Proceedings of the Special Senate Committee on
the Cape Breton
Development Corporation
Issue 2 - Evidence - Morning Session
OTTAWA, Tuesday, May 28, 1996
The Special Senate Committee on the Cape Breton Development Corporation met this day at 9:30 a.m. to continue its study on the annual report and corporate plan of the Cape Breton Development Corporation and related matters.
Senator Bill Rompkey (Chairman) in the Chair.
[English]
The Chairman: Before we commence our proceedings, we must deal with some housekeeping items. May I have a motion to authorize the printing of 400 copies of the committee's proceedings and that the chair be authorized to adjust this number from time to time to meet demand?
Senator MacDonald: I so move.
The Chairman: Is it agreed?
Hon. Senators: Agreed.
The Chairman: Carried.
I also need a motion that the chair be authorized to direct the research staff in the preparation of studies, analyses, summaries and draft reports.
Senator Murray: I so move.
The Chairman: Is it agreed?
Hon. Senators: Agreed.
The Chairman: Carried. Thank you.
Next, I need a motion that, pursuant to section 32 of the Financial Administration Act, authority to commit funds be conferred on the chair or, in the chair's absence, the deputy chair.
Senator MacDonald: I so move.
The Chairman: Is it agreed?
Hon. Senators: Agreed.
The Chairman: Carried.
I require a further motion that, pursuant to the Senate guidelines for witnesses' expenses, the committee may reimburse reasonable travelling and living expenses to no more than two witnesses from any one organization, and payment will take place upon application.
Senator Graham: I so move.
The Chairman: Is it agreed?
Hon. Senators: Agreed.
The Chairman: Carried.
May I also have a motion that, pursuant to guideline 3:05 of Appendix II of the Rules of the Senate, no account be paid by the committee unless certified in accordance with section 34 of the Financial Administration Act, by the chair, the deputy chair or the clerk of the committee.
Senator Anderson: I so move.
The Chairman: Is it agreed?
Hon. Senators: Agreed.
The Chairman: Carried. Thank you.
I would inform members that we have a review of last night's proceedings in a bullet format, and that will be circulated to you this morning.
Since we have just moved a motion relating to our staff from the Library of Parliament, I should like to take this opportunity to thank them and our communications people, for the work they have done. Senators have had at least three documents from the Library of Parliament, which I personally found very helpful. I think we all did. They were comprehensive and readable. Thank you very much.
Senator MacDonald: Mr. Chairman, I would add that, considering the short time you had to put this documentation together, with the help of the clerk and the research staff, I have rarely seen such a thorough job in my 12 years as a senator.
The Chairman: I would welcome everyone to our second session, particularly Dr. Tom Kent, the former president of the Cape Breton Development Corporation, who has also had a long and distinguished career in Ottawa in a number of influential and important positions. He is a distinguished Canadian in his own right.
If Dr. Kent could make his presentation within 15 minutes, then we could start our questioning. This morning we are operating under some time constraints which was not the case yesterday evening. I want to be as disciplined as possible today. Having said that, I would invite Dr. Kent to make his presentation and thereafter we will ask questions.
Dr. Tom Kent, Former President of the Cape Breton Development Corporation: Needless to say, it is a great pleasure to meet with this Senate committee to try to assist you. However, my ability to do so is somewhat limited in that I resigned from the presidency of Devco 19 years ago and I have never felt that second-guessing one's successors was anything but an indulgence that was likely to be rather frustrating, so I have always tried to avoid it. I am not an expert on the current situation of Devco.
I hope I can clarify the guidelines on which the operation of Devco was set up and perhaps use that as a basis for discussing what can be done now.
As you all know, federal subsidies to Nova Scotia coal began soon after the First World War. They increased in the last year of private operation; in 1967-68, the total was over $30 million. That, of course, is equivalent to about $150 million in current dollars. A subsidy of $150 million in today's dollars for one year's operation puts in perspective the costs of Devco. Devco has been expensive but, compared with the cost of the previous support, it has been cheap.
However, even that enormous subsidy was not enough for the private operation, and Dosco decided to quit mining. As you know, the government set up the Donald inquiry in 1966 which agreed with Dosco that the mines could not become economic, but the social disruption of sudden closure was quite unacceptable and Donald therefore produced an ingenuous plan for phasing down the mines over 15 years. In that case, the last coal in Cape Breton would have been mined in 1981.
Donald rightly regarded Dosco as an unsuitable agency for that plan and proposed federal ownership, which the federal government of the day accepted, but with some significant modifications. Donald proposed a separate development corporation to promote alternative employment. The legislation did not follow that advice. It set up one corporation for the two purposes. I should emphasize that, in my view, that was crucial.
Donald had prescribed a firm phase-out, whatever was achieved by development. Legislation kept the two programs together and instructed the joint corporation that the operation of coal should take into account progress in providing employment outside the coal-producing industry.
In that spirit, the legislation provided additional flexibility. The phase-down over 15 years, of course, did not remove the need for some new equipment in what were decrepit mines. Donald proposed that that be confined to improving some of the existing mines, and that there be no new mine. The legislation left that option open.
Devco began in March, 1968, with an appallingly awesome task, and the early results were disappointing. I will not go into the reasons for that unless you want to discuss them later. What was important was that by 1971, it was clear that a different approach was needed and, in the winter of 1971-72, there was a reassessment of the Cape Breton problem. In essence, the conclusion was less optimism about alternative employment but more optimism about coal.
Understandably, Devco had rushed into a vigorous conventional promotion of the industry by way of financial incentives to attract footloose industries from outside. That was the conventional wisdom of the time. In practice, the looseness was chiefly in the area of finances. Some venturers took the money, came and soon went, and very little was left to show.
That kind of industrial development having failed in the late 1960s, could not be expected to succeed in the less buoyant economic conditions that were emerging in the early 1970s.
There was a shift of emphasis to reliance mainly on developing local entrepreneurship and enterprises with a natural link to Cape Breton resources. That was a surer approach, but a slower one.
On the other side, we stuck our necks out with an economic projection. We argued that the long decline in coal prices was over, that oil and gas prices were sure to rise, that hydro costs were also rising; and that nuclear energy was not proving to be cheap. The trend of energy demand in those circumstances meant that coal had a future.
In 1972, frankly, there was a lot of scoffing at that approach. Fortunately for me, OPEC came not long afterwards and energy prices escalated beyond expectations. However, there was a reservation and that was environmental concerns.
Dirty coal, especially high sulphur coal, was not wanted, even in conditions of high energy demand. Much of Cape Breton coal is high in ash and sulphur. The only washery that the old company had was a very small, run down operation which removed some ash and nothing else. That was not acceptable. We therefore undertook research and development to establish that, with a modern preparation plant, Cape Breton coal could meet excellent market standards.
The best bet for Cape Breton at that time was not a phasing out by 1981, but rather to aim at a stable industry for the next 20 to 25 years. It would be smaller than it had been, but more efficient. I say 20 to 25 years because that is the life one can expect from a modern, high-production, submarine mine. As you know, as you go further out with submarine mining, the costs rise dramatically.
The plan to give some sort of social stability to Cape Breton had another essential element: the introduction of pensions for miners. The old company had not provided pensions. In fact, in the early 1970s all that retiring miners had to look forward to from age 65 was the Canada Pension Plan which, at that time, was very small. We did not introduce a rich pension plan, but I think it is fair to say that it made a great difference to the social environment of Cape Breton. I always argued that most of that pension cost was not really a part of the Devco deficit. The pension miners worked mostly for Dosco, which had made no provision for them. A down-sized industry fulfilling social obligations to former employees of the industry is in fact carrying a burden from the past, not from its present operations. However, the Department of Finance never agreed with that view. They preferred that the Devco operation appear to be expensive.
In 1972, the government approved the new plan. The best of the old mines -- number 26 -- was to be modernized. There was to be a new Lingan mine, which had been approved earlier, but hardly any work had been done, and no firm plan had been made for it. Instead, that was to be vigorously developed. The other old mines on the south side of the Sydney harbour were to be closed. The decision about the one on the north side, Princess, was postponed while there was exploratory drilling in the nearby Point Aconi area. That was fairly satisfactory. In 1974, we began the development of the new Prince mine in place of Princess.
For a time, at least, the results were pretty satisfactory. By 1977, output-per-man shift had doubled compared with the 1960s. In 1977, the operating deficit was down to $11.5 million despite $13.5 million in pension and retirement leave costs. In fact, Devco was then returning a profit to the treasury because we had persuaded the Nova Scotia Power Corporation to pay for coal the firm equivalent of what oil would otherwise cost. At that point the federal government was subsidizing imported oil very generously. I argued that the Department of Finance should pay us for our coal what it would have paid for oil. Needless to say, I did not win that argument. However, at that point, it was fair to say that Devco was contributing to the national economy in every sense. It was also an important spin-off for Cape Breton. Arrangements were made with NSPC that led to the development of the large Lingan generating plant.
However, we knew that we had only bought time. By sometime in the 1990s, Lingan and Prince would be old mines. The way the national economy had begun to go from the mid-1970s on, it was impossible to be strongly optimistic about new industries for Cape Breton. The question was this: Would there still be coal mines after Lingan and Prince and the rehabilitated number 26 became old mines in the 1990s?
We began the essential move for long-term planning, which was that coal under the sea, which in the past had always been a matter of speculation until the miners got there, must be explored in advance. We decided to imitate the oil industry and do offshore drilling for the first time. That was undertaken in 1977-78. Some of the results were encouraging. They confirmed that Lingan and Prince probably could have fairly long working lives, and it indicated extensive, thick seams off Donkin.
I must emphasize that what I say from now on is only an outsider's view.
