NRGO Committee Meeting

STANDING COMMITTEE ON NATURAL RESOURCES AND GOVERNMENT OPERATIONS

COMITÉ PERMANENT DES RESSOURCES NATURELLES ET DES OPÉRATIONS GOUVERNEMENTALES

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, April 28, 1998

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[English]

The Chairman (Mr. Brent St. Denis (Algoma—Manitoulin, Lib.)): Good morning, colleagues, and a special good morning to our witnesses, whom I'll introduce in a moment.

I call to order the April 28 meeting of the Standing Committee on Natural Resources and Government Operations. We are continuing our study of the knowledge-based and technology-based industries, which are an integral part of the natural resources sector.

As we've heard from other witnesses—and we're all aware of this from our own dealings—Canada is not only a drawer of water and hewer of wood. We have evolved over the decades to a fairly sophisticated knowledge base and technology sector. But as with any sector, I'm sure there are problems and issues that need to be dealt with to encourage further growth and job creation.

So we're pleased to have with us today Dr. Tom Brzustowski, president of the Natural Sciences and Engineering Research Council of Canada, and Janet Walden, director general of the NSERC research partnerships program.

From the Department of Finance we have Paul Berg-Dick, director of the business income tax division; William Toms, acting senior chief, resource taxation; and Jack Jung, senior tax policy officer.

Again, we welcome you to our meeting today. We look forward to your helping us understand better where we've come from, and hopefully where we're going when it comes to the knowledge base and technology sectors, as they relate to natural resources.

I think we'll start with Dr. Brzustowski to take a few minutes by way of opening remarks, and then to Mr. Berg-Dick. Then we'll have questions to either and all of you following that.

Dr. Brzustowski, please.

Dr. Tom Brzustowski (President, Natural Sciences and Engineering Research Council of Canada): Thank you, Mr. Chairman, and good morning, ladies and gentlemen.

We are very happy to be invited here, Mr. Chairman, and we prepared a very short presentation to the committee. Our paper is in front of you in its entirety. It is intended simply to give you the impression of the very large commitment made by NSERC, the Natural Sciences and Engineering Research Council, whose mandate is the support of university research. The large commitment we make to support research in turn supports the various natural resource industries.

[Translation]

NSERC is very happy to inform the Committee about what we are doing to help meet the needs for new knowledge in Canada's natural resource industries.

[English]

NSERC is the national instrument for making strategic investments in Canada's capabilities in science and technology, the ones with the long-term horizon. We do this in three different ways. We support research in science and engineering in universities in three categories. We support basic research. That is the research that adds to fundamental knowledge, which may be used the next day, the next year, the next decade, or maybe only the next century. We support project research, which deals with current problems that have been defined by industry or by government, and we support those in partnership with industry and with government. Finally, we support the training of young people in all the areas of research that we cover. And that's that real long-term investment in our national capabilities.

[Translation]

In connection with Canada's natural resources industry, NSERC recognizes the importance of the natural resource industries to the prosperity of Canada and the well-being of Canadians. It believes that the natural resource industries need research and new technology, including high-technology solutions. It supports university research in many fields of science and engineering that deal with a great range of subjects related to the natural resources industry.

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[English]

Mr. Chairman, the first three bullet points on the first page of our presentation outline the beliefs we have, which are then illustrated with actions and examples in the rest of the presentation.

We do recognize the importance of the natural resource industries to the prosperity of Canada and the well-being of Canadians. We are capable of reading the trade figures, so we certainly recognize that.

We firmly believe—and we believe this is a statement that needs to be made widely—that the natural resource industries need research and new technology, including high tech, to be both competitive and sustainable.

At every opportunity we dispel the notion that high tech is something that resides only with computers, information technology and biotechnology. In fact, high tech is required in the natural resource industries to keep them competitive and sustainable. The level is very substantial. It's in the order of a quarter of our budget, well over $100 million a year

Finally, Mr. Chairman, NSERC supports university research in many fields of science and engineering, some of them in the basic research area. Some are much more applied, which ultimately deal with subjects related to the needs of the natural resource industry. This is from basic research, geophysics and the sciences of the earth, right through to industrial project research through environmental issues, extraction processes, and so on, right out to value-added end-products of those industries.

We'd be very happy to discuss this in whatever detail you wish, and to offer additional examples.

Mr. Chairman, the rest of the paper illustrates those three points, puts numbers, and expresses our commitment to them. So with your permission I would end here, and I look forward to your questions.

The Chairman: Thank you, Dr. Brzustowski. I appreciate your succinct presentation.

We're also pleased to have officials from the Department of Finance, who, as the general public might not suspect, are important players in the field of science in Canada, particularly through tax measures.

We welcome Paul Berg-Dick to open the discussion on behalf of the Department of Finance. Thank you.

[Translation]

Mr. Paul Berg-Dick (Director, Business Income Tax Division, Department of Finance): Thank you, Mr. Chairman. Thank you very much for this opportunity to appear this morning before your committee.

[English]

Canada's SR&ED tax incentive program to promote spending is certainly one of the most advantageous in the world, and, as you say, is a major part of the support the government provides to R and D in Canada.

We provide over a billion dollars' worth of investment tax credits to businesses operating in all parts of the country. That's in comparison to about $3 billion of additional support provided to businesses in terms of non-tax assistance, primarily in terms of subsidies for particular research projects, as my colleague indicated.

