AGRI Committee Meeting

STANDING COMMITTEE ON AGRICULTURE AND AGRI-FOOD

COMITÉ PERMANENT DE L'AGRICULTURE ET DE L'AGROALIMENTAIRE

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, April 22, 1999

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[English]

The Chairman (Mr. John Harvard (Charleswood St. James—Assiniboia)): Members, we'll bring the meeting to order. I see we have a quorum. Today we will be considering a study called “Impact of Selected Federal Cost Recovery Initiatives on the Agri-Food Sector”.

We have a couple of witnesses from the Department of Agriculture and Agri-Food. Tom Richardson is acting assistant deputy minister, policy branch; and Brian Paddock is acting director general, economic and policy analysis. I'm told, members, Brian Paddock used to listen to me on radio many long years ago.

Mr. Jake E. Hoeppner (Portage—Lisgar, Ref.): He's still alive?

The Chairman: I take it he's a very well-informed man.

Welcome, gentlemen. We look forward to your presentation, and then we'll have rounds of questions. Who would like to begin? Mr. Richardson.

Mr. Tom Richardson (Acting Assistant Deputy Minister, Policy Branch, Department of Agriculture and Agri-Food): Thank you, Mr. Chairman. I'd just like to make a couple of statements before Brian gets into the study we did.

The context of the study was that, if members recall, going back to the early to mid-1990s—a program review in 1995, restraint, budget cuts, etc.—industry noticed that there were increases in cost recovery and they became increasingly concerned about what the cumulative impacts of that would be on both the farm level and the processing sector. They wanted to be able to see how it all added up in terms of the impacts on the sector. So we were asked to take a look at that and Brian will report on that.

People need to judge for themselves how important the impact is. The bottom line is that the impact, as measured as a percentage of income or sales, in most cases is not large, but there are significant differences, and in some cases people may judge that the impact is important. Brian will go through that.

I just want to mention what we did not try to do with this study. We did not attempt to criticize or critique the policy on cost recovery. We took that as a given, as government policy. We did not attempt to compare agriculture cost recovery to other sectors of the economy. We did not look at provincial cost recovery, and we did not compare cost recovery to other countries. All of these are potentially important things for many people, but they are things we did not do in this study. Our sole objective was to try to look across all the agencies and institutions in the federal government that have fees that affect the agriculture and the agri-food sector.

• 0910

So with that introduction, I'll ask Brian to go through the study. As the chairman has pointed out, Brian is from Manitoba. He grew up on a farm north of Rivers, Manitoba, and many of his relatives are still farming. He's well connected to the sector. So, Brian, over to you.

Mr. Brian Paddock (Acting Director General, Economic and Policy Analysis Directorate, Policy Branch, Department of Agriculture and Agri-Food Canada): Thank you very much, Tom and Mr. Chairman.

We've handed out an outline of our remarks. If there are any questions as we go along, please don't hesitate to interject. Then, of course, we can discuss it more generally when we're finished.

The basic purpose of our study was really information. Increasing concern was expressed by the industry, and indeed by MPs in some of the discussion at this committee, that while any given cost recovery initiative might be quite small, the cumulative impact of these initiatives, when you added them all up, could be quite significant.

This is the reason we not only looked at the federal Department of Agriculture, but tried to look at federal cost recovery as a whole. We tried to identify the key impacts, who was affected and who was not, and lay a factual base for discussion of the policy and the fee structures.

So it was the cumulative impact of federal cost recovery. We did not look at the provincial aspect. There were two reasons for that. One was just a very practical matter. A study of this nature requires an immense amount of data, and we had the full cooperation of Treasury Board. They encouraged other departments to give us the data we required. We wouldn't have had that with the provinces. I'm very practical.

We were also concerned with federal policy, so it made sense to us to stop at federal policy. I don't know whether the provinces are looking at their houses or not, but we restricted ourselves to the federal government

Second, we were looking at the effects of the cost recovery policy per se. We were not doing a cost-benefit study of the services. A lot of people came back and said, “Well, yes, there are these costs, but don't forget these services are of benefit.” We think that's probably true. But we were trying to compare two situations: one where the service was provided but there was no cost recovery—in other words, the service was provided free—and the second where the service was provided but there was a charge. Those were the two situations we were trying to compare.

In the report there is some contextual information about the benefits of programs and that sort of thing. We provided that to give some sort of balance. But the essence of the study was to look at those two scenarios: services without cost recovery and services with cost recovery.

During the process of implementing cost recovery, a number of services were transferred to the private sector. We had a fair bit of discussion, both in the department and with our advisory committees, as to what to do with those. We ended up putting them into the study. Beef grading was transferred to the private sector, for example. Some laboratory fees in Prince Edward Island were transferred. Some services in the transportation area were transferred.

We felt it would be misleading to exclude those, because one can argue that the transfer of those services to the private sector was a result of cost recovery. The industry basically said, “No, we can do better”. They were transferred, and the industry is still bearing those costs—probably a little less, otherwise you wouldn't expect they would have transferred them in the first place. So we thought it would be somewhat unreasonable to take them out.

We were looking at cost recovery. We did not look at the other policy changes that took place during that time. As many of our advisory committee members and other clients have noted, during that time federal expenditures on support programs declined and the western grain transportation subsidies were discontinued.

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Again, in the study we noted the other things that were going on. Clearly those other things coloured people's attitudes toward cost recovery, and they wanted to look at the whole picture. While acknowledging those things, we did not study them per se. As Thomas said, we did not evaluate the policy of cost recovery, nor did we try to make a judgment on whether or not the policy was being applied correctly. We took the policy as it was applied and said, “Here's what we think the impact of this is on the sector.”

When we got together with our advisory committees, it took a little bit of time to get that clear. Some of them clearly came with the idea that we would be doing an assessment of the policy and whether or not there should be a charge. We did not do that, and it took some time to sort of convince the sector why we didn't.

We also started at square zero, and that's important. Following program review, there was a major increase in cost recovery fees in 1994 and thereafter. In some previous work, we had started to look at what had happened since 1994. Partly in response to that study, we consulted with the advisory committees. They wanted us to go back to the beginning and look at all fees, not just the ones post-1994. That made quite a difference.

You have to remember the that Canadian Grain Commission, in particular, had been heavily cost-recovered since about 1985, so if you started in 1994 you would get quite a different picture of the impacts. We had a long discussion with our advisory committee as to what they wanted us to do, and they settled on starting with square zero. That's not to say they wouldn't have been interested in looking at some other things, but that's what they settled on.

I'd like to say just a brief word about process. We had two advisory committees. We had a committee with our industry associations, and for those of you who may be confused by the acronyms, there is a page in the report itself with all the acronyms defined. So if you want to know what the CFA is or the CHC, it's in the study just before (vii).

Mr. Joe McGuire (Egmont, Lib.): Is that Roman numeral seven?

Mr. Brian Paddock: Yes.

The second was a committee of other departments. We used these advisory committees, particularly the government committees, to help us gather information. Remember, we were looking not just at agriculture fees but at fees from all departments. We needed a formal place to make our case and make sure we got the data we needed. A lot of the times we were dealing one on one, but we needed a place to get them together and sort of discuss these things. There were some arguments about what was in and what was out, and that sort of thing.

The industry committee was also there as a sounding board for us when we had questions of methodology: do you want to start in 1994; do you want to start at zero; what about the fees for services that have been privatized? We generally tended to vet those questions with the industry committee and ask them whether it was the way they wanted to go. Legitimately, in some cases we could have gone either way, and we used them for that.

They were also extremely useful later when we were drafting the report. As technocrats, you tend to write in a particular way, and they were very helpful at getting back and saying, “If you're writing for yourselves that's fine, but if you're writing for the public, here's what we want you to do.” It was a matter of checks and balances to ensure transparency and give us their views on what other things ought to be mentioned in passing. They provided a lot of the information, or at least a lot of the views, on what should be included.

By way of process, there were just four steps we went through. We identified the departments that had fees that affected agriculture and went back to them. We took the Treasury Board database, went back to them, and discussed what the fees were, because sometimes they weren't described in a lot of detail.

In stage two we went back and classified those cost recovery fees in terms of what sector was paying them—was it livestock or grains—and what the function of those fees was. A fee on imports has a very different impact on Canadian producers, for example, than does a fee on exports. A fee on imports acts as protection. It could actually be positive for them—it might not be positive for the consumer—as opposed to a fee on exports, which would act in some sense as a tax.

