[Recorded by Electronic Apparatus]
Tuesday, December 10, 1996
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[English]
The Chairman: Ladies and gentlemen, we'll call the meeting to order. I welcome everyone here this morning for what I'm sure is going to be a useful and worthwhile discussion.
I will give a few ground rules before we get into the discussion on the issue of cost recovery, an issue a lot of us have been talking about and dealing with in many different ways, from different perspectives, for many months now. The letter that came out to the presenters indicated we want you to stay, if at all possible, please, with five minutes. A couple of people have spoken and said they will take a bit longer than that.
There are seven or eight presentations. We are going to go through all of the presentations. It's my intention at this stage to go the way we are around the table here, starting with the Treasury Board. Then it will be the Auditor General, the department, the Federation of Agriculture, the Pork Council, the Meat Council, and so on around the table.
Then we will go to questions and comments from the members. But while we are doing that, if a member asks a question of a specific witness or presenter and if some of the other presenters wish to make a brief comment in response to that response or to the MP, I'm going to allow for the opportunity.
I think one of the big things we can gain from the session we have here this morning is the interaction among the different groups. Over the number of months this has been a topic there have been some concerns. We felt as a committee that it was our duty, if we could, to get some things clarified. Sometimes the best way to do that is to put as many people around a table as you possibly can so that we get an opportunity to explain or to understand and all talk from the same sheet to the best of our ability.
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The issue of cost recovery is a very important one - how it affects the industry, how it affects everyone involved in the industry, not only the primary producers but also all of the people in the agri-food chain. We know that's a big chain, it's a long chain, starting at the primary producer and going on up through and affecting the livelihoods of all Canadians. I guess to put in a plug for our industry, we need to collectively emphasize the importance of it even more than we do.
We will begin, then, with your presentation, Mr. Miller. I see it's going to take more than five minutes, sir.
Mr. David Miller (Assistant Secretary, Treasury Board of Canada): This is a supporting document; it's not my actual notes.
The Chairman: Okay. You scared me right off the bat.
Mr. Miller: I'll make reference to it only.
First of all, I'd like to thank you for the opportunity to appear before and participate in this round table. What I would like to do is spend a few minutes talking about the overall government perspective on cost recovery.
Basically, the current policy has been in place since December 1989. Its principle is to charge for services that provide direct benefits to identifiable recipients beyond those received by the general public. The policy is based on the principle of fairness in allocating and managing government resources. While deficit reduction is clearly important, it is not the only reason, obviously, for user charges.
In talking about the concept of user pay or user say, if users are asked to pay, they should at the very least have the right to know what they are paying for. Obviously, they also would like to have a say on how that service can be delivered more effectively and efficiently. In an ideal situation, users would pay for services rendered at standards to which they and the departments can mutually agree. If such agreements on standards of performance cannot be reached, ministers must be fully aware of that fact in reaching their decisions.
Prior to the introduction of many charges, no concern was expressed by recipients of government services. This to us is another important aspect of user fees. Since introducing the market test, there have been significant outcries for restraint and for lower levels of service. In other words, if it was a free good, there was unlimited demand for that service. Ministers see this as a strong impetus for charging as well.
In terms of our approach for costing, identifying full costs is an integral part of the policy. It does not mean, however, that charges must be equal to full cost. The aim is to provide a readily understood common starting point for determining appropriate user charges from which any legitimate departures must explicitly justified. Departures from full cost are considered at a later stage in the process in the context of determining how much to recover. In the case of rights and privileges, in addition to the actual costs incurred in granting the licence or permit, it includes the cost of any related regulatory or other activity incurred by the government.
We have issued a guide to the costing of outputs that provides a common framework for addressing all costing needs. It includes steps to follow in determining costs; definitions; the elements of full costs; and methodologies for calculating and apportioning overhead, capital and unit-cost pricing.
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In terms of the impact of these, we are aware that industry groups are particularly worried about the impact user charges have on the competitiveness of Canadian companies. This arises in part from fears about the potential impact of user charges from multiple departments, or different levels of government on a single industry group.
The responsibility to assess the cumulative impact of multiple fees must be shared by departments and their business clients. We believe that information provided by clients through consultations provides departments with insights that can be factored into the determination of what fair pricing is and the appropriate level of cost recovery.
It's not clear how one might centrally coordinate data on fees in a way that would address cross-linkage problems, especially those involving multiple levels of government. But we're concerned that it almost certainly would involve a large bureaucratic apparatus, something I'm sure we all want to avoid.
That being said, efforts are under way to obtain user-charge data from departments at the federal level that might be useful to identify areas of multiple impact. The Treasury Board Secretariat is in the process of updating the list of user charges for all federal departments and agencies for the 1995-96 fiscal year, which is similar to that produced last year for this committee.
I might add that multiple fees, which only recover a fraction of cost, may simply demonstrate the large number of services provided by the government to Canadian industry and help highlight the implicit government subsidies to industry. User charges do help make the utilization of government services more transparent.
In relation to parliamentary control over the raising of revenues through user fees, it is also important to note that before departments can charge, they must obtain the appropriate legal authority. This authority can be provided through a variety of means, including specific provisions in program or enabling legislation, general legislative authority under section 19 of the Financial Administration Act, or in fact the Crown's right to contract.
Most user charges are established by regulation conferred through legislation. As such, before user charges are implemented, the requirements of the government's regulatory process must be followed, including publishing proposals in the Canada Gazette, preparing a regulatory impact analysis statement, having a legal examination by the Department of Justice, and getting an approval by the special committee of council.
Once user charges are in place, they are subject to review by the Standing Joint Committee on Scrutiny of Regulations and the Office of the Auditor General. At issue is the fact that the balance between the costs and the time to go through the regulatory process is not always appropriate, and one size does not fit all.
There is a happy medium for each instance between streamlining and ensuring transparency and accountability. That happy medium is not all the same for all cases. For example, there's the difference between how much we charge for firewood in a national park versus mandatory food inspection for an entire industry.
It should be noted that regardless of the legal instrument or process used to establish this, it is accepted policy and practice that charges for services and facilities cannot exceed the full cost. Consultations must be undertaken and fees must be published in the Canada Gazette. Fees are subject to review by a parliamentary committee.
Also, all user-charge revenues collected are public moneys. Therefore, the authority to spend those revenues by departments requires prior parliamentary approval. Even in the case of vote netting, where departments are provided with the ability to spend revenues they generate during the year, there are limits on how much of these revenues can be used.
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In conclusion, communicating and facilitating a common understanding of the policy and procedures is a priority of the Treasury Board. In this regard, we contracted with the University of Toronto to write a theoretical paper on the application of user charges by federal governments, which I believe has been handed out. That's the green document that was handed out this morning.
Based on our experience to date and to respond to clients' concerns, the government is updating the cost-recovery policy in consultation with business and other interested groups, some of which are represented here today.
On the basis of the revised policy, supporting guidelines will be issued and institutional training models will be offered to public and private sector managers.
Mr. Chairman, I look forward to today's discussion. Thank you very much for the opportunity to speak.
The Chairman: Thank you very much, Mr. Miller.
Just before we go to Mr. Timmins, from the Office of the Auditor General, I do want to welcome a couple of members from the fisheries committee here this morning. Chairman Joe McGuire and member Derek Wells are joining with members of the agriculture committee here today.
Mr. Timmins, from the Office of the Auditor General.
Mr. Doug Timmins (Principal, Agriculture, Office of the Auditor General of Canada): Thank you, Mr. Chairman.
On behalf of the Auditor General of Canada, Mr. Denis Desautels, I would like to thank the committee for giving our office the opportunity to participate in this round-table discussion on cost recovery.
In the next few minutes, Mr. Chairman, I would like to briefly set out the office's perspective on the complex issues underlying the rather simple concept of cost recovery. Let me first deal specifically with cost recovery in the context of Agriculture and Agri-Food Canada.
Over the past two years we reported on two audits that touched on this subject: in November 1994, federal management in the food safety system; and in May 1996, animal and plant health inspection and regulation.
[Translation]
Mr. Landry (Lotbinière): Excuse me, sir, you are speaking far too quickly. It's enough to drive me crazy.
[English]
The Chairman: Okay, go ahead, Doug.
Mr. Timmins: I'm sorry, Mr. Chairman.
With respect to the food safety system, we observed that federal costs of food inspection were not being recovered in accordance with Treasury Board policy, and that if the policy were to be applied fully, the amount recovered would be up to $200 million annually. The chapter also identified inconsistencies in cost-recovery practices among and within departments involved in food inspection.
With respect to the animal and plant health programs, we observed that the amounts currently being recovered will be at most 40% of the full cost of delivering the service, of which industry is the prime beneficiary. Further, we recommended that the department should determine the level of private good for each service provided and develop a strategy to recover an appropriate amount of revenue for the private benefit portion of the service.
Mr. Chairman, the office has also examined cost-recovery issues in other departments. A summary of relevant findings from two chapters in our recently released November 1996 report is provided to you in appendix I.
Given this background, let me share with you some thoughts on how the issues relating to the establishment of fair and appropriate user fees might be dealt with.
First, consensus is needed on what is and what is not a private good. In the agriculture and agrifood sector, one might think of private benefits more as those relating to services that facilitate trade, and public benefits more as those relating to maintaining health and safety.
Since cost recovery is relevant to many government departments, a consensus on such principles across government is desirable. Treasury Board has provided some guidance on distinguishing between private and public benefits, but their application is another matter.
Second, criteria would be useful to promote consistency in the allocation of benefits between private good and public good components. However, there is a limit to how precisely this can be done. What we should strive for overall is consistency and fairness.
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Third, departments and agencies need to have reliable data on which to base decisions. The government's financial accounting systems were not designed with cost recovery in mind, which makes it a struggle to produce credible costing information. There is also a need for reliable activity-based management information, but in many cases it is weak or non-existent. In our view, good information systems are not an option, they are a necessity.
[Translation]
Even where good information is available, departments must address the question of which costs are recoverable; in particular, which overhead costs. Users are typically skeptical when it comes to paying some or all of these costs, yet they are significant and real costs that need to be factored into any cost recovery proposal. The Treasury Board suggests that, in most circumstances, recovery of full costs is appropriate. However, the question remains, will the application of this concept be consistent across government?
For several reasons, departments face resistance in trying to impose user fees. It is difficult for beneficiaries to accept user fees when they believe savings can be achieved through alternative means. In many of our audits, we have been able to identify opportunities for departments to operate more cost-effectively. For example, in the animal and plant health audit, we recommended further examination of inspection and other activities with a view to identifying additional efficiencies that could be achieved in program delivery.
At the same time, we noted that the Food Production and Inspection Branch has allowed for cost reduction and/or cost avoidance as alternatives to cost recovery. It is relying on a partnership with industry to identify the most cost-effective way to deliver services and to help identify the optimal mix of cost recovery, cost avoidance and cost reduction. This approach encourages industry to identify the best solution.
[English]
Another reason for resistance is the potential impact user fees can have on the competitive position of the Canadian industry. Many affected businesses operate in internationally competitive markets. For various reasons it is often difficult to identify comparative costs in other countries.
As a final point, I would note that government also has a responsibility to represent the interests of the public. It is tempting to accept any level of cost recovery that achieves industry buy-in. Nevertheless, there is a need to ensure that industry pays an equitable share of the cost of services that have a significant element of private good. Both public and private interests need to agree that the costs being recovered are reasonable and fair.
