Proceedings of the Standing Senate Committee on
Transport and Communications
Issue 7 - Evidence
OTTAWA, Tuesday, March 4, 2008
The Standing Senate Committee on Transport and Communications met this day at 9:37 a.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 Donald H. Oliver (Deputy Chair) in the chair.
[English]
The Deputy Chair: I should like to call this meeting of the Standing Senate Committee on Transport and Communications to order.
The committee at this time is doing a study to examine and report on current and potential future containerized freight traffic handled at major inbound and outbound markets served by Canada's Pacific Gateway container ports, East Coast container ports and central container ports. It also addresses current and appropriate future policies relating thereto.
Honourable senators will recall that, in 2006, the federal government announced the Asia-Pacific Gateway and Corridor Initiative, which committed $591 million primarily to transportation infrastructure projects in British Columbia and Alberta. The initiative is an integrated set of policy and investment measures focused on trade with the Asia-Pacific region. Its mission is to establish the Pacific Gateway as the best transportation network facilitating global supply chains between North America and Asia.
In 2007, the government increased its investment in the initiative to $1 billion and committed $2.1 billion to a national fund for infrastructure for gateways and border crossings.
Honourable senators will also recall that, in December 2006, the government announced the appointment of three strategic advisers, Mr. Jeff Burghardt, Mr. Arthur DeFehr, appearing before us today by video conference, and Mr. T. Richard Turner, to provide advice on the long-term direction for the initiative.
The advisers began their work in mid-January 2007, and their last information meeting took place in May of that year. They visited major ports and terminals, airports, air cargo facilitates and rail yards in several countries. Consultations were held with airlines, rail companies, marine and airport authorities, marine port and airport terminal operators, ocean shipping companies, government agencies, labour unions, logistics councils, academics, employers and employees groups, business associations and systems users.
Honourable senators, we are pleased to have as our first presenter Mr. Art DeFehr, President and Chief Executive Officer of Palliser Furniture Ltd. He is one of the three consultants who were advising the government. Welcome to our committee, sir. We invite you to make your presentation, following which the honourable senators will have questions they would like to put to you.
Art DeFehr, President and Chief Executive Officer, Palliser Furniture Ltd.: Good morning. Thank you for this opportunity. I will make a short presentation and rely mainly on your questions.
I think the report speaks for itself. It was prepared by three people, one from Vancouver, one from Prince Rupert and me. I am from Winnipeg, representing the Prairies. I am the only one of the three who uses containers. I am a receiver of containers and a shipper of intermodal freight in Canada. I have lived in Asia on a number of occasions and feel comfortable in Asia. My input reflected the container side of the business.
The overriding point I wish to make is that there are items in the report seen as critiques or criticisms. If you are, for example, a railroader or a port, you read a particular part and may see some point of critique. In our view, that is the wrong way to read the report.
The report was done to establish the view of the gateway opportunity as an opportunity that can be exploited to a much greater degree. The competition is primarily from the West Coast of the United States and the target is increasing the traffic that flows between Asia and the heart of the continent. Our gateway is concerned with Canada and the heart of the continent. In doing that, we critiqued the different elements of the system and try to make recommendations.
This is not about one particular element of the system. It is not only how the port operates or how the port is governed. It is not only about labour practice or railroads. It concerns many different things. That is one of the challenging parts for Canada.
As we travelled around the world, we visited different ports. I will use a couple of examples. The place we felt most compared to in terms of opportunity would be Northern Europe. We went to the port of Rotterdam, the leading port. Rotterdam has competitors — Antwerp, Hamburg, et cetera — who can perform similar activities. Therefore, Rotterdam needs to compete.
Places like Melbourne, Sydney or Perth, Australia, really only compete with themselves. They either offer good or bad service. However, if your container is going to Melbourne, it cannot go to Perth and get over to Melbourne. The issue is how well it is serving the local market or the country. However, it does not compete with someone else.
The other aspect is whether there is a ``hinterland.'' Singapore and Hong Kong are transshipping ports with a localized hinterland and serve a region and a shipping port. They are, in a sense, competing with other ports that perform a similar service or are the dominant port in the region.
Canada's challenge is its long supply chain. We have the ocean element, we have the ports aspect and we have railroad parts through fairly difficult terrain. With all that, our market is down in the heart of the United States. In terms of the gateway opportunity, the latter is the part we are addressing.
A container going to Toronto will go through Vancouver, whether the service is good, bad or terrible. It does not have much choice. When it goes to Chicago, it has other choices. What we are dealing with is a system; if a part of the system does not work, in a sense the gateway does not function well.
Our report notes that, for example, in Asia, we were always asked the question — whether by a shipper or ship owner — about the reliability of Canada, the reliability of the port. Often, the statement behind it was not that the port was bad but that the process was lengthy or wrong. The Asian experience was that, when they sent something to Canada, something went wrong — the containers were piling up in the port, it was taking too long; the trucks were on strike in Vancouver; the railroad workers were on strike; or the ports were clogged or there was snow in the mountains. In the end, they did not care about the problems. Their containers were supposed to get there in 25 days and it took 40.
I make that point to convey to honourable senators that it is very important to understand we have a systems issue. Our gateway is only as good as the weakest link in the system. While we will probably discuss individual parts of the system today, it is really a systems issue and we need to balance the different parts.
Within that, I would also say that some parts lead and some parts follow. That is important for Canada. I will use the ports as an example. The railroads can increase or change capacity probably more quickly than the ports. Some of the railroad capacity simply has to do with how much equipment they put on the line, or scheduling. The ports have issues such as number of berths. Adding berths in the port of Vancouver, as you know, can take half a decade or a decade because of environmental concerns and other issues. Some parts of the system need to be planned well in advance and, therefore, need to lead. Other parts can adjust more quickly.
Again, when we look at a systems issue, the fact that one part may have to lead and be out in front may not reflect the same issues as how it is financed or governed. The parts that, in fact, may need to be in front may not have the opportunity to really be out in front, given how they are structured. However, they need to be in front.
I use that as an example. We can explore those further. I simply say that, when I got involved in this project a number of months ago, I experienced the issue from the shippers' end. I am based in Winnipeg. We knew when our ship left somewhere in Asia. We knew when the ship arrived off the coast of Vancouver, but, after that, it entered a black hole. We had no idea when the ship would arrive in Winnipeg. The excuse would always be different, but it could take two weeks to cross the ocean and three weeks to get from Vancouver to Winnipeg.
I simply point out that there is a systemic issue — although the reason in each case might have been a different one. It is the reliability of the gateway that will allow us to compete. The ports to the south of us — Seattle or Long Beach and Los Angeles — are congested, similar to that of a Vancouver. The railroads to the south are often at capacity. The opportunity for us is simple: If we do a good job, the traffic will come our way.
We visited the port of Vancouver because Prince Rupert was not shipping at that time and were concerned by the feeling of ``We are not as bad as Los Angeles, so we get the business.'' However, Los Angeles being considered an inadequate port is not a great standard of competition. In the short run, that may bring us business. We were already experiencing shipping lines that said they had deliberately, for this year, diverted ships away from Vancouver because of the cost of the unreliability: Ships waiting in port, the complaint of customers, et cetera. Ship owners do have choices.
As a customer of the system and a ship owner, when you are at the other end of the ocean in Shanghai or Hong Kong, you have a choice of where to send your ships. You can send them on a different routing of the world altogether. When you send them to North America, you can aim your ship somewhere. You can choose to focus on Los Angeles, San Francisco or Vancouver. You are not forced to go to a particular port. We would like the ship owners, who probably make the greatest choices in this in terms of where they direct their assets, to think that Prince Rupert and Vancouver are their first choice rather than their last choice. If the system is attractive for them, then the traffic moves into our system.
Let me add one more point. We use the term ``gateway,'' but gateway implies that a gateway to something. When I got involved in the project and read the literature on the gateway, most of the analysis focused on the ports, the congestion around the ports and the economic impact on Vancouver. I appreciate that, but, being from somewhere else, it is a gateway to the users. Most of the users are not in Vancouver or Prince Rupert. They are along the track, whether it is Edmonton or Regina, Winnipeg or Chicago, or Memphis or Toronto.
The system should be designed with the user in mind. If the user is well served, the traffic and the mechanic activity will develop. The majority of economic benefit occurs where the container ends up and from where it returns.
