[Recorded by Electronic Apparatus]
Tuesday, October 29, 1996
.1613 
[English]
The Chairman: I call this meeting to order. Let us begin. This is the 31st meeting of this committee on this bill, and it will be the last hearing. So we have three strangers before us today to bring a new perspective to the table.
Mr. Pearce, perhaps you would begin. I don't think I need to tell you the routine around here.
Mr. Rick Pearce (President, Canadian Port and Harbour Association): Thank you,Mr. Chairman. We're delighted to appear before the committee today.
The Canadian Port and Harbour Association represents the majority of the commercial ports in Canada. With me are Monsieur René Paquet, chair of the Port of Quebec, and Mr. Mervyn Russell, chair of the Port of Halifax.
The Canadian Port and Harbour Association has 28 corporate members, from Vancouver, our nation's largest port, to the harbours and ports directorate, which manages a host of smaller ports. We also have 17 associate members representing other levels of government and users within our ports.
Regardless of their size or activity, each of our members will be significantly affected by what is being proposed in Bill C-44. The three of us have been empowered by our association to speak on behalf of the total membership and to present to you our concerns with this proposed legislation.
While certain provisions of Bill C-44, the Canada Marine Act, will improve Canadian port administration, other provisions, if implemented in their present form, will seriously impede the ability of Canada's ports to be self-sufficient and competitive, as required by the national marine policy.
The major ports in Canada are economic generators for the nation and they have not been an encumbrance to the government. Our findings, which are a result of extensive surveys, show that the new legislation will impact significantly on our business viability and thus on the nation's economic well-being. The simple fact of the matter is that we will be playing into the hands of our competitors, the United States ports, which are heavily subsidized either through direct taxing powers or from the receipt of government grants or programs for capital works and even for maintenance items such as dredging.
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I'll turn now to Mr. Paquet.
Mr. René Paquet (Canadian Port and Harbour Association): Thank you, Mr. Pearce.
Mr. Chairman,
[Translation]
I have noticed that this is your 31st meeting on Bill C-44, so I shall try to make my remarks as short as possible.
Representations that have been made to you over the recent past - I had the opportunity to make them last week on behalf of the Port of Quebec Corporation, and I thank you again for visiting us - reflect a wide consensus and even unanimity on key points, a unanimity that is seldom to be found among port stakeholders in Canada.
The new national marine policy made public by the government and the end-product which is Bill C-44 have given Canadians from coast to coast the opportunity to better know each other, to achieve better mutual understanding and to co-operate in helping the Canadian government reach specific goals in the context of an important and essential reform.
When I speak of the ports on the St. Lawrence River, I think of the Montreal and Quebec ports, which are already included in the schedule of Bill C-44, but also of a number of regional ports which have requested to become Canadian port authorities.
Ports on the St. Lawrence River are part of this broad consensus, and need to be full-fledged members of an appropriately structured national port system. That is why we are emphasizing the importance of the federal agency status. My colleague, Mr. Russell, will be talking about this later on.
We need a well thought-out national port system with a representative and well balanced board. This is also one of the major issues we will get to discuss later on.
We need a flexible national port system with extensive powers which will allow our ports to work in a business-like fashion, a goal of the new government policy, and that entails that each and every port will need letters patents tailored to its needs.
Finally, we need a competitive national port system. As Mr. Rick Pearce just mentioned, American ports are the real competition for Canadian ports on the St. Lawrence, in the Maritimes and on the west coast. But Canada needs a national port system which is efficient enough to fend off competition in the context of globalization, if we are to maintain the many jobs generated by the ports industry and create the new jobs that are so badly needed in this country.
By preserving a strong national port system, you can contribute to national unity in our country, Canada.
If it agrees with the proposed amendments to improve Bill C-44, the Canadian government will be in a position to reach the goals it has set for itself in its new marine policy. Let me rapidly remind you some of these goals: increased efficiency, reduced costs, greater user control over ports, more timely business decisions, eliminating bureaucratic infrastructures, and allowing ports to meet efficiently the needs of their customers.
In conclusion, let me quote the remarks of Hon. David Anderson, the Minister of Transport, before your committee on September 26:
Modernization of the marine sector has a direct link to jobs and growth... The stronger and more efficient marine transportation system would provide our international trade with opportunities... That obviously means jobs in Canada.
Representations made by ports and the CPHA today have the same goal as the government policy. We endorse that policy without reservations as long as you can also recommend some of the amendments we are suggesting in order to improve Bill C-44.
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I will now ask my colleague, the chairman of the board of the Halifax Port Corporation,Mr. Mervyn Russell, to present his views.
[English]
Mr. Mervyn Russell (Canadian Port and Harbour Association): Thank you, Mr. Paquet.
Mr. Chairman, in the interests of time, I'll confine my remarks to the major issues that concern the membership and that should concern the Government of Canada.
We understand you've now heard over 75 submissions. We're not trying to repeat their comments; we are, however, here to comment on recommendations that have arisen as a result of these surveys.
First of all, on the subject of federal status, we urge the committee to make certain that the ports in Canada under Bill C-44 have federal status. Our primary concern is that without a strong federal identity Canada port authorities will be vulnerable to a variety of provincial and municipal jurisdictions such as taxation, zoning and policing, with far-reaching negative results. We therefore recommend that a new section be added to clause 5 with words such as ``port authorities are agents of the Crown for the purposes of this Act''.
On the subject of capacity and powers, subclause 24(2) limits the power of a port authority to engage in activities within the port that are directly related to ``shipping, navigation, transportation of passengers and goods and the handling and storage of goods''. This provision totally ignores the fact that many port authorities currently own land that can be developed for viable trade-related purposes. A host of business opportunities are precluded by subclause 24(2). For example, in some ports there are significant value-added activities, such as the automobiles in Fraser port and in Halifax that would be excluded.
Another exclusion appears to be the processing and manufacturing of goods. This could seriously impact ports such as Hamilton with its steel mills and Sept-Îles with its aluminum plant. In Vancouver the port may be prevented from engaging in services and facilities that are vital to its cruise business. This would also be true in Montreal, Quebec City, Halifax and other cruise destination ports.
