[Recorded by Electronic Apparatus]
Thursday, April 27, 1995
.0943 
[English]
The Chairman: We have a quorum. We'll call the meeting to order.
I'd like to welcome Mr. Mulder, Deputy Minister of Transport; John Dobson; Howard Migie; and -
Mr. Bruce McFadden (Executive Director, Operations, Grain Transportation Agency): Bruce McFadden.
The Chairman: Bruce McFadden.
Mr. Mulder, after your presentation we can then go to questions. Welcome and thank you for coming.
Mr. Nick Mulder (Deputy Minister, Transport Canada): Thank you, Mr. Chairman, for inviting us to this committee.
I'd like to make a few introductory comments to put some of the items on your agenda in context. We can make available to the committee members the overall plan we have in Transport Canada, if you wish. But I think my minister sent that at one stage to all members of Parliament, so we didn't want to contribute toward pollution by sending you documents you already have.
I will highlight three things. In Transport Canada, we do have an overall plan as to how we change the role and the functions of the department and also how we deal with some major issues. The way we'd like to do that is first by commercializing a lot of our operations.
That is, we, as Transport Canada, would get out of the direct operating business. I think the members are familiar with us trying to transfer the responsibility for managing the airports to community groups. We are working on a plan to take the aviation system and put it at arm's length from the government, and various issues along that line.
Second, we have plans to reduce our expenditures. This is not, in a number of cases, because we want to, but because of the view of cabinet and the Minister of Finance such that we have no choice but to reduce expenditures.
Currently, our gross expenditures, between us and the National Transportation Agency, is somewhere in the range of $4 billion. The net number is about $3 billion. We recover about $1 billion worth of cost.
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The view is that $3 billion of government expenditures can't be sustained, so in a number of cases we're making reductions. We're either doing that by reducing operating costs, changing or eliminating subsidies, or in a number of cases we're increasing the user fees, the cost recovery. The overall thrust is to try to get those expenditures, the net figure of $3 billion, down to somewhere in the range of $1.5 billion, or perhaps even $1 billion, in four to five years.
Third, we also want to update a lot of the policies and legislation that currently provide the regime for transportation. As the members again may know, the department and certainly my minister, Mr. Young, have made a considerable effort to update air policies, including liberalizing the international air regime and getting a new air agreement with the U.S., the Open Skies agreement.
We hope to hear next week from the Standing Committee on Transport, which is chaired by Mr. Stan Keyes, to get a report as to where we might go on the marine policy issue with respect to ports management, the future of the seaway, the future of pilotage authorities and issues along that line, then take action on that.
We would also like to deal very much with a new rail policy. I'll outline a little bit of the thinking on that because it provides the context for some of the changes we're making to subsidies, east and west, and some of the other initiatives I believe the members are interested in.
For rail policy, we have a kind of four-pillar approach that goes roughly as follows.
First, we would like to find ways and means to reduce the operating costs of the railroads. That means management costs, direct operating costs and labour cost.
The railways have made some effort in that area over the last five or ten years, but the view is that the running costs of the overall operating costs of the railways have to continue to go down or else they will not be able to compete.
As you know, Mr. Chairman and members, part of the issue is also a new labour-management agreement. With the back-to-work legislation that Parliament passed a month or so ago, the work is now going on with a mediator and an arbitrator to see if also a new labour regime can be put in place.
But the bottom line on all costs on the operating side of the railways is that we have to keep getting costs down because there's not much room to jack rates up. In order for the railways to be viable, they have to find means to reduce costs.
Second, we would like to deregulate the railroads. I think my minister has made a number of comments publicly. In total, we've documented close to 200 different areas in which the railways have to come to Ottawa, either to Transport Canada or to the National Transportation Agency, to get decisions approved of one kind or another.
Some of them are very minor. We can really streamline that area. My minister is hopeful that in the next couple of months he could introduce legislation to see if the way in which we manage and regulate the railroads can be updated. We have a deregulation on the technical side, not the economic side, of the railroads.
Third, a lot of work has been done over the last ten years to show ways in which the railways have, relative to their competitors, a higher tax cost than that of truckers, or their competitors, in the U.S. Whether it's the federal, provincial or municipal government, the railways have a higher taxation cost, in a number of cases, relative to other modes and their competitors.
So we are working. We haven't made all that much progress yet, but we hope, over the next year, to see all levels of government collectively deal with these issues.
Some governments already have done so. The Government of Manitoba has reduced some of the taxes for the railroads. The Government of Nova Scotia has done it. Other provinces haven't done so. We are still dealing on the federal side as well.
The fourth area that we would like to deal with on the railroads is really their future structure. As part of the legislation we hoped the minister would introduce in the next couple of months, and so on, we would like to facilitate the establishment of short lines wherever that's viable.
We would like to see how we can deal with branch line abandonment in a more effective manner so that railways, for example, don't have to prove all kinds of losses before things get taken. A system should be in place in which responsibility for branch lines could be facilitated. One could go to short lines without the railways having to run it down and show big losses.
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We also want to have things like, for example, joint running rights. We want to see if more work could be done on that to have running rights between short lines in certain conditions to run on the main-line tracks or even to get the main lines to do more joint running rights or joint arrangements and so on.
We have, as my minister has indicated on several occasions, a broad plan to deal with the railroads. If we don't, we are going to have difficulties keeping a viable railroad system from coast to coast.
As members know, CP Rail is already more or less stopping its line in Montreal. It just runs west from Montreal. It will shortly have no operations east from Montreal. We want to make sure that there is a viable railroad system, at least in terms of CN Rail, from coast to coast: in Atlantic Canada, in Quebec and Ontario and in the west.
It's part of the plan to have something done, not to make the railways richer, in a sense, but to make them more viable. We want to make sure that we have a viable and efficient railroad system from coast to coast and not have continued abandonment and the chopping off of a large part of the system.
