FINA Committee Report

CASE I: HEALTH CANADA’S THERAPEUTIC PRODUCTS PROGRAMME

Among government departments, Health Canada has seen the second-largest percentage increase in user charges over the past five years. Since 1994-95, user charges have risen 118%, from $27.7 million to $60.4 million in 1998-99. For the first time, many mandatory services like drug testing were subjected to user charges.

According to Mr. Dann Michols (Director General, Therapeutic Products Programme, Health Protection Branch, Health Canada), user charges cover anywhere from 20% to 80% of the cost of the Health Canada activities for which fees are charged, with the balance coming out of appropriations. Currently, there are cost-recovery initiatives in the following programs: the Therapeutic Products Programme; Environmental Health Program; Pest Management Regulatory Program; Occupational Health and Safety Program; Medical Services Program; Food Safety Program; and the Hazardous Materials Information Review Program. In the Therapeutic Products Programme (TPP), user charges cover about two thirds of program cost.

Mr. Michols told the Committee similar industrialized countries, "including the United States, the United Kingdom, the European Union, Australia and New Zealand, all … have some form of user fee policy in place and in some cases their regulatory programs are funded 100% by revenue as opposed to government appropriation."

Cost recovery, according to Mr. Michols, has helped achieve the goal of making government more businesslike: "It also, I think, had a major impact on the mindset of the scientists and the regulators within the program in that it forced them into thinking about the regulatory process as being a managed process, as there being clients at the end of the process who had legitimate needs. That also was an incentive to increase the productivity."

It is, however, very difficult to make government businesslike when the incentives for such behaviour do not exist. For example, as cost recovery was implemented in a world of general program reductions, what guarantee does a department have that efficiency gains would not just lead to further funding cuts? When a fee is for a mandatory service without competing suppliers, what aspect of user charges would lead to a more businesslike mindset?

For this report, the Committee looked at the TPP, specifically at the experiences of Canada’s brand-name and generic drug manufacturers. Beginning in 1995, the TPP has charged five different drugs-related fees: fees for the authority to sell drugs, drug evaluation fees, drug master file and export certificate fees (both of which started in 1996), and drug establishment licensing fees (which began in 1998). Together these fees totaled $33 million in 1998-99, down from $37 million in 1997-98.

Source: Treasury Board Secretariat

Health Canada is working toward revising and bettering the cost-recovery program through a variety of initiatives and studies. These include the TPP Phase IV Review, which seeks to evaluate the impact of cost recovery in TPP on businesses of all sizes, consumers, affected sectors, and governments and regulators themselves. It will examine both benefits and costs to regulation. As well, the Health Protection Branch has conducted a wealth of studies and consultations on business impacts.

Mr. Michols contended that the transition to user charges has been largely successful, though difficult, including the problems of "having to manage a revenue-dependent operation within the constraints of the public service which is oriented towards an appropriations-based operation."

In setting fees, Mr. Michols told the Committee that both health and economics played a role: "The environment in which Canadian industry and Canadian-based industry must operate, is a very real factor in our environment. That said, our mission is to protect the health and safety of Canadians. It’s to ensure that the drugs that are available to Canadians are safe, effective and of high quality. That’s job one."

Further, seemingly in contrast to the Treasury Board Policy, a main role of user charges in the health portfolio is the generation of revenues.

PROBLEMS WITH IMPLEMENTATION

A. Service Commitment Not Met

Both the brand-name association, Canada’s Research-Based Pharmaceutical Companies (Rx&D), and the generic drug group, the Canadian Drug Manufacturers Association (CDMA), were not opposed to the principle of user charges — both, in fact, had been consulted extensively on the set-up of the various fees. In keeping with taking fee-payers’ needs into account, TPP introduced performance standards for submission review processes that were internationally competitive with leading drug regulatory agencies.

According to Mr. Jim Keon (President, CDMA), "We agreed to the fees to be paid because we were assured that there would be a real effort from TPP to improve the time it took to review generic drug submissions, ensuring faster notices of compliance and timelier access to the market."

