[Recorded by Electronic Apparatus]
Tuesday, April 23, 1996
.0904 
[English]
The Chairman: I call this meeting to order.
We'll start the meeting, but I anticipate that other members will be joining us. There's an important caucus meeting going on involving the government side today. That will soon be finished and I anticipate a number of members will be coming when it concludes.
We are continuing our discussion concerning cost recovery, etc. We have a number of witnesses this morning. The first is Mr. David Miller, assistant secretary, sxpenditure management sector, Treasury Board.
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Mr. Miller, I believe you have a presentation or some comments to make, so over to you and welcome this morning.
Mr. David Miller (Assistant Secretary, Expenditure Management Sector, Program Branch, Treasury Board of Canada): Thank you, Mr. Chairman.
A few weeks ago I had the privilege of addressing this committee on our project to improve information and reporting to Parliament, and I am sure the subject today will generate at least as much interest from the members. I am happy to be here to provide some background as to the overall approach we have taken in the area of user fees and cost recovery.
The rationale of user fees is to shift the burden of financing goods and services from taxpayers generally to those who benefit directly. No good or service can be provided free. It must be financed either by user charges or the tax system supplemented by government borrowing. There are few true public goods - in other words, those that cannot be divided into purchasable units, and where it is difficult to exclude those who refuse to pay from benefiting.
The government's policy on external user charges has been in place since December 1989. Given the understandable resistance of users to paying for services previously financed through general taxation, and therefore at no incremental cost to the recipients, implementing continues to be a major challenge.
I think it would be fair to say that industry groups in general agree with the principles of cost recovery, but there have been a lot of concerns with respect to the implementation and application of the policy. Industry is looking for greater emphasis on cost reduction, service improvements, the development of partnerships to control costs, the impact of user charges on competitiveness, agreement as to what constitutes a public versus a private good, and the need for a formal dispute settlement mechanism.
An underlying focus of our user charge policy is that clients who have to pay will exert pressure for the elimination of duplication of effort, more efficient service delivery, and the consideration of lower-cost alternatives. Departments want more guidance on when and how to charge, and more flexibility on the use of associated revenues. More than anything, though, they are seeking a more streamlined approval process.
Parliament, on the other hand, wants better accounting and more detailed disclosure of user charges. In part this is because it loses some control when programs are not financed exclusively by appropriations, and again there is the whole question of accountability for the impact of departmental actions.
The policy framework is based on a concept of full recovery of costs. Any departures from this have to be fully justified by such reasons as full recovery, or reducing consumption of the good or service enough to compromise broader program objectives. The presence of public benefits is a consideration in determining whether to go to full or partial cost recovery. Determining the amount of public benefit is often subjective and difficult to measure or allocate.
As I mentioned, industry groups are particularly worried about the impact user charges have on the competitiveness of Canadian companies. In part this arises from fears about the potential impact of user charges from multiple departments, or other levels of government, on a single industry group. There is no oversight role within the federal government to assess the cumulative impact of fees on a given industry. This responsibility is shared by departments implementing user charges and the industry being charged.
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While the intent of the policy is to recover full costs, most initiatives only recover a portion of costs. For example, the direct costs of the fish inspection program were $28.5 million in 1995-96. It is estimated that only $800,000 or less than 3% of this is being recovered. These recoveries represent fees that importers pay for licences, inspections and product analyses.
Another example is the Canadian Coast Guard, where the direct costs amount to $510 million in 1995-96, and revenues from Arctic resupply, marine radio and ship safety and registration are expected to reach $14 million or less than 3% of the cost of the program.
In agriculture food inspection activities related to processed products, dairy products and processed egg products are recovering about 10% of costs. Meat inspection activities recover about 13%. Breeding services and summer grazing in the community pastures programs recover about 76%. Inspection services provided by the Canadian Grain Commission recover close to 100% of costs.
Neither the Treasury Board nor its secretariat can become an arbiter in this area and intervene in the business of line departments. I believe that Treasury Board's concern is to ensure a fair process.
In cases where cumulative impacts become a real problem, users must raise the issue with the departments in question and push for an equitable resolution. And as the industry groups know, there are many avenues for exerting pressures on departments.
The policy requires consultations by departments to assess carefully the impact of charges on users and other affected parties. When regulations are involved, a regulatory impact analysis statement must accompany the regulation in the Canada Gazette, describing what the government is going to deliver, how Canadians have been consulted, and what they have said. The specific issues of competitiveness and the financial impact that the charges have on users must be addressed as part of this statement.
The business impact test - or BIT - is a new tool available to health departments assess the commercial impact of user charges. It also deals specifically with the competitiveness of Canadian companies and the financial impact of user charges on the users.
In situations where uncontested market conditions prevail, such as monopoly situations, mandatory services, rights and privileges, user charge proposals are intended to go through a rigorous review and approval process. Prior to implementation, proposals are approved by the responsible minister, by the Department of Justice, by the Treasury Board, and by a special committee of cabinet. User charge initiatives are also subject to review by the Standing Joint Committee on the Scrutiny of Regulations, and audit, of course, by the Office of the Auditor General.
Cost recovery fees are based on the costs of providing services, and the Treasury Board reviews departmental spending plans on an annual basis to ensure efficiency of operations.
Treasury Board will continue to be involved in the approval of initiatives where a statutory requirement exists, or where the uncontested market conditions prevail. However, for operational services, small fees or areas where commercial parallels exist, the continued involvement of Treasury Board in the approval process should be minimized.
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For example, a few years ago the full regulatory process had to be followed to set a price for firewood for our campfires in our national parks. This has since been deregulated, and similar action will be taken in other appropriate areas.
As a final point, I would like to explain that the government is in the process of reviewing and updating its user fee policy. Given the diversity of views on this policy, we want to bring interested parties together to discuss the key issues and explore creative options for improvement.
We have asked the Canadian Centre for Management Development, which has experience with principles-based negotiations, to facilitate consultation sessions on this policy update over the next few months.
We are planning to invite national industry associations, probably seven or eight different national groups that represent a broad spectrum of concerns among the business community, to participate, as well as the Consumers' Association of Canada, the National Anti-Poverty Organization, people from the academic community, representatives of the Auditor General, and parliamentarians, along with some key departmental officials. The objective is to identify ways in which we might improve the current policy and its implementation by line departments.
That completes my formal statement. I would be happy to try to answer any questions the committee may have at this time.
The Chairman: Thank you very much, Mr. Miller.
We'll start out with Mr. Calder.
Mr. Calder (Wellington - Grey - Dufferin - Simcoe): Thank you, Mr. Chairman.
Mr. Miller, good morning. You made a statement here about the user fees being shifted from the taxpayer and, in particular, those who benefit directly. I would like you to expand on who that is. Is it the consumer or the food industry that benefits directly from here?
I'm wondering a bit about the competitiveness of the industry with user fees. Somebody is going to have to swallow this cost. In the United States right now, they're looking at user fees, but they're not there yet. That's where we have one of our biggest export markets right now. If in fact we're going to swallow the cost as an industry, how competitive are we going to be with the United States?
Mr. Miller: Perhaps I should leave the first part of your question, which has to do with the application of the fees and who they will impact, to representatives from Agriculture and Agri-Food Canada.
We will say that the intent of the policy is quite straightforward. If there is a benefit associated with the government providing a service...and the Auditor General agrees in general with this recommendation, that those individuals, whether they be a commercial interest or in fact general consumers, depending on the nature of that service, would pay...
Perhaps I can put in here in general that the federal government now collects about $3.5 billion in fees across a variety of activities in almost all departments and agencies. Some of them would be well known to this committee. For example, there's the RCMP, who charge fees, of course, for provincial and municipal policing, and there's the air transportation tax. All of those can be looked at in a way.
We can use another example outside agriculture. With the RCMP providing this service and the province or municipality paying for it, eventually it is the consumer or the citizen, as a member of that community, who pays through their regional or provincial tax system.
So it's difficult for me to characterize the exact implications of any particular initiative. We leave that up to the experts within each area of the department conducting the negotiations with their client groups.
Mr. Calder: And what about the competitiveness with the United States? I want to go back to a specific here in a second.
Mr. Miller: If it's competitiveness associated with a particular industry within Agriculture and Agri-Food, that is up to the discussions that the department would be having with that group. From the Treasury Board's perspective, our principal function is to ensure that those consultations and negotiations occur, that there is an opportunity for those groups to express their concerns and to have those built into those plans.
