FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, October 28, 1997

• 0902

[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I would like to call the meeting to order and welcome everyone. As you know, the finance committee has criss-crossed the country, listening to Canadians from coast to coast as we attempt to give some recommendations to the Minister of Finance for the upcoming budget. We have heard many interesting views and certainly look forward to the views that will be expressed to us this morning.

As you probably know by now, you all have approximately five minutes to give us an overview of the major points of your presentation. Thereafter, we will engage in a question and answer session.

We will begin this morning with the representatives from the Association of University and Colleges of Canada. Mr. Robert Giroux, welcome.

Mr. Monte Solberg (Medicine Hat, Ref.): Mr. Chairman, I have a point of order. Because we're so busy we haven't had a chance to have a standing committee meeting, so I would like to take the opportunity to move a motion right now.

It has come to our attention, of course, that the minister is appearing tonight. We also know that the parliamentary press gallery is willing to televise the minister's appearance before the committee this evening on Bill C-2. So I wish to move the motion that the Standing Committee on Finance grant approval to televise the finance minister's appearance before the committee tonight from 6 p.m. to 9 p.m.

The Chairman: We could deal with this between the two round tables.

Mr. Monte Solberg: I'm sorry, I can't stay for that, so I'm going to have to ask that we deal with it now.

Mr. Jim Jones (Markham, PC): I'll second it.

The Chairman: What exactly are you asking for?

Mr. Monte Solberg: We're simply asking that the finance committee grant approval and that the thing be televised.

The Chairman: The problem we have with televising this evening is the availability of the room.

Mr. Monte Solberg: It's fine with the press gallery. They're willing to provide a camera, even with that room.

The Chairman: We still have to—

Mr. Monte Solberg: Wait for some Liberals to come? Why don't we just move to—

The Chairman: No, it's not a question of that.

Mr. Monte Solberg: Why don't we just go to the question asked?

The Chairman: If the rooms were available we would have done that, even—

Mr. Monte Solberg: It's not a problem.

The Chairman: You'll have to bear with us. Mr. Solberg has decided to do some housekeeping items in your time.

• 0905

If in fact what Mr. Solberg is saying is accurate—and of course I would need confirmation in written form to me personally—then we will go ahead this evening. There is no question about that. If you can get some confirmation to me right away, then we will debate the issue. It's fine for the chair, but of course I'm in the hands of the committee. We'll debate the issue and then act accordingly.

Mr. Monte Solberg: I want to make sure I understand this. You need written confirmation from the press gallery? All we're asking is that we grant permission to them. If they couldn't provide a camera for some reason, what would the committee be out? Why don't we just grant permission now?

The Chairman: I have no problem with televising this evening's proceedings; none whatsoever. What I'm saying is I have nobody here from the press who is basically stating that is indeed the request he is coming with.

Mr. Monte Solberg: We've asked them and they said they would be willing to do it. What does it matter if we move the motion and they decide not to come? I think it displays the openness of the committee if the committee says right now we would be willing to televise it.

The Chairman: That's precisely my point. Why do you need a motion for that if there's nothing to debate?

Mr. Monte Solberg: We need a motion so the press gallery can do this if they can provide a camera, and they have told us they would.

Mr. Bob Kilger (Stormont—Dundas, Lib.): Mr. Chairman, there hasn't been any holding back in the transparency of the workings of this committee or any other committees that from time to time would want to have their hearings broadcast. Obviously it comes down to a resources issue, room allocation and so on. Of course we've encountered that this week particularly. I regret we haven't been able to fulfil all the requests from this committee, and from others, as a matter of fact.

I think it would be the appropriate way to proceed as the chair has indicated. If we have a request of that nature, it would be brought to the committee and dealt with in an orderly fashion.

Mr. Monte Solberg: I've made the motion, Mr. Chairman. I would like a vote on the motion.

The Chairman: Yes. Can we have the motion?

Mr. Monte Solberg: I move that the Standing Committee on Finance grant approval to televise the finance minister's appearance before the committee tonight from 6 p.m. to 9 p.m.—and I would like a recorded vote on this, Mr. Chairman.

The Chairman: If I could make a friendly amendment, it would be that the Minister of Human Resources Development will also be there.

Mr. Monte Solberg: Absolutely.

The Chairman: It's to be accurate.

Mr. Loubier.

[Translation]

Mr. Yvan Loubier (Saint-Hyacinthe—Bagot, BQ): About this motion from the Reform Party, I must say that I have often seen in the past that some committees were not broadcast on television because the topic was too hot.

Yesterday, I mentioned also that, according to the schedule of the Committee, the appearance of the Minister of Finance, would not be broadcast. I asked you exactly the same question as Mr. Solberg and I would like to know now if a decision has been made by the clerk or by the government.

[English]

The Chairman: I checked with the clerk.

[Translation]

Mr. Yvan Loubier: I support Mr. Solberg's motion.

[English]

The Chairman: Mr. Loubier, I checked with the clerk and she told me there are only two televising rooms in the House and they were not available. That's the only reason.

You also have to appreciate that timetable change was brought about in Vancouver because of the committee as we restructured the CPP hearings. Mr. Solberg was indeed part of those discussions and he approved them.

If we can find a way to televise the hearings, there is no problem from the chair at all.

Mr. Valeri.

Mr. Tony Valeri (Stoney Creek, Lib.): I just want to make it very clear to all the members of the committee that the minister is certainly prepared to make any sort of testimony before this committee, whether it's televised or not, and the only reason there are no televised hearings this evening was, as the chair has indicated, no rooms were available at the time. I'm sure the chair will continue to investigate that possibility. In no way is this an attempt not to televise for reasons of content or anything like that. We're certainly open to every opportunity to do that.

Mr. Monte Solberg: Mr. Chairman, just so everyone understands.... We've talked to the press gallery. They have said they would make a camera available. They would use it to pool the coverage. Therefore it makes it entirely possible for them to do this.

• 0910

They're very interested in covering this issue. It's an important issue. Why don't we just approve it? Even if for some reason, some act of God, they couldn't bring a camera, how would it affect the finance minister or the committee?

The Chairman: I think your points are exceedingly well taken.

Go ahead.

Mr. Bob Kilger: In terms of the intervention by Mr. Loubier, I want to make it perfectly clear that on the one hand, first of all, I am open to the transparency that's being somewhat put forward here. I think we're all in accordance with that, and I will support the motion by Mr. Solberg.

As the person from our party who is responsible for trying to co-ordinate the room allocations, I can tell you that as late as last Friday we tried it every which way. First of all, we were committed to televising these proceedings, the budget consultation, and the constitutional committee. Only a long-standing request from other sources and commitments made on behalf of others for the allocation of rooms for a few social functions—one, to be perfectly honest with you, was the Hallowe'en party put on by the confectionery industry—obliged us to not have 200 West Block. I think the CPAC people themselves had a long-standing request for this room this evening.

So there was no manoeuvring whatsoever on behalf of the government to try to stick-handle around having particularly the Minister of Finance and the Minister of Human Resources being at committee while the committee's work was being televised.

So I want to make it perfectly clear that the request being put forward, and the spirit of it, meets all our requirements.

The Chairman: Ms. Torsney.

Ms. Paddy Torsney (Burlington, Lib.): I want to clarify something that Mr. Solberg just brought up. There are two rooms in which committee hearings are televised, which is terrific, but I want it to be clear that it is not the press gallery who will be filming; it will be one of the televised committee rooms that will be used for this. I think it's a really bad precedent to start switching around just for this hearing. I think we should go with the appropriate rooms and the appropriate process.

Mr. Monte Solberg: Because of the magnitude of the issue, I think we could break our little tradition here for the evening and make sure that the media has the ability to cover this thing electronically.

Ms. Paddy Torsney: Well, I would like my objection raised.

Mr. Dick Harris (Prince George—Bulkley Valley, Ref.): Mr. Chairman, it appears that most members of the committee are supportive of this motion, so I would like to call the question.

The Chairman: If there is no further debate on this issue, we'll vote.

(Motion agreed to—See Minutes of Proceedings)

The Chairman: I thank Mr. Solberg for his intervention, and I apologize to the panellists for the delay. Unfortunately, these housekeeping items have to be dealt with from time to time.

I once again welcome Mr. Giroux from the Association of Universities and Colleges of Canada. I think instructions were given as to how we operate in this committee. Please begin.

Mr. Robert J. Giroux (President and CEO, Association of Universities and Colleges of Canada): Thank you, Mr. Chairman.

I would like first of all to ask Mr. Paul Hough to introduce the group and the partnership that we put in place. To stay within the time guidelines, I will then highlight some comments from our opening statements.

The Chairman: Welcome, Mr. Hough.

Dr. Paul Hough (Chair, Canadian Consortium for Research): Thank you very much, Mr. Chairman. I would like to put your fears to rest, sir, in that the first six people from the first six organizations on the agenda are actually here to present a single joint presentation. I will make a few opening comments and then I will pass la parole to Mr. Giroux to outline some of the main points on it. So we will try to keep as much time as possible for discussion.

The Canadian Consortium for Research brings together 25 organizations, societies, and associations to collectively represent approximately 50,000 researchers, mainly in universities but with many in government laboratories and in the private sector. It includes the full spectrum of disciplines—biomedical, natural sciences, social sciences, and humanities. The consortium also includes the Canadian Federation of Students, which has a membership of over 400,000.

• 0915

Beyond simply representing a broad spectrum of Canadian research, these groups have also recognized for quite a while the need for the community to address collectively the issues that we face and to put forward our assessment of the priority areas and our proposals on these areas.

At this time one year ago, in 1996, these same groups had prepared a document entitled “Putting Knowledge to Work: Sustaining Canada as an Innovative Society”. In that document and in our collective presentations to standing committees, including this one, sir, we underline three priority areas: first, the pressing need to renew the university research infrastructure; second, the importance of sustaining the networks of centres of excellence program; and, third, the necessity of having programs that encourage research careers in all sectors.

These were the priorities that this broad coalition agreed were the most important. The finance committee at that time strongly endorsed these proposals in its report, and the government listened and responded.

The Canada Foundation for Innovation is itself an innovative approach to renewing at least some of the aging research infrastructure, and the community has collectively applauded this initiative.

Placing the NCE program on a permanent basis at current funding levels was also an important and welcome measure, as was the enhanced support of the industrial research assistance program and other student-related initiatives. But much remains to be accomplished.

The research community, through the organizations represented at this table, have continued their collaborative efforts to define the critical steps that must be taken for Canada to build and reinforce the research capacity that is essential for our future growth and well-being. These measures are detailed in the brief we're presenting here today. In no small measure, the research community has come together to an extent not previously seen in this country to define priority areas and the steps required.

Governments over the years have urged the community to do just this, and we have done so. This comes at a time when everyone—governments, economists, the private sector, and many others—is saying that science, research, and development form the base for the future.

It is encouraging that in its last two reports this committee has called for increased support of Canadian R and D that's critical to the country's development.

Thus we hope to get into a discussion of the elements of our paper, and I will now pass the microphone to Mr. Giroux.

Thank you.

Mr. Robert J. Giroux: As Mr. Hough has indicated, we were very supportive of the important initiatives taken by the current government in its February 1997 budget. It is these and other recent initiatives that we want to build on.

University research is the wellspring of innovation. It is at the root of the process that turns knowledge and ideas into new products and processes. The Canada Foundation for Innovation is of critical importance in this respect because it will increase our potential to conduct leading-edge research. However, realizing this potential will require increased support of research activities.

We have distributed to you a number of charts that contrast our performance in Canada with that of the United States. The current trend in Canada contrasts very clearly with that of the United States, where, despite efforts to balance their budget, the American government has increased substantially its support of academic research.

We have developed, as Mr. Hough has said, an action agenda entitled “Sustaining Canada as an Innovative Society”. This document has also been distributed to members of this committee. The document makes a strong case that the government should make strategic investments through the three federal granting councils, directed in three critical areas: investing in people, enhancing our current efforts in knowledge and technology transfer, and giving a greater international orientation to our research.

[Translation]

Mr. Chairman, we have to invest in people. If we want to improve our capacity to expand knowledge, we have to bet on the human component, that is to say on present and future generations of researchers, by providing the support they need to undertake research.

Increasing the financing available for excellence in research should be the cornerstone of any strategy aimed at supporting any academic research projets that want to be productive and connected to our real needs.

Our first priority should be to increase support for research and training in all fields. Graduate students, especially, face more and more difficult problems. These cuts increase student debt. The result is that, too often, our young people turn their backs on scientific careers or leave Canada because they do not want to leave science.

[English]

Our second priority area is enhancing knowledge and technology transfer. This second priority is to strengthen our current efforts in support of knowledge transfer and to expand them into new areas to include knowledge created in the social sciences and humanities, for nowhere is the gap between knowledge, need, and availability greater than in the social sciences and the humanities. We believe now is the time for the government to bring social sciences and humanities to the forefront and give them the support they deserve in helping Canadian society to prosper.

• 0920

Our third priority area is research in a global economy. A renewed vigour in support of international research and area studies is necessary if we are to understand our competitors and play an effective role on the international scene.

Moreover, Canada produces only a small fraction of the world's knowledge. In order to have access to new technologies, processes and knowledge developed abroad, we must work in partnership with researchers in other countries. But participation in international collaborative research initiatives requires that Canadian researchers be able to bring something significant to the table in terms of both financial support and expertise. Years of constrained funding followed by real reductions in research support have undermined our ability to engage in international research collaborations.

[Translation]

In conclusion, our plan is realistic and feasible. We know that everything cannot be done overnight and this is why we have established clear priorities and suggested concrete means, in order to support our capacity to innovate in the next millennium.

In particular, we recommend that the federal government increase by about 50 per cent its total investment in the councils during the next four years.

We also recommend that the budget of the Research Council for Social Sciences and Humanities be increased by at least 60 per cent during the same period. This would help fill the gap between the need for knowledge and its availability, which is nowhere as acute as in social sciences and humanities.

Mr. Chairman, distinguished members of the Committee, we thank you for having given us the opportunity to give you our priorities and our views about the important role that academic research can play for the social, economic and cultural development of Canada.

[English]

We look forward to a productive exchange. Thank you.

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

We'll go back to Mr. Hough first.

Dr. Paul Hough: Thank you, Mr. Chairman. I would simply like to underline the fact that the submission before the committee is supported entirely by not only the Association of Universities and Colleges of Canada, but also by the Canadian Association of University Teachers, the Canadian Consortium for Research, the Humanities and Social Sciences Federation of Canada, the Canadian Graduate Council, and the National Graduate Council.

