EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, November 26, 1996

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[English]

The Chairman: Order. Let us begin. I have a couple of quick announcements before we get too far down the road here, so to speak.

We are meeting tomorrow on future business of the committee. From 3:30 p.m. to 6 p.m. we will deal with clause-by-clause consideration of Bill C-43. It may not take us all that time but we thought we'd book it to make sure we can get through to the end of that.

Thursday morning we'll start at 10 a.m. on Bill C-58 to hear witnesses. The clerk tells me there are two witnesses. We'll accommodate the number we have, because we expect there'll be a couple more.

Monday at 3:30 p.m. we have Minister Eggleton coming in on TTT. We thought we would take advantage of that slot to have an in camera meeting on future business of the committee to finalize our last week or so of meetings as we try to finalize this report on TTT.

As well, next week we have Minister Martin and Minister Massé. Minister Manley has not confirmed at this point, but I anticipate he will confirm by the end of today, as well as a few other witnesses just to clean it up. Then we have to get down to the business of finalizing the report.

Dealing with all that meant that Warren Thomson could make his way through traffic and get here. Although I am told Gordon Thompson and Warren Thomson are not related, they travel in pairs all the time.

I will leave it to you to introduce yourselves. We have an hour for this presentation.

Mr. Gordon Thompson (Vice-President and Director, Newcourt Credit Group Inc.): Good morning. I think it's appropriate that Warren got stuck in a traffic jam this morning while coming to appear before the transportation committee.

At any rate, I'm glad you're here.

We never travel alone, particularly in Ottawa.

Mr. Chairman, I was delighted and somewhat concerned about coming here this morning in that I had the opportunity - or the pleasure, I should say - of introducing Reg Alcock to the audience of the Next City toll road conference last week. I wasn't particularly kind to him in my introductions.

Thank you for letting me off easy this morning, although we do have 45 minutes to go....

The Chairman: I speak last, so you have to be very careful.

Mr. Thompson: I'd like to begin by thanking the committee, particularly Mr. Alcock, for inviting us to address you today as part of your study on transportation, trade and tourism. Warren and I will try to keep our comments as brief as possible to allow plenty of time for questions and answers on some of the more difficult issues we'll touch on.

I think it would be appropriate for me to begin my remarks this morning with a little bit of an overview about Newcourt, but more particularly what non-bank lenders are, because that's important in the context of how public-private partnership financing actually happens in Canada. So while it may sound like a commercial, it's meant more to be an explanation of what role we can play in these transactions.

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The second thing I would like to do is to turn it over at some point to Warren, to talk specifically about some of the transactions we have been involved in, defining particularly the benefits and the risk shift that takes place in these transactions.

Newcourt Credit Group is a Canadian company with significant employee ownership: roughly 17%. It trades on both the Toronto Stock Exchange and the Montreal Exchange. In the past ten years Newcourt Credit Group has evolved to become one of North America's largest non-bank lending institutions. The company has 27 offices in the United States, Canada, and Europe, and affiliate offices in Barbados and Japan. It employs over 850 persons. The company's total market capitalization currently exceeds $1.2 billion and it has total owned and managed loans on its books of $6.3 billion.

The structure of Newcourt's activities is somewhat unique in the financial services industry. The company specializes in the origination of asset-based loans which it then sells to large institutional investors through syndication of large capital loans or the securitization of pools of much smaller loans.

Loan origination for 1996 will exceed $5.9 billion and is undertaken through two business units of Newcourt Credit Group, the first one being Newcourt Financial, which specializes in providing vendor-financed services and secured term asset-based financing, the second being the group Warren and I represent, which is Newcourt Capital, the company's specialized investment bank engaged in the provision of a variety of financing and advisory services for large capital acquisitions and infrastructure projects for institutional as well as corporate clients.

Newcourt's advantage stems from the company's unique structure as a non-bank lender and its expertise in understanding the assets being financed, the industry-specific financing needs of the borrowers, and the investment appetite for institutional investors.

At this point let me take a few minutes to describe to you what a non-bank lender is and why we are uniquely able to structure financing for public infrastructure projects.

As I alluded to earlier, non-bank lenders engage in specialized knowledge-based lending. Their competitive advantage stems from their expert knowledge of the assets being financed and of asset management. Therefore they make credit decisions based primarily on the asset being financed, thus requiring less in the way of additional security covenants and freeing up capacity for the borrower.

The most important defining factor for a non-bank is its source of funding. As I briefly mentioned earlier, non-banks finance their lending through funds supplied by institutional investors and capital markets, not by retail deposits. Consequently they're not subject to deposit insurance premiums, they have a lower cost of regulatory oversight, and they have greater transaction flexibility globally.

This source of funds also has has implications for the type of lending non-banks prefer. Unlike banks, which fund their financing through short-term retail deposits, the non-banks typically prefer longer-term financing to match the demand for longer-term assets by institutional investors and the capital markets, typically five to thirty years, as opposed to the banking structure, where it's zero to five years. It's then a natural fit, obviously, for capital infrastructure projects.

Non-banks such as Newcourt provide unique value-added through the assessment and the reallocation of risk associated with a particular financing transaction. Using a variety of credit enhancement techniques, non-banks specialize in unbundling the risks associated with a particular financing transaction and reallocating them, thus reducing the project risk borne by the borrower and at the same time creating investment-grade financial products for institutional investors.

This expertise in unbundling and allocating risk gives non-banks a unique ability to meet the emerging financing needs of governments through innovative structured debt financing for capital acquisitions and infrastructure projects, such as off-balance sheet and off-credit transactions, often important particularly in this current fiscal climate; sale and lease-back transactions; creditor-tenant lease transactions; and cross-border lease transactions. We'll touch on these later on in the presentation.

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Some recent examples of public sector infrastructure financing projects that have been undertaken by the Newcourt Credit Group include a $180 million transaction done with Canada Post, which was a lease financing transaction involving some transportation equipment as well as their technology processing centre. We are currently acting as the adviser to the Department of National Defence on the acquisition of the search and rescue helicopters. Newcourt participated in and led the $500 million sale lease-back transaction for Ontario's GO Transit system. We are currently the term debt financer on the Trans-Canada Highway in Nova Scotia, highway 104. We also provided the long-term debt financing for the Regina casino, and recently concluded a transaction with Public Works and Government Services on the 240 Sparks Street building.

I will now turn to my colleague, Warren Thomson, to provide a more detailed discussion on the benefits of private financing as well as the risk factors.

Mr. Warren Thomson (Vice-President and Director, Newcourt Credit Group Inc.): We are frequently referred to as Newcourt's ``Thompson twins'', but we have two distinguishing features: he actually has a ``p'' in his name and I don't, and I've got the hair.

What I'd like to do is provide you with some insight into the benefits associated with private placement financing for public transportation infrastructure. As an example, I will cite from Newcourt's experience in providing private placement debt for the Trans-Canada upgrade in Nova Scotia, known as the highway 104 western alignment project. I understand that Minister Downe, the transportation minister for Nova Scotia, was in to speak to you, so I won't talk a lot about the overall project. I'll focus simply on the debt aspects.

The benefits of private placement debt financing must be considered from a variety of perspectives. If you do a direct comparison of coupon rates for a straight public issue and a private placement debt offering, you'll generally find that the private placement debt offering has a higher coupon. However, there may be many ancillary benefits that must be assessed to determine which is the better type of financing.

Newcourt has a unique advantage in lending to infrastructure projects. Through its expertise in underwriting, its relationship with institutional investors and its understanding of the financial appetite of these potential investors, Newcourt is able to bring the certainty of funds to the table in the form of a bought deal. This transfers the placement or syndication risk to Newcourt. This upfront funding helps to ensure construction completion in the shortest possible time and eliminates the need for interim bridge financing or hedges to eliminate the interest rate volatility risk.

Perhaps the most important benefit of a true public-private partnership is the ability to structure the partnership in a way that allows for true risk sharing. Through the unbundling of risks associated with a project and our efficient allocation to the partners who are best able to absorb those risks, the project becomes a true partnership that builds on the expertise and protects the interests of each partner.

This is particularly important for governments facing severe constraints in their capacity to take on new debt. Through private financing structures, the government is able to fund to achieve non-recourse financing that is both off balance sheet and off credit to the government. That does not increase the government's debt, which might have an adverse effect on its credit rating.

At this point let me take a few minutes to explain what we mean by off balance sheet and off credit. Accounting disclosure requirements are set out in the CICA and determine when financing is considered to be on or off balance sheet. This is really whether or not the lender is at risk on repayment. If the financing is on balance sheet, it is also on credit. If it is considered off balance sheet, it still may be on credit - i.e., if there are contingent liabilities. If it's truly off balance sheet, then it will be off credit and will produce a credit rating advantage.

In structuring debt deals, the government really must confer with rating agencies such as Moody's and Standard and Poor's to ensure that the objectives related there are to be achieved.

When the financing is considered off credit to the government, the credit rating is based primarily on the project, the assessment of risks inherent therein, and the effective mitigation and allocation of the risks. The key concern becomes the efficient unbundling and allocation of risks associated with the project. This is an area where non-bank lenders such as Newcourt have particular expertise.

The risks involved in any major transportation infrastructure project include both project-specific commercial risks and those associated with the general economic or political environment. Some project commercial risks would include design and construction risk, operation and maintenance risk, and demand or traffic risk. Economic risks include interest rate volatility, inflation and placement. Political risks are generally associated with a change in government, a change in legislation affecting the project, or a change in attitude of a given government.

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In negotiations to allocate or mitigate these risks, the key question to be considered is if the compensation is appropriate vis-à-vis the risk allocation. Can the risk be cost-effectively protected by insurance? Finally, can the risk be mitigated by further structuring? The key is to ensure that the risks associated with the project are appropriately assessed and allocated for the party best able to manage that risk.

There are several means of mitigating and allocating project-specific commercial risks. This can be done through fixed-price, date-certain, turnkey construction contracts negotiated at the beginning of a project. The risks associated with design and construction can be allocated to the private sector construction partner. The constructor is obviously intimate with the risks and rewards inherent in those activities and as a consequence is in the best position to assume those risks.

Similarly, fixed-price operations and maintenance agreements can mitigate operation and maintenance risk. In the case of highway 104, these risks were allocated to the constructor operating partner, Atlantic Highways Corporation, AHC, which is a consortium of four large engineering and construction companies.

Demand risk, also referred to as traffic risk, is the risk that there will be insufficient revenue from the road to service the debt. It is essential that traffic risk be transferred to the private sector if the debt is to be non-recourse to the government.

In the case of low-usage infrastructure projects such as highway 104, the management of traffic risk was challenging. For the highway 104 project it was necessary to mitigate risks through covenants regarding the usage of both the existing road and the new road. These covenants had to be created in a way that did not result in traffic risk being transferred back to the province. The government agreed to enforce new regulations guaranteeing that it would impose a speed differential between the old road and the new road, that it would impose a requirement that all trucks use the new road with the exception of those on local pick-ups and deliveries, and that it would not substantially upgrade the existing road.

A key factor in the structuring of highway 104's debt was the government's desire to keep the real toll rates low throughout the thirty-year toll concession period. This could only be achieved through a tight matching of debt repayment and the revenues to be generated by the tolls.

This is an area where private placement debt was uniquely able to meet the financing needs of the project. The toll rates desired by the government were inadequate at forecasted traffic to meet the debt service requirements of a conventionally amortizing public debt issue. Newcourt was able to structure the debt repayment to precisely match the revenue stream. Interest accrues during the two-year construction phase of the project, followed by a ramp-up of payments during the next eight years, and the full amortization of the resulting principle and accrued interest over the final twenty years of the concession.

While the level of tolls was established by the government in the initial negotiations, the operator was granted some freedom to change the tolls within predetermined guidelines. These included a schedule of minimum fixed toll increases to take account of inflation and the establishment of a base debt service coverage test that could trigger toll increases if the revenues were not sufficient to cover the interest payments on the private sector debt.

The general risks I outlined earlier can generally be mitigated by or transferred to the private sector partner. Interest rate volatility can be mitigated through either the purchase of financial hedging projects or, as was the case for Highway 104, through the placement of long-term debt at the beginning of the project. Inflation can be managed through toll adjustment mechanisms. Placement risk can be managed, as mentioned earlier, through the bought-deal approach.

The risks that are ultimately borne by the government in the case of private financing for a public infrastructure project are those it is best able to control or absorb, namely, political and legal risks.

In this regard, if the Province of Nova Scotia changes any aspects related to our toll concession, the debt does become recoursed to the Province of Nova Scotia.

