Monday 8 March 1993

Pre-budget consultations

Ontario Chamber of Commerce

P.A. Palmer, president

Don Eastman, vice-president, policy

Canadian Institute of Public Real Estate Companies

Jim Bullock, president

Canadian Manufacturers' Association

Paul Nykanen, vice-president, Ontario division

Dr Jason Myers, chief economist

Eric Owen, director, taxation and financial policy

Ontario Good Roads Association

Viktor A. Silgailis, president

Gerry Lalonde, second vice-president

Leonard Rach, first vice-president

Sheila Richardson, executive director

Association of Canadian Distillers

Tim Woods, Ontario director

Steve Poirier, representative

Peter Chubb, representative

Ian S. Cray, representative

Ontario Convenience Stores Association

Russ Egerdie, executive director

Dr Geoffrey Pottow, board member

Council of Ontario Construction Associations

David W. Surplis, president

Bill Empey, member, tax and economic development committee

Private Livestock Auction Market Operators of Ontario

Lindsay Barfoot, agriculture and food consultant

Marie Forgrave, president


*Chair / Président: Hansen, Ron (Lincoln ND)

*Acting Chair / Président suppléant: Johnson, Paul R. (Prince Edward-Lennox-South Hastings/Prince Edward-Lennox-Hastings-Sud ND)

Vice-Chair / Vice-Président: Sutherland, Kimble (Oxford ND)

Caplan, Elinor (Oriole L)

*Carr, Gary (Oakville South/-Sud PC)

Christopherson, David (Hamilton Centre ND)

*Jamison, Norm (Norfolk ND)

*Kwinter, Monte (Wilson Heights L)

Phillips, Gerry (Scarborough-Agincourt L)

*Sterling, Norman W. (Carleton PC)

Ward, Brad (Brantford ND)

*Wiseman, Jim (Durham West/-Ouest ND)

*In attendance / présents

Substitutions present / Membres remplaçants présents:

Brown, Michael A. (Algoma-Manitoulin L) for Mr Phillips

Dadamo, George (Windsor-Sandwich ND) for Mr Christopherson

Hayes, Pat (Essex-Kent ND) for Mr Sutherland

Johnson, Paul R. (Prince Edward-Lennox-South Hastings/Prince Edward-Lennox-Hastings-Sud ND) for Ms Ward

Perruzza, Anthony (Downsview ND) for Mr Ward

Clerk / Greffière: Grannum, Tonia

Staff / Personnel: Campbell, Elaine, research officer, Legislative Research Service

The committee met at 1304 in room 228.


The Chair (Mr Ron Hansen): We're going to have the pre-budget consultations for the standing committee on finance and economic affairs.


The Chair: The first group to come forward is the Ontario Chamber of Commerce. I'd like to welcome you here. Could you identify yourselves for the purposes of Hansard?

Mr P. A. Palmer: My name is Pat Palmer. I'm president and chairman of the Ontario Chamber of Commerce, and with me is our vice-president of policy, Don Eastman. We appreciate the opportunity to meet with your committee today.

The Ontario Chamber of Commerce represents over 65,000 businesses of all sizes and types throughout Ontario and through 205 local chambers of commerce and boards of trade. Our membership represents the majority of private sector employment in the province of Ontario.

Our recommendations focus on four key areas. We believe the provincial economy is in serious trouble and that the provincial budget is a mess. We have reached the point where we require not an aspirin but surgery, or we face a worsening future.

The province needs, first, an immediate, across-the-board cut in wages for all public sector employees of 2% this year, followed by cuts of 4% in each of 1994 and 1995; next, an immediate stop to a continuing parade of spending initiatives that waste money; third, a freeze on all new taxes and tax rates to permit the private sector the change to start generating the economic activity that will produce more total tax revenue; and fourth, a truly clear set of books so that the people of this province can actually understand the province's financial position.

Some of that may seem tough. Doing any less will require more painful action in the future.

There is a substantial temptation in coming before you to say, "We told you so," if we look back over the budget advice we have been giving the government of Ontario through a succession of committees such as yours and to a number of treasurers. We are truly frustrated that our advice was not better listened to, that it was not better heeded. If it had been, we are convinced that the province's economic performance and prospects would be immensely brighter than they are right now. The public sector wage action we are currently calling for would not have been necessary.

It has been said that everybody has a right to his opinion, but no person has a right to be wrong in his or her facts. Let's look at the facts.

Fact: We in Ontario enjoy one of the highest standards of living in the world.

Fact: As productive and efficient as our economy is, it is falling short of paying for the standard of living we currently take for granted. Federally and provincially, we have become large international debtors. We are large borrowers on the international capital markets, taking in large sums of capital desperately needed elsewhere in the world.

Fact: The money we are currently borrowing to maintain a false standard of living will have to be paid back, with interest. The longer we delay that inescapable reality, the more pain we will inflict on ourselves.

Fact: Interest compounds. The $1 billion that is borrowed today soon becomes a debt of $2 billion, and then $4 billion, unless it is repaid.

Fact: We need to substantially improve the productivity and output of the economy or we had better plan on substantially reducing our standard of living.

We have enjoyed our past appearances before this committee. It has been a great opportunity to vent our frustration, and we suspect it has also been true for most of the committee members. However, it has been our perception that the impact of our presentation and of this committee's deliberations on the budget process has been somewhat less than momentous. We believe that is unfortunate. We believe it can, and must, be changed.

We regret to inform you that the pre-budget submission we did last year is still entirely valid. We commend it to you. The only significant difference between then and now is, to paraphrase a Tennessee Ernie Ford song, that we are another year older and deeper in debt.

We hope none of you here is taking false comfort from recent reports declaring the recession over. These are extremely dangerous times for the provincial economy, for the social programs that depend on that economy, and indeed for the quality of life of every person in this province. If we continue to mismanage the economy as thoroughly in the future as we have in the relatively recent past -- and by that I mean the past decade, not just the past two years -- we had all better plan on a much lower quality of life than we have become accustomed to.

The province is entering the economic equivalent of a black hole. An accumulation of fiscal irresponsibility has pushed us into a deficit/debt/interest cost spiral, a deep, dark vortex that promises to widen, dragging in more and more of our real assets, our production and our future unless we take bold action to escape.

For more than a decade, successive provincial governments have decided to delay fiscal responsibility. Each of those supposedly temporary delays has been accompanied by the rationalization or excuse that conditions aren't good enough -- "We will balance the budget next year or the year after" -- or that when we look at the other provinces, we are not doing too badly, as though there were some comfort in a slower rate of deterioration. The time has never been quite right for fiscal responsibility. The bottom line has been that each of our provincial governments has been more comfortable spending money than facing up to the revenue requirements of that spending. People want more services, but don't like taxes, so, "We'll cover the difference with increased borrowing and hope the future somehow fixes it for us."

A one-year deficit of $1 billion, $2 billion or $4 billion isn't too bad. A decade of such deficits, rising to more than $10 billion for the current budget year and the promise of a similar deficit for the coming year, is a disaster.

Each year's deficit means more debt piled on a mountain of previous borrowing. Borrowing costs money. The growing debt means continuous increases in interest costs. The increased interest costs aggravate the deficit position, making each successive year even worse. Hard-earned tax money gets sucked up in interest payments instead of being available for the health care, education, social assistance and roads it was originally intended for. The refusal to be fiscally responsible is now starving our social programs.

The first law of economics is: You can't have more than there is. We beg you to learn that first law of economics.

The problem of the deficit/debt/interest cost black hole is compounded by a connected black hole. The provincial government has not just reached but has passed the effective limits of taxation, the limit where further increases in tax rates and new taxes result in less, not more, taxation revenue.

It seems to us that the current government came to office with the firm belief or mythology that business represents the equivalent of a bank cash machine and that the election gave them the access code. Well, you can't make withdrawals if there's nothing in the account.

We don't have a warm feeling that you know what profit is. It is not bags of money locked away in a back room someplace. When profits stay in a company, they are not there in the form of bags of money but in the form of new equipment, new machinery, new buildings and, yes, new jobs, and old jobs that are protected. To the extent that profits leave companies in the form of dividends, much of that goes to pension funds to help pay for the current and future pensions of millions of Canadians. Most of the rest is reinvested.

Money taken away from business means jobs that are not created. This is an economy that desperately needs more jobs that pay taxes, not more jobs that absorb taxes. We have a fundamental imbalance in our provincial economy: a public sector that is absorbing far more revenue than the private sector is currently capable of generating.

We are long past the point where small changes and budget fiddles are of any value. If we are to break the spiral and escape the black hole, bold action is required. Anything less will truly be socially irresponsible.

Never in the past half-century have business conditions in Ontario been as bad: record numbers of bankruptcies, chilling numbers of plant closures and layoffs.

See our blood? No more taxes. Tax increases will only make the deficit position worse and subsequently put even more pressure on our social programs.

While the private sector -- that is, businesses, employees and shareholders -- have been suffering through a recession inflicted to cure inflation, the public sector still doesn't get it. The inflation problems that the recession was supposed to cure originated primarily in the public sector, with wage increases, tax increases, hydro increases and legislated cost increases for business, yet the public sector has escaped the ravages of the recession.

We have seen a great deal of whining and moaning because the public sector has been asked not to share the pain but only to slow down its rate of increases: the equivalent of Marie Antoinette complaining that she wanted more icing on her cake while the people of Paris starved.

We have been in recession for three years. That means the economy is actually smaller now than it was in 1989. That means there is less to share. You can't have more than there is. Those who have the same income today that they had three years ago have increased their share on the backs of others. Yet public sector wages have continued to increase, meaning even higher taxes on a private sector that has less income to pay them. That is the definition of irresponsibility: irresponsibility on the part of those demanding the increases and even more irresponsibility on the part of those granting them.

The starting point of building the foundation for a better economic future should be restoring the balance. Public sector wages need to be cut across the board to return them to the 1989 levels, and then cut by the amount the economy has been driven into recession since.

We recommend a cut of 2% this year, followed by further cuts of 4% in each of 1994 and 1995. When the economy is restored and we are able to once again see positive, consistent growth in the private sector economy, then public sector wages should share in that growth, maintaining the balance.

That is not penalizing or unfairly targeting public sector employees, but it is demanding that they share the burden. Anything less would be unfair, not just to the rest of us but to the public sector employees themselves. Unless we restore the health of the private sector economy, public sector employees condemn themselves to a long-term miserable future. Public spending has to be cut. We would sooner see that done through responsible wage measures rather than massive layoffs.

Despite the severity of our current situation, the provincial government continues to find imaginative new ways to waste money -- a continuing parade of prettily printed, thick reports with minimal content.

The most recent high-profile example of spending waste is the current charade on the provincial NAFTA hearings. Not only is NAFTA a federal issue, but this government already knows its position on NAFTA and these hearings won't change that. This is nothing more than an attempt to use Ontario taxpayer money to try to help out Audrey's election campaign and to try to deflect public opinion from this government's mismanagement of the provincial economy. If Premier Rae is so concerned about NAFTA, he should resign and run federally.

There is one area where this committee can make a positive difference not just for Ontario but perhaps for the entire country. We do live in a democracy. While all of us at times have frustrations with the results of our democratic process, it sure beats the alternatives.

The ultimate economic managers are the electorate. They decide which of you will be elected and which parties form the government. They also decide which programs they will press for and what tax levels they will tolerate. For each of you as elected members and for the elected governments that you are part of, they represent an irresistible force.

It is no coincidence that, nice words aside, each of the political parties that has held office either provincially or federally has been part of the debt/deficit problem.

We are pleased to see Premier Rae publicly recognize that there is a serious problem of federal and provincial government indebtedness. That appears to have been relatively late-breaking news for the Premier. If he has been so slow to realize that we have a huge, dangerous problem, where does that leave the bulk of the electorate?

Our true economic managers, the electorate, have been doing a lousy job, not because they're incompetent but because we have been working with lousy information. Lousy information doesn't guarantee lousy decisions, but it comes close. Let me state categorically that any person inside this room, or outside it, who claims to truly understand this government's financial position is either a fool or a liar. Ontario's process for providing information on its financial position is a mess. That is not a new problem, and the problem is not confined to Ontario. However, it has been getting worse.

Ontario has traditionally used a cash basis for its financial reporting -- relatively simple: Keep track of the dollars that come in and the dollars that go out, but ignore amounts that Ontario may owe but hasn't paid yet and amounts that may be owed to the province. Any corporation that attempted to report its taxable income on that basis would be charged with fraud and/or tax evasion.

Cash-basis accounting is a simplistic process that may have suffered when we had much simpler government but is now woefully inadequate. When government takes on longer-term responsibilities such as pension obligations, the public needs to know the financial implications of those obligations.

Cash-basis reporting invites abuse. Want to improve this year's budget? Simply delay paying some of your bills. That trick was worth $600 million in the Treasurer's attempt to pretend that the deficit in last year's budget would be less than $10 billion. Another cash game: Sell crown land to yourself and claim that it is cash income.

The abuse may have increased but it is not new. For years, the budget has shown deposits in the Ontario savings offices as though it was earned provincial revenue, when they are actually nothing more than another form of borrowing. The intention is not to finger the current government on this particular issue but to address some long-standing problems.


There have been some halting, partial moves towards accrual accounting, looking beyond the straight cash flows to consider changes in bills not paid or collected, and in capital assets. However, instead of using these changes to improve the quality of information available, we have seen a shortsighted pick-and-choose approach that actually makes the quality of the numbers worse than they would have been with a straight cash approach. The primary accounting rule used is: "If it makes the numbers look better, use it. If it makes them look worse, find something else."

In the last budget we saw an attempt to separate out capital spending and pretend it doesn't count when you look at the deficit. We fully endorse separating capital spending from current spending, but only if it's accompanied by an appropriate provision for obsolescence and depreciation. Otherwise, it becomes misinformation, not information. Last year's budget contained no consistent depreciation provisions.

Last year's budget revenue estimates included provision for a substantial fiscal stabilization grant from the federal government. The prospects of receiving that grant in the 1992-93 budget year, or perhaps ever, were dim at best. That sum might have been appropriate to include in a budget based on accrual accounting, but not in a cash-based budget.

Currently, the provincial government is proposing a much wider use of crown corporations to conduct activities normally done directly through the government, such as water, sewage treatment and roads. The potential merits of this change have been severely obscured by a substantial concern that the primary driving force behind the change isn't improved efficiency and effectiveness but an opportunity to hide significant portions of future deficits. That concern may be misplaced but it persists. A proper system of reporting the province's financial position would erase that concern.

The people of this province deserve and need a clear set of books for the province. They need to see numbers that are comprehensive, that include all the province's obligations. They need to see numbers that are consistent, that treat similar concepts in a similar fashion. They need to see numbers that are current. An accurate picture of the situation three years ago would be a lot better than what we currently have but it is not good enough. They need to see numbers that are clear and understandable.

The electorate needs that information if they are to improve the quality of their economic management. You need that information if you are to have any hope of being responsible to that electorate. You may also need it in order to survive politically. A misinformed electorate is dangerous and unpredictable. Unreasonable expectations of what is possible does not make for a very productive environment.

If this committee were to put the heat on and really push for a clear set of provincial books, for responsible, comprehensive economic information, it would provide a lasting service to the people of this province and a light beacon for the rest of the country.

Some of the required changes will be simple and straightforward; others will be more difficult. Getting a full handle on unfunded liabilities will be challenging. Sometimes getting things simple but not simplistic is hard work. However, if you think information is expensive, check the price of ignorance.

The Ontario Chamber of Commerce is anxious to help in any way we can. At the end of the day, we may disagree on the policy measures that may be taken in consequence of that better information, but let us at least start with the same facts.

In conclusion, we believe bold action is required now or future cures will be even more painful:

(1) Restore the balance: Take action now to bring public sector wages back into a reasonable balance with the tax base that ultimately pays for them.

(2) Stop wasting money: The claims of fiscal responsibility and painful restraint ring hollow when we are confronted with continuing examples of waste.

(3) Don't let future tax increases further damage the province's economic base.

(4) Let the people know; let the electorate know. Please, a truly clear set of books for everyone.

Thank you very much for your attention. Mr Eastman and I would be pleased to answer any questions.

The Chair: We only have six minutes left, two minutes per caucus. Mr Kwinter.

Mr Monte Kwinter (Wilson Heights): Mr Palmer, you stated in your presentation that the report you made to this committee last year is still valid and that there hasn't been much heed to your recommendations. What do you see as the prospects for the people you represent if this year is like every other year and the government doesn't heed your suggestions?

Mr Don Eastman: The whole deficit problem keeps building up and the spiral gets worse. If we had looked after our debt/deficit problems a number of years ago, that could have been done relatively painlessly. Every year we delay coming to grips with bringing our revenue and spending into line makes it even more difficult to do that in the future. That means a cure that becomes increasingly more painful.

The Chair: I'm going to go on to Mr Sterling.

Mr Norman W. Sterling (Carleton): Listen, I like your stuff on the accounting very much. As a representative of my party on the constitutional committee I was most upset when basically provincial premiers, not this Premier alone but the premiers across this country, put off the table the constitutional suggestion that everybody should keep the same kind of books across the country. I think that only when we get to a common accounting system like they have in Australia, in front of accountants who will sit in front of a committee or an independent commission or whatever is necessary in order to get the same method of keeping books, will we get anything where the people can tell whether or not their government is doing a good job vis-à-vis another provincial government or anything else. It's a joke now. I don't even know how the Treasurer of this province, this government, knows where it sits, because if you keep switching the method of keeping the books you don't even know what's going on in your own business.

Can I ask you one question? With regard to the public sector increases that have occurred, particularly during this recession but let's say since 1985-84 when we started to come out of the last recession, is there statistical information vis-à-vis the increases in the total benefit packages for a public servant as against what the private sector has been receiving?

Mr Eastman: In the period preceding 1989 there were a number of years where the available statistics indicate that public wage settlements in Ontario were higher than private wage settlements. That's before we went into the recession. Everybody else has now subsequently wound up with less.

Mr Jim Wiseman (Durham West): That's an interesting comment because the last survey I've seen showed that the private sector wage increases went up something like 2.3% while the public sector wages only went up something like 1.4%. That survey doesn't really jibe with the information you're giving us here.

Mr Eastman: If I might, the numbers I was quoting were the wage settlements prior to the recession, 1986-89, prior to 1990. Since we've had the recession, one of the things that's happened has been that the recession overall has weighed more heavily on those who have been last hired, so you have wound up with a substantial change in the mix. I think it would be interesting to look through those numbers. The reality is that from 1990 until now we haven't had a growth slowdown or a growth pause but an actual decline in the provincial economy. That means that there is less economy out there today to support wages in the public sector, to pay taxes.

