Proceedings of the Standing Senate Committee on
National Finance
Issue 7 - Evidence - May 26, 2010
OTTAWA, Wednesday, May 26, 2010
The Standing Senate Committee on National Finance met this day at 6:45 p.m. to examine the costs and benefits of Canada's one-cent coin to Canadian taxpayers and the overall Canadian economy.
Senator Irving Gerstein (Deputy Chair) in the chair.
[English]
The Deputy Chair: Honourable senators, it is a pleasure to call to order this meeting of the Standing Senate Committee on National Finance.
As you will recall, on April 27 of this year, this committee was authorized by the Senate to examine the costs and benefits of Canada's one-cent coin to taxpayers and the Canadian economy.
Our terms of reference indicate that the committee is to take particular notice of the recent cost-saving changes to Canada's currency system announced by the Royal Canadian Mint and how the future of the penny might fit in with those changes; the direct cost to taxpayers of producing and distributing one-cent coins in relation to their face value; the costs and productivity implications for Canadian businesses in light of the counting, handling and redistribution requirements of the coin; and international experiences with eliminating low-denomination coins.
Having said that, I want you all to know we are not limited to those considerations. We are, of course, free to go wherever the evidence might lead us. There may be considerations that we have not yet anticipated.
By way of background, many scholars and commentators have suggested that the penny has outlived its usefulness — that it is, in fact, a piece of currency that lacks currency. Many other countries have already eliminated their lowest denomination coins. Over the years, there have been sporadic calls for Canada to follow suit. However, while costs are associated with producing and using pennies, costs may also be associated with eliminating them. In the course of our study, the committee hopes to gain full and firm understanding of the implications of both options.
It is my pleasure this evening to welcome on behalf of the committee a number of witnesses from relevant federal government bodies who will help us kick off our deliberations on this issue. From the Royal Canadian Mint, we welcome Beverley A. Lepine, Chief Operating Officer, and J. Marc Brûlé, Chief Financial Officer. From the Department of Finance Canada, we welcome Wayne Foster, Director, Financial Markets Division, Financial Sector Policy Branch, and Ian Wright, Chief, Government Financing, Financial Sector Policy Branch. Finally, from the Bank of Canada, we welcome Deputy Governor Pierre Duguay.
Colleagues, I particularly appreciate Mr. Duguay appearing before us tonight. The Bank of Canada will make an announcement concerning interest rates in the near future, and this meeting falls within their blackout or no-comment period. As such, to avoid putting Mr. Duguay in a difficult position, and to allow him to respect the bank's blackout policy, your cooperation in avoiding questions relating to monetary policy and the economic outlook is greatly appreciated.
With that, I am pleased to invite opening remarks from the witnesses.
Wayne Foster, Director, Financial Markets Division, Financial Sector Policy Branch, Department of Finance Canada: I want to thank the chair and this committee for inviting me and my colleagues from the Department of Finance, from the Royal Canadian Mint and from the Bank of Canada to speak with you today about the one-cent coin, more commonly known as the penny.
Your review is timely. As you are aware, the government announced measures in Budget 2010 to modernize Canada's currency system, including the Bank of Canada's plans for issuing a new series of bank notes and changing the composition of the $1 and $2 coins produced by the mint. We will be interested to hear your conclusions and recommendations with regard to the future of the penny.
First, I want to clarify the relationship between the Department of Finance, the Minister of Finance and the Royal Canadian Mint with regards to Canadian circulating coins. It is a good relationship indeed, I might say.
Under the provisions of the Royal Canadian Mint Act, the Minister of Finance has the authority to take delivery of Canadian circulating coins produced by the mint. The act also provides authority for the minister to pay the mint for the production, storage and movement of coins. The terms and conditions for these activities and related costs are defined in a memorandum of understanding between the department and the Royal Canadian Mint.
The objective of the coinage system and all denominations within it is to meet the payment needs of Canadians and the economy, overall. Any decision to change the coinage system will be taken by the Government of Canada in consultation with the mint. Such a decision will take into consideration the effect of this action on consumers and businesses, among other things.
The Department of Finance Canada and the mint meet regularly to discuss coinage matters and the functioning of the coinage system. While pennies are still used today by Canadians as a method of payment, we realize many people also hoard pennies and do not recirculate them. Maybe some of you do that. It is not uncommon to see a bowl of pennies at a checkout counter where consumers can leave behind the pennies they receive in change, or perhaps take a penny and not have to receive pennies in change.
The purchasing power of low-denomination coins has decreased over time. As you mentioned, chair, many countries have taken the decision to eliminate their lowest denomination coins. In the early 1970s, Sweden withdrew its two lowest denomination coins. New Zealand ceased producing and began withdrawing its one-cent and two-cent coins from circulation in 1989 and its five-cent coin in 2006. Australia began removing its one-cent and two-cent coins in 1992, and we understand it is also now considering removing its five-cent coin. Reviewing the experiences of these countries among others would be a valuable exercise for this committee.
In closing, I thank the chair and the honourable committee members for this opportunity. I and my colleagues will be pleased to answer your questions. At the same time, we, at the department, hope to learn from the results of your comprehensive review of this matter.
Beverley A. Lepine, Chief Operating Officer, Royal Canadian Mint: I want to thank the chair and the honourable members for inviting the Royal Canadian Mint to return to this committee after our appearance in October of last year.
[Translation]
I was pleased to appear with Mint President and CEO Ian E. Bennett and Vice-President Marguerite Nadeau for an exchange on the many aspects of the Mint's profitable and successful business activities.
It is my pleasure to be back today, with my colleague Marc Brûlé, who is the Mint's Chief Financial Officer, to contribute to the discussion on the one-cent circulation coin, with you and our fellow witnesses from the Department of Finance and the Bank of Canada.
[English]
I think it will help frame today's discussion if I start with a brief overview of the mint. The mint is a commercial Crown corporation mandated to make a profit for its shareholder, the Government of Canada. We are responsible for the production, from our high-speed manufacturing facility in Winnipeg, Manitoba, of circulation coins for Canada and for the inventory management and distribution of coins across the country.
[Translation]
We also operate three other business lines: foreign business; numismatics (or collector coins), which we occasionally produce for foreign customers as well; and bullion and refinery services.
