Proceedings of the Standing Senate Committee on
Transport and Communications
Issue No. 4 - Evidence, May 31, 2016
OTTAWA, Tuesday, May 31, 2016
The Standing Senate Committee on Transport and Communications met this day at 9:30 a.m. to study on emerging issues related to its mandate and ministerial mandate letters.
Senator Dennis Dawson (Chair) in the chair.
[English]
The Chair: Honourable senators, part of this committee's mandate is to review emerging issues related to transport and communications. We are pleased to welcome two past members of the Canada Transportation Act Review Panel.
A review of the act was launched in June 2014 and concluded in December 2015, when a report was submitted to the Minister of Transport by the chair, the Honourable David Emerson. The report covered the Canadian transportation system and the legal and regulatory frameworks which govern it.
We have before the committee this morning, to speak about the report, The Honourable David Emerson, the former chair; and Murad Al-Katib, former adviser to the Canada Transportation Act Review Panel.
Hon. David Emerson, P.C., Former Chair, Canada Transportation Act Review Panel, as an individual: Thank you very much; it is good to be back.
It's really great to be here. As you probably know, the review of the Canada Transportation Act is done roughly every 10 years, and we had a panel of six people set up in 2014. I think you have the names of all panel members. My colleague on the right Murad is one of the key panel members, and I was the review head. We spent roughly 18 months preparing a report. We gave ourselves a very hard stop of December of last year to have a report done, complete and submitted to the minister.
I thought I would open this morning with a few comments to give you a sense of those things that we consider to be critically important in drawing the conclusions that we did. I think of these things as the axioms: the truths that we hold to be self-evident.
The first one is that Canada always was, continues to be and probably always will be as long as we are all around as what we call a small, open-trading economy. Canada is by world standards a small population base but a huge geographic area that is spread over a sometimes inhospitable and extremely varied landscape. It therefore leads you into our second basic truth, and that is that transportation connectivity is the life-giving oxygen, if you like, of Canadian society and the Canadian economy. Communities throughout the country are absolutely dependent on a good transportation system for their prosperity and well-being.
When you think about competitive success economically in the world today, for some decades people have recognized that competitive success is driven by what are referred to as global supply chains — some call them global value chains — that are basically transportation and logistical systems for both goods and people. The efficiency and the smoothness with which those chains operate are fundamental to the competitive success of the economy.
The fourth self-evident truth, of course, is that Canada is part of North America. North America is really our most immediate global neighbourhood, and is critical for environmental management, security management, transportation, economic and various other dimensions of life. North America has to be recognized as a critical piece of the transportation policy puzzle.
When you look at these global supply chains in terms of logistics and transportation, what you find is that throughout the world there are networks, and on those networks there are key channels or corridors of high-velocity, high-volume movement of people and goods. This applies whether you're talking about railways, shipping lanes or air travel. You have these absolutely critical high-volume arteries or corridors which, all over the world, connect into countries through gateways and/or what are referred to as hubs where transportation modes come together in a major urban context, typically.
Moving on, when you think about the more remote or secondary communities in the country, in most cases they connect to these critical arteries through what we think of as feeder systems. They could be short-line rail, connector air flights and highways and so on. You have these high-volume, high-speed corridors in all modes and feeder systems which allow remote parts of the country and smaller communities to connect into the global marketplace and the networks which basically span the globe.
Those are the immutable truths that we feel, as a group, have to be reflected on when one thinks about regulation and policy change. If you don't keep those squarely in mind, you will get very quickly down a rathole or into some sort of problem.
I won't go into the detail of the review, but we were given, at a snapshot in time, the goal of looking out 20 to 30 years and asking the question: What do we have to be doing with our transportation policies in order to be ready for the world we are likely to be participating in 20 to 30 years out? It was a longer term perspective.
Wrapped in this was an imperative to make sure that transportation and trade linked together in a very systematic and thoughtful way because in today's global economy, unknown to most people, frankly, transportation and logistics are actually significantly more important than the old traditional trade barriers of tariffs, quotas and those kind of things.
There are various sources of getting at that, but in the forestry industry your transportation and logistics costs can be 30 per cent or more of the delivered cost of the product, and that is a material factor.
The review was in a way precipitated by the grain crisis of 2013-14. In the mandate, while we were to look at grain, we are asked to look at transportation and logistics in a much broader perspective than just grain, which is what we have done. We have also come to the conclusion that the system is so complex and changes so radically and rapidly that a rules-based regulatory framework will not cut it. You will never be able to write and administer enough rules to correct every ill in the system. That is also a fundamental premise of the recommendations that we've made.
We undertook over 500 consultations or received reports from various groups and experts, and there are many specific recommendations in the report. I would say that if you have to fix one thing, and the one thing is a series or cluster of things, it's around governance and decision making.
In the Canadian transportation sector we need a much better framework for making decisions that are well informed by data and facts, and where there is transparency and accountability in terms of the various aspects of governance. When I say "governance," I'm talking about forging government policy, regulation and governance in some of the service-providing entities such as ports, airports and so on.
Murad Al-Katib, Former Advisor, Canada Transportation Act Review Panel, as an individual: Thank you very much. My name is Murad Al-Katib, and I am appearing as a witness in my role as an adviser to the CTA review which concluded in 2015. I was asked by Mr. Emerson to specifically focus during the review on the grain sector and natural resources, including potash, uranium, oil and gas, with a particular emphasis on the Western Canadian corridor.
I bring to this committee a perspective as an adviser of the CTA review, but also as the current CEO of a fast- growing agricultural commodity and food products exporter based in Saskatchewan. My company, AGT Food and Ingredients, was founded in 2003 and we've quickly grown to be a $1.7 billion exporter of lentils, peas, chickpeas and beans, an industry that has become an economic success story for Canada. The acreage of our crops has grown dramatically in the past decade. In 2016, it is anticipated that Canadian farmers will plant 10 million acres of lentils and peas in Western Canada, up 26 per cent.
I will share a bit of the philosophy and vision of the CTA review. The panel focused on important principles:
. . . that should resonate for Canadians everywhere. . . that the performance of the transportation system underpins the country's trade performance, the performance of the economy and the health and sustainability of communities.
