Proceedings of the Standing Senate Committee on
National Finance
Issue 14 - Evidence - June 30, 2010
OTTAWA, Wednesday, June 30, 2010
The Standing Senate Committee on National Finance, to which was referred Bill C-9, An Act to implement certain provisions of the budget tabled in Parliament on March 4, 2010 and other measures, met this day at 9:07 a.m. to give consideration to the bill (topic: Parts 3, 5, 22 and 24).
Senator Joseph A. Day (Chair) in the chair.
[English]
The Chair: Welcome to the Standing Senate Committee on National Finance. Honourable senators, this is our sixteenth meeting of this committee in relation to Bill C-9, the budget implementation act, 2010. Senator Neufeld is keen that we let everyone know that it is 900 pages long and involves 24 different parts. We will be dealing with one of the parts this morning.
Over our previous meetings, this committee has heard from departmental officials, from the Minister of Finance and outside stakeholders who are interested or have been impacted or will be impacted by this legislation, assuming it is passed.
This morning we will continue to hear from outside stakeholders. Over the course of this meeting we will be dealing with four separate parts of the bill, specifically with Parts 3, 5, 22, and 24.
Part 22 deals with payments to certain entities. These are transfers from the government to certain entities and colleagues will recall that this part provided for maximum payments to four different organizations, including the Canadian Youth Business Foundation, Genome Canada, Pathways to Education Canada and the Rick Hansen Foundation.
Of these four, the largest payment would go to Genome Canada, and we are very pleased to welcome Mr. Dale Patterson, Interim Chief Executive Officer and Vice-President, External Affairs; as well as Cindy Bell, Executive Vice-President, Corporate Development, Genome Canada; and Mr. Guy D'Aloisio, Chief Financial Officer.
Dale Patterson, Interim Chief Executive Officer and Vice-President, External Affairs, Genome Canada: Thank you very much. Good morning. It is a pleasure to be here this morning to appear before your committee.
As many of you may be aware, Genome Canada is a not-for-profit corporation that acts as the primary funding and information resource relating to genomics research in Canada, using a unique model of collaborative federal-provincial partnering. Genome Canada has adopted a bold yet systematic approach, which focuses its activities exclusively in the areas of genomics research with an emphasis on the delivery of tangible and measurable results. This approach has positioned Canada among the world leaders in genomics of human health, agriculture, environment, forestry, fisheries and the development of new technology.
Furthermore, Genome Canada continues to play a leadership role in what we call GE3LS, the ethical, environmental, economic, legal and social aspects of genomics research.
One of Genome Canada's strengths is its network of regional genome centres across the country; six have been established since the year 2000. The centres are independently incorporated and act as focal points for local expertise and interests by facilitating access to top flight science and technology innovation centres. The centres provide researchers with the expertise and technology to undertake genomics research, such as DNA sequencing. The centres also assist researchers with project development, management and fundraising.
The regional focus allows the centres to deliver fundraising efforts, government relations, education and outreach activities tailored to regional needs and priorities. Centres and scientists also work together to secure co-funding for each project at the level of 50 per cent or more of the total project cost. Appendix A of the package we have distributed illustrates the genome centres and the science and technology innovation centres across Canada.
We are proud of our track record. We are also looking forward to our future and how Genome Canada can continue to play a role in strengthening Canada's knowledge, people and entrepreneurial advantages, three key elements of the Government of Canada's science and technology strategy. To this end, the recent federal budget provided $75 million in additional funding for Genome Canada, for which we are thankful.
At our March 2010 board meeting, the board of directors of Genome Canada moved quickly to ensure that these new funds would be invested in areas of key importance to Canadians. First, we announced that $15 million would be directed toward a competition in support of the science and technology innovation centres. This is in addition to $9 million in existing funding for a total of $24 million to ensure access for genomics and genetics researchers to cutting edge technologies and expert analysis for the next two years.
Second, up to $60 million will be directed toward a combined multi-sector targeted large-scale project competition that will emphasize a high potential for economic return. At least $30 million will be targeted to research in the areas of forestry and the environment, and up to $30 million in support of strategically important research in Genome Canada's other sectors: agriculture, fisheries and human health.
To get these funds in the hands of researchers as quickly as possible, while ensuring we are funding the best of the best, we have enhanced our review process and expedited the launch of these two competitions. The large-scale project competition was launched in May and the science and technology innovation competition in June.
Just to provide you with the most current information possible, here are some of the statistics taken from the registration form submitted to Genome Canada in connection with our large-scale project competition. The total registrations received were 183, of which 56 are targeted and 128 are multi-sector. The registrations by region break down as follows: 37 from British Columbia, 20 from Alberta, 19 from the Prairies, 62 from Ontario, 31 from Quebec and 14 from Atlantic Canada.
Excellence is the only standard Genome Canada will accept or fund. That is why every project must first be peer-reviewed by an international panel of experts, ensuring that Canada's best research is the world's best research, with the potential to produce meaningful applications through knowledge transfer and technology development.
Genome Canada is also cognizant of its accountability requirements in relation to the funding it receives from the federal government, and has had a number of third party reviews of its operation over the past five years. These have included a compliance audit by Industry Canada and a formal third party summative evaluation and performance audit, the results of which are posted on the Genome Canada website. The regional genome centre's recipient audits are also undertaken on funded projects to ensure compliance to the formal terms and conditions of the funding. These are in addition to complying with the detailed terms and conditions of the formal funding agreement with Industry Canada.
Since its inception, Genome Canada researchers have been in the news, mapping variations in the human genome and uncovering key changes in the DNA of individuals with autism, identifying risk factors for type 2 diabetes, sequencing the SARS virus, making a major breakthrough in breast cancer treatment, creating new tools to diagnose organ transplant rejection, designing new biotechnologies that minimize the environmental impact of oil sands production, creating hardier varieties of wheat in response to climate change, and genomic studies of Atlantic salmon to improve breeding selection for commercially important trades. This has happened thanks to the support of parliamentarians, including many senators around the table today. A number of our success stories are also attached in the package you received this morning.
Finally, a number of internal changes are under way at Genome Canada to prepare the organization for the next five years.
Genome Canada is governed by a board of directors whose members serve renewable two-year terms. A key priority for us is board renewal. At our last board meeting, we approved the addition of six new board directors, with expertise, skills and talent that will help guide the organization as it prepares for its next five years.
Following the departure of our founding President and CEO in October of 2009, we retained an executive search firm to assist us in recruiting his successor. We are on track to have that successor in place by early fall.
The board's Science and Industry Advisory Committee is also undergoing renewal of its membership, with a view to having this committee become involved in the development of the scientific strategic plan. It will also have an enhanced role in the coordination of genomics at both the national and international levels.
We look forward to answering any questions you might have pertaining to Genome Canada. Clearly, we encourage the passage of this bill.
The Chair: Thank you very much, Mr. Patterson. What size of board do you have and do you have any rules with respect to regional representation on the board?
Mr. Patterson: Our board consists of 16 members. We have 14 appointed members. The rules relate to regional representation. Each region of the country is to be represented. We have two openings that we will fill in the fall that will deal with Atlantic Canada and the West. We also have international representatives. We have members from the U.S. This business we are in is global, so we have not only looked at representation across the country but also brought in key international expertise.
We have done a fairly detailed matrix of the characteristics that we need. That is an ongoing process for us.
The Science and Industry Advisory Committee, SIAC, is another international body where we draw on expertise from around the world to enhance what we are doing here.
The Chair: Is the scientific and advisory group paid a per diem to come together or how do you handle that?
Mr. Patterson: SIAC members are paid a fee yearly and then a per meeting fee. That relationship is part of what we are renewing. They have met three times a year previously, but we want to have this group much more engaged in not just providing advice around the table but also working with our staff and with the board, providing advice on the application and competition process as well.
The Chair: Finally, on governance, are any of the board seats reserved for government or a particular sector?
Mr. Patterson: On our board we have ex officio members that represent the granting councils. We also have an observer position for a representative from Industry Canada. Industry Canada participates in all of our boards.
The Chair: Is it in an ex officio voting position?
Mr. Patterson: No.
The Chair: It is just an observer type of position?
Mr. Patterson: That is right.
The Chair: Does the Auditor General have the right to do an audit on Genome Canada?
Guy D'Aloisio, CMA, Vice-President, Finance, Genome Canada: Our funding agreement itself says that the Auditor General may audit us.
The Chair: Have you been audited by the Auditor General?
Mr. D'Aloisio: No.
The Chair: That background is very helpful and I appreciate you giving us that information.
Senator Mitchell: We are all aware of the tremendous international and national representation of Genome Canada. It is a privilege to have you here.
In the past you have done stem cell research. As I listened and read, I do not see mention of stem cell research here. Are you still doing that research? That was a very important feature of what you were doing.
Cindy Bell, Executive Vice-President, Corporate Development, Genome Canada: The focus we have now on stem cell research is working on cancer stem cells, which are cancer initiating cells. They are adult stem cells and they are believed to be the root cause of cancer. It is not human embryonic stem cells. If we were to fund research in other than adult stem cells, we would follow all of the rules and protocols and review that have been established by the Canadian Institutes of Health Research.
Senator Mitchell: I am not concerned as much that you would be doing it as that you would not be doing it. It is essential research, from what I understand. My concern is that a government that is not as inclined to do that research might have discouraged you. Two years ago, when I saw that your funding was cut dramatically, I wondered if there is a relationship between the stem cell research and your funding cut.
Is it true that you were doing embryonic stem cell research? At what point did you stop doing that and start focusing on the cancer stem cell research?
Ms. Bell: We have not made a decision not to focus on any type of stem cell research. It depends upon the applications we receive and that meet the excellence standards. We have not, in any way, been disinclined to fund that research. As I said, for any research we fund we would go through all the ethical approvals. If it met those standards, and passed the excellence, we would be able to fund it.
Senator Mitchell: How much was your funding cut two years ago, and have you now recovered that amount?
Mr. D'Aloisio: I do not know if you can describe it as a cut. These are one-time grants given to us. In Budget 2007, it was $100 million; in Budget 2008, it was $140 million; in Budget 2009, there was nothing; and in Budget 2010, it was $75 million. Those funds allow us to run our operations up until 2012-13, and it gives us money to finance our research. It is better to say there was one year where we did not receive funding as opposed to being "cut" — I am not sure that is the right term.
Senator Mitchell: Or you could say that in two years, you received $240 million and for the next two years, you received $75 million.
Mr. D'Aloisio: That is correct.
Senator Mitchell: Was there a year prior to the zero year, either the 10 years prior or the 15 years prior, in which you received no funding?
Mr. D'Aloisio: One year there was no funding announced; that is right.
Senator Mitchell: I noticed with great delight that you have two projects outlined in your presentation — and, I love the headings: Plants Get Stressed Out, Too, and Seeing the Forest and Saving the Trees — that focus on climate change. Is climate change something that your organization specifically and consciously acknowledges?
Ms. Bell: Genome Canada supports five primary sectors. One is the environment; another is forestry. Over the years, a number of our projects have linked those two areas. As climate change has become more important, we have seen projects come to us that address that issue. In 2008, we held a competition that focused on crops and bio-products. The bio-products section had projects that were focused on climate change impacts on energy, looking at alternate biofuels, as well as how to make what we call greener oil sands, ways to get oil out of the earth that would produce fewer by-products and use less water.
In the current competition, which is ongoing, an envelope has been created to support research projects in the area of forestry and the environment.
Senator Mitchell: These projects seem to be focused on adaptation. You are getting wheat that can adapt to climate change.
Ms. Bell: Yes.
Senator Mitchell: You are doing things with water use, so it is more adaptation but not mitigation in the sense of reducing emissions or dealing with emissions in different ways. Have you any plans to get into that kind of research as well?
Ms. Bell: I believe we will get projects in this current competition. It is certainly within the scope and it has been identified as an area that is eligible for funding in our current competition under the environment.
Senator Mitchell: Good. Thank you.
Senator Gerstein: I would like to refer to your opening comment about governance. I wanted to disclose to the members of the committee that I had the great privilege of serving as the chair of the board of Mount Sinai Hospital in Toronto, a leading teaching and research institution. I continue to serve as honorary director, but I suspect that, over the years, Mount Sinai may have made application to Genome Canada for funds. I wanted it to be on the record that I am not involved in any way with the situation at the moment.
The Chair: Thank you. It is important to make those disclosures.
Mr. D'Aloisio, I have a point of further clarification, as you were going through the numbers quickly. As I wrote things down, in 2008 you received $140 million.
Mr. D'Aloisio: Yes.
The Chair: In 2009, it was zero.
Mr. D'Aloisio: Correct.
The Chair: Can I assume that in 2008 it was $140 million for two years?
Mr. D'Aloisio: That $140 million included funding for the operations of Genome Canada for three years, ending 2012-13. The great majority was to fund research in the areas that we fund. Those are funded over a period of years as well, if you know what I mean. We approve a project but do not pay it all out at once. It goes out as cash is required for that project.
The Chair: In 2007, you received $100 million.
Mr. D'Aloisio: That is correct.
The Chair: In 2005, it was $165 million.
Mr. D'Aloisio: That is probably true. It is before my time, but I think that is correct.
The Chair: There was nothing in 2006. Presumably, the earlier grant would help with operation costs, et cetera?
Mr. D'Aloisio: Yes, in fact, there are two components. We are funded for our operation's light, heat and water to run our programs, and so on, up until 2012-13. That came out of the $140 million for 2008. None of the $75 million has been allocated towards operations.
The Chair: Did you say 2012-13?
Mr. D'Aloisio: That is correct.
The Chair: That is out of the $140 million for 2008.
Mr. D'Aloisio: That is correct.
The Chair: That is for the 2012 and 2013 fiscal year. In 2009, you received nothing further.
Mr. D'Aloisio: No.
The Chair: This year, you received $75 million but that is over five years?
Mr. D'Aloisio: When you say, "that is over five years," we estimate our payout of that for our projects — and, we are anticipating three- to four-year projects — to go up until 2014-15. We pay that cash out as required by the project.
The Chair: Government officials told us earlier that the $75 million was over the next five years.
Mr. D'Aloisio: Yes.
The Chair: You do not feel constrained in that, if you wanted to spend $70 million of it this year, you feel you would be able to do that.
Mr. D'Aloisio: When you say, "spend," we will commit the two competitions that Ms. Bell talked about. Those will commit all the $75 million. When we actually pay it out in cash, we will go out over the term of the project but they will be fully committed.
The Chair: Are the terms of the two projects five-year terms?
Ms. Bell: For the research projects for this competition, they will be three-year terms.
Mr. Patterson: For further clarification, if the question is are we coming back next year for additional money, the answer is yes, that is a yearly exercise. We should not confuse the allocation in the budget with the payout or the cash flow, because we do commit those funds. We will be looking to commit more funds in the next budget. We work closely with Industry Canada and Finance Canada as we move forward in the fall with our priorities and our game plan in terms of what we want to do. We will be back into the departments and doing the rounds in the fall and in the new year, but we will be back.
This year, we are hoping that our submission will include a multi-year component, which will be the first time we have gone year to year to date. In order for us to look at certainty and planning over the next number of years, we think it is critical that multi-year funding be considered. We will be back and asking for that next year.
The Chair: I will refer to operating as internal operating — that is, the cost to keep your machine going. How much do you need each year to do that?
Mr. D'Aloisio: The question was how much do we need to run our operations?
The Chair: Yes.
Mr. D'Aloisio: Industry Canada has allocated to us, over the last five years, $9 million per year. However, in the first two years we did not spend the $18 million. The first two years of the $18 million, we saved about $3.5 million. In the last three years — that is, the $27 million for three years — we asked Industry Canada if our funding agreement could be amended so that it could be reduced by $3 million and so that it would go into research. They agreed to that request. Over the next three years, we have committed to operate within a total budget of $24 million for operations over three years, on average, $8 million a year.
The Chair: Does that come out of any of the figures we are looking at, for example, the $75 million?
Mr. D'Aloisio: No, that is separate.
The Chair: It comes through Industry Canada's allocation and appropriation each year.
