EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, October 24, 1995

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[English]

The Chairman: I'd like to call to order this meeting of the committee. We're going to spend the first hour dealing with the issue of credit insurance and venture capital.

We have with us from Millennium, Mr. Ron Doyle from Ottawa, and Mr. Gordon Sharwood, president of Sharwood and Company.

Thank you both very much for coming. We appreciate you taking the time to speak to us this morning. Our normal procedure is to ask our guests to speak for about 15 minutes each, because we like to have time for questions. I think you'll find the most productive part of the session is the question time, so if you have a short opening statement that would give us an idea of your basic ideas, we could move to questions from there. That would be helpful.

Mr. Doyle, may I ask you to go first?

Mr. Ron Doyle (President, Millennium CreditRisk Management Limited): Thank you, Mr. Chairman.

To give you a bit of my background to start, I spent approximately 20 years with the Export Development Corporation in various positions in the insurance operations of the corporation from 1968 through 1989. After I left EDC, I set up Trade Indemnity in Canada, which is actually a private-sector competitor to EDC on short-term credit insurance. Trade Indemnity is a British company that offers both domestic and export credit insurance for commercial and political risk.

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At this time, my role is one of a specialist broker in credit and political-risk insurance. As such, we can place business with EDC and with all the private sector companies here in Canada, London and New York. But basically our role is to represent the insured and assist them in finding and structuring the proper type of insurance to support their export needs.

Forgive me if I'm going over anything you already know, but to give you a brief summary of what credit and political-risk insurance is, it's basically broken into three areas. There's short-term credit and political-risk insurance, which covers commodities such as the sale of lumber or potash. This is normally sold on terms of under 180 days. It's sold basically through annual contracts around the world. Companies take out insurance policies covering a year's sales. They just put the policies in place and continue to ship in their normal way.

The other type of credit insurance that is used is specific-transaction insurance. This is used to cover the credit and political risks on specific transactions, transactions involving smaller projects, or the sale of quasi-capital goods such as aircraft or graders, trucks and so on.

The other area we're often requested to cover is the area of putting up performance bonds for bids, for advance payments, for warranty situations. In Canada, this is usually handled through a vehicle of a surety policy. However, overseas these policies don't exist and the Canadian exporters are forced to put up letters of guarantee through their banks. They're unconditional on-demand instruments, and therefore can be called by the buyer at any time.

When I joined EDC, or ECIC back in the 1960s, there were really only two players in the game in Canada. There was the Export Development Corporation, as it became, and there was the American Credit Indemnity. They had the market very nicely divided in that American Credit Indemnity covered all sales domestically in Canada and exports to the United States, and EDC covered sales offshore and only covered sales to the United States on an insurer of last resort basis.

Today the market has matured considerably and there are many players involved in the credit-insurance market. There's the Export Development Corporation, which offers commercial and political-risk insurance; there's Trade Indemnity, which offers commercial and political-risk insurance - Trade Indemnity is a British company; American International Global out of New York, which is a very large insurer, again offering commercial and political-risk insurance; Lloyds of London, which previously just offered political-risk insurance but now is offering commercial-risk insurance as well; and American Credit Indemnity. So any client in Canada going to the market now has a fair number of options to meet their needs. This has really only developed in the last four or five years.

The markets for specific-transaction insurance, which is the sale of specific items, as I said before, graders or slitting lines, is much more restricted and really the major players are only the Export Development Corporation, offering both commercial and political-risk. American International Global will offer political risk and Lloyds of London will offer political risk on this type of transaction, as well as some of the other international insurers. But they're not registered in Canada. You have to go to New York. You would only do that as a last resort if you couldn't find the cover available in Canada.

The purpose today is to basically put forward the position of the insured in looking for cover. So what I've tried to do in opening is basically summarize the market very quickly.

Now, the basic purpose of the paper is to look at what deficiencies we see in the market, as brokers, when we're trying to place cover for the smaller and medium-sized exporter.

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The first problem encountered by a small exporter is that the private sector companies all have minimum premiums. The larger ones trade indemnity - American, international - at minimum premiums of $25,000. ACI focuses more on the smaller end of the market. Their minimum premium would be $4,000. However, a $25,000 minimum premium makes it very difficult for a small company to take out credit insurance if it has export sales of only $500,000 or $1,000,000. It really puts them into EDC, which has a small business program that's particularly designed to accommodate this type of exporter.

If you get into the medium-size company, $5 million in sales and up, and the larger company, then the private sector markets become a much more viable option for this type of company. They can find cover at a reasonable price and can structure it to their own advantage.

As I mentioned earlier, the market has evolved considerably from 1989 through. Now there are a number of companies in the market. For large companies the increased competition has led to a tremendous increase in the flexibility of the insurance.

In the 1980s and the 1970s EDC was really quite inflexible. They tended to blame that on me. They say now that I have left it's become much more flexible. But now it's really a factor of the competition making the products out there. As the companies vie for the more attractive exporters, they're making their products very much more user-friendly. EDC has followed along in this pattern and in fact in many ways has led.

However, when you come to the smaller exporter, their ability to take advantage of the flexibility built in is greatly limited by the minimum premiums. If they have to pay a minimum premium anyway, they really can't structure the deal to make it more attractive to themselves. It also limits their ability to use other financial products, such as letters of credit or non-recourse discounting with banks, because every one of those items they take out of the policy and put with another institution limits the effectiveness of their insurance.

Private-sector insurers all live and die by the reinsurance treaties. Reinsurance treaties are basically that the front-line insurer will issue a policy and then they will reinsure 75% or 80% of the risk back through the reinsurance market.

The reinsurance market around the world is a very real national and global institution. All the risk tends to come back to a central pool of reinsurers, no matter whether the policy's issued in the Netherlands or in Canada or the United States. There tends to be a very restricted pool of reinsurance. Therefore the reinsurance capacity in higher-risk markets may be limited at times.

A good example would be Brazil, where the reinsurance available to any one insurance company may be $50,000. In Canada, with our resource sales of sulphur, potash, and coal, we may be looking at exposures in Brazil at any one time of $150 million or $200 million. So it's often difficult for private sector companies to handle the reinsurance and get reinsurance sufficient to accommodate the needs of all the people who want to cover in these particular markets, especially if you have a market that's particularly attractive to Canadian exporters.

Further, as I mentioned earlier, the reinsurance is international and everybody's using the same pool. If some of these private sector companies have insurers in the United Kingdom who are using the Brazil capacity, then there's only a certain amount left for Canadian exporters.

When ECGD privatized and was taken over by NCM, that was one of the questions that had to be addressed by the U.K. government: how to keep sufficient reinsurance capacity to meet the needs of the U.K. exporters.

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The other quite difficult area is that the private market works on a spread-of-risk principle. They try to spread the risk as much as possible. It is therefore very difficult to place specific transaction insurance for smaller and medium-size exporters where they have one buyer in one country and both commercial and political risk are involved. It's very difficult to get that type of transaction placed. There's usually a minimum premium of at least $10,000 and often we're forced to come back to EDC's product, which, again, is an excellent product. But there's very limited competition in that field.

The biggest area - and I'm sure Mr. Sharwood will speak to this as well - is the area of financing export projects once they get them. Small clients of ours have been able to attract quite nice overseas projects. They can get the insurance in place, but when they come to finance the project they have great difficulty because suddenly they have a product they have to deliver three or four years from now. All the moneys they're taking in are covered by performance bond and if at the end of the day there's any problem with the product and the buyer doesn't pay, the financing institution will be left out. So it's very difficult to get that kind of financing for small and medium-size exporters.

One of the risks always inherent in these transactions, which is covered only by EDC, is cancellation of the contract by a private buyer. The private sector companies will cover the cancellation of a contract by a public buyer, but only EDC will cover the cancellation of a contract by a private buyer. So any financial institution looking at putting up financing for this is naturally evaluating all the risks. If they can get this major risk covered that makes the product much more attractive to the insured.

The biggest area that can constrain a small or medium-size company in the ability to continue to take on business is the constraint imposed on their working capital lines by having to put up the on-demand or letter of guarantees to support their bid performance in advance payment bonds.

The more successful they are the more of these bonds they have to put up. In the existing system if their bank puts up a letter of guarantee on their behalf it is immediately taken off their working capital line. The only way to avoid this is to get an EDC performance security guarantee. The bank then will release the security on the working capital line.

While private sector companies in insurance have evolved and can cover the wrongful call risk or the political risk on a performance letter of guarantee, they unfortunately have not yet evolved to the point where they will give an unconditional guarantee to a financial institution and take the performance risk on the exporter. Naturally this impacts on the smaller exporter and the medium-size exporter much more than it does on the larger exporters who have more availability to raise finances.

The last point in the market gaps is that basically the private market up to this point - and I'll just put that in as a caveat right now - has offered cover on terms of up to only three years. Many of the sales of capital goods and quasi-capital goods require terms that go beyond three years. The reinsurance market has always set a limit of three years as their horizon on risk.

Again, that brings it down to the fact that if you want to go beyond three years you have a choice. You can set up a policy that covers three years with rolling cover. At the end of the first year you insure for another three years and at the end of the second year for another three years. But often that's insufficient for the people financing export contracts. Therefore one must again return to EDC.

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We've said here that whenever you have to come back to EDC, that's always fine if you meet the EDC criteria, but if you're a small or middle-size exporter and you can't get the cover from EDC, then you are in a problem.

It was very encouraging news that insurance companies around the world are now negotiating the reinsurance treaties for next year. It appears as if the reinsurance market is quite aggressive this year for credit and political risk insurance. One company - I'm not at liberty to mention their name yet - is thinking that they're going to be able to negotiate a political risk reinsurance treaty covering a five-year horizon, and even longer. So that will be excellent cover that will be available for Canadian exporters.

Just to close, I'd like to say that the markets are evolving. There's tremendous pressure in the competitive field in credit insurance now, and this is causing the markets to evolve rapidly. The flexibility of insurance.... As a broker, now you can basically approach the market, and if you can set up the risk in advance and analyse it and present it, there's a good chance you'll be able to get it placed as the companies really look to see how they can do the business, rather than yes or no. Again, it comes down to the minimum premiums restraining the smaller exporters.

More insurance companies now are offering the commercial risk in conjunction with the political risk. A lot of the private sector companies - for example, Lloyd's of London - until last year offered only political risk cover. They would not cover commercial risk on private buyers. They've now changed that to where they will cover the commercial risk, and this is a very good market for Canadian exporters looking for cover.

The reason why they're doing this is that, as the world privatizes, there are far fewer crown corporations and state trading companies than there used to be. So, in order to remain competitive, Lloyd's is going into the commercial side.

The coverages are expanding. One of the biggest risks, which has not been covered by credit insurance in the past, is trade disputes. As an underwriter for many years I thought you could never cover a trade dispute, but Chubb Corporation, through the United States, now is putting out a product with very rigorous conditions that must be complied with, but they're actually covering trade disputes. We haven't put one in place, but we look forward to doing it. This could be a major boon to smaller and medium-sized Canadian exporters looking for financing, because the banks are always very concerned about a trade dispute. If we cover all the risks but there is a valid trade dispute, then what do we do?

The competition is leading to better coverages. The Lloyd's market is now offering a blanket policy covering bid performance and advance payment bonds on an annual blanket basis rather than just individual policies. The most important aspect we see is that many of the European credit insurers are looking to North America for expansion because they're finding that their domestic markets in Europe are saturated and that, through joint ventures and participation in Canadian and U.S. companies, they can come into the North American market, which is virtually untapped as a private market for credit insurance.

