Proceedings of the Standing Senate Committee on
Agriculture and Forestry
Issue 13 - Evidence
OTTAWA, Tuesday, June 20, 2000
The Standing Senate Committee on Agriculture and Forestry, to which was referred Bill C-34, to amend the Canadian Transportation Act, met this day at 3:33 p.m. to give consideration to the bill.
Senator Leonard J Gustafson (Chairman) in the Chair.
[English]
The Chairman: Honourable senators, today our committee will hear two ministers on Bill C-34 to amend the Canada Transportation Act.
The ministers have a time constraint. The Honourable David Collenette, Minister of Transport, he can be with us until four o'clock. The Honourable Ralph Goodale has another meeting at five o'clock. We welcome you here today on this very important bill, Bill C-34.
I wish to make some opening remarks before I call upon our witnesses.
This committee has worked diligently on the issues related to the state of agriculture in Canada, and more particularly the grain industry in Western Canada. We have been particularly aware of this transportation bill since it will touch on the well-being of farmers in Western Canada. I welcome you here, Mr. Minister. Would you begin, please?
Hon. David Collenette, Minister of Transport: Mr. Chairman, I am happy to be here with my colleague, Ralph Goodale. However, I apologize that my time with you is limited since I must be in Toronto to attend another engagement this evening. Mr. Goodale will answer all of your questions. I shall put him in the hot seat. We have worked together collaboratively on this.
As you know, on May 10, 2000, Mr. Goodale, Mr. Vanclief, the Minister of Agriculture and Agri-Food, and I announced these measures to reform our grain transportation handling system. This particular bill is an important part of that overall effort to give needed savings to prairie farmers while improving the accountability and efficiency of the system.
The bill brings important changes on four issues. A cap on railway annual grain revenues replaces the maximum rate scale in sections 150 to 152 of the Canada Transportation Act. This increases price flexibility and efficiencies while lowering freight costs, for an average savings of $178 million. These are savings that the farmers will see. It is important that the producers are the ones that benefit from this package. However, we do feel that it is a balanced package.
The figure of $178 million in estimated savings is based on an effective rate for August 1, 2000 under the current law of $32.92 a tonne for a typical crop of 30 million tonnes. The government's May 10, 2000, decision sets the new revenue cap at $27 a tonne, which is a reduction of 18 per cent.
Shippers on branch lines will be protected from excessive rate increases as tariff rates for single car movements on branch lines are not allowed to exceed mainline rates for similar traffic by more than 3 per cent.
We are adding to the current final offer arbitration provisions a shorter, simpler and less expensive mechanism that would be put in place for smaller shippers. Furthermore, final offers will now be submitted simultaneously instead of sequentially, as is currently the case.
Mr. Chairman, the third major amendment contains measures to help establish short line railways and safeguards for existing short lines and for shippers on the branch lines. The Canada Transportation Act introduced in 1996 includes measures to help promote short line railways. We believe at Transport Canada that this particular provision has been quite successful. In fact, about 80 per cent of all the lines that have been offered for abandonment by the railways since that period of time continue to exist as short lines.
During the grain consultation process, some problems were identified that are connected to branch lines. This bill will continue to encourage the formation of short lines in all parts of Canada. It will also help communities that lose a grain-dependent line by having the railways provide transitional compensation.
We will protect shippers and communities from any carrier decisions to differ maintenance or to lower service levels on a grain-dependent branch line in order to make it uneconomical. The government will also mandate the Canadian Transportation Agency, upon complaint, to investigate and initiate remedies where it determines that carriers took such action.
The proposed amendments ensure that, if a segment of grain-dependent branch line is transferred, the remaining portion of that line must be maintained for three years. With this provision, a shipper and a short line railway will have enhanced stability.
The fourth legislative initiative includes measures to allow the government to collect and to convey information to a third party for the purpose of monitoring the results of these measures. We are taking steps to assure that this independent, private sector third party will preserve the confidentiality of any information received.
The government supported an amendment adopted by the House of Commons Standing Committee on Transport that provides that the Minister of Transport shall make an annual report to Parliament on the monitoring of the grain transportation and handling system.
Mr. Chairman, before concluding, I wish to reiterate that this was a very difficult process that took nearly three years to conclude. In the summer of 1997, after I became minister, I met with my colleagues and stakeholders in Winnipeg. We agreed that the status quo was unacceptable, following the very bad weather in the previous winter which delayed shipments. We agreed on the establishment of a mechanism whereby we would appoint a prominent Canadian to look at the issue. We approached Mr. Estey, former Supreme Court justice, who gave us an excellent report. Subsequently, Mr. Arthur Kroeger, who I believe is coming to see you this afternoon, former deputy minister of transport, undertook to put some flesh to the framework and the conceptual analysis done by former justice Estey.
Both these gentlemen are prominent. Justice Estey is a native of Saskatchewan, and Mr. Kroeger is a native of Alberta.
We took the results of their work, and we had extensive consultations with stakeholders and, obviously, debates. We wanted to shape the final package in a way that was acceptable to as many people as possible.
Our goal was to move towards a competitive system, but at all times keeping our eye on the fact that producers in Western Canada have had some difficult times, and that they should be the major beneficiaries of any reforms.
I believe that this is a start towards a more commercialized system. Some would say that we have leaned too far in one direction; that we have given too much to the producers; and that we have not changed the transportation mandate of the Wheat Board sufficiently. These are all legitimate criticisms from certain perspectives, but in politics you have to achieve the possible. Politics is the art of the possible, and we have to be fair and balanced while we move towards our objective.
I believe that once the benefits of the tendering process are seen, there will be calls by producers in Western Canada and supporters of the Wheat Board to move even further towards a more competitive system. That is, of course, what the grain companies and the railways want. I think that is what all of us want, in the name of greater efficiencies within the system -- a more competitive system that will provide Canada with more reliability as a producer and shipper, and provide more benefits to all of the stakeholders involved.
I was very pleased to work with Mr. Goodale and Mr. Vanclief on the file. It was a difficult one that required a lot of consideration, but I think that we have now got it right. I hope that you agree with this, and that this should become law.
The Chairman: Thank you, Minister Collenette.
Senator Wiebe: Ever since the first piece of sod was turned in the west to plant grain, those involved in the agriculture industry have never agreed, at one time, on everything. I want to congratulate you on the package that you have put together for us today.
I think that all four items that you mentioned are important. The railway cap -- $10,000 per mile for the rebuilding of roads for any lines that are abandoned -- is a key aspect of this bill.
However, the most important aspect of this bill is the fourth legislative initiative on monitoring. A monitoring system will be put in place to allow a true understanding of exactly what is happening in the entire grain handling sector. Correct information will be made available, not only to the ministers involved, but also to Parliament. When will this particular monitoring agency be up and running? Will you give us a brief outline of how it will work?
Mr. Collenette: Senator, the goal is to have this monitoring mechanism up and running immediately. It is key that this is not monitoring after a set period of time, but rather continuous monitoring to make sure that we get it right. We will work on that as quickly as possible.
I should just say one thing that I did not raise in my speech which was, mercifully for you, shorter than the one I gave to the House committee, and that is to do with the whole issue of open access on railways and more competition. This is a very controversial provision, and some people have criticized us for not dealing with it within the context of this bill. We have asked, in the context of the Canadian Transportation Agency to provide, within six months, a report by the group that will conduct the independent review on railway access issues. That review is to start on July 1. It will be very important for us to analyze that information from the perspective of the grain transportation industry and to take into account the aspirations of other shippers in the system. That is something else that is ongoing.
Therefore, we have the ongoing monitoring mechanism that you talked about, which I think shows that this will not be swept under the rug and that we will be on top of this file on an ongoing basis. As well, there is the fact that the access provisions, with respect to the railways, will be the subject of another process. There will be a report by the commissioners who will analyze and evaluate the act within six months. That will be done by February 1, 2001.
Senator Stratton: In the discussion on Bill C-34, I have letters from the railroads and, of course, the major grain companies -- Agricorp, James Richardson & Sons Ltd., SaskPool and United Grain Growers. They vehemently complain about the bill, itself. They are consistent in their complaints that the grain companies should be considered the shipper of record. In other words, the buck stops there.
In the past, we have had a problem with "where the buck stops." In 1996 or 1997, when we had this problem, a lot of it was buck-passing. The grain companies want to take this responsibility on, and the railroads want the grain companies to do just that. Could you, perhaps, enlighten us as to why that did not occur and should not occur?
Mr. Collenette: That will be negotiated between the grain company and the Wheat Board. Perhaps I could ask Mr. Goodale to deal with that part of the question, because it gets into the MOU discussion for which he is responsible. If that is agreeable to you, perhaps he could answer.
Hon. Ralph E. Goodale, Minister responsible for the Canadian Wheat Board and Minister of Natural Resources: Mr. Chairman, I would be happy to respond to that question. Given Mr. Collenette's limited time between now and four o'clock, perhaps we could defer that question. I will be happy to respond later. Senators will have the time that they need now to direct their questions to Mr. Collenette.
The Chairman: I will ask Senator Stratton if he approves.
Senator Stratton: That is fine with me.
I am also concerned about the estimated savings of $178 million. To us, that is a carrot offered to the farmers so that they will accept, to a large part, the bill. In the tough straits that they are in, $178 million is a substantial sum of money.
