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37th PARLIAMENT, 1st SESSION

Standing Committee on Finance

COMMITTEE EVIDENCE

CONTENTS

Wednesday, February 20, 2002

1535

The Chair (Mrs. Sue Barnes (London West, Lib.))

Mr. John McCallum (Secretary of State, International Financial Institutions)

1540

1545

1550

The Chair

Mr. Epp

Mr. Jason Kenney (Calgary Southeast, Canadian Alliance)

The Chair

Mr. Kenney

The Chair

Mr. Jason Kenney

Mr. John McCallum

Mr. Serge Dupont (General Director, Tax Policy Branch, Department of Finance)

1555

Mr. Jason Kenney

Mr. Serge Dupont

Mr. Kenney

Mr. Serge Dupont

Mr. Kenney

Mr. Serge Dupont

Mr. Jason Kenney

Mr. John McCallum

Mr. Jason Kenney

Mr. John McCallum

Mr. Jason Kenney

Mr. John McCallum

Mr. Jason Kenney

1600

Mr. John McCallum

Mr. Jason Kenney

Mr. John McCallum

Mr. Jason Kenney

Mr. John McCallum

The Chair

Ms. Pauline Picard (Drummond, BQ)

Mr. John McCallum

Ms. Pauline Picard

1605

Mr. John McCallum

Ms. Pauline Picard

Mr. John McCallum

Mr. Jacques Parent (Acting Assistant Secretary, Infrastructure Canada)

Ms. Pauline Picard

Mr. Jacques Parent

Ms. Pauline Picard

Mr. Serge Dupont

Ms. Pauline Picard

Mr. Serge Dupont

Ms. Pauline Picard

Mr. Serge Dupont

Mme Picard

The Chair

Mr. Shawn Murphy (Hillsborough, Lib.)

Mr. John McCallum

Mr. Serge Dupont

1610

Mr. Shawn Murphy

Mr. Serge Dupont

Mr. Shawn Murphy

Mr. Serge Dupont

Mr. Shawn Murphy

Mr. John McCallum

Mr. Shawn Murphy

Mr. Serge Dupont

Mr. Shawn Murphy

Mr. Serge Dupont

A witness

Mr. Shawn Murphy

1615

Mr. Serge Dupont

Mr. Shawn Murphy

Mr. John McCallum

Mr. Serge Dupont

The Chair

Mr. Lorne Nystrom (Regina--Qu'Appelle, NDP)

Mr. William J.S. Elliott (Assistant Deputy Minister, Safety and Security Group, Department of Transport)

Mr. Lorne Nystrom

Mr. John McCallum

Mr. Lorne Nystrom

Mr. John McCallum

Mr. Lorne Nystrom

Mr. John McCallum

Mr. Lorne Nystrom

1620

Mr. John McCallum

Mr. Lorne Nystrom

Mr. William Elliott

Mr. Lorne Nystrom

Mr. John McCallum

Mr. Lorne Nystrom

Mr. John McCallum

Mr. Lorne Nystrom

Mr. John McCallum

Mr. Lorne Nystrom

Mr. John McCallum

Mr. William Elliott

Mr. Lorne Nystrom

Mr. John McCallum

Mr. Lorne Nystrom

Mr. John McCallum

1625

The Chair

Mr. Scott Brison (Kings--Hants, PC/DR)

Mr. John McCallum

Mr. Scott Brison

Mr. John McCallum

Mr. Scott Brison

Mr. John McCallum

Mr. Scott Brison

Mr. John McCallum

Mr. Scott Brison

Mr. John McCallum

Mr. William Elliott

Mr. Scott Brison

Mr. Serge Dupont

1630

Mr. Scott Brison

Mr. Serge Dupont

Mr. Scott Brison

Mr. John McCallum

Mr. Serge Dupont

Mr. Scott Brison

Mr. John McCallum

The Chair

Mr. Epp

The Chair

Ms. Sophia Leung (Vancouver Kingsway, Lib.)

Mr. John McCallum

Ms. Sophia Leung

Mr. John McCallum

Ms. Sophia Leung

Mr. Jacques Parent

1635

Ms. Sophia Leung

Mr. Jacques Parent

Ms. Sophia Leung

Mr. Jacques Parent

Ms. Sophia Leung

Mr. Jacques Parent

Ms. Sophia Leung

Mr. Jacques Parent

Ms. Sophia Leung

Mr. John McCallum

Ms. Sophia Leung

Mr. John McCallum

Ms. Sophia Leung

Mr. Gérald Lalonde (Senior Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance)

Ms. Sophia Leung

Mr. Gérald Lalonde

Ms. Leung

Gerald Lalonde

The Chair

Mr. Yvan Loubier (Saint-Hyacinthe--Bagot, BQ)

1640

Mr. John McCallum

Mr. Yvan Loubier

M. McCallum

Mr. Yvan Loubier

Mr. John McCallum

Mr. Yvan Loubier

The Chair

Mr. Epp

The Chair

Mr. Epp

The Chair

Mr. Epp

Mr. Lorne Nystrom

The Chair

1645

Mr. Jason Kenney

The Chair

Mr. Shawn Murphy

The Chair

Mr. J. Clifford Mackay (President and Chief Executive Officer, Air Transport Association of Canada)

1655

Mr. Gary Pillitteri (Niagara Falls, Lib.)

The Chair

Mr. Gary Pillitteri

The Chair

Mr. Clifford Mackay

1700

1705

1710

The Chair

Mr. Mark Hill (Vice-President, Strategic Planning, WestJet Airlines Ltd.)

Mark Hill

1715

1720

The Chair

Mr. Jason Kenney

Mr. Clifford Mackay

Mr. Jason Kenney

Mr. Clifford Mackay

Mr. Mark Hill

The Chair

Mr. James Moore (Port Moody--Coquitlam--Port Coquitlam, Canadian Alliance)

1725

Mr. Mark Hill

Mark Hill

Mr. Clifford Mackay

The Chair

Ms. Pauline Picard

Mr. Clifford Mackay

Mr. Yvan Loubier

1730

Mr. Clifford Mackay

Mr. Yvan Loubier

Mr. Clifford Mackay

Mr. Mark Hill

The Chair

Mr. Roy Cullen (Etobicoke North, Lib.)

Mr. Mark Hill

1735

Mr. Roy Cullen

Mr. Mark Hill

Mr. Roy Cullen

Mr. Mark Hill

Mr. Roy Cullen

Mr. Mark Hill

Mr. Cullen

Mr. Clifford Mackay

Mr. Roy Cullen

Mr. Mark Hill

Mr. Roy Cullen

Mr. Mark Hill

Mr. Cullen

Mr. Mark Hill

Mr. Cullen

Mr. Mark Hill

The Chair

Mr. Lorne Nystrom

1740

Mr. Clifford Mackay

Mr. Lorne Nystrom

Mr. Clifford Mackay

Mr. Lorne Nystrom

Mr. Clifford Mackay

Mr. Lorne Nystrom

Mr. Clifford Mackay

Mr. Lorne Nystrom

Mr. Clifford Mackay

The Chair

Mr. Scott Brison

The Chair

Mr. James Moore

The Chair

Mr. Jason Kenney

The Chair

Mr. James Moore

The Chair

Mr. Moore

The Chair

Mr. James Moore

The Chair

Mr. James Moore

The Chair

Mr. James Moore

Mr. Kenney

Mr. Moore

The Chair

1745

Mr. Moore

The Chair

CANADA

Standing Committee on Finance

NUMBER 078

1st SESSION

37th PARLIAMENT

COMMITTEE EVIDENCE

Wednesday, February 20, 2002

[Recorded by Electronic Apparatus]

¹ (1535)

[English]

The Chair (Mrs. Sue Barnes (London West, Lib.)): Good afternoon and welcome to everyone.

The order of the day is Bill C-49, An Act to implement certain provisions of the budget tabled in Parliament on December 10, 2001.

We have with us the Honourable John McCallum, the Secretary of State for International Financial Institutions. Welcome back to the finance committee so quickly.

Our witnesses today are: from the Department of Finance, Serge Dupont, general director, Tax Policy Branch; John Davies, senior economist, International Finance and Economic Analysis Division, International Trade and Finance; and Gérald Lalonde, senior chief, Tax Legislation Division, Tax Policy Branch; from the Department of Transport, William Elliott, assistant deputy minister, Safety and Security Group; from Infrastructure Canada, Jacques Parent, acting assistant secretary; and from Human Resources Development Canada, Gordon McFee, director of policy and legislative development. Welcome to all of you. Bienvenue.

Mr. McCallum, you have the floor for your opening statement.

[Translation]

Mr. John McCallum (Secretary of State, International Financial Institutions): Thank you, Madam Chair.

It is a pleasure for me to be back before the Standing Committee on Finance and I appreciate the opportunity to appear today to discuss Bill C-49, which implements several of the key elements in the 2001 budget.

The initiatives in the 2001 budget build on the government's long-term plan for a stronger economy and a more secure society, and also respond to the economic and security concerns of Canadians following the tragic events of September 11 in the U.S.

This is accomplished in three ways. First, by providing a timely boost to the economy at a time of global uncertainty and positioning Canada to take full advantage of the recovery expected this year.

Second, by acting to build personal and economic security by keeping Canadians safe, terrorists out and our borders open and efficient.

Third, by keeping the nation's finances healthy by balancing the budget this year and for the next two years.

To enhance the personal security of Canadians, the budget announced a new approach to air security along with new intelligence and policing measures, emergency preparedness and military initiatives, and measures related to the screening of visitors, immigrants and refugee claimants entering Canada.

To address the concerns of Canadians for their economic security, the budget announced measures to make the Canada-U.S. border more open and efficient, and significant investments in health, skills, learning and research, strategic infrastructure and the environment, aboriginal children, and international assistance. These initiatives were designed to advance the government's long-term plan in a fiscally affordable way.

[English]

I'd now like to talk about the main parts of the bill, one at a time, beginning with the Canadian Air Transport Security Authority.

Bill C-49 establishes this agency, the Canadian Air Transport Security Authority, which will deliver improved security at Canadian airports and on board flights. The new authority, scheduled to come into force on April 1, will be tasked with providing a number of key air transport security services, a consistent and integrated air transport security system across Canada, and enhanced security performance standards and services.

The authority's responsibilities will include the following: certification of screening contractors and officers; pre-board screening of passengers and others who have access to aircraft or restricted areas through screening points; acquisition, deployment, and maintenance of explosives detection systems and conventional pre-board screening equipment at airports; federal contributions for airport policing related to civil aviation security measures; and contracting with the RCMP for armed police on board aircraft.

With the Canadian Air Transport Security Authority in place, air travellers will be assured that our air transportation system remains one of the safest and most secure in the world.

The next item, Madam Chair, is the air travellers security charge. The enhanced air travel security system will be funded through an air travellers security charge that will be paid for by air travellers. It only makes sense, and I think it's quite fair, that the costs of the new security expenditures should be borne by the travellers who use the system rather than by all taxpayers.

Starting April 1, 2002, the charge will apply to flights connecting the 90 airports in Canada where the government is planning significant security enhancements, and will be collected by air carriers or their agents when airline tickets are bought. Direct flights to or from smaller or more remote airports that are not among the 90 listed airports will not be subject to the charge.

For travel within Canada, the total cost of the charge will be $12 for a one-way ticket and $24 for a round trip. The charge on a ticket to the continental U.S. will be $12. It will be $24 for a ticket to travel outside Canada and the continental U.S. These amounts are inclusive of GST where the GST applies.

