Proceedings of the Standing Senate Committee on
National Finance
Issue 20 - Evidence - November 2, 2010
OTTAWA, Tuesday, November 2, 2010
The Standing Senate Committee on National Finance met this day at 9:33 a.m. to examine the Estimates laid before Parliament for the fiscal year ending March 31, 2011.
Senator Joseph A. Day (Chair) in the chair.
[English]
The Chair: I call to order this meeting of the Standing Senate Committee on National Finance. Honourable senators, this morning we return to our consideration of the Main Estimates for 2010-11. This meeting will be comprised of two sessions, each one affording us an opportunity to learn about the operations of two different agencies receiving funds from the government.
In the first half of the meetings, we will be focusing our attention on the Canadian Commercial Corporation. We are very pleased to welcome Marc Whittingham, President and CEO; Martin Zablocki, Vice-President of Risk and Finance; and Goran Samuel Pesic, Special Advisor to the Canadian Commercial Corporation.
As usual, colleagues, we have one hour for this first session, so please give me your continued cooperation in keeping questions succinct. I would also ask our guests and witnesses to do likewise with their replies to the questions and comments made.
Mr. Whittingham, I understand you have some opening remarks. I will yield the floor to you, sir.
Marc Whittingham, President and CEO, Canadian Commercial Corporation: Thank you very much. It is a great pleasure to be here to be able to talk to you a little about the Canadian Commercial Corporation. I think you will see as I discuss this that I am quite passionate about it.
I was in this job for a year in an interim capacity when the previous president, John McBride, left to go to the Canadian International Development Agency, CIDA, as the executive vice-president there. I was confirmed in this position two years ago, and it is a five-year term.
Before I begin my presentation, I will introduce Mr. Zablocki, who is our chief financial officer. He has been with the Canadian Commercial Corporation, CCC, for a few years. Before his current job, he was the vice-president of strategy and organizational development. He has more initials after his name for degrees and accreditations than I would care to mention.
Mr. Pesic joined us relatively recently. He is focused on market intelligence, and he also works with the chairman of our board on an outreach strategy.
The Canadian Commercial Corporation's role is helping to promote and aid Canadian exporters doing business in foreign government markets. We were established by an act of Parliament and are a federal Crown corporation. We assist in the development of international trade by helping Canadian exporters access markets and by helping foreign buyers obtain goods and services from Canada. The legislation also provides the corporation with a range of powers, including the ability to export goods from Canada either as principal or as an agent in such a manner and to such an extent as it deems appropriate.
The corporation's mission is to provide high-quality contracting and procurement services for the benefit of Canadian exporters, allowing them to access markets where risk, transparency and competitiveness require a government-to- government arrangement. We are a parent Crown corporation under Schedule III, Part I of the Financial Administration Act, and we report to Parliament through the Minister of International Trade.
We distributed our annual report, which was tabled in Parliament recently. It outlines our results in the previous year and talks about our governance. We have a board of directors, which I will talk a bit about.
The board of directors is composed of a chairperson and a president and CEO — myself — both of which are appointed by the Governor-in-Council. Additionally, there are nine directors appointed by the Minister of International Trade with approval by the Governor-in-Council.
The Minister of International Trade appoints board members who represent the Canadian business community and the federal government, striving to balance sector, gender, linguistic and geographical representation. Directors serve terms of up to four years, which can be renewed.
The board is responsible for the overall governance of the cooperation. It approves the five-year corporate plan and the annual report, both of which are tabled in Parliament.
CCC's board meets on a quarterly basis to review the corporation's overall operations, receive various committee reports and discuss our performance against our objectives. In monitoring the financial management, reporting and auditing of the corporation's performance, CCC's strong governance and accountability structure is reinforced.
We are Canada's international contracting and procurement agency. By arranging government-to-government contracts, CCC is part of a whole-of-government approach, working very closely with the Canadian Trade Commissioner Service, part of the Department of Foreign Affairs and International Trade, and working with our sister Crown corporation, Export Development Canada, EDC.
This whole-of-government approach supports export sales that bring several departments and agencies beyond those I mentioned together to provide best possible solutions for Canadian exporters and foreign government buyers. We work very closely with folks in Industry Canada, in the Department of National Defence when we export military goods and services, and in other Crown corporations like the Business Development Bank of Canada, BDC.
We have two main services. One is our prime contractor service, which facilitates what we call back-to-back government-to-government contracts. This means that we sign a contract with a foreign government and then we subcontract with a Canadian exporter. That can go from a widget for the U.S. Department of Defense — a very small supply — to building the new international airport in Quito, Ecuador, with Aecon as the prime contractor.
We also provide international procurement services whereby foreign governments will pay us to give them advice, produce a procurement strategy and then carry out the contracting activity with them. This we did with the Norwegian government, for example. The Norwegian government was looking at changing the wings on its maritime patrol aircraft because Canadian Forces were doing the same in Canada with IMP Group in Halifax. We advised the Norwegians and produced all of the contractual documentation to buy the wings from Lockheed Martin in the United States and have them delivered to IMP Group in Halifax. The installation of those wings is ongoing as we speak. It is very similar to what the Canadian Forces are doing at the same time.
One of the value propositions we will talk about as I go through this is that we give security. We end up helping contractors mitigate the risk of operating either in highly secure areas, like defence contracting, or in countries where transparency might not be at the same level one would expect from Canada. At the same time, we help foreign governments where they might not be able to produce the same due diligence requirements because of their size or scope, or because of the sensitive nature of defence. We give them the risk mitigation tools.
We have five clear business lines. The first is that we do defence sales to the U.S. Department of Defense under the Defence Production Sharing Agreement, DPSA. That has been going on for many years. That ensures Canadian exporters have access to the U.S. Department of Defense market.
Global defence sales is our second business line, which we recently created. As Canada's foreign military sales agency, this business line applies to allies and like-minded nations. In other words, we are the equivalent of the U.S. government Foreign Military Sales Program.
We also do international commercial business sales, mostly infrastructure, to government buyers and emerging and developing markets, particularly in Latin America and Africa.
Another business line is our trade financing to Cuban government markets in the tourism and agricultural sectors.
Finally, we do procurement services for federal government departments to support their international programs.
Let me put CCC business activity in perspective for you for the fiscal year 2009-10. We signed $3.5 billion worth of contracts. We had active contracts in 40 countries with 243 Canadian exporters, which included 131 firms in the defence business and 112 in other business lines. Our commercial trading transactions, or the throughput, were $1.6 billion. I would like to note that these results are all the more impressive considering the global economic downturn.
With respect to Canadian jobs, CCC helped create or maintain last year over 17,000 jobs in Canada through its international contracting activities.
All of this is made possible by CCC's 133 full-time staff, augmented by a subcontract we have with Public Works and Government Services Canada to do certain work for our DPSA portion with the U.S. Department of Defense providing about 32 additional people. Each person at CCC is dedicated to helping Canadian exporters increase their sales. As president and CEO, I am fortunate and proud to have such a committed workforce.
I will take a brief moment to explain what CCC does not do. We do not participate in speculative activities, such as mining exploration and real estate development; projects that might have adverse economic consequences for Canada; and projects that require operating, unless the buyer agrees to assign the operating requirement.
We have two main funding sources: appropriations, which are dedicated toward our treaty agreements under the Defence Production Sharing Agreement; and fees generated by service offerings, the other four business lines.
I will go over each of the five business lines to allow you to gain a bit of an understanding of them and of our operations.
In 2009-10, we received an annual parliamentary appropriation of $15.7 million to provide DPSA service to the U.S. Department of Defense. The Defence Production Sharing Agreement was signed in 1956 between the United States and Canada in recognition that what we had in North America at that point was an integrating defence industrial base; now I would say it is an integrated North American defence industrial base.
The appropriation is comprised of an annual baseline appropriation of about $15.2 million. Last year, we had an additional $500,000 for collective bargaining agreements retroactive to 2007-08.
We also have a borrowing authority because between the payment we receive and the time we make payments to our Canadian exporters there is a small lag. We have a borrowing authority for $40 million from the Minister of Finance for that business, and we have another $15 million in borrowing authority for our Cuban trade financing program.
Each of the business lines has a value proposition, and I will take some time to talk about each of them.
What the U.S. Department of Defense finds valuable about what we do for them is that we give them a fair and reasonable price certification. We give them a technical, financial and managerial endorsement of the Canadian contractor. We give them a contract guarantee of performance, which is enshrined in U.S. regulations, the Defense Federal Acquisition Regulation Supplement, DFARS, and we give contract management services where we manage issues and mitigate risk. As I said before, that is what we are appropriated to do by the Government of Canada. There is no charge to the U.S. Department of Defense, and there is no charge to the Canadian exporter.
CCC gives Canadian exporters access to U.S. Department of Defense acquisition. We are exempt from most Buy America provisions by regulation. We work very hard to ensure that U.S. Department of Defense buying commands and staff who support congressmen and senators in the United States understand our role, understand what we do for them and the value proposition that the U.S. Department of Defense acquires from us. We ensure that Canadian exporters get paid on time and are able to manoeuvre within the complexity of the U.S. purchasing and procurement infrastructure. They call us, and we are able to supply the information or navigate that complex system.