If you offer this to them, as an estimate, why would you not guarantee it to the farmers? Why would you not say to them, "If you commit to this, we will guarantee you that $178 million?" It is critical for them in their planning to have at least some assurance of the outcomes. If things go awry, and they often do, because there are many players in this game, what assurance is there about the $178 million?
Mr. Collenette: The $178 million is based on shipping 30 million tonnes. Obviously, we can only predict and we cannot absolutely say unequivocally that we are accurate. It depends on a number of issues. That is our best estimate -- that there will be 30 million tonnes shipped, and there will be $178 million of savings.
You used the analogy of the carrot. I do not like to think of it as a carrot because a carrot means "as an incentive" in your terminology, to get farmers to buy in. That is one way to look at the picture, but another way, certainly from the perspective of Western Canada, may be from the farmers' point of view -- that these are legitimate savings, just dues, from a more efficient system to which we are entitled.
It has been proven, by the CTA's analysis, that not all of the savings accrued, or not as much as perhaps one would like, have been passed on to producers by the railways. I suppose it depends on whose "ox is being gored," if you want to use that analogy, whether you see us as offering a carrot to get farmers to accept changes to the Wheat Board's mandate, or whether it is really something that is a degree of entitlement based on legitimate savings.
Senator Stratton: I would like to continue this discussion further, but I know you are short of time. I shall pass.
Senator Oliver: My question deals with the two reports that you have mentioned from Mr. Estey and Mr. Kroeger. Mr. Estey made 15 recommendations. Some of the criticism of this bill is that the 15 recommendations are not reflected in the bill.
As I understand it, at the time that the bill was tabled in the other place, the government also announced certain intentions to do some things in the future. Can you tell us what your legislative intentions are in terms of implementing some of the other recommendations made by Mr. Kroeger and Mr. Estey that are not contained in this bill?
Mr. Collenette: There are certainly elements of the Estey-Kroeger process and thinking in this bill. It is a question of degree.
I did mention the issue of running rights which was a conundrum for both gentlemen, perhaps less so for Mr. Estey than for Mr. Kroeger. Certainly, that is something that will be dealt with in the context of the CTA review.
The act will be reopened and there doubtless will be amendments. That will provide an opportunity, post July 2001 -- that legislative period in the year following -- to further refine this package, depending on how it is working out. As I said, we have the monitoring process. The Wheat Board and the producers may come to the view that this tendering out is the greatest thing possible, and conclude that the Wheat Board should be fully excluded from the transportation role of grain, and just stay in the marketing of grain. That is the direction in which Mr. Estey was going.
We could have that revelation based on this practice. Some would doubt it, but it is a possibility. Therefore, we could make statutory adjustments accordingly because the bill will be up for review in all of its various dimensions.
Senator Oliver: Are you contemplating any other legislation that will deal with those aspects of the recommendations of both Mr. Kroeger and Mr. Estey that are not in this bill?
Mr. Collenette: No, I do not have any further legislation planned in that regard.
Mr. Goodale: I would like to elaborate on that a bit. The two processes, Estey in the first instance and then Kroeger in the second, substantially narrowed the field of disagreement in Western Canada about grain handling and transportation issues. Of the 15 Estey recommendations, three were analyzed by separate processes through Transport Canada -- one dealing with ports, another with hopper cards, and the third with roads. The deliberation on roads led to the fiscal commitment to the $175 million that will now be built into the fiscal framework for the future.
The competition issue referred to in Estey, as Mr. Collenette has mentioned, will be part of the CTA review process.
Most of the remainder of Mr. Estey's work is reflected to a very large extent in either the proposed legislation that is going forward or the MOU, which is the companion piece.
The issues at the end of the day that continue to bedevil the stakeholders were threefold. One issue was the level of the revenue cap. There was agreement on the concept, but an argument about the level. The legislation establishes the government's policy position as to the appropriate level.
The second issue had to do with railway competition. Mr. Collenette has mentioned that that is now contained in a reference to the CTA review process.
The third issue was, as you mentioned, the most appropriate role for the Canadian Wheat Board. We tried to accommodate that in the changes going forward in the MOU.
There are a number of pieces to this. There are the contents of the legislation and the MOU, that which will be referred to the CTA and that which flows as a budgetary matter now with respect to roads. Putting these pieces together, the various dimensions raised by Mr. Estey and Mr. Kroeger are being addressed in this package.
As always in the gain business, there will be arguments on one side or the other about whether you are going too far or not far enough. However, overall, it is a comprehensive package that touches on virtually every base that was raised through those two processes.
Mr. Collenette: Perhaps, I could give a view as a non- westerner and having looked at this issue for a long time, going back to my first election to Parliament in 1974 when I was a member of the Transport Committee of the House.
Mr. Goodale: It was a good year.
Mr. Collenette: We came in together, in July 8, 1974.
Looking at it from afar, much of the problem is years of mistrust and fear on the part of the producers. Even though we have been criticized for not going as far as many would like to a more comprehensive and more competitive system, this will break the logjam, or whatever the analogy is. The legitimate fear that the producers have will be overcome.
I am optimistic that this is the beginning of a much more competitive system that eventually will be as Mr. Estey envisaged.
[Translation]
Senator Hervieux-Payette: On page 3 of your speech, you mention that this figure is based on an effective rate for August 1, under the current law, of $32.92 per ton, for a typical crop of 30 million tons. The government's May 10 decision sets the new revenue cap at $27 per ton, a reduction of 18 per cent.
I seem to remember Mr. Goodale saying:
[English]
There was an agreement on the concept, but disagreement on the level.
[Translation]
Are we discussing this agreement concerning the concept and the level? How have we gone from $32.92 to $27? Where does this 18 per cent reduction of freight cost per ton come from?
Mr. Collenette: We have done some studies at the department. We will study for example Mr. Kroeger's recommendations which set the level at $12 per ton. We will also examine other evidence, including that of Mr. Estey. My department's officials and those of Mr. Goodale's department, after analysing the figures, have determined that an 18 per cent reduction was fair.
Senator Hervieux-Payette: On what mathematical basis do you justify this 18 per cent reduction? Why not 25 per cent or 10 per cent? I know it is a rate, but we have already gone through this type of exercise in the air transportation industry. We had found that it was not practical and had decided to let the market decide.
Now that the air transportation market is a bit less strong, however, in this case, we have two competitors, one of which is a big organization that manages crops, and we fix unilaterally the reduction at 18 per cent. Why is this reduction not negotiated?
Mr. Collenette: We have estimates that are based on calculations made by the Canadian Transportation Agency. We think they are exact. After analysing costs, we have decided that, if we change the system, it would be better to reduce it by a certain percentage.
Senator Hervieux-Payette: I can therefore conclude that, when we paid $32.92 to transportation companies, we were paying too much. This is a substantial reduction. I wonder how the Americans establish the freight rate for tons of wheat? Does the American government unilaterally decide on a rate or does it open up negotiations with people who indicate their operation costs, their stock procurement costs or the more general costs of the whole rail transportation system?
Mr. Collenette: I must underline that the Canadian Transportation Agency has determined that, yes, you are right. Rail companies do not pass on all the savings to Western producers and for this reason, the assessment that we have looked at takes into account the Canadian Transportation Agency's decision on this issue.
As to the Americans, it is a bit complicated. Their system is different on several aspects. I do not think it would be useful to examine this issue in relation to the American system. It is preferable to stick to the Canadian context.
Senator Hervieux-Payette: This wheat that we wish to transport, is it not for the export markets?
Mr. Collenette: Yes, but you have in the States a system that is really different from ours and one must examine the role played by rail companies and the non-payment tradition to producers in the United States. Such a study would not be useful in this context.
Senator Hervieux-Payette: To novices from the East such as yourself, this gives the impression of going back to a rating system that seems rather unilateral in regards to a private corporation which has to invest and operate according to marketplace rules. It seems to me that there was not much advance notice of a substantial reduction. I have not seen any consideration. We are perhaps making other concessions that would be perceived by the business community as a return to interventionism where the State's role is not in balance with that of private enterprise.
Mr. Collenette: There were a lot of concessions made on the second part of the equation. For example, the Board of Directors of the Canadian Wheat Board will put in place the 50 per cent contracts in two years, a huge concession which counterbalances the reduction for rail companies.
I am sorry, but I must leave for Toronto. However, Mr. Goodale will remain with you for the next hour to give detailed answers.
[English]
The Chairman: Thank you, Minister Collenette, for appearing today. We appreciate your time and we realize that you have other obligations.
Would you care to respond to that, Minister Goodale?
Mr. Goodale: Mr. Chairman, you and I have trod many roads together in southern Saskatchewan. I will add further information in response to Senator Hervieux-Payette's point. Minister Collenette was referring to some of the balancing, or off-setting factors. One of those that should be mentioned is the move from the situation that we have today, which is a specifically regulated freight rate, delivery point by delivery point all across the Prairies, to this new concept of an overall revenue cap. We are fundamentally changing the methodology. This, surprisingly perhaps, is one of the points upon which virtually all of the stakeholders agreed during consultations -- that a revenue cap, as opposed to a rate cap, would be a desirable change.
