Proceedings of the Standing Senate Committee on
Agriculture and Forestry
Issue 8 - Evidence - October 7, 2010
OTTAWA, Thursday, October 7, 2010
The Standing Senate Committee on Agriculture and Forestry met this day at 8:01 a.m. to study the current and future state of Canada's forest sector.
The Honourable Percy Mockler (Chairman) in the chair.
[Translation]
The Chair: Honourable senators, I see that we have quorum, and I now declare the meeting open.
[English]
I welcome you to this meeting of the Standing Senate Committee on Agriculture and Forestry. My name is Percy Mockler, and I am from New Brunswick.
Today, we welcome witnesses from four different organizations.
[Translation]
From the Canadian Pulp and Paper Network for Innovation and Education and Research, Mr. Patrice Mangin, Chair.
[English]
From the Ontario Centre for Research and Innovation in the Bio-Economy (CRIBE), we have Mr. Lorne Morrow, Chief Executive Officer.
[Translation]
From the Natural Sciences and Engineering Research Council of Canada, André Isabelle, Director, Environment and Natural Resources, Research Partnership.
[English]
From FPInnovations, we have Mr. Jean Hamel, Vice-President, Pulp and Paper Division and Mr. Tom Browne, Program Manager, Sustainable Development.
The committee is continuing its study on the current state and future of Canada's forest sector and looking particularly at efforts in research and development in innovation.
Before I ask the witnesses to make their presentation, I would like to start by asking honourable senators to introduce themselves.
Senator Mercer: I am Terry Mercer, from Nova Scotia.
Senator Mahovlich: Frank Mahovlich, Ontario.
[Translation]
Senator Robichaud: Fernand Robichaud, from New Brunswick.
[English]
Senator Plett: Don Plett, Manitoba.
Senator Ogilvie: Kelvin Ogilvie, Nova Scotia.
Senator Eaton: Nicky Eaton, Ontario.
The Chair: Thank you, senators. Our witnesses today have handed the clerk copies of their presentations in one of the official languages. May I have permission for the presentations to be distributed now and the translation to be sent to us when it is available?
Some Hon. Senators: Agreed.
The Chair: Witnesses, thank you for accepting our invitation. I invite you to make your presentation. I have been informed that we will start with Mr. Hamel, to be followed by the other witnesses.
[Translation]
Jean Hamel, Vice-President, Pulp and Paper Division, FPInnovations: Ladies and gentlemen, senators, thank you for giving us this unique opportunity to share with you our understanding and our vision of innovation and the transformation of the forestry products industry in Canada.
We will give you a two-pronged presentation. I will begin by speaking about innovation and my colleague, Mr. Tom Brown, will follow with a more detailed description of biorefineries.
Over the next three or four minutes I am going to speak about several points that we feel are very important to understand with respect to innovation. If you look at page 2 of your handout, slide no. 4, you might wonder if there is a difference between research and development and innovation. The answer is yes.
It is in the handout entitled The Forest Biorefinery: A Strategic Overview, that is being circulated. There is a question on page 4 that states: ``Why isn't the R&D Always Converted into Innovation?''
So the first question that must be asked is how innovation differs from research and development. In fact, this is a continuum; research must be considered as an integral part of the innovation process. If one were to sum it up in one sentence, one could say that research and development is a way of transforming invested funds into ideas and technologies while the innovation process continues the development of ideas and technologies and transforms them into profits or products on the market, therefore into immediate dollars.
One of the reasons why innovation does not necessarily follow research successfully is that often the potential markets and clients for these technologies are not well understood. Therefore, at the innovation level, one must always keep in mind what and who the potential markets and clients are.
In order to illustrate that this evaluation process is effective, we are going to give a current example. On page 5 you can see a photograph of a demonstration plant that is currently being built in the city of Windsor, near Sherbrooke, in the Eastern Townships in Quebec. This plant will be manufacturing a product that comes from the forest biomass and that is called nanocrystalline cellulose. Barely three years ago this product was just an interesting laboratory experiment, but by using an innovation management process, that is by considering the engineering constraints, market constraints and feedback that we had received from potential clients for this technology, we were able to optimize the manufacturing cost and the construction cost of the plant in order to make this economically viable.
So, very quickly, in a three-year period, we were able to take an idea from the laboratory to the pre-commercial and demonstration level. And this demonstration plant — this is one of the important points I want to make — is the result of a collaboration between Domtar, FPInnovation, the federal government through Natural Resources Canada, and the ministère des Ressources naturelles et de la faune du Québec, for a $40-million project, in total.
Once again, what brought us to this stage was management not only of research and development, but research at an innovation management level.
Now I would like to draw your attention to page 7. Another part of innovation is the consideration of markets and the viability of the technology. New methods must be developed. One of the methods we developed, in collaboration, once again — and you will notice that the word ``collaboration'' comes up frequently — with Natural Resources Canada, FPInnovations and the Canadian Forestry Association — was a process called the biopathway.
We took approximately twenty existing technologies, twenty emerging technologies and we compared the viability of these technologies in various situations, in various geographical areas such as, for example, Saguenay-Lac Saint- Jean, the interior of British Columbia and Northwestern Ontario; we compared these technologies by putting them in smaller and larger plants while taking the economic circumstances into account.
The biopathway process showed us that the way in which technology is implemented, the area in which it is implemented and the way in which it is integrated into the circle will lead to different levels of profitability depending on the combination in any given situation. We undertook this evaluation not only from a financial perspective, that is the return on capital investment, but also from the perspective of its economic impact on any given region in Canada, its social impact, that is, the number of jobs generated, and from the perspective of its environmental impacts.
We cannot take a given technology and state that it would be viable without taking into account where it would be implanted, that is, the location, the country, or other, where the plant will be built. You need to take into account the climate and other factors affecting the areas where these plants will be built.
I would just like to make one last point. On page 11 of your document, you will see a table that projects the world market for plastics over the next ten years. You can see that currently global plastic consumption is approximately 300 million tons per year, which is a rather sizeable amount. However, because of population growth and because of the increase in the standard of living in developing regions, there will be a significant and increasing demand for plastics. Over the next ten years, the consumption of or need for plastics could double. We believe, at FPInnovations, that forest products could have the advantage of being integrated into these products and therefore providing products that are both biodegradable and renewable, therefore making plastics greener.
Not only will they provide that greener factor, but thanks to nanocrystalline cellulose, that was recently discovered, they could potentially have properties that are superior to those in existing products. There is therefore some truly interesting potential for forest products.
We have been talking about pulp, paper and wood but now we are talking about integrating the forest in all its aspects into consumer products. We are bringing the forest into your car, onto your plate, into your consumer goods.
To sum up, before giving the floor to my colleague, on page 13, you can see that if we are going to talk about innovation and the transformation of the Canadian industry, then we also need to transform the way in which we perceive innovation, that is, we cannot only perceive innovation as being research or investment in research, we also have to understand that we must establish an ecosystem that takes into account certain concepts including clients' needs, because we need those clients from the outset. All our collaborations must include working with partners who are willing to purchase the products that will be developed and produced by these plants.
We also need means to evaluate various technologies and put them in perspective through processes such as the biopathway. We also need to move towards high value products and focus on integrating them into plastics or replace the plastics, or use biomaterials or composite materials.
Once again, and I would like to emphasize this, we need to understand that management of the innovation process is not simply research management, it is a different process that calls upon different skills, but that must be entirely integrated into the research process. Therefore, research and development are an integral part of the innovation process, but the innovation process is a much broader, much more global process that must take other factors into account.
Finally, you will see that partnership is included in the table. We work with all the representatives, with Mr. Morrow, Mr. Isabelle and Mr. Mangin. We collaborate extensively and this collaboration is essential in order to transform the forest products industry in Canada. I will now give the floor to Mr. Browne.
[English]
Tom Browne, Program Manager, Sustainable Development, FPInnovations: Thank you for the invitation to appear before this committee. I will go through only a small portion of the slides in the interest of time, and I will start with page 17.
Page 17 shows that forest products today follow a common pattern in resource industries. We extract the products with the largest value first; in this case, 45 per cent of the raw material harvested in Canada becomes solid wood products. This generates 57 per cent of the benefits that accrue to the industry.
The residues from that production step — wood chips, in this case — are used for pulp and paper products. Another 21 per cent of the raw material contributes another 37 per cent of the value. The materials that are left over — sawdust, bark, spent pulping liquors and other low-grade residues — are burned to make heat and power. That consumes the remaining 34 per cent of the raw material but only generates 6 per cent of the benefits on the basis of avoided purchases of fossil fuel and power from the grid that we would otherwise have to buy if we were not generating that energy internally.
