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EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, December 12, 1995

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[English]

The Chair: The finance committee is holding its last meeting with respect to its pre-budget consultations.

We're pleased to have with us from the Canadian Council for Public-Private Partnerships, Terry Stephen and Michael Shaen; from the Canadian Life and Health Insurance Association, Mark Daniels; from the Canadian Association of Mutual Insurance Companies, Normand Lafrenière; and from the National Anti-Poverty Organization, we are expecting potential witnesses but we will see.

Perhaps we can start with brief opening statements before we turn to questions. You will each have as much time as you need to put your entire case on the record and you'll each have an opportunity to sum up afterward.

Normand Lafrenière, could you start, s'il vous plaît.

Mr. Normand Lafrenière (Executive Director, Canadian Association of Mutual Insurance Companies): Our association would like to congratulate the Minister of Finance for his efforts to decrease the deficit. We feel that probably the easier part of the deficit reduction has been done over the last year. The next portions, if you will, of deficit reduction will be more difficult to reach.

We are not in a position to tell the Minister of Finance which programs should be reduced, cut or whatever. We have heard witnesses who have appeared before your group say deficit reduction should be through expenditure reduction as opposed to tax increases. We agree with that statement made by most of the people who have appeared before your committee.

We would like to tell the minister what kind of criteria he should be using in order to achieve further reductions. He should compare all programs that are in place right now. Many of the programs were put in place for political reasons, and those political reasons should be reassessed. The reasons for the existence of some of the programs no longer exist or the objectives have been reached, so these kinds of programs should be abolished.

We have a couple of demands to make, which are basically on the technical side. First, we would like to have a tax-free catastrophe reserve put in place. Basically we would like the government to force P and C insurance companies to set up reserves to better meet catastrophes of any type, be they earthquakes, wind storms, tornadoes or things like that.

We would also like to bring some changes to section paragraph 149(1)(t) of the Income Tax Act, because insurance companies insuring farmers are now having difficulty maintaining their positions and continuing to insure farmers. So if changes can be brought to paragraph 149(1)(t) it might help in that direction.

Mr. Mark Daniels (President, Canadian Life and Health Insurance Association):Mr. Chairman, I will stay to your three minutes as requested and quickly review three main points.

In terms of overall fiscal management, we support the government's broad plan of action for fiscal restraint. Given the country's financial situation, we believe there's no option but to reduce expenditures and target scarce resources on programs of higher priority.

We urge the government to continue making the spending cuts necessary to reach its deficit reduction targets, and ultimately a balanced budget. Given that corporate and personal income taxes are very high in Canada, especially compared to our immediate neighbour to the south, there is no scope, we believe, for higher taxes in Canada.

One issue that has come up for considerable speculation over the last few years is the prospect that retirement savings could become subject to tax. Such a change, if it were to occur, would have a significant implication for the cost of saving for retirement, the level of retirement benefits that would result, and the overall financial security of the seniors population.

Moreover, in a recent study by the Conference Board, it has been shown that taxing retirement savings could very well result in slower growth and a much smaller economy than under the current system.

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Given these potential ramifications, in our view there should be no changes to the tax rules for retirement savings before the completion of a full review of the retirement income system.

Finally, I will take just a minute or two on the health and dental tax issue. The committee is well aware of this subject. As you well know, it is our view that if health and dental benefits were to be taxed in the hands of employees, it would lead to several detrimental impacts on the health care system.

A particular concern that was raised by both this committee and the Minister of Finance last year was that there may be a large group of Canadians - at the time it was thought to be up to eight million or nine million - who do not have supplementary health and dental protection because they cannot benefit from the current tax treatment.

The Canadian Dental Association has already brought the results of this study before this committee. I won't dwell on it at all, except to say that I think it does manage to show that the number of people who may be disadvantaged in a slight degree by the tax system currently in place is a good deal smaller than we might have thought. Indeed, it amounts to about one million individuals - those who are unincorporated, self-employed, and their dependents.

The workers in this group, unlike their counterparts in incorporated small businesses, cannot deduct the cost of their own supplementary coverage as a business expense. For them, a simple change in the tax deductibility of premiums would put them on the same footing as the incorporated self-employed, although it's important to note that the tax situation of the unincorporated self-employed is quite complicated. There are a bunch of benefits associated with that tax status as well, so we're simply saying it would have to be studied quite carefully, and that's clearly the province of the government and not ourselves.

Mr. Chairman, that concludes my prepared remarks. Thank you.

The Chair: Thank you, Mr. Daniels.

Mr. Stephen.

Mr. Terry Stephen (President, Canadian Council for Public-Private Partnerships): We appreciate this opportunity to appear before your committee on a matter that we believe affects both the economic potential of Canada and the strength of its public services.

On behalf of our chair, the Honourable Donald Macdonald, let me thank you for your time today.

The Canadian Council for Public-Private Partnerships is a non-partisan, non-profit organization, with membership from more than 120 groups, representing a broad spectrum of government as well as non-profit and commercial organizations.

We've been established to foster cooperative approaches between the public and private sectors in exploring innovative approaches to the financing and delivery of public services in Canada.

We don't seek to advocate on behalf of any particular project or any parochial interest. We seek to elevate the level of discourse between the two sectors, which otherwise operate from distinct interests. We also seek to be a vehicle through which government and non-government members share research and best practices experiences.

From our distant perspective, most of our members think there isn't enough going on in Ottawa. That may be self-interest; it may reflect their desire to do more business with the government. There may be more going on in Ottawa behind the scenes than we've been made aware of.

We have thought about an enabling environment, which the government might consider, under which partnership and co-ventured initiatives can proceed. We think the federal government ought to consider the establishment of two initiatives. One is the provision of a focal point for coordinating and advancing a cross-departmental alternative delivery systems program, and the other is the institution of a process that assures a consistent approach to defining and managing partnership opportunities.

