[Recorded by Electronic Apparatus]

Thursday, May 2, 1996

.0902

[English]

The Co-Chairman (Mr. Vanclief): Ladies and gentlemen, we'll call the committee meeting to order.

This is a joint meeting of the transport committee and the agriculture and agrifood committee for the purpose of hearing witnesses on the hopper car fleet issue. As we said at the meeting on this issue earlier this week, we are doing this because both committees were interested in hearing from these witnesses, and rather than duplicate the need for witnesses to come before both committees, at separate times, we felt it would be in the manner of efficiency to have one set.

Just to outline the problem we have this morning, we had another room booked for today's meeting. However, when we realized how many microphones we needed, the room was not large enough. It was available for a longer period. However, in order to have a room large enough that everybody could get around the table, we're here. We have this room for two hours. Unfortunately, towards the end of that time there is likely going to be a vote, so we are going to have to move quite quickly. I don't know whether we are going to have the availability of moving to another building and to another room after that vote if we feel that's necessary at the end.

Mr. Alcock is obviously not with us yet, but he will be here. We will start. Following the procedure and balance we completed last week's meeting with, we will start with the presentation from CP Rail. We will go absolutely no longer than till 9:40 a.m. with that presentation and questions and answers from it.

Mr. Hermanson.

Mr. Hermanson (Kindersley - Lloydminster): I have a point of order. At the last meeting we had we used the rather unusual technique of asking three questions in a row and then allowing the witnesses to answer all three. I'm not sure that's the best procedure. I would prefer, if we run out of time, that we continue the rotation but perhaps go to minute question, minute answer, rather than lumping three questions together, where some questions got lost, were skirted, or were not adequately covered, whereas others received an unduly long answer.

The Co-Chairman (Mr. Vanclief): Okay, we'll keep that in mind and see how we can handle that.

.0905

The Co-Chairman (Mr. Alcock): Welcome. I think we've been asked to be as precise as we can to maximize our time for questioning. So let's begin and see where we end up.

Mr. Rick Sallee (Vice-President, Agri-Products and Coal Group, CP Rail System; Senior Executive Officers' Group): My name is Rick Sallee, and I'm vice-president of agri-products and coal for CP Rail System. I am accompanied by Dennis Apedale.

I would like to make some brief comments, and I welcome questions.

The subject today, of course, from your point of view is to discuss car ownership and car allocation. These are fundamental to the efficiency and competitiveness of the Canadian grain handling and transportation system. We believe definite actions on these issues are overdue. Actual details of the plan called for in the budget are still sketchy, we believe, but are being developed.

Like most everyone else, CP Rail System favours a practical and effective solution to these issues. We have already made interested parties aware of our views as part of the senior executive officers process. I should mention I am also here as a member of the SEO committee and I will be appearing with Bruce Johnson later.

One message emerged clearly from the SEO process. There is a serious need in this system for accountability. Without accountability within the industry, Canada's offshore customers will not get the performance they're demanding. World demand for grains and oilseeds is strong and promising, but competition for meeting this demand is intense and intensifying.

Canada must make a concerted effort to have a world-class logistics system. Commercial approaches and efficiency are the only way to move forward. Much can be done to improve grain handling and to improve transportation - there's no doubt about that - and greater coordination of each is essential.

The SEO deliberations produced a general realization that car supply plus prospects for fleet renewal and for system improvements all depend on how car ownership and allocation are resolved. This was rooted in several understandings. Cars are an integral part of the service mix. Their use needs to be efficiency driven. Third-party involvement reduces efficiencies of car use and car replacement. Today's system is an obstacle to maximizing Canada's export success. How the issues are resolved will affect producers, shippers, the railways and the Canadian competitiveness of grain in our global markets.

Canada's agrifood vision is a bold one. We fully support it. To be winners, we need to manage towards a state-of-the-art logistics system. The Government of Canada has signalled its intent to dispose of the car fleet, taking into account the interests of producers, shippers and railways. It has also signalled a readiness to withdraw from car allocation. We endorse this approach if it supports the federal government's policy and goals on grain and brings more accountability to the system.

As part of your information base, I hope it will be useful if I enumerate for you a few points of importance to us.

First, there is a need to understand the interests of producers. There is a need to take into account the divergent and often contradictory interests of more than 120,000 Canadian producers across Canada. The interests of producers will be best served, we believe, if the system can assure long-term fleet planning, system competitiveness and efficiency, a continuing movement towards a market-oriented system. And yes, we need railway viability, which assures sustained investment in the system.

Secondly, cars are an integral part of the delivery system. Rail cars are tools a railway needs to do its job. Generally railways provide the track, the manpower and the locomotives, and own or manage the cars. Obviously, how they are managed affects the efficiency of the entire logistics system.

There must be clear responsibility for supplying equipment to avoid poor allocation of resources and service failure. Service planning involves capacity issues, financial risk assessments, asset replacement and service obligations. Service planning affects the bottom line of all stakeholders.

.0910

Practical issues raised by the ownership question include a number of questions about responsibility. One is responsibility for peak car supply. Grain does have a peaking effect from time to time, and the railways in the past have been expected to supply cars during this peak. Who will have this responsibility in the future?

There is also the responsibility for carrying excess equipment during the troughs. As we head into the summer period, usually our cars become surplus. In the future, who's going to be responsible for idling their equipment?

Another area is responsibility for maintenance planning. In other words, this involves repairing the cars, upgrading technology in terms of improving the productivity of our cars and long-term replacement.

These are all practical issues involved in producer ownership of the cars. Any solution must deal with these matters.

Thirdly, there is the case for railway ownership. Railway ownership brings in one of the very key features and this is accountability. Accountability, we believe, entails provision of short-term and long-term supply of cars; performance to market standards; effective planning for peak demand; and commitment to improve efficiency and lower cost.

The fourth area is the concept of third-party ownership. Third-party ownership complicates accountability for long-term fleet supply, near-term demand planning, customer service and fleet efficiency. Potential for distortion increases if ownership moves outside the shipper-carrier arena and its commercial relationships. A pooled Canadian rail car fleet must be retained to ensure efficiency. Commercial arrangements must be in place between car owners and operators to ensure supply stability. For example, the car owner has to know there will be a flow of funds that can support his investment. These are all issues involved in third-party ownership.

On the important issue of car replacement, we're currently talking about a fleet that exists today. But as we move forward there is an issue concerning the responsibility for car replacement. The need to upgrade and replace the car fleet must be addressed. These government cars we're talking about have an average age of 16 to 17 years. But some were built in 1972 and will be more than 25 years old when the sale is complete in 1998. In some ways these cars are technologically obsolete as well as being old. Their cubic capacity is 12% less than the industry norm. They have 9% less payload efficiency for wheat. There are new covered hoppers coming onto the market which can carry about 10% more grain.

Competitiveness is not fostered through old technology. The 75¢ identified in the 1996 federal budget to compensate the eventual owner is unlikely to generate even a modest down payment toward replacing the fleet over time. Investment risk is further complicated by the regulatory uncertainty beyond the year 2000.

To replace the 13,000-car fleet at a price of $80,000 per car, which is what it costs today to build a covered hopper at National Steel in Hamilton, it is going to cost about $1 billion in today's dollars. It's a bill of $1 billion to replace this fleet over time.

Because of attrition, aging and upgrading, car replacement within the overall Canadian grain fleet should soon begin at a rate of almost 1,000 cars or $80 million per year. We have to take this into account. The cars are there now, but you don't replace 13,000 cars overnight. It has to be planned in advance.

We should be considering now how we move forward on this issue of the way the cars are disposed of and the responsibilities and accountabilities of all involved.

If the railways are not owners of the government cars, they will not be involved in the replacement of the base fleet for western grain. This does not make us comfortable, nor should it make you comfortable. We urge you to think about who will be accountable and responsible to make future fleet investments, and what commercial environment is required to support these investments.

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Six, car allocation is a major industry issue. At one level, car allocation is an efficiency issue, with spin-off effects on product planning affecting, in the case of railways, track, power, crews, and service delivery. These are all planning issues tied to car allocation.

At another level it is a critical logistics tool. It is not a device to induce, for example, rail line rationalization.

Efforts to achieve near-term solutions to car allocation issues are progressing with the industry-led Car Allocation Policy Group, sometimes referred to as CAPG, if you hear that acronym. We support CAPG, or the Car Allocation Policy Group, as a transition mechanism to an allocation system that is administratively simple, transparent, and shipper-carrier negotiated. It stimulates efficiency and is responsive and flexible.

Car allocation has a broad impact in this area. It can play a leading or supporting role in many areas. I'd like to list just a few we believe it is tied to. For example, it has a supporting role to ensure the most efficient use of scarce resources during the peak demand period. This is often when the car allocation process is really required. It has a role to evolve effective demand signals to complement logistics planning and foster efficiency improvement; to offer shipper service options that suit a variety of needs; to reduce transportation risk; to facilitate competition among grain companies and between railways; to encourage creativity and innovation; to integrate sufficient flexibility; to identify and satisfy the needs of shippers in a rapidly changing marketplace; to optimize the opportunity for improving the asset management objectives of all participants; and to integrate linkages among participants' individual critical success factors.

