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Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce

Issue No. 2 - Evidence - February 18, 2016


OTTAWA, Thursday, February 18, 2016

The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:39 a.m. to study the present state of the domestic and international financial system (topic: the causes and effects of the recent decline in the Canadian Dollar exchange rate).

Senator David Tkachuk (Chair) in the chair.

[English]

The Chair: Today we continue our study on the present state of the international and domestic financial system, and specifically the Canadian dollar.

We have before us today from the Canadian Chamber of Commerce, Hendrik Brakel, Senior Director, Economic, Financial and Tax Policy; and from the Canadian Federation of Independent Business, Ted Mallett, Vice-President and Chief Economist.

Mr. Mallett, please proceed with your presentation.

Ted Mallett, Vice-President and Chief Economist, Canadian Federation of Independent Business: Good morning. It's a pleasure to be here today to present on a topic that our members frequently talk to us about. Whether the dollar is way high or way low, it's certainly a common point of discussion.

I've reviewed some of the earlier testimony from last week. Certainly you had some high-profile economists talking about the causes of the decline of the currency and some of the prospects for its future. I don't have much to add to those kinds of discussions, as they did a very complete job of taking one through the various points. So I thought I would take a different tack and talk more about what the effects are, what we're hearing from our members and to what degree something can be done about it, because you can overreact or underreact. We'll give you perhaps a little background.

You may be aware that the CFIB is a membership association made up exclusively of independently owned businesses. We don't have any publicly traded businesses in our membership. These people understand the challenges and successes of running a business first-hand. Therefore, it is an extremely important element of being able to present to a committee such as this and get involved in public policy because we have one-on-one discussions with members.

We don't have any publicly held businesses, so most of our members are small, although there is no upward limit on size of enterprise. We have a number of very large enterprises in the membership, although they're privately held. Half of our members employ fewer than five people and only about 4 per cent employ more than 50. You can get a sense of the shift downward. Even so, our membership is perhaps biased on the large side when you talk about the small business community in general. The vast majority of small business owners is incorporated, even those providing source deductions on pension plans and so on, and are one-person businesses or maybe two-person businesses. Even so, we are biased toward the larger side of the small business community.

We extensively poll our members on policy issues and track business conditions. That's what I'm going to be sharing in my talk today. Our Business Barometer, which I provided some detailed information on, is a regular monthly sampling of business conditions and perspectives out there. Since February 2009, we've been doing this monthly with a survey that has not changed in terms of its methodology. We value the importance of ensuring consistency so we have terms of reference. When there is a change in business conditions, we are able to see it clearly in our data.

I've provided four documents in my package for your review. I can briefly describe them before moving to the issue of currency. The two-page national report is a basic 12-month forward look at business conditions and expectations. We put business expectations in an index form at chart number 1 and compare that against GDP growth. It does a very good job of mirroring GDP growth in the economy. There is strong correlation between the two, but our numbers are released in the same month they're collected. We're releasing February results next Thursday, so we come in about two months ahead of the GDP estimate. It's a good leading indicator of how the economy is performing.

On page 2 we have things like full-time staffing intentions, general state of business health, future pricing and wage plans. Pricing is pertinent because that tends to show up some of the currency issues out there. We track business indicators, like unfilled orders, accounts receivables, capital intentions, spending intentions and limitations on growth. I direct your attention to chart number 11, bottom right corner, to "Major cost constraints.'' In the middle of that category is a grouping called "foreign currencies.'' It's deliberately worded vaguely because we have to have to the same wording, whether the currency is at one level or another. It provides an indication of the kinds of points of pain.

These are not necessarily the highest costs that a business faces but they're probably the least controllable by a business owner. They are the issues that they deal with every day, such as taxes and regulations. Of course they are going to point that out as one of the high points.

Concern about currency costs and, therefore, concern about the high cost of buying U.S. products, is at the highest level now that we have ever seen from our survey going back to 2009. We don't have the same kind of question about construction going back earlier, so we can't compare with the early 2000s as a point of reference. Hopefully, in another couple of decades we'll have information that is more complete along those lines.

We have two other larger documents, but they are simply provincial and sector-based comparisons using the same information. We were able to break out this information in more detail. You can review it at your convenience. The last one that I want to direct your attention to is information that was not available in our regular monthly publications that I provided with a little more detail for you to point out where the shoe is pinching in terms of currency. In terms of major cost constraints, chart number 1 at the top shows that close to 40 per cent of our members are saying that currency is a major concern for their business. Considering that not all businesses are directly associated with the trade markets, that's a pretty high number. It's quadrupled since 2011-12.

If you superimpose the value of the currency, you can see a perfect inverse relationship between the two elements. It clearly has become a major issue for our membership. Breaking that into size-of-business and sector issues shows other details.

It doesn't look like it's a size-of-business issue. It's hitting businesses no matter what size they are. Amongst the micro businesses of fewer than five employees, it's gone from an issue of 8 per cent up to about 25 per cent; so it has tripled. For larger enterprises it's a bigger issue, and we've also seen larger increases in concern.