Mr. D'Aloisio: Yes, it is part of our grant. We are one of Industry Canada's grantees.
The Chair: That is helpful.
Senator Callbeck: You have six centres across the country. Where are they located?
Mr. Patterson: We have centres in Vancouver, Calgary, Saskatoon, Winnipeg, Toronto, Montreal and Halifax.
Senator Callbeck: Where are the six science and technology innovation centres?
Ms. Bell: With respect to our six science and technology innovation centres, west to east, we have our University of Victoria Genome British Columbia Proteomics Centre. In Vancouver, we have the Genome Sciences Center, which is for DNA sequencing, genotyping and so forth, as well as a microarray facility. In Calgary, we have our bioinformatics platform or innovation centre; in Toronto, we have the TCAG, which is a multi-technology centre with primarily sequencing and some proteomics and cyto-genomics. In Montreal, we also have a platform, an innovation centre, which focuses mainly on sequencing, genotyping and some proteomics.
Senator Callbeck: Of the 12 centers, is there just one in Atlantic Canada?
Ms. Bell: The regional genome centres are management organizations, mimicking Genome Canada, but regionally located, and their role is to work within their regions to secure co-funding. For every dollar of federal money we invest, we need to bring another dollar to the table. They work with their regional industries and scientists and assist them in developing and in following applications to Genome Canada. We need one in each region, and there is one in Halifax to cover the Atlantic region.
The innovation centres are technology service platforms, and they are located across Canada through, again, an application process that started in our very first competition. Initially, there was a sequencing platform in Halifax, and when it was reviewed after the first five years, it was determined we did not need to support a sequencing platform there. It did not have sufficient demand and users, and so we closed that location.
However, scientists across all of Canada and internationally have access to all of our innovation centres and technologies. Because of the nature of the global view toward research, it is quite adequate for them to have access to the centres in other provinces.
Senator Callbeck: Are these incorporated centres run by a board of directors?
Ms. Bell: Yes.
Senator Callbeck: Does the centre in Halifax have representation from all the Atlantic provinces?
Ms. Bell: Yes, but I would like Mr. Patterson to confirm that.
Mr. Patterson: Yes, I believe so. We will get back to you on the details of that, but I believe so.
Senator Callbeck: I would like to have that information.
Mr. Patterson: I will be happy to provide the committee with that information.
Senator Callbeck: You say that the funding must be matched 50 per cent. Is there a problem in Atlantic Canada with coming up with that 50 per cent?
Ms. Bell: Historically, I think that they have met the requirements and provided the co-funding for the projects that were reviewed and approved by us. I am sure that the regional centres work hard within the regions to secure that funding, but the excellence of the science that we support there certainly assists them in the project.
Senator Callbeck: However, you really stick to the 50 per cent; do you? There is no leeway.
Mr. D'Aloisio: Yes.
Senator Callbeck: Of the overall money that you have spent or allocated in the last five years of the projects, what per cent has been allocated to Atlantic Canada?
Mr. D'Aloisio: When you say, "allocate," remember, there is not a conscious effort to allocate funds by region.
Senator Callbeck: Yes.
Mr. D'Aloisio: In Ontario, it is 34 per cent; British Columbia, 19 per cent; Alberta, 6.5 per cent; Quebec, 27 per cent; the Prairies, 6.2 per cent; the Atlantic provinces, 6.6 per cent.
Senator Callbeck: In your opening comments, Mr. Patterson, you talked about being audited several times. How often is a compliance audit done, or how do you account to Industry Canada? They give you the money, correct.
Mr. Patterson: Yes.
Senator Callbeck: How do they monitor that?
Mr. D'Aloisio: First of all, we interact with them often in the normal course of business. They are represented on the board. They attend every single board meeting. As part of our agreement, we have to publish an annual report, based on specifications as outlined in the funding agreement. We have to undergo performance audits, as specified in the agreement. At least every five years, we have to undergo an evaluation in accordance with the agreement. As well, they have the right to audit at any time.
Senator Marshall: I want to discuss the $75 million and how the money flows. You have not received any of the $75 million and those funds would be pending the budget. What triggers your spending? When you enter into agreements with the successful organization, is the cash flow outlined in your contract, or is there something that triggers the cash flow, like a progress bill, for example?
Mr. D'Aloisio: There was a time when a grant was announced and approved through the legislative process, and you would receive a cheque; in this case, it would be $75 million. However, that does not happen anymore. We have an agreement for $75 million with Industry Canada. We have to provide them with an annual statement of cash flow outlining our best estimate of how much cash we will need that year. In this case, it will be over three years because we do not pay it. We will be paying it out over three years.
Senator Marshall: When the budget is approved, that kicks in.
Mr. D'Aloisio: We distribute it to our projects through other regional genome centres, based on the same principle. We have a quarterly draw request process where they come to us and tell us what projects in their region need money for the next quarter. We go through a due diligence exercise to review that, and we issue our funds on a quarterly basis.
Ms. Bell: The amount is based upon a budget that the project that we have approved would have submitted to us to align with the research that they propose to undertake. It goes through a due diligence review to ensure it is for eligible costs and in line with what they have requested. That is the stake in the ground on which we then work, as Mr. D'Aloisio said, to determine their quarterly flow of funds. It is based on that budget.
Senator Marshall: How is the cash flow managed? The money is received, and you have the money for a significant length of time before you pay it out. You must have investment policies because we are talking about substantial amounts of money.
Mr. D'Aloisio: There is an investment committee of the board. We have investment manager. That is not as important now as it was before when we used to get the big amount of money. Now the money is used relatively quickly. Nevertheless, our investment policy is specified in our funding agreement with Industry Canada, so it is relatively conservative and primarily based on protecting the principle.
Senator Marshall: Is there an audit committee of the board?
Mr. D'Aloisio: Yes, there is an audit committee of the board.
Senator Ringuette: You do a lot of fundraising for your projects. What is the provincial contribution, depending on where the research is being done, and what is the contribution from the private sector?
Mr. Patterson: All of our projects are co-funded, and we manage our projects through the centres. Each of the centres must bring co-funding to the table, so whichever competitions are successful must bring that matching money. It does come from the provincial government as well. I am not sure of the percentage. There is a percentage of private sector funding that we are constantly monitoring, trying to encourage and trying to grow.
Mr. D'Aloisio: Our most recent figures indicate 46 per cent from the federal government through Genome Canada, 5 per cent from other federal departments such as ACOA and CFI — CFI is a big one, 8.3 per cent from industry, 19.4 per cent from the provinces and 17.7 per cent internationally.
Senator Ringuette: International governmental or international private sector?
Mr. D'Aloisio: A good portion of that is from the Wellcome Trust, through one of our large projects.
Ms. Bell: The Wellcome Trust is a charitable funding agency located in London, England. We are engaged with them as well as other Canadian funding agencies, Swedish funding agencies and three big pharmaceutical companies to support a project that is led out of Toronto called the Structural Genomics Consortium. The total value of that project for the last seven years has been about $215 million.
The role of that project is to determine the structure of human proteins and create the crystals of those structures. They put them out into the public domain, which means they are accessible to all scientists and all pharmaceutical companies, and they are used in the drug development process. This is a large consortium that has brought together funding from many sources to support Canadian-led major international projects that have sites at Oxford as well as at the Karolinska Institute in Sweden.
Senator Ringuette: I find that one of the characteristics Canadians lack in general is the ability to market our products, our research and our knowledge. Of all the projects that you have participated in since 2000, how many have led to commercialization of that research and brought in income for the research developed?
Mr. Patterson: If you look at the statistics that Mr. D'Aloisio just went through, we are looking for partnerships globally to bring in funding.
As far as the commercialization component is concerned, it is an area that we have not been as successful in as we had hoped to be, although we have started a very significant initiative with the BDC in the last year. We have signed an MOU with the BDC to look at working in partnership with the bank to be in a position where we can provide a pipeline of opportunities through our centres to look at venture capital funding. We have a number of opportunities that are close to being ready for that stage. In our previous submission to the government, we were looking at also having some funding allocated to assist in that.
They refer to this "valley of death" between where the research stops and the venture capital is ready. We are trying to find ways to avoid that valley of death, and we thought if we could stay in our projects a little longer and have the BDC come in earlier, it would reduce help.
We have ongoing discussions with them. We signed an MOU. We are in the process of introducing all of our centres to BDC to look at their criteria and what opportunities there might be for us. We think there are probably a couple of opportunities per region, but we are very much the catalyst for our centres.
These are regional activities that occur in each of the centres in each of the provinces. We will be bringing them to the table with the BDC to see how our companies can become BDC ready. If they are not ready, what are the criteria that the BDC looks for and what can be done in the next number of months with that end game in mind.
Senator Ringuette: Who owns the patents on your research? Do you own them? Do your centres own them? Does the private sector own them? If they do own them, it is 8 per cent of the funding.
Ms. Bell: In addition to what Mr. Patterson was talking about, we have at least 20 spin-off companies that have been created from the projects that we funded, either created or we have assisted those companies in developing a product. The most recent is the development of a mass spectrometer that will allow us to detect and identify cells at a cellular level, at a rate that we have never been able to do before. They have developed the instrument, which is now on the market, and they have sold it.
In addition, we have supported a project in Newfoundland and in the rest of the Atlantic region. This project concerns a fatal heart disease that has struck young men in the Newfoundland population, usually under the age of 50. They just die; their heart stops. Our team was able to identify the gene responsible for that heart failure. There is now a diagnostic. They are able to identify those individuals, and defibrillators are now implanted into their chests so they no longer die. It is being commercialized now to go internationally.
We have examples, but we are trying to do this in a more systematic way, also to be able to assist the projects that have typically had to go out there and do that on their own.
Senator Ringuette: I am asking these questions because I believe that we lack the skills needed to commercialize our research. I have no intention of suggesting that your mandate for research should include commercialization, but I would welcome that in some instances.
Ms. Bell: I think there will be greater opportunities available. If we can work to solve that valley of death issue in Canada and turn it into something more like Silicon Valley, I think we would do well by Canadians.
Senator Ringuette: It is our major weakness.
Mr. Patterson: On a point of clarification, in terms of the history of Genome Canada, there have been companies formed out of our funding. There have been a dozen of them in Ontario, two of them in Quebec, four of them in British Columbia and two of them in Alberta. There has been activity, but clearly, we want more.
Senator Ringuette: When you do research, it is time consuming. Sometimes you have positive results at the end of it and sometimes you do not. That is the risk at the end, but overall in this new world, it is worth the investment.
I feel very sorry that Canadians have invested in research and development in a Canadian owned technology and patent called the CANDU reactor, which is now for sale. I needed to get that off my chest.
Senator Gerstein: With the exclusion of the last little comment that Senator Ringuette made, I was going to compliment her because I think she is on a very important topic and I was going to pursue this question of commercialization.
Does Genome Canada have a relationship with MaRS, Medical and Related Sciences, which focuses on commercialization of research in Canada? What if any relationship exists with the MaRS project in Toronto?
Mr. Patterson: OGI, Ontario Genomics Institute, is our centre based physically in MaRS, but we have strong relationships with all the players around MaRS, whether it is the Toronto Region Research Alliance, TRRA, MaRS or others.
The Chair: For those of us who do not come from Toronto, could you explain MaRS to us?
Mr. Patterson: MaRS is located in the midst of the Discovery District in Toronto at the corner of College Street and University Avenue, and it is a collaboration centre. It is an incubator and brings together all of the elements required in the total package to produce all the way from the science through to the end, commercialization. You walk through the halls of MaRS and you have lawyers, accountants, scientists, labs, venture capitalists, and the idea is to be able to take all of the opportunities through MaRS right through to commercialization.
We have a window on that through our relationship with OGI, plus our own relationship with MaRS in terms of the people involved there.
Senator Gerstein: If I may put a compliment out, focused originally by John Evans and funded by Finance Minister Manley is what gave it a start, and it has been great for Canada.
Senator Runciman: Most of my questions involve the issue of commercialization as well. You have been involved in some fascinating projects. Maybe you could give us a quick update on a couple of them. I would be interested in knowing more about the greener oil sands and small is beautiful when talking about a diagnosis with respect to cancer detection and other ailments that can be done within two hours at a cost of $10. You are talking about a prototype here, but could you give us a brief update on those two projects?
Ms. Bell: Small is beautiful is a project that we funded in a competition called technology develop. Genomics, proteomics, meta-bolomics, transcriptomics, all of the -omics, are technology driven to answer a scientific question. We were incredibly impressed with the breadth of the skills in our Canadian scientists for the development of that.
This particular project is led out of Toronto. Shana Kelley has appeared on television and has been a wonderful spokesperson. Shana described why she was in this research, why she developed this technology and the potential applications. We will be following it through the funding. There is I believe one more year in this project, and they will be eligible, if the prototype needs further funding, to come back to us for additional funding. The potential to be able to do a number of studies on small quantities of cells and tissue will play an important role in going forward. It is a key type of program for us.
The oil sands project was funded in our crops and bio-products competition, and it is working with microbes and trying to use those to get down in the beds. I am not sure I understand the technology completely, but it is to use those microbes to enable easier extraction of the oil and have less methane by-products. One of the big issues is the amount of water needed to extract the oil, and the proposal is it will reduce the level of water needed. I think this project is only 18 months, so it will soon be going through an interim review where we do a rigorous assessment and look at the progress. At that point I could give you a progress report. It is certainly an exciting project and one we were hoping would come out of that competition.
Senator Runciman: You do a midpoint review, and how frequently, if you had to pull a number or a percentage out of a hat, have you actually ceased or stopped a project in midstream?
Ms. Bell: Every project that we fund has such an interim review, usually 18 months into the project. It is an extremely rigorous review by an international panel. Our projects are milestone driven, and so when they submit their application, when it is approved, there are specific milestones and deliverables they have to meet. They are assessed against that, taking of course into consideration the changes in science that have developed since they wrote their application.
Normally, the result is we find the projects are doing great in general. A number of them need some improvement, some cutting back, and we have done that, some refocusing through the advice of our international community, and I think over the years we have probably stopped funding to just a handful of projects that we would not take forward because they had not met their milestones.
The Chair: I think what you might want to do is keep parliamentarians more informed about your successes. These are just two, and we are all interested in your successes.
Senator Murray: Mr. Chairman, my question is much more general than the clauses before us. Mr. Patterson, if you do not want to comment, I will understand. It has to do with research in general.
I am breaking my own rule because I do not think it is ever a good idea to base a question on something one saw in yesterday's media. However, there was an article in the media having to do with this apparently unproven new treatment for multiple sclerosis. That is not what I wanted to ask you about. In the article, various knowledgeable, apparently concerned, people were quoted as saying that government research funding is too often driven by advocacy groups or what happens to be prominent in the media one day to the next rather than by more objective criteria. The suggestion of course, as usual, was there should be some central authority to decide all these matters. I am leery of central authority in general and the appointment of so-called czars to decide everything, whether it is national security or medical research.
However, do you have any general comments about how it is working, how the government medical research funding is working, whether the process is everything it should be?
Mr. Patterson: I will let Ms. Bell talk more extensively on this, but generally one of the hallmarks of Genome Canada is our competition process and the international peer review that we put every project through. We bring in panellists from around the world that review those submissions, so it is based on the pure science. The competitions come from our centres and their partners and are rigorously reviewed by experts in the field.
Senator Murray: Are you of the view that this is a formula that other granting bodies would be well advised to adopt?
Mr. Patterson: At the risk of sounding self-serving, absolutely.
Ms. Bell: We also, of course, look at the benefits that there will be to Canada and balance that with the scientific excellence. A project would have to justify that; it is not predetermined what the benefits would be. They have to justify that they will provide benefits.
You talked about a czar. One of the great things about the movements that are happening in Ottawa is that the funding agencies are working together more collaboratively, as are the federal departments and labs. We had a process at Genome Canada called the position paper process, which brought together industry, end-users, scientists, federal departments and the other funding agencies to identify areas that are of importance, but then you still put out a call and still only fund scientific excellence. Working together, the agencies will address the concerns that you have raised.
Senator Murray: That is good. Thank you.