Car allocation should ultimately occur at the shipper-carrier level - what I mean by that is between grain companies and the shipper of record as well as the rail carriers - as it does elsewhere in the transportation industry. In other words, the normal relationship in supplying cars and allocating cars is a commercial arrangement that we deal with on a day-to-day basis with all our customers, and I trust quite successfully.

To conclude, CP Rail is highly committed to grain transportation. It represents about 25% of our business. It's very critical to us. It's very critical to Canada. The need to increase accountability is critical for a competitive world-class grain-handling and transportation system. We cannot aspire to do less.

I leave these comments with you. I hope they will be taken into consideration as being significant in how we form the rules of the game as we move forward.

I will try to answer your questions. As I mentioned before, Dennis Apedale is here to assist.

The Co-Chairman (Mr. Alcock): Thank you, Mr. Sallee.

I will begin with the Bloc, then go to the Reform, then go back to the government. I have five people who have indicated a desire to ask questions. I suspect when it gets going there will be more. So I would ask people to keep their questions as precise as possible, and the answers also. Thank you.

[Translation]

Mr. Chrétien.

Mr. Chrétien (Frontenac): Last Tuesday, we met with a CN representative whose name I cannot recall.

Mr. Sallee: Sandi Mielitz.

Mr. Chrétien: That's it. In her brief, she referred to the turnaround time for orders. The actual time mentioned seemed unusually long to me.

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With the help of a study group, we compared the turnaround time at three ports: Prince Rupert, Vancouver and Thunder Bay. The cycle ranged anywhere from 38 to 60 days. Obviously, that is a long time. For someone who knows little about Western grain transportation, I find the 60-day cycle time somewhat long. However, for products such as coal and potash, the cycle was much shorter.

Once the government has sold off its hopper car fleet, I hope the cycle time can be shortened. I would appreciate your comments on this point.

In your presentation, you expressed opposition to third-party ownership of the hopper cars, arguing that it could create some problems. In particular, you questioned where these third parties would find the money to replace the cars once they became outdated. If the government paints itself into a corner by agreeing to sell the cars only to CN or CP, it will have some big problems on its hands.

You also mentioned that it would be preferable for Canadians to purchase these hopper cars. This could result in a loss of revenue for the government and I'm sure you are aware that I favour the government getting the best possible price it can for its hopper cars. We are willing to play the competition game. In the brief submitted to us on Tuesday, there is a rather lengthy list of prospective buyers, a fact which the minister confirmed to us. Eight groups have come forward and expressed an interest in purchasing the hopper cars. Of course, CN and CP made their intentions known, but so too did many others. I would appreciate your comments on this point as well.

[English]

Mr. Sallee: I'll begin with your first question in terms of the cycle times. Those were CN numbers that were presented but are probably reflective of some of the times that it takes to fill an order.

I think there are two important things to recognize here. The system today is not simple; it's complex. There are many origins. There are many rules and regulations that govern how cars are distributed from the order time to the time they are actually unloaded.

The point I was trying to make in my brief is that obviously we have to get this down, and the system has to be more accountable so that the regulations, or perhaps less regulation, are going to cut down on these cycles. We urge you to take a look at that aspect of it. It's highly desirable that we start to simply...

Secondly, on your question concerning car ownership, I would say I'm not so much against third-party ownership as in terms of how those cars are actually used in the marketplace. We feel strongly that railways are in the business of owning and managing the fleet for the benefit of our customers, and we don't want to see a more complex system entering into what is already a very complex system, and more arguments and confusion about how cars are distributed, owned and used. Our main interest is providing good transportation to all farmers.

The Co-Chairman (Mr. Alcock): Mr. Hermanson.

Mr. Hermanson: Thank you, Mr. Chairman, and good morning, gentlemen.

Farmers are trying to weigh out this car ownership issue and all of the allocation issues that surround it. They're experiencing mixed feelings, as I'm sure you're aware. They're saying the SEO Group came up and said that with the proposal that the railroads owned the cars it was going to cost farmers a dollar a tonne extra for five years and these cars would be paid for. Then they hear that the government brings down a budget in which they propose that these cars be paid for with a 75¢-a-tonne charge in perpetuity, but to be reviewed in 1999, so that could change in the year 2000.

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You're saying that with the 75¢-a-tonne charge there's no replacement capacity in that, so there's going to have to be some extra charge there. Farmers certainly realize that no matter what arrangements are made, they're going to have to pay the bill in one way or another. You're indicating that it might be a very costly bill.

Then we have the Travacon study by the Province of Saskatchewan, which indicates that if producers own the cars, it's going to save them $3.5 billion over twenty years, which is a heck of a lot of money. It almost makes me think that the railroads would use those cars as the cars of last resort and lease or buy the cars themselves if there was that kind of money to be made in the shipping of grain. Is that a realistic scenario?

You're representing the railroads, but say you were a producer. Why should the producer want the railroads, rather than the producer, to own the cars, given the $3.5-billion saving according to Travacon? Also, is the suspicion that the railroads might just park those cars on the siding and use other cars a realistic concern?

Mr. Sallee: First, on the Travacon study, of which I'm aware, maybe I'm being a bit biased but I think the study is outrageous. It makes some simplifying assumptions and it puts forward, I believe, a very timely sound bite that says it's going to cost you farmers $3.5 billion. So everyone says ``My God!''. I really dispute that. I think there are some highly simplifying assumptions that are very self-serving in that regard, and I think that study has to be answered - and we will be answering it shortly.

As far as the ownership question is concerned, the system is already very complex. I don't know if I object much to farmers owning the cars; it's a matter of how they are used and influenced. We want to be able to serve the needs of farmers through their agents, the grain companies.

Let's not forget who the real customer is here. It's somebody offshore or somebody in the United States. They want their grain when they want it. So to put a focus strictly on the origin is sometimes missing the point.

We want a system that flows, and if there is a lot of interference in terms of how the cars that don't have anything to do with the marketplace are used, we will be very concerned. We're going to have a long-term problem here. In the future we'll be back in these committee rooms discussing what the problem in transportation is, and you've really got to think about that.

Regardless of that, we're going to work with the process. We will be meeting with the financial adviser and talking to the various parties and trying to listen to what solutions may be out there.

Mr. Hermanson: On the issue of car maintenance, if the producers owned the cars, would they, given existing contracts with the unions, be able to take these cars and have them maintained outside of CP union or CN union shops for both heavy and light maintenance? That's a tremendous cost. My understanding is that it's maybe $2,400 a year per car for maintenance, or perhaps even more. If the producers owned those cars, what kinds of savings could they achieve through doing the maintenance outside of your union shops?

Mr. Sallee: First, I don't think there would be a union problem. I haven't really addressed that. Normally the relationship where there are third-party cars is that they're responsible for their own maintenance. We could maintain them and charge them or they could take their cars elsewhere.

I have not considered how much those savings are, other than that there is a maintenance factor built into the maximum rate today. Of course, as we go forward the cars will get older and so forth and there'll be a need for more maintenance.

To tell you the honest truth, I'm not sure what the savings would be, but there could be some, yes.

Mr. Easter (Malpeque): Mr. Sallee, on the order cycle business related to the question byMr. Chrétien, it has to be clearly understood that that is not a car side up cycle. That's not a delivery cycle.

The impression seems to have been left the other day, and today to a certain extent, that that order cycle is inefficiency. I see it as an efficiency point of view in that forward planning, in that with the current system, with the allocation system we currently operate under, the Wheat Board knows well in advance where its requirements are, where it has to draw the grain, whether it's Rocanville, Saskatchewan, Dauphin, Manitoba, or Fort St. John, and they use it as forward planning. To you, I would think that would also be an efficiency point of view, because you would know what rolling stock you need, what location you need it at, etc. Would you not agree?

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Mr. Sallee: Put the way you have put it, as a forward planning tool, that is correct. The accountability in the system and how you draw grain... I think you are familiar with the term ``demand pull''. The system doesn't necessarily reflect the forward planning in place today. Quite often we are loading grain that perhaps does not have a place to be put immediately. It may have to wait. It may have to be gathered.

When used as a forward-planning tool, Mr. Easter, I think it is valuable. But right now I don't think the system, the way we do car allocation, necessarily reflects that value.

Mr. Easter: The second point is one I have been grappling with since we started this issue. We are really dealing with two key questions here, ownership and allocation. The farmers are concerned, and to a certain extent the reason they want to own the cars is as the Saskatchewan report says. If producers acquire the federal government hopper car fleet, they could extract significant concessions from the railways. That's a point of view. They're concerned about railway accountability from a producer perspective.

I wonder if the government should be establishing the allocation process before dealing with the car ownership difficulty. I think the key issue here is car allocation and how farmer interests are protected.

Tied into that, as I said to the CN representative the other day, what we are trying to do here is to mix two options. The railways seem to want to operate the railways in an open-market philosophy, on a commercial basis. We have a system in place, the Canadian Wheat Board, the orderly marketing system, which this government strongly supports, and the two don't mix. We have to have that equal opportunity of delivery.

What is your view about dealing with allocation before ownership?

Mr. Sallee: I agree with the point that if you understood the allocation system you might be able to visualize the ownership situation more clearly.

