Industry Committee on Oct. 24th, 2016

[Earl Dreeshen, Conservative, Red Deer—Mountain View, AB]

Thank you very much, Mr. Chair.

Thank you for being here today.

You had a good message when you talk about Responsible Care and trying to get the positive message out there. I think it's extremely important, because we've found in some industries that if you wait too long, then the message gets ahead of you. One of the critical parts is that you're looking at safe food, and you're looking at the requirements that you have and how chemistry deals with that. Of course, people should be recognizing that we have the safest and best food in the world. That's a critical aspect of it, and it's so important.

The other comment that I would like to make before I ask a couple of questions is that you talked about low carbon, natural gas, and shale gas, and the message that is there so that people have been able to move and expand. Of course, it certainly has gone wild in the United States. They've looked at it, and they recognize that they don't need our petroleum products, because they've had the freedom and the flexibility to be able to do what they need to do in order to develop the resources they have.

I think that's one of the issues that we have to grab hold of to recognize that we are now a bit behind. You were talking about how we can get investments to come up to Canada, but we've tied our hands in so many different ways. Of course, the U.S. is just licking their chops to be able to move forward on that.

Can you start by finding some ways, or telling us about a few ways, that we might be able to change that trend, so that we can see investments coming into Canada that will be positive for your industry?

[Bob Masterson]

Let me make a couple of comments to your first point about food.

One of the key solutions provided by the chemistry industry is in the area of food preservation. More than half of all the food grown never makes it to the table. It ends up disposed of somewhere along the way, either through pests or through waste because it's no longer fresh. Those solutions to get food to the table are very important in today's world.

[Earl Dreeshen, Conservative, Red Deer—Mountain View, AB]

Before you go any further with that, Bob, there's still that messaging, because when you talk about that, there's this negative concept about what you are putting into food so that it's going to last two or three times longer.

Maybe you could address that side of it. I agree with you, but you have to look at the—

[Bob Masterson]

We spend a lot of time—

[Earl Dreeshen, Conservative, Red Deer—Mountain View, AB]

—perception as well.

[Bob Masterson]

—working with the committee on environment and sustainable development as they've looked at Canada's chemical management plan and CEPA, the Canadian Environmental Protection Act.

It's no secret that Canada's approach to chemicals management is second to none in the world. The folks in this room may not know it, but the United States has gone through its first modernization of its chemicals management in over 40 years. What they've done looks and feels a lot like Canada's chemical management program. They've collaborated extensively with people here in Canada to make that happen. We don't have anything that we should feel is second rate in our approach to how we regulate and manage chemicals.

[Earl Dreeshen, Conservative, Red Deer—Mountain View, AB]

That's great. I just wanted to hear it from you.

Now we go on to the other side of the United States and their issues there, which have to do with our technologies and the differences we have as far as investment is concerned.

[Bob Masterson]

Let me give just a basic quick overview for people who don't know the chemistry industry well. You might wonder in the back of your mind why we have a chemistry industry in Alberta. People say it's the oil. No, it's not the oil; it's the natural gas liquid.

There are two pathways to make traditional industrial chemicals. One is to take crude oil, turn it into naphtha, and then turn that into plastics-related chemicals. The other is to take ethane out of natural gas and go straight into chemicals for plastics in all the plastics chain. We call ethane a natural gas liquid. It comes along with the natural gas developments.

What's the benefit of that? It uses half as much energy, and therefore results in half as many emissions, to make plastics and all related petrochemicals out of ethane rather than naphtha. That's not to say that naphtha's wrong—there are a lot of very important chemistries that are based on naphtha—but the plastics chain can be well supplied from ethane.

Why does Alberta have a strong industry? It is because, for years, it was the only place in North America that had access to ethane. It was cost-effective to produce plastic-related chemicals in Alberta and ship them over the mountains or ship them back across Canada.

What has happened in the U.S.? Why is there a revolution? Well, they now have access to the same ethane we've had for a long time. In fact, in Sarnia you have seen the installations there convert their operations, which are historically naphtha-based, to the ethane feedstock. That has made them very competitive vis-à-vis their U.S. counterparts, but we should be able to attract more of that investment here.

Another way to ask the question is, “Well, what does the U.S. have that we don't have?” We have access to feedstock; they have access to feedstock. We're a little worried about the long term if we don't develop energy, but for now, feedstock is available. We have access to market; they have access to market, both the North American market and the Asian and offshore markets.

The third thing the U.S. has that we don't have, especially at the state level, is a competitive investment environment. On many occasions it has seemed that Canada hasn't been interested. If you look no further than Pennsylvania, which doesn't have the long, storied history of chemical development Canada does, Shell Chemical has proposed a project there that will amount to well over $10 billion U.S. That was seven years of work. The State of Pennsylvania was not going to take no for an answer. It was a question of how to make this happen for the 40 years of benefits, tens of thousands of workers in construction, and 800 to 1,000 good jobs after that. The question was, “How do we make this happen for Pennsylvania?” That deal was concluded this year.

There's a message here for Canada: there's a very competitive global environment for investment. If we want it, we're going to have to go for it, and we're going to have to work very hard to get it.

[Earl Dreeshen, Conservative, Red Deer—Mountain View, AB]

As a last point in the 45 seconds I have left, I wonder if you could give us an idea of what we could be doing to improve our patent system here in Canada. I doubt if 45 seconds will do it, but I'll lay it on the table.

[Bob Masterson]

I couldn't do it justice. I can have someone come back to you with some suggestions on that.

[Earl Dreeshen, Conservative, Red Deer—Mountain View, AB]

If you have a report that's handy and you want to send it to the chair, that would be a good idea.