Mr Wiseman: I agree with that, but the --

The Chair: Mr Wiseman, I'm sorry; the time has run out. I'd like to thank you for appearing before this committee today. We had a lot of new knowledge brought forward to this committee.



The Chair: The next group to come forward is the Canadian Institute of Public Real Estate Companies. I'd like to welcome you to the standing committee on finance and economic affairs. We have until 2 o'clock, and in that period of time, as you can see, the committee members like to ask questions. We'd appreciate it if you can keep it down to about 20 minutes and give the committee members an opportunity to ask some questions on your brief.

I just want to tell the committee members here that we're photocopying their brief now, so it should be down here in about five minutes. We might as well get started. Would you please introduce yourselves for the purposes of Hansard.

Mr Jim Bullock: I'm Jim Bullock. I'm the currently serving president of CIPREC, the Canadian Institute of Public Real Estate Companies. I'm also the president and chief executive officer of the Cadillac Fairview Corp. With me is Mr Andy Lennox, who's the senior vice-president of the Bank of Nova Scotia and is responsible for their real estate activities.

Firstly, let me begin by apologizing for the missing brief that's out being photocopied. Mr Ron Daniel, our executive director, did a good job of demolishing one of his knees over the weekend, and I came from another meeting to find that he wasn't here and neither was the brief, although I did have a copy which the clerk has been good enough to copy for us.

If I might begin, for those of you not completely familiar with CIPREC, we are the primary voice of the Canadian real estate industry. Our members have approximately $60 billion of real estate under ownership and management, and we've been in operation for some 20 years. We've endeavoured to provide a responsible voice to all levels of government in terms of legislative initiatives and budget preparation activities in the past, and it's in this context that we're here with you today.

If we were sitting here today as we were in 1989, one of the government's principal preoccupations at that point with respect to our industry was the sense that our industry was not paying its fair share of taxes and not carrying its full share of the financial requirements of governing this province or governing this country. Since July 1989, the publicly traded real estate companies on the Toronto Stock Exchange have seen their equity value diminish by some 86%. Many of our members are now unfortunately penny-traded stocks on the Toronto Stock Exchange, and our industry is indeed one that's in a deep crisis as we come before you today.

I want to spend a minute, if I can, on the market conditions for real estate and the kinds of real estate that are represented by our membership. Firstly, with respect to retail estate, in other words, shopping centres and major urban retail projects, that is where we have perhaps the best news to bring to you. Retail appears to have bottomed and is beginning to show some slow signs of growth back from what was a very difficult period during the past two years.

The difficulties in retail have been caused by such things as the introduction of the goods and services tax in January 1991 as well as by the impact of cross-border shopping. Cross-border shopping has diminished in the past six months. I think that's attributable to a number of factors: first, the decline in the value of the Canadian dollar; second, I commend the government on its initiative of Sunday shopping, which has in turn helped to stem some of the flow across the border; third, I think the Canadian retail industry is also to be commended for becoming much more competitive and much more progressive in competing with its neighbours to the south.

Unfortunately, that's all the good news I have to bring you today with respect to the real estate industry. When I turn to the housing sector, we continue to await the start of a significant and sustained recovery. CMHC talks in terms of housing starts having increased in the last quarter by 7.7%. I caution you that our experience with CMHC has been that its projections and forecasts with respect to housing starts in this country have consistently been overly optimistic over the past three or four years, and when you add the benefit of looking back, you find that the numbers in fact are not as strong. Nevertheless, with interest rates where they are, we believe there is some reason to believe that housing starts may begin to pick up during this year.

When you come to the office and other commercial real estate sector, it's clear that we have and will continue to have a significant problem here for some period ahead, and I am not optimistic that the situation will change significantly for several years. The vacancy factor in office space in downtown Toronto is something in the order of 18%; it's about 19% or 20% in the suburbs, and that's before you take into account space that is leased but not occupied.

We have a significant problem with inventory being dramatically overbuilt at this stage, and that's being impacted, of course, not only by an industry that perhaps was putting too much money into the investment and commercial real estate back in the 1980s but also by the significant loss of jobs, particularly in the service sector, that we've seen during this recession, and no apparent relief in sight in terms of growth in that sector for employment.

When you look at the office space, even the most optimistic forecasts are that the amount of space in the marketplace and the vacant space will diminish from perhaps 18% to 20% to something in the order of 13% or 14% by 1996 or 1997. Those are still unacceptably high vacancy factors which will continue to cause the marketplace to be extremely soft.

This is well known to the government, of course. They are presently renegotiating leases in the marketplace for space which they occupy and perhaps are enjoying some savings for the benefit of the other taxpayers in diminished occupancy costs. But clearly we have a serious problem as it relates to the office sector and it has not turned around at this stage, nor does it give any signs of doing so in the foreseeable future.

In our submission to you, what we've tried to do is focus on a couple of issues that we believe this government and the government of this province can address in legislation upcoming in the months ahead. First of all, the Metro market value assessment which has been before this government and has been sent back to Metro is an area of continuing concern for our industry. The industry and our association are on the record as supporting market value assessment, and we are in full support of market value assessment even today.

Having said that, the system that is being proposed by Metro is, of course, not market value assessment. If it were, it would not need to be before the government for enabling legislation. The legislation is already there for market value assessment. We have an inequitable property tax system here in Metro Toronto that's taken some 40 years to create, and the commercial real estate industry and for that matter the home owners in this city and surrounding region can't afford to address and respond to those inequities in that system in a year or two.

What we have proposed is the implementation of full market value assessment but that it be done over several years, in the order of 5 to 10 years, and not the type of gerrymandered system that's been put forward by Metro. So I would encourage the government and all parties in the Legislature to continue to resist the system that's being put forward by Metro at the moment, which has as many inequities in it as the system it's endeavouring to replace.

The second tax, which was introduced in 1989 by the then Liberal government and the Treasurer, Robert Nixon, is of course the corporate concentration tax, which was brought forward with little or no consultation with the industry and affected parties. We were encouraged at the time that the members of the NDP caucus were almost unanimous in their opposition to this tax and its inequities. This tax represents, in our view, an unwarranted intrusion by the provincial government into a taxing area that's historically been a municipal taxing area, namely, property taxes.

More importantly, the tax is ill conceived and, frankly, just doesn't work. It places an unreasonable burden on such things as pay parking facilities. It makes hotels in downtown Toronto some of the highest-taxed hotel facilities in North America, thus discouraging tourism and visits to this city, and the threshold of 200,000 feet, which is used to establish the size of buildings against which this tax is applied, results in a terribly inequitable situation with respect to small businesses located in large buildings versus large businesses located in buildings that are something less than 200,000 feet.

We fail to understand where the equity is in a situation where virtually all of the retailers on Bloor Street, including people such as Holt Renfrew and Harry Rosen and so forth, do not pay this tax because they don't happen to be housed in buildings that are larger than 200,000 square feet, whereas small businesses located in large commercial buildings get caught with this tax. It is a significant tax because it is assessed on the gross building area, not on the gross rentable area of the building, so that where there are common areas and facilities, those of course are picked up and added.


We have continued to stress to the government of the day, since the implementation of this tax on an annual basis, the need that at the very least it be restructured and hopefully that it be recognized as a tax that shouldn't be levied and imposed on our industry. It also has the effect of course of causing occupancy costs to be significantly higher in the greater Toronto region than in other portions of the province or elsewhere in the country. As a result, I think it also encourages people to look at their total cost of doing business in the GTA and perhaps make decisions to relocate elsewhere.

We had the opportunity, Mr Lennox and I, this morning to participate in a consultation session with the Honourable Mr Mazankowski, who's in the process of doing his budget. We raised with him, as we raise with you, the need for all levels of government to focus on and concentrate on tax harmonization and to recognize that there is but one taxpayer.

This of course is not news to any of you. You've heard this time and time again. But we see, for instance, where the federal government takes an initiative with respect to such things as unemployment insurance and tightens those down, the result of which is, it places more people ultimately on welfare, and a portion of the welfare costs of course are borne by property taxation.

I made the point this morning that property taxation is in some respects one of the more regressive taxes in that it has nothing to do with an individual's ability or a company's ability to pay. It's taxed before you get to the bottom line, either profits of the organization or income of the individual. We believe that this tax harmonization discussion needs to involve all three levels of government and to recognize that such things as education and social programs can no longer be funded to the extent they are by property taxation. We're not here arguing for less taxation in terms of dollars. We're arguing for a redistribution of the taxation as it relates to who can best pay these taxes and pay for these programs.

We believe that some of the initiatives that have been taken to date in the reports issued by the Ontario Fair Tax Commission represent a unique and important start towards addressing this issue of tax harmonization. We would encourage that process to continue to its appropriate conclusion and we would welcome the opportunity to continue to participate in that process.

Again I come back to the issue with respect to market value assessment. Market value assessment, as it's endeavouring to be implemented in Metro Toronto at the moment, is entirely inconsistent with the recommendations of the provincial task force at work, and there needs to be a reconciliation of these things and the recognition that once and for all we have to have a proper and long-term solution to the inequities in that system and not the patchwork quilt that has been presented to this government for its approval at this time.

Recognizing, Mr Chair, that you wish to have some opportunity for questions and discussion, I would leave you with the following comments on behalf of our organization: The real estate industry is in a serious crisis. We have credit and liquidity problems. We have retailers who, although business has begun to improve for them, have in many cases incurred a 20% to 25% drop in their business since 1990, and they are in a very difficult period, although perhaps there is some room to be optimistic that things are getting a little bit better.

What we do not need at this stage in terms of the upcoming budget for this province is increase in taxation. It particularly concerns us when we hear discussions of the possibility of increases in provincial sales tax, which would have a very significant and negative impact on retailing, which has just begun to see the situation turn around with respect to its business.

I will perhaps draw my comments to a conclusion at that point, Mr Chairman, and either Mr Lennox or I would be pleased to answer any questions or comments you may have.

The Chair: They don't allow me to ask any questions, so I have to go to Mr Carr next.

Mr Gary Carr (Oakville South): Thank you very much and thank you for your presentation. I was interested that you talked a little bit about the Fair Tax Commission. I personally believe that was set up because, as you know, the government in the last election said, "We can not only have all the spending that we have now, we could have more, and we'll tax the rich, and we'll tax corporations." When they got in, they found that only 7% of the revenue comes from corporations, and as we saw in the last budget, they had to tax the middle class. Anyone making $53,000 got hit with a big surtax because that's where the vast majority of revenue comes from, the middle class.

I believe they knew that when they made those promises in the election, notwithstanding the fact that some of the individual members may not. What happened is that they all of a sudden got in and said: "We can't live up to our promises. What do we do? Well, we will put together a commission, like any government would do, of any stripe. We don't know what to do. We'll consult."

The Fair Tax Commission has come out and talked about education funding. As you know, they said it's terrible, that it shouldn't be on property tax. In our area in the last election, the government said, "We're going to up it to 60%." In my area, it's gone down about five percentage points since they were elected in 1990.

How confident are you that anything will be done as a result of the Fair Tax Commission before the next election? I'll tell you what my personal opinion is. I think that it was a complete public relations sham and that they'll go up to the next election not having done anything and saying again, "But if we get re-elected, this is what we'll do." How confident are you that anything will be done as a result of the Fair Tax Commission?

Mr Bullock: Sir, I'll leave it to you to describe the political motives of the decision that was taken, but let me suggest to you that if, as you point out, the result of the Fair Tax Commission is that we have an educational process for a lot of constituencies, many of which you just touched upon, then I view it as a positive exercise.

How confident am I that their recommendations in whole or in part will be implemented into legislation? One of the reasons I'm here today and speaking to you is to underscore the need for those deliberations which have taken place and which have been, in fact, representative of a lot of groups, many of which I would agree with and many of which I don't agree with, but which nevertheless have had their say and have resulted in the report -- that those be given proper weight before such things as the legislation for market value assessment get run through the Legislature and implemented, as is being contemplated or proposed by Metro Toronto.

I recognize what you're saying, that there is a possibility that nothing may happen. But if you contrast that with the discussions that have occurred with respect to market value assessment at Metro, where even today our organization has asked for the computer disk so that we can run simulation models of what Metro is proposing, and they refused to give them to us, and we're perhaps going to seek them through the public access to information, I think the process has been open and has been a worthwhile exercise.

Mr Carr: I agree. In all fairness to the government, they did get a broad base. They didn't just select from one constituency, and there is some fine work being done on those. That's why I think we've had groups disagree, quite frankly, because they have got a broad base, and that's why you haven't been able to get unanimity, although the treasury has said they don't need to listen to anything the Fair Tax Commission says anyway. But you're right; some good work has been done.

I want to talk now specifically about the tax situation. As you know, the Treasurer has said that he has a revenue problem. I don't believe he does. I think he has a spending problem. We're now taxed to the hilt. He mentioned the commercial concentration tax. Would you maybe expand a little bit more on how that has hurt and what effect it has had on some of the members? What specifically can you give us to add to that?

Mr Bullock: Property taxation in the greater Toronto region now is two to five times higher than in comparable-sized municipalities to the south of us across the border. In fact, the corporate concentration tax on my own property, the Fairview Mall in North York, represents a higher tax on that property than the entire property tax load on properties of major shopping centres we own in places like Atlanta, which are comparable-sized cities. So I think it does represent a significant disincentive.

More importantly, though, as I said at the outset, the tax is discriminatory on large buildings versus other sized buildings and ignores the fact that the occupants of large buildings are the same types of business that occupy buildings that happen to be smaller than 200,000 square feet. Then, when you look at the impact it's had on such things as pay parking facilities and hotels, I think you reach the conclusion that this is a bad tax. There has to be a better way to raise this revenue than this tax.


Mr Anthony Perruzza (Downsview): I just want to pick up on Metro council and the developments in the property tax. Metro is currently undertaking a review of possibly implementing equalization factors for Metropolitan Toronto. How do you think that would fare when you compare that with their interim assessment plan?

Mr Bullock: Once they share the information and what the impact of that is with us, we'll be able to make a more definitive assessment, but I would say it's my expectation that what is being attempted presently by Metro is to do indirectly what the government of the day has seen fit not to allow it to do with legislation, and that is to impose the inequities the market value assessment plan they had was bringing to taxation in the city. I think it represents a serious problem for the city of Toronto in that it will place an unfair tax burden on properties in Toronto, particularly commercial properties, and will cause further businesses to decide to try and seek to locate elsewhere.

Mr Perruzza: So you think equalization would be a destructive thing because, I guess, in comparing that with what you said about market value -- you stated that Metro perhaps should phase in full market value over a number of years so its impact isn't felt all at once.

The way I understand equalization to work is they essentially add up the assessments within the different local municipal jurisdictions, compare their 1940 total value of assessment with their 1988, 1990, 1991 assessments, and on the basis of that develop factors where you would equalize on the basis of the assessment. To me that seems like a move towards some fairness and towards essentially what you talked about, market value.

Mr Bullock: One of the problems we have at the moment is the semantics that are being used. The system Metro has put forward that was rejected and sent back was not a market value assessment. The assessment was market value; the distribution of the taxes was a gerrymandered formula.

You now talk about, "What about an equalization formula?" Clearly, it's hard to be against equalization -- I'm using the term -- but it's the application, and what I'm saying is that I believe what we need in Metro, as we have in many other jurisdictions in the province of Ontario, is a market value assessment applied appropriately. We have created these tremendous inequities in the system over 40 years and it's going to take a period of time to phase it in, I believe. The phasing in that was put forward by Metro, before the province sent it back for reconsideration, was such that it retained a lot of the inequity in the system.

To properly respond to you, we need to see the calculations associated with what Metro is proposing for equalization, after which I think we could more intelligently respond, but I am suspicious of their motives.

Mr Perruzza: My last question has to do directly with market value. When we conducted our hearings, we heard from individual after individual, and corporation after corporation, that in fact not only Metro's interim assessment plan but full market value would simply tear apart the fabric that holds together the downtown core, that we would see massive amounts of bankruptcies and large numbers of people being unemployed. You don't agree with that?

Mr Bullock: No, I don't. I believe market value assessment, if it's fully put in place over an appropriate period of time, will also take into account that the occupancy cost -- rent, in other words -- against which market value is established on commercial buildings has diminished dramatically already in the downtown, and there is not the bias that was there in 1988, which was the base year for this current plan of Metro.

One of the things you also heard, I think, in that debate was the need to have the base year current, 1991-92, because of that significant and what I believe is a permanent change in the market rents in downtown Toronto versus the suburban, greater Toronto region.

Mr Kwinter: Mr Bullock, I'd like to talk to you about the corporate concentration tax. I've a lot of sympathy for you on that issue. The rationale that was behind it was that given the infrastructure renewal required in the GTA, and given the overutilization of larger real estate projects, there had to be some way of getting some revenues to renew the infrastructure, and this was the way the Treasurer of the day thought he was going to solve the problem. I have a lot of sympathy, because at the time I saw some major problems that I think have actually been illustrated.

You said just a couple of minutes ago that there has to be a better way to raise this revenue. I'd be interested to hear how you think this particular problem can be addressed.

Mr Bullock: Back in 1989, when this tax was brought in, I appeared before Treasurer Nixon and made representation on this particular tax. At the time, I argued that our industry recognized the need to fund infrastructure to keep the greater Toronto area in its then dominant market position, that this had to be paid for and that if there was need for a targeted tax to pay for infrastructure, it should be spread across a much broader constituency than simply buildings of over 200,000 feet.

At the time, we did calculations in which we suggested to the Treasurer that you levied that tax against all commercial real estate, but excluded pay parking facilities -- which made no sense at all to me, with all due respect -- and perhaps excluded hotels. To raise the same amount of revenue with the inventory in place required a tax of about 30 to 35 cents a square foot on rentable space. That, I thought, was a more appropriate way of raising the money for the infrastructure expenditures in Metro, because I find it difficult to accept that the business that happens to be located in First Canadian Place places a greater demand on the infrastructure than the business that's located across the street in a 150,000-foot building. If there is a rationale for taxing those businesses to pay for infrastructure because of the demands they place on infrastructure, then I think they both should be taxed equally.

I was not arguing against the tax, against the need to raise the revenue, and I was not arguing that there couldn't be a targeted tax at the time. Today, on balance, I would accept a broader-based tax over the inequitable situation we have at the moment.

Mr Kwinter: I think there is the other aspect. You have sort of concentrated on the commercial usage, as opposed to the commercial building. I remember at the time that one of the arguments was that there were a lot of corporations that were not necessarily centred in Toronto and were not paying any taxes in Toronto, but were utilizing space in the greater Toronto area, and as a result this was a way of capturing from them some sort of revenue to help pay the infrastructure costs. How is that affected?