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So it was very important not just to get the total fees but to find out what are the function of these fees. Are they in production? Are they in marketing? Are they in inputs? So we basically had to take a raw database and then go back to the departments involved and say, “Can you describe in more detail what these are?”

Once we had done that, we went on to what we call the macro-analysis. It's important to understand that in many cases it doesn't really matter who signs the cheque for a fee. That doesn't determine the impact. The impact flows where the market basically says it will. The best example I can give you is that some of the Grain Commission fees for weighing out and that sort of thing are actually paid by the exporter. But we all know that the Wheat Board has to price its grain competitively. So when you put that fee in, regardless of who writes the cheque—

A voice: It's right.

Mr. Brian Paddock: —it's right, exactly. So you can't just look at who actually pays it. You have to analyse where the impacts are. So in our macro-analysis we used a series of models to try to determine what actually happens after you put on these kinds of fees.

In the fourth stage we did what we call a micro-analysis. We looked at representative farms and individual representative meat processors and that sort of thing, and we tried to bring it a little bit closer to what people might identify with. But, again, it's all based on the market level or macro stuff that was done before.

So those were the stages we went through.

Turning to the results in general, just by way of reporting the data, the total fees increased from $110 million in 1994-95 to about $137 million in 1997-98. That's illustrated in the graph you have in front of you. One of the interesting things we confirmed was that about 77% of those were from the agri-food portfolio itself. So while our clients were very concerned about fees on transportation or on drugs, which may be more important for particular sectors, overall most of the fees fall within the agri-food portfolio. The other bigger one is transport, with about 17%, and the rest of them really are quite small. Health Canada, which includes the drug registration, still is about 4% overall. Now, as I said, if you're in a particular line of business, it's more important. But this is just the aggregate cut.

Then if you look inside the portfolio itself and at where the particular fees are, the Grain Commission is by far the largest. That really reflects in part the fact that the grain sector in Canada is very large. It's a big sector, so it pays a lot of fees. That's part of it. The other part is that the rate of cost recovery on Grain Commission activities tends to be high. Most of it is cost-recovered, with the exception of the Grain Research Laboratory, I believe, and a few other activities. But by and large, most of the Grain Commission fees are cost recovered.

The Food Inspection Agency is at 30%. Again, the rest of them are really quite small. PFRA is at 11% overall. But it's much more important than that for the cattle industry, because they run the community pastures, and for those who use those, the cost recovery in that area is very important.

Mr. Joe McGuire: The pie chart on page 13, what does that mean?

Mr. Brian Paddock: It means that 77% of the fees came from the agriculture portfolio, that is to say, Agriculture Canada, the Grain Commission, and the Food Inspection Agency.

The Chairman: In other words, 77% of the fees came from within the portfolio and 23% came from without. Is that right?

Mr. Brian Paddock: Yes.

Mr. Tom Richardson: So of the $137 million in that year, 77% was from AAFC or the portfolio.

Mr. Joe McGuire: The others are incidentals from Transport and Fisheries and Oceans.

Mr. Brian Paddock: Yes.

Mr. Jake Hoeppner: Doesn't the farmer pick it up in the end? I look at Health Canada, and this probably includes drugs for livestock. The cost under Fisheries and Oceans probably goes right back to the fishermen, doesn't it?

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Mr. Brian Paddock: In many cases it does, and the results basically tend to confirm that. It's particularly the case in the grain sector.

In the livestock sector it tends to be a little bit different. What happens really depends on the structure of the marketplace. If you have a regulated market with trade basically excluded, there's more of a possibility of passing things on to the consumer than if you're in a market where you're servicing an export market or you have imports that can come in. It's much more difficult to pass it on if you have competition from outside.

The Chairman: I'm sorry, we should let you finish. But I think one of the lessons here is that when you're looking at impacts and where they fall, sometimes it depends on the kind of activity that's going on. Sometimes the cost recovery is passed forward, but sometimes it's passed backward.

Mr. Brian Paddock: Indeed, and in some places it's passed to the side.

The Chairman: It's called side-swiping, is it?

Mr. Brian Paddock: No. When the Grain Commission has a fee, it basically creates a wedge between the export market and the farmer. It lowers farm returns for grain. Those lower grain prices get passed to the livestock sector as a benefit. A lot of the movement between sectors isn't that strong, but that's the most obvious one, where if you cost-recover one group, another group actually benefits. It's one of the things I think our committee found to be intriguing. For those of us who have looked at transportation subsidies, it's the same kind of thing.

The Chairman: Sorry we interrupted you. Go ahead.

Mr. Brian Paddock: That's quite all right. I probably tend to gloss over some of these things, and it's well worth going into.

Looking at the chart on page 15, over half of these are applied at the farm level or on the marketing chain. At the farm level it would be on inspections for seed or that type of thing, while in the marketing system it would be on, for example, grading systems inspections, that type of thing. While there has been a lot of talk about the cost to processors, they really form a relatively small portion of the total fee structure. They form quite an important part of the increase since 1994, but in terms of the overall figure they still are only a relatively small part of the cost recovery picture.

Turn to the impacts on page 17. I think we've covered this in our discussion, but as I said, different fees have different impacts. If you put a fee on exports, there's a much different impact than if you put it on imports. In order to see the impact, you have to look at the actual fee and what it actually does.

We talked about fees passing through the system. You may put a fee on the outloading of grain from the terminal in Vancouver, but you know very well who's going to actually pay that. Similarly, you may put a fee on a producer in supply management, but the chances are that's going to be passed forward. But the market has a say in that. Just changing the person who actually pays the cheque won't really do anything. You could change it so that somebody else actually pays the fee, but that doesn't necessarily change the impact. The ultimate impact depends on market structure. We've talked about that. It's trade. Openness of markets tends to make it much more difficult to pass fees forward.

I'm now on page 18. In looking at the overall impacts, what we found was that about 67% of the impacts—now, we're not talking about the fees, we're talking about the impacts—rest on the primary sector.

The Chairman: By impact, do you mean the ultimate payer?

Mr. Brian Paddock: The impact on income comes out at the primary sector. That's about $92 million. The processing sector pays about 8%, or $10.7 million. About 25% of these fees actually get passed forward to the consumer or the foreign buyer. That adds up to about $137 million.

The $92 million that are paid by the private sector represent about 1.7% of net operating income. In fact, most are less than 1%.

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Mr. Tom Richardson: Explain that in terms of net cash income.

Mr. Brian Paddock: Net cash income is about $6.5 billion, so $92 million. Overall it looks small. The cattle industry pays a particularly large amount, and that comes in large part not only because of the inspection fees on health facilities, but also the community pastures are quite significant.

Grains and oilseeds tend to be about 2.5% of income, and again primarily that's the Grain Commission. There is some in things like seed inspection and what not, but primarily that's the impact of the Grain Commission. It's virtually 100% cost-recovered.

Potatoes tend to be about 2.7%, but if you look specifically at the seed potato side, it ranges somewhere between 3% and 7%. And the reason for the range primarily is the difference in size of the operation; for smaller enterprises the percentage tends to be higher.

Moving forward in the food chain, the red meat processing industry is the one that stands out. There's an impact—I'm on page 21—of about 3.4%. The red meat industry is in a rather...I won't say peculiar, but perhaps different situation. As long as the market with the United States is open, they can't pass the fees back to the primary producer because he'll just export his cattle to the United States, and he can't pass it forward to the consumer because you can always import meat from the United States. So he's stuck, and that's why the red meat processor has a problem in passing it either forward or back, and a lot of it ends up staying right there; it comes out of his profits or out of his returns. That's not always the case in some industries where you have barriers to trade, but in this one you have free trade above, you have free trade below, so he has a difficult time passing his fees on, forward or backwards, for that matter.

The other one that stands out is the positive impact some of you probably noticed for feed manufacturing. I think the number is plus 1% or something. And the reason for this is that you have two things playing here. You have the direct effect of fees on the feed manufacturing sector, but you have the indirect fees of fees on grain lowering the price of their major input, which is feed grain. And what we're saying is, if you look at all of the fees, the price-lowering effect on grain prices is more than enough to offset the direct fees paid by the sector itself.

Again, if you looked at post-1994 you'd find an entirely different picture, because that would basically put into the base period most of the fees on grains, because grains haven't increased much since 1994. But that's the reason for this result. It's not to say that a fee on feed manufacturers is helpful to them. It's just to say that what we measured was a whole basket of fees. If you take them one on one, you'd say a fee on feed manufacturers would have a negative effect on their returns. But we didn't look at them fee by fee; we looked at the whole basket of fees.

