EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, April 30, 1996

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[English]

The Co-Chairman (Mr. Alcock): We have the room only until 11 a.m., so perhaps we should get under way.

Welcome, all, to a joint committee meeting between transport and agriculture. I'll turn it over to Lyle and let him introduce what we're about to do here, and then I'll come back and talk about how we're going to do it. Lyle.

The Co-Chairman (Mr. Vanclief): Thank you very much, Chairman Reg, and welcome, everyone, to this joint meeting.

Just to make it clear to everyone, the reason we're here jointly this morning is that there are a number of witnesses both transport and agriculture committee members wish to hear from on the issue of the hopper cars. We felt - Chairman Reg and I and the committees - that the best way to do that, for efficiency, was to have each presentation made once rather than the duplication of having people, for time, expense, and other reasons, coming before two committees and saying things more than once. That will be the process both this morning and Thursday morning. I thank everyone for cooperating in that regard.

As Reg has said, the time is tight, so I'll turn it back over to Reg to quickly go through the process and introduce the first witness this morning.

The Co-Chairman (Mr. Alcock): We are going to adopt a practice that we've adopted in the transport committee of five-minute rounds of questions. I ask the witnesses to make their presentation in as efficient a manner as they can. I suspect there'll be a lot of interest and a lot of questioning on this. We'll start that as soon as both departments have had an opportunity to make their opening statements. We'll run to about 10:15 a.m. or 10:20 a.m., and then we'll move to CN.

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So, Mr. Anderson, welcome.

Hon. David Anderson (Minister of Transport): Thank you very much, co-chairs and ladies and gentlemen.

I would just like to briefly introduce Nick Mulder, our deputy minister, who will take you through a deck on the hopper car issue.

I'd like to have a few preliminary remarks to the effect that an efficient transportation system is an absolutely critical part of any well-performing economy. Canada, with its problems of distance, geography and climate, has a particular interest in such a system. Reliable and cost-effective transportation improves the competitiveness of Canadian products at home and abroad and stimulates the growth and employment in Canada. If we do not have a functioning transportation system, we simply do not sell our products.

The government, in the last two and a half years, has taken a number of steps to improve the competitiveness of the Canadian transportation system in this period, including actions aimed at the grain transportation and handling system in particular. People around this table know many of the examples of this, which include reducing the role of government as a service provider through the privatization, for example, of CN, enabling a more rational branch line system through provisions in the Canada Transportation Act, and the repeal of the Western Grain Transportation Act. In addition, my colleague, the Hon. Minister of Agriculture, Ralph Goodale, is currently reviewing the marketing role of the Canadian Wheat Board.

However, public ownership of the 13,000 grain hopper cars and the government's role in allocating those cars among users through the Canadian Wheat Board and the western grain transportation office clearly represent impediments to an efficient and commercial system. Again, as people around this table know, complaints over the last few years have been numerous and bitter.

Selling Transport Canada's cars and reducing the government's car allocation role are two more steps towards improving the efficiency and the commercial operation of the grain transportation system.

So with those preliminary remarks as to the objectives, I'll turn the presentation of the deck over to the deputy minister, Mr. Nick Mulder.

Mr. Nick Mulder (Deputy Minister, Department of Transport): Thank you, minister, and good morning, co-chairs and hon. members.

I believe on Friday morning we sent to the clerk a black binder that has a series of tabs. I'd like to refer, if I may, to an item under tab 7. You should all have a copy of a presentation that we developed for both this committee and one other session. Do all the members have a copy of that under tab 7?

The Co-Chairman (Mr. Alcock): For the information of the members, it's headed ``Hopper Cars: What's Next'', and it's dated April 30, 1996.

Mr. Mulder: This presentation was prepared for this committee, and we also used it last Friday at a meeting of the Western Transportation Advisory Council in Winnipeg, where a number of us from the two departments met with about 20 different grain interests to go through where we are on the hopper car issue. So we thought the presentation might be worth while to walk through.

Just to tie in with what Mr. Anderson said, on page 3 of the documentation - I won't go through every page, some of them probably not at all - the minister referred to the fact that we are dealing in Canadian grain with expanding and diversifying global markets and increasing international competitiveness.

To do that, the government in a sense has to meet three objectives. We have to have an efficient grain transportation system. We have to keep costs to the producers as low as possible, because they're the ones who are finally paying for it. They're doing all the work to grow the grain, and they should maximize their returns. We have to encourage western diversification. We also have to, unfortunately, get the government out of the business of regulating, which most people want, and subsidization.

So the trick has been over the last few years, and will be in the next few years, to try to meet all three objectives. I think the members are all familiar with them. I believe most of the members have been involved in legislation that generated that.

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Since the 1995 budget that Mr. Martin announced, we have repealed the Western Grain Transportation Act. Through Bill C-76, we put in a maximum rate for five years that could be subject to review extended, but it has to be a formal review.

Mr. Goodale is dealing with the $1.6 billion pay-out. Most of the initial cheques have already gone out - at the end of February and March - and other cheques will follow. He's also sorting out the payment of the $300 million adjustment program for the prairie provinces and the prairie producers.

So all those things are in a sense in train and are under way. We also launched, through the review by Mrs. Marian Robson of the National Transportation Agency, a review of about 10 low-density lines at very low traffic that can't even hold the fully loaded hopper car. That review was finished last fall. If Bill C-14 sees the light of day, those branch lines will be dealt with.

We've also made changes by eliminating the Senior Grain Transportation Committee and the Grain Transportation Authority. These are bodies that have been around for about 10 years from previous legislation. I give you that by way of background, because a lot of those things have already been accomplished over the past year or year and a half.

What we are dealing with now, on page 5, is the role of car allocation and the disposal of the 13,000 government-owned hopper cars. Those are the two major issues that are on the agenda right now, and they have been subject over the past nine months to a lot of consultation with the grain companies, the railroads, and producer groups, and a number of recommendations have been made to the ministers.

On page 6, I would like to deal with two items before we go to hopper cars. On car allocation - because that has been a concern to certain members - in the final analysis, it really doesn't matter so much who owns the cars as how much you are charged for them and who allocates the cars to the producers on the various lines.

We have announced that we are getting out of the car allocation business, and a new group has recently been set up that includes one producer representative, Mr. Jim Robbins, who's from northern Saskatchewan. Mr. Easter knows that he's a member of the National Farmers Union. As a matter of fact, he's very much sided with it through family connections. He represents the producer interests in the prairies to deal with car allocation. Also, Greg Arason is there from Manitoba Pool. He represents the grain companies. Sandi Mielitz, from CN, is the representative for the railroads, and we are waiting for the appointment from the Canadian Wheat Board.

Those four people, in consultation with our own kind of stakeholders - they're our clients; they're our masters - will develop the new car allocation policy, and they will take over the car allocation function by August 1 of this year. Work is under way to do that, and as we note on page 7, we're prepared to facilitate that process to let the industry, including producer representatives, decide what the car allocation policy should be.

The other one, on page 8, is on port coordination. We have had, as part of Transport Canada and through the Grain Transportation Agency, a role in doing port coordination, primarily in Thunder Bay and Vancouver, whereby we try to facilitate more efficient movement. There's a process in place now whereby that function will be taken over by the grain companies and the railroads in Thunder Bay and Vancouver. Instead of government officials doing it, the industry itself will do it - the grain companies and the railroads. They will take that over on August 1 as a part of a trend to give the industry the responsibility and manage their own affairs.

On page 9 is the budget, which the minister highlighted already. Mr. Martin announces that as part of a train to get the government out of the grain transportation business and generate a more efficient system, the government is going to sell the hopper cars, leaving the day-to-day operations to the railroads.

On page 10, there's a reference to the conditions that cabinet and the Minister of Finance attach to this, that it should be done with open bids to all interested parties. It should increase the freight rate by no more than 75¢ on average. It will be 75¢ per tonne on average. The cars would be used primarily for western grain. They were bought for western grain. They should be primarily dedicated to that, but there should be room, when they aren't used for western grain, to use them either for other non-grain traffic in the west or for other commodities such as corn in Ontario and so on - various issues along those lines.

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Page 11 highlights the three areas I'd like to deal with briefly on the following pages. The first one is the budget legislation. Last Tuesday the government tabled Bill C-28, the budget legislation, which has about 15 or 20 different items in it. One of the items in it - and it will go to the finance committee of the House of Commons - has to do with the agreement that was reflected in the budget by cabinet.

There will be productivity sharing. You will see on page 12 what the formula is. That formula came from the senior executives committee that met last summer and last fall. There will be what they think is an adequate and fair sharing of productivity gains whenever the system generates a lower cost. The legislation also provides that the freight rate will increase by 75¢ per tonne on average, but only if the government sells more than 10,000 hopper cars.

If, for some reason, not all of them sold, the legislation wouldn't be triggered, and it allows my boss, Mr. Anderson, to legally sell those cars. Parliament would give him authority to do so. If that legislation gets passed by the end of June, which is what I think the expectations are, that will clear up the legal issues.

