Proceedings of the Standing Senate Committee on
Transport and Communications
Issue 4 - Evidence - November 1, 2006
OTTAWA, Wednesday, November 1, 2006
The Standing Senate Committee on Transport and Communications met this day at 6:02 p.m. to examine and report on current and potential future containerized freight traffic handled at, and major inbound and outbound markets served by, Canada's Pacific Gateway container ports, East Coast container ports and central container ports and current and appropriate future policies relating thereto.
Senator Lise Bacon (Chairman) in the chair.
The Chairman: Honourable senators, we are pleased to have with us this evening as our witnesses Mr. Prentice from the Asper School of Business, University of Manitoba; and Dr. Jake M. Kosior, from Manitoba. Welcome to our committee.
Barry E. Prentice, Professor, Asper School of Business, University of Manitoba, as an individual: Madam Chairman, thank you for inviting me here tonight.
I want to talk about the need for high-quality transportation to serve our value-added agricultural sector. I will speak specifically to the case for containerization of grain, although this is not the only aspect of agriculture or the only aspect of manufacture of value-added that would benefit by some change in the regulations that surround our current cabotage regime for containers and the impetus this would provide for a policy change.
In terms of value-added agricultural transportation, we have seen what I consider to be a third way of moving grain. The first way was, of course, in sacks. From the 1700s to about the 1900s, everything was moved in sacks. There was a transition in the mid-1880s into bulk shipment and this method has been the predominant way of moving grain since that time. In fact, some people think it is the only way to move grain. I disagree; I think that by 2040 we will likely see the majority of grain moved in containers, something that started in the 1970s. I will explain why.
The advantage of sacks was that they involved low technology and low handling damage. At the time, there was a wide choice of transport available and it was quality specific. Each farmer owned the grain all the way through the marketing system and sold it based on the quality of grain he produced. The disadvantages, of course, were the high packaging costs. The sacks had to be returned to the farms. It was very labour intensive and people literally carried sacks on their shoulders up gangplanks to put them into boats. The sack method produced high information costs because each lot of sacks had to be identified all the way through the system. Insurance costs were very high to protect the crop from rain or shipwreck. The picture you see is of a typical market where buyers are unloading the sacks and looking at the quality before they purchase. This was a very inefficient system and led to the change to bulk handling.
The impetus for bulk handling was the development of mechanical handling. By the 1860s, handlers came to realize that grain would flow like water and that by raising the grain up to a bin high off the ground, they could release a door and it would flow like water down into a rail car. This method sped up the loading of rail cars. It also led to grain economies of size.
In this picture from the 1910-20 era, you can see a large elevator not too different from one we would see today. There are many rail cars and in the background you will see a sailing ship, which is still there, but disappearing quickly.
Another benefit of bulk shipment was in the transactions risks; farmers could sell their grain right away and knew what they would receive as payment. They did not have to take a risk on the price. Of course, grading and commingling actually raised the quality. There were advantages to the bulk system. We went to it for a good reason and we are still using the system today.
The next picture is an illustration of what the bulk handling system looks like today. Farmers have storage bins and instead of small wagons, they are moving the grain to the elevators in large tractor-trailers. The primary elevators are big bins that load onto unit trains. You see the unit train, which could have 100 cars, each carrying 100 tonnes of grain. The train moves the grain from the port to the terminal elevators from where it is transferred from the rail cars to another large structure. It is then transferred into a ship. Each way through the system, you can see the storage gets larger and the quantity of inventory increases until it is loaded on to a ship and shipped across the ocean to a buyer.
There are many advantages to bulk handling, such as the economies of size and the reduction in costs. There are no packaging costs because you pour the grain in and out of the vehicle. Some blending advantages can be found in terms of upgrading the quality. There are low information costs. One of the reasons we went to bulk handling is because we did not have to keep track of who owned grain because one bushel replaced another. As long as it was the same quality, everyone was happy.
All those rail cars going to the coast come back full of sea air and most of the ships coming in to the harbour to pick up grain are coming in ballast. Farmers pay the full round trip costs of the ships going out.
Although we do have a relatively high quality of grain in Canada, it is generic quality. It is not specific; it is generic to a few grades. We do not necessarily capture the premiums that could be there for higher quality product.
There are high fixed costs in this system. You must build the system big enough to take the surge of capacity in the fall, but dedicated facilities are left sitting half used at other times in the year. You can find rail cars gathering dust on the Prairies in the middle of the summer because there is no need for them except during the rush at harvest.
You also have large pipeline inventories. At one time, and it is still the case, wheat sat in the pipeline for 100 days. After leaving the farm, we are financing that wheat in the pipeline for 100 days. Of course, at the final destination there are more charges for inventory. Finally, there is handling damage. The more you handle grain, the more it rubs together and creates dust, which is why we have dust extractors on these elevators to prevent fires, but it damages the grain. There are disadvantages as well as advantages to this method.
I would now like to move to the notion of containers for marketing grain. First, we have a dramatic fall in the price of containers. My colleague Dr. Kosior will speak more on that subject.
On this graph, you can see that we are into the sixth or seventh generation of containers. The ships have gotten tremendously large, much larger than any ship carrying grain in bulk, and of course, the on-sea shipping costs are lower as a result.
We also have a tremendous change in information technology. This is not news to anyone here, but I would suggest that this laptop computer has about as much capacity as the mainframe at the university where I was an undergraduate. There are tremendous advances in computers and in information, for example, the ability to send an email. One could literally send an encyclopedia of information to Australia for less cost than sending a letter across town. We do not need to worry about information costs the way we used to. This is important in terms of keeping track of who owns what in the system.
Finally, we have concerns about security and about GMO crops and the issues of blending products together. I will not suggest to you that we should be afraid of these things; I am not. However, that does not mean that buyers are not worried. We have had loads rejected because GMO crops have been found in them. Starling corn concerns people because sometimes things can leak into the system in bulk. It is hard to keep crops completely clean over time. Similarly, there is an advantage to having traceability in the security sense. If there is a problem, one can trace it back through the container system and find out exactly where something entered the system.