The third area is the western grain and Atlantic freight rate subsidies and so on. As Mr. Goodale indicated on Tuesday to this committee, we've tried to be balanced about this. It is certainly true in Transport and I think the same thing is true in Agriculture, that under the fiscal pressures from the government and the Minister of Finance, we had to make some changes in subsidies.
We've tried to be balanced in that for east, central and west. We've dealt with subsidy reductions for VIA Rail, Marine Atlantic, western grain transportation and on the Atlantic freight rates, and so on. In some cases, we also have what we think are fairly adequate adjustment packages in place at $300 million for the west. We have also roughly $300 million of adjustment funds available in Atlantic Canada and eastern Quebec from Lévis to the New Brunswick border. So we try to have a balanced approach on the subsidy reductions.
For the western grain, we realize that producers will have to pay more starting August 1 because of the changes in the freight rate subsidies, but at the same time we are working with them to see if we can achieve three things.
The first thing is a lower-cost system to keep driving the cost of the grain handling system down.
The second thing is to have a more efficient system. Those two are very much related. For example, there are car cycle times, better terminal arrangements, and different ways of dealing with inland transportation, and so on. Work has to be done in that area.
The third thing is that we would like to have more industry control or say on the future of the system.
Mr. Chairman, as you know, I've been around in this hall, as have some of my colleagues, for about 15 years and so on. Our view is that it's far too often the civil servants and the ministers who are forced to make the decisions. We would like to have the industry make more decisions.
We had a meeting on Friday with a number of representatives from the farm groups and the grain companies and the railroads. We would like to have a mechanism set up whereby they would be given the opportunity, with some assistance from us, to have more control over the future shape and structure of the grain transportation system in western Canada.
I've probably gone on longer than I should have, but I thought I'd give you a broad picture to show that we have an overall plan in Transport. We're very concerned about railway viability, and we think we've taken a balanced approach on the subsidies, east and west.
The Chairman: Thank you, Mr. Mulder. Before I turn to Mr. Chrétien, I just want to basically outline something.
I'm sure you're aware that this committee is dealing with the ``beyond the budget'' bill, you could say, in looking at the impact in the absence of the WGTA, ARFAA, MFRA, feed freight assistance, and so on.
With the WGTA, we certainly feel that it has been the cornerstone of agricultural policy in western Canada. So we're moving to a new regime, and we certainly want to ensure, as a subcommittee of the full Standing Committee on Agriculture and Agri-Food, that the impacts are in fact addressed.
I want to be very clear in saying that I know in my own experience over the past 15 years as a farm leader that I found a lot of spins out of Ottawa in terms of what this or that might do.
Whether the news is good or bad, this committee wants to know the substantial facts and the direct impact so we can move to address them accordingly.
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[Translation]
Mr. Chrétien (Frontenac): Mr. Deputy Minister, there is a question I would like to come back to, that is the transfer of the abandoned short lines.
It is true that railroads lose money with branch lines. I think that those losses can often be attributed to a lack of interest on the part of those railroads.
I did a test about a year ago. I pretended to be a potential customer with a large volume of grain to move from my area to the center of the United States, in Denver, Colorado. We started work at 10:00 in the morning and by 3:00 p.m., we still did not have a price. We didn't even know how many days or weeks it would take and we had the feeling that we were being laughed at. The railroads didn't want customers. They didn't care about profits.
Of course, the National Transportation Agency authorized the abandonment of that line, and that will happen a lot in the west also. When you tell me that the railroads are often in deficit, I believe you because they proved it to us in black and white but I wonder if they weren't doing it on purpose so that it would be more easy to have a line abandoned...
You are saying that you will try to facilite the transfer to private interests, to small businesses that would be interested in running the railway. I was wondering what you will do to facilitate those transfers to interested individuals or small businesses.
You also said that the minister announced a deregulation of the railway a few times. I would like to know what impact that will have on the western grain farmers.
Mr. Mulder: Thank you, Mr. Chrétien. Can I answer you in English? I speak French, but my wife often says that I speak broken French. I was born in Ireland.
[English]
On the short lines, you're quite right that in a number of cases, the railways, in order to have a line abandoned - this is what the allegations are - will go to a considerable extent to show the losses on the line. I don't have direct information myself on this, but some people have said that they, in a sense, disinvest or discourage traffic in order to show losses so the National Transportation Agency will then allow them to abandon the line.
To the extent that there is truth in that, we think we should have a system in place whereby, if the railways are no longer interested in running a line for a variety of reasons, instead of showing losses, we could facilitate a sale of those lines to other companies that may be interested in running them. They may have different marketing strategies or different running costs and so on.
We haven't finalized our plan and our minister is still contemplating and consulting with his colleagues what the shape of the policy will be. Certainly the idea would be to have a better indication for the railways of what their plans are for all the lines across the country.
To the extent that other people are interested in running those lines, we could facilitate short lines being established before lines are actually abandoned. This is so you don't go into the business of showing losses or discouraging traffic. Indeed, you might even do the reverse.
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That's one set of initiatives. The other initiative going on is that both Canadian National and Canadian Pacific are making some progress with their unions and others to see if they can have internal short lines.
I believe - you probably know this - that on the north shore of Quebec, CN has recently agreed with its labour staff and unions to see if three lines in Quebec on the north shore of the St. Lawrence River could be run by CN as a sort of special entities, almost like short lines. A similar experiment is taking place in British Columbia and so on.
So there is discussion going on about that. This is without actually abandoning lines or getting another short line to set up a line. It could be done within the CN and CP corporate structures as separate entities. So that's one area in which we hope to get some final decisions over the next few months and make it part of the legislation. In the meantime, the railways are working on it.
You asked whether or not our plans on deregulation would have an impact on the producers in the west. The short answer on the deregulation side is that there will be very little impact because they will not deal with economic deregulation.
