FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, June 8, 2000

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[English]

The Acting Chair (Mrs. Karen Redman (Kitchener Centre, Lib.)): I would like to call this meeting to order. We'll be dealing with Bill C-213, An Act to promote shipbuilding.

We have before us witnesses that this committee has requested. My understanding is that the representatives from Industry Canada will be making a presentation, and the representatives of the Department of Foreign Affairs and International Trade are here to answer any questions this committee may have of them pertaining to the shipbuilding industry.

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I would ask Ms. Ninon Charlebois and Mr. Brian Derick, senior adviser, to start.

Welcome.

Ms. Ninon Charlebois (Director, Briefings and Strategic Management, Industry Canada): Thank you, Madam Chair and members of the committee, for inviting Industry Canada to speak about shipbuilding today.

As you rightly pointed out, I have colleagues here from other departments, from DFAIT and EDC, who can take questions that have to do with either trade policy or export financing. I also understand that my colleagues from the finance department are scheduled to appear in about a week's time to answer any questions you might have on fiscal policy or financial issues.

I realize that the Standing Committee on Finance has already heard witnesses from the industry—last week—and that most of the discussion was on Bill C-213. My presentation today is mostly aimed at looking at the context and the background for shipbuilding in Canada, the purpose being to provide the members with context on shipbuilding, which will enable you, I hope, to use it as a background for your analysis of Bill C-213.

Also, I would like to report on the results of some of the stakeholder consultations that are currently underway.

Those are the purposes of the presentation today.

The Canadian industry is reflecting global patterns of change, characterized by consolidation and rationalization. These patterns are expected to continue for several years. These patterns of change are happening everywhere in the world. Canada is really not different in that perspective.

Our industry is currently concentrated in 14 major yards and roughly 12 smaller yards. Among the major yards, three of them are Canadian owned. These are Irving Shipbuilding Ltd., Allied Shipbuilders, and Port Weller Dry Docks. The remainder are really American subsidiaries. If you look at the map of Canada, the total employment currently is about 3,700.

If you look at the western coast, in British Columbia it's about 1,000 and has been relatively stable over the last couple of years, one of the reasons being that their business focuses mostly on repairs and refits. If we look at Port Weller in Ontario, again the employment is relatively stable. Actually, it has been up recently, around 800. They focus on repairs and refits and they are also poised to enter the Great Lakes market.

If we look at Quebec, of course we have Davie, which is now owned by Syntek and Transnational Capital Ventures, and where employment has been reduced. We also have two other yards, where employment is stable or has increased. Indeed, they focus on repairs and refits. And of course we have Atlantic Canada, where the employment is roughly 1,100 now, down from about 3,000 during the height of the major crown projects—the frigates and the MCDVs.

That's roughly the situation in Canada.

Since the mid-1980s, the industry has been restructuring. If we look at our graph, at the right-hand side, we see that there was an industry-led rationalization program from the mid-1980s to the mid-1990s. This resulted in the closure of some yards and the diversification of others. It was aided by the federal government, which contributed roughly about $200 million to this exercise.

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Not all yards opted to participate in the program. Atlantic yards, for instance, did not participate.

During that time, as I mentioned previously, the major crown corporations building project was happening. Canadian patrol frigates, MCDVs, and TRUMP vessels were being built at that time. We had about 12,000 workers fully employed for that period. Directly attributed to those crown projects were about 6,000 jobs. When those crown projects disappeared, the jobs went with them. That's a slice of about 6,000 jobs. Overall, through this restructuring and rationalization, the industry went from a height of 12,000 jobs to roughly 3,700 now.

The situation in Canada is actually quite similar to that of other countries. If we take Japan, for instance, which is a major shipbuilding power as we now speak, they've seen their employment decline over the last 25 years by about 75%, which is roughly the same percentage as the situation here in Canada, from 145,000 to 45,000 jobs.

In order to understand some of the issues we face in Canada, it's always a good idea to situate our country in the global context. Canada's share currently in the world market is 0.03%. The major players are really the Asian countries.

As you can see with the bar chart, a combination of South Korea, Japan, and China account for more than 80% of the world market. Even these very strong players are adapting to change, and they're constantly restructuring and reorganizing.

To give you an idea, South Korea is already watching over its shoulder because China, with very low wage rates, is trying to get part of the market. What South Korea is doing, through its company called Hyundai Heavy Industries, is to cut down the shipbuilding share of their outputs by about 36% over the next five years. They are decreasing their presence in the marketplace. This illustrates that we're not the only country experiencing severe difficulties in the shipbuilding market. It's really pervasive.

If we look at the overcapacity situation again, globally we see that competition is extremely fierce in the industry, essentially because too many yards chase after too few contracts. That's what happens, and that's why we have overcapacity.

We have some market segments, such as the very large vessels, which is the first market segment identified in the chart, that are not as crowded as others. We can see that the overcapacity is roughly 28%. But in the two other ones, the minors and the smaller vessels, the overcapacity is the greatest, and unfortunately these are the types of market segments in which Canada operates.

We could say at this point that shipbuilding is really a buyers' market. The prices are very soft; they're falling. As you can see from the charts here, the prices are falling in every type of vessel. So whether you build large vessels or smaller vessels, you really cannot avoid the downward trend of prices.

Actually, some of the countries that have very good prices, such as South Korea and China, have kind of a leg up on the marketplace and can capture a larger part of the marketplace.

To give you an example of the price differences, some of the vessels we can build in Canadian yards would cost about $40 million here; in China they could cost about $20 million. That's half the price. In some cases, these are the price differences we're looking at.

If we look at the situation here in Canada, federal capital expenditures have really decreased since the mid-1990s. In essence, they were cut by about $3.5 billion.

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If we look at the bar chart, we can see that most of the spending is on repairs and refits—the blue colour. This is where most of the federal activity is going on, and very little in terms of new builds—which is in green.

If we look at the pie chart, the yellow part of the pie chart is the new-build acquisitions that were carried out during the MCDV and frigate projects. You can see that this is literally gone, and the only slice of the pie that's left is in blue and green. However, there are a couple of more procurement projects that are going to appear in a couple of years, in roughly 2003, a couple of projects from National Defence for one to three supply vessels, but it's certainly not at the same level as it used to be.

We've had a shipbuilding policy in place for several years now. It's made up of five components. The first three are really domestic measures. The first one is domestic procurement of the federal fleet; the second is a 25% tariff on vessels coming from non-NAFTA countries; and the third is accelerated capital cost allowance with a four-year full write-off.

The next one is for exporting purposes. This is done through EDC export financing, under terms of 80% financing with terms of repayment of 12 years.

The fifth one is in terms of research and development, access to the Institute for Marine Dynamics, which is in Newfoundland. It's a research installation. They can provide quite advanced testing. Actually, they're one of the leading organizations in the world. They test the interaction of structures and waves, which is very useful for offshore projects, for instance. They can also get involved in oil pollution prevention measures. Those are just a couple of examples of what they do.

The industry also has access to a series of other federal programs that are available to all other industries.

For exports, they have access to the services of the Canadian Commercial Corporation and the Trade Commissioner Service.

They also have access to tax credits in terms of research and development. Those tax credits total, for all industries, about $1.3 billion a year, so those are quite rich. They're called the scientific research and experimental development tax credits.

There's also the TPC program for strategic investments in technological development projects. TPC is a tool that operates in my department. It operates really on cost recovery, so we're talking about repayable contributions with royalties. They're aimed at increasing innovation within industries. If we apply it to ships, they would not fund the production of ships, but they could fund innovation in ships.

For instance, if ever, for whatever purpose, ships needed to have a certain coating on the hull, those are the types of applications that would be funded, or alternatively, a very sophisticated global positioning system. The purpose is to build an innovative ship, but not just to build a ship. That's what TPC does.

If you look abroad, in other countries, policies often include a subsidy element. Depending on the countries, these subsidies can vary from nearly 9% globally in Europe to 30% in Asia, and tariffs from 0% to 8%. But other countries also benefit from other types of market advantages that are not subsidy related, such as low labour costs, which certainly is the case for China and South Korea, and national loyalty, which is where shipowners really buy in their own country of origin. Some also make very hefty investments in research and development or innovation.

All these factors do not really impact the fact that every country is massively restructuring. Some of them are losing business, they're losing market share to other countries, they're forced to restructure and downsize, and sometimes they even have to change the very nature and proportions of their business product lines.

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In essence, shipbuilding is a very volatile and constantly changing industry. It's characterized by soft prices that are also declining, overcapacity, and the constant entry into shipbuilding of new players from newly industrialized countries. These countries capture market shares that even traditional and well-established countries have had up to that point, the reasons being low wages and low environmental standards, which give them a market advantage.

Even if there is change, there's often opportunity if change is managed properly. Some industrialized countries—take Japan, for instance—are riding this wave of change. They are using the fact that other countries can produce, for instance, hulls at lower prices, and they're engaging in strategic alliances with them. So for the first time we see Japan, which is really almost the major player in the industry, entering a strategic partnership with—I don't remember if it's South Korea or China—in order to have the hull built there. What they're doing is they're adding the high-value parts to the ship—the systems integration and so forth. So they benefit from the low labour costs of these countries and also from the subsidies these countries are giving out.

