Public Accounts Committee on Feb. 28th, 2013

[Marta Morgan]

One of the things we look for in our SADI agreements is the kind of employment that will be generated directly by the contractual agreements. However, we don't collect information on overall eventual employment gains from specific projects because it's very difficult to establish that from a causal relationship. When we think about employment, what we're really looking at is the overall success of the Canadian industry, which continues to be very successful on a global scale, to generate high-value jobs and employment.

I would have to get back to you on the specific data tabled here if more information is desired.

[Alain Giguère, NDP, Marc-Aurèle-Fortin, QC]

Madam, your own figures indicate that you are not creating jobs, but that you are losing them. From 2001 to 2012, you lost 8,000 jobs in the manufacturing sector.

[Marta Morgan]

Mr. Chair, I would need to get back to the committee with that information. I don't have the specific numbers that the member has in front of him. I would note there are about 70,000 employees in this sector right now and that all sectors in manufacturing have faced a challenging period over the last decade.

[The Chair, NDP, David Christopherson]

Excuse me, Mr. Giguère, did those numbers come from somewhere other than the Auditor General’s report?

[Alain Giguère, NDP, Marc-Aurèle-Fortin, QC]

That is from the Library of Parliament study on the aerospace industry. It also refers to job creation.

[The Chair, NDP, David Christopherson]

Okay.

In that case, it's a fair answer. Can you get back to us on that, please?

[Marta Morgan]

Absolutely.

[Alain Giguère, NDP, Marc-Aurèle-Fortin, QC]

Very well.

We know how important research and development is for the aerospace industry. However, you say that you are going to have to reassess your objectives. The Auditor General in fact urges you to do so more frequently.

My question concerns the strategic nature of your review of objectives. We rank fifth among aerospace sectors, according to the OECD, but the Emerson report indicates that there is no proper linkage between Industry Canada and the aerospace-related orders placed by the Canadian government.

Is your strategic objective not to ensure that when the Canadian government needs an aircraft, our own industry is able to manufacture it to meet that need?

[Marta Morgan]

Mr. Emerson's report made a number of recommendations regarding the aerospace industry. In total, 25 touch a number of federal departments. His report concluded that innovation is critical to the future competitiveness of the industry. He made a number of recommendations on how we can improve our programs at Industry Canada, and also how other government departments can improve their programs vis-à-vis the industry. Right now, the government is looking at that report and all the recommendations and considering how best to proceed on the advice of Mr. Emerson.

[The Chair, NDP, David Christopherson]

That's it for time.

You're right on the money.

Thank you. I appreciate your cooperation.

Mr. Hayes, you have the floor, sir.

[Bryan Hayes, Conservative, Sault Ste. Marie, ON]

Thank you, Mr. Chair.

It strikes me that it doesn't really matter if benchmarks are being met if the company you're dealing with goes out of business. I'm looking at the sizes of these distributions: $9.6 million, $52 million, and $19.6 million. We're talking huge money here. As a taxpayer, I would want some level of comfort that the company I'm dealing with is going to be around for the foreseeable future.

I took the opportunity to look at your website. It's a very good and comprehensive website. There's a section on due diligence review. Could you speak a bit on that? As a CGA, I'm more interested in the financial information you look at as part of your assessment of doing business with a company. I'm interested in the capabilities of your staff and the number of staff involved in the due diligence process.

[Mitch Davies]

Thank you for the question, Mr. Chair.

The due diligence that's undertaken speaks to the reason it takes us a number of months to complete the review of an application. We will undertake a significant amount of work in a number of areas.

First, we look at the technology that the company is undertaking to work on, and often we will consult experts. The National Research Council is used for its expertise in aerospace in particular. We'll go to other departments if they have a scientific competence in an area and bring in information in that regard.

Second, we'll undertake to look at the market assessments the company has prepared and to validate those. We will work in the department to confirm information against other industry analyst reports, against reports prepared for public markets and such.

Then of course the financial due diligence is extensive. We will undertake a complete review of the company's financial health, because essentially that's the entity that takes on the obligation to return the funds to the crown under the agreement.

Speaking specifically—though I won't name the gentleman—the person who heads up the team we have which undertakes the financial analysis is the person who actually goes and scores the CFA exam in the United States for the best financial analysts who are put into industry. He's the one who marks their papers. So I actually have quite a bit of confidence that we have a team with a number of designations in different areas as well as strong financial analysis and financial review.

On the repayments side, we also undertake modelling. Not only do we take company information that they supply in terms of their outlook and repayments to us, but we'll also subject that to a number of tests. We do Monte Carlo simulations which is a probabilistic model to determine whether, based on past information, we'll expect to have the result we expect. We use that to evaluate whether or not we're going to meet our portfolio objectives.

Much of this says there's a lot done. There are a lot of belts and suspenders. There's a lot of review done, but it's still done with risk. You can work as hard as you can, but you can't take the risk away when you're in a business space that's R and D. So we still have to live with particular risk. We'll adjust the repayment expectation from each company based on the risk assessed. For example, if it's a higher risk company, we'll expect a higher repayment, which is a way of compensating for that in the program. For a lower risk company, there is a lower repayment cap on their contribution agreement. That's essentially how it comes together.

