INDU Committee Meeting

STANDING COMMITTEE ON INDUSTRY

COMITÉ PERMANENT DE L'INDUSTRIE

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, December 7, 1999

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[English]

The Chair (Ms. Susan Whelan (Essex, Lib.)): I call the meeting to order. In accordance with the mandate under Standing Order 108(2), this is a consideration of the 1999 report of the Auditor General of Canada, chapter 19, entitled “Industry Portfolio—Investing in Innovation”.

We're very pleased to welcome here today representatives from the Office of the Auditor General of Canada. We have Mr. Richard Flageole, the Assistant Auditor General, and Mr. Peter Simeoni, the principal from the audit operations branch.

You're welcome to begin.

Mr. Richard Flageole (Assistant Auditor General, Office of the Auditor General of Canada): Thank you, Madam Chair, for this opportunity to present the results of our audit of the industry portfolio's grant and contribution programs that support innovation in the economy.

I understand the committee is undertaking a study of productivity, innovation, and competitiveness. We hope this presentation and our testimony will be of use to you in your work.

With me today, as you mentioned, is Peter Simeoni, the principal responsible for industry, science, and technology audits in our office.

I will divide my remarks this morning into two parts. First I will give you an overview of the policy issues underlying the programs we audited, and second I will present the main observations of our report along with additional matters the committee may wish to pursue with the government.

As we have discussed in previous reports to the House of Commons and in testimony before this committee, the federal government has set out for itself a critical role in building our national and regional systems of innovation. By innovation systems I mean the sets of national and regional institutions and institutional linkages that generate, diffuse, and apply knowledge for various purposes. Accordingly the government has made building a more innovative economy, and in particular improving the country's innovation performance, one of its major policy goals.

A number of recent government reports have referred to an innovation gap, meaning Canada is not innovative enough compared with its main trading partners. These reports argue that weaker innovation performance is a problem that must be addressed, since it lies at the heart of broader problems in the economy, particularly lower productivity in relation to the United States.

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We decided to look at the information available on the so-called innovation gap, since it is often mentioned in government reports to Parliament describing the programs we audited. We learned that although innovation is undoubtedly an important factor in economic growth, assessing the actual innovation performance of the economy is a complex challenge that has not been met as yet. While innovation can probably be measured, a balanced and informative assessment would require reference to a comprehensive range of indicators.

There is also evidence that Canada lags behind its major competitors in relation to several of the indicators. However, what these lags mean is unclear, and most of the existing information is on inputs to innovation, such as R and D spending, and not on innovation performance directly.

More important, perhaps, recent studies identify a number of factors accounting for our relatively weak productivity performance in relation to the United States: slower adjustment to the two energy price shocks, a slower rate of capital accumulation, a slower rate of growth in R and D spending, and weaker competition in both product and factor markets. Other factors include relative tax rates, smaller scales of operation, and a falling dollar shielding less productive firms.

Although smaller investments in R and D have some role to play, there is clearly no single factor that explains this productivity gap and therefore no single solution.

While there are more questions about innovation than answers at this moment, several matters are reasonably clear. Assessing the innovation performance of the economy is a multifaceted challenge for which little comprehensive information yet exists. Improving innovation performance depends on more than increased spending on R and D; it involves supporting research and development with the activities needed to embed new technologies in the economy. Spending on research and development is not the only determinant of the Canadian economy's rate of productivity growth and may not be the most important one.

With this in mind, I would now like to discuss the results of our audit work.

Promoting innovation in the economy is one of the principal objectives of the industry portfolio. The programs we audited focus on supporting research and development by industry and account for the bulk of the grants and contributions made by the portfolio toward that objective; over $1.3 billion was spent over the last three years.

We audited the following programs: the industrial research assistance program of the National Research Council; the research partnerships program of the Natural Sciences and Engineering Research Council; the networks of centres of excellence, also at NSERC; and finally technology partnerships Canada at Industry Canada.

[Translation]

We looked at whether the management had a strategy explaining what improvements in innovation performance were expected for the money spent on a program or on a project-by-project basis. We expected that these programs would be based on a sound understanding of innovation problems and opportunities, since investing wisely in innovation is more than simply bringing money to the table. It means knowing how innovation systems work and what their strengths and weaknesses are, and it means making decisions on where and how to invest for best results.

We found out that no such strategy or framework existed, and that management did not expect specific results from these programs in terms that would explain the intended impact on innovation systems. Clear statements of expected results are a prerequisite to sound program design and management, as are measuring and interpreting the actual results achieved.

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We also sought to determine whether these programs were well managed and if management knew whether value for money was being achieved. We concluded that there are significant opportunities to improve the exercise of due diligence in approving contribution under IRAP and grants under the Research Partnership Program. In fact, we could not assure ourselves that many of the contributions and grants under these two programs were properly supported.

We found that only about 15 per cent of the funding decisions under IRAP were based on an assessment of all the project criteria, mainly because the need for IRAP support had not been considered. We also found a range of practices in how the other project criteria were assessed—in particular, how projects would improve the technological capability of recipients. In our view, the assessment of many projects was not sufficiently thorough.

We found that the scientific merit of the project we examined for the Research Partnership Program had been well established, has had the potential for training. However, scientific merit deals with the originality and quality of the proposed research, not with its potential significance to industry or other partners, nor with building innovation capacity. We found that there was often little information on file explaining the significance of the expected benefits to the partner company, or the need for government support.

For both of these programs, we found important performance issues for which management had little information.

IRAP management needs to gather reliable information on the results of funded projects and on its advisory services, and to investigate the extent to which its funding supports projects that would have proceeded in any case. In our view, any job creation numbers reported for the program needs to be carefully explained and qualified.

We also noted that the information gathered on the results of projects funded under the Research Partnership Program is limited to success in relation to research goals. There is little information on the commercial and pre-commercial success of the projects.

We concluded that due diligence had been exercised in the grants under the Networks of Centres of Excellence program. The 1997 program evaluation concluded that the program had met all of its objectives and suggested that the program will provide substantial net economic benefits.

We also concluded that the management of Technology Partnerships Canada had exercised due diligence in making these contributions that we audited, with some specific exceptions. Nevertheless, projects and results monitoring need improvement and reporting to Parliament on expected performance needs to be clarified.

[English]

My final comment is that parliamentary oversight is key in ensuring that the government's investment in industrial innovation yields the greatest possible returns for Canada. With that principle in mind, allow me to suggest that the committee, as it considers the important issues of productivity, innovation, and competitiveness, seek from the government answers to the following questions. What does innovation performance of the economy mean? What specific innovation performance problems are industry portfolio programs supposed to address? What specific results are expected from the programs toward improving the performance of innovation systems, and are these results being achieved?

Madam Chair, this concludes the office's opening statement. We would be pleased to answer questions from the committee.

The Chair: Thank you very much.

We're now going to begin with questions. Mr. Schmidt, please.

Mr. Werner Schmidt (Kelowna, Ref.): Thank you very much, Madam Chair.

Thank you very much, Richard and Peter, for appearing here this morning and giving us your very brief statement. I would like to address a couple of questions.

The first one has to do with this business of due diligence and the fact that you have some question as to whether adequate due diligence was in fact performed in both the TPC and the IRAP programs. You seem to be a little more critical of the IRAP program than of the technology partnerships program. Regardless, in each case, due diligence is part of a difficulty. So I'd like to ask you, just exactly what kinds of changes ought to be made so that due diligence would in fact take place?

Mr. Peter Simeoni (Principal, Audit Operations Branch, Office of the Auditor General of Canada): Two straightforward changes. One would be clarity in the assessment criteria they use when someone comes forward and asks for government funding. The more precise they can be, the easier it will be for program officers to develop an assessment of whether or not the project would represent value for money.

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The second thing that needs to happen is those assessments have to be substantiated. If someone comes forward and says the economic benefit of their project is likely to be 20 or 100 new jobs, the program officer needs to think beyond simply gathering that information and seek some kind of substantiation that those 20 or 100 or 1,000 jobs are in any way likely and in fact look at the business case for what the company is proposing to do.

Mr. Werner Schmidt: Okay. Does that suggest, then, that in fact when the applications are made for these moneys, they are not investigated except in the words or the interpretation of the applicants themselves?

Mr. Peter Simeoni: Yes. In the case of IRAP, our concern was that there was little investigation of the claims made by the applicant. In the case of TPC, we've concluded that the contributions were based on the exercise of due diligence in almost every case, but at IRAP and at NSERC we had concerns.

Mr. Werner Schmidt: It would seem to me that's a rather serious indictment, and I think the onus is clearly on the minister in particular.

Madam Chair, I think it would be well for the chair to address a letter to that effect suggesting to the minister that perhaps that ought to be changed and very soon.

I'd like to move into another area, which has to do with the research partnerships program and a particular sentence that I believe you read into the record a moment ago, the very one that I would like to centre on:

However, scientific merit deals with originality and quality of the proposed research, not with its potential significance to industry or other partners, or with building innovation capacity.

I think that's a very cogent sentence. I'd like to ask you, exactly how would the Auditor General's office propose that the Department of Industry, or any other group, in fact, state clearly what the scientific advantage ought to be for particular programs that are funded either through IRAP or technology partnerships, or whatever other program there is?

Mr. Peter Simeoni: We wouldn't want to underestimate the challenge faced by an organization like NSERC as it tries to fund projects that will represent the best investment of the limited funds they have. They're trying to combine two difficult ideas into one funding decision, that being the quality of the science that's being proposed as well as the expected benefits to the economy from the spinoffs from that research and hopefully actually some innovation.

I guess my answer takes me back to your previous question. They need to be a lot clearer.

Let me back up a bit. NSERC is very good at assessing scientific merit. That's what it has done since its inception. In recent years it has taken some of its funding and directed it toward projects that combine science and business opportunities. It's in the business opportunities side that we feel they could do a lot more work. They need to be a lot clearer about what a good business case would look like, and then they have to spend a lot more time assessing it and its plausibility, beyond simply accepting applications.

It comes back to the due diligence point you started with. There's a lot of due diligence on the science side and very little on the business side.

Mr. Werner Schmidt: But I think my question was what kinds of criteria you would recommend that would stand the test of a sound audit so that in fact it would meet the requirements you have set out. I think you've made a very good point here. The question is, how would you go about measuring this?

Mr. Peter Simeoni: What we look for in the files and in their assessment criteria is some notion of the potential market for the innovation that was being proposed. So it's a business case kind of analysis. Who would you sell it to? How much would they buy? How much would it cost to make? Is there an export potential? Those are the kinds of things you'd expect from anyone coming forward and looking for money to invest in a business idea. It's all of those things that NSERC has to bring into its assessment process, in addition to the science criteria it's already using. Only then will it be able to say these projects and the funding they direct towards these projects are likely to result in business benefits for Canadian industry and for Canada.

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Mr. Werner Schmidt: Okay. I'd like to move into a totally different area, which has to do with the advance notice of awarding contracts. I believe the Auditor General's department did make some observations here, particularly with regard to the Departments of Industry, National Defence, and Human Resources Development. But we're dealing with Industry this morning.

In this particular area, the industry department did issue some sole-source contracts, and some rather critical comments are made by the Auditor General with regard to those. I was wondering if you could tell us first of all which are the companies that in fact were given the sole-source contracts of which you are so critical.

The Chair: I don't believe that's in chapter 19, which is before us this morning, Mr. Schmidt.

Mr. Werner Schmidt: No, it's not, but it refers directly to the Auditor General's department, and it does deal with the Department of Industry.

The Chair: I understand that, but as a committee, we agreed to study chapter 19. If Mr. Flageole wishes to reply—

Mr. Werner Schmidt: Well, maybe he knows it. If he does, that would be great.

Mr. Richard Flageole: Madam Chair, I don't have the details on the specifics of that chapter, but again, we would be pleased to provide you the information later if you want.

The Chair: Sure.

Mr. Werner Schmidt: It's directly related to the study that's before you right now.

The Chair: But Mr. Schmidt, we're here talking about chapter 19. If someone wanted to talk about another chapter, they should have drawn that to my attention, because the Office of the Auditor General has specific people assigned to each chapter.

Mr. Werner Schmidt: Okay.

The Chair: No one did, with all due respect.

Mr. Werner Schmidt: Well, okay, but it deals directly with the next department we're supposed to be dealing with later this morning.

The Chair: We're not dealing with the department later this morning. We're dealing with witnesses from the private sector.

Mr. Charlie Penson (Peace River, Ref.): Madam Chair, I have a point of order. It seems to me it is relevant. The committee is studying the whole issue of productivity, and productivity has to apply not only to the private sector but to the public sector.

The Chair: There's no doubt about that, Mr. Penson.

Mr. Charlie Penson: My colleague is raising an important point. Part of the problem we're having with productivity is, if money isn't being spent properly—

The Chair: Mr. Penson—

Mr. Charlie Penson: —if departments aren't conducting their business properly—

The Chair: It's not a point of debate.

Mr. Charlie Penson: Well, it is, because it's in the—

The Chair: Mr. Penson, you raised—

Mr. Charlie Penson: I'm raising the issue of section B.

The Chair: You raised a point of order. In response to Mr. Schmidt's question—

Mr. Charlie Penson: Well, read section B and you'll see it's on our agenda this morning.

The Chair: Will you just let me explain?

Mr. Jerry Pickard (Chatham—Kent Essex, Lib.): Mr. Penson, they've already suggested they don't have that detail, and they will supply it at a later time.

The Chair: Mr. Pickard, thank you.

Mr. Charlie Penson: Maybe not, but it is part of our meeting this morning.