There's also some evidence of small yards here in Canada that are riding this wave of change. We have small yards that are active in actually quite interesting, innovative niche markets. We have z-drive aluminum tugs. A small yard in Quebec is extremely innovative in this type of vessel. We have fish farms in some areas, either in B.C. or in Atlantic Canada. We have patrol vessels and sonar domes. These are instances where we have very small niche markets that some yards have harnessed.

Also new standards are emerging, especially in environmental issues, where new technologies are real assets. For instance, some shipowners have told us if a yard can crack the water ballast problem in bilge water that's full of micro-organisms, that yard can become a very rich yard.

So we can see opportunities in the marketplace, but we have to be able to tap them. The main driver of these opportunities is the ability to innovate and to adapt.

I mentioned at the outset of this presentation that we're engaging in a series of consultations. This consultation process is helping us greatly in identifying these niche markets and these opportunities for Canadian yards. Our consultation process is the continuation of a dialogue Minister Manley started a couple of months ago with some players in the industry. We're consulting currently with a certain number of stakeholders from marine shipping companies, shipowners, yards, shipbuilders, unions, provinces, and municipalities.

The purpose of our consultation is to engage in a dialogue about the realities of the industry here in Canada and abroad, to share the information we have, and to start exploring opportunities. Our consultation should be done by about mid-summer, and at that point we'll review our findings and report them to the Minister of Industry, our minister, for his consideration and consultation with his colleagues in cabinet.

Some of the preliminary conclusions are as follows, and I alluded to them in previous parts of my presentation.

Certainly the best practice we've found up until now is that some yards are indeed capturing niche market opportunities. The small aluminum craft I was alluding to, sonar domes—these are examples of niche markets. They're small, but they're growth markets.

Some yards are diversifying into new markets or expanded product lines, such as the fish farms I mentioned.

They're investing in high-quality engineering, research, and design. This is a standard. Yards that invest in R and D, have a very good engineering group, or hire outside talent in terms of engineers are usually those that have an advantage in the marketplace.

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Other best practices include joining in strategic business alliances and very good labour relations.

In closing, I'd like to give an outline of our commitments. We're committed to listening and to continuing the dialogue. In order to continue the dialogue, we absolutely need to have a common understanding of the realities and the facts the shipbuilding industry faces.

There are many best practices out there. We found some, but I'm sure there are many more. We believe in high-value, long-term jobs.

The policy framework for shipbuilding has to be workable, affordable, and effective. It has to take into account taxpayers' desires for fiscal restraint and international obligations.

We also believe innovation goes hand in hand with competitiveness, and that is essentially the key for high-value jobs.

I hope you found this presentation useful. It provides a context. We're ready to take any questions.

The Acting Chair (Mrs. Karen Redman): Thank you very much, Ms. Charlebois, as well as Mr. Derick.

I would like to at this point welcome Mr. Robert Shaw-Wood and Mr. Jean Saint-Jacques, who represent the Department of Foreign Affairs and International Trade. They'll entertain questions as well.

I'm wondering, Mr. Epp, if it would be agreeable to you if we started with Monsieur Dubé, seeing as this is his bill, and then came back to you.

Mr. Ken Epp (Elk Island, Canadian Alliance): I think I can arrange that, Chair.

[Translation]

The Acting Chair (Ms. Karen Redman): Mr. Dubé.

Mr. Antoine Dubé (Lévis-et-Chutes-de-la-Chaudière, BQ): I'd like to welcome all of you. I am pleased to note that some progress has been made, but at the same time, I must say that people in this industry are slow to change their way of thinking.

The figures I have are more or less the same figures, with the exception of those submitted to the Industry Committee on November 16 last. They're tied to a view that goes back 20 years. Apparently, there was overcapacity in the industry worldwide and a decision was made to rationalize operations. Rationalization meant closing shipyards. Jobs were also rationalized. Current job figures in the industry are even lower than the ones you have provided. According to my figures, shipyards across Canada employ some 2,500 people. The figures do vary, but right now, the number of workers stands at 2,500. These numbers can't get any lower. If they do, the shipyards will be forced to close. The closure of the St. John Shipbuilding is symptomatic of the problem. Stone Marine is considering taking similar steps.

Soon, because of rationalization throughout the industry, there will be only four or five shipyards still in operation. I'm not blaming you for this, but I can't help but be discouraged by the state of the industry.

At our meeting of November 16, I raised a number of questions. How many ships in the world have surpassed the average 20-year life expectancy mark? The same life expectancy standard should be applied everywhere, but for a variety of reasons, some countries are less stringent than others when it comes to enforcing the standard. That is not the case with Canada. I was told that the average age of 85,494 ships was 19 years, but that 45 per cent of these vessels were over 20 years old. Forty-five per cent represents 38,874 vessels. This brings me to my first question.

In view of the figures supplied to me by industry officials in response to my question about the 20-year life expectancy standard, how can anyone continue to argue that there is overcapacity in the industry? The majority of the ships in use in the world are currently past their prime. They may even pose a danger, particularly when they navigate inland waterways. I could get you a report on accidents and incidents that have occurred in Brittany and elsewhere. Everyone is aware of the danger.

My second observation has to do with Industry Canada's dogged determination to put all ships into the same category. No shipyard in Canada builds vessels weighing over 90,000 tonnes. The reason for this is simple: ships this size can transit the Panama Canada. This is a critical consideration. Yet, the number of ships built in China, Taiwan, Korea and elsewhere are included in these statistics. All categories of vessels are lumped together, which gives us an amazing figure of .4 per cent for Canada. We had asked for a breakdown. Why have we not received one? Let's focus on ships of interest to us, namely those that weigh 90,000 tonnes or less.

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I had also wondered why one particular factor that seemed to be gaining in importance, particularly in light of the increase in the price of a barrel of oil, was not being considered. I was referring to oil drilling rigs. This question was completely overlooked. Why is that?

You mentioned four policy components. Perhaps you're not responsible for the custom tariff. Maybe that's the responsibility of International Trade. The United States are exempted from the custom tariff. I even asked a question about this matter. I will repeat it for your benefit latter. This is something else that is being ignored.

Mention was also made of the federal government's domestic procurement policy. That's a laugh. Recently, two foreign-built ferries were purchased. One services the route between Nova Scotia and Newfoundland, while the other, purchased three years, provides service between the Magdalen Islands and Nova Scotia.

You speak of designing, engineering and research. The small Canadian Coast Guard vessels currently built in Canada in Ontario shipyards - it goes by region and a decision was made to renew the Ontario fleet first - are built from plans drawn up by American architects and engineers. If your policy was sound, it would be working, but it's not.

My last comment pertains to the never-ending confusion that seems to reign in the field of government contributions, grants, contracts and loan guarantees. All of this has been thrown into the mix. I've been saying this for three years.

We managed to win one concession from industry officials on the infamous productivity issue. On being presented with the facts, the members of the Industry Committee were forced to concede that our figures were right. Shipbuilding is the industry has seen the largest gains in productivity over the past decade. Indeed, productivity in this sector has increased by 46 per cent, whereas in most other sectors, it has registered in the 3 per cent range. Why then maintain current strategies?

I am pleased, however, to see that consultations are taking place. I would appreciate it if you could respond to some of my observations and answer some of my questions. Thank you.

Ms. Ninon Charlebois: Answering each of your questions would be quite an undertaking, since you have asked many. You focused on some of the major problems facing the industry. The key issue here is overcapacity. Clearly, there is a demand for ships. Canadian as well as foreign fleets are aging and need to be renewed. However, while demand is strong, the number of shipyards in operation is even greater. That's what we mean by overcapacity. Supply outweighs demand.

Add to this the fact that new countries continue to enter the shipbuilding market. I believe India is poised to enter this market soon. This country boasts a supply of affordable labour and is looking for markets for such products as steel and ships, a natural for industries in developing countries. This industry is constantly changing and we are seeing this on a global scale. It explains in part why we are in the situation we find ourselves today.

You also asked a question about the tendency to put all vessels into the same category when it comes to Canadian contracts. Obviously, I won't pretend that Canada builds large ships. As you can see from the chart included in our presentation, Canadian shipyards build only medium-size or small vessels. Yet, even here, at approximately 50 per cent, overcapacity is a problem. The reality is that this is a highly competitive market. We'd like things to be different, but the market is very competitive.

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It's important to recognize these developments because they greatly affect the situation here in Canada. Moreover, Canada is in much the same situation in Canada as other countries. As I mentioned, Japan is in a similar position. It had invested heavily in technologies and in robotics. In the mid seventies, 145,000 people were employed in this industry. Now, I believe employment levels have fallen to around 45,000. Shipyards are looking at ways to cut jobs to increase productivity and capture a bigger share of the market. That's the reality within the industry.

You asked for a chart or list of the types of contracts awarded. We can get that to you. If you're interested, we can tell you not only which types of ships we can build here, but also which ones Canadian shipowners request the most. We don't have a great deal to do with the federal government as a shipowner at the present time, given budget cuts.

That about does it for my answers to your questions. We initiated a consultation process to find out more about the factors affecting the state of the industry. We're looking for facts.

Mr. Antoine Dubé: You've haven't said anything about one particular industry, namely offshore drilling and the entire industry that could fall into the category of energy equipment...

Ms. Ninon Charlebois: That's an emerging sector.