Our perspective has taught us over the years that without strong cabinet representation, new initiatives may not always have the prominence the government of the day wishes. We believe there should be a privatization minister, and this is not a new concept. It would be new in that in previous governments that minister was not an active or senior participant at the cabinet table. Previous privatizations were more in the nature of selling off crown assets in commercial sectors rather than restructuring actual government and public services.

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The one-time debt reduction is very important, but in the council's view it's a tactic rather than a strategy for addressing hard policy problems. We believe a senior minister ought to be appointed to organize and guide a comprehensive set of initiatives and capitalize on the emerging need for and interest in public-private sector cooperation.

Most of our members believe the private sector, the corporate sector, has something to contribute to government restructuring. There's some evidence that this government may take a slightly different view in that corporate capital may not be invited to the table, but rather employee groups or stakeholder groups will be asked to oversee the roll-out of government services, as is the case with the air navigation system.

In that case we take no position on that, but we do know that many of our membership do believe that private sector business planning, private sector access to capital, and private sector incentive systems make a difference in the private sector and that they can make a difference in the public sector.

The dialogue ought to continue, because once the government understands what it wants to do and defines how it's going to do it, there's an obligation in fact to educate the private sector, which may come before you and say they know everything, which of course is not the case. We would suggest something like the formation of a task group that could have a very short duration. Its findings would be reported to the minister, say within six to eight months of creation.

Such a group would take a look at some of the issues that are thorny around the world, such as dealing with unsolicited proposals, for example. Many good ideas get thrown in the waste bin because the officials cannot deal with something on a sole-source basis. There are ways of dealing with stuff like that. There are concerns about process, about the days after the final evaluation recommendation has been received from middle level officials and what happens after that time.

Because we see the rules imposed upon us in the private sector, we believe there are mechanisms all the way through our economic regulatory structure that speak to these problems. We're happy to participate in such a task force.

Rather than continue further and talk any more about foreign jurisdictions, Mr. Chair, I think we'll leave those as our remarks today. Thank you.

The Chair: Thank you, Terry Stephen.

[Translation]

We will now go to questions. Mr. Brien.

Mr. Brien (Témiscamingue): My first question is for Mr. Lafrenière.

The last witness referred to program evaluation and you said you weren't in a position to pass judgment on what programs should be cut. However, the government did do one program evaluation and the Department of Finance announced that there would be a second one.

It's too bad that all this evaluation is not only internal, but restricted to Cabinet. I'm not even sure if the Liberal Party caucus sees any of it. Don't you think those evaluations should be made public, so that we could consult on that basis and, using that as square one, decide which programs are a priority? Do you think the program evaluation process should be open to the public?

The Chairman: Are those like the Le Hir studies?

Mr. Brien: They're public. We may not like them, but they're public.

Mr. Lafrenière: I agree with you that they should be public, even more so because a serious analysis of programs leads us to net results; the analysis tells us if the program has positive or negative results for the government or society. Presently, to draw that kind of conclusion, you have to have objectives within the programs.

Most government programs don't have any objectives and we don't have any means to see whether the objectives were attained or not. Some programs may have more demanding objectives. On the other hand, if certain objectives were met in the past, in some cases the program has no further justification for its existence. Other programs may simply be inefficient in attaining the objectives. If they have no further justification, then we should have programs other than the ones we do.

So I agree entirely with you that this should be a public process, and the population should be in a position to find out how far programs have gone in meeting their objectives.

Mr. Brien: Does your definition of programs go so far as to include evaluating taxation mechanisms?

Mr. Lafrenière: Absolutely. The taxation program and direct subsidies should be evaluated in the same way.

Mr. Brien: I now have a question for Mr. Daniels. You have said, and we often heard this repeated during consultations, that people compared the level of taxation or income tax of individuals and corporations in Canada with the ones in the USA and elsewhere.

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Doesn't a partial comparison lead us to say that if we're more heavily taxed than the Americans, we can't be taxed anymore? Aren't we going towards some sort of standardization? If we want to compare ourselves to the Americans, we'll have to standardize our whole social security system. We can't be the same or better when it suits business and spend more on social programs.

Will there be some sort of normalization if we make that comparison?

[English]

Mr. Daniels: Yes, Mr. Brien, I would certainly agree that if you wanted to make a point-by-point comparison of the purchasing power of a dollar, for example, you'd have to go a lot further then comparing tax rates. We hear often, for example, about the cost of medical care per employee for the medical system in the U.S. I read somewhere recently that it runs about $7,000 per employee higher in one of the big car companies in the States than it does in Canada.

So of course more is involved in tax rates. The point of raising this, however, is that on the margin, when you're next to a country the size of the United States and you have an open border and capital is free to move and labour is largely free to move, when you get the differential cost of employment and cost of capital up to a certain rate, if taxes go much higher there can be an awful lot of bleeding off of resources. I think that's really the only point we were trying to make here.

Taxes there are just an indicator of the cost of capital and labour in both countries. But I agree with you that it's a more sophisticated matter than simply looking at tax rates, no question.

[Translation]

Mr. Brien: I remember the whole debate there was around free trade. I was in favour of it and still am, but its opponents were saying that sooner or later it would lead to standardization of social programs or to a coming together of our social system with the American one with free flow of capital.

Weren't they a little bit right, at that time? If we look at the results today, we can see this coming together. Employers are saying we have to be competitive and try to decrease all our social obligations. They're putting a lot of pressure on us to do it and we seem to be phasing things out, up to a certain point. Aren't we growing inevitably closer to the Americans in this respect?

[English]

Mr. Daniels: I'll generalize it even more. There's no question that when borders are open and capital and labour are free to move more easily across international boundaries, the economics of the situation will drive the price of labour up in labour-scarce countries and drive it down in labour-rich countries. That's been a precept of economic theory for a long time, and by and large it appears to be true. So I think those changes are right in the direction they're moving.

There are still significant barriers, not the least of which is the fact that people themselves don't want to move. They prefer to be in Canada than in the United States, and that in itself will have a lot to do with keeping the systems from becoming homogenized. So will taste. They're different countries and I think they have different value systems. But the economics certainly move the stuff in the other direction.

