1 EVIDENCE Standing Committee on Government Operations and Estimates NUMBER 053 1st SESSION 42nd PARLIAMENT Monday, October 31, 2016 Le lundi 31 octobre 2016 Standing Committee on Government Operations and Estimates CANADA [Recorded by Electronic Apparatus] EVIDENCE October 31, 2016 Committee Edited Evidence * Table of Contents * Number 053 (Official Version) Official Report * Table of Contents * Number 053 (Official Version) Témoignages * Table des matières * Numéro 053 (Version officielle) 53 31 10 2016 2016/10/31 10:00:00 House of Commons Comité permanent des opérations gouvernementales et des prévisions budgétaires Standing Committee on Government Operations and Estimates OGGO Chair Mr.

Tom Lukiwski 42 1 PUBLIC PART ONLY -

PARTIE PUBLIQUE SEULEMENT (1000) [ English ] The Chair (Mr. Tom Lukiwski (Moose Jaw—Lake Centre—Lanigan, CPC)) : Colleagues, we'll start. It's 10 a.m. We're missing a couple of our committee members, but I'm sure they will be here in just a few moments. Ms. Stairs, welcome to the committee. I think you know how things work around here, but very briefly, we'll ask you for an opening statement of five minutes or less, followed by a round of questions from all of our committee members. Thank you for being here. You're on for five minutes. Ms.

Andrea Stairs (Managing Director, eBay Canada Limited) : Good morning, and thank you for the opportunity to present today. On behalf of eBay Canada, I appreciate the committee's focus on ways to improve Canada Post, something in which we also have a keen interest. Indeed, eBay participated in phase one of the task force hearings, and I've also written and spoken on this topic in various forums.

We care about Canada Post for the same reason that this committee and all Canadians should; there are more than one million small and medium-sized businesses, or SMBs, in Canada that rely on Canada Post as an essential part of doing business. It's not overstating the case to say that Canada Post provides critical enabling infrastructure to the Canadian economy. Let me begin with some background on eBay. Launched more than 20 years ago, eBay has become one of the world's largest online marketplaces, with approximately one billion listings and 165 million active buyers globally.

Here in Canada, eBay is a top e-commerce destination, with more than eight million unique visitors each month who trade more than $1 billion each year. In addition to changing how consumers buy, e-commerce has changed the way we sell. eBay has created a platform where anyone can become an entrepreneur, starting with a single listing, and e-commerce is levelling the playing field for rural versus urban retailers. You no longer need to live in a city to access enough buyers to make your business viable.

Canadian entrepreneurs have been able to make impressive gains through e-commerce, and we should be very clear that Canada Post is a critical partner in driving that success. At present, there's much talk about the innovation agenda, but the reality is that SMB innovation is facilitated by a 200-year-old corporation. Canada Post allows small and medium-sized Canadian businesses to participate in the global economy by offering relatively cost-effective access to the world in what could be described as a 21st-century trading route. In terms of significance, this is meaningful trade.

Canadian commercial sellers on eBay export at a rate of 99.9%, reaching 20 markets annually, much stronger results than those of traditional SMBs. As a result of their ability to effectively serve foreign markets, these companies find that, on average, more than half of their sales come from international customers. Canada Post has more than a 90% share of eBay Canada transactions. There can be no doubt that the micro-multinationals I've just described depend on Canada Post to drive their businesses both domestically and internationally.

Canada Post is an enabler of small and medium-sized businesses, but it also creates significant challenges for them. For example, this summer's uncertainty around a possible disruption created major business obstacles for Canadian SMBs. While a work stoppage didn't occur, Canadian businesses were forced to prepare for the possibility of a strike or lockout. They had to invest time and effort in adopting alternative, and in many cases, more expensive shipping arrangements.

Given what we heard from our sellers, we were not surprised when, on July 8, Canada Post announced that its parcel volume had declined by more than 80%. Unlike their larger competitors, smaller businesses were not able to leverage their scale to negotiate favourable rates with private couriers, and as a result, many SMBs were forced to create patchwork solutions to ensure they could meet buyer expectations.

As Winnipeg-based small business owner Maureen Lyons described to this committee, she had to “offer local pickup for regional sales, courier service for domestic orders, and day trips south to utilize USPS for international sales.” Maureen was one of thousands of sellers dealing with this uncertainty. As the risk of a work stoppage extended into August, eBay drafted a letter to the Prime Minister asking for a return to consistent postal services. Within 24 hours, more than 2,000 concerned eBay sellers had signed the letter.

Everyone was gratified to see that a negotiated settlement was reached shortly thereafter, but given that it's a two-year agreement, SMBs worry that they'll be facing a return to uncertainty in a matter of months. Going forward, we believe that Canada Post should focus on accelerating the growth in its parcel division by expanding its e-commerce services, including affordable tracking and aggressive rate tiering. Further, Canada Post should invest in improved marketing of the e-commerce services it has already created, such as flex delivery, to drive wider awareness and adoption.

Modernization of customs rules would also drive volume for Canada Post. As the task force noted, Canada's de minimis threshold, the value of goods that can be shipped into Canada before duty and taxes are assessed, is out of line with international standards. Increasing it could accelerate parcel volume growth. eBay Canada concurs and asks that the committee recommend increasing Canada's de minimis threshold. As a platform for small and medium-sized Canadian businesses, eBay appreciates the time to appear before you today, and I look forward to your questions.

(1005) The Chair : Thank you very much. We'll get into questions, right now. Monsieur Drouin, for seven minutes, please. Mr. Francis Drouin (Glengarry—Prescott—Russell, Lib.) : Thank you, Mr. Chair. It's great to be back at the Canada Post study. I've missed you guys for a while. I want to thank Ms. Stairs for being here. I appreciate your testimony. You have mentioned how important Canada Post is to some of the SMEs operating on an eBay platform. You said 90% of the transactions on eBay in Canada are delivered by Canada Post. Is that correct? Ms. Andrea Stairs : Yes. Mr.

Francis Drouin : I've read your op-ed in The Walrus . You have talked about slower services, and you have also mentioned that in your testimony. What do you mean by slower services as a potential revenue stream for Canada Post? Ms. Andrea Stairs : What we hear from our small sellers and our large e-commerce retailers, as well, is that they would love to be able to offer free shipping to their buyers. It's table stakes in Canada and around the world in e-commerce to offer tracking when you deliver something. The current service offering from Canada Post really only has expensive, fast-tracking services.

What would be great would be to complement those with slower services that also offer tracking. What we find when we do studies is that there are a certain number of transactions or occasions when people engage in e-commerce. They are looking to have the goods very quickly—the same day, the next day, within two or three days—but there are also a number of occasions when consumers are buying something on e-commerce when they want their item next week or two weeks from now. If I'm buying a Halloween costume in September, I don't need it there the next day.