Having just issued the paper - and I circulated it to correspondents we have around the world just for their comments, to make sure that I was covering off most of the points and that my opinions were valid - I was very pleased to see that developments are taking place virtually on a monthly and yearly basis as the companies are expanding and looking at these gaps and trying to figure out how to fill them.

Thank you.

The Chairman: Thank you very much, Mr. Doyle. That was a very comprehensive overview of the insurance issues.

Mr. Sharwood, you're going to speak more to the issue of access to capital, are you?

Mr. Gordon Sharwood (President, Sharwood and Company): That's correct.

In discussions with Warren Coutts, myself as a resource to be questioned rather than an expositor of information, I thought I would refer briefly to a couple of things.

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I've distributed a document. Some of it represents a unique way of looking at the business. You will see in the first chart I have something that makes a differentiation that I have become a little bit famous for around the financial committee of gazelles. And talking about gazelles, Mr. Chrétien's pronunciation of ``gazelles'' is interesting. It now has become something even he talks about.

Lifestyle firms and foundation firms are those solid companies, usually family-owned in most provinces, that grow by 10% a year. You can see on the chart the different kinds of sources of capital - from love money and angels to, as they grow bigger, strategic alliances and customers - and the various returns. Right at the bottom of the page is somebody, an angel, putting up start-up money for a gazelle. They are looking for a 50% to 100% return over a period of five or ten years when they put their money in. But when you're going public, you're obviously aiming at a much lower rate of return than when the company is more mature. The lifestyle firms will not generate those kinds of returns.

One of my criticisms of the government-assisted programs - and I single out ACOA - is that from an economist's viewpoint, they are aimed at a very poor distribution of capital. There is a tremendous amount of money going to sustained lifestyle firms, which is a misuse of capital in my opinion. In the tourist financing industry, I sometimes refer to this as the SkyDome syndrome. In other words, we'll subsidize your fishing camp by giving you money to open it. You'll make no money, but your sister-in-law's gas station down the road will, so we should give you the money anyway, says ACOA. In my opinion, this is not a proper way in which scarce government capital should be distributed.

I've had a little fun in chart 2, ``Results in the U.S.''. I wanted to indicate that growth takes place in funny places. Some of you might now know right now, for instance, that Saskatoon is one of Canada's hot spots. It's become that way largely because of a large supply of venture capital available from the Saskatchewan government's growth fund. The figures in the top half are correct, and you'll see that the places where the most business starts are occurring, and the places with the high-growth companies, are not the usual places. You would expect San Jose because of Silicone Valley, but Utica-Rome, New York, is now something, and Washington, D.C. - and that's not lobbyists - is interesting.

The bottom is highly theoretical. I've been unable to persuade either the federal or the provincial government to look at the economy in this way. I have a sort of dream that somebody will hold a meeting and hold the mayors of these various communities to the fire with these statistics in order to get a little competition going. But that hasn't worked out.

I'm a limited-market dealer, which means I don't deal in public stocks. From my viewpoint, one of the interesting things is that, as you well know from reading The Globe and Mail this morning, whenever big companies get into financial problems, they pick up the phone and call Wood Gundy or RBC Dominion. Of course the big investment dealers don't deal with many deals under $20 million - or $10 million, depending on how much money they're making at any one time.

Entrepreneurs are big do-it-yourselfers, and there's a tendency on the government's part to create a pool of capital and to say the entrepreneurs will find their way there. But the access question is a very difficult one.

I don't know how Scott Shepherd, if he appeared last week, covered this, but getting the message out about the availability of the kind of insurance my colleague has; about all of the different kinds of evolving financing that are available in a sophisticated capital market like Toronto; and about how you let people know about that in Lethbridge and St. Thomas, and even Chicoutimi and Prince George, is one of the most difficult issues this country looks at.

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I've been working with the Department of Industry, and on the last sheet you will see a system that we worked on. It has apparently passed by cabinet and is sitting somewhere in limbo in the department. You have the local community board and investments under $500,000, and the top half would come largely through angel financing. If they get larger, they go into what I would call regional investment scrutiny centres, or RIS centres, in the major regional centres across the country, and those RIS centres would include institutions like mine.

In closing, and in throwing it open to questions, I want to emphasize how innovative the capital market is in Toronto. It is by far the most innovative capital market, and one example that I would pick would be Balmoral Trade Finance, which is a group of partners from relatively wealthy family companies whose businesses are doing quite well. They are doing equity financing or loaned equity at very high rates. We worked with them to finance contracts in Siberia, in Indonesia, and in other places. But again, the issue is that this is a new institution that is not well known. So how do you find out about it in the other parts of the country?

Because I was asked to, I've made some comments about the labour-sponsored venture capital funds. I would just leave with you the information that Mssrs. Manley and Marchi appointed me as the chairman of a panel to look into the revision of the Immigrant Investor Program. Immigrant funds are a very important source of capital generally. If our proposals are carried out, this will substantially increase the amount of money available.

I would close by saying that if you really want to get serious about this, one of the people you might want to talk to is a man named Don Allen. He has done some research on the comparative performance of mid-size companies in Quebec and Ontario.

The oversupply of venture capital in Quebec has caused the performance of mid-size manufacturing companies in Quebec in the metals industry and electronics industry to be superior to that of Ontario. They are, in a sense, less highly levered. I think that's also true in Saskatchewan, so I think the overall supply of venture capital itself in various regions of the country has a direct bearing on this growth issue that I have drawn your lighthearted attention to in my suggested growth areas. I guess that's why you wanted me to come up here to let you ask some questions, which I will now go on to do.

If you want me to talk about the other things, like NASDAQ, about going public, and about funds, I would be delighted to respond.

The Chairman: Thank you very much, Mr. Sharwood.

I have some on the list, but maybe I could start with this question. The committee is concerned about the distinction between goods exports and service exports. We are hearing more and more that the service element of the economy is more and more important. I just wondered if either or both of you could, very briefly, tell us whether there are significant differences in either the insurance component and its nature in the service side of the business, as opposed to straight goods exports. Are we developing appropriate tools to deal with service exports? Would the same be true of the need for venture capital in that area?

Mr. Doyle: Thank you. I should have put that into my remarks.

In credit insurance and in political-risk insurance, consumer goods, capital goods and services are all basically treated the same way. The coverage is available for services as well as for capital goods and the same terms apply.

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The Chairman: One service is a banking service, or an insurance company service. Do you mean to say that if I want to set up in Brazil as an insurance company, I can get the same risk coverage - commercial and political - I would get if I were selling computer products or satellites?

Mr. Doyle: No, I think it is a valid point.

The Chairman: I would sell those if I could.

Mr. Doyle: In my terms of reference, the services we are talking about here are basically trade finance services.

In other words, you have contracted with someone to provide them with services. What the insurance company is doing is following along and ensuring that you will be paid within the terms of reference of your contract - that the obligations the buyer has to you will be insured, providing that you fulfil your obligations to them. If you have to put up any type of performance bonding through letters of guarantee to provide comfort to the client to whom you are providing the services, then that can also be insured against wrongful call by that buyer.

The Chairman: In other words, as a rule these are services that accompany the sale of goods. I mean that it is a package. If, for example, I sell a helicopter with services attached, in guaranteed service, you are going to insure the whole package. This is different from going out and saying we are going to establish a service industry in another jurisdiction, as a start-up, and make the capital investment there. Do I understand you right?

Mr. Doyle: That is right.

The Chairman: Okay.

Mr. Doyle: Let's say you are going out to do a start-up and there is no identifiable buyer of your service when you go out to set it up. Rather, you are going into that country to establish a company or the foothold of an industry. What you can do when you are making your investment is get foreign investment insurance.

This will cover you on the moneys you are investing in the country. You are covered against expropriation, nationalization, war, deprivation of your assets and the ability to repatriate your dividends. You can get that type of cover to allow you to protect your investment through the Export Development Corporation or in the private sector through the World Bank Multilateral Investment Guarantee Agency.

The trade finance side can go along with the sale of equipment, as you say. It can be a servicing contract on the helicopters or a pure consulting contract. You can go in to do a project with the Government of Indonesia to improve public supply or something similar, and you can insure the billings you will make to the Government of Indonesia on that service.

The Chairman: Thank you.

Mr. Sharwood, anything from the capital point of view?

Mr. Sharwood: No. I think the capital markets are making less and less in terms of equity investment. Everybody knows you would have made more money over the last five years investing in Newbridge Networks Corporation and Stelco.

So I think the capital markets respond to that kind of shift, and I find it is easier to raise some money in backed per service businesses if they are gazelles in some ways. There is a skepticism that manufacturing industries are gazelles.

The Chairman: Thank you very much.

Mr. Penson.

Mr. Penson (Peace River): Thank you, Mr. Chairman.

Welcome, gentlemen. I am certainly interested in what you have to say this morning. I hope to have a question for Mr. Sharwood eventually, maybe on the second round. We'll see how it goes with Mr. Doyle here and how long it takes.

Mr. Doyle, you have an interesting perspective, having worked for EDC and now in the private insurance business. I am wondering how you see the competition.

My understanding is that credit insurance to small and medium-size companies is still largely serviced by EDC because they can give a lower rate. Some of the small companies come here and say that it is too high even at that rate. Is that because the private insurance companies have to go into the reinsurance business to spread their risk? Why can EDC offer a lower rate than your company to small and medium-size business people?

Mr. Doyle: The EDC doesn't, from our experience, offer low rates to small business companies. The biggest constraint on a credit insurer offering service to a small company is cost of the policy.

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The smaller policies are very labour-intensive. Credit insurance by its nature is a very labour-intensive product. Therefore, it is just not worth it for the commercial insurers to take on a policy that's only going to give them $1,000 in premium. It isn't worth their resources to actively try to attract that business.

However, in preparation for this question and knowing that we were looking at small business, during the past week I approached the former ECGD in the United Kingdom, which has been taken over by the NCM of the Netherlands, and I asked them how they handled the small business policy. I also went to Trade Indemnity and asked them how they handle small business in the United Kingdom.

Basically what they have done in each case is they have structured a flat premium type of policy very much like your car insurance. You pay your premium up front at the beginning of the year. You get certain parameters on your coverage. You take your policy, you go away and if nothing happens at the end of the year everybody is happy. And in some cases they have very nice incentives built in such as escalating no-claim bonuses going from 10% to 20% over three years if you don't have any claims.

But these policies are all designed to reduce the administration to the absolute minimum for the insurer. The difference is the minimum premiums are still on these policies and they'll be in the area of $2,500 to $4,000 for annual cover. That's not an unreasonable figure for the cover they are providing.

Mr. Sharwood: I just might add to that. Presumably you've had, or will have, Doug Patriquin appear in front of the committee to talk about the new program CCC has developed with the Toronto Dominion Bank and CIBC, guaranteeing contracts and receivables. I think that program is a very valuable addition. For a small business, the line between guarantees and insurance is crossed very easily.

Mr. Penson: But I want to follow up further. Don't the small business people generally deal for export insurance with EDC as opposed to private companies? Did I misunderstand?

Mr. Doyle: No, that's correct. EDC is a small business. As I mentioned in the paper, today in Canada Canadian exporters are faced with minimum premiums. The lowest minimum premium is $4,000 for American Credit Indemnity, and that company doesn't offer any kind of political risk.

The other major carriers, American International and Trade Indemnity, have minimum premiums that are in the range of $25,000. In practical terms that precludes smaller companies from using those policies because the cost is just too high relative to the amount of exports they're insuring.