Slide 18, which is the petroleum case — and I will only focus on one slice of that pie — shows that 4 per cent of the raw material is converted into chemicals, rubbers and plastics, but it generates 42 per cent of the value. This is an extraordinary number compared to forestry, and it should serve as an object lesson to forestry as to how we should work to generate greater value from that resource.
There is a wide range of value-added products that can be made from wood, and you have heard about nano- crystalline cellulose and other things. I will not go into any detail here, but in slides 39 to 43 we show a model for converting an existing kraft mill into a plant that would generate a range of chemicals, energy products, as well as the current traditional pulp products.
In an earlier submission to this committee and in some of the documentation that you have in front of you, we also describe next-generation building solutions; nano-crystalline cellulose, which my colleague has described; and a range of other energy and chemical products. The point I want to make is that, first, these steps described in slides 39 to 43, and in other slides, are now being taken in mills across the country. If we move to slide 45, I have a list of some of the ongoing projects across the country.
Tolko Industries Ltd. is operating a gasifier at its Heffley Creek, British Columbia, mill for the last number of years. They have also announced a partnership with Ensyn to build a pyrolysis plant. Both of these are designed to replace natural gas usage on site. The pyrolysis plant is also designed to produce new products as well as an energy product.
Kruger Products has installed and commissioned a gasifier at its tissue mill in New Westminster, B.C., again to displace natural gas.
My colleague Jean Hamel has mentioned the collaboration between Domtar and FPInnovations to build a nano- crystalline cellulose plant in Windsor, Quebec.
Moving to slide 46, I would mention the AV Group in New Brunswick, which has converted one mill to a high-value rayon grade of pulp and is developing new products from hemicellulose from that mill in collaboration with FPInnovations. They are also planning to extract and sell a methanol from their mill at Atholville, New Brunswick.
Continuing on the same line, Fortress Paper Ltd. has announced the conversion of a mill to a rayon grade of pulp. This is at their mill in Thurso, Quebec, just down the river from here.
On slide 47, AbitibiBowater's Thunder Bay, Ontario, mill is working with FPInnovations and CRIBE to develop extraction plants for both lignin and methanol. I believe my colleague Ms. Lorne Morrow will talk about that. Mercer International is building a methanol extraction plant in its Castlegar, B.C., pulp mill.
This is not an exhaustive list. Other projects are underway or in planning across the country.
The list teaches us two things, in my opinion. First, we learn that the forest sector is indeed capable of change and new thinking. Second, as shown in slide 48, none of these projects would have gone ahead without strong partnerships, strong government support and some measure of risk sharing, all of which are critical to the introduction of new technologies and, more importantly, the introduction of new products. We must remember that we are making new products, not new technologies.
Slide 49 identifies some of the risk factors that need to be addressed in particular by industry-government partnerships for these projects to go ahead and to be successful. The first factor is the technical risk associated with moving new technologies from the lab bench to pilot demonstration scale. Things do not work at a large scale as well as they do in the lab; there will always be surprises. The second factor is the capital risk associated with demonstration- scale plants, which are smaller than commercial-scale plants and do not benefit from economies of scale. The cost per tonne of production will be higher, and, even if you can sell the product, you might not earn the cost of capital on a small plant. However, you have to build the small plant in order for the commercial scale plant to be built further down the road. The third factor is the price risk in the case of energy products. When we compete with natural gas, coal or oil on a straight economic basis, it is difficult to make heat or power or transportation fuels that can be sold in the market without some form of price supports from government.
The concluding message, as shown on slide 50, is that the forest sector is willing to pursue transformation but cannot do it alone. Continued government support for pilot demonstration-scale plants to move new technologies and products from university and industrial labs into commercial reality is critical.
In Canada, we have a unique opportunity to develop a new generation of high-value products from a renewable and sustainable resource. We would be glad to discuss this at greater length.
The Chair: Thank you, Mr. Browne. Mr. Morrow, please proceed.
Lorne Morrow, Chief Executive Officer, Centre for Research and Innovation in the Bio-Economy (CRIBE): It is well timed, in that you have seen a national scope from FPInnovations, and CRIBE is a subset of that. I will talk briefly on how and why CRIBE was formed and then specifically about the relationship we have with FPInnovations.
CRIBE submission before you is an overview. CRIBE was formed in 2008 at a time when every mill from Sault Ste. Marie to Thunder Bay was closed down and the Ontario government saw a real need for bringing change and adding value to the traditional pulp and paper flow. Accordingly, the Ontario government put $25 million into that, as you can see on slide 2.
CRIBE is very lean and is one person — me at this stage. Accordingly, it requires cooperation and collaboration with groups such as FPInnovations, which we have done. We have a very experienced board, and, with that, we can move quickly and efficiently, which we are doing. We have $25 million from the province plus an additional $10 million from Natural Resources Canada channelled through FPInnovations.
Potential projects that we are looking at are very similar to what my colleagues, Mr. Hamel and Mr. Browne, have talked about. We see a real need for the demonstration pilot plant projects. Specific to Northern Ontario, we want to support something like a small combined heat and power demonstration plant. Many First Nations are on diesel, which is flown in. Hydro One flies 11 million litres of diesel in to support these small First Nations. We would like to bring in some of that technology as well as new bio-materials and products.
Slide 6 shows our partnerships. As I said, we are lean. I have a direct partnership with FPInnovations and with three other small groups: the Ontario BioAuto Council, in Guelph; the Sustainable Chemistry Alliance, in Sarnia; and the Biorefining Research Initiative at Lakehead University. Not surprisingly, many of our leads are coming from downstream in the car industry. The bulk of our leads come from car parts manufacturers looking for ways to make changes.
I will talk now about the relationship between CRIBE and FPInnovations. We have signed a four-year agreement. We support $8 million in operational costs. Our main goal was to build FPInnovations' research capacity in Northern Ontario, which we are doing. We have an additional $10 million that we will share for demonstration-type projects. We have staff located at the AbitibiBowater mill in Thunder Bay who work specifically on forest biomass projects.
We asked FPInnovations, prior to initiating projects, to give us some ideas, given their national perspective. We have concentrated on methanol from steam stripper gas. Our main project is around lignin, which I will talk about later, and looking at ways that we can treat these different streams from wood.
Slide 9 shows a basic breakdown of wood. The traditional way has been to cut the forest, make the logs and make lumber; or cut the forest, make chips and make pulp. The pulp mill breaks that down into three main parts: cellulose, lignin and hemicellulose.
Dr. Tom Browne spoke to the many pathways that slide 10 shows. We cannot afford to look at gasification, biochemical and fermentation, as well as many other ways, so we specifically chose and applied to a major mill in Ontario for the extraction of lignin.
Slide 11 shows the same mill where we have been running on an operational basis. You have heard about the scaling up that must occur. We have been running for about nine months extracting methanol from steam stripper gas. These mills are buying methanol, so by extracting from their waste gases, they can both use methanol and sell it at the same time. Across this nine-month period, we have dropped the cost to the point where the mill can go forward with this project.
The main project we are working on is lignin. When making paper, you cook chips and liquor to produce the by- product pulp. The black liquor formed is mostly lignin. Our current project is to extract the lignin from the black liquor and look at better uses, such as additives to phenol glues and carbon fibre. We are working with that project, starting at the bench in FPInnovations' labs in Pointe-Claire, Quebec, to make small amounts. We sponsored a project this year that will produce an amount equivalent to a 45-gallon drum. When a client wants to test lignin, we can ship out that quantity. We are looking at a lignin project that will produce 50 tonnes per day at that mill.
Taking the lignin from the black liquor off-loads the recovery boiler, which allows the mill to speed up at the same time. Thus, the mill gains in two ways: It can make more pulp, and it can make higher-value products from lignin. That is the main project at the Thunder Bay mill.
I will now speak to strategic options. This is on slide 16. My colleague Tom Browne explains it very simply by saying that biomass is bulky, wet and distributed, and petroleum is cheap and dense and comes from a pipe. We cannot compete against that type of scenario, so we have to find the 4 per cent of products that Dr. Browne talked about; novel products that can compete on both price and performance.
We will also look at platform chemistries. We have several projects looking at different products such as levulinic acid that can then go into car parts. It is a platform from which you get into surfactants, lubricants, polyfoams and that type of thing. We have several groups looking at those types of projects.
I spoke a bit about the combined heat and power at slide 17.
With regard to wood merchandising yards, I just returned from Sweden and Finland. I was very impressed with the merchandising that goes on there in the wood yard prior to going into the sawmill. It is a very different logging process than we have here in Canada. We would like to support some type of demonstration work along those lines. They are actually sorting to 1-inch log classes. They have 9-inch logs, 10-inch logs and 12-inch logs. One day the mill runs 12-inch logs and the next day it runs 13-inch logs. Think of the efficiencies of the saw heads when they are not going in and out. We would like to support something along those lines. Also, there is much interest around syngas, fuels and torrefied woods.
