[Recorded by Electronic Apparatus]
Tuesday, October 31, 1995
.1534 
[Translation]
The Chairman: Welcome everyone.
Pursuant to Standing Order 108(3)(d), we will consider issues relating to household goods removal services for the Department of National Defence (Public Accounts of Canada 1994).
We have with us officials from the Bureau of Competition Policy.
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[English]
From the Department of National Defence we have Mr. Fischer. I will let you make your opening statement, but before that could you introduce the people who join you today?
[Translation]
Lieutenant General R.N. Fischer (Senior Assistant Deputy Minister (Material), Department of National Defence): Mr. Chairman, committee members, let me first say that we appreciate very much the opportunity to appear here today to respond to any questions you may have about how household goods removal services are delivered to the government.
[English]
I am of course aware of the debate over this issue which has ensued over the last two years. Let me say that I understand the concerns raised in that debate and that the interdepartmental committee has made and will continue to make changes to the way it does business to satisfy the requirements of probity, cost effectiveness in the delivery of household goods removal services, sound competitive practices consistent with government's view in these matters, and last but far from least acceptable quality moving services to public servants and the military.
As the committee may know, the debate has focused on two main elements: move management services, that is the management activity which decides who moves, where, when, and how, and the more direct transportation-based aspects of actually packing, transporting and unpacking the goods.
Move management was studied by the interdepartmental committee and the request for proposal responded to by industry in 1993. Peat, Warwick, Thorne conducted the business case analysis, concluding that considering all cost factors, it was obviously less costly not to privatize this function. Treasury Board has approved this conclusion.
The aspect I will deal with today then is the second one, the more traditional household goods removal part of the business.
Prior to 1991 annual negotiations with the moving industry resulted in a series of increases to the rates charged to government. As a result of an internal DND audit in that year, the biggest change in many years took place with the introduction of competitive tendering in 1992. This change resulted in significant cost savings to government. Indeed, the rates fell by fully 35% from 1992 to 1995, a saving of over $30 million.
What the change did not do, however, was attract acceptable numbers of new entrants into the business. The Bureau of Competition's report of 1994 recommended more changes, which the IDC implemented with two notable exceptions. We did not offer ``all or a significant portion of the business to the lowest bidder''; we offered a modest increase only. And we did not release, for government moving purposes, individual carriers from their exclusive arrangements with their parent van lines. Our reasoning was that too many changes too quickly may cause more problems than they might solve. Nonetheless, some lessening of overly regulated relationship with industry did take place, which was helpful to both parties.
A convergence of issues caused the interdepartmental committee to consider other service delivery options. The first was our growing concern regarding the bureau's views that even our changed business process could still induce potential contravention of the Competition Act as well as the Ontario Supreme Court prohibition order.
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Second was the advent of reduced department dollars generally resulting from a series of budget cuts since 1989, which in turn caused significant reductions in the number of government moves, particularly in National Defence.
Third was the need to deregulate our business relationship with industry substantively because it was becoming a significant cost factor.
Fourth was the need to continue to maximize the value of the taxpayer's dollar invested in this program.
[Translation]
I should take a moment before proceeding to highlight the major government moving business level reductions.
In 1986, the government completed 30,000 moves; in 1995, this number was reduced to 19,000 moves and next year we expect only 15,000 moves. We expect reductions to continue. As well, in 1989, the government stored 45 million pounds of household goods compared to only 15 million pounds in 1995.
The latest service delivery option reviewed by the IDC was the single supplier concept of which you may have heard. The concept in essence proposed that we contract with one supplier instead of the current six.
The IDC felt there was further savings potential mainly in the areas of shipment consolidation, increased competition, and in not paying for existing overcapacity in industry.
[English]
The IDC's evaluation of the proposed concept concluded that while the potential for dollar savings exists, there are insufficient grounds for introducing such a major change at this point. The main reasons are the risks associated with, first, using the sparse data available to make reasonable projections regarding job losses, company bankruptcies, and the impact on our business operations generally, and secondly, implementing such a major change without some kind of objective validation of the data and the rationale we need to ensure the evaluation was properly constructed, the data used properly, and the right conclusions drawn.
In the making of such a change at one time, the risk of failure is potentially high for such a major one-time change, given the nature of the change and the time and effort required by industry to respond. Associated risks include loss of confidence in the system by, and major disruption to, its customers, those being moved, the potential cost to government in that regard, and the cost to re-tender if a prime contractor fails in whole or in part. Finally, there would not be sufficient time to complete a validation, issue a request for a proposal to industry, evaluate the bid responses, and award a contract, plus give the winner sufficient time to gear up to execute such a major change.
The IDC has nonetheless developed a new approach to acquiring these services, an approach we think represents a strong potential for savings and increases the level of competition and access by new entrants. It also addresses the concerns of the Bureau of Competition Policy and is supported by the bureau, and it moderates the implementation risks involved.
The basic elements of the proposed change are as follows: a one-year competitive tender, fully accessible by any interested party; secondly, the lowest or winning bidder getting 40% of the total government business. Remaining compliant bidders, up to three more, would receive respectively 25%, 20%, and 15% of the business.
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Only the lowest bidder's rate would be used, and there would be no right to refuse government moves, as had been the case in the past.
Contractors would determine infrastructure required to meet the requirement, not government, as in the past. The government interest is in minimum-quality services required to move goods safely.
Finally, exclusivity rules would be rescinded. That is to say, for government moves, any carrier could align itself with another carrier or van line.
There are other business distribution scenarios, such as a 50-25-25% split or a 40-20-20% split. But these scenarios perpetuate constrained bid competition, since many companies would not shoot for the lowest bid, knowing that if they are close enough they will get a guaranteed slice of the pie in any case.
The 40% business allocation and reducing the number of winners to four in total will cause companies to sharpen their pencils. As well, for smaller companies wishing to gain a foothold in the business, 40% is less daunting than 100%, and there are three other levels of business, namely 25%, 20%, 15%, they could aim at. In our opinion, a 15% share is deemed to be the minimum amount to support a viable business.
[Translation]
Some concerns have been expressed regarding the number of firms and the number of jobs that might be affected by a change. With this approach, as indeed with the single supplier concept, many of the existing firms could still go into partnership with their current van line parent, a new entrant, or a new entrant and their van line concurrently. I say many - not all. The major reduction in government - mainly DND - business would have affected the number of existing companies in any case. All in all we believe we have a good combination with this approach.