[Translation]

Mr. Brien: You said something about registered retirement saving plans, RRSPs. Maybe I misunderstood you, but you said we shouldn't touch them because it would have an impact on short-term consumption. It seems to me that it's the other way around. If the government started playing with RRSPs and it got consumers to decrease spending, it would have the opposite effect. There would be a negative effect on savings and consumption would increase in the short term.

[English]

Mr. Daniels: I wouldn't think so. Well, it increased consumption. If what you mean is that it will increase government revenues and by extension enhance expenditures as opposed to savings, perhaps that is true, but the argument here about not taxing the retirement pool is a good deal broader than that. I think arguably there aren't enough savings going into retirement in this country as it is. I don't think there would be any quarrelling about that. And if they become subject to tax they're going to fall even further.

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In any event, our bottom line there is, if that pool of savings were ever to be taxed, it would have to be done in the broad context of an understanding about the reform of the overall pension system and that you can't carve out a piece of it and go after it because it's a pot of money sitting there. That's our only point, Mr. Brien.

[Translation]

Mr. Brien: Without touching the pool of savings, is there a possibility in your view of having a plan which would be a good incentive? RRSPs constitute a mechanism which is a very good incentive for people to save for their retirement. Is there a way to make it interesting, though less generous?

We could, for example, grant a partial deduction, maybe 80 or 90% of the amount invested in an RRSP, instead of 100%. Would it not be a way of encouraging people to save while getting part of the revenue immediately, in order to reduce our short-term financial requirements? They will cost us more in the long-term, in any case.

[English]

Mr. Daniels: In the generality my answer is that there are lots of ways of designing ways to limit how much you can deduct. To the extent that you don't choke it off completely, you'll leave some incentive on the margin. So as a question of tax design there are an infinite number of ways.

In fact, I think in the budget of two years ago contributions were capped for a particular year. Presumably, there are lots of ways of doing that. It's merely a matter of designing the program.

I will certainly say it's not a binary thing. You either have a tax or you don't. Our world is full of half taxes, quarter taxes, third taxes and in-between.

The Chair: Merci, Mr. Brien.

Mr. Solberg, please.

Mr. Solberg (Medicine Hat): Thank you very much, Mr. Chairman. Both Mr. Daniels andMr. Lafrenière talked about the need to move toward a balanced budget. I am wondering if they have thoughts on the targets the minister has just set out. Do they consider them adequate, and if not, by when do they think we should have the balanced budget?

The Chair: We are listening very carefully to his answer.

Mr. Daniels: It's not a complicated answer for us. We've been broadly supportive of the government's program here. We understand that there are all kinds of targets and horizons to pick. Our position has been that the Minister of Finance has a responsibility. He's laid out a quite aggressive program. In the context of the government's own program, I think we're comfortable with that program.

On the other hand, I have to say that our adherence to this balanced budget liturgy is not, I hope, some kind of mindless commitment to a bit of arithmetic. Quite clearly, the balance between consumption and savings has to be brought into line, and it's been badly out of line for quite some time.

We see there is a plan out there by the government of the day that offers a systematic way to get from A to B. Rather than get out and argue it should be two years faster or three years faster, we're simply saying, let's get on with it. You'd be hearing from us if the government weren't on a path, but in this case, we're supportive of the program that's been laid out, but not without due regard to the arguments on the other side.

The Chair: We won't interpret that as a ringing endorsement.

Mr. Solberg: I'm not sure how to interpret that.

Mr. Grubel (Capilano - Howe Sound): Fence sitting.

Mr. Daniels: I'm sorry, but I thought it was quite clear.

The Chair: It's a ringing endorsement. The chair cannot get into disputes between witnesses and members.

Mr. Solberg: I was unclear as to when you thought we should have the balanced budget. That didn't seem to come out.

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Mr. Daniels: As I said, sooner rather than later, and the track that the Minister of Finance has laid out is one that we see as achievable and we're supporting it.

Mr. Solberg: So 2% is a good target.

Mr. Daniels: It's a good target in the near term, yes.

Mr. Solberg: Okay. Over the long term you don't have an opinion on when we should hit the zero mark.

Mr. Daniels: The association doesn't. I'm not sure zero in and of itself is anything magic to start with. As I said, there's a lot of economics involved. I know that we're really talking about first derivatives here, if not second derivatives. So let's get on with getting the thing down into a reasonable juxtaposition of consumption and savings. We're not there by a long shot. However, I think the targets between now and 2000 would serve us very well if we were to get there.

Mr. Solberg: You were talking a minute ago in response to Mr. Brien's question about RRSPs. Clearly, I think we all know that the Canada Pension Plan is not in very good shape right now. I'm wondering if you have considered alternatives to funding pensions through the use of RRSPs to a greater degree than they are now. I wonder if you have comments on that.

Mr. Daniels: I don't have any specific comments on that. I will comment that we're mindful, Mr. Solberg, that your party has a plan out in the public domain, which we're looking very carefully at. Our industry administers probably 75% of the pension plans in Canada. They belong mostly to the small and medium-sized companies. So we follow all reform, small ``r'', proposals with great attention, but I won't say we have put specific reform plans on the table as an industry, at least not in recent years.

Mr. Solberg: Small ``r''; okay.

Mr. Lafrenière, you talked about some of the programs that are currently out there not having clear objectives, and I'm wondering if you had any particular programs in mind. If you do, could you comment on what they are and on what you see as some possible ways that these programs could be reformed, small ``r''.

Mr. Lafrenière: I cannot name any, and I wouldn't wish to name any if ever I could. I can tell you - -

Mr. Solberg: But you must have had some in mind.

Mr. Lafrenière: No, not really. I would like to say that many of the programs of the Department of Industry, such as regional development programs and so on, have not yet proven to be effective at the end of the day to generate as much revenue for society and the government as was invested in the first place. I'm not in a position to comment really on the fine details, because I don't have the numbers on how much they brought back in terms of revenues, if you will. Basically, the principle should be applied to all programs, whether they are social development programs or regional development programs and so on; that these programs have to bring in for society and the government over time more revenue then we've spent in the first place.

