EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, June 13, 1995

.1103

[English]

The Chairman: We would like to begin our study of Bill C-82, An Act to amend the Royal Canadian Mint Act. Normally we like to begin with the proposer of bills, but we weren't able to arrange for the appearance of Mr. Dingwall this morning. Mr. Dingwall will be appearing this afternoon. Since time is of the essence, I thought maybe we would start with a couple of very interested parties with respect to this bill.

We're going to start with the B A Bank Note Company, followed by the Canadian Automatic Merchandising Association. Representing B A Bank Note is the president, David Atkinson.

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You're most welcome here, Mr. Atkinson. Please begin.

Mr. David Atkinson (President, British American Bank Note Inc.): Thank you, Mr. Chairman and members of the committee. I wish to thank you for providing my company, B A Bank Note, with this opportunity to participate in your examination of Bill C-82. I want to tell you who we are and explain the impact on our business of the government's proposal to switch from the $2 note to a $2 coin.

B A Bank Note is an Ottawa-based security printer that has been established here since 1866. We are a Canadian-owned company, part of the Quebecor Printing Group, and have been supplying banknotes to the Bank of Canada for over 50 years. We employ 200 people in Ottawa and 150 in Montreal with additional people in sales offices in Vancouver, Calgary, Toronto and London, England.

The arrival of the $2 coin has a very serious impact on B A Bank Note. We are one of the two high-security printers in this country that have been designing and printing banknotes for the Bank of Canada. A switch to a $2 coin will reduce our total business from the Bank of Canada by 33%. The current volume of work from the bank provides us with a domestic business base that has justified the investment in plant and environmental equipment as well as product and process research and development necessary for the penetration of world markets that will ensure our long-term survival. Please let me elaborate on our concerns.

My company has invested more than $20 million over the last five years in order to improve our technical competitive capability, and to respect our environmental commitment to the local community. The Bank of Canada, as our major customer, has benefited from these improved production efficiencies through higher quality and better prices. With the removal of a significant portion of this work, these investment costs would need to be spread over the remaining volumes in order for the business to remain economically viable.

To combat the rapidly advancing counterfeit threat of colour copier technology, we've invested in research and development activities, both independently and in collaboration with several of our Canadian suppliers. The Bank of Canada benefits directly from this also. A sudden reduction in business volume would require that this activity be re-examined to see if these costs could be supported by only a portion of the historic volume.

The long-term decline of volumes in our domestic market has been recognized by B A Bank Note and has been the major reason for our strategic decision to expand our efforts into the world market. Some 40% of our business volume is now in export sales to Europe, the Middle East, Asia, Africa and Central and South America. The value of these exports is currently $25 million and is targeted as our major growth market over the next few years.

We appreciate the need for the government to save money and we've been aware of the potential replacement of the $2 bill as a measure to cut costs. However, the almost immediate switch to a coin will have very negative repercussions on our business and on related businesses and sub-suppliers. As you have just heard from me, our strategy to accommodate an eventual switch to a coin is clearly defined and is already in process, but it requires a minimum of three years to implement.

Our contribution to the Canadian economy over the last five years has been in excess of $160 million, including wages and personal taxes, payments to Canadian suppliers, expenses within Canada for research and development, as well as municipal, provincial and federal corporate taxes.

We strongly urge you to take these factors into consideration and establish appropriate adjustment mechanisms in the process of transferring to the $2 coin.

Thank you very much for this opportunity to present the concerns of B A Bank Note. I'd be pleased to discuss this further with you.

The Chairman: Thank you, Mr. Atkinson. To sum up in a few words, the main message you're giving us is that conversion to the $2 coin would have a negative impact on your bottom line, at least in the short term, and you're pleading for more time. Would that be a proper summation of what you're saying?

Mr. Atkinson: I think that's a pretty good summation, Mr. Chairman. Perhaps there are additional mechanisms available, other than just looking at timing. That might not be the only one.

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The Chairman: Okay.

We're going to go to questioning.

Mr. Epp (Elk Island): Good morning, and thank you for coming here. I just want to review your presentation, because I didn't quite catch it. How many employees do you have?

Mr. Atkinson: In the Ottawa-Hull area we have 200, an additional 150 in Montreal, plus 30 more across Canada and in Europe.

Mr. Epp: You indicated that 33% of your business would be affected here. Are you telling me that 33% of your total business is printing $2 bills for Canada?

Mr. Atkinson: No. I believe I was trying to represent that it constitutes 33% of our Bank of Canada business.

Mr. Epp: In other words, your company isn't going to go belly-up just because we're going to stop printing these coins.

Mr. Atkinson: Absolutely not.

Mr. Epp: Do you anticipate having to lay off some people if this move does proceed?

Mr. Atkinson: Yes. I think if we were unable to find any other way to adjust, we would be talking about a lay-off of 30 to 40 individuals, primarily in the Ottawa-Hull area.

Mr. Epp: I don't know if you can tell me this, but I'm sure you know - and I don't know how to word the question to give you an easy out. I would like to know what it costs to print $2 bills, from your point of view. I don't know; maybe what it costs and what you charge are two different things.

We're into dicey business dealings here.

Mr. Atkinson: Mr. Chairman, please - help.

Mr. Epp: How do I word this?

Let me put it this way: what do you charge the Bank of Canada to produce $2 bills?

Mr. Atkinson: If I were to reply in some average numbers that I think would give you the right feeling, if we talk about the total cost of producing banknotes plus distribution to all of the banking centres, it would probably be in the area of 5¢ to 6¢ per banknote. Our portion would be half that.

Mr. Epp: Where does the other half go?

Mr. Atkinson: It goes to Bank of Canada costs.

Mr. Epp: Do you distribute to the different banking centres directly from your plant?

Mr. Atkinson: No, we do not.

Mr. Epp: You've talked about research and development. Have you ever studied in your R and D work whether a bill could be produced with some greater durability?

I've carried my birth certificate with me since 1939, and I still have it in my wallet. Admittedly, it's plasticized, so it lasts a little longer, but surely you can produce banknotes that are more durable than the kind we have. They wear out in a year and have to be replaced.

Mr. Atkinson: A laminated bill?

Mr. Epp: It wouldn't necessarily be laminated, but have you done any R and D work in terms of a more durable material?

Mr. Atkinson: Yes, we have, and I would like to expand a little bit. We have more than one initiative under way right now with different developmental partners, targeted specifically at the development of longer-life substrates; the material you're going to print the banknote on.

Some of these are entirely plastic and some have plastic components. I think you're going to hear about one of them from a later witness.

But we are spending a significant amount of money and time right now in the ongoing development of those types of substrates.

Mr. Epp: I want to get this straight. It costs 6¢ per note and you get half of it. It therefore costs 3¢ per note to print these babies.

If we could get a note that had a two-year life span instead of one year, what would be the cost? Would it go up 1¢?

Mr. Atkinson: Yes, that would be realistic.

Mr. Epp: I should be in business. I make these estimates just like that, off the top of my head, and I'm right.

So for only 1¢ additional cost we could double the longevity of these things; that's your guess.

Mr. Atkinson: Yes.

Mr. Epp: Why don't we do that? It would be a lot cheaper than producing all these coins.

Mr. Atkinson: The Australians, for example, already have a plastic note in circulation.

Mr. Epp: What has been their experience in terms of its longevity?

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Mr. Atkinson: I believe they are experiencing something like three times the regular note life.

Mr. Epp: Are there any significant implications with respect to security?

Mr. Atkinson: Do you mean a lack of security in going into this type of plastics substrate?

Mr. Epp: Yes.

Mr. Atkinson: No. In fact, one of the reasons we are investing so heavily in that aspect of R and D is because we believe there are additional security enhancements available by going to plastic-type substrates above and beyond what is available today in the international currency environment.

Mr. Epp: Mr. Chairman, that's about all I have at this time. I'll probably think of something for the second round.

The Chairman: We're going to go to Mr. Duhamel in a moment.

I just want to get something straight, Mr. Atkinson. You said that 33% of your business with the Bank of Canada would be affected by the conversion to the $2 coin.

Mr. Atkinson: Yes.

The Chairman: What percentage of your overall business would be affected? In other words, 33% represents what?

Mr. Atkinson: We're talking 10%.

The Chairman: In other words, 10% of your overall business would be affected.

Mr. Atkinson: That's correct.

The Chairman: I'm just trying to enter into some reconciliation. You have overall employees of 200?

Mr. Atkinson: Yes, 200 here in Ottawa, another 150 in Montreal.

The Chairman: So you have a total of 350.

Mr. Atkinson: Yes.

The Chairman: And one-tenth of your force would be affected.

Mr. Atkinson: Yes.

The Chairman: That's 35 employees.