This graph shows data from the port of Vancouver. These are containers filled in Canada for outbound shipment. Wood pulp and lumber are the two biggest products. Incidentally, we did not move lumber in containers 15 years ago. Lumber came into containers because containers became cheap. Now lumber is shipped in containers and I am told it will not go back to the other method of transportation. Waste paper is another of our products. Notice the lentils, peas, beans, soybeans and alfalfa hay; these numbers keep growing. There are over 1 million tonnes of agricultural products being shipped in containers today. It is a large and growing market.
This picture shows a container handling system for grain, literally having some kind of container loading system.
These pictures are from Australia; is that correct, Dr. Kosior?
Dr. Jake M. Kosior, as an individual: Some of them are from Australia. It is a conceptual model.
Mr. Prentice: Australia has already moved to loading grain and wheat in containers and shipping it to customers, although there are some issues with the marketing board wanting to control that process. It is easy to see how you can load a container, put it onto a double-stacked train and send it off to the port and onto a ship, as we do with many other products.
These are the advantages and disadvantages of containers. First, every container is a bin. The storage and transportation is combined. You can preserve the identity of the grain. You know exactly what you are getting when you load it. There is no handling damage. The product does not change from the time it is loaded until it is un-loaded. There are back-haul opportunities. All the containers going out can bring products back in. In our case in Western Canada, we can take advantage of back-haul container rates to ship at a lower cost. Finally, the opportunity for just- in-time logistics would lower inventory costs to the system.
There are some disadvantages to containers. Certainly, few loading facilities exist. We have an incumbent bulk- handling system that does not want to be replaced. There is a lack of foreign container handling equipment at some ports, though that is changing quickly. Last, we have the regulatory barriers, and that is what I am here to discuss.
Specifically, in terms of agriculture, the cabotage restrictions we have on containers increase the costs of repositioning containers. That means bringing a container into the Prairies to be loaded out. We also have an issue with the railway revenue cap, which was designed to protect farmers from excessive prices on bulk handling of grain, but they also pick up containers with that. There is no reason for us to protect any farmer from the price of containers, because the railways negotiate that with the shipping lines. The shipping lines really are the countervailing force against the railways for container cost.
Finally, we have new technology coming on board, the RFID tags, which will make regulatory enforcement a by- product of future security measures. We will know what is in every container the container's movement through the system.
Cabotage does have a negative impact. It raises the costs of container repositioning, as I have mentioned. It also means that it is not possible for us to have an organization that we see in the U.S. called non-vehicle-operating common carriers. These are people who work with the container lines to find loads for the containers. They lease the containers while they are using them and move them back toward the ports. They can do that because in the U.S. a container can go anywhere for 365 days, as long as it is moving on a U.S. train, truck or barge. In Canada we have restrictions, which my colleague will speak to.
There is a lost opportunity for domestic distribution. Again, my colleague will speak to that. There is also a lost opportunity in export markets.
My graduate student Eric Avido did a study looking at the impact of these higher repositioning costs on our export sales. We used a quantitative model to measure this impact using lentils as an export crop. We found that higher transportation costs reduce our sales by about $10 million annually. That adds up quickly. Lentils are only a small fraction of the grain we ship. If we multiply that across our crops, there is a large opportunity loss, as well as an environmental opportunity cost. We have empty containers moving across the country, right past places that would use them, and then we must bring containers back in to load out, and of course we miss the distribution opportunity as well. We are burning more fuel than we need to in order to carry out our distribution in Canada.
People are always interested in the winners and losers of any policy change. Clearly, the winners will be the exporters who will get lower-cost containers and the farmers, who will have more opportunities for their export market, as well as lower costs. The railways will be winners because they can make better use of their equipment and earn more revenues. The port authorities will be winners because they will become more attractive to shipping lines, and maybe bring containers out of the U.S. The consumers would benefit perhaps from the lower distribution costs, and mostly, the interior regions of our country would be winners. At the ports of Montreal and Vancouver, there is no problem because the containers are right there. It is when you get inland to try to get a container that you have some difficulty.
There are potential losers. In my view, the people whose business it is to take goods that arrive by truck to be converted and put into containers — we call them ``stuffers'' — at the port would have less business because we would not move things by port in trucks; we would simply move the containers inland and load them at the site of the shipper. They would lose some business, although I do not think they would necessarily complain very much.
Last, we have the cheaters who flout the law. These laws are not well enforced. It is hard to say how much cheating goes on, but from my discussions with industry officials, I certainly know that some cheating occurs. If we change the system, some of the benefits they accrue today would be lost.
My view is that the Canadian cabotage policy for containers is penny-wise and pound foolish. The revenue collected on international containers cannot be very significant because certainly none of these containers that are coming in and going out are paying that duty anyway.
In terms of the enforcement costs, if we decided to enforce these regulations properly, that would be a very expensive exercise. I do not think we do very much in that regard.
The inefficiency and additional costs imposed on the industry by these regulations is widespread and significant. You do not hear many people complaining, principally because it is a small hurt on many different people, very widespread. Collectively, however, it is a big hurt and it is hidden. It just gets passed on in costs and in many cases people do not even know it is there.
My argument would be that the increased economic activity generated by a more relaxed container cabotage regime would create additional profits and economic activity that would more than offset any tax losses that might be incurred by the loss of revenue on customs collection. We need some kind of cost benefit analysis to look at this if you want to have a true answer to the question. Even without looking at it ex ante, evidence suggests that the change is in our interests and overdue.
Mr. Kosior: Thank you for inviting me today to present to you. I was introduced at the start, but presently I am the senior planner with the Department of Infrastructure and Transportation with the province of Manitoba. I have held this position for the last nine months. Prior to that, I was a private consultant at Supply Solutions International for six years. Prior to that, I worked with Mr. Prentice for eight years. I was his senior researcher at the University of Manitoba. That is the affiliation. Eric Avido also worked at the university, and like three Ps in a pod, we did this work together. Today, I am speaking as a private citizen. My employer felt it was very timely to speak on this topic and what it means for Western Canada.
Where Mr. Prentice left off on the conceptual side of things, I am going into the operations and details to show you how these laws affect certain operations that we looked at in terms of case studies.
Two things lead to the evolution and the growth of the container industry. First was the rise in global trade from relaxed trade laws. That is, NAFTA relaxation in the Asia-Pacific and the access to cheap manufacturing labour in Asian countries. The second was the development of container technology over the last 30 years.
