International Trade Committee on May 26th, 2008

[The Chair, Conservative, Lee Richardson]

Gentlemen--it's just the gentlemen today--we're about to begin.

I want to welcome you all back to the 30th meeting this session of the Standing Committee on International Trade.

Mr. Parliamentary Secretary, it's nice to see you back. We'll just give Mr. Miller 30 seconds to get seated. While I do that, I'll welcome our witnesses here with us in the West Block.

Jean-Michel Laurin, thank you for coming. We'll introduce you more later. And welcome, John Wright.

Sorry I'm a little late. The flight from Calgary was a little late.

Can you hear me all right, John?

[John D. Wright, President and Chief Executive Officer, Petrobank Energy and Resources Ltd.]

I can hear you very well, Mr. Chairman.

[The Chair, Conservative, Lee Richardson]

Good. Thank you.

I think we will begin. We're going to take the first approximately 50 minutes with our first two witnesses. We have, from the Canadian Manufacturers and Exporters, Jean-Michel Laurin, who is vice-president of global business policy. From Petrobank Energy and Resources Ltd. in Calgary, we have John D. Wright, president and chief executive officer.

We'd like a five- to ten-minute opening to give a brief background, and then the committee will pose questions to you individually or to the two of you as we proceed.

If you're ready to go, I wonder if we could ask John Wright to begin.

[John D. Wright]

Can you hear me all right?

[The Chair, Conservative, Lee Richardson]

Yes, just fine. Please carry on.

[John D. Wright]

Great. Thank you.

Thank you very much, Mr. Chairman and members of the committee. It's a great honour to be able to present to your committee today.

I'm here representing Petrobank Energy and Resources Ltd., but I'm also representing a subsidiary of ours, Petrominerales Ltd., which is a Bogota-based oil and gas exploration company.

For a little bit of background, I have personally been doing business in Colombia since 1992 with the past three companies I've been involved in. I first went there about November of 1992. I most recently was in Colombia last week with my wife and four-month-old baby.

Petrominerales, our Colombian-based subsidiary, is a Toronto Stock Exchange-listed company. It's owned 76% by Petrobank. It's owned 24% by the general public. We have a current market capitalization of about $1.7 billion and we are 100% focused in Colombia.

Petrominerales is a major investor in Colombia, along with a number of other successful TSX-listed companies. We have many happy shareholders, and we have been fortunate both to have some success in the oil and gas business in Colombia as well as to be able to take advantage of recent upticks in the price of oil on the international markets.

Petrominerales is in the business of exporting Canadian expertise and capital and of repatriating profits. A good question to ask is why we would choose Colombia.

From both personal experience and experience with the many people who have worked with us in Colombia, Colombia represents for us the best combination of geological opportunity, fiscal regime, and geopolitical stability in the international exploration world.

Colombia has put in place a solid fiscal regime of royalties and taxes and a regulatory environment that we believe is second to none on a combined basis in the international oil and gas business. Colombia has demonstrated extremely strong business continuity, sanctity of contracts, and assurances from government that have meant that the political risk of doing business in Colombia is de minimis.

Colombia has also put in place a very strong regulatory and environmental framework, which we're very happy to work within, and we find many similarities between the Colombian regulatory framework and the Canadian, particularly Albertan, regulatory framework.

Perhaps the single biggest asset that we're able to encounter in our operations in Colombia is the Colombian people. We find them to be a well-educated, highly motivated, extremely passionate, and strongly nationalistic people who are prepared to work hard and build a better Colombia for themselves and their grandchildren.

There are also many brilliant initiatives that the Government of Colombia has undertaken, which we have actually been strong proponents of bringing back to the Canadian regulatory framework. If I could just highlight one of those, an interesting facet of the Colombian royalty regime on oil and gas exploration is that, by legislation and by law, a specific percentage of every royalty dollar earned from the production of oil and gas in operations in Colombia is returned to the municipality from which that oil production was originally received and to the province from which that oil production was originally produced.

