Proceedings of the Standing Senate Committee on
Transport and Communications
Issue 4 - Evidence, June 3, 2009
OTTAWA, Wednesday, June 3, 2009
The Standing Senate Committee on Transport and Communications met this day at 6:30 p.m. to study on emerging issues related to its communications mandate and to report on the wireless sector, including issues such as access to high-speed Internet, the supply of bandwidth, the nation-building role of wireless, the pace of the adoption of innovations, the financial aspects associated with possible changes to the sector, and Canada's development of the sector in comparison to the performance in other countries; and to study on the Department of Public Works and Government Services Canada User Fees Amendment Proposal for services relating to the Esquimalt Graving Dock, dated May20, 2009, pursuant to the User Fees Act, S.C. 2004, c. 6, sbs. 4(2).
Senator Lise Bacon (Chair) in the chair.
[English]
The Chair: I call the meeting to order.
Our first witness this evening is Mr.John Maduri, CEO of Barrett Xplore. Welcome, Mr.Maduri. Please proceed.
John Maduri, CEO, Barrett Xplore: Thank you for the opportunity to present today. We have the presentation on the screen and I believe there are copies of it available as well. As I turn through the presentation, I will speak to the numbered pages so you can follow along. Starting at panel 3, our company is focused on delivering broadband to rural Canada. You will never find us in Toronto, Montreal, Vancouver or Calgary because our focus is solely rural markets. We believe that we are part of a unique and emerging category of rural broadband service providers with a different mandate than many of us who live in large cities are familiar with.
Turning to panel 4, we trade under the name Xplornet Internet Services. We launched our business in the fourth quarter of 2005. Currently, we have in excess of 100,000 customers in rural Canada who were attracted to the business over a period of three years. We are proud of that accomplishment. We operate through a network of dealers — local business people, who represent us and carry our brand and install, support and service the constituents in their rural communities across the country. Our headquarters is Woodstock, New Brunswick, which is a town of 5,000 people — not surprisingly where the Barrett family reside. We have 400 plus employees. As an indication of the significant growth this business is experiencing, we have 70 open positions, most of them in rural Canada.
Turning to panel 5, an important point to make is that our business, as it was originally conceived and as it continues to operate, was intended to be driven by private capital. To date, the presentation says $120 million but I believe we are at $140 million in private capital invested. We are proud of the fact that during the most challenging periods in my history of raising capital, we raised capital in both the fourth quarter of 2008 and the first quarter of 2009 to the tune of about $35 million to $40 million.
We have a successful track record in P3 models. Most recently we were awarded, within a competitive process, a contract to deliver broadband to the last 10percent of the province of New Brunswick, enabling New Brunswick to have 100percent broadband coverage by July2010. We have a similar initiative underway with the province of Saskatchewan. We have won other competitive processes against some of the largest players in Canada and fairly entrenched local players, commencing in Ottawa and throughout Ontario and other provinces. We have customers in every province and territory, where we have deployed fixed wireless broadband technology. I will talk later about the nature of this technology in 500 rural communities. We are unmatched as an organization in terms of challenging topography, terrain, vertical clutter — trees, and other conditions that we see across the various provinces in Canada.
In addition to our wireless capability, we are unique in carrying a satellite capability that has as a key characteristic the ability to offer a ubiquitous national footprint. Unless someone lives under a rock or in a cave, we can get broadband to every Canadian. One of our mottos is 100percent broadband, guaranteed.
Panel 6 is a map of Canada. The tan shaded area was our initial satellite deployment with Telesat's Anik F2. In essence, it covers all of Canada. We supplemented that satellite capacity with other deployments, the largest being a satellite that is shared with Hughes Communications, Inc. in the U.S., covering the important fringe along the U.S.- Canada border where the bulk of Canadians reside.
Turning to panel 7, when we started this business, we sat in investment offices in New York, Toronto, Montreal and all over North America to raise the critical capital. We had many questions from prospective investors about the importance of broadband to rural Canada and the demographics. We can speak to market research and empirical data. In most of the markets where we deployed our service, we have gone from no penetration of broadband — no take-up or no availability — to 25percent in just under two years. If you extrapolate, it would put rural Canada on a trajectory that is faster than urban Canada in terms of broadband adoption. We have modelled urban broadband penetration based on Organisation for Economic Co-operation and Development factors — demographics, education, and income levels. We inserted the rural demographic to come up with the expectation that rural should see broadband adoption at the same rate as urban.
At panel 8, there is no surprise as to why broadband is not 100percent available today. Let us start with population density. There are over 1 million households in population density of fewer than six homes per square kilometre. As population density declines, the cost per household served is high. There is the initial cost to deploy service and, in addition, one of the great challenges is the sustainability of the service. We refer to something called "windshield time'' in our business, which is the challenge of 6 or 8 or 15 kilometres between households we serve in a given day. The nature of the density in the rural marketplace creates a significant sustainability issue.
Backbone networks: The Internet backbone is the core of what serves us as a service-provider. It provides us with the big connection to the Internet. We have struggled over the last three years to find cost-effective, reliable, scalable, high-capacity backbone that connects our last mile service into the local communities that we serve.
Best fit technology is an issue. It has taken a while to convince governments, consumers and all of the players in the ecosystem that wireless broadband is a quality broadband service. That is now coming. More and more, as you look at communities, they are looking for wireless; that is the go-to technology. The next big challenge for us is to convince them that satellite is the best-fit solution. We will talk more about that.
The rural market is different than urban. We can spend a fair amount of time talking about how we have to apply different marketing approaches to these communities. Windshield time, again, is a factor.
Finally, raising capital: Inasmuch as we have been successful, it is a challenge, particularly as capital markets and investors try to understand what the government stance or position is on broadband — the role that government wants to play.
In particular, in 2006, the government or the CRTC launched something called the deferral account. Without a word of exaggeration, from February2006 until March2007, we could not raise a nickel of capital as investors tried to understand and make sense of the intent of that program and what impact it would have on private operators like ourselves.
Turning to panel 9: When we started this business, one of the key social objectives was enabling rural Canadians to have all the benefits of broadband, whether it is education, health services online, shopping or banking. That was the initial goal. The people spoke of the elimination of the digital divide. More recently, the focus has swung — or at least a lot of discussion has swung — to the concepts of rural economic renewal and, no surprise, the creation of jobs in rural Canada.
Let me offer up some perspective on our small company. We have created, in the three-plus years since we launched service, 420 jobs and have 70 open positions for which we are recruiting. We have 2,000 certified installers — employees who represent us in the market, employees of our dealer partners. We have created jobs in the actual construction of the network, the underlying technology, working with organizations in Canada like DragonWave and Telesat.
Turning to panel 10, we won a competitive process in Ottawa in 2006 to serve the rural regions around the City of Ottawa. Today we have approximately 7,000 customers in and around the City of Ottawa. The city contributed $750,000 to that deployment.
On panel 11, there has been some recent research — February2009 — completed by Carleton University, funded by Infrastructure Canada. The statistics probably are not surprising, but they are absolutely critical as we think about the role of broadband in creating jobs and in rural economic renewal.
I have summarized a fairly lengthy report into three significant points. First, 75percent of the business-owning respondents to the survey indicated that access to high speed had improved their business sales and profitability. Second, 15percent of business-owning respondent indicated they would be forced to relocate if they did not have access to high speed Internet. Third, 20percent of non-business-owning respondents indicated they would not be able to continue working for their current employer if they did not have the capacity to telecommute.
Swinging to panel 12, I will address the concept that I assume is particularly relevant to the discussion of wireless technology and the wireless industry. This is the concept of best-fit, least-cost technology.
On panel 13: Our business is comprised of three fundamental technologies that we bring together in a hybrid approach to be tailored to the differences in the various rural communities that we serve across Canada. We employ fixed wireless broadband technology. In many ways, it looks like the cellular technology that we are familiar with. We use it in markets where the densities are still fairly good — above eight homes per square kilometre. The platform we use has 3 million customers on it globally. It is a Motorola platform.
On the satellite side, one of the core advantages we have with satellite is the ubiquity of the footprint. There are 1 million customers are on the same platform that Barrett Xplore customers are on today. I believe it is three satellites, which we share with some American organizations that have a similar business. Again, 1 million customers on one, 3 million on another — these are platforms that have gained technological maturity and whose cost structure is correspondingly improved.
On fibre: Everyone who focuses on the world of telecom understands the importance and capability of fibre. For us, fibre is the backbone network that allows us to carry our services and our signal into the worldwide Internet.
As I reflect on the technology, fixed wireless has really come into its own. In 2005, when we started service, people viewed wireless broadband as second-class broadband. Increasingly, it is becoming the choice of 3P models. Communities are looking for wireless; and now even the perspective has changed on satellite. I will take you through some of the changes that have occurred in the satellite market.
On panel 14, we have a simplistic chart, probably one of the most important charts as one reflects on the challenge of reaching 100percent of Canada with broadband. Along the vertical axis, we have the cost per household or the concept of cost per household; and along the horizontal axis, we work through the population density per square kilometre, coming out of urban markets into rural markets and into more remote markets.
The red line you see there is a depiction of the cost structure of wired cable DSL fibre. Clearly, as we move further out into areas with lesser population density, the cost of that technology goes through the roof. Wireless, the green line, is fairly competitive even in some of the urban environments, but through that green-shaded area is where wireless technology is the cost leader and the most cost-effective technology.
Finally, even with wireless, there are challenges, as you can imagine for those of you who come from different parts of Canada. It may be terrain, topography. If you live in Ontario, it is the Canadian Shield. If you live in the West, it is the Rockies. The challenges of topography limit the capability of wireless. The ability to get cost-effective backbone limits wireless, as does tree cover. This is near line of sight, line of sight technology.
There is a point at which satellite becomes the most cost-effective solution. The blue line represents satellite today. One of beauties of satellite technology is that it does not matter if we chose to serve someone in Toronto or in the most remote region of Canada, the cost of delivering service, the retail price points, would be the same.
