Industry Committee on Jan. 31st, 2008

[The Chair, Conservative, James Rajotte]

Mr. Cooper, do you want to comment on that?

[Graham Cooper]

Yes. There are a couple of things, Mr. Brison. There is, of course, the issue of what's being called a carbon tax and the impact that might have. I've talked already about the margins and perhaps the inability of our industry to pass additional taxes and charges along to our customers in this era.

Nonetheless, we're not naive. I did make comments about the 4¢-per-litre excise tax and how in fact that might be, if you will, re-engineered.

There's also the fact that, similar to what Mr. Barone was saying, in terms of the transportation equipment we use, our fuel is now regulated as ultra low-sulphur diesel fuel. Our engines are regulated. There's a growing awareness in the industry that the best way for us to reduce fuel consumption and thereby reduce greenhouse gas emissions is through the use of things like aerodynamics, low-rolling resistance tires, those kinds of things. These come with a fairly significant cost.

If you have a truck today and you say, “I want to have a green fleet”, if you will, you might be looking at an incremental amount of, perhaps, $20,000 to $30,000 per vehicle to make that optimum in terms of its greenhouse gas performance, particulate matter, NOx emissions, and so forth.

The industry is ready to move. We've asked the government to help us a little bit in terms of some incentives to get things out there, like auxiliary power units, for example, to reduce engine idling. It's all there.

If you haven't already seen it, I'd be happy to send you our information on what we call the enviro-truck. We had a launch on the Hill just a couple of months ago. We had some good reaction from parliamentarians. We'll send that to the committee.

[The Chair, Conservative, James Rajotte]

Thank you.

Yes, if you could send it to the clerk, we'll ensure all members get it. If you have it in both official languages, that would be very helpful as well.

Thank you, Mr. Brison.

Lastly, we'll go to Mr. Stanton, please.

[Bruce Stanton, Conservative, Simcoe North, ON]

Thank you, Mr. Chairman.

Thank you to our panel for joining us here this morning--I can say that; we have a few minutes left this morning.

First of all, I'm directing my questions to the air transport community. You talked about some of what you referred to as punitive taxes, measures that were imposed on the air transport industry, if I can call it that. It certainly is an important one.

In your understanding, what has been the logic or rationale for the continuation of things like the fuel levy and the rents? Are there not some offsetting contributions coming back? I'm thinking here in terms of what the government needs to collect, for example, to keep up and support other publicly held resources, air navigation systems, other things that support your industry and are in fact still in the public domain.

[Sam Barone]

Mr. Stanton, thank you for your question.

Actually, in terms of air navigation services, those were privatized in 1996 through the creation of Nav Canada. It is a fully self-sustaining, privately funded organization. We actually fund those charges through what we pay to Nav Canada. Every flight that overflies Canada in Canadian airspace is charged a levy, according to weight and distance, by Nav Canada. Once it was divested by the crown in 1996, that was fully privatized in terms of the pricing regulation. The safety regulation is still regulated by Transport Canada, as we are.

The rationale for continuing those is basically to protect government and crown revenue. That's the biggest reason we have been given for the perpetuation of many of those fees.

[Bruce Stanton, Conservative, Simcoe North, ON]

There has been discussion about how to increase Canada's competitiveness. One of the discussions, in terms of the air transport industry, has been about opening up, for example, the industry to foreign ownership. I'd be interested in your thoughts on whether that would be seen as advantageous to the strengthening of the air transport industry here.

[Sam Barone]

In our view, we have no problem with any of those policies. We already have given our share structure in terms of our publicly held companies, the three largest, of course, being Air Transat or the Transat group, Air Canada, and WestJet. There is a huge proportion of foreign ownership within those companies, in terms of their share capital, so our ability to attract capital is not--pardon the pun--a foreign concept to us; we would welcome it.

We're asking government, in terms of global competitiveness, when we're considering a lot of these policy options, be they foreign ownership limits or other structural changes, to consider us on a reciprocal basis, because these are very complex trade deals. If we're looking at global competitiveness, we're asking that we be globally competitive with other jurisdictions.

