Natural Resources Committee on Feb. 14th, 2008

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

So you're the major player in the Quebec forest industry.

[Michel Vincent]

Yes, absolutely, we are the main player in the primary processing forest industry. That's correct.

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

Perfect.

The $1 billion community trust granted by the Conservative government was highly contested in Quebec. That was also the consensus in the National Assembly and among industry players and the union. First, they say that the allocation isn't necessarily fair and equitable. They also say it's not enough to help the provinces hardest hit by the forest crisis.

Could you comment on that and give us the council's opinion on the subject?

[Michel Vincent]

Obviously we weren't consulted as such. As Mr. Lazar said, when you want to help a community, you don't necessarily do that by helping the workers who have lost their jobs, but rather by ensuring that workers don't lose their jobs.

That said, the QFIC is not opposed to the assistance provided to the forest communities or to workers. It does not oppose that and it supports these efforts. Our reservations about the program focus more on its basis. It's a bit unclear. We understand neither the basis of the program nor its objectives.

We also feel that, with a budget of $1 billion over three years, even though that seems enormous at first glance, Quebec will receive $216 or $217 million. That amount will be allocated over three years between the manufacturing and forest sectors. In our view, the allocation pro-rated on the basis of population isn't the best method. That doesn't necessarily reflect the actual manufacturing and forestry problems in Canada.

Ultimately, these are the reservations we have with regard to the program.

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

The big paper companies in the forest industry have made considerable efforts to cut their greenhouse gas emissions. They are often cited as an example of a major sector that has made real efforts, even though it is agreed that much remains to be done. You are often cited as a model.

Could you explain the importance of the reference year for your sector? Perhaps Mr. Simon can supplement your answer.

For many years now, the Bloc Québécois has exercised pressure to keep 1990 as the reference year rather than 2006, as the Conservative government proposes.

Could you inform committee members on the issues involved in changing the reference year for your sector, particularly in Quebec?

[Michel Vincent]

Mr. Simon will answer the question.

[Hugues Simon]

The industry has made an enormous investment since the 1990s to cut its emissions and to improve air and water quality. We feel we started before the others and did our work when we weren't required to do so as much as the others. Once we did our work, we were asked to do even more. That's why the reference should take into account what was previously done. I don't have any figures to give you, but we're talking about hundreds of millions of dollars in investments.

Every case should be studied, rather than establish an arbitrary rule setting a reference year. However, 1990 is the year when the forest companies in general started making significant improvements. Hundreds of millions of dollars in investments were made. So it would be fair to acknowledge the efforts made in the past.

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

You're no doubt aware the Bloc Québécois recommends that the government use a more territorial approach to setting its targets. It recommends that each province has an overall target, but that it should be responsible for setting targets by area and by major sector. The forest sector has made major efforts by investing millions of dollars to comply and be the smallest polluter. We find it hard to understand the Conservative government's indecision or refusal to take this fact into account. We think it's in order to favour another sector, particularly the oil sector, which, unlike our sector, hasn't made any effort for many years.

Mr. Simon, you referred to the softwood lumber agreement in your presentation. That agreement wasn't perfect, but there was consensus support for it in Quebec and it was a lesser evil. The Bloc gave its support.

However, you said that the agreement had been signed, but that it had weaknesses and that Quebec was nevertheless experiencing negative impact. Can you explain to me the negative impact for Quebec so that I can understand it?

[Hugues Simon]

The negative impact is at the administrative level. Industry players understand that the agreement signed on October 12 was put in place quickly. However, the effort that was made to put the system in place should be recognized. It's a system that requires an enormous amount of management.

Obviously, the rule differs with each province, which complicates the administration. Considering the present market, the specific interests of the companies are different. Some companies operate and need a larger export quota. Other companies aren't operating and need a lower quota, but they nevertheless want to retain that right.

This is causing a debate, as Mr. Lazar said, about assistance for the industry in general, not to individual businesses. Lumber companies currently have quotas that are too small and must therefore restrict their operations, while others have surpluses and want to retain their quotas.

