THE STANDING SENATE COMMITTEE ON BANKING, COMMERCE AND THE ECONOMY
EVIDENCE
OTTAWA, Thursday, May 4, 2023
The Standing Senate Committee on Banking, Commerce and the Economy met with videoconference this day at 11:30 a.m. [ET] to study matters relating to banking, trade and commerce generally.
Senator Pamela Wallin (Chair) in the chair.
[English]
The Chair: Ladies and gentlemen, senators, hello to everyone in the room and those joining us online. This is a meeting of the Standing Senate Committee on Banking, Commerce and the Economy. My name is Pamela Wallin, and I am the chair of this committee.
Let me introduce the senators who are here with us today: Senator Deacon, Senator Gignac, Senator Loffreda, Senator Marshall, Senator Marwah, Senator Ringuette. We also have joining us today Senator Cardozo and Senator Duncan.
Today we will be continuing to look at business investment in Canada. We have the pleasure of welcoming with us — all in person today — from Innovation, Science and Economic Development Canada, Simon Kennedy, Deputy Minister, who is accompanied by Charles Vincent, Assistant Deputy Minister, Small Business and Marketplace Services Sector; and Mark Schaan, Senior Assistant Deputy Minister, Strategy and Innovation Policy Sector. We welcome you all today. Thanks for joining us.
We’re going to begin with an opening statement from Deputy Minister Kennedy, please. The floor is yours.
Simon Kennedy, Deputy Minister, Innovation, Science and Economic Development Canada: Thank you, Madam Chair, and thank you to the committee for the chance to speak with you today about this very important topic.
I will try to keep my remarks brief. I’m anxious to discuss this topic with you. I thought it might be useful to just provide a short overview of the activities of our ministry related to business investment.
Innovation, Science and Economic Development Canada, or ISED, as many of you know, is the federal department responsible for the government’s microeconomic policy agenda. We work to foster a growing, competitive and knowledge-based economy in all parts of the country and across all the key sectors where Canada can bring market advantage and where we can have a growing economy.
Our approach generally consists of harnessing a diverse set of levers to promote and support business confidence. I would by no means try to go through all of them today, but, in general, we work to try to set fit-for-purpose market-based framework policies to create the regulatory certainty and consumer confidence needed for businesses to function.
We are not responsible for all marketplace framework policy, but quite a bit of it at the federal level. We support access to capital and, in some cases, as senators would know, we make direct investments to support the business sector and to help to de-risk investment and support industries in their growth and transition.
We also work to encourage greater investment and productivity-enhancing activities such as research and development, or R&D, to enable innovation.
These are all important to securing a prosperous economic future for Canada at a time of significant disruption and an increasingly volatile global economic environment post‑COVID-19.
[Translation]
The Canadian economy came through the pandemic with impressive resilience. In addition to government support measures, critical business investments in such areas as digital technologies were an important element of the success.
But Canada, like the rest of the world, is in a period of rapid economic transformation driven by the green and digital transitions. These profound forces are reshaping trade relationships, supply chains and whole industries and sectors.
Knowing this, Innovation, Science and Economic Development Canada works to deliver specific and targeted approaches to build and enhance business investment to directly target low business investment and its negative impact on productivity, competitiveness and Canada’s standard of living.
Allow me to provide some specific examples.
Modern, fit-for-purpose marketplace frameworks provide the foundation for business activity in Canada. To build confidence and trust, we are undertaking one of the most fundamental rethinks of foundational legislation in the areas of privacy, competition policy and copyright legislation.
[English]
In addition, given the importance of, for example, venture capital and helping globally competitive firms to expand their operations, the Government of Canada provides support through its Venture Capital Action Plan and the Venture Capital Catalyst Initiative. As part of Budget 2021, funding was renewed for the Venture Capital Catalyst Initiative — many of you would probably know it as VCCI — to build on earlier investments to ensure Canadian businesses continue to enjoy access to a globally competitive venture capital ecosystem capable of nurturing entrepreneurial talent and creating high-quality middle‑class jobs. That is in addition to the role played by the Business Development Bank of Canada, which is part of the ISED portfolio.
The Canada Small Business Financing Program is a statutory long-guarantee program that is also in the ISED portfolio. This facilitates indirect lending to small businesses and it has averaged approximately $1 billion per year in indirect financing. There were recent legislative and regulatory enhancements, which I know senators were involved in, and that is expected to increase the annual financing available by about $560 million to support the needs of more growth-oriented firms.
ISED also administers a number of sector-agnostic direct programming supports to incent and de-risk business investment to achieve specific economic objectives and build momentum in high-growth economic sectors. The Strategic Innovation Fund, or SIF, is certainly one of those instruments that I think people would be familiar with that provides transformational investments in innovation projects in all sectors of the economy to help Canada prosper in the global economy.
I would also note the Global Innovation Clusters, which is a close to $2-billion federal government investment that has been matched dollar for dollar by industry. This is to support the growth and development of key clusters in Canada with a direct impact on business investment in strategic areas such as advanced manufacturing, the food supply, supply chain logistics and so on.
Under the new Canada Digital Adoption Program, Canadian small and medium-sized enterprises, or SMEs, can assess their digital readiness and apply for grants and loans online. This funding is designed to help them leverage e-commerce opportunities and upgrade or adopt digital technologies to remain competitive in the digital marketplace.
I know senators are hearing from the Deputy Minister of Finance after our presentation today, and, of course, Budget 2023 outlined a number of supports in the form of tax credits to further support the greening of the economy. This is an area that my ministry certainly is working very hard on as well.
I could also talk about the Women Entrepreneurship Strategy, the Black Entrepreneurship Program and other measures designed to support business success, access to capital and growth.
[Translation]
Here are some intellectual property measures.
Intellectual property is a key asset for business and a basis for an innovation-based economy. The government has made a number of investments to build an IP-savvy innovation ecosystem, starting with an initial investment of $85 million through the National IP Strategy launched in 2018. We at Innovation, Science and Economic Development Canada are responsible for that strategy.
The Canada Innovation Corporation will help maximize Canadian businesses’ investment in research and development across all economic sectors and regions of Canada to promote the creation and retention of intangible assets in Canada. The Canada Growth Fund, as an arm’s length public investment vehicle, will help attract private capital to build Canada’s clean economy.
Those are a few examples of ongoing work.
[English]
I’ll stop there, but I’m happy to talk about any of these.
The Chair: We’ll have lots of questions, so I wanted to dive right in, please.
Senator C. Deacon: Thank you, deputy minister, Mr. Schaan and Mr. Vincent for being with us today.
We have been hearing an awful lot over the last two and a half months from different witnesses who are speaking to and living these dramatic changes that you spoke of toward intellectual property, or IP, and data-driven economy predominantly that this is where most wealth is being created in the world and about how Canada, strategically, is still working from a playbook that’s for a different game. The game has fundamentally changed from where our playbook was.
Our playbook was highly suited to the tangible economy, but not as suited to the intangible economy. For example, we invest a lot of money on building the structure, but we haven’t necessarily got our foundation right in terms of really knowing how to control the IP that comes out of our investments in research and how to control the use of data for the benefit of Canadians.
I just would like you to speak to it at a general level because what I’m not seeing is a cohesive way in which current programs are actually recognizing that change. One quick example is SIF investing in intellectual property, branch plant or research facility for a foreign-owned company which is now bidding up the cost of labour and taking the labour out, focused on Canadian IP, and we have actually incentivized that. That’s been part of the Strategic Innovation Fund.
There is not a cohesiveness in how we are delivering programs and in the programs we’re creating to recognize this fundamental change in the game. We still have that old playbook. What would be your thoughts in response to that?
Mr. Kennedy: Thank you very much for the question. I can give a high-level answer. I’m happy to go deeper and then maybe turn to my colleague Mark Schaan, who is in charge of the very specific programming on IP.
As a general rule, we are very well aware of these broader trends affecting the success of the economy in the future. Inside the department, we often talk about the major drivers of digital and data, the green transition and, increasingly, the need for resiliency and redundancy because of what we see happening internationally with the realignment of supply chains.
We have tried to take a holistic approach to how to address this. For example, there has been a significant investment by the government in the basic infrastructure of a digital, data-driven, knowledge-driven economy. The amount of resources that have gone into wiring up the country with high-speed broadband is literally an order of magnitude bigger than all previous federal investments combined. I would liken it to the electrification of rural areas in the last century in that we understand that a knowledge-based economy needs access to that. That’s a big focus of our infrastructure spend.
On the microeconomic policy framework side that I talked about before, there are significant changes that have been introduced in Parliament to modernize the basic rules around how companies are able to operate in the economy to take advantage of digital and data. We need more modern rules not just around privacy but around things like data portability and the ability to leverage these technologies. We’re trying to update the basic rules that the business sector operates under.
On the support-to-business side, whether it’s direct investment or other kinds of supports, there is a lot of work going on, whether it is through the Strategic Innovation Fund, for example, the provisions we seek when we seek to invest in firms that include much more attention than they may have in the past on IP; the support for Canadian leadership in frontier technologies; or the work we do through the intellectual property strategy, for example, to build IP literacy and help businesses better understand and protect their IP.
