Proceedings of the Standing Senate Committee on
Transport and Communications

Issue 13 - Evidence, September 26, 2001

OTTAWA, Wednesday, September 26, 2001

The Standing Senate Committee on Transport and Communications, to which was referred Bill C-14, respecting shipping and navigation and to amend the Shipping Conferences Exemption Act, 1987 and other acts, met this day at 5:32 p.m. to give consideration to the bill.

Senator Lise Bacon (Chairman) in the Chair.

[English]

The Chairman: Honourable senators, we are continuing our hearings on Bill C-14, respecting shipping and navigation and to amend the Shipping Conferences Exemption Act, 1987 and other acts.

Today, we will begin by hearing witnesses from the Canadian Shippers' Council: Mr. Goffin, Ms MacGillivray and Mr. Meuller. Welcome to the committee. We have received your presentation. We will hear from you first and then the senators will ask their questions.

Mr. Walter Mueller, Secretary General, Canadian Shippers Council: Honourable senators, the Canadian Shippers' Council is pleased to appear before your committee in the context of your review of Bill C-14.

The council's interest is limited to Part 15, the proposed amendments to the Shipping Conferences Exemption Act, 1987. The CSC represents shippers from across the country and is the designated shipper group under the provisions of SCEA.

The position of CSC is well known to the Canadian government, and its recommendations for SCEA include the following: First, confidential contracts between individual conference carriers and shippers; second, sunsetting of antitrust immunity for shipping conferences within five years; third, a simple and effective dispute resolution mechanism with enforcement powers; fourth, excluding from antitrust immunity all restrictive forms of agreements; fifth, eliminating tariff filing by conferences with the Canada Transportation Agency; sixth, reducing notice periods for independent action by carriers to five days; and seventh, permitting conference carriers to negotiate inland and inter-modal rates as a group.

The CSC considers SCEA as anti-competitive and outdated and as self-serving to shipping cartels and their member carriers, the majority of which are foreign owned. The cost of transportation is one of the most important factors in ensuring Canada's export competitiveness. Canadian industry must have free competition in marine transportation, costs based on the most efficient carrier and the ability to negotiate with conference lines in the same manner that they currently negotiate with other transport modes.

The CSC's proposed amendments to SCEA will bring it into line with the Ocean Shipping Reform Act, 1998, OSRA, implemented in the United States in May of 1999. They will remove SCEA's ambiguities and provide some balance of power between shippers and carriers, which the current act completely eludes.

These modifications will retain, for a specific period of time, the principle of antitrust immunity for conferences, just as OSRA does. Shippers will be given the freedom to negotiate confidential rates and service contracts with the carriers of their choice. Whereas conferences will be put on notice as to eventual removal of antitrust immunity, but will be given a reasonable time frame in which to adjust to a new environment of strictly market-based principles.

The revision of SCEA, outlined in Part 15 of the bill, now referred to your committee for review, ignores most of the major modifications needed for this act. Changes represent administrative relief and cost benefits for the carriers and barely aligns the Canadian act with OSRA on confidential, one-on-one service contracts.

Canadian shippers are deeply disappointed with the SCEA amendments proposed by the Minister of Transport. These changes do not satisfactorily address the fundamental issues that have plagued Canadian shippers since SCEA was originally proclaimed in 1970. After more than two decades of periodic reviews of this act, this is another lost opportunity for the government and Canadian shippers are again are the big losers.

While the council is the major shipper stakeholder in Canada relative to SCEA, it has not been the only organization calling for important modifications to the current act. A majority of participants in the current review have called for similar changes or even for outright abolition of SCEA.

On the opposing side, as expected, we find the liner conferences, their own carrier associations and some of the major Canadian container ports. The latter have gradually changed their position during the review process in favour of the conferences, as concerted pressure from the carriers had its effect.

Conference arguments remain unchanged since the first review of SCEA in 1970. These shipping cartels continue to imply that major changes to the Canadian legislation would result in them withdrawing future infrastructure investments and service to Canadian container ports. They also insist that they have been providing freight rate and service stability for Canadian shippers.

The CSC begs to differ on both arguments. Conference carriers' decisions on investments and port service are based purely on economic considerations and normal business realities and not on antitrust immunity legislation. Carriers will seek out cargo if it is there to be carried at a profit. Recent press announcements of major vessel and infrastructure investments by some North Atlantic conference carriers and by the Port of Montreal respectively must be seen as supporting our assessment of the conference's arguments. These fundamental business decisions have been made long ago, while SCEA reform, on the other hand, is still under review.

On the question of the conference's claim of freight rate stability to Canadian shippers, the council disagrees categorically. A recent shipper survey conducted by us across Canada of shipper experience with conferences over the past three years showed many examples of extraordinary fluctuations of freight rates, from year to year, to many classes of shippers. Fluctuations will easily reach 30 to 50 per cent from year to year, and is a clear sign of rate volatility and instability. A similar, but much larger, exercise conducted by a national shipper association in the U.S.A. produced similar results and identical trends of rate fluctuations.

Conference carriers move in and out of conference arrangements as it suits them and operate quite successfully as independent carriers in different trades, without antitrust immunity. They are the price leaders on freight rates when major rate restoration programs are implemented, sending rate levels sky high, while independent or non-conference carriers who have no such antitrust immunity merely follow the trend established by the cartel operators. This makes them the greatest offenders on freight rate and service stability. The livelihoods and financial success of conference carriers does not depend on their antitrust immunity and protection from normal Competition Act provisions.

Canadian shippers were profoundly disappointed that the Canadian government succumbed to carrier threats. The government should be asking itself why carriers are so interested in and insistent on maintaining a rate-setting mechanism that is out of date, anti-competitive, and skewed in favour of the weakest carrier? The answer is that it allows carriers to allocate shippers among themselves, limit competition and protect an otherwise costly and non-competitive system. In any other industry this would be known as price-fixing and collusion.

The CTA review panel, in its recent review of transportation legislation, we believe understood fully the intricacies and commercial impact of antitrust immunity for conferences and for SCEA legislation. While their final report included only a few comments on SCEA, their recommendation 8.3 is an unmistakable signal to the Canadian government that there is no room for antiquated price-fixing cartels in today's economy that is driven by free market principles and globalization. It states clearly:

The Panel recommends that the government make clear its commitment to eventual elimination of liner conference exemptions from competition law and that it actively pursue multilateral agreement among international partners to do so.