Through our privileged relationships with the U.S. military buying commands, we continue to make sure that, as I said before, the benefits of the integrated North American defence industrial base are understood by all.
With respect to fee for service, I will mention the global defence sales. Right now CCC is working on developing opportunities with Canadian exporters in Saudi Arabia, the U.K. and Colombia, to name a few. As I mentioned, we are completing the work for the wing installations for Norway done by IMP Group. We are also working on a memorandum of understanding with the government of Argentina for defence procurement.
The value proposition there is that we are able to facilitate direct contracting government-to-government with many foreign buyers. Again, we give the assurance that the contractual terms and conditions will be satisfied. The robust mitigation process we have in place now ensures that only competent suppliers are backed by CCC and that there will be a credible and transparent procurement process, active project monitoring and quality assurance.
The head of the U.S. Foreign Military Sales program, which does about $35 billion internationally every year, says the demand on him last year was $50 billion. Obviously, they could not satisfy it all. We are trying to tap into that market. We have many good services and products in Canada's defence and aerospace area that can satisfy the military requirements of our allies and like-minded nations. We are faster and less expensive, and we can give products and services that are tailored to the user's needs compared to the U.S. Foreign Military Sales.
For Canadian exporters, having a Government of Canada partner enhances their credibility, mitigates their risk and removes onerous buyer conditions in some cases. It frequently allows the buyer to award a directed contract based on a fair and reasonable price guarantee from the Government of Canada. It enhances access to opportunities with international buyers and gives them access to the Canadian government, including our embassies, in terms of a more precise support.
Probably the easiest way to describe our third business line, international commercial business, is to give you a couple of examples. We recently signed a contract with the Government of Ghana for a $185-million power generation project with Magellan Aerospace Corporation. What is Magellan Aerospace doing in the power generation business, you ask? They were looking to diversify. Their chairman of the board, Murray Edwards, was convinced by one of their vice-presidents at the company that the technology they use for aircraft engines and aerospace could be translated into gas and oil power generation. They built a prototype in Toronto, proved it and, working with the Canadian Commercial Corporation, were able to sell that to the Government of Ghana for a first phase. That has now led to that government asking us to negotiate a contract for a second phase. Kenya has looked at us and signed an MOU with CCC because Kenya is looking for the same thing. This is helping Magellan diversify and improve its bottom line, and it is helping Canada penetrate the African market for power generation, which I think has enormous potential.
Another example is the new Quito international airport in Ecuador. We signed a contract a number of years ago with the municipality of Quito and a back-to-back contract with Aecon, Canada's largest publicly traded construction and infrastructure development company. There was a change of government in Ecuador. Things got dicey for a while. Working with the Canadian government, we were supported enormously by ministers. Minister Fortier and Minister Day made visits there. Both of those visits we believe led to the current contract, a new strategic alliance agreement, as we have called it, that will pave the way for the successful completion of that airport, which is now nearly 70 per cent complete.
Again, it gives the international buyer the guarantee that whatever contractor we bring to the table, we will deliver that element. It brings that government-to-government relationship.
For Canadian exporters, having the Canadian government as a partner helps mitigate their risks of operating in markets that are sometimes a little more difficult to operate in.
I will briefly go through the other two business lines before opening up to questions. The fourth one is the Cuba trade financing. It is the only place we are involved with trade financing. It started when the Russians left Cuba. Some Canadian exporters saw opportunities in Cuba and started working with the Cuban government. It became obvious that having the Canadian government there would be beneficial. CCC in its contracting and procurement mechanism went down there. It started off as the net 30, which then grew to now almost net 365 days, so one year credit. The Cubans have always paid us. They find we have a preferred relationship with the types of stuff we do. We are focused on two business lines, tourism and agriculture, mostly sugar, both of which are revenue-generating for the Cuban government.
About 200 Canadian exporters benefit from Canadian support for them in Cuba. Peter Kent, Minister of State of Foreign Affairs (Americas), recently visited Cuba and saw the benefits of the business that we support in Cuba. We estimate that about 5,500 jobs in Canada have been sustained because of the Canadian companies working in Cuba with the Canadian Commercial Corporation.
Our fifth business line is providing assistance to other federal government departments for their international programs — mostly the Department of Foreign Affairs and International Trade at this time. However, we are looking at expanding that to Environment Canada, CIDA and others. We have delivered tents for police units in Uganda, Senegal and Burkina Faso to support the African Union/UN Hybrid operations. We participated in relief to Haiti after the devastating earthquake. Recently, we have been involved in providing bridges to Pakistan after the flooding.
The value proposition for Canadian government departments that have international programs is that they can focus on their core mandate without creating unnecessary procurement capacity that might be costly to produce or inefficient because it is so small and focused on one area. We are procurement and contracting specialists, and we do a good job. I will mention the Auditor General's report in a minute, which we took as a great sign of confidence.
Our involvement with other government departments ensures Canadian exporters that there is an open, transparent, fair and flexible process with a quick reaction time to contracting needs.
CCC has a long history in international contracting and procurement, mostly in defence and infrastructure-related sectors. As I alluded to in my opening remarks, CCC is an extremely important international trade partner that contributes significantly to the Canadian economy. Based on a University of Ottawa professor's estimates, we support approximately 17,000 Canadian jobs in our global business activities.
CCC's role as a trade facilitator and promoter ensures that Canadian businesses are competitive in some difficult global markets and continue to be recognized as innovative international leaders in their fields. These are exciting times at CCC, and I look forward to continuing to lead this dynamic organization in achieving results with and for Canadian exporters in each of our five business lines. I have more notes on each of the five lines, but I think I have covered them in enough detail.
In 2009, we had a special examination by the Office of the Auditor General, which took approximately nine months. They went through everything we do in detail. At the end, we received a pretty good report from the OAG. Auditor General Sheila Fraser came to meet our board of directors. She spoke glowingly about what we do in contract management, risk management and, first and foremost, about governance by our board of directors and internally at CCC. We had six minor recommendations after a nine-month audit, five of which have been fully implemented. The last recommendation will be implemented by the end of March.
Senators, I am pleased to answer questions. Three of us here today will answer any of your questions regarding CCC's activities to date and activities in the future.
The Chair: The Auditor General's 2009 report is available to us, although not before us, and the audit of CCC would be included in it.
Mr. Whittingham: That is right. A full report is available on our website, but we can make copies available to the committee.
The Chair: We could obtain the information from the website of the Auditor General as well. It is important that the record show that it is a public report to which we all have access. You indicated that it was a positive report.
I want to confirm the appropriation of $15.2 million plus some adjustments through supplementary estimates last year, which you indicated at page 5 in your remarks. Did the two borrowing authorities you mentioned flow through the Minister of Finance borrowing authority?
Mr. Whittingham: That is right. They are approved by the Minister of Finance. Sorry, they do not flow through that. We do them ourselves with the banks.
The Chair: Where might we find the legislative authority for you to borrow?
Mr. Whittingham: It can be found in our corporate plan.
Martin Zablocki, Vice-President, Risk and Finance, Canadian Commercial Corporation: The Canadian Commercial Corporation Act gives that borrowing authority up to $90 million.
The Chair: You mentioned $15 million for Cuba. Is that in addition to the $90 million?
Mr. Zablocki: No. We have total borrowing authorities of $40 million and $15 million. The CCC act allows us to borrow up to $90 million, so we are well under what our act requires or allows.
The Chair: What is the first part, the $40 million and the $15 million?
Mr. Zablocki: The $40 million is a borrowing authority for the Defence Production Sharing Agreement program.
The Chair: Is that in your act?
Mr. Zablocki: No. The act sets the limit, the dollar amount up to which we are able to borrow, which is $90 million. Annually, we go to the Department of Finance to discuss our borrowing requirements. They approve it based on our requests.
The Chair: Does it fall within the $90 million?
Mr. Zablocki: Yes.
The Chair: Currently, you have authority for $40 million plus $15 million within the $90 million.
Mr. Zablocki: That is correct.
The Chair: Do you prepare an annual report on how much of your borrowing authority you have used and then paid back? Where can we see that record?
Mr. Zablocki: We do not report directly on that. It forms part of our annual financial audit with the OAG.
The Chair: Is that a public document? Where can we review how much of your borrowing authority you have used?
Mr. Zablocki: I believe the annual audits of the Office of the Auditor General are available on the OAG website.
The Chair: At one time, all borrowing was reported annually, and Parliament approved it. Two or three years ago, Parliament agreed to forego that reporting. One of the omnibus bills that we passed contained a clause stating that there was no longer that need, which provided a blanket authority for borrowing. As a result, it is difficult for this committee, unless we ask this question, to determine how much borrowing occurs under that blanket authority we gave to the Department of Finance. I asked those questions so that we know how much the Government of Canada's obligation is through these various borrowings.
Mr. Zablocki: Right. I understand your question.
The Chair: We will move to honourable senators who have comments and questions. I will begin with Senator Runciman, from the Thousand Islands and Rideau Lakes, Ontario.
Senator Runciman: Thank you for that comprehensive opening statement, which addressed a number of my questions.
In reference to your role in the provision of international procurement services, do you have any involvement in the F-35 acquisition?