In 1981, the tunnels to get out to the Donkin coal would be gone. My private view was that that was a bit premature. I was not sure the drilling had been as extensive as the scope of the project called for. However, at that time, the attitude of Devco management had become expensive in a number of ways. The extremes of the late 1970s had been encouraging. The 1980, the deficit had been only $10.5 million, which in constant dollars was minute compared with the past. That was after $17.5 million in PRL and pension costs.
However, problems quickly intervened. In 1981, Devco was hurt by a prolonged strike, embittered by the corporation's switch to an expensive management style. By 1982, the general economic recession was a reality and was compounding the effects of the worldwide disruption in the steel industry, which had begun in the late 1970s, and it had dramatically weakened the market for coke and coal. The greatest setback was the disaster in number 26. That was, of course, a Westray type of disaster with a loss of life, but it compelled the closure of the source of the best coal in Cape Breton. All that had been invested in the modernization of that mine was lost.
To make up that loss as quickly as possible, Devco decided to develop the Phalen mine. That decision, I assume, was a basic factor in the abandonment of the Donkin project.
My impression is that Devco has since been living from hand to mouth without a long-term plan for a reasonably stable coal industry -- hence, the present situation.
Other lessons from the past can be applied. First, to go back to 1967, there was then very little unemployment nationally. Nevertheless, the government -- and I think it is fair to say the public generally -- accepted that the social disruption of sudden closure of the mines was unacceptable. If that was true then, then it is much more so now. At that time, at least, there was a decent chance of jobs by going down the road; now there is not even that.
The obligation to do everything possible to sustain employment in Cape Breton, in practice, means, to a substantial degree, mining employment. Legally, of course, Devco no longer has the obligation since the separation of industrial development; but it would seem to me that it is the government's obligation nonetheless.
We ought to be in a position to know whether Donkin is the best bet. If there are technical doubts, as there may well be, they should be resolved by immediate further drilling, drilling which, in my view, should have been done years ago. It is no use saying, with respect, that the government just does not have the money for such development. Government finds the money for what it wants to do, for example, by bribing the Atlantic provinces to harmonize sales taxes with the GST.
I am not saying that the Donkin project is feasible because I just do not know if it is. However, I am saying that we should be absolutely sure whether or not it is. As I understand, there has been some talk that, if it is feasible, privatization is the answer. Against the history of subsidized private industry, that would be an incredible situation. If Donkin is at all a dubious prospect for the government, it is even more so for serious private investment.
The only kind of privatization I can imagine is through some Westray-type of venturer who thought it could get sufficiently good terms from the government to make money by high-grading the mines for a few years and then walking away. That would be the last thing to contribute to the resolution of Cape Breton's social problems.
Like it or not, history has created a public commitment to ensure that, if the industrial community of the coal field area of Cape Breton must continue to on decline, then it should at least do so with civilized gradualism. That is the minimum, and I would hope, of course, that we could do better than that.
The Chairman: You see before you, Dr. Kent, a star-studded cast. If Cape Breton were the venue for the National Hockey League, this would be Team Canada. On both sides of the table we have a great deal of experience and knowledge. I know I need not introduce the players to you.
Senator MacEachen: Thank you, Mr. Kent, for your presentation. Your appearance here gives me an opportunity to say a word about your contribution to the country, a contribution which has been outstanding, particularly in the field of social development and social policy.
Insofar as Cape Breton is concerned, a great debt of gratitude is owed to you, though it is not generally understood or known, because of steps you took regarding pensions for coal miners. You pointed out the situation that prevailed in the early 1970s; that a coal miner retiring at age 65 had no support except the meagre Canada Pension Plan. The steps which were taken with respect to pension benefits have changed the perspective of those about to retire.
Having said that, I should like you to go into a little more detail on the pension arrangements, how they developed, and how you view them today. I would ask particularly about the funding of the pension plans. Is it now, in your view, legitimate for Devco itself to bear some responsibility for the pensions of those who have been employed over the period when Devco had control of the operations? I take your point in drawing a distinction between the Dosco employees and the present employees, most of whom began their careers with Devco.
Mr. Kent: Thank you for your kind words, Senator MacEachen. It is nice hear them, particularly from the driving force in the creation of the Cape Breton Development Corporation and the laird of the constituency where I lived for some years.
I apologize that I cannot give up-to-date details on the size of the present pension plan. One of its important provisions was that the benefits would be escalated on the same principles as the Canada Pension Plan. It was a non-contributory plan based on service in the industry, whether with the former employer or with Devco. That was crucial at the beginning. Additional pension was allowed on a contributory basis, if so desired.
I have forgotten the exact figures now. It was not an enormously rich pension, but it was certainly enough to make, as you suggested, senator, a very considerable difference to the retiring miner.
At the time it was introduced almost all the costs represented the costs of the past, so to speak, and therefore it was my view that they were not properly a charge against the current operations of the corporation. That would be less true now since more of the workforce has been employed during Devco's years. However, even with the present downsizing, a large part of the pension cost is still a cost attributable to the past and I would therefore argue that it should be distinguished from the current operating losses of the corporation.
I understand there has been talk about the necessity of funding which is a favourite concept of people who apply the ideas of private insurance to public insurance. That obligation belongs ultimately and inescapably to the government. It makes no sense at all as a charge on the current operations of Devco.
Senator MacEachen: On that important point, there is now a corporate plan proposed in which the corporation itself must meet the so-called "unfunded" liabilities, including the pensions. It raises the question of why a corporation like the Cape Breton Development Corporation should not be expected to discharge its obligations to its employees. It also raises the question of why, in the spirit of solidarity, the present coal miners should not make a contribution to their former colleagues who are now in retirement.
Yesterday, Senator Buchanan made the point that coal mining was a way of life. Certainly it has a culture of its own. One of the aspects of that culture, at least in my opinion, was the sense of solidarity that existed among the miners. In the old days, they called each other "brother." Members of the UMW were "brothers."
Drawing upon that view, is it a good thing to ignore that spirit of solidarity and say that the current corporation has no responsibility for those who served for many years and who are now in retirement? Where do you draw the line, if a line is to be drawn?
Mr. Kent: You draw the line in relationship to the period of service. Clearly there is no obligation on this corporation to continue to pay pensions to those whose "entitlement," which is admittedly established, is based on their work in the industry before Devco. They are now, obviously, a diminishing group. To me, that seems perfectly clear.
It must be recognized that the industry has continued to be significantly downsized. To ask the present miners to pay the cost of the pensions, even of those who retired relatively recently, is to ask them to carry quite an exaggerated burden in relation to the number of miners now working to pay for it.
Obviously, one would have to make a fairly complicated decision as to what portion of the total pension cost is fairly charged to the industry now. I am not suggesting that it should be entirely eliminated, but I think the charge, which is, fairly, a cost to the corporation and to its present miners -- its very much reduced number of miners -- is only a small proportion of the total cost.
Senator MacEachen: I appreciate that answer because it acknowledges that the corporation and the current miners have some responsibility to their colleagues, to their brethren, to their friends and to the community. That obligation can be modified to take into account these other considerations, including former employees of Dosco and, possibly, a portion of the pension costs that have developed as a result of the rapid downsizing of the workforce.
Mr. Kent: Yes.
Senator MacEachen: I ask this question with the expectation that possibly it is not a fair one, but sometimes questions are not fair. Have you had an opportunity to look at the current corporate plan?
Mr. Kent: No. I am sorry, senator, I have not. As far as I know, it has not been widely distributed. It certainly has not reached me.
Senator MacEachen: We will try to provide you with a copy. Perhaps you can read it at your leisure. If you have any comments about it, the committee would certainly be glad to hear them.
The Chairman: I will ask the clerk to send you a copy, Mr. Kent. You might want to reply to us.
Mr. Kent: I would be happy to do so.
Senator Murray: To the welcome extended by Senator MacEachen, I would add, for the benefit of colleagues, that Mr. Kent is also a fairly recent author of two books, which I commend to colleagues. One is a memoir, largely of his days in Ottawa, called A Public Purpose, which was written some years ago; and the other is called Getting Ready for 1999. Both are very interesting reading. I must caution senators that Mr. Kent does not spare the Senate.
Mr. Kent: I just want it to be elected.
Senator Murray: That is pretty radical for us.
Senator MacEachen: Not for this Senate!
The Chairman: For the benefit of those listening, perhaps you could tell us the publisher and where it is available.
Senator Murray: I believe the publisher of A Public Policy is McGill-Queen's University Press; and in the case of Getting Ready for 1999, the publisher is the Institute for Research on Public Policy.
The Chairman: Are they available at Books Canada?
Mr. Kent: Probably not by now.
Senator Murray: Recently, I had occasion to read your first book because of some reflections you had included on regional development, the beginnings of DRIE, for which you were the first deputy minister, and the Ottawa mind-set with which you had to contend. You will not be surprised, perhaps, to learn that the mind-set, at least in my experience, has not changed very much in all these years. My reason for reading the book was to get ready for a debate on a report by the Senate Banking Committee which recommended that the regional agencies such as ACOA and others be folded into the Federal Business Development Bank. I will not ask you to comment on that unless you would like to do so.
I wish to follow up on Senator MacEachen's questions about what are called "social costs." What portion of them belong on the bottom line of Devco, and what portion, perhaps, should be assumed by the federal treasury? This has become an issue in the present debate.
Last November, Mr. Shannon, the then acting president and now chairman of the board, suggested that one of the prerequisites for getting Devco back on track to a viable operation was that the "social costs" be transferred to Ottawa. Later in the same presentation, he said that, if the social costs were not transferred to Ottawa, then we would need $70 million in funding over the next couple of years.