We recommend that the word ``only'' be removed in subclause 24(1) and be replaced with the following in subclause 24(2):
- A port authority has the power to operate a port, employing assets that generate revenues that
can be reinvested back into port operations. Any other major project for enterprise that could be
considered outside the core business of the port will be subject to the approval of the Minister.
On the subject of governance, the membership responding to CPHA's questionnaire was unanimous. In its comments about the provisions for board sizes contained in Bill C-44, all were of the opinion that the size of the board of directors should be determined by the needs of each port. Size recommendations range from three to nine, with the majority in the five to seven range. In addition, it was the opinion of many that any one group may have a plurality, but not a majority. Table 1 in our presentation, gentlemen, gives you a suggested solution to the issue of port size and the plurality.
We recommend that paragraph 6(2)(f) be amended to state:
- the number of members may be between five and nine as determined by the port and stated in the
letters patent for the port and that no one group may have a majority of members but may have a
plurality.
On the issue of stipend, further impacting on the competitive position, paragraph 6(2)(h) of Bill C-44 requires that a port authority shall pay each year to the minister a charge on the gross revenues of the port authority. This is not a normal business practice, as corporations usually pay dividends on the net income or out of retained earnings after all other standard operating expenditures have been met.
We also understand that officials are now proposing that a graduated formula be used and applied to gross income to determine the stipend. This will be a priority charge on the incomes of ports. In earning their next dollar, some ports will be faced with having to borrow funds as well as having to pay Ottawa a percentage of the new dollar earned. This could impact very significantly on the profitability of a project. We therefore recommend that paragraph 6(2)(h) be amended to state that any payment to Ottawa will be calculated on net income and that it be based on the port's ability to pay.
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We further recommend that the minister have the power to suspend or alter the payments.
With regard to competition and financing of capital projects, all ports compete for cargo. In Canada, our major competitor is the United States. It is important that the costs associated with our port operations are competitive vis-à-vis the United States ports. We cannot afford to take on fee after fee when the U.S. ports are being subsidized in a variety of ways: direct financial support by ad valorem taxes, cross-subsidization from other activities, and assistance for capital projects and operating activities such as dredging.
In the U.S. there are also innovative credit vehicles, such as general obligation bonds, revenue bonds and industrial development bonds, under which the rates of borrowing are much less. In Canada we do not have such vehicles. One way in which we can get competitive interest rates is by pledging port assets to financial institutions for security.
We therefore recommend that subclause 27(3) be amended to allow for the pledging of any asset that is in the name of the port authority only.
On the subject of taxation, the bill is totally silent on all forms of taxation, leaving the ports to guess on the likely impacts. The provision of agent status, as recommended, will address this issue. What must also be addressed, however, is the change that will occur to some of our members as a result of the new requirement for them to pay grants in lieu of taxes. To some, this will bring huge financial requirements that must be phased in over a period of time.
We therefore recommend that SCOT require that, for those ports having to pay grants for the first time under the Municipal Grants Act, their payments be calculated on the ability-to-pay basis and be phased in over a ten-year period.
On coast guard cost recovery, it is CPHA's opinion that CCG has only partially identified its cost for services, has inadequate knowledge of the future levels required and has not demonstrated that it has its costs under control and down to lowest-cost operation possible. At this point in time the efforts being made by CCG to address the SCOT recommendations are inadequate, and fall short of what is required. In spite of this inadequacy, the CCG is proceeding to introduce charges and implement new practices without a true sense of their impacts on the users.
We recommend that the standing committee direct that a comprehensive and realistic review be taken on the Canadian Coast Guard cost recovery program as it impacts on ports and Canada's ability to compete.
In terms of policing, it is the opinion of our members that security is the responsibility of the ports. Regular policing is the responsibility of municipalities for ports and other residents of communities. The RCMP and Customs provide for the federal presence in major crime reviews. We further contend that if a federal agent status is not provided to the ports, they will be subjected to provincial policing policies.
In terms of cumulative cost impacts, taken separately, each issue has a serious negative effect on the competitive positions of Canada's ports. Taken collectively, that effect becomes disastrous for Canada's economy, employment and prosperity. These issues must not be considered as separate items. Table 4 in our presentation provides a rather frightening picture of the negative financial impacts of all the government initiatives as a result of Bill C-44, the CCG downloading, and the cost recovery programs.
Mr. Pearce: In addition to the cost measures it is equally important that the ports operate in an efficient, cohesive manner, building and maintaining strong, positive community relationships. Ports have built strong partnerships with their communities by recognizing some of the social desires of the community and coordinating them with the economic development programs of the port. This special relationship needs to be recognized throughout Bill C-44. We fear that Bill C-44 could, in its present form, create adversarial positions between the ports and their communities.
One thing must also be understood: Canada is a trading nation with four sea coasts. Its economic well-being is almost totally dependent upon foreign trade. For Canada to exist, it needs trade, and for trade to exist, Canada must have a strong, competitive and financially self-sufficient national ports system.
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The Canadian Port and Harbour Association knows, given its collective experience, thatBill C-44 can be improved. We submit that our recommendations will accomplish that, for we believe it is through transportation that this country will remain unified, as well as through the will of the people.
Thank you.
The Chairman: Thank you very much, gentlemen.
Mr. Pearce, I note your strong support for one of our coasts, the northern coast, and of course I assume that translates into your strong support for the port of Churchill, which we'll have an opportunity to discuss this evening.
Mr. Caron, do you have any questions?
[Translation]
Mr. Caron (Jonquière): I appreciate your presentation. I know we are into the last meetings on this bill, but I have been made a member of this committee as a result of various circumstances, and these meetings are the first ones for me. The great quality of your presentation and of the work of your association is amazing.
I have appreciated more particularly Mr. Paquet's remark that, basically, our competition comes from the American ports, and that we need a strong national port system.
