STANDING COMMITTEE ON INDUSTRY

COMITÉ PERMANENT DE L'INDUSTRIE

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, February 22, 2000

• 0901

[English]

The Chair (Ms. Susan Whelan (Essex, Lib.)): I call the meeting to order, pursuant to the committee's mandate under Standing Order 108(2), a study concerning productivity, innovation, and competitiveness.

I'm very pleased to welcome our witnesses here this morning. We have Mr. Peter Smith, the president and chief executive officer from the Aerospace Industries Association of Canada. We have Mr. Bill Murnigham, the national representative, from the Canadian Auto Workers Union.

I'm very pleased to have both of you here today. I propose we hear both of your opening statements and then move to questions. Some questions may be similar and directed to both, or some may be directed individually. If it's not directed to you and you think you have something to add, please indicate to myself, the chair, and I'll be happy to recognize you. I propose we start with Mr. Smith.

Mr. Peter Smith (President and Chief Executive Officer, Aerospace Industries Association of Canada): Madam Chair and members, thank you very much for the invitation to join you this morning. I thought I would spend just a few minutes to indicate to you who we are, what the industry is, and perhaps what some of the challenges are. I have text of what I'm about to say in both French and English, which I left with the clerk. If there are any problems, let me know and we can provide you with further copies.

AIAC is the national voice of the aerospace industry in Canada. We're happy to say we have in excess of 250 members now in every region of the country and account for about 95% of the aerospace sector sales. We have affiliate organizations in five provinces: British Columbia, Alberta, Manitoba, Ontario, and Nova Scotia. Ostensibly, we operate under five strategic councils that are chaired by board members of the AIAC, concentrating on trade, technology, supplier development council, defence procurement, and after market.

Finally, I think it's important during the course of the discussions today to also emphasize that AIAC has very close relationships with our counterpart organizations in various countries, such as the U.S., U.K., France, Germany, and Italy. So for comparative reasons, I think we can provide some evidence with respect to our comparative analysis with other nations.

Happily, I guess it's a good-news story, in the sense that aerospace in the 1990s is a jobs and growth success story. Our sales have doubled since 1993, and this year we expect to exceed $19 billion in sales output in Canada. This represents a growth rate three times faster than that of the overall GDP. Our exports account for in excess of 75% of sales. We're happy to suggest to the committee that we've contributed in excess of $25 billion to the trade surplus since 1991.

Our success relates to primarily commercial products, in that we have capabilities that are quite respected worldwide in regional aircraft, turbine engines, civil helicopters, and flight simulators. They are essentially the key products.

Our annual investment in the aerospace industry has grown by 70% to nearly $1.7 billion per year. We currently employ 76,000 employees directly, which represents an injection of 23,000 new jobs since 1993.

• 0905

Just to give you a bit of an overview of the market segments in which we concentrate, obviously the largest portion of our output is in airframes, second to propulsion. We have modest output in space avionics, defence electronics, and other. We have significant capabilities in all product sectors.

It's interesting to note that the Canadian aerospace industry is rather unique in many respects, but the one thing that makes it quite unique is that the infrastructure in place provides the supply base to what we refer to as OEMs, or original equipment manufacturers, such as Bombardier and Bell. In addition, Bombardier, as an example, basically concentrates on the 100-seater-and-below aircraft, whereas Airbus and Boeing are in the 100-seater-and-above category. So as Airbus and Boeing are fighting for market share, we happily are suppliers to both as well. The success of Bombardier in the 100-seater-and-below is quite remarkable.

This, in part, represents the success of the aerospace industry in Canada, in the sense that we are totally integrated and have the happy situation of being able to supply in a very wide global context.

Some of the things we have been successful in, as far as niche markets are concerned, are regional aircraft out of Bombardier; business aircraft—again Bombardier; commercial helicopters, such as Bell, Textron, and Eurocopter; small and medium-sized turbines, such as Pratt and Noranda; world-class landing gear manufacturers with Messier-Dowty, BFGoodrich, and Héroux; and flight simulators, of course, with CAE and Atlantis.

How we achieved the success I think is largely driven by a handful of successful prime contractors. We basically are export-oriented and have, as I mentioned, set up strategic niche markets. There's no question the Canadian aerospace industry has world-class capabilities. We've had to maintain this status through sustained investment in innovation and product services.

There is a relatively low cost of doing business in Canada, and the low exchange rate of the Canadian dollar makes it very competitive. We have established risk-sharing partners worldwide, but we also work quite effectively with government program support, such as the Export Development Corporation, CCC, the technology partnerships Canada program, and of course the SRED tax credit.

We consider the aerospace industry in Canada to be a strategic component of the dynamic knowledge-based economy. We are Canada's leading advanced technology exporter. As I mentioned, to date our exports are 75%, and we expect they will increase to in excess of 80% in the next few years.

We are an innovation leader, in that the aerospace industry represents 15% of all Canadian industrial research and development. To date, we reinvest 12% of sales in research and development on a yearly basis.

We have a highly skilled, innovation-focused, and highly paid workforce. The knowledge workers comprise a large portion of the employees because of the skill sets that are needed in the aerospace industry. Production work wages are well above those of the average manufacturing wages, and we can discuss that with my colleague from the CAW, in the sense that they are very sought-after positions in this particular area of our economy.

The technology spinoffs make our sector that much more attractive as well, in that you will find dual-use technology in spinoffs into the health, environment, security, and information technology businesses.

The market outlook, happily, is very strong, in that air traffic is expected to grow between 5% and 6% per annum for the next 20 years. You would have seen double-digit projections two years ago, but because of the Asian flu, so to speak, there have been reductions in the projections. These figures come from the IATA projections.

Fleet renewal will add to the demand for new aircraft, and we expect global aircraft purchases to exceed $1.25 trillion U.S. between 1999 and 2019. The trend to outsourcing and partnership arrangements with suppliers is creating new opportunities for suppliers who can adapt quickly. There will be a demand for related infrastructure and services, and the Canadian firms are market leaders, as I mentioned, in very select niche products.

• 0910

What then is the problem? Competition is intensifying. I need not remind this committee, because of your experience in dealing with industry, that consolidation is creating larger and stronger competitors. Canadian primes face very stiff competition in the U.S., Europe, South America, and Asia.

Changing original equipment manufacturer procurement practices are shrinking the supplier base. There's a tendency these days to consolidate procurement. Terms such as commodity-driven procurement are used, which basically means that in some cases—I can talk in some detail with respect to the impact from some of our members—as procurement is consolidated it provides an opportunity, but it also provides a challenge. Because of the small size of some of the Canadian industries, they may not be able to cope with the extraordinary opportunities that are out there without major investments in either capital, land, or labour.

The primes are also demanding fully integrated solutions, and suppliers are expected to become partners. The word “partners” is synonymous with sharing of technology and financial risks, which again, many of our companies at the lower end of the infrastructure are not capable of handling.

Canadian primes are not immune to this changing dynamic. They too shop the globe for world-class sources of supply. There are cascading impacts all the way down the supply chain; therefore, in this new paradigm, quality is a given. New competitive discriminators are a capacity to assume financial and technical risk; design system integration and project management capability; ability to significantly reduce costs over the life of the program; speed and agility in responding to new market demands; and demonstrated critical mass to absorb and accommodate the unknowns.

Most Canadian suppliers are not yet global competitors; in fact, less than 10% of our membership is export-ready. R and D expenditures, technology intensity, and technology adaptation all lag behind those of our competitor nations. Few small and medium-sized enterprises have the technical and managerial capacity and the necessary critical mass to move up the supply chain.

The status quo build-to-print model is not an option for survival any longer. There again is another challenge we find, in that it's very difficult to discuss with small and medium-sized enterprises the necessity to change, as the paradigm is changing, since over the last decade or more they have been very happily gaining in excess of 10% growth, year over year. The issue is, why change now when I've been successful?

Investment requirements to make the transition are significant and sometimes out of reach for our small and medium-sized enterprises. There is no question the Canadian aerospace industry, both commercial and defence, is very small from a domestic perspective. We are limited in the leverage for our growth; therefore we have to survive in the global marketplace.

Canada's favourable exchange rate is often a crutch to avoid investments and productivity enhancements. We have found that our aerospace industry, in part, has been successful because of these exchange rates, but we can't be lulled into complacency because of this particular advantage. Foreign governments continue to intervene with substantial investments in their respective aerospace industries.

I have a chart on how the aerospace industry is changing, and I don't think this is unique to many other sectors. In the past, you had the original equipment manufacturers who basically dealt with a base of multiple suppliers to interface with. The current platforms suggest that the systems integrator, in part, is the buffer between the supply base, which we consider tiers three and four, and what the OEMs indicate their preferred supply base is.

However, the future platforms will demonstrate, as I mentioned in this new change in procurement practices, that the discretion will be given to the systems integrator, so that someone who may have been a supplier to a Bombardier in the past, for example, will likely become a supplier to a Messier-Dowty or a Honeywell in the future, as a systems integrator. Therefore, the large change in the paradigm from procurement means a difficulty for tier three and four to cope with these particular changes and increase in capacity.

• 0915

Messier-Dowty obviously is not just a supplier to Bombardier, but is a supplier to the entire world with respect to landing gear. It's this kind of paradigm that I want to concentrate on in the sense of the issues that I think this particular committee is looking at as far as the productivity situation in Canada is concerned.

I give an example of the typical changes that have occurred, and these have occurred in very rapid succession over the last couple of months. Today, the complete landing gear for a Boeing 777—which is built here in Canada at BFGoodrich, by the way—arrives at the Boeing facility at Everett in three assemblies. About three months ago, Boeing ordered, scheduled, stored, and assembled 1,850 parts to make that same gear. You can see now the difference that is occurring at this particular level, and I can repeat from product and part the way in which this paradigm is changing.

We now need to concentrate on strengthening the competitiveness of the Canadian aerospace industry. Productivity is at the heart of today's competitive dynamic. As I mentioned, too much of the current competitiveness is linked to the Canadian dollar. Even a minor rise could threaten Canadian competitiveness in our sector. This is a factor at work across all industry sectors in Canada, but aerospace particularly is affected. Since there is significant dependence on trade and exports, the market for aerospace goods and services is indeed global. We lag behind our major competitors in productivity performance improvements, particularly at the tier three and tier four levels.

Innovation is the key to productivity growth and competitiveness. Innovation and productivity, in our view, are inextricably linked. Investing in innovation capacity is critical to strengthening Canadian productivity and competitiveness as the engine of growth for our economy. The status quo won't take Canada far in the global knowledge-based economy. Today, the growing innovation gap threatens our economic future. We lag behind our competitors in R and D spending and in the adaptation and diffusion of new technologies.

We need an innovation agenda for Canada. We consider it to be the engine of productivity and competitiveness. How can we stimulate this? With higher levels of R and D investment; a continuous drive for improved processes like lean manufacturing; quality initiatives like six sigma, ISO 9000 certification, and other programs that I'm sure you're familiar with.

We need to increase Canadian firms' capacities to invest in technology and innovation; promote and facilitate collaboration and partnering in technology development; establish key centres of excellence; strengthen university research capabilities and university-industry linkages; and enhance small and medium-sized enterprise access to patient capital necessary for innovation investments.

Finally, we need to attract the best and the brightest to graduate studies in science and engineering and keep them here in Canada after graduation.

In our opinion, the action priorities for the innovation agenda are bold and decisive leadership: to build a new culture focused on wealth creation and not wealth distribution and on innovation and productivity growth; and to create new incentives to invest in innovation and growth opportunities. We have also made representation to the finance committee with respect to tax cuts—corporate, personal income, and capital gains—which are essential to creating these incentives.

We need strategic investments in education, research and development funding, and infrastructure. Again, we've made representations to many of the committees, wherein industry in Canada, and particularly the aerospace industry, reacted positively to the government's agenda with respect to partnership. In our view, that partnership meant investment. We have already invested over $15 million each in the National Research Council engine test facility and the advanced manufacturing facility. We're now awaiting the government's contribution in kind in order to get these two facilities going, because they will be available to students in university, and certainly the output will be available to the industry in the future.

We suggest the removal of structural barriers that are unnecessary regulation, and particularly provincial trade barriers. On the international side, I'd be more than happy to discuss the current problems we have with the United States on an issue called ITAR, the international trade in arms regulations.

• 0920

We need to ensure that procurement policies and programs promote an innovative and globally competitive industrial base.

And finally, the innovative and creative use of outstanding offset obligations—which this committee may have had an opportunity to explore—should also be looked at as a potential opportunity to increase the innovation agenda in this nation.

Thank you very much.

The Chair: Thank you very much, Mr. Smith.

We're now going to turn to Mr. Murnigham, from the Canadian Auto Workers. He's the national representative.

Mr. Bill Murnigham (National Representative, Canadian Auto Workers): Thank you to the committee for inviting us here to make a representation. Just by brief introduction to the CAW, we are the country's largest private sector union, and we're the key union in the auto industry. Also, as Peter mentioned, we have membership based throughout the transportation equipment sector, with up to 100,000 members in auto assembly, parts, and aerospace, and the truck and bus industries as well.

What I'd like to do this morning is go through and draw from a paper that was recently presented in Ottawa by a colleague of mine, Jim Stanford, at the Centre for the Study of Living Standards. This paper looked at productivity issues, and it has been distributed to the committee. I believe it has been left with the committee for translation in the future. The title of the paper is “A Success Story: Canadian Productivity Performance in Auto Assembly”.

So rather than going through a really formal presentation, what I'd like to do is draw from that study, both about the performance of the productivity in the industry in Canada—what the reasons are behind that productivity success—and what it might mean for policy development now and in the future.

To touch briefly on the performance of the auto industry, as mentioned, it has been a success story throughout this last decade. In terms of simple measures like jobs, 35,000 high-paying jobs have been created over the decade in the industry, 30,000 of which are in the parts industry, with 5,000 in assembly. In terms of a trade surplus, it contributed $10.7 billion in 1998—for which we have the most recent figures for trade—and accounted for half of Canada's merchandise trade surplus in that year, and that continues.

As the committee is working forward on the issue of productivity, I'm sure you're starting to recognize that it's an incredibly complicated issue. It's complex in terms of talking about productivity, measuring it, and trying to disentangle some of the elements that lead to high productivity. What I'd like to do is go through some of that in the industry, take a look at some of the measures about productivity, and separate some of the differences between growth in productivity and the actual levels of productivity. I think those are two of the most key confusing factors in dealing with productivity issues.