Mr. Chairman, I would be happy to elaborate on any of the points I've raised, should you or the committee members have any questions.
The Chairman: Thank you, Mr. Timmins, for that presentation. I'm sure it will prompt some questions and comments later.
We'll now go to Dr. Olson, from Agriculture and Agri-Food Canada.
Dr. Art Olson (Assistant Deputy Minister, Food Production and Inspection Branch, Agriculture and Agri-Food Canada): I believe everybody has a copy of a deck that was prepared. The deck is entitled ``Program Change''. I would like to touch on the highlights of that deck.
A table on page 2 outlines the planned expenditures, the approved appropriation and revenue targets in our current revenue plan, and outlines the shortfall, by year, we anticipate as a result of the cost-recovery negotiations.
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You'll note I've included the $33 million reduction for the Canadian Food Inspection Agency to give you some perspective of the size of that reduction on the approved appropriation.
On page 3 I've outlined the framework we've been following for the last number of years. We basically have five points. The first is to deal with overlap and duplication; the second is to implement new technologies; the third is cost reduction; the fourth is cost avoidance; and the final is cost recovery.
The last three are operated under a framework called the ``business alignment project'', which deals with the changes to the programs I'm discussing. This committee has already dealt in considerable detail with the Canadian Food Inspection Agency that's noted in the first bullet.
What is the business alignment project? This came about as part of the 1992 regulatory review, which states that the cost of regulations should be borne by beneficiaries of the regulatory regime. This was elaborated upon in the 1993 branch business plan, which provided the intention to use market forces to shape program evolution. It deals with $70 million in financial reductions contained in the 1993, 1994 and 1995 federal budgets. It does not deal with the further $33 million reduction coming into place in 1998. It provides means to allocate resources relative to the traditional provision of free services, rapid changes in technology, and changing trading obligations.
Any program design had to be based on equitable treatment for similar activities in commodities of comparable risk, and I've already outlined the tools we're using to do this. The key has been the establishment of the appropriate degree of government services to maintain competitive advantage in public confidence.
The process we followed is outlined on page 5. If I may, Mr. Chairman, I'll just move past that. I think people can take the opportunity to read it.
The objective is outlined on page 6. In essence, we followed a process of active consultation with our major stakeholders to evolve programs, policy and design to develop an effective, uniform and streamlined inspection and certification system for 2000, and to meet our trading obligations.
The approach is outlined on page 7, and the methodology we followed in terms of the actual discussions and consultations with the industry is on pages 8 and 9.
On page 10 there is a set of principles we followed throughout the process. I want to reiterate the very last one on that list, which is that cost recovery will be applied equitably for similar activities on commodities of comparable risk.
Page 11 talks to consultation. This has been a difficult issue because we've discovered in our consultations that national groups may not necessarily reflect the views of all the members of their organizations.
In terms of current status, we've already exceeded the planned reduction of $24 million by $2 million, and we're falling short of the proposed revenue of $46 million by at least $9 million. This has involved 500 staff reductions thus far. The primary implication is the level of the service that can be maintained, as the only resource available to meet shortfall is salaries.
Pressures for reductions will continue as the Canadian Food Inspection Agency comes into being with planned savings across government of $44 million, $33 million of which relate to FPI. There are no planned increases in cost recovery beyond those that are already coming into place.
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On page 13 there is a list of cost reductions that have been carried out through the consultative process. It includes program redesign, introduction of new inspection technologies, reduction of management levels in the regions and headquarters, reduced numbers of front-line supervisors, reduction of district and sub-district offices, an industry-government joint study on the reduction of shell egg grading inspection services, and deregulation in fresh produce inspection services.
In terms of cost avoidance, again there is a list of approaches that are being taken. The Beef Grading Agency is an example. The proposed Canadian Seed Institute is another, and so on.
Mr. Timmins has already referenced the points on page 15.
On page 16 we've taken a look at the international picture, with regard to our trading partners. Our overview basically says that current Canadian service fees are not putting our exporters at a cost disadvantage. Foreign countries each use cost recovery to achieve different policy objectives.
There are many different forms of government, each with different types of service fees, and as Mr. Timmins noted, this makes specific comparisons difficult. We found it is important to base international comparisons on gross aggregate spacing in industry, rather than specific fee amounts. In other words, try to avoid cherry-picking when it comes to comparing fee schedules.
On page 17 we talk about the challenge of Canada-U.S. inspection fee comparison. We're obviously very different, in terms of structure of government. In the U.S., services for the same product may be provided by the federal government, the state government and the private sector. Canada has a more uniform approach. The U.S. obviously benefits from larger economies of scale, and it has two agencies involved - the USFDA and USDA. THE USFDA inspects all food other than meat for health and safety.
The Canadian agrifood industry felt it was very important that government maintain equity across all commodities, where implemented separately in each program, with no attempt to maintain equity across all commodity sectors.
Page 18 compares meat inspection. Page 19 provides some comparisons with regard to a small seed potato farm. Page 20 deals with a large seed potato farm.
On Page 21 there's a comparison in terms of animal and plant health. This is the animal and plant health inspection service of the U.S. Department of Agriculture, which compares with the animal and plant health program within the food production and inspection branch of Agriculture and Agri-Food Canada.
On page 22 there is the first in a series of sectoral economic impact assessments. This happens to be for poultry and red meat. On page 23 we discuss apples, a cattle farm, and grain and oilseed producers. On page 24 we assess seed producers and table potato farms.
We've tried very hard to look at the impact it has on the competitive position of Canadian agriculture. As I said last spring to the committee, we're very aware of the impact these fees could have on the competitiveness of our Canadian industries. Bearing in mind the dependence of Canada on our export markets, we're not particularly interested in doing damage to that export potential. So we've taken that into consideration throughout, in terms of our cost analysis and our consultations.
Mr. Chairman, I thank you again very much for the opportunity, and I look forward to the questions as the morning progresses.
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The Chairman: Thank you very much, Dr. Olson, for that deck and the quick but thorough walk-through. I'm sure it too will prompt some comments.
We'll go next to the president of the Canadian Federation of Agriculture, Jack Wilkinson. Good morning, Jack.
Mr. Jack Wilkinson (President, Canadian Federation of Agriculture): Good morning.
Thank you very much. It's always a pleasure to follow Mr. Olson, because if I'm not awake before he starts I always am after he gets going. We tend to find it's much the same way in relation to.... I'm sure there are lots of bureaucrats who don't follow the wishes of their minister either, as well as public officials who are elected. We're often in the same boat in that regard.
It's a pleasure to be here before the committee. You know from our point of view and that of our members cost recovery is a very large issue. Many of you were here when we were in last week to talk to the rural caucus. A very large group of people attended along with us because of their concern, in particular about the multiple effect.
As CFA, a general farm organization, I think we would prefer dealing with the overall issue of how it affects the sector, even though there are some glaring examples of specific concerns we have. I think it's fair to say many of these negotiations have gone on with individual sectors. Now we're in the middle of a public relations campaign. Everybody is saying everything was handled appropriately; the sector is, if not happy, at least agreed that we went through cost avoidance wherever possible, cost reduction wherever possible, and only as a final result moved to the dreaded cost recovery; now we have in fact done analysis and we have really no problem with competition in any one of the sectors we've looked at; in fact, we're substantially below all our competitors, and really it's beyond people's understanding what the problem could possibly be in this whole area.
Well, if you went back and had an open forum for everyone who went through cost recovery, I think it's fair to say a lot of people would attend that forum and say that they weren't happy with the process; that in fact they have situations where they don't see that they're receiving the benefit; that it's gone beyond that point, and where targets have not been reached they have come back to the sector and asked for more money, which obviously creates very serious problems. From the Treasury Board point of view the farm community has been fairly straightforward, even though reluctant to pay a portion of the cost where they receive a benefit, in some cases as high as 100%, but there needs to be some sort of tool and mechanism when arbitration has to be brought in, when we don't see the benefit in the stretch the government is making.
There are very clear examples, such as the Pest Management Regulatory Agency. Thank God the Honourable David Dingwall hasn't fixed this, because if he ever took this example away we would have to go back and find another one as good. Their cost-recovery targets are substantially higher than the registration fee and the entire budget for running the registration system within the proposed agency. Until we see different numbers, our target is $16.4 million, and on their own numbers they're starting off at $11 million and change and working down below $7 million. Yet we're going to be paying, in what we contribute for the benefit of the registration process for product availability, substantially higher than 100% of the cost.
It is areas such as like this where people, at the end of the day, have trouble understanding how this got off track. We are very concerned.
We have a short statement, which a number of you have seen, on what we believe should be the Treasury Board directives, rather than guidelines, whenever any sector of the government is proposing to move to cost recovery. There should be a set of hoops they have to go through to leave an absolute trail that all these issues have been looked at, versus the smoke-and-mirrors approach.
Very clearly, before moving to cost recovery, they must show proof of cost avoidance and cost reduction, proof that it has absolutely been extended not to meet the needs of government and employees and lay-off notices and whatever but actually to meet the needs, which we want to maintain, of high government standards. Everything after that should basically be a clean slate on how you get there. The public and private good should have been clearly defined, so people are comfortable with what they are cost-recovering in the aspect they're going after the sector for, and that it is user fees, not income generation. There clearly are more examples than just the PMRA to show where in fact it's gone above government's cost in administering a program, let alone the low-cost option that is often put forward.
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The pricing impact is true. It's beyond me how in some of these bit tests in fact the sector very clearly demonstrates from their point of view that there are going to be serious ramifications within their industry. There should be third-party arbitration in the event that they cannot come to some sort of agreement between parties.
I would like to put forward that this reminds me of a debt review negotiation in the old days. The banker walks into the room and says we're shutting you down: what the hell do you have to say for yourself? This is the area in which we're going to have negotiations. Period. End of discussion. You can either agree and sign on the dotted line for a minor concession.... For example, we won't steal your wife's and kids' bank accounts in return for your getting the hell off the property. Any discussions? Has this been a successful negotiation?
Well, I would say we have to move beyond this point to where people do not feel they're sitting down and entering negotiations with the people who are in charge of absolutely everything. At the end of the day there has to be some ability to work through and make sure all these issues have been exhausted.
We will pay our portion of a fair system, even though it will mean a great deal of problems for the farm community. It has to be fair. The cumulative effect of the cost-recovery system, the way it's moving forward now, is going to have very serious ramifications.
I would like to reiterate one final point. The table has to be made clean when we enter into negotiations. For example, shippers cannot say that they still need a pilot to move a boat from this side of the dock to that side of the dock - no discussion, no debate - when it comes to talking to the grain sector and trying to deal with cost. If there are cheaper ways put forward, if there are different ways to do it, these things have to be part of the discussion.
An advisory committee that makes recommendations to the minister after the agency is set up seems to many of us to be a bit backwards. Surely when we're going through a transitional mode, an advisory committee with sectoral representation to clearly define what is needed in the new agency would have been more appropriate, in our mind, with agreement ahead of time. If all of the people do not need to transfer over, those decisions are made ahead of time. In fact, if they were government employees, they then could deal with the downsizing, if any is required, or new job descriptions.
All we're doing now is looking backwards in the rear-view mirror, after an agency is set up. It'll depend on who makes up that advisory committee as to whether it will be aggressive or not in pursuing its goals. It will still continue, absolutely, on the minister's whims and wishes as to whether any of those recommendations will be accepted and implemented.
