Proceedings of the Standing Senate Committee on
Transport and Communications
Issue 7 - Evidence - January 31, 2007
OTTAWA, Wednesday, January 31, 2007
The Standing Senate Committee on Transport and Communications met this day at 6:17 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.
[English]
The Chairman: Honourable senators, I call the meeting to order. Your steering committee had a meeting yesterday and we worked on the work plan for the coming weeks. You have already received notices of the meetings, and I am pleased also to announce that on February 21 the Minister of Transport from Nova Scotia will be here to meet with the committee on the study on containers.
We feel that we can table our final report by the fall of 2007, by the end of the year, and we have sent a letter to the Assistant Deputy Minister of Transport. As you remember, they told us they would prepare some studies to be sent to us, so we have requested that the department send the studies and they will be available soon and distributed to all of you.
We also asked Minister Oda to meet with us concerning the study on Canadian media that was tabled by this committee.
On our legislative agenda we have Bill C-11, which is out of the committee of the House of Commons and should be sent to us soon. That is part of our agenda.
Tonight we have as our witness Dr. Mary Brooks, Professor and Chair of the Faculty of Commerce at Dalhousie University. Welcome to our committee, Professor Brooks; we are pleased that you accepted our invitation to meet with us.
Dr. Mary Brooks, Professor, William A. Black Chair of Commerce, Dalhousie University, as an individual: Thank you very much. I thought I would start by building a picture based on shipper requirements of the transportation system, and then what carriers do in response to that, so that you have the perspectives of both the buyer and the seller of transportation services. Each has an impact on terminal operators and how they choose to supply infrastructure to deliver trade from the rest of the world to Canada and Canada's trade out. Those perspectives then will build into a few minutes on how industry has responded to the global changes in container trade and a few minutes on expectations.
I thought that would set the scene for questions on a couple of different areas. One possibility would be infrastructure investment and the role of government. My colleagues and I at Dalhousie have now completed two studies on short sea shipping and its role as part of this; that is a second possibility. Last year, when I was working at George Mason University, I completed some research work on maritime container security. That is a third possibility. I feel comfortable taking questions in any of those areas, depending on your wishes.
I will start with how shippers choose carriers because that is the baseline. Manufacturers make decisions on how they will get their product to market or supplies into North America. Those decisions are made on criteria that differ by trade lane. Depending on the route, the decisions can be quite different. They all involve a trade-off between the price of the service and the transit time of the service, but on some routes there are no differences in perceptions of suppliers, so the business available for carriers will be split over a number of carriers.
Some shippers are a little concerned about terminals not working properly or delay or security issues and may decide to split their business over a number of different operators in order to mitigate what they would call route risk. Route risk is a big factor right now in the Los Angeles-Long Beach access to the North American continent, so it is something we need to think about.
This price-transit time trade-off that shippers make has meant that Halifax has been able to pick up premium end cargo destined for Chicago in competition with a lower price over the Montreal corridor. The majority of cargo coming from Europe, for example, might decide that they will use the Montreal corridor but the high end part will move over Halifax.
I have said that price, service and delivery are all important. Transit time reliability is the other key factor in today's global marketplace. Shippers are prepared to pay for security on that transit time, in particular the shippers who are shipping high value cargo. These shippers are making the decisions and carriers have to respond. Carriers have a different response, generally speaking, depending on the trade lane.
To understand what carriers are thinking, though, their primary purpose is to maximize the use of their assets. They will try to extract the maximum revenue they can get out of the assets they have in play. To do that, companies like Maersk have been going to larger vessels to get economies of scale. Companies like CN need their locomotives and their track to be in use in order to earn revenue, and their focus is to minimize the cost per route mile. This combination of everyone trying to make the most of their assets means they will configure their networks and their service patterns to maximize their share of the profitable part of the market. They will minimize the route miles to try to do so, and they will apply pressure on government to assist. In the United States, they are pressuring government to help them relocate track in order to shorten the route miles and compete with Canadian corridors. The end result is that the carriers will provide the best service to the market segments that have the lowest cost to serve and contribute the highest net contribution margin. That is, the shipper that is prepared to pay for transit time reliability.
That all drives what is happening right now in the marketplace. We currently have severe congestion and delay on some routes in the North American transport network. Congestion and delay south of the border is putting a lot more business through Canadian gateways than has been the case in the past and, because the whole North American system is capacity constrained, infrastructure investment is required at transfer points. Security is making that situation worse. Both of these have led to a lot of pressure on politicians and regulators to invest in gateway and corridor development on both sides of the border.
Meanwhile, the terminal industry is changing as well. We find that many of the container carriers are now investing in terminals. Those container carriers have concentrated their businesses. The top 20 carriers now control more than 70 per cent of the shipping capacity worldwide. Many shipping lines are investing in terminals and integrating their service offerings across the supply chain. The top four stevedoring companies handled only 15 per cent of the cargo in 1991; now they handle about 36 per cent of the cargo and are still consolidating.
According to Goldman Sachs, Global terminal operators are seen as pension-worthy investments. This means that we have a very fluid market right now in terms of infrastructure investment. If we add to that the Panama Canal changes and the fact that that new capacity will come online in the next seven to eight years, we have a situation where it is very difficult to predict what will flow how and who will win and who will lose in this business.