The net effect of this is that the local governments and the provincial governments of Colombia are able to participate fully in the success of any resource development that occurs in their area. They're able to receive direct funding in direct reference to the amount of oil that's produced in their region, which allows them to sustain a strong infrastructure framework as well as to be able to create some long-lasting institutional investments in the form of social infrastructure, such as schools, hospitals, and so on.

That's a great example of how the oil industry and the government have worked together to create a positive feedback loop in the country. Actually, in my opinion anyway, had such a system been put in place in areas like Alberta and some of the other regions of Canada where there are currently some serious disconnects between local industry and investors, there would be a much better continuity in Canada today.

We're big believers in implementing a north-south relationship over the long term. We think Canada's initiative to undertake a free trade agreement with Colombia and other nations in Latin America is an excellent opportunity to broaden Canada's scope and positive influence in the region. We believe Canada can take the lead right now.

From our perspective, we're not concerned with tariffs. We're not concerned with bilateral trade. We would like to have a very open and transparent relationship with the Colombian government. We have a strong tax treaty, reciprocal investment protection, and improved access to high-quality transfer of some of the best and brightest people. Some of the best and brightest people from Colombia are working for us in Canada now; some of the best and brightest in Canada are working for us in Bogota at this moment. We believe that's an excellent way to build and foster a strong relationship in the region, and we believe Colombia is an excellent place to start that relationship.

[The Chair, Conservative, Lee Richardson]

Thank you.

We will hear first from Monsieur Laurin, and then we'll go to questions from the committee.

Jean-Michel Laurin is vice-president of global business policy for the Canadian Manufacturers and Exporters.

[Jean-Michel Laurin, Vice-President, Global Business Policy, Canadian Manufacturers & Exporters]

Thank you, Mr. Chairman.

Good afternoon. If you do not have any objections, I will be expressing myself mostly in French today.

My name is Jean-Michel Laurin. I am here representing the Canadian Manufacturers and Exporters, Canada's largest trade and industry association, with members from all of the sub-sectors involved in manufacturing throughout the country.

The manufacturing sector remains Canada's most important commercial sector: 16% of our GDP is dependent upon manufacturing and 21% is dependent upon foreign exports. As we enjoy repeating, each manufacturing dollar produced generates more than three dollars worth of economic activity overall. When a single-industry community loses a plant, one often discovers that in that community everything was dependent upon that industry. That is a good illustration of the importance of the manufacturing sector.

The manufacturing sector is mainly responsible for our trade internationally. More than two thirds of exported Canadian goods and services are manufactured products. The rest is mainly made up of agricultural and energy products. Research and development are highly dependent upon the manufacturing sector. Three quarters of private research and development funded by the private sector is done by manufacturers. Approximately two million Canadians earn their daily bread working in a plant or a factory.

You are aware of the fact that the manufacturing sector is going through difficult times. A profound transformation of the sector is underway in Canada, especially in Quebec and Ontario. The diagnosis is the same virtually anywhere in the country. Manufacturers must be among the best in their field because, as we well know, the Canadian dollar has appreciated. This has brought about a reduction in the export income of manufacturers and exporters. Rising energy prices are further shrinking their profits. It is becoming more and more difficult to earn a profit, which explains why we have seen so many jobs disappear in the manufacturing sector over the last five years.

International competition is becoming ever stronger. Our markets have become much more open. This forces our companies to achieve good results, which is becoming more and more difficult. The economic slowdown in the United States is also of great concern to us. It is forcing businesses to re-examine their business model, to look for other growth opportunities and to seek out means to mitigate the impact of the recession on their main export market.

Lastly, people are very worried by the economic slowdown and the credit market problems. Many of our members are telling us that they are having difficulty obtaining credit. That gives you an idea of the present situation of the manufacturing sector.

