Proceedings of the Standing Senate Committee on
Foreign Affairs and International Trade
Issue 3 - Evidence - Meeting of October 20, 2011
OTTAWA, Thursday, October 20, 2011
The Standing Senate Committee on Foreign Affairs and International Trade met this day at 10:40 a.m. to examine and report on the political and economic developments in Brazil and the implications for Canadian policy and interests in the region, and other related matters.
Senator Percy E. Downe (Deputy Chair) in the chair.
[English]
The Deputy Chair: Honourable senators, we will continue our study on the rise of Brazil. The chair will be here shortly, at which time she will take this position and I will revert to the main table.
I will ask our guests to introduce themselves. I assume they have an opening statement, either from one or all three.
Joanne Lostracco, Manager, Strategic Policy and Government Relations, Canadian Commercial Corporation: I will turn to my colleague, Martin Zablocki.
The Deputy Chair: Thank you.
[Translation]
Martin Zablocki, Executive Vice President, Chief Operating Officer and Chief Financial Officer, Canadian Commercial Corporation: It is a pleasure for us to appear before your committee to talk to you about the Canadian Commercial Corporation. I will also specifically speak about our experience with Brazil.
[English]
Given that the committee is focused on foreign affairs and international trade, we thought it was fitting that we come today to speak a bit about the Canadian Commercial Corporation, because it is one of the stalwarts in the government's international trade portfolio.
With me today I have brought Joanne Lostracco, our manager of strategic planning and government relations, and also one of our legal counsellors, Alex Jeglic, who is well-versed and has been to Brazil.
I am the Executive Vice President and Chief Operating Officer and of the Canadian Commercial Corporation.
I would like to start by giving the committee a brief overview of CCC, what we do and how we fit into the government's plans, and then speak more specifically at the end about Brazil.
I will temper expectations at the beginning by letting the committee know that we have not had a lot of experience with successful contracts in Brazil. It is a market that has proven challenging for us in the past, but we see a wealth of opportunity there and we are tracking more closely now what those opportunities may mean in the future.
First, I will tell you about CCC. The corporation was established in 1946, predominantly to support reconstruction efforts in Europe after the war. We are governed by the Canadian Commercial Corporation Act. If I can read our mandate, it will give you a sense of how broad our responsibilities can be.
Our mandate as stated in the act is to assist in the development of trade between Canada and other nations, to assist persons in Canada to obtain goods or commodities from outside Canada, and to dispose of goods and commodities that are available for export from Canada.
You can see the mandate is quite broad. In time, our business has evolved. In 1956 — an important period for us — we were given responsibility as the custodian for Canada of the Defence Production Sharing Agreement with the United States to govern and facilitate the export of military products and services to the U.S. Department of Defence. That is a very significant part of our history.
As a corporation, we have two sources of funding. We receive a small appropriation from the government of about $15.5 million a year. That appropriation is dedicated and provided to us exclusively to do the work that we do with the United States Department of Defence. For all of our other business we charge a fee for service and are self-sustaining.
Our staff as an organization — and in a minute I will talk about results and you will see we do what I consider to be fairly significant volumes of business — is relatively small. We have about 140 staff. Despite that, we are able to leverage our activities to generate a considerable amount of exports for Canada. Of course, we all know that leads to jobs and that leads to a healthy economy.
We are a member of Canada's international trade portfolio. There are three distinct groups in that portfolio. The first is the trade commissioner services within the Department of Foreign Affairs and International Trade. The trade commissioner services people are situated in about 150 cities throughout the world and are there to help promote Canadian business, look for opportunities and communicate intelligence back to various parties who can help assist companies with the export markets.
The second organization is Export Development Canada. They are predominantly responsible for financing and insurance to help Canadian companies export abroad.
The Canadian Commercial Corporation is the third. We deal with government-to-government contracting and procurement for foreign governments.
There are two primary services that CCC offers. The first is our prime contracting service. In that service we engage with a foreign government and enter into a contract to provide them with goods or services that they are trying to procure. In turn, we then enter into a separate contract with a Canadian exporter to fulfil the terms and obligations of that first contract. We are almost a middle entity to help that foreign government find Canadian capacity, capabilities, technology that can help them meet their procurement needs.
Our second primary service is procurement services. We offer that in situations where foreign governments do not have the capability or the manpower themselves to undertake their own procurement services, and we can step in and do that work for them in an agent-type role.
As you can see, our role is unique, but in terms of why a foreign government would want to contract through Canadian Commercial Corporation or why a Canadian exporter would want us to be in the middle of a transaction, essentially the foundation for all of that is risk and risk management. Foreign governments typically do not always know the status and the calibre of Canadian companies. By having a Canadian government party in the transaction standing behind that export company and guaranteeing that the work that they have contracted for will be done based on the terms and conditions of that contract is incentive for the foreign government to buy from a Canadian entity. At the same time, some of the countries that we contract with have less stable legal regimes or changes in political power that can make contracting challenging. The Canadian exporter, therefore, likes to have the Canadian government in the contract because we can intervene and try to help them resolve disputes without having to go to international tribunals or courts. There is a win-win situation from a risk perspective both for the foreign government buyer and for the Canadian exporter. That is our primary value proposition.
When I talk about some of our business lines, I will give you a bit more information about our value proposition.
In order for us to perform the work we perform and to attest to the fact that the Canadian suppliers that we are supporting can provide the goods and services that they will provide under these contracts, we have a robust risk management regime at the corporation. We go through a thorough managerial, technical and financial risk assessment of the Canadian suppliers to ensure that, as a government entity, what we say will be delivered will be delivered by that exporter in those contracts.
I have mentioned as well that we can help with disputes that may come up in the terms of the contract.
The corporation has five business lines. The first and our largest is one I referenced earlier, defence sales to the U.S. government, U.S. Department of Defence, under the Defence Production Sharing Agreement business line. That has been in place for many years. Essentially, any contract with the U.S. Department of Defence over $150,000 U.S. must be contracted through CCC under the terms of that agreement.
Again, that is the only business line for which CCC receives an appropriation from Parliament. All of our other business lines are fee-generating.
Our second business line is global defence and security sales to allies and like-minded nations. In that context, as an example, we have done installation of wings on P3 aircraft for Norway. We have done pilot training for the Saudi air force through Bombardier, and other contracts of the like.
Our third business line is international commercial business sales, mostly in infrastructure markets and in the emerging and developing world. There are other types of contracts that would fit into that business line. It is a bit of a catch-all for us, but the primary thing is infrastructure. Examples would be our Quito International Airport project in Ecuador, where we are working with Aecon construction to build the most modern airport in Latin America, and we have done business with Orenda, a branch of Magellan, in power generation in Ghana, Africa.
Our fourth business line is procurement services for federal government departments. Ostensibly, that involves helping out on disaster relief procurements for emergency needs. We have done some bridges for flooding in Pakistan and masks for disasters in Japan; there are a number of things we do under that business line.
Our final business line is trade financing to Cuban government buyers in the tourism and agricultural sectors in support of Canadian exporters working in the Cuban market.
The benefits that are derived from CCC's work are threefold. There is a distinct competitive advantage for Canadian exporters to have the government in these transactions, as I explained earlier. It allows the foreign government to have comfort that the contract terms will be delivered, based on their terms and conditions.
It also allows the foreign government in most countries to enter into direct contracts. They do not have to go out and do an international tender, which can take a considerable amount of time and cost a considerable amount of money, especially in situations where there is an urgent requirement for procurement or in situations where the goods and services that the Canadian supplier would provide are unique and there is no other provider.
A third advantage that comes from all of that is simply a better awareness of the capabilities that Canada has to offer, in high technology and any number of areas. Our construction capacity is tremendous and our approach to business as Canadians is well regarded around the world. The more we can get out and perform, the more that perception is supported.
In terms of results, I distributed our most recent annual report to everyone today. The value of contracts signed last fiscal year reached $1.6 billion. That is a tremendous amount of business for us. It is 7 per cent higher than our average over the last five years and 14 per cent higher than the average for the last 10 years.
The reason we tend to talk about things in five- and ten-year averages is some of our contracts are very significant in size. Our revenue stream, therefore, can have very big peaks and valleys over time. However, if you take blocks of five years, you get a better sense for how the volumes flow in this business.