The Chair: Mr. Penson, please. No, in fact we're here to study, from 9 o'clock to 10:30, chapter 19. If there's another chapter you would like us to study at this committee, we'd be happy to request staff from the Auditor General's office to appear. That's not a problem, if there's another chapter. With all due respect, no one raised any other chapter at the steering committee meeting. You didn't raise it.

Mr. Werner Schmidt: I'm just going by the agenda.

The Chair: The agenda is very clear. From 9 o'clock until 10:30, on chapter 19, you're welcome to ask all the questions you want. Mr. Flageole has already said they didn't do the other chapter. So instead of getting into a debate, we're going to move on to Mr. Lastewka.

Mr. Walt Lastewka (St. Catharines): Can I take up their time also?

The Chair: Sure.

Mr. Walt Lastewka: Witnesses, I understand what you said about technology partners and due diligence and the paperwork required. I would like to understand better from you the IRAP portion, where you talked about the strategy and the paperwork and so forth required. Where did you review the IRAP when you did your audit? Where was that done? Locally here? Across Canada? In smaller communities?

Mr. Peter Simeoni: We took a random, representative sample covering the entire population of IRAP contributions made between 1997 and the beginning of 1999. It would have been representative of their work across Canada.

Mr. Walt Lastewka: One of the areas where I have a concern with the IRAP is in the area of small business people who are doing research. It's very much niche marketing when they do research, because it's a small business. Extensive paperwork is required, and there is a limitation on small business getting into research. Did you find any of that—that sometimes we go the other way, and therefore we're limiting small business research and innovation? Therefore it is no wonder that the small-business area is the most affected in not having productivity improvements. I'm not worried about the Nortels and the big companies. I'm more worried about the under-100-employee companies, the small-business people, where our biggest productivity gap is. Did you do any research in terms of how IRAP programs affect those small businesses?

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Mr. Peter Simeoni: IRAP is targeted mainly at businesses under 500 employees. I think in our sample roughly half of the contributions we looked at went to firms of that size or smaller. Some firms were quite small. I was surprised, in the few files that I wound up looking at myself, that there was so much paper collected. In all of that the right answers weren't evident.

I think IRAP could do a far better job of limiting the information it wants from the businesses but making sure it's the right information. I've been getting a proper sense that it's in fact a reasonable proposal the businesses have. IRAP's well designed to be efficient. They have people in the field. Those people have some authority to make contributions under I think $10,000 just about on the spot if that's appropriate. But what they need to do is ask about half a dozen really good questions about what this project is supposed to achieve and then satisfy themselves that it makes sense to do that and makes sense for the government to be involved. That should result in very little paperwork in the end.

Mr. Walt Lastewka: I specifically said under 100, not 100 to 500.

Mr. Peter Simeoni: Yes.

Mr. Walt Lastewka: I specifically talked about under 100 employees, and I didn't see in your recommendation that there's paperwork overload and that we should be focusing on the right questions, a minimum amount to allow small business to get on with the job.

What I see happening—and I have a feeling it's because we're trying to put too much onus on our IRAP representatives and so forth—is that they must have three inches of paperwork to justify. In the meantime, the small businesses are saying “I give up on that”. It's for that reason that Canada today, in the small-business area, has a large innovation gap. That's the difference between Canada and the U.S.

When I compare the Niagara—Hamilton area with western New York on research, there's a tremendous difference of approach in assisting small business on innovation. If you haven't looked at it this time, I'd ask that you do it next time, because I think we're crippling small businesses. I'd appreciate you taking a look at that and maybe helping to simplify and coming up with the right questions and letting small business get on to do their innovation. We're all searching for the reason small business is having the biggest productivity gap in Canada.

Mr. Richard Flageole: If I can add something on this, as Peter mentioned, IRAP—and I firmly believe this—is a well-designed program. Maybe it's not clear enough in terms of paper, but I think we really stress the need for IRAP to ask the right questions. Through the discussions we had with the IRAP people throughout the audit, I think we really stressed the need to keep it as simple as possible. It has to be a very easily accessible program for those small businesses.

We certainly take your comment into consideration in stressing the need on the paper aspect and making sure it's going to be an easy program in terms of access.

Mr. Walt Lastewka: For me it's the same. And it's not in this committee, but your colleagues in the finance tax credit area.... The tax credit area is more than crippled. In fact small businesses have said forget it on the Canadian side, whereas on the U.S. side it's simpler and therefore small business gets into the tax credit a lot more than do Canadians. I have a feeling that within our own system we have caused the small businesses not to be more innovative, not to do the things we would hope they would be doing because they have the biggest gap.

The Chair: Thank you, Mr. Lastewka.

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[Translation]

Mr. Brien, please.

Mr. Pierre Brien (Témiscamingue, BQ): I have some questions on IRAP, which you have criticized. You say it has many deficiencies. There are many ways of assessing projects. You said that the scientific merits of projects had been well established, and their potential for innovation properly assessed. You also focussed on commercial potential, which you felt should be evaluated more accurately.

The other aspect to consider was companies' ability to fund projects alone as opposed to requiring government support. You said that many of these projects would probably have proceeded even without government support. How can we determine this more accurately before a project goes ahead? It may be very difficult to measure this kind of thing, or to predict whether a project would have proceeded even without government support.

Mr. Richard Flageole: Madam Chair, this is an excellent point. This sort of evaluation is almost always easier to make after the fact.

Nevertheless, IRAP management must establish mechanisms to make those assessments, taking into account the company's financial ability to proceed with the project and the project benefits.

IRAP provides two very different services: consultation and financing. In my opinion, since initial contacts with the client are generally through the consultation component, there should be a greater focus on determining whether the company does have the means to proceed with the project. There are always some who can.

We were concerned about the extent of the problem. If I remember correctly, in over 80 per cent of cases analysis had not been sufficiently thorough. Studies of clients through IRAP show that up to 60 per cent of IRAP-funded projects would have proceeded anyway. These are clients who say: "Yes, we would have gone ahead even without the IRAP contribution." We believe these figures are much too high, and management should focus more on commercial benefits and companies' financial ability to proceed with a project. The consultation provided is probably an excellent way of doing that kind of evaluation.

Mr. Pierre Brien: In your view, is there any link between the fact that funding can be obtained fairly easily without having to demonstrate a project's commercial potential and the fact that there is little data on the commercial value of innovation? After all, it has been shown that some private partners might have proceeded with their projects even without government support.

Mr. Richard Flageole: I believe that the two are fairly closely related.

Mr. Pierre Brien: Right. I have one last question on one of the paragraphs in page 5 of your presentation. The paragraph reads:

IRAP management needs to gather reliable information...

The last sentence of that paragraph reads:

In our view, any job creation numbers reported for the program need to be carefully explained and qualified.

That sentence is not very clear. What do you mean by it?

Mr. Richard Flageole: This is about a problem we noted while auditing different types of grant and contribution programs. We noted that, on the whole, there was very little concrete evidence in support of the job creation numbers quoted. I should point out again that this comment also applies to many other programs having job creation as one of their objectives. We should expect to see more stringent analysis in support of the job creation figures before publishing them. In our view, asking a company simply to tell us how many jobs it plans to create, writing that figure out on the document and reporting it to Parliament is simply not enough.

The process should be somewhat more stringent.

Mr. Pierre Brien: And that number—10 or 12—is put into all the press releases.

Mr. Richard Flageole: We would expect more stringent procedures for measuring job creation numbers and communicating them. Again, this isn't always easy. But putting forward exact numbers based on superficial data is inadequate. I believe we have a right to expect something better for these programs.

Mr. Pierre Brien: I agree. Thank you.

[English]

The Chair: Mr. Malhi, please.

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

What actions should the federal government take to enhance innovation?

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Mr. Peter Simeoni: That would cover a lot of ground. Let me give you a general overview.

Our work suggests that innovation happens best first of all in businesses, and secondly, in businesses that are operating in a policy and economic environment that encourages innovation itself. There's a whole range of policy levers the federal government can use, some of which I don't think have been properly identified yet, because promoting innovation is still a relatively new public policy question.

From trying to help individual firms to helping groups of firms, helping firms work better with others and then the general economic climate in which these firms exist, there are all sorts of different ways to come at it. What we can't tell you is which ways would work best. We don't think that information exists at all.

One of the reasons we spent so much time in the beginning of our report talking about the question of innovation and as a matter of public policy is because we were a little bit concerned that overly simple solutions were being reported to Parliament. The departments were latching onto the available information and claiming that somehow this indicated what the solution to our innovation performance problems might be.

If we've done nothing else, we hope to suggest to this committee and to the House of Commons that innovation is a complicated idea and that we should be wary of any quick-fix solutions and anyone coming forward, in particular any department coming forward to Parliament and saying if you just give us more money so that we can invest it in research and development then innovation will be better, productivity will improve, and the incomes of Canadians will be higher. You should be suspicious of that kind of policy prescription because there's very little evidence to suggest it's that clear-cut.

The Chair: Thank you, Mr. Malhi.

Mr. Jones, please.

Mr. Jim Jones (Markham, PC): Yes. Thanks, Madam Chair.

I'd like to go to point 12, where you say:

We expected that these programs would be based on a sound understanding of innovation problems and opportunities, since investing wisely in innovation is more than simply bringing money to the table.

What do you mean by knowing how innovation systems work?

Mr. Peter Simeoni: In our work over the past little while when we took on the challenge of trying to audit the industry portfolio's investments in innovation—because there are a number of programs, as you can see, that are more or less trying to contribute to that public policy objective—we needed to inform ourselves about what that meant, to invest in innovation. What we ran into right away was a considerable body of literature, international literature, led by the OECD, talking about the idea of innovation systems, that innovation doesn't occur in isolation.

The idea that an individual working in a laboratory is going to come up with an earth-shattering discovery that will create new industries and so on is pretty far-fetched. That may still happen. It does happen. But by and large, innovation is incremental and it happens largely by people sharing information. Innovation systems were about helping the institutions we already have talk better to one another, and share what they know and work collaboratively if that makes economic sense.

It's in that context, and this is a theme.... We were before the committee this spring talking about the government's science and technology strategy. In that strategy the government made several references to the idea that it has to be a better partner in the innovation systems of Canada. The best way for the federal government to be a good partner was to understand how those systems worked and then pick the points of leverage that made the most sense and invest its money there, because it couldn't fund everything, of course.

That's exactly what we were looking for in these programs. We were taking the government at its word that they would be investing through IRAP and NSERC and TPC to best effect, and what we found is that there's very little management thinking on the subject of where to make the best investments. Rather, the investments occur because people come forward and ask for money and then from that group there's an assessment that's done, sometimes not as well done as we would like, and the money is distributed accordingly. What its impact would be on the innovation performance of the firm, let alone the innovation system within which the firm finds itself, is pretty much unknown.

Mr. Jim Jones: I'm having trouble understanding what is an innovation system. I'm having trouble with what you mean by what is an innovation system.

Mr. Peter Simeoni: An innovation system is first of all an abstract idea, so right away I understand why you'd have this trouble. I had the same trouble, and I still do.

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It's a theoretical tool for understanding how we create economic value through new uses of existing knowledge—

Mr. Jim Jones: Let me ask it in a different way. Are you trying to say an innovation environment? A system implies that some type of organization is in place. I don't understand what a system is in this particular case.

Mr. Peter Simeoni: I guess the best thing to do would be to use an example. Let's take aerospace. In Montreal you find a couple of large aerospace companies, engines and aircraft. There's a whole lot of smaller firms that are responsible for building the components of the aircraft. There are universities that do research on better aircraft design. All of these individual institutions are working together, sharing information, to create new products we can turn around and sell domestically and internationally.

One could say there is an aerospace innovation system in the Montreal area, for example, as there would be a high-tech information technology innovation system in the west end of Ottawa. There are regional, local, and national innovation systems like that across the country and around the world.

Mr. Jim Jones: Then what you're really saying is more an innovation environment.

Mr. Peter Simeoni: That's equally valid.

Mr. Jim Jones: Or an industry sector.

Mr. Peter Simeoni: Sure. I guess the idea in using the word “system” is that there's supposed to be a lot of interaction among the actors, whereas “sector” tends to just categorize them in a group.

Mr. Jim Jones: Okay.

I'd just like to go to your point 18. You say parliamentary oversight is key. What do you mean there? What should Parliament be doing?

Mr. Peter Simeoni: Well, it takes us back to one of the first things we were curious about when we started this work. We were looking at the estimate documents for Industry Canada from about 1997 and 1998, and immediately we ran into a discussion of something called the innovation gap—that this gap was a serious economic problem and that the programs Industry Canada had and the industry portfolio had were designed to somehow address that gap. So we got curious. We asked about the gap. We found there's no such thing as an innovation gap. If anything, it's a bunch of gaps, and it's not clear what they all mean, and all the things we talk about in the chapter.

Parliamentary oversight comes up when committees such as this one ask departmental officials what they meant when they said “an innovation gap”. What did they mean exactly? Is it getting smaller or is it getting larger? How do their programs actually address this apparent problem they talk to Parliament about?

They come forward to Parliament and say “We have this big problem. Please provide us with the funding we're asking for in order to address that problem.” We think they ought be able to close the loop for the House of Commons and say “Yes, this is the problem, and this is what we're doing, and things are getting better, or they're not.” You'll see from the recommendations we made that we don't think they can do that at this point.

While we can make recommendations, recommendations from a standing committee carry a lot more weight.

The Chair: Thank you, Mr. Jones.

Madam Jennings, please.

[Translation]

Ms. Marlene Jennings (Notre-Dame-de-Grâce—Lachine, Lib.): Thank you for your presentation. In answer to the question put by my colleague Jim Jones, you raised an important point about innovation systems. In some commercial and industrial sectors, innovations happen regularly, and systems enabling educational institutions like universities, subcontractors, major companies and other stakeholders to work together have been established.