An important point is we are on the cusp of seeing a massive amount of satellite capacity brought into Canada in 2011 and 2012. As you look at the chart on panel 14, the dark blue line will shift downward, making satellite a more viable solution for hundreds of thousands of Canadian households. In essence, it will allow Canada to achieve that critical goal of 100percent technical broadband availability at a cost to the consumer, a retail price point, that is comparable with the balance of urban Canada. It is a very simple slide but an important one as we reflect on the subject of rural broadband.
On panel 15, we have the depiction of each of the two technologies. Just quickly, the top right-hand corner depicts what wireless broadband technology: The backbone network that allows us to connect to the Internet — towers, what we call vertical real estate in the business, radio technology. At the top of the tower, a small device is hung on the roof line of the home and we shoot a signal from the tower to a subscriber module on the customer's home. Wireless has a lot of similarities to the cellular technology that pretty much all of us carry today.
On the bottom left-hand side, we have the depiction of satellite. In essence, the satellite — what we call a "bent pipe'' — is like a big reflector dish in the sky. We take the Internet to a gateway. We have a number of gateways across Canada that take messages or information up to the sky, hit the satellite and travel down to a small dish that looks very much like a direct-to-home satellite TV dish, which is located on customer's roof line.
Today wireless is fairly comparable to the urban value proposition. Roughly $45 equals 1.5 megabits down. There is a $99 installation fee start-up cost, and there is the ability to bring packages as high as eight megabits per second. Satellite is more expensive. The baseline price of an entry-level package is around $50, and that delivers half a megabyte of speed, and the upfront cost can be anywhere from $400 to $550.
On panel 16, we have the data on pricing for both offerings, the top being fixed wireless and the bottom satellite.
If I could take you to panel 17, we again discuss satellite broadband, a form of wireless, and look at the evolution of the industry. One of the challenges we face is one of perception. There are still people we deal with, whether in government, in the retail community or customer level, who remember the days of legacy satellite solutions pre 2005 where the upfront cost was significant, $100 a month or more, with $1,000 start up costs. In today's environment, it would not be considered to be high speed at 128kilobytes down, and the return path was through a telephone dial-up line. It was really one way down and not truly broadband. There was a limited amount of customer capability.
In the fourth quarter of 2005, we launched a service on Telesat's Anik F2 in conjunction with an American operator, Wild Blue. We delivered a service that was a quantum step improvement in satellite broadband at a monthly price of $55 a month, a much lower upfront cost — $400-$500, half a megabit down, packages up to two megabits, and completely bidirectional. In this case, there was no return path through a phone line. It was up and down through the satellite. This is a platform today that has in excess of 1 million customers in North America. The customer capacity or number of customers we could serve is 200,000. Initially, it was lower, and over the last three years we have been acquiring additional capacity to serve the Canadian marketplace.
The highlight or big news for us is that in 2011 and 2012, we anticipate a quantum increase in the amount of satellite capacity that comes into Canada. We have been challenged over the last couple of years in dealing with the perception of satellite as a weaker technology. I would suggest that it is an exceptional technology. The challenge we face is one of economics. It is no surprise in the world of telecom, but if you buy in small quantities, the cost structure is higher, the retail price points are higher. The big news in 2011 is that we will have about 10 times the amount of capacity available to the Canadian market, which will allow us to price more effectively. We anticipate pricing somewhere in the $50 a month range, $100 a month start up, and the ability to deliver packages starting at three megabits down, completely bidirectional, and the capacity to serve around 500,000 customers.
This will not happen on its own. Our company is making significant commitments and investments, and we are doing considerable work from a technology standpoint to ensure that we can deliver in 2011-12. When that capacity comes into Canada, we will be in a position to speak as a country to 100percent broadband availability, not just from a technological standpoint that someone can get the service but also that they can get the service at a value proposition that is comparable to urban.
On panel 18, we speak of government points of impact and how government can participate and help. I would start with the issue of spectrum licensing. We are a rural broadband service provider. Without a word of exaggeration, you can find 100 rural broadband service providers in communities all across Canada. One of the challenges that we all face is gaining access to spectrum. It is the lifeblood of the business. Today we have a number of communities in our stable of 500 communities where we are basically on stop sell. We have customer lists. We have customers who want the service. We have customers who want to upgrade their packages to higher speeds. We are, in essence, on stop sell because we have run out of spectrum.
Spectrum is the lifeblood of the business, and we are challenged as rural broadband service providers in the way the licences are constructed. To give you an example, the licence area surrounding the city of Calgary is not unique. There are 1.1 million residents constituents within the Calgary licensed area. If we wanted to acquire spectrum for the 100,000 rural population around the city of Calgary, we would have to bid in an auction process and buy the spectrum for 1.1 million customers. If the rural broadband business as a category is not sufficiently challenged already with the issue of low population density and therefore high cost of construction, we are further challenged by the fact that to get access to the lifeblood of the business, we have to deal with arcane issues like how spectrum licences are defined.
It is intriguing sometimes how, on one hand, there is a willingness to provide subsidy to rural broadband, and on the other hand, spectrum, the lifeblood of the business, is auctioned off. There have been some great auctions, most recently for cellular-like spectrum. Spectrum is so critical to the business. It would be great if we could find a way to get easier access, and access that does not come every three years in big events but comes as the businesses need it in order to serve their customers.
The second point limiting the wireless networks, and it is less of an issue for satellite, is the ability to gain access to cost-effective backbone. We encourage government to look at the Alberta SuperNet initiative. In our view, it is quite an interesting way for government to engage in the sector. Backbone is essential and critical to every rural broadband service provider. It is what brings us back to the Internet. It is the big pipe that takes us back to the Internet. The province of Alberta turned up the Alberta SuperNet in conjunction with Bell Canada in 2005.
As a result of that facility being in place, 50 rural broadband service providers, more or less, came into the market. In our view, it is a very interesting way for government to engage, to encourage private investment and to encourage competition, because once the backbone is there, others can invest in the last mile solution and deliver services at the retail level to end customers. We believe that model has been looked at in other countries, and we, as a rural broadband service provider, would be delighted to see it gain traction in other provinces in Canada.
The third challenge or consideration for government as they reflect on their role within the category of wireless broadband and rural broadband is the willingness to look at new technology. We faced a real uphill battle particularly on the satellite side, to get government at various levels to understand the potential of this technology and to look beyond some of the current and temporary challenges. This was surprising when you think of the role that Telesat and other Canadian companies have played in this category.
On panel 19, I make a confident prediction. We are not that far away from being able to make a confident commitment that Canada can achieve 100percent high speed broadband Internet access in the next 36 months. The essential ingredient, in our mind, is to create the conditions that encourage private capital to enter the marketplace. This is a business. There is an opportunity for private capital to generate reasonable returns. There is a historic opportunity given the capabilities of new technologies like wireless and satellite to create competition in rural Canada, and not just competition for broadband access but competition for voice services, because we do offer a voice over IP service on top of our broadband access.
We believe it to be a historic opportunity. We need to ensure that private capital understands the rules. We need to encourage deployment of backbone infrastructure deep into the rural fabric of Canada. Government needs to consider the issues I discussed around spectrum and how it is made available on a timely, relevant and cost-effective basis. Finally, there needs to be thoughtful consideration of the potential of new technologies, wireless, and emphasize next generation satellite. Please remember that these are technologies, that to a great extent, have been developed, are being manufactured and are being innovated in our country.
The Chair: Thank you, Mr.Maduri.
If I refer to page6, your technology is used all over Canada; is that right?
Mr.Maduri: That is correct.
The Chair: What is your main market?
Mr.Maduri: We have customers in every province of Canada. The greatest concentrations today would be in Alberta and in Ontario.
We were in Alberta because when we started the wireless business, we had the benefit of the Alberta SuperNet. In 427 rural communities in the province of Alberta, we had access to cost-effective, high-capacity, reliable backbone. We had a structure that was developed by the province where the provider of the backbone was not another telephone company; it was a company called Axia NetMedia. It is a situation where Axia cannot enter the retail marketplace and compete against us. Particularly as we were out raising capital, this created ideal circumstances where we could demonstrate to the investors that there was cost-effective backbone and there was an independent process by which we could gain access to it.
That is why we started in Alberta. We gained our initial experience there, understanding the challenges of the technology and how to market in a surgical fashion to rural communities. Alberta also adopted satellite at a much faster rate.
We then moved a lot of that learning into Ontario. We have built sites in Manitoba and we have started building some sites in British Columbia. We are also starting in Quebec and in New Brunswick. That is on the wireless side.
On the satellite side, we have had good penetration right across the country from day one.
The Chair: You are also involved in Northern Canada. Are you serving the Aboriginal and Inuit communities?
Mr.Maduri: Our service is available everywhere. We do have dealers who represent our service in Northern Canada. I cannot say that we have all of the communities covered from a dealer standpoint. In parts of Northern Alberta and Northern Canada, we have dealers who will almost telemarket into the community, build up a list and then fly in with an installed service.
The Chair: Have you spoken with the officials about the $225 million provided by Industry Canada over three years to develop and implement a strategy to extend broadband coverage to as many unserved and under-served households as possible? Have you had any discussions with them?
Mr.Maduri: We have been involved in Industry Canada's consultations with the industry. We have left them with some key points on our views as to how those monies should be deployed.
The first point was a view that governments should be thoughtful. If the assumption, for example, is that 90percent of Canada is covered, should the monies be going 90percent out, so starting at 90percent out, or should it be 100percent in? Should the monies be deployed in the markets with the most egregious, challenging conditions to get broadband? In our view, it should be 100percent in, because ultimately we believe there is still a lot of market where private capital will execute.
Secondly, we have been clear, as have other providers, that the process needs to be thoughtful to ensure there is not overbuilding and so the public monies do not overbuild existing footprint. That is because a large number of rural broadband service providers have invested private capital. That is a critical factor.
The third point we articulated is that the government take an approach that is technologically neutral so as to encourage different technologies — and in our case, wireless and satellite — that we believe best fit the nature of the marketplace. Yes, we have been consulted, and those are the three key points that we made to Industry Canada.
The Chair: Do you think those points should be included in the program?
Mr.Maduri: Absolutely. Those principles should be included, yes.
The Chair: Friends in the U.K. have national policies for the development of information and communication technologies. Do you think Canada should adopt a national policy?
