OCTOBER 28, 1982
Let's Stop Shooting Ourselves in the Foot
AN ADDRESS BY Radcliffe R. Latimer
PRESIDENT AND CHIEF EXECUTIVE OFFICER TRANSCANADA PIPELINES
CHAIRMAN The President,
Henry J. Stalder
Distinguished members and guests, ladies and gentlemen: Rad Latimer, President and Chief Executive Officer of TransCanada PipeLines, was born in Florence, Ontario, on October 2, 1933. He attended McGill University and graduated with a Bachelor of Science degree in Mathematics in 1953. Mr. Latimer earned a Master of Business Administration degree from the University of Western Ontario in 1956.
Following his graduation from Western, he joined CN as Administrative Assistant in the traffic department and served also as Traffic Research Officer and General Rates Officer, before leaving CN in 1962 to take up a position as Manager of Research for Royal Securities Corporation in Montreal. In 1963, Mr. Latimer was named Executive Vice-President of the Algoma Central Railway and in 1969, Vice-President, Operations, White Pass and Yukon Corporation.
In 1973, he was appointed Executive Vice-President of the Grand Trunk Corporation, CN's wholly owned United States subsidiary. He was named System Vice-President, Marketing, for CN Rail in 1974 and Vice-President and Senior Executive Officer of CN Rail in 1976. Mr. Latimer was named President of CN Rail in 1979. He was named President and Chief Executive Officer of TransCanada PipeLines on December 1, 1979. Mr. Latimer is also a director of Great Lakes Gas Transmission Company, Trans Quebec & Maritimes Pipeline, Prudential Assurance Company, Constellation Assurance Company, and Algoma Central Railway.
Mr. Latimer comes to us today not only with a message about his own company but also with some comments on TransCanada PipeLines's relationship with Dome Petroleum, its major shareholder. Ladies and gentlemen, please join me in welcoming our distinguished and accomplished guest of honour, Mr. Radcliffe Latimer.
Mr. Chairman, ladies and gentlemen: When I accepted your invitation to speak to you today I knew I couldn't help talking about some aspect of our economy, simply because it seems to have replaced the weather as the favourite topic of conversation. So much so, in fact, that if Mark Twain were alive today he might be prompted to revise his famous observation and substitute the word "economy" for "weather"--although that would not be quite accurate because a lot of people really are trying to do something about it. So if I were to take a stab at rephrasing, I would suggest: "Everyone talks about the economy and everyone has his own idea of what to do about it."
And most of the ideas seem to be directed toward our governments--particularly the one in Ottawa--and they run the gamut from replacing the cabinet to indexing layoffs in the civil service with those in the private sector, to selling off all Crown corporations, to whatever.
Well, one thing I can promise you is that I have not come here with any magical ideas or formulas to present as a cure-all for our economic difficulties. We are all wrestling with the problems of a severe national recession within the framework of a world economic slowdown. The complexities are so great that it strains the best of human minds; hence, the age-old human practice of looking for scapegoats or simplistic solutions is not all that unexpected. I don't think there is any question that the number-one scapegoat in Canada today is the federal government. But I promise you that I do not intend to join the thundering herd of critics who have been castigating the federal government for its sins of commission or omission. Anyone who reads the media is well aware of what people think and I don't feel it would serve any great purpose to run down the checklist.
Rather, I would like to zero in on one area of particular concern to all of us and which has been at the top of the news and that is our relations with the United States and how we are perceived by the business, government, and investment people in that country. It is a subject of special concern and interest to me because of the international nature of the company I represent and the fact that, as a major user of investment capital, TransCanada Pipelines looks to foreign markets to finance much of its needs.
Just about a year ago, I had the opportunity to talk to a large assembly of senior American businessmen in New York City. At that time, Americans had reached a point of heated exasperation over Canada's economic policies and I did my best to explain to this group just what was happening in Canada. I undertook this assignment out of a personal concern for the way many competent, professional businessmen and investors had come to see Canada--views and moods I had picked up during my business travels in the States. They amounted to sweeping, distorted generalities which were astounding to hear. The gist of it was that Canada had fallen into the hands of a socialist idealogue and as a result, the country was unreliable and unpredictable; that Canada's basic political motivation was hostility to the United States; and that we were something between a developing nation and a banana republic. I can't, nor can you, I am certain, accept such a casual summing-up of our country. Such views amount to sloganeering but once slogans are inscribed on human minds they are powerfully difficult to erase or replace.