Mr Bullock: I think you would have a fairer distribution if you eliminated the 200,000-foot hurdle, because obviously all of the larger buildings, or the vast majority of them that get caught by this tax, are located in downtown Toronto. The Treasurer of the day spoke in terms of raising money for the construction of such facilities as Highway 407. It's pretty hard to argue that a tenant at King and Bay is placing a demand on Highway 407, or is causing the need for the construction of Highway 407 with its business activity at King and Bay.

I'm saying that if there is a rationale for taxing business and commercial real estate for these expenditures, and I have some sympathy for that rationale, it should be on a much broader basis than the present system. The present system simply means that hotel rooms have the highest taxes in this city of any hotel industry in North America.

The Chair: Gentlemen, I'd like to thank you for appearing before the committee today.

Mr Bullock: Thank you very much, sir.



The Chair: The next group to give a presentation to the committee is the Canadian Manufacturers' Association. Welcome, gentlemen, to the standing committee on finance and economic affairs. We have until 2:30; in that time, could you leave time for questions at the end of your presentation? And for the purposes of Hansard, please identify yourselves before you begin.

Mr Paul Nykanen: Good afternoon, Mr Chairman and members of the committee. We appreciate the opportunity to be able to discuss some of the issues that are facing manufacturers today and to present some of our recommendations on the forthcoming budget. I apologize that, due to production problems, I don't have a copy of the submission for you, but I have promised the clerk that we would have it couriered tomorrow morning.

My name is Paul Nykanen. I'm vice-president of the Ontario division of the Canadian Manufacturers' Association. With me are Eric Owen, who is the CMA director of taxation and financial policy, and Dr Jason Myers, chief economist for CMA.

Before we get into discussing the substantive issues, I'd like to briefly comment on what we represent. As many of you are aware, we are a national organization representing manufacturers of all sizes, small, medium and large, and also all sectors of the goods-producing industry and all regions of the province. Our members represent over 75% of the total manufacturing output in the province. In shipments in Ontario alone, that represents about $110 billion annually.

Manufacturing in Canada, as well as in Ontario, drives about 52% of the total economic activity, and it's also a major source of fixed capital investment and is a key contributor to provincial and federal revenues. Translated into jobs in Ontario, manufacturing directly employs about 800,000 people, and in addition to this, there are another 600,000 service sector jobs that are directly related to manufacturing. These manufacturing jobs are also, generally speaking, highly paid jobs and contribute to an excellent standard of living for those employed in the industry, so it's very obvious that manufacturing is very important to the future prosperity of our province.

We acknowledge that the government faces a difficult challenge with a debt crisis, rising costs due to unemployment, increasing welfare rolls and declining revenues. Our manufacturing members continue to face a similar scenario with increasing costs, aggressive foreign competitors, higher corporate and non-discretionary taxes, and a legislative and regulatory burden which makes it extremely difficult to compete in a very fragile economy.

The decisions to be taken by the government for the forthcoming budget must establish a fiscal environment that encourages investment, innovation and growth. My associates here will comment more specifically on the trends and will suggest solutions to revitalize manufacturing, which is so important. I will now call on Dr Jason Myers to comment further.

Dr Jason Myers: Ladies and gentlemen, I would like to outline very briefly for you the condition of manufacturing, but I also mean the condition of the Ontario economy, because many of the trends apparent in manufacturing are also trends that are apparent in other areas of business and in other areas of the economy in this province.

In 1992, manufacturing more or less bottomed out. We held our own in terms of production; there wasn't a lot of growth. In terms of the value of shipments, it's up by a very small amount, and in terms of employment, again we held our own. There weren't any more job losses, as there had been over the period from 1989 to 1991, when the manufacturing sector of the economy really did suffer enormously. During that period, of course, about 250,000 jobs were lost in the sector itself.

While prospects for 1993 look a little bit brighter, and I'm a little bit more optimistic than I was when I was here last year, our export growth continues to drive the sector, and exports into the United States are particularly important in all areas and all segments of the industry.

In terms of domestic growth, it still remains exceptionally weak. In fact, we've seen an increase in the amount of goods manufactured in this province that are exported. Over 50% today is exported out of this country, and most of that to the United States. Our domestic market share has shrunk very rapidly. Today in Ontario, about half of the manufactured goods that are purchased are made here in Canada. We seem to be extremely competitive on the export side and we seem to be facing many problems internally. I think that will continue as two very basic trends underlying the growth of the sector next year or this year.

One very optimistic outlook is based on the current value of the Canadian dollar, which is much more competitively valued now than it was last year, and that is a tremendous help both in terms of competing against our imports but also in terms of raising sales revenue for manufacturers who are exporting.

But let me sketch in what I believe to be the most important context of all, and that's the financial condition of the industry. You don't have to look very far to explain why so many jobs will be or have been lost and why they continue to be shed in manufacturing. In fact, in spite of the stronger growth in 1993, I expect that there will be more jobs lost in manufacturing. It's for a very simple reason. Today, the average price of a manufactured good is exactly what it was on January 1, 1989. I wish I could name one cost that was at the same level. Labour costs are up by 20%, but labour costs haven't risen as rapidly as other costs, other types of benefits, regulatory costs, other forms of discretionary and non-discretionary tax revenue.

Those cost pressures above all, given the deflation, the falling prices in many industries, are causing the restructuring. The productivity increases we've seen are really, to a large extent, not based on improvements in the productive capacity of people who are working. A lot of it is simply based on cuts in the middle management sector that have to be made because companies are downsizing. They are reducing the numbers of employees that they believe are not adding direct value to their firm.

That, unfortunately, is a condition that I expect to remain in 1993. It will continue to drive restructuring, not only in manufacturing in Ontario but in other industries as well, as we see it now in the services sector. It's a very important trend that has to be, I think, the basis for any type of consideration on the fiscal side, because any increase in cost today is simply being translated into lost jobs. Every $35,000 increase in cost results in two job losses in manufacturing, as a rule of thumb, and that's been the case over the last two years.

The financial pressures, as well, are certainly creating strains in cash flow. It's becoming more and more difficult to raise external financing, and companies are drawing on retained revenues, if they have those retained revenues, to make the investments in the advanced automation systems that they require simply to stay in business today, let alone compete five years down the road.

That above all, I think, is where the focus of fiscal policy should be aimed. Let me pass it now to Eric, who will take it from there.

Mr Eric Owen: I'll go a little further on some of the things Jay has said, on to fiscal priorities as we see them.

We believe that industrial recovery in Ontario, particularly the recovery of Ontario's vital manufacturing base, depends more than anything else on improvements in the financial conditions of companies competing for survival in international and domestic markets.

It's rather interesting that this morning we met with the Minister of Finance and it was pointed out that, right now, the retailers in Canada are facing import competition and winning. That's something we have to be very conscious of and continue here.

We must commend the government for the income tax rate reduction for small business that was introduced last year. It was indeed welcome news for manufacturers. We didn't expect it, and everything like that really does help. However, price deflation coupled with rising unit production costs have seriously eroded profit margins, and the cuts in the income tax were minimized because the actual profits weren't there to take advantage of.


Also, we must say that Ontario paralleled the federal increase in the capital cost allowances for class 39, which was an increase of 25% to 30%. That again was very, very welcome news. However, the draconian put-in-use or the half-year rules were that anybody who is putting capital in place must wait until it's actually in place before he can start taking deductions from it. This doesn't act as a magnet for investment in Canada. In fact, if you look at it, on the average it's a one-and-a-half-year lag with investments before you start getting cash flows back from any of the investments you have made.

We believe the financial conditions of Ontario industry must be strengthened in order to stabilize employment and consumer confidence -- consumer confidence is most important -- and also to boost capital investment. That's the formula, we believe, not only for short-term economic growth but for making the structural adjustments necessary to meet competitive challenges and to provide jobs in the future.

Industrial recovery is the only guarantee of future employment. I did hear certain people this morning say that if you put everybody back to work, the actual money that will be paid from income taxes on personal income will more than offset the deficit. But jobs do not just appear, and you cannot make jobs. Jobs are a response to something that is happening in the economy. If there is indeed the need for people to be employed, then jobs will appear. That is what we're saying here, that industrial recovery is the only guarantee of future employment. We don't believe that governments can generate full employment on their own. We do recognize infrastructure changes, and that certainly does generate certain construction jobs, but again, it's not full employment.

The first priority of the government of Ontario, in our opinion, should be to create a fiscal and legislative environment that encourages businesses to innovate, invest and grow. That, in our opinion, is ultimately the recipe for full employment. High unemployment and anaemic business profits have reduced the province's tax base. I think we would all agree with this; if the Treasurer were here, I believe he especially would be the first to applaud that. Increased taxes, fees and levies, however -- we have seen this happening time and time again -- are not the answer to make up for the revenue shortfall. Getting Ontario working again will increase the base and produce the necessary revenue, and we believe that's the only solid way to go.

Industrial recovery is also the only solution to the province's own fiscal problems. If spending on social programs is to be maintained -- we certainly will not step away from the point that there are quite a number of social programs out there that are beneficial to industry; health programs, for example. It's always pointed out that the people south of the border don't have the health programs we have up here, and we certainly appreciate it. We hope they are able to be maintained. However, industrial recovery is a necessary first step.

We were disappointed, from the reports we're receiving, that the government will not be able to meet its $9.9-billion deficit target in 1992-93. We still hope the government can achieve a balanced budget within three years. This is our hope. By that, obviously we're hoping the economy will rebound and give the government the necessary revenues it needs.

We believe, however, that the province of Ontario should further reduce the growth in the overall level of operating expenditures by limiting inflationary increases in government ministries and transfer payment organizations, improving administrative efficiencies and further rationalizing spending programs. Striving to match the productivity of Ontario's manufacturing sector in the provision of provincial government services is, we believe, a must, and we in manufacturing have some what we call "best practices" which we are prepared to share with you.

Coming now to the point of harmonization, time and again we see one government step away from a certain taxation and another government step into it. This is something we cannot afford. I'm not pointing fingers in any way, shape or form at the province of Ontario, because in large part what is happening is that we're seeing time and again the municipalities step in. This is unfortunate. However, the lower down you go in the pecking order, a lot of these indirect taxes become taxes which are not dependent on profit and, as such, if you don't have profit, all you're doing is making payment after payment after payment. I think the property tax is a good example of that.

Harmonization of fiscal and regulatory policies with other levels of government is a must. I know it will stick in the craws of a lot of people, but one of the biggest and best issues that you can look at is the goods and services tax, whether it be called the goods and services tax or whether it be called any other tax. We can't afford to have our governments cut spending, only to see it reappear in another, more expensive form at another level. Again, we recommend that the government of Ontario reduce the overall tax burden on Ontario industry by again reducing the current corporate tax rates and providing enhanced tax incentives for capital investment and technology research and development by the private sector.

The Acting Chair (Mr Paul R. Johnson): Thank you very much, gentlemen, for your presentation from the Canadian Manufacturers' Association. Questions? We have almost five minutes per caucus, and it's the New Democrat caucus that is to start. Mr Perruzza.

Mr Perruzza: Really, it's just sort of a question of clarification. We heard -- and I'm sorry, I've forgotten your name.

Dr Myers: Jay Myers.

Mr Perruzza: Jay Myers. You said earlier in your presentation that what you saw in 1989 and 1990 and 1991 was loss of jobs and a sector that suffered very dramatically, and you said that in 1992 we've seen stabilization, both in jobs and in failures. We're seeing an industry that's essentially being driven -- and these are your words, if I recall them correctly -- "driven by exports," and you didn't foresee any major job losses in this year, and so on.

Then later on in your presentation you went on and you said, "Well, gee, there's this restructuring that's taken place," and the rest of it, and because the prices for goods are essentially the same as they were in 1989, and you wanted to have an example -- and you said that wages were up by 20%?

Dr Myers: Since 1989.

Mr Perruzza: Since 1989. Across the board in the industry?

Dr Myers: Yes, the average wage.

Mr Perruzza: Then you talked about how there are going to be future job losses. So the beginning part of your presentation and the latter part of your presentation essentially contradicted each other, and I just -- for the record, please, if you can clear that up.

Dr Myers: Sure. Thanks very much. In 1992, jobs overall, net job creation more or less was stable in manufacturing. I think what we saw, though, during that period of time, was probably a more dramatic loss of middle management positions. The jobs that were being created were part-time rather than full-time employment, and probably a little bit of strength in blue-collar job creation. But I certainly don't intend to suggest that the job situation is secure or stable in the industry at all, and I do expect to see 20,000 to 25,000 jobs lost this year in manufacturing because of the cost pressures that remain.

So I guess, in short, those pressures that were there from 1989 to 1991 are still very much there; that we saw some stabilization last year. Most of the job losses that we probably will see occurring this year will be middle management positions again, and time after time I hear companies say, "Well, these are jobs that do not add direct value to what my company is doing." But you can only cut so many jobs before the business fails, and one thing that didn't stabilize last year was the number of bankruptcies: across Canada as a whole, 1,200 bankruptcies in manufacturing. About a third of those occurred here in Ontario, a disproportionate share given the number of companies operating. Particularly with smaller industries I think we'll see tremendous pressure to reduce costs again, and for many companies the only cost that can easily be reduced today is, unfortunately, your labour cost.


Mr Perruzza: Just to clear up on the wages, 20% since 1989 when everyone else and everything else is telling us that, by and large, people are taking rollbacks in wages in the private sector. In fact, my colleague mentioned earlier today -- and I didn't know this figure -- that private sector wages are up 2.3% or something. I don't know where he got that figure, but he's saying that, and you're saying that in manufacturing it's 20%. Where? Who?

Dr Myers: Since January 1, 1989, across the sector as a whole, it is up by 20%.

Mr Perruzza: Is it at the top end? Is it at the bottom end? Who is it? Is it the executives?

Dr Myers: These are average wage rates. These are the wage rates paid for hourly work -- production workers. But I agree that the wage increases --

Mr Perruzza: Production workers?

Dr Myers: Well, people who are earning hourly wages. They're not salaried positions. These are hourly wage rates that are up by 20%. But I have to say that yes, the rate of wage increases across the industry is now running just a little bit over 2.5%. It's not that great. The major increases occurred in 1990 and 1991, at a time, though, that selling prices of goods were falling during that period. What you see is basically companies trying to keep their unit labour cost -- the labour cost per good they're producing -- in line with the price change. Unfortunately, that's what has been driving the unemployment that we've seen during that period of time.

The Acting Chair: Mr Perruzza, we have to go on to Mr Kwinter.

Mr Kwinter: Gentlemen, in your presentation you talked about -- certainly Jay talked about how the activity has been export-driven and how the domestic market is relatively flat, and yet we hear those critics of the free trade agreement saying that the free trade agreement has been devastating to the Canadian manufacturers. What is your response to that?

Dr Myers: I think the only way I can respond is that the real weakness has been in the domestic market. Certainly, it's a fact of life that companies in this country have to export. In a certain sense, it's the specialization we are looking for. The only way today that a manufacturing company can stay in business, creating value, is to specialize in what it's producing, either through quality or the market it's selling into. What many companies find is that the domestic market is just too small, and certainly all the interprovincial barriers to trade exacerbate that problem. So the export side is very important.

When you look at the import side, and I suppose that is where many of the critics of free trade are aiming their view, let's take a pretty realistic view here. From 1987 to 1991 the Canadian dollar ran up in value by 21%. Since the free trade agreement came into effect, the elimination of tariffs had the effect of reducing the price of imports by 0.5%. In other words, the appreciation of the Canadian dollar had 40 times the impact on import prices that the free trade agreement has had.

In short, my answer is that it's very difficult to say that free trade has created the problem. I think we have a lot of problems right here at home, starting with the monetary: the overvaluation of the Canadian dollar. Perhaps we should focus our attention there and realize that the free trade agreement and NAFTA are both more or less recognition of realities that are there in business. Business has to, and is, operating internationally today. I think the big question is, do we want it to operate in Canada at all today?

Mr Kwinter: Eric, you made a statement to the effect that you're calling for a balanced budget in three years. When the Treasurer brought down his budget in 1990 he took the unusual step of projecting the economic sort of forecast for the balance of this government's term. By the end of their term in 1995, his best-case scenario would be a deficit in the $7-billion range. Since that time, all those figures have been altered, and if anything, each year, instead of the deficit coming down, the deficit's going up. I'm just wondering how you thought or how you expect or what recommendations you have for this government to balance its budget in three years, given the reality of the situation.

Mr Owen: Really and truly I think they will not meet that target. The expectations are that we would hope that it would be the case, and we can always hope this, and from the point of view that if we see growth the way we would hope to see growth, we would be able to see the government benefit from growth through increased corporate taxation, increased personal income taxes and, more importantly, consumption taxes, although being realistic, I don't think it's really on the cards that they will meet it. Even talking about the total deficit in Canada, which is about $60 billion this year, even at a growth of 6%, 6.5%, 7.0%, by the year 2000 we won't grow out of this. So really and truly, to expect growth of 6.0% seems pie in the sky as well, but I guess we can always hope.

The Acting Chair: Thank you, Mr Kwinter. We have to go on to Mr Sterling.

Mr Sterling: I'm going to ask the first question and then Mr Carr will ask the next one.

We had an interesting presentation early in February, or it might even have been the latter part of January, by Leo de Bever from Nomura investments. Mr de Bever talked about the growth in the service sector and in the manufacturing sector. I just wanted your comments with regard to what has happened in Canada over an extended period of time and what we might expect over the next 10 years.

He claimed that the increase in world demand for manufactured goods went up -- I can't remember whether he said 2% or 3% a year -- and that the demand for services went up by about 3% as well. He claimed, however, that productivity rises at approximately 3% a year in manufacturing and at maybe about 2 points per year for the service sector. Therefore, his conclusion, which he claimed he was making in 1981 and was saying in 1991 and 1992, was that in real terms there aren't any more jobs in manufacturing worldwide, because the productivity catches up with the demand worldwide, whereas with all the new jobs, where people have said they'd come, in the service sector, that's a natural outflow.

I guess you'd have to look at it globally. From 1981 to 1991 or 1992, whatever 10-year period you want to look at, has the number of people involved in manufacturing increased in numbers or has productivity kept those numbers pretty constant? I guess you'd have to put in the caveat that you would be maintaining the same market share.

Dr Myers: I think what you'll see in every major country, and particularly here in Canada, is that the number of manufacturing jobs has fallen as a proportion of total employment and that in many countries -- and, again, you've seen it probably here in Canada particularly over the last two and three years -- companies are contracting out services that were once performed in-house. Now they are being contracted out to consulting engineers, to administrators, to accountants, to design people and so forth.