The Canadian economy and Canada's manufacturing sector are undergoing a deep transformation, but this phenomenon is not strictly Canadian. It is a symptom of what is happening at the global level. We are witnessing a realignment of the economic forces throughout the world. Global economic growth was quite steady during the 1990s, in large part because of the vigorous growth of the American economy.

The PowerPoint document I had distributed contains statistics that show that a good portion of the economic growth over the coming years will come from emerging economics, such as Columbia. For example, we see that developed economies will have an average growth of between 0 and 3% over the course of the next few years. In the United States, for 2008 and 2009, predicted growth is below 1%. Our traditional markets are not growing markets. Competition is becoming more and more fierce. Given that emerging economies are looking to penetrate the Chinese market, it is more and more difficult for our exporters to maintain their share of our traditional export markets.

In emerging and developing economies, however, economic growth has been very strong and quite steady. The data I have provided to you are those of the International Monetary Fund, that does economic predictions. Whether you are talking about Africa, Russia, China, India or Colombia, the annual growth rate is always above 5%. In certain cases, such as China or India, annual growth has even reached close to 10 or 11%. These are therefore major economies, characterized by rapid and even phenomenal growth.

Your study deals mainly with Colombia. Free trade agreements with developing countries or emerging economies are a relatively new phenomenon. In the past, we tended to negotiate free trade agreements with the United States. Mexico was one of the first cases. Traditionally, we have done much of our trading with comparable developed countries, whereas now, we are targeting developing countries. It is therefore perfectly logical that you ask yourselves these questions.

This is a phenomenon which will continue. A few years ago, 85% of our exports went to the United States. The number today is 79%. The percentage is dropping because we are developing markets other than the United States. Companies use North America as a manufacturing base, but their aim is to penetrate world markets.

Concerning the performance of Canadian exporters over the last year, our exports to the United States have fallen back by more than 3%. However, our exports to China have increased by 21%, and they have risen by 14% in the case of Brazil and by 29% in that of Colombia. Markets where growth has been strong are markets such as Colombia. Our members are certainly interested in developing and opening up these export markets. Therefore, any measure that would facilitate access by Canadian companies to these markets would be most welcome.

Moreover, not only have our exports to Colombia increased, but, over the course of the last year, we have accumulated a trade surplus with that country. We export more goods to Colombia than we import from that country. This is a very unusual situation in the case of an emerging economy. Usually, it is the opposite that occurs: we have a trade deficit such as that which we have with China.

Another aspect that should be underscored is that the manufacturing sector plays a very important role in trade between Canada and Colombia. Last year, more than 68% of our exports to Colombia were products manufactured in factories in Canada. Five years ago, that number was 57%. There has therefore been important growth in our exported industrial goods to Colombia.

We are seeing that economic growth is truly happening in the emerging economies. The majority of our members are in favour of a free trade agreement with Colombia. There will certainly be challenges for certain sectors, but that is the case in the negotiation of any type of free trade agreement.

One must not however view an agreement and the negotiations as an end in itself. The objective should be to do more in order to facilitate trade between Canada and Colombia. The witness who preceded me stated that security is certainly an aspect that is on top of the list when a company is thinking about doing business in Colombia. It is not simply economic development that should be taken into account; one must also consider the level of social development.

The Canadian government has a very important role to play in helping Canadian companies increase their trade with countries such as Colombia. For example, the Canadian International Development Agency for several years offered programs aimed at helping companies penetrate these markets and work alongside aid agencies. In our view, stakeholders in the economy, trade, investment and international aid should work hand in hand in order to maximize the impact we can have on the development of these partner countries.

I look forward to your questions. Thank you for having invited us here today.

[The Chair, Conservative, Lee Richardson]

Thank you, Monsieur Laurin.

We will now go to questions. I'm not sure if our witnesses are aware that the committee recently returned from Colombia, where we met, amongst others, a couple of representatives from Canadian firms doing business there--Nexen and Enbridge particularly. We're very impressed with their corporate social responsibility. We heard as well from the Government of Colombia that those Canadian companies, including yours, Mr. Wright, were well thought of in Colombia.