The CSC fully supports the panel's recommendation and its opposition to artificial barriers to competition that SCEA represents, and wants them removed. The council's proposed sunsetting of antitrust immunity for liner conferences was intended to do exactly that and goes in the same direction as does the CTA review panel's own recommendation in this respect.

Many international organizations have been addressing the question of antitrust immunity. Having looked at the immense cost burden this outdated conference system imposes on international trade, some have put forth a strong case either for outright abolition, partial abolition or sunsetting of antitrust immunity for liner conferences. Canada, through timely intervention by the Senate, still has an opportunity to move in that direction in a tangible and equitable way for all stakeholders and must not miss that chance.

In closing, we wish to reiterate that the CSC's ultimate objective remains the abolition of SCEA and of antitrust immunity for liner conferences. This is consistent with the 1992 recommendations of the National Transportation Act review commission and, very recently, the CTA review panel.

In the interim, the CSC respectfully submits that the Canadian government must modify the current SCEA legislation in line with the proposals made by the CSC on behalf of all Canadian shippers, particularly its "sunsetting" request.

A new act must finally provide a balance of power between shippers and carriers and, at the same time, give a clear signal of the eventual end to costly price-fixing cartels.

The Chairman: We are pleased to have you with us today. You are the only shipper to appear before us in these hearings, because of your official status as the designated shipper group under the provisions of the Shipping Conferences Exemption Act. I know that your interest is mostly limited to Part 15 of the bill dealing with the Shipping Conferences Exemption Act.

Can you tell me if the goods your members export by ship are bulk goods or containerized products carried by container ships? Could you give us an idea of the percentage in each of those categories?

Mr. Mueller: I would not be able to give you a percentage in those categories, but our members are members of the CSC as container shippers. Some of our members also ship in bulk liquid, dry bulk and break bulk, but they are members of the CSC as container shippers.

The Chairman: You cannot provide us with the percentages?

Mr. Mueller: We do not know the figures for bulk versus containers.

Mr. David W. Goffin, Secretary-Treasurer and Vice-President, Canadian Chemical Producers Association: In the chemical industry we would be pretty well even between bulk and container shipping.

The Chairman: We have been told that without the protection of the Competition Act, ocean carriers could choose not to serve Canadian destinations. As Canadian producers, you must have ocean carriage to carry out your business. Are you not worried that an end to the exemption could result in there being inadequate ocean carriage at Canadian ports?

Mr. Mueller: We are not worried about that because carriers are businesses managed by business people and, as we said in our presentation, their decisions are made on economic and business principles. In the eastern part of Canada, members of the Canadian conference on the North Atlantic insist on having antitrust immunity because they operate as a conference. However, the same carriers also operate out of the U.S. Midwest through the Canadian gateway, and they operate there as independents. As a matter of fact, 65 to 70 per cent of the container cargo they carry through Montreal and Halifax comes from the U.S. Midwest. Do you think they would give up 70 per cent of their present cargo by no longer serving Canadian ports?

I alluded to some announcements made recently by carriers in a conference with regard to a major purchase of ships. The Port of Montreal has made major investments in improvement or expansion of container facilities because of increased expectations by carriers. We do not think this is a valid threat. I think the carriers will go where the cargo is, as long as they can carry it at a profit.

The Chairman: Of the seven points you raised to be included in the reform, which do you consider crucial to achieving the kind of ocean carriage you want for your industry?

Mr. Mueller: We believe that confidential contracts are a must and the government has already suggested that that should be the case.

Sunsetting is a most important issue. Without that, antitrust immunity issues will drag on as they have for the last 30-odd years. There is much movement around the world toward that goal. The CTA review panel has recognized that too and is recommending that an end be mandated to that.

Simple and effective dispute resolution mechanisms with enforcement powers is an important issue to us because currently there are no dispute resolution mechanisms that really work or have enforcement powers.

With regard to excluding from antitrust immunity all restrictive forms of agreements, we used to deal with conferences only, and I think the Shipping Conferences Exemption Act talks about conferences. However, it also includes - ambiguously - all kinds of other agreements including discussion agreements and stabilization agreements. Some of these have voluntary guidelines; others have just fixed prices. In many of them there are non-conference and conference carriers together.

Mr. Goffin: To reinforce that, the seven points are important. Mr. Mueller started with confidential contracts, and it is absolutely vital that we are able to negotiate confidential contracts with individual shipping lines. That will bring us back into line with what the United States is able to do now.

In the other place, there were some amendments made to the proposed legislation to tighten up the wording of that particular section and make it clear that it is confidential contracts we are talking about. We certainly support that section of the legislation as amended in the house.

The Chairman: Have you brought your views to the attention of the Competition Bureau, and if you have, what was their response?

Mr. Mueller: The Competition Bureau is one of the organizations or government departments that has submitted proposals to Transport Canada and also to the Scott Review hearings. It has recommended outright abolition of antitrust immunity.

As an alternative, if the government insists on continuing antitrust immunity - at least partially - then the Competition Bureau strongly recommends that antitrust immunity should be sun-setted. They recommended 10 years; we said five years. Their views on abolition of antitrust immunity are much stronger, even, than ours although our basic objective has always been the abolition of it. By improving the act over the years, we would ultimately get the carriers to see that they no longer needed antitrust immunity.

We want to deal with the carriers as we deal with any other business, purchase of service or product. We want to develop individual partnerships with individual carriers.

Senator Gustafson: In terms of price-fixing, are you saying that the carriers in bidding do not allow competition?

Mr. Mueller: Essentially, under the Shipping Conferences Exemption Act, you have to deal with the conference office. Carriers have to agree on the rates that a conference agrees to. The current act does not permit negotiation on an individual basis.

Large shippers that have the tonnage have much more clout to get what they need even out of the conference, but medium-sized and smaller shippers have to deal with the conference office. Confidential contracts, at least, would allow an individual shipper to deal with the carrier of his choice - conference or non-conference area - and could negotiate a confidential contract.

Senator Gustafson: That freedom is not allowed under the present bill?

Mr. Mueller: That freedom is not allowed under the present act. The U.S. has that freedom now under the OSRA legislation, which went into effect in May 1999.

Senator Gustafson: That would automatically raise shipping costs.