During your IRAP audit, did you note that such innovation mechanisms were absent in those commercial and industrial sectors within Canada where small and medium-sized businesses predominate?

I recently visited a small business with about 50 employees. They prepare and sell food products. For years now, the company has been doing its own research to improve the quality of its products, without any government assistance. It has had to cut costs in order to remain competitive. The company has developed new processes that set its products apart from others on the market. If I gave you the name of their competitors, everybody would recognize it.

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This company has grown tremendously, since its products are of a better quality than those we are used to buying. It has grown in Canada and is now beginning to export across North America and even to Asia. In 12 months, it has doubled its work force and according to its business plan will be four times larger in five years. As for its profits and income,

[English]

they're going to go up five or six times. There's an example.

This is in an industry where you might not have as much innovation as you have say in the high-tech industry. I'd like to know what, if anything, the IRAP program has to identify sectors where there is not as much innovation as we see in other areas, and whether or not the IRAP program is set up to actually go and encourage companies to innovate, to try to do research that would result in a commercially viable process or product. That's what I see as being a problem.

The big companies, whether it's the car companies or aerospace, already have their systems in place, so they can take advantage very well of IRAP. But for small sectors that don't have those systems in place, how does the IRAP program assist them? And if they don't, what can Parliament and government do in order to set in place mechanisms that will assist those sectors that are not productive to become more productive?

[Translation]

Mr. Richard Flageole: I would like to take that question. Mr. Simeoni may want to add some comments on specific aspects.

What you say is an excellent illustration of how complex what we call innovation really is. What exactly is innovation? For a small business, it represents incredible potential for economic growth. That brings us back to IRAP's role. As we said before, IRAP has two components: it serves as a technical advisor and consultant for other services.

Obviously, most small businesses are not as systematic or organized as, say, the aeronautics sector. In some cases, the most important thing is to help them understand how to prepare a business plan. Quite often, the product is already there and can be improved through minor technological investment. However, the company then comes up against a larger question: commercializing its good idea. Needs are extremely important here.

This chapter points out that IRAP could define its consultation services better. In some cases, providing consultation services might lead to added value that is far higher than the $15,000 that the program would contribute for a small technological project.

Showing a company how to sell a product it already has, how to improve relations with partners on international markets, and how to explore export opportunities: there is great potential for this kind of assistance, which could generate excellent results. IRAP must target its assistance, and determine what kind of assistance would be the most effective. The program is designed to do this. There are strategic choices to be made, and IRAP management must make the right ones.

Ms. Marlene Jennings: The program isn't designed to solve the problem caused by the absence, in some sectors of commercial activity, of an innovation system or a concertation method between the businesses in that sector, between training institutions, universities, colleges and so forth. From what I gather, IRAP isn't designed to help the sectors set up such a system.

• 0950

So, I wonder. We're already giving money to some organizations—not Industry Canada, but Human Resources Development Canada—such as, out West, the Community Futures and Development Corporation; in Quebec, you have the SADCs. I wonder if those organizations who have an economic development mandate in their communities couldn't act as liaison, in a way. I wonder if they couldn't find the sectors which, on their territory, lack the innovation system and help them to establish one.

After that, as they know IRAP very well, they could establish the liaison with that program when things are ripe to make it possible.

Of course, IRAP isn't going to help a sector set up an innovation system. So there's a real flaw. To date, I don't see any coordination being established between the different government programs, at least not at the federal level. It isn't necessary to create a new program because there already is one. What is lacking is better coordination between existing programs.

[English]

The Chair: Madam Jennings, your question?

[Translation]

Ms. Marlene Jennings: I don't have any questions. I simply wanted to make my views known. Thank you.

[English]

The Chair: Mr. Flageole, do you have any response?

[Translation]

Mr. Richard Flageole: I think you're raising a very important question. Once again, I'll refer to the design of the program. The program is designed in such a way that the people working on it are very close to the businesses. In most cases, it's a matter of individual interventions.

I'm still referring to the matter of the consultation services offered by IRAP. I think that, in the different communities, they can play a liaison role between businesses or government programs. I sincerely believe that IRAP has the wherewithal to do so, at least to refer clients, because of the close and privileged relationship its stakeholders have with small business. I think they are in a position to provide that service. Once again, it's up to IRAP to determine which would be the most effective way of going about this with those businesses.

[English]

The Chair: Thank you.

[Translation]

Mr. Brien, do you have any questions? No? Mr. Jones? No?

[English]

Mr. Cannis, please.

Mr. John Cannis (Scarborough Centre, Lib.): Thank you, Madam Chair. I'll just make a few comments and ask a question.

I want to pick up where my colleague, Jim Jones, ended, talking about the word “innovation”. I'd like to try to dissect it a bit, if you will, and get a definition of “innovation”.

In your presentation in point 4, you talk about a national and regional system of innovation, and you go on to talk about the innovation gap, meaning that Canada is not innovative enough compared with its main trading partners. However, you go on to say in point 7 that what these lags mean is really unclear. Further down, in point 8, you say there is no single factor that explains this productivity gap, and therefore no single solution.

These are a lot of general statements, although we did hear a response from Mr. Simeoni. When asked to give us something specific, he talked about economic policy and economic climate, if I may quote him.

The question I have is on the end of point 9, on page 3. In order for an individual, a company, or an environment to be innovative, how does one become innovative if one has an idea or a new system, as you mentioned, Mr. Simeoni? How does one come forward to bring this new idea to fruition if one is not given the tools? Tools are not often described in terms of bricks and mortar; they're also described in terms of financial support to get to designing a system where they're coding or building or what have you.

• 0955

I agree with you. A comment was made that not every idea comes to fruition and scores, as they say. On supporting research and development with activities, can you tell us what activities we could support to improve our technology, to improve our society? You have just made an open-ended statement. We say it involves supporting research and development with the activities needed to embed new technologies in the economy. What activities would you suggest we support? And if somebody comes forward with an innovative idea, how do we support them? Do we just give them a pat on the back? Is it perhaps getting embassy approval? Is it getting compliance? Would that be part of it?

Mr. Peter Simeoni: We need to consider two notions of innovation, which is part of the problem in the policy discussions. Innovation remains a largely undefined idea, and the best definitions wind up being very general, such as information put to new uses, which is the one we used in the chapter. That was as good as we could find. You could also say invention and commercialization capture the ideas of creativity, but also being able to sell. Beyond that, there's a lot of debate about how innovation happens.

To get back to where I started, there are two ways of coming at it. There's innovation at the firm level. The Conference Board of Canada has done some wonderful work recently on the characteristics of firms that have been innovative in the recent past and what best practices they've followed and the kinds of things they did as a template for other firms to follow.

The comment in our opening statement and in the chapter about embedding innovation in the economy has to do with the systemic approach. Innovation is more than just good ideas and new products coming forward in individual firms. It's taking those new technologies and distributing them across the economy, because that's how we improve the innovation performance of Canada. If one particularly innovative firm and nobody else...that's not good for us either.

It also speaks to another problem we ran into. Canada can't possibly do all the R and D and all the innovation it needs to do. It will import and buy ideas from other countries. One of the roles of the federal government may be possibly to facilitate that transfer of information from other places to Canada.

Mr. John Cannis: In terms of partnership, the global exchange you referred to....

Mr. Peter Simeoni: Exactly. We hear often that Canadian firms aren't as technologically advanced, perhaps, in manufacturing as some of our competitors. Just exactly why is that so, and what can we do to get that technology into the hands of Canadian firms? That's another dimension of innovation that has very little to do with research and development but may in fact be just as important. This is why we made the general statement that innovation is something more than just doing R and D. Putting all of our eggs in that basket may not in the end make us more competitive. We have a lot of ideas, but it's more than just having good ideas. It's applying them broadly among small businesses, for example.

The Chair: Thank you, Mr. Cannis.

Mr. Lastewka, please.

Mr. Walt Lastewka: I want to go back to the innovation system, because I think you're right. It's very difficult for us to define and explain it because we haven't spent enough time to do it. Perhaps that's why we have the gap.

In your last remarks you were looking at innovation in processing, for example. It doesn't have to be always new products or things. It could be innovation in processing. It could be innovation in services. We haven't done enough work in that area.

I would like to explore with you more why we haven't defined our innovation system. From what you did under your report, is it because innovation in the past has been left inside universities and various buildings and not talked about as openly as it should be? Can you share any of your experiences on that? We need to get our arms around trying to define that so we can share this with more people across Canada.

• 1000

I look at innovation in agriculture. In Saskatoon you see it. You see it in some areas across the country, but if you go to some communities and talk about innovation they wonder where you're coming from. Could you perhaps share with us some of your work in this area?

Mr. Peter Simeoni: As part of doing the background for this particular audit and then doing the work that became the study portion, the introductory portion, as I was saying earlier, we looked at this question of innovation.

In defence of the department I'd like to say it's a relatively new idea. Innovation systems as a concept, as a policy analysis tool, really don't date back much before 1994 in any serious way. Canada was accused of having an innovation gap only in 1995 in an 0ECD country report. It is still a relatively new idea.

What worries us to some extent is that it didn't take very long for the idea of innovation to start appearing in reports to Parliament. At the same time as old programs were now in the business of innovation—it didn't used to be in the business of innovation—now suddenly we're promoting innovation. When we pushed we found there wasn't a lot of work underlying those claims. They didn't have a proper idea of what innovation might mean, which was your point. They need to backfill in a policy sense and try to be clear about exactly what problems they're solving and how the means they've chosen will do that.

We've leapt ahead. We've identified a problem without having done the full analysis of what that problem really amounts to. We say we're working on solutions that were already in play when the problem was identified, and they were there for different reasons.

IRAP was not originally conceived as a program for innovation. That's not what it was about. Now all of a sudden it is. It's solving that problem too. For TPC, it's the same kind of thing; it's about innovation.

I wouldn't say it's simply a matter of changing labels. They've more work to do than that. As you can see in our chapter, there's some basic policy analysis that hasn't been done, and we think it needs to be done. They're working on it. I wouldn't want to be too critical. They've started to do some good work at Industry Canada on that subject.

Mr. Walt Lastewka: Last week we heard evidence to the fact that only 2% of our innovation is domestically originated and 98% is transferred. I believe the original intent of IRAP was to help businesses to transfer and to implement technology rather than trying to reinvent it. Now we're trying to change it, as you said, to be the innovators, and it's going to take a while to make that happen, if that's the right thing to do.

We need to do more work on defining what the innovation system is. We should be able to define it and we should be able to say here's step one, step two, step three that we need to go through. It's not rocket science.

The Chair: Thank you, Mr. Lastewka.

Mr. Pickard, please.

Mr. Jerry Pickard: Not being an expert in innovation, I have to ask what you are really talking about. I have to relate that to my own personal life, to my own experiences, and I have understand what you're saying. Instead of giving somebody 30 points or 50 points about what's happening, I really believe there have to be examples where you can say this is how it happens and what happens.

I'll relate it to the greenhouse industry in my area. Ten years ago a certain type of tomato was developed and it caused a revolution in the greenhouse industry. That one piece of science led to new housing, new buildings in the greenhouse industry, new types of chemical distribution, new controls within the industry, new means of sales, new opportunities for sales across the board with the agreements that Canada had put together.

As a result, innovation, in my opinion, is not a nebulous thing. Research at universities...the Harrow Research Centre in my area.... What has happened is the greenhouse industry has become so potent in my area that all have clustered together. They're using similar sales people. They are bringing all products to a system.

The type of tomato that has been developed now can be sold competitively with California, with Florida. When the hurricane occurred in Florida a few months back, there were 20 trucks from one firm from my riding in Florida selling tomatoes.

• 1005

To me, we have to be able to say “Yes, these are the skills we need to have. This is the research that needs to be there. These are the methods by which we can increase productivity. These are the steps that must be taken in order to get there.”

Quite frankly, it becomes very clear if you analyse that type of situation. If you go to the biotechnology centre in Saskatoon, you can do a similar analysis of how all of these competing companies come together with one cause in mind—and that's to develop a set of skills, a set of technology, a set of information, and then market it across the country. You have huge marketers there. It's not something happening in isolation to everything else.

To me, that's not the message I'm getting—where you can walk in, you can look and you can see what's happening, where you can make some judgments on whether it's working or not, just by going through the different industries and seeing how it happens.

From what I've been hearing this morning, it seems to me so unconcrete, so nebulous. I think it is concrete, and I think there is a set of skills; there are very clear things the average person like myself can understand and apply. Why isn't that being done?

Mr. Peter Simeoni: It is, but only quite recently. The Conference Board report that I referred to earlier came out in the last month. They've done case studies of innovative firms, trying to figure out how this happens, as a lesson to others.

It relates to the point I made earlier about the need to do a policy backfill. As a government, we want to promote innovation performance. How is it happening? Because it is happening; every day it's happening. All sorts of different businesses are innovating all over the country. They're working together and there are innovation systems. What the government needs to try to do better is understand how that's happening so it can pick its moments and use its limited resources to best effect.

I really like the example you've given us of a different kind of tomato, because that obviously suggests that somebody was thinking beyond the science part. They didn't develop the tomato and then wonder what they were going to do with it. My guess would be they'd already anticipated that if they could do such a thing, there would be a market for it. That's the kind of analysis we would have expected from projects where the government has provided some of the funding, which was largely absent.

Mr. Jerry Pickard: What Mr. Lastewka pointed out a little earlier is so important. Small business doesn't sit and think about all the science research that happens in a field; it has really very little to do with their day-to-day operations and concerns. We as a country have to bring all of this into a working unit so that they can participate.