[Bruce Stanton, Conservative, Simcoe North, ON]

Hence, you're going back to the topics around some of these other barriers, these fiscal barriers that you've got.

[Sam Barone]

Exactly.

[Bruce Stanton, Conservative, Simcoe North, ON]

Thank you very much.

Do I have any more time?

[The Chair, Conservative, James Rajotte]

Two minutes.

[Bruce Stanton, Conservative, Simcoe North, ON]

Oh, thank you.

One more thing for Mr. Armstrong, if I can. One of the notions we've been coming across in the course of this study of the service sector is the notion or perception that there's a predominance of low-paying, lower-quality jobs in the service sector. I wonder how, from your association's perspective, you would respond to that kind of notion or that theory that's out there. Typically, this comes from the fact that people are losing jobs--perceptively higher-quality jobs--in the manufacturing sector and having to shift to something that's lower, or worse, in terms of pay and quality. How would you respond to someone who would promote that theory?

[Bob Armstrong]

I think first, while they're in the supply chain sector itself, yes, there are some lower-paying jobs, but there are also some pretty good-paying jobs. In Alberta, for example, we have people who own and operate warehouses there who are paying something like $28 or $30 an hour and still can't get people. So, funnily enough, we have a shortage in a lot of parts of the country in higher-paying jobs that we can't fill because people don't see it as glamorous, I suppose. Within companies, as you move up to a manager, director, and a VP in the supply chain of logistics, they're good-paying jobs.

[Bruce Stanton, Conservative, Simcoe North, ON]

There was one other thing that struck me here. On the one hand we heard that we've got a lot of trucks chasing less freight, but on the other hand we're hearing about skill shortages. I wasn't sure we could necessarily square those two: we're short of skills and yet there appears to be an oversupply. Could you comment on that?

[The Chair, Conservative, James Rajotte]

Could I just have one of the panellists address this?

Mr. Cooper, just briefly.

[Graham Cooper]

You're absolutely right, there is a bit of a dichotomy there. I think what we're dealing with here is a short-term phenomenon versus the long-term need. We have identified--in conjunction with a couple of other groups in our industry and with government as well--that over time the trucking industry is going to need 35,000 to 37,000 new drivers per year. So a couple of years ago, when capacity was tight, there was a real driver shortage. We just didn't have the drivers for the trucks. Now what we're finding is that because there is excess capacity--less freight--that situation is not as acute.

I think you've got to look at it from the standpoint that this is the economy in 2008; it could change around again in 2009 or later this year.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Stanton. Thank you to all of you for your presentations, questions, and comments here today. It was an excellent session and a very substantive one.

Mr. Cooper, I know you wanted to send something on to the committee, but if any of you have anything further to submit to the committee, please do so through the clerk. We will ensure all members get it.

I want to thank you for your presentations. Members, we will suspend for about two minutes, hopefully, and allow the new witnesses to come to the table and start the second panel.

Thank you.

[The Chair, Conservative, James Rajotte]

We will start our second panel of the 16th meeting of the Standing Committee on Industry, Science and Technology on Canada's service sector.

For the second session, we have two panellists. First of all, from Export Development Canada, we have senior vice-president and chief economist, corporate affairs, Mr. Stephen Poloz. We also have, as our second panellist, from SNC-Lavalin Group Inc., Mr. Robert Blackburn, senior vice-president, government and international development institutions.

Welcome to both of you.

We will start with EDC, and then we'll go to SNC, and then we'll go immediately to questions from members.

Mr. Poloz, we'll begin with you.

[Stephen Poloz, Senior Vice-President and Chief Economist, Corporate Affairs, Export Development Canada]

Thank you, Chair.

Good afternoon, everyone. Thanks for inviting EDC to appear before this committee. It's the first time EDC has been invited here.

I have had the opportunity to brief certain members of the committee in the past, and I welcome the opportunity to meet everyone at once.

Good day everyone. Thank you for inviting me here today. Most of my remarks will be in English, but please feel free to put your questions to me in French. Thank you.

I am also delighted to be sitting here with my good friend Bob Blackburn from SNC-Lavalin. He's a representative of one of EDC's most valued customers and a prime example of a successful Canadian company that exports services.