The functional change that is involved is that, while overall railway revenues from grain will be subject to a maximum limitation, there will be a great deal of flexibility for the railways and the grain companies to operate below that cap, rather than being restricted to certain specific rates at certain specific delivery points.
In other words, for the first time in a long time -- you would have to at least look back to the early part of the century -- we are moving from a fixed rate situation to a variable rate situation. At some delivery points, the rate will be higher, and at other delivery points the rate will be lower. Overall it all must fit within that revenue cap. However, there will be variable freight rates, which is one of the new flexibilities worked into the system and something that the railways have argued for at least the last 30 years, that I can remember, and probably longer than that.
As Minister Collenette said earlier, the actual level at which you set the revenue cap involves a judgment call about what is fair and reasonable in the circumstances. The information that we had before us was a calculation done for Mr. Kroeger during the course of his work last year by the Canadian Transportation Agency. Mr. Kroeger asked the agency to calculate what the productivity gains had been in the grain handling and transportation system since the last time there was a formal costing review. The last formal costing review was in 1992.
The CTA brought those numbers up to date as of 1998, which was the last year in which full figures were available. The CTA found that, during the period from 1992 to 1998, there had been an increase in the level of returns to the railways, from what used to be the case under the old Western Grain Transportation Act. Then, the returns ranged from about 20 per cent to 27 per cent, up to, in this new period as of 1998, numbers that were approaching 40 per cent or higher. Under the old WGTA, there was a set of arrangements where the range was 27 per cent to 28 per cent. The CTA discovered, based on its calculation in 1998, that the return against fixed costs for the railways was more in the neighbourhood of 40 per cent. On that basis, there was common agreement that that number could be brought down -- back to the previous range.
There is an interesting rule of thumb, as to what is appropriate. If you look at the typical experience with freight rates in the United States, where there is genuine competition in the system, the American freight rates typically turn out to be in the same order of magnitude as the rates that existed in Canada under the old WGTA. Where there is competition in the U.S., their practical rate is roughly the same as our former regulated rate, under the old WGTA -- the Western Grain Transportation Act.
If you apply the revenue cap at a level that puts you in that ballpark, it would seem to us to be reasonable in the circumstances. The calculation that is in the statute would bring about, essentially, that result.
It is still fair to say that the railways would receive, from grain, a contribution rate that is probably in excess of what they get to move other commodities in Western Canada.
Senator Hervieux-Payette: When you talk about the revenue cap, does it matter what quantity is transported? If we have a world record crop which is being sold and there is an increase in the shipment of 20 per cent, you say that the revenue cap stays in place, but is the distance taken into account? When you talk about a maximum revenue of $348 million and then you talk about the rate of return, are we talking about the same thing? I would like to understand the concept.
Mr. Goodale: In Bill C-34, there is a set of clauses that lays out, in a mathematical formula, how the revenue cap will be calculated. I know it is difficult to take a mathematical concept and write it in words in a statute. It becomes rather convoluted and you need to take practical examples and plug in the numbers to see how it works. You will find, in that formula, that both the issue of volume and distance are taken into account. Both of those factors are included in the mathematical calculation. I am certain that the technical experts in Mr. Collenette's department would be happy to walk you through the arithmetic of that formula to demonstrate how both factors are, in fact, included.
Senator Hervieux-Payette: If I understand correctly, to paraphrase you, it is a revenue cap that could be higher than it is today, if we add distance and quantity.
Mr. Goodale: Yes, depending on what happens with distance and quantity, the numbers change.
Senator Hervieux-Payette: Is the 40 per cent or 20 per cent rate of return a normal rate of return on the investment of equipment and other expenditures related to the operation of the transportation of grain? Is a 40 per cent return quite fabulous?
Mr. Goodale: Again, the rate of return is a contribution rate toward costs. All of this is reduced in prairie jargon to some pretty simplistic expressions. It is a contribution toward the costs of the railways. The old system under the previous Western Grain Transportation Act, resulted in a "contribution rate," as it was called, in the neighbourhood of 20 per cent to 27 per cent. In the period from 1992 to 1998, that rate had moved up to the range of about 38 per cent to 43 per cent.
With changes in this legislation, it will be back to the rate that it was under the old WGTA. For comparison purposes, that is probably a better contribution rate than the railways would normally obtain from the shipment of other, non-grain commodities.
The Chairman: Minister Goodale, would you care to make a statement now?
Mr. Goodale: Very briefly, Mr. Chairman, I would reiterate Minister Collenette's point about the amount of work and effort that went into this package to try to find the right balance. As you know, it is commonly said in Western Canada that anything related to the grain business is 13 per cent protein and 87 per cent controversy. That is, no doubt, true with this package as with any other package. We have tried very hard to find the balance, to reconcile all of the many conflicting points of view.
The immediate benefits are obvious in terms of the productivity gains that will be better shared with farmers -- this is the $178 million that has been referred to here -- on an annual basis.
Another obvious gain is the investment that the Government of Canada will make in the Western Canadian grain road system. That will provide the recognition that, as the rail transportation system changes, there will be increased pressures on grain roads as more grain moves longer distances, or in different directions, by truck rather than by rail. Accordingly, some contribution is warranted by the Government of Canada to offset some of that incremental burden.
The part of this package upon which I have been particularly focused is, of course, the development of the MOU in my capacity as the Minister responsible for the Canadian Wheat Board. I understand that copies of the draft MOU have been made available to the committee. I would be happy to go through any of those sections in detail if senators wish to ask questions.
From a broad overview point of view, the MOU begins with a number of paragraphs -- numbers one through seven -- that deal with the background and the policy context in which the MOU has been developed. Paragraphs eight and nine deal with the issue of overall railway capacity with respect to the Canadian Wheat Board's book of business. Paragraphs 10 through 16 deal with the new tendering system that is being contemplated for a portion of the logistical services that the Canadian Board will need to get its product to the four ports of Vancouver, Prince Rupert, Thunder Bay and Churchill. Paragraph 17 deals with the issue of rail car allocation and the procedures by which section 28(k) of the Canadian Wheat Board Act would be engaged. In paragraphs 18, 19, and 20, there are numerous provisions relating to good faith business relationships. That is a point that the grain companies and the railways were very anxious to see reflected in the MOU.
That relates to an earlier comment Mr. Collenette made, that is, that we have had much controversy for a long time, clearly too much controversy, in the western grain business. It is important that all of the players -- the Wheat Board, the grain companies, the railways, the terminal operators -- try to turn the page on that long period of conflict and bad relationships. It is important to move forward now, in a much more constructive and positive atmosphere. We have tried to capture the sense of that in those clauses that relate to the good faith relationship.
Paragraph 21 of the MOU, towards the end, deals with the information requirements that are necessary for the monitoring process to which Senator Wiebe referred. In addition, there are the usual paragraphs that deal with the coming into effect and the execution.
If there are detailed questions about the draft, I would be happy to try to deal with them to the best of my ability. Again, I will close by saying that we have an opportunity to progress to a better system -- one that is more efficient, reliable and gets the product from the farmer to where it is destined, on time, and in a way that can be counted on. It will wring unnecessary expenses out of the system and farmers can benefit from those cost savings. Overall, it is more transparent and accountable, to everyone's benefit.
The Chairman: I have one question in respect of the producer cars.
Senator Gill: Excuse me, there was a question that was to be addressed after Minister Collenette left. I believe that it was asked by Senator Stratton.
Senator Stratton: Minister Goodale, I was concerned because we have letters on file indicating that the grain companies and the railroads agree that the shippers of record should be the grain companies. Why were they not considered to be the shipper of record?
Mr. Goodale: Senator, I suspect that I have copies of the same letter, so I am familiar with the argument you are making.
The situation with the Canadian Wheat Board's volume of business is a complicated one because the Wheat Board has legal obligations that are imposed upon it by statute, in terms of how it must perform on behalf of farmers. That is at one end of the marketing chain -- the primary producers' end of it. At the other end of the marketing chain is the fact that, obviously, when the Wheat Board enters into contracts with foreign buyers, it assumes legal obligations to those foreign customers.
Thus, the board has legal duties and obligations at both ends of the chain -- the farmer at one end and the buyer at the other end. It does not, however, own and operate the logistical system that is in between those two ends. Those must be made to link up.
The board needs to be able to satisfy itself that it can deliver on its obligations at both ends of the process. This issue of shipper becomes a more complicated question than if you were dealing with a non-board commodity, for example.
As Mr. Collenette mentioned, the proper place for this to be dealt with is in the contracts that will be negotiated between the Canadian Wheat Board and the grain companies and the railways. One of the subtleties, which may not have dawned on all the participants, is that we are moving from the old regulatory regime.
Until now, the distribution of transportation services has been handled in an administrative manner under the umbrella of an organization called the Car Allocation Policy Group, the CAPG, as it is known by acronym. Under this new arrangement the CAPG is gone. There is no overall administrative umbrella. The parties must deal with one another in a commercial, competitive, contractual context.