In my area, the functioning reason why it participated so well is because of the Harrow Research Centre and several other mechanisms in the area that coordinated a lot of the most up-to-date skills. Then other small innovation firms came in, because that's the spot where it was happening. A government has very little to do with setting those things up, though.

Mr. Peter Simeoni: I couldn't agree more. The government is seeking to promote innovation in the economy, but it should be trying to understand that innovation. That's an innovation system, in my mind, that you've just described.

If that innovation system came forward and asked for money, then the government would be obligated to decide how best to give it money, given what it's trying to do. No, we're not suggesting the federal government needs to establish innovation systems. What it needs to do is understand how they're already working across the country, because they are already working, and then take the $500 million a year we're talking about and invest it to best effect in those innovation systems. It's doing that investment right now, without considering the systemic side of things, and that worries us a great deal.

• 1010

Mr. Jerry Pickard: So you believe we should be having people reaching out into other areas that are successful and coming back and implementing some of those things that are happening.

Mr. Peter Simeoni: Let's try to understand how innovation success stories have happened in Canada and see if we can't duplicate it in other places.

Mr. Jerry Pickard: Are you saying Canada-wide or worldwide?

Mr. Peter Simeoni: It probably should start at home and branch out as appropriate. Not everything is comparable to the situation here in Canada. If we are going to look outside Canada we should do it in countries that have a similar economic structure, not necessarily the United States.

Mr. Jerry Pickard: My problem comes back to another statement that was mentioned a little earlier.

It has been suggested that Canada lags in that area. Why, then, wouldn't we be going to where they are the leaders, the points of reference? If we're talking of the same kind of thinking, there are various points we can identify in innovation, be it the Silicon Valley or somewhere else, be it Dallas, Texas, or any place where we can see that mushrooming of innovation going on and we can identify the characteristics there. Is there relevance to doing that?

Mr. Peter Simeoni: I'm sure there is. I wouldn't want to discourage this committee or the government generally from undertaking exactly that kind of work. We can certainly learn from the successes of others.

But at the same time, we also need to understand our own situation as well as possible, because it seems unlikely that the lessons learned will be perfectly applicable here in Canada. We will have to change them to suit our own circumstances. Let's learn how others have been successful, and let's also understand what's going on here and then design solutions appropriate to our circumstances. I think all of that research needs to be done—soon.

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

I just want to pick up on Mr. Pickard's comments for a second. You made a couple of statements earlier about the expectations and what you'd like to see when it comes to the criteria for the program. I think Mr. Pickard hit on an excellent example of how no one could have foreseen or had those kinds of expectations about the growth in that industry.

We're not talking about an industry where you had an operation that doubled in size. You have an industry where you now have operations that have gone from being what was considered a large greenhouse operation of two to five acres to well over 25 acres, and one's over 40 acres in size. You have people in the industry who weren't in the industry before. No longer are they—necessarily—traditional growers who are running these operations, because of the size of the operations, the money that's involved, and the necessity for capital.

So when you talk about the importance of research and you talk about the dollars for IRAP and the expectations that should be there for.... I think sometimes you can't measure it, and sometimes if you set criteria that are too strict or have demands and expectations that are too high, you're not going to be able to reach them, nor are they ever going to be accurate.

I can point to the canola industry as another example. There's no way to measure the dollars that went into that research and the dollars that have come out of it. It's just impossible. If that were the case, all agricultural research would be funded for centuries. That's the reality of it.

I think we do recognize one thing. I still disagree with your comment that research is not the most important one. We've had economic experts here before this committee telling us, comparing, and showing us charts of where we compare with the United States.

One of the areas where we continue to compare ourselves with the United States is productivity. When you compare productivity and you look at the dollars they have continued to spend on research and development versus the dollars we spend, and you look at how they've balanced their books and how we've balanced our books, one of the areas they've continued to spend a large number of dollars on is research and development.

Yet their productivity rate has continued to go up and ours hasn't. There has to be some kind of direct correlation there. There has to be. It can't be simple enough to say that it's not. It has to be one of the factors that plays into this.

• 1015

So the better way might be to say it may or may not be. We don't know. But we do know that's one area where we're lagging, we do know that's one area where we continue to lag, and we do know that we continue to compare ourselves to the United States. I don't know if you have any comments.

Mr. Richard Flageole: I'm not sure we disagree on this one. I think the main message is.... We fully recognize that R and D is one of many components. You gave some very good examples. There are a lot of success stories in Canada.

If we could put on a chart, in a very simple manner, what has to happen, starting by creating an idea and going on to creating a product and putting the product on the market—what are all of those events that have to occur?—I'm sure we could find a certain number of players in the Canadian economy who either don't need any help or who need very little help from the government to make that process extremely successful. I think we have good examples of that. In other cases, maybe some other players would need assistance from the government at different steps. That's why it's extremely important to understand what those steps are and what the conditions are for success at every one of them.

I'm just thinking about the whole industry department portfolio—along with other government departments. I'm sure if we could look at such a chart, we could find government programs aimed at intervening at every single step. There are tax considerations to be taken into account. Financing is a big question. I'm thinking about other programs, like the small business loan program and the role of the Federal Business Development Bank—and export promotion is another issue.

By understanding it better, I think, the government would be in a better situation to make sure that all these intervention points are the most effective ones. In some areas, R and D will be the key. In other sectors, maybe it won't be; maybe another aspect would need more help.

The Chair: But sometimes it's more than that too.

I think Mr. Pickard's example of the greenhouse industry is an interesting one, because sometimes there's a judgment call involved. If you go back to the late 1960s when the greenhouse industry was in trouble, if the government hadn't interfered at that time—which some people may call political interference—it never would have survived. We wouldn't be talking about a multi-million-dollar industry in Essex County today if 30 years ago someone hadn't had the foresight to step in and save what industry did exist.

With all due respect, sometimes I find the reports a little critical of what I call judgment calls. Sometimes they have to be made. We're not going to be around 30 years from now to say whether or not they were correct, but I use that example as a good one, because if you were to go back and look at it, it would be interesting to see what happened and what the analysis was of the decisions made in the late 1960s and what has happened today.

It would be interesting to follow that industry through, because I don't think that in the late 1960s they could ever have predicted what was going to happen. As Mr. Pickard has already said in regard to the development of the tomato and the hydroponic growing, no one anticipated we'd go from five to 25 to over 40 acres—with one approaching 60 acres in size—virtually overnight. It's incredible. I just throw that out there.

As a committee, we do appreciate you coming here. It has been very interesting. I don't know if you have any final comments you want to leave with us, Mr. Flageole. Any parting comments?

Mr. Richard Flageole: We've been doing a fair amount of work on the Industry portfolio in the last two or three years, I guess, again, looking at different aspects. I'm just thinking about the work we did on the small business loans program, the work we did on the federal science and technology strategy, and further work we have planned on various grants and contributions.

I think the overall message is that it is a very important area for the office. We really hope that the work we're doing for the committee and for Parliament as a whole is going to be useful. It's probably one of the most important challenges facing Canada for the next couple of years, and, really, in the short term there's some sense of urgency, because things are accelerating very quickly.

Again, we will continue our efforts to try to provide you with the best possible information we can. If, as a committee, you have suggestions on other areas where you would like our office to do maybe additional or a different type of work, we would certainly welcome such suggestions from the committee.

• 1020

The Chair: We want to thank you both for being here this morning. We appreciate your input to the committee, and we look forward to meeting with you again some time in the future.

We're now going to suspend for about five minutes, as we have more witnesses coming in.

Thank you.

• 1021

• 1029

The Chair: We're going to reconvene the meeting if everyone's ready. Order, please.

We're very pleased to welcome our witnesses. From the CAW, we have Mr. Terry O'Toole. I just wanted to correct that he's the president of Local 3, Marine Workers' Federation. Also with us is Mr. Robert Chernecki, assistant to the president; and Mr. Gary Marr, president of the Marine Workers Federation.

Is that a different local as well, or is it overall?

Mr. Gary Marr (President, Marine Workers Federation, Canadian Auto Workers): Overall.

• 1030

The Chair: Okay.

We also have Mr. Bern Hardy, vice-president of the Marine Workers Federation; and we have Mr. Les Holloway, the executive director from the Marine Workers Federation. Finally, from the Syndicat des travailleurs du Chantier maritime de Lauzon, we have Monsieur Richard Gauvin, the president.

What I would propose is that we have the opening statements, in the order on the witness list. We'll therefore begin with the CAW.

Mr. Robert Chernecki (Assistant to the President, Canadian Auto Workers): Thank you, Madam Chair.

We extend our appreciation for this important time for us to take up with the industry committee. By any stretch of imagination or by any measure, this is a crucial issue to the people sitting here before you.

First of all, I do want to point out our document to you. Everyone should have in front of them a blue copy entitled “A Shipbuilding Strategy for Canada” and supplementary documents dealing with other information that will come forward during the process.

I want to start by saying that the document before you is unique in many ways. It brings together for the first time in the history of this industry, I believe, the employers and the labour groups from across the country, including, of course, our good friends from Quebec from the CSN, and the marine group from British Columbia.

It would have been about a couple of years ago that we decided as an industry.... And I'm proud to say “we”, because the employers here have been supportive, of course. They understand the issue, as we do at the head of this table. We live it every day, and we've watched this industry go by the wayside, in our view, because of a lack of a policy. This document reflects the voices and the views of all the groups I've just outlined, and we believe it is a real blueprint for the future in this industry.

Within the mandate of this committee, we want to try to deal with the issues of competitiveness; the issues of the future; productivity past, current, and future; and some of the innovative ideas that we believe we have as an industry to try to move the yardstick on this important issue.

In the marine industry today, there are approximately 40,000 people employed. We handle over 200 tonnes of cargo per year. About 75% of goods moved today are by the seas and the various lakes throughout this great country. We add about $2 billion worth annually to the gross domestic product of the country. The questions are, of course, what the state of the industry is, and how we frame the future here.

We believe there is a real opportunity for growth in this industry today, but there has to be a changing of the minds and the views that this industry is antiquated, is a dinosaur. Just the opposite is true. My colleagues will go through specific examples of how we believe the Parliament of this country, you in this room on this important committee, and we can move this industry forward to where it can and will be very competitive against the people we have to compete against, against the world.

In the spring of 1999 there were about 2,500 ships on order around the world. I think that's a very important principle to remember as we go through this. In terms of the industry in the nineties, when you look back and look ahead here, we are in serious straits. There is clearly a decline in the industry. Several thousand jobs disappeared over the last decade in these operations, most of them in the very most hard-pressed corners of the country: Atlantic Canada, Quebec, and B.C.

The policy we're trying to put across in very clear terms is the question about what the policy of the government is currently. We don't believe there is a clear picture of what that means to either the workers of the country or to the industry of the country.

• 1035

Some would argue that it was important to rationalize and downsize in the eighties and the early nineties. We suffered significantly during that time, as did the communities these shipyards were in. A lot of them closed. A lot of rationalization occurred. Some would argue that the government put some $148 million, I think, into the rationalization of the industry, and that the money was supposed to bring it to a new level of competitiveness, a new level of productivity. The assumption was that if you downsize, you come out of the ashes with a much stronger industry. Well, arguably that hasn't happened. By any stretch of the imagination, it hasn't happened.

We have worked hard with the employers to be competitive and to bring our productivity to a new height. We've gone through the decline, as I said earlier. Despite all the hard work that we have done as labour and as industry, in our view we have had very little or no government support. I suppose one can argue that we have.... I've read Mr. Manley's statements, I've read his articles, and I'm trying to understand his viewpoint. But when you look at the kind of support our competitor countries get, such as Japan, such as the U.S.—and I'll touch on the antiquated Jones Act in a minute—or Korea....

Some would say we have the EDC and we have the R and D tax credit system. All this is supposed to help. Well, I guess it does in some measure, and in some measure it will. But currently and clearly, these things are not enough. We don't have a level playing field. We keep hearing about how we are competitive with the other countries. We've all read the statements coming out of the other countries. We understand the game plan. But the question here is whether or not you're giving us, as an industry, the tools necessary to compete. We would argue that you're not.

Just one issue that stares us all in the face here—and the committee has dealt with this issue in camera and in other forums, I think—is where we are today with the WTO. Where are we today with the Jones Act? I think if all of us in this room are honest with each other, for someone to say we'll go to Seattle or wherever else the next one is going to be.... I don't think Seattle is going to invite anybody back.

The real issue here is whether or not the government of the day in this country has the wherewithal to deal with this Jones Act with the U.S. government. Our sense of it—and we have a lot of history around this table—is that there's not a chance. This has been around since 1936, and it clearly gives the United States miles of road to travel before we even get near them on a level playing field.

I don't think we can argue today and put the faith in the government that it can work with anyone to ensure that the WTO is going to deal with the Jones Act. It is not. There is a very strong lobby in the United States on this issue. That was clearly prevalent during the free trade talks, and even more clearly prevalent in Seattle. Minister Pettigrew didn't even deal with the issue of shipbuilding, as we understand it. He never got to it, and my guess is he never will get to it. This is very protectionist, and quite frankly I don't blame them. They're protecting a good solid base of industry in their country, and it's about time we did it in ours.

We can't compete in the game the way it is played today. We can do everything right. We can level our productivity. We can increase our competitiveness. We can work like hell in the shipyards day in and day out to raise our quality. But we can't compete because you won't let us, quite frankly. If there's a shipbuilding policy in Canada, somebody has to tell me what it is. When you look at what Japan's doing, when you look at what the United States is doing, or when you look at what Korea is doing, clearly they are protecting the principals of their own shipbuilding industries in their countries.