So if you looked at a specific fee on feed manufacturers, they would come out saying this is negative. And we want that clearly understood, because some of the industry was quite concerned that the impression we were conveying was that cost recovery is good for you and therefore maybe you should like a little more. And that's not what we're saying. What we're saying is, if you look at all the fees, here's the impact, but a fee on feed manufacturing per se would be negative to their returns.

As a general rule, when we looked at the enterprise data smaller firms tended to be affected more than larger firms, and there are two reasons for that. One is that as a general rule larger firms tend to be more profitable, so whatever the cost recovery number is, the denominator is small; their rate of profit is narrower, so any fee has a bigger effect.

The other reason—and this isn't the case in all kinds—in some cases the fees aren't pro-rated on size. There may be a fee for inspecting a particular facility, which doesn't necessarily mean that a facility twice as big pays twice as much. It costs a certain amount to go out and inspect a facility, and the actual size of it may not have much to do with the cost of providing the service. So if the fees are proportional to the costs incurred, that could mean that smaller enterprises tend to pay proportionately larger fees. This showed up particularly in meat processing when we looked at it. Some of these tend to be unit fees, and they aren't necessarily twice as big if a facility is twice as large.

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So for those two reasons, your smaller enterprises tended to be more affected.

Our overall conclusions are that if you look at the overall impacts, they seem quite small—1.7%. I don't want to give the impression it's not important, that if you say it quickly it goes away, but it does seem relatively small compared to the other things that tend to happen. An annual price variation or something would have much more impact on the cost recovery fees. But the impacts do vary widely. Our analysis suggests that for supply management almost all of it gets passed forward to the consumer and there's virtually no impact either on the primary producers or on the processing sector, whereas in other cases it's almost all borne and the results are quite a bit more important.

So it's hard to make generalizations. It varies very widely, and you really need to look at each case on a case-by-case basis. It's very hard to make broad generalizations.

I think I'll stop there, Mr. Chairman. I'd be very pleased to respond to any questions you might have.

The Chairman: I'd like to have one clarification before we go to Mr. Hoeppner. On page 20, this is the significant impact—

Mr. Brian Paddock: This is page 20 of the deck?

The Chairman: The deck. So you have the impact on cattle of 3.2%; grains and oilseeds, 2.5%; and so on. My question is, Brian, is that the mean? Is that the average?

Mr. Brian Paddock: It's the total.

The Chairman: That's the total of—

Mr. Brian Paddock: Total income. A 2.7% reduction in their net operating income because of cost recovery.

The Chairman: On the entire industry?

Mr. Brian Paddock: Yes.

Mr. Jake Hoeppner: That's on gross income, right?

The Chairman: No, it's on net.

Mr. Brian Paddock: It's net.

The Chairman: Net is not the same thing as profit, though, is it?

Mr. Brian Paddock: It's the closest thing we would have. It includes the return not only to capital but also to the labour. In most cases on farms they don't hire labourers; it's the operator's labour. That's really the return to the operator.

The Chairman: What I'm getting at is that if you just take cattle, for example, at 3.2%, that's the impact on the entire cattle industry. But within the industry, would there be some sectors of the cattle industry, if I could put it that way, where the impact might be only 1% or the impact might be 5%, 6% or 7%?

Mr. Brian Paddock: Probably the biggest variation would be geographically. Again, I don't want to belabour the point, but PFRA is a big part of this. Their community pastures are primarily in Manitoba and Saskatchewan. If you were living in Alberta and weren't using a community pasture, your effect would be much smaller.

The Chairman: If you're not using community pasture.

Mr. Brian Paddock: Yes, these are averages over the whole sector. If you were actually in Manitoba, these impacts would probably be larger, because some people use this service and some don't. Some are actually having to pay for private pasture. They buy their own land, they rent land. They're not directly affected. It would be small, but to the extent that these higher fees discouraged production and tended to raise market price a little bit, they actually might benefit a little bit. But given the other fees, that's unlikely. But certainly the people who actually use the community pasture would be more affected than the people who don't.

The Chairman: Okay, we'll leave it at that.

Mr. Hoeppner, seven minutes.

Mr. Jake Hoeppner: Thank you, Mr. Chairman.

Welcome, gentlemen.

I want to get back to this charge of fees for net or gross income. I'm looking at your chart on page 12, and as you know, farm income has been going down steadily since 1995-96. How can we have that amount of cost recovery increase from $110 million to $137 million? To me it sounds more or less like you would have to have the cost of product, as in the Grain Commission, where it would be charged to bushels of grain rather than the net income. So to me that doesn't quite jibe. Am I wrong here? Do you have an explanation? When you look at $110 million to $137 million...I look at my books on the farm as far as grain production and the net profits go, and, God, it should be somewhere around $75 million for cost recovery if it were on net income.

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Mr. Brian Paddock: I'm not sure what your question is. Specifically with grains, there has probably not been a lot of increase, because the Grain Commission has been in this business for a long time. As you know, they're out doing a major review now, and there will be some changes as a result of that.

Those are the total fees paid by the entire agri-food sector. They're not all paid by producers. In fact, a good part of the increase is those that have been levied on processing plants and what not.

Mr. Jake Hoeppner: Yes, but from what I gather from the other charts, grain is the primary one.

Mr. Brian Paddock: Yes, that's in the total—not in the increase, but in the total.

Mr. Jake Hoeppner: I think the Grain Commission has over half the cost.

Mr. Brian Paddock: That's right, of the total—not the increase, but the total.

Mr. Jake Hoeppner: Yes, the total. But that's why I'm saying it has to be off the product itself, the bushels of grain that you get inspected, not the price of that grain.

Mr. Brian Paddock: It's not the price, but no doubt those fees in the Grain Commission come directly back out of producers' incomes, if that's what you mean.

Mr. Jake Hoeppner: What I'm saying is it decreases your net income way more than the 2% or 3% if you have poor commodity prices compared to good commodity prices.

Mr. Brian Paddock: That's generally true. I believe we used 1997 income numbers, because that's what was available when we did the study.

What you're saying is, if we did the study today and we had the same number of dollars being cost-recovered but the denominator was much smaller, it would end up being larger. That's true. Is that really what you're trying to say?

Mr. Jake Hoeppner: Yes. That's what I'm trying to point out. Really, the impact in certain years is way different from the next year.

Mr. Brian Paddock: That's right.

Mr. Jake Hoeppner: The other thing I want to point out to you, Brian, is that the Canadian Grain Commission is probably a good vehicle to have, but the impact sometimes on what they do is far greater than what you see.

One example is in malting barley. To get a number one malting barley, you have 0.02 allowable vomitoxin. The U.S. has 0.05. A number of farmers have come to me with this issue, saying, “How come my vomitoxin is always 0.03, just above the allowable level, and then when the grain company has it, it goes into the U.S. and they sell it for number one malting barley?” And that amounts to as much as 65¢ or 75¢ a bushel.

That also holds true in the way our wheat is graded, because once you've graded down to feed wheat...we know that in the U.S. 50% or 60% of that will grade at number 2 hard winter in the U.S., which is the grain that goes to the Japanese market.

So those are things that really have to be looked at, and I was kind of surprised that you didn't look at that. You just kind of looked at the policy.

Mr. Brian Paddock: Yes. To go back, we weren't trying to do a cost-benefit analysis and ask, do these Grain Commission regulations increase farmers income or not? That wasn't the question we were asked to look at. You just went through a grain marketing panel that looked at some of these issues two years ago now. Our question was somewhat different.

I'm not suggesting the questions you pose aren't important. They obviously are, but it's not what we were asked to do.

Mr. Jake Hoeppner: So how will you handle this report to the minister? What will you say to him, that the policy is wrong, or the fees are wrong? That is really what you tried to derive from the study, what kind of cost recovery is taken out of the primary producer's pocket.

Mr. Brian Paddock: I've had no discussion with the minister.

Mr. Jake Hoeppner: But I imagine you did the study for government benefit.

Mr. Brian Paddock: It wasn't done for government benefit. Really, in some respects, it was a response to the industry, which was wanting to know the facts. You get lots of stories coming from here and there, and it was as much the industry saying give us something more comprehensive.