Without going into a lot of technical details, it is part of a 1987 legislative amendment. We provided competitive access provisions for shippers. These will stay in place to allow shippers to have better negotiating room, vis-à-vis the railroads, for getting lower rates. We are not touching those. We are dealing, for example, with technical regulation.
Let me give you one example. You may be familiar with this, Mr. Chrétien. CP recently wanted to take over the CAST container lines in Montreal and make them part of their overall container operation. It went to the National Transportation Agency. That's because, under the law, it has to deal with competition issues.
CN lost before the National Transportation Agency. They even went to the Federal Court to have the decision overturned. The Federal Court said no. It backed up the National Transportation Agency. Then CN had the right to go to the competition bureau and start it all over again.
The question is: why did the railways have to go through two different mechanisms in the federal government on the same issue? Other industries don't have to do this, so why don't we treat the railways like other companies? If the competition bureau deals with competition issues, then why does the National Transportation Agency do it as well?
We're looking at issues like that. But the kind of changes we're thinking about should not have major impacts on shippers, certainly not on western producers.
[Translation]
Mr. Chrétien: Mr. Deputy Minister, when the time will come to transfer those short lines, CP, for example, will want to make as much money as possible. Given that CP made tremendous benefits when it established those railroads lines, are you going to publish guidelines or at least keep an eye on the situation?
You know very well that a right-of-way of 100 feet in the heart of a city is worth a lot more than 100 feet of land in the middle of the forest or in swamp far away from any city or any road. When we think of a 400-kilometer line, how do we set a reasonable price so that another company can run it? If we sell it for a very high price or if we have to wait many years for the line to close, the potential customers will get used to other means of transportation.
In brief, what will a reasonable cost be if we want to come to an agreement so that those lines are not dismantled to be sold on the retail market? In the middle of the cities, the land would be sold for the enlargement of a lot, along the lake, to build cabins and so forth.
[English]
Mr. Mulder: Again, I sympathize with where Mr. Chrétien is coming from.
I have two sets of comments. First, if CP wants to make as much as money as possible, I guess they're behaving like any other company. My experience has been that whether you have a grain company, a railroad company or a grocery store, you try to make as much money as you can. It's the only way to stay in business.
Certainly if you look at their track record over the last 20 years, the rates of return for both CP and CN have been well below that of other companies such as Bell Canada or energy companies. So railroads have not been making a lot of money.
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I realize that the other part is certainly very valid, which is your example of what happens to the real estate.
Again, these are things that might be better dealt with whenever the legislation is tabled by Mr. Young. But certainly we've had discussions with shippers, the provinces and the railway companies, and so on, such that, if lines are abandoned or transferred, the track will not be torn up.
I think you may be aware that Mr. Young, as of last fall, asked for a moratorium on CN and CP lines being ripped up and the tracks removed whenever there is a possibility of abandonment. So that moratorium is generally in place.
Certainly we're having discussions with the provinces, shippers, and the railroads such that, in cases in which either a line can't be transferred to a short line or there are no buyers yet, then at least we would keep the lines in place. The railroads would have some obligation to make them available to municipal groups, or a province, etc. So the lines could be available to be used by other people later one, not just reverted back to real estate or whatever else that land could be used for.
So there is some thought being given to that, but there's no final decision. It's part of the discussions that the minister is having over the next few months as part of the legislation.
[Translation]
Mr. Chrétien: When you say that the local community uses those lines, do you mean for skidoo trails, for horse riding or for rail transportation?
[English]
Mr. Mulder: We don't have any definitive views on this as yet, but it could be for whatever they want. If a lot of people are saying to not tear up the tracks, then even though there isn't anybody right now who's able to run on those tracks, they shouldn't be torn up until we've tried again.
We have an actual case going on right now in the Graham subdivision north of Thunder Bay. We have asked CN to delay tearing up the track. Iain Angus, a former MP, is dealing with a group of businessmen to see if they can start up a short line.
In that case, the plans are with local groups and businesses to keep trying to set up a railway company that would run that instead of CN. There are no thoughts of using it as a bicycle path or skidoo trail. But if ultimately the local groups say there is no need for that railroad, and nobody wants to run it, then I guess, as has been done in the past in your home province, Mr. Easter, it will be used for other purposes than for a railway.
The Chairman: There are examples, especially in Atlantic Canada, in which the former rail lines have moved to recreational purposes, rather than to transportation. However, the farm communities basically lost out in that endeavour.
Mrs. Cowling (Dauphin - Swan River): As a former farm policy spokesman, someone who has been interested in this debate for some time, and a person who has made their entire living, before I came to this place, from grain - we will continue to do that in Manitoba - I am extremely interested in the issue of deregulating the railway system.
I have some reservations about short-line railroads. I'll just quote from a document I have here, which says that about 60% of the grains and oilseeds produced on the prairies are exported and transported mainly through the rail system.
The reason I have some concern about short lines is that when we are talking about short lines, we are talking about replacing branch lines we have said are inefficient. So it doesn't make very much sense to me to pass on some costs that will fall into the hands of probably the primary producers, who are the farmers out there are moving their grain through those branch lines right now.
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I want to know why we would move in that particular direction if in fact those lines are already inefficient, not cost-effective, and pass those costs on to those producers? What kind of projections or factual documentation have you got to support that kind of a movement?
Mr. Mulder: That's a very good question and a very difficult one to deal with as well. The question of whether or not to eliminate branch lines in the prairies is something that's very much on the agenda of the grain companies and the government right now.
Just by way of background, I think Mr. Goodale may have told you on Tuesday that, as part of the decisions made in February, a number of the light-steel lines and the low-volume lines might be abandoned fairly quickly: January 1, 1996. But this would only be after a review has been done as to whether or not they should be abandoned.