I'll now turn the discussion back to Gord.

Mr. Thompson: In conclusion, the key thing I wanted to say is that if there's any message we leave it's that in order to have a true partnership between public and private sectors, there must be a degree of risk sharing, and that means private financing.

If you take a look at the public-private partnerships that have been done in Canada to date, whether they are toll roads or water treatment facilities, and compare them with the U.K. or the U.S. experience, you will see that every one of the major public-private partnerships that have been done in Canada, like the P.E.I. bridge, the highway 407 toll road in Ontario and many others I could name, wound up with public sector financing.

There is no way you can have a true risk-sharing partnership if one party to the agreement has all the debt. When you analyse these structures, you will find that is the mistake that Canadian governments have made time and time again.

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If there's a message we have, it is that if government proceeds down the road to these public-private partnerships, you should ensure, so that the taxpayers of Canada are in a partnership where there is a fair and equal sharing of the risk, that there is private debt.

What I'd like to do now is entertain any question you may have about these transactions we've talked about or any of the points raised by Warren.

Thank you.

The Chairman: I thank both of you.

Mr. Crête.

[Translation]

Mr. Crête (Kamouraska - Rivière-du-Loup): Thank you for your presentation. It was very interesting and provides a new perspective or a wider perspective on a new way of financing infrastructure. It is an intriguing discussion.

You talked a lot about the four-lane highway in the Atlantic area, but some parts of the Transcanada Highway are in areas where traffic is not high enough for a divided highway.

Do you think your concept for private investment would fly in such an area? Should these projects be made part of a wider system and would it be more economically feasible? I would like you to elaborate on this. Is the question clear?

[English]

Mr. Thompson: That's a very good question. I apologize that my French is not good enough to respond to you and still make sense.

At the current time, the provinces that are showing the most interest in terms of creating these structures to bring the road systems up to date are, obviously, Nova Scotia and other parts of the Maritimes. We have had several meetings with the Province of British Columbia. They have particularly serious problems with their north-south transportation routes, less so on the east-west routes. They have major congestion in the Vancouver area. We've also had numerous discussions with the Province of Ontario.

Ontario has a slightly different situation. They have two particular problems now. One is that they have about $1.2-billion worth of debt on highway 407, which is the new piece of highway north of Toronto. The second problem they have is the 401 from the Quebec border virtually all the way to Windsor. It is a pothole-ridden, dangerous, terrible highway, given the traffic volumes that currently travel on that highway.

So those three provinces particularly are showing a great deal of interest in what we did on highway 104 in Nova Scotia.

The second part of your question, in terms of low traffic volume areas, I'll let Warren address. He's had some experience with the phantom and shadow toll concept.

The third point of your question was the cooperation question. As I said to your chairman some time ago, somehow we did manage to build a railroad right across Canada with the cooperation of every province. I think the situation in the major provinces now is such that the cooperation would be there. If the solution were found, the cooperation would be there.

We're not just addressing it from a jobs point of view, either. If you walk into the provinces and say it will create a great number of jobs rebuilding these highways, the real issue that seems to be important, particularly to British Columbians and the discussion out there, is the economic value of the road, period. It is not just a matter of short-term jobs but the long-term economic value.

[Translation]

Mr. Crête: Before Mr. Warren Thomson answers, I would like to clarify my question. I will give you a very concrete example. For example, the access road to New Brunswick through Quebec, which goes from the area of Rivière-du-Loup to Edmundston, is a two-lane highway. If there were private investment, would this not lead to a diversion of traffic through New England or elsewhere? Can we be sure this would not kill competitiveness? I am not trying to set a trap for you.

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[English]

Mr. Thomson: To address your question directly, the roads have to be competitively priced. To deal with the market risk and the demand risk, and to avoid a toll spiral, you really do have to assess the economic benefit. One of the key issues...and if you use highway 104 as an example of that, you had a low-traffic, relatively rural section of highway that needed to be upgraded predominantly for safety, not traffic-volume reasons. It had the highest fatality rate in the Atlantic provinces. Putting in a four-lane divided highway there was not a traffic-volume issue. It had 6,000 vehicles a day - 1,500 trucks, 4,500 cars.

The issue was that from a safety point of view the old two-lane undivided highway, with a number of grade access points, etc., was simply unsafe. We concluded that the new alignment was shorter. The new alignment, relative to the old highway, would save about ten kilometres. When we got the thirty-kilometre speed limit differential between the old highway and the new highway, which was also appropriate from a safety point of view, we were able to demonstrate that there was a 15- to 20-minute time saving, one way, for a truck. The combination of the time and fuel savings the new alignment provided had an economic value for a truck in the order of $10 to $12. That's the reason why the province was insisting on a toll, at the bottom end of the real benefit range, of $10 for a heavy truck. Similarly, for a car the benefit was viewed to be in the $3 to $4.50 range and the province wanted a real toll of $3 over the life of the road.

So we went in and we assessed it on the basis of economic benefit and pure pricing. We also demonstrated the ability to go into a relatively rural area. Just to put it in context, about 6,000 vehicles a day.... If you take highway 401 in Toronto, it has about 60,000 vehicles per hour. In 10 to 12 minutes on the 401 you have more vehicles flowing on it than you do on this road in a 24-hour span. Nonetheless, we were able to structure the debt so it wound up with an investment-grade rating, given the level of private debt that went into it.

It also demonstrates that you have to have a balance. That road was financed about 45% with public money and about 55% with private-sector debt. The advantage of putting the private-sector debt in and how that all worked was the road was built eight and a half years sooner, at about 30% total cost savings, and in the course of its life it will probably save in excess of fifty lives.

The Chairman: Mr. Gouk.

Mr. Gouk (Kootenay West - Revelstoke): Thank you, Mr. Chairman. I'll get mine in before the volatility starts. I sense some.

A couple of areas; first on toll highways being an alternative. I think in the right circumstances they are. I think the 104 is a good example, because you have an alternate. If people choose not to pay the toll and want to take a slower road or whatever, that option is available for them.

We have a road in British Columbia, a federal road, highway 1 through Rogers Pass. In terms of safety it probably makes the one you just replaced look like a carnival. Yet the concern I have is if the private sector goes in and does a major restructuring of that to make it infinitely safer, what is the alternate route? How do we get around the situation where we're taking an existing highway and putting private sector funding in there and saying you're now going to pay a toll for something that was already there and we don't have a viable alternate route for you?

Mr. Thompson: The experience we've had...and from Newcourt's point of view we try to manage the political risks that are associated with these projects, not always necessarily solve them. In participating in a number of discussions on this issue, because it's the notion of user fees and it's the notion and the structure behind not only the toll roads we do but also bridges and water treatment facilities and other public services....

The key issue where there isn't an alternative has to be the ability to show the public - and I brought a survey along for you, Mr. Chairman; it was done about a week ago - what the benefits are. If the question you're asked is, ``Will you pay a toll to drive the Rogers Pass?'', your answer will be no. But if you're asked, ``Will you pay a toll to drive the Rogers Pass and it will take less time and be a safer route?'', the answer starts to be yes for more people. If there isn't another alternative, then you're faced with that political decision.

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In British Columbia there's a toll to take the ferry to the island, as you know. There is no other alternative. For many bridges there are no other alternatives. But from a political point of view, the only way to sell it is the increased benefits of it.

Mr. Gouk: I want to shift gears a bit and look at another area. You said you specialize in asset-based loans, but when you talk in terms of a highway, you talk of using the cashflow as in fact that asset you would be basing it on.

Let's take, for example, the port of Halifax. They need tremendous infrastructure financing to get ready for post-Panamax development in, as I understand it, the magnitude of about half a billion dollars.

Would your organization be prepared to look at that, given that they obviously would be able to pledge anything they spend that money on as well as the property they own, their own property, their own fixed assets, plus their cashflow? Would that be the kind of security you would require to seriously look at that type of development?

Mr. Thomson: What we would be looking for typically is a contract that basically will be providing revenues over the life of the road and transactions such as our credit tenant-lease structure along the lines of what you're describing. Really what we're looking for is an occupancy agreement, a use agreement, with a high-quality credit - that is, you know the activity will occur there. As a matter of security, we will take a charge over the fixed assets - land, building, whatever - but we're fundamentally doing cashflow lending. We'd really be looking at securitizing the future service fees received from the ports.

So you'd look at it and say, what's the present value of the net future fees available from the port? Based on that stream, we'll look only to that stream, and taking a charge over the related assets, we can lend a principal sum of x, whatever that may be. You may find that if the port is economic and makes sense you frequently can get 100% of the funding through this type of financing arrangement, which is really securitized cashflow lending.

Mr. Thompson: In some senses, the asset actually comes through as secondary. If you look at 240 Sparks Street, for instance, having a long-term lease signed by the government to continue to occupy that building is worth more than the building, significantly more than the building. That's why that transaction, in fact, was done.

Mr. Gouk: You have billions within your parameters.

Mr. Thompson: That's absolutely right.

The Chairman: Perhaps I can ask a related question. In your Rogers Pass example, you talk about tolls. The payment mechanism...and we haven't had the Hambros Bank presentation yet, where they talk about the British history of these shadow tolls. There it's not people reaching in their pocket and putting a token into a basket and going down the road. There's a counting mechanism that gives a volume-related payment. Does a mechanism like that still allow the shift of risk you're talking about?

Mr. Thompson: Absolutely.

The Chairman: But from the perspective of the person driving down the road, they're just driving down the road, as they would be today.

Mr. Thomson: The shadow toll concept basically does use traffic counters. You go in and make an assessment as to utilization of the road. A shadow toll is most appropriate if the private sector is advocating that a particular road right of way would be desirable, and this would come in as a new alignment that's going to compete. You want to know that the public is in fact utilizing the road.

The shadow toll system works this way. If the public perceives a benefit from the road, utilizes it because of time-saving service enhancements, etc., then you in fact charge a toll. If you fail to meet the service standards, time efficiencies or whatever the road is supposed to deliver, people won't use your road. The private sector then takes the risk as to whether or not the road is in fact delivering the benefits.

While the payment still comes from the government out of effectively general revenues, you can also then earmark things, perhaps a special local improvement levy, that will go into a fund to actually ultimately pay the shadow toll.

So there is a variety of ways to get it through the overall tax system without an explicit toll-booth system. You're still counting traffic and the private sector is still taking the traffic risk.

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Mr. Gouk: I'd like to clarify that now that it's come up. Could we find ourselves, then, in a situation where you could have something like the Rogers Pass developed, and the government simply takes the attitude that we are getting a benefit from this, we will do surveys or counting of the traffic, and we will make a direct payment to you based on the volume that handles it, and that will be a drop in our tax resource but by the same token a drop in our expenditures? Is that essentially how that would work?

Mr. Thomson: You would be looking to the private sector basically to come up and say, okay, what's the level of debt we can service based on the traffic count? If more trucks choose to take the Rogers Pass because it's safer and more efficient, then we'll get the revenues there. That really shifts the service aspects of the road in ensuring that the road's maintained.

Mr. Gouk: I'm losing you. When you start talking about if they decide it's safer and decide to use it then they'll get the revenues, who is going to get the revenues?

Mr. Thomson: The debt will be serviced by the government so it will be a payment out of general revenues, for discussion, say, but it will be based on whether or not there's actually traffic on the road.

Mr. Gouk: If you have the only highway, then obviously whatever traffic was there will still be there.

Mr. Thompson: Let me give you a quick example of one that's currently being looked at.

There's the Red Hill road, an expressway designed to go around the city of Hamilton and provide trucks an access in and out of the city that they don't have right now. The province was originally providing $150-million worth of financing to that road. Under the NDP government it was cancelled because of environmental concerns.

The Mike Harris government has reinstituted the project, but the string attached is that it can't be a toll road. What they're looking at is a shadow toll. So there will be a counter, in effect, in the highway that counts the trucks and the cars. It issues an invoice then to the Regional Municipality of Hamilton - Wentworth. That invoice is then matched against a source of revenue that they create either by a general mill rate or a special mill rate on the commercial sector, or whatever. But the amount of the invoicing to the municipality is directly related to the amount of traffic using the road.

So the revenue, then, to repay the debt is generated by this invoice that's presented to Hamilton - Wentworth and is based on the traffic that uses the road.

Mr. Gouk: Do you have additional paperwork you could supply on that?

Mr. Thompson: Yes, we do.

Mr. Gouk: Could you do that through the clerk of the committee?

Mr. Thompson: Yes, absolutely.

Mr. Gouk: Thanks.