¹ (1540)

All revenues from the charge will be used to fund the five-year $2.2 billion commitment to an enhanced air travel security system. There will be an open and transparent annual review of the charge to ensure that revenues over the five-year period do not exceed costs. That is an important point: to ensure that revenues do not exceed cost. If revenues do exceed costs over time, the charge will be reduced.

The next item to mention is the Canadian Strategic Infrastructure Fund. Mr. Chairman, as members of the committee know, the 2001 budget included several strategic investments that were designed to help the government achieve its long-term goals of building a strong economy and a secure society.

One such investment concerns the physical infrastructure that Canada will need to be a modern economy in the 21st century. And to help meet the need for support for large infrastructure projects, Bill C-49 establishes the Canada Strategic Infrastructure Fund with a minimum funding of $2 billion, as set out in the budget. This new fund will complement other federal infrastructure initiatives such as the infrastructure Canada program and the strategic highway infrastructure program, which were announced in the 2000 budget.

Working with provincial and municipal governments and the private sector, the Canada Strategic Infrastructure Fund will provide assistance for large infrastructure projects in areas like highways and rail, local transportation, tourism and urban development, and water and sewage treatment.

I want to mention that the Minister of Infrastructure, amongst other things, will now be responsible for this Canada Strategic Infrastructure Fund. This move will ensure better coordination of the government's various infrastructure activities.

I come now to the Canada Fund for Africa. The throne speech in January 2001 indicated that Canada's long-term well-being depends on success in improving global human security, prosperity and development. Last July, G-8 leaders in Geneva pledged their support for a proposal put forward by African leaders, which is known as the New Partnership for Africa's Development, or NEPAD. NEPAD is about Africans taking control over their own development. The Prime Minister subsequently restated his commitment that development in Africa and the issue of Africa will be one of the main themes at the upcoming G-8 summit in Kananaskis.

In recognition of this commitment, the 2001 budget announced $500 million for African development to help implement the objectives of NEPAD. These funds will be administered by the Canada Fund for Africa and will support activities designed to help reduce poverty, provide primary education, and set Africa on a sustainable path to a brighter future.

Next, Madam Chair, I come to investing in skills and learning. There are three measures here. The first measures will allow apprentice vehicle mechanics to deduct the costs of buying their new tools, up to a certain amount. Second, the bill also exempts from tax the tuition assistance for adult basic education provided under certain government programs. Finally, a third measure extends the education tax credit to students who receive financial assistance for post-secondary education under certain government training programs. Taken together, these three measures will provide significant tax relief to about 65,000 Canadians who are upgrading their skills.

There's a number of personal tax measures as well, including the following. First is a measure to extend the existing intergenerational tax-deferred rollovers to woodlot operations. Second is base GST credit entitlements; the bill provides measures to base GST credit entitlements for a quarter on an individual's family circumstances at the end of the proceeding quarter to better reflect changes in family circumstances. Third, the law will make permanent the 1997 budget measures that provide tax assistance for donations of certain securities to public charities as well as the 2000 budget measure that reduces the tax on employment benefits for donations of eligible securities acquired through stock option plans.

Next we have a number of business income tax measures, including a deferral of federal corporate tax instalments for small businesses for January, February, and March of this year for six months; amendments to ensure that non-resident partners are not considered to be carrying on business in Canada solely because investment management or administrative services are provided to the partnership by Canadian residents; and third, a measure allowing full deductibility for the cost of meals provided to employees at a temporary construction work camp where employees cannot be expected to return home each day.

¹ (1545)

Next we have a number of items under employment insurance, and this is the final measure I wish to mention. If there is one thing that all Canadians share, it is a desire for a higher quality of life for themselves and their families. One of the ways in which the 2000 budget strengthened support for families was by providing parents with the opportunity to spend more time at home with newborn or newly adopted children through extended parental benefits under the EI program.

Bill C-49 further improves the delivery of parental benefits under EI. The current 50-week cap on the combined amount of sickness, maternity, and parental benefits that an individual can receive under EI means that women who become ill may not have full access to all of these extended benefits. To enable a mother to receive her full entitlement of special benefits, effective March 3, 2002, this cap will increase by one week for each week of sickness benefits she takes while pregnant or while receiving parental benefits.

A second EI measure improves on the parental benefits that can be claimed following the birth or adoption of a child by providing parents with a window of up to two years within which to claim these benefits. At present, these benefits can be limited when a child is hospitalized for an extended period following birth or adoption. This change will provide more flexibility for parents who want to start claiming parental benefits once their child arrives home.

¹ (1550)

[Translation]

In conclusion, Mr. Chairman, this is an overview of the elements contained in Bill C-49. I have tried to keep my remarks as brief as possible so that we have time for questions.

In considering this bill, I urge members of the committee to keep in mind that the 2001 budget reflects decisions the government made in the face of uncertainty. I want to assure the committee, however, that the events of September 11 have not changed the government's fiscal resolve.

The government will continue to prepare for a better tomorrow. It will continue to invest in people, cut taxes, reduce debt, and build a stronger economy. At the same time, the government remains committed to debt reduction.

Above all, the 2001 budget confirms that the government will continue to pursue its long-term plan to invest in the future without going back into deficit.

Government officials have joined me here today. We will now be pleased to answer your questions about this bill.

Thank you, Madam Chair.

[English]

The Chair: Thank you.

I've had your remarks in French and English copied so they can be distributed.

We are up to ten minutes. In the timeframe I would ask Mr. Epp to ask questions for the first eight minutes, and then we'll continue, as we normally do, with the Alliance, and then the Bloc, and over to government, as we have been doing for some time.

Mr. Ken Epp (Elk Island, Canadian Alliance): Thank you, Madam Chair.

I'm really ill-prepared, because I found it very difficult to hear, since in my earphone the French parts he was speaking were at a volume five and the interpreter's little, diminutive voice was at about a one. So I missed probably two-thirds of what he said. I don't know whether that is important, but it makes it really difficult to get right into it when I just received the notes right now. I would like to encourage the clerk and others, when we have such presentations, if at all possible, to get these things to us in advance. I know they always do. But this time it didn't happen.

Did you have some questions first, Jason?

Mr. Jason Kenney (Calgary Southeast, Canadian Alliance): I have a point of order, Madam Chair.

The Chair: If you would like to share your time, just as long as you are...

Mr. Jason Kenney: Maybe we had better wait for all the presentations before we ask our questions.

The Chair: There is only one presentation. This is it.

Okay, Mr. Kenney, go ahead.

Mr. Jason Kenney: I would like to ask the minister, with respect to the so-called air travellers security charge, did the government consult with particular airlines prior to the tabling of this legislation to establish their views on the design of this security fee?

Mr. John McCallum: I believe that was the case, but perhaps one of the officials could clarify that point.

Mr. Serge Dupont (General Director, Tax Policy Branch, Department of Finance): I could not speak on the security portion. Mr. Elliott may wish to speak to that.

I would suggest that in the context of budget preparation, with regard to a financial matter such as a charge, it would not be customary for the government to consult with, in this case, the airline industry.

¹ (1555)

Mr. Jason Kenney: I'm sorry; the answer is not clear to me. Did the government consult with airlines about the design of this fee prior to the tabling of the legislation?

Mr. Serge Dupont: Could you repeat the question, please?

Mr. Jason Kenney: Did the government consult with, say, WestJet Airlines to obtain their views on the $24 round-trip security fee prior to tabling the legislation?

Mr. Serge Dupont: Prior to tabling the legislation, yes, there had been some discussions with WestJet.

Mr. Jason Kenney: I see. And with other airlines?

Mr. Serge Dupont: And with other airlines, with the Air Transport Association of Canada, yes.

Mr. Jason Kenney: Mr. McCallum said in his remarks that over a five-year period, the government would review the balance between funds raised through the fee and funds expended through the security agency to ensure that there's not a surplus in that fund. Is there any provision in the bill before us that guarantees this, or is that simply a matter of government policy?

Mr. John McCallum: It's simply a matter of government policy, but the Minister of Finance has given his commitment. Moreover, I believe the regulations state that should revenues seem likely to exceed expenditures, the government can, through Order in Council, cause that charge to be reduced, but there's no provision to cause it to go up.

Mr. Jason Kenney: Alternately, can it cause the expenditures to be increased? The concern I think many people in the airline industry have, and those representing travellers, is that if there is an ostensible surplus projected over a five-year period, then the bureaucrats operating this agency will find all sorts of good ways to spend that ostensible surplus. In other words, spending expands to fit the revenues allowed for it. I think that's why we recognize it as a general principle in how government departments operate.

How can we be guaranteed that the rates would be decreased, as opposed to the spending increased, so that there's no surplus?

Mr. John McCallum: I'll give you an answer, and the official might have an answer too.

I think this will be scrutinized by Treasury Board. I cannot see why the agency would wish to spend more on security than is required. There is definitely a firm commitment by the government to reduce the charges should it appear that revenues exceed expenditures.

Mr. Jason Kenney: Did the government take into account the prejudicial effect that this flat fee would have on short-haul and price-sensitive air carriers? As proposed in this bill, the fee is the same for somebody travelling on a $4,000 fare from Halifax to Vancouver as it is for somebody travelling on a $100 fare from Calgary to Edmonton or an $80 fare from Vancouver to Victoria. Doesn't the government understand that this will have a hugely detrimental effect on those short-haul, low-cost, price-sensitive carriers? This is why the Canadian Tourism Association, the Air Transport Association of Canada, and smaller airlines are strongly opposed to this. Was that taken into account? Why did the government dismiss the idea, for instance, of a percentage pro-rated fee as opposed to a price-insensitive flat fee?

Mr. John McCallum: I'd like to make two points on that, and my colleague here might make further points.

First of all, the fees were designed to recover the actual cost, and the actual cost, in terms of security measures, doesn't really depend on whether you're flying 300 miles or 3,000 miles. You still have to go through the security clearance devices at the airports and so on. So if you want to make it fair in terms of costs incurred, then the flat fee is not without merit.

The second point I would make is that the government has indicated a commitment to review this matter in the fall. The government will certainly listen to recommendations made by the industry and by other parties, and does not rule out the possibility of a change in the nature of the charge.

Mr. Jason Kenney: That's very interesting, Madam Chair, but I'm wondering why the government is proceeding with the legislation and whether it would be willing to entertain constructive amendments to change the structure of the fee.

Why would the government want to implement legislation when in fact it's considering changing the structure of the fees?

º (1600)

Mr. John McCallum: Well, that speaks to my first point, that the costs do not vary according to the length of the flights. So we think this idea that's being put into law has the merit of both fairness and simplicity.

But we're always willing to be responsive, and should improvements be suggested, after a certain length of operation of the system, then we're certainly open to consider them.

Mr. Jason Kenney: I would just say for the record that the problem with that is that I've spoken to certain airline officials who feel they may have to make very serious service changes as a result of this substantial increase in their pricing structure.

So people may lose their jobs, people may be laid off, their routes may be reduced, and air traffic may be reduced because of this pricing-sensitive fee, and the government is now telling us that they may come back after the fact and review it. Well, it may be too late for some of the small airlines.

Mr. John McCallum: The point is that this has the benefit or the advantages of both simplicity and fairness, because the costs of protection are not a function of the length of the flight, and so I stand by it. I am just making the general point that in the conducting of the periodic reviews, the government will listen to interested parties.

Mr. Jason Kenney: Madam Chair, the Standing Committee on Transport's December 7 report, tabled in the House of Commons, in recommendation 14 explicitly called for the costs of any new security measures to be borne in a shared fashion by carriers, regional airport authorities, the travelling public, and general government revenues. In other words, they advocated a blended financing security measure similar to what exists in the United States and other jurisdictions.