Education is a very good program where money is well spent if the dollar spent brings back in terms of income tax later on in the process more than we spent in the first place.

This is the kind of criteria to which I would like all the programs to be subjected to. Many of the programs, again, do not even have objectives; therefore it makes it very difficult to see if indeed they have reached their objectives and if they bring back more revenue then we spent in the first place.

Mr. Grubel: Mr. Chairman, may I?

The Chair: Absolutely.

Mr. Grubel: I want to say I'm sorry that I wasn't able to be here, especially knowing the quality of Mr. Daniels' presentation.

In your own industry, how are most of the contracts written with respect to the age of retirement? When you sign a contract at age 20 for a pension, is it completely fixed that you're going to get your annuity at age 65, or can that be adjusted throughout the life of a contract?

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Mr. Daniels: Mr. Chairman, James Witol, the vice-president of taxation and research with the CLHIA, has spent his entire life in the insurance business, as I have not.

Jim, what about the contract terms? Are they flexible or not?

Mr. James Witol (Vice-President, Taxation and Research, Canadian Life and Health Insurance Association): It depends on whether you're talking about individual or group contracts. Group contracts, being pension plans, typically have a target retirement age of about 55, while 65 is standard.

For individual contracts, we sell flexible products. Most people purchase a contract with a five-year horizon, and then it's rolled over into another contract. There may be an anticipated use of this money at age 55, 60 or 65, but there is no requirement that it be kept in the contract until any particular age. It's a very flexible contract now. That's just the market; everybody wants flexibility.

Mr. Grubel: At the university I'm told that if I start drawing at 65, I will get a certain amount, but if I postpone the start of my pension, I will get more. I'm bringing this up because I understand there is a discussion going on about increasing the age of retirement. People seem to think that where they were able to retire at age 65, now they can't until age 67.

This isn't the issue. The issue is whether the maximum amount of benefits under CPP will be available at age 65 or 67, and implicit in this is the idea that at age 65 you might get a little less than you thought you would get under the current system. Is my interpretation correct? If so, do you think it might be worthwhile for the industry and the government to start clarifying this concept that is now being so criticized by the public?

Mr. Witol: Yes, I think people should remember that the retirement age is flexible, so if the normal retirement age is increased from 65 to 67, that's for full benefits, and there would be actuarially reduced benefits at early retirement ages. I don't think anybody is talking in terms of nothing being available before age 67. It just doesn't make sense.

Mr. Daniels: It may well be, Mr. Grubel, that long before a decision is made to move to that age, circumstances start moving it in individual contracts. By the time we get around to deciding, the decision may have been made in the market.

Mr. Grubel: Complicating this whole issue is not just the issue of financing and the government's role, but also the provincial legislation. At Simon Fraser University we had a court case that said the moment I turn 65, whatever I have to tell students is not worth listening to any more, and I have to go into retirement. That is a separate issue, and unfortunately we may have to tackle it, together with this idea that you can get your maximum benefits only at age 67. But from what I have seen of the CPP calculations by some experts, the problem of the baby-boomer bulge moving into retirement and having to be financed by a much smaller group of working people could be eliminated.

The dependency ratio would remain the same if by the year 2030 we increased the age at which maximum benefits are available to 69 from 65. The sooner we start thinking about it and trying to get Canadians to understand the issue and get all the other ducks in a row, the better it will be.

I'm just throwing this out. If with your expertise you can help me clarify my own thinking, and maybe for the record, I'd appreciate it.

Mr. Daniels: I'm not sure I can add much to this, Mr. Grubel. Perhaps we can add something to the committee under separate cover once we've had a chance to reflect on the question, but I wouldn't want to ramble on.

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There's no question that you're moving in exactly the right direction in terms of resolving what must happen in order for that bulge to be financed.

Mr. Grubel: This is current because today the finance minister is talking to the provincial ministers about exactly this subject.

The Chair: A couple of us here are fast approaching that magical age, aren't we?

Mrs. Brushett (Cumberland - Colchester): I have two quick points. The first one I'll direct to Mark Daniels. We talk about corporate and personal income tax. We've repeatedly heard from witnesses across this country that the high personal income tax is causing us to lose a lot of our professionals south of the border, and we are having a difficult time attracting highly technical engineers from Asia and wherever. Do you have comments on that in relation to the corporate tax?

Mr. Daniels: I was trying to make that point when I was responding to Mr. Brien, although he was correct in pointing out that my point was sloppy in the sense that it really needs to factor in all expenditures, not just tax rates, in order to make the point.

Having said that, the evidence that I have seen suggests that indeed there is a drain, especially among certain professional groups, and that makes sense. It is not particularly difficult to emigrate from Canada if you're highly skilled and you don't place a lot of benefit on non-pecuniary elements. So I think you're right, people are moving, and if we continue to raise personal and corporate taxes.... This isn't something associated only with individuals. It's also associated with companies. We've seen a lot of that drift over the years.

Some years ago I spent some time in the regional development business in this town, and it was dramatic to see what was happening in the U.S. south. Now it's a well-established fact, but at the beginning they were competing dollar for dollar with tax breaks on Canadian corporations, and doing it very well.

Mrs. Brushett: My second question is to Mr. Stephen. I thought your proposal for a privatization minister without portfolio was very interesting. Could you elaborate a little more on the real value of this and what we in society would gain from that?

Mr. Stephen: The real benefit may be your ability to communicate with the broader group of Canadians that is interested in or concerned about this type of activity. An Angus Reid poll in the summer - actually, it surprised me - said that about 80% of Canadians are supportive of at least examining private sector participation with the public sector on a partnership basis, or on some other basis, in providing what have hitherto been government services.

