Proceedings of the Standing Senate Committee on
Foreign Affairs and International Trade
Issue 4 - Evidence, March 25, 2009
OTTAWA, Wednesday, March 25, 2009
The Standing Senate Committee on Foreign Affairs and International Trade met this day at 4:02 p.m. to review and report on the 2008 Legislative Review of Export Development Canada, tabled in the Senate on Tuesday, February 10, 2009.
Senator Consiglio DiNino (Chair) in the chair.
[Translation]
The Chair: We have quorum. I call the meeting to order. Welcome to the Standing Committee on Foreign Affairs and International Trade.
[English]
The committee is currently examining the document entitled The Legislative Review of Export Development Canada, December2008. As stated in the document:
...the objective of this Legislative Review is to assess how EDC is evolving, and should continue to evolve in the future, to address the competitive dynamics and demands of international trade on behalf of its stakeholders, and to make recommendations where appropriate, including possible changes to the ED Act.
Appearing before the committee today is Gerry Fedchun, President of the Automotive Parts Manufacturers' Association.
[Translation]
We will begin with opening remarks by Mr.Fedchun, and then we will move to questions from our committee members.
[English]
Gerry Fedchun, President, Automotive Parts Manufacturers' Association: I am pleased to be here. EDC has been helpful and we wanted to explain what it has been doing for us and what we think its mandate should be over the coming year in terms of this review.
Certainly, EDC is an evolving organization. I participated in the review process 10 years ago. At that time, I had recently come to the APMA. To show how things have changed, I appeared on the same day as John Roth, who at that time was Chief Executive Officer of Nortel, which was Canada's largest company by capitalization. As we all know, Nortel today is sadly in bankruptcy protection. Nortel is an example of how things change quickly around the world and in Canada.
The automotive industry has also changed dramatically since 1999. That was our best year for vehicle production and we made almost 3 million units that year. The Detroit Three — General Motors, Ford and Chrysler— have 75percent of the market in North America. Today, our volume in Canada is about 2.5 million. Four assembly plants have closed since then, while two more have opened. Our employment in the parts sector has gone from about 96,000 people to about 77,000 this year. Our value of production has gone from $30 billion to about $24 billion. There has been some contraction but we are still a viable industry and, over the long term, a prosperous one.
It is important to note that, of the vehicles we build in Canada, about 80percent are exported — mostly to the U.S. but also to Mexico and other jurisdictions. Of the parts we make as parts producers, about two-thirds of them are exported. Again, most of that export is to the U.S. but about $1 billion in parts is also exported to other countries.
The export of parts has grown over the years and EDC has been an essential part of that growth. Today, EDC has financings to the auto industry of over $900 million and about $330 million in credit insurance. Last year, they helped almost 600 automotive customers and we appreciate that help.
The automotive industry is global. We have global supply chains and we have what I call local supply chains but they are North America wide under the North American Free Trade Agreement, NAFTA. The most times we have recorded a part crossing the borders of Canada, the United States and Mexico before there is a finished vehicle is 18 times. However, it is not unusual for a part to cross those borders six or seven times before a vehicle arrives at the dealer lot from which it is sold.
This industry very much requires receivable insurance to ensure on an international basis that we receive payment. The industry also requires financing for our companies. Companies also need to be able to service their customers in the United States and Mexico, as well as in Canada and, in some cases, they may need to set up factories in those jurisdictions to remain globally competitive.
The growth is now in emerging markets. The long-term growth in traditional markets of North America, Western Europe and Japan is probably around 1percent; it depends on population growth and immigration. It is not likely that we will put many more cars in the driveway. In Canada, we already have about one car per driver and in the U.S., more than one car per driver. Therefore, there is only modest growth potential. However, in the emerging markets, it is not unusual to see only 80 cars per 1000 people. That potential for growth is huge.
To be globally competitive, Canadian parts suppliers need to be able to participate in those emerging markets and they need to be able to compete with other companies, both local and foreign, in those markets. The local companies are usually low-cost producers but usually lack technology and could use a good partner like a Canadian company. Foreign companies we compete with have high levels of technology and they are in the same boat we are in. As you probably know, they all have export credits from their countries as well. They are sophisticated. We need EDC to ensure we keep a level playing field with our competitors.
In the last three years, the APMA has led trade missions to Russia, India, China, Hungary, Slovakia, the Czech Republic and Japan and, over the last ten years, we have led trade missions to almost every country in the world that is a significant producer of vehicles and parts for them. EDC has generally participated in those trade missions and we need them to continue to participate.
In terms of EDC, they also have industry experts and market experts that can help us with what is happening in that country and help us to understand the particular market. That expertise would be difficult for us to have as individual companies, and they provide it on a group basis, and disseminate that information not only to the automotive industry but to other industries as well in terms of preparing a country analysis. Their assistance in this country analysis is invaluable. They publish this information, and it is available to other Canadian companies, especially to the small and medium enterprises, SMEs, or to the SMEs that do not have the ability to gather this information on their own.
It is important to note that our industry runs globally on just-in-time, JIT. That means that all inventory is in the truck between the customer and supplier. It also means that in terms of location of plants, companies need to be relatively close to their customers, and that will continue to be the case. In the growth markets, we have no choice but to set up factories in those markets if Canadian companies want a piece of the action in those emerging markets that I mentioned previously.
It is no secret that our industry has been battered by the recession. North American volumes in terms of production are down 55percent for the beginning of 2009. There is no respite for companies that have business with the new domestics. They are down between 25percent and 30percent. There is no safe harbour. It is worse and worser. There is no such word, but there is no nice place to be these days in the automotive industry.
I have to say this situation is where EDC has shone. The regular financial institutions have almost abandoned the automotive industry as a place to do business. Certainly, these institutions are not doing any new business. They may have retained existing business, but there is no new business to be had. EDC was the only significant institution with the appetite for a little more risk, and it was able to step in and give financing where other financial institutions did not.
The other part of EDC's work is in receivable insurance. This insurance is vital to the cash flow of exporting companies. We found that receivable insurance has dried up. It is either not available or at such rates that it is unaffordable on the open market. EDC has been one of the few places from which we have been able to obtain receivable insurance. Why is that? They operate under commercial principles, and they have the expertise on staff to evaluate risk. In my opinion, they evaluate that risk more accurately than other institutions. They also take a longer- term view of things than more traditional lenders, and maybe their shareholder is a little more patient.
The EDC's existing rules have served the auto industry well in terms of risk appetite, but in these times of difficulty, companies that are financially viable in normal times and financially viable in the long term are having difficulties meeting EDC's commercial terms in the short term. We believe that EDC should have a new category of lending available. It would not be a large portion of their financing, but a portion that needs to be expanded, and I would term this portion, ``patient capital.'' Patient capital is defined as capital that would be available to start-up or even established companies, where the companies are now running slow and taking time to generate capital. Patient capital is also available when there is a particular downturn or time when there are financial difficulties; there is a valley, the valley is ending and there is a viable long-term plan. This capital would not require onerous payment terms to start, and the repayment terms would start after a year or two. This capital would be something less than the Canada Account, which must go through Finance, but something at a higher risk level than EDC's normal commercial terms. This kind of money would require a change to the act or the regulations to make it available. However, we think it is necessary in the long term for the benefit not only of the automotive industry but other industries that are falling on medium hard times or are starting up into a new area that does not have a track record and, in the long-term view of Canadian society, needs to be financed in a better way.