Within the SEO process, in which there were three producer representatives, we worked on these issues for eight months, with facilitators, with conflict people trying to keep everyone on topic, and so forth. At the end of the day we found the only way the system could really be viewed is in total, as a total logistics system, as opposed to taking pieces of it and saying okay, let's deal just with car allocation, let's deal just with ownership.

I think it has to be an overall review, with recommendations. That's what Transport asked us to do, to put forward our recommendations, and that's where we were coming from on the SEO agreement: to try to put forward recommendations to the government on how car allocation and ownership should be dealt with.

In answer to your question, there certainly is some value in understanding what the car allocation system should be. Personally, we agree with the SEO recommendations. A transition is probably practical, to see whether we can simplify this and get to just a normal commercial relationship. If we can't get there, then of course maybe there still have to be some rules or a transition policy group. But I think we can get there, so we get a more normal, less regulated system.

The Co-Chairman (Mr. Alcock): Thank you, Mr. Easter. I have at least three more on your side who wish to ask questions. Perhaps you could get Mrs. Cowling or Mr. Calder to incorporate your last question in their questions.

Mr. Keyes, a very short question, please.

Mr. Keyes (Hamilton West): Thank you, Mr. Sallee, for your eloquent presentation to us this morning. I think the witnesses are to be congratulated for their statement, in which CP is looking for a solution that is in the best interests of all the players and the work of the CEO is recognized.

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In light of what our colleagues in the Reform Party have mentioned about the study done by the transport minister in Saskatchewan, who hired an American researcher to come up with a report that says producers would save $3.5 billion in transportation costs over twenty years, if we keep that in the back of our minds for a moment and I come to my question...

If we had an overlay on the wall right now... You mentioned 120,000 producers out there, 120,000 dots on a map of four provinces. Then we're looking - correct me if I'm wrong - at the cars those farmers will need to send their product to port. If we start to visualize a dot of a different colour, with allocations of 100 or 400 or 1,000 or 2,000 cars spread all over this map, at the end of the day someone has to sit down, whether it's a group of producers or the railways, and decide who gets what car at what time. Is there a demonstrated ability by anyone other than the railways, which I would imagine have spent decades trying to make this thing work, a demonstrated one, wherein the complicated...

Well, Mr. Easter shakes his head in the affirmative, but I don't think there are 100, 200, and 500 pockets of ownership of cars all over western Canada, 13,000 cars spread all over the map; and this is what's going to happen. We're going to take something and we're just going to blow it out across four provinces and hope in some miraculous way a producer group is going to sit down together and make sure each and every individual farmer gets an opportunity to get those cars to the right producers.

I can appreciate, in light of the report, which says the producers are going to spend $3.5 billion, why the railways aren't excited about it: listen, this is terrific, all we're going to do is make sure we coordinate this thing for them; they can allocate anywhere they please, and let them have allocation.

Mr. Sallee: In a way I'm asking that question just the way you are: how is this all going to work, with producer ownership and -

Mr. Keyes: I'm lucky enough to be the questioner. You happen to be the person who has to answer.

Mr. Sallee: I'm reinforcing.

The Co-Chairman (Mr. Alcock): Thank you, Mr. Sallee. You've asked that question, and much more efficiently.

Perhaps I could get a couple more very quick questions on the table.

Mr. Keyes: I hope you get an answer.

The Co-Chairman (Mr. Alcock): We will. I have five other people and we have four more minutes. I'd really like to give an opportunity for everybody to have stated their question.

Mr. Landry.

[Translation]

Mr. Landry (Lotbinière): On Tuesday, the Minister estimated the value of the 13,000 hopper cars at $420 million. If sold for scrap, the cars would bring in $90 million. You estimate that each car is worth $80,000, which would bring the total value of the fleet to over $1 billion. Your estimate is more than double that of the Minister. Therefore, in your opinion, how much should Wood Gundy Limited expect to remit to the government from the sale of the fleet?

[English]

Mr. Sallee: Sorry. What was the last part? I didn't catch the last part of your question.

[Translation]

Mr. Landry: How much should Wood Gundy Limited expect to remit to the Canadian government?

[English]

Mr. Sallee: I would like to be able to answer that. I think it's been generally put out in the marketplace that the government, Transport, would be looking at something in the neighbourhood of $300 million. Maybe the value isn't there. It might be something less.

We just have to work with all parties involved. Through the bid process, if that's the way it ends up, the market value will be established.

I don't have an answer to that question. People will put in the values they put in. The 75¢ per tonne is a financial cashflow...

Dennis reminds me about the other point. You mentioned the different numbers and the wide spread. The $80,000 per car I'm talking about is to build a new car, as opposed to cars that are16 years old and what their current market value might be. It's a big difference. We're talking about replacement versus the current car fleet.

The Co-Chairman (Mr. Alcock): Mr. Hoeppner, please.

Mr. Hoeppner (Lisgar - Marquette): Mr. Sallee, the railways have first refusal rights on these cars, don't they? What happens if farmers make a bid for these cars and then the railways say no way, we want the cars, and they have the right? The government would then have to sell to them, wouldn't they?

The other thing I'm just wondering about, before the chairman cuts me off, is we have reduced turnaround on cars two days over the last fifty years. Is there any hope of reducing that turnaround time?

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Mr. Sallee: In terms of the rights, there is an operating agreement. We believe we have rights under the agreement. We have been working with Transport and will work with the financial advisers and others to see if there are solutions here, as opposed to threatening rights or whatever. But we believe that we have those rights and we will preserve them.

As far as the cycle times are concerned, this is a push-pull type of thing. Obviously we're not happy with the cycle times. Every time we appear here or visit with our grain company friends, we're looking for ways of getting these cycle times down. We have to get them down; there are just too many cars out there to be efficient.

Mr. Taylor (The Battlefords - Meadow Lake): I was most concerned about one comment the witness made during his comments. He talked about the replacement of cars. He said - and I think I'm quoting him correctly - that if the railways are not owners of the government cars, they will not be involved in the replacement of the base fleet.

Are you trying to impose threats or blackmail on the process that in fact if you do not -

Mr. Sallee: No, it is not that at all. I was suggesting that if producers feel that they need to own the cars, then there is a responsibility that goes with that. Who is responsible for replacing, when? You have to get this out on the table. The dollars that are involved are not there in the current rate to replace those cars.

Mr. Calder (Wellington - Grey - Dufferin - Simcoe): I'm going to go directly to allocation. I'm from Ontario, so this is going to be set to Ontario.

Historically, 10% of the fleet has been in eastern Canada. Ontario needs 500 of those cars, and the other 800 cars are going to be needed to run western feed to Wayne's province. I want to know what guarantees are going to be out of CP Rail to make sure that 10% of those 13,000 cars are going to be in eastern Canada.

Secondly, because we're going to a short-line philosophy right now, I'd like to know what kind of a guarantee you, as a main-line railway, are going to give to the short-line operators for car leasing.

Mr. Sallee: To answer the first question, the cars we are talking about were purchased for western Canada.

Mr. Calder: They were also purchased by eastern Canada taxpayers.

Mr. Sallee: I understand that point, but the way in which they were deployed wasn't our decision. They were deployed for western Canada to meet the Crow situation.

We have a common-carrier obligation to provide cars to eastern Canadian producers. We provide cars. They're not the government cars; they're other covered hoppers. We run a fleet of 28,000 cars. This is just a portion of that total fleet. So we are responsible to our customers in eastern Canada to provide cars. We have a common-carrier obligation.

I realize that there are problems from time to time, but there are problems everywhere from time to time. The simple answer to your question is that we have a responsibility. I don't think it needs to be tied up in this issue.

As for guarantees to short lines and so forth, I don't know. ``Guarantees'' is a strong word. We're prepared to work with our short-line partners and make sure that a proper arrangement is made. They can lease the cars themselves, or maybe we can help them with that.

Mrs. Cowling (Dauphin - Swan River): My question is on allocation and on the Canadian Wheat Board. Being a prairie farmer and knowing the important role the Canadian Wheat Board plays in the movement of grain throughout the west, I want to know what the future of the Canadian Wheat Board is under your proposal. It certainly makes a lot of us from the farm community quite nervous. So could you give us the information on that - and, as I come from Manitoba, allocation of cars and the Port of Churchill?

Mr. Sallee: Unfortunately, I'm not involved in the situation in the Port of Churchill, as CP Rail does not move there.

The Co-Chairman (Mr. Alcock): Unfortunately.

Mr. Sallee: As far as CP Rail is concerned, we're really not taking a position on the marketing aspects of the Canadian Wheat Board. We believe that over time there should be less involvement of the Wheat Board in transportation in the country, but that's an issue that will not be resolved immediately. It will be over time.

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The Co-Chairman (Mr. Alcock): Mr. Sallee and the other gentleman with you, I wasn't certain whether your last answer was an expression of interest in becoming involved in the Port of Churchill. We could certainly talk about that.

I do appreciate the time, energy and efficiency of this last discussion. I wish to thank you for being here today.

The Co-Chairman (Mr. Vanclief): Thank you very much, gentlemen.

What the next witnesses, the Senior Executive Officers' Group, the Producer Car Coalition, and the Ontario Producer Car Coalition, have agreed to is ten minutes or less each. We will begin with the SEO Group. I believe Mr. Johnson is making a presentation.