When we look at the productivity performance of auto assembly in Canada, what is really quite remarkable is that it is one of the handful of some of our higher-value industries in Canada that actually have higher levels of productivity than the United States. In terms of one of the most basic measures, which is real value added per labour unit, over the last dozen years productivity in Canada has shot up by 57%, while it has actually declined slightly in the United States. Again, that talks about growth, but not absolute levels.

In terms of other aggregate statistics at the industry level, Industry Canada studies have suggested that the decade of the 1990s has been an important one for productivity enhancements in Canada. A recent study by Industry Canada pointed to higher manufacturing productivity, in the area of 7%, throughout the 1990s.

When we're talking about levels of productivity in Canada versus those in the United States, things are always confused by exchange rates—something Peter talked about a minute ago—when we're trying to look at those levels. When you examine a range of different assumptions on exchange rates, though, what you'll find is that, regardless, the productivity in Canada has been 15% higher on average than the United States in the auto assembly industry.

When you look at the aggregate statistics, before the decade of the 1990s, it was quite commonly understood that productivity in Canada was lower than in the United States, and growth levels had also been lower. The 1990s were a decade when we saw a reversal of that. Growth levels shot up in Canada and the actual levels of productivity surpassed those of the United States.

Interestingly, again that was at the aggregate level. When you look at another source of information on productivity in the assembly industry—that being the industry's own statistics produced by Harbour and Associates, a consulting firm in the United States—that information goes into things in a very detailed way. The Harbour report is quite a unique opportunity to look at productivity plant by plant, examining hours worked and the number of workers per vehicle. Again, those statistics and the most recent data show that Canada has a 13% productivity advantage over the United States in the assembly of cars, and a slight disadvantage in the assembly of trucks, including things like minivans and sport utility vehicles. But on whole, when you add it all up, there is again a 6% productivity advantage in Canada from those measures.

• 0925

Just as terms of reference in terms of productivity, Mexico is 60% lower in productivity than Canada. Although it's gaining fast, Mexico still has a long way to go when you look at labour productivity.

So that talks about absolute levels. Again, echoing what we've seen in the more aggregate studies, the Harbour industry studies show that the absolute growth of productivity from 1992 to 1998 has gone up by 26.5% in Canada versus 18% in the United States. That is again echoing what we've seen in other types of measures. The conclusion is that no matter how you measure it, whether you look at the aggregate level or whether you look at it on a plant-by-plant basis, two things can be observed about productivity success in Canada in the auto assembly industry. One is that we've had higher growth throughout the decade than has been experienced in the United States. The other one is that levels of productivity are matching or exceeding those in the United States currently. The questions for policy-makers, then, are why, and what lies behind that success in the industry?

It often becomes complicated to untangle the self-reinforcing cycle of productivity that a lot of people talk about. I'm sure the committee is grappling with that. Strong productivity in any industry leads to export competitiveness and output growth, which of course attracts strong investment, and investment leads to higher productivity. We have a virtuous circle of productivity that continues, and it becomes a little bit difficult when you're trying to tease out which factors led to what. Some have referred to it as a chicken-and-egg kind of question, but what has become clear in looking at the Canadian example—and I would highlight these for the committee—are four factors that have led to this productivity success in Canada.

The first factor is fixed capital formation. What we mean by that is the attraction of investment not in speculative interests but in the actual purchase of equipment and machinery. Canada had an unprecedented record in the auto assembly industry throughout the 1990s, attracting an average of $3.5 billion per year, which is a much higher level of investment than was even witnessed during the last run-up in the eighties in the economy.

The relationship of fixed capital formation to productivity enhancement is quite straightforward. You buy new equipment, you buy the latest technology, and productivity in the industry increases. That's what we've seen in Canada throughout the 1990s. One by one, virtually every auto assembly plant in the country has been retooled or has seen a major investment in new equipment. Also, along with that have often come changes in work practices and working relations. So that's one of the key elements behind productivity.

Another one is cost competitiveness. Again in the 1990s, in terms of cost competitiveness in Canada, and particularly in terms of labour costs, we received more investment in good times and less job loss in bad times because of our cost competitiveness. Several studies, including some from Industry Canada in 1998, cite that labour costs in Canada are 30% lower than those in the United States on a common currency basis. Although the lower dollar certainly has helped—and this is something that has been raised before—a significant portion of that productivity advantage comes from health care in particular in the auto industry. The U.S. manufacturers are facing incredible costs to provide health care in the U.S., whereas Industry Canada cited that this counts for $4 of the labour advantage in Canada. About a third of the overall labour cost advantage comes from our health care system being shared across a broad base of taxpayers. So the cost competitiveness feeds into and encourages investment. That's something we've seen, and it's one of the key factors to highlight.

Union representation is another factor. The auto assembly industry is 90% organized and has been for quite some time, and organization is at 50% in the parts industry. In the United States, there are similar levels in the assembly industry, with very high levels of unionization. In the parts industry, it has dropped to about 20%. But again, it's a highly unionized environment. And in terms of basic economic theory that says if a union is successful in bidding up labour costs and putting some pressure on wages, the reaction of industry is obviously to seek productivity-enhancing investment to reduce labour costs, this is something that's happened throughout the Canadian automotive assembly industry—and I'd argue in other industries like aerospace as well—that has been one effect of unionization.

• 0930

The other one, of course, has been the CAW strategy. We've taken a very guarded strategy at times over the decade in dealing with productivity enhancements, and we've taken an approach that says we need to protect our members, but we haven't done that at the cost of allowing corporations flexibility. Where we've seen very good success in that is in places like Windsor, where we negotiated new shift-scheduling arrangements that allowed the corporation flexibility, but also did not threaten the livelihood of the members. So the active strategies of a union in this industry, I would argue, have helped and encouraged the productivity cycle that I mentioned earlier.

The fourth point I'd like to raise is trade investment policy, something that's back in the news again today. The Auto Pact from 1965, which allowed for a regulated but free exchange of auto parts and assembly, was a real driver, an engine for the creation of Canada's auto assembly industry, and while it has not been a direct issue in the 1990s—the Auto Pact says that corporations have to build as many cars in Canada as they sell in Canada—the auto companies had been exceeding those requirements for some time.

I think we should reflect on the fact that the Auto Pact allowed and encouraged investment throughout the eighties and nineties and throughout rounds of changing trade regulations under free trade and NAFTA, where the Auto Pact was maintained. Having a regulatory environment overseeing the industry helped to encourage investment and spur on the Canadian industry.

Recently the WTO ruled that the Auto Pact violates portions of the international trade rules. The federal government has announced that it will appeal this decision, and there are very good reasons to do that. I'll touch on some of those just very briefly, as an aside.

Currently, there's tremendous overcapacity in the global industry, and that can pose a threat to Canada's industry in the long term. Other countries maintain significant tariffs, including the European Union and the United States. Also, Canada is being targeted currently for exports from Asia, as the Asian flu persists and may be downgraded to an Asian cold. But Canada is still being targeted for exports. I won't go too far into that, but there are a lot of good reasons for the government to appeal in full the WTO ruling.

As we can see, one of the factors that has led to high productivity in Canada has been an active trade and investment policy, and in the longer term, beyond keeping a basic tariff structure in response to the WTO ruling, the Canadian government policy-makers, along with companies and other players in the industry, would be wise to consider other means to encourage investment in the industry.

So in those four points, really, I've touched on what the productivity success has been in Canada and some of the factors that have led to it. The big question then for policy-makers as they're heading forward with the work of the committee is what this means for them. I think it leads us to two assumptions.

One is possibly to rethink some of the basic assumptions that we're hearing these days about what causes productivity and how to enhance it. The other is to revisit and see a clear role for government in industry regulation and direct involvement.

On the first issue about rethinking some assumptions, it's quite surprising that it's been such a success story on productivity in Canada, given the current emphasis and talk about productivity and things like pro-market reform, such as deregulation, labour market flexibility, and even tax cuts. In fact, when you look at it, the auto industry is one of the most regulated in the economy. Producers and sellers face a whole range of government intervention on issues like trade, safety, and the environment.

Contrarily, it has been our experience, anyway, that the low dollar has not been a crutch that has protected a weak industry, but rather has encouraged investment and allowed that investment to spur on productivity.

• 0935

Again, on the issue of tax cuts, the socialized medicine that has been supported by higher average taxes than in the United States has actually supported productivity in Canada rather than been a detriment.

So according to some of the traditional free market thinking we've been hearing—and I'm sure the committee has been hearing this over the era, over its work—there would be a suggestion that the auto industry should be a productivity disaster. And quite to the contrary, the reality is it's been one of the brightest performers in an otherwise disappointing decade for the economy.

The second issue, of course, is what does this leave for policy-makers? I think it's quite important that policy-makers not simply suggest that the success should mean the industry should just be left on its own to proceed at its will. Rather, when you look at some of the factors that have led to its success, it leaves a very clear role for government involvement in the future.

There are a number of threats on the horizon in the longer term to the Canadian industry, some of which I've mentioned.

The Canadian dollar exchange rate leaves a certain amount of vulnerability to the industry in the longer term. The industry in Mexico, while productivity lags significantly, has been growing, and Mexico recently signed a new trade deal with the European Union that will certainly spur more investment in their auto industry. That is again an example of a trade deal bringing in investment and helping productivity.

Also, the Asian crisis continues to some extent. Canada is being targeted for excess imports from Japan, and Korea is looking to expand its productive capacity significantly in the next several years.

So there are a number of things on the horizon that would suggest that it may not be in the longer-term interest to the industry to simply abandon a role for government regulation or policy-making.

As I mentioned, in the past, careful craftsmanship helped develop the success of productivity, and now, as we look forward, there's clearly room for timely and effective policies and strategic choices by government, companies, workers, and their unions—which have been critical to success and which have now left us with an important legacy of jobs, incomes, and exports for the Canadian economy. As we look forward, we should concentrate on refreshing and updating the tools and active strategizing that will be important to the future success of the industry.

Thank you.

The Chair: Thank you very much, Mr. Murnigham.

I'm now going to turn to questions. Mr. Schmidt.

Mr. Werner Schmidt (Kelowna, Ref.): Thank you very much, Madam Chair, and thank you, gentlemen, for appearing.

I think it's always educational to listen to the perspectives you bring to the table from your respective backgrounds.

What I would like to do is perhaps try to clarify the apparent contradiction that exists between the two presentations.

On the one hand, we have the Canadian dollar encouraging, perhaps, the export of a lot of our vehicles, particularly in the aircraft manufacturing industry, and at the same time being a contributing factor to the productivity of the industry. Yet we have other people who are saying very clearly that it's the Canadian dollar that is actually discouraging industry from investing in some of the new equipment, and having certain old or ineffective practices continue simply because they don't have to compete—the Canadian dollar makes up the competitive element.

So I wonder if both of you could address that question.

Mr. Peter Smith: Perhaps I can start. I don't see a contradiction in what has been said, either by my colleague from the CAW or perhaps in some of my comments, other than perhaps to indicate that we are fearful that if there is overemphasis on the attractiveness of the Canadian dollar, it could have a significant impact on productivity. At this moment in time we are taking full advantage of the difference in the exchange rate, and as my colleague has mentioned, I think labour rates alone, taking into consideration the exchange rate as one factor, can certainly be an attractive issue for Canada, both in the automotive and aerospace industries.

However, if that is the only indicator of productivity, then I think we have a sorry state of affairs. I believe that, once again, both in the automotive and aerospace industries, the investment in capital formation has in fact been the leading contributor to our increased productivity in both sectors, which we're representing this morning.

• 0940

So Mr. Schmidt, if you are talking to industry and they are saying categorically that that is the single most competitive advantage, then I would say be very careful, because of the volatility of the exchange rate. Today we're talking about 35¢ to 40¢ on the dollar. It's predictable with respect to the elasticity of whatever we think the tolerance would be. However, if there are major shifts in that, then all of a sudden you are taking a look at your comparativeness with the U.S., direct dollar to dollar, or with Europe, Euro dollar to Canadian dollar. To me, it's foolhardy to think we would be as competitive, if not more competitive, on an equal basis.

Mr. Bill Murnigham: Yes, I would agree and echo a number of the points raised by Mr. Smith. There's a lot of commentary on what comes first and the causality of the impact of the low dollar on Canadian industry. It has not been the experience of one of the key industries in the Canadian economy, that being the auto industry and its related parts and the rest of the chain down the path. It has not seen that experience.

In fact we are in the unfortunate situation of having a number of more detailed productivity measures that look at the levels of productivity. Forgetting the dollar for a moment, some of the studies in the auto assembly industry suggest that if you are even on the same currency basis, productivity levels, at least in the area of labour cost and labour productivity, meet or exceed those of the United States. So it hasn't necessarily been the experience, but I would agree with Peter: treat with caution people raising the issue as the single most important concern as we move forward in talking about productivity.

And you'd have to treat with caution as well.... Industry does not invest simply on the speculative value of a few cents one way or another on a dollar. They look for very long-term investments. When you're building a new facility or a new capacity, they're looking five, ten, or more years down the road to really realize the full impact of that investment. I'm certain that as the decision-makers are moving forward with investments into Canada, they cost out a range of assumptions around the dollar and then factor those in, and they're still investing in Canada.

It is an issue. It is something to pay attention to and understand. But again, I wouldn't overemphasize the value of that.

Mr. Werner Schmidt: Well, no, I certainly didn't want to overemphasize it, but I noticed you made it a major point, and so did Mr. Smith, in the presentation. I don't think we can ignore that. It's not a determining factor in an absolute sense. It's not the only one. I'm certainly well aware of that.

I'd like to move into a totally different area now: research, and research and development in particular. Both industries, particularly the air industry, are very much involved in innovation and research. When you do these kinds of things, what should the role of government be in terms of research and development? A lot of this is very industry specific and is an element in the very competitiveness and, for sure, in the productivity. But is it the role of government to do this, or should industry do this? What is the relationship between government and industry in developing research?

And should it be done in Canada, or should research be done in other countries that are perhaps more capable in terms of research? Should we perhaps, in the global market, recognize, “Hey, just a minute now. We're really good at this part, Germany is really good at that part, Japan is good at that part”? Ought we to enter into that kind of partnership?