We also think that EDC needs to be able to finance more companies domestically with a long-term view of export potential. In our case, almost everything we make for the automotive industry is exported, so it qualifies, but there are other cases where, at the moment, the industry looks like a domestic industry, but there is export potential. To develop, that industry needs financing, and we think it would be good if EDC had the ability to look at that industry as a potential export product, although it is not there yet, and be able to lend on that basis.
I will summarize by saying that we have found EDC to be helpful to our industry. EDC is a government system that runs, more or less, on commercial terms, but until now, it has been more patient. Probably, it also has a higher level of expertise than many of the financial institutions, and we would like to see EDC continue in terms of its short-term lending and the receivable insurance. It has been good at that lending, and we want to ensure it continues. We do not see where it has unduly prejudiced other financial institutions. EDC has come up with great ways of helping the industry when others have not stepped in. I do not want to see its mandate decreased, because without its mandate, in present circumstances, our industry would be in a lot worse circumstances than it finds itself at the present time.
The Chair: Before I invite my colleagues to ask questions, the recent budget implementation bill changed some of the authority and some of the available capital for EDC. They increased both. If you have had an opportunity to assess that or review that, I know that colleagues on the committee would be interested in your comments.
Mr.Fedchun: From what I can see of the budget bill, and there is not a lot of detail, contingent liability has been increased. That translates, to me as a non-financial person, into more ability to provide more receivables insurance. I think that insurance is absolutely essential, because receivable insurance is required in today's environment when customer viability is much more questionable than it was in the past. SMEs, especially, need some assurance that they will be paid. The receivables insurance is important to small companies. They cannot afford to bet the farm on one or two companies without that kind of receivable insurance to ensure their customer does not drag them under, and yet it may be a great opportunity for them. Increasing contingency insurance, or liability, as they call it, is a good thing.
I also notice that they have increased the Canada Account sectionthat they can use. We think that increase is important. We think we will need to draw on that account this year. Automobiles or vehicles are the largest consumer expenditure other than homes, and people do not buy new homes often, but they buy new vehicles relatively often. Consumer confidence is as low as it has been in the last generation or two — some say 28 years, some 35. I do not know what the number is, but it is a long time. I did not have grey hair the last time consumer confidence was this low. Because of that lack of confidence, we will probably have to draw on Canada Account money to bring this industry through the hard times of this year. We see things improving by next year. The world economy has put trillions of dollars into the system to increase credit liquidity, and they are taking other measures as well, and they will start to have traction. When they begin to have traction, people will have a brighter view of life and we will see vehicle sales increase again.
The Chair: Thank you, Mr.Fedchun. I will invite our colleagues to ask questions.
[Translation]
Senator Fortin-Duplessis: Mr.Fedchun, in the letter that you sent last Octoberto the Minister of Finance and his Ontario counterpart, you expressed the view that companies urgently require money and not tax cuts, as most of them do not have any taxable income. You also said that the industry needed four things to weather the storm. First, short- term and low-interest loans, a package of distinct loans along the lines, proportionally, of the $25-billion U.S. program launched in Washington to assist automobile manufacturers so that they can start to build fuel-efficient vehicles, tax credits for scientific research and expenditures linked to experimental development to enable companies to have access to public funds even if they are not making a profit, and simplified regulations to make it easier for SMEs to obtain aid.
My question is as follows: Are you satisfied to date with the responses you have received from the federal and provincial governments?
[English]
Mr.Fedchun: First the loans: we are looking for the loans to come together still, and we are working through providing loans directly to suppliers. That has not happened yet. Also, the loans to our customers, the assemblers, have not been completed either so we expect that to come together.
In terms of the $25 billion that the U.S. companies have received, we have not received any of that money yet, but that issue is probably on the back burner now because we are more concerned with making it through this year and then we will look to that money over the longer term.
We have not heard yet about the tax credits but, again, that proposition is longer-term. Tax credits are great, but we need to have refundable tax credits in these hard times because tax credits work only when we have taxable income. We need to look at changing that. I understand that proposition is because the automotive industry is not the only one affected. It may be a bit rich for the automotive industry, but that is something to look at in the longer term.
The Scientific Research and Experimental Development, SR&ED, Tax Credit Program is a good system. It is not really tapped by non-profitable companies. These companies are good long-term companies, but people are not making that much money over the short term. That is one of the difficulties.
Senator Grafstein: Mr.Fedchun, about the size of the marketplace, of the $11 billion that your industry exported last year, 2008, where did those products go?
Mr.Fedchun: Most of the exports went to the United States.
Senator Grafstein: What is the percentage?
Mr.Fedchun: Approximately $1 billion did not go to the United States.
Senator Grafstein: Where did those exports go?
Mr.Fedchun: About three quarters went to Mexico and the rest went to Europe and to Japan mostly.
Senator Grafstein: Would that be a small portion that went to Japan and Europe?
Mr.Fedchun: That is correct.
Senator Grafstein: When we look at the auto deal, which impacts your industry directly, there is something asymmetrical about it. I use Toyota as an example, which has exceeded General Motors as the largest manufacturer in the world. My understanding is that two thirds of the automobiles of Toyota manufacturers are imported completely from Japan or someplace else; is that correct?
Mr.Fedchun: No.
Senator Grafstein: What percentage of Toyota cars sold in North America is manufactured in North America?
Mr.Fedchun: I have not looked at that issue because I am a parts guy, but about two thirds of what they sell in North America is manufactured in North America.
Senator Grafstein: Then one third is not?
Mr.Fedchun: About one third is not.
Senator Grafstein: We do not have reciprocity in their marketplace, though, do we?
Mr.Fedchun: No, we sell relatively little to Japan.
Senator Grafstein: Is it the same for Honda? What percentage of the Honda cars come from Korea?
Mr.Fedchun: The majority of units are made in North America for the North American market, but I do not know the numbers.
Senator Grafstein: Can you get that number for us?
Mr.Fedchun: Yes, I can get it for you. It is available. I do not know the number myself.
Senator Grafstein: In the last several weeks, we have heard that India, Tata Motors, is manufacturing a small smart car that will retail in the United States for about $2,000. The first week in January, I believe, we had an announcement that a battery company in China, BDY Company, is manufacturing a battery-driven car, which will retail somewhere between $2,000 and $4,000 U.S.
What is your industry's response to these new threats to our domestic marketplace in terms of jobs in our domestic marketplace?
Mr.Fedchun: I saw the Nano in India. It is made by Tata Motors. They are aiming to sell the Nano for the equivalent of 100,000 rupees. The amount you quoted is probably what it will sell for in India. They said once all the taxes are included, the price will be approximately $2,300 U.S. in India. That car cannot be sold in North America or in Western Europe because it does not meet the safety standards. I have no idea what it will sell for once it is qualified for crash standards and other things that we require here, but it will be substantially more than what it is selling for in the Indian market.
The Chair: Senator Grafstein, for your information, I had an opportunity last night to meet with the Canadian representative of Tata and I asked him that question. He said that, at this point, it is difficult to say but they anticipate the car will come into the North American market at about $6,000. I add that little bit of wisdom.
Senator Grafstein: I believe you are confirming my point that the car will seriously undermine the parts industry in terms of its cost effectiveness unless we have some sort of plan to deal with it. Does your industry have a plan to deal with this car? It is a year or two away, but it is coming.