Mr. Antoine Dubé: ... an area in which Canada, and particular our region's shipyard...

I know that the Export Development Corporation brought this matter up, along with the case of Davie. I don't know if it's possible to put the following question to them. I believe some EDC officials are here today. You maintain that your loan guarantee program targeting the oil industry and oil drilling rigs was adequate, whereas the industry claims the opposite. When we compare operations in this sector with those in other countries, can we say that we are competitive? Could I ask EDC officials to answer that question?

Ms. Ninon Charlebois: Most likely, they'll be able to.

Mr. Antoine Dubé: Are they here today?

Ms. Ninon Charlebois: Yes.

[English]

The Acting Chair (Mrs. Karen Redman): Is there an EDC rep here? Could you identify yourself?

Mr. Daniel Primeau (Relationship Manager, Transportation Group, Export Development Corporation): My name is Daniel Primeau. I'm with the Export Development Corporation.

The Acting Chair (Mrs. Karen Redman): Thank you. Could you answer?

[Translation]

Mr. Antoine Dubé: Would you like me to repeat the question?

Mr. Daniel Primeau: No, I was listening.

With respect to offshore operations, Canadian shipyards are working very actively right now to develop markets. This market fluctuates tremendously with the rise and fall of oil prices. The biggest problem is profitability. Indeed, whether offshore projects are profitable depends on the day-to-day fluctuations in oil prices. While this market does develop slowly, it is nevertheless very dynamic.

Mr. Antoine Dubé: Obviously, you have initiated consultations. I for one have been consulting with various stakeholders for the past two years. I've been told that in this industry, one does not borrow from the credit union. Financing is very important, as are loan guarantees to an even greater extent. However, in their opinion, loan terms are too short.

Mr. Daniel Primeau: All offshore oil drilling equipment is sold today at the day rate. Leasing an oil drilling rig can cost anywhere from $90,000 to $250,000 a day. This cost determines whether a project gets the green light or not.

The two most important considerations are the price of the oil rig and financing costs. The latter is tied directly to the interest rate and loan term offered. According to offshore oil project promoters, the longer the term of the loan, the lower the financing costs. The same would be true of people's mortgages if they could amortize them over fifty years instead of fifteen. Therefore, the loan term is an important financing consideration, one that determines if the purchase or lease of a rig is an attractive option.

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You're correct in saying that the offshore industry is dependent on technology, equipment prices and the financing available.

Mr. Antoine Dubé: I wanted to ask this question, Madam Chair, because the offshore industry is rather unique. I'm convinced that there are other options out there and that you are weighing them. I support you fully on this.

I disagree that India and other developing countries will be able to gain a foothold in this industry. This requires a certain commitment and I think our Canadian shipyards are up to the task. According to what I've been told, the number one problem continues to be financing and associated costs.

Of course, I haven't consulted with all stakeholders. However, I did meet last summer with two German parliamentarians who were looking into this matter for the European Commission. I also travelled to the United States. It would seem that shipyards around the world are encountering the same problems. Financing remains the top priority. What I'm proposing in my bill is that we adjust our shipbuilding sector to prevailing conditions within the industry as our neighbours to the south have done.

I'll stop there to give my colleagues an opportunity to ask questions. If there is any time remaining later, Madam Chair, perhaps you will let me ask a few more questions.

[English]

The Acting Chair (Mrs. Karen Redman): Thank you, Mr. Dubé. You had many questions. I was trying to keep up with them. If we missed answers, we can come back.

Mr. Epp.

Mr. Ken Epp: Thank you very much.

I want to ask a question first of all of the people from the foreign affairs department. We know other countries are subsidizing their shipbuilding industry rather substantially. I think they're also providing tax breaks for different companies to register their ships in their own country that are a lot more favourable than what Canada offers. Has there been any negotiation taking place with other countries to try to bring all of the countries together so that we don't compete with each other unfairly?

Mr. Jean E. Saint-Jacques (Director, Trade Remedies Division, General Trade Policy Bureau, Department of Foreign Affairs and International Trade): Madam Chair, I can take that question.

This has been one of our major objectives in getting ready for the launch of new trade negotiations in the area of subsidies: to have broad cross-sectoral negotiations to address the issue of subsidies, not only in shipbuilding but in other sectors. We were pushing very strongly for that at the run up to Seattle, but unfortunately we did not get a launch in Seattle. We're continuing to press this for the launch of the new trade negotiations. It's something we will be pursuing.

Mr. Ken Epp: Do I have this right? If I were a shipping tycoon and I wanted to buy a new freighter, if I went to South Korea or to Japan they would actually finance 87% of my project?

Mr. Jean Saint-Jacques: I don't have the details of Japanese or Korean practices there, but from what I've heard, I believe there are significant subsidies in shipbuilding in other countries.

Mr. Ken Epp: Right now, I think Canada finances up to 80% of shipbuilding that's done in Canada for other countries. Is that true?

Mr. Jean Saint-Jacques: Maybe Bob would want to take that one.

Mr. Robert Shaw-Wood (Deputy Director, Export Finance Division, Trade Commissioner Service Planning and Policy, Department of Foreign Affairs and International Trade): Yes, thank you.

I believe South Korea is a participant in the OECD consensus on export credits, where there is a broad agreement on terms of financing. Korea has joined to this an understanding on shipbuilding. So they adhere, as do most OECD countries, to terms of maximum 12 years' repayment and 80% of the contract.

Mr. Ken Epp: So if Canada doesn't do this, there's no way our shipbuilders can compete on the world market? Would the alternative be to get the other countries to stop doing it? Is that the dilemma?

Mr. Robert Shaw-Wood: No. I was saying that most countries apply the OECD consensus financing terms, which are repayment terms of no more than 12 years and financing for no more than 80% of the contract value. Most countries apply that. There are other ways to deliver a subsidy in the price of the boat, but not on the financing.

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The Acting Chair (Mrs. Karen Redman): Mr. Lever, do you want to answer that?

Mr. Rod Lever (Corporate Policy Officer, Government and International Relations, Export Development Corporation): Maybe one point that you raised before was 87.5%, and that is the amount of financing provided by the United States program Title XI, so that's specific to the United States. So other countries generally adhere to the terms of the OECD, which is what Mr. Shaw-Wood was referring to, and that's what we adhere to. We adhere to the OECD 1994 understanding on ships, and that's 80% in 12 years.

To add an additional point in terms of the financing, it has served us quite well. EDC has increased our volume from 1994 to 1999 from doing no business to our having done $250 million, and with more to come. I don't think emulating the United States is something we're looking to do. We think the terms of that agreement are in Canada's interest, in EDC's interest, and in shipbuilders' interest.

Mr. Ken Epp: I need to come back then to the Foreign Affairs people. If United States is exceeding the standards, have we made presentations to them and have we challenged them on it? Or do we just let them do whatever they want, and we end up having our industry shot to pieces?

Mr. Robert Shaw-Wood: There's a bit of confusion at this time. In the Title XI terms it's up to 87% of something called the actual construction cost of the vessel. The OECD terms of financing are up to 80% of the transaction. At the end of the day, 87% of actual construction may be 80% of the transaction. The repayment terms for Title XI are up to 25 years or the economic life of the vessel, whichever is less.

I don't know myself what that works out to in practice. The OECD is a maximum of 12 years. There may be a discrepancy there, but I don't know that we have a good sense of that. I think part of the problem is there hasn't been enough competition to date between Canadian yards and American yards financed under Title XI to know what the nature of the discrepancy might be.

Perhaps EDC could comment on that.

Mr. Ken Epp: I would like to put this question to Ms. Charlebois. Undoubtedly before Canadian taxpayers are drawn into a financial transaction of such magnitude, there is a cost-benefit study. Taking into account payments over 12 years, which seems reasonable, and I presume it includes interest, but in terms of the total cost-benefit analysis and the number of jobs created and the benefits to Canada, do we come out on the plus side of that or do the taxpayers end up subsidizing it?

Ms. Ninon Charlebois: I believe this would be more a question for the Department of Finance, which will be appearing next week, I believe, because then you're getting into the fiscal. These are mostly questions of a fiscal nature, tax credits and so forth, and I believe they would be in the best position to try to put a dollar amount to it.

Mr. Ken Epp: Perhaps we should ask that next week, then. I'm really interested in the answer to that question. I had one more question, and I don't know who wants to answer it from our panel here today. But when you consider that Canada, according to the numbers that you gave here, has roughly 1/25 of 1% of the market, that's infinitesimal when you look at it in terms of the world market. I think that works out to something like South Korea having 1,500 times as much capacity as we do.

I don't want to be negative here, because I do think we need to do everything we can to make sure Canadians prosper and participate in the world market and everything, but is there any hope at all of our biting into this market in a significant way when we face such formidable odds, and presumably with labour costs and other things being much less expensive in these other countries? You mentioned in your presentation that the final costs of production and everything seem to be going down. You mentioned in one case going from $40 million down to $20 million.

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I'm wondering whether there's any advisability to try to get into a market. It's as if I were to go back in my backyard and, with my little old home welder, start building cars and saying I'm going to take on General Motors. Do you have an opinion on that?

The Acting Chair (Mrs. Karen Redman): Who would like to answer that? Ms. Charlebois.