On the sale transaction itself, the minister announced last week that we've hired a financial adviser, CIBC Wood Gundy. We went through a competition to consider various firms, and CIBC Wood Gundy won. The responsibility of that firm is to work with the Department of Agriculture, the Department of Finance, and the Department of Transport to develop terms of reference for a tender call by the end of June or early July. So that firm will be dealing with us, the grain companies, the producer groups, and the railroads to develop the terms and conditions.

One of the issues the consultants have to deal with, and I think also the members of both committees plus certainly the ministers when they make the decision by the end of June - these are highlighted on page 14 - is the impact of selling cars in blocks. If you sell the cars in blocks of 3,000 or 4,000 different groups, how does it tie in with the common fleet? We've always had in the west a common grain transportation fleet of about 25,000 or 26,000 cars.

If you sell them to different groups, all of whom have different conditions attached to them, what happens to the overall system and what happens to the common fleet notion? Certainly the producer groups are very concerned about that. You can't have a split of ownership with contradictory terms, so somebody's going to have to sort out how far you go with this.

What happens if you use the cars in different ways by different users? What does it do to the overall efficiency of the system? What happens if the cars are used and dedicated for other crops or other commodities elsewhere in the country? If there's a major movement in grain, how do you make sure there are enough cars available and that they can be called back? Those kinds of issues all have to be dealt with in terms of ownership and part of the tendering process.

The divesture process, which is the last page I will deal with before I turn the issue back to Mr. Anderson, is, as Mr. Anderson indicated, one whereby the government is neutral in most ways about dealing with potential buyers. It could be one group of producers, it could be a consortium between producers and the railroads, or it could be the railroads - whatever. The government is prepared to consider all, and we need to sort out over the next two months what these terms and conditions are.

Minister, I probably took a bit more time than I should have, but I dealt with some information.

Mr. Anderson: Thank you very much. I think the real objective for everyone is.... At the end of the year we've had more carloads of grain moving to tidewater than previously - certainly the maximum that can be considered reasonable in any 12-month period. We want to maximize the efficiency of our system for the benefit of producers in particular, but also, of course, shippers and railroads.

We're at present in the process of developing these terms and conditions that Mr. Mulder talked about to structure the sale of the hopper cars. In consultation with my colleagues, the Minister of Finance and the Minister of Agriculture, we'll be going out to talk with interested parties over the next few weeks. These consultations will be with stakeholders, obviously producer groups, and obviously the grain companies and the railroads. This will be done prior to any finalization of the terms and conditions of the disposal process.

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Following the consultations, we'll be in a position to decide on the best disposal process. We can then issue a call for bids to the various people who are listed in the last page of the deck that Nick took you through.

The expectation would be the end of June or early July - the summer period. That's what the expectation would be. May I stress again that all interested parties listed on page 15 of the deck, and maybe others, such as pension funds - I don't know; somebody may want to invest in rail cars - are open to bid on these cars. We'll then obviously have to allow time for bidders to develop and submit their bids and for those bids to be evaluated once they come in. So a very rough timeframe would be perhaps the end of the year, but that's a rough timeframe.

Mr. Chair, I turn it back to you if there are questions or comments.

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

Mr. Mulder, I think what we'll do is ask Mr. Migie, director general for the western grain transportation review from Agriculture and Agri-Food Canada, to make his comments. We'll then go to questions and comments from the members on the side.

Mr. Howard Migie (Director General, Western Grain Transportation Review, Department of Agriculture and Agri-Food Canada): I don't have any additional comments to make.

The Co-Chairman (Mr. Vanclief): You don't have any additional comments to make?

Mr. Migie: No. I'm just here to help answer questions.

The Co-Chairman (Mr. Vanclief): We will start, then, and as Mr. Alcock said a few minutes ago, because of the time and because we want to get as many people as possible to make comments and questions, I stress we are going to keep it short. We'll have five-minute rounds - five minutes for each person - and you know how quickly that goes.

We'll begin with Mr. Hermanson, Mr. Chrétien, and Mr. Easter, so those three people can prepare their brief comment and question.

Mr. Hermanson (Kindersley - Lloydminster): Thank you, Mr. Chairman, and thank you, Minister Anderson and officials, for appearing before this joint committee meeting.

There's a lot of skepticism on the prairies right now, not only about the car allocation but about policy in general from the transport and agriculture departments. There's a lot of disheartenment over the Crow buy-out scheme. Farmers were promised cheques in January. I know I have constituents, as do all MPs on the prairies, trying to get in on a 1-800 line, but they can't get on because their cheques haven't even been processed yet. They're very concerned about that. They're very concerned about the hostility towards shippers in Bill C-14.

I've had a concern expressed about the fact that Mr. Robbins is the producer allocated for the CAPG policy development. There is a feeling that his presentation may not be balanced enough and that we need either someone else with a different perspective or someone a little more middle-of-the-road sitting on that group. There are concerns that it doesn't matter who owns the cars, that these producers are going to have to pay for it, that this is a red herring, and that it's a diversionary tactic. These are concerns on the prairies that we really want answers to.

I've talked to a lot of producer groups. There are a lot of questions. They want to know how much Transport wants for the cars. This has been gone about the wrong way. We've talked about how much we're going to pay per tonne to cover the cost of the cars. There's been discussion about who's going to own the cars, but at no time has anybody said what these cars are going to be sold for. We have a used hopper car salesman out there who won't put the sticker price on the used hopper cars. That's wrong, and it needs to be rectified. It should be done today.

As well, my understanding is that the federal government had an agreement with the railroads, when the government purchased the hopper cars, to allow first right of refusal to the railroads if those cars are sold. That has not been mentioned. I would like to know whether Bill C-28 would in fact negate that agreement and whether the railroads agree to that, or if the information I have about the railroads having first right of refusal if those 13,000 hopper cars are sold is actually incorrect.

The Co-Chairman (Mr. Alcock): Thank you very much, Mr. Hermanson.

Mr. Anderson: I'll answer one by one. With respect to the price of hopper cars, the program outlined has a group of financial advisers advising us, and they haven't yet done it. I'm here before receiving their report, so I don't have the details of any of their suggestions or proposals in terms of a disposal plan.

We could have waited to have this meeting some weeks hence when I have that information, but perhaps I could come back at that time. We just wanted to make sure you were fully informed as quickly as possible of the course of events.

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With respect to their value, the appraised value we've had on them, the fair market value was $420 million. That was the market value put on by appraisers who were knowledgeable about the transportation industry. I believe these people included both American and Canadian railway people.

The scrap value of the cars is $90 million. So it's somewhere between those two.

Where will it wind up? Well, this isn't exactly quite the same as a used car lot. There will in fact be bidding. Potential buyers will decide what they think they are worth, and they will put in bids based upon their assessment of the value of these cars.

So we don't know. We can't answer that question until such time as, first, we've established the criteria for the bidding, and second, the bids have come in from whoever may be interested in buying.

Mr. Hermanson: How can you come up with the 75¢ a tonne, then?

Mr. Anderson: That was a limitation cap put on. It could well have been left off, but that was put on through the budget process and that obviously will affect the price. The lower that amount is, the less the price will be. The higher that price, if there be no limit, you can charge whatever you wish on top.

Obviously the value of the cars would be higher, but I can't tell, and no one in this room can tell you, what the potential buyers believe the value of that 75¢ a tonne would be. Obviously if you don't have an efficient system of moving cars quickly, you don't accumulate that 75¢ a tonne for a 100-tonne car.

If you have an inefficient system of allocation and, let us say, you only get a total of five trips to the coast in a year, then obviously 75¢ times five isn't a lot of money spread over the life of the cars. So it depends on their expectation of the efficiency of the railroad. In addition, it will depend on their belief in crop size.

It will depend on a lot of factors, about which quite honestly I just can't tell you at this time. That's why it's out there for them to assess once we've established the parameters that would come forward from CIBC Wood Gundy.

The Co-Chairman (Mr. Alcock): Thank you, Mr. Minister and Mr. Hermanson.

Monsieur Chrétien.

[Translation]

Mr. Chrétien (Frontenac): Welcome to the committee, Mr. Minister. This is the first time I have the pleasure of working on a Joint Transportation and Agriculture Committee. I hope that when common interests are at stake, you will not hesitate to come back to see us.

I have five brief questions, and one of them has just been asked by my colleague, Mr. Hermanson. You talked about the market value of the 13,000 hopper cars, which is apparently $20 million. A rapid calculation tells me that that would be $1,700 per hopper-car. That isn't much, and I almost feel like buying one to keep it at home as a souvenir. At $1,700, it would be a good buy.

What percentage of the market value of the hopper cars, i.e. the $20 million, does your department hope to obtain?

Secondly, what would happen if a foreign country was the highest bidder for all of the hopper cars and wanted to use them in that country?

Do you intend to give precedence to grain producers in the call for tenders you are about to issue?

Finally, is there some risk of the hopper cars falling into the hands of a single organization that might then abuse the situation by asking producers to pay a clearly exaggerated price for transporting their grain? Thank you.

Mr. Anderson: To reply to the first question, the total value of those 13,000 cars is $420 million, or about $30,000 each. That value was assessed by experts in the field. Some of them were Americans and others Canadians. That is the price it would be possible to obtain. We think it would be possible to obtain such a price on the continental market, that is to say in the United States or in Canada.

