Proceedings of the Standing Senate Committee on
Transport and Communications
Issue 15 - Evidence - May 30, 2007
OTTAWA, Wednesday, May 30, 2007
The Standing Senate Committee on Transport and Communications met this day at 6:15 p.m. to examine and report upon 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, tonight we continue our study on containerized freight traffic. We have as our witness Mr. John Vickerman, Founding Principal of TranSystems.
Welcome to our meeting, Mr. Vickerman. We are looking forward to hearing your presentation. I am sure senators will have questions to ask you thereafter. The floor is yours.
John Vickerman, Founding Principal, TranSystems: It is a pleasure for me to be with you tonight.
I have entitled my presentation ``Global Container Trade and Transportation Trends,'' which looks at opportunities in that regard. I would like to entertain questions as we go forward. Please interrupt me, as we go through the presentation, if I use a term or phrase that is unfamiliar to you.
TranSystems employs about 1,200 people; we have 40 offices. It was formed 12 years ago by the merger of three companies. I was the CEO of the smallest of the three companies to merge. As our name portends, we focus on transportation systems cutting across modal boundaries for the benefit of the logistics system.
There are about 90 deep water North America general cargo ports, and I have been the author of 65 of the 90 strategic plans for those ports. We focus on the port arena. If we look at the top 15 ports in North America, the ports are ranked by size in 20-foot equivalent units, or TEUs. These are the top 15. Everything in yellow we have done the strategic plan for; I am still trying to get to Houston and to Hawaii. This also gives you a good representation of the competitive marketplace for the top 15, where half the entire volume is comprised of Los Angeles, Long Beach and New York.
Senator Eyton: You have named almost everyone, and the ones you have not yet done, you will do. You are talking strategy now with lots of different ports, many of whom are competitive. How do you manage all of that?
Mr. Vickerman: I sign a penalty confidentiality agreement. I disclose public information, but I do not disclose private sector issues. For example, the Ports of Los Angeles and Long Beach are next to one another. They did their 2020 plan, and I had to sign an agreement with both to keep things confidential. When you do an entire analysis and there are only two parts, and each member knows their part, you automatically know the other. However, they were still very concerned. I sign confidentiality agreements and I do not disclose individual port strategies.
Senator Eyton: Would there then be an annual report containing 20 recommendations, 15 of which would be common to everyone and five would address unique needs?
Mr. Vickerman: No. In fact, the ports are very different. There are landlord ports and operating ports. Their geometries and particular issues are different. Container ports are very different than break-bulk ports and neo-bulk ports. Each has a unique complexity, although some would have similar recommendations in that regard.
Senator Eyton: Thank you.
Mr. Vickerman: Tonight, I want to cover the external industry pressures from my perspective. What is driving the market and what are the North American responses to that marketplace? We will talk a bit about international cargo demands, where the cargo is coming from and where it is being driven to, and the horizons for that.
We will talk about the Asian import challenge. I call it a tsunami. The tsunami is at our feet today. It is a huge challenge for North America, and I will describe that for you.
We will then look at North American forecast volumes. We will drill down a bit and take a look to ensure that we understand those volumes. We will then look at Canada and, in particular, your transcontinental land bridge. A ``land bridge'' for me is any conveyance system, truck or rail, that moves freight from one ocean to another across the continent.
We will then talk about new vessels. I will show you the latest pictures, only a month old, of a very large vessel. There are now four of them, two of which are the Ebba Maersk and the Emma Maersk.
We will talk about emerging new corridors that connect Canada, the U.S. and Mexico. Where are the corridors? What are they doing? How are they connecting?
Finally, I will give you an example of a technology that is based on information and alignment of vessel data to train and truck data that, when used properly, can double the capacity of a port without building anything or adding new equipment or labour. It is one of the technologies, I believe, that will be in the future.
Without further ado, let us look at external industry pressures.
This is a hurricane. I am an architect and an engineer, so I like the engineering aspects of this photograph. This is a much defined wall of high pressure. I use this photograph to ask the question: Are we headed in the right direction? Maybe we should not be going where that is. What are we doing? On the horizon, there are real challenges for us, such as cargo demands and capacity constraints. If you take the very best terminal in North America and compare to the very best terminal internationally, we fail by a factor of more than five-to-one; yet, there is no silver bullet that they have that we do not. Why is that?
We have productivity and security concerns. The new president of the port commission in Los Angeles has said that we are killing 3,000 people a year through unregulated diesel emissions, PM10 and below, and nitrous oxide diesel emissions through unregulated vessel calls.
There are a lot of challenges. By the way, under the environmental area, both the Ports of Los Angeles and Long Beach have now been tied up for about three and a half years without going forward on 40 of their major projects because of the new environmental concerns and regulations that each of those parts are dealing with. I believe that some of those new regulations will be seen throughout North America shortly.
If I were a practising architect in 1950 and used the technology of the day on ships — and this slide depicts shipboard gear — and I tried to design a facility that is 40 or 50 years out into the future and to ensure that it was not obsolescent but I used this technology, I would be wrong. Here is the technology today.
If I am an architect circa 2007, my clients want me to design something that is durable and sustainable out 40 or 50 years. If I deal with this technology, maybe I am wrong again.
I am a retired navy captain. I served for 38 years in the Naval Reserve. I do not know what that is. All I do know is that it is very different.
This slide is an artist's conception of the Fast Frigate for the U.S. navy. The point is this: What we know today will be surely different tomorrow, so how do we imbed flexibility? How do we plan for the future? We will talk about some of those things today.
To be competitive today, a port must reduce cost, increase the velocity of the cargo speed through the port, and they have to do it securely and as an environmental steward. The port director does not typically say, ``Come to my port. I am slower, not as dependable and I cost more.'' That is clearly not the case.
Today, in a gateway port, the port director has to deal with more than just the port — for example, shipping agents, non-vessel operating common carriers, tug masters and third party logistics providers, or 3POs; we actually now have 4POs. If you are not dealing with all of these people for the conveyance of a seamless system, you have not touched on all the points that need to be touched on to make change in the system.
Let us look globally at containers. The blue bars on this graph represent what we call slots. A slot is a container on a ship. As we build more ships, the slots increase over time. The yellow bars represent the slots controlled by the top 20 carriers. The red bars represent the shots controlled by the four global alliances. Marine carriers like Maersk or Evergreen or Hapag-Lloyd are not big enough globally in their distribution, so they align in consortia and alliances.
Senator Eyton: The blue bars include the yellow and the red, do they?
Mr. Vickerman: Yes, they represent the total number of slots.
Senator Eyton: There are a few slots left over, are there?
Mr. Vickerman: Yes, which are not controlled by the top 20 carriers or providers.
This graph is telling us that, over time, more and more of the total percentage of cargo is controlled by fewer and fewer companies and that the alliances, which are very powerful organizations not controllable around the globe by antitrust, are more and more powerful and in control.
This is the Port of Los Angeles. In the background is Pier 400; in the foreground is Pier 300. Today in North America, we have a paradox. It is the best of times in the sense that cargo demand is way up. It is also the worst of times. I do not have any resources and fewer and fewer capabilities to execute on the larger cargo demands. It is a real problem.
By the way, this is a photograph of opening day at the gate at Pier 300. At current productivity levels, by 2020 we can guarantee that our ports will be severely congested. I will bet my retirement on it, and that is dear to me right now at this point in time.