These targets have not been met. The target chosen for brand-name drugs was 355 calendar days. However, according to Rx&D’s John Stewart (Executive Vice-President and General Manager, Purdue Pharma), approvals now average around 591 days. It should be noted that this is down significantly from a high of 1,142 days in 1992, though it is both significantly higher than the promised 355 days and compares unfavourably to international regimes in the United Kingdom, the United States and Sweden.

The Committee heard that while total approval time is averaging almost 600 days, delays are the result of drugs spending a long time in the queue waiting to be processed, due to a lack of personnel.

Drug evaluations consist of two parts: submission and evaluation, and chemistry and manufacturing-quality assurance. While these could be done simultaneously, as the above chart shows, at present they are being done consecutively, with significant waiting periods between the two steps. As the above chart also shows, if the tests were done simultaneously, TPP would have no difficulty in meeting its targets. While acknowledging this, Mr. Michols claims a lack of appropriations prevents this from happening.

Generic drugs face a similar situation. Approvals were promised in 225 calendar days, with another 195 days if the submission needed to go to a second review because of some deficiency. Performance, which initially improved in 1995 and 1996, has since deteriorated, according to the CDMA. According to Mr. Keon, "The actual performance, as reported in TPP’s annual report on performance in 1999, was 458 days on average for first reviews for generic submissions, which is more than twice the performance target. We understand that the actual time for reviewing a generic submission is approximately 30 days, and yet it takes 458 days to have them reviewed. The rest of the time is spent in the queue or in down time."

Rx&D contends that as a result of TPP’s longer processing times, drugs are taking longer to get to Canadian patients. On the economic side of the ledger, it ends up taking longer for industry to be able to earn a return on its research and development. Indirectly, since companies can get their drugs approved more quickly in larger markets, Canada loses out on investment, manufacturing and employment opportunities. And, of course, Canadians are denied access to newer and better drugs during this delay. No safety benefit results from an excessively slow drug approval process: this lengthy process is not due to careful review of applications, but rather to the bad management of that process.

For generic drugs, which cost up to 50% less than brand-name drugs, the longer drug approval period lengthens the time it takes to get less expensive drugs to market. This, in turn, imposes a cost on the health system, as patients in the interim have to rely on pricier brand-name drugs. Additionally, the CDMA calculates that since 1995, overlong approval times have resulted in lost sales totalling $250 million, between $100 and $140 million in lost savings to consumers and insurance plans, $57 million in lost investment and research and development, as well as about 140 fewer jobs created. In addition, approximately 75 fewer generic drug submissions were generated.

This is only one of the promises of cost recovery that has not been delivered. In the Regulatory Impact Analysts Statements attached to the Drug Evaluation Fees Regulations (JUS-95-297-02), the government made the commitment that: "Once future standards have been developed priority will be given to link them to the fee schedule in such a way that fees payable will be reduced for submissions which have not been processed within times defined by the standards."

One of the stated goals of the Cost Recovery Policy is that fees should be used to improve service by making government employees aware of the needs of the people using their services. "Charges also result in better and more client-oriented services, if for no other reason than the fact that users demand value for their money. Adopting client suggestions to improve service delivery and efficiency is a prime example of responsive government." Regarding mandatory services, it continues: "there may be scope for tailoring the service to better suit the operations of the clients it serves."

Fees can only provide for better services if there is some mechanism by which clients’ demand for better services can be effectively articulated. Since the User Charge Policy lacks an effective grievance-resolution mechanism, clients possess few levers to gain better services.

The Policy also presents a conundrum for policy-makers. As it turns out, user charges have become an important source of revenue for certain programs. At the same time, fees payable are to be linked to the achievement of standards. If the standards are not met, fees are to be reduced, lowering revenues and reducing the ability of the agency or department to deliver measures that benefit Canadians at large.

When standards are not met in a world of competitive markets, clients can seek out alternative suppliers. This is not the case when government is a monopoly supplier of mandated services. The checks and balances and incentive structure that exist in a competitive market do not exist in government. It is therefore a much greater challenge to incite businesslike behaviour in a government department than it is in a firm, even in a world of user charges.

B. Fee Set-up

According to the Cost Recovery Policy, user charges are to be seen as a way to improve governmental efficiency and not as a revenue generator. It is worth remembering, though, that the Cost Recovery Policy has its genesis during a time of governmental cutbacks, with programs facing budgetary reductions.