Ms. Ninon Charlebois: Yes, I'd like to answer that one.

I think the answer may lie in the fact that indeed we are not very big on the world scene, and piercing the market everybody else is already engaged in, and maybe the traditional markets, is extremely difficult, and this is what the yards are finding out. However, if we look—and sometimes it's good to do this—at some of the best practices and start from there to see where indeed our advantages are, there are indications that some yards, and especially I have to say some of the smaller ones and not so much some of the larger ones, have managed to find small niches that are actually quite successful. They have found small markets, and one of the overall threads in all of that is definitely the capacity to innovate.

In some cases they've identified corollary markets. There's one that's interesting. It's technology on a small vessel, a de-weeding propeller, and it serves to help boats navigate in weed-infested waters. It's a small thing and it's a small leap from what they're used to doing, but I understand there are not so many technologies of that nature on the marketplace and they hope to be able to commercialize it.

So these are the small success stories that we're finding out. It's too early to say what will happen to them, but that's probably the only response I can give to you at this point.

Mr. Ken Epp: Madam Chair, I think that's it for me.

Thank you.

The Acting Chair (Mrs. Karen Redman): Thank you, Mr. Epp.

Before I recognize Mr. Cullen, who I know has a question, you mentioned earlier, Ms. Charlebois, about the TPC. I'm wondering what the uptake has been in the shipbuilding industry, because I know it's something that certainly the high-tech sector and some environmental industries in my community have taken great advantage of. What's the uptake in this industry?

Ms. Ninon Charlebois: The uptake is actually none, and we'd like to encourage the yards to try it. There has been some misconception in the industry as to what TPC really is, and I think it's more a question of awareness than anything else.

As I mentioned previously, it's not a tool to fund the production of ships. It's a tool to fund innovation and it's repayable. If commercialization works, royalties have to come into play. So it's a case where the federal government decides to become a co-investor in a market or a new technology that might have applications.

I can give you a hypothetical example of where it could work in certain cases. For a ship that needs a special type of hull, I'd say, to withstand very special circumstances, the coating on the hull itself could be TPC-able. So that type of innovation, if it doesn't exist in other industries, could be very seriously looked at. New global positioning systems also could be part of it if they don't exist.

TPC call these enabling industries or technologies whereby, if you develop a technology in one industry, you can apply it to another. One case in cars has to do with the clean cars. It's a special mechanism that enables a car to reduce the amount of emissions, and the technology uses propane and uses less of the gasoline.

So these are examples of successful candidates of TPC. It's extremely innovative, and this is where the government invests some of its R and D. It is an R and D fund, so it is not a production fund. These are cases where yards could apply if they build such applications.

The Acting Chair (Mrs. Karen Redman): Thank you.

Mr. Cullen.

• 1200

Mr. Roy Cullen (Etobicoke North, Lib.): Thank you, Madam Chairperson, and thank you to the presenters.

I actually have a number of questions, and for some of them I'll will wait for the Finance officials. But I'd like to pick up on this question of capacity and supply and demand.

In the industry I'm familiar with, the supply and demand capacity goes through cycles. So when the pricing is good, there's more capacity coming onstream, which puts prices into the tank, and then the capacity falls off, and it goes in these sorts of cycles. That's in the forest products industry, pulp and paper, etc.

You seem to be implying that in the shipbuilding industry there is a demand still rising somewhat but that the capacity keeps growing, or the supply, which seems to me to be a bit odd. There must be huge barriers to entry. You can't just say you're going to set up a shipbuilding yard. You intimated that there were some countries that are looking for an outlet for steel, which would mean there would always be a growing capacity in supply.

Could you elaborate on how this industry, or this sector, seems to be a little different from some others in that regard?

Ms. Ninon Charlebois: One part of the equation I didn't mention is that there are new players coming onboard, and there are also traditional players or other players who decide to opt out. This has been the case in Norway, for instance, where we have a big yard called Kvaerner that decided simply to get out of it. It's the same thing for South Korea. They're actually the leaders right now, and one of their large yards, Hyundai, is thinking of reducing its presence in the shipbuilding market. So you see an ebb and flow, people coming in, people exiting, but overall the numbers show there are definitely too many yards chasing too small a market.

Mr. Roy Cullen: So in a rational market, people who wanted to get into shipbuilding might say to themselves, “Why are we doing this? It doesn't seem to make much sense.” Maybe I'll ask if you could elaborate on that.

But on the question by Mr. Epp in regard to looking at the percent of the market, clearly there have to economies of scale, and clearly I think that's why you're saying Canada has to be a niche player. I don't know how we could realistically compete if there were economies of scale, and maybe you could elaborate on that.

And could you talk about our cost positioning in terms of how cost competitive we are, and dissect it in the sense of cost competitiveness in terms of throughput, because we can achieve economies of scale, or someone can, versus, let's say, the cost structure. For instance, there's a notion that in Southeast Asia, for example, labour costs absolutely are much lower.

Could you talk about our cost competitiveness?

Ms. Ninon Charlebois: This is a bit complicated. I can certainly attempt to paint a more specific picture.

The cost drivers here in Canada, the labour rates, are actually quite good. They're not the best across the world; I think we're in about fourth position. Labour is one factor, but there are other factors that play into our ability to bid on international projects. The cost of steel is an important factor. Steel here is very costly. You have countries such as South Korea or China where the steel is almost dirt cheap. So that's a very big factor. The steel counts for at least 30% of the cost of the overall ship. So that's an area where the costs are transferred to the shipbuilding industry.

But competition doesn't only apply or doesn't only happen on price. Competition also happens in terms of technology or design. Japan is not a country that sells the cheapest vessels. Actually, the price of vessels in Japan is quite high. The reason they have such a large market share is that their vessels are extremely high quality and they happen to be not that expensive, so you have a very good cost-benefit ratio. Also, in order to keep their prices down and focus on where they're very good, which is the high-end value of ships—either sophisticated systems integration, very luxurious passenger ships—they sub-contract the parts, for instance the hull, to countries where the steel is not as expensive or the labour rates are lower, and that enables them to be really quite competitive.

• 1205

Really, they're playing on both sides. They're playing on the cost side; they're keeping costs down. They're rationalizing; they invest heavily in robotics. In some of the yards over there, almost all of the welding is done with robots. It's extremely sophisticated and extremely detailed. They have very good manufacturing processes and they restructure constantly.

Mr. Roy Cullen: That's helpful, but there are clearly economies of scale, obviously, in an industry like this.

I have one question for the trade people and one for EDC. I don't know if I'll have time to get them in.

On the trade side, is what is being proposed here by Monsieur Dubé WTO compliant? Secondly, are all our competitors WTO compliant? I'm picking up on Mr. Epp's question. Have there been any challenges by us or by anyone to any of these sorts of measures that are practised in other countries or that are proposed here?

Mr. Jean Saint-Jacques: Thank you, Madam Chair.

The proposals contained in the bill would constitute subsidies if you compare them with the WTO definition of subsidies. To the degree that they're applied equally across sales in the domestic and foreign markets, they wouldn't be prohibited export subsidies, which is the problem we had with TPC and the aircraft case.

But the subsidies.... And particularly in this case, these would be specific subsidies to an industry. Would these exports then be vulnerable, say, to a WTO challenge or to a countervail case? I can only say that it depends.

For example, in a countervail case you have to prove that there's a subsidy, which would not be too difficult to find, according to definitions here. I should say here that we're only talking very broadly, because a lot of the details would remain to be defined if this bill were to become law and regulations were passed and moneys were given and so forth.

Let's assume you have a subsidy specific to the industry. To have a countervail case, you'd also have to prove that there's an injury to the industry of the country that is importing the product. Whether you'd be able to prove that, I don't know. It all depends on the facts of the case.

As to whether there'd be a WTO challenge, they're not prohibited export subsidies, but there could be a challenge under what's called the “serious prejudice” provisions of the agreement on subsidies and countervailing duties. But there's only been one such case so far in the WTO history.

So yes, there's a vulnerability, but to what degree? I cannot tell you at this point in time.

Mr. Roy Cullen: Has anyone ever challenged any of these other countries on these subsidies that they clearly have or is there just a sort of gentlemen's agreement not to rock the boat or what?

Mr. Jean Saint-Jacques: The interesting thing is that there's a linkage in the WTO agreement on subsidies and countervailing measures to the OECD agreement. It basically says that as long as you conform to the provisions of the OECD agreement, there is a carve-out. I'm racking my brains, but I'm not aware of any WTO challenge on these types of subsidies specifically to shipbuilding.

Mr. Roy Cullen: Thank you.

Could I have one more quick question, Madam Chair?

For this it might be better to wait for the finance department officials, but maybe EDC could have a crack at it. In the Title XI program in the United States—as I understand it's called—they provide guarantees. We talked about the 87% versus the OECD's 80%. Do you know about the experience in the United States? Has the U.S. government had to come forward and honour these guarantees or bail out companies that get into difficulty? What has been the historical experience with this program in the United States?

Mr. Daniel Primeau: I must defer to my colleagues from the other departments. We haven't researched Title XI from that point of view, which is more of a policy matter; we will look into the actual commercial terms surrounding any specific proposal.

Mr. Roy Cullen: Oh, okay.

Mr. Daniel Primeau: I apologize. I couldn't really answer that.