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Mr. Chrétien: Minister, perhaps it was a problem with the translation, or perhaps my hearing failed me, but earlier I did hear that the market value of the hopper cars was $20 million. I was startled.

Mr. Anderson: I am sorry. I don't know if others also heard $20 million, but the figure is indeed $420 million. That includes the value of the steel in them, which is $90 million. The highest overall value is $420 million. That is what we expect from the market, either from the US or Canada, with no conditions attached to the sale. That is the price we would obtain if we could export to the US.

Will we give precedence to producers? No, not at this time. Wood Gundy and CIBC have not yet given us any indication that it was necessary or desirable to give precedence to producers or railway companies. At this time, in the field, they are considered equal. We are waiting for the information our advisors will provide us with in the matter. On page 15, we made a list, and no one is given precedence. I apologize if anyone said that the railways came before the producers, or that the wheat companies were considered ahead of the others. No, there is no precedence.

Finally, there is the matter of value. For those who buy those cars, their value rests in the use that will be made of them. If it is possible for them to make many trips to Vancouver or Thunder Bay, they will earn more money. It is in everyone's interest that we have an efficient system that uses those cars in the most cost-effective way. There are no restrictions on buyers. It is possible that Wood Gundy may say that it would be better for half of the cars to be in the hands of one company, and the other half in another company's possession. The only thing we know, is that it is very difficult to allocate cars properly when there are too many owners. If we have to impose conditions on each of these owners, it will be very difficult to manage the system. That is our only problem.

We do want to sell, but if we make a $2,500 sale to each of the companies listed on page 15, that may complicate the management of the system. But that is a consideration. I accept the spirit of your suggestion.

[English]

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

Mr. Easter.

Mr. Easter (Malpeque): Thank you, Mr. Chairman.

In his opening statement the minister talked about impediments, that many of these changes are being made due to impediments in the system.

One of the problems in this kind of debate, discussion or policy is that it all depends on what assumptions we start with, whether they are right or wrong, where we end up.

So I don't want an answer at this particular time, but I wonder if the department might at some point be able to table for the committee a list of those impediments so we know what is trying to be addressed here.

Mr. Chairman, I see this issue as perhaps more fundamentally important to the farm community than even the loss of the Western Grain Transportation Act. The key point here is the control and allocation of the rolling stock to the farm community, and in whose interests that is done.

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There are several important principles under which the Canadian Wheat Board operates, but two of them are certainly the pooling of returns and the equal opportunity of delivery.

In a December 1995 report the Alberta Wheat Pool made this statement:

The efficiency gain may come at the expense of a partial loss of the ``equal-treatment-of-all'' principle. In other words, as the CWB role in car allocation is reduced, the focus will shift toward efficiency in car allocation rather than ensuring equal delivery opportunity for farmers.

That's the end of the quote, but they do go on from there.

In his testimony in December before the agriculture committee Howard Migie said:

The grain companies would have more scope to use high throughput elevators more. That would be some of their added responsibility when they do.

The question related to those two statements is how do we find the balance here? In the terms and conditions you're trying to develop here for the sale of these cars and the allocation process, are those principles bottom-line principles that can't be broken in terms of equal opportunity of delivery?

The last point I want to make - at least at this time - is that I think there is a legitimate fear on the part of farmers out there in the farm community. When we start to look at this, not only are farmers worried about the impact the railways have on them, but they're increasingly worried about the impact the grain companies themselves might have as they move more towards a corporate structure from a cooperative structure. They do not want to find themselves at the mercy of both.

So what are we going to do with the government to ensure those principles remain and that farmers' interests are protected?

Mr. Anderson: On the first point, which I think is very valid, the concern over control and allocation, we do have the allocation principle established very clearly in everything to do with this hopper car issue, with the legislation itself, and in the budget.

If I remember, there is to be a committee composed of the producers, the shippers - and remember, the shippers are often co-op companies - and the railroads, who will decide on the policy of allocation.

The actual management day to day cannot be done by a committee. At some stage or another, you have to put it in the hands of a railroad to move a car from A to B, to get a locomotive there, to get the line freed up. That obviously can't be done by a committee, and can't be done by people who are not expert in railway activity.

But the concern over allocation has been there clearly throughout this whole process, and that committee has been established. Mr. Mulder mentioned in fact a committee already established, a new committee that has been put together, which I think again addresses the issue you have raised, and quite properly raised.

With respect to any proceeds on this, you'll notice there is an allocation of productivity in the deck that shares the productivity equally between railroads, shippers and producers after, I believe, a half of one percent, which goes to the railroads off the top. So there will again be some control and some financial return to the producers and shippers as well as, of course, to the railways from greater efficiency.

The final point is with respect to the possibility of a system such as this leaving out some people in the allocation process. I think this rests with the role of the producer organizations and their own co-op companies, which are absolutely, intimately involved in car allocation.

Again, this is a hypothetical.... I don't know the producer groups, but if there are producer groups that are so mistrusted by other producer groups that they don't want to have them on the allocation committee, because they don't know that they won't represent their interests, well, then please let me know about it, and we'll try to make sure that particular producer group isn't there.

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But at some stage or other you have to recognize that the producer groups will probably defend the producer - it seems logical to me - and their role in allocation of cars will avoid the problem you have indicated.

I don't know what the future role of the Canadian Wheat Board will be. That will depend on my colleague Mr. Goodale. But in allocation the producers are going to have a direct role, as are the co-ops, which are their creation.

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

Mr. Comuzzi (Thunder Bay - Nipigon): Thank you, Mr. Chairman.

In one of my prior lives I used to sell used cars -

Some hon. members: Oh, oh!

Mr. Comuzzi: I didn't say that for any comment, Mr. Chairman. I just wanted to set the stage.

One of the fundamental rules on the car lot was that the seller always puts a price on the product. I think it's important that if they are worth $420 million, the message should go out that $420 million is the starting price. How we dicker from there is important.

We've assumed a lot of bills in the last seven or ten days. We have that GST to pay for on the east coast. So I'd suggest we set the price.

My main question is this. Are you asking us to make a decision or a recommendation on the disposition of these cars before we know what the allocation process will be?

Mr. Anderson: Right. Well, I'm sure the skills you developed in a previous life will be very helpful to this committee as we consider this further.

Certainly you're right, the $420 million is a top value. It's extremely unlikely we would get that with the restrictions placed on the deal: the 75¢ restriction, the restriction to western Canada, in large part.... Those types of things will obviously have an impact on the value. But as a starting price, I guess you're correct. It's coming down from there.

I'm not asking the committee for a recommendation at this point. I'm simply trying to provide information to you people in response to your questions and what we thought were your concerns. I'm not asking for a recommendation in this regard.

On the allocation of cars, we are determined to have an effective system. It obviously has to involve the railways, and we think it should also involve both the shippers and the producers. Within that three-part organization, maybe Wayne has mentioned a few possible concerns about some producers not loving other producers. Okay. Maybe there are some things we have to adjust there. But within that basic structure, we believe we can come to an appropriate allocation system.

It must be borne in mind that it's probably not possible to have a perfect system, given the climate we have in Canada, such as the forty degree below zero temperatures of last January, and some error may always be made by the allocation committee in sending the cars to the wrong province or the wrong place. That's always a possibility too.

But the overall allocation committee should do a pretty good job, and will proceed with getting the recommendations from CIBC Wood Gundy, and then perhaps at that point I could consider your question further, whether or not we should carve the allocation process in stone before proceeding with anything on the sale. Right now, until I have that information, it's a little difficult to say where we should determine one thing before the other.

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

[Translation]

Mr. Landry (Lotbinière): I have three short questions. Are we to understand that Wood Gundy would be selling the hopper cars strictly on the basis of business considerations? If yes, what will your reaction be if Mexico, for instance, buys all the hopper cars? Will canada then find itself without hopper cars? That is my first question.

Secondly, what would be the role of the Canadian Wheat Board in grain transportation after August 1st?

Thirdly, what will the government be doing with the profit from the sale of those cars?

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Mr. Anderson: The third question is the easiest one. If there are profits from the sales, we will apply them to the deficit. But we have not reached the point where we could call that money a real profit.

Secondly, I will ask Mr. Migie to reply to the question concerning the Canadian Wheat Board. The future role of that board does not fall under my responsibility and I know very little about it.

[English]

Mr. Migie: About the car allocation, the Canadian Wheat Board has, as part of the SEO or senior executive officers group, agreed to move to a system of zones under which the cars would be allocated, which implies giving somewhat more freedom to grain companies in handling the allocation. They will also be prepared to turn over to the railways the task of making up train runs, as soon as the railways are able to do that in western Canada. Otherwise they will still be involved in transportation of grain in an active way.

They have agreed, as part of that process with the grain companies and the producers, to be involved in transportation only to the extent that it's necessary to market their grain effectively. They have taken some initiatives right now, starting really August 1 or later, whenever the railways are ready to take over train runs, in fact to step back a little and allow more flexibility for the industry in handling car allocation. But they will still be quite actively involved as part of the team that's allocating rail cars.