In the TPP, user charges have in fact been used to make up the appropriations lost. According to the Business Coalition on Cost Recovery, "In April 1995, the TPP provided to industry a detailed costing of their program, including a breakdown of private/public benefit by activity. While it was unknown what methodology was employed to derive the level of private benefit, overall the assessment indicated a 50/50 share of program costs … . However, the final fees were determined by applying a 1.35 ‘upscale’ factor to costs in order to generate the necessary revenues for the program."

Regarding the set-up of fees, Mr. Michols told the Committee, "We were starting from the premise that if we were losing 50% of our appropriations through the Program review then we needed to attempt to raise at least that much through cost recovery if we were going to maintain the current level of productivity. And, then as I’ve indicated, we’ve actually doubled the productivity in the same period of time." In fact, he stated, it is this lack of appropriations that is keeping submissions from moving through the approval process at the promised rate.

He was supported in this by Mr. Stewart: "It (the TPP) is a complex department. It does have a lot of activities … that are unrelated to the review and approval drug submissions, but very important. I believe some of those areas have in fact increased, and I do not believe that their appropriations or their budget, their overall funding, have increased in a commensurate fashion."

Without commenting on the optimal funding level of these or other programs, it seems clear that this approach contradicts the spirit of the Cost Recovery Policy. Namely, it ignores the principle that user charges should be based on (a) cost, and (b) the benefit received by whoever pays the user charge. In this case, what could result is the individual or firm subsidizing the benefit received by the general public. Just as firms should pay their "fair share" for services received, so should the public provide an appropriate level of funding through general tax revenues. Government appropriations should not be directed away disproportionately from programs with user charges into programs that do not have user charges attached. By introducing pre-set revenue targets into the fee-building process, attempts at achieving equity or efficiency are made more difficult.

The key to the success of any user-charge program is the business impact analysis, with the rule being if costs outweigh benefits, the fee should either be changed or scrapped. Here, too, Health Canada found it difficult to carry out the Policy, Mr. Michols related that business impact analyses were "of an uncertain quality, mostly anecdotal. Departments and agencies typically have no legal authority to request sales data, rendering it difficult to assess economic impacts of proposed fees on one company much less on an entire industry."

C. Role of Treasury Board

In setting up its cost-recovery program, the TPP seems to have hit two major problems: building a cost-recovery program from scratch in a bureaucratic environment while cutting costs, and a lack of direction from the Treasury Board, the overseers of the Policy. Mr. Michols commented on the difficulty of "working within the ambit of a broad Treasury Board policy but without detailed guidelines and little direction on how the various initiatives should be introduced."

There is also the general sense that the Department does not have enough support from Treasury Board: in other words, while individual programs are working with cost recovery, government at large has not adapted to support them. According to Mr. Michols: "Implementation has been a problem. … (M)uch of that problem has been that in setting those principles (of cost recovery), and in expecting program managers to develop targets and to measure performance, the infrastructure within the government to support the managers who are undertaking that has not been there."

Indeed, this refrain echoed in the voices of many roundtable participants. Both industry and departmental officials seem to agree that problems with the Policy are located in Treasury Board, which is not enforcing the Policy adequately, and which is itself not specific enough. If Treasury Board were actively enforcing the Policy, it would have looked into the revenue basis of these fees. If the Policy were more specific, it would be easier to define public/private interests and to make sure business impact analyses from industry were treated consistently. Such a policy could also deal with non-implementation of user-charge agreements such as overly long waiting times.

For instance, Mr. Michols said that users’ expectations are unreasonably high due to the implementation of user charges, or that they simply do not understand what the user charge pays for. As an example, he remarked, "It should be noted that the establishment of licensing fees are promulgated under the rights and privileges power of the Financial Administration Act (FAA), not the services provision, and, as a result, specific services are not required to be associated with the fees." While this might be technically true of the FAA, the issue at hand is the User Charge Policy of the government, where fees are to be linked to services.

There seemed to be frustration among industry about who to go to in order to have disputes about expectations, service, and the amount of user charges arbitrated. Treasury Board is generally seen as ineffective, and appealing to a department’s minister about that ministry’s program places the ministry in a conflict of interest.

