[Recorded by Electronic Apparatus]

Tuesday, October 29, 1996

.1839

[English]

The Chairman: I apologize to you. We were delayed this afternoon. We had a vote. Now we're almost 45 minutes late starting, and I apologize to you because I know you've made other plans. If there is anyone here who has plans and has to leave, perhaps you could signal me so that I could recognize you earlier. I don't want to inconvenience you any more than we already have.

The finance committee is very pleased to have with us many people who are very concerned about Canada's science and technology research and development policies and who are leaders in their fields.

.1840

They are: from iSTAR internet inc., Margo Langford; from IBM Canada, Tom Gray and Bob Reid; from the Ontario Technology Development Council, Greg Warren; from Nortel, Peter Kastner; from Spar Aerospace Limited, Cliff MacKay; from CAE Electronics, Bob Waite; from the Newbridge Networks Corporation, Jeff Laks; from the Canadian Advanced Technology Association, Christopher Albinson; from the Information Technology Association of Canada, Gaylen Duncan; and from the Geomatics Industry Association of Canada, Michael Kirby.

I propose that you each start off with an overview for three or four minutes and then we'll get into questions. I can assure you that everyone will have ample opportunity. Who would like to start? Will it be you, Greg Warren?

Mr. Greg Warren (Secretary, Ontario Technology Development Council): Mr. Chairman and members of the committee, thank you very much for the invitation to address you.

Our organization is involved in working with applied technology and technology acquisition, so we're not in the research area. Today we can share with you some of the opportunities and barriers that we have encountered over the last year.

In general, we feel that the government's been very generous in the allocations it has made under science and technology, given the budgetary circumstances. Although the need is great, and although there will always be great need, we expect that it's probably not appropriate at this time to increase those kinds of expenditures. Perhaps it will be down the road.

I will just touch on a couple of the issues that we have encountered this year.

One issue we wanted to discuss was the evidence in the European Community of the funding of small business networks, most specifically by Italy, Denmark, Norway and the United Kingdom. They are starting to get what appear to be excellent results and returns on the investment the governments have made in this kind of business activity. Essentially, they are funding multiple-partner projects, not single-partner projects, and are imposing a set of business rules on those partners so they can more effectively compete in global market.

In the past we were familiar with the funding of larger consortia, but this issue of funding smaller business networks is something new to us. Industry Canada has funded the Canadian Business Networks Coalition for three years to do some testing on this, and it may be appropriate to look at the existing sources of funding in future because a portion of those funds might be targeted towards small business networks. I think we're going to see our Canadian companies competing against larger business networks and consortia, so that's basically what we have to prepare for.

We encountered an issue this year with respect to mechanisms for the flow-through of research and development credits, and this was at associations and, in particular, at an agricultural marketing board we were working for. What amounted to a contribution from members that would get them a $20 or $30 tax credit was going to require filling out the four-page research and development tax credit form and a very sophisticated description of the project that was undertaken by the association. It may be appropriate to look at how the flow-through of those tax credits that are invested on behalf of an association or a group of industries or producers may be able to flow through on an administrative basis much more cheaply than is done now.

One initiative we've noticed in the European Community is the funding of what they refer to as regional technology plans. They have funded eight of these in the last eighteen months. Four of them are brand-new.

Essentially, they are undertaking an integrated funding approach that looks at a specific economic region and at demand-led proposals. The aim seems to be to increase the absorptive capacity of the institutions in the area, in both government and the private sector, and in small or medium-sized enterprises in particular. It may be appropriate for the government to keep an eye on it and monitor that situation, because it would appear to be a very productive way to invest government funds in science and technology in the future.

.1845

I wanted to mention multimedia. The year before last, the Japanese government announced a strategy that will employ 2.4 million workers in their multimedia industry by the year 2010. They've made a massive commitment to the development of the multimedia area, and it appears to be partly in response to the downsizing of their automotive industry, which now employs about 1.3 million workers. So I think it's important that our government takes a serious look at multimedia and understands the employment potential and wealth-creating capacity of it, because it's one of the world's fastest growing enterprises.

The last item I want to raise - and I'm sure you've heard this before - is the issue of telecommunications services that are accessible by agrifood producers. When we're talking about rural communities, this is a problem that's lingered for a long time. With the explosion of the world population and the massive growth of the agrifood sector, we believe it's important that Canada get involved.

One of the issues was going to be getting food to distant markets. You have to get it there quickly because it's perishable, so transportation logistics and electronic commerce become extremely important. I guess what we're saying is that it has probably gone on too long. It's probably time to take some kind of very direct action, not necessarily with old technologies but by looking at what's available. We're proposing here that the private sector get involved, but I think we've probably waited as long as we can wait to make some kind of decision about connectivity to our agrifood producers.

Thank you very much.

The Chairman: Thank you very much, Greg Warren.

From CATA, Christopher Albinson, please.

Mr. Christopher Albinson (Director, Business Development, Canadian Advanced Technology Association): Mr. Chairman, members of the committee, thank you very much for the opportunity to speak to you today. If I could draw your attention to a brief with CATA on the cover, I'd like to speak briefly to that as I go through.

CATA has a membership of about 1,000 members in aerospace, biotechnology, computing, instrumentation, medical devices, software and telecommunications. Among those firms, 85% are small and medium-sized enterprises and they export about 90% of their products. I'd like to speak to you today on their behalf.

Just briefly, I want to talk about what the committee has expressed interest in - jobs, growth, wealth, creation through innovation - and what role we can play to increase that as we go forward. CATA has five main requirements for that accomplishment or those kinds of objectives to be achieved, and I'd also like to talk briefly about our innovation system and how it's working or not working. I'll also make some brief recommendations.

In terms of the five thrusts that we need to achieve as a country, we basically need a competitive cost advantage to do R and D in this country because we don't have sufficient numbers of customers to justify the type of work we try to do. We also need a well-trained and dynamic workforce; aggressive opening of international markets; a competitive, open and healthy home market; and an early, aggressive procurement of small and medium-sized enterprise product for export.

Where do we stand? On the potential side, Canada does have a competitive cost advantage to do R and D. This is a cornerstone of our innovation policy and a cornerstone of our innovation system, and it must be protected. We also have real growth in private sector development and training, which is a good sign. We have a stable and attractive environment to do R and D, and it is critical to maintain that. Stability for R and D is a very critical element as far as making long-term plans for research and development is concerned. Making changes to that environment could be very problematic, and I'd ask the committee to consider that. And I would say the government has done a very good job in improving access both to markets and to capital over the last three years.

In terms of areas that I'm concerned about as a member of this organization, R and D in this country as a per capita of our 1,000 labour force has basically been flat over the last couple of years. Our gross expenditure on R and D as a country as a percentage of GDP is still below the OECD average.

The real threat moving forward is a that of brain drain, basically due to after-tax personal income. Right now, there is a worldwide shortage of knowledge workers. Canada is seriously at risk of losing our brightest and best to the United States. To illustrate this, you don't have to look any further than the University of Waterloo, where CATA just completed a study in talking to fourth-year graduates. Where there were thirty Silicon Valley companies recruiting there last year, there are a hundred Silicon Valley companies recruiting this year. The United States realizes the talent that we have and they're going after it very aggressively. That's going to seriously encumber our companies as we move forward.

.1850

The other issue I'd like to raise is that we have very poor connectivity between our public and private efforts in research and development. We need to strengthen that connectivity, both on the university front and in the national laboratories, to be able to maximize our resources.

Last, procurement is declining. I understand the reasons for this, but if we're going to reduce procurement, let's be strategic about it and ensure that we're procuring things that are export-ready so that when you buy a product from a small company, you buy a product that's ready to be exported worldwide.

Thank you.

The Chairman: Thank you very much for that very concise and meaty presentation,Mr. Albinson.

From the Information Technology Association of Canada, we have Gaylen Duncan.

Mr. Gaylen Duncan (President, Information Technology Association of Canada): Thank you for the opportunity to appear again, Mr. Chairman.

ITAC is a national association of leading companies in the computing, telecommunications, hardware, software, services and electronic content businesses. Our members - we now have over 1,200 - represent three-quarters of the IT industry employment of 350,000, revenues of $50 billion, exports of $12 billion, and R and D performance of $2 billion. This is our sixth year in making the same major points at the pre-budget consultations, yet each time we've attempted to be very simple and consistent. The good news is that we are now seeing some tangible results.

There are four main points. First, we must complete the process of getting our fiscal house in order. Second, we must refocus government priorities on strategic activities to position Canada for leadership in a global, information-based economy. Third, we must improve the efficiency and effectiveness of government operations through the use of IT. Fourth, we must create and maintain a favourable tax and fiscal climate for IT industry growth.

