US embassy cable - 05OTTAWA3572

C O N F I D E N T I A L SECTION 01 OF 03 OTTAWA 003572 
 
SIPDIS 
 
STATE PASS USTR FOR J MELLE, J MENDENHALL, S CHANDLER; 
USDOC/ITA/IA: J TERPSTRA 
 
E.O. 12958: DECL: 12/02/2015 
TAGS: CA, ETRD 
SUBJECT: CANADA'S FOREST INITIATIVE: LESS THAN MEETS THE EYE 
 
 
Classified By: Econ Minister Counselor Brian Mohler, Reasons 1.5 (b) an 
d (d) 
 
 1.  (SBU) Summary:  While it does raise subsidy concerns, 
there appears to be much less than meets the eye in the 
GOC,s November 24 announcement of a new CAD 1.5 billion (USD 
1.27 billion) forestry package.  In particular, the CAD 800 
million figure for loan insurance appears to be a political 
mirage.   Some industry experts have welcomed the package, 
but others have dismissed it as pre-election fluff.  The 
government could begin disbursing some elements of the aid 
package immediately, but the eventual total is likely to be 
much less than CAD 1.5 billion and the bulk of the aid may go 
to troubled pulp and paper operations.  Given the 
transparently political nature of the announcement, it may 
not merit much further USG response, at least until the 
election is over.  End Summary. 
 
2.  (SBU) On November 24, the Canadian government announced 
its &Forest Industry Competitiveness Strategy8, describing 
it as an &initiative worth almost CAD 1 billion to ensure 
the continued competitiveness of the Canadian forest industry 
in the global marketplace.8  (Note: all figures are in 
Canadian dollars; 1 CAD = approx  .85 USD)  The initiative, 
timed to play to maximum advantage as the country moves 
toward January elections, offers a variety of assistance, 
much of it geared toward local communities.  Context is 
everything; this initiative is just one part of a flurry of 
pre-election largesse from the outgoing Liberal government 
for everything from new tunnels for the Department of 
National Defense to theme parks on Prince Edward Island. 
Much of this new funding, unsurprisingly, is aimed at Quebec, 
where the Liberal Party is in danger of losing  seats to the 
Bloc Quebecois. 
 
3.  (SBU) A closer examination of the forest program, 
however, suggests that both total and annual outlays are 
likely to be a fraction of the ballyhooed $1.5 billion. 
Following is our preliminary analysis of the scope and impact 
of these programs, in order of scale.  Econ staff are seeking 
a meeting with Industry Canada officials in the next few days 
to answer some of the questions raised by the text of the 
announcement. 
 
Loan insurance ) $800 million (but not really) 
--------------------------------------------- 
 
4.  (SBU) The biggest part of the package is funding set 
aside to insure (via commercial insurance, not government 
guarantees) bank loans to &firms affected by the unique 
circumstances of the softwood lumber dispute.8  The funding 
&will help facilitate up to $800 million in loans.8  Based 
on this description, it appears likely, notwithstanding 
public statements by the Liberal leadership, that the actual 
government outlay is likely to be a small fraction of the 
loan total.   Industry reaction has been mixed.  One Quebec 
industry expert called it &nonsense8 and industry contacts 
in Britsh Columbia described it as &pre-election gimmickry8 
and predicted that BC firms would not be likely to 
participate.   As most U.S. countervailing duty deposits for 
softwood lumber come from BC firms, their nonparticipation 
further reduces likely spending under this program.  Quebec 
industry officials complained that only $150 million 
(presumably in new loans) would be available to Quebec,s 
troubled forestry firms, which have been hit harder by market 
conditions in pulp and paper and the rise in the loonie than 
by U.S. deposit rates.  (Embassy Comment: In fact the program 
appears tailor-made for the Tembec Corporation, which has 
been trying to shop its deposits to banks as &accounts 
receivable8, without success so far.  Predictably, Tembec 
CEO Frank Dottori welcomed the move. End Comment.)    We 
understand that because this program is covered by an 
existing framework program under the Industry Canada Act, the 
government can make these payments for loan insurance without 
further legislative or administrative review. 
 