From our point of view, it'll be a very serious problem of the agency in dealing with changes after the full bureaucracy within the agency is set up. There'll be all sorts of grief that does not have to happen if done appropriately.
We think there is still time to fix many parts and deal with many of the concerns that have been brought forward if in fact the political will there is to solve the problem versus perpetuating it, because there are still many layers of cost recovery to come.
Thank you very much.
The Chairman: Thank you, Jack.
We'll move on to Jim Smith, president of the Canadian Pork Council. Welcome, Jim.
Mr. Jim Smith (President, Canadian Pork Council): Thank you, Mr. Chairman.
I guess along the same lines as Jack, I'm sure to rewrite some of the material we've seen today it will take a lot of trees and a lot of time, if some of the things we're talking about are implemented. At any rate, I'll go through our presentation to put a bit of a different slant on our industry. First, however, I'd like to thank you for inviting us to make a presentation to this committee.
For our sector, at least, user fees must be considered in relation to their implications for our international competitive position. There are two countries in the world with major hog production industries that are fully exposed to international competition and do not have protective measures such as import quotas to sustain higher than world internal prices. One of these is the United States and the other is Canada.
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Due to our greater dependence on exports, as well as other economic considerations, Canada's hog industry must cope with lower hog prices than our counterparts in the U.S. This essentially means that we have to make do with the lowest hog prices in the world.
In the course of the past few months, our sector has absorbed cost recovery fees for federal government services that our U.S. competitors do not pay, most notably basic meat inspection. We are now facing additional fees effective April 1, 1997, for analytical testing activities performed in the federally inspected plants. This will impose an additional $1.5 million cost on Canadian hog farmers. Again, our competitors to the south do not have to bear such an expense.
After netting our imports, approximately 35% of our production is destined for export markets. This percentage is climbing, with some projecting it could easily be 50% soon after the start of the next century. Canadian governments in recent years have been strongly encouraging the agriculture industry to join it in meeting ambitious export goals. The hog industry is a very willing partner in this undertaking, but it needs to avoid being burdened with excessive fees for the services this country needs to provide to meet its targets.
To be brief, our points respecting cost recovery are as follows. The federal government, particularly Treasury Board, must become more aware of the implications of cost recovery fees for our international position before it imposes spending reduction targets on federal departments. We cannot impose costs that are not borne by our major competitors and still expect our industries to survive in the world marketplace.
When attempting to measure recoverable costs of government-delivered services, there should be an avoidance of cost recovery fees altogether where there is an overwhelming public interest in the activity, such as meat inspection, which assures Canadian consumers a safe meat supply.
Another important factor to consider is to what extent the domestic industry has any control over the means by which the program is delivered. Meat inspection, again, is an important example where many of the requirements are imposed by other countries, often unreasonably. The Canadian Pork Council has accepted the converse, as we did in accepting to fully privatize the grading system even though an important public benefit from that program was still found to exist.
The absolute maximum fee that can be justified for recovering private benefits of a government-delivered service is the cost the industry would incur if it were privatized. It is unreasonable that cost recovery fees reflect higher overhead allowances and long lead times that federal departments may require for personnel and other adjustments needed to realize the reductions needed to bring costs in line with what the industry would find acceptable.
On the matter of sharing in the pain of adjustment to fiscal constraints, the Canadian hog sector feels it has done its part. With the elimination of the tripartite stabilization program, the federal contribution to safety net programs has been dramatically reduced.
Finally, if after the fees have been established and any privatization has taken place, these changes do not generate the net spending reduction imposed on the departments, this should not be a reason for a further increase in cost recovery fees. For example, as is currently the case with the red meat analytical testing fees proposed by Agriculture and Agri-Food Canada for 1997-98, this simply becomes a form of taxation on the industry. The targets themselves have to be reassessed, and we would welcome the opportunity to participate in such a process.
I would mention at this point that we have appreciated and participated fully in the consultation process conducted by Agriculture and Agri-Food Canada with its business alignment plan, even though the financial objectives of the initiative were unreasonable in our view.
Again, thank you very much for inviting us. We'd be prepared to answer any questions.
The Chairman: Thank you very much, Jim.
We'll move on to Bob Weaver from the Canadian Meat Council. Good morning, Bob.
Mr. Robert Weaver (President, Canadian Meat Council): Good morning, everybody. The Canadian Meat Council is a trade association that represents federally inspected red meat packers and processors. In fact, it covers about 90% or more of the federally inspected red meat produced in the whole country. As you know, meat hygiene is the largest client service area that the food production and inspection branch has.
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I have submitted a document to Marc Toupin. About twenty copies are available. He has not distributed them yet, but they would be available to everyone.
The Chairman: They were available only in English, so we can't distribute them at this time.
Mr. Weaver: The covering letter will be translated today and submitted to the standing committee probably tomorrow.
I would like to tell you a bit about the total effect of user fees on our industry so far. To the present, during each of the years 1995 and 1996, the industry calculates the cost recovery at $8,389,000 each year. That's for overtime, export certification, import inspection, label approval, slaughter establishment registration, and processing establishment registration. It comes to $8,389,000.
In addition to this, there was a question of grading, which was costing the government about $5.2 million in 1993. This was one of the services that were to be charged to the industry at 100% cost recovery. The industry and the government made the decision to privatize it. It was privatized as of last April and at present it's operating at a cost of about $2.5 million to the industry. So you have that $2.5 million and the previous $8,389,000 for user fees.
We have another round of user fees being discussed at present in four categories of services. It's to be imposed on the industry on April 1, 1997. The cost of it is $2,570,000.
When you add up the three of those, you're looking at an increased cost of $14,459,000 to the industry, including the grading.
Two documents were submitted on this subject from the summertime to November. The first one was a letter to the minister headed ``Negative Effect of User Fees on the Canadian Red Meat Sector''. That document presented an overview on the effect of user fees for the red meat industry until our observations as of June 18 this past summer. It explained that the Canadian red meat industry is a 1% margin business, on average, in good times. In other words it operates on a margin of earnings of 1% of sales under normal circumstances, which we don't have this year; it's worse than that. The additional costs for user fees represent a tax on the red meat industry of 11.3% of those earnings.
There are all kinds of different ways of expressing the effect of user fees on the industry. Dr. Olson sometimes uses an expression of how much the user fees are per pound. If the number didn't look good we could always reduce it to user fees per gram, until we got low enough that the figure didn't look too significant, because it is a metric country.
That tax of 11.3% is to increase on April 1 because of those other user fees I told you about. It's going to go up to 14% of earnings.
I want to make something quite clear. I respect Dr. Olson very much. We work with him and his people all the time. But I have to tell you a slightly different story about this question of competitiveness and the user fees that are imposed by industries in other countries.
Most of our trade takes place with the United States, as everybody knows, so that's the important country we should be talking about in regard to user fees. The United States does not have any user fees for overtime between 7.5 and 8-hour shifts of work as Canada does. They pay overtime after an 8-hour shift, not a 7.5-hour shift. They don't pay user fees for export certification. They don't pay user fees for import certification. They don't pay user fees for label approval or slaughter plant inspection. They don't pay user fees for processing establishment inspection either.
.0905
Not only that, on April 1, 1997, with respect to these other categories of user fees that we are going to have to pay to the tune of another $2.5 million, they're not going to pay user fees on them either.
The red meat industry operates with open borders between the two countries. In other words, there are no tariffs, no blocks between the two countries for shipments of red meat back and forth. I checked the customs tariffs list in the records in our library to see how long this condition had existed and I checked back to 60 years ago, until I got tired of checking these figures. That condition has existed for many decades.
So if you want to buy red meat in either Canada or the United States and you're not satisfied with the price or the supply or whatever, you can just go anywhere in the United States and get it. That's why any cost disadvantages in the industry in either country can't be passed along to the consumer: because of the direct competition from the other country.
We think the competitiveness of the Canadian packers and processors in Canada really is impeded by these user fees. Those margins of 1% that I mentioned for the red meat business in Canada have actually been recorded at 1.3% - 30% higher - in the United States, so that gives you an idea of the competitiveness of the Canadian industry compared to the American industry. And the 1% versus 1.3% was calculated before the imposition of user fees. It's lower now.
In this first document, we made six recommendations. One of them is that user fees should be no higher than those of any competing country when a commodity is traded back and forth across the borders with no protection.
Next is requiring Agriculture and Agri-Food Canada to operate according to the Government of Canada cost-recovery policy. What we meant by that is that the department should be required to carry out an exercise of cost reduction and streamlining rather than just exerting or imposing user fees.
In all fairness to the department and the negotiators who dealt with us starting in March 1994, I don't believe the cost-recovery policy of the Government of Canada was available when they started to carry out these negotiations. We only saw it last spring. I think they had to deal with us without that policy.
We should have no additional user fees and we should provide the opportunity for the industry to reduce the existing ones through cost reduction and streamlining.
And of all user fees that we have, we believe you should just plain discontinue the one on red meat exports. The country is trying to achieve a level of $20 billion worth of exports by the year 2000 and we believe that taxing exports, which the United States doesn't do, is not the most brilliant way to encourage exports.
We should also discontinue charging the industry for overtime between 7.5 hours and 8 hours.
Those things dealt with the cost recovery itself. A second document was submitted to the minister on November 1996, which dealt with some information about cost reduction within the food production and inspection branch. This information shows that a total of $14.735 million has been reduced in the areas of grading, overtime, label approval, slaughter establishment inspection and processing, which applied just to our particular sector.
Before, we had a figure of $14.5 million in user fees, and now we have a figure of more than $14.5 million in cost reduction in this area, and we don't believe the industry has been given credit for that amount of cost reduction. The difference, the total of the two, is about $29 million.
In a letter we were sent from the Standing Committee on Agriculture and Agri-Food, we were asked to deal with four specific questions. The second one was about the global impact of user fees on the Canadian agrifood industry.
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We believe competitiveness is definitely impeded. I especially want to tell you that the records up to November 30 of this year show that the number of market hogs exported to the United States has gone from 500,000 last year to 1,300,000 this year. It's increased 160%. At the same time, pork exports from this country, which had been doing very well, are down 3.3% at a time when imports of pork to Canada have gone up 26.5%.
So what's taking place? We're shipping live hogs to the United States and they're turning them into pork and exporting to other countries, including Canada.
With respect to the second question about the departmental cost of services in introducing cost recovery, we don't know what all the departmental costs are. You would have to get that from the branch. We think they might be reasonably high because of the costs the industry has had to incur for meetings and travel and so on. I think the cost of administering the program should have been known before we started it in 1994.
``The beneficiary pays'' concept was the subject of the third question. We believe this should be based on the public good versus private good. We think the department and the consultation people for FPIB dealt with us quite faithfully on that, except for the fact that we have a question on the latest round of costs, laboratory costs for antibiotics. We don't think they should be imposed on us at a 100% cost-recovery level because we think there is quite a high degree of public good involved.
The last question is about parliamentary control over raising revenues through user fees. We think that has been developed into a vehicle to generate revenue. It represents a very substantial tax on the Canadian people.
So whereas we disagree with some of the things that Dr. Olson said about competitiveness and user fees as compared to the United States, we still work together very well. But we do think it's really important to realize what's happening to the red meat industry here, because those user fees decrease our competitiveness and make it less possible for Canadian companies to afford to buy their own animals. So the animals are being shipped to the United States, where they're processed into red meat.