Why did the government reject or ignore the recommendation in the transport committee's report in this respect?

Mr. John McCallum: I think if one looks at the budget, one finds that total security measures are something in the order of $7.5 billion over five years. So the bulk of those security measures are indeed financed by out of general revenue by the taxpayer. But it was felt that, in terms of airline transport, it was equitable that these direct airline-related security charges should be borne by their passengers.

I don't know if Mr. Dupont has anything else on the history of that.

The Chair: Thank you. We're a bit over time, unfortunately, so we'll go on to Madame Picard--si vous voulez commencer.

[Translation]

Ms. Pauline Picard (Drummond, BQ): Thank you, Madam Chair. I congratulate you on your new duties as chair of the finance committee. I think that you are the first woman to chair this committee, and we are honoured. We're glad you're here.

Mr. McCallum, I would like to speak to you about the Canada Strategic Infrastructure Fund. When he brought down the budget, the Minister of Finance said that the Canada Strategic Infrastructure Fund was conditional on a budget surplus. According to Bill C-49, can we be sure today that there is a budget surplus? Can we reassure the public that this strategic fund is solidly in place and that implementation will soon follow.

Mr. John McCallum: We hope that project applications will soon be received. It always take a while between the time an application is received and the time the money is handed over. So the money will be spent over a period of several years, but as rapidly as possible. That is the basic idea.

Ms. Pauline Picard: So, what you are saying is that the program has already been implemented and that the various partners, municipalities or agencies can already apply for funding, using forms that you will supply. That is what I am hearing.

º (1605)

Mr. John McCallum: We are in the process of creating the fund. To my knowledge, the forms do not yet exist but, under the direction of the Deputy Prime Minister, we are in the process of implementing the program, and I imagine that the fund will be prepared to accept applications as soon as possible.

Ms. Pauline Picard: Okay. You say that this new fund will complement other infrastructure initiatives, such as the Infrastructure Canada Program and the Strategic Highway Infrastructure Program.

I was told that a number of applications were sent to the federal government under the Infrastructure Canada Program and the Strategic Highway Infrastructure Program and that there is no longer any money in these programs right now.

Mr. John McCallum: I think that money is still available.

Mr. Jacques Parent (Acting Assistant Secretary, Infrastructure Canada): There is still money in the Canada-Quebec infrastructure program, and the strategic infrastrucutre program will just complement the existing program.

Ms. Pauline Picard: Good. Are there certain categories where money has run out, or is there one category where—?

Mr. Jacques Parent: [Editor's note: inaudible] —all categories of the program.

Ms. Pauline Picard: So the information I was given was wrong.

I also wanted to talk to you about the security charge. Before taking the decision you have just told us about, did you consult the Tourism Industry Association of Canada or ACTA about the impact of this new tax on the tourism industry?

Mr. Serge Dupont: I would give you the same answer I gave Mr. Kenney earlier; there were no consultations before the budget was brought down, which is normally the case when a budget is being prepared. Since then, we have held consultations with different parties. To my knowledge, we did not meet with the bodies you mentioned, but there may have been exchanges of correspondence.

Ms. Pauline Picard: Are you aware that it now costs more to travel within the country than from Montreal to Paris?

Mr. Serge Dupont: Are you talking about travel costs before the charges are added in?

Ms. Pauline Picard: Yes. I am talking about the cost after the measures you have just implemented.

Mr. Serge Dupont: The cost itself cannot be responsible for this difference, being $12 for a one-way fare within Canada, or $24 return, and $24 in all cases for a flight to another country outside North America.

Ms. Pauline Picard: Thank you, Madam Chair.

The Chair: Is that all?

[English]

Mr. Murphy, please.

Mr. Shawn Murphy (Hillsborough, Lib.): Thank you, Madam Chairman. I just want to question Mr. McCallum on the arithmetic that is used in this $24 fee.

It's my understanding--and you can correct me if I'm wrong--from the last figures available, the number of emplaned and deplaned passengers in Canada was around 86 million for 1999. If you do the arithmetic, that comes to between $1.05 billion and $1.1 billion. If you look at what the money is used for, the expenditures in the budget are approximately $2.2 billion over five years.

I guess my first comment to you is that the figures don't add up. You're going to collect about $5.25 billion for expenditures that, according to your own documents, are in the vicinity of $2.2 billion.

Mr. John McCallum: That is more like an opposition question. I don't know the statistics, so I will defer to Monsieur Dupont.

Mr. Serge Dupont: Sir, the estimates were developed in consultation with Transport Canada. They take into account the fact that, for instance, on a one-way or a return flight, when there are many connections, we only charge once. If you were to go from point A, to point B, to point C, and then back, you would have four emplanements, but the charge would be only $24. So the gross number of emplanements has to be adjusted to reflect the fact that, for instance, there is no charge applying to all connecting flights.

º (1610)

Mr. Shawn Murphy: With all due respect, even if you take that into account, I don't think the figures add up. Let's be realistic.

Mr. Serge Dupont: Again, the figures were developed with Transport Canada, taking into account as well their experience previously in administering the former air transportation tax that was phased out in 1997, where they could relate the number of emplanements and deplanements to actual ticket sales and to instances where a charge--or tax, in the case of the ATT--would apply.

We recognize, however, that a number of estimates go into the calculation from the emplanements to the actual estimate of the revenue from the charges. There are a number of factors at play. Certainly that's one of the reasons why the government is committing to review the charge once it's up and running and once we see what the actual revenue generated is.

Mr. Shawn Murphy: My next question is, can you file with this committee a detailed analysis showing, over a five-year period, according to your up-to-date numbers, exactly what you expect to collect using your $24 figure and not adjusted after a year, and taking into account the $2.2 billion that you're expecting to spend? Can you file with this committee a total detail on those figures?

Mr. Serge Dupont: We're certainly prepared to consult with Transport Canada in terms of the kinds of numbers that were used in the estimates. But on the expenditure side we'd defer to Transport Canada in terms of the kind of numbers they can provide to the committee. Basically, we were taking that amount of expenditure, divided by what we would estimate to be the chargeable emplanements--in other words, emplanements where the charge would apply--to come to roughly the number of $12 or $24.

Mr. Shawn Murphy: You can see my problem as a parliamentarian. According to the information you're giving us, you're going to collect up to $5.25 billion to be used to fund expenditures of around $2.2 billion. I believe this committee, in fairness, is owed a detailed explanation how you can square the circle--why you want the $5.25 billion to make expenditures of $2.2 billion.

Mr. John McCallum: Well, if I may make a comment, I don't know how you get the $5.25 billion, but you must have some logic behind you. What I think we should do is this: I could ask if the officials can somehow reconcile those numbers, because obviously there's a big difference between $5 billion and $2 billion. I don't think we can do it right now, but I think we should be able to reconcile, at least in general terms, why those numbers--

Mr. Shawn Murphy: So what you're saying, Mr. McCallum, is you're prepared to file with the committee a detailed breakdown showing how the number was arrived at?

Mr. Serge Dupont: Yes, we're certainly prepared to provide the committee with a sense of why the gross number of emplanements is not the proper basis to assess the revenue generated from this charge, and what adjustment factor was taken into account to bring it to the number we estimate to be chargeable emplanements which, multiplied by $12, generates $2.2 billion over five years. It's quite simple arithmetic.

Mr. Shawn Murphy: Now, a lot of these expenditures would also be a benefit to the whole air cargo business. My next question is, are there any additional fees being applied to the whole air cargo industry?

Mr. Serge Dupont: The thrust of the security measures set out in the budget is for passenger safety and passenger transportation; therefore the charge is applied to passenger transportation.

A witness: So the answer is no.

Mr. Shawn Murphy: I have two other questions. Is there any detailed analysis as to individual airports? I know some of the figures for some of the Atlantic Canadian airports. These are small airports, and you're going to collect in excess of $1 million from a lot of them. From my experience--and I'm not an expert in this whole industry--it's inconceivable that you could spend that much money on an annual basis on security in some of these smaller airports. Their annual budget is between $1 million and $1.5 million. Is there any detailed analysis as to how you can justify collecting this amount of money for this service?

º (1615)

Mr. Serge Dupont: We would not have a breakdown of the numbers expected to be generated by airports. Essentially, it is the total expenditures involved in enhancing the security at 90 airports across Canada, divided roughly by the number of chargeable emplanements, to come to one charge that applies in all circumstances--to $12. It cannot be related strictly to one airport. It is also the benefit of travelling within an enhanced security system.

Mr. Shawn Murphy: On my last question, I heard in the House the other day that an exemption had already been granted to the northern airports in Nunavut and the Northwest Territories. I can see that leading to other problems. Is this exemption going to be extended to airports in northern Newfoundland, Stephenville, Labrador, Corner Brook, northern Saskatchewan, and Regina?

Mr. John McCallum: Basically, the charge is applied to the 90 airports in Canada where significant security services are provided and enhancement is anticipated. All other airports are exempt.

Mr. Serge Dupont: So it's not just the north; it's all the airports across Canada not within the group of 90.

The Chair: Mr. Nystrom is next for eight minutes.

Mr. Lorne Nystrom (Regina--Qu'Appelle, NDP): Thank you very much, Madam Chair.

I would like to ask the minister about the workers who already work at airports in security. Many of them are members of trade unions, such as the steelworkers, and have collective bargaining rights now. What protection will there be for them? Are there going to be any successor rights for the workers who are currently employed? What is the process to guarantee, or can you make the guarantee to us this afternoon, that their jobs will stay there, that they will have successor rights?

Mr. William J.S. Elliott (Assistant Deputy Minister, Safety and Security Group, Department of Transport): Thank you, Minister.

Madam Chair, the legislation contemplates that the authority will really have a number of options with respect to the provision of screening services. It will be able to engage people directly, to have them carry out screening; contract with screening companies, subject to some conditions I will mention in a moment; or make arrangements through airport operators. In order to contract for screening services, the authority will establish standards and will certify both companies and individual screeners to those standards. Their standards, at a minimum, will need to include mandatory standards prescribed by Transport Canada.

The legislation provides that the act will not affect rights under existing contracts. What ultimately happens to employees under existing contracts will depend on whether or not they and their companies are certified to the new standards, and the option the authority exercises, with respect to a specific airport.

Mr. Lorne Nystrom: It seems to me this is wide open in terms of their having a number of options. As minister, can you give us any guarantees publicly today that you will recognize that there are successor rights and collective agreements in place and that these people should not lose their jobs?

Mr. John McCallum: I think it was already indicated that existing contracts would be respected. The fundamental, central purpose of this whole business is to have a higher level of security protection, and that's why we have certification. So if a company doesn't meet the certification level, I can guarantee that company won't be employed, because a condition is that everybody has to be up to a national standard, for purposes of safety.

Mr. Lorne Nystrom: If they do meet those national standards, can you guarantee that the successor rights will be there?

Mr. John McCallum: I don't know if I can guarantee that.

Mr. Lorne Nystrom: Why can't you? You are the minister in charge.

Mr. John McCallum: I think it's as much Transport Canada. But apart from that, I'm saying that the primary requirement is to get to that certification level. I don't think I can go beyond that in terms of guarantees.

Mr. Lorne Nystrom: My other question, along the same line, is on the new board for the new authority that is going to be created, with 11 directors.

Is the minister willing to make an amendment, or a commitment, that there will be some trade union representatives on that board? After all, they represent the workers who are working in the security locations across the country.

