EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, May 31, 1995

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[English]

The Chairman: Order.

We have with us Professor Ed Tyrchniewicz, from the Department of Rural Economics, University of Alberta. He has had a lot experience, I know, in terms of the transportation area.

Professor Tyrchniewicz, you can start, and then we'll go to questions.

Professor Ed Tyrchniewicz (Department of Rural Economics, University of Alberta): Thank you very much, Mr. Chairman. I appreciate the invitation to come here and make a few observations to your committee.

By way of a little bit of background in terms of what I do in real life, if there is such a thing, I'm currently dean of agriculture, forestry and home economics at the University of Alberta, and have been there for seven years. Prior to that, I was at the University of Manitoba, where for the last 25 or so years I've been working on grain transportation policy and agricultural policy issues in the academic world. As well, I was director of research for the Hall commission on rail line abandonment in the mid-1970s. I was director of research for the Gilson consultations in 1982. In 1993-94, I had my own road show called the ``producer payment panel'', which I chaired. So I've been rather interested in how all these issues have evolved.

Rest assured, I will not give you a lesson in history, but I would like to comment briefly on two things: the diversification question as it relates to life after WGTA; and the efficiency question. Then I'll go on to whatever issues members of the committee may wish to pursue in more depth.

Let me start off with the conventional wisdom that a change in the method of payment will lead to more diversification because the market signals will be clearer and will go to resource neutrality. It's certainly not a perfect view, but it's generally the direction in which things will likely move.

However, let me hasten to add some non-conventional wisdom, that a change in the freight rate policies, the removal of WGTA in and of itself, is not going to solve very much. I think one has to look at this issue in the context of the market opportunities for these products, for these services of agriculture that are expected to take place as a result of a change in freight rate structure.

The point I would really like to leave here is that the freight rate issue, changing freight rates, changing freight rate policy, is really sometimes overrated as having an impact on diversification.

The other thing we have to remember when we're looking at some of these changes, and particularly the impact on the prairie economy, is that we're not going to move out of cereal production or grain production. It's going to be reduced, but it's not going to be eliminated or reduced by 50%, or anything like that.

Indeed, in some areas there probably will be very little change in mix of crops and mix of enterprises, because again I come back to the market opportunities question, also in terms of climate and soil types. Those often are very restrictive in terms of what the opportunities might be.

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I think where the challenge is going to come on diversification is to be able to identify non-traditional market opportunities for the products and services of agriculture. By this I mean we're not going to go to wall-to-wall livestock on the prairies, or have a meat-packing plant in every community, or a canola-crushing plant in every second one. Rather, I think the opportunities lie in finding the niche markets for specialty crops.

I think we're doing that quite a bit in the prairies already with: the non-food uses of grains and oil seeds, whether it be for lubricants, pharmaceuticals, or other industrial purposes; the whole concept of PMU, pregnant mare urine, which is becoming quite a major enterprise in parts of the prairie region, again, for the pharmaceutical industry; the whole notion of farm woodlots as an alternative; and ecotourism.

We tend to look at agriculture as providing a product. There's a lot more to agriculture than simply the production of food. I think the whole notion of providing, whether one wants to call it a bed-and-breakfast type of operation or farm vacations, an opportunity for people who have a desire to see what life is like in rural, more pastoral settings does hold out tremendous opportunities. Perhaps we don't tend to think of those opportunities enough.

I think what that is going to require is creative thinking and a sharp pencil. Perhaps I shouldn't use the term ``sharp pencil'' but rather ``good computer''. I would suggest that as one of the non-conventional things. More and more people have computers. We have things called Internet, surfing the Internet. It's amazing what one can learn about what's going in the world, and get ideas as to what one might do, such as in the handicrafts area.

Again, in a sense, some people would say, well, you're talking about going back to the good old days when we used to ship a couple of cans of cream a week into the local creamery. Well, that was diversification. That certainly wasn't main enterprises. Maybe what we need to be looking at are some of these enterprises that aren't going to take over the whole farm but will provide some diversification in terms of where the farm incomes come from.

The last point I'd like to make on diversification is that it's broader than just transportation policy. In the policy discussions, there's an increased emphasis on a more conservation-oriented approach to agriculture. Certainly in terms of land use, again, the point I would make about the removal of the WGTA benefit is that maybe it will result in some land being taken out of grain production that never should have been in grain production, marginal lands that were broken up in response to opportunities or market signals as a result of the old Crow rate.

I think that's an issue where, regardless of whether we have a change in WGTA or not, there's going to be more and more pressure to take account of the sustainability and environmental issues and how we manage particularly our land resources.

A related issue is the notion of sustainable communities. We often get concerned about the decline or demise of rural communities, and we tend to look at agriculture as a saving grace. But there are a lot of other issues that relate to sustainability of rural communities, whether in prairie Canada or wherever. I see where there's going to be some diversification opportunities coming out of that.

Let me then turn very briefly to making a few observations about efficiency issues and the grain handling and transportation system. In my view, it is absolutely critical that we look at enhancing the efficiency of the grain handling and transportation system if we're going to offset some of the negative impacts of the higher freight rates that are a result of the proposed policy changes. I think a number of points need to be made here.

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First, there's no question that we're going to be seeing, and we'll have to see, the abandonment of more high-cost, in many cases low-volume, rail lines in the prairies.

Another area is in the regulation of freight rates. I'm sure you've heard from some groups that we need to have a totally deregulated system. Others will say, well, no, you have to continue the regulation. I suggest that perhaps there's room somewhere in the middle. I think we have to provide some flexibility, especially in the provision of incentive rates. At the same time, I'd be a bit apprehensive about saying that we're going to move to a totally deregulated system in terms of freight rates on grain when we've had such a highly structured approach. The process of change takes a little while. I don't think one can do it in one fell swoop.

A point related to that is that, to the extent that there are benefits from the efficiency provisions, whether these be through abandonment of rail lines or longer car spots, or whatever, it's necessary to ensure that these benefits are actually passed on to the farmer and other shippers. Let the market work it out. I'll say a little bit more about that from the perspective of competition.

One of the issues on efficiency on which I wanted to comment briefly is grain movement to and through the U.S. As you well know, this is a highly political issue. We have the blue-ribbon panel that's currently doing a lot of toing and froing on a number of Canada-U.S. grain issues. We have the cap on exports to the U.S. In the current political environment, I don't think it's likely that we will be able suddenly to exceed that cap of 1.5 million tonnes by a factor of 3 or 4 or 5.

There are opportunities in the U.S., however, particularly in terms of domestic U.S. markets. This is happening, particularly out of Manitoba with special crops moving into the U.S. markets. I'm not totally convinced that we can suddenly become a manufacturing centre for export to the U.S., because if the opportunities to do that are there, then they're already there without freight rates on grain.

So it comes back to just how real some of those market opportunities are. What are the competitive elements?

I would like to ask a question to which I honestly don't know the answer, but I have some suspicions about. We tend to look at the U.S. system as being a highly efficient and good system that we should try to emulate. But just how efficient is that U.S. system?

I'll raise only one question, in terms of car-cycle times. How quickly you can cycle a car through the ports and back out to pick up a load is a very critical element of efficiency in grain-handling and transportation. Some of the real horror stories are that Canadian cars go into the U.S. and seem to get lost for an awfully long time. So before we jump on that as a model, we have some questions to ask.

Let me end the efficiency comments by coming back to the question of competitive alternatives. Whether we're talking about rail systems in Canada or we end up with a privatized CN system, if all of it was to be owned by one company then we'd have a very interesting competition situation. In fact, there would be very little of it.

One of the real advantages of having the alternative of moving Canadian grain through U.S. ports is that it provides just that little competitive edge that keeps the Canadian rail system and the Canadian ports system sensitive to the needs of Canadian grain shippers.

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I guess one final point, if I may, is the whole area of labour disruptions. We hear about these and sometimes I think they're a little overrated, because there is some flexibility in the system. I would hope that in a country as advanced as ours we can find a better way to resolve some of these disputes, whether they be relating to the introduction of new technology or working conditions and perhaps a concept of some kind of industrial tribunal, not just for grain handling and transportation, but for any number of other areas.

My final comment, Mr. Chairman, is that there is life after WGTA, and it will be interesting.

Thank you.

The Chairman: Thank you, Mr. Tyrchniewicz.

I'll turn to Mr. Bernier.

[Translation]

Mr. Bernier (Mégantic - Compton - Stanstead): Good afternoon, Professor. First of all, I want to thank you for your presentation. I have a rather general question to start.

If I clearly understand the first part of your presentation, the elimination of grain transportation subsidies does not mean the death of agriculture in the West, and I totally agree with you. According to you, grain and oil seed production will remain very much the same in certain areas.

What do you think of the latest budgetary measures taken by the government in the area of compensation for the farmers and of diversification. What will be the impact on western agriculture and, consequently, on eastern agriculture? Have you an opinion on the matter?

[English]

Prof. Tyrchniewicz: That's a difficult question to speculate on because the compensation payment will be on a one-time basis and it will not be tied to any particular activity. There is a lot of debate as to how farmers will actually make use of that payment. Whether they will use the money to upgrade existing equipment, use it to offset their transportation costs, or for some totally non-farm, non-agricultural investment use, is open for discussion.

My own view is that it will likely find its way into debt reduction in the case of farmers who have fairly high debts. They will then look at the higher freight rates on grain, for example, and the resulting lower prices at the farm, and make production decisions accordingly.

In some areas one might expect that they will diversify into other areas, such as hog production, for example. I'm getting at what might be an issue in eastern Canada. I'm not totally convinced that it's going to be that major a factor. I come back to the notion that we already have a pattern of agricultural production that is governed by a lot of factors that are beyond the control of farmers. To simply start producing hogs...or one could take an even perhaps more remote example, like dairy production. There simply aren't the markets for these products.

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I think an important issue we can only speculate on is what will happen in the NAFTA, the North American Free Trade Agreement, relations between Canada and the U.S. in supply-managed commodities. I think that could well override any impact of the compensation package for the WGTA.

Mr. Bernier: Thank you.

Mrs. Cowling (Dauphin - Swan River): I'm sorry I wasn't here for the beginning of your presentation. You made a couple of comments, Professor, one of which was that we tend to look at agriculture as a sustainable base. Could you expand on that? You mentioned that there are other things, but you just very briefly skimmed over that. Can you expand as to what your thinking might be on rural communities and where we might see them in about ten years if in fact agriculture isn't the sustainable base?

Prof. Tyrchniewicz: I don't think it's a question of saying that agriculture is not a sustainable base, it's a question of saying that agriculture is only one possible source of sustainability in a rural community.

I apologize; I don't know whether or not you were here when I made my comment about ecotourism.

I know a little bit about your constituency, and there is some marvellous scenery there. There are marvellous opportunities for non-agriculturally related enterprises in terms of tourism and in terms of the bed and breakfast approach. Moreover, you have a lot of horses in your constituency. I think these are some of the kinds of activities, the handicrafts area, that are not going to be the be-all and end-all of the community but will add some enrichment in terms of small enterprises that can supplement agricultural activities.

My concern is if we take the view that the only solution is that every community has to have a canola-crushing plant or a livestock processing facility, because we can't afford those. We have to think of the communities as places where people live. I think from a policy standpoint we really don't want everybody moving away from Russell to Winnipeg or all the other communities and going into the urban areas.

I understand there's a group that moved into Rossburn, for example, from Toronto - urban people who saw an opportunity to do some interesting things. Again, from what I understand, they've added to the community. They're happy. Again, this is fuzzy kind of stuff, but we need to broaden our thinking beyond just thinking of production agriculture. That's what I'm really trying to get at.

I think an issue that we're going to be faced with in the agricultural sector is the perception, rightly or wrongly, that we're mining our natural resources, that we're polluting our environment. I think we have to be more than just defensive about that. I think we have to be more sensitive as to how we respond to some of those pressures with a proactive approach involving providing, say, bed-and-breakfast-type opportunities, inviting urban people who have few connections to rural life to come out and sample some of the good things we have in the rural prairies, in rural Canada generally.

That's a rather vague answer, I understand, but I'll let you go on from there.

Mrs. Cowling: One of the things I find happening in my constituency and probably across the west is that there has been an extremely great acceptance of the buy-out of the Crow. People are quite optimistic. I'm wondering, though, when they pick up those additional freight costs if in fact they will continue to be optimistic. I know some farm organizations are somewhat nervous themselves about how, when we move into a deregulated regime and into a free market, that optimism may well fade.

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Do you think we should have in place some sort of regulatory body as we watch the system unfold so that we don't jump off the end of the diving board and into a pool that may not have some water in it, a body that could supervise or watch the system? Do you think it might be a way this committee should go to advise the minister?

Prof. Tyrchniewicz: Your observations about the ease with which the concept is being accepted is something we found when I was chairing the producer payment panel. Indeed, I was amazed how little opposition there was. I don't know if it was as much optimism as resignation about the notion that changes were inevitable and let's get on with coming up with a mechanism that's equitable and helpful rather than trying to fight the inevitable.

Indeed, by far the most popular concept - if one can use the term ``popular'' loosely - was one of a pay-out. We did not recommend that in our producer payment panel because at the time we tested the idea with the Department of Finance and they were absolutely adamant that there was no way that kind of a big chunk of debt could be added, so we went the second-best route.

But we did ask a number of groups what kind of safety net they were proposing. We got very little advice on that particular notion. My own view is that we have to have some kind of a transition process. The notion of change being instantaneous is just not going to wash.

My understanding is that this year planting intentions, if farmers were indeed reading what was going to happen on August 1 in terms of the reduction in freight rates.... Yes, there's going to be a compensatory pay-out, but that's not coming immediately. I would say you're going to start hearing one awful lot of flack in about September or October, when the first load of grain is delivered to an elevator. I'm surprised more of them haven't realized that. People who provide advisory services have told me that those realities are not always being pencilled in, even by some of the more forward-looking farmers.

I'm not sure whether one has a regulatory approach that says we move through this gradually. I notice the minister did suggest there be some kind of dispute resolution mechanism to deal with the renter-versus-owner question. Maybe that's the approach to take.

In our original recommendations to the minister we had suggested that there be a dispute resolution committee, that it not be just on the renter/owner question but that it could be on any number of aspects relating to implementation of this legislation. It should be composed of perhaps five or six producers who have had some experience, whether it be in debt-mediation boards or whatever, who could try to work at resolving these issues.

That would be one alternative. I would be reluctant to suggest putting in a permanent body, but instead, maybe some kind of transitional body that may help with this end. I think there's still an educational process that's going to be necessary here as people start looking at it.

On the other hand, we could have some developments in the international grain markets that would drive grain prices up and the negative effects could be softened by market forces. It's hard to tell what will happen to the grain markets, though they do seem to be edging up.

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Mrs. Cowling: I like the concept of an education body to walk people through the process. Would you think the people within that body should be representatives of the farm community, farm organization people, industry people; a combination of people to go through the process? How would you put that group together? Who would you suggest beyond that group?

Prof. Tyrchniewicz: I could see a number of ways that could be done. One could be a collection of half a dozen or more, or perhaps in each province one would have something like the debt mediation board. These people would not be there to lobby for or against the policy, but to try to explain it.

I recall back in the early 1970s a major study was undertaken by Mr. Lang and the grains group. There was a very fascinating exercise where they hired a facilitator, a person whose job was simply to go out and give presentations in communities. In fact, you probably know the gentleman, Jack Nesbit. I went to a couple of those meetings, and Jack did not get himself drawn into the politics of it. He simply said, here's what's being proposed, here are what the implications are; if this, then that; but not in any recommending way.

Mr. Penson (Peace River): Welcome this afternoon, Professor. I know you've done a great deal of work in this whole area of freight rates. I think your help here would be of great importance to our committee this afternoon.

I should just tell you first of all that I represent a riding I think you know, Peace River riding, in northwestern Alberta, which has a big agricultural community, one that is well diversified in crops that are grown. So it concerns me that under the WGTA buy-out proposals there isn't some recognition that there would be a pay-out for crops such as legumes and grasses and forage crops, because I heard you talk about diversification.

That's one of the things that have been happening in several parts of the country: to try to diversify and take a better approach to soil management. Now, with the pay-out that's coming, although it's not a great deal, it seems to me people want it to be divided up fairly. The same land base that's used to grow grain is also used to grow forages in a rotational basis in my riding.

So that's the first question: under the Western Grain Transportation buy-out, what are your views about including forages in the pay-out?

The second one deals with the Canadian Wheat Board pooling of freight. As you know, we are moving away from the pool, which included the Thunder Bay point in the seaway system, but we are still planning on having some pooling points that would require producers to be pooled with others.

Just to give you some idea, we operate a grain farm ourselves. In the Peace River country we would be one of those farthest from market in those cases. But the people I talk to feel this should be fair: why should other people be asked to pay part of our freight?

I guess the question would be this. Is it not the best approach, the fairest approach, to have just a straight freight rate from Grand Prairie, Alberta to Vancouver, if that's where my delivery point is, or from Regina to Thunder Bay, or whatever it takes in order to have a true market situation in freight? Why should we be pooled with other people? Isn't that a concept that really should be done away with?

I would leave it there for the first round.

Prof. Tyrchniewicz: On your first question, about what should be included in the pay-out, in the producer payment panel report our recommendation was to broaden it beyond the cultivated acres to include forages and improved pastures. That would certainly be my view.

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Many of these people have already diversified. In Alberta especially we've seen the diversification happening. Granted, some of it was due to provincial government policies on the Crow benefit offset program. Nonetheless, these people have incurred some of the costs as well. From that standpoint I would certainly agree it should go beyond the current definition.

One of the other things we recommended was an adjustment fund, which was not quite as much as Minister Goodale put into his proposal. But part of the intent was to deal with special cases such as the DHI people, which we felt was a very special case, or the irrigation situation.

Some of these issues cannot really be dealt with in a straight pay-out. I think they might be better dealt with in the form of a special consideration under the adjustment mechanism.

Your pooling question is an interesting one. Let me see if I understand it. Essentially, you're saying that instead of having the price pooled, it should be the market price at whatever the particular point is. In a sense, that's getting into the whole area of the Canadian Wheat Board, because what you're suggesting, as it applies to canola, etc., is essentially what's happening there. It's the street price.

Mr. Penson: Yes, I'm dealing specifically with the Canadian Wheat Board's pooling arrangements.

Prof. Tyrchniewicz: Okay. I just wanted to make sure that's what you're referring to.