The good news is the progress that we've made on deficit - though not yet debt - reduction; the significant progress on the reorienting of government programs; and the very difficult but now, I think, very successful review of the scientific research experimental design tax credit program, which is now being tested in the field with seminars.

There are four areas where I feel we have not made substantial progress. The first is in multi-departmental and multi-government program delivery - and we can talk about things the government could do in this area to respond to that. The second is in improving and maintaining the climate for investment in the IT sector, particularly in comparing the Canadian situation to the countries that are competing for IT investments and not to the traditional countries that we compare ourselves to. The third is in the global marketing of IT products and services. And the fourth is in understanding the relationship between information technology and jobs in the new economy.

On the latter point, through the Conference Board of Canada, we expect to be releasing in the next month the world's first study on what has happened as a result of the use of information technology in all sectors of the Canadian economy. The results will not be consistent with the myths that have been around in the last few years.

Progress in those last four areas, sir, would constitute a significant response to the concerns that we've been raising over the last six years. Thank you.

The Chairman: Thank you very much, Gaylen Duncan.

Now, from Newbridge Networks Corporation, we have Jeff Laks and Ken Bellows.

Mr. Jeff Laks (Vice-President, Research and Development, Newbridge Network Corporation): Thank you, Mr. Chairman and members of the committee. What I'd like to do this evening is provide you with some information on how the economic policy of the government has impacted Newbridge Networks.

Newbridge is an international supplier of digital networking equipment. The briefing notes supply some background information in more detail on the specifics of how the company has grown, and on how we have been able to turn the investment that the Canadian government gives us - in terms of our tax credits and other grants - back into creating jobs and into increasing the wealth of the country.

What I'd like to do is talk a little bit about the sales growth of the company. The company is only ten years old. Between 1986-96, it has grown to a run rate of $1 billion a year - a substantial growth. The bulk of the funding we have received from the government has been in the form of R and D tax credits. That program has worked well for us in allowing us to reinvest the tax credits into R and D and to perform more R and D to leverage that.

.1855

In terms of how that relates to return, in Newbridge we now have over 3,000 high-technology jobs in four different provinces in the country. Export revenue is over $3.1 billion; obviously the bulk of our sales is export. We have 600,000 hours of annual workforce development training. And as a major telecommunications player, we've been able to directly affect local companies and grow local companies that supply us with products to allow us to manufacture here in Canada.

In terms of that investment, an $89 million investment over the period from 1987 to 1996, we've been able to identify directly $400 million turned back in direct taxation revenue to the country. Contribution to the local economy is also in the neighbourhood of $400 million. As well, Newbridge has been able to start up new companies and increase the number of high-technology jobs by leveraging the work that's been going on at Newbridge into other technology areas.

As to recommendations, it's very important for us, in order to continue growing our R and D, to have a stable investment environment and predictability in the R and D tax credits. I've personally been involved with the Department of Finance and Revenue Canada on the new software guidelines, and I'm encouraged that the new guidelines should help with the administration of the program.

Another area that's important to us is training for the workforce. We hope the government continues to support the universities and immigration programs that will allow us to bring in engineers from abroad.

Last, concerning the impact on personal income tax, it's important for us to retain the workforce that's educated in Canada against opportunities in the United States, as well as to be able to attract proper technology experts from the United States up into Canada. Personal income tax is a factor there.

The Chairman: Thank you very much.

Tom Gray, please.

Mr. Tom Gray (Vice-President of Finance, IBM Canada): Thank you, Mr. Chairman.

I'm going to focus my remarks on maintaining and enhancing a favourable investment climate so we can grow more jobs in Canada.

Over the last decade, profound political and economic changes have produced a new set of realities. Globalization is no longer rhetoric but hard fact. Those enterprises and governments that understand and act on these new realities will prosper, and those that run from the new realities will miss significant opportunities.

What are these new realities? Technology and skills are broadly dispersed globally. Technology now enables companies to move information, skills, ideas and technology itself across national boarders without limits, except those imposed by national governments. The Internet is a good example of that.

The global market is dynamic. The pace of technology changes shortens product cycles and lead times. To the extent that companies are too slow to market, sometimes this has devastating impacts on both them and the employees they hire.

Technology is also expensive. Companies with broad product lines cannot afford to finance by themselves all of the R and D costs necessary to stay competitive. To continue to advance, costs and risks must be shared among companies that are sometimes competitors, and also with governments.

I should note that Canada does have one of the most favourable R and D tax climates. It's this tax treatment that has played a significant role in the development of the Toronto IBM software laboratory, which is the second-largest R and D facility in Canada.

Finally, the nature of products themselves is changing. Most of us do not factor the services dimension of the economy into our thinking. A very significant portion of the foreign investment that helps fund the expansion of the Canadian economy is in the services sector.

What are the implications for this committee? There are four recommendations we would have the Canadian governments focus on.

First, governments must maintain their focus on fiscal matters. While both federal and provincial governments have done well in this area, they are susceptible to special interest pressures, and they need to ensure the pace of deficit reduction is maintained.

Next, governments need to understand who we in Canada are competing against for foreign investment. It is no longer just the United States. It is the Irelands, the Singapores, the Hungarys and the Thailands of the world. Understanding their investment climates will be more instructive than looking to the U.S.

In our industry, capital is very mobile and so is investment. Canada has some unique competitive advantages, particularly in software development, where our strength is in our people.

We are very proud of our Canadian universities and the public education system in Canada. Information technology companies from around the world come to Canadian universities to recruit our best and brightest. We need to produce more students with capabilities in the hard sciences and with network skills coupled with the traditional software skills. I'd also re-emphasize my colleague's comments about personal income tax rates, because they do come into play here as well.

Third, governments must change their mindset. Most of us in both the private sector and the public sector do not fully factor the services sector of the economy into our thinking. We still think of investment in terms of manufacturing to sell these and the products in terms of goods.

.1900

This year, IBM Canada will hire more than 1,500 people, largely in our services and software business. For example, earlier today we announced the opening of our Toronto call centre, one of three north American centres responsible for answering customers' technical questions and providing skilled support for IBM's entire line of products and services.

We're starting initially with 500 jobs, which will grow to more than 1,000 jobs when we're fully operational. Three-quarters of these jobs require technical university or college degrees.

Finally, we would recommend that governments should be cautious about removing existing credits. The financial case for many of these investments in Canada was made, and continues to rely, on favourable tax treatment.

For example, our Canadian manufacturing plant in Bromont, Quebec, which exports over $3 billion a year, and our software laboratory in Toronto, which employs some 1,500 research scientists, rely heavily on manufacturing process tax credits as well as scientific research and experimental development tax credits.

Let me pass to the next speaker, Mr. Chairman. Thank you for your time.

The Chairman: Thank you very much, Mr. Gray. Mr. Kastner.

Mr. Peter Kastner (Assistant Vice-President, Mergers and Acquisitions, Nortel): Thank you, Mr. Chairman, and thank you to the committee for the opportunity to speak with you.

I'll spend a couple of minutes, if I can, Mr. Chairman, just on the dynamics of our own business and how that fits into the environment we have in the national infrastructure.

Nortel lays claim to being a global provider of communications equipment and network software. We're no longer the captive manufacturer for Bell Canada. A statistic reinforcing this is that 11% of our sales worldwide is to customers in Canada.

In addition to that, while we think we've had considerable success as a Canadian multinational in our opportunity to exploit the bench strength of the people resources in Canada and the infrastructure, I'll comment on the R and D tax credit system.

When we compete internationally, we're number six. A lot of our competition has a very close state relationship. To that extent, I pass on to the committee that the relationship and some of the initiatives and successes of Team Canada have been good for us.

While 11% of our customer revenues come from Canadian customers, we continue to spend more than half of our R and D budget in Canada. This is particularly emphasized in the Ottawa area. This year that will be about $1.2 billion. There's a direct relationship between how much we spend on R and D in Canada and the tax credit system.

In addition to our success with the R and D environment in Canada, Canada continues to be our hotbed of export success. Approximately 13,000 of the 22,000 jobs in Canada depend on exports. That will be approximately $4 billion in 1996.

In terms of the comments on the people resources, while our population overall has stayed relatively flat from 1993 through to today, we have hired 5,000 people since 1993. We've hired almost 2,000 graduates from universities. We've provided 5,000 work terms for co-ops. We've provided 500 work terms for high school co-ops. We have 8,500 people at work on R and D.

There's been a change in the mix, but the mix has been toward high-value-added jobs.

I will comment briefly on one of the problems we have, which is facing the basket of issues that comes up with the ability to attract and retain that kind of talent.