[English]
Our core mandate is to produce and manage the distribution of Canada's circulation coins, as well as provide advice to the Government of Canada on matters relating to coinage. In that regard, the Royal Canadian Mint works closely, and has a wonderful relationship, with our colleagues in the Department of Finance Canada.
I will clarify at this point that the decision to introduce into circulation, or eliminate a denomination, ultimately rests with the Government of Canada through the Department of Finance Canada.
We also work with financial institutions and armoured car companies to manage the circulation of these coins through a network of distribution centres across Canada. This management requires timely production of Canadian circulation coins, which we consistently supply, in response to market demand. By virtue of this approach, we avoid building any significant inventories and prevent shortages of denominations, as coins circulate to meet the fluctuating needs of Canadian trade and commerce.
To further reduce the volume of coin production, the mint is engaged actively in the recycling of Canadian circulation coins. In cooperation with a partner, Canadians are encouraged to recycle their coins at several retail locations in Ontario and Quebec, from which a large percentage of Canada's coins currently circulate.
Over 65 per cent of recycled coins are pennies.
Recycling also reduces our annual coin production by approximately 50 per cent. As it is cheaper to recycle a coin than it is to produce it, this initiative saves money for the Government of Canada and ultimately, the Canadian taxpayer.
To further save money for the Government of Canada, the one-cent coin, previously made of copper, was first plated in 1996. In 2000, those savings were further increased when the mint applied its patented process called multi-ply plating to produce the one-cent circulation coin as well as Canada's five-, 10- and 25-cent circulation coins, saving over $20 million annually. This technology developed by the mint's own engineers is a Canadian-made technical innovation that produces circulation coins that are of high quality yet uses minimal amounts of costly metals such as copper and nickel.
Unlike any of our competitors in the world markets, we are able to keep the material costs of producing a penny below one cent per coin. However, with the addition of manufacturing and distribution costs, the total unit price of putting a penny into circulation is higher than one cent.
The success of our technology has gained international interest, which has helped us grow our foreign circulation business line into an increasingly important profit centre. Our multi-ply technology offers central banks around the world a cost-effective alternative to their expensive 100-per-cent alloy coins.
We saw a pronounced shift occur when New Zealand changed all its coins to our technology in 2005, and saved millions of dollars as a result of this decision. Since then, our multi-ply plating solution has won us valuable business around the world.
Although the mint maintains the flexibility to strike either alloy or plated products for foreign customers, multi-ply plated products has accounted for over 50 per cent of our foreign circulation coinage volumes over the last five years. As the chair indicated, in its March budget statement, the government announced its intention to generate savings of $15 million annually by changing the composition of our $1 and $2 circulation coins from their current expensive alloys to the mint's patented multi-ply plated technology.
The mint is proud of the crucial role it plays in supporting the growth of Canadian trade and commerce, and equally proud that it does so in a consistently profitable manner. At $68.6 million, the mint recorded its highest-ever profit in 2009 which eclipsed the already record profit we posted in 2008. Our ability to meet and surpass our customers' expectations by combining value, quality and innovation has given the Royal Canadian Mint a sterling reputation in the world.
[Translation]
Canadians can take pride in what their mint accomplished to date and we look forward to the future achievements, which will benefit our shareholder and the people of Canada.
[English]
Thank you again for inviting the Royal Canadian Mint to appear before the committee today. It will be a pleasure to answer any questions you might have.
Pierre Duguay, Deputy Governor, Bank of Canada: Good evening, honourable senators. I am pleased to have the opportunity to appear before you tonight to provide the Bank of Canada's perspective on the penny. It is particularly meaningful to be in this building, which housed the Bank of Canada in its first years of existence when it opened its doors 75 years ago.
Let me take a moment to explain the bank's role regarding Canada's currency. We are responsible for supplying Canadians with banknotes that they can use with confidence. At the end of last year, 1.8 billion bank notes were in circulation, with a total value of $55.5 billion, which is approximately a little over $1,600 per Canadian.
The Bank of Canada is not responsible for coins, as was previously mentioned. Decisions on coinage rest with the federal government, in particular, the Department of Finance Canada and the Royal Canadian Mint. However, coins are an essential adjunct to banknotes to complete cash transactions. Therefore, the Bank of Canada has an interest in coins. We welcome your review of the case for keeping or eliminating the penny.
Cash remains important to Canadians despite the popularity of alternative payment options. Surveys by the Bank of Canada found that almost three quarters of Canadians pay with cash at least once a week. This payment option compares with 64 per cent for debit cards and 36 per cent for credit cards. These surveys show that cash is a preferred method of payment for purchases under $25. Debit cards are preferred for purchases between $25 and $100. Credit cards are the preferred option for purchases greater than $100.
[Translation]
The bank's interest in coins can also be viewed in the context of our responsibility for monetary policy, which is anchored in our commitment to achieve our 2 per cent target for inflation, established in conjunction with the Government of Canada. Experience has shown that the best way for monetary policy to contribute to economic performance is by keeping inflation low, stable, and predictable. Therefore, the bank views the possible elimination of the penny in terms of the potential impact on inflation, and has conducted some preliminary research on this issue. The findings, which have been made available to other researchers, show that any impact on inflation would be insignificant and more likely non-existent.
[English]
A common concern is that retailers, who often post prices ending in 9 cents, may round up prices to an even number in the absence of the penny, and that this action will be inflationary. This concern is unwarranted for a number of reasons.
First, even if the elimination of the penny resulted in rounding up prices to the nearest multiple of 5 cents — which I will argue later is unlikely — that increase will be a one-time price increase and not a change in the trend of inflation. Inflation is a continuous rise in the price level.
Second, this one-time price increase of one or two cents will be so small relative to the price of items making up the basket of goods and services priced by the total Consumer Price Index that it will not register even though the CPI is rounded to the nearest one tenth of one per cent.
Third, it is unlikely that the price of items will be rounded up since such rounding will not carry through to the cash register after sales taxes are applied. Also, if retailers round up, they will lose the perceived marketing benefit of posting a price ending in 9 cents. Typically, retailers post $19.99 because they do not want to show $20, which is a psychological barrier.
[Translation]
In the absence of a penny, rounding would only need come into play in cash transactions and would apply to the total bill after tax, and not to each individual item purchased. If applied symmetrically, rounding down of cash purchases ending in 1, 2, 6, and 7 cents would offset the rounding up of those ending in 3, 4, 8, and 9 cents. It is more or less because these things balance each other out that some shopkeepers, for example, have a ``take a penny/leave a penny'' jar.