The report emphasized that the transportation system is the "supply chain upon which all other supply chains depend." That policy be developed that should respect the "far-reaching role as a key driver of the performance of all Canadian industries."
It has made clear that the goal should be to embed these policies in a national policy framework that builds and optimizes the system over the next 20 to 30 years.
In the grain sector there remains a strong view by producers, processors and grain handlers that there remains an imbalance between the railways and the users of the system. The CTA report recommended a number of measures that were intended to "level the playing field" and allow for market-based commercial resolution of service between the users and providers of the service. Too often the grain supply chain is too busy pointing the finger at the link directly in front of it or behind it and not looking at innovation to solve the problems it faces.
We attempted to have broad-based consultations with producers, railways, industry and other service providers, and I can tell you that even if all did not like the recommendations, I feel no one will be able to say they did not get a chance to input into this process. I personally did 83 days of face-to-face consultations with industry. Multiple consultations in Saskatchewan, Manitoba, Alberta, British Columbia, as well as an eastern consultation including the Maritimes, gave all groups an opportunity to feed into the process.
Key recommendations that I feel were very important are as follows: The Canadian Transportation Agency review recognized that while market-based solutions are the primary means of ensuring positive outcomes in the system, imbalances in power will continue to be a source of friction that need to be managed. Managing this has resulted in the review developing recommendations to modernize the Canadian Transportation Agency through strengthening its mandate, equipping it with better tools and the legislative and regulatory capacity to work in the best interests of Canadians as they take on the challenges of this next 20 to 30 years of global change.
Specifically, the recommendations included amending the act to confer upon the agency investigative powers, the power to act on its own motion and on an ex parte basis, as well as to act on issues that are considered to be systemic and to issue general orders. This is not a power that the agency currently has.
A new, integrated data platform and multimodal data dashboard should be established within the agency, specialized rail expertise within the agency established, and of course the agency should be provided with the financial resources to execute its mandate.
In addition to the regulation with the agency, in the National Transportation Policy, section 5 of the act, we recommended that the policy declaration in section 5 be amended to include recognition of the importance of transportation to international trade and our ability to compete in global markets.
In addition to all of these regulatory items, we also delved into encouraging investment in the railway systems. The report recognizes that railways do not bear the sole responsibility for capital costs and railway networks and that shippers also make substantial investments in loading, unloading, storage and handling. The report recognizes, however, that "absent any changes, railways will likely continue to operate at or near capacity, with minimal buffers for unexpected demand." Some would argue that is quite reasonable with the allocation of their capital.
As one of the mechanisms for encouraging investment, the report recommended changes to the Income Tax Act and its regulations to ensure that railway asset categories remain in sync with United States levels as far as taxation incentives. In addition, we recommend tax incentives be extended to first and last mile clients of the rail system to allow for accelerated capital cost allowance treatment for loading- and unloading-related investments.
In addition, we recommended a tax credit program for non-Class I short-line railways, a very important element of linking up this national network into more regional areas, similar to the 45G short-line railway tax credit program in the United States. In general, the ability to keep pace with the railways in the United States is very important to our economy.
In terms of railway service obligations, the report recommended that level of service provisions in the Canada Transportation Act be amended to recognize shippers and their collective needs in the context of optimal performance of a railway network. We also recommended changes to the dispute resolution and service level agreement provisions within the act.
Recommendations have also been made on railway service arbitrations under current section 169 of the act. The recommendations include requirements that service level agreements contain clauses for reciprocity for shippers as one of the parameters of the agreement. It was our intention that reciprocity means shippers and railways will be entitled to have service level agreements where reciprocity exists, with financial consequences and penalties, to ensure commercial solutions can be reached.
When we look at the specific measures related to agriculture, the review noted that the federal government has regulated grain freight rates and other aspects since 1897. This has been a role of our government for many years. The report notes that for agricultural shippers, though, the ability to access global markets and remain competitive depends on effective rail service.
The report notes that past failures have been caused in part by poor visibility of supply chain capacity and performance by the railway's inability to deal with extreme seasonal weather effects and the pressure they face in balancing service with financial pressures to achieve high levels of asset utilization.
It is problematic not to know what the crop is until we harvest. It is very difficult to plan capacity.
The review proposed over time that the railway's grain Maximum Revenue Entitlement provisions of the act be phased out and, in the short term, changes be made to address a number of technical and policy-related issues to allow for the modernization of the Maximum Revenue Entitlement. The review recommended the modernization of the Maximum Revenue Entitlement in anticipation of its total elimination within a seven-year time horizon, as the Western Canadian grain handling and transportation system evolves to a more commercially grounded framework.
Modernization should consider, but not be limited to, excluding the movement of containerized grains. Grains were never moved in containers in the past, so we recommend they be taken out of that formula to allow for surge capacity to be created in the system.
We recommended allowing railways to set aside up to one third of their respective railcar fleet, for which shippers may pay freight premiums to guarantee railcar service and supply. Shippers said it's not always about the cost; it's about reliability. They're willing to pay more if they get guaranteed service. These premiums would be excluded from the railway's Maximum Revenue Entitlements.
We recommended excluding inter-switching revenues, earned costs and tonnages from the Maximum Revenue Entitlement calculations, and we recommended reform to the Maximum Revenue Entitlement methodology to allow for the attribution of railway individual investments in capacity and create incentives for overall railway investment in new equipment.
Today, if one railway invests, each of the two railways gets half the credit. If CN invests, CP gets credit. So we recommended that the system be changed so that the railway making the investment gets all the credit. These are the types of modernization initiatives.
In summary, we have a world-class system in Canada. Regulation is a powerful tool that should be used wisely. Overregulation is a risk that may inhibit market-based mechanisms to work for the good of the system. At the end of the day, the recommendations are broad and large in scope and we considered a long-term horizon, as transportation regulation infrastructure is a generational opportunity for Canadians. We are trade-dependent and we need to get it right.
Asian middle-class incomes will rise from an estimated $21 trillion to $56 trillion by 2030. Population growth is real, and Canada is uniquely positioned as a country, blessed with renewable agricultural resources and non-renewable resources such as potash, uranium and oil and gas.