In the United States, a number of short-term solutions have been put in place to deal with port congestion. Some shipping lines have redeployed their services to the East Coast or to Pacific Northwest ports. Vancouver has benefited from this and from route risk mitigation strategies. Terminals have put restrictions on shippers for how much free time they may have. They have forced presailing arrival dates into place. They have implemented programs like block stowage and on-dock rail. They have developed inland terminals and off-dock container yards. Los Angeles-Long Beach has implemented an innovative program called PierPASS Inc. to encourage off-peak trucking. That off-peak trucking now represents 40 per cent of the business that goes over Los Angeles-Long Beach. The interesting part is Canadian ports had some of these advantages a long time ago, and now American ports are copying them.
What can we expect in the future? Global trade is continuing to grow. Everyone keeps wondering when it will stop. My opinion is that when people stop buying inexpensive goods at Wal-Mart and start spending more on recycling and having fewer disposable goods, then maybe we will see some of it easing off. At this point in time, however, the growth in trade is still booming.
In the United States, in 2004, only three ports had any excess capacity. The Panama Canal is now at 100 per cent capacity. They made a decision last week to move to a design build for their expansion in order to accelerate the delivery time on that.
We have a great deal of investment in capacity-growing measures. As well, there is much investment in landside activities. APM Terminals is investing U.S. $500 million in Norfolk, Virginia, for a private greenfield facility with private money. State funds are forthcoming to invest in landside infrastructure. They are hoping that by 2010 the Heartland Corridor will shave one day off the travel time from Norfolk to Chicago, which will eat into business over Halifax. The investment in Prince Rupert is seen as smart or risky, depending on whom you talk to, but the terminal will have the fastest times to Chicago from North Asia, when compared with Vancouver and Los Angeles-Long Beach. I expect that Prince Rupert will become a thorn in the side of the U.S. south ports because they will likely have difficulty competing with that option.
That sets the scene for the state of the global container trade. Definitely, the West Coast is the place Canada wants to be in order to participate, but there will be some East Coast attraction of that global cargo as well. The largest vessels will not be calling Montreal so that leaves us with the Halifax option. I am not sure whether there is a greenfield opportunity on the East Coast.
The question then is what should be the role of government in making sure that Canadians participate in what is a possible boom in the U.S. appetite for consumer goods.
There is definitely a role for government to invest where there are public benefits, and those public benefits come from reduced road congestion or better air quality or other such factors. There is also a role for government investment when the project is too risky or requires too fast a payoff in the private sector. I can come back to that later if you like.
There is an opportunity for Canada to participate in this but that window will close in the next five to six years. We have an opportunity to change the dynamics of the flow and to have a place in that North American access.
I can talk about short sea shipping and about maritime container security, and I have set the scene for discussion on infrastructure investment.
The Chairman: Perhaps there are some questions from senators, after which I will give you the floor to speak to those aspects.
We are pleased to have Senator Cowan, Chairman of the Board of Dalhousie University, with us this evening.
[Translation]
For the past several years, there has been considerable discussion of the Asia-Pacific gateway initiative as a winning strategy for diversifying Canada's trade with Asian markets. However, there are many people, particularly in Atlantic Canada, who are making a case for the need for two gateways to the Asian market, one being the Pacific gateway, in respect of which numerous efforts have already been deployed, and the other being the Atlantic gateway.
The concept of an Atlantic gateway to Asia via the Suez Canal is being explored in Canada, but very little has been said to date about this option. How would an initiative of this nature complement the Pacific gateway and what is different about the two initiatives? Do we really need two gateways? What would be the scope of the Atlantic gateway versus that of the Pacific gateway?
[English]
Ms. Brooks: If I may clarify your question, are you asking why we should have two gateways and how they should be different?
The Chairman: Yes.
Ms. Brooks: The breakpoint, with the globe being round, evolves around where the cargo comes from and where it is going. If it is coming from North Asia and going to Chicago, it will never come through the Atlantic gateway. If it is coming from Malaysia, India or Indonesia, it is not likely to go the other way to Chicago. Therefore, we have a natural line that is probably breaking somewhere between Singapore and Hong Kong. Best estimates are that the breakpoint for the two gateways is near Thailand.
I would see the two gateways as being complementary and not competing.
Senator Eyton: I will drill a little deeper with my question. Ms. Brooks, you talked in general terms about Canada in respect of shipping. Short sea container shipping should be explored further. I am affiliated with a company that has been bidding on ports over the last year. We have submitted significant bids on four packages of ports: Vancouver and Prince Rupert; San Diego; New Orleans; and New York and New Jersey. We bid aggressively on all of them but we lost all the bids. There is a tremendous amount of capital chasing after ports.
I have not heard of an equivalent opportunity on the East Coast. There is money, and people understand that ports are a growing, dynamic business. The bids range from $1 billion to $3.5 billion, all from the private sector. In our case, we came up empty, but it demonstrated to me that there are vast quantities of capital for this purpose.
I have not heard Halifax mentioned in the conversations as part of that phenomenon. Why is that? I understand that Halifax is underutilized and not operating at or near its full capacity. It seems odd to me that with boom times all down the East Coast to the Gulf of Mexico and up the West Coast to Prince Rupert the ideal year-round port of Halifax is receiving neither attention nor money. What is the problem?
Ms. Brooks: There are a couple of issues. When people talk about buying ports, they are talking about buying terminal management leases.
Senator Eyton: And infrastructure.
