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INTRODUCTION

We are a trading nation. One in three Canadian jobs depends upon our export performance. The current economic recovery is export-driven and a safe, affordable, integrated national transportation system is essential to Canada's competitiveness at home and abroad. A vital component of this system is marine transportation. The marine sector contributes $2 billion a year to the gross domestic product and moves 224 million tonnes of international trade. Canada needs a clearly defined marine strategy which will serve as one of the key elements of the economy and support the growth and development of our international trade.

It was with this in mind that the Minister of Transport, in December 1994, requested the Committee to undertake a broad review of the marine sector. The objectives of this study were to: identify key competitive challenges; define essential federal roles and services; develop options to reduce subsidies and examine commercialization; obtain regional views on priorities, issues and solutions; and try to encourage a consensus on solutions, future directions and development of a comprehensive national marine strategy. The Minister suggested that we examine the Canadian ports system, pilotage services, the St. Lawrence Seaway and the Canadian Coast Guard. We believe that the goal of this review is to develop an efficient, reliable, competitive marine transportation system at a cost that will ensure that we remain competitive in world markets while at the same time, recognizing that safety and the protection of the environment are of paramount importance.


THE PORT SECTOR

A. The Current Ports Structure (Chart I)

Transport Canada's commercial ports are divided into three systems all with different mandates, operating rules, regulations, financial and costing regimes. The major system, which handles approximately 50% of total ports tonnage, includes seven, semi-autonomous Local Port Corporations (LPCs) - St. John's, Halifax, Saint John, Quebec, Montreal, Vancouver, and Prince Rupert and seven smaller Divisional Ports: Sept-Îles, Port Saguenay, Belledune, Trois-Rivières, Prescott, Port Colbourne, and Churchill.

All of these ports are administered by the Canada Ports Corporation (CPC), a Crown corporation, under the Canada Ports Act (1983). Since 1978, this group of ports has paid dividends of $78 million and made cash contributions of approximately $270 million to the government. However, since 1978, the government has forgiven debts of about $735 million and made capital grants of approximately $370 million since 1982.

Under the Canada Ports Corporation Act, the LPCs are to be given a high degree of autonomy and expected to be financially self-sufficient. At the same time, the CPC is clothed with broad authority to act, either on its own initative or with direction from the Minister of Transport in the national interest, with respect to a national, integrated ports policy. The Act also provides that the LPCs must contribute to the CPC's expenses, consult with the CPC before appointing a port manager, obtain CPC's recommendation prior to getting Governor-in-Council approval to establish the harbour headline and make by-laws, and must obtain CPC approval to enter into leases or contracts that exceed the limit authorized by the LPCs' by-laws. Furthermore, although not required by the Act, LPCs have been directed to submit their corporate plans and capital budgets, to the CPC for analysis and comment. In addition, the LPCs are required to maintain and pay for a detachment of CPC police.

LPCs are Crown corporations in their own right and therefore governed by the Financial Administration Act (FAA). It requires that operations are managed economically, efficiently and effectively; that capital budgets and corporate plans be submitted; and that internal and external audits, and special examinations be undertaken.

The second system comprises nine Harbour Commissions located in Ontario and British Columbia: Oshawa, Toronto, Hamilton, Windsor, Thunder Bay, North Fraser, Fraser River, Nanaimo, and Port Alberni. Toronto and Hamilton are governed by their own Acts, while the remaining Harbour Commissions come under the 1964 Harbour Commissions Act. These Commissions serve regional and local markets and handle around 13% of total tonnage. They have not paid dividends nor have debts been forgiven and have received minimal appropriations from the government. The Harbours and Ports Directorate of Transport Canada has responsibility for these Commission ports.

In contrast to the LPCs, the Harbour Commissions are not Crown corporations and therefore do not fall under the FAA. A good description of them was provided by the Hamilton Harbour Commissioners who said:

We would characterize Harbour Commissions as autonomous federal agencies, with small, politically appointed boards and generally strong, stable, business-oriented management styles. This results in low overhead, fast decision-making and a generally good level of user satisfaction - all leading to cost-effective cargo handling.
It is generally acknowledged that Harbour Commissions have a greater degree of autonomy than LPCs. To begin with they can deal directly with Transport Canada and only have to file annual reports, while the LPCs must go through the CPC and file not only annual reports, but also annual budget and corporate plans which go through an onerous approval process. Harbour Commissions have more freedom to manage their own land than do LPCs who can own land, but as agents of the Crown, it is in effect Crown land and subject to government control. On the other hand, the LPCs have various levels of delegated authority to lease Crown land without government approval whereas Harbour Commissions administering Crown land do not. Furthermore, LPCs have more pricing flexibility to fix rates, tolls and fees than Harbour Commissions. They can set rates and grant remissions whereas the Harbour Commissions can do neither without government approval.

The third system, which is administered directly by the Harbours and Ports Directorate under the Public Harbours and Port Facilities Act, is composed of 524 public ports, harbours and sites. Some of these make an operating profit while many others receive federal operating and capital support which amounted to approximately $40 million for the fiscal year 1993-94. They handle roughly 20% of total tonnage.

A statement of the national ports policy is contained in each of the three Acts governing the various regimes. It directs all the ports to work towards a national ports system that: contributes to the achievement of Canada's international trade objectives as well as national, regional and local economic, and social objectives; is efficient; provides port users with assessable and equitable transportation services; and is coordinated with other marine activities and surface and air transportation systems.

In all three systems, the ports raise their revenue through harbour dues, berthage (a charge for occupying a berth at a port), wharfage (a charge for moving cargo), storage and leases.

In addition there are 52 privately-owned commercial ports which handle an impressive 17% of the total tonnage.

Finally, there is a fourth regime which is composed of more than 2,100 fishing and small craft harbours owned and operated by Fisheries and Oceans.

B. Problems with the Current Structure

The Committee heard a great deal of criticism of the "oversight" role of the CPC. The LPCs, supported by many other witnesses, said that they have not been given the high degree of autonomy that was envisaged by the CPC Act. Since the Act came into force this has been a contentious issue with the CPC constantly trying to define its role in relation to the LPCs. Unfortunately, this has led to considerable tension and conflict within the Ports Canada family. Indeed, it was stated that this has made it more difficult for the LPCs to meet their commercial objectives and compete. In fact, the CPC has acknowledged that the current regulatory framework is ``arguably the most archaic, complex and confusing system of regulation of any federal Crown corporation.''

It was stated time and again that the LPCs do not need "big brother" watching over them in Ottawa. Their commercial track record speaks for itself. They do not need a parallel layer of bureaucracy in Ottawa whose only role seems to be to oversee and verify the decisions and actions of the LPCs. The LPCs do not think they should have to pay for services they do not require and could reduce costs significantly if they did not have to pay for the CPC's overhead and policing services. For example, the Vancouver Port Corporation paid, in 1994, $2.2 million which was 24% of the CPC's national office expenses, while national office costs and Ports Canada Police were 19.6% of the total expenses of the Port of Halifax in 1994.

Many witnesses also expressed concern about the chronic overbuilding of port infrastructure, usually driven by regional pressures and politics, which has occurred in the system for many years. The result has been costly duplication of facilities and surplus capacity which has led to some destructive, as opposed to constructive, interport competition. It was pointed out that interport competition has not always been fair. Those Public Harbours and Ports that compete with the LPCs are subsidized while the LPCs must be financially self-sufficient. Moreover, the LPCs pay grants in lieu of taxes and dividends while the Public Harbours and Ports do not. The same holds true for Harbour Commissions who do not pay grants in lieu and have not had to pay dividends. There are varying degrees of financial and commercial accountability among the three port systems which give an unfair advantage to one or the other. All commercial ports should play by the same rules. The three different port regimes are not uniform and the playing field is not level. As one witness said:

What has evolved over the years is an uncoordinated collection of federal entities which are all trying to accomplish similar objectives under different sets of rules.
The conclusion of the great majority of witnesses was that a complete overhaul of the ports system was needed. A fundamental restructuring would go a long way towards improving the efficiency and competitiveness of our ports and increasing their responsiveness to regional and local needs.