Clearly, the minister agreed to that. That's why we were asked to do it, but it wasn't really for government benefit per se as it was, as we say in the early part, to lay the basis for a discussion. And by and large, that discussion is starting in some sense with the review that the Grain Commission is doing, because they're looking at alternatives and what not, and it's being used in other ways.

I believe the minister is going to be with you in a week or so. You may wish to pose that question to him at that time.

Mr. Jake Hoeppner: I'm glad you did this study. I just don't think it went quite far enough. I think you should have probably zeroed in on the impacts a little more aggressively.

Mr. Brian Paddock: A number of our committee members made suggestions that we could have done additional pieces, additional parts. To be truthful, it took us long enough to get this done. We wanted to get it out in the public domain, so we had to be very focused on our purpose. But, yes, there are lots of interesting questions.

• 0945

Mr. Jake Hoeppner: Yes.

Thank you, Mr. Chairman.

The Chairman: Just to pick up on that, Brian, basically your exercise was fact-finding, to come up with information. As you say, that in itself produces questions, and perhaps the next step or perhaps one of the possible future steps would be a real policy analysis as to whether government, or the entire industry, or segments of the industry are getting a real bang for their bucks. Am I right?

Mr. Brian Paddock: That's right. Our department really was the first one to take this on. It's now part of the Treasury Board directive that departments are supposed to do this.

Transport did a narrower one that looked strictly at transport fees. They didn't look at the impact of fees outside. Maybe that was reasonable, I don't know.

But clearly, an important concern of the stakeholders in agriculture was not just the agriculture fees, but the fees that are going on to the transportation, marine pilotage, and all that sort of stuff. That was raising as much concern—perhaps not quite as much—as the fees directly levied on a sector.

The Chairman: As one more thing before we go on to Madame Alarie—and I think this is relevant to what Mr. Hoeppner said—in this whole equation, commodity prices play a major role. For example, whether wheat is selling at $2.50 a bushel or $5 a bushel, I assume that the cost of any inspection by the Grain Commission remains constant. But of course, if the bushel of grain is only half its normal price, that's very relevant to the producer who is raising it.

Mr. Brian Paddock: That's correct.

The Chairman: Madam Alarie.

[Translation]

Mrs. Hélène Alarie (Louis-Hébert, BQ): Welcome. Just like my two colleagues, I read carefully your analysis but I kind of was left unsatisfied. It would be worthwhile having a more detailed analysis of the cost/benefit of government services. It is quite obvious that such an analysis would go beyond your mandate, but maybe we have the duty of making a recommendation for a more detailed study on your part because this is where we start to feel an appetite.

Obviously, an increase of $27 million for cost recovery between 1994 and 1998 is huge. I am wondering about the impact of the cost recovery initiatives on the different sectors according to the size of the businesses. We generally say that the bigger the businesses, the more competitive they are, and that big businesses are less affected by the impact of this increase in costs. Did you make an analysis of smaller businesses in order to see whether this increase in costs posed a risk for their future?

[English]

Mr. Brian Paddock: We did look at the impacts on different-sized enterprises. We did the basic market analysis, and then we took it back to enterprises of different size. Clearly, as the report shows, the impacts tend to be larger on the smaller firms as a percentage. We did not try to determine how decisive those differences would be in the future of the firms. In some cases, it looks to us as though it wouldn't matter.

The overall market structure is such that small firms tend to be earning less. The cost recovery differences are probably not all that decisive. Just the overall economies of production in their enterprises mean that their returns are lower. We're seeing a trend towards larger firms regardless of cost recovery. In some cases, cost recovery could be an additional factor. It doesn't look to us to be a really decisive one.

[Translation]

Mrs. Hélène Alarie: I am wondering whether this is not a decisive factor. For example, in the beef sector, where the profit margins are very narrow, we find and will continue to find many small size businesses.

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And I am drawing here from a document published in 1998 by the U.S. Department of Agriculture titled A Time to Act. It refers to an analysis that proves that 94% of farms in the U.S. are small businesses. Even if I don't have any statistics concerning our own farms, I would tend to think that the situation is not that different here.

I would fear that an increase in those costs might jeopardize the future of those businesses which have marginal profits in most cases. This could also jeopardize the quality of their products.

[English]

Mr. Brian Paddock: It is true that it's a factor. I think meat processing firms were particularly striking in the report. The range of returns between the smaller and larger firms is very, very large. It really wouldn't matter whether you had cost recovery or not. The firms at the bottom end are going to have a difficult time.

Yes, this will not help. I agree with that. But I would also argue that it's not going to be the decisive factor either. In meat processing, the large firms are tending to move into the marketplace. Cost recovery or no cost recovery, the smaller firms are probably going to have a difficult time.

[Translation]

Mrs. Hélène Alarie: I will not refer precisely to the budget since, as you said, the minister will come before us and we will have the possibility of asking those questions to him. Representatives from the Canadian Food Inspection Agency and the Pest Management Regulatory Agency already appeared before us. Isn't the mandatory recovery of costs for those agencies having an impact on the services they provide?

For instance, some businesses might tend, because of the costs they have to bear, to diminish the number of inspections they are asking for, since they are allowed to do that. On the other hand, those agencies, if they want to meet their obligations, may not be leaders for the research work they should do to make sure that Canada is at least competitive with the U.S. Isn't there the risk that in the agricultural area of which we are part, we might not be competitive anymore with other countries because we did not invest the funds required to go beyond that point?

[English]

Mr. Brian Paddock: First of all, the Food Inspection Agency has said—I think you should probably ask this of them directly—that health and safety will not be compromised. The standards are the standards, and meeting those standards is not voluntary; it's an obligation.

I think you have to distinguish some of the health and safety inspections from things like grading, which essentially is a quality assurance issue. It's really up to the producing sector to decide how much service they wish. In the case of beef grading, for example, when the agency moved on cost recovery, the beef grading people said, “We'll do this ourselves. We will determine how much grading we want to do.” In some cases they may feel that grading is well worth the cost and may say this is good. In other cases they've said, “Less is fine. Now that we're having to pay for it, we think that less of this would just fine.”

When we met with the industry, they said they wanted the choice of deciding whether they wanted the Cadillac or the Chevrolet. Now, this is in grading. This is in those kinds of quality assurance. It's a different matter on health and safety, but even there it does pose the motivation to find other ways. I don't want to get into defending the policy, because that's not what we did, but it does provide a motion to find other ways of assuring a healthful and safe product. So there are incentives provided there. It's always a challenge to make sure the quality of the product is not compromised.

The Chairman: We're out of time, I'm sorry.

Murray Calder.

Mr. Murray Calder (Dufferin—Peel—Wellington—Grey, Lib.): Thank you, Mr. Chair.

I'd like you to flip over to page 18. It's entitled “Impacts”. You're showing here that the total user fees are about $37.6 million. You're also showing that the primary sector out of that is paying about 67%, or $92.3 million. You're also showing that the processors are only paying 8%, or $10.7 million. I'm very curious as to why the primary producer would be paying 67% and why the processor would only be paying 8%. Why do we have such a inbalance here?

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Mr. Brian Paddock: I think there are two things you have to remember. First of all, this is the total. If you did it post-1994, you'd get a different picture. Secondly, think of where the biggest sectors are. The grain sector has very large exports; there is no processing. All the fees that are applied to the grain sector are pretty much paid by the producer. There is no processing; it goes for export. Part of that, a very small portion, gets paid by the buyer. But because of the world competition in markets, you can't just unilaterally raise your price because you've got an inspection fee. I mean, the U.S. will...they're not changing, if they don't.

I want to point out that the implicit assumption in our analysis is that no one else is changing their fee structure. If they were, it would reduce the impacts, because it would mean that other people would be having extra costs and we would be more competitive. So the implicit assumption behind this is that we're looking only at Canada. We're assuming no one else is doing anything. That's not strictly true, but that was the frame we used.

To come back, one of the reasons the primary sector is showing up as it is is because a lot of that product is exported and there are no processing fees on it. Another reason is that a lot of the services are provided in some sectors at the primary level. Your seed potatoes are inspected. Those are the two primary reasons, really.

Mr. Murray Calder: Well, let's jump into this. You're talking about the potato producers—and I realize what I'm going to say here is basically comparing apples and oranges, but I want to do it anyway. You've got potato producers right now whose operating margins have been reduced by about $1,558—licensing fees, etc.—and you have grain producers who have had their margins reduced by only $620. I guess the reason is, first of all, what you've already said. But if these trends continue the way they are right now, wouldn't you say it would be putting the potato industry here in Canada in jeopardy?

