First in a three-part series on how Canada’s heavy regulatory burden is choking competitiveness.
Ask Jean-Francois Boursier about running a business under Canadian regulations and he will likely tell you a tale of two paint shops.
ADF Group Inc., where Boursier is chief financial officer, needed to build identical painting facilities on either side of the border: one at its steel fabricating plant in Terrebonne, Que., and the other in Great Falls, Mont.
The approval process for the Montana project kicked off in 2016 and it was authorized a year later. The Quebec shop was a different story.
“Between the time we started and the time we ended up with our final environmental permit was about two years,” Boursier said. “These are twin paint shops — the two of them, identical, built at roughly the same time. I’d say we paid between a half-million and a million dollars more in Quebec on a $9-million investment. That’s not counting the frustration.”
Much of the recent debate about Canada’s competitiveness has focused on whether Ottawa should chase U.S. corporate tax reductions by slashing its own rates. But Boursier’s tale illustrates a less often considered, but growing concern about their respective regulatory frameworks — the mass of government rules that protect the public when they’re working well, but unnecessarily hinder business development, supply chains and operations when they’re not.
“Canadian businesses have a very legitimate issue on tax competitiveness, but we don’t just compete on taxation right? We also compete via regulation,” said Craig Alexander, Deloitte Canada’s chief economist. “And in Canada, we have significant areas where regulation is impeding competitiveness.”
Fixing those regulations is a longstanding problem that some say assumed greater urgency after U.S. President Donald Trump introduced a package of measures he touted as “the most far-reaching regulatory reform in history.”
One of Trump’s first actions as president was to establish a “one in, two out” policy, ordering agencies to cut two regulations for every new one introduced, and to offset the cost of that new regulation. The U.S. also created reform task forces in all federal departments charged with evaluating existing rules and making recommendations regarding their repeal, replacement or modification.
The resulting cuts have saved US$23 billion in costs, according to the White House’s Office of Management and Budget.
Yet many of Trump’s regulatory rollbacks — particularly those that weaken protections for wildlife, air quality and groundwater supplies — have raised grave concerns about the long-term impact on the public.
“If Trump’s regulations are harmful to the public interest, it might not be the case that you want to match them, because they aren’t necessarily where Canada wants to go,” said Alexander, who points to the 2008 financial crisis as a “great example” of where weak U.S. regulations contributed to a major economic catastrophe.
“But that doesn’t mean there aren’t things we should be trying to do, because when you take all the different sources and put them together, you get a picture that says Canada is facing a real challenge on regulatory competitiveness,” he said.
Indeed, Canada this week fell four spots to No. 22 on the World Bank’s latest Ease of Doing Business Index, which measures the impact of regulations in 190 economies in the Organisation for Economic Co-operation and Development (OECD).
Dig a little deeper and the drag becomes clear: Canada compares well in terms of access to credit and the ease of starting a business, but its performance takes a steep decline to No. 63 in terms of “dealing with construction permits” and No. 50 in “trading across borders.”
Similar concerns surface in the World Economic Forum’s 2018 global competitiveness index. Despite an overall 12th place ranking on favourable views of Canada’s labour market and macroeconomic stability, the country plunges to No. 53 when it comes to the “burden of government regulation,” down from No. 38 the year before.
Canada is facing a real challenge on regulatory competitiveness
Craig Alexander, Deloitte Canada’s chief economist
One of the key challenges in reshaping Canada’s regulatory regime stems from the way rule-making powers have been distributed between federal and provincial governments.
Unlike the U.S., where more power is held at the federal level, Canada’s status as a federation means regulatory control is spread between Ottawa and the provinces. That dynamic makes Canada’s key regulatory challenges — including the removal of inter-provincial trade barriers — and the remedies required to fix them particularly tricky, analysts say.
Decades of provincial rule-making have created a “tyranny of small variances” in regulations that affect trucking standards, food packaging and labelling, trade in beer and wine, and securities regulation, according to a May report by the Canadian Chamber of Commerce.
For trucking companies, Canada’s cross-country patchwork of rules governing permissible weights, speed limitations and driver hours complicates operations and denies companies a level playing field, said David Carruth, chief executive of Milton, Ont.-based One for Freight and incoming chair of the Ontario Trucking Association.
For example, rules regarding the number of hours a driver can stay on the road without stopping to rest differ between Ontario, Alberta and Saskatchewan, he said. Furthermore, Ontario and Quebec require licensed trucks to have “mandatory speed limiters” — devices that restrict speeds to 105 km/hr — while other provinces do not.