I would like to start the questioning today with Mr. Bains. I think we're going to have to get through this quickly, so let's try to keep it to seven minutes for each questioner, and that will include the answers. I'll ask the clerk to watch the clock.

Mr. Bains.

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

Thank you very much, Chair.

Thank you very much, guests.

As the chair mentioned, we came back from Colombia. I have learned a great deal from that trip. It is a country full of extreme contradictions. You have tremendous growth, but extreme poverty. You have a very popular president, but a Congress that's under investigation--up to 30 members, I believe. You have essentially a very mature democracy, but a country that is dealing with a very long internal conflict. It was incredible, the sharp differences we saw and experienced first-hand.

Our goal was a very clear-cut mandate to look at human rights issues and environmental aspects, not so much on the access to market and free trade, but on some of those other issues that became a cause of concern for many Canadians.

Mr. Wright, could you comment and elaborate on that particular set of concerns, and the one the chair raised, in terms of what initiatives your company has taken to address and deal with some of those, above and beyond the traditional free trade agreement with respect to market access, the reduction of tariffs, and so forth? I'm speaking specifically about corporate social responsibility and initiatives you are taking to help deal with the human rights issues and environmental concerns that are being brought forth to our committee.

[John D. Wright]

Excellent. Thank you, Mr. Bains. I'd be happy to comment on our programs down there.

We take a three-pronged approach to our community relations involvement. I echo your comments about the stark disparity between what's happening in the economy and what's happening with high levels of poverty and some of the social issues that are going on in Colombia. But I can comment, from having lived in Latin America and from having visited most of the Latin American countries, that Colombia is actually one of the few places where they seem to be getting it right over time. One of the things we found is that when we've implemented our own corporate social responsibility, we've actually started at a much higher level in the social hierarchy, dealing with much higher-level problems than, for example, some of the issues I dealt with the last time I was active in Latin America, which was in Ecuador.

So we've taken a three-pronged approach. We spend an awful lot of time working with the local communities, investigating their needs, and ensuring that they fully understand what our relationship will be with them if we go into an area and make investments in that area. We focus on our ability to contribute to the educational side of their communities to focus on improving the overall ability of the people in that region to both compete as well as participate in the business we're undertaking. We undertake to utilize the local people, in particular to provide both cultural and aboriginal baselines for us to complete our environmental studies, providing an opportunity for us to actually use the local knowledge as the baseline for how we want to do business on the surface.

Finally, we work very hard to make sure we inculcate a high level of employability and employment opportunities for the local people. In a very simplistic vision, our belief is that the best social program is a job.

I would suggest that we're actually starting in areas where there already is a decent social infrastructure. We're not starting from zero, so a lot of times the educational initiatives we're undertaking are actually helping local governments to understand the process of government and the legislative implications of things that are happening at the provincial and national levels. We've also spent an awful lot of time making sure there is corporate governance trickling down through the local governments and into the municipalities to allow them to carefully reinvest a lot of the tax revenue we generate and the royalty trickle-down that comes into their hands as well.

I can talk, if you like, about environmental initiatives we're undertaking, but from a corporate social responsibility perspective, those are the highlights.

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

If you had to calculate it for all those initiatives, what's the amount that you invest locally in Colombia in dollar terms, and then, if you could, as a percentage of your profits or a percentage of your revenues?

[John D. Wright]

I apologize, it's not a number I have at my beck and call, so I'll try to do my best to guess. I would suggest that our corporate social responsibility initiatives, including investments in the local economy, would be in the $2 million to $3 million range. That's about 10% of our profits.

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

If $2 million to $3 million is 10% of your profits, I think that's a substantial investment. I think that's something you should be proud of, and I'm very impressed by it.

I have a second set of questions. This one pertains to CME. I had a question with respect to this particular free trade agreement, and I heard your comments, Mr. Laurin. For any free trade bilateral agreement we undertake, there's a unique set of circumstances. There's no doubt that with regard to Colombia, time and time again we're reminded of the seriousness of the human rights violations that take place in that country, the unions, and the problems they're encountering. According to the feedback we received when we were there, by and large, the trend is that things are improving; things are getting a bit better.