Mr. Brian Paddock: I think the first thing is that this is not a trend. The program review came in, these fees were imposed, and I don't see a big trend in them. There was more or less a one-shot change. There may be adjustments afterward. I don't think that's quite the right frame, but nevertheless....

Secondly, sure, any fees tend to reduce the competitiveness. I would also point out, I suppose, that as a result of these fees.... Again, I'm not here to defend the policy, but fees do provide an incentive to find other ways of doing things. I know there are already discussions with the potato people to find different ways of providing this.

The fact of the matter is that for seed potatoes in particular, you have to have an individual walk through the fields several times a year. They're consuming a lot of service. It costs. Now, whether or not the taxpayer should be paying to have people walk through people's fields to inspect them so they can sell seed potatoes is a policy question. Part of the reason certain sectors show up higher here is that they consume a lot of services. As I say, what you do about that is a policy question. But they're different.

Mr. Murray Calder: Okay. One of the witnesses that have appeared in front of this committee a lot is PMRA. I hold a stakeholders meeting down at Guelph every year at the OAC, where we find out what's wrong within the industry. I'll just run you through this right now. PMRA, for instance, is an arm of the government. With that it sets its fees and it evaluates its cost of recovery. They're not competing against anybody at all.

I see this as a problem, because the only way we can hold their feet to the fire to make sure they're not setting their fees too high, which will put my vegetable producers or anybody who is cropping out there in jeopardy, is through the process of vote netting, through treasury. I still have a problem with this, because how do we find out they're as efficient as they possibly can be if they're not competing, if there is no competition? How do we correct that problem? Or is it a problem?

Mr. Brian Paddock: I think it is a problem. I think it's obvious that in areas where there is some sort of competition, even the clients tend to be more accepting of fees. And that's not saying they're necessarily lower. Perhaps they are, but they see the alternatives. So clearly a lot of the objection comes in areas where there is no alternate supplier of the service.

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I would point out—and again I'm coming back to defending a policy, which wasn't my primary intent—that the fact that you do cost recovery is an incentive for people to find other ways.

I don't know how you do it in drug registration—that's a difficult question—and clearly the PMRA has its challenges, but where it's possible, charging cost recovery fees provides an incentive. If a government body is fully paid for by the taxpayer, there's no way that another supplier can come in and say, “I think we can do a better job.” You can't compete with a zero price.

Mr. Murray Calder: Brian, you say you don't know how you do it. I'll throw an idea out to you.

The Chairman: You don't have much time, Murray.

Mr. Murray Calder: It will be a quick idea, then. And I'd love to have asked him a few questions about supply management, too. I'm a chicken farmer in my other life.

But you said you don't know how you do this. How about this for an idea: Would it be possible for us, or do you think it would be worth while for us, if we established an arm's-length body, something like the Auditor General, for instance—

The Chairman: CRTC.

Mr. Murray Calder: —to evaluate how these agencies run themselves, or something along that line?

Mr. Brian Paddock: Tom has another point. But I would point out that the Auditor General is looking at that now and I'm sure he'll have some things to say.

The Chairman: It's a good idea, it's a short one, and it's a policy question, and these guys are information providers.

Mr. Proctor, five minutes.

Mr. Dick Proctor (Palliser, NDP): Thanks very much, Mr. Chair.

Welcome. I noted that the report was written and the date on the cover sheet says September 1998, and here we are eight months later. Is there a reason why it took eight months to give us the benefit of this analysis?

Mr. Brian Paddock: It takes times to get things through a bureaucracy is the short answer.

The one thing I can tell you is we did not go through a lot of re-editing within the department to make it acceptable. We had a lot of discussions with our advisory committee, but these things have to be approved through a process, and that's the sole reason.

Mr. Dick Proctor: Did you look at the rationale for the higher fees on cost recovery in the first place? For example, did you ascertain whether it was the deficit that resulted in increased costs, or if it was our international trade obligations? Did you look at that at all in this analysis?

Mr. Brian Paddock: No. Regardless of why the fees were in place, we just took them and said here's the impact of them. And whether they were there because someone had a whim, or because we had a treaty obligation, or whatever...no.

Mr. Dick Proctor: As you know, I think while this study was underway there has been a moratorium on any increases in cost recovery fees, and you said earlier that you haven't met to discuss this with the Minister of Agriculture. But if he asked you for a recommendation as to whether fees should go up or down, what would you tell him?

Mr. Brian Paddock: Mr. Chairman, I don't think this is a question.... What I would tell the minister?

Mr. Dick Proctor: Yes.

Mr. Brian Paddock: I don't know, and I don't think that's—

Mr. Dick Proctor: In terms of what happens now, you don't have a position. It's a government....

Mr. Brian Paddock: Part of it has already been taken up by some of the individual agencies. The Grain Commission is doing a very extensive review, and this is information for the various agencies to do some things. There will also be some discussions. Again, I would suggest you pose this question to the minister when he appears to you in two weeks' time.

Mr. Dick Proctor: Okay.

My tongue-in-cheek question is, since the primary beneficiaries of this, according to you, is the industry itself, are you going to be sending them a bill for the study?

Mr. Brian Paddock: No.

Mr. Dick Proctor: Thanks.

The Chairman: Thank you.

Mr. McGuire.

Mr. Joe McGuire: Thank you, Mr. Chairman.

In addition to Mr. Calder's question or observation that the potato industry is paying basically a 30% rate operating margin, as compared to 10% for grain, recently—I think last month—the potato industry came out with a study in which they claim that the fees paid by the P.E.I. potato industry during the 1996-97 fiscal year for table stock inspection and that certification services represented approximately 25% of the fees collected by CFIA for inspection of all fresh produce in the entire country. When you're looking at new ways to address the concerns of the potato industry in this country, what kinds of policy suggestions are you making to respond to these seemingly exorbitant costs to especially the seed industry in P.E.I., or in Nova Scotia or in Alberta?

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Basically the effects of these fees are driving people out of the seed industry into processing because it's too costly to stay in seed. You're having a direct impact on farmers' choices of what they'll grow, based on cost recovery fees. Was that the intention, or is that just a by-product of applying these willy-nilly? How can that structure be readjusted or equalized as compared to fees paid by other industries?

Mr. Brian Paddock: I haven't seen the report that you're referring to, and I'd be pleased to look at it, if you could share it.

Mr. Joe McGuire: Sure.

Mr. Brian Paddock: All I'd say is that one of the effects of cost recovery is to make the sector aware of the costs of doing their business, and part of that is the cost of government services. It's an open question. If the costs of providing service to seed producers are so high it makes that business uneconomic relative to processing, there are some people who would say they should be in processing, because it takes more resources to produce seed. The market return, once you consider all the costs, is less than processing, so some people would say we should be doing the processing.

Mr. Joe McGuire: But you're making them go to processing. You're saying that they have to—

Mr. Brian Paddock: Well, I'm saying—

Mr. Joe McGuire: —actually walk through the fields a couple of times a year. They're walking through the fields now a couple of times a week, because the inspection services or the certification services on processing potatoes are a lot lower, therefore there are a lot more viruses and diseases that are going from processing fields across the hedge into seed potato fields, which is making the seed potato growers have these roguers out there at least twice a week. It really accelerated the costs of operating a seed farm, because there are more and more people going into processing and it's killing the seed industry. And all this basically started when the cost recovery fees were put on the industry.

Mr. Brian Paddock: I'm a prairie boy, and we did have a few potatoes, but not many. But it sounds to me as if—

Mr. Joe McGuire: You're getting a lot more now, because P.E.I., for example, is getting fewer seed potatoes and Alberta is getting more. Prairie boy or not, you're getting the benefit of the industry.

Mr. Brian Paddock: It sounds to me as if there's an interdependency of disease between the processing and the seed side, and it could be looked at as to who's paying. There are benefits flowing both ways, it sounds like, and it's not as simple as just inspecting seed. It's something that perhaps should be looked at.

The Chairman: Okay, Joe. Thanks.

Mr. Joe McGuire: Can I have another question?

The Chairman: I'm sorry, you have time for one more, yes.

Mr. Joe McGuire: I was wondering about the Alliance of Manufacturers & Exporters Canada's study as compared to yours. Have you made a comparison between the two?