That’s a very high-level answer, but I would say that we certainly have a view of our activity that puts a focus on trying to protect Canadian IP and trying to grow successful Canadian companies but also recognizes we’re a small open market-based economy of 40 million people. We will also depend on investment from outside and, to some extent, on foreign ideas coming into the country. We would work both sides of the aisle in that respect. The issue of generation and protection of Canadian intellectual property is front and centre for us.
Senator C. Deacon: Mr. Schaan, could you respond and mention the key performance indicators, or KPIs, that you’ll be tracking to make sure we’re actually turning the corner?
Mark Schaan, Senior Assistant Deputy Minister, Strategy and Innovation Policy Sector, Innovation, Science and Economic Development Canada: I’ll be quick on two examples that I think are foundational. The intellectual property strategy that we started with a number of years ago had a couple of core investments that were critical. One was actually creating a centre of excellence around intellectual property that’s housed in our program-related sector. It embeds IP-related knowledge in the contractual arrangements that we reach with corporations, as imon said, but also the degree to which we can support businesses.
The two big pieces that were added most recently that are game changers are both the program that we put in place for the clients at the National Research Council of Canada Industrial Research Assistance Program, NRC IRAP, to access dedicated funds for pursuing IP strategies and the same thing for ElevateIP through our companies that come through business accelerators and incubators. The KPIs are the following: Do our firms have IP strategies? Do they have mechanisms to ensure that they have freedom to operate and retention capacity? Do they have the venture capital to be able to continue to grow and to scale? Those are a number of the key metrics that we’re continuing to track.
Senator Ringuette: My question is a follow-up to the issue that we’re talking about. On March 23, we had at this committee the CEO of Innovation Asset Collective, which is an Ottawa‑based not-for-profit corporation that received funding for a pilot project to the tune of $30 million for four years. Very impressive. You say you want to bring forward a holistic approach. I find that this is one type of solution.
What other mechanisms do you have for bringing a holistic approach to help economic development, particularly for SMEs?
Mr. Kennedy: I will stick with the framework I had previously about investing in the infrastructure of the new economy, in the rules and then in the direct work with the business sector. As one example of that, in our direct work with the business sector we are increasingly including as a significant element of our work the protection and development of IP and the advancement of Canadian IP.
I’ll give you one example. The general question is kind of a crosscut; it infuses a lot of our activity. If you take the government strategy to support artificial intelligence, we’re now at the beginning of the second iteration of the strategy. That second iteration has a significant component specifically dedicated to ensuring that the ideas and the knowledge that are developed by our scientists and by the researchers in artificial intelligence, or AI, actually get translated, commercialized and used in Canada. That’s actually a funding stream. We’re working with the AI Institutes. We’re very conscious that not only do we work to support businesses, but there has to be a component which is about trying to ensure the IP gets used in Canada and, to the extent possible, exploited in Canada.
Senator Ringuette: We are hearing and have been hearing for the last year the narrative of dealing in supply chains with friendly nations. What will the department do in regard to moving the narrative to friendly nations?
Mr. Kennedy: A couple of good examples of that will be the work that we are doing on critical minerals and the work on supply chains in the electric vehicle, or EV, battery space. We’re very conscious that we have an integrated automotive sector with the United States and that the Americans have made policy decisions about what they would like to see going into the content of cars that are sold in their jurisdiction. That potentially creates a significant advantage for Canada because Canada is a friendly country that will have access to that market.
In the critical minerals work that we’re doing, we will be working through the Strategic Innovation Fund, for example, to support companies in the critical minerals supply chain to build out in Canada to supply, as one example, the EV battery facilities and the automotive factories and so on, which are part of this integrated supply chain across the border with our colleagues in North America. That’s a very concrete example. We are working right now with a range of corporates in the battery supply space, whether it’s copper foils, electrolytes, spacers, CAM, which stands for “cathode active material,” or precursor CAM. There is a gamut of firms that are needed to build these EV batteries and vehicles, and we are active in that space, trying to anchor that activity in Canada.
Senator Marwah: Thank you, witnesses, for being here today.
I want to talk to you about the supercluster program. There have been many views on this, and I think we all recognize that they were slow to start up. But I think you mentioned, Mr. Kennedy, that they are getting traction, and now things are beginning to work a lot better. Yet, I have heard views on the other side saying that the superclusters have not worked, and it wasn’t the way to go. You have two very different views on the success of superclusters. I would like your thoughts on whether it has worked. Why has it been so slow? What are the measurements of success as to why it is working? If there are roadblocks, are there any plans to address that?
Mr. Kennedy: Thank you very much for the question. My layperson’s way of thinking about the supercluster program and, indeed, the way I describe it when people ask about it is we’re aiming to provide some support through the government’s efforts to build out the connective tissue that, in different circumstances, might be there naturally if we had just maybe a little more critical mass or if the ecosystem were a little different but that might be harder to have happen by happenstance just because Canada is a smaller country or perhaps the ecosystem isn’t as developed.
Through the program, we’re trying to incentivize these collisions and connections among businesses, academics and different parts of the supply chain, which could be very fruitful, produce economic growth and create a lot of opportunities that might not happen otherwise. What that has required is a different way of operating than the way a normal government granting program operates. To be simplistic about it, we set up a program. A business applies. If it looks like a good project, we might provide some support.
In the clusters program, it doesn’t work that way. In order for someone to get support, what they have to do is they have to find other partners. In effect, they have to come in as a consortium. Let’s say I have found something that is really promising as a business idea, or we really think we can make something go and generate jobs and growth. Actually, it will be me as a company working with this other company over here, and maybe with these researchers over here.
Frankly, that’s a different way for a number of businesses to interact with government. It actually takes more work to find partners and figure things out. For that reason, I would readily admit the program took time for people to understand it and get it off the ground. At this point, we are thrilled with the metrics and would be happy to share data with the committee. There has been great leverage from the private sector and in terms of job creation.
There is concrete evidence that this effort to try to build these partnerships has paid off. We’d be happy to share data with the committee on that.
Senator Marwah: You are absolutely right. We fully understand the concept. The concept is great on paper. It would be very helpful to us to get us some hard numbers on success. How do you measure success? What is the job creation? Are there any other impediments to the program that you feel have to be addressed, or do you think it’s taking off now?
I would like some hard numbers behind this. All we hear are two polarizing views. It’s hard to determine what success is, and what measurements you use to measure success.
Mr. Kennedy: We would be happy, Madam Chair, to come back with concrete data for you.
The Chair: That would be helpful. Our time frame is short for the conclusion of this study. That would be great.
Senator Loffreda: Thank you, Deputy Minister Kennedy, Mr. Schaan and Mr. Vincent for being here with us.
We are studying business investment, because the lack of domestic business investment has been a concern and an issue for numerous years. We do well putting money into research, establishing programs and infrastructure to support our businesses; you have covered that well in your opening remarks.
I have always said a great deal of wealth is always created by the entrepreneur. Domestic business investment is essential in sustaining our economy and well-being.
You all have a wealth of experience on the policy side. Given your experience, I have a general question: Why have the federal government’s attempts to improve domestic business investment not been successful in the past? Sometimes the “why” will lead to solutions.
I am certain you all have a lot to add on how we can do it better. What types of policy changes should be put forward to improve matters? Why hasn’t all this investment turned into results for domestic business investment?
Mr. Kennedy: Thank you for the question. It’s a big question.
I would observe that having been in public policy in Ottawa for 33 or 34 years now, this has been a question that, since I was a junior analyst, has been on everybody’s mind in Ottawa for decades. I know senators know this: It has resisted easy solutions.
There are some things we can point to that might be part of the solution. The one I would offer, knowing time is short, would be that we know, for example, in certain areas, our capital markets aren’t deep enough or don’t have enough literacy in certain sectors to be there to make the investment.
We hear this all the time from businesses that they have a really great idea or they are growing like Topsy. But then, when they go to get the capital in Canada, it’s very difficult to get the kind of financing they might get elsewhere.
I would contend that the Venture Capital Action Plan and the investments made in venture capital by the Government of Canada — and this has been over many years — are a really great example where a government intervention has led to significant positive results. It has incented general partners to come to Canada. It has incented a lot of private capital to enter this space.
If I go back to my last time in the Industry Department, about 15 years ago, as against now, when those initial investments are being made, the VC ecosystem is profoundly different. There are a lot of people who would say at least part of that is on account of the government using its leverage to try to encourage the crowding in of private capital.
Crowding in of private capital, like smart use of the government’s balance sheet and programming, is a way to try to incent and encourage the private sector to improve access to capital; it might be one example. It’s not the only one. Clearly, there are many other levers to use. I would be happy to talk about that more.
[Translation]
Senator Gignac: Welcome to our witnesses. Thank you, Mr. Kennedy, for your public service.
I have two questions. The first follows up on the discussion you just had with my colleague, Senator Loffreda, on venture capital. We heard from a witness representing the Canadian Venture Capital & Private Equity Association.
I asked him a question about the role of pension funds, since you just mentioned the government. When I asked about Canadian pension funds, however, it was because when a business reaches a certain size, Americans are often the ones who show up with funding. Can you elaborate on that?