C. Suggestions for Reform

Regarding what should be done, the LPCs, while seeing no need for the CPC, all said they wanted to remain Crown corporations, reporting directly to the Minister, through what some called a "ports desk" or secretariat, and governed by the Financial Administration Act. One of the major reasons for this is the marketing advantage of the Canadian flag on their business cards. In many countries being a federal agency provides enhanced stature and prestige when promoting the port. Another marked advantage of Crown status is lower interest rates on any debt as the federal government is the guarantor.

However, the LPCs have major concerns regarding the limitations placed on their present delegations of authority for contracts, leasing, real property acquisition or disposal, and independence within the federal structure. It was pointed out that when government approval is required the process is cumbersome, complicated, and time-consuming to the point where some approvals have taken as long as two years. Currently, the following agencies are involved in the process to obtain Order in Council approval: CPC, Transport Canada, Department of Finance, Treasury Board, Department of Justice (in some cases) and the Privy Council Office. Within this process there are at least 14 "checkpoints." The LPCs would like to see administrative and regulatory changes which would give them broader delegation of authority and a much more expeditious approval process. What the LPCs are looking for is the optimum level of authority and autonomy which they claim is necessary to compete, especially against their American counterparts.

The Harbour Commissions are also looking for greater autonomy but are quite satisfied with what they have, which for the most part, gives them the independence, flexibility and authority to manage their facilities and compete. Indeed, it was suggested that one solution for the LPCs could be that they become Harbour Commissions.

To summarize, even though there are differences between the Canada Ports Act and the Harbour Commission Act(s), the LPCs and the Harbour Commissions agree on the following: the national ports policy mandate; accountability to the Minister; and reforms that will increase the authority and operating efficiencies of the ports. Generally, this was supported by most of the other witnesses and stakeholders. However, a good number thought that much more significant and far-reaching reform was needed.

They proposed the establishment of a new structure which would classify ports as either commercial or non-commercial. Entry into the commercial class would be based upon financial self-sufficiency, that is, ability to cover both operating and capital requirements. Those that could not meet this test or did not have the potential to do so would be classified as non-commercial. This group should not continue to be subsidized by the federal government, except where there is a clearly defined federal role or responsibility. Ports where there may be justification for a continuing federal presence and support include remote sites, particularly in the Arctic, which support marine resupply operations that are critical to the survival of remote or isolated communities, and ferry facilities that serve private, provincial and federal ferries, some of which are associated with constitutional obligations. Otherwise, the non-commercial ports should be leased or transferred to the provinces, municipalities and/or the private sector or, as a last resort, closed where there is clearly no opportunity or possibility of devolution.

Under this new framework all of the commercial ports would be governed by a single legislative regime, accountable to the Minister through a ports desk/secretariat within Transport Canada. They would be given the maximum commercial autonomy. The ports desk/secretariat would be assigned the task of classifying which ports should be, or have the potential to be, in the commercial category, as well as the responsibility to facilitate the devolution or closure of the remaining non-commercial ports with the exception of those which the federal government should continue to maintain for compelling public policy reasons. A transition period of at least five years would be necessary to create the new structure. During that period the ports desk/secretariat would make every effort to assist non-commercial ports to become commercial and only as a last resort should any ports be closed. Implementation of this model would put all commercial ports on a "level playing field" and remove a great many from federal responsibility.

Based upon what we heard, we think our task is to develop a new port structure which meets the following objectives: define the federal role in ports; provide a uniform, equitable mode for the governance of commercial ports; give them more flexibility and autonomy; eliminate surplus port capacity; and, particularly important, take unnecessary costs out of the ports system. A new marine strategy for the year 2000 has to start with a complete rationalization of the current ports system.

A NEW NATIONAL PORTS SYSTEM: THE COMMERCIAL PORTS

The whole review is about cutting costs, reducing subsidies and becoming more competitive in the marine sector. Therefore, as many witnesses said, the only rational way to restructure our ports system is to classify them on the basis of commercial viability. If they can demonstrate that they are financially self-sufficient, or if given time can be, they should become part of a new national commercial ports system. Otherwise, we think, with the exception of those non-commercial ports where a continuing requirement for federal government involvement can be justified, such as being remote, or a ferry terminal, the remainder should be rationalized either through transfer to local and/or private interests or closure. We will deal first, with a new structure for commercial ports.

A. The Role of the Federal Government

The overwhelming weight of the testimony was that the federal government should continue to have a direct responsibility in commercial port administration. There were a few witnesses who suggested a management model similar to that applied to the airport sector, or outright privatization. However, our role is to reflect what we heard and what most wanted in the way of reform and that is, that the federal government continue to have responsibility for a national ports system.

B. The Canada Ports Corporation

Although most favoured a continuing role for the federal government, there was almost unanimous agreement that the CPC no longer has any role to play within a national ports system. As one witness succinctly put it: "Any organization that after 11 years is still trying to define its role, obviously does not have a role." We agree, and the first step towards creating a new framework for our commercial ports must be the elimination of the CPC.

C. A New National Marine Transportation Act

The second step involves the question of whether commercial ports should continue to be governed under three different legislative mandates or a single comprehensive one. We agree with all those who said that there should be a set of common rules and uniform administration of them for all commercial ports. A system that levels the playing field and gives all commercial ports the maximum amount of delegated authority and autonomy compatible with the oversight responsibilities of the federal government which should be kept to an absolute minimum. We think this can be accomplished by taking the best of the Canada Ports Act and harmonizing it with the best of the Harbour Commissions Act(s) under a new piece of legislation. It should include the creation of a ports desk/secretariat inside Transport Canada through which the commercial ports would be responsible and accountable to the Minister. Its mission would be to coordinate and implement, under the Minister's direction, the new national ports policy.

It should be noted that under this new framework the LPCs will not be Crown corporations. This means that their loans for capital projects will not be guaranteed by the federal government. They will have to finance their activities through a combination of internally-generated funds and external debt resources obtained on the same commercial criteria that apply in the private sector. Of course they will have to obtain government authority to incur debt in excess of a certain limit which could vary from port to port. Furthermore, they will not be governed by the Financial Administration Act, which will greatly reduce the layers of bureaucracy and the number of "stops" they have to go through for approvals of such matters as capital projects, leases, and by-laws. For the most part with blanket approval of capital budgets and corporate plans the process will end with the Minister of Transport. However, they will still be federal agencies and therefore have the flag on their business cards when marketing their ports overseas.

D. Dividend Policy

There are four other key issues that the new legislation should address. The first concerns what level of financial return the federal government should receive from the commercial ports and what form it should take. Currently, the LPCs are required to pay annual dividends in accordance with a formula of up to 30% of net income. Under this formula no dividend is paid on the first $500,000 of assessable income, 10% between $500,000 and $1.5 million and 30% over $1.5 million. Moreover, from time to time over the last decade the government has directed the LPCs to make cash contributions to service the government debt. They have not been at all happy about this and have said so. It erodes their incentive to make a profit and reduces their capital reserves which inhibits their ability to build essential infrastructure. However, the LPCs are willing to pay dividends and, indeed, think they should but they do not want any more surprise "cash grabs."

The Harbour Commissions are treated differently. They are required to turn over any surplus funds to the Minister if so requested. To date, either the Harbour Commissions have had no excess funds or the Minister has not asked for them.

We think the federal government, and more particularly taxpayers, deserve a fair return on their investment in the assets and infrastructure of the national ports system. This can best be accomplished through the payment of annual dividends based on a formula, which not only reflects each port's ability to pay, but ensures that the federal government gets a reasonable return. There should be no more special dividends, as surplus funds should be retained for port purposes and projects.

E. Port Policing

Port policing and security are another issue that requires attention. As has been indicated, the LPCs maintain and pay for policing and security services provided by the CPC which cost $10.3 million in 1994. On the other hand the Harbour Commissions use municipal police forces or private security firms. All of the LPCs stated that they could reduce their police costs if they had responsibility for them. We have recommended that the CPC be disbanded and consequently we think the ports should be allowed to make their own arrangements regarding policing and security.