EDC will offer cover for a small business exporter but their premiums will be above what the market would be for a larger company. They will be paying premiums in the area of three-quarters, one, or one and a quarter percent of sales relative to Consolidated Mining and Smelting Company, for example, or someone like that, who may be paying a premium in the area of one-quarter of one percent. The absolute amount of premium paid and the portion that goes to cover costs is very high on a small business policy.

Mr. Penson: You've also mentioned that there are a number of European credit insurance companies that are looking to expand into the North American market. How would that affect your companies and the competition with EDC? Would it provide a better service to our small and medium-size companies, or how do you see that playing?

Mr. Doyle: Yes, it would provide a better service. Naturally, the greater the competition the better the service that's provided to the Canadian exporters. I think it has been demonstrated since 1989 when Trade Indemnity was really the first full-service credit insurer to move into direct competition with EDC. If you speak to any of the exporters you will find that the coverages available to them - the flexibility of coverages and the service levels provided - have all increased substantially just due to that competition.

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When we look at the policies and analyse them for our clients, each company is looking to provide a more efficient policy. The trend now is to move to more on-line service so that the exporter will be able to go directly on-line to the insurer. Once this is achieved, they'll be able to bring their cost of service down and provide better service to the small exporter because it will be much cheaper to do it on that basis.

Mr. Penson: Mr. Doyle, if EDC were not in the credit insurance business - they're a crown corporation and government policy changes from time to time - would the private insurance business be able to provide service to our small and medium-size businesses, and to our large companies for that matter? What type of competition do you see EDC being with the private insurance business? How do they affect you? Are they fair competition? How would you characterize that?

Mr. Doyle: Last year, when Bill C-118 was going through, the private sector insurers took the position - and I might mention that at that time I was before the committee also, but I worked for Trade Indemnity on the private sector side, so I was putting forward a slightly different position - that EDC, by virtue of the fact that it's financed with government capital, it doesn't pay taxes, it doesn't have to put a return on investment and it doesn't have to avail itself of the reinsurance markets, has a considerable advantage over a private sector company coming into the Canadian market, which must do all that.

Their concern is that in order to make the market attractive to bring in more companies, it has to be a fairer playing field. When the private sector companies are bidding against EDC on a larger policy - one of the ones that will actually pay the bills for the company - they want to be comfortable that everybody bidding on that piece of insurance is working within the same rules and that EDC can't just come in and buy the business under the market and then force the other companies down, which actually prejudices the viability of the whole market in Canada.

Mr. Lastewka (St. Catharines): I want to carry on with the questioning concerning credit insurance. We've heard from previous witnesses that the insurance market costs are too expensive. We've heard over and over again that the EDC's costs are too expensive compared with European markets. Could you tell us why our witnesses have continually made the point that European market companies can get lower-cost insurance compared with EDC or other North American companies?

Mr. Doyle: I would have to take exception to that comment because of the fact that when we're approached for coverage, often Canadian exporters are not aware of what options are available to them. They tend to go through the EDC offices, and once they get into the EDC stream, they become sort of captive to the services offered and they don't look abroad. Exactly the same markets that service European companies can service Canadian companies.

In other words, in our role as a broker, when we get approached by a company looking to export to Saudi Arabia, we go to EDC for a quotation, we go to New York companies and we go to the London market. When the quotations come back, we then evaluate them on the extent of coverage, the terms and conditions they're prepared to cover and what the rates are, and we make a recommendation to our client. We find that in some cases EDC may be a bit higher than the competition and in other cases a bit lower. It just depends on what the capacity is in the market and how those companies perceive the risk at the time.

The biggest reason people go to EDC is not so much the price but the other feature, that is, only EDC can provide performance security guarantees that lead to the letters of guarantee. That's often the case.

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Mr. Lastewka: So we have some work to do to compare what our witnesses have been telling us, because we could be assuming something that's incorrect here, very clearly.

The Chairman: Yes, I agree.

Mr. Lastewka, I think some of the witnesses may have been referring to concessional-type financing, which in Europe may be available at lower rates. In my experience, anyway, that tends to be more in the larger deals than the smaller ones. But I agree with you. I think it's something we're going to have to look at.

Mr. Lastewka: But every witness we've got into a discussion with has continually stated that our EDC costs are much higher than those for European companies getting insurance. Now, maybe they weren't getting the same type of insurance and so forth. That could be true. But the point has been made over and over in every one of our previous sessions.

Mr. Doyle: Mr. Chairman, could I add something to that point?

The Chairman: Yes. This is very important to understand, so if you can, it would be helpful.

Mr. Doyle: Last year at this time we were approached on the same basis. Some companies were alleging better support was offered by EDC's European counterparts to European companies bidding on contracts. Because of our correspondence with brokers in the Lloyd's market and the London market, they were here at the time. So we sat down and we asked them, is this true; is it the same coverage? Their reply was ``No''.

On the insurance side, basically because a lot of the insurance in Europe is offered by the private sector - a lot of the credit insurers have been privatized - there's a reduction in the implied subsidy that can be put into the market by credit insurers. But they found over there, particularly on the bonding side - this is the letters of guarantee - European exporters often work in consortia that have financing groups involved in them. They get bonding lines, as opposed to just having bonds put against their working capital lines. The European financial institutions are more prepared to take the regular insurance without the performance security guarantee and set that aside and base their decision to provide the financing or the letter of guarantee, the stand-by letter, on just the credit-worthiness of the company, without putting it against their actual working capital line. On that basis it reduces the cost substantially.

Mr. Lastewka: Mr. Chairman, I have one more question for Mr. Sharwood. I wanted him to expand on item 6 in his report.

It's a well-known phenomenon that the government's offices are moving into larger and larger cities and even the corporate structure is restructuring and moving from outlying offices and trying to do business from major centres, as you pointed out in item 6. What is the status of the system of creating community investment boards in outlying areas, as you mentioned? What is your comment on that?

Mr. Sharwood: This is an interesting philosophical question.

The Chairman: An unusual question for you to ask, Mr. Lastewka.

Mr. Sharwood: There are some interesting things about hot spots in the U.S. and where they are. As I say, they're in unexpected places. Rosabeth Moss Kanter, a professor at Harvard, has recently written a book about some of these unexpected places.

The question really is whether they can be spontaneously organized. If you look at the U.S. hot spots, it's really the local chamber and the mayor and the local industries that have got together and done an inventory of skills and requirements and taken the initiative, in many cases. It hasn't been government led.

The proposal before you is something that's in the Department of Industry and requires a very small subsidy. Communities can take this and start it themselves. London, Ontario, has just started to do this, and it goes a little bit in Saskatchewan.

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Industrial development of most smaller communities has focused on trying to get Toyota to come and buy some industrial land rather than on building up the intrinsic entrepreneurs and their ability to compete. So the whole focus of industrial development in this country has been wrong.

Talk to the Chatham industrial developer. He's supposed to be basically focused on selling industrial land in Chatham, not working with pools of capital and access to capital. There has to be a major change in that respect.

In the annual meetings of the municipal development officers it's beginning to change. Whether it comes in that way, through wider information, or otherwise, it requires some kind of government subsidies, which obviously is a political issue.

The Chairman: Let me introduce my question by saying that when we were doing our foreign policy review across the country, we found that some municipalities had a coherent game plan. In Calgary, for example, it was very clear that Calgary city hall was tied into the Calgary Chamber of Commerce. They had decided what sectors they wanted to focus on; the mayor's object of twinning with villages or cities elsewhere was all related to that comprehensive notion of what they were good at and what they could build on in their comparative advantages, internationally as well as domestically.

Are you saying that this is now becoming more of a norm or that we need to encourage that at the municipal level if we're to be effective in this area from an export point of view?

Mr. Sharwood: It's very much the latter. What you saw is the result of a heavily subsidized product, which so far has not been subjected to Mr. Klein's axe, which is the Alberta government matching service. I'm critical of this, because it's the best matching service. You have a very good matching service here in Ottawa with OCEDCO, which you probably know about, but the Alberta government one is better because they spend more money on it. They spend $1 million a year.

My argument is that it could be privatized, because they charge nothing for making marriages, which I think is outrageous and in effect subsidizes the -

The Chairman: Do they charge for divorce?

Mr. Sharwood: Obviously, if companies come apart.

Mr. Alcock (Winnipeg South): Divorce is always more expensive.

Mr. Sharwood: If you look at the Alberta investment service, of which the matching service is part - and Frank MacMillan built that up - you'll see those investment books go out. They have a circulation of 6,000. The investment opportunities in Alberta are open to foreign investors and they get that to all the embassies around the world. Alberta is far ahead of the rest of the country in building and developing that, but it arose out of a substantial subsidization at the provincial level.

Mr. Penson: Mr. Sharwood, when you spoke of the oversupply of venture capital leading to better performance in terms of SMEs - you used the example of Quebec - one of the things we heard here from a number of the small companies is that although there is a lot of investment capital out there, they can't access it because the people who tend to manage these investment funds are more banker types who loan on equity only in terms of the bricks and mortar rather than the service idea.

Do you have a comment on that?

Mr. Sharwood: This is a particularly Canadian issue, which each of us in the industry has been wrestling with for the last number of years. How will I encapsulate it in a few brief comments?

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In the U.S. the large institutional investors, the private pension funds and life insurance companies - and indeed public ones too, because California teachers, CALPERS, is one of the major investors - will fund venture capital pools. They fund a large number of pools.

If you read The Venture Capital Journal, or Buyout, which of course I do as part of my business, you'll see that every week there's another fund being formed with $60 million and three guys who have left Goldman Sachs are going to do their own thing. Those are the best kinds of venture capital funds, because venture capital is very much an issue that comes from here.

I had a bunch of students write to me from the University of British Columbia a couple of years ago. They were doing a survey, and they had this big questionnaire with pages and pages of decision-free analysis about how a venture capitalist makes the decision of whether or not to invest. I wrote back a very short letter. It said, ``Dear Students: The venture capitalist looks at the whites of the eyes of the entrepreneur, and if he likes what he sees, he makes the numbers fit.''

We don't have enough of that, so we have these enormous government-subsidized working ventures. The institutional investors have just not come in, and the life companies and pension funds have not been investing in pools.

As some of you around here may remember, in 1986, I think, the Hon. Michael Wilson brought in a proposal that for every $1 you invested in venture capital you could invest $3 more in your foreign basket. That produced about $1 billion of increased venture capital from all the life insurance companies and pension funds.

The trouble was that his timing was awful; by the time it was all organized and all the rules were set, the Department of Finance police were put on that. They were also put on the labour-sponsored venture capital funds, which took them a long time to get put away. The money had to go from the pension funds into fund managers during 1987-88, and by the time it actually got to the entrepreneur it was 1989 and we were at the end of the recession.

So they all lost a lot of money and now all the trustees of all the pension funds in Canada are saying never again will we go into venture capital. This is in total contrast with the U.S. It is a very big problem.

There's a big cultural thing there. Those of us in the industry say it's a generational issue, and we'll have to wait until all the investment managers and the trustees who saw those losses have moved out. Eventually, 25 years from now, they'll start doing what the Americans do so well.

Mr. Penson: Time is on our side.

Mr. Sharwood: We can't wait that long.

The Chairman: In the fullness of time, of course, we'll all be dead, but that's all right if we encourage them now.

Mr. Sharwood: That's right.

What this results in is a huge pressure on the banks, which I think is totally unjustified. Some of you may know about this venture fund formation in the U.S., the Atlantic Venture Capital Fund. The minister has met with the chairmen of the banks and forced the banks into that, and I think it's totally the wrong place. They should be meeting with the life insurance companies, because that's the long money.

