Natural Resources Committee on Feb. 14th, 2008

[Michel Vincent]

That would be a good way to make sure that stronger companies survive. Weaker companies may not be in a position to struggle until the end--too bad, but those weaker companies will have to disappear.

[Hugues Simon]

I wouldn't be able to say enough here on how important that is for companies. When we make a decision to invest, rules are different by province and rules are different by country. The R and D tax credit, call it what you want, is sometimes a very big factor in a decision.

[The Chair, Conservative, Leon Benoit]

Mr. Harris.

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

Thank you, Mr. Chairman. I appreciate it again.

Mr. Simon and Mr. Vincent, I think you wanted to comment briefly on Don Roberts' comments. Perhaps I can give you that opportunity to give your side.

[Michel Vincent]

Actually, I wanted to comment on the first part of your intervention, when you were talking about the situation of the industry in 1959.

What you're describing actually is a consolidation process. In British Columbia you were stuck with the so-called appurtenancy legislation that prevents someone from closing a mill and increasing the operational level of the other mills. It took a whole lot of political will and courage to abolish that appurtenancy, because by doing so, you were saying to some communities that they would lose their mill, and they would lose it now instead of later on. It took some courage to do that, but you did it in British Columbia. Now the average B.C. mill is 250 million board feet, whereas it is about 75 million or 80 million board feet in Quebec.

So the situation we're describing is something that I would dream about taking place in Quebec as well.

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

The thing is that when there's a downturn in the market, of course there are layoffs. There are layoffs in every industry when there's a downturn in that particular market. But when that downturn runs its path, and the economy comes back again, those people are all working again. Those mills are in business to make lumber or make pulp or make value-added products out of wood. That's what they do. And they need skilled employment. There was a good point made about retaining workers in the area. It's something I hadn't thought about, but I'm going to now.

Nobody likes to see layoffs, nobody likes to see a downturn in the economy, but it happens. It's how you survive it and how you come back from it stronger than ever that's important, because that creates more jobs, more employment, a better economy.

Mr. Simon.

[Hugues Simon]

When we talk about a future for fibre, and fibre being more and more restricted as far as volume, that's why it's important to brand our fibre basket in Canada. As I mentioned in the beginning, we have a very high-quality fibre and we can compete with anybody in the world with that quality. So branding is certainly an area where there can be a government role to help the industry to brand and to sell the certification and the way we manage our forests to the rest of the world.

Russia is not there yet, not even remotely. We have a very big strategic advantage. We have existing facilities. We have high-quality fibre. We are very far ahead in certification. But you know, when you're first in something, it's very difficult to remain first. We need to take actions now to make sure that we remain there.

I also want to build on Michel's comment on British Columbia. If you look at our company before the merger, Abitibi Consolidated, we had 20 mills. Two mills in British Columbia had 25% of the capacity, and 18 mills in the rest of Canada had 75%. So that gives you a perspective on the restriction in the province of Quebec, where a lot of small mills run one, two, sometimes three shifts, but with wood allocations attached to them, versus....

So you are right; British Columbia is ahead in technology because they were able to focus their investment and therefore make themselves more competitive.

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

Mr. Lazar, in regard to the capital cost allowance and the refundable research tax credits, I'm wondering if you could talk about how important the role of government is to use those things and particularly to attract investment to Canada rather than elsewhere.

In talking about the transformation and consolidation--that word, “consolidation”, was used here--I know that in fact there are Canadian forest companies that have been frustrated by some of the regulations that didn't allow them to grow larger and that have in fact invested outside of Canada. They have shareholders they had to answer to, and that's where they were able to do what they wanted to do in Canada. Unless we get current with the competition we're getting from other countries, we may see that continue a little bit, unfortunately.

[Avrim Lazar]

It won't be that hard to get me to talk about these things.

When it comes to international finance and investment, it's really not as complicated as you might think. There's a bunch of people sitting around the room, and in the middle of the table is a pile of money, the capital available to that company. The guy who runs the Uruguay operation says “I can get you this kind of return.” The guy who runs the U.S. operation says “I can't give you quite that, but I can promise you more stability. You won't have to worry about politics.” The Canadian guy says “Well, I can get you this return, and....”

So what we have to do is improve the hand, improve the argument, that the Canadian mill champion is making at that table. They have to talk about a bunch of stuff. For instance, can you trust the investment climate? A lot of that is provincial regulation. Will we still have access to the wood? Will we be able to make the necessary changes to make money? Will we know what the climate change regulations are going to be? There are all these uncertainties, and the dollar comes very much into that. Do we have any idea of what the exchange rate would be? Is it going to stay within a range or not?

I just want to congratulate Mr. Flaherty for talking about a reasonable range. I think it sends a very good signal to the marketplace. I think his range is ten cents above where it should be, but I think the acceptance of the concept of a range is a wonderful thing.