Mr. Peter Smith: Perhaps I can start the response representing the aerospace industry. There is categorically, in our opinion, a very definitive role for the government to invest in research and development in partnership with the aerospace industry. I say that because, number one, the return on investment is quite significant. I think if you have an opportunity to see any of our publications, you will see that even the modest investment of the only program the Canadian government really has in assistance to the aerospace industry, the technology partnerships Canada program, is totally repayable. I know there are all kinds of skeptics and critics out there who have indicated this particular program has been to the advantage of larger companies, such as Bombardier, Pratt, and CAE. The unfortunate part about it is that those persons don't take the time to take a look at the comparative analysis, as I mentioned, with other countries.

• 0945

Canada unfortunately has, number one, such a small domestic market and, number two, an insignificant defence market, that in order to compete in the aerospace industry, most of the products that come to fruition in a commercial sense have come out of the research and development of the military aerospace market. Therefore, in the United States, for instance, when you see such large defence budgets that are developing their fighter aircraft, all the associated technology, from the engine propulsion, through to the airframe and the landing gear, can find its way into the commercial marketplace with the advantage of not having to pay the non-recurring costs. Therefore, once a company is in the defence business in the United States and can transfer the technology into a commercial application, the price competitiveness is very different from that of a Canadian company, which is developing from start to finish without having the advantage of developing for another marketplace.

So Canada has been successful in this regard. We are quite happy with the government's ability, through some very tough times, to provide continual support to the aerospace industry through the technology partnerships Canada program. And there are other programs, like IRAP and TPC, and now some funding through NSERC.

The difficulty, Mr. Schmidt, I think in trying to explain this is that most people would look at it in such a way as to say “Mr. Smith, you tell me your aerospace industry has been so successful over the last decade, so why the hell should the government be providing financial assistance?” The fact of the matter is that it is truly as a result of the investment in research and development. If you take a look at our track record, Bombardier, as an example, have had one new product release every year for the last eight years. From the Global Express, to the Dash 8 400, to the regional jet—all of these are absolutely essential to ensure you have the range of products that fit those niche markets.

So if you don't have the research and development, you don't have the competitiveness advantage. I would say they are inextricably linked. The federal government, in this particular case, needs to continue to invest in research and development to sustain that growth.

Mr. Bill Murnigham: Yes, I would concur that there is a very clear role, a continuing role, for the federal government in supporting R and D. In terms of talking about it from the auto industry perspective in particular, there is a slight difference, I think—and I'll talk about it for a moment—between say the aerospace industry and the auto assembly industry.

In the auto assembly industry, the fact of the matter is that we're very dominated by a U.S.-based industry. So encouraging R and D investment in Canada for corporate entities that have such a large home base in the United States has been an ongoing difficulty in the assembly sector. But that does not mean there haven't been successes. There are some successes in the Windsor area in facilities joining with universities and creating hothouse ideas for technology development.

But again, I think when you look at the history of say, for example, even the aerospace industry, the support for R and D has been very much one of those success stories of capacity-building, where rather than being linked to an industry that is home-based somewhere else, the aerospace industry in Canada, at least parts of it, are very homegrown.

Perhaps Mr. Smith would comment further on that, but I would suggest it has been an incredible success story. The dollars invested versus what we get out of it at the end has clearly been a key factor in driving and creating this highly productive industry.

• 0950

In terms of where the future would go, in particular continuing support, while there are some structural problems in encouraging R and D investment in the assembly sector, Canada's parts assembly industry is in a different boat. We've seen a changing relationship. Whereas 20 or 30 years ago Canada imported most of its parts on the whole from the United States and assembled the vehicles here and returned those vehicles to the United States for sale, Canada has seen the development of an incredibly dynamic parts sector that has grown at an incredible pace, and it's very homegrown and has benefited from R and D support.

So again, there are some structural differences in the industries, but there's clearly a role, and there's a track record of success in support for R and D.

The Chair: Mr. Smith, do you have something more to add, briefly?

Mr. Peter Smith: I simply wanted to add that the government was forced, during the program review process in addressing the deficit, to cut a program called the defence industry productivity program back in 1995. There's a direct linkage to the amount of research and development that has been done since then and during the period in which the program was not accessible to the industry.

In fact it sadly is indicated that in the year in which that program was not available to industry, the aerospace industry in particular, the value-added of the Canadian aerospace industry, decreased from 66% to 54%. This meant that the industry was searching the world for available funds to continue the research and development that would be necessary to have the product releases that we have spoken about. That's gradually correcting because of the increase in the technology partnerships Canada program that the government addressed last year. But I can indicate to you that you can't remain complacent, particularly in our industry, because your competitors are continually releasing new products. So unless there's some way in which there's a linkage between research and development in country to that of the releases of products, then obviously there's a problem that would have a serious impact on the aerospace industry in Canada.

The Chair: Mr. Penson has a point of information.

Mr. Charlie Penson (Peace River, Ref.): Mr. Smith, in order to help the committee, can you tell us what share of R and D spending the aerospace industry spends comes from government as opposed to the industry itself?

Mr. Peter Smith: Very insignificant. Probably at the most about $1 of government money would lever about four and a half dollars of industry money. If you're looking at the TPC funding itself, it's about one to four and a half. The reason for that is that it's regulated by the World Trade Organization, which basically suggests that nothing in excess of 50% of the product development fund should be funded by government. So in Canada's case there hasn't been a situation, to my knowledge, in the aerospace industry where it has exceeded 30%. But for the most part it's one to four.

The Chair: Thank you, Mr. Smith, Mr. Penson.

Mr. Malhi, please.

I would ask members and people answering questions to try to be a little more succinct. We're going to run out of time here.

Mr. Gurbax Singh Malhi (Bramalea—Gore—Malton—Springdale, Lib.): Thank you, Madam Chair.

Mr. Smith mentioned in the report how we achieved success by a low cost of doing business in Canada. If they are doing that, why is part of the industry moving their operations to the United States?

Mr. Peter Smith: Very simply, it's a trade barrier called the international traffic in arms regulations that will not permit, as a result of changes that occurred in April 1999, technology or technical data coming north to be worked on, to be worked on here in Canada. So the way in which it can be successfully achieved, to continue the business, is to move the facility down to the United States to form a joint venture.

Mr. Gurbax Singh Malhi: Is this the same reason they award some contract to other foreign countries?

Mr. Peter Smith: To other foreign countries?

Mr. Gurbax Singh Malhi: Yes.

Mr. Peter Smith: No, that's a slightly different situation. For instance, if you take a look at the wing for the Global Express, which is being built by Mitsubishi in Japan now, that was really as a result of the Japanese government deciding that they wanted to invest heavily in the aerospace industry. They paid the entire development cost for the wing, which is the most technical aspect of the aircraft.

• 0955

Mr. Gurbax Singh Malhi: Second, do you feel the Canadian education system is providing the aerospace industry with properly skilled and knowledgeable workers?

Mr. Peter Smith: We have a first-class education system. The problem is we just can't get enough qualified people who have the experience necessary. As you can imagine, when you take a look at the growth and the rapidity of growth within our industry, we are accommodating as many of the graduates as we can, but we need also to complement that with experienced people.

The difficulty is that when we provide advice and assistance to the education system to churn out people, we also have a problem of being cyclical in nature. So by the time you have an aeronautical engineer, after four or five years, chances are you may be in a bit of a downslope.

So we're trying to have a modest involvement with our education system, which is providing excellent individuals with capabilities that we maximize. But we have to complement that with import of talent from other countries that may be experiencing difficulties. The combination of both is a very happy story in that 23,000 were engaged over the last four and a half years alone.

Mr. Gurbax Singh Malhi: What do you think government or the industry can do to encourage the people here in Canada, instead of bringing foreign skilled workers here?

Mr. Peter Smith: We have lost a considerable number of workers we perhaps would not have lost in respect of being attracted south of the border, for several reasons. The first is that Boeing, when it was in its upswing of production, aggressively went through Canada recruiting. People are genuinely attracted to higher wages in the United States, and particularly the higher exchange rate, and lower taxes. In both of these cases, we have lost, as has the IT field lost, considerable numbers of people to the U.S.

That's something people have to recognize, what the value of life is in Canada and that of the United States. We have suffered some losses. Some have come back, but in order to sustain the production levels we've had, we've had to attract people from abroad.

Mr. Gurbax Singh Malhi: What percentage of Canadian aerospace industry production is sold domestically in Canada and what percentage to the foreign market?

Mr. Peter Smith: The very modest amount of 20% is in both our commercial and military market domestically right now; 80% is exported.

Mr. Gurbax Singh Malhi: Can you identify how many other Canadian industrial sectors benefit from the operation and production of the aerospace industry?

Mr. Peter Smith: There are at least three or four others. Certainly, as I mentioned in my presentation, there are dual technology uses in health care. Automotive has a very complementary technology in the sense of aerodynamics and speed, and certainly on the environmental side as well. There are all kinds of opportunities on the electronics and the avionics side that get into domestic products.

Mr. Gurbax Singh Malhi: Thank you.

Mr. Peter Smith: You're welcome.

The Chair: Thank you very much, Mr. Malhi.

[Translation]

Mr. Dubé, please.

Mr. Antoine Dubé (Lévis-et-Chutes-de-la-Chaudière, BQ): When we look at the figures you gave us this morning, Mr. Smith, we can see that since 1993 sales have doubled, the growth rate is three times higher than Canada's average GDP and 20,000 jobs were created. The increase in jobs doesn't seem to have followed the other two indicators. Why? Is it because of technology?

[English]

Mr. Peter Smith: You're very right in your observation that there is no direct relationship between employment growth and that of our sales. It's attributed to two factors. The first is that there have been introductions of increased productivity enhancements through capital investments in the aerospace industry.

• 1000

The other major difference, as I mentioned earlier, is that in the years 1995 through to 1999, the Canadian value-added in the aerospace industry diminished from 66% to 54%. So although we were selling product, it wasn't necessarily made in Canada. That, therefore, had a tremendous negative impact on employment growth.

[Translation]

Mr. Antoine Dubé: Among the action priorities for innovation you've identified, you mention the importance of decreasing corporate and individual taxes as well as taxes on capital gains. Could you be more specific as to what you're looking for?

[English]

Mr. Peter Smith: We made a presentation to the finance committee with respect to its deliberations prior to the budget, which will be next week. Our primary concern was the anomaly associated with personal taxes with respect to where the various thresholds are in comparison with those of the United States. We hope there will be some reduction in the personal income tax rate.

Corporate income tax in Canada is slightly higher than that of the United States, and we are simply indicating that in the aerospace industry in particular, it's not commonly known but about 60% of our companies are foreign-owned subsidiaries operating in Canada. For the most part, they're U.S.-owned. Therefore when their chief financial officers look at the returns on investment in one country versus another, it's quite obvious, compared to many other sectors. We are simply saying that the amount of trade going on between the United States and Canada makes a fairly rational case for trying to harmonize our taxes, both corporately and personally, on a percentage basis.

[Translation]

Mr. Antoine Dubé: On the last page of your brief, you mention provincial barriers to trade. I'd like you to be a bit more specific on that also.

[English]

Mr. Peter Smith: We find it absolutely bizarre that there are so many barriers between provinces in Canada, from both a labour and a product and tariff perspective. We have the experience of working globally, selling to 54 or 55 countries worldwide, and oftentimes it's easier to transport goods and services to those nations than it is to go between provinces here.

We have encouraged Minister Manley and his counterparts and the premiers to try to break down those barriers. Quite frankly, this country has just tremendous potential for further growth, but we have various barriers that have grown up over time that have become impediments to that growth. We should do anything we can to encourage further mobility of people and skill certification.

We worked with the Canadian Auto Workers with respect to the Canadian Aviation Maintenance Council and the certification of maintenance workers, so they can move from Newfoundland to B.C. on a common denominator. We need to encourage much more of that. The smoothness with which both people and product can move across this nation will be a tremendous improvement in our productivity.

[Translation]

Mr. Antoine Dubé: I'd like to put a last supplementary question even though it might be delicate. Have you observed greater difficulties in some provinces than in others?

[English]

Mr. Peter Smith: I don't have any difficulty in answering those questions. I didn't mean to suggest there were any more difficulties in the province of Quebec or the province of Ontario. There are barriers within the provinces, and I think the first ones I've seen happened in the brewing industry. There's a much easier way of selling beer south of the border than there is across provincial borders. I wouldn't finger any one particular province over another.

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[Translation]

Mr. Antoine Dubé: Could you tell us more about your sector in particular?

[English]

Mr. Peter Smith: The issue is more in relation to the transport industry and whether there are ways and means we can ensure the ease of transport of product between provinces, and more particularly people.

The Chair: Thank you very much, Mr. Dubé.

Mr. Murray, please.

Mr. Ian Murray (Lanark—Carleton, Lib.): Thank you, Madam Chair. We are pressed for time so I'll try to keep this brief. I have one question. Unfortunately, it's for Mr. Smith again. We're giving him a real workout this morning.

I want to look at the question of managerial capacity. You mentioned it when you were talking about Canadian competitiveness at risk. We've already heard that productivity improvement is more a problem in small enterprises than in large enterprises. Now you have this model of changing OEM procurement practices, which is well underway.

When we look at the idea of having a systems integrator in the middle in your future platform, as you've put it in your chart, do you see that as an opportunity for Canada, or do you see that as a huge risk factor? Do you see any companies in Canada that might be able to shift into that and become very successful?

Mr. Peter Smith: It's a tremendous opportunity for Canada. I certainly agree with you that one of the concerns is the managerial prowess of our small and medium-sized enterprises. It's one of the things the association is very actively engaged in. There's not much point in creating any more tier twos at this time, because by the time you create them and assemble them domestically, it'll be too late.

What we need to do—and what my presentation was suggesting—is use innovative ways to attract the capability of a tier two from other nations, to work in concert with our Canadian companies and consolidate them. We've seen the consolidation of the tier one, the OEM, and in many respects at the tier two systems integrator level. The challenge will now be the consolidation into a much larger critical mass of smaller clusters of small and medium-sized enterprises, to complement the way OEMs wish to operate.

There's no question the smaller the number of interfaces there are, whether it's paper or people, the less cost it'll be. They're just forcing that right down to the supply chain. We have a tremendous opportunity, but it is a challenge.