Thank you.
The Chairman: Okay, thank you very much, Bob.
Now we'll hear from Bob Anderson, of the Canadian Poultry and Egg Processors Council. Good morning, Bob, and welcome to the committee.
Mr. Bob Anderson (President and Chief Executive Officer, Canadian Poultry and Egg Processors Council): Thank you, Mr. Chairman. It's a pleasure to be here.
When we look at this general subject of user fees or cost recovery and the Treasury Board guidelines, the focus in much of what we see and much of what we hear has to do with this attempt to define public good versus private good. To some degree, we think this is a futile exercise. Or it's an exercise that is superseded by the need to assess competitiveness. In our view, competitiveness is of more importance than attempting to define private good and public good. Bob Weaver, in his presentation, touched on some of what I'm going to say about that.
Our council represents the federally registered poultry-processing and egg-processing plants in Canada. The competitors of our members' plants are twofold: provincially registered plants and foreign plants. And the cost structure that our members have must take into account the cost structure our competitors have.
The world our members live in is one where the major input that they buy is produced under supply management and effectively priced under supply management, so for the vast majority of what they buy they have very little control over the price. They are not producers themselves, or if they are, they have to value the product at the pricing supply management dictates.
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Secondly, the chain store community in Canada is a small community. A relatively small number of chain stores effectively set the price at which poultry meat and eggs are sold in Canada.
The success of our members is how well you manage those few components that are between an input price established by supply management and a selling price effectively established by a major chain store. You know them all and you've heard them all talk. They will argue until 2 a.m. about the price of a truck, about the price of packaging, about the price of soap, about the price of labour in their plants, etc., etc., because they live on how skilfully they manage those components.
To assume that a cost burden such as inspection fees for cost recovery, which is not a cost component that is part of the package of their competitors - again, be it provincially registered plants or foreign plants - is never-never land...obviously it's a factor. With some of our larger members, and I'll come to the details in a moment, we're talking in the hundreds of thousands of dollars in terms of what inspection fees cost them, versus an American who is doing the identical thing who pays zero for that same service - zero. Whether you divide it by pound, by kilogram, by gram, by whatever, zero is still zero.
We support cost recovery where the service provided does provide a clear and obvious private benefit and competitiveness is not a significant factor, provided that the service is delivered as efficiently as would be expected. Someone made the comment here earlier this morning that the real comparison is to what a privatized service would cost to deliver the same benefit. I think that's a reasonable yardstick, and we will then, in that context, pay our share.
The emphasis in terms of deficit reduction, in our view, has to be on cost reduction or cost elimination. In that context our council is participating in studies, and I'm sure the red meat council and others are too. There was $50,000 provided recently, $25,000 from our members, to study the egg inspection system that's under way now. A complete review of the poultry meat inspection system is under way, which would take it to a much more science-based system at a much lower cost, delivering effectively the same benefit, we believe.
Our key concern about where cost recovery is today obviously focuses on the cost of inspection systems and the cost imposed on the industry for inspection systems. Unlike Dr. Olson, we do not view it as cherry-picking. It is a real and significant and isolated concern; it's of huge concern to our members.
The way the cost works for inspection systems in poultry meat plants, currently it's $12,000 and change per inspection station. Many of the plants have more than one inspection station and as high as approximately 30 inspection stations. In some of the larger plants that fee is increasing from $12,000 to $16,000 on April 1, 1997. That's a 33% increase.
The comment is in Art's paper that in terms of the poultry industry, competitiveness is not a concern because of the tariff situation. We believe the tariff situation is not something we can count on being there forever. The recent NAFTA decision obviously provides some breathing room, but my guess is the Americans will be back. The strategy being pursued by our members is to be competitive, come what may.
We also believe, as Jack Wilkinson discussed in his paper about third-party arbitration, that in the event that the parties can't agree, there has to be some vehicle to get some kind of independent resolution of these things.
We believe that the $33 million reduction being sought with the new Canadian Food Inspection Agency must not be sought through cost recovery, and we are told that this is not the intention.
Finally, we would make two specific requests, the first being that there be no further cost recovery increases for inspection systems. Dr. Olson did indicate that this is not the intent, but we would like it reiterated. And as Bob Weaver discussed, the overtime charge should come after eight hours per day, not after seven and a half hours per day. That is the real world in which our members live, that is the way it operates in the U.S., and that's the way it should be.
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Finally, we think the concepts of competitiveness and export enhancement should be enshrined in Treasury Board or Canadian government policy regarding user fees.
I'd be happy to answer any questions anyone has.
The Chairman: Thank you very much, Bob.
We have one final presentation, from the Canadian Horticultural Council, and Steve Whitney is going to make that. Steve, please go ahead.
Mr. Stephen Whitney (Assistant Executive Vice-President, Canadian Horticultural Council): Thank you, Mr. Chairman, and thanks to the committee for providing us with the opportunity to participate in the round table.
In the five minutes we've been allotted we will try to provide you with a brief overview of the experiences we've had with this initiative and the impact it's having on our sector.
As an umbrella organization representing producers of fruits, vegetables and ornamental crops from across the country, we've had direct or indirect experience with a number of initiatives. I'm going to focus on a few of them here this morning. One is the relationship and the dialogue we've had with FPI in dealing with the fresh fruit and vegetable program, plant health program, seed potato program and the processed products program. The second one, which is another little challenge, is the discussion we've been having with government officials on the Pest Management Regulatory Agency.
For the purposes of my presentation I just want to focus on some of the history we've had with the fresh fruit and vegetable program and the PMRA. We'll try to relate our comments back to the four main themes that were identified in the committee's letter.
In terms of cost of service, I'll take us back to 1984 and what we'll call cost recovery round one. We began discussions with FPI at that time. I remember the letter from Mr. Protti based on the guidelines that had been provided by Treasury Board back in the early 1980s, initiating discussion on fees for service. At that point we were informed that the total cost of the fresh fruit and vegetable program was approximately $7 million.
In 1994 we were back with round two of cost recovery. That, of course, was launched under FPI's business alignment plan. We were informed that the cost of the program had increased to approximately $17 million.
Suffice it to say that in both cases we had to rely on the branch's word that the figures were correct. I think that's the only way it could operate at that point. However, when we questioned how the program costs could have risen over $10 million over a 10-year period, especially when a number of services had been deregulated, we were informed that the rules for calculating the cost had changed. Again, we had no alternative but to accept the branch's word on that.
Suffice it to say that as the cost rose so did the industry's skepticism about the methodology. Moreover, if the methodology did in fact capture true costs, the industry felt somewhat powerless to effect changes that would reduce the cost without compromising the integrity of the entire program.
We need to be more involved with the overall management of the program. We have had good discussions with the department. We're currently taking a look at the possibility of doing some things in the area of accreditation. It's not an easy task, but it's fundamental for industry to get more involved with this, either working directly with the branch or taking something out of the department. It's not right to ask industry to pay an increasing share of the cost, especially for a quality assurance program, without providing it with any meaningful input.
It's worth noting that between 1984 and 1994 the principle of sharing the cost based on public and private good has disappeared. In 1984 one-third of the costs were deemed to be for the public good. By 1994 there was no longer any public good. We do not agree with this position for a number of reasons. First, although the program is a quality assurance program and there are definite benefits to the users of the service, there are also benefits to the public. Canadian consumers are provided with confidence in the quality and safety of our products. Our economy benefits from a system that assists us to promote our exports and to compete favourably with imports in the domestic market.
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Without the current system, we would not be allowed to export a number of our commodities, including potatoes - one of our major exports to the U.S. We already have problems on the Maine-New Brunswick border with people second-guessing our inspection. I'm not sure whether taking government out of the role is the answer. The reason for this, of course, is because the U.S. has certain minimal import and certification requirements. It will only accept an inspection certificate that has been issued by a federal inspector.
In addition, without this program we could have difficulty competing favourably against imports in our own domestic market. Most of our import competition comes from the U.S., where most commodities are governed by strict inspection and certification requirements, which are administered and delivered by the U.S. Department of Agriculture. The U.S. system, in our case, is based on a cost-recovery scheme. However, we're not sure how much of the actual cost is being paid by the industry.
While our experience with FPI's business alignment project has been somewhat frustrating, it is nothing compared to the frustration we've experienced with the cost-recovery discussions that have been held with the Pest Management Regulatory Agency. Openness and transparency have taken on a new meaning in this exercise. It makes the consultations we've had with the FPI branch seem rather pleasant. Are both of these government agencies operating under the same guidelines? Why is the PMRA proposing to recover 62% of its total costs, when FPI had established a 10% target of its recoverable costs for health and safety services?
Canadian producers of horticulture crops need access to new crop protection technology to compete favourably with our trading partners. Because we represent a very small market, many companies are already reluctant to register new technology here in Canada. What do you do for 300 acres of spinach?
If the PMRA proceeds with its current cost-recovery initiative, we are convinced there will be less interest by companies to register new products for horticultural crops in Canada, or companies will even be reluctant to maintain a number of current product registrations. This will impact on our ability to compete in both the domestic and export markets.
The PMRA needs to spend more energy on implementing measures that will reduce costs, not increase them. We don't need to build a system in Canada that simply duplicates what is happening in other countries that have similar registration standards and systems.
On the global impact of user fees, according to information from one of our members in New Brunswick who is a major exporter of Canadian potatoes to the United States, the current mandatory inspection fee of 27¢ per hundredweight represents 10% of the returns a producer is receiving from the marketplace. If anyone knows what potato prices are like this year, that means it's not impacting on a margin because there aren't any margins.
We recognize that potato prices are low this year. However, even if prices were to double, the cost of an inspection would still represent a significant amount.
When one considers that potato producers are also having to deal with increased fees for plant health program services, such as phytosanitary certificates that could apply going to certain countries - they don't to the U.S. for this particular type of product - and seed-potato program services, not to mention cost-recovery initiatives that are being implemented by other government agencies - coast guard, port and navigation fees, etc. - the cumulative impact of all these fees for service does not seem to have been evaluated.
We do know that under the fresh fruit and vegetable program the industry is paying 50% more for inspection, licensing and arbitration services this year than it was a year ago. The problem is this only represents a proportion of the total costs of delivering the various services, and that's a challenge for the department as well as for us. For example, based on the latest figures we have from FPI, 100% of the average cost of providing export inspection services for potatoes is about 54¢ per hundredweight. The industry is therefore only paying 50% of the total cost of this particular service.
In terms of the entire program, the current fees were supposed to generate about $5 million, which is about 60% of the recoverable costs of $8 million and 30% of the total cost of $17 million. Because of a number of cost-avoidance initiatives, we understand we're going to fall short of the cost-recovery target for this program.
We know this is happening with a number of other programs. We're about to enter into another round of cost-recovery discussions with FPI, and we will request a moratorium on any further fee increases. Before we collectively go any further, we need to know the cumulative impact of these fees on the competitiveness of our sector.
On the beneficiary pays concept, CHC has never argued against the principle of cost recovery. However, our position has always been based on the need for a cooperative government-industry approach to the overall management of any service that is being cost-recovered. We find it quite disagreeable that we are being asked to pay an increasing proportion of costs for certain services and we have not been provided with any material status in the management of the service.