I think that gets much beyond the issue of freight rates and where we're going to end up with the Canadian Wheat Board as a result of the blue ribbon commission and other things. I'm not sure if I could give you a quick answer in terms of whether that's good, bad or indifferent.

One of the potential realities, because of the location of the Peace River, far away from markets, is that one does run the risk that it could work against more remote areas like the Peace River.

Mr. Penson: Maybe I could just remind you, though, that lots of commodities are produced in all parts of the country, and Peace River country is one of them. Other commodities have to pay the real freight from Peace River, Alberta, or Grimshaw, Alberta, to wherever the market is. Why should the grain industry be different?

Prof. Tyrchniewicz: If we're talking about freight rates as opposed to the actual pricing mechanism, as I understand the pooling proposal, the freight rate will still be a distance-related rate. So someone who's just west of Calgary will have a lower freight rate than someone in the Peace River area, for example.

I'm not sure whether you're getting at the freight issue or the price-making issue.

Mr. Penson: It becomes part of both, of course, because as you pool freight, that comes off your initial payment. I'm concerned that any pooling at all of freight should really not be in place. We've seen what happens -

Prof. Tyrchniewicz: Excuse me, but we're not going to be pooling freight.

Mr. Penson: Oh, yes, I believe we are.

The Chairman: Mr. Penson, it's still distance related.

Mr. Penson: But why the pool at all, then?

The Chairman: That's pooling on pricing.

Prof. Tyrchniewicz: We're pooling prices. With the policy, at least as I understand it, we're getting away from the notion of pooling the freight costs. The freight costs, as reflected in the rate structure, will be charged to each individual point. It won't be a question of people in the Peace River area getting subsidized or cross-subsidized by those in the Calgary area, unlike the present system, where people in Manitoba are being cross-subsidized by those in Alberta. I think that part has been done away with, essentially.

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It's not a perfect fit, because you can say a mile is not necessarily a mile if you're going over a mountain as opposed to downhill to the prairies. But as I understand the proposed policy, it gets away from the kind of issue you were concerned with on the pooling of freight costs.

Mr. Penson: I may have misunderstood. If that's the case, that deals with my concern.

Mr. Collins (Souris - Moose Mountain): Professor, I want to thank you for being here. I apologize for coming late.

I have a number of concerns. You touched on one of them near the end of your presentation. It had to do with disruptions. You mentioned something about industrial mediation. When you have 22 to 25 unions that at some time can impact on the movement of a product either east or west, how do you see interpreting industrial mediation as a mechanism to get out of that problem?

Prof. Tyrchniewicz: Again, as with some of the other changes I don't think that can be instantaneous. It's going to require a certain attitude adjustment. I know there's a tendency to say the difficulties are all on labour's side, but there are some difficulties on management's side as well.

I think it's a matter of coming together and understanding the importance of this sector to the economy. I use the example of technological change, because that can often be one of the issues, and sometimes the issues may be quite petty. The only mechanism we seem to have is work stoppage or lockouts.

I see that as a much broader issue than just simply the grain. We are dependent on international exports and we will continue to be. We have to somehow build that reputation of being a reliable supplier. We don't have marines to bring in to run the docks for us. I think we have the opportunity here to think about this.

I recall the suggestion made by Judge Emmett Hall when we were talking about rail-line abandonment that surely we had to come up with some way of resolving some of these issues, whether it is how many people are on a shift, technological changes, or whether you have to uncouple the trains when they come through as a unit train. The gentlemen who's going to speak after me can probably tell you a lot more about the operational dimensions of that.

What strikes me is, how does one bring about change? That's really what we're looking at. How are we going to live in this new environment - and labour disruptions are part of it? How are we going to make people aware of these changes and the implications of these changes, and get them to think a little differently?

Mr. Collins: I like that term ``attitude adjustment''. I suppose you do that for university students too. You give them a little attitude adjustment, especially when you lower their marks.

I'm interested in knowing what you think of our car allocation system and car ownership. I'd like to know what alternatives to transportation arrangements you might expect to see.

Prof. Tyrchniewicz: I'm sorry; I don't understand that one.

Mr. Collins: As we go through this there are going to be some changes in our transportation system. Do you see any alternatives that might come into play? I would like to know what your thoughts are on short lines.

In five or ten years where do you see us making the changes? We talk about agriculture and agrifood. What are some of the impact areas, especially from your field of economics? What potential areas do you think we could move into in the overall picture of things? I know you talked to Mrs. Cowling about the Dauphin - Swan River area specifically.

Prof. Tyrchniewicz: If you'll permit me, I'm not going to say much about car allocation and ownership because I really don't know much about that. The one principle that I think is important is that car ownership and allocation should not be used as leverage on policy issues. I think at times our process has become rather complicated. Perhaps letting market forces do that more so than having a regulatory approach might be the solution.

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I think short lines have some very interesting potentials. I understand there are some concerns about current legislation on the part of Mr. Payne, about whether he's going to get any money out of it. I think the history of short lines has been a bit of a spotty one. Because they aren't constrained by the labour agreements and the like, the same individual can run the train, fix the track, do the books, and everything else. Where they tend to run into difficulty is when they have a capital problem, if a bridge goes out or whatever. That can often be the end of the short line.

In many ways I see the short line as a bit of a transitional operation. If CN or CP cannot operate, or feel they can't afford to operate, a particular branch line, the short line may serve as a transitional mechanism. But once you run into a capital problem, then maybe you let it go at that time too. There's a lot of history in the U.S. about short lines.

Changes in the next five to ten years: well, that's good for at least an hour, sir. I think the one thing we have to remember is that we are going to be eating food five to ten years from now. There are going to be more mouths to be fed in this world and there may well be more mouths to be fed in Canada too. So I have a very positive view of the importance of agriculture, that it's going to be with us.

Is it going to be the same as it is now? I very much doubt it, but some parts of it will be the same. I think we'll still have essentially a grain-based economy in western Canada. It may not be raw export-based, but it will still be grain-based.

If I may wear another hat, in terms of the development of new technology I think we really need to be putting more effort into the new product development area. Again, this is heresy from a dean of agriculture, but I think maybe we've put a little too much effort into production efficiency of the basic crops and livestock and perhaps not enough into the alternative uses. That's one of the directions in which I've taken my faculty, and we've done some very significant attitude adjustments at the University of Alberta.

Part of it is moving in two directions. Given that's where I've been pushing, maybe that's what I believe, but we have to be looking at agriculture as more than just a production activity.

In the case of Alberta, the gross provincial product for the agricultural sector is something in excess of $9 billion. Over half of that is off-farm activities. I think we need to be putting more emphasis on the processing, the marketing, the finding of the new products. What they'll be, I haven't a clue, but I think we have to put some of our bright scientists to work, encouraging them to do some of that creative activity and not necessarily just saying, ``Find me a new product six months from now''. It's the old notion that sometimes I get lucky, and the harder I work the luckier I get.

This is maybe off-topic, but some of what's happening in the agricultural research area is to me a cause for some concern, not because of how it impacts my operation directly, because in a sense it doesn't, but the fact that we're taking a shorter-term view of the importance of the development of new technology and especially new product technology. That to me is a very important area we need to be looking at and where I think the changes will be coming, more so than on the production side.

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The Chairman: Mr. Tyrchniewicz, on the market opportunity side, you suggested in your presentation that we need to identify the market opportunity. As a government we've certainly talked about exports to $23 billion. Even on that question, I question if we have the market research to show us that in fact it can be done, or is it just a figure pulled out of the air?

In this debate I find the same thing, that people are saying, ``Well, we'll produce beef. We'll produce hogs. The markets are there.''

What needs to be done in terms of identifying that market opportunity? Is there anything we can do, as a government, in terms of market discovery, and so on, or concepts such as Canagrex or of that nature, that actually go out in the international market and find the markets and assist, say, the grain companies, or whomever, in finding markets to market into?

Prof. Tyrchniewicz: In terms of what I think is a reasonably good model of how one might do that, in the grains sector we have something called the Canadian International Grains Institute, which provides not just trade missions - I don't mean to downgrade trade missions. Some of these tours are nice, but I'm not sure they are where the results come from. The real opportunities come from bringing people from these potential areas to Canada to see what we have. Sometimes they're the ones who can identify these opportunities.

I'll use one very small, but interesting, example. York Foods in Lethbridge produce french fries. They were trying to put french fries into the Pacific Rim market, which perhaps is not the most common day-to-day food. However, they brought a scientist over from one of the food processing companies and they asked him what kind of a product he thought would sell. He said, ``Well, you have to give it a seaweed flavour''. The reaction was, ``Seaweed? My God!'' However, the guy came over and they did a bit of product development. Now they've found themselves a market.

It's important to bring people from these potential markets to see what we have and to talk with them. I'm a bit cynical about a lot of trade missions going over. Some of them bring results, but sometimes the results are from people who've been back and forth perhaps at the technical level, more than from understanding what the tastes are.

I can give another example. I was in Korea doing something else and there was a trade mission from Alberta. I was invited to a presentation. They were peddling that marvellous Alberta beef, nice juicy steaks and huge roasts. I'd been in Korea for only three days - so that made me an expert. I saw the way in which they ate their beef. They pounded the dickens out of it, marinated it, and cooked it on little hibachis. The market wasn't for steaks and roasts; it was for some of the cheaper cuts of beef that we don't quite know what to do with.

So it's important to get that kind of understanding of where those markets are, but also to recognize that we're not the first ones in there. The Australians and the Americans and everybody else is in there. We have to come up with, to use that trite expression, the better mousetrap that will get them interested in the products we have.

The Chairman: If you look at some of the other countries, they actually service the market. I know what Holland does in potatoes versus what we do.

I agree with you on the CIGI. In fact Ted Allen, president of the UGG, and myself in 1974 were on it together. It shows people how to bake bread and what we can really do with our products, but we ought to find a way to expand that. That's what I'm getting at. It's a good concept and it's good to talk about, but how do government and industry get together to make it happen, especially in this new global world?

.1635

Prof. Tyrchniewicz: Let me throw one idea out, the notion that there's no such thing as a free ride. I use this in trying to manage our research enterprise as well. If I really believe something needs to happen, I try to scratch out 50¢ on the dollar from somewhere else. I then go to industry and say, ``I want to see something happen here, so here's my 50¢. Put in your 50¢ and let's have a partnership''.

This may be more the approach we need to be looking at. We need to get a commitment from not only the agriculture and food sector but also the individual companies, and not just their associations, to put some money on the table to identify these market niches.

I also made a comment about surfing the Internet that may have been taken as entirely facetious. But I think we sometimes are constrained by our conventional thinking on how we see things. One of the things I've done in my own organization is to let all my staff in the office take home some older-generation computers we had on hand. I wanted them to get on the Internet. Creative ideas have started coming forth in the last few months as these people, on their own time, are just having the time of their lives. They read a piece on the Internet and then ask me if we could consider doing that.

I think we have to somehow tap into the bright ideas that exist in our rural communities. A lot of those people have done a lot of thinking, and we need to somehow tap into that and encourage some of those ideas to come forward. These ideas, with the greatest respect to organizations, are often lost. This ties into the notion of sustainable communities as well.

The Chairman: I have one last question. Marlene also has a short question.

On the efficiency issues, you did say, and we agree, I think, that it's critical to offset the negative impacts, and the efficiency has to be passed on to the shippers and producers. Is enough being done in that regard through the legislation, or are there other things that, from a government perspective, we can be doing to ensure that the system's efficiencies are passed on, not kept by the railways, or whatever?

Prof. Tyrchniewicz: I suppose one way is to make sure there are alternatives to the current railways. If you end up in a monopoly situation, I think it becomes very, very difficult to pass on some of those efficiencies. But if a farmer's shippers have other opportunities, whether it be U.S. railways or whether it be trucking, I think the market can do a certain amount of that.

I suppose the question is whether or not the grain industry is ready to move from being very highly regulated, where everything is done by formula and fiat, to a situation where it's totally wide open.

I'm not sure it is. I don't know what that transitional phase might be, but I think we have to perhaps come up with a way, instead of having these costing reviews every four years. In the meantime, whatever efficiencies there are, the railways gain and eventually they have to pass on to the farmer, but it's four years later.

Perhaps one doesn't need to do quite that much detailed analysis but just do it more often, and say over a five-year period you move towards where you essentially let the market do a lot more of that.

The Chairman: Thank you.

Mrs. Cowling: It's my understanding, Professor, that you chaired the producer panel payment group.

Prof. Tyrchniewicz: I did.

Mrs. Cowling: You mentioned earlier the cross-subsidization Alberta had been doing with respect to the rest of the country. As a Manitoban, I want to raise the question of the adjustment of the pooling of the seaway costs.

.1640

One of the issues the producer payment panel group didn't recognize is the cross-subsidization Manitoba has picked up over the past number of years for the number of branch lines in northern Alberta and in northern Saskatchewan. I'm wondering why that was not addressed. It's my understanding it was in the document and then it was pulled out. Why did that happen?

Prof. Tyrchniewicz: You'll have to talk to Owen McAuley.

I honestly don't recall that the branch-line thing was in the document. We very carefully stayed away from getting into efficiency questions in the producer payment panel, because Peter Thomson's Grain Transportation Agency was dealing with the branch-line issue. So I'm not sure I understand.

Mrs. Cowling: Mr. Chairman, it's just that it doesn't present the whole picture of what happened in western Canada if in fact you don't have that in the equation. I'm just raising a question of why that wasn't addressed.

Prof. Tyrchniewicz: I guess to give a good bureaucratic answer, it wasn't in our terms of reference to address that.

I do have our terms of reference here, and I would be happy to leave this with you. We were asked to address the question of how, not if, the WGTA should be paid to producers. We were also asked very specifically to do that in the context of a new pooling regime.

We were also told quite specifically, though not necessarily in our terms of reference, to not get tangled up in all the efficiency issues relating to branch lines and other efficiency measures.

But I honestly don't recall that it was in our report and then taken out. I wouldn't have let it get into our report in the first place, because it wasn't in our terms of reference.

That was part of my job as chairman - to keep the fence lines around some of these guys.

The Chairman: Okay. I don't suppose you dealt with Churchill, either?

Prof. Tyrchniewicz: Do you want me to deal with it now?

The Chairman: I almost hate to ask the question, but based on the information brought to us yesterday, what's your view?

Prof. Tyrchniewicz: Churchill is an interesting situation. I don't really see it as being an integral part of an efficient grain handling and transportation system. Mr. Allen may have more specific numbers than I do, but it used to be said that Thunder Bay could move, in about two or three days, all the grain Churchill moves in a whole season.

I think we sometimes tend to look at Churchill in terms of just the rail costs because of the distance, but if you are going to look at a system approach - and I think we have to - how you can get the right grain to the right place at the right time, with the greatest of respect, I just don't see Churchill as playing a major role there.

The Chairman: Okay.

Thank you very much, Mr. Tyrchniewicz. We know you had to make a special effort due to other events, and we certainly appreciate your presentation and your thoughts.

Prof. Tyrchniewicz: Thank you.

The Chairman: I call on Orlin Hanson, please.

Orlin, welcome to Canada. Do you have a short presentation, sir? Then we'll go to questions.

Mr. Orlin Hanson (Chairman, International Consulting and Public Relations Inc.): Thank you, Mr. Chairman, and members of this committee.

By the way, Mr. Easter, I have a letter here that is the official letter from the Governor of the State of North Dakota. It is addressed to Mr. Bob Speller, the chairman of the standing committee. I didn't realize you were chairman of this committee. I apologize for that.

The Chairman: No problem.

Mr. Hanson: The answer the gentleman right in front of me gave you here was quite interesting, and I think I have some pretty good answers to that.

I have not been, for all my life, an avid promoter of the Churchill concept, but I am for the movement of grain from both our countries into the world market at the least cost and for the best money to the farmers that we can.

My name is Orlin Hanson. I am chief executive officer of International Consultants and Public Relations Inc. in Sherwood, North Dakota. I'm here on the possible shipment of U.S. wheat north through the port of Churchill to Russia and northern Europe, and possibly Amsterdam and Rotterdam.

.1645

First, I want to say I represent nobody today, Mr. Easter. I'm a cattle rancher on a ranch that straddles the Canadian border. I represent nobody but myself.

I have been a member of the North Dakota legislature for 12 years. Back when I was a member of that legislature, I got accused of being a Canadian so often and representing Canadian issues, they asked me why I didn't go to Canada and run for office. Well, I would have had to run againstMr. Gustafson, and now Mr. Collins, and I didn't want to defeat them, so I didn't go up there, you see.

To the gentleman and the lady who are on this committee, to Mr. Penson out of the Peace River country, I was in your neck of the woods about three or four years ago and spoke to the Western Barley Growers Association. I travelled there, and it's a very beautiful country.

To you, Mr. Easter, I'm an avid supporter of the central North American trade corridor, and of course that goes up the Yellowhead Highway, all the way to Prince Rupert Island, and I hope to be there before too long.

The Chairman: I'm in the other end. That's okay.

Mr. Hanson: That's all the way up there.

To you, Mrs. Cowling, I get up into that Swan River country and Russell, and my nephew and his boy just came back from there - they got a big black bear there last week. So they were quite excited.

Of course, Mr. Collins and I have known each other for many, many years, and all of the representatives from there.

I am almost half-Canadian. I was born in 1930 and was raised in an area straddling the Canadian border. We go back and forth so many times and do so many things. Just three days ago, I was on a saddle horse. I had a sick cow that had had a calf. She had grass tetany, and I had to go up and bring this sick cow home. Well, she had wandered across the line into Canada. Needless to say, I didn't report when I went to that saddle horse and got it, but I was in Canada just three days ago.

Two days ago, we had our 58th annual International Memorial Day at Sherwood. That's 58 years, and it started out over a bagpipe in 1937. The Canadians brought six or eight legion posts across that border, and they still are coming down. We meet at the Canadian border and have a big ceremony, we shake hands and exchange flags, and then that evening the Sherwood Yanks open the Saskota Baseball League, which includes one American team and nine Canadian teams.

Our little town of Sherwood is half Canadian business, and I know as much about your country as I do about my own. It's a privilege to be here today and to have this opportunity to testify.

Mark, I'm glad to meet you here today. I talked to you on the telephone, but it's the first time I've had a chance to meet you.

I have with me a gentleman back here, Mr. John Blackwood, who used to be the Canadian Consulate Genera. He was at our International Memorial Day and spoke once or twice. I've known him for many years.

