takes resources, people, money, and material away from the private sector. At the same time, failure to invest sees infrastructure start to decline and innovation fade.

In brief, we need to do five things. We need to act now. Any policy change is going to take between five and ten years to see any real impact, and we have about ten years to find a solution to this difficulty. We need to let people work in the private sector. A labour shortage is a worker's best friend. We need to invest in productivity, technology, innovation, commercialization, and access to market. We need to stop trying to find jobs for everyone and stop rewarding them if the jobs don't go and find them.

Finally, we need to stop placing barriers to the free flow of the practice of production. Interprovincial and international barriers to investment, trade, and labour mobility all have to be removed on an urgent basis. It shouldn't be necessary for Alberta and British Columbia to enter into a free trade agreement between provinces. We should already have that free flow within Canada.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Cirtwill.

We'll go directly to Mr. Durdan for an opening statement.

[Robert Durdan, Executive Vice-President, Maritime Steel and Foundries Limited]

I'd like to thank the committee, Mr. Chairman, for this opportunity to speak.

Being from New Glasgow, I must be one of those old country boys who the previous two speakers were referring to as being from rural Nova Scotia, so bear with me.

To give you a little background about Maritime Steel, Maritime Steel is a manufacturing company based in Nova Scotia and Prince Edward Island. The company manufactures steel bridges and other steel structures in the Dartmouth plant. We have a modern foundry located in New Glasgow, Nova Scotia. And we build food processing and fish processing equipment and other stainless steel structures in P.E.I. In fact, we recently finished doing some work for an Alberta firm in a reactor plant.

Maritime Steel has operated for 104 years in the New Glasgow area and currently employs 150 people in New Glasgow. We have a mere 25 people in Dartmouth now, because of a slowdown in the structural business, and 35 people in Prince Edward Island. The structural division is really in a state of decline. The foundry operation is relatively busy, as is the Charlottetown facility.

In terms of the business climate, Maritime Steel and Foundries Limited has been impacted by challenging market conditions that have restricted growth in the past five years. Currently, the company's foundry division has managed its way to record sales, despite a long-term decline in the industry and recent market conditions.

In the 1960s there were approximately 1,000 foundries in Canada. In the 1980s there were 500, and there are approximately 150 today. A number of foundries in Upper Canada, if you will, in Ontario, have recently gone out of business, and it's indicative of the issues that we face.

Some of the circumstances that have had an impact and may continue to negatively have an impact on the organization are as follows. The two previous speakers alluded to much of this.

As we export most of our product to the United States, the high relative value of the Canadian dollar and the speed with which it has increased in value have had an impact on both our revenues and our margins.

Competition from countries with low-cost labour, such as China, India, and Mexico, to name a few, and others, are an ever-present threat to our continued growth and prosperity.

The cost of energy and its impact on the shipping industry, as well as the direct cost of energy, is increasingly affecting the cost competitiveness of Canadian manufacturers and our cost competitiveness. The cost of meeting regulatory initiatives, as new environmental restrictions become tighter, is making our product more expensive in the marketplace.

Skill shortages in eastern Canada, as the migration of skilled trades and technical people to the west continues, has reduced our competitiveness here.

Competition from U.S. firms that are in close proximity to our customers means slim and shrinking profit margins as we pay the shipping costs to get our product to the market.

We have some suggestions to help Canadian manufacturers compete in this existing environment.

We would suggest that community colleges be encouraged to take an initiative to enhance formal industrial training initiatives directed at production workers, as well as in cooperation with industry and unions where the unions provide skilled people. We've seen a number of precedents for this in the Atlantic provinces that have been eminently successful in allowing people on unemployment insurance and welfare to become active members of the workforce.

Another suggestion is to encourage and simplify industry and university research and development partnership programs. As previous speakers have mentioned, we have some direct experience in working with universities in trying to develop a culture where we would share our capital equipment and expertise with the universities, and vice versa, in an attempt to rejuvenate the steel industry here in Atlantic Canada, which in days of old was a primary employer of Canadians.

Third, ensure that Canadian manufacturers have access to low-cost fuel to enhance their competitive advantage. For example, and this is one that is very specific to us, a natural gas pipeline passes within a few miles of Maritime Steel's plant in New Glasgow, and we and other industries in the area do not have access to that gas. This means that we are dependent on higher-cost propane for much of our process needs. Every dollar at the margin, every incremental dollar that you pay for fuel, reflects directly on your margins and your competitiveness in the marketplace.

Fourth, we are suggesting that the government help Canadian companies with market studies and provide additional assistance in matching our manufacturing capabilities here in Atlantic Canada and elsewhere in Canada with Alberta's industrial needs. The Canadian Manufacturers' Association in fact is working on that initiative, and I applaud that activity. Hopefully it will benefit companies not only in Maritime Canada but in Quebec and Ontario and will also satisfy Alberta's insatiable need to grow.

Fifth, ensure that environmental regulation is based on sound scientific research. In many cases we find that our province here has a tendency to adopt rules and measures that are put in place in other jurisdictions, and we find that some of these rules that are affecting us directly are in fact very expensive and cost the company a great deal of money.

Again, thank you for the opportunity to speak here today. That concludes my talk.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Durdan.

We'll now go immediately to questions and comments. Just for the information of the witnesses, the members have six minutes on the first round and five minutes on the second round. If we can try to get as brief a response as possible and brief questions, we'll get a good dialogue going.

We'll start with Mr. Lapierre.

[Jean Lapierre, Liberal, Outremont, QC]

Thank you.

Thank you for being here on short notice.

First, Madam Janega, frankly, I was very impressed by the letter from your association. The fact that you could get all those signatures on one piece of paper shows that those recommendations are really tied to what we have heard at this committee in the last few months. It's impressive to be able to get all those people, not that they all have egos, but they all have different interests. I'm sure that will have some influence.

I'm a fan of the gateway strategy, and I would like to hear more about what's going on in the Atlantic gateway, because obviously the Pacific gateway has been confirmed and the money is there. Has anything moved on the Atlantic gateway, or are we still at the concept level?