[Translation]

Mr. Anderson: To reply to your third question, I will say that we are imposing one condition on this sale, and perhaps, it is the most important condition. Those cars must serve Canada's needs; they must be used here. One can imagine a situation where an American railroad company might ask to use a given car for a few weeks or a few days, at a time when some cars are not being used. That might happen. But 99% of the time, that will not be an issue; they will be used in Canada.

The important question - and I hope that the committee will give us the benefit of their advice on this - is to know whether all of these cars must be used in western Canada, or is it possible to use them for transporting corn in Ontario, for instance? That is the question we would like your advice on. At this time, if you look at page 14, there is a discussion about the impact that the use of those cars elsewhere than in the west would have. The decision has not yet been taken. If there are any good ideas to make better use of those cars, I would be very happy to hear them.

Mr. Landry: Mr. Minister, would you prefer to sell these 13,000 cars to a single partner, or to five partners?

Mr. Anderson: If there are too many owners, past a certain point, that creates some management problems. Everyone wants to set their own conditions. Aside from that, I have no preference. If a company wants to buy all of them, all 12,900, we will examine its proposal. If there are four, we will do the same. Up till now, I have no preference. We want the best possible system, to transport as much wheat as possible.

Mr. Landry: Mr. Minister, I see things in this way...

[English]

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

Mr. Chatters (Athabasca): I'd like to follow up on a question asked by my colleague but not answered. Have the railroads in fact been given the right of first refusal on this deal?

Secondly, it seems inconceivable to me that after all this discussion and all the bafflegab that goes around on this issue, whoever buys the rail cars, the hopper cars, the producers are going to pay for them, inevitably, through the increased freight rate. It seems inconceivable to me that the railroads bid whatever they bid on this fleet of hopper cars and the producers buy them for them. That doesn't seem to me to be fundamentally fair. Something is wrong there.

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Mr. Anderson: On the second point, again, any company that provides a service to a customer generally charges the customer to cover its capital costs. This is true whether it's grain on the prairies or lumber in British Columbia or any other product. So ultimately the customer does pay. A company is merely a device for achieving a service to the customer.

So yes, you're right, ultimately the customer pays. But this is no different in this case, the case of western farmers, from the case of any other commodity that's shipped through the port of Vancouver, at least.

About the first question, about first refusal for the railroads, we do have an operating agreement with the railroads now, and I'll ask Mr. Mulder to explain it. But essentially, within the limit of that operating agreement, we want to have open bidding to make sure any organization, whatever it might be, can at least put its bid forward. It may be that when we look at it we will say it's undesirable. If the Mafia puts up a big bid, we may decide not to take it, even though it's the highest bid. But at the moment we have no preference.

The Co-Chairman (Mr. Alcock): Thank you for introducing that, Minister.

The Co-Chairman (Mr. Vanclief): That's a new concept.

Mr. Anderson: At the moment we have no preference, and the railroads are not put in a superior position, or the producers or the shipping companies.

About the operating agreement currently in place with the railroads, I'll ask the deputy minister to comment.

Mr. Mulder: Currently we do have an operating agreement with both CN and CP. When the cars were bought we entered into an operating agreement. There is a legal dispute, with all the changes in the western grain transportation legislation, whether that agreement is still valid. But instead of worrying about the legal interpretation, the agreement we have reached with the railroads is that generally they aren't going to stand in the way of making a normal, reasonable, business-like process dealing with the sale of the cars. It was said as recently as last Friday at a public meeting with the western transportation advisory group.

Mr. Chatters: Do they have right of first refusal?

Mr. Mulder: That's what I said, it's a legal dispute. They claim they do, we claim there's reasonable doubt, because of all the other changes. Whatever it is, I don't think the railways are going to stand in the way of the common good of the grain transportation system.

Mr. Chatters: Especially not when producers are going to pay for them anyway.

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

Mr. Reed (Halton - Peel): I'd just like to put a little perspective on this. What percentage of the tonnage is still being hauled by non-hopper cars?

Mr. Anderson: Mr. Migie, can you answer that?

Mr. Migie: There's a bit through boxcars. It's very small.

Mr. Reed: So this allocation of cars would be critical -

Mr. Migie: Oh, yes.

Mr. Reed: - to the success of the whole process.

I have just one other question. The comment was made about branch lines not being able to accommodate fully loaded cars. Is that because of the condition of the branch line or is it because of the way it was constructed in the first place?

Mr. Mulder: It's largely because of the condition of the branch lines. Until seven or eight years ago we had quite an extensive branch line rehabilitation program. Not all the lines were fixed, and some of the lines that weren't fixed were the ones that are still in existence because they were frozen under Governor in Council order. The producer groups and the railways got together under the chairmanship of Marian Robson for the National Transportation Agency to look at those lines to see what the costs and benefits of eliminating them were, and the view was they should be eliminated. Apparently on average they are in such shape that they can hold, I think, only about two-thirds of the weight of a normally loaded car.

Mr. Reed: Is the door still open for conversion to short lines? You haven't closed that door.

Mr. Anderson: Very much so. A number of short lines have been established. We expect a good deal of activity in this area. I believe most of the companies are Canadian, but a fair number of American companies with experience of running short lines in the States have come up to Canada. We feel this is going to be quite a revitalizing element for rail transportation in Canada.

Mr. Mulder: Minister, this is not to contradict you at all, because we are in the short line business, but for those particular lines we are talking about, the elevator companies have said to us they do not want to have any service on those lines any more. To the extent to which there are elevators on there, they have plans not to utilize the service. This is the work that has been going on for the last year. The view is that for the overall cost-effectiveness of the lines is it's better to abandon them than to retain them and have service on the line, because it slows down the whole system and the cost is passed on to all the producers across the west.

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

Mr. Fontana (London East): Thank you, Mr. Chairman.

There's no doubt that allocation and where these cars go and how they are used become the critical issues here for the betterment of producers and all the stakeholders. With ownership obviously come certain rights. The conditions on those sales will determine who is in a position to acquire them. But I know allocation has always been a very big issue.

As I understand it, allocation now, under the present system...because the government owns only half the fleet. The other half of the fleet is owned by others.

With the 13,000 we now own and we want to sell, the allocation of those 13,000 is determined by Transport Canada and by the Wheat Board primarily, as I understand it. Who determines the allocation of the other 13,000 cars, which are owned primarily by railroad companies or leasing companies? We might want to look at that model.

I agree totally. If you get five or six or seven or ten owners trying to determine where these things are allocated, I can see nothing but a brawl around the table over how these cars are going to be allocated. Yet our transportation system is so delicate that a bad decision can affect producers, the grain companies, railroads, our competitiveness, our customers...where they may turn to some other customer. Canada is not the only one that sells these commodities. In fact, if we don't get our transportation system right, we may potentially suffer in loss of sales.

So how are the 13,000 or so cars we don't now own allocated?

Mr. Migie: All the cars are in a common fleet, whether they are our cars, the provincial government cars, the ones the railways provide, or the ones the Wheat Board provides. They are treated as a common fleet, and a process has been in place a while now such that the former Grain Transportation Agency, or now Transport Canada, had and has a very important role in making initial splits as it has been administered. So they have all been treated in a similar fashion so far, and many in industry feel there's a lot of value in having that common fleet approach.

Mr. Fontana: If at the end of the day, even though the government may not be the owner, we still want to have the common fleet philosophy and the allocation is going to be determined by a committee.... Has the government been able to say to all the stakeholders, why don't you form, just like NAV CANADA, a not-for-profit corporation, with all the stakeholders, who will jointly buy the 13,000? Then their board of directors, obviously all with the same common interest, will determine the allocation. It would seem to me when you have only one buyer, all the stakeholders, it would be a far easier approach to be able to work with allocation with all the producers as shareholders in a not-for-profit corporation.

Are we advancing that with the railroads, the producers, the grain companies, and so on?

Mr. Anderson: I think it would be presumptuous of us to anticipate what producers may decide in their own wisdom. If they feel this is the best approach, this is certainly a great idea for them to put forward.

Again, I refer to Wayne's comment earlier about concerns over some of the co-ops. He said they were becoming too corporate and thus losing contact with the members. It may be there would be a similar concern if you had a corporation owning all the rail cars. People might say, well, the corporation is running it for the profit, not for the benefit of individual small people.

This is just a caution I put out there. It has been raised and I think it's appropriate. But it seems to me if there is such a benefit we'll hear about from producers. It's not up to me to encourage them, because they know a tremendous amount about shipping grain and they will come forward with suggestions that are in their best interests.

The Co-Chairman (Mr. Alcock): Thank you, Mr. Minister. I understand you have to leave us at this point.

Mr. Anderson: Unfortunately or fortunately, I have to go to cabinet.

The Co-Chairman (Mr. Alcock): There's a lot of gesticulating behind you that would seem to suggest as much, in any event.

Thank you very much for taking the time to be here with us.

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Mr. Anderson: I'll leave the other three witnesses. Thank you very much for your attention this morning. I'll be happy to come back later in the process, when we'll have more to discuss.