It's certainly more of a sectoral issue. There is nothing surprising in these things, but in the wholesale sector, the retail sector and even to a large degree the manufacturing sector is where most concerns seem to be showing up. Although I didn't put it in chart form, we were able to get down into far more detailed sectoral analysis as well. For example, the sectors affected most according to our membership, and I simply compare the 2011-12 perspective versus the 2015-16 perspective that groups them into nicer chunks over time, are wholesalers of HVAC equipment; farm, lawn and garden equipment; home furnishings; books; periodicals; music; construction, forestry and mining equipment; machinery; and electrical products manufacturing.

It's interesting that we are also dealing with concurrent issues around restructuring of the economy and the need for greater productivity gains. Those sectors are bringing products in that we hope other businesses will purchase to increase productive capacity. On the one hand, they are facing higher costs in bringing those particular products into Canada; while on the other hand, they are the products are needed most urgently in the Canadian economy to leverage and regain a more balanced economy.

It would be nice to have a longer history for this kind of information, but we'll keep tracking it consistently. Hopefully we will be able to provide further information on it. Small firms are price takers. There is not a whole lot that they are expecting us to do. They are not lobbying us to push for a higher dollar or a lower dollar from where it is. They are used to dealing with these kinds of things. Small firms have, to some degree, the ability to hedge perhaps some of their currencies. But the smaller the business the more expensive hedging is on a unit basis, so it becomes more of a challenge. The cost to business is immediate and they ride the wave whether it's a success or not. That's really how they have to operate and really it's reflected in the kind of comments that we get.

With that, I can wrap up my comments and I'm happy to hear questions.

Hendrik Brakel, Senior Director, Economic, Financial and Tax Policy, Canadian Chamber of Commerce: I will tell you a little bit about our forecast for the Canadian dollar, our outlook going ahead, and really what it means for Canadian business, what we've heard from our members because it has been, as my colleague said, a huge issue for Canadian business.

Our forecast for the Canadian dollar will average 71 cents in 2016 and rise to average about 74 cents in 2017 and then edge gradually up from there.

One of the challenges with forecasting the dollar this year is wild market conditions. We have never seen it like this. So far in 2016, Canada has one of the best-performing stock markets in the world. That's because the TSX has only fallen 5 per cent. The S&P 500 fell 8 per cent, the NASDAQ is down 10 per cent, European shares are down 17 per cent and the Shanghai Composite Index is down 22 per cent. We've never seen financial markets moving like this.

And it is just not just financial markets. Tim Cook, the CEO of Apple, one of the world's most profitable companies, was talking about their quarterly results. He said we are seeing "extreme conditions unlike anything we've experienced before'' in the global economy.

So it's a strange global economy. Rich countries seem to be doing a little better. The U.S. is expected to grow somewhere around 2.5 per cent to 3 per cent this year. Europe is pulling out of its funk, growing somewhere around 1.5 per cent to 1.8 per cent. What we're seeing is a really surprising slowdown in emerging markets and really tight financial conditions. One of the phenomena that we're hearing from our members in the banking community is these huge flows of liquidity, which are really roiling global markets.

The quantitative easing that took place in 2009 was huge from then on. It averted a global crisis. We should be very thankful that the U.S. federal reserve avoided the types of cascading bank failures we saw back in the 1930s, but it had unintended consequences in that the U.S. monetary base, the amount of funds available to the U.S. financial system, rose from US $800 billion up to about $4 trillion, so it almost quintupled. There was a huge amount of money in there.

Economists talk about the portfolio rebalancing effect where government bond yields dropped to zero because the fed was buying up all these bonds and so yields dropped to zero, and then investors move into corporate bonds, and then mixed portfolio people see corporate bond yields dropping so they get into equities, and then the equities get into emerging markets and commodities and currencies. There is this movement along the risk profile from less risky assets to more risky assets. And now the quantitative easing has stopped.

It stopped back in 2015, which is why we saw those big shifts in emerging market currencies. In fact now we're seeing the inverse; things are starting to tighten. Every time in the past when we've seen tightening of U.S. monetary policy, we've certainly seen negative impacts on equity markets but we've also seen impacts on currencies. This is an unprecedented tightening, because we've gone from spectacular liquidity coming into the system to some tightening.

The big consequences for emerging markets was in 2015 investors and companies pulled $735 billion out of emerging markets — the worst capital flight in 15 years. A lot of these emerging markets that have been accustomed to borrowing limitless amounts of U.S. dollars really cheaply suddenly found their borrowing costs rising and their currencies falling.

This all comes at the same time that you have this slowdown in China, which we're not really sure about. It's a little bit unpredictable. All of this is very bad news for commodity prices, because emerging markets are the biggest consumers of commodities. China buys half the world's iron ore. It's responsible for about 28 per cent of the growth in demand for oil. So a slowdown in China, in emerging markets, really impacts commodity flows.

What does it mean for the dollar? First, with regard to oil prices, global oil demand was usually going up at about 2.5 million to 3 million barrels per day in additional demand each year. A lot of the forecasters back in 2014 thought $100-oil would just continue forever because, thank goodness, the oil sands are pumping out more oil, thank goodness the Americans had this fracturing because we're struggling to keep up with rising demand for oil. Suddenly, when emerging markets slowed down, we saw a big decline in demand and so there is this surplus of oil on the market.

We're looking at a surplus of 1.5 million, 1.2 million barrels per day this year, which will probably shrink and come back to balance sometime in 2017. Our forecast for oil should be somewhere in $35- to $40-range by the end of this year, rising to $50 next year. So there is a consequence for that vis-à-vis the Canadian dollar.