The National Transportation Agency, with Marian Robson, is starting a process, with an advisory group of people from the prairies, to look at 500, 600 or 700 miles of track. These are light-density, low-volume branch lines. They're having a review done.
Among the issues that are being dealt with there - that's where the complication is coming in - is the elevator plans on those lines. Do the elevator companies have plans to consolidate those elevator points further? If the lines were to be abandoned, what would the road impact be? What would be the cost to the farmers to truck it another 10, 15, 20 kilometres, or whatever the distance might be?
There are various issues like that. The methodology on that analysis is being sorted out now with the advisory committee. I think there is a meeting on May 9 or 10 to try to finalize that approach.
Those are the factors that come in. The view in Transport Canada is certainly that if there are very few elevators on the line - in some cases, there are none - and the producers have no need for those lines, then they should be abandoned because it does, as you say, reduce system costs. There isn't much use keeping various parts of the system open and have those costs as part of the overall cost base if very few people are using them. By trucking for another 5, 10, or 15 kilometres, you could save money for the producers at large.
That will be looked at by Marian Robson and the National Transportation Agency over the next six months with the grain companies and farm groups. Some decisions will presumably come out of that by January 1, 1996.
Mrs. Cowling: One of the visions this committee has is for agriculture and being able to move into that export market with greater volumes of grain out of western Canada. In order to do that, the farmer, who is the primary producer, has to have the option to be able to deliver his commodity in a cheaper, faster and more efficient system.
When we talk about reducing the system costs that we have in place, what impact do you see this having on the key element of this whole discussion, which in my view is the farmer at the farm gate? How do you see this impacting on his decisions? How will it reduce his costs? Will he in fact have reduced costs? Or will he be picking up additional costs to move his commodity?
Mr. Mulder: Perhaps either Bruce McFadden or Howard Migie may want to help elaborate on that question as well because it's a very fundamental question.
As of August 1, the producers will be paying more. We've got to find a way then to reduce the costs in other areas so they don't get hit with a double whammy.
The discussions going on with the grain companies and others have a number of possibilities. I think when we met with you recently, you already had some of the documentation. For example, the Saskatchewan government hired a consultant, A.T. Kearney, to look at the ways and means to improve the efficiency and lower the cost. I think the grain companies recently had KPMG, a consulting firm, do some work for them as to how costs could be reduced.
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I think they basically fall into three or four categories. First, see if you can find ways and means of reducing car-cycle times by loading the cars more unidirectionally or by making sure that the trains are loaded with similar commodities that go to the same part of a port and so on. There are various things like that. Also, at terminal operations, they get faster turnarounds. It is areas along that line.
Second, there are areas along the lines of branch-line elimination and elevator consolidation, and inland terminal expansions and so on.
What are some other areas, Bruce or Howard, that those reports deal with?
Mr. McFadden: One of the areas of focus of the trade has been on the issue of just-in-time delivery into the port area. That starts with improved information from the vessel arrival, back through to the terminal interface, to the rail interface, then back into the country. The trade has been putting a fair bit of effort into this area of developing systems that can provide that kind of delivery.
Mr. Mulder: I believe some people in the audience are more expert on that, but I think they will probably share the views. Some of the reports I've seen claim that you could reduce the cost per tonne by as much as $15, which is the equivalent of what the rate will go up by effective August 1.
In order to get the magnitude of those kinds of changes, one would need to have a lot of work done over a long period of time. But it is certainly a possibility in a number of areas to shave $5 or $10 per tonne off the cost of moving and handling grain through a whole variety of means. That way, the system would maximize the return to producers.
That again ties in with the point I made, which is that the industry at large is going to have to make more decisions as to how it wants to shape the whole grain handling and transportation system. We've discussed before that it isn't just transportation; it's from the farm gate right through until it gets on the vessel.
As a matter of fact, for the Wheat Board, it's even beyond that because they also have to have a contract with the buying nations as to how to get it across the water. So you have to look at the whole system, not just individual components.
The Chairman: On this point, with all due respect, Mr. Mulder, the one thing we do know is that the costs are going to go up. We're told there will be benefits to the farm community.
I recall, as you do too, no doubt, the debates in 1980-84 that we were both involved in. I remember the same kind of rhetoric. I remember discussions of $12 wheat; I don't believe we've seen $12 wheat. But that was that was when the transportation cost was going to be small.
In light of that fact, our experience under the WGTA has not been a good one. As you know, Bill C-66 was brought in as a result of a subcommittee on agriculture and transport because some of the conditions promised under the WGTA were not met. Penalties and sanctions were never introduced.
In other words, the obligations on the farm side, in our experience with the WGTA, have been met absolutely. The obligations on the rail side under the WGTA have never been met. We've been given promises. What we've had under that experience is that penalties and sanctions were never introduced.
For the farm community, with all due respect, we're going to have to give them better assurances that at the end of the day there's something in this for them. I wonder if you can find those assurances.
Mr. Mulder: Mr. Chairman, I don't want to duck the question, but I was away from the transportation scene and files for about eight years while I was earning my keep elsewhere. As for some of those things you dealt with during that period, perhaps Bruce or John Dobson might talk about.
I'm dealing specifically with sanctions. Except for, perhaps, last spring, my understanding is that it was not the railway's fault that they didn't meet their obligations. Am I correct? The main-line track was improved. They invested in a number of other initiatives. The cars were available and so on.
Bruce, you're more of an expert on that, so perhaps you could talk about the sanctions side.
Mr. McFadden: The issue of sanctions has been dealt with, such as the WGTA provisions, through the SGTC. The SGTC represents a broad spectrum of the grain industry: grain companies, railways, labour, producers and special crop interests. So it's really a broad spectrum of the industry.