The banks are in the short-term money game, and venture capital is no good unless it's as a long view. The long money comes from the institutional investors, the pension funds. That's where it should come from and does come from the world over, and that's where the pressure should have gone instead of on the banks.

The Chairman: Thank you very much.

It's now past our time, so we'll have to draw this session to a close.

On behalf of the committee, I'd like to thank you both very much for taking time out of your very busy schedules to come and share your experience with us. I know we can contact you if there are any other specific details that arise out of the hearings. I hope you can fill in any gaps that might be there by correspondence, if need be. Thank you both very much for coming.

Before I ask for a five-minute break before we move on, Madame Beaumier, I think you had a motion you wanted to move. If we could deal with it now it might be helpful.

Ms Beaumier (Brampton): I move:

That further to the Committee's decisions of May 11 and June 13, 1995, the membership of the Sub-committee on Human Rights be increased to five (5) members, and that the membership list be amended to read as follows: Colleen Beaumier, John English, Bernard Patry, Lee Morrison, and Svend Robinson; and that further, upon the designating of a member of the Bloc Québécois, I move that the membership be increased to seven (7) members to include a member of the Bloc Québécois and an additional member of the Liberal party.

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The Chairman: Do we have a seconder for that motion?

Mr. Volpe.

Mr. Penson: Is the floor open to discuss this?

The Chairman: Absolutely.

Mr. Penson: Mr. Chairman, I'm opposed to this motion. I would not be opposed to one of the Liberal members on the committee giving up his or her spot in order to bring Mr. Robinson in, but I oppose the increase in membership.

In particular, if the Bloc comes back to this committee we're going to have a committee of seven, and I think that's too large a subcommittee, especially if the committee intends to travel. Therefore I oppose the motion as it's stated unless an accommodation can be made by a Liberal member on that subcommittee giving up a spot.

The Chairman: You do appreciate that Mr. Robinson is an associate member of this committee.

Mr. Penson: Yes, I do.

Mr. Lastewka: Is he on the committee now?

The Chairman: He's an associate member of our committee.

Mr. Lastewka: Is he part of the five?

The Chairman: Only if we adopt this motion.

Mr. Lastewka: That's not how this reads. What it says is that five members are the five and you want to add one Bloc member and one Liberal member. That's the way I read it.

The Chairman: No, I'm sorry. The composition of the committee will be the five names that have been given, because at the moment we have not formally adopted Mr. Morrison, Mr. Robinson or Mr. English as members of the committee so we haven't established the present composition of the committee.

We're establishing the present composition of the committee. We're saying in the event the Bloc announces it will now participate in the committee, we are agreed that there will be an additional Bloc member added and another Liberal member added, but only in the event the Bloc signals its wish to participate in the committee. At this time they have said they are not going to participate in the committee.

We can do two things. We can adopt the first part of the motion, leave the second part and tell the Bloc to sign, but I think it makes more sense that we do both at once at this time. Or we can deal with Mr. Penson's observation and objection that this is too many people for that size of a committee and that Mr. Robinson should only be on if one of the members of the Liberal Party component withdraws.

Mr. Penson: May I add something, Mr. Chairman? I also believe a subcommittee of this Standing Committee on Foreign Affairs and International Trade should come from the committee members in general, if possible, and not from the associate members, because those committee members have a working knowledge of what's happening around the table and are here on a weekly basis. I think this would be a better solution. The associate members come from time to time, but they're not nearly as involved in the whole process.

The Chairman: As an observation, Mr. Penson, I think an equally forceful argument might be made against that by saying that this committee has a very heavy schedule and we're going to keep a heavy schedule. We have a lot to do. We have this report. We move on to global issues after this report is done.

I think it would be very helpful if we could use some of the manpower and womanpower of the associate members for some of the subcommittees. To insist that all the subcommittees be made up of our own members would be putting an additional burden on our members. I think the time has come to recognize we have some other expertise out there that we should use. But that's a different view.

Is that all right?

Ms Beaumier: I agree.

The Chairman: Well, we've heard all the observations. Can I put it to the vote? Those in favour of the motion?

Mr. Flis (Parkdale - High Park): Mr. Chairman, because of the recent discussion and concerns I wonder if this could be referred back for further consideration and brought forward at a later time.

The Chairman: Yes, if that's the wish of the committee.

Ms Beaumier, do you want to withdraw it at this time? We can discuss it further and come back.

Motion withdrawn

The Chairman: Very well. There's no problem. The motion is now withdrawn and can be put forward another time. Thank you very much. We're going to take a short break.

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The Chairman: We'd now like to move on to the second meeting for this morning, in which we're going to turn our attention to the cultural and communications sectors. We are lucky to have with us this morning Ms Susan Whitney from Saskatoon, from the Susan Whitney Gallery;Mr. Holger Peterson from the Stony Plain Recording Co., from Calgary;

[Translation]

and Les éditions la courte échelle of Montreal, in the province of Quebec.

[English]

Mr. Penson: I think there is some correction. Mr. Peterson is from Edmonton and Ms Whitney is from Regina.

[Translation]

The Chairman: In any case, Mrs. Creary and Mr. Gauthier are definitely from Montreal. At least that is clear.

[English]

Sorry. For the record, then, Mr. Peterson is from Edmonton, and Ms Whitney from...?

Ms Susan Whitney (Director, Susan Whitney Gallery): Regina.

The Chairman: Well, they would probably wish you were in Saskatoon. Can I put it that way?

Ms Whitney: I spend time in Saskatoon.

The Chairman: Very well. The law school is in Saskatoon.

Perhaps we could start with you.

Ms Whitney: Just to give you a bit of an idea about my background, I have run and owned a commercial gallery in Regina for sixteen years now. In 1987, in an attempt to increase the market for my artists' work, I started doing art fairs in the United States. I've done as many as four fairs a year. For the last four years I've been president of our national association, a position I held until May of this year.

I'm a great believer in the potential of marketing Canadian art abroad. Sometimes the visual arts get lost as not being a product. There is a fair bit of division in our sector, because some people don't want us to be considered as a cultural industry selling work. There's a bit of paranoia that it's going to take away from the museum side, the non-profit side. In some ways that's been a bit of a detriment to our being considered a cultural industry.

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On that note, I'm very pleased to be invited as a witness to this committee, because we are indeed a cultural industry and we have a product to sell.

In about 1986, Canadian dealers started participating in international fairs. International fairs, to my mind, are the most effective way to reach the audience outside Canada. Unfortunately, we took some great strides and had quite a bit of participation in the fairs, and then we've taken giant steps backward.

The most important North American international fair is one held in Chicago in May. This year, to my complete dismay, there was only one Canadian dealer represented at that fair. This is for several reasons. One of them is that the federal government did support dealers going to fairs under one program through cultural industries, part of External Affairs at the time. They decided to end that support and sent us off to PEMD, but PEMD has not worked for us. Most of the dealers who applied were turned down because they were considered too small, or they would not have this great big marketing strategy. They might want to go to just one fair, and if they had a simple paragraph saying ``I want to go to Chicago to increase my market and I want to go to this fair'', a lot of dealers I know were, indeed, turned down.

I decided to take a more ambitious route and I went for three fairs a year and was successful. But I was one of the few dealers in Canada able to access the PEMD program.

To give you a quick sketch of an art fair, they are our version of the trade fair. They're very expensive. At least, I think they are. It costs between $20,000 and $40,000 to do a fair. The attendance for something like the show in May was 25,000 people. There were 165 participating galleries. About half of them were American and half were international.

One of the problems we've had with these organizers is they don't think of Canada as another country. Actually, at one point I was on a short list, and I was told that I was turned down because a gallery from Cologne was able to participate at the last minute and they thought it was more important to have an international gallery. I found that quite annoying and pointed out that Canada was indeed another country.

We've had several battles with these fairs and I think it's a terrible shame to see Canada represented so poorly in this international field. One of the things I've been pushing for is for us to go in a group, not just one or two galleries here and there, because we make no impact.

The Australians did a marvellous job a couple of years ago in one of the shows in Chicago where they actually invited aboriginal artists and had a live remote back to Australia. They had a cocktail party and it was wonderful.

The Italians last year were handing out free espresso and had about a block of maybe 15 galleries, which certainly made an impression.

One of the problems with us being tossed off to PEMD - and I really felt they were just trying to get rid of us - was that we can't coordinate our efforts and we're all applying individually.

I did speak to the person who was in charge of the PEMD program a couple of years ago and asked if I could apply on behalf of our association. We also have a foundation. He said ``Sure, try.'' I did and we were turned down because we were an association foundation.

The publishers...and it's quite an honour to actually go before the publishers. Art dealers have always looked to the publishers with awe and envy because I think they are one of the best organized of the cultural industries. They work together. They have a national association that promotes them, and they certainly don't go off, one little publisher all on their own, to one of these international book fairs.

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In conjunction with the art fairs, we've always worked very closely with the consulates and embassies. If you're working with PEMD, it's mandatory. I've had very mixed reviews, bad and good.

A few years ago the Los Angeles consulate said that they would send something out. They put the onus on me to organize all of the dealers that were going. I ended up doing nearly all the work. In my whole life I have never been as mad as I was when the consul general came to the opening and had obviously not even read the release that had been sent out and thought that the dealers at the show were showing their own personal work, whereas we had made this work. I had about ten of the top Canadian artists that I was representing. I absolutely saw red.

On a more positive note, the Chicago consulate, which is much more used to working with the cultural industry and dealers, has been quite wonderful. In one instance we were having terrible times with customs, and one of the trade commissioners absolutely went to bat, right to the very top, to ease the way for more unusual artwork coming across the border, because the U.S. customs officials felt that they could charge duty on anything that didn't fit into the painting/sculpture realm. He went to extraordinary lengths and was successful.

One of the things I've found with the consulates is that there is the feeling that they must entertain us in some way. A lot of these events have been completely misguided and a total waste of time. One of my recommendations is that I'd certainly like to see a slightly more adventurous attitude toward some of the things they do as far as the entertaining goes.

Two years ago I tried to organize a cocktail party actually at one of the fairs for the Canadians - because we were there to sell our work. We didn't want to go to the consulate office and have sticky buns; we wanted to invite people to the fair to see the work. We did quite a bit of work in organizing this reception, and the dealers themselves were prepared to pay for the additional cost involved in not having it at the site of the consul's home or office. The long and short of it is that it fell through because one of the Canadian galleries didn't want to participate. I thought that was a ridiculous reason to cancel or not to participate in the event. They really need to be much more adaptable.

Another area that ties in with the art fairs - it might be opening a can of worms, and I bring it up with a bit of trepidation - is U.S. Immigration. It's my understanding that we're breaking the law in taking artwork, craft work, to the States and actually selling it there. Nobody has clarified it.

I hope that in your package you have the letter from the consulate staff from Minneapolis, Dana Boyle. She had an experience recently where some artists wanted to bring their work to Minneapolis. They contacted her for information. She did some investigation, and indeed found out that, as far as U.S. Immigration was concerned, it was illegal for them to come into the States actually to sell their work, unless they got a special visa or they had someone in the States selling it for them.

I think it's completely against the spirit of the NAFTA.

If it is true, then I don't want to be sneaking across the border breaking the law.