Job losses are the direct consequence of that. That means lost income for the federal government, since the export tax is Canadian revenue. That's where the problem lies.

As for the agreement, it indeed isn't perfect, but, given today's prices, I don't dare imagine what the scenario would be if there were no agreement. I think that the choice of the moment was nevertheless relatively good for the purposes of reaching an agreement.

[The Chair, Conservative, Leon Benoit]

Thank you, Ms. DeBellefeuille.

Go ahead, Ms. Bell, for seven minutes.

[Catherine Bell, NDP, Vancouver Island North, BC]

Thank you, Mr. Chair.

Thank you once again to all the witnesses for appearing. It's good to see some of you again; thanks for the cookies.

This is a huge issue for my Vancouver Island North riding. We just learned last week that another one of our mills is going to close in May. It's a blow for the community. We're really concerned about the impact that's going to have on the sawmill adjacent to it, because of the high price of fibre. I've met with the mill manager and talked about this many times. It's a problem for us.

The logging that's happening is great; there are good jobs there. Since I come from a logging family, I understand that. But the sawmill that's closing is exporting the high-grade logs and milling the lesser grade, so the lumber prices of course are lower. That seems to be a problem. Is there is any way to legislate that we mill the better-quality logs, keep the value-added here in Canada, and keep the jobs going?

Mr. Lazar, the other part of it is that you mentioned the problems with the provincial government and the chill on mergers from the Competition Bureau. I'm curious to know about some of the problems you see with provincial government legislation that's having a negative impact. Also, do you think the federal government should have more oversight and more regulatory impact, and maybe take some of that away from the provinces?

[Avrim Lazar]

The export of logs is a very small percentage of what happens in Canada, and it's tied up with the rules of the softwood agreement, so it's pretty hard to deal with in itself.

The bottom line comes out pretty simply: we need a better business climate so that people will want to process in Canada. What will make people want to invest in the mill on Vancouver Island? The first answer is what the return on the investment is going to be. If the province prevents mergers and rationalization, people aren't going to be very interested in going there because you can't structure your business for success. If the tax on investment is lower--I go back to the CCA five-year window and the refundability on SR&ED--and you get a break on tax and investment, it makes you want to invest in northern Vancouver Island.

I've been in government policy for 30 years now, and my experience has been very consistent: when the government tries to force the marketplace to behave in the way it wants--even when it does it for the best motives, with the best intelligence, and with all due diligence--it almost never succeeds, because the market moves quickly. What made sense two years ago all of a sudden doesn't make sense, and government can't change its policies that quickly because of the exigencies of democracy and due process. Even when the government makes the right decision in trying to over-regulate or direct investment, that decision becomes wrong three years later, when the marketplace has moved and the government decision can't be changed that quickly. The only way to get the jobs to stay is to create a climate that draws the investment in; once the investment's in, business is going to want to stay and assist.

You asked me about provincial policy. One of the areas of provincial policy coming under increasing scrutiny is land tenure. If you want someone to invest billions of dollars--because a pulp-and-paper plant costs a billion dollars--in an area, they have to know there's going to be a fibre supply that's not subject to the whims of the political moment.

In Quebec, the expression of that is that this tree goes to this town and that tree goes to the other town. Well, that's fine social fantasy, but in economic reality and market reality it really means that all the investment goes to Georgia or Uruguay.

People will only invest if they think there's a chance of a successful business, and if you have three small plants forced to stay open by pertinency policies in the province, the opportunity to invest in one big world-class plant disappears. That's part of what we're suffering from now. It's right for governments to try to extract maximum employment from every piece of fibre by putting into regulations what basically becomes a chicken in every pot, but it just doesn't work. It just simply fails, and the people who suffer from it are the workers. You've got three plants that are not world-class struggling along because the province forces us to keep them open. The world-class plant that could have employed people for the next 50 years never gets built, and then the market hits and two out of three plants close. It's too late to get that investment, and the people who suffer are the workers in the towns. I would love to say we can micromanage this and keep the industry strong, but it just doesn't work.