F. Municipal Taxation

A third matter for consideration is municipal taxation. Currently, the LPCs pay grants in lieu of taxes while their leasees pay municipal taxes. In contrast, the Harbour Commissions do not pay either grants in lieu or municipal taxes although their leasees pay the latter. However, one Harbour Commission has negotiated an annual financial contribution towards the services it receives, such as fire and police.

Under the new regime, since LPCs will not be Crown corporations, they will not have to pay grants in lieu. However, we believe that all ports in the new system should meet their responsibilities as good corporate citizens. In our view, the best approach is to let the individual ports negotiate with their municipalities on the basis of paying for the services they use. We appreciate that there may be a reduction in the amount some ports pay. However, it needs saying that all of their leasees are paying municipal taxes. Moreover, we believe this is a fair compromise between those ports which currently pay and those which do not.

There was considerable concern expressed to the Committee by port users regarding the heavy burden of municipal taxes on port infrastructure. It has become a significant cost component which can adversely affect the competitiveness of the port. Different levels of taxation apply at various ports for the same types of facilities such as grain elevators. Moreover, these rates do not compare at all favourably with those at American ports which are direct competitors with some of our major ports.

We recognize that this is a provincial responsibility and that municipalities appreciate how essential a healthy and competitive port is to the local economy when levying their taxes. However, municipal taxation is obviously a major cost of doing business at the ports, and like all the other costs, has to be addressed if our ports are to remain competitive. In that light, we think an in-depth review of provincial assessment practices respecting port operations is needed to eliminate any assessment anomalies and ensure that the tax burden does not jeopardize the ports ability to compete.

G. Port Boards

Finally, the fourth issue concerns the question of the composition and quality of Boards of Directors for commercial ports under the new system. Currently, the federal government appoints all LPC directors, while appointments to Harbour Commissions are made by the federal government and the municipalities.

The LPCs and the Harbour Commissions indicated they were satisfied with the existing appointment process and think, that in general, good appointments have been made. However, a few witnesses expressed the concern that the process was too political and partisan. Certainly, it was emphasized to us that users want to have more involvement in the management and operation of the ports. After all, the new policy is "user-pay-user-say." There should be wide consultations and the Boards should include representation from the provinces, municipalities, local or regional industries, labour and the primary users. Furthermore, there was general agreement that Board members must be held accountable for their decisions. Accountability is essential to maintain credibility with users, the federal government, and the general public. Port Boards should be governed by clear and strict requirements for accountability, and it was suggested that a good model might be the Public Accountability Principles set out for Canadian Airport Authorities.

We agree that any new appointment process must recognize the importance of consultation and a broad representation of interests on the new port Boards. However, since ports are going to continue to be federal agencies, we believe that the federal government should appoint, at least, the majority of Board members, leaving the minority to be appointed by municipalities and business interests. But we believe the Boards must be kept to a reasonable size. Furthermore, we have no doubt that accountability is a key issue and an example of this is the code developed for the airport sector. We think the same type of model could be developed for the port sector, taking into consideration that the ports will remain government agencies.

Obviously, most, if not all, of the LPCs and Harbour Commissions will form the core of the new commercial national ports system. They have demonstrated their commercial viability and self-sufficiency. Indeed, it should be noted, that there is a significant degree of commercialization now in that the LPCs and Harbour Commissions operate for the most part, as landlords, leasing out facilities and operations to private enterprise. Moreover, despite the shortcomings of the current system, the LPCs and Harbour Commissions have performed quite well over the past decade. They have, for the most part, made money, invested wisely in needed port structure, and been able to respond to the competition. The new governance framework will allow them to do all of this better, smarter, and at a reduced cost.

THE NON-COMMERCIAL PORTS

The third step in this restructuring process is to deal with the remaining ports which include the CPC Divisional Ports and the Transport Canada system of harbours and ports. The latter group is composed of some 524 sites all across Canada. About 200 of them are simply that; they have no port or harbour facilities and consist of only a proclaimed public harbour (most dating back to the time of Confederation), or just a land interest. Another approximately 185 have had no traffic or revenue over the past five years, but do have facilities which must be maintained. The remainder, around 139 ports, have handled some tonnage in the last five years. Of that group, for the fiscal year 1993-94, 30 accounted for revenues of $9.6 million or 73% of the gross revenues of $13 million and these are the major commercial ports within the Transport Canada system.

It was announced in the Budget that the government would merge the Coast Guard and the Department of Fisheries and Oceans effective 1 April 1996 and this process started on 1 April of this year. The Harbours and Ports Directorate is part of the Coast Guard and the question is whether it will stay with Transport Canada or go with the Coast Guard to Fisheries and Oceans. We were told that a decision on this matter will be made in June.

We think it makes eminent sense for Transport Canada to keep the harbours and ports. To begin with, Fisheries and Oceans already has more than 2,100 ports and harbours which are subsidized. Obviously, it is going to have to address the issue of rationalization of its system and a reduction in subsidization. It will have enough to do coping with that, without having another 300-plus ports and harbours to deal with. Furthermore, Fisheries and Oceans does not have a commercially-oriented administrative or regulatory framework for its system while Transport Canada does. Mixing the two regimes at this time can only lead to more problems and confusion and should not occur.

Classifying the CPC Divisional Ports and the Transport Canada Group into commercial and non-commercial will be an onerous and lengthy task. We believe that the ports desk/secretariat should carry this out. It should also have the responsibility for advising the Minister on what non-commercial ports should remain under federal control as being in the public interest, and for the devolution or closure of the remainder. Those federally-retained ports would be administered by the ports desk/secretariat and financed from the dividend revenues paid by the commercial ports.

This approach takes care of the 324 Transport Canada ports that have facilities for commercial traffic. This leaves some 200 sites which do not have any facilities but have been declared public harbours. Declaration of public harbours goes back to colonial times and the usual way was by proclamation in an Order in Council. Most of the existing proclaimed public harbours have been around since Confederation and we think it is time to rationalize these sites as well. This should be undertaken by the ports desk/secretariat which should, with the exception of those sites which are still needed for marine purposes, or should be retained in the public interest, eliminate the public harbour status for the remainder through the revocation of the proclamations by Order in Council.

In connection with non-commercial ports there are three other issues that need to be addressed. The first concerns the period of time and the level of continuing support that should be given to non-commercial ports that have the potential to become commercial or, ultimately, will be divested. Certainly, we believe non-commercial ports should be given ample opportunity to try and meet the test of commercial viability. Moreover, divestiture to local and/or private interests will be a lengthy process. We recognize that there may be some politically sensitive and hard decisions to make on consolidation and closure. A considerable amount of time will be required for the consultation process and to assess the economic impact. On balance, we think five years, which is the time that has been given to the airport sector, is an adequate and fair period for adjustment to, and implementation of, the new national ports system.

We recognize that this process is going to be difficult and painful for many small ports and the local interests involved. We believe that it will have more credibility and a much better chance of success if it is supported by a capital assistance program. This program would be established to assist non-commercial ports to build and upgrade their infrastructure so that they could become self-sufficient and join the national ports system. In addition, since the divestiture might well be inhibited because of present and future capital fund requirements, the program would be used to facilitate the transfer of non-commercial ports to local or private interests. The funds for this program should come from the dividend revenues received from profitable ports within the national ports system and, after the five-year period, only those ports that have been divested would continued to be eligible for funding.

The second issue arises when a port is designated for closure but there are regional economic reasons for keeping it open. In that case, we believe that the funds required to subsidize the operational and capital expenditures should not come from the Transport envelope but from funds allocated for regional economic development programs. The port could well be funded under a joint federal-provincial program. Whatever the case the transport sector should concentrate on moving people and goods efficiently and competitively, and not on achieving social or economic development objectives.

The third matter concerns the responsibility of the federal government in the event that a port is closed. There may well be facilities that have to be removed or made safe and secure. Also, it may be necessary for environmental reasons to clean up the site. We think the federal government must take responsibility for this and that this should be made clear in the new legislation.