Doing nothing is a dangerous option, as we will affect the economic prosperity of Canadians. I'm optimistic that we will consider everything and will get it right. Thank you, Mr. Chair.
The Chair: I would like to introduce the senators before giving them the floor. From Ontario, Senator Runciman; from Newfoundland and Labrador, Senator Doyle; from Alberta, Senator Unger; from Quebec, Senator Boisvenu; Senator Greene from Nova Scotia; me, Senator Dawson, from Quebec City; Senator Mercer from Nova Scotia; Senator Eggleton from Toronto; and Senator Black from Alberta.
Senator Black: First of all, let me say that having spent the weekend reviewing your report you have done fantastic work, and my view is that if it is followed you have done a great service to Canada. Thank you very much for that.
I have a couple of high-level questions, if I may. Mr. Emerson, when you had the opportunity to review the current transportation infrastructure in Canada, as it relates to your goal of wanting to ensure that that assists our trade objectives, how would you rate our current structure?
Mr. Emerson: There has been work done by international organizations. I can't put my finger on it right now but they are listed in the report, and I think they would put our infrastructure, in global competitive terms, somewhere around fourteenth position. We are not in the top five, for example.
I would say that in certain areas we are very good: airports. Since commercialization back in the 1990s, there has been a tremendous amount of money spent on building up our airport infrastructure. In our report we make the case that the airport infrastructure component for the large airports is pretty much where it needs to be. A lot of small airports are lacking.
The Asia-Pacific Gateway and Corridor Initiative was widely praised in our consultations as being the right kind of investments in infrastructure. It was the Government of Canada putting $1 billion plus in and leveraging that four or five times to account for roughly $7 billion in infrastructure.
The most important thing we heard on the Asia-Pacific Gateway and Corridor Initiative was that the investments were not piecemeal. They were made with a careful, analytical approach as to what the priorities of the Asia-Pacific supply chain were from the point of view of the stakeholders. That was critically important.
I would say in Canada's North we are pathetic. That would be a kind way to phrase it. It doesn't matter whether you are talking about inadequate runways, road and rail or marine infrastructure. In the North it's a pretty sad state of affairs, not helped by an under-resourced Coast Guard.
Mr. Al-Katib: If we look at how we are doing in relation to long-term planning, I point to the Australians as a good example. They are running a 50-year infrastructure planning exercise where they have a large, key infrastructure plan on a 50-year rolling forecast where they have linked it into their national transportation framework.
I would like to see us get to a point where, as the growth of the economy continues and we look at cohesive gateway planning, we have the ability to take that national leadership role and take that national planning document and have it rolled out so we can secure right-of-ways and leverage funding from the provincial governments and municipalities. These are essential elements of not being reactive but having the ability to build a Canada that can deliver that economic prosperity to not only our children but our grandchildren.
Mr. Emerson: One of the big gaps that government and others face in Canada is there is no systematic database on infrastructure: municipalities, the federal government and private sector enterprises have some. One of the recommendations calls for a database which identifies what we have out there and the state of that infrastructure in terms of maintenance and repair, and then you can start to build on looking-forward priorities.
Senator Black: Mr. Emerson, a fabulous piece of work has been done. Who now owns it? Who is supposed to implement or reject your recommendations?
Mr. Emerson: The Government of Canada owns it. I've submitted it to the Minister of Transport. I have briefed him and a few others on the broad contents of the report, so it's really in the hands of the Government of Canada at this time.
Senator Black: If you can share with us, is there a point person, or do you believe there should be somebody assigned to make this happen?
Mr. Emerson: I'll be candid. When I handed off the document, I made it clear I was going to disappear from the radar because I did not want this to be seen as a David Emerson or a Murad report. I wanted it to be a document the government would consider and deal with it on its merits. I don't know who is dealing with it now.
The Chair: This committee felt comfortable enough to invite you because this issue deserves to have legs. I can assure you that Senators Greene, Mercer and I, who went up North on the Northern Airport, totally agree with you on the lack of service, investment and support for northern communities as far as transportation is concerned. The chair normally avoids these comments, but I'm biased on that one.
Senator Doyle: You speak of a transportation policy 20, 30 years into the future. I'm from Newfoundland, so I wonder what the best and most efficient way of trying to get off the island of Newfoundland is. I'm given to understand that both the federal and provincial governments are currently studying the feasibility of a tunnel link between Newfoundland and the mainland of Canada. Did your review contemplate the possibility of that kind of a project and the economic impact it might have on Canada's entire northeast?
Mr. Emerson: We did not, to be blunt. We tried to avoid wading into very specific initiatives and, given the compressed time frame, we opted to keep it at a relatively strategic and high level. My own gratuitous comment is investments almost to nowhere become investments to somewhere over multiple decades.
Whether it is the North, Newfoundland and Labrador or someplace in northern Saskatchewan, if you can't get there from here, nothing is going to happen there and people will not live there. However, when you make these investments, they seldom make private-sector sense from a profitability point of view.
I, for one, am an advocate of government engaging in developmental investments with a long-term perspective. The Newfoundland fixed link possibility would fall into that.
Mr. Al-Katib: I would add that the only time we would have considered it in a general sense is the cohesiveness. When we talk about gateways, we talk a lot about the Pacific Gateway, but we also considered the Atlantic Gateway side and the need for cohesive infrastructure development to concentrate port infrastructure and connectivity of the different regions within those gateways. I think it could generally fit into that recommendation of a well-planned Atlantic Gateway as well.
Senator Doyle: Did your review of transportation in Canada cover the development of new pipelines for transporting oil?
Mr. Emerson: We backed into pipelines tangentially, because the lack of pipeline capacity has led to a significant surge over the last few years of oil by rail, which has all kinds of implications, not the least of which is safety. Our mandate did not, nor does Transport Canada's mandate, include consideration of pipelines but it does fall into the area where we have made recommendations about the transportation of dangerous goods, for example.
Senator Doyle: Did your review have any opinions as to safety of moving oil by pipeline as opposed to rail?