º (1620)

Mr. John McCallum: My understanding is that all of the board members would be federal appointees representing the people of Canada, but I will defer to Mr. Elliott for details.

Mr. Lorne Nystrom: That's my understanding as well. That's why I was asking the question.

Mr. William Elliott: Again, the number on the board will be 11. All of those will be appointed by the Governor in Council. Two will be put forward by representatives of the airport operators, two by carriers. It would be up to the Governor in Council to decide what qualifications other individuals appointed to the board need have. Certainly, there is nothing in the legislation that would prevent the appointment of a member or representative of labour.

Mr. Lorne Nystrom: Then I'd like to ask the minister to make it explicit. Since the companies can have two people on the board and the carriers have two people on the board, would he be willing to make it explicit that the workers can have representatives on the board, too? I'm talking about representatives in the plural.

Mr. John McCallum: I think I should clarify one thing. I'm not the Minister of Transport--

Mr. Lorne Nystrom: But today you're answering for the Government of Canada.

Mr. John McCallum: --but in terms of who is guaranteed to be on the board and workers' rights, I would think that is more a question for transport than finance, so I don't think I can offer any guarantees as to the composition of the board.

Mr. Lorne Nystrom: I wonder, since you are the minister of the day responding on behalf of the government, whether or not you can make those representations to the appropriate minister, that there be labour representation on the board and that their successor rights be guaranteed. You are the first minister appearing before the committee on this particular piece of legislation. If you agree to what I am asking for today, could you make representations--

Mr. John McCallum: I will commit--

Mr. Lorne Nystrom: --and give us an undertaking that you will personally make those recommendations to the ministers in charge?

Mr. John McCallum: I will give an undertaking that I will raise this subject with the Minister of Transport, both the successor rights of workers and the composition of the board. I will undertake to discuss it with him.

Mr. Lorne Nystrom: In terms of drafting legislation, did you or did other officials or ministers in the government consult with the various workers, the trade unions, the steelworkers and others, in terms of drafting legislation before it was presented?

Mr. John McCallum: With regard to this new agency, authority--

Mr. Lorne Nystrom: Yes, and the bill.

Mr. John McCallum: I think I'll defer to the transport people.

Mr. William Elliott: Yes, thank you, Madam Chairman.

In the process of the development of this legislation as it relates to the creation of the Canadian Air Transport Security Authority, consultations were held with a number of organizations. The Minister of Transport, in fact, met with the Canadian steelworkers and there have also been broad consultations with other labour unions, including public sector unions, on issues related to air transport security in its broadest sense.

Mr. Lorne Nystrom: The other question I wanted to ask is about the $12 charge for a one-way trip and the $24 charge for a two-way trip. It does seem to me that it discriminates. I understand your argument that you go through security whether it's a short-haul flight or a long-haul flight, but people in places like Regina, for example, my home riding, or in Fredericton in New Brunswick and so on, often fly more than some other Canadians in their short-haul flights.

Why wasn't more thought given to a more progressive tax, rather than a flat tax, which is much more... I'm sorry, why wasn't thought given to a more progressive tax than a regressive tax? A flat tax is a regressive tax. It's $12 whether you fly from Regina to Calgary or whether you fly from Vancouver to Toronto.

Mr. John McCallum: I'm not a fan of a flat tax either, when it's applied to one's personal income, but I don't think you can equate the regressivity-progressivity of a flat tax applied to income compared with a flat rate, because, I don't know, that implies that if you fly from Vancouver to Halifax you're rich and if you fly a short-haul flight you're poor. It's an empirical question and I don't even know the answer to it, but it certainly doesn't follow by analogy with the income tax system.

Mr. Lorne Nystrom: Well, you're often flying in a small aircraft when you fly the short-haul flights as well. You're not flying on a huge aircraft and it takes a lot less time to process the people through security. Doesn't it seem it's a bit unfair in terms of that as well?

Mr. John McCallum: I guess I've already answered the question. I think one can nuance answers, but I think the basic point is that this charge has the double virtue of being: (a) simple, and (b) fair, because the basic costs of security are not much a function of the length of the flight.

º (1625)

The Chair: Mr. Brison for eight minutes. Then we'll take the final from Ms. Leung over here for eight. Then we'll have our next witnesses and go to another round.

Mr. Scott Brison (Kings--Hants, PC/DR): Thank you, Madam Chair, and thank you, Minister, and all of you for appearing in front of us today.

Minister, I disagree with the premise that only air travellers benefit from heightened security. If we think of September 11, most of the victims on September 11 were in the buildings. They weren't air travellers. Yet the burden for increased security, from a tax perspective, is entirely paid for by air travellers. At a time when, I would argue, the weakest industry or one of the most vulnerable industries in Canada right now is our airline industry, why would we impose such a significant burden on that industry?

Mr. John McCallum: Well, Mr. Brison, you say you don't agree with my premise. With all due respect, I don't agree with yours, because it's simply not the fact that the whole burden of the additional security costs are borne by the air-travelling public. As I said earlier, as announced in the budget, security measures in total over a five-year period are in the order of $7.7 billion, and the air security charge is $2.2 billion. So that sounds like less than a third of the cost, to me.

Mr. Scott Brison: We're talking specific charges for enhanced security for air travellers, and that figure is significantly less than that. In fact, based on Mr. Murphy's numbers--and we're looking forward to your analysis of those numbers--this would represent a significant tax grab on behalf of the government.

Regarding the competitive landscape in Canada in terms of the airlines right now, we're struggling in Canada with the loss of CanJet and Canada 3000 and Royal. Is this not another burden on any competition to Air Canada because of the disproportionate burden on our discount airlines with this being a flat tax? Has there been any analysis of the impact on the competitive landscape of Canada's airline industry?

Mr. John McCallum: That's more a transport question, so I'll defer it to the official, except to say, again, I don't accept your premise of a tax grab, because it cannot be a tax grab when we're committed to revenue neutrality.

Mr. Scott Brison: You're committed as a matter of policy, but not implicit in this legislation; you're not committed to it.

Mr. John McCallum: Well, I'm sure if we forget to do the review, you'll remind us.

Mr. Scott Brison: We've been reminding you of a lot of things, Minister.

Mr. John McCallum: We're committed to do the review and to reduce the rate should the revenues exceed the expenditures.

Mr. Scott Brison: And just grabbing the GST.

Mr. John McCallum: Is there a transport element to the question that you'd like to address?

Mr. William Elliott: I am not aware of any analysis by Transport Canada.

Mr. Scott Brison: Transport Canada...and the Minister of Transport has said repeatedly that he has focused on creating a more competitive landscape in Canadian airspace. Wouldn't it make sense for him to have done some analysis of this new tax, which disproportionately burdens discount airlines, which is the area where we need the greatest level of competition?

Mr. Serge Dupont: I guess there are a number of factors that could be brought into play. As the minister has indicated, I think the $12 or the $24 would apply to all carriers that are competing against one another, and therefore it does not introduce, from that perspective--

º (1630)

Mr. Scott Brison: As a percentage of the price, it does.

Mr. Serge Dupont: --on any particular line or any particular route, any competitive disadvantage.

Also, it would appear, or I think one could certainly suggest, that to the extent that one is concerned about the marginal traveller, the person who may be at the margin of deciding whether to travel or not, the concern about security would also be uppermost in their mind, and in many ways, having the thrust of restoring confidence in air travel plays in the other direction.

Mr. Scott Brison: Well, from a competitiveness perspective, WestJet, in part of its corporate mission, says it competes with bus travellers. There is not a $12 fee for bus travellers. So you could see from the business perspective that this disproportionately impacts the lower-cost carriers because, as a percentage of the ticket cost, it represents more.

Why is the charge $12 per flight for Canadian travellers, but in the U.S., they're only charging $2.50? Of course, it's U.S. dollars, so I guess, based on your government's record in managing the dollar--

Mr. John McCallum: I'll give a double answer, and Monsieur Dupont might have something to add.

First of all, the U.S. charge applies to each stage of a multi-stage flight, up to $5 each way. The second point is that the United States appears to think that all of the costs will not be covered by this charge, and--

A voice: Boy, that makes sense.

Mr. John McCallum: Let me finish.

--to the extent that the additional security charges are not covered by this passenger charge, I believe the U.S. government will have an additional charge applied to the airlines. So to the extent that happens, and the additional charge on the airlines is reflected in passenger tickets, it might end up similar to the Canadian experience. We don't yet have information on that.

Mr. Serge Dupont: That's correct. The U.S. government has essentially kept the financial burden for air security--if it existed on the airlines--on the airlines, which is the equivalent of $700 million U.S. They applied the $2.50 fee, which on a return trip, as the minister indicated, could actually amount to $10 U.S. if one factors in a connection.

Thirdly, they have indicated on record that they expect this to be insufficient, and that the shortfall would be made up by further charges imposed upon the carriers. So where this will all end up at the end of the day, in relation to the Canadian charge, is still in question.

Mr. Scott Brison: And lastly, could the minister report on the progress he has made in working with the chartered banks to reduce their credit card rates, which he described as being grotesquely high on January 16?

Mr. John McCallum: Limited to date.

Voices: Oh, oh!

The Chair: Madam Leung, it is your turn now.

For your information, we have witnesses scheduled at 4.30 p.m., but I think we'll go with a round for Madam Leung. I have Mr. Cullen, who will go after our next set of witnesses; and I have Mr. Loubier, who wishes to do a couple of minutes here, and Mr. Epp also.

Mr. Ken Epp: On a point of order, Madam Chair, probably at some future time we need to revisit this, but we have three members of Parliament here; they have five. I think it would be appropriate for us to get three-eighths of the time while they get five-eighths. I think the time should be allocated equally to the members of Parliament who are seated at the table.

That's my view, but carry on. Let's not waste time.

The Chair: We're not doing anything differently here today, Mr. Epp. We're trying to give everybody time. We have a round here, and we'll finish up this round.

Ms. Sophia Leung (Vancouver Kingsway, Lib.): Thank you, Madam Chair.

I'm interested in the funding structure of the infrastructure fund, the three-level government. Is that still one-third, one-third, one-third, or is it another structure--the contribution to the fund?

Mr. John McCallum: Do you mean in the new infrastructure fund?

Ms. Sophia Leung: Yes. We have $2 billion. What about the provincial and the municipal?

Mr. John McCallum: I stand to be corrected, but I think this is still in the early stages. The details of that nature have not yet been worked out.

Ms. Sophia Leung: I'd also like to know what kind of procedure there will be for application and selection. Is it very complex and cumbersome? The last infrastructure fund is not resolved, so are you going to continue that one, or just start this new one?

Mr. Jacques Parent: The Canada Strategic Infrastructure Fund is a new program. It will have a new set of rules and governance guidelines.

º (1635)

Ms. Sophia Leung: My question is, will you continue to carry on the last infrastructure?

Mr. Jacques Parent: Yes, we are.

Ms. Sophia Leung: For some provinces, the lack of financial resources... I'm from B.C., which is why... If there's no contribution from the provincial government, is that holding us back from any other application? I want to know.

Mr. Jacques Parent: Yes, because the strategic infrastructure fund stipulates that there must be a third party to finance a project. A project cannot be financed totally through the strategic infrastructure fund.

Ms. Sophia Leung: So you say the last one was one-third, one-third, one-third?

Mr. Jacques Parent: Yes.

Ms. Sophia Leung: Would you clarify, if one province has a lack of resources, what are you going to do?

Mr. Jacques Parent: If a province is not able to put in its share, we have difficulty there.

Ms. Sophia Leung: Do you mean you cannot accept any applications?