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They grappled with the issue of the sanction provisions of the WGTA. They determined that a system of performance monitoring should be established, which was established. On a periodic basis, when there were performance reviews conducted and when it was determined that performance did fall below a set level that had been established as a threshold, they reviewed the issue of sanctions and determined that applying notional sanctions would not be of benefit because the performance shortfall was due to the broad range of factors that were dependent on various parts of the system or were outside of system participants' control.
The exception to that, as Mr. Mulder indicated, was last spring. At that point, a review identified the issue of sanctions and raised that issue, which has since been dealt with by the government.
The Chairman: I think there are some different opinions surrounding that.
Mrs. Cowling: I clearly understand that we need to make the system faster, quicker, and more efficient. However, from a farmer perspective, I also understand about sitting in a grain truck and waiting at an elevator in a rural community in my home town. I question how, in fact, we can make that system much quicker and faster when each individual who jumps in that truck has to wait in line to get that grain through the system.
I guess the question I raise for you is: have you ever put yourselves in that position in the farm community and watched the process from the farm gate? How might you see it from that kind of a perspective?
Mr. McFadden: I have a farm background as well, which was in western Manitoba. I have seen the situation you're discussing firsthand.
The key driver of the system is the sales program. It really starts with that sales program and then pulls the grain through the system. That sales program, at times, is unpredictable, both on the board side and on the non-board side. There can be delays caused right from the vessel position that can have an impact on the movement right back at the country end. How to improve the pull of commodities through the system is a difficult issue that the entire trade is grappling with right now.
As I mentioned before, some of the initiatives, such as the Just-In-Time program, which is being developed for the west coast, and some of the recommendations that Mr. Mulder referred to from the KPMG study, are all initiatives that are designed to improve that process.
Mrs. Cowling: I have just one more question. It relates to this.
As a farmer, there's one thing that I think holds the system up. Farmers are paying for this on the prairies and it's not in your calculations when we start deregulating the system. One of the additional costs that farmers in Canada pick up is by storing the grain on their farms, which slows the system up. In many other countries, the grain storage system has already moved off the farm base, so it speeds their system up.
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That also eliminates the cost that the farmers have to pick up. For instance, as farmers in Canada, we pick up additional costs because we store the grain on the farm. To speed up the system, perhaps the storage system should be somewhere other than the farm base. This would speed up the system and there wouldn't be the line-up of vehicles going to the elevator system; it would already be there. It would also pull the costs away from the farmer who's holding that storage facility on his or her farm. Do you have any comment?
Mr. McFadden: That is true in regard to some other systems that are utilized in other countries. There is a very large capital investment involved in establishing that kind of system.
That investment has not been made, to this date, by the grain trade. At this point, the government is not looking at investing that kind of money into that kind of infrastructure. I think what you're referring to becomes a commercial decision.
Mr. Collins (Souris - Moose Mountain): Mr. McFadden, I hear you make reference to KPMG. I understand there is a report. Is that report available?
Mr. McFadden: To my knowledge, it hasn't been released to the public. The grain industry that commissioned that report has not yet received the final report or an executive summary that they are waiting for.
Mr. Collins: A number of things have come forward. I'll list them, then you can respond to them.
We talked about the expense of operation and that we're going to make it an efficient, faster system.
Look at our American counterparts. The fees they're charging are not even in the same ballpark. I'd like you to tell me how I tell my farmer friends that we're going to compete when we're not on a level playing field, whether it's at Duluth, Spokane, Seattle, or some other terminal. We're paying fees. We pay $640 million in taxes for fuel and other things. Who's going to absorb that?
Let me go back to car allocation. To whom would you recommend turning them over? Would you have any problem with turning them over to the producers at some point in time? As taxpayers, they've paid for them. I'll just go through them, then you might respond.
I noticed that you're going to allow the main-line carriers up to July 31, 2000 for funding, but you're cutting out the short lines in 1997. Is that going to happen or are short lines going to be able to receive the same benefits?
Someone told me that of the $300 million adjustment we're going to get in transportation, part of that adjustment cost is going to pay for the paying out of the $1.6 billion. It's in that figure.
I also heard a figure of about $27 million to pay out. If that were my business, I'd certainly want to do a review before I started to pay it out. That, to me, is just immoral. Other words fail me at this time.
Take a look at the transportation system that we're going to come into and the recommendations of the subcommittee. We made some recommendations last year based on an inappropriate movement of grains. I certainly hope those don't fall by the wayside now that we're going to move into a different system. Say somebody says we'll have a new bill. I wouldn't want to be on the committee that has to start to review those again. So I hope those aren't lost in the dustbin as we move forward.
Mr. Mulder: Mr. Collins asked a number of very good questions. He certainly has a pretty in-depth knowledge of some of the issues, based on those questions.
I'll try to answer some. Then perhaps Bruce and Howard can answer some others on different areas.
One concerned the producers having an expensive operation. You referred to some transportation and handling things, and also taxes.
I can't comment on taxes in terms of whether the tax regime in Canada is more generous or more expensive to producers or Canadians, and so on. As you know, we also probably get more benefits from something like medicare and hospitalization than the Americans, but that's a broader issue that the Minister of Finance can deal with.
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On the grain handling and transportation side - perhaps Bruce can comment as well - in some cases, the charges in Canada are lower; in other cases, they're higher. Take for example, the elevation charges. Most of the U.S. producers are lower. In Canada, they're higher. but we also have a different system.
As you probably know, we have a better-quality product. We do more grading and cleaning, and so on. So while the costs are higher, the system is different. Bruce may have more details on that.
As for cars, we have not made a decision as to what to do with them. Consider what the policy called for. Mr. Goodale may have dealt with that on Tuesday. There are three issues the government wants to have a review on before the end of this calendar year.
One issue is car allocation. The grain industry itself is dealing with car allocation rules for the new crop year, starting August 1. They're also going to work on what the rules are to be later on.
