It's an honour to appear before this committee today on behalf of Canada's chemistry industry.
Our industry is vitally important to Canada's manufacturing landscape. Chemistry is a $53-billion a year industry in Canada. That makes us the fourth largest manufacturer and the second largest manufacturing exporter. We directly employ more than 87,000 Canadians. These are well-paid and highly skilled jobs. We also support half a million jobs in other sectors. In fact, chemistry is an essential industry—you see a package of information with some examples in front of you—that provides the building blocks for more than 95% of all the consumer products in the economy today.
I want to use my brief time with you to respond directly to the objectives of your study. I'll demonstrate that chemistry is a strategic sector for Canada's economic development. I'll provide some recommendations on how to strengthen the sector through increased foreign direct investment to help grow the economy and create highly skilled manufacturing jobs for Canadians.
Let me just start by saying chemistry is a growth industry, period. As Canada is looking to expand beyond a slow, sluggish 2% annual growth rate, it need look no further than chemistry. Year after year, chemicals production has outpaced GDP growth in both North America and globally and that growth shows no signs of slowing down. In fact, analysts predict rapid growth with a near tripling of the 20 largest volume, platform chemicals over the next 30 years. This really shouldn't come as any surprise. We know that chemical demand is closely linked with population growth, societal demand, the needs and aspirations of a modern, growing middle class. As well, our industry is a key enabler for solutions to the world's most pressing problems of clean air; clean water; clean energy; and safe, nutritious, and abundant food.
Chemistry is also a highly innovative sector. Often it is forgotten; people think of it as yesterday's industry. It's a highly innovative sector. In fact, in the United States, there are more than a quarter of a million patents issued annually. About half of those do go into the computer and IT sector, but the next quarter of them go into innovative chemistry technologies. The balance, the remaining quarter, go to all other sectors combined. Chemistry is a highly innovative sector.
I'll finish just by saying chemistry is also a highly responsible industry. More than 30 years ago, this industry in Canada did face a crisis of public confidence. Our industry, with the assistance of our toughest critics, responded by developing Responsible Care, our commitment to sustainability. That initiative is a global success story, now practised in 62 countries worldwide.
The best example I can give you of the Responsible Care commitment to innovate for a safe and sustainable future is the pride we take in being at the forefront of breakthrough chemistries that will deliver new refrigerants that will help achieve the objectives of the Kigali accord. These new chemistries will have the single largest impact on global warming to date, with the environment minister estimating about a 0.5°Celsius decrease in global warming, all through the powers of innovative chemistries.
I can't say it enough and I can't say it more clearly: our chemistry industry is modern, highly innovative, solutions-oriented, responsible, and it's poised for growth.
Let's just talk about the growth potential for a moment.
The North American chemistry industry has changed dramatically in the past five years. The availability of low-cost, low-carbon feedstocks, specifically, natural gas, liquids, and shale gas, has put North American producers amongst the lowest cost chemical producers in the world. That, combined with the anticipated growth and demand, has led to significant capital investment. Today, we are tracking more than 275 chemistry projects with an impressive book value exceeding $225 billion under development in the United States alone. Sixty percent of that represents foreign direct investment into the U.S. In turn, those anchor investments have spurred an additional 600 investments in the downstream plastic sector alone.
Those investments make chemistry the fastest-growing manufacturing sector in the United States, and according to the National Association of Manufacturers, chemistry accounted for over 50% of all manufacturing investment in the United States during the past year. In short, chemistry has become the poster child for manufacturing reshoring in the United States.
Let's look at Canada for a minute. Canada has seen some investments from that recent wave, but we're lagging far behind our historical 10% comparative share.
Our industry should have seen $25 billion in new investments in Canada in the last five years. The reality is that we're seeing less than $3 billion, or just over 1% of the North American total, when we should be seeing 10%.
There's no doubt that the Canadian competitive landscape has improved significantly in recent years. We have very favourable corporate tax rates and enhanced depreciation treatments for new investment. We also know that Canada is making it to the short list when the global chemistry companies are considering where to make their next multi-billion-dollar foreign direct investment, but unfortunately, investment is not the Olympics; there's no silver medal. The competition is fierce. It's a winner-takes-all game, and we're not winning nearly enough.
It's our view that this pattern can and must change. We think our sector and the national economy face a bleak future unless the lifeblood of capital investment is restored.
I'll conclude my brief remarks by identifying what we believe are the three highest priority actions needed to land the next wave of investments for the chemistry sector in Canada.
First, the Government of Canada must work very closely—more closely—with the provinces.