I'm going to stop there, and I'll turn this over to Mr. Les Holloway, executive director of the Marine Workers Federation, and then from there it will go to Monsieur Richard Gauvin.

Thank you.

Mr. Les Holloway (Executive Director, Marine Workers Federation; Canadian Auto Workers): I would like to echo the previous speaker's comments and thank the committee for the opportunity to appear before you on what is without question a very important issue to the people who sit in front of you.

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I want to say, to start my comments, that when you think about it, this is really quite a unique situation in the country in terms of the support on the issue we're going to present to you today.

We have support from the Canadian Chamber of Commerce—this came out of their last convention a couple of months ago—on the issue that the stakeholders should be brought together and there should be a policy put in place in this country.

We had support from the Canadian premiers in 1997 and have it again in 1999. All of the Canadian premiers agree that there has to be something done on this. WTO was mentioned in the Canadian premiers' statement. We know where that has gone. The previous speaker did a good job of explaining that. Nobody here has to give much thought as to whether or not any headway was made. It wasn't raised, to our understanding.

As well, we have support from municipalities.

We have, for the first time ever, a document supported by shipyard workers right across this country and by the Shipbuilding Association of Canada where employers and the unions representing workers got their heads together and came up with a composite position on what a policy should look like in this country.

For our presentation I'd first like to go through the white document we gave you, including the “Atlantic Canada: Catching Tomorrow's Wave” shipbuilding section of a document from September 1999. That's the document that has just been tabled by a committee of the Atlantic federal Liberal caucus.

Specifically, they have a section on the shipbuilding industry, and we've copied that for you. It's very supportive of the need for the federal government to do something. This caucus, as you know, is representative of the governing Liberal Party in this country.

The last paragraph says:

We agree: it is time that Canada adopt a National Shipbuilding Policy, one that creates the climate for our shipyards not only to remain in business, but to compete effectively for the emerging shipbuilding opportunities both overseas and at home, in connection with the oil and gas development projects taking place in Atlantic Canada.

That's quite a powerful statement. It's one that we support, obviously. Again, it creates a uniqueness we have yet to see where the federal government in this country entertains the thought of pulling together the stakeholders to take a serious look at our proposals, tabling their proposals, and seeing if in fact we can create a policy in this country that will in fact employ people rather than have, as the previous speaker stated, the state of the industry today, where employment in the industry has plummeted by some 70% in the 1990s. That is after the rationalization that was supposed to make us much more competitive but was a complete failure.

The next point I want to raise from this same white document is the statement by the Canadian premiers that does speak to the WTO but also speaks to the need for there to be a shipbuilding policy put in place in this country that allows shipyards in this country to compete.

Finally, you'll find at the very back page the resolution passed by the Canadian Chamber of Commerce at the convention I mentioned earlier, calling on a pulling together of the stakeholders and the development of a policy for the shipbuilding industry.

In our blue document, I'd like to refer to page 6, specifically the points we raise with regard to what we say is needed for the industry.

In point (a), we speak to the issue of title XI financing, or an export and domestic financing policy that would allow Canadian shipyards to compete for a lot of the work that is presently going to other countries.

This program is a very successful program in the United States. It has a very good experience rate. Secunda Marine, a company out of Nova Scotia, is one of the best examples as to how effective this policy is. They built two ships in a Mississippi shipyard in 1997 to work the offshore in Atlantic Canada. They built those ships accessing title XI financing, which gave them 87.5% of the cost of the vessel, guaranteed for a period of 25 years.

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In Canada we have what Minister Manley says is a very good financing package, but it's a package that is only good for export. In fact, Secunda Marine, the same company that built their ships in Mississippi, would not have been able to access that same financing package; you have to export the vessels you would be building. Even if you did get access to that financing package, it's only for 12 years and only 80% of the vessel.

It doesn't take a brain surgeon to figure out that if you have to mortgage your home tomorrow and you mortgage it at 87.5% of the cost over a 25-year period, your costs are going to be substantially less than if you have to mortgage it over a 12-year period at 80%. So the reality is that we drive the work to the United States.

To add injury to insult, under the NAFTA agreement they then can import those same vessels duty-free, exempt from the 25% tariff. So it's not hard to see how we're not very much in the ballpark here and why companies would in fact want to go elsewhere from our domestic market to build their vessels.

The next point is with regard to the exclusion of new-construction ships built in Canadian shipyards from the present Revenue Canada leasing regulations. Our point (b) addresses what we feel would be a component for a policy. The reality today is that the writedown on the building of the vessel purchased is very good. That's not the problem. The problem is, most now lease vessels, so there has to be consideration to changing the leasing provisions and to giving better writedowns in that market. Again, we think that would create an environment here that would encourage more shipbuilding.

Point (c) reads:

Provision of a refundable tax credit to Canadian shipbuilders who contract to build a ship, or contract for conversion with change of mission, mid-life refit or major refit in a Canadian shipyard.

Of course, that's a program that is currently in Quebec, put in by the provincial government. It has been touted as one of the reasons they completed a very successful project on Spirit of Columbus recently and as one of the reasons they were able to secure that type of work.

So we see that as being something that would in fact be part of a strategy for the industry that would create that climate.

Our paragraph (d) speaks to eliminating the one-sided aspects of NAFTA. Again, the issue is our being disallowed or prohibited from building ships for the American market and their being allowed to build ships for our market under NAFTA. It makes no sense. It makes no sense that you can build ships in the United States and bring them here and profit from our resources when we can't build ships for their market.

We want some attention paid to sitting down and not necessarily creating a Jones Act, per se, for Canada, but getting rid of the one-sidedness of that part of the trade agreement as referred to in NAFTA.

The next section refers to developing an international social clause governing labour standards in shipbuilding. Without question, many countries in shipbuilding today, including China and India, don't recognize basic human rights. It's our view that labour standards have to be a major player in that. When you look at the definition of “subsidy”, we feel it's a major subsidy in the shipbuilding industry in these countries that don't respect labour standards and rights. That is part of what we say should be on the table for discussion.

As well, we point out in (c) the value to Canadian resources. We see the exporting of our jobs continually. There should be a value-added piece of the puzzle put in to insist that if in fact companies are going to benefit from our resources there should be some attachment to maximizing the benefits by adding value to those.

As well, we point to investing in coastal infrastructure to maintain in Canada the ability to ensure the security, sovereignty, and what have you of our coastlines.

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Those are just a few of the key points of our policy document. Again, I would say this document has the support of the employers. I'm told the Shipbuilding Association of Canada will be speaking here next week.

Just briefly, part of the issue we face here is that we see a reluctance from Industry Canada to recognize the importance of this industry and an unwillingness, seemingly, to want to sit down with us to discuss these issues.

I have a copy of the briefing notes from the Department of Industry. John Banigan, Ninon Charlebois, and Brian Kissner gave witness to that presentation.

As you open the first page of that document, it reads: “Shipbuilding in Canada shows virtually every classic sign of being an industry in decline.” That's an amazing statement if you want to set a “do nothing” tone.

You know, more than 75% of all manufactured goods in this world move in a ship at one time or another before they get to their final place. How can that be a decline? There are more than 2,500 ships on order worldwide. I guess I understand why it's placed that way, but it sets a tone of wanting to do nothing.

I want to refer to some of what's going on in the real world that we in the shipbuilding industry in this country are being asked to compete in. The United Kingdom has just announced new support for ship repair whereby 2.25% of the value of the repair is given as a subsidy. That was November 1999.

Norway has increased their subsidy from 7% to 9% and is planning a series of government and new building orders based on that. Norway has also stated their intention to provide a special new subsidy to support the building of fishing vessels.

The Netherlands has reported that their support for shipbuilding will increase in 2000.

Germany has reintroduced subsidies to the level of 9% and will continue its tax credit scheme to 2001. Germany has also approved state export credit guarantees to finance the sale of ships to South Africa.

The European Commission will allow Spain to spend $185 million U.S. annually to help its shipbuilding industry survive increased competition.

Britain has announced the extension of the home shipbuilding credit guarantee that provides finance for merchant vessels built in British shipyards.

Australia has extended its new building policy to the end of 2000.

India is considering raising their 30% shipbuilding subsidy another 10%, to 40% of the cost of the entire vessel.

China is considering further tax exemptions. Earlier this year their tax rebate for ship exporters was raised from 9% to 14%.

This is at the same time the WTO is meeting to talk in Seattle, and we as a country will table the position that they should get rid of subsidies. This is the reality. This is the world we must live in. Those countries obviously wouldn't agree with the statement that shipbuilding in Canada shows virtually every sign of being an industry in decline. I think not.

Our next point speaks to suggested questions, I take it, to the committee I sit before. Though I could go through this document and find many questions I would like to refer to, this one says that Canada's labour productivity performance in shipbuilding throughout the 1990s appears “stagnant at best”, and the question refers to what the lack of improvement in labour productivity would be attributed to.

We have a document prepared by our economist, Jim Stanford—

The Chair: Excuse me, Mr. Holloway, but might I ask you to try to wrap up your presentation? There are a lot of questions people want to ask, and we have to get on to Mr. Gauvin so that we can hear from everybody.

Mr. Walt Lastewka: I'd like to know what sheet he's talking about with regard to his last point.

Mr. Les Holloway: I'm referring to the briefing notes from Industry Canada.

To continue, Jim Stanford, our well-respected national union economist—he may be known by some in this room—can tell you that labour productivity in shipyards has increased by 46% since 1991. Real wages increased by only 3%. He can also tell you that the GDP per shipyard worker is $84,000, which is 68% more than the Canadian average in industry.

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Now, those are the statistics that I think we should be debating. We can provide those. The statement that the industry has not increased its productivity is not true or accurate, based on the information we have.

I will try to move towards wrapping up, but I do want to say that in fact the problem we have in the industry is that we're asked to compete in a globalized marketplace, a globalized economy, but we're not given the same advantages as every other maritime nation that has a shipbuilding industry. That makes no sense. It's fair to say that we must compete in the globalized economy, but it's not fair to say that we in fact must compete on a very unlevel playing field, which is exactly the situation we face today.

I want to defer to my friend now. I hope I can make during the question period the other points I wanted to make. I would ask that this committee seriously look at our wish to at least recognize that there is a crisis in the shipbuilding industry in this country. You can't have a 70% drop in employment in the 1990s without....

With no new orders, the largest shipyard in Atlantic Canada, Saint John, is looking to close its doors early next year. Halifax Shipyard is not far behind that. If it weren't for work related to the offshore, Marystown Shipyard would be very close to that as well.

So you can't have that type of situation if we have a great policy and something that's working in this country. Obviously, we don't have something that's working.

We want to have a discussion, a debate, on the issue, and table what in fact we might be able to do for the industry in this country so that we can turn that situation around and employ, in our industry, people from other parts of the country.

On that, I'll turn it over to Richard.

The Chair: Mr. Gauvin.

[Translation]

Mr. Richard Gauvin (President, Syndicat des travailleurs du chantier naval de Lauzon): Madam Chair, honourable members, ladies and gentlemen, we prepared a brief on the economic impact of the marine industry more specifically in our area, in Lévis. You will understand that this can apply to all areas where there are shipyards.

We're before you today to share our concerns about the future of shipbuilding in Canada. We would also like to show you that this industry has major economic impacts and that the Canadian marine industry as a whole would suffer from the disappearance or even a decrease in its activities.

We are here representing a coalition of socio-economic partners from the Quebec City and Chaudière-Appalaches regions on the Davie Industries standing committee. This organization, set up some 15 years ago, has always emphasized the importance of this industry for the community and its impact on the entire country's economy.

So we are addressing you here today on behalf of the members of the Syndicat des travailleurs du chantier naval de Lauzon, the City of Lévis, the Chambre de commerce de la rive sud de Québec, the Centre local de développement de la MRC de Desjardins and many others.

Grouped together, these organizations represent the dynamic forces of the social and economic communities of the Quebec and Chaudière-Appalaches Regions. In recent years the Industries Davie Standing Committee has been at the focal point of all the battles that the community has had to undertake in order to ensure the survival of this industry and to allow those whose livelihood depends on it better to face the problems of unemployment and massive layoffs.

This is not the first time that unions and the Industries Davie Standing Committee have called for vigorous intervention on behalf of government to ensure the survival of the shipbuilding industry in Canada and indeed that of the largest shipbuilding yard in Eastern Canada, situated in Lévis.

As early as October 1996 our committee made representations before the Standing Committee on Transport within the framework of Bill C-58 demanding the Liberal Party of Canada respect its electoral promises made in 1993 concerning this matter.

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Party commitments included the following: convening a national summit during the first year of the mandate of the present government in order to formulate a Canadian shipbuilding policy; providing the Canadian shipbuilding industry with competitive comparative advantages; favouring the consolidation of research and development in this sector of activity.

Now, nearly seven years later, we are faced with the fact that the file has not evolved significantly and that the electoral promises remain unfulfilled.

Recently, the Member of Parliament for Lévis and Chutes-de-la- Chaudière, Mr. Antoine Dubé, with whom we have worked closely for several years and who has, on several occasions, made the House and the government aware of the rather critical state of the industry, tabled and presented private Member's Bill C-312, aimed at encouraging the shipbuilding industry in Canada.

With this bill, the MP tried to demonstrate that the entire Canadian shipbuilding industry supported him and representatives of the shipbuilding yard in Lévis, along with various regional partners, who backed the demand that a proper shipbuilding policy be established in order for our yards to compete successfully with shipbuilding around the world.

This bill received the support of the ShipBuilding Association of Canada and other major unions representing workers of the Canadian shipbuilding industry: the Fédération de la métallurgie CSN in Quebec; the Marine Workers' Federation; the Shipyard General Workers Federation of British Columbia.