Mr. Brian Paddock: Actually, the section they had dealing with agriculture is really quite short and it's quite unclear what they mean. They make one reference to failing the common sense test, which they don't elaborate on but which I presume has to do with the result I explained earlier on the feed industry, where you have balancing fees on grain versus fees on feed manufacturers. I prefer not to do an overall assessment of their study. If there are specific questions they raise that you'd like me to elaborate on, I'd be very happy to do that.

Mr. Joe McGuire: It's serious enough that they banded together to form this association to fight user fees, not only in agriculture but right across the board. I wondered about what the impact, if it's coast guard fees or potato inspection fees.... Are there any numbers, or are their concerns justified in comparison to what you've uncovered in your study about the impact?

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Mr. Brian Paddock: Well no. The framework we used is actually quite close to the one they prescribe. They have a chart in their study that is quite elaborate. But when we looked at it closely, what we did was pretty close, except that we didn't look at the impacts on investment. We wanted to keep our study relatively simple so that people could relate to it. If you look at their framework and ours, we did trace through the impacts on markets and what not. We didn't go down to the detail of product lines, quite simply because the data aren't available. We can't even tell the difference, quite frankly, between a....

Statistics Canada publishes data on meat processing. They don't publish it on pork or beef; you have to try to tease it out of there. There's no way you're going to go down to individual product lines and look at the impact on decisions to market or not market a product. So we kept it up a level, and they would advocate going further and further down. Ours was at a more aggregate level and we did not look at the impacts of investment. But overall, our study conformed relatively well to the framework they prescribe.

The Chairman: Thank you.

We'll go to Mr. Murray, followed by Mr. Hoeppner, Mrs. Ur, and then Madam Alarie.

Ian.

Mr. Ian Murray (Lanark—Carleton, Lib.): Thank you, Mr. Chairman. I'd like to look at how the money circulates. When someone pays user fees, do they write a cheque to the Receiver General for Canada, and does that money go into a central pot or does it go individually to each department that is recovering costs?

Mr. Brian Paddock: In general, it goes to the agency involved. When inspection fees on grain are paid, they're paid to the Grain Commission. They have a revolving fund; it doesn't go the the Receiver General. The same thing is true for CFIA, and I presume for NISA as well. Those are earmarked fees. They don't go into the general revenue.

Mr. Ian Murray: Okay. Would some of the departments—for example, Industry Canada, Transport, or Foreign Affairs—have fees paid to them? How does that work?

Mr. Brian Paddock: I don't know.

Mr. Ian Murray: Okay.

Mr. Brian Paddock: My suspicion is that any place where it's a significant activity, it's isolated. But there are other areas where it's a relatively minor thing.

Mr. Ian Murray: Now, am I wrong when I assume—let's look at individual farmers—that they can deduct the cost of these fees from their income taxes?

Mr. Brian Paddock: Yes. In a lot of cases they will never actually pay the fee; it's in the price. In the case of potatoes, yes, I presume that an inspection fee would be tax deductible. In the case of grain, it comes back as a lower price of grain. So either way, it's deductible.

Mr. Ian Murray: I'm just trying to get at the real impact on the individual of paying these fees. We're talking about $137 million in fees for 1997-98, and I'm looking at the—

Mr. Brian Paddock: That's pre-tax.

Mr. Ian Murray: That's pre-tax. I'm trying to figure out what the cost is in lost revenue, what tax expenses are there by the federal government for the deductions for these fees versus the amount of money coming into various agencies that pay these fees. And I guess it comes down to....

The Chairman: In other words, the federal government nets. You collect $137 million, and it's all written off by the payers. So the net income to the federal government might be quite—

Mr. Ian Murray: It might be far less. Therefore, it then raises the question of why we have user fees at all, if the cost is negligible. I don't know the answer to that. I don't know if you have any idea what the figures would be, but it sounds as if there's an awful lot of turmoil here because of user fees, and maybe it was a wrong-headed policy to begin with.

I'm not making a statement there—

Mr. Brian Paddock: No, no, it's okay.

Mr. Ian Murray: —I'm asking a question.

Mr. Brian Paddock: I'll try not to pass judgment on the study, but we did describe that a little bit, and ultimately, if there's a service, it has to be paid for. Now, it's a policy decision to some extent, whether taxpayers should pay for it or whether the people who actually use the service should pay for it. Those are legitimate questions. The Alliance of Manufacturers & Exporters did a piece, and they came up with an estimate. The trouble was they didn't look at where the money would have to come from if it didn't come in the form of user fees. They just basically assumed it was there. And I don't think that's quite the right question. It's good analysis, but the wrong question.

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But you're right, ultimately you have to raise the fee to inspect potatoes, inspect grain, or inspect a meat processing plant. Someone has to pay for it. And the question is whether the taxpayer should pay it all or whether the people who use the service should pay a portion of it. In most cases the policy isn't a cost recovery of 100%; it's considerably less than that.

Mr. Ian Murray: I would argue that the consumer should pay for it, because it's part of the cost of doing business. Therefore, if you're going to have these fees, they should be included eventually—as they are, in part—in the end price of the product. That's the way normal inputs are passed along when you're engaged in any kind of business.

Mr. Brian Paddock: What we're arguing is that in fact part of that does happen through the marketplace. Regardless of who actually writes the cheque, in our estimate about 25% gets passed on to either the consumer or the foreign buyer, and that's the way the marketplace works.

If you tack on an additional tax on food, that will move elsewhere in the system, so it's unlikely that ultimately the consumer will pay for all of it. It will move around.

Mr. Ian Murray: If I have time for one more quick question, are you aware if any of the agencies that recover these fees actually budget for them? We see, on page 12, the total cost recovery fees, and the amounts increasing over time from $110 million to $137 million. Therefore, if you're one of the agencies that is involved in cost recovery, is this seen as found money, perhaps, that you wouldn't otherwise have? And is there, therefore, maybe an incentive for the inspector to walk through the seed potato fields a couple of times extra each year to increase the...? I'm being quite facetious here. Do they see this as a way of raising funds for their agencies?

Mr. Brian Paddock: We didn't look at this, but I think you'd be hard pressed to find an example of that.

Mr. Ian Murray: Okay. Thanks very much.

The Chairman: Mr. Hoeppner.

Mr. Jake Hoeppner: Thank you, Mr. Chairman.

I'm going to go back to the meat grading issue. A lot of it is done by the industry themselves now, as far as grading the carcass is concerned. That is recovered by the processing plant, as far as I gather. I see there is still 30% that is cost recovery. Is that due to health inspection more than the grading system itself? That's the chart on page 14.

Mr. Brian Paddock: Okay, if it's the—

Mr. Jake Hoeppner: The Canadian Food Inspection Agency is still 30%—

Mr. Brian Paddock: It's a mixture of inspections of processing facilities to ensure they meet the standards for health and safety. There still are some commodities where they do some grading. They actually have graders in the facilities, and yes, it moves around. It used to be beef grading, but the industry there took over the service themselves.

Mr. Jake Hoeppner: So they're paying for that portion of the grading.

Mr. Brian Paddock: Yes, they provide it themselves.

Mr. Jake Hoeppner: So that is not included in this 30%, then.

Mr. Brian Paddock: It's not included in this. This was looking strictly at the fees. When we looked at the impact analysis, we added back in those services that had been pushed to the private sector. The reason was because in some sense, that's an outcome of the policy of cost recovery, and we thought you shouldn't leave that on the side.

As I said, there was meat grading, and there were some transport fees privatized, and there were some potato laboratory fees privatized. We just felt that this was part of the impact. It's an outcome of the practice of charging, so we should add it back in. In the final analysis, the numbers would have been slightly lower had we excluded them, but not hugely.

Mr. Jake Hoeppner: That brings me to the other question on the Canadian Grain Commission. I see that's about 46% of the costs. I know their budgets are usually 92% recovered from the farmer. I've even seen one surplus year, I think, when there was more income than expenses.

Now, when we export our grain, especially into the U.S., they will not buy it on our grading system; they will regrade it. Do we need this grain commission at all? I sometimes get very discouraged with that system, and I've said in this committee that I'd fire the whole gang and let industry grade it themselves, because we're doing it with the canola and with the special crops. It's a tremendous cost, when you see 1.5% of $6 billion.

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Mr. Brian Paddock: It is costly. Most of the sector tends to believe it's worth the value. I'm not sure that canola is treated...canola is graded as part of that system. I'm not sure why you would suggest—

Mr. Jake Hoeppner: The companies grade it themselves.