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

Members, we had indicated that we would allocate another 20 minutes or so to this round of questioning before we ask the CN witnesses to come forward. I have Mr. Chrétien, Mrs. Cowling, Mr. Calder, Mr. Jordan, Mrs. Ur and - I'm assuming, Mr. Hermanson, that the Reform Party might want one other round in this - Mr. McKinnon, and Mr. Taylor.

Might I suggest that we ask members to pose their questions three people at a time and then give the officials a chance to respond, to try to get everybody's question on the table as quickly as possible.

Mr. Chrétien, Mrs. Cowling, and Mr. Calder. Keep your questions as concise as you possibly can.

[Translation]

Mr. Chrétien: One of the objectives of the Department of Transport is to improve the grain transportation network in the west. By the same token, we also want to abandon a certain number of little used lines or branch lines that are to be found, of course, in largely rural regions where there is no industry. Grain producers make almost no use of those railway lines. They cannot, of course, be as profitable as main lines.

How can we, on one hand, improve the transportation network and, on the other, shut down fairly important branch lines?

[English]

Mrs. Cowling (Dauphin - Swan River): My question relates to branch lines as well. In Manitoba, because of our geography, we have a system that's very fine-tuned. In fact, in my riding of Dauphin - Swan River branch line abandonment has already taken place. I'm wondering how quickly we will be abandoning the branch lines that are in fact inefficient so that we can have an efficient system.

The value of the cars has been raised. It's my understanding that we've had an independent appraiser appraise those cars at $90 million. We also have the top value of $420 million. What in fact is the asking price? What will be the value of those cars?

My last question is on a cooperative. Do you have all the key players at the table? After the SEO group, apparently a producer coalition was formed. Are all the producer players at the table? Are they talking about moving toward a cooperative movement to own those cars?

Mr. Calder (Wellington - Grey - Dufferin - Simcoe): I found to be very interesting the statement that was made, Howard, that there are no boxcars out on the line. It would be interesting to see what kind of rail stock is rolling up on the Churchill line right now.

Mr. Mulder: There are a few left.

Mr. Calder: There are a few left? I kind of thought so.

Question one is about the short lines in Saskatchewan, for instance, which have a very high number of branch lines out there. If these branch lines are taken out, that grain still has to move to the elevator. So if it's not moving by rail, it's moving by road. How are the municipalities going to be able to handle the high road maintenance that those roads will need, considering that one truck axle does around 17,000 times more damage to a roadbed than an intermediate-sized car does.

That's only part of it.

With private ownership, there are around 4,000 hopper cars out on the line right now. I would like to know how you're putting together the terms, when you consider who owns the car and how those cars will interact with the railway, and I'd like to know what kind of plan of operation they'll have to submit dealing with the allocation of the fleet, considering that usually 10% to 13% of the fleet of hopper cars is in eastern Canada.

The Ontario Wheat Board ships soft white wheat down into the United States. In view of the fact that in the United States they have very low grain reserves, if any, with this crop year coming up, you're going to see a lot of north-south traffic along with east-west traffic. That's something we're going to have to deal with.

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Also, I would like to know what terms dealing with upward management are in this contract. In other words, I'm looking at the maintenance of these cars. Right now some of the cars are 23 years old, and the average life of a hopper car is 25 years. So maintenance is a very important issue. I don't want to have these people coming back to the government in about 5 years saying they need new hopper cars.

Mr. Mulder: On the branch lines there were two questions, really, the first being how you can improve the system while eliminating them. No wholesale movements are on the way to eliminate a lot of branch lines on the prairies. As a matter of fact, the railways have indicated they would like to keep most of them. Some will be eliminated over time, but under the new legislation there is a provision to have short lines taken over.

The only lines people are talking about abandoning right now are the eight or ten that were reviewed by the National Transportation Agency, for a total of about 750 kilometres. As soon as Bill C-14 goes through, those would be subject to abandonment. All the other ones fall under the new procedures as part of the old Bill C-101, now Bill C-14, where the railways have to announce it, they have to put it up for a possible person to take it over as a short line, and so on. So we're only talking about abandoning those lines.

About asking price, I believe the minister has already decided that, based on his response to Mr. Comuzzi's used car analogy. The government has not stipulated an asking price. It has indicated a range, in which the upper value is $425 million - that was the assessment we had from three different firms last fall - and the scrap value of around $90 million or $95 million.

What cabinet discussed, in consultation with a lot of people, including in caucus but also with people out west, is what the terms and conditions should be. One condition is 75¢ per tonne on average. That's the car ownership cost. Then there are other conditions the consultant will deal with with us over the next few months, when we put out the tender.

The third question dealt with the setting up of a coalition to own the cars, which is similar to the suggestion Mr. Fontana made. I have no idea whether the co-ops have.... Certainly a car producer group has been set up. It includes SARM, the National Farmers Union, the canola growers, and the Western Canadian Wheat Growers Association. They have a loose consortium. Whether or not they want to pool and develop a cooperative organization to take it over.... Perhaps they will. I don't know. That's up to them.

Now we have Mr. Calder's questions on the boxcars. There are a few left for Churchill, but as you know, Churchill didn't get a lot of traffic. So when we said virtually none are left, we meant virtually none are left.

About the municipalities on the road impact, the analysis that was done by Marian Robson showed that the road impact of abandoning those lines is very limited, because most of the traffic in those areas already moves on the road. The thing you have to remember also - and quite often members know this more then I do, when they live in those areas - is that a poorly loaded farm truck with only two axles can do more damage to a rural road in the spring then a fully loaded regular five-axle trailer. If you want to, you can check with Andy Renaud, the Minister of Highways in Saskatchewan, who repeated that last week at the session I referred to earlier. He's very concerned about the axle loadings of regular farm trucks hauling grain to the prairie branch lines, as opposed to more regular movements of larger tandem trailers and so on.

About the cars, one of the issues raised was the use in eastern Canada. That's one of the things we're going to have to sort out by the end of June or early July. If the cars are not used for western grain, should they be used under various conditions elsewhere, including in eastern Canada, and if so, what happens to the returns from those? It's not fair to charge the western farmers when the cars aren't being used by them but are used elsewhere when they have a commercial return in, say, southern Ontario. These are the issues we're going to have to deal with.

On upward management, maintenance, there will be a requirement for maintenance.

By the way, the estimate now is that the cars will be good for 40 years, not 25 years. They've been around only for about 15 to 20 years; 16 is the average use now. So they have another useful life of at least 20 years.

They certainly have to be maintained. I'm sure whoever owns them, and the railroads, will want to maintain them, because it's very expensive to replace them with brand-new cars.

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The Co-Chairman (Mr. Alcock): Mr. Jordan, Mrs. Ur, our Reform member, Mr. McKinnon, and Mr. Taylor, I shall ask each of you to pose a one-minute question so we can try to get everybody in before we have to move on to the railway.

Mr. Jordan (Leeds - Grenville): I think we should be concerned about a couple things that have been mentioned.

First, there is Mr. Chrétien's concern about foreign ownership. I expect that this will be set out in the preamble as a condition of sale - it's quite obvious that it should be - but I'm hearing also a concern about the ability of the new owner to maintain the car, with concerns for safety and the environment. Would it not be practical to put those out there?

The other thing that I keep seeing coming through here is a concern that the cars might not be efficiently used. The guy who will buy them will have a fairly big investment. Wouldn't he be the one who would be most concerned about the efficient use? Is he going to leave the car sitting on a siding somewhere? Not if it was my money that I had invested in it - I'd want that sucker to be moving.

Mr. Hermanson: You've got to have a locomotive then. They don't roll by themselves.

Mr. Jordan: Yes, but aren't they interested in dragging it around? They make money by doing that. Are they going to say that business is too good, so they are not going to bother? They're going to be in the competitive business too. This is the free market system we're in. That's the whole idea of the exercise.

Mrs. Ur (Lambton - Middlesex): On CAFG, where is the CN rep from?

Is there a percentage breakdown on the level of life in hopper cars that are available at the present time, and is there a monthly breakdown of maintenance costs for cars?

Also, you said that perhaps we should look to Ontario for allocations. Were these hopper cars not paid for by all taxpayers, Canada-wide?

Mr. Calder: That's a good one.

Mr. Hermanson: My question is on the 75¢ a tonne cost to pay for the cars. At that rate, some calculations that we have done indicate that it would take the full 20 years to pay for those cars. I'm a bit concerned that this will be reviewed in 1999 under the existing legislation, so this 75¢ a tonne may actually be a loss-leader to try to encourage producers to buy the cars without knowing what the pay-back regime is going to be from the year 2000 on. I'd like some comment on that. It doesn't look as if it's as good a deal as the SEO proposal, where producers paid a dollar a tonne for five years and then it was a done deal.

Mr. McKinnon (Brandon - Souris): You mentioned replacement of the cars down the road, after the 40-year point. Have some suggestions been made about establishing a sinking fund for that eventuality? It would be good planning.

Secondly, there seem to be concerns that the railways might be reluctant to allow certain lines that they're considering abandoning actually to be abandoned, to allow a short-line operator to make a profit on something they can't do. I'm raising that as a concern.

Mr. Taylor (The Battlefords - Meadow Lake): Would the witnesses explain why the Government of Canada, the Government of Alberta, the Government of Saskatchewan, and the Canadian Wheat Board got into the business of owning cars in the first place? Was it because the rail lines wouldn't make the investment when it was needed? Do we have enough cars in the system? Are any more needed?