We get an appropriation from Parliament but we also generate fees. Last year, we generated fees for service of $12.9 million, a 55 per cent increase over the average for the last five years and a 79 per cent increase over the average for the last 10 years. Part of the reason for that is that it was only in 2002 that we were first given the authority through a mandate review to charge fees for service.
In terms of revenues, they are almost the same as our value of contracts signed, about $1.7 billion. All of that led to the creation or sustainment of 18,300 jobs in Canada.
When we undertake our business practices across the globe, we have a strong focus on strong corporate social responsibility. We have a corporate social responsibility framework, as well as policies in that regard. We have a code of conduct and a code of business ethics that all employees must sign every year as a refresher, and we adhere to Government of Canada laws on corporate social responsibility, including the Foreign Public Officials Act, the conflict of interest and post-employment code for the public service, the Public Service Disclosure Protection Act and the Canadian Environmental Assessment Act.
As a Crown corporation, we are governed by a board of directors. We report to Parliament throughout the Minister of International Trade and work closely with our colleagues at the Department of Foreign Affairs and International Trade.
Our board is comprised of 11 members and we have five committees of the board. These include a governance committee, an operations committee, an audit committee, an HR committee and a policy and priorities committee. Those committees meet quarterly and give guidance to the board and the corporation. In addition, our chair of the board is in contact regularly with the minister to ensure we are in line in the government's direction.
I do not need to say much about the importance of exporting to Canada because I know this committee is well versed in that. With a population of 35 million, if we are going to have competitive companies in the country, we need to be able to export to build the economies in those businesses that can make them competitive against other nations with much larger populations and local economies to serve.
You have probably all been well versed in Canada's Budget 2011 and the Economic Action Plan to try to help Canadian companies in that regard, so I will not go into that.
Senator A. Raynell Andreychuk (Chair) in the chair.
The Chair: We would like to leave time for questions. I apologize for coming late; I had a logistics problem. I do not want to run into another situation where we do not have enough time for the questions.
You are giving us the papers and we will have them. Is there anything in particular on Brazil that you would want to indicate to us? Then I would like to open it up because I have a long list of senators who would like to question you.
Mr. Zablocki: I will turn to that now. In the Brazil market, the corporation has worked with a number of companies trying to get into different contracts there. We found that it is challenging for CCC from a number of perspectives.
I have explained that our business model is based on government-to-government contracting. The procurement laws in Brazil are not receptive to that type of business model. They like to go to competitive tender; their laws require it. It is only in exceptional circumstances where they will do a government-to-government direct contract. There is Canadian business going on in Brazil, but a lot is done through the competitive tender process, where Canadian suppliers can win business on their own terms.
The second component to Brazil is that for much of the procurement contracts there, in order to bid you need to be involved in a joint venture with a Brazilian company. As a result, it is more complicated for Canadian companies to bid on contracts and the role for Canadian Commercial Corporation in that environment is not as apparent.
That being said, given the pace of growth of the Brazilian market and given the number of opportunities that are there, we continue to pay close attention to that. As the committee is probably aware, in 2014 they will be hosting the FIFA World Cup for soccer, which will have about $11 billion worth of budget and infrastructure needs. That will be followed quickly two years later by hosting the Olympics. Again, there is about a $14 billion budget attributed to that, much of it for infrastructure build.
We have been down to Brazil. We accompanied Minister Fast on his trip there in June on the trade mission and are continuing to learn more about opportunities and how we might be able to penetrate some opportunities for Canadian companies in that regard.
To date, Brazil has announced that they continue to be on pace for their infrastructure needs with those considerable investments so there is no emergency status or exception to the procurement rules that has been identified to us yet to take advantage of. Nevertheless, it is a situation we continue to monitor closely.
On that, I can open the floor to questions.
[Translation]
Senator Fortin-Duplessis: First of all, I want to say that I greatly appreciated your testimony this morning because it affords us great hopes. I also want to greet Ms. Lostracco and Mr. Jeglic. You are most welcome.
My question is about Brazil's airports. In 2007, there was a lack of capacity and security. Indeed, there was an accident at São Paulo airport where an Airbus 320 crashed.
On top of this, there is also a lack of capacity in traffic control in the area, which led Brazil to take strong measures in order to upgrade the system and reorganize its civil aviation administration.
You mentioned that you do business country to country. You help Canadian companies to implement projects overseas. You also said that in another country — I think it was in Central America — Canada was involved in the construction or expansion of an airport and that that was done in an outstanding way.
Have measures being taken so that Canadian companies can use their know-how to increase aviation safety in Brazil?
Mr. Zablocki: In the area of aviation and airports, we only have one project in Ecuador. The first time we did something of this kind was with the Aecon Construction Corporation. They seem to have the same capacity in Brazil, which allows them to build all needed airport infrastructure. So, to the best of my knowledge, there is no real opportunity there for Canadian companies to approach the Brazilian government in order to get projects in this area. However, there are many opportunities in several other Latin American countries.
Senator Fortin-Duplessis: This was my only question. I am sure many senators have questions for the witnesses.
[English]
Senator Downe: I am just wondering about the structure of your organization. Do you have offices and people in these countries, or do you just work from Canada?
Mr. Zablocki: We just work from Canada, with the exception of Cuba. We have one representative in Havana, Cuba, who manages projects on the ground. It is a market that offers more risk than some other markets, so we want to make sure we are mitigating risk in that region. That individual will also do business-development work for the rest of the Caribbean region.
Where we have significant projects, such as the Quito airport, we will hire locally engaged staff or someone on the ground to work for the corporation in that region. However, we do not have permanent staff placed in foreign cities.
Senator Downe: You mentioned Cuba, and I will use it as an example. You mentioned the risk as well. How high is the risk in some of these countries? In Cuba, according to your annual report for the last 20 years, you facilitated $600 million in trade. How many accounts have not been paid?
Mr. Zablocki: I am pleased to say that, in Cuba, we seem to have a favoured-nation status, and maybe even a favoured-corporation status. We have been doing business in Cuba since 1991, and we have always been paid for all of the business we have conducted there.
In terms of that market, I think that is somewhat extraordinary. The committee may know that Cuba, as a nation, has selectively defaulted on some debts with other countries. However, our relationship with Cuba and our experience in the nation have been very positive. Other markets can be more challenging. However, as I mentioned at the outset, we have a contract that we enter into, as the Government of Canada, to establish, for example, an airport for the Ecuadorian government. We have a mirrored contract with the Canadian exporter to undertake that work. In that mirrored contract, we pass all liabilities and risks on to the Canadian exporter. As a result, if there are financial risks in a country, none of them are facing the Canadian Commercial Corporation; they are all passed through to the exporter. That is why it is important for us to have done our financial, managerial and technical due diligence on that Canadian supplier to ensure that we are comfortable that they can perform that contract and that they have an adequate balance sheet to backstop all of those risks.
Senator Downe: In your earlier answer, you indicated that you have a permanent staff in Cuba because of the risks. You also indicated that you have always been paid. What are the risks?
Mr. Zablocki: The risk is that that nation has selectively defaulted on other countries. We felt it prudent to put a person on the ground to learn firsthand if anything becomes less stable in that nation. It is not, by any account, our biggest business-line. Our Defence Production Sharing Agreement line did $1.4 billion in business last year. In comparison, in Cuba, we would do about $60 million per year. Nevertheless, because of the sensitivities around those defaults, we wanted to have a person on the ground.
Senator Downe: Tell me about your funding. How much do you receive from Parliament?
Mr. Zablocki: We receive $15.5 million.
Senator Downe: What do you generate on your own?
Mr. Zablocki: Last year it was $12.9 million. That $15.5 million has been relatively the same since 2001-02 when we used to do $700 million per year in business under the Defence Production Sharing Agreement. Today we do $1.4 billion. We have essentially doubled our efficiencies in that business-line.
Senator Downe: Do you return any revenue to Canada?
Mr. Zablocki: We have over our history, since 1946, but we have not in recent times. We target a very narrow profit- margin because we want to ensure that the fees we charge to Canadian exporters will not make them any less competitive when they are bidding on contracts with competitors from other nations.