I was at a show in Seattle a couple of years ago and there a rumour was rampant that U.S. Immigration was going to bust us. We were all eyeing anyone in a suit, wondering if they were a U.S. immigration officer. The organizer of the show actually told us to be very careful if somebody approached us and said, ``Is this for sale? Can I take it?'' Well, that's the reason why we were there. To try to check somebody's shoes and tie - that's a sexist remark; it could have been a woman - to decide whether or not it was a U.S. immigration officer I thought was a bit bizarre under the circumstances.

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So I would ask this committee if there's anything it can do to clarify this for us, to find out if we indeed are breaking the law. If we are, it certainly should be addressed under NAFTA.

I'll end on something that's caused dealers grief - the GST legislation. It's not just that we hate collecting it and we hate paying it. It's to do with bringing artwork into the country.

Our industry is different from a lot of the other cultural industries. We're not threatened by international work flooding the Canadian market. We have an incredibly loyal regional audience for our work. But we do want to be able to bring other work in from other countries. It ties in very much with: you take our work, we'll take yours. At the fairs, it's an unwritten agreement that if you get one of your artists into another gallery, you indeed look at some of their artists' work to bring into Canada.

The way the legislation is right now, if the shipment, which is consigned - we don't buy this artwork, it's consigned - is over $250,000 we don't have to pay GST on it as long as it's re-exported within one year, I believe. If it's under $250,000 we have to pay the GST at the border.

The Chairman: And then try to get it back.

Ms Whitney: Yes.

We find it a complete waste of time and money...and the expense of dealing with our brokers. For the life of me, I can't see how the Canadian government benefits when it turns around and gives it back. I can't see how in any way it's not competitive, because of course we will be charging GST when we sell the work.

It's a battle we've been fighting. We fought the battle initially and what we won was the $250,000. You can imagine a dealer bringing a shipment of $240,000 worth of art across the border. They'd probably raise the price a bit. But to me it just does not make sense.

I'll end my comments by saying an international business plan is afoot for the cultural industries. I'm very pleased the government, through the different departments, is trying to coordinate the efforts for the cultural industries.

The Chairman: Thank you very much, Ms Whitney.

Mr. Peterson.

Mr. Holger Peterson (President, Stony Plain Recording Co. Ltd.): Thank you, Mr. Chairman, committee members.

I have a record label in Edmonton called Stony Plain Records. We've been in business almost 20 years. We're a small company. We have a staff of five. We release Canadian artists. We manufacture domestically. During that period we've released about 230 different domestic recordings. We work with about one dozen Canadian artists on a regular basis.

In addition we market some American labels in Canada. We do the marketing and oversee the distribution of those releases.

We're distributed in Canada by Warner Music, based in Toronto, with branch offices across Canada. We hire an independent promotion company and an independent publicity company, based in Toronto.

Our artists include blues, country, singers, songwriters. We're what's called in the industry a ``niche label''. We aren't that much in the mainstream. We tend to work around the markets the major record labels very effectively promote. Our sales and our artists tend to fall into country music: people such as Ian Tyson, Cindy Church, South Mountain, Steve Earle. We also have blues artists such as Long John Baldry, King Biscuit Boy, Amos Garrett, and Rita Chiarelli.

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We also have a number of American artists who are under contract to us, and we market their releases throughout the world. These are artists like Maria Muldaur, Jimmy Witherspoon, and Duke Robillard.

Our international marketing activities take place in the following areas. We export finished goods throughout the world. In some markets and with some artists, we license their masters to companies who then manufacture and promote those artists in those regions. Generally, on a licensing arrangement, the sales or the potential is greater. You have a local marketing agent, distributor, and promotion company working on a certain artist. On an export basis, you export more of a limited number of goods that are more into a specialty kind of music category.

We're also involved in exploiting copyrights of music publishing. Many of the artists we work with write their own material. We represent the publishing on some of those artists. As such, we have sub-publishing arrangements around the world and contacts in record companies, and film and television production offices. We try to do the best we can for our artists to get their material into film soundtracks, television shows, etc.

We also try to open the doors for our artists in terms of international touring, helping them to set up touring throughout the world, and having management situations throughout the world.

What we've learned regarding international marketing is the importance of attending trade fairs on an ongoing basis. At this point, there are a good half-dozen trade fairs in the music industry that are very important to be a part of on annual basis.

There has been a major increase over the last 10 years. When I started to go to trade fairs, about 17 or 18 years ago, there were two of them; one didn't survive.

One of the biggest areas of growth in the music industry is in international trade fairs. The benefits are fairly obvious, I guess, but it really does update you on information that's out there in the field, such as who is doing what.

It's very important in the music industry to recognize that the kind of associations we are looking for in our situation involve finding passionate people who relate to the music you're doing. This is unlike many of the industries, but I think it's probably true in the cultural industries. If you can find people who are believers in the same kind of musicians you deal with and the same kind of music you're pursuing, then those are the best relationships in the music industry. Those are the most enthusiastic relationships.

Going to trade fairs, meeting people on a one-on-one basis, and finding those believers is extremely important. It's a very personal business that way.

Going to trade fairs also helps you get paid.

There have been problems, obviously. It happens in any business.

The trade fairs we go to generally have seminars and workshop components. It also help you to keep up with technology.

The other area of trade shows is the showcasing element in them. In the music industry and in many of these trade shows, different artists from around the world get a chance to play in front of an audience. This has been extremely beneficial in our situation in which we've been able to take some of our artists to trade fairs in different parts of the world and present them on stage. That's the best way to present what we do: in a live way.

We believe that marketing dollars should be spent on maintaining an international presence through trade fairs. In our situation, we do a very comprehensive quarterly newsletter, with a mailing list of over 3,000 people. We have our artists on tour and that very personal, regular contact.

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As I mentioned, the product of recorded music is not generic in nature and cannot be marketed the way standardized types of products can. Customer identification and selling efforts are best accomplished by the record company itself.

Export initiatives are best coordinated through our industry associations. We're well represented by our associations, especially CIRPA and FACTOR. They understand the needs of our members. CIRPA organizes booths at trade fairs. CIRPA represents the independent recording sector, the Canadian-owned sector.

I'll list some of the problems we frequently encounter.

The cost of shipping small orders often discourages foreign buyers. In our situation it's taken us years to establish the size of catalogue from which a foreign buyer can order x number of many different releases and put together orders of 500 to 1,000 pieces on a regular basis, and we can ship those to that country.

Because what we do is a specialized area, the Americans have an advantage. They have a lot of different specialized companies like ours and they consolidate. We haven't been able to take advantage of that on an ongoing basis.

We've also had problems with the uncollectability of accounts receivable, and that's an international problem. Companies come and go.

The high cost of attending trade fairs and the high cost of international marketing through trade ads and other forms of visibility are also problems.

Our recommendations are as follows.

Any government program should definitely work through our industry organizations, especially CIRPA and FACTOR. They can best represent our needs and make sure every area is covered.

A very important point to us in the industry is that obviously, to have some success in the international market, we have to be able to have success at home. We have to have interest in our own market. We have to develop first of all in Canada the artists we're marketing internationally so that we have some kind of basis for support for them. With most artists there's a slow growth rate. They start as a regional success, then a provincial success and then become a Canadian success.

In order for us to compete internationally we have to have a very strong support system in place in Canada, and what's missing right now is the support for intellectual property in copyright legislation and regular updating of that legislation. Updated copyright legislation means protection for the creator, income for home taping, neighbouring rights, digital transmission, etc. - areas that are covered in phase two of the Copyright Act, which I understand you're all dealing with now. We need that support for our industries to survive in Canada and to be able to be on a level playing field internationally, because in the international marketplace, copyright is much beyond what it is in Canada in terms of protection for the creator.

We believe Foreign Affairs and International Trade should work closer in the areas of the international touring, presentations and trade fairs.

Lastly, the Canadian industry would like to have a WEB site and is developing a WEB site right now that can act as a digital promotion, marketing and distribution source for our industry on a worldwide basis. This is being pursued by CIRPA, and they are looking for partnership relationships in the area of a WEB site. Any encouragement in that area would be very much appreciated.

Thank you.

The Chairman: Thank you very much, Mr. Peterson.

[Translation]

Will Mr. Gauthier or Mrs. Creary speak on behalf of the Éditions la courte échelle?

Mr. Bertrand Gauthier (President of Les Éditions la courte échelle): I will get the other interpreter to work a little because he still hasn't said anything. I will make him work for his salary today.

The Chairman: Will you make us work intellectually?

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Mr. Gauthier: Yes, intellectually, and some people will have to use their earpieces. In any case, if you want to discuss an issue in more detail, Barbara will respond in English. I understand English very well, but I prefer speaking French because it's easier for me.

It's hard to compress 18 years of history in 10 minutes, because la courte échelle was founded almost 18 years ago.

I won my first international battle in my own market, in the Quebec and Canadian marketplaces. English Canada is a domestic market for the United States and Quebec is a domestic market for France. Or rather, France would like it to be this way! Our advantage over the French is that Quebec books are a lot cheaper than French ones, whereas English-Canadian publishers have to contend with the invasion of very cheap American products. It is even getting to affect readers in Quebec, because many people are beginning to read American authors in English rather than waiting for the translation in Parisian slang to arrive in Quebec.

So, our first big fight was to get established in our own market. As I've often repeated, I already experienced market globalization at the end of the 1970's and at the beginning of the 1980's. I had just published several books, when I realized that they were not being sold in bookstores. Despite being at home, my books were not being sold. So it was a long fight.

Canada has generally opted for giving subsidies rather than passing protectionist legislation. This point of view is quite defensible.

I would like to give you some example of the kind of problem we experienced when we try to export to the United States. We had a huge American order for game books and the merchandise was stopped at the border. Indeed, 60,000 products, which were contained in three or four trucks, were stopped. For two days, we had to defend ourselves because the border authorities contended that the "Printed in Canada" label was not exactly where it should be. It's for those kind of reasons that it's very hard to penetrate large markets.

However, over time, in seven, eight or nine years, we managed to become the Quebec leader in books for young people. We have sold books in all of Canada, for immersion classes and for other purposes. It took us about 10 years to become the leader in our own market, at which point we began exporting. We have been exporting our products for about eight years. At first, we were positive that it would be impossible to export all our products on a massive scale.

Canadians in general haven't yet grasped something Europeans understand: culture is profitable. Passionate people work in the cultural sector; they are willing to work for 20% of what senior business executives earn. It's easy to create jobs in the cultural sector, because people believe in what they're doing. They are willing to work for very little money because they want to do what they love. Europeans have understood this. France and Germany have transformed their culture into a huge money-making industry. These countries make a lot of money by developing their culture.

Things take time over here. As well, cultured people are often perceived as being dreamers and unorganized. However, you often find the best managers in the cultural sector, because good managers are needed given the small budget available for cultural businesses.

So we slowly managed to penetrate international markets. It might seem obvious that France is the easiest market for us to penetrate. But that's not true. In the same manner the United States market might not be the easiest market for Canadian publishers to export to.

We came to the conclusion that France is only one major international market amongst many. These markets are already well saturated by domestic companies which control the market. So we approached France as if it was a foreign market, and that's what saved us.

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Publishers in Quebec traditionally thought that they would receive recognition in France. But we realized that our target had to be the global market, including France. As soon as we changed our approach, we realized that it was possible to penetrate every market and we did business in China, in Germany and all around the world.

France slowly began to hold more opportunities for us. I often say this as a joke, but the day our books are translated into English we will send them to France and propose that the French buy the translation rights to our books, despite the fact they were originally written in French.

In fact, that has often been a problem. It's clear that the French are unable to sell their books in China. But we have sold 60 titles to the Chinese up to now.