Senator Neufeld: Thank you for being here. You are well known in our part of the world, in British Columbia, and much appreciated for the work you do.
The part about going from research to commercialization will always be a challenge. Probably a decade from now people will be sitting around this table talking about these same things, as they have in the past.
You spoke about some of these, Mr. Patterson, and listed some in different provinces. I would like you to touch on one, keeping in mind that we are running short on time. Could you circulate to the clerk a description of those you have done across Canada where there has been research and commercialization?
The British Columbia government, when I was there, started a fund called the ICE Fund, Innovative Clean Energy Fund, which was to conquer that valley of death from research to commercialization.
We put a small tax on all users of natural gas and electricity and gave it to an external board, not to government, to make a decision. With AECL, we have spent some $23 billion over 50 years and have not had a sale in 13 years. The government can only give so much, but there is a way to get outside people to help make those decisions. They can make non-political decisions.
Perhaps you could explain one or two such successes and provide the rest to the clerk in writing.
The Chair: That would be helpful. Unfortunately, we have run out of time. We have a teleconference waiting all the way from beautiful British Columbia.
We want to thank you, Mr. Dale Patterson, Ms. Cindy Bell and Mr. Guy D'Aloisio, for being here and explaining the good work you are doing, and we hope that you continue to do that work.
In this second section, we will turn our attention to Part 3 of the bill, amendments to the Air Travellers Security Charge Act.
We are pleased to welcome, on behalf of the Air Transport Association of Canada, Mr. John McKenna, President and Chief Executive Officer; and Mr. Michael Skrobica, Vice-President, Industry Monetary Affairs.
From the Canadian Air Transport Security Authority, we welcome back Mr. Kevin McGarr, President and CEO; and Mr. Mario Malouin, Chief Financial Officer.
Finally, joining us by video conference from British Columbia, we welcome Michele McKenzie, President and CEO of the Canadian Tourism Commission. She is accompanied by Chantal Péan, Senior Vice President, Corporate Affairs and Corporate Secretary.
Michele McKenzie, President and CEO, Canadian Tourism Commission: Good morning, chair and honourable senators. Thank you for inviting the Canadian Tourism Commission to join you today. With me this morning is Chantal Péan, CTC's Senior Vice-President of Corporate Affairs and Corporate Secretary. I will offer senators a few quick points of interest about the Canadian Tourism Commission and then make ourselves available for questions.
The CTC is Canada's national tourism marketing organization. We are headquartered in British Columbia and currently active in 12 countries, with offices in nine markets around the world. We are a Crown corporation, wholly owned by the Government of Canada. As part of our engagement with the tourist sector across Canada, CTC works with all provinces and territories through its advisory committees and has biannual forums with all provincial and territorial tourism deputy ministers, as well as with provincial and territorial marketing officials. Through collaborations and partnerships with the private sector, as well as with the governments of Canada, the provinces and territories, we work with the whole tourism sector to strive to raise its competitiveness and showcase Canada as a unique competitive destination.
Our vision is to inspire the world to explore Canada. To do that, we harness Canada's collective voice, all of that marketing power, so that we can grow tourism revenues, both domestically and from abroad. CTC, our partners and industry watchers agree, however, that the sustainability of Canada's tourism industry requires an increasing number of international travellers.
The board of directors has approved CTC's 2011-15 objectives to be as follows: One, increased demand for Canada's visitor economy and two, focus on markets with a Canada brand that leads and yields the highest return on investment.
Since the 2007 launch of Canada's revitalized tourism brand, Canada Keep Exploring, we have worked to build a bridge between the world's nature based perceptions of Canada and the need to present more diverse and real Canadian travel experiences in a personal, emotional, relevant and interactive way.
Our success in branding Canada has been cited as one of the main reasons why Canada has climbed FutureBrands Country Brand Index from twelfth place in 2006 to sixth place in 2007 and has held second place for the last two years.
The CTC achieved significance success during the first two phases of our 2010 Olympic Winter Games strategy. In many cases, our efforts far exceeded the initial targets. Our work during the final phase, converting travel intentions into actual bookings, is ongoing and will support the ultimate goal of increasing export tourism revenue for Canada.
Our third party administered tracking and conversion studies reveal that our measured campaigns had the following attributable results: In 2009, we generated an estimated $1.66 billion in tourism revenue for Canada's economy and contributed to the maintenance and/or creation of 15,284 jobs for the Canadian tourism industry.
Honourable senators, in the interests of time and the important work of this committee, those are my opening remarks and I look forward to your questions.
John McKenna, President and Chief Executive Officer, Air Transport Association of Canada: Good morning senators, ladies and gentlemen. I am President and CEO of the Air Transport Association of Canada, ATAC. I am accompanied today by Mr. Michael Skrobica, Vice-President, Industry Monetary Affairs.
ATAC has represented Canada's commercial air transport industry for over 75 years. We have about 185 members engaged in commercial aviation in Canada, operating in every region and providing service to the large majority of the more than 700 airports in Canada.
We certainly appreciate the opportunity to speak to you here today on an important aspect of aviation security, financing through the Air Travellers Security Charge, ATSC.
We have many questions on the issue of security. Why are Canada's security charges so high as compared to other countries'? Where is the accountability between the ATSC revenues and CATSA funding? Why do revenues collected through the ATSC far exceed the amount being spent on security through CATSA? What is the justification for a 50 per cent increase of the ATSC? Will the minister simply increase CATSA's budget and the ATSC every time a new security loophole is discovered?
[Translation]
Canada's ATSC was very high even before the latest increase. In 2008, ATAC conducted a survey to rank the 175 security fees charged by governments and airports worldwide. At that time, Canada's security charge was the second highest in the world, second only to the Netherlands. After the increase announced in February, we believe the Canadian security charges will be the highest in the world, the international fee alone having increased 52 per cent from $17 to $25.91. In the U.S., the international security charge is $5.00.
So we ask why are Canada's security charges so high as compared to other countries? We do not applaud the government for striving to be number one by increasing a tax that was already yielding a surplus.
We are very concerned by the lack of accountability between the ATSC revenues and CATSA funding. How much money is collected through the ATSC? What percentage of it actually goes to CATSA? Does any of it end up in the general account?
[English]
The Honourable John C. Major, who chaired the Commission of Inquiry into the Investigation of the Bombing of Air India Flight 182 recommended:
The collection, retention and disbursement of the ATSC should be subjected to comprehensive and transparent accounting. All revenues from the ATSC should be traceable and should be used solely for civil aviation security.
An annual report of the ATSC revenues, as well as expenditures by program or department, is recommended; and
CATSA should be the main beneficiary of funds from the ATSC.
The last report by the Auditor General on the ATSC dates back to 2004-05. Without audited information, we can only speculate as to the revenues generated versus the parliamentary appropriation for CATSA, which we have done. We looked at numbers supplied by CATSA and Statistics Canada. Our estimates are based on the 48 million passengers screened by CATSA in 89 Canadian airports during fiscal year 2008-09. The numbers put forward concur by CATSA concur with Statistics Canada's report of 108 million passengers enplaned or deplaned during the calendar year, with some 54 million departing passengers, CATSA's clientele. Statistics Canada indicates that 63 per cent of these passengers were domestic flights, 19.3 per cent on transborder flights and 17.6 per cent were on international flights. Based on these numbers, it becomes a simple exercise to estimate the revenues generated by the ATSC. The attached spreadsheet suggests that revenues generated by the ATSC well exceed CATSA's appropriation even before the increase in the ATSC. Based on these calculations of the ATSC collected in 2008-09, more than $70 million were retained as general revenue by the Government of Canada and not used to fund the CATSA.
With the exception of 2009-10, where the ATSC did not generate enough money to fund CATSA, as the government had allocated a special Olympic fund of $175 million to finance the special requirements of the Olympics, the government cannot then raise the ATSC on the pretext that it is not generating enough money to pay for airport security when it places specific Olympic security demands on the CATSA.
Once the increase in the ATSC has been factored in, and considering the budget allocation for CATSA of $1.5 billion over the next five years, the revenue generated by the ATSC will produce an annual surplus of over $225 million.
[Translation]
We fail to understand why the 50 per cent increase in the ATSC is necessary. We now find out that the revenues generated by the ATSC also fund air security projects at Transport Canada and the RCMP, but officials will not tell us how much is going to each.
Interestingly enough, the law that created the ATSC fails to mention what the fees are financing. There is no indication whatsoever dictating what the funds generated by the ATSC are to be used for. The ATSC should be used to fund CATSA and only CATSA. It is not an additional source of general revenue for the government for which it does not have to be held accountable.
CATSA's budget is entirely financed by the ATSC, whereas in the U.S., air travelers only finance 30 per cent of the Transportation Security Administration's budget. Sixty per cent of the TSA's budget comes from general revenue.
Our request is endorsed by the report chaired by the Honourable John C. Major as it recommended specifically that "funding for civil aviation security should be derived primarily from government."
The current appropriation for CATSA is $235 million, to which an additional $1.5 billion over five years was announced by the government in February.
How can the government establish a five-year appropriation for CATSA when it is so obviously prone to precipitated responses to incidents, which lead to additional security measures?
[English]
Is the minister simply going to increase CATSA's budget and the ATSC every time a new security loophole is discovered? How much security is enough security? How much security can we afford? Increasing the ATSC is not the answer. We do not need more layers of security — we need better security. CATSA is simply implementing additional security measures without doing any threat assessment whatsoever. This is done by either the RCMP or CSIS. Should this not be financed by the government's general revenue, as are all other aspects of national security? Has government determined what the real security threat in Canada is and are we prepared for it? Is our equipment sufficient, efficient or outdated?
Will our security measures continue to accumulate, or will the authorities dedicate themselves to developing and implementing a more efficient, simple step screening phase aimed at improving security, reducing the number of screening stages and the time and personnel required to process passengers? Industry sees the current airport security lines as inefficient and a real opportunity for terrorism.
Is Canada able to come up with made to measure security that reflects our own needs in light of the security threat in Canada? Our other concern is CATSA's performance. Has the government determined CATSA's performance is comparable from an economic point of view to other screening agencies worldwide? If so, how have they arrived at this conclusion? Where is the evidence? What parameters were used? The customers of our members are footing the bill and they are entitled to receive this information.
Finally, why did the Minister of Transport announce a tax measure one week in advance of the budget? Does the government really think that the aviation community and the travelling public are so gullible that they would not see the obvious ploy to protect the government's claim of no tax increases?
In closing, let me reiterate that the commercial air transport industry believes in good and efficient security but not in security at all costs.
Kevin McGarr, President and CEO, Canadian Air Transport Security Authority: Good morning. Joining me again today is CATSA's Vice-President and Chief Financial Officer, Mario Malouin. We are pleased to have been invited back to speak with you and to answer any questions that you may have.
When I was here a few weeks ago I spoke about some of our plans for the future. This included a shift to proactive planning and action because we now have the ability, the stability and expertise in place to move in this direction. I also referenced Budget 2010 and the $1.5 billion in long-term funding that we will receive over the next five years. This includes approximately $350 million in new funding for 2010-11.
Based on our approved funding, we have now developed a strategic plan for the next two years and this allows me to provide you with some further clarification. The plan spans from maintaining our core mandated activities to improving the effectiveness and efficiency of our programs based on the certainty that this investment brings.
[Translation]
As the Minister of State for Transport mentioned, last June 14, CATSA would undergo an expenditure review, as well as an efficiency and structure review, to ensure that it fulfills its mandate effectively. The review is currently underway and the stakeholders, the screening personnel and air travelers have been asked to participate in the process.
As I stated when I appeared before the committee, CATSA fully supports the review. We are constantly looking for ways to improve the effectiveness of our operations in order to keep security and customer service in balance. We also understand that we might have to change our current strategic plan for the next two years depending on the results of the review, which we are more than willing to do.
[English]
As we undergo this review, we are also in the throes of preparing for the implementation of the recommendations stemming from the 2009-10 strategic review. These include options to streamline our operations and enhance the cost effectiveness of our activities.
I might add that we will be proactively taking a number of steps beyond those identified in the strategic review, including investments in projects to enhance efficiencies through monitoring of wait times and throughput data, and by improving scheduling of screening resources.
In terms our current resources, I would like to speak first to our operating budget. Within this budget we will be able to maintain a level of screening over the next two years comparable to that of 2009-10. This includes the ability to address irregular and seasonal peaks, deviating from our standard baseline operations with current resources and existing inventories, and further, through the identification of potential efficiencies brought about by the optimization of equipment and processes.
Another significant step toward efficiencies is the launch later this year of a competitive request for proposals process for airport screening services. The RFP represents an opportunity for us to strengthen our current relationships with third party screening contractors by building on what is currently being done well, while addressing some areas where outcomes could be improved as part of our continuous improvement philosophy.
[Translation]
Overall, we are trying to use our resources more efficiently and consistently, without compromising our aviation security or the consistency of our resistance. This is in keeping with our change in organization aimed at result-based management and assuming full responsibility of taxation planning.
As to our capital budget, the funding we set aside in our business plan will allow us to follow through with various projects related to pre-board screening and checked baggage screening.
[English]
Specifically over the next two-year period, we will undertake the following activities to carry out our mandated activities. For pre-board screening, we plan to maintain our capacity and baseline services at the current 296 screening lanes. For both pre-board screening and holdback screening, we will undertake capital replacement and upgrading of aging and outdated equipment. We will undergo systems re-engineering and optimization, improved performance measurement and monitoring, and introduce new technologies to advance our threat detection capabilities.
[Translation]
In terms of screening non-passengers, we will still use the random selection of non-passengers as set out in the regulations.
As to our Restricted Area Identity Card program, which we call RAIC, we will use life cycle management for our RAIC equipment. We will implement our updated application and we will continue to assess our fixed biometric readers.
[English]
The last time I appeared before you I spoke about our commitment to change and I can assure you that we are making changes at almost every level. We are reaching out to passengers with our Pack Smart campaign, through our website and by adopting initiatives such as the new trusted traveller NEXUS program that will help facilitate the screening process for air travellers. We know that screening officers can be better engaged in the upcoming RFP process, for airport screening services addresses that very issue.
We know that we need to work more closely with our stakeholders in the airport community, including the Canadian Airports Council, the individual airports, as well as other stakeholders in the industry like the Air Transport Association of Canada, the National Airlines Council of Canada, Air Canada, WestJet and Porter Airlines. Getting the balance right between security and customer service is our absolute priority.
Along with our partners and stakeholders, we are all contributing to the best airport experience possible for those passing through Canada's designated airports.
The Chair: Thank you Mr. McGarr.
I would like to have clarification on a couple of points. First, Ms. McKenzie, what impact, if any, do you see a 50 per cent increase in air traveller fees will have on tourism in Canada?
Ms. McKenzie: We do not have information specifically on this particular fee, but airport fees and charges generally have been identified as issues with Canada's overall tourism competitiveness. By international standards, it has already been mentioned that our fee structures tend to be quite high and drive the overall cost of Canada as a destination.
The Chair: Mr. McGarr, last time you were here was with respect to Supplementary Estimates (A) and you were seeking $350 million to help CATSA. I am pleased to advise you that we passed that bill. You now have your $350 million allocated from general revenue. Could you tell us now why you need another 52 per cent increase in air traveller taxes in order to achieve what you have outlined?
Mr. McGarr: Senator, CATSA's operations are entirely appropriations-based. We submit a funding proposal to government for consideration and any decisions of government for our operations result in an appropriation. CATSA has no direct link to the Air Travellers Security Charge. That is managed entirely by the Department of Finance. It is my understanding that those funds are then deposited in the Consolidated Revenue Fund and we are given appropriations from that fund.
There is no direct relation, certainly from CATSA, to the Air Travellers Security Charge. We make a funding proposal to government for consideration and that proposal is based entirely on appropriations. The source of funds is a policy decision of government.
The Chair: Will you be able to achieve everything that you have outlined according to your business plan for the next year with the $350 million allocation that we have just voted for you?
Mr. McGarr: The $350 million allocation, senator, is in addition to the $234 million that was in the fiscal framework in the Main Estimates. Our operating budget for fiscal 2010-11 is $587 million.