In conclusion, a study of the Forest Products Association of Canada, FPAC, shows that if you are going to do this type of work, you should bolt it on to an existing mill and that will give you five times as many jobs. You can see that CRIBE does not have a large amount of funds. We are trying to work specifically with existing mills.
You must selectively strategize on how you will get that 4 per cent. Every mill is different, and you have to look at each one from a different standpoint. It is the role of CRIBE and FPInnovations to de-risk the project. Demonstration plants are not cheap; they cost $20 million to $30 million, with the return being very small. We have to assist industry to get through that phase.
I was with the senior executive of a company this summer who said that he had no problem putting in a new paper machine, because that is what he knows. This is different; they are afraid of it. However, they are trying to change and they are adapting.
Finally, the CRIBE-FPInnovations partnership is critical in Northern Ontario. They bring a national perspective to the project. We are doing lignin in Ontario and nanocrystalline cellulose in Quebec. We are trying to avoid duplication across the whole country. We are building capacity in Ontario, which we did not have, and that is linking to Lakehead University and Confederation College. We are building a cluster. We are seeing excellent collaboration. I deal directly with the BioAuto Council on a weekly basis.
We currently have a lot of excess wood in Ontario that is not being cut. We are cutting about 30 per cent to 40 per cent of the wood. That is the impact of what we have. I was one of the casualties and actually closed down my mill down, so I find it very rewarding to partner with FPInnovations and bring industry back up.
André Isabelle, Director, Environment and Natural Resources, Research Partnership, Natural Sciences and Engineering Research Council of Canada: Thank you for inviting me to meet with you today.
[Translation]
I am honoured to have the opportunity to speak to you about the Natural Sciences and Engineering Research Council of Canada and its role in the forest sector.
[English]
By way of introduction, I have provided a fact sheet for you this morning.
[Translation]
It is available in French and English.
[English]
It does not follow the presentation, per se. It simply reinforces and supports the presentation.
In my remarks this morning, I will cover three elements. The first is an overview of the council and our activities. The second is some of our efforts in the area of innovation, and the third, drilling down to the subject today, is our role in the forest sector in particular and some of the experiences and projects with which we have been involved.
The Natural Sciences and Engineering Research Council of Canada, NSERC, invests over $1 billion each year in grants and scholarships that support research and advanced training in Canadian post-secondary institutions. We have three priorities. First, NSERC invests in people by supporting 28,000 undergraduate and graduate students and post-doctoral fellows each year. These highly skilled people form the human capital necessary for Canada's competitiveness and economic growth. Natural sciences and engineering graduates have among the lowest unemployment rates in the country.
Second, NSERC promotes discovery by supporting the research programs of 12,000 professors at Canadian universities.
Third, NSERC helps make innovation happen by incenting more than 1,500 Canadian companies to invest in research and training at Canadian universities and colleges.
Last year, these firms invested more than $100 million in public-private research partnerships supported by NSERC. In fact, NSERC is one of Canada's largest, if not the largest, sources of grants for public-private research and development partnerships.
These three priorities — people, discovery and innovation — map directly to the three advantages of the federal science and technology strategy, mainly people, knowledge and entrepreneurial.
Given the committee's particular interest, I would like to focus my remarks on recent NSERC innovation-focused initiatives as well as specific support of product-centred R&D in the forest sector.
We know from experience that academic industry partnerships are a highly effective way to transfer new knowledge to the marketplace. All participants win. Industry accesses resources and expertise it cannot cultivate on its own. Researchers gain real world testing ground for their ideas and discoveries, and students get a more dynamic training experience as well as a wider range of career choices.
While fostering these partnerships has always been a key NSERC priority, we have substantially ramped up our efforts in the past year. We saw the potential to expand our reach with industry through funding support designed with small- and medium-sized enterprises in mind.
Last November NSERC launched its Strategy for partnerships and Innovation, a comprehensive and ambitious adventure whose goals include doubling the number of companies that collaborate with NSERC funded researchers. This plan builds on existing initiatives and introduces new government programs intended to bring Canadian businesses with university researchers to accelerate their R&D.
We have been encouraged in our efforts with extra funding allocated in Budget 2010, including $5 million to further this strategy. The benefits are already being experienced. We have launched highly successful initiatives designed specifically to develop new relationships between university researchers and companies. In particular, the Engage Grants Program offers researchers up to $25,000 to undertake a short-term, six-month project aimed at addressing a specific company problem. Some of my colleagues refer to this program as the ``first date program.''
Researchers have responded enthusiastically to this bridging tool. NSERC has approved more than 299 Engage Grants awards totalling over $7 million and leveraging some $4.8 million in cash and in kind contributions from their industry partners.
At the launch of this strategy, NSERC had 1,500 partners in place and a goal to double that number by 2014. The initiative is proving to be successful in accelerating the number of new partnerships we facilitate, and two thirds of the partner companies that have taken advantage of the Engage Grants Program have not previously worked with NSERC funded researchers. The vast majority of these companies are small- or medium-sized businesses not typically associated with major R&D efforts.
To help NSERC deliver its partnership programs, staff in NSERC's five regional offices is playing an important role in helping researchers and businesses connect and collaborate through new research partnerships. The adoption of a new NSERC intellectual property policy last year has also helped. It allows for more flexible access to intellectual property and has drawn praise from our industry partners.
In Budget 2008 the government asked us to help solve immediate problems in the automotive, manufacturing, forestry and fisheries sectors. In designing the NSERC Forest Sector R&D Initiative, we were able to capitalize on our strong synergistic relationships with FPInnovations and Natural Resources Canada, and indeed invited them to co- lead in the initiative. We agreed that alignment with the FPInnovations Flagship Innovation Program was the best mechanism to ensure that there was increased research collaboration within the forest sector innovation system.
A key requirement of any NSERC-funded project is the teaming up with FPInnovations staff and industry partners to ensure maximum synergy and a focus on one of five identified priorities. Another key attribute is the emphasis on building networks of collaboration spanning the country and many institutions. Four major new networks have been established and are outlined in the fact sheet that I have submitted today. These were designed to complement two existing NSERC strategic networks and a business led network of centres of excellence in the forest sector.
I will briefly highlight the NSERC Innovative Wood Products and Building Systems Strategic Network. The vision of this network is to increase the use of wood products in mid-rise residential and non-residential buildings. It links leading researchers from disciplines as diverse as structural and fire engineering, wood science, architecture and building science to achieve this vision. One of the main expected outcomes will be the development of new tools for use by design engineers, researchers and product manufacturers to help predict the performance of building systems and the products.
The building code is normally revised every five years, and it is expected that the information generated in this network will have a major impact on further revisions to the code and perhaps allow for more use of wood and wood products in building construction.
The network is overseen by a board, which is composed of a range of stakeholders from the forest product, construction, consulting engineering industries, the NRC Institute for Research in Construction, the Canadian Wood Council and, of course, FPInnovations. With this oversight, we can ensure it is well managed and remains focused yet responsive to emerging issues and opportunities.
Before I conclude, I would like to offer a couple of observations about possible ways to revitalize this important industry based on some of the outcomes of NSERC-funded research partnerships in the forest sector.
First, our experience with the development of forest nano-materials is that industry must strive to find new and higher value-added applications for wood in non-traditional markets. That is why ArboraNano, to which my colleagues referred, which is the business-led network of centres of excellence charged with commercializing this nano- material, is so compelling. It links the forest sector with new customers in industries ranging from aerospace to medical sciences.
The second point relates to export market diversification, or moving beyond our dependence on customers south of the border. One of our industry partners recently informed us that a university researcher they worked with helped open doors to new customers in China. What helped in that case was the fact that the researcher is a native of China, who is at ease in dealing with the company's Chinese customers. The bottom line is that the company's shipments to China have grown by a factor of three, to more than 300 million annually, since this research partnership began over a decade ago.
In conclusion, I have three messages. First, we are completely aligned with the government's S&T strategy. Second, we are delighted to be viewed as playing an important role in addressing Canada's research and innovation needs in the forest sector; and finally, we are working closely with our colleagues at FPInnovations and Natural Resources in Canada and others to optimize the government's investment in the forest sector R&D.
We look forward to the committee's report on this important subject.
[Translation]
Patrice Mangin, Chair, Canadian Pulp and Paper Network for Innovation in Education and Research (PAPIER): Honourable senators, dear colleagues, ladies and gentlemen, before I begin I would like to tell you that my brief is available, at least the general outline, in French and in English. I would like you to forgive me for the English in the English version which may not be perfect as I myself am not perfectly bilingual. You will also find a short biography that will help you understand my position and my message.