Mr. Ian Murray: Do you see a role for government in that? Is there some reward, for example, if larger corporations have a very intensive supplier development program, although that's obviously in the interests of that large corporation?

Mr. Peter Smith: Industry Canada worked in concert with the association to identify these problems in a jointly funded study that was released last year. We are currently working with them, in the sense that there are ways and means in which the technology partnerships Canada program can be levered to be on what we have seen in the sense of research and development. But technology transfer of a tier two from another foreign nation into Canada, superimposed on a cluster of companies, can qualify in the sense of supplier development.

We expect to have probably six or eight recommendations available for addressing in both an industry and a government context by the summer. We'll be working with John Manley and his officials to implement those.

Mr. Ian Murray: Thank you.

The Chair: Thank you, Mr. Murray.

Mr. Penson.

Mr. Charlie Penson: I would just like to follow up on the TPC and where that's going with regard to the rulings that were made by the World Trade Organization.

Mr. Smith, you addressed it by saying there were some limitations on how much R and D could be pumped in. It seems to me that area at the World Trade talks will be increasingly under pressure, as people tend to see that as an indirect subsidy. It's the same with the Export Development Corporation's financial arrangements in terms of credit.

I wonder how wise it is to build a significant portion of that industry based on those kinds of policies when they're under that kind of pressure. You know better than anybody the Brazil-Canada fight with regard to aircraft subsidies and where the fallout is there. I suspect it's not finished yet.

• 1010

You were telling us earlier that the amount of R and D spending that comes from government as opposed to industry is 25% to 30%. Maybe I got this wrong, but that's what I gathered. You said that was rather insignificant.

Mr. Peter Smith: Compared to other nations, yes.

Mr. Charlie Penson: I think a lot of people would suggest that it's not insignificant from a taxpayer's point of view.

Mr. Smith, I can understand a homegrown industry like Bombardier, but what about giving this to companies like Pratt & Whitney, which can use it? Wouldn't you expect that they would do their research in their home-based country? If you subsidize research to them here, where are they going to use it? Will it stay here? Will it be used in other places? Are we indirectly subsidizing a company that's going to maybe take jobs elsewhere?

Mr. Peter Smith: Let me answer a couple of the questions. The first is that I want to make it quite clear that the practices of the World Trade Organization make it fully permissible for any country to subsidize its aerospace industry. Categorically it is—

Mr. Charlie Penson: That's what they told us before, the last time.

Mr. Peter Smith: No, it's quite clear. The issue that has been under contest is that any subsidy to any industry, the aerospace industry in this case, cannot be contingent upon export.

The reason the TPC program was found to be non-compliant was the inability for us to provide information that was not commercially confidential. Therefore the panel came to the conclusion that the money that was being suggested as part of the research and development funding was in fact export contingent. As I mentioned to you, we take great pride in saying 80% of our product is exported. So they came to that actual conclusion. But that has been changed.

Mr. Charlie Penson: Mr. Smith, I'm sorry to interject, but we're short of time. I agree with that, but you do realize that the goal of the original GATT and the goal of the World Trade Organization was to try to eventually get rid of subsidies and tariffs worldwide. There's a move to generally try to phase them down. That's what I was suggesting to you.

Mr. Peter Smith: I agree with that, sir, but the other factor I think you're missing is that in the aerospace industry in particular, as I mentioned, the R and D generates its non-recurring advantage through military programs, which we do not have. If you have countries like Canada working in the aerospace industry, you have to be able to offset the inability to do R and D outside of the defence industry.

To answer the point about Pratt & Whitney, big Pratt & Whitney out of Connecticut versus Pratt & Whitney Canada are entirely different businesses because of the thrusts associated with their aircraft. The PT6, which was born in Canada for the general aviation field and the variance it has, is a different class of thrust from what you would ever see out of the United States, who are basically providing aircraft engines for the 100-seater and above. The technology of the 100-seater-and-below and that of the 100-seater-and-above are miles and miles apart. You don't see the seepage of technology certainly from a Pratt Canada to a big Pratt because you're talking 15,000 thrust as opposed to 4,000.

Mr. Charlie Penson: That's true, but you did suggest earlier that the technology that was developed out of the defence industry contracts was pertainable to commercial.

Mr. Peter Smith: Pratt & Whitney Canada has opened up a facility in the United States to take advantage of the funding from the Department of Defence for the production of a trainer aircraft called JPATS, which can be applied in a Canadian context in the various leagues for which they are marketing. You will not find the technology going from Pratt Canada to big Pratt Connecticut, but you will find technology going to both sides of the border on the basis of military programs.

The Chair: Thank you very much, Mr. Penson.

Mr. Cannis, please.

Mr. John Cannis (Scarborough Centre, Lib.): Thank you, Madam Chair.

Thank you, panel, for a most interesting presentation. I had some questions, but because of the questions from my colleague I simply have to make this comment.

I found it quite intriguing when he commented that we should not invest. I'm glad you pointed to the one before. Contrary to what the masses, the numbers out there, think, which is that government funds almost 80% to 90% of the research that is done out there....

I find it quite strange that the comment was made that if we subsidize a foreign company like Pratt & Whitney, to use that as an example, to do the R and D abroad, then what we would become here as a country is maybe assemblers. There is no technology, in my view. There is no brain retention. This is the statement I want to make. And that's when we're really going to lose our scientists if we don't invest.

• 1015

A voice: What about the auto industry?

Mr. John Cannis: In the auto industry General Motors would not have invested $58 million to do work here.

I want to address a question to Mr. Murnigham. You mentioned our health care system as being one of the reasons we have a competitive edge. Perhaps you could elaborate on why that gives us a competitive edge. As you know, discussions are going on across our country about restructuring it. Give me your comments on that.

Mr. Smith, in your presentation you refer to patient money, and you commented on SMEs. One of the things I have heard from people on the street is their difficulty in securing capital to improve. What do you think we as a committee could do? How can we overcome some of these barriers?

I know we're concerned about time, Madam Chair, but I want to say how pleased I was to hear some of the statistics in terms of our competitive edge and our productivity edge with regard to Canada, the U.S., and Mexico, which you outlined, Mr. Murnigham.

In closing, both of you talked about the Canadian versus the U.S. dollar, and it came from both sides of the argument, for and against. I think these are the trade-offs when we talk about gaining some and losing some. My colleague Mr. Penson referred to investing in R and D and not investing in R and D.

The Chair: Mr. Murnigham.

Mr. Bill Murnigham: I'll respond to some of those questions.

On the health care issue in particular, I could refer you to a study undertaken in 1998 that was completed by Industry Canada called The Automotive Competitiveness Review, which echoed a lot of existing research on health care. In particular, we often hear about employers in the United States providing a high level of health care benefits. We would argue that in the auto assembly industry in the United States, because of a history of strong unionization, the employees are receiving an equivalent level of health care as they are in Canada, but it costs significantly more. It costs them on average $4 an hour more on a common currency basis, which is a third of the productivity advantage. So this is an incredible benefit, and this is not a new phenomenon. It simply costs less to run a health care system based on a model of shared responsibility across taxpayers, rather than a one-on-one cost and profit-making environment. Interestingly, a side to that recent study came out that suggested 60% to 70% of industrial disputes in the United States—and by that I mean strikes—result from disputes over health care benefits.

Mr. John Cannis: If I may interrupt, are you saying that if we go to an American-style health system, we would lose that competitive edge?

Mr. Bill Murnigham: Yes, very clearly, and I think a lot of studies have supported that, not just from the union side but industry and academics as well.

In terms of the point about the Canada-U.S. dollar, it's obviously a confusing and controversial issue. It's also one that government may not actually have that much control over. So while its impact on productivity may be significant, at the end of the day we don't set the exchange rate entirely on our own, even if we wanted to go that route. But I think the main thing to recognize is that, yes, it has been important in encouraging investment, but we should not overemphasize the fact. I think that's the message Mr. Smith raised as well.

The Chair: Mr. Smith.

Mr. Peter Smith: My colleague spent considerable time on the linkages between fixed capital investment and productivity.

To respond to your question vis-à-vis patient capital, unfortunately, when the defence industry productivity program was cut and the technology partnerships Canada program was substituted, one element of the former DIPP, i.e. capital investment, was dropped, because it is truly research and development funding.

There is a major impediment right now for small and medium-sized enterprises in the sense of investment in capital equipment to improve their productivity. So if you were asking me what this committee might want to contemplate, it would be the ability of small and medium-sized enterprises in particular to be able to access capital at very attractive rates in order to make those capital improvements to improve their productivity and the consolidation.

• 1020

Again, from a comparative perspective, it doesn't take a space scientist to appreciate, as my colleague indicated, the differences between the United States and Canada, one being health care. All you have to take a look at is Europe, for instance, and see the large number of holidays and statutory holidays that are provided and then the social systems that are imposed upon that. It makes it very attractive to have pieces of work moved over to Canada, because it means less of an overhead cost to do so.

Mr. John Cannis: Would you buy a product because it's cheap or because it's good?

Mr. Peter Smith: Because it's first-class quality.

Mr. John Cannis: Thank you.

The Chair: Thank you, Mr. Cannis.

Just before we close I want to ask a couple of questions. Mr. Smith, maybe this was clarified earlier, but with regard to foreign ownership versus Canadian, did you give us a percentage for the industry, or do you have that?

Mr. Peter Smith: Our industry is 100% Canadian owned and operated, but what I was mentioning was that about 60% of our companies are subsidiaries of foreign firms.

The Chair: That's what I was looking for.

Mr. Peter Smith: The distinction in the aerospace industry, unlike many other sectors, is that most of those companies, such as Honeywell and Pratt & Whitney Canada, are operating with world product mandates. So they are basically stand-alone organizations that export out of Canada as a subsidiary of a U.S. firm. There's a tremendous advantage for Canada to have that kind of privilege.

The Chair: Mr. Murnigham, just to clarify, in talking about competitiveness, you mentioned the health care sector and how that's an advantage.

On a common currency basis, what are the wages between Canada and the United States?

Mr. Bill Murnigham: Let's just define our terms.

The Chair: In U.S. dollars.

Mr. Bill Murnigham: In U.S. dollars they are roughly parallel. The current wage rate for assembly in the United States is, I believe, around $23 an hour, and in Canada in the most recent contract it's around $24 an hour. So they are quite—

The Chair: Are both of those in U.S. dollars?

Mr. Bill Murnigham: No. Sorry, in Canadian dollars. Ignoring the exchange rate, it's the same dollar level.

The Chair: Just to clarify, in the United States they make $23 an hour U.S. and in Canada it's $24—

Mr. Bill Murnigham: In Canada it's $24 Canadian. So $16—

The Chair: So it's not on a common currency basis, then. Canadian workers are actually being paid less than American workers if you were to—

Mr. Bill Murnigham: Yes, if you factor in the exchange rate.

The Chair: What some of the economists are saying is that our workers actually pay for these benefits through their wages. I'm just trying to determine how it makes us more competitive if in fact our workers are making less money.

Mr. Bill Murnigham: Again, you can't ascribe the entire difference to an exchange rate.

If we're focusing on productivity issues rather than on labour cost issues, the productivity issues speak for themselves when you measure it on things such as hours and workers, which are a universal currency, and not in Canadian dollars or U.S. dollars. If you're suggesting that there's some sort of protection of the industry by a lower currency, that is not borne out by other evidence or research.

In terms of the cost advantage, all things being equal, if Canadians are as productive or more productive than people in the United States, there's still an incentive to be here regardless of the currency valuation.

The Chair: But shouldn't we be making more money if we're more productive? Shouldn't the worker—

Mr. Bill Murnigham: We argue that at the table every time, and I think we've had some success with that. So, quite clearly, there is reason to share the productivity gains.

But the workers in the United States are not necessarily making that extra money. The employer is having to pay for much higher levels of benefits. So some of that difference you're talking about is actually heading into the pockets of a for-profit health care system.

The Chair: So the numbers you've provided of $23 American versus $24 Canadian are just wages per hour.

Mr. Bill Murnigham: Those are the wages.

The Chair: On top of that are benefits.

Mr. Bill Murnigham: Yes, the total labour cost. I don't have the figures directly in front of me. The Industry Canada study related to the two of those, and it found that there is a one-third advantage. Now, considering the exchange rate difference, you could consider that out of that one-third, perhaps 15% to 20% would be exchange rate and the rest would be attributable to things like productivity and health care and other benefits.

The Chair: Maybe you could provide the committee with that information—just a brief letter explaining that—in order to clarify it.

Mr. Bill Murnigham: Yes, certainly. I'll provide you with copies of the Industry Canada study. It's quite clearly laid out.

The Chair: Thank you.

I want to thank both of you for being here this morning. It's been a very interesting discussion. As we search for the answers at this committee, it definitely will help us along the way.

We now have another group of witnesses scheduled. We're going to suspend for about two minutes. We do have to keep moving because there is a possibility of a vote this morning.

• 1025

• 1028

The Chair: We're back to order.

I'm very pleased to welcome our next group of witnesses.

Just to explain, we are anticipating that there will be a vote some time this morning, which will be slightly disruptive. I apologize, because it will mean that we will have to go over and vote and come back—so you'll get a little break from us.

That's what we're anticipating. When the bells do start, it'll be a 30-minute bell, so with the committee's consent, we'll continue going for about 15 minutes. At the 15-minute bell, we'll break and go to the vote, and then come back. It'll be a disruption of about half an hour and I apologize for that in advance.

We're very pleased to have with us this morning a number of witnesses. We have with us the Coalition for Biomedical and Health Research, with Dr. Barry McLennan, chair, and Charles Pitts, executive director; BIOTECanada, with Paul Hough, vice-president; and Theratechnologies, with Dr. André de Villers, president and chief executive officer. As an individual appearing here today, we have Mr. John Oliver, president of Maple Leaf Bio-Concepts.

What I would propose is that we have everyone's opening statements and then move to questions in our round table format. I'll start as listed, unless there's any objection, with Dr. McLennan.

Dr. Barry D. McLennan (Chair, Coalition for Biomedical and Health Research): Thank you, Madam Chair. Thank you for inviting CBHR to participate in this round table discussion on biotechnology. I believe copies of our brief have been distributed to your committee.

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Just to remind everyone, CBHR is a non-profit corporation that represents a very broad spectrum of health researchers in Canada. Our mandate is twofold: first, to foster increased funding for biomedical, clinical, and health research activities in Canada, and secondly and very importantly, to inform the general public and government representatives of the progress and value of health research activities in improving the quality of life for Canadians and in enhancing our economy.