Another gentleman I will talk about, Senator Eric Berntson, and I are very personal friends.

I want to thank you, Mr. Chairman, and members of the Standing Committee on Agriculture and Agri-Food, and the subcommittee on grain transportation, for the kind invitation to appear before you today.

I hope I have that all correct, because you do things differently here in Canada, and yet not all that much.

I was born and raised, as I said, straddling that border. I have been a frequent visitor to your country on many occasions, both for business and pleasure over the past 65 years.

The concept we're going to talk about here was proposed several years ago, by then U.S. Senator Mark Andrews, a Republican from North Dakota, and Alvin Hamilton, who was a member of Parliament, a predecessor here of Bernie Collins from southeastern Saskatchewan.

At the time, we were in a Cold War with Russia and many Communist countries in northern Europe, so not much grain was being sold to them. It was only about a three-month shipping season from the port of Churchill, because of the danger of damaging ships going through the icefields, and then the Canadian Crow rate subsidy for prairie farmers was another impediment to using this form of grain transportation.

Now, suddenly, the Cold War is gone and we are selling grain to these countries, if we can find a way of cutting the costs to make it more competitive with the European Common Market.

One of the ways to cut costs is to lower the costs of transporting those goods. The short shipping season at Churchill is one of the major stumbling blocks to using this means of sending our grain through this port. Now that the Cold War has diminished and the Russians are our friends, they have the means of extending the shipping season by another three to six months.

Incidentally, Mr. Chairman, all of the references I make today come from this set of books: Arctic Bridge Final Report; Gateway North; and Potential Opportunities for Using the Churchill Port for American Grain Exports by Pivotal Plus Consulting Limited out of Winnipeg; and Dina Butcher, executive secretary of the North Dakota Grain Growers Association.

The IBI concluded in Gateway North that right now they have found it is technically and economically feasible to expand the existing 12-week shipping season at the port of Churchill to 17 weeks, an extension of 1 week in the spring and 4 weeks in the fall, such that the extended season would last from July 20 to November 15.

.1650

It is also reported that a significant number of ice-class cargo ships are available for hire. Many of these ships from Russia north are also reported to be ice-class, and their crews are experienced in sailing the waters of the circumpolar north.

You each have a circumpolar map, and it's a very interesting one. When you lay the earth out flat and put the North Pole right in the middle you can observe how simple it is to get grain there.

Now we have to consider all of the factors relative to the possible shipping of grain north through Churchill. Is it feasible and necessary? What are some of the stumbling blocks we might run into in doing this? What are some of the benefits that might be gained by using this route? Do we have the political will to do this? Are we too provincial or can we look at this from a North American perspective instead of a Canadian or American one?

First, is it feasible and necessary? Look at the map from a circumpolar perspective; in other words, with the arctic pole in the middle. It makes sense when you look at it from this vantage point to use the port of Churchill as a jumping-off point to many areas of the world. For Canadians it is the best way to go to most ports of call. Included in this study are most of northern Europe, Russian, Norway, Denmark, Sweden, the Amsterdam and Rotterdam region, and even Brazil.

Another reason to look at it from a U.S. position is the elimination of the Crow rate subsidy. Formerly, it has paid Canadians to ship their grain east to the St. Lawrence Seaway because it was subsidized by the Canadian government. Now all of a sudden that's gone. Now you're looking for a cheaper way to market your grain, and one of the natural places to look is towards the north or south for a shorter route to market.

If you look to the south and the U.S. market even just as a way to move your grain to market it will overload the U.S. transportation system to the point of causing some definite irritations.

Churchill looks very inviting but not cost competitive, for two reasons: their short shipping season and not enough tonnage to make it profitable. As I explained early on in this presentation the Russians have the capability of extending that shipping season.

How can you attract more shipping through the port of Churchill? You have to make it cost competitive. One way of doing this is to attract more shipments so as to lower your cost of operation. Maybe we could utilize the ships or the back-haul, in other words, bring back goods from these countries or those close by, so as to maximize the use of ships used to haul the grain out. If we want to sell grain to these countries we might have to buy some of their goods so as to make it more attractive for them to buy ours - and I mean both our countries.

What are some of the stumbling blocks we might run into when doing this? Bringing U.S. grain through the port of entry will be one of the toughest ones to solve. It shouldn't be, but it always seems to crop up at the most unusual moments. A lot of the problem stems from those going across not always complying with the law. Sometimes it's from ignorance of the law or lack of trying to understand it. I'm referring to the border inspectors. Most of you have crossed that border and you know you run into certain ones and you have problems. The first is that we have too many rules and regulations in both of our countries. When someone breaks the law, either through ignorance or on purpose, the usual reaction is to put in a more severe or more restrictive rule, regulation or law. You just punish the honest people and really don't get at the root of the problem.

In our country we don't need more law enforcers but more law-abiding people. That's the key to this. Truckers or rail officers or whoever it is that takes this grain across have to comply with the law. The difference in our grain marketing system, or should I say the similarities, sometimes, restrict us from using each other's market system. It would seem to me that we need to look at ways to make our systems more compatible so as to maximize the best of both systems to better compete in the global market.

Of course one of the problems, especially on the U.S. side, is the farmers themselves when they market their grain. Usually we are trying to ship our grain all at the same time because the market happens to be at its high point and we need money. So now you put more grain into the system and it's not possible to ship it all at one time, or even feasible, because they don't have room for it at the processors and the millers. They don't have the room to store it all. When you have a bumper crop it takes a whole year to market that, and to ship it.

When you have one of our grain farmer's trucks sitting in line, and he has it contracted, and he's sitting in line for a day waiting to get some unloaded and there are three Canadian trucks sitting in front of him, it causes some irritations. It's not a big deal, but to that farmer it's one heck of a big one.

The Hudson Bay railroad is another major stumbling block. It'an old rail line and has many problems with permafrost, sinkholes, and other obstacles mother nature can throw in our way. Most of these can be overcome if the line and the port of Churchill can be made profitable. Let someone see a chance of making a profit, and a lot of obstacles can be taken care of. The profit motive is the greatest motivation factor mankind has ever come up with. Unleash it up north and the possibilities are limitless.

.1655

What is the potential catchment area in the U.S. for most grains? Is there enough to justify even thinking about it? The first answer is, yes, there is a significant catchment area in western North Dakota and eastern Montana.

The second question can only be answered when a lot of other problems are solved. Some of the railroads seem to be a part of the problem as they find it more lucrative to haul our grain a further distance in the U.S. rather than a short haul north to Canada. We can't even get Burlington Northern to give us a rate on what they do.

Will trucks be able to do a part of this movement of grain at a lower cost? The answer to that question has a two-part solution.

First, the infrastructure along the border is not good enough to support the movement of heavy loads of grain. The highway system along the border has been neglected for so long because of that wall that has been between our two countries for so many years. Most goods went east and west and followed the normal trade patterns back and forth. The arteries then leading to the border from both sides were neglected as far as being built strong enough to withstand the strain heavily loaded trucks would put on it, especially in the spring in the north country, where frost is a factor and the constant breakup of roadbeds occur. Weight restrictions become necessary and this further complicates the problems.

The road leading 12 miles from the Sherwood-Carievale port up to Carievale is almost impassable today, Mr. Collins. That's because it has been neglected for so long. Everything went east and west. Last summer, on the west side of Winnipeg, they broke the pipeline coming west out here, and they had to move most of their oil for a while down across through our port at Sherwood to a portal pipeline west of Sherwood. Today it would be an impossibility to do that because that road leading to the border is in such terrible shape.

That's one of the things that has to be taken care of if we're going to even think about this, but it's not that big a problem.

Second, the trucking regulations and laws in both countries leave something to be desired. Every province and state have their own sets of rules, regulations and laws. I used to be a trucker. I understand trucking and I know exactly what you run into. The NAFTA agreement has a committee working on this problem but it in itself is going to be a real test of how sincere we are in wanting to solve the problem. Again, do we have the political will to find a solution?

Third, what is the potential for specialty crops such as canola, sunflower, etc.? That's the hidden factor in winning this that could drive this Churchill thing to make it worthwhile. These types of crops could become some of the driving factors and become some of the more lucrative items to be sent through the port to Churchill and to northern Europe. It's a complicated picture, but one that I think is worthwhile looking at.

What are some of the benefits that might be gained by using this route? For the Canadians, it is their shortest route to most of their markets if we can make it competitive. For the Americans, it is the shortest route and the cheapest for some, but right now, not for enough. I believe there is another compelling reason for the Americans, the one I touched on before.

With the Canadian Crow rate gone, a lot more of their grain could be coming south and overloading our already crowded system. This factor alone would seem to be a compelling reason for the U.S. to help make the Churchill route more attractive and make a little extra money along the way by possibly lowering the transportation costs of shipping their grain to some other ports. There is that letter from our governor, Mr. Ed Schafer. He and I have talked about this at quite some length and he's very interested in getting together here with a group. I'm going to talk about what he is proposing a little later.

Do we have the political will to do this? Are we too provincial or can we look at this from a North American perspective? Do we have the political will? What an interesting question. I've been in politics most of my life, and I'm not sure of this answer. There shouldn't even be any question about the answer, but you and I know differently.

A few years ago we were having some terrible problems with water management in the Souris space in our part of the country. Our two countries had an idea of what the solution was, but didn't have the political will to do it.

A friend of mine, Senator Eric Berntson, was then deputy premier of Saskatchewan. I was in the North Dakota legislature. We had started a boundary advisory commission with the governor and the premier as the chairmen and with certain agency heads and ministers as members, and we'd get together three or four times a year. We would talk over these problems. The ones we couldn't reach a solution on, we set aside. We didn't talk about them. The ones we could, we did.

We sold that one. We made an agreement that we would spend so much money in each country, and we built those two dams up north. It was a problem. We ran into more environmental problems than you could shake a stick at. If you have ever read the book Against the Flow, you will understand.

.1700

But how did we solve them? It was very simple. I'd get a call from Eric: ``Hans, I have to talk to you''. I'd say okay, I'll meet you. We'd meet in a bar, at a back table, and we'd sit down there and talk this thing over, what had to be done.

When we finished we'd stand up and shake hands. We knew what we had to do. He'd go back to Regina and I'd go to Bismarck and we'd see the premier and the governor and we'd get the job done. We trusted each other explicitly.

I've lived on that international border all my life, with Canadians on a day-to-day basis. I know you are some of the finest people anywhere, and I know we could work that way. I believe it's time to stop thinking in terms of Canadian or American interests and start thinking in terms of North American interests. We had best do this before it's too late and the European Common Market or the Asian Rim countries outbid us for the world markets that are left. We are in a global trade market or whatever you want to call it, and we have to join forces so as to compete in this market on a day-to-day basis.

Many years ago Senator Berntson and I proposed a wheat cartel with Canada, United States, Argentina, and possibly Australia. At that time we could have controlled about 75% of the wheat in the world. Wouldn't that have been quite a coup now if it had been done then?

There are some interesting developments that might, if they come into place, make this project a lot more feasible. The Saskatchewan government has proposed some innovative ideas on how to make the Hudson Bay route more cost competitive.

A large majority of the nuclear fuel in the world is produced in northern Saskatchewan at Uranium City. This is sent out to users in the rest of the world as nuclear fuel packages. When it is spent it has to be recycled or disposed of. One idea was to bring those spent fuel packages back to the place whence they came, to be recycled or buried where they were originally dug from. Quite unique, but not a bad solution to a sticky problem. Not only could this remove those potentially dangerous spent fuel packages from falling into the wrong hands and becoming lethal weapons but the railroad also could be built up for this purpose and help all of us.

There are a couple of places in the U.S.A. that are thinking of this same project. One of them is not far from my home town, about 50 miles east, at Upham. Another is in central Minnesota. The three of them have ideas. If we could get them...it might be one of the driving forces that would make this thing work.

In conclusion, I believe we have a very interesting topic before us today, one that could be a solution to some of these problems that exist in our part of the world. We must find a solution to these problems or they will be a hindrance to generations that follow us. Winston Churchill once said - I like to quote the old gentleman; I do quite often on different things - some people see things and say why, but I dream things that will never be and say why not? I get accused of that quite often.

Mr. Chairman, and members of the committee, that is the extent of my written testimony.

The Chairman: Thank you, Mr. Hanson.

Mr. Penson: Mr. Hanson, you have some interesting ideas. I really don't know whether your proposal for Churchill is viable or not, but I do think some natural trade zones between our two countries should be explored, on the prairies, for example, as you were talking about, very much the same as in Atlantic Canada and the New England states.

One of the problems we've had in the past - I think you've already identified it - is that tariffs have been set up in different countries to make things flow in an east-west manner. With the NAFTA and the new trade agreements and the need to become more competitive in world markets, I see that some of these trade zones in North American north-south trade zones should be naturals for us. If that means through a market-driven system Churchill looks like a good opportunity, I think that will develop. What we can do in our two countries is remove any impediments we have through infrastructure or tariffs or whatever to stop that from happening.

One of the arguments you hear from some people from time to time is that if we did that, if there was more north-south trade, somehow there would be a threat to our sovereignty in Canada. I don't see that, but I am wondering....

.1705

I gather from your comments that you see some of these north-south zones as natural market areas and transportation routes as well, so I welcome that aspect of it. But in terms of Churchill in particular, my question to you would be whether you would see it as a viable alternative if it's simply on a market basis, rather than a government involvement basis, to keep it going or to make it work.

Mr. Hanson: Well, Mr. Chairman and Mr. Penson, I'm a free trader and a free enterpriser to begin with. I was one of the first supporters of the Canadian free trade agreement.

All my life I've worked for trade back and forth between our two countries, but whenMr. Mulroney and Mr. Reagan first started this back in 1985, I wrote them each a letter. I wrote President Reagan especially and told him, sir, if you will stretch forth an honest hand of friendship to the Canadians and treat them as equals, the Canadian free trade agreement will wind up as one of the greatest documents we ever signed, outside of our own constitution, as far as we're concerned. I firmly believe that, and I don't care what's in the agreement, as long as we have an agreement to sit down and talk.

As to the north-south, we've been going east and west and we've just about used up.... We have them settled, and there isn't all that much more expansion there. All of a sudden, we have a whole northern hemisphere and a southern hemisphere. We can go clear to the southern tip of Argentina and these goods are going to flow.

I'll guarantee you, it's going to go from Alaska. It's going from the north to all over Canada and the northern United States. It's going to go that way because if I can make a widget and I can figure out a way to make a profit, it's going to go. If you could do it up in your country, it's going to be the same thing, if you let people do this without hindrance.

The thing is, rather than have them go down the east and west coasts, it's the most natural way for them. It's just like a funnel. That Yellowhead Highway just comes right down there and feeds right into Highway 52 and right down into all the width and breadth of North Dakota, to I-29, 83, 85, every highway that goes south. It all winds up down at Laredo, Texas, and into Mexico.

What is the possibility of it going that way? We were at our agriculture symposium in Fargo about eight or ten years ago. Former agriculture secretary Orville Freeman says there are no more ready-made markets out in the world. We have to go establish them. We have to help them.

In other words, you put some money into that country. Find a good, stable government to begin with and build up the government, raise their standard of living there so that they want to eat your food rather than rice. We did that with South Korea. It was interesting when you were talking about South Korea a minute ago. Over a 20-year period, the U.S. put $20-billion worth of foreign aid in there. We raised the standard of living from $300 to $2,500. Then they wanted to buy our beef and wheat rather than eat their rice. They bought $25-billion worth over the next 2 years.

Here we are, Canada and the United States: we sit with Mexico and numerous southern hemisphere countries. We could put our money into them to help raise their standard of living, put their goods down there. In turn, they will come back up here. The central North American trade corridor is a big one, the Red River trade corridor, Can-Am, the Rocky Mountains: all four of those are working toward this end, to moving your and our goods to the south and bringing goods back. It works both ways.

In the port of Churchill, we trade with them overseas. We're meeting in Whitehorse, up in the Northwest Territories, later on this summer. We'll be meeting with fourteen European countries on that central North American trade corridor, to talk to them about trading goods. It comes back in right there. All you have to do is take a look at that map.

I was reading in some of these reports here about setting up a barter system with them. This is what Canada's already working on with some of these countries over here, so that we can trade goods back and forth, because a lot of those countries don't have much ready cash or the funds.

Mr. Penson: Your concept is interesting in that a lot of people don't recognize that sometimes the closest route is right under our noses. For example, I know my home in northwestern Alberta is closer to Los Angeles than it is to Ottawa. A lot of people don't recognize that there are some natural trade zones that need to be explored, so I'm happy to see you advancing this idea. My view is that it has to be market-driven, but governments should remove any impediments that might be in the way to make that happen.

Mr. Hanson: To me, the only reason government should be in anything is to get rid of the stupid rules and regulations. I don't know about you guys up here, but we have zillions of them down there. They're doing a good job down there; Gingrich and Dole are in there. They're kicking them out, but it takes a long time. As I think I said in my testimony, when someone breaks a law, government has a tendency not to punish him; they just put in stricter laws. It just piles up.

.1710

Mrs. Cowling: I'm pleased that you support the port of Churchill. Coming from the Manitoba caucus, as the chair of that caucus, we've been pushing the success of that port for a long time.

I want to talk about your system and the deregulated regime you are in. One of the things we find concern about in the country and within our constituency is the fact that once we get into a deregulated regime, and there are efficiencies built into that system, how can we ensure that the efficiencies will get back to the farmers and they will reap some of the benefit? Can you tell me how that works?

Mr. Hanson: The biggest impediment to getting efficiency back into it is the profit motive and competition. Don't impede competition. Don't let someone develop a monopoly.

We're going to run into it. We're going to have a problem with only one rail up there. But there are alternatives. If the rail line goes in there and starts hogging too much money and it doesn't get back to the farmers, then we'll figure out another way to go with it. As long as we can work together as a country - and you guys will still say what you say and we'll say the things we say and that will never change - we'll always have our culture and you'll never lose your sovereignty.

Eric and I - excuse me, I call the senator Eric, since he and I have been like brothers - always used to advocate that we should rotate the Canadian border at the Mississippi River and let them have the east and we'll take the west.

The profit motive and allowing competition are what will see to it that it gets back to the farmer. It works in our country. Sometimes you don't think it does, but our cattle industry has never had any kind of subsidy in all the years I've been at it. About every ten years we have to take it in the hind pockets. We've been doing it for two years now. Our cycles roll, but when the price is up.... I received $1.10 a pound for my steers about four years ago.