Mr. Emerson: The evidence that we reviewed would suggest that it's safer by pipeline. I think that's pretty much commonly understood now. It is safer, and for point-to-point longer distance it is clearly cheaper. I think there is a growing appetite in the energy sector — at least there was before the crash — to look at trains as a way of bringing more flexibility into their supply chain, so that when oil is en route to a market they could divert it by rail easily to a different market, if market circumstances dictated. It has the advantage of adding an element of flexibility.
It is not, in our judgment, safer; it is more risky.
While we did not have a mandate to look at rail safety, we did, again, back into it because it is our belief that an awful lot of the recommendations around pushing for greater technology and harmonization of regulations with the U.S., for example, will have significant benefits in terms of safety. You only need to think about the runaway-trains problem.
In a world where we are now looking into an autonomous vehicle environment, surely trains on a fixed rail can be controlled centrally through technology pretty effectively. I don't think you need armies of public servants out there checking to see if brakes are on in a parked train. I think there are technological solutions that need to be invested in.
Senator Unger: Thank you, Mr. Emerson and Mr. Al-Katib, for appearing here this morning. Your reports are interesting.
In Alberta we are landlocked and have a great need to get our resources out. The advent of all of the protestors and lobbyists against pipelines and this concept of social licence — which now seems to be applied to everything — has stalled getting our product out.
Have you anticipated that or would you comment on what is happening?
Mr. Emerson: We didn't talk about social licence, per se, but we did talk an awful lot about governance and the need to make evidence-based decisions in a timely and responsible way.
My problem with social licence is that it has no definition, there is no database and there is no way of knowing, in any particular project, whether you may or may not get a social licence and what you have to do to get one. I am not a fan of the concept of social licence. I am a fan of good governance based on good evidence, good data and expert decision making. A lot of our recommendations are around improving governance in that sense.
Senator Unger: Any comment, Mr. Al-Katib?
Mr. Al-Katib: The bottom line with the consideration of national policy frameworks and initiatives is considering how we need to deal with the issue of social licence. A cohesive, long-term plan will have to balance those interests and ensure that the process is transparent and facts-based. From there, we have to recognize that certain products can move well by rail, truck and others. Certain things can move by things like pipelines; certain products can't.
When we look at a finite capacity in a long-term economic growth model that we have for this country, we need to tackle this issue at some point and come up with a policy framework that acknowledges it, deals with it and ensures that consultations are had but that we actually have a start and finish.
Mr. Emerson: I don't want to be cynical, but if "social licence" means that we will finally make decisions based on public-opinion polling data, maybe that should be put out there for project proponents to understand that all of this environmental, technical and scientific work you are doing may be overridden by polling data — which is fine, but it should be declared.
Senator Unger: There is a relatively new proposed energy corridor. I just read about it within the last week, I think. It is to go across Northern Canada. Would you comment about that?
Mr. Emerson: We actually spent a lot of time, as you know from the report, on the North and the need for transportation and logistics corridors. We consulted closely with FedNor and territorial and provincial governments on possible corridors. We also had a consultation with the Calgary School of Public Policy, which is advocating this linear corridor, in effect.
While we did not have the information to draw a recommendation on that specific corridor, again our basic view was that corridors are critical. Those that exist need to be protected and new ones need to be identified, with steps taken to ensure that future generations of Canadians are able to have the new corridors that will serve the economy of tomorrow. I put that in that category.
Senator Runciman: My questions are all over the map.
Mr. Emerson: That's fine.
Senator Runciman: I live on the St. Lawrence Seaway, and I know that you spoke to that issue during your study; you talked about some recommendations regarding that. One of them was reducing congestion and providing more environmentally friendly ways of moving cargo — what you call "short sea shipping."
I am curious about that in terms of this. To me, the seaway traffic, over the last number of years, has been declining. We know that the Suez and the Panama Canals have undergone major restructuring to accommodate these new larger freighters that the world has seen come into being.
What do you see as the future? I know this is a U.S.-Canada challenge, but did you take a look at that in terms of what lies ahead for the St. Lawrence Seaway?
Mr. Emerson: We considered that whole corridor from Thunder Bay down to the Gulf of St. Lawrence. Our view is that it does have a future, but there are some impediments. One is the ice in the Great Lakes. Again, I am alluding to my comments about icebreaking capacity and the Coast Guard. Unless we are going to seriously improve our icebreaking capability in the Great Lakes, that corridor through the Great Lakes will be seasonal. If it is a seasonal corridor, that is a huge constraint to it becoming a really important, permanent part of global supply chains.
Once you get to Montreal, you are okay. The seaway needs to be significantly upgraded and widened if it's to be part of a bigger global outreach. Short sea shipping, again, is something that has not really taken off in Canada in recent years. We think it has potential, but it's going to require investments in the relevant infrastructure to enable these vessels to ply the Great Lakes. There are also issues around protectionism and the "Jones Act" on the American side and cabotage on our side, which, I think, have to be dealt with.
I think the Great Lakes corridor has a future, but it is limited by some quite serious constraints. Murad, do you disagree with any of that?
Mr. Al-Katib: No, I would agree. We have a port facility in Thunder Bay, and so we are shipping regularly. But, from the perspective of year-round shipping, it is certainly necessary as we build out the global supply chains.
In addition, we recommended taking a look at pilotage rules, the costs related to those corridors because, when we do consider the vessel size constraints that come into that particular corridor and the cost structure, it also becomes quite inhibitive when we look at it versus shipping out of the other side.
On a regular basis, in the agriculture industry now, shipments are leaving out of Vancouver and Prince Rupert and going all the way around the canal to the Mediterranean region. We certainly have an opportunity, in particular for the Mediterranean, North Africa and the Middle East, to utilize that corridor much more effectively.
Senator Runciman: You talk about a dedicated track for VIA and separating it from the freight train business. I guess that is part of your 50-year plan that you are talking about getting out of urban areas. That is a significant challenge on its own. Is there any short-term way that that can be approached, say in the next five to ten years, to try to improve the situation?
Again, I go back to a personal situation. I don't know if this ties in. To some degree, I think it does. We have seen a significant decline in VIA passenger stops in smaller communities. In my community, it is down to two direct trips to Montreal. I know it is affecting Kingston, Belleville, Cornwall, along that stretch, as well. Is there something here in terms of alleviating that, which might encourage increased stops for VIA to places like Montreal, or would it simply have more high-speed travel between Montreal and Toronto rather than trying to accommodate some of these smaller communities?