So you have all those things, and then you have the plain math: how quickly will we be able to give something back to our shareholders? The math on investment in research is very much affected by the refundability of the SR and ED. If you have a mill that's losing money so you're not going to actually be able to use a tax credit, but you know that if you invented new technology you could keep that mill operating, the refundability changes the math enormously. And then with the accelerated capital depreciation, again it changes the math. So we're not talking hocus-pocus, we're talking simple mathematics--i.e., for someone trying to make a business case, this is a smarter investment than that one.

Will it change the whole thing? I don't think so, but it will change a lot. When the finance department comes back and says we can't afford it, they're just dead wrong. You can't afford not to do it, because then the investment will go out of the country and there will be no tax revenue.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Lazar.

We have to go to Mr. Tonks.

[Alan Tonks, Liberal, York South—Weston, ON]

You don't have to, but it is my turn.

Thank you, Mr. Chairman.

Mr. Lazar, what percentage of the total forest products industry is Canadian-owned?

[Avrim Lazar]

I don't know.

Tom, do you know?

[Tom Rosser]

Not offhand.

[Avrim Lazar]

You'd have to go back to the shareholders, but just sitting around my boardroom table, where we have about 75%, three-quarters of the headquarters are in Canada. Maison-mère is in Canada. It's a global industry.

[Alan Tonks, Liberal, York South—Weston, ON]

The reason I ask the question is that in your analogy with respect to the pot of money in the middle, I can appreciate the incentives and the return that comes with respect to investing. As far as history is concerned here, is the fact that the headquarters are in Canada a compelling reason for us to be certain that, whatever the financial regime, the decision will be made with respect to a Canadian investment? Or is the multinational going to make a decision to invest it in wherever? International Paper will invest it in Russia, according to your analogy.

[Avrim Lazar]

Exactly. Having Canadian headquarters is great for research money, for the jobs associated with the headquarters, for the intellectual capital, or for the building of an economic cluster, but whether you're sitting in Helsinki, in North Carolina, in Seattle, in Montreal, or in Vancouver, the math on the investment works out the same: you're going to put the money where the return is.

We'd have no trouble at all convincing Shanghai to invest in Canada, or Finland or Sweden or any of them, when the return is there. If there is no return there, and the pile of money is sitting in the middle of the boardroom in Montreal, that money is going out of the country if you can't make the business case. Capital is the most mobile thing in the world, and it has no loyalty.

[Alan Tonks, Liberal, York South—Weston, ON]

It flows like water, I know, and will go to the path of least resistance.

But does not the Canadian public have some...? If it's Canadian investment, whether it's through the accelerated rapid capital tax program or it's tax incentives or whatever, is there not some role that the government has a responsibility to play so there is a value-added return to the Canadian worker, to the Canadian?

[Avrim Lazar]

That's a perfect question, and the answer is yes. Accelerated capital depreciation only helps you if you invest in Canada. If you invest in the U.S., it doesn't help you. The refundability of SR&ED only helps you if the research is done in Canada. That's why there is a specific benefit to Canadians.

[Alan Tonks, Liberal, York South—Weston, ON]

But you'll agree that if it's a multinational, it may not be as apparent in terms of the decision being made on that basis unless government makes it clear through the tax program that this is where the investment will have the highest value-added in return.

[Avrim Lazar]

Yes.

[The Chair, Conservative, Leon Benoit]

Mr. Tonks, you can have one more, and then Mr. Anderson has one question.

[Alan Tonks, Liberal, York South—Weston, ON]

This is a short question, and it's an easy one.

As I was sharing earlier with my colleagues, I was at a subdivision in Brooklin--not Brooklyn, New York, but Brooklin north of Toronto--and saw 250 homes that were totally built with metal studs. There was no wood framing, nothing. I couldn't believe it. There was absolutely no value-added wood with respect to that.

Do you not work as an industry with local municipalities and through CMHC to make sure that...? And I agree with you with respect to the wood content and the higher environmental value-added and so on. As an industry, are you working with other jurisdictions to make sure that there is code protection with respect to the industry?

[Hugues Simon]

I would like to see which project you saw.

The biggest challenge we have is for non-residential construction, where a very small proportion is being built with wood. If you go to Europe, you'll see that more and more people are building with wood.

We are focusing on non-residential. There are some mid-size buildings that can be made out of wood. There are also some larger-size buildings that could be built with a mix of steel and lumber. Pushing that is an expensive thing. We do it through some associations, Canada Wood and so on.

Certainly if we can grab just a small percentage of the non-residential business, we can create for ourselves a huge market.

[Alan Tonks, Liberal, York South—Weston, ON]

Well, watch the residential.

[Avrim Lazar]

Have you ever seen the picture of the giant-sized meteor coming close to earth and all the steel-built houses going zip into the air and the wooden ones staying?