Proceedings of the Standing Senate Committee on
Agriculture and Forestry
Issue 9 - Evidence - October 19, 2010
OTTAWA, Tuesday, October 19, 2010
The Standing Senate Committee on Agriculture and Forestry met this day at 5:07 p.m. to study the current state and future of Canada's forest sector.
Senator Percy Mockler (Chair) in the chair.
[English]
The Chair: Honourable senators, we have quorum and I declare the meeting is in session. I welcome all senators and witnesses to this meeting of the Standing Senate Committee on Agriculture and Forestry.
[Translation]
My name is Percy Mockler, a senator from New Brunswick, and I am the chair of the committee.
[English]
This meeting will be in two parts. We will be hearing from one witness for the first 45 minutes of the meeting, and others will follow in the second part.
[Translation]
Our first witness is John Thompson.
[English]
Mr. Thompson is the Chairman of the TD Bank Financial Group and is representing the Council of Canadian Academies.
[Translation]
We will also hear from Renata Osika, Program Director.
[English]
Thank you for accepting our invitation to be here to make your presentations. Mr. Thompson is here to talk to us, honourable senators, about the council's 2009 paper entitled Innovation and Business Strategy: Why Canada Falls Short.
[Translation]
The committee is continuing its study of the current state and future of the forest sector, and we will be focusing specifically on research, development and innovation efforts.
[English]
Before I ask the witnesses to give their presentations and formally introduce themselves, I would like to start by asking senators, starting on my left, to introduce themselves.
Senator Mercer: Senator Terry Mercer from Nova Scotia.
[Translation]
Senator Robichaud: Fernand Robichaud, of New Brunswick.
[English]
Senator Fairbairn: Senator Fairbairn, Lethbridge, Alberta.
Senator Plett: Don Plett, Manitoba.
Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.
Senator Ogilvie: Kelvin Ogilvie, Nova Scotia.
Senator Duffy: Mike Duffy, Prince Edward Island.
Senator Eaton: Nicky Eaton, Toronto.
Senator Wallace: John Wallace from New Brunswick.
The Chair: Mr. Thompson and Ms. Osika, I would now invite you to give your presentations, which will be followed by a question and answer session.
John Thompson, Chairman, TD Bank Financial Group, Council of Canadian Academies: Thank you all for the opportunity to be here this afternoon. I will give a brief overview of the innovation paper that was produced by the Council of Canadian Academies. I was a volunteer as part of an expert panel of some 18 people representing business, academia, labour and some NGOs.
The background is that the paper was a response to a request from Industry Canada to the council about innovation. The request said that Canadian business appeared to them to be far less committed to innovation than some competitive businesses in other countries, and asked if this was this true; and if so, why? They did not ask us for policy recommendations to remedy the issue, because it is a complex one; they wished to define the problem first. Hopefully there are a number of opportunities to talk about policy, based on what we had to say.
The issue starts with the fact that Canada has a productivity problem. If I go back 25 years, we were about 93 per cent of the productivity level of the United States. That has now dropped to just over 70 per cent, with the gap widening almost every year since 1985. I would add that it is not just a difference with the United States. If you look at the OECD countries, we rank number 15 in productivity out of 18 countries. There is some speculation that perhaps a smaller country is necessarily lower down on the ranking. However, I would tell you that other OECD countries, such as the Nordic countries, for instance, are growing their productivity 50 per cent faster than we are. Therefore, it is not just about size.
We began by analyzing productivity and breaking it into its components. You look at labour hours, skills and the amount of capital per worker and compare it to other countries to see if there are any underlying factors there. You also look at structural differences and what the differences are in industry mix of the country or the size of businesses. When you analyze all that, the gap does not change by much. The gap is certainly not in the labour differences. There is a little bit of a gap in the industry mix, but essentially the gap with the other economies does not change.
You are left explaining the gap by something called "multi-factor productivity," which is essentially the economists' term for innovation. It is what you cannot measure in terms of skills, labour rate or wages. What you are left with is the difference between how two economies innovate and become more productive.
I should spend a minute defining innovation. Simply put, innovation means finding better ways of doing things. Conventionally, innovation is often thought of as research and development that leads to new inventions or new products. However, innovation is more often a business process improvement, a new organization, a new method of going to market or new information systems. Innovation is not necessarily a new invention or product; it is whatever an organization does to become more innovative and more productive.
Innovation is also the investment in capital equipment. If you think about it, capital equipment is just purchased innovation. If someone else invents a machine tool, for instance, and you buy it, essentially you are buying the innovation that someone else created and transferring it to yourself.
I want to give you some examples of non-product innovations that have been very important over the years. I would say the assembly line in a factory is one, or the invention of the department store, or the drive-through window at a fast-food restaurant, or the one-click order on Amazon, or railway containers that are now double stacked on railway cars rather than single stacked. The latter did not involve a lot of product invention; it was a different method of doing the same thing. These are all innovations.
The conclusion of the council is that Canada is indeed less innovative, and this lack of innovation is a major contributor to the productivity gap that we face. There is no single answer why. It does not appear to be the nature of our people or our inherent capabilities. It is not a problem in our DNA. We have many examples of success, so it is clearly not something inherent.
The conclusion we came to is that it is the lack of business ambition in our businesses that is the major source of the problem. I might mention as an aside here that the focus was on business, so we did not look at the public sector but at commercial businesses.
If you step back a bit, conventional wisdom was that the lack of business research and development was the problem because spending by business on research and development in Canada is low compared with the United States and OECD nations. To put some numbers on it, Canada spends about 1 per cent of GDP on research and development, whereas the U.S. spends double that, or 2 per cent. One per cent sounds like a small difference, but it is double. When you multiply it by the size of the economy, this is a huge number and a huge difference.
I would tell you that we need to reframe our thinking a bit because research and development is really a business output; it is not a root cause of the problem. You have to back up and look at the inputs and outputs of a business system. At the base, it is business ambition, the competitive pressure, the business climate you are in and public policy that drive a business strategy.
A business strategy, in turn, drives specific business activities, of which research and development is one. Investment in human capital would be another, capital investment would be a third, and doing mergers and acquisitions would be another. These are outputs of the fact that you have a certain business ambition that creates a strategy, which in turn leads to investment and, therefore, innovation and improved productivity and eventually an improved standard of living. That is why the conclusion of the paper at its foundation was that Canadian businesses are not as ambitious as many others around the world in terms of creating competitive strategies for growth.
An interesting factor is also to look at profit. Our profits are very good in Canada. We are slightly ahead of the U.S. if you look at pre-tax profit. We are about 13 per cent across the whole economy, and the U.S. is around 12.5 per cent. It varies from year to year, but we have always been equal to or slightly above the U.S. in recent years. I think that might explain one of the reasons for lack of business ambition, because we can make a good profit without necessarily having to take more risk and go out on the risk curve in terms of investments.
The way I like to think of it is that there is a scale. At one end of the scale is an income trust. It is a company that does not invest in the future, does not have any growth, but it returns all its money to shareholders. It is the nature of that kind of business. At the other end of the scale is venture capital, where all the money is invested in growth, innovation and the future. There is no profit for a long time. You hope profit is there some day.
Businesses operate somewhere on this scale. The council would submit that Canadian and U.S. businesses might be somewhere in the middle, but we are a little bit closer to the income trust model, taking less risk and putting less investment in the business, whereas some of the other economies are more on the venture end of the scale. They are not way up on the scale, but they are investing more money in growth, taking more risk and becoming more innovative.
There are a number of other indicators. I will summarize them quickly and then I will stop for your questions.
One indicator is capital investment in information technology and communications. If you look at our investment in machinery and equipment outside of computing and communications, it is about the same as the other countries. This would include machine tools, production equipment and so on.
However, when you look at information technology, we are at only about 60 per cent of the U.S. on a per capita basis. If you look at some of the European countries, the gap is large as well. When you analyze that, you find it is in the manufacturing and services industries and mostly small business where this gap exists. There is clearly a lack of investment there in Canada, and that is one point.
Second, if you look at the export focus of our downstream businesses — I am not talking about resources but about secondary industry or distribution — we have low investment and a low level of exports compared to European countries and the United States. Again, it is not size, because small European countries not only have more exports, but they have created some major worldwide corporations that operate on a world scale. If you think of the Nordics, you think of Nokia, Ericsson, or IKEA. If you go to Holland, you think of Shell or Philips or ABN AMRO. If you go to Switzerland, you would think of ABB, Nestlé or Zurich Insurance.