[Translation]

This morning, I would like to present, to the Committee, the objectives of the tax policy, a summary of federal incentives, an evaluation of the program's effectiveness and a few examples of research and development work carried out in the natural resource sector.

[English]

In terms of the objectives of the tax policy incentives, they're really designed to assist businesses in developing new products and processes, improving productivity, enhancing competitiveness, as well as creating jobs here in Canada.

In terms of the tax policy objectives for SR&ED, they really can be divided into four broad categories. We're really encouraging SR&ED to be performed in Canada by the private sector—where we are behind in terms of other countries—and in the form of broadly based support, supporting all R and D that meets the definition.

The second set of objectives is to assist small businesses to perform R and D, and we'll talk a bit about the differential tax credit rate that's provided to small businesses. We also want to provide incentives that, as much as possible, are of immediate benefit. We'll talk a little about refundability.

We also want to provide incentives that are simple to understand, and comply with and are as certain in application as possible. That's really our colleagues at Revenue Canada, in terms of administering this program. It's always a trade-off between simplicity and making sure that the credits are directed toward appropriate activities.

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In terms of the investments in R and D, they can be broken down into basic research, applied research, and experimental development. Most of the R and D in the business sector falls into this latter category.

At the federal level, the incentives, if you like, are broken down into two parts. One is an immediate write-off of expenditures, whether that be salary or the cost of capital expenditures acquired for R and D. So they can be written off immediately. But more importantly, a tax credit is provided for research and development undertaken in Canada. The general rate is 20%. In other words, the federal government provides a $20 tax credit for every $100 of R and D that's undertaken.

As I mentioned earlier, small businesses qualify for a higher credit rate of 35% on their first $2 million of expenditures. So a small business could get up to $700,000 on that first tranche of expenditures, and these credits then offset taxes otherwise payable.

To come back again to small business and the concern they have about being able to find funding, especially in the early years of a program, that 35% credit rate is refundable. That means that a small start-up company that doesn't have any other taxes would receive up to $700,000 as a cheque from the federal government in respect of its R and D incentives.

The provinces, as well, have put in place a number of incentives in the R and D area. We prepared a paper that's available to you. It describes the federal system in more detail, as well as the various provincial programs.

As I mentioned at the start, the tax support for R and D in Canada is the highest among the G-7 countries. By way of example, the U.S. credit is only available to incremental expenditures, i.e., increases in expenditures every year, as opposed to the Canadian approach, which provides broad-based support for all of the R and D spending, as opposed to increments over a previous year.

In March of this year we released the result of a joint evaluation with Revenue Canada on the R and D program. Again, we have copies of that for the committee. It gives you breakdowns of the R and D in the various sectors, a survey of the R and D program, and how it's perceived by business.

Overall, in terms of effectiveness, the program was found to generate about $138 of additional R and D spending for every $100 of federal tax that was forgone.

In the resource area, R and D is really linked directly to technology. That links into productivity in terms of different factors of production, and can lead to the development of new products and processes in Canada. Sometimes that technology is also used outside of Canada in terms of licensing and is used by other operations and jurisdictions. In the resource sector, some of the examples we've seen are new techniques for drilling directional and horizontal wells, production techniques such as steam-assisted gravity drainage, as well as research on tailings at oil sands and other types of operations.

Some special issues come up with respect to R and D in the resource sector. Revenue Canada has undertaken a special paper on how to define the R and D expenditures in the resource sector in terms of guidelines. The general approach we've taken is to have a broad-based credit available to all sectors and therefore of benefit to the resource sector as well as other sectors in Canada.

With that, I'd be pleased to answer any questions the committee may have.

The Chairman: Thank you, Mr. Berg-Dick and the group.

Colleagues, just before we go to questions, there's a small item of business I failed to take care of last Thursday. One of our colleagues, Dave Chatters, is able to go to the climate change conference in Calgary for two days next week. We already approved the attendance of our researcher, and I asked Benoît to introduce a quick motion to cover his motel, per diem, and conference fees.

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Mr. Benoît Serré (Timiskaming—Cochrane, Lib.): Thank you, Mr. Chairman.

I would like to move that the committee allow the expenditure of up to $1,150.75 to David Chatters to represent the committee at the conference on climate change in Calgary.

The Chairman: Okay. Darrel, would you mind seconding that?

Mr. Darrel Stinson (Okanagan—Shuswap, Ref.): Seconded.

(Motion agreed to)

The Chairman: Thank you for your indulgence, witnesses. We need to have a proper meeting for that kind of thing. Thank you to our witnesses.

We're going to open the floor to questions now, and we'll start with Darrel Stinson.

Mr. Darrel Stinson: Thank you, Mr. Chair, and good morning.

I believe natural resources are the mainstay of Canada right now. Research is very much needed in this area, and I have no doubt about that.

I have a couple of questions here in regard to the funding. Now, when we supply the information to industry and business, do we get reimbursed in any way for that information we pass on to businesses? Also, is there any tracking device we use to see what the success or failure rate is when we supply funds in regard to research and development?

Dr. Tom Brzustowski: Mr. Chairman, we have a range of different projects, and the accountability and performance measures for these projects are different. Let me begin with our basic research.