Mr.Fedchun: That is why I was in India. I led a trade mission, in which EDC participated, to India to look at setting up manufacturing operations to be part of the Indian market. The vast majority of those vehicles will be consumed in India and there will be some export potential for some of them. The industry is very much a global one. We have to be able to participate in all of it.
Senator Grafstein: They will dump the cars here.
Mr.Fedchun: We would not allow that. There are rules that help us avoid that; that is for sure. The Chinese tried to do that to us and we went to the World Trade Organization, WTO. It took us three years to win that battle, but we submitted the complaint and on the auto parts we finally won. I wish there would be some way to speed up that process. The process does work but it is a little slow.
Senator Grafstein: The WTO and the World Bank have made an analysis of the current complaints, a complete report, about the protectionist measures in the United States and in Canada with respect to assistance to the automobile vehicle industry, which obviously assists your industry directly. The argument is that the industry is protectionist; it is contrary to the rules of the World Trade Organization and others.
You are now asking for short-term loans. By the way, I do not quarrel with that request. What is your response to the complaints that are being made that Canada, in this industry, is turning protectionist. I do not suggest we are alone in this protectionism. No one has clean hands. Europe and others are doing it. The United States is certainly doing it, based on the express provisions in their agreement for the automobile industry. What is your response to that argument?
Mr.Fedchun: Whenever a big sectionof the economy is in jeopardy, I think even the WTO allows you to take emergency measures to ensure your economy does not collapse. I believe this is a measure.
People must understand that, if General Motors collapsed, it would take a number of suppliers with it. If those suppliers collapsed, it would take Honda, Toyota, Nissan and everyone who makes a car down with it. It would be months before the automotive industry in North America is running again, and it would take months to find alternative suppliers for the ones left standing. It would be an absolutely horrendous thing for the economy in North America.
Senator Grafstein: I understand that point. However, I take it the issue is, you think there is an exception to the rulewith respect to the provisions dealing with both direct and indirect tariff barriers. Is the answer that this problem is short-term and there are exemptions or provisions that exempt Canada and the United States — let us talk about Canada — from the rules?
Mr.Fedchun: As I understand it, everyone else is doing it. What can I say? I am not an expert on that subject.
Senator Grafstein: Everyone might be breaking the rules, according to the studies. Perhaps you can give us your industry's official position so we can have it on the record.
I think this question goes to the heart of EDC's mandate which is, how do we appropriately finance sectors of our economy that are detrimentally affected during a downturn? Chair, I think the answer is crucial for us because it goes to the heart of our position on other matters.
Mr.Fedchun: I will see if I can find out.
The Chair: Mr.Fedchun, send any information to the attention of the clerk and we will distribute it to all members.
Senator Wallin: I have a couple of points of clarification that are interesting for the debate. My understanding of the Tata Nano is that, regardless of a $6,000 price tag in terms of manufacturing, that car would never be available in this market because of environmental and safety regulations.
Mr.Fedchun: The way it is constructed now it would not be. There are an awful lot of rules in Canada in terms of a vehicle ensuring qualification. With respect to the Smart car, it took three years and several millions of dollars to qualify the Smart car in Canada, even though it was already qualified in Western Europe. They have to crash 25 of them, I believe, among other things. Also, our emission standards are strict.
I will not call them ``non-tariff barriers'' but other countries have standards of safety that are inconceivably inadequate, according to Canada.
I was in India. Mr.Tata was right about this matter. Often, one will see a fellow on his motorcycle with his son on the handle bars and his wife and two kids behind him. Mr.Tata almost ran such a group over, so he said he had to do something to provide more protection than people have on an open motorcycle. That market is what that vehicle is aimed at.
In reality, I do not think most Canadians would want to buy this car and drive in it. They are used to something better.
Senator Wallin: Yes, never mind the issues with snow. I want a point of clarification. EDC has given about $4.2 billion to the auto sector, $3.2 billion of which was insurance for receivables.
What does that gap mean to you? How much of it is represented by the auto makers not paying — or delay in paying — versus the drop in demand itself?
Mr.Fedchun: Auto makers have not been bad in paying. In our industry, we are paid on the second of the month for what we deliver the previous month. Therefore, on April2 we will be paid for February.
Senator Wallin: There are not big delays, then?
Mr.Fedchun: They have been good at keeping to the standards. We can live with that situation.
Senator Wallin: Demand is pushing it?
Mr.Fedchun: Yes, the factories have been running at half production volume and that has been the killer.
Senator Andreychuk: I want to change the subject matter a little. We are talking about the economic crisis, the downturn and the demand. However, in the marketplace, there is also a debate about the types of cars being built.
To what extent have you been involved with the industry to foresee the difficulties coming in the structure of the auto industry here, as opposed to what the future will demand? Irrespective of the economic crisis, another crisis was looming. Can you comment on that subject?
Mr.Fedchun: Yes, I can. First, there are different-sized vehicles. Not everyone can fit into a smaller vehicle. The best example I have, personally, is my brother in Calgary with his five children. He will not be running around in a little car. He needs at least a minivan and that is what he owns because it has seven seats. When they go farther, they need something bigger and so he has a bigger vehicle for those times.
One must look at the total size of vehicle segments for the different parts. We are well situated for that. The minivan plant in Windsor makes good minivans that are more fuel efficient than they were before because they are running at higher levels of efficiency. The Ford plant in Oakville makes a CUV, a cross-over utility vehicle, which is our substitute for the sport utility vehicle, SUV. The CUV is 25percent more fuel efficient than what it replaced, yet it is the same size because people need the same size of vehicle to do the things they do. We make the Malibu in Oshawa and it is a mid-sized car replacing a full-sized car. Again, the Malibu is more fuel efficient than the others. The RAV4 plant that opened in Woodstock is a smaller CUV.
I will clarify those terms. An SUV is a truck-based platform. It is much heavier for people towing and camping. The CUV is a car-based platform. Its space frame is several hundred pounds lighter, so it is more fuel efficient.
There are always market segments for these various sizes of vehicles. We make smaller vehicles, as well, such as Civic, the Matrix and the Corolla. There is a good variety of vehicles that will always maintain a certain portion of market share. We do not have any dinosaurs being made in Canada. I am not concerned about maintaining market share. We are in good shape.
Senator Andreychuk: How is the North American market? You said that Canada is in good shape but we are tied into the United States.
Mr.Fedchun: The vehicles we build are mostly sold in the U.S., and the demand for those vehicles has been maintained reasonably well in terms of percentage. Now, the demand for everything has gone down. However, in terms of percentage shifts, we are not like the plants that make the Ford Explorer, which are in trouble. Frankly, the truck plant in Oshawa is closing because truck production has decreased.
That is part of the market and we adjust. That production is over and done with. Come next month, that plant is closed and we will live with that situation.
In terms of what is left open, we are in reasonably good shape.
Senator Andreychuk: If I can summarize, you are saying that you think the industry here in Canada is positioned well, providing we attack the economic crisis that has led to the decrease in demand?
Mr.Fedchun: Absolutely; also, I think parts suppliers are reasonably well positioned but we need to be more innovative because there is lots of demand from the assemblers to make lighter parts that do more things, that are smarter and that can provide better fuel economy for the vehicle or fewer emissions. We need to stay in that market, and we need to ensure we remain innovative. Innovation is the key to the long-term survival of the suppliers to the assemblers.
Senator Andreychuk: Why is there so much controversy on television and in the newspapers indicating the industry itself is part of the problem, as opposed to the economic crisis? You seem to say the industry has been attacking their difficulties and has been restructuring. Why is there still such a rap on the industry in the eyes of so many people?