With that in mind, the opportunity for Canada is in focusing both on the arriving and on the departing containers. We always focus on the arriving container. That is incredibly important. We should focus equally on the departing container. The containers leaving Los Angeles are about 75 per cent empty going back. There simply is not enough freight from North America to Asia to fill the containers. In Vancouver or British Columbia, it is about 75 per cent loaded with wood chips and other products. However, if the gateway reaches its potential and begins to double and triple its capacity, that will be driven by incoming freight. The outgoing freight will not be affected because more containers land, so the ratio of outgoing containers will increase a great deal.
That is a tremendous waste of an opportunity, which I believe is one we should focus on — how to fill empty containers. The cost of the container going back to Asia is one third or one quarter of the cost of the container arriving, which means that there is tremendous opportunity to ship, particularly more commodity-type products, back to Asia.
The way the railroads and policies are structured currently — we can go to the cabotage issue within Canada — does not favour loading containers in Canada. The railroads earn more or less the same amount of money, regardless of whether it goes back empty or full. The physical systems are also not designed to encourage the loading of containers going back. While the railroads will say that they would love to fill up the containers, the current system is not designed to make them really want to do that, so they do it reluctantly.
Using my own company as an example, I will pay for a container from Asia to my location in Winnipeg. I, in turn, ship freight back to my own retail stores in Vancouver. I am not allowed to use my own container, for which I have paid for both directions; I cannot fill it back to Vancouver. I could fill it back to Asia, but I do not ship back to Asia. I have to haul it in a truck back to Vancouver at much greater expense and environmental damage, while my own container arrives empty.
I simply point out that the railroads act, correctly, in their own interest. If we want to change the system, as you will read in our report, we do believe in private-sector solutions. However, as we went around the world, we discovered variations of this problem in different places of the world.
In a number of places, incentive systems have been developed to encourage ships, ports, railroads or trucks to alter their behaviour in ways that were more environmentally friendly — reduced congestion or did something else. There are a number of things we could do from a systems point of view to encourage railroads or the ports to change their behaviour in ways that allow other parts of the system to participate more fully without hurting the players themselves. In my opinion, a good starting point would be incentives and disincentives, rather than regulation.
I could go further, but maybe you can lead me through your questions.
The Deputy Chair: Thank you very much for that excellent overview. I would like to ask a couple of questions first.
You say that the main problem with having the Asians wanting to come through Prince Rupert or Vancouver is the systems issue that you have experienced. What specific recommendations would you have to this committee for overcoming some of these issues? I know from what you have said that sometimes the weather plays a part, for example, snow, or many other things, but in terms of this systemic problem that you so clearly delineated, what recommendations do you have for this committee that we might want to consider for our report to overcome the systemic problem?
Mr. DeFehr: Let me focus on two parts, as they experience it from overseas. The first is port capacity. As we all know, port capacity takes a tremendous time to develop. The Port of Vancouver just spent four or five years going through environmental and other processes and the net result is that they will add one berth. The Port of Yangshan Port in Shanghai, in two or three years, developed a new port that will exceed virtually the entire West Coast of North America in its capacity.
We did acknowledge differences in governance. For example, a Chinese government or the Dubai government can simply state what they want to do and do it. Given that we have a long and difficult process, port capacity is very important.
Port capacity is a couple of things. One of them is how ships land. If we wait until we need the capacity, and then decide to build, it will take five years. We will always be perceived as not having enough capacity, at least for parts of the year.
How the port is managed is also of importance. It involves a combination of issues, but probably a lot of it has to do with labour issues. Our feeling was that you could do a tremendous amount of change in flexibility and port capacity through labour.
You will note in our report that we referred to Australia. Because we compare ourselves to our competitive ports on the West Coast, which all basically have very mediocre, inadequate labour practices, we do not see ourselves as being worse than the others; but the rest of the world seems to have better practices.
We are aware that docks historically have been places where labour has had some challenges. However, in Europe, they are much ahead of us. Europe is also a place where labour has a great deal of strength in its bargaining power; yet we do not sense that labour there is anywhere near the issue that it is over here.
Labour practices were in much worse shape in Australia than in Canada 10 or 15 years ago. We were told repeatedly around the world, you can go to Dubai and they have no labour problems and China has no labour problems, so it was not very helpful. However, they said go to Australia, because they have the same governance as we have. Australia's ports were not serving the country well 10 to 15 years ago. Somehow they got their act together, with a view to making their ports serve the country. I note from what we learned that it was very much led by the federal government. The Australian government was the only body strong enough to realize that if you simply allow the local process to take it on, it was not a battle anyone could win. The government changed some labour laws. There were some tough times, but they got through; today, the labour unions and the ports will all say that the system works well. They have had no labour disruption for eight years.
All innovation is allowed. They work 24/7. They have a system in which the older employees have a regular work week — they know when they will get their weekends off — and younger workers are brought into the system. The Australian ports today have solved their problems.
Instead of recommending particular practices, all of which could be criticized, we said why not have the Canadian authorities — the unions, the terminal authorities and others — go to Australia and learn something from the system. Labour is the other major system and labour goes past the ports — it can be something else.
The Deputy Chair: Thank you for that. I have got a long list of other senators who want to ask questions, so I will ask you to keep your answers a little shorter. First, I want to ask one quick question.
In your report, you recommend that oversight of B.C. ports should be shifted from the federal to the provincial government. Why would the shift from federal to provincial oversight improve the operation of the B.C. ports?
Mr. DeFehr: That reflects more the opinion of my other two members, who are from B.C. and who probably feel the inability or the issues with the federal government. While I may have views on that, I will let the other people answer that one.
Senator Tkachuk: You mentioned the containers leaving the country empty and the railroads making as much money with the empty containers as they do with full ones and that you were not able to ship between Winnipeg and Vancouver but that you could ship to Asia. We have two issues, I think. One is the empty containers going back and providing incentives for them to be full; the second is the question of using containers within our jurisdiction, before they leave for Asia, to move product, as you say, from Winnipeg to Vancouver but also probably Toronto to Vancouver or Toronto to Halifax.
Could you explain what kind of incentives you are thinking of and what kind of incentives would work to stimulate that kind of action?
Mr. DeFehr: There are two parts. First, in respect of inland port systems, the railroads will tell us that on the ability to load full-train containers, they do not want to run the containers up little sidelines to pick up something here or there. They would rather stop a unit train in the Prairies, for example, have someone load it up in 24 hours and ship it on. That is not a totally unreasonable request. They need to access the empty containers quickly and move them on.
Second is cabotage, which relates to the fact that the GST has not been paid on containers, among others factors. No one builds containers in Canada. Apparently, we have historic laws that limit their use. CN said to us that they would like all restrictions on cabotage removed. It is their view that as long as they return the containers to the port within 30 days, they should not have any restrictions on their use.
In Canada, government policy creates artificial restrictions that have nothing to do with the shipping system.
Senator Tkachuk: Is that the reason you could not ship your product from Winnipeg to your stores in Vancouver?
Mr. DeFehr: As much as we have tried, we cannot get them to do that. Part of the fact is that we are not allowed to use the containers.
Senator Mercer: I point out the irony in your recommendation of the Australian model with federal government involvement while this committee recommended that we transfer management to the provincial government.
My concern is the labour unrest, congestion and reputation of the Port of Vancouver, because those factors paint the rest of the country with the same brush. In your studies and travels, did the Port of Halifax come up in your discussions with people overseas? The Port of Halifax has two container terminals open and ready for business. The largest ships in the world could dock there today, should they choose to do so. We have not had a labour disruption in the Port of Halifax since the 1970s. I sense that, at times, our reputation is tainted because of Vancouver's not-so- positive reputation.
Mr. DeFehr: In fairness, we had a limited mandate on the issue — and I am certain Halifax has its merits. It would be unfair of me to make comments on the Port of Halifax because we did not spend time studying it.
Senator Mercer: Focussing on one gateway and forgetting about the other is a limited scope on the part of the government.
You said that 75 per cent of the containers leaving the Port of Vancouver are full, whereas 75 per cent are empty when leaving the Port of Los Angeles and that, as we grow, that number will decrease. How do we avoid that? How can government and industry better organize to ensure that we are as close to 100 per cent as possible in shipping containers back? One of the greatest opportunities with containers is the fact that we can export, and we are an export country. We can spend all kinds of time talking about exporting east to west as opposed to always exporting to the south. Do you have any suggestions?