Mr. Mueller: No, it would reduce shipping costs. When parties can deal or negotiate with an individual company, they might find ways to work out arrangements that fit both parties very neatly. If a party has to deal with a conference office, five carriers who have to decide whether your proposal is accepted are always around the table.

Senator Gustafson: Can you give an example of that? Are you talking about back hauls?

Mr. Mueller: I can give you an example. When I was in the industry, we were able to work out arrangements with individual carriers shipping chemical products from Alberta to all over the world, with a large quantity to Europe, Scandinavia and the U.K., and we were able to negotiate arrangements based on the carriers having empty containers out there. Some carriers did and others did not, so we could fill the carriers that had empty containers and were looking for cargo, saving all of us costs.

Senator Gustafson: Do you deal with the shipping of grain as well?

Mr. Mueller: No, that is bulk product. The Shipping Conferences Exemption Act deals only with liner shipping, predominantly container movements.

Senator Callbeck: On the first page, you list a number of recommendations, but some of those recommendations are already in legislation.

Mr. Mueller: Yes.

Senator Callbeck: I want to ask about this sunset clause in paragraph 4. It is my understanding from the briefing material I have read on this legislation that no sunset clause exists in the United States for antitrust immunity legislation, but when I read this paragraph, it looks as though you are alluding that it does.

Mr. Mueller: No, we have not said that there are sunset clauses. SCEA used to have a sunset clause for review. That clause was taken out in 1992 by the NTA review commission.

Senator Callbeck: Does the United States have one or not?

Mr. Mueller: They do not have a sunset clause in the OSRA legislation.

Senator Callbeck: Yesterday, we had the International Freight Forwarders Association here. They certainly were very supportive of SCEA and its role in stabilizing both the industry and the rates. You represent the Canadian Shippers Council. Why is there such a difference, in your opinion?

Mr. Mueller: I cannot answer that because I have not heard what the freight forwarders have had to say. They are, perhaps, in a different position to the extent that the lower the freight rate, the lower the commission. I am not sure that makes any difference to them, but they are sort of sitting between the shipper and the carrier. They have to protect their own interests as well.

Mr. Goffin: In surveying the membership of the Canadian Shippers' Council - which represents quite a range of marine container shipping and chemicals, pulp and paper, and the variety of companies that Ms. MacGillivray represents - companies reported that their marine container freight rate fluctuates easily from 30 to 50 per cent from year to year. The U.S. did a similar survey, to feed data into an OECP study, and their results were consistent with what we found. From our point of view, certainly, we do not see the rate stability there coming from the conferences.

Senator Callbeck: I asked because I thought it strange to have such different opinions on this.

In the second last paragraph, you mention partial abolition of antitrust immunity. What would that involve?

Mr. Mueller: The OECD is looking at maritime transport reform. In a working paper, they had suggested that antitrust immunity should be abolished, at least in part, on all commercial and price aspects.

[Translation]

Senator Gill: I am trying to understand what you said at the end of your presentation where it says that, in the new act, you would like to have a balance of power between shippers and carriers. Furthermore, you are saying that this will no doubt be the end of cartels. Who makes up these cartels that you are referring to?

Mr. Mueller: I am referring to agreements between shipping companies. The current legislation refers only to conferences, but shipping companies now use other names in order to get around the existing regulations.

For example, there are agreements between shipping companies that include conference companies and independent companies operating under voluntary regulations. They maintain that, when they discuss increases or decreases in tariffs, these are only suggestions. Subsequently, each member is free to do as it wishes, but these voluntary regulations become established regulations. We receive letters from these conferences, from these shipping companies, advising us that the conference or the organization has decided to do this or that, and that we have to adopt it. They therefore use all sorts of mechanisms, for example, the market between Canada and Europe, on the North Atlantic.

On the west coast, the agreements have other names: stabilization agreements, discussion agreements. They intend to merely discuss prices, but they discuss and set the prices. We are referring only to conferences here, but when we ask the government whether stabilization agreements and discussion agreements are included, the answer is unclear: "We cannot say one way or the other." We need clear regulations.

Senator Gill: Does this bill cover what you would like it to? Does it provide a balance of power?

Mr. Mueller: No. The bill contains provisions that allow a shipping company that is a member of a conference to negotiate with a shipper without having to divulge the terms and conditions of such a contract to the other members or to the conference's office. This was implemented in the United States two and a half years ago and it has been highly successful to date. Shipping companies consider this to be a positive aspect. It is what the shippers want.

We have proposed going further: we would begin with this measure, but the anti-trust immunity would have to be abolished in five or ten years.

[English]

Senator Adams: Can you explain more about conferences and contracts and how they relate shippers? Are some better shippers or businessmen? How does that work? I have to bid for jobs in my line of work, but I have never heard of conference contracts. How does that work?

Mr. Mueller: If I understood the question correctly, at present, an individual shipper must either deal with the conference office, make a rate suggestion, a proposal for freight rate, or he deals with the carrier who then takes that proposal to the conference. All the members of the conference must decide whether that bid is acceptable. The conference office might refuse it and return with a counter proposal, perhaps. At present, legally, you cannot deal with an individual carrier and agree on a contract and keep that contract information confidential.

If I deal with a supplier, I do not want him to go to my competition and say, "Hey, I have got these on these terms." I do not want the others to find out, because I have negotiated with that particular carrier for specific business reasons, and perhaps it was suitable to him too. I do not want him to go to a conference office and have them say, "You cannot do this." If I buy other services, or if I buy a product, I may go to three stores and see who has the best price and then I will choose one. I do not need to go to the association of electronics appliances, for instance, and say, "Look, I would like to buy this and this, and that is what I want to pay."

Senator Adams: I understand, thank you.

Mr. Mueller: With confidential contracts, an individual shipper can do that with an individual carrier.

Senator Adams: You ship in containers. A few years ago we heard witnesses who said that in rough seas containers could fall off the ship. If you have a contract and half of your containers fall overboard, are they insured?

Mr. Mueller: Most shippers or receivers have insurance on marine cargo. Carriers have insurance, too. A container falling off the top of the ships does not happen very often, so I do not think it is a major problem. However, there is insurance to cover that, generally.

Senator Adams: Accidents can happen. What would happen if a situation were to occur as it did recently in Washington, where something might come through the ship containers. Does Bill C-14 cover that?