First, a sweeping statement: we pay only the direct costs of the research, and that means expendable supplies, materials, field travel, and the cost of technicians dedicated to the research. The universities pay all the indirect costs: the heat, power, light, and, most importantly, the salaries of the professors who are the principal investigators. We don't pay those. So in everything we do the universities and the provinces that fund the universities are silent partners. I wanted to put that on the table first.

Now, in basic research, people get research grants, and they're quite modest. The average grant is about $27,000 per year. The established researchers get those for four years, and after four years they're put through a wringer by their peers. This is in terms of tight scrutiny on the productivity they've shown during the four years and on the quality of what they have achieved in terms of basic knowledge, information published, and so on. So the accountability there is strictly in terms of reporting what they've done with the money, and losing their grant if they haven't done enough.

In programs where we deal with research projects that have some orientation to industrial needs, or sometimes to government needs, we engage in a partnership. That means that a university comes to us with a partner in tow, and they say these folks are ready to put $500,000 on the table for three years; will you match it?

Well, if they meet the criteria of quality and the design of the projects, have the appropriate management structure, and in fact convince our selection committees that the risk is sufficiently low that there is a good chance of success, we'll put some money into this.

The projects have milestones. There is accountability during the project, but with respect to the ultimate return, we do not try to protect the revenue stream back to government. The philosophy on which we work is that the return to the public for the public investment made in these areas, which levers a lot of private investment, ultimately is through increased economic activity.

We don't try to create a revenue stream for ourselves, and it would be extraordinarily difficult to manage. It might be an impediment to getting things done. It would be more hurdles, more red tape. So we take the view that enhanced economic activity pays the public back for their investment.

Mr. Darrel Stinson: With regard to provincial funding, I heard that they're also involved in this. Are we at least paying attention so that there's no overlap there?

Dr. Tom Brzustowski: We do try very hard to avoid any overlap, any double funding of similar projects. We have a high leverage role in this. Our decisions on particular projects in fact make the universities and make the provinces that support the universities put their money into it.

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We ultimately make the decision based on a tough assessment of both the quality of the research and the design of the project—its management structure, its accountability structure, all of those things. So in a sense we have the superior position in terms of decision-making, and we certainly do avoid any double-dipping, overlap, or duplication.

Mr. Darrel Stinson: Have we ever tracked what the dollar return is for the work we've achieved? You were saying the spin-off is employment and advanced technology that we can use, not only in Canada but maybe around the world, with our companies. Have we ever figured it out? Are we getting back five to one or one to one on that end of it?

Dr. Tom Brzustowski: Let me put on the table a figure the committee members might find surprising. I'll put down the number 33 to one in one area.

Canada spends money that supports basic research at about 3% of the world expenditure in basic research, but because Canadian researchers are working at the leading edge, right in those things the world is moving in, we have access to the other 97%. Having access means more than just loading it off the web; it actually means understanding what the stuff means, being able to assess whether the work is good or not, knowing where to go in the first place, and knowing what to look for. So in the basic research, we have this tremendous leverage.

In project research, the sorts of things we can measure are, for example, employment increases. The more difficult thing to measure is the extent to which jobs are saved by research we might help support. Occasionally we find a company develops a new product line, and one can track the income from that. For example, we've supported for about 20 years research in metallurgy at McGill, which ultimately led to the development of a new product for Cominco.

Am I right, Janet, that strontium was the metal?

Ms. Janet Walden (Director General, Research Partnerships Program, Natural Sciences and Engineering Research Council of Canada): Yes.

Dr. Tom Brzustowski: And strontium as an additive to aluminum alloys opened up product lines, so there you can begin to trace the impact.

Basic research, surprisingly enough, also is the source of new companies, new start-ups. The project research deals with existing companies; it supports what they already do, so there are not likely to be new companies started from that. But the basic research creates entirely new companies. These might be small agricultural biotech start-ups or they might be companies that deal with using satellite information and geomatics for forest mapping—things of that sort, entirely new things, so we can measure their return in this way.

The universities do indicate that they receive some licence income, but these numbers are very small. They're large only in the area of pharmaceuticals, which lies outside natural resources. They're quite small in other areas. But the money that comes back to the institutions is reinvested in more research.

Then underlying all of this is what I consider the main return: that we're educating bright young Canadians in areas in which they combine fundamental knowledge with what industry and the country need. In terms of an investment return to the public, I can't think of a better one, even though I can't put a number on it.

Mr. Darrel Stinson: I would take for granted then that we're also up to date on what industry is doing so we're not overlapping there.

Dr. Tom Brzustowski: Very much so.

Mr. Darrel Stinson: Okay, good.

The Chairman: Darrel, thank you.

Roy Cullen, please, then Pierre.

Mr. Roy Cullen (Etobicoke North, Lib.): Thank you, Mr. Chairman.

Thank you, gentlemen and lady, for your presentation.

I have a couple of questions for Dr. Brzustowski and then a couple for the finance officials.

Dr. Brzustowski, it looks as though the NSERC budget is about $400 million a year, and about $100 million of that is focused in the natural resource sector. How does that compare with a few years ago and what's been the plan with your budget?