Mr. Jacques Parent: We might be able to accept some applications with the private sector if those applications are supported by the province or the municipal government.

Ms. Sophia Leung: What would you advise us to do if I have a project from my community and the provincial government does not have resources? How would you go about it?

Mr. John McCallum: Well, I think you'd have a problem. There has been a precedent once in a while for the Atlantic Canada agency of the federal government to put in some money in partial substitution for provincial governments, because generally it's the Atlantic provinces that have been short of money. B.C. appears to be increasingly in that situation. I think it is a very difficult case, because the government has a difficult time waiving that requirement, because then no province will want to put money in. We want to leverage our money as much as we can to have maximum impact.

Ms. Sophia Leung: My second question is on personal income tax. Here you say there's a third category. There's tax assistance for a donation of certain securities to public charity. I'd like to know what that implies, specifically what kind of tax assistance.

Mr. John McCallum: What is the question?

Ms. Sophia Leung: The question is on the tax assistance, whether it is for a personal tax measure in a category. You did say the donation of certain securities--I guess bonds, stocks--to a public charity. So there is tax assistance. I want you to more specifically say what you mean by tax assistance if a person donates a security.

Mr. Gérald Lalonde (Senior Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance): This measure responds to a measure that has been in the Income Tax Act for several years but was scheduled to expire at the end of last year. What that measure provides is that if you make a gift of a publicly listed security to a public charity and a capital gain arises as a result of the gift, the capital gains inclusion rate is half the normal inclusion rate.

For 2002 the normal inclusion rate is 50%. So in the case of a gift of a publicly listed security to a public charity, the inclusion rate now will be only 25%. That's the amount that gets included in calculating your income, and then of course the tax rate would apply to that. So it would bring it down to less than 12%.

Ms. Sophia Leung: So this year it's 12%.

Mr. Gérald Lalonde: That would be a maximum. If for example you were in a 50% tax rate, which is pretty well the maximum, you would then apply 50% times the 25% inclusion rate on the gain. As a result, the tax in that example would be 12.5% of the gain.

Ms. Sophia Leung: Thank you.

The Chair: That brings us to the conclusion of a full round.

Mr. Loubier has asked me for two minutes, but you have one minute, Mr. Loubier. Go ahead. I'm clocking.

[Translation]

Mr. Yvan Loubier (Saint-Hyacinthe--Bagot, BQ): Thank you, Madam Chair.

Mr. McCallum, you are an economist by training. I would like to ask you a question about Bill C-49. As you know, in the past ten years, there has been a greater increase in air fares in Canada than anywhere else in the world. There has been a slight decrease in the United States during the same period, and an increase of several percentage points in Canada, which is disastrous for the regions, particularly remote ones. Every week, airlines announce that they will be dropping certain flights because there are not enough customers and the fares are too high. It costs more to fly within Canada than in Europe or elsewhere in the world.

As an economist, can you explain to me how these companies, which are already looking at very high service costs in relation to density of population, which are facing terrible problems in connection with profitability, are going to be able to make a buck with the new $2.2 billion tax being imposed?

In other words, explain to me how a sector already facing extremely high costs, a decrease in demand and the elimination of several facets of its activities is going to be able to survive when you are going to make its life even more difficult with a new $2.2 billion tax. As an economist, explain to me how you are going to help these people and how you are going to save Canada's regions, particularly the remote ones.

It must not be forgotten that this is often the only link between the large population centres offering a high concentration of services and remote regions. As an economist, explain that to me.

º (1640)

Mr. John McCallum: I do not know whether or not you are right about the cost of air travel. I believe you are right about the United States versus Canada but, in my experience, travelling by plane is expensive in Europe as well. It is a question of statistics. As I explained, the total cost of security will be $7.7 billion, and the amount we will be collecting from air travellers is $2.2 billion. I believe that is correct.

Mr. Yvan Loubier: It is right to collect a new tax in sector already experiencing considerable difficulties?

Mr. John McCallum: It is like a user fee. It is fair that the person using the services should pay what they cost, up to a certain point. That is what has been done, and it was the right thing to do. In terms of impact on the regions, I think that there are tax cutting policies. In terms of macroeconomic policy, we have provided considerable support for the economy in general. The proof is that the slowdown here is much less pronounced than in the United States. The performance in terms of employment has been strong.

Mr. Yvan Loubier: Mr. McCallum, is it fair to make the regions suffer more than they already are because of the lack of air services, the decrease in frequency, the lack of connections with major service centres and the big decision-making centres? Do you think this is right? The Minister of Finance has surpluses coming out his ears, and you think it is right for the government to help kill certain regions of Quebec and of Canada? Great. Just what an economist would say!

Mr. John McCallum: I think that my time is up, Madam Chair.

Mr. Yvan Loubier: And a good thing for you, because—

[English]

The Chair: Thank you.

We'll just take a minute to switch the witnesses.

Mr. Ken Epp: I have a point of order.

The Chair: Yes, Mr. Epp.

Mr. Ken Epp: This is a very important bill and we still have some very important questions to ask. I wonder whether we could extend it to 5 o'clock for these people.

The Chair: That's fine, just as long as you realize that we have witnesses scheduled at 4:30. My intention was to hear those witnesses and then do another round, and I will add them into that round.

Mr. Ken Epp: Can we get these officials back tomorrow?

The Chair: If we wish, we can get these officials back. I actually was just under the...

I will take the adjournment to switch, but Mr. Nystrom, I hear that you have a witness who you would like us to hear. Is that correct?

Mr. Ken Epp: We have several more, as well.

Mr. Lorne Nystrom: Yes, Madam Chair. It wouldn't be appropriate if we didn't hear from the United Steelworkers of America. They represent several of the people who work in the security business now at the airports. I think it's important that we hear the workers' point of view. They'd be willing to appear tomorrow morning at 9:30 or thereabouts, depending on the chair. I'd like to make that as a representation, if I may.

The Chair: Yes. I'll deal with that.

Go ahead, Mr. Kenney.

º (1645)

Mr. Jason Kenney: On a related point, Madam Chair, my office submitted to the clerk several other suggested witnesses. I'm not sure about the disposition of those witnesses. There were a number of questions here that the witnesses referred to the Minister of Transport. I think it would be very useful to have the minister here. After all, two of the most substantive developments of this bill deal with the jurisdiction of the transport department. I think it would be appropriate to call the transport minister to present to us as well.

The Chair: To answer your question specifically, Mr. Kenney, at our meeting yesterday, all the witnesses on your list were made known to the clerk. The clerk has contacted all of them. He can advise you that, so far, the ones who are responding wish to do so by written brief, and they know that. The rest have not advised us so far that they're willing to appear.

Yes, Mr. Murphy.

Mr. Shawn Murphy: Madam Chair, I don't know what the intention of the committee is before we go to clause-by-clause on this bill, but I'd certainly like to see the details. One of the most important considerations is what's behind the $24 fee. I'd very much like to see, as soon as possible, the very detailed analysis as to how the whole thing was arrived at.

The Chair: That's fine.

For now you are excused. We will have our own discussion in this committee about whether we will be having you back. It sounds like you might be back. We spoke the other day of going to clause-by-clause in this committee by Thursday. In view of that, I've put out a notice. But I'm in the colleagues' hands here, and if the will of this committee is to go tomorrow morning to hear the steelworkers, we'll accommodate that.

Thank you very much for your attendance here today. We'll just take a quick adjournment so we can bring up our airline officials. Thank you.

º (1647)

º (1653)

The Chair: Thank you very much. We'll continue with our hearing.

The next set of witnesses, from the Air Transport Association of Canada, are Mr. Clifford Mackay, the president and chief executive officer; and Mr. Warren Everson, the vice-president of policy and strategic planning. Welcome, both of you. From WestJet Airlines, we have Mark Hill, who is the VP of strategic planning.

Mr. Mackay, would you like to lead off with your presentation?

Mr. J. Clifford Mackay (President and Chief Executive Officer, Air Transport Association of Canada): Thank you, Madam Chair. Before I start, let me apologize to you and to the committee. We normally have our briefs in both official languages, but we were not advised until yesterday and we just have not had time to get it done. So please accept our sincere apologies for that. We will try to get it done as quickly as possible.

The second thing I'd like to say to the committee very briefly before I go into my prepared remarks is that the Air Transport Association of Canada is the association that represents the interests of commercial aviation in the country. We have over 300 members and we represent all elements of commercial aviation, everything from large carriers such as WestJet and Air Canada down through the charters, cargo operators, helicopter operators, flight schools, small regional carriers, the works. So we're quite confident that we speak for the broad interests of the industry.

Let me now start with my prepared remarks, and I will try to go through them as quickly as possible, Madam Chair.

Air carriers support efforts to enhance aviation security. That's an absolute statement. We work closely every day with government and other stakeholders on the goal of ensuring that both our customers and our crews are safe. That's axiomatic to our industry.

Today and until April 1, for example, air carriers have direct responsibility for passenger screening. We carry this out primarily through contractual arrangements with private companies, arranged with a major air carrier in each airport. These companies perform to standards established by Transport Canada and they're tested and audited regularly. They're responsible for training their own personnel to those standards.

In the budget of December 10, the government announced that it would nationalize passenger screening processes, and within this new agency that's been proposed in this legislation, they proposed to also enhance security through the creation of an air marshals program and through the implementation of very sophisticated explosive detection systems, which we have been working with the government on for a number of years. All of this is to be financed through the proposed air travellers security charge.

I'd like today to comment on two general areas. First, we'd like to talk about the implications of this tax to the industry, and then secondly, we have a number of comments about how the agency is being structured and then we'd like to make some suggestions to the committee on that basis.

Let me turn first to the tax. The first and by far the most important thing we can say about this tax is it's very large. The budget projects federal revenues of $430 million for year one and $445 million for each year thereafter. The new security charge will represent nearly four times the industry's operating income for the year 2000. Another equivalency is that it represents about 3% of the total revenue base of our industry. Those are huge numbers, Madam Chair.

The industry has been profitable three out of the last twelve years. In 2001 we experienced the most dramatic collapse in traffic in our history, and that is not just a Canadian phenomenon. IATA and ICAO both have produced recent numbers that indicate that this was a worldwide phenomenon.

So these are difficult times for a lot of our members. If I were advising the committee, I would say that when you deal with aviation files, you should put a “handle with care” on them right now. These are fragile times for a number of our members. I think you need to think very carefully about any actions that impact their business viability and their efficiency in the near term.

The size of this security bill, of which the tax represents only a part, will fundamentally affect the economics of our industry. I don't believe the people of Canada have yet grasped the scale of the costs these new security measures that are being created here in Ottawa, and in other places such as in Europe and in Washington, are going to impose on them.

We believe, though, that the Department of Finance does understand this. If you look at the department's projected revenues from this new tax, it's based on a 10% drop in traffic for the coming year.

º (1655)

Mr. Gary Pillitteri (Niagara Falls, Lib.): Madam Chair, I have a point of order.

The Chair: Yes.

Mr. Gary Pillitteri: We are here to listen to a presentation, sir, we're not talking about a tax, this is a user fee. I would really like to see that you would not use the word “tax”.

The Chair: Mr. Pillitteri, I don't think that's a point of order.

Please continue, Mr. Mackay.

Mr. Clifford Mackay: Thank you, Madam Chair.

If you translate that drop in traffic into passenger, you're talking about at least 4 million fewer passengers in the coming year. We certainly hope this doesn't occur. A drop of this magnitude coming on the heels of last fall would cost thousands of jobs in our industry and in related industries, which could also put huge financial pressures on airports. The implications for hotels and tourism are also obvious.