As an R and D spender, we spend one dollar in five of the industrial R and D in Canada. That's because of the R and D tax credit system. It's now stable. It has been a product of consultation, not just at the political level, but among the ministries themselves. We hold that consultation process as one that needs to be ongoing, as well as one that has been a model.

We like the R and D tax credit regime. It is the best in the G-7. One of the issues that we face regardless of ownership is not whether we would perform R and D, but where we would perform it. The tax credit system has to be attractive, stable, long term and predictable.

What are we faced with going into the next century? The ability to attract and retain the necessary skills in Canada. There are a number of issues that come into that, in addition to the tax load.

Take critical mass. The Ottawa area is a good example of critical mass. The relationship with the academic community is where the high-value-added jobs will be created and hopefully retained.

.1905

Our Canadian partnership successes so far will continue to depend on: human resource excellence; the success of small business in a stable environment, since we are a customer to over 5,500 suppliers in Canada; and our ability to exploit our strengths in the telecommunications segment of the Canadian economy internationally as an exporter.

Take the cost of compliance. I'm sure you've heard that we'd like to see that come down. But the three issues would be: our human resource excellence; an environment that fosters small business success, not just large business success; and how to exploit our export strength.

Thank you, Mr. Chairman.

The Chairman: Thank you very much, Mr. Kastner. Mr. Shugar.

Mr. Steve Shugar (Director of Policy and International Relations, Natural Sciences and Engineering Research Council of Canada): Mr. Chairman, thank you very much for the opportunity to address the committee tonight.

I'm going to take this as a given. I've done my homework, and I understand that members of this committee have a very good understanding and appreciation of the fact that universities, research and training, and all those sorts of activities are absolutely critical for maintaining the standard of living that we have in this country and even trying to improve it.

By the way, the remarks I'm going to make are in the notes I've handed out to the committee, so I'll go through them fairly quickly. I also won't spend much time describing NSERC, because I've provided you with a two-page summary of the activities that the Natural Sciences and Engineering Research Council engage in.

But let me summarize by saying that we believe that NSERC is the important tool, par excellence, of the government for making strategic investments in our intellectual resources in science and technology in the country. We believe that these investments pay off in the high-quality research and highly trained people needed by the industries that have presented before me.

When we say that these are strategic investments, we really mean it. Examples of it have to do with the fact that the people who are trained through the science and engineering research that goes on in our universities are highly employable. They find themselves in high-impact jobs. A recent survey that we did shows an unemployment rate of only 2% among former holders of NSERC scholarships.

Spin-off companies result from the type of research that the government supports in universities. In a study we did, we were able to trace many of these spin-off companies, in fact, to very basic research that had been undertaken in the universities. There's a message there, I think, for all of us.

In a brief survey we did, we found more than 80 companies that were generating more then$500 million in sales. These were mostly small companies.

By investing in programs such as the network of centres of excellence program, the government has been making sure that a large number of very highly trained people are produced to serve the needs of all the sectors, not only academia but also industry and the government sector. Patents and licences are awarded, and companies spin off.

However, we're facing a very difficult time now. There are a number of challenges facing us. If one wants to be optimistic, I guess we should look at them as opportunities. It all depends on what we end up doing with them.

Some of the major challenges we're facing have to do with the fact that there's a new generation of researchers growing up and that their environment is changing. We have to make sure that the resources and the system change to meet the changing needs.

Technology diffusion is something we've all talked about a lot. It's extremely important, we believe, to ensure that the knowledge generated in the universities is transferred to the user sector. I think many members of this committee know that NSERC has been very active in that regard.

I've already talked about the network of centres of excellence program, but what I'd also like to add is that all of these activities depend very firmly on a sound science and technology infrastructure. You can't do this sort of work without the facilities, equipment, laboratories and libraries that we have in our universities, which are not in the best shape right now.

With the very limited number of dollars we have at our disposal - we recognize the reality of the fiscal constraints - it becomes all the more important to strategically invest these dollars. That means also maintaining a very constructive balance between basic research, which creates knowledge, and more applied research, which puts knowledge to productive use.

The message I'd like to leave on that particular point is that we have to continue maintaining that balance by ensuring that we not only focus on trying to commercialize the results of university research immediately but continue to generate the storehouse of knowledge.

It doesn't always cost a lot of money to make a big impact. There are things that can be done. I've described those in the notes I've provided to you.

But no matter what you're doing, it takes a bit of a sustained effort and real people-to-people interactions. Those are the sorts of things we're doing.

.1910

I'd like to close with two points, in terms of NSERC's advice on how to best invest, with limited dollars, in our young people and in Canada's competitiveness. One is to ensure that we are able to keep alive the very excellent program of the government, the networks of centres of excellence. Phase two is quickly drawing to a close, and we believe it's extremely important to enter into phase three with at least the same level of funding that program has had, and that has done such a remarkable job of bringing people together from the various sectors.

Finally, the whole question of science and technology infrastructure that I mentioned: it's important that the country continue to invest in modern equipment and facilities. This could either be done through the granting council's budgets, or indeed through the government's infrastructure program, if there is to be a second phase of that.

Thank you very much, Mr. Chairman.

The Chairman: Thank you, Mr. Shugar.

From Geomatics Industry Association of Canada, Michael Kirby, please.

Mr. Michael Kirby (Geomatics Industry Association of Canada): Thank you,Mr. Chairman, and members of the committee.

The Geomatics Industry Association of Canada represents an industry that is one of the fastest growing parts of the information technology sector in the country. We all know what geomatics is from the fact that this industry creates and generates maps and employs a lot of technology related to remote sensing.

The world geomatics market is estimated to be in excess of $20 billion and is growing at an annual rate of 20%. The Canadian geomatics industry has annual sales of about $1.2 billion and it employs about 20,000 people. One of the most notable things about the Canadian geomatics industry is that our firms have worked in some 100 countries around the world, and so it plays the role of a high-tech standard-bearer, if you like, for the Canadian technology and the Canadian industry in general.

We work very closely with many Canadian government departments. These partnerships are very important, particularly that with Natural Resources Canada, which of course started the mapping program under Energy, Mines and Resources many years ago.

We also work with Environment Canada, Foreign Affairs and International Trade, and Industry Canada. CIDA is a very strong supporter of our initiatives around the world. The Canadian Space Agency, the Department of National Defence, and the Department of Fisheries and Oceans all employ our industry and capabilities, and each one, in its own way, has helped us export the capability around the world.

It is one of the ambitions of the industry to try to double its current export volume by the year 2000. We believe that we have a fairly large and important leadership role in the international geomatics community.

We have a number of recommendations, which are summarized in our brief. These involve various sectors or various initiatives within the government.

The first relates to the government science and technology commercialization initiative. We believe that the approach the government is taking to small and medium-sized enterprises is important in terms of continuing to provide low-cost, convenient access to public sector science and technology developments that are worthy of commercialization. The work that is done within our own country, within our own departments, and within our own industry is very important for us to continue to expand our business internationally.

Secondly, there is an area within the contracting-out and cost recovery practices that is both, I guess, good and bad. On the one hand, there are various groups that are contracting out more and more to both small and medium-sized industries within Canada. The leadership department in that regard is Natural Resources Canada, through its earth sciences sector. It has been instrumental in helping the companies in the geomatics sector to go international, and we continue to support that initiative and that approach throughout all of our departments.

However, on the difficult side of contracting out, we are somewhat concerned about the cost recovery policies that certain departments are taking to heart. We understand the importance of being accountable, but we are hoping - and will continue to encourage and be vigilant within the Canadian government confines and within our country - to make sure our departments are not competing either indirectly or directly with any of our companies.

.1915

I know there is no intent in this regard for them to compete, but many of our somewhat zealous government employees from time to time have tried to open up operations and get cost recovery that in fact industry could do.

In cases when that's happened, there's been a very good forum by which we've been able to communicate our concerns to the government, and we certainly laud the government's openness for that kind of communication. In a couple of cases we've actually purchased the capability within the government and made an industry from it.

Within the Canadian space program, and in particular within the long-term space plans that have been initiated and are continuing, we wish to strongly encourage that the current levels of funding for things such as earth observation, which affects our geomatics industry - in particular our RADARSAT mission, which is now currently quite an international success - be maintained or even expanded if possible, in order to protect our industry's heavy investment and potential in the marketplace.

Finally, within the international development assistance program - and this involves agencies such as CIDA - we believe it's important that Canada develop a specific policy that combines and links aid and trade activities in foreign countries that keep Canadian interests in the forefront. We realize this is a very difficult approach to take. There are countries, for example, that tie their aid and trade too aggressively. But in our case aid and trade are actually quite independent, and our industry has encountered some difficulty when that happens.