The vessel you see in this photo is the Regina Maersk. She was christened in 1998 and was a state-of-the-art vessel at the time. It is 6,000 TEUs — three football fields long. You can see a tug boat in the corner; that is your reference point. In 2002, there were new vessels christened at 7,200 TEUs. The next generation, in 2004, was 9,000 TEUs. There were 11,000 TEU ships christened in 2005 and in 2007, there will be vessels at 11,000 TEUs. A TEU is a twenty-foot equivalent unit. The new containers are large, the equivalent to 20 stories high and 14 stories across. They are the same size as an ultra-large crew carrier. It is a very large ship. The container lines must fill these vessels. The majority of freight will come from the bulk side of things.
Over the last 20 years, material handling has evolved quite well. The terminal you see in the upper left corner of photograph is located in the port of Amsterdam. Typically, in the past, ships were handled with cranes from one side of the vessel. This is U-shaped so that it operates and handles the ship from both sides. The NYK Apollo is a 5,000 TEU vessel. It operates at 350 containers an hour. This terminal guarantees 250 containers an hour as a minimum market guarantee.
At inland ports, container handling is very fast and efficient and rivals that of bulk. The train you see on the bottom slide is a train that operates under contract by Union Pacific for American President Lines, a Chicago to Los Angeles run six times a day; 100 containers by 100 cars long is quite significant.
I will now address the regulations in question. The regulation under the Customs Act is 9801.10.01, whereby a container is limited to 30 days duty free status within Canada as an import item. From time to time, the customs agency sends out memos that explain the operation of some of these regulations and memo D3-1-5 allows one incidental move back toward the port from the point of origin. If it came in from Vancouver, it must go back through Vancouver. That is the literal interpretation of that memo. You can only allow one domestic move to bring it back to that point. I will talk about this later.
Next is memo D3-7-1, the Canadian post-audit system, whereby a company can apply for a pool operator status whereby it can maintain an inventory of containers within Canada for duty free status of 180 days. Although the time is longer, it still needs improvement.
Let us start with an example. You have an importer that is bringing in a container from Vancouver all the way to Toronto. The importer is unloading that container in Toronto. It is now empty and available for export use. Let us suppose that there is an export load scheduled in Saskatoon. For domestic goods moved in that foreign container from Toronto to Saskatoon, you are allowed one. The green line in this graph represents the unloading and the subsequent loading of the export load on its way to Vancouver. Memo D-3-1-5 states that it must be consistent and incidental to the direction from where the container came, so that is Vancouver; this is legal.
Let us suppose we have another scenario. That same importer brings a container to Toronto and there is an export load in Calgary. Unfortunately, that carrier only has a load going to Winnipeg and, say, maybe there is a second one available, for instance, Winnipeg to Regina and Regina to Calgary. Finally, as the green arrow shows, that export load is picked up in Calgary going back out through Vancouver; that is illegal.
Senator Phalen: I ask the question why?
Mr. Kosior: That is the interpretation of the law. You are only allowed one.
Senator Munson: Who made that offer?
Mr. Kosior: Good question, senator. It is in the regulations. I have the actual regulation.
Senator Mercer: Somebody before us.
The Chairman: That is why we are studying containers.
Senator Tkachuk: We did not even know there was a law, let alone who framed the law.
Senator Phalen: I do not want to interrupt you, but why do you have the picture there? What happens to the person who uses more than the one mode and goes to the second and third mode? Are there tariffs?
Mr. Kosior: They could be subjected to fines; seizure of the container.
Mr. Prentice: They also must be caught.
Mr. Kosior: That is right. That is your cheaters.
Mr. Prentice: Again, we do not have evidence of that, but anecdotally we know that things go on.
Mr. Kosior: What about a few more examples?
Once again, the importer brings it into Toronto but let us say there is an export load again in Saskatoon. We have a domestic load Toronto to Saskatoon but say there is an export load available in Saskatoon but it is going over to Europe. The shipper wants to move it through the port of Montreal instead. That is illegal. You cannot do that because it is not consistent and incidental to the original port of entry.
This slide is from of the study that Dr. Prentice and I did just before I joined the Manitoba government. The red line shows Canadian Tire movement and the blue line represents Maple Leaf Foods out of Brandon. Maple Leaf ships a lot of frozen pork to Asia. Here we have two different operations that could combine and work together. The dotted lines represent the empty movements.
Would it not be nice if we could combine their operations and save on fuel and movement, thereby saving rail capacity? Would it not be great if you could move that container, even if it is empty, from Saskatoon back to Winnipeg and to Brandon by rail and truck? However, that is illegal. You cannot backpedal from Saskatoon to Winnipeg.
Let us take a seafood example with Canadian Tire taking a container from Toronto, moving their own goods up to St. John's and bringing it back empty. The blue dot represents a refrigerated container. A seafood exporter could pull an empty container out of Halifax, move it up to St. John's, and then it would go off to Toronto.
That is the way it has to be done now. The dotted lines represent the empty movements. You can see wasted capacity and wasted space, which is very inefficient. If container laws were changed where one could complement the other, the operation could be nice and smooth.
In the Maple Leaf example I calculated 650 litres of fuel saved. In this example, because it moves by truck, you save 1,700 litres of fuel. Why can we not do that? If the container came in from Vancouver and went to Toronto, the movement from Toronto to St. John's and back is considered backpedalling again and is not technically allowed under the law.
This slide illustrates what the federal government is aspiring to, the Asia Pacific Gateway Initiative. They are putting $591 million into infrastructure improvements for the West. This is the vision.
In 1997, Dr. Prentice and I were in Edmonton for a research forum. I proposed that we turn Prince Rupert into a container port. I was almost laughed out of the room, but 10 years later that is exactly what is happening.
This slide illustrates that CN's target traffic is not north Canadian traffic; it is L.A. traffic. The American ports are getting quite plugged up so they want to get hold of that traffic. The Prince Rupert-northern China route is actually three days closer to the American and Canadian heartland than is Los Angeles. There is a tremendous opportunity for Canada, particularly Western Canada. Winnipeg is definitely the branch point which provides opportunity for Manitoba.
U.S. container cabotage laws allow 365 days. It can be duty free with any amount of movement anywhere in the States, and it does not have to exit the States at the port where it entered. They allow unfettered movement. You can move domestic freight. Any amount of zigzag motion needed in order to pay for that freight is allowed in order to reduce the empty miles.