We on the outside - perhaps wrongly - don't see the lightning rod of activity, the lightning rod for going forward. Perhaps we don't understand as well as people on the inside what the government's course of action would be in this area. The council is not necessarily an advocate of privatization; it's an advocate of getting things right and not needing long Senate hearings every time a transaction is proposed, and making sure that the public and the media are comfortable with the idea and the result. The council is concerned about getting it right.

What does it result in? If government cannot hold the corporate sector's feet to the fire and experience significant savings in offering government services, then they shouldn't bother with this activity. The corporate sector, for all its bravado, has said we can make a difference.

We have a big deficit. Anybody who can make a difference ought to have a hearing. Around that hearing there are intricate parts of a process of how you go about deciding what is appropriate to analyse, how you establish a field of interested parties in an appropriate way, how you select from among those parties a partner to negotiate with, and what your negotiating mandate is going to be to achieve significant savings to the government in whatever area on a basis that's satisfactory to government, so this thing won't get away from them in three years but there are adequate controls, penalties and rewards. Something the corporate sector understands very well is penalties and rewards.

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Mrs. Brushett: What is the advantage of having this portfolio outside the cabinet? Aren't you going to be losing some communication?

Mr. Michael Shaen (Canadian Council for Public-Private Partnerships): Part of the reason we're interested in the minister is from looking at the experience of other jurisdictions that have had success in this area.

Part of the difficulty with thinking differently about the way governments should do traditional business - or at least the business of the last three decades, which is much of what has been the growth period of government in the 20th century - is the process tends to be skewed by individual projects that come forward. Governments tend to sort of stretch themselves in response to an airport, a bridge and so forth.

In thinking differently about the way the public, private and non-profit sectors ought to deliver services to the public, part of the difficulty is that without there being some fairly clear rules and some demonstrated political will, not driven by individual projects but driven by a statement of the government's ethos or mode of practice in an area, it becomes very tough for those on the outside to, one, get the signals on what the government's intention is, and two, understand what the rules are for then proceeding, as Terry was saying.

We don't underestimate for a second the challenge the government faces in doing this, by the way. But part of the difficulty is that when governments at all levels begin to say they are interested in exploring modes of co-venturing, and not just with private parties, they run the risk of having people come forward with ideas they weren't asked to bring forward. That's a big problem.

In the city of Edmonton, the mayor has actually called for submissions from consultants and others on the question of what to do with that intellectual property. People have generated ideas. The chaps who first came forward with the idea of Terminal 3 at Pearson Airport would say they were losers in that exercise, because there's very little sole-sourcing of those kinds of ideas.

Judging from the experience of other jurisdictions, both national and municipal, and provincial in the cases of New Zealand and Australia, a minister would give this the kind of oomph and focus that would give both those within government and those outside looking in who want to play some sense of where the government is trying to go.

Mrs. Brushett: Thank you, Mr. Chair.

The Chair: Thank you, Mrs. Brushett.

Mr. Pillitteri, please.

Mr. Pillitteri (Niagara Falls): Thank you, Mr. Chairman.

Mr. Daniels, you took on the question of Mr. Grubel here. I'll put it bluntly to you. If you had a choice, would you want to see...?

You talked about the aging of the baby-boomers coming on. Would it be easier for the insurance company to put it on an eight-year term, say for three months a year, adding on for those two extra years, or to put it on a twelve-year term for two months a year, so that some wouldn't be penalized right away? Would it make any difference as far as funding goes?

Mr. Daniels: Mr. Pillitteri, for the insurance companies - and I've discovered this since I've been working with the industry - once you get the objective straight, we can find an actuary to figure out the smoothest way to get from A to B. I would say simply that if you were really trying to make a transition like that over a four-year period, obviously you'd want to design it in such a way that it minimized disruption through the period. I'm sure that can be done. That's a technical matter that could be handled relatively easily.

Mr. Pillitteri: Thank you.

I have another question for Mr. Lafrenière.

You mentioned in your opening remarks that you do understand the programs, for political reasons, have to be eliminated. You make reference also to the western...ACOA and all of that.

What got me is you said you want changes to section 149 of the Income Tax Act, about farmers and insurance. Would you elaborate on that, please?

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Would you elaborate on that please?

Mr. Lafrenière: Under paragraph 149(1)(t) of the Income Tax Act, basically, a property and casualty, or P and C, insurance company that does more than 25% of its business - now this is a fine detail to be going over - with farmers gets some kind of tax exemption. Because it is pretty hard to do 25% of your business with farmers - that's because the number and value of farms is going down - companies barely succeed now by doing that.

The kind of companies that do business with farmers are mostly mutual insurance companies, which are those that I represent. Mutual insurance companies are companies that have been set up by farmers.

These are pretty small companies. The average property and casualty insurance company in Canada has about $150 million in gross premiums. In our case, the average is $5 million, so we're pretty small.

These are the people who still administer those companies. They are the owners of the companies and on the boards of directors. They administer them.

Of course, it becomes very difficult when they can't use that tax advantage they had in the past just by virtue of the fact that they are becoming so small. They are going under that 25% of their business with farmers.

In order to stay in business, their expansion takes place in the villages, cities, and so on. Therefore, their proportion, if you will, of business with farmers goes down below the 25%. This is a case we've seen mostly in the province of Quebec. You have 37 mutuals. Of those 37, 25 have lost their right to use that exemption over the last few years. They are still surviving, but they are having much more difficulty than others who still benefit from that. Companies in other provinces are now starting to lose that exemption as well.

Mutual insurance companies are not the only ones who benefit from that exemption, but basically they are the main ones who do benefit. This is disappearing on its own by virtue of the fact that the number of farms is diminishing.

The Chair: Thank you.

[Translation]

How much would it cost the government to increase the exemption? Did you estimate the costs?

Mr. Lafrenière: Yes; it would be between $500,000 and one million dollars a year.

The Chair: For all of Canada?

Mr. Lafrenière: For all of Canada.

The Chair: Thank you very much, Mr. Lafrenière.

[English]

Thank you, Mr. Pillitteri.

Mr. Campbell.