I have been following the proceedings of the committee right from the start, and I have read submissions to the committee. Some of our goals are privatization, commercialization and viability. I have had some difficulty seeing whether the Canadian government really intended to go on providing a strong national port system, or just a series of unconnected entities that have a certain degree of financial viability like the ports in Quebec, Montreal, Halifax and Vancouver. I have had a hard time seeing in all of this some coordination, a structure of some kind, something which helps Canada be a unified country and helps our port system take on the American competition.
You can count on the Official Opposition which I represent to scrutinize the amendments you have suggested. I do not want to wade into a constitution debate, but I think our country needs a cohesive system which is capable of sustaining the American competition, maintains some Canadian identity, and not a mere series of individual businesses, some of which fare quite well on the market, and some fare not so well.
This is just a comment I had to make. Thank you for your presentation. I am quite glad I could participate in this last meeting.
Thank you.
[English]
The Chairman: Roy, do you have any questions?
Mr. Cullen (Etobicoke North): Yes. Thank you, Mr. Chairman.
Thank you, gentlemen, for a good presentation.
One of the aspects you talk about in the area of the stipend is that it be based on the net income and the port's ability to pay. Without getting overly technical, how would you define that? Is it based on looking forward, in the sense of some of the cashflow that has to be reinvested into the port, and taking that into account? Is it strictly on a cash basis? How would you define it, from your perspective?
Mr. Russell: Can I put on my HPC hat, my Halifax Port Corporation hat, to explain it as I see it?
Mr. Cullen: Sure.
Mr. Russell: We're a small business. We're worth $13 million and we have a cashflow of about $4 million. We made $0.5 million last year. That's it, basically.
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In order for us to get ready for the post-Panamax phase, we're spending $46 million on infrastructure changes. I'm only speaking for my port here. I'm sure the other gentlemen have other points very similar. If you erode that potential anywhere between the cashflow and my net income, I have trouble.
I also have trouble from another couple of areas.
One is the pass-through costs. In the operation of our port we sell water. These ships come in from thousands of miles away and they have to be watered. That's just a pass-through cost for me, as is my electricity cost. I hate like heck to see that as part of the revenue and I have to pay a stipend on this. It goes against the normal rules of the business environment in which I work on a day-to-day basis. I pay off the bottom line.
There are ways of guaranteeing. It's an open book and the rules are set. It shouldn't be that difficult to apply this stipend from the bottom line rather than the top line.
Mr. Pearce: We take the view that if it is the stipend that is hindering the port, there may be a time in a port's life - and I don't know what port it would be - when it does need to have the stipend suspended for a year or two years or whatever to help it through. That's really the provision it's there for. It's not there so you can say, you're going to pay it and you're not going to pay it. It's to be suspended in the case of need.
Mr. Cullen: If someone came to me and said I'm supposed to pay a tax - well, let's not call a stipend a tax - I might say I have a lot of other ways I could usefully spend that money.
I have some sympathy with where you're coming from in terms of net income. I have some difficulty around how you determine whether one port is efficient or otherwise, if you're just looking at the bottom line. How could you make it easier for us to define ability to pay? It's so broad.
A port's ability to pay is just so broad if you look at, for example, the comments you made,Mr. Russell, in terms of reinvesting in the business and other burdens you have.
Mr. Russell: Well, Mr. Cullen, if you take off the top... First of all, you have a first lien against me when I head out. You have a superior, first-quality lien against first charge when I go out raising money. If you take anything away from my cashflow, that's a multiple that we're going to have to create capital for in our future growth and our future progress.
Take the port of Halifax. It has some very aging infrastructure. We constantly have to maintain that.
Maybe I could refocus it from this perspective. Our job is not really to make a bottom line in Halifax. We recognize that. If we wanted to make more money, we'd charge more, maybe become less competitive and have a bigger bottom line. But we're an economic job-generator. We generate a very vibrant economy with 7,000 direct and indirect jobs. We would probably have to revisit that if we had a piece taken off the top.
We don't just focus on the bottom line. Basically our number one goal is to be a very efficient port and to service our clients, but we also aim to be an economic generator.
Mr. Pearce: If I may add one more thing to that too, there are a number of charges that the provincial government is thinking of imposing on ports, or that because of its actions are going to be forced on ports.
I'll put my port's hat on now. We're going to inherit a dredging program from Canadian Coast Guard, something we haven't had to take on before. We've had a contract with coast guard. They're changing the rules and we're going to have to deal with that. We're probably going to be faced with grants in lieu of taxes if we no longer have the harbour commission system that we presently operate under. These are charges that perhaps should be dealt with before the stipend is paid.
As to ability to pay, maybe if you took the stipend off, took those other costs and then recalculated the stipend, that could be an ability to pay.
The stipend should not break the port. That's what we're saying. And it should be a last charge; it should not be a first change.
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The Chairman: May I ask a question to follow up on that? This debate has occupied a fair bit of time at this table with a number of groups as well as committee members. The model that's often used is generally acceptable accounting principles, as you would use in a business. One of the comments that came back to us last night when we were discussing this was that in a normal publicly held business you have a whole bunch of shareholders breathing down your neck, wanting their dividends. There's pressure to account in such a way that you're declaring a dividend. There's no pressure in this instance. So when you look at gross versus net, what's the insistence? What's the guarantee that government is going to receive its due?
Mr. Pearce: I'll speak again from our port's point of view. I'm driven by a board that is profit oriented. We have a responsibility to pay down debt. You have to have profit for that, and of course it doesn't consume all of your revenues. You have depreciation, which also helps in that respect. Any well-run business should not be able to use smoke and mirrors to try to hide profits. We don't in our port.
The Chairman: Mr. Pearce, it's the oddest thing. I like that statement, except every time I repeat it in front of an accountant he laughs at me.
Mr. Pearce: I am an accountant; and I'm laughing.
Some hon. members: Oh, oh!
Mr. Pearce: We believe there are rules and structure that can be set up so the government is protected.
The Chairman: Your comment about the relationship with the paying down of debt is an interesting one.
Mr. Keyes.
Mr. Keyes (Hamilton West): Thank you, Mr. Chairman.
