Canada has always had trouble diversifying its economy, but the time will come where it is too late. Investment and access to capital has always been an issue in Canada. That lack of credit and capital is making Canada the most difficult in the G7 countries to start new businesses.
Access to capital and investment dollars is the backbone to a health, diversified economy with robust GDP growth.
This lack of Canadian investment in new business is creating a stagnate economy, encourages talent flight and causes higher prices because of a lack of competition. Pricing becomes uncompetitive resulting in foreign trade deficits. Economists will tell you that when an economy becomes concentrated on a single industry (resources in Canada’s case) it lacks the strength to compete globally and weaken the currency and economy. Which is what is happening today.
Canada is a big country with little usable land, high infrastructure costs, a sole focus on natural resources and a low population concentrated along the US border. And lately, a federal & provincial government that has a propensity to tax the middle class and business.
Oil comprises 20% of Canada’s GDP. Cars and trucks consume 70% of all the oil produced. The other 30% is for chemical use.
The commodity price and jobs created by the energy industry is hinging on oil being the fuel of choice. If the combustion motor stops being the engine of choice, the entire energy industry will collapse.
Right now, millions of researchers, hundreds of universities, and hundreds of billions of dollars around the world are being placed into research on how to replace oil. That tipping point is close.
But there are several obstacles holding back the replacement of combustion vehicles with electric vehicles:
Battery storage density and cost should be better
Electric cars are not produced in large numbers
Combustion cars are cheap- for now
But to change this all it takes is one researcher that finds some way to make a better and/or cheaper battery. Electric motors are already good and will get better in time. It is estimated, that in 10 years all supercars will be electric.
The second tipping point could occur with a stoke of legislation.
Volvo has promised to switch completely over to electric by 2019, Germany wants to eliminate all combustion cars by 2030, Netherlands and Norway want a ban starting in 2025. GM said it would deliver at least 20 new electric vehicles globally by 2023.
Another way this could increase adoption would be in the form of a subsidy, for new electric cars OR a “cash for combustion cars” program. The average age of cars on the road today has never been older, about 8 years.
Oil comprises 20% of Canada’s GDP. The current government has no viable plans to replace this GDP and job loss. Any Oil pipeline or way to get raw product from Alberta elsewhere is shot down.
Is Canada Innovating Now?
Short answer is no. The current government feels its fine to take 3 steps backwards and 1 step forward (see drastic changes in professional taxation). The majority of the government incentive programs will continue to go to only large companies. Marginal grants or loans for re-training programs are not a guarantee, and is like pushing a string in terms of employment growth.
From the 2017 budget:
“What success will look like May 2016… “In May 2016, the Government announced $54 million for Macdonald Dettwiler & Associates Ltd. and its partners to collaborate to develop new satellite technologies.”
MDA Ltd. is a publicly traded TSX listed company, with a market capitalization of $2.5 billion and revenues of $2 billion a year. This is a perfect example of these types of subsidies being given to companies that do not need them.
Other types of government innovation funds that are being planned:
$900 million in “superclusers” over 5 years- with $150m of that total pulled from transit and green infrastructure allocations already planned.
$1.26 Billion over 5-year fund for Strategic innovation that supports high growth sectors to create jobs for the future
Investment into platform technology $125-million in artificial intelligence
Strategic Innovation Fund, which will allocate $1.26 billion over five years into auto manufacturers.
BDC proposes a $400 million over three years, a new venture Capital Catalyst Initiative to be administered by external VCs
(before VC fees)
The net effect will be no or little change in SMB’s with revenue under $250m, employment growth in smaller companies will be nominal.
Back when Jason Kenney was immigration minister, he developed an investor visa program. The visa was somewhat typical of almost every country in the world, a vetted person willing to invest X amount of capital in the host county for X period is eligible for permanent residency.
Created back in the ‘90s, this visa attracted immigrants to America who could invest a minimum of $500,000 in a troubled area or up to $1m anywhere into a business that created or preserved at least 10 full time jobs for U.S. workers. All other immigrant requirements were still in place. In the last several years the USA has seen over $5 billion in direct investment and over 85,000 full time jobs created. Typical returns ran from 0.25% to 0.50% per year, creating a very low cost of capital in exchange for a U.S. visa.
Canada came up with a lesser, but more safe program for investors looking swap cash for residency. Under that plan, administered by then Immigration minister Jason Kenny, the program called for a $800,000 CAD loan interest free to any Canadian Province.
The pilot program had 59,000 millionaires signed up totaling $47.2 Billion in commitments. That investor visa program was frozen in 2012 and finally killed in 2014. That visa attracted more interest than the UK, Australia and the US combined.
The New Opportunity
On April 28 2017, the U.S. government will raise the minimum investment from $500k to $1.35 million USD. This will create a void in for foreign nationals looking to seek residency to a western country in exchange for an investment. Canada could capitalize on this by creating a real investor immigration program.
Here is what the program could look like;
All pre-existing residency requirements must be fulfilled prior to granting of permanent residency
Have a certain net worth
Invest $900,000 CAD or $672,000 USD into a valid Canadian business, and create 10 permanent full time jobs for Canadian citizens
Investment in only certain kinds of businesses (non-resource)
The administration of the program would be like America, with regional centers set up across Canada
Based on the past waiting list, with a hypothetical attrition rate of 50%, this could inject $53,000,000 Billion in new investment capital to as much as $103 billion. This could bring as many as 590,000 direct full time jobs, the equivalent of 7 years’ worth of new jobs for Ontario or more than double what Canada added as new jobs (that were mainly part time). Some variation could include immigration advisors making home equity type loans to foreign nationals for all or a portion of the investment. Similar to Hungarian residency bonds.
How to Implement
To expedite, hire several retired US immigration officials to implement a Canadian version of the program.
The regional centers themselves would be job creators. And could use the same U.S. formula to have eligible companies achieve “exemplar status”. That status would be a stamp of approval from the regional center and would make the investment projects pre-approved something investors would look for.
Regional centers could fit into existing business development center (BDC) branches.Existing BDC staff would be well suited to administration of the regional center. Marketing and promotion conducted through provincial international offices around the world.
A successful Canadian Visa Investor Program (C-VIP) could bring in many times more capital than every current and proposed program the government currently has.
Targeted towards small and mid sized businesses, this investment would create a more diverse, robust & innovative economy. It would drive an economy that doesn’t rely on Canada to just continue to sell raw commodities. To further drive innovation and synergy, businesses could relocate to the government proposed super hubs for additional tax breaks and funding.
Canada must start attracting foreign investment to prepare for the changing economy. A program like this would be tremendous win for the standing political party as the job creation numbers would be outstanding.
Source: Trebuchet Research
This material is contains information from publications prepared by the Trebuchet Capital Partners and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of June 2015 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by Trebuchet to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Trebuchet, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.