I would suggest, sir, that this has a very wide base of support and the submission has resulted from a very extensive period of collaboration among those groups.

Thank you.

The Chairman: Thank you for bringing those facts to light. We appreciate that.

The next individual will be Dr. Henry Friesen from the Medical Research Council. Welcome, sir.

Dr. Henry Friesen (President, Medical Research Council): Thank you very much, Mr. Chairman. My professional career was as a research scientist for 30 years before I took on this responsibility.

The Medical Research Council is one of three federal granting councils. My other colleagues will be addressing this committee later today.

Medical research or health research activity in this country is anchored in the 16 academic health science centres across Canada associated with hospitals, universities, and research institutes. In one way or another, some 10,000 individuals depend on research grants provided to research scientists who make application to us and in turn employ graduate students, post-doctoral fellows, and technicians.

This group of individuals supported by the council provides the foundation upon which a number of other agencies, most particularly provincial research agencies and voluntary agencies, build on the foundation established through the investment made by the Government of Canada through the research council.

In other words, we're part of a partnership implicit—and I would like to underline the explicit partnership we have with the universities and hospitals that provide the space and in many cases the career support—as well as a partnership with the broad cross-section of voluntary agencies and provincial governments and others who, along with the Medical Research Council, provide the grant support.

• 0925

Most importantly, ladies and gentlemen, members of the committee, we are also in a partnership with Canadians broadly, across the country, who give great priority to their health, their health needs, and the health care system, who depend on and have as a fundamental tenet of their value system the assurance and the confidence that investing in research will generate the knowledge that will improve and maintain the health of Canadians on the one hand and, secondly, provide the new ideas, the new concepts, the new therapeutic agents that will lead to improved health, but also provide economic opportunity for Canadians.

That fundamentally is the position that the council supports. It takes very seriously that stewardship of the faith and hope that Canadians share in the generation and power of knowledge.

I have with me a colleague, Dr. Alex McKenzie, who is a perfect example of the kind of investment that generates new knowledge. Dr. McKenzie is a scientist based at the Children's Hospital of Eastern Ontario. Seven years ago he was supported by the council, dealing with a very critical illness affecting children, which is uniformly fatal. As a result of that initial seed investment, today a major discovery has taken place that will transform the hope and in due course hopefully the lives of these individuals.

I raise him as an example because, quite unanticipatedly, that discovery has very broad dimensions of application—to Alzheimer's, to cancer—as a result of which the commercialization of that idea is now under way, garnering some $12 million of support. A small, medium-sized company is emerging as a result of that discovery. That is the kind of initiative the council supports. It is built on the effort to ensure that Canadian discoveries are developed in Canada, for the benefit not only of Canadians but ultimately people everywhere, and in the process creating high-quality jobs.

I hope the presentation and discussion today will emphasize the critical role that investment in basic research at the front end of the R and D spectrum will bring to Canadians in rich dividends, not only for their health but also for their economic well-being.

What is the particular issue and recommendation I would like to bring to your attention this morning? It is that the government must re-examine the level of investment in support of basic research.

When we look at the international comparisons—and we provided you with charts on that—it is of grave concern to me, as president of the largest research agency supporting the health sciences sector, that Canadian scientists at the moment are not receiving an internationally competitive level of support. That position simply is not sustainable if we wish to be internationally competitive.

I urge you to look carefully at the comparisons and take under advisement as an urgent matter the reinvestment at an internationally competitive level in support of basic science in Canada. Thank you.

The Chairman: Thank you very much, Dr. Friesen.

We will now move to the representatives from the Canada Foundation for Innovation. Dr. Keith Brimacombe, welcome.

Dr. Keith Brimacombe (President, Canada Foundation for Innovation): Mr. Chairman, thank you.

Members of the committee, it is indeed an honour and a pleasure to appear before you today in my capacity as president of the Canada Foundation for Innovation. I'm accompanied by Dr. Denis Gagnon, executive vice-president.

We joined the foundation earlier this month, so it's been a short tenure. Before that I spent 28 years as a professor of engineering and research at the University of British Columbia, and Dr. Gagnon was a professor of pharmacology and most recently vice-rector of research at Laval University.

In our first few weeks we have had the opportunity, by virtue of meetings and visits, of seeing first-hand the enthusiasm of the research community for the foundation, and we are grateful to the federal government for the major investment in research infrastructure. My colleagues and I intend to work with partners and the research community to ensure that this investment has the greatest possible impact on economic development and quality of life in Canada.

To go on to my brief, the Canada Foundation for Innovation is a new presence among the agencies, corporations, and foundations that provide support for research and development in Canada. The mandate of the foundation is to increase the capability of Canadian universities, colleges, hospitals, and other institutions to carry out important world-class scientific research and technological development.

• 0930

CFI will not provide support for research personnel and operations. That is the role of the federal granting councils and other federal departments and agencies, the institutions themselves, and the provincial governments.

The role assigned to the foundation by federal statute is to build infrastructure for research, thereby creating capacity for innovation. There are good reasons to expect that the foundation will have a major impact on research and development in Canada. The time is overdue for a major infusion of new infrastructure for Canadian research. The capacity of the foundation to support research infrastructure is relatively large and its capital of $800 million will be committed over five years. Potential funding partners—governments, corporations, voluntary agencies—that will be providing 60% or more of the capital for projects supported by CFI are showing strong interest in our programs. Research institutions are already making ambitious plans for applications to the foundation and are actively seeking funding partners.

The optimistic view that we bring to this committee is strengthened by the changing pattern of discovery and application that has emerged in recent years. During the second half of the twentieth century, the pace of discovery has been breathtaking. Virtually every academic discipline has experienced at least one major revolution during this period. This came about largely through academic research within traditional boundaries guided by the contemporary logic of discovery characteristic of those disciplines.

The success of research in the academic disciplines has led directly to their transformation. In many areas the traditional boundaries are fading and disciplines are converging. This transformation is well under way in Canada, but with distinctive Canadian features. Thanks to the pioneering work of the Canadian Institute for Advanced Research, the provincial and federal networks of centres of excellence, and the partnership programs of the councils, Canadian research has evolved dramatically in the last decade. Participation of researchers from universities, institutes, and corporations, large and small, from all parts of the country, in co-ordinated research and development programs, is now a common occurrence. The dramatic improvements in high-speed communications with multi-media capabilities can only accelerate this trend.

There are now fledgling companies in all parts of Canada that have their origins in academic research. They are much strengthened by continuing links with academic centres and by the flow of new research trainees to the jobs that are being created. Start-up funding and venture capital from private sources is flowing to these new enterprises at a rate hardly imaginable 10 years ago. This is capital that might in the past have supported knowledge-based ventures in the United States or elsewhere. These mutually nurturing relationships among governments, universities, corporations, and investors have been described as “virtuous circles”.

There is potential for a growing pace of discovery through research that will not only expand our knowledge but also have dramatic effects on the well-being and prosperity of Canadians. The Canada Foundation for Innovation has an important role to play. We are well funded and well prepared for the task we have been given, but our responsibility is only a part of the larger picture. The foundation will no doubt help to create capability for innovative and productive research in many parts of the country but this would be only the first step.

The new infrastructure will increase the need for other research funds, particularly for operating support for staff and for trainees. We are here then not to argue our own case but to urge your careful attention to the roles and responsibilities of the three federal granting councils—of which Dr. Friesen is president of one, the MRC. Their capacity to support the operating costs of research has been severely impaired in recent years, and we believe there should be a substantial increment in the allocations to all three councils.

• 0935

Others will argue the case for restoring and stabilizing the program capability that has been lost in recent years. While we support that case, we want to focus our argument on the vital mutual dependence of the councils and the foundation. It is vitally important that the councils keep pace on the operating side with the capital program of the foundation.

At this early stage we cannot provide an accurate forecast of the impact of the foundation's programs on the requirement for operating funds in future years. In the absence of experience and relative analysis, we would just offer the following reasonable conjecture.

The foundation and its funding partners will contribute $2.5 billion to research infrastructures and universities, colleges, and hospitals over the next six to eight years. Part of this total will replace existing infrastructure; the balance will provide new infrastructure extending and diversifying the resources for research. The proportion is difficult to estimate at this point in time, but let us assume that 30% will be used to replace existing resources and 70%, or $1.75 billion, will be invested to support important new initiatives.

The incremental annual cost of maintaining this infrastructure, providing professional support, using the infrastructure and research to its full potential and providing support for additional research trainees would be approximately 20% of the capital costs, or $350 million. A part of this incremental annual cost, say $100 million, might be borne by private sector partners, by voluntary agencies, and by various provincial programs. The balance of the operating support would be the responsibility of the three granting councils, roughly a total of $250 million per annum.

The initial impact of the foundation's programs will be experienced in the 1998-99 year and will build quickly thereafter. We recommend therefore that there be an annual increment in the budget for the three councils of $50 million starting in 1998-99, to reach $250 million five years later. This would complement and support the mission entrusted by the federal government, the Canada Foundation for Innovation.

This increment should be supplementary to other adjustments required by the councils to fulfil their mission in support of research and research training in a knowledge-intensive economy.

Thank you, sir.

The Chairman: Thank you very much, Dr. Brimacombe.

Before we enter the question and answer session, I would like to take this opportunity to present to you some other individuals who are part of the round table: from the Canadian Association of Universities and Teachers, Professor Shirley Mills, treasurer; from the Humanities and Social Sciences Federation of Canada, Mr. Chad Gaffield, president; from the Canadian Graduate Council, Ms. Rubina Ramji, chair; and from the National Graduate Council, Mr. Derrick Deans, co-ordinator.

Welcome to you all.

Now we'll enter the question and answer session.

Mr. Ritz.

Mr. Gerry Ritz (Battlefords—Lloydminster, Ref.): Dr. Friesen, you talked about the programs creating new wealth and so on. Are these new companies that are spinning out of the research areas that are being done standing on their own, or are they now competing with the universities and so on that created them?

Dr. Henry Friesen: The spin-off companies that have been generated as a result of the investment are uniformly stand-alone. The council support is restricted to non-profit institutions, universities, hospitals, research institutes.

Mr. Gerry Ritz: Dr. Hough, as we went across the country we had other submissions talking about brain drain, people leaving the country, the money not being there for them, and so on. I'm wondering if you have any information. How can we stem this flow? Are these people going to government programs in other countries for the funding that's available there, or are they going to the private sector? Could you enlighten us on that?

Dr. Paul Hough: I'll try, sir.

Every institution across the country can provide examples of well-recognized researchers or individuals going elsewhere, be it to other institutions, be it to the United States. Many are going into the university sector in other countries. Some are going into the private sector. But I must admit there is no compilation of number or disciplines, for instance.

• 0940

It is a worry, but it's a very difficult area actually to quantify, because there is an ebb and flow. There are people coming back. There is a sense, without my necessarily having the numbers before me to substantiate it, that we are losing in many areas, or at least some areas, the more experienced people and gaining back some of the younger ones who have gone to other countries to do their postgraduate work, their postdoctoral experience, etc. But every institution, I'm convinced, does have examples of very well-known people who have gone.

The Chairman: Mr. Giroux.

Mr. Robert J. Giroux: I would like to add that we just had a meeting of AUCC in Quebec City this month and the subject was the brain drain. We did a study of the departures in our universities. We can quantify particularly the university professors who are leaving. We'll send you a copy of that particular study. It shows we are losing more than we are gaining. Secondly, those who are leaving are in mid-career, when they are the most productive. We're losing a number of high-level professors and teachers.

There are two very fundamental reasons for that. There's no doubt the compensation packages being offered are there, but also the whole research infrastructure, the research climate and the environment they were working in, was also a very key factor in their departure.

I will send you that information, sir.

The Chairman: Thank you, Mr. Giroux.

Dr. McKenzie.

Dr. Alex McKenzie (Medical Research Council): Thank you very much. As Dr. Friesen mentioned, I'm a pediatrician and a clinical scientist at the Children's Hospital.

Just to give a personal perspective on this, because of our good fortune in the last three years in cloning this family of genes, I myself and my colleagues have had a number of offers to move off to the United States. I have to say we are collectively proud Canadians and we're staying put, but it was the advent of a program such as the networks of centres of excellence, the hope of things such as the CFI, and the biotech context that has emerged in the last two years, which have helped us stay put. That's just an encouraging advertisement for the direction we're moving in. In 1997 there are encouraging aspects that keep individuals up.

As was mentioned, it's not so much individuals such as myself; it's people ten years back, the ones in their thirties who are coming on, the future Apoptogens—that's the name of our company—who are at risk. Those are the individuals we'll need to fund in order to keep them in Canada in the years to come.

The Chairman: Thank you very much, Dr. McKenzie.

Mr. Loubier.

[Translation]

Mr. Yvan Loubier: Ma question is for all the participants. Since the budget of 1996, the Minister of Finance has told us that he plans budget cuts in fields that bear directly or indirectly on research. It is believed that by 2003 the Minister of Finance will have cut more than $42 billion in transfers to the provinces that were used to finance higher education, health and social assistance.

What part of the amount, which is far from insignificant, was supposed to go to research and will not now be channelled into academic or health research? I ask this question because we seem to focus only on new initiatives and to forget that cuts are still being made in some critical sectors.

Mr. Robert J. Giroux: I would like to answer about the cuts in transfers to the provinces, especially for universities. First of all, all universities will not be affected at the same time. Some have already had cuts, like Alberta, and others are only implementing them now, like Quebec and Ontario.

We know that this has caused some grievous damage to what could be called the indirect costs of research, but I could not give you any figures. In Canada, we traditionally have some balance between the financing of indirect cuts of research, which is the purview of the granting councils we are talking about this morning, and the financing of indirect costs, which is the purview of the provinces, through their general grants to universities. These indirect costs relate to basic infrastructure, administrative expenses, maintenance activities, and so on.

• 0945

The role of the Canadian Foundation for Innovation is to support infrastructure. It is also to help researchers finance their direct costs and, naturally, it will be up to the provinces to help them finance their indirect costs by way of their general grants to universities or to specific programs.

I am told that in Ontario, for example, maintenance is being deferred and there will be a gap of $700 to $800 million because the funds are not there. I have no figures for Quebec.

Mr. Yvan Loubier: What should Quebec or Canada do to make sure that research financing is up to par? We have already been told that, in the past, we were far behind Japan, the U.S. or Germany. Is it still the case now? And what should we do to enhance our research capacity in order to catch up?