Mr. Bruce Johnson (Chair, Senior Executive Officers' Group): Yes, Mr. Chairman.

With me today is Mr. Curtis Sims. He is one of our three producer representatives on the SEO committee. Also with me is Rick, a person you are well aware of.

The SEO Group is comprised of most of the major players in the grain industry, including producers, railways, grain companies, the Canadian Wheat Board, and the Canadian Grain Commission. That will give you a rough idea. I'm here as chairman of the SEO Group. I'm employed by the Saskatchewan Wheat Pool. I look after their grain operations and I reside in Regina. But my function today is solely as the SEO chairman.

I'd like to thank you for the opportunity to appear before you today to discuss the contents and merits of what has become known as the ``SEO package''.

After the February 1995 budget we were asked to study and comment on the disposition of the federal car fleet - to whom and for how much - long-term car allocation following the phasing out of the GTA, or the WGTA, as it has now become known, and the role of the Canadian Wheat Board in transportation. We had to take a look at rates and productivity sharing because they tend to be interwoven with the foregoing items.

Here is how we went about the task. We created some basic premises that would guide us as we worked through the problems. We wanted to create the most efficient and cost-effective system. We wanted to create a reliable system, one that meets our customers' needs well into the future. We wanted to assign responsibility to the best-suited entity. We wanted to create a system with built-in accountability.

I could summarize some of the high points of the SEO package. I'm sure most of you have had an opportunity to look at it.

The recommendation on cars is that they be sold to the railways for $100 million, to be paid for by a $1 per tonne increase in the maximum freight rate for a period of five years. We wanted to get them paid for. I know this recommendation may be perceived as a gift to the railways. It was really an effort to make cars available to producers at a reasonable cost.

Another recommendation was that a high-level car allocation group be set up - this is the acronym ``CAPG'' - composed of three representatives, one from the Wheat Board, one from the Western Grain Elevator Association, and one from the railways. It's the view that the industry would move to a more commercial system.

Another recommendation is that the role of the board be no greater than necessary to perform its marketing mandate effectively. Initially this will result in the board allocating its cars by zone rather than train run. The railways would assume train run administration as soon as possible.

The maximum freight rate would be extended from five to ten years, with no review either in 1999 or at the end of the ten-year period. Producers, grain companies, and railways would share equally in railway productivity gains in excess of 0.5%.

We appreciate the focus today is on the disposition of the government fleet and car allocation, but I thought the package would be useful background because these things are all inextricably interwoven.

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The SEO developed recommendations in response to a request from Transport Canada. The request was seen as an opportunity to make a significant contribution to improving Canada's export capability. The group put a considerable amount of time and expense into developing a package in the belief that the recommendations would be adopted.

It's worth noting that the SEO created an accord in eight months involving issues that have been problematic for over twenty years. In fact, when we went into this the odds for success were almost zero, so it's been a very pleasant surprise.

We were able to arrive at and agree to a package of proposals to which all of the diverse interests could agree. No one entity achieved all of its objectives. In arriving at the final package, the concerns and interests of producers were considered at length. Producers actively participated in both the SEO process and the technical subcommittee that assembled and analysed background information. All participants had the opportunity to speak fully and voice all of their concerns and put forward their ideas.

I think the package at the end of the day reflects the needs of the system and is the best financial deal for prairie farmers.

In terms of options for the disposition of the federal grain fleet, you've heard from people prior to me. The way we see it, there are several options. One is the grain car coalition; a second is the railways; and a third is others in varying lot sizes.

We have considered at length a variety of options, including various forms of producer ownership, for disposition of the cars. After considering the implications of each, we concluded that as part of a total package the cars should indeed go to the railways, with all the strings that I've previously enumerated being attached.

In the interests of time, I'll paraphrase.

We basically see the railways as being equipped to manage and operate the fleet, have the equipment, the trackage and all of the things that go with it, and actually operate the other half of the fleet that's devoted to grain. So it seemed to make sense in terms of assigning responsibility to the railways as the best-suited entity, and it also put us in a position to hold the railways accountable for the provision of cars and service.

The package was more than just cars. It was a number of financial benefits for the producer. We recommended that the cars be used exclusively for hauling western grain. The railways agreed to continue to ensure that capacity equivalent to that in the base year, which I believe is 1992-93, would be maintained. Farmers would benefit equally with railways and grain companies in productivity savings. The ten-year cap in the system would move to a more commercial environment. Also, the cars would be paid for by a $1-per-tonne surcharge for five years. That gets them paid for, gets it over and done with.

The Travacon study, to which I believe Mr. Easter or someone else referred, done for the Saskatchewan government, as well as media reports, suggested that a sale to the coalition could be accomplished by paying for the cars through a 75¢-per-tonne surcharge on grain shipments over the next 20 years, as opposed to $1 per tonne over 5 years, by way of a $1.30-per-tonne surcharge for 15 years in accordance with the coalition's proposal.

We'll make some comparisons later in the brief, but I guess the fundamental issue is that many of those who favour producer ownership perceive that the cars could somehow be used to offset the power of the railways. We're not sure how this would be accomplished. Based on reports in the media and the Travacon study, it appears as if an adversarial relationship would develop between the owners of the cars and the railways, the entities that own the roadway on which the cars would roll, as well as the locomotives that would pull them, as well as the owners of the balance of the fleet.

Our belief is that average farmers would be adversely affected by the resulting inefficiencies and lost income, much as they now are when a strike or lockout occurs.

Since the release of the SEO report in November and the subsequent formation of a coalition, many statements have been made about the perceived benefits of ownership by producers. The most recent of these was the Travacon study, to which I've already referred. However, little, if anything, has been said about the risks associated with ownership of the fleet and the financial ability of this entity to manage those risks.

Rick has touched on some of the risks associated with owning railcars, so I'll try to be brief in this area.

The Co-Chairman (Mr. Vanclief): Excuse me. You were well warned, sir, a week ago that you would be allowed a ten-minute presentation.

Mr. Johnson: Yes. Fair enough.

Some of the risks associated with owning railcars are obsolescence, residual use and storage capability, replacement, and rate risks.

Rick commented on obsolescence, the age of the fleet.

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On residual use, once again there's a great variation in the numbers of cars that are supplied. There is some question where these cars would be stored and how their lack of use would impact on payment for the fleet.

On the question of replacement, there's going to have to be ongoing replacement of the fleet, upgrading to the newer technology, the larger hoppers. Then of course we get into the rate review, which will be conducted during 1999. We're not sure it's going to be a very clear picture in the future.

The Co-Chairman (Mr. Vanclief): The bell's just calling the House.

Mr. Johnson: I thought I was being gonged.

The Co-Chairman (Mr. Vanclief): Not yet, but you're getting close.

Mr. Johnson: I'll go directly to my conclusion.

Once you take into account all the factors I've raised, and Rick raised on behalf of CP, I think we have to be careful that what appears to be a reasonably good idea on the surface isn't necessarily so. We believe firmly the SEO proposal is the best financial option for the farmers, providing more than $1.7 billion in benefits over the next ten years. In the brief I've included charts people can refer to. Additionally, producers will benefit from a stable, known rate regime and from the efficiencies that will introduced into the system as it becomes more commercial.

Also, the resolution of the issue is fairly timely. Come August 1 we're going to have a new car allocation system in place. I think if we knew where the cars were going it would make everybody's life a lot easier.

The final resolution of the issue must represent the least cost to the producer and must result in a system that serves Canada's customers reliably and efficiently.

Thank you for your attention. I'd be pleased to answer any questions. As I indicated, there are attachments that explain our numbers. I'll be happy to talk about those in the question portion.

The Co-Chairman (Mr. Vanclief): Thank you, Mr. Johnson. The written presentation you made cannot be circulated until it's in both official languages. It will be circulated to the committee once that is done.

We will now go to Mr. Harrison, from the Producer Car Coalition.

Mr. Sinclair Harrison (President, Producer Railcar Coalition): Thank you very much. With me today I have Art Macklin, a producer from Alberta, and Les Jacobson, from Manitoba. I farm in Saskatchewan. We appreciate your having both committees here today to save your time and ours.

Producers have been put into a situation where they're in a deregulated system, or moving to a deregulated system. The changes that are coming about certainly have made them start looking at marketing and the things they can do to help themselves in the future.

The coalition we are representing is a broad-base coalition. We represent ten associations from across the prairies: the Wild Rose Agricultural Producers, from Alberta; the National Farmers Union; the Saskatchewan Association of Rural Municipalities; the Keystone Agricultural Producers; the Western Canadian Wheat Growers Association; the Southern Rail Co-op; the Advisory Committee to the Canadian Wheat Board; the Western Producer Car Group; the Saskatchewan Canola Growers Association; and the Family Farm Foundation.

We feel we represent a broad base of organizations across the prairies. Certainly if we brought to the table everybody that is an association representing agriculture we could have a group of 300. But as you can appreciate, in a discussion like this ten people around a board table is quite sufficient.

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The coalition came about as a result of the SEO report, which came down on November 3. The indication in that report was that the producers would pay $1 per tonne for five years so the railroads could own the cars. Producers felt that if they were going to pay for the cars, it would perhaps be an opportunity for them to invest in something that would help to secure their future. So after November 3 the associations I listed passed resolutions at conventions instructing those associations to look at the ownership of cars.