We use the excuse that it is congestion. The U.S. Secretary of Transportation has a big focus on congestion. I sit on her freight advisory round table. Fourteen of us advise her on that process. We do not really have a system. We say we have a system, but what we have is an aggregation or an amalgamation of public and private interest and they do not talk to one another. The ports do not talk to the truckers, the truckers do not talk to the 3POs, the railroads will not talk to one another and other people, and it just goes on and on. We have no true collaboration or communication.
Senator Tkachuk: Is this true of both countries?
Mr. Vickerman: Yes. This is North America.
I will compliment Canada. I have had the pleasure of meeting several of your federal ministers and provincial premiers. You are a lot more systemically oriented than the U.S. I sit on the secretary's round table, and it is so stochastic down there that we do not think in terms of systems planning. Sometimes I have made the comment that I would like 10 per cent communism right now. I would like to fix some of those choke points with the resources that are available. However, that is not the way it is.
In the U.S., one governor does not go to another and say, ``Why do you not have my jobs?'' They typically are very parochial and carnivorous. They like to steal cargo from their brethren. I know because I have dealt with most of them in that process.
Senator Zimmer: Senator Tkachuk asked if they communicate with each other in their own country. The other question is, do they communicate between countries also?
Mr. Vickerman: Yes. In my opinion, the boundary between Canada and the U.S., from a freight transport standpoint, should be obliterated. Quite frankly, we are a continent. We are trading as a NAFTA partner. What is good for Canada is good for the U.S. and Mexico, and I will show you some examples.
At the beginning of this week, I was at an announcement in Nova Scotia at a new port at the other end of the CN system. Prince Rupert is at the west end; this is at the east end. There is technology and security. Instead of stopping CN trains at the border, if we use the same technology and improve it and put it out at the port, we can convince U.S. customs and border patrol to release that monitoring at the border. We could then pass trains through the border at 50 miles an hour by monitoring at the remote port. That is good for the U.S. and for Canada, as an example of a technology that would apply to both.
Since 9/11, the World Bank has reaffirmed that every 10 years the world output increases U.S. $10 trillion. The world population is increasing. The production, manufacturing and output of the world is increasing. Trading partners are increasing and barriers to trade are coming down. Every 10 years we will have another $10 trillion output.
Let us look at the relationship between the world economy — and on this slide the blue bars represents the world GDP output in compound annual growth — compared to the growth of containers worldwide. You can see that containers are growing at about twice the rate of the world GDP, about 6 per cent.
Today, there are about 85 million containers. By the year 2024, we will have 243 million containers and growing. This slide uses the Fortune 500 data of Global Insight. They bought Wharton Econometric Forecasting, who won the Nobel Peace Prize for Economics. It is a dependable database that tells us that the slope of that line is up.
The next slide represents the container growth plotted in the entire globe. North America is in green and is growing at a lower rate than the entire world. Even at that, in the last five years, we have been growing at about 7 per cent and have about 48 million boxes — 20-foot TEUs — coming through North America. By 2015, that number will sore to 72 million boxes.
The next graph is the one that I am most concerned about. This is a graph of world country GDP arrayed across a planning horizon to 2050. When you see the U.S.A., you need to see NAFTA. The U.S.A. figure includes Canada and Mexico. If we look at this, the projection is that NAFTA and its trading partners will decline from the dominant economic engine in the world to number two in the year 2040. Some economists believe it is 2030, but the U.S., Canada and Mexico will decline as economic engines in the world.
Who is ascending? China is number one; India is number three; and, after a brief respite, Brazil. The GDP of all other countries decline.
Senator Eyton: Where is Russia?
Mr. Vickerman: Japan, Germany, the U.K., France and Italy are down; Russia is going up and then down. It has some stochastic characteristics, but Russia will, in fact, be a performer.
Where is this coming from? Why are China and India growing so much?
This next graph outlines product sourcing — that is, manufacturing — since 1980. The red bars represent Asian manufacturing, sourcing in Asia. The trend to outsource to Asia has been with us for decades. It is not new and will continue.
Today, more than 60 per cent of all North American container trade is with Asia. Europe is steady, at about 19 per cent. You will have to look at China and North Asia to get the whole perspective. In the last five years alone, the growth of containers from China has grown at 12 per cent compounded annually; 95 per cent of all that growth came from China. It surprised the U.S. that, for the first time in history, since World War II, China, minus Hong Kong, became Japan's largest trading partner. It used to be the U.S., but no longer.
I have a contract with the Chinese central government to design a new port south of Shanghai. When I came back from my last trip, I brought some facts with me. Let me share them with you. This picture is a layout of China geographically superimposed over North America. I want you to look at the faces of these children. The number of Chinese children in elementary school is greater than the U.S. population, every man, woman and child. They are mandated to speak in English and in Mandarin.
I was talking to some of our kids down in Virginia, and I said, ``Are you taught Mandarin? They said, ``We do not like oranges.'' There is something going on. That is the new upward, mobile society. That is why China is growing like it is.
Senator Merchant: Do boys outnumber girls four to one?
Mr. Vickerman: I do not know the number or the percentage, but in general, yes, because of birth control and the limit on family size.
Senator Merchant: Will that be significant in that culture?
Mr. Vickerman: I do not know. I do not think it will be hugely significant to consumption, but as they mature to become more affluent and become consumers, China will eventually consume the product that it is now pushing to the world.
Let us see what is going on in mainland China. This next slide shows the growth predominantly of Shanghai. That port is growing at 27 per cent compounded annually. I like to ask audiences how many of them would like their certificates of deposit to grow at 30 per cent a year. I would. However, they run out of space really fast.
Senator Zimmer: Is their infrastructure able to handle that growth?
Mr. Vickerman: No, and you are a good point man for this slide.
What are they doing about the infrastructure? Can they handle it? No, they cannot. They have looked out and here is the solution in Shanghai. The cloud right here is the old city of Shanghai. South of Shanghai, they looked 20 miles to sea and found some islands. They decided to cut off the top of each island and infill to create a new port. There were 54 berths in a single construction contract. The biggest we have had in North America is Maersk Sealand in Los Angeles, seven berths.
In three years, they built a 20-mile bridge with full environmental documentation, full permitting, full construction and full design. Again, it was completed in three years. I have walked the bridge. They are building a new city for the longshore labourers. When is the last time we built a city? Is the Delta port building a city? No. They are also building a new logistics park. I am under contract with ProLogis to design that new logistics park.
We know that the tsunami is coming at us. It is real; there is dramatic growth. What are are we doing about it on the West Coast?
This next slide shows Mexico. There are three corridors being considered in Mexico. The Punta Colonet port will dredge a new port into the desert and build a new rail line across the desert to the Yuma Port Authority to avoid LA/ Long Beach and its congestion. Guaymus goes to Tucson; Lazaro Cardenas goes to Laredo. Remember this one because I will show you some graphs of it in a minute.
What is happening in the world? If we look back, we have what I call centroids of manufacturing. Historically, for the last three decades it was Japan and Korea. That centroid of manufacturing has moved west and is centred in Singapore and Hong Kong. Will the centroid of manufacturing move to India or split and go to China? Typically, all of this goes across the Pacific and then moves to the largest urban consumption zone in North America — New York and New Jersey. News flash: New York/New Jersey is not moving to Halifax and it is not moving to Baltimore or Virginia. It is staying right there. The shipper's mandate is: Get my manufactured goods to the consumption zone cheaply and quickly.
A couple of years ago, a shipping line said, ``I will go backwards,'' and today the flow through the Red Sea, through the Suez Canal, past the strait to New York is larger than it has ever been in the history of the Suez Canal. The Suez Canal is unconstrained; it has no locks for a container ship. It is a big lake. If you run sprint service without stopping, you can get to New York one day faster than going across the Pacific and either through the Panama Canal or on to trains or trucks. I like to use that slide as a backdrop.