[English]
Mr. Chairman, I would like to thank you for the opportunity to have addressed you and the committee on this matter.
This afternoon I am joined by Colonel Jim Stewart, the director of transport and movements; by a member of his staff, Lieutenant-Colonel Bill Legue; and by Ms Debra Shilson, who represents the policy aspects from our personnel group at headquarters. Later, of course, we'll be pleased to respond to your questions.
The Chairman: Thank you, Mr. Fischer.
We will have an opening statement from Mr. Addy, du Bureau de la politique de concurrence.
[Translation]
Mr. George Addy (Director of Investigation and Research, Bureau of Competition Policy): Thank you, Mr. Chairman.
[English]
It's a pleasure for me to be here today. To my knowledge, this is the first time a director of investigation has appeared before this committee.
Accompanying me today are Mr. John Grant, who is a case officer in the criminal branch of the bureau; and Mr. John Bean, who is division chief in the criminal branch of the bureau.
Given that it's the first time I've been here, I'd like to spend just a very brief moment outlining what the Competition Act is all about and who the director of investigation is.
I've circulated a statement, Mr. Chairman, and I'll essentially be hitting the highlights of that document in my remarks.
The Competition Act itself is framework law. It is not designed to regulate industries. It does not make day-to-day decisions on behalf of any industry participants. It sets the framework: the rules or the boundaries within which supply and demand decisions are met by market participants. Our role is essentially one, if I can use the analogy, of border guards. As long as the activity is taking place within the bounds set by the act, the marketplace is allowed to operate freely.
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The essence there is that we do not consider ourselves, and the act does not contemplate, a system of regulation, but rather framework legislation.
[Translation]
The Act includes both criminal offenses, such as price-fixing and ``reviewable'' civil matters, such as abuse of dominant position.
If, following an investigation, the Director concludes that criminal activity has occurred, the evidence of criminal activity is referred to the Attorney General of Canada for consideration of prosecution before the criminal courts. With respect to breaches of the civil provisions, the Director may apply to the Competition Tribunal for various remedial orders.
With respect to typical criminal practices, the Act provides a variety of penalties including fines and jail terms.
[English]
In addition to the enforcement responsibilities, the director also has responsibilities as a competition advocate. That responsibility is discharged in two fashions. The first is formally, by virtue of two sections of the act, sections 125 and 126. By virtue of the first, the director has a statutory right to intervene before federal boards, commissions, and tribunals to bring to a board's attention competition issues or competition components to the issues those boards or agencies are dealing with. A good example of that would be our interventions frequently before the CRTC. There's a similar provision for provincial boards and agencies, but that is with the permission of the provincial board or agency. The same type of function is fulfilled by the director's office in that case.
The second means of advancing the cause of competition, if you will, is more informal. It takes place by and large within the public service by interdepartmental committees at that level. As policies are being developed, we are frequently consulted to provide advice and consulted on what the competitive and market implications of one policy direction or another may be at the officials level as policies are being threshed out within various departments.
Those are basically the two streams of advocacy we pursue. In dealing with the household-moving services issue, it's a bit of the enforcement hat in relation to the prohibition order and the informal advocacy hat within the confines of discussions at the interdepartmental level.
[Translation]
I will if I may talk about cases that are of concern to you today. After a lengthy investigation in the late 1970's and early 80's, the five major van lines operating in Canada were charged with conspiracy to fix prices under the predecessor statute to the Competition Act, the Combines Investigation Act.
The van lines subsequently pleaded guilty, and in 1983, the Supreme Court of Ontario fined them and issued a prohibition order.
The conspiracy among the van lines was effective in part because all five van lines required that their affiliated carriers not deviate from the prices set by the van lines. Therefore, one of the key objectives of the 1983 order was to enhance competition in the market by providing carriers with the discretion to set prices and product mixes independently of their affiliated van lines.
[English]
Since the issuance of the prohibition order in 1983, both industry participants and the IDC have discussed the implications of the order on industry practices with the Bureau of Competition policy and my predecessors. More recently, some firms in the industry have expressed concern that the provisions of the IDC tender restricted entry to the bidding process and limited the ability of carriers to access the government's moving service business. There were also concerns that some provisions of the tender could induce the van lines to breach the provisions of the order.
.1555
All of this is consistent with the issuance of the order and the preoccupation of those subject to that order. It is an ongoing court order, and it would give rise to contempt proceedings if it were violated. It's a quite legitimate concern that they not be inadvertently put in a position where they'd be contravening the terms of that order.
In 1994, in response to these concerns, we undertook a detailed examination of the government household goods tender process as it existed at that time to determine if it raised issues under the act or the prohibition order and to provide advice to the IDC on the competitive implications of their tender. I'd note that this was not a formal inquiry.
I underline that, Mr. Chairman, because the act provides that certain statutory powers are attached to formal inquiries. This is a pre-inquiry initiative; what we refer to in the jargon, if you will, as an ``examination''. Inquiries involve statutory powers such as search and seizure and compulsory testimony. Our examination in 1994 was not a formal inquiry.
The outcome of that process was a report we provided to the IDC in August of that year, 1994, which noted a number of conclusions and offered a number of suggestions or recommendations that in our view were designed to make the tender process more competitive and reduce the possibility that the tender provisions could indirectly induce a breach of either the act or the 1983 order. The report was subsequently released under the access to information process and I think it has been made available to the clerk. If not, we can make it available.
In summary, the report concluded that the IDC tender requirements of the day tended to inhibit competition among incumbent bidders, reduce access to the bidding process for potential new entrants, and limit the ability of approved carriers to provide service to IDC except through the van line with whom they were affiliated. The requirements restricted the ability of carriers not currently providing service to the federal government from becoming approved suppliers.
I draw your attention to two of the report's major recommendations. The first was IDC's allocation-of-business formula, which Lieutenant-Colonel Fischer referred to a moment ago. It was our recommendation that this formula be adjusted to create a greater incentive for people to bid low and essentially gain a greater share of the market.
The other recommendation was that the exclusivity requirement be terminated. The exclusivity of the rules of the IDC tender were viewed by us as increasing carrier dependence on van lines in the acquisition of this business. Independent, non-affiliated carriers in addition were excluded from obtaining access to the federal government business.