I would like to thank the committee for having invited me as a witness to contribute to your study and to therefore participate in the development of a vision for the forest industry and more specifically for forest products.
Before moving on to the main topic, I would like to quickly talk to you about the PAPIER network, that I currently have the honour of chairing and that I will be chairing until the end of the year. This is a network of research and university education centres working in the pulp and paper sector. We expect to, and you will see why, expand shortly to include the Canadian strategic networks funded by NSERC and potentially other universities working in sectors that are complementary to the forest product centres, somewhat like FPInnovations, which is the national laboratory involved with PAPIER.
Today, with few exceptions, especially in the pulp sector and irrespective of provincial or regional considerations, the Canadian forest products industry is not very competitive for several reasons. We are all aware of them: production costs, supply, energy, labor, transportation to remote markets — not only the American market, we need to find others markets — the value of the Canadian dollar, et cetera. Irrespective of the combination of an economic, financial and structural crisis, it has to be said that the industry's business model as a whole has to be completely reviewed.
Given our knowledge of the market, the globalization of the economy, the trends towards sustainable development, the environmental awareness of our society, the ubiquity of electronic media and the reduction in paper publications, which we have been strongly affected by, and given the new technological developments coming out of universities, industry research centres (FPInnovations), what vision can we propose for the forest products industry for the next 10 to 15 years — a very near future for us?
Our vision and objective for the future is of a forest industry that is dynamic, economically productive, innovative, appealing, civic minded, socially responsible and job creating — and this is not something I made up, it is taken from a study by the Quebec Forest Industry Council. In order to survive and maintain a globally competitive position, the industry will undoubtedly have to be diversified, while keeping to its traditional market base, i.e. paper and softwood lumber. Some of the technical aspects of this diversification have been raised.
The industry will — and is already since work has begun to that effect — be a pioneer in the area of sustainable development practices so as to best meet the demands placed on it by Canadians; but that is far from the image that people have of our industry today. In fact, we know that the forest industry has a positive impact on climate change, carbon sequestration, ground water reservoirs and water quality in general.
Contrary to what it has gone through recently, our industry will again create stable, well paid jobs, with increasing emphasis placed on a qualify labour force needed to operate the new technologies being deployed. Clearly, the forest industry is and will continue to be a key element in greening the Canadian economy, particularly through the development of a new industry based on bioproducts, biofuels and bionanotechnologies. I will not get into the technological details; my colleagues dealt with that.
With regard to research and development, but especially innovation, the industry is and will continue to be positioned and recognized as a global leader thanks to its networks of skilled, recognized and valued researchers as well as skills developed in other industries that are increasingly being used, thanks to NSERC among others, and sectors other than those we have traditionally relied on, including chemistry, chemical engineering and forestry. Given the structure and size of Canada's economy, R&D and innovation must — and this is my first key message — be based on interprovincial networks and international cooperation.
Having presented the vision developed by our various groups, we might ask ourselves what the success factors are in order to arrive at such a new industrial model. I have chosen to provide you with a summarized, easy to understand view of 12 of those key factors, which are based on work done within the Quebec Forest Industry Council, various round tables in western Canada, discussions with my colleagues in the Canadian Pulp and Paper Network of Innovation and Education and Research, as well its American equivalent — there is also a network of US universities — and work done with our American colleagues within the agenda 2020 Technology Alliance, in Washington, which does similar work to ours, as well as by TAPPI Research Management, which brings together people from around the globe. I could have chosen more or fewer factors, but I settled on 12. I also wanted to get away from a traditional presentation of technological issues — and I do not claim to be able to turn you into experts in 10 minutes — and that for two reasons.
I want to avoid a duplication of messages, and I am aware of the fact that science and technology programs are remarkably similar from one country to another. What we do here is also done elsewhere, so we must distinguish ourselves in other ways.
Point no 1: The Canadian Forest Innovation Council, or CFIC, which was set up by FPAC in 2005, created a road map that, among other things, led to the creation of FPInnovations, the Transformative Technologies Program and strategic networks like those at NSERC. The road map has not been updated.
Furthermore, Canada's regional and provincial characteristics were not particularly taken into account at the time — and for good reason. In the context of the crisis and the end of the crisis — perhaps it would more appropriate to say the storm of the century that the industry has weathered — it is interesting that now we are seeing provincial/ regional initiatives flourishing.
For example, in May 2010, a round table was held on research needs in Western Canada and, more recently, a research document which will soon be published was drafted by the Conseil de l'industrie forestière du Québec. While some provincial initiatives are being undertaken, we are not really seeing a true Canadian agenda. Of course I am excluding the program developed by FPInnovations, access to which is restricted. This program is not usually accessible or open to, among others, universities and university partners.
At the same time, our American neighbours have updated their 2020 agenda roadmap. The April 2010 version has replaced the 2006 version. The European Union is on its seventh framework program that it renews every six years through program recovery.
There is a critical need. The Canadian innovation roadmap has to be brought up to date with the involvement of universities and federal and provincial research centres, including technology transfer centres, industry and the economic sector. Of course, this time the Canadian agenda has to be more specific in order to take into account provincial and regional characteristics.
Moving on to the second factor, Canada has the advantage today of having a pan-Canadian national research centre, FPInnovations, whose future is nonetheless somewhat uncertain. In fact, because of the pulp and paper industry's situation, industrial funding of FPInnovations has progressively decreased to a current critical level. Governments have taken up the slack — and we thank them for that — but this is only a temporary measure.
Today, a large part of FPInnovations' funding comes from public federal or provincial funds, or granting agencies. There is no guaranteed long-term public funding. Because the industry is not yet back on solid financial footing, I believe it continues to face significant risks during this current critical period.
It is easy to imagine how a lack of funding for FPInnovations would impact the economy very negatively. The basics are developed within universities, who are becoming more and more involved in applications, but universities do not guarantee the fine-tuning and transfer of technology. We are working in the area of innovation, which has to be passed on to society.
In Quebec, for example, we have technology transfer centre networks, such as the Transtech network, that are very successful but generally constrained by limited resources. FPInnovations' demise would lead to serious losses of corresponding skills.
If we consider the international benchmark, we see that the Finnish Centre, FPInnovations' equivalent, was funded by the paper industry but it was dissolved and completely integrated in terms of staff and skills into the VTT, the equivalent of the NRC, through government funding. The American model is somewhat closer to ours. However they do have a major laboratory that is fully funded by the government. The Institute for Paper Science and Technology receives mixed funding and is associated with Georgia Tech University, somewhat like our association with CIPP.
In France, the Centre technique du papier receives about 40 per cent of its funding from the government, guaranteed for a ten-year period, although funding levels are declining slightly. The Swedish Research Centre uses a business model with shareholders, but it also receives support from European Union programs and from Swedish foundations.
So we need to start talking about FPInnovations' future now and about whether or not it could potentially become an NRC centre, or whether it could continue its activities with reduced staff and skills in a centre that would end up being an industrial research centre in name only. I just wanted to caution you about this.
My third point is this. With respect to universities' need to maintain innovative independence, it is vitally important for universities to be the source of new ideas. Professors willingly speak about their academic freedom. Canada has the advantage of having a network of successful universities; in fact, its main universities are involved in the paper industry. A message must be sent however regarding the best place for universities to position themselves in the value added and innovation chain.
The CFIC 2005 roadmap produced positive and beneficial coordination results in the short and medium terms, in that it kept costs in check by optimizing the rational use of resources through coordination. However, too much coordination leads to centralization that can end up generating what I call ``the myth of one way thinking'' which, in the medium or long term, can end up having a very negative impact on the innovative process. We need to start with ideas in order to be able to create.
I am therefore convinced that we have to maintain funding and have a broader definition and vision of what fundamental research in our area means in order to end up with the kind of diversification that we desire.
The fourth factor is that universities think and say that research is not complete until it is published. I say that it is not complete until it is used by society or industry. Innovation therefore requires a demonstration of feasibility. That is the dilemma we face today because the infrastructure that is needed for new technology, that is developed by researchers requires adequate investments, which can be prohibitive.
There has to be appropriate guaranteed funding for demonstration projects and infrastructure. That is the situation today. We are starting to see examples, but there are still shortfalls. Demonstration projects are absolutely necessary for the technical and economical validation of these new technologies that are called transformative technologies.
The proposed concept has in part been crafted by Natural Resources Canada and deals with risk sharing between government and industry. The role of federal and provincial governments is key in a changing world that is emerging from a crisis, and current funding is clearly insufficient.