D. Bureau of Veterinary Drugs

A similar situation exists in Health Canada’s Bureau of Veterinary Drugs (BVD), according to industry witnesses. Ms. Jean Szkotnicki (President, Canadian Animal Health Institute) remarked that, "Compared to other countries, the fees charged by the BVD are excessive. Approving a new animal drug in the United Kingdom costs on average — and these are food and companion animal estimates — about $30,000. In Australia it costs just over $20,000. In Canada the fee for the same service is more than $54,000. The Canadian cost-recovery program for veterinary drugs is the most costly in the world relative to market size. And in the United States, our largest agricultural competitor with an agricultural market 10 times greater than Canada’s, there is no charge to review new veterinary drugs or biologics." She added that these higher fees act as a disincentive to product registration and innovation.

As with the TPP, the BVD service performance has worsened since cost recovery. According to Ms. Szkotnicki, it now takes an average of 926 days to approve a veterinary drug, compared to 427 days in 1995, before cost recovery was instituted, and much above the 180 days promised upon the beginning of cost recovery. Despite these problems, the Committee was told that the BVD has decided not to participate in Health Canada’s cost-recovery review.

CASE II: AGRICULTURE AND AGRI-FOOD

In the agri-food sector, user charges collected by the federal government are not new: for over 60 years, farmers have paid grazing rights to the Prairie Farm Rehabilitation Administration (PFRA) for the use of its community pasture lands; and, for nearly 90 years, the Canadian Grain Commission (CGC) has charged fees for its export grain inspection services.

The three main entities in the agri-food sector that collect user charges are Agriculture and Agri-Food Canada (AAFC) itself, the CGC, and the Canadian Food Inspection Agency (CFIA). User charges in the agri-food sector totalled $127.0 million in 1998-99. These figures rank the agri-food sector seventh among federal government sectors that, together, collect $3.706 billion in user charges. By agency, in 1998-99 the CFIA collected $49.7 million in user charges for inspection services to food producers, and the CGC recovered $36.1 million in user charges, mostly for the inspection and weighing of grain destined for export. AAFC collected the difference.

Table II: Department of Agriculture and Agri-Food Cost Recovery

Source: Treasury Board Secretariat

User charges are a source of considerable concern in the agri-food sector. Agricultural producers have opposed the way these charges were implemented and criticized their cumulative impact. In 1998, AAFC carried out a study on the cumulative impact of federal user charges affecting the agri-food sector. The authors of this study, testifying before the Standing Committee on Agriculture and Agri-Food, concluded that the impact varied by production sector, and that user charges reduced net operating income by from virtually zero to 3.4%.

In all AAFC agencies, user charges have been frozen until 2002, except for the CGC, where fees will be frozen until 2004.

SOME POLICY CHALLENGES

A. September 1999 Report by the Auditor General

In its September 1999 examination of AAFC’s cost-recovery programs, the Office of the Auditor General found them to be severely lacking in many areas.

According to Auditor General Denis Desautels: "Each organization needs to improve its costing capability in order to improve its management of user charges and enhance public confidence. While the Treasury Board Secretariat and my office have emphasized the importance of good costing systems, we found a reasonable costing system in only one program area."

Further, the Auditor General told the Committee, "service standards are not widely used. Third, the organizations need to improve their assessment of the potential impact of fees. Impact assessments that we reviewed were imprecise and contained little information that would help the reader understand the fees’ expected impacts."

"Fourth, formal appeal processes were either not well known or not in place. Fifth, the organizations need to improve the quality of information on user charges that is made available to parliamentarians and to the public. This includes reporting on service standards achieved, revenue raised, the ways in which user fees have helped the organization meet its objectives and the means of obtaining more detailed information on individual fees."

"Finally, our audit found that these organizations have often viewed user charges primarily as a means of generating revenue."

Regarding dispute resolution, the CFIA and other AAFC agencies said they did have programs in place, and even if these did not find favour in the Auditor General’s eyes, "the Policy of 1997 in no way defines what a dispute mechanism is. As such it is very much in the eye of the beholder." (Mr. Jean Chartier, CFIA Vice-President, Policy and Regulatory Affairs) This suggests that the policy should be more explicit in its requirements, as this Committee has recommended.