Can we handle the freight coming at us? The next slide shows us the U.S. containerized forecast. It is growing at 6 per cent to 7 per cent compounded annually. If I freeze the market share and we go out to 2020, I need three times the number of ports. I like to ask audiences: How many people believe we will have three times the number of ports in North America by the year 2020? I would love it.
Senator Tkachuk: That will not happen.
Mr. Vickerman: It is not going to happen. How about two times?
Senator Tkachuk: That will not happen.
Mr. Vickerman: How about no times? The California Coastal Commission has generally said, and I will paraphrase, ``Thou shalt never consider nor even contemplate building a new port on the California coast, so help you God.'' It is not necessarily like that but that is pretty close. We have a problem. We will either have to be two or three times more productive or we get changed market share.
Here is the latest and greatest. We generated these numbers for the Secretary of Transportation. These are the top 10 North American ports. Vancouver comes in as the only Canadian port. Look at LA/Long Beach. This is the number of containers in the year 2020. This is the number of containers they are moving in 2004. At some point in time, there is a ceiling. We cannot push five times more freight through LA/Long Beach unless we change our consumption. The differential has to be accepted by all the other ports or the entire North American consumption has to change. We have to start saving and not consuming. We are buying weed whackers like crazy. We do not even repair the string; we just buy a new one. I do not think it will change. At 2020, demand will exceed capacity in many U.S. ports.
What is the future? We believe that China and the Indian subcontinent will be the leaders in container trade with North America; everyone else will decline. There are some economists who believe that past 2015, India will surpass China in its impact on North America. That is why the Port of Halifax has established two offices in India. Karen Oldfield is out there pushing that initiative.
We did a project for the U.S. Chamber of Commerce. We looked at the top 16 ports in North America. We looked at their overcapacity in 2010, which are the dark zones on the slide, and we found that 75 per cent of them will be constrained.
A new thing is happening. Wal-Mart — who is, by the way, 15 per cent of the Port of Shanghai — is telling the West Coast ports, ``Do not touch that cargo. Let it flow directly to my distribution centre and I will take care of it. Do not stop it.'' There is a whole new dynamic.
This is the direct absorption rate into distribution centres. The flow of that volume wants to go to these big distribution centres, where consumption of the warehousing and distribution occurs.
We have a real problem. We have capacity versus demand. The private sector has not stood up to it yet. We really must change course or within 15 years we will have unbelievable problems at our doorstep.
Comma: I would like 10 per cent communism right now. Give me some resources, give me a Cray computer for 15 minutes and a logistics system, and let us solve some of those choke points in North America.
With respect to Canada's transcontinental land bridge, trade volumes for Canada are up. This data comes from the Canadian Manufacturers and Exporters. Volumes are up at all the Canadian ports. Vancouver and Montreal are pretty similar. What people miss is that Canada is strategically located from a marine standpoint in the world. From a great circle route, Canada is the closest route trader in the Pacific and the closest route trader in the Atlantic, and it is the only country with a transcontinental scheduled railroad.
Senator Zimmer: Have they considered trade over the Arctic Circle?
Mr. Vickerman: They have, except now the containers are so heavy that it is all done on the sea echelon rather than the air echelon. If we could break it up and be competitive they would go over the circle.
Senator Zimmer: With the issue of climate change, icebreakers and so on, Russia is apparently leaning that way.
Mr. Vickerman: Yes.
Here is proof of what I told you. Here is the great circle route mileage, both in Asia, Far East and in Europe. Canada is in the ideal sweet spot.
Another thing is happening in Canada. Intermodal rail is the fastest growing rail volume bar none. If we look at rail and its growth and the empties associated with it, we can actually help other commodities.
I have had the pleasure of being out in Regina and Saskatoon, Saskatchewan. We are talking about an inland port where we will stop the CN trains. We will use the 50 per cent of the boxes that are empty for high value product, load it on trains and balance the backhaul, head haul dynamic.
A new connection is coming. There was a symposium yesterday on the Pacific Gateway and — I am one of the sub- consultants doing the business analysis on this — the Atlantic gateway. Prince Rupert is a scheduled port on the CN system. This slide shows us the CN system. On Tuesday — and I was there — Premier Rodney MacDonald announced a new port out in the Strait of Canso, an entirely private port, not a public port authority. These are transit times from Prince Rupert into the heart of the U.S. It looks to me like a pretty neat connection.
Let us take a look at the east. Many people do not believe it is changing. This is the North Atlantic, Virginia to Halifax. Five years ago the primary trading partner was North Europe. Today the primary trading partner is China.
Here is the eastern gateway analysis. It basically says that by 2020 about 3 million boxes can go through the eastern gateway. Even if we do all of the Prince Rupert cargo and all of the Mexican cargo and do everything we will do on the east, we still cannot get the numbers to match on Asian imports. This graph shows the projection for North Atlantic ports, Virginia to Halifax. The horizontal red line represents capacity. Somewhere between 2013 and 2015, we completely run out of room.
This next slide shows us the Strait of Canso, Nova Scotia. There is a vision for a new port called the Melford International Terminal or North America's northeast gateway. It is operational in 2010 at 2 million TEUs.
Senator Eyton: Is that year round?
Mr. Vickerman: Yes, that is annual throughput. It will be a year-round, ice-free port. The Strait of Canso is 175 deep at its primary navigational point.
Let us talk a bit about ships. In 1955, Malcolm McLean was a frustrated truck driver in North Carolina. He said, ``I will not take this congestion in New York anymore.'' He literally grabbed a truck body off his truck, sold his company, McLean Trucking, and created Sea Land Inc. His little ship was called the SS Ideal-X. We have built bigger ships, and up until last year the biggest was about 8,600 TEUs. Then six months ago, a monster was born.
The biggest ship to go through the Panama Canal right now is 5,000 TEUs. It will just squeeze through. The locks are 110 feet wide and the Panamax ships are 106 feet wide. There is a water ``squish-out'' — that is a technical term — of two feet. Ships comes in and water squishes out in the process.
The next slide shows us the denial rate of passages in the Panama Canal. The pink bars represent the denial. You have scheduled a service, your ship is going into Balboa and they deliver you. All 10,000 containers cannot go through.
Panama is building a new lock. Right now the maximum is 5,000 TEUs. Remember this number. In 2014, the new ship will be 10,500 TEUs. Just last year, Zim and COSCO Group ordered four 10,000-foot vessels each. Then, six months ago, this happened. Prior to this new vessel, Maersk's largest vessel was the Sally Maersk, an S-class. The ship in front of her — and this is an actual photograph, not a mock up — is the Emma Maersk. This ship is a monster. She is huge. In the 30 years that I have been practicing, this is the biggest jump in ship capacity ever seen. In North America we can only handle about five cranes to a ship; this ship can handle 10. We will not see the ship in the U.S. It will go to Algeciras in Spain and Asia. However, when she is put into place, the ripple effect through the fleet will be seen in all of our ports.
Is there a bigger ship out there? There is a concept for a ship to handle 18,000 TEUs. Such a ship would be difficult to get through the Panama Canal. The canal allows for ships with 13 containers across and the concept is for 28. How do you unload her?
Is there an even bigger ship? The Germans have a 20,000 TEU plan, but then we get so big that we would have to put in a second propulsion shaft.
Senator Zimmer: Why do they plan that far ahead and build that big when they know right now that the infrastructure cannot handle it?
Mr. Vickerman: In my opinion, senator, they do not care. We will continue to consume, and there will have to be some accommodation on the part of the port authorities to accept it.