Mr. Campbell (St. Paul's): Thank you, Mr. Chairman.

My question is for Mr. Daniels. It concerns the issue of supplementary health and dental plans. I thank you for the brief and your comments about it. You're quite right, there has been discussion last year, and again this year, about the issue.

I'm not purporting to speak for my colleagues, but my focus has changed over time as to how can we establish coverages or address those three million to four million Canadians who are not presently covered. You sketch out quite succinctly in your paper why those three million to four million Canadians are not covered.

There seem to be two possible proposals that pick up on all of them, I think. You've mentioned one in your paper, which is this whole issue of deductibility for unincorporated entrepreneurs. The other, I suggest, would be the 3% threshold for the deductibility of medical expenses.

Do you want to comment on those and whether you think those kinds of changes would do it? Have you done any analysis about what the cost might be to us if we did?

Mr. Daniels: Thank you, Mr. Campbell.

Mr. Chairman, I should answer this by saying that if I can do just a bit of arithmetic, you're right, when we got through all this research we discovered that the pool of Canadians who were uncovered either by private supplementary health care or by the special government programs, either for old age security or native persons and so forth, left a pool of 3.6 million individuals and their dependents. That breaks down further into three groups. About two million of them are people and their dependents who are in workplaces in which they could have supplementary insurance if they choose it. For one reason or another, they choose not to buy it.

Mr. Campbell: That's the employer's choice.

Mr. Daniels: Yes, the employers and/or the workers. It's however they choose to take their wages. One may say they don't have a choice in a lot of cases. I'm not ducking the answer to that; I just don't know one way or another. However, it's not the tax system.

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Hence, other than sweetening it, in which case you'd pull in 20 million others.... No doubt you won't hear any complaints from us, but it wouldn't be reaching the....

So the fix for those two million people is basically for us to go out to persuade them to get inside the system. We're not here asking for tax -

Mr. Campbell: The risk to you is that if we do something else, such as with the 3% threshold, people may opt to be out of plans. You don't want to see that happen; you want to see more people in.

Mr. Daniels: Exactly. Obviously, we don't want people to opt out of plans. So two million of those 3.6 million people are, one way or another, not sold on those benefits, and need to be.

There are another 600,000 who are simply outside of the workforce or outside of the orbit of somebody who's in a plan. The issue there is jobs, jobs, jobs. This has a familiar ring. It's something that I think every Canadian can put themselves back....

So we're left with a million people, and they're virtually all unincorporated self-employed people. The incorporated self-employed person can in fact deduct the premiums just the way any other employer does, including the Government of Canada. This is not so with the unincorporated.

We've said in here that one way to fix that is to extend the deduction to unincorporated self-employed people, but our information is that there are a fair number of tax benefits accruing to that group.

So before you'd be out there advocating handling that by just extending deductibility, you'd want to examine how much equity there is in there. There might be some combination of changes that would be - if I can use the word - fairer. That's obviously for you to decide.

So this is my response. We see the tax system only related to that latter group directly. The rest of it, short of changing the overall parameters, is not a tax matter.

Mr. Campbell: If we were then to address the deductibility of the cost of supplementary coverages for unincorporated entrepreneurs, would that pick up those one million people?

Mr. Daniels: Yes, it would.

Mr. Campbell: You're right that there are a bunch of people out there who have chosen not to take advantage of the opportunity that currently exists for supplementary coverage, either because employers have not taken on a plan or employees have chosen not to participate.

Mr. Chairman, let's just come to the last point very quickly. With the 3% threshold, if I understand it correctly, currently, in order to deduct your expense, you have to have spent more than 3%. Have I got this right?

Mr. Daniels: Jim, that's right, is it not?

Mr. Witol: Yes, unless you're a very high-income person, in which case, in effect, the number is $614.

Mr. Campbell: What happens if you take that 3% and make it 2%, 1% or nothing?

Mr. Witol: You ease the burden on those who don't have plans.

Mr. Campbell: On the 600,000 who are not connected one way or the other, and who can't take advantage. In order to get any deductibility at all, they currently have to spend more than 3% of their income, whatever that may be, to qualify.

Mr. Daniels: So it would be giving them deductibility right away.

Mr. Campbell: Of course, the fallout from that and where it affects your industry is that a lot of people might then start screaming and say that you can't do that just for 600,000 people; you have to do that for everybody. Some might say it's better for them to go that route than to be in a plan.

Mr. Witol: With respect to the 600,000, they're not reachable by our industry at the current time. They're not connected to employment, which is where we sell our plans.

Mr. Campbell: So the bottom line is that ways exist to have supplementary coverage for everyone.

Mr. Daniels: Yes, I think that's right. Ways do exist. I think what all of us have managed to do is define that group a lot more narrowly than any of us had it defined when we were last in here.

Mr. Campbell: It's extremely helpful. Thank you.

The Chair: Thanks, Mr. Campbell.

Mrs. Stewart, please.

Mrs. Stewart (Brant): Let me just follow up on the questioning of my colleague,Mrs. Brushett, to Mr. Stephen.

We were talking about strategies to assist and encourage privatization and to make sure we do it in an efficient and effective way.

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The examples that were given by Mr. Shaen were an airport, a bridge, and essentially things that have a rather large asset attached to them, but I'm assuming that you're also considering services that don't necessarily have a large physical asset attached to them. It may be the intelligence of our public service, a computer system that goes along with processing, and that sort of thing.

What are some of the services that the council has considered as being potential ones for review by this kind of a task force?

Mr. Stephen: I guess most of our membership believes that where there's a need from the public sector, just about any function that's performed in the private sector could be performed equally, if not better, by a corporate provider. I think the real point there is whether that is the case. Is there a significant and compelling case? Is there a significant saving to government of pursuing that route, including all the transaction costs?

We don't spend as much time thinking about the passport office versus the people who crank the driver's licences at Queen's Park. We think more about process issues, fairness issues, cost issues, expropriation issues, and compensation issues on the two sides of the equation.

