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Federal Response to the Economic Impact Study of Major Marines Initiatives
Marine Sector Reform: Coast Guard Recovery and Other initiatives

Fisheries and Oceans Canada
March 20, 1997

Introduction

The federal government's Program Review exercise, a report by the Standing Committee on Transport (SCOT) and the commitments made in the 1995 Federal Budget set the context for the cost recovery of services provided to the commercial shipping industry by the Canadian Coast Guard (CCG).

The Coast Guard held extensive consultations with industry during the initial implementation of the Marine Service Fee, including with the 22-member Marine Advisory Board. Additional consultations were held with the industry at large through the release of two consultation papers, and through several meetings with stakeholders.

Prior to implementing fees in 1996-97, the Coast Guard submitted them to the Standing Committee of Fisheries and Oceans (SCOFO) for review. Following public hearings, SCOFO recommended that the Coast Guard proceed with the marine navigation services fees at the $20 million level, conditional on undertaking a socio-economic impact analysis on the cumulative effect of all of the marine related fees and initiatives on the commercial shipping industry.

The Coast Guard agreed to conduct the study, in view of the multiple layers of fees that could impact commercial shipping in some areas. The Coast Guard and Transport Canada commissioned a study to look at the economic impact of marine service fees and other initiatives including: reform of the port system, the commercialization of the St. Lawrence Seaway, pilotage reform, the withdrawal of the Coast Guard from dredging in harbours and channels, and the creation of private-sector oil spill response organizations.

The results of the study and the consultations which have taken place over recent months have been extremely valuable in guiding the Coast Guard's thinking on the best approach to cost recovery.

This document outlines the Coast Guard's new, more measured and equitable approach to cost recovery, and responds on the part of the federal government to the results of the Economic Impact Study.

Cost Recovery: New Directions

The marine sector remains Canada's most subsidized commercial transportation sector. Cost recovery in the air and rail sectors, as well as reductions in subsidies have been underway since 1994. Prior to 1996, no cost recovery for Coast Guard marine navigation and ice-breaking services had ever been implemented.

The Coast Guard will proceed with cost recovery on a more measured pace. This will be reflected in a new more comprehensive fee system for the Coast Guard services provided to commercial shipping. The Coast Guard has listened to commercial marine industry and will continue to work with them to establish agreed-upon principles while maintaining safe and efficient marine system for the benefit of all Canadians.

Specifically, the Coast Guard is:

developing a fee formula based on a percentage of direct costs of services, as opposed to fixed revenue targets. This will ensure a cost recovery level consistent with the level of services provided to the commercial shipping industry.
establishing principles to guide regional fee structures and levels of service, explore alternative service delivery opportunities, and improve our consultation mechanisms.
exploring with industry the creation of an arms-length review mechanism that would provide advice on marine fee structures and annual fee levels.

All of these steps are to be completed during 1997-98, with a view to having a new marine services fee system in place for 1998-99.

Marine Service Fees (MSF) for 1997-98: A Year of Transition

In the interim period while the new system is being developed in partnership with industry, the Coast Guard will apply the 1996-97 fees over a twelve month period in 1997-98.

Consultations with the various marine advisory boards have yielded industry requests and recommendations for the structure of the marine fee. In response to these requests, and taking into account its experience in administering the marine fee, the availability of updated cost and traffic numbers and the results of the Economic Impact Study, the Coast Guard has proposed some adjustments to the application of the fees for 1997-98. The adjustments, which are subject to further consultations, include:

zonal fee structure for the Maritimes;
a tonne-mile fee structure for domestic bulkers, self-unloaders and containers to help them pass the costs on to shippers;
a quarterly fee based on Gross Registered Tonne (GRT) to apply to the remaining Canadian flag operators in order to recognize seasonal operations;
consistency in the rates applicable to vessels operating under a Coasting Trade license with the fees charged to domestic flag vessels in eastern Canada;
the restructuring of the current charges to recognize differences between the small passenger vessels and the larger cruise ships;
the establishment of fee levels for aggregates and gypsum that would mitigate the potential impacts identified by the Economic Impact Study.

The modifications will be subject to further consultations prior to coming into effect on July 1, 1997. As part of the proposed amendments, fees for west coast marine traffic which had decreased to a lower level on March 1, 1997 will revert to the 1996-97 fee levels.