On January 4, 1996, those groups came together and started to formulate their positions. We came up with a set of objectives and principles, which will be in your presentation once we get it to you.

Some of those are to secure reliable and adequate car supply for the movement of western Canadian farm products; to have producer influence on transportation issues; to optimize benefits to primary producers and enhance the competitiveness domestically and internationally for promoting the development of an efficient, economical, and affordable rail transportation system that will deliver products to our customers in a timely manner; and to ensure for all producers fair and equitable access to the rail transportation system.

Those are the objectives, and the principles follow.

It's certainly not our intention to cause interference in the system. It's not in our best interest to interfere. It's in our best interest to have an efficient system and to work in cooperation with the railroads and the grain companies, not to interfere with their operations.

In earlier presentations the first right of refusal was mentioned. Certainly that is a concern of ours. We're in the process of putting together a proposal for purchasing these cars. It's going to cost us considerable sums, and if at the end of the day the railroads retain that first right of refusal, it could all go for naught.

So we want to be on a level playing field when we put our proposal in. Under present legislation and regulations and agreements, we do not feel that this is the case. We've had some assurance from government that that will be taken out, but so far it has not come about. We urge you to deal with that as quickly as possible.

We've had discussions with the Ontario producers - corn, soybeans, and wheat. They started at the Canada Grains Council meeting about a month ago. Our producers met with them. We've had two conference calls with those producers. We're going to meet with those producers later today, and we feel that we can work out an agreement with those people from Ontario that leaves the 13,000 cars as a package. We can work out a long-term lease agreement for 400 or 500 or a negotiated amount on the cars.

Certainly it's our intention to use it as a common fleet. We do not feel it's productive to break them up into small packages and have dedicated cars for dedicated points. It hasn't worked in the past. It won't work in the future.

We would put that fleet of 13,000 cars into work with the railroads and try to cooperate with them.

On car allocation, CAPG has been mentioned. The budget indicated that producers should have representation on that, and certainly we agree with that. We have nominated a person to sit on that committee. A meeting is coming up on May 9 and 10, 1996, at which we will have a producer representative.

We realize that this committee will deal with high-level allocation. We agree that the day-to-day operation of cars must stay with the railroads.

We are at the point where we are going to put a work plan together, to put a proposal together. We had a meeting earlier this week at which CN Rail came in to speak with us. We realize that we need an operating agreement with both railroads, and we look forward to sitting down with CP in the very near future and working out an agreement that will work for the producers when they own the cars and will work for the railroads.

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Certainly we want to leave as much time for questions as is needed, because we know we're sort of the new kids on the block and you may have questions we have not addressed here.

I do have some copies of the Travacon report that was mentioned. It was not paid for by the coalition; it was paid for by the Saskatchewan government. It is certainly understood that every report done by a consultant can be questioned. We suggest this report will probably also be questioned. But it is a report; there is a number in there and it does support our position.

With that, ladies and gentleman, thank you very much.

The Co-Chairman (Mr. Vanclief): Thank you very much, Mr. Harrison.

I will now call upon the presenter from the Ontario group. Is John Andrews presenting? Who's doing the presenting? We'll have this presentation now. Mr. Doidge, are you presenting? Please introduce yourself and the other two gentlemen with you and then proceed.

Mr. Brian Doidge (Market Analyst, Ontario Corn Producers' Association; Ontario Producer Car Coalition): Thank you, Mr. Chairman.

I'm Brian Doidge, representing Ontario corn producers. To my right is Gus Sonneveld, representing the Ontario wheat producers. To his right is John Andrews representing the Ontario soybean producers' marketing board.

We're going to be very brief. If the previous group was the new kid on the block, we're even newer. You might wonder what we're doing at the table. So the first thing we're going to do is have Gus explain to you very briefly our view of transportation in eastern Canada and why we're concerned. Then we'll throw it back and we will make a proposal.

Mr. Gus Sonneveld (Second Vice-Chairman, Ontario Wheat Producers' Marketing Board; Ontario Producer Car Coalition): Good morning, ladies and gentlemen. It's certainly a pleasure. Mr. Keyes is smiling, and I suppose I could say I'm a new kid on the block, but I can't lie. It's not true.

As a marketing group we've been involved in transportation since day one, just as you have had in your portfolio many presentations from a variety of interests - from marine to rail to ports to the seaway. In short, what we're trying to say to you is this. We have a whole system evolving into something new in the next three to five years. Rail is part of it. Since time is short I will not read all of my notes, but I can tell you this. It's like a domino theory. If we don't look at the picture as a whole with the seaway, water, rail, short line, etc., we are going to have major trouble in eastern Canada and especially in Ontario.

I was listening with interest to the commentary that our railroad has served us well. I tend to take issue with this. In 1984 we had a survey system with both CN and CP. It was brought about because of the shortage of railroad cars that was almost consistent until 1994 or 1995. We have these problems. We see where CP is divesting itself from the eastern run - that's what I call it - and we see ourselves with major troubles in supplying rolling stocks for short line and certain other regions of Canada.

I had quite a little document for you as an opening statement, but I will leave the rest of it toMr. Doidge. The only thing I can say is we would like to support a producer concept. We can live with the other one also. But if we have to live with the railroads, I'd like to see some amendments so they live up to their word. If I ask for a car, it's filled, we get it and it's delivered within a framework of what we call the marketplace. Maybe it's a little rude, but that's the way I look at it. Thank you.

Mr. Doidge: Our proposal is rather straightforward and rather simple.

We're concerned about the availability of rolling stock in eastern Canada in the future because of the problems Gus alluded to. In particular, we are concerned about the abandonment of eastern Canada, except for their mainline connections, by the class one railways. Our concern is who has and who will supply the rolling stock in eastern Canada when CN/CP pull their hopper fleets back to the west, which we expect they will do.

Our proposal is straightforward. The federal government is the owner of the hopper fleet. We're asking the federal government to impose a term and condition on the sale so that 500 cars will be available through annual lease to commercial entities in Ontario for use in the transport of grains and oilseeds produced in Ontario.

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These leases could be flexible. A lease could be for one month, two months, six months. Most likely it would be an annual lease. We ask there be a two-month lead time required on the lease for the commercial entity to speak up. We also ask that there be a monthly auditing and monitoring process implemented so the eastern grains and oilseeds groups could be sure there were indeedx number of hopper cars in the lease. Those cars that were not leased could remain in the western fleet servicing the western conditions.

We're asking for these terms and conditions to be imposed on the tender documents when they go out for bidding for the sale of the car. We're advised there will be no regulation implemented covering the sale of the cars. So the only way we can see to do it is to impose a term and condition on the tender for sale.

With that, we'll turn it back to the chairman for questioning.

The Co-Chairman (Mr. Vanclief): Thank you very much, Mr. Doidge, for those comments. Since we're not going to have a vote, this leaves us in the position in which I'd hoped we would be but I was afraid we weren't going to be. That is, we have the time for a good dialogue here.

We'll go with three five-minute rounds to begin with, starting with Mrs. Cowling,Mr. Hermanson and Mr. Chrétien. Mrs. Cowling.

Mrs. Cowling: It would appear we have a number of players around the table who have an interest in the fleet of cars and who should own them. However, the message appears to me, at least, to be somewhat conflicting.

Two or three years ago I attended an International Federation of Agricultural Producers' meeting in Quebec City. At that particular meeting I heard producers from around the world and particularly from Canada say we should be moving back to the cooperative movement. I'm wondering if those people around the table who are interested in a producer perspective have thought of a cooperative movement with respect to owning the fleet.

The Co-Chairman (Mr. Vanclief): This is going to be somewhat difficult, but we're doing it this way because if not these questions might be asked of every group. So everybody doesn't have to answer every question. Let's go first to Mr. Harrison and then Mr. Doidge. Please give quick answers and then we'll move on.

Mr. Harrison: We've had initial discussions on what might work best for us. At the present time, it appears in the initial stages that a trust would best serve the producers of western Canada. This doesn't limit us or prevent us from, at some point down the road, dissolving the trust and moving to a cooperative, or a corporation, or some other vehicle. But right now it appears in a transition stage a trust would serve us best.

The Co-Chairman (Mr. Vanclief): Mr. Doidge.

Mr. Doidge: I guess from an eastern Ontario perspective we view this as a cooperative venture initiative anyway. The two eastern and western producer groups have consolidated and are working together. Our proposal is to sub-lease from them. If we don't need them, they're available for use in the west. If the commercial entities in western Canada get the cars, our same proposal applies. All we're asking for is a sub-lease. I would think what you're really talking about is cooperative action as opposed to a cooperative structure.

The Co-Chairman (Mr. Vanclief): Mr. Johnson, do you wish to comment?

Mr. Johnson: No.

The Co-Chairman (Mr. Vanclief): Mrs. Cowling?

Mrs. Cowling: I'm going to raise the question I raised with the previous people. There appears to be a bit of nervousness about the future of the Canadian Wheat Board. As a farmer, I'm concerned about that. Under your proposal and with the changes to allocation and zoning, do you fear there may be some undercutting of the Canadian Wheat Board and its future?