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When we went through the process in program review of assessing virtually all programs of the government, we did not have, as I read in testimony from some of the people who appeared earlier before this committee, any target for cost recovery. There was a target for improved service delivery. There were targets for better focusing of the activities we use. That may in fact translate into increased fees.
For the exact assessment of the competitiveness, we can use tools available, like the business impact test I mentioned, which is really a questionnaire for the industry to determine the implications. It's relatively new. It has been used in other areas, such as health, but quite frankly, Agriculture and Agri-Food had been undergoing negotiations for cost recovery long before we actually implemented that particular test in other areas.
So it's been a very complex series of negotiations and consultations in this particular area.
Mr. Calder: Then what I would look at is, for instance, pesticides or meat inspection, either/or, where, say, a user fee is attached to both of them. Both the consumer and the food industry benefit from that.
How would that user fee be split up? What percentage would be to the consumer and what percentage to the industry?
Mr. Miller: In principle, that would depend on the particular process. Using meat inspection as an example, if all meat in Canada is subject to the same level of inspection activity, then presumably those costs could be passed on to the consumer as part of the health and safety associated with buying that product.
The industry itself has a whole series of other dynamics within it that make it competitive within itself, but the particular costs they have... Presumably, if a company decides to internalize those charges and therefore not pass those costs on, that's just one of a myriad of marketing and other decisions they would make in the normal cost of doing business.
Mr. Calder: In other words, what you're saying here is that there could be situations where companies would be forced to eat those costs.
Mr. Miller: In the same manner they'd be forced to eat part of their production costs or their marketing or transportation costs. I can't comment on the individual situations as to how that would occur.
Mr. Calder: Okay.
Thank you, Mr. Chairman.
The Chairman: I have a point of clarification before we go to Mr. Hermanson and then Mr. Chrétien.
Mr. Miller, Mr. Calder said there isn't cost recovery in the United States. Can you comment overall on our government versus the U.S.? Is there cost recovery in the U.S.?
I know Dr. Olson may very well address agriculture versus agriculture when he comes to the table, but as far as the Treasury Board is concerned - and I can't think of the proper title for your counterpart in the U.S. - what's the apples and apples there?
Mr. Miller: Certainly the whole concept... Perhaps I can make it even broader than that. In terms of the idea of a program review, the idea of a fundamental look at government programs and how they're being delivered and how they're being targeted, virtually all countries are now going through a similar process. In fact, it's quite interesting how similar those outcomes and things are.
We have classic stories, places such as New Zealand, which of course has gone much further than we have in those areas. Certainly the United States, under the vice-president, has undertaken a whole series of initiatives that involve substantial cost recovery in virtually all elements of their activity as well. At the same time, they are rationalizing points of service.
As you know, the Department of Agriculture in the U.S. is a very complicated instrument, with over 100,000 employees. It delivers a variety of things that our department, or counterpart, here in Canada doesn't. But they are certainly introducing those kinds of concepts in virtually all countries.
The Chairman: Thank you, Mr. Miller.
Mr. Hermanson.
Mr. Hermanson (Kindersley - Lloydminster): Thank you, Mr. Chairman.
Good morning, Mr. Miller. I just want to clarify a couple of things. First of all, can you assure the committee that the general administration costs of the Department of Agriculture and Agri-Food are not trying to be recovered through the cost recovery program? In other words, is it strictly for the services provided?
Mr. Miller: We now operate under the concept of direct cost recovery. In other words, there's very little opportunity for departments to build in costs outside, or to cross-subsidize one activity with another. In fact, that's frowned upon because of parliamentary privilege in the use of those revenues.
.0925
There are situations, of course, where a certain level of administration is necessary even with an organization as large as a branch of food inspection and production, of perhaps 4,500 employees, where you do have costs of administration built in.
I think one of the important elements...comparing the operations of that branch against the Canadian Grain Commission, which is fairly autonomous within the department. They have very little interaction with the rest of Agriculture and Agri-Food. Their costs are all recovered and paid by the industry, as I mentioned, almost 100%, and in some cases 100%. The level of cost recovery we were talking about for Dr. Olson's branch is much below that. In other words, we're only dealing with somewhere between, say, 10% and 15% of his operations being cost recoverable at this time.
To say that we can achieve efficiencies to reduce costs or that we can perhaps reduce administrative burden in order to minimize the application of those costs is probably more valid in situations where we are closer to, as the policy requires, a full 100% recovery. At that time it becomes very important to analyse and review the implications.
Mr. Hermanson: It's important to all Canadians that we have safe food. It's the responsibility of the Department of Agriculture and Agri-Food and the Department of Health to ensure that our food stocks are safe. Does the Treasury Board policy consider ensuring that we have a safe food supply as a service to the industry, to producers? Or do they view that as a service to consumers and something that should be paid for by consumers?
Mr. Miller: In terms of the difference between a public and a private good, which in a way, I believe, is fundamental to your question, we'd obviously look at the mandate of the organization. I don't think anyone within Agriculture and Agri-Food would suggest that their primary objective is not to ensure a safe and adequate supply of food. That's their primary directive.
Within that, then, the accountability for ensuring it - the Treasury Board doesn't maintain that. It rests with the minister and with the departmental officials to ensure that happens.
Our objective in applying the cost recovery policy is to ask if it is a fair process. Are we ensuring that the requirements of the industry have been met? This will require substantial alteration. I believe members are familiar with the concepts introduced through the Speech from the Throne and the budget, and again, the president of the Treasury Board and the tabling of the main estimates, with the creation of agencies within the overall government that will operate essentially with a slightly different set of rules and objectives as to how they will accomplish things.
Part of the problem is that in a bureaucracy with over 200,000 people in it, you have a tendency to have to gear everything to that overall structure so that whether it's wage negotiations or terms of employment or application of particular policies, they all have to be applied in a uniform way. With the introduction of the agencies, we're actually hoping to modify some of those to have it make more sense in those particular situations.
So we are looking at ways of improving service through the adoption of those kinds of things as well.
Mr. Hermanson: That's rather a difficult answer to understand. Correct me if I'm wrong in my interpretation.
I think what you've just said is that in terms of administration costs, a portion of the general administration costs of the Department of Agriculture is being recovered, or being paid for, through cost recovery. I think I hear you saying that, for the most part, producers will be paying for the costs of ensuring that Canadians have a healthy and safe food supply.
Mr. Miller: Canadians are already paying to ensure they have a safe food supply.
Mr. Hermanson: But under your cost recovery program an increasing burden will be placed upon producers, and a decreasing burden will be placed upon consumers.
Mr. Miller: That depends on how the application of cost recovery is applied. Essentially, if my daughter is a vegetarian, then as a taxpayer she has no choice but to contribute to that as a public good. But as a recipient of actually buying the meat products, she then has the option of deciding, no, I'm not buying those products, and therefore I don't have to worry about the costs implicit in that activity.
.0930
I think that gets back to the fundamental reason that we are interested in the concept of user fees, which is that the beneficiary, the recipient of that service, whether it's a general Canadian or an industry, should recognize the costs of that. Certainly within our policy review the intention is that industry work very closely with departments.
I can't answer directly on the administration costs. Given the small percentage of cost recovery we have in the industry, it's very unlikely that it has any application. It would be only the direct people - the inspectors on the floors of the meat processing plants, etc. - but certainly as we have situations that may have a larger proportion of cost recovery, in those discussions that becomes important for the industry to understand.
We do operate in a government environment that requires us to do things that the normal private sector doesn't have to do; applications for things such as access to information do have substantial administrative costs. I'd leave it to Dr. Olson and others from Agriculture and Agri-Food to comment on how much of that element is actually in the current levels of user charges.
Mr. Hermanson: The natural resources sector, including the agriculture and transportation sectors, seems to be the primary focus of cost recovery, which is a very vulnerable sector. How consistent is your overall policy and criteria on cost recovery? I have been focused on this aspect of the Canadian economy and government services, and it's obvious to me that the government is not even allowed, for instance, under the Canada Health Act, to impose user fees for users of the health care system. That's not permitted yet.