There are many worldwide companies, world beaters. We do not have many in Canada. We have RIM at this stage. We used to have Nortel. Other than that, there are no major Canadian-based industries that have focused on the worldwide market.
Early stage financing is low in Canada. That is the next point. Canada invests about 3 per cent of the level of the United States in early stage investment or venture, which would say that we are about one third of our normal fair share. We are 8, 9 or 10 per cent of the U.S., and we are only 3 per cent when it comes to venture. The returns on venture in Canada are about 2 per cent of earnings, and in the U.S. that is over 20 per cent. We have not had success in venture. I will not go into the reasons why, but we have some ideas.
Government-funded innovation from research in Canada tends to produce fairly low output to business. To give you some examples, for research and development granting by the Government of Canada and provinces, about 90 per cent goes to universities or to government agencies and 10 per cent goes to industry. In the U.S., for instance, it is closer to 50/50. That includes joint ventures between universities and corporations. Some of it is defence related, which we do not have to the same degree in Canada, I would say. There is some explanation for it, but it does not cover the whole difference.
Canada funds research 90 per cent through tax credits, whereas the U.S. funds about 20 per cent through tax credits and 80 per cent through direct research grants. What that does is cause people to take more risk because someone else is footing the bill. I am not saying which system is good or bad, but there is a balance here and pointing out the differences sometimes tells you that you might be too far in one direction versus the other. It is at least worth discussion.
In education, Canada, interestingly, has a higher post-secondary educated workforce, but that includes community colleges as well as universities. That is good, and we should be proud of that. The U.S., however, does have about 30 per cent more university graduates on a per capita basis in the U.S. than Canada. They have almost twice as many masters' degrees in business. Some of it is engineering and some of it is MBA, et cetera, but they have a higher degree of expertise in their businesses. They have 30 per cent more PhDs in business, where many of our PhDs have stayed in the universities.
Let me conclude by saying that Canada has low productivity growth, as you all know. It is believed by the council to be mostly due to weak business innovation. Business innovation is driven by business ambition and business strategy. The issue of innovation needs reframing to look at the inputs to the cycle, not just the outputs, such as R&D, but what is at the root cause of our problem.
Obviously public policy is important but the bigger challenge is for business, because that is where the problem is. It is not that good public policy could not reinforce some of the things business should do, but the lead here must be driven by business.
Looking forward, I say we face some new challenges. We have slow economic growth right now, which could lead to less prosperity. We have rising protectionism, which could make our access to markets vulnerable. However, we also have some good opportunities. We have good market growth in emerging economies, particularly in Asia. Interestingly, we also have a new group of rising business leaders coming from multicultural backgrounds who may be better equipped to work in international markets than Canada has been traditionally.
I will leave it at that and invite your questions.
The Chair: Thank you, Mr. Thompson. We appreciate your presentation.
Senator Ogilvie: Mr. Thompson, there is absolutely nothing in your report or comments that I can disagree with — on the contrary. I read this report shortly after it came out a year ago. My great frustration is that there is absolutely nothing in that report that we have not said in dozens of reports for over 30 years.
I first became involved in these kinds of analyses at the beginning of the biotech era in the early 1980s. Every single analysis shows the same thing. This is not a criticism. You have it right in terms of the analysis of what is wrong.
My frustration is that Canadians are very innovative people, using your definitions of innovation, but we do not translate that into business and economic development. In fact, much of our scientific and technical expertise goes elsewhere to be translated into economic development.
The question is, how do we change that? It is not that we need another analysis showing us where we are. What we need is a way to bring about change. In the comments I am making, I do not want to knock those Canadians who are innovative and successful. The issue is that we just do not have enough of them. You have identified that.
Let me give you an observation. When I have looked at it, what I see is that when governments and other organizations such as think tanks recommend how we change, they go and look at other countries. Then they say this is what Finland did or this is what the United States has done in the following areas.
However, those ideas do not apply here for reasons like density of population. We have the second largest land mass in the world with 35 million people spread out across it; the same number of people as in California. San Diego has in one city as many biotech companies as we have in the whole country. Think of the cross-fertilization that occurs there. We cannot take the San Diego model and apply it here because our companies are spread from Saint John's to Vancouver. You look at Finland, and they have most of their population concentrated in one centre.
We have an entitlement attitude that has permeated business. Canadian business people are very entitled. They are risk averse. We are risk averse as Canadians. That is a change that has occurred during my lifetime. Canadians were once very solid risk takers.
Mr. Thompson, you lead a major organization that is very successful in its own right, but a traditional kind of business. It has modernized and adapted to our kind of world. Our business models of the past were figuring out how many trees existed in the forest and what is the cheapest way to build a road to get them out and then take them to the frontier and ship them somewhere else.
How do we use the information that you have identified? With the experience that you have, can you tell us one secret as to how we can say this will help us change that non-risk-taking attitude here and really get on with it?
Mr. Thompson: Senator, you know as well as I do that there is no one secret; otherwise we would have done it. It is a difficult problem.
I will give you some thoughts or ideas, but I would say at the outset that I am here to represent the council and explain the work that was done by them. The council was specifically asked not to get into remedies or ideas but to look at the literature over the last 30 years, as you say, and distill the problem, which I think we did succinctly. We did not spend time working on remedies, because we were asked not to by the Government of Canada. It does not mean we did not discuss remedies a bit and it does not mean that that work does not need to be done.
Let me give you some ideas. None of them are huge, and they will not work particularly against the density issue that you talk about or the entitlements, because those are givens with our environment. However, on the point about information and computer technology, we could clearly encourage more investment in our businesses. I do not know the status of the digital economy initiative, but initiatives like that could make a difference and help with our innovation and productivity in continuous improvements of businesses.
It would help to increase our exposure to competition, particularly in downstream areas. Red Wilson did his work on that. Although I am chairman of a bank, my background is with IBM. I was CEO of IBM Canada, but then I ran all the technology in the U.S., worldwide. I can tell you that I was awake every night worrying about who was going to eat my lunch in technology, because the pace is so fast. It is a very different environment — not because you are in the United States, it is a worldwide business — but because there is a competitive fear and threat every day. I lived through a period where IBM almost went bankrupt and then came back, so I have seen the kinds of changes you have to make to survive.
I would say that a fundamental driver is competition. Our industries where we are too protected will not have the need to change the way industries that are facing competition do.
By the way, I could talk a little bit about banking, in that for a long time the Canadian banks, which are essentially an oligopoly, were quite happy to be on the scale close to the income trust model and not invest a lot in new growth. At TD Bank we ventured out and now have more branches in the United States than we do in Canada. That started with Ed Clark as the CEO and me as chairman thinking strategically in the boardroom about what level we wanted to dial our investment to. The question is how to motivate people to do that. I would submit that competitive pressure is one of those motivations. We decided to do it for growth and we have been quite successful.
I think we could do a better job of diffusing research into business. Too much of it stays upstream in the universities. I am also chancellor of the University of Western Ontario and I have been working with the university to try to get more joint ventures out of the labs and working with business.
When I was at IBM in the States — and in Canada, although to a lesser degree — there was not a department that did not have some project going with some university somewhere, whether it was in marketing, research, or production. You find very little of that in Canada. Somehow we need to encourage that. We need to come together and get the transfer of technology working better, because we do spend a lot of money in the universities and it is not coming out the other end at nearly the right rate.
Most of our focus on higher education has been on access, in other words, ensuring more people have access to higher education. However, it is also important to work on quality and get more people to master's and higher-level degrees. This is a hard sell to governments because it is not something that resonates particularly well with the voters. If you are close to an election, access sells, but more masters and PhDs does not. That is a problem we face from the university perspective.
I would like us to improve the attractiveness of early-stage investing. Some governments have helped by making funds available for the right kinds of projects. One of the things I noticed that is different in California — and you may have noticed as well — is that they do an excellent job of incubating their investments, whereas here, our money tends to come from the Canada Pension Plan, or the Ontario Teachers' Pension Plan or the Caisse de dépôt, and they put some money against venture. The money goes out, but there is no incubation; there is no shepherding of the project or training of the young entrepreneurs in how to make a success.