Mr. Emerson: Our focus, as I have said, was not on the short term. We heard there was a need for greater collaboration between the Government of Canada, the Government of Ontario, the GO Train system, VIA, CP, CN in terms of planning usage of tracks. I suppose one could think of an increase in investment in sidings as a possible way of alleviating some of the problems with freight trains and passenger trains on the same track.
Senator Runciman: Some of that is being done.
Mr. Emerson: Yes, some of it is being done.
Ultimately, if there is any sort of variation from the track usage plan, for whatever reason, somebody is going to be late. It is either going to be the freight or it's going to be the passengers. When the passengers are late, they might not come on the train next time. When the freight is late, there are other implications. I really think it is a subject, beginning now, on which to do some very intensive consultations on a transition to a passenger-only line. That transition, I'm sure, could come up with some modest improvements in the short term.
Senator Mercer: Gentlemen, thank you very much for your presentation. I come at this subject with two prejudices. One is that I am a senator from Nova Scotia, and I look at it from how it is going to benefit us and, in particular, the Port of Halifax and how it fits into the scheme.
I also come at it as the Deputy Chair of the Standing Senate Committee on Agriculture and Forestry. I refer to your discussion of moving pulse products out of Saskatchewan. There is one constant complaint that we hear at the Agriculture Committee, and it's not a new problem that we have heard; I am the longest serving member of the Agriculture Committee and have heard it since the day I started. Empty container cars will roll through the province of Saskatchewan on their way to Vancouver while farmers are sitting there with product ready to ship and wanting to get it out of there as quickly as possible. The longer the farmer holds on to it, the more the quality of the product is going down.
Did you make any direct reference to that in your report?
Mr. Al-Katib: Yes, we did. One of the recommendations, in terms of the inclusion of what we call "first mile" and "last mile" investments by shippers was specifically intended to provide some sort of an incentive for shippers to invest in efficiency related infrastructure to utilize empty containers and empty infrastructure that is available.
For instance, my company utilized the Port of Halifax where containers are brought in from the United Kingdom into Halifax. CN, our partner, rails them into Saskatoon, where we feed them out to our plants and return them to Halifax, with a dwell of maybe 72 hours on the containers. These are the types of investment structures that were recommended as an ability to use containers and intermodal as a surge capacity in the system. I think that better utilization of all corridors is also a very common theme that we have through the report.
We cannot jam the entire crop, in particular when we have a larger crop size, through the Pacific Gateway all in the span of four months. We need to effectively use Vancouver, Prince Rupert, Thunder Bay, Halifax and Montreal as very important balances within the system. I think there is a lot of potential to include Halifax on a more concentrated basis. CN has proven to us their interest in doing that.
Senator Mercer: Did you also analyze the ongoing labour problems that plague the Port of Vancouver, for example? Again, I declared my prejudices going into this. The Port of Halifax has not had a labour stoppage since 1976. Many of the people in this audience here weren't born in 1976.
Mr. Al-Katib: I was just born in 1976.
Senator Mercer: There you go. I am talking about labour stability, and it is closer to the markets in India and Southern China, through the Suez, going through the Port of Halifax.
Did you talk about that in your discussions?
Mr. Al-Katib: In general, the predictability and reliability of the system was an integral part of recommendations. Labour stability has been referenced in the report, but, as it is not under the mandate of Transport Canada, it was not an issue that we tackled head-on.
I will say that, from a shipper's perspective, the ability to have labour predictability in supply chains is a very essential element of that reliability side.
Mr. Emerson: Over the last couple of years, it has been labour instability in the U.S. that has benefited West Coast ports in Canada. Labour agreements are up in 2017-18 roughly. It will be very important that agreements be struck on the West Coast to avoid what Murad is referring to. If we have another work stoppage of significance on the West Coast, it would do great damage to our reputation which is just slowly recovering from some of the problems we have had in the past.
It's not just labour. You get a pseudo-labour situation with the independent truckers on the West Coast as well, and that has created issues that are labour-like.
Senator Mercer: One of the things that could help the Port of Vancouver is to cut down the number of contracts that they have. The Port of Halifax has done a good job of consolidating their contracts. We are only dealing with a couple of entities and they get along a little better. It seems there are so many in Vancouver.
I want to go back to the brief comments about the Atlantic Gateway. It has always been my contention that there are too many players and not enough leaders in the Atlantic Gateway. While we all talk about being members of the Atlantic Gateway — Newfoundland, New Brunswick, Prince Edward Island and Nova Scotia — until we get down to splitting up the pie, because that is when we all want the bigger share, there doesn't seem to be any real leader here.
I sit around this table on the Transport Committee and the Agriculture Committee and continue to talk about the Port of Halifax, et cetera, but no one is sitting around and making a plan as to how we integrate the very good systems we have in New Brunswick, Newfoundland and Labrador, Prince Edward Island and Nova Scotia. I think the Port of Halifax is integral to that because it is the largest port, but everyone can benefit by it. High tides raise all ships.
Did you address the issue of a lack of coordination in planning in the Atlantic corridor?
Mr. Emerson: We made comments in the report to the effect that the Atlantic Gateway has been less successful than the Asia-Pacific Gateway, and we attributed it to fragmentation.
There seems to be a reluctance or inability to come together and designate one port for containers and another for energy and bulk or something. There doesn't seem to be the mechanism — and I think this is where the Government of Canada needs to think about asserting itself — to create critical mass in one or two ports on the East Coast. From that flows the rail linkage, frequency of rail service, competitiveness of rail service and all of those things, because the port has to be backed by a competitive rail link as well.
Senator Mercer: I don't disagree with you, Mr. Emerson, but I will add the political element to that. It becomes difficult for the government of the day to implement that without the political risk of choosing port A over port B — or port A over port H, because port H is the one I want to talk about.
Mr. Emerson: My only comment is we are adding yet another port there in Belldune.
Senator Mercer: If you talk to most Atlantic Canadians, other than New Brunswickers, they would ask, "Where is that?"