Mr. Thompson: I have one last point on that. The issue winds up being, though, really one of debt management. So governments, wherever they be, at any level, wind up getting the public service put in place, the infrastructure built, without adding debt to the balance sheet. That's winds up being the benefit to government, I guess.

The Chairman: Thanks. Mr. Keyes.

Mr. Keyes (Hamilton West): Thank you, gentlemen, for your report. It's a great job. You're always learning something every day. In regard to the language in this report, I have to admit that I had to go through it a couple of times to get my head around it.

I'm a little confused as to what you mean, exactly, by ``shadow toll''. On highway 407 you'll have your devices on the back bumper or whatever, and it will click for every time you use the road and you'll get a bill at the end of the day. What is this shadow tolling concept? What does it mean?

Mr. Thompson: The gasoline tax that's currently charged by the federal government and the provincial government is a form of shadow toll.

Mr. Keyes: What's this other shadow toll?

Mr. Thompson: A shadow toll can be a counter in the road that you as a motorist don't see but that generates a traffic count that generates an invoice for somebody to pay.

Mr. Keyes: Where does that invoice go?

Mr. Thompson: Government.

Mr. Keyes: Which government?

Mr. Thompson: The provincial government, or the municipal government, or a regional government - whoever is providing that infrastructure.

Mr. Keyes: So the user of that particular road won't be seeing a bill. They'll ride on the highway without a bill -

Mr. Thompson: That's correct.

Mr. Keyes: - except their bill will either take the form...because government is going to get their money back somehow.

Mr. Thompson: Oh, yes.

Mr. Keyes: So either the gasoline tax is going to go up -

Mr. Thompson: Or there will be a mill rate increase to the commercial people using it.

Mr. Keyes: Mr. Chairman, I don't want to get lost. I'm going to take off my PS hat here and put on my ``I'm the member for Hamilton West'' hat for the constituents in my riding. I get a little frustrated, I suppose, when I hear an organization come in and say, look, here's how we can do it. The language is there, and it's wonderful. Here are the alternatives. It's not on the books, and then it's off the books.

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The bottom line is, when we talk about 407 we're talking about a toll road. So now the consumer will pay to use the toll road. They're talking about taxpayers being charged to use the toll road, taxpayers getting a tax on their fuel, and taxpayers' money going into protecting the investment risk of what I like to refer to as a ``middleman'' between the agencies that have the money and the organizations that need the money. The agency in the middle is making all this happen.

That's okay with me. If you guys can find a market for money and you can act and get your cut, that's great. But we're getting all these cuts along the way, and the danger I see is, when does controlling risk overtake consumer choice?

I bring you to page 7 in this report. At the bottom it says, ``The government agreed to enforce regulations guaranteeing a speed differential'' - oh, so I guess we're going to go a little faster on the toll road - ``to impose a requirement that all trucks use the road'' - except your local pick-up truck - ``and to not substantially up-grade the existing road.''

Well, that's terrific. We're telling people they have a choice here. They can go on a new, improved toll highway, go 20 kilometres an hour faster and get to their destination, and so on. The person in my riding says, ``Know what? I can't afford to go on a toll road'', and we tell them, no, the old road will always be there for them.

Yes, but we're legislating. We're going to regulate to ensure that this road is not substantially upgraded. That means you can take that pothole-ridden road you used to take on old highway 8 or you can get on the clean, green, fast toll road. So everybody down this chain for mismanagement is getting their money.

At the same time, you're charging the taxpayers to protect these risk guys, you're giving them a toll on their automobile, and you're giving them their fuel taxes and maybe even a point or two, as demonstrated by witnesses, on their mill rate to pay for the shadow toll.

Their bill goes up. They have no alternative. It worries me to a great degree.

To correct Gordon on his remark, you said highway 401 is a dangerous, pothole-ridden highway. I've driven from Toronto to London, and I think that's going overboard.

Mr. Thompson: If you drive from Toronto to the Quebec border these days, it's very bad.

Mr. Keyes: It's not dangerous and it's not pothole-ridden. Come on, Gordon, let's be fair.

Mr. Thompson: I'm going to get Warren to answer this question, but in responding to the question, I think one of the things we have to keep in perspective in the case of highway 104, which is the one you're talking about, is the response to the issues Nova Scotia had in providing that service. It was not one of alternatives; it was one of an inability to do the road, period.

Warren, I wonder if you want to deal with that.

Mr. Thomson: Sure.

I think the key issue in any appropriately structured public-private partnership is that the government does maintain all the appropriate roles with respect to standard-setting and safety. That was paramount in the design of both the new alignment and the existing road.

To comment specifically on what we have in terms of speed-limit differential, first of all, the new western alignment is a limited-access, four-lane, wide-median divided highway. It has a design speed of 110 kilometres an hour, which is quite standard for a North American four-lane divided highway today, particularly in a rural area with this kind of traffic.

The existing highway has a maximum speed limit of 80 kilometres an hour, which, again, is appropriate for an at-grade intersection road. So you're dealing with a road where you have vehicles turning on and off, turning left onto the road. That's actually where most of the fatal accidents have occurred; about 80% of the fatal accidents were due to people turning left onto the highway, coming out of a driveway and so on.

So from a speed and safety point of view, the differential was appropriately warranted based on provincial safety standards.

In terms of mandating that trucks take the new road, it was also a safety factor in the sense that the province did have existing heavy truck legislation. The existing road isn't really compatible for through heavy truck traffic, so all they did was impose an existing heavy-truck restriction to ensure that trucks take the new road.

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A study done at Carleton University determined that modern transport trucks do more than 10,000 times the damage that a passenger car does. Railways for years have paid for the maintenance of their rail rights of way and the beds on which they travel. Having trucks pay a toll that better reflects the economic benefit they derive and the damage they do to roads is wholly appropriate.

In terms of not upgrading the existing road, the existing road will be maintained to Nova Scotia standards. What we meant by not upgrading the existing road was not keeping it in a pothole-ridden state; what we meant was that it can't be widened into a four-lane road. The province is fully permitted to put in turn lanes at intersections and do all of the normal things to maintain an existing two-lane, non-100-series highway in Nova Scotia. So there's no safety impairment and there's no lack of choice for the public, but there is a requirement that for valid safety reasons, trucks take the new alignment.

The Chairman: Let me add a couple of questions. One thing that was noted in the construction of the 407 and I believe the 104, and certainly in the Charleswood Bridge - and I can't comment because I haven't heard it relative to the Sparks Street project - was that by going to the private sector for the financing, construction and management of the project, in each case the project came in substantially lower than the original estimates.

Mr. Thomson: That's correct.

The Chairman: Why?

Mr. Thomson: In the case of highway 104, one of the most significant advantages was the fact that the road was being built in 20 months. Basically, that meant two building seasons. In Canada, where you typically have to stop construction in the winter months, you go to what is referred to in the industry as a demobilization. In the spring you have a remobilization of your crews.

Putting all that equipment back on site, bringing the crews on site and setting up each season costs money. By doing the road in the manner that 104 was done in, the road was...and being completed in two seasons, it's actually eliminated seven additional seasons that would have been required under conventional financing and construction methods. The fewer mobilizations and demobilizations, that decrease, cut about 30% off the cost of actually building the road. On top of that, of course, you get the benefit of the ability to use the asset right away.

The second thing that occurs is that when you go through a crew design and build - and Charleswood Bridge would be a good example of this - you allow the private sector to make the decision on how to value-engineer the road. To give you an example of value engineering in road construction, concrete pavement costs much more at initial installation than does asphalt pavement, which is most commonly used. On the other hand, asphalt pavement has a much shorter life cycle, particularly in our climatic conditions. If you did a life-cycle analysis of a road for which you were going to be accountable for all operations and maintenance over the next 30 years, you would typically choose to put in a concrete road, giving you the lowest life-cycle cost rather than the lowest initial cost for the road.

The same thing happened with the Charleswood Bridge. There were all kinds of design elements put in place that allowed the bridge to be built more quickly and more economically, using less material, with benefits to the public through a lower-cost facility.

The Chairman: Another criticism levied at public-private partnerships is this: why would we go to a private sector group and finance it this way? The government can borrow money at a much lower cost than the private company, so inevitably these things will cost more than if the government just followed its traditional methods. Do you have any comment on that?

Mr. Thompson: This is the point I was trying to get at in my response to Mr. Keyes. As a non-bank lender with the ability to structure alternative sources of financing, we're not in the business of promoting toll roads. We're in the business of solving problems in terms of debt management for various levels of government.

In the case of Nova Scotia, to borrow the money that the province needed to build the road, they were at risk of having their rating downgraded once again. They were in a position, in a sense, of having hit the ceiling relative to their ability to borrow money. So they were faced with the alternatives of borrowing the money and having the cost of all Nova Scotia's debt go up, or not doing the road at all. Not doing the road at all was not politically acceptable given the number of people being killed on the highway.

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The structuring Newcourt did was really to facilitate that problem. They had an inability to borrow the money. So the structure was put in place primarily to be off balance sheet and off credit so the province would not be affected at all by the bond-rating agencies.

In many of these transactions, the discussions we're having in British Columbia, for instance, any of the provinces that are aggressively managing...they have the deficit....

Well, B.C. is a bad example. They thought they had the deficit in line. If deficit management is under control and they don't have a deficit now, they're all starting to focus very intently on the issue of debt management: okay, we have the deficit taken care of; what do we do with this $400-million worth of debt we have out there? There's a little stepping-back now. They've accepted the notion of public-private partnerships. Governments all over the place have accepted the fact that the private sector can build and operate most of these facilities cheaper than they can and more efficiently than they can. So then you get to the issue of debt.

Now, every premier and every minister of finance has always said, go away, I don't want to hear from you; we can borrow money cheaper than anybody else; sovereign debt is the cheapest, so go away. They're not saying that any more, because yes, it is still cheaper, but the amounts that governments owe are rising and rising and rising. Somebody has said hold it, it's time to stop going that route.

In the case of highway 407, for instance, the current premier wishes dearly they hadn't gone with public debt. It would be nice to have the $1.2 billion they currently owe on that road - which, by the way, is not open - they would dearly love to have that off their balance sheet and off credit to the Province of Ontario.

British Columbia is saying the same thing now on the island highway and on the Coquihalla: why are we carrying all this debt when we could have done a private debt structure and had the whole thing shifted off the government's back?

So that's often the issue.

Mr. Thomson: To add to that point, in the case of Nova Scotia, they wanted it confirmed as part of our whole instruction that Moody's and Standard and Poor's would in fact confirm the debt was off credit. By having confirmed it off credit, they not only avoided a potential credit downgrade, they have actually been put in line for a credit upgrade; and that has been confirmed by both Moody's and S and P. So that may mean the overall cost of borrowing for the Province of Nova Scotia may be decreased as a consequence of taking this debt off balance sheet.

The second factor is actually the matching. This is really the private placement benefit versus a public bond issue. With a private placement debt instrument you're able to custom tailor that repayment profile. If you take your typical toll road and you map its revenues over thirty years, if you increase your tolls for inflation and GDP growth, your overall revenue base, you clearly have a growing revenue pool. If you make your debt payments exactly match that revenue pool, you can come up with a lower real toll over the life of the road.

So the issue isn't what is the coupon on the debt. What the public sees is what is the toll on the road. By having that debt structure better matched to the road revenue, you wind up with the lowest real toll, which is the cost to the end user.

The Chairman: Mr. Gouk.

Mr. Gouk: Mr. Chairman, just a brief comment on Mr. Keyes' comments.

I do believe there is a very big role for public-private partnerships. There are some restrictions to them I would like see, and I think the market automatically puts those in. But on the concept of legislating or coming to some agreement that certain things not be done, as in the case of this substantial highway upgrade, I think these gentlemen, and any other company that was looking at putting money in, would be absolute fools if they entered into a project where the government could come along a few years later and put something in that completely eroded their cashflow stream.

One example I'll leave you with is the government-funded VIA Rail selling off a business, namely the Rocky Mountaineer, to the private sector, allowing the private sector to invest and build that up, and then having VIA Rail coming along farther down the road, saying, gee, you're making so much money on that, I think we're going to open up a parallel one and go into competition with you.

That shouldn't be allowed. A substantial upgrade that would put it in direct competition with the toll highway that was built through private funding shouldn't be allowed. It can't be allowed to go overboard.

I think the points you have brought up are valid if in fact it would force them to leave it pothole-ridden and dangerous and unsafe, but by the same token, I think parameters that say, no, it can be completely up to provincial standard, you just can't put it beyond that, are realistic and reasonable.