Senator Zimmer: Would you not try to communicate that to all the other structures to ensure that you can accommodate it?
Mr. Vickerman: Yes. That is the logical way to do it.
Senator Zimmer: They are forcing the issue.
Mr. Vickerman: Yes, they are.
The last time Maersk did this, they came into New York harbour with the S-class, held a news conference and said that they cannot get up through Kill Van Kull to the Port Newark/Port Elizabeth complex. They are making the point that we are not keeping up with the infrastructure.
If we look now at big ships, the real connectivity is to the small ships. The new frontier is what we call transshipment or short sea. Short sea can take volume off of roads. We can put containers on barges. We even now have high-speed, intermodal, double-stepped barges.
In my last couple of minutes with you, I want to look at emerging corridors.
In this slide, we see NASCO, North America's SuperCorridor Coalition. Remember Lazaro Cardenas and Laredo? I want you to focus right there. Texas has just decided to build a grade-separated, fully intermodal, rail plus highway, parallel construction, from Laredo all the way up. The corridor is coming.
NASCO now connects — in fact, I am working with Saskatchewan and others — to something called the Canadian Intelligent Super Corridor, or CISCOR, and links this corridor right across, using the land bridge concept we talked about. Boy, that makes sense. If Canada has the shortest route to Europe, the new port just announced will be seven hours closer to Europe than any other port in North America — closer than Halifax. A ship saves seven hours in and seven hours out — that is 14 hours. The mother ship turns three or four more times every year. That is free.
We have new technology now with grains. We could take a container, automatically dump it and load it, and then use those empties. We could put them on special rail gear called rail runners, where we can move a whole warehouse on rail.
New ports are being built. This one is in Kansas City. It is not really a port; it just processes information.
Senator Tkachuk: You talked about Texas and Laredo. Who is investing? Who is putting up the money?
Mr. Vickerman: From Lazaro Cardenas to Laredo, it is the Mexican government; Kansas City Southern Railway, Hutchison Whampoa, Hutchison Port Holdings are doing it. In Texas, its trans-corridor 35 project was funded by the state, so the state is doing it. The elements of the corridor are being funded by a variety of different avenues.
Let us talk about ``agile port.'' First of all, this is a U.S. Department of Defence technology. The fastest containership today can operate at 26 knots. The U.S. Department of Defence, for about 10 years, has been experimenting with a ship that will run at 75 knots. That is three times faster than anything afloat, but they found out quickly that if you go between two slow ports, you defeat your fast ship. They have looked at how to make the ports go faster. That is the agile port technology.
We did the strategic master plan for New York Harbour. One of the elements of it was that we looked 400 miles inland and plotted all the manufacturing and distribution centroids. We knew that New York could not build enough, so we postulated an inland port that served the main port on a just-in-time, JIT, delivery schedule. That concept is akin to agile port. Agile port is not really a technology; it is a way of organizing information.
For instance, here is a ship. This container is put on this ship, not for port call; this container is put on this ship for train destination. Then this container is put on this train not for intermodal terminal or port call, but for the vessel distribution — Kaohsiung, Keelung, Osaka, Busan, Kobe.
The military has it own jargon. They call an inland port an intermodal interface centre, IIC, but it is basically a port, a buffer and a dedicated rail. We surge the major port from the inland rail.
After 10 years of analysis, a general with United States Transportation Command, or USTRANSCOM, said, ``I do not believe it. I will not believe that can work unless you test it full scale. You have to show me it actually works.'' At the Port of Tacoma, in our newest terminal that we helped design, we came up with a plan with Hyundai. In 2003, we did a full-scale test. Hyundai brought in their ship and BNSF Railway brought in their trains. We measured the back and forth movement, and then Hyundai allowed us to take the ship out and repack it, not for port call but for train destination. BNFS allowed us to take the train out and repack it for vessel call. We ran it and doubled the capacity of the Port of Tacoma without building anything.
I am excited about the potential that has not been tapped in information technology cutting across modal boundaries for the benefit of our whole system.
The thing to remember is that, on average, containers dwell in North American ports for six to eight days. The same container on a rail system dwells for one and a half to two days. The greater the percentage going to rail can reduce the dwell on the marine terminal. If you have the dwell, you double the capacity without building anything.
I was at the dedication ceremony on Tuesday for a new port in Nova Scotia. When Hunter Harrison, CEO of CN, was looking at the design of the port, he wants elements of the agile port there because he can more seamlessly load vessel to train and reduce the time.
Today, to really be competitive, ports and intermodal linkages must reduce costs, but they have to be value-added multipliers. They have to be able to leverage their services. You cannot just be a port and say, ``We are pretty, we look good and we have a nice coat of paint.'' Wal-Mart does not want that. They want a service that is faster, more reliable and cheaper.
How do we do that? We have to invest in and leverage technology to improve our terminals. We are not the best in the world. We fail by a factor of more than five to one, even our best.
Senator Tkachuk: When you say fail by a factor of five to one, what do you mean — by investment?
Mr. Vickerman: No, by throughput capability or port activity. I measure it in TEUs per acre, per year. The best in North America is Long Beach at about 6,000 to 7,000 TEUs per acre, per year. The best port in the world is over 30,000 TEUs per acre, per year. It is HIT, Hongkong International Terminals.
Therefore, we are not good examples of how to do it. Plus, we have very expensive labour. I am pro-longshore labour, but they are expensive. If they work the hoot owl shift, we pay them one and a half times their hourly rate.
We have to be able to bring them to the table and, typically, in North America, we do not like dealing with labour. It is like the electrified third rail; I do not even want to talk about it. However, if they are to be the implementers of our technology, they have to be at the table.
Therefore, we have to do it better. That is my conclusion.
The Chairman: Mr. Vickerman, I would like to hear your comments on the short sea shipping issue. We heard from past witnesses that short sea shipping within Canada is less competitive than it could be because of the additional costs resulting from our regulations: a 25 per cent duty on a vessel not built in Canada; an obligation to be flagged in Canada; and compliance with Coast Guard standards. These requirements are above and beyond the international Maritime organization requirements. There are huge costs resulting from the rules and obligations.
I would like to hear your opinion on short sea shipping and the competitiveness of Canada in this regard.
Mr. Vickerman: Short sea shipping over the last couple of years has become a talked-about subject, although it is not necessarily new. Short sea shipping is coastal trade. I believe it was invented by the Egyptians, so it has been around for a long time. In addition to everything you said, in the United States, the Jones Act, a cabotage law supported by union issues, prohibits and restricts the short sea shipping capability.
I happen to be a proponent of short sea shipping. The regulatory impediments ought to be looked at and adjusted. However, I link short sea shipping to the main demand in our gateway ports and to that graphic I showed the committee of the mother ship. Only when we get to the point when there is enough volume to make short sea shipping economical will we see the full measure of it.
I, for one, believe that there are regulatory impediments that go beyond just international shipping that need to be re-examined. I have been a proponent of that in the U.S. where it is not a popular viewpoint because the Jones Act has little possibility of being adjusted in the United States. Clearly, from a North Atlantic standpoint, you would have to look at the regulatory impacts both in Canada and in the U.S. on short sea shipping.
In general, we need to prepare, as the Asian import volumes grow, to move freight from the mother ship to short sea shipping and do it effectively because it is one of the few avenues we have to make sense of the inbound Asian import crisis.
The Chairman: We have also been told that short sea shipping is less competitive than truck shipping is in the small volume market. Sometimes short sea shipping can be competitive in certain markets, but when a shipper is concerned with a faster transit time, generally they favour trucking over short sea shipping. What would you suggest as public policy initiatives to make short sea shipping more competitive when compared with other transportation methods? Do you think the benefits of short sea shipping are important enough to justify more efforts on that front?