The IDC responded very positively to those recommendations and adopted some in their 1995 tender process. They have indicated, as you've just heard, that further consideration is being given to some of the other recommendations in the future tenders.
Lastly I'd like to underscore for the benefit of members that the IDC has been cooperative with the bureau throughout this process. I think it's an indication of the benefits we can achieve through the informal advocacy process.
Thank you. I'd be more than willing to respond to any questions. There may be some I'll defer to my colleagues, who are more familiar with the intricacies of the tender documentation itself.
[Translation]
The Chairman: Thank you, Mr. Addy. Do you have questions, Mr. Fillion?
Mr. Fillion (Chicoutimi): I want to thank the two witnesses for enlightening us about this case.
My first question is the following: Did you consult moving companies to develop your new policy?
LGen Fischer: Yes, Mr. Fillion, absolutely. We have had talks with industry representatives.
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Mr. Fillion: How many companies does that represent approximately?
LGen Fischer: We have to distinguish between what we call in English van lines which are traditionally companies such as United and Atlas. In total, there are...
Mr. Fillion: Four, five?
LGen Fischer: There are four. There are three other companies involved in this case. During the last 12 months, we've had talks with these representatives from industry.
Mr. Fillion: Have you had talks with each of these companies or with an association representing them?
[English]
Colonel J. Stewart (Chairman, Interdepartmental Committee on Household Goods Removal Services): We discussed it with the van lines that represent all of their affiliated carrier agents, and we did that largely because it's the van lines we do business with. We do not do business specifically and separately with each of the 800 carriers that are currently on the government list of approved carriers. So we dealt with the corporate entity called the ``van line'' as well as the corporate entities known as ``move management companies''. They are the major players in the Canadian household goods moving business.
[Translation]
Mr. Fillion: On page 2 of your document, Mr. Fischer, before the corrections, it is indicated that the system used from 1987 to 1992 was a rotation system which had been cost effective for government.
Then you considered having a single supplier. After rejecting that option, you decided to have three carriers who would get a percentage of contracts proportionally to the lowest bid.
Why were you willing to abruptly reject the first system which helped you save several million dollars?
LGen Fischer: The system we propose for moves in 1996 involves four suppliers, not three, and we are convinced that it will afford the government greater savings than the system we have used these past years, especially this last one.
I will now give the floor to my colleague, Colonel Stewart, who will explain this issue in more detail.
[English]
Col Stewart: The first system you referred to, sir, was the system we used until the change we're about to make now. It did not provide a sufficient level of competition. What I mean by that is the process by which we allocated our business to the industry essentially locked in existing industry business shares of the government moving business. While we did have a program called a ``performance improvement program'', which we instituted to try to allow existing bidders to get more business, it was not successful. So what we essentially have is locked-in business shares that have not changed appreciably for many years.
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If I can go one step back, prior to 1993 the interdepartmental committee allocated its business to carrier agents across the country based on the number of carrier agents that were located in each location where we did business. So the more carrier agents any van line had in that particular location, the more business it received.
In 1993 we changed the way we did business by contracting with the van lines instead of the 800 separate carriers. That then required the van lines to go out and offer the business that they won through the bidding process to their affiliated carrier agents. They continued to allocate the business based on the way in which the IDC had allocated it in the past.
When we instituted the change in 1993, we were hoping that in fact the industry would not do that, because one of its side effects was to perpetuate what we have all come to realize is an overcapacity in the industry. There was an overcapacity in the industry because the number of government moves over the last four years has decreased dramatically. In fact, between 1985 and 1997 they will have been reduced by over 50%.
So we had a business system that essentially locked in business shares to the existing players in the game. What we will gain by changing the system is that in fact we will enhance or increase the level of competition.
For the bids that were received for our business that we conducted this year, in the lowest bid we had an 8.8% reduction from the previous year. But of all of the eight bidders, we had only one who had a reduction below the previous year's tender. All of the rest ranged from 1% to 8% above the previous year's tender.
The difference between the lowest bidder and the second-lowest bidder was $8 million. The difference between the lowest bidder and the highest bidder was $16 million; and $16 million on an $85-million business volume is very high.
By moving to a system in which we will increase the level of competition - in other words, we will offer a significant incentive of 40% of the business to the winner - we will introduce more aggressive bidding.
In the previous years, where we essentially carried on with the entrenched levels of business allocation to industry, we were not getting this level of competition. We were not getting aggressive bidding. Why would you bid aggressively if you knew that even if you weren't the winner you would continue to get pretty much the same slice of the business as you'd been getting in the past?
If I can offer an example, you might find it interesting to note that the van line that traditionally over the last ten years - at least to our recollection - has had the largest slice of the government business has never been the lowest bidder.
So we are introducing a program this year that will increase the degree of competition by offering a 40% incentive to the winner - and that's a significant incentive - but at the same time we are going to be offering a sliding scale of incentives to the next three lower bidders that come in.
I realize that was a long response to your question, sir, but I think the process we are proposing is one that will increase the level of competition.
[Translation]
Mr. Fillion: Can you give us the names of those four suppliers? Can you also tell us about the impact that these suppliers might have on local and regional carriers, on small businesses?
[English]
Col Stewart: We don't have the names of the four bidders, because we have not yet gone through the acquisition process. We have not released our request for proposals and therefore have not completed the process. So we won't know who the four are.
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But four is a workable number for us to deal with. It still gives the current community, at least of the major companies, an opportunity to continue to work in it.
[Translation]
Mr. Fillion: I will rephrase my question. To how many suppliers do you send a request for proposal?
[English]
Col Stewart: We had only eight who decided to bid. Many more could have bid, but only eight decided to bid. We think with this process we will attract a greater number of bidders than we did with the previous process.
[Translation]
The Chairman: All right, you can answer the question.
[English]
Col Stewart: As to how it will affect the local carriers, I think the biggest effect will come from terminating what we call the ``exclusivity'' clause. The exclusivity clause in our current tender says if you want to participate in the government's moving business, you must be tied to an existing van line. Even with the existing tender we have, we had a situation this year where one of the four major van lines came very close to not being one of the six winners. That would have meant every carrier or agent affiliated with that van line, all across the country, would not have had access to the government's business.