The Chair: Thank you for that clarification. I had forgotten about the earlier $200 million.
Mr. McGarr: Excuse me, it is $593 million.
The Chair: Thank you. You are saying that if we voted to not approve the 52 per cent increase, it would have no impact on your operation.
Mr. McGarr: I cannot speak for the government regarding the funding for our programs.
The Chair: I understand.
Mr. McGarr: Our funding proposal is presented to government and we are granted appropriations. The source of funds for those appropriations is beyond CATSA's scope of activity.
Senator Ringuette: My first question is to the tourism commission. It is not directly related to this issue, but to another in Bill C-9, in regard to the 50 per cent reduction of your board of directors. My concern is in regard to the dialogue with the stakeholders and the stakeholders being part of your board. Can you tell us what the new composition of that board will be? Will Atlantic Canada have representation on that board? Will the aviation sector, which is very important for your marketing to international networks to bring tourism to Canada, be affected by the reduction of your board of directors?
Ms. McKenzie: The key difference with the governance change that we are proposing would move the CTC board from a representative-based board to a skills-based board. That does not mean that we would not still be interested in representation from across the country with respect to geographic representation or industry sector representation on the board. It just means that there would not be designated seats in that area.
We consulted extensively on this change and have received letters of support from the ministers of tourism in every province and territory in Canada. We have received letters of support from the industry. The industry recognizes that there are many different mechanisms in place to engage with the Canadian Tourism Commission, most important, our working committees, which have broad representation from all over Canada.
We are a marketing organization, so we have working committees that work with us to represent our marketing efforts and guide our marketing efforts in different parts of the world. For instance, we would have a committee that would represent Asia-Pacific, if you will, and we would certainly have the interests of, say, Prince Edward Island, which is very interested in the Japanese market, in that committee. They see that is where they need to have the most impact.
Everyone has recognized that the board of directors needs to be more of a skills-based board than a representative board so that we can have the type of skills that we need going forward. For years the CTC board was without a chartered accountant. We did not have an appropriate person to chair our audit committee. The representative board did not really give us the overall board capacity in terms of modern corporate governance.
Representation is still very dear to our hearts in terms of making sure our board has a good cross-section of the industry and the geography of Canada. I am an Atlantic Canadian. I spent my whole career in Nova Scotia before joining CTC. I can guarantee you that it is very near and dear to my heart as it is to our overall organization to ensure that we have a board that understands the country and this industry.
Senator Ringuette: There is nothing that is guaranteed in the current legislation in regard to the representation of Atlantic Canada. It is particularly important now that you are located in British Columbia. The distance is important. Atlantic Canadians want to be in, not out. I hope that my few comments to start will be kept in mind when you do have your reduced board appointments.
Ms. McKenzie: Thank you senator. We are very sensitive to the concern. We would not have the support of the industry in Canada and our partners in every province and territory if we were not able to achieve a board that had broad representation. I appreciate your comments and we will take those into consideration.
Senator Ringuette: My other question concerns the 52 per cent increase that is in the budget bill concerning the Air Travellers Security Charge. This increase comes while the world is in a global economic crisis.
You indicated earlier that you would be facing a decrease in international competitiveness at a time when we are already number one in air traveller's fees. I suspect that your expertise and reaches should be able to indicate to us the real impact of such an increase.
If we lose 10 per cent of air travellers because of this increase, then we will lose 10 per cent of $1.66 billion in economic activity in Canada.
Ms. McKenzie: In fact, it would be much more than that, because international visitation is much higher than what we can directly take credit for. The numbers I was quoting are those for which we can take direct responsibility.
Competing for the international air traveller is the basis for CTC's strategy going forward. It is in this area that we are fighting the fiercest competitive battle as a tourism destination. There are many new and emerging destinations competing around the world for that same customer. We need to compete for a higher yield customer — one who can spend more money. Canada is not an inexpensive destination, so we compete for that higher yield customer. As much as we cannot give you any specific feedback on this increased charge, the cost structures of tourism in Canada is a concern to the overall industry and is seen to be an issue that impacts our overall competitiveness.
Senator Ringuette: We are looking at maybe $1 billion of impact on a yearly basis?
Ms. McKenzie: I do not have that information.
Senator Ringuette: I will direct a question to Mr. McKenna. Have you looked into the impact in the reduction of seat sales from this increase?
Mr. McKenna: I will ask Mr. Skrobica to answer that.
Michael Skrobica, Vice-President, Industry Monetary Affairs, Air Transport Association of Canada: In my previous career, I worked as a financial executive at a number of airlines. The rule of thumb that airlines used was that a 1 per cent increase to a total trip cost for a passenger would result in a 1 per cent reduction in the number of passengers travelling. It is basic economic inelasticity of demand. That ratio increases when you have shorter trips, because the traveller has an option to get into their car. The ratio decreases for international travel when they do not have that option of other travel modes.
From our standpoint, airlines, on a historical basis, worldwide, generally operate on a margin of about 6 per cent. With that margin, they have to pay administrative costs, some of the lease costs, et cetera. As a result, they are dealing with thin margins. When you enter into a recession, as Canada and most of the Western World did in the last few years, those margins may turn negative. A number of airlines were essentially flying people and losing money even before paying any of their administrative costs. As a result, a small percentage increase will exacerbate the losses that the airlines in Canada will face.
Senator Ringuette: I understand that. I also understand the domino effect, not only for the airlines but also for all the tourism operators. Whether it is the coffee shop, or the bed and breakfast, or the hotels in Canada, this has a domino effect.
If I use your rule of thumb, you that say every 1 per cent increase in trip cost — that is, total trip cost — represents 1 per cent less in passengers. Therefore, a 52 per cent increase in an airline ticket may be equal to 5 per cent in total trip cost, roughly. Do you have that kind of scenario from the tourism commission?
Ms. McKenzie: I do not have that analysis. We could certainly take a look at that, but that has not been part of the consultation with CTC.
Senator Mitchell: Thank you all. To follow up on Senator Ringuette's point, and Mr. Skrobica's statistics, I look at the figures that were contained in Mr. McKenna's presentation of 108,000 passengers planed and deplaned. Applying your 1 per cent increase, you are talking about almost 1.1 million fewer travellers as a result of this increase. That is huge.
The tourism industry is a significant industry in Canada. I do not know if it is still the third largest in Alberta, but it was. We now have a situation where the Canadian dollar increases have diminished the competitiveness of our tourism industry; we have a recession that has reduced the appetite of people generally for tourism; and I think there is a residual fear established still in the U.S. about terrorism, which is generating a reluctance to travel. You have these problems for the Canadian tourism industry and then we get — and I will call it a tax increase because that is what it is — a tax increase. Even the government will say that all tax increases are bad for competitiveness.
Is this not piling on, Ms. McKenzie, to an already difficult situation for the tourism industry?
Ms. McKenzie: As I said, the whole issue of competitiveness for tourism is a major issue for this industry in Canada.
To give you some sense of magnitude of the revenue from international travellers, Canada receives revenues of about $7 to $8 billion a year from our U.S. visitation, and about the same amount from our overall other international visitation. Of course, the other international would all be air travellers. That gives you some sense of it. In the U.S., a large portion of our revenue — that other $7 to $8 billion — is also coming from air travellers. That gives you some realm of magnitude.
On the international scene, we are competing for those air travellers. Anything that adds to the cost of their trips impacts our overall ability to attract those visitors. The OECD produces a comprehensive report on tourism competitiveness for all countries and it breaks it down by different amounts. They have a specific component that deals with airport fees and charges. I think security charges would be part of that. It ranks, on a country-by-country basis, how different countries perform competitively on those elements. Overall, Canada is a competitive travel destination. However, on the specific element of airport fees and charges, we are far down that list.
Senator Mitchell: Also, for a family travelling to visit their grandparents, for example, they can find seat sales and those go down, but these taxes are flat rate; they do not go down. We might be able to get a deal for our five-member family, but we will still pay $250, where in the U.S. they pay $25. Is that correct? I am saying five people at $50, going and coming. It is $250. It is a significant amount of money, and it damages the tourist industry. You have been very polite to call it the Air Travellers Security Charge. It should be called what it is, namely, the air travellers security tax, particularly because it is now going to general revenue. All taxes, as we are told over and over again by the government, are bad except this one, I guess. One wonders why they are picking on the poor tourism industry. That is rhetorical.
Mr. McGarr, you have an important, difficult, significant job. It seems like you are getting significant money to do it and that is great. Did you get any of the $1.1 billion allocated by the government to the G8/G20 security process?
Mr. McGarr: There was an allocation of $400,000 if we were to incur increased security costs for the G8/G20 events. We have, in fact, incurred some incremental costs to our ongoing operations. They will be paid for from that $400,000 allocation. Naturally, anything that was not spent will be returned to government.
Senator Mitchell: Airport security was not the big part of the additional money that went into what the Prime Minister said would be thousands and thousands of people, and that is why it would cost $1.1 billion.
Mr. McGarr: The impact to cause an incremental increase to our activity and was not that significant. Most of the delegations do not go through airports.
Senator Mitchell: I know there was a report last year when Mr. Baird and Senator Kenny went on a field trip to one of the airports and were able to walk in the back door unlocked. That is a great concern. I know you would feel it; most people do. Is there an explanation for that? With respect to the $350 million provided now, are you taking steps to block that avenue of entry and address that issue from a security point of view?
Mr. McGarr: The security of the perimeter of airports is the responsibility of the airport authorities. They are not part of our mandated activities. We do not participate in that particular security function. It is something that the airport authority manages.
Senator Mitchell: The $350 million that you are getting now will not go to that issue.
Mr. McGarr: No, sir.
Senator Neufeld: Ms. McKenzie, I understand that you are from Nova Scotia. Some senators, probably rightfully so, were worried about Atlantic Canada being represented on the new board. You have explained well the process of getting a different type of board in place to manage things, but I guess Atlantic Canada is well represented by you, as president and CEO, and I am happy about that. That is good. I am happy that you are in British Columbia also. It is the two bookends, and we are well represented by you.
Do you have outreach, or are you planning outreach from the board to other committees or groups across Canada so you can get input from other regions in different ways? Is that part of the new structure? Perhaps you could explain.
Ms. McKenzie: I did mention our working committee structure. That structure advises the board and management on our various marketing programs on a market-by-market basis. That process involves about 100 different industry leaders and provincial marketing leaders from across the country.
We also have a forum for all deputy ministers responsible for tourism across the country, and we meet with them twice a year to speak specifically about their issues in marketing, and we work with the destination marketing organizations across the country in a regular forum. They are organizations such as Tourism Vancouver, Tourism Kelowna and Tourism Moncton that fall under a broad organization in Canada. We work with the various provincial marketing leaders, for example, the Nova Scotia tourism or the Ontario Tourism Marketing Partnership Corporation. We have a regular forum for them.
We have many structures in place to stay engaged with the industry. That is important to us because we have to market as part of a partnership. We cannot be marketing Canada and not have the parts of Canada working closely with us. Those engagement mechanisms are in place and robust. It is important for us to keep them going in order to maintain the type of collaborative support we need to compete most effectively.
With respect to the issue being discussed earlier, CTC is strictly a marketing organization. I know that there were many questions around charges and the impact of that with respect to tourism. We can speak to that to the extent that our research shows it is a competitive issue, but CTC is not the policy instrument for tourism in Canada. The policy lead is Industry Canada and officials from that department would be best equipped to speak to issues around how sensitive the industry is to charges in terms of the research they may have done.
Senator Neufeld: That explains it more fully because there were some valid concerns from across Canada.
I would like to go on to the security charge. Senator Mitchell just said that it is a tax, not a fee. I guess we can quibble about that. I would call it a fee for a service. When I can get upon an airplane and feel comfortable that security is done to the best it possibly can be done, I am quite happy about that. I think most travellers are happy to feel safe. We need to put the rates in perspective. There will be rates from $4.90 to $7.48 — I know 50 per cent or 52 per cent sounds tremendously high — that rate is for one way domestic. It is $9.80 to $14.96 for round trip travel domestically; for transborder flights, the charges will be raised from $8.34 to $12.71, and for other international travel, from $17 to $25.91. If you can get on an airline, go to Europe or Lima, Peru, and pay a fee of $25.91, I do not have a particular problem with that cost.
I want to compare it to the initial situation. Let us put it into specific terms. Under the Liberal government in 2002, domestic one way was $12, higher than the $7.48 projected now, which is an increase of 50 per cent to what it is now. The initial rate in 2002 for a domestic round trip was $24, and what is proposed today is $14.96. I wonder if the same senator would have said that was a tax at that time. I doubt it.
The Chair: We are getting into argument, here, Senator Neufeld.
Senator Neufeld: I want to put something on the record as the other senators did.
Mr. McGarr, do you hear a lot of people saying they do not want any security because they do not want to pay the $14.96 as a cost for domestic travel within Canada? Do people say to you that they will not travel because they have to pay $15 to travel and feel safe to do so within Canada?
Mr. McGarr: If I may, senator, we do extensive polling of passengers, and we are receiving very high and strong approval ratings, both on the confidence in the system and in the level of customer service that is being afforded Canadian air travellers.
Senator Murray: Mr. McKenna, did you appear before the House of Commons committee?
Mr. McKenna: Yes, I did, sir.
Senator Murray: Did you make substantially the same argument there that you made today?
Mr. McKenna: We adjusted it because we have discovered new information since then, but we have made substantially the same argument.
Senator Murray: What did they tell you there?
Mr. McKenna: To say it was a very productive meeting, would be exaggerating slightly.
Senator Murray: What do you expect us to do?
Mr. McKenna: We clearly feel that our industry is being less competitive than it could be and by far because of these extra charges. Travelling today costs roughly or even less, in many cases, than it did 10 years or 15 years ago, if you look at strictly the air portion part of the ticket. The prices have gone up considerably because now we have added many fees — airport fees, security fees, and taxes. All these things accumulate to increase the price of a ticket and make it less competitive. We are saying that in all other modes of transportation, there are no such fees. Therefore, we are not on a competitive, level playing field with other modes of transportation.
Senator Murray: It is quite fair for you to denounce this, and we hear you. However, with regard to the Air Travellers Security Charge, you believe that 50 per cent is too much. If we had it in our power to reduce it, to what level would you like us to reduce it.
Mr. McKenna: There has not been an audit of those fees since 2004-05, so we are not in a position to make claims as far as that goes. Our concern is what this money is being used for and whether it is being used efficiently. When we compare it to other countries, we wonder why we are so much more expensive here in Canada. That is our concern. We cannot tell you what it should be because we do not know where that money is going other than CATSA. Some of it goes to Transport Canada, but we do not know how much, and some of it goes to the Royal Canadian Mounted Police, but we do not know how much. Therefore, we cannot make that type of claim.
I understand that Mr. McGarr's concern is not the ATSC. Perhaps he does not link that directly to his budget, but the minister certainly does. In a statement that he made February 25 when he announced the increase in the ATSC, at the same time he announced the $1.5 billion to CATSA. For us, that is a clear indication. He indicated that the Air Travellers Security Charge will increase to match the demands of security costs. Industry and passengers can expect these user fee rates to increase. Then he provided criteria. CATSA will use these funds to implement existing and new security measures. In the minister's mind, there is obviously a direct link between these fees and CATSA's budget.
Senator Murray: I must tell you that while we have the power in the Senate to do so, it would be quite unusual for us to get into a tax or fee measure in order to reduce or eliminate it. That would be quite unusual because we try to recognize the pre-eminence of the House of Commons on those matters.
In the whole history of government, I do not think there has ever been a user fee or any kind of charge of that kind that does not contain some element of tax grab. There are people in the Department of Finance whose job it is to sit in front of a computer these days, and, as the old saying goes, electronically now, to pluck as many feathers from the goose as they can with as little squawk as they can.
I can only say that I think it is a real issue in view of the stated purpose of the charge, whether the charge is the appropriate one and if it is as out of line as we are led to believe by the witnesses. It seems to me that it is an issue that we should formally ask the Parliamentary Budget Officer to look at, if he has not done so already, and make a report to us.