Mr. Atkinson: Yes.

The Chairman: Okay, Mr. Duhamel.

Mr. Duhamel (Saint-Boniface): Merci, monsieur le président.

Thank you for your presentation. I just wanted to follow up on the chairman's question. That is, 30% of your business with the Bank of Canada would be affected. If I understand this correctly - and please do correct me if necessary - if you look at the $1 notes, the $2 notes, the $5s, the $10s, the $20s, $50s, $100s, etc., then the $2 bill must represent roughly one third of the total output. Is that correct?

Mr. Atkinson: Yes. I think in terms of -

Mr. Duhamel: Do you know offhand what the one dollar note represents?

Mr. Atkinson: What it did represent at the time?

Mr. Duhamel: Yes.

Mr. Atkinson: It was prior to my time, but if I were to do some quick math myself, I would think it would have been about 20% to 25% of the total volume at that time.

Mr. Duhamel: Were you doing that too, sir, at that time?

Mr. Atkinson: That's correct.

Mr. Duhamel: Did it have an impact? Do you have some historical evidence that it had some impact, or were you able to accommodate with supplementary contracts elsewhere?

Mr. Atkinson: Back in 1986-87 we recognized that the domestic market for security documents such as currencies was going to continue to slowly decline. Part of that is because of the pursuit of longer-life substrates. There is ongoing R and D still using the conventional substrates, but still they have longer and longer lives through better chemistry, better mechanics, better inks. So we expected the domestic volumes would continue to decline. As well, the Bank of Canada I think exercised a much stronger and better stewardship in their role of managing currencies over those years, to give them credit. We were called upon to print fewer and fewer notes as the years went by.

Projecting that type of trend, we decided at that time to try to preserve the life of our business by investing in equipment and personnel to allow us to penetrate the international markets so that we could replace the declining volumes in the domestic market with international volumes.

Mr. Duhamel: So you were able to offset that, at least somewhat?

Mr. Atkinson: Yes, somewhat.

Mr. Duhamel: When did you first find out that the government might replace the $2 bill with a $2 coin?

Mr. Atkinson: February of this year.

Mr. Duhamel: In your remarks, it seems to me you had indicated that you had a sense this was happening or might happen, or something to that effect.

Mr. Atkinson: Yes. It's been discussed for many years, Mr. Duhamel.

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Mr. Duhamel: Did you at any time make a formal statement to government or whomever might receive such a declaration that you were concerned because of the potential impact? I'm just trying to understand how one deals with this. It seems to me that if I were to hear that someone was about to do something that would impact on my business negatively, or positively, I suppose, I'd want to find out just what that was and just what might be done in order to introduce that change, particularly a negative one. Did your company make any formal declarations?

Mr. Atkinson: Actually, this is it. This hearing is our first opportunity to make such a declaration.

Mr. Duhamel: Would the government have known, for example, in February that its decision was going to have a potentially negative impact on your company?

Mr. Atkinson: I believe that would be a reasonable expectation.

Mr. Duhamel: You might have at that time said - and this is not a criticism - hold on, we have a bit of a problem here.

Mr. Atkinson: We did. We, as a company, wrote to the Minister of Finance at that time registering our concerns. So we did take immediate action, yes.

Mr. Duhamel: Then today is another registration of concern?

Mr. Atkinson: That's correct.

Mr. Duhamel: Tell me this if you will: what's your estimate, or do you have an estimate, as to whether or not the government will save money, and how much money will be saved, by going to the coin and not having the dollar bill? I suspect there can be some debate on that.

Mr. Atkinson: I'm not privy to any more information on that than has been available in the common press. What I read in the common press is that there will be a saving.

Mr. Duhamel: Do you believe it?

Mr. Atkinson: I think it's a difficult business case to defeat. I say that primarily because we lack the detailed information that is used to make those estimates.

Mr. Duhamel: Let me ask another question - and I'm sorry, I don't mean to be difficult, but it's an important question. Why would the government go to the coin if there was not substantial money to be saved over a period of time? Are there other reasons?

Mr. Atkinson: You're going to have to ask the government, Mr. Duhamel. I can't really speak for them.

Mr. Duhamel: Obviously you have some considerable knowledge about the subject of banknotes and coinage, and I just thought perhaps you had some insights I didn't have.

There has been some discussion as well that it might be appropriate to have coins of other denominations. I've read somewhere $5 coins, or who knows. Have you heard that?

Mr. Atkinson: It's often discussed internationally, in fact with respect to Canada. I've also read in the esteemed press that a $5 coin might be considered at some future date.

Mr. Duhamel: Is that a large proportion of your market today?

Mr. Atkinson: For my company in particular, no, it's not, but only because of the way banknote printing is distributed between the two high-security printers in Canada.

Mr. Duhamel: You share that task with another security printer?

Mr. Atkinson: That's correct.

Mr. Duhamel: If they'd chosen to do a $5 coin rather than a $2 coin, it would have been to your advantage.

Mr. Atkinson: The overall volumes are managed in such a way that we eventually split the total volumes anyway, so it would have had an impact on me.

Mr. Duhamel: What's the trend today, sir, in the world? Surely you must be watching this with some significant interest, because Canada is not your only market. You have markets across the world. What's happening in that relationship between ``paper money'' and ``metal money''?

Mr. Atkinson: In countries with higher inflation rates, the tendency to have currency devaluing at the interface between bills and coins tends to reduce the value of the currency at that interface very quickly. You tend to see those notes being either retired or transformed into coinage much more frequently than in, I would say, more developed countries that have better control over their inflation rates. The worldwide trend overall, though, is that there is going to tend to be less and less currency in the long term.

In Third World countries, there's still going to be quite a demand for currency-type vehicles for quite a number of generations. In developed countries, currency is under attack from a number of areas, not only coinage but also electronic funds transfers, smart cards, that type of thing.

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Mr. Duhamel: If I'd had time - and I take it I've run out - that was going to be my next question: the impact of electronic transfers of moneys.

The Chairman: Mr. Brien.

[Translation]

Mr. Brien (Témiscamingue): I will follow up on what my colleague said, because it's obviously the question I was wondering about.

You said that this has an impact on your company, but there are also other factors which have an impact. Particularly, I would like you to tell me if this has an impact now and what you anticipate in the future.

More and more, we are going towards electronic currency, which will obviously reduce the use of paper money. So this could allow us to use paper money already in existence for a longer period. Tell me what will be the impact. What do you think will be the impact of electronic money on your company?

[English]

Mr. Atkinson: Electronic money will have a quicker impact on us in developed countries, where we have more sophisticated payment systems, more sophisticated electronic networks, and where we will be capable of using electronic money more quickly than other countries that have not yet developed that infrastructure. I see markets that are more under attack in those developed countries and less under attack in Third World countries.

We have already taken a number of steps in looking at this type of product substitution for our own company's survival. We are part of Quebecor Printing, and in planning our business strategies we have already tried to address some of the trends in these markets. A good example of this would be that last month we opened up a new company - under Quebecor, not under B A Bank Note - in Mississauga, outside of Toronto, for the production of credit cards and smart cards; these types of ``electronic purses''.

[Translation]

Mr. Brien: Electronic money should normally ensure a better longevity for paper money and metal coins. So there is a possibility for the government to save money before the implementation of electronic money.

I would like to know if there is an alternative. If we didn't replace the 2$ note, the alternative could be to have a more durable paper money. You say you would be able to double the longevity for a cost that wouldn't be necessarily doubled. What other solution do you suggest? What is your vision for the future on this regard? Is it to keep a more durable paper money, since its substrate would be better and its use would be less important or is it to go to small denominations in metal coins and bigger denominations in paper money?

[English]

Mr. Atkinson: One of the things we are doing is investing very heavily in research and development right now in what I will call ``plastic money'', for lack of a better word. We are currently working on the development of those types of products.

They are in fact at a stage of development where this timing of the introduction of the coin is perhaps even more unfortunate for us, in that we have spent a lot of money, and our development partners have spent considerable amounts of money, in bringing those types of products to a state of readiness. It seems just short of the time necessary to have them proven in circulation and go through the final fitness-for-use testing and circulation testing so they could be offered as an alternative. We are, if you will, right at that cross-over point today where those types of products are available. I think if a little more time were available to us, we would be able to offer those as a valid alternative.

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[Translation]

Mr. Brien: If we make a more durable currency, we can use it for $5, $10 and $20 bills. From the point of view of currency buyers, that development could be interesting.

For the 2$ bill, the situation is not the same. For us, the issue is as follows: is it worth it to change the 2$ bills into coins or is it better to keep paper money? For other denominations, it is possible to get a more durable paper. I understand that the paper 2$ bills are more profitable for you, but from the point of view of the currency buyer, the government, it may be more profitable to have you do this research on the $5, $20 and $50 bills. Isn't that the solution that the governmnt should put forward: have more resistant bills for higher denominations and coins for smaller denominations? I would like to hear your opinion on this.