The Chair: Just to follow up, you said that the difficulty in Brazil was doing government-to-government. We heard from other witnesses that we were at a disadvantage because of other governments making government deals. More particularly, I think it was Europe and, perhaps, China.
Mr. Zablocki: I cannot speak to that precisely, but I can give you my own personal impressions.
There are a number of opportunities to do government-to-government in Brazil, in cases where there can be exceptions to their typical procurement rules. Whether those circumstances have come up in situations where there is a unique opportunity with another nation, I cannot say for sure. That could be the explanation for why they may have been into these roles.
The committee will be well aware that the global economy is in a severe downturn. That has certainly heightened competition across all markets. Many governments are bringing more force to bear to help their local firms win contracts internationally. I certainly do not know precisely whether or not that is succeeding in Brazil. I think we are seeing that increased competition in all markets.
Senator Finley: Good morning. I am just trying to understand your business a little here. You mention the fact that you have done $1.6 billion of business in the last year. Does that, or does that not, include the defence sales to the U.S. government?
Mr. Zablocki: It does.
Senator Finley: How much of it is defence sales to the U.S. government?
Mr. Zablocki: $1.4 billion.
Senator Finley: You have about $200 million left over that you are doing on a different basis other than defence business?
Mr. Zablocki: That is correct for last year. That number will fluctuate. The Quito airport project, for example, was about a $600 million project, but it was signed in 2005. It gets delivered over a number of years because of construction. You will see peaks and valleys in those numbers.
Senator Finley: I understand that. However, the general relationship between the total amount of business and the business that in effect you have been granted a monopoly on is $1.4 billion to $1.6 billion in the most recent fiscal year.
Mr. Zablocki: Correct.
Senator Finley: Of the 140 staff you have, do you have people dedicated to the U.S. defence arrangements and then a number of staff for the other, commercial, kind of business?
Mr. Zablocki: It is not a perfect relationship, but, in terms of level of effort, probably about 65 to 70 per cent of our staff work in the U.S. defence line.
Senator Finley: I had not thought about the breakdown at that point in time, and so I took total sales to try to establish, based on the fee structure of $12.9 million, that your percentage must be eight-tenths of 1 per cent. I realize now it will be much higher because U.S. sales are part of where you are funded. The balance of $12.9 million comes from the $200 million in commercial sales. Is that right?
Mr. Zablocki: Correct.
Senator Finley: Your agency fee, if we can call it that, must be somewhere in the neighbourhood of 6 per cent. I know it probably varies.
Mr. Zablocki: It does vary. Included in the $12.9 million in fees are the financing charges we make for the trade financing line in Cuba. They are different from the fees we generate on a Quito Airport type project where we are taking a percentage of the value.
We have a pricing strategy in place. Typically we charge five per cent or less depending on the nature and risks inherent in the contract. We tend to be thin on our margins in terms of the actual contracts. However, we do charge commercial rates in Cuba for our financing.
Senator Finley: In the very early part of your preamble, you mentioned that your business was about risk management. I am assuming that $1.4 billion from the U.S. government is not really a great risk management process. I do not know. I used CCC to do this many years ago.
Does the risk management run to ensure that the Canadian corporation will be paid? If there is a default, does your organization pay that? I did not understand if that was part of your mandate or not.
Mr. Zablocki: No, we do not ensure payment in any way. There are insurance services available through Export Development Canada and I would not want to speak on their behalf on that front.
We insert ourselves and assist Canadian exporters in any dispute over payment with the foreign buyer.
Senator Finley: I am just trying to understand. I promise I will get to Brazil in a second, Madam Chair. You are not fundamentally part of the marketing effort. If I am a corporation, I look at what is available in the market place. I will make a marketing decision as to how or what I will sell to a particular country. Are you or are you not a part of that?
Mr. Zablocki: We are a very large part of the marketing effort. We have a practice in place where we enter into memorandums of understanding with foreign governments. In Latin America we have those in place with Colombia, Argentina and Peru. We work with those nations in a proactive mode to try to identify opportunities to which we match Canadian capabilities. In other circumstances, Canadian exporters come to us to say they have identified an opportunity. They want us to come along to explain how we can help that foreign government manage risk.
Senator Finley: What is the total value of your contracting activities in Brazil at the moment?
Mr. Zablocki: Zero.
Senator Finley: Are you involved with any Canadian corporations to market business in Brazil at this time?
Mr. Zablocki: There are two or three Canadian firms working with us on pursuits in that region. They are in various stages of development. It is very difficult for me to say if they will be successful at this point.
Senator Finley: I have one last question. Without giving away anything particularly confidential, can you indicate what business these two or three companies are in?
Mr. Zablocki: Two of them are in the defence sector and the other is in infrastructure.
Senator De Bané: I have two questions. First, when a government knocks on the door of CCC, does that imply that it will be sole source with Canada? Do they knock on other countries' doors at the same time they come to see you to help them undertake a procurement contract?
Mr. Zablocki: There are situations where they will talk to more than one government to try to fulfill a contract need. We try to put the best foot forward of Canadian capabilities and technologies and show how they are superior to competitors around the globe.
Senator De Bané: The second question is about the military segment of your business. I assume that Canadians participate in this unified domain of the military — not because they have a guaranteed portion of the American procurement market — because they are competitive. Is that right? Or they are guaranteed a portion of it?
Mr. Zablocki: Your second comment is absolutely correct. The Canadian defence industry has tremendous technologies and capabilities across a variety of spectrums, including repair and overhaul.
Senator De Bané: Seventy per cent of the business of your corporation is to supply the American defence needs; the DPSA and through NASA. I understand you have a tiny portion of the global defence sales to allies and like-minded nations. Why is it that we are competitive for the American market, but for your other segment of allies and like- minded nations, we are not as successful?
Mr. Zablocki: I am glad you asked that question because it was a point I wanted to raise earlier.
The global defence sales line outside of the U.S. is relatively new for us. In terms of scope, the U.S. government sells products to allies and like-minded nations. Last year, they did significant sales in that business line. In talking to their leaders, they have told us they can do billions more but they do not have the capability to fulfill that demand.
CCC is now an alternative to the U.S. foreign military sales organization, but not really in a competitive way as they cannot fulfill that excess demand out there anyway. This line is relatively new for us, and that is why you will see that our numbers have not been significant to date. I would suggest it is probably the line with the greatest growth potential for the corporation right now.
Senator Mahovlich: Thank you. I had similar questions. As I recall, we have been in the mining business in Canada since I was born. I was born in mining country. We had mines in Brazil in the 1940s. Was CCC involved in those projects?
Brazil now owns and runs mines in Northern Ontario. Is CCC involved in those projects?
Mr. Zablocki: No, mining is not a sector that the Canadian Commercial Corporation is involved in.
Senator Mahovlich: Is it all private?
Mr. Zablocki: Yes, it is private corporations. There are certain risks. The nature of how far mining works in terms of being exploratory and whether you will be able to generate the types of returns from certain mines can be speculative. It is not really a sector we deal with. Canadian firms seem to be able to negotiate and vet their own terms with foreign governments in terms of getting access to do mining in foreign countries.
On the flip side of your question, senator, we do not get involved in any activity inside Canada. We do not do any import type work.
Senator Mahovlich: Has Canada always had a reputation for exporting military equipment to different countries?
Mr. Zablocki: It is tough for me to say with any clarity, but for sure with the U.S. military, yes. We have always tried to maintain a North American defence industrial base, and I think the two nations have always seen the prudence in not bothering to duplicate a capacity in Canada that could be built also in the U.S. As we are such close allies, it would just be a redundant effort. The North American defence industrial base is supported through the defence production sharing agreement wherein both countries can benefit from each other's technologies.
Senator Mahovlich: The military in Cuba or in Brazil might have Russian military equipment.
Mr. Zablocki: They might.
Senator Mahovlich: They might purchase it from the Russians. Is that right?
Mr. Zablocki: Correct.
Senator Mahovlich: Thank you.
Senator Johnson: I am following up on Senator Finley; his questions were very germane.
You have said, as did the chair, that Brazil does not like doing government-to-government and prefers the tender process, but you have no joint ventures going on now. Is that right?