Ms. Brooks: Yes, but the infrastructure is usually secured by a long-term lease. Currently, the capital markets are viewing that as a stable cash flow. Last week, at the Transportation Research Board in Washington, Jeff Holt of Goldman Sachs indicated that there was a time two to three years ago when the investment market pension funds, et cetera, decided that terminal operations with long-term leases were good investments, and they have been bidding up the market.
You asked why Halifax has not been on the table. The two terminals in Halifax have changed hands in the last five years.
Ceres has the management lease at Fairview Cove. Ceres, which is an NYK subsidiary, was purchased in 2002. Halterm Limited was recently purchased — I believe it closed last week — by the Macquarie group at about $19 a share for the units that were traded on the stock exchange in Toronto.
As a person who acquired shares in Halterm a long time ago, I will have to say that I got out when it looked like I was never going to get my money back, and if I had held those shares for another year I would have gotten $19 a share and done quite well.
The marketplace has been revaluing because this is a very big investment and pension funds are looking for places to put money, but they want a place that is already in existence. They do not want a place that does not have a track record.
Senator Eyton: There may be activity around Halifax, but I do not think it comparable to some of the other ports with which it should be competitive. What can we do to make it more attractive?
Ms. Brooks: The issue with capacity in Halifax is difficult because everyone has the attitude that there is so much capacity in Halifax, why should we do anything there. However, there is not enough capacity if one Maersk-size ship pulls in once a week and puts everything on the pier. Although it looks like there is a lot of capacity, it is because the current operation is a top-off operation. They drop 400 boxes or 500 boxes at a go. They do not drop 6,000 boxes or 7,000 boxes or 8,000 boxes at once. There is not the capacity at Halifax for that.
Halifax's future depends on whether the business model stays the same or whether there is a change in the business model. Right now the global environment is in a flux. If the business model were to switch tomorrow then there is not enough capacity.
Senator Eyton: Our notes mention that Transport Canada funded a study on the feasibility of a short sea container feeder service between the East Coast of Canada and the Great Lakes, which seems to me a natural extension and purpose. The study found that a potential Halifax-Hamilton route would not be economically feasible even if the seaway were open 12 months a year, due to rail competition, insufficient traffic and financial obstacles. The study identified a number of challenges to the expansion of Canadian short sea shipping: insufficient port infrastructure, lack of coordination among transportation providers, insufficient cargo flows, seasonal constraints, customs and security regulations, and the high cost of doing business — and I would think that includes labour.
That is very negative, but I guess that study is dated.
Ms. Brooks: No, actually that study was released last year by MariNova Consulting in Halifax.
Senator Eyton: That is pretty damning stuff.
Ms. Brooks: There are a number of reasons why short sea shipping on that route is not profitable. There are other routes that could be profitable. That particular one is not. Short sea works best when it is in competition with truck because they are different markets. Rail on the other hand is much closer in its characteristics to short sea so it has the same distance range in which it competes, whereas with truck the ranges are different so you can carve out a part of the market.
The second problem is that if you are operating in Canadian domestic service, which is Halifax to Hamilton, you have to pay a 25 per cent duty on your vessel when you bring it in. You have to flag it under Canadian flag rules and then have you to bring it up to Coast Guard standards and that adds, according to a study I did with Dick Hodgson a few years ago, almost 50 per cent to the capital cost of operating the ship. You cannot expect the ship suddenly to become competitive when you have hamstrung it with extra duty and extra requirements over and above those required by the International Maritime Organization on ships in other markets.
We have a problem. On top of that, if you operate a new service in Canada you have to pay a fee to establish the customs operation outside the hours, whereas existing services are grandfathered. That means you have to come into some place that has an existing service.
When we start adding up all of these costs I am not surprised at all that Halifax to Hamilton was not cost-effective. It is operating under a very heavy burden of additional costs resulting from regulation.
On the Eastern Seaboard we found we had a different set of problems when we looked into short sea between Canada and the United States. That goes back to the question earlier about container along the Eastern Seaboard. If you load a container in Halifax and offload it in New York, you have to pay harbour maintenance tax on the value of the cargo coming into a U.S. port, but if it goes by truck it does not have to pay that. We end up with a different set of public policy issues that need to be negotiated between Canada and the U.S. to alleviate the burden on the international route. There are regulatory burdens on both routes that are quite different.
Senator Eyton: It is a sad complexity. I have other questions but I will defer for now.
Senator Phalen: Previous witnesses before this committee have all sung the praises of short sea shipping in terms of the environment, highway congestion and so on. They also pointed out that there were some problems. One of them was cabotage. The Jones Act in the United States limited Canadian vessels from serving more than one port. Is there any move on the part of Canada to help alleviate that problem or have the United States change the Jones Act?
Ms. Brooks: If we asked the United States to change the Jones Act then we would have to be prepared to change our coasting trade legislation. We have similar rules in place in Canada. That is actually part of the problem with short sea shipping, because if you call on more than one American port you have to be American flagged and if you call on more than one Canadian port you have to be Canadian flagged, so you can offer only a shuttle service. You cannot triangulate your business the way the trucking industry can to be full on more than one leg. We could lobby the Americans to change the Jones Act but I do not think we would get very far because, in a way, it would like be the pot calling the kettle black. We have to look at ourselves and ask whether we would want to let this go. The people in the Department of Foreign Affairs and International Trade make a good argument: You do not give something away without getting something back. Therefore it is not likely we will change our coasting trade legislation without getting them to change theirs.