In that case, I might as a buyer, trade off time in order to have free shipping from my seller. The challenge right now is that Canadian sellers find it really difficult to offer free shipping with tracking because of the service offering from Canada Post. Complementing the fast, expensive services with slower, less-expensive services that also have tracking would give a better spectrum of services that buyers and sellers could use in e-commerce. Mr. Francis Drouin : Have you had a conversation with Canada Post with regard to tracking?

Do you know if they have the infrastructure in place or the software in place to do that? Ms. Andrea Stairs : My understanding is—and I'm going to preface my remarks by saying that I'm not an expert on Canada Post and Canada Post infrastructure—that they have been moving more of their volume to planes and faster modes of transport, and off trucks. There would have to be some rebalancing there in having some volume go by ground as opposed to air. The tracking infrastructure exists. I think there's another issue around the tracking of packet services that go through the letter mail channel.

I think the infrastructure is a real challenge. When we talk to our sellers, there's another key pain point for them. When they compete against American sellers—in most cases you have a Canadian seller competing with an American seller for an American buyer, and that's our most traditional use case in Canada—if the Canadian seller is shipping something very small, then it qualifies for packet, but they are in a catch-22.

Either they can send it for not very much money in a packet, but give up tracking, or they can spend significantly more, often the same amount of money as the item price itself, to provide tracking to their customer. That's a really difficult position for a seller to be in. In an e-commerce environment, particularly in a marketplace where you're a small business, you don't have a brand reputation, so buyers certainly do want to see tracking. On a platform like eBay, feedback is incredibly important. On one hand, in not having tracking, you risk feedback issues, such as, “Where's my package?

It hasn't arrived by the time I expected”. On the other hand, you want to offer value services, so I think there is a real infrastructure issue around tracking on lighter, smaller packet-qualifying items. But on the slower service, that should be something that is relatively doable. Mr. Francis Drouin : I'm reading your article. You mentioned that 99.9% of transactions on eBay are exported in Canada. Ms. Andrea Stairs : When we look at our commercial sellers, those are sellers who do more than $10,000 a year on the platform, and eBay may be all of their business or it may be a small fraction of their business.

When we look at that cohort of sellers, we find that almost all, 99.9% of them, export. When they export, we find they do more than 50% on average of their volume outside of Canada. This is a great success story in the Canadian economy, where you have small businesses that can reach demand beyond their local market. They can tap into the benefits of exports, and they can be insulated from local market shocks. In Toronto, for example, we were hearing about small retailers who lost their business as a result of road construction.

If you have the ability to tap into demand beyond your local area, then you can weather those storms and diversify your sales base. Canada Post is key to that, with a 90% share of the volume traded on eBay. They are very much implicated in what we call these micro-multinationals. These are very small businesses who are trading internationally.

(1010) Mr. Francis Drouin : How would you see Canada Post increasing its parcel business while at the same time increasing your export opportunities? Ms. Andrea Stairs : When we had a round table with Minister Chagger last year, and we invited a number of small businesses to come to talk to her, they raised only two issues. These are entrepreneurs. They're not looking for handouts, but they are looking for the removal of obstacles. Postal rates at Canada Post was a key area of concern.

The other area of concern was border frictions, specifically Canada's de minimis threshold, which is that threshold above which duties and taxes are assessed. It currently stands at $20, a rate set in the early 1980s. For that reason alone, it should be reviewed, but the task force noted that an increase in the de minimis threshold would likely increase the parcel volume to Canada Post. We see millions of transactions every year, purchases by Canadians that are delivered south of the border or to locations outside of Canada.

In some cases, right along the border there are businesses that exist only for this, to receive parcels essentially for Canadians. They then drive them across the border. That's lost revenue to Canada Post. Were the de minimis threshold higher, the vast majority of those parcels would be delivered within Canada, and Canada Post would get some of that revenue. The Chair : Thank you very much. Mr. McCauley, you have seven minutes. Mr. Kelly McCauley (Edmonton West, CPC) : Thanks for joining us today. We appreciate that. You made a comment that you do transactions of about $1 billion in Canada. Is that correct? Ms.

Andrea Stairs : Yes, it's more than that. Mr. Kelly McCauley : How much more, exactly, and the names...? Ms. Andrea Stairs : I can't tell you. Mr. Kelly McCauley : You mentioned the urban-rural divide. Do you have stats on how much of that $1 billion is through urban and how much is through rural businesses? Ms. Andrea Stairs : We see the businesses across the country, and we've done a heat map where we looked at commercial activity per capita across the country. We found that the hotbed of e-commerce is Perth, Ontario, perhaps not known to be the e-commerce— Mr. Kelly McCauley : Wow. Ms.

Andrea Stairs : Yes, exactly. We also saw significant hot spots in northern B.C., the southern part of the Northwest Territories, and down the east coast. What we see is that on a per capita basis, these little businesses that are in small towns, by relying primarily on Canada Post, are able to access demand across the country and around the world. Last year— Mr. Kelly McCauley : Do you have any stats that break it out between those hot spots and the big cities? Ms. Andrea Stairs : I don't have the stats, but I'm happy to share the heat map with you.

It's on a population basis, so you can get a sense of where the.... Mr. Kelly McCauley : If you're able to, that would be great. Ms. Andrea Stairs : Yes, we can send it to the clerk. You see urban areas pop, but the fact that you have sellers across the country in rural areas that are able to do business is something that I'm personally very proud of. Every year we have our entrepreneur of the year awards, and last year's winner was a woman who runs a shop that sells skating gear and dance gear in a small town called Blezard Valley, which is outside of North Bay, Ontario.

She is tapping into an international demand. Mr. Kelly McCauley : I going to have to interrupt you because I have a couple of other questions. You mentioned aggressive tiering of pricing. Could you explain what you mean by that? Ms. Andrea Stairs : Yes. It's having pricing based on speed and making real differences between those different services, and also pricing based on volume, so making Canada Post a partner with small and medium-sized businesses. As those small and medium-sized businesses expand and scale, there is a reason for those businesses to stay with Canada Post and volume discounts would occur. Mr.

Kelly McCauley : You mentioned that 90% of eBay transactions are Canada Post. Is the other 10% just a smattering of the other competitors? Ms. Andrea Stairs : Yes. Mr. Kelly McCauley : Generally, in the States is it the same, and 90% is with USPS? Ms. Andrea Stairs : I don't have the numbers, but I think, ballparkish, it's the same. I would say it's potentially slightly lower, but it's significant.