The Chairman: That's known around here as a two-mode question. He got roads and rail right in the same issue.

Mr. Gouk: It was a triple-T response.

The Chairman: Stan.

Mr. Keyes: I agree with the first part of Mr. Gouk's scenario. I can understand that. If the government is going to act on behalf of a taxpayer in going into a public-private partnership, and if it is going find the money to do all the things right to the benefit of the taxpayer, I'm certainly all for it.

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But on the rail issue, Mr. Chairman, I have to disagree with Mr. Gouk. He said you're going to have a subsidized company called VIA Rail starting up a parallel service to Rocky Mountaineer, but that's not correct. The Rocky Mountaineer has one type of tourist - two-day, overnight, fancy-dinner service. What VIA is attempting to put forward, as presented to us here, is not a parallel service at all. In the form that it will take, it is a commuter service that is very different from the Rocky Mountaineer service. So I think we just have to be careful that we are comparing apples with oranges here, and not a couple of apples.

The Chairman: Actually, I think that's an excellent introduction to the final question I might have on this whole process. We have extended some examples of special circumstances where these roads have been built or where these public-private partnerships have been used - the 407, the fixed link and the like. Even highway 104 was a special circumstance. Because it was a highly dangerous piece of road, there were all sorts of compelling reasons to deal with it, but I think people have difficulty getting their heads around this approach to building the commuter service, as opposed to the fancy programs.

Stan raises a very important point, and it's one that you encounter all the time when you start to use this question of tolling. Are we going to toll the northern Ontario highway? Are we going to put tolls down the Trans-Canada for people to drive between Winnipeg and Brandon? The answer is that we are not going to. That's just not going to happen. I just cannot ever see there being the political will to do that, leaving aside the other aspects of it. But that's where the question of shadow tolls becomes an interesting one.

If I understand what you're saying, in having a volume-related payment mechanism, whether it's the government making a $100-million cash payment in support of this road or having them pay on an account basis over a period of time, it's a different mechanism of paying out of the same pool. Right now, it collects gas tax revenues, and if the government was to choose to build a road, it could choose one of two forms of payment: the traditional form of payment, that sees it paying for so many kilometres a year until it's built, or a longer term, that sees them pay on a volume-related basis, whether it's the driver paying at the toll basket or the government paying it on a monthly bill or whatever. From what you present, my understanding is that by moving to the volume-sensitive payment, that's where the shift of risk comes in. That's number one.

Two, in the financing of the deal there are some advantages. I don't know if you dwelt on it, but as I understand it, certainly with the 104 - I'm not sure about the 407 - and also certainly with the Charleswood Bridge, government didn't begin to pay that until the asset was in place. So for the construction phase, there was no payment. All of the risk and all of the cost was carried by the group that did it.

The third thing is this question of the lower cost of borrowing, if I understand what you're saying. There is an argument, in any event.... You talked about the special case of Nova Scotia, where you actually may have lowered the cost of their overall borrowing. That's not going to happen for building all the roads, so that may be a special case. But even on the ordinary pedestrian stretch of road, it's at least competitive, if not somewhat advantaged in terms of - and I always miss the word - the future cost of money. There's a net present value calculation.

Can you respond to that?

Mr. Thomson: On the first point, with respect to the use of the shadow tolls and the risk transfer, what that really gives you is an ability to sit down and say that if there's going to be growth in the use of the asset over time, you may therefore have an indirect related revenue source, such as a fuel tax. If that's then matched to the asset you've actually built - i.e., are you maintaining the asset in a manner that attracts public use, and is it providing better service, better utility? - and you do get that use, then you've really seen that the public believes it is benefiting from the road, and you pay for the debt service. So that really does shift the debt repayment risk, the traffic risk, to the private sector, even in the case of a shadow toll and even though the government's paying the tax out of general revenues.

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In terms of actually timing the payments again...and that's the concept of what we refer to as ``acreting'', which is what we used on highway 104. Acreting debt refers to the fact that there are no payments of interest over some period of time. The interest actually accrues and is added to the principal balance outstanding. That's of use in the construction phase of a design-and-build project, because acreting debt will allow you to advance the money at commencement of construction and to build the infrastructure in the most cost-effective manner possible, but you'll have no debt servicing requirements until the asset actually commences to come into use.

In the case of highway 104, we only gradually bring the full debt service on line. At the inception of the road, the principal balance outstanding is about $61 million. That's what we had actually initially lent. After the road has actually been in place for about ten years, the principal balance outstanding rises to close to $80 million, and that's because of the non-payment of interest. But that's really the private sector saying it will be patient and will wait for a combination of GDP growth and inflation to bring on line the revenue stream necessary to service the debt. So again, it does allow for the asset to be built in the most cost-effective way. You can have all the value engineering done, build the asset as quickly as possible, and leave the risk with the private sector.

Your final point was around the actual cost of funds. On the difference between a public debt issue and private placement debt, you have to look at what goes into the cost of the capital model that anybody uses. If you have recourse to the Government of Canada and you have a publicly traded debt issue, that's quite clearly the lowest-cost debt in Canada. When you go away from it being a publicly traded debt issue, when you go to private placement markets, because the investors are going to give up liquidity, they won't have the ability to trade the debt over the holding period, so you'll pay up for the lack of liquidity in a private placement debt offering.

As well, because the private sector is in fact taking on the risk of the project, you're really then lending based on the actual project's stand-alone credit rating, which may be triple-B. The Government of Canada may have triple-A credit in paying domestic-based debt, but if you're looking at a toll road somewhere, it may wind up with a stand-alone rating of triple-B. Quite clearly, triple-B credit risk demands a higher coupon in the market, along with it being a private placement instrument. But as I say, that the repayment is better matched to the revenues the asset will generate will more than compensate for the premium on the coupon.

The Chairman: Gentlemen, we are about to hear from the people who now pay for the roads. I thank you very much for your time.

Mr. Thompson: Thank you, Mr. Chairman.

The Chairman: With us, from the Canadian Trucking Association, we have Laura Kilgour.

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If you've been sitting in, you know there's a bit of a discussion going on about this issue.

Welcome. We've had the Ontario Trucking Association in, along with a number of other smaller groups. We're pleased that you can now be here. We've been looking forward to it. If you can take about ten minutes for your submission, I guarantee you'll then get some lively questions.

Ms Laura Kilgour (Director, Member Services, Canadian Trucking Association): I'd like to start by thanking you for this opportunity to speak on behalf of the national trucking industry. I apologize in advance for my inability to speak in French. In this era of diminished resources, that includes associations too. Every other member of our senior staff is bilingual, but they're all out in the country doing something else. You therefore have me, the unilingual one, coming to appear before you today.

Mr. Keyes: You have nothing to apologize for.

Ms Kilgour: Today I'm really mindful that you've heard many presentations. I was pleased to listen in on the one before ours. Over many days, you've heard from a lot of diverse backgrounds. Our brief was sent to you in August, so I'm not going to go over it and read the brief we presented.

It's kind of obvious that the Canadian trucking industry depends on a well-maintained, effective road network. It's also no doubt obvious to anyone who travels around Canada that the national highway system as a network has deteriorated, and that reinvestment is necessary. However, I guess the more pressing question, which you were just discussing, is how these improvements are going to be paid for.

The Canadian trucking industry - and I'm sure you've heard from us in our many segments before - believes we have to reinvest a lot of the existing revenue base already collected from the users, and then make additional levies from users only for essentially commercially viable highway projects. I think that is the distinction.

I'm sure you've already heard a plethora of statistics from a lot of different sources. Frankly, I guess you can get statistics to say anything you want, so you really have to be careful of some of the assumptions that are made on the basis of some of these studies.

Our brief discusses the Transport Canada study that was made for the Royal Commission on National Passenger Transportation, showing that the reinvestment rate of road revenues generated by the federal government in 1988-89 was only 12.7%. By contrast, the provincial governments invested 82% of their revenues during that same time. Those percentages are similar today; however, sufficient funds are currently available to finance the highway network through the existing taxes collected by road users. Systems of dedicated funds are the practice in many countries, including the United States. When the funds go in, they are reserved for this purpose.

Another Transport Canada study was completed in June 1996. I've brought my copy along, because I'm not sure whether you have it. It shows the year 1993, and it says that Canadian fuel taxes and road-related revenues paid by road users to the federal government during 1993 was$10.4 billion. In that same year, including the transfers that they gave to other levels of government to do work, the provincial governments spent $5.5 billion on the roads, while the federal government spent $300 million.

That same year, municipal governments spent money on roads - including infrastructure for new subdivisions - to the tune of about $5 billion. To avoid double counting, those figures don't include transfers that they receive from the other levels of government. Their road building was funded by their tax base, which comes mainly through property taxes. One might argue that this was to provide the basic accessibility to that property development for the value that's derived from that.

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I understand that you heard from the railways last week, and that they suggested that if one considers the federal, provincial and municipal levels of fuel taxes and licence fees in 1993, it was $5.5 billion short of covering the cost of roads. Frankly, that differs from this Transport Canada study. I'm not really sure where they got those statistics. But I do think you have to be very careful when you're talking about municipal costs and how that's all dragged in.

I guess what I'm really trying to say is, in other words, the use of statistics is a highly complex mug's game and you have to be awfully careful about all the assumptions when you're looking at it.

This is not the first time, and I'm sure it's not going to be the last, that the industry and the truck industry have disputed the distribution of taxes and expenditures and the potential shift of freight from the road to the rail.

Because of the needs of the marketplace, trucking has become a dominant freight mode in Canada and in North America, overtaking the railways. Given the relatively short distance of the majority of truck trips combined with the multi-directional nature of trucking, its flexibility to deliver small quantities of goods to thousands of factories and retailers, and its overnight and just-in-time services, there really isn't a great potential for shifting modes.

This is the third time I've appeared in front of House of Commons committees discussing this kind of issue. I've looked at some of the things we said at other times. In November 1992, when we appeared before the Standing Committee on the Environment, we quoted from a study prepared for Transport Canada by the Canadian Institute of Guided Ground Transport, which is part of Queen's University. The study was called, ``The Impact of Changes in Road User Charges on the Canadian Railways.'' It came to the conclusion that even tripling road user taxes was unlikely to fundamentally alter the competitive balance, and shift freight between the rail and the truck.

So trucks have really become the dominant mode of transport because of market-driven factors that are shipper needs, contrary to some of the suggestions by the railway that it's cross-subsidization of trucking that is causing the shift. The facts don't really support that.

I was listening to statistics today from your previous presenters who were talking about trucks causing 10,000 times the damage of other vehicles. I've heard statistics saying it was 29,000, and other statistics saying it was a lot of other things. Really, this is another case when there are an awful lot of econometric and engineering formulas that say precisely how much the trucks should be paying for the highways and how much degradation is caused by trucks.

Again, this is an area where cost allocation is a very complex issue and statistics are really hard to tie down. There are a lot of formulas prepared by different engineers and it's very hard to guess how much -

The Chairman: Try to keep up with the tobacco industry.

Ms Kilgour: - trucks should be paying to maintain their place on the highway.

We do know that provincial governments in central Canada, along with the federal government since 1985, have been taxing all highway users, including trucks, far in excess of what they've been reinvesting in the roads. The remainder has gone into general revenue.

As an industry, we pay, as I'm sure you know, provincial and federal fuel taxes, licence taxes, sales taxes and corporate taxes, and in some jurisdictions we're already paying...toll roads and other forms of road financing seem to be increasing, as is shown by highway 104, highway 407, the Coquihalla and some other situations.

I understand a typical Ontario 18-wheeler out there - if we can ever find a typical one - contributes approximately $40,000 a year in tax revenue to the provincial and federal governments.

Again, studies conducted by the Transportation Association of Canada have shown that the provincial and federal governments in the last decade have taken out far more in highway taxes than they've put back into infrastructure.

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In 1994, CTA appeared on the review of commercialization of CN North America and a discussion on modal choice became rather current in that hearing. In reality it's the marketplace that requires economy and efficiency in transportation, and that becomes the critical factor. If you increase truck taxes across the board just to encourage a 10% to 15% shift in rail, it really would be detrimental to the efficiency of the whole economy as well as regressive for the average Canadian consumer, who ultimately pays the cost, as we all know.

Motor carriers really can't absorb additional costs in their operations without endangering their own survival in the marketplace and their competitive situation. The charges are going to be passed on to the manufacturers, and that's going to increase their costs and make them less competitive. We have to remember that about 70% of Canada-U.S. trade uses truck services, so it has a dramatic effect on the whole economy, because trucking is really only a service industry for the economy as a whole.

