Industry Committee on Dec. 9th, 2009

[The Chair, Conservative, Michael Chong]

Members of the committee, it's 3:30. We are going to get this meeting under way.

Welcome to the 50th meeting, this 9th of December 2009.

We're here to hear two panels of witnesses today, pursuant to Standing Order 108(2), to study the recent economic performance of the services sector in Canada.

In front of us, in our first panel today, we have the Canadian Services Coalition, represented by Monsieur Landry and Madame George, and we have the Conference Board of Canada, represented by Mr. Burt.

Without further ado, we'll begin with an opening statement from the Canadian Services Coalition.

[Shirley-Ann George, Senior Vice-President, Policy, Canadian Chamber of Commerce, Canadian Services Coalition]

Thank you, Mr. Chairman and members of the committee.

We appreciate the opportunity to speak today in front of the industry, science, and technology committee. This marks the second time that the Canadian Services Coalition has made an appearance before this committee to discuss the importance of services in Canada, and we are grateful for the opportunity.

The Canadian Services Coalition, an affiliate of the Canadian Chamber of Commerce, is a membership-based organization that provides a unified voice to the Canadian services sector. We advocate for greater focus and understanding of the impact of services to the Canadian economy. We also promote the liberalization of services markets through the removal of trade and investment barriers to increase the opportunities available for Canadian companies both within Canada and worldwide.

Our membership is comprised of a diverse group of leading Canadian services companies representing such sectors as financial services, telecommunications, IT, and insurance services.

I would like to introduce the chair of the CSC, Mr. Michael Landry, who will be making our comments today.

[Michael Landry, Chair, Canadian Services Coalition]

Good afternoon, Chair and members of the committee. Thank you for having us.

It's a pleasure for us to be here this afternoon. I am here in my capacity as chair of the Canadian Services Coalition. My day job is as a vice-president at Manulife Financial, and as such I think I'm well acquainted with the services, especially financial services.

Not only do services represent approximately 70% of Canadian GDP, but they employ three-quarters of our work force. According to Stats Can, in 2008 services were responsible for 90% of new jobs, and from 2002 to 2009 service labour productivity and its overall growth rate outpaced that of the total economy.

Furthermore, the majority of Canada's service exporters are small and medium-sized enterprises. More than 86% of services firms in Canada employ fewer than 50 people.

Canadian services industries are also prosperous. I can speak of my own sector, the life insurance industry in Canada, in which we have some 102 companies registered, with Canadian-owned firms controlling 87% of the domestic market. Canadian life insurers, with $900 billion in assets worldwide and roughly $400 billion of that here in Canada, are significant long-term investors in the Canadian economy. Furthermore, Canada's life insurance industry is a major component of the services sector, which has been recognized for its success in navigating through the financial crisis.

For my company, roughly two-thirds of our business, and it has been as high as three-quarters, is actually outside of Canada, but almost 50% of our jobs are inside Canada. That's because in addition to our Canadian operations, which are obviously here, our head office is here and some of our global businesses are here, such as our investment division. These contribute to that job count; it does not count the literally thousands of advisers we work with who are independent providers.

While this is positive news, we continuously lack a clear picture of the true status of Canadian services industries. We need to improve our understanding of the services sector in Canada and adapt our regulations and policies to reflect their importance. Canada has emerged from the global financial crisis in a stronger position than many of our competitors, but we need to better understand our strengths in order to capitalize on the things that we do best.

We must also take steps to address the areas in which we can improve. For example, while the global average of services exports in 2008 was 19%, Canadian services exports continued to underperform, representing only 12% of Canada's total exports.

If Canada wishes to remain competitive, particularly as we emerge from the global economic crisis, we need government leadership to address both our strengths and our weaknesses or challenges. Canada must make sure that services industries remain globally competitive to ensure continued economic growth for the entire economy.

The Canadian Services Coalition would like to applaud the industry committee for the release in June 2008 of the report entitled The Goods on Services. This paper stressed the vital importance of services to the Canadian economy and was a very important step in raising the profile of the services sector in Canada. Having participated in the initial hearings, the Canadian Services Coalition was pleased to see the inclusion of a number of our recommendations in the final report. These included first a call for improved service sector metrics; second, for more free trade agreements that include services obligations; and third, the need to develop a services sector innovation strategy.

The Goods on Services has already had a positive effect on policy development with respect to services in Canada. For the first time, Statistics Canada will be undertaking a survey on business innovation in Canada, which will include data on the services industry. Industry Canada has also increased its focus on the development of services sector metrics, while the Department of Foreign Affairs is increasingly developing FTAs that include services obligations.