Mr.Maduri: Absolutely. Right now, as a country we are still focused on access. We are in the business of access.
One of the elements of the overall strategy must include the encouragement to develop applications. As we have been out in the rural community, we have been surprised by the nature of the applications around agriculture and telecommuting.
Clearly, the initial focus must be to get broadband to 100percent of Canadians. The second goal must be to reflect on those application opportunities that will renew rural communities and create jobs and wealth for Canadians.
The last element within the strategy needs to be the issue of digital literacy and outreach to the communities. That has been one of the greatest learning experiences for us. You do not market to rural Canada the way you market to urban Canada. We cannot drop a free-standing insert in The Globe and Mail or in The Toronto Star and hit a couple of million households. It is much more surgical; it is different.
In the context of the issue of digital literacy, we need to look at best practices. One of the U.S. states has a program where high school students, as part of getting their graduation diploma, must complete a certain amount of volunteer hours. They have offered up to the students that if they go into the community and train those individuals or constituents who have not had exposure to the Internet, that qualifies as volunteer hours. With that program, they have had the impact of reaching out to those people who are not yet digitally literate.
Access is obviously the building block. Innovation in applications is where the wealth will be created for Canadians. Finally, let us ensure that as we work through that process, the outreach and literacy programs ensure that there is not just a technical service, but that people have the capability at a personal level to use the service and to benefit from it.
Senator Fox: Thank you, Mr.Maduri, for being with us this evening. Your presentation is very enlightening indeed. You have had a long career in telecommunications and in bringing networks to people, and you have spent a lot of money in doing so over the years.
I have a preliminary question. I note that at some points in your presentation you speak about broadband access and in other points you speak about high-speed access. Are we talking about high-speed access throughout, or is there a difference?
Mr.Maduri: Increasingly, the category is referred to as "broadband,'' but it is broadband/high-speed. I am using the terms in the same way.
Senator Fox: I just wanted to be sure of that.
As the chair indicated, we had an enlightening experience looking at the two European models, one of which was a British model, which had a market approach. I do not know if you have seen the document of Digital Britain. Extending across the U.K, they speak about a market approach, whereas on the continent they have a tendency to speak about a more interventionist approach of extending into various far-flung areas.
Can you help me and draw a line as to how far, in a country like Canada, the market approach can work? At what point do you reach the necessity of government intervention through funding? You mentioned that in rural Ottawa, you still needed some government funding to be able to make your business model a good one.
Mr.Maduri: The issue is mostly of timing and acceptance of technology.
In 2011, if we can execute what we would like to execute, we will see a lot of satellite capacity come into this country.
I do not know if you looked at the Australian model, but my recollection is that they were initially targeting 99percent fibre to the home. Ultimately, they worked through the cost structure of that and determined it was quite large and then went to 90percent. Australia and Canada are similar in terms of having a lot of geography to cover. Ultimately, the solution will be a multi-technology one.
I wish I had brought pictures of the markets we serve, where, if you get up high enough, you will see a house and lots of dirt and then another house. To get to 100percent is a challenge. It is imperative that we accept different technology.
With respect to the issue of the role of government, I think there is a role for government. There are certain markets that, even with satellite, may be really challenged today. It is an matter of time: If the objective is to get it done tomorrow, you will need a lot of money to get it done. If there is a willingness to wait, there is the opportunity, in my mind, with satellite and wireless to see all of Canada covered within the next three years.
There are certain elements of the broadband strategy that do lend themselves well to government involvement. I think the backbone networks are probably the best place for it. Again, when the backbone is created, much of the heavy lifting that is really challenging for any individual operator to execute alone is addressed.
As we looked at Alberta — and I speak from experience — it attracted us to build in Alberta first. I think it helped us with investors. If you are looking for something that jumpstarts the market, the backbone does address some of the heaviest lifting in creating a rural network. It encourages investment. It creates, in fact, a multiplier effect on private capital. There are at least 50operators, wireless and other rural operators, benefiting from that backbone network.
If government is looking for a role, it needs to be reflective and accepting of the technological choices. It has taken us a long time to get people away from the view that it must be wired. The good news is they are now accepting wireless. We must get them to the next step which is accepting satellite.
The challenge that I encourage you to reflect on when you think of government engagement in this sector is the unintended consequences. Again, the deferral account, by summary, in Februaryof 2006 —
Senator Fox: I do not quite understand the deferral account.
Mr.Maduri: The deferral account is a CRTC decision. It was released in Februaryof 2006. It took approximately $650 million in funds that had been accumulated out of a previous decision on local telephone rates. There was a capture of a certain amount of rate from urban telephone users. It was accumulated and then a decision was necessary around what to do with those funds.
The decision was that $620 million of the $650 million would go to subsidizing rural broadband. It went back to the telephone companies. For us as a rural broadband service provider, that was almost a deathblow because it meant that there was a substantial part of the market for which our competitor would have some form of public funding.
Again, it was an unintended consequence. As I said, it is very challenging to raise capital when you have that cloud over the marketplace. The CRTC, in fairness, went back through the consultation process and ultimately reviewed and revised — I do not remember the specific term — their decision in early 2008 and reversed it to a great extent because they understood that it had had these unintended consequences.
It is so important, if the intent is to accelerate the pace beyond what the private sector would do on its own, that government be thoughtful around technological neutrality and competitive neutrality. These are key principles of our telecom regulation.
Finally, how government can accelerate through backbone? We do not talk much about the role of government as it encourages innovation in applications, encouraging digital literacy and outreach into rural and other communities.
Senator Fox: Thank you. I have a few other questions on satellites. I will come back, perhaps, on the second round, but I will take a last question on the first round.
You dealt with the question that spectrum is the lifeblood of the system, which obviously it is. In both the U.K. and in France, we heard a lot about what they called the digital dividend, which is the bringing up of spectrum. Is this something that would be relevant in the rural areas or is there significant spectrum available now but it is the auction process itself which is deficient? Does that bring anything to you?
Mr.Maduri: I am not familiar with the digital dividend.
Senator Fox: As people go digital, you free up a lot of spectrum in the lower bands used by the analog stations. I never thought I would explain anything to you, but I am glad I have that opportunity once in my life.
Mr.Maduri: In the U.S. when you are watching your television, you will see the announcement at the bottom thatspeaks to the freeing up of channels — I think it is two to fifty-nine. I believe that is what is called the 700 band in Canada and the U.S. It is being freed up as a result of the movement of those channels to digital. That spectrum, 700 megahertz in the U.S., is in the process of being freed up and has been auctioned in the U.S. markets. I believe Canada has a date of somewhere in 2011 to auction or make available that spectrum. I do not believe that Industry Canada has released it.
Senator Fox: When that happens, because it will happen, does that do anything for you?
Mr.Maduri: That is exceptional spectrum. Seven hundred megahertz is exceptional for the rural environment because as you go down in the spectrum — let us say, from 700 megahertz to 3gigahertz — the spectrum has better propagation, a bigger footprint with a given tower. That is exceptionally important when you are a rural provider.
Senator Fox: Perhaps we should be looking at that in this study.
Mr.Maduri: Absolutely. We have communicated in the past with Industry Canada on the subject of 700 megahertz, to say we believe that there should be a different process for rural. Seven hundred will be valuable spectrum. In the rural market, because of its propagation characteristics — the size of the footprint from a given tower, it holds the opportunity to be able to improve the economics of the construction of towers and the deployment of towers. That would absolutely be a great help to the category if that spectrum were made available on some terms that are different than they are for the urban environment.
Senator Fox: Thank you very much.
Senator Zimmer: Mr.Maduri, thank you for your presentation. You certainly walked the talk. That was a high speed presentation.
You answered the question a bit about high speed distribution, but will the reliability of this new option be comparable to other high speed services offered by SaskTel? Do you need an agreement with an existing service provider, such as SaskTel, or could you offer service to these rural communities without such agreements?
Mr.Maduri: In the case of SaskTel and in the case of the competition we won in New Brunswick, I will emphasize the satellite piece. Today's pricing on satellite is higher than it is on wireless. In our view, as I indicated in the presentation with respect to developments from the original legacy satellite to the current satellites and what is expected in 2011, as we bring a quantum of capacity, costs will come down.
We have a challenge in the intervening period. We do offer our services everywhere, but there has been engagement by government to say that we know satellite is critical and an essential ingredient to getting to 100percent; we want to take a role, a position. We want to involve ourselves to essentially bridge that two-year period and get the price of satellite much closer to other options.
We do offer a service in all provinces. The rate card is higher than wireless. In a couple of provinces including in Ontario with FedNor, government agencies and government have been involved in working with us to essentially subsidize or buy down, the retail price point or cost of satellite to put it more comparable to urban alternatives.
Senator Zimmer: Barrett Xplore uses two service delivery platforms — fixed wireless and satellite. You explained to this committee what fixed wireless is. Do some of the customers use one or the other or do all of the customers use a combination of the two service deliveries?
Mr.Maduri: They are separate services. Some customers use wireless. If they are in the footprint of our towers and as we build more towers customers move from satellite to wireless because the value proposition is better. Today they are distinct, separate technologies. The concept of the hybrid is more in the business model but we have both technologies.
Senator Zimmer: Can you explain the public/private partnership model used in New Brunswick, Nova Scotia, Saskatchewan and Ontario? Do you intend to introduce this model into other province and territories?
Mr.Maduri: We have seen the public/private partnership model primarily on the satellite side in the New Brunswick and Saskatchewan examples, again where we are buying down satellite.
In the Ottawa example, we have built out the areas that are economic to do with fixed wireless, and then government engages with us to extend the footprint to areas that we would not have otherwise built with fixed wireless. That is the nature of the partnership.
The ratio of private to public is not 50/50 in Ottawa; it would be a much higher private than 50/50. When you talk about the future, the $225-million initiative, the federal broadband stimulus I believe is what it is called, will be a 50/50 public and private partnership.
Senator Zimmer: You are absolutely right, spectrum is the lifeblood of the system. I know a company several years ago that had an allocation and did not use it. Can the CRTC call this back, using the idea of either use-it-or-lose-it? Are they able to call that spectrum back if a company is not using it?