[English]
In New Zealand, the choice of rounding up or down on cash transactions was left totally to retailers after the country eliminated its one- and two-cent coins in 1989. Many larger retailers opted to round down as a marketing strategy and a few small retailers opted to round up prices. Ultimately, there was no noticeable effect on inflation in New Zealand, as we had predicted.
In Australia and New Zealand, the elimination of small coins — the one-cent and two-cent coins in Australia and New Zealand and also the five-cent coin in New Zealand — had no noticeable effect on inflation.
[Translation]
Inflation, however, does have an influence on the value of the penny. Since the coin was first produced by the Royal Canadian Mint in 1908, the penny has lost 95 per cent of its purchasing power. In other words, the penny then had the same purchasing power as 20 cents would today. Indeed, in 1908, you could buy your daily newspaper for two cents, and a loaf of bread cost five cents.
[English]
I thank you again for your invitation to appear this evening. I welcome the opportunity to answer the questions of honourable senators related to the future of the penny.
The Deputy Chair: Thank you, Mr. Duguay. I felt much younger when you said a paper could be purchased for two cents. I can only remember it costing three cents.
Before going to questions, I will sketch out visually what we are discussing because it is sometimes helpful to have a picture. I understand that we have approximately 20 billion pennies in circulation, which is roughly $200 million. That is 600 pennies for each Canadian child, woman, adult and grandparent; 77.5 typical North American railway boxcars packed full of pennies; 1,794 acres of pennies laid flat; 31,762 kilometres of pennies stacked; and 382,000 kilometres of pennies laid end to end — more than 9.5 times around the equator.
Senator Finley: I mentioned to some of my staff that I understand copper wire was originally invented by two Scotsmen fighting over a penny. It will be sad to see the penny disappear if it dies.
I was particularly interested in Mr. Duguay's comments. I have read, and I assume you also have read, the study by the Department of Economics at Wilfrid Laurier University called, Have a Penny? Need a Penny? A number of scenarios you described vis-à-vis rounding up and rounding down prices are contained extensively in this report. The study goes into many details.
My only question uses one of my favourite places, Tim Hortons, as the model for a product basket. Is there anything you can add to the findings and recommendations of this particular report that you have not mentioned tonight, or something that has changed since this report was produced in 2003?
Mr. Duguay: I do not know of any other simulation analysis like the one in the report. The analysis of Tim Hortons was insightful and instructive. For the benefit of other senators, the notion was whether pricing decisions by Tim Hortons makes it such that rounding will always be in their favour. They looked at a large number of purchases, I believe 10,000 purchases, of several items and concluded that at the margin, given the pricing structure, if consumers buy one item they may lose a little bit. However, as they buy more and more items, and the rounding of course is on the total, then the strategic pricing does not have any effect. Basically, the consumer is neither a winner nor a loser. This finding corresponds to what we thought but it was nice to have this empirical analysis demonstrating that finding.
We have not seen other analyses for Canada. A similar analysis was prepared in the U.S. that I believe is mentioned in that study.
Senator Finley: Also the U.S. study makes it clear they do not want to give up the penny. They seem to have a cultural attachment to it in a way perhaps that we do not have, and the dollar bill as well of course.
Senator Banks: Mr. Duguay, as a matter of efficiency, you must have looked at this issue, and I think you have told us what you think without having arrived at a position. However, I want to ask an almost bootleg question with respect to that efficiency. Who audits the Bank of Canada?
Mr. Duguay: We have two external audit firms that audit the Bank of Canada. They are appointed by the minister, I believe, and the board of the bank.
Senator Banks: Does the Auditor General audit the Bank of Canada?
Mr. Duguay: No, the Auditor General audits only one small part of the operations of the bank, the operations that we perform as an agent for the Minister of Finance; for example, our management of the foreign exchange account on behalf of the government.
Senator Banks: I did not have a chance to look at the Financial Administration Act as it is presently constituted, but it used to have different levels of audits that were different levels of depth or intrusiveness, depending on one's point of view. One used to be called a special audit, and there were agencies of the Crown that undertook to have special audits, which are the deepest form of audit, done only by invitation. Does the Bank of Canada fall within that part of the FAA; that is to say, can the Auditor General audit the Bank of Canada without being invited to do so?
Mr. Duguay: I do not think so. Our act was created to establish a certain distance from the government, and because we are a bank, in effect, our act requires that we be audited by two firms of auditors that are expert in auditing banks, and they are appointed on a staggered basis, a five-year basis, and must be rotated.
Senator Banks: KPMG and someone else.
Mr. Duguay: Yes.
Senator Banks: Is the rationale for not having the Auditor General, who is an officer of Parliament, audit the Bank of Canada to maintain a degree of independence from the government?
Mr. Duguay: Yes.
Senator Ringuette: Mr. Duguay, you have talked about surveys that you have conducted in relation to the penny and inflation. My first question is: Have any of you undertaken a study in regard to the cost for businesses of removing the penny?
Mr. Duguay: The studies and surveys I referred to are not specifically about the penny but they are about the use of cash, which is of special interest to us given that we produce banknotes. We tried to estimate the cost to businesses of using cash, as opposed to debit cards and credit cards, and we published some of these results in a recent Bank of Canada review article. However, we have not looked specifically at the cost to businesses of using the penny.
Mr. Foster: Desjardins Economics published a study in 2007, and updated it a year later, where they tried to get a handle on this question. They looked at both the cost of the penny in terms of its production to the government, as well as the cost to businesses and consumers, and they tried to estimate what the cost is of having to spend a few more seconds in line for change, and transporting large volumes of pennies around for financial institutions. They tried to get a handle on that question and they came up with a number. That study is publicly available.
The Deputy Chair: If I may interject, Senator Ringuette, you may be interested to know that Desjardins will be a witness at our next committee meeting, so they will be able to respond.
Senator Ringuette: Specifically, there is a cost implication to the business community, particularly the retail industry. A technology change might be needed to accept payments. For instance, if they have a cash register and they round up from $3.56 to $3.60, they may need to adjust the technology to do that. At the cash register everything is electronic now; and if the cost is $3.53 will it be rounded down to $3.50 or rounded up to $3.55?
Has anyone you know of, if not your department, studied the cost implications to Canada's retail community?