[Bob Masterson]

I don't have a report on patents per se. I could spend maybe 30 seconds to say that we felt the changes made to the SR and ED tax credit program were disadvantageous to Canadian manufacturers, including those in our industry, many of whom are existing manufacturers.

What they do is at the R and D and the deployment stages, they're taking research that may have been done elsewhere, but it's the final step to get it to production scale that they could do here in Canada. It has become more challenging to access that, and therefore we're probably going to see less of that type of work done in Canada.

[Earl Dreeshen, Conservative, Red Deer—Mountain View, AB]

Thank you.

[The Chair, Liberal, Dan Ruimy]

Thank you very much.

Mr. Masse, you have seven minutes.

[Brian Masse, NDP, Windsor West, ON]

Thank you, Mr. Chair.

Thank you for being here today. I just want to make clear that the chemical association was the previous—

[Bob Masterson]

You mean the CCPA.

[Brian Masse, NDP, Windsor West, ON]

Yes, the CCPA.

Your website is very good for a lot of information. There's a connection between some of the things we do ordinarily and the industry. You talked about how if we want to move we should go for it, in terms of getting more of that investment here. You mentioned tax, but what specific advice would you give?

[Bob Masterson]

I mentioned two specific things.

We know that Canadian governments will not do what is often done in the States, which is to give a tax holiday.

What are the other tools that can help? Certainly tax treatments such as deferred tax and accelerated capital cost depreciation treatments are ways to do that.

[Brian Masse, NDP, Windsor West, ON]

Yes.

[Bob Masterson]

Second, the federal government in particular has a lot of programs and funding at its disposal. Even when we talk to folks in the ISED department, it is difficult to keep track of it all.

The work of this committee, in our understanding, is to try to provide some strategic focus for Canada's investments in this area. We say it's long overdue, but more particularly, don't reinvent the wheel. If Ontario, Alberta, British Columbia, and Quebec, which are a large part of the Canadian economy, have already identified chemistry as a priority, that ought to be a priority for the federal government as well.

Think about the $500 million in Alberta this year alone that's going to attract two to three new investments. If the federal government partnered with Alberta on that, now you're talking about four to six investments, and all the additional revenues and jobs that go along with that. We strongly encourage the federal government to align its activities with those of the provinces.

[Brian Masse, NDP, Windsor West, ON]

Over the last decade, I have had deck after deck of lobby groups coming, not just from the chemistry association but others as well, talking about lowering corporate taxes. That was supposed to be the big promise for investment, but what you're saying to me today is that we're getting 1% of investment in R and D.

What was wrong with that argument? Why didn't that take place? We have lower corporate tax cuts than the United States; in fact, both presidential candidates are talking about raising them. However, we've seen states, Pennsylvania and many others—and I come from close to Sarnia where we do a lot of this industrial work—undercut us because NAFTA and free trade don't account for what state and provincial governments can do.

What took place in that? Can you at least explain and give me an insight? Your two specific requests are actually very helpful.

[Bob Masterson]

I think there are two things that have changed, and they're both very important to note.

The first is that if you went back a decade ago, Canada was not on anybody's short list for investments in the chemistry industry. As much as we might have wanted it and gave the right signals, it wasn't on anybody's short list. Now when these global companies are looking for places to make their next $8-billion investment or $10-billion investment, Canada is actually on that list. They're coming to talk to Alberta, to Ottawa, to Ontario. It's discussed. It's one of the two or three that they look at.

However, it isn't number one, and that's the other part of that question. What has changed is that the competition has become more and more intense. As we've moved the goalposts, others have moved as well, and we haven't necessarily been keeping up.

That's not just a critique of the federal government. I think it's across the board in how we approach economic and manufacturing development. There doesn't seem to be a lot of synergies between efforts at the provincial level and at the federal level. Certainly between places like Sarnia or Guelph and the provincial governments I believe there are, but at times there's a disconnect between Ottawa and the provinces.

[Brian Masse, NDP, Windsor West, ON]

Yes, and that's a lot of what this study is about for me. It's finding the things that Canadian taxpayers are going to subsidize in one form or another. Reducing corporate tax is a loss of a revenue stream and requires borrowing, because we are in deficit and in debt. It's the same with incentive programs, whether it be with the auto industry close to Sarnia, where I am....

The capital cost reduction allowance, again, is continued borrowing. Is that going to be returned to the constituents with results?

[Bob Masterson]

Well, you have to make smart and strategic investments, and, again, we think we're one of those. Why would that be?

First of all, if you're making, say, a $2-billion investment in a chemical facility, you're looking at investment that's going to be around for 35 to 40 years; it's not five years plus. Our analysis suggests that even at 100% accelerated capital costs allowance, 100% depreciation treatment, the federal government's forgone revenues from taxation would be returned over an eight-year period. The break-even point for the federal government is eight years. You now have the rest of this period.

[Brian Masse, NDP, Windsor West, ON]

There's a clear argument for that, and the general corporate tax cut reduction doesn't guarantee.... In fact, in the sense that we actually have mostly branch plants now, most of those profits are returned. Ironically, in the oil and gas industry—that's a debate for another day—we were actually returning Canadian taxpayers' money to Washington, because they could tax on worldwide profits.

This is why this committee originally came to see CCA as an actual objective. I believe, though, in a longer duration for it, and instead of the two-year renewal, looking at a five-year, and then maybe a potential of five more from there, a 10-year renewal. Some even argued for having it permanent. It would create more of a subsidy.

It's harder to move a piece of equipment to China that the taxpayers have helped fund through a reduction of taxes to the company, versus that of a general corporate return that actually doesn't end up in Canada because the investment—as you noted for your industry, it's 1% of investment for R and D—doesn't take place here.