On the post audit system, let us have it so that we can include any domestic carrier with non-vessel operating common carriers, to which Dr. Prentice referred. A good example would be a web-based load broker or equipment broker, a person who does not own the equipment but is like a travel agent. They do the buying, selling, and provisioning of equipment for carriers.
Bring Canadian regulations in line with NAFTA. When we looked at the regulations, we saw that NAFTA considers marine containers on the same level as a pallet or a truck body. It is just a steel package, because it adds no value to the goods in it. They consider it a duty free item, even though it can cross borders. If NAFTA is in the spirit of that, our laws are a little behind in that case.
With regard to anticipated benefits, I have already said that we would save on empty movements. Reduced emissions would help us meet the Kyoto Protocol. With no empty movements you increase rail capacity. Many other countries are moving toward relaxed cabotage as a no-money-down way of increasing transportation capacity.
On capital retention, Canadian Tire and CN went overseas to procure their domestic containers because it is cheaper to buy a 53-foot container in Shanghai, China, ship it here and pay the duty than it is to buy one from a Canadian manufacturer. However, if they were allowed to use foreign containers for their movements, to work with a container line, they would not have to buy all those containers overseas. That is capital retention, which could go back to Canadian shareholders.
A revamped rate structure is important to Western Canada and shippers. CN did mention that if these laws were changed, it would change the way things operate, the way containers move. Traffic flow would change. Along with that, revamped rate structures could lead to much lower rates for Western agricultural shippers. It goes without saying that increased rail capacity reduces congestion. It results not only in an improved system, but also in labour efficiency. You are not spending a lot of money and wasting time, labour and effort on moving empty cars all over the place.
I will conclude there and we will take your questions.
The Chairman: Thank you very much for your presentation.
In the 2005 report by Supply Chain Solutions International and the University of Manitoba Transport Institute, one proposal was to relax cabotage rules. The assumption behind the recommendation is that such an initiative could improve capacity and reduce fuel consumption in the intermodal system. What do you think could be the overall impact of freeing up capacity for Canadian shippers?
Mr. Prentice: Transportation is a derived demand. Whatever we have in terms of demand for transportation equipment is based on the flow. Clearly, if you can reduce the cost of transportation, people will ship more, so I can see it only as being positive. I am not sure we have the ability to put a hard number on how many containers would move, but we can certainly say that we will move in the right direction, that we will see more efficiency and better economics for all industries in shipping.
Mr. Kosior: The study you referred to was a case study analysis on what it would mean for one particular company. You are talking about network-level savings. We did calculate, for the western case, 650 litres, and in the eastern case, 1,700 litres of fuel savings. We recommended a network-level study beyond what we did, and I believe that is being done now by Transport Canada. I do not know whether that study is available yet, but I can put you in contact with the gentleman who is in charge of it.
That would involve looking at domestic freight east-west, container freight east-west, growth forecasting and so on. You would have to include in that rates, elasticity of demand for rates, et cetera.
These issues are a little more sophisticated than that. We will most likely have to wait for the outcome of that study and go beyond that.
The Chairman: Based on your studies, a positive consequence of relaxing Canada Customs regulations in Canada would be on the environmental front. You suggested that the environmental impact of container transportation would be reduced with more liberal customs rules.
The main reason behind my interpretation is your conviction, I suppose, that repositioning empty containers would be unnecessary in order to avoid customs duties if new rules are applied.
Could you provide us with concrete examples regarding the impact of new customs rules on our environment? What will the effect be on the reduction of emissions?
Mr. Prentice: This is an empirical question. We do not have the numbers because we have not completed that research. We have completed specific case studies where we looked at fuel savings without duplicating moves and repositioning empty containers. For example, we see empty containers moving through the Prairies towards Vancouver, and at the same time we have truckloads of products moving off the Prairies going to Vancouver to be loaded into these containers. At the same time, if you avoid additional trucking or rail moves, you will reduce emissions. It is axiomatic that will happen. Again, how much it will be reduced is an empirical question, but we know it is positive and heading in the right direction.
Mr. Kosior: There were some examples provided in the study we completed. With that were actual spreadsheet models for the case studies. In one case study, we calculated on the fuel savings. You can then take that and relate it to so many tonnes of emissions.
I think your interest is with respect to the total amount of reduction across Canada from these effects. That can be calculated, but that is involved in the study presently underway.
We can provide you the actual figures from each individual case study. I calculated 1,700 litres of fuel for that Toronto to St. John's trip. If we multiply that over X amount of moves the tonnage would be significant.
Senator Tkachuk: Do the railroads own the containers or do the companies that bring in the product own the containers. Who owns the containers in Canada?
Mr. Prentice: The international containers are owned by the shipping lines, although there are pool operators that lease containers as well. However, most containers are owned by lines such as NYK or OCL.
You will also see containers with the name of a trucking company written on the side of it, such as Yankee or some other name. CN has its own containers, but they are used for domestic moves only. They do not go overseas, and there is a reason for that. The containers moving internationally are standardized at 20 feet and 40 feet in order to fit into the cells of the ship and to get around narrow cities accessing Europe and other places. In North America, we have longer truck bodies measuring 53 feet. The difference, of course, of 13 feet extra capacity is not more weight but more bulk. Many of our products bulk out first; therefore, it is important for shippers to be able to use some of these bigger boxes.
To some degree we will see activity at the port converting goods from international containers to domestic containers. The reason for this is because three 40-foot containers will fit into two 53-foot containers and be moved inland. There are economics in doing it that way. There are a range of people who own containers, but all the export or international ones are owned offshore.
Senator Tkachuk: Are those the ones restricted by the cabotage rules? Are there no restrictions on what domestic containers carry or when?
Mr. Prentice: No.
Senator Tkachuk: Does the domestic owner of a container benefit by restricting the number of international containers running around in the country that may be taking away business from his containers?
Mr. Prentice: That could be a possible interpretation. The other possible interpretation is that the railway does not make any money on containers; it makes money on moving goods. Whether the containers belong to them, which they have to pay for and finance, or they belong to someone else, my argument is they would be making more money using someone else's equipment rather than their own. When we talk to the railway companies, they do not seem very concerned about this issue. They would be happy to use someone else's equipment. The only restriction is it may not be 100 per cent as a result of the issue of bulk and the desire for the larger containers. We will continue seeing them used in any event.