Mr.Maduri: Industry Canada is the agency that manages spectrum. I know that there are some provisions; I am not conversant with all the use-it-or-lose-it rules.
Senator Merchant: Thank you, Senator Zimmer, for asking all the questions about Saskatchewan.
I live in Regina. Not too long ago you needed to have two different providers if you were driving out of the city a bit. You needed two cellphones basically to get service. I think that has improved.
Is there a model country or state that you have looked to on which to model your system?
Mr.Maduri: There are components. If I remember correctly, France and Australia have a broadband guarantee program. They have direct-to-customer subsidies. If there were a situation where a customer was in an area that did not have alternatives and satellite was the solution, there are multiple satellite service providers. I cannot remember the specifics of how it works but basically the customer gets to choose and gets a form of rebate or subsidy. That is intriguing.
Again, I know I am being overly repetitive but we have a great example in Alberta with the backbone model that would go a long way, particularly given the nature of Canada — its size and the way we are structured with the small communities. That would be an exceptional capability if it went right across the country.
France and Australia have direct-to-customer subsidies. Increasingly, all the countries in Europe and Australia are looking to satellite now as a good solution. It is really snippets.
The next iteration is what governments are doing in applications. I am trying to remember the state that did the digital literacy program. I do not know that there is one country that is a complete model. We spend a fair amount of time talking to different providers in different countries. I do not know that anyone has the secret sauce yet. The key would be to look for best practices across the breadth of what we do in this industry.
Senator Merchant: I think, Madam Chair, that Alberta was mentioned to us when we were in Europe. We should look at them.
I had questions about satellite. When we were over in Europe, we heard that there were some problems with satellites in delivering high-speed Internet services. For example, one witness talked about transmission delays and asymmetries between uplinks and downlinks and suggested that some applications such as Voice over Internet Protocol (VOIP) would not work with satellites.
Could you comment on this? Have there been recent advances in satellite technology that would eliminate some of the perceived problems?
Mr.Maduri: It is an asymmetric service. The uplink is absolutely more expensive so it does figure into economics. If we need to construct packages that are symmetrical, they would cost more.
I believe the CRTC has been conducting studies and had a hearing recently on the issue of managing traffic in the Internet environment. I think the ratio on average is around 4 to 1. For the vast majority of residential, personal use, the demand today is 4 to 1.
If you are looking at business applications, there is a study in the U.S. that says that the No. 2 provider of complex data networks in the U.S. was actually Hughes communications, the satellite provider. AT&T was first, if I remember correctly and I would have thought Verizon was second. If the challenge is to the business side, complex networks used by enterprises, that does not hold up well when you look at the data in the U.S.
Yes, the uplink is more expensive but when you look at the vast majority of people who use residential, I believe it is 4 to 1 and satellite can deliver.
Satellite does have a latency issue. There is only so much you can do with physics. It is a 400 millisecond delay. We have customers who use VOIP on satellite. We have concluded a small market trial. We have not heard many complaints about that element. I believe VOIP can be delivered well over satellite. There are technology applications that are working on the latency issue for business applications. Ultimately, there will be ways to work around these.
If someone is an extreme gamer, it is possible that they would have challenges because when they hit "send'' they are looking for a certain response time. Does that 400 millisecond latency factor in? Yes. If you are in online auctions, and we do have some rural customers who participate in auctions for machinery for their crops and so on, there would be a delay that would have to be factored in.
There are impacts, but we look at how many Canadians use satellite for television. What is the percentage today? It must be over 20percent. Satellite has won a lot of market in television. We believe it has a lot of market to win here.
There is a real interest and excitement around fibre, but if you are in the rural environment and there is a fibre cut, what we call tractor fade or backhoe fade, the implication for down time for the entire network is challenging.
It is important to look at the strengths and weaknesses of all the technologies. Satellite has weaknesses like any technology but it has some incredible strengths in terms of capability, reliability, speed and cost effectiveness.
Senator Hervieux-Payette: I will continue the questions on satellite. Supposedly it is the best service, with more people in 2011. Is it because it is a new satellite technology that we are talking about? Where does it come from?
Mr.Maduri: There are two factors. One is that there is some evolution in the technology. We have learned much in three years in terms of how to deploy the gateways on the ground. Improvements will come from an evolution of the current technology platform in the ground segment. In satellite there is the bird in the sky, the space segment; the ground segment, the gateway; and the device that hangs on the customer's roofline. That is where the bulk of the technological evolution will come.
The second element is quantity. In both situations, we are in a situation where we can leverage a North American partnership, basically North American satellites. We would take the Canadian portion at a very effective cost. Historically, one of the challenges that we had in 2005 was what we bought. We bought a small quantity and, like anything you buy in small quantity, you buy at a high price. If your underlying cost structure is high, your cost at the retail level is high.
It is both components: technological advance and the quantum of economics, the quantity in which we are buying.
Senator Hervieux-Payette: My second question deals with technology. We had brilliant companies like Nortel and others I have dealt with, such as Newbridge. In your business, because you were talking about having good competition with technology, is it your own technology that you have developed or some portion of it? From where does it come? Where is the research being done?
Mr.Maduri: Those are all good questions.
I spoke about backbone. Much of the backbone network is fibre. At some points, we go from fibre to a wireless backhaul network to our site. That technology is a company called DragonWave that is based here in Canada — in Ottawa, actually. That is one example of Canadian technology.
From the Internet backbone to the community that we serve, we use a Motorola technology. I cannot speak specifically but I believe it was developed in the U.S. and manufactured all over the world.
On the satellite side, our initial deployment was on Telesat's Anik F2. Telesat is a significant player in the satellite industry. Our second deployment was Telesat's Anik F3 and the third deployment was Hughes Spaceway, from Hughes Communications, Inc. in the U.S. We use predominantly Canadian and U.S. technology.
Senator Hervieux-Payette: A question arises from that. We are talking about wireless communication but do you also offer telephone services?
Mr.Maduri: I will clarify. I should emphasize that there are various kinds of wireless technology. Motorola is only one of many manufacturers or vendors and there are hundreds of wireless providers in Canada. On the question of digital telephony and VOIP, we have a service with 1,000 customers. We have not gone to full market launch across Canada. We do intend to offer in 2011, or perhaps sooner, coincident with the availability of satellite capacity, both VOIP and other applications on our broadband access.
I believe that in Scandinavia a company — TeliaSonera — has already communicated with its rural customer base that by a certain year, they will be moving to a digital voice solution on top of wireless broadband. There are examples of countries where operators are looking at rural service and at different strategies, not only for broadband but also for voice and other services. I emphasize that Canadians have to reflect on the fact that the rural and urban markets look very different, at least from our vantage point. It is important to consider how we, as providers, serve them.
Senator Hervieux-Payette: You said that you raised $140million and that you are looking at the question of reasonable return. Did you raise capital in Canada or is it a publicly traded company?
Mr.Maduri: It is a private company and our capital has been raised in Canada and in the U.S.
Senator Adams: I come from Nunavut. I do not know if you are familiar with it. I live in Rankin Inlet. Your map does not show the Western Arctic or Baffin Island. Could you tell me if you serve in Nunavut? We have three regions: Baffin, Cambridge Bay and Iqaluit. How far up North do you serve?
Mr.Maduri: We have footprint where the tan line is on the map, which covers pretty much all of Canada into Baffin. I am quite certain that we are there with the availability. Now, we need dealers. It would be challenging for us to operate throughout Canadian rural communities without our dealers. They are local business people and have knowledge of the local market and customers. Usually, they are the local computer jockeys.
We have dealers in Nunavut but how many we have, I do not know. We have capacity in the North and we are always interested in new partnerships. We have capacity in the air and it is literally burning a hole in our pocket. We would love to sell more in all parts of Canada. We are on the hunt regularly for dealer channel partners to represent us in communities across Canada.
Senator Adams: We used to have Bell but now we have NorthwesTel operating in Yukon and Nunavut since Bell Canada sold their service because it cost too much to operate in the North. Do the installers need to have their own equipment or do you look to your partners to install service through NorthwesTel or Bell Canada?
Mr.Maduri: The equipment is capital light in that the bulk of the capital goes into the satellite and the ground stations. The balance of any capital employed in the network is the dish, which looks very much like a satellite TV dish that hangs on a roof line. As we look for partners in rural communities and in the North, there is a need for working capital because ultimately the dishes are sold to the end-user customers. The capital requirements for our dealer channel partners are not significant. Most of the dollars are in the sky or on the ground stations.
Senator Adams: I have a cellphone from Bell Canada. I can go up to my cabin and still get a signal outside. If I stay in my cabin, I cannot get the signal. In the future, if you were to install a tower in the North, how much would it cost? It is typical for vehicles to break down or for people to get lost in winter storms at minus 60degrees Celsius, and we have to look for them. There are some satellite phones and some broadband. We can carry small transmitters the size of a telephone to help locate someone who is lost.
Mr.Maduri: As we have said about the satellite and wireless, they are fixed technologies. Our services are delivered to a fixed point. The technology that we use is not mobile or portable. Such technologies are available but that is not our business today. I do not know how much it would cost to put up towers or to support that kind of mobile satellite service for voice or data.
Senator Adams: Are you able to provide any education in northern communities through computers with your satellite service?
Mr.Maduri: Once a school or student has broadband access, it would be well within their ability to surf the Internet and participate in an educational process. We provide access in that setting, and once they have access they can take part in online learning.
Senator Adams: The Nunavut education system is in English, French and Inuktitut.
Senator Eyton: I want to pick up on the question relating to your financing, which sounds like a remarkable achievement.
You infer you have been around three or four years and your first capital was raised three or fours years ago?
Mr.Maduri: The first capital to start the business, but we have been raising capital constantly. With one window where we were challenged, we have been raising it fairly constantly through the last three and half years. As most people know, telecom is a very capital-intensive business, and we are burning a lot of capital to get customers.
Senator Eyton: It is remarkable you were able to raise $35 million last year in tough times. You waffled a bit, but you talked about raising the money in Canada and the U.S. What is the division there? How much in each country overall?
Mr.Maduri: There is a healthy mixture of both Canadian and U.S.