Mr. Roy Cullen: Would the DFAIT people have that or would the Finance people have it, do you know?

The Acting Chair (Mrs. Karen Redman): Mr. Shaw-Wood.

• 1210

Mr. Robert Shaw-Wood: We have some information on this.

A lot has been said about the default experience of Title XI. I'm aware of a study that was done by an international organization—the OECD, I believe—as a working paper. They looked only at five years in the 1990s. Some of that business was export. Most of it would have been domestic. I think Title XI only started applying to export business in about 1993.

They concluded that yes, there were defaults, and after you factored in the risk premiums that Title XI received for these risks and after you factored in the recoveries, the programs still ran at a net loss of about $20 million U.S. per year. But I don't know what the total volumes were of which that $20 million is the bottom-line shortfall.

The Acting Chair (Mrs. Karen Redman): Thank you.

Mr. Szabo.

Mr. Paul Szabo (Mississauga South, Lib.): I have several questions, so maybe if we do a rapid response thing it would help here.

Do I understand that the opinion of the industry department is that any reduction in rationalization or any new entry will likely be higher-end or innovative shipbuilding stuff which in fact would be characterized as having less growth in jobs than traditional shipbuilding?

Ms. Ninon Charlebois: Not necessarily. It depends. If you're talking about the manufacturing processes or a new technology such as robotics or if you're talking new markets that require labour—

Mr. Paul Szabo: Is that the direction it's going in?

Ms. Ninon Charlebois: Not necessarily.

Mr. Paul Szabo: Because you mentioned something about the labour cost component being generally at about one-quarter.... How does Canada compare to others in terms of its labour cost component?

Ms. Ninon Charlebois: We're in good stead. We're in about fourth place.

Mr. Paul Szabo: About fourth place.... Okay.

On the subsidies issue, I'm just trying to get a feeling for the bill provisions. That's one of the reasons I asked for the Department of International Trade and Foreign Affairs to be here. The bill is basically prescribing loan guarantees and favourable financing rates, which would be available to Canadian shipbuilders. They could not benefit any offshore shipbuilders. So basically it's an assist to the industry proper. Does that in itself—

Mr. Antoine Dubé: Where does it say that?

Mr. Paul Szabo: It says it's “guaranteed” for the loans on shipbuilding, okay, for interest rates, the financing cost of building the ship. Does that constitute a subsidy when the manufacturer of the ships gets financing assistance?

The Acting Chair (Mrs. Karen Redman): Mr. Saint-Jacques.

Mr. Jean Saint-Jacques: Madam Chair, thank you.

The question raises an interesting thing regarding national treatment, but I haven't really looked at the question from that point of view. Whether—

Mr. Paul Szabo: Could you give us an opinion on the financing assistance? When you can, not right now if you can't....

Mr. Jean Saint-Jacques: With respect to the financing assistance, it would be a subsidy. It would be subject to a countervail if a case could be brought.

Mr. Paul Szabo: Secondly, this is asking for improved tax treatment of “lease financing for the purchase of a ship built in a Canadian shipyard”. In this particular case, since it is a Canadian tax benefit it would only be available to those conducting business in Canada. It therefore would not be a benefit available to those who simply purchase a ship from a Canadian shipbuilder but operate elsewhere. They wouldn't be able to take advantage of this. Would this also be an unfair practice with regard to discriminating against foreign operators versus domestic operators?

Mr. Jean Saint-Jacques: Yes. Again it would fall within that category of providing a subsidy to Canadian—

Mr. Paul Szabo: Okay. Similarly, there's a refundable tax credit being proposed. It's not specific but it is some sort of tax benefit, again probably only to the benefit of a Canadian purchaser or a Canadian operator, not a foreigner, so similarly this may put us into some difficulty with regard to the WTO.

Mr. Jean Saint-Jacques: Again, depending on whether a case were to be filed.

Mr. Paul Szabo: For EDC—

• 1215

Mr. Jean Saint-Jacques: Excuse me, Madam Chair. I would like, if possible, to come back to a point Mr. Cullen raised in an earlier question. I don't know whether it would be appropriate now or later, but I foresee some additional information that would complete an earlier response.

The Acting Chair (Mrs. Karen Redman): Why don't we allow Mr. Szabo to finish his questioning, and then we'll come back to you before we go to Mr. Herron.

Mr. Paul Szabo: Can Parliament pass an act that requires EDC to give favourable terms and rates to borrowers of money, for whatever purpose?

Mr. Daniel Primeau: EDC is a consequence of an act of Parliament, so I assume Parliament has the ultimate word on our mandate.

Mr. Paul Szabo: Does the current act of Parliament prescribe or give you the guidelines under which you must borrow or lend money? Do they tell you how to run your business?

Mr. Daniel Primeau: Yes, we are to operate on commercial terms within the international agreements and understandings.

Mr. Paul Szabo: Is there anything in the current act that says you have to operate at more favourable or less favourable terms than any other financial institution?

Mr. Daniel Primeau: I do not recall any such mention, but I need to defer on that.

Mr. Paul Szabo: I'm trying to understand, if we passed this bill and the actions prescribed by it were enacted, whether or not it would be permissible, for instance, for Parliament to pass an act that said you must lend money at prime to people who were building ships.

Mr. Daniel Primeau: Can I maybe take your question and put in a little different context? The Export Development Corporation is required, by mandate, to operate under commercial terms on a self-sustaining basis. So referring back to a comment by Mr. Epp, we are not an item and a cost to the taxpayer in the annual budget, for example. We are on a self-sustaining basis. Therefore, in respect of government policy and Canadian policy on international trade, we respect the international agreements to which Canada is party, and we operate on a commercial self-sustaining basis.

From that you can imagine the scenario. With Parliament being the ultimate mandate creator for EDC, I can't comment on such a scenario.

Mr. Paul Szabo: Sure. But the aspect of commercial means you would access the risk and operate.

Mr. Daniel Primeau: Yes.

Mr. Paul Szabo: But this bill says the interest rate has to be comparable to the rates available from other financial institutions to large and financially strong corporations. That's not commercial operations, is it?

Mr. Rod Lever: It would be very abnormal for Parliament to pass a law that would legislate the way we would conduct a deal vis-à-vis a particular industry.

Mr. Paul Szabo: So if you have a medium risk, you may not offer prime or have prime available.

Mr. Daniel Primeau: We will offer commercially viable rates for the credit risk involved, if that's what you're getting at.

Mr. Paul Szabo: But you won't offer the best rate that's available to strong financial corporations.

Mr. Daniel Primeau: We won't offer it to everybody if they don't warrant it.

Mr. Paul Szabo: Okay. I understand that if you cannot do it or won't do it, the Canada account might be able to take it, but that means the risk will be assumed by the Government of Canada, as opposed to EDC.

Mr. Rod Lever: That is correct. There are two accounts. One is the corporate account, which is everything we do on our own book, and then there's the Canada account, for a number of criteria laid out in section 23 of the Export Development Act. The government may decide to take that risk.

Mr. Paul Szabo: So you would administer the loan, but the risk would be to Canada.

Mr. Rod Lever: We would administer the loan and have an advisory role for the government in ascertaining the risk of that transaction.

Mr. Paul Szabo: Okay. My final question is on the Canadian position in the shipbuilding industry. Notwithstanding that we are a very small player in the world situation, does Canada have a reputation that provides us with any distinctive advantages in terms of why our ships are more competitive than others, for certain distinctive reasons? On the other hand, are there any disincentives, or any bad history in the Canadian shipbuilding industry that has taken away from our ability to be more competitive in the global shipbuilding industry?

The Acting Chair (Mrs. Karen Redman): Who would like to answer that?

• 1220

Mr. Brian Derick (Policy Analysis, Coordination, Planning and Program Management, Department of Industry): There are some instances where we are at disfavour. It is really premature again, as Ms. Charlebois was saying, to draw any conclusions at this stage, but we are picking up some feedback on that during our stakeholder consultations.

Price is a major factor in all of this, but there are other factors, such as reliability, just-in-time delivery, quality—all those things are at issue for ship buyers and affect the marketability of the product.

Mr. Paul Szabo: Madam Chair, I'm sorry, but there is one other item we had on the table already that I just have to clarify.

The Acting Chair (Mrs. Karen Redman): Quickly.

Mr. Paul Szabo: It has to do with the 87.5% that the U.S.... I think the discussion was that 80% of the transaction costs—

Mr. Rod Lever: Eighty percent of the financing.

Mr. Paul Szabo: I think what you have here shows that 80% of the transaction costs versus 87% of the borrowing—they may be equal.

This bill says “whereby a maximum of 87.5% of the money borrowed”. So it actually is comparable to neither the 80% nor the 87.5%. This is a totally new number in terms of what's being asked in the financing amount. This is 87.5% of the money borrowed. In the U.S. it's 87.5% of—

Mr. Robert Shaw-Wood: The actual construction costs.

Mr. Paul Szabo: So that 87% in the bill is not comparable to what the U.S. is doing at all.

On the second item, the OECD, the 80% is 80% of the transaction cost.

Mr. Robert Shaw-Wood: Yes. I suppose that could include tariffs, legal costs, shipping, insurance, and those sorts of things.

Mr. Paul Szabo: So the U.S. rate is relative to a construction cost; the OECD rate is relative to a—

Mr. Robert Shaw-Wood: A buyer's cost.