Mr. Mueller: Bill C-14 does not cover that, to my knowledge. However, that may be a question that our colleagues from the shipping or carrier sides might be able to address. We do not deal with that.

Senator LaPierre: Do you own ships?

Mr. Mueller: No.

Senator LaPierre: Walk me through this. If I have a forestry company and want to ship something, what do I do? Do I have to go to these conferences? Must I find an agent?

Mr. Mueller: You can go to an independent carrier.

Senator LaPierre: I could go to Canadian Pacific?

Mr. Mueller: If your cargo is in the U.S. Midwest, you could go to Canadian Pacific as an independent carrier. If your cargo is in Canada, you would have to go to Canadian Pacific as a conference carrier.

Senator LaPierre: And you consider that you are the prisoners of these conference carriers and that that is bad for your business? I am trying to find out whether you are a prisoner or a victim. Do you feel that you are not free to do business as you like?

Mr. Mueller: No, not necessarily, but the prices are not what we might get if we were able to negotiate one-on-one.

Senator LaPierre: If I understand correctly, you take your business to someone who has to go to a conference, and all the members of the conference have to agree to your terms or negotiate new terms with you?

Mr. Mueller: The majority of the members would have to agree.

Senator LaPierre: And that brings prices up?

Mr. Mueller: Yes.

Senator LaPierre: Because the cost of shipping is higher?

Mr. Mueller: Yes.

Senator LaPierre: By forming a cartel, these people are preventing the consumer from having cheaper prices. It gives them a monopoly.

Mr. Mueller: In some areas, it is essentially a monopoly. On the West Coast there is a conference called the CWTSA that has 14 or 15 carriers in it. Some normally operate as non-conference carriers or independents, and others are known conference carriers. They cover virtually 95 per cent of the trade.

Senator LaPierre: And that limits competition?

Mr. Mueller: Yes.

Senator LaPierre: It brings prices up and commodities become more expensive?

Mr. Mueller: That is right.

Senator LaPierre: The consumer must pay more money. He would pay less if you had the choice of going wherever you wanted?

Mr. Mueller: Yes.

Senator LaPierre: Therefore, you want conferences to be totally abolished.

Mr. Mueller: We are not saying the conferences should be abolished. Antitrust immunity should be abolished. Conferences could be allowed to continue to operate for technical or operational reasons, but not on the commercial and pricing aspects, because that is where it becomes collusion. We have trade associations within which industries in a certain trade cooperate with each other on technical matters and so on. A conference could operate like a trade association, but not to fix prices or commercial terms.

Senator LaPierre: And nothing will come to a standstill? The conferences cannot operate the way they are now operating if they do not have immunity from the courts?

Mr. Mueller: They cannot operate as a conference, but they can operate individually as individual lines.

Senator LaPierre: That I understand. Therefore, you are a victim of them. Get rid of them, to a certain degree.

You want an effective dispute resolution mechanism with enforcement powers. What would that be?

Mr. Mueller: Something that costs nothing.

Senator LaPierre: That is not possible in this modern world, I have been told.

Mr. Mueller: We would like to see a dispute resolution mechanism through which a shipper can file a complaint with an agency and have it resolved quickly without having to hire a lawyer and wait six months for an answer. If a shipper has a serious problem with a carrier, his business will be down the drain if he has to wait for six months.

Senator LaPierre: Would it be the responsibility of the Minister of Transport to set up this process, or would the industry do that?

Mr. Mueller: No, it would probably be operated by the government.

Senator LaPierre: So you would bear the costs one way or another.

Mr. Mueller: The CTA administers the current act, but it does not have the power to rule on certain things.

Senator LaPierre: What do you mean by "permitting conference carriers to negotiate inland and inter-modal rates as a group"? Would that create a cartel, or is a cartel only if you are not going to be taken to court?

Mr. Mueller: No. In certain areas, conferences have offered inland rates to shippers as an alternative to a shipper going directly to a carrier. For example, we have no objection to a conference negotiating a rail rate. They may come up with the best rate anyone can get because of volume. If that is made available to the shipper, we see no problem with that.

Senator LaPierre: I thought you wanted to stop them from creating cartels but that you would create cartels through your recommendation number 7. It would seem to me that you cannot have a conference that is not necessarily a conference. If a conference is good in certain instances to limit costs and to get better prices, why does that not apply to these cartel conferences that you are opposed to? Could they not get you better prices?

Mr. Mueller: On inland transportation, they have to use an outside carrier such as Canadian Pacific or Canadian National Railway. On the ocean side, they operate their own ships, so each company is independent. We are not saying they have to negotiate inland rates. We have no objection to that if they can offer a better rate to shippers than the shippers can get themselves.

Senator LaPierre: My immense experience of three meetings of this committee has shown me that everyone seems to want to have their cake and eat it too.

Mr. Goffin: There is a bit of a problem here because we are talking about two things. We are talking about amendments to do away with antitrust immunity such as the confidential contracts and dispute resolution. The conferences will still exist but will operate under better legislation than we have now. This bill has confidential contracts in it. In that case, the conferences will still exist and we have no objection to them negotiating inland rates.

If, however, the government did do away with antitrust immunity over a period of time, then the conferences would gradually fade away and that recommendation would drop off. We would not see the conference continue to operate then.

Senator LaPierre: Why were these conferences and antitrust immunity created?

Mr. Mueller: The conference system was created about halfway through the 19th century. It is my understanding that it was created to ensure that Britain would get regular tea shipments from India.

At that time, there were freight bulk ships rather than the modern container carriers that we have today. It was a totally different shipping world than exists today. Carriers went from one port to another. Currently, carriers go around the world both ways on a regular basis.

Senator LaPierre: The world has changed.

Mr. Mueller: The world has changed dramatically.

Senator LaPierre: And the law, therefore, should change to fit the world.

Mr. Mueller: That is right.

Senator Setlakwe: What is the position of customs brokers with regard to your brief? Are they in favour?

Mr. Mueller: I have no idea what the customs brokers' position is. If they are strictly customs brokers, they are not really concerned with the conference system because they handle customs clearance. Many customs brokers are also international freight forwarders, so they would espouse the position of the Freight Forwarders Association, I would imagine.

Senator Setlakwe: They would want liberalized trade without restrictions?