There's not much I can add. This is a very thoroughly thought-out report put to us by the Canada Port and Harbour Association. I know personally I was down in Halifax at the association meeting just about a month ago and it was put to them there that if you're going to come to the committee, come with some solid arguments and come with the amendments written down so there's no guesswork on behalf of anybody else who has to be listening in. They've done all of that.
This is just another example of how the ports community has come back in a responsible manner, Mr. Chair. I want to congratulate Mervyn, Rick, and René for all the work they've done, not only from their individual port's point of view but as a collective agency.
I want to pick up on Mr. Caron's remarks. I too won't get into any of the political stuff one can get into on that kind of thing.
With the repeal of the Canada Ports Corporation, Mr. Caron is probably reflecting a concern heard from others we have heard from at this committee, Mr. Chairman, who are essentially looking for what will be the tie that binds these ports together when they start to operate independently of one another and start to compete with one another, some being very close to each other. I wonder if our witnesses would agree that federal agency status for the Canadian port authorities would help create a national port system under a Canada ports act and actually be the tie this nation is looking for to bind them together to go forward into the world in a global economy and compete on behalf of not just their port's interest but the interest of the entire country.
Mr. Pearce: I would agree with that. I'm going to put my CPHA hat on now too, and say the Canadian Port and Harbour Association can play a major role in that unifying and that binding thing you're talking about. At present we have training seminars for our members. We have our annual meeting. We have regular information exchanges. We're now poised to take the next step forward.
We don't want to see another Ports Canada set-up exist, but at the same time some very fine people are working in Ports Canada. Maybe we'd set up a ports desk of three or four or five people such that you have a reporting-through relationship to the minister; not a report-to but a reporting-through relationship. That might be the way.
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I'll turn it over to my colleagues here.
Mr. Russell: Mr. Chairman, maybe this is a situation where necessity became the mother of invention. There have been many comments within the CPHA in recent months, basically after the August meeting, that there's never been more cooperation amongst the ports across Canada than there has been in the review and examination of Bill C-44.
A voice: And between the pilot associations as well.
Mr. Russell: Is that right?
It's absolutely amazing with regards to the CPHA. The challenge was thrown to us and we became a most cohesive unit. As a matter of fact, our presentation received unanimous consent at the annual meeting and the input, whether it has been from the surveys or from the conversations that have taken place in the interim meetings leading up to this presentation today, have brought us all together.
I also wear another hat. I'm on the outgoing CPC side of this. I'm one of that breed that will be gone, according to Bill C-44. I'm not speaking on behalf of the membership, but there are people here from CPC today. Don Morrisson is here. It's a tough time for them. It's a tough, difficult time and I wouldn't want their role to be diminished. When I first went on the board of CPC there were 77 positions there. Don Morrisson and the staff at CPC pulled all the budgets together for this year, with 33 positions. But the job's being done and being done well.
The LPCs, I know, the local port corporations, are fully appreciative of that because their costs have gone down. So there's a new cohesiveness, and I really believe the frosting on the cake, so to speak, will be federal agency status. I don't mind wrapping myself in the flag and I know that all the chairs would be happy to do it.
Mr. Keyes: It's more than just frosting on the cake; it's out of necessity to ensure the very viability of some of the ports in this country, because of the opportunities vis-à-vis taxation and income tax.
Mr. Russell: Absolutely.
Mr. Paquet: I'm glad you raised that question, Mr. Keyes.
Mr. Chairman, that's the point I wanted to make in my short presentation. On one side I think we need a strong Canadian port system. The ports of the St. Lawrence and the province of Quebec want to be part of that system. The St. Lawrence is one of the major maritime routes in the world and we have to be part of that system.
[Translation]
Like we say in French, we need to be a link in this chain, and the St. Lawrence River must be a strong link in the chain of Canadian ports.
The Chairman: Fine. Thank you.
[English]
Mr. Paquet: We're Canadian ports, and as Mr. Caron said before, we have a strong Canadian system, not only by having individual ports that can do well individually on a commercial basis. We have to have more than that. We have to be linked together. To be linked together means having federal agency status.
The work of a port manager, a port chairman, is not just sitting in the office waiting for the phone to ring. It's an international business. You have to do international marketing and the proper way to do it and to deal with your competition is to go along with the Canadian flag and be able to say you're part of the Canadian system and that you're federal agents in Canada. That's how we can work things out.
Perhaps I can give an example. Over the past ten years the Port of Quebec has been working in very close cooperation with the St. Lawrence Seaway Development Corporation in the United States. We are treated as equals. We are competitors in certain ways, but when it's time to do marketing these people are ready to bring us along because we are federal agents, we are members of the Canadian ports system.
Mr. Keyes: Thanks very much, René. Thank you, gentlemen. Thank you, Mr. Chairman.
The Chairman: I'd like to add my thanks. The presentations by the ports across the country have been interesting, they've been thorough, and I think we've all learned a lot. The next few days promise to be particularly interesting as we try to put it all down in a set of amendments that will reflect the collective wisdom of us all.
Mr. Pearce: If there's anything we can do to help, if there are any questions, just give us a call.
The Chairman: Mr. Pearce, you have done quite enough.
Mr. Pearce: Thank you very much. Thank you, Mr. Chairman. Merci.
The Chairman: Thank you very much. You might want to stick around. I suspect you'll find this next presentation very interesting.
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An hon. member: Mr. McNeill has a large bag here.
Some hon. members: Oh, oh!
The Chairman: Fred Mifflin, are you here to talk about the dredging?
Mr. Fred Mifflin (Managing Director, Government Investment Banking, Nesbitt Burns): No, no.
Some hon. members: Oh, oh!
The Chairman: Mr. McNeill, please introduce your group, and let's go.
Mr. Neil McNeill (Executive Director, Harbours and Ports, Department of Transport): Thank you, Mr. Chairman. It's an honour to be your last witness for these hearings. I'd say you saved the best for last, but since I was also one of your first witnesses, I'll skip over that.