As far as I'm concerned, that's the key thing in our system: make sure that competition moves freely. If a person has an opportunity to make a profit, then the competition has a right to come in and cut that profit a bit. That's what will get it back to the farmer.

Mrs. Cowling: How old is the car fleet in the U.S.A.?

Mr. Hanson: It's quite new. Practically every one of them has a hopper bottom. I used to run a semi back in the late sixties and early seventies, and they had regular boxcars. You had to line them and put boxcars.... Now they come rolling in and every one has a hopper bottom. They load a 52-car unit in less than 24 hours; it's gone. In any one of those country elevators, they just roll in and take 52 cars out and they're gone with them.

We don't have the problems you have up there, with the muskegs and the sinkholes and so on in the system.

Mrs. Cowling: When you indicate that you load a 52-car spot, do you clean up your terminals?

Mr. Hanson: Oh, no. Just about every farm down there has a semi. The elevator man puts out the call that he has a unit train coming in. Every 20 or 30 farmers.... He'll already have the contract for wheat from them, and they start hauling with semis. As fast as he can dump it, boom, it goes right up and into the cars and it's loaded out.

Mrs. Cowling: I just wanted to have that clarified. My son has worked with the combine business in the U.S., so I understood they moved it right to the elevator.

Mr. Hanson: Mr. Chairman, may I carry that question a bit further, now that Mrs. Cowling has brought it up?

When you get way down south, they don't even have grain bins on the farm. They haul it straight to the elevators and they store it right there. Of course, you have to understand that's in the early part of the harvest season, and they get the first crack at the market. Up where we are, the mill is already filled up and therefore we have to store it.

.1715

Mrs. Cowling: What is your perception of short lines and their running rights on other lines, on which they can run their cars and on which they can connect?

Mr. Hanson: Well, most of the short lines are owned by private companies or individuals. When the main elevator railroads, like Burlington Northern and what used to be the Soo Line but is now CP, go to abandon a short line of rail, will there be a group of farmers or someone like that to step in and buy that railroad? It's not always the case, but they can do it if it's feasible. They'll buy the whole rail line and run it on that, but I don't know what they do when it comes to running on Burlington Northern rails or on CP. I couldn't answer that question, Mrs. Cowling.

Mrs. Cowling: Do you think the move to short lines has been a good move for the U.S.?

Mr. Hanson: It's a salvation, yes. Otherwise, we're going to beat to death our infrastructure, our highway system. We have a lot of good roads, but if you put big semis carrying 100,000 pounds of grain on them and run them, especially in the spring or when it's wet, you beat your infrastructure quite badly. You need the railroads, and the short lines, and you need to supplement them. The whole thing has to work as a package. It's all profit-driven, and if it doesn't make a profit it won't operate.

Mrs. Cowling: I have one more question.

The Chairman: One short one. You're over.

Mrs. Cowling: I would assume from your comments that you would far rather see the movement of grain through the rail system than through trucking?

Mr. Hanson: If we can get a better price for the farmers by doing it, and if it's cheaper to move it that way, then do it. That's the whole key. If it's cheaper to roll it by truck, then do it that way. Do it in whatever way we can get the best profit for our farmers.

I retired from farming in the spring, but I've been making my living at it all my life. Any way I can get a better price for my grain helps to pay the bills in the end. So either way, it doesn't make any difference. But we have to make sure they pay the taxes to take care of the roads. All of our roads down there are built by gas taxes.

Mr. Collins: Orlin, it's a pleasure to have you here.

Mr. Chairman, I'm sure that of all the people we have along the border, one of the greatest, most well-known ambassadors from the United States to the Carievale and Carnduff area of Saskatchewan is Orlin. I know he spent a lot of time in the political circles down there.

Now that the WGTA is gone, what do you see as the potential for producers in our area of Carnduff and Carievale? What kind of potential is there for them now?

Mr. Hanson: The first thing we're going to run into is the fact that you, the farmers across the border, want access to our markets. The first thing I ask is, are you willing to take wheat allotments, or in other words, wheat acres? By that I mean you can raise only so many acres per quarter of land. Are you willing to abide by the swampbuster laws - some of the stupidest laws you will ever see - we have to put with? Are you willing to put up with all the environmental laws we put up with? It's the same for all of the other things that go along with our system. Is the Canadian farmer willing to do that?

He sees our price as being high. One of the reasons it is up there so high is that we try to control the amount of grain we grow instead of overloading the market, whereas in your system they have been allowed to produce what they want. Of course, they can market it if you can sell it. Some of it has been down into our market, and this irritates the heck out of some of our farmers because when we have a bad year and only have a 20-bushel acre, we depend upon $60-a-bushel wheat. If the Canadians bring some durum down and it drops to $5, it drags our profit down. So that's my question, Mr. Collins.

I had a lot of input into the free trade agreement when Mr. Donahue was at the state department desk, the Canadian desk. At that time, I thought they should have had the same thing you have, an end-user certificate. That way, if you wanted to sell it, it had to go to an end-user in order that it didn't get into our system. Our millers, Cargill, Continental, and all of our grain buyers have always had that.

.1720

We've bought a lot of grain from Argentina and other parts of the world. In cooperation with us, it was your grain board that held back on this for quite a number of years. Now, in the last few years, they have allowed them to sell it to these markets down here. What I think should have happened is that it should have been end-user. I have no problem with that.

Mr. Collins: I know you have that CRP program. I see lots of it as I go down to Noonan, Crosby, and wherever.

There are a couple of things that came up during our discussion in the last couple of days - I wish you'd been here for them - and one of them dealt with trucks. You mentioned the example of the trucks parked there and spoke of how you fellows from North Dakota ended up behind a whole host of Canadian trucks. The observation was made that those are all Wheat Board trucks. I said that if I could be shown that, I'd like to see it. Unfortunately, I didn't get the documentation.

Mr. Hanson: What do you mean by ``Wheat Board trucks''?

Mr. Collins: I mean that they all got permits and went through the Canadian Wheat Board, and are all going according to Hoyle.

Mr. Hanson: But, Mr. Chairman and Mr. Collins, they didn't have end-user certificates with them, so they were going into our market.

Mr. Collins: Oh, I don't....

Mr. Hanson: Now, here's what caused a lot of our grief. Cargill bought a lot of your grain and was taking it through to the gulf ports, but they were putting it in their elevator and into our unit cars when we were having trouble getting enough cars to haul our own grain to market. In essence, of course, that caused a problem.

The Chairman: Our information on that is that we were selling a higher-quality durum that was going to American millers. It was not that it was going through the U.S. system and out gulf ports.

Mr. Hanson: Mr. Easter, that was the deal. I'm not saying it was higher-quality durum than ours, although you claim it was. We were short of durum, and we were short of high-quality durum, and that's what a lot of it was, I'll grant you that. It was using our system to go to the millers, but when our system was overloaded - as I say, we had a bumper crop - and the farmers did not get enough wheat in to pay bills, seeing those Canadian trucks sitting there was quite an irritant to a lot of them.

Mr. Collins: I read an article in The Western Producer that quotes a Mr. Galvan, who is from the United States, as saying that they're prepared to put up to $900 million in subsidies into your wheat program in the United States. One of the things that I know about, Orlin - and I'm sure it came up yesterday - is the Export Enhancement Program. We said not to talk about those things, but when we're saying to our farmers that the Crow is gone and the subsidy is gone, and I then read that there's going to be a $900-million support kind of program, people are going to start asking whether or not we're both playing on the same level playing field. Do you have any thoughts on that?

Mr. Hanson: First, the $900 million that the guy talked about was what was authorized a year ago. Clinton has only used $320 million of it. He hasn't used the rest.

But let's go back to the Export Enhancement Program. I know it's been a tremendous irritant to both you folks and to the Australians. The U.S. put it in place to bring the European common market to the GATT table on the agriculture issue. Until that time, the European common market would not replace the subsidies.

You have to realize that back ten years...when I was talking about Eric Berntson, I was talking about establishing a grain cartel. That was during the early 1980s, when they weren't raising any grain over in Europe but did raise the subsidy. I think it's something like $12 a bushel for durum, isn't it? Look at the grain they're producing over there now. So this was the only way we could bring the European common market to the GATT table. And they still need to use that export enhancement to hold it to their fire to an extent, to keep them up until they get rid of those.

I'm sure that if we keep Gingrich and Dole, and if we keep Republican control in Congress down there, it'll go. I'll guarantee you that it will be gone, because those boys don't like government and they don't like.... They want to get rid of that money. So that $900 million was there, but -

Let me touch a little bit on.... I'd like to clarify the subsidy down there and I'll show you how it's dropped.

.1725

About 10 years ago on our land south of the border, we were getting approximately from $3,500 to $6,000 per quarter in subsidy payment. This included the CRP. This was the kind of money I was getting for loans and all that. It has dropped down now to where we're getting less than $1,000 a quarter. I'm not talking about the export enhancement, but it's dropped to that. That's all going to disappear; I think within the next year it's gone.

The export enhancement will be there, and they need it to keep their feet to the fire. I know it hurts you boys and it hurts Australia up here, but that is the reason for that. That was the only reason. Clinton has only used about a third of it; that's all he's used this year.

Mr. Collins: I have a couple of things, Orlin. I talked to people and when I mentioned that people of North Dakota, and you who have lived along that border all your life, looked at Hudson Bay, some people think we've gone to the silly bin. Yet the fact of the matter is, we're going to have to find the cheapest way that creates the best dollar value for all of us, especially those who are in farming and need to get their product sold, and on time.

We're talking about running rights as we sell off the CN, that they would have running rights on each other's line. Would that be an incentive as well for looking at Hudson Bay?

Mr. Hanson: I did a little bit of study of this, on the interchange of grain cars. I didn't do all that much, but one of the comments I wrote down, Mr. Chairman, was that CP Rail should be encouraged to enter into an unencumbered interchange with CN Rail in order to increase the number of elevator locations that can access the Port of Churchill as an export position and increase volumes of grain traffic specifically, and crops, and that they would be encouraged to exchange cars back and forth. That is one that came out of, I believe, the Arctic Bridge or the Gateway North study.

Mr. Collins: May I make one observation?

The Chairman: One last question, Bernie. We're running over time.

Mr. Collins: I'll make the observation that when Orlin mentions the teamwork approach, what they did in the city of Minot was this. In order to assist us with building those dams on the Rafferty-Alameda, they imposed upon themselves a 1¢ sales tax that generated $43 million American dollars approximately for the building of those dams.

If we go into an arrangement, what kind of arrangement would you see us using, and what kind of a cost figure would you look at if we're going to say, okay, yes, we'll look at the Port of Churchill? What would you see you'd have to pay, or what kind of a payment would be reasonable for you to access that, plus getting number 8 highway back into a rolling shape?

Mr. Hanson: It depends on how much grain you're going to bring down our way.

The Chairman: It depends on how much of ours you try to keep out.

Mr. Hanson: Yes, there it is right there, you see. You and I, Bernie, have to sit down on that back bar there and figure this out. I'll tell you, Mr. Chairman, you'll have some pretty heated discussions until you can figure it out. But everybody has to give a little, and you compromise on it.

The U.S. is looking for the best market for their grain so that the farmer can get the most for his crop, so he can pay his expenses and pay his taxes. That would be the driving factor: how lucrative. I think Mr. Governor Schafer says:

If the Churchill concept proves itself to be an efficient, cost effective link in the transportation system for exporting goods from the U.S. northern tier and Canada, I would certainly support it.

We will get Gingrich and Dole and them on our side, I can guarantee you that.

The Chairman: Mr. Morrison, do you have a couple of questions?

Mr. Morrison (Swift Current - Maple Creek - Assiniboia): Getting back to the Churchill route, Mr. Hanson, I take issue with you about the condition of the muskeg railway. We do haul loaded oil tankers up that line. It doesn't make much difference what's in the car; the weight on the undercarriage is the same.

I'm a little concerned in your proposal as to how you're going to get the bloody stuff to the Hudson Bay Railroad. You can go up the Sioux line and make a big curve back. Mrs. Cowling might correct me, but I don't think the north connection through Manitoba is that great to take grain trains up to the Churchill line. Have you looked at that part of your proposal at all?

.1730

Mr. Hanson: Mr. Morrison, what constituency do you represent?

Mr. Morrison: I'm right next door to Bernie; I'm in Swift Current.

Mr. Hanson: As we've looked at this situation and at the railways and such, and as we've been involved in this central North American trade corridor, we've been hearing a lot of rumours about how both the pool and the western wheat growers, I think it is, are anticipating building two grain terminals. One is to be right across the border from my town, right across from my ranch at Carievale and another one is to be at Redvers.

There is also proposed here that it would come up to Carlyle by truck; we would truck it that far. Or they can come up the short-line railroads over there on the eastern edge of North Dakota and take it on up to Winnipeg. So there are several different avenues. We can put it on the Northgate - I don't have that map handy - just west of me, which has a railway. That's where a lot of potash comes out. So, you see, there are quite a few different avenues that can be used.

What I was quoting in my testimony was what I had read about the railroad in here. I'm planning on taking a trip up to it within the next month.

Mr. Morrison: What I was really getting at is that to make your proposal really work I think you have to be able to load a 100-car train and take it up to Churchill without stopping. We have to do a little work first before we can do that.

My second question again relates to your presentation, where you were talking about the difficulties at the border and the red tape, and so on. If a car is sealed, what's the problem? I don't think you'd run into any difficulty then. It would be like bringing stuff through in bond.

Mr. Hanson: Mr. Chairman and Mr. Morrison, you wouldn't have the problems with that 100-car train that you would with the trucks as they roll across the border. Our problem there is that to roll trucks, if you're going to roll 100 semis across, you have 100 different drivers and 100 different trucks and each driver has a different attitude about how he rolls.

There is something that so far I haven't mentioned here today. One thing we need to implement along this border, which would help us - and this is not the place to do it - is a green card system. I believe they've tried it here in the east somewhere. They're talking about it near that port of ours, where you'd pay so much, whether $25, $50, $100, or whatever, and you would get a green card, which would be just like a credit card, and you'd check through and every so often you'd be susceptible to a sudden search. These are the things that we have to implement if we're going to get a system going across this border, where we market our goods and get the most we can for our people.

I've crossed that border many times. I know you could go across 100 times and, all of a sudden, you run into that one person who perhaps is not feeling good that day - I don't know what it is - and he can really make a mess of things.

Mr. Morrison: Yes, she's the one I always meet every time I go across.

Mr. Hanson: I've never found a ``she''; it's usually been a ``he'' who gets me.

The Chairman: Is that it, Mr. Morrison?

Mr. Morrison: Yes, thanks.

The Chairman: Mr. Penson, you had one question?

Mr. Penson: Yes, I do.

I'm not sure, Mr. Hanson, that you have the answer, but you did talk about short-line railways and private rail in the United States. You probably know that there's a move to privatize CN Rail in Canada, and one of the concepts I've been trying to develop for a while is that it could be turned into a public roadbed and there could be competition on that roadbed by many rail companies in order to introduce some level of competition. I'm not familiar with your situation in North Dakota. Does that exist in your country?

Mr. Hanson: No it doesn't; everything down there is privately owned. We have so few things that are owned by the government, in the line of businesses, railways, and so on, that it's almost a non-existent condition.

Burlington Northern owns a railroad that rolls through Grand Forks. There's a short-line railroad - and I don't even know what the name of it is - that goes down there. They pay it to take their cars and from there they're loaded and it is paid to take them. This is the way it works; they pay to go on that railroad track.

Private enterprise works that out, just as if you and Mr. Morrison were to sit down and figure out a deal. If you want to run your grain on his road, you figure out a deal and you pay the price. If you can't afford to pay the price then you won't haul the grain there, but there's another railroad not very far away that will probably do it, you see. That's the whole concept in the private enterprise system.

.1735

Mr. Penson: The problem with some parts of our country is that there are big areas where there is no other service close by, and that's the reason I've been developing this.

Mr. Hanson: Then we have to be very innovative in some of the ways that we do work so that maybe government can subsidize that to an extent. But don't let it subsidize it to the extent that it is going to start...because in our country when government gives you something, it always tells you what to do with it.

Mr. Penson: It's the same everywhere.

The Chairman: That was one of the key questions I had. In Canada, we have a massive land base at a long distance from tidewater and we have virtually a natural monopoly situation with the railways, which I think is somewhat different from yours.

We've had various groups before us and received various opinions on the railway system in the United States and how efficient that really is. We had some claiming that freight rates are a lot less than our real freight rates, which will be in place on August 1, and we had others who were giving us rates that are much higher.

Just what is the situation with the railways in the U.S., as far as you are aware?

Mr. Hanson: We get awfully disgusted with it sometimes because we think it's quite high. But I can remember when I was running a semi back in the 1960s and 1970s. I hauled grain all the way to Duluth and Minneapolis. We didn't run it on the rails. We had a railroad right into our town. That was before they abandoned a lot of those lines. Of course, that's what made them abandon the lines, because the rail rates got too high and we just rolled it by truck. That is what happens today. If the rail rates get up too high, the trucks will go because we have that interstate highway system.

I've hauled grain clear down to the Snake River, south of Spokane, Washington. I hauled wheat from Wolfe Point, Montana. We'd go out there down along the Snake River and go back up along the Canadian border to British Columbia, pick up a load of 4x6s and take them all the way to Mequon, Wisconsin and bring a load in there, somewhere in North Dakota, and pick up some wheat and take it over.

So if the railroad gets too expensive, we've got the trucks rolling. It's that simple.

The Chairman: The third paragraph in Governor Schafer' letter - and I think you referred to it - reads:

If the Churchill concept proves itself to be an efficient, cost effective link in the transportation system for exporting goods from the U.S. northern tier and Canada, I would certainly support it.

It's a big ``if'', and certainly as a committee we're looking at Churchill. We're looking at the impact on the seaway and we're looking at a number of factors. But how do you propose that both we here and you in the United States find out whether this concept would be an efficient and cost-effective link or not?

Mr. Hanson: First, Mr. Chairman and members of this committee, have we ever given Churchill an honest chance? Have we ever said, yes, this is a viable way if we can make it cost-effective so that the big boys are willing to invest some money in it? That's the key to it. Up to now, it has been piecemeal.