The fifth key success factor is this. Because this is a capital intensive industry, forest products companies are essentially conservative. To all intents and purposes, they are allergic to risk-taking. Furthermore, companies emerging from a crisis no longer have the financial resources or the necessary cash flow, and the banks are skittish about lending to the forest industry. That ends up increasing the cost of investment capital. It costs more to borrow.
After the demonstration phase, however, these new technologies require corresponding new investments. Gasification, for example, requires investments of $300 million in a single plant. The industry is therefore facing crisis management and risk-taking issues that it cannot and does not want to deal with alone, even though economic development entails some degree of risk management.
Businesses cannot take on these risks alone and that is where governments must become involved. Notwithstanding the innovative use of existing facilities, at a time when paper publications —that is the generic term used for newspapers and books — are decreasing, some provinces have no choice but to request additional assistance from the federal government because that is what is needed for this industry's renewal.
Sixth point: how do we do this type of thing? Taking these considerations into account, we need to demonstrate a bit of innovation and imagination to come up with solutions adapted to the reduced funding capacities of the governments and industry. One solution would be to create bridges of research programs between the agricultural and forestry sectors, and others, specifically for biomass conversion in energy and bioproducts.
This increased coordination amongst the various sectors should and would help maximize the use of public funds and make better use of both complimentary and cross-competencies. Indeed, these various sectors often use similar technologies but develop them in parallel, using different feed stocks such as, for example, thermo-chemical treatments, pyrolysis, gasification, separation processes, bio-chemical reactors and water treatment. These are processes where we can make gains.
We have not, however, answered the question as to who will provide this coordination and, in particular, how it will work. By the way, this is a matter that I raised more than a year ago.
Seventh point: there is another option, albeit a slightly more delicate one as it involves federal-provincial jurisdictions, which would be to increase the cooperation of provinces and regions. Here I am referring to Canadian regions. This would be made possible through the development of university networks that would receive joint financial contributions from the provinces and the federal government.
These networks already exist. However, they could be maximized and expanded, for instance, based on the European model. You will have noted, from my accent, that I am of European origin, even though I have been a Canadian for a long time. We could replicate what 25 countries do at the provincial level. An intermediate solution would therefore be to develop such programs.
The Chair: I apologize for interrupting you, but I would like to remind you that our time is limited. It is our custom to follow your presentation with a question period from senators.
Mr. Mangin: I thought that I had ten minutes. Is my time up?
The Chair: I would ask you to conclude quickly so that the senators can ask you some questions. Our research analysts will take a very close look at the documents that you have tabled so that they can be part of our final report.
Mr. Mangin: In this case, I will summarize each point.
The following factor pertains to international cooperation. This aspect is important, particularly with respect to demonstration projects. Our neighbours to the South can help us with this matter. The technologies are the same internationally. In order to illustrate this point, I have given you a few examples.
My final point pertains to what I call ``speedy marketing''. Financing is a significant factor as far as this matter is concerned. In other words, if we wait too long, we will not have time. This point was also raised by my colleague, Jean Hamel.
We also have to attract more young people to our industry. In order to do this, we need to change the overall image of the forestry sector.
Canada has tremendous biomass resources. There is competition for agricultural land use and we are in an enviable position. As of yet, there is no competition for the land located in the North. I often talk about 40/40/40, knowing that the United States, Europe and China, with different timelines, are attempting to derive 40 per cent of their energy from renewable sources. Consequently, we can expect certain parties to be interested in our natural resources.
Finally, we need to find a way, whether through legislative change or capital investments, to process our natural resources here in Canada. In doing so, the industry would help create value here and not abroad. That rather political issue is in the hands of our governments.
Our forest products industry can and must be a source of collective prosperity for Canadians. This is a watershed moment, and we cannot miss the opportunities that will arise. It is now time to make decisions.
The Chair: We will now begin our question period starting with Senator Ogilvie.
[English]
Senator Ogilvie: Thank you. I will address an observation and a question to FPInnovations and Mr. Morrow. It must be nice to be one employee in a $25 million operation, so you have our envy and attention.
I have been interested in this area since the emergence of the new bio-technologies that began to show some promise through Paprican, the Pulp and Paper Research Institute of Canada, and the Pulp and Paper Research Institute at McGill.
The difference that I hear today through you and some of our other witnesses is instead of hope, a little bit of company investment, a lot of government investment and fundamental research, there is actually a direct relationship with real commitment from real industry. We have seen the evolution of the organization up through a number of configurations to the current FPInnovations. As I have said, I followed that at a distance with real interest.
We had a presentation from Fortress Paper, and I notice that even in a stressed industry, we see a company whose stock price rose ten-fold in the space of 12 months. I know it is not quite as simple as that, but clearly, innovation in this area can have a real impact. You have provided very clear examples of things that are actually under way beyond the laboratory.
Do you feel that we are now at a point where there is genuine commitment and synergy between the base understanding of the chemistry of wood itself and the ultimate markets you have outlined? Do you feel that we are moving past those initial phases and we will see more Fortress Paper successes as we move forward?
Mr. Morrow: That is why I spoke about the 45-gallon drum. We have to get beyond the bench. I think when you can give that amount of raw material to a potential client, they do not want to hear, ``I can get you something in three or four years.'' This is the critical role that I see us playing. That piece is coming.
Being from the industrial side, the investment returns in Canada are still expected to happen in two, three or four years. In Europe, they are looking at 20-year returns. I think we have a way to go. I think it is shifting, and it is shifting dramatically.
I just walk in to the Thunder Bay mill now. They wave at me going in, and that is the human transition. They recognize me as a partner. In that sense, I think it is very promising.
Mr. Hamel: I have been in the industry for 25 years, and have seen a real change in the mindset of the industry. Two years ago, an executive from Domtar told us that two years previous, Domtar believed that the Transformative Technologies Program that initiated the work on the NCC was ``interesting.'' Two years ago, the comment was that it is key to the transformation of the industry. The new mindset sees the new products and new ways of doing things. It sees the new way of taking the fibres and not looking at them as just pulp and paper to make products.
There is a change in the mindset of the industry. We are traditionally an industry based on commodities. To change an industry from commodities to high-tech products or a focussed niche market, you have to change many things. With respect to the collaboration, the different parts of the innovation process, such as having organizations like CRIBE, they can invest parts and the process is key.
The Transformative Technologies Program began in 2007. We not only transformed the FPInnovations research program, but we also transformed the way we manage the business we are doing. I share with Mr. Mangin on a daily basis, if not every night, the concern about the survival of FPInnovations. We know there is a future for FPInnovations and we will be there; we just do not want to die in the transition. That is the risky part.
We have been doing very well in FPInnovations. We absorbed the change. We went through a merger of the three different divisions — Paprican, FERIC and Forintek — and now we have a united program. Like I mentioned, we are also changing the way we address the innovation. I mentioned the key points. This is integrated. We are no longer a research organization but an organization to manage the innovation.
Continuity is key. We had a major input of funding to help us with the risk; having continuity in these programs is key for that. We will not transform the forest product industry in two or three years; it will take longer. The infrastructure and the markets are there, so that is key.
Another point is that we have to make the change. We have no choice. The world is there. I was in Finland and Sweden last week at the same time as Mr. Mangin. We talked about nanocrystalline cellulose, nanofibrils and all the new products for heat and power generation. The world is already there. A great deal of work is being done and we are not alone. However, we are advanced in key parts such as nanocrystalline cellulose, where Canada is a world leader. All eyes are on us now because only we are will be producing 1 tonne per day of nanocrystalline cellulose in 12 to 15 months. We are there because of the innovation process, significant investment and a focussed research program.
Focussing on the markets, not necessarily on technologies at large, is what I call the ``inverse pyramid,'' like studying biopharma and just going at large. Mr. Morrow gave an example of CRIBE in Ontario focussing on lignin because we did analysis that showed lignin is key to that. Now we are developing a research program to address the challenge of bringing it to the market.
Senator Mercer: Witnesses, I thank you for being here this morning and thank you for your very good presentations. You cannot make experts out of us quickly, but it has been sinking in over the past few months.
Mr. Hamel, at page 4 of your presentation, you discussed the delayed market entry and why R&D is not always converted into innovation. Tell us why think that is a problem.
Mr. Morrow, in your presentation, I was fascinated by what you were doing, but I did not hear the word ``FedNor,'' which is responsible for development in Northern Ontario, where I understand much of your work is happening. Is FedNor not taking a role? Has it abdicated a role in this to FPInnovations? Where is that going?
Mr. Isabelle, you mentioned in passing something about doing some research in fisheries. This is not the Fisheries Committee, but I am from Nova Scotia, and there are several New Brunswickers around the table, so we would be remiss if we did not ask you to tell us whether we should be paying closer attention to something there.