Quite frankly, none of them is accustomed to doing that. This is a new game in town. There is not that old administrative crutch, if you will, to fall back on. It would seem to me to be logical that in the flow of events from the farmer delivery, to an elevator in the country, to the delivery of the grain to the port, there is a Wheat Board interest to be satisfied; there is a grain company interest to be satisfied; and there is a railway company interest to be satisfied. It is the normal business practice for the parties to negotiate with each other to determine who is going to play what role along the various stages in that marketing chain, define that very clearly as a matter of contract, and indicate that, if the contract is performed, the obligations have been satisfied. If better than what the contract calls for is done, there would probably be an incentive or a bonus. If worse is done, a penalty would be levied. All of that is laid out in black and white in the contracts among the parties.
It is that contractual process that would define the roles to be played. It would define who is responsible for what, and what the consequences are if you do not perform.
Senator Stratton: If I may, you are saying that the responsibility, if something goes amiss, as it did, lies with the shipper of record, the Canadian Wheat Board? Someone has to take the responsibility. The problem we had before, sir, if I may, is that the buck was passed all over the place. It is not the grain companies; it is the railroad. It is not the railroad; it is the Canadian Wheat Board, and on and on. How does this bill address that problem?
Mr. Goodale: The problem is addressed through the elimination of the administrative structure that was part of the problem, part of the confusion. There were no clear lines of accountability. That administrative structure will be replaced with contractual arrangements in the future. The parties will enter into legal obligations with each other. "A" will do such-and-such, and if they do perform well, they get paid for it. If they do not perform, they suffer the penalties that are laid out in the contract. It is not an administrative approach; it is a contractual approach.
Senator Stratton: Forgive me, sir. Let us say that you are a grain company, and you buy the farmers' grain. The railroads come to ship it, but you cannot quite fulfil your contract for whatever reason. Therefore, the railroad company cannot fulfil its contract because you have not met yours. You have a domino effect.
I do not see any substantial change. Despite the fact there are contracts and they are clearly defined, I can foresee another round of buck passing, only this time it will lead to lawsuits, I would imagine. How do we prevent that?
Mr. Goodale: It has in the past led to lawsuits as well, senator.
The administrative crutch will be gone. The parties will need to define their legal obligations to each other in the form of contracts. The contracts will need to be performed. If the contract is not performed, the aggrieved party has legal recourse.
One of the suggestions made by the grain companies in particular is that it would be useful in the system if there were some form of speedy dispute settlement mechanism.
Senator Stratton: That is essential. That is what I was getting at. Why is there not something like that?
Mr. Goodale: You will notice that that is referred to in the MOU, in paragraph 20, I believe it is. The MOU is a document between the government and the Canadian Wheat Board. Paragraph 20 states that the Wheat Board should endeavour to negotiate those efficient methods of resolving commercial disputes, including independent arbitration, or other alternative dispute settlement mechanisms.
The grain companies and the railways are not party to the MOU. Therefore, we cannot oblige that negotiation be successful, because the other party that it will take to make the negotiation successful is not a party to the MOU. We are sending a very clear signal in paragraph 20 that alternate dispute settlement mechanisms are by far preferable to long and convoluted legal proceedings. I would hope we would see a situation, and I have discussed this with the board, where the standard contract includes an arbitration process to which both parties have agreed in advance.
There are many precedents as to how those fair and equitable arbitration arrangements can be written into a contract. I believe those arbitration proceedings, or some other acceptable dispute settlement mechanism that allows for independent judgments to be passed in an expeditious manner, should be a part of the way people do business.
Senator Stratton: I have one short question. Did you discuss this arbitration process of resolution with the grain companies and the railroads this arbitration?
Mr. Goodale: I have had the opportunity to do that as recently as at the international grains conference meeting in Regina last week. The companies with whom I spoke on that occasion, and previously, have indicated a very strong desire to have an arbitration process that would resolve disputes fairly and quickly. I would hope that, during the negotiation between the parties, they would be able to arrive at a process that incorporates that kind of a mechanism into virtually every contract they write.
[Translation]
Senator Gill: The witnesses we have heard were highly dissatisfied with the system. You emphasize a different approach, that is the contractual approach. A little while ago, it was mentioned that there was a lot of distrust between parties. I imagine this is caused by the fact that people are not sufficiently aware of what is going on. Do you think that by taking a different approach, by putting in more flexibility and varying transportation rates, we will succeed in giving satisfaction to those who are implicated in the production and transportation? You seem optimistic. However, are people sufficiently implicated and do they get all the necessary information?
[English]
Mr. Goodale: I certainly hope so, senator. Issues touching upon any aspect of the grain business are, historically, very controversial. The package of measures that we have put together, including the legislation, the MOU, the reference to the CTA process, the money for roads, and the monitoring mechanism that will be there for the future gives us a tremendous opportunity to turn the page on some of the old animosities of the past. It will allow us to try to have a better, more reliable, less expensive, more transparent, and more accountable system for the future.
It will depend upon, though, the goodwill and the good faith conduct of all of the players. They need to do business with each other like mature adults. It is about time.
Senator Fairbairn: I should like to ask about the monitoring system. In the MOU, the system is referred to as "continuous monitoring." How often will they report?
Mr. Goodale: Senator, as we indicated, we expect at least annual reports. I suspect that we will receive reports much more frequently than that. Some of the practical people within the industry with whom I have spoken have indicated that expectations of a monthly report would be too frequent, because you would get too narrow a snapshot. Annual reports would be, probably, not frequent enough. Semi-annual or quarterly reports would be more satisfactory. We would expect to have no less than one, full, comprehensive, annual report, with whatever interim reports seem to be appropriate along the way, in the judgment of the monitoring agency.
Senator Fairbairn: It would seem that, as you are trying to turn a page and have a more, dare I use the word, "collegial" relationship among the three different parties, that it would be important to have those interim reports in order to establish the credibility of the system that you are attempting to set up.
In his statement, Mr. Collenette notes that the government supported an amendment in the House of Commons committee that provides that the minister shall make an annual report to Parliament on the monitoring of the grain transportation and handling system. When you use the word "Parliament," may I assume that that includes both the House of Commons and the Senate?
Mr. Goodale: Yes.
Senator Fairbairn: Thank you. I wanted to be sure.
The Chairman: I will ask a question in respect of producer cars. Some farmers suggest that they sometimes bypass the old elevator because the railroads do not want to pick up 15 cars. Why would they return to pick up one or two producer cars? Can you guarantee that, with the passage of this bill, the producer cars will continue to exist? Right now, I live on the main line and they pick up 100 cars at the Weyburn terminal -- the wheat pool -- but many farmers wonder whether the producer car will survive.
Mr. Goodale: I think it is important to note that the provisions with respect to producer cars, are not in either the Canadian Wheat Board Act or the Canada Transportation Act but, in fact, they are enshrined in the Canada Grain Act. Nothing in this bill, the MOU, or any of the other provisions that we are making, in any way changes the Canada Grain Act or the principle of producer cars that is enshrined therein.
The Chairman: Does the Canada Grain Act guarantee that I will receive three cars, if that is my request, and not have to wait two months for them?
Mr. Goodale: I would have to examine the act to find the exact language, senator. However, if it becomes necessary, as a matter of fairness and equity for the Canadian Wheat Board to fulfil its statutory obligations, it has the authority in section 28(k) should that become necessary. The expectation would be, as it has been in the past, that the power existing in section 28(k) is rarely exercised. The fallback authority is there, if necessary.
Senator Oliver: My question will deal with the partial tendering system for Canadian Wheat Board grains. One of the criticisms of this legislation is the entrenchment of the Canadian Wheat Board's role in rail car allocation and transportation. As you know, many of the critics have said that it is absolutely essential that the parties winning a successful tender be permitted to contract directly with railways in order to arrange the most efficient and competitive rates to deliver grain. Why was this not done? If you want to have competition, why would you not let them compete? Why is so much power still given to the Canadian Wheat Board?
Mr. Goodale: Senators, I mentioned earlier that the board has legal obligations to perform by virtue of the Canadian Wheat Board Act. Those obligations are to the producers. At the other end of the marketing chain, it undertakes obligations to its buyers when it enters into contracts, to sell them the grain.
The challenge is to find the appropriate linkages between those two ends of the chain. For the CWB to perform well, in terms of its responsibilities at opposite ends of the chain, it needs to satisfy itself that it will, in fact, have sufficient railway capacity to move its entire volume of business. The provision for that is set out in paragraph 8 of the MOU and then modified in paragraph 11, in relation to its tendered business, which indicates that:
...the Corporation shall limit its contractual arrangements with the railways to matters related to assuring itself of a sufficient supply of railway capacity, including freight rates for single car movements.
Senator Oliver: It continues: "...with all other terms and conditions to be arranged between the logistics suppliers... "
Mr. Goodale: No, it states, "...to be arranged between the logistics suppliers," and that means grain companies and railways. Once the CWB has dealt with that matter of overall capacity and the basic single car rate, then it turns to the grain companies for the logistical packages -- the multi-car loading, the extra incentive rates and so forth.
Paragraph 14(d) indicates that those logistics suppliers, the grain companies, originate the tendered quantity of wheat or barley from any location within the prairie region. Thus, the grain companies choose the delivery point from which the grain will move. They select the railway to be used. They select the terminal to be used. They make all the other arrangements to satisfy the tender.