Most times, success in the marketplace comes not because you have a good idea for a product or a service, but it comes because of all the other business attributes that you bring to bear. You have a good business plan, you know how to go to market, you find business partners and you do a good job of distribution. Those elements are what make a product successful, not just a good idea.
I cannot comment on the next point particularly well, but I know there were some people on our panel, particularly from the pharmaceutical industry, who felt improvements were needed in our intellectual property and copyright laws. That was another area that was felt could be looked at.
I could go on and have probably talked too long on this. To your point, senator, it is not one big secret idea that will change the situation; it is a lot of little things. The other factor that will change the situation is outside pressure. Competition, a weak economy, perhaps higher unemployment, a high Canadian dollar and more protectionism from the U.S. will put external pressures on businesses to innovate better.
[Translation]
Senator Robichaud: Do you understand French, Mr. Thompson?
Mr. Thompson: No, not well, senator.
[English]
Senator Robichaud: That is all right.
Your long answer provided a lot of answers to what were going to be my questions. In relation to the forestry industry, we are trying to find ways to make progress, because they are facing quite a challenge right now. Do you have any particular reflections on that industry?
Mr. Thompson: Again, I have to go back first to the council and say the council did not look at forest products as an industry. We looked at a few industries in the sense of a case study to try to validate some of our findings, but the forest products industry was not one of them. I have some of my own views, but they may not be right, so I cannot represent them as testimony from the Council of Canadian Academies.
Senator Robichaud: We will accept them as your own.
Mr. Thompson: Okay. There is a difference between the lumber industry and the paper industry, to begin with, a big difference.
I think the paper industry is more difficult, particularly in the West. I talked to some colleagues I know out there, and in the lumber industry they have been able to consolidate mills and go for larger scale and invest more in capital. They are actually probably, in most of the sawmills on the west coast, as productive as or more productive than the U.S.
I do not see that in eastern Canada. I think the mills are more dispersed with the exception of maybe New Brunswick because of the Irvings who do what they want economically and do a good job at it. I go to Quebec to fish and some other things. I see a lot of little mills and local businesses, and I think they are good from a community point of view but they may not be economic in terms of being competitive on a world-scale basis.
Paper is being run by engineers with little focus on markets, quite frankly. I do not know that they know how to adapt their product for different customers or how to run a business strategy to improve their businesses. There has probably been less capital investment in paper than there should have been over the years. These are personal opinions not representing the council.
Senator Robichaud: I understand that.
Mr. Thompson: I am not an expert. You probably know a lot more than I do about this.
Senator Robichaud: You seem to be putting your eggs in the big business basket rather than in small and medium enterprises. Am I correct in saying that?
Mr. Thompson: You mean me personally?
Senator Robichaud: Yes.
Mr. Thompson: In a commodity product it is very hard to compete on a cost basis with a lot of small operations. I think you probably need to consolidate and get economies of scale. I know that goes against some of the social objectives. It is important to trade those off because if you have unemployment everywhere, that creates another problem. I am perfectly cognizant of that, and I recognize the trade-off. I do not know the answer to that, and it is not my field so much. I do know that it is very difficult to make a small sawmill or paper mill productive and competitive without investing capital. When you start to do that, it sort of implies scale and consolidation. I think there is a real issue there. I do not know the right answer.
Senator Robichaud: Thank you.
Senator Eaton: Mr. Thompson, the latter part of your answer to Senator Ogilvie was very interesting because for the last six months we have been hearing how the forest industry being pushed to the brink is making it very innovative and looking at new products.
Mr. Thompson: I am a little deaf, I am sorry, Senator Eaton. Could you speak up?
Senator Eaton: I am sorry, I have a soft voice. I was just commenting about your remarks about how a little competition helps, a little tougher economy, helps sometimes. We have certainly seen that with the forestry industry representatives coming here, that have said they have been pushed to innovate and look at new products. There is definite hope amongst many of them.
Because you seem to be connected to a university, and you mentioned in your opening statement our risk-averse mentality and our lack of business competitiveness, do you see that as a problem that business schools awarding MBAs — Rotman, Ivey, the one in Montreal — should be looking at very seriously and trying to deal with for the next generation of Canadians coming in to business?
Mr. Thompson: Yes.
Senator Eaton: Are they doing it? Are they thinking along those terms?
Mr. Thompson: I teach a little bit at Rotman. Even though I am chancellor at Western, I have not taught at Ivey.
I would tell you Roger Martin, the Dean of Rotman, is very focused on it.
Senator Eaton: He came from Harvard, did he not?
Mr. Thompson: Yes, but he is driving the strategy at the school.
Senator Eaton: Yes, and so is Joe Rotman.
Mr. Thompson: I have talked to Carol Stephenson at Ivey about it. She is very aware of it. I do not know enough about the programs to be able to say they are teaching these issues and that the students graduating understand them fully. I would say they certainly understand strategy better. I would guess that if we had more MBAs or more masters', engineering, higher degrees in businesses, most of those businesses would be more competitive and would do better.
I am not sure it is the business schools not teaching the right thing. We may need more quantity in the businesses themselves, and particularly small business. Big businesses, the big banks and so on, hire many of these people and their organizations are full of highly qualified people, but small- and medium-sized business do not. Maybe there needs to be a percolation down somehow.
Senator Eaton: You mentioned that capital equipment is really purchased innovation. Is there something in terms of tax relief that would encourage Canadian companies to go out and buy new capital equipment?
Mr. Thompson: Yes, there are always those incentives, and they tend to work. We have had them here recently. We certainly had them in the 1980s. We tend to pull them out when we are in a down cycle, and they do work. They do advance and pull investment ahead, and I think that is good. You are seeing it now in the U.S. as well, so they tend to work. The answer to the question is yes.
Senator Mercer: Mr. Thompson, thank you for being here. I think it is important that we also thank you for being one of the people who volunteered. I am someone who has worked in the volunteer sector all of my life. I know the value of volunteers, and particularly senior people like yourself giving your time. I want you to know that it is greatly appreciated.
I will go back to the question Senator Eaton asked and pursue it a little further. In the discussion around education, Senator Eaton mentioned the Rotman School and the Ivey School of Business, and I will mention the Sobey School of Business at St. Mary's in Halifax. It seems to me that this is where one of the problems is.
We say that we have subpar business innovation and that we are risk averse. We are not teaching young people that risk is a good thing. As we have heard in these hearings and sessions, there is some innovation going on. I think you hit the nail on the head: Many of these things are being run by engineers, but there are no salespeople at the table.
Let us go back to the roots, as I think Senator Eaton was trying to do. In the business schools, should we not be integrating the business students with the engineering department and with the research departments at various universities? This would demonstrate from the get-go that the marketing people coming out of the business schools will be paying attention to what is going on in the research lab down the hall or in the next building, and will also be talking to the engineers, and vice versa? It does not matter if you come up with great innovation if you cannot market it and we are not taking advantage of it.
Do you see any value in that?
Mr. Thompson: I do. I am not sure I want to restructure the programs on behalf of the business school deans or the engineering school deans. In my own case, I am an engineering scientist by background. I worked in engineering at IBM in my early days, but I learned that business was really important if I wanted to get ahead and really be successful, so I did go back to business school, not full time. I went back to Western for two programs, and I went down to Northwestern University in Chicago and took sort of a mini M.B.A. When I look back on my career, I learned a lot from the business training and I learned how to do problem solving as an engineer. When you put those two together, you end up with a powerful combination of talent or executive skills that can solve some of these problems.
This does depend somewhat on the individual. Some people are in love with engineering and that is what they want to do, and other people do not want anything to do with engineering and they want business. So I think you have to offer the options. Most of the big universities do have options to combine some of those programs. Could we encourage more? Yes, perhaps, but it becomes an individual choice to some degree as to what people want to do.
What is important, though, if I am running a business — a paper company or something — is to have a blend of resources. Maybe I cannot find the super individual who has all those skills, but I need to balance my executive team with people who understand customers, markets, pricing and how to export. At the same time, I have people who run great mills and who are very productive. Having the right team and having that team come together on a strategy is what makes the business more successful than it might be if it were predominantly run by engineers, or salespeople, on the other side.
Senator Mercer: Mr. Thompson, when you did this study, did you do an analysis of your own sector, the financial services sector?
Mr. Thompson: Yes.
Senator Mercer: I would think that in that sector we would excel to a certain extent because of the strength of our financial institutions. You now have more branches in the U.S. than in Canada, and it is suggested that RBC is going the same way. And Scotiabank?