[Bryan Hayes, Conservative, Sault Ste. Marie, ON]

In terms of repayment, is interest charged on these funds that are given to companies?

[Mitch Davies]

It would be implicit. For example, a company could receive its contribution and be expected over the 15-year repayment period to repay 155% of their total. It turns out to be a nominal repayment to our portfolio, and it more or less equates to about a 3% interest rate. What you see right there is the incentive value in the program, because the cost of capital for most of these firms would be 12% to 15%. It's very high, and R and D is very risky. That funding is being provided through our program at around 3%. It's a low cost loan essentially.

[Bryan Hayes, Conservative, Sault Ste. Marie, ON]

In terms of success rate, have you had companies that have failed along the way, or is SADI too new to really have come to any of those types of conclusions yet?

[Mitch Davies]

We have one firm. I wouldn't speak in too much depth regarding the commercial information. It's the nature of the relationship. We have one firm that has undertaken a restructuring since the agreement was undertaken with them. There was certainly information in the public domain about financing challenges and difficulties of some firms, but for the most part, we're dealing with going concerns.

Most of the companies we deal with have been doing business of this kind with the department for many years with different program arrangements and different expectations and would expect to do so for many years to come, which obviously has an effect on behaviour in terms of meeting the commitments they've made to us and so on.

[Bryan Hayes, Conservative, Sault Ste. Marie, ON]

Thank you.

[The Chair, NDP, David Christopherson]

Thank you very much.

We'll move along to Mr. Byrne.

You have the floor, Mr. Byrne.

[Gerry Byrne, Liberal, Humber—St. Barbe—Baie Verte, NL]

Thank you.

This is a question for Industry Canada.

Do you deem these support programs to the aerospace industry to be a structural subsidy to the industry, or are they a temporary bridge to competitiveness?

[Marta Morgan]

We would see these programs as a support to the innovation capacity within the industry.

We have three objectives. One of them is to incent that innovation and increase the amount of innovation in the industry. One is to promote collaboration, because we believe that promotes more sustained innovation throughout the whole system. One is competitiveness, because we believe that companies that innovate, particularly in this sector, which is very innovation intensive, are more likely to be competitive.

[Gerry Byrne, Liberal, Humber—St. Barbe—Baie Verte, NL]

Do you anticipate that in the foreseeable future, let's say a period of five to ten years, this program, or the structure of these umbrella programs, would not be required by the Canadian industry?

[Marta Morgan]

If you look globally at the aerospace industry, you see that because of the kind of R and D that's required, with the long timelines, the high risk, the long payback periods, and the high value of the kinds of technologies that are being created, governments around the world are investing in R and D in this particular field.

The Canadian government has had some version of the SADI program since 1959, with DIPP and technology partnerships Canada, then SADI. I think that's really a function of this industry, and the fact that it is such a high tech, innovation intensive industry but also high risk.

It would not be for me to decide what would happen in the future, but certainly past and international experience suggest that in this area innovation has significant economic payback, both to the society and also to the specific industry.

[Gerry Byrne, Liberal, Humber—St. Barbe—Baie Verte, NL]

I appreciate that.

It sounds to me, and I think it sounds to most Canadians, given our support to the aerospace sector since around 1959.... You seem to be indicating to this parliamentary committee that you expect it to be around for quite some time; because other governments are doing it, our competitiveness is at stake.

It sounds like this is a structural subsidy to the sector, and could potentially be a cause or a reason as to why the industry is not being held in compliance with reporting under its contribution agreements.

It does kind of baffle the mind as to why, if someone's receiving hundreds of millions of dollars in assistance from the Canadian taxpayer, they're not being held to account to at least report, as per the contribution agreements, for those hundreds of millions of dollars.

Could you report to the committee your activities to actually get compliance from those who are receiving those types of taxpayer dollars?

[Marta Morgan]

What's important to note here is that from the outset of this program, the department has asked for information on the three program objectives through quarterly progress reports and annual site visits.

In the early stages, when the companies were just beginning their R and D activities, they provided significant information to us on their statements of work. What technical objectives were they trying to meet? What kind of materials were they using? What kinds of engineers were they using? Were they meeting their deadlines? Was the project on track?

We collected significant information vis-à-vis the project and whether the project was on track. I think that was acknowledged in the Auditor General's report. We also collected information through site visits and quarterly reports on program objectives, although that takes more time to materialize, because it really starts to relate to such issues as commercialization, which starts to happen a little bit later.

We improved the way we collected that information in 2010, which was also recognized by the Auditor General. That's something that we intend to continue.

[Gerry Byrne, Liberal, Humber—St. Barbe—Baie Verte, NL]

We've had an opportunity to go through the Auditor General's reports, so why don't we go right to you, Mr. Campbell, as assistant auditor general, and ask you, are you satisfied that the taxpayer dollar has been protected, or have the contribution agreements with industry, signed by Industry Canada, been satisfactorily achieved or enacted?