In summary, we're very much a strong supporter of the government's efforts to continue looking judiciously at its size and wherever possible make available to the private sector opportunities to commercialize. We are very much in support of initiatives such as the technology partnership funding and other initiatives that help small and medium-sized companies to both grow and also work successfully within the international business community.

Thank you very much.

The Chairman: Thank you very much, Mr. Kirby.

Margo Langford, welcome.

Ms Margo Langford (Vice-President, iSTAR internet inc.): Thank you, Mr. Chairman.

I'm particularly pleased to be here in such august company, because iSTAR is hardly in the league. As a brand-new start-up enterprise, we certainly are not a mature Fortune 500 company, as are some of my colleagues. However, I hope this will bring a different perspective and that I'll be able to answer some questions for you from a completely different point of view.

I should also mention that I wear a hat as a member of the board of the Canadian Association of Internet Providers, an industry association, so from that perspective I might also take questions.

While iSTAR is one year old and Canada is barely into the Internet industry, we still are leading the world, outclassed only by Finland and Sweden for our per capita consumption of the Internet products. Perhaps this says something about people in cold countries wanting to curl up to their warm computers; I'm not sure.

The Chairman: I wouldn't push it too far.

Some hon. members: Oh, oh!

Ms Langford: We've been very fortunate in Canada to have a government take as much leadership as they have in this industry.

Very laudable measures are things such as: SchoolNet, with 16,500 schools already connected; the remote access programs, with 1,000 distant communities benefiting from those; and this launch of government services over the Internet. Particularly remarkable has been the launch of Strategis from Industry Canada. I believe it's one of the leading web sites and gets loads of hits from around the world. So we are very pleased with the way the government is moving on its initiatives with CANARIE.

The nice thing about going near the end is that everything everyone has said about the R and D tax credits is very applicable to a start-up such as iSTAR. We certainly intend to take advantage of those for the first time this year, with some of the new products we're bringing to market.

We are also pleased to have been asked to join the Prime Minister on his next Team Canada mission. We do have export products and we're very excited about some deals already in the works that may get signed on that mission.

.1920

In general, things are moving along in a very exciting way. As my main point, I would like to reinforce what Gaylen Duncan said about government operations and the opportunity for efficiency and flesh it out by way of an example so that we're not just talking theory here.

I could give you the example of a private enterprise we just did a network for, where they took a $2 million annual recurring infrastructure cost and reduced it to $600,000 by using browser technology, the Internet, and private intranet networks. They got to use all their old legacy data, they merged all of their mishmash of e-mail systems and they harmonized and put up things they never had accessed before, such as their human resources material and so forth.

If we could translate that into the way the government is currently doing business through its technology, we would find, I think, an enormous amount of savings and contribute to Mr. Martin's goal of balancing that budget. At the moment, the government has job banks that are hard-wired in kiosks, and this is archaic compared to the technology that's out there now to do this kind of thing and to make it far more available.

I don't want to take much time, because I think this is the kind of thing where it's really a recommendation and nothing more than that. We would be looking forward to the departments being more innovative and not sticking with their traditional means of delivery of services. Everything from government publications on through should find its way through the net, which is obviously an open platform, accessible and an extremely economic way of delivering government services.

The Chairman: Thank you very much, Ms Langford. Now from Spar Aerospace, Cliff MacKay, please.

Mr. Cliff MacKay (Senior Vice-President, Space Systems and Corporate Development, Spar Aerospace Limited): Thank you very much, Mr. Chairman, and thank you, committee, for giving me the opportunity to speak to you again.

I want to start by congratulating the committee and thanking them, because when I was here last year there was a major debate going on about the government's role in R and D financing of companies and as a result, not in small part of the work of this committee, the government announced a number of months ago a new program called technology partnerships, which in my view and in the view of Spar was an extremely important initiative for the future of R and D funding in Canada. I want to congratulate the committee very much for that.

I should also say I'm here this year for my sins. I'm chairman of the Air Industries Association as well, so I would like to endorse the remarks that Mr. Peter Smith made to the committee last week. I think he appeared before you as the president of the Air Industries Association.

I very much share many of the views my colleagues have already expressed to you. I want to focus my remarks very briefly only on two points. One, I think the word ``interconnectivity'' was used earlier by one of the speakers about the relationship between academia and the research community and the private sector.

I think in Canada there are many laudable examples where that relationship is working well. I think you've heard from NSERC and others about some of the efforts to make it even better, but I do believe it is an area that needs even more focus. There can be more work done, in my view, to strengthen the connection between university researchers and the requirements and needs of the private sector.

I know the finance minister has indicated that he's prepared to look at certain tax provisions for job and wealth creation. This may be a particular area where that may be applicable. There could be some sort of tax credit system that would further encourage the interconnectivity between private sector research requirements and development priorities and the interests and needs of the academic community in the country. I would simply leave that thought with you, Mr. Chairman, as a potential for future investigation by the committee.

The only other point I wish to make is to give the committee a very brief thumbnail sketch of some of the things that are going on in the world of the space business. It's not something we talk about a lot in this country, but there is a massive change going on. The industry is being driven by two fundamental things to globalize at a pace that is nothing short of breathtaking. One is the digital revolution, and you've all heard a lot about that, and the second is the realization, particularly in the last 24 months, that space is a highly desirable way to deliver services in a global economy - communications services, remote-sensing services, and a whole range of other things of that nature.

.1925

That's one thing that's going on in the world, and it's changing at a pace that's very difficult to keep up. Every week there's another merger, another acquisition, something going on.

The second thing going on is that we're just beginning to realize that for the first time in the history of mankind, in a very few years, by the turn of the century, man is going to be a permanent resident in space. We're going to live there on the space station. That is going to change the world, and when it happens it's going to change people's optics and views of what space is all about.

So those two very dramatic things, when you can sit back and take 30 seconds to think about it, I would commend to the committee's thoughts about the future. Canada, in my view, has a very enviable track record as a spacefaring nation. For our size, it's the envy of the world. There are countries with much larger economies than ours that would love to do what we do.

I think we are going to come up to a debate on long-term space plan three, starting probably next year, and some of these issues and some of these factors are going to be important elements in that debate. I would simply ask the committee that they look into these matters when the time is right.

In conclusion, Mr. Chairman, I thank you and I would ask that the committee's attention be focused a bit on the interconnectivity between the academic and research community and the private sector. Finally, I would simply leave you with the plea that I hope Canada will continue to be a spacefaring nation as we go into the 21st century. Thank you very much.

The Chairman: Thank you very much.

Last, we have Mr. Waite, from CAE.

Mr. Bob Waite (Vice-President Corporate Relations and Marketing, CAE Electronics): Thank you, Mr. Chairman and distinguished members. I want to thank you for the opportunity to appear before this important committee. I'm here today to speak on behalf of CAE, a Canadian advanced technology company that invests between 15¢ and 20¢ of every dollar earned every year in research and development, and successfully sells almost 80% of its products in world markets, typically in direct competition with much larger and better-financed multinational corporations. Some of the names will be familiar to you: Siemens, .AA, Lockheed Martin and Thomson.

I mention that not out of pride, although we're proud of our people and our company, but rather to point out that CAE could never have achieved its acknowledged position as a world technology leader without the level playing field provided by to us by the Government of Canada. In that regard, I want to join Cliff in thanking this committee for its support last year in recommending to government the benefits of creating the Technology Partnerships Canada program.

I bring this up because while the initial announcements regarding TPC may have failed to generate universal acclaim in the media, the fact remains that a program such as this is an absolute imperative for any company hoping to compete toe to toe worldwide in aerospace and a number of other areas.

CAE would also like to express support for the government's effort to provide greater focus in the area of research and development tax incentives, especially investment tax credit. Having said that, however, we have been a little unsettled to find that Revenue Canada seems to be changing their interpretation of the act by moving away from experimental development with product applications as a goal and moving more towards what we would describe as pure scientific research. This change in direction is especially relevant to companies like CAE that use advancement in software as a differentiator in their products. Revenue Canada appears to discourage supporting this innovative use of software for new products, arguing that technological advancement should be in the pure computer sciences area.

In terms of areas where CAE would like to see change or new initiatives, let me mention three items we believe merit attention by your committee.

First, we would suggest that as currently configured, export support programs typically do not differentiate sufficiently between companies like CAE, and like most of those in this room, which have full-scale operations, including world product mandates and complete research and development operations, and foreign-owned storefront operations with questionable Canadian value-added content. As an example, we recently ran into a situation in Egypt in which we found EDC and other programs equally available to CAE and to a small Canadian branch operation of a U.S. company. This happened in the energy management sector, not simulation. It's an area you may not be as familiar with, but it is the very business that won us the Canada Export Award two weeks ago, and whose success allowed us to recently announce that we're hiring 300 new employees at our Montreal plant.