If our recommendations are accepted the new national ports system should look like that displayed in Chart II. Obviously, at this point it cannot be predicted how many commercial ports there will be. However, taking into consideration the fact that 90% of our marine traffic is handled by 45 ports, it is not likely the number will exceed that. Whatever the case, the new legislative regime recommended will put all of these ports on a level playing field to ensure that domestic competition is fair and constructive. The operating policies, accountability and financial requirements will all be the same. Continuing federal involvement should ensure that major capital expenditures are coordinated on a national basis to avoid port overbuilding and underutilization which has been endemic to the system and resulted in some destructive interport competition. Furthermore, while we recognize the validity of healthy domestic port competition, we think the real competition is provided by American ports and the global marketplace. In that light we see cooperation and coordination among our ports as being of a higher priority than competiting with each other. Indeed, it may well be that amalgamation is the most cost-efficient, competitive strategy and we would encourage the ports to be prepared to consider this option. Whatever it takes to ensure an efficient and competitive ports system which is responsive to changing market conditions should be done.

TRANSITION

It is obvious that transition from the old port structure to the new is going to take some time. It was suggested that, in the interim, until new legislation has been passed, executive action could be taken to make some of the administrative and regulatory changes the LPCs and Harbour Commissions have requested. We do not think this is the right approach. All resources and efforts should concentrate now on the consultation process, which will follow this report, the development of a consensus on a new national ports system, and the drafting of legislation. We urge the Minister to proceed as rapidly as possible and hope that legislation might be ready by late fall. Under the new House rules, legislation can be referred to a committee for consideration after first reading. This gives Members a greater opportunity to contribute to the legislative process through being involved in the actual drafting of the bill. We would like to see this done for the new national marine transportation act.

LABOUR-MANAGEMENT RELATIONS IN THE PORT SECTOR

A number of witnesses expressed deep concern regarding the state of labour-management relations at our major ports, particularly Vancouver and Montreal. It was pointed out that, not including the two recent strikes, port workers have been legislated back to work 14 times since 1972. This continuing record of labour disruption has damaged Canada's reputation as a reliable and cost-effective supplier of goods and commodities in an increasingly competitive global marketplace, with many customers demanding, and depending upon, just-in-time service. Export markets lost through labour disruptions are not readily, if ever, recovered. Shipping companies that move to other ports, particularly American, may not come back. The organization of both labour and management in our major ports is cumbersome and inflexible and there is a seeming inability to resolve outstanding issues. The collective bargaining process does not appear to be working as the issues never get resolved because of back-to-work legislation. Outdated and rigid labour practices increase costs and make it difficult to improve competitiveness and adapt to change. Wages are high and excessive overtime at double, triple and quadruple rates is said to be the norm rather than the exception. For many witnesses what is required is a major overhaul of port labour-management relations and consideration of a statutory dispute resolution mechanism such as final offer arbitration when deadlocks occur.

In addition, in Montreal and Quebec, the Committee heard sharp criticism of the job security provisions which have been in place since the Picard Inquiry in 1967. These guarantee stevedores a given number of hours a year whether they work or not. This has meant payments of thousands of dollars per man per year for no work. These are extra costs that the ports can no longer sustain. They are completely out of sync with the economics of the 1990s and reform is urgently required.

On the management side, there was concern about the role of the Maritime Employers Association (MEA) (East Coast). It was established 25 years ago under the Canada Labour Code to negotiate and administer labour contracts at seven ports: Montreal, Quebec, Trois-Rivières, Halifax, Saint John, Toronto, and Hamilton. In the view of some the MEA system of bargaining is outdated and rigid. Employers should be allowed to negotiate directly with labour at individual ports. This would make for better labour-management relations and reduce costs. Moreover, employers would not have to pay the MEA an administrative charge which keeps increasing. The MEA has outlived its usefulness, is not needed, and should be eliminated.

The two recent strikes at Vancouver and Montreal speak volumes for the sorry state of labour-management relations at our major ports. In order to prosper we have to trade. It has come to this; the Canadian economy can no longer sustain any labour disruptions to port operations, even a day or two is becoming too costly. Another way has to be found to deal with waterfront disputes than back-to-work legislation. We think it is time for a comprehensive independent review of labour-management relations at our major ports. The status quo is unacceptable and unsustainable.

PILOTAGE

A. Introduction

Pilotage is the conduct of a ship by a qualified officer who has local knowledge of the waters through which the ship is being sailed. Canadian pilotage was institutionalized in its current form by the Pilotage Act, 1972. This Act provided for the establishment of the Atlantic (APA), Laurentian (LPA), Great Lakes (GLPA) and Pacific (PPA) Pilotage Authorities. They are tasked with "establishing, operating and administering, in the interests of safety, efficient pilotage services" in their respective geographic regions. The Act empowers the Authorities to make regulations respecting: the establishment of compulsory areas, the prescription of ships or classes of ships that are subject to compulsory pilotage and the circumstances under which this may be waived, and the classes of pilots' licences and pilotage certificates that may be issued, as well as the qualifications and examinations required to acquire same. In effect, pilotage is a regulated monopoly and the Authorities are Crown corporations which are mandated to be financially self-sufficient. However, any losses are covered by annual government appropriations.

B. Problems with the Current System

A significant number of witnesses were very critical of the existing pilotage system. They are concerned about the high cost of pilotage, the monopoly position of pilots, the extent of compulsory pilotage, and the continuing substantial subsidization of the service. Regarding pilotage costs, one powerful example used was that of a maximum Seaway-sized ocean vessel trading to Thunder Bay, which would incur charges of approximately $53,000 for pilotage if it were to make one stop to unload at Hamilton en route, load in Thunder Bay and then exit the system. Based upon a 14-day transit time the daily cost of a pilot would be about $3,800.

Pilots have high incomes, most are well into the six figures with some pilots earning more than $200,000 on the West Coast. To a degree these high incomes are a product of the fact that they can negotiate from a monopolistic position of strength, since they can strike which would paralyze navigation in the compulsory pilotage areas. In addition, pilots negotiate their terms of employment, including compensation, with the Authorities whose Boards include pilot representation which creates a possible conflict of interest situation.

While users have been cutting their costs, the Authorities have been raising their tariffs. For example, tariffs for the Laurentian Pilotage Authority increased 32% over 36 months. Nevertheless, all of them, with the exception of the Pacific Pilotage Authority which has been continually financially self-sufficient, have needed public funds to cover their losses. Indeed, nearly $50 million in subsidies has been provided to the Authorities over the last 20 years, with $20 million of that going to the Laurentian Pilotage Authority over the last five years. Some suggested that the major reason for these losses lay in the delays in tariff implementation. The Authorities must apply to the National Transportation Agency for tariff increases. Objections can be filed and the approval process can involve Agency investigations and public hearings. This is a lengthy process, sometimes taking a year or more before the tariff is approved and the delay results in lost revenues.

Regarding compulsory pilotage, the strongly held view of a number of witnesses was that an exemption should be granted if the ship's master possesses sufficient detailed knowledge of local waters to permit safe transit. The master should not have to apply for a pilot's certificate which is a long and demanding process. It was pointed out that Canadian flag ships have a blanket exemption from compulsory pilotage in the Great Lakes, which is the area under the jurisdiction of the GLPA, based upon the requirement of having done 10 trips over a three-year period. In contrast, they are subject to compulsory pilotage in the St. Lawrence River which is administered by the LPA. Canadian shipowners have opposed this for more than 20 years. Their captains and deck officers make many trips a year through the Great Lakes/Seaway System and they know the waters like "the back of their hands." Furthermore, they maintain that the qualifications and experience of their captains and officers are well recognized by the Pilotage Authorities in that industry personnel form the main source of supply for pilots. The shipowners object to paying an individual's training costs only to have him recruited into the pilots' ranks once he becomes fully qualified. They also object to paying the pilotage fees which they consider to be an unnecessary expense, both to themselves and the economy, because their officers already possess the necessary qualifications. As one major user put it, ``It is the fireman on the diesel all over again.''