In our lighter moments, we have discussions about those things that simply couldn't be operated by a corporate provider under the right contractual terms. It might be foreign policy or it might be certain military operations, but that's a bit fanciful. We're just starting down a new path and, as I said, we're about trying to get that right so that people say yes, that's a significant saving; yes, that was done right, you didn't give it to your brother-in-law.

We also want it to be something we can sustain. This is not a contract that's going to fall in on itself in five years and we'll have to mop it up somehow. There seems to be some strength to this and it makes sense. It makes sense to my community as well as to my shareholders.

Mrs. Stewart: Speaking about process, I'm just trying to put a paintbrush to the picture you're drawing. We have program review now where all the ministers are looking at what it is their ministries do, what they should continue to do, and what potentially is not the business of government. Those things would be highlighted. They would then be fed into this task force that, at least from the federal side, would be chaired or led by a minister.

How would you consider identifying those in the private sector who should be part of that task force?

Mr. Stephen: I think you have various corporate constituencies that appear before you. It depends how widely you want to take it, whether it's our group or the Chamber of Commerce or BCNI or whatever. I think we could probably put that together in an afternoon and present something that was acceptable to government and to the community. I think the broader question is when you don't have a privatization minister and you let program review take its course, are you maximizing your privatization or partnering options?

I think it's fair to say that in the Government of Ontario they are pursuing drastic expenditure reduction options. They are not looking at this type of thing as seriously now as they might in a year because they feel the need to chop $6 billion right now. This does not do that for you; this does not chop $6 billion right now. It ought to offer, in a particular area, an annual saving that is significant in relation to what the government is spending now, but it certainly doesn't hit the cash register the way cutting welfare cheques by 20% does, whatever one thinks of that, and the council has no position on that in particular.

Mr. Shaen: Can I add just a couple of things to that? I think we want to be clear, or maybe I'm just speaking for myself in trying to clarify this point. We don't take the view that markets solve every problem. There may well be people around the table who take that view, but that's not my view.

I think I speak for plenty of people who are involved; one-third of the members of this council are people in the public sector, particularly on the municipal side, who, since they're at the bottom of the food chain, are desperately coping with what's happening on the debt shuffle. But part of the difficulty is that over the last 30 years in particular governments have begun to do things so that it becomes very difficult to stop and ask from within yourself whether we should still be doing this.

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Over the last two years, the City of Toronto was faced with a very interesting proposal on the planning side. Somebody came to them and asked why they had so many people in the planning department. Why don't we put more of the onus on the developers and figure out a way to set regulatory standards, whatever they may be? I'm not a planner so I can't flesh this example out in detail, but they said to put more of the onus on the proponent and lighten the load in terms of what we carry inside because we were carrying, so the argument went, way too many staff.

I think, by analogy, there are probably plenty of functions that governments are engaged in where one doesn't need to be an ideologue to say, this was a good idea when we started; we may well have solved the policy problem some time ago but we have continued to do it because we have.

For those of you who are interested in management literature, a man named Peter Drucker said one thing in particular twenty years ago that I thought was quite interesting. He said that people have stopped believing taxing and spending solves every problem; they believe taxing and spending solves some. The problem for people who sometimes live in the domed city where information doesn't flow in and out all that easily is that we continue to do things because it's not all that easy to stand back and ask whether there is another way, and to ask it without seeming to be ideological in doing it.

I think right-minded people from different perspectives can come to the same conclusion that this may not be a business, whatever it is, we ought still to be in. That's why having this driven on a project basis - the Minister of Transport having an air navigation system that it needs or wants to move out, or the minister of whatever wanting to move individual initiatives - is a strategy by accident. Given the fiscal stress the country is facing, and this side in particular is facing, it may be that something a little bit more coherent and cohesive might make some sense.

Mrs. Stewart: Thank you.

The Chair: Thank you, Mrs. Stewart.

Mr. Fewchuk, did you want to add anything?

Mr. Fewchuk (Selkirk - Red River): I've been through a lot of meetings in the last two years and they always say that the private guy is going to pull the government out. But every time I sit back and listen to all these meetings, the private guys like me...I was in business at one time. I see an opening here for me, as a private guy, if I could get my foot in the door. How can I get the cash where it's easy, the cheque will be delivered to me?

I haven't heard anything different in the last two years. The private guy is there wanting to get his hands on the taxpayers' money and he wants to be in front. I heard it again from these guys this morning.

Other than that, I think I'd better stay quiet. Thank you.

The Chair: You have a very ``Marxian'' view of the world.

Mr. Grubel, you would agree with that, I'm sure.

Mr. Grubel: I want to say something quickly, an additional comment on what Mr. Shaen said.

In economics we have the concept of market failure, which most economists agree with. The market does not do everything perfectly. But the great insight in the last twenty years in economic theory was that there is also something called government failure.

I think what has happened is that when government started to do things in order to fix these market failures, we learned that they themselves create difficulties, and there is a presumption that the cost to society of having the government fix it is greater than the cost that used to exist when the market was unrestrained. I think that is one of the most powerful arguments that exists for privatization.

Of course, ideologues would say that everything the government is doing is wrong, and very few people do that. The point is that we should nevertheless look with a properly focused bias, perhaps, and ask when the government is doing it, is it really achieving its objective or is it causing more problems at the same time? Thank you very much.

Mr. Shaen: Mr. Chairman, may I make a comment on that?

The Chair: It's a fight between you and Michael, Terry.

Mr. Stephen: No question, Mr. Chairman.

The Chair: Have we resolved this conflict? Okay.

Mr. Stephen: I think in responding both to Mr. Fewchuk and Mr. Grubel, there's a way of looking at these things. To presume that the corporate sector is going to solve your problems is dangerous, as Mr. Fewchuk points out, because at the end of the day we're all lazy, particularly if a free lunch exists, or if we think it exists, that's good. So there has to be some tension in the system.

What would be new in the 1990s in government circles would be the abolition of what I came to call over a period of years the suspension of disbelief.