User fees or cost recovery can be applied to Agriculture. We're involved in peacekeeping. We have no way of recovering the cost of that unless we could do it through the United Nations, and they don't seem to have any money to pay us, so we don't seem to have any fair criteria there. There are Canada Council grants that affect the arts industry; I see no cost recovery in that area. There is funding for aboriginal peoples through the Department of Indian and Northern Affairs; I see no cost recovery in that federal department. Correct me if I'm wrong, but I don't see any criteria from the Treasury Board to recover costs for those programs and services. There was a Beijing conference that offered involvement to various organizations with various agendas, and I saw no cost recovery in that area. We see the deficits of VIA Rail and the cost of the CBC, with very little cost recovery, although there is some cost recovery at CBC, I will grant you.
As someone who has been a farmer for quite some time, I see the agriculture sector being very vulnerable and other sectors getting away with far fewer demands made upon it. How do you respond to that? Can you assure me that your criteria are spread evenly and fairly across all sectors of the federal government?
Mr. Miller: Perhaps I can use some specific examples. While it will not encompass all the areas you've highlighted, I can comment on a few different areas.
For example, at Canadian Heritage we do have recoveries for broadcasting fees that more than cover the cost of the operation of the CRTC. At Citizenship and Immigration we've introduced landing fees that represent about $180 million worth of recovery for most people entering Canada who are going to live here and eventually obtain citizenship. We have the spectrum management fees of several hundred million dollars in the Department of Industry. We have recoveries for National Defence of approximately $450 million, some of which represents our international agreements on the use of Canadian military bases, others of which are recoveries from personnel for base housing and those kinds of things.
We do look at virtually every department. It is certainly up to the department itself how it applies those fees. So certain areas will have a substantial portion of their costs recovered in line with the policy. In other areas where there is a public good, and I will use Indian Affairs as an example since it is probably the only program of government that is actually growing because of the increase in the population and the requirements of that particular segment of our Canadian society...
Mr. Hermanson: Is there cost recovery in that department?
Mr. Miller: There is, but it's very small.
Mr. Hermanson: What about the Canada Council?
Mr. Miller: Unfortunately I don't have any details on that specifically, but certainly the council is a granting organization. How they would recover those costs would be interesting. I can mention things that other departments such as the Department of Industry use: they provide contributions that are repayable. In other words, if the requirements are met and we provide a particular industry or a company with additional resources and that company or industry is financially successful, it repays those contributions. It's not a loan in the true sense, because it has to be successful in its endeavours.
.0935
Mr. Hermanson: When you look at the cost recovery criteria, do you look at the reduction in spending of the various departments? Do you factor that in when you're calculating cost recovery? I know that the Department of Agriculture has seen a substantial reduction in its budget. Would you take that factor into consideration when you're looking at cost recovery programs?
Mr. Miller: I should say that we look at it in the opposite way. With the concept of getting government right, which is the underlying assumption of program review, we're asking how we can do things better. If it was the decision of a particular department to look at an area and say through cost recovery they could better target the implications of their program...I don't think anyone here on the committee would relate to their saying that they were simply going to reduce the inspection in their meat by 20%, which may or may not represent the reductions in agriculture, and therefore affect or modify the primary directive of ensuring a healthy and safe food supply.
It is essentially up to the minister and the department how they implement cost recovery. Again, because it's so diverse, we have difficulty in getting into the details of specific situations. What we are there to do is to ensure that there is a reasonable process.
We will undertake consultations with industry to ensure that they are satisfied with it, and from that point on we much prefer that they deal directly with each other, the industry group with the department that is imposing those fees, because those are the two entities that really have to work out the details.
The Chairman: Thank you, Mr. Hermanson.
Mr. Chrétien.
[Translation]
Mr. Chrétien (Frontenac): Mr. Miller, I very much appreciate your way of answering questions. Your responses are generally brief and allow us to ask for further clarifications if necessary.
Of course I agree with the principle of cost recovery, commonly described as the user pay principle. You mentioned that one of the effects of this would be to remove duplication.
I don't think anyone is opposed to the removal of duplication, particularly myself. I remember visiting a medium-sized bakery in Quebec whose owner gave me a flagrant example of duplication both at the provincial and federal level as well as at the interdepartmental one. He told me that in the course of the same day he was visited by no fewer than three inspectors to inspect his bakery. He was quite indignant about this waste. A single official could have done the job. Two of them came from Montreal and one from Quebec City. Since it was in a rural region of Quebec, the officials had to travel several hundred kilometres.
However, if we decide to privatize meat inspections and other things, will this not have an effect on the quality of the inspection? Will we have the same guarantee? I'm thinking for example of seed grain. We buy 200 kilogram sacks of grain guaranteed 98% fertile. I've never known a farmer to check to find out whether 98% of the seed planted did actually germinate and prove to be fertile. There are other sacks guaranteed to be 66%, that is two-thirds. It's a matter of confidence.
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Can we be sure that user health will be the main concern, since they are the one who will be paying for the inspection and the cost will be transmitted to consumers? Can they be assured of products of the same quality at a lower price, as you so aptly said?
[English]
The Chairman: Mr. Miller, just before you answer, I don't want to curb discussion, but I would suggest that the members of the committee should maybe consider putting their questions on the principle of cost recovery.
If there are specific questions referring to agriculture - some of them may very well be - they should keep those questions until Dr. Olson and his team are at the table. We do want to get to that stage today. So please, if it is at all possible, keep your questions that are specific to agriculture for the next witnesses.
In our discussion, you do wish to answer this question of Mr. Chrétien's, but you're here to talk to us about the principle of cost recovery.
Mr. Miller: Mr. Chairman, perhaps I can just answer briefly that although we are looking at virtually every area to ensure that there's no duplication, we are trying to work with all of the provinces in a variety of areas to ensure that we can harmonize those types of activities.
I think, as the budget pointed out, that the creation of a single food inspection agency will assist in those areas. It is difficult for us in the federal government to offer these kinds of things, whether it is in agriculture or in the collection of tax revenues. All we can do is set up a structure whereby we can make it easier to work with the provinces or other levels of government to complete our assigned responsibilities.
To the best of my knowledge, there is no intention to privatize these kinds of functions. It is a question of improving the way in which the services are delivered, while retaining that food inspection agency within the sphere of the federal government and the public sector.
[Translation]
Mr. Chrétien: Is there not some possibility for abuse? You referred to the example of provincial parks. In one of the federal parks I visited, we had to buy some wood for a camp fire and for an armful of wood we ended up paying the price of a cord of wood. Supposedly this was to cover the cost of the wood. I asked the official if I could give my name as an official supplier of wood. I would have been able to make thousands of dollars in profit.
Is there any assurance that there will be no abuse in implementation of this principle of user pay when it comes to recovering the cost of inspection?
[English]
Mr. Miller: There is a process that will continue requiring, as I mentioned, that in situations in which the government has a monopoly, or when the requirements are included in legislation or regulation, the application of fees will be subject to a very detailed review and end up with publication in Canada Gazette.
We are trying to make a difference between those kinds of major initiatives, the ones that may have an impact on the competitiveness of a Canadian industry, and the kind of example of firewood in a park. I haven't purchased firewood there, so I have no idea of the cost, but I know, for example, that they charge amounts for rentals of certain items with the explicit understanding that a portion of those rental fees will help expand the entire operation of the national parks in Canada. So if a Canadian or a visitor wants to help contribute, they can purchase or rent that particular item knowing that a portion of that rental will be reinvested in developing future sites and developing current sites to a higher level.
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[Translation]
Mr. Chrétien: In the riding of my colleagues from Lotbinière, in Princeville, there is a huge hog slaughterhouse. Hog classification is now done by laser electronically in a split second. One hog will be graded A and the other B. It's done on the production line in a spit second, probably seven to eight hogs can be graded in a second.
What changes will there be in this specific slaughterhouse where hogs are graded using laser?
[English]
Mr. Miller: You would have to leave that to the officials of Agriculture and Agri-Food.
I've had the opportunity to go through a meat processing plant, but I don't pretend to understand the details as to how the items are graded and how the costs of that inspection would then apply to a particular operation. But in my experience it's obvious that the more efficient the producer is in how the meat and other products are processed, the increased likelihood that the costs associated with that inspection activity will be diminished as well. If it's an efficient operation, it's likely the costs will be less in order to complete the inspection activities at both the federal and provincial level in this case.
The Chairman: Thank you, Mr. Chrétien.