Mr. McKenna: Our claim is that the air transport industry has been getting hit from all sides for many years. We compare ourselves to other modes of transportation. Rail, for example, receives $50 million in subsidies every year. Our industry gets nothing. On the contrary, we support the government in paying these fees that do not all go toward airport designated measures. We are concerned about that, and we ask for more transparency. We need to know what is happening. The public is paying this, and we feel they are entitled to know where the money is going.
Senator Finley: I have a question addressed to ATAC. Are Canadian airlines, which is primarily what we are interested in, self-insuring? Do they buy insurance or do they self-insure in the event of an accident?
Mr. McKenna: Of course they are insured.
Senator Finley: No, are they self-insured or do they buy insurance?
Mr. Skrobica: Under the requirements of the CTA, they are required to have adequate insurance in the eyes of the CTA.
Senator Finley: Tell me, then, how much on a passenger seat mile basis or whatever basis does the insurance typically cost of a ticket? Is it 1 per cent? Is it 5 per cent?
Mr. Skrobica: I do not have those figures at hand.
Senator Finley: What do you think would be the insurance cost or the payout cost of a Boeing 747 going down off the southwest coast of Ireland?
Mr. Skrobica: It would be in the billions of dollars.
Senator Finley: It strikes me that the total cost to the Canadian traveller of, in effect, a few hundred million dollars against the billions that it would cost in the event of an accident is small insurance to pay, would you not think, from a purely economic basis.
Mr. Skrobica: On a purely economic basis, it would be very difficult to do those computations because you have to make an assumption that there will be an accident or an incident and — well, no, senator.
The Chair: Give your answer, please.
Mr. Skrobica: No, senator. Under your determination, you have to make an assumption that there will be an incident. We are operating under the assumption that we have already taken adequate security measures to deal with those.
On top of the insurance that you have indicated, we also have additional costs, which are entailed among others in the Air Travellers Security Charge. All of those costs are on top of the insurance that the airlines carry.
The insurance itself is generally put through markets in Europe, in Lloyds, so it is not necessarily something that is borne by Canadians. It is borne by Canadian airlines that operate from here.
Senator Finley: You do not pass that charge on to the customer, right?
Mr. Skrobica: We certainly do and, unfortunately —
Senator Finley: Of course you do. You tell me what would have predicted or not predicted, on your part, some guy stitching explosives into his underwear and getting on an airplane. You say this cannot happen, and I am telling you it will happen and it has happened.
The Chair: Mr. Skrobica, would you like to answer now? There were four questions posed.
Mr. Skrobica: I would appreciate it. You have brought in a number of points, the first one being could an underwear bombing happen. Yes, it could. The root cause behind the Delta incident on December 25 was a tremendous failure on the U.S. government's part in allowing that gentleman to board that flight. The U.S. instituted a secure flight system, and it was a tremendous failure.
Senator Finley: One would assume that CATSA is spending this money to avoid such a scenario.
Mr. Skrobica: We are not objecting to CATSA spending the money. We do not in any way impugn what CATSA is doing. We are asking something that any taxpayer should be able to ask: Am I getting value for my money? That information is not available today.
Senator Finley: Someone asked earlier, what was the phrase, how much security is enough security. I recall a colleague on the other side of the Senate saying once is once too many. It was Senator Carstairs in regards to a completely different subject.
At what point in time do you ask how much security is too much? We have not had a fatal incident, as far as I can recall, in Canada due to terrorists or terrorist action in the last number of years. The proof is in the pudding. What do we do, back off until we have one and then say, "Oh, my goodness, we better ramp it back up again?"
Mr. Skrobica: Senator, you are misrepresenting what we are saying. We are not impugning CATSA. All we are asking for is whether our dollars are spent efficiently. Why can other countries have effective security, yet Canada is the most expensive of the lot?
Senator Finley: Senator Mitchell mentioned the fact that in the United States, it is $25 or something. Then they had the catastrophic —
Senator Mitchell: It is our $25 charge, not theirs.
The Chair: He may well have it wrong, but this is not a debate, Senator Mitchell. We are here to explore the facts from these witnesses.
Senator Finley: I do not have it wrong.
Senator Callbeck: Ms. McKenzie, you said you want the world to explore Canada. What about Canadians exploring Canada? Do you spend any money on getting Canadians to know their country or is it all spent on other countries?
Ms. McKenzie: We are currently spending money on Canadian campaigns. With the stimulus investment, we spent $10 million last year and $10 million this year on a campaign with which you may be familiar. It is called Locals Know. It has had quite heavy media presence in Canada. We see a big opportunity to promote Canadian tourism.
We also see that most provinces and cities are most heavily invested in Canada already, as well, so we also put our emphasis on international marketing where we are fighting the fiercest competitive battle.
Senator Callbeck: Are you planning to continue that campaign of trying it get Canadians to know their country, or is this just for the two years you mentioned?
Ms. McKenzie: Yes, this is a two-year campaign. As I say, it is funded under stimulus, and on a go forward basis, it is a budget concern for us whether we would be able to fund future campaigns. At this point we do not plan to do that based on our funding level.
Senator Callbeck: You do not have any plans to do it based on the funding level you have now?
Ms. McKenzie: Yes, going forward.
Senator Callbeck: It is a big industry. In the part of the country I come from, it creates a lot of jobs and puts a lot of dollars into the economy.
I think you said that the revenue was $7 billion to $8 billion per year from the U.S. and $7 billion to $8 billion per year internationally. Have you done any predictions or projections for the next three years? I know you said that Industry Canada is more sensitive to this type of thing, but has the commission done any projections?
Ms. McKenzie: Yes, we do have very good information on the overall revenue from tourism in Canada. The numbers I was speaking about for our international revenues represent overall 20 per cent of our total revenues. You make the very important point that the bulk of our revenues come from domestic travel. Eighty per cent of tourism revenues in Canada are generated from Canadians travelling within Canada. From a marketing point of view, we see that the Canadian market is very well served by marketers, and the domestic market has been growing over the last number of years quite substantially.
We have been in decline with our international travellers, so that is, as I say, why we have been putting our investments more to the international traveller to fight that battle while the Canadian marketers are investing very heavily in Canada.
Senator Callbeck: Does the commission have any projections for the next three years for tourism?
Ms. McKenzie: We do not do independent forecasting, but the Conference Board of Canada is forecasting that tourism will be rather flat this year and then will experience growth again starting in 2011. We know that tourism is one of the fastest growing industries in the world. We know it will come back as economies come back. There is no lag between economic strength and travel, so we are very optimistic going forward about what travel will be. We do expect that we will continue with that split on revenue, that about 80 per cent of our revenues will come from domestic and we hope 20 per cent will come from international.
The Chair: I do apologize for having to cut you off, Senator Callbeck, but we are on a teleconference and the time limit is up there. We have the next panel waiting.
Senator Murray wanted to bring up a point, but why do you not bring that up at the end of our session at 1:15.
Senator Murray: I will not be here.
The Chair: I would like to thank the Canadian Tourism Commission, Ms. McKenzie and Ms. Péan, for being here. I know it is early in British Columbia. Thank you for getting up to help us with this issue. Good luck in your work.
The Canadian Air Transport Security Authority, also known as CATSA, Mr. McGarr and Mr. Malouin, thank you for helping us and thank you to Mr. McKenna and Mr. Skrobica. We thank you for preparing the written submission as well.
Our next panel will deal with Part 5, honourable senators. We have with us, by video conference again, Mr. Finn Poschmann, Vice President, Research, C.D. Howe Institute. He is joining us from Toronto.
Mr. Poschmann, do you have introductory remarks? We are dealing with Part 5 of the bill, and we presume you have some knowledge of the initiative that appears there.
Finn Poschmann, Vice President, Research, C.D. Howe Institute: Yes, I have some knowledge; that is about the right way to put it. Good morning, Mr. Chair and honourable senators. It is nice to see you again. I am sorry I cannot be there in person, but I am glad to participate in your hearings all the same.
As you know, I am speaking for myself and not for my institute. That is a good thing to bear in mind, because often I find myself saying things that come across as a little controversial.
We are here to talk about Budget 2010, in particular Part 5 on customs tariffs and the plan to lower or eliminate import tariffs on a wide range of business inputs.
I have three simple messages on that.
First, so far so good. This is a good thing to do. I will not go into detail on any of the line-by-line items with respect to this bill. There are many items. However, the general thrust is absolutely in the right direction.
My second point is that there are many good reasons to be thinking big, so why stop there?
My third point is this: Let us do it, but start thinking bigger and thinking about trade liberalization on a wider number of fronts and get that conversation going. That aspect may not fall within the mandate of this committee, but it is worth talking about and getting the message out that trade liberalization is good for the economy and for growth. Let us bear that point in mind and not forget it for a minute.
The first point I mentioned is "So far so good." That is absolutely right. Tariffs on business inputs are clearly a product of ancient thinking. We used to finance governments primarily through import tariffs. Many countries in the West and elsewhere have taught themselves that they should avoid imports; they should produce things themselves and avoid competing with low-cost suppliers, and tariffs are part of that process.
However, if tariffs did make sense once, they hardly do so now, and I think that is pretty clear. In part, this is owing to the breadth and depth of the supply chains that now serve world markets. Canada's businesses are deeply entwined in the U.S. marketplace as far as selling things to them that go into things they sell back to us and to others. This applies not only to the U.S. but also to Mexico, China, India and South Korea. We are engaged in extensive supply chains through cross-border investment at a high level, with a wide range of countries.
Getting back to the point about tariffs, they get in the way of this. As a matter of logic, I want you to contemplate, please, starting from a blank slate. If you are studying government policy, what tools would you use to encourage growth, trade, investment and jobs? Would you decide that what Canada needs is to have higher business input costs? Would you decide that we need more expensive machinery and equipment and higher-cost components? The answer is surely no. Surely you would not choose to raise the cost of business inputs if you were interested in investment, jobs and growth. If you would not impose the costs starting from a blank slate, it would probably make sense that we should get costs down and eliminate them at our earliest opportunity.
For that reason, in particular, the measures in Bill C-9 are good measures and the right ones, and the bill should pass.
Let us step back for a minute on the economics and logic of this. The reason for lowering tariffs on inputs goes right back to our understanding of trade and the ordinary gains from trade. For people who took high school or first-year economics, this is David Ricardo speaking, a terrific early economist. When we specialize in what we do best and trade with other people who are specializing in what they do best, we all gain. That is absolutely axiomatic in economics; there is not much debate about it. There are some arguments, but the thrust is always towards gains from trade and specialization.
Sure, some Canadians worry about low-cost competition from the developing world — from Mexico or Southeast Asia, for instance. There are legitimate worries about job losses when we shift how and from where we buy things. It is absolutely true that people worry about this, and sometimes with reason.
However, we should remind ourselves — and this goes back to the supply chain point — that we are in an integrated trading relationship. Our exports include energy and non-energy commodities, but we also export communications technology and other kinds of technology and services. It is a big deal for Canada that we sell these things in world markets.
The U.S., of course, is our largest market. The U.K. is number 2. Think about what are some of the other top-10 destinations for Canadian exports. Numbers 3, 4, 5, 7 and 10 are China, Japan, Mexico, South Korea and India. These are key export markets. We sell things to them; they use them in things they make; and they sell them back to us and to other people. We make things that developing countries need. The products they sell back to us and to others embody, in part, the things we sell them. Therefore, putting sand in the gears of this trade could only make us all poor. The logic is crystal clear on that.
That takes me to my second point. Again, going back to David Ricardo, there is no good case for imposing tariffs on anything, so why stop there? Why lift the burden for only some products and services? That is something we should think about.
This leads to the third point, which is let us think bigger about these things. The largest trade barriers in Canada, for instance, are those imposed by federal policy. This includes tariffs, but it also includes things like supply management, the Canadian Wheat Board, dairy and poultry quotas. These are costly and destructive policies. Addressing them could only make us richer, and we should have a conversation about that.
Just focusing on the dairy sector alone, we think about farmers and about producing milk, butter and cheese. We think about these as consumables, but they are also inputs. There is a huge agri-food processing business in the world. Why is Canada not more engaged in that business? Why do we raise the cost of business inputs, including simple things like milk and milk protein? Why do we make that more costly? Why do we put these sands in the gears of trade? Why do we make ourselves poorer than we need to?
This all goes back to the overall gains from specialization and liberalization in trade. That these gains are there to be had is unarguable. It is true that we can construct a set of policies that will help us do better on all these fronts.
It is for these reasons that I support the general direction of Part 5 of this bill. The government of the day should be encouraged and congratulated for taking this step. It is the right thing to do. Many people have recommended it. Let us make it part of a bigger and longer-term liberalization program that helps us all gain from trade across the country. Thank you. Those are my comments.
The Chair: Thank you, Mr. Poschmann. I appreciate your comments on this point. Could you confirm for us that the approximate cost to the government for this initiative is about $200 million?
Mr. Poschmann: That is not a bad number. I do not know that it is precise, but it is consistent with some of the figures I have looked at over the years.
The Chair: Just to confirm as well, roughly 30 per cent of the items that come to Canada that are further refined or are part of a further refining process will still have tariffs on them.
Mr. Poschmann: That is true. Thank you for making that point. It is a continuing concern. It is the one I was raising. If we are thinking about improving the overall functioning of the economy, why do we stop there and keep this list short? Mind you, it is not a short list. That said, the overall economic direction of liberalization is one we should encourage the government to stay on.
The Chair: Thank you.
Senator Ringuette: Mr. Poschmann, we always welcome your comments on these issues. I understand the issue of trade and the importance of trade. I also understand that when you enter into trade negotiations, you need some bargaining chips. Some of these bargaining chips are the elimination of tariffs. The current legislation before us eliminates tariffs, and there is no reciprocity. We are losing bargaining chips for future trade negotiations. How do you feel about that?
Mr. Poschmann: It is a long-standing view of trade negotiators that you need to have tools. You need to have chips in front of you on the table that you can deal with when striking a deal. It is an argument we hear all the time. A companion line to that is known as the strategic trade theory. The general concept is that sometimes, at least temporarily, you can be better off by imposing tariffs if they could encourage, in part, future liberalizations on the part of other people. We should bear in mind that it may not be true. In other words, it is perfectly reasonable to describe a set of scenarios where we liberalize on all fronts or any particular front, and we are better off for doing it even if no one else does.
A good example is the dairy industries in New Zealand and Australia, which went through a fairly brutal liberalization process. It was quite a shock to the system. The government in New Zealand was extremely concerned that the country would lose a huge number of family dairy farms, that output would go down and that New Zealand would be swamped by external markets. It did not happen. The industry ended up being stronger and bigger. New Zealand engaged in international trade and specialization of exactly the sort I am talking about.
One of the lines you will hear in the dairy business or in the dairy trade about the trade question is that there is not a big international market in it anyway, and it is simply not true. It is probably foolish on the part of Canadian policy to keep ourselves out of that market and limit, therefore, the amount of investment we could see going into agriculture and agri-food and processing in Canada. It is a big world out there, and we can be a part of it.
Senator Ringuette: This legislation before us is an omnibus budget bill with over 1,500 different tariffs from various industries. I believe the government will be losing $300 million in income, but that is a separate issue in itself, from my perspective. My concern is that there is no reciprocity, and we are losing 1,500 tariff items from our bargaining toolbox for the future. We see ahead a major trade discussion with the European Union, and what do we have left? In this current budget bill, we are taking away 1,500 tariffs in the EU countries. Then we are looking at south of the border, south of the continent, on other issues, and we have 1,500 items with no reciprocity.
The Chair: Mr. Poschmann, would you like to comment on that, or have you already? That is the second time you made that point.
Senator Ringuette: It is my point.
The Chair: Why do you not just make it once?