(1015) Mr. Kelly McCauley : The threshold you were discussing, I know is at $20. It came up recently in the National Post . I think it's $800 the other way. I understand how it will help Canada Post, but how do you think it would help eBay Canadian suppliers? Would it not be just like a huge influx of competition? Ms. Andrea Stairs : No, in fact our sellers find it a huge pain point both because it makes their inputs more expensive relative to their U.S. competition, and also because on returns they're often having to pay duties and taxes on inbound returns from foreign customers. Mr. Kelly McCauley : Okay.

Regarding the possible labour disruption you were talking about, I can understand what everyone went through. My wife at the time had a small business and she was getting the constant letters from her bank and everyone else to say, “Make sure you're paying.” How do you think it would be best addressed? We have to follow collective agreements and the bargaining, so we can't have a no-strike position. How would you have handled it differently besides what Canada Post did, which was to warn their customers that they needed to find someone else just in case? Ms.

Andrea Stairs : I'm not an expert in collective bargaining. I am only really representing the impact. Again, I do think the two-year agreement is a real challenge, because the odds of us getting back into the same situation— Mr. Kelly McCauley : We will be. Ms. Andrea Stairs : Yes. I think that's a real challenge, particularly as we all want Canada Post to maintain its leading share in parcel delivery. If this happens every two years, it's basically an impossibility. Mr. Kelly McCauley : Is the U.S. the number one customer for eBay merchants in Canada? Ms. Andrea Stairs : Yes.

The U.S., the U.K., Germany, China, and Australia would be our top markets. Mr. Kelly McCauley : Do you get any feedback on what USPS does that might be of value to copy up here? Ms. Andrea Stairs : Yes. If you talk to one of our sellers, they know the USPS postal rates backwards and forwards and how they compare to Canada. They are much more affordable relative to Canadian rates. As I mentioned earlier, tracking on packet services is a key point of differentiation that our sellers find particularly difficult. It hampers our ability to compete with U.S. sellers. I think those would be the key things.

They also have purpose-built products. Media Mail, which I think still exists, is a purpose-built product for a certain segment. They have flat-rate boxes, which sellers in the U.S. really appreciate. Mr. Kelly McCauley : Yes, we've heard of that before. Do you think something like that would be of value up here? Ms. Andrea Stairs : eBay and Canada Post have been working together for more than 10 years. We've had various partnerships. They're on our platform providing label printing services, and we tried to do a flat-rate box test. It was okay; it wasn't amazing.

I think, frankly, investing in the products that they have already and complementing them with some slower products and just making the pricing a bit more aggressive would be the things that our sellers would most appreciate. Mr. Kelly McCauley : You would like to see a slow service option and better tracking. Ms. Andrea Stairs : It's not so much better tracking. For a long time, tracking was a problem because the points of tracking— Mr. Kelly McCauley : My understanding is that they are developing stronger tracking. Ms. Andrea Stairs : Yes.

The tracking capabilities are going in the right direction, but it's the pricing of the tracking capabilities. The pricing of services and tracking on letter mail, the packets, the things that are light parcels, are the challenge as well. The Chair : Thank you very much. Mr. Weir, you have seven minutes. Mr. Erin Weir (Regina—Lewvan, NDP) : Thanks very much. I really appreciate your testimony. I'll start off with a point of clarification. When you talk about eBay Canada having about 90% of its shipping with Canada Post, does that include Purolator, or is Purolator part of the other 10%? Ms.

Andrea Stairs : It's simply Canada Post. It doesn't include Purolator. Mr. Erin Weir : Okay, thanks very much. I'm going to almost repeat a question that Mr. Drouin asked, because I think it's a very important one. It seems that your key concern here is about the pricing of tracking and wanting to have maybe a slower and less expensive option. I just wonder what Canada Post has said in response to that concern. Ms. Andrea Stairs : I raised it at a very high level just in passing, and I got the response that it was interesting and something they would take back.

I don't know, where our organizations are more closely linked, what the response has been. It isn't where they have been going. They've been going to faster delivery to compete with couriers, which I think is appropriate. They should be offering those services. I think this is more an idea of extending the spectrum and adding a complementary service.

(1020) Mr. Erin Weir : Okay. It sounds as though it's a big priority for your organization, so I wonder what engagement you've had with Canada Post on it. Ms. Andrea Stairs : Yes, we've brought it up. I haven't gotten anything definitive from them. Mr. Erin Weir : Fair enough. I guess we can try maybe to help put that question to the corporation directly and get an answer to it, because it seems to be an interesting and important point.

You've talked a lot about the situation where a Canadian and an American supplier might be competing for an American customer, and I take the point that it's probably a common situation. I want to ask about the situation where a Canadian seller and a foreign seller are competing for a Canadian customer, because we've heard in other meetings that there's a real problem with differential rates for parcel shipping within Canada. Canada Post is able to discriminate based on the size of the different markets and those sorts of variables,

whereas international postal treaties oblige Canada Post to provide flat-rate shipping to foreign sellers coming into the Canadian market. Is that an issue that eBay Canada also has? Ms. Andrea Stairs : Honestly, that is not an issue that I'm up to speed on. I think that our small and medium-sized businesses, while they are very much focused on international markets, are seeing significant growth in the domestic market, and increasingly they will be concerned about their competitive niche in Canada relative to foreign retailers and small businesses. Again, I couldn't comment beyond that. Mr.

Erin Weir : It is something we've heard quite strongly from small shippers that they're not really able to offer flat or guaranteed shipping rates within Canada, because Canada Post will charge them different amounts, depending on where they're shipping,

whereas their foreign competitors have this right to almost a flat rate within the country. It seems like that's something that has been a relatively big deal to other small shippers. Ms. Andrea Stairs : I think the problem has gotten better. We used to do a survey, and we found that it was less expensive for a Canadian seller to drive something across the border, put it in the mail in the U.S., and then have it sent back into Canada. In 2013, USPS increased its rates significantly on international shipments, and that problem seems to be less of a problem now.

When you heard from Maureen, she wasn't driving her Canadian inventory across the border to induct it into USPS in order to send it back into Canada. I would say that was probably less of an issue, particularly relative to the U.S., than it had been previously. But on the specifics right now, again, I don't have that information. Mr. Erin Weir : Overall, would you say that Canada Post's services are critically important to your business? Ms. Andrea Stairs : Absolutely. Mr. Erin Weir : You're happy with the quality of the service.