Mr. Desautels remarked that, "according to the people that we talk to, the producers, they weren’t well aware that it existed. So while it is there, it doesn’t seem like everybody knows that it’s there and making proper use of it."

On the positive side, the Report found that AAFC and its agencies had made progress in management and consultation processes. The shifting of beef grading to a not-for-profit private firm was cited as a positive cost-cutting measure. The OAG also noted that the AAFC was also the first department to undertake a study of the cumulative effects of its fees, a step that the Committee would like to see imitated in all other departments.

However, taken together, the Committee can only conclude that Treasury Board’s cost-recovery Policy has not been completely implemented. While the Committee is heartened by AAFC and its agencies’ statement to this Committee and the Standing Committee on Agriculture and Agri-food that they are going to address the Auditor General’s concerns, the Committee notes that their problems are similar to those faced by Health Canada. This further reinforces the Committee’s contention that implementation problems with the Cost Recovery and Charging Policy are widespread, and must be addressed at the source.

B. Small-Business Burden

Cost-recovery programs that do not take into account differences among firms can have a disproportional effect on small business. According to the Canadian Federation of Independent Business (CFIB), a survey of their agri-business members found that user charges at all levels are a problem. According to the Mr. Rob Meijer (Agri-business Policy Analyst, CFIB), "flat or capped rates penalize smaller operations because these fees represent, in percentage terms, a much higher share of their sales or revenue. In this regard, smaller operations do not have the ability to always pass on or spread out the increased expense of governments much like big businesses, leaving many smaller operations at a serious competitive disadvantage."

Mr. Meijer also made explicit the link between user charges and regulation. Like user charges, regulations impose a cost on the regulated, in time and money. He mentioned the example of an agri-business, "who recently stated that they are … subject to a drawback tariff on imported polypropylene bags. This amounts to a cost of $35,000 per year in fees, and apparently another $10,000 in red tape to apply for a refund."

"For just over half of our agri-business members, an average of three or more hours per week is required to satisfy government. In the course of one year, this amounts to a minimum of 156 hours of business productivity — nearly a month of a regular salaried employee’s time. … Overall, this burden has been found to weigh more heavily on smaller operations as they do not have the spare resources, time, employees or readily available information to satisfy government’s demands."

As in other departments, producers and consumers are affected through direct and indirect costs, and the availability of products. According to Mr. Garth Whyte (Senior Vice-President, National Affairs, Canadian Federation of Independent Business), farmers are hit by direct and indirect costs. "One, they’re hit with direct fees, and two, they’re hit with indirect costs, which they can’t pass through. If fees are increased on chemical or whatever, those fees can be passed on, but the farmer can’t pass them on. That’s why, in our report, especially during the farm income crisis where 75% said the import costs were a big deal — and tax burden — the fees hit two issues: they hit as a tax and they hit as indirect costs or import costs, and the farmers just can’t pass that on."

Ironically, by imposing a cost on farmers, user charges can stymie the best intentions of governments. According to Mr. Whyte, the CFIB has suggested that the grants given to farmers to help combat the farming crisis are almost completely offset by the fee regulatory burden at the provincial and federal levels.

Ms. Szkotnicki, President of the Canadian Animal Health Institute, which represents manufacturers of pharmaceuticals, biologicals, feed additives and animal pesticides for agricultural and veterinary medicine use, remarked that the promised drug-approval times in the CAHI have not been met. This has a real cost:

A leading-edge vaccine for food animals, which was developed by a small Canadian company, was submitted to Canadian and U.S. regulators at the same time. The vaccine was approved in the U.S. within three months — and remember, this was submitted by a Canadian company. In Canada the approval process took over 24 months, even though the maximum response time for these submissions is supposed to be four months. During this 20-month delay, sales of the vaccine in the U.S. $4 million U.S. The delay in registration in Canada cost the Canadian company 52% of the revenues it forecast from vaccine sales in this country. This meant less money for job creation and R&D in Canada.

In addition to these direct costs, the delay also imposed additional costs to the livestock sector. Because the vaccine is designed to be injected subcutaneously, i.e. under the skin, as opposed to in the muscle, a major benefit was that this product reduced the amount of meat loss resulting from trimming the carcass around the injection site. The delay in approving this vaccine cost the cattle industry over $28 million annually, it’s estimated, because of more trimming than would otherwise have taken place.