.1930

Secondly, we would encourage the acceleration of the process to renegotiate treaties with other countries along the lines of the recent changes to the Canada-U.S. tax treaty, with its reduction and/or elimination of certain withholding taxes.

Finally, at risk of upsetting the finance minister - who has done an admirable job on the deficit - we would submit that some consideration be given to reducing the overall tax burden, including that on individual Canadians. The simple truth is that our tax structure, combined with the relatively weak currency, makes it very difficult to attract talented people to Canada from outside our borders. While we can meet 95% of our resource needs here in Canada, a world technology leader needs to recruit the best people from around the world in certain select skill areas.

Again, CAE wants to thank the committee for this chance to express its views prior to the formulation of the 1997 budget.

The Chairman: Thank you very much, Mr. Waite.

[Translation]

Would you like to start the questions, Mr. Rocheleau?

Mr. Rocheleau (Trois-Rivières): When we talk about research and development, we are talking about big money, in terms of our investments as well as in terms of tax credits. We must keep in mind that in 1995, tax credits amounted to almost one billion dollars shortfall for Revenue Canada.

That leads me to ask the representatives of private companies what their reaction would be if the Canadian government, in order to lower its contribution, took a leaf from the American model. In the American system, the annual investment threshold fixed by the company does not imply any commitment on the part of the government. This threshold can correspond to a certain percentage of the company operations. The government's contribution only covers any amount above the minimal level. Could we apply the American model and use a ceiling that doesn't currently exist in Canada? How do IBM, iSTAR or CAE feel about it? Since we are committed to improving the government's financial situation and since we are all asked to contribute, that might be an option.

The Chairman: Who would like to answer the question?

[English]

Tom Gray, would you like to start, please? Thank you.

Mr. Gray: Yes. I think one of the things the hon. member must keep in mind is the fact that when you compare us to the American system, you have to compare all in-tax structure, the total effect of tax rate. In Canada, we obviously have a series of taxes that our competition located in the U.S. would not meet. They would not have the same employment taxes that we have. They certainly have a much lower personal tax structure. And across the board, their corporate tax structure is much lower. So, in fact, the R and D types of tax credits that we do have start to bring us closer to their environment, but I would suggest today that we are still at a disadvantage with respect to what the U.S. has. I would therefore favour a U.S. tax system. If you would in fact give us that full U.S. tax system, I'd be quite happy.

[Translation]

The Chairman: Thank you very much, Mr. Rocheleau. Mr. Grubel.

[English]

Mr. Grubel.

Mr. Grubel (Capilano - Howe Sound): Thank you, Mr. Chair.

I've heard from several of you. Congratulations for all the wonderful success stories you have about Canadian companies. I'm very pleased that this is going well.

Several of you mentioned the fact that you have trouble recruiting and retaining highly skilled individuals because of the differences in taxes and the exchange rate between Canada and the United States. We've heard this before and it's a very discouraging kind of thing. As you may know, the Reform Party has in its platform the objective of exactly removing some of these obstacles.

.1935

What I would like to ask you is this. When we raise this issue here with people who are interested in social programs, with all kinds of special interests groups that come here and say taxes should be raised, they always say that these stories are really distorted because if you take into account the fact that we have free medicare, these people shouldn't really be leaving. Now, what should I say to individuals who come with this argument before this committee?

The Chairman: Mr. MacKay.

Mr. MacKay: The first thing I think you have to understand is that the kinds of people we're talking about, the competitors we have, are companies like Hughes, Rockwell and, in my world, TRW. These companies offer full benefit packages. We run companies in California. To be competitive, we must offer full benefit packages on medical and what not, even to maintain the people we have down there. So I would say I don't think that's a legitimate argument. It particularly isn't legitimate when you're trying to attract world-class engineering and science-type people into the worlds we live in.

I would make just one observation. I agree entirely with my colleagues about the fact that we are not as competitive as we should be in this area. There is, however, another absolutely critical factor in attracting and maintaining these kinds of people in our companies and in our high-tech sectors, and that is the nature and the quality of the work that we can offer them. People in these sorts of professions are driven by the challenges they face in their jobs - the technical challenges and the other sorts of challenges. That's why I come back to some of these framework issues that you're struggling with to provide the right framework for the fostering of high-tech industries and activities in Canada.

People in these kinds of jobs will accept something a little less - not a lot less, but a little less - if you can really challenge them technically, but we must at least be in the same ballpark competitively as California or some of these other areas. We don't have to be better than them, but we have to offer very good, high-quality, challenging jobs.

Thank you.

The Chairman: Thank you, Mr. MacKay.

Mr. Grubel.

Mr. Grubel: I just wanted to be sure to express that I hope some of those people who believe taxes should be raised and that all the social programs should be maintained have listened to the answers that were given. We do in fact have a choice, but the answer they give to me, upon pressing them and citing to them what you have said, has on occasion been, well, if that's the way they are, we don't want them. My response to these people is that I'd like to be able to tell their children and grandchildren someday, when their income is well below the opportunities that exist in other countries, that this is what their parents and grandparents said.

In fact, I consider it to be an act of irresponsibility to say that we don't want those people, because they certainly are needed for future generations. If you're not already, I just want you to be aware of the tensions that exist here in Canada on this particular subject, and the difficult choices that both this government and the Reform Party face in this trade-off. The trouble is, of course, that we have this big debt. Hopefully we can get out from under it very soon by at least stopping the growth in the debt.

Thank you, Mr. Chair.

The Chairman: Thank you, Mr. Grubel.

Ms Whelan.

Ms Whelan (Essex - Windsor): Thank you, Mr. Chairman. I just want to pick up on the discussion that was taking place.

I don't believe anyone has suggested we should have higher taxes.

Mr. Grubel: Oh yes, they have.

Ms Whelan: I don't believe we have suggested that by any means. But I do want to pick up on the fact that a number of you mentioned that a brain drain due to taxes is a real threat. I come from a border community, and I think I may have a bit of a different perspective on this.

Maybe some of you have already done this - and I guess that's why I'm asking - but next time you should maybe compare the total picture, not just the personal income tax structures of Canada and the United States. Compare what it costs to live, for example, on the Canadian side of the Detroit River with Grosse Ile on the American side, and compare the taxes for that. Compare the fact that we have a publicly funded separate school system in Ontario with the cost of going to a separate school system in the state of Michigan. Compare the fact that clothing prices for certain styles or designer makes of clothes people will buy show very little difference in price in certain states versus the cost in Canada.

.1940

If you go through a number of factors - and we talked about income tax - and compare the other taxes they have to pay... I've talked to people. I have neighbours who live in Canada and work in the United States. They choose to live in Canada because of the difference in tax structures - aside from personal income tax as well as the benefits of living in this country.

So I think there's a lot more to be said about the benefits of Canada other than just the state of income tax. I would hope your companies would express that to the new recruits you're out there trying to attract. If we want to continue to invest in research and development we have to ensure that we maintain a certain style of living in Canada as well.

I do believe we are also in a global market and are going to have crossovers back and forth. There's a huge tech centre in Michigan for Chrysler. It has over 2,000 employees. We don't have that in Windsor. People who want to stay in the Windsor area are going to work in Michigan, and perhaps even live in Michigan. I don't consider that a brain drain to Canada; I consider that a benefit to the automotive industry that benefits both Canada and the United States.

I'm sure in your industries as well, especially in the space and tech industries, and the Internet and where we're going, there's a sharing of information. To me, we have to focus on what's more important. We have to talk about not lowering taxes but investing in our future, and that's research and development.

I'm wondering if there's any concrete example of what you'd like to see in the budget for research and development. A couple have touched on different things we've already done, including the tax credits. Are the tax credits sufficient? I understand they're better than those in the United States, but is there something we're missing there? Is there someplace we should be going?

Does anybody want to answer that?

The Chairman: Mr. Waite, I think you mentioned a little problem in the application of it by Revenue Canada.

Mr. Waite: That's right. In our view, there seems to be - and this obviously is a bureaucratic and regulatory issue, but it affects us - a narrowing of the scope of allowable work. In our case, most of what we do is really software and database creation, although flight simulators, for example, are hardware. Unlike Detroit, we don't mass produce flight simulators. Each one is built to an individual tail number for an airline. Each iteration is quite different and requires a lot of software development. For the first time, we're finding some resistance to allowing that as R and D work under the credit system. So that is a specific area of concern for us.

The Chairman: Mr. Shugar.