Mr. Vickerman: In general, the effort would be well founded. One of the problems with short sea shipping, particularly for containers, is that each time you touch a container and move it, there is a cost. When you put the volume into the truck, or put the container on the chassis, it goes door to door. Let us think about short sea. You put the container onto the short sea ship or barge, it goes to its point of destination, and you then have to touch the container again to take it off the ship. Short sea shipping requires more handling.
I showed you a picture of a double-stacked train on a high-speed, low-weight barge. That barge is lifted into place with a technology called ``synchrolift,'' whereby the containers are put on on the short sea vessel once. It goes to its destination and is synchrolifted up to the level of the rail. The rail is pushed off in the sequence that is needed, and the boxes are not handled again.
Technology that would allow short sea to eliminate container handlings at both ends would improve the short sea system costs dramatically, but we still have service requirements. If the trucker can drive directly from door to door, we have to match that service issue of the truck with the service issue on the barge. We know that a barge in usual markets is less costly than a truck, except for very short distances. We ought to take advantage of that. On the longer distances, where short sea is available, it is my opinion that we ought to look at technologies that would reduce handlings and increase the cost competitive short sea shipping. I believe that is possible and should be coupled with regulatory improvements to eliminate impediments to short sea shipping.
We are facing a rising tide and we need all available boats to help us move those goods. It is my view that what I have talked to you about would help short sea shipping dramatically.
The Chairman: One important element for productivity and efficiency of a container terminal is the quality of its railroad service. Some representatives from terminal operators have recommended that the railway should be more accountable to the terminals as a way to ensure the quality of the rail service provided, in particular when quality is in decline.
What can be done to strengthen the relationship between terminal operators and rail service providers? Can rail service providers be more accountable to terminal operators? How can we achieve that?
Mr. Vickerman: The independence of Class I railroads vis-à-vis terminal operators is notorious. There are terminal operators and logistics park contractors who would like to see regulatory processes brought to bear against the Class I railroads to make them more competitive, in certain instances, to the terminal operators' requirements. I still like the free market issue. I believe that working together to optimize train and port infrastructure for the benefit of all parties is still a rational way to handle this matter.
Conventional wisdom would say that for a port you need two Class I railroads because you do not want to be captive to a unique, single-rate structure. However, there are examples, particularly in the U.S., where partnerships between Class I railroads and the ports have been highly successful. I draw your attention to the Virginia Port Authority and its partnership with the Norfolk Southern Railway. Flying in the face of traditional multiple Class I railroads, both of them have been able to profit and to increase efficiency on both sides.
I am very impressed with the inter-modal excellence program of Hunter Harrison, President and Chief Executive Officer of Canadian National Railway, and his ability to optimize vessel-to-train transfer. I believe that example in partnership with new ports or operators can help the port and help the railroad.
Let us take the example of the new port in Melford on the Strait of Canso. If we can save seven hours sailing time coming in and seven hours going out and if we save a day in transfer to the rail, the port operator and CN Railway both make money. We are getting close to servicing the back door of New York faster and cheaper than we can service the front door. That makes Canada, the CN Railway and the operator more productive.
Clearly, the rubber meets the road in the rail operating agreements between the Class I railroads, the short lines and the terminal operators. I believe it is the private sector incentive for profit and efficiency that will drive all of this, and those who are most efficient will become the dominators in that process.
We are blessed that we will have lots of cargo to experiment with, and those who do it effectively will benefit together. I would like to see tighter relationships focused on productivity and throughput, although some believe that some regulatory issues exist.
I am not one to revisit, for instance, the Staggers Rail Act in the United States, which deregulated the rail industry. We have seen huge incremental increases in productivity out of that act. We have to fine-tune relationships between Class I railroads, the railroad structure and the port operators. That is a technology throughput efficiency argument.
Senator Tkachuk: We have heard from a number of customers who are not very happy with the responsiveness of our railroad companies. Given that container terminals are increasing in capacity and efficiency, has your work on the West Coast led to a similar conclusion, that perhaps the railroads, especially CN, are rather unresponsive to the needs of the port?
Mr. Vickerman: I have heard those issues. I hear them frequently in that process.
In 2008, the West Coast is facing a collective bargaining agreement with the ILWU, the International Longshore and Warehouse Union. In my opinion, we are facing another slowdown like we did in 2002. We could have a slowdown in excess of seven days. We have seen rail rates out of Los Angeles/Long Beach for the BNSF Railway raised 35 per cent, which some people believe is a gouge in rate increases in the process.
I have heard complaints about CN Railway and its scheduled rail service. In all of those regards, if we put a rail car into a terminal in a time way and load it in a timely way, with the requirements on the terminal operator to load it within a given time and the railroad to pull it out and service it at a given time, this helps both. CN is the only scheduled railroad in North America. I believe in the extrapolation of that scenario. I like the IMX program in CN, intermodal excellence. Pushing that and using more technology, while using the agile port and lowering the dwell time, will again benefit both.
There are certainly customers today who are not satisfied. Let us take our western U.S. railroad ports and look at speed. With BNSF and Union Pacific, the main line velocities have been declining in the last couple of years. We are facing great increases in volume, and we are going in the wrong direction if main line velocities on our western railroads are declining.
We must operate the ports more effectively and increase the speed and capability of the rail. I happen to like the idea of timely scheduled service with mutual understanding — perhaps mutual penalties on both sides — for the penalties associated with the delay and the loading of trains.
The more we can push containers onto trains, the lower the dwell on the marine terminal, which makes the terminal itself more capable.
Senator Tkachuk: When goods come into Vancouver, does a company like Wal-Mart negotiate with the railroad, the port and then the trucker? How does that happen? Are there package deals where the railroad and the port have an agreement with one price to get the goods to Chicago, or wherever, with a guaranteed delivery time?
Mr. Vickerman: There are different examples for each of the railroads. Let us look at it historically. Let us first set the facts.
In the United States, the ports are antitrust immune. They can fix rates on the West Coast and the East Coast just by agreeing. They are about to lose that immunity because they do not use it.
The carriers are also antitrust immune by U.S. regulation. The carriers have been more effective. If a carrier goes to port A and asks, ``What will you give me?'', then goes to port B asks the same question, then goes back to port A and says, ``I got this from port B,'' they have been effective in that regard. Over time, the carriers have been the historic controllers of the rates. The rates have tended to be in tiered echelons; published rates, volume rate reductions and then confidential rate making. We have confidential rate making in the U.S.
A phenomenon in the last couple of years has been that the shipper, or what I call the beneficial cargo holder — companies such as Wal-Mart and Home Depot — are so large they are now dictating the market place dynamic. Those deals may come pre-packaged or with pre-determined rates. Some of those rates may be confidential, some may not. In general, they are tiered. The current trend is for the beneficial cargo owner and shipper to be higher in the food chain than the historic marine carriers have been. They are making a determination as to where they are putting their warehousing and distribution centres, and then they are actually forcing carriers to service that market.
A good example is Wal-Mart. If we look at Joliette Arsenal in Chicago, it is the largest intermodal complex in North America. Wal-Mart just opened a distribution centre that was 3.2 million square feet, seventy-five acres under one roof. They have two 4 million square foot distribution centres to go in. I believe the shipper, the beneficial cargo owners — the Wal-Marts of the world — will have greater and greater control over rates. They are usually volume sensitive.