Along with work to restructure existing fees for marine navigation services, the Coast Guard will continue to develop, in consultation with industry, a new fee for ice-breaking services. This fee will be introduced as part of the cost recovery system for 1998-99.

The Economic Impact Study

The Economic Impact Study undertaken by Hickling Corporation and Booz Allen Hamilton, at the request of the Department of Fisheries and Oceans and Transport Canada, as recommended by the Standing Committee of Fisheries and Oceans (SCOFO), looked at the potential impact of marine service fees and other federal marine initiatives on the industry. Industry was closely involved at all stages of the study, with the terms of reference developed in close cooperation with the Marine Advisory Board.

The results of the study indicate that for the period 1997-98 to 1998-99, the average impact on the costs of shipping would be modest, based on a $40 million cost recovery level for the marine navigation and ice-breaking services. The total cost to industry of all seven initiatives was estimated at $75 million, including $40 million of marine services fees. At this level, the average impact would be less than .09% of the $100 billion estimated value of commodities shipped.

The study indicates that even though the average impact is modest, it is not evenly spread across all communities or regions. The areas that would be hit harder and may be disrupted or diverted include the gypsum and aggregates industries in the Maritimes and Great Lakes regions and Miramichi ports.

At the $40 million level, the Study determined that the effects of cost recovery for marine service fees had little impact, with the exception of a few areas where the impact could potentially be adverse. Through consultation with industry, the Coast Guard has developed, and will implement, mitigating measures for 1997-98. The Coast Guard will continue to work closely with industry to ensure any potential impacts are addressed during the development of the 1998-99 fee structure.

It should be noted that for 1997-98, the marine navigation services fee will total in the order of $26 million with the application of last year's fees over a longer period of time.

The following is a summary of the Study's main findings:

Areas Subject to Potential Diversion or Disruption

Miramichi Ports

Study Findings: The study identifies Chatham and Newcastle, two commercial ports on the Miramichi River, as areas where there may be potential diversion of traffic from marine to rail. Costs to the Miramichi would be very high due to significant icebreaking and dredging costs. The current low volume of traffic (250,000 tonnes per year) does not provide a sufficient base over which to spread the costs.

Government Response: The ports of Chatham and Newcastle handled an approximate total of 250,000 tonnes in 1994, in comparison to the 13.4 million tonnes handled by Halifax and 18.2 million tonnes handled by Saint John. The disproportionately low traffic volumes in the Miramichi cannot support the current level of Coast Guard expenditures, which is $2 million for dredging alone.

The Coast Guard held discussions with the province and stakeholders to examine ways to make more efficient use of dredging in the future. The two major clients that use our services have indicated that they are considering other more cost-effective options.

Aggregates and Gypsum

Study Findings: The aggregate and gypsum industries may face potential disruption of operations in both the Maritimes and Great Lakes regions. The industries normally operate with low profit margins and any additional shipping costs on their low-valued cargo would pose a problem.

Government Response: Aggregates and gypsum were the only two commodities identified as having potential for disruption. As the study used 3% of value of the commodity as the threshold for having potential for disruption, the Coast Guard intends to ensure the 1997-98 marine navigation service fees do not exceed a level of 2% of the commodity value. Two proposals put forward by industry, including a zonal charging system and a per tonne-mile charge for aids to navigation fees may have a sufficient mitigating effect on both the aggregates and gypsum industries. If the fees resulting from these two proposals are insufficient, the Coast Guard will set a fee for these two commodities at 2% of value.

The Coast Guard will closely monitor these two low-value commodities in the development of future fee proposals.

Regional Impacts

Study Findings: Though impacts vary on a regional and provincial basis, the impacts were still far short of the threshold level that would likely cause disruption to the traffic at the $40 million level for the marine service fees. The overall results of the analysis showed the Atlantic provinces to experience the highest costs, due primarily to their reliance on icebreaking and, in certain areas, dredging. Icebreaking is the largest cost element in Newfoundland and Prince Edward Island, while dredging is the second leading cost element in New Brunswick.