That seems to quantify the social costs which he felt might be assumed by Ottawa. Last night, I tried, unsuccessfully, to get him to elaborate on this. I was unsuccessful because, I believe, he is happy with the present plan that has just been approved by the government, and he will not press his case on social costs too strongly. I asked him: If Devco were a candidate for privatization today, what portion of those costs did he think the government could realistically expect a purchaser to assume? He would not be drawn into that discussion. I then referred to a number that he used -- approximately $640 million -- which represented the cost of closing Devco down. Of that amount, he reckons that about $380 million would represent an ongoing cost for the federal government, for example, for pensions and other social costs.
In answer to Senator MacEachen's question as to where you draw the line, I wonder whether the line might be somewhere around 1982, which, I think, was the date when the contributory pension plan became compulsory. One of the witnesses last night said that there are still an astonishingly large number of people who are still not covered by the contributory pension plan. Have you any thoughts on quantifying the social costs that do not belong in Devco's bottom line?
Mr. Kent: I wish I could be more helpful. When I was actively involved, almost all of the social costs were, in effect, costs of the past and did not fairly belong, as I saw it, to the corporation then. Obviously, that has changed for the reasons Senator MacEachen noted, and 1982 seems to be, possibly, not an unreasonable break point. By then, certainly the costs would have become much more significantly the costs fairly attributable to the present corporation and to the present miners to help to support their brothers.
I do not honestly feel I can competently say whether or not that would be the right solution. If the will were there, there is no question that a dividing line of some kind could be drawn, a dividing line that would still be reasonable, given the drastic downsizing and the unfairness of requiring a present miner to support four of his brothers. That has been put forward as a reasonable ratio.
Senator Murray: Devco identified this in their financial statements, and perhaps always has, because their next-to-bottom line is something called "cash flow before pensions." Usually, the cash flow before pensions is positive. It is certainly projected to be positive over the next five years. It is only when you include pensions and something called "human resources strategy," which is the closure of Lingan and the present downsizing, which amounts to $50 million to $60 million more or less, that you get a negative bottom line for the corporation.
The next witness to appear before us is the mayor of the Regional Municipality for Cape Breton. The regional municipality and others have suggested that Devco should be split into two divisions, a coal mining division, and one called an "accumulated liabilities division."
I will not ask you to comment on the numbers, Mr. Kent, unless you wish to do so. I will leave that question for our next witnesses. Their recommendation is that unfunded historical liabilities be transferred to this accumulated liabilities division. The amounts are $160 million for pensions and benefits; $180 million for workers' compensation; and $150 for environmental, a rather large number. In a way, the number for environmental is a recent number in the sense that our consciousness of the need to deal with the environment is of fairly recent origin. As well, there is $10 million for last year's loss. The total estimated liabilities amount to $500 million.
What is your view of the concept of dividing Devco into these two divisions and wiping the slate clean?
Mr. Kent: I am not sure that I appreciate the concept of two separate divisions. What would the accumulated liabilities division do except appropriately meet financial obligations at treasury expense? I would have thought that the same effect would be achieved by simply recasting the accounts of Devco to show those liabilities of the past as a separate line in the accounts. It would have to be more sophisticated than an overall line for pensions, for the reasons we have discussed, although there are some pension obligations which are genuinely current obligations.
Perhaps the structure is not the point. I agree entirely with the idea of a separation and it what I argued for many years ago.
Senator Murray: There is a man in Sydney by the name of Mr. Peers -- I do not suppose he will object to having his name used -- who sent a fax to Senators MacEachen, Graham, Buchanan and myself in which he outlined an argument with which I think you are familiar, Mr. Kent. The argument is this: "Pension them all off. Give them a dignified pension. Stop sending good money after bad. Invest your money in information technologies or something of the kind." Earlier, I left a copy of the fax with you. I am sure you have heard this argument before. Would you care to comment on it?
Mr. Kent: The average age of a miner is 40, which means a good many are younger than 40. To pension people at that age seems to me to be an extraordinarily cruel thing to do. It may mean that they live, but the most important thing in a man's life is to have a sense of function and purpose in society. For a young man, a pension does not provide that at all. It seems to me an evasion of the real problem, which is to provide jobs, whether in coal mining or, if it is possible to provide them elsewhere, even outside Cape Breton. That would be better than pensioning off these people.
Unfortunately, with the current state of the economy, as I said, even going down the road is not a solution for many people. Therefore, I would say that pensions are no substitute for work. If it is uneconomic to continue coal mining, then I would suggest that a revised community development corporation be set up to employ people in cleaning up the environment, for example, something which we all know is desperately needed.
In fairness to Devco, compared to what it had done in the past, it did try to do some environmental clean-up out of its own resources. However, much more needs to be done. I would have thought the solution lies in a community development corporation, or whatever you want to call it, much more so than in universal pension system.
Senator Graham: I would welcome Mr. Kent. I had a ring-side seat when he was persuaded to come to Devco as president in early 1971. I watched, as did many others, Mr. Kent's magical, persuasive powers, both on the Cape Breton scene and here in Ottawa where, most especially, it was terribly important to the corporation. I value the experience of having served under Mr. Kent when he was president.
As a matter of fact, as many of you might suspect, the gentleman to my immediate left, Senator MacEachen, had some influence on my coming to Ottawa when I was appointed to the Senate in 1972. When I think back over those 24 years I sometimes think that Mr. Kent had some indirect influence as well on my coming to Ottawa because, perhaps, he wanted to hasten my departure from Devco. At any rate, I look back with many fond memories to the enormous contribution Mr. Kent made to that area and, as Senator MacEachen said, to our country.
Mr. Kent, would you cast your mind back and describe the state of labour-management relations at Devco when you were president?
Mr. Kent: On the whole, they were fairly good.
However, let me first say that part of the reason I am critical of an unelected Senate is that what Senator Graham said is the exact reverse of the truth. I very much resented his being called to the Senate shortly after I went to Devco. During the first few months I was there he was by far my most important and closest colleague.
To return to the question, it is hard to give an altogether simple answer. On the whole, they were good relations although there were problems. Perhaps the greatest problem, in a sense, was that the inclination of the UMW was to always want the most even possible wages for all coal miners. There was a great reluctance to agree to the size of the differentials which were needed for the electricians, the mechanics, and so on with an increasingly mechanized operation.
In negotiations, I often found myself arguing for more pay for the more skilled workers. The UMW always tended to object to that as lessening the size of the increase possible for the workforce as a whole. That was one very difficult issue.
The other issue was that the willingness to adapt to a more mechanized operation was far less than what was in the long-term interests of the miners. They were conservative in their approach to their jobs.
Another problem -- or another aspect of the brotherhood relationship -- was an excessive willingness to treat all accidents or illnesses as having been caused in the mine, even when it was fairly clear that some of them had not been caused in the mine, to take maximum advantage of workers' compensation. Therefore, to some extent, there was a resentment of what we had done by introducing medical and paramedical services into the mines. However, in a sense, those were entirely understandable problems. They did not alter the fact that the essential relationship was a cooperative one.
With respect to union leadership, there were no strikes during the time I was involved, but there were some illegal walkouts. Those were always resolved fairly quickly with reasonable cooperation from the union leadership. I look back with some satisfaction at the extent to which we were able to slowly, but in a cooperative spirit, change what had been very understandably the resentment of the company and the suspicion of any change that had been inherited.
Senator Graham: Was there an absenteeism problem?
Mr. Kent: Given the nature of the work, there is an absenteeism problem in all mining.
There was a problem, yes. There was more absenteeism than one would have liked to see, but I think that was something inherent in the nature of the industry. We reduced it by an appreciable degree. As the mines became mechanized and there became a greater understanding of changing needs, the sense of responsibility, of not being off the job suddenly and disrupting the operation, definitely improved.
Senator Graham: How much emphasis did you put on export sales?
Mr. Kent: With the coal preparation plant, export sales became possible. Of course, this was before the development of Lingan and before the Nova Scotia Power Corporation's needs became anywhere near as great as they did later. We put great emphasis on developing export sales, and met with considerable success. After the preparation plant was in operation, we sold coke and coal to a many companies all over the world. We were more successful than we had been in the past in selling some thermal coal.
Senator Graham: Over the years, the word "privatization" has cropped up every once in a while. I am sure it did in your time. Do you have any views on the privatization of Devco?
Mr. Kent: My views on that subject are of two kinds. Insofar as I hope a viable operation is possible for the next 20 to 25 years with new mines or at least one new mine, I feel that to put that into the hands of private enterprise, against the volumes of history of the industry and some recent events in Nova Scotia, would be a risk, an unwise risk to take. If there is a viable operation after all that the federal state has put into it, then the operation and the advantages of that development should continue to belong to the Canadian public.
That being said, I think there is a danger in one type of privatization in that it could lead to a quick, high-grading operation that would use up some of the existing resources rather quickly and perhaps, in the short run, profitably, but not last for very long and leave us in a worse state than ever.
Senator MacDonald: Mr. Chairman, if this sounds like Dr. Tom Kent day, it is overdue for reasons that have been mentioned. I also wish to add my words of welcome and express my appreciation for the tremendous assistance and advice Dr. Kent gave me as deputy minister of DREE when I was heavily involved in the attraction and financing of secondary industry in the entire province of Nova Scotia.
In responding to the questions I will ask you, I hope we will come to the conclusion that coal has proven to be the only commodity that we have to cling to in Cape Breton, if we can cling to it in a practical and workable way.
When you left DREE and went to Devco, had you come to the conclusion that the Donald suggestion of diversification was really not working?
Mr. Kent: It clearly was not working. Before I went to Cape Breton, I did not have a view as to what should be done otherwise. The place of development was in Cape Breton, not in Ottawa. I went in the spirit that there had to be a new approach, but I had to be there in order to find out what the new approach should be.