The witness seemed to say that both pension funds and retirement funds in Canada are big. They are the equivalent of the Canadian gross domestic product. The very risk-averse, conservative. Do you have any thoughts to share with us? What can the government do to encourage them to invest in Canada rather than China, for example?
Mr. Kennedy: Thank you again for the question. It’s a good question. We’ve been talking about all that in Ottawa for years, about the pension funds issue. I want to answer your question. However, it would be better to ask it of the next witness, the Department of Finance, because in the end, it’s not our responsibility as such to debate pension fund rules. I know that question has been asked for quite some time.
Senator Gignac: That’s fair. There was Bill C-34, to modernize foreign investment in Canada. However, I think we should also reflect on foreign investments made by our country’s retirement funds, especially within the framework of the new world economic order.
My second question is more specific. This time, you referred to the Black Entrepreneurship Loan Fund. Am I mistaken, or has only 1% of the fund been disbursed over the last two years? At the Senate, it makes my colleagues uncomfortable. Why does the fund not seem to be working?
Mr. Kennedy: If I may, I’ll give the floor to my colleague, who is responsible for the initiative.
Charles Vincent, Assistant Deputy Minister, Small Business and Marketplace Services Sector, Innovation, Science and Economic Development Canada: Thank you very much for the question. It’s a good question. It’s important to remember that the program was new in 2021. It’s an ecosystem that’s growing and creating the system for using those funds.
Organizations such as FACE, which are responsible for long‑term funding, were creating the required infrastructure and ecosystem to support entrepreneurs and give out funds.
It’s true that the fund started off more slowly than we wanted, but now, we continue to grow. According to the last numbers I had, 427 entrepreneurs received $38 million in loans. We’re now starting to see more progress, more initiatives. It’s true, it started slowly.
Senator Gignac: Compared to the size of the fund, potentially, $38 million is a relatively low percentage.
Mr. Vincent: That’s $38 million drawn from a $160‑million fund.
[English]
Senator Marshall: Thank you for being here today.
Nobody seems to be talking about the evaluations of the various funds, like the Strategic Innovation Fund. Senator Marwah mentioned the superclusters. Has that been successful or not?
Is there any role for evaluations of the various funds? It seems like what’s happening is we’re creating another growth fund, the Strategic Innovation Fund, but it seems like government keeps doing the same thing over, hoping to get a different result, but it is more of the same.
Is there a role there for evaluations? Has there been anything done; has there been someone from outside doing a critique out of the $20 billion that’s spent on outside sources? Could you talk about that?
Mr. Kennedy: Certainly, Madam Chair, I would be happy to elaborate on that.
As a formal matter under the policy for results that the Treasury Board has published, we are required to evaluate all of our major programs on a regular cycle. All of them are subject to regular review and audit. Those are eventually made public. I’m not sure that totally responds to the senator’s question.
Senator Marshall: Who does evaluate them? I know, for example, that your internal audit group did something on the Strategic Innovation Fund a couple of years ago, but that was done internally. Where there are such large amounts of money going out, how do you know you’re channelling the money in the right places?
Mr. Kennedy: It’s a good question, and I would say it is one that we do think about a lot, obviously wanting to make as effective use of the funds that we receive as possible. It’s not unusual, actually, that we would go out to a third party to get an auditor evaluation done. I don’t have the details immediately available in terms of some of the programs you mentioned.
I would also note that we certainly make a point of publishing the statistics. I would be happy to share with senators some of the statistics around, for example, the leverage the Strategic Innovation Fund has achieved. We have detailed statistics and have done reviews of the clusters program. That I can speak to with some authority because it’s fresh in my mind. I don’t know if we have gone out to a third party, but we have detailed statistical information about how much private money has gone in for every dollar of government money, how many jobs have been created, how many university partnerships, how many patents have been filed. There’s a lot of material available for inspection. Admittedly, it may not always be front and centre in the way we communicate, but we’d be happy to share some of that.
Senator Marshall: In the area of regulation, who’s responsible in the government for, I guess, the regulatory regime? I’m asking that because you mentioned the Critical Minerals Strategy. It just reminded me I was talking to several people about it, and they were saying, “Just wait until somebody wants to start up a mine and they have to go through the regulatory process. It’s going to be years down the road.” Who’s responsible for the regulatory process in government?
Mr. Kennedy: On the regulatory front, in terms of regulatory policy, which sounds a bit dry, so how the government regulates, how agile the government is in regulating, that would be the Treasury Board. But individual ministries are responsible for their respective regulations. In the case of mining, I can’t speak with authority, but the Natural Resources Department, or NRCan, and the Environment Department would often be front and centre. There may be other regulations that come into play, but they would be two key actors under environmental rules and rules around mining. In telecommunications, for example, it’s almost entirely ISED and the Canadian Radio-television and Telecommunications Commission, or CRTC. If you’re talking about Rogers or Bell or somebody, that’s us; if it’s a mine, it would typically be Environment and NRCan that would be responsible.
Senator Marshall: Who oversees it globally? It’s the Treasury Board, isn’t it?
Mr. Kennedy: It would be the Treasury Board as the kind of authority for regulatory policy. Generally, it is the Treasury Board that reviews and approves regulations through the Gazette process. They also manage an annual regulatory review process designed to thin out regulations that have outlived their purpose. That’s coordinated by the Treasury Board.
Senator Marshall: Thank you.
The Chair: Just a bit of a follow-up on that. We’re trying to focus in on evaluating outcomes. Are you actually achieving what you want to achieve? We keep hearing from people who are out there who have benefited from the funds that in the end it doesn’t get you from point A to point B.
I’ll mention two issues on that. We’ve heard repeatedly on the question of attitudinal issues in Canada of complacency — that the incentive system that government provides lets them build a short-term build, scale it to saleable, not scalable. They end up selling to a foreign body at an early stage. We lose the IP, we lose all of that. That’s a big issue.
On the other side of that is the jobs-model approach to government funding, which is you get a political announcement, and 300 jobs are created, but that’s kind of an outdated one and neither is it an incentive for foreign companies to actually invest. They’re going to come and take the IP; the profits go back home, et cetera. Those are two issues we’ve heard a lot about over the last months. Could we hear some response on that, please?
Mr. Kennedy: I think this would be something, Madam Chair, senators would want to look at the latest statistics on. Certainly, we can potentially come back with some information.
There has been a lot of commentary over many years about entrepreneurialism in the Canadian economy and so on. I think some observers have noted that historically Canadian firms could make a decent profit without necessarily having to invest heavy amounts of money in R&D and so on. We were not entirely but largely a resource-based economy. We had a pretty good standard of living without necessarily having the same kind of constraints in achieving that standard of living that maybe some other countries had.
Economic structure may have had something to do with the lower levels of R&D. Businesses are generally driven to produce a good bottom line. They are not driven by the kind of things that drive us, worry about BERD, or business enterprise expenditure on R&D, and these kinds of abstract concepts. Canadian companies can generally produce so that there is a good bottom line without necessarily having to put very large amounts in R&D.
I don’t have the statistics immediately in front of me, but I remember vividly there have been a lot of debates about the export orientation of Canadian companies. It is true that many Canadian companies export, but a very large share of the exports, historically, has been to the U.S.: same language, market very close by. Firms that are successful in export markets tend to invest more in R&D and be more competitive. There may be some evidence to suggest that those who have to survive in the outside ecosystem by definition wind up having to do the sorts of things that firms in other countries have to do to survive.
The Chair: That’s really my question. Are we incentivizing the right behaviour with government dollars?
Mr. Kennedy: Our contention would be, yes, that’s certainly what we try to do. To Senator Deacon’s question earlier, I don’t think that drives us to a conclusion that we only, for example, work with domestic firms. We try to keep all IP in the country. Canada is a small open market-based economy. It would not be possible to have every capability within our borders. There are world-leading firms that we want to have in Canada that are not Canadian. Indeed, we want Canadian companies to go out and be able to buy IP internationally.
We are very concerned with the development and protection of intellectual property generated by Canadians and the growth of Canadian firms, but, I’ll be frank, we don’t necessarily see it as a monolithic thing — that when we work with a foreign multinational, that doesn’t automatically mean that we don’t care about growth-oriented Canadian companies. We’re very concerned with both, I would say.
The Chair: Just on the jobs model issue which has come up, the obvious one is Volkswagen: $13 billion and we get jobs. But again, the IP and the profit leave.
Mr. Kennedy: Madam Chair, would it be okay to comment on Volkswagen? A central argument in favour of supporting a firm such as Volkswagen in establishing a battery facility would be something like this: Canada has a significant automotive cluster anchored by a relatively small handful of firms, and those firms, it’s true, employ a lot of people. Those firms are really anchor facilities for a much broader ecosystem, including hundreds of Canadian companies, including Canadian firms like Magna, Martinrea, Linamar and so on that are substantial parts suppliers and so on.
An analogy I used before — that doesn’t work as well now that we’re heading well into the mid-21st century — is that if you think of a traditional shopping mall with hundreds of stores in it, in the old days it was traditionally anchored by three or four large department stores. You have to think in a way about some of these facilities as anchors.