Mr. Robert J. Giroux: First of all, we are indeed behind. We have distributed this graph showing the position of Canada in relation to the other countries of the G-7, and you can see that Italy is the only country whose proportion to GDP is lower than ours. In all the other countries, especially the U.S., which have a huge impact on us, and Japan, enormous additional amounts have been channelled to basic research.

Our claim is that Canada must catch up. Let us not forget that those countries invest more and more each year in research and development. You can see here the investment of $800 million in the Canadian Foundation for Innovation which, as Mr. Brimacombe mentioned, when added to the grants of the other partners will increase research financing to more $2 billion. You can also see here the potential effect of increasing the budgets of the granting councils, which would be another way to reduce the gap.

Let us not forget either that the support of the private sector to research has been considerably increased for seven or eight years, even though it is still lower than in some other G-7 countries. The federal government having done its share, the private sector will certainly continue to invest more in research.

The Chairman: Thank you, Mr. Giroux.

[English]

Mr. Riis.

Mr. Nelson Riis (Kamloops, NDP): Thank you very much, Mr. Chairman.

The trend lines on all of the charts you presented to us this morning are quite alarming. My first question is probably an easy one. The case you all make in terms of returning support for basic research at the front end of the R and D spectrum is obvious in terms of what needs to be done—restoring funding to some of the granting agencies and so on.

My question—and I'm not sure who I'm aiming this toward—is that we understand why research has fallen in the organizations that you folks represent, but why has business research and development been so abysmal? We know why ours has fallen off, because of the lack of financial support, but over the years business in Canada has had an abysmal record when it comes to R and D. What would be your explanation of that?

The Chairman: Who would like to answer? Dr. Hough.

Dr. Paul Hough: I'll start.

In fact, sir, in recent years, as Mr. Giroux indicated in his previous response, investment on the part of the private sector is now approximately 1% of GDP. In other words, the ratio in Canada of investment in research to GDP is about 1.6% in total, including all the different sectors. The rate of increase from the private sector in the last five to eight years has been very much greater than any other sector. In fact, the component, if you wish, of that factor from the federal government has been coming down at the same time as the private sector has been going up.

• 0950

I think there is a perception there that the private sector in Canada does not invest a lot in research. A relatively small number or at least a minority of firms do invest in research, even though they've been putting more into it. I think the more important trend that has occurred, not only in Canada but elsewhere, is the focus of their core business activities, including in their research, which means that instead of installing in-house research capacity in a whole lot of areas just in case they might need it, what they look to is other sectors, including the university sector, for a niche expertise, or for expertise and facilities that they would need on an occasion, for instance.

So there's an enormous number more of alliances, connections, networks, and so on, between the private sector and a variety of institutions these days. What they're really looking for is a very solid capacity within those institutions. They are going to go where the expertise is, where the experience is, where the ability is. If Canada does not reinvest quite significantly in retaining that front-end capacity, these companies, be they in Canada or elsewhere, are going to go to other institutions in other countries.

The Chairman: Thank you.

Dr. Friesen wants to join in.

Dr. Henry Friesen: To reinforce and support what Dr. Hough has said, I think first of all I'd note that there are some considerable sectoral differences in the kinds of industry that exist in Canada. Telecommunications is Canadian home-grown...the health science sector. The big farm, of course, is often multinational, and their branch-plant efforts in Canada.

But I would note that there has been dramatic change in Canada. Over the last decade, government support, from provincial and federal, has increased 1.6%; in industry there has been an eight-fold increase. It's a phenomenal increase, buttressed and enhanced by venture capital flows, which is really quite astonishing in scope and size. There was a $250 million venture capital pool invested last year. A few years ago it was in the health science sector. A few years ago it was almost non-existent. The public companies have raised $1 billion.

So Canadians are investing in a magnificent way in support of the sector I represent, seeing the value of the investment as a dividend for their longer term—in some cases, their pension plan support. I think the environment is rapidly changing. Of course, all of this ultimately fuels the creation of companies and high-quality jobs.

The Chairman: Thank you, Dr. Friesen.

Mr. Riis.

Mr. Nelson Riis: As a supplementary question, if we were going to target reinvestment in research in a way to send a signal to those people who are thinking of leaving the country, or have already left and would like to come back, what would be the most significant area of investment we could take to send a signal to the research community that we're serious about restoring in a very serious way support for research and putting ourselves on the sort of cutting edge of knowledge-based economy?

Dr. Keith Brimacombe: I think, Mr. Riis, the government has already given a very strong signal through the creation of the CFI, through the permanent funding of the national centres of excellence program, and of course through the new scholarship program for students. To me, that is a very strong commitment. I do see, however, in the future, again with the CFI, that we are prepared to put equipment, make renovations and so forth, as required and subject to proposals and peer review. It's a bit like buying a new tractor and nobody is there to drive it; it sits in a field and rusts.

So a clear signal to me would be to beef up the operating component of the granting councils, as I indicated, because I think that's really important.

• 0955

I think the combination of the CFI, with its $800 million plus, and the grants in council—which hopefully would be able to cover some of the operating costs while we're levering funds out of the provinces, out of the private sector and so on—will be very powerful. Those are powerful messages that this government has sent. I think that's a credit to the government.

So I think those signals are certainly out there. You're not going to stop every person from leaving for the United States. In my own case, I've had multiple offers, but I kind of like this country. I think we're in a situation now where if we can keep the momentum going we're going to be big-time winners. I really believe that.

The Chairman: Thank you, Dr. Brimacombe, and thank you for staying in Canada.

Some hon. members: Oh, oh!

The Chairman: Professor Mills.

Professor Shirley Mills (Treasurer, Canadian Association of University Teachers): Thank you. Perhaps I could address that from the point of view of a professor.

I am a professor in a very technical area—mathematics and statistics—in one of our local universities. I teach a great many students in engineering and computer science so I understand about the brain drain. I see my colleagues being offered jobs all over the place and I'm asking what we can do to stem that.

From the perspective of professors, certainly, increasing the funding to the granting council would help to stem the brain drain. Programs that were funded in the past have been cancelled. Two that have funded me have been cancelled. I have been offered jobs outside as well, so I understand it exactly. I guess it's because we love to teach that we remain as professors, but there comes a time when, if you don't have funding coming in from the granting councils to support your graduate students and to continue your own research, you do have to look very seriously at offers from the private sector.

So, really, I think restoration of the funds to the granting councils.... I'm looking particularly at programs for international scholarly collaboration. Those programs were subject to severe government restraint and they have impacted a great deal on our research.

The Chairman: Thank you, Professor Mills.

Dr. Gaffield.

Dr. Chad Gaffield (President, Humanities and Social Sciences Federation of Canada): I'd like to connect this discussion to Canadian society, if I could, because I think at the heart of this matter is a sense of where Canada's going as a country.

We tend to think about research in terms of science, technology, business, and so on, but I think one of the key elements here is the extent to which Canada's going to take itself seriously as a society in terms of understanding its history, for example.

I'm a professor of history, and one of the things that disturbs me, as I'm sure it disturbs you, is to read in the paper that many of us Canadians don't even know our history and that it's not taught in schools and so on. This isn't an accident. In fact, when I was in university in the late 1960s in Canada there was very little history being taught and very little research going on. Most of the books used in our schools were written elsewhere. It's only as a result of funding for the Social Sciences and Humanities Research Council, for example, that we began to study Canada and take our history and our society seriously.

When we think about where Canada's going today, many of the big questions are in fact social and cultural questions. How do we live in our society? How do we deal with violence? How do we deal with the changing nature of families? How do we deal with ethnocultural diversity? How do we deal with a rapidly changing society? It seems to me that without fundamental research on ourselves, in a sense, all of these other issues are just going to fade away and become somewhat irrelevant.

I think we need to know ourselves better. We need to understand ourselves better. We've made great progress in this. Now many of the textbooks our children use are written in Canada, but we also know there's a long way to go.

My message is yes, we're at a point where we have a research foundation, so I think we have some right to be optimistic. But I would say it's fragile; it's recent and it's somewhat fragile.

Without sustained, continued support we could go into the 21st century in what we talk about as a new colonialism, a world in which Canadian society is really at the brink, is marginalized, and it could be partly because we don't know who we are and where we've been and therefore we can't say where we're going.

The Chairman: Thank you, Professor Gaffield.

We'll hear from Mr. Derrick Deans and then from Dr. Hough.

• 1000

Mr. Derrick Deans (Co-ordinator, National Graduate Council): In terms of graduate students, we're here to talk about the need for support to the research granting councils. The funds that go to the research granting councils help graduate students directly and indirectly. There are scholarships and fellowships that are awarded to grad students that are of direct help to grad students in continuing their studies at the graduate level.

I'm sure you've already heard at this committee about the high debt load that undergraduate students are experiencing. When they're carrying that high debt load, estimated to be $25,000 next year, into grad studies, they need to look more than ever for a source of support. The granting councils at this time are the most high-profile places for them to turn to for support.

The funds that go to the granting councils help students indirectly as well. Research grants are awarded to many of the professors, and many of those funds are recirculated to graduate students through research assistantships, where students are working with a professor in new areas and being trained at the same time in new research processes.

Graduate students are helped in two different ways. We can only speak anecdotally now—we haven't been able to do the research—but we know that as the granting councils have been constrained in their funds, grad students, particularly when they're deciding where to pursue their Ph.D.s, are likely looking internationally to see what opportunities there are for study. If they can get better support internationally for their studies, that's likely where they will go.

There is only one figure I can give you right off the top of my head, because it was something I saw just the other day, but the number of applications for Social Sciences and Humanities Research Council doctoral fellowships has continued to rise, while the number awarded has decreased. Only 16.4% of those who tried for fellowships this year at the doctoral level were awarded them. What happens to the other 83%? I'm not sure.

The Chairman: Dr. Hough, and then we'll go to Dr. Friesen.

Dr. Paul Hough: The basic message here is that in order to not only limit any kind of exit of our brains but also instil a sense of real challenge among our students and our future researchers, there must be sustained support for the research enterprise in this country. Support has been drifting down quite significantly, and therefore the perspective in the last couple of years from the younger people has been that there's really no point in going into the research enterprise. It's really important to have a commitment, and a sustained commitment, to that part.

The Chairman: Thank you, Dr. Hough.

Dr. Friesen.

Dr. Henry Friesen: Just to remind ourselves, the question was, “What is the most important signal that could be sent to Canadian researchers?” I entirely endorse the thrust of the suggestions that have been made that investment in research granting councils is an important element of that decision-making.

To give you a measure of the kind of frustration that exists out there, last year we saw 500 excellent scientific grant applications that the council simply couldn't fund. That's the signal that's out there, and in order to address that issue the granting council's base budget must increase. How many of those 500 might have resulted in the kinds of ideas the Alex McKenzies of today—

Dr. Alex McKenzie: Or even better.

Dr. Henry Friesen: —might have discovered. I think that's a haunting question. It should concern us.

I think the analogy is, whether it's a tractor or the pipeline system, somebody has to drill for oil. We're building an infrastructure. We have some of the capacity. The CFI is improving that. But unless the oil of discovery fuels this network, all of that investment, unfortunately, will not reap maximum benefit.

I think the government has created a lot of the key instruments such as the CFI, the networks of centres of excellence, the venture capital regimes, the Technology Partnerships Canada program, etc. They're all in place, but what we now need to feed this appetite for discovery is investment in basic science.

The Chairman: Thank you, Dr. Friesen.

Mr. Jones.

• 1005

Mr. Jim Jones (Markham, PC): I've enjoyed your discussion so far. How do we stack up in funding in comparison to the U.S. in terms of what they put into research in the private sector and in the public sector? Also, do we have the same type of relationship with the universities that the U.S. does with the business community? I know that in the U.S. a lot of the research that the universities do is funded by corporations for their own interest. Do we have that going on here in Canada?

The last question I have in this relationship is do we have the right tax incentives to do research here in Canada?

The Chairman: Mr. Giroux.

Mr. Robert J. Giroux: First of all, I'll refer to this chart again. This is the United States; the white part is the business expenditure and the dark part is the total expenditure. Proportionately in Canada you have expenditures outside of the business sector—when you look at the proportion. It's difficult to see here, but as you see, the business expenditure in the United States proportionately is much higher than it is in Canada. We're below on both. We're below in total research expenditures as a percentage of GDP and we're below in terms of business expenditures as a percentage of GDP. There is no doubt that in the United States the business sector does of course a larger part proportionately, but the government sector also provides a larger part.

We gave you two other charts. This compares the National Institutes of Health with the Medical Research Council of which Dr. Friesen is chair. Of course, these are growth numbers, because when we look at absolute numbers there's just no comparison. They show that our MRC has been going down while exactly the reverse trend has been taking place in the United States. Not only for that but also for the National Science Foundation, which funds research in the domain of our national council on engineering and basic sciences, NSERC, and also the Social Sciences and Humanities Research Council. This is the U.S. curve and this is the Canadian curve, which has been going down.

So we stack up very badly against the United States both in terms of proportion and in terms of actual government expenditures.

Your third question was about R and D. People will tell you that we have some of the most attractive research and development tax exemptions, tax advantages, here in Canada in terms of research and development. That may account—as we were seeing previously—for the growth in private sector expenditures. That growth has been good but it hasn't really allowed us to move to that level. We must remember it's not only tax incentives that increase private sector funding. Some studies have shown that the location of head offices of major corporations, the environment in terms of having available universities, having strong researchers and research institutes, also increases the private sector investments. That is why we are making the case that strengthening university research and strengthening the basic research is really the magnet that will attract more investments on the part of the private sector down the road.

The Chairman: Mr. Iftody.

Mr. David Iftody (Provencher, Lib.): Thank you very much for those presentations. I was particularly interested in some of the emerging discussions in terms of the relationship between venture capital and science and research, and I think one of the things that has struck me is that my general sense is when a private sector company is making an investment in research they're looking for a quick return on that money. In other words, the basic science and research that would require perhaps patient capital might not be that well exercised in the market.

• 1010

I was wondering. Perhaps the role of the government might be more well placed in terms of the long-term patient capital in terms of basic research.

Perhaps somebody could comment on this.

The second point I wanted to make is the difference between the roles of the private and the public sectors. I appreciate the analogy, Dr. Friesen, in terms of drilling for oil, but in those cases when we don't find oil, should the public sector be paying for that or should the private sector be paying for it?

In the cases when we do find oil, who gets the return and the benefit? Should the Canadian taxpayers, as perhaps investors in these undertakings, also be rewarded for the results of that research?