What I can find out from all of the books I've read and studied and from what I've listened to over the years about Churchill is that we've never given it a chance because it is basically a three-month season. Until now, they'd say the Russians had the capability. The Russians are in there right now breaking ice to get to where that earthquake is, so they have the capability.

Have we ever given it an honest chance? The first thing is that both countries have to make a commitment to it and say yes, we're going to take an honest look at this to see if it is at all possible so that investment money will roll up there.

It can't be government money; it has to be private industry that is willing to put the money into it, to make a profit. You have to give them the chance to make a profit - that's the whole key to it - and they'll make it. They have to understand that we're supporting them and that the two governments will do everything they can.

Ed Schafer just had a business go under; his fish farm just went under. I don't know how many millions of dollars he lost on it. He understands business, though, and he understands that you can fail and that you can win. He makes the statement, and he'll back it up, that he will support it.

Right now, what he is proposing - and he wants me to do it and I'm starting to work on it now - is to get together with Premier Filmon. I've talked to Jim Downey and we're going to set up an unofficial boundary advisory commission. We had it set up with Eric Berntson in Saskatchewan when Devine was premier there. I mentioned it here earlier. They would get together so often. It's one of the things they're going to be looking at very seriously. There will be the premier and the governor as chairman and there will be half a dozen or a dozen ministers and agency heads and legislators from each side who will sit down and try to figure out a way in which we can make this work.

.1740

The Chairman: We'll not get into export enhancement, as much as it would be fun.

On behalf of the committee, I thank you for coming and giving us your viewpoints. We will see to it that the letter from the governor gets to the chair of the agriculture committee, as well as probably the Minister of Agriculture. We're certainly willing to entertain the concept and have a look at it. So thank you, Mr. Hanson.

Mr. Hanson: Thank you, Mr. Chairman. It's a privilege to be here with you and to be able to talk to all these members of this committee and answer your questions.

The Chairman: We call on Ted Allen, the president of United Grain Growers.

.1741

PAUSE

.1752

The Chairman: Could we come to order again.

Ted, the floor is yours. Mr. Allen.

Mr. Ted Allen (President, United Grain Growers): Thank you, Mr. Chairman, and thank you for taking the time to hear my oral submission.

First of all, I'd like to touch on the CN privatization issue briefly with this committee, just because it does impact on agriculture.

I think it's important in the government's examination of this issue not to saddle CN with an inordinate amount of debt in the process of this privatization issue. I've heard numbers of $1.5 billion bandied about. Some of the preliminary analysis we've done of this indicates this would make CN a kind of marginal operation in its ability to compete both with CP and also with some U.S. carriers. I'd like to throw out a number of $1 billion as perhaps the maximum amount of debt CN should probably be saddled with.

I'm also a little concerned because the way the thing appears to be playing out it's uncertain how much debt CN will have relative to what the returns are from the sale of some of its non-rail assets.

So I would encourage all members of Parliament to try to ensure the level of debt of CN is equitable so there's a level playing field; there is a balance, as CP points out, between absolving them totally of debt and saddling them with so much debt they simply can't operate effectively. I'm a little concerned about the level that is being talked about.

If I could talk briefly about the WGTA changes, I think the grain handling sector, the transportation sector, and farmers all have one interest in common. It is that we drive as much of the cost out of the system as we possibly can while sharing the benefits fairly amongst all the players within the system.

.1755

I raise this concern because I see a number of initiatives that don't appear to be driving towards this end result. I will mention just a few.

First of all, there is the proviso of the $10,000-per-mile penalty, if you want to put it that way, levied against railways if they abandon lines but not if they sell them for short-line operation. That will do a couple of things that I think are contrary to everyone's best interest.

One of the things it will do is to cause railways not to abandon lines where there is $10,000 or less in savings available to the system. Another thing it will do is to perhaps create uneconomic short lines, which again are in no one's long-term best interest. The third thing it will do is to slow down the process of rationalization and cost reduction in the system.

Another really unfortunate amendment to the original bill that has come out of the finance committee of the House is a proposal to increase the freight rates for all farmers in the system by anywhere from 4¢ to 18¢ per tonne. In our view, this is really bad legislation.

First of all, in a press release on the changes to pooling, the Minister of Agriculture indicated that one of the primary purposes for this change was to eliminate cross-subsidization. The amendment of the finance committee proposes to add a new element of cross-subsidization into the system. Ironically, it's a reverse cross-subsidization where basically the eastern prairies subsidize the western prairies.

Over and above that, these kinds of initiatives deliver a message to the investment community that the government is not really serious about creating a for-profit entity, because it is going to continue to burden the system with elements of social policy piggybacked onto these commercial entities.

When you look at what the net effect of this increase in farmers' freight rates really is, you determine that 100% of the farm community is going to deliver a subsidy to two short lines, which are probably uneconomic on their own, and that the trickle-down effect from the delivery of this subsidy to the 1% of the farmers who are on those lines is marginal at best.

You will also discover that this subsidy of farmers to railway operators is not even very cost-effective if you determine that subsidized they must be, because when you look at trucking costs off of these short lines, you determine that this grain could be trucked for somewhere between one-quarter and one-half the cost of what the subsidy is that's being delivered to the short-line operator.

The short line in southern Saskatchewan is composed of two tiny elements, the longest of which is 26 miles, I think. The short line in Alberta is a T-shaped affair, but you discover that the western portion of the T is where the bulk of the grain is produced. In fact, the single largest shipping point is Stettler, which is where the short-line railroad meets CPR. The subsidy on this tonnage is actually being delivered to the short-line operator for moving the cars across town.

.1800

The next biggest delivery area for the short-line operation is in the very extreme southern portion of the railroad, which is within ten or fifteen miles of Canadian National's main line. In fact, this grain cannot move that way by rail, but instead moves many miles north to connect with the main line in a movement that defies any logistical sense.

One other point needs to be raised with regard to this amendment. If the amendment is passed, you will have in effect caused farmers who are currently hauling grain 40 miles or more with no subsidy to subsidize farmers who are hauling grain a shorter distance. Again, this is not a very sensible proposition.

Overall, then, this amendment is illogical and goes contrary to the desire of, I think, the government and the industry to become cost-effective and, to use that word some people take offence at, ``efficient''.

As a postscript, it is important to add that what you are asking is that one group of farmers should subsidize two railways in the hope that some of that subsidy will trickle down to the 1% of the farmers who are affected. The farmers who deliver to the short line railway will pay the high rates, just as everyone else will.

In winding up this subject, I might say that most of the players in the grain industry didn't get on this topic sooner because no one believed that it was possible that this kind of an amendment would come forward and it caught us all by surprise. The vast majority of the players in the industry now, regardless of whether they are on the so-called right or left side of the marketing debate, believe that this initiative is ill-conceived and should be retracted.

I realize that time is short and Bill C-76 is imminently due to go through report and third reading, but I urge you to reconsider this one and turn it around if this is at all possible. I've talked to some of the people on the finance committee and I have a sense that if the agricultural group were to indicate to them that they thought that maybe this one should be removed, the finance committee don't purport to be experts on agriculture and they would not feel it to be an insult to them.

.1805

Finally, I'd like to talk a little about the $300 million that's been put forward for an adjustment fund. A number of areas have been proposed to receive some of this money, or put forward as possible recipients. UGG believes there are only two legitimate recipients of this money. We believe some of this fund should go into compensation for farmers who are adversely affected by changes to the pooling system. We believe the balance of the money should go to rural municipalities to develop road infrastructure to deal with the changing rural transportation environment that will come about as a result of rail and elevator rationalization.

Mr. Chairman, this concludes my remarks. I realize it's late in the day. I look forward to your questions.

The Chairman: Thank you very much, Mr. Allen.

Mr. Penson: Ted, I wonder if you could give us more information on the $300 million adjustment fund in regard to people who are affected in the pooling system; farmers affected on pooling. You suggest that's one of the legitimate uses of it. Can you fill me in on what that would mean?

Mr. Allen: I believe adjustments to this change are going to have to be made by people in the eastern prairies. I am a strong foe of ongoing subsidies, but I do believe there is some legitimacy to giving people short transition funding in order to adjust their business enterprises to new realities.

Mr. Penson: That's what I was trying to find out. I wasn't sure what you meant by that.

Can you also tell me, under the railways act or the act that the freight is going to come under within the five-year timeframe, how you see that transition coming about; whether that is adequate coverage in terms of regulation; or how you would see us functioning under that new system once the WGTA is gone?

Mr. Allen: Part of the difficulty the industry has had with the changes to WGTA is that some people have held what I believe is a false hope, that what they would get out of a changed WGTA would be ``Son of WGTA''. Because of that, I don't think many players in the industry focused very much on the national transportation act, which is the new legislation they will have to deal with around the year 2000.

To compound that, the National Transportation Act (1987) is itself being amended.Mr. Mulder, the deputy of Transport, was out in Winnipeg talking to the grain industry not too long ago. That was as a result of the grain industry suddenly deciding they didn't know enough about the way the new NTA was going to play out.

You can place part of the blame, I guess, in Transport's lap. They did give a lot of notice to the industry that these changes were coming, but an industry that is 25% of the railways' business I think should have been more proactively approached to give their input into the revisions to the NTA.

On the other hand, I think the grain industry bears some blame for not being alert enough about what the implications of the new NTA were going to be, never mind what it meant to operate under the old NTA. I think a lot of that is being addressed now in shipper protection provisions within the new NTA. There are some negotiations going on, if I can call them that, between the technical experts and representatives of the Western Grain Elevator Association and Transport Canada with regard to various kinds of mechanisms to ensure that in areas where there is no real rail competition, shippers have effective tools at their disposal to make sure they are not exploited because of these kinds of situations.

.1810

Mr. Penson: Thank you.

Mrs. Cowling: I want to raise the issue around the amendment that was brought before the finance committee. I believe you indicated you thought we should be retracting that specific amendment. Just so that everyone around the table understands, it is my understanding that because we have a cap on these maximum rates - we have extended them on into the year, beyond the NTA - that will not allow the system to deregulate. It won't allow those branch lines that are being cross-subsidized by many people in the eastern prairies to be abandoned, to fine tune the system, and it will force the people on main lines to pick up the additional costs.

Is that a fair reading of what may happen?

Mr. Allen: With all due respect, I think not.

First of all, I am not aware that there is a cap on rates beyond the year 2000. I thought that issue was still being debated within the government and among the various players as to whether the cap would be extended beyond the year 2000. The initial proposal was that the cap would be dropped.

Putting that aside...and I am sorry I don't have the technical numbers for the amendment, but I think it's 51 or something like that. What this particular amendment did was to raise the maximum rate for everybody by between 4¢ and 18¢ per tonne. What the railways apparently agreed to do, either formally or informally, was to turn around and cut a cheque for the two short-line rail operators to in effect subsidize their operations over and above this rate.

Let me put it this way: the difference between the old rate and the new rate was going to be rebated to the short-line operators by the main rail companies. But the net impact of that on other branch lines and short lines would be nil other than perhaps to set a precedent, an ugly precedent, that the government might have to deal with in terms of how they dealt with these other lines that are proposed for abandonment down the road.

Why should some short lines get preferential treatment and not others?

The Chairman: I want to finish on this point, because I have some questions on it too.

Mrs. Cowling: Okay, Mr. Chairman.

The Chairman: We looked at that issue and in fact I've spoken in favour of putting those two short lines back into the base. I guess the key question here is that the short lines currently in existence were not in the base calculations Finance or Transport put forward.

.1815

It's the short-line railway's point of view that although there are provisions for new short lines to come in, the current ones in fact would go out of business.

Do the short lines that are currently in the system deserve any less consideration in terms of being in the base, which this amendment will do, than does a steel low-density branch line that will be up for abandonment shortly? It's in the base too.

I looked at the map, and I understand your point about going over to either the Three Hills line or the Coronation line. I believe it's a CN line. But do they deserve any less consideration for being in the base than some of the other low-density lines that are going to be abandoned anyway? They're in too.

Mr. Allen: Except that there is no way in which these will be abandoned as long as they're being force-fed, if you want to put it in that way.

Let's look at what happened before. Error compounds error. They build on one another. The first error was for the federal government to create these short lines and decide arbitrarily that their subsidy.... This is just the subsidy for the operation of these little lines. We are talking about anywhere from 21 miles to 100 miles. We're not talking about all the way to export destination.

Those subsidies came right off the top of the Crow benefit. So in the order of $4 million came right off the top of the Crow benefit before it was distributed out. If you're asking if we should perpetuate that error, my response is no. Why don't we correct it?

If those short lines are viable, then they won't need that subsidy.

First, if it makes economic sense, the railways want to see successful short lines operate, because this in a sense protects their volumes at a lower cost than what they can do themselves. That's the very rationale of short lines where they exist in Canada and the U.S. now. Individuals can sometimes operate businesses more economically than large corporations can, especially when they're small businesses.

But I fail to see why the bulk of the farm population should be asked to subsidize a business that will minimally flow a benefit back to a very small percentage of their peers.

The Chairman: I wonder if we would be having this discussion if they had been included in the base rate in the first place. Your argument sounds to hold some logic, although I don't agree with it. Now that it has been brought in, it looks that way, but the fact is that they were left out of the base in the first place.

The short-line people, the Canadian Western specifically, talk about how they have been able to increase the efficiencies on that line in terms of their operation - filling the cars and so on. But my question remains: did they deserve to be left out any less than do x number of branch lines that are on that network?

Mr. Allen: When you're talking about the base, you're including a subsidy that didn't deserve to be there in the first place. So if you're saying that the logic for including it in this base is that the mistake was made by somebody else, my response is that I think you have an opportunity to fix it.

.1820

I think I understand why the committee passed the resolution. They did so with all the best of intentions, but I think having now, belatedly, recognized some of the pitfalls of what they have done, they have an opportunity before this thing gets passed into law to correct that anomaly.

If you don't do that, what you're doing is saddling every farmer in western Canada, including the people on those short lines, with an incremental cost that isn't necessary. In the process you're introducing all kinds of precedents and anomalies that are going to haunt us down the road.

The Chairman: I'll turn back to Marlene. I do want to come to the $10,000 question a little later.

Mrs. Cowling: I think we were talking about two different things. I was addressing the cap on maximum rates after the NTA. Do you think there should be a cap on maximum rates after the NTA; after the year 2000?

Mr. Allen: Yes, I do. I think it should be a cap that has an adjustment factor to take into account things such as inflation, for instance. It is in our interest as well as the public interest and farmer's interest to have financially viable modes of transportation, and as many of them as possible, to give us choice. But it is not in our interest to see them able indiscriminately to become whole simply by raising their revenues. Our whole thrust in this is to have them be financially viable by compressing their costs; by reducing costs as much as possible.

Mrs. Cowling: Right.

My next question is because you have raised the question of the commercialization of CN. Do you think CN is a national interest? Do you think we should have a line of steel right across the country? We know there's over-capacity, but also it's a high-cost operation. Do you think we should continue to maintain that line from the west right through to the east coast?

Mr. Allen: Let's start with Pierre Berton. I love this quote from Pierre Berton. He said that Germans built railroads to wage war, Americans built them to develop their country, and Canadians built them just for the fun of it.

The party is over. We as Canadians have this habit of wrapping ourselves in the flag whenever we want to do something that isn't very economically viable. I think the day when we can do that holus-bolus is rapidly coming to an end.

This is my long-winded way of saying I don't think there's anything in the national character or psyche that demands we have a crown-owned railroad.

Mrs. Cowling: About the commercialization of CN, do you believe there should be special efforts for grain companies that represent farmers to buy, or to be able to buy, a share of the CN shares?

Mr. Allen: We've been asked that question before. I don't see any reason why they should be prevented from buying those shares. I guess each business will make its own decision about how much they know about running a railroad, or, if they're doing it purely on an investment basis, if that's where the highest return is. But speaking for our company, I would be very surprised if we were interested in getting into the transportation business.

Mrs. Cowling: My last question is on the adjustment for the pooling of the seaway costs of $300 million. As a Manitoban - and my colleague is from eastern Saskatchewan - we know we are going to be picking up some of the highest freight costs in the country. In fact, Swan River and Estevan I believe have been noted as two of the areas that will pick up the high cost of moving wheat out.

What portion of that $300 million do you think should come back to Manitoba and eastern Saskatchewan?

.1825

Mr. Allen: I don't have a definitive answer on that one. Part of the reason we haven't delved into it very deeply, as you probably can guess, is that the United Grain Growers has customers in Alberta and we have customers in Manitoba and so we, quite properly I think, have remained very neutral on this one.

We await with interest the government's decision on this, but we have not definitively developed a number that we think is appropriate.

Mrs. Cowling: Can I just squeeze one more question in, Mr. Chairman?

The Chairman: Okay, thirty seconds, Marlene.

Mrs. Cowling: When we talk about the NTA and the year 2000 and we take a look at a system that is completely deregulated, do you believe there should be at least a supervisory body or someone to watch that system from the industry to be sure that we aren't gouged by the railways?

Mr. Allen: I believe one of the suggestions was that there be some kind of a desk within Transport Canada that would monitor these things. Yes, I believe one of the roles of government, generally speaking, is to monitor the performance and health of various facets of the economy, and that includes the interaction between the shippers and the carriers.

So yes, I believe there's a continuing role, but perhaps not as intrusive as it has been. I believe we need some significant deregulation, but most of our concerns about deregulation to this point have been that the railways haven't been allowed to get their costs under control. The government has forced them to maintain operations that were not very cost-effective.

I look forward to the day when we can more naturally get into some testy exchanges with carriers because shippers' and carriers' interests in some ways are naturally a little adversarial. But we need to get this other garbage off the table first before we can get to that stage.

Mrs. Cowling: Thank you.

Mr. Morrison: Ted, getting back to the costs of the short lines, I find myself in the terrible position here of leaning towards our chairman on this.

Mr. Allen: I've looked at the lines south of Swift Current myself.

Mr. Morrison: There's one in Alberta, too.

You're saying the short lines should be competitive and I could agree with that, but how do you operate competitively inside a tightly regulated system? As I understand it, these guys can't do what a trucking company does and say, yes, we'll haul your grain up to the main line, you give us so much a tonne and it's just between the shipper and the short-line company. That just wouldn't be allowed. You have to work within the system and if you have to work within the system, then why are you not entitled to the same treatment the CPR or the CNR gets?

There was a $3.5-million oversight, as I understand it, where somebody just forgot to put the number in when they crunched the rates. Walk us through this again.