Last April, in a presentation to this committee, I described biotechnology as an enabling technology that was rapidly emerging as one of the most important technologies with respect to job creation. I emphasized that while biotechnology cuts across many industrial sectors in Canada, it's dominated by the health sector.

In addition to the explicit federal support for this sector, virtually every province in Canada has identified biotechnology as a primary component of a high-tech, knowledge-based economy. Saskatchewan—my home province—Quebec, and Ontario provide excellent examples. Clearly, biotechnology development can contribute and is contributing to reversing the brain drain, creating employment, and improving the personal and economic health of Canadians.

However, Madam Chair, there is a growing discomfort with the pace at which Canadian researchers are able to compete in the global biotechnology development race—and it is a race. The window of opportunity for Canada to compete successfully is narrow and rapidly closing. CBHR believes that the low level of public sector involvement and a lack of political will could result in Canada being left on the sidelines, a situation none of us would like to see develop.

Today, Madam Chair, I wish to focus on a few key issues that are of concern to the health research community.

Supporting health research: a year ago the federal government signalled increased support for health research by supporting the CIHR concept. CIHR—and we do live in an alphabet soup of acronyms these days—is the Canadian Institutes for Health Research project. I can tell you, Madam Chair, that the research community has received this initiative most enthusiastically. If I might be permitted a personal comment, I could actually detect—it was palpable—the increase in morale and the renewed enthusiasm in the corridors of the research halls in our university, and I'm sure it was true right across the country.

This was indeed a very positive step by the federal government. CIHR has the potential to contribute significantly to biotechnology development in Canada. As the Honourable Allan Rock, Minister of Health, stated last February, “these investments will pay long-term dividends in the quality of life of Canadians”.

Despite this increased funding, we are meeting stiff competition from our trading partners. Even if we look to the year 2002 when the CIHR commitment is fully realized, it's estimated that the U.S.A. will generate four times the amount of research funding per capita—four times more per capita—than we will have in Canada. So one of our chief recommendations is that the government make a specific commitment to invest 1% of health expenditures in Canada on health research. For every $100 we put into health care, set aside $1, just $1, for health research. If we do that, I think we can become competitive.

Retaining our best: CBHR has repeatedly made the case to parliamentarians that the brain drain of our brightest and best is both real and increasingly costly to our economy and to our society. CBHR wholeheartedly concurs with the statement made a few days ago, on February 16, by the Honourable John Manley, Minister of Industry, when he said that “opportunity is leading people to the United States” and that “we have to look at the policies that are going to increase opportunity in Canada”.

I couldn't agree with him more. Fundamental reforms are required in the tax structure, the regulatory framework, the venture capital market, and government policy in order for Canada to become competitive and to become a place that talented people want to stay in or return to. There's already some evidence that we're beginning to see a bit of a positive brain gain reversing the brain drain, but it's just anecdotal at the moment.

CBHR has made several recommendations—and in our brief they're on pages 8 and 9—which speak directly to these necessary reforms. For example, CBHR calls on the federal government to develop comprehensive tax incentive programs for investors willing to direct funds to the health technology sector. Also, we recommend that a separate agency be established outside the Health Protection Branch to undertake approvals and reviews for biotechnology products.

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This morning in the National Post there's an article that's very timely, focusing on this issue. The article is entitled “Canada slow to approve medical drugs”. The data shows Canada's target—of course, by Health Canada—was 355 days. In fact, from 1996 to 1998, Canada took 518 days to approve drug products—160 days late. It's just not good enough.

We're way behind the United States at 365 days, the U.K. at 308 days, and Sweden at 371 days. These are our competitors. Time means money. We can't afford to lag behind like this. So it's very timely that this article is in this morning's National Post.

Promoting the benefits of genetically modified organisms is another issue. This is a hot topic today, as I'm sure you've heard others talk about it. As much as adequate financing is essential in biotechnology, there is a deeper, more dangerous, threat to the entire area of biotech development.

I refer to the general public's lack of information regarding the outcome of implementing certain biotechnologies.

The “Canadian Biotechnology Strategy”, our own government report in 1998, describes the applications and products it hoped to encourage and outlines the potential benefits to all Canadians. Genetic engineering has already brought relief to millions of people. The human insulin story is but one example, and I can give many others.

Unfortunately, the positive side of the story has not been getting out to the broader public. I quote Dr. Peter Morand, who says: “The media capitalizes on the fear of the unknown and loves to create monsters.” Dr. Peter Morand is a former president of NSERC.

The level of understanding and ignorance, Madam Chair, is unbelievable. I'll refer you to an article that was in our paper a few days ago:

A survey on genetic engineering of food done in Quebec and Ontario found that 60 percent of consumers believed a crop sprayed with chemicals

—now listen to this—

or hormonal agents constituted genetically engineering foods.

What nonsense.

The same survey also found that consumers believed irradiated food was also genetically modified.

The level of ignorance out there is abysmal. It's absolutely unbelievable. So one of the things that we'd like to suggest and recommend, Madam Chair, is that we call on the government, in cooperation with sector stakeholders, to provide accessible and comprehensive information to the public concerning all areas of biotechnology discovery, including its potential economic development benefits.

In conclusion, Madam Chair, CBHR commends the government for moving forward with an integrated approach to health research through several recent initiatives. I refer very simply to the Canadian Institutes of Health Research, CIHR, the Canada Foundation for Innovation, and of course the most recent program, the 21st century research chairs program announced by the Prime Minister a few months ago.

Secondly, CBHR reiterates its longstanding view that the Government of Canada has a key role to play in setting the stage for Canada to become a world leader in biotechnology. By encouraging risk and rewarding success in the health biotech sector, the government will increase Canada's productivity and will ensure our competitive position in the world marketplace.

Thank you very much.

The Chair: Thank you very much, Dr. McLennan.

We'll now turn to Dr. Paul Hough, vice-president of BIOTECanada. Dr. Hough.

Mr. Paul Hough (Vice-President, BIOTECanada): Thank you very much, Madam Chair. It's a pleasure to be here this morning on behalf of BIOTECanada. Our president, Joyce Groote, was originally scheduled to be here. She is unfortunately sick and sends her sincere regrets for not being able to appear before you.

As you probably already know, BIOTECanada is a non-government organization that is the voice for the biotechnology industry and research community in this country. It has membership based from industry, from the service sector, from universities, and all the regional associations. Through these groups we represent approximately 85% of the biotechnology community.

It is a technology association, by which I mean that it crosses a variety of sectors, including health care, agriculture, environment, aquaculture, etc. Our main purpose really is to foster an environment for the development of biotechnology across all these sectors.

Our members also have a number of interests, not only in commercialization but in the regulatory aspects of this country, the financing of their activities, human resources, and public policy issues. It's really in this light that I am pleased to be here this morning.

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As Dr. McLennan has indicated, biotechnology is really an enabling technology; it's a tool. It's not a single technology by any stretch of the imagination. You will find a more explicit definition in the brief that has been distributed to you, but basically it's the use of living organisms in an innovative manner to produce goods or to improve existing processes.

To provide a couple of concrete examples, I'd like to mention that, for instance, in the environmental area, Iogen, a local firm here in Ottawa, is using enzyme technology to convert agricultural and forestry waste products basically into high-quality ethanol for use in gasoline, thereby reducing the CO₂ emissions.

In the health area there are a number of companies right across the country that are getting very close to being able to identify the sources of genetic diversity in people that will really allow for drug delivery that is tailored to individual requirements and responses. As you probably know from reading in all kinds of articles, a particular drug for a particular disease or condition does not elicit the same response in everybody, and we're getting much closer to understanding those responses.

Finally, as an example, in the agricultural area there's a company in Montreal, Nexia Biotechnologies, that has developed the ability, the technology, to actually make spider silk using transgenic goats and extract that silk from the goats. To give you an example of the utility of this kind of material, it's been calculated that a one-inch thick rope made of this material, which is really the strongest material known, would stop a 747 aircraft in flight. It therefore has a lot of application in personal body armour and a whole lot of other areas.

I'm trying to give you a sense that the types of products that come out of the biotechnology world are really quite astonishing.

The Canadian reality is that biotechnology is a very important component of the economy, and in the brief I provide a few statistics that demonstrate that Canada is already number two in the world in terms of the number of companies and employment—after the U.S. We have close to 300 core biotechnology companies in all the different sectors, and on top of that we estimate at the moment that there are approximately 100 start-up firms as well. Now 75% of these are small, by which I mean that fewer than 50 people are employed in each one, and, as Dr. McLennan has indicated, the health care sector certainly dominates not only in the numbers of companies but also in the people employed, and especially in the level of R and D that is invested by these industries.

Clusters of biotechnology firms are quite common not only in Canada but in other countries. Saskatoon is perhaps the best example of what can be achieved when all the different levels of government work with industry and the academic base that's available to create a very dynamic cluster, in this case an agricultural one, which is recognized as such across the world.

This situation in Canada did not arise by accident. There have been a number of factors involved, including sustained government support. The government has long recognized biotechnology as an enabling or strategic one through the national biotechnology strategy that was initiated in 1983, through to the current Canadian biotechnology strategy and a number of other activities.

Having a strong regulatory capacity that is recognized as one of the best in the world is very important and has been recognized as such by the government. Having a reliable, predictable regulatory environment is absolutely critical to industrial development, certainly in the biotech area, and it also provides the public with the assurance and the confidence that any of the products that are reviewed are not only safe but effective.

Long-term funding of research and more recently of infrastructure, especially for new faculty, some of whom have been attracted from outside of Canada, is another important factor. And still other programs, such as the industrial research assistance program, the technology partnerships Canada program, and the scientific research and experimental development tax credit program, are all important to the biotech industry and they've helped develop that. Provinces, as Dr. McLennan has said, are instituting their own programs, certainly in Quebec, Ontario, Saskatchewan, and B.C.

That being said, there are barriers to the further development of biotechnology and to its productivity and competitiveness. There's no such thing really as a “typical” biotechnology product or even company, but in all cases it requires a great deal of time for them to bring a product to market. Therefore, access to capital is a primary preoccupation, in order to keep operating, to conduct research, to do the tests that are required, and to then undergo the modifications to the products and more tests and trials.

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According to the report we did last year, the relatively few products that are available and have been developed over the years accounted for sales of about $1.1 billion in 1997, but five firms accounted for 60% of those sales and a total of 50 firms account for virtually all of those sales. This means that the real need here is to get more products out into the market.

The year 2000 certainly has all of the markings—or the makings, if you wish—of being the year of biotechnology. Investors seem to have developed better means to be able to evaluate and value such companies, and they recognize the need for long-term investment. As an example of what has been happening in the investment community, QLT Phototherapeutics, based in Vancouver, has gone from $16 on the market last year to $200 this year. They currently have a market capitalization of close to $6 billion, yet they only have sales of about $1.6 million at the moment. I could give you other examples.

Again, it's a question of doing everything we can to get more products on the market, so there's great pressure on the regulatory system to be efficient. I'll come back to that in a moment, but in particular—and that requires the resources to sustain that system—we're very concerned that there are large numbers of products coming down the pipeline that are going to require review. So what do we suggest as some proposed next steps?

First, we must recognize that the regulatory system has to be efficient in order to avoid placing Canadian firms at a competitive disadvantage. Delays, as Dr. McLennan has indicated, must be reduced, not only as they relate to new product submissions but as they relate to the initiation of clinical trials and to the status and review of good manufacturing practice facilities. Resources must be provided. As in the case of Health Canada, replacing base funding with cost-recovered revenue does not provide those means to go ahead.

Creative means must be found to overcome some of the capital requirement hurdles as well. We all talk about the requirement to mine the results of the research and development in this country, and we certainly agree with that. The start-up firms, certainly in the biotech area, have trouble attracting venture capital at an early stage. There are also gaps that exist in the testing, demonstration, and pre-commercial stages of development. What we're suggesting is that there need to be creative solutions for filling these gaps.

I certainly endorse what Dr. McLennan has said with respect to the science base: it must be strengthened further. We know that CIHR is going ahead. We understand that the proposal for Genome Canada is to go ahead—or at least we certainly hope so. But there are calls that have been made for other activities as well, such as efforts in health outcomes research, cleaner processes, and environmental sustainability, and certainly in the latter two biotechnology has a role to play.

Efficiencies are required, really, in the allocation of the limited resources that are available for R and D, industrial development, and international collaborations in trade. Thus we are certainly in favour of connecting the expertise that is resident in the universities, the government, and industry much more effectively, to showcase their work and promote collaborations.

Peer review of government science is also an activity we would endorse. I understand that Health Canada is putting this kind of program into place, in advance of other departments.

Finally, establishing a technological foresight capability in this country would, I think, provide a mechanism for assessing where the new developments are going to be, the important ones, and therefore where the resources could be applied. Japan and the U.K. have had foresight activities for many years, which has certainly assisted them in developing their technological capabilities.

Finally, government must really tout the regulatory system more effectively, by which I mean it has to talk about its role, its excellent track record, the resident expertise, and the international recognition it has gained, because it is seen as a model that is being copied in other parts of the world.

In conclusion, I'd simply like to say that biotechnology is an integral part of the Canadian economic scene and its importance is steadily growing. It's very much at the stage that the information technology sector was at about 20 years ago. The potential benefits are enormous, but there are barriers to full development, and all three sectors—government, universities, and industry—must work together to achieve that goal.

• 1050

The regulatory system works very well to ensure that any of the products that are reviewed are safe and effective, but that system must be sustained in a reliable, predictable manner. That requires resources. In addition, the government must really broadcast what it's doing in a regulatory system and how it goes about it. Finally, the science base must be strengthened, in the way industry has been doing for many years and will continue to do.

I'd be more than willing to answer questions. Thank you.

The Chair: Thank you very much, Dr. Hough.

I'll now return to Dr. de Villers from Theratechnologies.

[Translation]

Dr. André de Villers (President and Chief Executive Officer, Theratechnologies): Thank you, Madam Chair. May I use French?

I'm here as a medical doctor and an entrepreneur in biotechnology. I operate a biotechnology firm with a little under 100 employees most of whom are either Ph.Ds or MDs. I'm also chairman of the Board of the Comité biopharmaceutique R-D which used to be known as WCAP. As my colleagues have already addressed environmental technologies, I'll target biopharmaceutics.