Now the bright light on this would be that under the memorandum of cooperation on short sea shipping we should be able to negotiate something within Canada, the U.S. and Mexico that is special for the NAFTA region.
Senator Phalen: You mentioned the problem with Canadian shipping regulations and flagships. Is there any move to help alleviate the problem, to make a more positive business environment for short sea shippers?
Ms. Brooks: If one is collecting duty or tax to support an entity, one should see the benefits of that. Right now we collect a 25 per cent tariff on imported vessels supposedly to support the shipbuilding industry. However, I do not see that the shipbuilding industry is particularly healthy right now, so I am not sure that that is working. The only reason for that tariff is to support an industry that is not getting the benefit of it; that tax is not accomplishing anything for them. I do not think Canadians order any more vessels in Canadian yards than they would if there were no tariff.
That one is an easy fix. The total amount of duty being collected is very low, so why leave that tax in place? It is more trouble than it is worth.
Senator Phalen: Is it true that in Europe the shippers get a reduction of up to 35 per cent for short sea shipping?
Ms. Brooks: Every market in Europe is different, so I could not say that is the case. I have not heard that there is a blanket reduction.
Senator Phalen: Why would they get a reduction at all? What is the purpose of the reduction?
Ms. Brooks: My understanding is that there are short sea shipping promotion centres in Europe and there is an effort to move things through inducement, but I do not think that there is a cargo rebate or anything like that. I am not sure of the source of your information.
Senator Phalen: Is it an advantage for the country to ship short sea as opposed to highway because of the congestion and everything? They have invested something like $500 million out west, and I understand much of that is infrastructure. If you were shipping short sea, especially in Atlantic Canada between Halifax and New York, would it not be an advantage to ship rather than clog a highway?
Ms. Brooks: You have raised an interesting question. If we were to improve short sea shipping between Halifax and New York, the prime beneficiary would be automobile drivers on the I-95 around Connecticut and Boston. We would have taken Canadian trucks off the road and benefited American automobile drivers. I would love to see short sea shipping on that route grow, but the prime benefit would be improved air quality for the New England citizens.
Senator Phalen: Cost-wise, would it be cheaper to ship short sea on that run rather than by truck?
Ms. Brooks: Studies currently under way at Dalhousie University on short sea show that there is a break point about Philadelphia, where suddenly short sea becomes very competitive.
As you go down the coast, you end up with a longer transit time and a cheaper price. Truck and short sea are about equal in Massachusetts, and as you go further down, you get price improvements. If the shipper wants a cheaper price, he will switch to short sea. If he wants a faster transit time, he will stay with truck. The question becomes how many trucks do you pull off the road.
Senator Phalen: Now for my pet question. It has been said that the thinking is that on the West Coast you have Vancouver and Prince Rupert, and on the East Coast you have Halifax and Canso. Can you give us your opinion on the idea of a port in Canso?
Ms. Brooks: Canso is a successful port now; it is the fourth or fifth largest in Canada. I have not seen this year's figures but it is a bulk port at this point in time. It has deep water and wonderful attributes. It has a fantastic position with respect to tanker traffic into the U.S. and I imagine that will continue to grow.
Americans do not want tanker facilities for big tankers; they are afraid of pollution in their harbours. They will continue to have their big tankers come into Canso, drop off tanker oil and leave, and then smaller tankers go into the U.S. Canso has done extremely well from that business; it has done well from aggregates and so on.
There is not currently a Class 1 rail service to Canso. Not too far away now there will need to be a stronger and more viable rail link. I am not sure that the right land is still available. The Bear Head facility that would have been good for a container terminal has since been reallocated.
I am not entirely sure that Canso is a strong player in that. My personal opinion is that one should build on the strengths one has. Right now, there is strength in Halifax and a system in Halifax. However, Canso has done extremely well.
Senator Mercer: It seems to me that in each market there is a niche market for short sea that is unique to each port. In Halifax, for example, you said that short sea may not be economical beyond Philadelphia.
Ms. Brooks: No, it is actually more economical. The problem is that as you go further south there is less demand.
Senator Mercer: I was actually going much further south with my question. I understand there is a niche market that needs to be filled, which is the Caribbean. Halifax is out of the business for a short period of time, but hopefully will be back in it. There is no short sea shipping going to the Caribbean now from East Coast Canadian ports. My understanding from the Port of Halifax is that they are desperately looking for a carrier to do that.
Ms. Brooks: There used to be service from Saint John, New Brunswick. I am not sure of the present state of that. Irving's Tropical Shipping and Kent Lines were in that market a few years ago.
There has to be a certain volume of trade to keep that business going. The alternate is to send it by truck to New Jersey or Miami and put it on a carrier that is going to the Caribbean from there. I think that is how the market is being serviced now. I would imagine that is a more expensive proposition than ship the whole way.
Maybe I should explain the economics of truck and ship. A ship can carry so much more than a truck, so if you do not have a large enough volume, truck will always be more competitive in the small volume market. You need enough volume to keep a train or ship going. They carry bigger volumes. If the demand is not strong enough, that becomes a problem.
Senator Mercer: You talked about shipping from the Far East, and from India, et cetera. You thought there is a point somewhere around Taiwan or north where it is more economical to go to the West Coast, and perhaps south of that it may be more economical to go through Suez. Is China Shipping Container Lines not breaking that mould now a little bit in going through Suez to Halifax? They are carrying almost exclusively products for Canadian Tire and they are going to Halifax.