I was particularly intrigued recently by an article in the Globe and Mail—some of you may have read it—out of Guelph University, the Department of Agriculture, where one of the professors actually started a small company and listed it on the Toronto Stock Exchange as an attempt to raise funds for research. Being frustrated by the cutbacks, this gentleman and a group of his colleagues decided to do something about it. So they issued a security instrument on the Toronto Stock Exchange, and I think in the first year this company raised $8 million of private sector investment to do research in agriculture. I thought this was an absolutely wonderful exercise, and perhaps this gentleman has provided some leadership.

My basic two questions are these. In terms of the difference between basic science and research, which needs patient capital, and that of venture capital, which perhaps needs a greater and quicker return, is there a difference in the roles between the public sector, the Government of Canada in this case, and the private sector? Second, is the example that was provided by the Department of Agriculture in Guelph something universities should be entertaining more, getting up into that saddle, as it were, and trying to harness some of that money that is looking to be invested in universities?

Perhaps I could start with Dr. Friesen.

Dr. Henry Friesen: Those are critical issues. We deal with them increasingly. Some of those questions, I think, would have been thought curious a decade ago, when I was in science, but the world has changed dramatically in the last period of time.

You asked the question, who benefits from the investment in basic science? I think I made reference to my colleague Dr. McKenzie. The public benefits.

Let me give you a more specific example: BioChem Pharma. A bit over 12 years ago it was one of those ideas that the councils funded. Today it's the fourth largest capitalized company in the world, employing 1,500 individuals, based in Montreal. One of the lead compounds that is used in the treatment of AIDS, 3-TC, is their product, with $1 billion of sales annually.

That's kind of the way it unfolds when you hit a gusher in the Leduc well, if I can continue that analogy. It doesn't happen all of the time. That's the nature of basic science.

My view is that the government's role is fundamentally to ensure that the basic platform of discovery is secure and stable. I think Dr. Hough made that point. Basic research can't be turned on and off like a tap, so stability in the research environment is an important element.

The role of venture capital, even pre-venture capital, is very important. The networks of centres of excellence program was critical, I think, in beginning to change attitudes in the university community. The labour-sponsored venture capital in fact secures five to eight years now with the latest change, an eight-year period, locked in in investment. That's probably the right time scale.

Perhaps I could invite Alex McKenzie, who has benefited from one of those investments, to describe his own experience.

Dr. Alex McKenzie: The network was absolutely critical as far as moving it along went. Just a technical point, the actual sequencing of the gene that we found was conducted with network funding and it was really a sine qua non for getting it done.

Parenthetically, I want to add that as an academic I have tremendous ambivalence about the infusion of commerce into my laboratory, but it turns out that this is millions of dollars spent on a fatal pediatric disorder. This is moving the science along in a dramatic sense over the last two years. This is a miserable disease for which there is no treatment in 1997, but thanks to the segue from the Medical Research Council to the CMDF, with the centres of excellence network providing the bridging funds, we're looking at potential therapies for these children with this fatal disorder. So it's a no-brainer, from my point of view, never mind the profit motive.

• 1015

Mr. Derrick Deans: I wanted to mention something else in response to your question. It probably had more to do with financial returns than with other returns, but within our document a suggestion is put forward for the creation of what are referred to as “community research information cross-wards”. That is trying to set up a pilot project so the interchange between the community and the universities on issues in the social sciences and humanities can occur more readily.

Right now you're probably all aware that a lot of community groups out there are in need of research. They don't have the resources to do it themselves. Meanwhile, on campus there are graduate students, there are professors, performing all sorts of different kinds of research into different areas. The links are never established. So I would like to urge you to consider that part of the document we put forward. I'm not going to go much further here than to highlight it. It would serve a valuable role in trying to build bridges between the universities and the community by the social sciences and humanities tackling a lot of problems that families and our society face right now but we're not well enough co-ordinated to deal with.

The Chairman: Dr. Keith Brimacombe.

Dr. Keith Brimacombe: Thank you, Mr. Chairman. I have one or two other points to make.

One is that a very strong and stable research capacity at the universities in Canada has as probably the most important component that its primary product is people. I keep reminding people of this: universities don't exist to do research, they exist to create talented, educated people, and research and teaching are vehicles for this. The wonderful thing is that when we actually develop new knowledge as a result of that research the ultimate product is the young people, maybe even some not so young people, who go out into industry or out into the community and make a very strong contribution to our society.

The thing that has always intrigued me in my own career is the fact that knowledge by itself is not enough. I'm a professional engineer, so it's easy for me to say. It's the actual application of knowledge. So you create the knowledge—fine, you write your papers, you do this, you do that—but it's a bit like what Alex was saying. If you simply do research and you don't actually apply it to a really debilitating, as you say, nasty pediatric disease, disorder, whatever, it's fine for MRC—Henry may give you grants and so forth; maybe he won't—but the point finally is the application of that knowledge, in your case to improving the health of Canadians and people in the world. In my case I'm much more interested in wealth creation by virtue of the things we do; how we take knowledge....

Of course within the CFI, what is innovation? Well, to me it's a chain, but the last part of the chain is taking knowledge and putting it to work. In the case of the CFI it's in the areas of wealth creation: unemployment, a strong economy, the area of health, the environment. I think that's another reason why we need this.

I agree entirely with Henry that we've seen a step change, a big wrapping-up, in the last decade. I've been in business a long time too, and I think the last decade has been marvellous in this respect.

That's why I keep saying we have to keep building this momentum. BioChem Pharma is a good example. QLT PhotoTherapeutics in Vancouver is another. But there are many, many other cases, software companies and so forth, which are really contributing to the Canadian economy.

The Chairman: Dr. Hough.

Dr. Paul Hough: The example from Guelph, for instance, is probably another one of the application of knowledge. That is happening on a much more regular basis at all institutions, but it is not something that can happen with research in all cases.

• 1020

I think the other message we would like to leave with you is that you really do have to support a broad base, a lot of activity, to actually achieve the nuggets, the gushers, as Dr. Friesen referred to them, and then take advantage of those through the other mechanisms. I don't think it's appropriate to look upon research as all being equivalent and able to follow the same kinds of steps as did those people in Guelph.

The Chairman: Ms. Torsney.

Ms. Paddy Torsney: Thank you.

First of all, I want to say that I'm very supportive of your request to ensure that we are adequately funding research in this country. I'm very concerned about the brain drain, partly because of its implication for our future as a country but also because we've invested a lot in these young Canadians who are leaving. It's not just the $25,000 they've invested; it's a lot more money for governments and for Canadian taxpayers.

But I have to tell you, I'm a little concerned; I want to know that if funding is increased, the problems that have been identified in the past have been addressed, problems specifically related to young researchers getting money, young women researchers getting money. Young researchers, particularly the young women researchers, have said, “Know what? To get any funding, you have to crack the old boy club”—emphasis on “old” and “boy” there.

Some would say, well, that's not really a problem, don't worry about that, but I say, wait a second; we are paying for our share of taxes. We are part of the population. It's not just the kinds of research but also the kinds of researchers doing the research.

I want to know what each of your organizations is doing to address these criticisms. I want to know whether that is just a criticism of the past and everything's hunky-dory now. What active measures are you taking?

Dr. Giroux, I'd like to know if the brain drain stats have been analysed to see if there are gender implications for them.

Ms. Ramji, do you feel hopeful for the future, as a young graduate? I want to know that we are properly weighting the research dollars to reflect the involvement of the population and toward the things that women and men care about in our community. I want to know that the proper research is being done.

The Chairman: Who would like to answer that question? Ms. Ramji.

Ms. Rubina Ramji (Chair, Canadian Graduate Council): I'm not even a young graduate yet. I'm still in a Ph.D. program. The statistics I've heard suggest that there are less than 10,000 women in graduate programs in Canada out of more than 80,000 graduate students.

Five out of six applications to granting councils get turned down. There's not a lot of money out there. It's very difficult, whether you're a man or a woman, at this point in time. I think it's harder for women to even think about going into graduate programs because of the lack of money, especially if they have a loan in there. If they are single parents, I think the millennium scholarship will help in the sense of helping needy students, but it's not really going to help to create new researchers.

The Chairman: Dr. Friesen.

Dr. Henry Friesen: The issue that has been raised is one that is of great concern to our council. We've had a standing advisory committee on women's issues relating to women health scientists.

I just had the council staff review the outcomes of applications from women compared with men at the post-doctoral fellowship level, at the first career opportunity, at the first faculty position of women, and overall, the grant support applications. I am pleased to tell you that it's virtually dead on in terms of the success rates. What is obvious, however, is the point you've made, that there aren't enough women in health science. At the graduate student level there is almost equivalence. Among post-doctoral fellows you begin to see the drop-off. In terms of applications pressures to us there's a further step down, a decrease.

That's obviously a complex issue. We have our committees looking at that issue. I'd be pleased to send you the informational analysis that has just been undertaken. Council, too, has indicated there must be at least a third of women on all our review committees.

Sometimes in our effort to address one issue we in a sense inadvertently create another. Those women in science who are performing so very well are much sought after. So we get them too engaged in all the committee work, and the time they can devote to science is kind of compromised.

So that balance sometimes is a difficult one, but thank you for asking the question.

The Chairman: Mr. Gaffield, followed by Mr. Deans.

• 1025

Mr. Chad Gaffield: It's a very, very important point you made. I would just say two things, one a slightly optimistic note.

As you know, in the field of history until quite recently it was the story basically of men, his story. That's changed dramatically, and I think it's fair to say now that our understanding of the past is more inclusive and we're moving that way. In my own department, for example, now approximately half, 50%, of the professors are female. So there is a change.

The other thing I'd like to say is that the funding councils have played an important role in this. For example, in the case of the Social Sciences and Humanities Research Council of Canada, they've set up a specific program in a proactive sense to promote funding. There's a program called Women in Change that's called a strategic program, and that has in fact attempted to move in the direction you're saying.

So there is a long way to go in many fields, but there is movement and the funding councils have played a leadership role in past years in this sense.

Mr. Derrick Deans: Just as an example, you spoke of addressing the concerns of young researchers. I just wanted to point out that the Natural Sciences and Engineering Research Council last year had a three-day workshop specifically on that subject: what are the needs of young researchers and emerging researchers? A couple of the recommendations that came out of that workshop dealt directly with increasing the representation of women again, and they're following up again this year with a follow-up workshop in November, I believe. So there is an interest there.

This won't provide funding support or scholarship support to graduate students, but the community research information crossroads would provide an opportunity on campus for students to get involved with research issues and make links with the community. So that would help all young researchers.

Mr. Robert J. Giroux: For the benefit of the members, the information we'll be sending you on faculty attrition and replacement and so forth does not distinguish between men and women. It's basically just strictly professors. I just wanted you to be aware of that when we send it over to you.

The numbers are not that large. It is a sample. It is information obtained from the universities. So having them broken down by gender might not be very conclusive, either.

The Chairman: Mr. Szabo.

Mr. Paul Szabo (Mississauga South, Lib.): I wanted to ask a question to which I have not heard the answer yet. It's important because many of the groups that have come before us, like you, who have made excellent presentations as well about the importance of research, have been reluctant to comment on the questions that were posed to the witnesses about the propriety of the deficit battle, getting the fiscal house in order and the 50-50 allocation.

I think it's important to have on the record your view to the extent that you feel you can make a statement as to the propriety of dealing with not only the deficit but also, looking forward to the surplus, the allocation between debt pay-down, tax cuts and real expenditures.

Mr. Robert J. Giroux: If I may, Mr. Chairman, I'd like to answer that. I think we can say we're on the side of government using part of whatever surplus occurs towards investment in the future. I think we're on the record as in a way supporting the approach that the Minister of Finance is taking on this issue, in the sense that where the term “fiscal dividend” is being used, there has to be a balance as to where it goes. We think that the balance of making investments in Canada's future, which we see on two major fronts, of course, from a university perspective and the groups that are around the table.... One of them is on the innovation side, which of course is the issue we're discussing this morning, and the other one is on accessibility and the student debt side. I think a number of us will be coming back in front of you next week to discuss this particular issue.

Canada must produce knowledge workers and must also feed the innovation chain, and those two areas, we feel, are important for federal investment. In that context, we think a proportion of whatever surplus there is should go towards that. Of course, we also recognize that it's important to look at taxes and at reducing the debt. We are conscious of that also. Through our demands in past years we have in fact recognized the importance of fighting the deficit.

• 1030

The Chairman: Thank you, Mr. Giroux.

Dr. Brimacombe.

Dr. Keith Brimacombe: I will simply speak as an individual, not as president of the CFI, although I think many of my colleagues would agree with me.

If we're going to invest in Canada in the future, we have to get our debt down. The fraction of our GDP that is currently our debt is unacceptable, and whether we invest in innovation, in research—which I sincerely hope will continue and will expand—in day care centres, or special social programs, I would really rather we do that than put it in the pockets of investors or bankers who have invested in our country by virtue of supporting our debt.

As a citizen of Canada and as a taxpayer, I think it makes good sense to continue to hammer away at the debt while at the same time beginning to see what relief could be brought to tax and so on. So I suppose I come out in favour of what Mr. Martin is proposing, although I wouldn't say it's 50:50 or whatever the number might be. I would hate to see us stop our determination to bring this debt down.

The Chairman: So debt reduction is very important.

Ms. Redman.

Ms. Karen Redman (Kitchener Centre, Lib.): Thank you very much, Mr. Chairman.

Part of my question may already be answered. Dr. Brimacombe has actually touched on the fact that we're looking at coming out of a period when there's been a great deal of human cost at wrestling down this deficit. I personally really support what this Liberal government has been able to do, but when we've gone across Canada, we've heard some of the angst that's been created in the communities.

I do believe in research, and I think you've made many valid points. We've heard about our investments in research as compared to those in the United States and other international countries, but we've also heard Mr. Gaffield specifically talk about the fact that it's multi-sector and isn't being done in isolation.

So my question to anyone who wants to respond is, what is the optimal role of government, acknowledging that this is a very important sector that does deserve being funded?

Dr. Chad Gaffield: I would like to answer that. I think one of the big challenges is to come to grips with basically the emergence of a new society. You talk about the social costs and so on. One of the things we're seeing now is that those costs include a basic redefinition of our fundamental institutions. For example, I think of the family.

Throughout the 20th century and part of the 19th century we developed social and economic policies on the notion of a family being mom, dad, children, and so on. Now we see, for example, that the family or household organization is far more diverse than that. In terms of our tax system and in terms of all our social policies, we basically have to rethink things. In terms of how we're coming to grips with this, it would seem to me that one of the great needs is research on it.