Mr. Shugar: I'd like to suggest that it's not simply a matter of trying to attract talent from other countries to come and work in Canada, whether it's in industry or academia; it's also a matter of using our home-grown talent. In that regard it's extremely important that young people in this country feel there are opportunities to be involved in R and D in whatever sector.

Two weeks ago NSERC sponsored a conference in which we invited 30 or 40 young people from across the country to come and talk about the future. Certainly one of the messages we got was that there's great concern. People are even having second thoughts about getting involved in R and D when they see what their professors are up against in terms of success rates. Somehow or other I would agree with the young people who were at this conference that we have to find ways to give people some hope.

In terms of attracting people from outside the country to work with the industry around the table in this country, at least part of the reason people come, I think you're correct, has to do with the quality of life in this country. It also has to do with people - in certain industries, at least - being able to interact with colleagues in university, to get involved in a wide range of research. The extent to which that will happen will depend on, for example, the state of S and T infrastructure in our universities.

The Chairman: Thanks, Ms Whelan. Mr. St. Denis.

Mr. St. Denis (Algoma): Thank you, Mr. Chairman.

Thank you all for being here. These discussions are always stimulating.

.1945

I've had the chance to visit a few countries in the last couple of years. I can tell you, it's always been a source of pride to hear the high esteem in which Canadian technology in engineering and science is held in other countries of the world.

One question - among many - occurred to me when I was in an Asian country. Reference was made to, in the field of telecommunications, for example, different world standards. In electricity, they have 220 volts in Europe and we have 110 here. It's that type of fundamental design difference between, say, European technology in telecommunications and what we use.

To what extent is that going on, that this will be a brake on Canada's ability to break into markets where another technology has moved in? If so much of our future in high-tech involves exports, as a country and as an industry are we doing enough to make sure that different world standards aren't being used as trade barriers?

I wonder if Mr. Kastner might offer something on that.

Mr. Kastner: I came as a fiscal expert and now I'll be a trade expert.

Certainly there are cases where standards are an extralegal barrier to trade. If I were to ask you to do one thing, I think it would be to fuel a very vibrant R and D regime and community. Like a lot of my colleagues at the table, I think if you're first in with a robust standard, you can become the world standard. That's a wonderful sales advantage.

So I think we'd like to rough and tumble it out through the R and D community first and be first to the street with that world standard. Like some of the other companies and associations represented at the table here, with the infrastructure in Canada, and particularly with our close relationship with the U.S. market and the amount of trade that goes on there, that does give us a position of considerable leverage.

Is it a problem? Yes, it is.

Mr. St. Denis: Is it a fair statement that a lot of other countries use the government-industry alliance to create market advantages - I'm thinking of the Europeans - where, without overdoing it, we should be working together, government and industry, to carve out, or as you suggest, to get a lead on, the standards and have that advantage?

Mr. Kastner: Mr. St. Denis, that probably is a fair general comment. As I mentioned, we feel pretty big in Canada. We're sixth in the world, and of the other five, four of them have very close state-sovereign relationships. That's what we run up against in international competition.

I think what we'd ask you to do would be, rather than to provide more government support in the area of standards, to bring your sovereign pressure to bear on other countries to minimize their trade barriers and to open up to world-class standards faster.

Mr. St. Denis: Thank you for that, Mr. Kastner.

Mr. MacKay, you mentioned interconnectivity among academia, the research community and the private sector. What do you mean by that? When I think of interconnectivity I think of hardware. Are we talking about more than that?

Mr. MacKay: What I'm talking about - and I don't want to overdramatize this; I think progress has been made, but I think a lot more can be done - is trying to find incentives and ways to have companies like Spar perhaps doing a better job of articulating its requirements in research and development to various university or research institutions, who usually have some very bright people and have fairly low overhead. They can work some of these issues probably more efficiently than we could. On the other hand, there's also trying to find a way to provide greater incentives to those people in academia to respond in the timeframes that make some commercial sense.

That's what I mean by interconnectivity. How can we take the research community in academia, which is primarily driven by a need to discover and to advance knowledge and to understand phenomena, and link it more closely to companies like ours, who are driven by a need to figure out a problem in a particular timeframe so we can meet a particular market window? That's what I mean by interconnectivity.

.1950

The Chairman: Thank you, Mr. St. Denis.

Mrs. Brushett.

Mrs. Brushett (Cumberland - Colchester): Thank you, Mr. Chair.

I have several things I want touch on, but I'll follow up on Mr. MacKay's point very quickly.

One of the other members here tonight has mentioned the Prime Minister's Task Force on Commercializing Government Science Research, and I've been co-chairing that. We've been hosting some meetings in the Atlantic region, where we brought 20 Atlantic university directors of research together to talk about this very thing: how to get that research into commercial applications and how to link it with the capital that's out there through various means. It seems there's plenty of venture capital, but who knows who's doing what and how useful is it, really, in commercial applications?

One of the suggestions from one of the scientists who's doing quite well at this was to provide airline tickets to scientists to visit private industry. Another suggestion was to put a menu on the Internet of who's doing bits of research in various areas, only enough to kick in interest, and then you could explore the option. You could have a World Wide Web of all the science research that's going on in our universities so that if anyone's interested, they can connect with that person and explore it a little further.

Do you think these options are reasonable? Where should we go as a government?

Mr. MacKay: They're more than reasonable. Those thoughts and ideas make a lot of sense.

One of the issues we face internally with our chief scientists and our researchers is they have their own network - they know a group of people, and some of these people have a worldwide network - but there are so many things going on at the same time. Being able to access what is really going on in some of these areas would be very helpful.

Mrs. Brushett: I have one final point on the training and that whole aspect of jobs.

An aircraft plant called me just this past week and said they could almost double their workforce if they could train those people a little more effectively. They referred to Bell Helicopter in Montreal, which is putting its workers through a training program of 12 weeks, whereas their plant is taking people off the street and putting them on the assembly line. As a result the QC goes down very quickly, and they're just not capable of keeping up to speed with quality products.

What do we do there? Should we have apprenticeship programs? What do we need to train our workers to be more competitive and more satisfactory?

Ms Langford: As a new industry with absolutely no new education programs with respect to any kind of Internet training, we have to have apprenticeship programs. That's the only way we're going to get kids, before they ever even decide what they're going to do with their lives, to come in and have an opportunity to work with us.

We are doing on-the-job training right now. If there were an opportunity to do it on a greater scale, we could also quadruple our business. We just don't have enough people who know our business to keep up with the demand that's out there.

Mrs. Brushett: How do we solve it for you? We'd love to put more people into training programs so that it's effective and they have a job at the end of the day.

Mr. MacKay: One thing going on in a number of jurisdictions across the country is the creation of industry-government almost pseudo-institutions that are training people for the specific requirements of that industry. More of that kind of approach to life may help. It's certainly not a panacea, but it may help.

A voice: Newbridge also has a good apprenticeship program.

The Chairman: Mr. Laks.

Mr. Laks: We have different ways of training. We have management training programs for people to make the transition from one type of industry to another. We're involved with universities through various funding programs and in sponsoring research activities there. That gives us an opportunity to meet with students and potentially recruit them later. We're involved as well in the various co-op programs that many of my colleagues here today have been mentioning. We're also involved with high school programs to bring students in and introduce them to high technology, and hopefully direct them into a career in that area, which I think is very important.

The Chairman: Steve Shugar, who just happens to be in the training and educational field.

.1955

Mr. Shugar: I'd like to respond very briefly to Mrs. Brushett's first question on how companies find out what's going on and link up with the academic sector.

You'll be pleased to know that NSERC does have a web site and we do publish on our web site right now a list of all of the awards that are made to university researchers, including the title of the research grant. There are various ways one can get at particular types of grants to find out who's doing what in certain areas.

Also, effective this year, we're requiring our grant applicants to provide us with a plain-language summary of what they're actually going to do. This will be in English or French, but it will be understandable to someone who is not an expert in the field. This information will also be on our web site.

I would also like to inform you that tonight and tomorrow NSERC is sponsoring the second annual symposium on university-industry synergy. Some 270 people from all of the various sectors are gathered in Montreal tonight to particularly discuss how to bring the different sectors together. Also, a series of awards are being given for best practice in university-industry relationships.

I would certainly agree with Mr. MacKay: there's a lot to be done and a lot more that could be done. But things are really happening and things have changed an awful lot in the last couple of years.

The Chairman: Thank you.

Mr. Discepola, please.

Mr. Discepola (Vaudreuil): Thank you, Chair. It's good to be back.

The Chairman: Good to have you.

Mr. Discepola: I'd like to touch on what's been festering in the House of Commons in Question Period about the role of government in R and D grants. I refer particularly to the Bombardier grant, although I know it's more a participating loan.