Mr. Foster: You are asking about the cost of removing the penny. The Desjardins study was about the cost of the penny as it currently exists in the coinage system, but I will turn the question over to my colleague who can perhaps comment.
Ms. Lepine: A survey that might be of interest did not look specifically at the cost but provide comments from retailers, consumers, and large organizations that deal with coinage issues so they may be of interest to the committee in terms of addressing part of the question you are asking. The mint's most recent survey was at the end of 2007. The survey was of 1,500 consumers, 250 small retailers and 28 large organizations. They were randomly selected by a research organization that conducts these kinds of surveys in terms of statistical basis of results.
In summary, the conclusions were that small retailers were in favour of removing the one-cent coin. Sixty-three per cent were in favour, versus 19 per cent against. Consumers were more evenly split on the issue. They were 42 per cent in favour versus 33 per cent against, with a neutral factor of 25 per cent.
Specifically, if we look at the business community in terms of financial institutions, charities, transit authorities, groceries and small business, the financial institutions, charities, transit authorities, grocery distributors and convenience stores were in favour of removing the one-cent coin. However, the grocery distributors and convenience stores, which I will characterize as the smaller business owners that touch on some of the difficulties perhaps in transitioning, had reservations on what the effects would be on the smaller businesses, largely due to the equipment and the systems issues related to rounding and pricing.
The armoured car companies, the large retailers and the retail associations were neither for nor against. That finding is interesting because the retail associations in particular are always worried about consumer pricing issues. Mr. Duguay spoke of the fact that there is really no inflation associated with this change but that perception is perhaps a different thing. The concern of the large retailers and retail associations was that consumers would be concerned about retailers' decisions on pricing and would perceive there to be some kind of an issue.
That does not answer the question on precise cost. It is difficult to find out exactly what is involved on some of the issues such as waiting in line and the speed of using cash versus non-cash, cards or whatever, and this survey did not go into detailed costing.
Senator Ringuette: How many pennies do you produce in a year?
Ms. Lepine: The chair gave us some colourful examples of how many pennies are out there. We have produced 30 billion pennies since inception.
Senator Ringuette: How many do you produce each year?
Ms. Lepine: The demand for pennies is one billion every year. We produce to the trade and commerce demand that comes in. We deliver half of that, 500 million a year, and the remainder is delivered through the recycling programs, which puts coins back into consumers' hands.
Senator Ringuette: Does the production and recycling occur at the Winnipeg plant?
Ms. Lepine: Yes, production occurs at the Winnipeg facility. Consumers bring coins to retail locations and they are recycled at our processing centres across the country.
Senator Ringuette: Approximately how many employees are employed in Winnipeg to produce those pennies on a yearly basis?
Ms. Lepine: In Winnipeg, there were 326 employees at the end of 2009. Between 10 and 15 employees will be directly affected by a one-cent decision. Our penny production uses a small percentage of our workforce.
Senator Ringuette: Mr. Foster, has your department looked at the impact on the goods and services tax of removing the penny?
Mr. Foster: Preliminary work has been done on that impact. The GST and HST are applied to the total bill, so that total will not be affected. The rounding will come after that. Tax in Ontario is 13 per cent, so it will be rounded to 15 per cent. The full GST will be paid and either the consumer or the business will take care of the rounding up or down. Therefore, it does not appear there will be any impact on GST.
Senator Ringuette: Adding the harmonized sales tax, HST, to a one-dollar item will bring the cost to $1.13. The 13 cents will be sent by the merchant to Revenue Canada. You say it will be rounded up or rounded down. If it is rounded down by three cents to $1.10, Revenue Canada receives 13 cents but the merchant is out 3 cents. If it is rounded up to $1.15, Revenue Canada still receives 13 cents, but the consumer is out two cents.
Mr. Foster: The government always gets its GST.
Senator Ringuette: I suspect that on a $1.13 purchase, the rounding will be to $1.15 and the consumer will be out two cents.
Mr. Foster: Yes, with Swedish rounding, which must have originated in Sweden, it will round up to $1.15.
Mr. Duguay: On that particular trade, the consumer will lose. In some cases, with large amounts, merchants have been known to round down. However, on a $1 item, three cents can be the profit margin.
On some transactions, the merchant loses and the consumer wins; on some, the merchant wins and the consumer loses. However, on balance it evens out. Since the rounding takes place on the total amount and not on each separate item, if consumers buy a large number of items, the one- or two-cent rounding up or down is a much smaller percentage.
Senator Ringuette: We agree that this rounding will occur only on cash purchases. If one pays with a debit or credit card, the rounding will not occur. Therefore, from my perspective, this change is an incentive to move Canadians from cash payments to card payments.
Senator Neufeld: I have a couple of questions about your recycling program. Grocery stores in Ontario and Quebec collect pennies. Do they recycle them through the mint? Please explain further what you mean by recycling.
Ms. Lepine: Through the recycling program, consumers can take any coins to a machine in a retail operation that accurately counts the coins and gives a receipt. Some retail organizations give cash for the receipt and in others, the receipt is used to buy other goods or services. We pick up, sort and process the coins that are put into the machines. Sixty- seven per cent of the coins that go into those machines are pennies. The collective partnership has approximately 550 machines across Quebec and Ontario. It happens that Quebec and Ontario have Montreal and Toronto as two big urban centres where there is a lot of coin activity.
There is a charge, obviously, to the consumer for using this service, and the charge is 10 cents on the dollar. The processing takes those coins through our processing operations, our coin pool locations, and they are rolled, wrapped and put back into the coin pool inventories — in this case in Quebec and Ontario. There is a process right now to look at whether this service will be expanded. Instead of having to produce and ship new — I will say one-cent — coins but any denominations from Winnipeg to any of these coin pool sites, these recycled coins are coming out of people's closets, drawers and pots.
Senator Neufeld: The consumer puts their pot of coins into the machine, the coins go to the mint, they must be rolled and then redistributed.
As a point, would it be better to have the coins in the bank, because that is where we need the coins to start with, instead of in the grocery stores? Maybe there is a good answer to that. You put them all back into circulation, which means they must be moved around by trucks and those kinds of things. I roll coins all the time. My goodness, we have so many coins, my pockets all have holes in them. I have to reroll them, but I take them back to the bank. That is where they should be. Is that not a better place to have them?