Mr. Poschmann: If I may, senator, the answer is very much the same. We do not know that we would in fact get the reciprocity that you might expect if we retain these tariffs. We do not know for sure that we will be worse off by lowering these tariffs and giving up that reciprocity. However, there is a lot of good reasoning that tells us that it will make it more likely that we are better off, because these are inputs to business processes and inputs to things that Canada makes itself. Making these products more expensive for businesses to buy when they want to invest in plants and equipment does not make sense. Imagine if you are starting from a blank slate where you have no tariffs and you are wondering what we can do to encourage investment, jobs and growths. Would you start imposing tariffs on business inputs? I do not think so.
Senator Ringuette: We also do not know how this will impact our Canadian manufacturers, who are facing fierce competition from abroad, and we would be eliminating a cost to their competition by doing this. We do not know that either. Have you studied that particular issue?
Mr. Poschmann: When competition in the world marketplace is increasing, when other people are innovating or finding a way to deliver products and services that people want, and to do so effectively, cost efficiently, competitively, how should Canada address that? How should Canada meet that? What can policy do to make it easier for Canadian suppliers and manufacturers to make investment choices, to build their businesses, to hire new employees and to train them? What would you do? It makes a lot of sense to me that one of the things you do is lower the cost of inputs and taxes that apply to our input cost so that investments are more likely to be profitable and businesses are more likely to grow and invest.
Senator Runciman: Thank you for your presentation today. I agree with most of what you have said here. I have a quote from you that I thought I could share with other members of the committee. When the budget was released, you were quoted in the Financial Post as saying, "Eliminating all tariffs on inputs is an absolutely brilliant move." Well said.
The Chair: Do you want to confirm that quote?
Senator Runciman: I think he has.
The Chair: Has he?
Senator Runciman: In many respects.
I am not surprised by Senator Ringuette's view on this. Some people, and Michael Ignatieff and some Liberal senators come immediately to mind, disagree with that approach. We have seen it with respect to their comments on capital taxes on the GST if they form government.
Senator Ringuette: Can we talk about Employment Insurance taxes?
The Chair: Mr. Poschmann, do you want to comment on that?
Senator Runciman: I was waiting to get to a question here.
Mr. Poschmann: I was, too.
Senator Runciman: I will read to you a quote from Simon Harding, from KPMG, which is a much respected firm:
Harding believes that Canada cannot rest on its laurels. "It must continue to present a clear value proposition to businesses in other areas in order to maintain its attractiveness for international firms," he says.
I think you have referenced this. According to KPMG, this is largely because Canada's big rivals are no longer developed countries but emerging low-cost economies. You may want to discuss that. You have also talked about the impact this could have on productivity, and that has always been a challenge in this country. Perhaps you could deal with both those issues.
Mr. Poschmann: Dealing with competition from low-cost economies is often very difficult for us to confront. Ontario and Quebec in particular have long histories as manufacturing hubs. As we all know, Ontario's manufacturing sector is significantly key to the North American automotive marketplace, and it is not a bad example to draw on. Going back to 1967, we entered an auto pact that clearly contemplated that we would make things in Canada that were part of the production process in the U.S. and vice versa. Canada makes an awful lot of cars and parts aimed at the U.S. market. We import a lot of cars and parts from the U.S. It is an integrated production process.
If you want to succeed in that process, or if you want to succeed in that marketplace and compete in that marketplace, which I think we do, then it is incumbent on us to make the shrewdest investment choices we can and deploy resources appropriately, to deploy capital where it will find its best use. One of the ways to do that, or to see that that happens at least as best it can, is to be neutral in your policy choices, to lower costs for investment where you can so individual projects are more likely to be profitable. That is the general idea.
What we are dealing with in Mexico, to some extent in South Korea, certainly in China, is fairly low-cost labour. Historically, one of the reasons we have been relatively competitive, relatively wealthy relative to workers in those economies is that we have a tremendous stock of capital backstopping our employees. In other words, we have a lot of capital investment in manufacturing equipment and a lot of training embodied in our employees so they can put that manufacturing equipment to good use. That is why our incomes are relatively high.
If we want to maintain and build jobs and growth, we need to stay competitive with those economies where they rely more heavily on low-cost labour but are also starting to bring in technology and are starting to improve their own productivity. Certainly we will see income growth in China in a big way over the coming decades. How do we meet that? We keep our costs down and are shrewd about our choices and our tax policy and we will do just fine. Canada is not in a bad position at all. We have done pretty well on liberalization on a number of fronts. We can always do better, and we will have to continue to do better as the world changes around us.
Senator Mitchell: Mr. Poschmann, I am compelled by what you say about free trade. I think probably most of the people around this table are quite amenable to free trade and the tariffs argument that you make, but the manufacturers' association said explicitly that, if given the choice, they would prefer to continue with the accelerated capital cost allowance rather than tariff reductions. Can you give us some indication of what the preferential policy choice would be from your point of view and why reduced tariffs would be better than a reduced capital cost allowance, particularly if that is what the industry wanted?
Mr. Poschmann: That is a very good point. It is a fine line. It is really a tax policy question more than a trade policy question. Think about what accelerated depreciation is: It uses the tax system to make particular investments — and we are talking mostly about manufacturing investments in this case — a lot cheaper now. We introduce accelerated depreciation on a temporary basis because we want to pull investment from the future into the present. That is why some governments have chosen it as a stimulus measure.
Businesses like it too. Of course they do. The reason is the same: It makes investing now easier to do because you are cutting the tax bill associated with it.
This is part of a bigger tax policy question. What would you rather have in the long run? Would you rather have a system that taxes almost all activities at a very low rate or a system that raises revenues by taxing some activities and some investments much more highly than others? What happens if you do that? An awful lot of economics suggests that the low-rate, broad-based approach is the right one.
If you are in the energy sector, for instance, and you are benefiting from accelerated capital cost or accelerated depreciation, you like it and you will want to defend it. You are motivated to because it is your industry and your investment. We all understand that. The bigger question, though, is whether, as a matter of policy, governments should be neutral about activities. These activities are important, but there is more to life than just investment in machinery and equipment.
There are all kinds of other investments that pay off. There are intangible investments; there are training costs, for instance. There are all kinds of things that businesses need to invest in or buy, such as financial services, that do not benefit from accelerated depreciation.
Senator Mitchell: They do not benefit from a tariff cut either, do they?
Mr. Poschmann: They may well do, and for all the reasons that I have enumerated. It is part of the targeting question. Do we want to use tax policy to target and support given kinds of industries or given sorts of activities, or do we want to be more broad and bring down the effective tax rate on new investment for everyone? Getting these tariffs down is part of that.
Senator Mitchell: Are you aware of whether these tariffs will have a differential impact? For example, I am from Alberta, and I am concerned about input costs into developing oil sands plants. This will not affect only a manufacturing sector from a given region or sector; is that right?
Mr. Poschmann: If you are paying these tariffs in the first place, then you will be better off, obviously, from not paying them. Have we looked at the distribution of benefits province by province? No, I do not have an answer to that.
Senator Mitchell: You have been very positive about this bill and this feature of the bill. You make good arguments, for which I thank you. You are probably aware of other features of the bill. We had a long discussion today about the considerable increase in the Air Travellers Security Charge that airline passengers will pay, which will damage the competitiveness of airlines. In this bill we also have an increase in EI premiums to be paid by businesses generally.
Could you give us an idea of how you feel about those two taxes compared to the reduction in tariffs? To be consistent, undoubtedly you would disagree. I do not want to put words in your mouth though.
Mr. Poschmann: My answer here would be pretty clear. Several years ago my institute published a paper on air transport taxation, including security tax. We observed that the delivery of airline services, in other words, the tax cost as a share of costs imposed on the airline companies themselves as well as on passengers and shippers, were really quite high relative to other sectors of the economy.
For quite familiar reasons, I am sure, we frown on taxing one sort of activity quite heavily. There are arguments about the airline industry and its sustainability for a number of reasons that we cannot really get into here. Imposing special taxes on air travel does not make a lot of sense. To the extent that taxes represent a benefit — in other words, we benefit from airport security, for instance — then the impact of the tax is not the same with respect to investment. In other words, if what you are charging for is simply the cost of delivering a service from which passengers benefit, then that does not have a significant impact on the industry and it is not such a painful thing.
Which of those this is, it is quite difficult to tell. There have been questions over the years about whether or not the size of the airport fee was justified by the cost of delivering security services. This is irrespective of how much you like the degree of security service that we have. There have been questions about the link between the level of the fee and the cost of delivering the service. I do not have any additional information on that now.
Senator Mitchell: To the extent that it is fee for service, it does not impact investment as badly as if it is not fee for service. Today we received testimony that at least $225 million per year of this new increased tax will not go to cover the actual service of security; it will go literally to general revenues.
Thank you very much. We appreciate your input.
Senator Murray: I support the proposals out of the customs tariff. However, Mr. Poschmann, when you were talking about trade liberalization in general, I had to ask myself what movement you were talking about. The leaders of the G8 and G20 got up from the table the other day having done nothing to try to re-energize the Doha round. I think they have given up on it. There may be reasons for that — perhaps their preoccupation with the financial and economic problems, perhaps their voters' preoccupation with the impact of those problems on their lives. In any case, Doha seems to be going nowhere fast.
There was a rather pessimistic and not very well argued editorial in The Globe and Mail yesterday, the purport of which seemed to be that multilateralism is dead and the only thing for us to do is to do what we are doing, pick off what we can, bilaterally or regionally or whatever. What is your take on all this?
Mr. Poschmann: That analysis is probably correct in that it is not going anywhere quickly. Let us take that as a given, indeed, for some of the reasons that you mentioned.
What are we to do about it? That is less clear, but one of the things we could do about it is to face up to the really tough questions, put Canada on the right side of these questions, and see whether we can energize the debate in the coming years and get it back on track. It is a long process.
What does that mean? It means we have to confront trade in agricultural products. We are on the wrong side of that front. We are getting this one wrong. Our supply management on a number of fronts undercuts our position with the World Trade Organization, WTO, and elsewhere. We are not getting that one right.
Government procurement is the other one. Facing up to the tough questions internationally means dealing with procurement; it means liberalization again.
This is not easy to do. As you know, we have had some trouble with the U.S. The Buy America Act has a lot to do with procurement. That one seems to have worked out okay, but we have not really locked down Canada's position on this domestically. There is a lot of procurement in the energy and water infrastructure sectors where we could really use more participation from France and the U.K., where there are tremendous suppliers with good products who would like to bid more openly into this process, but we have not opened that one up all the way.
Yes, the outlook for multilateralism on trade is not all that rosy. Making it more rosy is something that we can do. It will take a while, but it will mean that Canada faces up to the supply management question, and it will mean dealing with the provinces and the municipalities and doing a better job on procurement.
The Chair: Mr. Poschmann, we have been talking this morning about Part 5 and customs tariffs, but there are 23 other parts to Bill C-9. Are you looking for an opportunity to express a view on any other parts of the bill?
Mr. Poschmann: I think you have Employment Insurance coming up next; it was already mentioned. I did not prepare specific comments on it, but I am a little concerned about the long-term financing of the program and the extent to which the premiums collected in support of the program will move with the economy or against it. When times are good, you like to stock up the EI fund, and then you let it run down when times are bad and unemployment is going up. Dealing with this has been a persistent problem for the EI program, not least because we layered on federally a whole lot of other goals for the program. We do not just support employees when they are laid off or when they lose their jobs for economic reasons. We have a whole bunch of policies to do with adoption, to do with family, to do with sickness. These may be good things to address, but it layers a lot of cost into what is already a complex program and one for which the financing is already quite difficult to manage.
Are we getting this one right? I am not sure. What we have now is a system that restocks itself quite quickly. When the fund goes down, the rule is that the government will have to top it back up to roughly $3 billion over the year following. This means that occasionally we can expect to see ourselves ramping up the premium when times are bad. The government has not done that. The last couple of years the federal government has used ministerial discretion to limit the rate increases as the fund went down. That is okay, but it is not clear that we have over the long term a sustainable system that works well and builds up the fund enough in good times and runs it down suitably in bad times. There is work to be done on that front.
The Chair: Thank you very much for those comments. We have not had a panel on that yet, but we will certainly recall your comments when we deal with that particular issue.
Mr. Poschmann of the C.D. Howe Institute is appearing as an individual and expressing his own views. We thank you very much for doing so. We look forward to the next opportunity we have to discuss matters with you.
This is our fourth and final session for today. We are now examining Part 24, which deals with Employment Insurance financing.
[Translation]
We are very pleased to welcome Jean-Michel Laurin, Vice President, Global Business Policy, Canadian Manufacturers & Exporters. Welcome.
[English]
We have also, on behalf of the Canadian Federation of Independent Business, Ms. Corrine Pohlmann, Vice-President of National Affairs; and Mr. Ian Dawkins, Policy Analyst.
Corinne Pohlmann, Vice-President of National Affairs, Canadian Federation of Independent Business: Thank you for the opportunity to speak to you today about the EI provisions in Bill C-9. I will walk you through a slide deck, and Mr. Dawkins will help me with the question and answer period.
The Canadian Federation of Independent Business, CFIB, is a not-for-profit, non-partisan association that represents more than 107,000 small and medium-sized businesses that are all independently owned and operated Canadian companies. We are 100 per cent funded by our membership and deal with issues at all levels of government from our 11 offices across Canada. Our members come from every region of the country and represent every sector of the economy.
It is also important to note that small and medium-sized businesses in Canada are big business. They are 98 per cent of all businesses in Canada, employ the majority of Canadians and produce almost half of Canada's economic output. There are statistics on that on slide 3.
On slide 4 is CFIB's Business Barometer index, which is published monthly. It shows the outlook of small firms for their business, which, in turn, has become a predictor of the overall economy. As far back as 2007, small-business owners began to feel the effects of the downturn, and we were fully immersed in it by late 2008. Since late 2009, however, things have been looking better, and small business owners have begun to feel more confident. As you see on slide 5, however, there is still apprehension with where the economy is going, as employment numbers remain soft. Only 15 per cent state that they plan to increase full-time employment in the next 3 months, and 12 per cent plan to decrease it. This is not unusual coming out of a downturn, as employment is often the last thing to recover. However, it does indicate there is still uncertainty in the economy, and we need to ensure that decisions being made now help and not hurt the situation.
Given this continuing uncertainty in employment, there is growing concern with where EI is going, especially since payroll taxes such as EI are regarded as having the greatest impact on business growth, as seen on slide 6. This is because it adds cost to hiring and retaining employees. As a result, smaller firms tend to be sensitive to changes in payroll taxes. With recent talks about EI premium increases, possible Canada Pension Plan, CPP, increases, and likely Workers' Compensation Board, WCB, increases in many provinces, small-business owners are becoming more concerned with how they can continue to hire and retain their staff in the future. Let us focus on EI, which is what Part 24 of the bill is all about.
CFIB has a long history with EI; in fact, we were one of the first to identify the growing EI surplus now at $57 billion, which you can see on slide 7. CFIB also pushed for EI rate reductions from 1995 to 2008, as government took in more EI revenues than it was paying out in each of those years. However, excess EI premiums went into general revenues, and those dollars were spent on other items unrelated to the EI system. CFIB also pushed for the EI rate freeze for 2009-10 to help small businesses hold on to staff through a difficult economic period. The last thing you want to do as jobs are being lost is to make it even more difficult for employers to hold on to their staff. However, we hoped that the rate freeze would be paid out of general revenues as part of the government's stimulus measures. This was not the case, leading to the situation that we face today. I will talk more about this in a moment.
As a surplus grew during the 1990s, we started urging government to have an independently managed EI account separate from general revenues. We were doing this as far back as 1997, as you can see on slide 8. Over the years, a few attempts were made to address the burgeoning surplus, but it was not until Budget 2008 that a plan to have a separate fund was established, managed by an independent group now known as the Canada Employment Insurance Financing Board, CEIFB. While we support the establishment of this independent board and a separate account, the timing could not have been worse.
By dating the onset of the CEIFB back to January 2009, right in the middle of the economic downturn, and charging any debt or credit to the account since then means that only deficits have accumulated — the first in 15 years. As the CEIFB was provided only $2 billion as an initial reserve, which is a fraction of the surplus accumulated, it will do little to offset the deficit that will have accumulated since January of 2009, which is estimated to be between $10 billion and $15 billion.
