INDU Committee Meeting

STANDING COMMITTEE ON INDUSTRY

COMITÉ PERMANENT DE L'INDUSTRIE

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, November 16, 1999

• 0905

[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 as it relates to shipbuilding.

I am very pleased to welcome here today, from the Department of Industry, Mr. John Banigan, the assistant deputy minister from the industry sector. We also have with us Ms. Ninon Charlebois, the director and manager of briefings and strategic management, and Mr. Brian Kissner, issues policy officer, briefings and strategic management. From the Department of Finance, we have with us Mr. Paul Berg-Dick, director, business income tax division, tax policy branch, and Mr. Miodrag Jovanovic, tax policy officer, business income tax division, tax policy branch. From the Export Development Corporation, we have with us Mr. Glen Hodgson, director, government and international relations, and Mr. Daniel Primeau, relationship manager, transportation equity and business team.

My proposal is that we have each of the different departments do their opening statement. Then we'll go to questions all together, if that's okay.

We'll begin with Mr. Banigan.

Mr. John M. Banigan (Assistant Deputy Minister, Industry Sector, Department of Industry): Thank you, Madam Chair.

If you'll permit me, I have a short slide presentation. I believe there are paper copies available for members as well.

The shipbuilding industry in Canada in 1999 comprises employment of approximately 5,000 people and approximately 12 companies. There are four regions where there's activity.

In British Columbia, employment is about 1,300. The firms are as listed: Allied Shipbuilders and the Washington Marine Group, which is a fairly significant industrial group. There is one firm remaining in Ontario: Canadian Shipbuilding and Engineering Ltd., in Port Weller, which employs about 700 people. In Quebec, there are two firms, with employment of approximately 1,000: Industries Davie and Verreault Navigation. In Atlantic Canada, there are approximately 1,900 employees in three firms: MM Industra, Friede Goldman Halter, and the Irving Group, which owns a number of smaller shipyards. So we have some major industrial groups in each region, as well as a few small firms still remaining.

The industry has been undergoing a rationalization for some time in the face of somewhat difficult market conditions. From 1986 to 1994, there were a number of rationalizations, which were assisted by the federal government. They are listed in our chart.

In Ontario, the Collingwood yard closed, the Port Weller yard was modernized, and Port Arthur was decommissioned. You'll see from the chart that there were some 2,000 job reductions in that province. Federal contributions to assist the workers as well as the yards are listed there: $14.1 million in the case of Collingwood and $9.1 million in the case of Port Weller and Port Arthur.

A similar rationalization took place in Quebec, with the closing of Vickers and Tracy, where assistance of $144 million went to a combination of workers and the firm to assist with the closure and a job reduction of 2,150.

There was rationalization on the west coast as well, with some displaced workers receiving assistance of $1.8 million. A firm called Rivtow closed, the Vancouver dry dock was modernized, and what was called VPSI, Vancouver Pacific Shipyard Industries, closed in North Vancouver. The Yarrows yard in Esquimalt closed. There were job reductions of about 2,500 with some federal assistance to help workers.

• 0910

There was not much in the way of rationalization; this was a voluntary program. There was very little in the way of rationalization on the east coast. Pictou did close. There was no financial assistance involved. It has since reopened. The rationalization really was in the three main regions, not in Atlantic Canada.

Some of all this activity was a reduction in employment of about 7,200 jobs, and a smaller market as a result. The industry association, called the Shipbuilding Association of Canada, has acknowledged that this rationalization has led to an industry that is better suited to the market prospects.

You'll note as well that employment was sustained throughout the involvement of some major federal procurements: the CPF, the Canadian frigate program; the TRUMP, which is the tribal class update and modernization program; and the project on the MCDV, which is a small military vessel. These military contracts sustained the industry in Quebec and in Atlantic Canada throughout the 1980s and into the early 1990s. But these programs are completed now, so the lack of federal procurement has, I think, been a factor that now faces the industry. It sustained the industry during the 1980s and into the early 1990s, but it contributes to their weak market prospects at the present time.

On the global scene, this industry is dominated by Asian producers. Japan and South Korea, as you can see from our chart, are the dominant players. Together with China now, which is an emerging rival, they supply some two-thirds of the total market for commercial shipbuilding. This doesn't take into account military shipbuilding. This is the commercial market.

We observe that the rationalization pressures and the competitive pressures affect Asian producers as well. China's industry has been rationalized from some 26 companies to 2 major firms. There has been restructuring in Korea in firms like HHI and Daewoo. The competitive pressures amongst the Asian rivals are clear.

Also, we've seen a strong impact on the European producers, such as Norway's Kvaerner, which have elected to get out of the business. This industry has largely migrated from traditional suppliers in western Europe in the post-war period to southeast Asia. Many European firms are suffering the competitive pressures. You can see that their market share is reducing.

The United States, as you can see from our chart, is a very small supplier of commercial vessels. I don't have the exact number, but on the scale it looks like about 1% of the world's market. By comparison, Canada is too small to show up graphically. We estimate it is .04% of the world's market for commercial shipbuilding. We're rather small in the world scale of things. You'll see on the chart where the major international competitors exist.

Our next slide attempts to break the market into three general categories. It's important to talk about these market segments, I think, because if you look at the first market segment for major ships, Canada is not really a producer in this area, so comparisons would not be appropriate.

The very large crude carriers and the very large passenger cruise ships—and these are growing all the time, as you may have observed—is an area that Canada's not active in. We don't build vessels of this nature. The Japanese, despite being a high-wage country, are fairly active in the very large crude carrier market, which is a specialization they've carved out.

Our chart shows output and capacity expressed in what they call compensated gross tons, which is a term used in the industry. You can see that in 1998 we have output of some 12 million compensated gross tons and you can see that the capacity was 23% higher than that. There's overcapacity in that sector.

• 0915

In the second category, smaller vessels, which we've called minors, there are three types of vessels. There is a mid-size cargo ship, which in the trade is called a 1200 TEU; TEU means 20-foot equivalent units. Basically, I think, those cargo containers that you see are container ships. The Irving Group has recently built some of these vessels. Icebreakers, ferries, and frigates is a category where Canada has some capacity, where it can build ships of this size. As you can see from the data, the output was some 4.2 million CGT and the capacity was 41% higher than that, so the overcapacity is worse at this higher end.

Then, of course, there is a series of smaller vessels, where Canada can compete as well: tugs, fishing vessels, rescue craft, and offshore supply vessels. Again, globally there is overcapacity of some 40% in this particular area.

I think it's important for members to note that Canadians don't compete in all segments of the market, so if you should compare where Canadian capabilities exist with what other countries do, you have to exclude the larger category.

You see an industry suffering from overcapacity. We understand from some market forecasts that the global overcapacity is expected to reach 40% by 2005, but for the smaller category of vessels, in which Canadians produce ships, we are already at that level of global overcapacity.

It's rather difficult for us to give you detailed data and analysis on competitiveness, so I am largely restricting my presentation to observing market trends. I guess, then, the verdict of the market will indicate how Canada fares in these markets.

Our next chart looks at some statistics dealing with projected prices and orders. On the left-hand side you can see, from a source called Drewry Shipping Consultants, the projected demand for new orders. You can see that it has been fairly steady in the last couple of years, but it's generally on a downward trend. It's comprised largely of the tankers—and those are those large category vessels made in Japan which I referred to recently, which Canada does not make—bulk carriers, and some other vessels. A fairly declining market seems to be the forecast there.

The chart on the right-hand side tries to indicate what's happening to prices in all categories of ships, prices in terms of observed transactions in the marketplace by this one source, Clarkson's World Shipyard Monitor. There are soft prices and declining prices in the market, which we observe. In some, if you look at our last two observations, the container ships of 1100 TEU and 3500 TEU, there seems to be more price pressure than in some of the larger ships that are in the top of the category. We have weak demand and we have declining prices, according to these industry observers.

There is an OECD working party on shipbuilding; it does not include the United States. Canada, I believe, has an observer status in this working party. Amongst the members—as I recall, there are some 30 or 40 members of the OECD in this group—they have collectively combined some statistics. I've shown you some data on this next chart.

For the total working party, the labour force in this industry is on the decline. In 1976 it was 548,000, and by 1994 it had declined to 167,000. Two years later, it rose slightly to 187,000.

In the EC, the decline continued. It declined from 314,000 in 1976 to 79,000 in 1994, and then continued to decline to a little less than 72,000 in 1996.