[English]

Mr. Atkinson: What you're proposing is a very viable alternative for future planning. Certainly we would look, as a target, if you will, for the introduction of plastic - I'll call it the next denomination - in any country that was likely to be retired because of circulation problems such as you describe.

One of the options that could be considered for the future is to look at the next target denomination and at a more durable substrate or an alternate material for that.

Mr. Murray (Lanark - Carleton): My question follows on Mr. Duhamel's question about when you found out about this change. I understand from your brief that you made a business plan based on an expectation of certain volumes of work with the Bank of Canada. I presume you had some assurances that these volumes would continue to be available and that would allow you to fund your investment program.

Bearing in mind the almost unilateral withdrawal of that expectation as a result of the $2 coin, my question is whether you have contractual redress with the Bank of Canada, and if not, what you would propose to ensure a fair outcome.

Mr. Atkinson: To be frank, there is no redress for us in the current contract. There are no guarantees of volumes; there are no mechanisms in the contract that specifically define an equation to be used should volumes change at all, let alone radically.

As for what I could propose, I'm looking for possible transitional mechanisms.

Delay of the introduction of the coin could be one of those mechanisms. That would certainly allow us to maintain the stability of our domestic base a little bit longer and allow us to complete our penetration of the international markets.

Another possible mechanism would be some way of recognizing that the current pricing mechanism we're operating under with the Bank of Canada did not take into account things such as the sudden acceleration of the introduction of the $2 coin.

Possibly we could look at restructuring the current pricing mechanism to take into account the investments we've already made that were based upon those expectations of more normal volumes.

If you look at the volumes over the past number of years, for example, in 1987 our company's portion of the printing of currency for Canada alone amounted to 516 million notes in total. The introduction of the $2 coin will complete a decline that will now reduce us to 200 million notes. Not all of that is the result of the $2 coin, but from 1987 until now we're going to have experienced a reduction of volumes from 516 million to, we expect, 230 million in this year. If the $2 coin is implemented as planned, then that would be further reduced, to 200 million for next year.

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Mr. Murray: That's quite a drop.

I wanted to ask you about your suppliers and whether there'll be a significant impact - obviously there'll be some impact on them. Are these very specialized suppliers? Where are they located, and what impact on them do you see?

Mr. Atkinson: Our major domestic supplier from the point of view of materials is Domtar, for paper; another good Canadian company. The product we take from them is used for Canadian currency as well as some of our international currencies.

This product is made in their Beauharnois mill and I believe accounts for a not insignificant portion of their production. I think I could logically conclude they're going to be in the same situation as we are: in a chain of supply where a large proportion of volume suddenly disappears. It is not totally unforecast, but the timing is not so good.

Mr. Murray: Another thing that occurred to me is that you must fund a fair bit of your R and D from revenues generated in Canada. I'm interested in your export markets and how this could impact on future growth in export markets, that you see a reduction in the amount of money available to fund your R and D. Is that not a problem?

Mr. Atkinson: It is a problem from the point of view of overall survival of the company. I'll use the word ``profitability'', and I mean that in the sense of survival today. Today we don't talk about how magnificent our returns are to our shareholders; we talk about whether we are making enough for them to put up with us and keep us in business. Certainly our ability to please our shareholders has a direct bearing on how much money we are allowed to continue to invest in research and development and in new equipment. If our parent companies don't feel there's a good long-term future for us, we don't have a long life ahead of us.

As a company we've committed ourselves to going into the international market. We've seen this trend. Like all businesses, we've had to accept risk; and we've accepted the risk. We've invested in people, in equipment, and in R and D. So far we've been reasonably successful in achieving our goals in that international penetration.

In 1987, for example, only 1.5% of our total revenues came from foreign products and foreign markets. Today 45% of our business is in foreign markets. From a Canadian perspective I think that's a tremendous success. But it is at risk.

The Chairman: Mr. Atkinson, when people are facing a loss of business or jobs they generally don't turn philosophic. But there are inherent risks in the marketplace. Is that what you're facing now, those inherent risks that have come full face?

Mr. Atkinson: Perhaps it's a matter of degree. We've seen for a long time that the domestic markets were going to decline. But I think neither ourselves nor our customers nor our suppliers could envision this decision happening as quickly as it did.

The Chairman: Yes, it's the rapidity of it all.

Mr. Epp: You mentioned there are two high-security printers in Canada. I won't ask you to identify the other one - I don't know who it is - but what percentage of the business do you get for the Bank of Canada versus their percentage?

Mr. Atkinson: You'd have to ask the bank to confirm this, but my perception is that it's about fifty-fifty.

Mr. Epp: Do you compete? Do you submit bids? Is that how this is done? How do you get your contracts?

Mr. Atkinson: Until now we have not bid in an open-market concept. What has happened is that we have shared our cost structures with the bank and the bank has indicated what it would be willing to pay us.

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Mr. Epp: So you make a deal, and the other company makes some deals on some notes, and you do others? How does that work?

Mr. Atkinson: We do this simultaneously, and the bank gets to look at the cost structures from both companies. Then they make their decisions on that basis.

Mr. Epp: So the decision is made by the minister, then.

Mr. Atkinson: I wouldn't know that. I wouldn't know who the actual decision maker would be. I deal with the head of banking operations, Mr. Bennett.

Mr. Epp: Do you have clients in Canada other than the Bank of Canada?

Mr. Atkinson: Not for currency, certainly, we wouldn't.

Mr. Epp: No, but you do other kinds of -

Mr. Atkinson: The high security product range, if you will, includes stocks and bonds, tax certificates -

Mr. Epp: So you do things like that as well.

Mr. Atkinson: Yes. Passports is another good example.

Mr. Epp: I want to ask you about research, and whether you have done any customer preference surveys. We know the government tried some, and from our information, it has not been very well handled.

I wonder whether you, in order to bolster your business, have also gone out to the public with polls or research of that type to find out what Canadians prefer in terms of currency? Would you be able to come up with some proportion or number that says, for example, 83% of Canadians prefer to carry a bill versus a coin? Have you done any research like that?

Mr. Atkinson: No, we haven't.

Mr. Epp: Maybe you should, because if you could come to this committee and you've done this research and there are so many more people that would like to have bills, then you'd wind up printing them and the coin company wouldn't get the business.

I'm giving you some free business advice here. I don't know whether that would be useful or not. It would be useful, from my perspective, to know that. I really am not sure we can trust the current statistics we have on preference.

Mr. Atkinson: If I may, I think your point is very valid and perhaps we should have done that. We should have done our own surveys. We've made a commitment to be a world class company, so we tend to look at things from an international market perspective. So one of the things we're doing internationally is to try to get out there and use Canadian niche expertise to be successful in the international market.

Part of the base for that is our Bank of Canada business. The Bank of Canada has been a good base for us and a respected customer for many, many years.

The people we're competing against internationally are often much more vertically integrated than we are. They offer a full range of products and services, including banknotes and in many cases coins as well. This might be a good model for Canada to follow.

I think of that just based on you talking about coin people versus currency people. Perhaps that shouldn't be the way in Canada. If we are to be successful and thrive, we have to be successful as a Canadian entity in an international market. Perhaps for us to be fighting at the interface doesn't make a lot of sense.

The Chairman: Last question.

Mr. Epp: In other words, if we wanted to get the most efficient way of giving us, say, a $2 currency - whether it's coin or bill - and in view of the fact that right now your business is being threatened, would it be an appropriate time and would you be willing to come voluntarily to the government and say, look, we have these old raggedy $2 bills that last one year. We'll undertake to give a guarantee that, on average, they will last two years instead of one year, and we will give them to you for this price.

Obviously, I think you'd probably have to increase your price, although not necessarily so. Sometimes you can bring in new materials that in fact are even less costly but are better.

Would you be willing to do that? Have you been asked to do it? Would you just voluntarily do it so that we could put that into our decision-making loop here?

Mr. Atkinson: I can speak for my own company. I'm sort of following your train of thought along the lines of more durable substrates, plastics, this type of thing. Certainly that's a viable alternative for us, and we would be willing to do that.

The Chairman: Okay, that's it. We're going to have to wrap this up by noon. We have four members to hear from on this side. We'll have to limit each of you to about four minutes.

Ms Chamberlain.

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Mrs. Chamberlain (Guelph - Wellington): I'll do mine in less time.

Mr. Atkinson, you're a totally private printing company. The government doesn't have any shares or run you in any way.

Mr. Atkinson: No, it doesn't.