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We can understand that for some programs, especially those that are health and safety related, there may be a need for government to maintain full control. Having said this, we would suggest there is an urgent need for government to reassess its current public good and private good position and the application of user fees to health and safety services. If government wants to or has to maintain total control of any program, then the public should pick up the full cost.
On parliamentary controls, our experience suggests that Parliament needs to exercise more control over the cost-recovery exercise. We've found that user fees and cost avoidance seem to be the two preferred features in the cost-recovery scheme. Departments and other federal agencies seem to prefer to charge fees instead of reducing their costs. This causes industry to look at cost avoidance wherever possible. Cost avoidance is not a bad thing. However, it should be done for the right reasons, not simply because an agency has not succeeded in streamlining its operational costs.
The fact that cost reduction is largely an internal departmental or agency process does not make us very confident that it is being pursued as aggressively as it should. We therefore believe there is a definite need for an external process to ensure it is.
We also think there is a need for an external process to coordinate the cost-recovery initiatives of various departments and agencies. I note here earlier Mr. Miller, I believe, said we don't want to create other bureaucratic exercises. I would suspect Treasury Board and possibly the Auditor General could try to ensure that doesn't happen.
There is a need for consistency and uniformity in the interpretation and application of the cost-recovery policy. We agree entirely with that. As well, there is a need for government to conduct financial analysis on the cumulative impact of these initiatives.
Thank you for listening. I would be pleased to answer any questions.
The Chairman: Thank you very much, Mr. Whitney.
Just for the committee members, a presentation dated December 5, 1996, was also sent in from the Crop Protection Institute, and that was circulated to all committee members at the end of last week. Everyone has that presentation. It deals with the Pest Management Regulatory Agency and their concerns on issues there. They will not be making that, but they asked that it become part of the record of today's meeting. I'll ask the clerk to attach it to the proceedings of today's meeting, as all presentations are.
I thank everyone for their cooperation. I think we did quite well in having eight presentations in that time.
Mr. Easter, you indicated you wished to make a comment.
Mr. Easter (Malpeque): Thank you, Mr. Chairman. I hardly know where to start.
First, for Treasury Board or Mr. Olson, as I understand it, cost recovery really is an imposition that came from Treasury Board onto a line department to cover so many fees; so much in terms of costs. I would like to know, first of all, how that came about.
Secondly, to Treasury Board, one of the reasons for this meeting is we've met as the Standing Committee on Agriculture a number of times, and we're trying to get to the bottom of how to monitor and get a handle on the cumulative impact of cost-recovery fees. Basically we're still just dealing with them here today in relation to the Department of Agriculture and Agri-Food, but as an industry the farming industry is impacted on by cost recovery fees from other line departments, such as Customs and Fisheries and Oceans, through port fees. We're impacted on by a number of them.
Mr. Miller, you said in April:
- So it's difficult for me to characterize the exact implications of any particular initiative. We
leave that up to the experts within...the department conducting the negotiations...
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That was in April. Now we're in December and I still don't see any indication anywhere of how we're going to get an overview in terms of the cumulative impact and the damage that could be done.
The Meat Council - Mr. Weaver explained it very well. He was talking about the pork industry and where it now seems to be at.
If the government is covering some of these fees as a public interest, it's an investment in the economy. If we weren't sending the raw meat to the States, and we were value-adding here, just imagine what that would do to our economy in terms of extra economic activity, jobs, and so forth.
I'll leave it at that for the moment, Mr. Chair.
The Chairman: Mr. Miller, do you wish to comment? I think those questions were primarily directed to you.
Mr. Miller: Yes, I'd be happy to try to reply, Mr. Chairman.
The first issue dealt with the imposition of cost recovery. I wouldn't characterize it as Treasury Board deciding which elements require cost recovery. As part of the program review process, there was intensive discussion and negotiation on six questions associated with the program review exercise, and there were targets established for different departments and agencies.
I think Dr. Olson can probably comment on this more, but certainly for a particular department like Agriculture and Agri-Food there was a certain amount of flexibility where they were dealing with initiatives - whether or not they could discontinue them, whether they could impose cost recovery, or whether in fact they could increase the levels that were already being recovered.
The decision was based on those primary six questions and the impact of that. In other words, for situations where the government realized that it was a federal responsibility - that we should be involved in it, that it was not particularly something that we could contract out to the private sector, and several other issues - then the bottom line was there had to be some method. If it did fit within the implications or the principles of cost recovery, then that was quite often pursued.
So there were several initiatives introduced as a result of program review, and that's what led us to the current round of consultation and negotiation.
Perhaps before I get to your second question I'll ask if Dr. Olson has anything to add on that.
The Chairman: Go ahead, Dr. Olson.
Dr. Olson: Thank you very much, Mr. Chairman.
If I could just do a little bit of history, the Canadian Pari-Mutuel Agency, the people who run the race track system as a 100% cost-recovered activity.... For many, many years it's financed by a 0.8% take on the handle that's bet. The Canadian Grain Commission, of course, is 95% cost-recovered. It's primarily a quality function and it has been highly cost-recovered in that regard.
Cost recovery as far as this department is concerned started in the 1970s, I believe, and I think there was further discussion about it in the mid-1980s. It resulted in a revenue level, for my organization, of around $12 million.
The 1989-90 policy framework that Mr. Miller has already mentioned, the regulatory review that I referred to earlier - I think in part the reason those are germane is that what the regulatory review was trying to deal with was how to establish the level of service.
As long as it's a free good, you have no way of establishing a level of service, it's just based on demand and there are no market forces being applied against it. When the regulatory review looked through every one of the regulations that existed within Agriculture, from both the FPI side and also from the grain trade side, the overall process came to a conclusion that there needed to be some method of establishing market forces against services so that the demand for services could be managed more effectively.
This free good issue became an issue during program review one. Knowing the debate that had happened on the regulatory review, knowing the debate that had happened during the.... I can't remember the exact name - maybe Steve can help me - but there was a horticultural review done on all of the programs relating to the horticultural industry. It became pretty apparent during that discussion, Mr. Chairman, that the level of services provided to the horticulture industry in Canada, and in particular the potato industry, were significantly higher than those in the United States.
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The question is, how do you deal with the resource allocation? The tool that was applied at that point in time in fact was cost recovery, in terms of bringing market forces against the free good or free services that had been provided. So that tool was in place at that point in time.
And of course program review two has now come upon us, and we're looking at how best to deal with that in terms of further program reductions that will be necessary over the next number of years. But it was a framework that was primarily, from at least my point of view, dealing with resource allocation - the need to provide some mechanism of market forces, however odd it seems to be within the government structure - against the programs we've had.
I hope that's useful to you, Mr. Chairman.
The Chairman: Okay. David, did you want to make another comment on...? We've got to keep moving along. We've already taken twelve minutes with the first question and comment, and there are a number of members who want to comment.
Mr. Miller: Perhaps I could just take a second to answer Mr. Easter's second question on the cumulative impact.
I believe we provided the committee in the springtime with a listing of the charges. This is a detailed listing that gets into specifics - for example, the amount of cost recovery associated with fresh fruit and vegetable compulsory inspection versus non-compulsory inspection. If we use your example, Mr. Whitney, of the two horticultural areas, one in spinach and the other one in potatoes, we have no way of assessing, as an individual producer or even a sector, what impact the combination of several pages of cost recovery had.
That's why in the spring my emphasis was on having the industry identify this, especially in situations involving more than one level of government. That's the only way we're in a position to understand, because the situation for a spinach producer may be completely different from that of a potato producer, even though they're located next to each other.
That was the context of my answer, I believe, in the spring. We are working at complete listings, but we still have to focus on the association to identify those kinds of implications that may be impossible to look at from a departmental perspective, in the sense of what that means to individuals.
The Chairman: Okay. Thank you very much, Mr. Miller.
Mr. Hermanson and then Mr. Chrétien.
Mr. Hermanson (Kindersley - Lloydminster): Thank you, Mr. Chair, and thank you to each one who made a presentation to our committee. We found it very helpful.
We heard two stories around the table, Mr. Chairman. The first was by the Treasury Board and the department, basically saying that cost recovery was going well; that there are a few glitches here and there, but overall what was happening was fair, fair to the industry, and reasonable, and being well-managed. I guess you'd expect that story to be told by the department and by the Treasury Board.
However, the story we heard from the industry was quite different. And quite frankly, I have to believe the industry, for three reasons. First of all, looking at the Auditor General's paper, the Auditor General seems to side more with the industry than with the Treasury Board and the Department of Agriculture.
Secondly, I've received numerous calls from right across Canada, from the industry and from producers, who are concerned about what's happening on this whole issue of cost recovery.
Thirdly, I see several Liberal MPs very nervous about the issue of cost recovery, and I think the reason this issue came before our committee is a reflection of that nervousness. I guess I would caution the industry not to think that because the issue has been brought before this committee we're going to see results. Often the government would use this as a way to let off a little pressure, and hope that the issue would go away or be forgotten for a while. So I would encourage the industry to keep the pressure up on the government.
I was contacted by a meat processing plant that told me how much their costs were increasing as a result of cost recovery. They brought up the issue of overtime. I contacted the department and they told me that this processing plant just didn't know how to schedule their people right. That was the government's response to the issue of overtime.
My question will be to I guess Mr. Olson primarily, unless Treasury Board also wants to respond.
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I mentioned that I side with the industry because of what I read in the Auditor General's report. On page one of the report, paragraph four says that they've observed that federal food inspections were not being recovered in accordance with Treasury Board policy. If they were, it would be $200 million. So something is terribly wrong. Treasury Board says that it should be $200 million, but I believe right now that the projections are to have cost recovery at levels of about $60 million, if I remember my numbers correctly. Treasury Board has unbelievable expectations for cost recovery, and they're putting the department in an impossible position. That had better be fixed, and it should be fixed very soon.
Secondly, on paragraph eight on the second page of the Auditor General's paper, he first says that a consensus is needed on what is and what is not a private good. Obviously the Auditor General doesn't think the department and the Treasury Board know what is a private and what is a public good, and they had better decide. He says ``A consensus on such principles across government is desirable.'' I should certainly say I agree with that.
If you go to number ten on page two, the Auditor General says that the agencies need to have reliable data. Now that sends up a flag if anything does. The department doesn't have reliable data.
It says the government financial accounting systems were not designed with cost recovery in mind. How is it going to work if they don't have an accounting system that can handle whether or not cost recovery is fair and working correctly?
He says there is a need for reliable, activity-based management information, but in many cases it is weak or non-existent. This is an indictment of the department and of the Treasury Board, and they had better answer to it.
Number eleven says the departments must address the question of which costs are recoverable and which are overhead costs. The Auditor General doesn't think you know the difference between recoverable costs and overhead costs. You'd better get your act together there.
In number twelve, he believes that savings can be achieved through alternative means: ``We have been able to identify opportunities for departments to operate more cost-effectively.'' If there's anything that I'm hearing from the industry, it is that the government is just trying to pass these costs holus-bolus on to the industry without aggressively looking at cost reduction and cost avoidance. We heard from the officials that they are putting cost reduction and cost avoidance ahead of cost recovery, but that certainly isn't what the industry is feeling. Again, I have to side with the industry on this.
Number thirteen says that Agriculture and Agri-Food Canada is relying on a partnership with the industry, yet the industry is saying that the consultations have all been one way. Again, we have a huge problem here. It had better be fixed.