Senator Eyton: You will not say? It is a remarkable achievement. What was your business story when you went out? You attracted the money. You told them a story. It probably related to cost and number of subscribers you might have onside. You told us you have 100,000 now. Was that your story in the last year or two?
Mr.Maduri: Senator Fox will remember the cellular business. We are not creating the demand for broadband. When we come into a community, there are lists. You have to know how sad we are when we have to put a stop sell on a community. We are not creating the demand for broadband. First, it is a proven fact, and what we had going for us at the time was we completed the research, as I mentioned. Point number one is broadband everywhere is an inevitability.
Senator Eyton: My question was: Are you on plan?
Mr.Maduri: Are we on plan? No, we are not on plan. We are a little behind in that we are being challenged a bit in certain markets in terms of getting spectrum and that is holding us back. Beyond that, on the satellite side, we are on plan. We could be doing better on wireless.
Senator Eyton: Where will you be five years from now? How ambitious are you?
Mr.Maduri: How ambitious are we? The question can be answered by looking at a map of Canada and understanding that the number of households that exist within low population density is our market, and we think it is a very big market and much larger than 100,000 households.
Senator Eyton: How much bigger do you think?
Mr.Maduri: It is multiples of 100,000.
Senator Eyton: Talking about your marketplace now, I am a rookie. I am not a technocrat. You talked about the distinction between rural and urban, but I understand you have a hybrid service where you marry together the pieces that make sense in any particular geography. You have wireless and fibre and at least prospectively you have satellite. It strikes me that that combination means everywhere. How do you define rural and urban? There is reference in your presentation to Oshawa. There are some of the outlying regions of Oshawa but I am sure there is overlap. In some places you are competing with other conventional services.
Mr.Maduri: We tend to focus on markets that are unserved. As an aside, the U.S. government providing funding of$350million to map the U.S. in order to guide their $7.2-billion rural broadband stimulus program. I would say mapping is a critical part. We map the markets to identify where the greatest potential is in terms of unserved households. We use mapping to make sense of where the density works for wireless, and then where it does not work for wireless, the balance of the market is satellite.
Senator Eyton: You have said satellite is coming along, so in effect it covers everything, does it not?
Mr.Maduri: In 2011, we believe we will be in a scenario where customers by and large we hope will not care about which technology but rather about the value proposition. When the cost structure of satellite improves, we believe we will be in a situation of two technologies hopefully delivering one value proposition, and that is what customers will care about.
Senator Eyton: Where there is overlap and head-to-head competition, how do you fare in the some of the examples you have now?
Mr.Maduri: In most of our wireless markets we have competition.
Senator Eyton: I am talking about competition against the big guys, and you run into probably Rogers in Oshawa, for example.
Mr.Maduri: In the markets we serve, we do not tend to see the big guys. It is usually other players who look like us.
Senator Eyton: Who will it be in Oshawa?
Mr.Maduri: I believe the example was Ottawa. There are areas where we might overlap, but by and large the markets we are in are markets where we do not see the big guys.
Senator Eyton: With satellite coming in, I assume there will be more overlap.
Mr.Maduri: Yes, more overlap between wireless and satellite.
Senator Eyton: In terms of your provision of your service, your signal is as good as or better than other technologies and other providers?
Mr.Maduri: We have a very reliable wireless service and satellite service. Where we struggle is in certain areas where there is not backbone or where the backbone requires us to hop — a technological term. That means that if there is backbone in a community and we cannot get to it, we have to put in radio links to get to it, so we put in what is called radio hops. In those situations, we are at greater risk of reliability.
One of the most significant things that government could do if they wanted to better enable higher quality, more available broadband in rural communities, is to assist the process of getting more backbone — hardened, scalable, reliable backbone. One of the biggest challenges to our reliability is when a backbone network goes down — a backhaul link is what we call it — it impacts reliability for all the customers in the community. Otherwise, radio is a very stable technology.
Senator Eyton: Would the same thing apply to a speedier signal?
Mr.Maduri: Yes. Wireless has the capabilities to deliver large package — 8- or 10-meg. It is all a function of economics and demand.
Senator Eyton: There is a lot going on in this area. You are very entrepreneurial. Do you expect there will be some consolidation in the industry in years ahead?
Mr.Maduri: That is hard to say. Right now it is still a big market. The federal program — the $ 225 million — will encourage more people to invest, we hope, and come into the category. I do not know if we are at the stage where the industry has reached maturity and there is no more opportunity. I would assume that would be where you would see what they call rollups. From our standpoint, of the 108,000 customers we have, there might be a total of 4,000 or so that we have acquired and mostly in situations where we wanted access to a tower. We wanted to bring a partner on board who was a great local business person, running their own business, but ultimately we saw value in them as dealer representing our service.
At this point, the vast majority of our growth has been organic. As I look forward, the opportunity for organic growth would occur just to focus on building our own network that we are comfortable with as opposed to acquiring and consolidating other players. One of challenges when you acquire another player is you adopt their technology and then you have to change it. That is time consuming and expensive. We have done it, and I cannot say if we have done it well. Integrating any company is challenging but particularly so if you are on different technology platforms. There is a lot of market opportunity and a lot of rural Canadians who want the service. Our focus is getting more service out to more customers and continuing to improve reliability and our servicing capability.
Senator Wallace: Thank you. I want to congratulate you, Mr.Maduri. You not only talk the talk but you walk it as well, and this idea and need to provide broadband to rural areas of the country is very important. You demonstrate that by basing your operation in Woodstock, New Brunswick. I am from New Brunswick so I am extremely happy that you chose New Brunswick and congratulate you for using that example and showing that rural Canada is important to you and is the essence of your success.
In the short period of time you have been in business, your growth seems remarkable. You are providing service in a cost-effective way, one that enables you to make a profit, to provide service to sparsely populated areas that have been overlooked or ignored by the major players.
With the integrated hybrid technology you are using, do you have competitors that are doing the same thing? Where have they been to this point, and do you sense that they are picking up on the direction you have taken? Do you see the competition in what has been your niche market getting more difficult as it goes on?
Mr.Maduri: There are a lot of players in the sector. I can hazard a guess and say there are 100 across Canada. Particularly where we have wireless, there is generally another player in the market.
The federal broadband stimulus, the $225-million program, will encourage more players to enter the marketplace. There will be good players that have a viable, sustainable business model and there may be other players that do not. That will be the challenge for the public, and for the industry as a category, if those people come in, make commitments and fail.
As we continue to demonstrate success, others will come into the category. I do not see competition lessening; I see continual investment. One of the critical factors is that whatever the rules are, they are clear. When capital does not understand the rules, it shuts down. Any telecom business is difficult to operate — and, particularly, grow — if you do not have access to capital.
Senator Wallace: Without asking you to disclose your business plan, is there anything unique about your model — this integrated hybrid model you are using? Are you doing anything that is unique?
Mr.Maduri: Yes, there is no one else in North America using satellite and wireless together. There are satellite players and wireless players, but no one uses both of them. One of the things that has been very effective is when we launched satellite, it would be an early indicator as to where there was opportunity. One of our commitments to customers was if you come on to the network on satellite, as we rolled out our wireless, we would move you to the better value proposition.
One of the challenges with wireless is that it is an imperfect footprint. When you put up a tower based on topography, you have what we call "vertical clutter'' — trees. You have spots, just as with cellular, where you cannot get service.
In our business, when a dealer and installer are running out six or eight kilometres to get to a customer's home and cannot deliver service because of the challenges of topography and terrain, you have problems. You have both an unhappy customer who has been looking forward to having broadband and a dealer who is probably out-of-pocket quite a bit of money. It take be as much as half a day to get there and back. When you think of range roads in the Prairies, it is six to eight kilometres as the crow flies, but not as you run up Range Road 35 and across and down.
One thing that has enabled us to do is deal with the issue of windshield time, so that the dealer — our representative — always has a solution. If they cannot get them on wireless, they can get them on satellite.
The combination of the two technologies has been helpful. Over time, as satellite becomes more cost effective, we will be in a situation where a customer will have a value proposition. They will not care whether the service is wireless or satellite; they will care about the speed they get, the amount of throughput they get and the applications they can run on it. In that situation, I believe the two will be very comparable.
The other thing that is unique about the company — maybe not unique, but fairly different from a lot of the players — is that the Barrett family who started the company are long-term distributors of a variety of electronic products. They were early pioneers in the satellite TV business — Direct Choice, which became Star Choice. They developed an affinity for working with local business people.
We do not have our own salespeople in the community; they are local business people — akin to the local geek squad or computer jockey, the person who supports local business people and residents with their computer needs. There is a profile to the dealer. We think that is an advantage over trying to do this through telemarketing, particularly in remote communities. Having our own people would not be cost effective. Those are probably two of the most important elements.
Senator Wallace: Obviously, your success is dependent upon having a successful dealer network. As you say, through Barrett's experience, you were well on your way with that.
Mr.Maduri: It is hard to find a rural community in Canada that does not have a well-entrenched, local, IT, satellite- focused, TV-focused provider of service. In most cases, those are our folks.
Senator Fox: I have one question or maybe two, not necessarily for an answer tonight because time is running out. First, at the beginning of your presentation, you mentioned a position you took with Industry Canada to the effect that if you were to roll out in certain areas, you would start with the most underserved in the country. Do you have a paper on that and, if so, could you favour us with it?
Second, there are thousands of communities that are underserved in this country, some of them very distant communities. Is there any role for those communities to play to increase the speed of rollout?
I come back to the Cancom model. Is there potential for that type of model, either through the municipality or a cooperative that would own the downlink and, as in the Cancom model, would rebroadcast the signal?
Mr.Maduri: On the first question, the mapping, we have the entire country mapped. That has been a critical part of calculating how much satellite capacity we need, where we build wireless and where we focus our capital dollars. It is absolutely critical.
We started the business initially by using more intuitive methods that did not prove to be very effective. In the early days, we used to call into communities, call a certain sampling of customers and ask them if they had broadband. It was surprising how inaccurate that was. Ultimately, it was the mapping methodology we use today that got us there.