We basically have two old-fashioned philosophies. One is if government just spends enough or regulates enough, we could fight globalization. That's not true. The other old-fashioned philosophy is if government does nothing, the marketplace will save us. That's also not true.

The middle ground, the true ground, which you'll see in Finland, Sweden, China, Singapore, France, is if government partners with industry by creating the right business climate, we'll get lots of jobs.

What does that partnership look like? It's a tax regime that draws investments into research and technology, which are public goods; market development with the Canada brand on it; stuff that accelerates the switch to eco-energy; and those sorts of things.

That type of partnership actually creates jobs. It's not subsidies, it's not bailouts, it's not micro-management, it's not regulation, but it's also not laissez-faire. Laissez-faire is just as naive as subsidies. In the end, if you look around the world, for those countries and economies that are expanding--look at Finland, with the high quality of life, very high social values, and a very successful economy--it's not because of laissez-faire and it's not because of 1960s-style intervention. It's because they have an industry-government concept of success and a partner for success by creating business climate, investment in research, and investment in market development.

Finally, you asked if the federal government should take it over. I don't think so.

[The Chair, Conservative, Leon Benoit]

Thank you, Ms. Bell.

We'll go now to Mr. Allen for seven minutes.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

Thank you, Mr. Chair.

I'd like to open with a couple of comments and then I have three questions.

My first comment is that I appreciate your creating a business climate, because I think you're right, that is important. Some of the things we've done with respect to lowering the taxes and things like that.... Your accelerated CCA is a good point.

I'm also comforted to know about direct subsidies, although that makes me comfortably uncomfortable, considering some of the mills that have closed in my riding. I do understand that giving subsidies does not cure the problem.

However, on the pine beetle, I do want to take a moment to thank my colleague, Mr. Harris, who's been a real bug on the pine beetle file, if you will, since leading up to 2005 and the commitment of our government to get $1 billion. I think Mr. Harris has played a tremendous role in that and has single-handedly fought that. Thank you, Mr. Harris for that, and thank you for reminding me about beetles every day.

On capital stock, it really disturbed me when I looked at your report on the competitiveness task force. Looking at the charts, especially in Atlantic Canada, even our best-practice mill is really cost-inefficient, with some exceptions. When the dollar was hanging at 68¢ to 75¢, did some companies miss some opportunities when they were making money at that to reinvest and didn't take that opportunity? That's my first question.

My second question is that with the $127 million FP Innovations money we put in, we have an AV Nackawic in my riding, which is now making dissolving pulp, which is going into rayon, which is a value-added product. Can you tell me how you think you would interface with that FP Innovations in terms of the betterment of the innovation?

My third question is around optimization of wood supply. It seems to me that when I look at a number of cases where wood is being chipped up and going either to fire furnaces or whatever it happens to be, or being shipped out of the country to burn, we may be losing a high opportunity on veneer logs and things of that nature for creating value-added products. Do you think we could do better than that, and is there a place for optimization of that wood?

[Avrim Lazar]

Those are great questions.

Let's start with the dollar. Did we lose opportunities when the dollar was low? The answer is yes, we definitely lost opportunities, but I want to be very clear that the body that was hiding behind the low dollar was government. We didn't become the world's most successful forest product exporting nation by having people who lacked market drive and entrepreneurial skills. But it was very hard to invest in Canadian mills when the Competition Bureau was putting a chill on mergers and the provincial governments were not allowing rationalization. I go back to the three substandard mills being forced to stay open by the province and not being able to invest in a global one.

Could we have been more aggressive when the dollar was low? Yes, but it would've required forcing the government's hand. Even today, with all the layoffs in Quebec, they don't seem to be getting the reality of the marketplace.

Was that good policy when the dollar was 70 cents? Yes, it was great policy. It maximized jobs, and there were social rents for the people from the fibre.

When the dollar is at parity, it's a disastrous policy. It leads to layoffs; it leads to closures, both impermanent and....