Mr. Paul Szabo: And this is relative to the amount borrowed. There are three different bases on which these percentages are applied, so there's no real significance to this 87.5% in the bill, other than its requiring a level of financial support. It doesn't mirror what's happening in either the U.S. or the OECD. Is that correct? Okay.

The Acting Chair (Mrs. Karen Redman): Mr. Saint-Jacques, before I go to Mr. Herron and then to Ms. Leung.... Mr. Cullen was called out and would like to hear the answer to your question. So if you're amenable, we'll wait and you can answer his question when he returns to the committee.

Mr. Herron.

Mr. John Herron (Fundy—Royal, PC): Thank you, Madam Chair.

I know we're all trying to do our best here, and if my comments aren't on the most positive of terms, please take them that way. I'm just trying to move the yardsticks in this particular sector.

On page 13 of your document, I take exception to your comment that you've been listening to the stakeholders, the shipowners, the shipyards, organized labour, municipalities, the provinces, and parliamentarians in that regard. Categorically, time and time again, they've stated, when compared to Korea and Japan, that they are not the principal sectors they're looking at as their competitors.

You've analysed the industry for the most part, and what's mostly produced in Korea and Japan are not ships that have a high degree of mechanical outfitting, smaller ships with sophisticated navigational equipment, or ships that would actually have a petrochemical perspective. I almost see this presentation as being about why we can't compete, as opposed to how we can.

One of the principal issues Mr. Dubé touched on is that in this document one of the largest growth areas, in terms of the shipbuilding capacity, is what's taken place off the east coast of Atlantic Canada in terms of not only the Hibernia project but a completely private-sector-funded offshore project, in terms of Terra Nova.

Everyone within your department knows that White Rose still has to be developed, Ben Nevis still has to be developed, and there's a fair amount of exploration taking place along the whole Jeanne d'Arc Basin off the coast of Newfoundland. There have been preliminary finds on the west coast of Newfoundland as well, in particular off the shelf off Nova Scotia. It's an immense sector opportunity.

• 1225

I also take exception to how we've decided to look at what's wrong with the bill. It's in the facts. I'm quite concerned about what is erroneous.

In regard to the comment with respect to Title XI, in terms of how it has worked, the Americans were not even a player in selling ships external to the United States until they extended Title XI for export consumption. Since 1993, the American government has funded $3 billion in Title XI loans. Over that timeframe, the default rate has been $1.1 million. HRDC has lost that in a week.

The overall benefit to the federal government in the United States over that same timeframe is a net profit of $47 million. That's the case currently in the United States using Title XI.

When I also look at the standpoint.... This is my first of many quick questions, hopefully, Madam Chair. Is revising Canada's leasing regulations for domestic consumption, setting our tax code, our tax rate in this country, a subsidy? Could you explain that to me?

The Acting Chair (Mrs. Karen Redman): To whom are you addressing your question?

Mr. John Herron: Within Canada, for Canadian consumption, our tax, our corporate tax rate, how we finance—how is that a subsidy, when we're reducing taxes with a tax incentive?

The Acting Chair (Mrs. Karen Redman): Are you directing that to Mr. Saint-Jacques?

Mr. John Herron: Yes, Mr. Saint-Jacques.

Mr. Jean Saint-Jacques: If the product is not exported from Canada, that's one thing.

Mr. John Herron: That was Mr. Szabo's question.

Mr. Jean Saint-Jacques: Well, the WTO.... Maybe I misunderstood the question, but I was looking at it from an export point of view. In other words, if the product were to be exported, would it be subject to a WTO challenge? That's the vein in which I took and answered the question.

According to my quick read of the bill, the proposals would amount, if you will, to a revenue forgone by the Canadian government and a benefit to the lease owner or lease holder. That's the definition of a subsidy. Whether it leads to trade action depends on the other conditions—if the product is exported, or if there is injury to the industry in the importing country.

Mr. John Herron: So when you say revenue forgone, if we had a Canadian corporate tax rate, instead of what it's currently established at—26% or 29%....

Paul, what is the corporate tax rate?

Mr. Paul Szabo: It depends.

Mr. Jean Saint-Jacques: It doesn't really matter.

Mr. John Herron: No, but the point is that we're forgoing revenue because our tax rate is not 42%.

Mr. Jean Saint-Jacques: If you're reducing the general tax rate across the board, that's one thing. But if you're forgoing revenues or directing assistance to a specific sector, that becomes a countervailable subsidy if the production that results from the sector that benefits from the subsidy is exported into another country, another jurisdiction, and the industry there decides to file a case. I'm not saying that's going to happen. I simply said, in general, these are the broad parameters.

Mr. John Herron: Okay, I want to move on.

The question was in terms of comparing labour rates, the $40 million to $20 million, and what happens in Korea and Japan. Just to make it very clear on the record, are the Canadian labour rates competitive with the EU, for us to do trade in that regime?

Ms. Ninon Charlebois: Yes, they are.

Mr. John Herron: Then let's start talking about where we are competitive, the EU, as opposed to saying we're not competitive with respect to Korea and Japan, because that's a fundamental issue.

Most of our shipyards have made it quite clear that in order to address this yellow pie chart you have here, in order to address this particular issue in terms of federal procurement versus the other sectors, they know they have to find something else to fulfil this yellow pie. In order to do that, they need to find export markets. And they know, from a labour perspective, a cost-of-material perspective, that they can compete with the EU. They want to export, they want to find new markets, and they want to be able to fill the consumption here in Canada. In order to do that, we need to provide some things within their particular tool kit.

• 1230

So that is the market they want to focus on, not the Pacific Rim as much. Ocean-going tugs have been produced in the East Isle Shipyard as well. So that's the context I think we need to ultimately address for the labour market.

Ms. Ninon Charlebois: Okay. If I may respond to that and the comments you made previously, the consultation process is about sharing facts. The facts that we have found up to now, simply because, I guess, there's more documentation in certain countries than in others, are mostly geared toward Asian countries. One of the reasons we're referring, for instance, to Asian countries—essentially a very pragmatic reason—is that this is where the body of literature exists.

Second, Japan in certain aspects is quite comparable to Canada. Japan has higher labour rates than us, but they're a highly industrial nation, just as we are.

Now, the consultation process is aimed at, as I mentioned previously, sharing facts, and we would love to hear from the yards, from other players, about any studies, any literature they have on the European market that is more than what we have right now. So that's an offer. We'd like to hear from them.

Mr. John Herron: I guess the point I'm trying to make is to put things in terms of what the lay of the land is internationally. The industry rationalized, understanding that it had to become more competitive, more focused, and that ownership had to be stronger as well, because they wanted to set sights on an export-driven market and be more competitive. But the other side of the equation never happened, in terms of having a shipbuilding policy that actually works in this regard.

Now, in government our role is to respond to society's will. Clearly what we have right now is not meeting the needs or the desires of the first ministers across the country, all the premiers. When the consensus has been built between labour, shipowners, and shipbuilders about initiatives that could be done, then I think we owe it to them to actually take a bit of a look.

Now, there are two issues I wanted...and this is in conclusion, Madam Chair. One is foreign affairs. We know the Jones Act has been in effect since the thirties in the States, since 1932, and it is a protectionist regime. We know that Canada does have some advantages in making certain types of ships, and that is the expertise that has been built up in terms of offshore drilling rigs. There's desire, perhaps, in markets along the Carolinas or the Gulf of Mexico as well to participate in that sector.

Could you provide in writing to the committee, if you can't answer this question right now—but I'd be shocked if you couldn't, Foreign Affairs, on this issue—when the last time was that we actually had a bilateral chat? Could we actually negotiate something with respect to the Jones Act on having maybe certain types of ships? When did the last conversation take place on a bureaucratic level or a political level with the Americans on at least having some kind of market penetration into the States?

Mr. Jean Saint-Jacques: Madam Chair, we've raised this issue continually with the U.S. It has been raised not only in bilateral discussions but also in the NAFTA negotiations, where we and the Mexicans tried to pressure the Americans to eliminate the Jones Act, or to modify it. There were some modifications made, and we retained the right to apply quantitative restrictions. We raised it in the WTO, but it is about the only piece of legislation that has a specific carve-out in the WTO agreements.

• 1235

So we're pressing. We're pressing on that continually. But I just put these points as an illustration of the resistance we've faced all along. We're certainly trying to find ways to facilitate access of Canadian shipyards in this, but it's not been easy.

The Acting Chair (Mrs. Karen Redman): Mr. Herron, in conclusion.

Mr. John Herron: My last question is on the 87.5% number that's been utilized under Title XI. Maybe there should be wording in an amendment, which Mr. Szabo touched on earlier, to spread it over 25 years.

We know what we have right now isn't working. Why don't we just go and do that, especially in view of what's been working with the United States since 1993 and how beneficial Title XI has been in the States? They have $3 billion in loans and $1.1 million in loan defaults, because they have really prudent criteria to actually go and do. They've made $47 million in revenues.

We know what we have right now is not working. It's not filling the yellow pie chart. Why don't we just go and do that? Why don't we do that and actually take advantage of what's been proven to work in the States?

Ms. Ninon Charlebois: I would like to—

The Acting Chair (Mrs. Karen Redman): I was assuming that was somewhat rhetorical, but if you'd like to answer the question, go ahead.