The challenge you have with public sector is what is the message you want to send to the private market? There are lots of examples in Canada and U.S. where public organizations have engaged in telecom. It would be interesting to do the report card on how well they have thrived or survived.
One of the advantage of the satellite capability is that it does not require a lot of on-the-ground equipment. It is in the sky and when it goes up, it goes up in one quantum size. It creates the opportunity for local business people to be dealers; and most of the dealers we have play beyond just access. They are on the IT side; they are supporting their customers beyond just Internet access. In my view, there is a significant local economic development opportunity through those dealers.
Senator Eyton: You have ambitious plans. You want to grow, which requires capital. Are you confident that the capital you require in order to grow your business as you plan and hope for is available?
Mr.Maduri: I am confident. I would emphasize two things. The first is that it is absolutely critical that we know the rules. The rules should be technologically neutral to the best extent possible and whatever engagement of government is competitively neutral. There are some key principles.
The second point is I spent 13 years working for Ted Rogers and I understand well it is a business where you have to raise capital. We have a team of people who know how to raise capital. We are looking for the right rules. Hopefully, we will not see another Q4 of 2008 or a Q1 of 2009 for a long time. We have raised capital through that period, and I am confident we will continue to raise capital as long as we know the rules. We are not inventing the need for broadband. It is there. We are servicing it, and we are finding the technology and business model that allows us to prosecute the opportunity profitably.
The Chair: Thank you, Mr.Maduri. The information you have given us has been beneficial for all of us and will be helpful in our study.
Mr.Maduri: Thank you very much.
[Translation]
The Chair: We now move to our study of the Department of Public Works and Government Services Canada user fees amendment proposal for services relating to the Esquimalt graving dock, dated May20, 2009, pursuant to the User Fees Act.
[English]
Our witnesses tonight are Mr.John McBain, Associate Assistant Deputy Minister, Real Property Branch, and Ms.Bonnie MacKenzie, Director General, Engineering Assets Strategy, from Public Works and Government Services Canada.
Welcome to our committee. Will we hear from you both?
John McBain, Associate Assistant Deputy Minister, Real Property Branch, Public Works and Government Services Canada: Yes. I will start.
Thank you for the opportunity to be here with you this evening. It is my privilege to be the Associate Assistant Deputy Minister for the Real Property Branch. Many of you may know Public Works as a custodian of office space. We house 240,000public servants in 1,800 locations across the country, but we also are a significant custodian of another type of asset called engineering assets.
Since 1841, when the department was created, we have been involved in developing the infrastructure of the country. We include in our inventory bridges, roads, dams and another category of assets called specialized assets, which include, for example, the Alaska Highway but also, most importantly, the Esquimalt Graving Dock. We are here this evening to speak with you about a proposal to adjust the fees on it. It is the most important strategic and economic asset in our inventory. It is my pleasure to introduce to you Ms.Bonnie MacKenzie, our Director General responsible for that portfolio of assets. She will take you through the deck that we will discuss with you.
Bonnie MacKenzie, Director General, Engineering Assets Strategy, Public Works and Government Services Canada: Thank you. It is a privilege to be here.
I would like to take you through the process that we followed to amend the tariff fees for the Esquimalt Graving Dock. We did it in accordance with the User Fees Act, a new act that came into being in 2004. It sets out a rigorous process.
The Esquimalt Graving Dock is the largest deep sea, shipbuilding repair facility on Canada's West Coast. It is located on Vancouver Island, near Victoria in the municipality of Esquimalt. It is the only open access, multi-user facility of its kind on the West Coast of the Americas. It is unique in the world. The other docks on the West Coast are what we consider to be closed docks, which means they are owned by a ship repair firm or shipyard and they are closed to any other shipyard.
It is a large dock. It is one of only two on the West Coast that are what we call Panamax size. Any vessel that can go through the Panama Canal can fit into our graving dock. We are easily accessible to the West Coast, the Pacific Gateway. It is on the Strait of Juan de Fuca, so it is accessible to the shipping of both Canada and the United States.
As Mr.McBain said, it is an important asset for the Government of Canada. It provides access for the federal fleet, which includes the military, so it is important for national security. It allows for competition because it provides the essential infrastructure for small and medium repair firms and support firms to the ship repair industry. It supports the federal ship building policy. At any one time, between 200 and 1,000 to 1, 500 people are working at the dock. It is an extremely important economic engine for the area.
There has been growing concern from stakeholders about the limited shipyard infrastructure capability on the West Coast. It has been diminishing over the years and, without the Esquimalt Graving Dock, the infrastructure that would remain would be monopolistic at best. This is a common user facility. The open access facility provides for a competitive shipbuilding industry because it allows shipyards that do not have infrastructure to be able to bid on ship repair contracts.
Due to the legislative tariff regime of the Esquimalt Graving Dock, fees for the dock are regulated under the Public Works and Government Services Act. It has been very difficult to change the fees. They have not been changed since 1995, so we have been operating at an annual operating loss since that time.
In 1985, the Nielsen Task Force on Program Review recommended that the Government of Canada divest itself of all non-essential land and marine assets that were not core to government programs. This facility then fell on the divestiture list. Because of the divestiture list, it became difficult for us to get funding to maintain this asset. Because of the uncertainty on whether the asset would remain open, it created a difficult situation for the ship repair industry on the coast to make long-term plans or capital funding. As part of the government's recent decision to remove it from the divestiture list, we committed at the time to ensure that we would get it on a self-financing and sustainable financial footprint.
We then proceeded under the process as outlined under the User Fees Act, which requested that we do a thorough and robust consultation process with the users of the dock. We had to do an impact assessment on what a fee increase would mean. We had to look at establishing service standards that the users would agree to and that we would be held accountable for. Finally, we had to look at trying to get compliance and unanimity around the users for a fee increase at this time. At the end of the process, the proposal is to be tabled in the committees, and that is why I am here today.
During the consultation process — and as I said, it was robust and thorough — the users basically felt that to go from a 1995 rate to a 2009 rate in one fell swoop was too economically hard on them. They asked us to phase in the increase over a five-year period, so we are recommending a tariff increase that is stepped over five years.
The other element we have put in with the tariff arrangement is a means of ensuring that we do not fall behind in the future. We have an economic increase built into the rate so that after we reach cost recovery and recover all our costs, we will automatically, every year, increase the rates by the Bank of Canada bond rate.
The act prescribes a lengthy process. We started consultations in 2006 and completed them in 2008. The consultations identified several recommendations that our clients wanted us to look at. The first was that we should increase the ancillary tariffs, which are not the dockage fees per se but all the other utilities, to market or near market at the onset of the increase. The second was that the dock tariffs should be sectionbased and not give a discount for using more than one section, since currently, the dock tariff is weight-based only. It is an unfair and inequitable way of charging for vessels. We have now come up with a blended tariff that is not only weight based, but is also sectional.
Third, as I said, they wanted the tariff increase spread over a five-year period, with increments for the dock charges, and that there would be an adjustment for inflation built into the fees, which we have done.
We charge a booking fee for ship repair firms to bring a vessel into the dock. So their fourth point was that they wanted the fee capped at $5,000, and that is specifically for federal clients. That is their authority level to make a booking.
Finally, our clients looked at a couple of other items, which, at the end of the consultation, they felt were too difficult to implement.
We are now tabling this. We have done further extensive impact analysis. We have looked at it from not only the type of shipyard but also the type of vessel. We have been able to get agreement from the users. We sent them a formal notice on November2, 2007, according to the act, which allows them to file a formal complaint. If they had any complaints, those complaints were filed and dealt with and they were then withdrawn. We had acceptance, so all the concerns were addressed.
We are doing this now because we committed to the government that we would get it onto a cost-recovery framework. It is also government policy that we recover costs for all our assets, and we have not been doing that since 1995. The subsidization of this dock has been a significant irritant to most of the shipyards in Canada, and we have been looking at trying to fix that for them for a long time. We are looking at how we will stabilize the dock for sustainability, now that we know that it will remain as an asset of Canada. The shipyards want us to get on with improving the rates and getting the rates to where they should be so they can do long-term business planning. That is where we are today.
Mr.McBain: Thank you for the opportunity to present our proposal to the committee. We would be pleased to entertain questions at this time.
The Chair: Can you tell the members of the committee how long an average stay for a boat repair is?
Ms.MacKenzie: It varies dramatically, depending on the vessel. Our major classes of vessels are, first, our domestic fleet, which is our federal fleet, which includes all the military vessels, Coast Guard and RCMP boats, etcetera. Normally, when the vessels come into the graving dock, they stay there for quite some time because there is no shift work done. The government, for budget considerations, does not pay for shift work, for overtime or for weekends.
If you are dealing with a cruise ship, for example, or a foreign fleet or a commercial vessel, time is money for them. While the vessel is in a dock, they are not making money, so they get the vessel in and get it out. They work three shifts, 24 hours a day, to get the vessels in and out. The stay for a boat repair varies depending on the type of vessel and the owner of the vessel.
The Chair: Can you tell us how much money an average stay would cost this year, and also in five years, with the amendment of the tariff structure? Would you know?
Ms.MacKenzie: No. Again, that depends on the vessel. Currently, we are making approximately $6.4 million in revenue a year, and at the end of five years we will be making $15.4million, based on our forecasted revenues and the bookings that we have.
The Chair: Due to concerns of the users, you have proposed that changes in the tariffs be phased in over five years. At the end of the five-year period will the Esquimalt Graving Dock be able to compete with other shipyards offering the same kinds of services elsewhere on the West Coast of North America, or even South America?
Ms.MacKenzie: As I said, the dock is unique. All we provide is infrastructure. All the other shipyards have their own dock. When they look at getting a booking or a repair contract in their dock, they usually include the cost of the infrastructure in their repair costs. We do not have the ability to compare our dock to theirs.
What we can say, though, is that the impact analysis by the shipyards themselves has said that the increase in our dock fees should not in any way limit them from getting future bookings. There are other issues that affect their ability to get a booking.