It was acknowledged that Canadian captains and deck officers can apply for pilotage certificates for LPA waters. However, the process is long and demanding and it is argued that the current system of examination and certification is intimidating, and biased against such applications. Examination Boards have a majority of pilots. Clearly, they have a vested interest in restricting the number of pilotage certificates issued as they are a direct threat to their livelihood, particularly during a period of declining traffic which has been the pattern for the Seaway over the last decade. This "conflict of interest" is the major reason why very few captains have obtained certificates over the years even though they have many years of experience and their knowledge of local waters cannot be challenged.

C. Reform of the System

It should be emphasized that nobody disputed the necessity of pilotage for safe navigation and the protection of the environment. What is at issue are the high costs of pilotage, the excessive leverage pilots have to protect their interests and the perception of a ``closed shop.'' On that basis many witnesses concluded that the current pilotage system cannot continue. Reform is essential to reduce pilotage costs and subsidies and make the system more flexible and user-friendly.

Some witnesses said that the only solution was to eliminate the Pilotage Authorities by repealing the Pilotage Act and make pilotage a competitive service; in effect privatize it. However, because safety is paramount, the federal government should continue to regulate it. Others suggested, that since a significant amount of pilotage is concerned with going in and out of ports, that they should take over the service.

On the other hand, significantly, the groups representing foreign shipowners, who pay nearly 100% of pilotage fees on the West Coast, and more than 80% on the East Coast, took the position that only minor amendments were required to the Pilotage Act. One of these would address the Authorities' problems with deficits through a streamlined tariff approval process. The Pilotage Act should be amended to include what was called "a negative disallowance feature" under which, whether or not there were objections, the tariff would come into force within 60 days of publication. If the Agency refused the increase then the Authority could be obliged to return all or some of the extra revenue to the users.

The other amendment suggested would deal with the monopoly question and the right to strike. A final offer selection mechanism should be put into the Act similar to that included in the recent contracts between the Laurentian Pilotage Authority and its contractor pilots. Under such a mechanism, all parties are bound by the decision of an arbitrator, who must be employed when agreement cannot be reached by any other means. The arbitrator's mandate is limited to selecting one of the two final offers and his or her decision is binding. Not only does this serve as an incentive for both parties to present credible final offers but also eliminates strikes and lockouts.

As far as reform was concerned for Canadian shipowners, particularly those trading in the Great Lakes/Seaway System, the answer was simple; an exemption from compulsory pilotage. They do not want it and they do not need it.

Finally, other witnesses felt that recent developments in navigation technology, such as differential global positioning systems, computer-based electronic charting, and automated bridge controls could, and should lead to more efficiency and reduce pilotage costs. Indeed, some went so far as to suggest this new technology will solve the pilotage problem by making it redundant.

On the other side, all of the pilot groups, supported by some users, were in favour of the status quo. For them pilotage is an essential service to ensure safe navigation and the protection of the environment. As one witness said: "Pilots are to marine transportation what surgeons are to the health sector, experts with special skills and knowledge. Pilots ensure that our waters are safe and oversee the protection of our waters, our shores and our environment ..." It takes 10 to 12 years of experience and training to become a pilot. The licensing and certification standards are very high because it is necessary to have highly qualified and skilled pilots. The new navigation systems cannot replace pilots - they are simply aids to navigation, not substitutes.

In connection with the question of self-sufficiency and the Authorities' deficits, the pilots say they are due to the cumbersome approval process for tariff increases. Users have abused the right of appeal by delaying tariff implementation. It was pointed out it took the Laurentian Pilotage Authority 24 months to get the last increase which resulted in lost revenues of $6 million. Basically, the only change the pilots want is an amendment to the Act that would ensure that tariff increases come into effect expeditiously.

A NEW PILOTAGE REGIME

What we heard time and time again, as the Chairman put it, is that organized pilotage is taking too big a piece of the marine sector pie. The competitive environment has changed dramatically in the last decade because of free trade, deregulation, privatization, rapid technological change, shrinking fiscal resources, a deep recession, and global competition. Other marine sector users have cut their costs in response to this, and we believe it is time for the pilots to make their contribution. The easy answer has been to simply increase pilotage tariffs to cover costs. This is no longer sustainable if we are to have a competitive marine sector. What is required is a complete overhaul of pilotage and the creation of a new regime.

To begin with, we think pilotage service must be separated from the regulation of it. Safety and the protection of the environment cannot be compromised. However, the Pilotage Authorities have absolute authority over all aspects of pilotage in Canada. They deal with the users on behalf of the pilots and control the supply of pilots. Potential conflict of interest situations are evident in the negotiation of contracts and the licensing and certification process. Moreover, there is a perceived, if not real, conflict of interest in meeting the mandate to be financially self-sufficient, while at the same time controlling the regulatory environment including when and where pilots are needed and supplying those pilots. Originally established to meet safety concerns, the Pilotage Authorities now have a stranglehold and this is not healthy in this tough, new competitive climate.

Many pilot groups referred to the Bernier Royal Commission on Pilotage in 1968 as the basis for the Pilotage Act. It is instructive to point out that one of its recommendations was the creation of a Central Pilotage Authority which it suggested should be called "The National Pilotage Board." This Board was to be given wide powers to ascertain what pilotage services were necessary throughout Canada, establish services required in the public interest, organize administrative controls, provide general surveillance of pilotage administration and operations, and enunciate general policies.

We think that the Pilotage Authorities have to be disbanded in favour of a central body to regulate pilotage. We do not envisage anything like a National Pilotage Board, we do not want to replace one bureaucracy with another. We want, among other things, to reduce administrative costs. What we think is appropriate is the formation of a unit in Transport Canada similar to the Ports desk/secretariat for port administration. It would regulate pilotage, define compulsory pilotage areas, determine the qualification of pilots, and take care of licensing, certification and training. In connection with the latter, from what we heard, we have the impression that our marine training institutions are ready, willing and able to take on the responsibility for the training of pilots.

Having separated the regulation of pilotage from the service the next question is what type of service it should be. We see the two options as being either a regulated monopoly or commercialization, and, on balance, we favour commercialization. There is nothing like the discipline of the marketplace to control costs and improve efficiency. We do not think competitive pilotage will compromise safety. We believe that the regulatory framework we are recommending will ensure that safety and the protection of the environment will not be subordinated to commercial imperatives.

While we support competitive pilotage, it does not mean that the consumers of the service will have a choice of whether to take a pilot or not. There will still be compulsory pilotage because of safety and the protection of the environment. However, we think that the current designations for compulsory pilotage areas, done by the Authorities, should be reviewed, particularly in light of the recent advances in navigation technology. In addition, as part of this review, the question of exemption from compulsory pilotage should be examined. A set of validation criteria should be developed based upon the essentials, namely, knowledge and experience of local waters without discrimination based upon flag, and these should be the bases on which exemptions are granted. It should be the same test for all pilotage areas and it should be open not only to Canadian officers but to foreign as well.

Currently, pilots are either members of corporations that contract with the Authorities or employees of them. Under the new system of competitive pilotage the pilots will be negotiating their fees directly with the users. It is quite possible, that the pilots will attempt, through the establishment of one corporation, to create a monopolistic situation in each pilotage district. This, combined with the right to strike, will give them the excessive leverage that they now enjoy.

With the repeal of Pilotage Act, the tariff approval process, which does provide some control over rates, will be gone. We think that a binding dispute resolution mechanism is what is required to settle rate or any other disputes. We would note again that such a mechanism has been included in the most recent contract between the Laurentian Pilotage Authority and the pilot corporations. As in so many other areas of the transportation industry we can no longer afford to let a small group shut down our major ports or the Great Lakes/Seaway System.