As I'm sure the other witnesses said, the biggest factor in the Canadian dollar is oil prices. We used to joke that oil prices and the Canadian dollar are like an old married couple because they go everywhere together. Sometimes one wanders off, but they always get back together in the end. Historically the correlation is 80 per cent, such that a $10- increase in the price of barrel of oil usually affects the loonie by about 3 cents.

The second factor is the interest rate differential between Canada and the United States. As you know, the U.S. fed raised interest rates by 25 basis points in December. We are anticipating three more interest rate increases in 2016, to bring the interest rates all the way up to 1 per cent. None of the investors or the financial community thinks that interest rates are going up in Canada. In fact, we saw speeches by the Governor of the Bank of Canada talking about negative interest rates and quantitative easing and some of the other tools he could use to essentially stimulate the economy if Canada went lower.

The third factor that pushed the loonie above parity was that Canada was a safe haven. We had gone through this great financial crisis with no bailouts, our banks the strongest in the world, and so we saw huge portfolios flows going into Canada because we were the safe haven. Now the U.S. is doing better so there's not the same need for a safe haven and, finally, investors are more aware of some of Canada's vulnerabilities.

All that is to say investors see rising rates and strength in the U.S., and lower rates and vulnerabilities in Canada. So you see the investors are moving out of Canada into the U.S. dollar. So that's why we have the loonie at 71 cents.

What does it mean for Canada? Actually results have been mixed, but it has been positive for exports: last year exports declined by 1 per cent. It sounds bad, but that's actually pretty good. When you think 24 per cent of Canada's exports are oil and gas related, and prices fell by half. The math is very easy. That's a 12 per cent hit to exports, so how to fill that great gaping hole was with manufactured goods and services. We saw some spectacular results last year: auto exports up 14 per cent, aerospace exports up 29 per cent, communications technology up 13 per cent. Services did really well; U.S. tourism visits up 8 per cent.

As my colleague mentioned, there are sort of mixed results here in a lot of the natural resources companies and a lot of the services companies where their wages are in Canadian dollars, the bulk of their costs are in Canadian dollars and their revenues are in U.S. dollars, so that has been helpful and we have seen companies benefit.

I was talking to an Ottawa-based company called MDS Aero, and they do test cells for turbine engines. They were saying that the challenge they had when the dollar was at parity is they were always struggling to cut costs: can we run a facility with 15 people instead of the 20 that the Americans usually use? From 2003 to 2008 the loonie rose 8 per cent per year, which is very difficult for a business like that, but now their costs are quite competitive.

During that harsh period, when we had the loonie above parity, we saw a decline in the number of exporting companies in Canada. But those companies that are still there are now really competitive and they're doing quite well with the loonie at 71 cents.

Now, that being said, we don't think a lower loonie is a panacea for Canadian competitiveness because one of the coping mechanisms, and one of the things that our world class companies do, is to link into global supply chains. They are sourcing from all over the world and bringing in parts from United States, Japan and Asia, so a decline in the loonie just raises their input costs. The other thing is that we really want Canadian businesses to invest more in capital, to invest overseas and to invest in the latest computer technology, so it becomes much more expensive with a lower loonie.

All that to say it's a fairly mixed bag, but overall it has had some modest benefits for exports.

Senator Massicotte: Thank you to both of you for being here.

Mr. Mallett, I look at your survey, and 30 to 40 per cent of your membership base is very worried about the higher cost of the dollar. Yet, when you have 47 per cent of GDP that is trade oriented, where are your clients that benefit from a more expensive U.S. dollar? How come we don't see that in your graphs?

Mr. Mallett: We certainly show that there is a large-scale shifting of perspective within the membership. If you look at the general business conditions, the optimism out there, by province we find it at record low levels in Alberta for obvious reasons. We haven't seen the turnaround as quickly in the other parts of the country. A year ago, we were saying that this is probably an equal situation here, where we are going to have a decline in fortunes in one, but we are going to see a lifting in others. We haven't seen that lifting yet, largely because of the uncertainty associated with costs.

A large degree of exporters also rely on imported products for their subcomponents. It is not always an automatic benefit to one particular business because they are an exporter. A lot depends on their mix of inputs and outputs. What is interesting, though, is that we do note stronger rebound in the Atlantic provinces on the positive side. Tourism is a form of export, especially for U.S. travellers. The most optimistic businesses in Canada are in Nova Scotia right now, for a number of reasons, possibly related to the navy contracts, also possibly related to many on the resource side. These are very connected economies to the Northeast U.S.

We are seeing that kind of turnaround. It's just that the benefits that many thought were perhaps automatic and that would kick in quickly in fact move much more slowly than anybody thought.

Senator Massicotte: Just on that note, as you know, the bank economists were here last week. They were basically saying it's sort of kif-kif, the benefit of the cost of the dollar.

Let me ask Mr. Brakel a question. The Conference Board of Canada was here yesterday; the economist was here. He said that we are not seeing the immediate lift to the economy from the lower dollar because our manufacturing sector is not as competitive as it should be, either because they lack capacity or they're not as competitive or modern in their processes. Therefore, he was saying that we will not to see a lift for some period of time until they re-invest, because they cannot compete. That's a little discouraging, which means we will suffer a delay before our economy benefits from that dollar due to the fact that our Canadian players, particularly the manufacturing sector, are not competitive and not adequately organized.