Mr. DeFehr: The inland terminals on the Prairies, in particular, would help to create better access. As well, the use of incentives is an interesting idea. For example, the Port of Los Angeles wanted to change the behaviour of the truckers such that the ones who behaved in a way that they did not like would have to pay a certain amount, perhaps $100, which is given back to the truckers who behave in the opposite way. The point is, they move the truckers from daytime to nighttime and decongest their roads. In that way, the government did not take money out of the system.
We might suggest a $100 surcharge for every container coming into Canada and then giving it back to the railroads when they fill a container going out. In other words, begin to use financial incentives to change behaviour, so that they will ship full containers out, which is value. That means they will spend money organizing their system to be more oriented to filling the empty containers going out. Currently, they do not care about the empty containers.
Senator Zimmer: I have a couple of questions in respect of your company. Evolution and growth in containerization driven by relaxed trade laws globally have lowered the price of container transportation. What proportion of your total freight shipments is now containerized? What do you send by container?
Mr. DeFehr: We have two businesses. We are still a North American manufacturer — one of the few still around. Within Canada, we use the intermodal system a lot. We would like to use containers for internal freight, which we have not been able to do. The part of our business that is container-based is relevant to Asia. A couple of our companies are Asian-based, but it is hard to put that into a percentage of our total business because the two parts are different. Our Asian-based business is 100 per cent container.
Senator Zimmer: How has this containerization affected your logistics and model? Earlier, you touched on it briefly.
Mr. DeFehr: For example, we are based in Winnipeg and much of our market is in the U.S. We also have factories in Mexico. Part of the problem is that the container trains coming through Winnipeg from Prince Rupert to Vancouver do not stop in Winnipeg to allow me to add freight to that system. They want to pass through already full, so I cannot ship containers at the same rates paid by people shipping to Chicago or Memphis. We are shipping our U.S. stuff out of Mexico because I do not have good access to the containers going south. It hurts my Canadian business, so I would rather produce in Mexico than in Canada because I cannot access the system.
Senator Zimmer: Railway service seems to be the choice of most shippers. How much do you ship by rail and long- haul containers and how much by truck? Do you have any idea of the percentages?
Mr. DeFehr: In North America, most of our shipping is by truck, which is an entirely different system. The rail system in North America is designed to run east-west. The new gateway that drives from the Prairies south to Chicago and Memphis is, for the first time, creating a north-south access. However, it is not designed to pick up our freight and go south. They want to pick up pork being shipped to Chicago, and I cannot get on those trains at a good price. I have to ship parallel to the trains by truck at a much better cost.
Perhaps you could help me to figure out how I can get my freight on those runs — because, currently, it is not designed for Canadian freight but is designed for Asian freight.
Senator Zimmer: I have one more question that pertains to our home province and the Port of Churchill. We talked about east-west movement and movement south. In 1990, we met in Moscow, and I know you were doing business in Russia related to the overland route with the use of icebreakers. In this regard, there are the issues of global warming and icebreakers. First, how feasible is it for us to continue trade pursuit with a polar route over the North Pole into Russia? Second, what are your thoughts on an inland port for Winnipeg?
Mr. DeFehr: Churchill will always be a specialized port for certain commodities. Clearly, with strategies such as icebreakers, it could be enhanced. One has to be careful to develop a strategy that works for those commodities and destinations, because it is not year round. Certainly, it has potential.
As to an inland port, the Prairies could provide several inland ports because they are also pickup points for empty containers. Vancouver has three ports and they are trying to combine trains. As they leave and go through the Prairies, the increase will not be to the Prairies but rather to the east and the south. The trains are going to certain destinations.
Our view was that the ports are congested places in which to make up trains. You should get trains out of the ports as quickly as you can and bring them to a place where you have land and where the rail lines converge, which, in CN's case, is anywhere between Edmonton and Winnipeg, and develop inland ports where you make up trains for destinations. That is the way Europe is developing. There is probably room for a port at the western and eastern ends of the Prairies.
Winnipeg has a particular advantage, in that if you get the containers to Winnipeg, you also have the ability to enter them into a trucking system to disperse them into the northern United States. I would argue that Winnipeg is an excellent location for an inland terminal, as are a couple of other cities in the Prairies for slightly different reasons. The inland terminal structure would greatly benefit the ability of users of industries along the system to benefit from the system, not only having trains going through and having us wait longer at level crossings.
Senator Mercer: I have a supplementary on the second last question. We made reference to your ability to ship into the United States by container, and you say you service the American market from your Mexico plant rather than from your Canadian plant in Winnipeg. My question is this: If all things were equal, would you ship from Winnipeg as opposed to Mexico? I suspect a difference in labour costs between your Mexico plant and your Winnipeg plant.
Mr. DeFehr: It splits. We actually try to do the north from Winnipeg by truck and the south by Mexico. About two thirds of the way up, we go from Mexico. The issue is that there is a very weak north-south system, certainly out of the Prairies. They are developing a system in which these unit trains pass through at a low cost per container. I am not able to get freight onto that train at the cost that train is supplying my competitors in the U.S. The trains pass through Winnipeg but are not designed to benefit me from the freights they get into Chicago or Detroit or other places that are important markets for me.
Senator Mercer: If this were fixed, would we be creating jobs in Winnipeg, which is obviously an end goal for us?
Mr. DeFehr: I would say yes, because the logistics into the U.S. are becoming a nightmare for us.
Senator Johnson: I should like to talk about the First Nations issues. Your report cites that we need urgent action. Maybe you can tell us about the major impediment to resolving these issues. What would it take to facilitate the process? Is the concept of partnering with the First Nations an option for resolving the issues?
Mr. DeFehr: That context needs to be taken in the sense in which we addressed it. A number of issues in Canada can complicate making the system work. Some of the issues relate directly to the system, such as labour in the ports or the capacity in the ports. When you actually try to expand or develop the system, for example, developing the port in Vancouver, then you have First Nations issues. We are saying that things are complicated enough in making the freight system work. As to the First Nations, when you finally agree what you want to do but then have another 100-year-old issue to be resolved, these background issues prevent the development from happening.
We are saying to the federal government that, for these issues to be dealt with, the background noise must be dealt with before dealing with the issues. I do not see the First Nations issue as primarily a container gateway issue, but it is an issue that can prevent us from being effective. We want to encourage the government to deal with those issues so the issues in which we are directly involved can be dealt with. We do not have particular recommendations because they vary in every jurisdiction.
Senator Johnson: Did you come across this in other countries, for example, in Australia, with respect to these kinds of issues?
Mr. DeFehr: It was not raised there. We did not come across those kinds of issues in other places. Let me use another example. The Netherlands is incredibly crowded. They had the same kinds of issues about how to move across a crowded country. Despite all the crowding and issues we know about, they have in the last number of years developed a brand new railroad that takes freight from the Port of Rotterdam on a freight-dedicated line without a single level crossing straight into Germany in an hour to be distributed to 22 inland ports in Europe.
In Holland, with all the crowding and issues, they figured out how to develop a new rail corridor that works like at a charm at 100 miles an hour, and we cannot figure out little things.
In other places, the world is moving and developing new patterns. In Los Angeles, they developed the Alameda Corridor, which took out 180 level crossings and is a corridor that moves straight through. Other places are acting. If we do not act, we will find that the world passed us by.
Senator Eyton: The committee has heard from many witnesses. It seems to me that the general approach is one that is local, and the concerns are local, and it is on a platform that emphasizes the problems. Your three-man committee report was valuable in taking a broader perspective. It seems to me that this issue should be seen as a national issue and not as a problem but as an opportunity. I do not get much of that building a national system from the witnesses or, indeed, from much of my reading. I am talking about the kind of vision used when we helped create this country with the CPR or with the St. Lawrence Seaway or with our pipeline infrastructure going from east to west across the country. Those were all seen as great national undertakings. It worries me that even the title of this study talks about Pacific Gateway container ports, which is in heavy print because it is an entity, and it refers residually to East Coast container ports and central container ports as a collection of independent entities.
