Natural Resources Committee on Feb. 14th, 2008

[Avrim Lazar]

We're talking about federal programs, and I would point out that there is one program that's working very well. It's the ecoENERGY Initiative. The emphasis was previously placed on wind projects. Now biomass projects are eligible. However, there isn't enough money for those projects. We have a full range of projects that are almost ready, but that won't be supported by the government because the program doesn't have enough funding.

We have la sixième recommandation, which is to extend the ecoENERGY program to a target of 12,000 megawatts by extending the application date to 2015.

The program exists, it's intelligent, and it was created by the government and industry in partnership. It has made possible a lot of progress in the development of clean fuel.

It's good for the environment: it reduces air pollution hugely, it reduces what goes to landfill hugely, it reduces greenhouse gases, and at the same time it makes the mills more economically self-sufficient. It's a great program; we'd just like to see have enough money so that it can actually help. Otherwise, it becomes symbolic. When it's got enough money, it actually moves things forward.

[The Chair, Conservative, Leon Benoit]

Thank you.

Yes, go ahead.

[Michel Vincent]

The rule of thumb is that every tonne of biomass fuel used results in the elimination of one tonne of greenhouse gas. In the current context of the fight against climate change, the conversion to combustion of forest mass is entirely appropriate.

[Claude DeBellefeuille, Bloc, Beauharnois—Salaberry, QC]

Do you agree with Mr. Lazar that budgets should be increased to enable all applicants to receive assistance for that conversion?

[Michel Vincent]

Yes, obviously.

[Hugues Simon]

Earlier we talked about the business climate. It's definitely becoming harder to invest in the sawmill sector when certain operating units operate at 50% of their capacity. Once the consolidation has been achieved, it will be easier to invest because returns on investment will be made more quickly.

[The Chair, Conservative, Leon Benoit]

Merci.

Mr. Harris, you have two minutes--or maybe six or seven.

[Dick Harris, Conservative, Cariboo—Prince George, BC]

Thank you, Mr. Chairman.

Gentlemen, thank you for coming. It's been a most informative morning thus far. I appreciate the expertise in the forest industry that you bring, particularly because we're getting a side from the pulp and paper industry, the Quebec industry overall, and of course the wood products business from Mr. Lazar.

I really liked what I heard in some opening statements. Most people would say that their first thought about the forest industry is that it's in a severe downturn right now, bordering on recession, and there's a lot of doom and gloom. I don't share the philosophy that the sky is falling.

Mr. Lazar, you used a great word--“transformation”. It's true. Having lived in interior B.C. for just about fifty years now, I've seen a huge transformation in the forest industry. When I went to Prince George in 1959, there were about 600 small sawmills employing x number of people in the area. Twenty years later there were about 30 or 40 larger sawmills employing the same number of people. Twenty years from there we're down to maybe eight or nine major sawmills in Prince George proper that employ more people than were employed in the 600 sawmills. So the transformation has not meant automatically that there are going to be job losses. In fact, our experience has shown that it's contributed not only to the employment numbers but also to the advance in technology in the forest industry that we've needed to stay at the head of the pack on a world picture, and we certainly are doing that.

I'm happy to say that located in my riding are probably the most technologically advanced sawmills in the entire world. They are in central British Columbia. They include West Fraser and Dunkley Lumber and Canfor, as you know; these mills and companies like AbitibiBowater and others across the country will make it through this transformation period because they've done what they had to do over their years of growth. They will make it through.

There will some continuing transformations, and we are getting a good understanding of what you want from government and the partnership role we can play. It does not necessarily mean dumping a bunch of money into the industry, because, first of all, that is not necessarily the answer, and second, we may be verging on a softwood lumber challenge the minute the Americans see or even perceive we're aiding the industry directly in that manner.

I want to bring to your attention an article that appeared in The Globe and Mail. I found it really interesting, and it backs up what you're saying. CIBC world markets analyst Don Roberts has made some excellent comments about the opportunities in the forest industry, particularly in pulp and paper, in what he calls “the convergence of global markets for food, fuel, and fibre”. He suggests that in the developing countries, the huge and growing demand for increased production of food and increased production of biofuels requires taking over more and more land that's used to grow trees; therefore, the amount of wood fibre available for pulp and paper will shrink, which will put our mills and our industry in a much better global position, a position that will continue to improve.

First of all, I don't know if you've seen this article, but if any of you have, it has some great comments. Perhaps we could start by getting some comments on this. I'd appreciate it.

[Avrim Lazar]

Maybe I'll start, because I'm quite familiar with Mr. Roberts' work.

It's a fairly simple thesis: if you want to know where people are going to make money, you've got to ask where scarcity is going to be. Is it going to be in PhDs and engineers? I don't think so, because China and India can put them out at a much faster rate than the current industrialized world can produce them. Scarcity is going to be in natural resources, and the greatest scarcities are going to be in land for fibre production, in energy, and in water.

My colleagues with very modern mills in South Africa are being told by their government that they don't want any expansion, because growing the trees is taking water away from agriculture. My colleagues in Brazil are looking at transforming their plantations from eucalyptus to sugar cane to feed what's going to be a huge demand in the United States for biofuels in order for them, when they come up with a new political regime, to try to meet any type of climate change target.