We believe that pharmaceutical biotechnology, in coming years, is going to explode and will radically change the rules of the game in the area of health systems and new products.

Increasing knowledge of the human body, genomics, which gives us the key to many problems, cell therapy that allows us to replace cells with other cells, and molecular biology which helps us much better understand our bodies are factors that support what we say. We will have available far more efficacious drugs whose secondary effects will be reduced to zero.

Small companies will rapidly become big because they will possess these new technologies which will quickly replace everything we presently know. For Canada, this is an extraordinary opportunity to have Canadian companies with their headquarters here, in the country, who will be able to export their new products and their new technologies. At this point, most companies are foreign multinationals who have branches here, in Canada.

If Canada, in terms of the number of biotechnology firms ranks second in the world, it's not just a matter of chance. Thanks to its tax policies adopted some years ago, Canada has created a favourable environment. We have risk capital that is diversified and shared out amongst all regions of the country. We have excellent universities which have proven themselves during the last century. We have brokerage houses, banks, research organizations, CROs and industrial parks. The basic situation is excellent.

As Dr. Hough was indicating, many companies capitalization exceeds the billion-dollar mark. Amongst others, you have Biochem in Quebec, Biovail in Toronto and QLT in Vancouver that have made it possible for Canada to establish its credibility worldwide.

Our exports are now over $1 billion. Ten thousand employees work in this sector and we spend between $500 and $600 million in research and development here, at home.

Europe—more particularly Great Britain, Germany and France—has started accelerating its development in biotechnology. You have the same phenomenon in Asia, especially in Singapore and Japan.

Because of circumstances, Canada has managed to become the number 2 in biotechnology and must continue to speed up its discoveries and investments to remain at that level.

This morning, I'd like to make very simple recommendations on two matters of the highest importance for biopharmaceutical companies. The matter of funding and access to our natural market here, in Canada.

Contrary to the first biotech companies, we'd like to keep the production of our raw materials here, in Canada, and acquire expertise in marketing. If an R & D company or a university licences technology abroad when it's still very young, the benefits for Canada will accrue as temporary royalties and the added value will go abroad. So it's important for our companies to keep control over production and part of the marketing of their new inventions.

From the funding point of view, it is well known that you need about 10 years to develop a new molecule. The cost is enormous, some $500 million. To manage this and keep the molecule as long as possible, we need access to funding.

• 1055

Based on my own experience, for first-stage funding or seed money, the situation is relatively good in Canada at this time. In all the provinces there's a lot of risk capital available. There are also a lot of things that have been done in the centres of excellence, at the Canadian Institute and at the Medical Research Council. There are now a lot of institutions working with the private sector. What is more difficult is getting funding when you start the clinical phase of a drug. That's the most costly stage and the most important one for our Canadian companies.

Last week, in specialized publications like BioWorld Today, it was reported that Abgenix corporation was raising U.S. $630 million to develop its new products, that Calgene was offering $303 million to develop its studies on thalidomide and that Sangamo was doing a $103 million OPI. These figures are impossible to reach for Canadian companies.

We're regularly asked to move our firms to the USA where financial markets are far more friendly for this kind of undertaking. If Canada wants to remain competitive, it must find creative ways of keeping its companies here.

I'd like to draw your attention this morning to an Industry Canada initiative called Technology Partnerships Canada that's been going on for about three years. One solution would be to grant biotech companies venture loans that would give them leverage to obtain the necessary funding for the technical development of their molecules.

The process is very rigorous. There's a scientific due diligence done by the National Research Council of Canada and there are also due diligences for the marketing which means that, for Canada, the investment is justified and has an unbelievable leverage effect for our corporations. If the drug is a commercial success, then Canada gets its money back with interest added. So an accelerated funding program for our corporations should be set up.

So with regard to funding we're recommending that you maintain our tax credits, that you improve on certain deficiencies that presently exist and that you focus on Industry Canada's present PTC program.

The second matter I'd like to address is access to the Canadian market for our Canadian innovations. The big pharmaceutical companies complain, of course, about how long it takes to have their drugs approved. It has been said this approval took almost two years and then you had to wait another year for the drugs to be put on provincial drug licensing lists.

The American, Swedish and British reaction time is far shorter. If it's hard for a big pharmaceutical concern, then it's a matter of life or death for small companies like ours. If we manage to go through all the clinical development tests for our molecule, our financial health will depend on our sales. If there's a three-year delay between our validation and acceptance by regulatory authorities, then that delay can mean the disappearance of many of our businesses.

I think it would be timely for Canada, a bit like we see in the United States and other countries, to allow Canadian innovations to take the fast track to access their own market. Besides having an impact on biotechnology economics, it would have a direct impact on the health system. For example, we're developing a molecule to delay certain aspects of aging, that's the decrease in muscle strength and power of recovery. If this medication is a success, you can easily imagine the impact it might have on the present aging population in Canada and on our health system.

We'd like to see a federal-provincial committee set up made up of the departments of Industry and Health that could allow quick acceptance of a drug if it goes through all the tests so that we can have access to our own Canadian domestic market.

Thank you, Madam Chair.

[English]

The Chair: Thank you very much, Dr. de Villers.

Mr. Oliver, your opening comment, please.

Mr. John P. Oliver (Individual Presentation): Madam Chair, ladies and gentlemen, it's a pleasure to be here this morning to talk to you about agricultural biotechnology.

Just to quickly give you a little background about where I come from, I come from a farm in eastern Ontario and am still actively farming, but I grew up in the companies of Eli Lilly and Dow on the agricultural side of the business.

• 1100

My objective in life is to create value in Canada by spinning companies out of the university research and to provide opportunity here. I'm absolutely paranoid over the brain drain. I believe we're selling oil and gas equivalent at $2 a barrel when we allow our young people to leave this country, and the way to stem that tide is to create opportunity here.

I want to talk to you about agricultural biotechnology, and by that I'm referring specifically to the genetic enhancement and modification of crops and production animals.

By applying genetic engineering in agriculture we have the opportunity to make healthier and more nutritious foods for man and animals as well as increase the quality and sustainability of the environment.

Some of you may have been here at the Ottawa Life Sciences Council annual symposium awards dinner in early November and heard Dr. Julia Levy speak at that dinner. She is CEO of QLT Phototherapeutics in Vancouver, as Paul mentioned, the largest bio-pharma company in Canada and well up in the top ten in the world. She's been at QLT since 1981, so I would regard her as an icon in the biotechnology industry.

At that meeting she made four projections on genetic therapy in the new millennium as it relates to life sciences and the human health care field, but the comment she made at the end is the most impactive of all. Her four projections, which I thought you might be interested in, were: one, gene therapy will remove birth defects; two, humans will enjoy an endless array of organ transplants from transgenic animals; three, we will arrest the process of aging; and four, humans will have the opportunity to live well into their second centuries.

Then Dr. Levy summarized, and this comment we have to keep in mind. She said “Take the growth and life expectancy of the developed world, with average ages approaching 90 to 100”—and if you're turning 50 today, you have a 30% chance of living to be 105. That's a comment I picked up. That wasn't hers. But with an average lifespan of 90 to 100 achievable, plus the growth in population in the undeveloped and developing world...put those two events together and we're facing only two options on this planet. One, we control population, or two, we dramatically increase the food supply.

Ladies and gentlemen, I believe that with agricultural biotechnology we have the potential to expand the food supply, and expand the food supply into more nutritious, higher-quality, more positive, health-impacting food products.

I'm also one of those people who, despite the low commodity prices we see on the farm today, believes the Titanic has sailed in food production. When we start adding the equivalent of the total number of people in the world in 1900 to the global population every 12 to 13 years, on October 12, 1999, we topped six billion people on this planet. That's a doubling in 39 years since 1960, a 75% increase from the early seventies.

You take that factor and then you take two other drivers that are driving agriculture and you'll see why I'm pessimistic about long-term food security, possibly even for us here in Canada. Right at this very moment in Asia we have a meat-eating tiger waking up in the form of the economic development pathway being followed by a potential four billion consumers. That's twelve times what we have in North America. Those four billion consumers today are consuming less than 20 grams of animal protein per day. We in Japan, western Europe, and North America, are someplace between 65 and 70 grams of animal protein per day.

Every time you put 10¢ more disposable income into the pockets of a person, a citizen of a developing nation, they do one thing: they diversify the diet away from starch-based foods towards the consumption of animal protein and vegetable oils. That's what's happening in Asia. On top of that, Asians have lost the dependability of natural-catch fish from the sea, which was what Japan industrialized off as their source of animal protein after the Second World War.

Our single biggest driver in agriculture in the future will be the demand for animal protein in Asia and the limitation that we have in good farmland. If we take the consumers in Asia and don't take them to what we're consuming, take them part way up, around 50 grams consumption over the next 20 years, we need two and a half times the good farmland we have in the world for feed grain production. One of the ways to deal with that deficiency is through technologies like biotechnology. I really believe that we are going to hit the iceberg in food production.

I think we have two options. We either dramatically raise prices or we go to shortages in certain parts of the world.

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The second major factor pointing out the need for agriculture biotechnology and genetic engineering techniques is the aging population in the developed world. As I said, the baby boomers, if they're 50, have a 30% chance of living to be 105. There's one turning 50 in the U.S. and Canada every seven seconds as we sit here today. In 2001 we'll have 80 million people in Canada and the U.S. over 46 years of age. This generation of people are literate, they're technology savvy, they have a lot of money, and they're going to inherit somewhere between a $12 trillion and $41 trillion inter-generational wealth transfer from their parents.

With that kind of knowledge, with that kind of literacy, with that kind of money, they're going to achieve their goal, and their goal is a longer, healthier, higher quality of life. They're going to look for life insurance policies, and the life insurance policy they're going to look for and find is in a healthier, upgraded, nutritious diet. That, ladies and gentlemen, is what we can deliver in the form of functional foods and pharma-foods from agriculture biotechnology.

If we take the growth in total population, the demand for animal protein in Asia, the aging population of the developed world, it points to the need for one thing: better food, healthier food, more of it. That's a promise that I believe agriculture biotechnology and genetic engineering can help deliver on.

I look forward to your questions in the question period. Thank you very much.

The Chair: Thank you very much, Mr. Oliver.

I'm now going to start with Mr. Penson, please.

Mr. Charlie Penson: Thank you, Madam Chair. It's a very interesting panel this morning, gentlemen. Thank you for your presentations.

I agree with you that it's an exciting business you're in. The things you've raised this morning about the need for more R and D spending by government and your industry, the need for more venture capital to develop your industry—those are all good objectives, but it seems to me until you solve this problem, which Dr. McLennan referred to, and maybe some others, about the GMO issue, you're stalled. That's how it appears to me.

Somebody suggested here that government has a role to play in education. I suggest that you also do. You people know best your industry and you know how to deal with this issue. You know where we are these days. The precautionary principle idea has blossomed around the world.

In my own business we have a 2,000-acre farm out in Alberta and have used GMO products on our farm. I've recognized the importance of how it has reduced herbicide use on our farm. You go to Europe and in France they are using about seven times more herbicide than we are. Through GMO production we have been able to cut that down dramatically.

In any case, until the public have bought into the GMO issue and the genetically engineered organs for transplants, there's that fear out there. Until that's addressed, I don't think you're going to get that investment in your industry, either through government or through private sector venture capital. I think that's your biggest challenge. How would you respond to that challenge?

The Chair: Who are you directing the question to?

Mr. Charlie Penson: Just to the panel generally, whoever wants to answer.

The Chair: Mr. Hough.

Mr. Paul Hough: Thank you, Madam Chair.

It is a challenge, and I think Dr. McLennan has outlined that quite clearly, and so has Mr. Oliver.

There's no question in my mind that industry does have to speak out a bit more as to what the technology means, to explain what's involved in the technology, but also to explain the benefits of it both to the consumers and to the producers in the agricultural area, and certainly to consumers in the other areas. The government does have to stand up on its back legs a little more as well and explain the regulatory process, which is a fundamental part of the whole basis of providing that kind of confidence. Industry can say what it wants about the regulatory system, but it's really the government itself that can do it and has to demonstrate clearly to people what its role is and how it's conducting that role.

But you're right, everybody has a role. I don't think it has stalled things. I think if you look at the investment activity, it's encouraging, at least at the moment, in the biotech sector. These are aspects that we have to take into account, that we have to address and deal with, but we also have to make clear to everybody that there are very clear and important benefits.

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The Chair: Dr. McLennan wants to comment on that, Mr. Penson.

Dr. Barry McLennan: Thank you, Madam Chair.

Firstly, in an oversight, I forgot to mention that my colleague, Charles Pitts, our executive director for CBHR, is quite happy to answer questions as well.

I apologize, Charles, for not mentioning that earlier.

Yes, I quite agree with you that we have a collective responsibility. Indeed, our recommendation at the top of page 9 says that the government, along with all the stakeholders, the science community, the academe.... We all, collectively, have to get on this and take back the agenda. At the moment, the agenda is in the hands of the media and a few people who have a particular interest in stalling the train. We have to take back the agenda. I quite agree with you.

I guess I was pleading for a sense of urgency so that we do this as soon as we can, collectively. There's no sense me sitting around the table saying to you, you do it, with you saying, well, you do it. We have to get this together—and quickly. I teach biochemistry and I'm just amazed. The level of knowledge—about the benefits and the facts about genetic modification and so on—among the students is fine, but that's only one small sector of the population.

I grew up on a farm as well, and as you pointed out, farmers have been modifying food for decades. You pick the best steer, the best cow, and the best bull and you produce an animal that produces more meat per month, or whatever criterion you want to use. We've been modifying foods for decades. Why is there suddenly this screaming and howling about it? It's because the term “GMO”, as I said earlier, is badly misused. We're allowing that to be an umbrella term to confuse the issue—not us, I mean, but the people who are putting this up. So I agree with you: we have to work together.

The Chair: Thank you, Dr. McLennan.

Mr. Oliver.

Mr. John Oliver: I think the other thing you have to realize about the GMO debate is that it has nothing to do with science. The GMO debate has to do with lifestyle, political opportunism, fundraising, and corporate control of life. This debate is not a scientific debate.

The other thing we have to realize is that we have to keep our perspective on where the value creation really is. The early phase of agricultural biotechnology, and that's what we're talking about in GMO foods, is behind the farm gate.

