March/April 2008

MAC Economic Commentary

The key drivers of economic competitiveness

By P. Stothart

In mid-July, the Canadian government created a Competition Policy Review Panel, chaired by long-time business executive Red Wilson and tasked with the mandate of “reviewing Canada’s competition and investment policies to ensure that they are working effectively and that Canada is positioned for continued economic competitiveness.” The panel’s ultimate objective is to provide recommendations to the federal government with the aim of enhancing Canada’s ability to attract talent, capital and innovation. To this end, the Mining Association of Canada recently prepared a submission on behalf of the Canadian mining industry that outlined four main priorities for the consideration of the panel.

Competitive tax regime

First, it is important that government tax policy support a competitive and internationally active industry. The Canadian business tax regime is reasonably competitive internationally — indeed, significant revenue flows from the petroleum and mining industries have contributed to the government’s recent announcement that it would lower corporate income tax rates from 21 to 15 per cent by 2012. While this is a positive move, there are additional tax improvements relating to accelerated capital cost allowance, exploration in proximity of existing mine workings, applicability of flow-through share revenues towards environmental improvements, and simplification of royalty regulations, among others, that should be considered in the future.

Modern infrastructure

The mining industry accounts for 17 per cent of Canadian goods exports. Annual exports of aluminum, gold, nickel, copper, zinc, iron ore, uranium, potash and diamonds are each measured in the multiple billions of dollars. In this sense, the industry relies heavily upon Canadian infrastructure — such as ports, railroads, highways and international bridges — in order to reach global markets with competitively priced products.

In rail services, for example, the industry contributes a significant percentage of the freight revenues of CN and CP. Because these two railroads enjoy a monopoly position in many regions, it is important that rail services be efficient and fairly priced. The changes in progress to the Canadian Transportation Act will help in this regard, although more improvements through other processes, such as the government’s promised Level-of-Service Review, are also needed.

Canadian ports also draw considerable revenue from the mining industry and investment in port infrastructure and road/rail linkages is required. In northern Canada, there is also a need for increased investment in transportation infrastructure as the interest of investors is influenced by the efficiency with which materials can be moved in and products moved out of prospective remote mine sites.

A less visible type of infrastructure, the mapping and e-database of geological information, is also critical to a mining nation such as Canada. In this regard, federal spending on geological mapping has declined by 50 per cent since 1988, a decline which is even steeper at the provincial and territorial level. The result is that some Canadian regions, particularly the North, are poorly mapped, thus diminishing the likelihood that prospectors will find commercial-scale mineral resources. We need an increased and sustained level of government investment in geoscience.

Efficient regulatory system

In proposing projects, Canadian mining companies and domestic and foreign investors depend on governments for a clear understanding of information requirements, approval processes, timetables and responsibilities. Recent reports by the Auditor General and the Conference Board highlight regulatory and authorization processes as being costly, cumbersome, inconsistent and unfair. These obstacles are relevant to major and minor projects as they exist at multiple levels of government, are problematic in many regions (especially the North) and intersect with questions of aboriginal consultation, land use planning and government sharing of resource revenues. The recently created Major Project Review Office represents a good first step, although the overall efficiency, cost-effectiveness and clarity of these processes must be significantly improved.

Openness to inward and outward investment

There are few industry sectors as internationally active as Canada’s mining industry. An estimated 1,000 Canadian companies explore for minerals in other countries. In financing, the Toronto Stock Exchange provided 38 per cent of the world’s mining equity in 2006, and TSX-listed firms have 4,200 mineral projects in different stages of development outside Canada.

As a “home grown” sector with a long history, the Canadian mining industry has traditionally invested more abroad than it has received in Canada. As of year-end 2006, Canadian mining companies had $62 billion in direct investment abroad, while foreign firms had invested $38 billion in Canada. Of note, though, is that inward investment levels represented almost nine per cent of total foreign direct investment stocks in Canada in 2006 — up from a six per cent share the previous year. This increase reflects the foreign acquisitions that occurred in the sector in 2006, in particular, the international fight for control of the century-old Canadian mining icons Inco and Falconbridge.

As a general principle, the Canadian mining industry supports a free and open flow of direct investment. Foreign investment flows — inward and outward — enhance the access of Canadian businesses to new technologies, to fresh ideas and concepts, and to larger markets and production chains.

Given this approach, the government’s main role is to ensure the fairness and openness of two-way flows and to negotiate investment protection agreements. It would be delicate, if not hypocritical, to call for restrictions limiting foreign investment in Canada — particularly when our own leading companies such as Barrick, Goldcorp, Teck Cominco, Cameco and Kinross, along with a host of juniors, are actively investing and acquiring assets in foreign countries. Even in screening prospective investments from state-controlled entities, the government should proceed on a case-by-case basis and be careful not to move down the slippery slope of discriminatory restrictions that could invite retaliatory measures from other countries.

Paul Stothart
Paul Stothart is vice-president, economic affairs, at the Mining Association of Canada. He is responsible for advancing the industry’s interests regarding federal tax, trade, investment, transport and energy issues.

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