The entire automotive supply chain and the automotive industry are rapidly moving to battery electric vehicles. The Inflation Reduction Act in the U.S., or IRA, is only going to accelerate that trend. All of the large manufacturers have plans to go to full EV in a relatively short space of time, and if Canada is not able to successfully make that transition, not just the handful of companies that make the cars will arguably disappear but the entire cluster will disappear, which is hundreds of thousands of jobs, hundreds of firms, many communities. These are generally highly skilled engineering — we saw in the pandemic, for example, that actually having a manufacturing base turned out to be enormously useful in a crisis. They were able to pivot to make masks and ventilators and all sorts of things.
The argument is not just that you’re going to put this plant here, and it’s going to create X jobs. The argument is this is an entire industry. It has traditionally been an enormously important industry for the country, employing hundreds of thousands of people. It has spun off world-leading companies that are Canadian.
If we don’t have the capacity to make the single most important component of the vehicle in Canada — because the battery is up to 40% of the value of the vehicle by sales — if all of those facilities are somewhere else, is that a challenge or a concern for the long-run health of the Canadian ecosystem?
The Chair: Yes, I think it’s facilities versus IP, which is what we’re trying to get at here. Anyway, I will let others ask questions here.
Senator Cardozo: I just want to carry on the questions you’ve just raised, Madam Chair. Thank you for that.
In terms of Volkswagen, then, can you tell us a little more about how much money the feds put in the province? I think Volkswagen put in $7 billion. Over time, do you see more investments coming from other sources, either Canadian or foreign?
I’m thinking of this — and part of the discussion has been mentioned about the issue of complacency on behalf of investors in Canada: Does this kind of investment by government really help other investments come?
Finally, can you tell us what exactly this money goes to? Is it R&D, or is it the actual manufacturing of the battery?
Mr. Kennedy: Senator, some of this is a matter of public record, so I’ll briefly cover —
Senator Cardozo: Tell us the stuff that’s not on public record.
Mr. Kennedy: That might be more difficult. I can elaborate a little bit.
The government has made a contribution to the capex to build the facility. I’d be happy to provide the figure to the committee, but that has been discussed publicly. The government has also agreed to level up to the support provided in the U.S. through a kind of contribution. That will only be paid out if and when the facility is built, and it’s producing the product, and the product is shipped and sold. It’s contingent. In other words, the government in the public communication gave a range because, at this point, it’s kind of a best-case scenario — the company produces as much as it hopes to produce and it sells all of it — and then there’s a lower-end range.
That’s because of the way the Inflation Reduction Act works in the U.S. If you’re a battery manufacturer, you have to make the battery or the module. You then have to sell it. You provide evidence to the government that you’ve been certified and audited, and then you get this tax payment. The payment is in arrears only after you’ve manufactured and sold the battery.
In this case, the total final amount would be in that range the government provided because until the facility is built and starts shipping, no dollars will flow. One of them is kind of a backstop to make sure that the company receives equal treatment across the border between Canada and the U.S., and the other is a capital contribution to build the facility.
Senator Cardozo: Regarding the amounts, does the government put in about the same as the private sector puts in, let’s say, five years from now? What do you anticipate? What will the money be used for — R&D or actually manufacturing?
Mr. Kennedy: The specific use of the capex contribution will be to support the construction of the facility. The specific use of the support that the government provides for the production — that will be something that would have to be discussed in part with PowerCo, the subsidiary of Volkswagen that’s building the facility. Those payments will ultimately go to the firm, and the exact use of them will in part be determined by the company.
What we can say — and again, there has been some discussion of this publicly — the facility is expected to last dozens of years. The subsidies under the IRA are scheduled to phase out commencing in 2030 and be phased out totally by 2032. The facility will take a number of years to construct. There will be this period — again, some of this is contingent on how long it will take to build and so on — of six or seven years or so where support will be provided by the government. The facility is expected to last many years beyond that. The company is on record publicly talking about being here for decades.
The output of the facility will be many multiples of the government contribution. The actual value of the material produced and sold is going to be some significant multiplier of the value of the government’s contribution.
Senator Cardozo: Does the St. Thomas plant get money from the IRA, from the U.S.? What is that part? Do they have another plant in the U.S.?
Mr. Kennedy: Any plant that a company such as Volkswagen builds in the U.S. to produce batteries, battery modules or both would receive a payment under the Inflation Reduction Act. It sets out a range of payments that are available to the business sector.
Any plant they choose to build in the U.S. would receive the payment.
The Chair: We’re going to try to bring our focus back here. Thank you.
Senator Duncan: Thank you for your appearance today.
The focus of this discussion about the Volkswagen plant and so on is really on Southern Canada. Being from Northern Canada, I just need to remind people that those strategic minerals aren’t coming from Southern Canada; they’re coming from Northern Canada. We absolutely need to deal with the regulatory framework.
In that regard, building on Senator Gignac’s question about the Canada Pension Plan and domestic business investment, what liaison does your department have with First Nations economic development corporations? I’m not talking about a colonial aspect of liaison; I’m talking about a familial relationship. Are you loaning expertise? Are you working with them to encourage Canadian investment? Do your policies dovetail with First Nations policies?
Mr. Kennedy: Thank you very much for the question.
I won’t get into it because it’s not directly your question, but just to note, we do have an active agenda in the department on economic reconciliation, so this is an area we’re very interested in.
In response to your question, as a general rule, we have not historically worked with resource exploration companies. That has typically been Natural Resources and other colleagues of ours. We have not, as a general rule, been on the ground working with Indigenous groups on, for example, mineral exploration projects. It’s not a lack of interest; it’s just not been our kind of lead responsibility.
Senator Duncan: I appreciate that. Those economic development corporations often work with the mining industry to support their initiatives and to ensure that those economic development corporations benefit from some of the expertise. You’ve gained perhaps an evaluation of your programs. Is there any kind of loaning of expertise working with them? Again, as I said, I do not mean in a colonial manner.
Mr. Kennedy: I understand, senator. I completely agree with the need to not approach things in a colonial manner.
As the deputy minister, I would say we stand ready to be helpful in that regard. Whether it’s a car battery facility or, indeed, some of these mining facilities, they are typically on provincial Crown land, so the way the processes typically work is that it’s often the provincial ministry that takes the lead on duty to consult on some of those relationships. I’ll be frank, we have not traditionally been in the front seat or the driver on that, but that does not indicate a lack of interest, if need be, to be at the table. Indeed, when federal authorities or lands are engaged, then we would be directly involved. Traditionally, we have not been a key player in that regard, just by virtue of the way the authorities and responsibilities are divided up.
Senator Duncan: Respectfully, I wasn’t looking for you to be a key player. Where Canada has worked with an Indigenous community to set up an economic development corporation to work with them, that corporation is working with the mining industry. Are you loaning your expertise in helping in a familial way — “How can I help you today?” as opposed to, “Here’s how you do it”?
Mr. Kennedy: I’ll be frank, I don’t know the answer to that question. It’s possible we have. We typically work with large corporations, so often the work with local communities is led by the company. It’s possible, but I just don’t know. It’s not something we regularly do.
The Chair: Thank you.
As we are wrapping up our study on business investment, I know Senator Deacon and Senator Marshall have some specific questions because we’re on deadline on our report as well.
Senator C. Deacon: Thank you, witnesses.
I just want to go back to where 90% of the global value seems to be, which is intangible assets, and our focus, speed and intensity in responding to that global reality.
I’m concerned when I hear statements about the complacency of business because it sounds like blaming the customer. We have all these programs, and they’re just not accessing them. We certainly have a lot of programs.
Competition is not abstract. BERD may be, but competition is not. You invest to survive, and we have had a protective, oligopolistic approach to that. Now the competition review is completed, and it’s now an internal process, not transparent, which is concerning.
With regard to privacy, we’ve been at the wrong end of the data vacuum. We have that legislation in place in the House, and we’re hoping to move that along. We’ve heard a very concerning level of a lack of capacity in intellectual property management in this country. Yes, you’ve got programs, but there is an urgent issue there.
I really want to bring you back to the issue that 90% of the global value is intangible assets now, and we’ve got all these programs, but they’re not getting traction, according to every witness we’ve had. Can you speak to the focus, the intensity and the speed you’re applying to that gap? Or do you disagree with what we’ve heard?
Mr. Kennedy: I was very careful in my remarks — I hope I was very careful in my remarks. I was never and I certainly would never be one to suggest complacency. I was responding to a question about what accounts for the historic lack of investment in business R&D. There are certainly thoughtful people who have said that part of it is that the fundamental structure of the economy has maybe not created the incentives that would require that. It was not a comment on businesspeople. It was more a comment on the industrial structure and incentives.
Indeed, we have seen lots of Canadian businesses that have been stellar in that respect, and often it is those that are the most export-oriented and the most dynamic abroad. I personally think there’s probably a link there. Their international success requires them to do that. I think it might be partly about economic structure and so on.
I’d be happy to circle back, because I know we have limited time, but I just want to assure senators that the data-driven, knowledge-driven and intangibles-driven economy is front and centre for us. It infuses all the work we do. We have been tightening up, would be the layperson’s way to describe it, putting more and more focus on this in our direct subsidy programs and our work to support university R&D, for example, in our frontier programs such as on AI, where the second iteration of the program actually has a whole piece on commercialization where we want to use this in Canada.