Let me give you a sense of the value creation. The whole pesticide market in North America is about a $10 billion market. If you replace 50% of that by delivery via genetics, via the seed, you have a $5 billion play. If you change the performance characteristics of plants so they'll tolerate more drought, tolerate more salt, and extend the growing season, it's a $20 billion value creation. If you do the pharma-foods and the functional foods and put positive, health-impacting traits in foods, it's $80 billion.

The biggie is where Canada should be going. This is from a strategic point of view for Canada. The biggie is if we go to green energy, if we do the kind of thing we're seeing out here with Iogen. If we replace between 15% and 20% of the fossil fuels going into our petrochemical plants, it's a $125 billion value creation play.

We're playing in the short end of the playing field, and unfortunately we're playing with a community that has been very good at production efficiency gains. We have about 2% to 3% of the population on the farm now versus back at the turn of the century when we had about 40% to 50% on the farm.

With regard to the farm community, industry and government thought this was a scientific, intellectual, and economic argument. We forgot that in the consumer's mind it's an emotional argument. I think we have to figure out how to better communicate that, but in the long term, the value creation play is huge for a country like Canada.

The Chair: Dr. de Villers, do you have anything to add?

Dr. André de Villers: I think the comment is not as acute for the biopharmaceutical as it is for the human. For example, if I develop drugs, I think the concept of GMO is not there for the venture capital or the brokers or the investment.

I agree with my colleagues. The thing I will add is that I think there were some mistakes made. I think the people who are against GMOs have a few points. I agree that the positive side is not well expressed. I think we should advance in this field and prove scientifically that if we alter crops or animals we don't change the universe.

In our field, human health care, it's extremely difficult to pass all the steps. I think ag-biotech has to pass the exact steps: that if you modify seeds you won't change the environment and alter the natural cycle.

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This is a big problem. We agree with you that communication and science have to be behind that.

The Chair: Mr. Murray, please.

Mr. Ian Murray: Thanks, Madam Chairman.

Mr. Penson has anticipated, if not my question, at least my thoughts on this subject.

First of all, I have just a few comments in reaction to your presentations. It's interesting to see a bunch of academics sounding like hardbitten businessmen, and you do. That's healthy when you consider the urgency of what we're talking about today. But what I want to talk about is this problem of public acceptance.

When I was on the industry committee and we were reviewing Bill C-91 on patent protection for pharmaceuticals, I was struck by the antipathy out there towards the so-called brand-name pharmaceutical companies. There's a large constituency out there in Canada that thinks these companies are bad. It's as simple as that.

The other thing that strikes me whenever I listen to presentations on biotechnology is how exciting it is, but I'm also one of those people who gets calls from my constituents telling me how frightened they are by this kind of Frankenstein approach, they think.

So on the one hand we have information technology industries in Canada that are seen as superstars. People are looking to invest in every IPO that might be out there. I understand a lot of people invest in biotechnology as well, but people are holding back because of this fear of the future. I may be naive, but I have tremendous faith in our scientists as individuals who would not put in their mouths or in their children's mouths something to eat that would be bad for them. I tend to trust Canadian scientists to that extent.

So I'm trying to essentially address the same concern Mr. Penson raised. I don't know that it's up to politicians. The problem is something we can't address on our own.

As Dr. Hough knows, I was involved in starting up something called Bacon and Eggheads here on the Hill. Once a month we have a breakfast and we invite eminent scientists to talk to MPs and Press Gallery members. It was very important that we had Press Gallery members invited. And they don't pay for the breakfast, just as politicians don't pay for the breakfast. Everybody else gets charged $10. We're trying to get this message out that there's exciting stuff going on in Canada.

I know I'm rambling on. I don't really have a question. I'm just wondering how we wrestle with this. Again I come back to Bacon and Eggheads. The genesis of Bacon and Eggheads was actually at a reception with members of the Royal Society a couple of years ago, in particular members of the Partnership Group in Science and Engineering Activities. I was there, and they were talking about how nobody understands the value of science in Canada. That debate has been going on for many years. I essentially said to them, “You have some of the finest minds in Canada assembled in this room and you're telling me you don't know how to make your case with the Canadian public?”

As I said, you have a very exciting story to tell. You need to talk to editorial boards and newspapers and find some way. I'm sure we're happy to help as well.

I guess my concern is, if you have companies with revenues of $1 million a year that are worth $6 billion, they must have the same sort of thing in the States and other countries, and I'd be afraid of acquisitions of all kinds of small Canadian companies by highly capitalized firms elsewhere as well. I think that would be a threat. If we have so much talent here and we're recognized as such around the world, we have to guard against other companies just swallowing up all of these exciting little Canadian biotech companies that are springing up.

I know we don't have much time. That's more of a comment than a question. I just throw it out.

Dr. Barry McLennan: The dissemination of knowledge piece is terribly important. One of the things that is going to happen in the new CIHR is of course a tremendous attention and focusing on dissemination of knowledge. The creation of these institutes is just the beginning. One of the pieces the governing council will charge the institutes with is making sure you communicate not only with each other but with the public. So on the health research side, that will certainly happen. But that's only one small part of it.

I agree with you. All of us in academe, every chance we get.... I never turn down a chance to go and talk about science and the benefits of science.

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As I said earlier, the problem at the moment is that we've allowed someone else with different interests to take the agenda, and we have to take it back. I don't have the details in my mind today on how we would do that collectively, but we have to do it and do it quickly.

As Mr. Oliver says, there's nothing wrong with the science. Canadian science is sound. It's recognized worldwide. My God, that's why we lose people; other countries know a Canadian scientist can be very useful to them. Unfortunately it turns out that they then become our competition. There's nothing wrong with our science or the products of science, but as I said, we have to take this agenda back and deal with it collectively and quickly.

The Chair: Mr. Oliver.

Mr. John Oliver: I'll just make a couple of quick comments for you to think about.

Regarding the biotechnology field, I want us to keep in mind that what's happening in human health care is a continuum to plants and animals. Molecular biology is the science of the 21st century. What we're going to see happening is that human gene therapy is going to be transferred to plants and animals. I do want to make that point, but I also want to deal with this question of large companies, multinationals, the Canadian fear of control, and that kind of stuff.

Firstly, we haven't seen the dominant design develop in this industry yet, and I'm a great believer in the dominant design. We're in very early days in biotechnology. We're probably where information technology was about 10 to 15 years ago. Most people would have said last year that Bill Gates and Microsoft were the dominant design in information technology. I don't believe that. I don't think we've yet seen this happen. It's still out there. It's still up for grabs.

With the early control aspects we've seen in plant biotech in particular, where you have several major large companies, they bought up the early stage of freedom to operate. I believe that will be a Grade 10 science project by 2005. We haven't yet seen what's going to happen there.

The other thing I wanted to tell you about is from a confidence point of view. These are real figures I'm using from a Canadian point of view.

One of the jobs I do is I sit on the board of Foragen, which is the advanced agricultural technology venture fund spun out by the Royal Bank. We're looking to start up companies out of technology in Canadian universities. We haven't gone out for proposals yet. We've had 56 come in from scientists or from someone at a university who has a technology that they think could have a major impact on agriculture and that's strong enough to build a company around. I believe we have 80 to 90 out there in Canada. I think we have 300 to 400 in the U.S.

I think in North America we can create 500 new high-tech agricultural technology companies. I think that's the kind of opportunity that's out there. We can do it in Canada and grow them here.

The Chair: Mr. Jones, please.

Mr. Jim Jones (Markham, PC): Dr. Hough, I think in your presentation you said the marketplace right now is roughly $1 billion. Five companies are producing 60% and 50 firms have virtually all the sales. What is the market in the U.S. right now in biotechnology? What do you see in terms of how big this market will be in 10 years, worldwide?

Mr. Paul Hough: Those are challenging questions. I honestly don't know what the market is in the U.S. at the moment. It's at least 15 times what it is in Canada.

A variety of analysts have tried to project what the biotech industry could achieve in the next 10 years. They're talking absolutely huge numbers. I think it was $500 billion in 10 years. It was just huge. But I don't know what the basis of those numbers is, so I wouldn't want to say that's a definitive one.

• 1125

From the kinds of things that Mr. Oliver has indicated could be generated even in North America alone, you can see the opportunity. It's really an upward climb only.

Mr. Jim Jones: What do we have to do? I listened to what Mr. Oliver said, that we are in the infant stages here. What would stop American companies just gobbling up everybody and taking everything back to the U.S., sort of like they did in the technology industry, in the Internet industry, and all of that? Do we have the right tools or instruments in place right now to make sure this doesn't happen if we start to grow this industry?

Mr. Paul Hough: I think there's always a danger of these things. Certainly one of the realities in the biotech world, for instance, is that some companies have generated or have created tax credits they cannot access themselves, to a point where they become target takeovers simply for the tax credits as opposed to the technology, which is really not what the tax credit system was put in place for.

I think there will be a number of mergers and acquisitions both in Canada and from outside of Canada. We've seen that in every other sector, and it's going to happen in the biotech sector. Not being an economist and not being in that game, I certainly would be the last person to say biotech is going to suffer any worse than any other sector. I think there are going to be significant amalgamations within this country as well, as the different groups become synergistic. It just makes sense to put those kinds of groups together.

Mr. Jim Jones: Mr. Oliver, you talked about the opportunities you could see in this industry. With all these opportunities, somebody is going to lose. The people who are going to have to lose in this industry are going to fight very hard and maybe stop this. What do you say there?

Mr. John Oliver: I'm not absolutely sure that anybody has to lose because I think the opportunity is so great. I don't think we've ever seen the kinds of opportunities we're going to.... I don't think we necessarily have to lose.

I think there are three things we have to keep in mind from a Canadian point of view in attracting.... In my mind, the number one determinant of economic development in the future is going to be quality of lifestyle. If you look right now at the polls that have been done recently for the information technology industry, the two best places in North America to live and develop a company are Boston and Ottawa.

There is another thing we have in Canada. Keep in mind that I said the number one critical constraint on agriculture in the future is access to good farmland to raise feed grains. In Saskatchewan alone we have 64 million acres. If we do the kind of thing where we can end up by expanding the application of crops, etc., this is a resource that is huge.

I'll also speak to something we don't think of in Canada. I've just been through it recently in Calgary, where we have a biotech company called SemBioSys Genetics, one of the top companies in the world. We couldn't find the CEO we wanted in Canada and we brought him in from California. His wife didn't know where Calgary was. She looked in the atlas, remembered the Olympics, and 45 days later she was living there. Two years later they wouldn't go back. Do you know why? He said people don't understand what personal security is until you lose it. They came from a place where they couldn't let the kids play outside. He's the greatest salesman we have for Canada, that individual.

We have a whole bunch of stuff we can sell here that I think will make this the place to invest. Keep in mind that in agriculture we have a much stronger base, we have deep roots, we have a lot of land, and we have a resource on the farm that's second to none in the world.

Mr. Jim Jones: We have to do some selling, though.

Mr. John Oliver: That's the problem with agriculture; it's production-driven and it has a very short-term focus. It's three years: last year's crop, this year's crop, and next year's crop. We have to think out 10 to 20 years because that's when the lines cross.

You stop and consider that China and India alone will each have three billion consumers by 2020. If you look at the country where biotech has taken root, it takes root where you have a high part of disposable income being used on food. You have three major countries in the world in agricultural biotech right now: U.S., Canada, and Argentina. The fourth is China.

• 1130

We can't stop the train. The ship's left port. The Titanic's on the water.

The Chair: Are there any other comments?

Dr. McLennan.

Dr. Barry McLennan: The numbers we're throwing out here this morning clearly remind us that we do have a very viable, growing biotech industry in Canada. What we're talking about here is ways to nurture that, make it grow stronger, and make Canada more competitive. Just to remind you, most jobs are created in small companies, as you know. And a lot of these are small companies.

That's what a lot of our recommendations speak to. We need to maintain and create an environment that allows those companies to grow, so that the jobs are in Canada, so that our young people don't go to the States and become our competition. Mr. Oliver has given us an excellent example about the lifestyle argument. Yes, it's true.

So I just want to repeat that. I think we are competitive and we can be more competitive. We can hold those jobs, create the jobs and hold those people in Canada, and stop worrying about the States taking over everything. Let's dig our heals in and create an environment for a Canadian competitive position.

I agree with my colleague at the end of the table that the train is going down the track. We have a narrow window of opportunity here to respond in the biotech sector, it's moving so fast. And that's one of the comments I made earlier—I'm worried about this. We have to move quickly to change the regulatory environment and change the tax structure to make sure our companies can grow, thrive, and prosper in Canada.

Thank you.

Mr. Jim Jones: What we have to define, too, is creating the environment, because money talks and BS walks. I think we have to think of this, because we have seen other industries that were in their infant stages and somehow got their doors blown off by the Americans in technology. Even now, on the Internet, they're going leaps and bounds way ahead of us. And the adaptation of a—

The Chair: I apologize, Mr. Jones. We're going to have to suspend and return. I'd ask members to return as quickly as possible after the vote. It will probably be about 15 minutes, so our witnesses can relax until we come back.

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• 1201

The Chair: Order, please. We'll try to finish up in the next 15 or 20 minutes, if that's possible. Again, I apologize to you. We all know you're on schedules as well.

Just before we broke, Dr. de Villers was going to add something to the discussion. I don't know if you'd like to add to it now.

Dr. André de Villers: Yes, I was referring to Mr. Jones, who unfortunately is not here any more. The question is what will happen to the young companies that will be bought by the large ones. I think there are some examples. Biochem Pharma, for example, developed the best AIDS drug in the world. It's still a Canadian company, and it will grow. QLT and Biovail are still Canadian. At Theratechnologies, we had the choice of selling one of our companies to Hewlett-Packard. We chose to manufacture and do R and D for a new medical device here in Canada, so we made a deal with Hewlett-Packard and kept the production and the R and D in Canada. That was good for us and good for Hewlett-Packard.

So even if it's a starting company, for a lot of reasons I think we can build something in Canada. What I suggest to you, ladies and gentlemen, is the fact that if we make a deal with Industry Canada for the TPC program, for example, if we have Canada as a partner, it will be very difficult for us to move to the U.S.A., because we have a contract with the Canadian government.

So there are creative ways to keep our talent and human resources. I think we are very good. We are extremely creative and the science is there, and that is a way to keep those people and to build on biotech. Biotech will be a success, and I think Canada can still be in the foreground.