Mr. Brakel: That is an excellent point, and what we are hearing from our manufacturers is they are running into those production constraints. They can't find the skilled people that they need. They're hiring, but they just can't find them.

The decision to invest in plant and equipment, to spend millions of dollars expanding your facility, is a 10-, 20-year decision horizon. It is difficult to make a decision like that based on what the loonie is doing in 2015 and 2016. They have a long-term horizon in mind, so they've seen where the dollar has been. The challenge has been that, over the past 12 years, the dollar has fluctuated between 63 cents and $1.08. To try to make decisions based on where the loonie is going is a tough proposition.

We have seen pickup in business investment, but it is not showing up in the overall numbers because it is being overwhelmed by the sharp drop in business investment in CapEx that is happening in the oil and gas industry. Overall, business investment numbers are very weak in Canada. It is a negative for the economy, but it is because the natural resources decline has been so sharp that it is overwhelming any gains we are seeing.

Senator Massicotte: On that note if I could, I know you mentioned hedging a little bit, but you have a large membership base, up to 500 employees. The Canadian Chamber of Commerce has many large players. There is really no excuse. If the dollar is so important to their profitability, they should not be speculating on that kind of commodity. They should have hedged. It's not that expensive and it's well organized. There is immense depth to that hedging market. Why did your bigger members not do so? They were basically profiting at no cost from the previous circumstance, but now they are getting burnt maybe from bad decision making on their behalf.

Mr. Brakel: Certainly there is a huge financial industry in Canada and any bank would be very happy and delighted to help any company hedge the currency.

I think some of the challenges are the complexity associated with it, the predictability of what sort of revenues you are going to get. We have heard mixed things from our members. Some do absolutely hedge. Others deliberately don't hedge.

For example, in gold and oil companies, people buy those stocks because they want those stocks to react like the oil and the gold market does. If you hedge, then you take that away from the investor. A lot of the oil companies deliberately don't hedge so that their stocks move the way their investors want.

Mr. Mallett: Investment decisions are made by humans, after all. It is not just a statement to say that a certain sector is uncompetitive worldwide and that that is an issue.

The concerns we get from our members aren't necessarily about whether the dollar is too high or too low. What they really don't like is the uncertainty around that. It is very difficult to make that forward decision about hedging without knowing what the risks and costs are because they are very difficult to quantify.

The same goes for how far ahead they have to plan for, whether they have to commit to a price list, for example, that they send their customers or how much they have to commit to purchasing inputs from other countries. Those are all big decisions. The more that the dollar moves around, as Hendrik said, the more difficult that kind of decision is. They develop a risk premium for that. In a more uncertain world, it means that they are less interested in investing. That is part of the issue. If we could come up with an ideal way to stabilize the movements in currency or at least give people more assurance of where it is likely to be that could help, but that has its costs and difficulties as well.

Senator Enverga: Thank you for the presentation. It has been mentioned many times that the low price of oil is a factor. Every time the oil price goes down, our dollar goes down too. As you said, one does not live without the other.

We keep on buying oil from outside the country. What happens if we buy our own oil? That is, keep the money within our country? Would that be a good thing for the Canadian dollar?

Mr. Brakel: Generally, Canada is a big net exporter of oil. The reason the international financial community is buying and selling Canadian dollars every day is, in large part, to get our oil. We are stuck with having that fluctuation between the Canadian dollar and oil prices.

But you are right, absolutely. Instead of importing oil from Venezuela and other countries, if we had pipelines keeping our oil within Canada that would absolutely be of benefit to Canada. We wouldn't have to import from other countries.

Senator Enverga: So how much benefit is it? Do you have something like a cost or growth estimate if were to we keep buying our own oil and don't import anything from another country?

Mr. Brakel: One of the challenges we have in North America is that refineries are glutted with oil. When we talk about West Texas Intermediate — that is the $32 that it is at today — actually, for Western Canadian Select, which is a different grade of oil, there is a discount below that. Often Western Canadian Select is $5 cheaper because it's heavier, it has a lot of sulphur, and they are shipping it to these refineries that are glutted with oil. What we'd like to do is get Canadian oil out to Asia, out east and all sorts of other places where they really need our oil so that we get a bit of a higher premium.

A few years ago the Chamber did an estimate, and they called it the $50 Million a Day that we are losing in oil revenues because we can't get our oil out to the higher price markets, like in Asia and elsewhere. So, absolutely, redirecting our oil within Canada and getting it out to Asia would be a huge benefit to us.

Senator Enverga: We talk about infrastructure and putting money into infrastructure. Do you think a pipeline would be great infrastructure to help our economy and our dollar at the same time?

Mr. Brakel: Absolutely. The Chamber of Commerce supports it. We think it's critical for us to get our natural resources to market. There is incredible technology going into natural resources. Big parts of the green technology industry are coming from the natural resources industry. It's growing. If we make these critical investments and get our natural resources to market, yes, absolutely, we are very bullish on natural resources.