THE SEAWAY

A. Introduction

The St. Lawrence Seaway is an essential part of the Great Lakes/Seaway System which is a major and unique North American inland transportation route. The Seaway, a joint venture of Canada and the United States, opened in 1959. It extends from Montreal to Lake Erie and is composed of a system of 15 locks and canals divided into two sections: the Montreal-Lake Ontario section, consisting of five Canadian and two U.S. locks; and the Welland Canal, with eight all-Canadian locks. The Seaway is operated and administered in Canada by a federal Crown corporation with its own Act, the St. Lawrence Seaway Authority, and in the United States, by the St. Lawrence Seaway Development Corporation.

From the beginning, the Seaway Authority was required to be financially self-sufficient and Canada and the U.S. established a tariff of tolls to cover operations and maintenance expenses, interest on loans and repay capital over a 50-year period. It soon became apparent that this financial mandate could not be met and by 1977 the Authority's debt had reached $841 million. In that year the government recapitalized the Seaway through the forgiveness of accumulated interest of $216 million and conversion to equity of the remaining $625 million debt. As part of the refinancing, the Authority was directed to ensure that tolls were set at a level which would keep it on a self-sustaining basis.

Since then the Authority has not had to rely on federal funding to operate and maintain the system. It has managed to cover its losses which, because of declining traffic, have been heavy over the past years, through drawing on its financial reserves. However, in 1994, the Authority made a profit of $10 million due to a substantial increase in traffic. As far as capital expenditures are concerned, a $175 million structural rehabilitation program for the Welland Canal was financed by the federal government in a form of an increase in its equity.

Export grain, iron ore from Quebec and Labrador mines, and British Columbia and Alberta coal are the major commodities that move through the Seaway. However, since it opened in 1959, export grain traffic has been the "lifeblood" of the Seaway. The successful commercial formula, which has worked well for its viability and competitiveness, has been grain down-bound and iron ore up-bound. This has been supplemented by movements of potash, salt, cement, general cargo and, very recently, substantial tonnages of steel plate. However, there is no doubt that the Seaway's future is inextricably linked to export grain traffic.

B. Self-Sufficiency

A large number of witnesses said emphatically that the Seaway must be financially self-sufficient. But this cannot be done by constantly raising tolls; it must be done through containing and reducing costs. The Seaway is a national asset. It is of great importance to the social and economic prosperity of the North American heartland. Recent studies demonstrate how essential the Seaway is to the economies of Central Canada and the U.S. Midwest. It is estimated that the Seaway adds Cdn. $3 billion annually and up to 17,000 jobs to the Canadian economy, and U.S. $2 billion annually and up to 49,000 jobs for the U.S. economy. However, the Seaway has been in decline, with the exception of last year, for a number of years. The only way it can survive and prosper is, if it is a cost-effective and competitive transportation route for the movement of bulk commodities. What is needed is a comprehensive revitalization plan and a clear, unambiguous commitment by both government and industry to carry it out.

The option most favoured by key stakeholder witnesses is the commercialization of the Seaway. What is envisaged is the establishment of a public/private not-for-profit binational corporation which would operate the Seaway on a financially self-sufficient basis. It would be responsible for the day-to-day operations including the operation of the locks, setting tolls and ongoing routine maintenance. The Board of Directors would include not only representatives of the Canadian and U.S. governments but also from industry and users on both sides of the border. Since it is in the public interest to maintain the Seaway the two federal governments would be responsible for the long-term capital costs for major maintenance and infrastructure. It was suggested that the cost of maintaining and rehabilitating the Seaway infrastructure should be shared between each government on the basis of each country's use of the system. In addition, the new corporation should not be responsible for non-marine assets such as the Melocheville tunnel and the Valleyfield, St. Louis and Mercier bridges in the Beauharnois Canal. The new corporation should not be forced to subsidize land transportation facilities, and, it either should be compensated for them or responsibility should be transferred to a more appropriate government department.

Another option was put forward by the Seaway Authority. It proposed the complete integration of Coast Guard and Pilotage activities from Montreal to Thunder Bay with the responsibilities of the Authority. Rationalization of sites, facilities and human resources would ensue with the emphasis on the delivery of services which are deemed necessary by users. These services would be provided on a commercial basis and a carrier advisory committee would be established to advise on the services required.

There was overwhelming agreement that one option that could not be considered is closure. What is required is a bold, indeed revolutionary approach, to solving the Seaway's problems to ensure its future as a user-friendly and efficient system; or, to quote one witness, who put it much more graphically, "The Seaway system needs an enema."

C. A New Direction

Two Sub-Committees of this Committee have undertaken studies on the Seaway in the last three years. We are not going to repeat what was said in them. Suffice to say we welcome the freeze on tolls for a second year. We would observe that when all is said and done regarding the Seaway, and a lot has been said, to a major degree the Seaway's viability and competitiveness depend upon export grain markets, the health of the steel industry, the global economy, and cost control.

As has been repeatedly said during our hearings this whole exercise has one objective, and that is to take costs out of the system to ensure that we have an affordable, competitive marine transportation sector. The Seaway Authority over the past few years has made credible efforts to reduce its costs and improve productivity. It made $10 million in 1994, its first operating profit in a decade. But no one should be lulled into a false sense of security. There is a great deal of doubt and uncertainty surrounding future traffic prospects for the Seaway. For example, reform of the Western Grain Transportation Act and the elimination of the grain subsidy may or may not generate more export grain for the Seaway. Moreover, the future prospects for the Seaway depend heavily upon the performance of the economy and its natural export markets for grain such as Europe or Russia.

Therefore, the cost-cutting must be unrelenting and we do not think the Authority is doing this deeply enough, nor quickly enough. We believe the only way this is going to occur is through the commercialization of the Seaway as soon as possible and for us the lowest cost option is a financially self-sufficient, not-for-profit corporation which would have responsibility for the administration of Seaway operations, including tolls, marketing and annual maintenance. The federal government would continue to own the assets and control would be exercised through the Minister of Transport. The Board would be business-oriented with representation from the public and private sectors. There would be a maximum delegation of authority with a minimum amount of oversight and control compatible with the government's responsibilities to the taxpayer and under the Seaway agreement with the United States. Furthermore, the new corporation should not be saddled with responsibility for non-marine structures, such as bridges and tunnels. They should be transferred to a more appropriate department of government. The users of the Seaway should not have to continue to pay for them.

For this particular NFPC, we think financial self-sufficiency must reasonably be limited to covering operating and routine maintenance expenditures. It has been demonstrated over the years that, while financial self-sufficiency is a realistic mandate for the operations of the Authority, covering major capital expenditures is not. Obviously, the federal government recognized this when it provided $175 million for the Welland Canal restoration project. The Americans treat the Seaway as a national asset to be maintained in the public interest and we should too. The federal government should accept its responsibility for major capital projects as being in the national interest.

Seaway labour-management relations have been stable for sometime. However, Seaway workers have considerable leverage in collective bargaining because they can shut down the whole waterway with a strike. Neither the Seaway's reputation as a reliable transportation route nor the economy can afford the damage done. Back-to-work legislation is never a long-term solution. As in the case of pilotage, we think the only reasonable approach is that the right to strike or lockout be replaced by a final offer arbitration scheme.

It will be appreciated that we have not recommended a public/private financially self-sufficient binational corporation for the administration of the Seaway. Certainly, as users who supported this pointed out, it would no doubt be the lowest-cost option for the Seaway. Significant cost reductions would be achieved through the elimination of duplication and by rationalizing personnel and services.

However, our visit to Washington to discuss the Seaway with users and government officials revealed that since the Sub-Committee's recommendation for a binational agency last fall, there has been very little said or done regarding it within the Administration or Congress. Currently, the binational agency is really only a concept and it was suggested that what was needed to start serious discussions was a substantive proposal. Certainly, the U.S. government would be prepared to discuss it, but we were warned that a binational agency would be a very "hard sell" on Capitol Hill.

In fact, the main focus of our discussions was on the elimination of tolls. The Americans want us to remove them, as they did in 1986, because they believe tolls inhibit Seaway competitiveness, and their removal would substantially increase traffic and generate direct and indirect economic benefits, which would more than offset the loss of toll revenue of approximately $60 million annually.