Finally, I would like your comments about employment because that is what it is all about, from my perspective — employing Canadians and employment. Are we talking about new jobs, or are we talking about savings jobs? Are we talking about research jobs, or are we talking about line jobs?
It would be useful if we had the numbers. Are we getting better or worse? Unemployment is over 8 per cent, and that means it is serious in some parts, rural Canada in particular.
Mr. Hamel: Senator Mercer, thank you for the question. To answer the question about why the delayed market entry issue is important and why I put it in the presentation, it is often the first thing I bring to the traditional industry. Over the last 25 years, every time we wanted to put a new technology in a mill, the first question that was always raised is: Where has that been installed and is it working? Is there a risk there? In innovation, we have to realize there is no second best. If you want to innovate, it means you are there first; celerity is key. You have to be the first one and take the risk. Using the Apple iPad as an example, can you imagine another device like it coming afterwards? Would it have had the same success? No, the iPad was there first, and everyone follows it.
Mr. Morrow: Most of those projects coming to CRIBE, especially on a demonstration plant basis, are beyond CRIBE's scope. When someone wants to build a $40 million demonstration plant, it is not just CRIBE. CRIBE is acting almost like a conduit in Northern Ontario. We are dealing with FedNor; we are dealing with the Northern Ontario Heritage Fund Corporation. A suite of supports will bring these demonstration plants in.
On the employment side, it is a combination of all three. For example, the Thunder Bay mill has dropped from 1,300 to 430, so there is some job retention with it, but another add-on plant will add another 40 or 50 jobs in some cases; however, it is a combination of both.
Mr. Isabelle: On the fisheries initiative, we went through a similar exercise of consulting and working closely with the industry to find out what their needs were in that case. We were not as blessed, in this case, in forestry, having FPInnovations and NRCan already working closely with industry that they could right away reflect and move on with funding initiatives and so on.
However, through a process of consultation, we did narrow down and fund two major initiatives. One is on the capture industry, and the issue there is sustainability, ensuring that future stocks are sustainable for resource exploitation and so on. The second initiative is also in a similar vein. It is on multi-trophic aquaculture, which means that instead of having a single species of fish, you are cultivating those fish on top of algae, which are also used and harvested on top of mussels, for example. You use the whole system and try to avoid the waste products that would come from a traditional aquaculture application, and you try to maximize that and get synergy out of it.
That is what we have done out of fisheries. There are also a number of smaller scale projects.
The question about jobs is difficult to answer. I can give you the very cold statistics. It is a question of saving jobs at the moment, of course. Forestry, logging and support, in five years, have gone from roughly 61,000 jobs down to 39,000, according to Statistics Canada. In the paper sector, it has gone from 88,000 jobs down to about 66,000, perhaps not as dramatic, but still going down. The wood products sector has gone from 135,000 jobs down to 89,000 jobs in the space of five years. At the moment, it is an issue of trying to save jobs, but in the future, it should be more than that.
Regarding product diversification, eventually it will be an issue of deciding where forestry begins and ends, and where the other markets begin and end. Those things will bleed into each other. The hope is that there will be value- added jobs, but can you count them as forestry jobs? They may be in other columns of the reporting, if you will.
In many of the projects, several new small- and medium-sized companies are emerging, which is why I put an emphasis in our general innovation presentation. We are trying to reach out to those companies in particular because a lot of the growth opportunity might be there. You may see emerging new companies. You may see existing, non- traditional forest companies that will take on what might become interesting lines of business. Then, of course, you will have the traditional forest companies that will also evolve, take on new business lines and expand their existing ones.
I do not have a crystal ball, so I cannot tell you, but there is a great deal of possibility there, and R&D is essential. If you look at the statistics on the R&D side, the resource sector in general, not just forestry but also mining, oil and gas and so on, it is a very low percentage. We all understand why that is. The economics are very different compared to an information communication technology company. We understand there are big differences in investment and R&D and that is okay. However, the level of investment, especially in the current climate in this sector, is pretty poor and that needs to change.
Senator Mercer: Mr. Chair, I think one of the things that Mr. Isabelle has pointed out that we should perhaps consider when we do get the right to report is future calculating of jobs in the industry. To produce the cellulose that will go into the dashboard of a car does not just get counted as a job in the automobile sector. Somehow we need to have a true measurement of what is happening in the forestry industry, so we should perhaps consider that.
Mr. Hamel: In slide 9 of our presentation, we show results from the bio-pathway. We analyze the technology not only based on the potential economic return, but also there is an impact on employment, the social impact.
In the example on slide 9, you see there are two curves here. The columns show the employment that these technologies generate and the red line shows the return on capital. You see that we have to consider and analyze these technologies and try to predict the maximum impact on jobs. That is what we can do with these types of analysis.
Mr. Browne is involved in the bio-pathway too, which is to extend these studies on the bio-materials. The example you were giving on putting cellulose in dashboards is the kind of thing we will be doing in the next few months.
We will answer these questions through real in-depth analysis of each technology.
Mr. Mangin: Both Mr. Isabelle and Senator Mercer are 100 per cent right. Right now, it is a question of savings jobs. If you look at the downfall of newsprint, for instance, all this mechanical pulp, if you want facilities, you can do something with it.
I want to reinforce what you were saying about these jobs are not created directly in the forestry sector but in associated industries. What happened with the invention of polyester is what can happen now with nanocrystalline cellulose, creating a new industry with it.
If you are looking at the jobs to produce NCC — the graph that Mr. Hamel is talking about — it is very small; but if you are looking at the industry, it will develop. The multiplication factor is huge. It is a step process.
Step one is small jobs after the loss of jobs in the newspaper and forest industry, small jobs to create these new products with, I hope, a strengthening of the research. Again, the path to success is critical, and then you create the new industry, like in polyester. It is like looking from three to five and then 10 years. Yes, it is the future.
Senator Plett: Gentlemen, I will just make a few comments with maybe one or two questions at the end. As with Senator Mercer, I will finish all of it and then you can respond. Our Library of Parliament does wonderful research and I want to read some of what they have told us in as far as research and development is concerned:
From 2000 to 2005, research and development expenditures in the Canadian manufacturing industry hovered around 4.5 per cent of GDP.
Over the same period, the percentage in the pulp and paper industry fluctuated around an average of 3.3 per cent, while in the wood and wood products industry, the percentage was down around .47 per cent.
Thus we see that the Canadian forest industry does not seem to invest the same effort in research and development as the manufacturing section overall.
Further from the Library of Parliament study:
In Canada in 2009, venture capital and private equity investments for all sectors of the economy represented around 0.3 per cent of GDP.
Mr. Isabelle noted that NSERC maximizes the value of the Government of Canada's investments in research by promoting research-based innovation, university-industry partnerships and — here is the key one — the training of people with the scientific knowledge and business skill to create the wealth from the new discoveries in science and engineering.
I have a few questions. First, as opposed to asking government, what can be done to increase access to venture capital and private equity in the forestry sector? We have been told that private companies are adverse to risk taking. There are many businesses that do a lot of risk taking; farmers, for example, spend all of their money at the start of the season with the hope that at the end of the year, they will be able to reap some rewards.
Development companies — and I have done a little bit of land developing — spend all their money developing a piece of land, hoping that the interest rates will not kill them before they get to the point of being able to sell some of their property. In many industries, in fact, private companies do a lot of risk taking.
What can be done so that we can increase venture capital and private equity in the forest industry?
Another question that I have is NSERC gets $1 billion a year from the Government of Canada, and I think it is money well spent by the government. However, we are told we need to give more money, certainly to R&D and to train young people.
What can we do to get more private investment and how much money is enough?
Mr. Mangin: I will discuss the risk, because that is something that we analyzed very quickly and my colleague discussed it.
The risk is different for different industries because this industry is capital intensive. That is the first factor. These new technologies, if you are looking just at a new demonstration plant, it was said the first for NCC is 1 tonne per day, which is $40 million. Now, because of the crisis, industry is in this transitory period so they cannot take the risk.
They are not asking for money from the government; they are asking for some guarantee versus the banks. This is the main factor. I believe Mr. Lazar from Forest Products Association of Canada, provided the same message. Right now it is just a timing factor, where a little push on the sharing of risk is needed. That is factor number one.
When you presented your data on pulp and paper, I wish it were 3.3 per cent. It is not. In the data you mention, it includes what they are doing in the mills so it is not truly research. The true value of research is much lower than 3.3 per cent; it is actually less than 1 per cent, 0.55 per cent. This is dramatic.