We know the experience of women is very different. We know the experience of children and growing up is very different. We know household organizations are very different. The whole notion of the breadwinner is changing fundamentally. How can we deal with that? It seems to me that a starting point at least is to be able to connect the research frontier of our society with social policy. The crossroads example that we have in our document is one way to think about this—our communities and the organization of our communities. How can we connect the research frontier on campuses with the kinds of problems and social costs being incurred as this new society emerges in the situation in which the policies we have for the 20th century often just don't apply any more? They're just out of whack with the kind of society that we see emerging.

• 1035

Dr. Paul Hough: I think the most important things the federal government can do are twofold. Number one, by its actions it can reinforce the understanding that R and D and support for R and D are important, and the activity itself is fundamental. As well, through that sustained support it can challenge the community and all its different sectors to actually respond to real needs.

We're looking for leadership on the part of the government to not only provide the money but to ensure that the resources are allocated and the questions are being asked and answered appropriately. It doesn't mean all of that has to happen in the government sector; it can happen in the private sector and in universities. But there is a lack of co-ordination and understanding about what is happening where. The community, wherever, would respond appropriately and very well through challenges like that.

It's really the leadership aspect that the government has to apply, both through funding and through pushing on the community, wherever it lies, to actually respond to social and economic needs.

The Chairman: Thank you, Dr. Hough and Ms. Redman.

On behalf of the committee, I'd like to thank the participants of this round table. I think it's been a very interesting round table. You've made a very strong case for research in this country, the impact it has on enhancing health care, the issue related to international competitiveness, the creation of jobs and wealth, and of course the cultural and social benefits that research provides our country.

Ultimately, I think you all have something in common. You are all striving to improve the quality of life for Canadians, and this is precisely what we're trying to do here at this finance committee. Thank you very much for your participation.

I'll suspend now for five minutes.

• 1040

• 1044

The Chairman: I'll call the meeting to order and welcome the witnesses for the next round table. Many of you listened to the previous one on research. Now we have the pleasure to hear from representatives from the Aerospace Industries Association of Canada, the Canadian Advanced Technology Association, the Information Technology Association of Canada, iSTAR internet inc., the Canadian Research Management Association, and the Newbridge Network Corporation. Welcome everyone.

We will begin with Mr. Peter Smith, president of the Aerospace Industries Association of Canada.

Mr. Peter R. Smith (President, Aerospace Industries Association of Canada): Thank you, Mr. Chairman, members.

The Aerospace Industries Association of Canada would like to join the millions of other Canadians in applauding the government for its determination in exceeding its deficit reduction targets. Through responsible fiscal management this nation's deficit has been virtually eliminated.

• 1045

While the deficit crisis has been solved, AIAC remains concerned about the enormous public debt. We share the minister's view that the fiscal challenge has shifted to achieving a significant reduction in Canada's debt-to-GDP ratio. Paying down Canada's debt must be a priority of this government.

At the same time aggressive action is required to invest in sustained economic growth for Canada. It is increasingly clear that Canada's economic future hinges on our ability to grow and sustain strategic advanced technology and knowledge-based industries that are internationally competitive. The aerospace sector is a shining example of how Canada, through good public-private management and focused investment by industry and government, can compete and win in the global marketplace.

In the past ten years Canada's aerospace sector has grown 140%. That's double the growth of Canada's GDP during the same period. We have also outstripped the performance of our international competitors by a significant margin. Export sales accounted for almost three-quarters of the 1996 sales volume. In the period 1990 to 1996 our industry racked up a cumulative trade surplus of more than $15 billion.

Aerospace is a research-intensive industry, accounting for more than 15% of all industrial research performed in Canada. In 1996 industry members spent $1.4 billion on R and D, which averages about 12% of our current sales.

Aerospace employees are a highly educated, well-paid workforce, with an average salary double the national average. Each day aerospace provides direct employment for 60,000 Canadians and another 30,000 indirect jobs. Aerospace employs proportionally more science and engineering workers than any other Canadian manufacturing sector.

Our success in global markets has been driven by a focus on selected, high-growth market niches and sustained commitment to R and D in innovative products and services. As we look to the future and respond to the challenge of the Minister of Finance, the board of directors of AIAC identified four priority issues requiring the government's immediate attention in order to sustain the impressive growth of the sector and its contributions to the economy of Canada.

Our first investment priority for the government is increased funding for the Technology Partnerships Canada program. To date TPC has invested more than $450 million in 20 multi-year R and D projects. This investment alone has leveraged $2 billion in private sector R and D spending. Projected sales from these investments will reach $40 billion and more than 9,000 jobs will be created coast to coast. These investments have not been limited to the aerospace sector alone.

Current estimates indicate that TPC funding is sufficient to meet only one-third of industry's strategic investment requirements. This shortage of critical investment funds threatens our ability to capture the important new market opportunities that will sustain our growth into the next millennium. The opportunities for growth are outstanding, but the window of opportunity is limited. We firmly believe, therefore, the Technology Partnerships Canada program's successes to date are compelling enough reasons to increase the funding levels substantially. Jobs and growth are at stake.

Our second investment priority addresses a critical and growing resource shortfall in the Department of Transport. Regrettably, Transport Canada resources dedicated to the timely certification of aeronautical products have not kept pace with industry's growth. They are woefully inadequate to cope with the unprecedented new product development and production rates in the Canadian aerospace industry. Unless immediately addressed, this shortfall will impede our ability to deliver our products. The Minister of Transport must augment those resources, increase delegation to our members, and immediately recruit top-notch engineering and inspection staff to cope with this demand.

The marketplace unfortunately is unforgiving. If we cannot meet customer delivery demands because of delays in certification, our customers will turn to our competitors. Having established a respectable world market share for many of our products...it truly would be unfortunate if this market share declines because of government inaction.

The third investment priority addresses the delays in planned Department of National Defence procurement programs. Numerous planned projects have been delayed, amended, or cancelled. These delays do not only impair the military's operational capabilities. They endanger key elements of the country's technological and industrial base. The price of further delay and indecision will be an erosion of the Canadian ability to respond to our domestic defence requirements and a concomitant erosion of the aerospace industry's international competitiveness, growth, and jobs.

• 1050

We feel there is no reason for these delays. Replacement justification has been determined. The capital resources are in place, but for whatever reason, expected announcements have not been forthcoming. We are not asking for increased funding, but simply appealing to the government to proceed with defence programs that are already announced.

Last but not least is our plea to the government to officially address the practice of illegal foreign subsidies by our competitors.

Evidence of these practices has been repeatedly brought forward to the government for it to take immediate action by officially lodging complaints with the World Trade Organization. Delay in doing this has already had a significant impact on the loss of sales and job opportunities, and could cause irreparable damage in the market share, seriously affecting many Canadian aerospace companies.

The government must bring our case before WTO now. But whether the government chooses to use existing redress mechanisms or not, we would expect existing export financing programs to take into account the current dismal situation by fast-tracking funding available to Canadian companies to level the playing field out there.

In conclusion, Mr. Chairman, we believe the government needs to strike an appropriate balance between paying down the debt and investing in sustained economic growth. These investments must be targeted at advanced technology and knowledge-based industries, which are vital to the success of an ever-more-competitive global economy.

Mr. Chairman, members, I thank you for the privilege of being able to participate in this forum. I trust you'll be sympathetic to our concerns in your deliberations.

The Chairman: Thank you very much, Mr. Smith. Now we'll move to the representative from the Canadian Advanced Technology Association, Ms. Shirley-Ann George. Welcome.

Ms. Shirley-Ann George (Executive Director, Ottawa, Canadian Advanced Technology Association): Thank you very much. On behalf of our members, I would like to thank you for the opportunity to present today.

We understand that you're looking for a brief overview. Then there will be a dialogue on the issues that are of most interest to you.

CATA represents the best of Canada's new economy in the aerospace, computing, defence, electronics, telecommunications, software, and systems integration sectors. These are highly successful companies. A recent CATA survey of just 175 of our members showed that they expected to hire more than 10,000 new workers in the next 12 months.

You asked to hear our views on deficit and debt reduction, spending priorities, and ensuring job opportunities in the new economy.

First, we would like to add our sincere congratulations to the Government of Canada on continuing to meet its deficit targets. Its ability to meet its commitments year after year is very important in maintaining our confidence that Canada is the right place to grow our businesses.

Your next stated milestone is to put half of any surplus against the debt. This important goal needs some clarity to ensure that measurable results happen. We all know that the days of very low interest rates will not last forever, so it's very important to start retiring this burden now.

We're also looking to have you reduce the personal taxation burden on professional Canadians. We are very uncompetitive when our brightest look south of the border. Highly skilled people are our biggest asset in the knowledge economy of Canada, and every other country, and these people move very freely between international borders for job opportunities. For example, an engineer takes approximately 30 minutes of processing to enter the United States. Our high-tech skills shortage is expected to grow into a high-tech crisis, and more and more of our brightest will be lured south of the border.

All of your investments in industrial development must continue to be only in areas where you can see a direct return on investment as measured by jobs and taxation. The three programs that our members have stated have had a direct impact on their ability to grow their businesses in Canada are, first and foremost, scientific research and experimental development—R and D—tax incentives; IRAP; and the currently underfunded Technology Partnerships Canada program.

On your final question, which was on ensuring job opportunities in the new economy, CATA has three comments.

First, you must ensure that the new companies will maintain their job growth in Canada and that multinationals will bring new projects here.

This is not a given. You do this by fighting the never-ending battle of keeping Canada globally competitive. These companies make location decisions for each and every major project. Other jurisdictions are constantly enticing your companies to set up shop outside of Canada.

• 1055

We must be continually improving our competitive position, and we remind you that the good work you do in Parliament can quickly be undermined by bureaucratic policies and practices. For example, under consultation at this very moment are new requirements for transfer pricing, R and D tax incentives, and government policy on contracted intellectual property. Every one of these has a potential to impose a significant bureaucracy on our members and increase our costs of doing business in Canada.

Although we are hopeful that the government will make the necessary changes, you should be aware that when you put all three of these together they could become a significant burden unless substantive changes are made to each.

Second, you must ensure that there's an adequate supply of highly trained people. Unfortunately, there is not nearly enough being done here. At a minimum we must at least double the enrolment in high-tech professional and university programs. Today there are serious impediments to doing this. We encourage you to work with the provinces to find a way to meet this need.

Finally, although it may be inevitable that higher education will become more and more expensive, we must work to ensure that cost is not a barrier to entry into university programs that all but guarantee employment. Kids are not stupid, and the old adage still works: follow the money. We encourage that you direct student aid and scholarships to these programs.

We are in an era of growth, and our members are very bullish on their ability to compete and succeed in a highly competitive global marketplace. What we need from the Government of Canada is a globally competitive business environment, which includes continuing to get your fiscal house in order and a good supply of highly trained professionals.

Thank you.

The Chairman: Thank you very much, Ms. George.

The next presentation will be made from a representative of the Information Technology Association of Canada, Mr. André Gauthier, treasurer and senior executive vice-president, LGS Inc. Welcome.

Mr. André Gauthier (Treasurer, Information Technology Association of Canada): Thank you very much, and on behalf of ITAC thank you to this committee for providing us with the opportunity to share our views.

We are the largest Canadian association dedicated to the IT sector, representing over 1,400 companies both directly and through provincial affiliates.

Last year at this appearance we made four points. One, we need to complete the process of getting Canada's fiscal house in order. We need to refocus government priorities on strategic activities to position Canada for leadership in a global, knowledge-based economy. We need to improve the efficiency and effectiveness of government operations through the use of information technology, and finally, we need to create and maintain a favourable tax and fiscal climate for growth of the IT industry.

We're pleased to note that the federal government has made significant progress in the first three areas, and today we have one major message to deliver to the government: The time has come to take a balanced approach to managing the economy. This means that it's appropriate to respond to the growing demands for attention to Canada's social infrastructure, but we must not lose sight of the need to continue to deal with our underlying economic issues.

Tax levels in Canada must be reasonably competitive with those of our competitors if we are to continue to attract and retain investment capital and skilled personnel. As we all know, this country offers many advantages in terms of quality of life, and these may, in many cases, offset a bit marginally higher taxes.

However, we are now seeing the impact of an unfavourable investment climate in Canada vis-à-vis our real competitors. We can provide examples of investments that have been made in other countries because the total environment is more conducive than Canada's. Just look at the who's who of companies that have invested in Ireland over the last few years. There are ITAC members who have been unable to convince their international head offices to bring more investment into Canada because other locations are more attractive. It does not matter that we can say we are ranked number one in the world; when it comes to attracting investment, we are not at the head of the class.

Let us be very blunt. Between 1985 and 1995 foreign direct investment in Canada doubled to $168 billion per year. Each billion dollars creates about 45,000 jobs and increases real GNP by about $4.5 billion over a five-year period.

• 1100

This is the good news.

The bad news is that during the same period our share of global foreign investment fell from about 9% to about 4.4%. In other words, we've lost half our global position.

What does it take for Canada's legislators to understand that we are perhaps losing the battle?

Furthermore, we can no longer look simply at the tax rates of the U.S. and other G-7 countries. If we hope to attract major investments by international players in information technology and other advanced industries, then we must recognize that we are competing with aggressive, fast-rising economies like Ireland, Malaysia, and Singapore, where total tax burden is 20%, 25%, and 30% below our own and where generous investment incentives are already available.

All of us are very much aware that, with the deficit beaten, there will have to be a long and hard-nosed discussion of how best to apply the fiscal dividend that Canadians have understandably come to expect.

In our view, the first priority must be, for reasons just stated, the reduction of the tax burden in this country. We recognize that corporate tax reductions may not be the most politically popular step for a government to take, but if we wish to achieve predictions of real economic growth, this is a reality that must be addressed.

However, we also need government to develop and mount an ambitious multi-year assault on the enormous federal debt that was allowed to accumulate over previous decades. In an increasingly competitive global marketplace, Canada must make the best of our current advantages as a developed nation and act rapidly to remove the millstone of unproductive interest expenditure that the national debt represents.

As realists, we are fully aware that the government will not direct its attention to tax reduction and debt reduction alone. We do still need to talk about expenditure priorities. We believe that the time has come to consider forms of creative stimulation of the economy. We continue to be opposed to grant programs where the government chooses winners and losers. But we do favour policies that level the international playing field, or even tilt the field in Canada's favour.

Our thinking is founded on the premise that the IT industry will continue to be one of the key drivers of the economy for years to come, but only if we can compete successfully and on a global basis.

I want to spend a moment reinforcing the point that investing in IT is in fact feeding an engine of growth, because for years we've suffered under the myth that IT reduces jobs. ITAC has sponsored a major study by the Conference Board to address this issue from a factual, rather than episodic or anecdotal, point of view.