I gather that North American customers are now asking their suppliers to spit up shipping between East and West Coast ports and not to depend totally on West Coast ports. That is due to of a number of factors — the delays in the West Coast ports, the labour situation in the western ports as compared to the eastern ports, and the closeness to the East Coast market in the United States. Is that becoming a trend?
Ms. Brooks: I think that is where I started tonight, with the concept of route risk mitigation, because the West Coast routes are seen to be more risky. Companies are choosing three large options: Asia to the U.S. Gulf or East Coast through Panama; Asia to the West Coast; and Asia through Suez to the East Coast.
You are right; China Shipping is proving it can be done. I know many people in the Halifax area would like to see more of that. On the other hand, you have the question about Maersk, which withdrew late last week. I will speculate that Maersk's withdrawal was due to some losses and they have some fairly large investments, so it may be that the model is not broken.
Senator Mercer: I, too, was concerned when I saw that Maersk had pulled out of Halifax. I quickly consulted with the port and others involved and I understand that Maersk's removal from Halifax had little to do with Halifax and more to do with their global situation. They made a large acquisition a couple years ago and it has not yielded the volumes they thought it would, so they had to shrink internationally and Halifax was one of the victims. As they have done before, Maersk may be back as things change with them.
Ms. Brooks: It is a volatile business.
Senator Mercer: Exactly. You talked about the Halifax-Hamilton route. On the Halifax-Hamilton route you have to sail past Montreal. It seems to me that the Montreal-Hamilton route would be much more economical, especially since Montreal has the bulk of the European market on the East Coast.
Ms. Brooks: It depends on what you are carrying. The issue with the Hamilton service was that when you run for nine months of the year you cannot ask shippers to commit to something that runs parallel to rail. Rail provides very good competition, and that would still exist in a Montreal-Hamilton run. I am not sure that Montreal-Hamilton would be any more successful than Halifax-Hamilton because the rail competition is direct. There is no rail competition running against short sea down the Eastern Seaboard because the rail lines go into Montreal and west before they go down. The rail lines do not compete on a cross-lakes service, so that is a possibility. I understand that Hamilton is still trying to get a service into Oswego in the U.S. There are possibilities still being developed for short sea across the lakes, just as there are possibilities for short sea across the Gulf and down the West Coast from Vancouver into Seattle, Oakland and so on.
There are other options. I am just not sure that you can make it work when you are running directly parallel to rail.
Senator Mercer: I want to get your opinion on the advantages that Halifax has, and that Port Hawkesbury at Canso would have if there were a container port there, with regard to ability to receive post-Panamax size ships. At Halifax, both piers can receive post-Panamax size vessels, including up to the sixth generation that are now coming on stream. On the East Coast of North America there are only two ports that have that capability, New York and Halifax. Am I correct?
Ms. Brooks: New York does not have that capability. New York hopes to have complete capability, but they are not finished their dredging program. Halifax has the same problem that New York has when the vessels get large at the top end; that is, although they are currently clearing the MacDonald and MacKay bridges in Halifax Harbour, the air draft will be a problem if they get too much larger. In New York, the Bayonne Bridge presents almost the same problem.
The East Coast is the last market that the largest ships will be put into because the entire East Coast has a problem of draft issues.
New York and New Jersey are talking about how much it would cost to tear down and replace the Bayonne Bridge. I think there could be a similar issue in Halifax. What do you do when the ships get so large that, although the harbour is deep enough, there is not enough space for the ship at the top?
Senator Mercer: The trouble in Halifax is that we have two bridges and a terminal outside the bridge.
Ms. Brooks: Yes. It has just been sold to Macquarie.
Senator Mercer: That leads to my next question. The sale of Halterm to Macquarie closed over the last 30 days. Do you see in that sale an opportunity for Macquarie, because of its international connections, to bring some business to Halifax that Halifax may not have seen before?
Ms. Brooks: I think it will depend on who else Macquarie buys. Its current portfolio of ports is not necessarily going to drive more business. The Macquarie investment provides Halterm, which was an independent before this, with deeper pockets and more ability to access funds. Macquarie has a reputation in public-private partnerships as well, so I think they may be able to bring other parties to the table. If there is an expansion of Halterm, I understand that it would be possible to expand it into space that is currently Port of Halifax property. It is possible that Halterm could get more of the business.
Another reason the Ceres terminal has the advantage right now is that it is tied in with NYK. It is a subsidiary of NYK, and NYK is an alliance partner with Orient Overseas Container Line, OOCL, and others in one of the larger alliances globally. They bring the lines that go with that alliance to that terminal.
Senator Phalen: When they are finished dredging in New York, will they be able to take the large ships?
Ms. Brooks: I am not sure that they will, because New York silts. When they think they have finished dredging, they start dredging again, whereas in Halifax it is rock, so we are not silting up at the same rate. Canso also does not have a silt problem. However, the rest of the Eastern Seaboard has a silt problem.
Senator Phalen: Canso is deep enough now, is it not?
Ms. Brooks: Yes, it is.
Senator Mercer: I have a question regarding outside-the-gate infrastructure. As you can gather from my questions, I am from Halifax. I understand that Halifax's two terminals are the best. I grew up blocks away from the Ceres terminal and I have visited Montreal and other ports to get a feel for them.