Government policy doesn't move that quickly. When the dollar went up, the industry moved like crazy. If you look back at the numbers in that report, the number of mills that are top-quartile productive has tripled since we wrote that report, because we've adjusted to the dollar and moved quickly; government policy has moved much more slowly.

I'm going to go back to the federal government. A tax regime that made sense at 70 cents doesn't make sense when the dollar's gone up. Just as industry has to adjust to the exigencies and demands of a rising dollar, we can't just sit back and whine and say, “Fix it for us”, and we haven't. We've made the adjustments; we've merged, we've rationalized, and we've increased productivity year after year, more than the Americans. We've been running like crazy.

Government also has to adjust. A business regime, a tax regime, a regulatory regime that was acceptable at a 70-cent dollar is disastrous when the dollar is at parity. We certainly deeply respect what your government has done in terms of reducing corporate taxes in general, but it's slow compared to the speed at which the marketplace is moving: the dollar goes up 36% in a couple of years, and taxes inch down over five years. Global marketplace competition increases hugely every year; the tax regime moves very slowly.

The CCA thing and the refundability of SR&ED would help, but overall, while we're moving with a sense of urgency created by necessity, the improvements in business climate are moving much more slowly. We understand that the government gets it; what we need is to get it and act faster and harder, because we're losing a huge opportunity.

The economists in finance say to me that the CCA rapid writeoff is going to cost money we don't have. Each time someone makes an investment in Uruguay, in Carolina, or in Indonesia, we're losing money that we're never going to get back. You won't have to offer an accelerated tax writeoff for that investment, because it's not being made in Canada. When people say the SR&ED credits cost too much money and the cupboard is bare, well, what's it cost when people don't invest in technology in Canada? What's it cost if a mill closes because it can't get access to a tax credit that it would've had three years later?

The relative sense of ease that we hear makes us very uncomfortable, because we're living in the global marketplace, which is a nasty, competitive place, and we don't see the business climate changing as quickly.

Let me go to your second question, which was on forest product innovation. The money you gave is great. It is helping. We have moved our innovation institutes from four separate ones to one integrated one to try to extract more value. Industry's paying the largest share of the cost of that. One of the best ways government can help is to increase its investment in the institute.

One specific idea that I would throw out to you is right now we lack receptor capacity in the mills. The innovation institute comes up with a new technology, but because we're running so hard to stay in business, we actually haven't got the capacity to receive the new ideas. Some form of extension program out from the federal forest products innovation institute into the mills would actually hugely lever the current investments in the technology.

On the optimization of the wood supply, certainly the best way to get optimized wood supply would be to reduce the tenure system politics, so that fibre will be allowed to go to its highest and best value. What we're seeing with some raw logs being shipped and sent as pellets to be burned in Europe is the impact of subsidies for biofuels in Europe. Our approach to renewable fuels in Canada has been much slower than the European approach.

We don't think that it makes sense either economically or for the environment to take trees and burn them for energy, but we do think it makes sense to use the waste byproducts, sawdust and bark, to power our plants. The current ecoENERGY initiative is just about out of money, and refurbishing that, refunding that, would speed the transition of mills from the use of hydrocarbons to the use of renewable fuels. That's a very cost-efficient way of getting an environmental plus and an economic plus.

If I may add to Madame DeBellefeuille, we did reduce our greenhouse gases by 44% from 1990. No other industry has done that, and the recognition of 1990 would certainly be respectful.

Merci.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Lazar.

Thank you, Mr. Allen.

We go now to the second round, starting with Mr. St. Amand for five minutes.

[Lloyd St. Amand, Liberal, Brant, ON]

Thank you, Mr. Chair. I'll split my time with my colleague from Thunder Bay—Rainy River.

I have a couple of questions, likely for you, Mr. Lazar.

I hear you clearly and very articulately disavowing further government intervention, and that's my phrasing rather than yours. I'd like you to address for us how level the playing field is worldwide and to what extent the forestry sector in Russia and Europe is being supported, so to speak, if not protected, by their respective governments.