Mr. Whittingham: Not yet. I hope that once things start to roll out and Canadian exporters have the products going to the United States, we would be involved in those export sales if they were trying to sell them to other countries or even to the U.S. for repair and overhaul in the U.S.
Senator Runciman: You are talking about procurement. I looked at that as buying services.
Mr. Whittingham: I understand. We do not buy for the Government of Canada. We buy for foreign governments.
Senator Runciman: I see. You might have a view on it in terms of your export arrangements and partnerships with other governments. If the Government of Canada were to back out of the arrangement to purchase the F-35 Lightning II aircraft, what kind of a stigma might be attached? Would Canada be viewed as an unreliable partner? Do you have a view on that?
Mr. Whittingham: Most of my experience is in dealing with Canadian exporters who sell to foreign governments. All of the Canadian exporters that I talk to, including the Aerospace Industries Association of Canada and its various members, are thrilled and excited about the opportunities they will have with Lockheed Martin in the United States because of the F-35 program and the way it has been designed. It has been designed not as favouritism to Canada but to look at the technology that Canada can bring and the price effectiveness that Canadian contractors can supply. Therefore, they have competed for their benefits.
The issue would be that there are many other countries competing for the same things. If the Canadian government were not to continue to pursue that aircraft, then there would no doubt be an impact on Canadian firms' ability to continue to be part of that program. Right now every one of those Canadian firms I have met feels that would be very detrimental to their business.
Senator Runciman: I know there is a lot of enthusiasm about this project. We talk about that possibility, which we hope is a very remote possibility. With respect to what is happening in the United States, in the U.S. economy and in terms of our own aerospace and defence industries, what do you see happening there looking down the road?
Mr. Whittingham: The million-dollar question is how much defence business will continue. Canada is matching the U.S. Department of Defense as it looks at budget issues. It is not just Canada but other countries. I will tell you quickly about our situation with the British government.
Working with Canadian Helicopter Corporation, we have won the bid for outsourcing search and rescue in England. The Canadian Helicopter Corporation will be part of a consortium of three companies called Soteria. They will be doing all the pilot and maintenance services for those aircraft for 30 years at £7 billion. It is a huge contract.
When the new British government was elected, it put everything on hold while it was examining all of its programs. We have not yet been told whether that program will continue. We believe it will, but it shows a little bit of what the austerity measures in various countries are.
When we look south of the border, we continue to see a huge budget. We think we will be able to maintain over the foreseeable future the $1 billion or so that comes through CCC for the Canadian defence industry, because we do not see the U.S. budget declining that quickly. We are still confident that the types of things that Canadians produce will continue to have access to the U.S. Department of Defense.
Senator Runciman: Is the bulk of employment in Canada in aerospace and defence in Quebec and Ontario, or is it spread across the country?
Mr. Whittingham: I talked about IMP Group in Halifax. There are some companies out west in British Columbia. The biggest part is Ontario and Quebec. Quebec has more of the aerospace. One of the biggest ones we have in Ontario is General Dynamics in London, Ontario, with light armoured vehicles.
Senator Runciman: I have a quick question about Cuba. That is a unique arrangement, I guess. You mentioned the background when the USSR pulled out support.
You provide loans and some sort of funding to the Cuban government to purchase Canadian agricultural products and other things; is that right? What do we get in return? Do we get products or cash payment? What kinds of terms are attached to this, such as interest rates? Are these forgivable loans? I am curious about how that process works. Could you give us a bigger picture of it?
Mr. Whittingham: It is all on commercial terms. I will start with that: The rates are commercial interest rates. We charge them interest rates that are competitive and that are negotiated on a contract-by-contract basis, based on the type of items they are buying and the terms they want.
In the tourism sector, it is anything from jeans for some of their stores and markets to cars for their rental vehicles. Almost every rental car in Cuba is a Canadian car. The Chinese are now starting to penetrate that market, but even the Cuban officials will tell us they are cheap and for the low-end clients. The higher-end cars are from Canada.
There is machinery for their mills in the sugar industry; it is most of the machinery and equipment that supports their sugar industry. The contracts are mostly with Quebec and Ontario companies. However, we recently sold around $30 million of potash from a Canadian potash corporation, again for their sugar industry. The potash for the Cuban market came from New Brunswick.
As I said, we negotiate terms on each one of them. The commercial interest rates are confidential between us, but I can tell you that they are more expensive than we would get from a Canadian bank as a citizen here, but they are commercially competitive.
Senator Runciman: You say you can attribute about 5,500 jobs in Canada to this arrangement.
Mr. Whittingham: Over the span of the program.
Senator Runciman: Obviously, there are some advantages to this. Why would this be restricted to one country? What distinction makes Cuba so unique?
Mr. Whittingham: I think it started that way in the 1980s. The OAG looked at this and said we could be doing this same type of program with other countries. We have limited our focus there because the relationship has been there. We see it from a business perspective. You saw the three pillars in our annual report. One is about operating a business to help Canadian exporters. Another is about public policy issues, and then the third is about the internal work.
We were in Cuba historically. There is no way we want to abandon the exporters who have been with us there for a long time. We just had another recent report from Ernst & Young, which basically said that if we withdrew our support, there would no doubt be a detrimental impact there on Canadian exporters in terms of payments.
The Cubans have gone through one of the worst periods of their history after the special period after the Russians left, because of the global economic slowdown and also because of two or three damaging hurricanes two years ago when they lost almost 20 per cent of their gross domestic product, GDP. We stayed with them through that period, which enabled the Canadian exporters to continue to be paid. They did slow it down, but they tell us why and are very honest with us. I think it is making a difference.
Interestingly, in part because of this relationship not just with us but with our Canadian exporters that are there, the Cubans are asking for help as they move forward in trying to understand how they can change their society towards bringing more entrepreneurship into Cuba. They recently announced a number of initiatives there, and I think we can make a difference on human rights and all of the other factors by being there with them and then influencing them.
Senator Gerstein: Thank you, gentlemen, for appearing before us and for a very comprehensive presentation. My questions are really for my own edification. I am looking at page 41 in your annual statement. I would like to go through the revenue sides with you quickly so that I understand them better.
Commercial trading transactions are $1.5 billion. On page 52, you show the breakdown of that by country. What proportion of the $1.5 billion is Government of Canada and what proportion is unrelated parties?
Mr. Zablocki: All of the $1.5 billion is from transactions with other foreign governments.
Senator Gerstein: That leads me to my question: Why is the cost a direct offset of the revenue? Why is there no room for any margin if you are dealing with third parties?
Mr. Zablocki: The way we record revenues and the way our contracting works with Canadian suppliers who provide the deliveries for those goods is as follows: We receive money from a foreign government, and we flow all of that money through the Canadian exporter, with the exception of a small fee for ourselves. It is a negligible amount, depending on the contract. All funds when received by CCC get passed through to the Canadian exporter who delivered those goods.
Senator Gerstein: Is your role that of a facilitator? Is the fee you are talking about, the one you take, shown on the third line, which is $9 million?
Mr. Zablocki: Correct.
Senator Gerstein: What if any opportunity is there that you might increase that, just from the perspective that it would offset the necessity of having to go to Her Majesty to fill in the gap?
Mr. Zablocki: There certainly is opportunity. Mr. Whittingham spoke earlier about our value proposition and the recent focus on our global defence business line, which looks to sell defence products from Canadian exporters to like- minded nations and allies. There is a fee component that will come out of that line that could see our fees increase in the future.
Senator Gerstein: Is there a potential opportunity that the concept of parliamentary appropriations, which here are $15 million, could, in fact, disappear and there would not be a need?
Mr. Whittingham: The appropriation is dedicated to the business we do for the U.S. Department of Defense and supporting the Canadian exporters that sell to the U.S. Department of Defense. Under that legislation, we charge no fees for that business, so the only way that we could reduce the appropriation would be that in the rest of our business we would be asking Canadian exporters to pay the fees to subsidize the U.S. Department of Defense, in essence.
The Canadian government has decided through this Defence Production Sharing Agreement that there is a reciprocal benefit to not charging Canadian exporters or charging the U.S. Department of Defense a fee for it because of the access it gives us to the U.S. Department of Defense acquisition.
Senator Gerstein: As I understand it, it is part of this mandate. It is not left up to you for your discretion.
Mr. Whittingham: We cannot charge fees for that business.
The Chair: As a follow-up, is that in legislation, or is it just government policy expressed in some other manner?
Mr. Whittingham: I am not positive. I can come back with that and specify whether it is in the Defence Production Sharing Agreement per se or whether it is government policy not to charge.
The Chair: It would be helpful, and we might want to make a recommendation if it is legislation that goes before Parliament.
Mr. Whittingham: We will bring that back to you.
Senator Ataullahjan: I understand that one of the areas you are involved with is the emerging and developing markets. CCC has a proud history of helping deliver Canadian commodities to Europe after World War II. You were involved with the Tarbela Dam in Pakistan in the 1970s, and most recently you were involved in providing equipment to the Afghan National Police. You have mentioned that you were helping with the aid to Haiti. Can you elaborate on that? You mentioned that you were helping with bridges in Pakistan. Could you elaborate on that as well? Would you have any idea which province of Pakistan, in the north or the south?