The only way for the new board to recoup this deficit is to increase EI premiums to their maximum amount, starting in 2011. As you can see on slide 9, CFIB research found that there will have to be a maximum rate increase, which is 15 cents for employees and 21 cents for employers per $100 of earnings each year for the next four years, resulting in a 35 per cent increase in that period.
We believe that is unfair, given the excess revenue collected from employers and employees for more than 15 years. To increase rates just as the economy is recovering and employment is still tenuous will make it more difficult for smaller firms to retain, much less hire, new employees. When you add to this mix the potential increase in CPP and various WCB rates across Canada, it will be tough for many small firms to bring on new staff any time soon.
In fact, further CFIB analysis found that such an increase in the EI premiums could cost the Canadian economy as much as 170,000 jobs in the short term and potentially reduce wages by 1.2 per cent in the longer term. You can see why we are trying to convince the government to rethink its approach to EI premium increases in 2011 and beyond.
Ironically, as can you see on slide 11, the EI fund is about to go on another roller coaster ride, as it is expected to result in future surpluses once the fund reaches its equilibrium. As premiums cannot be reduced by more than 15 cents per year, a new surplus will accumulate in the latter half of the decade. While some surplus dollars may be appropriate, it should not be allowed to get too large, should governments in the future want it get their hands on it. We have some ideas on how to prevent that as well.
In conclusion, we support the idea of a separate account, but we believe the timing to do so could not have been worse. Increasing premium rates now will have an impact on job growth going forward, and, given the surpluses accumulated in the EI account prior to January 2009, which also happens to be the first year in which there was no surplus, we strongly believe that the federal government has a moral obligation to maintain a premium rate freeze or minimize any future premium increases in recognition of the $57 billion surplus accumulated over several years from employers and employees.
We have put forward other ideas to help stimulate training and hiring through an EI training credit, which I can explain in more detail if you are interested. We have also suggested that appropriate reserve funds be built for future downturns, but once the reserve fund limit has been reached, allow premium rates to fall to their natural level, even if it means going beyond the 15 cent maximum reduction.
We have many more ideas around EI, if you are interested, and we would be happy to talk about them, but I look forward to questions. Thank you for your time.
The Chair: Thank you very much, Ms. Pohlmann. I will now go to Mr. Laurin.
Jean-Michel Laurin, Vice President, Global Business Policy, Canadian Manufacturers & Exporters: Thank you for inviting me to appear before the committee today on behalf of Canadian Manufacturers & Exporters to talk about Part 24 of the proposed budget implementation act. As an association that represents sectors that employ over 2 million Canadians, changes to EI are of great of interest to our members.
Before I begin, I would like to say a few words about the association I have the privilege to represent here today. CME is the voice of Canadian manufacturing and global business, and as such we represent more than 10,000 leading companies nationwide. More than 85 per cent of our members are small- and medium-sized businesses located across Canada. Our members represent every industrial sector and every export sector of our economy.
As I am sure you know, CME and employers have had long-standing concerns with the Employment Insurance system in Canada. One of our key concerns right now is the rates for 2011 and beyond. EI rates are expected to increase significantly over the foreseeable future, given the growing cost of the program and the accumulated deficit arising from the two-year rate freeze.
The Parliamentary Budget Officer estimates that even with an annual rate increase of 15 cents, which is actually 21 cents for employers, there will be an EI account cumulative deficit of $5.7 billion between 2008 and 2014. Uncertainty about unemployment compounds that risk in the short term.
We do know that there will be a substantial gap to close starting next year. Just in 2010, the break-even rate for the year is estimated at $2.43, while premiums have been frozen at $1.73, so we know what is coming. We know that employers will be required to pay more going forward, starting next year.
What makes the pill hard to swallow for employers across Canada, as Ms. Pohlmann said, is that over the last 15 years, we have overpaid premiums by $57 billion, and now there is a funding shortfall, but we are told to forget about the money because it is not there anymore.
The changes introduced in Part 24 of the bill do answer one of the concerns we have had for years by creating an Employment Insurance operating account. However, the problem remains, and the counter is now being reset to zero as of January 1 of last year, while there still should be $57 billion left in the account.
Our other concern with Part 24 of Bill C-9 is that we are quite far from having an EI system that is managed as a true insurance system. If you want to contain EI costs, we need to strengthen the ability of Canadian businesses to create the high-paying, highly skilled jobs that we need as a country to compete and to prosper. Doing this will require a concerted strategy that strengthens the ability of Canadian businesses to invest in productive assets. One element of that strategy needs to include incentives for workplace training so that workers have skills that are up to date and up to speed with the needs of the marketplace, not only today but also in the future.
The government needs to provide an employer training tax credit to help offset increases in Employment Insurance premiums. It is far more productive to keep people employed and to upgrade their skills on the job rather than to attempt to provide transitional training for unemployed workers, in an economy where rates of job creation are relatively low. At the same time, it is good public policy to encourage employers to invest in upgrading the skills and capabilities of their workforce. The credit should be creditable against EI premiums paid by the businesses investing in that training.
Moreover, we believe that Canada's tax policy should place a priority on encouraging businesses to invest in all productive assets. That includes workplace skills development but also investments in research and new product development and in the equipment and technologies used to produce goods of higher value.
Such investments are more important than ever today to boost productivity, improve business competitiveness, accelerate job growth and sustain economic recovery. As we look forward over the next few years, it will be the new products and technologies that manufacturers bring to the market that will help Canadians address the societal challenges of an aging population, growing demands placed on our health care system and improved environmental and energy management. Likewise, it will be the adoption of leading-edge manufacturing and processing technologies and new skills that will enable Canadian industry to enhance productivity and create the economic wealth and tax base required for sound public finances and, eventually, a balanced budget.
In this budget, the government made a decision to eliminate tariffs on imported machinery and equipment items and on inputs used by manufacturers. I believe you had discussions about that earlier today. CME supported this measure. At this point in time, any cost saving to manufacturers is certainly an added plus, but we would have preferred by far that the government decide to extend the period during which companies can take advantage of the two-year writeoff for investments in manufacturing and processing machinery and equipment for at least another five years beyond 2011, when the measures are currently scheduled to expire.
In conclusion, an employers training tax credit and the two-year writeoff applied to manufacturing and processing equipment are two measures that would encourage exactly the type of investments that Canada and Canadian businesses need to make to add value to our natural and human resources and to generate economic wealth in a global economy.
The Minister of Finance and the government were very well aware of our position going into this last federal budget, and they opted to do otherwise, but it is not too late for the government to ask, especially as the economy is starting to recover and companies are looking at where they will be making investments for the next few years. I will stop there and be glad to answer your questions.
The Chair: Thank you for your comment on custom tariffs. Were your members polled? Were they asking for the custom tariff? Was it a policy decision for the government between one and the other?
Mr. Laurin: I have to be honest with you. It was pretty clear. CME has a coalition of 40 sector associations representing pretty much every subsector of manufacturing you can think of, and we have been telling the government that this accelerated capital cost allowance that allows manufacturers to depreciate their new investments in machinery and equipment over two years was by far our number one priority going into this budget. The government introduced this a few years ago, and the measure is slated to expire at the end of 2011.
Investment cycles take time, so we have told companies that they cannot put a measure in place for only two years; we need a period of five years so companies can take advantage of it. In some cases, just getting an environmental approval permit can take two years.
We priced that measure at $469 million over five years, for extending the measure from 2011 to 2016. I can provide more detailed numbers after this meeting, if needed. The government decided instead to eliminate tariffs on inputs, machinery and equipment, which is certainly a positive step. It was certainly not on our list of things we wanted the government to do, but when they told us they were looking at different scenarios, we said that is certainly a positive.
We did not think there was either tariffs or a two-year writeoff; we thought they could do both. This measure they announced in the budget is costing them $300 million per year forever. Once you eliminate the tariffs, I do not think they will come back. The $300 million per year for five years is $1.5 billion, but in the meantime, what we were asking for would have cost them much less money. In our opinion, it would have done much more to generate the kind of investments we need to bring into Canada.
Companies are getting out of the recession. It is true for small and medium-sized manufacturers as well. Companies are looking at markets now. The growth is not happening in North American markets; it is increasingly happening in some of the emerging markets. Companies are more able now to position their investments where it makes the most sense to them. They shop around jurisdictions, which is nothing new.
Any measure we have to stimulate the economy and to make those investments attractive from a tax perspective is a good measure, and not only for this fiscal year. When manufacturers invest in a jurisdiction, when they invest in a town, that investment usually stays in place for an extended period of time, because that is the nature of manufacturing. I hope that answers your question.
The Chair: Yes, it does. Thank you very much.
Senator Finley: I will address my question to CFIB. A number of comments have been made that are not new. Back in 1998, Garth Whyte, then vice-president of CFIB, said in The Times, "This sneaky little tax has turned into a huge tax grab that is going to hurt job creation." Whyte was quoted in The Sault Star in 2000 as saying business is "tired of the EI fund being the slush fund for other initiatives." In 1998 The Windsor Star reported that this fund is "only on paper because in fact the Chretien government has actually spent the money — making EI a key contributor to Martin's cherished balanced budget." In 2004, the Toronto Star added, "Martin and Manley confiscated the entire $44 billion from EI, first to reduce Ottawa's over-all budget deficit, and then to enlarge its budget surpluses."
That money would have been there, even notionally, to ride through the latest downturn.
The witness previous to you, Finn Poschmann, an economist with the C.D. Howe Institute, was asked about the EI fund and said that it kind of goes up and down. One problem is that it got away a wee bit from the original concept, which was to provide regular benefits. Now regular benefits are only 55 per cent, and we cover special things for fishing, sickness, maternity, parental leave and so on.
The money has to be restocked. The Conservative government has instituted a stand-alone arm's-length board to manage the fund and also, I believe, to set tariff or rate increases. Would you say that is a progressive move on the government's part? Never mind the fees at this point in time, but the concept that the government cannot touch that fund, that it is a stand-alone fund, is that a positive move?
Ms. Pohlmann: Absolutely. We support the establishment of a separate fund away from general revenues and managed by an independent board. Our issue is the timing of it. The date it comes into effect is January 2009, which happens to be the first year we do not have a surplus after 15 years. That is what angers employers — and employees, for that matter. It is not just an employer issue; this is a worker issue as well.
Senator Finley: Would not you agree it is like determining when to jump into a skipping rope: Is now the time; is tomorrow the time; or should it have been done five years ago? It had to be done at some point in time, and that money must be restocked.
If I recall some of the numbers I have read, you are saying that a reserve of around $15 billion would be a fair safety net. Is that correct?
Ms. Pohlmann: I think what would be appropriate needs to be debated, which is why we are not necessarily putting a number out there. I think $10 billion to $15 billion is the number many people have thrown around.
Senator Finley: Certainly not $59 billion or $60 billion, as it was claimed to be at one point in time?
Ms. Pohlmann: No. Never.
Senator Finley: Let us assume that the rates do not get rolled back, that the current proposed rates stay in effect. In your view, for the sake of argument, when would that $15 billion be achieved? When would that level be achieved?
Ms. Pohlmann: Our economics team did some analysis, and you have the "Employment Insurance Whipsaw" report before you. We determined that probably by 2014 or 2015 we will have equilibrium. By then, of course, the rates will have increased by 35 per cent. At that point, it should be paid off if everything else goes as planned. There are a lot of uncertainties in the economy, given yesterday again; we do not know where things will be going.
Senator Finley: That is the final part of my question. To go back to the comment about when you jump into a skipping rope, by all accounts the economy is still in an extremely fragile state. There is no particular indication that the EI payments being made at the moment, which I think are probably record-setting at this time, will diminish substantially in the near term. The funding for this, if it is not coming from the EI system itself, must come from somewhere. Where would CFIB recommend the money come from?
Ms. Pohlmann: The original proposal was always that it should have been part of the stimulus measures of the government. In fact, we felt that this was the ideal stimulus measure in that you are supporting employment during a difficult economic period.
When it came out sort of after the fact that it is only a loan for that two-year period and it is now expected to be paid back, that came as a surprise to a few people, including those in the EI system itself. We felt that initially that money could have been dedicated more. If you had taken $10 billion to $15 billion out of the $50 billion that was stimulated in the economy and put it towards employment, you would have had many folks nodding their heads around the table.
Senator Finley: Not many people were nodding their heads about where the money was actually spent. As they say, you cannot please everyone all the time.
Ms. Pohlmann: I am not denying that, either, but this was an area we felt was appropriate for stimulus spending.
The Chair: Ms. Pohlmann, you should be aware that this committee is on record in one of its reports advocating there should be $15 billion in the fund. We studied Employment Insurance extensively one or two years ago, and it is in our report as well that this should be there.
As a point of clarification, your point of equilibrium was 2014. Does that take into account the 170,000 jobs that would be lost by virtue of the increases in the employment insurance rate?
Ms. Pohlmann: Yes. It all comes from the same analysis. In the process between now and 2014, we predict as many as 170,000 jobs could be lost to the economy because of the increases in the EI rates. By 2014, the fund should be at zero again. Then, of course, we cannot reduce the premiums quickly enough and a new surplus will start growing.
The Chair: Because it is a legislated cap, there cannot be an increase or decrease of more than 15 cents per year. Is that right?
Ms. Pohlmann: Yes, 15 cents for employees and 21 cents for employers.
The Chair: Thank you.
Senator Mitchell: I wanted to start by saying that in answer to the question of when you jump into a skipping rope, generally most would jump in when it is up. That is kind of your point, is it not, that the economy is weak, so why now would you implement or increase a tax?
My question to you, Ms. Pohlmann, refers to your slide 6, which is on taxes that most affect the growth of small and medium-sized businesses. It is very interesting. The one that affects SME business growth more than sales taxes, personal income taxes, property and capital taxes and corporate income taxes is payroll taxes, like EI. Can you give us the economic or business reasoning for that? Is it that hiring people is more flexible than investing in capital?
Ms. Pohlmann: Small businesses are employee-heavy as firms, so they tend to put much of their investment into people. When you start taxing the hiring of people, that makes it more difficult for small firms to absorb those costs, and they have to make critical decisions. We are going out to our membership now and warning them that this is coming, that they have to prepare themselves. Anecdotally we are hearing from members weekly who say if this happens they will have to let people go; they cannot afford this.
The other concern on the EI side, and on CPP for that matter, is that the employees' rate goes up too, so their take-home pay goes down. Many employers want to try to make up that amount because they want their employees to continue to have the income they used to. It is a double whammy for many employers, so that is why it affects the growth of their business the most.
When we ask them which they would like to see lowered, it is not always the top priority to get lowered, but they admit that is where it affects the growth of their business, because they have to make decisions about employment that can be critical to deciding whether their business can expand or not.
Senator Mitchell: As the other side of the same coin, we are at a critical juncture now, and Senator Finley just made the point that there is lots of discussion and analysis that the recovery, such as it is, is quite fragile. Taking it from the specifics of a business and its impact there — the business cannot hire more people — have you done any analysis to suggest its overall impact on the recovery trajectory, or is it not possible to do that?
Ms. Pohlmann: The fact that our analysis shows us that it could cost the Canadian economy 170,000 jobs in the short term shows a big impact on the economy. We are continuing to look at the model we created to do this, and we readjusted again in June because the employment numbers were better than we thought. We originally thought 200,000 but have downgraded to 170,000. However, that is still very significant, and we still think that can absolutely have an impact on our growth going forward.
Senator Mitchell: Can you translate that into GDP per cent?
Ms. Pohlmann: I cannot; I am sorry.
Senator Mitchell: Maybe we should have Kevin Page look at that.
Ms. Pohlmann: We can ask our lead economist on this.
Senator Mitchell: You said one of your recommendations would be to create an EI training credit to incent hiring.
Ms. Pohlmann: Mr. Laurin brought it up as well. We have been advocating for this for a long time now. It is basically providing an EI holiday for employers who hire new employees in a given year, and it is based on a new hires program introduced in the late 1990s when unemployment was also at a fairly high level. For a period of about a year to two years, basically any time you increased your payroll above your previous year amount, any increase in that payroll did not have EI premiums for an employer, and you could use that to help train the new people or whatever. It is extra income for that employer for a period of time. We believe something more permanent like that should be done because we understand that workplace training is probably the most effective form of training to get people set and ready for employment.