Mr. Reed.
Mr. Reed (Halton - Peel): Thank you, Mr. Chairman.
Yesterday morning I met with the owner of a fairly large seed company. The discussion centred around what is described as the ``piling on'' of fees that has taken place since about 1985. Fear was expressed that there is another limit after which the company may lose its competitiveness, because it depends so much on export sales - over half of its business is exported.
The suggestion was made that a serious look be taken at what has happened to this point and what is projected for the future, with a view to possibly privatizing some of the processes that are performed. I'm talking to government about this, and maybe that is not the way to go.
He listed a few of the fees: basic certification fees, acreage assessment fees, variety fees, local seed growers association fees, Agriculture Canada seed program import fees, Agriculture Canada seed export fees, plant health certificates for imports, plant health certificates for exports, etc. You can go down the line.
He was saying that they don't mind a user pay situation, but looking at the future and considering what has gone on in the past, they're afraid they will be priced right out of the market and that privatization of some of the process might help.
Mr. Miller: Again, because this is an agriculture question, I'll leave it to Dr. Olson and his colleagues. But this is why we feel it is so important for these kinds of consultations to go on between the industry and the departments applying the fees.
In this case there may be local fees as well as regional and up to national costs, and whether or not those can be commercialized or privatized I believe is an area that is under fairly active review by the Department of Agriculture and Agri-Food for specific applications. They're also looking at better ways to apply their techniques. That may include these kinds of things. I honestly don't know, and they should be the ones to answer it.
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Our objective at the Treasury Board is to make sure the seed association, and therefore the individual producer represented on those kinds of groups, is talking to Agriculture and Agri-Food and expressing their concerns, and that although those concerns may not in total be realized, at least they're getting some answers to their questions and being dealt with in a fair and equitable manner as a result of that.
Mr. McKinnon (Brandon - Souris): Great minds work alike. He kind of stole my thunder over here.
The Chairman: I will remind the committee members to keep their questions to the principle of cost recovery, not to the specifics of cost recovery at Agriculture, about which we'll have a chance to question Dr. Olson.
Mr. McKinnon: What's your personal view on the degree of integrity of inspection services in terms of private versus departmental?
Mr. Miller: Do you mean in general?
Mr. McKinnon: Yes, in general.
Mr. Miller: That would depend on the specific implications. I can give an opposite example to the one on food inspection, which is for weights and measures. That activity and subsequent certification is essentially privatized and the companies operating in that area do their own policing, if that's the correct word. If one of the federal inspectors finds that there is a serious variance with that, they close that particular operation down.
When you get into food and the implications there, that is totally different, but in situations where it makes sense to do so, then self-accreditation or using other alternatives is fine. If it's more efficient, meets the requirements and saves money for the Canadian taxpayer and the industry and clients of that group, we're certainly trying to encourage that kind of thing.
The Chairman: Mrs. Ur.
Mrs. Ur (Lambton - Middlesex): Regarding cost recovery, what is the percentage for the producer and the consumer, per fee?
Mr. Miller: On a particular item, I would not know. I'd have to say the application... With something like the cost of going through the Rideau Canal system, that one happens to be 100% for the consumer, so the people who use that system... In other cases it would depend on the industry and probably more on the individual company that operates within that environment.
As I mentioned before, I feel it's just one of the input requirements that has to be addressed in normal commercial operations. It's a cost the same as raw product, transportation or any other element of successfully marketing a product or service.
Mr. Easter (Malpeque): Mr. Chairman, can I have a little question?
The Chairman: It had better be little. You weren't here on time, so you have a detention.
Mr. Easter: I'm trying to deal with two committees, Mr. Chairman. I apologize.
My question does deal with the principle of cost recovery. What I want to get at here with Treasury Board is who is really calling the shots and what foresight has gone into decisions.
Mr. Reed mentioned cost recovery in agriculture, and there are 42 such cost recovery fees. We in agriculture are also impacted by Fisheries and Oceans, including cost recovery in Fisheries and Oceans, by Transport decisions, by Canadian Coast Guard ice-breaking, cost recovery in Transport and privatization in that area, etc.
In terms of your decisions at Treasury Board, is anybody doing any impact analysis of the cumulative effect of cost recovery through various departments on our ability as primary producers to be competitive vis-à-vis our American counterparts? Where do we stack up? We can't have this discussion with just the department because we're being affected by so many areas.
I'm worried that if we're going to remain internationally competitive with the United States, we're going far beyond what we have to in the GATT agreements, whereas they're staying at the line. What are you doing at Treasury Board, when you basically impose your will on cost recovery, to determine the cumulative impact on our industry of cross-departmental decisions?
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Mr. Miller: Unfortunately, you missed my opening statement -
Mr. Easter: I'm sorry about that.
Mr. Miller: - in which I indicated that we, at the Treasury Board, do not have any oversight function that allows us to assess the impact of a whole series of decisions from individual departments on a particular industry. It is up to that industry to discuss it with the departments involved, and therefore up to those departments that are doing it to get together.
The Treasury Board does not impose cost recovery on departments. It is a mechanism that departments are using to better focus the provision of their activities and to ensure that the right level of activity is going on for the expenditure of general tax dollars and in those areas.
It is difficult. We have several thousand cost recovery initiatives throughout government, but we have to rely on the industry groups to bring those concerns back to the departments involved.
The Chairman: Thank you very much, Mr. Miller, for coming this morning to answer some questions.
But I do have a little homework for you. When you were before the committee some weeks ago, you had three questions to which you wanted us to respond with regard to our comments on part III. We asked you to get those to us very quickly, and to the best of my knowledge, we haven't seen them yet.
Mr. Miller: It was my understanding that they were provided.
The Chairman: No, the clerk has not received them from the Treasury Board yet.
Mr. Miller: I apologize for that, Mr. Chairman. It was my understanding that they were ready a few days after our appearance. I'll ensure that the three questions are there.
The Chairman: Okay. Thank you very much, Mr. Miller, for your input this morning.
Mr. Miller: Thank you.
The Chairman: Our next witness is Dr. Olson, Assistant Deputy Minister, Food Production and Inspection Branch, Agriculture and Agri-Food Canada. He may be bringing some of his team to the table with him.
We thank them for their patience. The last time Dr. Olson and his team came to be with us, we spent the complete committee meeting talking about another issue. We'll see how far we progress in the discussion with everyone today to see what we'd like to have as far as future dates are concerned..
Welcome, Dr. Olson. When you're ready, over to you.
Dr. Arthur Olson (Assistant Deputy Minister, Food Production and Inspection Branch, Department of Agriculture and Agri-Food): Thank you very much, Mr. Chairman.
I have Wayne Morris with me, the director of the operation and policy division of the branch. John Jones is the director of our finance planning and management services. Randy Benoit is the director of the policy analysis and coordination area.
I have a short statement. We've also, Mr. Chairman, provided four documents, I believe, this morning. One is a copy of the short statement.
Another one is a document that was requested from us with regard to page 10 of the estimates. It's a list of the regulatory initiatives that are under way. It estimated our forecasting of the proposed revenue on those initiatives.
There's a peach-coloured document that outlines a single food inspection agency.
There's also an initial document that was put out in terms of the discussions around the government's interest in creating such an agency.
I think I've covered off the four documents. If I may, Mr. Chairman, I'd like to walk through my summary.
The Chairman: Go ahead.
Dr. Olson: I should say, Mr. Chairman, that your comments regarding patience should be directed to my colleagues, because they unfortunately had the pleasure of learning an awful lot about mad cow disease at our last visit. I'm not sure anybody wants to be knowledgeable about the subject, but I very much appreciate the opportunity provided to me and my colleagues from the animal health and food inspection areas and Health Canada to make that presentation.
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About a year ago we talked about the issue of cost recovery, so I thank you very much for the opportunity to talk to you again about the department's initiative in the area of inspection services, including cost recovery.
If you recall, when we had the special briefing on BSE, or mad cow disease, last month, I provided committee members with an information package that included a series of documents entitled ``Directions or Orientation'', which we used to communicate with our staff and our clients about changes in our inspection system. We also had a good discussion on this topic with the committee last May, and I look forward to updating you on the progress we've made from that point in time.
With trade agreements opening the world to agrifood trade, our food inspection and quarantine system is becoming even more important. If I can make a comment, I think the mad cow issue made it very clear how important those issues are in terms of our trading opportunities.