And one of the two last points the Auditor General makes and which I have heard reiterated by the industry is that it's very difficult to identify comparative costs in other countries. If we're not competitive in this ball game, we're going to lose big time. Canada is a country with a small population. We rely on exports, and if we're pricing ourselves over the market through cost recovery on exports of hogs, or any other product for that matter, we'd better get our act together.
Finally, on number five - I think I mentioned this before - on representing the interests of the public, I guess that comes back into the public good. Who should be paying this cost recovery? In some cases, of course, we agree that the industry should pay it, but not in all cases. We had better decide where the industry pays and where the public pays.
I'd like to get a response to the Auditor General's comments from the Treasury Board and from the Department of Agriculture.
The Chairman: Who wishes to start?
Mr. Miller: I think perhaps I could start. I may not make it through all the points raised, but I think it's important - and Mr. Timmins can certainly correct me on this - that a lot of the points concerned the availability of information.
The Treasury Board is not insisting on 100% cost recovery for food inspection. What was pointed out is that the principle of our policy is to deal with 100%, to be able to identify the provision of a service, and to say how much it costs. To do that, you need the necessary financial systems and whatever other costing mechanisms you can get to support that.
I will give you an example outside of agriculture. It deals with ice-breaking. Someone had asked how much it is costing to break ice in his portion of the St. Lawrence. The answer from the department is that we don't know. We know how much it costs us to break ice across Canada, but we can't tell you how much it costs in this particular area. The response from the person asking was that he didn't want to pay for west coast ice-breaking because it was probably higher than his cost, so he wanted us to tell him how much it was just for his particular portion of the river. We were not set up as a financial system to be able to provide those details. It was a very realistic question, it was something we could have done, but the systems weren't in place at that time.
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So our financial systems will have to be modified to include full costing, which includes overheads and the allocation of other indirect costs, in order to provide that first principle, which is how much that activity costs overall.
I don't think there was any expectation.... There certainly was no target established for Agriculture and Agri-Food to recover 100% of those costs. But because of the nature of imposing user fees, we may not have the support information available in our normal financial systems to detail it enough right now in order to satisfy specific questions that would arise from producer groups or from associations. That we are working on.
Dr. Olson mentioned the Pari-Mutuel Agency. It has very detailed costing because they're in that business and have been for several years. In some cases, though, it's a question of working that through.
I would suggest that on average, outside of those few agencies that recover full costs, our levels are probably between 15% and 20%. I'm sure the Auditor General would support that. So although we're no where near full cost recovery, we realize how important it is to have that information available to associations and to industry so that they can understand and work with departments on reducing those costs.
The Chairman: Dr. Olson, did you have just a comment?
Dr. Olson: If I may, I have a couple of comments.
In terms of the available resources, how we handle the revenue targets, and what we're currently seeing in terms of a shortfall on cost recovery, I refer your member to page two of the deck I provided.
I have basically two choices from an operating point of view. Either I find some way.... Well, there are really three choices if you put them all together. First, I can go back and I can ask for more money, but I think that under the current fiscal situation of the Government of Canada we and all the other departments of government are trying to bring the costs down. Secondly, I can look at alternate sources of revenue. That's always an option. As I said, with a free goods issue, revenues provide a means of allocating resources. And the third option is to cut the level of service.
I have basically a fixed budget to operate from. I need those kinds of tools in terms of making that decision. When I look at what my options are, I have to take into account a couple of things. First, health and safety is our number one priority. The rules of the road include health and safety. Whatever we do, I have to ensure that those two things are not in any way compromised. Second, we're a trading nation, and whatever we do has to ensure that we continue to be able to trade with United States and other countries. We have to ensure that they will want our products. I have to take that into account, and all of that process is complex. It's a process that takes a considerable period of time.
When we were faced with the first set of budget cuts - and I should tell you that if I recall correctly, and maybe Mr. Miller can correct me, I think there was something of the order of twelve or thirteen previous budget cuts leading up to the series that we're going through right now - we had a couple of choices. We could have made a unilateral decision in terms of program reduction, or we could consult with industry. Without a tool such as cost recovery, obviously there wouldn't be a lot of interest on the part of industry to negotiate or to discuss how program changes might be made. That's a key function of the cost-recovery initiative.
In terms of public and private good, I think Mr. Timmins' information makes it clear, Mr. Chairman. We're a long way from dealing with public good. We're talking about a current cost recovery of something to the order of 15%, which is a long way from the public good side of the work that we do. From my point of view, in watching negotiations, it's always interesting to see how a service that is about to be cost-recovered moves from being a benefit to industry to being a public good. That's an interesting negotiation at the best of times. I very much understand why industry would take that point of view. My primary concern, though, is dealing with the free good issue, and bringing some market forces to bear on resource allocation and therefore on the decisions that have to be made in terms of programs.
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As you will see from page two, Mr. Chairman, we need a tool, and cost recovery in fact has provided that tool for resource allocation.
The Chairman: Okay. We're going to have to move on now. Mr. Chrétien.
[Translation]
Mr. Chrétien (Frontenac): Before turning to the heart of the matter, I'd like to make two comments that might be of interest to Mr. Miller from the Treasury Board and Mr. Timmins from the Office of the Auditor General.
Mr. Miller, you said that in applying cost recovery, a laudable principle based on user pay, your aim was to reduce use. Treasury Board officials must feel quite uneasy when they are reminded that Ms Sheila Copps has been distributing $23 million worth of flags without asking for any payment. If the government wants to decrease use, then it has a strange way of going about it in this particular case.
Using the pseudonym Bob Sweater, Robert Gillet, a well-known Quebec radiobroadcaster, rang up the office responsible for distributing flags and said that we was interested in flying the colours from the cottages along the St. Lawrence River. A few days later, he received several thousand flags and banners to decorate these cottages.
I think it might be a good idea if the Office of the Auditor General and Treasury Board were to monitor whether all departments, including those engaged in propaganda, are respecting the principle aimed at reducing use in areas where there is not cost recovery and where this kind of handout is offered.
Now let me return to cost recovery. I am surprised to hear Jack Wilkinson accept right at the outset the principle of cost recovery when we members of Parliament, both from the opposition and the government party, have been receiving telephone calls from processors and farm producers to tell us about their worries and fears. This morning hog producers told us that in the U.S. cost recovery is practically nil whereas it is very high in Canada. Robert Weaver from the Canada Meat Council mentioned that the profit margin was scarcely 1% and told us that because of the dramatic drop in the price of beef this year, the margin would go down even lower than 1%, if not below zero. Mr. Weaver told us that this recovery amounts to an indirect tax on net revenue of 11.3%.
Mr. Jim Smith from the Canadian Pork Council raised the same concerns, noting that the Americans were buying more hogs on the hoof that are slaughtered in the U.S. and sold back to us in processed form. We are exporting our raw material and once again the principle of added value is being given short shrift. Bob Anderson from the Canadian Poultry and Egg Processors Council also remarked that in his sector cost recovery was non-existent in the United States whereas here it is at a substantial level.
I'd like to conclude with a remark about PMRA and make a point that was drawn to my attention by various representatives. Our domestic market is ten times smaller than that of the United States. PMRA wants to have cost recovery set at the level of 60% so that it can implement its pest control.
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Pesticides, fungicides and insecticides cost slightly more in Canada than in the U.S. Small producers of these insecticides and fungicides will have a great deal of difficulty competing with their American neighbours. In the case of PMRA, the desire to create jobs, jobs, jobs seems to be working the wrong way. We are going to be causing shutdowns rather than encouraging research in Canada because of the significant difference between the U.S. and Canada.
The basic principle is certainly a laudable one. In listening to Mr. Miller from Treasury Board, I was impressed by the concept of reducing use and the principle of user-pay. You refer to the ice breaker breaking up the ice on the St. Lawrence River. If Canada Steamship Lines wants its boats to ply the river, it can pay the bill. If another three feet of ice form and the boats want to go down the river again, they can pay another time. I agree with this approach and I think everyone does.
But there are specific cases where we have to take into account competition and the globalization of markets and we should be careful not to be masochistic and cut off our nose to spite our face by absolutely insisting forcefully on cost recovery. The United States is our main competitor and our biggest trading partner in agriculture and in other areas. We are going to have to be very careful in this respect.
In conclusion, I'd like to hear the comments of all those who have an answer to give me. Once again, Jack, you gave me a fright this morning. It's the first time you've given me that kind of shock. Maybe I misunderstood your presentation. Well, I hope I misunderstood.
[English]
The Chairman: I would guess that Mr. Wilkinson might wish to comment briefly.
Mr. Wilkinson: I would, because I think something was missed in the interpretation, quite clearly, and I would like to clarify.
I believe I added a couple of words, which were that Canadian producers will pay their fair portion of cost recovery, and it clearly is not defined as in what has happened with the negotiations with Ag Canada. I think there is a desire, where we see benefit coming back to producers, to pay a portion of that cost in the long term, that it is one way of maintaining that fee. But it is totally dependent on an up-front assessment of where that benefit is, and the two other principles very clearly are worked on: avoidance, and basically trying to lower the cost of that.
I disagree fundamentally, and I think this is where part of the problem is with Mr. Olson. He says he has two options, and one of those is the withdrawal of service. He never mentions the option of lowering the cost of that service. This is fundamentally where the problem is. It is not up for discussion, the way agencies do business. It's either this or that.
Who could ever talk about the government contract, for God's sake? Who are we to have an opinion as to somebody working eight hours a day or the fact that somebody has to be a veterinarian every 10 feet versus 15 feet, or a technician or whatever, to meet these standards. None of that is up for discussion, or very seldom. It's always that we have to maintain our standard this high to be internationally competitive, and I have a choice: it's either that or I withdraw service and the sky falls. That's not the way the world works in putting economic pressure onto this. In case after case, people are saying if we don't need that piece of paper, why are we doing it any more - when the economic overlay is put up - only to find out that wasn't part of the discussion.
The only point I want to leave here is, if everything is working so well.... And I hark back to a couple of years ago when CFA first had its resolution around cost recovery, and a certain individual, a senior bureaucrat in Ag Canada, came back to us afterwards and pointed out very clearly, if cost recovery was such a big issue to your members, how come we're able to cut a deal with every one of them?
Now a little bit of time has passed, and I would like to say that if everybody was feeling so good about this, how come organization after organization, processing group after processing group, maritime shippers, and the list goes on and on, are saying it is not working right? It is fundamentally flawed. It has to be fixed. Could we dump the public relations campaign and just get down to what's not working and see if we can fix it? It is not going to go away.
Thank you.
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The Chairman: Before I go to Mr. Collins, I'm going to take the prerogative of the chair and make a couple of comments.
I know the purpose of bringing everyone around the table today was to see if we could get at the realities of where we are. Maybe there will be some comments as participants answer questions afterwards. But it appears to me, and it has been summed up by a number of people already, that the problem we have, the reality we're dealing with....
Mr. Weaver listed a number of fees that are paid by the red meat industry in Canada that are not paid by the red meat industry in the United States. I raise the question, then: Do we have equality in competitiveness between the red meat industry in Canada and the United States? Sometimes I hear yes; other times I hear no. Both answers can't be correct.
Mr. Anderson outlined that there are hundreds of thousands of dollars of fees to the poultry industry in Canada, and there are zero fees in the United States. I raise the same question. Is there equality in competitiveness?