By our removing the exclusivity clause, and it is consistent with the prohibition order, carriers will therefore be free to offer price and product anywhere within the market where they feel they need to do that. In that way it maximizes the opportunity, notwithstanding that it is in a diminishing business-volume base and in a diminishing market, for that local carrier to do business with someone else. We should not, I believe, penalize a carrier who is affiliated with a van line that may not have been able to put a good enough bid together to be one of the winners.
I have one other point I would like to raise. The relationship between a carrier agent and its van line is a contractual business arrangement. As chairman of the IDC, I am of the view that it is an unwarranted intrusion into how business does business. We should not be telling businesses how they should go about providing services to us.
The Chairman: Mr. Abbott.
Mr. Abbott (Kootenay East): I wonder if you could identify for me the function Randall McCauley would have had in December 1993. What would his function in the Department of National Defence have been? Would you have any idea? He had signing authority for the Minister of National Defence.
LGen Fischer: He's one of the special advisers to the Minister of National Defence.
Mr. Abbott: In your presentation today, at page 4, you went on at some length that the IDC evaluation of the concept concluded that while the potential for dollar savings exists, there are insufficient grounds for introducing such a major change at this point. Then you went into the matter of using the sparse data available to make reasonable projections, your second point being that implementing such a major change without some kind of objective validation of data and rationale.... You were saying you had insufficient data.
It's my understanding that under the letterhead of the Minister of Supply and Services, dated October 15, there was a notice concerning a move-management and audit system announced by Kim Campbell. She announced that two pilot projects would be initiated by GSC for GSC-controlled moves. These two four-month projects were to represent the forerunner of a government wide move-management system. Then she goes into quite a bit of detail.
Perhaps I'm uninformed, but it would seem to me a lot of the detail you are saying is unavailable at this point, in 1995, might have been available if this had been pursued in 1993. Certainly there appears to be a parallel here.
So a decision was made, and signed, I might say, by the Minister of Government Services, by the Solicitor General, and by the Minister of National Defence.
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I wonder if you could offer an opinion as to why the defence minister on December 9, 1993, on the Minister of National Defence letterhead, signed for the minister but signed by Randall McCauley, would have said:
- To begin with, I have determined that the actions of former ministers in dissolving the IDC were
not appropriate; it was not within their competence to do so.
It would appear as though the original announcement would have provided the information that you wanted, starting three years ago, yet when there was a change of government, it would appear - I'm just suggesting how it appears - as though the people within the department simply went ahead and rescinded this previous decision that probably would have been good for your exercise and the reason why you're saying you can't go ahead with these things.
I wonder if you can help us understand this.
LGen Fischer: Yes, I'll try, Mr. Abbott. I don't have the benefit of the correspondence in front of me, and my colleagues will, I'm sure, come to my rescue if I'm going down the wrong path.
I believe the letter that McCauley signed referring to a decision made by the previous government specifically referred to the abolition of the IDC, a decision that was taken.... I don't remember the exact date, but I think the letter McCauley signed really said in effect that the IDC could not be abolished at that time under those circumstances. It was not in reference to the specific point you made earlier about the introduction of automation in this business. That is a separate issue, which we can certainly address, but the McCauley letter you read to us was in reference to a ``decision'' to abolish the IDC.
Lieutenant-Colonel Legue, who was involved at the time, might be able to help me put a little bit of information around that. Again, I don't have the letter in front of me.
Lieutenant-Colonel William Legue (Member, Interdepartmental Committee on Household Goods Removal Services): That's essentially correct, sir.
As well, the entire letter involved a directed trial to two firms. The PCO felt that also was not within the competence, as well, to do.
Mr. Abbott: I'm sorry -
LCol Legue: That involved move management, and the tender we're talking about is for transportation management, the actual provision of the van line services: the packing, loading, transportation, unloading, unpacking.
Mr. Abbott: So was Randall McCauley saying on behalf of the minister that the competence of the current defence minister is a greater competence - I believe that's the word you used - than the competence of the former Minister of Government Services, the Solicitor General, and the previous Minister of National Defence? Is he saying that the new minister's competence is greater than the other three ministers' competence? That's what I'm reading here.
LCol Legue: I couldn't say.
Mr. Abbott: It seems rather unusual to me.
I suggest for your consideration that, although this particular letter referring to the competence of previous ministers is out on the letterhead of the Minister of National Defence and is signed for the Hon. D.M. Collenette, it is not signed by the minister, and I seriously question that particular statement in this letter.
Can you understand why I'm having a bit of difficulty here? How can today's Minister of National Defence - not even under his own signature, I might say - be more competent than the other three ministers, particularly with one of them being a former Minister of National Defence?
LGen Fischer: I would sincerely like to be able to shed some clarification on this issue,Mr. Abbott, but if we could have the opportunity to review the correspondence....
I have a vague recollection of the issue, and I think there is some confusion, certainly in my mind. In the last days of the last government there was a direction that we embarked on in a trial with specific direction to specific firms. It was that direction that Mr. McCauley, on behalf of the minister's office, with the benefit of considerable consultation with the Privy Council Office, had determined was not a binding direction. I'm certainly not in a position to speak for Mr. McCauley, but with the benefit of reviewing that correspondence and speaking with McCauley I think we can reconstruct the events and give you some rationale for what appears to be some confusion here.
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In your question you did originally link this to a comment I made that we have chosen not to proceed to a single supplier in this business on the basis that the data we have at our disposal are not reliable enough. The data we're referring to are not data that relate to the business transactions of our department or the rest of government. They have to do with data we would find from Statistics Canada on the industry at large, which Statistics Canada itself has told us is highly unreliable. So rather than make a rather significant decision that will impact on this industry on the basis of information that is marginal at best and such that the custodians of that information tell us to proceed at our own risk.... That is the significance of my remarks this afternoon.
About your point on Minister Campbell's statement at the time, that we would like to embark on a project to put in place systems to allow us to capture data internally, that remains very much on our agenda. It is in fact in progress. We have projects that are in train, and plans in the mill, to provide that internal ability to track this business internally. The point I made this afternoon related to industry data in general.
Mr. Abbott: Thank you, General.
Just one quick last question. While we're dealing with this letter that was dated December 9 to Scott Baird, vice-president of Corporate Moving Services, another rather curious thing in the letter is on page 2, where he states ``The firm of Peat Marwick Thorne was engaged to precisely determine in-house costs''.