Dr. Tom Brzustowski: Let me just go back to this. The $100 million is a very rough estimate, because we don't have a category that breaks out research in support of the natural resource industries. Our budget, as you know from the federal budget of February 24, has just been returned to the level it was in 1994-95, which means in the current fiscal year it is at the level of $494 million. That's an increase to us of $60 million over last year.

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That is a huge step, because it takes us back to a level that, while still quite limited and making our researchers very productive.... I want to underline that. I'd like to leave the impression with the committee, Mr. Chairman, that Canadian university researchers are extraordinarily productive by world standards. They've had to be. And they've managed to be that productive and also maintain the quality. It's something to be very proud of when we think about that.

The return of our budget to the level of 1994-95 allows us the freedom to move in a number of areas. The budget recommended, very wisely I think, that the remuneration of the young people engaged in research should be enhanced, and that means both the number of awards and the value of the awards. And secondly, the budget recommended the sort of thing we're talking about in the last two pages, that university industry programs should be enhanced, because there is quite a demand for these university-industry partnerships. So we're very happy with that, Mr. Chairman.

Mr. Roy Cullen: Thank you.

You talked about the partnership with industry, but we all know that often scientists can be very good in their work but may not be very effective at technology transfer. Do you build that into the design of the research projects? How do you go about ensuring that happens?

Dr. Tom Brzustowski: This is an important question, and the expert at NSERC on the subject is here with me. If you would agree, I will ask Janet Walden to answer that question.

The Chairman: Okay, Janet.

Ms. Janet Walden: Thank you.

There are several ways. We do build it into the projects, just by the incentives for interaction with industry, so there are many university researchers working directly with industrial partners. Part of our requirement in the partnership area in fact is that there be not only a need for the research results but a receptor for the research results, so there's a Canadian receptor to pick it up and interact with.

In addition, we have a smaller program that actually tries to build the resource base in the universities themselves, to assist them to develop their tech transfer activities. So for those researchers who either don't have a natural outlet or haven't yet been able to experience working with industry, they can work with their tech transfer offices and exploit their ideas.

We also have a program that extends our mandate slightly, which we underwent with Industry Canada and our sister granting councils. It was designed to actually assist researchers to understand better what it requires to take a new idea out to the business community in terms of market studies, prototype development, business plan, and those sorts of things.

So we take it from a number of perspectives: first, as I said, direct interaction with industry; secondly, building the tech transfer expertise within the universities themselves; and thirdly, trying to provide educational programs to assist researchers to develop the expertise to interact with the business community.

Mr. Roy Cullen: Thank you. But by definition or by inference, most of the research you support would be defined as basic. Is there a basic applied component, or...?

Dr. Tom Brzustowski: If one were to look at our budget, then one would find that something in the order of half of the budget, or slightly less than half—something like $200 million—is spent on basic research. The partnership programs with industry take about half of that amount. But there's a leverage: we attract additional money from industry, from the industrial partners, for these direct costs that I mentioned earlier. So when it comes to spending at the university level, they're not that different; they're pretty much the same.

Mr. Roy Cullen: Can I carry on a bit?

The Chairman: Yes.

Mr. Roy Cullen: If we don't have time, I can come back to finance later.

In the natural resources sector, in the kind of research you support there, do you set priorities? In other words, do you say you're going to be particularly encouraging or supportive of projects, for example, in the environment or in value-added products, etc.? Or do you leave that totally up to the research, so if it's a good project and it seems to make some sense, you might be inclined to support it? Or do you have an umbrella? And if you do have an umbrella of priorities, how do you develop that?

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Dr. Tom Brzustowski: Again, I'll ask Janet to expand on this, but generally NSERC works in a responsive mode. There's one project area, strategic project grants—and I'll ask Janet to talk about that—where six quite general categories are defined as priorities.

But when an application comes to the table and a university applicant and an industrial partner are saying they've talked about the strategy of where this is going and the partner is prepared to put money on the table, that tells us some of that connection and the setting of priorities has already been done. So we assess then the quality of the proposed research and the quality of the design of the project, its management structure, and so on.

But on strategic....

Ms. Janet Walden: There is one programming aspect at the council that does target specific areas. It's roughly, I would say, 10% of the budget, maybe slightly less than that now. It has targeted, in fact since the beginning of the program, which was in the late 1970s, energy as a particular area of focus.

In addition, over time we've added areas such as mineral resources and environment. So we do focus on key areas such as that. Biotechnology also comes into it as a major area, and there are aspects of biotechnology that also fit into the resource sectors.

Mr. Roy Cullen: I'll just ask a supplement and then I can come back to finance later.

In setting those priorities for this strategic part of your budget, how do you develop those priorities—by working with stakeholder groups, or is it just your own sense of where things should be going?

Ms. Janet Walden: I believe the three original areas were developed when we were still part of NRC, which included energy as one of the major thrusts. Beyond that we've tried various consultation methods, including a lot of feedback from the community, in terms of developing those.

Currently our council requires that every three years we re-examine the various target areas to determine whether they're still priorities and whether we're putting sufficient resources behind those particular areas.

As to finding the perfect way of determining those areas, I don't necessarily think we've found it, but it's interesting to note that internationally the areas we're targeting are extremely similar to where you see most of the developed countries focusing their activities now.

The Chairman: Thank you, Roy. We'll try to come back to you.