We're not opposing the need to find a way to pay for new security measures, but we have three points we'd like the committee to consider. First, the charge should be as low as possible, particularly in the early years. We have to limit the sticker shock of this charge in the current environment.

Second, there must be controls to ensure that this does not become a slush fund for government, and we were pleased with the comments of the minister at the hearing here. But we have some suggestions along those lines.

Third, we must ensure that there's a reasonable way to adjust annually, so that this charge only reflects the costs needed to run this agency.

Let me start with keeping the costs down. For all the reasons we stated above, we think it's imperative that the government do everything in its power to ensure that the new tax is as low as possible. The first option available would be of course to ship some of the costs onto the taxpayers' contribution. We still believe that is a reasonable thing to do, but obviously the government has very clearly signalled that they are not prepared to consider that option at this time.

The committee may wish to ask the government to reconcile this approach, given their stance on other aspects of national security. Why is aviation being singled out as the only part of this whole process that is being asked to pay 100% of the cost for security? We are not asking the truckers to do that at border crossings. We're not asking the rail operators to do it in any way. We're not asking any other segment of the economy to do that. We are asking the aviation industry to do that, and we frankly believe that's fundamentally unfair.

Let me then turn to what can be done pragmatically to reduce some of this burden. Perhaps the most obvious option available to government to ensure that the security cost is as low as possible would be to adopt normal business financing arrangements for a capital budget for the new agency.

The capital spending in this agency we estimate to be in the order of about 50% of its outlays in the early years, and that's primarily because it will be buying very large and sophisticated explosive detection systems. As the honourable members know, few businesses make major capital purchases on one instalment. Indeed, it's routine for them to amortize their purchases over the useful life of the asset. Even we as individuals do that when we buy cars and other things.

However, government departments do not use accrual accounting; instead, they expense their purchases entirely in the year in which the transaction occurs. We are told this will have to be the case with the new agency. If that's true, it's very regrettable. An unnecessary increase in the cost to our consumers in the first two years of this tax would be in the order of about one-third of a billion dollars, if you don't amortize these costs in a normal business way. That's well over $300 million. We'd be dismayed if our customers were forced to pay such a substantial sum upfront at a time when the industry is just recovering from a very serious crisis.

We've written the Minister of Finance asking that he give the new authority the right to finance their capital program. Although we've not yet received a formal reply, we are concerned that some officials are suggesting that this will not be permitted because of the government accounting rule. I would really hope that a government accounting rule wouldn't get in the way of a very common sense approach.

Let me comment, secondly, on the risk of it turning into a slush fund. The department's reluctance to permit amortization makes us frankly nervous, because it could easily lead to a situation where in year three or year four all of a sudden the revenues are significantly higher than the requirements.

We'd like to draw the committee's attention to the letter that Minister Martin sent to us recently when we'd raised these issues to him. The minister has made it clear that he does not intend to allow a slush fund to be created, and we really appreciate these comments. However, the letter can't bind future governments, and it certainly can't bind future ministers of finance. We therefore respectfully ask the committee to make sure that Mr. Martin's wishes are in fact reflected in the legislation. We believe that's by far the best and most prudent way to ensure that this risk is simply put to bed.

» (1700)

The third point I want to bring to your attention with regard to the fee, the tax or the charge, is that the adjustment of this fee regularly to reflect the actual costs of the operation of this agency is again a very important point. Again, Madam Chair, Minister Martin's comments to us in writing and also Minister McCallum's comments are very welcome on this subject.

However, it is a lot harder to do it than to promise it. Making a promise of this nature, when you have difficulty tracking the revenue back to the agency because there's no direct connection one to the other, is not easy to do.

We would say another model that has worked very well, where the revenue and the costs are in fact in the same pot, is NAV CANADA. We still believe the government should look at a change here to go back to that model. It's working extremely well. It's seen around the world as a very good model.

The problem with the model we have is how will you ever know what the real costs for this agency need to be? If you ask the officials who are going to run the agency, it's unlikely--and I spent 20 years as a senior government official--that you will get the response, “Reduce our revenues, because we don't need any more money.” I'm not saying this to be derogatory to federal public servants. They try to do their jobs well. But it's not a normal occurrence around this town.

We suggest the committee should assign oversight responsibility to ensure the fee is calibrated to meet the legitimate costs to the Auditor General, and that the Auditor General should be asked to report to this committee and to Parliament to ensure that happens.

Let me now turn to the new security agency itself, which is the second part of our comments. We're concerned that the government agency will control passenger movement in the very middle of the facilitation of people on and off of airplanes. This is absolutely critical to the quality of service we give to our passengers. We all know that government agencies have difficulty responding to rapid changes in business marketplaces--the lessons have been vividly illustrated in our aviation industry since deregulation. Whether the shortages were aviation inspectors, air traffic controllers, customs personnel, or just not enough money to upgrade airports, we've all been there in the last 10 to 15 years, and I believe that the country has seen some innovative solutions.

Confronted with this realization, government has created innovative approaches in aviation. It's devolved airports, privatized crown corporations, and sold the air navigation service to NAV CANADA. Long before this budget was released, we wrote to ministers urging them to create a security agency along the lines of NAV CANADA, because as I said earlier, Madam Chair, NAV CANADA has developed a world-class reputation, and we think it's a model that should be replicated.

In light of this example, we are somewhat frustrated that the government decided to nationalize the security function and not go with this model. However, there are some pragmatic suggestions we want to make to the committee in terms of things that could possibly be done to improve the model we have before us.

Specifically, we would suggest that the proposed board of directors be changed to a model where the government would appoint five members; there would be four independent members appointed; and the industry, made up of airports and airlines, would appoint four members--two each. We believe this shift in the balance in the board would not only improve the board's ability to act independently on behalf of the mission of the agency, but it would also, we believe, improve the governance structure of the organization itself.

We believe the new body must have a requirement to establish service targets. The bill, subclause 7(2) specifically, provides for service requirements for its contractors, but it is silent on service requirements for the authority itself. We think we need clear rules separating the regulatory power of the minister and the service function of the authority. Depending on how closely this authority is going to operate under the control of government, it is extremely important that the regulatory function and the delivery function be separated. This is an absolute principle that we've learned many times in our industry over the years. You can't mix up regulation and operation. It's dangerous for both functions and it's dangerous for our customers.

» (1705)

Lastly, Madam Chair, the authority must establish service-quality management systems, and we believe it needs to tender a report to this committee and to Parliament more generally, at least on an annual basis, on how it's doing with its service quality.

All of these are suggestions that we hope will improve on the existing bill and its complexity.

Let me make one last point, Madam Chair, because I think it's important that the committee understand it.

The implementation of this tax or charge--we really don't care what you call it--is, frankly, extremely complex. We have spent hundreds of hours with finance officials and others trying to figure out how to do this. For example, we have 16 different charging options on this tax, depending on where you start from, where you go, what jurisdiction you're in. It's an extremely complicated piece of analysis and coding to put into our reservation systems.

It's not going to be easy. It's going to be very expensive to do, and there will be absolutely no compensation to our industry for doing it. The one thing we know for sure, Madam Chair, is that with something this complex and having to do it in such a very short period of time, there will be problems and there will be mistakes made.

The legislation provides for no grace period. It provides for no common sense, as I would use that term, so that if people make mistakes and things are done wrong in the run-up to the implementation of all of this.... Companies shouldn't be unduly penalized for what are honest mistakes. We would urge the committee to think about some sort of grace period in the implementation of this charge, particularly given that even some things as simple as some of the definitions are still moving around.

Thank you, Madam Chair.

» (1710)

The Chair: Thank you.

Mr. Hill, go ahead please.

Mr. Mark Hill (Vice-President, Strategic Planning, WestJet Airlines Ltd.): Thank you, Madam Chair.

Thanks for providing WestJet with an opportunity to speak to the committee.

We think it's important that the views and opinions of Canada's only consistently growing, profitable, viable, and sustainable national scheduled carrier and one of only three profitable airlines on the continent be seriously considered in this debate.

WestJet supports enhanced security measures for the industry and is not opposed to collecting a fee for such services. However, we believe that imposing another flat tax on air travellers will surely have a negative impact on our industry and will discourage Canadians from choosing air transportation for their short-haul travel needs.

The tragedy of September 11 was an attack against our society using aircraft as weapons. We believe that society as a whole should bear some of the burden of this attack against our way of life.

Any analysis of our industry conclusively proves that the only sustainable model that works for new entrant airlines is the short-haul, low-cost, low-fare model. Ryan Air and easyJet have proved it in Europe; Southwest, with its fleet of 350 aircraft, proves it in the United States; and WestJet is proving it with six consecutive years of profitable operations, including 20 consecutive quarters, a situation unmatched by anybody, with the exception of Southwest in the United States.

This model relies on the phenomenon of low cost and price stimulation to attract new passengers into the skies. As more passengers fly, new entrants can add more frequency, thereby appealing to a wider audience. The phenomenon of price stimulation is most prevalent in short-haul markets; for example, Calgary-Edmonton, Hamilton-Ottawa , and Vancouver-Kelowna, any market that's within a three- to four-hour drive of each other. Those are markets that the stimulation occurs in.

In order to do it, flying has to be price competitive with car, bus, and rail. Of course, there is essentially no rail outside the Quebec City-Windsor corridor in this country, especially in the west.

This $12 tax is the latest charge being tacked on to the price of travel. As an example, in February 1996 our $100 round-trip fare from Calgary to Edmonton cost $121 with taxes and surcharges. As of April 1 the same $100 fare will cost consumers $184, and even more on Air Canada, which still persists in adding a fuel surcharge in spite of the price of oil today. By adding a $24 tax to the short-haul, round-trip ticket, price-sensitive passengers will switch to alternate forms of transportation or will not travel at all, which could cause a collapse in the spectacular growth in passengers we have seen in every one of the 21 Canadian cities we currently serve. The largest example would be Kelowna-Edmonton, with a 421% increase in traffic between those two cities since we started.

The spinoff from this growth is enormous. Ask any mayor or chamber of commerce in any city we fly into what the impact of low-cost travel does for their community. That is why Southwest Airlines has petitions from 60 communities in the U.S. for service. It drives growth.

This tax artificially constrains the growth and spinoffs, and it is bad for local economies, bad for consumers, bad for airline competition, and bad for Canada's competitive position in the world. Indeed, the only constituency we can see this tax being good for is Air Canada, which, with an average flight length of 1,200 miles versus 450 for WestJet and a historical indifference to making air travel affordable for all Canadians, would dearly love to see the only airline economic model that can challenge their 80%-plus dominance of Canada's skies being artificially curtailed by this flat tax. If we've seen one thing over the years, it's that what's good for Air Canada is never good for the Canadian consumer.

Let's talk numbers. WestJet and all other airlines currently pay about $1.10 per guest for security. Increasing it to $12 represents about a 1,000% increase. On our super short-haul routes, that is, Calgary-Edmonton, Vancouver-Kelowna , Hamilton-Ottawa, that type of thing, into Sudbury, Timmins, North Bay, Sault Ste. Marie, and the southern Ontario area, the flat tax is an enormous percentage of our low fares. For example, our lowest fare in the Vancouver-Kelowna, Calgary-Edmonton, Hamilton-Ottawa routes has a base fare of $57. Adding $12 is a 21% increase in our fare. We believe it is these sorts of super short-haul routes as well as all spokes to existing hubs within a three- to four-hour drive that would be irreparably harmed by this flat tax.