In my experience in helping people is that if you go into Bentonville, and in a small secluded area you negotiate the rate, every penny. The rate and volume controls in that process are such that the beneficial cargo owner has the upper hand at this point in time.
Senator Tkachuk: I would be remiss if I did not ask you about the inland ports and the work you are doing in my home province of Saskatchewan. Of course, as you know, there are other potential sites, such as Manitoba, and there is already one being built in Edmonton. What does government have to do, if anything? Does it just get out of the way? What does it have to do on the regulatory side or on the infrastructure side to promote the idea of the inland port and perhaps make more efficient use of the containers back and forth?
Mr. Vickerman: I am a huge proponent of an inland port. We need more of them to make our system more effective. There are certain regulatory rate restrictions in Canada related to rail that have and are inhibiting some of that development. Historically, the railroads have not been conducive to dealing with the commodity market and stopping trains from doing that.
Whether it is in Saskatoon, Saskatchewan or Manitoba or Edmonton, if we look at the rationalized rail system, several inland ports could be opportune.
The government should do everything it can to allow the development of those inland ports that make market sense. First, it should be a private sector, market driven equation, but then the government needs to do everything it can, including rail rate restrictive regulation review in order to allow CN trains to stop at the inland port. It needs to develop an inland port with information technology where the government again can actually be constructive in helping information related to the inland port.
I am a big advocate of the inland port, and I think it is one of the future solutions for North America.
Senator Zimmer: I was in Los Angeles last week at Hollywood and Disneyland. Your presentation is better than any Disneyland production I have ever seen. Congratulations. It was very well done.
When we think about larger ships, we immediately think about bigger is better: ``If you make yours bigger, I will make mine bigger.'' As soon as you see a bigger ship, the first response is that we need bigger infrastructure.
You have somewhat shown that the little guy can win in this respect. By that, I mean there are other things we can look at such as the efficiencies of a port that can handle it whereby there is a rapid turnover and not necessarily always a larger infrastructure.
In one of the slides on your web site, you point out that a poll of the top 1,000 blue-chip, multinational shippers uncovered that their main priorities, which are almost of equal importance to them, are schedule reliability and consistency and competitive freight rate. The maxim, as you point out, is that the customer wants more and is willing to pay less. I think that is a great line.
In your view, what are the main challenges that we must overcome to increase the efficiencies in the change without disproportionately increasing the rates?
Mr. Vickerman: I am impressed with your research. You have done a good job at looking at some of the other presentations I have given.
Senator Zimmer: I have good assistants.
Mr. Vickerman: The senator has uncovered a jugular principle that I believe needs to be adhered to, namely, that the top 1,000 blue chip slippers in the world, when asked about the governing criteria by which they make selection of port or carrier partner, said that the number one criterion, by about 43 per cent, was that scheduled, reliable service is everything. If you can provide scheduled, reliable, repeatable service 24/7, 365 days a year, that is what we should be focusing on. They say, ``Do not talk to me until you make it consistent.'' Close behind that is the freight rate. A minor third criterion is speed or time.
If I were focusing on the public sector and where a government or a community could make a change, I would focus on helping private sector firms make and maintain scheduled, reliable service.
I will give you an example where I believe we could make a difference. I do agree with you that bigger is not always better. I believe that the change will be on the soft market, that is, the information side of the house, cutting across the modal boundaries, not necessarily big hardware issues. I believe those who respond to that softer side of the equation, focusing on reliability, will be the winners. That does not necessarily mean we all have to be the Port of New York. We cannot all be the hub and spoke. We can be at the end of the spoke and still serve that market well.
Let me give you an example that is current and I think is pretty important. Port security is a big issue. Booz Allan Hamilton did a table-top exercise where they shut down the Port of New York and Savannah, Georgia. Through a radiological portal monitor, they detected a hot detection. We could not find it. About 18 days later, they closed the ports. The rail car exploded in Chicago. We finally found it. There was a $50-billion loss, and it took 60 days to clear the ports of all their cargo. The $50-billion loss was horrific. Companies become bankrupt beyond about 10 days of logistics in the supply chain.
In that regard, it is so important that we now have new legislation. For instance, the U.S. President signed the Safe Port Act in October requiring 22 of the largest ports to be radiologically inspected by the end of this year, with the remaining ports inspected by the end of 2008. The Democrats now have new legislation that might force all ports in the U.S. to be 100 per cent radiologically inspected by the end of this year, a phenomenon that I do not think can occur.
Buried in that legislation is something called the green lane capability if you qualify as a Tier 3 C-TPAT — the Customs-Trade Partnership Against Terrorism — which is the Good Housekeeping Seal of Approval that the U.S. Customs and Border Protection issues through the container security initiatives. A green lane would be a certified, compliant user of a port who is allowed to stream cargo without inspection because the technology that is applied is the current one.
The first generation of radiological portal monitors detected false detections. For example, kitty litter sets off our portals. If you are shipping kitty litter, or Mexican tile, or if the trucker has had an isotope medical procedure, he sets off the portal monitor. We are now developing second generation portal monitors that are spectral so we can see that a dirty nuke is inside a barrel of kitty litter. We do not have to stop the train for kitty litter or Mexican tile; it can continue on. If we use that technology and current X-ray examination, and we prove to both Canadian and U.S. border patrols that we have this same image in the same radiological detection at a remote port, like the Strait of Canso or Prince Rupert, we can actually eliminate trains stopping at the border. North America currently has no green lane ports. No one has certified thus. We currently do not deploy the same technology that would not stop a train for a kitty litter detection. I am being extreme here.
The point is that port security is on one side of the coin; port productivity is on the other side. If we used advanced information on what is coming in for that port and we use advanced portal technology, we could actually accelerate the velocity, the implementation of that port security regulation. I have to credit Canada. Canada is already requiring 100 per cent radiological portal inspection. If you ``incentivize'' that, I believe you will be able to dramatically increase the capability and productivity of the port. Port productivity and port security are not mutually exclusive. In fact, they are highly interdependent. That would be an accelerator. That is an example where you use a soft system to allow our smaller people to be more effective.
Encouraging green lane C-TPAT Tier 3 compliance is good, and I think the Canadian and U.S. customs and border patrol ought to be working together to perfect it. I said at the beginning of my presentation that, in my opinion, we should act as a continent. We ought to erase that border and work together. That technology would help.
Again, I applaud you for your research. You did a great job.
Senator Zimmer: Thank you.
Senator Tkachuk touched on governments and what they can do with the inland ports, but I want to expand that point further. You advocate the elimination of impediments by government such as economic constraints on the private sector. What do you view as the main impediments to members of the cargo transportation logistics chain in the current Canadian environment, and how can those barriers be eliminated, in your opinion?
Mr. Vickerman: I do not have a clear understanding of all those impediments myself. The simple summary answer would be that I think the solution is in the information technology end of that, perfecting and making information technology available, usable and implemented throughout the entire logistics supply chain. We have not even touched the potential of just using information between modes, between 3POs, between a trucker, between a non-vessel operating common carrier. When we get to that point, I believe in large measure that will perfect and help us answer this Asian tsunami that I keep talking about.
Senator Zimmer: I believe in your belief of communism at 10 per cent; I would recommend 20. Sir, I thank you for your venture tonight.
Senator Eyton: Thank you for your presentation, which was enlightening to me and I am sure to all members of the committee. I say that for two reasons. First, you gave us, dramatically, world trends so that Canada and its concerns could be seen as part of an overall picture. That fact is rather frightening but, on the other hand, it is something that we should be trying to make recommendations about.