Pierre de Savoye, please.

[Translation]

Mr. Pierre de Savoye (Portneuf, BQ): Mr. Brzustowski, Ms. Walden, Mr. Berg-Dick, I have a few questions for you. I'm not really familiar with your organization. This morning, we have the privilege of having you here with us and, without further ado, I would like to ask you a few brief questions so that I will gain further insight into this sector.

I believe you said that a board headed your organization. You are the chairman and there are 21 other members. I would imagine that you have a Web site.

Mr. Paul Berg-Dick: Yes.

Mr. Pierre de Savoye: I should therefore be able to obtain some information about you on the site, including the names of the 21 members. Does the site also identify the projects in which you are involved? Could you, for the benefit of the Committee, indicate what you are doing in each province and who are your main partners in each of the provinces?

Mr. Tom Brzustowski: First of all, I would like to say that funding allocation for all of our programs is almost identical to population distribution, it is almost identical. Our partners are industries, and you can find an example of this on page 3: Ms. Line Rochefort of Laval University who works in peat-land management in Canada. This is a partnership we have with Laval University. We have a lot of partnerships that deal with the requirements of Quebec's dairy industry.

In the West, in Alberta, we have partners such as Syncrude. In British Columbia, we have partners in the forestry sector. These are a few examples of industries that we have partnered with across the country. In Ontario, these are industries with engineering requirements, for automobile manufacturing. In Montreal and in Ottawa, we are involved in the computer sector.

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It's difficult to provide you with a complete list of our partners. We have partners that are participating in the network of Centres of Excellence program. The annual report includes a list of 400 partner firms that are involved in all sectors of the economy and in every region of the country. These are small, medium and big businesses.

Mr. Pierre de Savoye: Mr. Brzustowski, am I to understand that it is no accident that the distribution of financing is similar to the distribution of the population, and that this is one of the things you are looking for when you enter into a partnership in a project? Is this one of the criteria you are looking for or is this something that has just happened by chance?

Mr. Tom Brzustowski: This happens naturally because the people involved are important: these are university professors, Masters or PHD students, and their number is just about proportional to the population found anywhere.

Mr. Pierre de Savoye: I would now like to ask our finance people a question. Mr. Berg-Dick, in your presentation, you mentioned that our research and development tax system was advantageous compared to that of the United States. I think I understand why it is advantageous: we have an on-going program from year to year that is provided for by law and then, we provide considerable assistance.

That being said, is there any measure of performance for that assistance? How does our tax benefit stack up to that of the Americans?

[English]

Mr. Paul Berg-Dick: It's always difficult to get exact figures as to the return on research and development. I think one indicator of that was in the evaluation, where we determined that for every $100 of tax credits provided by the federal government, there is about $138 of additional research being done.

I think the fact that the program has been stable over the period as opposed to being extended year by year, or every three years as in the United States, has been an important factor in attracting businesses to locate more R and D in Canada. We've also had examples where significant amounts of R and D have been moved to Canada. In terms of some multinationals like Nortel, that's been a factor in keeping R and D here in Canada.

Also important is that it's not only the federal government but the provincial governments that have been providing incentives. For the province of Quebec, the combination of the provincial credits and the federal credits provides a very advantageous regime for companies to locate their activities in Quebec. In fact, we find proportionately more R and D being done in Quebec than in other parts of the country.

[Translation]

Mr. Pierre de Savoye: As far as research and development is concerned, and more specifically natural resources, do you have any particular examples that illustrate the leverage effect of these tax benefits?

[English]

Mr. Paul Berg-Dick: As I indicated, there are a number of examples where research has been undertaken in the natural resource area. These are listed at the end in terms of some of the different types of drilling, etc. Again, if you're trading off whether you do your research in Canada or the United States as part of a multinational, then obviously the Canadian regime is of more benefit.

Bill, are there other examples you want to bring up?

Mr. William Toms (Acting Senior Chief, Resource Taxation, Business Income Tax Division, Department of Finance): A number of research and development projects relating to the environmental aspects of mineral production have been undertaken in the mining industry in particular.

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There's one project I'm familiar with in the province of Quebec called Magnola, where they're doing some reprocessing of asbestos tailings. R and D has been done there with the idea of extracting magnesium, which is part of the tailings, and at the same time doing some stablization work on the tailings.

Any R and D associated with that type of project could become eligible for research and development tax credits. At the same time, I think some federal funding is involved in that project as well. The people who want to undertake those kinds of projects have a choice of looking for program funding from governments or, if eligible, qualify for a research and development tax credit.

[Translation]

Mr. Pierre de Savoye: If I understand correctly, you cannot tell us, in quantitative terms, how well these credits are performing which, in a final assessment, are government expenses, an investment to obtain a result. You don't have any numbers that would enable us to measure how this investment is performing.

[English]

Mr. Paul Berg-Pick: Other than, as part of this evaluation report, having gone through an examination of the program, that overall sort of figure—the $134 of research for $100 worth of tax credits—I think that's the extent of that evaluation.

[Translation]

Mr. Pierre de Savoye: Thank you.

[English]

The Chairman: Thank you, Pierre.

Roy, Yvon, and then Darrel.

Mr. Roy Cullen: Thank you, Mr. Chairman.