Mr. Zablocki: I should correct it if I misspoke there. I do not want to say that Brazil does not like doing government-to-government per se. What they do not like are direct contracts with a sole source type outcome. They like to go for international tenders and get competitive bids. Our business model in a government-to-government contract is to facilitate more direct contracting.
Senator Johnson: That explains it better for me.
What about the visits by our Prime Minister and the discussions with President Rousseff? Do you think that enhances your chances in terms of Brazil and dealing with the business community there?
Mr. Zablocki: Absolutely. I was inferring earlier that governments around the world are becoming more competitive in terms of the global economy, and the nature of the relations between nations can play a substantial role in assisting local companies to win contracts.
Senator Johnson: What are your plans for the future in this respect? Do you have anything going on at the moment that we can mention in our report?
Mr. Zablocki: We do have three pursuits, as I mentioned earlier, with companies in the Brazilian market. Probably in terms of greatest opportunity, we are keeping a close eye on infrastructure opportunities around those two significant events that Brazil will be hosting.
Senator Johnson: How are you finding Canadian business? Do they prefer to do business in Chile or other countries compared to Brazil? Do you find that kind of attitude amongst the Canadian businesses you deal with?
Mr. Zablocki: It is hard to say that they prefer it. However, our business model is more facilitative in other parts of Latin America, where they do like to identify a solution and go into a sole-source contract where they need things on an urgent basis or where they recognize the significant cost savings and the risk reduction they get by going through the Government of Canada. We have many more pursuits and contracts under management in other parts of Latin America than in Brazil today.
Senator Johnson: They do business quite differently than Brazil does.
Mr. Zablocki: Right.
Senator Johnson: That would be the area we would have to focus on in terms of our work there.
[Translation]
Senator Robichaud: You provide the service to foreign countries. You more or less guarantee that Canadian companies will be able to fulfill their requirements. You also provide service to Canadian companies.
Now, do other countries that do business with Brazil have a corporation similar to yours to help them overcome the different problems they may encounter? Or is Canada unique in that regard?
[English]
Mr. Zablocki: Canada is unique in how we are set up to do this type of work. That is not to say that other governments do not have their own strategies to try to assist competitively their local firms. For example, the Chinese government, as you are probably aware, comes in with very low financing offers. Some of them will put in place entire packages of services where they are offering a financing opportunity. They are offering a company to do the infrastructure, and they are maintaining very close relations at the most senior political levels with people in that country to try to assist.
There are a number of forces that other governments bring to bear on that. For us in Canada, CCC is relatively unique. The only other country that has a CCC-like organization that we have been able to identify is Spain, which has an organization called Isdefe, but they are much smaller than we are in terms of their business volume and probably newer as well.
Senator D. Smith: I will ask my question to the next presenter from Bombardier, but I will ask you the gist of the same question and see how you respond.
Brazil manufactures airplanes by Embraer, and Air Canada uses a lot of them. Of the smaller version, there were about 45, and of the bigger, about 20. It is something in the range of 60 airplanes. If there were Brazilian airlines for which Bombardier was trying to sell airplanes, would it be a level playing field? It is obviously a level playing field for Embraer to compete in Canada. Would it be a level playing field for Bombardier to compete in Brazil in the sale of airplanes, in your opinion?
Mr. Zablocki: That is hard to say because we deal with government purchases. Were the government of Brazil trying to purchase aircraft, we could assist Bombardier or any other Canadian supplier in that domain and try to negotiate a deal to help sell the Canadian product to the government. Many of the civilian aircraft sales are done at the business- to-business level, and that is not a market we tend to play in.
Senator D. Smith: Do you ever hear opinions expressed on that issue as to whether it is a level playing field?
Mr. Zablocki: It is tough for me. Particularly in terms of Brazil, I would not say I have.
Senator D. Smith: Thank you.
The Chair: Thank you for appearing and explaining not only the corporation but also your work in South America. As you can see, we are focused on Brazil. Your testimony is helpful indirectly as to what we maybe should be doing and are not doing in Brazil. Your piece in our study is extremely helpful to know as to where you are positioned and what your possibilities are. Thank you for appearing this morning.
We will now change panels. On our second panel, continuing this study, we have from Bombardier Inc., George Haynal, Vice President, Government Affairs; from HB Global Advisors Corp., Michael Woods, Partner; and Élie Ducharme, an articling student. Is that correct?
Élie Ducharme, articling student, HB Global Advisors Corp.: That is correct.
The Chair: You are brave. I am not sure that as an articling student I would have presented before the Senate.
Finally, from LED Roadway Lighting Ltd., we have Charles Cartmill, President and Chief Executive Officer.
As I have indicated separately to our panellists, we are engaging in our study on Brazil. We have heard of companies and initiatives that have had difficulties working in Brazil. We have heard from others that we have missed opportunities that were open for Canadian participation. We now have some experience at our table. We would like to hear from you in short opening statements, and then we hope we can engage in a dialogue of questions and answers with the senators.
Mr. Cartmill, you are first. I do know you will do a show-and-tell. It is all within your five minutes. Welcome to the committee.
Charles Cartmill, President and Chief Executive Officer, LED Roadway Lighting Ltd: Thank you very much. This is my product and I want everyone to see it. When I am finished with my presentation, I would encourage you to come by and touch it because there is a secret to the technology. You will not even know that it is on. It will light a roadway and it operates so coolly that the electronics last for 20 years. That is the secret we have that separates us from the others.
I am Charles Cartmill, President and Chief Executive Officer of LED Roadway Lighting. I would like to thank the Senate committee and other panel members for the opportunity to provide testimony regarding Canada-Brazil trade relations and specifically the challenges faced by Canadian exporters.
We are a Canadian manufacturer of LED-based lighting products for street and area lighting applications. We are headquartered in Halifax, with a 55,000-square-foot plant manufacturing facility in Amherst, Nova Scotia. Our products are currently installed in 24 countries in over 300 cities and utilities.
Our interest in the Brazilian market was originally piqued after participation in a federal government-led trade mission earlier this year with Minister Fast. Additional visits to the market have taken place and we have received tremendous support from the Department of Foreign Affairs and International Trade, DFAIT, including potential client and partner introductions. We have found the services of DFAIT — in particular, the trade commissioner services — to be invaluable when entering new markets. We see substantial opportunities in the market, based on understanding of forecasted spending on clean technology and infrastructure projects, particularly as we approach the 2014 World Cup and 2016 Olympics.
The market potential is substantial. With some 14 million streetlights, the older technology nationwide in Brazil, the market is approximately $7 billion Canadian, including approximately 500,000 fixtures in Rio de Janeiro and 560,000 fixtures in São Paulo alone. Currently energy costs are at 27 cents a kilowatt Canadian and significant maintenance challenges make the Brazilian market an ideal fit with our energy efficient LED-based technology, which requires virtually no maintenance and provides up to 80 per cent energy savings.
Turning now to challenges and obstacles for a small to medium-sized enterprise, we currently have approximately 155 employees at LED Roadway Lighting Ltd., so we are an SME. For an SME such as LRL, entering any new market is a challenge and a costly endeavour. We found several regulatory and other challenges with the Brazilian market that need examination, such as high tariff barriers and an import duty of 60 per cent. Municipalities and other end users have expressed the desire to purchase our products on large scale, but the high import duties put LRL at a significant disadvantage from a landed cost perspective.
The complicated customs mechanism results in significant costs and time delays. LRL has experienced significant difficulty with sending products for evaluation into the country. Two customs clearance regimes have been identified — express and formal. Despite the claimed custom clearance times provided for either regime, we have found in practice that clearance can literally take months. Further, our attempts to make use of the so-called express regime were denied.
The delays inherent in the current system could potentially prove quite costly to LED Roadway Lighting Ltd. In particular, delays related to customs clearance of evaluation of product for an upcoming tender for São Paulo have potentially jeopardized approximately $280 million in new business, as evaluation samples are still trapped in the complex customs clearance processes.
Issues with financing and export credit insurance are next. LRL has been a client of Export Development Canada for approximately 10 years. Our consultations with EDC have revealed that, in many cases, Brazilian municipalities may not qualify as an insurable based on current policies.