Transport gave you a number of undertakings to provide quite a bit of material throughout the days of the sittings. We've done that through different briefing notes and clause-by-clause briefings. The last material presented to you today were the briefing notes on stipend or charge on gross revenues and port taxation, and the briefing book on port divestiture, the guidelines on how to handle public port divestiture. The most important piece we had promised on the first day of hearings was to table to this committee the report from our financial advisers, Nesbitt Burns.
I'd like to introduce at this time Mr. Fred Mifflin and Mr. Rick Byers. You have the summary report before you. They're here to make a presentation and answer any of your questions on port ``financeability''.
Mr. Mifflin: Thank you, Neil.
Good afternoon, Mr. Chairman and members of the committee. I am the managing director of the Nesbitt Burns government investment banking group.
For the record, I'm not related to the current Minister of Fisheries.
My colleague, Rick Byers, is a vice-president in our government investment banking group. We are here today to present to you our firm's report on the financeability of Canada port authorities. I understand you've already received our summary report.
We plan to review the report briefly with you and then we'd be happy to answer any questions you have. The areas we will cover are: first, the scope of the assignment; second, an overview of the process we went through in our review; third, our reproach to assessing financial self-sufficiency for Canada port authorities; fourth, certain key financing issues we unearthed; and fifth, our assessment of financial self-sufficiency for the prospective CPAs.
Nesbitt Burns was engaged by Transport Canada in July to review the financeability of Canada port authorities. Specifically, Transport asked us to undertake two primary tasks: first, for each of 19 ports that may apply for CPA status, to assess the financial self-sufficiency, the debt capacity, the estimated borrowing costs and the appropriate source of financing for each of the 19 ports; and second, to determine the impact on financeability of policy changes since December 1995 and possible amendments to Bill C-44. The list of the ports and harbour commissions we reviewed is included on page 2 of our report.
To complete the assignment we assembled a team of professionals from across our firm. It also included two members from the corporate credit area of the Bank of Montreal, which is our parent, who focused primarily on the credit issues associated with accessing bank financing. Over the past few months we have met personally with senior management in each of the 19 ports identified by Transport Canada. These meetings were important to our review process. They enabled our team to gain a fuller understanding of the issues facing each port. It also allowed us to directly assess the quality and the condition of port assets.
In addition to these meetings, we met with representatives of each of the four major credit-rating agencies in North America - two American agencies and two Canadian agencies - as well as potential investors who might be buyers of CPA debt in the future. These meetings enabled us to get a first-hand understanding of the specific financing issues facing CPAs in the financing process.
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As for the approach to financial self-sufficiency assessment, we don't propose to reveal in detail the approach we use to come to our conclusions about financial self-sufficiency for each port. This information is included in section 3 of our report. Rather, what we'd like to do is to highlight a few key elements of our assessment approach.
Our approach included both a quantitative and a qualitative review. The quantitative review focused on the corporate plans prepared by port management, including expected financial performance and expected capital expenditure requirements over the next five years. From this we built a comprehensive financial model for each port, which enabled us to estimate the future cashflows for each port and thereby assess whether or not the ports were financially self-sufficient.
The qualitative review focused on a number of other factors, which indicated how sustainable the estimated cashflows would be. The main factors included the following. Does the port have long-term contracts with operators? Is the port well diversified in its commodity base? Is the port exposed to international competition or competition from other modes of transportation? Finally, is port management experienced and capable of operating in a competitive environment?
Together, these quantitative and qualitative factors enabled us to come to a conclusion about the financeability of each of the nineteen ports and harbour commissions we reviewed. Rick will talk about our assessment shortly, but before he does, I want to talk a bit about financeability issues, which were raised by the last presenters.
In the course of our review we identified a number of policy issues which impact on our assessment of financial self-sufficiency. These are identified in review in section 4, again. What I'd like to do is briefly discuss three of these issues which deal with the specific provisions of the bill.
The first of these is municipal taxes. Currently the amount of municipal taxes paid by ports and harbour commissions is well defined. Local port corporations pay grants in lieu of taxes. Harbour commissions pay no municipal taxes. However, under the current wording of Bill C-44 the amount of municipal tax to be paid by ports and harbour commissions is uncertain. This uncertainty creates issues for financeability. In the absence of more definite information, investors would likely assume the highest level of tax; that is, full municipal taxation.
From the perspective of port financeability, a better arrangement would be one under which CPAs could identify with certainty the amount of municipal tax or grants in lieu of tax they would have to pay. This would clearly enhance CPA financeability.
A second issue is the scope of port activities. The current draft of Bill C-44 restricts the nature of activities that can be undertaken by CPAs. This provision generated significant interest among the ports, given their current mix of activities. Again, this was raised by the previous presenters.
Ultimately the activities of a port must be assessed on a case-by-case basis, to determine their impact on financeability. Accordingly, as long as activities undertaken by the port are not so significant in scope or so unrelated to port operations, to ship management and the board in their core competencies, or to the direct goals of the port, then modestly expanding the scope of port activities would not negatively impact on port financeability.
The third issue I would like to review is pledging of assets in borrowing. The current draft of Bill C-44 contains a provision in clause 27 that prevents boards from mortgaging property to support borrowing. Ports would be able to pledge only their revenues in support of borrowing.
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We believe the ability to pledge assets is an important factor for those ports wishing to access the bank financing market. This is relevant for CPAs, since many of these entities would borrow from banks if they required financing. Therefore enabling them to pledge assets in support of borrowing would provide more flexibility in their borrowing activities. We believe this would enhance their long-term commercial viability.
I would now like to pass the podium to Rick Byers, who will review our conclusions on financial self-sufficiency.
Mr. Richard Byers (Vice-President, Government Investment Banking, Nesbitt Burns): Thank you, Fred. Our assessment of financial self-sufficiency is included in section 5 of our report, beginning on page 24.
Of the nineteen ports and harbour commissions we reviewed, we believe that seventeen are financially self-sufficient, and two are not. I want to briefly review some of our conclusions about specific ports and harbour commissions.