It seems to me that one of the problems we are going to have, which Vancouver has now, is the infrastructure outside the fence. Should the federal government be addressing that in some way, perhaps through infrastructure programs that are transportation-specific?
Ms. Brooks: Absolutely. Although it will cost U.S. $500 million in private terminal investment to build the APM terminal in Norfolk, the State of Virginia is paying for the relocation of track. It is paying for the highway interchanges that service that terminal. It is doing deals with the other states in order to support the Heartland Corridor redevelopment to get goods coming into Norfolk to Chicago a day faster. That is being done with more public money.
In U.S. ports, the landside infrastructure is traditionally provided much more by the state. They view that as a public benefit in many ways, because it alleviates car congestion, makes life for the residents in the area much better, and so on.
The landside infrastructure for the competing ports south of the border is, generally speaking, publicly funded, but usually at the state level as opposed to at the federal level.
Senator Mercer: Is there no federal involvement at all?
Ms. Brooks: The federal government is involved, but the involvement is usually not of the size or magnitude that would be normal in Canada. When there is public funding in Canada, it is quite often a 50-50 split between the federal government and the provinces. In highway development, for example, that is the norm. That would not be seen in the U.S.; it is not how they tend to do things.
Senator Zimmer: I met with two gentlemen from CN this morning, and they talked about infrastructure and the role of government. They also talked about two options for transportation: another rail line for double tracking right across the country versus another trans-Canada highway. Of course, I know which side they were leaning on. What do you think about those two types of transportation or a combination of the two? The second part of the question is who pays for it, which you have answered somewhat.
Ms. Brooks: That is difficult, because the two methods service very different needs. Trains tend to be good at more than 700 kilometres. Canada is a big country. Trains are good at doing the freight thing. Highways are good at people and the shorter haul. If we had a trans-Canada highway that was fully intact, double lanes all the way, the trucking would be better and the car experience would be better. In Atlantic Canada, whole stretches of highway are single lane each direction and need to be made double or made to look like a trans-Canada highway.
Highway and rail service different needs, so I would not say it is an either/or situation. Canadians need a network that works. Networks are like the arterial system in our bodies. If one part does not work, it clogs the system and produces a bottleneck. Trade then does not flow, people do not flow, and the system does not work efficiently.
Senator Zimmer: I think the solution they had this morning was a combination of rail and highway, depending on what province you are in. For instance, in Saskatchewan, it would not make sense to have another trans-Canada highway because the traffic is not that heavy in many areas. It appeared as if in certain portions of the country you would have one over the other, depending on the terrain and the geography and the service provided.
Senator Adams: You mentioned different buyers, and I want to find out more about the Asians or Americans. You said that people pay an extra 27 per cent tariff to go into the United States. Americans are buying some of the terminals around the harbours. If the terminals are owned by an American company, do they still have to pay tariffs? Who gets the tariffs? You mentioned that we should not change the policy regulating the terminals between Canada and the U.S.
Ms. Brooks: I think you are referring to the tariff question and the 25 per cent tariff that is applicable on the acquisition of a vessel. Americans have a different problem. Instead of having to pay 25 per cent on the vessel, they have to order their vessels in U.S. shipyards, and they cannot use one that was not been built in a U.S. shipyard. The U.S. shipyards are used to making their profits on military contracts, so you can imagine the price that an American ship owner has to pay to buy vessels. The buyers in different markets for vessels will be faced with quite different cost structures, which may make them uncompetitive with other ones that could be supplying the service, or other routes.
With respect to buyers of transport services from Asia, much of what is coming from Asia to North America is to service the North American retail market. The decisions about what happens are being made by Wal-Mart, Home Depot and Sears, the very large companies that control the products that you and I buy in the store. Companies like Dell, for example, have based their entire business model on the truck as a moving warehouse. You can be sure that very large companies making decisions about what route to use are looking at all the details along the way, and they will use the transport suppliers, the routes, the gateways and the corridors that provide them with the best service at the lowest possible price.
Senator Adams: You mentioned that some terminals do not have big warehouses around the harbour. Most containers coming in do not need to go there. They are not worried about stuff freezing in the wintertime, and now the containers do not even have to be waterproof. Are people buying that land?
Ms. Brooks: I am not sure I have understood your question.
Senator Adams: The containers now are not put in warehouses for storage. I figure that gives us more area for all those huge ships coming in and unloading. I watched on Discovery the system of harbours and how they operate to move those containers.
Ms. Brooks: It depends on where the container is going. For some markets, the containers will come in off the ship, be moved directly to rail and go to, say, Toronto, whereas other containers may come in, then go to truck and be sent a short distance away. Sometimes they stay at the terminals because there is not a requirement to move them as quickly and the shipper is not pushing for it because he has a lot of buffer stock. Other times the shipper is looking for the fastest possible service, and he is looking for it to be delivered tomorrow in Toronto.
These business decisions are made on a very large scale that we did not contemplate 30 years ago when we first saw containerization really take off in the ports in Canada.
Senator Adams: You also mentioned that the Americans are talking about making the canal bigger or widening the canal.
Ms. Brooks: Yes. The Panama Canal will be going to post-Panamax size locks. They were expecting it to be finished by 2014, and last week they approved going to a design build process that will put it in place faster. Most people think that means that they will be able to service all the largest vessels, but Maersk's newest vessel, the Emma Maersk, is too large to go through the revised Panama Canal when it opens in 2013 or 2014. We are still seeing the vessels get even larger than the new facilities that Panama is putting in place.