My question is so big that it may be impossible to deal with adequately, but how do we change the focus of Canadians away from local problems, for example, talking about Vancouver as a separate entity and so on? How do we change to a broader focus, where we can do something to bring about a national system that deals with containers from the time they arrive in this country to the time they arrive at the customer's door?
Mr. DeFehr: I think the question of East Coast and West Coast should be separated. If we had been given the assignment of the East Coast, we might have come up with a report that would have addressed it. In many respects, it will have different issues. There is probably value in a good report on the East Coast, as there was on the West Coast. They are dealing with two different traffic flows. They are not identical. There is an East Coast strategy and a West Coast strategy and other strategies. I do not think the fact that this was a West Coast strategy is a problem. I simply say you should recommend someone develop an East Coast strategy as well.
Having said that, I agree with you entirely. The nature of the problem, in a sense, is national and may have certain geographical dimensions to it. You deal with some aspects of it nationally. The question of cabotage is national. The question of labour policy refers to all ports. Some of the solutions would probably have the same impact everywhere across the country. On the other hand, the idea of the Asia gateway and the railroads is a very particular system that needs to be dealt with, but more broadly than in just one port.
I made the joke with my group that, when I read the literature we were given at the start of the process, it sounded as though the gateway ended at Abbotsford. Nothing referred to anything after that. As I was from the Prairies, I saw my role as continuously reminding everyone that the gateway leads to something. Within government and most officials with whom we deal, they saw it as a port issue and not a systems issue beyond the port. Through our research, the three of us quickly realized it was a systems issue.
That was not the perspective I encountered when I became involved with this project. It would be a tremendous contribution if the Senate could address how to make this a systems issue.
Senator Eyton: I would like to talk about Prince Rupert. We had a fascinating visit there and I saw the port itself as a unique and special Canadian opportunity. We were told that the first phase of their current development cost approximately $110 million. The second phase of the development to double their capacity would be in the order of $700 million and a second berth further out would cost over $1 billion. At the same time, the location of Prince Rupert seems to be ideal; the water conditions of the port and the weather that permits an all-year port seemed remarkable. As a business person, I thought this should be exploited. The difficulty is the amount of money that I cited is very large and beyond the government's budget and support.
Your report talks about privatization. Can you comment on how and to what extent privatization should go into funding the required infrastructure for Prince Rupert as a unique opportunity?
Mr. DeFehr: The question of privatization in our report refers more to operation of terminals in the system. We view the land and the port itself as a government trust. We were quite consistent in that.
I do not know all the regulations, but I understand the Canada Marine Act governs the ports in a way that they have limitations on borrowing capacity. If you travel the world, to places like Dubai, Singapore or Shanghai, their governments would clearly invest in advance. Many of you have been to China and know they will build a bridge. You were talking about the rounding error in the port of Shanghai. In a sense, Canada is not prepared to go in advance of something to invest.
If we believe that the gateway can create an economic opportunity in Canada, something must go first. We felt that the investment in Prince Rupert is worthwhile, even if it is $1 billion. The railroad capacity and the rest of the capacity are there. If the system works, the ships and traffic will come.
To put the $1 billion in perspective, I believe the budget for fixing a few overpasses in Vancouver to allow the trucks to move between the ports is also approximately $1 billion. In my view, that is not needed for the ports because the containers should get out of Vancouver as quickly as possible and not run around Vancouver. We are prepared to spend $1 billion on building the overpasses. However, we should be spending it on getting the containers into the hinterland where they can be dealt with better.
If there is any place as a nation where we want to invest, invest in the upfront capacity where there may be a risk. The risk is low that it would not pay for itself. However, our current structure does not do that.
I do not know if privatization is the answer for the port itself. If the ports are well built and the system works, much of the port will be paid for through the operation of the terminals and it is not a high risk. That is where we should put our money.
Senator Eyton: You are suggesting that that should be government money, correct?
Mr. DeFehr: Yes, and government money that is paid for by the use of the port.
Senator Eyton: I have one other question. I am familiar with a mining company shipping metal concentrates from Australia to China and other Asian destinations. As a result of a variety of factors, including environmental concerns over exposure of the public to some of the concentrates, that company is moving from bulk shipment, which has been its practice until now, to container shipments of bulk supplies.
In Prince Rupert and other ports, it is clear that bulk shipping is treated differently than container shipment. I think there is a long-term trend wherein some of that bulk shipping will go into containers. Did you note that trend in your observations?
Mr. DeFehr: One of the reasons for the inland terminals is to make the containers more accessible. I will not go into detail, but the point is to make it easier for people to get to the rail lines and for the rail lines to handle that. A series of five or six inland terminals across the Prairies would do that.
I am from Manitoba. As you know, we have a diversified cropping pattern. The big grain companies will not be excited about containerization. They have a terminal in Prince Rupert and others in Vancouver that they want to keep busy. However, this also lets them control the freight because that is the only way you can get it out.
If you containerize it, many smaller users could also get onto the system. The person who can attach their name to 10 or 50 containers of organic wheat or specialized crops suddenly can get access to the system and ship higher-value goods. If you begin to flip the incentives a little to let the containers work for the grain industry, you would begin to ship more higher-value commodities. Instead of transporting a shipload of wheat that is all mixed together, many farmers who produce special crops can now ship 2, 10 or 100 containers and get the higher value.
With respect to the question regarding the First Nations that Senator Johnson asked, looking at the CN line across the northern Prairies, there are a lot of products such as hay. Approximately 100,000 containers of hay can go to Dubai and the Gulf Region. That is a product that does not have to be shipped on a time-sensitive basis. The same is true for wood chips. You can store it and load it during the slow season for container traffic — ship it during the Christmas week. There are products for which First Nations lands might be very suitable. They can access containers in the seasons when the demand is weakest since they are not as time sensitive.
If one began to explore what containers can be shipped, you can do more. The container shipped is 20 tons because that is the capacity of the road. There is another interesting thing about Australia. The Australians have figured out that certain containers have extra steel in them and can handle up to 36 tons. They are loading the containers at the rail yard and load 36 tons per container. They keep it on the rail lines and avoid the roads. When you go from 20 tons to 36 tons per container, you tilt the system in favour of bulk shipment.
I could give you more examples. However, as you go around the world, people are figuring things out. The more we shift to containers, the more we can increase the value of our products in access. We are told that where there are more loaded containers going out, shippers will send their ships to those ports because they will get extra revenue. The ability to load containers going out should be an important consideration. We always consider containers coming in because it is important. I would say there is even more economic opportunity in containers going out.
The Deputy Chair: Mr. DeFehr, the time has gone quickly because your presentation has been so interesting and informative. In particular, I found your comments about the systems issues, such as why people do not want to come to Canadian ports, issues of the reliability of Canadian ports, very important to our committee. Thank you for highlighting that in the manner you did.
In this next session, we are honoured to have Loblaw Companies Limited make a presentation to us. With us, we have Mr. Robert Wiebe, Senior Vice President, Transportation, and Mr. Dan Parkes, Vice President, International Transport and Logistics.
Please proceed with your presentation, following which we will ask you questions. Welcome, both of you. You now have the floor.
Robert Wiebe, Senior Vice President, Transportation, Loblaw Companies Limited: We want to thank you for the chance to present to you today. We look for your feedback once we have concluded the presentation.
Most people are aware of Loblaw Companies Limited. However, if you are not, I hope this will help you understand who we are and the extent to which we use both Canada's ports and the rail system.
We are the largest private employer in Canada. We have 137,000 teammates across the country. We continue to maintain dominant market position in each region, whether that be Atlantic Canada, Quebec, Ontario or Western Canada. From a grocery perspective, we are the dominant player.
Historically, we are a region-intense business. That will become clear later when we talk about transportation and the infrastructure. We are Provigo in Quebec, Atlantic Wholesalers in the Atlantic and Loblaws in Ontario. In Western Canada, we are Westfair Foods Ltd. and Kelly, Douglas & Company, Limited. The structures within our company have grown up as a result of the regional nature of our business and the acquisitions that have led us to where we are today.
Obviously, one of the big pressures that we are facing today is from a large American retailer that has come in. They do make a good use of logistics and transportation and they truly understand how important this is to their business model.
The Deputy Chair: We are trying to get them before this committee to talk about that.