The inspection and quarantine system protects Canadian consumers as well as our plant and animal industries. The system also helps Canadian exporters meet or exceed international standards. We also monitor the regulatory activities of other countries that could unfairly keep Canadian products out of their markets.
In today's climate of increasing government fiscal restraint, our inspection and quarantine system must be both of high quality and efficient. Over the past few years, the department has been consulting with the agrifood industry on how to use our resources wisely and to ensure that our system remains among the best in the world.
We've been involved in an extensive consultative process involving more then 400 meetings with the agrifood industry to look at a comprehensive strategy that has three basic directions: to use market forces to determine the value and need of services, to determine the appropriate level of government inspection services to maintain public safety, and to ensure that Canadian agrifood products have access to markets.
To bring market forces to bear on inspection services, the department has been developing cost-sharing arrangements with stakeholder groups that use the services, such as product quality grading, that largely confer a private sector benefit. This direction is also a key part of the regulatory reform process that the department has been actively involved in over the last few years, again in consultation with industry.
The principle of sharing the costs of services with those who derive a private benefit from them was endorsed in the 1992 regulatory review and in the federal budgets of 1993, 1994, and 1995. The Auditor General in 1994 also recommended that federal departments actively apply Treasury Board's cost recovery policy to food inspection.
It's also worth noting that Treasury Board is currently in the process of reviewing the policy of cost recovery. Mr. Miller discussed that initiative. The intent is to refine elements of the underlying principles and to rethink certain implementation aspects in order to provide better guidance to departments. The Treasury Board is seeking input from both departments and industry as part of the review.
Charging users for regulated services that were previously a free good, that is, provided by taxpayers, is an impetus for regulatory reform. So as we recover legitimate costs from industry, we are also seeking their collaboration and advice on how to further reduce and avoid costs in the regulatory system.
Cost recovery is not a new concept for the department or for the Canadian agrifood industry. The department has been collecting about $12.6 million per year for various inspection services before new cost recovery regulations came into place last spring.
As Mr. Miller indicated, the Canadian Grain Commission's inspection services are almost fully cost recovered. That is also consistent with the direction being taken by our major international trading partners.
Along with cost recovery, we are also focusing just as hard on reducing and avoiding costs in the system. In the period of 1994-98, we will have reduced our costs by at least $24 million through the use of new technologies and other operational and administrative efficiencies. This is being done in consultation with industry and with the unions that represent our employees.
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We have a strong commitment to making sure our staff is informed of the changes that are happening and are helped in adjusting to the changes. But as we streamline, we must also ensure that we have the human resources we need to deliver our programs.
We are avoiding costs by sitting down with industry clients and developing new ways of doing business, such as privatization and accreditation. Progress is being made in this area.
For instance, the red meat industry has set up a private agency that grades beef to government-set standards. So government inspectors are concentrating on health and safety inspections, while grading, which is a price-setting mechanism, is done by the agency.
We are looking at increasing the amount of routine testing and analysis work that could be more cost-effectively done in private laboratories that are accredited by the government. Again, we must ensure that our approaches are acceptable to the access requirements of nations with which we want to trade.
We are also evolving our inspection systems based on the internationally recognized hazard analysis and critical control point system, or HACCP. This science-based system is designed to prevent the occurrence of food safety problems rather than focusing all of our resources on the end product.
These initiatives will allow us to meet the spending reduction levels of $70 million, which is about 25% of our budget, as set by the federal budget in 1994 and confirmed in the 1995 program review. Over the same period, we expect a reduction of at least 447 full-time equivalent positions. The balance of the $70 million reduction, $46 million, is targeted to be offset by revenue from new service fees or negotiated cost reductions or cost avoidance.
Part of the problem with that listing I've given you this morning, Mr. Chairman, is that some of those negotiations aren't complete. So we've tried to estimate what the revenue might be, but depending on the demand for services, this may not in fact meet those forecasts.
Last year I shared with the committee a number of basic principles that we have been following throughout the process of change. I'd like to share them again with you because they still hold, and I think they have served us and our clients well:
- - we will not compromise health and safety services;
- - we must honour our international trade agreements;
- - we strive for an open and transparent approach with a view to developing a partnership with
our clients;
- - we must maintain adequate resources for regulated services to withstand third-party
scrutiny from a legal liability point of view;
- - our approach to program redesign is a blend of cost reduction, cost avoidance and cost
recovery;
- - cost recovery will apply to those activities from which private benefit is attained;
- - cost recovery will be applied equitably for similar activities and commodities of comparable
risk; and
- - finally, we strive to minimize the impact on the competitiveness of the agrifood sector.
As announced in the federal budget this past month, the government is establishing a single federal food inspection agency that will bring together the inspection and quarantine activities of three departments: Agriculture and Agri-Food Canada, Health Canada, and Fisheries and Oceans Canada.
The agency will make it simpler for industries who use federal inspection services and will accelerate the discussions with the provinces on building a national food inspection system. This represents an opportunity for developing harmonized standards that allow for easier interprovincial trade and international access for Canadian exporters.
The new inspection agency will also be expected to achieve additional savings of $44 million, beginning in 1998. The government will consult with stakeholders on how these savings are to be realized.
To conclude, Mr. Chairman, as consumers, Canadians depend on a safe and high-quality food supply. As taxpayers they expect an efficient, cost-effective inspection system. Our agrifood industry also needs a system that works efficiently and helps provide market access for their products.
Through the new directions that I've outlined today, Canada's inspection and quarantine system is successfully meeting these demands.
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I'd be very willing to answer any questions.
The Chairman: Thank you very much, Dr. Olson.
We'll go to the first round of questions, beginning with Mr. Reed.
Mr. Reed: Thank you, Mr. Chairman.
Dr. Olson, your attendance at this committee meeting couldn't be more timely for me, because, as I said previously, I met yesterday morning with the owner of a very significant forage seed company out in the riding. He is expressing a concern about the escalation of costs. He describes the thing as the piling on since 1985. His concern is not that the beneficiary shouldn't bear the burden; it is how that burden is applied, and what the prospects are for the future. He sees it possible that if the costs for his industry escalate much more, it's going to put at risk the competitive position in the international trade market, which he depends on for a great deal of his livelihood.
So he put the proposition to me - and I thought it had a lot of validity - that an impact study be done on the seed industry in terms of the costs of inspections, and so on, with a view to looking at the privatization of at least some of that inspection system. The feeling expressed was that privatization could improve efficiency and end up lowering costs to that industry, while not sacrificing in any way the need to maintain quality, assure variety and the health of the seed, and so on.
Dr. Olson: We deal with a series of products that have almost no health and safety component, and seed is an example.
Our role with seed basically has to do with the quality of the seed and, as a committee member mentioned, the issue of germination, and those kinds of things.
There is an element that has to do with countries requiring certification of evidence that the seed isn't contaminated with particular diseases. As you can appreciate with the kernel bunt issue right now, we're being quite careful in terms of any seed coming from our neighbour to the south. That certification process exists.
But in the sense of a health and safety issue, seed is not a product that is basically regulated for health and safety reasons. The consumer is the farmer. The trading opportunity, in many cases, is international. So over a period of many years we've built up quite a complex structure for regulation of that industry.
When you put a cost on regulation, the industry says maybe we should look at what we're doing, and the people you talked to yesterday have done just that. We've just agreed to second one of our staff to an initiative that has been put together between the Canadian Seed Trade Association and the Canadian Seed Growers' Association to in fact look at the creation of a Canadian seed institute that would carry on the bulk of the inspection certification functions. That seems to be coming along reasonably well.
One of the experiences here... I guess it says something about the vantage point of somebody who has to manage a budget, but I find it interesting that many of the industries we deal with don't know the cost of the service that's being provided by government.
So the first part of this debate is focused very heavily on making sure the costs we've identified are real, and that they're substantiated in terms of the number of man-years invested in the particular program and in terms of the variety of tests.
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We've gone through that process with that industry. We're now at the stage that they've asked us for staff support. We've seconded somebody to them to help with that process, and it's our hope that they'll come forward with a proposal.
In terms of the level of services we currently provide to that industry, I've explained to industry leaders that if push comes to shove, health and safety comes first. I think they understand that. They do see a need for our involvement in terms of phytosanitary certification. They also see a need for our involvement in terms of meeting international standards. They see themselves as possibly taking up the rest of the role.