But I see a change in the nature of manufacturing. It's those services that really add value to manufacturing today and those services that are still very, very important in manufacturing and I think it's in a way a little misleading to look at business today and try to separate manufacturing from the services sector, or at least to construct policies for both, because it's a much more integrated whole, and particularly with the technology that is there today, the strength of the Canadian economy is really going to be based on how small companies in particular, service companies, can link in to manufacturing.


The Acting Chair: You have a minute left, Mr Sterling.

Mr Sterling: Okay. The other question I have to ask is that it appears, if you read the new management techniques in the manufacturing of the future, that the sales person will be going in to a customer and saying, "What are your needs?" and that sales person will be a facilitator in bringing the various parties together to meet those needs. Is there any attempt by manufacturers in Ontario to band together and say, "Okay, we are auto parts people, we are airplane parts people, we are telecommunications people," to band together in what I guess you would loosely define as trade companies or whatever, to have people going out and bidding on behalf of not only one supplier but a group of suppliers?

Dr Myers: There are lots of examples of companies, especially small companies, working much more closely together in computerized networks and so forth. I know of one group of companies -- this is based on the Italian ethnic business association -- that is working very closely with a number of manufacturers, where they are acting as basically sales agents on their behalf in a number of developing countries. I think that's a very positive step. So yes, but I guess it does come back to when you're looking at supply-side policies and trying to push companies to adopt technology or to get better management or whatever, you can only go so far because sooner or later you're going to end up with this money problem. It costs money to make those changes, and if you don't have the money, it becomes very difficult to make the changes.

On the whole, companies in Canada don't have the money today. In an eight-hour production shift, for example, it takes an average company in Canada about seven hours and 52 minutes simply to cover operating costs, another 5 minutes to pay taxes and you've got about 3 minutes to make any money to reinvest in your company and the technologies or the management changes or the training you require in order to do what you're suggesting. So it's a very difficult problem today to get to where we want to be from where we are.

The Acting Chair: Dr Myers, Mr Nykanen, Mr Owen, representing the Canadian Manufacturers' Association, thank you very much for making your presentation before the committee today. Have a safe trip home.


The Acting Chair: The next group presenting before the standing committee on finance and economic affairs is the Ontario Good Roads Association,. Many of us were recently at Good Roads, and I welcome you before the committee today. Make yourselves comfortable, and if I could have everyone introduce themselves into the microphones for the purposes of Hansard, I would appreciate that very much, and then you can proceed with your presentation.

Mr Viktor A. Silgailis: I thank you, Chair, and members of the committee. My name is Vik Silgailis. I'm the president of the Ontario Good Roads Association and I'm the commissioner of works for the regional municipality of Durham. Gerry, you can introduce yourself.

Mr Gerry Lalonde: Good afternoon. My name is Gerry Lalonde. I'm a councillor for Cumberland township in the Ottawa-Carleton regional government.

Mr Leonard Rach: Good afternoon. My name is Leonard Rach. I'm director of engineering for the Metropolitan Toronto transportation department and I'm OGRA's first vice-president.

Ms Sheila Richardson: I'm Sheila Richardson, executive director of the Ontario Good Roads Association.

The Acting Chair: Thank you very much. Please proceed.

Mr Silgailis: OGRA represents over 750 municipalities across Ontario. Our members range from small rural municipalities to the municipality I work for, the region of Durham, and we speak on behalf of and with the support of our membership on a variety of road and transportation issues.

At the outset, I want to say that OGRA is well aware of the push-and-pull pressures that governments at all levels are feeling. Municipalities, as well as the provincial government, are being required to meet unprecedented demands with shrinking resources. I would like to take this opportunity to congratulate the provincial government on two recent initiatives to meet these challenges.

Firstly, the new framework for strategic capital investment in Ontario: The government has recognized transportation as one of the five areas vital to the province's plans for economic renewal through capital spending. The creation of the Ontario Transportation Capital Corp to finance and implement major public transit and highway construction projects will accelerate much-needed transportation projects in Ontario.

Secondly, the Premier's announcement of a major capital investment plan: The government of Ontario, together with municipal and private sector partners, will invest about $6 billion in the province's infrastructure. Of this, $900 million will be spent in 1993-94 on the construction and development of provincial highways. Ontario Good Roads applauds this recognition of the importance of Ontario's transportation system and the economic importance of investing in transportation infrastructure.

This afternoon, we would like to offer some comments which hopefully will assist the government in its deliberations to map out strategies to ensure that Ontario's transportation infrastructure is maintained during these tough times, and indeed how the transportation system can assist in the return to prosperity.

We know financial predictions are hard to make and financial commitments are even harder to keep, but the Ontario Good Roads Association was keenly disappointed when the Treasurer announced that the 2% increase in unconditional transfers for 1993 is a one-time payment and will not be built into the transfer base. Municipalities were advised at the same time that the 2% increase scheduled for 1994 will not be forthcoming.

When the three-year announcement was made last year, it was seen as evidence of a provincial government committed to a partnership with municipalities. The abandonment of the commitment and the withholding of promised transfers will cause future endeavours to be cautiously received.

We understand that in its submission to this committee, the Association of Municipalities of Ontario recommended that the province make a three-year announcement of unconditional transfers on an ongoing basis, that the province honour its earlier commitment to increase transfers by 2% in 1994, and that unconditional transfers in subsequent years be increased at a rate sufficient to meet increases in provincially mandated, municipally administered programs. OGRA supports these recommendations.

The Minister of Transportation recently announced that $741 million would be allocated to municipalities for the construction and maintenance of municipal roads. This is a decrease of approximately $20 million over last year. Again, we feel that conflicting messages are coming from Queen's Park. The reduction of funds flowing to municipalities, which are attempting to achieve the same transportation goals as the province, would seem to be at odds with the Premier's announcement regarding investing in infrastructure under the capital investment plan.

I want to take a moment to speak on the Ontario Good Roads Association's position on the issue of disentanglement. As you know, the major provincial-municipal initiative during the past several months has been the negotiation of phase 1 of disentanglement. Under the proposed phase 1 of the disentanglement agreement, approximately 2,100 kilometres of provincial highways will be transferred to upper-tier municipalities in southern Ontario. The dollar savings for the province from this transfer is estimated at $40 million, which will be deducted from the funds allocated by the Treasurer to the Ministry of Transportation.

The Ontario Good Roads Association believes it is imperative that the allocation of funds to the Ministry of Transportation of Ontario not be further reduced following implementation of phase 1 of disentanglement. Investment in and maintenance of both provincial and municipal roads infrastructure must remain a priority in the allocation of funds by the provincial Treasurer.

While the Ontario Good Roads Association supports the overall intent of disentanglement, that support is contingent on fiscal neutrality for each municipality. The only transportation component in the proposed disentanglement deal is the transfer of provincial highways to upper-tier municipalities. Possibly the most important advantage of the proposed deal is that local spending on roads should be more stable and not subject to great fluctuations due to changes in welfare spending, which are mandated through provincial policies and not currently subject to local control.


However, the information that has been published showing the financial impacts on municipalities directly attributable to the transfer of highways excludes reference to several issues as yet unresolved. These include, among others, capital funding arrangements for infrastructure -- for example, bridges -- funding for connecting links created by the transfer of the highways, and special arrangements for townships which are not currently part of a county road system, but through which the highways to be transferred run. The Ontario Good Roads Association has recommended to the standing committee that these concerns be reviewed and the fiscal implications resolved, and that municipalities impacted by the issues receive appropriate credits to ensure fiscal neutrality.

I want to take a moment to address in greater detail one of the recent initiatives announced by the government. The Ontario Good Roads Association endorses the introduction of toll roads. The association agrees with the government and other groups that accept the fact that tolls are a realistic alternative and an innovative means of raising capital and establishing partnerships with the private sector.

The Ontario Good Roads Association's support is, however, conditional on many of the conditions already identified in the provincial policy. Only new roads should be considered for funding by the use of tolls. There must exist an alternative route for motorists to use that would not require the payment of tolls. All money collected must be dedicated for expenditures on the capital and administrative costs of that roadway. When the capital costs of the road are paid off, the tolls must be removed.

The introduction of tolls must not be used by the government as a reason to reduce the present funds spent on roads. Dedicated funding for roads is a long-standing position of the Ontario Good Roads Association and we support tolls on this basis. The Ontario Good Roads Association also maintains that a dedicated fuel tax is a practical and palatable way of funding road projects.

The Ontario Good Roads Association has also discussed the potential for toll roads at the municipal level. The association believes that if there is a major congestion problem on an existing municipal artery, a cost-benefit analysis might justify the construction of a new roadway. Therefore, the need for and possibility of municipal toll roads cannot be completely ignored. When the provincial government passes legislation to create provincial toll roads, the legislation should be permissive enough to allow municipalities to implement this and any other new funding systems for municipal roads.

As I mentioned earlier, municipalities are experiencing the same frustrations in attempting to maintain services with declining revenues, but many municipalities have met the challenge with creative alternatives to traditional operations. There are increasing numbers of examples of municipalities working together and with MTO to reduce costs and maintain municipal road services. Joint purchasing and tendering, equipment sharing and coordinated staff training are becoming integrated in municipal operations and we will see more in the months ahead. I mention these examples to show that municipalities are not relying totally on the provincial government to help them in tough times, but are identifying and initiating innovative and creative ways to cope with new fiscal realities.

I would also request that the province continue in its efforts to announce its annual transfer payments to municipalities as early as possible. Municipalities are especially dependent on timely announcements of municipal road transfers in order to plan and undertake construction and maintenance projects each year.

We want to thank you for allowing us to speak to you this afternoon. I hope our comments will be useful and your deliberations fruitful. We wish you well.

The Acting Chair: Thank you, Mr Silgailis. We have five minutes for caucus. First, Mr Brown.

Mr Michael A. Brown (Algoma-Manitoulin): As you might realize, a northern member in a largely rural constituency hears probably more about roads than any other issue, and certainly from my friends in municipal government about roads and funding.

When I was listening to your brief, I was impressed by the numbers going down in terms of expenditures -- I think $20 million less this year. Is that correct?

Mr Silgailis: That's correct.

Mr Brown: To be fair to the government, I think one of the questions we have to ask in this climate is, what kind of economies are you finding? We have a market that is relatively soft in the construction field these days. Prices are better. Are you getting more bang for your buck? That's what I would consider to be a fair question.

Mr Silgailis: This was one of the arguments advanced by the Ministry of Transportation, that tender prices generally are coming in less so that maybe we will achieve the same amount with the reduction. I don't know whether that is the fact everywhere.

The fact is that we have taken such big hits in the past. In my own municipality, I had to come in with a budget of minus 11% in the works department in order to bail out welfare. We're falling way behind in our infrastructure. We spent beyond the subsidy level in the past, but now we cannot raise the dollars to do that.

Mr Brown: On that topic, I noticed your concern with the disentanglement process. I think you're reflecting the views of municipalities, certainly those I represent. They're very concerned that this may be just a downloading exercise, and they're worried about what may happen in the years to come, that in actual fact they may continue to take the hit in terms of paying more money for roads and the maintenance thereof.

Have you received any assurance from the Minister of Transportation or the Minister of Municipal Affairs that this won't be the case, that this is in fact a one-time situation and that things will go on from here as what one might call normal?

Mr Silgailis: We have no commitment for the future. This is the deal that's been put in place for this particular situation.

Mr Brown: One of the government members will probably want to give you that assurance when it becomes their turn to speak. Mr Sterling agrees.

I was interested in your comments about toll roads, particularly when you got to talking about toll roads for municipalities. I was having a little difficulty trying to envision what that may be in a municipality, so maybe you could help me with that, with an example perhaps.

Mr Silgailis: Maybe Mr Wiseman could relate to a situation. We're building a major bridge in a region of Durham, and it's a possibility that a toll may work in that situation. We're not suggesting it at this stage, but it's a principle that we are sort of applauding.

We're saying that the way the funding is coming now, it's just impossible to get some of the major infrastructure put in place. So there's possibly a mechanism, if partnerships can be developed with private enterprise or whatever. If tolls are one method of maybe collecting the funds and paying back the original investors, we applaud that principle.

Mr Brown: The other thing I thought was important in your brief was that you indicated that there was a real need for governments to indicate at least three years in advance what the funding for roads would be. When you're planning your maintenance and planning new construction of roads, certainly you have a long look down the road -- that's kind of a pun -- to see how you're going to do it and the most cost-effective ways. It seems to me that without that kind of commitment, you increasingly have a difficult budgetary process, given, as you said, the pressures on the municipalities to come up with money for other programs.

Mr Silgailis: That is definitely the case. We live in a complex world. It's impossible now to launch anything in one year, with all the environmental concerns etc. Three years is the minimum lead time.


Mr Sterling: Thanks very much for coming in front of us. I think you've put your position forward clearly with regard to disentanglement and toll roads. I want to tell you that I do not like the introduction of toll roads, not without a coincident reduction in the gasoline tax. I think that people in our society in Ontario are perhaps somewhat attracted to this notion because they've seen it in the United States, but when you compare gasoline taxes, in some of the northern states in particular, with our gasoline taxes, we outstrip them either two to one or three to one in terms of those gasoline taxes.

I think toll roads are attractive to me in terms of saying we want to attract our tourist industry, but we want to replace gasoline taxes with toll roads. I don't think that we should let governments off the hook. I'm not only saying the NDP government or the Liberal government; I'm talking away back into the Conservative government when the amounts expended on the resource side of government -- and I consider you on the resource side of government -- started to decrease as a total amount of the budget, and that squeezing has continued and continued.

But the big problem I find with groups such as yours is that the resolution to your problem doesn't come from asking the government to reallocate resources. It comes from saying, "Get more money out of the taxpayer," and this is a method of getting that money. That's the big problem we have, in my view, in the global sense of it. I understand your attraction to it because you've not been done well by by any of the governments over a long period of time, and I think this is a last straw kind of plea in order to get decent money into your area. I understand, as a civil engineer, the need to maintain roads because of the huge costs once you let a road go downhill and you don't take on the maintenance of that road within a reasonable time.

The question I'd really like to go to, however, is within your own municipal areas. I'm intrigued in the United States, where state governments in particular have found alternatives and county governments have found alternatives, with regard to how they provide services to the public. What they've done is they have said, "Our job is to maintain the roads. Our job is to provide the roads. Our job is to clean the roads when the snow comes. We don't really care whether the public sector does that or the private sector does that," and they are contracting out large chunks of maintenance work. In terms of the construction area, we already contract that out.

Are there many municipalities in Ontario looking at that option or doing that option now? I mean, it just seems ludicrous to the public, I must say, that you have people sitting around in a township garage or a county garage or a regional garage doing nothing all day because there isn't any snow that day.

Mr Silgailis: To respond to your question, contracting services has been a very common practice for many, many years, and is probably becoming more and more common. As we pointed out, some of the smaller municipalities are pooling resources now and also looking at more efficient ways of accomplishing this thing, and maybe some of my colleagues want to comment. Len is from Metropolitan Toronto, and I believe he said it was a very common practice in Toronto.

Mr Rach: In Metropolitan Toronto, we have contracted out all of our electrical services for the traffic signal system for years and we do considerable contracting with respect to our maintenance activities. In our winter maintenance, all our salting and plowing is contracted out at the present time as well as a good portion of our grass cutting in the summer. So, yes, we're always looking at different ways of cutting the cloth, so to speak, and contracting out is always at the top of the list in looking at alternatives.

Mr Sterling: Does anybody compare costs from municipality to municipality as to how much it is costing to keep a certain kind of road maintained in your municipality versus the other? I guess I'm concerned about how a taxpayer knows whether municipality A is doing as good a job or a worse job than municipality B in keeping its roads in shape. Are any comparisons made between you as to who's doing the best job for the least amount of bucks?

Mr Silgailis: Yes, to answer a question, it is being done and of course we are tied in with the Ministry of Transportation which provides subsidy, and the subsidy's provided on a needs basis. In order to work the formula you have to look at the miles of roads and the cost of equipment and labour in that particular district.

At the Ontario Good Roads Association we are very much promoting exchange of information. We have a planning and productivity program where we publish information and articles of comparison and we have a productivity manager who travels around the various municipalities and creates that type of a dialogue so that the municipalities stay in touch with that particular aspect.

Mr Perruzza: Just to get this cleared up, you're saying you're getting $20 million less per year now on roads than you got last year.

Mr Silgailis: That's correct. That was the announcement by the minister to the Ontario Good Roads Association.

Mr Perruzza: You're transportation commissioner for Durham, right?

Mr Silgailis: Yes.

Mr Perruzza: Do you not get any money from the Jobs Ontario Capital program for roads and bridges? Did you not get any money from the anti-recession package? These are funds of billions of dollars, right, and these moneys are being directed all over Ontario for major road repair and road construction.

Mr Silgailis: My understanding of Jobs Ontario, and this is what we said in our brief -- we are commending the government for having announced such an ambitious program, but this was also provincial highways. The municipalities did not receive any money, to my knowledge, under that program.

Mr Perruzza: One other question: You received no money under that program?

Mr Silgailis: No.

Mr Perruzza: Either the anti-recession, the $700 million, or the $2.1-billion Jobs Ontario Capital fund, which is mostly slated for roads, bridges, water services, sewers and that kind of thing -- you didn't get any money from that?

Mr Silgailis: For water and sewer --

Mr Perruzza: I mean, the fund was created for that, but roads is a huge component of that entire fund. Maybe my colleague from Durham can speak to that, if he has any statistics.

In this kind of climate and in the middle of a recession, do you not think it's wiser to invest moneys in major roads and roads that provide the infrastructural supports for business and that kind of activity rather than paving over a cul-de-sac because a councillor decides to drive by and the road's a little broken down and a couple of people in that cul-de-sac have helped him out in a campaign and they manoeuvre the political will to pave over that cul-de-sac?

Mr Silgailis: First of all, you've picked a very unfortunate example of cul-de-sacs, because we have some pretty major regional roads that are not cul-de-sacs that are suffering as a result of insufficient funding.

In response to your Jobs Ontario, I do have the announcement and it says that in total $900 million will be spent in 1993-94 on the construction and development of provincial highways; specifically provincial highways, not municipal roads. Basically, as I said in our brief, we are expressing concern that the funding on average is reduced by $20 million over last year.

Mr Perruzza: I find that really surprising. My colleague wants to ask a question.

The Chair: I'm sorry, Mr Wiseman.

Mr Wiseman: Oh, it's so fast.

The Chair: Your committee caucus member took all your time up.

Mr Silgailis: We'll talk in the corridor.

The Chair: You can ask the question in the hallway, Mr Wiseman.

I'd like to thank you for appearing before the committee today. I'm not trying to rush you off.