Maybe as a bumper sticker, we’re acutely aware that there has been enormous expenditure on R&D, in particular university R&D, and a lot of that has been harvested and used elsewhere. We don’t want to continue that legacy. We want to change the curve. And we have a lot that’s specifically focused on IP activity, which we would be happy to come back and talk to you about. It’s a crosscut of all of the work we do. I appreciate there are critics who feel we need to do more or we’re not moving fast enough, and that’s totally fair. We have to try to respond to those concerns that people raise.
Senator C. Deacon: Overall, from what we’ve heard, the messages we’ve received, you wouldn’t disagree with those — that this is an urgent issue, and we need to do a lot more a lot faster and a lot more focused?
Mr. Kennedy: I definitely think we need to do more to support the commercialization of intellectual property generated by Canadians in Canada and we need to do more to support growth-oriented Canadian companies that, in the vernacular, have a great idea and have the potential to scale it up and turn it into something world-leading, and they might need access to capital, mentorship or a better regulatory environment, but that is a focus of ours.
Minister Ng, for example, who is one of our ministers, has launched the Global Hypergrowth Project, which is designed to focus on high-growth-potential Canadian companies because, again, we know there are these great companies, but scaling them to be world leaders is something we think about quite a bit.
Under the Strategic Innovation Fund, for example, we have companies like AbCellera, which is amazing Canadian technology. We’ve been working with them. We have had multiple investments. Our fervent hope is it becomes a world‑leading international, multinational pharmaceutical firm.
Senator Marshall: Senator Cardozo raised the issue of the Volkswagen factory. Is that funded under the Strategic Innovation Fund?
Mr. Kennedy: It has received funds under the Strategic Innovation Fund. Just to go back to this, there are basically two elements to the government support. One of them is support for the capital expenditure to build the facility. That is a traditional Strategic Innovation Fund support. The other is this contingent support I talked about, which is effectively an offset to mimic the support they would have received in the United States had they located their facility in the U.S.
Maybe just to go back, the United States, through the Inflation Reduction Act, has put in place very generous supports for a range of clean technologies and is strongly incentivizing, effectively, businesses to establish in the U.S. The response in the case of Volkswagen was that Canada has provided a kind of measure that would allow that playing field to be levelled. In the recent budget — I know you’re seeing Michael Sabia later — the government announced a series of tax credits in clean tech, which, in a sense, is a Canadian response to some of these pressures that have been created.
Senator Marshall: When would we expect to see the money flowing? You’re talking about after, I don’t know, batteries are produced. Is there money up front, or is that all at the tail end?
Mr. Kennedy: Generally, the government programs pay on receipt of goods, if you like. Even in the case of the SIF, you have to build the factory and then invoice us. In the case of the incentive for the batteries, the way it would work is the company has to manufacture the batteries and basically sell them, and, ex post, we would have confirmation that it happened, and they would receive payment for that.
Senator Ringuette: In regard to investment in research, for many years we’ve been investing billions in research. Through our study, many of our witnesses have said that we need to find a way to have a form of ownership in that research because Canadians supply the funds to do that research, so Canadians should be able to benefit more from this research.
Are you thinking of a form of ownership in the research-granting program?
Mr. Kennedy: What I would say — and my colleague Mark Schaan might wish to add more — the government committed to doing a strategic review of our supports and policies in the area of intellectual property. It’s a detailed review. We’re three quarters of the way through that process, and we would be looking at all those sorts of things. I don’t know whether Mark might want to weigh in a little more. We’re doing a comprehensive review of all of our IP interventions right now. That was something the government had announced would be done.
Mr. Schaan: To add very quickly, right now, research in Canada that we fund at the federal level does have to have net benefit to Canadians and does need to be available to Canadians. One of the things we’re looking at in the IP review is the format of those benefits and ensuring that we’re maximizing the intellectual property value that is actually accrued.
Senator Ringuette: Would you include this committee in your review in regard to looking forward for comments?
Mr. Schaan: In terms of your report?
Senator Ringuette: No. It could be outside of our report, but —
The Chair: Yes, we’ll be sending you a copy. Don’t worry about that, for sure.
Senator Marwah: Mr. Kennedy, you made a comment that I agree with, which is a lot of our companies that have been successful have pursued foreign markets. I agree with that. What baffles me time and time again is that notwithstanding the numerous free trade agreements, leaving aside the USMCA, but the other ones, whether it’s CETA, CPTPP or many others, our exports significantly lag our imports. Why is that? That is going by the last numbers that I looked at, and the numbers may have changed. I hope they’ve changed, reversing that trend. Why is that? What are the impediments? Is Canadian business too risk-averse? What is it that results in that outcome?
Mr. Kennedy: I’m not sure that I can give a wise answer to that. I can ratify the senator’s observations.
I was deputy minister of trade many years ago and was responsible, working with Steve Verheul and others, for negotiation of the Canada-EU Trade Agreement and so on. Many of us remarked that Canada does have all of these trade links with all of these other jurisdictions — the only G7 country that has free trade agreements in Asia, Europe, in North America, really remarkable — but the majority of our exporters continue to go to one market, and that has been a difficult figure to move substantially. It may be worth talking to our Trade Commissioner Service, if you have the time, or to the deputy of trade.
The Chair: Yes. Thank you all very much: Simon Kennedy, Deputy Minister of Innovation, Science and Economic Development Canada; Charles Vincent, Assistant Deputy Minister of Small Business and Marketplace Services Sector at ISED; and Mark Schaan, Senior Assistant Deputy Minister of the Strategy and Innovation Policy Sector at ISED. We appreciate your comments as we hone in on our report.
For our second panel, we have the pleasure of welcoming with us in person Michael Sabia, Deputy Minister at the Department of Finance. He is accompanied today by Rhys Mendes, Assistant Deputy Minister of the Economic Policy Branch at the Department of Finance. We appreciate you being here.
Mr. Sabia has decided not to give any opening remarks so that we can all leap into our questions at this point. I will take the chair’s advantage here.
As you know, we have been doing a report on business investment and lack thereof in this country and some of the issues surrounding that. I would like to start out with the part of the problem with the subsidy approach that we have seen in all these departmental programs.
I’ll just quote James Hinton, who was here a few days ago. He is an intellectual property lawyer with Own Innovation. He said:
You can’t just fund your way into economic prosperity. . . . In clean technology, we own less than 1% of the global intellectual property. So unless you . . . intentionally ensure that Canadian-owned IP and data assets are part of the . . . value chain, you are initiating a generational wealth transfer out of the country . . . .
Mr. Sabia, could you give us your thoughts on that? Thank you.
Michael Sabia, Deputy Minister, Department of Finance Canada: First, Madam Chair, on behalf of Rhys and myself, let me say thank you for the invitation to be here today.
I’m not sure where to begin in answering your question. Maybe I’ll start here: In the Department of Finance, we’re very focused on these issues about business investment and levels of business investment in the country going forward. This is a very complex problem and it doesn’t have silver-bullet solutions. This is about bringing a range of government efforts together to try to tackle the problem, which, as I say, has been with us for a long time, but, frankly, in the near term it’s gotten worse.
Yes, IP is part of it, but IP is only part of it. In terms of your work — it will be an impertinent comment, so I apologize — I think you need to be very broad in your thinking about this.
Improving IP in Canada, there are things that the government has done starting in 2018 and elsewhere, which we can talk about if you like, to get at that problem. That’s part of it, but it’s only part of it. Canada’s problem around some of this stuff is not that we’re not good at creating and inventing. We’re actually quite good at creating and inventing. What we’re not good at are the linkages between the creation and invention process and, say, the innovation process. There just seem to be gaps there that diminish the capacity of our economic system to translate what is world-class invention capability into world-class innovation capability. That’s a huge problem for the country.
We can talk about a lot of different ways of trying to fix that, some of which I can talk about wearing my current hat at the Department of Finance or my previous hat at the Caisse de dépôt, where we did a bunch of stuff around that. It’s a very complicated problem, but to synthesize my answer, IP is a part of it, but IP is only a part of it.
If you want to unpack some other stuff on IP, I’m happy to do that.
The Chair: I agree. We will have a broad range of questions, but we’re about to wrap up our report on that issue. We are putting it in a larger context, but we’re trying to focus on some key things that we hope can be changed.
Senator C. Deacon: Thank you, Deputy Minister Sabia and Mr. Mendes, for being here. I want to pick up from exactly what you started to say. There is no silver bullet here, and we’re looking at a range of issues, for sure.
One of them I want to ask about is competition and competition policy. I want to commend the Department of Finance for running an exceptional open banking consultation process that has built a lot of agreement. It’s probably set a new standard in how consultation can occur. It’s open, it’s transparent, it’s detailed.
Mr. Sabia: Often we’re accused of setting standards in the other direction.
Senator C. Deacon: I commend your work in that regard.
It seems to have fallen silent as an issue, but it’s an area where Boston Consulting Group just talked about the sixfold growth that’s going to be seen in financial technologies. We have certainly seen an awful lot of evidence around how it enables Canadians who are marginalized to improve their credit scores, to improve access to affordable services and dramatically cut the cost of interchange fees for small business. We’re paying six- or sevenfold what we would be paying in other parts of the world that are comparable with us.