Mr. Wiebe: Good luck to you. I am not a fan.
I am sure some of you are invested in Loblaw or have read The Globe and Mail over the last two years. We have certainly had our issues. One of our major issues is that of supply chain. I will take you through a little bit of it later in the presentation. Regardless, it is timely that you are considering this. Loblaws' issues regarding our shelf-age availability for our consumers and our supply chain issues are really a direct result of a lack of funding and a lack of focus over a period of years on our supply chain and transport infrastructure.
I will give you the scope of our transport operations. We are the second-largest private fleet in Canada. We run 700 tractors and have 1,100 drivers. We have about four times that if we include our third-party relationships with people like Armour Transportation Systems in Atlantic Canada, Calac Trucking Ltd. in Saskatchewan, people in B.C. and primarily Canada Cartage in Ontario.
We made a strategic decision to move away, in some cases, from having our own drivers and our own tractors. We contracted a lot of that work out. We currently control about 60 per cent of our inbound freight. That 60 per cent of the inbound freight comes from India, China, California, Florida, Mexico and anywhere across Canada. We move freight about 800 million kilometres a year.
We have also got an ongoing factory gate pricing project. It is part of our supply chain 2010 strategy whereby we will assume freight at our vendors' docks, bring that freight into our distribution facilities and leverage our transport know-how and transport dollar-spend to bring down our costs. Obviously, by virtue of that, we hope to bring up our competitors' costs.
Our annual freight cost is about $824 million. With the factory gate initiative, that will rise to $1.1 billion by 2009.
We are one of CPR's largest domestic intermodal customers. We run approximately 40,000 loads annually between the West and East with them. We are a heavy user of the rail infrastructure and, as you will see, we are also the fourth- largest direct importer through the Port of Vancouver. Therefore, we are also a heavy user of the port infrastructure as well.
Mr. Parkes will take us through the TEUs.
Dan Parkes, Vice President, International Transport and Logistics, Loblaw Companies Limited: Over the past few years, we have tracked the TEUs, 20-foot-equivalent units, we bring into the country. They are coming primarily from Asia. Between 2002 and 2006, we saw a steady rise in our volume coming through the Port of Vancouver. In 2007, as you can see, our food wallet continued to grow. Our GM fell off somewhat. That was a strategic initiative within our organization to get away from a lot of the seasonal items. Because of some infrastructure and supply chain issues in getting it to the market in a timely fashion, we would have issues with product sitting in our warehouses. Again, it is a summer program, but by the time we get it through the port, the rail system, the avalanches and so forth, we cannot sell it during that season. We have made that strategic change.
Our GM initiatives going forward up through 2010 will be centralized around our new apparel program. We will be tripling our volume there, so we will start to see a steady rise in our GM volume. With the issues we have at the terminals and with the railway, it is a great concern to us now, knowing that we are putting a lot of financial burden on our organization by trying to triple the size of our new apparel program.
We will see a considerable increase in our GM volume over the next three years. A big concern for us moving forward is to ensure that moving through the port is seamless, onto the railways and into our networks.
Mr. Wiebe: The next slide is our supply chain 2010 initiative, and that has been announced to the market through our investors' calls and also at our annual meeting.
I could take you through each line, but I will generalize it in this fashion. We understand that we need to have much better shelf-edge availability for our consumers. In order to get there, we have to take ourselves, as a supply chain within Loblaw, to a flow environment versus a transport-it-and-store-it-in-a-big-warehouse environment.
Today, we are probably the largest private-warehouse operator in Canada. We operate over 7 million square feet of warehouse facilities across the country; however, that will not cut it in the future. One of the reasons we look forward to speaking with this committee is that, as we enter into a flow environment, having product on time at the dock when it is required will be of paramount importance to us.
I will take you through our transport planning structure in a moment. The key is that everything we have gone through — avalanches, derailments, port congestion issues and those kinds of things — leads us away from our supply chain 2010 program, which is flow. In order to have flow, you must have reliability in the transport infrastructure. Transport is the backbone for our entire supply chain 2010 program, which leads us to our keen interest in this committee.
I did not take you through present state because we are moving toward our future state, which is the geography- based planning from a transport perspective. Today, we have 29 transport hubs or transport planning centres in virtually every distribution facility in Canada. Obviously, they are very efficient at managing their own transport but not very good at stepping back and looking at the Loblaw network from an integrated perspective.
We are going to move to geography-based planning. Atlantic Canada would be planned in one bucket, Quebec would be planned in one bucket, Western Canada would be planned in one bucket and Ontario would be planned in a bucket. Obviously, given our intermodal nature and the national nature of some of our freight, those moves would be planned together as well.
The next slide, from the distribution facilities to the stores to the vendors and back, is meant to show you how time critical this will be. Whether we are shipping from Vancouver to our stores in Saskatoon, or from Saskatoon back into Alberta and Alberta back into British Columbia, the flow environment we will operate in, along with the regional nature of the plan, will require us to have a high degree of reliability from a transport perspective. That will put a lot of pressure on our ports and a fair bit of pressure on the rail system as well.
Some major issues we face from a rail perspective are derailments and avalanches. We faced 12 derailments and avalanches, resulting in an average delay of 2.3 days over approximately 18 weeks. That effectively means that three weeks out of four, we had a delay anywhere from 24 hours to 72 hours into our distribution facilities.
I would take you through our inventory numbers, but what it really means is that we have to begin operating in a just-in-case world, which is bring more product in than is required just in case there is an avalanche or a derailment that the trains cannot get around. For us, every day of extra inventory that we hold costs us $50 million. That is the hit we will take by increasing our inventory.
I am sure this committee is well aware of the BCMEA/ILWU negotiations and their successful outcome, thankfully. However, as Loblaw companies, it forced us to look at U.S. port and rail options because we have a disproportionate reliance on the Port of Vancouver for our imports. We use Halifax a fair bit, Senator Mercer, but not to the extent we would like. I am sure we will get into that in the question and answer side of it.
The Deputy Chair: What do you mean by ``due to space allotments''? What does that mean?
Mr. Wiebe: We would love to use the Port of Halifax more — and I noted your keen interest in that with Mr. DeFehr. We want to use more of our allotment into Halifax, but right now we cannot get shipping lines to call Halifax. They will stop their ships in New Jersey and New York and will not carry on to Halifax, primarily due to the economics. We have approached the shipping lines and guaranteed them slots on the ships — we will fill those slots each week — yet we still cannot get the lines to call the Port of Halifax with another ship.
It may end up that Canadian Tire, Loblaw and potentially Wal-Mart, although they tend to use the U.S. ports a fair bit more, may have to create some sort of Canadian retail consortium to fill a ship each week. We have not done that yet. We did not think we would have to if we were willing to commit a certain number of containers. I certainly know Canadian Tire has gone through the same thing, as has The Bay. We thought that if you were willing to commit a certain number of slots to those ships that would be enough incentive to bring another ship into the Port of Halifax, but we have not been successful to date.
The Deputy Chair: Canadian Tire told us they are bringing 5,000 containers a year into Halifax, and they would like to immediately increase it to 10,000. The desire is there to do it.
Mr. Wiebe: Yes; every Canadian retailer is interested in using the Port of Halifax. I have said it before, but we have a disproportionate reliance on Vancouver. If there is a problem in Vancouver, we face it. We have been through the truckers' strike. Mr. Parkes was on the lines getting our containers through when the truckers went on strike.
We got the ILWU, which was concluded successfully, but there are many other issues out there. For example, the rail labour disruptions, when the maintenance of way workers were on strike, affected international containers through the Port of Vancouver. It seems there is such a reliance on that port. One glitch, one tick, one problem and we face it all the way through our supply chain.
The Deputy Chair: Please continue.
Mr. Wiebe: Truthfully, we are not confident the Canadian port or the rail infrastructure will be robust enough to handle our predicted growth as a company. We are looking at a 12 per cent increase through the port annually and about a 14 per cent increase over the rail lines. Some of that is due to our factory gate pricing initiative, but a lot of it is due to the fact that we are sourcing more products offshore. As Mr. Parkes mentioned earlier, apparel is becoming an ever-larger piece of our business.
We put down some suggestions. I am not presumptuous enough to think these are brilliant suggestions. I am sure you have heard this from many people.