The Chair: The next group to come forward is the Association of Canadian Distillers. Would you come forward please. We're just waiting for the overhead to come. Can you start your presentation without the overhead or do you need it at the very beginning?


Mr Tim Woods: Mr Chair, have you used projectors and overheads here before or am I breaking --

The Chair: Yes, as long as we've got all the equipment here, that's all. Sometimes some of the presenters will bring their own, so we never know what's happening ahead of time.

Mr Woods: You never know what's going to happen. Perhaps while we're getting the equipment, I could at least introduce our delegation.

My name is Tim Woods and I'm the Ontario director of the Association of Canadian Distillers. John Ellis is the economic director for our association. Guy Paquet is a vice-president with Seagram Canada, Ian Cray is from Gilbey Canada and Bob Duddy is from Hiram Walker. Also with me today are some colleagues back here. Could you just introduce yourselves here? Fred Lang, just put your hand up there, and Brian Kirkwood.

Mr Steve Poirier: Steve Poirier from Bacardi.

Mr Peter Chubb: Peter Chubb from Corby Distillers.

Mr Woods: We have about another 25 outside.

The Chair: You've covered the whole province then?

Mr Woods: That's right, every one of our industry workers. We're very pleased to be here today and very pleased to participate in this forum. The association represents about 95% of the Canadian distilled spirits industry, a majority of which is located here in Ontario. We're very concerned about the future viability of our industry, though, so we come at a very difficult time in the history of our industry. I wish to share with you some of the numbers and problems we face.

Primarily, taxation is the root of our 10-year decline. I know you will be happy to hear that we're not in fact here looking for some kind of special treatment or dispensation in terms of our competing industries or other industries in Ontario. What we are looking for, however, is a degree of fairness in terms of the way the government of Ontario deals with the taxation, distribution, sale and promotion of our products vis-à-vis our competitors in the wine and beer industry.

First of all, I want to give you, in this brief introduction before questions, some sense of the scope, the size of our industry. Hopefully, some of this material or information will be familiar to you, but I wouldn't be surprised if some of it is a little bit of a shock, or at least a surprise, in terms of the scope.

The total retail value of beverage alcohol products sold, and by that I include beer, wine and spirits, in Ontario is about $11 billion. That was in the year 1991. Distilled spirits account for about 30.6% of this, or $3.4 billion. Here in Ontario the total retail sales value of beverage alcohol was $4.1 billion. That's $11 billion nationally and $4 billion here in Ontario. Of this, the spirits industry accounts for 32% or $1.3 billion in terms of sales. There's that chart there.

Despite the significant share of the market that spirits have in Ontario, our manufacturers actually receive $263 million, or 6.35% of the provincial retail sales value of all beverage alcohol products sold in the province. This is less than the value received by the wine producers and significantly less than the revenue received by the brewers.

The distilled spirits industry is a major source of revenue for both the federal and provincial governments, and obviously you must be greatly concerned with the supply and distribution of revenue. Together, the beverage alcohol sector generates about $2.5 billion in net revenue in taxes and markups just from the sale of spirits; domestic spirits made here in Canada generated $2.5 billion, of which the government of Ontario, in the most recent figure, received some $763 million. That represents, just to flashback quickly, about $500 million more than the spirit manufacturers themselves received from the sale of the products.

In terms of employment, the industry provides direct employment for some 4,300 Canadians, of which 2,200 are employed here in Ontario in plants across southern and central Ontario. If you take into consideration indirect employment of another 5,300, some 4,000 of those jobs are also located here in Ontario. Of course, in addition to that there are some 13,000 people who are employed nationally by the various liquor jurisdictions. I think there are about 3,500 current full-time jobs at the LCBO here in Ontario.

The industry makes a significant economic impact on the province of Ontario, and the upstream economic impact of the distilled spirits industry in terms of output and employment generated in all the industries supplying our industry is estimated to be some $380 million. As you can see up on the chart there, this is the direct economic activity here in Ontario: $380 million, $35 million of which is in agricultural inputs. We have $105 million in packaging; $33 million in distribution; $125 million directly in wages; taxes paid to municipalities and such. The "Other" comprises such things as advertising. So that's $380 million of direct economic activity, and any kind of multiplier -- or even the most unreasonable would be one, so you'd be looking at $800 million worth of economic activity. If you combine that with the $760-million-odd in tax revenue, you're looking at Ontario with about $1.5 billion worth of economic activity generated by just the sale of our industry's products here in Ontario.

I hope this number will come as a bit of surprise, at least to some of you, because it's almost a hidden secret, and that is the value of our exports. There are some $487 million in exports by the Canadian spirits industry, primarily to the United States, generated on an annual basis, and most of those exports, about 52%, were exported out of Ontario, or 52% of our total production and 65% of the exports. One of my favourite statistics in this area is that 12% of the American market for spirits is made up of sales of Canadian whisky. If you think about that, we have 12% of their spirits market in the United States. Another fact that comes to mind in terms of relative terms: Canadian beer has a fraction, or 5%, of the American market for beer. In terms of the top 25 brands of spirits that are sold in the United States, brands that you would have heard of, I'm sure, five of those top-25-selling brands of spirits in the United States were brands of Canadian whisky. Even more remarkable perhaps is that there is not a single brand of Scotch whisky in that top 25. So Canadian whisky, largely made here in Ontario, has a 12% share of that market; five of the top 25 brands are brands of Canadian whisky competing with rum and vodka and so on, and we have some 12% of the entire market, compared with a much smaller fraction for Scotch whisky, which we are all more familiar with typically as an export product.


Taxation of all beverage alcohol is unfortunately not based on its primary ingredient, ethyl alcohol. I want to note that in terms of a standard serving, which historically has represented 1.5 ounces of spirits in a mixed drink, a 12-ounce bottle of beer or five ounces of wine -- I hate to use the old-fashioned measures, but I'm going to be 40 this year; I can't really get the hang of metric yet -- they contain the same amount of alcohol. But these products are not taxed based on that quantity, even though that would be the argument. If you were asked as politicians to explain why it is that alcohol is taxed, you'd say, "Well, these are special products," and so on.

This table up on the chart now condenses all of the gobbledegook in terms of federal taxation and puts it down to taxation in terms of litres of absolute alcohol. If you took out all the liquid and left strictly the alcohol, what would the rate of taxation be? This is what's looked at in Europe and around the world in terms of measuring how the system is taxed.

As you can see up there, the federal government has a system that has almost double the rate of taxation on alcohol and spirits versus that going into beer and about two-and-a-half times the ratio in terms of wine. That always has a tremendous impact on price and, as you may know, taxation represents about 83% of the overall retail price. So in the LCBO, when you buy a bottle of Canadian whisky, doing your patriotic duty, some 83% of that price is taken up by taxation from either federal or provincial levels of government.

The province of Ontario also applies a number of taxes, three additional kinds of taxes on beverage alcohol: One is an ad valorem markup which varies according to the type and the source of the product; a flat levy which is, if you will, an environmental levy charged on each container sold; and of course the retail sales tax which is 12% on the basic retail price added on at the LCBO, or actually only 10% of it's sold through a licensee, a bar or a tavern.

So the table below demonstrates how the province's markups on beer, wine and spirits work out. You can see that when the LCBO receives these products it has its own yardstick which it applies and the markup on spirits is some 131% to about 138%; beer, it's about 21%; and wine, it's something in the neighbourhood of 34%. This is for Ontario wine as opposed to, say, Ontario spirits.

If you look at the two categories of coolers, spirit-based coolers and wine-based coolers have 5% alcohol by volume. To the consumer, they are identical products. When they go into the LCBO they are put in the same place in the stores. They contain the same per cent alcohol. They're manufactured by people living in the same province. Almost without exception they are manufactured here in Ontario with Ontario agricultural products. Men and women working in one plant might be just a mile down the road from men and women working in another plant where they make wine-based spirit coolers. However, the taxation is significantly different, with a markup of 61% versus 47% even though the distribution channels are identical. So it is extraordinarily without justification or without any rationale that we're aware of that could justify that.

So taxation on markups by the federal and provincial governments translates into about 83% of the retail value of distilled spirits, leaving about 17% for producers. By way of contrast, about 45% is left over to Ontario beer producers for the sale of their product and 39% of the retail sales value of Ontario wines goes to the wine producers.

Once again, to give you a bit of perspective, there really is no other product in Canada that is so highly taxed as spirits. In fairness, if you asked the typical consumer what the most heavily taxed product in the marketplace would be, I would imagine many of you would put hands up for tobacco, when in fact at this point none of tobacco, gasoline, beer nor wine compares to the markup rates on spirits.

Now, despite the relatively low contribution made by wine producers to the Ontario revenue situation, the Ontario government has put in place a number of wide-ranging support initiatives for vendors. These have included, over the past number of years: guaranteed listings, which means that the vintner would show up and say, "I have a new brand of Ontario wine," and then it gets guaranteed immediate access to the marketplace; special display opportunities within the LCBO; preferential markups, which of course became the subject of a GATT controversy; within the last 10 years, funds were taken by the Ontario government from general revenue for television advertising campaigns promoting Ontario wines; and there have been moneys made available for farmers supplying the industry and also capital input support for the companies.

I note that our industry has not objected to these support measures. We understood why the domestic industry was being assisted, and in fact we're not here today to ask for any of those comparable support initiatives. However, the ACD believes that the current taxation structure should be amended to make it more efficient and more equitable. We strongly believe that a fair sales tax system should treat competitors in a marketplace equitably without favouring particular firms or products.

The impact of this unfair burden on our industry has been profound. While spirit sales have declined considerably since 1981, the retail price of spirits has increased markedly during the same period. The decline in spirit sales is mostly attributable to increases in the rate of tax on our industry's products, and the effect this has had on the retail price for consumers has been dramatic.

Spirits are relatively price-elastic. Therefore, each increase in the price from taxes and the resulting increase to the consumer is accompanied by a corresponding decline in sales. If governments continue to increase taxes on spirits, there is growing evidence to suggest that these revenues will continue to decline. The decline in spirit sales has had such a serious negative impact on our industry that we've seen a dramatic decline in the number of manufacturing plants here in Ontario. Back in 1980, there were 14 distilleries in operation. Since that time, seven have closed. As a result of those plant closures, we've had a loss in direct employment of about 32% from 1980 to 1990. That translates into about a thousand jobs.

Unfortunately, we are expecting this trend to continue, through further rationalization and takeovers, unless something is done to recognize the plight of the industry. I think you would all agree that it wasn't very long ago that we were reading about the concern of the LCBO employees' union when it was looking at a relatively small but significant number of job losses, in the magnitude of about 150, as I recall. We've lost about a thousand jobs over the last decade; seven plants which won't pop back up. In orders of magnitude, I think that tells a bit of a story.

Also important to note is that if you were to allow spirit sales to decline further, the demand for product in the LCBO would correspondingly decline. They sell some wine, but there are wine stores outside of the LCBO distribution system, and there of course is the Brewers Retail system. Spirit sales basically justify the 4,000 LCBO jobs that are in place today, so they're at risk as well.

Beyond just the impact of the taxation itself, we wish to bring to your attention the perception that's created among consumers by this discriminatory level of taxation, where spirits are taxed at a rate double or triple the rate of taxation on beer and wine. It, among other initiatives taken by both federal and provincial governments, conveys to the consumer the perception that there is inherently something more evil about spirit consumption than wine and beer. Although this isn't true, it clearly leaves an impression with consumers.

If we're talking about promises of wine and beer in the corner store, what about spirits? Obviously, the perception is that this would be less appropriate. The federal government has legislation that allows beer and wine to be advertised on TV, but not spirits.

I could go on and on with examples of messages delivered by government saying that we have a double standard here. Presumably, the consumer, the Canadian or the Ontarian, should take some direction from those double standards, notwithstanding the fact that organizations such as the Addiction Research Foundation and others would tell you that a drink is a drink and that they treat them equally in terms of public health policy issues.


The spirits sector, our industry, is not here today seeking any special treatment, but rather to ask you to reconsider the way in which these products are taxed and to plead for a more equitable taxation system. In 1990, our industry asked Canadians about the propriety of drinking, and some 91% of respondents said that they still believe there are occasions when it's acceptable to drink. We don't anticipate that tolerance for beverage alcohol in our society to change. Furthermore, some 75% of Canadians agreed that beer, wine and spirits should be taxed at the same rate, based on the amount of alcohol. I grant you that they may not have been totally conversant with how that would translate into prices and the mechanics of it, but conceptually, the point is that people on the street would argue that if you're going to tax alcohol products, the fairness should be based on the amount of alcohol in each kind of product.

We recognize that the Ontario government is facing serious financial difficulties and that a solution can't be arrived at overnight. However, we would ask you, given the fact that ours is such an important exporting industry in the province, with high-paid, organized jobs, commanding a significant share of the American market and so on, to take a closer look at our industry and see what can be done to recognize the trend lines in our industry and to work with us to do something about them.

Now, one component of this work that needs to be done was undertaken by the tax policy branch of the Ministry of Treasury and Economics in 1991, which agreed to establish a working group to look at the situation facing our industry. They were joined by representatives of the Association of Canadian Distillers, the Ministry of Industry, Trade and Technology, the Ministry of Consumer and Commercial Relations and the Liquor Control Board of Ontario. Their task was to set out and look for means by which we could measure the relevance of the distilled spirits industry in Ontario, the impact of taxation, the future of the industry and, I suppose, the equivalent of looking for a way to give the industry a tuneup, if you compare it to an automobile industry.

The working group examined three alternatives as examples of variations to the current taxation system, all of which were designed to be more equitable but revenue-neutral to the government of Ontario. I'm going to sum up these alternatives by notion.

The first is an ad valorem rate. Such a system would be simpler and would reduce retail prices of spirits and wines but would significantly increase the retail price of beer sold in the beer stores.

The second is a flat tax rate based on LLA, litres of absolute alcohol. This system would have a price impact similar to the simple ad valorem rate, but the impact on beer would be less severe.

The third is a combined single flat rate per LAA and ad valorem rates for domestic and imported products. Under this alternative, the retail price of spirits and wines would decrease but the retail price of beer would increase marginally.

The ACD is seeking a more efficient and equitable taxation system, and we would urge the government to consider these three points:

(1)That the Ontario government announce in its next budget a commitment to the principle of fairness and equality in the taxation of beverage alcohol products.

(2)That the government examine closely the alternatives identified by this task force.

(3)That the government continue to work with the ACD to find other ways to enhance the viability of our industry.

Our industry has made an important contribution to the province of Ontario; however, if we are to remain viable -- indeed, even survive as an industry in this province -- steps need to be taken and attention needs to be paid. Our industry is committed to working with you and with the government at all levels to find a more level playing field that will ensure our survival.

Thank you very much for the opportunity. You're obviously welcome to ask questions.

The Chair: What does your emblem stand for? I've been trying to figure it out.

Mr Woods: That's a glass. Beyond that, I'm afraid I'm not enough of a psychologist to tell you what else is in there. I know in the old days we'd be looking --

The Chair: It looks like water.

Mr Wiseman: It's wine from Niagara.

The Chair: Mr Sterling, you've got two minutes.

Mr Sterling: It doesn't leave me much time. One of the things that I don't think a lot of Canadians and Ontarians understand is that, of the top three distilleries in the world, we are blessed with having at least two in Canada: Seagram in Montreal and Hiram Walker in Windsor. People don't understand how much of the world market we have cornered in Canada and the support that perhaps governments should give back in recognition of having that luxury.

I think we're a long way from a level playing field, and I agree with some of your arguments. There are two factors I'd perhaps like to put into the three solutions you have mentioned in the summary. One is that handling or distribution costs must be greater for wine and beer because of the bulk of the product. Can you give me some idea of what that factor might be in terms of the total cost of the product?

Second, from my incomplete knowledge of the ratios in the United States, in terms of their taxation, how would the ratios on your LAA be in the United States? It seems to me that they must have an inequitable taxation scheme as well, if I compare the price of beer in the United States to the price of spirits there also. If we're going to be competitive in our taxation structure in Ontario, we can't be totally devoid of what's happening in the surrounding area, and the United States is of most importance to us.

Mr Woods: The relative levels of taxation in the US are considerably lower to begin with --

Mr Sterling: I know that.

Mr Woods: -- but they are relatively closer as well. Among our industry, which is international, our environment would be considered particularly extreme in terms of the ratio of taxation one to the other. It does vary from state to state as well. There are provincial and state differences, but Canada would be known internationally as a place of particularly high levels of taxation on beverage alcohol, period. Also, the ratio of discrimination would be relatively high here despite the fact that we're a spirit-exporting nation as opposed to, say, a wine-manufacturing and wine-exporting nation.

I'll have to ask a colleague if we know the first question about the distribution costs to the LCBO.

Mr Ian S. Cray: The distribution cost for the LCBO of distribution to the LCBO central warehouses is not covered within the taxation structure within the province. Our distribution costs are included for warehouse movement to store, and on that basis, the analysis would suggest that the weight of containers is not a significant factor in affecting distribution costs per case. On most occasions there are small deliveries made, and weight is not an inhibitor to the costs of distribution to the store.

Mr Sterling: Could I just say --

The Chair: We're way over time, Mr Sterling. Mr Dadamo.

Mr George Dadamo (Windsor-Sandwich): Thank you for the two minutes.

The area I represent in this Legislature takes in the Ambassador Bridge, and feet away is the tunnel, so we're into an endless mode of talking about cross-border shopping all the time. In the last year, year and a half, we've talked to various groups about how they're affected on cross-border shoppingon whatever it is, whether liquids, foods etc. What I'd like to know is how it has affected your industry. I spoke to somebody last night whom I hadn't seen since high school; he had 19 years with Hiram Walker and just got let go about eight months ago.

The Chair: George, could you get to the question, please?

Mr Dadamo: I'm getting to the point. Whether they're smuggling the booze over, buying it over there, how is it affecting the industry?

Mr Woods: I think the LCBO has used an estimate that 25% of demand in Ontario is being met by purchases outside of Ontario.

Mr Kwinter: Thank you for your presentation. I'm very familiar with the arguments. I think the problem you have, and I don't have the solution, is one of both politics and perception. There's no relativity to the fact that 83% of your retail cost goes to taxes. When the Treasurer looks at revenue sources, he looks at spirit alcohol as being one that is an easy hit, because the only people who are going to complain are the distillers. That is one of the problems you have.

For whatever reason, there's a perception that beer is the working man's drink, wine is the drink of the beautiful people, and whisky is the drink of drunks. If you sat down and drank a bottle of wine, no one would comment. If you finished off a bottle of scotch, everybody would be talking about your doing it. So I think you have a perception problem. As I say, I don't support what I've just said about the perception, but it's there. It's something you have to deal with. I've seen some of your promotions where alcohol is alcohol is alcohol, but somehow or other, the message isn't getting through.