Let me talk about the programs. As the spokesperson for the Susan Whitney Gallery said, the publishing business is generally very well organized in Canada and Quebec. Both associations do good work. Whether you want to or not, the cultural sector has really fostered n association between the publishers of Quebec and another association which brings together English-Canadian publishers. We are members of both associations and we have many contacts with publishers throughout English Canada. Approximately 60 of our books have already been translated in English. There's a high level of cooperation and both associations often work closely together to create programs adapted to Canada as a whole. It's not always easy, but we are generally successful.

So, on the whole, we are quite satisfied with existing programs. In fact, nothing should be cut. At the moment, there are three important components. There is an association called l'Association pour l'exportation du livre canadien. In English, it is the Association for the Export of Canadian Books. This association has a permanent office which helps publishers throughout Quebec and Canada to export their products abroad.

There are two different programs. The first helps publishers sell their books abroad, in terms of specific targets. The other program provides funding for publishers to take part in international book fairs. This is essential, because it allows us to make international contacts when attending those fairs.

The third component is the Canada Council. It is very important, especially for Quebeckers. Whether we agree with it or not, French is not the universal language anymore. It's English. Our books have to be translated into English as soon as possible. We write summaries in English and we even go so far as to ask the translators to translate whole chapters, and so on. So, this program allows us to translate our books into English, and it also provides something for a German or Norwegian publisher, for instance, who wants to translate our books. The Canada Council will therefore, for instance, pay a Norwegian translator $500, $600 or $700, and this may help us clinch a sale. It is increasingly difficult for small countries to keep their production costs down. We recently learned that a Norwegian editor wanted to sign a contract with us at the Francfort Fair because he would receive funding towards the translation into Norwegian.

These three programs are really essential.

Fundingwise, it's not any harder to get money for exports than for the rest. I must admit that things have changed. When I got the business going 18 years ago, we really thought that whoever took an interest in cultural affairs was a dreamer. They used to say: "It's over, he' going to go bankrupt. We're going to lose our money." It's changed a lot because now you have some big international success stories: The Cirque du Soleil, the troup Carbone 14, La La La Human Steps, the Courte échelle, Montreal's Jazz Festival.

These all succeeded on the international stage. They are very strong businesses that managed to become viable. Of course, economic viability in the cultural area means help from the state in a country like Canada whose population isn't big enough to support a whole culture.

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So you have to take a global view of funding. Our business now has 11 employees. We were four in 1987. Eleven employees is a lot for a publishing house because to that you have to add hundreds of freelancers: writers, illustrators, printers, bookstores. All that generates hundreds of jobs.

I'll wind up with the famous GST. There was a major battle to try to prevent GST applying to books which were our grey matter at the time. You will remember that it was a battle royal. In Quebec, there is no provincial sales tax on books.

At the time, we were promised programs to compensate for the GST; those programs lasted a year and the programs were cut this year. So the 28 million dollars the GST brought in on books just went to the consolidated fund. The promises were forgotten. I think I speak for English-Canadian publishers when I say that the situation is even more catastrophic for them than for the Quebec publishers because English-Canadian publishers have to deal with ferocious and direct competition from American publishers.

In my opinion, it's essential to try and help those publishers and not just at the international level. I know there is an international commission and I'd like to take this opportunity to make it aware of the following problem. If the publishers can't manage to be profitable on the national market anymore, they just won't be able to export.

Generally speaking, I think the programs as such are well thought out and properly done. Those programs shouldn't be cut any further. The key for Canada is exports and that includes culture. Let's not forget that culture is what makes you known the best!

It's fine to sell all kinds of wagons or whatever other manufactured product, but culture is what makes us known and gets us to be appreciated and that is solid value added.

That's about all I had to say. I know that I've wandered a bit, but, what can I say, it's impossible for the head of a business to stick to the subject. Thank you.

The Chairman: Thank you, Mr. Gauthier. I'm quite happy, because you ended your presentation with a thought on what we said in our report on Canada's foreign policy. I don't know if you read our committee's report, but we said exacly what you just did that Canadian culture and values are exported together and it's very important for the Canadian government to support them.

Mr. Gauthier: If ever I wanted a new life, I could ask to sit on your committee.

The Chairman: Yes, with pleasure.

[English]

I have Mr. Penson, Mr. Flis and Mr. Lastewka on the list.

Mr. Penson: Thank you, Mr. Chairman.

I guess I heard two different things. I think I did, from the committee at least, and I'd like to explore that. I think Ms Whitney and Mr. Peterson were looking for more help on the promotion end of your industry rather than in the sort of subsidy end in developing. If that's the case, I can understand where you may have some difficulties with the PEMD program. It may not be tailored in quite the right way on the promotion end.

My perspective is that culture is a business. I think it can be a very profitable business. We have seen in the United States that it is one of their biggest industries.

But if it comes to the government spending money for the development of culture, I have more of a difficulty with that, Mr. Gauthier.

I guess what I'd like to ask from the panel is, how do you see this being broken down? I think it's a very legitimate role for government to be in the promotion end, to promote business, art and culture being a very important component of that, and if there are some difficulties we should really strive to remove those and try to dovetail it closely with the industry. But if it's in the development end - I know I have a different perspective from many of my colleagues - I would like to see government out of that end of it and more into the promotion side.

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I'd just ask each panel member what your perspective is on that.

Ms Whitney: As it is right now, dealers are getting virtually no assistance to do the trade fairs except if they're lucky enough to get a PEMD grant.

One of the things we were supposed to address, which I didn't, was what assistance we get from financial institutions, or what funding is available to us. Well, we have none. They don't look at art galleries as being particularly solid businesses to lend money to.

I know the government is not in a position to hand out lump sums for doing things like trade fairs right now, but why not have a program like PEMD and adapt it more to our business? We are quite prepared to treat it like a loan, for example. If we need to pay it back based on our sales, that would be completely acceptable to us.

Without causing any grief for my colleagues, there is funding available for the other cultural industries as far as their participation in trade fairs.

Mr. Penson: So the promotion is what you're really dealing with.

Ms Whitney: Right. But there isn't for ours. We get sort of muddled in with sectors and subsectors. I call the visual arts a subsector. There is not any assistance as it is right now.

Mr. Penson: Okay.

Mr. Peterson: By promotion, do you mean taking part in trade fairs? Or do you consider that developing a business?

Mr. Penson: My suggestion is that the cultural community be treated like any other business sector; it's a business. We do offer those kinds of services to other businesses. They would take part in trade fairs, do the development, and I see that as a very legitimate role of government in the promotion of our cultural products. But if it comes to subsidy of it in the production, I have a different view from some people around the table here, I guess. But I'm wondering what your view is in that division.

Mr. Peterson: I think certainly having PEMD be a little more responsive to our industry would help the overall marketing and promotion of what we do.

At this point, in terms of attending trade fairs, for example, and being in the front lines, the SRDP program, through FACTOR, set up a program where a company can apply for a maximum of $10,000 per year. When that was put in place, the understanding was that it was to replace PEMD's involvement in the music industry. FACTOR now has less money to give out and has had to restrict that $10,000. But PEMD is again available to our industry.

The initial contact with PEMD for companies in our area was not very fruitful. It appears that our company may have some success at this point. We've started the process and we've been encouraged to follow it through. But it appears that other smaller companies in our area will not qualify.

So I think PEMD is a good way for our industry to get support, and I think there could be a little more development to include our industry. We're quite different in the sense that we don't have standardized trade. We're not selling a pipeline that has a world-standardized format and value. We're selling a cultural product. The application, I think, could be rewritten slightly to help support companies that are involved in that kind of activity.

Mr. Penson: Really, design a program that is more flexible and takes into account the type of industry you're dealing with. Trade promotion is really what's required here.

Mr. Peterson: I believe so, yes.

Ms Whitney: I think one of the reasons a lot of us are turned down by PEMD is because they think we're too small - just to clarify that.

Ms Barbara Creary (Publisher and Foreign Rights Director, Les éditions de la courte échelle inc.): It might be just a question of semantics, but I think in a country like Canada the government must help to develop and to sustain cultural industries, whether it be publishing, art, theatre, dance or whatever, because we don't have the population to support that in large part.

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As we said earlier, to succeed internationally you have to succeed nationally. To develop your artists, your creators, sometimes takes a number of years. You can't just invest all the time in this yourself, because you don't have the population that will necessarily buy your cultural product.

If I say that in Quebec we have maybe 5 million French-speaking people, they're certainly not all book buyers. We want to develop a certain product, which in our case, many years ago, was book and game sets. We decided we had to go out of our own country to be able to support our own company, which we did. Luckily, we've had help from the government to do so over the years.

We now have less and less help, however. As Bertrand said earlier, the government programs to promote the export of Canadian books are good programs per se. They are well-thought-out and developed, but we mustn't forget that they're also getting less and less money every year. As far as I know, there are more and more publishers that are able to profit from these programs. So everyone gets less.

I think the government should definitely be there to help promote the books on an international level, but I also think that in a cultural industry, books, and probably art and music also, are considered luxuries. So when you tighten your belt, those are one of the first things that go. But cultural products are what make us different from Americans, from British, from French, from Italians, etc. So I don't agree with you.

Mr. Penson: I respect that, but the point I would like to make back is that we now are in very difficult financial circumstances. I think we also have to take that into account. We are running a $34 billion deficit this year. I understand your point of view and appreciate your view on it. I'll leave it at that.

[Translation]

Mr. Gauthier: I know that there is a major deficit, but we publishers have done our bit this year don't you think? Our programs were suddently slashed in half this year without any warning. Those programs were supposed to compensate for the GST over a four year period and they've disappeared after only one year. So we're doing our share but don't ask us for too much. If Canada wants to become subservient to the USA, that's her choice. We'll let our culture go and do business as the 52nd American state. In any case, we'll soon see what's going to happen. There's the rub! You absolutely have to have national pride. Otherwise, there is no interest in carying on.

Culture is what makes us different. You hear about Le Cirque du soleil everywhere in the world. They are our best ambassadors. I'm sure the Cirque du soleil has drawn a lot of tourists to Quebec these last few years. But it seems we have problems evaluating the total impact of culture.

On top of that, culture has a constant value-added factor that a manufacturer doesn't necessarily have. When Bombardier sells its cars in Indonesia or in Bangkok, it's funded by the EDC, you have guaranteed loans and so forth. It has repercussions on work here, yes, but there are none worldwide. Le Cirque du soleil, Céline Dion and others in the cultural community really give value-added to a country. They give the country an identity that makes it better known on the world stage and helps it make better deals.

We make good deals with all countries in the world because Quebec is different from France. German or Italian publishers never say: "You speak a funny kind of French!" What we do get is: "You make nice children's books."

[English]

The Chairman: D'accord.

Mr. Penson is going to have to listen to more k.d. lang. I think that's his problem.

You'd better not open that door, Mr. Flis.

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Mr. Flis: Thank you, Mr. Chairman.

In making its recommendations on the foreign policy review this committee did recommend, as one of our foreign policy pillars, the promotion and export of our culture, our values, our internationalized education, etc.

I congratulate the staff for bringing the cultural industry before our committee to explore this pillar of our foreign affairs in greater depth. I'm pleased that we were taken through the PEMD, the trade fair programs and the consulates. Mr. Penson already explored those.

The consulates do feel they must entertain Canadians when they are abroad, and I couldn't agree more. They can entertain the Canadians, but I think it must be done where the show is so people can see the product and buy the product. That's an excellent recommendation this committee should make.