We found the Oshawa Harbour Commission and the Toronto Harbour Commissioners to be not financially self-sufficient.
In the case of Oshawa, the ability of the harbour commission to use port property is currently in doubt, which has had an impact on port operations. There is currently little traffic at the port. Further, there is significant dredging required, which would more than eliminate existing reserves. On this basis, we assess the Oshawa Harbour Commission as not financially self-sufficient.
In the case of Toronto, current operations do not generate cashflow sufficient to cover expected maintenance capital spending. In addition, a significant portion of the port's revenue comes from a subsidy from the City of Toronto, a subsidy which is not commercially enforceable. We believe this current situation could not support commercial lending, and as a result we identified Toronto as not self-sufficient.
Of the seventeen ports we view as being financially self-sufficient, we reviewed four ports in more detail than others. These ports are Vancouver, Fraser River, Quebec, and Sept-Îles.
Vancouver Port Corporation has recently taken on a significant amount of debt to finance the construction of Deltaport, a large new container facility. The issue with Vancouver is the ability to service this debt in the future, on commercial terms. We believe that by fine-tuning the corporate plan to reflect reasonable adjustments that could result from a more commercial operating environment under Bill C-44, and by extending the amortization period of the existing debt, the port would be able to meet its financial commitments and would therefore be financially self-sufficient.
The issue regarding Fraser River Harbour Commission is the port's future dredging costs. Historically these costs have been borne by the coast guard. If the port's future annual dredging costs are at $3 million, as currently estimated by CCG, then the port would not be financially self-sufficient. We understand that these costs have not yet been confirmed and that CCG's cost recovery regime has not been finalized. We also understand that the port is in discussions with CCG and is entertaining private sector alternatives for dredging. The outcome of these discussions will be an important determinant of financial self-sufficiency.
In the case of Port of Quebec Corporation, the issue relates to certain capital expenditures included in the corporate plan that may be discretionary in nature and not absolutely necessary for port operation. If these discretionary expenditures are removed from the plan, we regard the port as being financially self-sufficient.
Finally, in the case of Sept-Îles, the issue is whether the port's existing debt from the interport loan fund can be financed on commercial terms. Based on a review of the contract, we believe commercial financing would be available as long as there are no legal issues associated with the signing of the contract, and lenders were satisfied with the credit quality of the contracting party, and finally, that the port had fulfilled its commitments on the contract.
Mr. Mifflin: Mr. Chairman, that concludes our formal remarks. We'd be happy to take any questions you might have.
The Chairman: Mr. McNeill, do you have anything to add?
Mr. McNeill: No, Mr. Chairman. Besides the financial report, we've tabled all of the remaining material required, and so we're open to questions.
The Chairman: Thank you. Mr. Caron.
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[Translation]
Mr. Caron: If I get it right, you have made an assessment of 19 ports. You have examined their self-sufficiency. A few of them have problems, but you did not notice special problems in other ports like those in Thunder Bay, Windsor or Hamilton.
If they were turned into CPAs, you would not see any problem, financially. It means they could run their own operations, operate their facilities, see to it that everything runs smoothly and on a viable basis so that the government does not have to pour any money into them or subsidize them.
In the 19 ports you have examined, the situation looks rather sound on the whole.
[English]
Mr. McNeill: The 17 are in fairly good shape financially, but the other criteria of the proposed act have not been fully assessed - the diversified traffic, the international market, and the links to other modes. We have not yet completed the full evaluation of whether all 17 will fit into CPA status.
[Translation]
Mr. Caron: This was not part of your mandate.
[English]
The Chairman: Do you want to add anything?
[Translation]
Mr. Caron: It is okay.
[English]
The Chairman: Mr. Cullen.
Mr. Cullen: Thank you, Mr. Chairman. Thank you, gentlemen. I read through the reports briefly yesterday and I must say I was really impressed with the thoroughness and your approach and how you've gone about the task.
I have four questions. Two are more technical and a couple are more philosophical, if you like. Maybe we can get the technical ones out of the way first. I'm just wondering, how sensitive are your analyses and your conclusions with respect to interest rates, given interest rate volatility right now?
Mr. Mifflin: Thank you for your compliments on the report.
In building the financial model for each of the ports, where there was existing debt, we included refinancing of that debt under current interest rates. Most of these ports, other than a few notable exceptions, do not carry debt today, and therefore they are not particularly susceptible to interest rate assumptions, but clearly in this interest rate environment all of the ports that do carry debt are beneficiaries of what is happening in the markets today. We have modelled them on current assumptions and they are not extremely vulnerable to interest rates. One exception would be the port of Vancouver, which carries a significant amount of debt on its books today.
Mr. Cullen: So it's based on a scenario of low interest rates into the foreseeable future?
Mr. Mifflin: We assumed that where debt was outstanding it was long-term debt, so in our modelling we did not leave the port exposed to short-term interest rate volatility. Particularly with Vancouver, we assumed that they would borrow for 20 to 30 years and therefore fix the rate and not be at the mercy of the markets, of a crisis tomorrow raising rates 300 basis points.
Mr. Cullen: Okay, thank you. In your report you talk about ports' corporate plans, but you do say ``where available''. I'm just wondering - presumably the preponderance of the ports had corporate plans, or did you have to build them yourself?
Mr. Byers: No, all the local port corporations had detailed corporate plans; a couple of the harbour commissions did not. We were actually quite impressed overall with the nature of the information we reviewed in them.
Mr. Cullen: Okay. If what you say is true, and the legislation was drafted to accommodate some provision for the pledging of assets, do you think it's reasonable or unreasonable, if a port authority wants to access the pledging of assets, for the government to reflect that in an increased stipend? Essentially the federal government is guaranteeing the loan, or part of the loan, is it not?
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Mr. Mifflin: We have not assumed any federal government guarantee in any of our work. We've assumed part of the commercialization thrust is that the ports would stand completely on their own. When we speak of the pledging of assets, those would be assets that either are being built or are owned by the port, but where there would be no guarantee of the debt by the federal government. That has been our underlying assumption.