Ms. Lepine: Thank you for rolling, wrapping and taking coins to the bank. I appreciate that. Two pilots have been done by two banks to see whether this recycling operation is something the banks want to do. They are looking at whether this will bring people into the branch. Grocery stores often happen to be one of the convenient locations for recycling coins.
The other interesting thing is that coinage, in the form of coins themselves, rarely goes into the banks. In the end, coinage is in a coin pool site, which is in an armoured car site. We manage most of our distribution and all of our forecasting of that distribution from the coin pool location — not the bank — to the bank's customers. That distribution could be to a Wal-Mart, McDonald's, Tim Hortons and back again.
Senator Neufeld: I was looking at moving some of the coin around because the Wal-Mart will come to the bank for their coin. Anyhow, that is something for you to work on.
I was interested in Mr. Duguay's discussion about pricing. Instead of pricing at $1.12 or $1.13, they price it at $1.15. I am talking about liquids — gasoline and diesel at the pumps. They would not round up to the nearest nickel if the price happened to be $1.119 — I remember that number from the last time I fuelled up at home. They would not round that up to $1.15.
When a customer goes to the pump to fuel their car and the rounding comes at the end price, I put my credit card in, the price is $1.119, will the credit card system be able to round that number to the nearest nickel or will that happen in the statement from the credit card company? Where do you envision that rounding to happen?
Mr. Duguay: The credit card amount will not need to be rounded only because the penny does not exist. Any electronic or bank transaction, cheques, et cetera, can still use the penny. It is only when they use cash that they need pennies. If the penny is not available to pay in cash, then rounding must take place. In other transactions, there is no specific need to round up.
Senator Neufeld: I appreciate that. One thing people say — and I have heard it from some around this table — is that we will not have the $1.99 sales any longer. Retailers will be able to say $1.99, but at some places, if consumers pay in cash, the amount will be rounded right where they pay. If they pay by credit card, it obviously will be rounded somehow, but if they pay their credit card by cash, it does not eliminate those kinds of things. You worried me a bit when you talked about rounding up something. I thought immediately of the gas pumps, which will be a severe rounding up.
Mr. Duguay: Yes, that is what I said. The rounding up of prices is a fear that is not warranted because in a sense there is no need for it. Rounding up only occurs at the final point.
In the example that you gave of $1.99, the merchant can advertise the goods at $1.99 because they do not want to advertise those goods at $2. In the end, the consumer will pay, in Ontario, 26 cents tax on that purchase. The total will come to, in this case, magically, $2.25. There is no rounding involved. When the tax was 14 per cent instead of 13 per cent, it would have come out to $2.27.
The price posted by the merchant does not necessarily indicate what the final amount of rounding will be.
Senator Neufeld: The price can still be posted at a tenth of a penny value.
Mr. Duguay: Exactly; when gas price was two digits, it used to be expressed to one tenth of a penny even though that amount did not exist as a coin.
Senator Callbeck: Welcome to everyone. Ms. Lepine, you talk about supply in response to market demand. I was looking at a chart here that shows the years 2000 to 2008. It is generally 700 million, 800 million and 900 million, but in the year 2006 it went to over 1,200 million. Why was that?
Ms. Lepine: You are correct; in 2006 we had a large increase in coinage demand. There were a couple of factors. The economy contributed and retail contributed. Retail statistics in that year were strong.
I will use parking as an example. As coinage industries outside of retail transition into a non-coin payment, where now consumers go to a parking lot, put their credit card in, receive their chit and put it on the dashboard, there is a fairly significant impact on coinage with that transition. Coin that would normally come from a consumer putting 25 cents into the parking meter no longer happens. There has been some proliferation and changes occurring in that industry.
We think perhaps in 2006 that combination of factors caused coins not to circulate as they normally would. Someone would go to a parking meter and put change in, that change was picked up in a night deposit and recirculated back into a coin pool to serve the retail industry. That recirculation was not happening. That coin movement from parking — those kinds of operations — did not come back in. However, retail cash registers, were continuing to boom. Retail cash registers still need their 1-, 5-, 10-, 25-cent coin denominations to make change and transactions.
We believe there was a combination of factors: a pick-up on the retail industry and retail demand in that year; and a shift in some of the coin operations in Canada going to non-coin operations and stopping the natural flow of coin that would have avoided having to produce that much coin.
Senator Callbeck: That is a tremendous increase for one year. It spiked that year and then it went back down.
Ms. Lepine: Yes, it was an incredible increase and it had an incredible impact on the facility to be able to react and deliver that coin. We operate two performance measures for the role we play in distributing coin, inventory management and forecasting across the country. The measures are that we do not have a shortage of coin denomination. When the demand is there, we meet it. However, we do not do that by building inventories. In that particular year, there was a huge amount of pressure on the Winnipeg facility to ratchet up in a space of eight months to be able to deliver that kind of coinage increase.
Senator Callbeck: I want to talk about the cost of the penny. You say the total unit cost of putting a penny into circulation is slightly more than one cent. In a study from 2002, you used the figure of 3.95; a penny costs about 4 cents.
Ms. Lepine: The cost of the penny today is approximately 1.5 cents, so a penny and a half to produce and distribute a penny. Our material costs, the cost of the metal, as I mentioned, is below a penny, but the manufacturing costs push it to just over a penny and the distribution costs then push it to about a penny and a half. That is what it costs to produce, so we are into a negative situation on every penny.
Senator Callbeck: What is the manufacturing cost? Do you have the breakdown?
Ms. Lepine: Approximately 60 per cent of the cost is metal costs, so about 0.85 cents, about 0.50 cents for manufacturing, and then distribution on top of it.
Senator Callbeck: You say in your brief that the act provides authority for the ministry to pay the mint for production, storage and movement of coins. Under the formula, how much does the department pay the mint?
Mr. Foster: The agreement specifies a per-denomination cost, which is the direct cost. It includes metal plus labour and distribution. That cost is slightly over a penny. On top of that cost, fixed costs are allocated across all the production. If one were to allocate fixed costs reasonably, the pennies would take it up to about 1.5 cents.
You mentioned the figure of 3.95 cents. That figure was based on an assumption — I recall that study — where they took the fixed costs and they allocated them proportionately across the denominations based on volume. The assumption was that if we eliminated the penny, the mint would cut back severely its employment and close various parts of its plants and so on, which is not a reasonable assumption. We use as a rule of thumb fixed costs of a cent and a half, although a little more than a cent of that, under the agreement, is the per-production cost of a newly minted penny.