Mr. Allen: First of all, what the $3.5-million oversight amounted to was the subsidy these people got before that was over and above everybody else's. When you look at what happened on those short lines, the short-line operator got $3.5 million. Last year I think Central Western's was just a shade under $3 million and Southern Rail's was $413,000 or something like that.

.1830

What happened there was those two rail lines got that off the top, but then every farmer on those lines, over and above that, got an equal share of the Crow benefit. So they really got two kicks at the cat, not one.

All we're suggesting is let's move it back down to just one opportunity, except that no more subsidy is involved. No other farmer in western Canada is getting a subsidy on transportation, directly or indirectly, after August 1, except for the $300 million of transitional funding, which was the way it was originally proposed to deal with short-line operators: give them a bit of transitional money to get through this stage.

Now what's being proposed is to embed this subsidy in legislation permanently. Because the government isn't subsidizing this business on an ongoing basis any more, what's going to happen with this amendment is the bulk of farmers are going to subsidize the few who are on these short lines.

There are some interesting questions about this thing too, questions which, even if it does go forward, I'm curious about, because these are so many dollars that are going to be extracted out of the western Canadian economy to go to the two short-line operators. I doubt very much if any grain company is going to invest in these short lines any more. Certainly we aren't.

As the level of investment falls, as some new facilities get built on lines adjacent to these short lines, as the volumes fall, does all this money continue to go to the short-line operators in the same dollar amounts? I'd like to start a short line and then just forget to deliver the service but be there to collect the cheque every year. Or if that's not going to be the case, is the difference going to stay in the railways' hands? And do we want to do that?

Mr. Morrison: As I understand the amendment - maybe I don't understand it very well - it seems to me they're going to be getting paid on a tonnage basis, and if they can't keep their volumes up they're going to go under anyway. This money is not just going to be handed to them like a Christmas gift. They have to haul the grain.

Mr. Allen: If the money is being checked off everybody up front, what is going to happen to the surplus, if we assume the short lines aren't going to qualify for it?

Mr. Morrison: If we assume they go under, you mean. I don't know. I'd have to think about that one. I'd like you to answer -

The Chairman: I think the discussion needs to be held. But as I understand it, if efficiencies are gained, then those savings will come back into the system. That's my understanding of it.

Let me put it another way. If these short lines that are now short lines were still in the regular rail network as branch lines, they would have been included in the rate. Right?

Mr. Allen: Yes.

The Chairman: I believe your proposal, Ted, is trying to treat them differently from another branch line not yet abandoned, and I think they should be in the base. I do have some concerns about that $10,000, but that's another matter.

Do you have a follow-up question, Lee?

Mr. Morrison: Yes.

I just wondered if you would address the other half of my question, which was whether there is any possible way these people can operate outside the system and just charge for their services. I don't think they can.

Mr. Allen: Ports and railways and grain companies are all service providers. Sometimes we forget this. There is no raison d'être or reason to be for these railways other than to serve these customers. You can truck that grain from those points to alternate rail lines for a quarter to half the cost. Why then do we insist on perpetuating the existence of this service, which can be provided in a much cheaper way?

Mr. Morrison: If your figure is true, then why would you object to their being allowed to try to compete as independent operators outside the system? This is what I've been asking. You can't, as I understand it, just go off and haul stuff down a track in a railway car and deliver it to a major hauler on the main line. This just isn't allowed.

.1835

Mr. Allen: I apologize, because I really didn't address that part of your question very well. The idea of short lines and what makes short lines successful where they are successful is that they have a common interest with a major carrier with whom they connect. I think that's as true with these operators, or will be in the future, as it is in other jurisdictions.

The major carrier has an interest in protecting as much of that volume that comes off that short line for himself as possible. So what they do is arrive at revenue-sharing agreements with the major carriers in order to make sure that grain is generated for that carrier as opposed to, if the line is abandoned, the possibility that much of that grain will dissipate to competitors. In that scenario, instead of asking farmers to subsidize these operations, they should make arrangements, cut deals with the major carriers.

In the case of Central Western, they deal with both major carriers. If it was in everybody's best interest, why wouldn't they be able to cut a business arrangement without having to ask everyone else to kick in? I think the rules are the same.

Incidentally, there are also some rules currently within the NTA and proposed within the new NTA that would give shippers on those lines a lot of leverage in those negotiations, because things like competitive line rate provisions, interswitching provisions, and final offer arbitration - all of those kinds of things give, not directly to those carriers but to any shipper who is on that line, an opportunity to intervene and make sure they get fair and equitable treatment.

Mr. Collins: I'm glad you walked us through the process. I find it interesting that some of your observations.... I'm just going to use some examples, and then I'd like you to come back and respond, if you would.

In the $300 million you were pretty clear about who should receive the two pay-outs. I find that interesting. You didn't mind that one of them was on the roadbed, on the infrastructure that should go back to the municipal....

I would imagine that's the way you would like to see it, and that's what you've said here, but you have some problem where the government would step in and say just a minute, that they don't mind some going into the roadbed but they have some others: what's your problem with their dealing with some of the other issues in the $300 million and leaving out just dealing with your side of the coin? Then when it comes to capping on railroad, you're kind of comfortable with the capping procedure as long as you say compensatory rates and they become competitive.

For example, if we used Mr. Easter's and my good friend opposite, Mr. Morrison's, proposal for that line down there, let's say they never did have the line; the line was still there. Would they get a subsidy? Would they have caught up in the system? My suggestion is they would have.

Now if you can tell me they wouldn't have, I'd like to know how. If that was the same for the Great Western, and they're not providing that service but the line is still there, who's going to fund them? They're part of that railway system.

I'd just like you to walk me back through those, and then maybe we'll discuss a couple of others.

Mr. Allen: I'll try to answer your first question first. I didn't quite understand your last question, so I would like to get you to repeat that.

.1840

On the question of the $300 million, we feel that investment in infrastructure is something that will be there for a long time to come. So when you build roads, the roads are there for a long time.

On the other hand, if you fund trucking programs, for instance, as was one of the suggestions, the day after the truck is moved there's nothing left to show for that investment. The same is true of the seaway pooling issue. The only reason for supporting it is that on a transitional basis, it allows people who have fundamentally had their lives changed, not marginally but in a very major way, some time to adapt. There are purists who would say you shouldn't even do that.

Nevertheless, many of the suggestions we looked at on the $300 million seemed to us to be expenditures that would not see any long-term benefit derived from them, whereas with infrastructure we felt comfortable that it would be there for a long time to come.

Mr. Collins: With regard to funding of trucking programs, where did you come across that?

Mr. Allen: I believe that was in one of the press releases on the initial -

Mr. Collins: That would be the last thing I'd be checking into. I think the problem is that -

Mr. Allen: There were about five items, and one of them was trucking.

Mr. Collins: What I am saying is that I wouldn't rush out and take that as the Koran, that it was going to follow for a couple of days. I have no problem with the infrastructure type of thing, but I think there are other avenues we have to look at in this total $300 million.

As Mrs. Cowling said, I just happen to be right in the place where the compensatory rates are going have the highest impact - Estevan and to the east. So I am concerned, and I'm glad you talked about it, but I think within that $300 million, they are going to look at the ``dehy'' program as well, and I don't have any problem with that being in there.

When I go back to the one where you don't mind the capping of those rates, I don't have any problem with it, but you want us to step in and have some controls in some of these areas. Maybe you're right. I'm just saying if, for instance, Southern Rails and Great Western Rail didn't exist, who would give them a pay-out? They would have been caught within the system of CN and CP. Is that not correct?

Mr. Allen: ``They'' being the farmers?

Mr. Collins: I'm just saying back to the railroads, they would have gotten some compensation for those lines because they would still be in the system.

Mr. Allen: You mean they would have been factored into the rate-setting mechanism?

Mr. Collins: Yes. That's why we're coming back and we're saying that because they were factored in and they took the option of providing a service and they happen to be a short line, through some oversight.... All I'm saying is that I don't know what would have happened if we had not had the oversight. Would it have been such a problem for UGG or Inland Terminal or some of these others to say it was all in the system?

Mr. Allen: What I think would have happened in that event, and you're right, is that those lines would probably be operating today because the government had a freeze on line abandonment, but they would be up for abandonment January 1, 1996, when the handcuffs come off the railways and they're allowed a little freer hand in abandoning. Those lines would have been at the top of the list.

So what you're really doing with lines that would have been abandoned January 1, 1996, is ensuring that they're around for quite a while longer. You're ensuring it by asking farmers to subsidize that process.

Mr. Collins: But you talked about the $10,000 per line, and I heard some figures from people within the budget areas of government saying that's really not an accurate figure either. Should we be able to subsidize or should we have these short lines being able to be bought up by farmers or different groups of people who may not want to go with the trucking? They may want that service closer and buy into it.

.1845

Mr. Allen: We're mixing a couple of different issues now.

On the issue of the $10,000 per mile, the proposal was $20,000 per mile, and again I think it's a case of people in government, with the best of intentions, coming out with something that really was going to have a very major negative impact on the industry.

By and large, the industry said that this was crazy. I don't mean just the railroads; I mean the grain industry too, farmers and grain companies. We recognize that about 1,500 miles of track should have been abandoned 20 years ago.

It was interesting to listen to the fellow from the U.S. today, because what they're talking about is how after you abandon that 1,500 miles, you get into some serious discussion about the balance of the grain-dependent branch-line network, which totals over 6,000 miles, and the creation of real, viable short-line railroads. But we have to get over this kind of no-brainer stuff.

First, there's 850 miles of light steel out there, 177,000-pound steel, which means that you load a Canadian Wheat Board hopper car to 55% of capacity and you haul it all the way to Vancouver or Thunder Bay. We talked about car shortages a while ago. Well, when you're utilizing your resource in that way.... How many fewer cars could we get by with if we didn't have to deal with that kind of an abuse of the resource?

The Chairman: This is one thing that at least CWR talks about. By going at slower rates on that line, they have been able to fill the cars to capacity. That's one of the advantages they have seen on that particular short line. That's what they tabled with this committee as evidence on that one.

But I know that you're right in terms of lots of other branch lines. Cars are running half empty.

Mr. Allen: When we examine what's happening, they have made a decision that they will do that, that on this 177,000-pound steel they will operate in a certain manner, and they're going to be responsible for it. They're going to deal with the safety and all the other issues. Main line carriers don't want to get into that. I guess time will tell where the wisdom of it is.

In any event, this 850 miles I'm talking about is not any of this short line; it's all in CP's and CN's network, mostly CN's.

The Chairman: I want to come back to the $10,000 business. I think you're right: if the railways don't see more than a $10,000 saving to them, why would they abandon it? It holds the base rate up by being included in it. I believe I'm correct in that.

Mr. Allen: Yes.

The Chairman: How would you change that? What would you propose in order to change it?

Mr. Allen: I think the proposal was designed to try to create an environment in which more short lines would be created, because the railways lose that $10,000 per mile only if they abandon. If it gets turned over to a short-line operator, they don't lose the $10,000 a mile.

Again, there you're mucking around in the marketplace by creating a hot-house environment for the creation of short lines, which I don't think is in anybody's long-term best interest.

The Chairman: Which leads me to my second question, the one I'm most concerned about. How do you ensure that these efficiencies in the system -

Mr. Allen: Get shared.

The Chairman: - get passed down not just to the shipper, get shared not just to the shipper, but actually to the primary producer himself? I ask this because he's not the shipper in a lot of cases; his companies might be.

.1850

For example, if ABC company takes over a branch line, the $10,000 per mile rate is in there and it's able to operate that line for much less than that, how can we be absolutely sure that efficiency gain comes out of the base rate? If the short line can do it for half the cost, how do we get that passed down? Will the system we have set do it? If not, how?

Mr. Allen: First of all, in those kinds of environments where you would have an abandonment application or a short-line creation, those are lines where elevator companies and grain companies are not investing. This is a gradual phase-down of an operation. Hopefully, in the new NTA we will have as many shipper protection provisions as possible that can happen in a market environment. If a company doesn't like the rates it's being quoted it can go to final-offer arbitration, competitive line-rate provisions, interswitching and common-carrier obligations, common-carrier kinds of situations, or as many kinds of shipper protection provisions as possible. That will create competition even though, physically, there's only one carrier in a given region.

When you get to grain companies sharing it with farmers, there's already strenuous competition. You don't have this lack of competition among grain companies the way you do among carriers, simply because they're all cheek by jowl with one another trying to tear each other's hearts out in this business. I believe that's going to intensify.

The Chairman: But the producer's choice in many areas is not a variety of elevator companies to ship to. Especially within recent years, we've seen elevator companies trading elevators. There aren't the options there. I can't haul to UGG or Saskatchewan Wheat Pool in a given area.

Mr. Allen: Let me just respond to that, because I think even grain companies have been slow to recognize an evolution.

You no longer have five companies competing at Redvers or Carnduff. But if you draw a 20-mile circle around any given point, you will find a fair degree of competition. Grain companies have been slow to pick up on the fact that competition doesn't just mean that at a given delivery point there are more than one or two companies. It means, in a geographic region, farmers are quite willing to drive by four or five delivery points if there's an advantage at the sixth.

As you get consolidation of the system you will get lower freight rates for grain companies that are able to load large blocks of cars, because the railways will have some savings. Because the grain company will have some savings, it will then have to pass on part of that benefit to farmers for the additional trucking distance that may be involved, and the farmer is not going to do that for zero gain. Some of that is going to have to flow into his pocket. So this whole thing will cascade down as the system rationalizes.

.1855

The Chairman: You talked about the monitoring desk at Transport Canada, or wherever. The Auditor General's report - I don't know if you've seen it - in looking at the GTA and the NTA was loaded with criticism. I don't think I've read a report that was so critical of how they handled the situation in terms of monitoring in the interests of the industry. In fact, to some extent they ended up being an apologist for the railways.

Given what the Auditor General's report has said, how do we set up an agency or a desk or whatever in as simple a way as possible and a way that can be effective in doing the job?

Mr. Allen: First of all, I think the mandate that was given the GTA and some of these other agencies was far more extensive and intrusive than what we're talking about here. One of the things you find is when the government has someone who has to allocate this resource, grain cars, amongst a lot of competing interests and the government has a heavy investment in that infrastructure and there are all kinds of public interest and political themes that play, this agency...and I haven't been a fan of the GTA, as you know.

The Chairman: I know that.

Mr. Allen: But the GTA has all these competing interests to try to appease, and really, it becomes a very political kind of entity.

I think some of the Auditor General's criticisms of them were that they hadn't fulfilled their mandate under the Western Grain Transportation Act. And I agreed with them. They didn't pay much attention to that because that involved public finger-pointing at people and organizations who were not performing up to snuff, and that's not the way to have a long-term future as the head of the GTA.

If you looked at their statistics, the way they used to come out.... I can't remember exactly how it was, but the shortfalls and the failings were put in such euphemistic terms and in such a way that you really had to understand the statistics to read what the foul-ups were. Almost no one picked up on it when they did come out with the evidence. Yet they got severely criticized for putting it in even very gentle, mild ways.

The Chairman: All we did was create employment for a few people for a while.

Mrs. Cowling: Mr. Allen, you had mentioned there were 850 miles of light steel out there. One of the questions we need to address within this committee is rail line abandonment. Can you give us a timeline...or how you think that system should be fine-tuned, how quickly we should be moving on this type of thing, how much of that line should come, if it should or if it shouldn't, or if there should be more?

Mr. Allen: There are over 15,000 miles of line in western Canada. There are over 6,000 miles of grain-dependent branch line. There are 850 miles of...and this is the 177,000-pound steel. We haven't talked about the 220 or 250; and now the 263 is going up to 268.

All that aside, I really liked what Transport Canada and the government came forward with in the first place, which was to expedite the abandonment of this stuff that makes no sense whatsoever, probably about 1,500 miles: 850 of light steel and another 400 or 500 of heavy steel but very lightly utilized. Expedite that and just let it happen - and then get into some serious discussion about the creation of short lines and how much of the remainder, and over what timeframe, gets either converted to short line or abandoned. Then some serious number crunching was going to have to go on.

.1900

What happened instead was the creation of a committee - and I have the greatest of respect for this lady, Marian Robson, but now I can't recall the name of the committee - to look at the economics of the abandonment of any lines the railways chose to put up for abandonment.

Instead of 1,500 miles, you got 500 miles, because the railways were scared to death of a process where they didn't know how it would unfold and what the parameters would be. So they really put up the stuff they thought there could be no possible argument about. Now this committee is struggling with the fact that they have so little line to examine, because I think we all believe when the numbers come down it's going to be a no-brainer.

What has started to get a little scary, though, is you start getting RMs saying, gee, if we lose an elevator, that's part of the tax base and there are going to be road implications for going elsewhere; somebody has to pay, so we should have the right to tax either the railroad or the grain company.

That's like saying if your Canadian Tire store down the road closes, it has to pay a tax because you're going to be driving on your road a little farther. By the way, consolidation of schools and hospitals has created a certain amount of extra travel, too. I don't know who pays for that, but it opens up a real Pandora's box.

I'm sorry, Mr. Chairman, I'm carrying on a very lengthy time on this one.

Mrs. Cowling: Do you think there should be a moratorium on the rail line abandonment until CN is commercialized and/or amendments to the National Transportation Agency providing for railway renewal and the regulatory reforms are in place? Do you think there should be a moratorium until we get that job done?

Mr. Allen: I would have felt that way if we weren't about 15 to 20 years behind in the rationalization process. Because we're so far behind and some of these decisions appear - to many of us, anyway - to be so simple, I would say get on with that. By the time the other stuff is in place, we'll then hopefully be at the stage where we're looking at some real decisions.

The Chairman: Anybody else? Mr. Morrison, and then I'll come back to you, Bernie.

Mr. Morrison: I have a brief question, Ted, and you can take off your grain company hat and answer this as a businessman.

On the privatization, there are the three restrictions: maintain the head office in Montreal; maximum 15% equity for any investor; and maintain official bilingualism.

Would you care to express opinions on those three stipulations?

Mr. Allen: On the 15%, I don't think it's unreasonable at this stage of the game. On the other two, I realize they are political dynamite. I understand the reason why a crown corporation would have those kinds of rules in place. If the bulk of CN's business is in western Canada, I fail to see why as a public company it needs to have that same rule, and the same goes for the language situation.