Senator Tkachuk: How does that work? When Wal-Mart or Canadian Tire hauls in a product that heads down to Toronto and then it returns to port to meet the 180-day restriction, do they pay for that container's return costs?
Mr. Prentice: My understanding is it is an agreement between the railway and the ocean container line as to what the railway pays to take the container back empty. I do not believe it is the shipper.
Mr. Kosior: No, it is an agreement between the two carriers; it is not free.
Senator Tkachuk: I think we are all struggling to realize the advantage of having 180 days rather than 365 days. Is there any logical explanation for that 180-day rule?
Mr. Prentice: No one has ever explained to me why they chose 180 days. My guess is it was considered to be an ample amount of time. I think the issue is not so much the time in the country as it is the ability to move the container around in the country freely. I think those are the restrictions that are more binding and hurtful than the actual absolute days. After all, the container shipping lines want their equipment back as well, so they do not want their containers floating around forever in North America. They want to see them back on the ships to make money for them, even though they will make some lease money.
Senator Tkachuk: How were the restrictions on what they carry back, when and in what routes decided? Are they decided by regulation as well? If so, what is the point of having those regulations in the first place?
Mr. Prentice: We have regulations on cabotage of trucking as well as on other modes of transportation. Some of them do not make a whole lot of sense.
In the case of containers, I think it was more a matter of at the time they were put in place; they thought it was appropriate to protect Canadian industry. That could have been the reason. The notion that only one shipment is allowed on the way to a port consistent with the way it is going is similar to the way the trucking cabotage regulations work. My guess is — and, again, I am speculating — is that they simply took the trucking-type regulations and applied them to containers as well.
Senator Tkachuk: I am intrigued by pulse crops loaded into containers. Do you see the day that regular number 1 wheat will be containerized and moved to ports?
Mr. Prentice: I have had an ongoing battle of the minds with the Canadian Wheat Board on this issue. I have been arguing for many years that this is what we should be doing in order to increase the value of farmer returns. As you may be aware, the quality of wheat changes depending on the soils and the climatic conditions across the Prairies. The same variety grown in Manitoba yields a different quality in Alberta. We have the ability to benefit from that if we market it smartly and brand name our wheat. My view is that containers would allow us the ability to literally have brand names for wheat and package it that way. The best example I can give is the Australians, who have allowed shippers to use containers for grain. They found a tremendous surge in the use of containers for shipping grain to Asian countries, so much so that the Australian Wheat Board became quite upset and finally regulated and closed down the amount they could ship. Part of the reason was that the shippers on the other end like to receive smaller container loads. It was easier for them to finance and interest rates in developing countries can be very high. There might be a pull on the marketing side as well.
The Canadian Wheat Board does fill some containers with grain. Some receiving countries want the grain in containers. A miller in Hong Kong for a long time has no capacity or space for receiving big shipments. They receive grain in containers but they move it in bulk all the way to the coast and then fill the containers at the coast and then out they go.
Senator Tkachuk: It seems to me that the day will come when a farmer will load his grain directly into a container or an inland terminal of some sort, bypass the elevator, work through an agent, and ship the grain directly to the market. To an orderly marketing person that might seem chaotic but as a market person I think would be highly efficient. How can we make that happen with the Canadian Wheat Board?
Mr. Prentice: We have had a battle of the wits over this issue. I noticed that the Wheat Board is becoming a little more open to the idea of using containers. They have actually talked to me a bit about this. Since there is a pending change in the Wheat Board and where they have no assets, containers would be the ideal way for them to go. In that way they might be able to survive best by moving grain in containers. The real point comes down to Canadians and our products. We have to face generic exports from Ukraine, Argentina and many other places. We have very good quality wheat but I do not see that we have truly maximized the value of it by looking at its inherent qualities and trying to find specialized markets. A well-known example is Warburton's which wants only a few specific varieties of wheat and only from the specific area of Manitoba and Saskatchewan. Warburton's pays a happy premium for that wheat because they get just what they want. That could be replicated and containers would allow us to do that in a better way. My view is that we should do it that way.
Senator Phalen: In your first diagram, you showed us the farm storage and in the second diagram, you showed us a container loaded for storage. You are saying then that you will eliminate farm storage. Will the container be right on the farm to accommodate that storage?
Mr. Prentice: We do not have the ability to do this now so we have not explored all the possibilities. Logically, farmers do not get paid for the storage as soon as they sell the grain; the storage is waste. Why would they not be better off to have containers come and use them right after harvest when you have to protect your crop, when the grain leaves, off goes the storage too. It would make sense.
Senator Phalen: They could have a container facility.
Mr. Prentice: Equipment has been developed independently to move containers around on farms. My guess is that farmers could have the storage because they still need a certain amount of storage to aerate and condition the crop. You cannot ship grain if it is not fit. Certainly, in years when we have a very large harvest, containers would come in and add extra storage. They might well fit into the way that farmers would change their systems.
Senator Phalen: You would eliminate the elevator.
Mr. Prentice: The elevator might still play a role. I like to use the analogy that there is single malt and there is blended scotch. Some people will like to buy specific grain with the variety and location and some will want to receive the same blend every time. The elevators might play a role but they will have to earn the right by providing a service that people want.
Senator Phalen: Is there a heavy cost to the farmer for the container-loading system?
Mr. Prentice: There is some cost that they do not have now but I do not think it would be excessive. It is quite simple to fill a container with grain. It is not a sophisticated system.
Senator Phalen: Would the cabotage rules affect the number of containers available for inland producers?
Mr. Prentice: That would be the biggest advantage. You would have a non-vehicle operating common carrier system whereby as soon as farmers would want containers, they could email the supplier or contact them on the website and have a container delivered.
Senator Phalen: There is no shortage of containers.
Mr. Prentice: That is right. It is simply a matter of getting them when you want them.
Senator Phalen: You raised the subject of revenue cap imposed on the railways under the Canada Transportation Act. The revenue cap limit is the revenue that the railway can earn from grain transportation. Can you tell us the rationale behind the revenue cap?