I do want to congratulate the committee for focusing on the service sector, because I believe it's typically underappreciated, especially in the area of exports.

I'd like to preface my remarks with a very brief overview of EDC's mandate, since we haven't appeared here before. Obviously, EDC is an instrument of public policy for Canada as the crown. Its mandate, though, is to support and develop, whether directly or indirectly, Canada's export trade and Canada's capacity to engage in trade, as well as to respond to international business opportunities for Canadian companies.

Exports, as we know, are the backbone of the Canadian economy, and EDC plays an important supporting role in those activities. Just to illustrate, our 2007 numbers are not yet finalized, but in 2006 EDC served 6,800 companies and investors in Canada. More than 85% of those companies were small to medium-sized enterprises.

We facilitated a business volume on behalf of those companies of over $66 billion in the world, and almost a quarter of that was in the so-called emerging markets—much higher than Canada's percentage of trade that is in emerging markets. We did this without any appropriation from the government. Indeed, this year we paid a dividend of $350 million to the Government of Canada. We do this on a commercial basis. All of our activities are commercially priced and operate in a commercial manner. We provide a variety of instruments to companies such as receivables insurance for their foreign receivables; we do contract bonding insurance and guarantees, political risk insurance, financing for foreign buyers; and we have an equity program for emerging Canadian exporters.

A great deal of what we do is done in partnership with commercial financial institutions: Canadian banks as well as insurance companies, or banks and insurance companies that are in foreign countries.

The committee recently did an extensive study on the manufacturing sector, and I know that during the process of studying that the committee came to understand the emergence of what we at EDC call a new trade paradigm with a strong focus on global supply chains. At EDC we call it integrative trade, because it's not just export trade, but it integrates both importing and exporting, connected by foreign direct investment in a structure that allows the firm to optimize its global operations.

Trade in services is fully embedded in the integrative trade story, so I want to review it very briefly just to underscore the importance of international trade in services, which, as I said before, is widely underappreciated.

At the heart of the matter is the underlying force of globalization. Traditionally, people have seen globalization as companies selling their products and services to all four corners of the globe, and it still is true, but today it's only the smallest part of the story.

Today, globalization is the process by which companies can locate the individual slices or the series of activities they perform in order to get their product or service from concept to the market, to the consumer himself. Each of those activities, then, is located where it makes the most sense, and then of course each of those activities is connected through international trade, and the pieces may have been built through international investments, and then we truly have a global notion of the firm.

We have formed, thereby, a global value chain where the links are connected through international trade. So international trade, then, becomes not just a way to sell our things, but it's a tool that we use to actually produce our things. That is why international trade has become so much more important to global prosperity than it was in past decades.

Integrative trade, though, is not just about goods and their subcomponents. It's about services, because many of those links in that chain are services. I'll offer you an example. We might suppose that we intend to manufacture an airplane in Canada, and we know that requires R and D, designers, engineers, fabricators, marketers, accountants, and of course the chief economist—all those roles that may go into a firm of that sort.

We typically group that entire chain under the rubric of manufacturing, but in fact most of the jobs are actually service sector jobs within the manufacturing firm. If we were to take that manufacturing firm, let's say, and subcontract a company in India to produce one of the components of our airplane, we have built a global supply chain. If that component happens to require the input of an Indian design engineer, we have now done trade in the services of that Indian engineering company.

Later on, when we sell the airplane to a foreign airline, we think of ourselves as exporting a manufactured good, but we're also exporting the R and D services--the engineering and design services, the marketing, etc., all those service jobs--which in theory could be moved into a separate company that we would call “services”. Then only the manufacturing part would be purely manufacturing.

In effect, the service sector is fully embedded. We also see, though, that there are areas of the service sector, which are very obvious on their own, that aren't embedded, but they are embedded in someone else's supply chain.

The new globalized economy has seen enormous growth in exports and traded services. We know that services count for two-thirds of the global economy. Trade and services account for about 20% of global trade. It is a very important factor. Almost $3 trillion per year in services is being traded around the world.

In Canada, for example, 13% of our exports are of services--$67 billion in this past year. On top of that we have companies with foreign operations that sell $140 billion worth of services annually.