• 0920

Japan, although they hold significant market share, has faced declining employment, as you see, from 175,000 down to 53,000 in 1994, and then to 46,000 in 1996. Also, Korea has had a dip, as you see, in 1994; it has rebounded somewhat, to close to the 1996 employment levels.

So labour is under pressure, really, in all major markets according to these data, both with overcapacity and some withdrawals from the market and, in some cases, I guess, significant productivity gains as firms are able to maintain their output while reducing their labour costs.

On the right-hand side of the charts, you'll see similar numbers in terms of the number of shipyards. You'll observe the global rationalization here, continuing from 1,100 yards down to about 775 yards. It continued to climb in the EC. Japan has gone down a bit, from 579 to 492. Korea has stabilized; it has reduced the number of yards with its rationalization program, but has stabilized at about 78. This data excludes the United States. However, as you saw from the previous chart, the United States are not really major producers of commercial vessels. They produce some, but that's about 1% of the market.

Those are some statistics on the market. The final slide, Madam Chairman, deals with the federal shipbuilding policy, and it entails a number of policy measures that have been in place since about 1996.

Firstly, the acquisition of ships in Canada by the federal government is done on a competitive basis but is restricted to Canadian sources. There is duty protection of 25% for non-NAFTA vessels imported into Canada, with the exception of some small fishing vessels. There's an accelerated capital cost allowance, whereby a Canadian-built and -flagged ship purchased by Canadians can be written off over a four-year period rather than the normal life expectancy of the vessel, which may be perhaps 20 years.

There was a rationalization program to assist workers in yards to adjust to the difficult market conditions. As you saw in a previous chart, from 1986 to 1993 the federal government contributed some $198 million to ease that adjustment.

On the trade side, the government will continue its negotiations in multilateral fora to deal with unfair trade barriers. The most difficult one, of course, is what's frequently referred to as the Jones Act. This is an act that has been on the books in the United States for many decades, which essentially says that all vessels plying a trade between ports in the United States must be built, manned, and repaired by Americans, which precludes Canadians and others from accessing the commercial market in the United States. We will continue our efforts to try to remove these unfair market access barriers.

Other forms of assistance for the industry are offered through the Export Development Corporation, which provides export financing for manufacturers of ships in Canada. The Canadian Commercial Corporation can also assist in government-to-government contracts to assist exporters.

The government of course encourages an innovative economy and has attractive support for research and development if firms wish to improve their productivity through improving their products and processes. We have an attractive R and D tax credit system. We have financial assistance through risk-sharing repayable funds through Technology Partnerships Canada. There is some institutional support through the National Research Council's Institute for Marine Dynamics. So if firms wish to work on the innovation side of their competitiveness challenges, the government is there to help them in a number of ways, as they are for other industries.

Madam Chairman, that's the end of my presentation. I'll be pleased to pass this over to my colleagues now if that's your wish.

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

I'm wondering if Mr. Paul Berg-Dick from the Department of Finance has some opening comments.

Mr. Paul Berg-Dick (Director, Business Income Tax Division, Tax Policy Branch, Department of Finance): I just want to reinforce some of John's comments in terms of how the tax system provides support for shipbuilding.

• 0925

In this case, it's indirectly through a four-year write-off for the purchase of Canadian-built ships—which is significantly shorter than the economic life of a ship. As well, that's a higher CCA rate than would apply to other ships used in Canada. That's also a higher CCA rate in comparison to what the U.S. provides for ships.

Again, just to reinforce John's comments about the availability of an R and D tax credit for all companies in Canada, it's really the most generous R and D regime, certainly in the G-7, which again provides an opportunity for companies should they decide to avail themselves of that. With that, I'll pass it over to the chairman.

The Chair: Thank you very much.

Mr. Hodgson, from the Export Development Corporation.

Mr. Glen Hodgson (Director, Government and International Relations, Export Development Corporation): Thank you, Madam Chair.

We don't have a prepared statement to circulate, but perhaps I'll just make a few comments, first of all to remind the committee who EDC is. We're a federal crown corporation. We operate very much at arm's length from government but we report to Parliament through the Minister for International Trade. In fact, as I speak, there's another parliamentary committee meeting this morning to review our act, which is in the midst of a five-year review as mandated by our legislation.

I guess the other key principle I'll put on the table is the fact that we have had a mandate from the outset of EDC to be financially self-sustaining, so we're not in the business of providing grants or subsidies. We try to operate on sound commercial terms. We support transactions in all sectors, including the shipbuilding and ship repair sector, on sound commercial terms.

We're active in this sector. We've been actively building relationships with the shipyards and with the management and workers across the country. My colleague, Dan Primeau, has this as a full-time occupation—working with the shipbuilding industry—and he has just passed me a number for the committee. Over the last almost four years now, we've concluded 17 transactions in this sector, for a total of $247 million in business. So EDC is active in supporting the ship repair and shipyard industry but very much on commercial principles.

I'll stop there, Madam Chair.

The Chair: Thank you very much.

Now we're going to turn to questions.

Mr. Penson, do you have any questions?

Mr. Charlie Penson (Peace River, Ref.): Yes, I have.

I can hardly believe what I'm hearing here this morning in this presentation by Industry Canada, who are telling us about all the problems in the shipbuilding industry, that is, that it's a declining industry, with a world overcapacity of over 40%, with Canada not even in the ballpark, and with 25% duties against imported product. I guess it's maybe a study on what not to do in terms of productivity.

Yet the department comes here and tells us that it has a shipbuilding policy that has technology partnership grants, research and development grants, and the Export Development Corporation supporting it. Why? Why are we going here? Sometimes I think we have to say that other people do things better than we do and maybe...I guess if you were the supreme optimist, you'd say, well, there's a lot of room for improvement. That's the only thing I can see that's good about this.

I can't understand what we would be doing trying to support an industry that is in decline all over the world. The industry has moved away from North American and European markets into southeast Asia. Let's do things that we can do well, let others do the same with theirs, and take this 25% duty off.

We've seen a cost overrun of $300 million on one of the B.C. ferries. That's the kind of thing that's happening. I just can't understand why government departments would come here and tell us about all of the things that are going wrong and then still have policies that suggest we continue to prop it up.

I would just throw that out to Mr. Banigan for a reaction.

Mr. John Banigan: As you observed, sir, it is a difficult market, and it has migrated to Asia. There are a number of problems facing shipbuilders in terms of protected markets and in terms of subsidized operations in other countries. I wouldn't characterize the government's policy as propping up the sector; I think there are some generally applicable support mechanisms that are available to it, such as a duty on non-NAFTA imports.

Normally we reduce duties in a multilateral forum. We're going into a WTO round in Seattle. If we're going to deal with duties, then we'll deal with them, I think, in that type of forum, where normally we do things on tariffs multilaterally, not unilaterally.

• 0930

Technology Partnerships Canada is a program that is available to a number of firms, for them to do research and development if they so wish. It's repayable based on success; it's a risk-sharing, reward-sharing program. I don't think anybody would characterize TPC as propping up anybody. It's a partnership for technology—

Mr. Charlie Penson: I think some would.

Mr. Banigan, in regard to your statement about negotiating down tariffs, can I ask you—it's a multilateral process and I agree—what the government's policy is in that regard, going into the WTO talks, specifically about duties? Is Canada prepared to give on the 25% duty we have in return for a more liberalized duty regime?

Mr. John Banigan: I don't think I'm qualified to speak. That's for the Department of Foreign Affairs and International Trade, which is leading our trade negotiations in Seattle. All tariffs are probably on the table for discussion, I would expect, depending on what we can get in return.

Mr. Charlie Penson: But are you not advising Foreign Affairs and International Trade in this sector?

Mr. John Banigan: We are advising in terms of industrial impacts. That's correct.

Mr. Charlie Penson: Yes, and you still don't have a position in terms of what you'd like to see in terms of trade liberalization in this area...?

Mr. John Banigan: We don't have a formal position for this particular sector. It's a multilateral forum and it's all a question, I think, of trade-offs as to where Canada's national interest best lies. The tariff is there for the protection of shipbuilders, who are facing very difficult market conditions. I think some would see it as a positive thing. If you're a shipbuilder in a very difficult market, that does give you some protection against competitors who are often subsidized or where we don't have access to their markets on a reciprocal basis. A shipbuyer may want to have a lower tariff, but a shipmaker, I would suggest, would probably would like to keep the tariff in place.

The Chair: Thank you, Mr. Penson.

Madam Jennings, please.