Mr. Chairman, I'm not sure who the person was Mr. Reed was talking to yesterday, but Mr. Morris met all day yesterday with the negotiating group of the seeds industry, and perhaps he might want to comment further on the progress that's being made.
The Chairman: If he could briefly do so, sure.
Mr. Wayne Morris (Director, Operations Policies Division, Food Production and Inspection Branch, Agriculture and Agri-Food Canada): Certainly.
It was a very creative and productive meeting yesterday. We have in fact been meeting with them for almost a year with a specific focus on how we legally and logistically get in place the Canadian Seed Institute. They're quite excited about it from the standpoint of the problem you alluded to; that is to say, it's very difficult for us to predict what fiscal pressures we may be under three or four years down the road.
In these areas of quality assurance the industry is very pleased to have the opportunity to try to set up an alternate way of getting the job done that gives the industry a little more self-reliance and also control of their own destiny with regard to future costs. They look at that as a big advantage.
There are those who may feel uncomfortable about losing some of the credibility internationally and nationally with regard to the pedigree system. Let me assure you that a lot of good work is going on in that committee from the standpoint of looking at accreditation principles of that agency, and the kind of monitoring and verification our branch would continue to perform to ensure that the high standards continue to be given to our consuming segment of trade.
Also, we're looking at the development of quality management systems and training programs for operators within the seed industry that will place them in a better position to better manage the quality of the product they provide.
So I feel fairly confident that if we can work out the legal implications of the accreditation, and what have you, under the Seeds Act, we can continue with a good, effective, credible program, while at the same time allowing our clients to gain control over their future costs. That's what it's all about.
Mr. Reed: I'm very enthusiastic about the responses I've received. The company is called Oseco, one of the great seed companies in Canada. The president happens to be a constituent of mine, and it was very timely that he brought this problem forward. I thank you, because it allows me now to be able to bring a text of this meeting back to him, and he will know that we're making progress.
Mr. Morris: You may point out to him, Mr. Reed, that with the upcoming annual conventions of both the trade and grower organizations, there will be proposals that will include by-laws for the Canadian Seed Institute, and how it will operate. There will be a lot of information tabled at that time.
Mr. Reed: Thank you.
The Chairman: Mr. Chrétien.
[Translation]
Mr. Chrétien: My first question deals with potato certification. Can you explain to me why Newfoundland is in a separate category for potato certification?
[English]
Dr. Olson: Newfoundland has two diseases. I believe one is called potato wart disease, and the other is the golden nematode, for which Newfoundland has been under quarantine. These are diseases or pests that probably were established many hundreds of years ago, and have built up to such a population that the rest of Canada would be endangered in terms of its ability to move product. For that reason, we are involved in maintaining a quarantine on the province of Newfoundland for the movement of soil and potato products from that province.
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We have a similar quarantine in place in fact for Vancouver Island, where again golden nematode was established many years ago. We have just gone through a look at the viability of the golden nematode found on Vancouver Island. Unfortunately, we found that the nematode has survived a 15-year isolation period.
[Translation]
Mr. Chrétien: You talk about reduced costs. In the conclusion of your statement, you say that starting in 1998, you will have to save $44 million every year and somewhere else you say that between 1994 and 1998, your costs will have decreased by at least $24 million through the use of new technology and other efficiency measures in operations and administration.
Under basic principles you say:
- We will not compromise health and safety services.
Of course the inhabitants found that this was a very costly procedure and there was pressure brought to bear. As elected representatives who wanted to be re-elected, we decided to decrease the costs. In order to do so, we reduced the number of inspections but then several of the inhabitants installed septic tanks that were not in keeping with standards and ended up polluting the lake or the river.
I have a hard time understanding how you can assure me that consumers' health will be just as well protected if we decrease the number of inspections. I'm in favour of the principle but I wouldn't like to see either meat or seed inspection neglected so that we end up poorly served. Can you explain to me how we can provide the same service while at the same time carrying out reductions?
[English]
Dr. Olson: I'd start by saying that I don't think anybody can guarantee a zero-risk environment. I don't think that can be achieved by anybody. I don't think that guarantee can be provided as a 100% guarantee for a food product or any other kind of thing.
We're in the business of monitoring the inspection of products to ensure that they have been manufactured or produced in a way that meets an adequate level of safety. Those safety standards under which we operate are generated by Health Canada. We operate to ensure that inspection meets those standards, but as far as guaranteeing that there's zero risk, I don't think we live in that kind of world.
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In terms of the level of inspection, very much part of the reason we've tried to encourage the kind of consultation we have underway right now was to ensure we had that feedback you're talking about, so it isn't late. We want that consultation to be a continuing process.
One of the experiences we had, Mr. Chairman, was during the 1992 regulatory review, and perhaps it's the same kind of issue I was referring to on the budget. When we looked at all the regulations for which the Food Production and Inspection Branch was then responsible, and we went out and consulted with the industry for which those regulations were in place, we found that very few members of the industry really understood the regulations. If they did understand, it was only a very small portion of the regulations.
Through the process we have right now we're hoping to achieve a stage where that is all on the table. One of the side-benefits of charging for that service is that people's interest level stays fairly high.
As far as the inspection of septic tanks in the province of Quebec is concerned, I have to presume that the local government went to a more appropriate level of inspection. I really don't want to get into what process was used there, but I do hope that people accepted their own personal responsibility, or the possibility that they might be contaminating the groundwater for other residents in the area.
Mr. Chairman, I believe Mr. Chrétien raised a question with Mr. Miller earlier regarding numbers of inspection levels.
The Chairman: Yes, I believe so.
Dr. Olson: I could perhaps touch on that issue. We only inspect bakeries if they use meat products, sausage products, or sausage rolls; otherwise, we basically don't go into bakeries.
One of the things we tried to achieve - and we've been very successful with Quebec and a number of other provinces - is to deal with the number of inspectors going into dairy plants and maple syrup establishments.
In the case of dairy plants we've basically gone to whichever agency has an inspector in the area and carries out the inspection for either the province or the federal government.
With respect to maple syrup for the province of Quebec we've actually had a very silly arrangement involving the Quebec inspectors inspecting maple syrup, sealing the drums, then our inspectors coming in, ripping open the seal, inspecting the contents, and sealing the drums. We've gone on to a situation where the Quebec inspector now does the inspection for the federal government.
Those kinds of issues - I'd like more detail on the one you were mentioning - have to be dealt with. We can't afford the expenditure and duplication.
I must say that as Agriculture and Agri-Food Canada we clearly do not inspect bakeries unless there is meat product involved.
The Chairman: Thank you, Dr. Olson. Mr. Hermanson.
Mr. Hermanson: It's good to have you back again, Dr. Olson.
Listening to Mr. Miller's answers was a bit disconcerting for me. It just seems like the Treasury Board really has no standard criteria for the departments, and no fairness tests. There seems to be no relationship to overall departmental budget changes in expenditure. There seems to be no relationship to trade agreements like the WTO, and there seems to be no economic impact analysis. So this probably makes your job somewhat difficult, in that you have a lot of difficult answers to give to producers and industry people.
Given that situation, I would be curious to know - and perhaps you'll have to give us ballpark figures today and maybe more exact figures later on, if you could, or maybe you do know them exactly... These costs that are being recovered have to be borne by one of three groups, either the producers, the consumers or the taxpayers, and then there is some overlap there, of course, as you know. Where would that breakdown be approximately now?
In other words, of all of the work that you do in the area of cost recovery in the Department of Agriculture, roughly what percentage would be borne by producers, by consumers, and by taxpayers? How does that compare with the way it used to be a few years ago, and what do you anticipate in the future, given the new Treasury Board agenda?
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Dr. Olson: Your question is difficult, because we're all consumers, and I think we're also all taxpayers. So we're singling out one group, which is -
Mr. Hermanson: I recognized that, but I'm saying that when you send the bill to someone, does it just go through the treasury, and is it recovered by the taxpayers? Is it being paid by the producers?
In other words, if somebody puts a bull in quarantine, they pay that. That's pretty obvious; the producer or the owner of the bull pays that cost. Are there areas where that cost is actually passed on to the person who purchases the food for the consumers? That's the way I'm categorizing it.