Mr. Thompson: Scotiabank has gone to Latin America, yes.
Yes, we did analyze the financial services sector. We looked at the financial services sector both historically and as to why this oligopoly stayed only in Canada. They were focused on whether they could merge with each other as opposed to looking out beyond their boundaries. In recent years we have seen more enlightened thinking about how you grow a business and how you grow shareholder value. Not only the executives but the board of directors came to the conclusion that we have to take some of the returns on investment that are being used in buying back shares or increasing dividends, and use that money to invest for growth instead.
When you sit in a small country and there are five banks and each has 20 per cent market share, you start to get into diminishing returns about stealing a point or a share here or there from the other competitor. You are better to look at a strategy where you can expand beyond your borders.
Now TD Bank is the tenth largest bank in the United States, and the Royal Bank is one of the 15 systemically important banks in the world. As Canadians we have been very successful, which comes back to my earlier point. There is no problem with our DNA. It is not that we cannot do it; it is that we have not been doing it.
Senator Marshall: You touched on access to capital in some of your earlier remarks, and you mentioned that, generally speaking, businesses do pretty well in Canada and they have good rates of return that they could channel back into business. What are your views on access to capital? Is that a problem in Canada? What impact has that had on innovation?
Mr. Thompson: First, I was speaking in terms of venture investment. I was talking about start-up companies and access to venture capital, which is all risk capital. When a venture company starts up, they cannot go and get a loan at the bank because there is no security, and the bank is loaning the depositors' money, so they will not do it. That is not the purpose of a bank.
Investment in venture capital is usually done initially by angel investors and then later by venture capitalists who raise a fund and then put equity in those companies. They expect maybe 70 per cent of them to fail, but the 30 per cent that are successful and perhaps go to an IPO or are acquired by someone else hit the jackpot from an investment point of view. Over the long term, as I mentioned, the U.S. internal rate of return has been somewhere around 20 per cent, whereas in Canada it has been much lower in venture.
The availability of venture funds in Canada is very weak. Many of the good companies that we have will go to the U.S. to find venture funds because not only is there easier access to the money, but they also have access to organizations that know how to help them incubate their company, and they put experts on their board and they help them to be successful.
If I move to more steady-state businesses, small and medium-sized businesses, they do get lending and lines of credit from banks. Apart from a short period when there was a liquidity crisis following the failure of Lehman Brothers and Bear Stearns and so forth, there was a brief period there where it was hard to get lending. Not long after, the taps opened again, and I do not think there has been a problem in Canada for reasonable credit risks.
Senator Marshall: Do you think one of the issues with regard to innovation and productivity is cultural?
Mr. Thompson: To the extent that we are less risk-averse, I would have to say yes. The senator who spoke first talked about a number of the findings from many years ago where we have a lot of entitlements; life is good here and the wages are good.
Senator Marshall: That was my next question.
Mr. Thompson: There has been less need to venture out, and it has become part of our culture to some degree, yes.
Senator Marshall: I wonder if our social programs provide more benefits, say, than in the States, and would that have an impact?
Mr. Thompson: I would say yes, having lived there for 15 or 20 years.
Someone else, though, made the point that we are different. We are a diverse country with a lot of small places. The U.S. does not have a Newfoundland, where, if you did not have Employment Insurance for many months of the year, you might not have any income and you might have some social problems such that you want to provide a better benefit shield.
That is not my field. I cannot really answer that. I do think there is less of a safety net in the U.S., if that is the question you are asking. We have a better safety net in Canada, and in some places that is needed and is justified.
Senator Marshall: Yes, and it might have an impact on innovation.
I think you mentioned that some governments provide money for innovation. Correct me if I am wrong in interpreting what you said, but my understanding is that governments tend to provide money to universities and other public agencies. Do you have any views as to whether perhaps government should put money into industry as opposed to the universities and other public policy organizations?
Mr. Thompson: I would like to see the projects that get funded by the federal government to universities demand more joint venturing between the university and industry. I do not want to take the money away from the universities, but I would like to see some incentive for them to work with people in the marketplace to ensure that that innovation can be commercialized.
Senator Marshall: Yes. The bridge is not there.
Mr. Thompson: The bridge is not there to the degree it should be.
By the way, the bridge is there in some clusters. If you look at Waterloo, there is a very good bridge there, and in some other places, Kanata, for instance.
Senator Marshall: We would like to see more bridges.
The Chair: Before we ask the other witnesses to come to the table, there are two other senators who have questions.
Senator Duffy: Mr. Thompson, thank you for coming today. I echo my colleague's comments of how generous it is for a person in your position to have spent so much time on building a better Canada. It is noted and much appreciated.
Senator Ogilvie, who had to go to another committee meeting, mentioned the fact that we are stretched out across 3,000 miles with a sparse population. When I heard that, I thought about your expansion in the United States — having recently driven through New England and seen TD everywhere. I suspect part of your ability to move into the States was not just that you ran a bank, but that you learned how to make money running a series of banks from tiny communities from coast to coast electronically. In the States in the past they did not have these huge banking networks, and you were presumably able to import that technology knowledge into the United States. Congratulations to you on that. Some of the things we have learned here, as I am sure you would agree, are applicable there.
Now, about the skill of workers in relation to forestry. We have seen on our tour some amazing plants, including some owned and operated by the Irvings, where, with a laser and all these other tools, they are able to do amazing things with raw logs. That requires a certain skill of the operator, who has to be able to run a computerized machine in that mill. Are you concerned, when you and the council look down the road at productivity, that our dropout rate among high school kids is too high and that we are not getting people to a higher level of education? Perhaps, in some ways, it is too easy and comfortable to drop out without completing even high school.
Mr. Thompson: That is a good question, Senator Duffy, and I do not know the answer. I would be guessing if I answered, and I do not really want to do that. I do not know the statistics on dropouts. Let me back up and say that education is key to a productive workforce. The more people are better educated, you will get, as a result, more innovation and more productivity. I think the premise is correct.
Senator Duffy: Through the entire chain?
Mr. Thompson: Yes. What I do not know is whether our dropout rate is higher than others and how we compare. I happen to think our secondary education system in Canada is a lot better than the U.S. I do not know how it compares to other countries. I cannot give you a very thoughtful answer, but I can tell you that I think the premise that a more highly educated workforce is more productive and innovative is absolutely correct.
Senator Duffy: Ms. Osika may have something to add to that.
Renata Osika, Program Director, Council of Canadian Academies: This is an important question and, in fact, when the panel was deliberating, they did not answer directly from the K-12 education point of view. When we were presenting this report after its release, that particular question came up many times.
In a comparison, for example, with Scandinavian countries, we tend to analyze innovation as a higher education problem or a business problem. In Scandinavian countries, when they talk about innovation, they talk about introducing innovation activities into kindergarten so children grow up in a risk-accepting environment and they learn to accept mistakes because that leads to something good happening.
What the panel did consider in terms of evidence is not only the importance of formal education, but also the important role of mentors. In the discussion and questions here it is clear that venture capital is important. In Canada, however, we are facing a shortage of mentors for younger or older business people who may not have as much experience starting new ventures. As a result, if you do not have that experience, investors may be less likely to invest in you. It would help, we hope, if we had a large pool of mentors that people could lean on. The problem of the management of talent is both formal education and informal coaching.
Senator Duffy: Thank you. Senator Eaton may know this number, but I have run into a number of people from business schools who tell me there is a huge line-up at their doors. Maybe we should have, not just in universities but throughout the school system, a celebration of entrepreneurs and of the importance of business in our society as something to be aspired to. I think it is catching on, but we should expand it, if we can.
Ms. Osika: In fact, the council, right after releasing this innovation report, released another report on the relevance of management in business and finance research to Canadian businesses. That report covers those questions. I would be happy to submit it as further evidence to the committee.
The Chair: Thank you for that.
Senator Wallace: Thank you, Mr. Thompson, for an excellent presentation.
As you have said, and it is certainly somewhat of a condemnation of our Canadian business, we do have weak business innovation or a lack of business ambition in comparison to other countries. That is obviously a very serious statement. You have made that statement, though, in the context of our entire country. It is a broad, sweeping statement, covering all of our provinces and territories, and generally all of our industries and businesses.