Ms. Marlene Jennings (Notre-Dame-de-Grâce—Lachine, Lib.): You made the point that the American market, through the Jones Act, I think, is actually closed to Canadian shipbuilders and that there is a move on to attempt to see that act removed. What are the chances?

Mr. John Banigan: Slim, I would suggest.

Ms. Marlene Jennings: Slim to none.

Mr. John Banigan: This legislation has been in place since the 1930s in the United States. It has been very aggressively defended by the Americans.

When the previous government negotiated the free trade agreement some 10 years ago, in the draft of the document there was some liberalization suggested, but it didn't stay in the draft very long. The previous government was unable to get the Americans to make a concession in the context of the FTA. I think we'll continue to try because it's an unfair trade barrier, but there are very strong interests in the maritime sector in the United States that would oppose this.

Ms. Marlene Jennings: Has there ever been any challenge at the WTO?

Mr. John Banigan: Not to my knowledge.

Ms. Marlene Jennings: Why not? If it's unfair, I don't understand why a Canadian shipbuilding company hasn't filed a complaint—through the government, I mean.

A voice: It has something to do with our 25% we have ourselves.

Mr. John Banigan: Well, that's a good question. I'm not aware of any complaints being lodged by any firms in Canada through the government.

Ms. Marlene Jennings: This may be redundant, but don't you think that if it is unfair and if that is a possible market for our shipbuilding companies, there would have been pressure on the Canadian government to file a complaint and start up a trade war or whatever you want to call it?

Mr. John Banigan: The industry has often suggested to the government that we should approach the Americans on this particular subject. The dilemma the government faces is this: what would we have to give up in return? This would be a very stiffly opposed measure. It's very long-standing policy in the United States. We would have to give up something significant in return.

Ms. Marlene Jennings: Our 25% possibly...?

Mr. John Banigan: I think they would probably want something more than that. The Americans already have duty-free access into Canada under NAFTA, so that doesn't benefit the Americans.

Ms. Marlene Jennings: Thank you.

The Chair: Thank you very much, Madam Jennings.

[Translation]

Please proceed, Mr. Dubé.

Mr. Antoine Dubé (Lévis-et-Chutes-de-la-Chaudière, BQ): I'm delighted you could be here with us this morning.

Mr. Penson expressed some surprise that despite the statistics, the government is still willing to prop up this industry. You told him that was not the case, and that's precisely what the members of the shipbuilders coalition and workers in this sector believe. While Mr. Penson may be happy to hear you say that, I'm not.

• 0935

Many jobs are on the line in this industry and the Canadian government has disregarded many issues. For example, it has disregarded the fact that this industry is excluded from the Free Trade Agreement. The Americans enjoy duty protection of 25 per cent, whereas our workers cannot even cross the U.S. border. The market is completely closed to them. This situation is totally unfair.

As Mr. Manley has often stated in the House of Commons, Canada would like to see OECD countries stop subsidizing their domestic shipbuilding industry. In Europe, this sector is subsidized to the tune of 9 per cent, whereas outside the European Community, subsidies go as high as 16 per cent. In Asia, the figure is 30 per cent.

Meanwhile, here we have Canada, a country with probably the largest number of waterways, a country bisected by the St. Lawrence which flows through the Great Lakes all the way to Thunder Bay.

Our fleet of ships is aging. They are running aground and breaking apart. I'll spare you the details. There are no rules in place. Canada maintains that it wants nothing to do with subsidies and protectionism. Yet, it's not calling on the U.S. to abandon either subsidies or protectionism. The industry, therefore, has reached an impasse.

In the meantime, some people are watching these ships pass by and others are quietly getting out of this sector. There are those who are patting themselves on the back for having contributed financially to the elimination of jobs prior to 1993, all for the sake of rationalizing the industry. However, the industry wasn't really rationalized in Atlantic Canada, where operations go on as before.

I have a few very specific questions. How many vessels in the world have outlived their normal 20-year life expectancy? This question isn't related in any way to demand. How many vessels ply our waterways? What percentage of the ships built here in this country are destined for export?

You mentioned write-off provisions. Could you give us some indication of the write-off provisions that apply to the railway and trucking industries? Can you compare these to provisions in place for other modes of transportation?

Representatives of the Export Development Corporation have quoted figures on loans awarded in recent years. I'd like to know if you have some idea of the total value of the loans awarded during the fiscal year ending April 1 last.

Once you've answered these questions, I might have a few more for you.

Mr. John Banigan: While I don't have, right at this very moment, figures on the number of ships that ply our waterways or on the number of ships that are over 20 years old, I can look into this and get that information to you in a few days.

Perhaps Mr. Berg-Dick could field your question on the write-off provisions for other modes of transportation.

Mr. Paul Berg-Dick: The shipbuilding industry benefits from more favourable write-off provisions. My colleague Miodrag can give you the figures for other sectors.

Mr. Miodrag Jovanovic (Tax Policy Officer, Business Income Tax Division, Tax Policy Branch, Department of Finance): One has to understand, first of all, that the 33 1/3 per cent write-off for ships built in Canada represents a linear depreciation rate. Total write-off can occur after four years. The rates for other modes of transportation are known as declining depreciation rates. Write-off is never completely achieved. For example, the rail transportation sector benefits from a 10 per cent declining depreciation rate, a rate that is clearly less favourable than the one enjoyed by the shipbuilding industry.

The aircraft and heavy truck industry enjoy a declining depreciation rate of 40 per cent. However, this is a declining rate, as compared to a linear depreciation rate of 33 1/3 per cent for the shipbuilding sector, and as such, it is a far less advantageous rate. A linear depreciation rate of 33 1/3 per cent represents more than a declining depreciation of 40 per cent. Small trucks, on the other hand, benefit from a declining depreciation rate of 30 per cent.

Mr. Antoine Dubé: Could you explain to me what this 33 1/3 linear depreciation rate for ships is all about?

Mr. Miodrag Jovanovic: In the case of this 33 1/3 linear depreciation rate with mid-year adjustment, in the first year, half of the cost can be written off, that is anywhere from 16 per cent to 17 per cent. In the second year, the write-off is 33 1/3 per cent, in the third year, a further 33 1/3 per cent and in the fourth year, the remaining 16 per cent or thereabouts.

• 0940

Mr. Antoine Dubé: The rules were changed in 1989. What provisions were in place prior to that time?

Mr. Miodrag Jovanovic: Before 1989, the general depreciation rate for ships was 15 per cent, with depreciation being calculated according to the declining balance method.

Mr. Antoine Dubé: What method is used to calculate depreciation in other countries? What about the United States, which you claim have a better system?

Mr. Miodrag Jovanovic: The depreciation rate is calculated differently in the United States. Instead of relying on a linear or declining balance method, they use a combined rate, that is they start out with a declining rate and then subsequently switch over to a linear rate. The write-off is over a 10-year period and amounts to a declining rate of 20 per cent. Therefore, this formula is half as attractive as the one in place in Canada.

[English]

The Chair: You had also asked a question of Mr. Hodgson.

Mr. Hodgson, do you wish to respond?

[Translation]

Mr. Glen Hodgson: I could probably answer the question more effectively and expeditiously in English.

[English]

I can give you our business results over the last four years so you can see that there has been a significant ramping up in our overall business in the ship sector. In 1996 we did $3.5 million in total business. In 1997 that rose to $15 million. By 1998 the overall business volume was $97.3 million. This year, to date—

Dan, I would presume this is in September...?

Mr. Daniel Primeau (Relationship Manager, Transportation Equity and Business Team, Export Development Corporation): Yes.

Mr. Glen Hodgson: This year, we're up to $131.2 million.

That is really a consequence of dedicating human resources—and some experienced hands at EDC—to work in this sector.

The Chair: Thank you, Mr. Dubé.

Mr. Cannis.

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

Good morning, Mr. Banigan and all the presenters.

I would like it if you could just touch on the niche that Japan and South Korea are showing here on your slide 4. Of course we see a tremendous difference between their ability to produce and, as you indicated, our ability, which is .04. Obviously there has to be a system whereby they've succeeded; they've done something, whether it's the support or the methodology of building. Can you just touch on that?

The second question I have is about slide 7, with respect to the totals of employment. Of course I've seen Japan and Korea...and they seem to have reduced their labour numbers over the years. They've obviously fine-tuned. Does that correlate with respect to their niche and how they are putting their product on the market? Is there a way of tying that? Can you possibly touch on that?

There's a last question I have, Madam Chair.