In 2015 Ontario identified chemistry as an advanced manufacturing sector. This was important, because it made the chemistry sector eligible for investment assistance under the province's $2.7-billion jobs and prosperity fund. The province has also identified chemistry as a target sector for a regulatory modernization project under its Open for Business initiative, and that will be taking place in 2017.
If we turn to Alberta, the province this year launched a $500-million petrochemical diversification program to attract global investment to add value to Alberta's resources. With funding at that level, the province will likely be in a position to support just two, or perhaps three, large projects. That program, however, has attracted significant interest. They've received more than 16 proposals with a book value of more than $20 billion.
British Columbia is also exploring how to add value to the portion of the significant natural gas volumes it anticipates will leave the province through the proposed LNG terminals.
In Quebec, the government is well aware of the benefits that will accrue in new chemistry operations to support mining and other developments in the province's Plan Nord.
Canada's chemistry sector could easily get back to the 10% historical investment share if the federal government were to partner directly with those provinces that have already identified chemistry as a priority strategic sector for their own economies.
Second, Canada introduced a long-term, 10-year accelerated capital cost allowance in Budget 2015. That measure merely matches existing and permanent treatments in the U.S. It closes an important gap, but it doesn't offer Canada any overall advantage.
To level the playing field, we believe the ACCA needs to be made more permanent, and even more is needed to provide a strategic advantage and draw the attention of foreign investors. Here we're recommending specifically a 100% depreciation for value-added resource developments, over a five- to ten-year investment cycle. We believe this will send a very strong signal that our economy is serious about attracting foreign direct investment and moving beyond our lacklustre 2% growth.
Third and finally, we believe it's vital that Canada approve the development of supporting infrastructure so that the country's natural resources can reach markets. If we can't develop our natural resources, there's nothing to add value to, and the future of the chemistry industry will be bleak indeed.
I'd like to conclude by saying that the work of this committee, along with that of the Barton advisory panel, will provide the Government of Canada with very relevant and important advice. If that advice is followed, we believe that investment in the chemistry sector can advance from being poised to deployed.
I thank you again for the opportunity to share the chemistry industry's investment and growth message with this committee today.
Thank you very much, Mr. Chair.
Thank you for being here today.
You had a good message when you talk about Responsible Care and trying to get the positive message out there. I think it's extremely important, because we've found in some industries that if you wait too long, then the message gets ahead of you. One of the critical parts is that you're looking at safe food, and you're looking at the requirements that you have and how chemistry deals with that. Of course, people should be recognizing that we have the safest and best food in the world. That's a critical aspect of it, and it's so important.
The other comment that I would like to make before I ask a couple of questions is that you talked about low carbon, natural gas, and shale gas, and the message that is there so that people have been able to move and expand. Of course, it certainly has gone wild in the United States. They've looked at it, and they recognize that they don't need our petroleum products, because they've had the freedom and the flexibility to be able to do what they need to do in order to develop the resources they have.
I think that's one of the issues that we have to grab hold of to recognize that we are now a bit behind. You were talking about how we can get investments to come up to Canada, but we've tied our hands in so many different ways. Of course, the U.S. is just licking their chops to be able to move forward on that.
Can you start by finding some ways, or telling us about a few ways, that we might be able to change that trend, so that we can see investments coming into Canada that will be positive for your industry?
Let me give just a basic quick overview for people who don't know the chemistry industry well. You might wonder in the back of your mind why we have a chemistry industry in Alberta. People say it's the oil. No, it's not the oil; it's the natural gas liquid.
There are two pathways to make traditional industrial chemicals. One is to take crude oil, turn it into naphtha, and then turn that into plastics-related chemicals. The other is to take ethane out of natural gas and go straight into chemicals for plastics in all the plastics chain. We call ethane a natural gas liquid. It comes along with the natural gas developments.
What's the benefit of that? It uses half as much energy, and therefore results in half as many emissions, to make plastics and all related petrochemicals out of ethane rather than naphtha. That's not to say that naphtha's wrong—there are a lot of very important chemistries that are based on naphtha—but the plastics chain can be well supplied from ethane.
Why does Alberta have a strong industry? It is because, for years, it was the only place in North America that had access to ethane. It was cost-effective to produce plastic-related chemicals in Alberta and ship them over the mountains or ship them back across Canada.
What has happened in the U.S.? Why is there a revolution? Well, they now have access to the same ethane we've had for a long time. In fact, in Sarnia you have seen the installations there convert their operations, which are historically naphtha-based, to the ethane feedstock. That has made them very competitive vis-à-vis their U.S. counterparts, but we should be able to attract more of that investment here.