As we all know, the two red-flag issues which have angered Americans and undermined our credibility as a welcome and' sound environment for capital investment are the administration of FIRA and the way we implemented the National Energy Program. Please note that I used the terms "administration" and "implementation." That's because I do not feel there is a genuine quarrel with the validity for the existence of either of these pro-Canadian initiatives. Contrary to what people beyond our borders might think, they were not spawned overnight and without due warning by an overzealous nationalist government. There was plenty of advance warning on both of them and each should have been predicted by any astute observer of Canadian political developments--particularly the NEP, which was outlined in a strategic paper in 1976 and which was a part of the Liberals' election platform in the last election. And as surveys confirmed, there has been overwhelming public support for the idea of Canadians owning a larger slice of the manufacturing and resource sectors of the economy. Also, let's remind ourselves that FIRA and the NEP are conceptually far from extreme measures when compared to investment-screening apparatus in other Western-world countries.
No, I think most of us now understand that the problem with FIRA IS the lack of clarity in its rules and terms of reference--its negative watchdog reputation. And in measuring FIRA'S performance, it is pointless to look at the percentage of investments it has approved because that doesn't tell us how many worthwhile investments were scared off. As a result, no major foreign-owned company plans to try to move in Canada with plans that include acquisitions or consolidations of existing activities. The present FIRA screening process has eliminated such activity. Even with plans for brand-new investments, technically not covered by FIRA at present, the combination of hints that FIRA powers would be extended--possibly retroactively--and the clear application to energy companies retroactively have acted to cool enthusiasm in this direction. Couple this with the present world market outlook in traditional Canadian business areas and I venture the view that there are currently no new capital investment plans for Canada before the boards of major foreign companies. I can think of no time in the past thirty years when interest in the development of Canada has hit such a low ebb.
The same thing can be said as far as the NEP is concerned. It was the methods employed toward achieving the policy's goals which cost us our credibility internationally. I believe Canadians have come to realize that the real motivating force behind the contentious measures implemented under the NEP umbrella was primarily the government's greed for revenues. The government cruised for a long time on the almost universal support for Canadianization to serve its own self-interest to the detriment of the petroleum industry and other sectors of the economy.
In fact, that basic motivation to take money for public coffers was, in retrospect, so powerful that it blinded government eyes to what was really happening in the energy world. Government people were among the last to realize the world energy market had turned around--that all the predictions for prices and supply upon which the NEP was based were no longer valid. None the less, they proceeded to structure the NEP and thereafter the agreement with Alberta armed with a view of world energy that was no longer realistic. So I have come to the view that the failure of the NEP was not because it was nationalistic and angered our American friends, but because of a massive misjudgement in reading the market.
Enough said--I am sure I am preaching to the informed. I want to look ahead but I felt it was necessary to remind ourselves where we are coming from in order to appreciate the difficulties we face in the future.
From what I have seen emerging from Ottawa in the past few months, and especially in the past few weeks, there is plenty of evidence that the government has done an about-face and is taking a more realistic stance in economic matters. The shuffled cabinet has ministers in place where they can effect changes and that's happening. We hear that FIRA is being revised; that the government is shying away from Canadianization; that the government has met with senior American industrialists and taken other steps to patch up our relations with the United States. Whatever else may be said, I believe that the public statement of such views by the prime minister has been a step in the right direction.
I, for one, am gratified to see the new directions and initiatives the government is taking. But at the same time, we must realize Ottawa is undertaking a valiant effort at the worst of all possible times. We are in the middle of a world recession. The world energy market has turned totally negative and if our neighbours to the south are not actually hostile, they have become more isolationist and just don't care as much about Canadian resources today as they did in past years. It is a most difficult moment in which to try to obtain results through a quick about-turn--but the change in direction had to come and even though it's belated, we can be thankful it is under way.
However, in saying that, I have to admit to a sinking feeling that our leaders are once again misreading what is happening in the world and are reacting to an old situation while a new one is fast overtaking us. I say this because I have just returned from an extensive trip to Asia and have had an opportunity to learn what is going on there first-hand and, at the same time, to view the United States from that far-off vantage point. It conforms with what I have felt while travelling in Europe and presents a totally different perspective on the Canadian view of relations with the United States.
When I spoke in New York a year ago, I was concerned with the negative attitudes I mentioned earlier because of our nationalistic economic policies. I also dealt with our growing fear that the United States might take retaliatory measures to bring us into line and discourage our pro-Canadian ways. I have now come to the disturbing conclusion that those are old concerns, and my ears pricked up earlier this week when I heard a cabinet minister on the radio say he hoped the United States would not impose retaliatory trade measures on Canada. I suggest it would be a massive misjudgement to think that anything the United States might do of a protectionist nature would be particularly directed toward Canada, FIRA, or the NEP.