Mrs. Chamberlain: So you're totally private?

Mr. Atkinson: As much as any customer runs a supplier, yes. All of our customers run us, but they hold no equity position in us.

Mrs. Chamberlain: I'm interested in your three-year plan. It's only to increase penetration in foreign markets, etc., as you suggested. There's nothing more there other than just to get a foothold somewhere else to allow you to have that business flow somewhere else. Is that basically what you're looking at?

Mr. Atkinson: No, our strategic plan is actually quite - how shall I call it - multivalent. It has, I'd say, a dozen simultaneous tactical issues in it. Many of them are targeted at either increasing share in existing markets or penetrating markets we aren't already involved in or introducing new products, as well as establishing strategic partnerships or alliances with some of our people in our supply chain.

We also look at acquisition issues. I mentioned in passing looking at the relationship between ourselves and the Canadian Mint as far as a Canadian solution goes. It's certainly much more than just trying to make more sales.

Mrs. Chamberlain: My final question is a really hard one. I don't sense from what you're saying that you quibble with the idea that something different is in order for the $2 bill. Have I misread you on that?

Mr. Atkinson: Could you say that again?

Mrs. Chamberlain: It's the idea for something that has a longer life expectancy. I didn't sense through your dialogue that you were really negative on that; you did feel that the $2 bill only having a life expectancy of one year is pretty short.

Mr. Atkinson: As far as its own durability, you mean?

Mrs. Chamberlain: Yes.

Mr. Atkinson: Well, the durability of the $2 bill has more to do with how much we use it and the soil that comes off your fingers and your hands. It's really more of a physical and chemical issue than anything else.

Mrs. Chamberlain: What I was referring to was the common sense route of perhaps looking at something more durable. I don't sense that you were really in opposition to that.

Mr. Atkinson: Not at all, no. It would validate a lot of the money we're spending on R and D.

The Chairman: Thank you.

Mr. Bryden (Hamilton - Wentworth): How many new $2 bills are put into circulation each year? Can you give me a figure?

Mr. Atkinson: No, I can't, because what goes into circulation is controlled by the Bank of Canada. I can tell you what we print.

Mr. Bryden: All right. What do you print a year?

Mr. Atkinson: Our portion is about 100 million notes.

Mr. Bryden: And the other company prints about the same number, doesn't it? So that's 200 million notes a year.

If the $2 bill were eliminated altogether, would there be an increased demand for $5 and $10 notes, other denominations?

Mr. Atkinson: We would expect a small increase, yes.

Mr. Bryden: Just a small increase? Okay.

The Americans, and I believe the Albertans, get on very well without a $2 note altogether. Why can't we get along without it?

Mr. Atkinson: I don't know; I use $2 bills a lot.

Mr. Bryden: But you're in the field. Why do the Americans and Albertans manage without a $2 bill? Why is there this necessity for Canada to have a $2 bill?

Mr. Atkinson: Unfortunately, you are outside of my area of expertise now.

Mr. Bryden: Is it possibly because the Americans and Albertans use $5 and $10 bills in lieu of $2 bills and more loonies, perhaps?

Mr. Atkinson: Perhaps. Again, unfortunately I don't know those circulation statistics.

Mr. Bryden: You wouldn't be able to supply me with any estimate on what sort of increase in $5 and $10 denominations there would be were the $2 bill eliminated altogether?

Mr. Atkinson: We have not done any studies on that matter at all.

Mr. Bryden: So from your point of view, there's no way of my knowing what the cost savings would be if we just eliminated it altogether.

Mr. Atkinson: Not based on my data.

Mr. Bryden: Thank you.

[Translation]

Mr. Bélair (Cochrane - Superieur): Mr. Atkinson, in your initial presentation, you alluded to the fact that it would take about three years to introduce the new $2 coin. Did I understand you correctly?

Mr. Atkinson: Yes.

[English]

Mr. Bélair: Why would you say that?

Mr. Atkinson: When I talk about three years, Mr. Bélair, that is what I think we need to make sufficient progress in our own international penetration.

So I'm not suggesting that it would take three years to phase in a $2 coin, I'm asking.

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[Translation]

Mr. Bélair: You also mentioned that you get some 35% to 40% of your revenues from foreign markets. A little bit earlier, you also mentioned that you had only some 30 employees outside Ottawa and Montreal, in Canada and abroad. How do you reconcile those two numbers? It seems to me disproportionate in as much that the vast majority of your employees are based in Ottawa and Montreal.

[English]

Mr. Atkinson: If we look to the $2 coin representing 33% of our Bank of Canada volume on the one hand, it represents about 10% of our total production volume. If one was to take a simple linear approach to that, 10% of our employees is 30 to 35 employees. It would be pretty well a direct lay-off, because this would affect pure production volume, and we staff ourselves very tightly to our production requirements. So if we lost 10% of our volume, then 10%-plus of our floor employees would be laid off.

Mr. Bélair: It's your international markets I am interested in, because as you have mentioned yourself, there is some trend to revert to coins. You say you are making good business on the foreign markets, so how do you explain that?

Mr. Atkinson: How we are able to find business in the international markets?

Mr. Bélair: Yes.

Mr. Atkinson: I don't think it has that much to do with the note/coin interface, Mr. Bélair. It is really more a question of quality, delivery and price in the foreign markets. We have been able to build a competitive animal here in Canada. We are still in the process of completing the growth of our company as a competitive entity, because we know our domestic volumes will continue to fall.

So we are using this time as an opportunity to solidify our position in the international markets. That process has had some success, but it is by no means complete yet.

Mr. Bélair: When the alloy is produced, the Royal Canadian Mint will also try to sell abroad the technology surrounding the minting of the coin itself. At the same time they are giving you contracts to print Canadian currency, they will be in competition with you in the foreign markets. How are you adjusting to that?

Mr. Atkinson: Well, I tried to address what were my thoughts on that a little bit earlier. Some of our competitors, our major competitors, in fact, on the international and world markets come to their customers with both coins and currency in hand. So those competitors don't care any more whether the customer wants to have coins up to here and then notes up to here in the ranking of their monetary units. To me, from an international business point of view, it would make some sense for us to find a way not to compete in a similar way in the international market.

The Chairman: Thank you, Mr. Bélair.

We will finish up with Mr. Bellemare.

Mr. Bellemare (Carleton - Gloucester): I am interested in your foreign contracts and the fact that your company is doing well. If we pull out a large number of contracts from you, would that affect negatively? Would there be a very big impact on your company as far as foreign markets go, to the point of putting you at risk?

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Mr. Atkinson: If I were to take this trend to its perhaps longer-term conclusion, Mr. Bellemare.... I will take us back seven or eight years. One of the main reasons we were able to penetrate these international markets and make our first sales was based on the credibility we had because we were a printer of Canada's currency, a well-respected currency in the world.

If this trend were to continue in Canada and the volumes continued to fall to the point where one printer or the other was no longer printing Canada's currency, or if it were thrown to the open market and we were unfortunate enough to lose the privilege of printing Canada's currency, we would be in a very difficult position in the international market.

Mr. Bellemare: Would it be similar to the aviation industry in Europe? I know they use the word ``subsidized'' by different countries, mainly France, such as the Airbus example. Because of all these contracts from these European governments, it would appear Airbus has taken over the American aviation industry.

Could a similar effect occur to you where we pull out, and you then of course are blanked out? If we are in the revenue business in Canada, would we get less tax because there is less money made by a Canadian firm?

Mr. Atkinson: Certainly if we were no longer printing Canada's currency as a company, we would have a very difficult time with credibility in the international marketplace. I would expect the first thing our competitors would do - especially whatever competitor ended up printing Canada's currency - would be to go customers and tell them that we don't even print the money for our own country, so we can't be any good.

Mr. Bellemare: Which would be the next note to go? Would it be the $5, the $10, or the $20?

Mr. Atkinson: To coinage?

Mr. Bellemare: To coinage.

Mr. Atkinson: Hopefully, none, but from our perspective, it would make sense that the $5 note would be the next one threatened.

Mr. Bellemare: Do you have any knowledge about the downside of the $2 coin, not on the financial impact on your company but about the negative side of the coins - physically speaking? As a type of enemy of the coin, you probably know some of their weaknesses.

Mr. Atkinson: It is more behavioural than anything else. I think it is the consuming public's attitude to coins versus currency that is really the only arguable issue.

Mr. Bellemare: Thank you.

The Chairman: Thank you, Mr. Atkinson. We appreciate your spending this time with us.

We will call on the next witness, Dan Stewart, Ontario regional president of the Canadian Automatic Merchandising Association. With him is Cynthia Davenport, managing director.

Welcome to both of you. Who will begin?