Mr.Fedchun: There is a lot of misinformation. People's perception of today is based on five- to ten-year-old information. They say General Motors does not make good cars. Oshawa was car of the year last year, and the year before that they received the J.D. Power and Associates Founder's Award. They have received wonderful awards for quality over the last three years, and people say that is not what they want because they are misinformed. They say they remember their 1992 car from General Motors was not good. Maybe it was not good, but this is 2009. One of the experts said that perceptions take 10 years to 15 years to change. I do not disagree with that statement. Even though we are performing well as an industry, and all of them are performing well, we have to take our lumps from the fact that, at one point in time, we were not performing well, and it will take a long time for people to get over that.
For example, the J.D. Power awards came out last week, and the minivan plant in Windsor won best quality vehicle in North America in its category. In consumer reports, which are consumers' opinions, it came third. The objective analysis says it is first, but people's perception is that it is not, and we need to deal with that perception.
The Chair: I want to go back to my comment about Budget 2009. I believe you were quoted as saying that the receivables insurance was the big ask, the big request, to the politicians when they were preparing the budget. Why did it become such a big issue?
Mr.Fedchun: The financial institutions had stopped issuing receivables insurance, so we had no place to turn for that insurance at a reasonable rate. I do not blame the Canadian banks. A number of large, non-bank institutions also gave receivables insurance, such as GE Capital. A number of semi-banks, or whatever you call them, withdrew completely from the Canadian market. They closed their offices. They closed up shop and left. We needed a replacement for that insurance, and EDC was the one place it was available, and we feel it is in the long-term interest of the industry to have that insurance.
The Chair: It was not so much that EDC offered receivables insurance at a more favourable rate; you are saying that the market was not there at all to provide those services?
Mr.Fedchun: The market dried up.
The Chair: My other question deals with a change in the 2009 budget, which is the entry by EDC into the domestic market. I understand your organization was in favour of that entry. How has it helped you? How does that entry improve the opportunities for your new members?
Mr.Fedchun: EDC has good expertise in the automotive industry. Some people needed financing, and their company was not involved in the export side of the business, yet EDC knew they were a good risk but said they could not lend because the company was outside their mandate. There are good companies that are not on the export side of the business now, but in time, because of the nature of our industry, they will end up on the export side. As they become bigger, they will have no choice but to globalize to stay competitive. In the long term, they must grow and globalize. They have no choice. The Canadian market is not big enough for a company as it grows. I do not know what the number is, but if it grows to about $400 million in sales annually, they will be an export driven company because the market is not big enough for them after that size. That is where I think EDC can help companies make that transition from a domestic company to an export company. I do not think EDC is allowed to lend to those companies under the current rules.
The Chair: The EDC has competitors. They are private or non-governmental companies. Does your industry use those other sources for EDC-type services?
Mr.Fedchun: As I understand it, yes. EDC has consortiums with various companies where EDC is not always the lead bank. EDC is involved in the financing of various receivables or financing of the company and its working capital. They participate in various parts of that financing.
The Chair: EDC does this, but do members of your association seek out the services of the private insurers and those who offer services similar to EDC, or is it only done through EDC and their participation: joint ventures and so forth?
Mr.Fedchun: In normal times, members go through all of that process, and we have been good customers of various financial institutions in Canada. Those sources of financing have largely dried up over the last year, so EDC has become one of the few places where capital has been available. That situation is a reality of the recession.
The Chair: Do you see the changes as positive in Budget 2009 to EDC's authorities and capital base, and do you feel they will help the organizations or the corporations through these difficult times?
Mr.Fedchun: Absolutely; those changes to the budget to give EDC more authority and more ability to finance have been helpful to our industry and probably to manufacturers as a whole to come through this recession. We do not see this difficulty as long-term. By this time next year, things will look a lot better. That is the economists' view, and that is our view. Coming through this year is tough.
Senator Grafstein: As a point of information, my understanding is, and the chairman can correct me if I am wrong, that we passed in the budget implementation bill not only an increase to the capital of the bank but also to its terms of reference to include domestic as well as international companies. Eric Siegel of EDC and others appeared before the committee to explain the rationale for the change, which is exactly your rationale, to prepare Canadian companies domestically to move towards an export potential. That bill has been passed. Am I correct in that understanding, chair?
The Chair: For clarification, do you mean EDC? You said ``bank.''
Senator Grafstein: Yes, I refer to EDC. My understanding is that bill has been passed, so you can go after them as soon as possible if you feel you have customers for them. We had that discussion, and the bill has been passed.
Mr.Fedchun: I thought the chair was asking if I was in favour of that change, and the answer is yes.
Senator Grafstein: You indicated earlier that there was some question as to whether the export bank now has the mandate. It does have the mandate. Go to the first ATM and see what you can get.
The Chair: Senator Grafstein is saying that we have set money aside to help the industry. If you have not used it yet, please do so, because we want to save jobs. Is that correct?
Senator Grafstein: Yes.
Senator Mahovlich: When did the shift in demand occur for more fuel efficient cars? What year was that shift?
Mr.Fedchun: I cannot say it has been any particular year.
Senator Mahovlich: Did it start 10 years ago?
Mr.Fedchun: It has been happening for some time. The big demand was when the price of gas hit a dollar a litre. Up to that point in time, there was not a huge demand.
Senator Mahovlich: Cars like Kia and Hyundai recently came on the market, and I see a lot of them in Toronto. They are fuel efficient, good quality, cheaper and still provide safety. They are all over the place. How did we ever lose that market?
Mr.Fedchun: We in North America have not been in the small car market. We make Corollas and Civics, but they are still decent sized cars, bigger than the Kias you see running around. Canadians buy fuel efficient vehicles but are not big on the A bodies, the really small ones. These cars do not do well in snow, so there are relatively few of them around. We like to buy something big enough to fit four people into it. We tend to have only one vehicle for the family, as opposed to in the U.S. where they have many vehicles in the driveway. They will have a little one, a medium-sized one and a big one to tow their boat.
Senator Mahovlich: You were talking about your brother's family with an SUV and two large vans. What would happen if they bought two smaller cars instead of a huge van?
Mr.Fedchun: Then both he and his wife would end up driving around all the time. Families do not like to that.
Senator Mahovlich: They do not like to be apart.
Mr.Fedchun: Yes, they like to have everyone is one vehicle. That is why the minivan plant does so well. You can get seven people into the minivan. Either the mother or father is driving. They have more control over the children.
Senator Stollery: The reality is that every car you see has only one person in it and that is the driver. That is what happens in Toronto, anyway.
Senator Mahovlich: Will it come to the point where, if people want to go north, they have to go with five people in the car? Do you see that situation in the future?
Mr.Fedchun: We see that situation now in Toronto. We have high density lanes that I use all the time. People cannot drive in those lanes unless they have two people in the car. The province could change that to three or four at any time they want. The lanes are there, they are marked and they are high-vehicle capacity lanes only. I can see that as a trend over a period of time to be more efficient.
When people do not have a lot of money, they need a vehicle to take the whole family. However, when they go to work they do not have a second vehicle. In large cities like Toronto, Vancouver and Montreal, huge numbers of people use transit but when we go out of those large centres into places like Regina and Winnipeg, the transit system is not wonderful. It is adequate but not wonderful. Not as many people use transit. We do not have the density of population. It is called mass transit and we do not have mass. In our smaller centres, and that is most places, I think we will still have some kind of personal transportation.