It seems to be improving, and the main questions are about pricing and the availability of low-cost tracking. Would those really be your concerns? Ms. Andrea Stairs : I think more broadly, yes, absolutely. As we talk about innovation, Canada Post does not get brought up in the innovation conversation as enabling infrastructure for Canadian innovation, but when we talk about the productivity gains and the long tale of Canadian SMBs, having Canada Post be an effective partner is critical to that, particularly as we talk about e-commerce and using the Internet to tap into customers around the world.

Having a strong Canada Post is critical. Mr. Erin Weir : Okay. Are there any other specific changes you'd like to see to their services or to their operations to facilitate that support of e-commerce? Ms. Andrea Stairs : We would very much encourage Canada Post to focus on its core lines of business and not enter into new lines of business that could be distracting to management. They need to continue to focus on their shift from a letter-centric business to a parcel-centric business, and we would be supportive of that. Mr.

Erin Weir : I guess one of the challenges Canada Post faces is that there's also a lot of competition in the parcel business, and that just expanding in that area alone might not be enough to compensate for the decline in letter mail. That's where our committee has had some interest in exploring other lines of business. If those other lines of business help to sustain Canada Post and help to allow it to continue offering the services that you rely on, then might that not be reasonable?

(1025) Ms. Andrea Stairs : I think that the competition in the parcel business.... Certainly, there is competition there, but Canada Post has a 90% share on eBay and that is an indication of orders of magnitude. We see that the private couriers are cherry-picking the most lucrative weights and dimensions services, but there is a vast set of other businesses and services that need to be serviced. When we talk to our sellers, couriers are often not an option for them. Their economics would not permit them to have that service level.

Yes, there's competition, but I think we need to not lose track of the huge numbers that Canada Post services and that there are very high switching costs for small businesses in moving off Canada Post. The Chair : Thank you very much. [ Translation ] Mr. Ayoub, the floor is yours for seven minutes. Mr. Ramez Ayoub (Thérèse-De Blainville, Lib.) : Thank you, Mr. Chair. Thank you for being with us, Ms. Stairs. I am going to continue along the same lines. You are saying that Canada Post has to stick with its main activity. What is your idea behind that? What are you afraid of?

I sense that you do not want Canada Post to open other lines of business because you are afraid of something. Can you explain your recommendation to me a little more? [ English ] Ms. Andrea Stairs : I think it comes from two places. One is that in running a business you know that when you open a new line of business you have to allocate resources and executive mindshare to that new business in order to build it. The other thing is in reading the report it seems like there's a fairly definitive statement that banking, for example, is unlikely to be profitable in Canada.

As someone who has read the report, that's where I come out on that. I think that distracting— [ Translation ] Mr. Ramez Ayoub : Does that recommendation for Canada Post come from a discussion with your board of directors or is it your personal view? [ English ] Ms. Andrea Stairs : No, I think that eBay is very much supportive of Canada Post staying with its core services. [ Translation ] Mr. Ramez Ayoub : Okay. In the last few years, with the five-point action plan in place, what communication have you had with Canada Post and its senior management? How have your business and your area of activity been treated?

Was your company consulted? Was information shared? [ English ] Ms. Andrea Stairs : In terms of moving to the community mailboxes and...? [ Translation ] Mr. Ramez Ayoub : I am talking in general terms about e-commerce, which is your business' main activity. Have you had discussions with Canada Post about the projections for you area of activity? What are your concerns in terms of Canada Post's service and the new direction it intends to go in? Residential service is one thing. But business service is what you are all about. Was your company consulted?

Have you been able to get into Canada Post to discuss it? [ English ] Ms. Andrea Stairs : We have access to them, so we have fairly ongoing...and I'm not part of this. It's someone on my team who is engaged with Canada Post. We're working on our label printing and bringing different rates to our members. They will consult us on new programs that they're developing and get our input.

I would say there's a fairly continuous back and forth with them in terms of, not just us asking for things, but being more of a consultant in terms of what our sellers are looking for, pain points, that kind of thing. [ Translation ] Mr. Ramez Ayoub : Which of your recommendations did Canada Post accept? [ English ] Ms. Andrea Stairs : In the past, we've worked on a flat-rate box, which was a pilot we ran that was exclusive to eBay. We've gone as far as that in terms of the creation of a new service.

Then we were engaged fairly early on with the whole concept of flex delivery, allowing Canadian consumers to reroute packages to a postal outlet that was more favourable to them. I'm sure you guys are aware of the flex delivery program, but we were involved in discussions such as “Would that be a service that your customers would like?”, those kinds of conversations. (1030) [ Translation ] Mr. Ramez Ayoub : I am sensing, not so much a confrontation, but a degree of interaction between the commercial side and the residential side, between the access to a residential market, a small one, and access to a clientele.

Are you suggesting that Canada Post should, through its rates and its flexibility, subsidize in some way the small and medium-sized businesses working in e-commerce? It would allow them to offer better rates. You mentioned free delivery. Is that possible in today's world? [ English ] Ms. Andrea Stairs : Regarding the internal workings of Canada Post, how the different lines of business fund or don't fund each other, and how they use the same infrastructure, again, I'm not an expert on that. I'm here representing the end-users, the customers, both on the business side and the consumer side.

How we get there, how we make the sausage, I'm not sure. This is what the committee is tasked with. However, I think the outcome is that we need to have a broader range of services so that businesses can pick the ones that make the most sense and deliver value to the customers in a way that makes sense for those customers. Again, the utilization of infrastructure and whether there are subsidies, I think is something that is beyond my expertise certainly. [ Translation ] Mr. Ramez Ayoub : Okay.

Along the same lines, when we went across the country, chamber of commerce officials told us that they actually were ready to pay more if delivery was quicker and the service was of a higher quality. Is that something you are suggesting? Would that work for your area? [ English ] Ms. Andrea Stairs : Rather than all the services being priced relatively the same, rate-tiering should be offered so that very expensive services, like same-day delivery or one-day delivery, would have a premium. However, you need to have the flip side, where slower services are your economy service.

The challenge there is to also have tracking, but I think that creating those tiers and pricing things in that way makes sense. [ Translation ] Mr. Ramez Ayoub : There is talk about the potential for strikes and bargaining. What impact does that have on you? Have you been able to quantify the highs and the lows created by the uncertainties of bargaining? [ English ] Ms. Andrea Stairs : We saw a huge impact four years ago in the business. I think the impact, particularly on the buyer side this year, was more muted. Canadian buyers just seemed to carry on buying.

What we did see, though, was that our sellers had to scramble, particularly the small sellers. Their cost of doing business really increased significantly over the summer. It wasn't that they had to have these alternative solutions in their back pockets; they actually had to be using them because—and there were a couple of points there—at any moment there could have been a strike or a lockout. They would have had to have already shifted their business to these alternatives, which were very expensive and costly to manage.