Mr. Mueller: I have not read the submission made by the CIFFA, the International Freight Forwarders Association, but our understanding from discussions we had with them was that they supported the position.

Senator Setlakwe: I would think they would agree with your brief.

Mr. Mueller: I would think so.

Senator Setlakwe: I did not know whether they had taken a position on it.

Mr. Mueller: I am not aware of a specific position that the customs brokers have taken, but if they are strictly customs brokers, then they would not be too greatly involved in the conference shipping.

The Chairman: Feel free to send us more information through the clerk, and it will be distributed, if you have any numbers. Thank you very much for your presence here.

Our next witnesses are from the Interested Carrier Working Group. Certainly you represent an impressive group of small ocean carriers. Your views will be helpful to us in considering the bill currently before us. I believe that you are interested in part 15, as well, from what I read.

Mr. Michael Jordan, Director, CP Ships: The Interested Carriers Working Group, or as we term it, the ICWG, represents 23 ocean liner shipping companies whose interests and origins are from 15 countries, including Canada, Mexico, and the United States. It is on behalf of those carriers that we join you today.

According to the Canadian press, I am a veteran of 40 years in the liner shipping business, which is quite a long time. I am proud to say probably 37 of those were within the Canadian trading market, notably the St. Lawrence River.

Mr. Watson is a 30-year veteran of the liner shipping business. He is domiciled principally in Canada, but he has also been operating out of Australasia and Hong Kong. He is global in his thinking.

Mr. Le Blanc, who is the youngest of our team here today, is responsible for 20 liner conferences and agreements within Canada and the United States.

I am tempted to forget what I was about to say and respond to some of the questions and answers that the honourable senators had with my esteemed friends, the Shippers' Council, but perhaps I will defer from that for a moment. I would just say to the senators that Bill C-14 does not cover the unfortunate circumstances of persons that you alluded to, but they are well taken care of by the Canadian government, immigration and the like.

The liner shipping business in modern day terms is a highly complex one, difficult to understand by those not intimately exposed to it and difficult to explain by those who are. In Canada, as in other parts of the world, conferences are felt to be cartels that fix prices and share their spoils. In the context of Canada alone, and elsewhere, nothing could be further from the truth.

SCEA is broad in its definition of liner conferences. It facilitates what our industry describes as strategic alliances, vessel sharing agreements, discussion agreements, and conference agreements. They are all variations on a theme, the theme earlier being a traditional conference. I will briefly differentiate the four types of agreements for a broader understanding.

A "strategic alliance" is a multi-carrier, many shipping companies group designed to operate in globally defined strategies. Members of a strategic alliance may or may not be, in addition, members of a traditional conference. In other words, they may be independent in their thinking, and they may wish to be part of a conference in a particular range.

A "vessel sharing agreement" is generally a trade specific agreement - that is, an agreement that deals perhaps with Canada to North Europe, or with the U.S. or the Canadian West Coast to Japan.

It is an agreement in which carriers agree to contribute their vessels or share slots - slots being container spaces in ships. Members, again, may or may not be members of a traditional conference.

The Federal Maritime Commission's report, which was issued in respect of the two-year experience of OSRA, indicates that under discussion agreements some 68 per of U.S. cargos now move with carriers privy to such agreements. Discussion agreements have, in the case of America, well taken over from what were in days gone by conferences.

A "discussion agreement" is an informal and voluntary agreement in which carriers may discuss issues including rates and market trends, amongst other matters, on a voluntary adherence basis. It means the members may, if they wish, discuss rates, but they can agree to disagree but not be disagreeable. That is, they need not follow what they have discussed in the meeting, and, therefore, a discussion agreement is a hybrid of carriers, some that wish to work together and cohesively price, and others that wish to be independent.

A traditional "conference agreement" facilitates discussion on specifics while concurrently permitting independent action. The independent aspect is important because any member of a conference in any trade today can decide of his own volition not to work in concert with his conference colleagues and make his own independent price for his preferred customer.

It is interesting to note the current SCEA recommended amendments have recommended the independent action time frame be reduced from 14 days for carriers to give notice to five days.

It is also a fact of life that most of the conferences have already changed their agreements to accommodate that recommendation before the amendments to SCEA are actually adopted, which, one hopes, will be.

Notwithstanding the independent action aspect of conferences, conferences offer "collective service" contracts for their clients, that is, all or some of the conference members participating in one contract at price and terms for a client.

All conferences operating from Canada are now either in the process of amending their agreements or have amended their agreements to facilitate individual service contracts by their members with their shippers or customers of account. This is done on either an open or a confidential basis, providing the confidentiality is between two willing parties. In other words, a confidential agreement is nothing if one party decides it wants to tell everybody what is in it and the other party retains confidentiality.

The conference system, as was described by Mr. Mueller, is gone. It is something of the past and I fear it is still a figment of the imagination of our antagonists - our antagonists being the liner industry versus various councils of shippers and the like.

The majority of cargo originating from Canada moves under the first three alternative arrangements, that is, the smallest amount moves under traditional conference agreements, and those traditional conference agreements are more or less situated only in Canadian, northern European, the U.K. and Mediterranean trades. A little bit is situated in one or two of the South American areas, but nowhere else.

It has been almost two years since the ICWG was formed. It will be no surprise for you to hear that in that time we did meet with Minister Collenette and his officials as well as various representatives of the House of Commons. We have also communicated with all of the Canadian provinces and major stakeholders in Canada, our purpose being to ensure that Canadian legislation is reflective of global initiatives - meaning legislation the same as or similar to that operating in other countries and no more - without jeopardizing our carrier or stakeholder investments in container ships, vessels, container equipment and infrastructure, and to foster optimum rather than a reducing level of liner shipping service to Canadian shippers and Canadian ports.

SCEA affords our industry limited anti-trust immunity. It is not blanket immunity. We are not free to do as we will. In fact, under the current SCEA we are policed, and rightly so. There is a mechanism for complaints in the present act and it provides for a $1,000 fine for non-performance. In the proposed amendments, we volunteered to raise the penalty to $10,000 per offence. A ten-fold increase is a rather large amount in anyone's books and it must indicate to those who are observing our activities that we are sincere in our belief that we do need immunity but, in exchange for having it, we will behave ourselves and not abuse it.