There are trends toward making these vehicles lighter and more fuel efficient, with less consumption of energy. The Volt that GM is bringing out is an all-electric vehicle. It will go 64 kilometres before it needs to be plugged in again. The average commute is only 50 kilometres. The vast majority of people who will buy a Volt will never buy gasoline for it most of the time although it has a gasoline engine that keeps it running when it is needed.
Those kinds of trends are happening. Are vehicles becoming smaller: yes. Are we moving to electrification of the vehicle: yes, absolutely. That is where the industry is going. A hybrid is basically an electric motor and a gasoline engine to recharge the battery, which is a trend that will continue.
Even the use of diesel in larger vehicles burns 30percent less carbon than gas. Without going into the chemistry, there are fewer carbon molecules in diesel so fewer greenhouse gases are created in the use of diesel than in the use of gasoline.
Senator Mahovlich: I do not like the smell of diesel.
Mr.Fedchun: That is old technology. Brand new diesel does not smell. Take a brand new diesel vehicle, such as a Jeep Liberty, and you will not smell the diesel. One reason it smelled in the old days, which is the other thing that is federal, is because we used to have high-sulphur diesel, 300 parts per million of sulphur, and now it is down to 15 parts per million. If they use low sulphur diesel in an engine designed for square vehicles, there is no odour or noise. The diesel vehicles rattled like crazy with the 20 to 1 compression ratio. The top head of the engine rattled like crazy because of all the compression. The brand new diesel vehicles built now do not stink and they are not noisy. That is new technology compared to old technology.
Senator Mahovlich: I will talk to my wife about one.
The Chair: Mr.Fedchun, thank you for your testimony. On behalf of all our colleagues, we invite you not only to submit the information you have been asked for but if you think of something that you want to enlighten us with, and some additional comments, include it in your letter, send it to our clerk and we will pass it on to our members and ensure it goes into the testimony so that it can be reflected if appropriate in the report we will make. Thank you kindly.
Senator Dawson: Before we move to the next witness, I want to be sure that my understanding is correct. Is this the last official meeting?
The Chair: On this particular subject matter, yes it is.
Senator Dawson: I know we are not televised, but I want to be sure that people know who have come before us, as well as people who have not, that if they want to submit written proposals, can we accept their comments until next week?
The Chair: Absolutely.
Senator Dawson: I want it to be on the record that we encourage people who wanted to come but could not to write written proposals because we are finishing the hearings.
The Chair: We will introduce the proposals as testimony and circulate them to all the members so they are official and then their opinion, if appropriate, can be reflected in the report.
Our second witness this evening is Denis Bélisle from Dessau Inc. Dessau is an engineering consulting firm headquartered in Canada. The firm currently has 3,800 employees.
[Translation]
Mr.Bélisle, welcome to the Senate. We will begin with your opening remarks and then committee members will have questions for you. You have the floor.
J. Denis Bélisle, Chairman of the Board, Dessau International: Mr.Chairman, thank you for the opportunity to appear before you. My remarks will be brief and focused. I am speaking as a firm that already uses EDC services and that truly needs EDC to continue expanding.
My remarks will focus on four points: first, EDC and Dessau; second, increased international competition; third, a suggestion copied from an EDC competitor that I would like to leave with you; and fourth, the integrated approach we need, in my view, if we want to do better on foreign markets.
On Dessau, first of all, allow me to correct a small mistake. The company has 4,000 employees. That is rather large for an engineering consulting firm.
Dessau was founded in 1957 and offers engineering consulting services as well as construction services, since last year.
We have offices in 35 Canadian cities and abroad, primarily in the Maghreb region, Central America, Latin America and the West Indies.
By virtue of our size, over 4,000 employees, for some time now we have been forced to turn to global markets to continue expanding. You can be present to a certain extent in Canada, however the time had come for us to expand abroad. EDC support is essential for us in that context.
We currently have some $35 million in letter of credit insurance with EDC. Over the past five years, we have had $250 million in sovereign loan guarantees. We have also received approximately $75 million in performance bonds for construction contracts.
Our relationship with EDC has always been excellent. We consider the organization highly competent, very professional, highly qualified, and responsive to private-sector requirements. Despite all of the respect we have for EDC, in the future, we will have to do even better if we want to keep our foreign markets. We will need to be more aggressive, more flexible, more present and more creative to beat our competitors, especially the ones in emerging countries.
International competition has heated up considerably and the massive entry of China, India and Brazil into developing countries has altered the landscape. They are taking very impressive steps to set up for the long term in African, Asian and Latin American markets. They are seriously threatening Canadian presence in these markets. We need to get off the beaten path, do more and better, otherwise as Canadians, we will be out of these very important markets.
Opening EDC offices abroad is a step in this direction, and hopefully there will be many more. Competition among export support agencies has become very fierce. Furthermore, we should not hesitate to copy our competitors when they do something good.
As I indicated earlier, the costs of business development abroad have become so high that one of EDC's competitors, COFACE, the French agency, has developed business promotion insurance. Firms that want to do business abroad and that have an idea of the short-term costs for establishing themselves in these markets can obtain insurance from COFACE. If their efforts do not bear fruit, COFACE reimburses 80percent of the expenses incurred. Of course, conditions must be respected and insurance premiums paid. This approach enables our French competitors to go farther than we can in their efforts to penetrate foreign markets.
EDC does not have a similar tool. There is only one Canadian government program that is somewhat similar: CIDA's Industrial Cooperation Program, under its cost sharing of feasibility studies for large public infrastructure projects in developing countries. This program that is so useful and highly appreciated by Canadian engineering consulting firms is currently the target of concerted efforts to abolish it. In the case of Dessau, we excel in developing countries. This program is very useful for us. I will come back to that in a moment.
In light of this increased competition and almost exorbitant cost of promoting businesses abroad, I have the impression something must be done. What? I do not claim to know the answer. I think that part of the answer lies in greater cooperation between the private sector in Canada and EDC, as well as among the various federal agencies that provide export support. The answer also lies in more specific targeting and a longer-term approach for these markets, a bit like our competitors do, perhaps more focused since our means are more limited than those of our competitors in China, India and Brazil.
Despite widespread agreement on the value of cooperation, more could be done. We claim to be doing a lot, but we are doing less than we could or should be. I remember my years in government, I worked there for a while. Based on the discussions I have had, I do not think things have changed. We must go farther. Allow me to go back to CIDA's industrial cooperation program to explain my remarks.
I have heard that the CIDA program may move. This program enables firms like ours to discover opportunities for projects abroad. As long as we believe a project is serious, we are more than prepared to share the costs of a feasibility study and to subsequently turn it over to the government of a developing country. They have a lot to do and they need arguments in order to borrow from development banks, EDC, or other institutions. Moreover, they are often ill- equipped to prepare these requests. Receiving a $500,000 feasibility study free of charge from a Canadian firm puts Canada in their good books.
This program, combined with the capacity for CCC to sign government-to-government contracts, with EDC's loan and insurance activities, and with commercial intelligence available from Canadian trade officers, enables us to identify large-scale projects and to offer developing countries attractive Canadian ``packages'', before their funding is finalized by development banks.
At a time when so many developing countries are preparing to invest massively in infrastructure development, would it not be appropriate for Canada to find an integrated way to involve these programs and satellite programs to their full potential?
Moreover, EDC demands serious environmental studies, and I think it is EDC's right to do that. However, the cost of that is very high, and the Industrial Cooperation Program is along the same lines. So we can begin these studies and then take them a step farther when it comes time to present something to EDC.