I'm glad you touched on the GST obstacles.

Mr. Chairman, that's another thing we should look at. What are the obstacles blocking smaller and medium-size businesses from penetrating the export markets?

We were told that different departments are trying to coordinate efforts to help the cultural industry.

Susan, could you be a little more specific? Which departments?

Ms Whitney: I'm a member of the cultural industry's SAGIT, Sectoral Advisory Groups for International Trade. That committee was approached by the departments of Canadian Heritage and International Trade to do a draft.

There was an international business plan floating around that was quite inadequate. When I initially joined the committee, I carried on because visual arts weren't included. They decided to ask the representatives on SAGIT to do the first draft. We were thrilled to actually be consulted and to do that initial draft.

The two main players are the departments of Canadian Heritage and International Trade. The draft is now being circulated to the provinces as well so that there really is a comprehensive and coordinated effort as far as international promotion for the cultural industry.

Mr. Flis: We've heard from other industries in the export business that trade fairs were not too successful. Some witnesses mentioned that the Philadelphia trade fair was a waste of time and money, etc. How important are the trade fairs in your industry?

Ms Whitney: We'll have to answer separately.

For me, it's important because of the direct sales that happen at the fairs and afterwards. I'm in a very small city in the middle of Canada on the prairies. To get phone calls from Los Angeles for purchases of my work on a regular basis, from artists who send out invitations to an international mailing list and get responses, has been a tremendous boost to my business.

The sales at the fairs have been all over the place. I did a show in Los Angeles where before the show even opened I'd sold $50,000 worth of art, and it kept selling all the way through the show. The next year I went back and sold $5,000 worth.

So it's terrible for the.... I don't know what my colleague's experience has been. It's very uncertain with the visual arts, but there is sort of a continuity in between the shows.

Mr. Peterson: In our situation, the most important single marketing tool we have is being at a trade fair, face to face with people.

I've been going to the biggest one, the MIDEM trade fair in the south of France at the end of January, and our industry is of such a size that virtually all the players can get together. Most of the players from around the world can get together in one place once a year and find out what kind of business they can do. It's very well organized. We have a Canadian stand there in a very visible area. There's a Quebec stand too, and I think Canadians and Canadian companies are extremely well-represented at that trade fair.

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In addition, there are about half a dozen other trade fairs in the music industry that are not quite as important.

If you're going to be part of the music industry, then you really have to be part of those trade fairs. There's no other way. You really have to have a presence there.

Mr. Flis: Someone - I think it was you, Mr. Gauthier - mentioned La La La Human Steps. I had the pleasure of seeing them perform in Vienna, and I was able to witness the warm reception they received from an international audience.

I was also in Cuba not long ago, where Vic Vogel, a jazz pianist and singer from Quebec, was teamed with a Cuban pianist and singer. I had three functions when I was in Cuba: one was visiting the trade show, another was opening a consular office, and the third was seeing this performance of Vic Vogel. The talk around Cuba the next day was not about the opening of the consular office, nor the trade; it was about Vic Vogel.

That struck home to me how important it is. As you said, culture is our best ambassador.

How do we promote this culture in a cost-efficient manner? Is it the trade show? Is it the actual performances and our embassies and consulates getting involved in helping promote those performances? We're strapped for dollars, and yet we can see the importance of exporting our cultural industry. How can we do it efficiently?

Ms Creary: In the publishing world, the number one way to begin to export is through the international book fairs. I can't go from country to country wearing my books so that they'll see them. They have to see them. They have to touch them. They have to know what they look like. They have to know me. Either they want to deal with me or they don't. It gets to be on a quite personal level. And when you get back, in between the fairs, they want to know how efficient you are.

When I first started in this area in the international field in 1987, it would take me maybe two or three months to negotiate a contract, because it had to be sent by mail. When you're talking about over five pages of contracts, they want to see it. They don't want to hear it over the phone or whatever. It would take three, four, or five weeks. Now it takes three hours by fax, or a maximum of three days. But they've seen the books; they've seen me. They know what they look like.

So I'd say that, yes, the number one thing in publishing is that we have to be at the book fairs. There are some important ones: the Frankfurt International Book Fair that finished just last week; the Bologna Children's Book Fair, which is the biggest one in the world, in Italy in April. There's the American Booksellers Association convention every year. For the next four years it will be in Chicago. The Guadalajara book fair has become very important in the last two or three years for all of Latin America. As a matter of fact, Canada is the invited country in November 1996 in Guadalajara.

We're using that invitation to promote a lot of cultural industries. We hope to have La La La Human Steps there. We hope to have the graduating students from the Cirque du Soleil. We hope to have Kashtin, which is a popular group of native Québécois - they wouldn't like to hear that - Les Sortilèges, maybe part of the symphony orchestras, and also art galleries. There's also an art gallery that's waiting for some things from Canada in Guadalajara.

They do this every year. They invite a country and they open a lot of things to us. They will provide a hotel and a per diem. They want us to pay for the plane.

We're trying to have business come in with us. Naya Water deals a lot in Mexico - Bombardier, Quebecor, Molson, etc. We want them to come in, and they would be partnered with a cultural group to present that.

We're now dealing also with Tourism Canada to have anything. We'll have a meeting with them later this month and in November before I leave for Guadalajara again.

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Mr. Flis: All the witnesses mentioned that it's important that a product be successful domestically in order for it to be exported effectively and productively.

Mr. Gauthier, you mention in your written presentation here that the International Translation Program is a Canada Council program that provides financial assistance to foreign publishers wishing to translate literary works by Canadian authors into languages other than English and French so that they can be published outside of Canada. The budget is $200,000.

Is that $200,000 just for the book that you requested be translated, or is that the total budget?

Ms Creary: That's the total budget for almost 200 publishers.

Mr. Flis: Are there any grants for translating your books from French to Chinese, English to Polish, French to Greek, etc.? There is a big market within Canada - and again, I know you're already doing this - for selling your products in the different heritage languages in Canada. Is there any money from the same ministry for translating those books to be used on the domestic market?

Ms Creary: No, there isn't. If we wanted to translate Ça va mal pour Sophie for the Polish market across Canada, we would not be subsidized to do that. What we have to do to be able to publish it in Polish is to have a Polish company and have a contract with them. They hire their translator, etc., and Canada Council pays them to pay their translators.

What does exist in Canada, though, is the program that goes from a French Québécois company into a Canadian English company. They will subsidize that.

Mr. Flis: And vice versa?

Ms Creary: Yes. They will subsidize translation from English to French and French to English. But let's say I wanted to publish my own book in the different languages within Canada; I would not be subsidized to do so.

Mr. Flis: There's the discrepancy within our own government, Mr. Chairman, where I think we could consolidate funds and cover both domestic and international markets with the same budget.

The Chairman: But I would presume, Mr. Flis, that if the book were translated into Polish for the Polish market, the publishers here would not be prohibited from selling it to the Polish Canadians.

Mr. Flis: Oh, no.

The Chairman: Once it's translated, it's available for the domestic market.

Mr. Flis: The cost, though - and correct me if I'm wrong - is to get someone to translate it.

Ms Creary: We have that experience, because a lot of our books have been translated into Spanish and Chinese and Greek and Polish. It's difficult, because there's not a very big market here for, let's say, a Greek publisher to ship the books to Canada. They're not going to sell a lot, so the books become prohibitively expensive.

What we've done is we've come to an arrangement with Champigny, a bookstore on St. Denis Street in Montreal, and they have copies of all our books in all in the languages. So they've centralized and they're going out to all the school commissions and public libraries trying to get sales and to centralize them all through them, but that's very difficult because if you're ordering ten copies of ten books from China, it's quite expensive. That's the reality.

Mr. Flis: Thank you.

The Chairman: Thank you. That was very helpful.

Mr. Lastewka and then Mr. Alcock.

Mr. Lastewka: Thank you, Mr. Chairman.

My question is going to be on the regulation side. We talked about the GST, the neighbouring rights issue, the trade regulations and understanding of taking art to the U.S. and selling it in the U.S., and the importance of promotion on trade fairs. Are there any other regulations that are prohibiting you to expand and develop to be a bigger company? Are there any Canadian regulations that stand in your way?

Ms Whitney: One thing that our professional association is working on right now is to try to set up an art fair in Canada, which is very much part of our international promotion strategy. I would assume that this is the same for some of the other industries; we don't have these big international fairs in this country because of the tax situation, the provincial and federal sales tax.

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One of the things that came out of a meeting I was just at was we thought we'd ask if we could have a tax-free zone for three days for an art fair. Someone suggested I bring this to this committee. Well, I'm tossing it out on the table. It's a real concern to bring people from other countries to this country and to have to deal with those two taxes together at a trade fair. So I will bring it up at this point.

Mr. Peterson: I would just reiterate about copyright protection. In the area of neighbouring rights, there would be reciprocal arrangements with European countries that already have rights in place and that have accounts set up for artists. Unless Canada has a reciprocal agreement, we don't have access to the money our Canadian earners have earned abroad.

I would say the most important factor would be to update our copyright legislation. Phase two comes a long way to doing that and represents only the second substantial step in this process since 1928, I believe. We really haven't done very much in this area. We really need to do this on an ongoing basis, technology being what it is.

Ms Creary: Not really particularly for our company, but I would say for English-Canadian publishers the biggest problem with legislation right now is the copyright legislation, which apparently allows Canadian-authored books published by an American company.... Let's say Margaret Atwood is published in Canada by a Canadian publisher who cedes rights to the American market to an American publisher. That American publisher has a distributor in the United States who sells back to Canada for a lot less than the Canadian publisher can do. That's a problem for mostly Canadian publishers, with the Americans right next door.

The people at the Association for Canadian Publishers in Toronto are looking at that in the copyright law, for sure. It's their biggest problem right now. Books coming back to Canada through the United States are a lot cheaper.

Mr. Lastewka: Likewise, we talked about the trade fairs. Are there any other means the Canadian government should be doing within its existing system to help your industries in your promotions?

Ms Creary: I always thought it would be nice if in the embassies and consulates they had our books, and maybe some of our art on the walls.

Mr. Lastewka: I've been working on that with wine, too.

Ms Creary: Is that cultural? The label.

Mr. Lastewka: Assisting with culture.

Ms Creary: I've always thought that would be really nice. If the personnel in the embassies and consulates knew their authors and their artists better, whether they be singing artists, performing artists, visual artists, authors, illustrators.... Obviously there has to be a will to do that. I know in the publishing industry we'd be ready - and personally, we've done it a lot in our company - to send them books they would have available there. We would also encourage them to give our books as gifts to visitors in the different countries. We try to let them know that many of our titles have been translated into the language of the country they are in.

However, personnel change every two or three years. It's a lot of work for us for little return. So we don't actually keep that up. But it would be nice if there were that political will to portray our books, our artists, and everything right in the embassies and consulates.

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The Chairman: May I ask a follow-up question to that, Mr. Lastewka?

Some of our embassies have a cultural officer, as you know, such as Paris, but many of the embassies do not. In your personal experience, do you find that those embassies that actually have a cultural officer enables a better access to the market and that the embassy is more sensitive to the issues you're discussing, or not?

Ms Creary: Basically, no, but it helps. But not really, because in other places - you're right - where they don't have a cultural office, I haven't felt that much difference.

The Chairman: You don't find any more paintings -

Ms Whitney: It's hit and miss.

Ms Creary: It's the people who are there, basically.

The Chairman: It depends on the individual; that's what you're telling me.

Ms Whitney: Some of the trade people have been much more effective and knowledgeable about art than the cultural people.