In what appears to be the relevant Peat Marwick Thorne document, in their ``Notice to Reader'', considering that they have said they were engaged to precisely determine in-house costs, they say:
- The Cost Reconciliation Summary and related schedules are based on information presented by
management. We have not audited, reviewed or otherwise attempted to verify the accuracy or
completeness of the information provided to us. Accordingly, we do not express an opinion or
any other form of assurance on the Cost Reconciliation Summary or related schedules.
LGen Fischer: I'm well aware of this disclaimer you've just cited. That was Peat Marwick's policy. That's the way they do their business, essentially saying: we proceeded with data you made available to us; from that data we drew conclusions; if you gave us garbage in, you get garbage out. I think that is what they're saying.
We would very much like to see a different statement. We didn't engineer that statement. That is Peat Marwick's position.
In my opinion, it doesn't invalidate their conclusion. They are simply saying they worked with what they got, in terms of the information.
I would like to point out, in case there may be an element of confusion here, that the report Peat Marwick Thorne did was in relation to a different aspect of the business from what we're specifically discussing here this afternoon. They were asked to look at the business case for either maintaining within government, within DND, the function of move management services, or privatizing that function. The conclusion from that activity was that it was not cost-effective.
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Incidentally, the Peat Marwick Thorne report was endorsed and validated by our internal auditors as well.
But again, I reiterate that the whole debate surrounded the business of move management services, the question of deciding who moves, where they move, and how they move, which is a function that, as a result of that, we have chosen to keep within government, within the department. We consider it to be a more cost-effective proposition.
What we are talking about here this afternoon in terms of the way ahead relates to the business of actually moving goods from A to B. The management of that whole process we have retained within government, within the department, partly based on that report and others.
Mr. Telegdi (Waterloo): I welcome this opportunity to have the witnesses with us. Let me just say that an operation that has been a cartel over a number of years, where people have been convicted of price-fixing.... Now we have the report from Combines saying that indeed there was an inducement under the present system for price-fixing. I am glad to see that changes are being made.
I want first to underline that the carriers are going to be protected. That's a very important consideration for everybody to know. The van lines, which coordinate carriers and have alliances across the country, are going to have to sharpen their pencils. If they don't, then they are not going to win. That's really the way it should be in this day and age when we in government are struggling to deal with a bad deficit and choosing which social programs we are going to chop.
My understanding is that to get the best competition, you go sole source, meaning 100%. So you get the sharpest pencils. I am concerned that 40%, 25%, 20%, and 15% does not accomplish that.
I hope that people around the table were shocked to learn that the van line that got most of the business over the years has never been the lowest bidder. That's important.
My question is to Mr. Addy of the Competition Bureau. In terms of what the allocation of business is, is this 40%, 25%, 20%, 15% split the best-case scenario that you see to maximize savings on behalf of the taxpayers and the government?
Mr. Addy: That's a very interesting question. Our position on the issue is that there is a spectrum of approaches one can take. There is what existed in the period prior to our report. There are the changes that have been made to date. There are the changes that are proposed for the next cycle. Then there's your suggestion, as I understand it: the winner-take-all, sole-source type of operation.
I agree with you that in a perfect environment the sole-source environment is the one that would generate the most competitive discipline within the market, but as I understand it - and my colleagues will amplify it, if you would like, and I think Colonel Stewart referred to it earlier - there are contractual relationships between the carriers and the van lines.
While the IDC can remove the exclusivity clause in its tender call or in its specifications, there is the issue of how you manage this transition until the carrier van line contracts with exclusivity clauses have cycled out. If you move to a sole source at the present time before that is resolved, then you might in fact be precluding a lot of carriers from combining it by virtue of their contractual ties to certain van lines.
However, grosso modo, you are right. The sole source is at that end of the spectrum, at the optimal end of the spectrum, and as I see it, there has been a progression down that road. The transition issue is one that has been flagged on this one, because the only area for exclusivity clauses isn't in the tender, but there can be contractual arrangements there.
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Mr. Telegdi: Is there transmission at the low end?
I'm concerned, though, when you say some of the carriers, because of the contractual arrangement, could be affected. My understanding was that the business would be open to all carriers.
Mr. Addy: There are two elements for the business. The government business may be available for all carriers. Whether all carriers are able to bid on it depends on whatever their contractual links may be with the van lines they're currently affiliated with. That's where I think the transition...and typically these contracts cycle. So eventually that can disappear.
But I'm saying as a transition issue...there might be a problem there. I don't know how big it is. I just wanted to flag it for you.
Mr. Telegdi: The next question I have trouble understanding is on page 2, where we're talking about the savings that have resulted. It talks about 35%; savings of $30 million.
I tried to get the researcher to find out how much money was spent on moving by the IDC and what the cost of moves was. It is something that seems to be eluding us. I wonder if in the near future you could provide the committee with a cost per move, because essentially, that is what the critical question is. We know there have been variances by volume; volumes dropping back. But I think the critical question we have to find is the cost per move.
In your report you talked about how you are just right now looking at the carriers, basically, and the van lines. Could you tell me how many people in the IDC are involved in move management; how many government personnel?
Col Stewart: Just in the move-management aspect, or in the more traditional transportation?
Mr. Telegdi: No. How many government people are involved in this endeavour?
Col Stewart: Just a moment. I have that here.
LGen Fischer: Mr. Telegdi, on your first question, we certainly will make available to the committee the information you're looking for. Presumably you want it on a per annum basis, because -
Mr. Telegdi: That's right; and how much the government spent on moves.
LGen Fischer: For about the last five years?
Col Stewart: For the entire spectrum of government involvement or management in the household goods business - that's the move-management portion and the traditional transportation portion - there are 124. These are 124 ``FTEs'', full-time equivalents; in other words, 124 full positions in government that look after that business.
Mr. Telegdi: Do you have the breakdown between the civilian and the military? If you don't, could you provide us with that?
Col Stewart: I don't have that with me, but it can be provided.
Mr. Telegdi: My understanding is that to beef up this section you're going to be asking for $3 million for computers.
Col Stewart: You're probably referring to the automated move-management system we are about to embark on developing. It's an automated system that will bring a lot of our existing systems together into one system. The newest element of that system will be electronic commerce, where we hope eventually, with a couple of exceptions, to essentially get out of the paper game.