I'm looking at one of the captains of the industry to make sure that he's nodding to say yes.
We're looking at the transportation function of the Wheat Board as part of the overall review of the Wheat Board, but certainly in terms of their role for car allocation.
Third, we're looking at what we do with the government-owned hopper cars. We own 13,000 outright, and we've leased 2,000. The ministers of Transport, Finance and Agriculture - the three of them - have jointly decided to take look at it in terms of what should be done with the cars. Should the government keep owning them? Should we lease them? Should we sell them? To whom should they be sold? What are the impacts if you sell to the railways versus the farmers, and so on?
We hope, with the grain companies and the farm groups in the prairies, to do some work on that and have some work finished by the fall. Then the ministers can make a decision as to whether or not to make changes in car ownership.
On the question of main lines, we do not guarantee money to the railroads until 2000. What we have provided for is a maximum rate, particularly for captive shippers. This aims to protect those people who feel they may have been charged too much by the railroads. The railroads should have a ceiling.
So that stays in place until 2000. We're hopeful that producers and particularly grain companies and railroads can negotiate rates that go below that.
We do want to facilitate the establishment of short lines, as I indicated before. In the meantime, we hope the existing short lines in the prairies can remain viable. We're having discussions with them and some others as to what we should do to make sure that, for example, the Central Western Railroad and so on remains part of the system. There are number of options for that which we're discussing with the owner of the railroad and some of the grain companies. We certainly do not want to reduce the prospects for short lines.
On the $300 million, I think Mr. Migie ought to explain a little bit more. The brief answer to the adjustment package of $300 million is that it's not part of the $1.6 billion. There's $1.6 billion and then $300 million on top of that.
Howard perhaps can comment when I've finished.
The other one is from the recommendations of the subcommittee that I think you, Mr. Easter, co-chaired with Mr. Comuzzi. There were a number of recommendations being followed up on demurrage that will be in place, we believe, on August 1 so that there will be some rewards and penalties for the misuse of cars. That ought to make some improvements.
On the backhaul, the issue is gone because there are no subsidies. You can't backhaul or front haul when getting a subsidy. It doesn't matter what you do.
On the views you had as to where we go on the St. Lawrence Seaway system, and so on, that is being followed up through Mr. Keyes's standing committee report. We do want to have a more efficient system in the Great Lakes and in the seaway, and so on.
We did follow up on sanctions. We had Orders in Council ready to apply sanctions to the railroads and others. But as part of the budget legislation some of that is, in a sense, academic.
Mr. McFadden: I think Mr. Mulder covered most of those areas quite well. I might just add that after the situation last year, the industry collectively put a lot of time and effort into how certain aspects, such as car allocation as one example, were managed. There were some significant changes made with a great deal of consultation and consensus from the industry into how car allocation would be handled.
At this point in the current crop year, we have moved record volumes of grain. I think we've had a very good response and result this year.
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A voice: Do you want to comment on subsidies?
Mr. Howard Migie (Director General, Policy Branch, Western Grain Division, Agriculture and Agri-Food Canada): I'll make one quick comment on the subsidies. One of the provisions of Bill C-66, the demurrage, has been taken over in terms of being the same content in the new legislation. So that part is also there.
In terms of the $300 million, which Nick said is separate from the $1.6 billion, we haven't made decisions yet as to how that's to be spent. The minister indicated a couple of days ago that there are some very key areas for which he feels we're going to need that $300 million.
He mentioned the Canadian Wheat Board pooling and the impacts. There are also issues related to branch lines in terms of the roads, such as oil, some trucking assistance, the DI industry, and, potentially, short lines.
There also was the point you raised about the administrative costs of making a payment. In terms of the legislation that was put forward, we have kept that separate from the $1.6 billion. It won't come out of the $1.6 billion, but it will be significant.
The policy decisions haven't yet been finalized. Until you know for sure how you're going to treat forage for sure or how you're going to handle the owner/renter issue....
We're still working on that administrative cost. It will be significant, and we have to fund that through the department. So that's going to be an issue. But we're still working on that.
We'll finalize it. We're certainly going to try to keep it as low as we can, but at the same time we want to make sure we're administering it well.
Mr. Collins: I don't mind you administering it well, but with $300 million to spend.... Someone suggested $27 million.
Mr. Migie: Administering the $300 million will depend on how we -
Mr. Collins: With $1.6 billion paid out, and using $27 million out of $300 million is just bloody incredible. That is what I heard.
Let me go back to another one, which has to do with the reverse onus procedure. I would like you to tell me why you would remove the cap provision. If we're working alone now, and we have at least a protected ceiling, you'll just say to let it fly.
I think there should be a responsibility on somebody to say to us that there is a reason for us having to raise it. This is rather than us raising it and then trying to figure out later what we've done.
Mr. Migie, that's why I say I'm very concerned on that other one. Let me assure you, I'll be watching that expenditure kind of payment very closely. We have to be accountable to all those taxpayers who have asked us to be watchdogs over how we spend funds. I take no kind regard to the suggestion that $27 million would have to be used in administrative costs.
I think there was an example here the other day in which somebody was going to change windows around here for $2.5 million because there was a little frost on them. Yet, if we went to their house, the whole bloody house would be frosted and they'd never even notice it. We have to be very careful.
What about that reverse onus procedure, Mr. Mulder?
Mr. Mulder: On the reverse onus, the legislation provides that in 1999 there will be a review of the overall system in terms of efficiencies, rates, impacts, and so on. Based on that review, it will be deemed that the maximum-rate formula should stay in place or be changed. Then that review can recommend that the legislation should be opened up to either continue that regime or make some changes to it.
But the review would have to explicitly recommend that, and the legislation would have to be opened up. Unless the review recommends it and the legislation is opened up, the maximum rate would disappear.
The Chairman: I have a couple of points of clarification, Mr. Mulder.