Secondly, it's my take on your recommendation number three, on the Competition Bureau, that the Competition Bureau has been somewhat timid vis-à-vis mergers. I'm wondering if that's your view as well, that the bureau has been too timid, and if so, if there are specific instances or examples of the timidity and how that has been detrimental to the sector.

Lastly, a more aggressive or open-minded approach, so to speak, by the Competition Bureau will surely result in less rather than more domestic ownership of the forestry industry.

I would ask you to address those points.

[Avrim Lazar]

Those are great questions.

There are no level playing fields in the global marketplace. I wish I could say the free market involves fair play, but there aren't any level playing fields. Certainly our competitors offer their forest industries much greater percentage investment in research. If you look at the Scandinavian countries, they spend much more in research and technology to support their forest industries than we do, and that's something simple we can do.

Our competitors are also a lot less diffident, a lot less modest in branding their products in the international marketplace. We go as Canadians and in a way damn ourselves with faint praise, whereas they're quite aggressive for their own products. That's another partnership with government that would really help.

Could we do more to level the playing field? The answer is yes, we could do a lot more. Are there limits? Yes, there are limits, and you'll find the successful countries haven't been targeting individual companies; instead, they've been targeting sectors. The brilliance of the Finland model is in creating a partnership for sectors to succeed through business conditions--not by subsidizing, but by creating the winning conditions.

“Timid” is probably not the word I would use for the Competition Bureau. I'd say they've been anything but timid. Our perception is they suffer from two problems. One is their legal mandate, which is to ask whether narrowing competition would lead to increased prices. Maintaining low prices in Canada is a public good, but it's only one public good. If you're going to shut five towns by doing that, you should balance off the two public goods.

Unlike a cabinet system, this is a regulatory system with only one public good as its reference point; in that way, they don't take into account the economic impact of their decisions. We could live with that, except that within that mandate they're most often based upon an outdated economic model. They assume that if we consolidate, prices will go up. Well, we export most of what we make. We take the global price, and whether we're fragmented or consolidated, the global price is whatever Brazil or China pushes it down to. Our customers, both in Canada and all over North America, are more consolidated than we are, so if two companies come together and find efficiencies, do you think our customers give us a break? If we find three cents a tonne efficiency, they'll take three and a half cents out of our hides, because they are more consolidated and have more market power than we do. It's just an empirical fallacy that when you consolidate, prices go up, because the marketplace continually squeezes you down. We disagree with their economics, and empirical studies support the simple fact that consolidation actually leads to synergies and price reductions.

Would it lead to more outside ownership? On the contrary, it would not. If you're a company headquartered in Canada and you want to acquire Canadian assets, the Competition Bureau is standing right in your way, because they don't want to see consolidation in Canada; as a result, you have to invest your money in the U.S. or Europe to find new acquisitions, because if you invest in Canada, they say it's too much consolidation. Getting a large Canadian champion has been a fight against the Competition Bureau, which tells you not to become big in Canada; become big by investing outside Canada.

I don't think that's what we want; I think we want investment in Canada.

[The Chair, Conservative, Leon Benoit]

Mr. Boshcoff, you had one question.

[Ken Boshcoff, Liberal, Thunder Bay—Rainy River, ON]

Yes, and I thank you, Mr. Chairman, for your kindness in this.

Almost everyone in this room will have a similar situation. Mayor Dennis Brown in the Township of Atikokan asked this specific question. Because he has two plants at which all the workers are out of work, would industry have any objection to a proposal to extend EI benefits while the restructuring took place and perhaps other buyers could come along? I know this question would be multiplied many times across the country right now.

[Avrim Lazar]

Industry loves the government paying EI to workers. Of course we won't object. Extended EI does work for both the community and the industry because it allows us to keep our worker base in place for a longer period of time during transformation.

Like you, I end up having conversations with mayors all the time, and I get approached by individual parliamentarians facing a mill shutdown and asking what can be done. I just want to emphasize--and I know I'm beginning to repeat myself, but I'm going to repeat myself--that there's nothing we can suggest once the mill has been proven to be losing $10 million or $15 million a year. We suggest that you act on business climate before that happens. Don't come to us to ask how to prevent this closure after the failure; prevent the failure by creating market conditions that draw investment.