Mr. Telegdi: It was said the previous government considered privatization of move management. My concern is we have such a shortage in the military in terms of peacekeepers and resources to do our military functions...and your armaments are bought....Supply and Services handles that. I find it curious that here we have the military doing what I consider to be not an essential military task, and I'm concerned you don't have enough soldiers in the field to do peacekeeping and what have you. Are you going to be looking at putting out move management at some time; taking a look at privatizing it or getting it out of your department so you can spend your precious resources better?
LGen Fischer: First of all I'd like to respond to your observation, confirmed by Colonel Stewart, that we are indeed trying to join the 20th century and move into the 21st quite rapidly by way of using the benefits of electronic commerce in a business where this is a very logical way to use that technology.
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When we do so, the number of people, both civilian and military, who are currently engaged in this activity - which Colonel Stewart just read into the record as being 124, of whom 106 come from our department - will be reduced by 50% by the advent of electronic commerce or automation. That's our estimate. We will then be in the order of fewer than 50 people engaged in this activity.
Concurrent with the introduction of electronic commerce, and as part of an overall strategy on which the department has embarked for some time now, I represent a matériel group that probably is the single area of DND where the most potential is for changing the demographics of the employment of the military in what have become traditional areas, where we can no longer afford, as you very correctly pointed out. I think you're going to find that in this particular activity, as we bring on the benefits of automation, as we reduce the number of people involved, the number of folks who are going to remain in this activity will for the most part be civilians.
I don't discount the possibility down the road of looking at privatizing that function. All we're saying is that we went through collectively - the industry and government - a considerable amount of effort a few years ago and came to the conclusion that it was not cost-effective to do that. In fact, it would have cost us in the order of three times more to do it on a privatized basis.
If circumstances change in the future that would convince us that it would be worthwhile to re-examine that question, then we certainly would. In fact, we are looking at every possible opportunity to do just that under an approach that we in DND call ``alternative service delivery'', which is really aimed at divesting ourselves of performing activities in this department that can best be done more economically by industry.
In this particular instance, after a considerable amount of research and verification by both an outside agent and other auditors, we concluded that this particular activity, called move management services, did not lend itself to economies by privatizing it.
To recap, yes, we're introducing automation. Automation will reduce the number of people by 50%. Most of those will be civilian, and even there no doubt there'll be other opportunities to look once again at the feasibility of privatizing that.
The indications based on the experience we had a few years ago suggest that, unless there are dramatic changes, it's not likely to be necessarily more economical to do so.
Mr. Telegdi: Consulting an audit Canada...government department seems to come to a totally different kind of conclusion.
The Chairman: One last question.
Mr. Telegdi: This is something that concerns all the members. We all have constituents and basically they're the carriers. My understanding is that business - all those folks, carriers - will be in a position such that they themselves will be able to bid on government business. I just want to make sure that is clearly understood, because that has been a point of concern amongst a number of my colleagues, if you will, and it's understandable.
Government business will be available to the carriers. The people who will lose out on it are the van lines.
Three of the ones doing the existing work are foreign owned and one is 75% Canadian owned.
Col Stewart: Just one small point of clarification. Yes, we believe that the process we are about to embark on will maximize the opportunity for the local carrier to participate in government business. It's a little bit different from having the opportunity to bid on the business.
Any carrier who wishes to bid on our business would, in response to our proposal, have to come in and prove to us that they are able to manage 15%, 20%, 25%, or whatever percent of the business. That would be the only limitation.
[Translation]
Mr. Fillion: Mr. Fischer, in different areas, time is of the essence concerning savings to be made. According to the new approach that you propose, a request for proposal over a one-year period is cost effective. You can explain that later.
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As a related question, I would like to know how this new approach can be fair, which is what you assert on the last page of your document. How can this approach be fair for all of the carriers, that is the regional and local carriers as well as the big moving companies?
LGen Fischer: As my colleague has said in his answer to Mr. Telegdi's question, the agents - there are some 800 in the country - are affiliated with one of the main van lines and will all have the opportunity to take part in the system we propose.
Mr. Fillion: Excuse me. Does that mean that all the carriers, even the regional and the local ones, will receive the request for proposal? Can it go as far as that?
LGen Fischer: The request for proposal is available to anyone.
If one of the local carriers thinks he is able to put together the required infrastructure to compete, he can do it. However, the van lines are equipped, they have the experience and the infrastructure and they are supported by local and regional carriers.
Mr. Fillion: All right. I find the one-year period very limited for a local or regional carrier because they won't be able to organize all the services needed for a period of one year only. If you had extended this period beyond one year, the local carriers might have had more opportunity to equip themselves in order to offer you their services. Not all carriers will have the capacity to do this for only one year. If this period was extended to two or three years, they could invest in their companies to meet your needs. What do you think of this idea?
LGen Fischer: If I understand what you're saying, you're asking me why we limit a request for proposal to one year instead of two or three.
Mr. Fillion: If you would extend this period to two or three years, the small carrier could invest in its company in order to offer services. However, it will not invest for a one-year period because it won't have enough orders to fill to justify its investment. What is your view on this subject? By limiting the period to one year, you prevent them from gaining a foothold in the business from the start.
[English]
Col Stewart: About the one year, we have a dynamically changing marketplace. In order to maximize the opportunity to save money for the government through reduced rates, or at very least to retard the rate at which rates might increase, we have to be in a position to capitalize on those market dynamics. Because of the rapidly changing number of moves taking place and the positioning the various companies in the industry will be making in order to position themselves to respond to these changing market forces, if we lock ourselves in for too long a period then we'll be locking ourselves into a longer time when we would not be able to take advantage of changing market conditions.
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About the ability of a local or regional carrier to gather about it sufficient resources to participate at a higher level and the investment it would have to make in that, there already exists in the industry more than enough capacity to meet our requirements, certainly, and most of the other requirements as well. So it is highly unlikely a new carrier, or a new bidder, would actually have to go and acquire - that is, buy - resources or make that kind of investment. In fact, I don't think there has been any substantial investment in long-haul trucking resources in the industry since 1989 or 1990.
So there already is an existing infrastructure out there such that if one of the regional carriers in your area felt it had the competence to pull together a large enough network to do 15% or 20% or 25% of the business, it would, with this proposal, have the ability to do that, because we have removed the exclusivity clause that ties each agent to its van line for doing government business.