I know I was the minister who was trying to bring beer and wine to the corner store, and the minute you talked spirits, there was just no way. Beer and wine maybe, but spirits, no. How do you address that? How are you, as an industry, addressing that?


Mr Woods: My operative answer to you is that I agree with the concern you raise. You say, "You have a problem," and you're right. We have a very serious problem. Before we came down here today, I asked to look for one more number. Heaven knows, we have enough numbers in this presentation and brief to fill a boat, but the question that we asked was, how much money has the government of Ontario lost in revenue as a result of the decline in spirit sales over the last 10 years? The number is $370 million. I don't know how many people have been here today looking for some assistance from this government, but I suspect you could have helped out an awful lot of them if you had $370 million in your pocket left over from sales of spirits.

We've lost seven plants. We've lost a thousand jobs. The government of Ontario has lost $370 million. We're in it together. We take home $263 million from the sale of our products in Ontario. You take home $760 million. So we're in it together.

We may not have done the job that needs to be done to try to change that perception. I think you're right. Let's face it, we are Ontario; we're not the world. We're competing with perceptions that are there across the country and around the continent.

However, one thing that's different here in Ontario than in other parts of the world is that we are a net exporter. We're an export industry based here in Ontario. If you said, "Who in France is willing to stand up and defend the interests of the French wine industry?" you would have 50 million French men and women standing on their feet saying, "You bet I am." If you went to Germany and said, "Are you prepared to defend the export of beer from your country?" you bet they'd be on their feet. Now, if you're in Prince Edward Island, you might make a case to say, "Tax ain't the way," whatever is politically expedient, but here in Ontario it's our industry, our jobs, our exports.

Mr Kwinter: Just one quick question: There's also a problem with drinking patterns changing, like going away from the brown goods to the white goods. How has that affected you?

Mr Woods: These trend lines are difficult to read. You were saying from brown goods to white goods, and of course we make a brown good, a whisky. Certainly, the erosion in sales in Canada has been greater for Canadian whisky than it has for white goods. However, in the United States, our exports are still doing relatively well compared to, say, Scotch or bourbon.

There are some trends. We have an aging population. The aging population means that as people grow older, they tend to drink in more moderate ways. Historically, that's meant they often move from beer to wine and spirits. What it may mean in terms of public perception, in terms of a change, is that because there is a more moderate environment for beverage alcohol, the trends and abuse of alcohol are all significantly down, as you would know as a former minister. Trend lines in terms of impaired driving and other indices of alcohol abuse have been going down dramatically, in part because we have an aging population and therefore it takes on a more temperate tone. That should help alleviate the political problem of saying, "We have an export industry here that we need to do something about."

I believe, and I'm sure the numbers will show, that people are less concerned about the levels of abuse. Even though intuitively they would cite spirits as a problem, if you said, "What about underage drinking? Which beverage alcohol product is most associated with beverage alcohol abuse among young people?" they'd say, "That would be beer." If you went to the Ontario Provincial Police and said, "Which beverage is most involved in impaired driving?" they would tell you their surveys show seven out of 10 impaired drivers were drinking beer.

Even though those two issues would be the number one and two issues in terms of, "I'm concerned about abuse of alcohol." "Be more specific." "Underage drinking and impaired driving," would be their answer. Those are more associated with beer consumption, but overall the perception is that spirits are somehow more harmful. There's a lag there.

We're not in the public relations business, obviously, so maybe we could use some advice on how to overcome that.

The Chair: We're going to have to wrap up. We've gone over a little bit. I don't know if Mr Kwinter could take that high octane and drink a whole bottle compared to a bottle of beer. I've got to try him on that one. Thanks for coming before this committee today.


The Chair: The next group to come forward is the Ontario Convenience Stores Association. Please take a seat. We have until 4 o'clock. I'd like to welcome you to the standing committee on finance and economic affairs. If you don't mind introducing yourself for the purposes of Hansard, you may begin.

Mr Russ Egerdie: Good afternoon, everyone, my name is Russ Egerdie. I'm executive director of the Ontario Convenience Stores Association. With me is Geoffrey Pottow who is also a director of the association. We're here today to address you concerning an industry which is in very serious difficulty. We're talking about the corner store, the variety store, the milk store, the convenience store. You have been given a copy of our presentation. I hope you will have a little time later to read it. Right now, I would like to save time by verbally hitting the high spots of that presentation and acquainting you with major, salient features in it.

The C-store industry in Ontario: This is an industry, to repeat, in major difficulty. There are about 6,000 stores in Ontario and over 50,000 Ontario citizens derive their livelihood from those 6,000 stores.

Our particular part of it, the Ontario Convenience Stores Association, has 11 organizations that operate over 1,400 C-stores in the province. We provide employment for 13,000 Ontarians. We purchase over $500 million worth of products which we sell, all from Ontario wholesalers and distributors. We collect about $32 million of retail sales tax for the government and we pay over $12 million in municipal taxes.

The OCSA speaks not only on behalf of its own members, but over the years since 1980 we also have spoken on behalf of many of the independents who are unrepresented by any organization.

We come here today to discuss two problems. Our sector, the C-store sector, has been hurt badly by the wide-open Sunday shopping that started last June. That is complicated by the fact that in our communications with the government, government officials apparently feel this is not that important a matter.

Let's go back to the beginning a little bit. The C-store business was created many years ago by supplying essential consumer needs during the hours and on the days when other stores were not open; they were kept closed by government control. The industry was built by serving the small-quantity needs of consumers, Ontarians, in the evenings and on Sundays. The most important day for sales in our industry has been, over the years, Sunday.

As a result, the economics of our industry -- rent negotiations, equipment purchases, all of those things -- essentially have been based on or predicated on those Sunday economies.

What has happened? The business was quite profitable over the years, and in 1992, the latest year just ended, to the end of May, C-store sales were off by 1.6% from the prior year. This was the function of a tough economy and all the things that we're well aware of. On June 7, the Ontario government permitted wide-open Sunday shopping. We've surveyed all of our 1,400 stores, and over the period of the following four months, sales in our stores were reduced by a further 5.7%.

Because of the leverage in our business, we find that a loss of 5.7% in sales reduces the profit on the bottom line by about three quarters. Your sales go down that much and your profit goes down that much. This is a key factor and this is why we're here today, because this is relatively an intolerable situation right now. This is an industry that is in real, deep trouble.

Results to date in 1992, at the end of October: There were 200 of our 1,600 stores that closed and 1,950 jobs were lost, full-time and part-time. That's just in our group. Remember, we're only a quarter of the whole industry.

In the full year -- we're projecting now to next June 7 -- we feel that in our whole industry there will be lost revenues to the tune of $367 million. Those will be lost to the C-stores and gained by others. This is the critical factor now. We expect to lose 5,500 jobs over the one year ended next June.

I submit to you that if those 5,500 jobs were in an industrial environment in London or Kitchener-Waterloo or Peterborough or Ottawa, this meeting would be held with TV cameras, media and all sorts of people asking awfully direct questions. This is not happening because these are small stores; they're scattered all across the province and they represent workers who do not have a collective voice at this level. I'm here and Geoff is here to try to speak to that and to bring to your attention the importance of this group of people and the jobs they represent.


Over the past few months we've held meetings with the Treasurer's staff and with that of the Minister of Consumer and Commercial Relations. Results: The meetings were cordial and the comments were sympathetic and the results were nil.

What really happens here? We talk big numbers here, but let's get down to the basics. We've got someone operating and owning a convenience store on the corner. He's running along very successfully and then all of a sudden sales are reduced by 5.7%. He notices very quickly, in 30 or 60 days, that his profit is three quarters gone, and he says, "What am I going to do?" Well, the first thing he looks at is, "How do we increase sales?" and he works very hard to do that.

Then he looks at his costs, because costs have to be kept in line, and he says, "Which costs can I affect?" Well, you can't affect the rent, you can't affect your business licences and can't affect your heat, light and power. Those are all fixed, and you come down to it and you say, "The only meaningful number on the expense line is labour." So what does this operator do? He lays off one person and then two persons and then three persons and tries to make the thing come together economically in that fashion.

But what really happens? The store stays open but now we've got one, two or three people who have lost their jobs. That time has been made up by the owner-operator and perhaps his wife and his teenage kids working more hours, working 12 hours instead of eight or whatever it might be. Because they're not serving the customers properly, the customer service is falling off quite dramatically.

This operator has a business there. He's invested $75,000, $100,000 or $125,000 in that business, and up to that point he's been making a reasonable return to justify that investment. Now, all of a sudden, the profit goes like this. The business isn't worth that any more.

We now have now an individual who's in a jam. He's caught in a trap. He can't get out of the business, he can't hire enough people to do it well and he is there, stuck, trying to make the wheels go around and to work hard enough with few enough people to try to keep the thing equitable.

Here I think is part of the difficulty why the people we explain our plight to don't understand. They look and they say, knowingly or unknowingly, "That store is still open," and it's correct, but it's being opened by the direct efforts and the massive hours of the owners of the store to keep it open. It is open today. We tell you very seriously it's very doubtful if it will be open tomorrow. So the picture people see in looking at it and the open stores tells them one story, but it is truly a false picture, it doesn't tell the real story, and we're predicting that by the end of next June, 5,500 jobs will be lost in the convenience store industry in Ontario.

Solutions: What can be done? I've made a list of some things that might be considered. Some of them may look a little way out; some of them may be quite feasible. I raise them here now because we're desperate enough to raise all possibilities in the hope that some of them may work and that some of them may have the possibility of being enacted to save a meaningful industry and a lot of jobs.

First one, sales tax commission: Collectors of retail sales tax keep 5% of what they collect, to a maximum of $1,500. We collect about $32 million in the industry. We're proposing you change that from 5% of the tax collected to 10% and take off the cap of $1,500 a year.

Secondly, impose commercial rent control. Rent control isn't something we like to talk about, but we have a situation right now where landlords of commercial premises have high rents that were negotiated when things were much better a few years back, and there are falling mortgage interest rates, which are generating a real windfall for them. We're suggesting that perhaps we could have a sunset date for current leases. The landlord and C-store would have to renegotiate new terms and new leases based on current economics.

A third area is municipal licences, because our stores not only have to have the municipal retail licence to operate in that town or city, but in turn there's a victualling licence, there's a tobacco licence, and I'm not sure what Queen's Park's ability to control in this area is. It's quite possibly limited by the Municipal Act, but any assistance there would be meaningful. An example, a tobacco licence: Some municipalities have brought it in several years back at $50 a year. In one particular instance we're looking at $700 a year right now.

Another possibility that might be considered by the government, who put us into this situation by opening the stores on Sunday, would be a provincial income tax credit. That would be useful. It would be limited because the profit, of course, in the store has been reduced from this to this, but none the less a provincial income tax credit could help.

Another thing we could look at is the Ontario Lottery Corp commissions. The lottery corporation is very definitely an arm of the government and a generator of income for the benefit of all Ontarians. We help sell them. We are citizens of Ontario and we think perhaps we might be able to use some of that. We're suggesting they could consider an increase in the commission remuneration to the stores from 5% to an average of 8%.

The right to sell beer and wine: The previous delegation -- that was brought up to some extent. It has been raised by other groups within our industry. We're just saying this should be considered, and there are in other jurisdictions effective licensing controls, stiff penalties, selling prices set at current prices for Brewers Retail or even higher.

This situation works well in Quebec and US jurisdictions and I would submit that it would generate jobs. If, for example, the sale of beer and wine through convenience stores was permitted, Brewers Retail could act not only as retailers but also as distributors to the stores. They would be staffing up in trucks, truck drivers and warehousemen. We think this would be additional employment in the province.

That alone could increase provincial income tax that would be paid by the improved profit in our stores by several millions of dollars. Again, it should be examined as one more area where assistance to a beleaguered industry is very desperately needed.

In conclusion, I hope the brevity of the presentation -- and I hope it has been considered brief -- does not understate the very serious situation we're confronted with. Our economy is in trouble and we look to you as a body to consider this and to review it with the Treasurer with compassion and hopefully a sense of urgency -- a high degree of urgency.

Regarding the remedies we've proposed, some of them you might be inclined to reject out of hand as being unreasonable. I suggest that difficult times require difficult measures and, with great respect, it's always easy to explain why something cannot be done. We're looking for someone to find a way that a change can be made and something is made to happen because, to repeat, we're looking at 5,500 jobs lost by the end of June in 12 months in our industry. If this were the steel industry, if this were a major industrial complex, it would be shouting it from the rooftops. I'm at this point looking for assistance from your group in helping the government to give us some assistance.

Fifty thousand Ontario citizens are employed by the C-store industry. They need your help and they need it now. They need action within the framework of the next provincial budget. I thank you for your attention. If you have any questions, I'd be very pleased to try to answer them.

Mr Paul R. Johnson (Prince Edward-Lennox-South Hastings): I was wondering if you could tell me if you know what the ratio is of your losses based on just the poor economy versus the Sunday shopping issue. It would depend on the area of the province you come from, I know, but certainly the poor economy must have impacted to some extent. You've indicated that since June 1992, the four months following that date, you noticed some changes, but that was also a particularly bad time in the economy.

Mr Egerdie: Yes. Last year from the first of the year through June, relating that time period to the same period in 1991, our sales were down 1.7%, in spite of all the efforts we could do to introduce new products and all that sort of thing. So from our point of view, the recession -- if you will, the tough situation in the marketplace is covered off by that 1.7%.

The 5.7% additional tacked on the top, that became effective almost immediately on June 7, we attribute totally to the effect of wide-open Sunday shopping.


Mr Johnson: Could you give me an explanation of how you come to that conclusion?

Mr Egerdie: We recognized early on that this was having a major effect with us. In some stores sales were off as much as 15%, really a major difference. So we got all of our members to poll all of their stores and report the sales results, in confidence, this year, last year, to a consultant who compiled

the results and told us the sad story that this is where the money has gone.

We're looking at a store this year, in the 12 months ended June 7, 1993, versus the same year a year ago, being down about $39,000 worth of sales, and with the tremendous leverage in our business, a good part of that would have fallen directly to the bottom line.

Mr Johnson: Part of my constituency, because of its tourist designation, has had wide-open Sunday shopping for a long time and the other part hasn't. I find it curious, to say the least, that those convenience stores on both sides complain that Sunday shopping had affected them when indeed at least a portion of the group had already been under that rule, if you will, and some of them actually didn't know that they were under that rule. I just mention that as something curious.

Is there a story about the proximity to the borders that convenience store operators care to share? Those stores that are closer to the borders of the United States, with regard to cross-border shopping, has it impacted any differently on them than it has for convenience stores that would be farther away from the borders?

Mr Egerdie: Certainly, there would be a difference there. We haven't split them out in any way as far as reporting the results, but earlier on, much earlier on, of course, your cities such as Niagara Falls and Sarnia and Windsor and Kingston were reporting major difficulties at the immediate border crossings: stories out of the Kingston area where a convenience store with a gas bar was selling two gallons of gas to an Ontario-licensed car to cross the bridge to do their shopping. I know there are horror stories in all of the retail industry like that.

The Chair: I've got to go on to Mr Brown here. I imagine on Manitoulin Island you have a store that sells liquor, beer, and you call that a convenience store, or a trading post? Okay, it's yours, Mr Brown.

Mr Brown: Thank you, Mr Chair, I think.

It strikes me as a little bit surprising that you come before us with this brief when your major problem is Sunday shopping, which is a bill that has not been presented to the Legislature since first reading. We haven't seen it; it hasn't been passed. We're told it's retroactive and yet it's subject to a free vote so it's very difficult to know how a Premier could know that under a free vote the legislation could pass. Anyway, I guess that's just kind of an aside that a poor oppositionist is trying to figure out.

We're told that the Sunday shopping initiative is such a job creator. Has the government in any seriousness looked at your proposals? You said you met with some cordiality in your sessions, but are you getting any signals at all that the government is willing to look at the plight of the workers who are in your particular --

Mr Egerdie: No. As I say, cordiality; certainly lack of anything concrete as far as suggestions or alternatives were concerned. Our follow-up contacts have gone unanswered and we are looking at a situation where we have to assume that the people concerned either do not understand the seriousness of it, ie, 5,500 jobs, or that this in their view does not constitute a serious problem.

Mr Brown: A large number of your employees would be young people working part-time, coming after school, earning money for their college or university education. Would they be among the first to go in this kind of situation?

Mr Egerdie: Yes. You raise a good point there because this is the retail industry, where jobs are very difficult to find, as you well know, and here are people, full-time and part-time, who will lose their jobs through cutbacks. The part-timers very frequently are students who are earning money to put themselves through school, that sort of thing, or it can be a spouse working part-time to help make the financial wheels go around at home, so it cuts across all segments. A problem here is that people losing these jobs will find it extremely difficult to find a job elsewhere, because the whole retail economy, if you will, is in tough straits right now.

Mr Brown: I raised the issue because I think one of the increasing concerns of Ontarians is the lack of opportunities for young people in our society to get a job anywhere. Often the first job is the experience they build on, because when they go to the next employer after you, the first thing he asks them is, "Do you have any experience?"

The Chair: Mr Kwinter, one quick one.

Mr Kwinter: I just wanted a clarification. In your presentation, where you are calling for beer and wine in the corner store, you are assuming that it would only be in the corner store and not in supermarkets. Is that correct?

Mr Egerdie: We have viewed it from the position of our own industry, if you will. I could not address that except to say that beer and wine in the convenience stores could be handled very efficaciously, very efficiently, very economically and be a great boon to the consumer.

The Chair: I've got to go on.

Mr Carr: Thank you very much, and thank you for your presentation. I had a situation in my own constituency office. I back on to a convenience store, and my office was broken into. They cut a big hole in the wall. I couldn't figure out why anybody would want to break into an MPP's office when we're there every day to come in. We've got all the government brochures that anybody would want. The reason was that they had cut through the wall to steal the cigarettes in the convenience store.

I got a call at 7:30 in the morning from the police officer and was rather surprised that this was taking place. Being a non-smoker, I guess I didn't realize the extent of it. They said, "Oh, no, a tremendous amount of this goes on, and we know of some of the tragedies that have come along." They said one of the big reasons now, of course, is that we increase taxes on the so-called sins, cigarettes, and that we've driven an underground market.

Do you have any idea what the losses would be in terms of sales of cigarettes and taxation as a result of it now being driven underground, either through smuggling from the US or as a result of buying the illegal activity? Do you have any idea?