Another way to ask the question is, “Well, what does the U.S. have that we don't have?” We have access to feedstock; they have access to feedstock. We're a little worried about the long term if we don't develop energy, but for now, feedstock is available. We have access to market; they have access to market, both the North American market and the Asian and offshore markets.
The third thing the U.S. has that we don't have, especially at the state level, is a competitive investment environment. On many occasions it has seemed that Canada hasn't been interested. If you look no further than Pennsylvania, which doesn't have the long, storied history of chemical development Canada does, Shell Chemical has proposed a project there that will amount to well over $10 billion U.S. That was seven years of work. The State of Pennsylvania was not going to take no for an answer. It was a question of how to make this happen for the 40 years of benefits, tens of thousands of workers in construction, and 800 to 1,000 good jobs after that. The question was, “How do we make this happen for Pennsylvania?” That deal was concluded this year.
There's a message here for Canada: there's a very competitive global environment for investment. If we want it, we're going to have to go for it, and we're going to have to work very hard to get it.
Thank you. Merci
, Mr. Chair and committee members. We're pleased to be back here today to answer your questions.
Before we begin, there are two questions that were posed last week that we didn't answer fully. I'd like to take this opportunity to quickly answer those. Mr. Nuttall and Mr. Lobb asked a question about what particular sectors within manufacturing are seeing growth. We went back and looked at our numbers.
In terms of dollars authorized and numbers authorized, we break our systems down into 17 subsectors. Since 2010 the trend has been up in all 17 subsectors of manufacturing, except for a few. Those few are wood products, printing, paper, and machinery manufacturing. Those are down, while the subsector of construction products is flat. The sectors where we've seen the most growth in numbers of deals authorized and dollar amounts authorized are the automotive industry, fabricated metal, food, medical equipment, and tech equipment.
There is a second question that we want to address. Mr. Arya asked a question about our activities to finance start-ups in the manufacturing sector. He seemed a little underwhelmed with our response, so we did a little more research and digging and, according to Statistics Canada quarterly estimates of business entries and exits, in 2015 there were 3,645 manufacturing start-ups in Canada. Of those we financed 220. That's 6% of the total. While that result may sound low, keep in mind that our overall market share of BDC to start-ups nationally is 3%, so in fact we're doubling our national average for manufacturing start-ups.
It was also noted that the average size of our deal was only $150,000, which to the committee appeared small. There are two points I wanted to make to that.
First of all, BDC does partner with other financial institutions, including chartered banks, that have access to the Canadian small business financing program that guarantees up to a million dollars for businesses with under $10 million in sales. We partner on many programs with them. The use of that SBF program can only be for tangible assets, mostly equipment, while the $150,000 that we provide is working capital for soft costs or start-up costs. It's a very complementary offering that we offer with the SBF that's delivered through the chartered banks.
The second point I want to make is that while the $150,000 first round may seem small, we do grow with our clients, and we offer multiple rounds of financing, often larger, as clients continue to grow. For example, in the growth and transition capital group, our repeat business is over 40%. We have a lot of growth companies in that portfolio, and as they continue to grow, we continue to lend to them and support the manufacturing base.
I hope that additional information is clear and helps finalize those two questions that we didn't answer fully last week.
We call it BDC Advisory, and it is structured around three main areas.
The first one is more of a traditional consulting business, one where we do one-off mandates. Basically, the themes are companies that want to increase their revenue, want to improve their efficiency, or want to improve their management capabilities. We'll do mandates around those. They're tailored toward smaller businesses. The average mandate size is about $10,000 to $15,000, so they're quite small relative to other consulting firms.
The second part, which is fairly new for us, is what we call the high-impact firm initiative. This is an offering that is a very, very high-touch offering. It's intended to provide this high-type service to companies that we feel really have the potential to move the needle from a GDP standpoint, so they are bigger companies with $15 million in revenue and over. We assign an executive adviser to that company to help them craft a growth plan. What we envisage with that offering is a two-year to three-year relationship. We just launched that in the last year or so, so we're still building that up.
Then the third kind of pillar of the advisory offering is called BDC Academy. That is one in which we're providing learning to entrepreneurs. It will range from online learning to much more intensive classroom learning.
Those are the pillars.
Thank you, Mr. Chair. By the way, may I congratulate you on the quality of your French.
I thank the witnesses for kindly lending themselves to this exercise. I think the Business Development Bank of Canada, the BDC, is a very good vehicle for economic development, and Canada is lucky to have an organization such as yours.