Mr. Prentice: At one time before the revenue cap, we had a regulated system of rates for moving grain by rail to the ports. As to what they can charge, I do not know the exact number. Perhaps it is $35 per tonne or something in that neighbourhood. The review by former Justice Estey resulted in deregulation of the rates but in order to protect the farmers, they imposed a revenue cap on the maximum earnings you can make adjusted by the volume you move and the distances you move. If you go over that revenue, then you pay a big fine. This means that the railways can charge anything they want to move the grain by rail but they cannot charge more than the aggregate total of this revenue cap. I believe the unfortunate side effect is that containerized grain was caught up in that cap. It was not part of the intended protection but it is there as well. I am told that there is an adjustment after the fact whereby the extra cost for the containers does get factored back into the railways so they do not lose money. However, it does not create an incentive to try to encourage the use of containers by the railways.
Senator Phalen: Do you recommend eliminating the revenue cap?
Mr. Prentice: At minimum I would recommend that containerized grain be removed from the revenue cap because there is no need for that protection for the farmers. They are already protected by the impact of the big ocean liners or carries to negotiate rates.
Senator Phalen: What would the farmer realize if that cap were removed?
Mr. Prentice: One thing would be better service because there is more incentive to try to bring containers to them. If you speak with the people selling pulse crops, you will hear that they are not worried about the revenue cap. They want the service and are happy to pay what it costs for containers. I do not think there would be an impact to farmers.
Senator Zimmer: Your presentation was interesting and revealing. I want you both to know I was talking to Lyle Bower, General Manager of the Winnipeg Blue Bombers. I told him you were presenting and he said we should have faith and keep the faith that the Blue Bombers will be in the Grey Cup on November 19. He wanted me to pass that along.
In your paper, Dr. Prentice, on the restriction of value-added agriculture exports, you talk about containerized grain and bulk shipments. You indicated that containerized grain costs more to move than bulk shipments of grain on trains. Why is that?
Mr. Prentice: It costs more if you are looking at the actual transportation cost. However, we have to recognize that a container is both the storage unit and the transportation unit, and there different amount of handling that goes on. In order for the grain to reach the ship, it has to move off the train into a terminal, and then out of the terminal and back into the ship. There is a lot of handling and storage in the bulk system, and that is charged differently.
If you look at the true comparison of the cost between containerization and bulk, you find that they are very competitive. In fact, we have seen lower costs for the containerized system. Just looking at one aspect of the cost is misleading; you must look at the total cost.
Senator Zimmer: Why does grain in containers generate more revenue per tonne than the bulk system?
Mr. Prentice: If you can get a higher price for the product you are selling because you can provide more precise quality, you should be able to earn more revenues. This is the case with some kind of specialized product — be it organic wheat or pulse crops and so on.
Senator Zimmer: Your research suggests that relaxing customs regulations in Canada would likely result in more container capacity available to Canadian shippers. I have three questions in that area.
In what Canadian production sectors is there a latent demand for container capacity?
Mr. Prentice: We see this in terms of moving grain, such as the pulse crops. The answer comes back to the derived demand of transportation. If the costs are lower and the service is there, you will see more people wanting to use the service. It is not just grain and raw materials. Anyone who is using a container, any manufacturer that is not in the immediate vicinity of the ports will have a benefit. It is very widespread.
Senator Zimmer: Is there more demand for domestic or export movements?
Mr. Prentice: It is an integrated market. Even when we bring product in and it is imported, it comes into Canada and is then distributed around Canada. For example, we mentioned Canadian Tire; the product arrives in their warehouse but then it moves out of the warehouse back out to other regional centres, so you have domestic and international distribution combined.
A big part of the benefits of changing cabotage will accrue to the domestic distribution because it will make more effective use of those vehicles within Canada.
Senator Zimmer: What range of increases in capacity for Canadian shippers do you expect might result from relaxing the customs regulations on international container equipment?
Mr. Prentice: That is a good question. I do not know that we have an answer to that; it is an empirical question.
We know that many empty moves occur, so I suppose you could simply say filling more of those containers. We should have our heads in the clouds that every container will be filled all the time; there will still be empty moves. However, if we can reduce the amount of empty moves, that will increase the capacity by that amount.
Senator Mercer: I am from Nova Scotia, so my interest is in the East Coast. You did not spend a lot of time talking about the East Coast, but we will get to another special interest that I have.
When a container is used for grain, can it be used for something else afterward?
Mr. Prentice: Yes. Typically, you put a plastic liner inside the container.
Senator Mercer: You have bags of grain in containers.
Mr. Prentice: Yes, it is essentially a big baggy and you fill it up.
Senator Mercer: In your presentation, you talked about the potential winners and losers for a new container cabotage regime. You missed a couple of the losers.
Mr. Prentice: I am sorry; which ones?
Senator Mercer: You missed one, in particular. Using containers means that the manufacturers of grain cars, particularly the plant in Trenton, Nova Scotia, lose a lot of business because containers are not made in the same place as hopper cars. Unless we are shipping the grain to the extremities of Churchill, Vancouver, Halifax or Montreal and then filling the containers with the grain in those locations, that has a potential economic impact on the East Coast. I am sure that the Minister of Foreign Affairs, who represents Trenton, Nova Scotia, would not be too happy about that situation. That is a political problem.
I am concerned about the number of empty containers moving around the country. We have this regulated so that we are forcing people to move empty containers. Do we tax them when they do it? What looks logical on the map does not look logical on the balance sheet. Am I correct?
Mr. Prentice: Let me answer your first question about the hopper cars. I do not envision that we will necessarily move away from using them completely. Even in 2040, we still may be using hopper cars for domestic moves for people who are set up for them. I do not see them going away. Certainly, hopper cars will be in demand for potash and other products that can use hopper cars. I do not see that as being all that negative.
In terms of the plan, there will be a desire for more platforms to move containers. It is just a different kind of rail car as opposed to a hopper car. We may not see the same negative impacts at the works that you have mentioned just because of containers.
Senator Mercer: We talked about the movement of empty containers. On the map, from business point of view, it looks logical that you would make the stops to fill up the container. However, it appears, because of regulation and taxation, that it does not look so smart on the balance sheet. Is that correct?
Dr. Kosior: On the balance sheet, no. For every container that comes in, it only moves partially the way back. There is a three-to-one ratio of empty containers moving out of Vancouver. On the export side, it is three; on the import side, it is one. Those containers have to come from somewhere and a lot of them come up through the States; however, they are empty and they all allowed to cross the border that way. Logically, when you have a domestic load coming up from the States and it is going by truck, then it could just as easily go in a container on a rail car, or even on a truck for that matter.