In conclusion, at a time when developing countries are preparing to spend massive amounts to upgrade or build for the first time infrastructure that will help them develop their economies, I wonder if it is not time to bring together the people I mentioned, EDC, CCC, the Industrial Cooperation Program, trade commissioners and firms to look at how we can achieve more cooperation and have a more significant impact on the markets we are trying to penetrate.
While what I am saying does not affect EDC's act of incorporation in any way, we wanted to appear before you to express our respect for EDC and the ever-increasing importance the corporation will have for us in the years to come, and to offer you the suggestions I have provided. Since my notes were prepared in French, I stuck to my first language. Of course I will be pleased to answer questions in the language of Shakespeare.
Senator Dawson: Thank you for your presentation. As you know, our committee studied Africa some years ago and produced a comprehensive report. It is very clear, for example, that the Chinese, among others, are competitors who were not on the radar screen a few years ago and who may well be our competitors for many years to come, and that creativity is their strong suit.
It is clear that the constraints we have imposed on our institutions and firms prevent us from doing what they are doing, but joint action may certainly help us ensure that Canada is in a position to deal with them.
I would like to use a concrete example like the Dominican Republic. How did the partnership between you and EDC unfold on the Guajimia Basin project?
Mr.Bélisle: With pleasure, Senator Dawson. A feasibility study like the one I just mentioned costs CIDA approximately $400,000 and our firm about $200,000. That study enabled us to develop an idea that the President of the Dominican Republic had in mind for water purification in the Santo Domingo region. In fact, many tourists were disgusted to see how dirty the water was. Canals overflowed regularly and people threw their garbage into them. There were a host of problems and the drinking water was contaminated.
The Dominicans greatly appreciated the study we conducted, starting with the President who asked us where funding for this project could come from. We went right to EDC and organized funding for a $100 million project. This project is underway and has almost been completed.
For starters, CIDA was reimbursed, as that is one of the rules of this program. If a project can be completed, CIDA is reimbursed and is very happy. The Canadian firms were able to get more involved than they could have if the project had been done by our European or Chinese competitors, and we are currently negotiating the second phase of the same project that may run between $125 million and $150 million.
That is a case where we were able to come together, but that does not happen often. When the ball is in our court, we do not hesitate, we come running. Now, more so than before, especially in countries that have EDC representatives, between the EDC representative and the trade commissioner, I do not think these people will be able to avoid talking to each other when they are in Lima, Peru, because there are fewer Canadians there than here. They will get to know and respect each other. Then it will be time for others to get involved. That project illustrates the kind of cooperation that I think should exist systematically.
Senator Dawson: CIDA traditionally focuses more on the social side, rather than the economic development side of things, if I may put it that way. Are you recommending that industrial cooperation be taken away from CIDA and sent to EDC or the Department of International Trade? Do you have a specific recommendation?
Mr.Bélisle: Yes.
Senator Dawson: The committee has expressed some reservations about CIDA in the area of competitiveness.
Mr.Bélisle: There is absolutely no doubt that I think this program must be moved from where it is. I have heard that is what has been suggested. I do not think EDC has shown an interest in the program, and International Trade has. It would be definitely better off there. In my view, it could also go to CCC, but International Trade is the best place for it.
Studies are under way and in passing, tomorrow I will be appearing at a CIDA committee that will be in Montreal and that is trying to structure the program before proceeding. The background documents prepared by CIDA, which accompanied the invitation which was received at the last minute, propose abolishing the part of the program dealing with feasibility studies. I think that would be a big mistake.
Senator Fortin-Duplessis: I would like to congratulate you on your firm's success. It is always nice to hear from a witness who employs 4,000 people. You will be surprised by the question I am going to ask you, because personally, I am concerned with the issue of human rights. I would like to hear your views on human rights and EDC.
The export credit agencies are part of government machinery. In fact, EDC is specifically identified in the Export Development Act as a government agency. This legal link to the state has considerable importance in terms of international law.
Concretely, that means that states have a legal responsibility for the operations of their export credit agencies. As a result, they must ensure that they do not violate any of their obligations through these agencies, and that obviously includes human rights.
As regards EDC, Canada lacks legal provisions dealing with human rights. I am not sure if you are familiar with the famous report on EDC, but there is no mention of human rights in the Export Development Act, except for some vague references to the principle of corporate social responsibility.
Personally, I think they are lacking transparency and not publicly disclosing their criteria. Some reports, including the Halifax Initiative report, mentioned it being very obscure.
In your opinion, should EDC support projects in countries that violate human rights? Do you not think that such obligations should be specifically entrenched in the Export Development Act? Can you tell us to what extent Dessau's recent projects in the Dominican Republic or elsewhere were subject to the application of these principles on social responsibility?
I know too that Dessau has significant interests in Algeria. Are you required to respect human rights or are you free to work in countries that do not respect those rights? This concerns me.
Mr.Bélisle: It is not easy to answer that question. Quite honestly, I will give you my opinion on Dessau, which I am more familiar with, and the EDC, which I am less familiar with.
It is a question of optimum dosage. First, with regard to Dessau, we are not working in every country in the world, not really because of human rights but because of the size of our company. We are very targeted in what we do. We have picked a number of countries, not very many, less than 10, because we feel that by targeting our efforts, we have a better chance of penetrating the market.
Of those countries, including the two you mentioned, we probably have the greatest presence in Algeria at this time.
We are in the Dominican Republic, Chile, Peru, and we have a significant presence in Central America.
In those countries our code of ethics is to respect not only human rights but also the environment and social measures, to encourage local governments to work to that end to the extent where the projects that we want to develop can help do so.
I must say honestly that we are not an NGO, running around the world trying to right wrongs. It is important to be extremely careful when I say that it is a matter of dosage. We must not go to extremes.
The CIDA program that I was telling you about stresses that. The scope of the environmental studies being required, in terms of the feasibility and the social impact, is so extensive that often countries tell us that they would like to have our feasibility studies, because they are extremely useful in allowing them to borrow, and they feel that the importance we give to social issues, for example, during a project is out of proportion. First they want to know whether the project is technically feasible and commercially so, and they are asking us to also indicate where we will need to pay a lot of attention in terms of a potential impact on those other levels.
They want to know, first and foremost, if they are making a mistake in wanting to develop a project or not. For example, some years ago, when we were undertaking a project in the Dominican Republic, the requirements were not as great.
Despite this, we included an environmental chapter in our project, because we were working in an area where it was essential to ensure that we would not be harming the environment. We tried to resolve an environmental problem while ensuring that we were not creating another. We are very careful about this.
With regard to social measures, we were clearly asked what our project would do in that country. Naturally, it will ensure better hygiene. It will have a positive impact on health. Now, what will its negative impact be? It will temporarily unhouse people.
Initially, people living along a canal will be unhoused, squatters living in shacks, but they have been living there forever and there was a small black market economy that ensured that these people lived together, survived. Suddenly, they are being told: You have to move out while we redo the canal.
So people said that cheap social housing was needed but better than what had existed before and the state, which had not necessarily expected this, got involved in the project.
The state was not opposed, on the contrary, but the issue needed some explanation. Then, these people needed help developing a new economy within their means.
We hired local NGOs to help us to do this. The NGOs, the unhoused residents and our company tried to see what more could be done. There were things in the project that could have been defined differently in keeping with what you are talking about. That is clear. That is the way we hope to work.