Government Response: While the impact of the Marine Initiatives is higher in Atlantic Canada when compared to other regions, the impacts were still far short of the threshold level that would likely cause disruption to the traffic at the $40 million revenue level for marine services fees. In addition, the deferral of the icebreaking fee until 1998-99, reduces the impacts of the 1997-98 fees substantially.

Differences in the costs will occur between regions and provinces due to the varying services provided and the nature and volume of their commercial marine activities.

Remote Communities

Study Findings: The Study examined the impacts of the initiatives on remote areas located south of 60⁰. The communities of Bella Bella, BC, Blanc Sablon, Quebec, and Nain, Labrador were selected due to their status as port communities and their relatively high dependence upon the marine mode.

It was determined that the initiatives would have small incremental costs and it was anticipated that the small increases would be passed on to consumers without creating hardship or disruption of services to the residents of these communities or to related users of marine services.

Government Response: Given that the initiative would have marginal impacts on the residents of these communities or related users of marine services, no action is being considered.

Ferry Services

Study Findings: In 1993, Canadian ferries carried about 40 million passengers and 14.5 million vehicles. The study of the three major public ferry systems in Canada: BC Ferries, Quebec Ferries, and Marine Atlantic, determined that the impact of the five Marine Initiatives will increase the cost of operation of the three companies by a maximum of 1% in 1997-98.

With regard to the Quebec public ferry services, the Study has concluded that the initiatives will have a relatively minor impact on the costs of running the ferry services in Quebec. In the matter of the Matane-Baie Comeau rail-car ferry, the Study noted a cost of some 30 cents per tonne (25 cents attributable to icebreaking services) but does not indicate any disruptive impact as a result.

Government Response: Given that no disruption of operations is expected to occur, no action is deemed necessary. Further, the delay of ice-breaking will provide ferry operators in eastern Canada with more time to adjust.

Anomalies in the Marine Navigation Service Fees (MNSF)

Study Findings: The Study also assessed the Marine Navigation Services Fee structure in terms of any anomalies in its treatment of a range of services. These anomalies are found applying to: Canadian flag, foreign flag and applications of Coasting Trade Licenses, types of vessels, regions, ports, carriers, or transportation safety and the environment.

The Study recognized that many factors in the fee structure have diminished the potential for anomalies. It also noted that while certain factors protect against anomalies, other anomalies may be created as a result. The study recognized that most of these anomalies are well known by the Coast Guard and members of the industry.

Government Response: Both the Coast Guard and members of the industry recognize that the current fee structure presents some challenges for ensuring that it remains fair and equitable while at the same time ensuring a close link between services provided and level of fees charged.

Recognizing the unique characteristics of the marine industry -- specifically coastal and inland waters -- the 1996-97 MNSF structure was developed on a regional basis. Each region contributes to the revenue target based on their share of the costs.

The Coast Guard has continued to work closely with industry over the last year to address the issues raised by those anomalies. As a result, a number of proposals are currently under consideration for the 1997-98 Marine Navigation Services Fee.

Additional Marine Sector Reform Initiatives

Marine sector reform and cost recovery are part of the federal government's ongoing goal of providing safe and efficient waterways while decreasing the financial burden on the Canadian taxpayer. Achieving this goal involves a program of internal cost reductions by the Coast Guard, restructuring of its programs and services, and the introduction of new technology. Several other marine initiatives undertaken by both DFO and Transport Canada were examined as part of the Economic Impact Study.

Reform of the Port System (Transport Canada)

The Canada Marine Act is currently at the report stage in the House of Commons and is expected to move to second reading in the spring. Adopting a more business-like approach to the business of running ports, this legislation is designed to put Canada's primary ports system in a better position to control and reduce costs. Port authorities would have more autonomy to respond to business opportunities, have greater local and user involvement in the management of the port, and be subject to greater commercial discipline with respect to investment decisions.

Under this system, the user pay, user say principle will be in effect. Users will be in the position to determine the level of marine infrastructure and service they need and charges that they are prepared to bear. Ports classified as part of the national system must demonstrate financial self-sufficiency and a diversified national and international traffic base. Major ports like Vancouver, Montreal and Halifax have applied for Canada Port Authority status in anticipation for the passage of the Act. Smaller ports will move to local management. The transfer of smaller regional/local ports began in 1996 with the divestiture of 78 facilities to local interests or other governments.