You talked about the maximum rate. Maybe I'm wrong on this, but at one point in time, the current formula for the transportation rates, which will become the maximum rates as I understand it.... The railways are assured a 20% return on capital. Is that correct?
Mr. John Dobson (Policy Advisor, Freight Policy and Programs, Transport Canada): Under the current WGTA, there's a 20% contribution to constant cost; it's not a 20% profit margin. There is a difference.
The Chairman: I'm not saying it is a profit margin. But isn't it correct that it's in the grain industry that the railways basically have made their profit over the last number of years?
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From this committee's perspective, I'm saying that we're concerned from the agricultural point of view. We want to see balance. Although there's protection there for the farmers on that component, I see that the maximum rate scale is to the advantage of the railways, in that the railways almost have an assured profit. Am I correct or incorrect?
Mr. Mulder: There is profit running grain. Whether or not it's less....
John Dobson has convinced me, since I came back to Transport, that with a number of bulk commodities, the railways have a bigger contribution than they do for grain. For coal, potash, forest products and so on, depending on the market cycle you're in, the return on capital or costs is greater for those commodities than it is for grain. There certainly is no doubt about that. As far as we know, the railways do not lose money when they haul grain, Mr. Easter.
The Chairman: Thank you. I also have a question on the short line. I've been led to believe that the current proposal has left them out of the cost base.
Mr. Mulder: Yes, they took that out.
The Chairman: I understand discussions are going on. Is that going to be corrected?
Mr. Mulder: The short answer is that it's up to the parliamentary committee when it receives Bill C-76. We've had discussions and looked at a number of options. Certainly the short-line operators and perhaps some other people are thinking of appearing before the committee to see whether or not the maximum rate should be adjusted to include those costs so they get a chance to have a revenue split between them and the main-line railroads. That is a proposal that has certainly been suggested by some of the short-line operators and others.
But that's not for us to decide. As you know, you'll be going to committee in a week or two on Bill C-76. You can hear the briefs and see whether or not changes should be made.
The Chairman: Okay. On the car allocation, you've talked about the current cars. There's no question that some of these cars are getting older. It's not widely known that the railways haven't put cars into the system. They've maintained them, as I understand it.
What about the future? What's going to happen in terms of new car development? We can have a marketing system in place, but if we don't have the cars to put the grain in, then our farmers or the Government of Canada are going to be responsible for buying them. Where does that leave it? What about the future in terms of rail cars?
Mr. Mulder: First, I would hope that efforts would be undertaken in a more determined way by the grain industry to remove car cycle times and to get better use of the cars that are now there. If you did that, everybody would save money, not only the railroads, but also the producers and the grain companies. I think the top priority ought to be to improve significantly the car cycle times.
Of course, the question also is: what happens to the existing hopper cars? Not only does the Government of Canada have hopper cars, the Wheat Board, and the Governments of Saskatchewan and Alberta have them. Who takes over those cars? Do the governments keep them? That's an issue. What happens to the rates based on whether you lease them or sell the cars, and so on?
After those first two are dealt with, there's the third question of: who pays for the additional cars if the railways want to or need to buy them? I believe Canadian Pacific has made suggestions that the rates should be allowed to go up if the railways feel it's required to invest in more hopper cars. The jury is out on that. You can ask CP to appear before you.
But some people say there are already enough cars, so just improve the cycle times. Are these cars going to be used only three months for the grain trade, and then for some other traffic other times of the year? Why should the producers pay for all of it if they're only going to be used for part of the year? You get into all kinds of complexities.
That's why some proposals were made in January and February that we should build that in. We decided not to. You can argue a number of ways. Certainly CP and the grain companies are still discussing it. I think some of them might make a proposal on whether to deal with it to the parliamentary committee on Bill C-76. It all depends which side you're sitting on.
The Chairman: If you're sitting in the position of the president of Saskatchewan Wheat Pool, you have to wonder about the question of whether there are going to be cars in the fleet.
Mr. Mulder, I want to come back to what you said. I mean no disrespect. You said you would hope - we would hope too - if the railways want to.... Someone might make suggestions.
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From a farmer's perspective and certainly from the pool's perspective, with these massive changes that are taking place, there has to be something to assure the farm community that there are going to be cars in the system and that we're not going to get into a spot ten years down the road in which the railways come crying to the Government of Canada, as they have so often in the past, and say they can't afford to put the capital into rolling stock under this regime. Then where are we left?
I'm very concerned about that point from our perspective and the farm community's perspective. How do we deal with it?
Mr. Mulder: I appreciate your concern, Mr. Easter. But it almost seems the implication is that, somehow or another, government officials, elected members of Parliament, or cabinet ministers have to deal with that.
As I said before, it's up to the grain trade to decide that. Collectively, the grain trade - the railroads, terminal operators, inland operators and grain companies - ought to make a lot of decisions as to how to improve car cycle times. It shouldn't be up to Bruce McFadden, Peter Thompson or Nick Mulder to make their decisions. We're not competent to make those decisions in those areas. Those are operating issues that they ought to decide.
That's why we're pushing for an industry agency. Over the last ten or fifteen years, there has been very little improvement in car cycle times, except for the last crop year. Right? In the current crop year, we've made significant improvements through a determined effort.
But the grain companies, terminal operators, and railway companies have to do more work. They're working on it to see how they can better use the existing cars, because a lot of them are still in pretty good shape. Instead of rushing around worrying about buying more cars, let's make better use of what we have in the whole system: lines, elevators, terminal operations, and cars.
The Chairman: I agree with you in terms of making better use, but we want assurances of where we're going to be if we run into a problem in the future.
Mr. Taylor (The Battlefords - Meadow Lake): I'm a former journalist and newspaper reporter, and I'm never one to take somebody out of context. But did I just hear you say you weren't competent?