The work that is done in our dock is brought in by the shipyards. All we do is provide the infrastructure. The shipyards themselves feel that the increase in the dock fees, since it is mostly for them a pass-through to their customers, will not be a deterrent for them to get ship repair contracts. What affects that more are events such as the recession and the cost of the Canadian dollar, and so on. Our dockage costs vary with the contracts, but they are traditionally about 3percent to 7percent of a ship repair contract.
The Chair: Will the tariff be adjusted automatically after five years?
Ms.MacKenzie: Yes, it will be.
The Chair: Will the tariff be inflation adjusted or will it also take into account the true cost to run the operation of the Esquimalt Graving Dock?
Ms.MacKenzie: The tariff will be inflation adjusted. It will be based on the Bank of Canada bond rate rather than the CPI. We are not going through a review, because of the regulations and the length of time it takes — it took four years to do this — to be able to continue to look at the costs. There is a chance that we will not be recovering the cost with this inflation rate, but it is certainly better than where we are today.
Senator Zimmer: Madam Chair, you covered my questions. You are so thorough that you asked everything I wanted to ask.
Senator Hervieux-Payette: In my mind, when you talked about the cost, it was like people paying to rent space. You renovate, and now they can do the repair, but you have nothing to do with the repair. I want to understand what we are talking about. What the people are paying, your $6 million, would be like renting a space for repair?
Ms.MacKenzie: They pay to make a booking to bring their vessel into the dock. They then pay for any services that they use there, such as cranes to take things onto and off the vessel. They use air for sandblasting. They use freshwater. We charge them for emptying and filling the dock; and tug boat services, etcetera. They pay for our services and they pay a dockage fee that is based on the sections. The graving dock can be divided into three sections. If they are using all three sections or only one section, they pay by the sectionand by the weight.
Senator Hervieux-Payette: It is easier to understand.
Ms.MacKenzie: It is a unique business model. As I said, it is found nowhere else.
Senator Wallace: At page10, it says that the goal of the consultation process was to bring the asset to a cost recovery position. Later, it says that the tariffs should increase to market or near market levels. Is the costing model based on just cost recovery only or is the idea to bring it to a market rate that would be comparable to yards elsewhere? Is there an element of profit?
Ms.MacKenzie: There is no element of profit. The User Fees Act is clear: We can only recover costs; we cannot recover deferred maintenance or requirements where we have not kept the asset up-to-date. The government must deal with that. As well, you cannot recover things such as future expansion or growth. Only costs can be recovered.
We had to look at how we would get to that cost. One of the recommendations for hydro and water was that the users wanted us to bring it as close to market costs as we could because those costs were readily known in the marketplace. We used a blended formula to bring all 22 elements to a point where we were recovering our costs but not going over.
Senator Wallace: In providing for future upgrading of the facility, is the cost of capital costs or depreciation factored in?
Ms.MacKenzie: We budgeted $2.2 million for capital costs, which is being spent currently by the department. Anything significant over that amount, and infrastructure usually requires many zeros, will require a separate funding approach.
Senator Wallace: I believe that you said your current revenues are about $6.4 million per year and are projected to be $15.4 per year in five years?
Ms.MacKenzie: Yes.
Senator Wallace: On page5 this is a reference to supporting 1,000 jobs in the Victoria area. Is that a current figure? I assume it depends on the volume of work in the yard. Is that an average over time or is that what you project going forward? How many jobs will be created from this?
Ms.MacKenzie: At this time, the majority of the booking that we have in the graving dock over the next few years is federal work. We can guarantee that the average will be around 850. When we have cruise ships, it can increase to as many as 3,000 because they do a total remodel. Recently, we had a cruise ship in dock for a total remodel that required 2,800 workers on site. The average is about 1,000. At low times in this cyclical business, it would be around 250. Much of the work is temporary and workers are brought in as needed. It is not 1,000 full-time jobs, but is made up of many different parts.
Senator Wallace: Is maintaining the West Coast fishing fleet part of the market that you are helping to service with this facility.
Ms.MacKenzie: Yes. The market we serve is, first, our domestic fleet, which is both federal and provincial because of the huge British Columbia ferry transportation fleet. We service the foreign fleet, which is oil tankers, cargo tankers and cruise ships. The other is the domestic market, which includes barges, tugs, fishing fleets, fishing boats and fishing factories on the West Coast.
Senator Fox: I see in your background paper that the Esquimalt Graving Dock is the only open access facility on the west coast of the Americas. How do you ensure that you are cost competitive? Is there no competition? How do you stack up against the competition if there is any? How do you ensure that you are running an efficient operation?
Ms.MacKenzie: Basically, there is no competition. As I said, the only other competition for a dock is owned by a shipyard and we can never find out how much they charge. They will not tell us because it is proprietary information. They could include the costs or not include the costs when they bid on something; it is up to their business model.
There are a couple of similar situations to our dock, mostly over in the Middle East. However, because of their political regimes and how they determine who can access the facility, they will not share their pricing with us. It would not be available to our market.
You cannot look at whether our dock is competitive but to whether the shipyards that work there are competitive with other shipyards. The shipyards to the south of us, in the United States, are not open either. They are owned by a shipyard. We are doing so well where we are because the shipyards in the United States are closed and used mostly for military work. The United States will not allow military and commercial work to happen in the same yard at the same time. If you are a commercial operator and you need to have your vessel fixed or repaired, then you come up the coast to Canada or go through the Panama Canal to South America or the Middle East. You would do that only if the company that owns the dock repairs your vessel.
We have had a consultant try to look at cost comparisons for us because efficiency is a big issue for us. Basically, they said that they cannot do it because there is nothing out there that does what we do. That is why there was such pressure on us from the industry and Industry Canada to ensure that the open access part of public policy was still met for our dock.
Senator Fox: During your consultation process, did any of the major users of your facility complain about costs? Did any of them say that the increase in cost would have a negative affect on their business?
Ms.MacKenzie: They all complained about an increase in cost. Let us face it — no one is happy about this. Fees have not been increased since 1985 because there has been a huge subsidy. It was a big issue but they all recognized that the costs had to change.
One complaint we received was from the largest shipyard on the West Coast, which is Victoria Shipyards owned by Washington Marine. They complained about our overhead and felt that it was not competitive with the private sector. It is not competitive, but it is what it is and Treasury Board policy tells us to recover full coast so that is what we do. However, they did not say it would impact their business in any way. Much of their business is the federal government. They pass the costs on to their clients and it is not an issue for them. More of an issue for them happens to be the Canadian dollar, and it is making them a little nervous. The dock rates will not impact their business one way or the other.
There are two kinds of small and medium shipyard enterprises on the West Coast. Those who do not use the dock and have their own dock facilities are looking forward to the increase in the fees because they hope this will get them more work. We will then be on the same playing field in that people will not be coming to the yards because we are cheaper. The way we have blended the rates will make it more cost-effective for a company or an owner of small vessels to have them done in other yards as opposed to our dock.
The small and medium-sized enterprises that use our dock and have no infrastructure of their own so they are housed on our facility and use our dock for their repair business.
They are going to have a problem. It depends on their business model. It depends on how efficient they can be and the niche market they are going after. There are only three of them but they will see an increase in their cost. As to whether that will impact their business significantly for them to be concerned, they felt at the time that with enough notice they would be able to accommodate it. They agreed to the increase in costs. We will wait to see.
Senator Merchant: Is there provision for a review mechanism in the future?
Ms.MacKenzie: Yes. We have said that we will sit down with the users and we will review in one year's time, once we have had a full year of the implementation, to determine whether we have the formula right. If we do not, we will then look at other things outside the regulations that we can do to get it to where it should be. If we cannot, then we will have to undergo a formal change if they insist that we do that, and unfortunately that is another four-year process. It is a significant effort. I have to give thanks to the ship repair firms because they put a lot of time and effort into this, working with us to ensure we got this right. We will be reviewing it, though.
Senator Eyton: I am sorry, I was out of the room for a minute and I missed the first part of your presentation but I have scanned it and I think I understand it pretty well.
Your first comment was that EGD has historically operated at an annual loss. What kind of annual loss has it been incurring? For example, what was the loss last year?
Ms.MacKenzie: Last year we lost $6 million. Our revenues cover 50percent of our cost.
Senator Eyton: Your revenue last year was $6.4 million?
Ms.MacKenzie: It was 6.4 and we lost 6.
Senator Eyton: What capacity were you running at, in terms of your potential? Were you at 20percent or 30percent?
Ms.MacKenzie: No, we have been at almost full capacity now for a number of years. We will be at full capacity up to about 2013 and we have bookings further beyond that as well.
What we are trying to do with the rates is to change our capacity loading by changing the culture and the behaviour of some of our clients so that they get their vessels in and out quicker, which would then free up more capacity. If you get a frigate sitting in our dock for six or seven months, it takes up two sections. It is a real impediment to the shipyards out there to actually maintain a viable business model when the only dockage available to them on the West Coast is our dock and you cannot get in there.
Senator Eyton: Do you turn people away?
Ms.MacKenzie: Constantly.
Senator Eyton: Do you not have to do that to manage something efficiently and effectively? "No, you cannot come in; I cannot accommodate you.''
Ms.MacKenzie: No. For the shipyards we do a booking system for, it is first come, first served. The booking is on a website. They all know what the bookings are. We do not turn them away. If they want to bid on a piece of work, before they put their bid out to the private sector they look to see whether they can get a docking. If they cannot get a docking, they do not bid.
Senator Eyton: If you are losing $6 million, that is not bad.
Ms.MacKenzie: We are losing money, but the bigger issue certainly for Canadians is that the shipyards are losing money. They are losing opportunity.
Senator Eyton: You talked earlier about a workforce. You said the workforce varied from a few hundred to 3,000, I think was the number, depending on the job and the ships that were in there. How can anyone ever run a business like that? From what I understand, EGD owns the infrastructure. There are different people who go in there. Is the workforce made up of different teams and individuals and they book in and go in and use it?
Ms.MacKenzie: No, the shipyard books it and they bring the vessel in, and they bring all the workers in.
Senator Eyton: That is what I meant. The repairmen must vary then.
Ms.MacKenzie: They vary totally, depending on the job.
Senator Eyton: Would it not be a good idea to have specially qualified people, a core group, that had fine talent and fine abilities, which would be therefore more efficient? I can see team1, team 2, team 10 and team 12. How would you ever manage that?