Mr. Morrison: Thank you.

The Chairman: Mr. Collins.

Mr. Collins: If you wouldn't mind going back to the one about the short-line, because I think it's something we're going to have to deal with, I need to have some clarification from you as to how you see that impacting. If, as Mr. Morrison said, they're not competitive, they're not going to be around; they're just not going to be around. You may be part of the focal point, because if they're not going to be dealing with you or somebody else, then as soon as that starts to tighten up, they'll find that the dollars aren't going to be there.

Mr. Allen: I know, but they are going to be around a lot longer than what a normal situation would dictate if you continue to force-feed them this subsidy. They're getting a subsidy over and above what anybody else is getting. Nobody else is getting the subsidy, actually. They're getting a subsidy, and this subsidy is going to prevent a normal, rational business decision from taking place, or delay it for a long time.

.1905

Mr. Collins: Well, that's certainly something I guess we'll -

The Chairman: I think we've pretty well covered that topic. Some of us have different views.

I have just one last point. What are your thoughts on Churchill?

Mr. Allen: I listened with great interest to our American friend on Churchill, too. With regard to Churchill, I'm from Missouri.

I agree with a lot of people that if Churchill can be made a viable, economical entity - some believe it can - on its own without taxpayer subsidy or without some kind of a farmer subsidy, as we see on these short lines, I'll be delighted - and surprised.

The Chairman: That's a good political answer. When are you running?

Mr. Allen: It's absolutely true.

The Chairman: Thank you very much, Ted. We appreciate your coming in, and the discussion we've had.

Mr. Allen: Thank you, Mr. Chairman.

The Chairman: We'll turn to Bruce Flohr, who is president of RailTex. He will be our concluding witness today.

Where did you fly from?

Mr. Bruce Flohr (President, RailTex Incorporated): In this case, I came from our Missouri and Northern Arkansas Railroad in Springfield, Missouri.

The Chairman: Well, Ted was right in saying Missouri.

Mr. Flohr: His last comment was very appropriate.

The Chairman: Welcome. You have a short presentation.

Mr. Flohr: I'm going to summarize the presentation. I have ten copies to submit to you. I am glad I got here a little early tonight, seeing that you are running early. The weather is so nice tonight, maybe we could all finish up earlier.

I am president and chief executive officer of RailTex Incorporated. RailTex is the leading operator of short line railroads in North America. We have 25 railroads covering 3,475 miles of track in 20 different states, two Canadian provinces and Mexico. Revenues in 1994 were $74.5 million in U.S. dollars, with after-tax profits of $6.9 million. We have assets now of $185 million.

We have had a compound annual growth rate of 35% a year for the last five years. Our Goderich-Exeter Railway in Ontario is a 70-mile line purchased from Canadian National in April 1992. In Nova Scotia we operate the 425-mile Cape Breton Central Nova Scotia Railway purchased from CN in October 1993.

Most recently, RailTex, through a newly incorporated subsidiary, the New England Central Railroad, purchased the rail assets of the Central Vermont Railway, a former Canadian National line running southward 326 miles from East Alburgh, Vermont, on the Canadian border to New London, Connecticut.

Three of our 25 railroads have rail labour unions representing the employees of those railroads. RailTex stock is publicly traded on the NASDAQ stock exchange, and as a result our financial information is on file with the U.S. Securities and Exchange Commission with quarterly information issued to update our investor public. I'm now submitting copies of our annual report of 1994, as well as our first quarter 1995 results. I brought one copy with me but I will be sending more to the committee.

All the CN transactions have been completely arm's-length business deals where we bid to buy the line. CN received 100% cash for each of the acquisitions, and CN does not guarantee any of our debt. Our debt is with the National Bank of Canada for all of our Canadian lines.

.1910

We do not have any minimum revenue guarantees with Canadian National nor with any of our other railroads that sold lines to us. There are no provincial or federal loan guarantees. There are no tax abatements and no government subsidy payments on any of our Canadian lines. We set our own freight rates for intra-line movements and we jointly set freight rates with Canadian National and connecting line moves.

We like doing business in Canada and we plan on doing more business in Canada, and we like doing business with Canadian National.

I'm deeply concerned that many parties, especially shippers, do not understand the real reason large railroads in North America are selling off their light-density branch lines. Our experience over the last 11 years indicates that selling railroads do not want to continue management operation of the lines but would still like to have the railcar traffic on their main line system. The trend is identical to the airline industry, where routes to smaller communities are better served by lower-cost regional airlines operating smaller planes.

Why are the big railroads in both the United States and Canada selling their light-density lines? First of all, they're downsizing for profitability. Generally, a feeder railroad will pay wages slightly above local prevailing wages, plus profit sharing, whereas the large railroads pay well over $25 U.S. per hour, and no profit sharing. Fringe benefits are similar. However, the big cost reduction is not the wage level, it is the improved workplace efficiency, because we do not have the traditional railroad union craft line work rules.

Traditional railroad craft line work rules don't permit efficient operation on small properties. As an example, on our Nova Scotia railway, our 47 employees are actually doing 20% more business than when CN operated the line with 110 people.

Other reasons big railroads are selling off the lines is that they're trying to improve their return on invested capital, dollars that are spent for things such as locomotives, track and signalization improvements. It's much different spending that money on a line where there's one train a day than when there are 20 trains a day on the line. I think of the example of CN with the money spent on the Sarnia tunnel. It's a good example of the big capital expenditures necessary on your busy rail routes. That's where their capital improvement dollars are going.

We see improvement in asset utilization. We see improved frequency of service. In fact, on our Goderich railroad, Canadian National was serving the shippers there three times a week; we're serving the shippers there six times a week. We are supplying railroad cars to our lines, something Canadian National and the other big railroads generally do not do, and we have a fleet of over 850 railcars right now that are an expansion of the total railcar fleet in North America.

The big railroads get better management utilization by focusing on the main-line issues, not the branch line issues. We're able to generate more business. In fact, on our railroads we've had for more than a year, we're having an increase of at least 5% a year on business returning to rail. And in Nova Scotia it's actually up almost 20%, comparable months on a year-to-year basis, in the first year and a half we've been operating in Nova Scotia.

Lastly, the short-line movement is the last chance to save a rail line from being actually abandoned, and I think this is an important story to tell. Much of the testimony by other people in these hearings, which I have read in the committee Hansard, has addressed the grain issue.

We are now hauling grain on our Goderich and Exeter railway an average of 40 miles from some of the grain elevators that are down in the Centralia areas. One example is into Goderich, to go into the big grain elevators that are at the port in Goderich. We got that business back out of trucks by charging the farmer, or the grain elevator operator, a half-cent a bushel less than what the trucker was charging. Not only is the farmer getting a lower freight rate moving that grain down to the Goderich elevator, but downtown Goderich had 900 fewer truck trailers going through the town in August and September, which are two of their busiest tourism months. So we're a real hero in the town of Goderich at the same time.

.1915

Every time we've taken over a line there's been a lot of apprehension on the part of shippers. The best answer to this apprehension is to have them talk to the shippers on our line, and also to look at a study that was conducted by the United States Interstate Commerce Commission in 1989.

In responses to shippers' concerns on lines that had gone over to the short-line business, only 5% of the shippers reported poorer services, and 52% actually reported improved service. As for freight rate changes, only 12% reported higher rates, and 20% actually saw lower rates.

Here in Canada it has generally been a matter of seeing lower rates. Just talk to Nova Scotia Power about how much freight rates have been reduced in Nova Scotia since we took over from Canadian National.

It's also interesting to note that the big shippers did not see much of any changes but the little shippers were the ones that noted significant improvements, especially in service.

Many people don't realize that a branch line really goes through a death spiral. In the United States, rail workers losing employment from an abandonment of a branch line get six years of wages. Here in Canada everyone other than the train and engine service people, if they have eight years of seniority, ends up with a guaranteed job for life, whether the line is in service or not.

What happens then is that, in the United States especially, in order to avoid the six years of wages the American railroad starts to drive off business, first by reducing it from daily service to thrice-weekly service and then to once-a-week service. They don't spend as much money on track maintenance; speeds get slower as a result; car supply gets slower; and freight rates suddenly seem to keep going up. That really is the start of a death spiral on these branch lines.

Our trick, as a company wanting to operate these branch lines, is to be able to get in quickly enough, before most of the business is driven off. Of course, out in the prairie provinces now, this means before the grain elevators get moved down and rebuilt on the main lines of either CN or CP.

Another important thing is what the employees think about this. On our Cape Breton and Central Nova Scotia Railway, 45 of the 47 people we have working came from Canadian National. CN offered them a buy-out that was approximately one year's wages, or slightly more; it worked out to about $75,000 per employee in Canadian dollars.

The same employees now have been interviewed by Canadian National. I will leave on file with the commission a copy of a Canadian National personnel newspaper in which three of our employees, all former Canadian National employees, are quoted about what the difference is in working for the new railroad as compared to working for Canadian National.

The one on which I focus the most is at top of the front page; that is, the former local chairman of the Brotherhood of Locomotive Engineers, a gentleman named Swales. He was talking about how he loves the new idea of a composite job where he works part of the shift running the locomotive and the other part down on the ground switching the railroad cars. He also is given a business card and he goes out and makes sales calls. He likes the variety of work. Personally, I thought the one we'd have the hardest time convincing to do this would be that locomotive engineer, because he's always sitting in the warm, dry seat of the locomotive, in the rain and the snow. But this guy really loves it.

The other thing he talks about is that he does not need a job guaranteed for life. Of course, that's what the recent strikes in Canada have been about: eight years of seniority meaning a job guaranteed for life. He is quoted as saying that his best guarantee of a job is the fact that he sees a railroad out trying to bring business back to rail. As long as he sees the railroad growing rather than shrinking, that's his best guarantee of a job.

When these articles were written, the reporter was hired by Canadian National; it was not a Canadian National employee. The reporter took all these quotes, wrote up the story and sent the quotes back to each of the three employees who were interviewed to make sure the quotes were all accurate. So they had a second time to review the accuracy. I think it best tells what the employees now think about this, and they're all very positive about what's going on.

.1920

Let's talk about the process of acquiring a railroad here in Canada. If Canada really wants to save its light-density rail-line infrastructure it must change the approval process; change the labour legislation to allow small railroads to operate more efficiently; and resist attempts by shippers to open access to competing long-haul railroads.

It took RailTex 19 months to start the Goderich-Exeter from the date we signed the deal with CN until we turned the first wheel. In Nova Scotia it took us 12 months, and we were happy to speed up the process that much. But we're still in court there contesting various labour issues.

This compares with the United States, where just last December we started a rail line in Oregon that was 420 miles long with 40,000 cars per year of traffic. We had it approved in a seven-day review process. There were no shipper complaints and there were no rail labour complaints. In the United States, states themselves do not have any voice in the transaction. That's very different form here in Canada, where both federal approval and provincial approval are required.

The forced transfer of prior labour agreements to the buying railroad has stopped all RailTex's interest in acquiring lines in Ontario and Saskatchewan. We have tried to negotiate with rail labour under the encouragement of the Ontario Labour Board here in Ontario, but it has not been successful, even though we did get an agreement with the Brotherhood of Locomotive Engineers. It could not guarantee that any of the other affected labour unions would not come in and attempt to put successorship labour contracts onto the employees of any new railroad we acquired here.

You have to realize that our Ontario employees have voted to join the Brotherhood of Locomotive Engineers, and we are now negotiating a contract on that railroad. But the contract does not have any issues on work rules or craft divisions; it's strictly grievance procedures and wage rates.

RailTex is not anti-union, but we are very anti-traditional railroad craft lines because of the inefficiencies craft lines bring to the smaller railroad. In fact, if the successorship laws had been in place in Ontario when we started our Goderich line, we would have had eight employees and eight separate labour unions to deal with because of existing contracts.

The same pass-through labour contract issues apply on Via routes and on rail lines crossing provincial boundaries. If you really want to save rail lines, the previous rail labour contracts cannot be forced on the newly acquiring railroad. That is why branch-line sales were stopped in Saskatchewan and not because of the theory Mr. Paul Beingessner, the general manager of Southern Rails Co-op, gave this committee in his testimony on May 16. You just cannot start a short-line railroad in Saskatchewan with the existing successorship laws in place. We can't do it in Ontario right now either.

The character of the work duties on a small railroad is totally different from a large railroad, so successorship rights have no true application. If it had been in Ontario, as I mentioned earlier, there would have been eight employees and eight different labour unions. We actually would've had to have more employees simply because in some jobs one person could not do all the work of that craft. Yet in many other areas one person would be idle two-thirds to three-quarters of the time because there wouldn't be enough work to do, such as maintaining railroad grade-crossing signals.

I continue to learn more about the needs of Canadian shippers through the Canadian Industrial Transportation League meetings, conferences and publications. At the recent Department of Transport stakeholder meetings here in Ottawa, I continually heard shippers express the opinion that the big railroads are totally dominating the short lines and could drive the short lines out of business.

.1925

RailTex's railroads interchange with every large railroad in North America, and 34 railroads in total. In all cases we have partnership relations, not adversarial relations.

Our competition is the trucker, not our big railroad connection. Of our 25 railroads, 10 outlet only to a single carrier, with 2 of those being our largest lines, and we willingly negotiated the agreement. Both our Canadian lines interchange only with Canadian National, and we have an excellent partnership with CN. But don't take my word. Ask the shippers on our two Canadian lines. Do they feel the railroad is being dominated by CN?

Recall my earlier testimony as to why the large railroads sell off branch lines. They want the business, but they cannot afford to use their old system of operation to bring that business down to the main line.

I've heard some proposed legislation that would find many shippers wanting to grant access for the short line to other large railroads, and they feel this access to another large railroad would allow for greater competition. I call this an open access theory. I'm totally opposed to the open access theory. The main reason I'm opposed to it is that in the United States rail labour is now using this as a tactic to stop the sale of any further branch lines into the short-line industry because they know if the selling railroad opens up that branch line so that the shippers can route out via another long-haul railroad, they might lose a lot of the business they currently have. If rail labour can force through open access to another large railroad, the selling railroad is just not going to sell.

Now, I have no proof of that going on here in Canada, but I have heard a number of shippers testify that they want the open access rule. It's my opinion that if open access is permitted in the legislation, that will stop the big railroads from selling any of their branch lines. It's already been talked of that way in the United States, and what will happen is that we'll have the death of those branch lines.

I believe what we're really trying to do, and what the committee is up to, is to preserve rail service to these light-density branch lines in rural Canada.

In conclusion, the feeder railroads are not controlled by the large connecting lines. The large lines do not control our service or our intra-line rates, and they even encourage us to supply railcars. Shippers will benefit with a locally focused railroad serving their plant. Just ask the shippers on our Goderich and Nova Scotia railways. They are benefiting from improved service, and they don't need access to another large railroad.

Remember, the light-density branch line is still owned by the big railroad. If legislation is passed that might cause the large railroad to lose potential long-haul business, they might just continue the death spiral of the line by not selling off the line. More than anything else, we must all work to save our existing rail network here in Canada.

Thank you, Mr. Chairman.

The Chairman: Thank you, Mr. Flohr.

Mrs. Cowling.

Mrs. Cowling: I'm intrigued by your presentation. One of the issues we've been discussing in this committee is rail line abandonment and short lines. With respect to a short line, are there any problems with the light steel?

Mr. Flohr: Do you mean the weight of the rail?

Mrs. Cowling: Yes.

Mr. Flohr: We have not run into any problems here in Canada so far. In fact, on our Goderich-Exeter line, we had about 20 miles of track down in the Centralia area that was 80-pound rail, and that is very light rail for big railroads. Canadian National had put a 70-tonne weight restriction on any cars moving on that section of the line. That's where a lot of the grain moves on the railroad right now.

We looked at the track and felt that with a little bit of tie replacement the 80-pound rail would be adequate to carry a full 100-tonne loaded grain car. We increased the load limits to 100 tonnes within six months of starting up, and we have not had any derailments there. Everything's working fine, shipping the 100-tonne cars on the 80-pound rail.

.1930

So that's an example of where we have not had a problem.

I've heard Tom Payne of Central Western make similar testimony on some of the light rail he acquired. He has not had any derailment problems on that light rail either.

Mrs. Cowling: My other question is about the size of our country, how large it is. You had mentioned you would like to get the short lines in with the elevator system in place. One of the things we're hearing from the industry is that we're moving to high throughput elevators and moving grain faster. Can you explain to us why, if we move in this direction, those elevators are important to the short lines and how the system would work with high throughput elevators, where we clean the grain on the prairies and in those systems?

Mr. Flohr: You're getting into an area where I'm starting to talk as a grain shipper, and I'm certainly not. In our business, not only do we have to know how to railroad but we have to learn a lot of what our shippers' problems are, too. But I'll try to answer the question as best I can.

We're seeing today that the real trend in grain movement is, first, get it out of the field and into some type of controlled storage environment, just to keep it from spoiling or to keep the birds from getting it, or whatever. Then it will move to a large grain elevator and sit there maybe for several months, until whatever the market flow is in the whole world.

What we are seeing now is there is a role for the small grain elevator. I'm using primarily our Northeast Kansas and Missouri railroad. We have a number of small elevators in the northeast corner of Kansas. Many of those were actually shut down or were being used only for bringing in inbound fertilizers to go out during the planting season and were not doing any holding of harvest grain. All of that grain was going rubber-tire into Saint Joseph, Missouri, which is a big complex of your high throughput elevators on the banks of the Missouri River, and then a lot of it was being barged out of there.

With this half-cent a bushel freight rate reduction they're now bringing the grain straight out of the field back into these little elevators. We're now coming in with our railroad covered hopper cars and with the half-cent freight rate reduction hauling it over about a three-month period into the big elevator complexes on the Missouri River. They're saying there's no big urgency, no speed urgency, to get it to the big elevator, because it's going to sit there for a long time, until the dynamics of the world marketplace take over. Then they're looking for a very fast throughput, whether it's on an ocean-going ship or a 150-car grain train, or whatever else might happen to it.

We're actually seeing the small grain elevators coming back to life in Kansas. We're seeing a similar thing with the Texas Northeastern railroad, in the Panhandle area of Texas, where a lot of wheat and milo, primarily, is grown.

I've been told about a similar thing up in Ontario in the Centralia area, where they were looking at trucking directly from the field down to the big elevator in Goderich and now they're putting it back into the little elevators down in the Exeter-Centralia area. Then we rail it down to Goderich.