Dr Geoffrey Pottow: I think Imperial Tobacco came out with a study on that, and I think it gave a figure that about 10% of the market is underground economy, which is basically smuggling. I also would like to point out your point that in the brief we mention about getting additional compensation for selling lottery tickets. A lottery ticket is another cash thing that thieves go after. In the compensation we get for carrying lottery tickets, we have to look after the losses we have in those. So there's a cost of doing business, of looking after that cash for the lottery commission. The amount of commission we get for it is relatively minimal.

Mr Carr: I believe a lot of your sales are the point-of-sale marketing, where somebody comes in for a pack of cigarettes and then picks up some chips and says, "Oh, now I need some milk," and then goes down the shelf. So if they're not coming in for the cigarettes because a lot of people are buying them on the illegal market and telling their friends, you really do not know the impact that would have. If it is as high as 10%, then we would be talking about a tremendous amount of lost revenue for your people in terms of total revenue. What do you suggest we do about that? Is there anything? If we just froze the tax on tobacco, would that work? How far would we need to go down before people would start getting back into buying them in legal situations? Do you have any idea at all?

Dr Pottow: I don't know.

Mr Carr: It's a difficult question, I know.

Dr Pottow: I think part of the problem is going to be corrected a bit by Clinton's attitude, where he is going to increase his taxes on the sale of cigarettes, because the main thing that we find with cross-border problems is the differential. But the problem you're referring to is the illicit trade and the fact that you've taken a commodity that was worth about $1.50 and is now worth $6 and turned it into a very marketable thing on the black market.

Mr Carr: I was totally amazed when they said that what they would have gotten just by reaching through my hole in the wall and pulling it off the shelves would have been about $10,000 and they would sell it for $5,000. That was just a small amount. I guess I hadn't realized how much cigarettes had gone up, although I know, having played hockey with some people in the Legislature a couple of Sundays ago, that there are a tremendous number of them who are quitting, and I suspect a lot of it's driven by the finances.

I want to go on to another --

The Chair: I'm sorry, Mr Carr. Four o'clock is here. Doesn't time go quickly when you're having fun. I'd like to thank you for coming before this committee today.

Mr Egerdie: Thank you.

The Chair: I want to take a two-minute recess just to stretch. Mr Brown hasn't been out of his chair for three hours, and I don't know whether he can walk.

The committee recessed at 1603 and resumed at 1605.


The Chair: We'll resume the pre-budget consultations. The next group we have before us is the Council of Ontario Construction Associations. I'd like to welcome you to the committee, and for the purposes of Hansard, would you mind identifying who you are and your position, please. You may begin.

Mr David W. Surplis: We are, as you said, from the Council of Ontario Construction Associations. My name is David Surplis; I'm president of that association. With me today is Bill Empey, who is a consultant at ARA Consultants but he's also a member of our tax and economic development committee as well.

The Chair: Mr Frame was not able to make it?

Mr Surplis: He wasn't able to make it. As a matter of fact, he's a new father, so we're all very happy for that.

We're a bit of a tag team here in a sense. I'm going to make a plea on behalf of our industry, more an impassioned than a reasoned plea, and Bill's here to provide the statistics, the facts, the reason. Just so you know, at the back of our presentation is a list of our members. We represent the ICI, the industrial, commercial, institutional engineering side of construction -- in other words, everything except housing, home builders; they have their own organization. We're responding to a request of the committee and a request of the Treasurer to give you some of our views.

We have been giving you our views for a number of years now and they seem to have fallen on deaf ears. I stress "seem to" because, of course, we try to be helpful throughout the piece. But the unemployment in construction is absolutely staggering. It's well over 30% -- you'll see in the graphics we provide, 30% and higher. In some of the sectors of construction it's over 50%. I just came from the office of a contractor who is down to four employees from over 80 in just the last 18 months, and that was just this afternoon.

I know you can see the effects of this recession on our industry because, as I challenged other committees here before, it's almost to the point where I will give you $1 or $10, whatever, for every construction crane you can cite to me that is in your riding. There just aren't any. There is no activity going on.

Another telling story I relate to people, MPPs, anybody caring to ask: They say "Wow, I got down to the Legislature in 20 minutes from the airport." I say, "Well, yes, you can thank the construction industry for that." They say: "Why? You mean they built the roads or something?" I say: "No. We're in such a sorry state that your trip in here was not impeded by concrete trucks, by plumbing and heating trucks, by electrical contractors and so on."

The unemployment is so drastic that there aren't any vehicles on the road, or so few that you can count them all on one hand.

We've said this over and over and we're frustrated by the growing gap between the stated priority for capital projects and the actual results.

We're here to plead for assurance that an adequate level of capital spending is undertaken in 1993 and 1994. We want the province to increase spending to the original target of $4.3 billion, and that was the borrowing target. We want it also to be the spending target consistent with the government's own plans. We're in a crisis mode, as I said before, and we're asking you to consider projects to urge upon the government -- to urge upon the Treasurer, the Premier, anybody -- those projects, those spending priorities, that will truly help save our industry.

As you'll see in a minute, the loss of our skilled workers, our skilled managers and owners, is nothing short of staggering.

We're very heartened actually by the report of the investment in infrastructure. We're glad people are beginning to look on that now as an investment because construction, which was Ontario's second-largest industry -- I'm really not sure where it would stand right now -- really needs a shot in the arm.

We already told you about the statistics in unemployment. The only thing positive in 1992 was hope. We had some hope, but the province's capital spending fell below the budgeted level yet again. To make matters worse, overall construction activity continued to decline and building activity, just to underscore what I said before, is down 34% from 1991, 21,000 workers left the industry, sliding into unemployment and welfare, and 696 firms went bankrupt.

The notion that the recession is over, I'd like to address that just for a second and you can read our comments about the vacancy rates and so on, but the notion that the recession is over is particularly hurtful to us. If you look at those vacancy rates in Metro Toronto and in Ottawa and virtually every other builtup area of Ontario, you will see such an oversupply of available space, especially commercial office space but also industrial and warehousing, all the rest of it. There's so much available that if the recovery started full-blast this afternoon, we in ICI construction wouldn't see very much of anything for three to four years; in other words, until that oversupply is used up. Not all of it, of course, because of different factors and so on, different tastes, but I do want to stress that even if the recovery was starting full-blast this afternoon we wouldn't see much, if anything, for years.

At the current rate of decline in the construction industry we are losing 2,500 workers every six weeks. If you contrast that or compare that to the government's position of trying to pare the civil service by 2,500 positions in two years, 2,500 every six weeks is a bit more of a commitment than 2,500 every two years. That just gives you an idea.

Another point we want to bring to your attention: We've often heard, in fact we heard just the other day, the Treasurer saying that he had to balance between capital spending and cuts to health care. He's not really talking about cuts to health care; he's talking about keeping health care static. We're talking about actual declines in construction and employment and we think there's a big difference between stasis and decline.

We're proposing a further round of fiscal restraint that would reduce operating spending by between $1 billion and $2 billion in the next two fiscal years. These cuts would reduce the operating deficit and the Minister of Finance could expand the plan borrowing on capital investment by the equivalent amount. As the government itself has noted, there's an important difference between borrowing for capital projects that create valuable new assets and borrowing for current spending.

I realize that some people had some differences with our notion about off-the-books investment and so on, thinking that it's flim-flam or smoke and mirrors or something like that. We, of course, argue that it isn't necessarily. If it's done properly and invested in the right areas, the multiplier effect in the construction industry is second only to agriculture, and we know that there would be an excellent return as well as saving a very valuable industry.

Fiscal planning should reflect the continuing recession in construction. Maximizing capital spending is our priority. Further cuts in operating expenditures are needed. Where tax measures are required -- and we'll talk a little bit about that in a minute -- we ask that the government carefully consider the impact on the construction businesses that will be the instruments of the province's public investment priorities.

I just want to mention briefly some recent statistics from the University of Toronto, the policy and economic analysis program. You know or you can see by our proposal here that the Conference Board has already registered a 25% decline in construction activity in Canada; a further erosion in 1992 -- overall, we expect it'll have reduced by 7.4% -- and the board forecasts another 1.2%. But the most recent projection from the University of Toronto anticipates that construction volumes will drop another 8.6% in 1993 and begin a very slow recovery in 1994. So non-housing construction, as I said so many times before, is really up against it.

We believe that more investment in construction isn't just an election tactic, it is not just strategic at a certain point in time, but it is necessary overall to preserve the industry as we know it.

We applaud the announcement about the three crown corporations, but I think that's about where we'll stop, because there has been so little fleshed out on that. We don't know -- I'm sure the members don't know any more than we do -- where they're actually going to go, when they're actually going to be in place, who's going to be guiding them, when they're actually going to be expending the capital that presumably they're going to be responsible for and so on.

COCA believes that more private sector involvement is required in the three capital corporations. One of the things we would like, and certainly have made representation to the Premier and others on, is private sector representation on the boards of directors of these three corporations. We think doing that in tandem with tax and other measures that support private investment would greatly enhance private confidence in Ontario and help stimulate investment.

To reiterate, we really have noticed that the government's announced spending targets have consistently been missed on the short side: The original $4.3-billion target announced in 1991 was never achieved; the lower $3.9-billion target in 1992 -- 93 is now reduced to $3.7 billion; and the 1992 budget projected that the province's direct capital funding would fall to $3.1 billion, with at least $800 million left to the crown corporations, about which, as I said, we have some concerns.

Given the delays in setting up the crown corporations and given the patterns of declining investment, I think you can see why we are worried. We've tried to be helpful. We've had many, many meetings with ministers and staff. One of the unfortunate things is that so many of our letters haven't been acknowledged and we don't understand exactly what is being told us. We're asking you, the committee, to help us understand the government's proposals and to urge it to do the kinds of things that would help the sewer and watermain corporation, for instance, and all the others.

Just a brief word on taxation and then I'd certainly like to get to questions and let Bill explain the charts and so on.

You've heard us before. The Council of Ontario Construction Associations has been consistently here at Queen's Park to urge the government not to implement ideologically based programs which scare away investors. We've said it so many times. We're not here to do political battle with the government. Whether you're for unions or against unions, investors tell us Bill 40 is dissuading them from coming to Ontario. As I say, no matter what you think about that, it's an irrefutable fact that investors are telling us they don't like Bill 40. Sure, there are other reasons for not coming to Ontario, and the government is correct in pointing to free trade. It has been dislocative in the initial stages, but obviously we would argue that there are going to be more jobs created than are dislocated in the beginning.


At any rate, we plead with the government not to go ahead with ideologically based taxes, because frankly we think they're insane. For instance, we know or I certainly know of socialists who are bitterly opposed to inheritances of any kind. They see them as undemocratic, unfair and so on and they would like to tax them out of existence. No matter what socialists believe about that, and they're free of course to believe anything they want about that, there are so many capitalists on the other side who say, "If you're going to tax all of my efforts out of existence for the sake of some ideological program, I'm not going to invest in Ontario."

Again, we're not here to argue philosophy; we're here to tell you that investors tell us they're not going to invest in a situation, in a jurisdiction like that. When that happens, we don't get any work, because we need investors to create the jobs, to create the projects that sponsor the jobs. So that's where we are.

Our recommendations, in a nutshell, are:

-- That the government initiate a further round of cuts to current operating expenses totalling between $1 billion and $2 billion. These savings should be introduced into the capital spending cycle.

-- That the government give the highest priority to interim pilot projects that will begin building in the critical 1993-94 period. We have offered, and offer again, to assist the government in identifying, planning and starting these projects. The emphasis is on getting buildings started immediately. -- That the government invite members of the construction industry to participate in a permanent advisory committee to provide private sector input into the capital spending priorities and to participate on the boards of directors of the three crown corporations.

-- That the government design any new corporate and payroll taxes with exemptions, rates and provisions that will protect the large number of financially vulnerable construction businesses that are absolutely necessary to supply the province's new infrastructure.

With that, I'll let it go. We certainly would like to get into questions and answers and, as I said, Mr Empey would be more than happy to talk about the graphics and the research that we've provided you.

Mr Kwinter: Thank you very much for your presentation. In your presentation you said that your sector of the construction industry usually lags behind the economic recovery, but it's also a precursor of economic recovery because these things don't happen in one day. What is your feeling about projects that are sort of on the books, or are they non-existent?

Mr Surplis: There are a number of projects on the books. As a matter of fact, just right here in Toronto there is Operation Jobstart, which is a Metro thing, and one of our member associations, the Toronto Construction Association, is involved. They've identified all kinds of projects just around Metro that could get going right away. In fact the government has acknowledged and put some money into the subway extensions and other things, and yes, that's appreciated, but there are more.

Mr Kwinter: You also said that if the boom was to start today, it would take you three or four years before you saw any results of it, and you're losing about 2,500 workers every six weeks, which is 23,500 a year. Do you anticipate that you will continue to lose those over the next two or three years?

Mr Surplis: I'm afraid so. That's why we're pleading for government to step in -- countercyclical policies -- to assist in that. Bill will give you a little more in a second on that. One of the worst things that's projected is that non-housing construction won't see the 1989 levels until 2005.

Mr Bill Empey: That was the University of Toronto projection that was provided, actually, to the ministry here. It showed that construction activity in Ontario, even with the fairly strong economic recovery, won't return to its previous level, the 1989 level, until the year 2005. That's the extent of the erosion of the construction industry that we're dealing with -- non-housing.

Mr Sterling: Thanks very much for coming to our committee. I have a great deal of concern about the construction industry. I know a lot of people who are involved in the construction industry and I can tell you that they're having a tough go. There just isn't anything to work on or anything to look forward to. One of my close friends is considering closing his business because there just isn't any work. He's been in business very successfully for 25 or 30 years.

I was skiing in Ellicottville on the weekend, as you can maybe see from the slight change in my complexion, and was talking to a developer there.

Mr Perruzza: You should be ashamed, taking money out of Ontario.

Mr Sterling: They've got the best skiing.

Mr Carr: Anthony goes across to buy his beer there. He spends more on beer than he does on skiing.

Mr Sterling: Anyway, I was talking to a small developer there, and he was talking about housing construction costs. He was getting something built in the United States in that area, I would presume -- well, I know -- to the same specifications as we would build here. You know, you'd need the same footings and that kind of thing basically, maybe a foot or two less, but not a significant difference. But they were building for about $51 a square foot -- $51, $52 -- and a pretty good building, a pretty nice building, good windows and good everything else in it. When you come up here, we're talking $80 to $100 a square foot, and even when you've taken into account the exchange or the difference in the dollar, you're still talking a significant difference in the product there.

Are we competitive buildingwise or in the building industry? I mean, building costs are part of the overall cost of doing business here, and if we're paying our trades too much or we're inefficient in how we carry this thing off, we're not going to be able to have the manufacturers or the other parts of the economy fit in. Are we competitive?

Mr Surplis: That's a very difficult question, because not only the comparisons to the United States versus here -- people are here for very different reasons, maybe costs or whatever it is -- are difficult to compare. What we're interested in, whether the wages are higher or lower or whatever, is, are we attracting investors? Are people coming here to build? We're saying no, they're not, whatever the combination of reasons.

Just to give you an example along those lines, Norm, there was a fellow the other day -- I was very intrigued to hear him; he was a lawyer here in Toronto -- talking about how he had a client up from the United States who wanted to invest in Ontario and he decided against it. We said: "Oh, Bill 40. Is that the reason?" We wanted to hear that it's Bill 40, and he said no. That was partly it. But you know why he eventually decided not to come to Ontario? He looked at the deficit of the Workers' Compensation Board and said: I'll have to buy ownership of a large part of that and I don't want to do that. I didn't incur that."

It's hard to separate out what it is that makes something competitive or not competitive. We know of costs well over $6,000, $7,000 per employee in Ontario before they lift a tool.

The Chair: Mr Wiseman.

Mr Wiseman: Yes. I'd like to talk just a little bit about --

The Chair: I wouldn't talk too long. You haven't got that much time.

Mr Wiseman: You let them ramble.

Alberta is suffering a major problem in the fact that a lot of its megaprojects are now completed and it has a lot of tradespeople out of work: steamfitters, pipefitters, tinbashers, concrete layers, structural steel moulders and so on. What I'm afraid of is that if all this money is injected into the economy in terms of all these projects and they all start now and they all terminate around the same time, we may be a little bit countercyclical in terms of what we're doing, but in the long run we will have developed another cycle, and that is the skilled tradespeople who will start to be laid off as these projects wind down and the money may or may not be there. Could you perhaps tell me how we can avoid that kind of a trap?

Mr Empey: The whole idea here is that there's going to be a long lag before private sector construction activity comes back. I mean, we're looking at three, four years. It's that immediate period, 1993 and 1994, where we're looking for the government's capital spending. The workers can move among regions in the province and across different kinds of jobs.

We want to get them working now on the infrastructure investment that the government has already indicated is a priority. We want them to meet their commitments in terms of spending money, get people to work now on the infrastructure that will create a climate that will bring in the private sector construction activity three or four years from now. What we're proposing will smooth the cycle out and keep these people employed over three, four, five years, well into the next cycle.

The Chair: Okay. Gentlemen, I'd like to thank you for appearing before the committee today.



The Chair: The next group is the Private Livestock Auction Market Operators of Ontario. Would you come forward, please?

I'd like to welcome you before the standing committee on finance and economics. We have until 5 o'clock. In your presentation, could you leave some time at the end for questions from the committee members? Mr Carr will start off for the third party when you're finished.

Mr Lindsay Barfoot: Thank you very much. My name is Lindsay Barfoot. I'm with Price Waterhouse, the agriculture and food consulting group, and I'm here representing the Ontario Livestock Auction Markets Association. Marie Forgrave is with me. She is currently the president of OLAMA, the livestock auction markets association, and also a principal in the Campbellford sales barn, which is one of the sponsoring auction markets for this brief.

The theme of this brief, obviously dealing with the public Ontario Stock Yards, is basically that the public stockyards are an opportunity, not a problem. I've followed this for several years, 10 at least, and the stockyards have been seen as a problem: What to do with them. The clients I'm representing here today are presenting this brief on the basis that there's an opportunity to make a right decision now.

One of the common denominators for the 12 private auction markets I'm representing is that they all believe in an efficient, competitive auction market system on a non-government-subsidized basis. I know that position has been made very clear in several presentations to the Ministry of Agriculture and Food, and I believe their position is well known, that they believe that and have been campaigning on that basis for some time. Notwithstanding their belief that the way to provide this service to the livestock industry is on a non-subsidized basis, this proposal does provide for and propose some transitional subsidization to the two principal commission firms that operate at the stockyards.

The brief recognizes that there are several stakeholders in the Ontario Stock Yards question. I'm citing four of them: The government obviously is a stakeholder, livestock producers in the industry are stakeholders, the two commission firms that still operate at the stockyards are stakeholders, as are the private country auction markets that I'm representing; four groups of stakeholders involved in this decision. They believe that this proposal I'm going to outline to you maximizes the collective opportunity for them all. The 12 I'm representing are listed on the covering page.