Mr. Whittingham: I am not sure where in Pakistan. I can tell you the type of bridges. They are called Mabey bridges, not because they are maybe a bridge but because of the name of the company. They are quick-erection bridges that are easily put in place in flooded areas.
The Department of Foreign Affairs and International Trade has a number of programs. One of them, the Stabilization and Reconstruction Task Force, has a fund that they look at. We are helping that department with its procurement. We are able to do things extremely quickly.
I will tell you a little story that goes back to when this started. A number of years ago the Department of Foreign Affairs and International Trade determined that it would supply helicopters as part of its contribution to the Sudan peacekeeping effort that was done by the African Union at the time, before the UN mission took over part of it. They talked to CIDA and to Public Works and Government Services Canada about helping on the procurement, and everyone said it would take six months minimum, maybe a year, possibly a year and a half to get the helicopters in place.
Peter Harder told me this story. He was the deputy minister. He suggested they see CCC about this. They came to see one of our fellows and he said we could do that type of contracting. We checked it out mandate-wise. Within 30 days of that first discussion the helicopters were in the Sudan. Our procurement is quick. That is part of what we are able to do. We are small and nimble, and we are very efficient at making things happen.
In Haiti, we have been doing a number of small procurements. We think we could do more. There is no doubt about it. The problem always is that if it is CIDA money, CIDA has paranoia about tied aid. They wonder whether, if they have us do their procurement, there will be an unfair benefit for Canadian industry. We believe not. We believe we can be transparent and open there.
If it goes to international organizations, they have their own procurement mechanisms, so there is a little bit there. We continue to work. I am attending a deputy ministers' meeting on Friday about reconstruction in Haiti to continue to see what could happen there. We have some discussions going on with some Canadian exporters about potential work at the airport there and that type of thing.
We can find out for you exactly where in Pakistan, and we can give you the list of what we have provided for Haiti if you would like that as well.
Senator Ataullahjan: Are you basically building bridges in Pakistan? Is that it for the time being?
Mr. Whittingham: Yes, for the moment.
Senator Ringuette: I had the opportunity in June to meet your employee who is now holding an office in Havana along with the Department of Foreign Affairs and International Trade; he is an impressive young man, I must admit.
In regard to your role with Atomic Energy of Canada Limited, AECL, were you involved in the Argentine sale a few years ago?
Mr. Whittingham: I hate to say no because we are involved in so many things, but since I have been at CCC, four years now, in this job and the previous job, I have not had any dealings with AECL. I have had discussions with the head of AECL to discuss the possibility that if they are sold and no longer part of the Government of Canada but still wanted to have a Government of Canada-type presence with them, they could work with CCC in terms of export sales, but we have not been involved with them in the past because they were already part of the Government of Canada, so they did not really need Crown agents like us to help them front the sale as a government-to-government methodology.
Senator Ringuette: You indicated in your presentation that you are dealing with 243 Canadian exporters. More than half of those are in the defence sector. How many of the 243 would be small to medium-sized enterprises, SMEs?
Mr. Whittingham: That is a good question. I do not have the numbers here. I could probably figure out exactly which are SMEs, based on Industry Canada's description of SMEs, but we do deal with some of them directly. An example that comes to mind is Neptec, which is a small business here in Ottawa that we sell through to NASA, and they do high-end space technology.
We do a number of SMEs with defence sales. We are working with one here, CPCS Transcom, an infrastructure project management company, on some contracts in Angola. There are a number of SMEs. As well, below the first level or tier of contractors we deal with, there are many SMEs that are supported through that work.
Senator Ringuette: From my perspective, the line between your role and Export Development Canada is blurring more and more. EDC supports Canadian businesses that want to export abroad to other companies. However, you deal solely with government to government?
Mr. Whittingham: Yes.
Senator Ringuette: You are not involved at all in exporting to private entities outside of Canada?
Mr. Whittingham: We can be. We had a description — I do not know where it is now, but there are three elements of the international trade portfolio. There is the Canadian Trade Commissioner Service, which does mostly trade promotion. They obviously work hand-in-hand with the people who negotiate free trade agreements. Then there is EDC, which does financing, insurance and bonding. Then there is CCC, which is the only entity there that can sign contracts. We sign government-to-government contracts. We can sell to a private entity. Our legislation gives us the ability to sign with them, but where would the value proposition be?
For example, there is the case in point of the search and rescue helicopters. We will be selling to this consortium that is formed, called Soteria; that is who the contract will be with. Soteria will then have a contract with the U.K. government, so it is a government requirement that flows through a commercial entity. We can sell commercial, but mostly where there is a government that is the originator of the requirement, and that tends to be where the value proposition for having a Canadian government partner sees itself.
There is a difference between the three elements: Canadian Trade Commissioner Service — trade commissioners and trade promotion, ensuring that Canadian companies are aware of potential deals in foreign countries and ensuring that foreign government officials are aware of Canadian capability; EDC — bonding, insurance and financing; and CCC — government-to-government contracts. All three of us work very closely together.
Senator Ringuette: Have you experienced losses?
Mr. Whittingham: In the past. The OAG's special examination talks about it. We have experienced losses because of problem contracts. If our due diligence on the Canadian exporter is not perfect, and I mean perfect, then sometimes we can be the contractor of record for something that cannot be delivered or that there is a failure. Historically there have been some that we have had to get out of. In the last few years, we have not had any cases of those happening, or they have been minor to the tune of hundreds of thousands of dollars, very little.
Because of the type of business, we budget $500,000 on an annual basis. Six to seven years ago, we were paying out $5 million a year for a couple of years for damage control costs, as we call them.
Senator Ringuette: Could you give us an example?
Mr. Whittingham: About four or five years ago we took a company with us to Saint Lucia to do a waste management system. I prefer not to mention the name of the company. Things happened, and there were many lawsuits. The Canadian company said that the engineering studies done and provided to them by Saint Lucia were not right and so the bid was different than what was needed to build the product. Less than halfway through the project — about 30 per cent into the contract — work was stopped. We came to a settlement with the Canadian company and a settlement with Saint Lucia. We settled that one from both countries' perspectives.
Senator Ringuette: I look at your example of Aecon, which is a huge construction company. Did Aecon definitely need the backing of CCC to obtain that contract?
Mr. Whittingham: It is interesting. I meet with Aecon often. In a market like Ecuador, there was a need for CCC, because although Aecon is a huge domestic company, it is relatively small internationally. It has done a road in Israel, which it felt very comfortable doing. It has done an airport in Hungary, which was considered a concession model. They built the airport based on probable profits from running the airport. After they finished building it, the airport was nationalized. They wanted to avoid this same problem in Ecuador and felt that having a Canadian government partner would be advantageous to ensuring that the project went according to plans. When the government changed in Ecuador, it changed parts of that country's constitution. That caused an impact on the potential airport project. We now have it back on the rails, and it should be completed in the next year and a half or so.
Senator Ringuette: In this example of Ecuador, you are assuming the risk of having to pay the Canadian construction company.
Mr. Whittingham: Virtually all of the risks are flowed through to Aecon in our contracts. We assume the risk and front it as the Government of Canada, and then in our back-to-back contract, Aecon assumes the financial risks. Obviously we have reputational risks and other types of risk inherent in that, but no financial risks. Aecon assumes any cost, including litigation if the project goes south.
Senator Ringuette: Are there no fees?
Mr. Whittingham: There are fees on those projects.
Senator Ringuette: My next question pertains to the proportion of government procurement. For example, your operating baseline is $15.2 million. How much did you collect in fees in 2009-10?
Mr. Whittingham: In 2009, our fees were about $7.5 million, and in 2010 they were $9.3 million. We see the potential for global defence sales. For whatever reason, CCC has never marketed itself nor gone into the business development efforts to sell defence goods to the rest of the world in competition with the United States Foreign Military Sales. We see the potential for that being quite significant, for example in search and rescue helicopter services in the U.K. and light armoured vehicles to Saudi Arabia.
The Minister of International Trade, Peter Van Loan, was in Saudi Arabia with CCC's vice-president of business development a couple of weeks ago. The Saudi Arabians are very interested in two significant contracts for light armoured vehicles through CCC. The fees associated with those projects would be significant. Historically, in something like that, it would have flowed through the United States Foreign Military Sales program because all kinds of foreign governments are aware of it. They would have purchased it from us and from the Canadian company, so all fees would have accrued through the U.S, which is not the right way to do it. I want to go direct.
Senator Callbeck: Thank you for your presentation. I come from Prince Edward Island, where agriculture is the main industry. We are always looking for new markets. The only place I see agriculture here is in connection with Cuba. Does CCC play a role in foreign agriculture markets?
Mr. Whittingham: I always say that we are a niche where the foreign government sees the benefits of having a government-to-government relationship. Normally, that tends to be in defence and security, in infrastructure and in emerging and developing markets. Cuba is a case unto itself because of the way the Cuban economy is structured.
I never say no. If a foreign government were looking at purchasing an agricultural product, such as potash or food products, on a government-to-government basis, then we would look at it. That requirement does not seem to exist. Most commercial food product is on a commercial basis, so that is easy; and foreign governments are comfortable going directly to the companies dealing with that.