In response, we pointed out that our share of Seaway costs is 83% ($85 million) while the American is 17% ($17 million). However, in terms of tonnage value going through the Seaway, ours is worth about $3.1 billion or 47% whereas the Americans have approximately $3.6 billion in tonnage value or 53%. Clearly, the benefits from the Seaway are roughly equal yet the Americans are paying a very small amount of the operating and capital costs. We made it very clear that we thought that there must be a more equitable division of the costs based upon the ratio of benefits received. Certainly, if we were to eliminate tolls we would expect the Americans to make a much greater contribution to Seaway costs.

As a result of our talks in Washington, we have concluded that for now we should pursue a made-in-Canada commercialization initiative for the Seaway. We should concentrate on putting our own house in order, getting our costs down as much as possible. We should then develop a concrete proposal for a binational agency since it is clearly the lowest-cost option for operating the Seaway and the best way to ensure its long-term viability and competitiveness. It would be the basis for discussions in Washington, which would include the issues of the elimination of tolls and a more equitable sharing of Seaway costs based upon benefits received. We recognize the difficulties involved in such a proposal, not the least of which is the question of sovereignty, but we think we must try.

Another issue that we raised in Washington was the Jones Act. Essentially, it provides that all American marine traffic moving between American ports must be carried by American flag ships. We suggested that, for the Great Lakes/Seaway system, consideration should be given to waiving the requirements of the Jones Act so that there would be competition which would reduce shipping costs. Frankly, we did not receive any encouragement and were told that the Administration supports the Jones Act. Nevertheless, now that we have "open skies," we would simply like to make the observation that an "open waters" arrangement, for the Great Lakes/Seaway system, has merit.

D. Seaway-Size Fleet Renewal

Several of the major Seaway users expressed deep concern regarding the declining domestic bulk carrier fleet and the dwindling Seaway-size world fleet. The average age of the Canadian laker fleet is close to 30 years and, apart from further rationalization, the remaining vessels will require refits within five years. The last laker was built 10 years ago. In connection with the world fleet, about 130 ships are needed to sustain the deep sea trade at its average level of the last five years which is 9.25 million tons. Today there are over 400 Seaway-size bulk carriers of which 124 are more than 15 years old and their average lifespan is 20 years. Only 11 Seaway-size suitable ships have been built in the last six years. If no new ships are built, or refitted, it is estimated there will be only 42 transiting the Seaway by the year 2000, and nine by the year 2005. Clearly, there is an urgent need to renew both the Canadian and deep sea Seaway-size fleets. What is required is the development of an incentive program to stimulate new building and refits. This could take the form of investment tax credits; tax deferral programs; ship financing guarantees; or through a scheme, which has been proposed by Canadian and foreign shipping interests, of toll, pilotage, and port dues discounts and rebates over a period of years. Under such a proposal these charges would be rebated to shipowners or operators of new buildings and refits of Seaway-size ships on a sliding scale over a5-year period; 100% the first year, 80% the second, 60% the third, 40% the fourth and 20% in the fifth with no reduction after that. This incentive program would be effective between January 1, 1996 and December 31, 2001 and would apply to any size, class or flag of ship which uses the Seaway during that period.

Our main focus has been on reducing the costs of the Seaway so as to ensure its future competitiveness. Certainly, the implementation of the measures we have suggested should reassure shipowners and users that there is a commitment to the Seaway's future viability and that if they invest in new building programs they will receive a reasonable rate of return. However, we think the fleet problem is serious. After all, while it is essential to get costs down to increase traffic, it will be for naught unless there are a sufficient number of Seaway-size ships to carry that traffic. An incentive program to ensure that should be developed. Furthermore, while shipbuilding policy was not part of our mandate, we see this incentive program as one way of providing work for our shipyards which, clearly, badly need it. Therefore, we would limit the program to new building and refits that are done in Canadian shipyards.

THE CANADIAN COAST GUARD

Apart from pilotage and the public harbours and ports group, the activities of the Canadian Coast Guard (CCG) include responsibility for the marine navigation system, icebreaking, marine regulation and marine search and rescue. Its budget is approximately $580 million and the level of cost recovery is about 5%.

A large number of witnesses, albeit some of them very cautiously and reluctantly, recognized that increased cost recovery for CG services was necessary and inevitable. However, there were a considerable number of caveats; it must be fair and equitable, include all users (not only commercial shipping but recreational boating and fishing as well), clearly define the services required, who benefits, and those which are in the public interest, recognize the principle of "user-pay-user-say," be phased in to give everyone time to adjust, and finally be sensitive to economic realities so as not to undermine the competitiveness of the marine sector; if charges are too high, traffic will divert to American waterways and ports. Moreover, they were unanimous in emphasizing that before any cost recovery program was put into effect the CG must not only put its own house in order, but must be seen to have done so. It must rationalize its activities to eliminate duplication and unnecessary services and drive costs down to the lowest-cost operation possible. Only then should the user pay. In that light they welcomed the establishment of the Marine Advisory Board which is composed of industry representatives with a mandate to review the CG's costs and service levels and make recommendations on a cost recovery program. They are prepared to pay if the true costs can be identified, who are the beneficiaries, and the services are delivered efficiently. It was often suggested that alternative methods of delivery including partnerships with industry and full commercialization/privatization should be considered as they may well be the most cost-effective and efficient ways of providing them. However, as far as safety and the protection of the marine environment are concerned they should continue to be the responsibility of the CG and its core service.

We agree that any credible, fair and equitable national cost recovery program can only start with the CG. It must clearly identify the true costs of its services, the need for them and demonstrate that it has reduced costs to the minimum compatible with the efficient and safe delivery of services.

In connection with that, we have the following comments to make.

A. Fleet Utilization

There was a broad consensus of support for the amalgamation of the fleets of the CG and Fisheries and Oceans. However, it was based on the strong feeling that the savings and synergies that should occur, must take place. It is on that basis and we also welcome the combining of the two fleets, which we understand has started to take place as of 1 April.

B. Marine Navigation Services

The operational, maintenance and capital costs for the delivery of marine navigation services account for approximately $300 million, or about 51% of the CG's total budget. The three major components of the program are aids to navigation, dredging and marine communication and vessel traffic services.

C. Navigation Aids

It was pointed out to the Committee by a number of users that recent advances in navigation technology, based upon satellite technology (Digital Global Positioning Systems) and computerized electronic charting (Electronic Chart Display Information Systems) and Automated Dissemination and Surveillance Systems will mean that within five to seven years 80% of the current navigation aids will be redundant. The Committee was told that later this year a public/private pilot project to demonstrate this will commence in the St. Lawrence River.

From what we heard we think there is great potential for significant cost savings by using the new technology to the fullest extent possible. When this has been achieved then consideration should be given to commercialization of the operation and maintenance of what is left, which will be the essential navigation system. Once the unnecessary costs and services are taken out of the system the users will be prepared to pay their fair share.

D. Dredging

Those witnesses that commented on dredging in particular took three positions. Some favoured full cost recovery, others argued that it should be treated as an essential service and provided by the CG, while a third group thought that the ports should assume their fair share for channel dredging but that the CG should remain responsible for channels in the main national commercial waterways. It was emphasized that there are some ports that are heavily dependent upon dredging from time-to-time and could not possibly pay for it.

We appreciate that this is the case for a number of small ports, which may or may not become part of the commercial group. Their survival does depend on dredging. Nevertheless, on balance, we think that there must be cost recovery for at least those users where it is clear they are the beneficiaries. We also think that the major commercial ports should take responsibility for dredging within their areas and in the channel approaches.

E. Vessel Traffic Services

Several users indicated that new navigation equipment will permit a master to identify most traffic without recourse to vessel traffic management services. The new Automatic Dissemination Surveillance Systems will show on a screen where ships are on a real time basis. As a result, it will be possible to reduce the role of vessel traffic services to monitoring and advice functions, needed only to respond to navigational errors or equipment failures. Indeed, it was pointed out it will probably be possible to offer vessel traffic services from one shore station covering Thunder Bay to Halifax, thus allowing the rest of the stations, of which there are 10 in eastern Canada, to be phased out.