I briefly went through this evaluation that was done on the scientific research and experimental development tax incentive. You've also done some sort of macro-economic modelling, and the program seems to have a very positive benefit cost in terms of the economy, etc., which is good.

In my previous life in the forest industry—I think Mr. Toms and I had some discussions—when I did some work with the Forest Sector Advisory Council, we looked at the technology and science and research. Two issues came up that I recall. Perhaps both groups could address it. One is the business of.... The industry tended to overstate their case in terms of the research and science that is done on what they call the shop floor. I call it money wrenching. Instead of a lot of these discrete projects that are formulated and go forward to NSERC or to other agencies, they say there's a lot of experimentation and development that happens on the shop floor and the industry doesn't get much credit for that. It's hard to quantify and it's kind of mushy.

They were using that example to make the case that they do more in R and D than they're given credit for, but I think also to see if there was a way of packaging up some of the R and D in terms of tax breaks. I know intuitively that they overstated the problem. Have you ever looked at that?

The other question was literacy. In many cases in the forest products industry we will have third-generation technology but on the shop floor we're still trying to plug away at the first-generation technology because often we don't have the skills, training, or literacy as we move from a mechanical process to a highly computer-based process. So that seemed to be a challenge.

Would any of you comment on those two issues?

Mr. Paul Berg-Pick: On the shop floor research, there's a recognition that as the manufacturing and research areas become more integrated, and with this computer-aided design, computer-aided manufacturing, that has to be an integral part of it. At the same time, I think it's incumbent upon industry to set out exactly what they were intending to do, what projects they had in mind, and document that.

I think it's important for us and Revenue Canada to have that information in order to assess that and provide the kinds of incentives we are providing, because they are quite generous and one wants to make sure they're focused on the research. But there has been work with Revenue Canada in terms of designing guidelines, in terms of what kinds of research in that area would qualify, and trying to work out protocol.

There are situations now where some of the bigger companies are setting up an R and D protocol and have to have their R and D auditor in to make sure, before they get too far along, that they have a good understanding of what kinds of information requirements Revenue Canada will need, and that what they are doing in fact does qualify for the program.

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As you say, it's always a bit of back and forth. Industry would like to say that almost everything they do is research in that area, and obviously Revenue Canada wants to make sure they can adequately document what's going on.

Mr. William Toms: I think there's been just one change since the last time we talked. It relates to shared-use equipment. At one time there was a problem associated with the fact that in order for something to get R and D, it had to be a piece of capital equipment that was used 100% throughout its entire life to do R and D. In recognition of the fact that some pieces of equipment might do production control as well as research and development, a few years back we put in a system where partial tax credits could be earned in circumstances where equipment had two purposes, i.e., working on the shop floor for production control as well as an R and D contact.

But it's very difficult for Revenue Canada to identify what R and D takes place on the shop floor. They look for an organized project where somebody has an objective, and just research that is done in off hours. It's hard to identify that and identify the costs associated with it that earn the tax credit.

Dr. Tom Brzustowski: Mr. Chairman, the last part of the question, the human resource issue, addresses something that's been a very hard lesson for many companies in many sectors. It has earned a name in the recent business management literature. It has to do with either complementary or incidental innovation, as it's called. That means that if you want to introduce new technology in a production process, you must at the same time be innovative in defining new job requirements, job functions, and skill requirements, and providing the innovative training approaches that will introduce these measures.

Janet mentioned earlier that one of the things NSERC looks for is receptor capacity. We do that not on a detailed level, because we're not capable of that, but at a gross level. We look to see if the people who are proposing to be partners in a research project have the capacity to use the results.

You're dealing with a very complicated issue, and it's an issue of management of a very serious sort.

Mr. Roy Cullen: I just have one quick question.

The scientific research and SR&ED tax credit—the issue in my riding, and which I often hear from people, is that it's more of an administration process through Revenue Canada and time delays and paper work. Some people in my riding would say that in Ontario it takes sixteen months and in Quebec six months, but I'm sure they're overstating it. But I know there are some bottlenecks and it was taking a long time. Some of these companies really look to that credit for cashflow. It's a very positive program. Have we made improvements? I know you can't speak on behalf of Revenue Canada, but you must be plugged into what they're doing. Have improvements been made in terms of the administrative processing and the backlogging of claims, etc.?

Mr. Paul Berg-Dick: I think you're right that there have been problems in that area, and Revenue Canada has moved to increase the amount of staff directed at research and development. About two years ago there was a time period in which claims could be made from previous years, and that resulted in a big bulge of claims to meet that particular deadline.

Revenue Canada has certain guidelines in terms of the different types of credit claims that they'd like to satisfy, a certain proportion within three months, six months, etc. But the addition of more staff in that area and more R and D auditors is an initiative to provide an indication to companies earlier that they can talk to the Revenue Canada auditors and get a sense as to what would qualify and make sure they're doing that.

It may be useful for the committee, if they wanted to get more information from Revenue Canada as to the administration, as to what they're attempting to do. I could also provide more information to the committee by way of a background document that they recently put out in terms of their approach in this particular area.

The Chairman: That would be welcome.

Thank you, Mr. Cullen.

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Yvon Godin, then Darrel Stinson.

[Translation]

Mr. Yvon Godin (Acadie—Bathurst, NDP): First of all, I would like to say good day to you.