Senator Callbeck: There is no demand for CCC in that area. Is that what you are saying?
Mr. Whittingham: We have not seen it.
Senator Callbeck: We have been talking about the fees. CCC revenues come from fees for service, net interest income, gains on foreign exchange and, of course, parliamentary appropriation. It also mentions ``other income.'' What is the other income?
Mr. Whittingham: There are various little things. For example, we are working on a common services package with a new Crown corporation, Public-Private Partnerships Canada. When PPP Canada was formed, it did not have human resources or information technology or even some legal advice. We developed a common shared services arrangement with PPP Canada whereby it pays us a certain amount of money to provide shared services. That is one of the little things.
Mr. Zablocki: Another revenue source that is more substantial is under our program with the U.S. Department of Defense. We pay Canadian suppliers on 30-day terms. If they request that we pay them earlier, we discount the amount we pay them, so we make some money.
Senator Marshall: You were talking about the revenues. I noticed from your annual report that at the end of March 2010 about 20 per cent of your receivables were past due. Could you briefly discuss whether it is an issue with regard to the collection of your accounts?
Mr. Whittingham: I will ask our chief financial officer.
Mr. Zablocki: Did you ask whether 20 per cent of our receivables are past due? I am sorry, but could you refer me to where you are getting that?
Senator Marshall: I think it is on page 54.
Would you have extensive writeoffs? Earlier you were explaining the relationship between the fees and the appropriations, so I am curious about whether there are significant writeoffs.
Mr. Zablocki: We do not have significant writeoffs. As Mr. Whittingham mentioned earlier, even in the Cuban market, which can be risky, they have always paid us. We do see some slowdowns in payments with the economy the way it is, so I cannot say that has not delayed payment across some of the business lines.
We work closely with the Canadian exporters and the foreign governments to understand their situation and whether we think there might be something more detrimental coming or the reasons they might be late. We have not suffered any losses from non-payment. When things are late, interest fees are paid to CCC to compensate for that.
Senator Marshall: Therefore that is not an issue.
Was the sale of the 30,000 tonnes of potash to the Cuban ministry just one time in 2009-10?
Mr. Whittingham: It was the first time, but hopefully not the only time. We are in discussions now with the Cubans for a second purchase.
Senator Marshall: If ownership of the potash industry changes, would that have any impact?
Mr. Whittingham: It depends on whether the company's strategic direction changes. Right now, it is obviously open to making those sales. It would depend on the strategic direction of the company.
Senator Marshall: What would be the value of that transaction?
Mr. Whittingham: I think it was about $30 million.
Senator Neufeld: Thank you for being here. I first want to ask how long CCC has been operational.
Mr. Whittingham: CCC was put together as part of the Marshall Plan in 1946, so it has been around for a long time.
Senator Neufeld: Has it operated much the same way since its beginning? Has its mandate been similar?
Mr. Whittingham: It has gone through different things. At times it has been part of Public Works and Government Services Canada. It has had an independent board of directors since 2002.
Senator Neufeld: You have about 135 employees. Where are they based?
Mr. Whittingham: They are all here in Ottawa, except for the one we recently put in Cuba.
Senator Neufeld: There is one in Cuba and the rest are in Ottawa.
Do you actively go to other countries, or do you wait for other countries to come to you? How do you decide to do that?
Mr. Whittingham: Historically, we have just had a reactive strategy where we have waited for companies to contact us. Now we have a new vice-president of business development. He has been in place for a year, and we are putting together a proactive strategy that will be targeting specific countries in defence and infrastructure and will be about having strategic accounts with Canadian contractors. We are open to every contractor who passes our due diligence model.
Senator Neufeld: I am from Western Canada. I have heard of a lot of Eastern Canadian companies accessing your services. Can you break it down a little for federal institutions? Maybe you cannot do it now, but perhaps you can provide it to us. For my own information, I would like to know what companies from the part of the world where I come from have access to CCC. You can provide that to the clerk.
Mr. Whittingham: Yes.
Senator Neufeld: Next, let us discuss China. China is absolutely massive. We all know that. What has your activity been in China? I ask that from the perspective of a British Columbian. China is close to British Columbia, and British Columbia has a good relationship with China. What kind of work have you done in China if you are actually getting proactive in going out and looking for opportunities for Canadian companies that are broadly spread across the whole country of Canada?
Mr. Whittingham: Interestingly enough, one of our directors of business development was in Vancouver yesterday talking to companies there. Last week we had other people: Sandwell, one of the SNC-Lavalin groups there, Cascade, and Field Aviation. The last two are both in Vancouver.
The Chair: Do you deal with MacDonald Dettwiler?
Mr. Whittingham: Yes, extensively. We did work with them in Germany for RapidEye and in Columbia.
There are quite a few companies in B.C. and right across the country.
We opened six trade offices in China on behalf of the Department of Foreign Affairs and International Trade. The department wanted to enhance its trade promotion and trade aspects there. It was looking at trying to do this in a new model. We did all of the administrative aspects. They still take functional direction, per se, from trade commissioners in China, but they are locally employed Chinese citizens through the Chinese agency, employed by CCC.
We do all of the administration for the offices, the financial stuff and similar things. By so doing, we are trying to see whether there is a role for us. Historically, there has not seemed to be a situation where the Chinese government buys from the Canadian government. The Chinese government seems to be comfortable going straight to Canadian companies.
For Canadian companies to get assistance, they have the Canadian Trade Commissioner Service for that assistance, and they have EDC for the financing.
We have not seen government-to-government contracting being a need from the Chinese government. That does not mean we have stopped and given up on it; we are still trying to penetrate that market. The chair of our board is on the boards of two Canadian companies that operate in China, so obviously he has great interest in and knowledge about China. We are trying to see what we could do in China.
Senator Neufeld: I have one last question, and you might need to get back to us with an answer. I asked what companies you work with across Canada, specifically in Western Canada. Can you give me some sense of the amount of business that you folks actually do with other countries as it relates to different parts of Canada?
Mr. Whittingham: We will come back with that information.
Senator Neufeld: Thank you very much.
The Chair: We have run out of time, but Senator Dickson would love to get one more question in.
Senator Dickson: I come from Atlantic Canada. Following up on Senator Neufeld's question regarding companies in Western Canada, I would appreciate it if you could do a similar list for Atlantic Canada, including how many apply, from what sector, the size of contracts and the number of companies that failed your due diligence tests.
The Chair: Are you able to do that work for us?
Mr. Whittingham: I am not sure about that last one, but we will endeavour to do that.
Senator Dickson: Thank you.
The Chair: On behalf of the Standing Senate Committee on National Finance, we would like to thank the Canadian Commercial Corporation — Mr. Whittingham, Mr. Zablocki and Mr. Pesic — for being here and giving us a detailed, first-blush explanation of what you are doing. We congratulate you. Thank you for the good work you are doing.
Mr. Whittingham: Thank you for the opportunity to speak with you.
The Chair: We have our next panel, the National Energy Board, here ready to go. We are pleased to welcome Pradeep Kharé, Chief Operating Officer, and Susan Allen, Business Unit Leader, Corporation and Information Solutions and Deputy Chief Financial Officer. There are many hats and many different jobs. We congratulate you on being able to do that, and we thank you for being here.
Mr. Kharé, do you have an opening statement before we get into questions and answers?
Pradeep Kharé, Chief Operating Officer, National Energy Board: Yes, I do. Honourable senators, I am pleased to appear before this committee today to discuss the National Energy Board's mandate, our priorities and our budgetary appropriations and how they have been invested to bring value to Canadians.
[Translation]
This morning, I am joined by Susan Allen, our Deputy Chief Financial Officer.
[English]
The NEB's purpose is to promote safety and security, environmental protection and efficient energy infrastructure and markets in the Canadian public interest in the regulation of pipelines, energy development and trade.
The board's main responsibilities include regulating the construction and operation of interprovincial and international oil and gas pipelines, international power lines and designated interprovincial power lines. Furthermore, the board regulates tolls and tariffs for pipelines under its jurisdiction. With respect to the specific energy commodities, the board regulates the export of natural gas, oil, natural gas liquids and electricity and the import of natural gas. Additionally, the board regulates oil and gas exploration and development on frontier lands and offshore areas not covered by provincial or federal management agreements.
We also have an advisory function. In this function, the board also keeps under review and analyzes matters related to its jurisdiction and provides information and advice on aspects of energy supply, transmission and disposition in and outside Canada. It is the board's responsibility to ensure that this energy infrastructure is built and operated in a safe and secure manner that protects the environment.
The NEB is funded through parliamentary appropriations. The NEB's total budget for the period 2010-11 is $63.8 million, of which $52.5 million was appropriated through the Main Estimates and the remaining through the supplementary estimates. Under the National Energy Board Act, the Government of Canada recovers approximately 90 per cent of the appropriation from those companies regulated by the NEB.
To deliver on our mandate, the NEB is staffed with seven full-time board members and five part-time board members all appointed by the Governor-in-Council, and they are supported by approximately 380 staff.