Such disciplines do not address only freight rates and pricing. Indeed, it accepts that vessel sharing, discussion agreements, strategic alliances and variations thereof are recognized as modern-day derivatives of conference and present line of practice. In our interpretation, that is how SCEA allows our industry to operate. We believe that at the moment it respects, as does the U.S.A., the 68 per cent of the cargos that now move under discussion agreements in America, and a large amount also from this country.

Alliances conference discussion vessel sharing agreements afford carriers of like mind the ability to develop and maintain jointly operated, multi-carrier services to all parts of the world. These carriers, while cooperating with each other, compete among themselves on inter-modal price and structure, while at the same time offering highly enhanced liner shipping services from Canada.

Honourable senators, in 40 years, many of them being in a conference or, as Mr. Mueller indicated, from the U.S.A. as an independent carrier in CP ships, I have never known carriers to behave themselves in the sense of working tightly together on price and service issues. They compete like crazy.

In fact, as an example, carriers that provide weekly service from Canadian ports to Asia need to invest in seven to nine large container ships, each of which cost approximately $80 million U.S., or a service investment of $700 million U.S. That is, roughly speaking, a $1 billion investment to run one service weekly from the West Coast of Canada to Japan, Korea or Hong Kong. That is rather a lot of money in anyone's term for one service.

As a commercial for CP Ships or Canadian Pacific, we have become the seventh largest container carrier in the world. We operate 88 ships and we operate nine weekly services from various parts of the world to Canada. Each of those loops does not cost $1 billion, but it is a very expensive loop to operate with the carriers with whom we cooperate.

This high cost of investment, in the light of liner shipping returns, has proved conclusively to be beyond the ability of individual carriers to provide such services alone. In other words, there are very few, if any, liner shipping companies left in the world today that run a service alone. They have to share their ships. They have to individually agree to share ships. They have to do that globally or in small trade lanes.

For example, in Canada, one of the greatest successes of a cooperative liner operation is the St. Lawrence Coordinated Service. It celebrated its twentieth anniversary recently. It is a joint venture between Orient Overseas Container Lines, a Hong Kong based company, of which Mr. Watson is the president, and the CP Ships company Canada Maritime. That company alone, working together, contributes two ships from Canada Maritime and one from OOCL, and we operate five different loops weekly between Montreal and Europe.

I would venture to say that the growth of the Port of Montreal and the importance it attaches to it as a principal North American port, and most especially for the amount of U.S. cargo it carries through it, could only have been achieved in principle by that cooperation of carriers working together. In 12 of those 20 years, I was the chief executive officer of the Canadian maritime side of the business while David was the president of Montreal for the opposition, OOCL. We fought like cats and dogs on price, but we put together a super operating service. That is a fundamental fact of life. You will find that today, in all the major trade lanes of the world, including the Montreal river trade line, the services provided by our industry are superb and definitely tailored for just-in-time inventory and service for clients, at a very reasonable price.

One of the key consequences of the ability of carriers to collectively provide liner service has been that scale economy should generate lower unit costs, thus complementing the continuing trend of inexpensive freight rates from Canada, especially in the main trade lanes.

Having listened to our friends from the Canadian Shippers' Council speak about the studies they have undertaken to prove that there are fluctuations in freight rates of 30 to 50 per cent, I must say that the Interested Carrier Working Group was in a position - discretely and individually - to take a view on every major shipper's cargo moving out of Canada at a certain time to see what the price trend had been over two years.

It went one way: down. I would also have to say that since April of this year, the prices in the North Atlantic trade from Canada and the U.S.A. are in a deep downward spiral. The only way that these price variations downward can be sustained, is that carriers work together, cooperate, pool resources and ships, and obtain benefits of economy of scale.

Unlike its American neighbours, many countries of the European Union and Asia, where multi-port calls are facilitated, liner services from Canadian ports depart from Halifax, Vancouver or Montreal - not two ports or one port. That means the carriers that operate from Canada have to depend seriously upon the infrastructure of railways and trucks to move cargo to those ports, while the same is not true of their European or Asian contemporaries. This logistically suggests that for such capital-intensive investment, carriers must continue to believe that port calls are necessary transport infrastructure at value.

These observations aside, some 65 per cent of transatlantic cargo exiting Canadian ports is of U.S. origin. Whereas, in the transpacific trade, principally shipped through the West Coast, there is little U.S. export cargo moving by Canadian ports. However, there is a substantial portion of Canadian cargo already moving by American ports.

Generally, although not in all cases, these features work in Canada's favour. Competitive forces, not the least of which are competing U.S, ports, are intent on reducing the outflow of U.S. exports by Canadian ports - hence the added need for Canada to ensure that its own legislation does not encourage carriers to reduce the importance of Canadian ports in the service structure.

The proposals to amend SCEA that are before your committee, could do, in ICWG's view, a fair and balanced approach to the benefit of all stakeholders. They reflect changes to those similarly embraced in the Ocean Shipping Reform Act, OSRA, as earlier adopted by the United States. They retain the balance necessary to maintain international comity and if adopted, will ensure that Canada continues to enjoy a healthy and viable ocean transportation system well into the future.

Regrettably, since Canada's Parliament recessed, economic pressures and political events that descended upon the United States this month may together have conspired to affect the underlying fabric of containerized liner shipping services and its general ability to ride out such negative forces. For instance, the earlier thinking that mega-sized container ships may be a feature of next-generation buildings to accommodate continuing world trade growth - ships of 9,000 or 12,000 container units - appears to have been shelved out of deference to recessionary demand.

The suggested withdrawal of tonnage in the major trade lanes of the Transpacific Ocean and in the Far East European trades, and the hugely increased insurance premiums already an expected to attach to liner service, which must necessarily transit what are generally termed "warish areas." Therefore, a period of uncertainty is produced for our industry and indeed and sadly for others.

These negative elements notwithstanding, it is acknowledged that in recent times - especially following upon the introduction of the Ocean Shipping Reform Act in America - shipping conferences have had a declining impact in their influence on freight rates. The preservation of SCEA with the proposed amendments now being addressed by your committee closely follows the principle elements found in OSRA, and therefore, it is axiomatic that this conference influential trend on trade rates will diminish even more. Under the broad definition of a liner shipping conference within SCEA, more than 80 per cent of all liner cargo from Canada is lifted by conference carriers.