There are a couple of facts that are worth remembering as we go along. When we export one dollar's worth of services, it generates almost 83¢ worth of income in Canada. When we export one dollar's worth of manufactured goods, it's more like 55¢ worth of value to the Canadian economy because we have imports embedded in those things. Our export of services is much more diversified than our export of goods. There is 50%-odd of our service exports outside the United States, whereas it's much smaller for goods.

The bottom line for me is what role we play in this. In 2006, for example, EDC facilitated over $3 billion worth of exports of engineering and construction services from Canada. A great example is sitting with me today. EDC also facilitated over $4 billion worth of transactions for Canadian financial institutions with their operations abroad. These are just two examples, to give you a sense of how important these things can be.

It is an extremely important sector, and EDC plays a key role in facilitating that.

I look forward to your questions.

[The Chair, Conservative, James Rajotte]

Thank you very much for the presentation.

We'll now go to Mr. Blackburn.

[Robert Blackburn, Senior Vice-President, Government and International Development Institutions, SNC-Lavalin Group Inc.]

Thank you, Chairman.

I think I've met just about all of the committee people here. I'm happy to be here today too. I haven't appeared before this committee, although I think Jacques Lamarre, our president, did on the last five-year review of EDC. EDC is a very important partner of ours.

I thought in my opening remarks today I would just tell you very briefly a little bit about what SNC-Lavalin is. Quite often people think we make airplanes, because they've heard of Bombardier. Sometimes we work with them, but we don't make airplanes.

The second thing I wanted to focus on specifically is the things the service sector needs, from our point of view, to remain competitive in Canada and internationally. The things we need are a competitive tax system, a reliable and supportive regulatory environment, strategic partnerships in a number of sectors--nuclear would be a good example of that--and outsourcing. And for exports of services, which Steve has talked about, we need positive foreign relations in key markets and supportive export institutions: EDC we've heard about, and Foreign Affairs and International Trade, CIDA--it would be nice to work with CIDA more--and the Canadian Commercial Corporation. Those are the things we need.

Who are we? Well, we're among the top five engineering construction companies in the world. We specialize in public and industrial infrastructure, heavily into power, including nuclear; right now, the huge boom in mining and metals; transportation; chemicals and petroleum; general engineering; pharmaceuticals; and facilities management. We have projects in over 100 countries. We're carrying the Canadian flag to a lot of places it isn't seen very much.

As Steve said, traditionally half of our revenues are from outside North America. In 2006 our revenues were $5.2 billion. We don't have full numbers for 2007 yet, but by the end of the third quarter we were just half a billion below our 2006 numbers. So we'll certainly reach last year's numbers and more.

The interesting thing is we look like a services company, but in fact we mobilize Canadian SMEs wherever we go. I just checked where we're building a 1,200-megawatt power plant in Algeria right now called the Hadjret Ennous. We're taking 24 Canadian suppliers of goods and services with us, some manufacturers, some other service companies. We're building a $2 billion nickel mine in Madagascar for Sherritt. We have 80 Canadian suppliers that we're taking with us. So we're putting together Canadian skills and manufacturers.

Typically, in an aluminum plant--and we build most of the aluminum plants around the world; not all, but most--we take around 30 Canadian suppliers. We're also using the best local supply we can and local labour as well. We have to, to be competitive. But we're constantly taking Canadian companies on the road with us. We do that in Canada too.

We mobilize pension funds. When we put together the group that built the 407, we used Quebec pension funds as part of the financing. We bought most of the transmission system in Alberta and operate it, and we mobilized Ontario teachers' pension funds to do that, along with our own. So we're taking some of the huge pools of pension money and mobilizing them for infrastructure purposes. We are increasingly owning and operating parts of infrastructure. We're going to run the power plant I talked about in Algeria for 30 years, and we own about a quarter of it. We will operate the light rail system, the Canada Line, in Vancouver, and own and operate a good part of it for 30 years. We're providing service to about 65 naval vessels around the country. We manage federal buildings. That's the direction we're going in.