On top of that cost, as Ms. Lepine indicated earlier, is the cost of recycling. When we recycle a penny, we do not produce it. We still have to pay a cent for it. Then administration goes along with that recycling, so the cost is probably less than a cent and a half for a recycled penny. In the last couple of years, the split between new production and recycled pennies has been about fifty-fifty in terms of procurement.
Senator Callbeck: Let us build in profit.
Mr. Foster: In the arrangement there is a management fee, as we call it, which is based on a return on equity of around 10 per cent. That fee works out to about $15 million. Incentives are built into the arrangement where if the mint is more efficient in producing the coinage we procure — for example, if it cuts its fixed costs and overhead costs, and increases its productivity in producing the coins — it can make more than that amount through the agreement. The base management fee is currently around $15 million.
Senator Callbeck: I read that for Canadian society, the cost of keeping a penny in circulation is at least $130 million per year, or just over $4 per person. What are your comments on that figure?
Mr. Foster: That is the Desjardins result, which includes these other estimated costs that are based on a lot of assumptions. You might want to ask them about some of their assumptions, but they include things like imputing a cost for the time spent at a cash register, et cetera. However, when they looked at the estimated cost of producing a penny, I think they came up with direct costs of about a cent and a half as well. It was close, if I recall.
The Deputy Chair: Mr. Foster, so I understand this question of cost, what is the net impact to the federal treasury if we decide to eliminate the penny? Is there a cost initially? Is there a benefit? How does the cost play out?
Mr. Foster: That is an excellent question. There are both costs and savings. If we use the cost of a cent and a half per cent as a benchmark that the department pays for, say, a billion pennies, using that estimate going forward, that is $15 million per year. We receive a cent per penny sold to the financial institutions. Therefore, we spend $15 million and we receive $10 million. That is a net of $5 million, which currently is a loss. The penny is the only coin on which we do not earn a so-called seigniorage. If one were to cease production of the penny, those figures imply that the government will save $5 million per year, based on those assumptions. That saving assumes one and a half cents will be the cost forever. That saving assumes a billion pennies will be demanded forever if we were to continue.
There will be transition costs, and it will depend on how we implement the strategy, but we obviously will need to inform consumers and businesses. There will be communications around that transition. We also will have to deal with the outstanding stock that will come back, one would think. People will bring in pennies, cash them, and want their money.
How many pennies will come back? You used the Desjardins figure of 20 billion; 33 billion have been produced in total by the mint. I do not expect it will be either of those numbers. I think it will be something lower. If we say that 10 billion pennies will come back, that is about $100 million. We are buying back pennies, so there is a cost of $100 million. However, we will not throw those pennies away; we will use the metals in them. What will we receive from melting down that stock? We will not receive a penny — some of them might be a penny; the old copper ones are probably worth a penny — but something less than that, probably less than half a cent. Of the $100 million, we will receive back $50 million, say, in salvage value.
If we add up those numbers, we have an upfront cost if we buy the pennies that come back, and then we have ongoing savings. Therefore, we have a potentially positive long-run economic benefit, but we may have upfront costs that are higher than the annual cost savings. We need a lot of assumptions to address that question.
Senator Manning: Thank you. I have the privilege this evening to fill in for Senator Elizabeth Marshall, who could not join us.
This discussion is interesting indeed. My great-grandfather started a business in rural Newfoundland in 1898, followed by my grandfather. He did not know how to read and write but he had a business for 16 years. He had a saying that was passed down through the generations: If you take care of the pennies, the dollars will take care of themselves. What will happen to that saying if we get rid of the penny?
Mr. Foster, you made a comment a few moments ago with regard to other coins. To clarify, the penny seems to cost the taxpayers of the country. Can someone elaborate on the costs of the nickel and dime, as an example of the costs in producing those coins? I gather from your opening comments that New Zealand moved to eliminate the nickel. They had two-cent coins also. What are the costs of the other coins?
Ms. Lepine: As Mr. Foster indicated, all our denominations are positive in terms of a cost that is significantly below, in fact, way less than half in most cases, of face value. I will use the example that Mr. Bennett used in October. The cost of our five-cent piece is approximately 2.3 cents on five cents. There is a 2.7-cent seigniorage gain or profit on each coin issued. The reason for that gain is that Canada and the Government of Canada made the decision to adopt multi-ply plating technology in 2000. That technology means our Canadian coins are made with a steel core, with a durable, highly secure layering process on top of the steel core.
The U.S., for instance, right now, has a metal that was what our five-cent coin was made with before. The cost of their five-cent coins is running at eight cents now. All our coin denominations are running favourable seigniorage in terms of the difference between face value and cost.
Senator Manning: That is a step in the right direction. Mr. Duguay, I believe you mentioned method of payments that Canadians use with respect to how many pay with cash, debit card or credit card. Can you tell us the numbers again? I missed the percentage on a couple of those methods.
Mr. Duguay: I indicated not so much a percentage of payments made but that our survey indicated that three quarters of Canadians pay cash at least once a week; 64 per cent use debit cards at least once a week; and 36 per cent use credit cards at least once a week.
We have data on the number of debit-card and credit-card transactions. I am working from memory for last year's available data, probably 2009. The debit card transactions are probably around 100 per person per year, which is two per week. Credit card transactions are, on average, roughly 75 in a year per person, per capita — per man, woman and child. The data is a little misleading in that sense. It is not per household, which calculates to 1.5 per week. Our estimate of cash transactions is, of course, difficult to determine because there is no specific data, but we look at the average cash withdrawal from automatic teller machines based on the assumption of the total amount of cash taken out of the ATM and the average price of a cash transaction. When we divide one by the other and divide by population, we arrive at the number of approximately three and a half to four cash transactions per week.
Senator Manning: In your opening remarks, you mentioned other countries that have moved to eliminate their one- cent, two-cent and, in some cases, five-cent coins. What is the impact on the retailers and small business owners in those countries? Have any of you conducted surveys or studies to see what the possible impact will be in Canada if we eliminate those coins?
Mr. Duguay: Initially, the one- and two-cent coin in New Zealand was eliminated. There were some concerns prior to the elimination; these concerns basically vanished. When it came to the elimination of the five-cent coin in New Zealand, the population, merchants, were all in favour because they had gone through the elimination of the penny and the two-cent coin and did not see adverse effect. That experience was one piece of anecdotal evidence.