Secondly, the minister had talked about Wood Gundy Limited preparing the criteria for evaluating the bids. Is any kind of public interest leadership being provided to Wood Gundy Limited? Is the department providing any criteria upon which the government would like the criteria to be based?

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Mr. Mulder: They're all very good questions. On foreign ownership, I'm not aware that the ministers have explicitly dealt with that issue. I'm sure it's one of the factors they'll take into account. I doubt very much whether there would be allowance for foreign ownership. But more particularly, why would a foreign company want to have a big stake in it when most of the use has to be under the terms and conditions in western Canada? They couldn't use it in the U.S. and Mexico.

I think the question of maintenance and safety that was raised is a valid concern. It has to be taken into account, along with the use of the cars to get an effective turnaround. As Mr. Goodale said a couple of years ago, if they are just a movable warehouse and they just sit there most of the time on the siding, you don't get much return. So the car allocation and car turnaround is very important.

On CAPG, the Car Allocation Policy Group, the CN representative is your next witness, Sandi Mielitz. She's very good and she represents the railroads in this group.

I didn't get the second question that was asked. Perhaps Howard can deal with that. The maintenance of the cars and so on is a legitimate concern. The taxpayers did pay for them, but to go back to Mr. Taylor's question, the reason why the cars were bought is that when the Crow rate was in effect, up until 1984, the railways were moving grain at an increasingly large loss. Towards the end in the early 1980s the railways were losing as much as $600 million to $700 million a year moving grain in western Canada. There's a debate as to how much they lost, but certainly everybody knows they lost. So the railways did not have the money to fix up the lines and to get cars because the more they moved the more they lost. Therefore, the Liberal government, with Mr. Pépin and Mr. Axworthy in charge, changed the Crow rate into the Crow benefit regime in the Western Grain Transportation Act.

While all those losses were occurring the government did three things. One, they fixed up the branch lines; they had the branch line rehabilitation program. Second, both the Liberal and Conservative regimes bought hopper cars for a period of six to seven years. Third, they worked on finding ways and means to reduce the losses for the railroads. So those cars were bought because the railways were losing money, not because they didn't want to invest.

The 75¢ per tonne review that Mr. Hermanson raised is a valid concern in terms of how long will it be in effect, what are the terms and conditions and what could the impact be of a review. That's one of the things we'll have to deal with. That just shows you how fascinating and complex grain transportation is in Canada. I don't know of any file that is more complicated and more interesting than this one.

The issues of a replacement car and a sinking fund are a valid concern. It ties in with the maintenance and how do you replace something in 10, 15, 20 years down the road? In terms of the railways abandoning, as I indicated earlier there is a procedure for dealing with abandonments and encouraging short lines. I hope this is sufficient.

In regard to the eastern allocation and Wood Gundy, we thought we'd get an independent party to help us out on the financial conditions and terms. The final decision will be made by the ministers concerned and I'm sure based on advice from this committee and members of the caucus and other groups, certainly the stakeholders. We have put out some issues that have to be dealt with, but we are allowing the stakeholders and advisers to develop their own ideas as to what the terms and conditions should be. We put out some already - this 75¢ per tonne, for example, the fact that they have to be used primarily for western grain, and various issues along that line. Those are ready markers that are in the public interest. Within that there have to be other conditions and they have to be developed.

Mr. Fontana: You have not mentioned eastern allocation - because easterners paid for those too.

Mr. Mulder: As I said, taxpayers paid for them. That is a valid point. We also sank $1.25 billion into the seaway, which is valid.

But the more legitimate concern is that eastern Canadian producers, particularly in southern Ontario, have used those cars extensively over the past 10 to 15 years when they were not being used for western grain. We have to allow a process to continue that. If they're not being used for western grain there isn't much use having them sitting at Thunder Bay. They might as well go a few miles further and be used in southern Ontario, where they're needed and there's a commercial return.

The Co-Chairman (Mr. Alcock): Mr. Migie, do you have anything to add?

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Mr. Migie: I would just add, on the maintenance question, that the current freight rate does allow for costs involved in maintaining the government cars as well as the cars provided by the railway. So in terms of maintenance, it is built into the freight rate, which should continue on. That's one important factor.

With regard to the 75¢ per tonne, it's important to realize that there is some grain that moves at commercial rates - all through the United States - and that would be in addition to the calculations you were doing earlier.

Also, when they're not needed for prairie grain the cars are available for other purposes, and there's a revenue stream from that as well. So it's really all three of those revenue streams that should be looked at. There was one question about the percentage of the cars by age, which I don't have here, but we do have the dates of purchase for all the cars and can provide that.

On the final point, the question of the terms and conditions for the sale, it was always intended that there would be a discussion with stakeholders. We would put out something in draft after getting some advice from CIBC Wood Gundy. But that will go out in draft before they're finalized, and these issues will in fact come back, in terms of how we treat foreign ownership, or how we would treat the words ``primarily for prairie grain''.

The Co-Chairman (Mr. Alcock): Thank you, Mr. Mulder, Mr. Migie, Ms Burr.

Mr. Easter: I have a point of information.

The Co-Chairman (Mr. Alcock): Mr. Easter, very quickly.

Mr. Easter: I don't want Mr. Mulder's sympathy toward the railways to.... There is another side to the coin. The railways...in terms of the government buying the hopper cars, yes, because they were not making money. But as part of that original agreement, they were not asked to sell off their land assets, which were given to them as part of the Crow statute in the beginning as well. I think that should be put on the table.

The Co-Chairman (Mr. Alcock): Thank you very much, Mr. Easter, for that additional comment.

I would like to thank Mr. Mulder, Mr. Migie and Ms Burr. It's a complex topic. Obviously members' interest in this thing outstrips the time available, and I appreciate your taking the time to be here this morning.

The next witness is from CN, Ms Mielitz.

The Co-Chairman (Mr. Vanclief): Sandi Mielitz is vice-president of the western region of CN. She will be making a presentation. I remind you again that we have the room only until 11 a.m. Therefore, we will go to a five-minute round to begin, after Ms Mielitz has made her presentation, and then we may have to group up from there because of the time we have available.

The Co-Chairman (Mr. Alcock): Are you speaking about grade separations today, Sandi?

Ms Sandi Mielitz (Vice-President, Western Region, Canadian National Railway): Grade separations, yes.

The Co-Chairman (Mr. Vanclief): Go ahead, Ms Mielitz.

Ms Mielitz: Thank you for this opportunity to appear before you this morning.

With your permission, I would like to make some brief opening remarks, and before getting into the specifics of the issue at hand, I would like to set the stage with some observations about the grain market outlook and the implications for Canada's grain logistics system.

I don't believe the market demand outlook for Canadian grain and the processing industry has ever been so bright. Markets for all major Canadian grains - wheat, barley, canola, oats and specialty crops - have bullish outlooks, with prices expected to strengthen or remain at high levels. The grain processing and value-added sectors also have exceedingly bright prospects, and new investment continues to flow into the industry. At the same time, Canada faces very strong competition in our markets, both offshore and in North America.

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The prosperity of all stakeholders in Canadian agriculture - producers, suppliers and service providers like CN - depends on how fast, how effectively, and how efficiently Canada can respond to these market opportunities. At CN we are continually struck by the growing diversity of the types of grains and grain products, and of individual grades and specifications of products, we are asked to move to market. We are also struck by the diversity of market strategies adopted by our customers. They are targeting widely different markets or segments within markets. They have different technologies, investments, and cost structures. They are often pursuing fundamentally different logistics and inventory management strategies.

To win, Canada needs a strongly competitive world-class grain transportation and handling system. Yet we currently have a grain logistics system that is not well geared to respond to the opportunities before us.

Cost is one issue. Rail rates are not a problem in international competitiveness, but in Canada handling charges, the tariffs charged by primary elevators and port terminals, are more than double what they are immediately south of the border. A lot of the handling cost differential reflects our inability to drive efficiencies within the total system.

Effectiveness is also an issue. Unreliable performance of the western grain logistics system hinders the market success of Canadian agriculture. Our system is more production-supply push than customer-demand pull. Too often the wrong product flows into the system at the wrong time. Coordination failures cause lost sales when the right grain is not there at the right time to meet customer commitments. Canada's lost share of the Japanese canola market is a well-publicized case in point. The slow and unpredictable flow of product through our system hinders effective asset management through the logistics chain in elevators, in cars, and in terminals.

Let me quickly give you three examples of benchmark indicators of system effectiveness and efficiency. Consider the implications for the competitiveness of producers of ports and shippers of Canadian grain.

First, the order cycle time - and let me say an order cycle is not a car cycle; this is the elapsed time from when a grain car is ordered by a shipper to haul grain to port until the time the grain is loaded in a vessel - is excessively long. A joint study team from the Canadian Wheat Board, Prince Rupert Grain, and CN found order cycles for Prince Rupert export grain averaged 38 days, or 5.5 weeks. I would say only 8 days of that is the actual car cycle. The rest is the lead time required to place your order in the system.