Where do things stand with open banking? It seems to fit with so many different government priorities, but it seems to constantly hit these periods of extreme waiting after every burst of progress.
Mr. Sabia: From our point of view within the department, there is a process of technological change that’s going on that is substantially remaking the world of financial institutions, and that has to do with fintech and more sophisticated technology, which we can discuss if you would like.
Both ministers in the department are seized of this issue because there are millions of Canadians who are basically doing screen scraping and using that as a basis for changing their banking arrangements, et cetera. That’s not a secure way for those Canadians. What that shows and tells you is there is a demand out there to have greater flexibility with respect to how data is managed and how data is moved around. That’s on the one hand, and I think government policy is going to have to address that.
And I think recently we have seen yet more examples of this in the current turbulence we’re seeing in financial markets.
The flip side, and the reason it’s a complex issue, is the resilience, the stability of Canada’s financial system, which is a bedrock characteristic of how our economic system works. If you compare how we have navigated the last number of months in an environment where there has been a lot of turbulence, whether in the European market or the American market, the stability of our institutions is a really important competitive advantage for Canada.
Open banking and finding the right path to open banking are really about trying to find a path that accomplishes both of these things: that continues to open up the system, that provides consumers with more choice, that helps deal with costs, et cetera, and that makes the system more competitive, which is a good thing — all on the one hand — but on the other hand, we also have to make sure that we do it in a way that we don’t diminish the stability of our system, which I would say is becoming increasingly important and an increasingly important differentiator for Canada in the world.
That is maybe a roundabout answer to your question, but from a policy point of view, we need to think about how we balance these things and find the right path through.
Senator C. Deacon: I hear, though, that there is not prudential regulation required with the financial technology companies; it’s giving their consumers secure control of their data. How could that be an impediment? Because prudential regulations are entirely separate. Consumers need to have secure control over their data and make sure that who they are giving it to is a secure recipient of the data, but this isn’t about prudential regulation. The problem we have right now in financial institutions internationally is a prudential regulation problem; it’s not a data-sharing problem.
Mr. Sabia: That’s a fair point, but I think that data sharing and how that’s done and the stability — look at what’s happened in the United States recently with respect to regional banks and the issues associated with, in effect, the flight of deposits and how that has contributed quite centrally to the instability that we have seen among U.S. regional banks.
Again, I don’t want you to misinterpret me. I’m not saying that I think or we think — and certainly the two ministers think — that there is a problem with open banking; not at all. I think, in concept, everybody is there. The question is finding ways to make sure that we do it in a way that we don’t destabilize, particularly on the deposit side of the ledger — but there are other aspects of this — the institutions where those deposits matter a lot in terms of the overall balance within a financial institution.
Again, we’re supportive, and I think you will see in the coming weeks and months further action on the part of the government to make this happen. You asked about pauses — we actually don’t think about it as a pause. We actually have been pretty busy with a lot of different things, but you can only get so much done in a week’s time. We’re working on this, and you will see progress on this, and I think you’ll be satisfied with the progress that you see.
Senator C. Deacon: Thank you very much.
[Translation]
Senator Gignac: Welcome, Mr. Sabia and Mr. Mendes. This is the first time, as a senator, that I’ve had the chance to see Mr. Sabia as a witness. I’d like to take a few seconds to highlight your devotion and public engagement. In a previous life, I had the chance to interact with you when you were president of the Caisse de dépôt et placement du Quebec and I was Minister of Economic Development. I know your abilities and I think Canadians are very lucky to have you.
I want to talk about funding. In the 2022 budget, we heard about the Canada Growth Fund, which was a new innovative tool to deploy technology and accelerate Canada’s energy transition.
Can you tell us a little about it? My follow-up question is this: Why, instead of being a different organization, is it suddenly under the responsibility of PSP Investments, and what does that mean? Will we have transparency and accountability afterwards?
Mr. Sabia: We decided to create the fund because it’s part of a broader strategy to accelerate the transition towards a low carbon economy. In the budget, we made an announcement and included a picture, a pyramid with levels, including a price on carbon, on pollution. It’s part of the structure’s key components. We’ve now added another level, which includes very important tax credits. We’ve allocated about $80 billion over 10 years to accelerate progress.
On another level, we created a growth fund. The reason we created the fund was to have access to capital for making potentially riskier investments to develop new technologies.
Senator Gignac, given our history, I thoroughly understand your concerns about Canada’s retirement funds and their investments in Canada, the exception being the Caisse de dépôt et placement du Quebec. We’ve done very good work there, but that’s another matter.
I understand your perspective. It’s another way for us to make these investments. Due to of the nature of the investments, they’re not front and centre for Canada’s retirement funds. Creating the fund gives us another tool to accelerate things. Furthermore, the fund will allow us to do other things.
As for why PSP Investments was chosen, that’s a good question. We talked a lot about it. In the end, the reason we chose an institution like PSP Investments — in fact, I think there’s two key reasons — was that, above all, the fund had a significant amount of expertise. It’s very difficult to hire people and build a similar organization to manage growth funds. So, we asked ourselves: Why not use the existing pool of talent, which operates at a very high level and is world class, to make and guide these investments? That’s one point.
The second point is that because of significant links between the two, we learned certain lessons. The government decided to create a new entity when it created the Canada Infrastructure Bank. However, creating that organization took a lot of time. We lost a lot of time.
This time, our objective always exists in a context of acceleration. That’s another reason why we chose an existing institution. PSP Investments is now creating a separate division, because the nature of the investments is completely different compared to investments made by a retirement fund.
The goal is to have our cake and eat it too. We want to benefit from PSP’s expertise and create an institution under its supervision dedicated to another investment strategy. We want to do it very quickly, because frankly, we don’t have a lot of time when it comes to transitioning towards a low‑carbon economy.
Senator Gignac: I’ll stop you there, because I don’t want to infringe too much on my colleagues’ time. If we need to, we’ll come back to governance during the second round. Thank you very much, Mr. Sabia.
[English]
The Chair: I will just remind everybody that we need both questions and answers to be a little shorter.
Senator Loffreda: Thank you for being here and welcome.
Many businesses will be changing hands in the next decade, and keeping these businesses in Canada is key in improving domestic business investment. You did mention we must take a broad approach and there is no silver bullet in improving domestic business investment. Increasing the return of labour will, undoubtedly, also improve our economy and promote the domestic business investment.
The employee ownership trust would result in an exceptional contribution to meeting the aforementioned objectives. Can we hope for improvements in legislating this important incentive in the near future? I know it has been addressed, but with respect to the current legislation, many experts feel it is inadequate. Four quick points: It has missed its social purpose — closing the gap between the return on labour and the return on capital — it makes the adoption reliant on the owner’s goodwill and charity instead of incentives; it restricts qualification of businesses to those with 90% of their assets in Canada, where many of our businesses are exporters and would not be eligible and are disqualified by this restriction; and finally, it creates a non‑traditional politicized corporate government structure. Employee ownership trusts are intended to be a form of employee ownership that maintains a traditional corporate governance model. Thank you.
Mr. Sabia: Senator, as you know, I would describe it as we have begun to move this along. In the past, there have been some impediments in Canada to the creation of employee ownership or fostering the whole notion of employee ownership. On the positive side of this, we’re very supportive of this, and it is an option for some businesses and some entrepreneurs who got to a stage where they want to pass on their business one way or another. We’re supportive of the concept of this.
From your answer, you are clearly not sold that we have delivered the whole loaf. In fact, it sounds like we have delivered a slice or two, in your mind. I think we have actually delivered a little more than that. But, look, it’s a first step.
Senator, you made a point about not providing incentives. For now, at least, we want to see what happens with the changes that we have introduced and whether or not those lead us to the kind of opening the doors and encouraging more of this kind of thing in the country.
If not, we’ll have to learn and make adjustments. But on the issue of incentives, we’re also conscious of the fiscal issues associated with putting more money behind more tax incentives. We have adopted a different approach, which is not to provide tax-based incentives for doing this — again, we have always got things to learn — because we don’t think that’s the core of the issue. But we’ll see in the coming years, as the legislation hopefully gets approved and we move forward with this, what kind of benefits it delivers.
Senator Loffreda: Just a quick follow-up: Where it has worked globally, it is because of the tax incentives. It’s only a tax deferral we’re looking at because there are capital gains exemptions for Canadian-controlled private corporations, as you know. So there isn’t a lack of taxes coming in if it is adopted. It’s a tax deferral because when the employees sell shares, they will be taxed. So it’s something to look at where it has worked around the world, other models, and the take-up is huge when the tax incentives come in. I wanted to add that and put it on the record.
The Chair: Thank you.
Senator Cardozo: My question is regarding the current climate for business investing. It’s a two-part question. Is a high‑inflation, high-interest-rate era good for business investment? Second, in terms of inflation, what do you think about price controls? We have many price controls in place around things like rent, tuition fees, insurance and other areas. Would targeted price controls for those aspects of inflation which are most of the problem be useful? Are those something you have given any thought to?
Mr. Sabia: I’m going to give you a quick answer and then I’m going to turn to Rhys Mendes.