I know the question has been asked, but if you could, for us, again please, just touch on the Jones Act that the previous Conservative government negotiated and just shed some more light on it because—

Some hon. members: Oh, oh!

An hon. member: We didn't negotiate it.

Mr. John Cannis: —it's a stumbling block here.

Ms. Marlene Jennings: Thank you, John. That was the one part I forgot to say.

Mr. John Cannis: We all want to hear a little more. You've touched upon it, but elaborate for us.

I wasn't referring to my colleague, Jim Jones.

Mr. Jim Jones (Markham, PC): We're going to have a Jones Act in Canada.

Mr. John Cannis: Thank you.

The Chair: Mr. Banigan.

Mr. John Banigan: With regard to your first question, Mr. Cannis, if I may make a general observation, what frequently seems to happen in the post-war period in newly industrialized nations or nations that are rebuilding their economies is that the shipbuilding industry is an outlet for their steel production. Quite frequently, newly developed countries develop a steel industry as part of their industrialization.

They then seek outlets for that steel. They get into steel fabrication, which often is a result of getting into the shipbuilding business. The technology is relatively mobile. For example, the British and the French sent consultants to Korea to teach them how to build ships, and they went from not being in the business to being a major force in the business in a very short number of years.

Secondly, there's a strong partnership in some of these countries between the government and private industry. There's a lot of industrial policy, a fairly dirigiste industrial policy, where there's quite a bit of industrial planning in the economy. This, I think, accelerates the entry of some newly industrialized countries into the shipbuilding industry. We've observed that in South Korea. I think you're seeing that in China and in some of the former Soviet Union countries. I think some of those market conditions would exist there as well.

• 0945

The Japanese have been big shipbuilders for a number of years. Their strategy appears to have been to specialize in some of the very large tankers and bulk carriers that have been a niche market for them. It's been an outlet for their steel industry in the post-war period as well. They have come to dominate that particular area.

They have become involved in a number of specializations in terms of production technology, like modular construction. They have used information technology for CAD/CAM design and some of these sorts of things and have managed to keep their productivity gains quite high in this particular sector, despite being a fairly high-wage country. So as for the challenge of high wages, I guess it is possible, although obviously rather difficult; if you do use technology and you learn how to specialize, you can be competitive in a niche market despite being a high-wage country.

If you look at the firms on this list, Japan is perhaps an exception. Many of the nations you see that are participants in the business have wages lower than Canadian-level wages, so it certainly is a very formidable challenge.

With regard to the Jones Act, it's frequently referred to as the Jones Act, but I think the proper name in the United States is something like the Merchant Marine Act of 1936. It is a protectionist measure that has been in place for a long time in the United States. I think it is sometimes defended under national security provisions, although it deals with commercial vessels as well as military vessels. There's a very strong marine lobby in the United States, which has persuaded Congress to keep that legislation in place for these many years, perhaps some 60 years.

During the FTA negotiations, the trade negotiators did get some relief in the draft text that was released, but it was very quickly removed when it was under tremendous pressure from the marine interests in the United States. The previous government was not successful in getting the U.S. government to give us relief under what's commonly referred to as the Jones Act.

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

Mr. Riis.

Mr. Nelson Riis (Kamloops, Thompson and Highland Valleys, NDP): Thank you, Madam Chair.

I have three or four questions, John. I'll just lay them all out and then perhaps you and Paul can respond. You've outlined some of the existing policy programs to encourage and assist the shipbuilding industry. How do you measure whether those programs are ever effective? It would seem to me that so far they are not that effective. Is there a process whereby the accelerated capital cost allowance, the 25% tariff and so on...do we ever ask whether these things are working? If so, do you have some evidence of that?

Secondly, you went on at some point about Japan being a very high-wage country and extremely successful in the shipbuilding industry. What is it that they do? You have sort of referred to a couple of things, John. What is it that we don't do that makes them so successful? You've identified a niche market. There must be many niche markets. Are we not aiming for any of them? Do we not go after a niche market?

Lastly, in regard to page 3 of your presentation, I need this as more of a clarification. I'm not suggesting anything, but when you look at the closure of the various shipbuilding facilities, the federal contribution for the closure of Vickers and Tracy seems to be significantly higher than anything else in the country, with $144 million for 2,000 jobs lost, when compared to all the other closures and the amount of money they received. Can you explain why that would be?

Mr. John Banigan: If I may, I'll deal with the second and third questions, sir.

With regard to Japan, I guess it's not altogether clear to us how they've managed to be so successful in this obviously very difficult industry. Early on in the post-war period—we'll talk about that period—they managed to attract and to hold on to a niche in the large vessels that they specialized in.

Again, I think it is partly because in that country, at least in the sixties and the seventies, there was a considerable amount of what we would call industrial planning, with a large role for government. Somehow, in partnership with the government, the private sector interest managed to get into the business and stay in the business, and it managed to hold on to the business despite intense competition from low-wage countries in the same region, such as China and Korea.

• 0950

I guess one could observe that holding on to a niche is perhaps a little easier than entering a new niche. Once you're there, you're a dominant player. You have technology, you have some capabilities, and you have some customer loyalties. It's not easy to pick a niche.

I think Canadian shipbuilding does have some capabilities. Perhaps there are some niche opportunities. Certainly ice-breaking vessels are a Canadian speciality. We need them and I think we build them quite well. Our military frigates, I think, are certainly very well regarded by the Canadian navy and other navies. The ships that were build for the CPF program are apparently of high repute. It's difficult to market vessels like that, but it's certainly a speciality in Canada.

Self-unloading vessels is another area in which Canada seems to have some expertise, partly because of our resource industry, I guess, where we do move a lot of bulk commodities through the Great Lakes and on the ports. So materials handling and bulk commodities is a Canadian specialty where I think we have shown some competence.

Ferries, certainly...we do have a lot of ferries in Canada because of our waterways. There is some capability there, in British Columbia, for example. I believe that all of the B.C. Ferry Corporation's ferries are built in British Columbia. If you've visited British Columbia, you've seen that they do have a number of very fine vessels in that area.

There is some specialization in Canada where there is some competence.

A voice: Offshore drilling.

Mr. John Banigan: In the offshore I believe there is some capability as well. We've supported the Hibernia project in Newfoundland. It has been an engineering success.

So there are some niches where Canada can compete, but it's a very competitive business. To penetrate export markets is a particular challenge, I guess. We've heard from our colleagues from EDC that there are some exports, which have been supported by EDC, so we are able to compete here and there, but it's a very difficult industry.

Mr. Nelson Riis: John, could I just jump in for one second on that point?

Mr. John Banigan: Yes, sir.

Mr. Nelson Riis: In terms of where we have been successful, are there some trends we can identify that would complement what John has just been saying, where we're moving to some niche marketing?

Mr. John Banigan: Would you like to respond to that, Dan?

Mr. Daniel Primeau: If you don't mind, maybe I'll just take a minute to respond if you want the angle on where Canada has found some niche markets. Going against the Japanese and Asian markets with VLCCs is suicide at best; they've already gained niche control.

The Canadian shipyards have been very smart in the last few years in targeting where they want to be. The first place where they are being successful right now, especially on the west coast, is the ship repair business, where they are attracting a lot of container vessels on the Pacific Rim. They're trying to attract the cruise liners doing the Alaskan cruises, for million-dollar maintenance and repair work. There are some very good success stories developing through 1999.

Another area in which we are becoming very successful is the specialized vessel area, such as supply and anchor-handling vessels and the cable-laying and speciality vessels that they use in the oil and gas business and the telecommunications business. The east coast and the Quebec-based yards are very good at producing those vessels and have targeted that market. It will obviously take some time to reap all the benefits.

But they're not targeting cruise liners for building here in Canada because we don't have a competitive edge in that area. Some of the shipyards mentioned earlier, whether it's Verreault, Davie, the Irving yards, or Marystown or places like that, are very efficient at building tug-like and specialized vessels.

Another area in which Canada does have a niche is the offshore equipment, like the Industries Davie Petrobras 36-Spirit of Columbus. Marystown has two yards, and we can mention a few more. They are very good and they are competitive in that field.

• 0955

It's important when looking at the Canadian shipyard industry to understand that we are not necessarily competing head-to-head with the Japanese and South Koreans. Our competitors are in Norway, in the U.K., in Spain, where they have similar-sized yards, where they have similar types of niches they're going after. This is more where the Canadian the shipbuilding industry is. We're not into the VLCCs. We're into ship repair, specialized vessels, conversions, and offshore equipment. If one were to look at those areas, the picture would be different from the one where Canada is less than .04% of the marketplace.