C. The Pest Management Regulatory Agency

Though it is part of Health Canada and not AAFC, the Pest Management Regulatory Agency (PMRA) is directly involved in the agricultural sector. In its examination of AAFC, the Committee also heard evidence of problems with the PMRA.

Table III: Pest Management Regulatory Agency
Total Expenditures, Including Revenues from Cost Recovery Fees

Note: There was no cost-recovery revenue in 1994-95

In the PMRA, fees mainly cover registrations of pesticides. Ten percent of the fee is paid when the application is submitted, 25% when it is accepted for preliminary review, and 65% when it is accepted for evaluation; in other words, all fees are paid before inspection, even if the product is never registered. Specified fees are charged for each component of the examination process. Fees are reduced in some cases, to account for low volume or niche products, and some applications are exempt from fee payment.

Discussing the PMRA, Mr. Whyte agreed with the assertions of the Auditor General regarding the lack of an appeal process. He also pointed to a more fundamental flaw: that there is a conflict of interest in appealing fees to the organization that is charging the fees.

Industry witnesses told the Committee that the Auditor General’s observations on the AAFC also applied to the PMRA. The Crop Protection Institute, which represents manufacturers, developers and distributors of agriculture, forestry and pest-management chemicals and biotechnology, has found that cost-recovery guidelines are the victim of inconsistent interpretation and enforcement. For instance, firms must pay to have pesticides approved by the PMRA, yet "Canadians are allowed to consume produce from elsewhere in the world where the product has been used." What, then, is the threat that the PMRA is protecting against? The Institute also told the Committee that business impact tests, a vital part of cost recovery, were either discredited, or left incomplete or undone. (Mr. Milne, Crop Protection Institute)

Mr. Milne also commented that cost recovery at the PMRA has suffered because of the way it was implemented. "Cost recovery was imposed on the PMRA at the same time the agency was inventing itself from portions of four different federal departments. Effectively, the creation of the PMRA was a merger, experiencing all the interpersonal and locational adjustments inherent with change and the beginning of something new. The imposition of cost recovery at the PMRA during its inception, when there was no historical data for any of the agencies processes, created the challenge of attempting to recover costs that were effectively unknown."

The Finance Committee is not the only committee concerned with cost recovery. In its study of pesticide regulation, the House Standing Committee on the Environment and Sustainable Development expressed concern that cost recovery was causing difficulties for the department. Specifically, it worried that the reliance on fees was causing the PMRA to concentrate on fee-generating activities to the exclusion of other important programs. Further, it expressed concern that cost-recovery fees present a "possible disincentive to the registration of safer pesticides."

While noting that, "The Committee has not had the opportunity to study the issue of cost recovery more closely," the Standing Committee on the Environment and Sustainable Development did reach the following conclusion:

In the opinion of the Committee, it is critical that the impact of the cost-recovery fees on the registration of safer and more efficacious products be assessed forthwith. … If cost recovery fees are discouraging the registration of such products (safer pesticides), corrective action must be taken as soon as possible.

REASONS FOR PROBLEMS

According to both industry and departmental witnesses, cost recovery suffered in its implementation. User charges were introduced in the PMRA and at the CFIA as each organization was being created out of mergers of other government agencies. According to Mr. Chartier, the creation of a new agency, in his case the CFIA, led to a delay in implementing a dispute-resolution mechanism in his agency, though one is now in place.

Further, the Auditor General suggested to the Committee that, in contrast to the Cost Recovery Policy, user charges in the CFIA were intended primarily as revenue generators, as cost recovery was implemented at a time of sharp cutbacks.

The September 1999 Auditor General’s report states:

The food production inspection branch had little time to implement its fee structure as the funding voted by Parliament had assumed that user charges would be in place and would generate the planned revenue. … The fiscal pressure continued after the agency’s creation since it was expected to make the delivery of inspection services less costly to the federal government. Revenue from user charges was needed immediately and identifying areas to reduce or avoid costs had secondary priority.

This reinforces the point made earlier that departments and agencies should look to user charges for market discipline, not as revenue generators. From the government’s side, this also requires that cost-recovery programs be adequately funded.