There are, however, particular road projects that will enhance the productivity of road users and that can be financed by user-pay. If you looked into the history of highway 407, the trucking industry supported that, on certain conditions - i.e., that there would be alternatives - but that was really a function of effective user-say as well as user-pay.

As an industry, we say the decision to proceed on new projects has to be based on the existence of tangible commercial benefit. The users are prepared to support these investments, but the governments have to show their willingness to have the users participate in the evaluation process. That didn't happen with the 104. There are a lot of long-term costs to the trucking industry and to manufacturing in that area that I think are going to play out later and haven't been taken into consideration in that process, since trucking has no alternative.

Whatever happens, governments also have to be willing to commit a greater portion of their existing resources to infrastructure improvements, but only on a strategic and selective basis, for those portions of the highway infrastructure where they are needed; where upgrading would be to the greatest benefit of the system. I know people appear before you and look at the whole national transportation network. They look at percentages and how much is 39% below grade and whatever. But I think you have to look at how those roads strategically connect and look at them on an individual basis and make the investment of the money in the most strategic way possible.

In the trucking industry we're familiar with the fact that there's a shortage of funds. We're not going to come here and say you have to take all that money back and take it out of general revenue and put it into the roads. I think we're quite realistic about what happens in the economy, because no one feels the economy faster than our trucking industry. If the economy is starting to slow down, you see it immediately in our bottom lines.

I have an interesting little gauge I use. I look to see how the leasing of trailers is going. That usually tells me six months before we have differences in the bottom lines of our trucking companies. We're actually a pretty good gauge of what is happening in the economy.

With that, I'll invite questions. I'm not an engineer and I don't have a lot of expertise in funding formulas and everything else, but for the last five years I have been very involved in the trucking industry itself. I hope I can answer the questions you have.

The Chairman: Mr. Mercier.

[Translation]

Mr. Mercier (Blainville - Deux-Montagnes): We very often hear, from the public at large, three complaints about trucking. Firstly, and you alluded to it, there is the fact that a truck causes 10,000, 18,000 or 29,000 times more damage than a car. You said a truck in Ontario pays $40,000 a year in taxes. Forty thousand dollars divided by 10,000 would be $4. If trucks and cars paid taxes proportionately to the damage they do to roads, if a truck pays $40,000, a car should pay $4. Obviously, the car pays much more.

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In other words, what do you reply to people who say that trucks pay too little compared to cars or that cars pay too much? It amounts to the same. This is the first criticism. I am not saying this is my opinion, it is a criticism I often hear.

The second complaint is that people say, at least in Quebec, that the legislation is insufficient or that it is insufficiently enforced with regard to the number of hours a driver can be on the road and that this raises a risk of fatigue. You often hear in Quebec that drivers have false logs and that the inability, under current legislation, to limit the number of hours a trucker drives per day is a calamity.

Thirdly, it is being said that trucking causes more damage to the environment than rail, despite the obvious advantage of trucking compared to railroads, i.e. the ability to pick up freight directly at the point of origin and to deliver it to the point of destination. It is obvious that a ton of freight carried by truck uses up more energy than a ton of freight carried by rail and that it will cause a greater emission of carbon dioxide into the air.

I would like you to answer these three criticisms that are being made regarding trucking. Then I would like you to say a few words on bimodal transportation, which is the subject of a lot of talk. Freight is picked up by a truck that is then loaded onto a railway car and carried almost to the final destination and, from there, continues to its destination.

[English]

Ms Kilgour: You've packed a lot into one question. I'm not sure which one I want to deal with first, but I'll start in the same order you gave the questions.

In terms of damage to the road, when I was preparing to come over here I looked at some studies - and I have a whole shelf full of studies - on what they call ``cost allocation'', trying to determine the actual damage caused by trucks compared with cars and weather and everything else. I see from your assumption and your figures that you're accepting the 10,000-times figure. I'm not sure, on an engineering basis, one can accept that.

There are a lot of different formulas, and from what I've been able to read, it's very hard to accept that there is that much difference. So I'm not quite sure that's a very accurate complaint against the industry.

If you take a road and put it out in the middle of nowhere, and nobody drives on it, it's still going to deteriorate over time. When I drive in my subdivision on a road that has no heavy trucks, it still has potholes from the use of cars. As well, studies don't seem to show that there is that magnificent a difference between the damage that's caused.

So I can only say that I don't think those differences are as great, although I do acknowledge that trucks do cause wear on the road. No one denies that.

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Your second question was really with regard to safety in terms of trucks on the roads. The whole issue of enforcement of legislation, not just on fatigue but on a lot of other things, is something that is very much of concern to the industry. We have for quite some time been stressing to the provincial governments our concerns in those areas.

When trucking was deregulated 10 years ago we were to be regulating on the basis of fitness, but 10 years later, we still don't have the criteria for a safety audit accepted by the provincial governments and enforced in the industry. That's not because we haven't as an industry been trying to get that. We feel there should be enforcement. It only hurts responsible owners to have irresponsible people travelling on the roads in a manner that is not safe. I would encourage enforcement. I think a lot of it, though, is blown out of proportion because it makes good news.

Fatigue is a problem. Because of that we've been involved in a North American-wide study on the causes of fatigue, and fatigue management. You may not be aware that the hours of service guidelines, when they were set up, were done on a basis that had absolutely no connection with fatigue itself and the science of fatigue. In reality, the studies are showing that somebody can be back after a week's holiday, be driving for only two hours and be more fatigued than somebody who has been driving for 10, based on their circadian rhythm and a lot of other things.

So we need to understand a lot more about what causes fatigue. Because of that, our industry has started an education project on fatigue. We have cassettes and books for drivers on how they can manage their fatigue, to try to help them understand why they get tired and what they can do about it. Pure enforcement of hours is not a complete solution.

In terms of the third question, about the environment, the industry is a strong supporter of intermodal transport where it makes sense. We should be using all of our resources more wisely. If rail would use more wholesaling than retailing of its services, it would probably work a lot better. There are a lot of projects going on, including the Iron Highway project CP is involved in. Our people are part of that, trying to see if we can find ways that will save money and also make more sense for the environment and everything else.

The Chairman: Thank you, Ms Kilgour. Mr. Gouk.

Mr. Gouk: Thank you, Mr. Chairman. I have three, possibly four, questions, so I'll keep them short.

Ms Kilgour: I'll try to keep my answers short.

Mr. Gouk: First, the previous witness, talking about highway 104, said it provided a shorter distance and higher speed. There was a saving in both fuel costs and time, which is money to commercial operators.

If highways can be put in where that advantage can be shown, is the Trucking Association generally accepting of the concept? In this case, they says it's a $10 advantage. Would it be realistic to talk about a $10 toll in this particular case if they can truly demonstrate that there is an advantage in the magnitude of about $10 for each truck that uses it?

Ms Kilgour: That's what we mean by ``user say'' and ``strategic placement''. I think you have to be careful of the assumptions, though. I saw they were building their highway for 110 kilometres. You may not be aware that most trucking companies try to restrict the travel speed of their vehicles to 90 because of the savings on fuel. So that extra design really doesn't help them all that much, because they are only gaining a smaller amount on the speed savings.

But with highway 407, we could see a saving. We could see it was strategically beneficial, and we supported it.

Mr. Gouk: Is there a cost advantage to U.S. carriers? I know there's no cabotage within the country, but given that you truck down to the United States and come back, and they truck up from the United States and go back down, is there an inequity between American and Canadian carriers that is causing you difficulty?

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Ms Kilgour: When we are both using the same roads it's difficult to say that we're getting a worse situation than they are. Since you have to look at the total economic picture of the firm and whether it is more expensive to do the domestic part, and the Canadians are doing more of the domestic travel, then that causes an inefficiency in their system.

Mr. Gouk: There's a program that sends parliamentarians to spend a week with a company or a union. I did that last year with a Teamsters trucking local, and they brought up the question of driver fatigue. Notwithstanding your last comments, which I think were somewhat appropriate, about it not being just hours, they said hours are a big factor. Because of lower rates, drivers are trying to put in more time to get more mileage because it's a paid thing.

Given that they have to stop at weigh scales frequently as they travel on major highways particularly, would it be appropriate to have a time/date stamp with the location as part of their logs? That could prevent the driver from driving fourteen hours and saying he has only been on the road for eight or whatever.

Ms Kilgour: If you look at the log, you have to put in the mileage you've driven and the places you've gone. There is a lot of information you have to put in the log. A lot of trucking companies study it to make sure people are staying within the speed limits and within the times, to make sure they are not going over the hours. Companies generally try to do as much as they can to keep people within the hours. It's a safety issue and it's very important.

Mr. Gouk: I met with the British Columbia Trucking Association last year, and they said that sometimes they don't feel like they're truckers; they feel like they're tax collectors because there are so many tax forms, logs and different things. They spend a significant amount of their time actually in compliance. Aside from the money you pay, is the compliance aspect a problem for you?

Ms Kilgour: The compliance aspect of regulations is what keeps me employed. I'm a lawyer working for the Trucking Association. I went back to my law school and they said, you're working for trucks? I said, I have more constitutional and legal problems in a trucking company than most of your clients will ever see.

We're the most over-regulated industry, I think, in Canada - provincially, federally and municipally. The paperwork is incredible. When someone wants to start up a trucking company, the things they have to go through and the records they have to keep are unbelievable. People can't believe the kinds of things they have to keep track of and the paperwork they have to do.

Mr. Gouk: Do you have any kind of paper outlining this problem that you could present to this committee?

Ms Kilgour: I'm not sure we have anything in one place. We just finished helping write a book called US Trucking in Canada for the American industry. A lot more of the American trucking people are starting to come into Canada and they want to know about our regime. We constantly get calls from people asking what they have to do to set up, and we try to steer them towards some of the resources that are available.

We spend a lot of our time writing and producing books for the truck driver to understand all the regulations - the safety code, the hours of service, the border crossings, all of these things. If it's any reflection on that, being the Canadian Trucking Association, we get calls from the most incredible sources and places, including kids who want to become truck drivers. We get a lot of letters from them. Some of those letters are not legible; obviously they have problems with their ability to read and write. We always tell them they have to improve that because you can't go into this business without it.

The Chairman: I have one final question. Trucking, as contained in your brief, recognizes the fact that there's a cost of building the roads they run on and doesn't object to the fact that they should pay that cost. If there were a move to a different form of user pay, a different form of tolling for that, which was offset by a reduction in the fees you now pay through the fuel tax, would it have the support of the association?

Ms Kilgour: Part of that question is in the answer to the last one. Whatever is done, don't make it a paper nightmare. We're prepared to pay our fair share.

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The Chairman: Government make something a paper nightmare? Perish the thought.

Thank you very much.

Now we have Vélo Québec. Welcome. Please take about ten minutes for your remarks and then we'll move to questions.

[Translation]

Mr. Michel Labrecque (Executive President, Vélo Québec): Mr. Chairman, committee members, I would like to quickly lay out for you the La Route verte project, which is described in the information folder that was handed out to you. It contains a map of the Route verte bikeway and of what the project should look like by the year 2005.

I am presenting the project to the committee because it has important implications in the area of transportation and I therefore believe you should be made aware of it. You will thus be in a better position to make the right decisions, since some of these may eventually have an impact on La Route verte.

La Route verte is a project that came into being in 1991, during the world conference on cycling that was held in Montreal and that brought together some 600 delegates from 30-odd countries. The purpose of the Route verte is to link up eastern Quebec and western Quebec and northern Quebec and southern Quebec, as well as to establish links with Ontario through the Témiscamingue region and the National Capital Region, the states of Main, New Hampshire and Vermont, as well as the state of New York and New Brunswick, through a loop running from Cabano to le Petit Témis and Edmundston.

La Route verte is inspired by the great bikeways being established throughout the world, but especially in Europe and in the United States. Take for example Denmark's National Bike Routes, Great Britain's National Cycle Network, carried out by Sustrans under Great Britain's Millenium National Lottery Fund, Oregon's Veloroute and the bike path that will run through the United States from Washington to California.

It is not a biking path, but rather an itinerary, which means that it is in fact the result of the recycling of abandoned railway rights of way that have remained public property. In some areas, the Route verte will use paved shoulders, pathways belonging to provincial and national parks and country backroads, all of this with uniform signage for clear identification. The project should be completed by the year 2005.

In 1994-95, costs had been estimated at $88 million. It therefore can be expected that in the year 2005, once adjustments have been made, the project will reach approximately $100 million.