Mr. Miller, you said there's no way of assessing the cumulative effect of cost recovery and everything that goes with it, and it's up to the industry to do that. I believe your letter from the Treasury Board to us in August from Minister Massé basically said that, in the second-last paragraph on page two of that letter.
Right or wrongly, the industry is saying what the cumulative effect is. In answer to the concerns and the fiscal realities of the day, which we all recognize, isn't there anything we can do any differently? The chips will fall where they may, be that the effect on the horticultural industry or the poultry industry, the meats industry, or whatever the case might happen to be, whatever industry is there. Is this the only way it can be done?
There have been suggestions, and we all have to admit that it's always easier to look at it from the other side of the fence or the other side of the desk.
I don't know whether I've made myself clear, but from what we're hearing - I'll repeat it again - every statement we've heard can't be correct because they are at opposite ends of the spectrum as to the realities of cost recovery being done and the effects of it as it is at the present time. There may be some comments as people go along, and I'll leave it at that.
Mr. Collins, you're next on the list, and then Mr. Calder.
Mr. Collins (Souris - Moose Mountain): Thank you, Mr. Chairman. You stole half of my concern. It had to do with a comment that was made that inspections in the United States are zero. I believe Mr. Anderson said that was zero.
If I were somebody in the United States, I would suspect that somewhere along the line somebody pays for that inspection. So it's not zero. Whether it's taxpayers or someone else, somebody pays the bill.
Mr. Anderson: Taxpayers.
Mr. Collins: Yes, so it's not zero. For you people it may be, but I pay whether you.... All right? I think that point has to be made.
I think the question is not so much that as how much is it in relation to your doing the service and the good that you provide, as opposed to the United States. I think for once we should have some kind of a factual balance there.
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Mr. Weaver, I am impressed that we went from a million, or half a million, to a million and a half hogs in the United States. I happened to be in a city where we opened a producer plant for processing hogs, a very modern, state-of-the-art, good program. It didn't last a year. The problem wasn't that we couldn't get the hogs or we didn't have the facilities. When we moved them down to the United States, as soon as the fellow saw even a mark on it, he'd send the whole bloody load back. So we went from a process that was doing some of the work at home to completely shelving the program and closing it down. I don't know what the hell that facility is doing now. Moose Jaw had the same thing with shipping into the United States.
I don't know how we visit that, but I would be interested in knowing. I would like to see that happen. But we have to have people down there who aren't going to be the jackasses of the world, and because there's a mark on one loin send the whole load back. With the cost of doing business, that's not cost avoidance - it comes right back. That's serious.
To Dr. Olson and to David: would that we could have people from your departments go and work in the private sector along with the people who are facing those issues to see how the problem spins out for them, whether it's in horticulture or whatever. I think we'd get a better appreciation of other people's problems if we had an opportunity to work alongside them and see what they are facing in costs in the real world, in writing cheques and doing business. If we could do that, I think it would help eliminate some of the paperwork when it comes to analysing this.
The bottom line, David, is how we, in comparing our costs with the United States', look at it, when somebody says to me that it's zero down there, and here it is up here. Are there checks and balances? Where do they shift off that cost?
My final analysis is that using pari-mutuels is a totally different item. That is not a good and service, as I see it, in terms of a product that we need on an everyday basis. I know the cost of doing service in the pari-mutuel business, but I think that's a little different analysis than talking about foods and groceries and that kind of thing.
The Chairman: Dr. Olson, do you wish to comment?
Dr. Olson: Thank you very much, Mr. Chairman. I was thinking of those who enjoy the gambling life and very much appreciate it as part of their -
The Chairman: Dr. Olson, you know that anybody connected with agriculture must enjoy gambling. There is no bigger gamble.
Dr. Olson: The Canadian Pari-Mutuel Agency provides consumer protection by doing the audits of how the dollars are handled in the racing process. Also, a significant portion of the cost to that agency is related to drug testing for the new and creative ways people find to make animals move faster. So it is a form of consumer protection.
Also, quite fairly, there is a health and safety connotation. Let's face it, when all is said and done, those horses get eaten in the end. So there's an issue of antibiotics and drugs. We need to know what's there.
Some hon. members: Oh, oh!
The Chairman: Members, it looks like we have a 30-minute bell.
There is one thing I want to get some explanation on, and Dr. Olson, you have the floor and I know you want to. It's the comments some of us have made on zero versus hundreds of thousands and the competitiveness between the two. Go ahead, Art.
Dr. Olson: Thank you very much, Mr. Chairman.
The Chairman: Oh, it's a quorum call. Go ahead.
Dr. Olson: The issue is basically this question of whether one looks at a particular service or looks at the cross-aggregate of services provided to an industry. You can pick any particular service and there's a difference between the United States and Canada.
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Bob is correct on the point that the U.S. does not charge for export certification or for import re-inspection, but they do provide a mechanism that allows the private sector to charge. These are the border inspection sites. If I recall, the fee is $50 U.S. for every import shipment and about $400 for handling re-inspections.
We tried to look at the gross impact. We are two different systems with very different forms of government. We looked at the total impact on the industry. And you have to look at it that way if you're going to assess the impact on competitiveness rather than looking at a series of different services that make up that gross aggregate.
I refer you to page 18 in the deck I've provided. The Americans have had a lot more experience than we have in this area and have an adjustment process. They've also ignored equity between commodities. For instance, they charge for export certification of live animals and plant products, but not for meat. They have not built a system based on equity. We were in the position of being able to start a process. And as one of its early goals we set the principle that I referred to earlier: we were trying to achieve some measure of equity between products of comparable risk.
In terms of expenditures and revenues for red meat and poultry product inspection in 1995-96, the figure on that table on page 18 covers it reasonably well. I can give you specific figures if that would be useful to you. In terms of our fees, we're looking at a 17% cost recovery for inspection and 100% for grading. The USDA is looking at 16% for inspection overall and 100% for grading.
Most of the revenue on the inspection side is in fact the overtime fees that are applied by USDA against the operation of plants. Our overtime fee relates primarily to the half-hour difference that we're obligated to under the existing collective agreement. That's an area we intend to deal with under the Canadian food inspection agency, along with the problem Mr. Timmins referred to in terms of accounting systems. We'll be moving to an accrual accounting format that will allow us to get at the figures more effectively and appropriately.
Mr. Anderson makes a point with regard to specific services. I'm making a point with regard to an overall impact on an industry. That's the difference between the two points of view.
The Chairman: Mr. Weaver.
Mr. Weaver: My point is that no matter who pays the user fees in whatever country, we operate in a North American market. If my neighbour is charged user fees and I am not, I have an advantage over him. For red meat, this applies within the country as well without, because it's a North American market. As well, it applies to provincially inspected plants versus the federally inspected ones. If the federally inspected plants are charged user fees and the provincially inspected or municipally inspected plants are not, that represents an impediment as well.
Since the user fee adventure began in March 1994 our industry has been horrified. As a trade association head I think they are very united on this issue. They think this is the worst thing that's happened to them in decades. They talk about creeping inflation. This is a phrase they use.
Since 1994 we've been trying to find out what the federal government's intention is with regard to user fees, because this activity has introduced the element of a bad business environment. The companies try to make short-range and long-range plans as to how their company's going to operate, how much they're going to produce, how many plants they will have, how much they will invest in the country and how many employees they will use, but this remains a mystery. We've never ever been able to get an answer from the government about what your intentions are or how far you're going with these targets.
I would like to ask Mr. Miller about this and I'd like to receive some sort of response. What are you going to be doing one, two, three or four years from now with regard to user fees? The people we've dealt with either didn't know or were afraid to tell us because of the effect it would have on the industry. We've never been able to get any guidance on that.
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The Chairman: Maybe before Mr. Miller responds Mr. Anderson would like to make a comment. And maybe Mr. Timmins has a comment.
Mr. Anderson: This is really directed more to a couple of comments made by Dr. Olson about the table on page 18, which indicates that in the U.S. 16% of the budget is being recovered for inspection-related services.
But I believe you commented that they recover significantly more than that for vegetables and fruits or whatever, and zero for meat. For our members the inspection cost related to apricots or peas is academic. We compete in the meat business. I'd like to hear your comments about that.
Secondly, with respect to the comment related to overtime, as you know, the structure in the U.S. is much more oriented towards a three-shift - either five days or seven days - operation than Canada's structure is, so they generate huge dollars relative to overtime. It's academic. The fact is that in Canada we start to pay overtime after seven and a half hours. There are less dollars generated because the Canadian industry typically doesn't work on the same schedule as those large U.S. plants do.
Perhaps you could comment on those points.
Mr. Miller: On the question of exactly where we're going with user fees, one of the other initiatives that we have had the opportunity to discuss in front of this committee is our project for improved reporting to Parliament.
A key cornerstone of that is providing Parliament with plans that reach at least three years into the future, that have priorities and that set targets for financial terms, performance, and results expectations. Those will be introduced for the first time this following March as part of the pilot process, and the agriculture department is one of our pilot departments. They also provided a performance document to this committee at the end of October.
I cannot comment on what will happen in future years in terms of the government. I can tell you, given the current scenario, that the Department of Agriculture and Agri-Food does have a good idea of the relative level of resources that will get them to the year 1999-2000. Those are fairly stable. For the first time in fifteen years, the exercises of program review have allowed Treasury Board to establish what I would consider stable numbers for more than a year's planning.
For the last two years we've been successful in not introducing short-term change. So although I certainly can't decide what the Minister of Finance may do in his next budget, for planning purposes we're looking at a fairly stable environment.
And although there may be specific initiatives that will be introduced by ministers in order to deal with some of their program priorities, there is no overall emphasis right now on doing anything new in terms of reductions or in terms of cost recovery that isn't already well known to those departments, and that should not be reflected in those plans that will be put forward to this committee next March.
Mr. Anderson: What about percentages?
Mr. Miller: There are targets. The application of the percentages is up to the individual minister as to how he or she wants to apply them. There are targets established, but the Treasury Board does not dictate how to reach those targets. It's an overall objective. It is up to individual ministers to decide how they will go about it.
I should add that from the international perspective, as of this week I've been asked to participate with the United States General Accounting Office on a study of external charges and how we do it in this country. They've asked Australia to participate as well. They obviously plan to do a complete review of their process down there. And it's not just for the agricultural industry. This affects all user fees and all cost-recovery initiatives. That's just under way. Hopefully we'll have some better information and comparability.
I know Dr. Olson spends a fair amount of time dealing with his counterparts in the United States in finding out exactly the specifics of what's going on with the industry by product type.
The Chairman: Dr. Olson, do you wish to comment?
Excuse me. I stand corrected. Apparently there is a vote twenty minutes from now. We have a maximum of fifteen minutes left. Unfortunately, that will use up the time we have for the room.
Art.
Dr. Olson: I have three comments. Firstly, in terms of the point about my commodity versus your commodity, that's a process the U.S. used, whereas we tried to bring equity between commodities of comparable risk. The alternative is to pick a winner and a loser. We chose not to do that. We did it on the basis of comparable risk.
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In terms of Bob Anderson's comment regarding inspection, overtime, and what have you, I'll go back to my point about the gross aggregate cost faced by an industry. You have to look at the overall impact, not at the impact of particular services, on the industry if you're going to assess the competitive impact.