Mr. Brian Paddock: But there are inspections at the terminals and the weighing. Those services are provided for all the grains for which the Grain Commission has a mandate, including canola. Companies do the grading on wheat too.

Mr. Jake Hoeppner: Yes, I know. But it's to their benefit, right?

Mr. Brian Paddock: Yes.

Mr. Jake Hoeppner: Why do we farmers have to pay for it? That's what I'm saying, because when you sell it to the U.S., no matter what kind of grade the Grain Commission puts on it, they won't buy it on that basis.

Mr. Brian Paddock: It probably sounds like I'm using this as an escape hatch too often, but that is a policy question.

The Chairman: You shouldn't be expected to answer it.

Mr. Jake Hoeppner: But it should be pointed out in your study that these are issues—impact. What good is your study if we can't analyse it enough to say whether this policy is right or not? Why did you do it if it's not supposed to point, outside policy, to whether it's good policy or bad policy?

Mr. Brian Paddock: My guess is that the very questions you're raising are being addressed in the Grain Commission review now.

Mr. Jake Hoeppner: I hope so. Will you keep your finger on it to see if it happens?

Mr. Brian Paddock: I'm sure you will.

Mr. Jake Hoeppner: Thank you.

The Chairman: Thanks, Jake.

Rose-Marie.

Mrs. Rose-Marie Ur (Lambton—Kent—Middlesex, Lib.): Thank you, Mr. Chairman.

We keep hearing “Well, that's policy”. Are you not with the policy branch?

Mr. Brian Paddock: Yes.

Mrs. Rose-Marie Ur: I'm confused.

Mr. Brian Paddock: Yes, I'm with policy branch.

Mrs. Rose-Marie Ur: But then you say that's policy.

Mr. Brian Paddock: The purpose of the study was to estimate what the impacts of this policy were. We didn't go back and ask if Treasury Board had a good policy here. It wasn't what we were trying to do.

Mrs. Rose-Marie Ur: That's fine.

Just to go on further from my colleague Mr. Proctor, that was September 1998 and I believe we're in April 1999, seven or eight months later. How many people worked on this report and what did it cost?

Mr. Brian Paddock: One person worked on it probably about 80% of their time. It probably took about 30% of my time just running the process. We had probably two other people who worked on it 20% of their time. Overall, probably close to two people worked on it—

The Chairman: How many months did they work on it?

Mr. Brian Paddock: —for a year.

Mrs. Rose-Marie Ur: What was the cost to put that report out?

Mr. Brian Paddock: We used all internal departmental resources. The salaries were about $200,000.

Mrs. Rose-Marie Ur: Okay. I was a farmer in a previous life, and farmers don't have eight months to get their acts together. Either they do it now or they don't have a farm to run. So I have a little bit of a problem with that.

You stated that you were summoned to do this. You heard a lot of stories and you had to lay a basis for discussion. You were fact-finding. With all this in mind and all the information you've gathered, what consensus have you come up with? Have you found a mechanism or an idea that would change what is happening with cost recovery?

Obviously we have a major problem here, when the primary producer has to pay 67% to process their 11%. You stated that the smaller facilities got hit every bit as hard as the larger facilities. This is a slippery slope for small producers here again. They are being pushed out of business by some of the fees that have been put upon them.

You say you want these people to be aware of the cost of services. I can assure you these people know the cost of services, but they seem to be held at bay to pay the services, with no avenue for recovering those dollars.

You can't stay in business long when you have to pick up 67% of the tab, no matter what kind of mathematician you are. How can we improve this if you've collected all these facts?

Mr. Brian Paddock: One of the ways you're going to improve it is to find alternate ways of deriving this service at lower cost. The beef industry found a way. They basically said the price was too high, so they would do it themselves. They would never have done that if it had been provided for free. The potato producers, as I understand it, are looking at alternate ways of doing lab testing because they find the fees too high. I can guarantee you they would never have done that if they had been free.

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Mrs. Rose-Marie Ur: But they still have to do the inspection and the fees are there, so what's the difference with the fees they're doing now on their own? Who's making the money now?

Mr. Brian Paddock: If you're referring to the beef industry, which was paying the grading fees before, our study suggests most of those end up being paid by the producer. If you find a cheaper way to do your grading, most of the benefit will go back to the producer.

Grading is basically a way of communicating the quality of your product to the consumer. It's up to the producers, in some sense, to decide how much they are willing to spend on that kind of activity. How elaborate a system do I want? Do I want a Cadillac or a Chevrolet? If you give people a Cadillac for the same price as a Chevrolet, you know what they're going to choose.

Mrs. Rose-Marie Ur: But here again, the primary producer is held at bay to make sure they follow all the inspections. I totally agree with it on, say, food. But it's not only the primary producer that's benefiting from this; it's the consumer. I don't think the basis is shared evenly, because it always hits the primary producer.

Mr. Brian Paddock: That's not true. The fees for field inspection are a producer issue. The fees for inspecting a meat slaughtering plant do do not get passed back to the producer, they end up being paid by the meat processor.

Mrs. Rose-Marie Ur: Well, 11% or 8%.

Mr. Brian Paddock: Okay, but that's proportional to the amount of fees that are actually levied there. Overall, those fees are not a big part of the fee structure in the first place.

Mrs. Rose-Marie Ur: But they can pass it on.

Mr. Brian Paddock: No. Our analysis suggests that's not true. Our analysis suggests the meat processing plant cannot pass it back because the producer will just export their product. If the domestic slaughter plant is not prepared to pay the price, they go south.

Mrs. Rose-Marie Ur: Regarding finding another agency, where is the competition for these agencies to be set up?

Mr. Brian Paddock: It really depends on the particular case. In the case of fees for basically quality assurance, the industry is free to set up other mechanisms.

Mrs. Rose-Marie Ur: Other mechanisms includes what?

Mr. Brian Paddock: Cheese, for example, is now inspected by an industry association. They set up an alternate way of doing it. The same is true of beef. It's more complicated, clearly, when you deal with inspecting a meat processing plant. This isn't quality assurance; there are health standards involved. But in a lot of cases, the industry itself has a lot to say about when and how you have other ways of doing things.

The Chairman: I think Mrs. Ur's questions indicate that we need a true study of policy, whether it's working, and whether it's unfair to the consumer, the producer, taxpayers or whomever. It seems to me, Brian, when it comes to applying recovery costs of one kind or another, basically it's just a reality check. I can understand where Rose-Marie is coming from, because she wants to not only represent but protect her primary producers in the constituency she represents.

But true recovery costs are a reality check that says, this is the true cost of doing business. Then I guess it's up to the company or the persons providing the service whether it's worth it or not. If we constantly mask our true expenses in providing a service, where does that lead us? It leads us to providing a service that perhaps should be altered or just eliminated. I think that's one of the reasons we try to have an open market system and a system whereby we can respond to signals of one kind or another.

I think in the old days we did too much almost covering up. “Oh well, that's an irritant and that's going to make business a little bit more difficult, so we'll just get government to pay for it, or the taxpayer”. I don't think that's a good system. I know sometimes these reality checks can be uncomfortable, but they're necessary. These are policy questions.

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The other thing too is that government so often finds itself in a conflicting situation. It's not only a regulator, but it's also a service provider. Government is put into that uncomfortable position of saying you're going to do that because I'm your regulator, and by the way, I provide the service and this is the price you're going to pay. It could be in agriculture; it could be in providing a service in passports. You must have a passport, and, by golly, this is what you're going to pay. It's not easy.

Madame Alarie.

[Translation]

Mrs. Hélène Alarie: This discussion makes me think of all kinds of different views. Although you are talking about actual costs, it might not be a very good way of saying it. They are actual costs based on the analysis that is being made today when there is no competition for those agencies. Those actual costs are almost abstract because, if there was competition, they would perhaps decrease significantly in favor of the users. This was my first comment.

My second one would be to tell you candidly that it beats me when you talk about Cadillac and Chevrolet. We are an exporting country that wants to increase its exports and, to that end, we must have the Cadillac to be able to compete with other countries on the world market. Even if they are footing 8% of the bill, the processors I met at the beginning of the week told me that they are not well served by government agencies because they will not be able, in the coming years, to compete with other countries if the situation does not change. When they ask the agencies why they do not proceed more quickly for a given activity or why they are not offering such and such service, the answer is: because of cost recovery, we do not have any leeway. Has the department established a resolution mechanism for complaints from stakeholders in such instances?