The conclusions are clear. Investment in IT is not a job killer; it is the very opposite. Those sectors of the economy that invested heavily in IT created 850,000 jobs between 1986 and 1995, while the sectors that invested little or no money in IT lost 146,000 jobs over the same period. Furthermore, the Conference Board concluded that if we could increase investment in IT over the next two decades, this would create more than a quarter of a million additional jobs beyond the current forecast.

Given the fact that investment is a stimulant to both jobs and the economy, we've considered what policies might contribute to that growth. To offer one illustration of our thinking, ITAC suggests that consideration be given to allowing some form of tax relief for individuals that invest in IT products and services. The relief could come in many forms: tax credits for IT purchases by families with students, depreciation deductions from computing employment income, GST waivers or income tax deductions. That is for the technocrats to resolve. The point is that relief will lower the affordability bar and stimulate Canada towards becoming the most connected nation in the world.

This would improve IT skill levels among young Canadians, thereby contributing to Canadian competitiveness and economic growth over the longer term. It would lower the barriers faced by those with low incomes, the have-nots of the new economy, and it would stimulate the Canadian IT industry, increasing tax revenues from corporate profits and offering a platform for competition and global markets.

• 1105

The committee asked specifically for our thoughts on how the government can ensure a wide range of job opportunities in the new economy and how it can best support Canadians in acquiring the education and skills required. Clearly, our proposal would do much to address both of these points.

There are many signs that the federal government has realized that the knowledge-based industries are the wave of the future. Certainly the throne speech and Minister Manley's reply reflect this growing awareness. But at the same time there remain several irritants that send a contradictory message. Examples include the recent abrupt termination of the software tax shelter, the application of the scientific research and experimental design tax credits program, withholding tax on offshore software sales, the treatment of software development expenditures, the treatment of sales with future royalties, and the treatment of maintenance contract revenues. These are all technical issues and as such should not be of concern to this committee. However, we believe that when taken together they send a message to the producers in the new economy. Unfortunately, this message states that the government does not understand the dynamics of their industry.

ITAC believes the time has come to open a dialogue between the government's tax policy experts and the financial representatives of the IT sector. As an industry association we stand ready to assist in such a dialogue.

In summary, ITAC believes the government should take a balanced approach to managing the economy over the next few years. This means we must take steps to improve our investment climate and address the existing debt in addition to attending to the needs of Canada's social infrastructure.

Secondly, we should begin to investigate creative options to stimulate the sectors of the economy that are the new engines of growth. Finally, we need to begin a dialogue on the dynamics of the new economy and how it relates to the old tax regimes.

I thank the committee for its time and attention.

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

I will move to the representative from iSTAR internet, Mr. Rainer Paduch, chief technology office, vice-chair and founder. Welcome.

Mr. Rainer Paduch (Chief Technology Officer, Vice-Chair and Founder, iSTAR internet inc.): Thank you very much, Mr. Chairman and members. Thank you for allowing us to present here.

I'll begin with just a bit of a background in terms of where we come from and where we're going. iSTAR is a publicly traded company and Canada's largest supplier of Internet services. We offer high-speed accesses from our national backbone all the way from Halifax to Victoria. We currently reach about 80% of the Canadian population.

We are also the carrier of choice for about 120 other smaller ISPs. We offer consulting services and other application support to enable Canadian businesses to use the Internet to become more effective and competitive in a global marketplace.

iSTAR contributed to the Canadian Internet infrastructure as early as 1989 when NSTN, Nova Scotia Technology Network, which was a precursor company, was awarded a contract to build an extensive provincial network. Since then, through mergers and acquisitions, we've grown to be one of the largest providers in Canada. Boardwatch, which is an independent technology analyst company, has rated the iSTAR network as one of the top ten in North America.

Today iSTAR provides services to over 2,000 commercial accounts, including some of Canada's major corporations. We also provide network services to companies such as Rogers Cablesystems and other cable companies, as well as some independent telephone companies in Ontario.

We currently employ over 200 people across the country with 100 technical personnel in Ottawa. These people have some very strong technical skills and are really well versed in the complexities of deploying and running these types of national internetworks. This is a very scarce resource that we feel must be protected and grown so we can build and sustain a domestic industry. The retention of staff in the face of very competitive poaching is one of our greatest challenges.

As a result of a number of forces, there has been an erosion in Canada's ability to train, employ, and retain the necessary technical expertise to design, manage, and further develop this important technological revolution for the best interests of the Canadian citizens. In fact, iSTAR has already lost some of its technologists to the U.S. network management centres at MCI.

One of the ways to keep staff, of course, is to pay them well. This ties into a matter of grave concern we'd like to bring to your attention that is having a profound impact on the development and employment of Internet services in Canada. The scope of an endeavour such as iSTAR's requires extensive amounts of investment to continue the deployment of the infrastructure to meet the needs of the country and the marketplace. Therefore, access to capital markets is a key ingredient for success.

• 1110

There is a significant lack of this type of support in Canada, which leads to our fear that a domestically built and managed Internet infrastructure is in danger of slowly being consumed by U.S. interests. The design and control of this infrastructure will be determined by U.S. companies. Indeed, Rogers Cablesystems has already turned over its residential cable Internet access to be designed and managed by @Home, a California-based network provider for the cable industry. Also, AT&T Canada long-distance services will be importing the WorldNet Service from its U.S. parent into the Canadian market. Sprint Canada is also heavily dependent on its parent for technical support and network management.

A company called Hook-Up Communications, which to date was the only other publicly funded Canadian Internet service provider, has just been acquired by a U.S. competitor called Netcom, and that leaves iSTAR as the remaining public company providing services in Canada wholly concerned with the Canadian market.

I should also like to add that iSTAR's biggest competitors in the Canadian market today are U.S.-based entities such as UUNet, Netcom, and PSINet. No other regional ISP in Canada has been able to raise the capital to become a national network provider.

Furthermore, although the domestic telephone companies and cable companies also offer Internet service, their offerings are regional and poorly integrated across their territories, yielding a fractured service that does not stand up well against a co-ordinated sales effort driven by a national or international player. However, we are certainly aware that both the telephone companies and cable enterprises can sustain significant losses that can be subsidized by other interests for quite some time without their own shareholder revolt.

The differences in the capital markets between the U.S. and Canada highlight the perspectives that each country places on the importance of these technologies. Specifically, new Internet service providers in the U.S. continue to be funded and supported by the investment community and the telecommunications industry through acquisitions. Consolidation continues unabated, thereby creating stronger companies that are sustainable domestically and are formidable on the international scene.

Indeed, U.S. Internet companies are trading on the U.S. markets at values of four or five times sales, while iSTAR trades at less than one times sales, highlighting the difference in the confidence level that U.S. investors have in this new technology.

It's interesting that at this time, when Internet growth worldwide has exploded, in Canada capital markets no longer provide the necessary capital to Internet service providers to expand. It is an understatement to say this creates tremendous difficulties for the establishment of domestic enterprises that can survive the competition against better-funded U.S. entrants.

iSTAR today finds itself at a very serious crossroads. Lack of capital market funding is forcing the company to weigh many options. With this background in mind, iSTAR's recommendations can be summed up under three topics: money, people, and procurement.

On the money side the Internet industry in Canada needs access to both capital markets and bank financing. Both sectors need to be educated in the potential of these technologies, and companies such as iSTAR lack the resources and staff to undertake such educational campaigns.

The government's promotion of technology should include these groups. Even when capital funding is available there will be times when, due to competitive forces, technology companies must re-engineer more quickly than originally forecast. As such, many of us have been caught in short-term cash crunches which in some cases, like the recent demise of Gandalf, have proven fatal. Since Canadian banks have been so reluctant to invest in technology enterprises, at this point in history we need a government-operated loan fund to bridge these temporary gaps.

Loan programs such as Technology Partnerships Canada do not meet this need because they involve months of assessment and huge in-house resources to create a program that fits a specific government-designed box. We are not advocating that the government support losing operations, but rather that a commercial due diligence process be undertaken to assess the long-term viability of companies and to provide short-term cash loans for technology companies, since these appear to be particularly vulnerable.

On the people side, there's been much discussion about the need for skilled staff. Increasingly over the last couple of years, the private sector has started skills training to supplement this shortage. If the tax system does not already do so, such programs should be encouraged in the same way as public education is, through tax incentives to students or the supporting taxpayers, such as parents or partners. Start-up grants to establish technology training centres might also kick-start the sector.

• 1115

The government should continue to promote technology with Canada's youth and continue to fund centres of technology excellence, such as universities and community colleges. More of these should feature co-operative learning, involving work terms at technology companies.

Distance learning is one of the most economical means of upgrading skills and knowledge. Before the Internet this occurred on television channels and occasionally conference calls. The Internet now offers an economic way to share information and knowledge resources. Besides being merely a repository of information, real-time or taped lectures can be accessed by anyone with a personal computer and a modem, a telephone line, and an Internet connection. They can also be used to communicate between teacher and student, either in real time or by e-mail.

All professions and all levels of education have been closely examining ways to use the Internet and there has been a tremendous growth in the knowledge provided to industries since the Internet has become more widely used. The government could also be taking advantage of this tool in offering training to its staff and indeed to Canadians who need to upgrade skills or knowledge to become employed.

The last item is on the procurement side. A great deal of government spending has gone into research and development of CNet phase 1, which was subsequently sold off to Bell Canada. Now that the government has created the CNet phase 2 advanced technology network, neither of these have generally enhanced private Internet industry in Canada in the way federal spending in the U.S. quite literally created the Internet infrastructure.

Over the past year many technology companies have bet that the Internet will be the medium of choice for Canadian businesses. Many have retooled their hardware and software products to this end. iSTAR and most other ISPs have also recognized significant market growth. We are all convinced the Internet as a communications medium is here to stay.

This past year the government has also passed a Treasury Board directive instructing departments to integrate Internet services into their departmental plans. It goes so far as to state that the Internet will be the preferred method for doing business with Canadians in the near future. Last year iSTAR stated that the best thing the government can do for itself and for technology companies is to make this transition from expensive hard-wired, private-line data systems to the much more economical Web-based technologies. Both internal and external communications can be vastly improved, with very quick payback on the infrastructure investment.

We have demonstrated this repeatedly for business and would like a chance to do so with government. To date we see no outward sign of departmental planning for this transition. It may be that this is going on internally, so we boldly suggest that expert advice is available and this private sector expertise ought to be utilized by the government, rather than losing precious time to training, trial, and error.

I would also like to highlight a success story we have been involved with. About six months ago iSTAR created an electronic commerce program for Statistics Canada. Now information products from Statistics Canada can be ordered directly over the World Wide Web and delivered instantly, with no shipping and handling costs. The government also immediately gets paid by automated secure credit card transactions, cleared through iSTAR's electronic commerce system, which is connected to various Canadian banks. We congratulate the Minister of Industry for his foresight in supporting this project. While this may seem self-serving for us, I raise it to encourage the government to procure from the private sector as one of the best ways to ensure technology is developed and fostered in Canada...as well as improve its own bottom line.

I thank you very much for this opportunity.

The Chairman: Thank you very much for your presentation.

Now we will move to the representatives from CAE Inc., Bob Waite, vice-president of corporate relations and marketing. Welcome.

Mr. Bob Waite (Vice-President, Corporate Relations and Marketing, CAE Inc.): Good morning, Mr. Chairman, distinguished committee members. I want first of all to thank you for this opportunity to appear before the committee as part of this important pre-budget process.

I represent CAE, a Canadian-owned and -operated company that is perhaps best known as the world leader in commercial and flight simulation. In reality, flight simulation is only a small portion of what CAE does. We also provide advanced technology for the forest products industry, the energy sector, and the marine and rail transport sectors, to name just a few. Our success in these varied markets reflects our determination to help solve our customers' business problems by providing them with ever more useful technology. CAE can do this because year in and year out we invest 15% to 20% of our revenues in R and D, research and development work that directly addresses the customers' needs or requirements.

• 1120

We are a global company. We export more than 85% of what we make or do and our products can be found in almost 100 countries. Yet we are also proudly, perhaps even stubbornly, Canadian. Of our 6,600 employees, 5,000 live and work in Canada, with 3,700 employed under one roof in our Montreal electronics facility.

Mr. Chairman, you gave us some welcome guidance regarding our testimony here today, including three questions we might address.

The first, as I recall, asked us to provide financial prognostication. But given the past 24 hours, I will gladly leave that to others.

What I would like to do is address your third question, regarding job opportunity in this country. That's because attracting and retaining good people is what is most on our minds here today.

I mentioned that CAE has 6,600 employees. I should add that more than half of our employees have advanced degrees, typically in software engineering or in other of the technology sciences.

At CAE our success can be traced directly to our employees. Innovation, which is at the heart of our success, is generated from the knowledge and skills of the people we hire. The key to sustaining our position as a global leader in our industry is our ability to continue to attract and retain a skilled workforce.

The government's recently reaffirmed commitment to support knowledge, innovation, and risk-taking, in part through education, skills development, and the acquisition of work experience, is an important and vital investment in our country's future. We know this commitment is shared by provincial governments as well.

CAE also invests significantly in workforce retraining and skills development. We are particularly pleased that the government has also recognized the value of supporting high-growth and globally leading industries. As I outlined earlier, CAE fits into that category. However, we know this welcome commitment only addresses part of the challenge. The market for skilled workers, like the market for our goods and services, is becoming increasingly globalized. Just as we compete with American, British, French, and Japanese exporters, we also compete with them to attract our key resource: people. Today our best and brightest university and college graduates can choose from job offers at companies located in California, New York, Paris, or London, in addition to those located in Vancouver, Montreal, Toronto, or Ottawa.

CAE once recruited from all over the world. Today we are lucky to keep our Canadian grads from listening to the siren song of job offers to the south. We accept this reality, but we also believe Canadian companies and their governments must work in partnership to ensure that our work environment remains an attractive option in the globalized workforce. The role of business in this partnership is clear. We must provide attractive and challenging opportunities and provide competitive compensation for the work performed. But the role of government is also clear. They contribute by helping to ensure we have a society that is vibrant, safe, and caring.

But government's role extends beyond that. As the Minister of Finance said in his last budget, personal tax rates in this country are too high. This has real, bottom-line consequences for business and government in Canada. The top marginal tax rate in Canada in comparison to our major competitor nations makes it hard for us to compete. In order for Canada's businesses to attract and retain a skilled workforce, Canada must have a competitive tax system. To this end, we strongly urge the federal government to make personal income tax reductions a priority investment. Our nation's very significant investment in higher education can only be maximized and leveraged if we retain that investment by keeping Canadians employed in Canada.