Hard critical questions have to be asked. Is this a good deal for the taxpayer? The guy says there's a 20% savings. Is that true? Can I demonstrate it? If it doesn't come to pass, what stick goes over that person's head? If it does come to pass, how do I share in the savings? We have some balance of not sharing losses so much as sharing gains and having somebody lose something if they can't perform as advertised.

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The Chair: Could I ask you, Michael or Terry, to fill me in on the genesis of your association - who the members are, how you're appointed, who funds you and things like this?

Mr. Shaen: Only the loftiest belong.

The Chair: Certainly unlike Parliament.

Mr. Shaen: It's very much like Parliament.

Mr. Stephen: In the beginning there were a number of people, principally in two professional firms, who said, this is coming and there isn't an infrastructure for doing this in this country that is really well understood to us. Our members are municipalities, banks, investment dealers, law firms, engineering firms, and constructors. Our money comes from our membership and through the profits shared from an annual conference that took place last November 20 and 21 in Toronto.

We don't have our hand out anywhere in particular, just among our membership at this stage, obviously. As one of our directors who's a former CEO of Hamilton - Wentworth recently said at a board meeting, we have too much money to do what we're doing now but we don't have enough money to do what we should be doing. That's like a lot of organizations, I guess, Mr. Chairman.

The Chair: So it's totally a private sector initiative among mainly professionals and some municipalities.

Mr. Stephen: Yes.

The Chair: When was it formed?

Mr. Stephen: The fall of 1992.

Mr. Shaen: A similar organization has existed in the United States for about ten or twelve years. The early birth of the Canadian operation came about when somebody from the States spoke at an event in Canada, which caused a group to say, you don't have to be a genius to see that governments won't be able to continue doing what they've been doing; we ought to think about a forum, a vehicle of some sort.

This is not a fraternity. There are no secret passageways.

The Chair: Have you identified some areas the federal government should be looking at?

Mr. Stephen: No, we haven't specifically. We have federal government departments that are members. Being a process shop and saying we don't advocate projects, we don't want to put any undue pressure on the different emanations of, say, Public Works and say, you really ought to be doing this.

The Chair: Why not?

Mr. Stephen: Because we don't have a process. We haven't received enough clues from you people, perhaps because we haven't spent enough time up here. But in spending time up here last week we received an invitation to be here today. As a result, our submission is not quite finished, but it will be very shortly.

The Chair: Good.

Mr. Stephen: Maybe we should, but being kind of ecumenical and arguably having members who have different interests and trying to balance those interests - as between an investment dealer and a large municipality - we say, let's stick to how to do these things. That will be enough of a contribution in 1995-96. Sure, if you want to have some discussions in another forum about where to start, that would be fun too.

Mr. Shaen: Part of the reason why we put this particular proposal together today to look at either a minister or a task group is because much of what has brought people to play at this organization is from the government side doing it or being asked to do it, and they're not really sure where to begin, or they've done it and been burnt and want to do it better next time.

Obviously, from the private side they've either done it or they're getting a whiff that there's an opportunity to do it, but they would like to know more about how to do it so they don't stub their own toes. That's why this vehicle is gaining a little bit of interest and notoriety among those who are interested in this field.

The Chair: So if we wanted to privatize our pre-budget hearings we could come to you and you could suggest a process, recommend some people who could do it for us and tell us what the cost would be.

Mr. Stephen: Absolutely. We look forward to that, but your take would be on a success fee basis only. So there would be no more regular cheque.

The Chair: Yes, Mr. Pillitteri.

Mr. Pillitteri: Mr. Chairman, I just want to make one remark. I was a pupil of municipal council and I do remember that part.

You also have a lot of individuals who are in the consulting field. I know my municipality used the service to find out how to do it differently and how to possibly do it better.

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May I say that in my own municipality the end result was that just a couple of changes were made - not always that you come up with the answer, but only a couple of changes were made. I think we came out spending $10,000 more. We just changed the name from chief administration officer to something else. The changes were there, no doubt about it, but actually the cost of running that municipality was the same thing.

Mrs. Brushett: Can I just make one comment, Mr. Chairman.

In the past year of hearing about contracting out, it seems the history here in this government has been that we've contracted out without knowing what our basic cost was within government. How can you contract something out - and this is the big pitch we're hearing from the corporations - not even knowing what our own costs are, and yet saying we're getting a better benefit?

Mr. Grubel: Come on, Dianne.

Mrs. Brushett: I think we have to do the fundamental steps first.

The Chair: Agreed?

In conclusion, let me say I believe that there is a lot of scope for us to work together, in a much more cooperative way, with the Canadian Council for Public-Private Partnerships. Quite frankly, I think we'll have to look to you for suggestions as to how we can increase that interchange. I'm just very sorry, Terry and Michael, that David Walker wasn't here to learn of this initiative.

Mark Daniels, I certainly can't say I disagree with anything you said in terms of how the issue of retirement income has to be looked at, as we recommended last year, within the global needs of those who are going to be there, and Mr. Grubel raised some interesting concepts.

How much do you think it would cost us to extend the deduction for health and dental plans to the one million people who aren't covered today? About one-thirtieth of what the tax expenditure already is? Approximately?

Mr. Witol: Our estimates are a lot lower, simply because we don't expect everybody to take up the offer. It still involves an expenditure.

The Chair: What would your guess be?

Mr. Witol: Our estimates are that it would maybe cost $35 million to extend -

The Chair: To create a level playing field.

Thank you very much.

[Translation]

Mr. Lafrenière, you have made two suggestions, and I think your ideas are good.

[English]

On behalf of all the members, may I thank each one of you for excellent presentations.

We adjourn until tomorrow afternoon at 3:30 to deal with Bill C-100. It should be our last meeting before Christmas, I believe.

Mr. Grubel: Are you bringing the Christmas cake?

The Chair: I'll be bringing you lots of things, Herb.

Thank you very much to our witnesses on behalf of all members.

The meeting is adjourned.

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