With respect to the more general question, the conclusion that quickly emerged was that the attempt to bring in industry from the outside will work to a degree in some circumstances, but it is only possible on any substantial scale if the national economy as a whole is buoyant. Therefore, the attraction of an available labour force becomes extremely important to companies. However, if there is an available labour force in many other parts of the country, attracting so-called "footloose industries," attracting them to such a relatively remote area from the centre of the economy is only possible if they are either entirely new industries that have no natural location or if they are industries that, frankly, would not survive without a great deal of external public investment. In that case, the risk that they will not survive long is great. In other words, I am saying that under the economic circumstances -- not so much as they had been in the 1950s or 1960s, but as they were becoming in the 1970s and as unfortunately they have remained ever since -- it is true that coal is the best bet still for Cape Breton. The situation may be different now, but the only possible conclusion in 1972 was that, most definitely, the idea of phasing out the mines had to be abandoned.
It was possible to create a viable coal operation, and it was helped indeed by correctly guessing the emerging energy circumstances at that time. It did become, if one discounts the old social costs, a profitable operation.
Senator MacDonald: As I remember, over the six or seven years that you were the president at Devco, you applied yourself pretty well to what the term would suggest, the Cape Breton Development Corporation in all its forms. You experimented with a variety of different things. In one particular meeting you referred to things that would fit the lifestyle or the culture of the Cape Bretoner. Sheep farming, for instance, is one I remember.
Mr. Kent: That was one, yes. It had limited success, as it turned out. We decided that chasing after footloose industries was not a workable program. We decided that industrial attempts at development should be concentrated on trying to develop local entrepreneurship in activities that had a natural link to the community, to its lifestyle and its resources.
We did that on a very considerable scale. There were many small-scale ventures in the tourist industry and in various agricultural operations. Not all the experiments were successful, but a good many of them did make an appreciable difference to Cape Breton Island as a whole.
Unfortunately, that was not true in the industrial area. Even now in the industrial area one really cannot see any better prospect than a stabilized, still-more-efficient coal industry. I have to confess that I have not seen Devco's latest plan, but I hope that is still their conclusion.
Senator MacDonald: Your experience would cause you to conclude what you have just said: Coal is what it is.
Mr. Kent: Yes. That is not to exclude other things, but one must focus on the best chances, and coal is certainly still the best chance.
The Chairman: I will conclude the questioning now because we must leave time for the Cape Breton Regional Municipality. I know Senator Buchanan has a question, but I will put him on first with the next witness.
Senator Buchanan: My question is for Dr. Kent. It is a very quick question and very important.
The Chairman: I would hate to think that the elected mayor of the regional municipality came all the way from Cape Breton and had to be rushed through.
Senator Buchanan: I realize that, but Dr. Kent and I have --
The Chairman: I will exercise the prerogative of the Chair and bang my gavel and say thank you very much, Dr. Kent. We appreciate your time and your assistance.
Senator Buchanan: I will talk to Dr. Kent outside.
The Chairman: The corridor is often more important, as you will discover.
I should like to welcome His Worship John Coady, mayor of the Cape Breton Regional Municipality. With him are Jim MacCormack, administrator of corporate services for the Cape Breton Regional Municipality, and also Steve Farrell, president of Farrell & Associates, a consultant to the Cape Breton Regional Municipality.
Mayor Coady, welcome. Please proceed.
His Worship John Coady, Mayor of Cape Breton Regional Municipality: Thank you, Mr. Chairman, for giving the Cape Breton Regional Municipality an opportunity to be heard. I apologize that I must catch a flight soon. I thank you, Mr. Chairman, for expediting the process.
Our written brief as presented to the committee is in draft form. We have made some modifications and will provide you with the final version later.
Our presentation comes in two stages. The first will be a reflection of the community's concern with respect to the impact of Devco and coal mining on the community. Second will be a more technical presentation; hence we have the overhead projector and slides which we will use a little later to explain the implications of our municipality's proposal, as provided to Devco, and to address some other issues which may be of interest to the committee.
The recently announced approval of the Cape Breton Development Corporation's five-year plan by the Government of Canada is the first step in affirming the delicate but vital stability of the coal mining industry in Cape Breton. The injection of essential capital allows Devco to begin its challenging mandate of achieving commercial viability. While achievable, success could prove elusive unless there is a full commitment of all stakeholders to the necessary directions of this plan.
The Cape Breton Regional Municipality welcomed the opportunity to contribute to the consultative process initiated by Devco. We used the opportunity to present our views on the corporation's proposed strategic plan, stressing the need to take bold but responsible measures, including the pursuit of aggressive new mining technologies modeled on the recommendations of the Boyd report. I will refer to that report again later.
In part two of this presentation, we will review our submission to Devco in which we proposed an alternative mining plan, including Boyd's findings in their independent assessment of Devco.
Based on commercial viability within three years, our plan included a strong human resource component with enhanced training and the retention of a younger workforce. Cape Breton Regional Municipality was pleased to see that some of its suggestions, along with those of other community contributors, were incorporated into the approved plan.
We support and endorse the underlying philosophy of commercial viability and competitiveness. To achieve this, we must turn our collective focus on its successful implementation. As we stated in our initial presentation to Devco, the crisis confronting our community, ladies and gentlemen, and our mining industry is in reality a community crisis. Not only does downsizing affect the lives of miners, their families and our mining communities, but it also directly impacts on the economy and the very fibre of the overall Cape Breton community. However, despite the reassuring news of government assistance, the situation remains critical, demanding local solutions and positive support and intervention.
The historic problems confronting Cape Breton's stagnant economy have been well documented. Our economy continues to be buoyed on our resource industries of coal and steel, defying the global trends which dramatically shifted world economies to a more knowledge-based orientation. We find ourselves at times locked on the horns of a dilemma, unable or unwilling to let go of what we have for fear that the bottom will fall out, and fearing that lost jobs will not be replaced to accommodate our inadequately trained workforce.
Many Cape Bretoners understand the directions of the new economy and are embracing it with surprising resolve. High-tech ventures are taking root throughout Cape Breton Island initiated by young, enterprising entrepreneurs. They take advantage of high-tech communication and a pristine lifestyle to make Cape Breton an accessible and competitive environment for business; but these new-age industries could not survive in our communities without the presence of staple industries like coal mining.
One of the immediate impacts of Devco's approved plan is the reduction in job loss from the original projection of 800 to 660. That most workers will be able to take advantage of the early retirement package will negate some of the ominous projections we presented in our earlier response to Devco.
In our attempt to place in perspective the loss of 800 jobs, with the accompanying loss of 1,600 other jobs when a two-to-one multiplier is applied, we presented the following chart to indicate what these layoffs would have represented in other economies. The 800 Cape Bretoners laid off in our coal mining industry would equate in Toronto to a loss of 42,000 jobs. In Ottawa-Hull, the region where we are today, it would be 10,000 jobs; and in Halifax, it would be 3,400. If we factor in the unemployment rate that presently exists in Cape Breton, a layoff of the magnitude originally proposed would actually result in a loss of 289,000 jobs in Toronto, 75,000 here in the Ottawa-Hull region and 22,000 in Halifax.
These figures are put before you to give you an example of the type of economic impact that we have when we look at a substantial reduction in our workforce.
Clearly, the enhanced benefit package and the reduced layoff numbers resulting from the new plan impact less severely on our economy and alter these numbers. Nonetheless, we still realize a significant negative impact on our economy when the layoffs presently envisioned have their full effect.
The Cape Breton economy is best characterized as a stagnant one, with average unemployment rates hovering around 20 per cent. That is double the provincial average and 2.5 times higher than the national average. The cumulative effect of both public and private downsizing, the downturn in our fishing industry, health and social assistance cuts, employment insurance "reforms" and education spending cuts, combined with increased taxation, have already taken their toll on our economy.
Over the past few years, National Sea Products displaced 700 jobs; Micronav displaced 150; and Maritime Tel and Tel's province-wide rationalization reduced its payroll by 800 jobs. The Department of Health has projected 800 institutional health care cuts, jobs that will disappear in Cape Breton as a result of provincial reform measures. Unfortunately, the list grows.
Throughout our communities we see daily evidence of the ripple effect of what we call rationalizations. The informal responses from retail outlets suggest that business is off by 25 per cent; the Board of Trade speaks of uncertainty within the business community; and there is a feeling that the current industrial situation has temporarily immobilized our local economy, with everything being put on hold.
The recently announced Employment Insurance Program changes will have a further negative impact on our people. Currently, UI claims from Cape Breton represent 17.5 per cent of Nova Scotia claims. Whereas UI benefits make up 4 per cent of the total income in Nova Scotia, they represent 7.9 per cent, or about twice the provincial average, for our area. Clearly, the proposed reductions of these transfer payments will destroy jobs disproportionately in our area as compared to metropolitan areas.
Demographic profiles reveal further evidence of deterioration in our municipality. We have high unemployment, a shrinking labour force participation rate and a declining and aging population. Recent statistics indicate that the participation rate for Cape Breton stood at 50.7 per cent in 1993, compared to 60 per cent provincially. When one factors in those who have dropped out of the labour force or who have never been able to enter it, the real unemployment rate in Cape Breton is more in the order of 35 to 40 per cent.
While our overall population has been decreasing, the senior citizen segment of the population is the only group to have recorded an increase. Out-migration of young persons is reaching critical proportions. Recent census figures reveal that in the five-year period ending in 1991, 2,700 persons aged 18 to 24 left our county -- and they did not come back. Job opportunities for young, educated persons are crucial if we are to reverse this trend.
What about the future? The future is why every job in Cape Breton is so critical and why any plan for that future, especially related to the coal industry, must optimize every opportunity to maintain and create new employment initiatives. That is not to say that jobs within Devco must be retained at all costs. Viability is essential. The Boyd report is unequivocal on this point and predicts that, with proper strategic interventions, the mines can have a long-term, commercially viable future. This will require a new industrial culture at Devco, one that Boyd concludes would allow substantial improvements in productivity and costs, if all the parties -- that is, Devco, management, union, government and the community -- take action.