Despite these observations, the proposed amendments, as put forward by the Minister of Transport and his staff, coupled with the changes already conceded by the liner shipping industry, ensure that Canadian shippers gain and that they should be able to compete with their neighbours on a level playing field.

Fortuitously, in our judgment, Canadian ports, Canadian railways, Canadian truck interests, Canadian terminal operators and other related Canadian infrastructure providers may also remain competitive and protected.

Carriers need the assurance from all governments interested in securing the above-mentioned services that legislative certainty is something that carriers may expect in exchange for the high investment they incur in delivering such sophisticated and all-embracing container service. With this in mind and contrary to the opinions of those who propose that Canada should lead the global charge to abolish the limited anti-trust exemption - which would be extended to our industry under the proposal before you - we would submit that it would be in Canada's interest to take a lead role in discussing with its trading partners, the thought of preserving the prevailing but limited immunity that carriers should continue to attract.

Honourable senators, thank for your attention. We are at your disposal to answer questions.

The Chairman: Are the shipping services offered by members of your group to and from Canadian ports exclusively for containerized traffic, as opposed to bulk cargo?

Mr. Jordan: Certainly, yes, as opposed to bulk, but we also have container shipping service for roll-on-roll-off cargo, although most are containerized.

The Chairman: Mr. Jordan, you see that the exemption from the Competition Act results in freight rates that are reasonable and stable, from what I read in the documents. The shippers and your customers tell us that this protection results in freight rates that are both too high and unstable. What are we to believe?

Mr. Jordan: I would like to think that you would believe me. I calculated that a can of Labatt or Molson beer, on the shelf in Hamburg, Germany, or on the shelf in London, England, where they drink a great deal of Canadian beer, costs five cents per can to transport 3,000 miles. That is not very much.

I could also tell you that freight rates in all of the trades adjust according to market conditions. There is no question about that. In the case of Canadian trade to Europe, in real dollars, freight rates today are no greater than they were 30 years ago. Mr. Mueller talks about what he did when he was able to negotiate one of those with me, so we know what we are talking about.

The Chairman: Government research suggests that the amount of traffic under conference rate is gradually dropping. Do you agree with that? What do you think the future holds?

Mr. Jordan: The answer to that depends on one's definition of "conferences." In our opinion, with the four categories embraced under conference, we think it is not falling. Eighty per cent, in fact - and perhaps more from Canada - is a very high element of business.

What is falling, however, if I may allude to it, is the incidence of U.S. cargo being shipped via Canadian ports, notably in Montreal, as shown in the statistics just released by the Port of Montreal. Freight rates moved up rather strongly out of Europe when demand for liner space one year or so ago was acute and to the point where certain shippers were offering a premium just to get on-board a ship. Unfortunately, those days have gone. From Canada, the rates have always remained stable and we are perfectly prepared to submit confidential material to explain that.

The Chairman: In terms of international practice, if the United States decides in the coming years to remove the antitrust immunity, do you think Canada should follow their example?

Mr. Jordan: In future years, I will be on the golf course more frequently but still watching, and I would recommend then that Canada should not do that. I fervently believe that Canada, above any nation, has a major advantage from its liner shipping services and the revenues derived from it. I think it would be rather foolhardy for Canada to follow the U.S.A. if the U.S.A. indeed does decide in five years' time or whatever to remove it. One has to remember that 72 countries have signed the liner code on conference practice. We have to remember that Japan and Australia have only just reviewed their legislation and have decided to continue with the limited antitrust immunity they afford carriers.

Senator Callbeck: You seem to be pretty happy with this legislation.

Mr. Jordan: Yes.

Senator Callbeck: Is there anything you would like to see added or changed, or are you completely happy with it?

Mr. Jordan: Mr. Leblanc, Mr. Watson and I have become students of this proposed legislation over the course of the last 18 months. We also watch very carefully what our friends in the Canadian Shippers' Council are saying, and we are extremely knowledgeable in OSRA. I would say the legislation as it is proposed or the changes proposed are at the peak of where it should go. There should be no more "take away" from the immunity levels, and there is really not much I would personally like to see added. I would ask if my colleagues would like anything added.

Mr. Edward Le Blanc, President, Associated Conferences Secretariat, Interested Carrier Working Group: We would like it to go back to the way it was before, but that is not going to happen.

Mr. Jordan: We think it is an extremely balanced piece of legislation. One has to realize we conceded already four of those points, as an industry, and already implemented those in our agreements.

Senator LaPierre: You have convinced me that you do not need immunity, limited or otherwise.

Mr. Jordan: I must have been a very bad speaker.

Senator LaPierre: You have admitted you are not a cartel and do not do all the nasty things cartels do. Your people are quite independent of each other and can move in and out of the conferences as the spirit moves them, and they all compete with each other.

You are not a cartel and cannot fix prices because some of your members are not going to follow them. You cannot do whatever it is you say on whatever page it is. You should always number your pages. You tell us that you can discuss a common tariff and all that, but you do not do that to the detriment of competition. You are not a cartel and do not need immunity. Case ends.

Mr. Jordan: I would not agree with you, sir. I consider the scenario we are in, in answer to that question, as when one marries. One likes to see what one's partner is like and with whom you are going to share your investments. We have to realize that in our business we no longer have an individual set of ships that we work with. We work with partners.

You therefore need to have an immunity that allows you to talk to your partners about all sorts of things and not just price. You also need to be fairly certain, when you are spending $100 million or $150 million, as we just put into the St. Lawrence River trade, that your partners have a reasonably similar mind to you on pricing and are not about to come on board your ship and undercut all your rates just to satisfy their own P & L. Those are the things you need.

Senator LaPierre: That is free competition. That is the way business operates. The banks have no cartel, and yet the interest rates are comparable one to the other. They do not have to sit down, and they tell us they do not sit down and fix the interest rates among themselves.

Why do you need this protection? You are business people. You invest $1 billion into things. You take a risk, like the taxi driver takes a risk by buying a licence at $600,000 or whatever it costs. He does not demand immunity and set up tariffs.

I find it difficult to believe that in order that your business to carry, you need the capacity to come together and fix prices so the poor man who was here before you finds himself a victim of your astonishing power to determine the tariff. If I understood him, he does not want you to have that power because it endangers his company. He wants to be able to bargain from carrier to carrier to get the best price possible, but you arrange it in such a way as to not permit this. That would be a crime in every other instance. You commit this action, and you do not want to pay the consequences of it, in the name of competition.