We shall not discuss specific elements of this bill because the MP for Lévis and Chutes-de-la-Chaudière took the opportunity to present them to you quite clearly just recently. However, we believe it important to take advantage of the opportunity afforded us, in the wake of the work of this committee and resulting from representations in favour of this bill, to offer a different viewpoint based on questions of productivity, innovation and competitiveness in the shipbuilding industry and the real economic spinoffs generated by the industry through the example of the Industries Davie shipyard in Lévis.

First, we would like to say that the data that follows was gathered during a study conducted by the Groupe de consultation pour le maintien et la création d'emplois au Québec following a request made by the Syndicat des travailleurs du chantier naval de Lauzon during the winter of 1999. The goal was to obtain an analysis of economic spinoffs related to maintaining operations at Industries Davie, the most important employer in the processing industry in the Quebec City area with a work force, over the last decade, of over 3,500 workers.

The most crucial element that must be grasped, before reviewing data gathered during the study, is that the experts concluded that closing down the Industries Davie shipyard would in no way permit recovery of any kind of shipbuilding activity or of jobs in the industry by any other employer in Quebec, since Davie faced no competitor of similar size in the province. Therefore, any benefits or costs related to the operation of the shipyard are total and net.

The same holds true for economic activity generated among Canadian- and Quebec- based suppliers of Davie. In the event of a close down of the shipyard, activities at Davie would be rerouted to foreign competitors. Thus, it seems reasonable to foresee that steel mills and other Canadian- and Quebec- based suppliers of Davie would also lose a major share of their respective markets, leading to probable job losses.

According to operation hypotheses provided by the vice- president of finance at Industries Davie, experts with the Groupe de consultation were able to assess the following economic spinoffs resulting from the presence of the shipyard in Lévis. They are as follows: economic activity generating $300 million in revenue for the company each year; annual added value of $170 million to the economy of Quebec; annual payment of wages of $77 million, including non-wage benefits; creation or preservation of 1,650 jobs.

Moreover, in terms of tax output, shipyard activity generated each fiscal year for both levels of government the following amounts: $19.2 million in income tax; net incidental taxation of $11.5 million; sales taxes totalling $830,000 related to consumer groups. Furthermore, since most of the production output was destined for export, the value-added taxes of the company were estimated at zero; therefore, annual government revenue totalled $36.6 million or 11% of total expenses and 48% of wages paid, without taking into consideration that the pursuit of activities can result in savings in unemployment insurance benefits and social security totalling approximately $45 million over four years.

In terms of indirect economic spinoffs, the experts asked us to consider the creation of 2,475 jobs and $20 million in government revenue. All totalled, over a one-year period, maintaining shipyard operations would result in the following economic spinoffs: 4,125 jobs; $92 million in value-added; and $82 million in government revenue.

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The hypothesis on which this information is based consists of 1,650 jobs. In passing, from 1987 to 1993, MIL Davie, in Quebec, had a yearly average of 2,700 jobs generating a $125 million payroll. As you can see, the spinoffs are enormous. We're talking about an annual average income of $39,333 which includes salaries of administrators and professionals, with annual indexing of 1.5% and an average taxation rate of 16.1% for Quebec and 13.5% for Ottawa which generates $10.5 million in taxes for Quebec and $8.5 million for Ottawa. By maintaining and creating 1,650 jobs at Industries Davie, it can be estimated that the Canadian government would benefit from $70 million in income taxes, incidental taxation and sales tax over a five-year period. According to expert analysis, each job at Industries Davie generates 1.5 spinoff jobs including indirect jobs, which adds to the multiplier effect influencing the statistics.

Therefore, in the light of these results, we can state that governments would benefit substantially in economic terms if Industries Davie were to be revitalized. At the same time, one can conclude that there will be significant social and economic costs and loss of potential earnings should the shipyard be forced to put an end to its activities.

The example shown by the Industries Davie shipyard speaks for itself. There is no doubt in the minds of management, union and the workers as well as all the socio-economic players in greater Quebec, that the presence of this shipyard constitutes a vital economical factor in the local and regional economy. The same may be said of all Canadian shipyards, since the present approach is part of a strategy embraced by all partners in the Canadian shipbuilding industry. This is far from an isolated effort; in fact, it is quite the contrary. This is a concerted effort designed to serve the interests and preoccupations of the entire network of partners. The other organizations, particularly the Shipbuilding Association of Canada, will be given the opportunity to present their case to you later.

Adopting a truly Canadian policy for shipbuilding will doubtless have a beneficial impact on the entire Canadian economy, as well as on the communities concerned. The Industries Davie case is itself extraordinary. The company has built more than 700 ships and 13 oil drilling rigs. The recent contract to transform the Brazilian rig Spirit of Columbus, renamed Petrobras 36, shows unequivocally that the high technology of the company along with the quality of its human resources demonstrate our ability to compete successfully in every way on the world stage.

Present marketing tendencies in shipbuilding indicate that the next 10 years will belong to offshore rigs. It is pointed out that 90% of the world's supply of hydrocarbon energy for 2010 has yet to be discovered. This is exciting! Regions in the Gulf of Mexico, the Brazilian coast, North Africa and Northern Europe are most promising and within the grasp of Industries Davie and other Canadian shipyards.

Worldwide, the Merchant marine has some 40,000 ships of 2,000 tons or more. The average age of this fleet is 19.5 years. Given that the useful life of a ship is 23 years, one may assume that the world fleet is getting long in the tooth! Every year, 1,400 to 1,800 ships are built all over the world. Regulations concerning the quality of ships are becoming more and more severe all the time and by 2005 all oil tankers will be required to have double hulls.

Canadian production costs of a ship are relatively low and shipyard productivity is high. Average construction costs here are $55 per hour while in Japan they are as high as $95 an hour and $110 per hour in Europe.

In Korea, Romania, Poland, Estonia, Germany and China they tend to invest massively in shipyard development. If Canada wants to avoid becoming a minor player in the field, strong shipbuilding policy must be implemented and soon.

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The union and the organizations we represent here today do not pretend to have all the answers needed to establish such a policy or save this industry which is rather unhealthy at this point in time. But we are convinced that the implementation of such a policy supported by government investment and the encouragement of technological innovation can only lead to beneficent results for the industry as a whole as well as for governments which stand to gain major revenues.

In our opinion, Canadian shipyards don't suffer when being compared to the major American or Taiwanese shipyards. Those who have visited foreign shipyards state without hesitation that the Canadian shipyards and especially Industries Davie, are at the cutting edge of technology and sometimes even ahead of our foreign competitors.

Computer-assisted construction is a routine matter at Davie. Three dimensional blueprints allow for expert quality production procedures. For example, Canadian frigates built in Lévis and St. John have more computers on board, designed and built in our facility, than some of the most advanced aircrafts.

Admittedly, one of the elements that is often neglected in this kind of discussion is the humanitarian impact of the decision made by political and economic leaders. If the Canadian shipbuilding industry is still alive today, as amply demonstrated by our Lévis shipyard, it is due in large part to the unselfish efforts of our workers, not to mention their financial concessions, and to the various players involved in keeping tight quality control and ensuring competitiveness and productivity. We owe it to ourselves, throughout these discussions, to bear in mind this important aspect of the question at hand since it is what keeps not only the industry alive, but which, as you know, contributes significantly to the local and national economies but also the social communities that risk long-term, irreparable damage or even extinction.

Ladies and gentlemen, we thank you for your attention and we invite you to study the possibility of adopting a Canadian shipbuilding policy as a key element of the future economic development of our country and a number of its regions. Thank you.

[English]

The Chair: Thank you, Mr. Gauvin.

We're now going to turn to questions. I just want to remind members and let our witnesses know that questions are done in five-minute rounds, so we ask that both the questions and answers be succinct. We are here until noon.

Mr. Penson, please.

Mr. Charlie Penson: Thank you, Madam Chair. I'd like to welcome people to the committee this morning to talk about this shipbuilding industry, where it might go, and what government policy might be.

A number of you have made the case pretty strongly that the Canadian shipbuilding industry is not working with a level playing field, that there are a number of countries—Japan, Korea, and other countries—that are subsidizing their shipbuilding industry. I think you've even gone further to say that there are a number of countries that have just started a new round of subsidies, such as Norway and the Netherlands, for example, to try to boost production in those countries.

Given that that's a problem for the Canadian shipbuilding industry, I guess there are two ways we can go on it. It seems to me that the better approach, rather than getting into the subsidy round ourselves, which is difficult to keep up with and tends to keep accelerating because different countries want to increase or at least maintain their market share.... I would have thought your organizations would have been quite supportive of Canada going to the WTO round—the failed round at the moment, but I don't think a failed round completely—and ask that the playing field be levelled by reducing these massive subsidies. It seems to me that's a far better approach.

I was on the trade committee prior to coming onto industry, and we held hearings across the country last year and asked Canadians, Canadian business, and Canadian unions what Canada's position should be. I was surprised to hear a lot of unions say, don't negotiate any further; Canada should not participate in another round at the World Trade Organization. I was surprised also to see that the unions had a pretty big presence in disrupting the talks in Seattle. Is that the better approach, to ask for subsidies and not negotiate our way out of this? Can I get comment on that?

The Chair: Mr. Chernecki.

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Mr. Robert Chernecki: Thank you.

No one here is asking for subsidies. You read our brief. We're not talking about subsidies. We're talking about a level playing field. Regarding how we get there, as our document properly points out, there needs to be an understanding, a meeting of the minds of the stakeholders in the industry.

I don't know where you're going with this other question about the unions and WTO in Seattle. It's no secret where our minds are as a labour movement in these discussions. We think free trade has been a disaster for this country in terms of the social fabric of it. I'm not going to get into a philosophical debate with you this morning. I've read the minutes of the committee meetings and I clearly understand where you're at and your view of the industry. All I can say is put the stakeholders together—you owe us that—and let's have a good discussion on where it's going. Let's not rule anything out. That's where we get to today.

The Chair: Mr. Holloway, do you wish to reply?

Mr. Les Holloway: If I could just briefly respond to that, I'd like to refer you to the Canadian Chamber of Commerce, which is an organization that has a standing position to not support issues that are asking for subsidies. We're continually shelved off and shoved aside because we're accused of wanting subsidies. In our view, title XI financing.... We have a financing package in this country. The problem is the financing package does not sustain building ships in this country. It's not enough. That program can be accessed only for the exporting of vessels.

As an example, the shipowners' association has come out in support, in principle, of the need for a policy in this country, and they will tell you that within the next five to six years they'll be replacing or modifying in a major way 60 to 70 of their largest vessels. That work could be done in Canadian shipyards if we had policies that made some sense.

I want to read that resolution to you. I would encourage everybody to read the resolution in the package from the Canadian Chamber of Commerce and their convention. It states:

That the federal government support shipbuilding, shiprepair and offshore and related industries by immediately calling together the resources of said industries to initiate and implement a shipbuilding policy that will insure the long-term viability of a competitive made in Canada shipbuilding industry and that the policy be consistent with the direction and intent of the 1998 Canadian Chamber resolution entitled “A Reduction in Business Subsidies”.

So their position is clear. We've spoken to many within the chamber of commerce since this was endorsed, and one of the reasons they say they could support our position in our document is because we're not asking for subsidies; we're asking for a debate.

Mr. Charlie Penson: I think what we need from you, then, if you're not asking for subsidies and you don't want to use the trade negotiation route to resolve what other countries are doing in that area, is to tell us what is available.

Now I see that you have asked for some changes in the tax side—R and D tax may be one of them.

We heard from the Auditor General just before you got here, or you may have even got in on the end of it. The Auditor General's department said that the use of R and D tax credits was in anybody's best estimates a crapshoot at best, and they were pretty critical of the industry department for not being able to fully assess whether they were effective or not. Is that the road you're going on, that you want tax credits through R and D? Is that your major initiative to resolve this issue?

Mr. Les Holloway: No.

Our major initiatives are to put a financing package in place in this country that makes sense, that is comparable to what our friends to the south have. I look at the Industry Canada document, and they reference our industry to the American industry. That's how they reference the industry. It's the Canadian shipbuilding industry on this side and the United States on that side. Well, let's do that with the policy. Why don't we have a policy in Canada that is the same as what they have in the United States of America?

Again, if the financing to EDC is not a subsidy—and it wouldn't be, going by the tone of this government—then what is wrong with putting in a title XI program that has an excellent experience rate, that has created a very vibrant shipbuilding industry in the United States? They're building two ferries in a Mississippi shipyard. That was just awarded, some months back, to Litton Industries, and it will represent over a billion dollars in work. And the first cruise ships they have built in over 30 years.... Do you know, we are having inquiries and we will be talking to our people about going down there to work and build those cruise ships.

Mr. Charlie Penson: Mr. Holloway, you've raised the issue of whether export financing through EDC is a subsidy, and I guess we've found that it can be—we've just found that out through the aerospace industry, where the WTO has said that it is in some cases.

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I would suggest that to finance shipbuilding—if that's what you're suggesting—is probably a subsidy of some type too. Other countries may be doing it, but it may not be a field that Canada can get into. We have a $573 billion debt on which we have to pay some $40 billion in interest, and a lot of people say that's the reason we got into this to begin with, that we've given too many subsidies to business.

The Chair: The question, please.

Mr. Charlie Penson: I'm asking whether you believe that's the route we should keep going on, to—

Mr. Les Holloway: Let me respond in this way.

You say “financing shipbuilding”—that's the way you term it. Now the financing goes to the shipowner. You should read the document on title XI. You'd have some knowledge on that issue as to what we're speaking of. It's to finance the shipowners' purchasing of a vessel in a Canadian shipyard. It's not financing the shipyard; it's creating an environment where shipowners will come here.