Economists predict that in the future our region will not be able to rely on the federal government or federal Crown corporations to create new jobs or to increase transfer payments to support our local economy.
Prior to the era of transfer payments, our island was built on a culture of self-sufficiency and independence, like many islands. Transfer payments, while propping up local economies, do impact negatively on our region's capacity to make do for itself. Local responsibility diminishes. If we are to be competitive in the new economy, Cape Breton must take ownership of its own future. Attitudinal change must be encouraged and self-reliance nurtured. From crisis, we seize opportunity. The advantage of local action is that it can identify, mobilize and combine diverse local resources while at the same time establishing structures to deal with local factions and antagonisms that commonly accompany restructuring.
The federal government has now provided a measure of working capital that should assist Devco to implement necessary primary technological improvements to increase mine safety and output. The challenge now shifts to Cape Breton. The corporation, both administration and union, must address the whole question of management structure, work policies and labour relations to create a production-oriented culture within the mining community. The Cape Breton community is inextricably tied into this whole process.
The human resource problem, which the Boyd report described as "the single most serious and fundamental problem" confronting our local mining industry, can best be addressed by our own community. This will not be an easy task. Leadership, vision, initiative, understanding and patience, as well as cooperation and conciliation, will be required to reverse the fortunes of the industry. It is important that the senior orders of government recognize the enormity of this challenge and, while acknowledging that their direct interventions cannot lead to the necessary solutions, recognize that support must be available for local initiatives focusing on these so-called social problems. The government's role should be to facilitate ongoing access to information at the local level and to promote our capacity to make best use of that information.
This is not soft talk. Our island's economy must adapt if we are to maintain the lifestyle and standard of living most of us have come to cherish. Too often, it has been easier to throw money at problems than to confront the problems firsthand. Now is the time for prudent and informed intervention. We will build on our strengths: our miners' tenacity, determination and expertise; our modern mine infrastructure; the corporation's local technical capacity; our mining culture and heritage, and our community's determination to survive. With astute intervention, we will emerge from this crisis stronger, more independent and better able to compete in the global marketplace.
That reflects the community's concept of what is happening in Cape Breton with respect to coal mining, to Devco, and to the initiatives taking place there. We will now turn very quickly to the proposal that we provided to Devco some weeks ago as a result of the public-dialogue process that we entered into. We have overhead projections to show you. I will start it off and then my assistant and our consultant will take over when we get into the complicated stuff.
The objective, as you can see from the projection, is to structure the Cape Breton Development Corporation to make the company viable and capable of commercial operation within three years.
The Chairman: Mayor Coady, do you have a hard copy of that to distribute to us?
Mr. Coady: We can provide that to the committee.
Senator Murray: We have it pretty well in Part II of the presentation, Mr. Chairman.
Mr. Coady: That is correct.
The objective is to structure the Cape Breton Development Corporation to make the company viable and capable of commercial operation within three years. We propose to do that by having the Phalen and Prince mines operate at full capacity; the Victoria Junction wash plant wash Phalen coal; and International Coal Pier operate for the export sales that we envision.
The first step would see what Senator Murray referred to earlier, that is, a split of the corporation into two divisions, a coal mining division and an accumulated liabilities division. Under this proposal, the coal division would be responsible only for the costs associated with present-day mining. Management's focus would change to issues relevant only to today's coal mining activity. The accumulated liabilities division would be managed separately from the coal mining division. It is extremely unlikely any private sector company would have the resources to operate successfully with such large unfunded liabilities.
In our view, in order to make the Cape Breton Development Corporation a viable and progressive coal mining company, these liabilities must be removed from the present coal mining costs.
The second step would allow for greater direction of the workforce and eliminate future liabilities. It would call for a renegotiation of contracts and bonuses paid based on safety, production and corporate goals. To be competitive, high-cost equipment used in modern coal mining has to be in operation on a continuous basis. Roster shift changes, schedules and hours of work have to be flexible to allow the company the right to maximize its return on investment.
In order to react to workplace changes which occur in any dynamic company the right to move employees between sites and to lay them off temporarily without rearranging the workforce is necessary.
A compulsory contribution plan for all employees must be implemented. Only a minority of Cape Breton Development Corporation employees contribute to a pension plan. In order to reduce future liabilities, all employees should begin to contribute to the plan.
There must be a strengthening of the joint union-management committees. The present confrontational situation must stop. A key element to the future success of the corporation is for all employees, union leaders and management, to work together to cut each other some slack and to share the responsibility.
The third step uses the John Boyd case-three mining plan. I am sure that by now the committee is well aware of the Boyd study. The study went through three separate case scenarios for the development of coal mining and resolved, in the third case, that commercial potential based on unemployment downsizing of 34 per cent, technological improvements, and aggressive management would achieve profitability by the year 1999-2000.
We suggest that Boyd used overtime as a commercially prudent method of reducing fixed employment costs. In an area of high unemployment such as we have, we do not believe that is acceptable. While Boyd advocated 25 per cent overtime as a standard, we are suggesting an overtime rate of 8 per cent. That would result in 148 retained jobs in 1996-97.
Additional employees would be used to develop airways at Phalen to compensate for a decrease in efficiency due to increasing depth and dip, and to increase the long wall cutting time. That would require a contingency on capital of $16 million for the first five years.
The fourth step involves training at all levels. We are calling for training in commercial mine management methods, training in management skills for line supervisors, and that an underground training section be created for mining techniques and equipment operation. We factored in the costs of those training modules for 1996-97 and 1998. You will notice that the costs reduce substantially during the three-year period because the amount of training required after the three-year period is minimized.
In the fifth step, we look to management to be reorganized, strengthened and enhanced. We have provided a plan which would establish a director of engineering and safety and which would strengthen the human resources department with the inclusion of a manager for surface operations. At the colliery level, we would see a strengthening of the position of operations manager, a long wall coordinator and the transfer of duplicated engineering services to the corporate level with a construction manager added in for good measure.
Step six relates to coal production. There has been a great deal of discussion about whether or not we could have both coal mines operate to full capacity and market the product. What you see before you now is a chart which indicates that, in our estimation, every tonne of coal that can be extracted from the Phalen and Prince mines can be marketed to Nova Scotia Power, the export market or the employees. We also contend that we could market additional coal to Nova Scotia Power in an amount up to 900,000 tonnes per year by the year 2001 if Nova Scotia Power were to put extra electricity on the grid and sell it on the market.
Step seven sees us moving into exploration of the Donkin mine. I know that Senator Buchanan had a question he was prepared to address earlier on that issue. Our plan shows that there could be funding available for underground exploration of the Donkin mine, the type of exploration we believe is essential in order to determine if Donkin can be operated viably as a coal mine.
Another aspect of what we are looking at is a human resource strategy to which I referred earlier. Basically, it would retain the younger workforce, finding a way to allow the older workforce to retire with dignity. We would develop a compassionate severance package to deal with employees who cannot work or who do not go to work. They would be severed or retired with an amount of $17,000 per year each. The creation of an early retirement incentive would allow older employees with years of service to retire and younger employees to keep their jobs. Basically, we are looking at a factor of age 50, plus 25 years of service, which would entitle 285 employees to retire at a yearly projected cost of $20,500 each.
Finally, we would see a float of 30 employees who would be used to replace employees while they are undergoing the intensive training that we talked about in the first two years of the proposal. All of that comes at a cost, including the training costs, of $35 million per year.
I will now ask Steve Farrell to go through the technicalities of our proposed mining plan.
Mr. Steve Farrell, President, S. Farrell & Associates, Consultant to Cape Breton Regional Municipality: Honourable senators, this human resource strategy summary retains the younger work force and retires the older members. The first line of numbers is from John Boyd's study. For example, in 1996 it is projected that there will be 1,638 employees. With the overtime adjustment, 148 will be kept at the same cost. There is a certain number of employees who do not go to work for whatever reason. Over a five-year period, we propose to sever 101 employees who would receive a compassionate pension. This group would amount to 60. The number for normal attrition would be 154.
The Chairman: To assist the committee, that chart is on page 23 of Part II of the municipality's submission.
Mr. Farrell: There will be 285 on an early retirement plan. The total reduction of employees over a five-year period would be 600.
The next slide shows, graphically, what would happen. The red line represents the municipality's proposal, while the blue line represents Mr. Boyd's proposal. The difference between the two is caused by reducing overtime from 25 per cent to 8 per cent.
The next slide illustrates the numbers per year. In the first year the workforce is reduced by 311, then 103, 84, 56, and 45 in year five. Thirty employees will be retained for training.
This next slide shows that the benefit of new mining techniques and training that is realized with increased production. We would have a positive cash flow in 1996-97. We would have a 30 per cent greater increase in production at Phalen than is now proposed. We would operate Prince mine on three shifts producing 1.5 million tonnes. The current plan is to operate Prince mine on two shifts producing 1 million tonnes.
The overhead slide shows a comparison between what is proposed by Devco and what was proposed by the municipality. The operating cost per tonne is virtually the same. In year five, the Devco projection was 47.70 per tonne, while the municipality projection was 47.27 per tonne. This is based on run-of-mine tonnes.
This slide shows the coal mine division costs. The revenue and the operating costs are taken directly from the Boyd study. The human resource costs include a contributory pension plan, plus some funding of the non-contributory pension plan. Capital is included with the municipality's addition of about $15 million, with Donkin starting in the year 2001. The result is that, in 1996-97, there is an immediate positive cash flow. That includes the capital to buy new equipment.
As you can see, the cash builds up fairly quickly. As you proceed with the plan with success, you start building up cash.
This next slide shows the bottom line of that chart graphically. In the first year, you have a surplus of $1.5 million. Over a five-year period, it builds up to $134 million. This is without the effect of the liabilities division.