The Chair: I wouldn't want Mr. Emerson to be asked to talk about politics. That's not something he wants to be involved in here.
Mr. Emerson: I'm also not very good at it, as you know.
Senator Eggleton: I think you are very good at this. This review is wide ranging and comprehensive. I hope you and your colleagues would reconsider following up on this with the minister. You have put a year and a half into all of this and you don't want to see it collect dust on a shelf. A lot of reviews and reports end up doing that, so I hope you or your colleagues will do some follow-up.
I want to ask you about air transport, which is one of the chapters in the report.
You recommended the possibility of privatization of airports, as they have done in the United Kingdom and Australia. Back in the 1990s, as you know, we devolved the management of our airports from a national system to localized operations. In Toronto the Greater Toronto Airports Authority runs it. These are nonprofit based. A lot of business people and municipalities are involved with them.
Do you think that system is not working? Do you think it needs to go a step further as they have done, as you say, in the United Kingdom and Australia with regard to privatization?
Mr. Emerson: I think if you didn't do anything it wouldn't matter for a few years. My view is that if you are really going to be serious about looking out 20 to 30 years; and if there is a large infrastructure deficit in Canada, which I believe there is, then it would be quite easy to do something that would improve the governance structure of the authorities, raise capital for deployment on other Canadian infrastructure and not result in any troublesome aspects of being privately owned, such as trading on the stock market, where you are constantly trying to react to short-term analyst comments and so on.
Our recommendation was to look at and adopt some form of asset-recycling policy, which is to say these assets have been put into a commercial format. They have been well capitalized. All of the studies internationally show we are amongst the best in terms of our capital, but they have also become high cost. Studies also show that our airports are amongst the highest cost. We are suggesting that there probably is a need now to pull some of the mature capital out, redeploy it in the country for public policy reasons, and get long-term institutional investors involved in acquiring airport assets, which they are now. Canadian pension funds, as you know, are investing all over the world but they are not investing in Canada because they don't really have a framework in which they can invest in Canadian airports.
My own view, and the view expressed in the report, is that long-term investors in airports and ports can give you the best of both worlds. It can give you a long-term perspective. You don't have to sell the land fee simple; there are other ways you can restructure these things.
I think there is a significant need for greater rigour in terms of capital allocation at some of these airports. I think that a private investor will get the young guns in the pension fund looking at the kind of return you are getting on alternative capital investments, and I really don't think that there is a lot of rigour that is going into it at the moment. It's more about if it feels good at the community level in terms of capital deployment. I think over time that will come back to bite us.
Senator Eggleton: One of the issues also in this regard has been the rent extracted by the federal government from these airports, which means that they are passing on a lot of additional costs, for example, that American airports don't have to do. That becomes clear when a lot of people are heading over to airports close to the Canadian border on the American side and there because the travel is cheaper.
Mr. Emerson: I nearly fell off my chair when we were consulting with the major airports in Canada. I asked them if there was anything we need to do to make their business stronger over the next 20 to 30 years. The only thing they could come up with was fixing the security screening system. I asked about access to some deep pockets in terms of equity capital. "No." What about airport rents? "They're okay now, they've been fixed." I found it actually quite shocking that there was not a degree of concern that I thought there would be around airport rents.
Again, my own view and the view articulated in the report is that the airport rents in and of themselves are not back- breaking and one could easily create a framework in which a pension fund, for example, can just take out the lease, buy the lease with the rent payments and maybe some other features that would keep the bondholders whole and that kind of thing.
I think there are ways to do it, but if you deal with airport rents without dealing with security charges and the various government taxes and AIFs, then you're really only getting at the tip of the iceberg. AIFs have been growing with mad abandon, as you know. Under the airport leases an airport can basically put an AIF in place and alter it — meaning raise it — any time they want.
That's fine, but at some point your customers are captive customers and there is a great power imbalance between the passengers who run through the GTA airport or Vancouver or wherever, and we have argued that there should be a more structured framework under which airports should operate and that there should be some principles around the implementation of AIFs. There should be an appeal mechanism to the CTA for possibly unhelpful conduct on the part of authorities.
There needs to be a real hard look at a variety of these issues to restore the long-term financial discipline that's being applied there and to protect passengers.
Senator Eggleton: Thank you.
The Chair: As a supplementary question, this committee, as you know, concluded a report entitled The Future of Canadian Air Travel: Toll Booth or Spark Plug? that addressed the fact that the governments are considering airports as a source of revenue instead of seeing them as a source of investment.
Yes, I can understand that the airports have become used to paying rents on buildings that the government never paid; they are paying taxes on those expenses that the government never invested in, but they get used to it. I also understand their frustration on the security concept.
Where I have a problem with your statement is where you talked about the major airports. As you know, we theoretically have a system of 26 national airports, and I know politicians don't like to draw the line on whether Winnipeg is a major airport. Where would you draw the line on saying which airports should be privatized?
I ask that because there is a lot of insecurity right now in the airport communities about whether they will be privatized and how they invest if they're going to be told in three or five years that they have to divest to a pension fund. Where do you draw the line?
Mr. Emerson: Let me just say that the level of comfort in the authorities and their boards and the management is telling in and of itself. It is very comfortable, and you really have to ask yourself if it's getting too comfortable.
On drawing the line, I would say this: Were I in charge, I would look at those airports that had an interest in pursuing a long-term investor in the airport in a world where there was a little bit more discipline around AIF so that they can't just sit back and say we don't need that, we'll just raise the AIF. If you live in Toronto you have to use the airport and pay the AIF, no sweat.
I would go around and talk to different airports and try to establish some success stories. I know, for example, Montreal has expressed interest in having an institutional investor. There may be others. I don't know if Winnipeg would or not. Vancouver used to want to, but I'm not sure if they do anymore.
I would do an incremental approach and bring institutional investors in so you know what kind of financing structure works for them. There is no point putting it out there when nobody really wants it in the investment community, so you'd have to structure it appropriately. I would do it that way. I would iterate and wouldn't try to draw a line in the sand arbitrarily.
