DETERMINATION OF FOOD PRICES FOR RETAILERS

According to Indian and Northern Affairs Canada (INAC), the formulas used by retailers to set retail prices under Nutrition North Canada (NNC) should not vary much from formulas they used under the Food Mail program. To determine the selling price of a food item, retailers usually add a margin to the landed cost of a given product, which is made up of wholesale cost of the product itself, transportation (e.g. ground, air marine), insurance, taxes and levies, etc. The difference between Food Mail and NNC will be related to how transportation costs are calculated:

• Under the Food Mail program, transportation costs include the total of:
  • freight cost to bring product to specified entry point;
  • plus Food Mail air shipping rate (e.g. $0.80 per kg + $0.75 per package for perishable food);
  • plus ground transportation at destination.
• Under the NNC program, transportation costs will likely include the total of:
  • freight cost to bring product to the most efficient and cost-effective air staging point;
  • plus air shipping rate negotiated between retailer/wholesaler and air carrier;
  • plus ground transportation at destination;
  • minus program subsidy.

DETERMINATION OF FOOD PRICES FOR WHOLESALERS

As with the process for retailers, INAC expects that formulas used by southern suppliers to set selling prices to northern clients under NNC should not vary much from formulas they used under the Food Mail program, except with with respect to how the net transportation cost will be calculated (see examples above).

The department of INAC understands that southern suppliers have different selling prices for different clients depending on purchasing volumes, and arrangements between southern suppliers and northern clients can vary. In some cases, the southern supplier pays the transportation costs and recovers the cost, sometimes plus fees, from their client. In other cases, the cost of transportation is paid directly to the air carrier(s) and/or freight forwarder(s) by the northern client. In any of these cases, the southern suppliers will need to fully pass on the savings (i.e. subsidy received from INAC) to their northern client in the form of a reduction in the invoice.

The department of INAC further notes that over 80% of the program's funding will be provided directly to northern retailers via a funding agreement between them and INAC, and that southern suppliers will receive direct funding, also via a funding agreement, only for shipments made to individuals (personal orders), social institutions, restaurants and small northern retailers who may not have the capacity to manage the requirements associated with a funding agreement. These northern persons and businesses will not have to do anything to benefit from the subsidy except ensure that they order from southern suppliers that are registered with the program and ensure the supplier is passing the subsidy on to them.

ILLUSTRATION OF HOW PERSONAL ORDERS WILL WORK

The following is an example provided by INAC illustrating how the personal orders system will work under the NNC program:

• Jane from Coral Harbour wants to order 10 kg of apples directly from the South. In order to benefit from the subsidy, she can order those apples from any of the southern suppliers registered with the program (this supplier can be located anywhere in the country[2]).
• Jane will order the 10 kg of apples from Grocer X, whether via e-mail, fax, telephone, or the supplier's website.
• Grocer X will prepare the order and the invoice which will show, for example:
  • 10 kg of apples:        $40.00
  • Shipping:                   $38.00
  • NNC subsidy:           -$30.00 (10 kg x $3.00/kg for Coral Harbour)
  • Total invoice:              $48.00
• Arrangements for payment will be negotiated between Jane and Grocer X.
• Grocer X will add these 10 kg of apples to its claim at the end of the month and INAC will reimburse $30 to Grocer X.

TRANSACTIONS BETWEEN SMALL INDEPENDENT AND MAJOR NORTHERN RETAILERS

In the case where a small independent retailer in a small isolated community sources food from a major retailer in a larger urban centre in the North, INAC states that:

• If the independent retailer has an agreement with INAC, it would include the shipment received from the major northern retailer with its claim for all eligible items shipped to its store for the month and provide all required supporting documentation. The major northern retailer would not be eligible to claim a subsidy for these products as this would be considered "double dipping."
• If the independent retailer does not have an agreement with INAC, it must order eligible items from registered southern suppliers to benefit from the subsidy that would be claimed by the southern supplier. If the independent retailer determines that it would still be cost-effective to purchase eligible items from the major northern retailer, the small retailer in that isolated community will only benefit from the subsidy rate for the large urban centre in which the major retailer is situated.

PROCESS OF SUBMITTING CLAIMS TO INAC

Information obtained from INAC indicates that, on a monthly basis, all northern retailers and southern suppliers that will have an agreement with INAC will need to submit a claim for payment of the subsidy. This will consist of:

• A claim form that will show the weight in kg of eligible items shipped for the period, per community and per level of subsidy (and per client type for southern suppliers);
• A report presenting the content of the shipments claimed, detailed by item category (e.g. apples, eggs milk, etc.) and by community (and by client type for southern suppliers); and
• Supporting documentation to provide the proof of what was shipped (e.g. invoices) and that it was flown in to its final destination (e.g. waybill). INAC notes that retailers and suppliers with very high volumes of shipments may be asked to keep supporting documents (i.e. invoices and waybills) for audit and inspection by INAC instead of submitting them systematically every month.