Our financial statements are audited by the Office of the Auditor General each year. The Cost Recovery Liaison Committee, a joint initiative between the NEB and industry associations, provides an informal forum to inform industry about financial statements and other cost matters.
As with all agencies, we submit our financials to Treasury Board Secretariat and report in our departmental performance report annually. Being an independent body reporting to Parliament through the Minister of Natural Resources, we also submit an annual report to Parliament.
What are our priorities? There are five at the moment that the board has established: first, the public review of Arctic safety and environmental offshore drilling; second, enhancing our regulatory efforts respecting infrastructure, safety and integrity, and environmental protection; third, increasing the clarity of NEB application filing requirements; fourth, improving public engagement with landowners, Aboriginal peoples, environmental non-governmental organizations and other stakeholders; and fifth, working to have Canadians well informed and equipped to make energy choices.
As usual, the NEB is very busy addressing many regulatory applications. Two of the larger applications before the NEB right now involve the Mackenzie Valley gas pipeline project from Mackenzie Delta to Alberta, and the Northern Gateway oil pipeline project from Alberta to the West Coast of British Columbia.
Through its 51 years of existence, the NEB has always made public safety and environmental protection its number one priority, and this continues to be the case. I am confident we are continuing to provide good value to Canadians while prudently managing our budgetary allocations.
[Translation]
We would be happy to answer any questions you may have.
[English]
The Chair: Thank you, Mr. Kharé, for that succinct but detailed explanation of the National Energy Board. We are always interested in knowing about appropriations in this committee. You indicate that we should anticipate $11.3 billion in the supplementary estimates for this year. Supplementary Estimates (B) will be tabled this Thursday. Should we expect to see the $11.3 million for the National Energy Board in those supplementary estimates?
Susan Allen, Business Unit Leader, Corporation and Information Solutions and Deputy Chief Financial Officer, National Energy Board: We will have some adjustments in the Supplementary Estimates (C). For the Supplementary Estimates (A) it is $7 million, and for the Supplementary Estimates (B) it will be approximately $3.4 million.
The Chair: That brings it up to the $11.3 million and therefore the total of $63.8 million that you indicated to us. Thank you.
Senator Eggleton: Earlier this year, you announced that you would be reviewing the drilling rules. This followed the Gulf of Mexico oil spill in April. Could you indicate at what point this project is and what your findings are to this point?
Mr. Kharé: Absolutely. You will recall that the Gulf of Mexico spill incident from BP was April 20 of this year. Within 20 days of that, on May 11, the NEB announced it would do the review you are talking about, the public review of Arctic safety and environmental offshore drilling requirements.
Since that time, we have done a fair bit of work at the board level, and the board has actually released the scope of the review. We invited citizens to comment on the scope. The scope has three areas. The first is checking the drilling safety while protecting the environment. This is more on the preventive side. The second is responding effectively when things go wrong, which is more on the response side. The third is the lessons learned from accidents at BP and elsewhere around the world, what we have seen and learned. The fourth is filing requirements: What information does NEB need to make a decision on the application?
We released the scope, and after comments from various stakeholders, we revised the scope in September and released it again. Recently, we have released the three phases of the program.
The first phase will be information gathering. For that, we not only will look at the technical side but also will go around the communities in the North, talking to Aboriginal people to understand the traditional knowledge and what information is there. The second phase will be analysis, where every stakeholder and all the people who have registered to participate in the study will have a chance to examine the others' evidence and question them on it. The third phase will be NEB work with the board, analyzing the information and putting a report out. Our timeline for Phase 1 is this fall; Phase 2 will be next spring and summer; and the report will be completed toward the late fall of next year.
Senator Eggleton: That is about a year from now?
Mr. Kharé: Yes.
Senator Eggleton: How does our regulatory framework stack up against those of other countries? What about our ability to respond to an emergency should we have something similar to what happened in the gulf? Where do we rate right now? Where are we starting from?
Mr. Kharé: That is part of the investigation that we will be carrying on in the next year.
We have looked at the rules. Canada has one of the most robust systems of drilling safety and environmental protection. There is no question about that. We have looked at the U.S. We have also looked at Greenland, which has been drilling in the area of the North this summer. Our system is second to none, although we learn from them and we want to incorporate them as we do our further investigation.
We have fairly strong legislation under the Canada Oil and Gas Operations Act, which allows us to require contingency plans of the companies and also to establish financial liabilities, if needed, in that area. We have a fairly good system. We will be doing further detailed checking to improve on it and make some recommendations for the next year.
Senator Eggleton: You say we are second to none. What is an example of something in which we are second to none, something that would give us confidence that what happened in the Gulf of Mexico could not happen here?
Mr. Kharé: There is no activity or application before us in that area, so we do have the time to do this right.
The Canada Oil and Gas Operations Act allows us to get from the industry the information required to give us the confidence that it is safe and environmentally prudent to give our approval. In that process, we can look at a company's financial liabilities and the financial strength behind the company. We can also look at the equipment it is deploying and how that will be used and also what emergency response measures the company has in place. The legislation is fairly strong in what we can demand of a company before we give a permit or a licence to operate in that area.
Senator Eggleton: Are we demanding that? Presumably BP was doing all of this stuff in the gulf, and it is certainly an organization with a large reputation. What do you do differently here from what the American government or the state government was doing there?
Mr. Kharé: We have not had an application in the North in our jurisdiction.
Senator Eggleton: Do you deal just with the North? What about other places off the coast in Canada?
Mr. Kharé: The West Coast is a jurisdiction where there is no activity, and in part of the Gulf of St. Lawrence there is no activity. The only activity right now is in the Newfoundland offshore area, which is governed by the Canada- Newfoundland and Labrador Offshore Petroleum Board. It is a federal-provincial joint partnership. It has full authority in that area. It deals with active applications.
Senator Eggleton: You are not regulating that particular installation?
Mr. Kharé: No. That is outside our jurisdiction.
Senator Eggleton: There was a Canadian pipeline break in the northern part of the United States; I cannot remember where. What was your involvement with that?
Mr. Kharé: The pipeline break was in Michigan. It was a company called Enbridge Pipelines. It was just across the border. That pipeline goes from Canada across the river into the Michigan side. The break was on the U.S. side, so they were the primary responders and primary regulators, but we work very closely with PHMSA, the U.S. Department of Transportation Pipeline and Hazardous Materials Safety Administration, our counterpart in the U.S that regulates pipelines. We had our people out there learning what happened, what went wrong and how they regulated. When they were trying to put the pipeline back into operation, there was a fair bit of a process, and we had a person in Edmonton at the headquarters monitoring it. We are learning much from them.
We are also involved in checking the integrity of the entire pipeline, particularly in that area. A small dent was just discovered on the U.S. side of the buried pipeline, and the U.S. will require replacement of the whole thing. We are working closely with U.S. authorities to ensure that the requirements on both sides of the border are met in that replacement.
Senator Marshall: You mentioned in your opening remarks about the regulating of the import and export of natural gas. Could you talk about shale gas and its emergence and how it will affect imports and exports in Canada? We read a lot in the media about it, and it seems like it will have a significant impact. Could you briefly discuss that?
Mr. Kharé: Certainly. The shale gas regulation in general is a provincial responsibility. British Columbia has one shale gas field and one tight gas field, which are regulated by the BC Oil and Gas Commission. Quebec is going through some possibilities in the future.
Shale gas in general is non-conventional gas. The conventional gas supplies in Canada are slowly on a decline and are being replaced by non-conventional gas.
Also, there were major discoveries in the U.S. — I should not say discoveries; the gas was there, but the Americans found the technology to be able to extract that shale gas in the U.S., and it is certainly changing the market mix on how much we export and how much they get internally. That is happening at a fairly organized and clear pace. Pennsylvania has gone a big way in permitting shale gas.
We are keeping an eye on it. We make some reports on shale gas nationally, but we do not have any direct regulation responsibility at the moment, other than the pipelines that will carry the shale gas, for example, from British Columbia to Alberta. We have approved and will be approving those as we go.
Senator Marshall: Would flows across the border fall under your jurisdiction?
Mr. Kharé: Yes, interprovincial or international pipelines.
Senator Marshall: Will that replace natural gas? How extensive is it?
Mr. Kharé: It is hard to predict, from my point of view, but shale gas is natural gas, so it will replace conventional natural gas as the natural gas supplies start to dwindle. It also depends on the cost of it. In some places it is easier to extract, based on the type of rock and fractures, while in other places it is more difficult and expensive. Second, there are transportation costs involved; for example, from Northern British Columbia down to the hub in the U.S. will have a transportation cost on top of that. All those economic considerations will play into it.
It will certainly fill the void where natural gas supplies are going down. It also connects with the imports of liquefied natural gas, LNG. At one time, my counterparts in the U.S. were telling us that LNG was the biggest thing in the U.S. two years ago. Now it is not so big because shale gas is available. It is all playing in the market as we go slowly.
Senator Neufeld: It is good to see you here. We go back quite a ways. I am glad you explained shale gas: It is natural gas, but it is just derived from a different source of rock. It is a lot more difficult in many cases.