Therefore, there is a high-level arrangement between the Canadian Wheat Board and the railways by which the board assures itself that its overall capacity requirements are met. The grain companies dealing directly with the railways handle all of the logistical detail within that for the tendered portion. Thus, the grain companies do have scope to bring to the table all of the unique strengths that they would have in the contracting process.
I will give you an example that was cited to me by the former president of the Saskatchewan Wheat Pool, who has recently retired. He demonstrated the importance of this in saying that if the Saskatchewan Wheat Pool wins a tender from the Canadian Wheat Board to move 50 cars of board grain out of a certain delivery point in Saskatchewan and if, at that same delivery point, they have 50 cars of non-board grain, say it is canola or some other product, what the Saskatchewan Wheat Pool could do that the Canadian Wheat Board could not do, is bring those two things together in a single train movement. Thus, instead of getting a rate to move 50 cars of one thing and another rate to move 50 cars of another thing, they are put together and a 100 car train is moved at a lower rate for everyone.
That is one of the innovations in this system. That was not there before. There will be scope for those contractual juices to work, and make the system faster and cheaper for everyone.
Senator Oliver: I have a different question. It relates to my fear of the monopoly power of the board, of which you have charge. Perhaps my facts are wrong and, if so, I apologize. My understanding is that wheat farmers are told that we want them to become more commercial. We want them to add more value and be more profitable. However, if a wheat farmer wants to produce a value-added product and sell it south of the border, he cannot do that because he must sell the wheat to the Wheat Board, and buy it back. Is that correct?
Mr. Goodale: Essentially, in the broadest terms, it is. If you wish to export wheat or barley from Canada, you must have an export permit from the Canadian Wheat Board. The board issues those permits on this buy-back basis that you mentioned.
It has to do with the integrity of the Canadian Wheat Board's pooling system. When that wheat or barley leaves the country, the Wheat Board's objective is to capture for the equitable benefit of all prairie producers, the commercial value that it believes it could get from that grain if it were conducting the transaction.
If Canadian exporters believes that they can get a better price in the U.S. market than the Wheat Board's price, they are free to do that.
Senator Oliver: How? Would they still have to go through the Wheat Board?
Mr. Goodale: Yes, they get their export permit. They pay the buy-back cost. They go to the market and sell it for whatever price they can. I believe it would be a better price.
The pooling system says that the price that the Canadian Wheat Board gets goes into the pool. If a grain company operating on its own can do better than that, it is entitled to the excess.
The Chairman: The buy-back cost is in addition to that. Are the freight and handling charges added?
Mr. Goodale: Those fees are part of the transaction costs.
The Chairman: He cannot take that grain directly from his farm, mill it and sell it to the United States without paying the buy-back cost.
Mr. Goodale: That is correct.
Senator Oliver: Therefore, the incentive to add value and become more commercial is virtually taken away.
Mr. Goodale: Senator, you may be thinking specifically of the most recent proposals on the Prairies for the development of pasta operations. There have been discussions between the promoters and the Canadian Wheat Board about whether there could be some kind of a special arrangement. Certain of these proponents are suggesting that it should be structured as "a new generation co-op," which some would argue is the natural extension of the family farm.
Exemption is available for on-farm milling. That exists under present arrangements. It is when the product goes off the farm that the restrictions come into play.
The dilemma the board has in examining special arrangements for particular processors is if they could make those special arrangements available for certain particular processors and not other processors. If there were a small new generation co-op, could arrangements be made that were a particular advantage to co-op members, but not to others in the processing business in Canada? Part of the issue is fairness among all the processors on the Canadian side of the border. There is another issue surrounding the creation of a special arrangement for a processing plant on the Canadian side of the border. If that product were then exported to the United States, there could be some kind of trade action launched by the United States claiming that that is a special deal entering into international trade. The American processor is seen as being put at a disadvantage. There is an issue of the equity of the pooling concept. A part of it is fairness among processors on the Canadian side, and part of it is the international trade implications when a product is exported to the United States.
Having said all that, the Canadian Wheat Board does have all of this under consideration. They are in discussion with the processors. They very much want to encourage value added products, so that we would be are exporting not just the raw product, but the further processed finished product. The Wheat Board wants the jobs and growth in Canada, rather than somewhere else.
I have encouraged the Canadian Wheat Board to be very creative and innovative in dealing with these situations. They should see themselves as a positive catalyst for value added products, and not in any way an impediment.
Senator Oliver: Do you think that there might be some new policies on this in the next few months?
Mr. Goodale: No. We are dealing with a new governance system, a board of directors with two-thirds duly elected by farmers. We have never had this system before. The board has innovated on a number of things in the last year and a half. There are new policies with respect to fixed-price contracts and new policies with respect to switching of stocks at different locations on the Prairies. There are innovations coming along all the time.
The board of directors is relatively new. They have been in office 18 months. That is not a long time to be running a $6-billion commercial operation.
I hope that they will be innovative and creative in dealing with these issues, and that we will continue to see good, solid, forward-looking change, all aimed at enhancing the end result for farmers.
The Chairman: Is there not also a challenge for the organic farmers? I understand that they have some questions about this. Given the environmental issues and the move to organic produce, they have a point.
Mr. Goodale: Yes. There are legitimate issues to be raised.
Everything that I have been talking about for the last few minutes is within the jurisdiction of the board of directors. The act expressly says that all of the powers of the Canadian Wheat Board are vested in the hands of its directors. It may be useful in your ongoing analysis of grain issues to invite senior executive officers and members of the board of directors of the Canadian Wheat Board to appear before you.
I should like to take this moment to commend this committee for being so proactive in looking at those issues in a constructive way.
If representatives of the Wheat Board appeared at one of your meetings, you could exchange views on these issues and find out the current status of their business plan. I think that might be a very useful thing to follow up on with the Canadian Wheat Board directly. You are fully entitled to call them to this committee.
Senator Stratton: I would like to discuss the memorandum of understanding, paragraphs 18 and 19. The first paragraph of paragraph 18 refers to "positive business relationships."
Paragraph 19 refers to a "Good Faith basis." If a lack of good faith is alleged, to whom should a complaint be made?
Mr. Goodale: Senator, as you know, enforcement of subjective conduct is a tough thing to do. If I saw in any report from the monitoring agency that there was any evidence that would raise a concern that one party or another in this process was not behaving in a good faith manner, that would set off alarm bells with me. We are sending a very clear signal here. The parties must conduct themselves appropriately with each other so that this system works, and works better for the future. Part of that is a good faith business relationship.
If any players in the system were not conducting themselves in that manner, I would hope and expect that the monitor would pick it up. This being very much a democracy, if there is a player in the system that feels they are being hard done by the non-good faith conduct of another player, they should draw that to the attention of the ministers.
Senator Stratton: That is yourself?
Mr. Goodale: The three of us are functioning together on this file.
Senator Stratton: I foresee a lot of buck passing here. That is my big worry. Where does the buck stop?
Mr. Goodale: I am the one who signs the memorandum of understanding.
[Translation]
Senator Ferretti Barth: First, I would like to congratulate you on the work you have accomplished in relation to Bill C-34. At the moment, the bill does not meet all the farmers' expectations, but huge steps have been taken.
The witnesses we have heard have said that most of the problems arise at the level of transportation. Bill C-34 seems to want to strike a balance. Do you intend to inform the Canadian farmers of regulations included in this bill? Will they get instructions allowing them to avoid reliving the situation they knew a few months ago?
As to communicating the information, it is very important that the farmers understand this information. The bill also concerns small farmers. You have said that in the future, the system will lead to creativity and innovation. You also say that the farmer who owns a small lot and does not have much money can also make a future for himself.
Parliamentarians always talk of things they understand well and they sometimes use a specific lingo. Do you think that the target population, i.e. is farmers, will understand what we are trying to do? I am amazed by what you have done. It is perhaps incomplete, but it is still a good start.
[English]
Mr. Goodale: Communications is always a great challenge, senator, but it is a challenge that we take very seriously. With the work of Mr. Estey and Mr. Kroeger and the entire debate, deliberation and lobbying that went on before our policy decision on May 10, 2000, there is a reasonable level of public information and public understanding about this package.
It has been reported thoroughly in the daily media in Western Canada. Several very prominent farm based newspapers, such as The Western Producer, have carried extensive coverage of this. Western press has covered it extensively. I am sure that that coverage will continue.
There is a need, periodically, for the government to communicate directly with producers. We have done from time to time in the form of letters that are sent directly to producers with detailed information on major policy changes. For example, when we amended the Canadian Wheat Board Act several years ago, a serious effort was made to keep farmers posted on that process as it was evolving over a three-year period.
When this legislation is concluded and the MOU is signed, and before we get into another crop year starting on August 1, 2000, it might be an opportune time for a round of communications. A direct communication with farmers would provide them with the detailed information. Thus, they would have the needed information in their hands in written form, on the Internet, or by way of 1-800 numbers.
Senator Wiebe: Mr. Minister, I must apologize. I was not able to get this question in on the first round. I must ask you to put on your memory hat. This question is more for my own satisfaction.
The questions that were asked on the first round by Senator Stratton and Senator Gill identify some real concerns. Would not some of those concerns be addressed by the independent monitor?
Mr. Goodale: Yes, Senator Wiebe, they would be. We are asking for all of the players to change their conduct under an entirely different set of rules.