I'd like to ask you a question and I will try to do so clearly. The Department of Finance gives tax incentives such as tax credits for research and development. Are there any guarantees that these grants will be used solely for the purpose of research and development and job creation here in Canada? We are beginning to realize that it's perhaps not the case. I can give you, as an example, the initiative called "Keep Mining in Canada" which was then changed to "Mining Works for Canada".

Many companies are investing in Africa or elsewhere when in fact we still have regions in Canada that could be developed. I would therefore ask you whether or not we have a guarantee that this money will be used exclusively for research and development and for job creation here, in Canada.

[English]

Mr. Paul Berg-Dick: I don't think it's a question of a guarantee. First, there's the initial impact in terms of research and development being undertaken in Canada by researchers here. The second question is about the benefits of that. Some of that will also be linked to activities in Canada in terms of manufacturing or other processes, but some of that may be useful in other operations outside of Canada, where we arguably benefit because it's being directed from Canada.

We may have people employed in those jurisdictions on a short-term basis and then coming back to apply the results of their research. But there's not a direct link between the research that's undertaken and where the results of that research will take place. However, I think there's a strong linkage. As we see in the case of Nortel, where you have your head office, you may link some of those to the manufacturing.

[Translation]

Mr. Yvon Godin: All right, but is the research being conducted here in Canada? That's what I was really asking you. You have guarantees. You give a tax credit, for instance, to a company because it has helped do research here in Canada. And since we are talking about research and development, I think that I can even carry this a little bit further, to talk about exploration, for instance.

I would also like to tell you that I am frankly disappointed to see that, in 1998, we still have enormous problems in getting people to use the new technologies. We know how to invent all kinds of technologies, but we still don't know how to teach people to use them. Let me be clear about this. I think that we are not making enough effort to get people to learn how to use these new technologies. When workers wake up in the morning, I hope that they will know how to use these technologies.

We are not sufficiently prepared for the new technologies. We should be developing programs in advance so that we will be ready when these new technologies come on stream in the businesses. Machines are not built overnight. It takes from three to five years before a new technology is born and we could perhaps be getting ready for it. We don't put enough emphasis on training workers and I am quite disappointed.

Mr. Tom Brzustowski: I fully agree with you. Our role is limited to providing young people in research with advanced training. These are young people who are working on their Masters' or PHD. These people are experts. Our role is not to educate, but I'm very sensitive to what you're saying. You should know, however, that this problem is not exclusive to Canada, but exists everywhere.

Mr. Yvon Godin: We've managed to send a rocketship to the moon, but we haven't been able to put an end to poverty in the world. Thank you.

[English]

The Chairman: Thank you, Yvon.

Darrel Stinson.

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Mr. Darrel Stinson: I have a quick question. We know now we're into global trade and we compete in a global network, so to say. I heard earlier that in one case we get approximately—and this is a rough figure here—33 to one on dollars invested. How are we doing on the global scene in regard to the funding we're supplying here? Do we run in the middle of the pack, the bottom of the pack, or are we not even close to the pack?

Dr. Tom Brzustowski: As to the expenditure on research and development as a fraction of the gross domestic product, we're quite low compared to the OECD countries, to the G-7. For example, one often hears the statement that in Canada we're a small country. My gut doesn't accept that statement. Sweden is even smaller. Sweden spends about 3% of its GDP on total R and D, and we spend 1.5%.

Where we are particularly low in Canada is in the spending on civil R and D by the private sector. If we had time, we could begin to discuss the reasons for that, but I think they're tied to our history, the fact that we've taken as a given that we had this permanent gift of natural resources that we could sell in the world without any processing, without adding value. Of course, that's changing, and that's why we make the points we make in the first three bullets, that we hear from industry leaders who say they now realize how important it is for them to deal not just with the extraction of the resources, but in the production of value-added products for export.

If that change becomes significant, that number will increase, that percentage of GDP spent on R and D. But at the moment we're quite far behind.

Mr. Darrel Stinson: To interrupt here for a second, if I can, when you say on our value-added we're falling down, it seems to me maybe the general population is not educated to the fact that all value-added is not environmentally unsound, if you know what I mean.

Dr. Tom Brzustowski: I know what you mean, and that's a very difficult issue. You'll notice that in the bullet I said we really believe the natural resource industries need the best of high tech, the best of research to be both competitive and sustainable. We have to learn how to do these things. Other countries are learning them, and I think we have smart people.

For example, the program of networks of centres of excellence supports a network on sustainable forestry, which includes people ranging all the way from first nations right through the most advanced industries, with knowledge from many fields, many disciplines. We are learning how to do these things.

When you say we're falling down on that, that suggests to me that we're falling below where we once were. No. We might be climbing a little more slowly than I'd like to see us climb, but we are climbing. We're getting better. And the pressures are on us, the global pressures of competition.

Mr. Darrel Stinson: The bottom line here, though, is do you think the funding you're getting is adequate?

Dr. Tom Brzustowski: I don't think the funding we're getting is adequate for our needs, but it has become a lot more adequate than it was until recently. I think this is part of a general culture change in the country, to recognize that the natural resources are not a permanent legacy, that we have to work at extracting value, adding value to them and creating prosperity and wealth for Canadians. I think more and more people are starting to understand this. So I would put ourselves within this change, this improvement that is happening.