The Chair: Thank you.

Unfortunately, Mr. Picard has to go to chair another meeting, and we have a couple of members who are still on their way back.

I just wanted to raise an issue with regard to GM foods and the issues around them. Things are happening and there are a lot of questions out there. It's not that it's not good science; it's a question of what it means to productivity and efficiency. I'll just use agriculture as an example.

A study is going to be released that deals with triple-resistant canola weeds that were found in Alberta. What does that mean now, and what is that going to mean to the future? The whole idea was having canola that was going to require less pesticides, but we've created these weeds that are now stronger than ever, so now we're going to have to go back to using the pesticides to get rid of them. Where's the efficiency or the productivity gain there? I'm sorry, but I seem to be missing something in the link.

Mr. Oliver.

Mr. John Oliver: I'll give you one answer to that, Susan. This, of course, is the environmentalists' story.

Keep in mind that when we talk about canola, firstly we wouldn't have the canola crop if we didn't have genetic engineering, because canola is a genetically engineered crop. Canola is a rapeseed crop in which we bred out the bioglucosinolates and erucic acid to make it into an edible crop.

• 1205

Rapeseed was grown in Canada as a replacement for oil at the time of the Second World War. That's how we got into the production of rapeseed. It was as an oil source, and then we modified it so that it could be a food source. Now it's the single-best, low-saturated-fat oil produced in the world. It's second to wheat in our exports in terms of dollars, and sometimes it passes wheat.

When you look at canola, it has been modified to tolerate two herbicides that would normally kill it—Roundup from Monsanto, and Liberty from AgrEvo. When we have it passed out.... Canola is a brassica crop, so it's in the same family as mustard and that sort of thing. If anybody is used to farming, if you just put a whiff of 2,4-D near a canola plant, it's gone. That's the issue. You're talking about the volunteering of other species that come in afterwards and create a superweed, but we've always rotated herbicides in our....

You have a natural selection process that takes place in farming no matter what happens. If you use a product like Treflan, for example, you'll get a certain percentage of grass escapes. Well, you then use a different herbicide like an alachlor or a Lasso. Actually, you don't use alachlor because we took it off the...not alachlor, Dual. It's a natural rotation that farmers are used to doing, so I don't see that becoming a big issue.

The efficiency we've gotten out of genetic modification using Roundup gives us a crop that is more competitive because it takes all the weeds out of the crop. It also allows earlier seeding. The issue in western Canada is not so much the crop you're growing, but the managing of time in a short growing season of 90 to 105 frost-free days. This gives a farmer more options, which is the reason why they go to the technology. They know exactly what they will get from a productivity enhancement. It's hard to sell that on the street in downtown Toronto, though.

The Chair: I guess that's part of the problem. As these studies are being done, it's not that there should be fear created; there just need to be some answers out there. The whole idea of creating this canola that we grow without pesticides was to avoid using Roundup.

Mr. John Oliver: Well, they have to use Roundup on it. They spray Roundup on as the pesticide. The crop will tolerate Roundup, which it normally wouldn't. It was genetically modified to tolerate Roundup, so you only really have to use one herbicide then, rather then rotating to two or three, which is what they have historically been doing.

The Chair: Some of the predictions were that the weeds are going to develop the same tolerance, so that you're going to have to go back to using something that you weren't supposed to use or that you didn't want to use.

Mr. John Oliver: You could take a genetically modified crop, like a Roundup-ready canola, and you don't have to use Roundup on it. You can use several weeds. It's just a variety of canola that happens to have a characteristic that allows it to tolerate Roundup. You could use Treflan, you could use Edge, you could use Poast, or you could use a number of other herbicides on it.

The Chair: Dr. McLennan, did you wish to comment as well? No?

Mr. Murray.

Mr. Ian Murray: I just had a question, again maybe loosely tying this to enhancing productivity.

Mr. Oliver, there are other major public policy issues right now in the future of the family farm in western Canada: the price of wheat, and where the price of wheat is going. Apparently it's not going anywhere upward for some time. I'm on the agriculture committee as well, and that's what we've been told. Would you suggest that there may be hope there for a good number of farmers in western Canada if they were to start switching now to some things that we haven't heard about, or is this way off into the future?

Mr. John Oliver: I would say to the group that if you want to look at productivity enhancement for the family farm and where this is going to go, look down in the Winchester area, here in Ontario. A group of farmers have come together to form a consortium that will put forward the equivalent of ISO-9000- or ISO-9002-quality characteristics in order to raise crops that will then be destined for industrial purposes, whether they be for pharmaceutical production, for cosmeceutical production, or maybe for high-value, health-impacting food trade production.

Take a crop like canola, which generates for the farm gate about $2.5 billion in Canada. I think that crop in the future will be about a 15-million acre crop, of which I think about three million acres will be of modified versions for various industrial processes. The value of the three million acres will equal the value of the 12 million acres for traditional feed and food purposes.

• 1210

I can give you a specific example of that. If you take canola, your gross margin per acre normally runs between $280 to $300 an acre. We were producing an anticoagulant on our test at one of the prison farms in B.C., because we wanted to be well away from commercial control. It comes from the leech and it is being developed by Rhône-Poulenc at the present time as an anticoagulant for post-cardiac surgery. The value of that crop, with that active ingredient in it, was $1.1 million an acre. So this is what we're looking at in terms of range.

I think we'll see several acres of crops that'll be produced by the family farmer who is in a production consortium, because they're the people who know the land. The one thing that all these companies are afraid of is farming, because you have to get the people who know the land to do it.

Mr. Ian Murray: We have the government spending billions of dollars. We offer a billion and we're asked for another billion in aid to farmers. Perhaps there is a more economic way of using that money to turn farmers in a different direction.

Mr. John Oliver: The issue there is that Canada is caught like the meat in a sandwich, between a socially driven agriculture in Europe, where you have 7.3 million farmers farming an average of 47 acres, and the U.S., where 2 million farmers are farming an average of 467 acres. The drives are different. Unfortunately, Canada gets caught in the middle, between the U.S. government trying to make sure their farmers can survive and the European farmers trying to keep the farmers on the farm and out of the cities.

Mr. Ian Murray: I understand that. What I'm trying to get at is this. Could we make a dramatic turn or a dramatic shift, then, accepting that we can't out-subsidize the U.S. or the Europeans and get a step ahead of what may be down the road for Europeans and Americans in terms of what we're growing on farms in Canada?

Mr. John Oliver: The minute we get to the functional foods with the health impacts we'll have an opportunity to do that. The other one that could help us a whole lot, and I'll give you a specific example with regard to the Kyoto agreement...the Iogen people, the link between Industry Canada and Petro Canada...what has to be done on carbon credits.

I looked at the numbers of what Petro Canada said they had to do. If you take solid-seeded silage corn, genetically modify it for a high sugar content, plant it in the spring and don't harvest until the following late fall or winter so it dries down the field, this would be a biomass, a new process of ethanol production. We're taking ethanol costs from $4 a gallon down to about $1.25 a gallon. I think we can take it below $1, but we would need about 1.8 million to 2 million acres of silage corn to accomplish that. We're only growing 2.6 million acres in Ontario. The constraint is the land that's available to do these things.

Unfortunately, we're in that five- to seven-year transition period from the situation we have today. We were on a fairly good wicket until the economic flu hit Asia because we were shipping a lot of pork and beef and so on to that market, and that'll carry the feed grains. We're in that transition period. We can't spend our way out of it with a subsidy. I don't believe it will work.

The Chair: I would like some clarification. Perhaps I said something incorrectly earlier, so I would just like to make myself understood and understand what you're saying with regard to canola and when you talk about productivity and efficiency gains. The idea was that canola would be able to tolerate these pesticides. The problem we now have is that these weeds can now tolerate the same pesticides.

Mr. John Oliver: The weeds have to be in the brassica family, so you have to have weeds like wild mustard or volunteer canola.

Those weeds are particularly susceptible to phenoxy herbicides, which are the benchmark. We've had phenoxy herbicides for about 50 years now. They're relatively cheap per acre and they just devastate a brassica crop. So you can take those weeds out if they emerge very easily.

• 1215

The Chair: How can you very easily take them out if they emerge?

Mr. John Oliver: You spray them. Their concern is outcrossing from the Roundup-ready canola. They're not concerned about the weeds in the Roundup-ready canola, but they're concerned about the outcrossing into wild mustard, into volunteer canola or that sort of thing, which would come in in a crop. If you're going to have other modified crops coming in behind that are Roundup modified, say, then these particular brassica species would become weeds.

Today we're not modifying the monocots. We're working on it, but we don't have any products on the market for their genetically modified wheat. If you have that kind of weed come into the wheat crop, following your canola crop, or your barley crop following your canola crop, simply spray it with 2,4-D, which you're likely to spray anyway. It isn't a real issue. It sounds like a real issue, but it isn't.

The Chair: Until that message gets out, people are wondering and people are asking questions.

Mr. John Oliver: We're not very good communicators.

The Chair: We've lost market share right now. For example, we've been shut out of the EU when it comes to certain things. What does that mean for productivity and efficiency in agriculture?

Mr. John Oliver: We're shut out of the EU because of their desire to protect their farm support program.

The Chair: I understand that, but what does that mean for productivity and efficiency in Canada?

Mr. John Oliver: It's a loss of a market. It isn't a big market for canola, because our big market for canola is Asia, particularly Japan. It is a concern. Most of all it raises uncertainty. It slows down the development of the science.

More than anything else, the kind of pressure that we see from the Europeans...and the Europeans are out around the world, asking questions and talking. It's a customer we have to serve.

Dr. Bob Church from the University of Calgary puts it best. He says in agricultural biotechnology, perception is reality; the facts are negotiable. That is what we're dealing with in agricultural biotechnology. What we saw on the weekend with the Loblaws' announcement again raises uncertainty. Farmers are getting ready to go out in the field. You have that out there, so they ask themselves whether they should plant GMO or not plant GMO.

Dr. Barry McLennan: I want to make a comment on a different topic.

I just want to respond to a question Mr. Jones asked before the break, and that was the issue concerning how we create an environment in Canada that will ensure that companies can prosper here and not migrate to the States. I want to pick up on a comment made by Dr. Hough in terms of the technology partnerships Canada program.

That program has made some very important strides lately, in my view, with respect to going after and nurturing the biotechnology sector. They're doing it in part with the technology transfer offices at the universities. Let me just back up a little bit.

Many universities in Canada are now finally putting some time and attention into tech transfer; in other words, generating spinoff companies from research done by their scientists in the university environment. There's a really nice synergy now going on between that activity and the opportunities provided by TPC. So I'm just making a plug to ask Industry Canada to continue to do that. Indeed, one of our recommendations speaks to that, to encourage TPC to continue to realign what they're doing and address this emerging biotech sector, because there's a tremendous opportunity there for synergy and for developing economic activity for Canada.

Mr. Paul Hough: I would agree with that. I think, though, that it would be worth looking at the mandate of TPC, because as I understand it they are obliged to actually devote something like 80% of their resources into the aerospace sector. So while they have made significant investments in the biotechnology world in the last three to four months—and hopefully will continue—the actual level of resources they have available to do this, be it in biotechnology, be it in other enabling technologies, is relatively limited.

I'd like to make another quite unrelated point. While the Europeans have put into place non-trade barriers to our products, one might conclude from this that they are not interested in developing biotechnology. Yet, in fact, from a government point of view and from the private sector point of view, all the European countries are actually pouring very significant moneys into the development of biotechnology of all types: agriculture, pharmaceutical, and others. So they are not just sitting on the sidelines watching, by any stretch of the imagination. That's another reason that Canada really has to keep in place all of these programs and more, such that our own industry and research capacity is not diminished in any way.

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The Chair: From a committee standpoint, some of you may remember that we had written a letter to the Minister of Industry after the biotechnology panel report first came out in June 1998, endorsing a number of their recommendations but adding a caveat to it that we were concerned about health, that we didn't think that health was a strong enough aspect for consumers in that knowledge.

I don't want to say that we kind of foreshadowed what was to come, but as a committee we saw that consumers are going to want to know and that this needed to be a larger focus of that group itself and of the results that came out of it. Because we believe that our technology, as we know in agriculture and other industries, has been around for a long time and is what has been driving.... You can't pick up anything that you eat that hasn't been enhanced over time in some way, shape, or form.

That being said, consumers want to know, consumers have a right to know, and the safety issue needs to be spelled out. It's not that it's not safe. It's that we need to do a much better job of promoting the benefits of biotechnology and where the future of it lies. Obviously we can see the benefits, and we hear from you today the necessity for government to maintain and be involved in the productivity and the efficiency that could result for Canada. Whether we're going to be at the forefront or not in the picture is going to be an interesting decision, just to see what happens over time.

Again, it's been a very interesting discussion today. I—

Mr. Ian Murray: I have just one quick question.

The Chair: Sure, Mr. Murray.

Mr. Ian Murray: Sounds like you're about to—

The Chair: It's just that we have to go to vote again.

Mr. Ian Murray: Yes, I know. I'm listening to the bells.

Again, just because we have the experts here, on the question of the danger of genetically modified foods in the minds of the public, is there any genetically modified food that could be dangerous to human beings? The human gut can destroy all kinds of things, I imagine, but is there something that could be developed that would be dangerous? I know I'm showing ignorance here, but what is the potential life-threatening modification?

The Chair: Dr. McLennan.

Dr. Barry McLennan: At the moment, I don't know of any product that is unsafe. These foods aren't simply produced and put on the market without testing and without adhering to and complying with rigorous standards. I would ask anybody who is excited about this to show me some evidence of a product that's harmful and is on the market.

On the flip side of that, we have an alternative medical industry developing. Also, there are all kinds of products in the health food stores and so on. There are products that you can buy there that don't have to follow the same rigorous standard the pharmaceutical industry has to follow. So I guess my answer to the people on the street waving the placards is, show me some evidence that there's a problem.

Now that doesn't say, as the chair was pointing out, that we don't have a problem in communicating and in putting out the positive news story. We do, and we must do that, but it's absolutely wrong to suggest that these products are on the market without testing. They are tested—rigorously.

The Chair: I apologize. We're going to have to break again. We're at three bells, which means we're voting in less than five minutes. We thank you very much for being here.

The meeting is adjourned.