Review of tariff barriers, in particular for clean technologies and energy efficient products, is an action item to increase probability of success for SMEs in the Brazilian market. I will repeat: review tariff barriers, in particular for clean technologies and energy efficient products; streamline customs process to reduce supply chain costs for all concerned. In light of EDC financing and credit insurance concerns, investigate a mechanism whereby the Canadian Commercial Corporation and Export Development Canada could provide financing to infrastructure projects that promote green technology and generate energy savings and receive a return based on energy savings realized.
Simplify the process for CCC involvement in infrastructure projects. Our discussions have led us to believe that early involvement of CCC can facilitate a more expeditious request for proposal process. The city of São Paulo actually suggested to us that CCC would be the best viable option for them. They have an election for mayor next year and they would like to get started with the process, and their current RFP process would delay the initiation of the largest energy program that they have initiated in Brazil, which is in São Paulo, and it is the conversion of these lights.
As Brazil has been designated a global commerce strategy priority market, business and government organizations need to develop cross-cultural linkages that foster trade and economic development for both countries. The traditional view of most companies seeking export opportunities led them to simply look south of the border. Current global economic realities demand a different approach. Programs that prepare current and future business leaders for doing business in Brazil will pay dividends in the future.
A recent Vancouver Sun article by Ray Castelli, CEO of Weatherhaven, suggested that Brazilian Portuguese language training is one way to increase the likelihood of trade development with a country that in a few short years will likely be one of the top five global economies.
We ourselves have recently hired Brazilian, Portuguese and Spanish commerce graduates from university.
George Haynal, Vice President, Government Affairs, Bombardier Inc.: I appreciate the opportunity to address honourable senators on what is a very important and timely relationship. I will congratulate you, if I may, on taking this up.
I do international relations for Bombardier. We live in a complicated world. We make planes and trains, and it is quite pertinent for me to stress the fact that we make trains, because that does enter into the Brazil equation, although most people would not be aware of that.
Bombardier is the world's third largest manufacturer of civil aircraft. I will come back to that in a minute. Our only competitor in the field of regional aircraft in the past was Embraer, a flagship of modern Brazilian manufacturing that is a very strong competitor.
We are also the world's largest manufacturer and supplier of rail solutions. I think most people in Canada are not conscious of that because the market in this country is not on the scale that would bring this to public attention. Nonetheless, that is our position; we are the largest in the world. As a way of staying the largest, we are also in the forefront of developing rail technologies, including in urban transit. That is very relevant to the Brazilian case.
I think the Embraer-Bombardier trade relationship, which was dramatic at times, has been the image of Bombardier's presence in and relationship with Brazil. I think that is incorrect, and I will say a few words on that. It is also important to understand the context and why that issue became so public and had so much resonance.
The context was a lack of context. In another life I was very much concerned with the relationship, totally unrelated to my present job. However, to use a terrible analogy, the relationship between Canada and Brazil was so thin that it was like a drum. Every time you dropped a pebble on it, it kept bouncing and was difficult to manage because of the absence of context. In contrast to that, our relationship with the United States is like thick, green grass. You can drop a boulder on it and eventually there are ways to put the context to use in managing individual issues.
I have been waiting for 20 years to use that analogy in a broader context and you have been the victims of that. It is important to understand that individual issues in a case like that have far more resonance than they probably deserve.
We are very strong competitors. Embraer is an excellent and aggressive competitor. They had been the only competitor to us, as I said. It is worth noting that they are no longer that. There is no longer a duopoly in the regional jet aircraft market. Other entrants from Brazil, Russia and China have come into this market, so the playing field has changed. The Canadian and Brazilian governments are working hard to ensure that there is a level playing field for all of us in this global market, and that creates a different dynamic for everyone, including the manufacturers who are involved there.
I am happy to answer questions on that if you like, but I think it is important to set that in context. There has been significant progress made between our governments and other governments in this field in establishing international rules that will avoid trade conflicts that are unnecessary and unjustified.
The other part of the aircraft market that is worth mentioning is that we make not only commercial aircraft but business aircraft. In fact, by value, Bombardier is the largest manufacturer of business aircraft in the world, another fact that is not very well known, and Brazil is a very important market for us in business aircraft. There are over 120 Bombardier business aircraft in service in Brazil, so it is a very big market. We have a service centre there. We are very much embedded in that universe in Brazil, so it is not necessarily the picture you might have been given by earlier exposure to this issue.
We can come back to that. I am sure you will have questions on it.
Without abusing my time, I would like to say that we are present in rail in Brazil. This is a very important dimension of the relationship from our point of view. Bombardier first established a presence in the rail market in Brazil in 2001 through an acquisition, and it is one that is focused very much on the maintenance and servicing of metro vehicles in São Paulo and beyond, and that business has now grown. We have 200 employees working in Brazil in the rail sector alone.
The most dramatic thing I can report to you in that field is our recent success in securing a major contract to build a revolutionary monorail system in São Paulo. This line, which is in part in preparation for the World Cup and other things, will literally revolutionize urban transit in a part of the city, cutting transport times from well over 2 hours to 40 minutes. It is a very small footprint. It is technology developed in Canada. In fact, the program was initiated out of Kingston, out of our engineering centre there. It uses an advancement of technology that we developed with our automated people mover system, which many of you will have seen in service in Vancouver and elsewhere. It is now a technology that we are marketing worldwide and have also succeeded in installing in Saudi Arabia and in other markets.
Again, we are present on both sides. We are competitors and partners. It is a big and complicated world. We have a great interest in making sure that our partnership with Brazil and our relationship with Brazil continue to grow and expand.
Michael Woods, Partner, HB Global Advisors Corp.: Ordem e progresso. This is the motto that appears on Brazil's flag. It is Portuguese for "order and progress." When our Heenan Blaikie team was in Brazil with Minister Fast this past June, I noticed how proud Brazilians were of their nation and that motto. It says a lot about their country, just as "peace, order and good government," says a lot about Canada. Both phrases have more than a little in common. It is the same with our two histories and, I hope, with a common future.
[Translation]
Heenan Blaikie is grateful for the opportunity to appear before the committee today. I will start with a few words, keeping in mind the importance of the question and answer period. My name is Michael Woods. I am a partner at Heenan Blaikie, working just down the street at our Ottawa office.
I am joined today by a representative of the "next generation," Mr. Élie Ducharme. He is a hard working articling student who has a global focus, like most of his young friends and colleagues.
[English]
I have been at Heenan Blaikie for five years, having spent most of my career in trade law and trade policy at the Department of Foreign Affairs and International Trade. Given my DFAIT background, which includes postings overseas, I am delighted to report that Heenan Blaikie's experience on Minister Fast's trade mission was most positive.
We know how much hard work it took to put together this initiative, and we want to thank Minister Fast and his team. In particular I want to thank John Allen, Assistant Deputy Minister for the Americas, and his Brazil team at headquarters, including Sylvain Fabi, Hilary Esmonde-White and Jane deVille of the Latin America and Caribbean Bilateral Relations Division. Karen Sleiman, Jennifer Gowan and Carrie Marr of the International Trade Missions Division, which is a very important division, played a vital role in the success as well.
Of course we do want to highlight the great work of Ambassador Jamal Khokhar and his team, including Consul Generals Abbie Dann, Charles Larabie, and Senior Trade Commissioner Ed Jager and the whole DFAIT team in Brazil. They are doing a very important job and they are doing it very well.
The preparation and attention to detail were evident from the early days of the initiative and, of course, the minister's contribution was vital and I would say exceptional during the infrastructure mission, as was the strategy of focusing on infrastructure and targeted sub-sectors and addressing it in the context and the theme of the upcoming Olympics.
I have been involved with trade missions in various ways since 1983 and seen them from all angles. I am glad to say this time I got to be a participant and not a hard-working trade commissioner organizing everything.
In the interests of time and considering the committee's own priorities, I will simply say in my view trade missions are a first-class way to open new doors to business relationships and opportunities and I will leave the rest of that discussion to any questions you may have.
I also want to indicate that you may have some questions about Heenan Blaikie and Heenan Blaikie global advisers. I want to clarify that we participated in the mission as HB Global Advisors Corp., an international consulting company affiliated with our law firm, which gives us added flexibility and gives us the ability to have engineers, geologists and former diplomats, a whole range of professionals that complement our legal work.