I could make a case, but this isn't the time for it, as to why we need much more money and how we would use it, and so on. But it's quite clear that the step that was taken in the last budget was a moral boost for the country, because after years of decline in the R and D budgets through NSERC, that was a significant increase. That sent a tremendous message, particularly to the youngsters who are working in these areas.

Mr. Darrel Stinson: Thank you.

The Chairman: Thank you, Darrel.

Pierre de Savoye, please.

[Translation]

Mr. Pierre de Savoye: I will be brief. One of the people in my riding has a problem and I would like to know your thoughts on the matter. This person is an agricultural producer who grows hot house tomatoes throughout the year. He told me about one of his problems. As you know, in winter, tomatoes are imported from Morocco and, obviously, they are competing with the local product. However, these tomatoes are able to withstand the trip because of a technology that was developed in Saint-Hyacinthe, as part of a federal program, of course. This technology makes it possible to ship fruits and vegetables because of a special process that extends shelf life.

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We therefore find ourselves in the situation where, the money from Canadian taxpayers along with money from this company, as well as others, has made it possible for a foreign competitor to take part of our market share. As a result, we are laying off people who contributed, through their tax dollars, to a program that enabled a foreigner to develop his industry. Does this type of situation occur often?

Mr. Tom Brzustowski: Yes, this happens a lot and we are trying to do the same thing. I stated that we pay for 3% of overall research, but that we're prepared to use it at 100%. Canadian businesses are constantly trying to do the same thing with discoveries that come from other countries. It's all part and parcel of today's open and global economy. Sometimes there are problems associated with this, but it does give us opportunities.

Mr. Pierre de Savoye: Do you have any documentation or any thoughts on... Well, something in writing that highlights what you have just explained? I have the impression that I could argue the issue properly, and perhaps I'm not the only member in this situation.

Mr. Tom Brzustowski: I don't have anything to give you today, but I will see whether or not we have such a document. Generally speaking, our partners in industry are the ones who point out these facts to us. But I will try to find a document that will shed some more light on the issue.

Mr. Pierre de Savoye: Mr. Brzustowski, thank you very much. Thank you, Mr. Chairman. You will have to excuse me, I have another appointment. Thank you.

[English]

The Chairman: Thank you, Pierre.

With the indulgence of the committee, I would like to ask a question before we adjourn.

A witness at a previous session, in an informal conversation afterward, made what I thought was a fascinating comment. The discussion during the meeting had included intellectual property rights, which I'm sure somehow comes into the transfer of technology somewhere in that stream. I took his comments—I'll give them to you in a moment—to be in the context that information and knowledge technology is exploding around the world, and the exchange of that information is exploding, and controlling intellectual property rights is becoming more difficult.

This person told me—and I'm paraphrasing—that possession and ownership and title to knowledge wasn't so important, and that if a company, university or researcher had the ability to do research, that person or organization would then have the ability to use other people's research. He said that knowledge was becoming a currency, and that if it was flowing freely, it would be those organizations and people doing research who would be able to use that knowledge as you would use money, if you know how to use money.

I think it's important as we move into the future that we either take an attitude of protecting knowledge and controlling it or letting it exist out there in the open domain, so that those who can use it do use it.

Do either of you have any comments on that?

Dr. Tom Brzustowski: I'm very happy to, Mr. Chairman. I may shock you by saying this, but I think you can do both and that both are appropriate in different areas.

I made the point that when Canadians do basic research that is of a quality comparable to world standards, that gives us access to information and knowledge that is published openly, as basic research results are. The international literature is entirely open and it's increasingly available electronically, and it's there that I talked about the 3% and the other 97%.

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However—and I'm going to ask Janet Walden to speak on this, because she is the expert on the issues of intellectual property—when industrial processes, industrial products, and industrial partners are involved, the picture becomes different. These are things that are in fact very often developed out of the knowledge that is openly available as a result of basic research, but the character changes with the involvement of industry.

Janet, perhaps you could add to that.

Ms. Janet Walden: I'd just add that it's extremely sector-dependent.

What we see more frequently now in the information technology sector, where you have extremely short turnaround times on products—six months or less—is that the companies are not as interested in ownership of the intellectual property, but they want to understand it, have access to it, and get it out to market as quickly as possible.

In other areas, such as pharmaceuticals, where there's an extremely long lead time into the market—with clinical trials and this sort of thing, upwards of 10 years—you'll see a lot of protection of intellectual property.

So as I say, it's extremely sector-dependent. In our particular situation, the universities own the intellectual property where we have a joint partnership agreement, but up front in a project there will be an agreement as to how the intellectual property will be dealt with.

The Chairman: Is there a comment? I'm not sure if you'd like to comment about it.

Mr. Paul Berg-Dick: Not really, again, because we're providing funding for research. We don't provide funding for the acquisition of rights, etc., so I'm not sure there's a tax linkage to the question.

The Chairman: On behalf of the committee, I would like to thank our witnesses today for adding to our understanding and appreciation of the challenges and opportunities in the knowledge-based and technology sectors as they relate to natural resources. We always reserve the right to invite you back again someday on this or another study.

With that, thank you very much. We'll adjourn this meeting for today.