That's what we saw and heard from our sellers, particularly over the duration of the entire summer, that managing these alternatives was very expensive. The Chair : Thank you very much. We'll go to our final two interventions. They will be five minutes each. [ Translation ] Mr. Clarke, the floor is yours for five minutes. Mr. Alupa Clarke (Beauport—Limoilou, CPC) : Thank you, Mr. Chair. Good morning, Ms. Stairs. I am pleased to see you here this morning. You deal with Canada Post directly, in a business sense, of course. When Canadians order things on eBay and their parcels arrive late, to whom do they complain?

Do they complain to eBay or to Canada Post? [ English ] Ms. Andrea Stairs : eBay has a money-back guarantee, so if your item doesn't show up, then you come to eBay and we will make you whole. Then we will go and sort it out with the seller. This is why tracking is so important, so the seller is able to justify that they inducted their package, that it went through, and that it was or wasn't delivered. If there's an actual issue with something being lost in the mail, and you can prove that with tracking, then we would go to Canada Post. It rarely happens that things actually get lost.

Usually you have a bad actor, so tracking allows you to sort that out very quickly. That's what usually ends up happening. The first line of interaction is the buyer and seller, and then eBay steps in the middle and will use the tracking data to sort things out. (1035) [ Translation ] Mr. Alupa Clarke : Okay. I imagine that it happens very rarely, as you said. However, after the tracking process, when people find out that the delay is due to an error on Canada Post's part, what happens? Are databases turned over to Canada Post? Have you set up a relationship with Canada Post to deal with that? [ English ] Ms.

Andrea Stairs : We have delivery estimates on the website. As a buyer, when you're buying something you can see the window in which the parcel is supposed to be delivered. As long as there's tracking on that parcel, if the parcel is delivered outside of that, then the seller is not in any way affected. On a platform like eBay, feedback is obviously incredibly important, and the ratings that sellers receive from their buyers is very important. We will protect sellers from bad ratings in the case that the parcel took longer through no fault of the sellers.

That's why tracking becomes very important, because if the sellers put something into the mail and they don't have tracking, there's no way to prove that it wasn't their fault and that they didn't just take a really long time getting it to the post office. In this setting, particularly a marketplace setting, where you have feedback, and seller ratings are driving economic value because they impact where you rank on search results and they impact the fees that you pay, affordable tracking becomes critical to being able to conduct your business well. [ Translation ] Mr.

Alupa Clarke : Has Canada Post ever had to reimburse either you, or the companies that go to your website, because of any delays? [ English ] Ms. Andrea Stairs : I don't think that happens. [ Translation ] Mr. Alupa Clarke : Ms. Stairs, I am sure you are aware of the five-point action plan. [ English ] Ms. Andrea Stairs : I know it more or less, yes. [ Translation ] Mr. Alupa Clarke : Could you tell me what you think about the plan, especially in terms of the way it has been implemented, that is, between 2013 and the moratorium that has been in effect for a year?

After the five-point plan was implemented, what consequences, if any, have there been for your business? [ English ] Ms. Andrea Stairs : There weren't that many. I think the major component of that plan was the move to community mailboxes. I don't think that has had a significant impact on our buyers, outside of their reactions in general. I don't think the reaction on eBay was any kind of differential. [ Translation ] Mr. Alupa Clarke : Okay. In recent weeks, our committee has heard a lot of proposals to add services to Canada Post, especially government services. They affect the employees and the offices alike.

What is eBay's opinion about those additional services? Do you believe that Canada Post will be able to meet your needs as effectively, as quickly and as efficiently if all kinds of services are added? How do you see that? [ English ] Ms. Andrea Stairs : Again I come back to the distraction of the entire corporation with additional unrelated services. I think if there's a positive revenue stream to them, then it might be something worth looking at, but I really am concerned about pulling resources away from the core business. The Chair : Thank you very much. For our final intervention, we have Mr.

Grewal, for five minutes please. Mr. Raj Grewal (Brampton East, Lib.) : Thank you very much, Mr. Chair. I will be splitting my time with the parliamentary secretary. Thank you, Andrea. It's good to see you again. We saw each other just last week at the pre-budget consultation in the finance committee, and you were advocating for an increase to the de minimis there. I like to see your consistency, that you're advocating for an increase of the de minimis here.

It's encouraging to know that Canada Post offers such great service in the parcel business and that 90% of your parcel business is with Canada Post, which is promising. Having said that, it doesn't tell the whole story, because you're just one customer from the Canada Post perspective. I am interested to know how much impact there is on your margins when there is a disruption like the one that was about to occur this previous summer and your guys go to private companies.

(1040) Ms. Andrea Stairs : The main impact is on whether our sellers can convert. It's whether the listings on eBay have become more expensive and therefore, they're unable to convert. Basically our incentive is aligned with our sellers. We charge fees on successful listings. If the shipping is too expensive, listings won't be successful. It doesn't really impact our margins. It really impacts the top line, whether our sellers are actually creating sales, which we record as gross merchandise volume, which is a key metric in our business. Mr. Raj Grewal : It's a driver aspect at the end of the day.

You guys don't have any cost implications from it, but your revenue would decrease because people would be shipping less, essentially. Ms. Andrea Stairs : Yes, so what would happen is that somewhere in eBay that sale would happen. It just would be that the Canadian sellers would be less competitive to U.S. sellers, or international sellers. The revenue moves around. eBay Inc. is in the same position; it's just that our Canadian sellers have lost their competitive edge. Mr. Raj Grewal : That makes sense.

When you talk about the de minimis, the counter argument to the de minimis is always that sales in retail, and small and medium enterprises, also use Canada Post to ship their parcels. If you look at it from a macro level, if we increase the de minimis by $20, from $20 to $40, that will be a net positive for online retailers, but it would also be a decrease for regular retailers, or so we've heard. Neither of you have been able to provide a study to say what the economic impact is across the board.

We've heard from the Retail Council of Canada on the finance committee that even raising the de minimis by $20 would really affect small bookstores, small shoe stores, and stuff like that. Do you have any comments on that? Ms. Andrea Stairs : I think you heard at the finance committee that the retail industry does not speak with one voice on this. We're a member of the Retail Council. The sellers that we're most concerned about are precisely those tiny guys who are penalized in terms of their ability to bring inputs into the country relative to U.S. competition and competition around the world.

They have to deal with the exports issue. At the end, this is a threshold that was set in the early eighties, has not been revisited, is a constraint on regional fairness and the ability of Canadians in far-flung places to fill the holes in traditional retail, and is a massive driver of government inefficiency, as the C.D. Howe report pointed out. Mr. Raj Grewal : This is my last question. How much of eBay's U.S. parcel business is with the U.S. post? Ms. Andrea Stairs : I don't have the precise number. It is significant. It's in the same ballpark as what we see in Canada. Mr.