Mr. Arthur Macklin (Member, Advisory Committee to the Canadian Wheat Board): I will try to address this.

We do have a concern about the effectiveness of the Canadian Wheat Board marketing system. To be an effective marketer, the Canadian Wheat Board needs to have the ability to draw the grain forward in a timely manner to meet the customers' vessels as they come in, and to draw the grain forward in such a manner as to meet the exact specifications.

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It takes a very complicated logistics system to accomplish this. And it is important that the marketer have the ability to control enough logistics to satisfy the customer need, to do that in the most efficient manner possible and to maximize returns for producers while doing it. So the Canadian Wheat Board does have to be very intimately involved in logistics planning. We do see the SEO proposal and the railways' proposal as one to move the Wheat Board out of that, and that will be to the detriment of overall producer returns.

The Co-Chairman (Mr. Vanclief): Any other comments? Mr. Johnson.

Mr. Johnson: Mr. Chairman, I should note that the board was a full participant in the SEO process. It had no problem whatsoever with moving to zones. What we're all trying to work towards is a system that supports marketing in an efficient manner.

I would disagree with the comments made. There is no effort to push the board out of the way. The question is just how you get the right grain to port in a timely fashion so all the assets are properly utilized.

The Co-Chairman (Mr. Vanclief): Mr. Hermanson.

Mr. Hermanson: Thank you, Mr. Chairman. I have two questions I want to get in on this round. The first one is addressed to the SEO Group.

Your proposal is based on these cars being sold for $100 million. Of course the government never agreed to that. We understand they might want $225 million to $300 million. If that's the case, what would be the impact in increased freight rates for producers? Under your car allocation scheme, how would Ontario be impacted and how would short-line railroads be impacted?

Mr. Johnson: The magnitude of the dollars involved would obviously have an impact on either the amount of increase in the freight rate or the length of time. There are really only two ways to deal with it.

What we tried to do is to come up with a package that dealt with the issue of disposal at a number people could deal with and in a timeframe people could deal with, so you could get into reinvestment. If the price goes up to $250 million or whatever the number is, it's just going to cost more money. There is no simple solution.

The SEO package and something like short lines...that would be an area that's left open to people who are interested in operating short lines and negotiating with the railroad. That could involve grain companies getting involved in the short-line business, or some of the American short-line operators coming up. So that field of play is left wide open. It has to make commercial sense, though.

About Ontario, Ontario product has always been involved in the overall usage of those cars. We didn't deal with it extensively as part of the package, but we certainly recognize a certain amount of grain is going to be moved in eastern Canada, and the cars will be there to do the job.

Mr. Hermanson: Thank you.

My second question is to the producer coalition. I wasn't an MP very long before I learned the status quo in car allocation is a recipe for finger-pointing. The Canadian Wheat Board points the finger at the railroads and the grain companies. The grain companies point at the other two. Of course in the past the GTA was also involved. What I see in your proposal is the same sort of structure, with perhaps the additional problem of producers owning all these cars and thinking, why are those wheat producers getting that wheat moved and my canola is not moving, or vice versa. How are you going to propose that this is going to be a more efficient system, with so many players involved in the allocation process?

Mr. Macklin: I welcome the question.

Yes, there's always the problem of accountability in a system. In fact, though, in Canada - and I think the Wheat Board has stated this a number of times, and as an advisory committee member I think we recognize it - the Canadian system has some pretty good statistics relative to the U.S. system, which is one where you have relationships between railroads and shippers. In Canada, with this third-party GTA, or this allocation group, our car turnaround times, according to statistics, average about 19 days for the overall fleet. In the U.S., for the overall fleet, it's 26 days.

You have to be a little more specific, I'll acknowledge, because there are various considerations about those statistics. But in fact Canadian statistics for car turnaround times and performance are quite good relative to the system that I think is being advocated by the SEO Group and the railroads.

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As a producer, I don't want to go backward. I want to go forward. There can always be improvements in the system, but it seems to me that good planning and overall planning by the total group, which has the producers involved as well, is a way to move forward to get better performance and to encourage cooperation of all players within the system, recognizing that producers are a big stakeholder and should have a place at the table.

[Translation]

Mr. Chrétien: I have three questions in all. The first one is for Mr. Johnson.

You spoke of improving the cost-effectiveness, efficiency and speed of the system. However, to achieve this objective, should the government settle for selling 13,000 hopper cars for $100 million, whereas the Minister of Transport himself stated that their market value was $420 million? A CP representative who testified earlier said he was anticipating a windfall of about $320 million.

I'm comparing the market value of $420 million to the sum of $100 million that you hope the government will get by selling the hopper cars to the railways. Of course, that is your opinion. This price represents a mere 25% of their market value. Don't you think you're being unrealistic by agreeing to sell the cars for $100 million, whereas their book value is estimated at $420 million?

[English]

Mr. Johnson: I guess it comes down to what kinds of conditions you put on the railcars. If they were simply going to be sold at open market to anybody on the continent, I would be awfully surprised if they achieved the $300 million.

I guess our assessment is that given the make-up of the fleet and the age and the conditions and the intention behind the original purchase, $100 million as part of a package makes sense, from both fiscal and policy points of view. If government wants to emphasize solely price, then that's a different matter.

You have a fair point.

[Translation]

Mr. Chrétien: My second question, Mr. Chairman, is for Mr. Harrison who represents a broad coalition of Western grain producers. At first glance, I would be favourable to the idea of the government selling its hopper cars to the producers themselves since they are the raison d'être of the hopper cars. Without the producers, there wouldn't be any hopper cars.

I would like you to clarify something for me or at the very least give me your opinion. The Department of Transport intends to sell all 13,000 hopper cars together. In the event they are purchased by producers, will the producers be able financially to maintain this fleet of cars? Some are said to date back to 1972, which means that they have reached a ripe old age. Will the producers be capable financially of keeping them in good condition to ensure their speed and effectiveness? When the time comes to replace this hopper car fleet, will the producers be able to do so?

[English]

Mr. Harrison: Certainly we've looked at this, and we have a complete breakdown of when the cars were purchased.

It's our intention in our bid to purchase the existing cars and have in our proposal how we are going to replace them in the future.

It was made plain to us by Mr. Goodale that certainly he's in this for the long run, and I think producers are into this for the long run. We, as producers, feel that just to purchase the existing fleet and not to look at how it is going to be replaced would be irresponsible.

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We will be taking our direction from the 75¢ in our bid for the existing fleet and how we will generate income for replacing those cars, and we feel all other bidders will be taking their direction from the 75¢.

[Translation]

Mr. Chrétien: What guarantees can you give the committee members that in seven, ten, or twelve years' time, you won't come back and ask the federal government for financial assistance to replace a significant portion of the hopper car fleet?

[English]

Mr. Harrison: I guess producers have accepted the fact that freight rates are going to pay for rolling stock regardless of who owns it, whether it's a lease company, whether we own it, whether the railroad companies own it. I think it's fair to say if additional stock is needed in the future, producers are going to pay for it in the end. Who owns the asset is yet to be determined, but producers pay for the whole system. They pay the railroad system, and the guy who pays the piper should have some say.

Mr. Doidge: I realize the question wasn't put to the entire group, but I thought I'd give you our view on the rates and capital asset replacement value.

We agree wholeheartedly that the producer foots the bill in the end analysis. In our proposal the lease rates we would pay to whoever owned the cars would be commercially prevalent lease rates in eastern Ontario. Therefore they would have to incorporate the capital asset replacement value for the owner of the cars anyway. So in our proposal whoever gets the fleet would receive the commercial lease rate, and buried in that would be replacement value.

Mr. Calder: I want to deal with two things, ownership and allocation. I'll be putting the ownership question to Mr. Johnson.

Mr. Johnson, I've employed the same type of tactic any time I went out to buy a tractor. I've always run it down and tried to get it at the best price.

With these cars out there right now, the front-end ones were purchased in 1972 and the last were purchased in 1986. As I understand it, the life expectancy of one of these hopper cars is anywhere from 25 to 40 years, not the 16 years Mr. Sallee mentioned. I'd like your comment on that. If that's the case, it almost sounds as if the better person to sell these cars to would be CN, if we went that route, because they're saying the life expectancy of these hopper cars is 40 years.

Mr. Johnson: What we're talking about is residual life; and sure, there's some debate. You almost have to look at the fleet by year of purchase. There are cars that obviously have higher value than others. Some of the older ones are going to be a problem.

The issue that's coming up really is that the newer-generation cars that are on the market now have a much higher payload. When we begin to look at the costs involved in moving product to market, a 10% to 15% higher payload really translates into significant dollars.

I hope you did well on your purchases.

Mr. Calder: Do you have any problem with the farmers owning the cars?

Mr. Johnson: Not particularly. I think the issue is how the fleet is allocated, how it's utilized, and whether or not we can get to a system where time actually begins to have some value, where we can predicate investment on some known pillars, if you want, within the industry. Over time it doesn't really matter that significantly who owns the cars, as long as they're available and everybody is playing according to rules they understand.

Likely what we will end up with over time, if I can guess, is a combination of some sort, where there'll be some producer-owned cars, some railway-owned cars, and probably some grain company-owned cars.