To correct that problem, businesses typically look at best practices from competitors in other areas and regions. I am wondering, in coming to that conclusion, did you analyze by province and by industry? I am wondering if, from that, there are examples within this country where we can find best practices. We do not have to look to Finland, we do not always have to look to the United States, but there are industry and regional examples of where there are higher degrees of business innovation. Can we learn from ourselves?
Mr. Thompson: Yes. I think we did do some of the work. Unfortunately, we did not do forest products as a sector, so I cannot help specifically there.
I will tell you that as we looked at our innovation and productivity, the highest sector was the finance industry and the lowest was the services industry, primarily retail and wholesale services. Manufacturing was not bad, but you have to get underneath it.
What you find, for instance, in an automotive plant is that the factory itself is very productive relative to a factory in Detroit or Germany. However, one of the things that happens when you get above that is that a lot of the innovation that comes from design work, et cetera, is not in Canada because we have rationalized to become a good manufacturer only. That is not all bad because if we did not do it, we would be importing 100 per cent of the cars rather than some portion of them. It gets to the whole question of where the business headquarters are. You see examples on both sides. You see places where the headquarters have moved out of the country and the jobs went with it. A lot of those were some of the high development jobs. For instance, we saw a lot of that with Nortel when they went down to Research Triangle Park and to Nashville. There was still some good work here at Bell-Northern Research, and some of the factories were good, but we did get a brain drain out of that and some of the innovative talent left the country.
On the other hand, we see an example like IBM, my own ex-company. IBM has one of the largest labs in the country now, which is a research and development lab doing software in Markham. IBM also has satellite development labs in Ottawa and Vancouver. These are probably some of the most productive and innovative sites that IBM has doing software in the world.
IBM happened to have a philosophy of trying to balance trade. We would export certain products for world markets from here and we would import other products 100 per cent from elsewhere, but we would try to come close to a balanced trade. That kind of strategy leads to much more in-depth talent in an industry. You see that to some degree in the pharmaceutical industry, but in some other industries where we have lost the headquarters, the design work and R&D have left as well.
There is a question coming back as to how you parse this problem, where we have headquarters and where we do not, and what is the nature of the development, R&D and innovation strategy of those companies. Some are better than others in terms of investment.
There is certainly a lot going on around the Waterloo cluster, where there is a pairing between top-notch universities and some of the technology companies that have made it and therefore have a lot of employment and do outsourcing and vendoring in the area. There are spinoffs from that. There are employees who leave and do start-ups. That whole cluster tends to work. You see a few of those in Canada. They should be fostered, because they do in fact create a centre, which is a good model for other people to follow.
Ms. Osika: I may offer some specific examples. There is often hesitancy in governments pursuing strategic procurement roles. There have been examples throughout Canadian history where this worked very well. Telesat is an example. It started as a public-private partnership and it evolved into a successful enterprise.
Also, IRAP, the Industrial Research Assistance Program, has been popular. Many business people report it as the key success factor in their being able to access markets. Again, this is both from the perspective that it helps them find actual market and gives them funds, and also from the business expertise they can lean on from the IRAP representatives that work with them.
With regard to more recent programs that have been experimented with in Canada and that have been successful in other countries, the Innovation Voucher Program comes to mind. In this, a small amount of money is given to the business. The business makes the decision where to invest the money and the research community is matched in terms of needs. It is a business decision rather than a research decision, to reverse the sequencing of the decisions. We are not starting with creating more research ideas and then trying to push it out into the market; rather, we are having the market create the pull for the research ideas. Alberta has been experimenting with that and they have had some success.
Senator Wallace: A real benefit that an organization such as yours can bring to the table is to highlight those positive examples you see within our boundaries on how we can build and extend to other areas of the country. That would be very helpful.
The Chair: Mr. Thompson and Ms. Osika, thank you for accepting our invitation to appear. There is no doubt in our minds that you have touched on a lot of topics.
The Chair: Honourable senators, I now present the following witnesses for our second panel. From the Sustainable Chemistry Alliance, James Lee, Portfolio Manager. From Biotech Forestry, Tony Roy, Project Manager; and Nathalie Charbonneau, Secretary-Treasurer. Thank you for accepting our invitation to appear and to share your knowledge and professionalism with this Senate committee. I now invite you to make your presentations, which will be followed with a question and answer session. I am informed by our clerk that Mr. Lee will make the first presentation.
James Lee, Portfolio Manager, Sustainable Chemistry Alliance: Thank you for inviting me to speak. I will relate to you the experience of the Sustainable Chemistry Alliance and their business dealings in helping to commercialize new sustainable companies.
I will give you a brief outline of what I will talk about.
I will talk a bit about the Sustainable Chemistry Alliance itself and some of the opportunities that we have observed in upgrading biomass, both forestry-based and crop-based, into commercialized products. I will close by suggesting some policy initiatives that the Sustainable Chemistry Alliance believes will accelerate the commercialization of new innovations.
Let us start with the Sustainable Chemistry Alliance. It is a not-for-profit organization established in 2008. It is funded by the Centres of Excellence for Commercialization and Research. We have $5 million to provide to companies with technologies in the sustainable green field to commercialize their business, either products or processes. The ultimate goal of the Sustainable Chemistry Alliance is to be self-funded from the returns we receive from investments.
Within the portfolio of the Sustainable Chemistry Alliance, we have nine equity investments. Four of these investments require crop- or forestry-based biomass to produce product. As you can probably tell from newspapers, et cetera, the primary motivation for many of the new innovations lately has been conversion of biomass to fuels. We have two examples where these companies have the option to convert biomass into either fuels or chemicals.
From an industry perspective, Canada is a global exporter of natural resources. Our natural resources create wealth for the nation largely in value chains that are for the most part siloed. Ultimately, we know this is not a sustainable way of doing business. The building blocks we produce are not long-term sustainable. We have noticed over time, however, that things have changed. There is a higher consumer sensitivity and demand for sustainable energy and products. As a result of this, industry and new innovators have tried to embrace this challenge.
Today, we have the silos coming down. There are opportunities to encourage convergence of how we manage our natural resources beyond the traditional silos. This leads to integration of the different value chains. This results in a more efficient use of our limited natural resources, cross-pollinization and integration of our knowledge and resources. At the end we produce products that enhance sustainability. Ultimately, the customer is the consumer and his or her environment where we produce products of higher value and we demonstrate greater social, environmental and economic responsibility.
I will use Ontario as an example. If we look at how Statistics Canada categorizes different manufacturing sectors in Ontario and you add up all the sectors that use chemical processing to achieve their means of business, we see that chemical processing is clearly the number one means of manufacturing wealth generation in the province of Ontario. Obviously, it is the right path to encourage innovation in forestry or biomass conversion to seek higher value for the country.
A little while ago, a study was done in Sarnia to look at emerging sustainable product opportunities in the province of Ontario. The province of Ontario is unique. If I look globally, there are three areas around the globe that have both the technical resources and the raw material resources to be global leaders in sustainability. They are Brazil, the United States and Canada, and in particular within Canada, Ontario.
Traditionally, our industries have been fossil and non-sustainable based industries. Recent media reports have not shone a bright light on those industries. That is a big mistake, because those industries can provide the talent and the infrastructure required to build our sustainable businesses and industries. Doing so gives us a head start. Why start from scratch when we can build on what we already have? In doing so, by overlaying sustainable opportunities on existing core businesses, we can accelerate the development of a sustainable hybrid industry within Canada.
In the next three slides, I will relate some of the observations made by the Sustainable Chemistry Alliance in the commercialization of green and sustainable chemistry. In general, the demand for sustainable products is driven by three rough groupings. The first is market economics or market demand. In this particular section, big box stores such as Wal- Mart and Canadian Tire are examples of leaders who are providing that demand. They are demanding green, sustainable products from their suppliers. Their prize is more shelf space in the retail stores. That is a big thing, shelf space in retail stores.
The second is a first-year economics type of mechanism where regulations promote development of a sustainable product. A good example is the federal renewable fuels regulation. Without that regulation, which requires 2 to 5 per cent renewable content in fuels, we would not see ethanol plants or companies like Iogen in Ottawa developing new technologies to commercialize. This is a good example of where policy has stirred up innovation and industry in Canada.