There's no doubt at all that there will be a demand. We'll be well positioned, but it's quite possible to blow it. We don't own this; other people are figuring out the same thing. International Paper, one of the world's largest forest products companies--I don't know if it is the world's largest, but it is certainly the biggest in North America--now has 40% of their company in Russia. Why would they go to Russia, where there's a huge problem with gangsterism, no infrastructure, and an unreliable business structure? The answer is that Russia has exactly what Canada has: fibre, water, and energy. International Paper has figured out that those are the critical success factors, the scarcity factors in the future.

Our job in industry is to make certain we are structured and positioned to take advantage of what will be a tremendously growing market and a shrinking capacity of others to occupy it, and the job of governments is to create conditions that help us get there. It's primarily our job, but spending on things like research and technology, spending on market reputation, and creating an investment climate that draws investment will position us to take advantage of this opportunity. If we don't do the job--if we don't transform to be ready for this opportunity--someone else will grab it.

Can we compete? Yes, but we've got to actually do it.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Harris.

Mr. Alghabra is next.

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

Thank you, Mr. Chair.

Thank you, everybody, for coming here today.

The committee is certainly benefiting from your testimony today in getting an understanding of the actual reality on the ground and in getting help in coming up with recommendations we can present to the government, to the public, and to the industry on what the committee thinks needs to be implemented or done.

I heard a lot of things today that I personally agree with. I heard about the fact that we need to find middle ground. We cannot assume that direct subsidies will solve this issue. They are going to be short-term patches and they won't be effective. We also cannot assume that letting the market resolve these issues on its own will be a solution, because unfortunately other countries in the world are not doing the same. If we look the other way for a short period, we may lose the industry in Canada. We need to find the middle ground; we need to find a business climate--this is terminology all of you have used today--and find a way to have the federal government partner with the industry players or stakeholders so that we can overcome this transitional period.

Perhaps to help us as we come up with recommendations, I need to throw at you some ideas based on what I heard from you, and you can tell me if this would work or not. I'd like to hear from all three organizations represented here.

One of the ideas I heard today was to create incentives for private investment, whether foreign or domestic. The federal government can play a role in creating those incentives, whether in tax breaks or in partnership. How does that sound to the witnesses?

[Hugues Simon]

Creating a business climate so that people invest--that is something we've said, yes.

[Michel Vincent]

An investment climate, period, is the name of the game here. That's all we can say.

[Avrim Lazar]

Partner with the industry, don't partner with companies--but yes.

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

I understand what you're saying, but can you elaborate on what you mean by that?

[Avrim Lazar]

It's why I was suggesting the use of the tax instrument, because it applies generally to anybody who makes an investment. If you start investing in individual companies, individual mills, you're basically disadvantaging all the others. Then you also end up with the lack of agility necessary to survive in the marketplace.

So you as a company can move here and there, and restructure. You don't like doing it--it's painful, it's tiring, you don't sleep at night--but you have to do it. Governments can't move that quickly.

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

Just to clarify, you're saying that when a government chooses to create some kind of incentive for investment, they shouldn't do it to a specific company.

[Avrim Lazar]

Exactly.

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

Enable all industry stakeholders or partners to apply and benefit from it.

[Avrim Lazar]

Yes, and there's also another way--branding Canadian products, expanding the non-residential market for wood products in the United States, expanding the market for our pulp and paper wood products around the world. Branding Canadian products helps the whole industry. We wouldn't want you to do it alone, but we'd certainly want you to partner with us in doing it as an industry. Same thing with research.

[Hugues Simon]

To build on the comment, don't cherry-pick projects. Make it available to an industry. Cherry-picking only gives a specific project an advantage. Typically it's a project that wouldn't survive on its own, so it doesn't even mean it's a good project.

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

Yes, but you'd agree that there have to be some criteria that will ensure--

[Avrim Lazar]

What happens when you cherry-pick is that the most effective MP gets the money to their mill. We don't want it to go to the most competitive MP, we want it to go to the most competitive mill.

[Omar Alghabra, Liberal, Mississauga—Erindale, ON]

Yes, let's make the process transparent and equitable.

We certainly heard from all of you today that the so-called $1 billion forestry aid is not necessarily going to end or alleviate or allay any of the concerns you guys have today. So we're looking for future and other measures.

I heard a lot of talk about research and development today. In the current structure, you can only benefit from the R and D tax credit program if you're making a profit, but if you're not profitable you can't benefit from it. Therefore, it's no longer an incentive.

So how would it sound if we made it partially refundable, regardless of the profitability? It's not a tax credit any more. Some percentage of the investment that was placed in R and D is refundable.

[Avrim Lazar]

Certainly refundability is a huge step in the right direction. I know that some people say it costs lots of money, but it's money that is a credit to our accounts. It's just a question of whether we get it when we're profitable or before we're profitable. It's the same amount.

I understand that the fiscal implications in the short term can be large, but there are ways of doing it without blowing away the fisc. For example, there could be a cap. Refundability up to a certain amount would help the smaller players and certainly the whole forest industry manage their investments in research over a difficult time, and wouldn't blow away the fisc. But given that this is money that is going to come to us when we get profitable, I just don't buy the argument that it just can't be afforded. Otherwise, you're just betting on it going bankrupt and never having to pay the money.