Likewise, the Canadian Services Coalition has developed a report that breaks down the value of services by province, and we'd like to thank Stats Canada for their assistance in the development of this report.

One of the key conclusions of the industry committee report was the need for the Canadian government to develop a services sector innovation strategy. Other countries, such as South Africa, Japan, the United Kingdom, New Zealand, have already developed similar strategies, and we believe it's time for Canada to do the same.

To aid the government's efforts in this area, the Canadian Services Coalition is in the process of developing our own strategy, which seeks to drive innovation in the services sector and increase competitiveness and productivity across the economy. The Canadian Services Coalition's Canadian services innovation strategy has two primary goals: first, the development of services-based policy and regulations; and secondly, increased focus on services in our trading agreements.

We would also be happy to share our innovation strategy with you when it is completed in the new year, and we hope that you will give it serious consideration to a strong recommendation for the development of a services innovation strategy that is tailored to ensure a competitive sector.

We have a couple of recommendations here, Mr. Chair. To ensure a robust and meaningful services strategy, the Services Coalition recommends the following:

First, that the industry committee update and re-introduce The Goods on Services report, which recognized the need for action on important cross-cutting issues and highlighted the importance of services to the Canadian economy. This would allow the valuable work being done by various government departments to continue and would increase the awareness of the services sector as a whole.

Second, that Canada continues to boost our trade in services both internationally and domestically. At the international level we need to ensure a comprehensive services chapter in all our trade agreements, including in the context of Canada and EU comprehensive economic and trade agreement negotiations currently under way. Domestically, interprovincial trade barriers continue to inhibit economic activity in Canada and should be eliminated. For example, labour mobility remains a serious concern for many services industries in Canada, and the cost of complying with different regulatory systems is having a negative influence on the ability of companies to remain globally competitive and to expand into new markets.

Third, we need to increase the collection of services sector metrics. In order to capitalize on the available opportunities in the services sector, policy-makers need reliable data regarding the current state of services in Canada. Other countries, like Japan, the United States, Australia, South Africa, New Zealand, the U.K., and the EU, have already developed significant research into the performance of their services sector. To remain competitive Canada must do the same. The Canadian government needs to continue to promote and invest in the development of services sector data.

Fourth, and finally, we must do more to address labour market gaps. Canada is facing a nationwide shortage of skilled labour. The Canadian government should identify current and future labour market gaps and encourage the development of a nationwide strategy for identifying how these needs can be met within the framework of the current educational system.

As services employ three-quarters of the Canadian labour force, it is important to make sure that our colleges and universities are able to train competitive workers. Barriers to labour mobility should also be eliminated to ensure the flow of skilled workers into new markets.

This committee has demonstrated that your reports do have a valuable impact on government activity, and we look forward to your report, which will, we hope, result in further progress.

Thank you again for having us, and I would like to welcome any comments or questions that you may have.

[The Chair, Conservative, Michael Chong]

Thank you, Mr. Landry.

Now, an opening statement from the Conference Board of Canada.

[Michael Burt, Associate Director, Industrial Outlook, Trade and Investment, Conference Board of Canada]

Thank you again for having me here as well. For anyone who is unaware, the Conference Board of Canada is a non-profit, non-partisan think tank based here in Ottawa. We do research in a variety of areas, including economic policy, public policy, and education and learning.

When I was first asked to testify today, the question raised was the services sector. I thought you've given yourselves a very broad mandate. As Michael Landry already outlined, it accounts for roughly three-quarters of economic activity in the country and 80% of employment when you include government and the public sector. It is by far the dominant part of the Canadian economy. Given its dominant role, I find it surprising that it's often overlooked or undervalued.

Just as an example, we often hear characterization of the sector that it pays low wages. This is generally and often inaccurate. There are many high-wage industries and occupations within the sector. In fact in aggregate the service sector's wages are only about 6% below the average for the economy as a whole. And there are a variety of industries that pay above-average wages, including wholesale trade, information services, financial services, and business services.

In terms of recent performance, the services sector has generally survived the recession with minimal damage. Some sectors have been more affected than others. Just as an example, over the past year, the goods-producing portion of the economy has shrunk by 11%, while the services sector portion of the economy has basically been flat over the same period of time. Services industries related to the movement of goods and tourism have been the ones worst affected. This includes things like wholesale trade, transportation, and accommodations. Industries like professional services and publishing, which are dependent on business spending, have also been affected by the recession. However there are many others—including sectors like retail, telecom, and even much of the financial sector—that are either quickly rebounding from the effects of the recession or actually grew through the recession. They did not see an outright decline in economic activity over the last year.