The third one is kind of an enigma. It is through break-through innovations. On the chemistry side, typically, it means creating a product that offers new functionality for the marketplace. For projects related to biomass conversion, the Sustainable Chemistry Alliance has observed two trends. First is the upgrading of low-cost raw materials. Typically, that deals with corn stover or what you get from the corn crop after you take the corn off the corn stalk. Another good example is the devastated pine forests in British Columbia, where you have vast hectares of devastated forest just sitting there. From a business perspective, what an opportunity that offers. There is a lot of forest biomass that can be converted to higher value material. In partnership with the forestry industry, companies can take away the devastated forest, replant and, at the same time, process the devastated forest material product into products of higher value.
Another focus is trying to achieve the highest value for your product. Typically, we observe today that there are two areas: energy, which is obvious, and specialties and niche products. In the opportunities we have observed, I am happy to see that the companies we are looking at are not looking for the home-run business plan. At the end of the day, games are won by a bunch of singles. Specialties and niche products offer a bunch of singles to allow success in sustainable businesses.
Given the choice between a green product and a not-so-green or traditional product, today we observe there is more openness to trying out a green product.
However, on the road to commercialization, new, green or sustainable products have challenges. These challenges mean assistance is needed for these products to become successful.
Here I am talking mainly about small and medium enterprises. The large, mega-giant enterprises and global enterprises do not need as much help. They have the financial resources available to implement whatever business plan they can afford to do, and that is a lot. It is really the small and medium businesses that need the help.
Given a product that is both technically and market ready, some of these barriers include — and some of this has been talked about in an earlier session — the aversion to risk, the lack of access to capital, and something that is seldom discussed, the economics of change.
If I were to approach an auto manufacturer with a brand new green product to produce panels for their car, it will cost them to adapt their machinery to build the panel inside their car. There is a cost associated with that. In this age of competition, if the competitor is not doing it, will they do it? I am not sure.
The next slide lists some suggestions for overcoming some of the barriers. First, a national strategy on sustainability. Canada is a very big country, but population-wise it is only one tenth of the U.S. Given our size, Canada can be nimble and successful in deploying a national strategy on sustainability.
Second, trying to take what we have learned from the federal renewable fuels regulation and applying that to other renewable products to give people the incentive to produce renewable products and make them available for the population.
Third is access to capital. I will tell you that the chemical industry as a whole, in the recent economic downturn, received an almost blanket credit downgrade. You had A-rated companies going to BBB, and that has made access to capital even more difficult for start-up chemical companies. Unfortunately, the feedback that I have received is that the lenders are still fixated on economic indicators from seven years ago when the global economy was much healthier. People are fixated on AAA credit ratings, but the reality is AAA credit ratings are very rare.
To help reset lenders' expectations, there is an opportunity for some policy decisions to back up some of these businesses to help bridge the need for investment-grade credits. Another is to extend the eligibility of flow-through shares, which have traditionally been available to oil, gas and mining companies, to qualifying sustainable companies. Third — and this is more self-serving — is continued support for organizations such as the Sustainable Chemistry Alliance where we help companies commercialize new innovation. Lastly is one I believe many people have voiced, is to help improve the capital economics of investment by extending the capital cost allowance from three years, which it is today, to five years.
In summary, I think today we are at an excellent point for Canada. We have an opportunity to demonstrate global leadership in a bio-based and sustainable industry. It would be very foolhardy to think that to try to go 100 per cent bio-based sustainable, because it is not the way to go.
We must recognize the existing industry and try to cultivate a hybrid industry that is both fossil, non-fossil and bio- based. From a global perspective, and given the fact that Ontario has an excellent reputation for being a manufacturing centre for Canada, there is an opportunity for Ontario to be a global leader for Canada.
I must stress that there is a sense of urgency. I will give you a story. Not too long ago I was developing a co-gen project down in Houston, Texas. We had all the "Is" dotted and the "Ts" crossed. We had all the paperwork done. The last thing I needed was the final signing from one of the venture capitalists involved in the deal. We went to the venture capitalist and they said, "You guys did a great deal, but it was just too slow for us. We found another company to invest in with higher returns. They were faster than you were and the money that we had reserved for you is no longer there."
This is an example that is happening all around us. In the world of net present value (NVP) decision-makers, time is money. With small- and medium-sized companies that are trying to innovate new products, you have a thing called cash burn. Once the cash is burnt, they are not coming back to where they started. They will move somewhere else. Thank you.
The Chair: Thank you, Mr. Lee.
[Translation]
Nathalie Charbonneau, Secretary-Treasurer, Biothec Forestry: Mr. Chair, I will begin with an overview of our company, and then Mr. Roy will explain the difficulties we are having getting the company off the ground. Biothec Forestry's head office will soon be moving to Saint-Tite, primarily because of its abundant resources and established maple producers. Biothec Forestry's main focus is forest operations, and the company employs more than 40 employees at the height of the season.
That division largely helps to fund our biopharmaceutical division. In that sector, we are aiming to market four products derived from Quebec's boreal forest in the next two years. They will be made mostly of birch sap and a specific variety of mushroom. We will also be incorporating other value-added products, which will be unique in the world. But before we can market those products, a number of analyses are still necessary, and we are working on those as we speak. We are currently taking an inventory of the mushroom in question and putting together a book of specifications in compliance with Health Canada's traceability standards.
These new areas of activity will, without a doubt, carve out a place for Biothec Forestry in the global birch sap market, which is already growing. In addition, we have partnered with lumber producers' unions in the Mauricie region, as well as the Bas-Saint-Maurice forestry cooperative to address the issue of harvesting crown land and private land.
Biothec Forestry has also acquired a unique expertise in harvesting and processing ground hemlock. We are working on an application to Minister Normandeau to set up a bioprocessing facility in Saint-Tite. Tony Roy will be able to explain where things stand with our facility, as well as all the obstacles we face on a daily basis in our work.
Tony Roy, Project Manager, Biothec Forestry: Mr. Chair, Biothec Forestry is a company whose primary focus is forest operations, but it uses the profits from that division to fund most of its biopharmaceutical research, as Ms. Charbonneau pointed out.
We work with academia through Quebec's technology transfer centres. Ms. Charbonneau mentioned that the situation in Quebec is very particular when it involves developing private forests and crown forests, owing to the well- known lobbying of the UPA. Private and public forest agreements are necessary before bioproducts can be harvested.
One of the first bioproducts targeted by Biothec Forestry — which is currently finalizing a market study and which already has nutraceutical and biopharmaceutical customers in Europe and Asia — is the export of several hundred thousand litres of birch sap from Quebec's forest.
Birch sap has been a thriving market for years in Europe and Asia, especially Japan and Korea. It is surprising that Canada did not get on board sooner in terms of developing this product.
In the course of our conservation analysis, aimed at ensuring product quality, we established relationships with people in academia, which gave us the ability to do comparisons with the products currently available in Europe and those we import from Europe for consumption. I was very taken aback to learn that we were consuming birch sap from Switzerland in Quebec. That is one product of considerable interest.
The other is derived from a variety of mushroom in Quebec. I am talking about a mushroom and not the product directly, because we are in the process of acquiring a non-timber forest product, and certain issues prevent me from discussing it right now. However, a great deal of research has been done at the university level, and a number of studies are approaching completion.
And it is very realistic to expect that we will be able to market this mushroom in North America and Europe by late 2011. Our partnerships with an international pharmaceutical company and European exporters are extremely promising.
As for the ground hemlock, one of our most recently developed products, I worked with the now defunct company Bioxel Pharma, in Quebec, and we have revived the venture with customers in China and Japan. Customers in India have also come forward.
In Quebec, however, there is still the unique public forest-private forest context, which is quite complex. What we want to make clear is that Biothec Forestry has shown innovation by promptly initiating talks with private forest stakeholders and reaching agreements under which it can harvest public forests. But we still have to set up exclusive harvesting areas, because the harvesting of the ground hemlock does not work the same way in Quebec as it does in Ontario and New Brunswick, for instance, where Chatham Biothec is well established. There, they can carry out harvesting activities without having to pay a levy to the various stakeholders, namely the private sector and the provincial government, as is required in Quebec. It appears that this type of levy is going to be reduced. Our meeting with the minister's office and forest program managers seems to have paid off.