When I say that it is a question of dosage, I am not convinced that major papers, major studies and criteria that are less directly related to what we want to do are appropriate. If we look at the competition, there are western European countries, Scandinavia in particular, that are doing the same thing we are, and sometimes perhaps even better. But the majority of our competitors are not doing this. So in order to continue to be the leading competitor, we must always remain aware and work in stages.
With regard to the EDC, should it be required to do more? Honestly, I do not know. I am convinced that the EDC is well aware of what other agencies are doing. I am convinced that the new competition from China, India and Brazil is not doing this. That is clear. And it is real competition. This does not mean however that we need to act like they do.
I would simply recommend some Canadian caution in asking what is appropriate.
Senator Fortin-Duplessis: Thank you. You are almost advising the EDC to, as you put it, consider the dose and not necessarily be too heavy-handed with the criteria.
[English]
Senator Wallin: On the one hand, as we read in the information, you are an incredibly well-established international company. You are growing and expanding your number of employees, correcting the record there to 4,000. You are in new and growing markets. Acknowledging that many of the projects you are involved in have high risk, my simple question is: Would you exist without EDC?
Mr.Bélisle: Yes, we would exist. We existed first in the Canadian market. Fortunately, we rapidly reached a point that we had to go beyond. Had it not been for EDC, it would have been a lot tougher.
Senator Wallin: Are you saying there would not have been financing from conventional sources for your work?
Mr.Bélisle: Our work comes from different places. Some comes from regional development banks in Latin America and Africa. We are not doing much business in Asia. Some comes from the private sector. For instance, in Chile, we work a lot more for the private sector and the mining companies than we do for the public sector. Some of those firms and mining companies may wish to borrow from EDC. It is up to them.
In the past, it would have been difficult for us to grow as rapidly as we have without EDC. We are convinced that, for the future, if we could not count on a still better EDC — one that is more alert, aggressive and present where deals are made — there is no doubt we would be at a disadvantage.
Senator Wallin: You may have explained this information at one point. This question is a difficult one. What percentage of your total operation is participated in by Export Development Canada, the Department of Foreign Affairs and International Trade and the trade officer services, and perhaps the Canadian International Development Agency program?
Mr.Bélisle: At this point in time, our revenues are about 30percent abroad versus 70percent in Canada. The EDC portion applies to the foreign part only. There are different services coming.
Senator Wallin: I understand. Break them out, if you want, instead of clumping them together.
Mr.Bélisle: One way or another, EDC's participation in our business is 25percent of the foreign business. I am venturing a number without calculating it.
Senator Wallin: It is 25percent of the 30percent.
Mr.Bélisle: I want to emphasize that working abroad is the only way for us to keep growing. In the years ahead, EDC will be capital for us.
The Chair: If that 25percent figure is incorrect by a large enough amount, would you mail us a correction via the clerk? We will then ensure that our members receive a copy of the correction.
Mr.Bélisle: With pleasure.
Senator Grafstein: Thank you, Mr.Bélisle. I want to commend you and your firm for extraordinary efforts overseas. It is great for Canada and great for you. We have to do everything we can to help you.
From my own personal experience, I understand your concern about the first money in, which is the project development feasibility study. That part of the deal is the riskiest. If you cannot accomplish that part, you are nowhere. I think your suggestion is well taken. I know that other countries provide this capital, directly or indirectly through different means. Essentially, they put up front money so the corporation can become involved. For that reason, I think that suggestion is a fabulous one.
I confronted this situation myself in South America and in Europe. Obtaining the original money to start — to even know if there is a project and whether it can compete — was the toughest part of the deal. Well done on that.
We have heard from both EDC and from other witnesses that the Canadian Trade Commissioner Service and EDC provide leads for companies but sometimes companies are reluctant to take up those leads. Have you found them helpful in developing leads in particular countries you are interested in?
Mr.Bélisle: Yes, but it depends. In our case, we are not interested in going everywhere around the world. We think that is the best way to lose. We cannot afford to run after everything. There could be solid trade commissioners, who we know and respect, who can tell us, get excited; there is the following opportunity in China. Our answer would be: thank you, but no; we cannot afford it.
Other Canadian companies do the same thing. Once companies reach the size of our number one competitor in Quebec, which is SNC-Lavalin, they have the size that allows them to go to more places than we can. Those companies would be more attentive to leads coming from anywhere. In our case, our first thing to determine is whether this country is a target country or not. The second thing is to validate it.
We will not mount a big attack on that basis alone but we, generally, know our way enough in our target countries to be able to validate opportunities. There is no way we can know everything. We find leads through all the sources we can. A good trade commissioner is able to bring some leads to our attention, and they do.
Finance is the portion where they can talk a bit but cannot go as far as EDC will go. If trade commissioners have leads they think are worthwhile and they readily bring their EDC colleagues from the same office into the picture, the two together may well be able to promote a Canadian approach, which goes a bit further. The Canadian firm may be more interested.
The feasibility study is the first step. The second step is to determine whether the country will be able to borrow the money. Some countries can pay by themselves but few can. Developing countries with natural resources, oil and gas in particular, either pay or borrow. However, most developing countries cannot.
The development agencies will say to whatever country: We know you are doing a good job, Mr.Prime Minister, but your shopping list is far too long. We cannot afford to fund all those things.
If the Canadian EDC representative is in that country, it is probably because EDC is open to lending or participating somehow. They would know rapidly whether this risk is worth looking at more closely.
When the lead comes back to Canada, I think it will be taken much more seriously. I remember information from trade commissioners saying that a country was serious and needed a company badly. All of that information may have been correct but can the country borrow to accomplish that?
Senator Grafstein: It is a double-edged sword; the front-end costs are for the feasibility study and if the feasibility study works out, the likelihood is that there would be adequate funding for that country in most instances.
Mr.Bélisle: The second-most difficult step is to finance the project.
Senator Grafstein: Let me briefly change the topic to another topic that is about the same thing: How does the government help you? Would it be helpful to you if Canada was proactive in partial free trade agreements, as opposed to full free trade? In other words, what is the value of entering into partial free trade agreements, even with a developing country? Are those agreements helpful in terms of opening up opportunities?
Mr.Bélisle: In my opinion, it is useful but marginally so. It facilitates a certain number of things but I doubt that it would make the main difference. It is a plus but I do not think that the plus is as big as the ability of EDC to lend, and the competitiveness of the firm.
The world is so big and so expensive. Firms that succeed all follow the same recipe: Where is something badly needed that I am good at? On that long list, who can afford it? In turn, why would they believe I am better than my competitors?
When they reach that third point, a trade agreement with a country is a plus whereby more people go back and forth and more buyers are exposed to the Canadian way of doing things.
Senator Grafstein: Thank you for this evidence. It has been informative.
Senator Stollery: As I understand it, EDC is an insurance. It insures exporters. I suppose it plays a relatively modest role in loaning money to start something, but that is not really EDC's main business.
Mr.Bélisle: They guarantee, principally.
Senator Stollery: Yes, they guarantee the deal. You are dealing more or less in the development business. This committee is familiar with that business. Can you give me a rough idea of how often someone does not pay and you must go to EDC to be paid? That situation is the basis of the whole operation.
Mr.Bélisle: It is not frequent.
Senator Stollery: I would think not, because you are dealing with governmental agencies and that sort of thing.
Mr.Bélisle: Yes, we are, but sometimes with poor governmental agencies.