Ms.MacKenzie: The shipyards, such as Victoria Shipyards or Canadian Maritime Engineering, have their own core people. They have their own shipyard workers that do most of their work. When we get up to 3,000, we are talking about a cruise ship where you have people who are goldsmiths and marble workers when they gut a cruise ship and then remodel the inside. You have tapestry people and fine craftsmen. Those people are hired for the job. The main unions that we have working there through the shipyards have a core group of about 250 full-time employees who are machinists, electricians, metal workers, aluminum welders and those types of people. They have enough business to keep them going full time.
Senator Eyton: Do you think that they may be reasonably efficient?
Ms.MacKenzie: Yes. They are highly skilled, too. One of the issues on the West Coast now is the lack of skilled workers to be able to grow the business as much as we would like to see it grow.
Mr.McBain: Just to underline part of the problem with not recovering our costs is that we are working with tariffs established in 1995 and have not been able to update them to current numbers. That includes our inability to recover our capital investment, which is what makes that big gap between the revenues we recover and the costs we incur.
The dock is at 70percent capacity until 2013 and we have bookings as far ahead as 2019. In terms of demand for the dock, it is high. We want to put it on an equitable footing to recover the costs that we incur to operate.
Senator Eyton: You made a commitment. You are saying you are ensuring the dock has a self-sustaining financial framework based on cost recovery. Someone invented a whole lot of rules that almost make it impossible. It says that is okay; the transition from the current tariff, which is way too low, should be spread over a five-year period with equal increments to dock charges each year. There is a therefore, and that is a guarantee that there will not be cost recovery in the first five years.
Ms.MacKenzie: No, we will not be. We will be running at a loss for the first five years.
Senator Eyton: That is inconsistent with the general approach. Then you say that the tariff structure should include an inflation adjustment. Were you certain about that? You talked about Bank of Canada bonds.
Ms.MacKenzie: The way the tariff is structured is that the dockage is stepped. We are recovering almost all the dockage in the first year except for the stepped 3percent every year for five years, so the accumulated projected loss over the five-year step is $6.9 million, which is equal to one year's loss now. At the end of five years we hope to be at a fully cost-recovered basis and then from that point forward the rates automatically get adjusted by the Bank of Canada bond rate.
Senator Eyton: That assumes the competition does not do anything either; they stay flat. Presumably they will be moving while you are moving.
Ms.MacKenzie: Yes.
Senator Eyton: Then you say the booking fee should not exceed $5,000 including GST, as federal government department authorities are limited to $5,000. That seems like a weird rationale.
Ms.MacKenzie: When we looked at the formula, because there are 22 elements in how we can change the rates, we started with a clean sheet and said, "What do we want to do with each one of these elements?'' One of elements was the booking fee. The user said, "Why not just triple the booking fee and start with that?'' When we looked at it we said, "Well, we cannot. That will limit the federal government's ability on the West Coast to be able to make bookings under their current Treasury Board authority.'' Then we said that the maximum it can be is $5,000.
Mr.McBain: For clarification on the booking fee, that is the reservation fee.
Senator Eyton: That is not a big number. The idea of a manpower levy charge is not easily workable and it is rejected. It means that a job will be priced the same on your sectionrental or fee. However, a good customer or a large customer does not get any break at all. Would that be correct?
Ms.MacKenzie: A large customer for a large job such as cruise ship does not, no.
Senator Eyton: There is nothing about manpower?
Ms.MacKenzie: No. They wanted to look at manpower but the premise was that if you are using a lot of people on the dock, the impact on the infrastructure is a lot higher and there should be a way to have a fee to cover that.
Under our regulations, we are limited on what we can charge for; it is legislated and we cannot change it. We were open to everything but there was no way to get the users to agree to a formula that we could implement under our regulations that would meet those objectives. That was another issue that was rejected at the time.
Senator Eyton: The big guys will be paying on the same basis?
Ms.MacKenzie: That is correct.
Senator Eyton: The seasonal discount concept was considered to be too difficult to implement without encouraging potential problems. There are busy seasons and less busy seasons, I assume, but you wipe that out too. You have rules that make it hard for full cost recovery.
Ms.MacKenzie: We did what we could with the tariff structure and the regulations we have. We worked with the users to sit there and say, "Here is the amount of money that we have to recover. Here are the 22 elements. Work with us to get there.'' There were extensive consultations and everyone came up with a lot of ideas because it has not been done for 15 years. We wanted to make sure that every idea was looked at. They appreciated the opportunity to be able to think outside the box and to see if there were things that could or could not be done.
Senator Eyton: This is out of left field, but I am involved with the Standing Joint Committee on Scrutiny of Regulations. I notice that the fee structure you outlined includes an adjustment for inflation. The point I will make here — and I underline it for your consideration — is that I hope your enabling legislation permits you to do that.
There is a real question mark about what we call automatic increases in scenarios where you are obliged to set tariffs or fees on a certain basis. In general, that does not include the ability to hand it off to automatic adjustments because of the cost of living or other factors.
Ms.MacKenzie: Thank you for that. When we first started down this road, we consulted with officials of both the Department of Justice and the Treasury Board. However, I will verify it again to make sure that we do have that capability.
Senator Eyton: The joint committee, representing both houses, has differences with the Department of Justice on that very point.
Senator Adams: I am on the Senate Standing Committee on Fisheries and Oceans. We have been talking about the Diefenbaker icebreaker. The Coast Guard has told us that it will not be ready until sometime in 2027. Is there a process of tenders that they are working on through Public Works? Are we going to build it in Canada or in some other country? How far along is the Diefenbaker icebreaker?
Ms.MacKenzie: At this point in time, it still has not gone out to tender; it is in the design and planning stage. It is before government as to when and if it will proceed.
Our marine procurement legislation at this time provides that it is to be done in Canada. It will be built in Canada, but whether it is done in a yard on the East or on the West coast will be based on the tender process.
Senator Adams: Will it be built in Canada or would you tender to another country like Russia or the United States?
Ms.MacKenzie: Federal marine procurement is exempt under tariff limitations and it will be built in Canada.
Senator Adams: Are you able to tell me what thickness of ice it will break up in metres? Is it a class 8 or class 7 icebreaker?
Ms.MacKenzie: A class 8 ice breaker like the Polar 8?. At this time, I am not privy to that information. I know there are some concerns around the environment and what the ice breaker will be up in the North. They refer to it as slush breakers now. I am not familiar with that information at all, I am sorry.
Senator Adams: Do you have any idea if the Louis S.St.Laurent is a class 5 or a class 6 icebreaker?
Ms.MacKenzie: It is a class 5, I believe.
Senator Adams: I was on it six or seven years ago. We travelled from Resolute to Coppermine. We tried to go through the permanent ice. I wanted to know if that was class 7 or a class 8. It might be different in 10 years, with global warming and so on. This year, we do not have global warming in Arctic. I was up in Rankin Inlet last week and hardly any snow was melting. A couple of days ago, the wind chill was minus 25.
You say it is still forecast for 2027?
Ms.MacKenzie: That is the last I heard. That is really not our portfolio. I cannot speak very much to it other than one of the things we do for the graving dock is look at what potential work might be coming down. We have bookings so far in advance that the ice breaker has been flagged to us as a possibility. There may be a possibility for it to be built on the West Coast but we do not have any information on that.
Senator Adams: I approached the Coast Guard last fall in October. I do not know if we will have ice breakers in Nunavut in the future. The Prime Minister was campaigning at one time in Nanisivik about getting navy vessels there, especially last fall. I was going to ask if DFO would be able to rescue the narwhals that are caught up in Pond Inlet. DFO has said that only 200 were trapped in the ice but about 570 whales were destroyed last year.
I do not know what happens with DFO in the North. There is a fishery still up in the Baffin Strait, fishing for either shrimp fishing or turbot. Last year, some fishermen were crossing at Hudson Strait and they got caught in the ice. A plane was able to land but it went through the ice. Both people were able to jump off it but they had to wait 24 hours, standing out on the ice before the Enterprise got there to rescue them. If we are to have an ice breaker there in the future, then why does it come down to the south every fall? If we are we going to protect Arctic sovereignty, then they should be there for more than one week.
I understand that you are not a politician.
I hope the new icebreaker will be built and will be serving in the northern communities in the future.
Senator Hervieux-Payette: I have a short question. Senator Eyton and I both sit on the Standing Joint Committee on Scrutiny of Regulations. First, you have come before this committee; are you going also before the House of Commons committee? Second, will the committee receive the new regulations that have gone through all the processes for expeditious approval where the regulation is well drafted and does not present any difficulty with our lawyers? What is the process once we have finished this meeting? The committee does not adopt the regulations. The regulations go through their own process.
The Chair: There is the amendment process.
Senator Hervieux-Payette: I want to know where it goes after that.
The Chair: It goes back to the chamber.
Ms.MacKenzie: It has been tabled both with the House of Commons Standing Committee on Operations and Estimates and also with this Senate committee. After you make your recommendations, it then goes to the minister. The minister, under the User Fees Act, decides whether he wishes to proceed, amend or cancel. If he wishes to proceed, then we go through the regulatory process. We have just done the user fee side. Now we go through the regulatory process, in which case we then file a Treasury Board submission for a change in fees under the regulations. We publish it in the Canada Gazette and follow that process. You will see it through the regular process, yes.
Senator Hervieux-Payette: That was my question. I do not think there is any opposition. It is a long process. You have my sympathy.
Ms.MacKenzie: Thank you.
The Chair: Any other questions, senators?
Thank you so much, Ms.MacKenzie and Mr.McBain for your presence here.
Does the committee wish to discuss observations?
Senator Fox: Report back to the Senate.
The Chair: That is my second question. Is it agreed we report the proposal back to the Senate?
Hon. Senators: Agreed.
The Chair: You do not need observations?
Hon. Senators: No.
The Chair: Is it agreed unanimously we report the proposal back to the Senate?
Hon. Senators: Agreed.
The Chair: Thank you very much. We will adjourn until next Wednesday at six o'clock when the minister will come to discuss BillC-7.
(The committee adjourned.)