Mr. Jordan: You have misunderstood, if I may. As I just indicated, even in the traditional conference now, there are individual contract facilities with individual shippers.

Senator LaPierre: No question. Does the carrier who becomes an independent participate in the conference? For example, I go to your conference, and you say this is the tariff. He winks at me, or she does, and after that we go outside and have a beer, and he tells me he will give me 20 per cent less if I go with his ship. Is that possible?

Mr. Jordan: It certainly was possible in the past and no doubt is still possible these days. That was abuse of privilege. Nowthat we have things like individual service contracts and confidentiality - certainly in America and between two willing partners in Canada - those kinds of practices have diminished radically. It is a fact of life that if a gentleman or a firm is a member of a conference and leaves that conferences and prices himself, in many senses he is in no different position to a member of a conference as the traditional conference is disappearing. Each individual member of that conference, if he wishes to, can either take independent rate action on his own, irrespective of what the conference says, or he can and may make a contract with a willing shipper, and if both parties are willing to have a confidential contract, that would apply.

Having said that, under the next variation, which is the discussion agreement, you indeed do have members of discussion agreements who are also or used to be conference traditional orientated and independent or non-conference carriers. They work together on the basis of discussing price but not necessarily agreeing to follow the price.

Senator LaPierre: Are they immune?

Mr. Jordan: They have antitrust immunity, yes, in America and every country we know in the world.

Senator LaPierre: The chair said that in the United States they are going to sunset this clause.

Mr. Jordan: No, sir. There is no sunset.

Senator LaPierre: Would Canadian Pacific go bankrupt if the sunset clause were removed?

Mr. Jordan: I do not think Canadian Pacific will go bankrupt, but at the meeting of the Canadian Pacific board to put its various divisions public, CP Ships would be a very unhappy company, I would have thought.

Senator LaPierre: Why is it that you have to be treated differently than any other business conglomerate or discussion group or conference group? If the banks did this, we would take them to court in an hour.

Mr. Jordan: Under SCEA - as under OSRA, as under the European Community - all of those groups are treated in the same fashion. They have immunity to follow practices and to make rates providing they operate within the disciplines imposed by governments. In the U.S.A., those disciplines are extreme. In Canada, they are less extreme, but there is still a discipline and there is still a possibility of abuse.

The answer to your question is an easy answer to give, but it has been given for 100 years in the liner shipping trade. The liner shipping trade is the one business in the world that suffers dramatically from instability during cyclical trading times and imbalances in trading patterns that lead to fights and collapse and the like. Those circumstances have not disappeared, sir, in 100 years.

Senator LaPierre: You are still carrying tea.

Mr. Jordan: We carry tea for Tetley into Canada, and Mr. Watson has been trying to take it a way for a long while.

Mr. Dave Watson, President, OOCL, Interested Carrier Working Group: And will continue to try.

Senator Adams: You are saying that you have competition with American shipping, and you mentioned a figure. Do you have competition with any other shippers, or is there a monopoly in Canada? How does the system work?

Mr. Jordan: I will deal with this question from the perspective of CP Ships. Our competitors, in the sense of the market from the eastern section of Canada and indeed in Montreal, are American carriers and carriers coming from Asia moving down the coast. They compete for our Canadian cargo and take it back to New York. There is a railway service that runs down there and does that. On the West Coast we have the same situation. There is an inherent plight between Canada taking cargo through America, and likewise Canadian carriers taking American cargo.

If I can look at my competitor as I ship into the European theatre I count 20 competing carriers, minimum. Then, of course, we have freight forwarders and non-vessel operators who also compete with us in the direct marketplace. It is a highly competitive business.

Senator Adams: Our dollar is only worth about 60 cents American. Do you have better business than some of the American companies using your ships?

Mr. Jordan: The currency of tariffs in the course of the last 20 years, because of the volatility of currencies themselves, has caused us to put our tariffs in U.S. dollars even for Canadian trade, and in Deutschmarks in some parts of the world. Currency fluctuations have been taken care of by currency adjustments, which has been a traditional practice in the conferences and the like.

I would not be flippant if I said that in my judgment Canada is an afterthought for some carriers. If the ship is not full of American cargo when it leaves American ports, they might pop over the border and take some hay or some pulp to Japan and the Far East. That is a fact of life. I simply look at this from the perspective of freight rates. The currency does not play a major part in whether a carrier is interested in Canadian cargo or American cargo.

In the Canadian Shippers' Council paper they make a statement that carriers would go after cargo that is profitable, or words to that effect. I hesitate to say it, but I do not know one piece of profitable cargo that moves on ships from Canada. I know of Canadian cargo that moves on ships from Canada that contributes to the fixed expenses of the steamship operator and helps with the imbalance of trade.

I fear that if, from a shipper's perspective, immunity was lifted and the Canadian shippers relied on shipping services for the profitability of Canadian cargos, there would be no shipping services for Canadians.

Senator Adams: I live in the Arctic, in the territory of Nunavut. You mentioned about shipping Molson beer and the cost of that. What is the best way to make a profit, from kilograms or cube? There are many ways. I can never win. Anything I want to ship, either I do not have enough weight or we put on a cube.

Mr. Jordan: That is an interesting statement. In the St. Lawrence River trade, one of the problems that has become apparent is the lack of water in that river. The consequence of the lack of water to our services - that is Mr. Watson's and my service to Europe - is that invariably we must reduce the dead weight that our ships contain by up to 1,000 containers a sailing. That is a significant amount of risk and cost: because we bear the cost of the ship we cannot take the cargo.

Fortunately, we have invested in a fleet of three ships that can deal with those idiosyncrasies of water and allow us to continue to lift the sort of volume we would expect. However, it did cost us $150 million. We did that in good faith and trust that SCEA would not materially be changed from what we understood it might be.

The Chairman: Thank you for your testimony here tonight.

Honourable senators, we will meet again next week for a discussion on the bill in camera. After that, we will come back after our one-week recess to study the bill clause by clause.

The committee adjourned.

Transport and Communications

Proceedings of the Standing Senate Committee on Transport and Communications

Issue 13 - Evidence, September 26, 2001

Proceedings of the Standing Senate Committee on
Transport and Communications