There has been a way of doing things over the last number of years in grain handling and transportation. It has tended to be a highly regulated approach. That is changing.
It will require that the Canadian Wheat Board changes the way it does its business. It will require the grain companies to change, the railways to change and, in many respects, farmers will need to change, particularly in response to that issue of variable freight rates that I mentioned earlier.
We are embarking upon some uncharted waters. We believe that the changes will result in positive benefits, but we need to know whether that is happening or not. We need to know if farmers are benefiting, and if so, in what way and by how much.
We will need to know if the Canadian Wheat Board is being adversely affected in any way, or in fact if its operations are being improved by this new operating environment. We will need to know their effect on railway efficiency, grain handling efficiency, and the efficiency in our ports. Is the overall system better?
We know from the consultations that the status quo is unacceptable. There needs to be change. Thus, we have put together a package of change involving the legislation, the MOU, the reference to the CTA process, the monitoring, the roads, et cetera. Thereafter, right from day one, we want the monitoring process to be in the hands of an absolutely independent, respected, and impartial third party who will follow the conduct of all of the players in the system and report to the ministers on what is happening under the new arrangement. If something is awry, for example, and there is evidence that the negotiations are not in good faith, or that an arbitration process is not working, or that someone in the system is not performing as they are supposed to, that information will be brought forward through the monitoring process. The ministers will be in the position, then, to make future corrective decisions to address issues that emerge from the monitoring.
Senator Wiebe: Minister, that was my understanding of it. From my perspective, and I am sure from the perspective of all of the stakeholders, that part of Bill C-34 is the most exciting part of the bill. We have a wonderful opportunity to put an end to some of the old animosities and to begin the process of building a grain handling and transportation system that will be of benefit to not only all of the stakeholders, but to this country, as well.
The Chairman: The railroads have been, probably, the giver in this bill. Have the grain companies contributed anything or are you leaving that to competition? Sometimes, I compare the handling charges in the United States with the handling charges in Canada. It seems that some of the companies have been pretty prosperous. There are so many terminals being built in the west, you would think that money grows on trees. In reality, farmers are going broke.
Have the grain companies contributed anything to this bill?
Mr. Goodale: Senator, you are asking me to tread on delicate ground, because the giver and the receiver are often in the eyes of the beholder.
The grain companies, I think, would say that, over the last number of years in particular, in response to changing domestic and international circumstances, they have made tens of millions of dollars worth of new investments in new grain handling facilities. That has been all for the point of trying to have a system that can deliver faster.
Having made those investments, they are now anxious to utilize them efficiently, so that at the end of the day, that efficiency will be reflected not only in the bottom line for their shareholders or stakeholders, but also in the service packages, incentives and other forms of paybacks that they would then be able to provide to producers.
Their principal contribution has been, to this point, at least, a major investment in both inland and port infrastructure to enable faster grain handling.
The Chairman: I accept that. There is no question that we have, probably, one of the finest terminal systems coming into place in the Prairies as you will find anywhere. If you cross the border you will see some pretty rundown operations in the United States.
However, if the farmers have not got the wherewithal with commodity prices to produce that grain, those terminals will be wanting. I personally can say that we, as farmers, have never been under as much pressure in terms of commodity prices, and trying to get back the input costs that we have today. I am sure the minister is aware of that. It is important to recognize that this bill is a step in the right direction to understanding that situation. It is important to bring relief to the freight rate costs, and, to some extent, to the pressures that are on the roads.
With that, I thank the minister for appearing.
Mr. Goodale: Thank you, Mr. Chairman.
The Chairman: On balance, this is a positive bill. There are certainly many other things that we would like to see, and probably a different direction taken, but I believe it is a start. I thank you for appearing today and doing a very good job under difficult circumstances, which always exist, as you said, when handling grain issues and situations in the Prairies.
Mr. Goodale: Thank you, senators, for your careful attention to this important matter.
The Chairman: I would welcome Mr. Kroeger, to the "best committee on the Hill." I said to you earlier that I thought you were the best bureaucrat that I had seen in 21 years, because you were a practical man. That is my opinion, and you can make your own decision about that.
I understand that you do not have a formal statement. You might tell us your role in the development of this bill. We will then go to questions. I am sure there will be many.
Mr. Arthur Kroeger, O.C., Facilitator, 1999 Grain Transportation Consultations: I am grateful for your generous introduction. Ex-bureaucrats, like wine, get better with age.
I would assume that the committee would like to hear about the process for which I was responsible through the spring and summer of 1999 and into the fall. I submitted my report in September 1999; therefore I may be a little rusty about some of the details.
I suppose that I have three qualifications for appearance here today. First, I was raised on a farm in Alberta. Second, I spent three and-a-half years of my life with the Honourable Jean-Luc Pépin, replacing the Crow's Nest Pass rate with the Western Grain Transportation Act when I was deputy minister of transport. Third, last spring Mr. Collenette decided to recycle me, and asked if I would facilitate the consultations out west. That process gave rise to my report in September, and, of course, you have since had the government's decision on that.
Senator Stratton: Minister Collenette asked you to put something together for him, and you had made recommendations to that effect. Did he listen to and adopt any of the recommendations you put forward? We are always curious as to what you recommended and what really happened in the end. I could understand they might not accept all of them.
Were there recommendations that you did make that you felt should be in the bill but were not included?
I have read the bill, but I have not studied it, and I have read the government's announcements. I sense that they have picked up a number of items that were in Justice Estey's and my reports. One of those is the change to a revenue cap from the detailed control of freight rates. That ends approximately 100 years of detailed control of the rates to be charged for the movement of grain. It provides the railways with greater flexibility.
Justice Estey developed the original concept with the help of CPR. In my process, we -- that includes the stakeholders in the west who were part of my process -- elaborated on that considerably. They designed the rules for operating a revenue cap. That was interesting because, at the outset, many people said that we could never make a revenue cap work because the railways would beat us each time. However, by the end of summer, we found the set of rules that were effective for the operation of a revenue cap. I think it is an important change in the regime, as it gives the railways the flexibility that they have not had for a long time.
We had some recommendations about branch lines and final offer arbitration. My understanding is that the bill does not follow those exactly, but it captures some of the points that arose in the consultations that we had.
In my letter to the minister, I recommended a reduction in railway revenues, which was more modest than that which the government eventually settled on. However, the concept of a reduction in railway revenues was there.
The area in which, as I understand the legislation, there is probably the greatest gap between our process and the bill is the future role of the Canadian Wheat Board. I do not pretend to have a detailed understanding, but from our consultations, two models emerged. One of those was quite a modest set of changes, which, in my letter to the minister, I characterized as approximately 20 per cent of what Mr. Estey had recommended. The other would have been approximately 80 per cent of what Mr. Estey had recommended. My sense is that the government's legislation is probably closer to the first of those two models and that is probably the biggest discrepancy between what came out of the consultations and the present bill.
Senator Stratton: Do you believe that the government has introduced an evolutionary process? Do you believe that there will be further changes to your report than there will be to Mr. Estey's report?
Mr. Kroeger: There has been an evolution. I think it will continue, but it is mostly a question of how fast. Some changes will be set in motion by the decisions the government has made. Many people in the west want those changes to proceed more rapidly and to go further. However, this is a subject on which there are great divisions in the west, and there have been for a long time. You must make a judgment call, which is the business of the government, as to how far you want to go and how quickly. Their conclusions are reflected in the bill before you.
Senator Hervieux-Payette: I have your recommendation and again I return to the 12 per cent revenue compared to the 18 per cent that is mentioned in the bill. Earlier I asked the minister about the 18 per cent. He explained that it related to the history of the increase and the return on the investment. How did you arrive at 12 per cent? What was the major component of the revenue cap set at? Did you believe that the railway company would agree, at least, to this reduction in relation to other compensation? Did you feel that there would have been a balance? I have never seen a company that would subscribe wholeheartedly to the prospect of losing 12 per cent. I suppose there was a "give and take" -- the give was the 12 per cent and the take was, what? Was there another type of compensation that the company would feel comfortable with?
Mr. Kroeger: The senator is right that the railways did not welcome my recommendation of 12 per cent. All of these things are judgment calls. Justice Estey's report recommended that the government take the railways revenues where they are now, cap them at that level, and then rely on competition to bring the rate down in the future.
When my process began, there was widespread discussion in the west on the need for what is called a "costing review." The railways, since 1996, had no longer been required to go through what others did. Every four years, under the Western Grain Transportation Act, an examination of railway costs and revenues was done and then they were cut back down to a 20 per cent contribution of constant cost. They were relieved of that in 1996.
There was a sense, in the west, that they were making a lot of money, and so we obtained some figures from the Canadian Transportation Agency -- not a detailed costing review, which is an elaborate exercise, but rather a simpler one provided for us within a couple of months. It showed that, indeed, the railway's revenues were moving up in quite a healthy way. There was a strong sentiment in the west that there should be some kind of reduction. Justice Estey did not have the benefits of those figures for his report, but we did.
There was a widespread view that there should be some reduction. The next question was, how much. In the process that was run by one of our working groups, there were two figures of 8 per cent and the other was a drastic cut of 20 per cent, with strong regulation thereafter.