I'll talk about taxation. We say the services sector is one of the key sectors for Canada's future, and it's totally exposed to global competition. It isn't like oil or resources, where we have a strategic advantage because that's where we are. We're totally exposed to competition. So we need a competitive tax rate. In fact, our corporate tax rate is higher than most of our OECD competitors', and that's true even after the phased reductions kick in. So that's a big problem.

We don't have tax treaties with enough countries, so we're sometimes exposed to double taxation, and we pay more, we think, on our foreign earnings than we should.

And finally, for our people working abroad, the personal income tax treatment is always a problem. It's complicated to get authority to be taxed at the out-of-Canada rate, and the treatment of allowances for people who are abroad.... There are all kinds of little tax issues like that that I can go into later, if you want.

Regulation. We need more regulatory certainty and efficiency. Part of the problem is, in the environment area, we need better federal-provincial coordination. There have been improvements there, and we're hoping the new federal Major Projects Management Office that NRCan is funding will help that.

We have no problem with regulation. We cooperate fully with regulators, but we want them to have the resources to do their job in a time that's predictable and in ways that when you're doing a big project, you can see what your track is, so it's not just an open-ended wait.

Strategic partnerships. More and more infrastructure is being built through strategic partnerships, and this has helped create competitive firms internationally. One of the things that made us competitive internationally was the Quebec government insisting that a Canadian company be involved in the James Bay project, so we were loaded onto Bechtel, which otherwise would have done it all by itself. That gave us the experience in managing complex projects, and now we're doing them all over the world.

CIDA. Back in the 60s and 70s, working with CIDA put us into the African market. It wouldn't happen anymore; CIDA doesn't do that anymore. We need a strong federal partnership on CANDU sales internationally. Nuclear sales are highly political. The French president and the American president and the German people, politicians when they travel...they're not doing it for technical reasons, they're doing it to be there with their companies.

When we're looking for export of services, there's not much difference in most markets between the political and the personal and the economic. We need to have all three there. We need networks. We need people on the ground. We need Canadian export support services to be there and coordinated. And it's not the money. We're not going around with our hands out. We want Canada to be there with us. They need to have the Canadian flag on some of the things we're doing internationally.

I'll stop there.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Blackburn.

I apologize to both of you. I know you have a lot to say.

As it is your first time before the committee.... The clerk has your presentations, but the members do not. If you consent, we would certainly have those translated and distributed to all members of the committee.

We'll now go into questions. We'll start with Mr. Brison for six minutes.

[Scott Brison, Liberal, Kings—Hants, NS]

Thank you very much to both of you for being here. There are great synergies between your organizations. SNC-Lavalin is a Canadian company that's doing a lot of business internationally, and the EDC is a company that can help facilitate that.

My question is about Canada's opportunity with the emerging economies, particularly China. Currently there are seven new cities being designed by the Chinese authorities to house 400 million Chinese. These will be totally green cities being designed by the Arup Group out of London and William McDonough + Partners out of Virginia, state-of-the-art cities.

Of course, there's a lot of negative publicity around the coal-fired plants they're building on an ongoing basis, but at the same time, they have set a target, I think, that 20% of their energy requirements will be provided by alternative energy within 15 years. A massive demand is coming out of China for clean energy. The reason I speak to the issue of energy particularly is that Canada has a tremendous expertise in the area of energy and a capacity to research, develop, commercialize, and export a lot of those technologies to help build these plants. And whether it's China, India, Brazil, or, more recently, the fastest-growing economies—for instance, the prediction of Egypt and Turkey and others—there's a real opportunity for us.

Specifically on China, is SNC-Lavalin doing projects in China currently?

[Robert Blackburn]

We've been there for a long time. We've done a certain number of projects there. We've worked with them on cleaning up some dirty industries, chemicals and steel, over a 10-year period, actually with a CIDA project.

I don't know about those cities you're talking about, but I will say that the Saudis are talking about six new cities like this, and we're involved in a group that's looking at that. I think we put our bid in yesterday on a similar city like that in Algeria and one in Abu Dhabi.

[Scott Brison, Liberal, Kings—Hants, NS]

Has there been a change over the last year or so in the attitude of the Chinese authorities to doing business with Canadian companies?