We know smaller companies in particular invest a lot in training. They often find themselves to be training grounds for larger companies and government employment; because they cannot necessarily always compete on salary and benefits, they invest a lot in training. We have done a lot of work to calculate how much they invest in training.
We believe the EI system is a critical tool in helping to encourage training and hiring going forward. The irony of the situation now is that yes, unemployment is going up and it will be difficult over the next few years, but we are facing a shortage of labour in this country as well, and we need to find ways to encourage more training, and we think the EI training credit idea could have a lot of teeth to it.
Mr. Laurin: We have an insurance system. Our main point is that if it is really a separately funded and managed insurance system, there should be differences in premiums or getting a tax credit to offset some of those premium increases. Basically, employers invest and train their workers. Usually when you hire people, you have to provide them with training. The logic is that typically if workers have skills that are up to speed with the needs of the market, that is good not only for the businesses, because they are more competitive, but also for the employees, because they should be able to find jobs much faster if for one reason or another they lose employment.
If it is an insurance system, it should be managed as such. We have seen that in provinces with workers' compensation, for example, rates may vary according to perceived degree or level of risk in some cases. The message we are trying to get across to the government is that if we are serious about managing this as an insurance system, then put some incentives in place to ensure that businesses and employees have the right kind of behaviour to lower their level of risk in the end. It is a fairly simple argument, but so far it has gone nowhere with this government.
With these changes in Bill C-9, Part 24, I think the next step would be to have the discussion with the government. I am not saying I want to put all the blame on them, but now would be the time to have that discussion.
Ms. Pohlmann: I also wanted to mention on training, as Senator Finley pointed out, part of the EI revenues go towards many things other than benefits, and one of those is training. Right now over $2 billion a year is spent on training. It is siphoned off to the provinces, and there is not a lot of follow-up as to how effectively those training dollars are being used. There is evidence that some is not being used very effectively at all, and we believe that is one source of funding for this type of credit. We think the $2 billion minimum going towards training already could be used more effectively in some sort of training credit to encourage more workplace training. That is why we are pushing this as another way to encourage training.
Senator Murray: I probably have not read the bill as carefully as I should, but you have and you will answer the question. What is to prevent a future government from dipping into the fund to finance some new initiative or program? Is it the existence of the board?
Ms. Pohlmann: Anything could be changed by any future government, so we do not know, but my understanding is that the set-up is similar to CPP; there is a management board, so that a separate management group oversees the fund. The board has strict parameters as to what it can do with the fund and how it can set rates, but that is all it does. The government is still responsible for setting policy and can certainly influence the management board regarding where that money goes, so if the government decides one year that it wants to expand and include some other new benefit within EI, the board has no choice but to include it in its calculations for where the rates go. That is as far as we know, but it is always a risk, which is why we do not want to see too much surplus accumulate in that account.
Senator Murray: I had always suspected the government would not close off that possibility completely.
Ms. Pohlmann: I should mention that the government still has the ability to override the decisions of the board. If the board makes a decision on a premium rate, the government has up to 30 days, I believe, to override its decision and decide to either change the rate or do something different.
The Chair: Ms. Pohlmann, are you assuming that there is an account where all the money collected for EI premiums will go that is separate and apart from other money the government has?
Ms. Pohlmann: That is what I am assuming this new law says. It is a separate account from general revenues.
The Chair: We will have to clarify this, but I wonder if you could look into that and let us know, because it is our understanding that it is a notional account, the same as the other. They are closing out one notional account and creating the next one. If you could look into that and let us know what your position is, it would clarify that point. All of your arguments are based on a separate account that is sitting off somewhere.
Ms. Pohlmann: Yes, and that is my understanding.
Mr. Laurin: Mine as well.
The Chair: That would be very helpful if could you look into that and advise us.
Ms. Pohlmann: Sure.
The Chair: Thank you very much.
Senator Callbeck: What you are saying is that the board sets the premium, but cabinet can intervene within 30 days and Parliament does not have any say in this matter?
Ms. Pohlmann: From what I understand, it is an order-in-council that can override the board.
Senator Callbeck: That authority has been passed to the board, but as I say, cabinet can intervene.
I wanted to ask about incentives for small business. The question has already been raised. Mr. Laurin, you mentioned the employer tax credit to upgrade people in your workforce. Do we not have incentives now in the Income Tax Act for people working for you if they want to take courses and upgrade themselves?
Mr. Laurin: I believe there are some incentives in place in some provinces. As Ms. Pohlmann mentioned, many of these programs and workplace training sessions are managed out of the provinces. I would not say we have a national approach to look at this. Some provinces do have incentives. For example, Quebec recently adopted a measure similar to what we are advocating that is capped at a certain amount. I do not know the details of this program. Some provinces have programs to encourage employers and employees to invest in training.
However, when you look at this system, we are talking about significant contributions from employers and employees. Our argument remains that Employment Insurance should be managed as an insurance system. All of us buy insurance. Typically, when you are considered to be at a lower risk, you pay lower premiums. We are advocating for a system that is similar and that rewards or encourages employers and employees who invest in training and in upgrading their skills.
Senator Callbeck: For small business, are there fewer income tax incentives now than there used to be for hiring new people or training the people they have?
Ms. Pohlmann: I am not sure that there are currently any incentives for hiring, especially at the federal level. The tax incentives for small business have to do with corporate income taxes and so forth. I am not aware of any training incentive available to small businesses at the federal level. There may be some incentives at the provincial level; however, if anything, they are penalties. The training tax in Quebec, for example, is actually a penalty.
Senator Callbeck: If my memory serves me correctly, there was a credit there a number of years ago; if you hired someone new or through the training program, there was some kind of a tax incentive.
The Chair: We will provide you with a copy of the earlier testimony from the government official who explained to us these accounts and the fact that it is backdated to January 1, 2009.
Senator Ringuette: It is always a pleasure to see both of you at our committee.
Three years ago, when the first new notional account for EI was introduced in a budget bill, I remember that this committee recommended in our report to the Senate — and that report is forwarded to government — that there should be a reserve of anywhere between $10 billion and $15 billion. Of course, that was at a time when government budgets were in a surplus position.
Now we are within a three-year time frame, and we are again looking in a budget bill at a second notional EI account. This EI situation is quite interesting. Ms. Pohlmann is talking about small and medium-sized businesses, which is the bulk of your membership. Mr. Laurin is talking about manufacturers, which are bigger in size.
You have two different membership bases. In order to operate, small and medium-sized businesses are more human resource-intensive. Mr. Laurin, your membership base is more capital-intensive in order to produce your output of services or products. Yet, both of you make the same recommendation with regard to EI.
There must be a way for your concerns to be taken into consideration. I do not know what else we can do. We have made those recommendations, and again in this 900-page omnibus bill we are still looking at the same issues that we have been repeating for quite a while. Is there some tactic we are missing in putting the point across?
Ms. Pohlmann: We just continue to shout it from the rooftops. We are trying to get as vocal as possible about this issue with this government. Again, this is not just the Conservatives or Liberals; it is everyone who has been in power for the last 15 years. I do not see this as being one party over the other.
We launched an extensive campaign this spring, and over the summer we are engaging our membership and making them aware of this. The problem is that they do not realize this is coming. Many small-business owners are just running their businesses every day, and January 1 will come and suddenly all these new increases to payroll will happen. As I said, it is not just EI we are worried about; we are worried about WCB increases and potential CPP increases. These things are adding together and will have an impact.
Senator Ringuette: I think you also should be worried about probable credit card increases, as a sideline.
The Chair: That, of course, is another issue.
Senator Ringuette: That is another issue, because the credit card issue has not been resolved as yet.
Let me move on to the issue you raised with regard to tariffs. I do not know whether you were here when I questioned our previous witness. One of my concerns with regard to the tariff situation is that with tariffs being reduced on more than 1,500 items, most of which are being brought to zero, for the next 10 to 20 years of trade negotiations with different states and the European Union, I think that not only are we losing $300 million a year in revenue for the Government of Canada, but also we are losing major leveraging tools to negotiate, for your better future, trade deals with other countries. Has your organization looked at that aspect of this tariff issue?
Mr. Laurin: That is a very good question. Unfortunately, I was not present to hear what your previous witness said. You raise a good point: Are we giving up a lot of leverage? Canadian companies are export-intensive. The majority of our industrial production in Canada is sold outside of Canada, so it is a big issue for us.
We found that the advantages of eliminating those tariffs outweigh some of those issues, which are difficult to cost. Are we giving up a lot of leverage or negotiating power in future negotiating rounds, whether at the WTO level or in bilateral negotiations? For many of the products where we eliminated tariffs, whether they are inputs used by manufacturers in production processes or in machinery and equipment they are bringing in, typically in trade negotiations we are not talking about sensitive items.
It is probably not as big a concern for our members as you might think, but it is a concern, nonetheless. For example, we are going through negotiations with the European Union right now, and we have some significant offensive interests getting into that market, but I do not think the tariff elimination significantly jeopardizes our position or ability to deliver expanded market access for Canadian exporters.
As I said earlier, what the government did in the budget by eliminating those tariffs is certainly a positive measure. Canada currently has a free trade agreement with the United States and Mexico. We will soon hopefully have a free trade agreement with the European Union. This can really help position Canada as one of the most attractive places to manufacture goods for export around the world. You would be able to bring in your inputs from all over the world without having to pay tariffs, and you would be able to access the two largest and richest export markets in the world without having to pay tariffs or duties as well. This has a lot of potential. I am not saying that if the government does this, we have it figured out for manufacturing, as more needs to be done to ensure we attract those investments into Canada, but it is a positive step forward to help position Canada as one of the key, leading manufacturing economies in the world.
Eliminating tariffs was not number one on our list of priorities for this government getting into this budget, but when it made that announcement and when we looked at the tariff items the government was considering, they showed some flexibility. In cases where Canadian producers expressed concerns with the tariffs being eliminated because it would bring more competition into their market in Canada, the government said we will phase them out over five years. In some cases, we would like some of those tariffs to maybe remain in place for a longer period, but overall it is a good thing for the Canadian manufacturing sector.
Senator Ringuette: Do you think that five years is long enough for those Canadian manufacturers? Will that give them time to prepare for increased inbound competition?
Mr. Laurin: We are already used to competing, and these tariffs were generally between 2 per cent and 12 per cent, and in most cases they were around 5 per cent, 6 per cent or 7 per cent. In some cases, yes, it means that will change some things for a Canadian company that was partly protected by these tariffs in the Canadian market. What it means for most manufacturers is that they can bring in inputs at a lower cost. Many of these inputs are not made in Canada.
Overall, it is good. For those manufacturers whose competitors can bring goods into Canada at a cheaper price because they no longer have to pay tariffs, it is an issue. In some cases, yes, we would have liked to see more flexibility from the government. However, our members export the majority of their production outside of Canada. The Canadian market is an important market for Canadian manufacturers, but in most case it is one market among many others. I am saying yes, it is an issue for some companies, but overall, if you look at a sector in its entirety, the measure has more positives than negatives.
Senator Ringuette: Which sector do you believe will benefit the most from these tariff reductions?
Mr. Laurin: I do not look at it on a sector-to-sector basis. I look at it more as businesses that have been able to look abroad for inputs, basically putting their company as part of a global supply chain that not only uses domestic inputs but also sources inputs from different sources around the world. The nature of manufacturing has changed quite a bit. Since the Canadian dollar started appreciating years ago, manufacturers have had to change their way of doing business. More and more, we are looking at higher-value-added products. We are looking at companies trying to differentiate themselves from the competition. We are not competing based on price any more but on quality, innovation, time to market and agility. The manufacturers in business today have succeeded in embracing that change and making those changes. Those companies that have been able to go abroad and find suppliers and business partners outside of Canada will benefit the most from this in the short term, but in the long run almost all manufacturers will succeed.
If you look at the tariff items in detail, a great proportion of them are either for chemical or steel products. If you ask me which sectors probably have the greatest interest or stake in this, it is probably metal fabricators and the chemical industry, because most of the tariffs are in those sectors, but even in those sectors, if you talk to sector associations, yes, they have some concerns about some of their members being negatively impacted, but when you look at it in terms of what we are doing to help grow our manufacturing base in Canada and to help manufacturers be more competitive not only in Canada but also internationally, this measure helps address that issue and improve our global competitiveness. That is why we came out strongly supporting what was done in the budget.
Senator Ringuette: It is not as good for the industry as your first priority, which was the accelerated depreciation.
Mr. Laurin: The accelerated depreciation does much more to help stimulate investment in manufacturing, by far. Yes, the tariff reductions will reduce in some cases the price of importing some inputs or machinery and equipment, but when companies look at investment projects, they are usually talking about tens if not hundreds of millions of dollars, sometimes even billions. Companies look at the return on investment. When you do these cash flow calculations, the first few years are critical. When you are allowed to depreciate your equipment from a fiscal standpoint in those first two years, we have had some members run us through the numbers, and it makes a huge impact. The impact of tariff elimination on some machinery and equipment is negligible, because machinery and equipment are an important cost, but that 4 per cent, 5 per cent or 6 per cent tariff elimination does not include all machinery and equipment. Tariffs were eliminated on a very large number of machinery and equipment items in the previous budget. If you are trying to stimulate investment in manufacturing, a two year writeoff is a much more targeted but also a much more effective measure for manufacturers.
Senator Marshall: Thank you for appearing here this morning. The presentation was very informative.
There is quite a lengthy section in the proposed legislation regarding the role of the Auditor General. I know that Ms. Pohlmann mentioned earlier how you support the setting up of a separate account. There is quite an extensive requirement in the bill that provides a big role for the Auditor General both in auditing the new account and in going back and auditing the old accounts, giving her quite a broad mandate. Would your association have any opinion on that? Could I have some comment from you on whether you have taken a position as to whether this is a good thing or whether you would like to see it strengthened in some way?
Ms. Pohlmann: I think any time an independent auditor comes in and checks the government's books, it is a good thing. We would support the Auditor General's being able to continue to monitor and ensure that the fund is being used appropriately. Given that now an independent board is supposed to be managing the fund, it makes even more sense, and it makes sense that the Auditor General does it for the government as well. We would definitely support that idea, and we often call for independent auditors to oversee any type of fund the government has control over.
Senator Marshall: I found the proposed legislation interesting in that in the transition sections, there is also a provision there for the Auditor General to go back into the old fund. Really, she can go back into any year she wants and report on that, as well as reporting annually into the future. I thought that was quite a strong accountability regime for this new fund that is starting up.
Ms. Pohlmann: I would agree. It is too bad that she cannot force them to bring the $57 billion into the new fund.
Senator Marshall: You were saying earlier that you supported the new fund, but it was the timing. I guess really the issue is that the money was taken out of the fund.
Ms. Pohlmann: The set-up of the fund happens to be in the first year that there is no surplus after 15 years of surpluses.
The Chair: Deducting the $12-billion debt that industry will have to pay off against that $57 billion would be nice too.
Ms. Pohlmann: That would be a start.
The Chair: I was looking at the clauses with respect to the Auditor General, and some of the proposed sections are the same power the Auditor General had before but changing the name of the account. The amendment is to put in the new account name.
Senator Marshall: I found it interesting that while quite often the term "may" is used in the context, in some of these proposed sections it says she "shall" audit, so there is a requirement that she do certain things, which is quite a strong regime.
The Chair: Thank you for bringing that to our attention. We had not focused on that previously.
Honourable senators, on your behalf, I thank Mr. Laurin and Ms. Pohlmann and Mr. Dawkins for being here. We had that one outstanding issue, and if you could send us a note with your new understanding of this account that will be managed by a board when there is no money in the account, because the account is going into general revenue, that would be very helpful for us. Many people have the same concept you have, and we have to sort that out. Thank you for being here on short notice.
This meeting is now concluded, and we will reconvene on Monday at 2 p.m.
(The committee adjourned.)