Instead, whatever negative measures--or simply indifference--we may experience coming from the United States, are nothing more than a reflection of the position the United States is taking with respect to the rest of the world, and Canada has become part of the rest of the world. There is an isolationist mood to the south of us which stems from a gut-level American view that the United States is not getting much in return from its relationships with the rest of the world either economically, politically, or militarily. It is a mood spawned by protectionism that is emerging among countries throughout the world in response to economic difficulties. I am convinced we are going to see far more rallying around the Stars and Stripes and calls for "America First" and our special position with the United States will not be so special anymore. America's isolationist stance is not visible in Canada with the same clarity as it is in Asia and Europe where it is omnipresent and the countries there just don't have any way of coping with the about-face the Americans have made.
So, when I returned home last weekend and began catching up on what had been taking place while I was away, I assessed what I was reading against what I feel is really happening in the United States and I can only conclude that events there have overtaken us and we are responding too late to the wrong thing. Now, this does not mean the government should disband its current initiatives in courting the United States. No, I think the situation calls for all the haste we can put into the exercise in order to secure whatever measure of special status or treatment we can. And in that respect, I think it would help all of us to
have a clearer idea of what the government has in mind. We know changes in policy are being made in Ottawa, but it is not yet apparent how fundamental they are--how far they go.
Take the NEP, for example. It is no secret that the government realizes the mistakes it has made. For some time now, changes and concessions have been occurring at a rapid clip. Most of them have received little publicity--certainly not the kind of attention that was paid to the high-profile moves by Alberta and Ottawa to return large amounts of cash to the oil industry; or Alberta's most recent move to reduce provincial royalties on enhanced oil recoveries. I would suggest most Canadians are unaware of the extent to which the original NEP measures have been modified. It has been a piecemeal process and it is not clear whether or not the government has backed off the NEP in a fundamental way. If Canadians don't know that, how can Americans or anyone else not directly involved be aware of what is going on?
Now, it is generally considered an admirable trait for individuals and businesses to come clean when they have made mistakes--to say, "OK, we didn't get it right, but we are prepared to do it differently." Would it be any less admirable for a government to do the same? I think not--and especially under current circumstances which surely call for concentrated action on both technical and psychological fronts. If the government could bring itself to clearly state that the previous ways no longer suit today's urgent needs and be frankly open about its new directions, I feel it would go a long way toward clearing up confusion and allaying the kind of suspicion expressed a few weeks ago by a New Yorker after hearing government overtures to invest in Canada: "How do we know," he asked, "that in a few years down the road we will not be nationalized?"
I would like to be able to answer him confidently, with a firm and unqualified, "No fear, it won't happen."
In the same vein, if the FIRA rules are being revised as we have been led to believe, then the new rules should be simple and clear so that they can be easily comprehended. However, I do fear that it will be difficult to convince people that FIRA has changed simply because the name "FIRA" has had such bad press outside Canada. Negative feelings well up in American business and investment minds at the mere mention of the name. So, perhaps a new name is needed to reflect a more positive and welcoming approach to foreign investment in Canada--to indicate to people that the changes are fundamental and long-lived. And to make it clear that this was a change in long-run strategy, not just a convenient tactical feint. The kind of clarity in stating new policy direction which I am suggesting would add impetus to letting people know in an understanding way where Canada now stands. It would help you and me to become promoters, rather than apologists, of Canada and our economic policies. I would like to stress, however, that we don't fool ourselves into believing a few policy alterations are going to result in any substantial change in the fundamental policy shifts taking form in the United States. The course has already been set and we can expect it to continue for a prolonged period.
Now, I would like to turn my attention from our relations with the United States and come closer to home. As I mentioned at the outset, TransCanada PipeLines is a major employer of capital investment funds. In fact, during the past two years the company has been one of the largest capital investors in Canada, as a result of projects to increase the capacity of our system and to extend gas pipelines into new territories.
We will be continuing with major projects into the future and I feel it may be significant for the business community to know how the company sees itself within the context of current developments, particularly with respect to Dome Petroleum. There have been mountains of publicity, speculation, and comment about the Dome refinancing. The nub of it is that if anyone thought a magic wand would be waved when the banks and the federal government came in with their proposals, then they just misread the process. It is an extremely complex situation because there are a number of levels of investors with different kinds of security--people all over the place with valid interests in Dome. It is naive to think that all those interests would be satisfactorily dealt with when only two elements were sitting at the table. All that that represented was the first big step forward because it gave notice that the biggest stakeholders--the federal government and the banks--were determined to save Dome and keep it from going under. The process is now going on from there and it is going to be prolonged. What should be clear, however, is that TransCanada is not involved in, or a part of, the solution.