Going to the liabilities division, we transfer all liabilities as of March 31, 1996 that are not related to present coal mining. We have liabilities from pensions and benefits in relation to various early retirement initiatives that were taken in the past, including the Lingan closure and compassionate pensions. They are estimated at $160 million. The Workers Compensation liability is estimated at $180 million. That is not current; it is from the past. It is an amount currently paid out at the rate of about $13 million a year by Devco.
Various groups have estimated environmental costs, and we have used the figure of $150 million for environmental liabilities. This includes all old coal mining sites and coal mining-related sites throughout the Cape Breton industrial region.
There is a $10 million estimated cash loss for 1995-96, giving a $.5 million liability. This has to be paid either by surplus cash from the coal mining division, which seriously affects its viability, or by the federal government.
The next slide shows what the municipality sees as the cash cost for the accumulated liabilities division. Administration is $.5 million a year. This would provide for administering payment of the liabilities plus environmental remedial management for old sites.
With regard to pensions, two-thirds of the present non- contributory pension is included in these numbers. The remaining one-third, unfunded, is charged to the coal division. Since 1991, Devco has paid over $200 million to fund this non-contributory pension fund. There is approximately $65 million outstanding. So, in effect, this $200 million has come out of Devco for pensions and benefits since 1991 in addition to what they pay on a current basis.
In the year 2001, when the accumulated cash flow between the accumulated liabilities division and the coal mine division is positive, we have added a provision to increase pensions to an industrial level for people who are on pension right now.
The environmental numbers there reflect a systematic clean-up of some old sites around the industrial area.
This slide graphically illustrates what happens to your pay out of liabilities. It continues to increase. In 1996, $42 million will be paid out, and this increases cumulatively. In five years, you will be paying $177 million in liabilities. At the present time, that amount of money has to come from coal mining.
This slide could apply either to the municipality's proposal or Devco's proposal. The dotted line above the zero represents the accumulated cash from coal mining. The dotted line below zero represents the accumulated losses from the liabilities division. The red represents the balance between the two. In 1999-2000, we break even.
If Devco were for sale today, the corporation would have very little or no value. This illustrates that in 1999, on a net cash flow basis, the corporation would have a value of $250 million or $300 million.
The next slide illustrates the municipality's proposal that certain bench marks be met. I should first like to say that no plan should start for six months. There must be a lead-in time for a plan. The corporation has to set itself up to administer the plan and put the elements in place.
We proposed a benchmark on May 1, 1996. There would be agreement by all parties to the various concessions we asked for in this proposal. This would trigger setting up a liabilities division and bridge financing by the federal government of those liabilities.
In January 1997, we projected that the 3 centre-wall in Phalen should be ready to start. The training section, as we proposed, would be operable, and there would be positive results from it. This event would trigger advancement of the purchase of new equipment for the plan as proposed.
In summary, both the Phalen and Prince mines are operating at full capacity with a positive cash flow in 1996-97. Mining methods have changed to a more modern, productive system. The VJ plant and the international piers are kept operating to keep CBDC in the export market.
This plan focuses on training for the future and retention of the younger work force. It minimizes the negative socio-economic impact on the region by reducing employment downsizing to 28 per cent. As well, it provides Cape Breton with a viable and sustainable commercial operation with the ability to compete in world markets.
Mr. Coady: By way of conclusion, Mr. Chairman, I should simply state that what we have just presented to you is the overall plan provided to Devco by the Cape Breton Regional Municipality. We invested significant time and dollars in developing this proposal. We believe that components of it have extreme viability and potential. Our focus is to retain as many jobs as we can for young miners in the mining industry in the long run, recognizing its impact on our economy.
One issue raised earlier related to the liabilities division, as we call it, or the social costs that have been referred to by other people. We believe there is a need for the federal government to offload those social costs in the long run from Devco so that it becomes a more viable coal mining operation.
The Chairman: You did not read the last page of your submission, Mr. Coady, which is the editorial from the Chronicle-Herald. Let me read it into the record. This is a cartoon. In the left picture, a sign on a building reads "Economic Analysts Inc." The caption reads as follows:
The diminishing interregional distribution of federal expenditures coupled with the protracted disintegration of major labour intensive industries will have a devastating effect on the economy.
In the picture on the right side of the page, the sign on the building reads "Steel City Tavern & Think Tank." The caption reads as follows:
...The arse is right out of 'er now boys...
Mr. Coady: We thought it appropriate, Mr. Chairman, that that be included as the conclusion to our report.
I might add that I have with me a production from Folkus Atlantic by Joan Weekes of the Cape Breton area. It is entitled "The Men of the Deep Join Canada's only Coal Miner's Chorus for: A Day Underground." It talks of songs about the coal mining industry with an accompanying video of coal mining underground. I present that to you Mr. Chairman, on behalf of the Cape Breton Regional Municipal and Ms Joan Weekes. It is an excellent production.
The Chairman: Thank you very much.
Senator Buchanan: Mr. Chairman, I wish to welcome the mayor and the others representatives of the Cape Breton Regional Municipality. The presentation they just made was excellent. It certainly covered all points.
Mr. Chairman, I will not get into the financial aspect of all of this since it was well reviewed last night and again this morning. My interest is in the future of coal mining in Cape Breton.
Way back in the late 1970s and early 1980s, an energy plan was put together by Devco and the Nova Scotia Department of Mines and Energy. DRIE or DREE -- or whatever it was at that time -- was involved. There were some people involved at that time who were very competent in the coal mining industry of Cape Breton. I think Mr. Farrell probably talked to Bill Shaw at the time about this. Coady Marsh was definitely involved at the time, as were many others in Devco and in the provincial departments.
At that time, the reason for the in-depth study of the coal industry was that it was pretty evident that number 26 would have a limited life. Of course, it closed eventually in the 1980s because of the fire and many other factors. This left Prince and Lingan as the only operating minutes. Since then Lingan has been closed. The Phalen seams are operating now and Prince is operating.
Core drilling was done at that time. I think Mr. Farrell is familiar with what happened there.
I did not have an opportunity to talk to Tom Kent at the table this morning, but I spoke with him outside the committee room. He told me that back then he was on the board of Devco. He was very supportive of doing core drilling work offshore on Donkin and also proceeding with the tunnels for the new Donkin mine. He said he would have preferred at that time to have some more core drilling done to further delineate the seams, but there is no question they were on the right track of looking to a new mine as an alternative to the existing mines.
I have heard it said -- and I have spoken to many people in the industry -- that, with respect to Prince and Phalen and their problems at the present time, it is very important that there be an alternative to one or both of these mines in the near future or maybe down the line in 10 or 15 years.
Mr. Farrell, what is your opinion about the viability of a new mine? The Donkin block, as you know, contains a lot of coal. It is good quality coal. It contains about one billion tonnes of proven coal. I am told that about 30 per cent of that could be recovered, given the mining technology of today, which is about 350 million or 400 million tonnes of coal. It appears to be a very viable operation as an alternative if it is required in the near future. Perhaps you could give us your opinion on that.
Mr. Farrell: There is no doubt there is 100 years of mining at Donkin at 3 million or 4 million tonnes per year. At this point, the sulphuring seam is located on the roof and at the floor. Some work has to be done to ascertains whether it can be selectively mined, which would give a very good product. The dip is more favourable there than at the Phalen mine, so we could use some of the American technology to a greater degree. We could open and operate a mine there that would be very valuable. The big question, of course, is this: Can we selectively mine it? If we take the whole seam, then we have to wash the sulphur from the entire seam, which I think might be in the 3.5-per-cent range. I am talking about the Harbour seam, one of the three major seams. However, if we could selectively mine it, we could leave most of the sulphur in the ground and mine a 2-per-cent to a 2.5-per-cent product.
Senator Buchanan: Which could be washed down again.
Mr. Farrell: Yes. I think successful washing has been washing done on it by CANMET. The number "1.9 per cent" sulphur rings a bell. Before spending $100 million or whatever on a mine of this magnitude, some exploration should be done underground, and an investigation should be conducted to determine how it will be mined, and determine the actual conditions. In my opinion, it would be well worth the investment to do the underground exploration.
Senator Buchanan: These tunnels are drilled right to the coal face now, as I understand it.
Mr. Farrell: That is right, three-and-a-half kilometres long.
Senator Buchanan: Of course the mining of coal at Donkin would be, in a cost sense, more efficient than the others because it is right at the coal face and the others are quite a distance out under the ocean.
The cost of developing the Donkin mine back in the mid 1980s, including the tunnels that have been drilled and the site clearance that has already been done, was estimated to be in the range of anywhere from $200 million to $240 million. That cost, I am told, has escalated to something in the range of $300 or $350 million, less the money that was already spent on the tunnels.
As we heard last night from George White, those tunnels are now flooded. Of course they are in excellent condition and could be pumped out and used. If you deduct that amount of money that has been spent, it would cost a maximum, in 1995-96 dollars, of somewhere in the range of $240 to $250 million to finish the mine to two operating walls. Would you agree with that?
Mr. Farrell: The $250 million would give you a Cadillac operation, no doubt about it.
Senator Buchanan: I am always on the high side, hoping you will bring it down.
Mr. Farrell: If you started it off on a phased basis, you could start a mine at Donkin producing 1 million tonnes for approximately $120 million. That is a ballpark estimate. Then, as the mine expands, you would need more tunnels. The tunnels are three-and-a-half kilometres long, and they are very expensive.
As you enlarge the mine, the cost does not go up proportionately. However, you reach a certain point where the cost will jump because of ventilation requirements and what have you. If you wanted a 1-million-ton operation, you could do it reasonably for approximately, at a guess, $120 million. To go on to a bigger operation down the road, you would be looking at the $250 million you mentioned.