There are also two European countries that use the euro and have decided, contrary to other countries, not to produce the one- and two-cent coin in their countries. Again, merchants and the public seem to accept that decision.
Senator Manning: With respect to time period, if the government and the bank decided tomorrow to eliminate the penny from circulation, I guess there would be some type of lead time given to retailers and consumers to adjust. Has any thought been given as to how long it will take to eliminate the penny? Is there any estimation on time?
Mr. Foster: If you look at what other countries have done, they have communicated it well in advance. They have provided information as to the implications; what the elimination means and what it does not mean. It does not mean, as we discussed earlier, that we have to round all the posted prices to the nearest nickel. Rounding is only on cash transactions. It is on the total, and it is after tax and so on.
It is important that consumers are comfortable with it. You would want to give several months' lead time. You might want to release a background paper to provide information and to give retailers, consumer associations and others a chance to react to that information.
At the mint, we have an inventory of pennies, so ceasing production of the penny should be significantly ahead of when you bring into force the new policy, if you do that.
I do not have any exact dates, but I think you will want to leave several months between the time you announce an intent to eliminate the penny and the time you bring that policy into effect, whether it is six months or nine months. It should be some period of time like that.
Senator Manning: On the study brought forward by the Royal Canadian Mint on the attitude marketing research, small retail owners were asked whether there would be anything different to running the business if there were no pennies. Of those small retail owners, 69 per cent said nothing, 28 per cent yes, and 3 per cent do not know. The study implies that many retailers may not have thought through what is at stake — cash register software, staff practices, price adjustments, et cetera. I am trying to find out what other countries have done.
Has there been an opportunity to educate retailers, to assist them with cash register adjustments where needed or to have people buy into the idea of eliminating the penny? We do not want to add costs to a business. Has there been some experience, or is there any knowledge, of what has been done in other countries?
Mr. Duguay: Yes; one of the elements broadly advertised is the notion of Swedish rounding and helping the merchant and the public to round out prices. Price that end in 1, 2, 6 and 7 are rounded down and prices that end in 3, 4, 8 and 9 are rounded up. That information can be provided to people so that rounding is symmetrical. Some countries distribute cards to merchants to put on their cash registers so they do not need to adjust their cash registers. The cashier can glance at the card to know what the fair rounding price is. That is one communication exercise used in some countries. I read about a study by the Bank of Hungary, I believe, on the results of that exercise. I do not know if Mr. Foster has other examples.
Mr. Foster: Through our normal dialogue, we have spoken with officials in New Zealand and Australia. I do not think they did anything special to assist retailers in dealing with the cash register. I do not think anything needs to be done. It is easy to round a five to a zero. The Prices Surveillance Authority in Australia put out a background piece, which I have in front of me. It is useful. We can provide the committee with a copy. The short piece speaks to some of the issues, including the rounding, and serves to educate consumers and retailers in terms of what this change means.
The Deputy Chair: Mr. Foster, that offer is kind of you. If there are any public policy statements or implementation programs available from other countries, can you forward them to the clerk of the committee? They will be helpful to the committee.
Mr. Foster: I will be happy to do that.
The Deputy Chair: Are you aware of any country that has eliminated a low-cost denomination of coin, and is unhappy for having done so?
Mr. Foster: I am not aware of any.
Mr. Duguay: Neither am I.
Senator Runciman: My questions have been dealt with.
Senator Finley: It strikes me that perhaps the biggest issue, and you have addressed some of it, is the confusion about rounding up and the total, as opposed to the individual line items. There can be panic about this issue, which might be readily put to bed with a good public relations program.
I do not know if you folks are the right people to answer this question: Do you have access to, or do you know where one might find, reports or studies on the growth and trends in the use of debit and credit cards vis-à-vis cash by age group and perhaps by value of transaction? Has such a study been done? We talk blithely about the elimination of the penny not affecting people with credit cards or debit cards. We are aware that some elements of society, such as older, younger, or poorer people perhaps do not have access to these transaction systems. I am particularly interested in trends and forecasts as to where these cards will go. Whether we have pennies or nickels can become a moot point in a few years.
Mr. Duguay: Although it is a point of time, we have conducted surveys that address the question of demographic characteristics of the people that use credit cards, debit cards and cash. That survey was in the 2006 Bank of Canada review. It was a time-series study on the evolution of cash payments with debit cards over time. As expected, the number of debit-card and credit-card payments is rising, and payment with cash is decreasing over time. The total number of cash payments in number of payments is still larger than the other two, but the value is much lower than the other two.
That analysis looks at the evolution on a time basis. As well, we have completed an analysis at a point in time going into more detail.
Senator Finley: Can you supply that information to the committee?
Mr. Duguay: Certainly, I will supply it. Only last year, research on the role of convenience and risk in customers' means of payments was published and we have conducted a similar survey on merchants' acceptance, cost and perception of retail. We can provide those studies to the committee.
The Deputy Chair: It will be appreciated.
Mr. Duguay: These studies do not deal specifically with the penny but they deal with the use of cash.
Senator Finley: We are talking about cash and, as you neatly call it, Swedish rounding. We talk about cash transactions being much smaller but more prolific than debit and credit transactions. It is precisely those kinds of transactions that will be trapped by the abolition of the penny. If we spend $100.98, we do not care whether it is $100.95 or $101. However, when the cost is $1, two cents can make a difference, in particular on low-profit, high-volume items sold by places such as Tim Hortons or bought by kids, such as a candy bar. The rounding will change significantly either the profit margin or the expense. If someone making 3 cents on the sale of a doughnut has to give up two cents suddenly, the profit margin is reduced significantly. That is why I am interested in looking at what the transactional process is, and at any demographic information that supports those transactional issues.
I can see that once we go past $1 to $2, $3 or $4, the impact of rounding becomes smaller. I am interested in seeing those impacts.
Senator Ringuette: I think Senator Finley has a good point. We need to consider seriously the impact cash payments have on the use of debit and credit cards.
I come back to two realities here. Any retail outlet, whatever the size, will need to reprogram their cash register, and a major cost is associated with that reprogramming. In the GST debate, cash register reprogramming was a major issue in regard to tax calculation.
Do you have any information in regards to costing? With the technology today, if consumers buy something for $1.13, they give $2 to the cashier and she punches in $2 and needs to know what change to give back.