Senator Tannas: We had a good discussion yesterday with some witnesses around productivity. Senator Massicotte has talked a bit about it and you have responded, but I think we heard that Canada, in general, has about a 1 per cent productivity gap between us and the United States. Is there a difference the smaller the business? Is that gap wider? Is it the same? Is it smaller? Do you have any comments on why?

Mr. Mallett: Yes, I can certainly talk about that.

There is often a mixing or confusing of two concepts: one is economies of scale and the other is productivity growth. Certainly with small firms, when you talk about labour activity, they are more labour intensive, therefore less capital intensive, and therefore have lower labour productivity.

The more important issue is the growth in that productivity over time. There is mixed reaction. Looking at some points through the business cycle in the 1980s and 1990s perhaps some small firms were on the low side. Later results, especially small manufacturers and so on, were showing higher productivity growth than large enterprises. The difficulty is that no one has a good, solid measure of productivity because it's a vaporous kind of measure. It's how much output you produce for every given unit of inputs. How do you measure inputs? You can measure people but you cannot necessarily measure how much effort they're putting into their work. They may be showing up every day to work and working just as hard in some measures, but are they actually doing the right things and so on.

It's a difficult concept to measure. Many of the measures that we have tend to break things into categories that may not make a whole lot of sense because the business community is a series of vertically integrated steps. Small firms are embedded in those steps so that there may be a large manufacturer making a particular product, but they are buying hoses and parts from a medium-sized supplier but everyone is hiring an accountant and a lawyer and payroll services and all that, which may be a smaller enterprise.

Simply saying, "Let's group all these suppliers into a small group and then make the large firms. Oh, gee, those small firms are less productive; therefore they are a drag in the economy.'' No, they're embedded within the whole production process and the reason they're there is that it's better for these larger enterprises to subcontract that work out than doing it themselves.

There is a lot of confusion when you try to break those kinds of measures into size categories, or even industry categories, because there is so much interplay or interconnectedness between these kinds of businesses. It can be quite deceiving to be able to break those things into issues. That is not to say that productivity is not an important issue, but we have to look at it in a holistic sense rather than a micro sense.

Senator Tannas: Maybe we're getting off topic, but small business America or small business Canada, where are the deltas or are there any significant deltas that you have seen in your research and your work? We hear loud and clear from your organization and from others that small business is the engine of our economies, and thank God for small businesses and all that. So are there any comparators between American small business and Canadian small business?

Mr. Mallett: Small firms in the U.S. have an easier time growing. You've heard all the policy arguments around tax rates and so on, but I think there are also some major advantages around the way the geo-economic structure of the U.S. is so much more structured around networks and hub and spoke and so on. The upper U.S. Northeast is a densely populated area. People can move from St. Louis to Chicago to Nashville to Columbus, and all those cities are within an hour or two of driving. Canada isn't structured that way.

Apart from southern Ontario and southern Quebec, we have a long ribbon of cities that requires a very different transportation infrastructure. The wholesale sector is completely different. Canadian firms going from micro- to small- to medium-sized have to grow almost in an unnatural way, whereas in the U.S., if you become a solid supplier in central Ohio you can service Michigan, Indiana, South Carolina, all within a reasonable driving distance. You can't do that in Canada purely because of the geography.

I think that's one of the major disadvantages the Canadian economy has, probably because of the way our geography is laid out for us.

[Translation]

Senator Bellemare: I am trying to make sense of the data you have presented, especially the data from the Canadian Federation of Independent Business. Those results are surprising. I am wondering how much they have to do with your membership, as you say that 50 per cent of your members — and you have 109,000 of them — are from companies with five or more employees. So they are very small businesses.

The data is provided by sector, but there is a percentage indicating the cost constraints. I have always thought that, at the CFIB — as well as in chambers of commerce — a lot of your members were independent workers, small companies truly associated with independent work, in which case, as you said yourself, the work is very intensive in terms of labour, but not in terms of capital. I have always thought that these were companies with a significant domestic market. Given that the dollar is low, I would have thought that foreign competitors, large consulting firms and small Canadian companies would have had an advantage. I understand that, if your members are only small retailers, they import a lot of products. Therefore, they will be hurt a bit by all this, just like consumers.

Can you shed some light on the issue by telling me about your members by sector, and telling me what sector you represent the most?

[English]

Mr. Mallett: Thank you very much for the question. Our membership is quite reflective of the business community at large. We don't have any obvious strength in one particular area or the other. Just fewer than 10 per cent of our members are manufacturers. Between 20 per cent to 25 per cent of our members are retailers; about 10 per cent are construction businesses; about 6 per cent are in the agri-business, area farmers and related industries.

The service sector is a bit underrepresented in our membership compared to the economy as a whole, but that is largely because just being a membership organization where we're knocking on doors saying, "Hey, join CFIB,'' they tend to be more hidden. They don't have signs in front of their businesses as much as a vendor or a retailer or whatever. But it is broadly reflective of the economy as a whole, between goods producing and the service sector.

It is an important question to ask whether there are advantages for small, nimble businesses to be able to respond positively to the kinds of changing forces we've got. Absolutely, I think there are tremendous opportunities and small firms have proven to be capable of filling opportunities when they take place, but it still takes time.

You have to have somebody with enough capital to be able to buy their inventory, develop or hire the people they need to meet the possible demand for their services. We are just saying that it can't take place within months of the dollar moving from one level to the next. Also, it requires confidence that the dollar will stay at a certain level to be able to do that.