We feel there has to be an economic incentive for railways to double track or put more double track within their infrastructure. This reduces delays when derailments occur. From a transport perspective, we operate in one of the most difficult environments in the world, so we understand that these can happen. It is a question of what to do when they happen. You need to ensure that you have the appropriate infrastructure so trains can skirt the derailment to minimize the delays. Going back to my inventory numbers, if we have to plan for a three-day delay every winter, then we will to increase our inventory in our warehouses. Across our patch, that amounts to $150 million, which is a significant hit to our cash flow.
I talked about a potential public-private partnership to increase spending on the rail infrastructure. We have derailment pinch points, such as in Northern Ontario and the Rocky Mountains. As well, the Rockies are avalanche- prone. We are a primary customer of the Canadian Pacific Railway and, although we have had a pretty good winter, CN has been hit hard by derailments. We feel the repercussion of that in our distribution centres and no-shows because many of our suppliers ship to us via CN rail. In terms of shelf availability in our stores, that becomes an ever-growing problem for us.
Wal-Mart has a plan for the just-in-case scenario. They have a 1 million square foot facility on an 80-acre lot, which effectively means that they have a trailer parking lot, which we call the bone yard, full of stock waiting to come into the distribution facility and go out to the stores. It is not that we do not want to operate in that environment but rather that we will not operate in that environment because it causes a too-heavy load on the inventory position for Loblaw Companies Limited.
There is potential for a tax incentive for shipping product by rail versus by road. Certainly, because of our heavy use of rail infrastructure, we think we reduce the wear and tear on the roads more than many retailers do.
The Deputy Chair: You have the second-largest truck fleet in Canada, so you must be shipping something by the highways.
Mr. Wiebe: Yes. Those fleets are primarily in regions where we cannot use the rail. Our transport infrastructure or network is very large and brings product to our distribution facilities, which is primarily by rail or sea. Once we leave the distribution facility, the store-direct deliveries are by road. We deliver from our distribution facility in Cambridge, Ontario, for example, to the Superstore on Winston Churchill in Toronto. You could not get there by rail. You are right in saying that we are a user of heavy trucks — and we pay our share in terms of the fuel and road taxes.
On the potential incentives for enticing the shipping lines to call the Port of Halifax, I cannot stress enough our reliance on the Port of Vancouver. I do not have anything against the Port of Vancouver, but we have an asset in Halifax, which, as a retailer, we would love to use more. We cannot seem to garner the interest to get another line in. If we could increase direct sailings through the Suez Canal versus the Panama Canal, because the economics are better with deepwater vessels versus shallow vessels, it would be beneficial.
I have a bit of a bone to pick with the use of biodiesel fuel. This is less related to transport infrastructure, but when I knew I was coming before this august group, I thought I would put it on the table. Of our entire fleet, 51 per cent run on biodiesel. Other retailers tout that they are environmentally friendly. We operate with biodiesel and pay a 7-cent- per-litre premium to do so in some areas, such as Quebec City. In Ontario, the premium is about 4 cents per litre. There is little to offset that extra cost, but we will continue to do what is right for the environment. However, it would be nice if there were some sort of economic incentive to get other shippers and retailers to do in kind.
Likely you have heard this from other retailers, such as Canadian Tire, that we owe it to our consumers and to our shareholders to explore both tactical and strategic alternatives to what we have today in terms of Canadian infrastructure. That means we need to explore American port and rail options for running product into ports at Long Beach, New York and Savannah and then either trucking or railing it north. Our other option, which might seem like a small step backward, would be to take more product by road versus rail. With the lack of reliability and the increased flow environment, we will be forced to ship by road if we cannot address some of these issues on rail.
Environmental goals must align more closely with good economics. We pay more for our biodiesel and that 11 percent to 12 per cent hurts at times. Obviously, we have our PNL and shareholders to report to, which we do, and we are proud of the stance we have taken on biodiesel, but I believe there should be an offset to that expenditure.
The public sector must bear some of the burden for the port and rail infrastructure because private capital does not seem to sufficient. Perhaps there is no economic incentive for railways to double as much track as perhaps they should do. We operate in a duopoly such that, if we do not use Canadian Pacific, we will use Canadian National. Given the size of our account, we could not shift all of our volume over to the other railway, because they could not accommodate us physically.
Senator Mercer: Perhaps they could if you offered it to them.
Mr. Wiebe: They always say that, but something has to be put together because private capital does not seem to be moving quickly enough for us.
The Deputy Chair: I should like to know what percentage of the goods in all of your stores across Canada today comes from India, China, et cetera, in containers. Is it 5 per cent, 9 per cent or 20 per cent?
Mr. Wiebe: I would have to calculate that in percentage of loads. It is in the ballpark of 5 per cent to 10 per cent and quickly growing. You are talking about overseas containers, not necessarily domestic intermodal containers.
The Deputy Chair: Yes.
Mr. Parkes: From an inbound perspective, I would say that it is about 10 per cent.
The Deputy Chair: I like reading the financial papers and have noticed that Loblaws' stock has been dropping. Many commentators say that is because you cannot get the product on the shelves for your consumers.
Mr. Wiebe: Yes.
The Deputy Chair: I have been in some of your stores and looked for things that are not on the shelves, and some shelves are empty. What percentage of that current problem is due to transportation and container traffic issues?
Mr. Wiebe: As a direct result of a transport port or domestic rail issue, it would be between 10 per cent and 20 per cent with our reliance on rail and shipping lines.
The Deputy Chair: That is what you call ``shelf-edge availability.''
Mr. Wiebe: Yes — ensuring that we have the product available to our consumers when they want to have it.
The Deputy Chair: Of the recommendations you have made to this committee on the last page of your presentation, what is the one thing that you would like to see this committee recommend to reduce your shelf-edge availability problem?
Mr. Wiebe: I cannot keep it to one recommendation. The major one would be the doubling of rail track across Canada, especially in the pinch points to which I referred earlier in the Rockies and in Northwestern Ontario, and the Port of Halifax. Those two recommendations could have the greatest impact on our shelf-edge availability.
Senator Tkachuk: I have a supplementary on the Port of Halifax, which you mentioned a number of times in your presentation and in response to Senator Oliver's question. Why do shippers not want to come to the Port of Halifax?
Mr. Wiebe: I think it is the proximity to New York/New Jersey. Very few of the vessels call Halifax exclusively. In many cases, they call New York/New Jersey first. When they do that, they can fill the container ship up into New York/New Jersey all day long. They do not need to go that extra trunking from New York/New Jersey into Halifax. They feel they just will not. Perhaps as a retailer, we have good enough pressure on the shipping lines. I think Mr. Parkes and I have a conversation every quarter, and certainly every year, when we negotiate with the lines, and we put a significant amount of pressure on them.
Senator Tkachuk: When we were in Halifax, two more ports were being planned.
Mr. Wiebe: I am aware of that. I would say we need to make better use of the port we have.
The Chair: They are working at 40 per cent capacity right now.
Mr. Wiebe: Yes. It is not my place to tell folks to invest in ports or not, but I would say that before we spend millions, maybe billions, developing a port beside one that is underutilized someone should look at that. Intuitively, it does not make sense to me.
Senator Tkachuk: It is private, so there is not much we can do. If they want to develop a port, good for them.
Mr. Wiebe: You certainly have Saint John, which could be better utilized, and it is not. There are other options.
Senator Tkachuk: That came up three times, so I wanted to follow it up.
Senator Mercer: Thank you for mentioning Halifax as often as you did, except it was always negative. I guess we will mark Loblaw down as not investing in the project.
I have a couple of quick questions, one relating to the Port of Halifax. Has the port authority been of help to you in your efforts directly? Has the Department of International Trade been of direct help to you? Have you spoken to them? Has the Government of Nova Scotia been of direct help to you? All three of those groups have a vested interest in the success of the Port of Halifax.
Mr. Wiebe: Yes. I would say the Port of Halifax has been somewhat helpful.
Senator Mercer: Somewhat?
Mr. Wiebe: Yes. I am not familiar with berthing fees in Halifax versus Vancouver and whatnot, but I do not think that is what leads lines to not call Halifax.