Ms. Ninon Charlebois: Well, it's not so much to that one but to a previous question you had: what are the areas in which we can compete?

There are areas in addition to small niche markets, which I mentioned quite at length in the presentation, where indeed Canada is showing proof that there's an ability here to sell. Certainly drilling platforms such as the Spirit of Columbus, which was done in the Davie yard, are a good example of that.

There are also proactive initiatives such as the Chilean frigate program. I don't know how that one will pan out, but it is another example where Canadian yards are seen to have an advantage.

In terms of the offshore market, in our consultations we're finding that indeed the market prospects for offshore are extremely impressive. You understand my group was looking at shipbuilding in the sense of traditional ships and not necessarily in that area, but that's an area we're also looking at and studying to see how big the market prospects are and try to understand the dynamics at play.

So in closing, I want to say there's serious desire by the federal government to understand what's going on and to look at the market prospects. And indeed our consultations are very helpful in finding out what those prospects are.

Mr. John Herron: Thank you, Madam Chair.

The Acting Chair (Mrs. Karen Redman): Thank you.

Ms. Leung.

Ms. Sophia Leung (Vancouver Kingsway, Lib.): Thank you, Madam Chair.

I'm sorry I missed your presentation, but perhaps you can help me on a couple of questions.

If I understand, the three leading countries in shipbuilding are South Korea, Japan, and China. I believe, Ms. Charlebois, you did mention 30% use of steel, so that's the major cost. I don't quite understand. Japan, South Korea, and China don't really produce steel. They have to import it, actually adding more costs. In comparison, another fact is that Japan has very high labour costs and their quality is high in shipbuilding.

What is the reason we cannot compete? I witnessed the shipbuilding industry in B.C. slowly just go down, and it's very sad. Can you...[Technical Difficulty—Editor]...the competition we cannot make?

Ms. Ninon Charlebois: The sources of market advantage from one country to another vary considerably. Indeed, among the three major players, a combination of factors is at play here. For some of them it's the cost of steel—China, for instance—or the cost of labour. In Japan it's the sophistication of the technology and the incredible amounts that are put into research and development. They're targeting a very different market from the Chinese, and it's a market characterized by the high value or the systems integration—almost the luxury market, if you want. They build passenger ships and so forth.

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So the factors of competition are extremely different. Every country has an industrial strategy of its own to try to gain part of the marketplace. That's an analysis of what's going on across the world.

Here in Canada one of the market advantages we do have is labour rates. They're not the lowest in the world, but they're not the highest either. So that's an advantage we have.

A disadvantage is that sometimes the vessels we build have problems in terms of reliability of delivery dates, because of difficult labour relations. This has been brought up as an issue. It means the contracts spread over time and the buyers want to have guarantees as to when a ship will be delivered. Those are indications.

Also, apart from certain specific yards, there's not much investment in research and development or in technology.

These are the factors at play here in Canada.

Ms. Sophia Leung: On page 10 you say Southeast Asian countries are subsidized at about 30%. What are the subsidy rates in Japan, South Korea, and China?

Ms. Ninon Charlebois: South Korea is roughly 30%.

Do you know what it is in the others?

Mr. Brian Derick: I think that's correct for South Korea, 30%. It's a little bit less than that, I believe, in Japan. I don't have an accurate number. Perhaps some of our colleagues do. With respect to China, it's virtually impossible to even estimate what it is, due to the nature of the economy. The U.S. Bureau of Labor Statistics, I think it was, recently observed that it's beyond them to try to fathom what it is. You know it's there, but you can't really quantify it accurately.

Ms. Sophia Leung: In China it's probably state-owned, so it's 100%.

Mr. Brian Derick: Exactly.

Ms. Sophia Leung: In Canada, what does our government subsidize? Do we have any? The borrowing or the financing is 80%.

Ms. Ninon Charlebois: Yes. We have a series of measures in the policy, which is on page 9, but we don't have subsidies per se.

Ms. Sophia Leung: It's 80% over twelve years.

Ms. Ninon Charlebois: Yes.

Ms. Sophia Leung: But that's a loan.

Ms. Ninon Charlebois: It's a loan; that's right. We don't have subsidies per se.

Ms. Sophia Leung: So this act actually suggests 87.5% through the...[Inaudible—Editor].

Mr. Paul Szabo: It's 87.5% of the money borrowed.

Ms. Sophia Leung: Yes.

Mr. Paul Szabo: This is different.

Ms. Sophia Leung: So is there a reason we cannot subsidize?

It's a very simple question.

Ms. Ninon Charlebois: It has a very complicated answer.

Mr. Jean Saint-Jacques: In terms of the reasons we may or may not subsidize, one of the issues that has to be taken into account when we subsidize is whether that subsidy, the provision of that assistance, could expose the exporting product to be subject to a countervailing duty investigation in another country.

The parameters, the broad elements, of the bill indicate that the form of assistance considered in the bill would be a subsidy that could be subject to countervail action in another country, if the vessel that's exported benefiting from these subsidies were to cause injury to the industry of the receiving country.

So there's a vulnerability here. It's a question of whether we want to take the risk or not. I think that's the only way we can answer.

Ms. Ninon Charlebois: I'd add—and this is more a segue into what Finance would answer—subsidies are also costly for taxpayers. So that is a matter also. As to how much it would mean and what would be the cost impact or the cost benefits, I guess that would be more of the purview of the finance department, but there certainly is a question of a fiscal policy. Generally taxpayers want tax cuts, not tax increases, so this is definitely an issue of fiscal policy and fiscal restraint.

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The Acting Chair (Mrs. Karen Redman): Ms. Leung, the Department of Finance is coming next week. Those may be the kinds of questions we would like to ask them.

Do you have any more questions of this panel?

Ms. Sophia Leung: I think it's fine, thank you.

The Acting Chair (Mrs. Karen Redman): Right on time, Mr. Saint-Jacques. Before we go to Mr. Dubé, perhaps you could give an answer to the question Mr. Cullen had asked earlier.

Mr. Jean Saint-Jacques: Just to add precision to the last point raised by Mr. Cullen about WTO actions, I was thinking in terms of whether there has been a finding by a WTO panel or appellate body against such subsidy measures. I still think the answer is no, but there were consultations and possibly the beginning of an action between the European Union and Korea, which led to an agreement between the two parties for Korea to conform itself to certain market-oriented policies and to reduce its subsidies, etc. This was recently concluded. Really, we don't have any idea whether it's going to work out or not.

I just wanted to add that precision.

The Acting Chair (Mrs. Karen Redman): Thank you.

[Translation]

Mr. Dubé.

Mr. Antoine Dubé: I listened closely when you spoke about the definition of subsidies that are in keeping with WTO and OECD rules. In Canada, Nova Scotia introduced a loan guarantee program. Three years ago, Quebec brought in a tax credit program which remains in effect to this day. I'm not suggesting that we end these programs. I merely want to draw your attention to the fact that they do exist. British Columbia has introduced an accelerated program to renew its fleet of ferries and only BC shipbuilders with yards in Vancouver can bid on contracts. Do these three programs run counter to the spirit of the subsidies as defined in the WTO rules?

You mentioned one case in particular and talked about consultations that had taken place and the possibility of an agreement. I understand that there are now rules in place and that consultations were held prior to the adoption of these rules. I have to wonder why Canada doesn't lodge a complaint with the WTO over the Jones Act in the United States and the resulting protectionist measures. Shipbuilding and shipping are excluded from the free trade agreement. However, the US is exempt from the 25 per cent tariff. According to my notes, this represents a loss of some $30 million for Canada.

OECD countries, England, Norway, Germany - in short, all EU member countries - continue to award subsidies to the tune of 9 per cent, whereas a number of other countries award 16 per cent subsidies. Subsidies in Asian countries can run as high as 30 per cent.

Although we would need to see some political will to act, would it be possible for Canada, acting under WTO rules, to take action against China, a country that has allowed Canadian shipowners, notably Canada Steamship Lines Inc., to build ships in China? I won't go into this, but a trust is involved. Is Canada hesitating to invoke the WTO rules because a Canadian shipowner is involved?

Mr. Jean Saint-Jacques: I will try to answer your many questions.

On the subject of tax credits, I would have to say that it depends on how they are applied and their impact on international trade. If the product eligible for a tax credit is not exported, then one avoids leaving oneself vulnerable on a foreign market. Furthermore, if the tax credit is general and non specific, then the product is not vulnerable to attacks of this nature. Therefore, a 10 per cent tax cut across Canada or in a particular province is quite different from what you're suggesting.

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In terms of lodging a complaint with the WTO under Title XI, this is something we could consider. It would all depend on the trade implications. In my view, the purpose of Industry Canada's consultations is to obtain information to find out what interests are at issue and how we could promote these issues globally.

In terms of tariff reductions under NAFTA, both parties have in fact protected their coastal shipping. We reduced our tariff over a ten-year period. The US did not impose any duty, but under NAFTA and the WTO, we reserved the right to impose quantitative restrictions having similar effects, if necessary. Thus, we could impose quantitative restrictions on the importation of US vessels into Canada. As a rule, we would need to consult with all stakeholders in Canada, but we do reserve the right to do this.