It is important to understand that Biothec Forestry is responsible for creating a lot of forestry jobs and will also generate numerous processing jobs. Not only do we generate employment, but we are also competitive on the world stage. Whether it involves birch sap or mushrooms, we create jobs for common folk, for voters, for regular people, and well-paying jobs at that. We are talking about jobs where people earn between $500 and $700 in net income, people with little education. Keep in mind that most people living in remote areas, in forest areas, do not necessarily have a college or university education. But we also generate significant employment for forest technicians and engineers, as well as technical, writing and other related jobs.
As I said, Biothec Forestry encounters a number of obstacles because of the unique situation in Quebec. Nevertheless, we are trying to obtain investment capital through the Economic Development Agency of Canada for the Regions of Quebec, capital we can use to speed up the development process because we could clearly face international competition in the very near future. We especially have tremendous potential in terms of the birch sap market. We need people who are willing to put up venture capital. We have already invested huge sums in relation to the company's revenue. For the past two years, the company has been reinvesting all of its income in biopharmaceutical product development.
I would not say we have run out of steam; we are very keen, but we will definitely need some venture capital.
We have some support at the federal level. I am from the labour movement, I was trained in human resources management, and I worked for the Fédération des travailleurs du Québec; I experienced the crisis from the inside, and I saw how it happened. That is something I understand. I live in the Mauricie region, where paper mills and sawmills are shutting down. I have seen and lived through those situations with loved ones. My brother is a plant manager in a sawmill. So this is an area I am very familiar with.
I have also seen huge sums of money being invested to keep companies afloat, companies that will have to shut down in the short term because they can no longer compete.
More investment is needed in the biopharmaceutical sector. You need only take a look at the current global market, and it is very easy to see what is happening; we have all the potential here, in Quebec and Canada, to bring competitive products to the market and to create a lot more jobs than those currently being generated by sawmills.
I am not trying to be pessimistic about the future of sawmills, but I know that it is important to specialize to ensure that companies can survive in the long term, and that applies equally to pulp and paper, and sawmills. It is also important for Quebec and Canada to diversify when it comes to the forest sector so they are able to survive the forest crisis and compete in the international arena.
Senator Robichaud: You talked about birch sap.
Mr. Roy: Yes.
Senator Robichaud: What does it do?
Ms. Charbonneau: Essentially, birch sap is a depurative that contains a lot of ingredients, a lot of distinctive characteristics such as antioxidants. France uses birch sap in its shampoos. They also use it in health products. They use it in almost everything. This sap represents an opportunity to take advantage of these characteristics.
Mr. Roy: I can give a more specific answer. Birch sap seems to be used namely as a treatment to purify built-up deposits in the kidneys. It is as simple as that. And it is also used in many European shampoos and many other value- added products.
I will give you an idea of the market that exists in Korea right now. They are selling two to three million 250-ml bottles every three months. The bottles retail for around US$22.50. So that is the marketing potential from a financial standpoint.
From a medical standpoint, this product is referred to as a "biopharmaceutical" but could also be called a "natural health product." Super antioxidants such as toluenes and polyphenols are naturally occurring in birch.
Comparative analyses between our products and those available in the European market have shown, for example, that birch trees in Quebec and elsewhere in Canada are high in toluenes and polyphenols, which makes us extremely competitive at the moment.
There are also other markets such as birch syrup, which is aimed at replacing a product such as monosodium glutamate, a flavour enhancer. So birch syrup is another area with potential. Our main interest at Biothec, however, is to convert birch sap, conserve it and sell it to European companies, which want to import thousands of litres of it.
This could extend to cosmetic-based industries because the levels, the concentrations of toluenes, polyphenols and super antioxidants have tremendous properties for high-end creams, made by the likes of Dior.
Senator Robichaud: You did not have to do much research. The market was already there. You had to find birch sap.
Mr. Roy: Yes, but we also had to carry out comparative quality analysis and determine the impact of harvesting the sap on the trees. We had to figure out how much sap a birch tree could produce and whether tapping a birch would adversely affect its growth. We conducted a study to determine with certainty, as far as the department was concerned, that we could obtain a birch stand, an exclusive harvesting area, without harming the trees so they could be harvested in the future. When you talk about tapping the tree, it involves not just tapping the tree, but also making sure that it can be harvested for the forest industry in the future, given that the birch is an intermediate tree that can live approximately 60 years.
Senator Robichaud: You also mentioned mushrooms.
Mr. Roy: I talked about mushrooms, which I did not develop, because they are mushrooms with a biopharmaceutical use. We are still at the development stage of the final natural health product. It has tremendous potential. Canada already imports this mushroom from Russia and other European countries. Comparative product analyses have shown, however, that the mushroom growing in Quebec is richer in antioxidants, toluenes, polyphenols and betulinic acid than the Russian and European products. These products are highly sought-after for treatment purposes.
I do not want to get into the literature review we undertook that talked about HIV, AIDS and cancer; that is not what we are trying to show. What we are trying to say is that this is an excellent natural health product that could be exported to Japan, Korea and the United States and that could develop the Canadian market, as we do not have much of a culture in terms of the market for mushrooms. Our parents always told us not to eat them, that they were poisonous. So the culture surrounding the mushroom market in Canada is more fear-based and needs to be developed. We are pursuing European and Asian markets, where the demand for this type of mushroom is high. Right now, we are working on establishing and finalizing a marketing plan, given that we have already done the comparative market analysis on our mushroom.
Another thing that sets us apart is that most of the products we market are fully traceable. We worked with forest engineers to develop a complete traceability process. Most of the products on the market do not meet traceability standards. We have the chance to do something completely different; it is possible to know the condition of the tree on which the mushroom grew, because pollutants and toxins can accumulate in the mushroom, and that information should be available. We have analyzed all the mushrooms and done all the research; we will ensure complete traceability for the mushrooms we market. Customers have shown a keen interest in this area, and there is considerable development in Europe at this level.
Senator Eaton: That is quite interesting, but, as you say, Europe has a well-established mushroom culture. Europeans love mushrooms, and they pick them in the woods.
[English]
You seem to have done so much research and you have created these products. Has your business case gone alongside the development of the products? Have you received the financial help you need? Apart from the Government of Canada, do you have venture capital people interested? Do you need outside capital? Do you have mentoring?
[Translation]
Ms. Charbonneau: We are an emerging company. We are looking for all of that right now. I am working very closely with my CLD these days.
Senator Eaton: What is a CLD?
Ms. Charbonneau: It is the agency in our municipality that helps businesses get started, helps them locate funding and guides them. Ours is an innovative area, however, and we have a hard time finding resources. We do not know where to turn. I work a little bit with the Economic Development Agency of Canada for the Regions of Quebec and Innovation Canada, but we have not received anything for a year and a half. We have received $5,000 in assistance to date. No one has given us proper direction in terms of where to find funding. We are still looking. We do not have any direct or indirect assistance. We have to work hard, scouring Government of Canada and Quebec government Web sites for useful information, because we will not receive any assistance if we do not.
Senator Eaton: Is FP Innovation not interested?
Ms. Charbonneau: I did not know about them. It is really difficult.
Senator Eaton: They have testified before the committee several times. I am sure that the clerk could help you by providing you with some addresses.
Ms. Charbonneau: They can help small businesses like ours. As Mr. Roy said, currently, it is difficult because the whole forestry division is being used only for raising funds to help us reach our objective: biopharmaceuticals. There are three of us in the administrative system, and we are all paying ourselves modest salaries in order to put as much money as possible into our research and projects. This approach to doing business takes its toll in the long run.
Senator Eaton: So you are lacking money.
Ms. Charbonneau: And we know that the products are good.
Senator Eaton: You have a market.
Ms. Charbonneau: Everything is there except for the money. We are having trouble securing financial assistance because we do not know where to look. There are no resources for us to turn to for help.
Senator Eaton: There are some, but you are not familiar with them, and they are not well-known.
Ms. Charbonneau: Exactly.
The Chair: Thank you, senator.
[English]
Senator Marshall: I wanted to ask Mr. Lee a question similar to the question Senator Eaton asked Ms. Charbonneau. Is access to capital an issue? When you gave your presentation, you were speaking about a $5 million fund that was used to fund nine companies. Is funding an issue? With the companies that you are funding, are you far enough along to give any indication as to how well they are doing?
Mr. Lee: Realistically, we do not expect to see any results until three or five years from today. In in terms of how these companies were funded prior to coming to Sustainable Chemistry Alliance, the majority of their monies were grant monies from the government. There was also a lot of private, self-pocket, funding.