Ms Cynthia Davenport (Managing Director, Canadian Automatic Merchandising Association): I will be reading our presentation. Then Mr. Stewart and I will be receiving questions from all of you.

The Chairman: Is your text in both languages?

Ms Davenport: It has been prepared in both languages.

The Chairman: Good. Thank you.

Ms Davenport: On behalf of Mr. Stewart and myself, thank you very much for allowing us to be here today.

The Canadian Automatic Merchandising Association, also known as CAMA, is a national business association representing companies and individuals engaged in the vending industry as owners and operators of vending machines and equipment, and as product suppliers.

In our brief today we will present our views on the impact of this legislation on the vending industry. Although today's session is meant to concentrate on the $2 coin, CAMA is unable to respond to this issue in isolation. For the vending industry, the $2 coin and the change of metal content of coins must be dealt with simultaneously.

This association has not taken a stand for or against the $2 coin. Choosing to use or not to use a $2 coin is a decision owners and operators of vending machines will have to make on their own by weighing the merits and drawbacks of including $2 coins in their coin set.

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The only stand this association has taken on the $2 coin is that, first, it be introduced to the public concurrent with the introduction of the new metal coins; second, the introduction of these coins, both the new metal and the $2 coin, be delayed until April 1997, or at the very least, January 1997; and third, the diameter of any of the new coins not exceed 28 millimetres.

To introduce the $2 coin and the new metal coins according to the current proposed schedule will make it impossible for a large part of this industry to respond in a timely manner, especially in light of the fact that manufacturers of coin mechanisms have yet to receive production-quality samples of the $2 coin or the new metal coins. We have been told production-quality $2 coin samples will be available this week. There is still no word on when coin mechanism manufacturers will receive production-quality samples of the new 5¢, 10¢, 25¢, and 50¢ pieces.

The current schedule leaves less than six months for coin mechanism manufacturers to develop new coin mechanisms that accept new coins, manufacture those new coin mechanisms, and begin the distribution and installation of those coin mechanisms. There are approximately 200,000 vending machines in Canada. It is estimated that anywhere from 5,000 to 10,000 machines a month could be converted to accept the new coinage. It is not unrealistic to say a complete conversion of all machines in Canada could not take place until April 1997 or later, and then only if the coin mechanism manufacturers were to receive final-version production-quality samples for both the $2 coin and the changed metal coins this week.

Two serious problems will be created if the new coins are introduced according to schedule in 1996 and vending machines are not yet able to accept the new currency. First, the potential for lost sales for the owners and operators of vending machines will be great. Within six to twelve months of the introduction of the new coins, depending on geographic location, owners and operators of vending machines can expect a one-in-twenty chance of one of their customers having a new coin. If the machine is not converted to accept new coins, the 1996 coin will be rejected. If the customer does not have enough pre-1996 coins in his or her pocket, there will be no sale. If rejection of coins happen often enough, the customer will stop going to that machine, possibly forever.

Second, again, if we use the one-in-twenty calculation and the dissatisfaction of a customer at not receiving his or her product, the potential for increased vandalism against machines is high. Whether a matter of lost sales or the expense of having to repair or replace damaged machines, the cost to vending machine owner-operators will be great.

Another issue to take into account is that many vending machine owner-operators have a significant investment in bill changers. In many cases these machines will be made obsolete or ineffective.

Now we add another dimension. On top of the potential cost of lost sales and machine repair or replacement, we add the cost of conversion. Responding to the changes is going to be very costly for owner-operators of vending machines. We do not yet have exact information on how much it will cost owner-operators of vending machines to convert their machines. We won't have that information until the Royal Canadian Mint and the Canadian government decide on the exact specifications of the new coins. However, we estimate the cost will be anywhere from $75 to $800 per vending machine. The total average cost to the industry will be approximately $80 million.

The Canadian Automatic Merchandising Association is supportive of the government's efforts to reduce the deficit. However, we have grave concerns that responding to the new coins, particularly the new metal-content coins, will cause an unfair financial burden for the owner-operators of vending machines. It is for this reason that CAMA is seeking financial compensation from the government for the cost of converting coin mechanisms. In 1967-68, when there were changes in the metal content of Canadian coins, a precedent was set for compensating owner-operators of vending machines for 50% of the replacement cost of mechanical coin acceptor-rejectors, which we refer to in today's language as ``coin mechanisms''.

To recap, the fast-track process proposed for introducing the $2 coin and changing the metal content will make it impossible for all of the vending industry to respond quickly enough to the new changes. Vending machines that have not yet been converted will not accept any of the new coins. The result for the vending operator will be lost revenue and customer dissatisfaction, which are detrimental to the vending industry as a whole.

CAMA encourages the government to make a quick decision on the make-up of the new coins so that sectors of the vending industry that manufacture coin mechanisms can begin production of new equipment. However, we also encourage the government to slow down the fast-track process and postpone the introduction of the new coins and the $2 coin until April 1997 or January 1997 to allow the industry to be better prepared when the new coins are issued.

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It will also allow large vending companies, as well as owner-operators of small vending businesses - who, incidentally, make up a great proportion of the vending business owner-operators in Canada - to spread the cost of conversion over a longer period of time.

Finally, we are also seeking compensation for the costs associated with converting Canada's approximately 200,000 vending machines.

The Canadian Automatic Merchandising Association is grateful to the Royal Canadian Mint for including us in the consultation process that has preceded changes to Canadian coinage. It is our sincere hope that this spirit of cooperation will be extended now that implementation is upon us.

We would also like to thank the government and the organizers and members of this committee for allowing us to present our views.

We would like to close by saying that while the association is supportive of the government's efforts to reduce the deficit, we are concerned about how those efforts will affect this industry.

We will be pleased to answer any questions you have. Thank you.

The Chairman: If the conversion was slowed to a schedule to your liking, would you still be asking for compensation?

Ms Davenport: I think they are really two different issues. Ideally, we would like to see compensation as well as a slowing down of the fast-track process.

The Chairman: So you want both?

Ms Davenport: Ideally, we'd like both. It's going to be very costly for our members and non-members, people in the vending industry as a whole, to respond to these changes, and we feel that compensation would be a fair thing to ask for.

[Translation]

Mr. Brien: My first question will be in the perspective from which you addressed the issue. When the 1$ coin was introduced, what kind of compensation was given to your industry?

[English]

Mr. Dan Stewart (Ontario Region President, Canadian Automatic Merchandising Association): Our industry, along with the telephone industry and the transit industry, actually lobbied for the introduction of the dollar coin. Given the average price of products through vending machines at the time, and given the technology at the time, the dollar coin was deemed to be a benefit to our industry, because it enabled us to put change in the hands of our customers that could readily be accepted by our equipment.

Because of that, compensation was not an issue. At the time this was something that we deemed to be a benefit for the industry, although there was a cost.

As well, at that time technology was at a crossroads where we were going from the mechanical acceptance of coins, with rockers, cradles, magnets, and wires, to electronic acceptance of coins. This technology was there and developing anyway, and that really made acceptance of the dollar coin feasible. The upgrade to this new technology was happening anyway, so we felt, why not incorporate the dollar coin into it and do it all at once?

That's why compensation wasn't sought at that time.

Ms Davenport: The other thing to bear in mind - and this is why as an association we haven't taken a stand against the $2 coin - is that as a vending machine owner-operator you don't need to accept a $2 coin in your machines in order to do business. The same was true of the loonie: you didn't need to accept the loonie in order to continue to do business.

With the change in the metal content, there is no option. You have to be able to accept old coins as well as new ones in order for your business to run and in order for you to maintain the sales that you have had up to this point.

So that's the difference. On one hand, you don't need to introduce the $2 coin into your coin set, just the same as with the loonie. With the change in metal content, you have no option. You need to convert your machines.

Mr. Stewart: Just to clarify, I don't think it is the association's stand that we're seeking compensation because of the implementation of the $2 coin. We are seeking compensation because of the change in the metal content of the coins. I think that was a bit unclear.

[Translation]

Mr. Brien: It's clearer now.

You said that the introdution of the $1 coin was demed to be a benefit because prices were nearing a threshold where a bigger value coin was welcome. Won't there be the same trend with a $2 coin. Will it not be seen as an opportunity to sell products at a higher price? You might find new openings on the market. There still is a number of benefits and it is difficult to assess a compensation package because the 2$ coin may also mean benefits to the industry.

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If I were in that sector, I would see business opportunities. I would imagine that there are others that see it this way.

It is therefore difficult to assess a threshold for compensation. How can we weigh the advantages against the disadvantages?

[English]

Ms Davenport: I get back to the fact that we as an association and an industry cannot look at the two in isolation. I know that today's issue is specifically the $2 coin. However, we feel they have to happen hand in hand. So again, it's not the $2 coin that's the issue for us. When it comes to compensation, it's the change in the metal content.