Senator Greene: Thank you very much, and I'm very happy that you were able to come. I was going to ask a bunch of questions, I'm sure you're aware, about airports, and Senator Eggleton has asked them and also Senator Dawson.
Is there any hope, do you think, that the federal government will abandon its policies with regard to rents? It strikes me that they help to put Canadian airports at substantial disadvantage vis-à-vis American airports, plus it's almost a tax more than anything else: It's a tax on consumers. Airports don't receive anything in return for the rents and it doesn't surprise me that some airports are okay with the system the way it is because they have a virtual monopoly where they are located. Consumers in the Niagara area can opt to go to the U.S., but in Halifax there are no options except Halifax unless you want to go to Montreal. That would be the closest international airport, or maybe even Boston.
Do you see any progress on that issue?
Mr. Emerson: I have a couple of comments. We do say in the report — and further to the chair's comments earlier — that the governments, of several stripes I believe, have looked at the airports as a source of cash rather than as an economic driver and a driver of Canada's trade competitiveness. They've tried to have it both ways, but there's a limit to which you can do that.
My second comment is to express a bit of concern, if not alarm, that some of the people we spoke to, when pushed on leakage to U.S. airports, responded by saying, "We don't have to worry about that, the exchange rate is taking care of it." Well, if for the next 20 to 30 years you're planning your competitiveness on the assumption of a 76-cent dollar, you have a serious problem.
I think there is an issue there, but I think it comes back again to the Government of Canada looking at the airports, looking at all of the taxes and charges that the airport authorities and the governments are putting in place, including provincial governments on fuel and so on, and coming up with a reoriented strategy around airports, which is oriented toward trade facilitation and improving competitiveness. Maybe everybody will have to put a little water in their wine and put a little bit back on the table for the customer.
Senator Greene: Yes, I would agree with that. We have the highest airport fees in the world, I believe, which prevents a lot of our airports from becoming truly regional hubs.
Mr. Emerson: Yes.
Senator Greene: In your look at this area, did you look at Open Skies?
Mr. Emerson: Yes.
Senator Greene: What did you conclude there?
Mr. Emerson: We were very aggressive in the recommendations. We basically made recommendations that Canada should become much more aggressive in terms of Open Skies or air bilateral agreements. There is a view that we heard in our consultations that air negotiations are too much about what we can do for the dominant Canadian carriers as opposed to what we can do for the Canadian public and the Canadian economy.
I know just one example, but I don't want it to be taken out of context. There was a blow up for a couple of years with Emirates, and maybe Qatar Airways, when Canada refused to give sufficient rights to those carriers to allow them to have seven-day service in multiple markets.
What we ended up with in Vancouver is Emirates is now doing a booming business out of Vancouver and British Columbians are flying down to Seattle and getting on Emirates down there. This is at a time when Delta has a hub out of Seattle, and in terms of the Asia-Pacific Gateway and Vancouver's position there is a real threat coming from Seattle. If you are coming from China, Taiwan, Korea or Japan and going to the U.S. why would you cross two borders if you don't have to?
There is a real risk there, and as Seattle grows and wakes up both on the port and the airport side, their competitiveness is becoming much more threatening. Once it becomes a threat that is so bad that the numbers start to kind of bleed on you, it's probably too late.
[Translation]
Senator Boisvenu: Mr. Emerson, I agree with my colleagues. Your report is very well-researched and relevant, and I am confident that it will be very useful for our study.
One of the issues related to marine transportation is water management. We know that water levels have dropped in the past two decades or so, which in some cases has prevented certain vessels from using the waterways. Climate change will therefore represent a challenge and a major constraint in the future.
In your study of marine transportation, have you studied the northern shipping route? We have heard a lot about the fact that, with the ice melting in Canada's North, the northern shipping route would be one of the routes that might compete with the Panama Canal, for instance, especially for Northern Europe.
Have you studied that route, Mr. Emerson?
[English]
Mr. Emerson: Some of my colleagues spent quite a bit of time in the North. Much of our report does address marine issues in the North, like the deficiencies in charting the sea bottom, inadequate infrastructure for bringing supplies on to land and the lack of pilotage availability, and a policy toward pilotage in the ice-riddled waters of the North was highlighted.
We put a significant number of recommendations in place to strengthen our presence in the North, as well as safety, security and navigational efficiency because a lot of the northern sea bottom has not been adequately mapped.
On the southern waterways, dredging has been an issue for a number of years. Again, this is one that has transcended governments because the Government of Canada has, as part of its restraint programs and economizing public expenditures, pushed a lot of dredging responsibility out on to the local authorities and the private sector. Candidly, I think the Government of Canada has an obligation and a responsibility to maintain those waterways.
If you go to New York and New Jersey, there is constant dredging going on in those areas. It really is a responsibility of government, and I think it is a mistake to push it off on to local entities because you are dealing with waterways that link into that global network. If there is a lack of consistency in water depth and dredging, you will have a problem.
[Translation]
Senator Boisvenu: You are talking about dredging and that opens a door for me, because I was a senior manager at Environment Quebec for 10 years. When we talked about dredging, there was a lot of pressure, with respect to regulations or environmental groups that considered dredging harmful to the environment.
I am trying to understand. In your opinion, which is more realistic, investing in a northern shipping route or in dredging?
[English]
Mr. Emerson: I'm sure there are environmentally friendly approaches to dredging, but I'm also sure that there are none that have zero impact on the environment, if only short-term silting and so on. We didn't delve into the particulars of what is the most appropriate way to dredge to minimize environmental impacts.
In the North the ice is melting, the permafrost is melting, the engineering challenges around construction — whether of roads, ports or airport facilities — is becoming a major challenge. There is little prospect that you can rely on the private sector to go in and do this. Government is really going to have to do it. The territories don't have enough money so it comes back to the Government of Canada to significantly up its game and resource commitments to the North, and it's a matter of constructing, regulating, charting and icebreaking. If you look right across the spectrum of activities and projects that are needed in the North, it's a huge challenge.
[Translation]
Senator Boisvenu: Mr. Al-Katib, the image of the railway in Western Canada is related to the transportation of grain and wheat, historically speaking.