My counterparts and Mr. Parkes' counterparts and every other major Canadian retailer express interest in using the Port of Halifax more. We swing a fairly big stick in North America. Loblaw would be the fourth-largest direct importer through the Port of Vancouver. Canadian Tire is very large, as is Wal-Mart. Sears has been an active supporter, as has the Bay. I struggle with what else we need to do to get these things in. I do not think it is an issue of berthing fees or port fees. I think we will have to put more pressure on the lines and get more active about it. There may come a day when we charter a ship if we cannot find a viable commercial model to use.
As far as the other two, we have not really dealt with the Government of Nova Scotia.
Senator Mercer: How about with respect to International Trade?
Mr. Wiebe: No. It is primarily the shipping lines directly in the Port of Halifax.
Senator Mercer: It would seem to me that those people would be interested in helping.
Mr. Wiebe: You would think, yes.
Senator Mercer: You talked about derailments. Avalanches are obviously hard to control. With respect to derailments, is this an infrastructure maintenance issue? Is it that the rail lines are not being maintained at the level they should be? We are talking about running trains 110 or 130 cars long along tracks that were not built for that. Should we be looking as a committee at making recommendations that government or someone needs to be spending some money on properly maintaining the rail infrastructure across the country, no matter where it is?
Mr. Wiebe: Absolutely. The issue is twofold. First, there is the maintenance issue. It seems hard to believe we can have as many derailments as we have had this winter and not think that the maintenance policies could be better. I am told that cold winters and frost heaves will lead you to an environment where there will be derailments.
The other piece is infrastructure, which means how much track is doubled and how many sidings you put across Canada to ensure that, when there is a derailment, if that is inevitable and that will happen, the delays are 24 hours and not 72 hours.
Senator Dawson: As far as derailments are concerned, is one of the companies more fragile than the other?
Mr. Wiebe: It seems to depend on the season and the year. Last year, CP Rail had a terrible year. I know they put a tremendous amount of money into their maintenance procedures. This winter has been quite good for CP Rail, from our perspective. CN seemed to have been plagued with far more derailments. Next winter could be entirely different. I struggle to say that one is worse than the other. Year in and year out, it depends.
Senator Dawson: You mentioned probably having to increase your use of American ports. Would an additional Customs operation cause delays and costs? How are you relations with the Canada Border Services Agency, CBSA?
Mr. Wiebe: Our relations with CBSA are quite good. Mr. Parkes deals with them far more than I do. American customs are not particularly easy to deal with, which adds complexity and paperwork to the operation.
Senator Dawson: Instead of going to Halifax, if you are going to New Jersey, would you not have two Customs operations to go through and would that not be an incentive to using Halifax?
Mr. Wiebe: Yes. We would much rather see Halifax grow than send our business south of the border. We are a Canadian company, so we want to keep our business in Canada. Above that, we will still do what is right for our consumer. If we cannot get viable Canadian options, we will sadly be left with the second option.
Senator Dawson: Even though senators do not have to get elected, all politics are local. I would not want Halifax and Vancouver to be the only ones mentioned. What is your level of operation in the Port of Montreal?
Mr. Wiebe: I would have to defer to Mr. Parkes for that. I think we are relatively light in the Port of Montreal, primarily because of the sailings and our reliance on Asia rather than Europe.
Mr. Parkes: Yes. The majority of what we get through Montreal will come from Europe, and our Europe offering right now is only imported from somewhere in the vicinity of 50 vendors, most of it on a less-than-full container load basis. We are talking about expanding the European market more today. Europe operates with smaller vessels, so they go all the way down to Montreal. We think it will continue to grow as we shift. As we come out of places like India, or if we look at Halifax as an option out of places like Shanghai, the transit time becomes an issue and it shifts some of the purchasing to Europe.
Senator Johnson: You say one of the issues facing you is that every day of added inventory is $50 million when you have delays in transportation. You also say you are not confident in Canadian port or rail infrastructure to handle the growth you are experiencing. What are the alternatives? Is it just double tracking and Halifax? Is there anything else?
Mr. Wiebe: There is the U.S. option, unfortunately.
Senator Johnson: What would lead you to take that option?
Mr. Wiebe: We have a peak season coming up through the Port of Vancouver. Mr. Parkes and I will be closely watching how that peak season is handled through the Port of Vancouver.
Senator Johnson: Will you be evaluating that this year?
Mr. Wiebe: Yes. We will evaluate after this peak season. At the beginning of August, we will sit down and plan strategically for next year.
Senator Johnson: Which routing would you take?
Mr. Wiebe: We have a solid relationship with one shipping line in particular. They operate their own port within the Port of Tacoma. They have solid rail links with both Burlington Northern Santa Fe Railway and the Union Pacific Railway. We would run from the Port of Tacoma through the Port of Chicago and into Eastern Canada as required.
Senator Johnson: Do you feel that would solve the problems you are facing now?
Mr. Wiebe: It may lead to other issues. We need to understand what our customs problems and the paperwork issues will be. Added paperwork may not be convenient, but it would be easier to overcome than the physical infrastructure issues we may have at the Port of Vancouver.
Senator Johnson: This is a crisis to an extent because you also say we should provide economic incentives to railways to double track. That will not happen overnight, unfortunately.
Mr. Wiebe: No. I do not think I would call it a crisis. We will assess where we sit after the peak season. As a retailer, we need to assess what we transport over rail versus over the road next winter. The economics are always in the rail's favour. It is cheaper to run the entire train than one truck. However, when we talk about yogurt and deli meat, they have a very short shelf life and cannot sit.
Senator Johnson: The use of biodiesel fuel is serious. You say 51 per cent of your fleet is using biodiesel. Is this a percentage common with other fleets or not?
Mr. Wiebe: It is not, no.
Senator Johnson: What would be the average percentage of other fleets?
Mr. Wiebe: In many cases, it is zero. I know other fleets have dabbled in it. Supply is an issue. We had problems finding a reliable supplier when we started using biodiesel in Quebec. We had to switch from one supplier to another.
There are two ways of mixing biodiesel. One is direct inject — I forget the technical term — and in the other you dump the biodiesel or bio-particulates into the regular diesel. Doing that, you end up with an inconsistent percentage of biodiesel within the diesel fuel. The direct-inject method is better.
Senator Johnson: It is impressive to me that you have proceeded with this fuel given the pollution caused by heavy truck use. We have talked with the trucking people and it is enormous.
Mr. Wiebe: Absolutely.
Senator Johnson: Is biodiesel a regulatory change you would recommend to this committee to increase efficiency of the transportation system in Canada?
Mr. Wiebe: Yes.
Senator Johnson: What would you start it at?
Mr. Wiebe: If we look at Europe, Germany in particular, there are tax incentives for biodiesel. They run up to a B- 25 blend. Today, we run a B-5 blend in our trucks. That means 5 per cent of the mass is bio-particulates. Germany achieved 25 per cent primarily because of the tax incentives available.
There are more costs. You have to either ship fuel to a site where you mix it with the bio-particulates or do it at-site, which requires a separate tank. There are added costs. Germany has been able to offset that through tax incentives.
Senator Johnson: Have we no regulations in Canada with regard to fleets or companies using this?
Mr. Wiebe: There is nothing that demands transport companies use biodiesel. There is no tax relief. There is little economic incentive at this point to use biodiesel. There are a lot of things on the table; however, there is nothing concrete to date.
Senator Johnson: Are there any other policy or regulatory changes you would recommend environmentally or otherwise?
Mr. Wiebe: There is nothing that I have not raised in our report.
Senator Tkachuk: I want to clarify the 51 per cent you stated. Is it 51 per cent of the miles driven by your trucks are using biodiesel fuel or 51 per cent of the trucks have the 5 per cent biodiesel in them?
Mr. Wiebe: It is 51 per cent of our trucks. If we had 100 truck, 51 of them would be using biodiesel fuel.
Senator Tkachuk: That is not 51 per cent of the miles driven?
Mr. Wiebe: No, it is not. It would be somewhat less.
Senator Tkachuk: That is because they would be mostly local trucks and not necessarily those out on the highway, given the lack of accessibility?
Mr. Wiebe: That is correct. We operate on a card-lock system as we get into longer distances and card locks do not have the biodiesel available for us.
Senator Eyton: Your remarks emphasize Vancouver and Halifax. I would have thought that it would go beyond that. You responded to a question about Montreal. It seems to me that with a national system and national needs you would consider other alternatives to make it more competitive.