Mr. Calder: That already exists.

Mr. Johnson: It's just an extension -

Mr. Calder: You have 12,000 cars that are out there. Basically 6,000 of them are directly and indirectly owned by farmers.

Mr. Johnson: Yes.

Mr. Calder: Okay, I'm going to swing to Mr. Doidge, then, on allocation.

I want to go back to what I was talking about. Historically, in eastern Canada, of the fleet of hopper cars we have right now, the 13,000, 10% are in eastern Canada, basically marshalled out of Thunder Bay. You're talking about 500 for Ontario. Is that 500 for all of eastern Canada, or just for Ontario? If that's the case, then what about the extra 800?

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Mr. Doidge: The 500 cars we are talking about would be sufficient to handle grains produced in Ontario. The 1,300 cars, or the 1,000 that Mr. Goodale may be talking about, in our opinion are most likely a total of that 500 plus 800 that would handle grains originated in Thunder Bay that most likely are prairie grains.

Mr. Calder: Western feeds.

Mr. Doidge: So they originated from Thunder Bay and are delivered in eastern Canada.

I think the reason for the distinction is the difference in the freight rate structure west of Thunder Bay as opposed to east. So we have no opposition to 1,300 as long as it includes 500 allocated for Ontario grains and oilseeds.

Mr. Calder: Mr. Harrison, are you willing to give up 1,300 cars for eastern Ontario?

Mr. Harrison: As I understand the position, a lot of that is western grain. It's our intention to get our western grain to market wherever that market is. If that happens to be in Ontario or Quebec, then it's in our best interest to make those cars available. So I think we can work with these people.

We've had an expression of interest from B.C. producers that are part of the Peace River, that are part of the western region. They have a shortage of cars, and certainly we want to have an influence up there also.

Mr. Calder: What about some of the cars that would be going south of the border? For instance, if Ontario decides to ship soft white for the pasta market down there, what about that?

Mr. Harrison: It's our understanding that a lot of their markets are in the U.S. There's a set of standards across North America that regulate rolling stock, and their cars would go wherever their markets were.

The Co-Chairman (Mr. Alcock): We in the west have always believed in feeding the east, Mr. Calder.

Mr. McKinnon.

Mr. Easter: You mean feeding central, Mr. Chairman, not the east.

Mr. McKinnon (Brandon - Souris): Thank you for your level of wit, Mr. Chairman.

I've enjoyed the representations and interactions that have gone on this morning.

I'm concerned about a couple of things. One is that I am still hearing some concerns about perceived belief by some groups that the railways, through the former Bill C-101, have developed an advantage in the level of the playing field and all of the operations in the industry. I would like you to comment on that, if you wish.

Secondly, there's a concern about the concentration of power. In all of the negotiations and discussions you've been part of, are you comfortable with what appear to be your positions as we head into what is generally described as a deregulated régime?

Lastly, I'm concerned, again by people who want to get into short-line operations, that they are not getting the fullest of cooperation from those from whom they need it. I will decline to name those persons.

I'll ask any of you to comment on that.

Mr. Johnson: A duopoly is not wide-open competition, but it should also be noted that, say in Saskatchewan, within probably $3 or $4 for trucking, I can move a significant portion of grain between CN and CP. BN and some of the other roads are also expressing an interest. I think if things got out of hand, there would be a move to try to get joint running rights for other roads.

I think there's a reasonable balance of power. We're all mindful that the other guy may be getting the edge, and we're extremely jealous of that right.

There has been a positive experience with some short lines in the U.S. The Canadian short lines that are operating right now are not doing particularly well.

There is a place for short lines. In fact, the two that are operating right now benefit from a permanent government subsidy, which is generated by 10¢ a tonne off the top of the freight rates that everybody pays. But I don't think there's any effort to freeze the concept out, or to refuse to work with people.

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The other thing is the system has to rationalize and modernize. If as a grain company I want to invest significant capital in larger, more efficient facilities, I will probably want to close some smaller ones. Again, there's a balance there.

Over time, I think you will see some short lines.

I don't know whether I addressed all your points, but thank you for the question.

The Co-Chairman (Mr. Vanclief): Mr. Doidge, do you wish to comment?

Mr. Doidge: Yes. We made a presentation to the Standing Committee on Transport on Bill C-101 from the position of Ontario grains and oilseeds. The basis of it was we weren't happy with the appeal process that was set up in the proposed regulations. That has since been corrected and we're happy with it.

The second part of our proposition was we needed reciprocal running rights, short line to class I, because we were very much concerned about the operating relationship, in particular the service provided by the class Is to the short lines. It's not covered in the bill, and we're very concerned about it in the east, because we're going to be left with a system of main lines only and then a feeder network of short feeder lines.

So we think Bill 101 has potential, but we really want the working relationship between short line and class I addressed.

Your second question concerns concentration of power. Of course we're concerned about that. In the east we operate and have long lived in a situation of a total and open free market system. We're used to that, we can survive on that, provided the playing field isn't tilted against us. We think Bill C-101 to some extent tilts it towards the railways.

The third question concerned short-line connections and working relationships. I think I've addressed most of that.

Gus, you had a comment?

Mr. Sonneveld: Yes. I think we have mentioned the issue of rolling stock, the supply of equipment, in our past presentations; in some of our briefs. We are now looking at the very same thing again. Where are we going to get the rolling stock, for instance?

I would have loved to have seen that... Okay, under the common carrier obligation we have the right to go to the NTA or CTA for cars if they're not supplied. When you are a marketer of grain as we are as a board, we work against futures. They have to be delivered. If they're not delivered and the timeframe is over, we pay a penalty for storage, etc. All I wanted is a little amendment in that bill that would have said if those common carriers do not supply the cars in a properly ordered time of two months, then they pay the market storage or the penalty of the grain company involved. I would have loved to have seen that in the bill, to solve that problem.

The Co-Chairman (Mr. Vanclief): Mr. Macklin.

Mr. Macklin: First, on Bill C-101, western Canadian farmers have really been put in a shock position, going from the protection of the Western Grain Transportation Act to the regime under the new legislation. We're very concerned about that kind of change. We have to move into a deregulated system, and I guess it's the thought of western Canadian farmers that if that's the name of the game, farmers should have as much real power in the system through ownership of assets as they can acquire as they can to be full players in the transportation policy area.

We've also seen, and it's been documented, that to date the Canadian railroads have basically refused to compete with competitive line rates and some of these provisions that are in the bill. So we haven't seen that in fact there is competition in the railroads, or that we've been able to stimulate it to any effective degree.

About concentration of power, yes, most areas of western Canada are captive to rail. We do not have the option of water. I think in reality eastern producers have some greater intermodal competition than we do. We are basically captive to rail. Trucks are going to add cost to the system.

The Co-Chairman (Mr. Vanclief): Mr. Hoeppner.

Mr. Hoeppner: Mr. Chairman, I thought politics here on the Hill were sometimes strange, but when I see the Western Canadian Wheat Growers and the Farmers Union being on one side, with an advisory board member from the Canadian Wheat Board, it almost reminds me of an oil fire you're trying to put out with water. Isn't that what we're trying to do here by solving your car allocation system?

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What really worries me is that we can solve the car allocation, but how do you harmonize that with the terminal space? This is one problem we've run into time and time again. You get the cars to the ports, but then you find out that you have the wrong grain, or you don't have the terminal space to handle it, or you don't have the ships there waiting for it. So those have to be harmonized or synchronized before you can have an effective car allocation program. How are you intending to do that?

Mr. Harrison: Certainly the CAPG process deals with everything right out to port coordination. With a voice there, we feel we'll gain a better understanding of what is happening.

Some of us have been out there to take a look at what is happening. There is room for improvement.

Mr. Hoeppner: This is my own idea. If you sold these cars to the shippers and to the grain companies who own the terminal space, couldn't they do a better job of allocating them? In that way, they would know how many cars they really need and when they need to be replaced.

I know that sometimes when you talk to the private grain trade they have made commitments on special crops and the Wheat Board steps in and says ``We have a big sale now and we need the cars''. So there's always going to be friction between the special crops and the board grains.

This is my idea, as a farmer. I think that's the way to go. I think it would solve a lot of headaches for you people, too.

Mr. Macklin: Canada does not have an overbuilt transportation and handling system. Our ports are generally utilized to the maximum, particularly on the west coast. Our rail system and our primary elevator system are pushed to the maximum. We need really good cooperation and coordination of the entire system.

Because farmers are the ones who pick up the entire cost of this whole system, we are the entity that has the greatest stake in ensuring cooperation in this whole system. To have farmers own the railcars and then be an impetus to encourage the others to cooperate...

You have to recognize that the others are concerned about their bottom line within the framework of the assets they control. They want to maximize their asset utilization, not necessarily the overall system.

So farmer ownership can be an encouragement to all parties to cooperate and have the least-cost, most-efficient system. That's in our interest.

Mr. Hoeppner: The reason I was bringing that forward was that I feel - and maybe I'm wrong here, and if I am, please correct me - that if the shippers, the grain companies, owned a percentage of the cars, then they would probably be better positioned to negotiate with the railways than you as farmers would be.