You indicated, Ms. Lepine, that the cost to produce a penny is 1.5 cents. What is the life cycle of the penny you have produced, and how many times has it been involved in a transaction? We need to know that information to determine the true cost, because you do not produce a penny at a cost of 1.5 cents every time a penny is used, so we need to know the life cycle of the penny as well as its usage.
Ms. Lepine: I can answer the first part. We do a lot of technical testing in terms of ensuring that we have high durability, so the life of the coin is 25 years plus. I am not even sure how to tackle the second part of the question.
Mr. Duguay: I have a partial answer to your question, but maybe it is a plea to ask that question to Desjardins when they come here to talk about their studies. Their studies cite one figure, and I do not know exactly how they arrived at it, but they estimate that financial institutions, based on Desjardins' own experience and then blown out to all financial institutions, on average process nine billion pennies a year, which is roughly 10 times the annual production of the mint. If you believe their estimate, there are 20 billion usable pennies in circulation out of the 33 billion that were produced since the mint's existence. Nine out of 20 is 45 per cent in terms of circulation of the penny, which is not immaterial, but you may want to question Desjardins a bit further.
Mr. Foster: On that point as well, a figure for the U.S. on this question, I think, is that 35 per cent of pennies minted continue in circulation, so 65 per cent are hoarded, as it were. I do not know how that figure compares to Canada, but it is fair to say that, relative to other coins, more pennies are set aside than re-enter the system, although the recycling program has helped in terms of re-entry.
Senator Ringuette: It is the first piggy bank. It has a value.
Senator Banks: I will again bootleg a question that has nothing to do with pennies. Ms. Lepine, I first thought when looking at this piece of paper that I had spotted a typographical error under revenue; the bottom line, bullion and refinery, when I saw an increase in revenues of 2,489 per cent. I thought that number cannot possibly be right, but then I see it is, and is attributed in the main to the year 2008, in which case you must have hired one hell of a salesman because obviously your revenue from activities other than what you did previously went way up. What happened?
Ms. Lepine: You are not asking the question specifically about bullion?
Senator Banks: Bullion and refinery.
Ms. Lepine: Obviously the markets have been favourable, as I am sure all the committee members are aware, and so it has been an excellent year for the brand that the mint has, which is a gold maple leaf and silver maple leaf coins, so we have been successful with volumes that have not hit the highest record in our history but we have gotten close. It is important to note that the revenue number, of course, includes the actual value of the gold and the silver. As prices have increased from $800, $900, $1,000, $1,100, $1,200, the revenue number is produced by taking the sales of the actual units multiplied by the value of metal, and so we sell bullion coin, as do our competitors, at the price of the London Metal Exchange gold and silver price of the day with a profit factor attached to that price. Revenues look good as a result of the bullion sales.
Senator Banks: Congratulations to us all.
Ms. Lepine: Thank you very much.
Senator Banks: I have one more bootleg question. I am looking at this excellent book you provided us, Word-Class Performance: 2009 Annual Report. On page 45, Senator Callbeck pointed this out to me, the circulation of coinage by geographic distribution, some cities appear on the face to be anomalies, and I do not know whether there is an explanation; whether you have distribution centres or something. For example, Saint John, New Brunswick, has more than a million and a half $2 coins in circulation, whereas Ottawa, which is a bit larger, has somewhat less than half of that number. In my province of Alberta, Edmonton has a circulation of new $2 coins of 743,000, and poor Calgary only has 9,000. Why is that? You said earlier that you respond to market demand.
Ms. Lepine: Absolutely.
Senator Banks: Calgarians do not like toonies?
Ms. Lepine: One of the answers is that these locations you see down the left-hand side of Table 3 are the coin-pool- site locations across the country. Particularly in New Brunswick — New Brunswick happens to be a centre distributing into Eastern Canada — you see here by coin pool location, but it is because those sites are distributing across the country.
The Deputy Chair: Mr. Foster, in answer Senator Manning's question if the decision was made to implement the program and discontinue the penny, how long it would take to put this into force, I gather you said three to four months if it was to begin today?
Mr. Foster: I think I said I did not know but there would have to be a lead time of six months or nine months; something like that.
The Deputy Chair: Is there a period of time, for those who have discontinued coins, when the coin disappears so consumers cannot cash it in? I recall in the U.K. and France there was a time where there was old coin, and after a time consumers could not even take it to a bank. It was the consumer's to keep, and it was finished.
Mr. Foster: The two countries we always look at when we study this issue are New Zealand and Australia. They followed slightly different paths. New Zealand ceased production of their lowest denomination coins, one-cent and two- cent, and after a period of a year and a half, I think, they declared it was no longer legal tender. That meant consumers could no longer use it to buy anything.
The Deputy Chair: Nor could they redeem them at the bank?
Mr. Foster: Yes, they could still bring them to the central bank, and I think they can to this day. I can stand corrected on that. However, New Zealand declared that the one- and two-cent coins were no longer legal tender.
Australia followed a slightly different path. They ceased production of their penny and brought into force the rounding guidelines, but they did not take the next step of withdrawing legal tender status. If you travel to Australia and happen to come across a one-cent or two-cent coin, you can go in and try to use it. I do not know that they will recognize it, but consumers can still do that. If they stumble across a jar full of them in a basement of a house they buy, they can take them to NFI or the central bank and receive their coins. In both cases, as far as I know, they can still receive value for their coins, but they cannot use them like we use pennies in stores here.
The Deputy Chair: With your experience in other countries, are you aware of any efforts that were made to link charities into bringing coinage back into circulation in the sense that they can bring them in, people can redeem them, give them to a particular charity, receive a tax receipt, et cetera? Are you aware of any program of that type?
Mr. Foster: My understanding is that in both countries, but, in particular, New Zealand, and, in particular, with the latest move to eliminate the five-cent coin, that one or more charities step up to use the occasion for fundraising purposes. The program was not something that was sponsored by the government per se, but it was encouraged. Charities had these campaigns to bring in pennies or nickels for charity or what have you, and it was successful from that perspective, but it was the charity that stepped up, as opposed to something that was organized.
The Deputy Chair: They were charities, as distinct from political parties.
Mr. Foster: I think so, yes.
The Deputy Chair: On behalf of all members of the committee, I will express our great appreciation to our witnesses tonight. This meeting has been most interesting and informative. It has helped our study dramatically. On behalf of all of us, we thank you very much.
(The committee adjourned.)