[English]

Mr. Brian Paddock: I'll deal with the first three remarks. Tom can talk about dispute resolution, if he'd like.

With respect to real costs, costs are costs. It doesn't matter whether you have a competitive system or not; costs are costs. Maybe they could be lower in a competitive system, and I won't deny that. The question then becomes, who pays them? Cost recovery says the users are going to pay part of them. But I don't think one can say, well, what are real costs? The fact is, someone pays. It could be the taxpayer, it could be the consumer, or it could be the user.

With respect to your comment on a Cadillac system, I guess the question is this. Is your consumer willing to pay for a Cadillac product? In some cases that's true, in which case the producer will soon find out that, yes, he wants a Cadillac. In other cases, the producer may say, no, my consumer is only willing to pay for a Chevrolet and that's what I want. If I'm paying for a Cadillac and my consumer only wants a Chevy, then I have a problem. That's part of the dialogue between the producer and the consumer: what kind of product do you want? In some cases it's a Cadillac and in other cases it's not.

In terms of your remark about the dialogue between the agency and the transformateurs, I think the essence of that one really is that that remark, that dialogue, would never have happened if it wasn't for cost recovery. In other words, when you're getting the service for free, it's probably a pretty good service. When you start having to pay for it, then you start saying, “Well, I want something better; I'm paying for this.” That's one of the functions of cost recovery, to make people take a close look at the service and ask, “Is this the service I want? You're not providing me with this. I want something different.”

Yes, cost recovery is an irritating thing—no one likes it—but it does bring the picture into focus, what the costs are, what the service is.

Anyway, I'll shorten it up because you may want to follow that.

[Translation]

That's it.

Mrs. Hélène Alarie: I'd also like you to answer my question concerning the complaint resolution mechanism.

[English]

Mr. Tom Richardson: Just to follow up on Brian's point about dispute resolution, we had a press release from Minister Massé, the President of the Treasury Board, and he suggested that where there were cost recovery issues, ministers should make sure that the dialogue or the process was open and fair. He encouraged ensuring that disputes were solved in an appropriate way.

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Obviously, we didn't do that in this study. We have so many different agencies, and everyone has their own way of dealing with that. When you or the industry think the process is not acceptable, then obviously that's an issue. In the case of NISA we have an advisory committee, and when it came to setting the fee, we went through a long process with industry, which challenged us, and I think we got the fee right with the industry.

As Brian said, there's always tension there and people wondering if the bureaucrats are padding the books, etc. I think, Brian, you're right, the Grain Commission is doing a review now. The CFIA has an advisory committee, and the minister asked them to take a look at their process. I think it's up to the system to make sure that the process for the resolution of fees is doing the job.

The Chairman: Thank you very much.

Mr. Calder.

Mr. Murray Calder: Thank you very much, Mr. Chairman.

I want to follow up on what Mrs. Ur was talking about. One of the things you said to her, Brian, was that fees are deducted, for instance, from the price of grain. The scenario would be that you have the gross price of grain and a fee that has been deducted from it. Basically the farmer is being paid a net price, but he wouldn't have known that the net price would be that plus the fee that was deducted. In your analysis of these different systems, is there any place where that has happened? That in fact would be a hidden tax the farmer has paid. It would be a situation where the farmer has no way of knowing the percentage of tax he is paying, because the fee was deducted before he was paid for his grain. Did that exist or does it exist?

Mr. Brian Paddock: It has been a while since I've sold grain, but I believe the cash ticket actually includes on it—this is for the Wheat Board one—the gross price, in-store Thunder Bay, weighing, and inspection. It has details of the costs going back, and then what he gets at his local elevator.

Mr. Murray Calder: Does the farmer see that?

Mr. Brian Paddock: I believe so, yes.

Mr. Murray Calder: Okay. Maybe Jake, who is more involved in this than I am, has a comment.

Mr. Jake Hoeppner: I don't think it tells you what the costs are for the Grain Commission. It just says handling, cleaning, and shipping costs. It's very general.

Mr. Brian Paddock: If it's not on the ticket, it's posted in each elevator office.

Mr. Jake Hoeppner: Yes, it could be. I wouldn't want to argue about that.

Mr. Brian Paddock: You're right that it doesn't say this is for the Grain Commission and this is for somebody else.

The Chairman: But if somebody wanted to find out, it wouldn't be that difficult.

Mr. Brian Paddock: No.

Mr. Murray Calder: So that situation wouldn't exist.

Mr. Brian Paddock: When it comes to Ontario, I don't know what people actually get when they deliver some grain to an elevator. But I think the Grain Commission stuff is there. It may not be labelled Grain Commission.

The Chairman: Jake.

Mr. Jake Hoeppner: Thank you, Mr. Chairman.

I just want to continue with that a bit. I don't think the farmer objects too much to the cost of the Canadian Grain Commission. What they object to in the job they're doing is not harmonizing it with the demand, and we're losing a tremendous amount of value by that. What we're grading as feed wheat can grade as a number 1 or 2 U.S. spring hard wheat, and we lose $1 or $1.50 a bushel, if not more. The line is very thin between a number 3 Canada western spring and a feed wheat. That's where we have to improve our grading system.

The other thing I was going to mention, which Mr. Harvard brought up, is that we have tremendous talent here. We have the acting assistant deputy minister of the policy branch and the acting director general of economic and policy analysis. Would we be able to draw on that experience and get some real feedback on what you think of these policies, or is that just for the minister's investigation or input?

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The Chairman: You don't have to answer that.

Mr. Jake Hoeppner: I'd like to see you appear before our committee someday and allow us to really draw on your expertise as to the pros and the cons of some of these policies.

Mr. Brian Paddock: You can pose that to the minister.

The Chairman: Is that all, Jake?

Mr. Jake Hoeppner: Yes, that's all, Mr. Harvard. I think you know what I'm getting at, and I think it would be very beneficial for us.

The Chairman: The thing is that, of course, civil servants have advice, but it has to be given in private. If you didn't like it, you'd be the first one to stomp all over them, and they have to be free to give advice.

Mr. Jake Hoeppner: Try me, just try me.

The Chairman: I happen to believe that's how the system works and that's the way it should work. We have to leave people like this in an unfettered position to give advice as freely as possible, because if they gave advice that appeared in public and was very controversial, they'd get kicked in the teeth.

So we're here to protect you a little bit.

Did you want to say something, Rose-Marie, by the way?

Mrs. Rose-Marie Ur: No.

The Chairman: In closing, I think we've come to a point where we all agree that cost recovery in principle or as a concept is the right way to go. We're always going to face this issue, though, of where you draw the line between private interest and public interest. Even at that, when you do provide a service, especially government, and there is no competition because sometimes that's the nature of government, there is the issue of whether the cost of providing the service is really acceptable or proper. In the kind of system we live in, we tend to accept a more competitive model where if there is competition for a service, we will sometimes look for a service that is the cheapest.

Anyway, I think we've had a pretty good go this morning, and I really want to say thank you to you. We welcome your appearance, and I'm sure we will have an encounter like this again.

Madam Alarie, you want to say something.

[Translation]

Mrs. Hélène Alarie: Mr. Chairman, given the discussions we had this morning, would it be possible for our committee to recommend that this study be pursued further, that there be a second phase, so that we have a cost/benefit analysis and know the impact of that on the market, sector by sector?

[English]

Mr. Joe McGuire: The Auditor General is conducting a study now, which is supposed to be ready by September. Maybe the honourable member would like to see that study first before we go further.

The Chairman: What I was going to do, Joe, was bring to the attention of Madam Alarie a letter from this committee to Marcel Massé, the Treasury Board President, which is dated January 8, 1997, a little more than two years ago. This letter included a number of recommendations. One of the recommendations, in fact the last one, is that the Treasury Board conduct a global assessment of the accumulative effect of user fees on the agri-food sector. A number of recommendations were made not to these people but to the Treasury Board. The chairman of the committee in those days was a fellow by the name of Vanclief, who happens to be the minister.

Mr. Joe McGuire: His first name is Lyle.

The Chairman: Yes, his first name is Lyle. When Minister Vanclief comes before us, we might ask him if he has been speaking to his cabinet colleague, Mr. Massé, to determine whether Mr. Massé is indeed going to carry out some of these things. Is that fair?

Mrs. Hélène Alarie: Okay.

The Chairman: Thank you.

This meeting is over.