It does beg the question of what the role of government should be in these types of loans versus what the role of business should be. I, being a Quebecker, know full well the role of government in R and D and the incentives you can give, especially in the pharmaceutical industries, aeronautical industries and high-tech.

However, when we studied the impacts on subsidies to small business, it was almost unanimous from the business community that we should probably get rid of them, because you favour one company to the detriment of another.

When it comes to R and D, I'm just wondering what the government's role should be. The Reform Party is saying we shouldn't have favoured Bombardier, because their asset base is huge, their profit picture is great, and they had the cashflow to have done it themselves anyway.

Should the government be lending to selected industries? Should they be lending to selected companies? Should we be looking at only profitable companies or profitable areas in the future, where we can see a return on our investment, which is essentially a job creation initiative? I open that up for discussion.

The Chairman: Who'd like to start off? Michael Kirby.

Mr. Kirby: I'm not sure I want to be specific about the Bombardier question -

Mr. Discepola: No, I don't want that either. I was just using it as an example.

The Chairman: Unless you want to praise it very fulsomely.

Mr. Kirby: Of course.

Sometimes there seem to be two classes of companies at least, but within the approach to the kinds of funding incentives that are out there, most of our industry - certainly the association I'm representing now at this forum and some of the other companies - are very much involved in the export field.

One of the things that's very important to us, which I would continue to encourage the government to do, are funding incentives such as the technology partnership program, which involves the partnership truly in the sense of not just investment but looking at the potential of commercialization.

In particular one of the things that's very important to us on the export side is to have our public sector be out there internationally with us. There's nothing like a good third-party reference, from either a minister or a director of an agency who's worked with us, to another government representative from another country or another industry. They like to see that kind of guarantee in the partnership.

I know you're all very busy with your own mandates and activities, but whenever you get an opportunity to get out there and support either the academic activities we do outside of Canada or the industry, I would encourage you to try to take that opportunity to be out there.

As the exports come in, companies that are involved in the sectors we represent are then able to grow and get an advantage over some of the other countries that are competing with us.

.2000

Mr. Discepola: Then would you agree that we should be selective with the types of industries, the types of companies? To what point will we go?

Mr. Kirby: In the export market you always want to pick a winner, and there are many good arguments for this. What I would suggest is that you make your particular incentives, whether they're financial or any other kind of support, equally available across the sectors and then watch how the various companies respond to them in terms of certain criteria.

Many companies expect to be handed incentives just because they're a company when in fact the leaders in the various sectors that are out there exporting soon emerge out of the field. If it's equally available across the various sectors, then I think it's up to the individual businesses and business leaders to actually pick up that banner and run with it. The TPC example I think is an excellent example of what Canada should be doing to encourage those partnerships.

The Chairman: Peter Kastner and then Cliff MacKay.

Mr. Kastner: Thanks very much. I think there's room in policy for both. I'll address the targeted grant, subsidy, loan, whatever the relationship is, first.

I think if that's an investment in the Canadian infrastructure, if it addresses exports, if it addresses a particular technology that may be vulnerable, or if it's a strength that we want to exploit, there's certainly an argument to be made to say that the best investment is in the winners. That's why I think there is room in policy for that, for targeted subsidy loan relationships. Customer financing is an example.

The tax credit system as a general policy I think should not be targeted. One of the joys of the system right now is it's indifferent to the field of science. It's indifferent to your product and it's indifferent to your ownership, which is an example we use when we compete with our other labs around the world, that it is indifferent to ownership. I think you can see that from the people at the table.

What it does is it gets me to invest my shareholders' 80¢ up front and take the risk on it, and the government, as my partner, falls in line behind this. So I think as an R and D program it's indifferent to the science, it's indifferent to the ownership, and you have to spend your own money first on it.

I think we also support that the small Canadian privately controlled corporations with a fast-track program and a much richer credit is also appropriate. Thank you.

The Chairman: Mr. MacKay.

Mr. MacKay: Very briefly, I think the key acid test is what's going on in the marketplace. We are living in a global marketplace, there's no doubt about it. The area where these kinds of practices are most virulent in terms of what our competition is doing tends to be in the aerospace and defence area.

My view is a very simple one. If in Canada government and industry collectively are not prepared to do some of the things we're doing through the technology partnerships program, then you are simply not prepared to be in that industry. In Canada what you're walking away from in that context is sales of $11 billion to $12 billion and exports of $9 billion plus and thousands and thousands of high-tech jobs. Frankly, it's an industry performance that's second to none around the world.

So in my head it's very simple hard-nosed choice. If you're going to play, those are the rules. We didn't make them, but those are the rules.

If you want to know what happens when you decide not to play, look at what happened to the space industry in the U.K. when the U.K. government decided not to continue to be a partner with their industry. It ceased to exist.

The Chairman: Thanks, Mr. Discepola. Last is Mr. Grubel.

Mr. Grubel: I need some help. I thought that under NAFTA it was not allowed to subsidize industries and that we open ourselves to actions, by the Americans especially, on the anti-subsidy ruling. What has been your experience on this?

Why are you all frankly inviting or quietly supporting subsidies to specific industries? I can understand that a case can be made for general broad basic research expenditures, but I thought the Americans were likely to bring some action against expenditures that would disadvantage their own companies in competition with a Canadian company.

.2005

Mr. MacKay: Very briefly, in the aerospace world, the levels of subsidies in the U.S. are 100% plus. When I go and compete for certain kinds of satellite products, the people I'm competing against have not only had their development costs paid for but they've been given a profit on top of it by the U.S. government, largely through their defence contracting process.

Mr. Grubel: Would you say that's true for Boeing?

Mr. MacKay: In the defence world, absolutely true.

Mr. Grubel: Let's talk about the private -

Mr. MacKay: In the aircraft world, much of the technology that is in the aircraft is derived from previous work that was done on the defence side. That is the nature of the subsidy process in the United States. It's well documented.

Mr. Grubel: Is it true or not true the Americans have brought an action against Airbus?

Mr. MacKay: That is certainly true and there is -

Mr. Grubel: Aren't we exposing ourselves to the same kind of action by having those kinds of subsidies?

Mr. MacKay: In my view, sir, no, not at all. First, it's a loan, and second, it's repayable. It meets all the rules of the game.

Mr. Grubel: I beg your pardon, but if it's zero interest, you can easily calculate. If $100 million is given and you have a 10% interest rate, then the subsidy is $10 million per year.

Mr. MacKay: But if you go and look at the OECD consensus form, which is what governs these kinds of issues, you'll find we're well within the rules of the game. And that's what governs aerospace practices -

The Chairman: It's a big royalty pay-out.

Mr. Grubel: But the Americans did challenge Airbus.

Mr. MacKay: Yes, and they challenged them on a very different basis, not on the kinds of things we're talking about. They challenged them because Airbus was a state-owned company and there was no transparency whatsoever in what was going on in terms of their cost of capital and other issues. They argued that this was against the OECD consensus rules that had been put forward for a number of years.

Mr. Grubel: So, Mr. MacKay, you are giving me as an expert in this field the advice that the Canadian government could subsidize the development of any airplane up to 100% of the development costs without having to worry that the Americans would step in.

Mr. MacKay: No, I haven't said that at all, sir. What I've said is that the programs that have been put in place and recently announced, in my view, are well within the trading practices and rules of the game as they're understood today. They're well within those rules.

The Chairman: Mr. Campbell, you had a comment.

Mr. Campbell (St. Paul's): To clarify the point, I think Mr. MacKay has done a fine job of explaining it but I'll add some additional commentary. There are two kinds of subsidies that are normally discussed. There are prohibited export subsidies and and there is another category, actionable subsidies. Countries are permitted under the rules of the game, as Mr. MacKay indicated, to provide subsidies of a certain kind and nature. This is permitted both under NAFTA and under the GATT. The Technology Partnerships Canada is totally consistent, but it doesn't rule out the possibility that a country member of the GATT or someone in the NAFTA agreement might argue that a particular program is actionable, and they could use the dispute resolution procedures in the NAFTA or the GATT to examine it. But generally subsidies are permitted if they are on commercial terms, repayable loans, such as you find in the Technology Partnerships Canada program. AndMr. MacKay is quite right, the Airbus situation is entirely different.

The Chairman: Well put, Mr. Campbell.

Go ahead, Mr. Grubel, and then Chris Albinson.

Mr. Grubel: But we do have softwood lumber. We have had all kinds of actions on that basis, and I would suggest that this is primarily a matter not of law but of the willingness of the American industry to go to bat.