In terms of targets, Mr. Chairman, I think I've already made the point, but I'll make it again. We exceeded the target in terms of cost reduction, and we're a long way from meeting the one on cost recovery. That has a significant impact in terms of my ability to operate the food production and inspection branch, because I won't have the necessary revenues to pay for staff. We have to go through some mechanism of dealing with the resource allocation.
Mr. Wilkinson: I would like a point of clarification. My understanding is that there wasn't a separate target for cost reduction and cost recovery. How can the department meet the target for cost reduction, but not cost recovery, if in fact in numerous other discussions we've had in the past we explored all the possibilities of cost reduction? If we can meet the Treasury Board targets, then we don't move into cost recovery. It seems to me there's a slight difference here.
Dr. Olson: The targets that were identified in 1994, when the $70-million adjustment was made, were for a cost reduction of at least $24 million and a cost recovery of up to $46 million.
Mr. Wilkinson: So then you couldn't cost-reduce the full $70 million?
Dr. Olson: No. We could have cost-reduced, but at a minimum, we had to have a cost reduction of $24 million. We were given the option -
Mr. Wilkinson: If you could cost-reduce that, then how could you have met your target already of cost reduction? If the cost reduction could have been $70 million, then in theory we could be continuing to reduce and there wouldn't be this problem of not meeting our revenue target. So is this an internal decision in the department that in fact you would choose how much would be cost-reduced and how much would be recovered? You always said there was no such determination inside the department and that everything was up for grabs.
Excuse me, I'm almost sounding like an MP here. I apologize.
Dr. Olson: Mr. Chairman, if I could go back over it again, program review one, which was in the first year of the set of reductions, involved an overall target of $70 million. At least $24 million of that was to be achieved through cost reduction or cost avoidance. Up to $46 million was to be achieved through cost recovery.
We've exceeded the cost-reduction target. We're about halfway there in terms of the cost recovery. So the option left in front of us right now is whether we continue cost recovery or expand cost reduction. I'm dealing with a fixed budget, so the math ends up having to balance.
The Chairman: Stephen, you had a comment?
Mr. Whitney: Maybe I had an experience, Mr. Chairman, that kind of comes back to the part of the problem we're dealing with as a community. We've looked at this program sideways on the fresh fruit and vegetable program. It's quality assurance. We've looked at it to death since 1984.
We've just done a recent study to see if in fact we could take over and put that under some kind of a privatized agency status on a national basis under accreditation. I don't think it's going to happen, for a whole bunch of reasons, not all of which are related to departmental issues. It's more from an industry standpoint.
Having said that, the one thing we found is that, as we move along, the cost-recovery issue has promoted cost avoidance very quickly. Industry had opted out of services before really thinking about the consequences of that. So the option isn't really there to bring the service back, because it has disappeared.
The department is caught with a problem. They have certain costs internally that they can't seem to get at. We did a study in which we asked what it would take us to run something on a privatized basis. We figured it would be about 88 FTEs, plus some capital expenditures. The FTEs allocated to this program currently are 229.
Even if our figures are somewhat off, the magnitude of the difference suggests to me that this is where part of the problem is. We're targeting $5 million in revenues as per the current agreement we have on cost recovery. The second phase is to kick in on April 1. We're not going to achieve it because our industry keeps deregulating certain components of the program.
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It's interesting because this program has a certain number of activities that are totally voluntary. As you shove those prices up, people start to look at the value of the service and a lot of them are opting out. So you don't even have to deregulate in some cases because nobody's picking up the phone and calling for the service.
That is exacerbating the problem to the point where if we go back to the department, which we will shortly do, we will need Agriculture and Agri-Food Canada in order to do certification of potatoes, onions, and field tomatoes to go to the United States. There's no option at this point.
If everybody else is bailing out of the program, are we just loading costs back in that can't be reduced? That's part of the problem, and that's what Jack was talking about.
The Chairman: We're down to about seven or eight minutes. Do you wish to make a quick comment to that, Art? There are a number of MPs who wish to make comments yet. We're just not going to have time, unfortunately.
Dr. Olson: Steve makes a very clear point why we had to deal with the free goods issue. We have three times the level of service the industry side itself says is necessary. If I touch that level of service, boy does the noise level go up.
We've tried to find a mechanism to adjust that level of service. As Steve has indicated, putting a price on it has tended to bring the level of demand down, and will over time change the program to something industry feels is more appropriate in terms of the kind of service provided by government.
The Chairman: I'm going to go to two or three people for comments and then wind it up with general comments. We'll hear from Murray for a couple of minutes, then Mrs. Ur for a couple of minutes, and then Joe McGuire. We'll use the rest of the time for comments back.
Mr. Calder (Wellington - Grey - Dufferin - Simcoe): Thanks, Mr. Chairman. I can see we will have to go through much more of this exercise you're doing now because we are basically into the ``are too'', ``are not'' loop on this issue.
I asked questions about the food inspection agency when we were talking about a $44 million savings, which was 10% of what the budget was going to be. Yet nobody knew what the figures were. We're still dealing with the problem with PMRA.
I just listened to David a little while ago talking about the Great Lake shippers and how they've taken $35 million to $40 million. They've found out how to be cost-effective, yet we don't know how much it costs us to ice-break on the St. Lawrence Seaway.
If we're going to start working together like this we will need better lines of communications than what exists at the present time. I don't know whether that's going to be through a third party approach on this issue or not, but quite frankly right now it's obvious to me it does not exist, and I'd like some comments on it.
The Chairman: Mrs. Ur.
Mrs. Ur (Lambton - Middlesex): I have a question also. The IPMAC has met twice in the past year - in 1995 and 1996 - but has not asked for a review or to consider costs. In the real world in agriculture, our Canadian farmers cannot operate without any cost factors - they wouldn't be there. I find it very unusual for a department to go in and not really know the assessment of the cost for the cost recovery. That's not the way it happens in the rural communities.
It has been said time and time again that producers want harmonization. They saw it as an opportunity to utilize resources and data from other countries. That does not appear to be working and it seems to have a negative impact.
The EPA registered 40 new activities in the U.S. with 180 plus people. The PMRA registered 19 new activities with 201 people. The EPA guaranteed 400 emergency state requests and exemptions in 1995. Canada has done one in two years. That's not accountability in my farming books. We have a problem.
The Chairman: Mr. McGuire.
Mr. McGuire (Egmont): Thank you, Mr. Chairman. I'll be brief.
In Mr. Timmins' presentation on page 3 he says that many affected businesses operate in internationally competitive markets for various reasons, and it is often difficult to identify comparative costs in other countries. That statement was supported by almost every presenter around the table.
When we look at Dr. Olson's deck where he compares large and small seed-potato farms, I can understand why it would be difficult, because I don't follow it at all. Idaho would probably have three times the rate of production in potatoes as Canada would have. I think that would screw up the whole presentation here.
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In addition, the new marine service fees that Fisheries and Oceans will be charging are not included at all. So I'd like to know from Dr. Olson what effect on Canada the new marine inspection fees of $20 million, $40 million or $60 million coming in the next three years would have on his presentation.
I'm doubly concerned, not only with the marine fees, but with the impact on our seed potato industry. We're the second-largest exporter of seed potatoes in the world outside of Holland. Participation of farmers in the quality seed program dropped from 100% to 35%, so to me it looks like we're going to destroy that particular industry in Canada. I'd like to have a comment from Dr. Olson on that.
The Chairman: Dr. Olson, you may wind it up, because we have only two or three minutes.
Dr. Olson: You're back to asking what portion of those fees would apply to P.E.I., for instance, and I don't have that figure in front of me.
In terms of the potato figures, my understanding is there was a very positive and cooperative negotiation around the issue of cost recovery on the potato issue. There was agreement to use a bunch of things. In the 1994 crop year there was an agreement to maintain fee levels that were comparable with the U.S.
In looking back at that data, there are two things. The 1994 crop year was one of the highest return years we've had in decades. I admire the positive attitude of the people who were around the table in picking the best ever crop year as a base on which to start the cost analysis.
Second, you made a very valid point regarding the levels of returns. One of the things that again speaks to the optimism of the potato industry is it was comparing itself to the Columbia basin in Idaho, where the yields are at least double Canadian yields. So we're going back to that to take another look at those fees.
It's also a very low-market industry and we want to ensure that the level of cost recovery is more commensurate with the kind of competitiveness the industry has to deal with. But there is the reality that without that revenue I can't provide the level of services.
The Chairman: Bob.
Mr. Anderson: If the conversation this morning has done nothing else, I think it's kind of crystallized in my mind where some of the difficulty in this whole cost recovery area is. To say that Canada has made the decision that the risk should be comparable among commodities and we're not going to pick winners and losers - I think you've just done that. You've made meat a loser and you've made fruit or vegetables a winner by assigning different cost-recovery levels. But I don't think there's any argument from you, Art, that cost recovery for inspection services for meat in the U.S. is zero.
Secondly, the aggregate comparison argument works on a cents-per-kilo basis if you add in the U.S. overtime, the U.S. grading charges, etc. But it's also true that if you move one of our member's clients across the border to New York State or whatever, the day you move that bigger cost there, the cost drops by the cost of those inspection fees. Is that true?
Finally, we've had assurances from Minister Goodale and Minister Eggleton, in his former portfolio, along the lines of what Jack was talking about, that if you can over-achieve in cost reduction and cost elimination, that should factor back against cost recovery. It only makes sense. You're looking at the bottom line.
The Chairman: That's three bells, folks. We have only five minutes to get everybody to the House.
Mr. Wilkinson: I want to thank the committee very much for having the group here. I thank the committee for doing work in this area, but I would like to make it perfectly clear - as you can see at the end of this meeting - we haven't solved our problem yet. Mr. Olson will not go back to his department and do anything differently tomorrow than he's done for the last five years. So we will still have our problems. His job career is on the line if he admits he made a mistake, but every time we have a meeting, group after group says things aren't working right.
The Chairman: Dr. Olson.
Dr. Olson: I think that's a really unfortunate comment. With regard to both Mr. Anderson's comments and Mr. Wilkinson's comments, this has been a very open process. I can cherry-pick comparisons with the United States and I can also deal with the resource allocation issue.
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Some of you are aware there was a pre-budget consultation a few weeks ago, and one of the biggest pressures that I think faces all of the members of Parliament is the issue of resource allocation between competing needs and desires. One of the tools we have available is cost recovery to deal with the free good issue. I think it's unfortunate that Mr. Wilkinson intends to personalize that. We have a job to do in terms of carrying out a health and safety, market access and consumer protection program. We're trying to do that within the resource levels we have available to us.
Thank you very much, Mr. Chairman. It has been a useful debate. I do agree with Mr. Wilkinson on one point: it's not going to go away.
The Chairman: I want to thank everyone for coming. We have a couple more meetings of the committee this week. Hopefully, the committee can take five or ten minutes tomorrow to discuss where or how we might wish to comment and to whom on today's meeting. The purpose was to bring everyone around the table today so each one's views could be expressed.
There is a challenge and an opportunity out there for us to make our industry as healthy as it possibly can be under the realities we're dealing with. Those are not only fiscal realities, but the realities of continuing to show and prove to the world that our agrifood commodities are the safest and the best in the world.
Again, I thank everyone for his or her participation. And we'll see you, members of committee, tomorrow.
The meeting is adjourned.