Senator Adams: I live up in Nunavut, and that is why I am asking about global warming. We are talking about Canada's not even having an arctic harbour in the future. I do not know how many kilometres that permanent ice on Ellesmere Island moved last year. There was open water up there in June. You are talking about the canal being ready in 2013. Maybe between now and 2020, a ship can come through the Arctic.
Ms. Brooks: I understand you will be in competition with Churchill, which is looking at that same market.
Senator Adams: I worked in Churchill when we had the Russians coming in back in the 1950s and 1960s.
Senator Trenholme Counsell: What role do you see the Port of Belledune playing on the Atlantic Coast? I know something about their hopes, but is there significant practicality in all of this?
Ms. Brooks: I understand Belledune was trying to get a short sea service between Belledune and Newfoundland in place last year. I am not sure. It would be a faster route to Newfoundland than the current option over Sydney, but I have not heard anything more about it.
Senator Trenholme Counsell: Are they doing any significant shipping now? I should know this, being from New Brunswick, but I do not.
Ms. Brooks: Yes, it is a bulk port.
Senator Trenholme Counsell: Would it be lumber or logs?
Ms. Brooks: I have not been tracking what Belledune has been doing.
Senator Johnson: Which domestic and international routes in the short sea shipping bring about the most benefits in terms of air quality improvement and reductions in road and rail traffic congestion, noise pollution, fuel consumption and the cost of maintaining road infrastructure? That relates to federal policy changes that would be necessary to facilitate the development of short sea operations on these routes.
Ms. Brooks: One of the three most congested corridors where short sea could alleviate congestion is the I-5 corridor on the West Coast. The Blaine border crossing is the fourth largest crossing into the U.S., and it is quite constrained. They are making investments in the infrastructure there, but if one could take traffic off that crossing and down through the Seattle area, where I understand the I-5 is very congested as well, that is one route where some congestion mitigation is likely.
The second would be the Ambassador Bridge, which is fairly congested as well, and if one had trans-lake short sea, that would assist in some measure. The likelihood of that happening is almost non-existent until such time as the Americans alleviate the harbour maintenance tax. Right now, that route tends to service the auto trade, and the tax on the value of the cargo would be very high.
The third area where there is congestion is the I-95 corridor, which we have already talked about tonight. From a congestion mitigation point of view, those would be the routes that would have the biggest impact.
I am not sure what the impact would be from an air quality point of view. There are some studies underway, but I am not sure what they are finding. The jury is still out on the quality of air because trucks emit some kinds of emissions that are not desirable, but vessels emit others. You get more sulphur emission and more acid rain from a vessel. However, if you are carrying a lot of cargo, you are better off with a vessel, which can carry more volume. In terms of the tonnage carried, you get lower emissions with a vessel.
Senator Johnson: I am sure you have heard of carbon footage. Attention is being paid to how much carbon is emitted every time a given person takes a flight.
Ms. Brooks: Yes.
Senator Johnson: The Prime Minister of Britain and Prince Charles among others were told a couple of weeks ago that they will be given their carbon footage record at the end of the year. To help the environment, everyone is supposed to plant a tree to deal with the amount of carbon he or she puts out.
With all the emissions going into the air, should we not be doing the same thing in this industry? It that not realistic? At least as an individual you can say, ``I am contributing something after taking 6,000 flights in the last year.'' Some of the trucking is atrocious.
Ms. Brooks: One of the be biggest growth markets in transportation is the air cargo market; every time we order something from Amazon.com and it is delivered by FedEx, we have contributed to the air emissions problem.
Senator Johnson: All those carbons produce the greenhouse gases.
Ms. Brooks: If we as consumers would rather be less impulsive and not demand our goods tomorrow but demand our goods two weeks from now, we might find that they travelled by a more environmentally friendly method.
Senator Johnson: That is another avenue we could easily go down. How long can we sustain this consumerism in our society? Consumerism is worldwide. Look at China, for example.
Ms. Brooks: Transportation is a major beneficiary of that consumerism at this point in time.
Senator Johnson: Has the whole business of shipping made globalization possible?
Ms. Brooks: Absolutely.
Senator Johnson: What are we doing to ourselves? I would like you all to read Cormac McCarthy's new book called The Road. Read it, and you will not have to worry about transportation or anything else in the world.
With respect to my wonderful province of Manitoba and the latest regarding Churchill, I am sure you are up to speed on the Russians — the Russians are coming to Hudson's Bay; they are anxious to develop this seaport. Can you give me your insight into this development?
Churchill is the most viable deep water port in the country. Is there potential there for the northern route? I know that we are losing polar ice and we are dealing with all those environmental conditions in the North now. Given all the congestion and so forth on other routes, do you think a northern route will ever happen?
Ms. Brooks: I am not especially current on Churchill, but I will make a couple of comments. I would imagine that Barry Prentice at the University of Manitoba will tell you airships are where it is at.
Senator Johnson: That is true.
Ms. Brooks: My second point would be that I believe there is a permafrost problem with Churchill which could affect getting cargo by land to and from Churchill. The warming may open up the ocean, but it might cause problems on the land side.
Senator Johnson: Global warming would melt the winter roads, so the whole thing is probably not a viable option.