The Chairman: Mr. Williams.
Mr. Williams (St. Albert): DND and IDC are the largest customer of the moving industry. Therefore you have two roles. One is to minimize the expense to the taxpayer and ensure your activity within the moving industry is not detrimental to the industry. At the same time, you must ensure you're not in collusion with the industry at the taxpayers' expense.
I'm looking at the report where you mentioned that the changes back in 1991 resulted in savings of over $30 million. Yet on page 3 you talk about the need to continue to maximize the value of the taxpayers' dollars invested in this program. It seems to me you went off the rails significantly somewhere along the way. You were able to save $30 million for the taxpayer by virtue of a change of policy that by your own admission said the carrier that did not provide the lowest bid sometimes got the largest slice of the pie.
Why do you want to move toward a single-bid contest, which seems to be your ultimate goal, when, it would seem to me, if your objective is to maintain the financial health of the industry, to split it into three or four different segments, if there are six or seven participants, would be more beneficial?
Col Stewart: I think there is a very fine line to be drawn, sir, between serving the public.... There are a number of ways, obviously, to serve the public interest, one of which is to reduce the financial risks to the government in the provision of these services, and another of which is to ensure that our business practices - that is, the government business practices - do not unnecessarily or without warrant impede industry from doing its business.
About maintaining the health of the industry, we have a requirement for a certain level of service from that industry. In the past we have been telling industry, in a too detailed way, how they should be doing that business. What we should be going out and acquiring, or what we should be asking industry to do...is we have have 15,000 moves to do during the coming year; we would like you to submit a bid to tell us how you are going to do that and what cost, what rate, you are going to charge us to do that.
Mr. Williams: But we say that you're concerned about ensuring value for the taxpayer; quality of service to you; and ensuring that your policies are not detrimental to the industry. Yet now you're stepping right in and saying even if someone bids x dollars and is the second-lowest bidder, he is going to get paid only the amount equivalent to the lowest bidder. You're requesting that the exclusivity clause be eliminated.
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You're right back into - I don't mean to use the word in a detrimental sense - collusion with the industry in telling the industry how to do its business again, which you found was detrimental to the taxpayers' interests before.
Why don't you just deal with the industry and say, ``This is what we want. This is a minimum standard''? Let's get some bids on the table and ensure that there is sufficient competition by leaving some people without any business whatsoever, and get on with it.
Col Stewart: In fact, I believe that's exactly what we are doing with this approach.
Mr. Williams: When I read your report, it seems to me that this is only a transitional situation until you get to a single-bidder proposition.
Col Stewart: We have no plans at this time to develop further the single-supplier concept. Frankly, there may well be a time - three, four, or five years from now - when the government's moving business volume will get down to a level at which only one is required.
Mr. Williams: I'm very concerned about the fact that IDC people weren't doing their job properly. They were aware of the paper carriers - I think that is the terminology you used - and they allowed a situation to develop in the past where, through collusion with the industry, the taxpayer was not getting any benefit whatsoever. I want to ensure true and absolute competition, but you are dividing up the pie so that the first bidder will get 40% and the second one 25% or 30%.
Why don't you give the lowest bidder a range, say 40% to 55%? If he's that good and his prices are that low, why restrict him to 40%? Why don't you have more flexibility? Why don't you ensure that the taxpayers' money is best protected and at the same time ensure that you're not going to kill the industry by your policies?
Col Stewart: The first thing is that if we had not had this bid reduced by 8% to cover this moving year, every bid that came in would have been over the previous year's tariff, and therefore we would have been paying more for government goods - when you consider that we had eight bidders and every single one, with one exception, was over the previous year's tariff.
With this approach, we are terminating the essentially entrenched business share that has existed in the industry for some time, because our own -
Mr. Williams: But you're going to bring in a new formula for entrenched business share.
The Chairman: Mr. Williams, one final question.
Mr. Williams: He can answer this one and I'll have one more, Mr. Chairman.
Col Stewart: In order to acquire the business share, you are going to have to be much more competitive now than you were in the past. It's no longer going to depend on the number of carriers that each van line has in each location. If you want 40% of the business - in fact, if you want any slice of the business, since we are now going to four winners from the six we had previously - then you're really going to have to sharpen your pencil. If your pencil is not sharp enough, then you could fairly easily find yourself not being one of the four.
We have a significantly increased level of competition, because in the range of the four, the van line that currently has the largest slice might not get the largest slice again. In fact, there's a much better chance that it would not than there would be if we retained the current system.
The Chairman: Mr. Richardson.
Mr. Richardson (Perth - Wellington - Waterloo): Thank you, Mr. Chairman.
You said that you saved $16 million with this contract this year because of the bidding. Or was it $8 million?
LCol Legue: It was $8 million, sir.
Mr. Richardson: Two or three things have come up, and it bothers me because I see what's happening to the forces. I see three well-qualified professionals here defending something that could be done by people learning the job on training, an OJT kind of operation. When I look at the people I know in the van line business, they don't have anywhere near the kind of investment put into your training to do the job you have. Why we're involved in this business bothers me. I know you are big operators, and it's a need.
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I'm going to ask this question. For all other commodities and services the government purchases them through Public Works and Government Services. Why is moving different? What is the requirement for this 27-year-old committee still to exist when it originally was set up to stop abuses in the local bases, abuses that have long since been corrected?
LGen Fischer: While my colleagues take a moment to ponder your question, I hope you don't have -
Mr. Richardson: I don't think you're involved too much.
LGen Fischer: - the impression that the three of us spend every waking hour on this issue; far from it.
Mr. Richardson: No, I'm aware of that.
LGen Fischer: We all have varying responsibilities. This gentleman here is probably closer to this issue on a weekly basis than either of the two of us, but that's far from his only responsibility.
I would ask Colonel Stewart perhaps to give you some insight into the IDC operation. It is not a committee that spends its time meeting. It's a vehicle that allows the government - and the membership on that committee is DND, Government Services, and the RCMP - and those three departments, as an interdepartmental committee, to ensure that the common interests of the customers, recognizing that fully 75% or 80% of them come from our department...but to recognize that the RCMP's interests are protected, and those of the rest of the government.