The Chair: Mr. Berg-Dick, on the final question.

Mr. Paul Berg-Dick: Thank you.

Just to respond to your first question in terms of effectiveness, in general terms we take on certain projects and then analyse specific tax measures. Examples include the research and development incentives, flow-through shares, etc.

Every year we publish a tax expenditure report, which runs through all of the different preferences that the tax system provides, and we provide information. In this particular case, we've estimated that the benefit of this accelerated CCA is equivalent to about 5.8% of the cost of the vessel.

But you do raise a very important point, which is, are we being effective in this particular measure? The measure is indirect in the sense that it goes to the person buying the ship as opposed to the shipbuilder, and it also is a function of their taxable position in terms of the accelerated CCA as it can only be used.

In terms of our projects in the future, in terms of looking at particular measures, we assess, based on our own resources, which ones would be most appropriate to analyse.

The Chair: Mr. Banigan.

Mr. John Banigan: Mr. Riis had another question, Madam Chair, about the amount for the Quebec rationalization.

The Chair: That's right.

Mr. John Banigan: This was not a program where there was a formula based on so many dollars of subsidy for a displaced worker; it was more case-by-case negotiations. Each individual firm was in a different situation.

At the time, the owners of Vickers and Tracy were in some financial distress so there was a restructuring involved. They were also a subcontractor to Saint John Shipbuilding. The Canadian government procurement of the frigate program was involved in this, and part of our goal was to ensure that the frigate program was maintained on schedule and on cost. There was quite a variety of factors.

Some of the resources went to the firms to assist them to restructure their operations, and some of the moneys went to workers, particularly older workers, to give them some assistance to basically leave the industry. So it really wasn't on a formula of so many dollars per worker: each deal was negotiated separately as to what was required, both for the owners of the firms and for the workers themselves.

The Chair: Thank you very much.

Mr. Pickard.

Mr. Jerry Pickard (Chatham—Kent Essex, Lib.): Thank you very much, Madam Chairman.

I'm not even sure if I'm in the right area with this question. A small metalworks company in my riding, Hike Metal, does hovercrafts and the smaller types of vessels that usually fall under government contracts. They could do lockers and all kinds of things. But what I've been hearing—and it has been relatively consistent over the last several years—is that there is a lot of concern with regard to contracts and contracting and how all of this comes together.

I don't know if it's a question that should go to Public Works or if it's a question that should come to you folks. However, I see that we're not necessarily promoting small Canadian businesses in many respects. I see contracts that this company could handle usually going through Westland or a larger company offshore. They end up coming in and picking up the actual building of the vessel under the partnership of others. That has happened on different occasions.

I am consistently being barraged, I guess, by this company, which is asking for help with regard to their understanding of the contracts, and when we seek answers, we don't necessarily get clear answers from anyone on how those contracts were awarded or why they went in the direction they did.

• 1000

The latest one I can think of was a contract that was awarded and was very questionable because the company was near bankruptcy, as I understand it. The contract was then taken off the market and it was suggested that everything would be re-tendered. The end result, up to this point at least, is that there has been no re-tendering, and it has been quite a long period of time now.

So I'm wondering if there is consistency in what we're doing to try to help our smaller people who do work in niche markets. Hovercraft, in particular, and that type of thing, are vehicles that can be used predominantly across Canadian waters and in other areas as well. Opportunities are there, but we don't seem to be promoting them.

Mr. John Banigan: I'm not sure I can answer your specific question, sir. Perhaps it's more appropriate for the public works department to deal with any specific contracts you have in mind.

The policy in terms of procurement for federal government purposes is that federal department needs, through the public works department, are satisfied on a competitive basis, through Canadian shipyards. They are not permitted to buy offshore, even though in some cases they may wish to do so. There are a number of transactions dealing with private sector purchasers of vessels, but the Canadian government is not a party to those contracts so there's nothing we can really do in that regard.

But in regard to the specifics of this firm you referred to, perhaps we could suggest that you deal with the public works department on that particular question. I'm not familiar with the firm or the business case that you're discussing.

Mr. Jerry Pickard: Maybe I can give you one example that I found a little difficult. They had built a hovercraft for the Canadian Coast Guard. It was going to Vancouver. They were asked to do a demonstration in the Los Angeles and San Francisco areas, which could have led to further purchases of craft of similar dimensions.

The problem occurred in shipment. The boat was loaded on and taken to Vancouver, but they wouldn't allow the boat to be unloaded at Los Angeles—for insurance purposes. It was right there, right in the location, and a demonstration there might have been pretty valuable to several groups that were looking at harbour work for hovercrafts and at various opportunities.

But I guess we couldn't get any help. The cost of unloading was going to be very high. I understand that, but I'm looking at what Canada's advantage might have been. A few dollars spent there to try to help them do that demonstration may have brought further contract work into our area.

Those are the types of things that I'm getting complaints about, and I think it is problematic.

Mr. John Banigan: May I suggest that perhaps you bring that up with Public Works, sir? They're the party more directly involved in that transaction.

Mr. Jerry Pickard: Okay.

The Chair: Thank you, Mr. Pickard.

Mr. Jones.

Mr. Jim Jones: Thank you.

I'd just like to get back to the U.S. numbers. Can you tell me what the actual size of the U.S. market is internally? Also, there have to be big U.S. shipping companies that go worldwide but are probably buying their ships from the U.S. shipbuilding industry.

Mr. John Banigan: There would be a number of shipping companies that would own ships in the United States, but I would speculate that probably many of them buy from lower-cost producers, such as the Canadians do. A lot of Canadian commercial shipowners—

Mr. Jim Jones: What is the size of the U.S. industry?

Mr. John Banigan: I don't have that data, sir. We can try—

Mr. Jim Jones: How many people are employed in the shipbuilding industry in the U.S.?

Mr. John Banigan: I think the data on page 4 would suggest that for ships plying American coastal waters it's about 1% of the world market, but I don't have the data on the size of the U.S. industry. I can try to get that out and get back to the committee, if you wish.

Mr. Jim Jones: Wouldn't there be a lot of ships that are built in the U.S. added to the U.S. fleet for use around the world?

Mr. John Banigan: There would be probably a significant fleet of U.S.-owned ships, some of which would be built in the United States and some offshore. As for what that mix is, I don't have that data, but I'll see if I can find out and get back to the committee.

• 1005

Mr. Jim Jones: What kind of special financing terms does the U.S. give to their shipbuilding industry, both in the U.S. and around the world when they're selling to other countries? Are you aware of special status financing?

Mr. John Banigan: Yes, the United States government has a program that provides loan guarantees. I believe it's up to 87.5% of the value of the ship, with rather long amortization rates. With those guarantees, they can get very good interest rates in the world market, and these are available to domestic purchases and to exports of American-built ships. So yes, there is a program in the United States to support their shipbuilders.

Mr. Jim Jones: On the Great Lakes, if I'm going from Cleveland to Chicago, I have to use a U.S.-built ship. Is that the way the Jones Act works?

Mr. John Banigan: That's my understanding, sir.

Mr. Jim Jones: But I can be going from any city or port on the Canadian side and I can use any ship, right?

Mr. John Banigan: That's correct.

Mr. Jim Jones: When was the last time we met with the U.S. from a free trade standpoint and started with, say, the Jones Act is monopolistic or unfair trade...? When was the last time we tried to do something about it?

Mr. John Banigan: I don't know the exact date of the last discussions. We could inquire of the foreign affairs and international trade department and get back to the committee on when they last raised that with the Americans.

Mr. Jim Jones: Was it this year, last year, or...?

Mr. John Banigan: I don't know, sir.

Mr. Jim Jones: Was it when we did the split-run advertising or something like that?

Mr. John Banigan: I don't know what year it was, sir. I would have to inquire and get back to the committee.

Mr. Jim Jones: What types of boats or ships is Ontario's Port Weller making? Great Lakes freighters...?

Mr. John Banigan: They are active in the repair market, I believe, and do a lot of repair work for some of the Great Lakes vessels. I'm not sure if they've built anything in recent years. I know that over the years they have done some shipbuilding. I'm not familiar with any recent contracts that they've had for new builds.

Mr. Jim Jones: In the summertime I visited the Saint John shipyard. It was really sad. They were building their last two ships. I guess it closes down in March when the ships are finally built.