Another interesting point relates to the previous question on technology. One reason that small firms are more labour intensive and less capital intensive is that labour is available in very small units. When you think about hiring somebody to help out in a business, you can hire someone for about three hours. The call-in requirements are such that you have to pay part-time temps for three hours when you call them in. That is a small unit of production.

If you want to buy a small unit of technology, you probably have to buy a machine or a truck. You could lease it; that is one element. That is why leasing is a much more common factor now. However, technology is only available in fairly large units, and a business has to get to a certain size. There is a minimum size of that unit, whether it's a customer-relationship management system, a piece of machinery, a truck, or a backhoe. You have to have the confidence that you'll get two or three years of good use of that product to be able to use it effectively. A piece of labour, hiring someone for a couple of hours, is a short-term thing. That is why for small firms it is less expensive to expand on labour than on technology.

Senator L. Smith: We've had a group of economists before us over the last couple of weeks talking about the fluctuations in the dollar and the causes, et cetera. We have asked questions related to assisting corporations, whether big or small.

I know it is hard to come up with a plan because there are some different categories of business, et cetera. In each of the presentations there was the decision about whether to invest in building Canada based on whether you have world- class talent. Market technology was one challenge of many manufacturers' global supply chains, best capital equipment. Another was relative efficiency, cost of transportation and availability of pricing information and so on.

If you had to make a three- or four-point plan that could apply generally to Canadian business to help them weather the storm and move forward, could you come up with your top three or four points that you think would be advantageous to Canadian companies, whether big or small?

Mr. Brakel: Absolutely. As we talked about before, people will not make decisions to invest millions of dollars based on where the loonie is. You have to have the long-term revenues and the business plan.

The first priority we hear from businesses across the country is the skills gap: "I can't find the employees.'' Any investments in training and enhanced flexibility to bring more immigrants to Canada would be first.

Senator L. Smith: The skills gap.

Mr. Brakel: Yes.

Senator L. Smith: Lack of education or experience? What is the skills gap?

Mr. Brakel: It is. Jobs and technologies out there today require greater and greater skills. We have unemployed people in Canada, but their skills don't always match with the skills required to fill the vacancies.

The success of new companies in services is all about the people and talent the business has; so skills are always number 1.

The second point we would make is the types of infrastructure investment that can give us big productivity gains to get our products to market more easily and cheaply. Some investments in infrastructure, like ports, roads or even the digital technology, can give us productivity gains in the long term. There's a lot of private sector investment in infrastructure out there and the government just has to sort of provide support. For example, VIA Rail would like to build a new passenger rail system to connect Toronto, Ottawa and Montreal. We're not talking about high-speed rail but about normal-speed rail because currently all those trains have to travel at 50 miles per hour because freight trains share the tracks. If we had dedicated passenger rail, we could double the speeds up to 90 or 100 miles an hour and we'd all get to Toronto in two hours and Montreal in one. Wouldn't that be great? These are investments that the government has to support.

So we would say skills, infrastructure and more support for innovation and technology. Those would be the suggestions.

Senator L. Smith: Do you guys have committees across the country that look at these types of issues to try to prioritize and get those messages out, besides all the analyses you do?

Mr. Brakel: Yes. We have committees on tax and innovation.

Yesterday, the Canadian Chamber of Commerce launched their Top 10 Barriers to Canadian Competitiveness initiative, going through the biggest things that are holding Canadian businesses back. They're issues like getting our resources to market, getting up to scale and making the investments in capital.

One stat that always troubled me was that for every dollar that an American company spends on capital, Canadians are at about 65 cents. We were catching up when the dollar was at parity and it was much cheaper for Canadians to bring in that technology, but we are worried that we will start to slow again.

Senator L. Smith: I would ask that of Mr. Mallett?

Mr. Mallett: I don't disagree at all with Mr. Brakel's statement, but it is interesting that I have a very different list.

Senator L. Smith: What is your list?

Mr. Mallett: Let us start with the broad principles of promoting and protecting the entrepreneurial culture within Canada. We are envied around the world for having people who are confident enough to start their own businesses and succeed. We have enough success in business creation around here, which helps in the long run. It's not quite at the level we see in the U.S., largely because of other structural advantages, but it is not something that we should ignore or take lightly.

It will be an interesting test, because Alberta and Saskatchewan have more self-employed people per capita than anywhere else in the country — B.C. as well. Because those economies have been challenged, Alberta and Saskatchewan the most, it will be interesting to see how quickly they rebound if there's a restructuring. I have high hopes that because people have had so much exposure to self-employment and entrepreneurship in those economies they will be able to restructure faster than elsewhere in the country.

The flexibility to operate is the second one. Things like the small business tax rate is critical to maintaining the ability of firms to retain equity where they don't have the availability of scale in that they can't borrow or take on equity markets to the same degree. Things like the small business tax credit helps give a signal. We are not in favour of things like direct government intervention or direct government subsidies to small businesses.

Finally, and many people have said it before, open markets nationally by removing internal trade barriers will allow businesses to grow organically between provinces. This is critically important as well because businesses naturally grow to the most available market to them. If it is easier to sell to another country than to customers in another province, it says something about how restrictive it is in Canada. Those are my three asks.