Cycling, as you are probably aware, is consistently making tremendous gains in popularity in Canada and in Quebec. All sorts of elements come into play, but Mr. Foot, the well-known demographer, links this phenomenon to the ageing of the population and to the fact that people are looking for leisure and tourism activities that they can indulge in with their family, with their children, and throughout their lives.

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There is also another element that comes into play here, that of the ``bicycle boom''. In certain cities, namely Vancouver, Toronto and Montreal, a certain percentage of the population use bicycles as a means of transportation. Indeed, 2% to 8% of the population, depending on the neighbourhood or the city - Toronto, Hamilton, Vancouver or Montreal - bike to school or to work.

This fits in with the recreational trend as well as with the bicycle tourism trend. In the United States, more than 800,000 people participate in extended cyclotouring, in other words these people leave their state and cycle through others. Right up against Quebec's border, in Vermont, there are four travel agencies that live off American bicycle tourists who come to ride the circuit. We wanted to present the Route verte project to the committee because we look to the American example and to their ISTEA (Surface Transportation Efficiency Act) program, which is part of the major American infrastructure programs and which provides for the funding, under infrastructure programs, of the construction of cycling facilities, the paving of road shoulders and the planning of links between municipalities or abandoned rail corridors.

We believe that Canadian infrastructure programs should provide for those provinces or municipalities that are interested - it would always be optional - funds for the establishment of utilitarian or recreational biking facilities in urban or rural areas.

In the brief, I have outlined the main activities under the ISTEA American model, the Congestion Mitigat and the Surface Transportation Program, to name but two. There are in all a dozen programs that, through funds drawn from taxes on gas, have enabled participants to obtain financial resources that, added to provincial, or state resources in the case of the United States, and municipal resources, have facilitated the linking together of projects similar to the Route verte.

We believe that your committee should take a serious look at the possibility of opening the door to all projects or programs similar to the Route verte. At the present time, there is an 8 cent tax on gas, and 2 cents are used for road construction or repair. We believe that part of this money should be devoted to the paving of shoulders.

I would remind you that, from a technical point of view, the paving of shoulders - which is very common in the United States - improves not only the quality and the life expectancy of roads, but also the safety of all users, including cyclists and pedestrians.

We have come here to make a presentation on the Route verte project, but we are aware that there are similar projects in other Canadian provinces. These projects should have access to these funds, in partnership with provinces and municipalities.

Cycling is a means of transportation, but we believe that the recommendations you make should recognize this fact, as well as its advantages for the environment, for tourism and for recreation. Indeed, it should be underscored that cycling is a means of transportation that Canadians can use to move about for recreational purposes or as a means of transportation.

The Chairman: Merci beaucoup. Mr. Mercier.

Mr. Mercier: It is with great interest that I listened to your presentation. I am very interested in the project, and all the more so because I myself cycle quite a lot.

I have two questions for you. First of all, there is quite a controversy surrounding the wearing of helmets. You are familiar with the arguments used. In Europe, you hardly ever see any. I think of Foglia, who was travelling in Holland and who, when he saw two cyclists with helmets on guessed that they had to be Americans.

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In the United States, you see a lot of helmets. Here, there are people on both sides. The arguments in favour of helmets are based on the fact that there is a large number of head injuries. The arguments against helmets are based on the fact that helmets are quite costly, that the requirement to wear a helmet deters young people who, otherwise, would get involved, from cycling and, thus, deprives them of the advantages of biking. I would like to know what your opinion is.

Mr. Labrecque: Our position as far as the wearing of helmets is concerned is well-known: we actively promote it. The rate of helmet-wearing varies between 20% and 35% in Canada, depending on the province. We are in favour of it, but we are opposed to the compulsory aspect.

Let us talk about what we call the perverse effects of this measure. Take the model of Australia, that imposed helmets at the beginning of 1990, six years ago. There was a very substantial drop in cycling among primary school-age children and adolescents, aged 14 to 17 years, 30% to 40% of whom abandoned biking. In the adult population, it varies; in other words, there was a drop and the numbers have come back up to former levels.

The perverse effect is the health costs that are saved in the immediate, but that will be there later on, because fewer people practice this sport.

The other element is that of policing. At the present time, all Canadian provinces have legislation regarding lights on bicycles. Normally, in the evening, bicycles should have lights on at the front and at the rear. You should be aware that 22% of serious and fatal accidents occur in the evening, but during evening hours, travel by bicycle only accounts for 1% of the total. There are therefore 22 times more accidents in the evening that in the day, proportionately. This regulation is not yet enforced. Police officers do not have the necessary means to do this and there have been no campaigns carried out.

Our position therefore is to say yes to helmets, yes to their promotion, but no to the requirement side, because of these perverse effects. What is important is that people be sensitized to the need to have lights. Bicycles are vehicles that should have adequate headlights and tail-lights.

That is our position, and we recently explained it to a parliamentary commission in Quebec City. In Ontario, the legislation applies only to people aged 18 years or under and police forces have decided to do very little enforcement, if I may put it that way.

Mr. Mercier: This brings me to my second question, dealing with cyclists' lack of respect for the rules. Perhaps people are not well enough aware of them. On bikepaths I often come face to face with people who are cycling on the left side and who tell me: ``When you cycle on the left side you are able to see the traffic coming''. They do not even know that they should be on the right side of the path.

I have also noticed that in countries where bicycles are a means of transportation, police forces are much stricter regarding lighting on bicycles. It is inconceivable here to have thousands of bicycles running around without any lights, because it is obvious that when a bicycle comes upon a car, it is the reflector that serves as a light, but when two bicycles meet one another and neither one of them has a reflector, then they run into each other.

What role could your organization play in the necessary task of educating cyclists? We are aware that this lack of education is responsible for a form of open war between cyclists and drivers.

Mr. Labrecque: In Canada, over the last 30 years, the number of cyclists has gone from three million in the middle of the 1960s, to nine million today. Not only did their number triple, but the frequency of biking activities doubled. Therefore, cycling is six times what it used to be.

Cyclists are not a group of people who are set apart from the rest. There are not pedestrians, drivers and cyclists. A good many people who drive cars also cycle.

Why is it then that when they are behind the wheel of a car they respect the rules, but as soon as they jump onto their bike they no longer respect them? This is attributable to the nature of the vehicle and to the fact that from a legal point of view, bicycles and pedestrians are lumped together. They are lumped together, because in Canada cyclists do not need a driver's licence or a licence plate.

Mr. Mercier: They ride on the right side.

Mr. Labrecque: Legally, cyclists are lumped in with pedestrians. This is because they do not have driver's licences nor licence plates. In a way, they are pedestrians on bicycles and this makes it very difficult to enforce requirements and to hand out fines in those cases where they would be warranted.

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Bicycles were a toy in the 1960s and today they are a vehicle. It is perfectly plausible that ten years from now, with the development of bikepath networks and bicycles as a means of transportation in cities, things will fall back into place. Things will not be perfect, but I believe that people's behaviour will improve over the next few years.

[English]

The Chairman: Thank you, Mr. Mercier.

I can testify that Mr. Mercier is interested in bicycles. I see him riding one almost every morning. However, he doesn't travel very far; it's in the gym.

Just one final question. We've had a presentation like this from a number of groups that are interested in these bicycle paths, and their recommendation has been that some portion of the funding be set aside - in your case you're talking about 5% - to improve the shoulders and those kinds of things. Have you had discussions with the provincial government? Are they prepared to follow that recommendation?

Mr. Labrecque: Yes, for sure. I think it was in the spring of last year that the Quebec government adopted a new by-law that is, in a way, the cycling policy of the Quebec government. They have established a point where when you have a number of cars per day on a road and this road crosses a small town or a village, or if it's a provincial road under the jurisdiction of the provincial government, they will pave, from time to time - not every road at the same time, but when they rebuild or renew this highway or this road - a shoulder. In some parts of the province the road is under the jurisdiction of the Quebec government, and in some parts it's under the jurisdiction of the municipalities. It's under these two jurisdictions that we think this infrastructure program could allow those municipalities, or the Quebec government, to present a demand for a grant or a subvention under this approach.

But the Quebec government has established a clear policy of paving a shoulder on roads in Quebec.

The Chairman: Thank you very much.

Now, from the Canadian Construction Association, Mr. Michael Atkinson and Leo McArthur.

Mr. Atkinson, somehow you've gotten younger.

Mr. Jim Facette (Staff Officer, Canadian Construction Association): The miracles of science, Mr. Chairman.

Mr. Atkinson, unfortunately, could not be here today. He had to be at another committee hearing.

My name is Jim Facette. I'm a staff officer with CCA, responsible for the road building and heavy construction industry.

Mr. Leo McArthur is giving CCA's presentation today. For your information, Mr. McArthur is the chairman of the Roadbuilders and Heavy Construction Council of the Canadian Construction Association. He is also chairman of a special program at CCA called TRIP Canada.

The Chairman: Welcome, Mr. McArthur. You can take about ten minutes for your remarks. Then we'll give you some questions.

Mr. Leo McArthur (Member, Board of Directors, and Chairman, Roadbuilders and Heavy Construction Council, Canadian Construction Association): Thank you very much,Mr. Chairman.

Mr. Chairman, committee members, thank you for the opportunity to appear here before you today. In the few minutes I have I will try to be brief and address the issue that has been asked of us: to examine trade, tourism, and transportation and how important Canada's national highway system is to these industries. I will touch on only a few of the highlights in our full submission, which you now have in hand.

The Canadian Construction Association is a voice of the non-residential construction industry in Canada. I own one of the 20,000 firms across Canada that are members of CCA.

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It is a generally accepted principle that the best vehicle for promoting growth and creating jobs in Canada is the private sector. I guess government's quick fix, Canada employment programs, are generally short term jobs with no promise for the future.

With this said, it is important for governments to govern, and govern in a way that is compatible with creating a sincere economic climate conducive to making real investment in Canada.

Competing for investment in the late 1990s has changed, there is no doubt about that. Today, Canada must offer a real climate that reflects world ideas and true realities. Business must now be prepared to compete with companies all over the world. Providing necessary basic infrastructure is critical to promoting economic growth. In the long term, this will produce meaningful employment.

As a collective voice of the non-residential construction industry, we are greatly concerned about the deterioration of our highway network and negative impact on Canada's economic competitiveness. Canadians are really wasting fuel, time and money. They are endangering their health and their environment and in the process becoming less competitive in the new global economy. Highway decay, which we are now experiencing right across the country, adds unnecessary costs to all our operations in Canada and also impacts negatively on our real competitive capability, reducing demands for our own products in Canada.

I will touch on the two industries in Canada that have become, perhaps, two of our largest Canadian employers, trade and tourism. In 1995, domestic trade in Canada totalled $31.5 billion and accounted for 20% of the total GDP and nearly two million jobs. The importance of international trade in the Canadian economy grows each year. Recent Statistics Canada figures indicate 1995 was a record-breaking year with Canada's trade surplus growing to $28.3 billion from $15.4 billion in 1994, representing a 32% increase overall.

The impact of tourism on the Canadian economy continues to grow. Total tourism spending in Canada amounted to $41.8 billion in 1995. The response is a 69% increase over 1986 figures. In 1994, Canadians made $76.6 million worth of overnight trips, of which $68.5 million or 89% were made in their own automobiles. International tourists numbered 16 million with American visitors accounting for 78%. The remainder came from overseas. Sixty percent of American visitors use automobiles for travel.

When the current Liberal administration was in opposition, a Liberal task force on infrastructure recognized the importance of highways in our economy in Canada. It recommended a federal commitment to rehabilitate and expand the entire TransCanada system. To quote the task force:

...the economic consequences of poor roads is staggering. Studies reveal that the productivity of a region is very much dependent upon its transportation system. Traffic congestion increases the cost of transporting materials, reducing an industry's competitiveness, revenues and jobs. Bad roads and polluted waterways also have a negative impact on tourism, an important sector of the Canadian economy.

A recent Transport Canada study came to the same conclusions.

In CCA's view, there remains one hurdle: how do we pay for the necessary work? After reviewing expert opinions, including ones provided by governments, we submit that governments continue to contribute to the maintenance of our system in Canada. Governments are the primary owner of the public infrastructure, including highways.

It has become increasingly popular for governments to discuss the financing of necessary infrastructure work by trying to answer the following question: how can we, the government owner, maintain traditional infrastructure but have someone else pay for all or part of the work?

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When governments examine how infrastructure investments are made, more and more governments are turning to the private sector for assistance in the form of public-private partnerships. The generally accepted definition of a public-private partnership is a transfer of responsibilities from public agencies to the private sector or private owners. Private owners would assume responsibilities for the public facilities with the notion of making a profit from the sale of the service provided by the facility. Simply put, users are now charged for the use of any facility.