CAE appreciates that government must prioritize, and helping those most in need of tax relief must be a high priority. We also recognize there are certain factors beyond the effective control of government, such as the cost of money and the value of the dollar. We know there are other ways to build company loyalty and continue promoting those as well, but the fact remains that Canada's leadership in key high-tech industries and companies will depend on the ability of those industries and companies to retain an experienced, highly capable, and productive workforce. Support from government in this regard is critical. We look forward to working closely together with government in meeting this challenge.

Thank you.

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

We'll now move to the representatives from the Canadian Research Management Association, with Mr. Frank Maine, director, science and technology policy. Welcome.

• 1125

Mr. Frank Maine (Director, Science and Technology Policy, Canadian Research Management Association): Thank you, Mr. Chairman and committee members.

The Canadian Research Management Association is a national association representing the majority of the research done in Canada—that includes industry, university, and government research—with an emphasis on industrial research and development, which is the basis of technology-based innovation. To quote from the government's most recent Speech from the Throne:

The future belongs to societies whose economy is sound; who invest in...innovation.

The Government is determined to do more to support innovation and risk-taking in Canada

and

the Government will significantly increase the resources allocated to help small and medium-size businesses develop and commercialize new technology.

It is these issues that I wish to address.

Technology-based innovation comprises a spectrum of activities, from research through product and process development, to pilot plant and commercial operation. Technology-based innovation needs both technology push and market pull to be commercially successful. The federal government is the major player in funding research in Canada, which is done primarily at universities and government laboratories. Industry funds the commercial part of the innovation spectrum. In between the publicly funded research and the privately funded commercialization is what the Royal Bank calls “the critical gap”. This is the area in the innovation spectrum after the Natural Sciences and Engineering Research Council-funded work has been completed and before industry is willing to start its funding.

For the venture capital industry, which funds pre-commercial innovation, the necessary entry document for funding consideration is a business plan. The business plan incorporates information about the product to be made, the market for that product, the cost of manufacturing, and the profit expected. For projects that have taken NSERC funding as far as it should go, this information is not available.

The university work shows proof of concept. What is needed for commercialization is a demonstration of economic and engineering feasibility. This is the work that has to be done for a business plan. Other than private individual funds, there is no source of funds to finance the gathering of this information, which typically takes six months and costs $50,000. Market research information is a key element in the business plan, and Canada is extremely weak in having available good sources and amounts of market research information, especially when compared with the Japanese. Institutions such as the Canadian Industrial Innovation Centre can supply the needed information to help prepare business plans, but who is willing and able to pay for it, especially when one looks at the high risk involved and the fact that only very few will be successful?

The labour-sponsored venture capital companies were supposed to address this need but have not. The one closest to addressing the problem is the Canadian Science and Technology Growth Fund. The recent changes in legislation concerning labour-sponsored venture capital funds, however, have dramatically reduced the amount of money being invested. Of the two major changes that were recently made, I can agree with the decision to increase the holding time for these investments from five to eight years, as these projects take a long time to become profitable. But the reduction of the maximum amount that can be invested by an individual—from $5,000 to $3,500—has resulted in brokers not being interested in marketing these investments. It is not worth their time and effort.

Marketing support is essential if private sector money is to be directed into support for innovation. With the present legislation, and with the market working on short-term returns and not long-term ones, there are not rewards adequate for the high risk involved in supporting early-stage technologies and their development. What is needed is patient capital. To obtain capital, there must be a decent reward.

What should the government do? One suggestion for finding a way through the critical gap is to have a working group, with representation from the investment community and the industrial community, in order to address these problems with the appropriate finance department officials. With these resources, all the problems that need to be addressed can be examined and the necessary checks and balances can be prepared. One initiative could be to change the existing Labour Sponsored Venture Capital Corporations Act so that funds raised could be directed into the critical gap area in a profitable manner. An alternative suggestion is to create a post-NSERC body or fund that would address the critical gap directly.

• 1130

The Canadian fund for innovation, which you heard about in the previous presentations, is one such recent federal government initiative, and is being used to address the university infrastructure problem.

It is important to recognize that the present rewards for innovation are inadequate unless we are prepared to accept the status quo. We have to do something if we want to increase the amount of technology-based innovation that is being commercialized in Canada. Early-stage funding, the critical gap, is the most important problem at this time. The CRMA is willing and able to help the federal government in addressing this problem.

Thank you, Mr. Chairman.

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

Now we will enter our question and answer session. We will begin with Mr. Ritz.

Mr. Gerry Ritz: Thank you, Mr. Chairman.

I'd like to thank everyone for their thoughtful presentations this morning. Some of you alluded to the fact that one of the critical things you have in your industry or your technology is the role of adequately trained employees, and the problem you have in finding those people.

We have a youth unemployment crisis in this country. It's double the unemployment rate for everybody else and so on. It's been an ongoing problem, and no one has yet seen any light at the end of the tunnel. A major scholarship was announced in the last throne speech. Maybe we're heading in the right direction, but should those types of funds be targeted in a different way? Are we training our youths improperly? Are we putting them into programs where there is no future employment? Would you folks like more direction into what type of training these people should have to have a sustainable job when they graduate?

The cost of running these education programs is extremely high, and they're coming out with high debt loads and no future in the economy. Would you like more input in the direction in which they should be trained?

Mr. Bob Waite: I certainly would not represent myself as an expert on this issue, but it is important to us, for the reasons I outlined before. Let me give you some thoughts in terms of the way we approach it.

From a public service or donations point of view, we have chosen to target not so much the university level—people make their decisions about what they want to do or like to do in terms of academic subjects typically earlier than that—but working with consultants we have targeted children more in the fourth, fifth, and sixth grade levels, particularly girls. We've found, again working with consultants, that girls tend to drop out of the streaming into the sciences and maths around that time, for whatever reason.

Again, in the private sector in our case we have targeted programs that encourage an interest in math and science at that age. Once you get to the university level, if people don't have the prerequisite work in high school or at a collegiate, it's very difficult for them to suddenly decide that they want to be a nuclear physicist or a software programmer.

So it's a small piece, and it's just our view, but I think we need to intervene in some way earlier than just at the university level.

Ms. Shirley-Ann George: I'm often surprised that we are surprised about the number of unemployed youth. If you look at where our education dollars are going, without a doubt if you don't have higher education your risks of unemployment are much greater. We have far too many people who aren't continuing in their education.

As well, once you go into post-secondary education, if you use Ottawa as an example, of the 11,000 or 12,000 graduates who come out of the colleges and universities here in Ottawa only about 7% are coming out with the degrees that our industry can use.

So we are educating a lot of people. Many of these people are finding jobs in other sectors. We're not the only ones who are creating new jobs, but without a doubt the percentage of investment in the high-growth sectors is just not adequate.

Mr. Rainer Paduch: There's also another component, which is that the rapid changes in technology require continuous education as well. So there's a need on our part to keep our employees going through courses to upgrade their skills, particularly in the early stage when they come out of school into the workforce and they have a lot of skills they have to learn, including business processes. If they have a good background in terms of how to learn, then specific programs to give them the skills to be productive at work are also required, in particular dealing with the technologies and so on.

• 1135

Mr. Peter R. Smith: Mr. Chairman, I would simply like to reiterate what Mr. Waite said in the sense of the necessity of the aerospace industry attracting youth to the science and technical areas in both high schools and universities.

Unfortunately, at the present time we're experiencing an unprecedented growth that requires a selfish demand, if you will, on the part of industry to have people not only with the education but the experience. However, I should add some encouragement in that our forecasts over the next five years indicate that there is a possibility of an increase of about 55% in the overall output in the aerospace industry, and certainly the graduates who are in the school stream right now will find the jobs. I agree that the difficulty has been a rapid growth in the aerospace industry, where there has been a tendency among many of our qualified workers to move down south to Boeing and to other companies that have experienced unprecedented growth. Therefore, we have to fill that gap in a very short period of time. But there is some optimism there.

Mr. André Gauthier: I have some personal comments on this topic. Information technology has to be the greatest opportunity offered to our country, and as a father—and I see many youngsters around me—I can't say that these kids are terribly encouraged to take courses and undertake careers that lead them to these very lucrative and interesting careers. There's no more emphasis on these careers than all the other ones, and so there's certainly a lot that we can do to encourage these kids and to present them with an environment that shows them the areas they should be espousing—of course, if they have the talents, obviously. Here I think government can certainly plan an active role in stimulating and making sure these areas are interesting to kids.

The Chairman: Mr. Perron.

[Translation]

Mr. Gilles-A. Perron (Saint-Eustache—Sainte-Thérèse, BQ): Good morning, ladies and gentleman.

In your presentations, you did not talk very much about the way the Minister of Finance is suggesting using the fiscal surplus: 50 per cent for debt reduction, 25 per cent to re-invest in existing programs or to invest in new programs, and 25 per cent for tax cuts.

I would like to know if you think this distribution is acceptable and what you would recommend to the Minister of Finance on this matter.

[English]

Mr. Peter R. Smith: First of all, in response to Mr. Perron's question, it is the position of the Aerospace Industries Association that there has to be a very delicate way of balancing debt reduction and expenditures in the next several years.

There is no question that the government has had success in deficit reduction, but the debt reduction is still very troublesome, particularly as we've seen over the last 48 hours in the sense of what could potentially happen if interest rates go up. Therefore, yes, we do agree with a formula. Whether that's 50-50 or not I think we have to see what the results of the deficit reduction will be and how soon.

With respect to any portion of investment, we are pleading with the government to ensure that we responsibly address the debt plus investment, and the investment we refer to is essentially the investment in the advanced technology, knowledge-based industries, and more particularly the programs I referred to in relation to the Technology Partnerships Canada program that has been in existence. Unfortunately, at this moment, it can only afford to invest in about one-third of the available technology in place today.

Therefore, I think a formula of modest investment and addressing, in a responsible way, the continuation of the debt reduction is indeed critical.

[Translation]

Mr. André Gauthier: To answer your question, Mr. Perron, I believe that the objectives you have expressed are excellent.

• 1140

You want to know how the surplus could be used. Personally, I believe that this money should be invested in order to help our economy leap into the technological age.

I mentioned a while ago the problems we're facing to educate our children and to convince them to study IT, engineering, aerospace and so on. If we could apply some of those dollars to make sure that our children study in those fields that will be profitable in the long term, that would be an excellent investment.

[English]

The Chairman: Would anybody else on the panel like to answer that question?

We'll move to Mr. Riis.

Mr. Nelson Riis: Thank you very much, Mr. Chairman.

In terms of the comments on the need for training and investment in that sector, some weeks ago a number of CEOs of some of the major financial institutions indicated that their view of the need for training was the following. Our colleges and universities and schools give a good basic education and leave the specialized training to us. With the kind of training we require and the fact that it is changing so rapidly, we'll take care of that. Give us a good, rounded, educated student and let us do the actual training.

I wonder to what extent that would exist with the firms you folks represent, first of all.

Secondly, to you, Mr. Waite, you have distinguished yourself amongst so many witnesses to our committee by being one of the few to call for personal tax reductions as a priority.

In terms of the kind of personnel you have, many with post-secondary education, with advanced degrees, and that your competitors, you mentioned, are from California, New York, Paris, and London, other than pay packets, to what extent do things like available health care, cost of housing in Montreal compared to New York or wherever, the cost of accessing education for children, and so on, factor into the decision that means the people working for you stay in Canada and are not attracted to go elsewhere?

Mr. Bob Waite: Thank you for the question. To address the first point you made, we, like the CEOs that you spoke to representing their industries, also spend a good deal of time and money training people. We do need people with very good skills, particularly in the software area. Our largest area of activity, particularly in the flight simulation field, is in software engineering. So we would go into a Waterloo, for example, or a UBC or McGill and recruit those types of folks.

It takes anywhere from six months to about 14 months to really get people up to the point where they're productive. I have to tell you that somewhere around 18 months to about two years we're losing a lot of them.

To give you a sense of that, we have classifications of workers that we refer to as TS-1 and TS-2. These would be entry-level but highly skilled folks, coming largely out of universities. Over the past 12 months we have lost 24.7% of the entering group, and we're losing about half of those to the United States.

Why did they go? I think you're right about the health point. I've lived on both sides of the border, and there's no question we do have a safer environment. We certainly have, I believe, a superior health care system. I mentioned New York, but they don't move to New York City. I didn't mention Detroit; I didn't mention downtown Washington, D.C. So on the safety side, while we are overall a safer place, most of these people are moving more to the Palo Alto's or the suburban Seattle's of the world, which aren't a whole lot different from, say, the Markham's of the world.

With regard to other factors, I guess one issue is that these folks are highly mobile. They tend not to be married. They tend not to have put down the same kinds of roots that you or I may have in our respective locales, and to them it's a bit of an adventure.

• 1145

You mentioned housing. Housing in Montreal is inexpensive, no question about that, but it isn't underwritten by the federal government, whereas buying a house in South Carolina or California or Florida...depending on how large your mortgage is, the federal government is suddenly your business partner. It's a young group of people. They don't worry so much about health care. They are not tied down in quite the same way as some of us middle-aged folks are with families and all that. The housing piece actually works to the advantage of the U.S. companies, because on the back of an envelope they will indicate just how much is being paid by Uncle Sam rather than by the individual. So it's tough to hold on to them.

The weather is a bit better too.

Ms. Shirley-Ann George: CATA actually did a small study to look at exactly this factor. We had thought perhaps all we were hearing was the anecdotal evidence of a young engineer being enticed from Vancouver to Boeing and getting a $50,000 signing bonus and a $30,000 raise; there must be more to it than this, so let's take a look at the disposable income to try to get a better balance as to what the real picture is. We made the decision not to release the study because there wasn't any good news in it.

If you compare technology clusters rather than the global picture, we're competing with jurisdictions such as Austin, Texas and Washington state, which have no state tax. In Ontario you hit the highest tax bracket at $56,000. In the United States you hit it at $249,000. If you have an income of under $40,000 you don't pay much federal tax. So you can see it doesn't take a mathematician to figure out very quickly that if you're in the higher income brackets we definitely have a disadvantage.

For example, an executive from Northern Telecom came back to Canada and his take-home pay decreased by $50,000 a year. You can buy a lot of education, a lot of housing, and a lot of security with $50,000.

The Chairman: Now we'll go to the member of Parliament from Markham, Mr. Jones.

Mr. Jim Jones: And from a high-tech background to.

I have a few questions. We were talking about the surplus and how we should spend it. First of all, maybe we should get a clarification on what you believe the definition should be.