Mr. Cullen: So these would not be federal assets involved here. You say about financeability issues that the pledging of assets creates some clouds. The ability to pledge assets creates some uncertainty about the financeability of some of the authorities.
Mr. Mifflin: Our feeling is that the inability to pledge assets may limit the terms a CPA could obtain in the bank market in particular. When we move to the public capital markets or the private institutional markets, we believe those markets can understand a revenue pledge. That's general for the larger ports, anyway. For some of the smaller ports, when they go to the bank and they want a mortgage, it's like an individual. When you go to the bank you generally will get better terms if you can give security. In effect the bank would have the security for the loan.
Mr. Cullen: Yes, I realize in the report you did differentiate it in that way.
My last question is this. If we look at the stipend, the marginal rate for the larger corporations is less. There is a sliding scale. You say that helps the larger ports, which are perhaps facing stiff international competition. Is it not also true that some of the larger ports are the most profitable?
Mr. Mifflin: Some of the larger ports, yes, are profitable, but they also are in the most competitive league. By and large, we were very impressed with the financial standing of the smaller ports, because these are very good small to medium-size businesses. In fact, many of the smaller ports are in great financial condition. The larger ports, while they may be profitable, are subject to intense competition. They're subject to significant capital expenditure requirements.
I don't know if that answers your question.
Mr. Collins: Yes, I think it deals with it.
Mr. Byers: One issue we were struck with, as Fred says, is that at the outset of the assignment we assumed the large ports would be the ones most profitable and most willing to sustain additional expenditures and the small ones would be most vulnerable. In fact, in many ways you can argue it's the other way around.
One port we had to spend an awful lot of time in looking at was Vancouver, one of the prime ports in the entire system and one of the best-diversified ports in North America, certainly. As Fred noted, because of the investment they've had to take and the lack of commitments from shipping lines, etc., they've had to expand facilities greatly, and it's a challenge for them to finance that. In some of the other ports, which are perhaps less exposed to the competition, customers are a bit more captive, they have a little more flexibility, we have found, to be more financially self-sufficient. So I wouldn't say there's that necessary correlation between size and profitability.
Mr. Cullen: The larger ports are faced with bigger capital expenditure programs to remain competitive.
Mr. Mifflin: They're also generally engaging in the most competitive lines of business. For example, container traffic is Halifax, Montreal, and Vancouver primarily, and that's extremely competitive business. That is international competition. If there are containers coming into the west coast of North America, Los Angeles, Long Beach, Seattle, Vancouver, they can stop at all those places and still have the goods end up in western, central, and eastern Canada. Vancouver faces that every day.
It's the same on the east coast, with Halifax. To get to Chicago it can come from New York, it can come from Philadelphia, it can come from Baltimore - or Montreal, for that matter - as well as Halifax.
Those are the really competitive products. The marginal revenue on those dollars concerned us.
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The Chairman: Thank you, Mr. Cullen.
In your model you used the sliding scale, but you felt it should not be a first charge for the dividend or the tariff.
Mr. Mifflin: I don't think we said that, Mr. Chairman. It would be a positive. That's not to say that it is an absolute.
The Chairman: And it was calculated for port revenues at the following rates: 2% up to$3 million, 4% from $3 million to $10 million, and 6%... This is on page 17.
Mr. Byers: Yes. Our model initially included the sliding scale that ended at an 8% marginal rate. That presented two concerns for us. One was the 8% on the largest ports exposed to international competition.
The second point is the one you've raised. In general, having the stipend as a operating expense, if you will, and not subordinate to debt service... If it were subordinate to debt service that would be an advantage for financial lenders.
We have not modelled it, though, to be clear about this. We have not assumed that the stipend would be subordinate to financing.
The Chairman: So is your model, which has you coming to this conclusion that these ports are sustainable, based on the stipend as proposed in the bill?
Mr. Byers: That's correct. As a first charge...
The Chairman: As a first charge -
Mr. Mifflin: Mr. Chairman, I apologize. That's where my misunderstanding was in your question.
The Chairman: It may be the clumsiness of my question.
Mr. Mifflin: I think it was the clumsiness of our words.
The Chairman: Mea culpa, mea culpa.
Mr. Keyes: Well, that's established. You're both clumsy.
Some hon. members: Oh, oh!
The Chairman: Mr. Keyes, save us from this.
Mr. Keyes: Now that we've established that you're both clumsy, I want to thank Nesbitt Burns for their contribution, Mr. Chairman. I was also heartened by the fact that this report dealt with the financial situation based on, as I understand it, no coming back to the federal government for funding. Is that correct?
Mr. Mifflin: That's correct.
Mr. Keyes: Mr. Chairman, I want to highlight this again. If it's the intention of this committee to move toward federal agency status - like this committee has been hit with at every turn and every port and every opportunity - it was with the full intention and understanding that it was there to protect the ports from the taxation that comes their way, and not there in order for them to use the government as a lien on any financial situations in the future. What we've heard here today is a win-win. I think it's just been justified by Nesbitt Burns and it's exactly what this committee is considering as an amendment to the bill.
Gentlemen, of the seventeen ports that are financially self-sufficient, based on your findings how many would necessarily need to pledge assets, given their revenue streams?
Mr. Byers: Of the seventeen that are financially self-sufficient, we looked at four in detail. Those four either have debt outstanding currently or have identified specific needs for debt. Beyond those four, Halifax has also identified specific borrowing requirements and Prince Rupert has debt outstanding. That's six out of seventeen.
As for the remaining eleven, we don't really see them requiring any financing over the planning period. So eleven of seventeen are businesses that generate positive cashflow and have reserves set aside to meet capital expenditures. The other six have either identified financing that they do need or have it in place already to support capital expenditures they've already made.
Mr. Mifflin: Let me add that, as we said earlier, most of these businesses have been well run and conservatively financed. That speaks to the conservativism -
Mr. Keyes: With a small ``c''.
Mr. Mifflin: That's correct.
Some hon. members: Oh, oh!
