CANADA'S FOREST INITIATIVE: LESS THAN MEETS THE EYE

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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