In this particular free trade agreement, how far, from your perspective, and aside, again, from the trade aspects, should these other measures be included--human rights issues, labour standards, and environmental standards? Do you think they should be part of the main text or the side text? Do you think they should be excluded altogether? I'd like to hear your comments on that.

[Jean-Michel Laurin]

Thank you, Mr. Bains, for the question.

Whether we have those other elements included in the trade agreement is something personal that has to be negotiated with our partners. I think our interest is partnering with them to develop their own economy. That being said, we want to make sure we frame the agreement in a way that Canadians are comfortable with our going forward.

I know with the current Colombian government, things are moving in the right way. That's what we hear from our members that are doing business in that market. I think having this trade agreement moving forward is just an additional step in trying to engage with our partners in Colombia.

Obviously, I think if you want to expand trade with Colombia, you need to address security, human rights, and environmental issues as well, because as I said earlier, they are part of the obstacles to doing business there. If you talk to a lot of companies, they'll say, “Well, maybe Colombia is not on my radar screen for some of these reasons”.

Tariffs are just one aspect of it. I think the trade agreement in a traditional way focuses a lot on eliminating tariffs and non-tariff barriers, but I think if you want to effectively expand business between Canada and Colombia, you need to address some of these other issues that are of concern to—

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

And create a genuine partnership.

[Jean-Michel Laurin]

Exactly. I think there are cases such as the ones you've heard about today, and I'm sure when you met with Nexen and Enbridge in Colombia.... I think we have expertise and we have resources to contribute to developing the Colombian economy, whether it's by building infrastructure, helping them build transportation infrastructure, or getting access to energy. We have the knowledge and expertise in Canada in all those fields, and in water and sanitation.

These are things the people there need in order to develop their economy, but also in order to improve their own personal lives. You talked about poverty, and I know this is something that is very prevalent in many parts of Colombia. I think you need to put the infrastructure in place so that people have access to electricity, running water, safe drinking water, and access to roads so that trade can expand into some of the rural areas, and so on. This is something Canadians can do in partnership with Colombians.

I hope that answers your question. I think we need to look at it in a much broader way than just eliminating tariffs. That's one small aspect of a much broader, deeper relationship that we need to establish with them. We actually have a relationship now, but it's just a matter of enhancing that relationship.

[The Chair, Conservative, Lee Richardson]

Thank you.

Thank you, Mr. Bains and Mr. Laurin.

We're going to go now to Mr. André. Before we do, Mr. André will be directing his questions in French.

I wonder if you have the translation facility there for French, Mr. Wright.

[John D. Wright]

Yes.

[The Chair, Conservative, Lee Richardson]

Mr. André, you have seven minutes.

[Guy André, Bloc, Berthier—Maskinongé, QC]

Welcome to you both.

My first question is for Mr. Wright. How many people do you presently employ in Colombia? What are their working conditions? Are they unionized? You talked about your companies' social responsibility. It was stated that 10% of your profits were devoted to human investment. Should that be the standard? Should a free trade agreement better frame corporate social responsibility?

Mr. Laurin, you are very familiar with the manufacturing sector in Quebec and throughout Canada. Which manufacturing sectors would benefit the most from a free trade agreement with Colombia, and which ones might be threatened?

There is also the issue of respect for human rights. A good many union members have been assassinated in Colombia over recent years. What fears might such an agreement bring about for businesses setting up shop in Colombia and that must have some form of security?

[Jean-Michel Laurin]

I will answer your question with regard to those sectors that would most benefit from a free trade agreement and the ones that would have the most to lose. The manufacturing sector exports a whole variety of products. It mainly exports auto parts and various related goods, the majority of which are produced in Ontario. It also exports mining equipment, because this is a sector that is active in Colombia. Large trucks are used to transport equipment.