Even before we started preparing for the June mission we were aware of many opportunities in the $800-billion Brazilian infrastructure market. A great deal of this is directly related to the high pressure that Brazil faces in the double mandate of the 2014 World Cup and the 2016 Rio Olympic Games. The mission helped us meet the right people and explore available opportunities and related challenges. During the mission, my colleague Frederico Marques, our in-house Brazilian lawyer, and I were able to promote, for example, the use of public-private partnerships and the Canadian capabilities in that regard, with a particular Canadian stamp to it.
I must say that I regret that Frederico is not with me today. He is on an airplane heading to Brazil, where he spends a great deal of his time working on various duties that he has in that context. I have learned a lot about Brazil from Frederico. He has been a real asset in that regard.
Getting back to the mission, it heightened our awareness that Brazil has become an economic giant and aspires to a leadership role in the global community. I have seen in some of the testimony that the Senate committee may be considering a trip to Brazil. I would recommend that. This trip to Brazil on the trade mission was my first since the 1990s, when I went as a government official trying to negotiate a foreign investment agreement. You really do have to see this economic miracle and the sense of optimism in that country for yourselves.
In our view, the time has come to capitalize on the opportunities that Minister Fast's mission identified. It is time to build on the goodwill and promise of Prime Minister Harper's August visit and what he underlined. It appears that Canada and Brazil are two relative unknowns to each other and they are reaching out to each other. That is what we are doing now. The problem for us is here in Canada — and we should be very much aware of this — we are not the only ones who want to forge a special relationship with Brazil.
I heard a comment before coming into the room that perhaps we are too late, or we should have or could have or whatever. I do not think we are too late. If we look to a special kind of strategy that draws on the best that Canada has and makes Canada the most attractive to Brazil, we can hit the winning combinations.
Particularly important to us at Heenan Blaikie is the strategy of using the Olympic connection. Just as sports has done in a lot of other areas, the Olympic link opens up interesting possibilities. As you may know, one of our firm's senior partners, Marcel Aubut, is the president of the Canadian Olympic Committee. He has been instrumental in bringing Olympic success to Canada and owning the podium as per Vancouver 2010. We are still looking to own the podium in Sochi and Rio and at the Pan-Am games as well. As the President of the COC, he is working hard at building special links between the COC and the Brazilian Olympic Committee.
On his August visit to Brazil, Prime Minister Harper signed an MOU to further strengthen cooperation on the government-to-government level on that same subject — the Olympics.
I think we should start looking at the elements of a strategy that could link the dreams of the athletes, the young Canadians and Brazilians who want to own the podium themselves, to the objectives of what are really two industrial giants. Let us work together and create a strong and lasting legacy. Let us help Brazil do that in the form of new, modern infrastructure with lasting benefits. Let us find where we fit.
On trade negotiations, we encourage the Government of Canada to follow through on the opening of the free trade dialogue with the Mercosur countries. It will not be easy but I believe we are making a good start. We should approach those negotiations with an open mind and a sense of purpose, and we should make sure that those discussions are linked closely to the reality of the Canadian private sector and its key commercial objectives.
On visas, I like to tell the students whom I work with when we do our own little trade missions that there are three things they need: their hotel room, their airplane ticket and their visa. Once they get those three things, everything else will fall into place, especially if they can rely on the trade commissioner in that particular country.
Visas are a big issue for trade lawyers because it is not really a trade law issue, but if you cannot get to see the client or you cannot bring the buyer to Canada and you cannot sit down face to face you have a big problem. As I say, most business people will tell you that it is a bottom-line basic requirement — quick and easy access. We should put Canada in a position where we can do something creative. In my view, the best would be like the EU where there is no visa requirement.
With respect to team approach, we should leverage what we have and work at a collective Canadian strategy. I saw the beginnings of that in June, and we saw it even more in August. This will advance things for Canadian business. Let us begin with a basic strategy assessing where Canadian capacity fits best in the Brazilian context. If we do not do that, our trade competitors will do it.
My friend, Mr. Cartmill, quoted Mr. Ray Castelli, who works with us in partnership at HB Global Advisors Corp. in Vancouver. He helped me by bringing the article that he wrote in the Vancouver Sun entitled "Should our kids be learning Brazilian Portuguese?" In the article, Ray Castelli provided a testimonial on the importance of government leadership. His company, Weatherhaven, is an example of Canadian enterprise taking advantage of specific expertise in the context of Canada's resource economy and how we have addressed it and Brazil infrastructure needs.
I hope that I have not gone beyond my time. We are grateful for the invitation and look forward to questions from the committee. I encourage you to go to Brazil. We look forward with great interest to your report.
Senator D. Smith: My question is mainly for Mr. Haynal, but any others may comment as well. You probably heard my question to the last panel.
Mr. Haynal: I had a sneak preview.
Senator D. Smith: My wife and I have a condo in downtown Toronto so I regularly fly Porter Airlines, as do other senators because it is right downtown. I have flown Embraer, Air Canada and others many times. I raised the question as to whether there is a level playing field in terms of our ability to compete in Brazil. Maybe you almost have to compare us as with airlines because I noted well over 100 private airlines in Brazil.
I could phrase the question this way: There was an inference in your comment that it was not a level playing field in the past. Could you explain the fundamentals of that? You left the impression that it is better today. To the extent that the field is still not level, what needs to be fixed?
Mr. Haynal: You ask a very big question.
Senator D. Smith: I know. I am not on the attack but would just like to know the facts.
Mr. Haynal: The facts are both history and the future. The WTO answered your question about a level playing field between our two companies' programs to develop new aircraft. Mr. Woods would probably be in a more advantageous position professionally to comment on those judgments. The outcome of that dispute was a transparency and a desire to ensure that there was no unnecessary misunderstanding about how markets were approached.
The issue is not necessarily domestic markets; the issue was a global market for aircraft that is full of inconsistencies and not necessarily related to us or to Embraer. It is a messy, very competitive environment where we are both reasonably small players compared to the giants. It is very dynamic.
Ultimately, the competition depends on the product. When one product serves a market in a particularly advantageous way, it will find its way into the market and establish itself there. That is why I say that both the history and the future are important in this respect.
When Embraer sold its aircraft to Air Canada, it was of a size larger than what we made. That was a competitive reality. Now, we are manufacturing what will be a generation-changing aircraft in the CSeries, which is larger than the current class of regional aircraft. It is a continental aircraft that is finding wide acceptance around the world. There are many companies with whom we are talking, including in the Americas. There is no reason that they should not do well in every market where there is a demand for them. I would have to include Brazil in that category because the CSeries aircraft stands unique and has established its place in a category where there is no competing aircraft presently being manufactured.
Talking about disequilibrium in playing fields is taking on an issue that is far beyond that which is between us and our competitor in Brazil.
Senator D. Smith: Is there anything that still needs to be fixed?
Mr. Haynal: Do you mean between us?
Senator D. Smith: Yes.
Mr. Haynal: It needs to be managed, not fixed; and management is the affair of governments, not us. We are not parties to trade disputes, which are managed by governments. The rules under which companies operate are managed by governments. We do what governments tell us to do, permit us to do and encourage us to do. Our job is to make a competing aircraft and to do so on competitive terms. We are doing that, and we challenge our competitors to do the same; and then the market can decide.
Senator D. Smith: I believe Mr. Woods' comment on the WTO decision —
The Chair: We will leave it to Mr. Woods, if he wishes to comment at this time.
Mr. Woods: I brought Mr. Ducharme with me in case I was asked a hard question.
Mr. Ducharme is an articling student. What we are talking about is much more important to him and his generation than to us. On the aircraft wars, which are now history, I must say that on the mission they did not come up at all. When you fly airplanes in Brazil and Canada, chances are there will be parts from the other country built into those aircraft.