Let’s stand back just a little bit. This is a very important question you are asking. The world has gone through a period in the pandemic where, for good reason, absolutely staggering amounts of liquidity were injected into the global financial system, and I mean staggering amounts. That’s good because I think if that had not happened, then we could have had a very severe and lasting recession, maybe worse than that.
The right thing has been done, but there has been so much liquidity injected into the system, then compounded by the Russian invasion of Ukraine and the impact on energy prices, supply chain disruptions associated with the shutting down of the world economy because of the pandemic, et cetera — umpteen reasons that have broken a lot of the connections that make the global economy work.
So what have we got? You’ve got a supply problem, and that supply problem has been manifested in the high inflation that you have seen. And, yes, monetary authorities have had to respond with higher interest rates. But what we’re seeing now — we’re seeing it elsewhere, but especially in Canada — is that inflation is now starting to come down. It’s starting to come down in Canada at a pretty reasonable rate.
Now, it’s true that there are still some areas where inflation is a little bit higher than anyone would like, for example, on groceries, shelters — because you mentioned rents — those are things that are coming down but not as fast as some other aspects of inflation. I’ll turn to Rhys in a second because the question is important, but what I’m saying is we shouldn’t be surprised about what has happened with inflation. Yes, rates have responded, but the situation is improving significantly. Given that, I think to take a step into the world of price control right now, we would not see the need to do that.
What we do see is the need for targeted assistance on groceries, which the government did in the recent budget. Where there is need and difficulty, we see the need to respond to it through that kind of a mechanism rather than a very difficult and potentially highly distortive use of price controls, given that the situation is improving.
Rhys Mendes, Assistant Deputy Minister, Economic Policy Branch, Department of Finance Canada: In terms of thinking about the impact on investment, when I step back and think about what one of the key underlying challenges for investment in Canada is, it’s businesses thinking about how to invest in an uncertain environment.
When I think about interest rates and inflation, the key thing is getting inflation back to the 2% target because that will minimize the uncertainty created by inflation and, therefore, facilitate investment. So ensuring inflation comes back to the 2% target is key. That will also ensure that we have stable interest rates.
When I think about price controls, an issue here is that a lot of the inflation, as Michael said, has been generated by supply disruptions, whether it’s in global goods prices or in different commodities markets. Price controls won’t help to bring forth more supply. What you’ll end up with is rationing in terms of how the available supply is distributed.
Ultimately, the experience with price controls in the 1970s was that they didn’t actually manage to stop overall inflation. Ultimately, what stopped overall inflation was monetary policy, so I think that’s the line we have to continue pursuing in terms of stabilizing inflation.
The Chair: Okay. Thank you for that.
Senator Marshall: Thank you for joining us this morning. The government has all these funds located throughout government funds or corporations that basically give out money, but there seems to be a reluctance to go back and do an evaluation to see if the objectives were achieved. What worked and what didn’t work? We haven’t been able to get a handle on why there is a reluctance to do that.
What seems to be happening is that the government keeps doing the same thing over and over again through the various funds, hoping there will be a different outcome at the end. Why is that reluctance there? Evaluations would give you some insight into which direction you should go. It’s the money that seems to be the focus, getting the money out there, but the problem is not just money; the regulatory regime for different projects is also overly burdensome.
I was just reading an article in The Globe and Mail that this relates to projects under the Impact Assessment Act. The article is entitled “Project progress under Impact Assessment Act remains slow.” The government seems to have a problem with regard to getting projects under way, and the focus seems to be on giving out money and hoping that will work.
Can you talk about the evaluation aspect? Also, it’s not just about the money.
Mr. Sabia: Well, coming from the Department of Finance, we heartily agree it’s not just about giving out money. We’re in radical agreement on that.
You’ve touched on a whole bunch of things, so I’m going to try to get through this fairly quickly.
One, the definition of insanity is trying the same thing over and over again and expecting a different result. That’s a bad thing to do. To come back to Senator Gignac’s question, the Canada Growth Fund is a completely different way of doing things. Putting $15 billion out at complete arm’s length from government — I can tell you from having to convince people internally — that’s a different approach. It’s designed to depoliticize the use of public funds to lever in — that’s the objective — private capital so that we can get a cumulative effect of $15 billion levering $45 billion, $50 billion or $60 billion, which we desperately need in the country. That’s new. We haven’t tried that before, so we’re going to try it.
The Canada innovation corporation is a new idea, again, at arm’s length from government — we can talk about it more if you like — designed to be able to work at the speed of business. Let’s be clear, government doesn’t. Having lived in both worlds, I can assure you it doesn’t.
We are trying different things because these problems require a spirit of experimentation, and we have to be ready to try things. Here and there, we have to be ready to fail because that’s how you learn. We are trying different things. That’s point number one.
Two, you are 100% right on project approvals. It remains a significant challenge for the country. As I said in my answer to Senator Gignac, $80 billion in tax credits to promote and accelerate the transition to a low-carbon economy is good, and that was a big step forward, but an accompanying piece to that — and I truly believe it is an accompanying piece — is that we have to find ways of getting better and quicker at approving projects. Because if we don’t, we can provide all the tax incentives we want; if people are looking to make capital investments, yes, they might like the tax credits, but if they can’t get the project done, what are they going to do?
There’s a significant amount of work under way on that issue within the government, and I’m hopeful that in the coming weeks and months you will see, again, some fresh thinking about how we can move this along in a way that respects the rights of stakeholders and that gives people an appropriate voice in these things but does lighten up the process. There are lots of interesting opportunities for us to work more closely with provinces, not to duplicate everything they do, but for them to use us sometimes and for us to use them. There are things that we can do that, in combination, can accelerate things, and I think that’s really important. That’s point number two.
My last point, there is work under way, for instance, around a review of intellectual property in the government. That’s one example. I think we are trying to review and assess the effectiveness of programs. Do we do it enough? I think that’s an open question. Probably not. Every organization can do more, whether in the private sector or the public sector. I think it’s a fair observation on your part.
It’s equally important not to underestimate the amount of internal reassessment that goes on. My issue with that is sometimes it takes too long, but I think there is a fair bit of that activity happening.
Senator Marshall: I want to make the point that you talked about one of the corporations bringing the private sector to the table. The Canada Infrastructure Bank was supposed to do that, but there seems to be a real reluctance for the private sector to join forces with the government. I just want to make that point that it’s a problem.
Mr. Sabia: I know the chair wants to move on, but in the first three years, the Infrastructure Bank massively underperformed for a whole bunch of reasons that I won’t bore you with. It had less to do with the Infrastructure Bank and more to do with how it was set up.
In the last three years, if you look at a graph of what the Infrastructure Bank has done, the first three years are kind of like that, and then it goes like that. Now the bank is really hitting its stride. It is working with the private sector. It is drawing in private capital, but I agree it took way too long to get going, hence a different approach that we adopted with respect to the Canada Growth Fund to avoid those very problems. You’re right about the past, but things have changed quite significantly.
Senator Marwah: Thank you, deputy minister, and thank you, Mr. Mendes, for being here.
Mr. Sabia, you have a very unique perspective of extensive experience in the private sector and extensive experience in public service. There are very few people in your shoes who have a combination of those two.
When we look at one of the problems we face as a country, it is low or anemic — as I’ve heard people call it — private sector investment, which leads to low productivity and has consequences as a result.
Where I come from, and talking to many in the private sector — from small business all the way up to large-cap companies — two things come up again and again in terms of impediments. One, as I’ve mentioned many times, is regulation, and problems with regulation are threefold: over-regulation, time to approval and certainty of approval. Regulation has many facets. I’d like your thoughts on that and whether there are any initiatives to address that.
The second point that comes up is tax policy in terms of its complexity and the fact that it has become more of a mixture of wires than a comprehensive policy; we plug holes rather than try to deal with it from a macro perspective. I’d like your thoughts on both of those and what we can do to address them.
Mr. Sabia: In terms of your point, senator, on regulation, I think everyone would probably agree that there are always ways to improve what various levels of government do. In Canada, given our political and governance structures and the overlap between federal and provincial regulation, I think there are always ways to improve that.
But when I ask myself the question, “Does regulation explain a significant part of this fundamental question about business investment, especially in research and development?,” there, when I look at, for instance, Canada’s performance with respect to those business investments and investments in R&D and I compare it to the United States, there’s a world of difference. The U.S.’s recovery from the pandemic in terms of levels of business investment — they’re already 6% over where they were. We’re at 1.5%. We’re recovering much more slowly. That’s just a recent statistic. There are others.
There’s a big difference between how the United States is recovering and the way we are from a business investment point of view. Some of it has to do with oil and gas prices and a whole range of issues.
But then I look at most OECD assessments of regulatory operations and the complexity of regulations. Actually, between Canada and the United States, there’s not a big difference between the two countries from a regulatory point of view.
If I’m looking for an explanation as to why the United States has recovered so quickly on business investment, and we haven’t — and it’s not just recovery; on an ongoing basis, the United States, their overall level of business investment is much higher than it is in Canada as a percentage of GDP — I’m not sure regulation explains it. It could be a contributor, but it’s not the centrepiece. I guess that’s one person’s thought about regulations.