[Translation]

Mr. Brien: You talk of the costs to the industry. It seems to me as a general rule that the cost is always passed on to the consumer. Why are you concerned with the cost to the industry? I am convinced that the conversion cost, in the end, will be reflected in the price. It is therefore the consumer who will absorb the cost. Should we then talk about cost to the consumer or cost to business?

[English]

Mr. Stewart: I think I can answer that as the owner and operator of a vending company here in Ontario. As everyone knows, all sectors in the business world are highly competitive, and our industry here is facing some disadvantages in adapting to these changes, disadvantages other sectors would not have. Grocery stores, retail outlets, convenience stores, snack bars will really have to make no change in order to accept either the $2 coin or the new metal-content coins other than perhaps one more plastic tray in the cash register.

We, on the other hand, have to make a serious investment not only in hardware but also in the overhead in going to each machine, making the change, forwarding equipment to the manufacturers' depots or offices and having them converted and sent back to us, and in investing in newer equipment. So we face disadvantages and costs that others won't. Yet the consumer is not going to allow us to charge a higher price because of that.

We have to be competitive. We heard the common comment by the public when the $1 coin was introduced, well, great, now everything is going to go to $1. I certainly wish it were that easy, that I could have put my 75¢ can of soft drinks up to $1 at the time. I wouldn't be sitting here now talking to you. I'd be somewhere in the Caribbean, I think. But it's obviously not that simple. Here, how many years after the $1 coin, we're just starting, at least in my part of the province, to hit $1 prices for canned drinks.

No, we cannot pass this cost on to the consumer. It just doesn't work in today's world, because the consumers have too many choices. They'll just go elsewhere.

[Translation]

Mr. Brien: I do understand your point of view. Mine is a bit different because I am sure that part of the cost will be passed on to the consumer, maybe not in the short term, but at some point. At any rate, the increase in price, in your sector is in the range of 5 cents to 10 cents. There are times where you lose more but others where you win more. In the beginning, things are more difficult, but I remain convinced, although I understand your arguments, that part of the cost will be passed on to the consumer.

You talk of an estimated cost of $80 million which on average is a $400 cost to adapt one machine to the new coins. I would like to know if that estimate is realistic. Furthermore, I would imagine that pretty soon you will have some decisions to make when the electronic money or cards are introduced. Changes of that kind will soon happen. Would you not rather have it also delayed to be able to make all those changes at the same time? These changes could happen in the very near future. If there was a longer period, would you be able to make that kind of adjustment to your machines at the same time?

[English]

Mr. Stewart: There are several points there. First of all, yes, that is the association's stand. Delay in implementation will allow us the time. Again, the manufacturers don't even have production-quality coins to begin their R and D. They have to do R and D. They have to do manufacturing. There has to be distribution. Then we have to visit the machines physically and make the changes.

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Addressing the cost issue, the estimates range from a low of $75 or perhaps $100 per mechanism to convert existing mechanisms, those of the recent electronic era, to take the $2 coin.

There are some other issues that enter into this. If I could, I'll just read briefly what I have prepared here.

The benefit of the $2 coin to our industry is minimal right now. When we lobbied for the $1 coin, prices were approaching $1. Inflation has not been significant in the last several years and prices have not escalated. They are nowhere near the $2 price. It's unusual - most prices are down around $1 or under. So we're not going to see the immediate benefits that we saw with the $1 coin. Certainly down the road they will be there. And that is why we haven't taken a stance against the $2 coin because ultimately it will be of benefit to our industry.

The short-term disadvantages are great. Just to give everyone a perspective on the workings of it, vending operators, as Cynthia has said, have made a sizeable investment in bill changers. Some changers will become completely obsolete - those that take only $2 bills. Those are older changers, admittedly, and they will not be convertible to take $5 or $10 bills.

More recent changers that take multiple denominations will still be usable, although they will certainly be less effective, since at least 75% of the bills taken in by a bill changer are of the $2 denomination. People just don't want to change $10s or $20s and get $10 or $20 worth of coin to make a 90c. purchase.

If the introduction is January 1, 1996, as proposed, and if the $2 bill is eliminated, within a matter of weeks or months the bills will disappear, as we saw with the $1. People will hoard them; they'll think they're collectable or something. They'll disappear quite quickly and yet we may find that the vast majority of the machines in Canada are not able to take the $2 coin. That will leave us unable to change any $2 denomination, which is one of the most common denominations presently used. That will be definitely a disadvantage.

Just to elaborate slightly, it's not quite as simple as converting existing mechanisms to take the $2 coin. Current mechanisms can inventory quarters, nickels, dimes for payback. That's okay when you're putting in $1 and getting back 10c. or 15c. change. If you start putting in a $2 coin and getting back a $1 and more in change there will never be sufficient change in there to provide the customer with change. So that's where the $800 figure comes in. It will cost $600 to $800 to put a new mechanism on the machine that will be able to inventory $2 coins and $1 coins.

This technology is not available to us today. We've seen it at shows, and the manufacturers are telling us that it could be available within weeks or months. But it's going to be roughly double the cost of current coin mechanisms.

Mr. Epp: I want a little more background on your organization, first of all. How many members do you have?

Ms Davenport: We're here representing not just our members but the industry as a whole. In terms of members we have about 180 member companies across Canada. That number is split almost equally between the people who own and operate vending machines and the people who are in the business of supplying the vending industry either with product or equipment.

Mr. Epp: Do you have any estimate at all of how many machines there are in the country that use coins?

Ms Davenport: According to Statistics Canada in 1992, it's just under 200,000, or about 196,000 machines. They run the gamut from coffee machines and snack machines to cigarette vending machines outside of Ontario.

Mr. Epp: Do you include also all these millions of gaming machines?

Ms Davenport: No, this industry is not involved in the gaming or lottery side of the industry. That is another organization. We are strictly, ``Put money in, get a tangible product out.''

Mr. Epp: So all of these slot machines and so on, don't come under your interest at all.

Ms Davenport: No, they don't.

Mr. Stewart: I might also say that really our membership does not include, per se, bulk vending operators. The gumball machines and the novelty machines you put a quarter in tend to be a slightly different industry as well. We represent more the large, full-service operator, such as the equipment I passed in the hallway here.

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Mr. Epp: What would be the impact in your business if there just wasn't a $2 denomination? Would it affect you?

You said several times that the $2 coin was going to benefit you in the long run, and yet just a few moments ago you said you had a new problem with it, because with the $2 coin you were going to run out of change in your machines.

As soon as you said it, I said that makes sense, because people are going to put in all these $2 coins that won't be used in change at all. The way it is right now, I'm sure you dispense nickels and dimes in change, but you're also receiving them at the top. So that makes a lot of sense.

There's a contradiction there. You say in the long run it's going to help you, but there's a problem because your machines can't handle it. So reconcile it.

Mr. Stewart: It's not really a contradiction. I guess what I was trying to convey there was that it's only a disadvantage if we're unprepared, and given the timeframe we will not be able to be prepared.

When we are prepared and when our machines are converted and we have made the investment in this new technology that will be developed, then we will be equipped to take that coin. A coin is always easier to handle in our industry than a bill. It's easier to validate and there's higher security at a lower cost, particularly with Canadian currency.

I may be getting into someone else's technical expertise here, but American bills are easier to validate than Canadian bills.

Mr. Epp: They're easier to forge, too.

Mr. Stewart: Yes, but they're easier for us to validate electronically. Hence you'll see a proliferation in the United States of machines that take bills. You're only now starting to see it trickle into Canada, and that's for two reasons. The technology is advancing to the point where we're starting to get better security in that area, but also, the dollar coin alleviated somewhat the need for that technology here in Canada.

Mr. Epp: I have a question with respect to the change-making machines. It's true that right now they accept $2, $5, or $10 bills, if I'm not mistaken. But you won't really need to change them so that they'll accept a $2 coin. At least, I wouldn't think so, because if your machines accept the $2 coin directly then they don't have to put the $2 machine into the change maker to get change.

Mr. Stewart: Maybe you misunderstood what I said. The existing bill changers that take $2 bills will become obsolete because there will be no more $2 bills, so we'll have to take them to the landfill site. The existing bill changers that take multiple denominations will still be there and they will continue to take $5, $10, $20, $50, or $100 bills if we wish.

The limitation is that we can only dispense coins, not bills. It's even possible that we can change the bill into a combination of two coins. It could be a combination of $2 coins and $1 coins, which would then be used in the vending machine. But the vending machine has to be able to take the $2 coin in order for that to work.

Mr. Epp: So that would require a replacement of your bill-changing machines.