Are there trade issues? Of course there are trade issues with Brazil. I do not want to avoid the question, but something struck me about Brazil when I was there. I was in Brazil 16 years ago trying to negotiate a FIPA, which was a model of the NAFTA chapter 11 — it was the Cadillac of investment treaties. I went down to Chile, not because of me but because of the hard work of many smarter lawyers at DFAIT and the Department of Justice. We ended up with a free trade agreement with Chile: They were attracted to NAFTA. We took that same heavy model to Brazil in 1994- 95 and it got us nowhere. If we had been more flexible and had taken a different approach to the barriers in Brazil, perhaps we would be in a better position today.
There are high tariffs in Brazil and non-tariff barriers in the form of taxes, both federal and state, applied to imports. There are registration, licensing, customs, trade valuation and remedy issues. There are registration issues. There is a lot of bureaucracy. There are problems with customs compliance and uniformity. Export subsidies are an issue that will not go away. This is true in the WTO context because we cannot forget that the Doha round crashed and burned. It is not as though we can rely on the Doha round to create new regimes so that governments around the world are on their own.
Government procurement may have been a problem, which I believe came up in your discussions with CCC and others. There are intellectual properties and services issues. As trade lawyers, we could go through the list and identify the issues. The Government of Canada has decided to knock on the door about Mercosur. That is one potential solution. However, I think we need a creative trade policy that looks at the real issue — and for me, the real issue is market access.
There is no point in a relationship that can be so important to Canada, vis-à-vis Brazil, to worry about hunting for trophies in terms of a broad agreement. What you want is market access for the companies like Mr. Cartmill's that can do something in that country, and then you want to address the issues. I think we can do that and we are doing that. As a trade lawyer who is no longer with the department, the problems and issues I face are those practical market access issues.
Yes, there are a lot of trade issues, but we are doing business in China. People want to go to China. Brazil does not have the time zone problems; it is part of the Americas. There are fewer problems, I would say, in terms of market access and trade policy issues with Brazil than with China.
The other thing is that we are talking about a country that is changing. I was there in 1990, and now in 2011 I see a country that reminds me of when I was young at the time of the centennial. When I was really little, we were almost still a colony and then we burst into this fantastic sense of optimism. That is what is happening in Brazil right now.
If you go there and talk to the Brazilians, you will see. They have a confidence. There is a crisis of confidence around the world, but not in Brazil, and I think it is contagious.
The Chair: I have market access problems right here. I have several senators in line to ask questions and we have less than 20 minutes in our time slot. I will ask for short questions and short answers. If we all work at it, we can accomplish it, with some optimism from your chair.
Senator Finley: I will make my question as short as I possibly can, seeing as we have 20 minutes for 12 questions.
Several of our witnesses previously have mentioned that there is a growing air of protectionism in Brazil. We have seen that in a variety of industries, the automobile industry being a recent and classic example.
Incidentally, I congratulate Bombardier on their successful bid to win the light rail system in São Paulo. Obviously, you are a global corporation, but this contract was actually won by Bombardier Transportation which, if I recall, is headquartered in Germany. Is that right?
Mr. Haynal: Yes. The head office of that component of the company is in Germany.
Senator Finley: Where will the components for your particular project actually be made?
Mr. Haynal: Everywhere. The engineering is being done in Kingston. We have an establishment of roughly 300 people there, and this is one of their keystone projects. The prototype of the train will also be made in Kingston and then the train itself will be made in our plant in Brazil, with components coming in from a global supply chain.
Senator Finley: That presumably was part of the arrangement and negotiation by which Bombardier would be successful. I know there are other reasons, such as technology and science, et cetera. However, there is obviously a requirement to somehow partner with or to provide what we used to call offsets to the purchasing country.
I want to go back for a second to the airplane incident that my colleague Senator Smith mentioned. We had a person here — I do not recall who it was — who indicated to the panel that Embraer was a large purchaser of Canadian parts, including engines from Pratt & Whitney Canada.
I do not recall ever having seen a Pratt & Whitney engine on an Embraer aircraft. The engines are produced by General Electric and, if I remember, they are out of Cincinnati, Ohio.
Bombardier, on the other hand, has used Canadian-built Pratt & Whitney engines, which were built for the large part in Montreal, and Air Canada purchased the Embraer airplanes. Where was the offset here?
Air Canada bought X number of airplanes, I do not recall how many, both of the I-75 and the I-90. What was the value of the offsets? Do you know?
Mr. Haynal: Senator, I have no idea. I am sorry. I really do not know. You will have to ask Air Canada that. If anyone knows, I guess it would be them.
Senator Finley: I thought the perhaps the competition might have an idea of it, at least. No? Okay. Maybe I will ask Air Canada that question. I would love to explore this more but we are running out of time.
I have one question, if I may, for Mr. Cartmill. This problem with the customs clearing on the prototype equipment that you have in for a bid, could you give me an idea of the time frame here and what we might be able to do or to recommend that our government do to try to compact that clearance?
Mr. Cartmill: First, I will say that we will find a solution around that regulation; however, it would be helpful if our government could work with the Brazilian government to align processes and streamline it.
Because of protectionism, they have eliminated the ability to ship direct to a company that does not have an import licence. When the city of São Paulo directed us to send our samples to their engineering department to get them put up, they got held up. However, we found a potential partner with Canadian roots, 2,000 employees, and they are now importing for us. We have audited them; they have been up.
The key thing here is that the regulations are there. That is history. It is a barrier, things that have been around, but they are a lovely, warm people. They want to deal with us and they like Canadians.
This manager of the lighting department, which is a huge group in São Paulo, invited me out for lunch when I went on the second trip with the Prime Minister. When we left, he held me back from his other employees that came with us and the DFAIT person and he gave me a couple of tips. He told me he would like to see us win this and he gave me help on what we should do. When we parted company, he gave me a great big hug. When I tell people this story, they ask, what did you do? I said I gave him a hug back.
Senator Finley: Unfortunately, this committee is not able to mandate or recommend hugs, but thank you very much.
Mr. Cartmill: In comparison to the U.S., we do not have free trade. I do military work, as well. We have been blocked out of everything in the United States. With Buy America, the American municipalities find it almost impossible; we have had to set up manufacturing in the U.S. It costs us 20 per cent more. In the U.S., they really want to buy from themselves, anyway. They want made-in-America products; they want American companies.
In Brazil, Canada has a fabulous reputation on technology. We have Brookfield there, Valet. There is a tremendous amount of history. In fact, Canada helped Brazil electrify 100 years ago and some of the fixtures we put up 100 years ago were pointed out to me; they are still operating. They can believe we have the best light in the world.
Senator Finley: I know exactly how those fixtures feel.
Mr. Haynal: I want to make a quick comment about the senator's reference to protectionism. We have to look at trajectories. Brazil was a completely closed market well into the 1980s, and the process of liberalization there has been ongoing now for about 20 years. They are on a trajectory toward easing the economy, unfortunately at a time when a lot of other economies may be heading in the other direction. In this context, it is important to keep that in mind.
Senator Finley: Some of the decisions made for railroads or aircraft fleets have extremely long life cycles. If you happen to be doing the selling, negotiating, or marketing at a point in time where that protectionism is spiking — simply because of the world economy at the moment — it has a long-lasting effect. That is why I was asking about the cyclical thing. Thank you.
Senator De Bané: Mr. Cartmill, can you briefly tell us the different countries you have been able to export your products to?
Mr. Cartmill: We are in the U.K. and we are doing some sub-assembly with Sony. We have a huge business in the U.K. We are in Norway. We are going to receive part of an $8-million project. We are in Colombia and Mexico. We are expecting something very big out of either Costa Rica or El Salvador. We are in Switzerland, throughout the Caribbean, and in Iceland. It goes on. They love our technology anywhere we go.
Senator De Bané: Canada?
Mr. Cartmill: We are doing very well in Canada, but we find it is much easier to sell outside of our home area of Nova Scotia. Everyone is so worried about looking like they are giving us preference. The City of Edmonton selected us exclusively. We have shipped 4,000 or 5,000 lights to Edmonton. Thank you, Edmonton. Thank you to Ottawa for giving Halifax the big shipbuilding contract.
Senator De Bané: Mr. Cartmill, I understand the contract for São Paulo is imminent and is coming soon. Is that right?
Mr. Cartmill: Yes, very quickly, and that is why CCC is important. I know the hugs do not mean a lot, but everywhere we have gone, they are helping us eliminate the barriers.