That is why the intermediate time might take five years. It is also why I gave the message or warning compared to FPInnovations. I have no doubt about the future of FPInnovations. However, in this transitory period, if you are losing the competencies because you have to downsize, that is part of the risk we are talking about.
How do you get investments — to answer your last part of the question — because we will need investments when we move from demonstrations to the real plants? We will not buy 300 million or 1 billion plants, but we want to ensure that they are built in Canada and not to export resources to the United States where they do the transformation there. Then we will create the jobs and the value.
It is part of some legislation on how we force, more or less, this converting of the biomass to be done in Canada. That is the key. Then the investment will come from the south and other parts can come from Brazil to convert to biomass.
Mr. Isabelle: To answer the ``how much is enough'' question, I do not think there is an easy answer.
Look at the benefits: You have 12,000 professors, and you want to put them to good use. You have these 28,000 students.
About five years ago we asked the question ourselves: How much would be enough? We looked at it from a different perspective, and we said we should take advantage of that capacity in universities. Is it being underutilized? If we were to try and make an estimate of the capacity to absorb more funding and make good use of that funding, what would the number be? We came up with a doubling of the budget.
I do not want to emphasize that today. You are absolutely right in your point about the business investment in R&D. When we track Canada on the world scale, investments in post-secondary, higher education, R&D level and so on track pretty well; Canada is actually mapping pretty well to the rest of the world. It is on the business side that we do not.
I think the absolute emphasis right now needs to be how we do get that percentage up and how we maximize the benefits. Quite frankly, the issue is the transfer of knowledge. We have wonderful world-class institutions, generating all sorts of ideas. We do not necessarily have the synergy as tight as it should be across the system to ensure that those benefits are ensured in a business sense. That is the weakness in the Canadian system.
Mr. Hamel: There are two things: The people and the investment. Mr. Browne gave you many examples of new, major investments. AV Nackawic invested more than $100 million to transform the mill to produce dissolving pulp to make rayon, which is useful to make shirts and which is a much-appreciated fibre in Asia. Fortress Paper will invest hundreds of millions into the product.
However, the key point is products and the customer. You invest hundreds of millions into a mill like Thurso because you know you will be able to sell these products. Fortress Paper announced this week that they signed a major contract with people who already buy their products.
Domtar has invested in a demonstration plant; it is not even a business plan. It is for producing 1 tonne of NCC per day in 18 months. They are investing $20 million out of their own pocket of the $40 million. It is a high risk for a company like this to produce just a demonstration plant.
They are doing it because we have new products. We have identified customers. Due to the innovation process we have been doing, right up front in the research work we have been putting engineering and customer feedback foremost so we could reduce the cost and adapt the product for these needs.
In French, we say ``capital de risque.'' There is the word risk. If you talk to them, the risk is probably the thing they are most adverse to. They will invest large amounts of money only because they are business people; they will invest money into places where they really believe there is a strong proposition and a customer need that can be filled. The approach they have makes sense. There are real benefits at the end and they are stronger than the competition.
Those are the factors that we need to address in the research. We are doing the Bio-pathways Project type of analysis to screen those technologies. We have to identify and clean up the researchers' ideas. Believe me; researchers have many ideas. I see Mr. Isabelle smiling. There are all kinds of ideas. It is good to have ideas, but you need to channel them through.
That is why we need to have this different perspective in order to be able to pick the best technologies for Canada. We have to develop the customer base and markets and do the appropriate research to enter these markets. Then, when you face an investment — when you have these strong, valid propositions — they will put the money on the table.
[Translation]
Senator Eaton: Thank you, gentlemen. This is all very interesting, and I have many questions.
[English]
We have listened to witnesses from both the steel and concrete industries that have come and talked about the research they do every single year. They go into universities and teach architectural students new ways of using concrete and steel.
The forest industry has never done anything like that. Do you sense after this terrible downturn in the forest industry that they have learned their lesson and that research will be ongoing, or do you think you will help them now and then it will go back to the old way? Do you feel a real sense of change of attitude in the forest industry in terms of research?
[Translation]
Mr. Mangin: I have 37 years of experience in the forestry, printing and especially paper industries, and I would say that the industry so far has not been very good at doing these types of things, particularly when compared with other industries. Why will they do that today? Simply put, because they no longer have the choice. They have now been forced to do so. And so we are seeing change occurring. We have had a few examples, but I would say that we still have a long way to go, and although I am generally an optimist, I am also quite pragmatic.
I spoke about having to completely change the industry's business model. We will no longer be looking at the same industry. If the industry were to remain as is, I would tend to have a rather negative outlook because I do not think it can carry out major changes. However, because of the implementation of new technologies, new players will enter the industry and become a catalyst for such change.
In terms of research being conducted today, strangely enough, the largest number of applications from young people are coming from the doctoral and post-doctoral levels. On the downside, it is becoming very difficult to enter the forest industry as a technician because of its terribly negative image. That is basically what I would respond: First, the increasing number of people with PhDs entering the sector and second, the fact that there will be many SMEs that will want to become associated with biomass processing. Those people have no other choice then to put a lot of energy into increasing their businesses margins.
We also have to keep in mind that the Canadian dollar is weaker than the American one, and so we cannot simply base our industry on the exchange rates any longer.
The industry will be going down that road, but not in the next three years, in my opinion. We have to wait for the new players.
[English]
Mr. Morrow: We have to recognize that the dust is settling. My particular mill swung $100 million negative in 10 months; my gross sales went from $250 million to $150 million. The dust has settled.
I think there was, is and has been through FPInnovations a very strong research effort in the industry.
Senator Eaton: I am not talking about FPInnovations. They are wonderful and stellar.
Mr. Morrow: And they are supported by the industry.
Senator Eaton: Yes. However, I am trying to ask whether you feel the interest in research will be ongoing by the woodlot owners and the pulp mills, or will they just get over it, start making something new and go back to their same old ways?
Professor Mangin said perhaps they will make more of an effort because it will be a new type of person in the mills — they will be more science- or engineering based, perhaps.
Mr. Morrow: You are correct. I think you can model that around the forestry schools right now. The undergraduate programs in the forestry schools are struggling, but the post-doctoral, PhD and master's programs are booming. There is a subtle shift going on right now.
Senator Eaton: Is that because of the interest in new products?
Mr. Morrow: I think it is because the operational jobs of working for a Domtar or a Bowater are not there anymore, and they recognize that jobs in forestry are in research. The operational line function jobs, like the job that I used to hold, are disappearing. The jobs are coming from — and where the young people are moving towards — the master's and PhD side. Almost every forestry school is like that today.
Mr. Hamel: There are two aspects of what is happening. We have been a committee type of industry. The commodities side was pretty mature with the cost reducing. Look at Paprican, the division of FPInnovations that was doing pulp and paper. Even in the organization, we were divided into various process types of research. We were reducing and trying to reduce costs. As a joke, I say that when you dig to reduce costs to zero, then you start digging your grave, and that is the end. There is a limit to reducing costs.
Plus, the market has disappeared. The need for research is not as pressing as it is when the market is demanding and it is easy to do business. A lot of research is needed on these new fibres and products for the new markets, if you want to be the first one in.
Domtar just invested an additional $1.5 million into research at FPInnovations on certain markets for the NCC. This is real money being transferred, not in kind. There is an understanding that we need to do this research. People are averse to putting money into research but more amenable to putting money into the innovation process.
Education needs to be done in the area of building products. Currently, if you want to build a new building like they had in Vancouver for the Olympics, we are still missing part of the supply chain of building products. It is kind of a chicken and egg situation. You need the architects, civil engineers, woodworkers and carpenters to build these new high-tech structures.
Senator Eaton: I would like to get to that scenario, and I would love to talk to you about clustering and foreign markets.
Mr. Isabelle, you talked about the building code. We had building code people appear before the committee. They said that they do not do research ahead of the curve. They always wait until people have developed products and want to build an eight-storey apartment building before they come to them. That makes it difficult for innovation when you have a building code that is not up-to-date.
Is that a fair assessment or do you think the building code people will start being more innovative like FPInnovations, who take the research and bring it to the marketplace?
Mr. Isabelle: I am not an expert on the building code, but I have heard the same thing from my contacts as well. One contact was in my office the other day from Tolko Industries and told me that there is a real shortage of structural engineers coming out of civil engineering programs in Canadian universities. There is a shortage of structural engineers to put their stamp of approval on structures involving the use of wood.
You are perhaps right in your observation that the steel and concrete industries have been far more effective in influencing the curriculum and the ability of civil engineering programs to produce the broad range. The blanket has been pulled to one side of the bed, as it were, and we now need to address the other side. Absolutely, those issues resonate with the people that I talk to.