Mrs. Cowling: About car allocation and cars, do you, the short line, own a certain percentage of the cars?

Mr. Flohr: On the car ownership, we don't own any grain cars, but we are leasing 450 grain cars from companies such as General Electric. They have the largest railcar fleet in North America that's non-railroad owned. We're leasing 450.

What we're doing is moving those cars after the harvest season. In fact, a month ago those cars started moving the winter wheat in the Texas Panhandle area under these short-haul movements. Not the long-haul; the big railroads are still supplying the cars for the long-haul movements, down to the port of New Orleans, say, or wherever else they may go. But we're bringing the cars in for the short haul.

.1935

When that winter wheat harvest is over, we then move the cars up to this Northeast Kansas and Missouri railroad. They'll stay there until about the middle of July. Then we'll split and we'll move part of them to Goderich for that movement, and part over to Georgia where we haul peanuts in them in August. Then there's another peanut harvest up in North Carolina.

We then take part of our other cars...in fact, the Goderich cars then go over to Michigan, around the Grand Rapids area, and haul edible beans in December, January and February. We then bring them back to Missouri, and we move poultry feed down there. It's all short-haul.

The big railroads like to supply the cars if they can get a 1,500- or 2,000-mile haul, but they don't want to supply their cars for a 40-mile haul. We like that business, so we're supplying the cars for the 40-mile haul.

Mrs. Cowling: Thank you.

Mr. Morrison: I was looking at your little blurb here about your Northeast Kansas division. It seems to be the only thing you have that is analogous to what we're talking about.

Mr. Flohr: It's very close, yes.

Mr. Morrison: Is it totally grain-dependent?

Mr. Flohr: It's not totally grain-dependent, but it's about 90% farm-related, because we do get inbound fertilizers in the spring as well as the outbound grain in the fall.

Regarding the other 10%, we have one scrap dealer. There's a small machinery company that makes equipment, primarily for the food processing industry, and we get about one scrap car a week out of them.

But about 90% or more of the business is entirely grain-related, so I think it probably is as close a comparison to the prairie province grain lines as there is.

Mr. Morrison: Okay.

On the basis of grain haulage, is the line totally self-sustaining, or is there somewhere in your freight structure in the United States, or specifically on that line, some sort of a tonnage subsidy? Is it totally self-sustaining or not?

Mr. Flohr: It is totally self-sustaining, and it is one of our railroads that is profitable.

We bought the railroad from Union Pacific. We did not lease it, because that's another area where you can get into fuzziness, where if you lease the railroad...and we do have seven of our railroads leased from the owning company. So in your freight rate division there is nothing embodied to cover the purchase price of the line. But we did purchase our Northeast Kansas and Missouri railroad from Union Pacific, and it is a profitable railroad.

Mr. Morrison: If you didn't have the option of moving your equipment around the country and getting several months of service out of it, would the thing fly?

Mr. Flohr: Probably not. The big business is the short-haul business. That's where it went from a break-even railroad to being a profitable railroad.

Mr. Morrison: Because you can move your equipment around?

Mr. Flohr: Yes, including here into Canada.

Mr. Morrison: Does any of it ever disappear into the system, never to be seen again?

Mr. Flohr: Let's just say it has always resurfaced. We've been in the railroad business since 1977, and we did have a fleet of open-top hopper cars we leased to the stone quarry industry.

One time we did lose a car, and it stayed lost for almost a month until it finally showed up out in west Texas. The last time they had physically seen it was switching it in a yard in Fort Worth, Texas. When they took the numbers of the cars on the outbound train it was supposed to be on, it was not on that train. Everybody said it would show up sooner or later, and sure enough, about a month later it did show up.

Remarkably, we don't lose many cars. They do get delayed sometimes, but no, we really don't lose any cars.

Mr. Morrison: Thank you.

Mr. Collins: I wish a member of our Standing Committee on Agriculture and Agri-Food were here, because he certainly speaks very highly of your Goderich-Exeter line and is well informed of it.

I do wish the people who appeared before us would have had been able to listen to your presentation before they made theirs, because it's amazing, depending on where you see yourself in the system, as to what your thoughts are about these lines.

Let me ask about that 80-pound steel. What speed do you run your cars at?

.1940

Mr. Flohr: For the Goderich-Exeter Railway, on the main line between Stratford and Goderich, we're running at 30 miles per hour. On the branch line down to Centralia, the last time I saw it we were operating at 10 miles per hour.

Mr. Collins: Are those controlled under the railway transportation system?

Mr. Flohr: They're partially controlled. What happens is that we post a speed, they bring out inspectors on a periodic basis, and then the inspectors look at the track itself and say whether or not they think it's safe.

There are some criteria, but they're not really definitive criteria. In the United States there are very definitive criteria. For example, if you want to go 10 miles per hour, you have to have at least five good ties per rail length. If you want to go 25 miles per hour, you have to have eight good ties per rail length. The higher the speeds, the more good ties you have to have. It's not quite as detailed in Canada, but there are people who come in.

Both our railroads in Canada are under provincial jurisdiction rather than federal jurisdiction, but in both Nova Scotia and Ontario the provinces have contracted with the federal inspectors. So they're still coming in to do the inspection as if Canadian National were still operating the lines.

Mr. Collins: Mr. Chairman, I just want to make a couple of observations and then ask a couple of questions.

Based on your experience from the 1970s until now, you certainly are a proponent of short lines, otherwise you wouldn't be in the business.

Mr. Flohr: That's right, and we can make money at them, too.

Mr. Collins: That's right. I notice that when you can have 47 people do what 110 used to do and still run at an efficiency over and above, there have to be some secrets in the process.

We have some line for sale and we wondered if you would be interested in about 15% of it.

Some hon. members: Oh, oh!

Mr. Collins: I thought I'd just throw that out, Mr. Chairman.

Mr. Flohr: Paul Tellier has said that east of Winnipeg, 50% of Canadian National should go. He's saying that 20% should be short-lined and 30% should be abandoned. I think the 20% and 30% are reversed: 30% should be short-lined and 20%, abandoned. That's simply east of Winnipeg. Then you get out into the prairie provinces and you have a lot more out there.

Mr. Collins: Hypothetically, if the time came - and we're certainly pressed right now, because abandonment is going to be coming up very quickly - and there was a mechanism in the system whereby we could avoid some of the pitfalls you're facing in terms of the problems with crafting and so on, what would be the interest of RailTex in moving into places such as Saskatchewan and back into Ontario if we could get the labour issues removed?

Mr. Flohr: We would be very interested. In fact, we have four-and-a-half positions of people working just on acquisitions within our company right now. We are looking at some lines in some other parts of Canada that don't have successorship rights.

What we have proposed here in Ontario is that the labour act legislation requiring successorship rights be amended only to remove light-density rail lines, and we have defined that to be any rail line where the acquiring party would have fewer than 50 employees working on the line. That's all we've proposed as being carved out. Because the nature of the work is so different, the successorship of the labour agreements is really no longer applicable.

That's what we have been proposing ever since that amendment in the labour act was first passed here in Ontario. I'm not as familiar with Saskatchewan. We haven't worked hard in Saskatchewan, but that's an approach we would be very comfortable with.

Mr. Collins: Mr. Chairman, I know the Saskatchewan Association of Rural Municipalities, municipal people and farmers, are very concerned that we don't abandon lines, tear them up and then say that, gosh, we should have left them in place. We can use examples in Saskatchewan where we've done it. Now we're in the back-haul arrangement where we run it to Brandon to take it west.

.1945

Would RailTex, as a consultant, take a look at a place such as Saskatchewan and possibly Manitoba, in terms of giving advice as to those that may be viable so that we come to a position of using some good common sense and judgment not based on some airy-fairy arrangements that some people have as their own personal agendas?

You come with a tremendous background and experience that we'd really like to draw on. Coming from Saskatchewan, I just say we would want to take a look at your capabilities and knowledge to give us your overview of those lines you think we should keep in place and those that could be abandoned. Maybe we could work collectively to see some approach to some efficiencies.

Mr. Flohr: Yes, we'd be very interested, but only on one condition - that it not jeopardize our ability to ultimately bid on buying some of the lines. Because that's what we're really after.

What we have done in other areas, other parts of North America, is actually have two of our people come in and have meetings with interested parties, either at the provincial or state capital, or at some of the major locations along the lines. We'll just talk for half a day about what we look for in wanting to acquire a railroad.

A number you can take back right now to look at is that on a rough-cut basis, we say that we want a line that has at least 2,000 cars per year per crew working on the railroad. So if you have a branch line where there is one crew right now of Canadian Pacific going out and coming back and it requires just one crew to keep the service on that line and there are at least 2,000 cars a year in traffic on that line, that's a line we believe has the potential for having someone come in and operate it, and operate it at a profit.

Mr. Collins: What happens is this. On some of the lines I see running out of Estevan, which are up for abandonment, the railway, notoriously, will run an engine, or two engines and one box-car, down to prove the line is inefficient, and then they'll build up the roadbed to enhance their position even further. Of course, if you're going to look at that line and ask if it will pass, it will never pass the test.

Mr. Flohr: We actually go out and look at the railroad first. We don't look at the track on our initial look. We look at what the conditions of the factories on the line are. In this case, it would be the grain elevators. Are they active or are they not? Our worst nightmare is that we'll go in, put out good money to buy a line and then the factory will shut down through no fault of our own and we'll be stuck with a piece of railroad with very little business left on it.

We'll look more at the condition of the industries on the line to get comfortable there. If we get comfortable with that, then we'll go back and look at the condition of the track and start to put together a full business plan on how we'd operate the railroad.

It's always critical, though, that if the traffic is going to move on the short line and then going to move on the big railroad, what the division of revenue between those two entities is going to be. At least in our cases with Canadian National, we have had very good negotiations. They've been tough negotiations. You're not going to get anything extra out of CN, I'll tell you that, but they've been very professional negotiations and we're very happy with what we've had happen.

So that is always the other concern. I read the testimony of Tom Payne of the Central Western Railway. Of course, that was one of the issues he is concerned with, the proposed legislation and the division of revenues in getting Central Western included in those computations.

The Chairman: Last question, Bernie.

Mr. Collins: The line you picked up, the Goderich-Exeter - did you pick it up for salvage, or is that...?

Mr. Flohr: The main reason I'm hesitating on this is that I don't recall. I can look here. I know what we paid for it. It's public record. I just have to look up the number here. I think it was fairly close to salvage. I know the Nova Scotia line was right at salvage value. We paid $4 million Canadian for that line, and it's 70 miles of track and the lighter-weight rail. We picked it up for about salvage value.

.1950

Canadian National kept your mineral rights; they kept fibre optic easements. But we did acquire all surface rights for a 100-foot wide right-of-way strip on that. We did not acquire any of the trackage that was down in the port facility. That was owned by either the Goderich elevator or Sifto Salt.

The Chairman: Thank you, Mr. Flohr.

Coming back to the elevators on the line point, on your Northeast Kansas and Missouri Division, who owns the elevators on that line? Is it a mixture of operators, or is it one or two main grain companies?

Mr. Flohr: There's one large co-op in Hiawatha, Kansas, that has, I think, three of the elevators. All of the other elevators are, I believe, small independent operators.

The Chairman: When you come into St. Joseph, where your high throughput elevator is, would the company that controls that be the same as any of them on the line?

Mr. Flohr: No. They're all the big boys, the ADMs of the world.

The Chairman: The Cargills....

Mr. Flohr: The Cargills, ADMs - no, they do not own any of the small elevators. There's no common ownership between the two groups of elevators.

The Chairman: I ask this because in our system, this is an ongoing dispute between myself and the cooperative companies, the pools in Canada. Are they really operating in terms of the producers' interests, whom they claim to represent, or are they operating in terms of their corporate interests and their financial bottom line in advocating the abandonment of rail lines with their elevators on it, and then going to their higher throughput elevators and main lines?

To them, they're going to draw the grain anyway to their high throughput elevator. For them, there's less labour cost if they're not running all these little elevators along their lines.

I think that is a difference between us and the situation in some of your lines in the States, but it's not one that can't be overcome.

Mr. Flohr: Let me add a little dimension to that. In both St. Joseph, Missouri, and in Goderich, the big elevator operators all are saying now they'd much rather have the grain arrive in a railroad car than in a truck, because the truck comes with a mouth in it. There's a lot of chaos with them all coming in and out, where that dumb railroad car comes and it gets unloaded on an orderly basis over a 24-hour period.

In the case of the Goderich elevator, they had only a two-car spot to unload railroad cars when we first came in up there. After the first year of doing this, they've now expanded that rail siding, so now they can unload 20 cars at a time. They like it that much better, rather than having the trucks come in.

The Chairman: This leads me to another question I had. That is, at the point where you interchange with a main line or a bigger railway, how much capacity do you need at those points of interchange? I suppose it depends on the line, but I'm looking at Canadian Western, Payne's line, and some of the difficulties they have in interchange.

Mr. Flohr: It all depends on how many cars are delivered to the big railroad at one time, and how many empties you get back. Generally, if you're doing 5, 10, 15, 20 cars, it's not a problem anyplace. But if the big elevator has put in a 50-car unit, or greater, train situation, sometimes the problem we run into is that the interchange trackage does not have enough capacity to take that full train at one time. So it defeats the purpose of having those large unit trains.

The Chairman: On your short line.

In terms of successor rights in Canada, what's the greater problem, wages or the fact.... I guess I'm assuming that in the Cape Breton situation, probably where you've made your greatest efficiencies on labour is by a worker being able to do more than one job. I forget what you called it.

.1955

Mr. Flohr: It's the craft line - the work rule distinctions. That's where the big savings are.

In fact we gave the people in Nova Scotia about a 15% wage cut from what they'd been earning with Canadian National, but the profit-sharing they've been getting is averaging about 15% of their wages. So they're right back up to the kinds of earnings they were getting before.

The whole issue is having the craft lines eliminated, because in the big railroads the person who runs the locomotive can't even wash the windshield on the locomotive. That is a different labour union's job. Much of the time in the big railroads, all they do is say to each other, ``This is not my job''. On our railroads everybody just gets the work done, and then they share in the profits.

The Chairman: The last question I have is on the open access theory. If you look at a railway map of Canada, a lot of our lines running north and south do in fact cross over both railway companies' lines. I'm wondering if we're going to run into problems in the area of open access. It is certainly our aim to encourage short lines; that's why some of the decisions we've made have been made.

Could you explain the open access theory?

Mr. Flohr: Let's just use an example. Let's say Canadian National sells a rail line to RailTex. Given open access, the RailTex railroad could then go out on the Canadian National railroad and go to the first point where it could connect with Canadian Pacific or maybe a railroad in the United States. That's open access.

So the little railroad would have the physical ability to deliver traffic to the selling railroad, Canadian National, but also the ability to give traffic to Canadian Pacific.

Of course the shippers love that, because then they can start getting a tug-and-pull between Canadian National and Canadian Pacific on lower freight rates and maybe car supply. That's the advantage to the shipper.

Canadian National is sitting there looking at this line and trying to decide whether they should sell it to RailTex or to anybody else. They're saying ``If the buyer then has the ability to haul that traffic over and give it to Canadian Pacific, I stand to lose the business, whereas if I don't sell the line at all but continue to operate the line under Canadian National, I have the long-haul traffic locked up on Canadian National.'' So the decision will often be to not sell the line because they don't want to lose that business to the other big, competing railroad.

In the United States several of our rail lines are leased from big railroads. In fact the one I just came from in Missouri is leased from Union Pacific. In our lease agreement with Union Pacific it says 95% of the traffic has to continue to route out long-haul Union Pacific. We could route out via Burlington Northern, the other big railroad down there.

As long as we keep routing it out 95% Union Pacific, we make no lease payments to Union Pacific. We get to use the railroad free of charge, really. But if we get one car under the 95%, we have to pay over $150,000 a year in lease payments to Union Pacific. So guess where we're routing all of our traffic? It's out Union Pacific.

They do leases instead of sales for two reasons. That's one reason: to control the routing.

.2000

The other reason some railroads use leases is you can bring in maybe a marginal or underfunded short-line operator to give them a chance to get the railroad going, but if the shippers aren't happy with the lessee who's operating the railroad and the shippers complain enough, then the lease can be unravelled and the lessor railroad either comes back in and restores service or turns around and leases it to another short-line railroad company, whereas once a sale occurs it's all over. The shippers may not be happy with the new short-line operator, but there's no way the deal can be unravelled.

Mrs. Cowling: You've indicated that you have a very good working relationship with CN. Do you have any comments on the commercialization of CN, or any further comments on the atmosphere we're looking at in Canada with a deregulated system?

Mr. Flohr: I'll answer the second part of the question first. I'm a big advocate of a deregulated transportation system, because I see that ultimately the shippers or the customers benefit because of lower freight rates. That's happened in every place where we've seen it.

As for the commercialization of CN, I think it has already had some benefits, just by being talked about, because we are already seeing significant reductions in a lot of the CN overhead staff, a lot of the office positions where we long questioned why they were even in place. Over the past three years we've seen a significant reduction in those overhead people. I think it's all part of getting the property fixed up so it will get the maximum number of dollars when it will be privatized. I am a big supporter of it, because I think it is going to make Canadian National a good, lean, strong, well-capitalized railroad that's going to be good, strong competition for Canadian Pacific.

Mr. Morrison: I wonder if you'd walk me just a little bit further through this open-access concept. As I understood you, the way you define ``open access'' is that if railway A sells to B and then B wants to ship through railway C but has to use railway A's track to get there, that's open access. Is that correct?

Mr. Flohr: Yes, that's how I define open access.

Mr. Morrison: We have railways in this country - not too many, but some, particularly in the west - that are physically set up so that they could deliver freight as a short line to either of the major operators. That wouldn't be classed as open access, then?

Mr. Flohr: No, because they could reach each one and they don't have to run over railway A to get to railway C. That's the difference.

Mr. Morrison: Yes, that's right. Okay.

Mr. Flohr: One other thing on open access, though, is that if you have to run over railway A, who is going to set the charges for operating over railway A? Also, if railway A doesn't really like you doing it, then the dispatcher of the trains can make life very miserable for you in getting over to railway C and then getting back.

The Chairman: I thank you for coming. I think we all found your presentation very encouraging and enlightening. We wish you much success in the future.

Mr. Flohr: We like doing business here in Canada.

The Chairman: This meeting stands adjourned.