Similarly, for Vancouver it's 42 days, and for Thunder Bay it's 60 days, or over 2 months. Order cycles for other CN bulk commodities, such as coal and potash, are in the range of a week to 10 days.

Another example: The average number of days ocean vessels spend waiting and loading at the west coast ports of Vancouver and Prince Rupert is 11 to 13 days. By comparison, average vessel waiting time in the U.S. gulf and Australian ports is 4 days. Canada's west coast is 3 times worse.

Another example: Only 20% of CN's volume is shipped from elevators with trackage capable of shipping large car lots, a large car lot being defined as 18 cars or more. Those large car lots qualify for incentive rate shipments. However, today fewer than 20% of the shipments from those stations alone, or only 4% of all the grain shipped from CN points, are actually shipped in large car lots. By contrast, 65% of North Dakota wheat is shipped in large car lots of 25 cars or more.

In addition to high cost and inefficiency, lack of accountability is a fundamental underlying problem in our system. Stakeholders have been unwilling to accept accountability for performance. A critical factor is the involvement of third parties other than the shipper and the carrier, parties who have no stake in the movement of individual shipments but who have the authority to intervene in managing the movement of product and bear no accountability or liability for the consequences. The third hand on the steering wheel has inhibited the adoption of commercial mechanisms, clear market signals, and economic rewards and penalties for performance.

CN believes the responsiveness, efficiency, and competitiveness of the western grain logistics system must be significantly improved. To do this we need to adopt the best practices of other sophisticated high-performance logistics systems, our own versions of just-in-time, and our own versions of quick-response approaches used by leading-edge retailers and wholesalers. We also require investment, and reinvestment, in physical infrastructure and information systems.

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This improvement in the logistics system can occur only within the framework of sound, clear, consistent government policy. CN fully supports the long-term direction taken by the Government of Canada to bring grain transportation into a commercial framework and to treat grain like any other commodity. We need to ensure the specific policy reforms all work toward bringing grain into a commercial framework.

Specifically, CN supports the policy changes that have been proposed by the Government of Canada to reform the centrally administered western grain car allocation system. The current allocation system discourages efficient movement and investment in new handling facilities, reduces competition among grain companies and railways, and frequently results in logistics problems that affect Canada's international competitiveness.

For other commodities CN deals directly with shippers in the allocation of cars based on their commercial requirements. This must also happen in grain.

Over the past two years both major railways have participated with a range of shippers and producers in grain industry technical committees. We have listened to their concerns on what we should offer in a commercial allocation system. Farmers have told us they want the system to provide equitable access. We are fully prepared to offer transparency, with rules clear to all participants and the same rules for everyone, from the farmer loading a producer car to the largest grain companies.

Farmers are also concerned about efficiency. We are prepared to reward the efficient shippers, such as those who ship in large car blocks or those who load or unload on weekends to speed up car turnaround. Such shippers would be given preferred access to cars.

Shippers have been telling us about the need for flexibility. We will offer a system of commercial car allocation mechanisms providing all shippers freedom of choice among a menu of service alternatives. This is in contrast to the current system, which forces all shippers to accept effectively the same level of service despite differences in their service and market requirements.

All agree the system requires accountability. On a portion of the fleet we will offer car placement guarantees for advance orders backed by customer commitments to ship. This will make it possible for shippers to manage risk on their forward sales and vessel commitments by booking rail freight in advance, and to manage their own assets more effectively. Advance reservations and two-way commitments between a shipper and a carrier are impossible in a car allocation environment where third parties can intervene or impose other priorities.

To date the Canadian grain system has operated with essentially one car allocation system, with limited discretion open for each railway. Yet car allocation is a component of service, and commercial car allocation mechanisms will be a new basis for competition between the railways. It will be in the interest of all stakeholders to have railways compete in these ways.

At the time of the March 6 budget the government announced its intention to end its involvement in grain allocation and administration. Effective August 1, 1996, the western grain transportation office will be disbanded. High-level allocation principles are to be set by an industry-led car allocation policy group, as you heard earlier, to be called CAPG.

The government also intends for the Canadian Wheat Board to implement zone allocation for board grains and for the railways to take over administration of specific allocation and train runs as soon as they are prepared to do so.

CN supports these changes. We agree a transition period is needed to enable industry participants to phase in commercial car allocation. Many industry practices, processes, and information systems will require overhaul.

In creating CAPG, both railroads and industry shippers agreed this should be a transition group that sets guiding principles during a period when shippers and carriers are moving increasingly to direct commercial relationships. We are engaged in consultations with others in the industry on the creation of CAPG and with the Canadian Wheat Board on the design and implementation of zone allocation. Further, CN is planning systems and processes to take over administration of low-level car allocation and train-run programming in 1997.

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Let me now turn to the sale of government cars - but I would like to stress that the heart of this issue is car allocation and how we manage the direct shipper-carrier transaction as we make sales and have to honour commitments to vessels.

We obviously have a number of key business interests in the government's stated intention to sell these cars, some 6,500 of which are in our service. They represent roughly half the hopper fleet CN typically has in grain service in western Canada. Although we do not own them, we currently possess exclusive rights to quiet enjoyment of these cars in almost all respects, as though the cars were owned outright by CN.

This is the essence of the operating agreement between the Government of Canada and CN, which also provides us with confidence in the continued availability of the cars to us over the term of the agreement.

From the time when the cars were first placed in service, we also have had the obligation to maintain them. Needless to say, we are in the grain business in western Canada for the long term. We expect to continue to be responsible for providing the majority of the railcars in the base fleet. The stable supply of a railway-provided base fleet is a key to ensuring access by all shippers, large and small, to the transportation system. Whether and on what terms we will continue to have the rights to these cars over the long term clearly is a major concern to us.

We truly believe that the best alternative for shippers and farmers is for railways to continue to possess the exclusive right to use and operate the fleet in an undisturbed manner over the long term.

Essentially, there are three potential buyers of the fleet.

If the cars are acquired by shippers, we see no way to avoid the problems associated with uneven distribution of the fleet, which will be determined by those who can afford to pay for the cars. Some will gain; others will lose out. The most likely candidates to lose out are the smaller shippers. We also see the danger that existing efficiencies would be lost if today's common fleet was to be fragmented among many players.

If sold to farmers, the awkward matter is that farmers generally are not shippers and therefore will find it difficult to capture commercial benefits from ownership, which instead would be captured by shippers. CN's great fear is that farmer ownership would reintroduce third-party involvement and perpetuate political considerations at the heart of the operationally complex grain logistics system. This would be an extremely damaging outcome for all stakeholders in Canadian grain.

This leaves the railways. We see a number of system benefits that can be preserved only if the railways continue to have rights to undisturbed enjoyment of the cars over the long run. First, railways are common carriers and have service obligations to all shippers using cars drawn from a common railway fleet. Second, leaving the cars in railway service also preserves the efficiencies inherent in operating a common railway fleet. Third, railways alone have a vested interest in upgrading cars to exploit operating efficiencies and in replacing fleet that has become obsolete or has reached the end of its economic life.

We look forward to meeting with Transport Canada's and Agriculture Canada's newly selected financial adviser in the coming weeks to discuss this issue further.

In closing, let's remind ourselves of what we are talking about: the introduction of more direct commercial relationships, more accountability, and more common sense in a highly complex system in order to improve its efficiency and effectiveness. We truly believe that the result will be a logistics system that will create prosperity for Canadian farmers, will improve the competitiveness of Canadian ports, and will be more responsive to the many Canadian shippers of agricultural products seeking to capitalize on opportunities in the world marketplace.

We'll be happy to answer any questions.

The Co-Chairman (Mr. Vanclief): We have very limited time. We will have a fast five-minute round.

Mr. Calder.

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Mr. Calder: Sandi, good morning and welcome. You were saying there are three potential buyers here, shippers, farmers, railways, and you seem to voice some concern about the farmers owning the cars. Well, the farmers already own 2,000 cars. That's called the Canadian Wheat Board. So my question is how are you getting along with these guys? Are there problems here?

The next thing I want to deal with is the allocation system. If, as you're proposing, the railways own all the cars, how would CN deal with the increased grain trade that's happening in Ontario right now? The U.S. likes our soft white wheat. The pasta makers down there think it's the best in the world, and of course I'm not going to argue with them. We've had a pretty efficient rail system in eastern Canada ever since we had the St. Clair tunnel put in.

Ms Mielitz: First of all, the 2,000 cars the Wheat Board owns happen to be, just by happenstance, in the CN fleet. Basically we treat them just as we do the government cars right now. So the Wheat Board has effectively given them to us to operate, and it works extremely well.

Please don't misunderstand me. I'm not saying farmers, as major stakeholders, should not have a voice in this whole issue, and potentially they could own the cars. The issue is whether we can have some predictable longer-term enjoyment of the cars so we can drive an efficient common fleet. I think that's the essence of the issue. It works very well right now, with the Wheat Board having basically given us those cars to operate; and of course those costs are not in the system.

Secondly, increases in traffic in Ontario - we've noticed them too. We have a significantly larger fleet in Ontario than we've had in historical times. I think we're up between 550 and 600 cars. We see excellent crop prospects ahead. Frankly, we make money out of moving grain for Ontario farmers, and we will continue to supply them with the cars they need.