With respect to subsidies, let us consider first of all a case of countervailing duty. What impact will the subsidy have on a vessel imported into Canada? That's the first question that needs to be addressed. If this subsidy is one that is generally available, that's one thing, but if it's a specific subsidy, then it is more vulnerable. The Canadian industry must bring forward a case to the Canadian Customs and Revenue Agency and to the Canadian Foreign Trade Tribunal. A quasi judicial investigation is conducted, without any government intervention. Therefore, it's always possible to institute legal proceedings under Canadian law, but a sound case is needed, along with some evidence.

In the case of a Canadian shipowner in China, normally, commercial rules apply, regardless of nationality. For example, while the bill refers to a Canadian citizen, a person residing in Canada or a company, the subsidy proposal does not take into account the nationality of recipients, but merely the location where the ship was built. The same is true of China. The fact that a shipowner may be Canadian in no way contravenes international law. This issue is simply whether the product manufactured in China benefits from a subsidy; once the product is imported into Canada, these subsidies may be subject to a countervail investigation. That's really the issue here. Nationality is of little consequence. The product is what matters. It matters little whether the shipowner is Brazilian, Chilean or Panamanian.

Mr. Antoine Dubé: I'm saying that Canada is extremely good about complying with the terms of an agreement negotiated at the OECD. The Americans were the ones who wanted the agreement, but they were the first not to ratify it. As a result, the Europeans haven't ratified it either. What I've been wondering from the very beginning is whether we should be patient and continue to put up with other countries not complying with rules that normally link supply with demand. In the meantime, our shipyards are being shut down.

Thank you. I will have more questions for Finance Department officials on Tuesday.

[English]

The Acting Chair (Mrs. Karen Redman): Merci, Mr. Dubé.

We have another question from Mr. Cullen.

Mr. Roy Cullen: Thank you, Madam Chair. I do have a couple of small questions.

If you look at what's happened out in British Columbia with the ferries, is that...? I'm really trying to get at the question in terms of our competencies in shipbuilding; and I'm sure we are competent. But is what happened in British Columbia with the ferries, the fast ferries, an aberration? Hopefully it's not reflective of our competencies in shipbuilding.

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Ms. Ninon Charlebois: That's a good question. I don't know if it's an aberration. I haven't looked at it very carefully. It's more an issue that the provincial Government of B.C. decided this was an area where they wanted to partner with the industry. In terms of the federal government, we're kind of twice removed from that process.

There are many schools of thought. To extrapolate the B.C. situation to a situation in Canada is very hard to do. Let me just tell you what the two schools of thought are on this one.

One school of thought on why this happened is that the technology and the design come from Australia, and for whatever reason, the design was adapted to Canadian circumstances. This meant tremendous changes to the design or to the applications of ships. I'm thinking of environmental components of it and so forth.

Some say we shouldn't have made the adaptations. Others say they were needed, because the ferries operate in very different circumstances. Indeed, the temperature of the water and issues like that had major implications. The weight on the hull was also an issue. The truth lies probably somewhere in the middle. I cannot arrive at a conclusion; I can only give you some of the arguments that have led to this situation.

Mr. Brian Derick: I could just add to what Ms. Charlebois said.

I don't think in any way Industry Canada or the Government of Canada is concluding, from looking at the third party, if you will, that the ferries reflect negatively on the competency of the west coast yards. Absolutely not. But we're observing from afar, and there were some problems with technology, design building, having to recut some of the plates, and so on. Therein we believe lies the problem, rather than the competency of the yards involved.

Mr. Roy Cullen: Okay.

I'm not meaning to put you on the spot if you don't want to answer my next question. I suppose I can't force you.

In Mr. Dubé's bill, he says “The purpose of this enactment is to promote shipbuilding in Canada and make Canadian shipyards more competitive”. Do you think the measures he has proposed would accomplish that objective? If not, are there other measures that would accomplish that objective?

The Acting Chair (Mrs. Karen Redman): Who would like to take this one on? Or is this another rhetorical one?

Ms. Ninon Charlebois: It's probably a combination of rhetorical and financial.

A part of the answer is what the costs are and what the benefits are. That's a finance issue, but it's also kind of an overall policy issue. It's to be determined. I guess we simply have to follow up and see what happens. It's too early to engage in any type of outcome or conclusion on that front.

As I mentioned a couple of times, we're in a consultation mode, and our consultation mode is really only to provide a diagnostic of the situation. So we're collecting facts, sharing information, seeing areas that work and areas that don't work so well. The next step is probably to look at the policy instruments and see what we need to do about it, but we're not there yet.

Mr. Roy Cullen: It's the grand policy question, as you alluded to. If you implemented these measures, it would create, I would say, a fairly favourable business condition or environment for the shipbuilding industry in Canada. I'm just wondering if what's proposed here would be enough. In other words, with some issues you can throw a lot of money at it, you can throw a lot of support at it, but it just doesn't have the legs to sustain itself.

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If the Government of Canada wanted you, Ms. Charlebois, to craft policies that will reach this objective, would you come up with something like this or would you come up with something totally different?

Ms. Ninon Charlebois: The indication of our consultations—and this is preliminary; we only finished one-third of it and the analysis is not done—is that the common thread to all these small success stories is really innovation. It's not so much to go after a market that's already mature and where overcapacity exists, which potentially could require the government to offset the difference, but it may well be in areas where there is more growth and where those market segments are not as crowded. I preface this with lots of mays and maybes because we're not really there yet.

The Acting Chair (Mrs. Karen Redman): Ms. Charlebois, you've mentioned the consultation a couple of times. One of the criticisms I have heard from some of the stakeholders you've consulted with is that it's being done on an individual basis. Are there plans to do some kind of round table or group consultation so that people can hear other sectors of the business and their views on it?

Ms. Ninon Charlebois: As we're doing them currently, the best format in our view was indeed the bilaterals. We found out, through testimonies or comments in the industry committee or in any other fora in the House, that the needs of the yards, the needs of some of the shipowners, and the needs of the shippers are quite different. It's extremely difficult to get a conversation going on so many levels at the same time. The best approach for us was to simply look at this very carefully and logically and to look at various issues in isolation from one another and get information on their views.

To use the example of the 25% tariff, shipowners don't want it. It's an element of the policy. What do we do? We have all these conflicting views and all these divergent views that we have to fit into a policy framework.

The Acting Chair (Mrs. Karen Redman): Mr. Szabo, do you have one last small question?

Mr. Paul Szabo: Does Industry Canada endorse the object of this act, which is to promote shipbuilding in Canada and make Canadian shipyards more competitive?

Ms. Ninon Charlebois: I would say that the principle is one we're committed to.

Mr. Paul Szabo: Okay.

The Acting Chair (Mrs. Karen Redman): Thank you very much to all of the witnesses for coming and giving such beneficial testimony on this topic.

[Translation]

Mr. Antoine Dubé: Can you tell me when our next meeting will be? I believe we will be hearing from Finance Department officials next week. I know that other people and politicians, including the Premier of New Brunswick, would like to appear. Have you received that particular request? If so, are we going to hear from him next week? You don't have to answer that question today. I realize you're sitting in for Mr. Bevilacqua, but are you still planning to do a clause-by-clause study of the bill before the end of the session?

[English]

The Acting Chair (Mrs. Karen Redman): Thank you for the question. I can't give you those answers, but we will undertake to get them and give them to you in a timely fashion.

Mr. Szabo.

Mr. Paul Szabo: We had also requested a witness from the clerk's staff on private member's business drafting, whoever was responsible for drafting this bill. Is that person available? It would be helpful to have them with the....

[Translation]

Mr. Antoine Dubé: I received an answer. I looked into it and the individual in question is currently on extended sick leave. I asked that the other person, the legislative counsel, attend the meeting, but he's not familiar with these matters. Therefore, unfortunately, we won't be able to hear from the legislative counsels. On the other hand, perhaps we could call upon a legislative counsel from another department, say Justice, or...

[English]

Mr. Paul Szabo: Okay. So we're going to hear from somebody who can give us the House perspective about this bill and its current condition. We will also hear from Finance, and that will be next week.

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I understand Mr. Dubé was hopeful that we could go to clause-by-clause before next week. If that's the case and if it's possible.... I don't believe it will be possible if we continue to call witnesses to give us testimony generally about shipbuilding and the industry, as opposed to addressing the bill. This process winds down when we start focusing on the bill rather than on the....

[Translation]

Mr. Antoine Dubé: I realize that even if we decided to do the clause-by-clause study, if the House wraps up its work on Thursday, as expected, clearly, we won't have time to finish. However, I would like to do the clause-by-clause study.

Just a word of caution to my colleague opposite and to other members. I appreciate the consultation process. However, let me just say one thing: the government that you represent made a commitment in 1993 to hold a summit the following year. It's only because I tabled a private member's bill and held informal meetings that we are now engaged in this consultation process.

Personally, I find the process slow, but that's not the half of it. All of Atlantic Canada finds the process very slow and former premier Camille Thériault blamed his recent defeat on the slow pace of the consultations. I just wanted to caution you about this. There's a political side to this issue. Thank you.

[English]

The Acting Chair (Mrs. Karen Redman): Well, I think today has been very productive.

Once again, I thank the witnesses for the benefit of their testimony.

This meeting is adjourned.