Clearly this is another service where new technology can safely be used to reduce costs and the delivery of the service could easily be done by the private sector or for that matter our ports where most of the vessel traffic control takes place.

F. Icebreaking

There was a great deal of interest in icebreaking in Quebec and Atlantic Canada. Many witnesses pointed out that icebreaking fulfils a variety of functions. In the St. Lawrence River it is used primarily for flood control and it was noted that the passage of commercial shipping through the channel assists in this respect. Icebreaking is provided to small ports and settlements in remote areas of the country as well as in the Arctic where it is directly related to sovereignty, northern resupply, and scientific research. In connection with commercial activities, it was noted that some companies which have established mines in the Arctic did so on the basis that icebreaking services would be provided. The same was said for companies that manufacture forest products in western Newfoundland. Moreover, ports in Quebec, Northern New Brunswick and Prince Edward Island depend heavily upon icebreaking.

The conclusion of a good number of witnesses was that icebreaking is an essential service and should continue to be paid for by the federal government. On the other hand, some witnesses, most of whom were not located in Quebec or Atlantic Canada, favoured some form of cost recovery for icebreaking.

The problem with this, as we see it, is that it is going to be exceedingly difficult, if not impossible to make a clear distinction between those icebreaking activities which are for the public good and those which are of commercial benefit to the user. We certainly believe an effort must be made to find a fair and equitable formula to apportion the costs and we recognize that there is cost recovery for icebreaking in Northern Europe. However, if this cannot be achieved then we believe icebreaking should be considered an essential service.

The Committee was told that a major problem for CG icebreakers is that many foreign ships have no ice-strengthening in their hulls, and their crews, which are often from tropical countries, do not have the experience or ability to deal with ice navigation. This adds to the costs of icebreaking and it was suggested that cost savings could be made if ships were ice-strengthened. Indeed, several users indicated they own or charter ice-strengthened ships and would have no problem with such a requirement. However, they made it clear that any cost recovery program should reflect this through the form of a reduced charge or none at all. It was also noted that the cost recovery regime in the Baltic levies icebreaking charges based on a ship's ice-strength classification.

We think this approach has merit and should be adopted if a cost recovery program can be established for icebreaking services. Moreover any program should recognize through reduced rates and rebates, any measures to make a ship safer, such as double hulling, using precision navigation systems, specific training for the officers and crews and ship-board pollution prevention programs.

G. Search and Rescue

The general consensus was that search and rescue should be seen as being in the public interest and considered an essential service. It was pointed out that Canada has an international obligation to maintain an efficient and responsive search and rescue service in its designated area. It was also noted that in Canada search and rescue services are used primarily by fishing boats and pleasure craft and rarely by commercial shipping.

We agree that search and rescue is clearly in the public interest and should be considered essential, certainly in life-threatening situations. However, we want to emphasize that every effort should be made to reduce the costs of search and rescue and consideration be given to the possibility that some degree of commercialization could be the lowest cost alternative for the delivery of the service.

H. Consultation

Among the users there was agreement with the establishment of the Marine Advisory Board which is composed of 17 members representing a cross-section of marine interests. It has a mandate to provide advice and assistance to the CG on how to deliver and finance its programs in a more commercialized, business-like manner.

In our view, full and open consultation with the users is absolutely essential for the creation and implementation of any fair and equitable national cost recovery regime. The bottom line is "user-pay-user-say." After all, in the future some CG services are going to be operated by the users or paid for by them. We think the Marine Advisory Board is an excellent and credible vehicle for the process of consultation on a national cost recovery program which is going to be demanding and complicated to establish and put into effect.

What we heard on cost recovery has convinced us that it is going to be a real challenge to craft and implement a national program for individual CG services based on commercial need and use. It may well be virtually impossible to develop a fair and equitable cost recovery formula for each CG activity. In that light, we would like to suggest an alternative method of cost recovery based upon a national levy for all marine traffic. The revenue would go into a dedicated fund which could be called the Ports and Harbours Development Fund. This fund would contribute to the operating and capital expenditures for CG activities. This type of program would be much simpler to develop and implement than cost recovery programs tailored to each service. Moreover, the national interest, which must be recognized, would be better served by such an approach.

I. Recreational Boating

According to Statistics Canada data there are over two million licensed pleasure boats in Canada. In addition, there is a sizeable fleet estimated to be in the range of 400,000 of other small craft, such as canoes and rowboats, which do not have to be licensed.

The Canada Shipping Act provides the CG with the regulatory authority to set whatever rules and regulations are necessary to ensure that Canada's waters are safe. This regulatory regime applies to all vessels, recreational or commercial, Canadian or foreign. The CG also has the responsibility to provide a service for identifying boaters. Currently, this is done either through registration or licensing of vessels and delivery of this program is carried out in conjunction with Revenue Canada, Customs and Excise Branch.

There were not many witnesses who commented on recreational boating. However, for the most part, those that did were emphatic in saying that the federal government must maintain its role and not delegate it to the provinces. The CG is doing a good job. What is needed is a national, uniform regulatory regime in order to ensure safe boating across the country. Delegation to the provinces could risk the creation of a "hodge-podge" of administrative and regulatory systems reflecting local, rather than national interests. In addition, delegation will not result in the desired goals of reducing costs, or improving safety. On the contrary, costs are likely to increase with the growth in provincial bureaucracies and lack of uniformity may actually compromise safety.

Nearly 40 years ago the federal government delegated responsibility for extraprovincial trucking to the provinces. Since then, and particularly since deregulation, federal and provincial governments have devoted considerable resources to harmonizing the different operating and technical standards and regulations which have been developed over the years by the provinces. Certainly, delegation increased the costs for the trucking industry and now every effort is being made to establish a uniform and harmonious regulatory regime to reduce costs to enhance the viability and competitiveness of the industry. We do not want this to happen to recreational boating. The best, most cost-effective way to ensure safety is through continued federal regulatory control.

While the recreational boating community is generally satisfied with the Coast Guard's regulatory role it is very critical of the vessel licensing system. The present paper-based system lacks any sort of a master file and provides little or no information. It is very difficult to locate the owner of a boat from the vessel licence number. This lack of information hampers search and rescue where a boat is found adrift and makes it difficult to verify if a boat being sold is actually the property of the vendor or has been stolen. It is, in fact, essentially useless and a ``shambles.'' Morever there is no cost recovery for the operation of the system as the licences are given away. What is required is a new computerized system for licensing recreational boats. Such a system would improve boating safety as search and rescue agencies would be able to obtain detailed information about the boat which can aid in a search. It will also be of assistance to enforcement agencies through the provision of an effective and comprehensive vessel identification system. In addition, an up-to-date database of small vessels will enhance the government's regulation and inspection of them for safety purposes.

Since we have recommended that the federal government continue to regulate recreational boating we think that the licensing system should be modernized and financed completely by the users. In addition, a part of the revenue from the licence fees could be used to promote safety and for enforcement as well as for any cost recovery program where it is determined in a fair and equitable manner that a CG service, such as aids to navigation, is of benefit to recreational boating. This new system could be run by the government or a special agency, or could be operated by the private sector. Whatever the case, we think it is important that a new system be put in place as soon as possible.


CONCLUSION

It was stated on many occasions during our hearings that the object of the whole exercise was to see what could be done to reduce costs in the marine sector. In the new competitive environment of free trade, deregulation and the global marketplace, the status quo is neither acceptable nor sustainable. What we must have is an affordable, competitive and efficient marine transportation system for all users - one that can meet the challenges of the 21st century.

Our aim was to provide, in this report, a blueprint for a new marine strategy. We recognize that we have recommended some dramatic changes to the system. However, as in so many other areas of government, the only choices left are hard choices. There are no soft options and we do not have a lot of time. Hard decisions have to be made and implemented. We hope that this government and Minister have the determination and courage "to go boldly forward where no Minister has gone before."

After our report is tabled, Transport Canada will conduct a number of comprehensive roundtable discussions in all regions of the country on a new national marine policy. We applaud this approach and hope that our report and recommendations will set the stage for this process.

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