Mr. Stewart: No, it would require a replacement of the coin mechanisms in our vending machines.

Mr. Epp: Clue me in a little bit on the industry with respect to the supplying and the updating of the coin identification machinery. How many businesses, how many firms, are there in Canada? When something like this happens, does the business typically put it out to bids? Are there American firms bidding on this? How wide does that go out?

Mr. Stewart: There are basically two firms that are predominant in North America. They're both American firms and they both have offices and representation here in Canada.

In the U.S. market there is beginning to be an infiltration of some foreign units, some Japanese units, but we haven't seen that much to date here in Canada. It's basically the two main manufacturers, which are American-based companies. Incidentally, they are predominant in the world market.

Mr. Epp: Now they stand to win big every time coins are changed.

Ms Davenport: What's your point?

Mr. Epp: I'm just wondering whether.... Well, I guess the point is that there's a huge cost involved and it's going to two firms that are not even Canadian firms.

Mr. Stewart: If the government or the market deems to make changes and companies are poised to adapt to those changes and meet a market demand and there's profit to be had, I guess that's the way in a free market.

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There is competition there, fierce competition, which we feel should make it a competitive thing. It's not going to be any type of windfall for anyone. I think it would be viewed simply as a new market opening up through means beyond their control.

Mr. Epp: I have a question with respect to your request for government compensation. You say the market will not bear an increased cost at the machines. I've speculated that if all of this point-of-identification equipment has to be replaced at a cost of $500 to $800 per machine, then every vendor is simply going to add 10¢ to cost of his product. After a year, the initial capital outlay is paid back and after that it's profit, so it's an easy excuse to make more money.

But you're saying this will not happen, that my 90¢ chocolate bar will still be 90¢, and that you'll have to pick this up. Now you turn around and say because that's a cost imposed on me, I want the taxpayers to pay for it.

Am I getting that right? Is that what you're asking for?

Mr. Stewart: My response is no more than the response of the previous speaker, who was able to raise the cost of the bills he sells to the government from 3¢ to 6¢ to compensate for his loss. And we are not able to increase the price of a product.

Because of this government decision our industry is going to be burdened with an extremely difficult cost relative to the size of our operation, and we are seeking financial compensation. Keep in mind that this is because of the change in the metal content. We are not seeking compensation because of the introduction of the $2 coin.

[Translation]

Mr. Bélair: First of all, I would like to continue in the same line of thought as my colleague from the Bloc québécois who alluded a moment ago to the new opportunities that could surely be greater with the introduction of the new coin.

First of all, I'm sure that you cold put in a microwave oven inside your vending machine for hot meals. Another example would be for you to sell bigger ticket items that would be larger and more costly. Would that not be a signifant advantage for your association?

[English]

Ms Davenport: Again, our specific dispute is not with the $2 coin.

You're absolutely right. A larger coin does open up opportunities for putting in new products and maybe bigger-ticket items. Yes, there is a potential for increased business opportunities with the introduction of the $2 coin. In Japan they sell oxygen, flowers and shirts out of vending machines. I don't know whether the North American market will go for that, but you're right when you say there is an opportunity for increasing the product lines in machines.

Mr. Bélair: Now, given that you're asking for financial compensation, don't you think these new opportunities could compensate for your investment?

Mr. Stewart: I guess we have to reiterate that we're not seeking compensation because of the $2 coin, but because of the metal content change. Had the metal content change -

Mr. Bélair: The bottom line is still dollars.

Mr. Stewart: Yes, but had the metal content change not come along, and we were sitting here talking solely about the $2 coin, we would not be talking about compensation. We would still be asking for a delayed implementation to allow us to get ready. Our specific concern with the $2 coin is that we will not be ready, that we will not be able to take the $2 bill because it will have disappeared, and that we will not be able to take the $2 coin because we haven't had sufficient time to prepare.

The only reason we talk about the metal content change in conjunction with the $2 coin is that our industry feels it is important that both things happen at once, and if we're asking for delay in one, we are asking for delay in the other.

The basics are that the physical conversion of existing equipment and the development of new equipment to handle both of these separate issues can be done at once and is therefore much more economical. However, as I say, the $2 coin is not as much of an immediate benefit because of the lower vend prices. The average vend price of a machine is down around a dollar, so it won't be as big a vend now. Slowly, down the road, it will be.

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Mr. Bélair: Changing the subject, I found it a little bit strange this morning that my colleague, Mr. Epp, would not have referred to the possibility of inflation. My question would be then -

Mr. Epp: I left it for you.

Mr. Bélair: Thank you. You may have had second thoughts, because when you spoke at second reading you went on at length about inflation.

In answering a previous question, you just had one small line in there, that it will not have an impact of bearing on inflation, because I am of the opinion that you still have to maintain a certain level of competition if you're going to remain in business, and therefore prices will be kept down.

Am I right? Do you want to comment?

Mr. Stewart: I agree.

Mr. Bélair: With regard to compensation, your conversions, changes, of course will be tax deductible. Am I right?

The Chairman: It's the cost of doing business.

Mr. Stewart: Like any other capital expenditure, yes, they would be able to be depreciated over a period of time, certainly. However, as a business owner, I find people quite often think this tax write-off is some type of magic thing, that you get things for free. In order to have a tax write-off you have to be a solid, profitable company, and by taking a capital expenditure as depreciation it compensates you for a very small part of that original investment. It's not as though you're getting half of it back or anything. I think if you had it worked through the accounting process, it would be a relatively small part.

Just for the sake of argument, if we're spending $100 and by depreciating it we recoup $15 of that $100, that's still $85 we had to spend on the metal content change, had the government not decided to go from nickel to nickel-plated steel.

Mr. Bélair: But if you would have it your way, then, it would be 65% recoupment.

Mr. Stewart: We haven't announced the specific figure we're seeking compensation for.

Mr. Bélair: You said 50% in your presentation of whatever the cost is.

Ms Davenport: We used that as an example. That was what in 1967-68 the government did reimburse vending machine owner/operators for the cost of conversion.

Mr. Bélair: We had money then.

Ms Davenport: Yes, I know - the good old days.

Mr. Stewart: It was easier for us to make it then too.

[Translation]

Mr. Bélair: Canada's finances is surely one of the factors that have to be taken into account when we talk about compensation. You must surely know that we are making a tremendous effort to save the money necessary to bring down the deficit and reimburse our national debt. We still believe that the $250 million that we will be able to save with the introduction of this new coin will in the longer term be profitable to all Canadians.

Mr. Chairman, in closing, I would like to make two comments. First of all, I would like to remind everyone that my colleagues from the Bloc stated forcefully at second reading that this conversion would cost $400 million. Everyone opposed that figure at the time and said that they were exaggerating considerably. They admitted themselves this morning that the conversion would cost around $80 million. I am not in a position to confirm or deny the figure that I will be giving you, but the Minister might be able to give you more details on this this afteroon.

Secondly, we have heard your message asking us to slow down the implementation process and I will dutiffully pas it on it to the Minister of Public Works.

[English]

Mr. Epp: I have a few more questions I would like to ask you.

Following up still on this issue of compensation, if compensation were denied, and let's assume for a second it is, how would you recoup your costs?

Mr. Stewart: I think it would be very difficult in today's market. I think there would be reduced profits, therefore reduced taxes paid. I think some operators, particularly the small ones, could even be forced out of business. I think it would be a set-back for the industry. We've made a lot of inroads over the last decade or so with technology and the quality of the service we provide and the quality of the equipment that's being manufactured.

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We have a stereotyped image to overcome of undependable service, a machine that takes your money and doesn't pay you out. We've made leaps and bounds in that area and we don't want to see that set back with these two changes whereby people are going to go to our machine and either not be able to spend the money they have in their hand or try putting it in and not have it accepted.

They don't know all the mechanics of what we're going through here; all they know is they put money in the machine that wouldn't be accepted. So it is going to result in lost sales; it's going to result in a loss in confidence to our industry if that happens, which again translates into more lost sales. It would just be a huge set-back for our industry.

I wanted to address one other matter that was brought up. As far as the savings to the government are concerned, we appreciate that, and it is why the association has taken the stand that we do not oppose the $2 coin and that we do applaud the government's efforts to save money. However, we would like to see ourselves as partners in this effort. As it stands now, the government is making the decision to make the changes; the government - and therefore the taxpayer, granted - is going to receive the benefits, but you're asking our industry to make all the investment.

So we're saying there are going to be savings; we applaud the government for that and we're willing to be partners in that effort. But I think it's not much of an equal partnership if we're asked to make all of the investment financially, as well as the overheads, the costs and the work involved to do it, and the government seeks all the benefits. We won't seek any benefits from the metal content change and very little short-term benefit from the $2 coin. We'll be making the investment. We can't raise our prices, we've established that, but there are immediate benefits to the $2 coin.