I want to talk a little bit about public engagement and the role the NEB plays, specifically with landowners. I want to take you back to a time of the Alliance Pipeline that went from British Columbia all the way to Chicago. That was regulated by the NEB. I still have people in my part of the world who complain they were treated differently than other provinces — Alberta and Saskatchewan, for instance, and the U.S., to a degree.
How do you go about being the regulator for the whole pipeline, because it is both interprovincial and international?
Mr. Kharé: I will answer that question in two dimensions. First, we have a number of programs for landowner engagement that have significantly accelerated in the last three to four years. There are more programs across the country. However, for individual pipelines, we expect that the first people to engage the landowners and the Aboriginal communities will be the pipelines themselves, because any compensation agreements or any agreements not having to go to arbitration are done between the pipeline companies and the landowners when they sign agreements.
If there was an issue besides that, then Natural Resources Canada has a department that looks at what is fair compensation.
Our involvement has more to do with the physical aspects of the pipeline, such as its placement, to ensure that farmers and farming practices will not be affected or disturbed too much. We look at detailed routing, what the rights- of-way will be and how or if the farmers will be allowed to cross with heavy equipment. We cover those types of issues.
Senator Neufeld: You do not deal with compensation for landowners; is that correct?
Mr. Kharé: Not directly, no.
Senator Neufeld: You said earlier that 90 per cent of your costs are recovered from the companies that apply for permits, and I appreciate that.
The Mackenzie Gas Project has been going on for a long time. Can you tell me if all the costs the NEB has incurred are received yearly from the companies that have been applying, or are they received after the pipeline is built? How does that work? Is the NEB paid every year for its costs of dealing with the Mackenzie Valley gas pipeline, which has probably been going on for 30 years or more? Is there absolutely no deficit?
Mr. Kharé: I will answer your last question first. There is no deficit. It is not based on fee for service. Parliament gives us the appropriations based on the checks and balances from Treasury Board. Those are allocated to the pipeline industry on a formula, based on their throughput and the type of commodity they look at. There is no deficit at all.
When I say 90 per cent, it is approximately 90 per cent. All the costs appropriated to pipeline and electricity regulation are recovered. The one not recovered is our efforts in the North, which are the drilling and production. The government made a decision a long time ago that to encourage development in the North, we will not recover costs in that area. That is about 10 per cent in the mix at the moment; it is actually slightly less than 10 per cent. Northern activities are capped at $5.7 million for us.
Senator Neufeld: As I understand it, the NEB has recovered no dollars for the money that has been expended in the North for the McKenzie Gas Project; is that right?
Mr. Kharé: No, pipelines are all covered by the act. The Canada Oil and Gas Operations Act activities, which are drilling and production activities in the North — the Northwest Territories and Nunavut, basically — are not recovered.
Senator Neufeld: Okay. Therefore, Imperial Oil has received some pretty healthy bills from the NEB, I would assume.
Mr. Kharé: Yes, they have.
Senator Neufeld: I have a final question about your five priorities. One of them is working to have Canadians well informed and equipped to make energy choices. That is an interesting comment, given my background in energy choices and what we have tried to do.
Can you explain to us what the NEB does in those areas, and are such activities across Canada or in specific provinces and territories?
Mr. Kharé: We have a section dedicated to the advisory role to the government and Canadians. These people are market analysts, energy engineers and commerce-type people who actually look at energy supplies and trends across Canada, imports, exports and some global trends. Then we publish timely, public reports on these. The intent is to advise the board on making its decisions on exports and imports, but those reports are available to anyone.
Those reports are actually very well regarded. We constantly get kudos because they are independent and not considered to be biased. We have a fairly good reputation concerning the reports. If you would like, we can send you a list of what we have produced this year. However, they are all available on our website.
Senator Neufeld: Do you know what kind of activity happens on the website from average Canadians looking at energy choices, as opposed to the board? Do you get many hits on your website from average Canadians, or is the audience more technical?
Mr. Kharé: It is hard to figure out where the hits come from. In the past, it has been mostly industry and technical people looking for that information. The board is making a very strong effort to move to a mix of reports to be relevant for ordinary Canadians as well as the technical people who are looking at the import-export industry.
Senator Neufeld: That is what I was trying to get at — the steps being taken to make it easier for Canadians to access that important information in today's world. Thank you.
Senator Callbeck: Welcome, witnesses. I have a couple of questions on your presentation.
You talked about the board's main responsibilities, and you mentioned the designated interprovincial power lines. Are some interprovincial power lines not designated?
Mr. Kharé: None of them are designated.
Senator Callbeck: Okay. You said that you regulate the tolls and tariffs for pipelines, but you have nothing to do with the power; is that correct?
Mr. Kharé: Correct. The tolls and tariffs for power are provincial.
Senator Callbeck: Right. However, do you not have anything to do with international or interprovincial lines?
Mr. Kharé: The interprovincial power lines are not regulated by NEB, unless the Government of Canada through the Governor-in-Council designates them and asks us to regulate them. We regulate the physical aspects of the portion of international power lines.
Senator Callbeck: I read somewhere in the material that you hold public meetings where you feel it is appropriate and that you had roughly 750 applications annually. Roughly how many public meetings do you have?
Mr. Kharé: The public meetings are connected to the hearings that we hold for gathering information on large applications. I have the numbers here. There were somewhere between 6 and 18 public meetings in the last five or six years. In 2005 we had 6 hearings. Then we had 10, 12, 17, 14 and 18 meetings in the intervening years, respectively. It has increased quite a bit.
These hearings are done by the panel in the adjudication of an application and could be held anywhere. We hold them as close as possible to the community of interest so that they do not have to travel.
Senator Callbeck: You said there were 6 to 18. How do you determine whether it is appropriate to have a public meeting? What criteria are used to measure that appropriateness?
Mr. Kharé: The criteria for large applications include a full panel review. The panel decides where the hearings will be held. For example, a toll hearing generally does not need to go out to the communities because it is usually only lawyers and industry accountants who show up. It is generally held in Calgary or another large centre.
A hearing for the laying of a pipeline can go to the communities as needed. The panel decides what is appropriate. It is based on the amount of interest we get in the application. When the pre-application is published, we have a fairly strong engagement with our staff going around to talk to Aboriginal communities and other landowners expected to be affected. Based on the interest we get, the panel decides where the meeting will be.
Senator Callbeck: However, you only hold a public meeting for a large project?
Mr. Kharé: Correct.
Senator Callbeck: Of the 750 applications, how many would be small and how many would be large?
Mr. Kharé: There are many small applications for electricity export permits. Many applications are for short-term export by BC Hydro to California or Ontario Power Generation to New York State. We turn those applications around in 48 hours. We do a quick check of the availability, et cetera. That is an example of the largest number of applications.
Every large application has a hearing, without question.
Senator Callbeck: Every large application has a hearing.
Mr. Kharé: Yes.
Senator Ringuette: I was surprised to hear you say that you have no jurisdiction over interprovincial electricity distribution, because the Constitution of Canada clearly states that the federal government has an oversight role; and yet you are not responsible for that oversight by the Government of Canada. You should be the designated body to do that. It is in the Constitution.
Mr. Kharé: The National Energy Board Act was promulgated in 1959. By that time, I believe the provinces had a fair bit of control over electricity generation and transmission. I do not know what the legislatures had in mind, but they decided that in the act we will be asked only to regulate an interprovincial transmission line if it was designated by the GIC, assuming a conflict arose between the provinces. We have not had one designated, that I know of.
Senator Ringuette: You stated in your remarks that you are responsible for safety and security of energy. There are major concerns across the country with regard to the lack of update to the electricity grid. Your American counterpart faces the same situation. Are you in discussions with the U.S. about the upgrade of the North American electricity grid? Is there a void in responsibility?
Mr. Kharé: We are in constant discussions with the Federal Regulatory Energy Commission, our counterpart in the United States. FERC is responsible for natural gas and electricity. We receive updates from them, but generally they are more often about natural gas because we have a mutual responsibility, and we exchange notes. On the electricity side, they work through other mechanisms, including a consortium of provinces and other areas. There is not a single federal body to work with them on electricity.
Senator Ringuette: You have no responsibility for, no oversight of and no say at all on the national electricity grid and its current state.
Mr. Kharé: We have only those little parts consisting of international transmission lines. Most of the electricity grid in Canada runs north-south. There is not as much running east-west as we think there is. There is more export. If they cross the international boundary, we regulate the physical aspects of it. Other than that, no.
Senator Ringuette: You are confirming that no national body looks at this great concern over the national update of the electricity grid? There is a vacuum. That lack of responsibility has been transferred to you from the Government of Canada.
Mr. Kharé: As a regulator, it would be unfair of me to comment on whether there is a national body. It is more a policy issue that the government has to look at. We have been given a mandate, and we discharge that mandate as a regulator.
I am not supposed to have an opinion, so it would be unfair of me to express one.
Senator Ringuette: I understand. However, in fairness to the Canadian taxpayer, much of your internal energy is devoted to oil and natural gas.
Mr. Kharé: Yes, that is correct.
Senator Ringuette: The major component of taxpayers' day-to-day energy needs is electricity, and yet you have no responsibility for it. You spend money on supplies, expertise and conduits related to the import and export of energy, but none of it is related to electricity.