They are calling the fiscal dividend a surplus, but as we toured the country a lot of the people said the fiscal dividend is when you pay down the debt—these are the economists and the chambers of commerce and other business leaders—the difference between the servicing cost and the new servicing cost once you've paid off some of the debt so you don't have to pay as much interest. I would be interested if you agree that is the fiscal dividend or you agree the surplus is the fiscal dividend.

Secondly, on tax reductions in the high-tech industry, if we had a tax reduction, or if we started to create a climate of tax reductions, would we be able to attract the large corporations that are doing plant relocations, such as in chip manufacturing, which are going to the U.S. now, and which create some of the best-paying jobs, versus.... I think if you looked at the industry in Canada and all these new businesses that have set up in the last year, there are probably a lot of people who have been let go from companies that downsized and who have set up a business to contract their services back to the large companies.

The last point is this. I think Peter mentioned that the opportunities for growth are outstanding but the windows of opportunity are limited. I believe it's not only for your industry—maybe you could expand on what you meant by that—but also for the high-tech industry. If we don't open our eyes...I think we could see what happened to Canada in the electronics industry, where all is offshore; all the parts.

Mr. Peter Smith: Perhaps I could start off with the last comment first. The windows of opportunity are limited to the extent that unless action is taken, as I had mentioned, in certification and availability of resources within Transport Canada.... You have to understand that in the aviation business, for instance, if you lose a sale, whether it's as a result of a delay in certification or as a result of delays in export financing, you lose that sale for virtually 25 years in that you don't replace planes as frequently perhaps as other commodities. That's why I was trying to express the concerns associated with the availability of funds through Technology Partnerships Canada to lever the amount of funds that are necessary from the private sector to get into product development and ensure you have a stream of competitively available product.

• 1150

The second issue I wanted to raise is with respect to taxes. I can only speak for myself and many of the industries in the aerospace industry, and perhaps it's slightly different for some of the other sectors represented today, but I don't believe there is much of a complaint with respect to the corporate tax structure we have in Canada and the research tax credits that are available. There are always some adjustments that could be made in that regard, but what is particularly difficult to deal with and cope with is the tax structure related to the personal income tax regime in Canada.

The other aspect that hasn't been mentioned, and one that is very much of an element in the aerospace industry, is the difference between the Canadian and the American dollar. Obviously, when you're talking 30% or 40% in this regard the ability for an American firm to attract a Canadian is much greater because of the fact that we would have to make the differentiation in the difference of the dollar, not only in dealing with the tax difference but also the dollar itself. So that makes the second challenge even that much more difficult to address.

As far as the surplus is concerned, the issue we were looking at was the impressive track record of the government in addressing the deficit situation. We assume that the surplus would be that which is defined in having addressed the elimination of the deficit, so therefore there would be a surplus in respect to the ongoing revenue expenditure equation that could be responsibly addressing both the debt reduction as well as an investment.

That's all we were pleading for, in the sense that it should not be 100% addressed to a debt reduction because it's going to take some time to do so. However, these adjustments will have to be made over time, depending on the ability of the government to continue to ensure that there is a stable economic environment in Canada that has reasonable interest rates and that we can take advantage of, as we have over the last number of years.

The Chairman: Mr. Szabo.

Mr. Paul Szabo: Thank you, Mr. Chairman.

Youth unemployment certainly is a very serious issue. Mr. Waite, I really was fascinated by your comment about taking an interest even in the pre-secondary levels.

Very often we have heard about the obscene levels of debt carried by university grads. I understand that about one in four students has a debt and that it averages somewhere around $20,000 to $25,000. I'd be very interested, given the unemployment rate in Canada of university grads at about 4.5%, to know whether you think there should be something done with regard to the cost or subsidy of post-grad work.

The second part of the question has to do with what I referred to in Vancouver as Canada's poor in waiting, being the high school dropouts of Canada, who represent more than half the unemployed youth and who don't seem to have a place in what we see as the growth industries. How do we address, in your view, this major crack we have in the stream of youth development?

Mr. Bob Waite: You've asked some very complex questions. I'm not sure I have any easy answers.

With regard to the university fee structure, my only comment is that I fear sometimes it is a mechanism for subsidizing, again, our neighbours to the south and their enterprises. The fee structure is actually quite low as compared to the U.S. I could buy my house again for what it would cost to send my son or daughter to MIT, whereas they can attend quite good universities in Canada for a fraction of the cost.

• 1155

I sometimes wonder whether there's justice in that, after hearing stories about people who have gone through the Canadian system financed by loans from the government and have then headed south to Microsoft or whatever. I don't know what the mechanism is to stop it.

Some of them—again, these are stories—have declared personal bankruptcy and then headed south, which seems a little unfair. I don't know the answer to that. I don't know about subsidizing education—maybe in terms of grants or scholarships—but generally I think we have a very fair and good system.

To Mr. Riis' point, it's an attractive part of doing business in Canada that our education is reasonably inexpensive. I think you hit the nail on the head, though that's not the big issue. Peter or someone else can help me out—he has better statistics—but the big issue is that a small fraction of the high school dropout population, which is among the largest among OECD countries, would populate the high-tech jobs in Canada quite easily. That's the real dilemma.

We're losing a whole generation of people, and other than the proverbial hamburger-flipping jobs, or call centre jobs perhaps if they're bilingual, it's really hard to know what they're going to be doing.

That has brought us back to intervening through a number of mechanisms, typically non-governmental organization mechanisms, to try to get the attention of these young fourth, fifth, and sixth graders, through summer science programs or visits by our technical people in the classroom, to get them excited, that there really is something at the end of the road. It's not just working out quadratic equations; it's eventually working on simulation for the space station or whatever.

The Chairman: Mr. Paduch, do you want to join in?

Mr. Rainer Paduch: Yes. I have just a few comments that tie together a number of components and also take into account the question of what we can do with the surplus. To a large extent, we have to be careful about managing how we make more capital available in the country that can then find its way into various enterprises and boost them up. Through the needs of those enterprises we can grow and take on more people.

With respect to the business I'm in, we don't need Ph.D.s to run a network. We need people who are willing to learn and willing to fit into that kind of business environment. We can provide some up-front training to take their skills from where they are when they come out of schools into higher-value jobs. The problem we have is that high school education is just not enough. They need the next level of education, which would be community college or a university degree related to the industry we're in.

Mr. André Gauthier: There are 25,000 job openings in information technology at this moment in Canada. There are ten times that many in the U.S. So far we're holding our own.

Just to put a bit of paranoia into the discussion, the year 2000 problem is coming. It's going to cost billions of dollars to correct. There's no way we, the IT industry, will be able to recruit, train, and employ the number of people fixing that problem will require. Yet we have tens of thousands if not hundreds of thousands of unemployed, including very intelligent youth. These people could very well be going into these industries if the system were there to help them. It seems we're wasting one heck of a lot of talent and letting go an absolutely fantastic opportunity because we're just not geared up and organized to do it.

The Chairman: Thank you.

Mr. Assad, one brief question.

• 1200

Mr. Mark Assad (Gatineau, Lib.): We have a distinguished group here that has given so much interesting information. It reminds me, in February Marlene Catterall and I co-chaired a group for the 1high-tech industry in the National Capital Region. The same concerns came up here.

You're talking about education. Lester Thurow published a book a few years ago called Head to Head, where he brought some very disturbing facts to our attention in terms of how we in North America compared with Japan, in particular. Secondary students that graduated there had a basic understanding of elemental mathematics that we just didn't have here. This brings into question the ability to learn. If they don't have the basics, it makes it very difficult to train them.

There are so many elements you've brought up about the taxation system. I don't think we have to worry about surpluses; we should consider tax reform. It's long overdue.

You're talking about money. We have our chartered banks, and God knows, everybody is complaining that they're so tight-fisted. It's very difficult to get any kind of money out of them for research and development. That is a big problem.

We have the Canadian development bank. I think they could play a role, if we would look into that. If the chartered banks don't want to come up with the money, we do have the Canadian development bank. I think you would find your answer in that institution.

So I'd like to hear your opinion. Do you think the Canadian development bank could close this critical gap? I heard about it in the technological park in Quebec City; they were just as concerned as you were about that critical gap area where there's no money.

Mr. Rainer Paduch: I'd like to respond to that. This is a fairly fast-moving industry. What it requires, basically, is investors who are willing to move quickly with it and can also appreciate the risk and the volatility.

My experience has been, yes, the Canadian banks are very conservative. If you don't need money, they're more than happy to lend it to you. My experience also is that the Business Development Bank is slower and more conservative than the Canadian banks. Consequently, the problem we have is that we have a certain amount of time and effort to get the job done. It's a tremendous strain on a growing business, a small business, to deal with these onerous processes.

We would feel much happier if more liquidity was made available within the marketplace through tax reform and through programs that specifically encourage investment in a higher-risk area.

The Chairman: Ms. George, followed by Mr. Smith and then Mr. Maine.

Ms. Shirley-Ann George: One of the challenges we have is that our companies often go looking for funding at the wrong door. Banks finance debt and cashflow needs. The return on investment requirements for a venture capitalist is very high, and the due diligence required is very expensive, so they generally are not interested in funding projects of less than $5 million.

Now, some of the funding has brought that down into the $2 million range, but there has been very little to address the angel financing, or that first-stage financing, at the $250,000 to $2 million stage. Unless we seriously look at what is needed, there is definitely no incentive in the tax system for anybody to invest in a high-risk venture like a start-up technology company. The labour funds do not allow for the costs and the higher risk in those very early-entry.... Although the government has done a lot, we have not yet addressed that first-stage financing.

Mr. Peter R. Smith: I may confuse the member by my response in this regard, but I don't think the availability of money is a problem; it's the availability of risk funding that is the problem. I think that CDC, as you mentioned, or commercial banks have the money available, but it depends on the cost of the money and how that's portrayed in the profit and loss statements of the various companies.

• 1205

Our concern right now in the aerospace industry is that the projects on the table today and those that will be there next year require in excess of $300 million in seed financing.

The problem is that you can go to Ireland, as was mentioned by one of my colleagues, and you can go to the Asia Pacific and get very competitive...if not grant money. We are not looking for grant money. We are looking for sustaining the technology here in Canada by trying to convince the federal government that aerospace is a sector that will provide to the Canadian economy the return on investment that has been extraordinary, 140% growth over the last decade. That is extraordinary.

In this regard, what we are saying is that we feel a $1 investment by the federal government matched by $4 of industry investment will in fact provide an opportunity for repayability that shows very differently on the balance sheet than if we went to a Royal Bank or a development bank or whatever.

In this regard, we're not suggesting that it's a handout; we're suggesting it's a leveraging investment by a country that puts prestige in a particular sector and has the confidence that not everything will come to fruition in the sense of product development, but at least it's a risk-sharing investment. You take winners and you take losers. Banks are not in the business of taking losers.

Mr. Frank Maine: I am glad to hear the support from some of my colleagues here about what I was talking about, the critical gap. I'm glad to hear my colleagues' recognition of that problem and the doing of something about it.

I recommended in my presentation that the government form a task force using industry and the financial institutions as resources to help them address how to look at this risk area and what financial environment the government should create to lower that risk to an acceptable level for the banks, who will not now invest in that area because the risk is too high. There are a bunch of approaches. I think there's too much detail to go into at this committee hearing.

I'm suggesting that recognition of the problem be accepted and then action taken to form a task force to address this. It could be done in time if that initiative was taken.

The Chairman: Mr. Mahoney, you have the final question.

Mr. Steve Mahoney (Mississauga West, Lib.): Mr. Chairman, since you're running out of time, I'll try to be brief.

I had a number of actual questions in the area of education, but some of them were addressed.

I'd like to focus, if I might, on the angel money, Ms. George, as you refer to it. In any business it's typically the most expensive money you'll get, if you get it at all.

The banks have their shareholders to answer to, and supposedly that's the reason why they would be reticent to provide such funds. A government would clearly have the taxpayers to answer to, and I wonder if it would indeed be more appropriate for the private sector to be looking at establishing funds within the industry, industry-wide, to provide that angel money—rather than government—and to actually do a business plan.

Mr. Maine, I think you used the example of six months and $50,000. I just wonder if it is appropriate for any government to be investing that high-risk money prior to a business plan even being done and what kind of security or end or justification there might be for the public for expending government funds in that way.

Mr. Frank Maine: The government now invests in the highest risk going, NSERC. NSERC is fundamental basic research. That's the highest risk investment you can make and it's 100% government involvement. The taxpayer pays for that. Let's say that down the road there's a transition from 100% government-funded to 100% industry-funded. The government sets the financial climate by its tax regime, by its incentives. The labour-sponsored venture capital fund was supposed to address this. It didn't. It got interpreted as being too far downstream. What needs to be done is something after the NSERC funding. The Canadian Foundation for Innovation is one such approach, where $800 million has been designated for university infrastructure.

There's another way the government should look at this, in conjunction with industry and the banks, so as to leverage the money. The banks have the money and industry has the know-how to choose these projects. What you need now is some way for the tax environment to be attracted so that it will put money into this area. Right now, it's not attractive, and the government's role is to set that up. Using taxpayers' money is what the government does and NSERC funding is a good example of it.

Thank you.

• 1210

Mr. Peter Smith: I would simply want to suggest that the industry today is investing money. I mentioned that in the Technology Partnerships Canada program, over the past two years there was $450 million of federal money, but that leveraged $2 billion of R and D money from the industry.

Our industry takes great pride in suggesting that on an annual basis we are investing about $1.4 billion of industry money. All we're looking for is the ability to match, in the sense of this particular program, $1 for every $4 to allow the leveraging that does take place.

It's very different in some other sectors, which was explained. There's a time gap. In the aerospace industry it's simply a matter of partnership with the federal government. Indeed, a lot of money is being invested by each and every one of our companies involved in research.

The Chairman: Thank you, Mr. Mahoney.

I think this has been a very interesting round table. You certainly made a strong case for the important role technology plays in our society. We've touched upon a number of issues, such as research and development, access to capital, and the issue related to technology and youth and the great opportunities it gives to young people.

But there are also some issues, like brain drain, that are extremely important. Taxation levels have come up quite often. Essentially, there's the fact that technology, in terms of the generation of wealth and creating jobs, is indeed one of the key components in the new economy.

As we attempt, of course, to recommend to the Minister of Finance the best ways to deal with the fiscal dividend, you can rest assured that this presentation will be reflected very much in that report as we also attempt to build a new economy with great wealth and prosperity for this country.

Thank you very much.

The meeting is adjourned.