Raj Grewal : The second question after that was, after the de minimis was increased, how much did the parcel business increase for the U.S. post? Ms. Andrea Stairs : I don't know. From the U.S. de minimis increase...? Mr. Raj Grewal : The U.S. increased the de minimis range. Ms. Andrea Stairs : Right. Mr. Raj Grewal : After the U.S. increased the de minimis range, how much did the U.S. parcel business from eBay go up? You are advocating for a de minimis— Ms. Andrea Stairs : It was already at $200, and our average selling price is significantly below that, so— Mr. Raj Grewal : It's still a telling thing.

You are advocating for a de minimis based on the fact that an increase in the de minimis will increase the parcel sales of Canada Post, which, in my humble opinion, isn't a terrible assumption. I'm sure that will happen. To prove that fact or reasonable assumption—not that everything in Canada and the U.S. is the same—when the U.S. increased the de minimis range, what was the increase to eBay parcels in the U.S. post? The Chair : Unfortunately, even though the question was posed, you are overtime already, so we'll have to wait to get the answer. We have a few moments left.

Normally, we adjourn about 10 minutes to the hour in order to get the new witnesses to the table, but if there are any one-offs here, a question and an answer for a couple of minutes.... The parliamentary secretary, or Mr. Grewal, did you have a brief question? We'll take two additional questions. We'll have Mr. Grewal for two minutes, and then Mr. Clarke for two minutes. Mr. Raj Grewal : I'll keep going. Thank you, Mr. Chair. Madam Stairs, by no means did I expect you to have that answer here. I just thought it was a good....

To sell your case even further, I think it's a really good study, and I'm sure the number is available.

(1045) Ms. Andrea Stairs : We know—and this is just eBay data—that there are literally millions of packages that are bought by Canadian customers and shipped to addresses in the U.S.— Mr. Raj Grewal : Yes, my friends do it all the time, to be honest. Ms. Andrea Stairs : I think that this is almost a more salient data point. Mr. Raj Grewal : I don't do it, though. Ms. Andrea Stairs : Of course not. Mr. Raj Grewal : Is there a potential for your sellers to increase their volume if there were an economy tier of shipping with tracking? Ms. Andrea Stairs : Absolutely. They want to be able to offer free shipping.

They can absorb a certain amount of shipping costs. Free shipping is a massive competitive advantage for them, particularly if they are competing against U.S. sellers, so if they have a slower, less expensive service—where they can still manage buyer expectations and deliver the goods at a certain time with tracking, but do so in a more cost-effective way—then, absolutely, they can expand their businesses. [ Translation ] The Chair : Mr. Clarke, the floor is yours for two minutes. Mr. Alupa Clarke : Thank you. Ms.

Stairs, I want to go back to our discussion on the addition of new government services to Canada Post. You said that doing so would create a distraction and would move away from Canada Post's mandate and core activity. The suggestions were to have a postal bank, to process passport applications and a whole series of services that now escape me. In your opinion, which of those new services would create the greatest distraction that would move Canada Post away from its mandate? [ English ] Ms.

Andrea Stairs : Honestly, I don't know what the laundry list is, but I think that the more intensive the spinning up of a new line of service is, and the more widespread it is across the country, as opposed to a niche, the more concerned we are about the distraction. It's really about mindshare in terms of.... I read in the report that there are conversations about community hubs in some places, where the post office is the only representation of the federal government. I think that this idea is probably....

We are talking about a handful of places, relatively speaking, so the level of distraction of that, versus spinning up an entire bank, seems to be quite different. I would be much more concerned about the latter than the former. [ Translation ] Mr. Alupa Clarke : Okay. Thank you. [ English ] The Chair : Thank you very much. Thank you, Ms. Stairs. I have one question, because we have a couple more minutes. You mentioned that, in your opinion, it would be beneficial for your clients to have an economy level of service from Canada Post—slower service—but only if it contained tracking.

Based on the fact that Canada Post already has a tracking system for their premium products, it seems to me that this would be a fairly easy fix to employ. Am I missing something here? Ms. Andrea Stairs : I am not an expert on this, but I think that the infrastructure has been set up in order to facilitate speedy delivery. Is there supporting infrastructure that can actually do slower delivery, or do you have to put the lower-priced packages into that speedy service and just hold them somewhere? How do you do that on the back end? I think that's the question.

How do you match the revenue that you are deriving from the economy service with the cost to deliver? I think those are the concerns that Canada Post would have, but I would say—to your point—that the tracking piece has been figured out. I would think that these obstacles are not insurmountable. The Chair : Have you suggested that formally to Canada Post? If so, what has their response been? Ms. Andrea Stairs : I'm not sure if we've suggested it formally.

We've suggested it informally, and they've answered that it's interesting, that they appreciate where it's coming from, and that they'll take it under advisement and look into it. The Chair : Thank you very much, Ms. Stairs, for participating in our review. I know you probably have a lot of better things to do with your time. We will suspend for a few moments while our next witnesses approach the table. (1045)

(1055) The Chair : Thank you, colleagues. I think we'll start again. Before we commence, I have just a couple of comments to the committee members. We will have opening statements from our witnesses, which will be in public. We've also—if you notice on the agenda—tentatively scheduled one hour for public testimony and one hour in camera. However, we have the ability as a committee to go in camera for as long as we wish. For example, if all of the questions that you have for our witnesses pertain to commercially sensitive information, you can certainly mention that to us.

We'll gauge the committee's willingness, and we could go in camera almost immediately after the opening statements, if that's something that the committee members would like. I want you to be aware of that. We're not forced to have one hour public and one hour in camera. We can have as much of the testimony in camera as we would like. We will have the opening statements on the public record, and for that, Mr. St-Jean, you have five minutes, please. Then we'll go to Mr. Spear.

(1100) Mr. Charles-Antoine St-Jean (Partner, Advisory Services, Ernst & Young) : Thank you very much. Good morning, Mr. Chair and members of the committee. Thank you very much for the invitation to testify today. Here with me are partners Uros Karadzic and Pierre Lanctôt. Pierre is here to conduct the financial assessment, and Uros is here to review all of the pension issues. The mandate that we received from the task force was to review four streams of work. [ Translation ] Our analysis focused on four areas. First, to review and validate Canada Post's financial performance in the last five years.