Again, it is a judgment call. I looked at that and concluded that 8 per cent was not really enough, especially in view of the income problems that farmers were experiencing, and so I suggested 12 per cent. I might have said 13 per cent or 10 per cent. It was not a science. On the one hand I did conclude that 8 per cent was not enough. On the other hand, the 20 per cent reduction, which some of the farm groups were recommending, was quite extreme. In addition to the 20 per cent reduction, there would have been mandatory reductions every year thereafter, in railway revenues -- 3 per cent per year -- regardless of whether the revenues went up or not. This provided a return to the kind of detailed control that successive governments have moved away from in the previous 10 to 15 years. I suggested 12 per cent and the government settled on 18 per cent.
Two general comments about the considerations apply in this instance. In my letter to Mr. Collenette I said, "You must be careful. If you cut the railways too deeply, then you will reduce the attractiveness to them of moving grain." The railways look at the investment in rolling stock -- the movement of coal, automobiles, or grain -- and they will examine the different rates of return. If they find that grain is too unattractive, there will be deterioration of the system, over time.
In my letter to the minister, I believe that I established a certain relationship -- the more freedom you gave the railways to apply normal commercial practices in the future, to gain efficiencies, and so forth, the deeper you could cut them in the short term.
Conversely, if you were to retain most of the old administered system, essentially administered by the Wheat Board, the railway's ability to recoup from their cuts would be more constrained. Thus, the 12 per cent figure that I came up with was a middle ground based on the assumption that the railways would be given more freedom to engage in commercial practices as compared with the past.
Senator Fairbairn: Mr. Kroeger, in almost every presentation that we heard from witnesses before this committee, regardless of the stated subject, we would hear about rail competition, and how to enhance that. I suspect that you heard that once or twice during your consultations across Western Canada, which I am told were open and very lively.
This will be an issue during the review of the Canada Transportation Act, which I think commences at the beginning of July 2000. I think there is a desire to have this particular aspect of that review before the government by Christmas.
From your experience in your hearings, what ideas do you have about how to increase the competition given the sometimes contradictory expectations and realities across Western Canada?
Mr. Kroeger: I will start with a preliminary comment. Mr. Justice Estey and I talked about a significant decree of deregulation of what has been a fairly tightly controlled system. The more you deregulate, the more you must try to increase competition, because competition is the substitute for regulation.
There is more competition on the Prairies now than there was before. People still argue whether it is significant, some say yes, some say no. My sense was that it has become significant because of the coming of the high-throughput elevators.
When I was growing up there, the railway lines were 20 miles apart, and the elevators were eight miles apart. There was not much choice as to where to take grain. Currently, the grain companies can play off the railways against one another.
SaskPool can ask what rates one is prepared to offer for the movement of grains through their high-throughput elevator on the CP line, for example. CP comes back with a number, and they say that that is no good. They would talk to CN about moving the same grain through the high throughput line 60 miles north. That sort of competition has become a reality. It will become more so as the wooden elevators disappear, higher volume trucks are used, roads are improved, and elevators become more efficient.
There will be more competition, but that still does not do it. The big debate in our process was about running rights, open access. Mr. Justice Estey recommended it.
Working Group 3 was deeply split on this subject. The producer groups in Working Group 3 were, for the most part, strongly of the view that running rights were a very important matter. I hardly need to tell some members of the committee, such as the chair and co-chair, that this has deep roots on the Prairies. There has been a view on the Prairies that the government should nationalize the roadbeds and treat it as a national utility. Anyone who wanted to run a train could do so over any set of tracks. The strong emotional commitment to the running rights proposal in working group 3 drew its intensity from that history.
The railways were more emotionally opposed to the running rights proposal than any other thing in the whole consultation. Rightly or wrongly, they thought that this would have enormously adverse consequences for them. They said that it would create an uncertainty and make it harder to raise capital on markets. They were afraid of cherry picking by American railways. There were a number of arguments of this kind.
The problem in this rather emotionally charged debate was that everyone was hypothesizing, because no one knew. We never had in Canada, nor in the United States, the kind of system of "forced access," as it was called. The majority in Working Group 3 recommended that.
Therefore, I arrived at several conclusions. First, anything possible should be done to increase competition while deregulating. Second, open access is not a critical question, and it is not limited to grain. If open access is to be done, it should be done across the entire country.
You are talking about the health of the national railway system. My conclusion was that you should take a careful look at that, and get expert advice. There were people on the working group who had some knowledge of this, but probably not a lot of expertise.
My suggestion to the minister was to get some experts to tell him what would work best. If open access would work best, do it. If something else worked better, do that. However, he should look before he leaps. I suggested that he not just jump into this on someone else's say, because ultimately he, as Minister of Transport is accountable to the public for the health of the Canadian railway system.
Competition among the railways on the Prairies is and old question. That competition is increasing. I will be interested to see if ways are found of increasing it further in the future.
Senator Fairbairn: What are your thoughts on how competition would be affected by the interesting proposal of the merger between CN and Burlington Northern Sante Fe?
Mr. Kroeger: It is very difficult to give you a confident answer on that. One possibility is that, if CN merges with BN, and Canadian Pacific follows suit and merges with Union Pacific, the trend would be in the opposite direction. There would be less competition in North America.
Currently, there are only four major railways left in the United States. There is concern in the United States that the trend is to still more concentration. Members of the committee will remember that, not many years ago, CN and CP were discussing a merger. It is not frivolous to foresee the possibility of a single railway in Canada, which would put you back into a regulated system.
Senator Oliver: Air Canada.
Mr. Kroeger: The problem is that regulation is second best to competition. Regulation can produce certainty about what will happen. The trouble is that you do not know the good things that did not happen because of the dead hands of regulation.
If there were only one railway left in the country, I would assume that measures of a regulatory nature would be required. We may not have heard the end of story regarding Air Canada, to which one of the senators referred.
My thought is that the trend is towards less competition as opposed to more. The high throughputs could mitigate and reduce competition in a particular area. However, the trend is for less competition globally.
The Chairman: Are you saying that you think grain will start moving south through the Mississippi when CN and the Great Northern amalgamate? That amalgamation is certainly a possibility. If rates become too high going to the West Coast, that will happen. That is a statement, not a question.
Mr. Kroeger: It is striking how much grain is moving south now. I believe that 10 per cent or more of Canadian grain exports already moves across the American border, which is a very significant increase from 15 or 20 years ago.
The Chairman: I read the other day that a great deal more of milled grain in flour is going south, and, of course, that drives up the numbers.
[Translation]
Senator Gill: Mr. Kroeger, it is a pleasure to meet with you again after all these years -- I think the last time was somewhere in 1975 -- and to realize that you have survived your duties at Indian Affairs. You will probably survive just as easily in the Department of Agriculture.
I would like to tap the pollster in you because evidence we have heard here puts in evidence a lot of dissatisfaction on the part of farmers, particularly in relation to transportation. In your opinion, will the passing of this bill produce an adequate satisfaction rate? It seems to me, as one who comes from the East, that there is a very high dissatisfaction rate in the West and it almost always concerns government services.
Mr. Kroeger: Divisions in the West are so deep that it would be almost impossible to come up with a bill that will accommodate all points of view. It is interesting to observe that, 20 years ago, when I was Deputy Minister for Transportation, there was a lot of unity in the West over a lot of things. When I went back there, 13 months ago, I observed that the West is now extremely divided. There are those who are in favour of the Canadian Wheat Board -- emotions ran rather high on this subject -- and there are those also who are opposed. I think the West is now divided almost 50-50. I realized last summer that there were not many common views on these subjects in the West which could be used to come to an agreement. It is almost impossible.
The ministers' task at the time was, first and foremost, to find an acceptable formula or compromise, and the bill you have before you today represents their conclusions. It is now their duty to continue to debate their conclusions and the points of view of Western stakeholders. This debate must take place. I only made a study and recommendations, but it falls to the ministers to make the political judgement on very different points of view.
Senator Robichaud: You are wise.
[English]
Senator Wiebe: Mr. Kroeger, you are quite right in saying that there are some strongly held views in Western Canada in regards to grain handling and transportation. As a farmer, I have spent 30 years of my life trying to come to some consensus with other farmers regarding how we address this issue.
I want to compliment you and Mr. Estey. The work that you both have done in the last three years has gone a tremendously long way toward the farmers and all the stakeholders reaching the consensus that they have reached today. We still do not have that on all of the issues, but the work that both of you have done has moved it in the right direction. For that, I thank you and congratulate you.
Regardless of which way we go, the evolution of the grain handling system will go much slower than what people on both sides want. Perhaps from a government perspective, that may be the best route to go.
If you were here before, you would have noticed that the one aspect of the legislation that has excited me is the monitoring. As a farmer, I feel that it is important that it be monitored. An independent body would hopefully address the myths and accusations that exist and which cause some of the misunderstanding.
What is your view on the value of the monitoring system in the bill?
Mr. Kroeger: I have read the government's announcement about the monitoring system. I have not had a discussion with any official in the Department of Transport, or anyone else, therefore, I am not sure that I understand it very well.
I will offer some general comments. Whoever does the monitoring will be up against the divided views of the west. I was really struck last summer that this is the most politicized economic question in the country. There is nothing else like it. The emotions that go into grain transportation and the attitudes of people on both sides are all tied up with prairie history, radicalism, protest and attitudes towards the railways. It will be an extremely difficult job for anyone to do a monitoring job and gain acceptance from both sides simultaneously.