CASE III: CANADIAN COAST GUARD MARINE SERVICE FEES

It is often asserted that user charges are taxes by another name. While this is not the intent of the Policy and is not generally true, a strong case can be made that, as presently constructed, some of the Marine Service Fees charged by the Canadian Coast Guard as part of the Department of Fisheries and Oceans are in fact taxes.

Marine Service Fees (MSFs) are charged in two areas: navigation services (e.g. buoys, radar, navigation systems, traffic services — routes and other traffic controls), and icebreaking services. They were introduced in June 1996 "to recover a portion of the cost of delivery aids to navigation and vessel traffic service to commercial shipping. Icebreaking fees were deferred that year to give industry time to prepare for the fees introduction and an economic impact study was carried out by private sector consultants" (Mr. John Adams, Commissioner, Canadian Coast Guard, Department of Fisheries and Oceans). Icebreaking fees were finally introduced on 21 December 1998, reduced 50% from their original proposed level.

In 1998-99, navigation fees totalled $26.7 million, representing 30.8% of the total cost of the service to commercial shippers. The full cost of all marine services, in 1996-97, was $260.7 million. Icebreaking fees recovered $13.3 million out of a total $76 million for icebreaking services to commercial ships. The total cost of all icebreaking services in 1996-97 was $163.5 million.

Table IV: Marine Service Fees, Canadian Coast Guard

These numbers and categories from Treasury Board do not correspond to other data possessed by the Committee, for example those provided by the BCCR. This demonstrates the difficulty in assessing the extent and scope of user charges in Canada.

According to Mr. Adams, "These cost-recovery fees are intended to shift a portion of the costs of delivering commercial marine services from the general taxpayer to those who benefit from the service thereby regulating demand and obviously recovering costs."

In April 1998, the Minister of Fisheries and Oceans announced several modifications to the marine services fee program. These included the capping of fees for three years, improved consultation, the setting up of an independent fee dispute mechanism, a Treasury Board accumulative economic impact study, a regional approach to fee setting and finally the introduction of an icebreaking fee. At present, MSFs are in the second year of a three-year freeze.

PROBLEMS WITH THE FEES

Marine transportation is a highly competitive field that affects iron ore, grain, and other commodity producers. As such, MSFs have the potential to affect significantly the costs and ability to compete of producers and shippers. Mr. Adams told the Committee that a Coast Guard business impact study found that the present fees, which generate about $33 million, would have less than 1/10 of 1% of the value of the commodity shipped.

In 1995 the Standing Committee on Transport published its National Marine Strategy. It recommended that: "No national cost-recovery program should be implemented until Coast Guard has clearly identified its cost for services, the future level required, and demonstrated that it has its costs under control and down to the lowest-cost operation possible."

According to voices from the shipping industry, these commitments have not been met. Costs for services are unclear, while the Coast Guard has not become more efficient.

However, according to Mr. Adams, the Coast Guard has seen significant reductions. "For example, we reduced our marine control and traffic services centres from 43 centres across the country to 22. We reduced our personnel resources by about 1,400 people. We reduced our fleet from 189 … to 106. … So all of those things have added up to somewhere between 20% to 30% reduction in cost."

Though the Coast Guard says it has consulted actively with commercial groups, industry has complained about inconsistent consultation. While a current agency-industry panel has yielded results, including better deployment of the Coast Guard fleet, they are still working on the same questions: "What are the true costs of the marine services? What is the proper allocation to commercial users? What’s the required level of service and what’s the appropriate service level?" (Mr. Wayne Smith, Vice-President/General Manager, Seaway Marine Transport, Canadian Shipowners Association)

Other complaints include:

Fishing, commercial and pleasure shipping were all supposed to pay cost recovery. Five years later, only commercial shipping is paying.

Impact assessments have been ignored. According to Mr. Smith, "In a letter I received from the principal consultant (of a 1996 Coast Guard study), after the fee was implemented, he said, ‘I cannot agree with the assertion of Mr. Thomas’ — who was then the Commissioner of Coast Guard — ‘that the marine industry can absorb the costs.’ …" He concluded "I can certainly see a significant cargo loss in sensitive cargoes … at this fee level."