Has there been a real transformation of rail transportation in the past few decades? Has competition emerged between agriculture and other sectors, such as resources, which would cause one of these two sectors to be penalized by this recent competition in the use of rail transportation?
[English]
Mr. Al-Katib: If we want to look at the competitiveness or transformation that has happened, the potash industry is a good one to look at because it has faced a scenario where production in the mines was growing dramatically. The requirement for significantly higher levels of transportation infrastructure were seen by the industry and, in partnership with Canadian National and CP, the potash industry has transformed itself into a model supply chain initiative where the mines have very significant storage and surge capacity, a privately owned fleet of hopper cars and extremely efficient port terminals.
In an environment which is entirely regulated by commercial agreement — not by regulations like the way the grain industry is regulated on the Maximum Revenue Entitlement — they have achieved a lot of supply chain innovation in the railways, and the industry has shared the benefits that each side has managed to put into play.
When I look at the past decade in terms of transformation, certain sectors have moved more quickly but sectors like agriculture face a lot more challenges. We have so many delivery points. A mine is constructed and has a very predictable output. You can start and stop production according to your requirements, whereas the rain, sunshine and the weather dictate the output of the agricultural economy.
With this in mind, we need to look at forcing regulation to regulate the grain sector and mandatorily move grain over other commodities, and I think long term is a mistake. Ultimately, it's a network. We don't have a grain network, a potash network and a forestry network that you piece together. There is one transportation network that needs to be optimized for the performance of the system.
We need to encourage all industries to use, as I said earlier, all the ports available, and we need to be better at marketing our products year round, not just in a very short window with everything put through the system in four months. We just can't operate that way.
If I look around the world, other markets do much better. Australia markets their crops year round. I also have four factories in Australia, so I see first-hand that buyers in the world are willing to book out Australian production six months in advance, whereas in Canada they want a "buy on the spot" market. We as an industry have accepted that. I have challenged my colleagues in our sector to do a better job marketing. I think the transformation is happening.
Senator Black: Thank you very much.
In line with the comments of my colleagues, I have a couple of short snappers, as I think they used to say in "Reach for the Top." Mr. Emerson and I would remember that show.
Last week in Calgary the CEO of Air Canada was speaking about his concerns respecting airport fees and other competitive issues respecting Canadian airports. Mr. Emerson, how great do you think the risk is to Canadian consumers, and obviously Canadian corporations as well, if the Government of Canada doesn't address these series of airport issues?
Senator Runciman: You made recommendations on a per-tonne fee on shipments of hazardous goods, and I think that has been applied to crude after Lac-Mégantic.
You recommended a number of other things, and I tend to agree that it should be risk-based. I know you mentioned ammonia as one. As someone who once experienced getting caught in a cloud of ammonia and seriously contemplated jumping off the second story of a building as a result until I found a pocket of air, I think it's much more serious in terms of the hazard it poses if you had an ammonia tank car split open in a heavily residential area.
I can understand reacting to Lac-Mégantic, a horrible tragedy, but there are other higher-risk commodities that are being transported by rail to which the government should be implementing the same kind of approach. It helps in terms of training costs for first responders and builds up this pool of resources to respond to accidents.
The Chair: I want to congratulate you. This has been one of the better meetings we have had in a long time.
Mr. Emerson: I will deal with Air Canada's comments about fees and charges. I do think it is a risk. If you just go back to my example of Vancouver and the competition from Emirates that is now coming out of Seattle, increasingly there will be ways of diverting people to other carriers who cannot get into the Canadian market and it will hurt Air Canada in the end.
I think the CEO of Air Canada in our consultations expressed what I thought was a pretty enlightened view in terms of the need for Air Canada to engage much more intensively in the global marketplace. Reading between the lines, I think it is a recognition that we will have to be more aggressive with air bilaterals and those kinds of arrangements.
I will let Mr. Al-Katib deal with the dangerous goods.
Mr. Al-Katib: In terms of the dangerous goods side, we looked at the per-tonne fee and a pooling concept to allow recognition that these goods, in many cases, need to be transported. Consumers require these goods as inputs into manufacturing processes and other things. So while we look at this risk-based approach, I agree that we need a system that allows for communities to know where their first responders are to be trained and all of these things need to be accounted for.
In the long term we need to move away from urban centres. We do a lot of projects in this country that has truck traffic bypass communities for traffic reasons and the convenience of consumers and drivers, but we don't talk about the need for these types of corridors.
User-pay systems, where the shipper is actually responsible for paying the fees of transport, we have a balance here. Railways are common carriers under the legislation. They have an obligation to carry, but do they have the obligation to take all of the liability of transporting these goods?
The system we recommended would allow for some sort of a pooling system that would allow for these goods to be transported but for the risk to be truly shared.
The Chair: Final comments?
Mr. Emerson: I would wrap up by saying thank you for some tremendous questions and good interaction. I really appreciate it.
There were questions on airport governance, but not on the issues of governance and regulation. I think one of the big problems the government needs to deal with is the mandate of the Canadian Transportation Agency. The agency has the authority, when it receives complaints, to deal with a single complaint dealing with a single service provider and a single complainant. It has no mandate to get ahead of the problem by self-initiating investigations and analysis to identify systemic problems. It has no mandate when a problem, let's say, arises with Air Canada or WestJet, to apply the solution system-wide.
I think there needs to be a hard look at re-empowering the CTA to be able to deal on a systemic basis and to have access to much more real-time information, along the lines of the Surface Transportation Board in the U.S. I think what we have done with what we've called, through successive governments, a market-oriented approach to transportation regulation has gone a bit too far in terms of regulatory capacity. I think it's time to look at how the CTA can be strengthened.
When you have all kinds of situations of captive customers and power imbalances in the system, the only place you will be able to address that is through a government body. I really think the CTA has to be upgraded and given stronger powers to enable it to more effectively deal with system-wide issues.
The Chair: Thank you, Mr. Emerson. As my colleague Senator Mercer said, there may be room for a further study on our part.
I would like to thank Mr. Emerson and Mr. Al-Katib for their comments.
Tomorrow we will be hearing from Ken Coates, Senior Fellow in Aboriginal and Northern Canadian Issues at the Macdonald-Laurier Institute.
(The committee adjourned.)