Senator Marshall: These are all new companies trying to start up. Were the companies that you are familiar with able to access sufficient funding easily, or is it an issue?
Mr. Lee: It is still an issue. There is funding available from various government programs for research and for piloting new science. There is a funding gap to take a business venture from the piloting stage to the commercial stage. That is where SCA helps.
Senator Marshall: That is the bridge. Thank you.
[Translation]
Senator Robichaud: You have found that there are potential buyers for products you are currently marketing. You talked about harvesting, about various agreements with owners, but you are experiencing research-related and marketing problems right now that are standing in the way of you getting the most out of what you are harvesting. That is where the problem lies.
Ms. Charbonneau: We are currently at that stage. Frankly, the issue at hand is related to funding; to take inventory of our mushrooms, we have asked for a second tier of funding. The mushroom we want to market is unusual, since it is picked in the winter. We will start taking inventory next week. We have received financial assistance to the tune of $10,000, I think, for our inventory taking.
Mr. Roy: We received $10,000 for a project that will cost us around $40,000. We have to be realistic: the money paid out to us compared with the money we reinvest in time, staff, hours and work is ridiculous for the number of jobs being created. Often, we are looking into funds available in the very long term. Realistically speaking, in terms of competition and the market, we need to get funding for the marketing component because we already have potential buyers, we already have the product and we can already create many jobs. So existing programs are sometimes not useful to us.
I am a product of the university environment, I work in that environment, and I often have trouble making my colleagues understand that our work is based on business competitiveness. I often have to be the one to move deadlines forward when dealing with these people and say to them: "The analysis is not due in five months' time. I do not care if it costs $5,000 more, you will conduct it now because I need it now." It is often at this stage that we have trouble achieving our goals. We are lacking short-term investments, and so we are unable to get the centre truly up and running.
We already have a deal with the municipality of Saint-Tite, for instance, which has leased us some land and is prepared to fund the building — the conversion centre, I am talking about the outside building — over several years, under an interest-free lease. We would be making the payments over a 10-year period. There are people who are prepared to invest because they know that jobs will be created. They know very well that the jobs are related to forestry, to picking. They also know that there will be positions for technicians in addition to jobs in the forestry division. Our work will also be related to non-conventional wood operations. We already have 40 people working for us, but wood operations related to installing tubing for 200,000 taps will generate a lot of work for a lot of people, who will be working for $15, $16 or $17 an hour. We are not talking about university graduates, but about people who need to work and are currently unemployed because of the cutbacks in the forest industry. These are the people we would be providing jobs for, and they are already working for us at very competitive salaries.
We also need technicians and engineers, but we need to start from the bottom up. We need people to do tubing. We need pickers, whom we will train to ensure traceability and who will be supervised by technicians and engineers. To be completely realistic, in the case of Biothec Forestry, we are talking about creating at least 200 jobs. That is a lot of well- paid jobs. It makes us wonder when $10, $20, $30 million is invested to save 50 sawmill jobs, especially when we ask the government for money to take inventory and we are given $10,000 and told that that is the most they can give us. That makes us wonder because the government is putting up $10,000, and I am putting up $30,000. If I were not providing people with jobs, I could at least tell myself that my business is not generating jobs. However, I am already employing many people.
Senator Robichaud: Which organization provided you with the funding?
Mr. Roy: A development organization was involved in providing us with second-tier funding. The Conférence régionale des élus, the CRÉ from Quebec, which covers the entire Mauricie region, provides all second-tier funding. I think that we asked for $22,500, which is about half of what it will cost us to take inventory properly. We are looking at $6,000 to $7,000 in engineering costs alone. Those costs do not include the services of technicians or cartographers. The services of a geomatics specialist who will be drawing maps are also not included. It is as if the country were completely out of touch with reality. We are creating many jobs, but we are getting very few subsidies. That is how we see things. So, we are looking for investors and capital at this time.
Of course, people have shown an interest in this venture, but we have to be extremely careful in biopharmaceuticals, as some of the interested parties might turn out to be vultures. They know that we have an excellent bioproduct and that we have conducted analyses. Even though we are working with university-based technology transfer centres, there is still a risk of leaks. Each week, we have to ensure that our confidentiality agreements are appropriate for the levels of work we are paying for and doing.
[English]
Senator Duffy: I would like to congratulate you on your innovation. I wonder, hearing of all the doors on which you have knocked, you must have bruises on your knuckles from going door to door. Montreal is the centre of the pharmaceutical industry in Canada, and I would think with these proposals that you have, these ideas, this innovation, the yew and so on — it is all very exciting — that the firms along the Trans-Canada Highway in Montreal would be jumping at a chance to be your partner.
[Translation]
Ms. Charbonneau: What we want to do is develop the product ourselves. We could, of course, sell primary raw materials to the pharmaceutical industry, but we would really like to develop the product because we know that the potential is there and we do not want to just sell raw materials to the industry. We want to take things further.
Mr. Roy: I would like to add to Ms. Charbonneau's comments that companies have shown an interest, but when they invest, there is always a risk of our company being absorbed. I worked with the now-defunct Bioxel Pharma, a company that used Canadian yew. Bioxel had developed decataxel, an innovative product on the global scale, with four researchers — and one of them was a personal friend of mine. There were 400 researchers around the world working on this, and Bioxel Pharma ended up developing decataxel. Unfortunately, they had to close shop because venture capital was lacking, and the product patent fell into the hands of a company — which is actually looking to buy millions of pounds' worth of Canadian yew from us.
The infamous decataxel slipped through our fingers in Canada. I would say that we are trying to develop a suitable market and we believe that we can have a biopharmaceutical company manufacturing its own products here, at home. There would be no risk of being absorbed by other companies. The current situation is dangerous for the Canadian market — we have received very attractive offers. We could settle for being just another company exporting birch sap to Europe to be transformed into something over there, and exporting our mushrooms to be transformed into something else. However, we want to export a finished product; we want to set an example. We do not want to export primary raw materials to Europe just to have them resold to us.
For instance, we are currently buying birch sap from Switzerland, which makes no sense. Six birch sap ingestible capsules are worth $56. It is unbelievable, but we are buying these at natural health stores in Quebec and in Canada, and they come from Switzerland. We buy special shampoos and creams made from birch. These creams are worth up to $250. We are buying those products from Switzerland.
[English]
Senator Plett: I have a question a little bit further along the line of what Senator Duffy already mentioned. Perhaps I have lost something here, I am not sure, but $10,000 funding for a $40,000 project is 25 per cent funding. That is pretty significant funding.
You say that you have a market for your birch sap. I do not know if I have the litres or the numbers right, but you say people are paying hundreds of dollars per bottle for this birch sap, and there is a market for 325 million bottles. Those seem to be absolutely astronomical numbers.
If that market is there, I cannot imagine that there would not be many private investors wanting to get together with you, yet you seem to be saying, "We do not want to partner; we just want to be given money here so we can run our own show." Maybe I am losing something there.
One of my favourite television shows is a CBC show called "Dragon's Den." I think Kevin O'Leary might be interested in what you have here. I know that he will demand a good share of your company if he gives you any money.
My strong suggestion is that you try to find private individuals to partner with, and maybe 49 per cent of something good is better than no per cent of something that has failed. There is really no question there. Those are my comments. If I am wrong in my observations, please correct me.
[Translation]
Mr. Roy: Senator Plett, 250 millilitres of birch sap sells for $22.50. There is a significant market for it. That share of the market currently belongs to the Europeans and the Russians, who harvest birch sap. In order to become competitive on that market, we could look to the private industry for support. We have actually not rejected that option. However, we are trying to develop our company further before we launch into official negotiations to establish a partnership with capitalist private companies that could invest some venture capital.
Funding to the tune of 25 per cent of total costs is minor in comparison with investments made, for instance, in Quebec, in industries that create a lot less jobs, and in comparison with the capital Quebec and Canada have invested since the beginning of the forestry crisis.
[English]
Senator Plett: The $10,000 is minor or the 25 per cent is minor? Thank you.
The Chair: Mr. Lee, thank you for accepting our invitation to appear and for your presentation.
[Translation]
Mr. Roy and Ms. Charbonneau, thank you for your attendance and your comments.
[English]
On behalf of the committee, I thank you. Honourable senators, I now declare the meeting adjourned.
(The committee adjourned.)