The man-hours that went into that ship were 860,000, with roughly—and I'm just trying to recall now—70% to 80% Canadian content going into that ship. What kind of economic benefit is it to Canada to have, first of all, that type of employment, plus all the subsidiary industries that are providing...? Have we looked at the business case from that standpoint? I believe the ships we build in yards like this are more high tech in nature, especially versus the ships being built in south Korea. Isn't there some economic benefit to maintaining that type of competitive edge and technology in this country?

Mr. John Banigan: I as well visited the facility you refer to. It's a very impressive facility. In speaking with the Canadian navy, I can say that they've been very impressed with the frigates that were built in that particular yard. They've demonstrated them with great pride to some of their NATO partners, who were very impressed with the quality of these Canadian-made frigates. It's unfortunate that the yard is out of work.

I'm not sure what you had in mind. It's a privately owned firm, which suffers from a lack of orders. In my view, I guess, the primary responsibility would be for the owners of the firm to try to find some work for their yard. I'm not sure what you would expect the federal government to do about that.

Mr. Jim Jones: Are you aware of what other countries are doing?

I believe they bid on 55 or 65 RFPs and lost every one. The last one they were bidding on, they were close to winning. They were the number one contender, but at the last, the Spanish government, I think, threw in some large subsidies. Is that a common practice around the world?

Mr. John Banigan: That seems to be a fairly common occurrence. Subsidies are offered by other nations to get an unfair advantage in the marketplace in order to get some of these international orders.

Mr. Jim Jones: So are we taking this up with the WTO?

The Chair: Last question, Mr. Jones.

Mr. John Banigan: This has been a subject of negotiations in the WTO and in the OECD on a number of occasions when Foreign Affairs and International Trade has raised these concerns with these unfair subsidy practices.

Mr. Jim Jones: I have just a quick question, Madam Chair.

If we had a level playing field, if everybody competed in the same way, could Canada compete in the shipbuilding industry?

• 1010

Mr. John Banigan: If there were market access and if the subsidies were eliminated in other countries, we would get a better market share than we're getting right now. We might have some difficulty against some nations who have lower costs or better technology, but we certainly would increase our global market share if subsidies were eliminated and market barriers were eliminated.

The Chair: Thank you, Mr. Jones.

Mr. Lastewka.

Mr. Walt Lastewka (St. Catharines, Lib.): Thank you, Madam Chair.

Your report talks about major yards with over 100 employees. That misses a lot of employees who work in companies of 50, 70, or 90 employees. Would the multiplier factor on that total number be four or five rather than the two or three normally used as a multiplier factor?

Mr. John Banigan: There would be a number of small firms supplying subcontracts, components, and materials to these yards. So certainly for instruments, subsystems, materials, steel, and a number of pieces of equipment, there would be a ripple effect in the economy. I don't know exactly what the multiplier would be, but it probably would be in the order of two to four, I would think, of the direct employment effect.

Mr. Walt Lastewka: You see, I just completed a study in the Niagara area. We used a number lower than 100 because of the modular builds now. Whether you're building new or renovating, there are modular build shops now that provide input; the number is about a quarter in our studies. The multiplier effect would have to be the higher multiplier.

Mr. John Banigan: I would think that's probably a good assumption, sir.

Mr. Walt Lastewka: I want to talk about competitiveness, and I want to talk about it from the research side, the design side, the process technology side, and the manufacturing side.

When we compare ourselves to others, are we competitive from the standpoints of the ability to research, the ability to design, and the ability for processing technologies used in shops, which then leads to the manufacturing? Could you give us a comment on that?

Mr. John Banigan: I could probably give you a personal observation that's not backed up by research, but is perhaps backed up by some experience with manufacturing in general. I would say that Canadian manufacturers are on a par with just about anybody in the world when it comes to the ability to design products, to manufacture them efficiently, to be innovative, and to be effective marketers. Certainly our costs would be very comparable to those in western Europe and in Japan and the United States in terms of direct labour and overhead.

So as a general observation about manufacturing, I think we are competitive. We've seen growth in manufacturing in Canada in recent years and a lot of exports of manufactured goods from Canada. I think our market success would be attributed to that sort of general observation. With regard to any specific firm or subsector, they may vary from the norm, but in general, I think, our manufacturing firms are quite innovative and quite competitive.

Mr. Walt Lastewka: A number of our shops across Canada have come into five-year contracts to stay away from having a strike or negotiations and problems during builds. In fact, they have gone into rolling negotiations to protect the shipowner who is buying the ship. It would seem to me, then, that low wages—what you've said—is a criteria and that subsidies is a criteria.

Mr. John Banigan: Yes.

Mr. Walt Lastewka: Then, when the negotiations under NAFTA were being held, why did we give access to the U.S. to come to Canada and not the reverse? Where's the line of thinking there?

Mr. John Banigan: I'm not sure I could give a precise answer to that, sir. In a multisectoral negotiation like we had, unlike the FTA, the approach is really country to country. I don't think there's a sort of desire to have a sector balance, necessarily, to line up Canadian interests and American interests sector by sector by sector. It's a give-and-take series. Canada sought a number of requests and realized a certain number of them, and the Americans sought a number of requests. I guess the negotiators and the governments of the day looked at the overall balance of the deal and decided it was good enough.

• 1015

I don't think the negotiators pretended to say that each sector lined up perfectly. There were a number of gives and a number of gets, and then at the end of the day, there was a judgment as to whether the balance was sufficient. We may have some symmetry in one particular sector, but I don't think the goal was that every sector was supposed to be in a certain balance. It wasn't sectoral negotiations; it was multisectoral negotiations between two nations.

Mr. Walt Lastewka: So we might have given up one sector for another.

Mr. John Banigan: It's possible.

Mr. Walt Lastewka: You did mention a number of times that the U.S. marine lobby is very strong.

Mr. John Banigan: Yes.

Mr. Walt Lastewka: It almost leads me to believe that the strength of the Canadian lobby is very poor. Is that true?

Mr. John Banigan: I don't think I'd like to speculate on that one.

Certainly in the American lobby we've observed a great deal of effectiveness with their government. That's something we have seen, and it has been very difficult for us to make any headway in terms of market access in the United States. I wouldn't care to comment on the Canadian side.

Ms. Ninon Charlebois (Director and Manager, Briefings and Strategic Management Group, Department of Industry): There is one point I would like to add. In the current round of negotiations in Seattle, shipbuilding is one of the priority items that was put on the list of items to be negotiated in terms of negotiating on subsidies. This is more of an issue that the Department of Foreign Affairs, for instance, could answer, but definitely it has been our position and it's one of the priority items.

The Chair: Last question, please, Mr. Lastewka.

Mr. Walt Lastewka: My concern is that we've allowed them access, we don't have the access, and now we're going back to negotiate. “Lotsa luck”, you know, on something like that.

I have a problem there. I look at it from this standpoint: how do we make our Canadian shipyards find their niche and their competitiveness in order to move forward? I know that under EDC there have been some changes, and you're continuing looking...you gave us some numbers. I'd ask that you table something along that line so we could have the same numbers on what's happening, especially in the last five years, and on what you've changed.

My concern is that in your report you mention that Technology Partnerships Canada programs are available. Has it ever been applied to the shipbuilding industry?

Mr. John Banigan: I don't have the data on how many applications they've had from the shipbuilding sector, but we can inquire, sir, and see what—

Ms. Ninon Charlebois: They have received none. None were ever made by the shipbuilding industry.

Mr. Walt Lastewka: No applications?

Ms. Ninon Charlebois: No.

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

Mr. Dubé.

[Translation]

Mr. Antoine Dubé: Clearly, Mr. Lastewka is quite knowledgeable about this sector, given that there is a shipyard in his own riding. A study done by the unions found that salaries are lower in Canada than in most other countries, including the United States. Only in Korea were salaries found to be lower.

Following up on Mr. Lastewka's question, I'd like to ask the Finance Department officials what revenue is derived from the 25 per cent duty on imported products, with the exception of U.S.-built products that enjoy duty exempt status. Do you have these figures handy?

Mr. Paul Berg-Dick: No, I don't have that exact information handy.

Mr. Miodrag Jovanovic: I'm sorry, but I can't answer your question either.

Mr. Antoine Dubé: That's understandable.

Mr. Paul Berg-Dick: We'll look into this and try to get some figures for the committee.

Mr. Antoine Dubé: My next question may be even more difficult to answer since the Americans pay no duty. Given the number of U.S. vessels plying Canadian waterways, can you tell me what kind of revenues we might take in if the 25 per cent duty were to apply to them, as it does to vessels from other countries?