Meanwhile, there has been a great deal of speculation and curiosity about what will happen to TransCanada PipeLines in all of this. One area of speculation that is particularly damaging is that the federal government is interested in acquiring Trans-Canada. I can say that from all the conversations I have had inside and outside government, there is no evidence to support such a notion. Rather, the federal government, the Alberta government, and the banks appear very interested in finding a long-term, stable home for the TransCanada shares held by Dome Petroleum. And I think once the dust settles, there are several ways these shares can be distributed to Canadian investors in an acceptable way. TransCanada would welcome and support such an outcome and I have every reason to believe that it would be welcomed by any of the other interests in Dome. It would certainly be welcomed by the twenty-three thousand other Canadian shareholders of TCPL.
Meanwhile, TransCanada continues to carry out its day-today role of transporting natural gas to Canadian industry, businesses, and homes and since there is a lot of good news in natural gas, perhaps it might help to lift our spirits if I talked about it for a minute or two so I can end my talk with you on a positive note. I don't think Canadians fully realize the remarkable national asset we have in this fuel. When people talk about energy, they automatically think of oil. And that is understandable because oil has been in the forefront of energy news for most of this century. It is something we are conscious of every time we drive up to a filling station. It is also the major energy source that Canada is importing, so it has dominated the scare stories during the "energy crisis."
Natural gas, on the other hand, has a low profile. Five years ago, it was a very junior element in our energy picture. But it is now coming on rapidly as a full-fledged and major energy partner, supplying one quarter of all energy from primary sources in Canada. The total pipeline grid--from Quebec to British Columbia--totals ninety-five kilometres in length--far more than the total trackage of all railways in Canada.
It is a fuel in which we are not only fully self-sufficient; we have plenty to export and we earn billions of dollars of new foreign exchange every year. While we have been exporting natural gas to the United States for years now, we are really only beginning to exploit its full potential and there is a tremendous amount of activity taking place in the industry across the country. As a whole, the gas industry has been given a great deal of encouragement from governments, both in providing incentives for consumers, businesses, and industries to switch from oil to gas; and in expanding the pipeline system into new territories such as those covered by the Trans Quebec and Maritimes project; and in providing further help for the spread of local distribution systems; and in setting prices for gas which will make it increasingly competitive as time passes.
While the question of the extension of the pipeline to New Brunswick and Nova Scotia is not resolved, one way or the other the Maritimes will be served by natural gas. They will either be served by TQM or, as seems probable now, by a regional system distributing Sable Island gas. Once this is accomplished, the fuel will be fully available to most Canadians, coast to coast.
With the Canadian market fully served and large surpluses of gas still requiring markets, the industry has turned to developing new sales in the United States. At TCPL, we have sold large additional quantities of gas to existing customers in our traditional areas of the mid-West and to an exciting new service area in the American Northeast. We are confident that the Canadian government will soon approve the greater part of the new exports that we and others have requested.
On the American side of the border, the situation is hopeful since several of the new sales are into markets which are currently short of gas. However, the best time to have made these sales was during the energy crisis and that has passed us by. Before these imports are authorized by the United States regulatory authorities, we can expect prolonged bargaining on the terms and conditions, with particular emphasis on limitations on the Canadian government's right to set the price from time to time without reference to competitive conditions in United States markets.
Natural gas is one of the very few high cards Canada has to develop in the medium-term future. But Canada faces the reality of new, harsh world market conditions and, as in other areas, we will have to learn a new lesson--that we must compete aggressively. We have the basic gas supply but the Americans will bargain hard and if we do not meet this test, they will resolve their energy supply without us. I am optimistic and I believe there is enough understanding of the nature of the United States market by governments and producers that the bargain will be struck and these massive new exports will flow.
More's the pity that this wasn't recognized two years ago. The bargain would have been better, probably much better, and the tremendous construction programs to provide the new capacity would already be under way. We calculate that upwards of $4 billion of new facilities will be needed. What a stimulation if this were taking place in 1983 and 1984 instead of our just being at the start of the whole process with most of the construction delayed into the mid-1980s.
Nevertheless, I suspect the benefits of this large investment program will be every bit as welcome and as necessary when they come. The combination of this multi-billion-dollar investment program, the flow of several billions of dollars of new gas sales each year, and the influence of this new flow on gas exploration and development will undoubtedly comprise the most substantial single program or initiative to move our economy forward that we will see in the next few years. The fact that it has drawn such little public and media attention is to me quite remarkable.
With all of the activity to realize our natural gas potential, there is a lot of good news in our energy picture. The time has come for us to think automatically of natural gas when we mention that word "energy"--it is the fuel we have most of now and will continue to have for generations to come.
The appreciation of the audience was expressed by Ronald Goodall, the Treasurer of The Empire Club of Canada.