I've been here six years now and I've had this conversation over and over again. The answer to mill closures is not to come in when a mill is closing; the answer to mill closures is to come in and create the market conditions that will lead people to invest. Then we'll never have to have the conversation about the mill closing.

I wish there were pixie dust or some sort of tooth-fairy formula for pretending the global marketplace doesn't exist, but short of pixie dust there's nothing we can do except create a business climate that draws investment.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Lazar and Mr. Boshcoff.

Now we'll go to the Bloc Québécois for five or six minutes. Please go ahead, Madame Deschamps.

[Johanne Deschamps, Bloc, Laurentides—Labelle, QC]

Thank you, Mr. Chairman.

This is the first time I've had a chance to sit on this committee. Allow me to welcome you. I'm also jumping from one thing to another, and I wish you a very happy Valentine's Day, to you and to our colleagues around this table.

I feel more comfortable with the human aspect of things and human resources. I represent a riding north of Montreal, Laurentides-Labelle. North of that riding, there's a small single industry RCM that has been hit hard by the forest crisis. Most of the sawmills are shut down, and 1,500 people have been laid off since January 2007.

I was also fortunate enough to sponsor a bill in the House, Bill C-269, which was designed to enhance and improve the employment insurance system and thus to enable more unemployed workers to qualify for benefits. What is unfortunate is that the bill died on the order paper because the Conservatives did not want to give it Royal Assent. That's very unfortunate. As you know, the Bloc Québécois fought a long battle to have Bill C-269 passed.

The second battle we are waging concerns the creation of an adjustment program for older workers. We're pressing the present government on this matter. If the program were in place, it would provide older workers with a bridge, from the moment they lose their jobs to retirement, through benefits that they could receive. This would enable a region like mine to retain a young and skilled labour force. Currently we're experiencing an exodus. Our young generation is leaving the region, and our population is very old. It's very hard to diversify an economy and to put other measures in place when you're experiencing an exodus such as this.

Can someone comment on that? Mr. Vincent, I'm listening.

[Michel Vincent]

I'm very familiar with the problems of RCM Antoine-Labelle because I come from Mont-Laurier. The forest industry has always gone through economic cycles. This isn't the first; we've been living through them for 150 years. However, we've never experienced one that was both so long and so serious. Businesses have survived other economic cycles in the past. The forest industry is an industry of fighters. People will persist because they think the crisis will pass. However, people are realizing that they've made virtually no money in the past year and a half and that they'll be making nothing in the next year and a half. And yet we're talking about businesses that are efficient. They think they won't survive another year and a half and that they won't benefit from the recovery if they continue losing money every day, on every shipment that leaves the plant. They may think that one way of getting through it is to shut down immediately and wait for the recovery. However, the first problem they'll then have to face is the problem of rehiring the labour force. An adjustment program for older workers would be one way for them to get by.

You have to understand that an unskilled 55-year-old worker probably won't go anywhere else. However, a young skilled worker 25 years of age who has a family may go elsewhere because the employment rate is lower and the Canadian economy is doing well in general. As a result, the young worker will find work. That labour force will be lacking when the recovery occurs. An adjustment program for older workers could therefore definitely help ensure a resumption in forest industry activities, particularly in outlying and semi-remote regions such as the RCM Antoine-Labelle or RCM Hautes-Laurentides because young workers only have a two-hour drive to the big city to find a job and move for good.

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

Mr. Lazar, I'm interested in one part of your speech. That was the investments that would be necessary to lend a hand and help the industry convert to biofuels and use its own biomass for the energy it needs for its production.

My question is for Michel Vincent or Hugues Simon. What's needed in Quebec right now? I was struck by your comments. You say our policies and measures still lag behind the market. What could the federal government do tomorrow morning, in concrete terms to help lend a hand to the Quebec forest industry and invest in the conversion of its plants so that it can use its own biomass to create its energy and reduce related costs?