Ms Creary: Exactly.

The Chairman: It's a big corporation. That's interesting. Thank you.

Ms Creary: I told Warren Coutts that I would mention this, because I was very impressed. When I went to Beijing in 1992, I was not impressed with the Canadian embassy's officials there. But in 1994, when I went back to Beijing, I was very impressed with the person in charge of cultural affairs, Richard King. He went out of his way. He knew as much as he could about publishing, per se. He took care of us, but he also took care of our partners in China, which is really very important. I appreciated that a lot. You don't get that very often.

The Chairman: Thank you.

Mr. Alcock.

Mr. Alcock: Mr. Peterson, I was interested in your comments about a WEB site. For a digital product, it's possible not just to display or to promote but also to sell it, electronically. Is that what you have in mind, or are you simply looking for something to showcase works right now?

Mr. Peterson: Basically, at this point, it's a promotion vehicle that includes video clips, samples of music, updated press releases, touring schedules that can be tied into government offices around the world, and new Canadian release information. In terms of actually downloading and selling a product, I don't see that as being one of the realistic goals at this point. Basically, this would be an instant information source and useful promotional tool.

Mr. Alcock: That's interesting. I know a number of the houses in different parts of the world are trying to develop the capacity to download and sell, and to be on demand, of course, is another aspect of that.

The problem domestically is the establishment of a secure transaction engine that allows you to track the purchase and get reimbursed for it. But it strikes me that it's going to produce some other issues as we do it internationally. As well, I wonder if some of the questions of providing capital and securing credit and such don't arise in that market. I don't know. It just occurred to me as you were talking about it.

Mr. Peterson: I see this incentive to be more of a promotion vehicle, but obviously the big picture is that this will be a reality and is in an experimental stage already, in terms of digital transmission and selling music through that method. That's inevitable, I think, but the way I see this particular program is that this is more of a promotion vehicle until the rest of the technology, copyright and payment issues have been resolved. At that point, I think, independents will have the option of wanting to sell their goods through that system, based on the market price that is available or is established.

You're right, it's going to happen. But at this point I see this as a promotion vehicle.

Mr. Alcock: Okay.

The Chairman: Mr. Penson.

Mr. Penson: I would like to ask Mr. Peterson a question to help me understand this neighbouring rights issue a little bit better.

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I'm sure you're aware the radio stations are putting a different philosophy forward. Can you tell me what the situation is in the United States in terms of neighbouring rights? Do artists have that protection in terms of royalty there?

Mr. Peterson: Not at this point. It's a European protection. Yes, radio is opposing this. Radio currently pays 3.2% of their income for performing rights, the use of all of the music they have. A neighbouring right would be a new cost to them, some percentage to be determined by the copyright board. Obviously, the opposition is that they feel they can't handle any additional payment.

I think the feeling of the copyright owners is that they certainly are able to handle another payment. That payment, for those who are not aware of how this neighbouring right system works, is that currently the performing right payment goes to the composer of the song and the music publisher of that song.

Radio does not pay a royalty to the copyright owner, whether that's a record company or a production company or, indeed, the artists themselves or the singer of that song. This neighbouring right would be a payment that would go to those two sources, the copyright owner and the artist who has performed the song. As an industry, we feel very strongly that there should be a payment there.

Mr. Penson: Can you tell me how it would work in terms of artists from the United States? Would they also get a royalty?

Mr. Peterson: They would get a royalty once they have neighbouring right legislation in place as well.

Mr. Penson: Suppose Canada moved without the United States moving in this area, the American artist being played on a Canadian radio station. Would the radio station have to pay a royalty for that American artist in the same way they would for a Canadian artist?

Mr. Peterson: It would be a blanket arrangement. Wherever the artist came from, there would be a blanket arrangement. At this point, the reciprocity would happen with the European organizations that collect that royalty. I think the feeling is inevitable that this will become legislation in the United States as well.

Eventually, everybody in the world will have this. At this point, Canada is behind.

Mr. Penson: The reason I'm pursuing this, and this seems to clarify it, is because I wondered whether we might be putting our Canadian artists at a disadvantage if you didn't have the Americans subject to the same kind of treatment.

My understanding is now, if Canada went ahead in this area without the United States doing so, if a Canadian radio station is playing an American artist versus a Canadian artist, they would have to pay a royalty to both artists.

Mr. Peterson: That's right.

Mr. Penson: Okay.

The Chairman: Thank you, Mr. Penson.

[Translation]

Mr. Gauthier, I listened very closely to what you said about Canada Council grants. You said that the three existing programs are all essential. One is provincial and the other two are federal, you say?

Mr. Gauthier: No. I'm not saying anything about the provincial programs here.

The Chairman: We're not asking you what you're getting from other sources.

Mr. Gauthier: I wouldn't want to be accused of spying or anything like that.

The Chairman: No. However I do have a supplementary question for you. Are the federal and provincial programs complementary? The committee would like to know. Is there any way of improving what we're doing?

Mr. Gauthier: Yes.

The Chairman: So, are they interdependent?

Mr. Gauthier: I'll make the committee happy, because I must say that in Quebec there's still no real export policy in publishing. For some 15 years now, the Canada Council and the Department of Canadian Heritage - I don't want to play politics here - have set up programs which have become extremely well designed and extremely well important.

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There has been a development. Leadership in publishing has been taken in hand by the federal government through the Canada Council, Heritage Canada and so forth and Quebec has always sort of just tagged along.

Since the appointment of the new minister who shall remain nameless, this leadership has been lost and financial support has been melting like snow in August which is why Quebec is now catching up in this sector of support to publishers.

The Chairman: Okay.

Mr. Gauthier: Those three programs are federal. Two come from Canadian heritage: the Export Marketing Assistance Program and the Foreign Rights Marketing Assistance Program. The third comes from the Canada Council in the form of grants for translation; $500,000 are still being paid for translation from French to English or English to French and another $200,000 for other languages.

The Chairman: Yes, but let's forget about the amounts because it's always a bit difficult...

Mr. Gauthier: It's because there was a matter of...

The Chairman: I'd like to know if the programs are complementary or if they try to outdo each other. If I got the message correctly, they are more interrelated thant competitive.

Mr. Gauthier: They are complementary.

The Chairman: That's not necessarily true in all areas, but it is at least in yours.

Mr. Gauthier: Yes. In any case, publishing is one area where the officials and other parties who have done the work have done it well. The cuts over the last two years were done a bit blindly, but there are real programs and we have an industry that's relatively healthy as compared to others today. However, it is an industry. Any cultural industry is fragile today because of market globalization.

The Chairman: Mrs. Creary, you spoke of the reimport or the import of Canadian writers' books printed in the United States or elsewhere. Is this a problem for the Canadian industry? To my understanding, according to Mr. Gauthier, it isn't for the Quebec industry, because a writer such as John Ralston Saul, for instance, who appeared before this committee, is published in France. He wrote Voltaire's Bastards: The Dictatorship of Reason in the West. This doesn't compete with Quebec, because in France, books are much more expensive than in Quebec. So if it's published in Quebec, there is no French competition. You are somewhat protected by the market.

I'd like to come back to my real question. Are you asking for a cultural exception in this area for your anglophone compatriots or do you think that if we create a truly North-American market, it will allow Canadian publishers to export to the United States, but it will also mean running the risk of exports to Canada?

That is the problem, in a way, that we must all deal with in all areas, no?

Mrs. Creary: My anglophone colleagues in Canada would very much like to export their books to the United States, where there's a market of 270 million people, but that isn't ahow things work. The fact is that they must transfer their rights to an American publishing house. That's how it works.

Even our best English-Canadian authors, such as Margaret Atwood, often keep their own copyright, and they have their own agents here who hand over those rights to the United States, France, Norway, Spain, etc.

What is unfortunate for my anglophone colleagues in Canada concerning books published in the United States by American publishing houses, in English of course, is that the American publisher washes its hands of them. The publisher says: "I'm not the one selling the book in Canada, it's my American distributor, and I don't have much control over that. I send my distributor a letter to tell him he can't sell." He distributes 50,000 titles. Something is lost in there.

We know very well that these people know what they're doing, but there must be some legislation and regulations to regulate it. If we don't use the Copyright Act, perhaps we might use customs.

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We must innovate and find solutions for them.

The Chairman: You say that we have an open market, if not by law then at least in fact, but their market is open neither by law nor in fact.

Mrs. Creary: The Americans traditionally refuse our products systematically at customs. Bertrand was just telling you the anecdote about Printed in Canada. Those are the rules of the game. Fortunately, I'm a lawyer. When they phoned us, at the customs, to tell us that 60,000 book-games had been stopped because the inscription Printed in Canada wasn't big enough, we were in a difficult position. Under which law could we act?

It took two days for them to answer me. There is no law concerning that. We were in order. Other companies bring back their products and the American company then says: "Too bad!" I don't have the products and I'm not paying." All this leads to problems.

The Chairman: The matter of brand as always been a problem for us.

Mr. Gauthier: The problem isn't the same for Quebec, but there is still a problem. Often our Quebec authors, after achieving some success, will publish directly in France and their books come back to be sold in Canada. In that case, the Quebec publisher loses out. There are many good Quebec authors - Anne Hébert, Michel Tremblay, of late Jacques Poulin - who publish directly in France. The books come back to Canada and they're very expensive, and we don't have the equivalent in Quebec publishing. In English Canada, there is often a Canadian edition and that edition competes with foreign editions. I think this matter can be settled better at customs than by using the cultural exception. If we made an exception, we'd also have to make it for Quebec.

[English]

The Chairman: Mr. Lastewka, do you have one last observation? Then we'll have to terminate.

Mr. Lastewka: I had two more, but that was one of them. I misunderstood what was said earlier, but I think it's clarified. We need to discuss that in committee some other time.

My other one was on the international translation grants. My understanding from what you've said is the way it works is the grants from Canada would go to a publisher in a foreign country who wanted to translate the book into that language. We'll use the Polish situation. If we wanted to do the translation and publishing in Canada and then just sell into that country, would we get the translation?

Ms Creary: As far as I know, I, as a Canadian publisher, have to have a contract with a Polish publisher for the translation of that book into Polish. Then the government has a look at that contract and says ``Oh, yes, it exists; it's true'' and a translator is hired.

The translator can be hired in Poland with the Polish company or it can be someone who lives in Canada, but the Canada Council International Translation Program shall pay that Polish publisher, who will in turn pay for the translation.

They may make an exception if the translator lives in Canada. That I don't know. I have never had that experience.

Mr. Lastewka: Mr. Chairman, on that one maybe the researchers can do some work with us and tell us the way it is supposed to operate. Then we'll be able to ask further questions from that.

Ms Creary: That research is done.

The Chairman: Thank you, Mr. Chairman of the Canada-Ukraine Parliamentary Association.

Some hon. members: Oh, oh.

The Chairman: On behalf of the members of the committee, I'd like to thank our panellists very much for having been willing to spend their valuable time with us. We appreciate that businesses of your size require your own personal, hands-on attention, and you're very good to have given up some of your time to come and spend it with us. We feel it's been a very enriching experience.

[Translation]

Thank you very much for appearing before us.

[English]

Members of the committee, we'll meet at 3:30 this afternoon to talk about the international financial institutions. We'll have with us Mr. Gordon Smith, the deputy minister, to tell us about the follow-up of that.

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I remind you that of course there will be a meeting on Thursday morning, which we will adjourn somewhat later than 10 a.m., but I will send you a notice about that.

Thank you very much. Until 3:30 p.m.