Ms. Brooks: We are back to that first point I made regarding the Halifax-Hamilton route. If you are going to have a route, it has to be available 365 days a year, or the manufacturing community will not view it as a credible alternative. People in the U.S. think Prince Rupert is not smart but risky because they have a vision of the frozen part of the Canadian Rockies not taking care of their cargo in winter. I do not know if that is the case, but I am sure that CN is working its hardest to make sure that that is not a flaw in that route.
Senator Mercer: I guess we have just touched the tip of the iceberg here talking about Churchill and other ports. I want to go back to something you said earlier in response to Senator Phalen's question about the Strait of Canso. I believe the Strait of Canso has tremendous potential. You raised the issue of Americans' attitude to large bulk oil carriers coming into their harbours. The same holds for liquefied natural gas. We have seen that in Passamaquoddy Bay, and our willingness on the East Coast to accept natural gas terminals, or at least our apparent willingness.
Do you see this as a shift, on the East Coast at least, where some of our ports — not necessarily Halifax, but other ports — should be looking at, for future development, making themselves terminals for bulk oil carriers for liquefied natural gas? We have only talked about the Strait of Canso. There are other harbours along the coast that are attractive as well but that do not have the infrastructure behind them.
Ms. Brooks: I think Canso was in the right place at the right time in the development of the tanker business in the early 1990s because it had a Gulf refinery that had gone out of business, which means that it had in place the infrastructure to handle that oil. When the Exxon Valdez oil spill happened in Alaska, the Americans introduced the Oil Pollution Act of 1990 because they did not want another spill of the same magnitude inside their political boundaries.
Canso had the storage tanks and the deepwater access available to take advantage of that opportunity. A greenfield site is a different issue. Then you have to invest in oil tanks and everything else, whereas Canso already had that. They just happened to be ready when the opportunity was there, and it happened. I am not sure whether the business case exists for others to do the same. I think you do that on a case-by-case basis.
Senator Mercer: How about liquefied natural gas?
Ms. Brooks: Liquefied natural gas or LNG is different, because right now the Americans are happier with pipeline for liquefied natural gas. They do not want to see LNG tankers coming into populated centres on the East Coast. To me, the opportunity there is for pipeline as opposed to tankers.
Senator Johnson: I do not think we touched on policy changes you said might be a good idea for development of the operations on those routes. Have you proposed any federal policy changes that would be helpful for those congested domestic and international routes?
Ms. Brooks: For the short sea routes?
Senator Johnson: Yes, for the purposes of our study.
Ms. Brooks: The study we did last year on short sea shipping laid out a policy agenda that government could look at. Part of that was dealing with the U.S. on the harbour maintenance tax issue, in other words, having a negotiation. It is my belief that if Canada were to unite with Mexico and argue that there should be no harbour maintenance tax on all NAFTA-originating cargos, then we would end up with short sea development, because it is now currently paid by Americans on domestic traffic as well. They would end up spurring their own short sea industry, the Canadian-U.S. short sea industry, and the Mexican-U.S. short sea industry. I think that would go a long way. That would be a NAFTA exclusion. We suggested that as one possibility.
We suggested that customs not charge for development of new facilities. The current grandfathering means that there is no creativity in route development, and then we get route congestion and complaints. We suggested alleviating that customs charge for establishing new services.
There is a problem with the Department of Homeland Security's marine notification requirements for truck and air. The notification requirements are very short. With marine, you have to announce 24 hours before loading, which effectively limits you to very slow-moving cargo. As we found on the East Coast, the lobster is still in the water at the time you have to tell the department how many will be going by water. It is a little hard to meet that term and condition.
We also considered the need to remove whatever policy impediments become more obvious when you get rid of the things you know are definitely impediments. Usually what happens with policy changes is that when you change the stuff that is really obvious, the stuff that is not so obvious suddenly becomes apparent, and I think that is probably a good approach to take.
Senator Zimmer: Professor, my question is in conjunction with what Senator Johnson asked you about the viability of Churchill. There has always been discussion about inland ports, Winnipeg and Saskatoon. What is your opinion on inland ports if, in fact, Churchill were viable?
Ms. Brooks: I think the phrase ``inland ports'' does not refer to ports like Churchill. Americans call any place that is an access point a port. Sweetwater, Montana, is a port in American terminology. Inland ports are places where cargo is exchanged. Marine containers that come in then travel inland by rail, arrive at an inland port and are loaded into trucks. The Americans use the phrase to designate an exchange point. That means that Churchill is not in the location that it would need to be.
One could have an inland port in Saskatchewan, for example, servicing traffic that comes from Vancouver or Prince Rupert, and the same with Winnipeg. You would have an inland port somewhere along a rail line, if you are following the American use of that phrase. We have just accepted that phrase as Canadian, when we think of ports as having water.
Senator Eyton: When you were responding to Senator Johnson, you referred to a study. I want to be sure we have a copy that of study.
Ms. Brooks: The study I was talking about on short sea is publicly available on the web. I could supply the web address for the record now. It is www.management.dal.ca/Research/ShortSea.php. That will take you directly to the page. You can download it. I am sure that you could also get a copy of the study from Transport Canada, which has one.
Senator Eyton: How long is ``short?'' When does short sea become long and out of the parameter?
Ms. Brooks: Transport Canada has had this argument in-house a fair bit and came up with a definition of anything not transoceanic, so you could have short sea to Mexico.
The Chairman: Thank you very much for your contribution, which is very important to our study.
The committee adjourned.