Second, most of our witnesses are part of an overall system. They acknowledge and pay tribute to it. We have heard from the ship guys, the railway guys, the truck guys and from the distribution people. To see an overall picture within a set of trends is very useful. I am sure it will impact very much on the way we present the material we discovered in this committee.
This issue is complicated. I have a business background. I look at it and say that this requires planning, which establishes priorities. From the priorities, we need to fix the kind of investments that are required. We then need to put it in place and manage all of the system and do it well, and we have to achieve buy-in from all the component parts. That is really complex.
I will challenge you. Let us assume that I am the Government of Canada, which is who we represent here. We have a challenge and we must do something intelligent about it. This is a broad question, but what are the priorities? What can and should the system do, altogether? What is the vision? What can we do now collectively given the state of this industry? You know much about the Canadian state. What role can the government play in making it happen? I know those are very big questions, but we are challenged in a complementary way.
Mr. Vickerman: I am a consultant, a hired gun to some of these institutions. Your depiction of a complex, almost stochastic system knit together differently, in different parts, is pretty hard to come up with.
I will be critical of the U.S. right here. Up until January of last year, the U.S. did not have a federal freight policy, period. The policy was to relegate the decisions to states and to allow the states to perfect what is best for the populous, with politics always being local when it comes to hierarchy.
Last January, the U.S. Deputy Secretary of Transportation — and I participated on the committee that formed it — created a freight framework analysis and published a set of frameworks by which you could address the issues you just talked about. It has been quiet; not a lot of people have read it. You could go to the website right now. If you are interested, I will provide you a copy of the proposed U.S. federal freight policy framework.
Part of that framework says that to do anything, we need to measure what it is that we are doing. So many players are competing head to head that they all measure things differently. Ports do it. They measure themselves in TEUs, or revenue tonnes, or units of whatever, because they always want to be different. We have to come up with a more uniform performance measurement to understand and cut across that issue. As soon as you do that, a real big problem emerges in that you begin to detect winners and losers. You detect who is operating more efficiently and who is not. I believe there are some hierarchy of performance measures that could be applied to a system that does not, per se, determine who are winners and losers in the process.
This issue is pretty complex, but I like the national freight policy framework that was published in the United States. I am more knowledgeable about the U.S. than I am about Canada. However, it has not been very popular and has not been addressed very much. I believe the framework in there is as applicable to Canada as it is to Mexico and to the U.S. I believe in performance measures that look to the freight framework analysis to ensure that we can answer those questions. There are seven framework principles in that process.
I will ensure that the clerk gets a copy of the little known and little published policy from last January. Jeffrey Shane made the announcement at the National Academy of Sciences down in the U.S. I believe that framework could be one road map to help you look at your systems vis-à-vis the U.S. systems.
Again, you are talking to a person who is a consultant. I will make a joke of this, but confusion begets consulting. That is to say, the more confused people are, the more consultants they need to help. That tells us that we need to have everyone around the table. I believe that we have not included all the people around the table. If you took the freight framework that the U.S. just tried, which has not yet been accepted, applied it to Canada and then brought to the table practitioners who care about the system, then I believe you could fill that framework out. I believe you could start measuring across those modal boundaries with standard performance measures and start identifying some of the issues. As a result of all that, you will be to pinpoint certain problems, but you will then need to solve those problems. Putting money where that choke point is will advantage Saskatchewan over someone else, or Nova Scotia over British Columbia, but so be it if it is part of and viewed as the entire system and the need is there to perfect that linkage. This is a very complex issue, full of constituents who may or may not want to participate.
Senator Eyton: You seem to regret identifying winners and losers, but it seems to me the system will not work unless you identify winners and losers. There have to be some losers if you are to improve the system overall.
I will make it more local. You talked about Tacoma as a place where you carried on a radical experiment. You referred to it as an agile port, which has a lot to do with information, convergence and cooperation between the moving pieces that make up a port and shipping hub. How did you achieve buy-in then? Was it the railroad company called Burlington Northern? If you achieved it in the one port — at least for a period of time while you were doing the test — is it not possible to extend that to other ports and say, ``See what those guys won? See the example they set? See the economies they achieved?'' Is that not possible?
Mr. Vickerman: It is possible. The agile port test in Tacoma was sponsored by the U.S. military with the belief that if we were successful at agile port, the excess capacity achieved could be used by the military, which was really their objective. You have correctly identified the real potential. It has a commercial application to make the system work better.
One of the important things we did is that we brought longshore labour to the table. I went down to the ILWU headquarters in San Francisco and asked for the Coast Committee, which is comprised of representatives of every port on the West Coast that has the International Longshore and Warehouse Union. I asked the president of the union to be a subconsultant to us. I had to hire the ILWU. That was the first time I ever did that in my life because I could not go on to a terminal with a PDA and make notations of speed without having a marine clerk next to me in that process. Those are the work rule issues there.
That act, for the first time, brought the ILWU to the table in a constructive fashion that was not going to deleteriously affect the outcome. In my opinion, that is the first time on the West coast that has ever been done. I believe that more and more of those kinds of tests and deploying more and more caring, concerned people, including labour, would be helpful. Obviously, if you were to talk to the Pacific Maritime Association, the collective bargaining arm for the employers, they might view it differently. However, I believe that one of the main achievements for that agile port was that for the first time in history a longshore labour union actually participated in the application of a technology. I think we should do more of that. The same unions apply to Canada that apply to the U.S. and to Mexico. I think you could, in fact, do more.
Let me tell you why, however, some people have said that we will not do it. To load a ship in Kaohsiung, Keelung or Osaka for a train departure destination in Kansas City or New Jersey or Melford, Nova Scotia, requires the ship owner and the beneficial cargo owner to pre-sort in overseas ports in advance. It is too easy right now just to dump it at the port. Figuratively speaking, we bring the ship in, turn it upside down and kind of dump it in the port. We do the same thing with rail. We kind of dump it. We then run around trying to figure out where everything is. It is easier today not to do that and to just designate it for a port.
We could incentivize through tax credits, or the like, a shipper or a beneficial cargo holder for overseas loading. If we knew in LA/Long Beach that we could build half of what is required and it could save us billions, then maybe we ought to incentivize the carrier overseas to load the ship over there. Right now they do not do that and it is too hard.
That same kind of test, with the right people around it, such as longshore labour, is a perfect example of where we ought to be achieving model results in the system. When you can say that we actually doubled the throughput and did not build anything and did not add a stick of equipment or a single person, that is pretty compelling. By the way, we did it at 40 per cheaper cost because we ran the experiment both on time and on cost.
Although the agile port was viewed as a radical experiment, I believe that elements of it are the future of our logistics system.
Senator Eyton: Might we buy that technology? It sounds good to me.
Mr. Vickerman: You do not have to buy it. All you have to do is go into the computer of the ship or the train and realign the assignment of the box. You or I could do it right now. It is not a computer or a new algorithm or simulated Monte Carlo, et cetera. All it requires is going into the loading system of the ship and assigning that box, not for what benefits the ship, but for what benefits the end distribution when it is transferred. It is not really a technology. To be honest, it is pretty simple. However, it is radical and a lot of people do not agree with it.
Senator Fox: Most of my questions have been answered. I found the presentation to be extremely interesting.
I do have one query that I would like to put on the table concerning the competitiveness between ports and differentiators. I will start with an example.
Ireland has a tax system that makes it advantageous for a corporation to invest in Ireland compared to other jurisdictions in the world. Are there any differentiators that make a port more profitable or competitive based on the legal or corporate structure? If I look at all of those ports in North America or around the world with which you are familiar, are there any impediments in setting up that legal structure that make one port more competitive than another?