Dredging services, the first thing to be privatized, continue to escalate in cost. Service fees pay for the Coast Guard’s oversight of this privatized service. Dredging fees, said Mr. Adams: "came off of our bottom line and we did pass that on to the commercial sector. But you’re talking between $3 million and $4 million. We’re not talking phenomenal amounts of money, but that’s what it is in the St. Lawrence."

The Coast Guard has failed to take advantage of technological advances, only marginally cutting the number of its buoys (which it charges for) when Global Positioning Satellites are used by all. Mr. Adams told the Committee: "We continue to try to come up with more effective ways of providing aids in the water that will be more cost effective. But our large aids, you’re absolutely right, they’re extremely expensive. But they have to be extremely capable because of our weather patterns and the ice, etc., etc. But we will continue to work with industry to reduce those costs."

The Coast Guard’s costing practices are not clear.

Industry also complains that in Eastern Canada, shipowners are administering fees because the Coast Guard bureaucracy is a mess, and paying $2 million for the privilege. Further, according to Mr. Smith, "The Coast Guard is not equipped to develop fees or administer fees. Really, Canada now has a patchwork system, with different regional fees, with different fees for domestic ships and foreign ships. It was a mess from the beginning. Industry worked very hard to rationalize these fees but the Coast Guard just said, you know, this is it. This is the fee."

Example: Icebreaking Fees

Icebreaking fees present a good example of a flawed user charge. For a user charge not to be a tax, it must be linked to the cost of the service. However, icebreaking fees are paid whether the service is being used or not. For example, boats in Lake Superior must pay this fee even though there are no Canadian icebreakers operating in Lake Superior. Ports with no icebreaking needs must pay this fee.

According to Mr. Smith, and echoed by other marine-shipping voices, "With the Coast Guard layering on a Canadian icebreaking fee we have the ridiculous outcome that a Canadian icebreaker can provide service to a U.S. ship carrying U.S. cargo, competing with Canadian ships and Canadian cargoes, free of charge. But, as is often the case, if we’re assisted in ice conditions by a U.S. icebreaker and carrying Canadian cargo, trying to compete in the U.S. market, we are charged by the Canadian Coast Guard whether there are ice conditions in place or whether it’s a U.S. icebreaker or even a private icebreaker."

In general, MSFs affecting navigation are economically questionable, as anyone sailing up the St. Lawrence benefits from these services, and only those stopping at a port must pay.

In the absence of an independent appeal mechanism and review process, such fees are hard to challenge and change.

EFFECTS ON INDUSTRY

Of all the industries from which this Committee heard, marine shippers were the only ones to call for the outright elimination of user charges. This is because of the high cost they can have on their businesses. Industry representatives contended that these can have significant long-term effects on competitiveness. In iron ore, shipping costs make up 25% of the final price. Since Canadian iron ore has an ore grade only half of the major countries in the world, these are very important.

Ports are also affected. Competing against other ports and waterways, such as the Mississippi, which have no charges, narrows the margin. According to M. Ross Gaudreault (President, Société du port de Québec), "We are operating in a very competitive business. … So when my customer tells me I’m too expensive they don’t have to come in Canada. They don’t have to use the St. Lawrence River. …"

"Are we really that broke in Canada that we can’t afford to dredge the St. Lawrence River, one of the most important waterways in the world, which brings billions of dollars in economic downfall to Canada? We are broke in Canada. It’s incredible that we can’t afford to dredge the St. Lawrence River. Ça ne se peut pas."

The Committee also heard that MSFs could mean the difference between ports like Quebec City being able to attract the booming cruise-ship industry. It was estimated that a ship cruising out of Quebec City twice a week could generate $140 million for the economy. "The new ships have to find a niche. If they don’t, it’s too costly to come into the St. Lawrence, they position these ships in the Mediterranean. … We have one of the most beautiful cities in the world, and (at the moment) they come into the St. Lawrence. But if we’re too costly, we’re not going to get part of it." (Mr. Gaudreault)

Marine groups also contend that insofar as cost recovery was supposed to impose discipline through fees that take into account business impacts and the actual cost of services, it has been a failure. And with the large impact on industry, which business impact analyses are supposed to cover, fees should be eliminated.