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

Mr. Hermanson: Sandi, thank you for coming before the committee.

The Saskatchewan government did some research through Travacon Research, which indicated that if producers bought the cars they would save $3.5 billion over twenty years. I suspect they think if producers own the cars they'll be able to strike a better deal with the railroads than if the railroads own the cars. That seems to be the premise behind that.

If that were the case, would it also be a fair comment to say producer-owned cars would be the cars of last resort to be used by the railroads? In other words, if any cars were sitting on the siding, it would be those cars, and CN would use its own cars first.

You mentioned several inefficiencies, conveniently not related to the railroads. If those inefficiencies were corrected, perhaps there wouldn't be as much demand on the cars and these cars would be used even less. I'm concerned about that.

Secondly, with the Crow gone now, and with the price tag for the producers at 75¢ a tonne, wouldn't CN and CP be better off just to make an offer to Transport Canada for these cars and not try to pass the cost on to producers by their owning those cars? When you're considering only 75¢ a tonne.... The rate increase this year is $7-and-something a tonne. Wouldn't it be better just to swallow that cost and have ownership of the cars to provide the service to producers? You're making money hauling western grain anyway. Wouldn't you be better off just to forget about trying to pass that cost on to producers?

Ms Mielitz: First of all, the rate increase this year is $2.24, not $7. It's 7%.

Mr. Hermanson: It's 7%. Okay, I stand corrected.

Ms Mielitz: Let me go back through this in order. I want to talk for one second about the Travacon study. Right now we're preparing an in-depth analysis of it, but here are a couple of key points.

First of all, it makes the assumption that because the government cars have been allocated out on a fifty-fifty basis to CN and CP, that is a major reason why CN and CP have a fifty-fifty market share. In other words, the car ownership is determining market share. Actually, the cars are divvied up on the basis of volume actually moving through the system. Market share is determined far more by where farmers choose to deliver their grain, whether it's to elevators on CN or elevators on CP, or producer car loading on either railway.

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The Travacon study also makes the assumption that we have rate freedom, which is an interesting assumption. Leaving that aside, it then goes on to assume that, if we had rate freedom, our rates on regulated corridors would go up by 40% if we had regulated grain.

I'll hand out this bar chart. I have a number of copies. Basically, this chart simply shows the total cost for a farmer in North Dakota moving his grain to Portland, Oregon versus a farmer moving his grain from Saskatchewan to Vancouver. The green portions of this chart show the railway costs; the red, yellow, and blue costs are the handling at the primary elevators, cleaning, terminal elevators, and other charges such as storage.

The charts show that the costs to farmers in the U.S. and in Canada are very similar, and how we could jack up our rates by 40% and not have a lot of that grain go to the United States is beyond me. Frankly, we feel that his basic assumption in trying to come up with $3.5 billion is very flawed.

I don't know whether producers would be the last resort in using the cars or not. That would depend on the operating arrangements on owning the cars that we would have with the producers. There is certainly a risk of that happening if they were to treat the cars as not part of our base fleet in the way that they wanted to use them. But if they were willing to do a deal with us whereby we could use them over time as our base fleet, I don't see why we wouldn't continue to do so, although I think that is a risk for producers in owning the cars.

Finally, why wouldn't we swallow the 75¢? The issue here is that we have a rate ceiling that already is compressing our returns to some degree. That rate ceiling does not include any costs for owning the cars. I don't think it's an unreasonable request on our part to say that if you would like us to buy the cars and we are ready and willing to do so, then the cost of ownership should be part of the rate ceiling.

[Translation]

Mr. Chrétien: Good day. In your brief, you mentioned a fact observed in three Canadian ports: Prince Rupert, Vancouver and Thunder Bay. The time between the order and the delivery to the port varies between 38 and 60 days. That is enormous. It makes no sense. Sixty days is 17% of a whole year. Hopper cars are almost being used as storage facilities, and that is unacceptable.

You say in your brief that for other merchandises, your company, CN, needs between seven to ten days. How can you explain the fact that it takes up to 60 days to go to Thunder Bay, when you can go there six times faster? That is difficult to understand.

If I understood your conclusion correctly, the federal government would almost have to hand over its hopper cars, for the common good, to carriers such as CP or CN, and maybe others such as the western company whose name I can't recall. It's a small CFIL.

Am I to understand that the carriers would be willing to pay the price to acquire them, or would you hope to obtain the hopper cars at a lesser price in order to make more money?

[English]

Ms Mielitz: Let me start with the 60 days to Thunder Bay. The key here is not that the product is in the cars for 60 days. This is from the time when a shipper decides that he wants a grain car and puts an order into the centralized system. It takes a long time before that order actually funnels through the formulas and he gets his car. From the country to Thunder Bay, it will actually take an average of seven to ten days physically to get there. But the complex centralized car allocation system is cumbersome in the advance notice you need to provide to get an order to get a car. So it isn't that physically the car is filled for sixty days.

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Secondly, yes, we are willing to pay the cost, and we are willing to provide a competitive bid against other owners for the cars. Obviously that will depend on the conditions that are set once the financial adviser and Agriculture, Transport, and Finance have determined what the rules are for prospective bidders. Subject to those conditions being satisfactory, certainly CN is prepared to provide a market offer for the value of the cars.

[Translation]

Mr. Chrétien: Am I to understand that the fact the trip lasts 60 days is due to a lack of hopper cars in Canada?

[English]

Ms Mielitz: No, it means the system of allocation is quite complex and cumbersome and driven by formulas where it becomes unpredictable to a shipper when he is going to get his order filled.

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

Mr. Keyes (Hamilton West): I pass.

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

Mr. Easter: I have a couple of specific questions, then a general one. What is CN's view on the right of first refusal for purchase of the cars? Secondly, who's your largest shipper?

Generally, in the decision that has to be made here on control and allocation, in the fundamentals or the principles we are to make this decision on, I could accept your position in here, Sandi, if we were operating in an open-market system in this country, as the United States is doing. We're not. We're operating on an orderly marketing system in this country. The Canadian government in its red book, and by other means since then, has said it's committed to an orderly marketing system through the Canadian Wheat Board, and this just will not work with the Canadian Wheat Board orderly marketing system.

I think Mr. Chrétien's point on the sixty days is an important one. You answered by talking about how complex and cumbersome it is. From your point of view that may be true, but you've done quite well under this system. As a railway, you people have made money under this system.

The reason for the order cycle time is that what the Canadian Wheat Board is trying to do is target high-quality grains, maximize returns out of the marketplace, and ensure it draws from a very complex array.... It's not like shipping coal or potash. They're drawing from thousands of producers, many delivery points across the country. So you can't use that comparison. You're comparing apples and oranges.

The important point is that yes, it's complex, but it's efficient in returning back to the producer a maximization of returns out of what's in that marketplace and drawing from where those grains are within the system. I ask you whether you would agree or disagree on that point. Simply put, can an orderly marketing system for the marketing of grains work together with an open market system in transportation? I don't think they can.

Ms Mielitz: I believe they can in car allocation. If the Canadian Wheat Board is working directly with the grain companies on a zone allocation basis, whereby the board is not saying this wheat car will be specifically put at this station with this elevator but is more general in the orders it gives to the grain companies but requires the grain companies to deliver at port at the time specified exactly the grade and quality of grain it wants, we can have a system that is more direct, shipper-carrier, yet does not contravene the fundamentals of the orderly marketing system, which I understand why you are supporting.

Let me go back to right of first refusal. The operating agreement we have with the government right now has rights for us in it of right of first refusal on the sale of the cars and the right for us to approve any sale. Clearly this is going to have to be one of the issues dealt with and dialogued with as we go through this process.

Who is our largest shipper? It's Saskatchewan Wheat Pool. I'm sure that's no surprise to you.

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I think you can have transparent rules that apply to any shipper, large or small, with no special deals behind closed doors for the large shippers versus the small ones, which actually give maximum protection to the small shipper, who will not have the capital to acquire cars and participate in the way the Saskatchewan Wheat Pool would.

Does that cover all your questions, Wayne?

Mr. Easter: I guess there's a debate as to whether or not you should consider the Canadian Wheat Board to be a shipper. As you will recall, at one time we had a court case on it.

Given that you believe the Saskatchewan Wheat Pool is the largest shipper, how do you see tying the Canadian Wheat Board into this allocation and delivery system that you're proposing?

Ms Mielitz: I see the Canadian Wheat Board telling the Saskatchewan Wheat Pool, for example, that in northeastern Saskatchewan it wants to draw so many tonnes of No. 1 14.5 red spring wheat into Vancouver within a particular window, and the Saskatchewan Wheat Pool will honour that contract and will come back to us with advance orders and we will give it guaranteed placement.

Right now, when the wheat doesn't arrive at the right place at the right time, we all blame one another. We all point fingers, and it's all done by formula. We have to get into the more direct mode of ``I contract to do this'', and the next guy contracts to do that, to honour vessel commitments and sales.

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

We will continue this topic on Thursday morning, with four witnesses at that time.

This meeting stands adjourned.

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