Mr. Campbell: Again, Mr. Grubel, the issue on softwood lumber is not akin to what we're talking about here. On softwood lumber, what was being attacked were stumpage fees, the whole manner in which the opportunity to cut timber was awarded and the fees that were charged for it. It's not the kind of loan provisions that we're talking about in these other situations.

Mr. Grubel: But it was under the subsidy code.

Mr. MacKay: That's right.

Mr. Grubel: The idea is that it is prohibited to provide a subsidy, in this case by not charging proper stumpage fees.

The Chairman: Can I ask Chris Albinson to intervene and have the final word on this issue.

Mr. Albinson: I'd just like to broaden the scope on TPC. From CATA's perspective there are many things that are covered in this program, including areas in which basically market failure occurs. This is in enabling technologies where a group of smaller companies trying to move forward a general technology thrust can't do that individually, but through cooperation and consortium under TPC they can share that risk with government and also share the return through a royalty repayment.

.2010

It is much broader than just aerospace. I understand the pressures going on on the aerospace side, but they equally are on the enabling and environmental technologies. Programs like ACTS in the U.K. and CCBC in Japan are actively subsidizing those new enabling technologies coming out, to their advantage.

Canada currently is the only G-7 country that does not have the ability to fabricate silicon. There's a reason for that. We failed, when that technology was coming on, to see the promise of it and to move aggressively as a country to have that capability. From a technology point of view, it's now like having an auto assembly business with no parts capability. That's where Canada is today. We have no silicon capability.

We can't afford to make that mistake on the new technologies coming along. TPC is very important in ensuring that.

The Chairman: Thanks. Mr. Grubel.

Mr. Grubel: I thank you very much for the opportunity to hear the optimistic outlook. I will predict that if you hit an industry, and subsidize it, where the Americans are finding it is to their advantage, they will challenge that. But we shall see. We shall see.

The Chairman: We're coming to the end of our hearings today. I'd like to give each of you 15 seconds to leave one last message with all of us. Before we come to that quick sum-up, is there anything else you haven't had a chance to discuss with us adequately tonight?

If not, then, Mr. Waite, I'll ask if you want to say a couple of words.

Mr. Waite: I may be in a somewhat unique position. I was vice-president of the Export-Import Bank of the United States under the Reagan administration, an administration that certainly was like-minded in terms of Reform's views. I would have to tell you that the United States is anything but clean. If they began to raise these types of issues, they might find themselves in a bit of a hornets' nest.

The Chairman: Thank you. Mr. MacKay.

Mr. MacKay: I have very little to add - I know I'm preaching to the converted here - other than that I really do strongly endorse the committee's focus and effort on R and D and science and technology. I sincerely believe this is at the core of our future competitiveness and well-being as a country. So I would simply continue to endorse your efforts in that area.

The Chairman: Thank you. Ms Langford.

Ms Langford: I echo that. As well, although this is not a finance issue, for those of you who sit on anything that has anything to do with foreign affairs, there are a lot of trade barriers that don't have anything to do with subsidies - for instance, the Government of Burma banning the import of modems so that they could restrict who could actually have Internet access.

There are a lot of issues internationally in our industry that have regulatory overlays. Obviously it's not for today, but in general what we want to do is keep the industry open in its protocol so that it is interoperable around the world and so that we can export the Canadian products we're developing, on top of the Internet infrastructure.

The Chairman: Thanks. Mr. Kirby.

Mr. Kirby: I'd like to encourage the public sector and the government to do anything it can to support our industry in its export endeavours.

The Chairman: Thank you. Mr. Shugar.

Mr. Shugar: We have some excellent programs in the country producing the people required by industry to produce the ideas and ultimately the products. I think the government should do everything it can to continue to support these programs and to ensure that researchers have the facilities available to keep doing what they're doing.

The Chairman: Thank you. Mr. Kastner.

Mr. Kastner: Our Canadian partnership does indeed depend on our ability to exploit the human resource potential we have. In our industry, best of breed is not good enough; we have to be best of show. We need an environment that supports a very active, vigorous, vibrant R and D community, including academia, that allows for small business success and that feeds the winners, particularly in exports.

The Chairman: Thank you. Mr. Gray.

Mr. Gray: I'd like to re-emphasize what Mr. Waite said. We should not go forward in fear. There's a lot going on out there. A lot of governments are in fact doing many innovative things, not just the OECD countries but other countries in the emerging environment.

We should look seriously at what they are doing in the types of technologies we're talking about. If we're too late to get on the train, it's going to go without us, and there will be no jobs here.

.2015

The Chairman: Thank you. Mr. Laks.

Mr. Laks: I'd like to once again reinforce the importance of the R and D tax credit program as it exists today. I look forward to your support of the work that's been done by both Revenue Canada and Finance, with industry, to improve the administration of that program.

The Chairman: Thank you very much. Mr. Duncan.

Mr. Duncan: To concur with a number of the others, much has been done over the last few years. The environment is healthier.

I'd like to respond to a series of points made from this side of the table that were perhaps not heard in the way they were intended by the other side of the table.

The situation of the brain drain and the tax situation is real. We are putting up all the defences when we deal with people to explain to them why they should stay here. But the youth are leaving directly and don't really worry about health insurance at that stage in their lives.

It is a real problem. It's getting worse, not better. I'm hoping that when we come forward a year from now, there will be some progress, even if it's only in a better understanding and appreciation of the degree to which this problem can hurt us in the long term.

The Chairman: Thanks. Mr. Albinson.

Mr. Albinson: I'd like to 100% concur with Mr. Duncan. We now have a second-generation effect in that the first generation of graduates who went down to Redmond, Washington, and other locations in the United States are coming back, saying, by the way, health care is not a problem; by the way, crime is not a problem; by the way, the job's exciting, and you get to retain 30% more of your income, deduct your mortgage payments, etc.

If you can go to the University of Waterloo and tell the students coming out of that university why, concretely, they should be working in Kanata and not Redmond, if you as a committee can achieve that, I'd very much appreciate that work. It's a big problem. It's our future - our best and our brightest. We need to think about it.

The Chairman: Thank you, Mr. Albinson. Mr. Warren.

Mr. Warren: There is a tremendous amount of global innovation with respect to the way in which governments are planning their science and technology expenditures. We've mentioned a few that Canada has adopted and embraced, the finding of consortia, and now the funding of small business networks. It's important that the Government of Canada keep an eye on what's happening globally. We've seen processes in Singapore and Europe that have been extremely effective at increasing the productivity of investment in science and technology.

The Chairman: Thank you, Mr. Warren.

I must say, when I sit here and look across the table I feel extremely optimistic and incredibly proud of the achievements I see. We're looking at Nortel, Newbridge, Spar, CEA, IBM - all world leaders, and a world-leader-to-be in iSTAR internet. We see them supported by their industry associations - CATA, ITAC, Geomatics and the Ontario Technology Development Council. There's a partnership there, a working together.

I get the message loud and clear from you that government cannot create jobs, that only the private sector can, but that you need us as another one of your partners. You need us as a partner when it comes to corporate tax incentives for research and development. You want those incentives to be long-term and stable so that you can plan.

You welcome Canada's technology partnership program, which allows us to have a level playing field in competing against many of the other international industries, and can give us a leg up.

You've talked about government procurement, be it computers and telecommunications, maps and the Internet. You've talked about export promotion and how important it is to have the politicians out there with you, proudly selling things made in Canada. You've talked about how we can further reduce the trade barriers that exist abroad.

What struck me most tonight, I think, is what you said with regard to the human resources we have in Canada, which is why you're here. It's the most important aspect of your competitiveness.

We do have problems with the high level of personal taxes. The top marginal rate in Ontario is now 54%. We recognize that by all standards in the world, this is extremely high.

.2020

One of you mentioned how our immigration policy has to become part of our human resource needs. And you've talked about the potential for the brain drain. But you've talked so enthusiastically, and with a sense of urgency, about our educational system, our training system, and how we have to fund it, and how we have to make sure that it remains at the top of the world to keep us in that very enviable position where Silicon Valley wants to steal and shanghai our students.

It's probably a lot better position to be in than the other way round, although I hate to see those wonderful products of our system leaving our country. So we have to work with you to find ways to make sure that we lose less and that we keep more of them here.

I'm sure part of that is the funding that we need to give to NSERC, which I think has earned a reputation among granting councils in the world as one of the finest ways to create high-level graduate programs in the technologies, the sciences and the engineering.

Last, out of this meeting I take two things that we have to do: we have to hug a computer and we have to hug an exporter.

Voices: Oh, oh!

The Chairman: We're so fortunate to have people like you in this country. You're an example of what has been achieved and what can be achieved. We look forward to working with you in the months and days ahead. Thank you.

We adjourn.

Return to Committee Home Page