All we're asking for is a little bit of those savings to come back to our industry to help us with the investment we're going to make in this endeavour to save the government money.

Mr. Epp: I have no idea if you can help me with my next question, because to me it's almost critical here. I've talked to very few people in the vending business. I know only one person who I can think of right now, and he used the phrase, as I recall, that his machines - and he was in the electronic game business - were ``money-printing machines''. That was his phrase to me. That's because these kids stand there for hours dumping in quarters, and they have no materials they have to supply except for the power input. So they are indeed pretty lucrative.

I'm sure you have numbers on food vending machines, and all these other machines, as to what kind of profit they return. You take this Pepsi machine that's downstairs here. Do they make $500 or $5,000 a month? Because that would help me get a perspective of what this $500 to $800 cost is going to be. If it's 10% of one year's profit, no big deal. If it's 100% of one year's profit, then it's significant. What are your average numbers, if you have that?

Mr. Stewart: To give you a perspective, according to the 1992 figures Statistics Canada released, which are the most recent available to us, vending sales in that year were $392,939,000. Let's call it close to $400 million sales through vending merchandisers in Canada.

Mr. Epp: That's gross?

Mr. Stewart: That's gross sales. We can pretty much take, at least in the province of Ontario, 15% of our sales right off the top and give them to the prospective governments. Seven per cent of all sales are subject to GST. Another issue, again, which I won't go into in great detail, is that there is a competitive disadvantage where a vending machine has to charge GST on yogurt or milk when no one else does, unless it's part of a prepared meal over $4.

Provincial sales tax applies to not all items sold through vending machines, but most items, and particularly the large-volume items such as confectioneries and soft drinks, which are two of the larger-volume items we do. So it might average out that 10% to 12% of all our sales are returned in the form of retail sales, both federal and provincial.

Then, as you say, we're not like a video machine or a pinball machine. We have a product we have to buy and sell. If you wanted to pick a rough figure, pick 50%. If we buy something for 50¢, we sell it for a $1.

Sometimes it might be 80¢, sometimes it might be $1.10 - it's going to vary - but that is typically a rough figure. Now throw on top of that the cost of keeping trucks on the road, employees, overhead, municipal taxes, utilities, insurance; all the costs of business that everyone else in this country has to bear - workmen's compensation. I could go on and on.

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Mr. Epp: May I conclude? It's just a closing statement. It's not a question.

The Chairman: Try to make it short, Mr. Epp.

Mr. Epp: I think it is good for the other members to hear this.

I just did a quick calculation on your gross sales and divided by how many machines you said you had. It comes to about $1,900. If you take the net out of that, after all the 50% expenses and all this stuff, we're looking at spending maybe eight or nine months of one year's profit on changing the coin mechanism. That's my estimate.

Mr. Duhamel: My colleague has in fact broached the question I wanted to raise. As I understand it, there are roughly 200,000 machines out there and they gross close to $400 million. That means the overall sales average - and I know that can be distorted; it is not intended to be - is roughly $2,000 a machine per annum. Is that the ball park?

Mr. Stewart: That's really hard to say, but yes -

Mr. Duhamel: Your figures range from $75 to $800, but if you look at the $80 million divided by 200,000 machines, it is roughly $400 a machine. My mathematics - and of course they may not be as accurate as yours - would suggest roughly 25% of that can be recouped over time, depending on the time over which one deals with it on one's income tax return; whether it's a two-year depreciation or one- or three- or four-year depreciation.

So I go back to the point. Clearly there are some problems and additional expenditures. I don't want to pretend otherwise. Clearly those are serious, in view of everything that has to be absorbed, but this is a fairly lucrative business. And I don't mean that in a pejorative sense. It has grown by leaps and bounds over the last few years and there are substantial profits in spite of taxation and what have you. It's a healthy business. But we want to keep it healthy.

Mr. Stewart: It's a business that's regaining its health after a long and hard recession. But we face all the same challenges as other businesses in this country do. This is an additional one we really don't need.

Mr. Bellemare: I have a copy of Coinage Update from your association. You send it to the vending machine operators. In it you list all the members of your association. Just to name a few of them, you have CanWest, Clark Foods, Coca-Cola, Versa Services, and so on. Then you state here that there was a trade show on May 5 and 6. You talk about updating this situation of the coinage and you say there would be questions and answers at that trade show. What were the comments you got at the trade show on May 5 and 6?

Mr. Stewart: Some we can't repeat.

Cynthia.

Ms Davenport: Actually, Dan, I would prefer that you answered that question, because I was managing the show itself, so I didn't have a lot of opportunity to sit in on the sessions.

Mr. Stewart: Again, the same confusion seemed to reign between the two issues. We have two issues. They are separate issues, but by nature they have to be intertwined. The sense I got from it was that particularly small vending operators - and there are a lot of them - are really upset about both these issues.

Mr. Bellemare: That's exactly what I was hoping you'd say.

I do have some operators in my riding. One small vending machine operation, a family-owned operation, sent me a very detailed letter. The woman who sent it seemed to be very knowledgeable. She even mentions that with the advent of the smart-card technology we are just a couple of years away from another drastic government change after the coinage change. She brings this into play. This is a family team and she is the one who is the spokesperson for the family.

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She said they have 157 machines. At $75, you're talking about $12,000 that she would have to put into the business. She said, ``We can't make it. If you saw our books and the difficulties we're in with the competition - We're in difficulty as it is now; this will crucify us''. She didn't mention that if it was $800 per machine to change, then that would cost her $130,000.

Do you have a lot of people like this who came to the trade show and said, ``Look, this will crush me. The big guys will take over and they'll be happy, but the small family businesses working in each city are in for a big crunch''?

Mr. Stewart: Indeed, we did - although I can assure you that the big companies are no happier with this metal content change issue than are the small mom and pop operations.

By the way, yes, our membership does include companies such as Coca-Cola and Pepsi. So 150 members translates into a lot of vending machines, a lot of people, large national operators that operate from coast to coast as well.

But I've always stated that it's all proportionate. The cost to convert of the small guy who has 15 vending machines is relative to his sales. The costs of the big guy who has 2,000 or 3,000 vending machines are relative to the number of machines and to his sales. So it is an equal burden. There is the perception of the big guy squashing the little guy. There may be some truth to it, yes. The small person may have more trouble, may have more limited resources, but it is a problem -

Mr. Bellemare: I'm aware that these groups are not part of your group, but have you heard anything from them through the grapevine? The video games, those who own public lockers, the telephone companies - do they have an association? Are they not aware, or are they not concerned?

Ms Davenport: We've spoken with some other associations. One is the Canadian Soft Drink Association, who I believe will be meeting with you tomorrow; another is the Bell Telephone Company. With the exception of the Canadian Soft Drink Association, everyone has slightly different concerns. Everyone's business will be affected in a slightly different way. We have been in contact with these people, but all of us have our own mandates and our own objectives.

Mr. Bellemare: If it costs between $75 and $800 to change the mechanism, and if we take as an average $300, then, using the 196,000 or so machines you were speaking about, I calculate this is an expenditure of $16 million just for that group in your association.

Is this a good ballpark figure?

Ms Davenport: It's an industry number, rather than an association number. It's tough to say. I mean, $60 million, $80 million - We chose $400 as the average.

Mr. Stewart: On a comment that was made earlier about the discrepancy between the original estimate of $800,000 and $400,000, what explains that is the fact that at those early stages no one in the industry knew if any existing equipment could be converted. We might have been faced with total replacement. As we've had dribs and drabs of information and communications with the Royal Canadian Mint, it has become apparent that, indeed, the existing equipment, at least that with some modern technology, can be converted. That brought the cost estimates way down again.

The Chairman: Just so I'm absolutely clear on this, the ideal schedule for implementation for your industry is how long, especially based on the experience you had with the introduction of the loonie?

Mr. Stewart: The ideal schedule may be longer than the year we're asking. We're trying to be reasonable on that.

Ms Davenport: Yes. April 1997 would be ideal. We could live with January 1997.

The Chairman: Which would be a year and a half, roughly?

Ms Davenport: That's right.

Mr. Stewart: One year past the proposed implementation.

Ms Davenport: Yes.

The Chairman: About a year longer than what the government is hoping for?

Ms Davenport: Yes. They're hoping for January 1996.

Mr. Epp: That's providing that you get the production prototypes essentially right away.

Ms Davenport: That's it.

The Chairman: Thank you very much.

Ms Davenport: Thank you.

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The Chairman: We'll be meeting this afternoon, colleagues, at 3:30 p.m. in this room.

Again, thanks to our witnesses.

The meeting is adjourned.