Second, to evaluate the financial impact of the resumption of payments on the pension plan solvency deficit. Third, to provide an independent assessment of Canada Post's projections to 2026, including the measures in the five-point action plan. And finally, to validate the annual savings target of $400 million to $500 million from the move to community mailboxes and to assess the possibility of keeping door-to-door delivery. [ English ] If I may make this point to the committee, the major findings that we would like to bring to your attention will be dealing with three issues.

First is the financial position of the corporation; second is the cost savings associated with the CMB, or community mailbox program; and the final one is the pension situation. Starting with the financial position of the corporation, as we recall, the one-time strategic price increase of April 2014 and the growth in partial volumes have briefly curtailed the ongoing weakening of Canada Post's financial position. Looking ahead, the financial position projection to 2026 paints an unsustainable future, with over $700 million per year of run rate loss.

Drivers for these negative results are multiple, but include the continuing mail erosion driven by electronic communications; inflationary cost pressures; the network growth linked to the Canadian population increase; competition, including new service providers, lower-cost service providers, and disruptive technologies; and the funding requirements of the pension plan. Our analysis leads us to believe that Canada Post's projected loss is at the optimistic end of the acceptable range of estimates. It could be higher. A major element of the negative financial results is the labour cost structure.

When we looked at the productive hours for Canada Post's inside employees, it's approximately 68% more expensive than that of competitors. The cost of delivery agents is approximately 26% higher. Labour accounts for 70% of the cost of Canada Post. Making up such differences is very challenging, especially at a time when the future of the corporation is dependent on its ability to compete in the parcel delivery business. Maybe I'll say a few words on the [ Translation ] community mailbox program. The initial proposal was to find savings in the order of $450 million per year.

We reviewed the hypotheses and tested them. We also reviewed the partial implementation of the program up until it was suspended in the fall of 2015. We believe that the figure of $450 million makes sense. Making those savings is essential to temporarily stabilizing Canada Post's financial situation. If the program were not relaunched in a form more or less in conformity with the initial proposal, Canada Post would quickly run out of funds, requiring it to borrow an estimated $2.9 billion by 2026.

Now, I would like to say a few words about the pension. [ English ] The pension liability of Canada Post is large in relation to its revenue. A number of factors have led to this. Some are challenges common to all pension plans in Canada, and some are unique to Canada Post. All plans in Canada have been negatively impacted by a low and declining interest rate environment, by an improvement in the longevity of Canadians, and by a volatile asset return.

In addition, Canada Post's exemption to make solvency payments in recent years has released some funding pressure in the corporation, but has resulted in fewer assets in the plan and, hence, a larger pension liability. Most employers in Canada with pension plans have moved to defined contribution plans. While Canada Post has moved in a similar direction in recent years for some of its management and all of its executive employees, the vast majority of employees are covered under a defined benefit plan with indexation. Changing the plan for future employees will only contain the growth of the challenge.

It will not yield any meaningful relief to the corporation's financial position in the short or medium term. The current deficit is a problem that will not go away by itself. Finally, we propose a number of ways to deal with the solvency deficit. They all have pros and cons. Some are easier to implement than others. None are without consequences. The decision to choose one or another solution is an issue of equity between pensioners, employees, taxpayers, and future generations. It's clearly a policy issue.

(1105) On this note, we thank you, Mr. Chair, as well as on behalf of our colleagues. The Chair : Thank you very much. Mr. Spear, you have five minutes, please. Mr. Bruce Spear (Partner, Transportation Practice, Oliver Wyman) : Good afternoon, Mr. Chairman and committee members. Thank you for inviting us to appear before you today. Oliver Wyman is a leading global management consulting firm. We're part of Marsh & McLennan, which is a $13-billion global risk management and advisory services firm.

We combine deep industry knowledge and specialized expertise in strategy, operations, risk management, and organizational transformation. We help companies optimize and improve their business performance and accelerate organizational effectiveness in the most attractive areas of opportunity. Our firm's credibility is established by more than 40 years of experience serving “Global 1000” clients. We have a staff of more than 4,000 and offices and operations in more than 50 cities in 26 countries. Specifically, we're organized by industry vertical, which means we bring domain expertise to each project.

I'm representing a team of two other partners who were involved. I'm part of our transportation practice. We had a lead from commercial banking, as well as our European global transportation practice leader and three full-time consultants on the project. Oliver Wyman was engaged by the task force to assess the planned and potential business operations in both traditional and new lines of business. Simply put, my colleagues from EY were focused on the core business and baseline performance, while we were focused on the potential new areas of opportunity for Canada Post.

Based on our international experience, we identified almost 40 initiatives that had potential for CPC, which were included in detail in the report. These included new lines of business, changes to existing services, as well as changes that were leveraged to an existing asset model. We created a filtering methodology for evaluating the long list of ideas and focusing on the highest value areas of opportunity. This iterative assessment of the long list, according to the filtering methodology, resulted in a short list of opportunities with the highest potential.

Development of more detailed business cases and analyses of key elements of each of the short list are included in the task force report. Here are a few key findings in terms of the value drivers, in terms of where we would see these areas of opportunity. The key value drivers are as follows. The first is shifting demand; mail volume continues to decline, while parcel volume is increasing primarily in response to the growth of e-commerce. Next is growing competition; the competition for parcel delivery, as well as adjacent services that replace paper communication is growing fiercely.

There's a split business model. Although letter and parcel delivery share assets, they are fundamentally different business models. Further, one has the government exclusivity guarantee, and the other is highly competitive, which is further complicated by the split between Canada Post and the Purolator parcel businesses. Last is the high-cost workforce; labour agreements establish labour cost rates at roughly 20% over private sector rates, which adds further constraints to business flexibility and limits the ability to adapt or change current operations. The overall findings were that there are no silver bullets.

Some of the options have value and have been deemed worth pursuing. There are no credible game-changing initiatives that would stem the demand trends that we're seeing. Of the highest potential initiatives evaluated, the best opportunities focused on improving or optimizing the current CPC operations in response to declining volumes. Most of these opportunities, however, would require flexibility on the part of the government, policy, and labour. There are a few opportunities to increase profitable revenue. Most are insufficient, even in combination, to compensate for the reduction in volumes.

Some of those opportunities are advertising and consolidation with Service Canada centres. Many opportunities also fall short based on their fit with CPC capabilities or its cost to serve, and also due to competitive concerns, such as the government putting a subsidized entity in against what is already established private market competition. A consistent challenge across many of the areas identified are the labour constraints, especially for initiatives where adjustments to the current labour agreement would be required.

Implementation could be as long as five to 10 years in order to match with the schedules for contract negotiations. Finally, a number of potential initiatives aimed at reducing cost or increasing revenue could actually undermine CPC by driving away customer volume, while strengthening the competition, potentially accelerating CPC's declining financial position despite the relatively positive benefits. Those might include alternate-day delivery or last-mile delivery for third parties, sometimes referred to as “interliner”.