The Economic Impact Study noted that port reform will not adversely affect cargo flows at Canada's major ports, nor is it expected to increase the cost of using smaller ports.

Commercialization of the St. Lawrence Seaway (Transport Canada)

On July 15, 1996, the Minister of Transport signed a Letter of Intent with the Seaway Users' Group (composed of the main users of the system) that contains the main parameters of a commercialization agreement. Negotiations on the details are underway.

The Economic Impact Study noted that substantial cost reductions, increased efficiencies and responsive toll charges will strengthen the financial base of the Seaway with minimal, if any, costs for shipper and carriers.

Reform of Pilotage (Transport Canada)

Consistent with Transport Canada's marine pilotage reform, all four Pilotage Authorities have been striving to reduce administrative overhead, staff and pilots while controlling wage and tariff increases. Administrative costs have been held in check and all expenditures are forecast to remain relatively stable for the foreseeable future. Three of the four Authorities are now self-sufficient and projected to remain so. Only the Laurentian Authority has yet to reach financial self-sufficiency.

As pilotage generally represents less than one percent of total transportation cost, the Economic Impact Study found that the impact of pilotage reform would be neutral on individual cargo flows.

Withdrawal of the Coast Guard Funding from Dredging Activities (Fisheries and Oceans)

As part of the government-wide review of programs and expenditures, the Coast Guard began to phase out funding for dredging activities starting in 1995-96. This action was also consistent with the 1995 report from the Standing Committee on Transport which recommended cost recovery for dredging where commercial users can be clearly identified, and that dredging for channel approaches and within port areas should be the responsibility of the commercial ports.

Funding for dredging in Saint John, New Brunswick was withdrawn at the end of fiscal year 1995-96. Funding for dredging in the Miramichi River will terminate in 1997. The Fraser River dredging funding will be phased out completely by 1998-99. The dredging program in Lake Winnipeg will be downsized in fiscal year 1997-98, while the Coast Guard will continue to fund a scaled down dredging program on Lake Winnipeg for the next 2-3 years. Funding for St. Lawrence River dredging will end at the completion of fiscal year 1996-97.

The Coast Guard will maintain its international commitment regarding the Detroit/St. Clair River, as well as ongoing departmental responsibilities related to: engineering, investigations, surveys, forecasts, rental property and maintenance of ice control structures.

Emergency Response Organizations (Fisheries and Oceans)

In its final report of September 1990, the Public Review Panel on Tanker Safety concluded that Canada's ability to respond to marine oil spills was inadequate, In June 1991, the government responded to this and other findings by adopting a strategy to improve Canada's ability to respond through a partnership with the private sector. Cabinet directed that legislative changes be introduced under the Canada Shipping Act (CSA) to implement the approved strategy; the central principle underlying Bill C-121 involved the implementation of a private sector-funded response capability.

Five private sector-owned Response Organizations (ROs) have been established to enhance national preparedness and response capability in the event of an oil spill in Canadian waters. In response to user concerns about the fee structures proposed by the ROs, the Minister launched an investigation in March 1996 to determine their fairness and equity.

The panel determined that the fees as proposed were not fair and equitable, but did not identify fees that would be fair and equitable for each RO. Discussions have been held between Coast Guard officials and the interested parties to clarify concerns and identify areas of common interest to stakeholders. Since that time, bilateral discussions between ROs and objectors have revealed areas of compromise and potential solutions. Third party-mediated discussions may also be held in the event of unresolved issues. These will assist the Minister in rendering a decision to approve or amend the fees.

The panel also raised a number of policy issues, unrelated to the fees, which Coast Guard has undertaken to discuss with stakeholders immediately following resolution of the fees.

Coast Guard is committed to working with its partners to implementing a fair and equitable, private sector-funded preparedness and response regime. As lead agency for ship-source oil spills, Coast Guard will continue to ensure the provision of an effective, efficient, and immediate response for all marine oil spills in Canada.

Conclusion

The needs of both shippers and taxpayers and the ongoing role of the Coast Guard will be considered as the Department of Fisheries and Oceans and the Coast Guard continue to work with industry to develop an equitable structure for cost recovery while ensuring safe, efficient and viable Canadian waterways.

The Coast Guard will continue in its traditional role of providing services such as flood control and search and rescue at no cost to the user.