Senator Stollery: I understand that.
Mr.Bélisle: The problem is the risk. I think we are all scared. If country X, which has been good for us in the past, suddenly embarks on a tough situation, can we have as much exposure there?
Senator Stollery: I understand that.
Mr.Bélisle: It is not frequent.
Senator Stollery: Thank you. That is what I was wondering.
Senator Mahovlich: Mr.Bélisle, thank you for appearing before us. Have you ever undertaken any work for Africa through CIDA?
Mr.Bélisle: In the case of Dessau, we have done little other than in Algeria. It is a choice of our own.
Senator Mahovlich: I can give you advice about a place in Africa that I visited, and they need work on their roads. I can tell you that it is a good job. It is a big job. Their roads are in terrible need, and you could probably work with CIDA on that project. Would that road be a good job?
Mr.Bélisle: I agree totally with you.
Senator Mahovlich: They need help.
Mr.Bélisle: I lived in Africa for three years, and I have travelled there for 35 years. They all need infrastructure, roads and railways. Some are worse than others, but most of them are in bad shape. Other than a few places in South Africa, the norm is terribly bad infrastructure. The problem is that few of them can afford to pay, other than, occasionally, South Africa; Angola now because they have oil; and Nigeria.
Senator Mahovlich: The Congo has lots of mines.
Mr.Bélisle: There are exceptions. The Congo is one.
Senator Mahovlich: Are you saying their governments are corrupt?
Mr.Bélisle: No, that is part of the picture everywhere. For someone to be corrupt, there needs to be a corrupter. It is not one-sided.
The time lag in Africa is enormous after the day an African government convinces a lending agency, mostly the African Development Bank or World Bank, to finance the project.
CIDA cannot do any more because CIDA is completely out of infrastructure projects. In the past, most Canadian consulting firms started in Africa under CIDA-funded infrastructure projects. About 15 years ago, they moved out of infrastructure and went into the softer side, such as building institutions, assisting with transparency in government — a whole lot of things that needed to be done as well — but infrastructure was out. Now we are down to the few other funding agencies for funding.
It takes two to three years for the funding agency to assess the feasibility of the project and the ability to pay back. One day, a company receives an invitation to bid. If they begin there, they are looking at another five years down the road. They make proposals where they commit staff to be present, because that is the way the borrower decides who is best.
It comes down to competence, etcetera. In particular, who will work for them on this job? What do these people know about Congo? How often have they been here? Have they ever been in Africa? Did they do road work such as we need to do?
The company commits its better people, the CV that fits the job, but guaranteeing that seven years down the road that person will go to that project is a big gamble.
Right now, there is so much work to be done around the world that, in our case, to grow, we pick and choose those countries where the turnaround time is shorter and the ability to borrow is bigger. In all of Africa, we have picked one country as a target country. We incorporated Dessau Maghreb. We now have 400 people in the office, consisting of a few Canadians but mostly Algerians. We are training them to work our way. We are creating jobs. We are giving something from the social perspective. The Algerians are happy, and we are happy.
In the older days, Dessau began its work abroad in the Congo. The company worked on a road job.
Senator Mahovlich: What year was that?
Mr.Bélisle: It was 1973 or 1974. That was the first one. The company did not do much for some time, but it began there. It was funded largely by the World Bank, with a bit from CIDA.
Senator Stollery: Where was the road?
Mr.Bélisle: Honestly, I do not know. I was not there. I joined Dessau three years ago.
The Chair: Mr.Bélisle is a young man, Senator Stollery.
Senator Andreychuk: I know your company, your work and your track record, so I will not go into those areas. I think you have explained your EDC position. However, you have tweaked me on this entire African issue. We used to fund infrastructure, because we said if we had infrastructure, the roads, the communications, all of that, then they could then come up to speed on a world level. The problem was that the governance was not there. We could build a hydroelectric dam, and it could be blown up the next day, which happened in one of the countries I served in. We said we have to concentrate on governance and those issues before we can have value added in our infrastructure. That has been the debate, and I think we have gone from one face to the other, back and forth. You mentioned China and other countries now being players, where the governance issue is set aside and they are giving volumes to the countries for infrastructure, etcetera. Are we still right to continue on governance issues and management?
Mr.Bélisle: In my personal view, we have to be careful. Everything needs to be done. Governance is an area where a lot of help is needed, but the objective is to help those countries join in the world economy and begin to live by themselves and beg less. Unless they can produce something, it will always be the same. They do not have much, but they have a number of things that can be exported. If there is no road and no infrastructure, nothing moves.
I had the pleasure of working at the International Trade Centre for some time. We could see that even though Africa did not have much, it had something. For instance, fresh cut flowers are delivered to Europe, winter and summer. In winter, it is far cheaper to grow them in Kenya, Burkina Faso, or somewhere in Africa, fly them overnight to Amsterdam and distribute them around Europe. A lot of people earn a living this way. To do that, the country needs a minimum of infrastructure to take the flowers from wherever they are grown to the airport and frozen or kept in such a manner that they arrive fresh at the other end.
Infrastructure is everything to grow the economy. I would hesitate to support governance only and think that once we have solved that problem, the rest will follow. The countries need a mix of different things. Canada cannot help everywhere; it has limited means.
It is a question of aiming at countries where we want to do something for legitimate political reasons or otherwise, picking the countries in view of the needs and Canadian sectors of excellence, and then asking on what front we can help them. What are their main difficulties? Maybe we could have some grids that say for each road we finance — if we were to do so again — we would also put a percentage in these other soft aspects, which are needed.
However, I would never recommend 100percent soft and then, one day we can graduate to something else. I believe that is too dangerous.
The Chair: We thank our witness. We appreciate your comments. They will be useful. If you have additional thoughts that you have not expressed or thought of, as well as the information you have agreed to provide to us, include it in that missive and we will share it with our colleagues.
Mr.Bélisle, thank you very much; we will see you again.
There are a couple of quick things about what is happening. I remind everyone that tomorrow at 2 p.m. Senator Stollery is hosting a Mexican delegation in room 256-S. An email at least has gone out to all. I want to remind you that if you can be there that would be great.
Next week we have a continuation of our China, India and Russia study. On Wednesday, the new High Commissioner for India to Canada will appeal, S.M. Gavai, who I have met and is an interesting gentleman. We have reserved Tuesday for BillC-2, the free trade agreement with the European Free Trade Association. Hopefully, we will have the bill. I understand we may have BillC-2 today or tomorrow: probably not today, obviously it is too late. We have reserved Tuesday for that bill. Frankly, we may also have someone appear, in case that bill does not arrive, to deal with the other study although short notice makes it a little difficult.
As well, we have had a request from a group of African ambassadors to meet with the committee. After the Easter break we will have a meeting. I believe there are about 12 of them that would like to meet with us.
Senator Wallin: Why?
The Chair: It is a courtesy that we extend to the diplomatic corps from time to time. If they wanted to come one at a time that would be a difficult, but since they have offered to come as an informal group we have done it before and we will, from time to time, extend this courtesy.
If you have not received the notice, the Japanese ambassador has invited the committee to a dinner on Tuesday, April28 at the residence. We have accepted, subject to attendance by committee members. The requested time is 1900 hours. We have suggested to them that we usually sit until 1900 hours so 1930 would be a good time for us. You will be further informed on this invitation, but so that we are all up to date, that is all of the information that I have to share.
I thank all colleagues for attending. See you next week.
(The committee adjourned.)