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Mr. Keyes: That's the only question I had for the gentleman, Mr. Chairman. But I want to take, if I may, a little latitude from the chair, while Mr. McNeill is sitting with us at the table, to say in regard to the port communities talking to each other and reaching a consensus, the likes of which has never been seen before - two and a half years of work to achieve that consensus - that it was only achieved, I think, by a team approach from two Ministers of Transport, Doug Young and David Anderson; the deputy minister, Nick Mulder; the Department of Transport and all the people there who worked so hard, led by Neil McNeill who visited these ports on many occasions and was on the telephone for more hours than I can count; and the members of Parliament of this committee,Mr. Chairman, who produced the national marine policy of 1995 that led to the most comprehensive consultations, that led to Bill C-44, which will be amended, I believe, to better reflect the standing committee report of 1995 and the consensus that was built around it.
The Chairman: Thank you, Mr. Keyes. You're not, of course, presuming upon the work of this committee.
Mr. Keyes: Absolutely. I'm the parliamentary secretary.
The Chairman: There will be a fair bit of debate about that.
Given that you're here, Mr. McNeill, there are two questions I would like to ask you before we wrap this up. They come out of some final discussion that took place today. One was the question of shipper appeal mechanisms. The other was the specific concern raised by the Port of Saint John or by the representatives from the City of Saint John relative to policing.
Let's deal first with the question of shipper appeal. Is it something that has been contemplated in any of your discussions?
Mr. McNeill: At the moment, Bill C-44 is silent on any of the appeal mechanisms, and yes, we're proposing to you some of the appeal mechanisms with regard to CPA's and public ports.
The Chairman: On the second one, the issue that came at us today from Saint John was somewhat different. In all of our discussions on this issue of port policing, all of the other ports have made arrangements, with the one exception of Vancouver, where we have confronted a debate that I think transcends perhaps the specific issue of policing. But in the situation with Quebec, Montreal, Halifax and others, they seem to have made their own arrangements and seem quite satisfied with that.
What was raised with us was that at the port of Saint John the community of users that it would be presumed to be drawn upon to form or have input into the forming of a board have taken the position that they will not have policing. It sort of came as the other side of the coin. Is it possible to not have policing on the port property?
Mr. McNeill: We don't think so. Certainly since May 1995 when this committee recommended the abolition of CPC, we've been working on the whole issue of policing. It's been a real strain on the Ports Canada police to be held in an area of uncertainty for over a year now, but hopefully it will come to an end soon when this committee does recommend to repeal the Canada Ports Corporation Act.
Our belief on the policing issue is that in each of the major ports that have a Ports Canada police detachment, the policing function should fall to two major communities. Under federal enforcement we would ask that the RCMP and Customs take a greater role, and that the ports negotiate services with the local municipal police forces for the non-federal enforcement role.
So in Saint John, New Brunswick, there clearly will be a requirement for municipal policing, and we would expect the port to negotiate a deal with the municipality for enhanced policing and compensate the municipality for that. The users have often said in many of the ports that they don't need that; they don't want it because they don't want to pay for it.
Mr. Keyes: How do we make sure it happens?
Mr. McNeill: We believe the port administrations should deal with the local municipality to make a special arrangement for policing for non-federal responsibilities. We're also recommending that the port authority have, in law, responsibility for safety and security, so you deal with the whole idea of safety, security and policing at the same time.
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The Chairman: Mr. Cullen.
Mr. Cullen: As a Toronto area MP, I would feel remiss not to bring to your notice that the only two harbours or ports you would deem not financially self-sufficient are the Toronto Harbour Commission and the Oshawa Harbour Commission.
The Chairman: Welcome to Churchill.
Mr. Cullen: I spoke earlier today, just to give a heads-up to the MPs in those areas, and of course they firmly believe the ports are viable. But I haven't seen their studies yet.
About Oshawa, in your estimation, is the financial non-viability driven more by the dredging issue or by the fact that there's a problem with the OMB?
Mr. Byers: First, the OMB is chilling the operations of that port in the sense that there's a great deal of uncertainty and they are unable to get traffic and people committing themselves if they can't say whether or not they can operate and use the land. But there's no question that even if they had the volumes they've had in the past, the amount of capital they have to spend on the structure and the dredge containment facility is very significant for the size of the port. It's not a trivial issue at all. I think we would have to look long and hard at whether they could finance that from operations. Certainly now they can't. So it's both issues.
Mr. McNeill: Mr. Cullen, we anticipated that it was the combination of no traffic and the OMB chilling which would make them not financially viable. We've met with the municipality and we've met with the Oshawa Harbour Commission on several occasions this summer. We've encouraged them not to apply for CPA status but to stand by for regional or local status; in other words, divestiture. We have the users dealing with the municipality at this moment to talk about a municipal not-for-profit corporation that would take over that property.
We've started that process for Oshawa. We have not started it for Toronto.
Mr. Keyes: Why not?
Some hon. members: Oh, oh!
Mr. Keyes: I retract the question.
The Chairman: Mr. McNeill is showing a wisdom that transcends his years.
I guess it was in mid-December of last year I found myself stuck on the tarmac with Rick Pearce in a DC-9 run by Air Canada. Two months later I became chair of this committee. I don't think there's an association between those two events. Actually, it would frighten me if there were.
It has been fascinating. I want to thank all the witnesses. I want to thank the members of the opposition. There's very little petty bickering and petty politics in this committee. A lot of really hard thought has gone into this. Since Mr. Keyes isn't able to say this, we should all commendMr. Keyes for the original SCOT report, which I have heard about ad nauseam since becoming chair of this committee.
The staff work has been uniformly fine. Mr. McNeill, I really appreciate the work you and your crew have done in providing us with information that helps us think our way through this...as well as the clerk and the staff who support the committee. It has been a really interesting process.
The hard work begins now, as we try to sort out the fine points and round off the corners on this one. I think it's going to be an interesting process, but I know all the members are really fascinated by it. We will emerge next week bloodied but I'm sure unbowed, with a really fine piece of legislation.
My thanks to all.
This ends this meeting. Now we're into clause-by-clause.