Advanced Forest Technologies Program 
------------------------------------ 
 
5.  (SBU) The next largest item in the program is the 
Advanced Forest Technologies Initiative (AFTI), which will 
receive $215 million in additional funding over five years. 
According to the official press release, it will &increase 
the competitiveness of the Canadian forest industry by 
providing the momentum and financial incentives required for 
commercial-scale development and application of 
transformative technologies (allowing) the Canadian forest 
industry, especially pulp and paper industry, to enhance its 
competitive position, improve its environmental performance 
and take advantage of the growing bio-economy8.  While this 
description seems to imply a financial benefit, it also 
suggests that funding will not go primarily to the big 
softwood producers.  Post is seeking further detail on AFTI 
from Industry Canada. 
National Forest Community Adjustment Fund 
----------------------------------------- 
 
6.  (U) $150 million over five years will go to regional 
development agencies and the Federal Economic Development 
Initiative for Northern Ontario for community support and 
economic diversification in &communities affected by recent 
job losses in the forest industry8.  At first glance, this 
appears to be an extension of existing community adjustment 
programs. (Prime Minister Martin referred to this program in 
a campaign stop yesterday in Cornwall, Ontario, where Domtar 
Corp. is shutting down a pulp and paper plant with a loss of 
over 900 jobs.) 
 
Industry Support Program 
------------------------ 
 
7.  (U) $100 million will be made available to regional 
development agencies in &support to firms to address 
short-term viability pressures8 via &conditionally 
repayable contributions8 to firms affected by the softwood 
lumber dispute but not eligible for the loan insurance 
program (presumably struggling smaller firms that do not 
export).  We are seeking clarification from GOC officials as 
to whether the stated value of the program is an annual or 
five-year total.  It appears to raise some subsidy concerns; 
notably, the Atlantic provinces have declined to participate. 
 
Support for Bioenergy 
--------------------- 
 
8.  (U) An additional $50 million over five years will be 
made available under an existing program, the Renewable Power 
Production Incentive, which is designed to encourage 
cogeneration.  However, according to Natural Resources 
Canada, this program is not industry-specific and the new 
allocations will not be earmarked for the forest industry. 
NRCan is working to broaden the criteria for the incentive, 
mostly used by manufacturers and utilities until now, to make 
it more attractive to forest product companies and local 
municipalities. 
 
Forest Innovation and Value-Added Wood Products 
--------------------------------------------- -- 
 
9.  (U) The package includes $90 million  for various 
programs under this item over five years, and will &focus on 
precompetitive research.8 
 
Growing Wood Markets 
-------------------- 
 
10.  (U) The government intends to pump an additional $66.3 
million over five years into the existing Canada Wood Export 
Program (focusing on stregthening exports to China and other 
developing markets) and other existing export development 
mechanisms. 
 
And Don,t Forget the Workers 
---------------------------- 
 
11.  (U) Finally, Human Resource and Skills Development 
Canada, roughly the equivalent of the Department of Labor, 
will chip in $10 million over five years to upgrade worker 
skills and recruit youth and underrepresented groups into the 
sector. 
 
Doing the Arithmetic 
-------------------- 
 
12.  (C) Comment: Based on the figures above, apart from the 
loan insurance program average annual spending under this 
initiative will probably amount to no more than $122 million, 
a substantial sum but a far cry from the $1.5 billion 
trumpeted by the Liberal government as it takes to the 
campaign trail.  In addition, much may go to pulp and paper 
producers, whose problems have little to do with the softwood 
lumber dispute, or into the forests of northern Ontario. 
Moreover, government contacts have told us that some of the 
package is still "somewhat notional8; while it does not 
require legislative action, details remain to be worked out. 
While we are still looking for more detail, our view is that 
the impact of this package on U.S. softwood producers is 
likely to be marginal at most, and does not merit further 
immediate USG reaction. 
 
13. (C)  In our view, the program probably serves two 
purposes: a) to ensure that Quebec,s hard-pressed forestry 
companies get their share of the pre-election handouts, and 
(b) to create an additional bargaining chip should the GOC 
eventually return to the table.  The Canadian media reports 
that some officials have already said they might &review8 
the package, although they have again described the quid pro 
quo (predictably) as the full return of all existing 
deposits.   Once the campaign rhetoric subsides, there may be 
more of an opportunity for constructive dialogue on Canadian 
aid to its forest industry.  End Comment. 
 
WILKINS 
 
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WILKINS