I will give you another example. At one point we lost a very good baseball team in Montreal, the Montreal Expos. They were looking at building a new stadium. The whole delegation from Montreal visited Baltimore to see how their stadium was being built. The amusement taxes and rebates made it a lot easier to build a new park there than in Montreal. That is the point I am trying to make. Are there differentiators of that kind that cause impediments to Canadian ports vis-à-vis eastern seaboard ports in particular?
Mr. Vickerman: I have seen in my travels and practice many examples of a legal or business practice that has been constrained by a local mandate of some sort. It is hard for me to characterize one or two or to tell you exactly what should be eliminated.
I will say that the efficiency and productivity of the system should be the paramount focus. There have to be tax credits and incentives, but look at what Canada recently did with regard to the foreign trade zone issues. As I understand it, the Canadian foreign trade zone practice versus the U.S. trade zone practice has been generally brought into alignment or agreement. The idea that a port is part of a foreign trade zone where the tariffs on its freight are not assessed until the value-added product is moved out of the foreign trade zone, as well as the idea to establish sub-zones and to create common foreign trade zone practices, are all positive.
From my perspective, the governing factor should be a focus on the efficiency of the movement of freight in and out. Anything legal, regulatory or otherwise that prematurely affects the regulation is something that should be dealt with.
I will use a U.S. issue, but a radical example. We have two unions in North America — the International Longshore and Warehouse Union on the West Coast and is the International Longshoreman's Association, the ILA, on the East Coast. This will sound like I am labour bashing, but I am not. I am an advocate of and actually work for the labour unions; I have a contract with the ILWU every two years to review technology with them.
It was not too many years ago that on the East Coast, in Baltimore, the longshore labour did not work in the rain. Furthermore, you could not call the day before and order a crew from the hall a day in advance. It was called telephonic hall hiring. It was prohibited. You had to call the day that you wanted the labour. You had to call in the morning.
In my opinion, labour work rules, legal impediments, regulatory impediments, anything that would effect the efficiency or productivity of the port or the intermodal system need to be tested against that efficiency and altered, if need be, in order to perfect the system. There are many examples where local work rules are quite onerous.
Senator Merchant: What is your view on where the markets for mega-ships will be and why? Let me explain.
Representatives from the Port of Vancouver old the committee that the mega-container vessels are not likely to be deployed on the Asia-Pacific service because the crossing is too short and the number of top-up ports on the ``string'' would slow the vessels down. On the other hand, we were told that the East Coast will be the last market for the largest container ships because, with the exception of Halifax and Canso, it has a silt problem. What do you think of that?
Mr. Vickerman: I have a drawer full of predictions from marine carriers as to what will and will not happen with mega ships. I will not name the company, but a newspaper article, an interview, that says container ships in the Atlantic will never get above 4,000 TEUs. I have predictions from influential people in certain ports saying this or that will not happen. I have shown you pictures of the Emma Maersk at 14,000 twenty-foot equivalent units, which outstrips anything anyone ever considered. There are four of them either under construction or floating and there will be 11 more. As soon as those vessels are put into the fleet, there will be a ripple effect through the fleet and out of the bottom they will scrap older vessels, older keels and reassign smaller issues.
I concur that North America will not see the mega ships, the Emma Maersk or the Ebba Maersk. These are named after the spouses of the Maersk executives. In my last presentation I referred to the mega ships as monsters. A young lady said you shouldn't refer to them as monsters because they have female names.
It is true, in my opinion, that we will not see the mega ships in North America immediately, if ever. I should not say that because the progress of this whole thing is dramatic. However, we will see the ripple effects on the fleet. Montreal is different because of the St. Lawrence Seaway. There is a restriction there so I would exempt it. Certainly Vancouver, the West Coast and the East Coast will see added increases in ship size and volume because the mega ships have gone in and there is a ripple effect.
It is also true that the mega ships will not call at very small load-out ports. It will do what they call ``first port in'' or ``last port out'' calls. They want to come in, dump as much cargo as they can and go back, or they come in and they call big mega hubs and go back. That is the case.
I differ with the analysis of the East Coast. I am perhaps on the edge more than anyone in the industry because of that. Let us say we are a shipper and bringing our freight into the West Coast. I showed you proof that the West Coast cannot take the Asian import volumes. We are facing another slowdown with the ILWU either at the end of this year or the beginning of the next.
Let us say that I am shipping hundreds of millions of dollars of freight to the West Coast, and I am going to experience a seven-day slowdown. No way will I do that.
Am I going to accept 35 per cent increases in rates from railroads to ship to LA/Long Beach? Maybe not.
Am I going to take the rate increases proposed in the Panama Canal? Maybe not. If I do, I might go backwards through the Suez. Although the political stability of the Suez is in question, it has been blocked before. The U.S. navy had to raise the ships to clear it. It is clear to me that if I want reliable and dependable service, I may go backwards. I believe we are on the cusp of seeing significant increases of traffic through the Suez and we will see larger vessels in the Atlantic.
The final question was depth of water. I like to make a joke of this. A famous naval architect by the name of Archimedes — well, he was not really a naval architect.
Senator Merchant: He was a relative of mine. I am Greek.
Mr. Vickerman: Your relative, Archimedes, basically said that as the containerships get wider and longer, their depth is not proportional to TEU capacity. It is proportional to the volume of displaced water. That means as these ships gets wider, the draft is shallower. I could melt the 14,000 TEU Emma over 25 hectares and have a half meter draft. That is what Archimedes said. He knew nothing about containers.
As we get bigger and bigger, we get shallower and shallower. We have problems with manoeuvring, with air drafts. We cannot get under bridges. The point is that if we are getting shallower and shallower, all we need is manoeuvring room. Right now the maximum vessel draft is about 48 feet. We use two feet of under-keel clearance because we do not wish to scrape the hulls. They have anti-fouling paint and cathodic protection anodes on them, which is very expensive stuff that we do not want to scrape off. Also, at low speed the stern of the vessel, because of inertia, squats. The slang in the industry is squat. We allow two feet of squat or vertical ship movement because of the inertial propeller system capability and two feet of under-keel clearance. If you add that to 48 we get 52. If we get wider vessels, 52 to 53 to 54 is about as deep as we need to go. The Strait of Canso is 175 feet deep. The Port of Seattle is 938 feet deep; there is a big gorge. The Virginia Port Authority's approach channel is 55 feet on one side and 50 on the other.
In general, if you are in the 50- to 53- to 54-foot range, you are probably okay from a containership standpoint for a long time. A lot of our harbours can do that and more can do that. For that reason, and because reliable service will not have to contend with the congestion, I believe we will see much larger vessels on the Atlantic. I do not see LA/Long Beach putting four or five times its current volumes through their port. I just cannot conceive of that.
I am a proponent of the backwards flow through the Suez. If I were a shipper, it would be a more reliable service. It takes two more vessels in the string so it is more costly.
I beg to differ on what we might see in the Atlantic. I would like to show all the prognostications of the shipping executives from the past. I have a book on how to design a port, and they said the largest containership that would ever come about is 4,000 TEUs. Someone goofed. I think we need to be careful that we are flexible enough to accept it. I think it is driven by commercial issues of reliability, rate and time.
The Chairman: Thank you very much, Mr. Vickerman, for your presence here tonight. Your presentation and answers to our questions have been quite beneficial for our study. We wish you a safe trip home.
Mr. Vickerman: One final comment. I put the analogy of a tsunami in my presentation because I believe it is coming and no one talks about it. It is my way of getting people to talk about it.
The Chairman: Thank you.
The committee adjourned.