Mr. Harrison: It's my understanding that the real impetus behind this producers' ownership is that they want a place at the table. Grain companies at one time were producer owned and controlled, but this is no longer the case. Giving or selling the cars to the grain companies does not gain us a place at the table, which is what we're trying to achieve.

[Translation]

Mr. Landry: My question is for Mr. Harrison.

I am assuming that the owners will also be producers. Do you think you will have any problems reaching an understanding with the railway owners over the use of their lines? What type of negotiations will you have to undertake with the coalition and the railway owners?

[English]

Mr. Harrison: As I indicated initially, we've had only one meeting, and that was with CN. It's our understanding that it might be bidding for the cars, also. When you're both bidding for the same asset, it makes it somewhat difficult to sit down and hammer out an agreement.

We realize that we are going to have to cooperate with the railroads if we're successful, and we feel we will be. So it's our full intention... It's in our best interest. We don't own the railroads. We don't own the power that pulls the cars. So we know that we have to work with them, and that's our full intention.

[Translation]

Mr. Landry: My other question is for Mr. Johnson and concerns the hopper cars earmarked for Quebec. What arrangements have been made in this plan and how many cars does Quebec need?

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[English]

Mr. Johnson: As I said earlier, what we're assuming is that there will be an ongoing requirement for cars in all of eastern Canada. Right now there's a fairly large movement through Quebec City. Within the province, for domestic usage - that's really an issue that would be negotiated directly with the railways. We haven't really contemplated a detailed plan for Ontario or Quebec. All we really assumed is that there would be a need similar to what there has been in the past. We recognize grain has to move within the province, either to port or to feed or industrial users. I don't see that as an issue or something we would have a problem with.

The Co-Chairman (Mr. Vanclief): Mr. Easter.

Mr. Easter: This was one of the questions I wanted to raise earlier with the representative from CP. Under a question I raised with the representative from CN on Tuesday, CN felt they had the right of first refusal in the sale of the cars, or at least the right to agree on the conditions under which those cars would be sold.

Mr. Chairman, just for the record, I have asked the Department of Transport for a copy of that agreement, which has supposedly been signed between the railways and the government. I haven't received it yet. I've put a question on the order paper to that effect. But there is a possibility here that in the final analysis the government may not have the right to sell these cars to anyone without obtaining certain conditions first.

In the event that may happen, I'm sitting here listening to this discussion and I'm saying to myself - what's the old saying - watch the doughnut and not the hole. Is the key question ownership or is it something other than that? The presentation by Harrison, I believe, said the object here is to secure car supply and to have producer influence. Ownership does not necessarily imply those two points. What's more important - I come back to what I raised earlier - is the whole allocation question. I believe we have to determine how that's solved first.

My question to whoever is what's your view on that in the importance of car allocation versus ownership? Ownership, although I'm not opposed to it - I'm in fact leaning in favour of it - doesn't imply you control the system. The allocation system's more important in that perspective. So I wanted your points on that.

Secondly, there's a broader concern here. Given all the changes in transportation and the move to commercialization, I think there's a fear in the farm community that it will lead to an Americanization of our system in Canada, not only in transportation but in marketing.

I guess I'd raise this question with Art. I know he's had some experience in the States. Some around this table promote the American system as better, but I would say the grass is always greener on the other side of the fence. My experience is in the United States it's far worse than our system. I wonder if Art could comment on how well the farmers are doing in the U.S. under that commercialization system and with their marketing system versus ours.

Mr. Harrison: You talked about the terms and conditions and the first right of refusal. Certainly that concerns us greatly. Until we see those terms and conditions it's going to restrict our ability to... If there are a lot of terms and conditions, naturally what we're prepared to pay for the cars is going to be affected. We won't know that until we see at least the initial call for proposals. So we are concerned, as you are.

I'll ask Art to talk about the U.S. system.

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Mr. Macklin: In the U.S. you have basically a deregulated system. The concern I have is that when I look at the CN brief that was made here, and listen to the CP brief, the elements that they want are to take any third-party protection out there and go to direct relationships between shippers and railroads. Well, that's basically what they have in the U.S.

So what's the performance in the U.S.? You have a situation as is reported in one instance by the Montana farmers' union. It is 992 miles from Billings to Portland and it is 1,470 miles from Alliance to Portland, yet it costs $278 more per car to ship grain from Billings because there's no competition for the Burlington Northern from Billings to Portland, whereas from Alliance there are other railroads and other intermodal kinds of competition.

In Canada we're basically in the situation of the Montana producers. We're captive shippers. We don't want to get into that situation.

There's a whole litany of examples one could go into. This is sufficient. It's a situation of captive shippers and railways maximizing profits.

Mr. Doidge: There was a question about ownership versus access. In the east we have debated that point, and we've come out on the side of access, at least in eastern Canada, being more important. That's why our proposal is what it is.

On ownership versus allocation, we don't have an allocation system in the east. It's based on open-market conditions. So we're already in an Americanized type of system.

The brings us to the third point. That's why we feel that Bill C-101 is extremely important, particularly the parts that deal with appeals and shippers' rights and reciprocal running rights.

Mr. Johnson: I agree that the essential point is not really ownership; it's utilization, allocation, and access. I think most of these things have been covered off.

Just for your information, a new allocation process is already under design. A lot of us have sales that extend beyond the crop year, and we've had to take matters into hand and get moving on this so there will be a seamless transition from the withdrawal of government come August 1.

Mrs. Ur (Lambton - Middlesex): For my one question, I guess I'll have to go with the railways.

In your presentation you said that you had to be competitive, accountable, and efficient. Does that include east of Thunder Bay?

When CN gave a presentation the other day, I was a bit taken aback. I asked what assurances Ontario and the eastern provinces can be given from the rail that cars will be allocated beyond Thunder Bay. The answer - and I got the same feeling this morning from your presentation - was ``Because we're so nice, if we have some extra cars sitting around, we'll direct some your way''. I take offence from that a bit. I guess this is because I'm from Ontario - and I do have colleagues to the east of me, as well.

Mr. Johnson: I'm not representing the railways. I'm here on behalf of the SEOs, which is a fairly broad spectrum of industry players.

If Rick wants to comment, he certainly can.

Mr. Sallee: We have had some problems - there's no doubt about that - when we've had an overall tight system. We have been doing better. We try to make sure that we are adequately covered in eastern Canada. Usually when it breaks down it's breaking down all across because demands are heavy right across Canada and there are shortages all over the place. There is an allocation of cars to try to take care of peak demand. At times we are short.

Mr. Hermanson: I'd like to address my question to Mr. Macklin, and perhaps Mr. Johnson.

The Canadian Wheat Board was part of the SEO Group and agreed to that. We've been getting mixed signals from the Canadian Wheat Board. First, the board you serve on, the advisory board, withdrew support. Now we have the resignation of Mr. Beswick because of a lack of consensus of the commissioners.

Is it true that three of the commissioners wanted to retreat from their support of the SEO proposal but Mr. Beswick wanted to continue to support it?

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Mr. Macklin: I'm not going to comment on that. Mr. Beswick and the commissioners can speak for themselves.

About the Wheat Board position on the record on the SEO proposal and the hopper car issue, as early as last July the Canadian Wheat Board chief commissioner sent a letter to Mr. Goodale supporting producer ownership of the hopper cars. Yes, they have been a part of the SEO agreement. Last December at some time a news release came out stating that they were in support of the producers' owning the hopper cars. I think their public statements speak for themselves.

The Co-Chairman (Mr. Vanclief): Mr. Johnson, do you wish to speak?

Mr. Johnson: I'm just as confused as everybody. I don't propose to speak for the commissioners, but we have received a mixed message.

The Co-Chairman (Mr. Vanclief): Mr. Taylor.

Mr. Taylor: A brief question in two parts to Mr. Harrison, first coming off what Mr. Hoeppner had to say.

Certainly it is a broad coalition that is taking place here. He has the pleasure of chairing a group with the National Farmers Union on the left side and the Western Canadian Wheat Growers on the right-hand side. Does this not demonstrate how important this issue is to these organizations, which have broadly diverse views on agriculture but which have all worked for decades on bringing the farm system into a more efficient way?

Secondly, does it not make sense that this broad-based coalition should have an opportunity to be a serious part of this process when the recommendation from SEO is $100 million, only$10 million more than the scrap value of the rolling stock? If it's going to be a give-away, should it not be a give-away to this group which has worked so hard for decades to better the system?

The Co-Chairman (Mr. Vanclief): A fifteen-second comment, Mr. Harrison. The next committee is already starting to sit at the table.

Mr. Harrison: You've indicated the diverse group, and certainly that demonstrates the strong producer support there is for this initiative. We are all there because the producers in our associations have told us to be there and said, you have one objective and that's to get the cars; we'll deal with the transportation issues once we've achieved that.

Mr. Johnson: One last quick comment on that subject. We're not advocating a give-away to the railways at scrap value. We tried to put together a package that had give-and-take for a lot of parties and tried to continue the policy the government was involved in when it first bought the cars. So it's not a scrap give-away to the railways, it's an effort to try to treat everybody in the system fairly.

The Co-Chairman (Mr. Vanclief): Ladies and gentlemen, on behalf of Mr. Alcock and myself, thank you for your cooperation.

The meeting is adjourned.

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