Senator L. Smith: If we do a study on opening barriers between provinces, would you like to give us testimony in support and participate in it?

Mr. Mallett: Wholeheartedly. I am sure the chamber would like that, too.

Mr. Brakel: We would love it.

Senator L. Smith: Did you talk about venture capital in terms of changing the Canadian mentality from risk aversion to taking more risk?

Mr. Mallett: It's not that we have so much risk aversion. The venture capital market in Canada is dealing with a much smaller pool. It is not so much the quality of the pool; it's much smaller. The U.S. VC system has its hubs in Massachusetts and Silicon Valley, California. It's difficult to get that kind of scale of effort going. Venture capital is only a very thin edge of business creation in Canada. The vast majority of business startups happen on a shoestring, using parents' money or friends' basements, and that's as much as we have to promote and protect.

Mr. Brakel: Just to build on Ted's comments, absolutely, venture capital is critical. We issued a report last year on how to build up the venture capital industry in Canada because we hear from a lot of companies in Canada, like Shopify, which is just around the corner, that they get repeated offers to go to the United States where it is more alluring, but what we want to do is to build up a really strong domestic venture capital industry in Canada. There are questions about size, but it is growing. We could do so much more.

You look at some of the solutions, like B.C.'s investment tax credit, which is a 30 per cent refundable tax credit, but you have to have your money in for five years. We think that has worked really well in B.C. We know that flow- through shares work really well for mineral exploration. What is the point of giving a company a tax credit if they are not going to have any revenues for the next five years? So, instead, that tax credit is passed along to the investors. That has worked really well for mineral exploration, but it can work really well in biotech.

We exempt the capital gains on your TFSAs to encourage people to save more for retirement. Why not exempt certain capital gains if you invest in a high-risk company that's going to produce a new technology?

Venture capital, absolutely, I think is critical to growing our businesses.

Senator Greene: I'm interested in your comment about your Nova Scotia members being the most optimistic members that you've got across the country. I'm interested in this because I would suspect that, if you took a survey of Nova Scotians in general, they would not be amongst even the top five provinces.

Can you explain why you believe your members are more optimistic than perhaps the population as a whole in the province would be?

Mr. Mallett: I think it is a very good question. Let me just refer to the Nova Scotia results, which would be the third page of the provincial document I had. Traditionally, during the recovery from the financial crisis, Nova Scotia firms were lagging behind the national average quite significantly but really, starting at the end of 2014, we saw a significant hiking up of optimism.

The structure of the question that is used for that particular index is how you expect your business to perform12 months from now. It's a forward expectation, so t's a relative measure. I'm going to be better off than I am now, on average.

Perhaps one can say that Nova Scotia businesses are due some optimism because they have been lagging for such a long time. If you look at the general state of business health, which is chart number three in that area, it has traditionally lagged. Only 30 to 40 per cent of businesses said that their businesses were in good health. That's low. That's nationally, but lately, in the past two years, we are now up to roughly the 50 per cent number which is, historically, one of the higher numbers that we tend to get across the country.

We think that a lot of this is because of the stimulating effects of the dollar, because so much of the Nova Scotia economy has revolved around either forestry or tourism, that they expect that there are some spinoff benefits that happen more quickly than in, say, a manufacturing base like Ontario and Quebec, where it takes more time for a currency change to have an effect on the forward expectations. If they are selling their products overseas or to the U.S., they will see other benefits.

The transmission of the benefits of a lower currency has been faster in the Maritimes than in other provinces.

Senator Greene: Amongst your members then in the Maritimes in general, would the tourism component be the largest?

Mr. Mallett: Tourism isn't officially a sector in the SIC sense, but it's hospitality and transportation. There are a lot of service businesses that are connected with tourism and so on. It is very difficult to have a direct connection with that, but I suspect that we have an awful lot more waiting within the tourism sector no matter what the industry sector is in that province. It's a good question. It's worth delving into in more detail.

Senator Greene: It's very interesting because there is a lack of connection between where I believe most Nova Scotians are about the future and the businesses they might work for.

Mr. Mallett: It's better to have that than the other way around.

Senator Greene: Yes, I suppose it is.

Mr. Mallett: Hopefully, the optimism of employers will find its way into the general populous, through the people working for them, and I think, over time, you'll probably see consumer sentiment start rising in Nova Scotia as well.

Senator Greene: I hope so.

Senator Ringuette: Mr. Mallett, particularly — my regards to Dan Kelly by the way — I'm looking at your graph 11, major cost constraints nationally. Bank fees I know very well, and I have been trying to highlight that issue and will continue to do so.

However, what is very intriguing to me is the insurance issue in your graph. Insurance is in the private sector. We think that the competition is relatively good in Canada so that there is flexibility with regard to cost and so forth, but have you investigated why insurance has such a high rate and of concern to your members?

Mr. Mallett: Insurance is one of those areas that businesses have very little control over. There tends to be a bit of whipsawing that takes place within the industry. When there is a major shock; 9/11 created a massive ripple effect through the insurance sector.

Senator Ringuette: That was a decade ago.

Mr. Mallett: That's the way that it seems to move. Small business owners may have a feeling about what their own risk profile is, but the insurance industry has another idea of what risk profile is. So it's not a meeting of minds of what businesses feel is an appropriate risk profile versus what they are being charged by insurance companies. We tend to find very delayed movements in the cost of insurance for small firms based on some of those ripples that take place within broader insurance markets.