Despite its relative success, Canada's service sector still faces a number of challenges. I just want to identify a few of them here for you today. First is non-tariff barriers to trade. Services are generally not thought to be a particularly trade-dependent sector, and this is somewhat true, but they still account for about 15% of Canada's total trade volumes. The share is even higher when you consider the fact that many of the material inputs the sector uses are imported. Major sources of trade in services include tourism, transportation, financial services, and business services. Given that much focus in trade policy is on the movement of goods, we actually find it interesting that a lot of our research has found that non-tariff barriers to trade—things like regulatory differences, access to visas, border security—have actually had a bigger effect on the service sector than they have on the goods sector.

Just to give an example, roughly half the number of visitors who were coming to Canada in 2000 are coming here now. The number of visitors coming to Canada from the U.S. has declined by half. This is an absolute decline in the number of visitors, and it's a decline in market share within the U.S. It's not just the fact that Americans are traveling less; they're actually travelling less to Canada. There's a variety of factors that contribute to this, including the strengthening Canadian dollar over much of this period, but tighter border security is an issue for the tourism sector.

Another issue for the services industry is labour force. Most components of the service sector are labour-intensive. Thus, labour market conditions are of particular import to many businesses within the sector. Obviously this is less of a concern at the moment due to the recession, but we do expect this issue to quickly re-emerge in the coming years. It is the most pressing for high-skilled workers, for whom unemployment levels tend to be low, even during recessionary periods. As a result, we must continue to coordinate our education and immigration policies in order to reduce the effects of labour shortages on growth in the services sector. For lower-skilled workers, the services sector also faces challenges. These include things like seasonal fluctuations in demand, high employee turnover, and poor productivity.

This brings me to the last issue I want to highlight today, which is the productivity gap. It is well publicized that output per worker here in Canada is significantly below that in the United States. In fact, most of that productivity gap can be attributed to the services sector. Retail, wholesale trade, financial services, and business services all have significantly lower output per worker than their U.S. counterparts.

Now, there are a variety of contributing factors to this. Some of these are beyond our control; some of them are within our control. For example, there are fewer opportunities for economies of scale in Canada. We have a small population based over a larger area, fewer opportunities for economies of scale. We also see under-investment in machinery equipment by the services sector here in Canada. Just to give you an idea, the capital intensity of the retail sector in the U.S. versus Canada--so the amount of invested capital per employee in the retail industry--is roughly two-thirds in Canada of what it is in the United States. So needless to say, it's harder for Canadian workers to produce as much when they have less invested capital to work with.

Finally, we've seen limited foreign investment in the industry. Some of this is deliberate; some of it is not. For example, we restrict investment in some sectors, like telecom and air transportation. The end result is that it reduces investment in the sector and reduces the ability of our services sector to benefit from global best practices, global innovation, and different techniques.

Just to sum up, the services sector is a large and growing part of the Canadian economy. We believe the services sector will continue to outperform the goods-producing sector over the medium to long term, thus enabling its success as a key component to Canada remaining internationally competitive in the coming years.

Thank you.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Burt.

We'll begin now with about a half hour of questions and comments from members, beginning with Mr. Rota.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

Thank you, Mr. Chair, and I want to thank the witnesses for coming out today.

I just have a quick question about the Canadian services sector. It appears to have shrunk less since the economy has started...I won't say falling apart, but shrinking. Recently, with the manufacturing and other sectors going down, it seems to have increased. What are the reasons for the relatively strong performance of the service sector, and are there certain specific sectors that are much stronger than the others?

[Shirley-Ann George]

I'll start an answer, if the Conference Board would like to add to that.

The services-producing industry, according to the Department of Foreign Affairs and International Trade, actually has increased in 2008 by 231,000 jobs. This was largely due to a growth in professional services, banking, and the insurance industry. Stats Canada has also confirmed that as well. Some of our services sectors have done quite well during this economic downturn. I think we can take a significant amount of pride in the fact that because our financial services were well regulated, they have been able to withstand this downturn better than some others.

[Michael Burt]

Basically, I would just say, broadly speaking, that much of the problem with this recession, or the source of the cause of the recession, was imported into Canada. Because the services sector is much more domestically oriented, it's one of the key reasons that it's been less affected. Manufacturing, which tends to be much more export-oriented, has been more heavily affected. Within the services sector, as I identified in my opening comments, for example, wholesale trade is highly dependent on the movement of goods. It's been very negatively affected by the recession.