We did a tour this summer that allowed us to meet some intelligent young people. Our society allowed them to develop extraordinary expertise, and these young people have products to put on the market.
I want to talk about start-ups, new enterprises. I would like to know what the BDC can do for them, since I think it has a responsibility there. As an example, let's do a simulation.
Suppose there is a student at Concordia University who has an extraordinary product that other countries are fighting over. They want to invite him over, invest in his product, develop it and turn it into a very prosperous enterprise that will sell such products to Canada. Do you know what prevents people here from going abroad? Their family ties.
As a society, we are fragile. If the people I am talking about do not have children or spouses in Canada and go abroad, we are going to lose business opportunities. And yet it was Quebec and Canadian society that made that development possible.
All through the school cycle, research and development allowed these young people to develop an interest and an expertise. Now other countries come and get them. What does the Business Development Bank of Canada do in such situations? On your website, your slogan mentions that you are the only bank dedicated solely to entrepreneurs. However, are you thinking about those who will become entrepreneurs and have prosperous businesses?
The BDC occupies a really interesting component of our rural economy and for Canada. It really comes about from the Second World War, basically moving people from wartime to peacetime activities.
It's interesting in the sense that you're criticized for making too much of a profit and you're criticized for not making enough of a profit. Many people like to go around saying, “Oh, government needs to act more like business.” If you were in business, you wouldn't provide many of the loans that you do provide. It's an interesting aspect. You take risks, but you only exist because the private sector won't do this, so it becomes a giant muddle in terms of what we expect out of the BDC.
I think that's where we really have to come to grips in terms of a modern understanding of where the BDC falls. You pay a dividend to the government. You don't see a benefit of that dividend. You don't see that dividend being similar to Canada Post, for example, where for generations upon generations, it returns annual returns to the government of any political stripe, and then it doesn't count for anything later on, even despite anomalies.
Right now you're a $23 billion organization with 2,000 employees. The mandate, though, of the BDC is very difficult to square right now related to young entrepreneurs getting access to capital, and that is really their mandate. It is to entrepreneurs, smaller SMEs. To be quite frank, I don't think it's done a great job of doing that over the years. I think it's strayed from that. I'd rather have more risks to support more entrepreneurs and start-up businesses than other ventures.
On your website, you have an incentive model for performance, based upon the success of lending in different departments. That seems to be a conflict with the overall mandate, and for taking risk. If you do those and you don't have that return, you get less of a salary. Could you explain a bit about that, and how that can work in the culture of what you're supposed to do?
Overall, I actually do have great empathy. It's an incredible tool that could be available for the economy and for Canada, but the mixed messages that are being received are quite contradictory to what you're able to do, in the sense that if you return less, it's “Why didn't you return half a billion this year?”, when it was only $400 million.
At the same time, we have many people who are complaining because they don't get access to capital for riskier ventures that may turn out to be losers at the end of the day, but that capital is actually still in our economy, in our society.
Can you explain how this works internally, when you actually post for people who have expectations that risk is not financially rewarded when return is?
You're absolutely right that in Newfoundland we have a higher market share than in other parts of the country.
About a year and a half ago, we embarked on something called an increased reach and visibility program, where we were to look at the market penetration in other markets to see how we can increase that to have more impact.
In some parts of the country, the market penetration is as low as 3% for our target SME market. That means 97% of SMEs don't know about us. That's a shame. We do client surveys. In 2015, we surveyed 7,345 clients; 62% of them said they were very satisfied and 34% said they were satisfied. That's 96% that were satisfied or higher. That's unheard of in commercial lending.
I think it's a really good thing that these 97% of entrepreneurs that haven't dealt with us have to hear about us. There's a myth among entrepreneurs that haven't dealt with us that we're very bureaucratic and slow, and it's the 3% that deal with us that realize we're a very good organization to deal with.
We've embarked on this increased reach and visibility to have more impact in areas where we don't have a lot of impact now. That involves partnering with more rural agencies to share space and to have satellite branches. It also involves doing some advertising and sponsoring events. It involves hiring people who have specific market skills that we didn't have before.
For example, we now have an automotive team focused on the automotive sector who have special skills that are specific to the automotive industry. We have a food and beverage team specific to food and beverage manufacturing, so we can have more impact with that manufacturing industry. We have an aerospace team looking at aerospace opportunities to make sure we have more impact with that. We've targeted some key manufacturing industries and hired experts to increase our reach and visibility.