The building and maintenance of Canada's national highway system by provincial and federal governments was and is paid for from tax revenues. There seems to be no direct link between what the federal government collects in gasoline tax and what it invests in our own system in Canada, as opposed to the current system in the U.S. That is to say, we do not dedicate funds for highway investment.

The federal government collects 13.7¢ per litre in tax. In 1995, Ottawa collected $5 billion in tax. In the same fiscal year, Transport Canada will spend only 5%, or $2.5 million.

Mr. Chairman, committee members, the financing of a national highway program for Canada comes down to two basic options, continue to commit tax revenues or enter into public-private partnerships, which will place direct user fees on the whole system in Canada. It may be possible to blend these two options, but the government must be prepared to place direct user fees on highways that do not currently have them. Recent Transport Canada work and that done by the national highway policy study demonstrates that opportunities for applying user fees for the national system are somewhat limited.

In closing, Mr. Chairman, the Canadian Construction Association offers the following to this committee:

1. That through an act of Parliament the federal government designate Canada's national highway system as prescribed by the national highway policy report. This will lock in a current, agreed-upon system.

2. That the federal government adopt a national highway policy that would be long term in nature and oversee future improvement, maintenance and expansion of the system. This would facilitate the efficient use of taxpayers' money in investment in highway infrastructure.

3. That to meet the immediate needs of Canada's national highway system, the federal government adopt a national highway program for rehabilitation.

4. That the federal government increase its percentage of gasoline tax revenues spent on highway investment to address the immediate needs of Canada's national highway system. CRCI suggests allocating 2¢ per litre of the revenues collected.

5. That the federal government set up a special highway trust fund for the allocation of resources. This would be similar to our NAFTA partners.

As well, our highways are really inadequate today, both structurally and in their capacity to carry our trade. Tourism is suffering because of poor roads. Tourists are now encouraged to travel U.S. roads rather than through some parts of northern Ontario, for example.

Some of our young engineers are now migrating to the U.S., because the opportunities in our industry are no longer there. Queen's civil graduates are very typical of the problem we are facing today in Canada. As well, there would be many spin-offs to other industries if we went ahead with some type of program and we would all enjoy a much improved highway system.

Mr. Chairman and committee members, questions on the needs, the whats, the wheres.... The why questions have all been answered concerning the state of Canada's national highway system. We are only left with ``what''. The hurdle now is to finance a national highway program. The Liberal task force on infrastructure in 1990 had one suggestion - and I will quote that in closing - that ``...applying fuel tax revenues to road construction/maintenance'' really should be examined now.

Thank you very much, Mr. Chairman.

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The Chairman: Thank you, Mr. McArthur. I appreciate that final quote. We'll have to ask the Liberal members of that task force how they feel about that.

Mr. Jordan.

Mr. Jordan (Leeds - Grenville): Thank you, Mr. Chairman.

I saw here that you were pretty positive about the Canada infrastructure program we had.

Mr. McArthur: Yes.

Mr. Jordan: It generated jobs and did a lot of things. But some people seem to think that you can continue with that and that maybe there's some furtherance to it as a national highway system.

I don't personally think that's the way to go about it. I think you need to have a totally different initiative here. I think people sometimes get the two a bit confused. I'll tell you why. I think all we did there with the infrastructure program was tinker with some things and fix them a bit. I don't think that's what you're talking about.

Mr. McArthur: No, it isn't.

Mr. Jordan: I think you need to have a whole new initiative. I think the infrastructure program was great, and I hope we repeat it, but the difficulty that I'm finding with it in small municipalities is that it got away from them in some cases. Some of these little municipalities end up with additional infrastructure, but they can't maintain the existing infrastructure.

There's nothing that will make you more popular than to go into an area and say we're going to have a new arena. Everybody gets terribly excited about it. But they forget that once that damn thing is built, the cost of maintaining it falls back on these little municipalities. They have a very limited assessment and a very limited possibility of increasing their assessment. That's what's hurting them.

But then, think in terms of next year and the municipal elections in Ontario. Say you put that out there. A reeve, a deputy reeve and three little councillors yield to pressure groups sometimes. Somebody wants a new library. Who would say they didn't?

I'm glad to see you're saying that it was okay, it worked, it created jobs and it was wonderful. But I'm with you if you're saying that this is not what you're talking about, or I'm talking about, when I'm talking about a national highway program. That's out of it.

But it gets around to - and you talked of it - financing it. Who's going to finance it? Would you agree with private enterprise financing it -

Mr. McArthur: Yes, I would.

Mr. Jordan: - if you can get the money?

Mr. McArthur: If we can get the money and if it's a viable business, there would be no problem with the private sector getting involved in that at all.

I know this from my own experience. We were very much involved in highway 407 in Toronto. I know the funds are really available as long as you have a very good business case.

Mr. Jordan: Would you agree to an additional tax? I know you're saying that money is being taken now that isn't being returned. It's taken from those who use the highways to be used for other things, not for building highways and so on. Would you agree with the idea of an additional tax of 1.5¢ or 2¢ per litre if you could be convinced that this tax couldn't be used for anything but highway construction?

Mr. McArthur: Yes, as long as it was a designated number that would be really for highway infrastructure building in Canada. I think that would be acceptable.

Of course, there may be some provinces.... I'm sure the Province of Ontario would have some problems with that.

Mr. Jordan: But you, as an organization, would support that?

Mr. Facette: Actually, yes we would, Mr. Jordan, provided, as Mr. McArthur said, that the funds were dedicated or set aside for an investment in Canada's national highway system.

Mr. Jordan: That and nothing else.

Mr. Facette: That's correct.

The Chairman: Mr. McArthur, I would like to ask you a question that's not within your brief. You've built more than a mile of road over the years.

Mr. McArthur: Yes.

The Chairman: Here's one of the things that has been noticed. You mentioned the highway 407 project. I went through some material on this last week that suggested the change in the method of building it, the way they approached building it, resulted in a savings of some hundreds of millions of dollars. Part of that, it was argued in this piece, was attributed to the fact of the design-build-own-operate approach that was taken to it through SHIP.

How are those savings realized? What's the difference between you building a piece of road for the government and building it for a private sector consortium?

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Mr. McArthur: I think the answer to that is strictly value engineering. Up to this point in time, when you are really bidding on a 15- or 20-mile stretch in the province of Ontario, the government lays down the specifications and you have to do them even though the contractor and the engineer may think there are better ways of doing it.

Now, on these large design-build projects, you're able to have value engineering. In other words, you can be innovative. Therefore, you can save considerable amounts of dollars and still really end up with a well-engineered project.

That was what happened in Ontario. There was a $300-million saving on highway 407 just because of the innovative ways the contractor and the engineers decided to design it. But you also have to take safety into consideration. Everything else has to come into this. If it's planned properly, those are the kinds of things you can do in the highway construction business in Canada today.

The Chairman: Thank you very much, Mr. McArthur, and thank you, Mr. Facette. I appreciate you taking the time to be with us today.

Mr. McArthur: Thank you very much.

The Chairman: From Hospitality Newfoundland and Labrador, the tourism industry association of Newfoundland and Labrador, we have Cathy Duke. Welcome.

Ms Cathy Duke (Executive Director, Hospitality Newfoundland and Labrador): Thank you very much.

The Chairman: Take about ten minutes for your remarks, and then we'll do questions and answers.

Ms Duke: I'm the executive director of Hospitality Newfoundland and Labrador, which is the tourism industry association in our province. We have been in existence for about 15 years, and we represent about 500 businesses in the tourism sector.

Just looking at the objectives of your committee, I can see that what you're basically doing is looking at the national transportation system and how that can serve, support and promote both domestic and international trade and tourism. What I'm going to be talking about this morning primarily is on the tourism side, although I am open to any questions you may have on the trade side as well.

I just want to start by laying a very brief background to the kinds of concerns that we have in Newfoundland and Labrador with respect to access to the province.

The Newfoundland and Labrador economy has been dealt several hard blows in the 1990s. As you know, traditionally, we have been very dependent on our resource-based industries and seasonal employment. For that reason, we have been dependent on income-support programs. There have been declines, of course, in transfer payments over the years. Basically, on top of that, we experienced a fisheries crisis with the moratorium on the northern cod, which put some 25,000 people out of work.

We have been working very hard over the last decade to develop strategies for improving our economy in Newfoundland and Labrador. As part of that, we have been studying the areas of our economy in which we have the most potential for growth.

The Economic Recovery Commission over the last six years or so has done a lot of work in that area. As a result of the fisheries crisis, there was, in fact, a joint initiative between the federal and provincial governments to look at our growth opportunities and to focus on a couple of industry sectors in which we had a lot of potential for growth. We have decided that tourism is one of our most prominent sectors. Two others would be information technology and aquaculture.

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The tourism industry, however, in Newfoundland and Labrador is still very much in its infancy. We have a lot of work to do, but it does have tremendous potential. Looking at the trends internationally and even here in Canada in terms of the aging baby boomers, the product we have in Newfoundland and Labrador....

I see the majority here are in that category.

The Chairman: Yes, you can see those people around the table here.

Ms Duke: The timing is perfect for the tourism product we have in Newfoundland and Labrador. Obviously there are our natural attractions, including whales, icebergs and birds, and our hunting and fishing are world class. There's also extreme interest in our culture and our heritage. We feel we have tremendous potential in the tourism industry.

In 1995 total tourist spending in Newfoundland and Labrador was approximately $500 million. There are 24,000 people employed in that industry, and we have some 2,300 tourist-related businesses. It is the fourth-largest industry in our province, and represents approximately 4% of our GDP.

But we still have many challenges. The industry, the provincial government and the federal government are working together and taking what we call an ``integrated approach'' to the development of our tourism. We realize we need to do a lot of work in marketing and spend more money marketing our province. We still have some more work to do in developing our product, and we also have work to do in the whole area of human resource development.

The reason I lay that background is because I want to say to this committee today that another very important element of developing the tourism industry is transportation. Our tourism product must be accessible and affordable. Transportation is really essential to its growth.

In the few minutes I have to talk right now I'd like to really emphasize two major points. If you hear nothing else today, I want you to hear our grave concerns about the ferry service to Newfoundland - the gulf service as well as the service to coastal communities - and the difficulties in Labrador because there is no Trans-Canada Highway linkage across the Labrador territory.

Marine Atlantic is the single biggest deterrent to visitors coming to Newfoundland and Labrador. There have been a couple of major studies done in the last year. One was done by the economic planning group, which did a product market-match study in which that concern was expressed by motor-coach tour operators and other visitors. Another study, done by Sypher-Mueller, was an air access study. In those instances as well, tour operators and visitors expressed concern about the Marine Atlantic service.

The first problem is that there forever is threat of a strike. The contracts with the employees from Marine Atlantic are negotiated every two years. By the time one contract gets negotiated, the two years is up and you start all over again. So tourists travelling to the island particularly are very concerned that if they come over they're going to get stuck there. There has not been a strike by Marine Atlantic in 23 years, but the threat is always there, and that's almost as bad as the strike itself.

In a couple of the services that have been contracted out - for example, from St. Barbe to the south coast of Labrador - we've had two summers where there's been a strike the whole summer. Tourists who are travelling up the northern peninsula to Gros Morne want to go over to visit Red Bay, the site of the Basque whalers, one of our major historic sites. There's the fear that once they get over, they're not going to get back. There's also just the discomfort of having to deal with moving through a strike line and so on.

The second point is that the fees to travel on Marine Atlantic are still much too high. The Marine Atlantic corporation should be commended in terms of the kind of cost recovery it has undertaken in recent years. At one time the fares on this service were subsidized 70% to 80%. That has now been reduced to about 45%. Our concern is, where does it stop? You have to look at the point where you have to add value to the service in order to encourage visitors to travel.

Obviously, when visitors come over it promotes the tourism industry, creates employment, generates wealth and new tax dollars. We really feel it is something that needs to be looked at in the future.

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I took the schedule yesterday and called to ask what the cost would be for a couple and two children to travel from North Sydney to Argentia in the summer. It's about $800 return just to get to the province. So you can see why someone travelling in Atlantic Canada would not want to say, ``Let's go to Newfoundland for a week as well - and add $1,000 just to get over there''. It's a real deterrence.