Dr. Olson: For the first one, Mr. Chairman, I'll ask Mr. Benoit to respond with some examples that might be useful to you in that regard.
In a number of the services we provide, the benefactor of that service is an individual, not all of society. That individual gains the service. That person gets access to a market, that person gets the stamp the Government of Canada puts on a product. In essence, the Government of Canada shares the liability for that product, for having inspected it. So the person who benefits is that individual.
What are we there for in the global sense though? Somebody put it to me this way: in terms of the single food inspection agency what we're doing is creating an agency whose rules of the road are health and safety and environmental protection. But the purpose of the agency is trade and commerce and consumer protection.
So in terms of the price-setting mechanism, the grading systems that are used for pork, beef or what have you, what you do is set a price between a buyer and a seller. But society as a whole benefits because the price drives the seller of that product to produce a better quality product, so the consumer benefits in the end.
Whether government provides that upgrading mechanism or whether it's done by the private sector becomes a bit irrelevant in terms of the net benefit to society. That's where the difficulty is. We're dealing with many different combinations.
We tried to factor those costs. And by the way, we do keep a very close eye on the impact of these from a competitiveness point of view. I believe last year we discussed the competitiveness test we applied against the regulatory initiatives. That was part of the regulatory review we started in 1992. In fact that is the basis for the business impact test Treasury Board is currently using. That's part of the tool we've used to look at these vehicles. We're very aware of the additive effect of these kinds of regulations.
I should also say, by the way, that the cost recovery we apply in most of these areas is roughly equivalent to that applied in the United States. In meat inspection, for instance, our estimated cost recovery is somewhere between 13% and 15%. The U.S. government figure is about 13%, but the American Meat Institute figure is 16%. So we've looked at that very carefully from an international point of view.
If I may, I will turn that question over to Mr. Benoit.
The Chairman: Mr. Benoit, briefly.
Mr. Randy Benoit (Director, Policy Analysis and Coordination, Agriculture and Agri-food Canada): In the department we have an economic model where we attempt to look at the segregated impacts of a fee with respect to how much of a fee that is charged to a processor can be pushed forward to the consumer and how much can be pushed backward to the producer.
It's not precise - it's an economic model - but it's roughly 20% to 30% in the meat area. This is where we've done the bulk of our modelling. Roughly 20% to 30% can be pushed forward, and roughly 20% to 25% can be pushed back to the producer. The rest is allocated to the processor.
Just as an example, for an average cattle farm on the prairies finishing 200 head per year, with gross revenues of $117,800, the total impact that would be pushed back, in terms of added charges to him from the processor, would be about $221.60 in a year. That's what our model tells us. So although there's no direct charge to that producer for those activities that take place in the processing plant, probably about $221 of it can be pushed back to him in terms of additional costs.
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Now, as I say, it's an economic model, and it's not precise, but it does give us some indication. The key is the relative strength in each of the commodity areas of the producers, versus the processors, versus the competitiveness in the marketplace. Clearly, wherever the strength is, that's where they're able to push back and push forward the most.
Mr. Hermanson: I just have two very quick questions, and you've touched on one already: our competitive position vis-à-vis the Americans'. In light of the WTO agreement, it seems like this type of thing is a GATT green expense to taxpayers, whereas a lot of things we've done in the past aren't. Does Treasury Board understand that, and how is this playing out in your department? That is the first question. Are we going to be competitive with the Americans and other competitors in the future? In other words, are we all going in the same direction, and are we going to be on a level playing field in the future?
The second question is again with regard to administrative costs, which I brought up earlier with Mr. Miller. If you have a veterinarian who quarantines a bull, certainly those costs should be passed on to the owner of the bull. I think we all understand that, and agree with that. But there's probably someone who supervises that department the veterinarian works in. There's probably also someone who is the secretary to that supervisor, and there is paper and pens bought in some office somewhere. Is that all considered part of the cost of serving that producer, or is it strictly the quarantine procedure where cost is recovered? Those are the two questions.
Dr. Olson: I would like to start with the second question first. What the department has chosen to do is charge for the cost of the Food Production and Inspection Branch. That includes my salary. What it does not charge for is the cost of the overhead for running that branch. The department carries that.
Mr. Hermanson: What does that include?
Dr. Olson: That includes the libraries and our portion of the fixed assets and what have you that are outside the purview of the branch. You have to draw a line at some point in time.
Bear in mind that we're not dealing with a particularly high level of cost recovery. You get into huge cost accounting problems the more detail... We chose to go at that particular point. The other reason is that you're going to have an administration regardless to carry out these functions. We chose to draw the line at that point and place.
On the WTO issue, as you're aware, Mr. Chairman, Mr. Benoit is Canada's negotiator on the sanitary and phytosanitary technical barriers to trade, and perhaps he might wish to comment on the rest of the questions.
Mr. Benoit: You're certainly correct that within the context of the WTO inspection fees are green. Before we went into looking at charging fees for a number of these activities, we took a very careful look at what our major trading partners were doing. We looked at what Australia, New Zealand, western European countries, and the United States were doing. We focused particularly on the United States because 80% of our non-grain trade is with the United States, and we wanted to make sure that in a regulatory sense we were on a level playing field.
If you take a look at the activities for which we are cost-recovering fees, you'll find that they very closely parallel those activities for which the American government is also cost-recovering. Quality assurance types of activities, grading functions, export certificates, import reinspection are the things we targeted at the outset, because those were the things the United States government was also targeting.
There's nothing in the WTO that says you have to provide inspection services free of charge. In fact there is an annex to the sanitary and phytosanitary agreement that says very clearly that if you do charge, and particularly on import certificates and reinspections, this is how you are to do it: you're to do it so that you charge no more than the actual cost of the activity.
In terms of looking at the international competitive position, we have been very sensitive to ensure that we're trying to retain a regulatory level playing field with the United States, which is our major trading partner.
Mr. Hermanson: If the services are competitive, are the costs of those services competitive as well? In other words, are our costs equivalent, higher or lower than the American cost for those services?
Mr. Benoit: We looked at what the cost of the certificate would be. So we tried to equate the cost of the certificate and what we would charge as our share of that cost. We were trying to take a look at what we were actually charging as a cost to the producer and making sure that it was equivalent to what the Americans were charging.
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Mr. Hermanson: Thank you, Mr. Chairman.
The Chairman: Mr. Calder.
Mr. Calder: Mr. Chairman, I just want to follow up on what Mr. Hermanson was on. It was a question that I'd brought up before about competitiveness.
From what I can see, we have been leading the pack. We've looked at the treasury user-fee policy of 1989 and the redesign of inspection services of 1992. These inspection programs underneath ``GATT'' are green, and the support programs, depending on what they are, can be either amber or blue. I can see why we've been after the support programs, but with respect to the inspection ones, are we not ahead of the United States with what we're doing here with user fees or are you telling me that the United States is lock step with us right now?
Dr. Olson: I don't think it's lock step, but let's put it this way: we don't intend to exceed their levels for reasons of competitiveness. In terms of the overall world situation, we're definitely lower than many countries.
Australia and New Zealand are at 100%. The United Kingdom has gone to similar levels of inspection. I think you're aware, for instance, on pesticides the United Kingdom is £150,000 - I think it's pounds, Mr. Calder - for the cost of registering a new pesticide. They have a whole set of fees and structures in place. Each country has moved down this path.
I think what the World Trade Organization, the GATT agreement, means is that inspection is one of the functions that's done for a variety of reasons; it was seen to be green and therefore wasn't subject to challenge from a trade point of view. That didn't mean that the country involved couldn't use tools such as cost recovery to put market forces against the demand for services.
In many of the services we've got, there are no market forces except our cost recovery. I think this government's concern about the fiscal situation is such that those market forces needed to be applied. Mr. Jones has indicated to me that his estimate is that we get about a 20% drop in demand once we start charging. I don't know whether that's the first penny, or the second penny, or the third penny, but there's definitely pressure brought to bear on the demand for services, which I think is in keeping with this and the previous government's policy directions to us.
Mr. Calder: You said that we're not lock step with the United States, so that tells me there must be somebody leading. Who's that?
Dr. Olson: Well, the Canadian Grain Commission in Canada is about 95% cost recovery; the American equivalent is 80% plus. We're at about 20% on fruit and vegetables; the American Marketing Service is at 80%. On meat, as I said, we're at 13% to 15%; the USDA tells us that meat is at 13%. The American Meat Institute, the equivalent of the Canadian Meat Council, says they're at 16%.