I think it would make more sense for Secunda Marine to build their vessels in a Canadian shipyard than to go to Mississippi to build them. And even though Mr. Banigan in his report made it sound like it was just a nicer place to go to have his ships built, the reality is he went to have his ships built there because he could get 87.5% of the financing for a 25-year period, and he could bring those in exempt of the 25% tariff. Then he could profit from our resources on the east coast.

Mr. Charlie Penson: Did he get that from a commercial source?

Mr. Les Holloway: Give us the same.

Mr. Charlie Penson: You can't get that financing through a commercial source?

Mr. Les Holloway: Why do they have it in the United States?

Mr. Charlie Penson: Well, I'm asking you, can you get that financing from a commercial source?

Mr. Les Holloway: No. We're saying the industry can't get it.

Mr. Charlie Penson: But why not?

Mr. Les Holloway: You'll have an opportunity to ask them, but the United States—which we like to compare to, by the way—figured out some time ago that there's difficulty with that type of financing, so they put a program in place to ensure that the shipbuilding industry in their country got that kind of financing. If it's good enough for them, and we like to copy a lot of what they do, even our briefs to this committee, then we should in fact consider that maybe we should copy some of their policies that are already working quite well for them.

The Chair: Thank you.

Thank you, Mr. Penson.

Madam Jennings, please.

[Translation]

Ms. Marlene Jennings: Thank you very much for your presentations. I am sorry that I had to leave for a little while, but I can assure you, Mr. Gauvin, that I read your entire brief even before you presented it.

To begin with, I would like to know what percentage of the market the American shipbuilding industry has captured here in Canada. We hear that Canada has removed nearly all its trade barriers and makes it easy for ships built in other countries to come here. I would like to know if you have the figures on this.

Second, given all of the political programs that offer assistance for shipbuilding in other countries and given that those countries do not seem to have any intention of getting rid of their policies and financial assistance programs and incentives, does Canada have any hope of convincing the WTO to force other countries to eliminate those things?

[English]

The Chair: Mr. Holloway.

Mr. Les Holloway: I'd say very little.

The OECD had an agreement that they had drafted on the elimination of subsidies in the shipbuilding industry. It was regaled by the Americans, so they would not relinquish the Jones Act, which is a direct subsidy in their industry. So we think very little.

I don't think anybody needs to be a brain surgeon to figure out that at the same time the WTO talks are going on, all these other countries I listed, that are in the record now, are increasing subsidies in their respective industries.

The point is, our policy and our position is not to talk about wanting to create and get into the subsidy war. We're saying let's try to put some policies in place that would move toward creating an environment where we believe our shipbuilders in this country have increased the productivity enough, are of high enough quality, and have the technology that we can compete, given some of those more basic things such as title XI financing, which in our view is not a subsidy, and other initiatives that we ask for in our policy document.

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[Translation]

Ms. Marlene Jennings: I can assure you that I do not share the opinion of our colleague Mr. Penson, who says that if we give money, we are giving subsidies, but I do want to understand.

No one answered my first question. You do not have the information? If you can provide it to us, you could do so in writing later.

Mr. Richard Gauvin: Ms. Jennings, you will no doubt have the answer to your question next week. I think they will have all the information and will be better able to give you those answers.

Ms. Marlene Jennings: Very well. Thank you very much.

A second question deals with productivity. You said that since the early 1990s, the productivity rate in the industry has increased by more than 60%. Is that based on figures comparing the Canadian and American industries? Is our shipbuilding industry as productive as the American one if we are talking about building the same types of ships or structures? Is Canada as competitive as the United States when it comes to productivity?

[English]

Mr. Les Holloway: Again, we don't have that specific information, but we can get it.

Our national union has done a sector analysis. That's what I was referring to in the document I referred to. In our analysis of the situation, productivity in the shipbuilding industry in this country is up by 46%, since 1991.

Of course, all statistics are open for debate. We're willing to have that debate. We know productivity has increased substantially in the shipbuilding industry in this country, and that's at a time when we've been receiving very little support in the form of policies for the industry, so that's a fairly substantive increase.

[Translation]

Ms. Marlene Jennings: Thank you and good luck, Mr. Gauvin.

I was also involved in the Dominion Bridge issue in Lachine. So I took part...

Mr. Richard Gauvin: [Editor's note: Inaudible]

Ms. Marlene Jennings: Yes, yes. I want to wish you good luck.

The Chair: Thank you, Ms. Jennings.

[English]

Mr. Dubé.

[Translation]

Mr. Antoine Dubé (Lévis-et-Chutes-de-la-Chaudière, BQ): I am pleased to see you all again.

Almost exactly a year ago, you were taking part in an informal committee in another place. You no doubt remember that on December 8, 1998, you were here meeting informally with members of Parliament. Today, in a more official setting, you are essentially seeking the same thing from us.

I do not see any objection to your three demands. For the information of Mr. Penson, I would point out that none of these proposals involve a request for subsidies.

The first request is for a loan program. There is already such a program in Canada, under the Export Development Corporation, which covers 80%, whereas what is being proposed here is 87.5%. So this would be a reimbursable loan program.

You are also asking for a tax credit that would also be reimbursable. I would like to make it clear to my colleagues that I know that we are in Canada. I would also emphasize that no one has asked for any subsidies this morning. No one.

This morning, we are looking at the issue of productivity, which means labour. In your presentation, Mr. Gauvin, you provided us with some tables from Statistics Canada. We can see that employment went down but productivity increased. Mr. Gauvin and the other witnesses have said that the problem was not on the technology or equipment side. The technology exists in Canada.

The third element is capital. In my opinion, that is really where the problem lies. The ships require big investments, and the shipbuilders and ship owners do not always have the capital they need.

Mr. Gauvin, I know that we do not have much time, but I would like you to tell me about some of the difficulties involved in financing the Petrobras 36 platform, which took three years. The financing guarantee was provided in July of this year, three years after construction began. I would like you to tell us about that as an illustration of the financing problem that people face. The financing finally came through, but it took a great deal of time. I would like you to tell us about that.

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Mr. Richard Gauvin: Work on the Spirit of Columbus began in September 1997. At that time, discussions were already under way with the Export Development Corporation to obtain financing for the project. It took nearly two years before the financing for the Petrobras 36 platform, originally called the Spirit of Columbus, was finalized.

There are obviously complications that create stress and enormous difficulties for the companies, which have difficulty surviving in those conditions. That is what we have experienced beginning in August of 1998 and continuing even now. We are still under the protection of the Bankruptcy and Insolvency Act. Things are going quite well at the stage of adequate verification, since a proposal by a consortium was put to the creditors and accepted. So there remains the whole issue of adequate verification.

To come back to Mr. Dubé's question, these things are very difficult to go through, for both the employees and workers, as long as the contract financing has not been finalized.

Mr. Antoine Dubé: My second question is for all the witnesses. You all came to the Finance Committee the other day, I was there. The subsidy issue is often highlighted. Most countries with shipyards subsidize them, but there is another aspect that has been given little attention: that is the fact that in many countries there is no taxation. In some cases, shipbuilders are State-owned companies and do not pay taxes. In other cases, they are practically exempt from taxes. The shipowners themselves are not encouraged to have their ships built in Canada because taxation here does not give any breaks to the industry. It is not higher than in the United States, but in other countries, shipyards are totally exempt from taxes. Is this not the biggest issue, that needs to be dealt with most quickly? It is the whole question of tax avoidance, because that is what we have to call it.

Mr. Richard Gauvin: We can make a comparison with what we have gone through here in Canada. The Fednav company had four bulk carriers built in China, at a cost of $25 million each. The bid submitted by Davie, for the construction materials alone, for the steel, were higher than $25 million. So it is nearly impossible to compete with shipyards like that. Their government gives them very substantial financial assistance. We cannot be competitive under those conditions. Our shipowners are turning to other countries to have their ships built, since Canada's policy is not effective in this area. That is the current situation in Canada. We need a policy coupled with vigorous measures to turn the tide of these contracts going abroad.

[English]

The Chair: Mr. Holloway.

Mr. Les Holloway: In our view, the problems we face in this industry encompass many issues, maybe issues that we haven't even put in our document. Whether we want a shipbuilding industry in this country is what it's coming down to. That's a very serious question that I think this committee has to deal with.

We're saying that we think there are some solutions to the problems we face and that we can create an industrial strategy for this industry in the form of a policy that will in fact assist us. That doesn't mean we have to subsidize it, but it does mean we can put policies in place that will ensure that it has an existence and continues to thrive.

We want to enter into that debate. The federal government has to lead that debate and the federal government is saying they won't lead that debate. They won't recognize the problems we face in the industry, and the industry is dying on the vine as we sit here.

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When we talk about what specific proposals would be on the table and discussed, I think there are many. I think everything is open. In wanting an industry to continue to exist, to contribute to our economy, especially in areas of the country such as where I come from in Atlantic Canada—some in other parts of the country consider us a basket case—we in fact are sitting here in front of you telling you that we have many thousands of shipyard workers who want to work building ships and that we may have some solutions to those problems.

The federal government and any other stakeholder in this issue can table whatever points or issues they feel are important in that debate, but we must have that debate if we want the industry to continue to exist. I think it covers many things.

The Chair: Mr. Chernecki.

Mr. Robert Chernecki: I want to jump in here just for a moment, if I may, because that's a key element in all of this debate and discussion that's going on all over the country. I looked at and reviewed very carefully the minutes of the November 16 discussion you had. It was a pretty healthy one and a pretty good exchange.

I want to point specifically to Mr. Nelson Riis' questions in that meeting of November 16, particularly around the issue of Japan, where there were questions raised: How can we compete? If they're doing everything right, what are we doing wrong? That was basically the question: why can't we compete?

Mr. Banigan's answer to that question was interesting. He wasn't quite sure whether or not they knew what the real answer was and why Japan was being so competitive. He didn't have a clear, definitive answer, but he did say this, and it's important that I read it, because it is absolutely dead-on:

Again, I think it is partly because in that country, at least in the sixties and seventies, there was a considerable amount of what we would call industry planning....

What have we done here? We've done very or little or no planning.

I'll give you an example that faces this government today. Newfoundland and Labrador are having a very serious debate about ferries. They can't get their goods across those bodies of water. So what are you, this government, doing today? This government—you—is in Europe today, looking for a ferry to bring to Newfoundland and Labrador. Now, where were you two or three years ago when a ferry could have been built in Newfoundland or in Nova Scotia or in New Brunswick? That's what we're talking about here.

If you're not serious about the industry, then have the courage to have someone come out from the federal government to say it's dead, it's dying, and we're giving up on it. That's kind of Mr. Penson's attitude towards it.

Well, it's not on. We're going to make sure this issue is on the burner—the front one.

Mr. Les Holloway: May I add...?

The Chair: No, Mr. Holloway. We only have 20 minutes left. I really have to move on. You may add your comments in the answers. I apologize.

Mr. Murray, please.

Mr. Ian Murray (Lanark—Carleton, Lib.): Thanks, Madam Chairman.

At least I would call a spade a spade here. I'm going to take another look at this chamber of commerce resolution, Mr. Holloway, which you've referenced a couple of times. I think we can be frank with each other here. We have a bunch of union leaders in the marine workers. It's not the Royal Winnipeg Ballet we have before us just to dance around the issue here.

We keep hearing about policies being needed. This word “policy” has been beaten to death. I need you to explain to me, as somebody who would very much like to see a thriving shipbuilding industry in Canada, what those policies entail.

I'll go back to this resolution from the chamber of commerce. In the body of that resolution, they make the statement at one point that “it is not economical”—I think they mean economic—“to build ships in Canada”. They then reference the “subsidies, grants, preferential loans and tax benefits” that other countries provide their industry. Then, in their fairly mushy—the way I read it—recommendation they suggest that the federal government organize a meeting among “shipbuilding, ship repair, offshore industries and related activities” to come up with a “policy”—there we go—that will guarantee “the long-term viability” of this industry without having any subsidies, because that's their stated preference as a chamber of commerce.

So why can't we drop this talk of policies and you can tell us exactly what subsidies you need? If you're looking for some help with financing, fine, let's talk about that. Let's accept that it's a cost to the treasury and that perhaps the government has to decide whether or not it wants to have a viable shipbuilding industry in Canada. Let's say yes, it's going to cost some money. Right now I'm going through a debate on whether we keep the Ottawa Senators in Ottawa, to keep hockey in Canada. It's the same sort of thing. People keep saying it's not going to cost any money. It is going to cost money.

If you want policies—and I think you've explained to us what policies you want—let's just accept that this is going to cost some money. Now, the real debate is whether or not we're willing to pay it. As Mr. Chernecki asked, has the government decided this is a dead industry or not? I think all we need to be convinced of is that it can be viable with some reasonable help.

The Chair: Mr. Holloway, please.

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Mr. Les Holloway: We can't ask for the solutions until we recognize that there are two problems we have. One is that the federal government doesn't recognize there's a problem with the industry. I listened to member John Cannis speak on the shipbuilding policy issue in the debate in the House for first reading. Clearly his view is that there's nothing wrong with the industry in this country. I have to tell you that you have to have complete blinders on to come to that conclusion.

So there are two issues, as I said. One is to recognize that there are serious problems in the industry. After we do that, we have to have a meeting of the stakeholders to talk about what they are. Are there things we can do? We're tabling what we say are things that should be included in a policy that would assist the industry in this country, most of it taken from examples of what's being offered in other countries. We're agreeable with saying we don't want to get into a subsidy war. We're already to that point. We don't want to sit here and say to throw money at us. But are there things we can do with the industry in this country that would assist it?