Mr. Kharé: Very little of it deals with electricity, I agree. The provinces are fairly strong in that area. There is no question that British Columbia and Ontario have a very strong electricity connection. You are right: We have limited oversight of that from our end.
Senator Ringuette: I agree that you have limited oversight of and limited designated responsibility for electricity. It is in and out with regard to the constitutional obligation of the Government of Canada.
My last question, if I may, pertains to the potential sale of AECL. What is your recommendation for the import and export of atomic energy?
Mr. Kharé: Zero. The short answer is none. AECL is regulated through a number of other mechanisms. Natural Resources Canada has the authority over policy, and the Canadian Nuclear Safety Commission looks after safety. The NEB is part of the overall NRCan portfolio, but our connection to nuclear power production and sales is zero.
Senator Ringuette: I reinforce your lack of designated responsibility in respect of electricity generation, safety, security and transmission, et cetera. Thank you.
The Chair: Are there comments, Mr. Kharé, or are you content to let that comment go?
Mr. Kharé: We deliver what we actually regulate, and we are very proud of it. We have regulated very well for the past 51 years, following what we have been mandated to do, and we will continue to do so. We are well respected in the industry, by stakeholders and outside people, for what we do, and we will continue to do it. If we are given more mandate and responsibilities, so be it.
The Chair: Exactly.
Senator Ringuette: You could handle it.
Mr. Kharé: Oh, yes, we can.
Senator Runciman: I have just a couple of quick questions. Reading the report here, I am curious about the fact that natural gas licences are long-term and oil and gas exploration licences are short term. What is the rationale for that?
Mr. Kharé: That is a good question. I do not have an answer regarding the rationale behind it. I know that is a fact, and we can certainly find that answer and get back to you. It would be proper for me to get back to you on that rather than to try to guess the answer.
The Chair: The way to do that would be through the clerk, who has contacted you, and he will ensure everyone gets the answer.
Mr. Kharé: Yes, Mr. Chair.
Senator Runciman: Previously in this committee with other witnesses we have talked about the processes for approval of major energy projects and timelines. When was the Mackenzie proposal first initiated?
Mr. Kharé: I do not recall the exact number of years, but certainly several years. There is no question about that.
The NEB had a role in the ultimate approval of the pipeline, but it had to go through the requirements of the Canadian Environmental Assessment Act. Within that act, there was a joint review panel. That panel is the one that took a very long time to do a proper environmental review.
The panel's report was finally submitted to the government in December of last year, December 2009, and our panel has completed the final arguments and is ready to make a decision, but it must wait until the government responds to the report of the environmental panel. Once the government's response is given to us, we will consider that. Our panel has publicly said that it will make a decision within a month of receiving the government's response.
Senator Runciman: You expressed your concern about one of the deliberations taking so long, but regarding these processes, one area raised with us was the duplication from having a variety of bodies essentially looking at the same issue and assessing it with the same kinds of responsibilities.
You have talked about your priorities here. I understand that enhancing the regulatory efforts relates to that, but do you also look at this issue and how critical some of these energy projects can be to the well-being of this country's economy? We recognize the importance of taking a close look at environmental impacts and so on, but it seems an outrageous amount of time is required to get some of these to a yes or a no decision.
Mr. Kharé: This is a very timely question. As a result of this issue of duplication and having several agencies looking at the same thing, the government and the NEB have worked very closely with the Minister of the Environment and the Canadian Environmental Assessment Agency to provide substitution. There is a provision in the Canadian Environmental Assessment Act to afford the minister to allow the existing hearing processes to substitute for a separate panel that is used for these big projects. That substitution discussion has come a long way. A proposed memorandum of understanding was published on the Canadian Environmental Assessment Agency's website for comment, and it has received comments. We are in the final stages of completing that.
Once that MOU is signed, which we expect very shortly, then we will be allowed to have one NEB panel do the entire thing, which includes economic, safety and environmental assessments within the act. We will be designated or substituted for a panel, so instead of going through two panels, it will be just one panel. That is very recent, and we are quite encouraged and energized by that.
In order to make that happen, we have also established recently through government appropriation a participant funding program, which we never had. Our participants had no way of accessing that. That was established as of last month, in anticipation of having the substitution come through.
Senator Runciman: That sounds promising.
With respect to the Newfoundland and Labrador proposal regarding a transmission line for the Lower Churchill, now they are talking about this underwater line, I guess. I am not sure what the history is there. They were rejected by Quebec or the Quebec regulator. I am not sure whether Hydro-Québec rejected it initially and then it was supported by the regulator.
Is there a role for the NEB there around mediation? I understand that the overland approach would cost significantly less than the under-ocean project that they are sort of being forced to consider. Is there a role there for the NEB?
Mr. Kharé: The only way there would be a role for us is if the government by policy decided that NEB should oversee the regulation of that part of the transmission line. At the moment, we have not been asked to do anything like that.
We have certainly had some senior bureaucrats come and talk to us, but just for information gathering. We do not have any indication either way whether or not we will be asked. Once we are under the National Energy Board Act, we can certainly take on that role.
Senator Runciman: I have heard comments in the media about the oil sands and a new pipeline into California or Nevada; I am not sure exactly where the end destination would be. Is anything happening with respect to that, or is that just media speculation at the moment?
Mr. Kharé: The pipelines we have in front of us are mostly connected to the hub on the east side. I do not know of a proposal. A lot of speculation comes to us, but I cannot confirm that we have any application before us in that area.
The Chair: Going back to your budget for the year and the appropriation, you indicated that your appropriation is $63.8 million. Presumably you spend all of that, and you could spend more if you had more. How much money do you get from tolls and other sources of revenue? What is the total budget you have to operate the National Energy Board?
Mr. Kharé: The budget is actually $63.07 million. It does not matter; it is neither here nor there for your question. That is the total budget. We do not get any more income from any other sources. This is the appropriation by Parliament, and that will be the total budget.
The Chair: All the tolls go into the general revenue of the government; is that correct?
Mr. Kharé: Correct. All the levies and the bills that we produce go directly back to the government.
The Chair: What is the total of that?
Mr. Kharé: That would be approximately 90 per cent of that, so I assume it would be almost $55 million to $57 million.
The Chair: The original appropriation in the Main Estimates, when we looked at the whole year, was $52 million.
Mr. Kharé: Correct.
The Chair: At that time, we were looking at recovering $57 million and spending $52 million, but then you discovered that you needed more money through Supplementary Estimates (A) and (B). The supplementary estimate funds total about $11 million. Is that extraordinary? In another year, would we anticipate that you would receive more in tolls than you would get in appropriations?
Mr. Kharé: No. The act has been cleverly crafted, actually. Whatever we spend at the end of the year is what we bill the following year. We will be recovering based on what has been appropriated to us, and out of that, the funds that we expend are what we recover. There is never a question of anticipating revenues, because this is not a fee for service. This is allocation of our total expenditures to various commodities and pipeline companies.
The Chair: What role does the Cost Recovery Liaison Committee have if it is legislated that you will recover all of your costs in the year following?
Mr. Kharé: It is more of an outreach, if you will, to keep the industry informed as to how we are spending money. We are not out there wasting on things that are not part of our mandate; we are delivering what is on our mandate within the act and we are doing it in a prudent fashion. It is more of a check and balance.
In addition to that, by law the Auditor General audits us every year on cost recovery to ensure we are within the mandate given to us by Parliament.
The Chair: The Auditor General audits annually that comparison of expenses and cost-recovery; is that correct?
Mr. Kharé: Correct.
The Chair: Does an independent, outside auditor do your normal financial audit?
Mr. Kharé: The Auditor General is the independent, outside auditor.
The Chair: Does the Auditor General conduct your entire financial audit on an annual basis?
Mr. Kharé: Yes, on an annual basis.
The Chair: Do you have a separate commercial auditor coming in to do financial audits?
Mr. Kharé: Not on top of it. We have internal controls and internal auditing, but that is just to keep our own business in a proper fashion. The Auditor General acts like an external auditor. If you brought in PricewaterhouseCoopers or KPMG, they would do exactly the same thing the Auditor General does.
Ms. Allen: The Auditor General does a standard financial statement audit for us, and then the second piece is the cost-recovery part and the allocations.
The Chair: Is it a separate audit?
Ms. Allen: It is part of the whole audit, but it is like a standard financial audit that you would have with any organization. The piece after that is how much is cost-recoverable and how much is not.
The Chair: Would we see all of that in your publicly disclosed annual statement?
Mr. Kharé: Correct.
The Chair: From time to time, does the Auditor General do a performance audit, which is more than and different from a financial audit?
Mr. Kharé: The value-for-money type of performance audit is usually done through the Office of the Comptroller General of Canada. They have a committee of people who do small agencies' audits, and they would look at our travel, hospitality, things that are discretionary, if you will, of which we have very little. Whatever is there, they will do the audit, contracting, and making sure we are following the proper practices within the government.
The Chair: Thank you. Ms. Allen, did you have anything to add in that regard?
Ms. Allen: No.
The Chair: Thank you both for being here, Mr. Kharé and Ms. Allen. We appreciate your bringing to us information about the work you are performing in the National Energy Board. Thank you.
(The committee adjourned.)