Again, we talked about hedging. That's a form of insurance. It's a form of sales insurance for businesses, and there is a cost associated with that. But if the cost of buying that insurance is out of line with what a business feels their appropriate risk profile is then you will have concerns over that sort of thing.

Again, it's not a direct measure of the costs themselves; it's a feeling about how much control they have over their ability to manage those costs.

Senator Ringuette: As 45 per cent of your members said that the cost of insurance was an issue, have you investigated why? The commodity issue, capital, technology, occupancy, tax regulation, we understand those, but to my surprise after banking the insurance cost is a major constraint. To me, it's an indication that the insurance scheme needs to be looked at. Why is it creating such a cost constraint on our business community?

Mr. Mallett: I'll have to take a look at that in greater detail, if you want to raise that with others. But I can go back into some of our history and see where that changes and where it is related to other elements. It is a very good question.

[Translation]

Senator Massicotte: Mr. Brakel, concerning venture capital funds, you suggested changing the tax credits program to encourage investors, especially small ones, to invest in those funds. Our committee has debated this a lot, but the most significant dilemma in terms of venture capital, in my opinion, has to do with the fact that it is not profitable over a period of 10 to 15 years. The returns are not in line with the risk taken. Should the government and the taxpayers subsidize venture capital investments?

I am a bit puzzled. Fundamentally, those mechanisms have to stand on their own two feet, but they are not profitable. Additions are made to the funds through the government, the BDC, and so on, as that is very important for the Canadian economy. However, something is not right. It is questionable to provide funding when it is not profitable from the outset. Do you have any comments on that?

Mr. Brakel: You are completely right. Profitability and the rate of return on those types of funds carry a very high risk, and the amount of time that passes before a return is enjoyed is long. Those are long-term investments. So we believe that the government definitely has a role to play, and the investments made by the BDC have greatly helped the venture capital industry in Canada. When we bring this up with Canada's Venture Capital and Private Equity Association, they tell us that these types of investments require the private sector to match the investment. That increases the industry's investment capacity.

So we believe that the government certainly has a role to play. As you said so well, profitability is very often low, but when the government creates fiscal incentives to improve the revenue on those investments, it may help attract a lot more capital.

Around the world, in the United States as in Europe, the government plays an important role in that kind of venture capital.

Senator Bellemare: Mr. Mallett, I was looking at the business barometer, and all the provinces, with the exception of Alberta, are more optimistic than the Canadian average. Among your members, is the percentage of respondents from Alberta proportionally higher than that the province's population in your survey?

[English]

Mr. Mallett: No, it's roughly equivalent. About ten per cent of our members are based in Alberta. We have a lot of members in Saskatchewan as well, maybe another 5 per cent, but because those two provinces are so far below the national average it's weighting down significantly. We've never seen barometer index levels down to the 20s, where Alberta is right now, and that's what is bringing the whole average down. That's why almost everybody else is above the average.

[Translation]

Senator Bellemare: All the others are above the average, even Saskatchewan, which is at 58.7. Alberta is the only one that is lower. That is why I was thinking that there should be a significant proportion, but you say it is only about 10 per cent.

[English]

Senator Enverga: It's actually on the same line of questioning. Saskatchewan and Alberta have some similarities. What is wrong with Alberta, and how come Saskatchewan is a lot better than Alberta? Is there any big difference between the two?

Mr. Mallett: Alberta's economy has had a couple of generations of adapting to the oil extraction industry. Heavy investment in oil sands, heavy oil and so on has created a structured economy around that. Saskatchewan is far newer at that element. It was more traditionally a farming economy, potash, timber, uranium to some degree as well, so it only came fairly late to the process of oil and gas extraction. Therefore, its economy was not structurally built around that element. That's why we are seeing a different kind of reaction, at least in terms of this element.

The same can be applied to Newfoundland and Labrador. They are facing the same kinds of conditions for their offshore industry. Maybe their prices are not quite so dire because we are dealing with the Brent as opposed to WTI, but the small business sector is not integrated within oil extraction as the Alberta economy has been.

The Chair: Thank you. Senators, I have a little note that I'm going to read. This is our last meeting on the currency issue, and so I have a little note to read that I think is quite appropriate. I'm just going to read it into the record before we say goodbye to our witnesses.

The note reads: "Senators, although I am no longer on the committee, or a senator for that matter, I would like to close the loop on a very important issue. As members may recall, on April 9, 2014, I purchased 0.18 bitcoin in committee, from a bitcoin ATM, for $100. Several members reminded me that I would have to pay a capital gains tax should I cash out that bitcoin at a profit. Well, colleagues, you can rest easy knowing that my assistant cashed out my 0.18 bitcoin for $85, a net loss of $15 over a course of almost two years. I actually should have received close to 89 for my bitcoin, but the machine does not dispense change. I wish you all the best. Senator Irving Gerstein.''

Witnesses, thank you very much for a very informative session. I think we have all enjoyed it very much. Senators, again, if you could remain for a few minutes in a closed session after we say goodbye. I want to make sure everybody's represented here. We were very uncomfortable yesterday because it was only Tories, and I don't want to conduct business that way. If we could all remain, that would be great.

(The committee continued in camera.)