Perhaps Colonel Stewart could provide you with some indication of the role of the IDC and not leave you with the impression that we have a great big bureaucracy that is spending all of its time dealing with this issue.
Mr. Richardson: Would you like me to repeat the question for clarity? For all other commodities and services the government purchases it goes through Public Works and Government Services. Why is it that moving is different?
The second part of the question is what is the requirement for a 27-year-old committee still to exist when it was originally set up to stop abuses at local bases, abuses I am aware have long since been corrected?
Col Stewart: First of all, on your question about Public Works and Government Services Canada, this year we will for the first time be using the services of PW-GSC to do our contracting business.
Secondly, these services are services that are required by government. The delivery of those services has to be managed in some manner. About the move-management portion, I think we've already noted there was a public offering a couple of years ago, the result of which was the conclusion by officials, including Treasury Board, that it was manifestly less costly to retain that management activity in-house, in government, than it was to contract it out, at that time.
Secondly, when we are dealing with the second component, transportation management, we will always have to have at a military base somewhere, or a government office some place or an RCMP detachment somewhere, some organizational entity that manages arrival and departure of the member's goods for the member. There has to be some basic infrastructure. What we're doing is we're going to come up with a system that will reduce the investment we have to make in that infrastructure in order to manage those services.
So the bottom line, I guess, is that there is a requirement to deliver these services to government; that we have concluded from the studies we have done over the last two or three years that it remains a cost-effective approach to continue to execute that management responsibility within government.
Mr. Richardson: It seems to me the cost.... I'm just approximating here, with the 124 or 120 people. I'm using approximately $40,000, and therefore it is $4.8 million in personnel costs. I know the computers will be a one-time cost to speed up and track the business. I know it's a need in the forces. I'm not questioning there's a strong need, because for morale factors everything has to be neat and tidy. But it seems to me it's an add-on in this day and age.
I have one question to ask you. I don't like...it's been circulated around here. I'm going to ask this question. Collusion was discussed.
It says here - and this is a paper that was given to me, so I'm reading it - that Colonel Roach, Colonel Richardson - I don't think he's my brother - Colonel Steeles, past chairmen, all went to work for Boyd Moving, United Van Lines of Ottawa, for one year in the 1980s.
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It's a litany of things here.
Lieutenant Colonel Michael Paré left IDC to work for Central Removal Services. He currently handles both the civilian travel contract and the household moving.
Colonel Bob Mondoux, past chairman of IDC and former boss of Michael Paré, announced that he was leaving the military shortly before the civilian travel contract was awarded to Rider Travel. He looked after the military travel before and he now works at Rider Travel.
Colonel O'Brien replaced Colonel Mondoux, retired in 1993, and works for North American Van Lines in Ottawa.
Warrant Officer Andy Duchesne left IDC and went to work for Atlas Van Lines in 1994.
I don't want to go on down the list. I shouldn't leave anyone on it out, but the list is long.
There is just no arm's length here.
I don't know if you're aware of those connections, but how can these people...? If anyone was doing that with a government contract, there has to be a certain removal time-space so they wouldn't have friends in position so they could contact them.
Other people are here who I know are interested in some way or another. The list is reasonably long and I'll pass it to you.
Col Stewart: I would like to respond to that very briefly.
I am aware of a number of those. Mr. Paré, for example, who was with CRS, which is a component of Public Works and Government Services Canada, is a public servant.
Colonel O'Brien took up his duties two years after he retired from the military.
For the two other warrant officers who were involved, in both cases the issue went before the conflict of interest authorities in our department.
I have no specific recollection of the issues of the previous years with the earlier gentlemen you mentioned, but I can assure this committee that the conflict of interest rules are applied diligently in our department. Certainly, within my ken - although I haven't been with the IDC assignment very long - in researching this, in fact these conflict of interest regulations have been appropriately applied.
Mr. Hopkins (Renfrew - Nipissing - Pembroke): This question is to the Bureau of Competition policy and Mr. Addy.
Have you at any time suggested that there should be a sole-source contract policy?
Mr. Addy: May I confer with my colleagues? I was speaking in the spectrum and I don't know if you're asking if we have actually communicated that to the IDC. Is that the nature of the question?
Mr. Hopkins: Yes.
Mr. Addy: I'm advised, sir, that we have not. Our recommendation has been that a significant share should go to the winning bidder, but it has not been the sole source.
Mr. Hopkins: Are you satisfied that the removal of the exclusivity clause, as proposed by the IDC, satisfies your previous concerns?
Mr. Addy: Several concerns were identified and it is one that we are very pleased to see come about, sir.
Mr. Hopkins: To the IDC personnel, did you discuss your proposals with representatives of independent moving companies, as opposed to just the move management companies?
Col Stewart: We discussed it with the move management companies and the major van line players in the industry.
LCol Legue: The four major van lines, and Paul Arpin Van Lines, as well.
Col Stewart: Paul Arpin Van Lines, as well, which is a regional carrier on the west coast but in fact had submitted a bid to our last year's tender. We discussed it with him as well.
Mr. Hopkins: As you know, I had concern about service to families whose goods were being moved. Are you convinced that your proposal will provide good service to the families whose goods will be moved in the future?
Col Stewart: Yes.
Mr. Hopkins: To the Bureau of Competition Policy, are you convinced that this system will provide competitive bidding while at the same time providing an efficient and effective service to families whose goods are being moved?
Mr. Addy: If you're asking me if the plan as proposed is optimizing both objectives, one being market efficiency and the other being objectives that the forces and other participants might have with respect to whatever they set as their standards for service to their members, I guess the answer is yes.
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Mr. Hopkins: To IDC, how will your plan promote or discourage paper companies?
Col Stewart: We will no longer, and neither will the van lines, be allocating business based on the number of.... Certainly we are now out of the business of allocating business based on the number of carriers at any particular location. We are now just doing business with the van line.
Mr. Hopkins: And you're satisfied this system will retain the backbone of the moving industry to the capacity required from the independent carriers who are the backbone of the system? I'm taking here about the infrastructure out there.
Col Stewart: There is always a risk in any of these approaches, but we believe this will better allow the local carrier to continue to participate in the business than it would have, for example, had we gone to the single-supplier concept.
The Chairman: Thank you, Mr. Addy, Mr. Fischer, and Mr. Stewart, for coming and answering our questions.
[Translation]
Thank you.
The meeting is adjourned.