I listen to member John Cannis—I don't want to pick on him—but he made the comment. My friend raises the issue of the ferry and raises the issue that first, thanks to Public Works and Government Services Canada, the acquisition of ships in Canada by the federal government is done on a competitive basis but is restricted to Canadian sources. Well, I don't know where the Canadians are working over in Europe to build this ferry, or where they built the ferry in Europe with Canadians, but that ferry is going to come over here.

The last ferry that runs between Nova Scotia and Newfoundland and Labrador was built in a Davie shipyard, the Joseph and Clara Smallwood ferry. There is that ability if we do some of the managing that was talked about, such as a short-term lease to deal with the capacity problems that exist on that route and the planning to build a ferry for the 21st century and beyond by employing shipyard workers in this country. But I guess what we're saying is to table it.

The last point I'd make on that is that when Minister John Manley announced the meeting with the NHL Canadian franchises to sit down and talk about their woes, he made it very clear that he did not have any answers to their problems. They wanted to sit down and talk about whether or not there are answers to the problems they have. We're saying this is what we want to do. We want a recognition that there's a problem, and then we want to sit down to talk about what the problems are and whether we can get a Canadian-made solution to our problems while maintaining an industry that is vitally important to this nation, for many reasons.

The Chair: Thank you.

Thank you, Mr. Murray.

Mr. Riis, please.

Mr. Nelson Riis (Kamloops, Thompson and Highland Valleys, NDP): Thank you, Madam Chair. Our own Jones act here has asked me to ask a couple of questions on his behalf, if you don't mind. So if you can add a minute or two....

Mr. John Cannis: We'll give you more time.

The Chair: Are you asking whether I mind?

Mr. Nelson Riis: Yes.

The Chair: Is that a question?

Mr. Nelson Riis: You don't have to answer that; just be patient.

This morning reminds me of a book that's on the market. I think it's called Men Are from Mars, Women Are from Venus. It talks about how people who are trying to communicate are actually on different planets. They're not even close to communicating.

After the presentation we had from Industry Canada in terms of the shipbuilding industry, I was under the impression that, based on that presentation, things looked pretty bleak and it was pretty well game over. This was a sunset industry unless we could find a little niche here or there to save some of it. But you folks come along today and say productivity over the last decade is up 46%, and you lay out in your presentations all sorts of viable alternatives and say it could be a dynamic industry. You point out that there are 2,500 ships on order around the world. I don't know what size those ships are, but we're talking about a multi-trillion dollar industry presumably. We should be going after those, I guess.

You then talked about the WTO. I have this image of us as boy scouts everywhere. We dismantled a whole bunch of agricultural support programs and then went down to the WTO as boy scouts and said to those folks to now do the same. They basically told us to screw ourselves, and then we walked away and said we'd continue to keep working. Then the picture you paint is sort of the same. We are boy scouts here. We don't want to subsidize. We don't want to have any programs. We don't even want to have a strategy or a policy. As you suggest, Mr. Holloway, everyone else is out there supporting their industry.

My question is perhaps a little odd, but if what you say is even remotely true, this is a dynamic industry and we should be getting part of it. We can do it, as you suggest through a whole number of proposals here that seem eminently sensible. You have the chamber of commerce saying it wants to do this. You have the unions saying they want to do this. You have the premiers saying they want to do this. I guess you probably have us, at least on this side, saying we want to do this, and some of the folks over there are saying they want to do it. Why is it that the government will not do it? I won't say just the government, but why won't Mr. Manley or somebody sit down and come up with a shipbuilding policy, an industrial strategy, for that sector that makes economic sense? They're not stupid people, right? So what is it that's holding us up? Can you pinpoint it?

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Mr. Robert Chernecki: What we'd like to see happen is for Mr. Manley to put the shipbuilding policy on the same level as the hockey teams he's concerned about. I guess that's a bit tongue-in-cheek, but to answer your question pretty directly, there appears to be an attitude in the federal government, whether right, wrong or indifferent—and we think it's clearly wrong—that this industry is dying. It is not. We can show proof that it isn't, but somebody needs to listen to us. All we've asked for from the get-go was to allow the stakeholders to get together with leadership from the federal government, not to have this debate about subsidies but to have a discussion about what the ills of the industry are and what government can do to help. That's all we're looking to do.

Again, I think it needs to be said that if the other governments of the world are clearly supporting their industry, why wouldn't the Government of Canada support an industry that, at one point in its life, was the best in terms of the highest productivity and quality in the world? It moved product from coast to coast to coast in this country.

The bottom line is that we deserve a chance for people to understand what we're going through and what the needs are to support the industry.

Mr. Nelson Riis: With all due respect, I hear what you're saying. It's perfectly clear what you're saying, and you've been saying it for years and years. But my question is why you think the government of the day—whoever the government of the day is—doesn't do something. As you say, just call a meeting of the stakeholders—we do it all the time—to see if we can't come up with a policy. Why don't we do that?

Mr. Les Holloway: We obviously don't have that answer. If we had that answer, we'd have a big piece of the puzzle figured out. We don't know why we can't even have the debate, or why we would want the industry to die on the vine.

Consider that we hear the arguments consistently. I sat in the House and listened to the fact that there's overcapacity in industry worldwide. It would take 1% of what's going on in this world in shipbuilding to over-employ every shipyard worker in this country. We would be running over capacity in this industry in this country if we could get that 1%. We sit at 0.04% now, not even at 0.5%.

The other issue that's important to recognize is that you have to consider that the shipowners have already said that over the next five to six years Canadian ships in this country will have to be replaced or modified in a major way. That's 60 to 70 vessels. They've said a policy would go a way to ensuring that a lot of that work could reside here. But think about it. They could take their ships to the United States, get the work done there, and get 87.5% of the financing for a 25-year period. We don't even have a program for financing a Canadian ship in order to have it done in a Canadian shipyard. We only have it for export development. We're completely out of the ballpark on this, and unless we start to recognize that....

To go back to your question, I think it's just an unwillingness to want to recognize that there are serious problems in the industry in this country. Bringing the stakeholders together to start to talk about what the solutions can be may result in putting a policy in place.

So we don't have an answer to it, but we're hoping that as we continue to press with our campaign—and we are going to continue to press with our campaign; we're not going away. Everybody should understand that. We are not going to let down the thousands of workers who sit home today because there are no ships to build because they're building them outside the country. We're going to continue moving on this issue. We want the government to recognize that there is a problem and that, yes, there are solutions. We have some that we want to table. We want to have the debate in order to see what we can put together for a Canadian alternative to what's going on in the country at present.

The Chair: Thank you very much.

Mr. Nelson Riis: I have one last question on Jim's behalf.

The Chair: You can ask one last, short question for Jim.

Mr. Nelson Riis: There was a comment made in the presentation that the next ten years will see a lot of activity in offshore rigs. Can you folks provide some more information to us on that particular future? Can you get your economists to look ahead a few years to get some idea of the extent to which that could be a possible industry for Canada to look at?

That's just a rhetorical question.

The Chair: Thank you.

Mr. Lastewka.

Mr. Walt Lastewka: Thank you, Madam Chair.

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Mr. Chernecki, I just want to go over some of your points here. I don't want to go over point (a), but on point (b), where the initiative is for the leasing regulations, at the end of the paragraph you give examples of leasing.

Do any of those areas, from your perspective, also get the accelerated write-off?

Mr. Robert Chernecki: I didn't do that part, so Les should answer it.

Mr. Walt Lastewka: You leave me with the impression that these other products have the accelerated write-off and the leasing, and why shouldn't the shipbuilding. So I want to clarify it.

Mr. Les Holloway: We're saying they do in the area of leasing.

Mr. Walt Lastewka: Could you provide me with some data that the rail cars and trucks do get the accelerated write-off and the leasing?

In point (c), where your initiative is to have a tax credit and then you lump it in with R and D, from our previous discussions even this morning, it's not automatic, of course, so you're trying to disguise it under R and D. It's really a tax write-off or a subsidy. Would you agree with that?

Anybody who gets an automatic 20%, 15%, or 10%...it becomes a subsidy, a write-off, a tax credit. I don't think you meant to put it under R and D also.

Mr. Les Holloway: The issue as to what you consider a subsidy and what we would consider a subsidy is open for that debate. We have a situation where our document has been told it's a complete subsidy request when presently the federal government has a financing package. We're asking for a better financing package, but if a financing package is not as good as the other one as a subsidy, then the other one is still going to be a subsidy too, yet it's not considered a subsidy by the federal government.

I guess I'm trying to answer the question by saying that in our view it's not. How do you create incentives for shipowners to build ships in Canada? We're saying this should be part of the policy. The Quebec government has put a similar program in place that has worked to some degree, but there needs to be the federal initiatives.

Mr. Walt Lastewka: I have to interrupt because I'm going to run out of time and I have some more questions.

When you lump it with R and D as an extension, the Auditor General would hit us over the head, and that's my problem. When you put it under that, the Auditor General says, “No, it can't be that.”

Some of you have said we have a policy; some of you have said we don't have a policy today. You infer through your document that we do have a policy. Do we have a shipbuilding policy today?

Mr. Robert Chernecki: One that works, no.

Mr. Walt Lastewka: You're saying no.

I'm asking you whether we have a policy, yes or no. Whether or not it works or it's good or it could be extended, we do have a policy today. Would you agree with that?

Mr. Robert Chernecki: No, I would not agree with that.

Mr. Walt Lastewka: Okay. No policy.

Mr. Gauvin, you mentioned what happened at Davie shipyard and so forth. It's my understanding that during the time you referred to, there were also grants and subsidies to Davie shipyard to the tune of $1.9 billion. Would you agree with that?

[Translation]

Mr. Richard Gauvin: Absolutely not. We call that disinformation. I can tell you that the Government of Canada, when it needs to have ships built for the Canadian Navy, is on the same footing as all the customers that Davie has had since its beginnings. When Brazil has a drilling platform built or modified or when anyone has a ship built by us, there is no subsidy involved.

The total amount provided to Davie by the Government of Canada may have been on the order of $1.9 billion over the last 15 years. That could be. I have not looked at the figures. But that money was not a subsidy. It is not what we would call a subsidy. When a contractor builds a house, the owner does not provide the contractor with the subsidy; he pays him for a service he needs and receives. That is how it works. This money is definitely not a subsidy.

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[English]

Mr. Walt Lastewka: In your report, Mr. Gauvin, you also mentioned the hourly rate and that we're competitive there. I don't know whether or not in total we are competitive, but let's assume we're competitive in the hourly rate and we're competitive on the technology, as you say here. If we are competitive in those two areas, are you saying the only area we're not competitive in is in the financing area?

[Translation]

Mr. Richard Gauvin: Yes, and you have confirmation of that today. Davie Industries bid about two years ago on two contracts to build drilling platforms, the Amethysts. We were up against Korea and Halter Marine of the US. Davie got two contracts and Korea and Halter Marine, in Missouri, got two each as well. Davie is the one selling the design and engineering of the contract to Daewoo and Halter Marine. The Korean shipyard employs 14,500 workers.

Next week, you will find out a little more about the technology developed and ship design. The Shipbuilding Association of Canada will be able to give you the details on those aspects. It is an area that you may not know much about if you do not work in the field, and I think that it will be very useful information for you.

[English]

Mr. Walt Lastewka: I want to stop you there. I'm assuming you are competitive on the technical side and the labour side, so I'm trying to find out where you're not competitive.

The Chair: We'll have to save those questions for the next group of witnesses, because I need to let Mr. Cannis have a brief moment here.

Mr. John Cannis: I would like to thank the presenters.

Just for the record, I'll start off by saying I appreciate Les' comment, but just to correct him, I didn't say there wasn't a shipbuilding policy. Perhaps the organization might not agree with what policy exists today, as Mr. Chernecki said, but in being productive I'm not going to go into highlighting the Export Development Corporation's activities, the Canadian Commercial Corporation's activities, and the depreciation factor. My colleague, Mr. Walter Lastewka, covered that.

There was a statement made of industry not wanting to sit down with us, period. According to my notes—and I stand to be corrected—I understand that the ministry, the minister, the staff, Industry Canada officials have met with and listened to representatives of the shipbuilding and repair industry on many occasions to discuss ways and means of improving. Have they met or have they not met, for my own satisfaction?

Mr. Les Holloway: Have we met as a group? No.

Mr. John Cannis: I'd like to say there are two sides to the industry too. I just want to know that's all.

Mr. Les Holloway: The short answer you want favours your question, but I'd answer it like this. There's no question there was seemingly a token meeting with the lawyers, but the better person to ask that question of would be the members of the employers' association, who will be here next week.

Mr. John Cannis: I don't know if there's enough time to continue, Madam Chair.

The Chair: Thank you, Mr. Cannis.

Mr. Robert Chernecki: I have something important in response, Madam Chair. What we've asked for is a meeting of the stakeholders. Has that meeting happened? No.

The Chair: Okay, Mr. Chernecki, thank you very much.

There have been many questions asked here today, and obviously, as you can see, there's great interest from all sides of this committee in this issue and in this industry.

On a point of clarification, and you could take some time and send this into the committee, one of the committee members wants some information on how Canada can compete with shipbuilding in other parts of the world without subsidizing, because we know that other parts of the world are subsidizing. We know you've suggested a financing package, but if you could just clarify that again, perhaps in writing to the committee at your convenience, that would be fine.

I want to thank you all for being here and to let you know that the committee is going to pursue this issue. We have another round of witnesses scheduled for next week, and we'll see where it goes from there. We are optimistic that down the road we'll have some recommendations from this committee.

The meeting is now adjourned.