Senator Buchanan: The figures that I have here are exactly what you said. If you escalate it to 1996 dollars to do the million tonnes, it would be in the range of $120 million more. If you go up to the 2 million tonnes, and two walls, you would be over the $200 million mark in 1996 dollars. Do you agree that the mine could be opened and producing up to 1 million tonnes with approximately $120 million of new money?
Mr. Farrell: Yes.
Senator Buchanan: Thank you.
Senator MacEachen: I thank the mayor and his colleagues for an extremely good presentation. It shows you have done your homework. You have made a very important contribution.
In your presentation, you have made what I thought were very positive declarations about policy in the future of Cape Breton. To take one example, you have underlined the necessity of commercial viability for the coal industry. In a sense, that is a marked change in attitude because in the past there was an underlying belief in the culture of Cape Breton that the hard necessity of viability could be postponed. It is interesting that you have abandoned that view and now say that commercial viability is a necessity. In the circumstances, the achievement of a commercially viable operation is the best guarantee of the future of the industry and the only way by which any further investment will take place in the industry.
Senator Buchanan and Mr. Farrell have talked about Donkin as a new possibility. I raised it yesterday because I believe, too, that in all of this one must have hope. We need a vision of the future.
Today Mr. Farrell gave us some numbers today as to what this Donkin operation would cost. Yesterday, Mr. White gave us some numbers. Although he did not give any precise numbers for Donkin, he did give numbers for the opening of new mines. Whatever numbers we accept, it represents a huge investment, an investment that no private enterpriser will ever make in any circumstance that I can foresee. Anyone who talks about the privatization of the coal mines as a solution at this time, is living in a dream world.
The barrier between privatization and the closure of minutes is the Cape Breton Development Corporation, and once you lose the Cape Breton Development Corporation, you lose everything. That is my attitude.
I will carry this thought a bit further. We have from the corporation a plan that was examined last night, and now we have a plan from the municipality, both of which declare, support and exemplify the necessity of commercial viability. It will not depend, at the end of the five-year term, on a federal injection of funds. That is what you all say, and that is very good.
If Senator Buchanan, Mr. Farrell or Mr. White are thinking of a new mine, the only way it will ever happen is if this development plan works and produces results. That is my firm view. The miners, the management, and the community can look forward to many possibilities if this plan succeeds. If it does not succeed, with the mood in this country and with the views, for example, presented last night by Senator Ghitter, which I respect, it will not be easy.
You talk about a new production culture. I find that very interesting.
If I may say so, Mr. Chairman, that is my own analysis of this situation.
I noticed also the realism in this plan, even though the municipality has agonized over every single job. Every single job loss is a crisis for the municipality, as one reads the brief, and I understand that. Nevertheless, in its plan, the municipality calls for a downsizing of 600 employees over a five-year period.That is a dose of realism. It is important to note that it is not substantially less than the approved plan. I would be interested in knowing why the municipality was driven to that conclusion. Why do you say it is necessary, in any plan, with all the agonizing you have done, to have downsizing?
Mr. Coady: I do not know if I can give you a definitive answer. The process that we followed led us to that conclusion when we throw in the concept of commercial viability.
You are right on when you talk about the fact that the regional municipality and council have endorsed the concept of commercial viability. We did that in recognition that, if this is not achieved, we do not believe we will be able to come back to the federal government in the future with our hand out looking for more money. We have had to indicate along the line that we endorse the concept of commercial viability as the end result of going through this exercise and that, if such viability cannot be achieved, then we are not so sure that the future of mining will be secure in Cape Breton.
That brings us to the whole issue of how we downsize the corporation to achieve that commercial viability. Our objective was to hold on to what we believe to be a major element of success with the corporation, and that is the younger work force. In order to do that, we had to offer the older workers and to those who may be unable to work for any number of reasons, an opportunity to retire with dignity.
We have incorporated the cost of doing that into the plan Mr. Farrell talked about. You are correct that we have not adopted commercial viability as a guiding principle. We have recognized that we must downsize in order to achieve that. However, in order to downsize, keep in mind, senator and all committee members, that we were responding to the original presentation by Devco on January 9 of this year.
In that presentation, the downsizing projected by the president and chairman of the board at the time was 800 jobs, 400 of which were to take effect immediately, and the other 400 to be absorbed in the next few years. It would have had a massive impact on our economy. We looked for a way to recommend downsizing without suffering the full force of the impact of losing 800 jobs and make the commitment to income.
You will notice that we have recommended retirement with dignity, retirement with an income so that, although the positions are lost, there is still income to our community and a possibility for a resident to have at least a minimum standard of living as he works into his retirement.
Senator MacEachen: Mr. Chairman, it is obvious that the municipality has put in a lot of work and a lot of expertise into this plan. In his statement, Mayor Coady has said that a number of their proposals have been incorporated into the revised, now approved, plan by the government. I think that is positive.
Many of the technical proposals that you have made, about how the mines ought to be operated and the shifting, are beyond the competence of myself and of this committee. We cannot easily make judgments on those issues. However, they are issues which you can continue to press with the management who must make the decisions. The management now, as it were, is in the danger seat. They must deliver. That is not to say that all your ideas cannot be pursued in the future. I think you ought to do that.
I have one other question which relates to the Prince mine. You paint a brighter picture for Prince than does the government plan with three shifts, more production, more of everything that is good. I want to ask how it is that you can produce this? You are downsizing 600 people, yet you have a very promising picture for that mine, and that I like. I did not much like the first proposal for Prince. I was pleased when the decision was taken to have two shifts. You now propose three. That means more production. How is that possible? Where has the government plan gone wrong on Prince, if it has gone wrong?
Mr. Farrell: Prince mine, since it opened with a long-wall system, has consistently produced its budget of coal. Presently, it is producing about 1.4 million tonnes a year. The John T. Boyd report, upon which we based many of our proposals, projected selling all the coal. That included selling 1.5 million tonnes from Prince mine. They sold coal on the international market to make up the difference.
With Prince mine, the facilities are in place. The long walls, all the infrastructure, everything is there. In adding a third shift, the cost per tonne in that shift is considerably less. The key is being able to sell the production. You must be successful at Phalen mine and increase production there because this is the coal which is washed and blended with Prince coal to make it saleable.
If Phalen continues to be successful to the degree it is now, I personally cannot see any reason why there would not be a third shift at Prince mine. Phalen must come first. That is the key to the problem.
Senator MacEachen: When you say Phalen must come first, what does that mean?
Mr. Farrell: Phalen needs to improve its production. It must increase from present levels. Devco is projecting 2.3 million tonnes a year at Phalen mine, and a modern, long-wall operation can get more coal than that. There is a fairly good safety factor in that number. John T. Boyd was projecting almost 3 million tonnes from Phalen mine on a run-of-mine basis with modern equipment.
Basically, some American mining methods were being used. As you know, the Americans are probably the most successful coal miners in the world right now. Boyd proposed to introduce some of this technology. When it is introduced, my feeling is that Phalen will get more production. Subsequently, Prince mine will be able to operate for a longer period.
Senator MacEachen: In essence, you are taking the more optimistic view of the potential than the plan which we heard about last night. Maybe this is the type of contingency which management has built into their plan to give some assurance to Senator Ghitter. I am hearing from Mr. Farrell that there are possibilities, if certain things happen, for a greater production, more employment and a better pay-off. That is not factored into the government plan. If it works, it is all to the good. Maybe they have that in the backs of their minds. I have no idea.
Senator MacDonald: Do you have a representative on the board of Devco?
Mr. Farrell: No.
Senator MacDonald: Senator MacEachen is suggesting some kind of monitoring to ensure that this will work. That surprises me because it sounds like a "Gestapo" kind of deal. Do you have a director who represents your views?
Mr. Farrell: No.
Mr. Coady: No.
Senator Ghitter: I have the greatest empathy for the position in which you find yourself. Today the demographics are against you and, with the deficits and debt fixations that are occurring, the approach of the government is against you. When I consider the problems you face on a day-to-day basis in the fishery, the loss of jobs, and then the pressure of this, I have the greatest sympathy for the position in which you find yourself.
However, it seems that your numbers are very different from the numbers we saw from Devco in some very material ways. Is there no communication between the two of you concerning what your aspirations are, what theirs are, and no reconciliation of your numbers so that what you are presenting to us today would have some relationship to what Devco presented to us last night?
Mr. Coady: There has been some communication between us and Devco, through the board of directors and through Mr. Shannon. Merrill Buchanan has gone over our plan and has given feedback to us with respect to numbers that he thought might have been soft or which might have been inaccurate. I cannot say that there was no communication at that level.
Initially, we had some difficulty getting access to the Boyd study, but eventually that was provided to us. We were able to review those figures and get a firmer grasp of the numerical implications there. In the final analysis, I do not know if it is the numbers that are so radically different or the way in which we approach them that differs. Our approach was significantly different from that of the Devco plan. Yet, in the final analysis, the final plan that Devco has adopted reflects some of the issues that we raised and the suggestions that we made.
Senator Ghitter: Let us deal with something like the accumulated debt. First, I do not understand the advantage of separating the accumulated debt from your coal operation. The debt is still there and must be dealt with.
Perhaps you could explain to me what advantage you think you are achieving by moving the $500 million over here other than perhaps the hope that you have, as I see in one line, that the federal government will pick up that $500 million debt. If that is your aspiration, I should like clarification on that.
Aside from that, the way you deal with it is different from the way Devco is dealing with it. You are taking that $500 million debt and writing it off over that period of time on the chart you showed us; whereas the numbers we received from Devco show that in the first few years they are writing it off as $35 million, then $26 million, and then $9 million. I was not left with the feeling last night that the $500 million of debt had to be dealt with. The way you are dealing with that aspect, which is very substantive, is very different from the way Devco is dealing with it. Maybe you could help me understand why I am having difficulty reconciling your approach and Devco's with respect to that one very important social cost ingredient.