While we discussed depreciation earlier, there's also the whole issue of leasing to consider. In 1989, Revenue Canada exempted furniture, office equipment, computers, household appliances, televisions, radios, furnaces, air conditioners, railcars, automobiles, tow trucks, trucks, trailers and even container berths from the application of lend-lease regulations.

• 1020

Why isn't shipbuilding equipment similarly exempted?

Mr. Paul Berg-Dick: We're talking about equipment valued at less than $25,000. It's somewhat different for ships. The purpose of these exemptions is to eliminate the paperwork required of small companies wishing to acquire equipment of this nature.

Have I forgotten anything?

Mr. Miodrag Jovanovic: There are also two important provisions that need to considered. First of all, there's the general restriction that applies to leased equipment. The firm must be in the leasing business and it cannot report a loss through depreciation. Generally speaking, depreciation is limited to the firm's revenues. However, if a firm is mainly involved in the leasing business, then there won't be any problems. However, problems could arise if the property leased by the firm is subject to accelerated depreciation. In that case, tax shelters could be created using the accelerated depreciation provisions.

That's why, in addition to general provisions, we have more specific leasing property rules which apply to ships built in Canada, because they benefit from the 33 1/3 depreciate rate. These rules do not apply to property not subject to accelerated depreciation because of other, more general provisions in place.

Mr. Antoine Dubé: I see. I wasn't expecting you to give me the figures this morning. I know that tax returns are personal and confidential, but information on the overall taxes paid by Canadian companies should be available. This information could give us an overview of shipyards in general, and could be broken down by shipyard and Canadian shipowner.

As for my next question, I'm more interested in getting your personal opinion. If taxation measures are favourable, how then do you explain the fact that Canadian shipowners seem to prefer to have their vessels operate under a foreign flag?

Mr. Miodrag Jovanovic: Most likely, factors other than purely fiscal ones come into play. I can't tell you what makes shipowners decide one way or another. This phenomenon appears to be growing and it's not limited to Canadian shipowners. However, I can't tell you for certain why businesses feel compelled to make decisions like this.

Mr. Antoine Dubé: On a final note, I have here a chart comparing the subsidies awarded in different countries. In EC member countries, subsidies are in the order of 9 per cent; in non-EC member countries, they total 16 per cent; in Korea and Japan, depending on the year, subsidies are in the 30 per cent range. Recently, England received the go ahead to award subsidies to the ship repair sector. This has made quite a difference because it managed to wrest some contracts away from the Koreans and Japanese. As we can see, the gap is not all the wide.

In my view, tax breaks are an important consideration. Do you have any comparable tax data for other countries? We seem to have a fair bit of information about the subsidies awarded for shipbuilding, but what do we know about the tax breaks awarded to this sector in other countries?

Mr. Miodrag Jovanovic: Unfortunately, as far as direct subsidies are concerned, I can't answer that question. However, with respect to tax deductions, I can tell you that our accelerated depreciation rate of 33 1/3 percent is quite a favourable rate. I don't think any other country offers a more favourable rate than that. From a taxation standpoint, that's an important consideration.

Mr. Antoine Dubé: While we're at it, I'd like to talk about leasing, an option that seems to have become very popular these days. Since ships are very expensive to build, shipowners prefer to opt initially for a leasing arrangement, combined with a future option to purchase. In such cases, how do the rules respecting depreciation apply?

• 1025

Mr. Miodrag Jovanovic: Obviously, the depreciation rate is still 33 1/3 per cent for ships built and registered in Canada. However, in the case of a leasing arrangement, the depreciation could be limited to the lessee's revenues because leasing property rules would prevail.

Mr. Antoine Dubé: Are you saying that our taxation provisions are more advantageous than those of other countries?

Mr. Miodrag Jovanovic: I couldn't say at this time. I'd have to look into this further.

[English]

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

I have one more questioner.

Mr. Herron.

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

The line of questioning which I'm going to go forward with reflects essentially the reasons why this industry has been included in this study.

All 10 premiers in the country have identified that the initiatives we have for shipbuilding aren't working. All shipowners in the country have identified that the initiatives we have in shipbuilding aren't working. All shipbuilders have identified that the initiatives we have aren't working. Labour in every shipyard area in the country has identified that the initiatives we have aren't working. That's the text we want to work from.

Now, one of the questions I have for you—and I don't think I'm going to get too much argument amongst the group—is about access to competitive capital to build anything. If you're building a hockey arena or any kind of building, or even a ship, it is part of the equation. Would we agree that access to competitive capital is important?

Mr. John Banigan: Certainly.

Mr. John Herron: The Americans have had a program in place known as Title XI, which is a loan guarantee program very similar to what our friends at EDC have in place. That's a loan guarantee program so that the buyers of ships built in the United States would have access to the most competitive capital on the market. That's agreed, right? That's essentially what Title XI is...?

Mr. John Banigan: Yes.

Mr. John Herron: All right. Now, that program has been in place since 1936. Do you know how many loan defaults they've had with that program since 1936?

Mr. John Banigan: I don't have the exact data with me now.

Mr. John Herron: Well, I fortunately do. The answer is zero: absolutely zero, nada, not one at all.

In university when you copy something, it's called plagiarism. In the real world, it's called being resourceful. So my perspective is, why would we not want to take the positive initiatives that our friends at Export Development Corporation have as a loan guarantee program and extend that to domestic consumption as well if it's proven that it works? That would be making sure that our own Canadian shipyards are more productive and more competitive. Why would we not want to do something that has been proven to work since 1936?

Mr. John Banigan: We do not have any programs in the federal government that provide sales financing for domestic purposes. If a purchaser wishes to obtain some financing, the purchaser can use the Small Business Loans Act, for example. We do not have any programs aimed at manufacturers of transportation equipment, for example, to assist them in selling their goods to Canadians. We have the Export Development Corporation to help them sell their goods to foreigners, but there are no domestic sales financing programs.

Mr. John Herron: I'm familiar with the fact that we don't have one; I think it might be a good idea for us to get one.

Are you familiar with a company called Secunda Marine?

Mr. John Banigan: Yes, I am.

Mr. John Herron: Would you like to tell us a little anecdote about Secunda Marine and Title XI?

Mr. John Banigan: I'm not sure which anecdote you had in mind, sir. Maybe you could elaborate on it.

Mr. John Herron: I can share it with you. Secunda Marine is a company in Dartmouth, Nova Scotia, a Canadian company that wanted to get access to capital to build their ship, so they went to an American yard and used the Americans' Title XI to have a ship that's going to be used in Canada. They used the American loan guarantee program of Title XI.

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Doesn't that trouble you a little that we need to have the access-to-capital aspect of it?

Mr. John Banigan: I'm not troubled that a Canadian company decided to buy some manufactured goods from the United States. We have a free trade agreement with the United States and we buy and sell a lot of goods back and forth across the border. I don't presume that every Canadian shipowner should necessarily be buying a Canadian-built ship if he chooses to buy and American-built ship.

Mr. John Herron: Here's my next question. That that is one of the components that all of the premiers, shipbuilders, shipowners, and the labour...and now the Atlantic Liberal caucus is actually saying that this is an initiative they want to do. I think that's a very positive step in the right direction. So I'm trying to help out my Liberal caucus teammates—and all members of the House as well—in advancing that particular issue.

One of the other initiatives they're looking at doing is this: we've talked about having accelerated depreciation. That is a competitive initiative, perhaps a step in the right direction in terms of the financing package. But we also know that when it comes to an economic perspective, large capital investments, from a financing perspective, are done very much on a lease basis today. One of the initiatives in terms of what they are looking at doing is accelerated depreciation for lease financing, which I know you guys are all aware of...aspects of it.

Now, the concern is this: I believe my friends in finance would probably say that is precedent setting, because no other industry has both lease financing and accelerated depreciation combined. So my question is quite simple: if that did work and created a fair amount of economic activity, wouldn't we take in...? Right now we're taking in a small amount of revenue in this industry because there is not a lot of economic activity going on, but if they are made more competitive and more productive by having that initiative, that would likely generate more economic activity and the Department of Finance would actually take in more money.

Mr. Paul Berg-Dick: There are two points in response. First, the reason we have the leasing rules is that we're concerned about after-tax financing, that is, when companies that aren't in a currently taxable position can therefore get the value of these accelerated deductions through a leasing company. We experienced significant downfalls in revenues in the 1980s before those rules were put in place. If you're suggesting that we should bring back a system of after-tax financing and therefore deplete the revenues significantly for all sectors, I think that's a major step—and in my view, a retrograde step—in terms of allowing these fast write-offs to go out to non-taxable companies.