» (1715)

» (1720)

I could name dozens of communities whose service would be harmed. Communities such as Sydney, Gander, Charlottetown, Moncton, Fredericton, St. John, Quebec City, Chicoutimi, Kingston, London, Windsor, North Bay, Timmins, Sault Ste. Marie, Sudbury, Thunder Bay, Brandon, Thompson, Grand Prairie, Fort McMurray, Medicine Hat, Lethbridge, Fort St. John, Dawson Creek, Kamloops, Kelowna, Smithers, Cranbrook, Terrace, Prince Rupert, Victoria and the balance of Vancouver Island will all be irreparably harmed by this tax.

By pricing short-haul local travel to a point where local traffic cannot be generated, these spokes simply become uneconomic and unaffordable to all but the wealthiest of Canadians. So unlike other G-7 nations that recognize the value of affordable short-haul air service, Canada is heading down a path to an era where only the rich can afford to fly. It is no wonder Air Canada supports this flat tax, because low fares in competition inhibit their ability to charge high fares.

How do we fix this problem? We think there's a better way and we believe the industry is capable of finding a solution to this issue. Again, we believe the ideas of Canada's only growing, viable, sustainable scheduled carrier should be considered carefully.

First and foremost, for the sake of simplicity, this tax has to be calculated as a percentage of the fare. You must understand that there are only two types of air travelers in this country: the passenger who pays for his ticket--and those are our customers and, to some extent, Air Canada's; and the corporate guy who is on an expense account, who doesn't care whether his one-way flight to Ottawa or Toronto is $400 or $412. It doesn't make a difference; he's on an expense account. This tax hurts the little guy and the people who can least afford to pay.

Once the tax is implemented, we believe the traffic will evaporate off the short-haul routes. Once the traffic goes, we'll have to back out of some of our short-haul flying, and once that begins, the genie is out of the bottle, and it's very hard to stuff the genie back into the bottle once that happens.

Unlike all other new entrants who have come and gone, WestJet has been very successful in servicing the short-haul secondary markets--places like Comox, B.C.; Brandon, Manitoba; Sudbury and Sault Ste. Marie. These are all places where we've had tremendous success--Grande Prairie, Fort McMurray, and some of these sorts of places. We've been very successful in serving these short-haul secondary markets. This tax will inhibit our ability to provide competition and low fares to these secondary markets in the Maritimes, Quebec, Ontario, and the west.

We believe the Canadian marketplace, domestic, transborder and international, is about an $11.5 billion business. A 4% tax on tickets would generate the $460 million that is proposed to be raised. More importantly, it would keep short-haul markets growing, which drives increased passenger growth, thus increasing and not decreasing the overall revenue base.

A flat fee would be simple to administer. If WestJet does $500 million in sales next year, we would remit $15 million. As it stands now, the tax is riddled with “the devil's in the detail” issues.

For the fellow who travels from Ottawa to Hamilton for a stop and goes to Sudbury, is that considered a round trip or a one-way trip? If a fellow lives in Hope and flies from Kelowna to Calgary and back to Vancouver, is that a round trip or a one-way trip? If a local carrier flies from Charlottetown to Moncton, picks up WestJet, which flies from Moncton to Vancouver, and flies Pacific Coastal from Vancouver to Nanaimo, is that a $12 charge or a $24 charge; and if so, who collects it, Pacific Coastal at one end, Air Labrador at the other end, or WestJet in the middle?

Of course, Air Canada doesn't really mind about this tax, because they control the regional carriers all the way through. So again, it's the little carriers that get hurt. We can't provide a competitive product by connecting with Pacific Coastal from Nanaimo to Vancouver, to fly from Vancouver to...did I say Toronto? I meant Hamilton--hint, hint.

Who determines this, and who collects it? It's going to be an auditing nightmare for airlines, except for Air Canada, to try to figure out who owes what to whom and when. A flat tax or a 3% to 4% tax on base fare is a simple solution and ensures that air travel in Canada continues to grow, competition continues to flourish, and smaller communities keep their air service and receive the benefits of more choice and low fares, and ensures that moneys collected from the government are spent on security and not administration of security.

Thank you for your time. I ask you to strongly consider these ideas.

The Chair: Thank you.

We're going to go to five-minute rounds, starting with Mr. Kenney.

Mr. Jason Kenney: Thank you, Madam Chair..

I hope the testimony of both these witnesses causes this committee to pause and reflect before rushing ahead to clause-by-clause. I think many very serious substantive concerns raised about the application of this tax need to be further explored, and some very positive, very concrete suggestions about proposed changes.

I would just note for the witnesses that in fact we have drafted certain amendments that we will be bringing forward in clause-by-clause. These include, for instance, amortization, as has been suggested by Mr. Mackay, and as well, a percentage fee, as has been suggested by Mr. Hill. So we'd like the witnesses to perhaps take a look at those at some point to give us their feedback.

My question is for either witness. We understand the dire straits in which the Canadian airline industry finds itself, with the notable exception of WestJet, right now. The government, as has been pointed out to us, is projecting a 10% decline in passenger loads next year. Is that accurate?

Mr. Clifford Mackay: That's the Finance projection. I would hope that we would be somewhat more optimistic in that, but frankly we've tried not to second-guess people, so we've gone with their numbers. That's what you get.

Mr. Jason Kenney: There seem to be two competing policy objectives that are not being well reconciled in this approach. One policy objective is to have a healthy competitive airline industry that services Canadians in as many communities as possible, and the other is the security imperative.

It seems as if the way the government is approaching security is really contrary to the policy objective of a competitive, vibrant airline industry that can service remote communities. I'm wondering if you can comment. Is it fair to say this is going to undermine the government's stated objective of that kind of airline industry?

Mr. Clifford Mackay: We believe it will. We believe there are sensible ways to meet the absolute requirements of enhanced security. We're not arguing about EDS, we're not arguing about the need to do this sort of thing, but we believe there are better ways to get there that will have less market impact.

Over the last year or so, we have made a number of suggestions. One is to have the taxpayers pay for these one-time big capital costs and have the passengers pay for the ongoing costs. That's another suggestion that's been out there and discussed quite often. As you pointed out earlier, this was in fact proposed by the transport committee of the House.

We believe there are ways to get to where we need to go. We need the security and the safety, but we need to find ways of doing it that don't have negative economic impacts.

Mr. Mark Hill: I would echo that. I was actually quite interested... between Finance and Transport a few minutes ago, and they preceded to tell the committee they'd done no analysis on the impact to the airline industry. I was stunned by that. It's not difficult to do the analysis.

I also thought it was quite interesting when they said this would actually increase the public's willingness to fly. I can tell you categorically there's no concern with the public wanting to fly. Our numbers prove it. Air Canada's numbers have higher load factors year over year, after taking down capacity. It already had an overcapacity issue prior to September 11. There's no concern about the public's willingness to fly. We have real-time sales numbers that can prove that.

The biggest concern is that if the government wants competition, there's only one economic model that works, and that's the Southwest-WestJet-Ryan Air model that relies on short-haul, price-stimulated traffic. This particular initiative goes right to the heart of that.

The Chair: Thank you.

Mr. Moore, you have one question.

Mr. James Moore (Port Moody--Coquitlam--Port Coquitlam, Canadian Alliance): Thank you. I have only one question. I want to put it on the record that given there's been no government impact assessment on the $24 fee, and that you two gentlemen have done such a fantastic job of putting your presentations on the table, I think it's a disgrace there's only one government member at the committee.

My question is multifaceted. Apparently they haven't done a comprehensive study, but did they ask WestJet what the impact would be on your carrier and what the fee would be? Was ATAC directly consulted on what the fee level should be, so you could check with your stakeholders?

Also, prior to the introduction of this bill, had you heard anything at all in the industry, through whispers or the networking you do, about a $12 rate being floated around anywhere, prior to the introduction of this bill?

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Mr. Mark Hill: We heard about the tax at the same time as every other person in the country heard about the tax--in the budget. We had never been consulted prior to that. Any whispers we heard were probably through our industry ears, which to a greater or lesser extent are ATAC.

Mr. Clifford Mackay: I would answer your question exactly the same way. We were consulted and asked to provide advice on the cost of things, which we did, but we were not consulted at all about the charge, the tax, or the level. Our expectation prior to budget night was that there would be some sort of charge, but frankly very modest--three or four dollars. We were expecting to see something more analogous to what the U.S. government had done.

The Chair: Thank you.

Is it Monsieur Loubier or Madame Picard?

Madame Picard is next for five minutes. You're splitting your time.

[Translation]

Ms. Pauline Picard: I have a very quick question, Madam Chair.

Mr. Mackay, you mention in your brief that you look after security. With the new security agency to be created, what do you think will be the difference between the security you are now providing and that which the new agency will provide? What do you think will be the difference?

[English]

Mr. Clifford Mackay: There would essentially be three differences. At the moment the current system is that what we call the lead carrier in a particular airport is responsible for security. Under the new system, there will be an amalgamation of the responsibility into one agency. There will be only one agency in Canada that has the direct responsibility for this security.

Now, they may implement it in a manner that we're already doing, but there will only be one focal point. I think that is probably the biggest single change.

The second change is, if we understand it correctly--and I must tell you that there are a lot of things we don't know yet--they will receive their funds from government through some sort of budgetary process through appropriations from the House. That is the assumption we make. Now the way it works is the system is financed by carriers and passengers through charges that are fed through the normal financial system of our members. So that's a big change.

The third change is there is now an air marshal program, and that never existed before. That is something brand new. There's not much I can tell you about that, simply because we don't know much about it, other than that the RCMP, we understand, will be contracted to do it. We understand that it won't be comprehensive, but it will be a targeted type of program.

The Chair: Yvan Loubier.

[Translation]

Mr. Yvan Loubier: Thank you, Madam Chair.

Mr. Mackay and Mr. Everson, you heard my brief exchange with the minister responsible for this bill concerning the impact of this new tax. We need to call a spade a spade. The Liberal party must stop taking offence and saying that they are not imposing a tax. It is a new tax, which will bring in $2.2 billion. Let us call a spade a spade.

I had an exchange with the minister who, on top of it all, is an economist. He seemed so sure of himself. He said that the tax would not have a disastrous impact on the airlines and that it would be wonderful for the regions because it would not have an impact on them either. Even though he trained as an economist, he thought it was fine to add to the costs and difficulties of the airlines by imposing a $2.2 billion tax. He said that things were worse in Europe. He has done a lot of travelling, has our minister. He has often been to Europe. He should have travelled a bit more here. He would have understood that the system is not as wonderful as he says.

What do you think of the statements and nonchalance of the minister and of the government in general in connection with the very important decision to tax a sector which was already a victim of the slowdown before September 11 and which has been pushed into certain decline since September 11? The minister simply does not see a problem. The regions no longer have air service. There is no problem. The regions are having trouble developing because they do not have regular connections. There is no problem. What do you think of such an attitude?

» (1730)

[English]

Mr. Clifford Mackay: I can't comment on the minister's answers, but I can tell you that we, as an association, have been concerned about the economic viability of what we call small, regional, thin routes. Mr. Hill can comment about WestJet's approach to that, which we frankly think is the right way to go.

We were before this committee about a year ago. We have been before the transport standing committee and other committees such as the industry committee. We have been consistently telling parliamentarians for at least two years now that we are concerned about viable quality air service in small, thin markets in Canada, particularly in regions where you don't have very large volumes. This is simply going to make that problem more difficult. There is no doubt in our minds about that.