Senator De Bané: We are politicians. We understand.
Mr. Cartmill: Everyone we have visited has gone out of their way, including the standards group, engineering groups and contractors. We are working on five different initiatives at the same time to get to a point before the end of the year. I met with the CEO of Brookfield and the mayor of São Paulo. That is like meeting the Prime Minister. Even he touched the fixture after I made the presentation.
Senator De Bané: Is that a viable solution to establishing a manufacturing plant there?
Mr. Cartmill: We definitely have the ability to do the electronics here. It is an electronic product. There is a light engine and an electronic driver. We can do that. We are shipping the brains of it — the heart and soul — from our Amherst facility. We can do the assembly. They are heavy, so we need to get castings made in Brazil. You have to have a global supply chain. We can still comply. We found a Canadian company in Porto Alegre that has 2,000 employees; they build bank machines. They are going to be a perfect partner for us. We have a straw-man type of arrangement. We have audited each other. Most of it is trusting people.
[Translation]
Senator Fortin-Duplessis: First of all, I was pleased to hear your testimony. I will be brief. I have two questions to ask you.
You no doubt have a long-term vision. I read somewhere that Ms. Dilma Rousseff very often meets her closest advisors in the morning in order to deal with a problem that seems to have no solution, which is the issue of China. They are trying to see how Brazil can become more competitive and find a solution to this problem. Since 2005, Chinese goods are flooding the Brazilian market. The short-term effect was that Brazil has put in place very specific tariffs for manufactured goods of Chinese origin. Brazil also has strict custom controls and antidumping procedures.
If Brazil considers that China may be a problem, they would probably try to find solutions. In your opinion, will expected changes in Brazilian policy towards China have consequences? Can they affect — whether positively or negatively — an eventual free trade agreement between Canada and Brazil?
[English]
Mr. Cartmill: I believe it will help us. We find two things in Europe and Latin America. The Chinese we run into the LED business were one of the first out there but they invariably find a way to cut costs, reduce quality and run into trouble. It is a high-tech product and they have been eliminated in Europe. Throughout Latin America we are continually asked to help the client write a defendable specification. China is referred to as the people they want to defend against. I would say it is helping.
[Translation]
Senator Fortin-Duplessis: Does anyone else wish to comment?
[English]
Mr. Woods: One of the key words you mentioned is "competitiveness." As Mr. Haynal has pointed out, Brazil has a history as a country that is large and not dependant on international trade to the degree many other countries are. It traditionally protects its labour force, where the default position is protectionism.
When the places I travel — like Saudi Arabia — want to be competitive, they open the door to investment and to trade with countries who are at the level of Canada. The relationship between Canada and Brazil — the government and business level — seeks to take advantage of the president's desire to become more competitive. I think that is a win.
I think China is a problem for all countries in terms of access to our markets. The WTO accession protocol gave WTO members a special ability in terms of anti-dumping safeguards and countervail tools. Canada is using the same thing in challenging products brought into the country based on a non-market analysis.
I am not qualified to comment on the politics of Brazil and China, except to say it is an interesting discussion. Based on his broader experience in this regard, perhaps Mr. Haynal can comment. There are some politics involved, based on the fact that they see themselves as reaching out for leadership for a certain segment and marching from a developing status to a new kind of status.
I agree with Mr. Cartmill. When you get to Brazil, you talk to people and you get your big hug because you are from Canada. You will find most people want to deal with someone like my friend, Mr. Cartmill. The Chinese come in as an army. They are cheap. They build and they leave. When it does not work, who do you call? That is a practical consideration.
It is complicated in terms of a free trade agreement. I think it creates opportunities for Canada at the other end of the scale.
Senator Johnson: I wonder if you could just explain about the customs issue. We had witnesses yesterday talking about the problem that people are experiencing. It is one of the biggest complaints we have had about getting involved with Brazil.
Mr. Cartmill: Usually cities pilot products. They put it up, and they look at it for six months or a year. In São Paulo, they have been piloting three different companies for about a year. However, they liked our technology so much that they opened up that opportunity, at this late stage, for us. They said, "As long as you can get your product here." This was in August, and we shipped within a few days. We flew a couple of dozen fixtures down. We were going to do two different locations. They spent a lot of time working with us, selecting the right product, the right light levels, the right area, and all of those things. They told us where they wanted the fixtures to go. We sent them down air express, which is not cheap, and then we started looking for them. It was weeks before we could even find them in customs. It has now been months since we have tried. It was only yesterday morning that we spoke with the people in São Paulo, and they said, "Look, you have to get them here soon. We are holding it open for you, but we are getting close to the end. We would like to have you involved." We did find this company in Porto Alegre who we will partner with. They will be our manufacturer in the area. They have an import duty, so we sent another batch of fixtures.
Senator Johnson: Are your colleagues in the same business in Canada having the same issues as you?
Mr. Cartmill: I do not know. We went to Brazil for the first time in June, and it is overwhelming. Everywhere we went was the same. Anywhere we go, they love the technology. It will pay back in under two years. The $130 million or $140 million contract that we are looking at, part of what São Paulo is doing, is 80 per cent energy savings. They missed a whole generation of technology. They are way back on mercury, which is ancient. It will pay back in maybe a year. What I find hard to understand is why they just do not do it. The payback is enormous. It is moving, but it is moving slowly.
Senator Johnson: How could the government facilitate this? Did the visits help?
Mr. Cartmill: They were amazing. Minister Fast and DFAIT managed to get me an appointment with the mayor. I always like to start at the top. I look for the mayor, and I got the mayor. I brought representatives from DFAIT, CCC and EDC. I went to another large city and also met with the mayor. On the trade missions we use matchmakers. This does not work. We always target who we want to see. Then I tell the matchmakers that I will be their worst nightmare because I want to see everybody on my list.
Senator Johnson: That is a cool thing, matchmakers.
Mr. Woods: Every time you see a problem, there is an opportunity. The customs procedures are a universal problem for all of Brazil's trade partners. We have a great system. We have the Canada Border Services Agency. Let us see if we can get the CBSA down there to talk to them about how we run our system.
[Translation]
Senator Robichaud: Mr. Woods, in your presentation, you quoted an article entitled "Should Our Kids Be Learning Brazilian Portuguese."
Would you recommend to the new generation to learn Portuguese in order to maximize your trade opportunities in Brazil?
Mr. Woods: Yes, absolutely.
[English]
The fact of the matter is you can list all the trade barriers you want, and you can eliminate them through negotiations. However, in world trade, the language barrier is not something you can negotiate away. The language barrier exists when people need someone to translate. They need someone in the middle. Brazil is a much larger country than ours. It has been an insulated country for much of its history because it is a Portuguese-speaking country surrounded by Spanish-speaking countries. Brazilians are fiercely proud of their language, as they should be. More and more, by the way, there is another opportunity. I think you have seen in the testimony that more and more Brazilians are coming to Canada for English as a second language. I must say, at the top level, dealing with Brazilian government officials, most of my counterparts at the equivalent of our DFAIT speak three, four or five languages. In fact, you have to speak three or four languages just to get into the foreign service. At a certain level it is not a problem, but if you want the big hug, if you are doing what Mr. Cartmill is doing, getting down and doing the deal, you need someone who speaks Portuguese.
Nowadays the kids are learning Mandarin in kindergarten. That is fine, but let us look beyond China at some place that is even closer and something that has a different dynamic. Portuguese is a beautiful language, too.
Senator Robichaud: Mr. Cartmill, should we practice our hugging?
Mr. Cartmill: Yes. You could even kiss if you want.
The Chair: I think we are coming to the end of the meeting. I thank the senators for their patience in trying to get everyone in. In particular, I thank our panelists. Before we started someone asked me, "What happens after the presentations?" I said that that is when the senators really put the questions to you that have been generated out of your original remarks. You can see there was a lot of interest. We wish we had more time. We are going to follow your various pursuits in Brazil. Hopefully, we will be of some benefit to the businesses through some of our recommendations. We do not pretend to have all the answers but, perhaps, we will echo some of your concerns and recommendations in our report.
Thank you for sharing your experiences and your recommendations with us today.
(The committee adjourned.)