In terms of being able to get back the funds, it has seldom been the case that governments get more than a fraction of whatever incentives they've provided in terms of the increase in actual taxes. Certainly that's always posed by various groups, but in terms of the actual cases, they're very hard to find.

The Chair: Last question, Mr. Herron.

Mr. John Herron: Thank you, Madam Chair, for the opportunity to participate.

My last summing up is from the standpoint that, one, I'm not advocating that it go for all sectors. I think this is an industry that has a totally different and separate set of rules out there, so that if we're going to engage in the industry, we have to be able to do things in the Canadian context.

Mr. Primeau's comments very much replicate my thinking on this. Some of these graphs in here are really very much irrelevant, from the standpoint that we have things about China and South Korea. These are ships that have a high degree of steel content, a small degree of mechanical outfitting, and very little value-added from a technology perspective. We don't care about those ships because we're never going to make them anyway. They're too heavily subsidized. We can't do it, we won't do it, we never will...so we should remove that.

Now, Mr. Banigan did head in the right direction in that regard in that he did say we're not competing in all sectors. That's a direction we would like to do...but in terms of the depleting of the industry, guess what? Canada is not the only country in the world that has actually done some rationalization in the shipbuilding industry.

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When you're looking here at the depletion of jobs that have existed, you have things like 314,000 in 1976 from the European Community. I would wager that a whack of those jobs came from the former DDR, East Germany, and Poland, countries which have been in massive economic change. Those numbers do not just reflect the rationalization which has taken forth within the European Community—and they're not the kind of ships we'd go after, to start off with.

Here's my last question, which I really have. When we had this debate in the House back in the spring, I asked about...there are some U.S. senators right now saying that the Jones Act is a trade barrier for choice, for being able to transport certain goods. I specifically asked the Minister of Industry if he would be interested in doing some form of a bilateral initiative, saying that maybe we could do some kind of open trade on certain types of ships, maybe sea-going tugs, like they've made in East Isle, P.E.I., or maybe shipshape drilling rigs or that sort of ship.

Now, when my friend colleague, Jim Jones, mentioned the boat—

The Chair: Mr. Herron, your question, please.

Mr. John Herron: My question...we didn't know the year the last time we had a discussion with the Americans about maybe having a bilateral accord in some form, so my question is, was it this year, last year, the last five years, or this century?

Thank you.

Mr. John Banigan: I'm sure it has occurred this century, sir, but I don't know in what year it has occurred. I'll endeavour to find that out from Foreign Affairs and International Trade and get back to the committee.

Mr. John Herron: Would you get back to the committee?

Mr. John Banigan: Yes.

Mr. John Herron: Thank you.

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

Thank you very much, Mr. Herron.

One last question, Madam Jennings.

Ms. Marlene Jennings: It's just a question because you stated that there have been no applications from anyone in the shipbuilding industry under Technology Partnerships. Can you tell me if that's because there's a barrier within the criteria of the program that precludes that industry from being eligible or admissible? Or is it simply that there isn't the type of innovation going on within the industry, whether it be in the processes or in the actual product, that would make it eligible for Technology Partnerships?

Mr. John Banigan: I think it's difficult to be too precise as to what the barriers are. Technology Partnerships focuses on some enabling technologies that are fairly pervasive: biotechnology, which obviously is not relevant in this sector; environmental technologies, which could well be relevant; and advanced industrial materials. For some reason, the firms have chosen not to do much in the way of research and development or to seek the assistance of Technology Partnerships to partner with them in the research and development area. Perhaps there's more that they could do, but they've not chosen to avail themselves of that programming.

Ms. Marlene Jennings: So are they doing any research and development? On the tax side, you would know, because we have the most generous research and development tax credits. Is the shipbuilding industry taking advantage of that generous regime we have in terms of taxation on the research and development side?

Mr. Paul Berg-Dick: I believe there have been some yards that have used the R and D tax credits. But again, because of the small nature of the industry, it's difficult to break out any specific figures for that industry. In terms of foreign approaches, particular shipyards have taken advantage of the program.

Ms. Marlene Jennings: Yes, but on a comparative basis...? In comparison to other manufacturing industries, where we're talking about major—

Mr. Paul Berg-Dick: But there again, it's up to them to decide how they view the innovation, how they view the research and development in their particular sector.

Ms. Marlene Jennings: I understand that, but—

Mr. Paul Berg-Dick: So it's very difficult to compare what they're doing with other manufacturing sectors, which may have both a different focus and a different need for the R and D tax credits.

Ms. Marlene Jennings: Thank you.

The Chair: Thank you, Madam Jennings.

Mr. Jones, do you have a point of clarification?

Mr. Jim Jones: Yes, it's just a point of clarification in this document. On page 2 of the four pages on production, when I look at the Canadian added value and the U.S. added value, the Canadian added value—

A voice: Which document?

The Chair: Mr. Jones, you're referring to a briefing document that was prepared for the committee by our researcher. They wouldn't have that document.

Mr. Jim Jones: Okay. Still, then, my question is about the Canadian added value. It appears like it's in Canadian dollars. The American added value appears like it's in American dollars. It looks like we're not comparing an apple and an orange—

The Chair: Which document are you referring to? Which page?

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Mr. Jim Jones: It's on page 2 of four pages, under “Production”. If I look at the American added value, if it were in Canadian dollars...it's a $15 billion industry in comparison to our $0.7 billion in Canadian dollars, so if we can just get a small slice of that, we would be—

The Chair: In fact, that's from the website of Industry Canada, so maybe they can explain it.

Mr. John Banigan: I'm not sure if we can explain it at the moment, Madam Chair, but we can study the document and get back to you.

The Chair: Sure. Thank you. I appreciate that.

Mr. Dubé, you have one final question.

[Translation]

Mr. Antoine Dubé: I'd like to know if the principal amount of the loan is considered when depreciation is calculated in the case of a leasing arrangement?

In the case of a ship, we're talking about a substantial amount of money in the first few years. Depreciation applies to the principal, not to the interest, whereas it's a fact that the interest can almost be greater initially. Why isn't this fact taken into account.

Mr. Miodrag Jovanovic: I'm not sure I understand your question.

Mr. Antoine Dubé: I'll repeat it for you. In the case of a leasing arrangement, only the principal amount of the loan is taken into consideration for the purposes of calculating the depreciation.

Mr. Miodrag Jovanovic: In the case of a leasing arrangement, the amount of the lease payment is considered much like a loan payment. A loan payment has two components: the interest component and the principal component. Depreciation applies only to the payment on the principal, which prevents any irregularities. For instance, accelerated depreciation provisions can be applied to ships. It's a simple matter of doing the calculations.

Mr. Antoine Dubé: How long has this been the case?

Mr. Miodrag Jovanovic: Since 1987 or 1989—basically since the late 1980s.

Mr. Antoine Dubé: However, the situation isn't the same in all sectors or in particular, when less than $25,000 is involved.

Mr. Miodrag Jovanovic: For administrative reasons, sums of less than $25,000 are exempt from this rule, the reason being to simplify the administrative process. We fully realize that the resulting tax shelter is a function of the face value of the lease.

The Chair: Thank you, Mr. Dubé.

[English]

Just before we adjourn, I want to remind committee members that we do have a meeting this afternoon at 3.30. There's a steering committee meeting following that meeting.

I want to thank our witnesses for being here today. It was very informative. I look forward to the replies you have to give us.

Mr. Dubé.

[Translation]

Mr. Antoine Dubé: I understand that staff in the clerk's office was going to call in industry witnesses. It was my understanding that we were going to hear from these people this afternoon. Until when has their appearance before the committee been postponed?

[English]

The Chair: In fact, Mr. Dubé, the steering committee meeting will take place this afternoon. We had agreed that we would do the thematic meeting first. There's a series of six. In between those, if we can't fit those in, we're going to have the witnesses; I think we've tentatively scheduled them for two weeks from today. We're looking at that date. We have a couple of things we have to work in. We do have some private member's legislation.

There are a number of industries we're going to be looking at, and there will be witnesses from the shipbuilding industry. If you do have witnesses' names, you should be giving them to the clerk so we can determine how many meetings to have, what that format will take, and when it will be. We don't have all the witnesses' names yet, so it wasn't appropriate to schedule that meeting.

Mr. Antoine Dubé: Okay.

The Chair: If there are no other questions, the meeting is adjourned. Thank you.