In some of the sectors, like telecom, growth slowed down. It continued to grow through the recession. So it's very much dependent on the conditions of the particular sector. In the case of telecom, one of the reasons for that is that it is, in effect, a utility. Businesses and consumers want a minimum level of service in order to have their day-to-day operations, their day-to-day lives, so they may cut back a little bit on the margin, but they continue to use the service rather than having wholesale cuts and getting rid of their phone services or their Internet services, these sorts of things.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

So essentially, from what I understand, it's essential services that are keeping the service industry going or keeping a base. I listened to what you were saying in your opening remarks. You were talking about government services, probably one of the biggest sectors in that area. It gives it a stability or a base. Then, other services are basically included as essential services. So would that be the largest portion of the services section?

[Michael Burt]

I'd have to double-check the numbers, but it is definitely one of the biggest. If you combine federal, provincial, municipal, education, and health, then yes, that combined would definitely be the biggest part of the services sector.

[Shirley-Ann George]

I would just add to that. The banking and insurance industries are private industries, and in other countries, especially in the banking sector, they have incurred massive layoffs. That's not the case in Canada.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

We talked about services being more of a domestic product than anything else. Statistics Canada reports that export services account for about 13% of total Canadian exports. What percentage of the service industry's production is exported? What is the total there?

Maybe you can define what kinds of services are exported. I guess the old mentality is that you produce something, a hard good, and ship it out, but more and more we talk about services being exported.

I come from northern Ontario, where I see often with mining companies that they sell intelligence, sell services for developing mines abroad. That's not something people think of, really, when they think of exported services.

Maybe you can elaborate on professional services or services that are exported, and what portion of the total of the service industry they represent.

[The Chair, Conservative, Michael Chong]

I'm going to interrupt here.

We are going to have to suspend. We have bells that are ringing for an unscheduled vote in the House, and it's going to take us at least half an hour. What I'll suggest to members of the committee is that we reconvene here at 4:30 to continue the meeting. What we will do is finish with our first panel, and I'll apologize to the witnesses for the second panel, but we're going to have to reschedule it to another day, because we are out of time.

So we'll reconvene here at 4:30 to finish the first panel of witnesses. I apologize to the second panel; we'll reschedule it for the new year.

We'll continue our meeting at 4:30.

[Mike Wallace, Conservative, Burlington, ON]

There's another vote at 5:15.

[The Chair, Conservative, Michael Chong]

I understand that. You can come back here for 45 minutes.

This meeting is suspended.

[The Chair, Conservative, Michael Chong]

We're coming out of suspension of our meeting due to the vote in the House.

We'll have you answer the question that Mr. Rota posed so as to put that into the record, and then we'll go to Monsieur Vincent.

Go ahead, Mr. Landry.

[Michael Landry]

It was a question about exports?

[The Chair, Conservative, Michael Chong]

The question related to which part of the service economy is export-oriented and what the government might do to enhance those service exports.

[Michael Burt]

I don't have all the figures in front of me, but to my knowledge the most export-intensive part is the transportation sector. If I remember correctly, about 15% of its revenues come from exports. Other segments can be lower. Financial services, if I remember correctly, are at about 8% of sales. There are some segments that are more export-intensive than others. And there are some that are not very export-intensive—for instance, the retail trade is almost entirely domestic.

[Michael Landry]

Certainly in the financial services industry, our sales abroad, particularly in our life insurance sector, are quite extensive. For our life insurance industry, it's about 53%. For our company, about two-thirds of our business is outside of Canada. That's divided between the United States and Asia. Asia is our fastest-growing area—China, Japan.

Depending on the specific sector, the numbers can vary quite a lot. As we grow our business certainly many of the opportunities are outside of Canada, and that will continue to grow, as far as we can see.

[Shirley-Ann George]

I would add that currently there's about $68 billion worth of services that are exported—financial services. There's also the tourism industry, for example, which is very important. But there are massive opportunities to increase this. If you look at the U.S. numbers, for example, the U.S. has the highest percentage of services exported. I believe they're doing close to double what Canada is doing in exports, as a share. There are massive opportunities for Canada, if we could develop a strategy for how we grow the good services companies we have.

[The Chair, Conservative, Michael Chong]

Thank you very much.

Mr. Rota has now joined us.

Just to let you know, the witnesses have read into the record the answer to your last question--

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

I'll have to follow up on it, then.

[The Chair, Conservative, Michael Chong]

—so you can follow up on the IntraParl website.

You have the floor, Mr. Bouchard.