“Mandatory speed limiters are safer, better for fuel consumption, better for carbon emissions,” Carruth said. “But we’re competing with carriers in other parts of the country and in the U.S. who don’t have speed limiters on their trucks. There’s a lot of good rules there, but we need a national standard.”
Scrapping or streamlining such differences could be a game changer for the economy since internal trade accounts for almost a fifth — or $370 billion — of Canada’s annual GDP.
Removing barriers could boost annual output up to two-tenths of a percentage point, according to Bank of Canada estimates — about as much as is expected to result from the Canada-European Union Comprehensive Economic and Trade Agreement (CETA).
A “harmonize or justify approach,” in which provinces must explain why their standards need to be different, is one way to “hold feet to the fire” and address issues of regulatory duplication and overlap, said Grant Bishop, associate director of research at the C.D. Howe Institute.
Harmonization between our provinces on regulatory standards is the real way to unleash Canadian competitiveness
Grant Bishop, associate director of research at the C.D. Howe Institute
“Harmonization between our provinces on regulatory standards is the real way to unleash Canadian competitiveness, with the federal government ideally playing a supportive, but assertive role to bring that competition together,” he said.
Governments and businesses broadly agree on the need to ease the regulatory burden, particularly at a time when rising trade barriers are creating new challenges for businesses.
The federal government announced a “one for one” regulatory rule in 2015 — in which one rule must be removed for every new one introduced — and will hold a first ministers meeting in late November or early December that will focus on easing internal trade barriers.
Federal, provincial and municipal governments also ratified the Canadian Free Trade Agreement (CFTA) last year in an attempt to resolve inter-provincial differences, though analysts and business groups say progress has been slow.
“Without strong top-down leadership pressure, we remain skeptical that officials and regulators will on their own through this agreement achieve significant action,” said Ryan Greer, lead analyst on regulatory issues at the Canadian Chamber of Commerce.
“It’ll take a lot of pressure from the provinces and the prime minister to take advantage of this new tool and show the business community that things will be different this time. We think it’s positive it’s happening, but what matters is what comes after.”
Getting Canada’s regulatory house in order would add a degree of clarity for domestic businesses as well as for international investors, who are already grappling with foreign investment rules that have been a “great point of uncertainty for competitors entering the Canadian marketplace,” Bishop said.
For instance, Canada imposes unusually strict ownership restrictions on sectors such as telecommunications and banking compared to international standards, according to an OECD survey. The Investment Canada Act is also unusual among countries in that it requires foreign investors to show a “net benefit” to the country when buying a domestic company.
Various incidents this year — including the decision to halt the purchase of Aecon Group Inc. by a Chinese state-owned entity and the upheaval surrounding the Trans Mountain pipeline — have led to calls for more transparency on foreign direct investment rules and the government’s duty to consult Indigenous peoples.
“Instead of having companies prove a net benefit, I’d like to have a world where government has to show net harm to the economy,” Alexander said, noting that clear policies on investments by state-owned enterprises are also required. “If we could clear up that, we might actually make it more attractive for companies to look at Canada and say, ‘Boy, that’s a place I’d like to invest.’”
Organizations such as the Canadian Chamber of Commerce point to international examples for inspiration on how to turn things around.
For example, Denmark’s Business Forum for Better Regulation — a group of industry, labour and professional organizations assembled in 2012 — is charged with suggesting rule changes that the government must either accept or give reasons for refusing.
Instead of having companies prove a net benefit, I’d like to have a world where government has to show net harm to the economy
By 2016, the Danish government had adopted 308 recommendations, either fully or partially, for savings of $168 million, according to an OECD report.
Others say reforming regulations begins with the fundamental task of improving the collection of data necessary to identify cases of regulatory overlap and duplication.
Introduced in 2014, the federal government’s Administrative Burden Baseline (ABB) requires governments to establish a count of the number of regulations imposed on business.
But the number of regulations is only part of the picture for Canadian businesses. The ABB does not provide information on the intensity of those burdens or how they correlate to rules issued at other levels of government, analysts say.
“If you can’t measure it, you can’t reduce it,” Greer said. “There’s no magic bullet, of course, but any political effort to reduce regulatory burden has to start with a measure of what’s actually there. Otherwise, that cumulative burden just builds up.”