Quebec and other provinces also export a lot of newspaper and other paper products. The pulp and paper industry is a major player in Quebec. It is therefore an important export market for that sector. Often, products such as copper wiring, various types of machinery and equipment are exported to Colombia in support of mining. A good many of our members do business in Colombia because their clients in the mining sector are established there. They therefore will export their products to Colombia to serve their customer base.

With regard to those sectors that are more at risk, there is good complementarity. We produce a lot of goods that the Colombians do not produce, and vice-versa. Colombia exports coffee and bananas. It would be nice if we could produce more such products here in Canada, but we do not have the right climate.

Canadian refined sugar producers have some concerns. These companies' business model was designed in order for them to be close to their clientele. I do not know if you have invited them to participate in these consultations, but I know that they have concerns all of their own. Colombia exports a lot of raw sugar. Is this sugar used in processing in Canada? I do not know, but I do know that Canadian sugar refineries have concerns whenever there is talk of a free trade agreement with a tropical country which, by definition, is close to the source of supply. That about summarizes my position with regard to the costs and benefits.

As for the defence of human rights and the fears in this area, the Colombian government is very aware that one of the main obstacles for Canadian businesses wishing to set up in the country relates to human rights and the safety of persons. Mr. Wright spoke of this. A free trade agreement is a step in the right direction, but more still must be done. Colombia has demonstrated that it is moving in the right direction. The country has a plan and wants to attract foreign investment, increase trade in order to develop its economy and show its people that trade is profitable and will help the country grow richer.

We must negotiate an agreement that will be beneficial for both economies, but we must not limit ourselves to that sole aspect. We must continue to work with the Colombians and move on to the next steps and establish a relationship that extends beyond trade with our partners in Colombia.

[The Chair, Conservative, Lee Richardson]

I'd like to hear from Mr. Wright on this too.

I would ask that we try to keep responses to two or three minutes, so we can allow everyone an opportunity to ask a question today.

Carry on, Mr. Wright.

[John D. Wright]

Okay. I think I've remembered the questions.

First of all, with respect to the number of people we've hired, we directly employ about 100 people in Colombia—96% of them are Colombians, the other 4% are ex-pats.

As far as the number of people we employ in our operations in the field, a huge majority of our operations are conducted through third-party contractors. We currently have three drilling rigs working for us and a typical drilling rig would employ about 100 to 150 people through all the different subcontract groups, so it's in the range of another 300 to 500 employed in that. We also have a full-time seismic crew running, which probably has a contingent of about 100 to 120 people involved, again primarily third-party contractors.

The working conditions for everyone I think are very good. Certainly the local staff in our office command salaries that are very commensurate with Canadian salaries. The professionals are well paid and in huge demand. They're very capable people.

None of our direct employees is unionized. Very few of the people in the contracting industry are unionized. Not unlike Canada, the preponderance of unionization is in the public sector in Colombia.

Finally, with respect to the question about more social responsibility, oversight associated with a free trade agreement, I don't think we would have any problem with a normalization of corporate social responsibility in setting some minimum standards and so forth. I think one of the greatest things Canada has to export is our ability to actually deal in a multicultural sense and to deal with the competing parties in any type of a business negotiation and to find a win-win solution. I think that's really what corporate social responsibility is ultimately going to be about.

If I could take 30 seconds, I just want to clarify that the amount of money we're investing in the social responsibility part of our business during the investment phase will actually change over time. As we reduce the level of investment after a field has been developed, we then will shift our investment to a non-profit foundation we've set up called Fundación Vichituni, which will continue with some of the initiatives we've begun, but which, ultimately, we hope, will become self-sustaining and will not require over the long term the support of Petrominerales to be a success.

[The Chair, Conservative, Lee Richardson]

Thank you. That was very helpful.

I think we're going to have the Conservative Party split their time on the first round.

We'll begin with Mr. Miller, and I'll let you know when you've gone about halfway through.