Mr. Mulder: In areas in which I have expertise and responsibility, I like to think I'm competent. But you can judge that or ask some of my colleagues. I cannot make, nor should I be asked to make, decisions on how to operate the grain handling and transportation system in western Canada. That is up to the people who pay for it and run the system. It's not up to civil servants, no matter how competent they are. That's not their area of expertise or responsibility.
Mr. Taylor: Basically, you, the department, and the minister are proposing a number of decisions to be made, and are actually putting forward some decisions that have been made. Those decisions will probably have a significant impact on the future of transportation in Canada.
I apologize that I missed your original presentation. I hope I'm not covering ground you've already covered.
In terms of the grain trade, what are your projections for grain movement over the next ten years from the prairies? What assumptions did you use to reach those projections?
Mr. Mulder: Mr. Taylor, you asked two very good questions. Somebody who has been in the forecasting business said that one should not into forecasting, especially in terms of the future.
I think Mr. Migie and Mr. McFadden might comment on that. There have been projections made, but they depend on assumptions. I think it's better to deal with the assumptions.
First, given the changes in the western grain transportation subsidies, you have to decide what happens to the production mix. Howard Migie might comment on that. If a number of commodities are no longer going to be grown, and if there's a shift to other crops, they have different transportation contents. There's barley versus canola, for example.
There's also the question of how much processing gets done on the prairies versus just a shipment of the raw product.
The third assumption you have to make is how much cleaning will be done over time inland versus at the port. A number of people feel there isn't much use taking stuff you're not going to put into a ship all the way to a port and then cleaning it up. Clean more of it inland.
Those are the various factors that are at play. But I don't know what the final projections are over the next five or ten years. Howard or Bruce, do you have some?
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Mr. Migie: I'll talk about impact analysis or economic analysis because several people have raised that with me outside of the committee.
Within the department and with Transport, we've certainly endeavoured to try to put together based on the changes that were put forward in the budget and what might happen with respect to the freight pooling system, the subsidy changes. We're trying to integrate the efficiency measures as well.
Also, as Nick Mulder said, we are making assumptions that are very important with respect to the future and that certainly can be proven wrong, both on access to various markets as well as what might happen to prices in the absence of any of the policy changes.
We're close to completing that analysis, at the stage of peer review. It goes ahead five years. It's meant to be the best judgment we can make in terms of the implications of these changes.
Consider longer-term forecasts. As part of the May 16 group that Minister Goodale set up, led by the grain companies and others, there's a vision for the grain industry that's fairly optimistic in terms of export potential with value-added products or greater use of raw products.
Getting into forecasting beyond that five-year or ten-year period is not going for accuracy; it's assumptions. That has not been something that has been put forward or is driving reforms such as a broader National Transportation Agency, the act or rail renewal.
Mr. Taylor: I tossed that out because, obviously, if we're making decisions now based on some vision of the future, what is the basis on which we're determining that future?
We know that China within ten to fifteen years will be in need of two to three times the amount of grain they're currently importing. What position is Canada going to be in to meet that market? If we're moving out of grain and into some other product and you're making decisions based on that analysis, where does that leave us ten years from now when the demand for grain exists?
Mr. Migie: We expect to have a very significant role in the area of grain production and grain exports. That certainly is a fundamental assumption that's there. That doesn't mean it's going to be exactly the same type of.... The crop mix has changed. There are more value-added opportunities. We certainly hope to be there. But we're not basing it on the assumption that we're getting out of the business of grain export. On the contrary, we expect to be quite significant.
As Nick said, government is not determining how it's marketed or the system, and we're not basing it on any one single forecast.
Mr. Collins: Was your observation about the movement of last year based on the transportation subcommittee. Did that have an impact?
Second, Mr. Mulder, you mentioned that the captains of industry are here. What if the captains of industry hypothetically said that they will take over and look after the cars. Would that be supported by people like yourself as an initiative that really would have some focus to it?
Mr. Mulder: Certainly, in terms of taking the responsibility for allocating the cars, we think they should do that. They have already decided to do that. They are deciding the rules for the next crop year as to how cars should be allocated; it's no longer the Grain Transportation Agency.
By the way, your committee had an impact on that on a number of fronts. I came back to the department in May. Because there are problems out there, one of the first things Mr. Young asked me to focus on was a subcommittee report.
So work with Mr. Goodale and get some of these things fixed.
I think, on balance, that those recommendations were helpful.
On the car allocations, certainly they're also dealing with the farm groups and the producers themselves to make sure it isn't just the grain companies, but also a wider net of people on car allocation.
Were you also dealing with the future of the cars themselves?
Mr. Collins: Yes.
Mr. Mulder: If the grain companies and/or the railroads want to take them over, I would say, yes. But the Minister of Finance would probably ask what Mr. Young or Mr. Mulder what we get in return. Are you suggesting we turn them over just for a dollar, or do we get some price back for the Government of Canada and the taxpayers?
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Mr. Collins: I am suggesting that I think we have to find a group that can handle this business of car movement.
Mr. Mulder: Yes.
Mr. Collins: How you then work out the formula is another issue, but it's something that has to be dealt with.
Mr. Mulder: Yes. As I said, we need a review and a recommendation by the end of this year.
The Chairman: We are going to have to adjourn. There's another committee trying to get in the room. We will continue the meeting with Prairie Pools in room 208 of West Block.
Mr. Mulder, I know Marlene and I will probably put some questions to you in a letter covering a number of areas. We may, at some future point, have to call you back.
I wonder if we could get the KPMG study you mentioned as quickly as it is available and as quickly as it is available.
Mr. Mulder: Mr. Chairman, it is not our study, and we are in no position to release it. Perhaps when your next witnesses show up you, might ask them that question.
The Chairman: Thank you very much for coming and for the information you put forward.
The meeting is adjourned.