INFORMATION TO BE DISCLOSED TO THE PUBLIC BY INAC UNDER ITS CONTRIBUTION AGREEMENTS WITH ELIGIBLE RETAILERS AND WHOLESALERS

In addition to practical information such as program operations, the eligibility list and the subsidy rate schedule for all eligible communities, INAC will also post on its website information collected from recipients through reporting requirements. This includes:

• Average food basket prices per community for the period;
• The weight of eligible items shipped during the period, detailed by community and item category (99 categories have been created to classify eligible items).
• The total amount of subsidy provided to each recipient and for each community.

There will be two different types of audits performed under NNC, claims audits and recipient audits, with both applying to all recipients of the subsidy, whether they are northern retailers or southern suppliers:

• The claims audit will consist of verifications of the claims submitted by recipients against the supporting documentation to validate the accuracy of the claims and the amounts to be paid:
  • These verifications will be made on a statistical sampling basis and the level of claim lines to be verified will be based on the risk level of each recipient.
  • Initially, a higher percentage of claim lines will be verified against supporting documents for all recipients.
  • As claims are submitted, statistical information on the accuracy of the claims for each recipient will inform their individual risk level, with more verification focused on higher-risk recipients.
  • Complaints or other information brought to the attention of the Department will also play a role in the determination of the risk level of each recipient.
• The recipient audit will consist of periodic overall recipient verifications to ensure they comply with all the requirements of their contribution agreement, including providing visibility for the program, passing the subsidy to their customers, meeting reporting requirements, etc.
  • These audits can also be used to verify the recipients' processes and systems so that necessary controls are in place to ensure compliance with program requirements.
  • Frequency of audits will depend on the determination of risk level.
  • Before a contribution agreement can be finalized, a risk assessment of the recipient must be completed, which will be used to build a multi-year recipient audit plan for the program.
  • The Department intends to perform these audits on every recipient at least once within the first couple years of the program.
  • Complaints or other information brought to the attention of the Department will also play a role in the determination of the risk level of each recipient and could trigger ad hoc audits.

DETERMINATION OF FOOD PRICES FOR RETAILERS

According to INAC, on average, the Canada Post Corporation pays about 36 cents per kilogram more than what retailers pay to ship to eligible northern communities. This was calculated in the following way:

• For each community (69) where at least one major retailer operates, information provided by these retailers was used to determine the cost to ship a kg of food. In communities where more than one retailer operates, the lowest shipping cost was used (see table below).

Table: Shipping Cost (Food Mail) vs. Market-Driven (Nutrition North Canada)

	Retailers	Canada Post	Equal	Total
Who gets lower shipping cost?	54	14	1	69
% of total perishable weight shipped	91%	8%	1%	100%
Average shipping cost per kg (approx.)	$3.31	$3.67

Source: Based on data provided by INAC, submission to the Committee on December 13, 2010.

• These shipping costs were compared to the price paid to air carriers by Canada Post to ship the same kg of food for every community.
• The results of this comparative analysis show that in 54 of these communities, the rate that Canada Post negotiated with air carriers is higher than the rate negotiated by the retailers, and amounted to an average difference of $0.36 over the 69 communities.
• Based on this estimate, the Department concludes that, due to the stronger negotiating power of retailers relative to Canada Post, the introduction of NNC is expected to save the government over $7 million per year through market negotiated shipping rates.
• Cautions related to data sources and simplifying assumptions:
  • Canada Post's rates were based on 2009 shipping costs, excluding NAVCAN costs or fuel surcharges (i.e. the full cost to ship a kg of food in 2011 would be higher than the rates used for this analysis).
  • INAC notes that the retailers' rates used in this analysis are less precise than those obtained from Canada Post for the transportation subsidy, as the rates negotiated between retailers and airlines are confidential.
  • INAC determined approximate rates based on information provided by the retailers, who were asked to review the list of rates INAC determined and provided some additional information to correct some rates where errors were significant.
  • INAC states that the final list of shipping costs per community used with this analysis was vetted by the retailers as being generally very close to real costs.
  • INAC believes that the actual average difference between Canada Post and retailers' rates to be higher than $0.36 kg.
  • INAC further states that the shipping rates negotiated between Canada Post and airlines, and the shipping rates negotiated between retailers and airlines, are proprietary information and are therefore confidential. As a result, INAC states that it is not in a position to provide specific examples of the differences in shipping costs for specific communities as it would breach the confidential nature of this information.