In terms of the tax system, show me an advanced, sophisticated industrial country that has a simple tax system. I don’t think that exists in the world. It certainly doesn’t exist in the United States. It doesn’t exist in most European countries. Tax systems have many objectives. It’s not just about raising revenues; tax systems are about creating incentives for certain kinds of behaviour to deal with a whole host of issues, social or economic.
There are tax credits that we use to improve the progressivity of, for instance, the goods and services tax; tax credits we use to encourage scientific research and experimental development, so‑called SR&ED. All of these things bring with them complexity, but that complexity is the result of an effort to use the tax system to accomplish a set of social and economic objectives.
Is there a need every — I don’t know what the time period is — to sit back and reassess and find simpler ways of managing the tax system? Yes, I think that’s always the case. I think that’s true across every country, but I wouldn’t say that I find, in comparing us to other countries, that the Canadian tax system is unusually complex to a point where it becomes an impediment to investment.
Senator Marwah: I think you’re right in terms of complexity. I’ve often said that, in tax policy, complexity is the price you pay for fairness. I understand that.
But at the same time, there’s a point where you say that it is time for an overall review to be done, which should take place maybe every 20 years. I don’t know what the time frame is. I think the last time we had done one was 25 —
The Chair: Is there a quick question there, Senator Marwah?
Senator Marwah: Perhaps we should encourage doing a broader review that should take place and that hasn’t taken place in over 20 years.
Mr. Sabia: The last time we had a truly comprehensive review of the Canadian tax system was a long time ago. It was in a prior life of mine, when I was first here, and, God knows, that was a long time ago. That was before the creation of the internet. That’s how old I am.
Is there a need, from time to time, to come back and look at those issues? Yes, I think there is. In the future — perhaps not right now — that’s something that I think always makes good sense.
[Translation]
Senator Massicotte: Thank you, Mr. Sabia. I must echo my colleagues’ comments. Thank you very much for your contribution to our beautiful country. You have come full circle in your career. Thank you for being with us this morning.
Our subject is investment. You commented that we are very far behind. The challenge is enormous. At the same time, you say that Canadians are creative, but they have difficulty being innovative. I want to understand the words you chose. Nuances can be very important. That may summarize the issue.
Mr. Sabia: Here’s my point of view: The level of our investments, creation activities and development of new ideas, such as those that already exist in Canadian universities, is fantastic. It is world‑class.
The challenge is to find ways to translate those activities and make them more operational within the way our companies operate. When I distinguish between developing new ideas and innovation, I mean that innovation happens after a period of marketing. It makes those new ideas useful within the context of how a company operates, to achieve the economic potential of each one of those ideas. As a country, our ability to translate those new ideas into the way a company operates is not as strong. What’s the solution? I’m not sure.
Just to come back to my previous life, at the Caisse de dépôt et placement du Quebec, we put a lot of emphasis on how to find ways to put researchers and businesses together physically. At the time, it seemed to us like a good way of solving the problem of translation. It gave entrepreneurs an opportunity to talk directly with researchers, to tell them about their needs and encourage them to develop new ideas, to work within their context and develop what was required to improve a company’s operations.
Senator Massicotte: Did that work?
Mr. Sabia: It wasn’t bad; we created an institution called Mila in Montreal. At Mila, we set up sources of capital, investors, researchers and entrepreneurs. We put all three together physically. Right now, I think it’s moving forward rather well. That’s one example. We have other examples that summarize the same idea, basically. You have to find the means. You have to be willing to experiment and find ways of solving the problem of translation.
Senator Massicotte: Thank you.
Senator Ringuette: My question follows up on that of my colleague. First of all, thank you for being here and for your contribution to your department.
Earlier, we had people from Innovation, Science and Economic Development Canada (ISED). This was my question for them: We invest billions of dollars in research in this country, but we don’t have control. You just described a way of managing research or undertaking research. Representatives from ISED told us they were reviewing their programs.
During our hearings, we had a lot of witnesses appear before us. They told us we had to find a formula so that Canadians, through their government, become a kind of co-owner and have a certain ownership over sums granted for research to maximize potential growth and profits for them.
I know the Department of Finance will have a big impact on how the review happens and on what will be implemented. What’s your opinion on the subject?
Mr. Sabia: I’m not sure I correctly understood the suggestion from our colleagues at ISED wen they talked about co-owners. For me, it’s not entirely clear.
Senator Ringuette: They’re not the ones who suggested it. They told us they were reviewing their research investment policy. Other witnesses who appeared before the committee over the last few months suggested that it would be an excellent idea for us to continue funding research. However, we would benefit from a certain sense of ownership to maximize wealth and orient their investment and research policy to maximize its impacts in Canada; that’s my question.
[English]
Mr. Sabia: Senator, as you can tell from this long pause, I’m not sure what the right answer to your question is. The funding that the government is providing — whether it’s in artificial intelligence, genomics, quantum research or whatever — directly to higher education is making a significant difference.
If you look at Canada’s position in the world with respect to artificial intelligence, those investments have paid off substantially because Canada is now globally recognized as one of the leaders in AI, with some of the strongest academic capability that exists in the world.
These days, whether or not AI is going a little too fast, et cetera, is its own issue. I use AI as an example. We have built in Canada — and I think we don’t focus on this enough — academic research capability that is really second to none in the world.
Now, the question then becomes what we’ve been talking about, which is how you get the industrial benefit of that and, through that, the creation of social wealth from that research. That is really a fundamental issue here for the country, but the focus of thinking there needs to be — as I was saying to Senator Massicotte in my answer — it’s not the investments we’re making in universities. That is working pretty well. It’s how we take that and use it from an industrial point of view. That’s hard.
Senator Ringuette: That’s why we need to be invested in a form of ownership or otherwise to make certain that the A‑to‑B‑to-C happens in Canada.
Senator Duncan: Thank you very much. Thank you for your appearance here today. This committee is very focused on the results of investment and Canadian investment in Canada by way of tax credits and investment policy.
The Mineral Exploration Tax Credit has been around for a very long time and it has recently increased specifically for strategic minerals, which is critically important.
Given the length of time that this tax credit has been around, is there work under way to determine its success? How is it relating to investment by Canadians in the success of the development of the mine?
Mr. Sabia: Those credits are not limited to just Canadian companies. That’s quite intentional because the objective is to encourage investment in the mining activity itself as opposed to whether it’s a U.S.-based or Finnish-based or German-based company; it’s the activity itself.
You allude to some very important initiatives launched in the budget where we’ve done something that we have not done before in the area of critical minerals, such as copper, nickel, et cetera. There, we’re providing tax credits not just for the mining activity itself, although the mining activity is eligible for the credits. We’re also providing tax support for the downstream processing of those minerals, so that we are not just extracting materials but extracting them and processing them in Canada.
The traditional tax credit approach to this has been focused just on the mining activity, and the reason why we’re so focused on this is that we believe that critical minerals are the new oil. In the industrial period, where fossil fuels were the driver of industrial activity, oil was a critical determinant. That gave rise to the politics around the Middle East, et cetera. In an economy where we’re moving away from fossil fuels and toward lower carbon production, it’s those critical minerals that will play the geopolitical role that oil did in the past.
For Canada, given that we have a reasonable endowment of critical minerals, how we use them, how we develop them in Canada and how we use them geopolitically vis-à-vis the United States and other countries is a critically important issue.
The Chair: We have to wrap that up.
Mr. Sabia: We encourage the investment by, in effect, sharing part of the cost of it through these credits. By lowering the cost of investment, we’re trying to encourage investment into those areas. Part of it is the tax credit; part of it is the Canada Growth Fund providing capital for higher-risk investments. It’s a whole variety of things required to get the level of investment up so that we can exploit those resources, process them and therefore generate social wealth.
The Chair: We’ve heard a lot of comments from all these different areas. I want to end very briefly, because we’re out of time, on your actual bailiwick. We have interest rate issues, inflation, a growth problem, a productivity problem. The latest number I’m reading here is that every Canadian household has about $2 of debt for every dollar of disposable income. Is that an issue for you that you have a plan to deal with?
Mr. Sabia: Senator, you started your question by saying that in Canada, we have productivity issues, investment issues, this issue, that issue. But you didn’t say something else. We also have immense potential.
The way I look at where we are as a country, the glass isn’t half empty; the glass is half full. And half the time in Canada we spend too much time saying, “Oh, we’ve got this problem, and we’ve got that problem.” I assure you, I go with my boss to a lot of G7 meetings and a lot of G20 meetings, and when I look around the room, whether it’s from a fiscal point of view, an indebtedness point of view or any of those other things — I admit that Canada does have a productivity issue. Yes, I agree. Yes, we have business investment issues. Yes, I agree. And we have to overcome those. But, boy, when you stand back and you compare our circumstances fiscally, economically, in terms of growth potential, natural endowments, quality of the labour force, a whole variety of things, there are very few places I would rather be than in Canada right now, in the world as we have it.
The Chair: We will invite you back to talk about debt and many of those other things as well. Thank you so much, Michael Sabia, Deputy Minister, Department of Finance Canada, and with him today, Rhys Mendes, Assistant Deputy Minister of Economic Policy Branch. We really appreciate your time and, as many have said, your commitment to the country. And we have a promise he’ll come back. That’s wonderful.
Our meeting is at an end, and we’ll see you again next week.
(The committee adjourned.)