You have two documents, one of which is text, and at the back are some supporting exhibits. I'm going to refer to both simultaneously. We'll basically be going through the text, and I'll point out where I want to refer to certain exhibits.

The objective of submitting this proposal is basically that the principals I'm representing want to ensure that there are wise decisions made regarding the future of the Ontario Stock Yards for two reasons: (1) to ensure efficient and effective marketing services for Ontario producers, which is obviously the mandate of my clients, and (2) that there are wise decisions in order to maximize the financial benefits of the Ontario Stock Yards for Ontario livestock producers.

On page 3 of your document, we list several what we call realities and parameters. These realities and parameters form the basis for this proposal. We believe that all six of these are very well documented and accepted. They're offered here in no particular order of priority.

(a) Certainly the government's financial position is well known. The government has been very clear about how serious the government's financial position is, how serious it regards that position and how serious it is in its desire for soliciting creative and sound solutions that can address the government's financial position.

(b) Asset ownership and best use: I'm talking here about the asset as represented by the 35 acres of urban real estate that the Ontario Stock Yards operate on. It would, conservatively, probably have a value of something in the order of $30 million to $40 million. We submit that it's not being well used, not being put to best use on behalf of the livestock producers of Ontario. It's well accepted that the livestock producers of Ontario essentially own the asset. We're all about putting it to the best use on behalf of those producers.

(c) The current situation is not viable. This is another reality. The Ontario Stock Yards have outlived their usefulness. It's expensive to operate, it requires subsidization on an ongoing basis, the industry is changing, and the assets will only further deplete if this situation is allowed to continue.

(d) Continued subsidization is in fact counterproductive. We believe that the industry is best served by a viable network of strategically located country auction markets. It's well known that there's significant overcapacity and underutilization in this industry. The continued subsidization of the stockyards in Toronto, at what we submit is the wrong location, in fact potentially weakens that network of country auction markets. Some may fail.

(e) We recognize that there is a commitment to the commission firms. Two commission firms currently operate at the stockyards. They have a base of clients, they're providing a useful service, presumably, to their clients, and they've developed and thrived and grown on the basis of being dependent on the Ontario Stock Yards. Therefore, some transitional funding is recommended to support those two commission firms.

Finally, the last reality is that the long-term industry needs are that while the industry in Ontario is changing and downsizing, it does require a large and significant network of country auction markets. The clients we represent are ready, willing and capable to take on the challenge.

Just to illustrate, I'm going to turn to exhibit A in that supporting exhibits package. Exhibit A shows the last 10 years of operating surplus or loss at the Ontario Stock Yards. This is straight from the operating account. As you can see, it shows that in the last nine years there's only been one year where it's operated above the line, on a profitable basis. That was 1989, where the operating surplus was a mere $26,000. The livestock industry has been significantly downsizing at auction markets since 1989. You can see the trend: increasing losses from 1989 to 1992.

In addition, exhibit B reflects the fact that the financial position is even worse than the first exhibit would reflect, in that the provincial government pays a grant in lieu of taxes on behalf of the stockyards. It's identified on here as "property taxes paid"; in fact, it would be more appropriately called a grant in lieu of taxes. Nevertheless, it is a subsidy. On top of the operating losses out of the stockyards there's about a $300,000 grant in lieu of property taxes paid to the city. As you can see, by 1992 that operating deficit was approaching $800,000 in the year. There are also some extraordinary items noted on here -- for example, a provincial grant of over $500,000 in 1998, a land sale for $250,000 in 1989 and some insurance proceeds in 1990 -- which have helped finance this increasing loss position.


Our proposal is on page 5 of our brief. What is the proposal? Specifically, it consists of five steps which we would encourage the government to adopt.

Step 1 would be to immediately announce closure of the Ontario Stock Yards. We foresee that June 1994 is an achievable and feasible date; however, it could turn out to be sooner, depending on some of the other developments here.

Concurrent with that announcement, step 2 would be to offer the 35-acre real estate parcel at Keele and St Clair for sale and invite offers for sale or lease of that real estate parcel.

Step 3 would be to invite private sector proposals for new and expanded facilities at more optimal locations. Presumably the private sector here would be invited to propose newer, expanded facilities, especially to provide equivalent service to producers in eastern Ontario if it's deemed that there are not sufficient facilities with the closure of the stockyards. We see that any private sector practitioner would be invited to submit a proposal here, including the two commission firms that now operate at the stockyards.

Step 4: We would suggest that the Ontario government provide capital assistance to fund attractive proposals for facilities that would be deemed to be required if the stockyards were closed. We see a realistic, feasible cap of $1 million being reasonable, and we would recognize that priority preference should be given to the two commission firms, which may want to relocate to either new or expanded facilities outside the city, and that that priority preference could be as much as 100% financing for those two commission firms, up to the $1-million cap.

Step 5: The liquidation of the stockyards should generate an annual income stream of $3 million to $4 million, and we would propose that that income stream be used to fund a livestock industry development fund on behalf of the producers in Ontario.

Schematically, it looks like the next page in the exhibit. Concurrent with the closure of the stockyards off to the right there, you would invite proposals for new and expanded facilities, funded up to $1 million. The sale or lease of the real estate would generate an income stream of $3 million to $4 million, of which the first $1 million would go to repay the transitional relocation funding, and the additional ongoing stream would be used to fund the proposed industry development fund.

I want to outline -- and we do on page 7 of the brief -- what we see as the attributes of this proposal. There are several reasons why we believe it should be adopted. Firstly, it generates a positive net cash flow of about $4 million a year. It eliminates the need for ongoing subsidization at the stockyards, as you've seen from exhibits A and B. It encourages the development of private sector community auction markets which we believe are key to the long-term needs of this industry. We are mindful of the fact that by doing that we are also stimulating the rural tax base in the municipalities where those auction markets exist, and we believe that's important to this government as well.

It provides an attractive and permanent solution to the ongoing question of, what are we going to do with the Ontario Stock Yards? We believe that now is the time to make a decision to do something positive, and that this is that attractive and permanent solution.

It maximizes the potential value of the real estate in that it looks at how to maximize the value as an ongoing parcel of 35 acres, as opposed to, over time, selling off various parts of it.

It meets the needs of the Ontario livestock industry for market services through the network of private auction markets on a viable, competitive basis. It provides fair treatment to the two commission firms that still operate there. It provides funding for industry development. This proposal generally will be widely supported by livestock producers and it is, of course, widely supported and positively supported by private auction markets. Finally, we point out that it's consistent with the government's initiatives to privatize operations where the opportunity exists. Organizations like the Ontario Plowman's Association, the Ontario Soil and Crop Improvement Association and Ontario Agri-Food Education Inc are all examples where this government has moved to privatize government activities, and the stockyards are an even better example of one where that would be appropriate.

Moving into the question period, I've anticipated the first seven questions you might ask, so I'm going to go through these quickly.

Question 1 might be, what capital costs are required to establish new facilities? Is $1 million in fact enough if you were to close the operations at Keele and St Clair?

The best and most recent example: Historically there were five commission firms operating at the stockyards. Some time ago, two discontinued. In the last two to three years, the Gamble and Rogers commission firms discontinued and bought Brussels stockyards and established an operation at Brussels. The full cost for them to buy and renovate the facility there was $550,000. That operation is growing, currently handling 125,000 head annually, and that volume is growing there.

Certainly it's possible to spend more than $1 million, but we would point out that the investment decision must be prudent and in tune with what's required. In short, $1 million is fair and adequate if reasonably invested, and certainly it doesn't preclude it if the two commission firms wanted to spend more; it could be quite feasible to add some of their equity to do that.

The second question: Why are the Ontario Public Stockyards now obsolete? Perhaps I can go to 6.2 please, Marie. Thank you. There are two key reasons why the stockyards are obsolete: one is the geographic location; two is the organization structure.

The geographic location in 1903, when the stockyards were established, was excellent, and up until the late 1970s and maybe the very early 1980s, they operated very well. Things have changed. The location is now inappropriate. Downtown Toronto is an inefficient place to bring cattle in. In fact, 75% of the cattle that come into the stockyards are moved back out to final destinations, and virtually 100% of the sheep that trade there. We're also mindful of the negative environmental impact of bringing truckloads of cattle in and out of the city every day.

The inefficient organization structure refers to the fact that as presently structured, there are two layers of management, one to operate the buildings and facilities, which in fact lose money. The two commission firms market cattle there, and in effect what's happening is that they're getting rented below cost. Other businesses have restructured over the years to meet the needs. There are precedents in Winnipeg, Edmonton, Calgary and Chicago for these types of stockyards closing and restructuring.

There is an example of the declining volume trends in exhibit F in your package. This shows the volume of slaughter cattle at the Ontario Public Stockyards from 1989 through to 1992. It's going down in the first, in the top graph there, on slaughter cattle. The middle one's feeder cattle, declining as well. The bottom one is sheep and lambs; it's declining slightly but basically holding its own. If you push that up a little bit, I think I've written a note on the bottom of that, Marie. A telling factor is that in 1980 the Ontario Public Stockyards handled 716,000 head of cattle; in 1992 they handled 245,000 head and that trend is continuing.

The third question: Can private community auction markets do the job? There's excess capacity in these country auction markets right now. Many of them operate a day a week; a few operate two days a week. Right at this moment, the way they're presently operating, their excess capacity is 400% of what the stockyards' annual volume is. If they operated at their optimum efficiency, which would be three days a week, they could handle 1,000% of what the Ontario Public Stockyards' volume is. That volume can be readily absorbed by the existing country auction markets. In fact, in recent years there's been a significant trend to increasing market share traded at the country auction markets, and believe me, this network of country auction markets is committed and capable of meeting the industry's needs.

The next exhibit, G in your package, reflects the changing nature of the Ontario cattle industry. In 1981, the top pie graph, almost one million head of cattle were slaughtered in the province, and about 37% of them, represented by the black piece of that pie, were traded over the Ontario Public Stockyards, with country auction markets representing about 31%. By 1991 the amount of cattle slaughtered in the province was almost half of what it was in 1981. The Ontario Public Stockyards are now only trading 18% of those. The country auction market network has grown to 52%.

In addition, I've included exhibit H to illustrate the capacity utilization at these country auction markets. The dark, tall bar graph in the case of each of cattle, sheep and pigs represents the annual capacity of the current network of country auction markets if they operated three days a week, which would be the optimum. In fact, in the light bar graph right beside each of those, you can see where they're currently operating: at about 25% of capacity for cattle, at about 8% of capacity for sheep and 27% of capacity for pigs.

The fact is that if all of the red part that I've put on here represents what the Ontario Public Stockyards current volume currently represents, if it was all absorbed by the current network of community auction markets, we'd go to about 32% of our capacity in cattle and about 13% of our capacity in sheep. It's very capable of being done.

Question 6.4: What if you don't adopt this proposal, if the Ontario Public Stockyards restructures at the present location? There are reasons not to do that. One, the financial assets will not be optimally employed. There's a better use, as I've indicated previously. The assets will continue to be depleted. Ongoing losses will continue. The trend is entrenched. There's lots of precedents for closing these kinds of operations.


Continued government subsidization will be required. The location is not sustainable. All we will be doing if we restructure at that location is to defer a decision which cannot ultimately be avoided. That location is not the appropriate location to buy and sell cattle.

Some community auction markets may not survive and will be lost, and that would be unfortunate. It would not address the fact that the unfair subsidization question will not be addressed. The beneficiaries of that stockyard are not the livestock producers of Ontario and not the Ontario government; it's the two commission firms that operate there as private practitioners competing with the clients I'm representing, and they're renting their facilities at much less than what it's costing to provide them.

Do some livestock buyers need the Toronto location? Buyers are not dependent on Toronto. The current buyers in downtown Toronto that buy cattle source less than 20% of their requirements at the stockyards. More than 80% they bring in from other sources. Most of the livestock that come into the stockyards, as I said earlier, are moved back out: 75% for cattle, 100% for sheep. Buyers are much more versatile and mobile than producers. Buyers will go where the cattle are being offered for sale. Several buyers that have already moved out of Toronto over the recent years are closed. Most buyers already source, as I said, the majority of their requirements from other markets. Finally, it's important to realize that it's much more rational and efficient if producers haul their livestock shorter distances and buyers haul them longer distances, once the final destination has been determined.

I'm winding down. Does the sheep industry need the Ontario Public Stockyards? The volume of Ontario sheep can easily be absorbed by community auction markets, as I've indicated before. They'd still only be using 13% of their capacity if they absorbed all of the stockyards' current volume. It is interesting to note that with the network of community auction markets, their volume of sheep sales have actually grown from 47,000 to 89,000 from 1987 to 1991, at the same time as the stockyards' volume has been going down. Regional markets are more efficient for producers to access and most sheep purchases at Toronto, as I said, are moved back out of Toronto for slaughter anyway.

Finally, is the Ontario Public Stockyards needed as a price-setting mechanism? Historically, it might have been. Historically, when the stockyards were established and as it operated for the first 50 or 60 years of its existence, Toronto was the price setter and the rest of the industry followed. That is no longer the case. Community auction markets often have higher prices. Toronto is a minority and declining market share, as I've shown you. Some community auction markets have a substantially larger volume than Toronto.

In your exhibits there are three exhibits which support those statements. This first one is exhibit C on cattle. The Ontario stockyards prices averaged in 1992 are compared to 12 computerized country auction markets that the Ontario Cattlemen's Association tracks, and the bottom half of that page shows that for all of those stocker and feeder type cattle the price is always higher at the country auction markets. For the slaughter cattle at the top of it, the 12 country auction markets have a slightly lower price than the Ontario stockyards.

What this doesn't reflect is that all the cattle at the Ontario stockyards stand overnight and therefore shrink anywhere from 30 to 50 pounds overnight, so less weight sells at that. The computerized country auction markets are usually same day. The difference in shrink tends to account for that difference in price.

Exhibit D shows one of those stockyards; in fact, it's the Brussels stockyards and compares their prices in 1992 with the Ontario Public Stockyards. Brussels is higher in every category. Brussels, I remind you, is the Gamble and Rogers commission firms that relocated out of the city.

The last chart on your graph is documenting the same type of thing on sheep. This is exhibit E. In each of the last three years any one of the Kitchener Olex operation, the Embrum operation near Ottawa, or the Toronto stockyards operation could have been higher priced at some time in the year for lambs. The variation is not that great.

In summary, we believe this is an opportunity whose time has come. I'd welcome any questions, but we put that in front of you and we hope it documents clearly what we are proposing.

The Chair: Mr Carr, how many are you going to buy?

Mr Carr: Thank you very much and thank you for the presentation. I was interested in how far along with the government you've got. Have you made any other proposals to the government, and if so, where are you at and what has been the reaction so far?

Mr Barfoot: Marie may want to comment on that. I've been involved helping our organization prepare this for the last three or four weeks. I've had the opportunity in that period of time to read correspondence and presentations to the Ministry of Agriculture and Food that date back to the summer of 1991. There's been a series of presentations, letters, meetings and so on.

My belief, as a bit of an outsider, is that the Minister of Agriculture and Food has listened carefully and is interested in this but has been non-committal to date. The OLAMO organization wanted to take this opportunity, and the Minister of Agriculture and Food is on side with the fact that we're here today; Minister Buchanan is aware of it. This presentation was given to him by mail last Friday. I can't say much more than that. Marie, you may have more history on it as to where you think the Minister of Agriculture and Food stands on it.

Ms Marie Forgrave: I know he's been presented with a couple of presentations, and as was stated, he hasn't got back to anyone. Of course, the poor man hasn't had a chance to yet because he just got it last week. The OCA, the Ontario Cattlemen's Association, has held meetings all of January and it had a convention a week ago. So the public has been notified of what is out there and that the stockyards are costing the government $690,000 a year that's put in by taxpayers. They're aware of the situation, and I guess the rest is probably up to the committee that makes the decision.

The Chair: I have to go on to Mr Wiseman, and you're looking for sheep.

Mr Wiseman: This is all too good to be true.

Mr Barfoot: It is, isn't it?

Mr Wiseman: My immediate question is, what is the other side saying to the minister? I saw the arguments you put up there, but there's also the other side. What would the other two groups that are currently running the stockyards be saying to the minister?

Mr Barfoot: That's a very valid question and I'm not the appropriate person to ask. Obviously, those two commission firms, though, are the beneficiary of lower-than-cost rent, and there's obviously a vested interest in wanting to keep the operation going. As I've pulled this together and tried to look at it objectively as an outsider, I think the case speaks for itself. It does look almost too good to be true. How could you not do something like this? The facts are there that it's the right decision to make.

The Chair: What about drovers? How are they involved? They can open up and sell for one or two days in the northwestern part of Ontario.

Mr Wiseman: Excuse me, Mr Impartial Chair --

The Chair: I'm talking about drovers; I'm not talking about government.

Ms Forgrave: Drovers are at each of our locations. They are free to buy wherever they choose, even out in the country at the farm gate, and they do. They are licensed by the Ontario government to do so, and they pay their dues to the cattlemen's association and the Ontario financial protection plan, but they are free to deal wherever they get the best deal.

The Chair: Maybe we'll hear about Mr Brown and the cows on Manitoulin Island.

Mr Brown: Mr Kwinter.

The Chair: You've got someone down here? Okay, go ahead, Mr Kwinter.

Mr Kwinter: You're not talking about an industry that I know something about.

The Chair: Oh, the weiners, yes.

Mr Kwinter: It seems to me that the industry has changed dramatically. I agree that it makes no sense for the site to be there. It made a lot of sense at one time only because in 1903 when it was established the major meat packers established right beside it, and you had Canada Packers, Swift, Hunnisett and Presswood, and they used to just walk the livestock under the killing floor. They have either disappeared or seriously downsized, and there's no reason for it to be there.

Are the 12 independent sales organizations the best way of doing it? I'm not particularly supporting the two commission companies, but what does industry on the other side say, the buyers? Are they in agreement? Do they have no problem with that?

Mr Barfoot: Again, they're the people to ask, as opposed to myself. My perspective, though, is that the buyers are ambivalent, that it really doesn't matter a great deal. It's kind of like the Field of Dreams situation: If you build it, they will come. They will go where the cattle are available for sale. The buyers in Toronto are already sourcing more than 80% of their livestock outside of Toronto, at other country auction markets or direct from farmers.

The Chair: Mr Kwinter, time has run out. I'd like to thank you for your presentation before the committee.

Mr Barfoot: Thank you for the opportunity.

The Chair: This committee will adjourn until 10 o'clock tomorrow morning, in room 228 again.

The committee adjourned at 1700.