I do not want to throw out a number and then be cornered for it, but we could reduce a large percentage of empty moves. Mr. Prentice mentioned the works in Trenton where they could easily make chassis rail cars.
In the next five to 10 years, CN will want to renew a large portion of its deck fleet. The first generation of container rail cars, which are only single stack, will need to be replaced. Those are light rail cars, meaning they cannot take 265,000 pounds. They will need heavy-haul cars, double-stack cars, and the well cars. There are single platform cars and then ones that can sit in the belly of these cars.
Mr. Prentice: To answer your question, what we are doing simply does not make any sense. It does not make any logical sense to restrict these movements.
Senator Mercer: I like your analysis and I like to know the fact that CN will have to replace a number of its containers.
Dr. Kosior: Do not make hopper cars make intermodal cars.
Senator Mercer: That is always an issue; but CN is now a North American company and no longer a Canadian company. I suspect that the pressure will be on to have the rail cars made south of the border. The advantages may not be there to make them in Trenton, Nova Scotia, where I would like to see them made.
You both referenced the backlog at Vancouver. Of course, there is no backlog at Prince Rupert until it is open, but it will be backlogged soon. In your studies, have you analyzed the use of East Coast ports to help solve that problem?
We heard testimony from other witnesses about taking the post-Panama ships through the Suez Canal to Halifax then moving them inland from Halifax, where we are closer to the Eastern seaboard markets of the United States.
Mr. Prentice: Logic suggests this will happen, especially as India becomes a bigger player. India is closer to North America coming through the Suez than going the other way. I would suspect there is very good news in the future for the growth of Halifax.
Senator Mercer: I think the widening of the Panama Canal is very good news for Canada. The widening would also draw China and Taiwan closer to the East Coast.
Mr. Prentice: Yes, today the containers are off-loaded on the West Coast and sent to the markets in the East by rail. It is always so much less expensive to go by sea. I would say, yes, the bottle neck is the Panama Canal. Incidentally I understand the Nicaraguans are also interested.
Senator Mercer: I should point out that we have no waiting in Halifax. We can service people right away. We are only working at 40 per cent capacity. We have as much capacity vacant in Halifax as Prince Rupert will have when they come on line. We are ready for business.
Mr. Prentice: I believe Port Hawkesbury is as well.
Senator Mercer: Yes. It is a huge, deep terminal that has been able to bring in the large tankers over the years.
Dr. Kosior: Mr. Prentice forgot to mention one thing. China has a ``go west'' policy. There are nine provinces bordering the Pacific Ocean. It was easy for those states to get all the manufacturing because they were so close to ports. Most of the manufacturing is within 100 kilometres of those Chinese ports, but with all the wealth they have now they are moving outward towards Western China for additional manufacturing. They are spending all their newfound wealth on revamping their highway and rail system and building 18 intermodal state-of-the-art centres. They will be going, not across the ocean but across by rail, the great Silk Route, where they will terminate in Europe, and in the Mediterranean. As to Halifax, they will be coming through Halifax and New York. Halifax is the deep-water port and those ships are getting so much bigger. Forget New York dredging; it will not be able to keep up with it. Halifax is on the horizon and within 10 years, it could be a bigger player, dare I say than New York.
Senator Mercer: I am glad to hear that.
Senator Zimmer: Do you see the same possibilities with Churchill based on when it is not iced over? Second, what are the possibilities for the inland port of Winnipeg and also Saskatoon?
Mr. Prentice: The one aspect of Churchill comes down to the issue of ice. We do not know where global warming is going. It could well be that Churchill becomes a year-round port within the not-too-distant future. I may not be around to see it but certainly, my children could be. We feel that if Churchill wants to become a modern, main, state- of-the-art port, it must have containers as well because that is the way the whole world is moving. Containers cannot be run easily on a seasonal basis. We will keep our fingers crossed. In some ways, global warming is a pro and a con for Churchill.
Senator Zimmer: With regard to the bladders they put in containers, is there any restriction on the products that they can handle? Can they handle liquids and fuels?
Mr. Prentice: There is equipment that handles liquids in containers. There are specialized containers for doing that. I am not sure you would necessarily load them in the same containers as grain. These are just a fairly thin plastic liner.
Dr. Kosior: A heavy bladder bag can be put in a dry container for wine. The Australians ship wine in these collapse- safe bags.
You can move anything in a container. They are in the frame of a 20-foot container but they are actually a liquid container. Specialized equipment includes high boys, low boys, standard, dry, refrigerated; the list is long. You can retrofit any dry container for anything you want and you do not necessarily have to put a bag in a container to haul grain. In Australia, depending on what the customer wants, you can put a bulkhead up against the doors and blow it in pneumatically. They crack it open with a forklift and unload it.
I have brought everything I have ever done on containers with me. If you want to spend until midnight, I can show you all kinds of pictures.
Senator Zimmer: I guess it was like the old days when I used to crimp cars where you put the plastic over it and load it in.
Dr. Kosior: That is right; it is the same concept. There is no difference.
Senator Phalen: I see that everyone is doing some pitching. You mentioned looking at Prince Rupert 10 years ago and thought it would be a good area for a port. I am from Cape Breton and we have Canso. Canso is bigger than Halifax and has a large basin where ships can turn. What is your opinion on that?
Mr. Prentice: I have actually heard a proposal by a very credible source looking at Port Hawkesbury — I think Canso is the same area — as a hub for ships that come in and simply unload big ships off onto smaller ships and feed off to other locations up and down the coast. I do not think we have seen anything near the maturity of the container industry. It could very well be a future possibility. I will tell you that there are people looking at it seriously. It is a hope.
Dr. Kosior: That is done now in Hong Kong. It is ship-to-ship transfer. Rather than just call in a report, the mother ship is about half a kilometre off shore. They bind the vessels together and then go up and down the coast. It is a feeder concept.
Senator Phalen: Last week, it was mentioned to us that the Americans would do security. Would that be an idea?
Mr. Prentice: Security is a big concern about containers. I have seen a reference by one U.S. custom official who said the container was the Trojan horse of the 21st century. We will see little RFID tags that identify where the container has been. It may well be favourable to have the containers come first to Canada to be inspected and then go to the U.S. It makes sense to me.