[Translation]

Mr. Yvan Loubier: Mr. Mackay, if you had to make a prediction today about the future of small air carriers in remote regions such as Abitibi, the Gaspé, the Magdalen Islands, remote regions of the western provinces, the territories, what would it be? Draw us a picture. Can one cut the transportation service of those living in remote regions or render it completely insignificant, considering these people as second-class citizens, or is there a way to compensate and to strengthen the sector in remote regions in particular? How can this be done?

[English]

Mr. Clifford Mackay: Unfortunately I have to tell you that these new costs, and frankly other new costs, the most significant one being insurance costs, which are enormously increasing--300%, 500%, 600% increases in insurance premiums in our industry today--are going to make it more difficult to provide service in the areas you have mentioned, sir.

Mark may want to comment on a possible solution to that problem. We think there will be restructuring of service in many of those areas simply because it's extremely difficult, facing those new costs, for small carriers to be able to make a living. It's just that simple.

Mr. Mark Hill: There are 90 airports they're discussing. If we're talking about the airports that are not included in the 90, I think they'll probably do reasonably.

The issue is on the 90 airports. To take a carrier like WestJet Airlines Ltd., which has about the lowest break-even load factor in North America--it's about 63% right now--we carry 73% load factors. That means we have 10 passengers on each airplane who create our profit. On a short-haul route, all you have to do is take 10 people off our airplanes--a family of four going off to Grand Prairie may take the minivan instead of flying--and that eliminates the profitability of that route.

As a value-focused, profit-oriented airline, we will not operate routes we can't make money on. We simply will not do it. It's going to be these super-short-haul routes, whether they be to places like Grand Prairie or.... I look at a market like Quebec-Montreal, a two-and-a-half hour drive. Why would you get on an airplane to fly to Montreal from Quebec City, when a family of four wants to go down for a day and we can offer it for $57--when we get there: with 94 airplanes coming in the next seven years, we'll be there--how can you justify it?

It's going to really hurt the smaller markets. It's not going to hurt Toronto and Ottawa and Vancouver and the hubs. It's going to hurt everything that feeds into a hub, which is the vast majority of the communities across this country.

The Chair: Mr. Cullen, you have five minutes, please.

Mr. Roy Cullen (Etobicoke North, Lib.): Thank you, Madam Chair, and thank you to the witnesses.

This is to Mr. MacKay--and is it Mr. Hill? I'm sorry, your name tag has fallen down. If a traveller is going, let's say, Vancouver-Kelowna-return versus Vancouver-Toronto-return, would you argue there's a difference in the cost of processing those passengers? In other words, if you're going on the shorter haul, is the time you're going through the security less? Is the equipment different?

Mr. Mark Hill: The screening process is the same, and we've all been through the process. The airline business is a very complex business and a very difficult one to make work. As a country, if we're looking for economic growth and stimulation, we all know way more people who live within 250 miles of where we live than people who live 1,000 miles from where we live. So the propensity for travel is over short-haul distances.

The only model that works, if we're looking for competition in this industry, is the short-haul low-cost model, and if we hammer the pricing on those low-cost routes, we're just not going to see competition develop.

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Mr. Roy Cullen: I only have five minutes. I guess I'm trying to get at the point that if you're saying the cost is the same, it would mean someone going Vancouver-Toronto-return would basically be subsidizing the shorter hauls--I'm not saying that's a bad thing--if you went to a percentage of fares. Is that correct?

Mr. Mark Hill: Long-haul already subsidizes short-haul. It always has and always will. If you're paying sky marshals by the hour, why would WestJet pay the same for a sky marshal service on a half-hour flight between Calgary and Edmonton as Air Canada flying from Vancouver to Halifax?

Mr. Roy Cullen: No, but you'd be asking the passenger who flew Vancouver-Toronto-return, if it was on a percentage the way you're proposing it, to subsidize someone who was flying Vancouver-Kelowna-return, even though the screening process would be exactly the same. Is that not the case?

Mr. Mark Hill: The short haul, from every perspective, has always been subsidized by long hauls--on every issue. It's just the way the industry works.

Mr. Roy Cullen: If you want to talk about that, I'd like to come back to it in a moment if I have time. But we've talked about how it could impact the short-haul business. Do you have models that really test out the price elasticity or inelasticity of your customers? In other words, how are they going to react?

You must have models that tell you and substantiate what you're saying here, that you're going to lose a significant amount of business.

Mr. Mark Hill: Yes, we have models. The models have been proven in Europe. They've been proven in the United States. If the government was prepared to underwrite, we could show you in real time what happens when we add $10 to a fare between Calgary and Edmonton: the traffic goes right down.

Mr. Roy Cullen: But you don't actually have working models right now?

Mr. Mark Hill: Oh, absolutely we do.

Mr. Roy Cullen: You do?

Mr. Mark Hill: Absolutely, we do, and they're very simple price elasticity models. They're universal. That's why we were so stunned that Finance and Transport hadn't looked at them yet.

Mr. Clifford Mackay: We tend to use the models that are used internationally. ICAO validates these models quite routinely, Mr. Cullen, and they did so quite recently. What they essentially tell you is that the business traveller is quite price-inelastic, but all other travellers are very price-elastic. That essentially means they respond to price changes at the margin quite vigorously. And the models have shown that over the years.

Mr. Roy Cullen: Thank you.

You know, this is a serious matter. Picking up on the earlier comment about the short haul versus the long haul, I'm going to put the proposition on the table and you can refute it. I'm a big believer in competition in the airline industry, believe me, but there are some who would argue that a company like WestJet is basically going for the high-volume, less risky types of routes--high volume, steady as she goes--and they're able to price accordingly.

Now, I'm sure you can give arguments that would refute that, or you're going to try. I guess what I'm saying is why should we feel terribly supportive for the short haul when we really have to look at the whole system?

Mr. Mark Hill: I would argue that Comox to Calgary is not a high-volume route. I'd argue that Thompson to Winnipeg isn't, and Thunder Bay to Winnipeg certainly isn't. We have shown that over half our routes are routes that nobody else flies on a non-stop basis.

If you want to see competition, there's only one model that works in the world. We've all seen CanJet, C3, Royal, VistaJet, and all these other jokers come and go in the last six or seven years. There's only one model that works, and if we want to see competition, if we want to see the spinoff that occurs, that's the only thing that's going to work.

Of course, we could be accused of saying WestJet wants it because it doesn't impact their business. Well, Air Canada is quite comfortable with this tax, because their average flight is 1,200 miles. They love this because they know exactly what it does. They're not interested in short-haul travel.

Mr. Roy Cullen: Why are you particularly interested in short-haul travel?

Mr. Mark Hill: Because that's the model that works.

Mr. Roy Cullen: You mean that's the one that makes money for you.

Mr. Mark Hill: That's the only model for new entrants that's worked in North America in the last 27 years.

Mr. Roy Cullen: Someone has to do the longer hauls, don't they?

Mr. Mark Hill: I flew from Calgary to Ottawa today on WestJet.

The Chair: The next chair has this room booked, which unfortunately I was not aware of when we started late. Mr. Nystrom is the only person left with questions. You can just do two or three minutes of questions, if you wish.

Mr. Lorne Nystrom: Thank you. I'll try to be very brief. I'd like to ask a question of Mr. Mackay.

I want to learn a bit more about your organization, the Air Transport Association of Canada. Are you a non-profit or a profit organization?

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Mr. Clifford Mackay: We're a not-for-profit trade association.

Mr. Lorne Nystrom: Do you own some of the screening equipment in airports? How do you operate that? Do you operate at just a break-even point? Do you rent it out to Transport Canada?

Mr. Clifford Mackay: The answer is that at the moment, today, we own all of it. We own it because the government decided a few years back to essentially get out of the business of owning and operating or maintaining all of this equipment. So they came to us and asked us if we would take it on, and we said yes. We created a not-for-profit company called the Air Transport Security Corporation. Its specific purpose in life is to own and maintain the screening equipment that you see in all the airports across the country.

With this legislation, the government has served notice that we are to wind that company up and ensure that all of this equipment is transferred to this new agency. We're in the process of going through a due diligence and negotiating process with the government to do that, as we speak.

That company is not for profit. It earns its revenues by charging a per passenger charge to the companies that use these facilities. At the moment, the charge that we charge to WestJet, Air Canada, and others is 0.07¢ per passenger through the system.

Mr. Lorne Nystrom: So you have a charge, but it's not for profit. You don't make any money on this, and yet you do it at basically a break-even point.

Mr. Clifford Mackay: That's correct.

Mr. Lorne Nystrom: Can you tell us a bit more about how you see the future unfolding for you? What will happen to the equipment? What will your role be? What about employees? Will you be hiring employees? Are you talking to employees?

Mr. Clifford Mackay: Our expectation, Mr. Nystrom, is that the company will cease to exist shortly after April 1. All the employees will be gone, we'll wind it up, and it will cease to exist.

Mr. Lorne Nystrom: My last, very quick question would be about the board of directors with 11 people on it and the recommendation they're making that there be some changes in terms of more representation from the industry. What about representation from the workers, from the trade unions that represent these workers? Shouldn't they have a voice there as well?

Mr. Clifford Mackay: We don't have any objections in principle to that. I've referred to the NAV CANADA model, which does make provision for labour representation. That's certainly not an issue that causes us any concern at all.

The Chair: Thank you very much.

The meeting is called. Thank you very much to our witnesses.

A point of order?

Mr. Scott Brison: I haven't....

The Chair: Yes, but the witnesses for the next committee meeting are here. Mr. Brison, yes, you did miss out. What I will do is look at tomorrow morning to see if we can reschedule, Mr. Brison. This is not our room right now, unfortunately.

We are adjourned. Thank you.

Mr. James Moore: I have a point of order.

The Chair: We are adjourning--

I am sorry, Mr. Moore has a point of order.

Mr. Jason Kenney: I have a point of order. I moved the point of order, though you may not have heard me. The point was simply that there are a number of witnesses we still need to hear from. We discussed this earlier. There was no determination about when we would allow those witnesses to be heard. I would submit that we're not in a position to move to clause-by-clause tomorrow and I'd like to hear from the chair if she.... I think that's the consensus of the committee.

The Chair: This is time-sensitive legislation. The committee, earlier this week, said they wanted to go to clause-by-clause tomorrow. I had called that meeting based on that. I will look at now.... We may have one more witness and we may have the officials back. I will attempt to get that sorted out and get back to you as soon as possible.

Thank you.

Mr. James Moore: Madam Chair, you recognized me for a point of order. You did prior to the last one. You recognized me--

The Chair: I didn't think you had one. I thought Mr. Kenney did.

Mr. James Moore: We both did, as a matter of fact. And you recognized me first. It will be brief.

The Chair: Very brief, please, because we don't want to abuse our privileges here.

Mr. James Moore: Fair enough.

Madam Chair, I move that Mr. Roy Cullen replace Sue Barnes as chair of the Standing Committee on Finance.

The Chair: Unfortunately, I think--the clerk will confirm--we only have one person here so we do not have a quorum.

Mr. James Moore: We have quorum.

Point of order, Madam Chair, we have quorum.

The Chair: We don't.

Mr. James Moore: We do.

Mr. Jason Kenney: We have nine people.

Mr. James Moore: We have nine people. We have nine members here.

The Chair: Ten is quorum.

We are now adjourned.

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Mr. James Moore: You are a member of the committee, Madam Chair. The chair of the committee is a member of the committee. We have nine members here, Madam Chair.

The Chair: I will ask for a rule...

My understanding from the clerk is that there are nine members in the room. But quorum is 10 and I am in the chair. That is the clerk's advice to me.

We will deal with this afterwards.

We will adjourn right now. Thank you.