There is a recognition that it has to change. The building code has to be more forward looking, and the creation of a network like this will have an impact. The professors and their students who collaborate with industry and so on will create a buzz and a push that will begin to effect change. It is too bad it did not happen earlier, of course.
Senator Eaton: Yes. We have heard from people at universities in British Columbia, Toronto, Edmonton and Laval who say the same thing. They offer few courses to their engineers and architects in the use of wood, which is the chicken and egg syndrome again, is it not?
Mr. Isabelle: There is also the possibility of picking up on international aspects. We understand that other jurisdictions are more advanced than we are in this technology. Quite frankly, there should be more effort to align efforts, instead of trying to reinvent the wheel in different jurisdictions; learn from each other's experiences; adapt the building codes to the same information; and support each other in advancing the building code more effectively.
I understand that there are efforts afoot to try to do that but I guess at this time Canada is in a bit of a catch-up mode, not a leadership mode.
[Translation]
Senator Rivard: I would like to come back to Mr. Isabelle's presentation and where he talks about producing bio- fuels from insect infested wood. Out west, there was the pine beetle infestation. It is estimated that some 13 million hectares of pine forests have been infested, an area the size of Denmark and Portugal. That gives an idea of the sheer scope of the problem. Are such projects profitable or do they need to be subsidized, because Canada could reap rewards by assisting the export of that product abroad, no? So my question is: Is that something that is profitable or would this initiative need to be subsidized?
Mr. Isabelle: I am not an expert in economics. Perhaps my colleagues from FPInnovations could answer that question more clearly. What has already been presented, if you only look at the simple product which is ethanol, for example, is a problem, but if you look at the wide range of potential products, that might be profitable. That is really where we have to make an effort so we can take advantage of every opportunity.
Of course, as far as research is concerned, people have to focus on their own specific area to make breakthroughs, which in turn will lead to developments related to ethanol, which is the case we are discussing. But, at the same time, we have to work on other aspects of other products to maximize profitability.
Mr. Browne: If you turn to slide 18, you will see that 70 per cent of the petroleum is transformed into fuel, but that this activity only generates 43 per cent of revenues. As Mr. Isabelle said, it is not enough to just have the fuel, you also need other products, the remaining 4 per cent, to generate additional value.
Senator Rivard: The same reasoning applies to a problem we have in western Canada. Eastern Canada, Quebec, northern Ontario and parts of New Brunswick are periodically invaded by the spruce bud moth, but they are not affected by it on an ongoing basis, as is the case in western Canada. Is that the same kind of reasoning that would apply?
Mr. Browne: Indeed, the wood is distributed and the petroleum comes from a well. The cost of harvesting is a huge part of the production cost for a litre of ethanol or synthetic diesel.
Senator Rivard: Over the last few months, several witnesses talked about how we could make better use of the forest biomass, specifically through the transformation of wood into pellets for industrial or urban heating purposes. I will not deny that, at first, promoters approached us, and they were very enthusiastic. Over time, as others came to us, we were told about the less positive aspects. I am thinking, among other things, of the presentation made by representatives of Greenpeace, who looked like they were going to have heart attacks and tear off their shirts. So, what to do? Do you think that transforming biomass into wood pellets for heating is good for the economy and the environment, or would it be better to let the ground regenerate itself?
Mr. Mangin: I recently conducted a study on pellet use for the Ottawa region. There are two aspects which should be considered: should the pellets be made directly from roundwood or from forest residue? If they are made from roundwood, you have to ask yourself all kinds of questions, including where the harvesting will take place, and then determine whether it is worth it or not. As for forest residue, we know that in our regions, we can use part of the residue — but again, where will we find the residue? By the roadside or directly in the forest? So the costs after harvest will either balance out or not. Greenpeace representatives would not suffer heart attacks with that approach. The forest ground would not be depleted if you do not harvest it entirely.
One last point related to the market: For now, the people who have gone into the pellet business are doing well, there is no doubt about that. Exports to Europe are strong. Two countries can serve as examples, namely Sweden and Germany. For now, it is a profitable business because those countries have carbon credits.
It is a bit like parity between the U.S dollar and the Canadian dollar. It is a little delicate from an economic point of view, even today. It is a matter of being prudent more than anything else. However, these might be potential solutions for some else. The CIBC Biopathway Report also saw these as being complementary strategies, but we need markets.
There was one example in the Mauricie region, where a person went into this business without doing any market research beforehand, and things did not go well. So now there are 630,000 tons of forest residues available each year, but no wood.
Mr. Browne: To add to what Mr. Mangin said, it all comes down to economics. Pellets compete with heating oil or kerosene. Without support, it is very difficult to make the economic case that Canada should be selling pellets to individuals or to industry. It is profitable to do so in Europe because of the price of coal-generated electricity, which can be very high. It comes down to economics. It is not really profitable in Canada as yet.
[English]
Senator Mahovlich: I thank the witnesses for appearing. This has been very interesting.
For businesses to succeed there has to be a demand for their products. Where will the demand be in the next 20 to 30 years? Will it be India? Will India need homes? Will it need wood? Will China need homes? India has 1,100,000,000 people. In 2020, there will be another 300 million people. That is a lot of people.
The Gates family in America is giving $1 billion a year to help the poor people in India. Are we prepared to transform wood into homes and be ready to ship them to some of these people? Do we look at the future that way? China right now thinks that wooden homes are far more secure when they have a catastrophe such as an earthquake. They are more stable and less collapsible compared to a clay home.
Are we looking at a demand for wood in the next 20 to 30 years?
Mr. Browne: I cannot talk about building products, but the people who run the two AV Group mills in New Brunswick sell into the rayon market. The way they have explained it to me is that we have 1 billion Indians and 2 billion Chinese. Five years ago they could all afford one shirt apiece and now they can afford two. In a few years, it will be three. They see a huge market for rayon from wood in the future, and those markets are India and China.
Senator Mahovlich: Can these people afford a home?
Mr. Browne: I am sure if you can buy more shirts you can also afford a nicer home.
[Translation]
Mr. Mangin: Yesterday, on another subject, we had a discussion with Mr. Jean Hamel about the average standard of living in India. Today, India's middle class can afford to buy a house, a car and one meal out a week; its size equals all of Europe's population, or 350 million people. That number will only increase.
So the answer is yes, gradually they will be able to afford it and it will probably be a potentially interesting market for Canada to consider and develop.
Senator Fernand Robichaud (Deputy Chair) in the chair.
The Vice-Chair: Thank you, Mr. Mangin. We still have a few minutes left and I have a question. We talked about the private sector. I heard that research and innovation seem to be spearheaded or used mostly by big companies.
How can SMEs also get on board the new forestry research and innovation train?
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Mr. Morrow: I have an observation. That is what CRIBE has noticed in its short term of one year. The small- and medium-sized entrepreneurs are not coming to us for funding. We are refocusing ourselves and saying that we have to rebrand ourselves to go after them. That is just an observation. That is what we are seeing in Thunder Bay. The small entrepreneurs are not coming to us.
The Deputy Chair: You say you have to redirect your efforts. How will you do that?
Mr. Morrow: That is what I am working on right now: more outreach, more field visits. I chase every lead. There has been such an impact from the downturn, these small entrepreneurs are not around right now. We have to rebuild that.
[Translation]
Mr. Mangin: The bigger companies, paper companies and forestry companies, are creating intermediate products, which will help SMEs get off the ground. To go back to the example of nanocrystalline cellulose, and to draw a parallel with polyester, if nanocrystalline cellulose products become available, they can be used in other products, such as panels, or other parts, which are used in the auto industry. We also have clients with CIPP, including SMEs, which do that kind of thing. I think that we will see more of this, but first we have to create the products, which I call intermediary products, if SMEs are to get into this business as well.
Mr. Isabelle: Indeed, that is a very good point. What should we do about SMEs? In fact, NSERC has recently specifically targeted this group to increase collaboration with universities. Our mandate is to support universities and colleges in particular with a view to creating new programs which would be based on this type of collaboration. This has worked successfully with the small companies, but it is just the beginning. We really need to continue our efforts. After these smaller collaborations, we need to focus on longer term and bigger projects. We have certain programs which will help small companies hire doctoral students and pay a portion of their salaries. This will help us move forward with research and development. Indeed, it is very important to engage these people in this type of issues.
The Deputy Chair: One final comment.
Mr. Browne: I know many small businesses that sought venture capital to help them expand, and in 2009, it disappeared. Many of these small businesses are now waiting for venture capital.
The Deputy Chair: Thank you for having taken the time to come and speak to us. Someone said that you did not turn us into experts in the short time you had to submit your briefs, but we will certainly take into account all of the information you have provided when we draft our report. Thank you, gentlemen.
(The committee adjourned.)