The truth of the matter is that you cannot have open trade and live in a hermetically sealed society. This is a conundrum we have for containers. There was a big concern in the U.S. when Kuwait was looking at buying port facilities. I notice they are now interested in coming into Halifax.
Senator Dawson: We heard it was Dubai.
Mr. Prentice: Why should we be concerned about this? It is more secure. When we have a vested interest in keeping things secure, it would be more positive. There was a big to-do about not every container being inspected. If we were to do so, the cost of our trade would rise astronomically. We have to use smart technologies.
Senator Champagne: If Eastern Canada is to be an important place for containers going in and coming out, we were told that Sept-Iles on the north shore could be interesting because of the depth of the water. Then you do not have to fight the ice to Quebec City or Montreal. Have you looked at that possibility?
Mr. Prentice: We have not, but I know that large grain ships come in that would probably have the same depth that would be used for the containers. I see no reason why Sept-Îles could not be a logical port. New opportunities come up. For a long time, Halifax has lived in the shadow of Montreal. Montreal has a depth problem in the river. You can only get a certain size of ship into Montreal. Even Montreal will do quite well. It has carved out a niche for itself for very rapid movements where ships can be unloaded quickly and get back and forth into the interior of the continent. Montreal has not lost trade even though we are seeing these bigger ships. Different strategies will work out, and Sept- Îles has an opportunity, which should be investigated.
Senator Champagne: You can be sure that Quebec will try to get the little niche somewhere.
Senator Dawson: Mr. Prentice, I come from Quebec City. We have lost that fight, so we will not be battling it tonight. If it is so logical that we do not have empty containers, who is winning? As a former lobbyist, there is normally someone winning in this type of situation. Is it the truckers? Is it the people that rent the containers? Is it the train industry? Who is winning?
There is normally a lobby. Is part of it the fact that we have regulations about container sharing with the United States? Is it all about information?
Radio frequency identification tags will be identifying where they are from, where they are going and whether they are traveling empty. Who will control that information? How will it be shared?
As you seem to be believers in this issue and as we are studying it because we want to solve the problem, do you have any recommendations on other people we should hear from? We want to get the right information. We want to make the right decisions.
Mr. Prentice: I recommend you speak to the container lines. I would recommend Maersk, which is largest shipping companies in the world. When we spoke to the shipping companies, they said that they follow the rules of the country. They want to be good citizens, and they will follow the rules precisely. There is no cheating going on with the big container lines. That is not where it would happen. They absolutely do see the inefficiencies because it affects how they do things. I recommend that you talk to them.
In terms of who will control the information, the container lines track their containers all the time. They try to keep control of their entire infrastructure and track their equipment worldwide. Certainly, the ports also track containers within the terminals, and the railways try to track the containers within their terminals because they all work on the basis of throughput.
I am not sure that the information they would contain would be terribly damaging if it leaked out anyway, but it is a case that these RFI tags will be generic so that the ports, railways and shipping lines will have access to them. It is a case of knowing where your load is and whether the container is enroute in the system. It gives better logistics.
If we have this inefficiency, who is losing if we make a change? I mentioned port stuffers, the people who unload trucks brought to the port. These stuffers load the containers that go on the ships, would have less of that activity. There would be the other means of getting the loads to the ports to put into the containers. The trucks would not have that business as it would go on the rail and would go into the containers. I suppose their business would be less, and they would, in that sense, lose although there are other loads the could carry, presumably, so I do not know that they would complain.
Any change will affect other people, but I think the biggest point is that we have inefficiency. We have a missed opportunity. It is a case of how to the greater opportunity by freeing up the system and finding the passage that was not there because it is being occupied now by empty moves and an inability to move things around.
Senator Dawson: We have heard you.
Senator Munson: I will be very brief. First, I must make a representation, even though I am an Ontario senator that Senator Tkachuk talked about Saskatoon; Senator Champagne talked about Sept-Îles; my friend Senator Mercer talked about Halifax; Senator Phalen talked about Port Hawkesbury; Senator Zimmer talked about Churchill; and, Senator Dawson talked about Quebec.
I come from Northern New Brunswick and there is Belledune. I will make a pitch for it. It is a good port that has been sitting there for a long time.
What kind of tariffs should we be adopting? Should we have tariffs similar to the United States?
Mr. Prentice: The best outcome would be to replicate and harmonize with the U.S. system and create a North American market, so that it looks absolutely seamless to the outside world. If it was seamless to the outside world, we would get the benefits of containers that would be available at times to come into Canada or exit from Canada and go into the United States. We would have a more free flow of containers that literally follow the goods anyway. The containers are only there to move freight. I would not say we should go more beyond the U.S. I do not think there is any reason to do that, but we should at least match them. We must recognize that the Americans are not nearly the free traders that they claim. The U.S. has looked at the costs and benefits.
Senator Munson: Time is money, but all governments seem to move slowly in changing regulations. What key changes should be made to make Canada a more attractive place to do business?
Mr. Prentice: Do you mean in terms of containers?
Senator Munson: Yes.
Mr. Prentice: Completely open up the moves, even if it is only 180 days, take the U.S. approach and say it is reusable packaging. Anyone who wants to move a container anywhere from one port to another or into another port, allow that freedom. That would allow the domestic industry to take advantage of this excess capacity and free up the ability for shippers like those in the Prairies who are far from the ports to get a container when they need one.
Senator Munson: If we do not?
Mr. Prentice: We just carry on with a little extra cost.
Senator Munson: Can we stay competitive if we do not do something along this line?
Mr. Prentice: We will not be as competitive. As I say, it is small charges multiplied by millions of transactions. These are some of the things we see in terms of why do we approach the free trade arrangement? The tariffs are relatively small already, but it is added across millions of transactions and discourages activity and creativity. That is what we do not want to do. We wan to have a society and economy that is flexible and robust.
The Chairman: Are the other questions, senators?
Mr. Prentice and Dr. Kosior, thank you very much for your presence here tonight. We certainly learned from both of you tonight.
Feel free is to send us any more information. You followed all the questions that we had, so if you feel you have more information to give us, feel free to send it to our clerk. It will be distributed to our members.
Mr. Prentice: Let me simply say thank you for inviting us tonight to have a opportunity to bring this point across. I very much appreciated your questions, and I wish to compliment you on your staff.
The Chairman: Senators, we will adjourn until next Wednesday.
The committee adjourned.