We have a different form of government, a different structure. Frankly, I think we're more efficient because we don't have quarantine and inspection spread all across...as the U.S. Department of Agriculture has. We are not running the same structure of law, but the overall impact on the industry is roughly the same.
Some of these fees, by the way, have been there for a long time.
Mr. Calder: Yes. We're running at different speeds in different sectors, then. I can see that.
I have an example of a CFA presentation, as well as one from the Crop Protection Institute. They're saying that the annual operating budget of the PMRA for the short term is going to be$28 million and for the long term it's going to be $34 million, with a staff of 375. That compares with an EPA budget of just under $90 million and a staff of 750. They're kind of complaining here that this is a little bit of overkill. What would be your comments there?
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I see also, on this sheet you have here with regard to food production and inspection branch, the 1996-97 and 1997-98 forecast. Just about every column all the way down here goes up. Sometimes it goes up as much as five to six times from the previous year. Why? I guess maybe the next question would be, what were the figures for 1995-96?
Dr. Olson: I'll answer the last question first. Cost recovery on all of our programs was about 3%. Starting in 1995-96, the regulatory process takes awhile. The implementation of the 1994 policy of the previous government in the 1995 budget started; that's why the figures start at that point in time. We rate about 3%. We're now at about 9%. We eventually will be somewhere between 15% and 20%, depending on the negotiations we have going on right now.
But as I said, this sheet is based on that list of regulations on page 10 of the part III estimates. We were asked to provide a breakdown of what we estimated would be the forecast revenue for each of those regulatory initiatives.
Many of those are still in negotiation. I don't know what the net result will be, whether or not it involves a cost recovery, as this list is based on, as per the request we got, or whether in fact it will involve a cost reduction or a cost avoidance. In the discussion Mr. Morris had yesterday, for instance, with the seed industry, it is obvious they're about six months minimum - probably a year - away from having sorted out whether or not they want to privatize the certification system.
That's their decision. It's their product. We'd like to find the best way to support them in that regard.
Can you give me the other questions again? Did I touch on that, PMRA?
Mr. Calder: Yes, and a little bit on the overkill. Just to add onto what you said here, my question would be, by whom and how are these costs going to be absorbed in cost recovery?
Dr. Olson: The Pest Management Regulatory Agency, which now reports to Health Canada, is a result of the pesticide registration review done back in the early 1990s. The initiative that was taken by this government in fulfilling a red book commitment was to transfer the function and to implement the recommendations of that study. I was one of the principals, obviously, involved in walking through what was implicated in the carrying out, or the creation, of the agency.
The agency is at the stage right now where it started negotiation with the people who use its services. A document put out about a month and a half ago outlined what the costs of all those services would be if all the recommendations of the pesticide registration review were implemented. I presume the negotiations going on right now have a lot to do with how many of those recommendations you want implemented. So that eventually will set the final cost for what that agency will be.
A lot of things in the pesticide registration review were agreed to by consensus of the group of stakeholders around the table. The Canadian Federation of Agriculture, the Canadian Horticultural Council, the Crop Protection Institute signed off the report, as did a variety of environmental groups. I believe the medical community and so on all agreed to the consensus that was achieved. But the one thing they never did was calculate the cost.
I and my colleagues from Health Canada, Environment and Natural Resources got the rather interesting job of estimating what it would cost to in fact carry out those recommendations. An existing number of dollars are available in the budget. There are some Green Plan moneys that have allowed a transition, but if you're going to carry out the rest of those functions, there's a shortfall in terms of the dollars that are needed.
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I presume the agency, and I'm in their territory rather than my area of responsibility, is establishing the nature of the service. If you want it all, that's what it's going to cost you. If you don't want it all, then we can put a cost on it. That's the discussion that's going on right now.
The Chairman: Mr. Calder, we're going to have to move on to Mrs. Ur.
Mrs. Ur: I have a real concern. I was reading some material that said the operating budget for inspection and quarantine will be reduced by $70 million from 1994 to 1998. This was brought to my attention by the hog producers in my riding, with the pseudo-rabies in the United States. Will that have a detrimental effect to the hog producers in Canada?
Dr. Olson: We already have inspection fees for the importation of live animals, and those inspection fees are designed to cover the cost of the necessary inspection.
There is another interesting thing on pseudo-rabies. Where Canada imports a significant amount of breeding stock from the United States, those breeding stocks stay alive and are used as a source of additional pigs and therefore provide a continual potential of risk. Where the pseudo-rabies issue involves the importation of hogs for slaughter, the hog in many cases will already be pork by the time the tests come back, so the risk is quite a bit different.
So the pseudo-rabies issue, from my point of view, is one where the industry needs to make up its mind in terms of whether or not they want a supply of additional hogs.
Mrs. Ur: I have another question. The industry and department set fees for small and large operations. Is this the beginning of the end for small slaughter plants, for example, if it's based not on the size but on the complexity or level of inspection that's carried out within a facility?
Dr. Olson: Our negotiations with the industry, and we're tried to take into account all of the different facets of the industry, have been based on the number of inspection stations required to do the job. Of course the bigger the plant, the more inspection stations. Part of the logic behind that is that we're trying to protect the smaller plants. If you tied it to a fee and volume, or hours of work or whatever, you get into different kinds of math.
The other logic in many of these plants was that as long as the inspection service was free, it was cheaper to have an inspector on the line than it was to do some automation that might have improved your product. By going to an inspection station fee, we are trying to encourage these operations to improve the quality of their operation. I think we're achieving that.
Earlier on Mr. Chrétien gave an example of some of the new automated technology that's becoming available for pork grading. You can do that with some of the new electronics. We're not sure it's there yet, but we want to try it out.
That initiative might not have happened if the industry had not realized that it was maybe cheaper to do the electronic route than it was to have at least part of his salary paid by that plant. Those kinds of combinations, Mr. Chairman, are very useful in terms of bringing about change.
Mrs. Ur: Do I have time for couple more?
The Chairman: Just one question and then a quick one from Mr. Hermanson. We just have the room until eleven o'clock.
Mrs. Ur: Following on Murray's presentation, this is a reduction rather than an increase in fees in the maple and honey products. What led to the reduction in the cost-recovery fees? That's a positive. How did that come about?
Dr. Olson: I think what you're dealing with here is also a transfer of responsibility to another level of government, to factor...
If I'm correct, Wayne, they are concerned about our slowness in implementing fees that they require as income for the inspection function.
Mr. Hermanson: I have a revenue question You have the answer right at your fingertips. You have the cost-recovery revenue projections. What is the cost of cost recovery? It has to cost the department quite a bit of money.
Dr. Olson: John, would you like to comment on that?
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Mr. John Jones (Director, Financial Planning and Management Services, Agriculture and Agri-food Canada): We don't have any figures in terms of actual dollars. Our estimate is that we're taking in revenues of somewhere in the neighbourhood of $27 million to $28 million for 1995-1996, and our estimate is that it's costing us somewhere in the neighbourhood of $3 million to $4 million to collect that.
We recognize that's high and we're attempting to introduce a series of automated processes, particularly in terms of being able to do one-time data capture of program information and financial information. So we are going to automate the process. We're going to start on that next year and we feel that will reduce the cost of collection considerably.
Mr. Hermanson: What's your target percentage?
Mr. Jones: We haven't set a target at this point because we're looking at the possibility of having Customs assist us at border points in terms of collecting this revenue. If we're able to to that, they will be able to remove about 400,000 transactions that we in Agriculture currently bill for and have to track. So that process would be automated. If we can get those off the table, that will change what our target should be, but we can't set that until we know exactly what Customs can achieve.
Mr. Hermanson: If we're at 10% now, is it reasonable to expect to get it down to 3% in a couple of years once we get this system in place?
Mr. Jones: I think 3% is very low. We've been talking to private companies in terms of what they charge for an accounts receivable function. The estimates there vary between 6% and 9%. If we're able to achieve what the private sector is able to achieve, I think that would be reasonable.
Mr. Hermanson: Thank you, Mr. Chairman.
The Chairman: Thank you to the committee members and to Dr. Olson and his team. I think the meeting served a good purpose of you providing us with information and us getting a chance to ask you some questions.
The meeting is adjourned.