In particular, I question whether or not you had considered or made use of Prince Rupert? It is essentially a brand new container port serviced by rail that is underutilized. It seems to me it would be open and available.
Can you comment on why you focused almost entirely on Vancouver on the West Coast and only Halifax on the East Coast?
Mr. Wiebe: Is that in terms of why we have not made use of Prince Rupert?
Senator Eyton: Yes, and other ports.
Mr. Wiebe: We have a particular relationship with one shipping line. Evergreen Shipping Agency would do 60 per cent to 65 per cent of our business. They have not been able to strike a deal with CN to get the interlining from Prince Rupert into Toronto and Prince Rupert into Montreal. We stuck with that shipping line and they chose to use the Port of Vancouver for the time being.
Senator Eyton: Is Evergreen entirely independent from Loblaws?
Mr. Wiebe: Yes. There would be nothing preventing us from going with a line operating from Prince Rupert.
Senator Eyton: Or preventing them from doing that as well?
Mr. Wiebe: Yes. First, to set the situation in context, there is one sailing per week into Prince Rupert today. Those slots, as I understand it, are taken up by American retailers. We have not pushed to get slots in Prince Rupert. We could do more.
A personal issue I have is that when the Port of Prince Rupert became a viable option, the collective bargaining unit could have been split so that the ILWU would negotiate on a separate basis from the Port of Vancouver. Someone chose not to do that. When there is a labour issue with the ILWU, we will face the same problem in Prince Rupert as we will in Vancouver. I am not sure why that was done. That does not mitigate our labour risk. If there is any issue from a labour perspective, that will be a problem.
The other concern I have about the Port of Prince Rupert is that it is served by a single rail line. All the things I have discussed in terms of the pinch points and the holy cows are doubly concerning in Prince Rupert. If that line goes down, I have no idea how to get around it. It would be difficult to use the road. There is only one road and there is only one rail line. Until you get to Prince George and Edmonton, you are at a high degree of risk for anything going wrong with that rail line. I do not see anything wrong with it now because they only run one train a week.
Senator Eyton: For that reason, I would have thought that you would have liked to ship out of both Vancouver and Prince Rupert to have that alternative going for you.
Mr. Wiebe: We will look at it in the future.
Senator Eyton: In terms of Evergreen, do you have certain transportation requirements that you contract out to Evergreen, who then take over and make the shipping decisions, or are you directly involved?
Mr. Wiebe: We make the shipping decisions.
Senator Eyton: Do they facilitate that?
Mr. Wiebe: Yes.
Senator Eyton: We are talking about the need for change. I have one other question after this. Change requires planning. I know enough about the retail business to know that the planning or business cycles are fairly prolonged. Typically, on the marketing side, it would be more than a year. Then you pick up the pieces and you know the customers and the volumes, the kinds of goods and the timing. You have all of that.
With all that said, what is the cycle for your part of the business? The marketing guys told you what to do and where they want it. How far ahead are you? I suppose you are a few months behind them. When is your planning cycle?
Mr. Wiebe: In the planning cycle, we would be eight weeks behind the marketing plan.
Senator Eyton: You are running out maybe eight or nine months ahead of the need, is that accurate?
Mr. Wiebe: I think we would be roughly six months. If we choose to go through let us say the Port of Halifax or the Port of New York it is a difference in transit time. We have a ``dead date,'' which is a date we have to hit or that we must be in country by. In order to get there, we may have to depart the port earlier. That is why we need to let the manufacturer know we do not need it on June 14 but on June 1 because there is a 14-day increased sailing time to a certain port.
Senator Eyton: What is your competitive environment? You need goods that must go from A to B. I gather you have a tendency to go with Evergreen and with particular shippers because you have established relationships with them.
Are you satisfied with the competitive environment in terms of the choices available to you? You have to decide port and beyond that it is rail or truck. Considering those factors, is it competitive?
Mr. Wiebe: The shipping lines, yes.
Senator Eyton: What are your alternatives at the moment in time you know these goods ship from A to B? You have to select a port and then rail or truck, or probably rail and truck. What is the competitive environment and what are the trend lines?
Mr. Wiebe: Regarding trucking, there has been a consolidation of the industry over the years. There continue to be fewer drivers. You have people like TransForce who are picking up trucking companies and bringing them together. Others, like Armour Transportation Systems, are doing a good job at home and picking up some of the smaller Atlantic trucking companies. There has been consolidation.
From a choice perspective, I would say it is relatively regional. In the Atlantic, we have fewer choices. Midland, Day & Ross and Armour Transportation are major shippers. Day & Ross is McCain's, Midland is Irving, leaving Armour Transportation as the only independent to choose from. In the West and in Ontario, there are a variety of options. With the exception of one or two regions, particularly the Atlantic, I am happy with the choices we have, even with the consolidation of the industry that we have seen over the past five to six years.
From a shipping-line perspective, there has been some consolidation in that industry. There is no issue from choosing another carrier, whether it be Hyundai America Shipping, Evergreen or Yang Ming. There are a plethora of choices for us. That keeps that end of the business very competitive.
I have left the rail for last. There is no choice. There are two rail companies to deal with in Canada: We will deal with Canadian National Railway or Canadian Pacific Railway. Am I happy about that? No. I would rather have three or four options.
Senator Eyton: Are the two lines competitive with each other now?
Mr. Wiebe: Yes. The fact that railways are or are becoming capacity constrained begins to limit our option as large rail shippers. I will not say we have been our own worst enemy but we have done some things that have limited our ability to move railways. We run co-facilities with CP in some places. If you chose to go with CN rail, it would be uncomfortable situation to come out with a CN container from a CP yard. We probably could have handled that better in the past.
I am not particularly happy with the lack of competition in the rail industry.
Senator Eyton: Have prices generally been trending upward?
Mr. Wiebe: Yes.
Senator Eyton: Within all three modes?
Mr. Wiebe: The price pressures are particularly on the fuel side with respect to road. I am sure everyone has seen it. We have seen that go up.
We have seen price relief. Power unions, trailers and tires are cheaper because they are all primarily U.S. sourced. We have seen relief on the capital side.
On the driver's side, we see pressure. When you cannot get enough of a particular trade, you end up paying more. Prices have been up on the road and they have gone up on the rail. Price has gone up for shipping inland for our international business.
Senator Eyton: I have one more question.
The Chair: We have two minutes. Senator Mercer wanted to ask a supplementary.
Senator Eyton: You basically divide the country into three equivalent geographies — the West, Central and East — on your sixth or seventh chart with the future state of shipping. Then you have the white line indicating the national system. It is my understanding that this has nothing to do with market or destination. By far, the largest percentage of your volume goes into Ontario or Quebec.
Mr. Wiebe: Absolutely; yes.
Senator Eyton: It is misleading in a sense.
Mr. Wiebe: I am sorry. I usually start this slide by noting it is illustrative only. The vast majority of what occurs in the transport section occurs in the blue circle.
Senator Eyton: Our concern is how to best service volumes of traffic, which is almost necessarily Ontario and Quebec. They are coming from Vancouver. It is, in fact, transcontinental.
Mr. Wiebe: I generally put particular emphasis on the white line. Some of this is just the way our company is. You plan British Columbia and Alberta together usually because we have two major distribution facilities — one in Alberta and one in B.C. Anything that would ship across Canada would be planned in another bucket.
Some of this is the technology available to us as well. We need to break up the planning sessions because the system needs to grind through a vast amount of data to come up with the routes.
Senator Mercer: I would like to go back to the Port of Halifax. As you are trying to shift some of your business to the Port of Halifax, have you emphasized with the shipping lines and other people the stability of the workforce? In other words, have you emphasized the fact that we have not had a work stoppage in the Port of Halifax since the 1970s? It seems to happen almost annually on the West Coast. Has that been an advantage in trying to convince others to get on board?
Mr. Wiebe: Yes. I think that reputation, as well as the experience, is really what leads the Canadian retailers to push for more capacity through Halifax.
The Chair: On behalf of the Senate committee, I want to thank you both for appearing and telling us about Loblaw's transportation and container issues. We thank you for your recommendations.
That brings us to the end of this meeting. The next meeting will be a week Wednesday when we will be looking at a draft report.
The committee adjourned.