Mr. Coady: Mr. Farrell can get into the technical end of it, but we looked at proposing spinning off a separate division so that the coal division could focus primarily on the production of coal and develop successful mining and management techniques.
Our belief is that some of their energies are being expended in the wrong direction right now because they have to spend so much time focusing on the contingent liabilities. I do not know if it would all be referred to specifically as "debt."
One of the liabilities they carry is the environmental liability. That liability has yet to be determined in terms of the long-term future of the corporation. What will the cost be in the future to clean up some of the issues relative to coal mining today or relative to mining that was done in the past? We must look at the impact of environmental regulations, provincially and federally, and attempt, in the clean up of their operations, to meet all the new regulations. Obviously, those liabilities will have to be carried by the future operations.
As to the numbers and why we would recommend spinning them off separately, I would have to turn to Mr. Farrell, because he has the expertise in that area.
Mr. Farrell: Since 1991, Devco has put over $200 million into an unfunded pension plan. This is a liability from the past. At the same time, there was a plan in place to make Devco viable over a five-year period. While $165 million was used for capital improvements, $200 million was expended to fund pension plans. A private company would not have this kind of debt; it could not afford it. If someone were to buy Devco today, obviously they would never buy $500 million worth of debt.
Senior officials with the Cape Breton Development Corporation, will have to come to Ottawa continuously to request funding to eliminate the liabilities. Perhaps you have heard the expression, "When the kings are strong, the barons are weak." If the king is sitting in Ottawa, then the baron who is running the Cape Breton Development Corporation is weak. However, if we can transfer the authority to run the corporation totally to Cape Breton, then the baron who is running it will be strong.
Senator Ghitter: Are you saying that the only hope for the economic viability of the corporation is for the federal government to take care of that $500 million debt?
Mr. Farrell: No. We are saying: Let us not confuse the cost of mining coal today by liabilities that no other company would have. We use the vehicle of another division. Let us put those liabilities to one side and put a true price on mining coal today.
When we talked about Devco losing $10 million last year, what did they pay out on these liabilities? I am not sure of the number, but I would venture to say that it was approximately $40 million.
Senator Ghitter: I should like to say to my bank, "I have incurred this debt over the last five years, but know I will make a profit this year. Would you forgive the debt?" That is not the real world. It will not go away by separating the accumulated debt from the coal operation. It will still be there to be dealt with. Would you agree with that?
Mr. Farrell: It will definitely be there. If the company achieves the results that it is projected to achieve in five years time, then your revenues -- that is, your positive cash flow from coal mining -- will pay off all the liabilities.
There is still the factor regarding the source of these liabilities. When Devco started, there were possibly 6,000 miners. It was the intention to gradually cut back on coal mining and phase it out. We have now taken the cost of downsizing Devco and left it on the coal mining balance sheet. We are now saying that it is not economical to mine coal because we have downsized and we have put these costs on the books. The policy was to downsize. The catch-22 is that the downsizing costs are now on coal mining. We are saying that it is no longer economical; it is costing too much. If you just mine coal by whatever means and talk about the cost of mining coal today, then Devco can survive as a viable company.
Senator Buchanan: We had a similar situation with Sysco where the province had to take over a massive amount of debt. It is the same situation here with the social debt.
Senator Murray: Mr. Chairman, I agree with Senator MacEachen when he says that it is quite significant that the municipality has committed itself to the concept of commercial viability for Devco. It has accepted some difficult implications that are involved in that concept. As the government that is closest to the people down there, that would not have been easy for you.
That being said, we are all committed to commercial viability. The question is whether your plan or, indeed, the Devco plan approved by the government will achieve commercial viability.
The reason I tend to be skeptical is this: Last November, when Mr. Shannon defined commercial viability, the scenario for attaining it was a far more drastic one than what we have before us today. In January, as Mayor Coady has mentioned, the scenario was more drastic than it is today. In the spring, when Devco embarked on the consultation process, the scenario was a tougher one than what has emerged in the approved plan. I see that the most vital difference between the previous plans and the approved plan is that the Government of Canada is willing to pony up some $79 million. That is, perhaps, a superficial impression. We will have an opportunity to look behind the numbers we received last night from Mr. Shannon and Devco.
Between the spring plan and the plan that was finally approved, they have discovered that they can produce 3 million tonnes more of coal over the five-year period, and that they can sell it and make money on it. That is a situation in which they would de-emphasize export markets. They would now sell anywhere from 700,000 tonnes to 1 million tonnes per year on export markets.
With regard to export markets, your plan is even more ambitious. Next year, you would have Devco selling 1.4 million tonnes in export markets, rising to 1.7 million tonnes in the year 2000-2001.
We heard evidence last night of a loss of $23 million with regard to selling coal on the export markets. I am not sure what year that was in or, indeed, whether it was typical of the experience. If it was typical of the experience, then the economics of that are pretty dubious.
You have made Boyd's projections your own in this regard. Have you looked behind them? How can the company make money on the export markets? How can it sell the volumes of coal that you are projecting? I recognize there have been times in the past 10 years when they have sold more than that in export markets. The real question is whether they can make money at it.
Mr. Farrell: John T. Boyd did a market study in which it was projected that this amount of coal can be sold. Their lowest selling price for coal, for instance, was $47.50 per tonne. If you look at $47.50 per tonne in isolation, then it may not be enough. However, if you could sell 500,000 tonnes at $47.50 per tonne, your overall mining costs may decrease due to the increased volume that you will be mining. Basically, coal mining is a volume business. You have to have volume in order to spread your costs.
Therefore, I think what you are looking at in the Boyd proposal is a blended price for coal. I believe their blended price was around $58 per tonne for all this coal. Some of it might have been at $47 per tonne, while some of it was at $65 per tonne.
Senator Murray: Is that for export coal or coal for export and sale to Nova Scotia Power?
Mr. Farrell: All coal.
Senator Murray: Are you saying they blend the price of domestic and export?
Mr. Farrell: They have a schedule which shows where the different coals are going and at what price. What I am saying is that, if you took that 1.4 million tonnes out of the export market and did not mine it, then your mining costs for the remaining 2.2 million tonnes that are going to Nova Scotia Power would be much higher.
Senator Murray: I appreciate that. However, what do you make of the comment that was made last night that they lost $23 million in one year in selling coal overseas? I see our friends from Devco are still here. Do you know what fiscal year they were talking about, Mr. Buchanan and/or Mr. White?
The Chairman: Perhaps we could invite Mr. White back to the table in order to take part in our discussion.
Senator Murray: That would be helpful.
Senator MacDonald: Have they ever made money selling coal in export markets?
Senator Murray: Do you know the answer to that question, Mr. White?
Mr. George R. White, President and Chief Executive Officer, Cape Breton Development Corporation: I would like to have the answer to that question, senator. I have been with the company six weeks, and I do not have the answer to that question right now.
Senator Murray: You were there before. You were manager of Prince and Phalen.
Mr. White: That is right. As manager, what I tried to do was produce the coal for the costs which were budgeted in our operations. There are other costs associated with marketing, distributing and transporting it.
Senator Murray: When you talk about Donkin, are you talking about Donkin as a successor to Phalen; or are you talking about the possibility of bringing Donkin on stream while Phalen and Prince are still in operation? I ask that question because some of the information we have about Phalen indicates that there are very serious challenges there in terms of its future viability. I have seen one statement to the effect that all the economic coal at Phalen has been mined.
Mr. Farrell: The geology with regard to Phalen is what I would call a "bad" piece of geology in terms of where the mine is at now. My understanding is that the information concerning bore holes and other geological information disappear over time.
Senator Murray: You are speaking of that occurring as a result of development?
Mr. Farrell: This piece of geology is no longer an issue.
Senator Murray: It is an expensive proposition, that is what the Devco management is getting at. Mr. White could probably fill us in on that.
Mr. White: We are now mining on the east side of Phalen, at 7 East, which we will complete in this fiscal year. On the east side we have 8 East and 9 East where the current geological conditions are difficult. Beyond that, I concur with what Mr. Farrell says in that the conditions will get better.
Senator Murray: With regard to Donkin, the Boyd report says that the idea of selective mining there cannot be done. Further to that, it states that the economics of bringing Donkin on stream at any time in the foreseeable future -- and I am paraphrasing now -- do not make sense.
Mr. Farrell: In terms of economics, it would not make any sense to open Donkin now and have more coal to sell, because the quality of the Donkin coal approximates the quality of the Prince coal, which is the coal that is difficult to sell.
The municipality is proposing that, in the year 2000, they begin underground exploration at Donkin. In this way, if you drilled some underground tunnels, you would get the quality of the coal, you would know the mining conditions, and you would also know whether you could selectively mine it. It is my opinion that it is a reasonable assumption that you can mine selectively at Donkin. However, you do not base a $120 million to $250 million mine on a reasonable assumption; you have to have some hard data from exploration to move forward.
Senator Murray: You understand that, while that is in your plan, it is not at the moment in the approved government plan.
Mr. Farrell: We took the liberty of adding an extra three years to our plan to show what happens over time. If you look at the situation in the short term, it looks a lot worse than what is projected.
I keep going back to the John T. Boyd study because they are a recognized international company in coal mining consulting. They projected a good future for the corporation. The results, the cash, come later on. You have to get by the liabilities that are now in place.
The Chairman: Mr. Mayor, I should like to thank you and your colleagues for being with us today. As Senator Ghitter has said, demographics are against us, but they have been against us since the 15th century. I read that cartoon into the record because sometimes I think the only thing that saves us is our sense of humour. However, that masks the dilemma that we face. Although we do not have any easy answers at this point, I want to send you away with the comment that we take this job very seriously. We know that the hardest people to keep in heaven are the Cape Bretonners because they always want to go home.
The committee adjourned.