When I talked about little value added, I meant this service is not geared to the tourism industry. We have constant complaints about customer service. In the summertime many summer students are employed and trained, and things aren't quite so bad as in the shoulder seasons. But basically in the shoulder season you get someone who last month was tying a ship to the wharf and is now at the cashier's desk dealing with customers. It's not helping us at all when we're trying to develop our shoulder seasons when a lot of seniors visit. The largest percentage of our visitors is from the U.K., and there are a lot of motor coach tours.

In terms of little value added, another real concern is that schedules have been changed. The October before last, six motor coach tours had to be cancelled because at the last minute Marine Atlantic decided to cut short its run to Argentia. Those tour operators are not coming back. We have an Atlantic Canada showcase every year. This year, talking to motor coach tour operators there, they said that Marine Atlantic is their single biggest deterrent to selling visits to Newfoundland.

The other point is that with the privatization of other routes within the current Marine Atlantic service, particularly the Bay of Fundy service, and with the completion of the fixed link to P.E.I., the remaining service for Marine Atlantic is to Newfoundland and Labrador. We really feel that the head office of Marine Atlantic should be in Newfoundland as opposed to Moncton in New Brunswick.

In Labrador you can't even call the road a highway in terms of the roadway that runs from Labrador City-Wabush to Happy Valley-Goose Bay. It's a dirt road and very hazardous. Even as it is, there are some motor coach tours that attempt to come across there. Particularly now, with the potential in Happy Valley-Goose Bay, the discoveries at Voisey Bay and the employment and wealth generation currently being created there through low-level flying activities with the Department of National Defence and so on, there are more and more reasons to have that linkage across Labrador. We feel it's a public service that really must be provided.

I have been talking mostly about tourism. There are many other business organizations in Newfoundland and Labrador that would very much like to have an opportunity to express their concerns to you as well. I would really encourage you, if it's at all possible in the next couple of months - I guess you'll be finishing your consultations in February or March - to come to Newfoundland, because there are other groups that would like to make presentations.

Thank you.

The Chairman: Thank you very much, Ms Duke. I can assure you that members of this committee would love nothing better than to travel to the island. We will be continuing with the trade and tourism portion of this study in the new year, so it's not beyond the realm of possibility that we will be travelling. We'll take your request under consideration.

We have on the committee a member who knows something about the island.

Mr. Byrne, do you have any questions?

Mr. Byrne (Humber - St. Barbe - Baie Verte): Yes, I do.

Before I get into my questioning I'd just like to say, Ms Duke, I have used every resource and every talent possible to convince my colleagues that Newfoundland is indeed an island, even to the point of using maps and other sophisticated audio-visuals, and I think I've met with some success. But you're absolutely right. The points you raised in your brief are very appropriate.

Newfoundland and Labrador is poised to take advantage of an emerging tourism sector. I think your point about the baby boomers, while it may be insulting to some members around the table, is that where once upon a time more mass attractions such as Disneyland and Canada's Wonderland and others provided a reasonable, cost-effective vacation package to tourists, I think more remote, more adventure-tourist destinations are coming on line.

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So it is very appropriate, I think, that this committee should make a stronger effort to look at the needs and the opportunities in Newfoundland and Labrador. I've communicated that need directly to the chair. I can assure you, we'll have another hard look at whether or not we can indeed make a trip to Newfoundland. However, there are other provinces we haven't been to, so we'll try to balance out competing demands.

To zero in on one of the points you made regarding the Marine Atlantic service, could you give the committee a little bit of a better overview on the North Sydney-Port aux Basques run and the North Sydney-Argentia run in terms of what it means to the economy, particularly to the tourism sector in Newfoundland and Labrador?

Ms Duke: As you know, within the tourism industry visitors like to do a loop. They don't like to go back and do the same thing twice. Many of our visitors will either travel to Newfoundland via North Sydney-Port aux Basques and return via Argentia, or the other way around.

The North Sydney-Port aux Basques run is anywhere from four to maybe six hours. The ship can go at a different speed. You can do a return day trip, if you like, or you can go a night route and take a cab and then go over it through the day. What happens then is that the visitor will plan on going across the island, which might mean a visit up to Gros Morne through central Newfoundland to the Baie Verte area to see icebergs, off to Trinity to see a living pageant and so on, and then probably come back the other route, which is on the east coast, where Argentia is.

I'm not sure of the number of hours. It's perhaps 16 hours. It would be an overnight run, however, which is a longer one. That's why it's more expensive. It tends to be a more popular route for those visitors who would like to come to the east coast only and visit St. John's and do some touring around that area.

So basically there are two options. A number of other services are run within the province. A Marine Atlantic service goes from Lewisporte, which is on the northeast coast of the island, up through the coast of Labrador. Marine Atlantic has been trying to promote ``Cruise Labrador''. They have been selling passages to visitors who just want to drop in at these coastal communities. Once again, that's something that has tremendous potential and really appeals to adventure tourists.

There are a couple of other services. On the south coast of the province it has been privatized, or contracted out. Another one goes from St. Barbe to the south coast of Labrador. That has been contracted out as well.

Mr. Byrne: To follow up on that, the marketing of those particular services are critical, because we have a barrier we have to overcome in terms of making the tourist aware that the attractions on the other side are valuable enough to merit the cost of the ferry ride.

Ms Duke: That's right.

Mr. Byrne: One other thing. I've been doing a fair bit of investigation in terms of exactly what that ferry service means to Newfoundland and Labrador and also what the impediments are to the tourism industry. One of the things I found was that according to the 1949 Newfoundland Act, Canada will maintain, ``in accordance with the traffic offering'', a freight and passenger service between North Sydney and Port aux Basques.

The key phrase is ``in accordance with the traffic offering''. In other words, as best as I can interpret, if we as the federal government keep the traffic volume low, then in other words the rate of subsidy also remains low. If my interpretation is correct - and I'm testing the waters on it now - by offering through Marine Atlantic or other service just a basic passenger service and a very basic freight service, what we're in fact doing is not marketing as effectively as we could for the simple reason that we have a vested interest in not marketing it as effectively as we could.

Would you comment on my conspiracy theory?

Ms Duke: I think that's a very good point. As I mentioned earlier, I think Marine Atlantic should be commended on the cost recovery it has been able to achieve, but we feel it really should be focusing more on cost minimization in terms of the actual operation of the vessels and so on.

The province this year will be very much focusing on niche markets. We've had a very sophisticated marketing study done. There is a great deal of interest, even at the cabinet level, in increasing our marketing dollars, because we have been convinced that there is a very good return on investment from our marketing dollars and a very short payback.

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With the Marine Atlantic service, we need to market it as being something that's attractive, that's part of the adventure, that's something the tourists will enjoy. But we have to make sure that the fears that come with it are alleviated; that there won't be a strike. We have to deal with the cost factor, ensuring it isn't too high. But we really very much need to have it as part of our marketing package that our product is accessible and affordable.

This year we've negotiated with Marine Atlantic to add on a couple of additional runs at the beginning of the season, because this summer is a very big year for Newfoundland and Labrador with our Cabot 500 celebrations. The first festival was to arrive in Argentia on June 24, which is the date on which the Matthew is arriving from Bristol, England, for the key event of the whole summer. On June 24 it will be arriving in Bonavista, which is a five-hour drive from Argentia, so there's no way people could take advantage of that key event.

It's very much linked to the tourism industry. It has to be attractive and it has to be something that's marketed as part of the adventure. I think you're right; giving a very basic passenger and freight service does keep the cost down, but you can't be too short-sighted. You have to realize that the investment up front, in conjunction with other marketing efforts being undertaken by the province, have to be done hand in hand, so increased travel will happen if the service is improved and if its scheduling is improved.

The Chairman: Your association has obviously had discussions with Marine Atlantic. Have you been involved in any of the explorations around privatization of Marine Atlantic?

Ms Duke: We haven't been directly involved in those discussions, no. We do certainly support privatization of the service, provided the service is not cut back from what it is now and the costs don't increase. As I say, we still feel the fees that are being charged on the fares are a deterrent at this point.

One theory is that the subsidies that are offered to Marine Atlantic should also be offered equally to a private operator. Let's see what someone else can do to run it efficiently.

The Chairman: Mr. Jordan.

Mr. Jordan: There have been a few success stories in these privately operated short-line railroad operations. Did you lose the steel when they pulled up the Bullet? Did they take up the steel and the right of way?

Ms Duke: Yes. In looking at the tourism industry we were trying to take advantage of the track that had been laid across the province. All the railway ties have been lifted in most areas, except in Labrador, I believe. We have a program called Rails to Trails. We're basically promoting hiking trails and Skidooing trails, cross-country trails, but there is very much a potential for cross-Labrador adventure, because the track is still there.

Mr. Jordan: It's apparently working quite well in some other areas of Canada.

Ms Duke: Yes.

Mr. Jordan: Where did it start and stop?

Ms Duke: It went from Port aux Basques right across to St. John's, counting loops down around the Bonavista peninsula, to every peninsula. I don't believe the south coast was served, but most other areas, yes.

Mr. Jordan: Is anybody looking at that, to restore the scenic route for a railroad?

Ms Duke: It hasn't been. I'm not sure if I can answer your question very well, but I guess one of the problems was that the railway in Newfoundland was constructed very differently from in other parts of Canada, as you know, with a narrow rail bed. As we said, pieces of the Newfie Bullet, the train we used, are all over the province. They are used for tourist chalets and attractions and so on.

I'm not sure about the economics of restoring that particular train to run on those tracks. I would say it probably has been investigated and was just not seen to be feasible, but I'm just guessing that.

Mr. Jordan: That would be the attraction, that it was different; very different.

Ms Duke: It's a very good notion, actually.

Mr. Jordan: Like a lot of things in Newfoundland, it's very different.

The Chairman: That takes us back to the member. Mr. Byrne, did you have a final question?

Mr. Byrne: I guess we're about to sum up, are we?

The Chairman: We are about to sum up, sir.

Mr. Byrne: First off, I would like to congratulate you and your organization. You've done an incredibly sound job of marketing and building tourism infrastructure in the province.

To get back to this Marine Atlantic stuff for a second, the Government of Newfoundland and Labrador and Transport Canada entered into an agreement to have a private operator operate the south coast ferry service. Apparently, as best I can understand it, it's working out quite well. The actual service levels have improved, according to some anecdotal evidence from the users.

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Privatization of the Marine Atlantic service from North Sydney to Port aux Basques is not quite the same, I don't think. First, there is a constitutional obligation to offer the service, and second, there's also a constitutional obligation to limit the rates or the fares that are paid on that service. In other words, built into the terms of union - 31 and 32 - is the maximum rate that can be charged. Third, there is the point that it will maintain that service in accordance with the traffic offering. In other words, as the traffic level goes up, the level of service also has to go up, and the cost or the subsidy also has to go up.

I'm exploring that particular issue because I think we have to do a very sound job, and your organization is critical to that. The better we market that particular service, the more use it gets. We also get the increased services, so it's a bit of a compounding effect...but also in terms of the essential service, because I want to talk a little about that.

Year after year we have what is assumed to be a strike threat. Look at bus tour operations, which operate on a very low profit margin. If you bring a bus tour from Nova Scotia into Newfoundland and certain Marine Atlantic employees are handing out cards to passengers as they arrive at the terminal in North Sydney telling them they may not be able to get back, it's quite a detriment to building a tourism industry.

The reason is simple. A tour bus operator who brings his or her bus over to Newfoundland when there is a labour disruption knows that passengers will have to be flown off the island so they can hook up with another bus in Nova Scotia and resume the tour. When you're operating on a 4% to 6% profit margin, you're just going to make the conscientious decision not to go.

Basically, I want to hear what you propose as a solution.

Ms Duke: We very strongly believe that the gulf service and coastal service should be deemed an essential service, because, really, we consider that link across the gulf an extension of the Trans-Canada Highway. It's a public service that must be provided constitutionally.

We believe it should be deemed an essential service. That doesn't protect you from an illegal strike. That can happen. But at least there's a comfort, because the motor coach tours are a big market for us. We had only 126 last year compared with something like 2,500 in Nova Scotia.

As I said, with the product we have, the market is definitely there. It's the same thing with the service to Labrador. For visitors to come along and be in the middle of a strike where eggs are being thrown, rocks and everything else.... With an essential service that would not happen, unless it was an illegal strike. Obviously that's something that could happen. But we really believe that having it as an essential service is just so important.

The Chairman: Thank you, Ms Duke. I appreciate your taking the time to come here.

Mr. Byrne, as you were talking about the constitutional requirements I was getting ready for a recommendation that we build another fixed link.

Some hon. members: Oh, oh!

The Chairman: I'm pleased we didn't go quite that far.

Thank you. We're back here at 3:30 p.m.

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