There were times last summer when I felt that if I said to one of the parties that two plus two equals four, they would have asked, "Who said so?" There would then be another argument, requiring another study.
Numerous studies have been done by consultants on both sides of the border, which studies have found that you can get good results by doing this or that. The polarization was such that almost any study, no matter the data, would be rejected by one side.
I do not envy the person who becomes the monitor and who wants to make the statement that the efficiency has been improved. It is a complicated area. You can find evidence on the opposite side of any proposition.
I hope that the monitoring will work, but I cannot pretend to have a good grasp of it. The polarization of the west will be a problem.
Senator Wiebe: My next question has nothing to do specifically with this particular bill. It is a result of one of the comments that you made in an answer.
You alluded to the investment of the railroads into the grain handling and transportation industry. Mr. Estey, in his report, mentioned that the revenues of the railroads are approximately $1.5 billion a year, and that this amounts to about 20 per cent of their total business. In addition, they receive approximately $300 million from the transportation of the product within Canada. The $1.5 million is the export figure.
Grain farmers, similar to the potash industry in the province, own rail cars.
Other than the locomotives and engines, what kind of investment do the railroads make specifically for grain handling that they would not normally need to make for the hauling of potash and other commodities along those main lines?
Mr. Kroeger: At some point, presumably, the hopper car fleet will need to be renewed. Some judgment calls will have to be made, because there are different categories of hopper cars -- more expensive or greater capacity. There may be some questions of investments on the grain-dependent lines. In the last days of the Crow, which I am sure you will remember, especially Senator Weibe, the railway simply did not invest in branch lines or rolling stock. Eventually, the government had to do it for them.
There could be cases where investment could go elsewhere. I want to go back to Senator Fairbairn's question about the Burlington-Northern CN merger. If that happens, the investment universe of the merged railway will be greatly expanded. You will not just look at where CN can invest in Canada or with the Illinois Central, but you will now consider a much greater area. In any company, there is always competition for the investment dollar. Different branches of the merged railway will make their case to the president and the board of the directors. They will say, "If you invest in these new coal cars, we will get you an excellent rate of return," or "Forest products are the coming thing and you can put your money into moving that product." They can go through the list of commodities.
My comment was simply that, if you go too far in cutting the returns from moving grain, you could prejudice certain kinds of investment decisions by the railways. That would not apply to all decisions, because a locomotive is a locomotive. However, there could be areas where the grain system could come out on the short end.
Senator Wiebe: The potash industry tells me that they are saving approximately $5 per tonne by owning their own rail cars. The farmer have had a substantial saving by the governments -- provincial and federal -- and the CWB purchasing those rail cars for them over the years. It was quite a savings for CN and CP.
The main line goes to the West Coast whether they are hauling coal, potash or grain. It has been said that the passage of the bill may mean a cutback in their investment, what investment would they cut back that relates specifically to the transportation of that 20 per cent of grain? Perhaps this is an unfair question to ask, and if it is, please tell me.
Mr. Kroeger: I do not believe it is unfair, but I am not sure I can provide a well-informed answer, because I am not close to railway investment decisions. At the moment, you have hopper cars that are owned by the government, and one day those cars will come to the end of their usefulness. At that point, you could, indeed, face some awkward questions about how much money railways want to put into hopper cars for grain as compared to cars for coal or other commodities. There are other areas of the country that would be competing for the investment dollars of the railways.
Just as that applies to every other corporation, I think it would apply to the railways, although I am not close enough to give you an answer as to what the tradeoffs might be.
The Chairman: I have two more questions about roads and trucking.
This is, as you know, a very serious problem in the Prairies, especially now with fuel costs going up. The truckers claim that they cannot haul grain for the price that used to be charged, because fuel costs are too high. They budgeted a certain amount per bushel, but now, with the increased fuel costs, they must charge farmers more.
Farmers say that if the price of grain were to go up, then the prices of fertilizer, freight, and input costs would go up. We are price takers -- we take what we get, because we do not set the prices. Everyone else in the industry, even the railroads, set the price. They will not haul grain if they lose money. That is the problem we face. As you say, we are trucking further distances. The day is gone when a farmer will use his own truck, unless he is a big farmer, to haul grain to a terminal. He will hire a trucker, because he cannot afford a $250,000 truck to haul his grain.
Obviously, you have examined this. The bill is positive in that it recommends $175 million for roads over a five-year period. Have you ANY comments on the road and trucking situation? Certainly, in the case of Saskatchewan particularly, it is a real challenge.
Mr. Kroeger: I agree it is a real problem in Saskatchewan, because the grain-dependent roads, I gather, were not constructed to the same standard.
In the terms of reference that I was given, Mr. Collenette excluded three things: the ports; the sale of the hopper cars; and the question of roads. Those three were dealt with separately. However, there was some interaction and, certainly, the question of roads kept coming up in our consultations, especially from the Saskatchewan people.
There are costs to farmers for moving their grain the greater distances. There have been some very interesting consultant studies about this, and I can provide you with details after the meeting, if you like. One study done last September examined how much money must be spent to upgrade the road when a branch line is closed out, and what the increased trucking costs will be. That was on the negative side. Then, the study considered how much would be saved in railway and grain handling costs if there is a move away from wooden elevators to the high-throughput elevators.
I was surprised at those figures, because the consultant found a savings in the order of seven to one and eight to one, from closing out high cost branch lines, high cost elevators, and trucking. These things could be done, and the grain trucked greater distances, and there would be still be a net saving in the system.
However, does the farmer realize any of the savings? That is one of the awkward parts, because the grain companies are better off, as they reduced their costs by closing out the wooden elevator, and the railways are better off, because they reduced costs by closing the branch line. The question is how much of that does the farmer get, and that depends on the competition between the Saskatechewan Wheat Pool and the UGG, or competition between CN and CP, to the extent that you can get it.
It is interesting that, inherently, if you look at the costs globally, you are better off with a greater efficiency. However, there is the question of distribution.
The Chairman: Do you think the elevator companies have overbuilt in terms of terminals? It seems that that competition is very keen, and there has been a great amount of money spent on the Prairies. Have they overbuilt?
Mr. Kroeger: I am not competent to answer that, but I can tell you that there are some who think they have. There is increasing worry that this has been overdone. When I returned to the Prairies and drove past Camrose last summer, in the span of five or six kilometres I saw three high throughputs east of town.
This could work to the advantage of the producers, depending on how it all shakes out. The greater the competition between the grain companies, the greater the likelihood that the producer will end up the beneficiary of the increased efficiency, as compared to the grain companies keeping the profits.
The Chairman: Thank you, Mr. Kroeger, for appearing before this committee to answer our questions and for the work that you have done relevant to the Prairies and this delicate subject. I have read articles in the papers that commended you and some that did not, as I am sure you are aware. This has been quite a challenge.
Mr. Kroeger: Thank you Mr. Chairman, it was pleasure to be back.
The Chairman: We will move ahead with a clause by clause for Bill C-34, to amend the Canada Transportation Act.
Senator Robichaud: I move that the committee move to clause by clause consideration.
The Chairman: Is that agreed?
Hon. Senators: Agreed.
The Chairman: Carried.
Senator Wiebe: I do not have a copy of the bill.
The Chairman: At the outset, certainly there are items in the bill that we might change. However, on balance, I believe we are very supportive of the fact that this is a start to understanding that the problems in the Prairies are very serious. It is a special step toward rectifying some of those situations. I hope that the government will continue in the direction it has begun with the introduction of Bill C-34.
Senator Stratton: Mr. Chairman, we just bought them off for $178 million. That is the carrot.
Senator Hervieux-Payette: We "bought" them. That is a big word, but I would point out that someone else is paying for that.
The Chairman: Shall clauses 1 to 21 carry?
Hon. Senators: Agreed.
The Chairman: Carried.
Shall the schedule carry?
Hon. Senators: Agreed.
The Chairman: Carried.
Shall the title carry?
Hon. Senators: Agreed.
The Chairman: Carried.
Shall the bill carry?
Hon. Senators: Agreed.
The Chairman: Carried.
Is it agreed that the Chair report the bill at the next sitting of the Senate?
Hon. Senators: Agreed.
The Chairman: Carried.
Senator Fitzpatrick: Mr. Chairman, could we spend just a moment to deal with the Subcommittee on Forestry? I have a motion to move. I believe you have a copy. I move:
That the committee delegate to the Subcommittee on Forestry the authority, pursuant to section 32 of the Financial Administration Act, to commit funds relating to the study of the present state and future of forestry in Canada;
That the Committee delegate to the Subcommittee on Forestry the authority, pursuant to section 34 of the Financial Administration Act and Guideline 3:05 of Appendix II of the Rules of the Senate, to certify accounts relating to the study of the present state and future of forestry in Canada as payable; and
That the Committee's power to permit coverage by electronic media of meetings be conferred on the Subcommittee.
Senator Stratton: I second the motion.
The Chairman: Is that agreed?
Hon. Senators: Agreed.
Senator Fitzpatrick: I should like to have a short meeting with the members of the subcommittee to discuss our program for the fall.
The committee adjourned.