(1110) The results of the detailed options analysis are as follows. These are proposed opportunities, not specific recommendations, and they need to be balanced against the other priorities. The first is changing mail delivery service to alternate-day delivery, which would save $74 million per year. Another is easing the 1994 moratorium and the CUPW agreement, which would allow CPC to convert more post offices to franchises. That would save $177 million per year.

Then there is rationalizing depots and sort centres to adapt the network to changes in volume and product mix, which would save roughly $66 million per year and would likely require capital expenditures. Next, providing services on behalf of the government, enabling consolidation of some Service Canada centres may save roughly $11.5 million per year. Expanding CPC's interliner offering, providing last-mile delivery service for third parties, is worth roughly $10 million per year.

Further pursuing synergies with Purolator beyond the ongoing efforts that have already been identified would generate roughly $16.5 million per year. Finally, selling advertising space in the retail locations and on the delivery fleet would generate almost $20 million per year.

We did do a study of postal banking options and it appears that postal banking is just a marginal opportunity for Canada Post, and when compared to other higher-yielding, lower-risk initiatives explored in the main report, such as adjusting the retail footprint, we did not come down supportive of postal banking as a particularly good opportunity for Canada Post. Please note that this report and the related review of CPC's strategic business options contain a substantial amount of information deemed commercially sensitive by Canada Post.

I'll be more than happy to answer whatever questions I can now, and further in the in camera session. The Chair : Thank you very much, Mr. Spear, and thank you very much, Mr. St-Jean. To the committee members, do the questions you will be posing to our witnesses deal with the commercially sensitive information as contained in the report? Mr. Weir, I see you shaking your head. Do you have some questions you would like to be in public? Mr. Erin Weir : Absolutely, and I think we have enough time with these witnesses that it would be reasonable to have a fair bit of discussion in public before we go in camera.

The Chair : Your point is well taken, Mr. Weir. As I mentioned in my opening remarks, we can determine exactly how much time we wish to spend in camera versus public. If there are committee members who want to have questions on the public record, that will absolutely be how we proceed. If, however, you do have questions of a commercially sensitive nature, we will have to suspend and then go in camera. I'd like to hear some commentary first, though, if any committee members besides Mr. Weir have other questions you would like to be held in public. Go ahead, Mr. Whalen. Mr. Nick Whalen (St.

John's East, Lib.) : Almost all my questions relate to the documentation, but if Mr. Weir is amenable to doing one seven-minute round in public.... The Chair : Do you mean initially? Am I getting the sense correctly that, on the government side, you would prefer all of the questions to be in camera? Ms. Yasmin Ratansi (Don Valley East, Lib.) : There are some questions that have appeared because of their presentations, but I think most of our questions—if I speak for all of my members—are on the report itself. The Chair : Mr. Clarke and Mr. McCauley, what are your preferences? [ Translation ] Mr.

Alupa Clarke : Personally, I would choose seven minutes in public first and then we would go in camera to discuss the report. [ English ] The Chair : If that is the case, may I make a suggestion just to amend the order of questioning, then, since my understanding is that we will have public questioning on one side of the bench and in camera on the other? Ms. Yasmin Ratansi : I'll have a public question. The Chair : Madam Ratansi, you will be in public, and you're on for seven minutes.

Once again, I will make sure that we're all aware that, if there is any line of questioning in public that gets into the commercially sensitive information, I will suspend the meeting immediately.

(1115) Ms. Yasmin Ratansi : Absolutely, and I'll try not to ask for any commercially sensitive information. Thank you, all, for coming and thank you for your presentations. I'm trying to figure out what sort of Canada Post we have for the future, because basically from your quantitative analysis, it appears that Canada Post is doomed for failure. We need to understand that we have to do qualitative analyses as well. Mr. St-Jean, your mandate was to validate, basically, the financial statements, so how far did you go?

You made statements that on the labour cost—if I got it right—there was something around 68%, but then I hear from the task force report that one says 45% higher than the competition, and the other says 41%. I'm a little confused. Could you explain to me what the real figure is of the labour cost in relation to the competition? Mr. Charles-Antoine St-Jean : Thank you very much, Mr. Chair and committee members. Maybe I could ask my colleague, Pierre Lanctôt, who conducted the detailed financial review, to give you the detailed answers to those questions. Mr.

Pierre Lanctôt (Partner, Advisory Services, Ernst & Young) : Thank you. To answer the first question, we did not necessarily audit the financial statements or do a review of the financial statements per se from an accuracy perspective. We relied on the fact that they were audited by two firms: the Auditor General and a private sector firm that does the audit. What we did is assess the financial performance using the financial statements and also using some other information that was provided to us by Canada Post. We did our own analysis of the performance for the last five years. Ms. Yasmin Ratansi : Okay.

Canada Post's financial statements show profits for the past 19 years. When you're projecting, when you're doing the extrapolation, and I know you looked at declining volumes in mail, etc., there is.... As we've been in the field, there's a constant challenge. If Canada Post is making profits in all these years, where is this $700 million coming from? As Ernst & Young is a very reputable firm, I would like to hear where that disconnect is between what people see as a profitable organization versus a non-profitable organization. Mr. Pierre Lanctôt : We looked at the financial statements for the last five years.

We did assess the profitability, and we did some analysis to satisfy ourselves that we understood the financial situation. On the last five years, of which three were negative and two were marginal-positive years, if I recall correctly, without adjusting, we did look at the one-time event, but in the report, we presented numbers the way they are stated in the financial statements, because that's the information that is known, public, and has been audited. When we did the projections, though, we did not project the past....

Essentially, the projections for the future are based on a set of assumptions for the revenues for volume growth—or volume decline, in the case of letter mail—and for increases in costs, some of the measures Canada Post intends to implement, and the general direction of the economy, inflation, and so on and so forth. It's not a projection where the last five years were such and the future years will be that. We went by type of revenue and by type of cost, and we looked at specific assumptions for each of them. Ms. Yasmin Ratansi : I'm an accountant by trade, so I understand what you're talking about.

When you were projecting it, were you taking into consideration any anomalies that took place in previous years that would guide your discretion or decision to project losses? Mr. Pierre Lanctôt : Yes and no, in the sense that, very often, one-time information or a one-time event that occurred in the last five years is not necessarily going to be repeating in the future. To understand the past historical performance, we looked at the one-time information, but to project, we try to understand if there is any event that we can foresee. We obviously cannot forecast an unforecastable event.

That's why often in financial statements there are differences between projections and the actual, because there are events that are not projectable or cannot be estimated. Ms. Yasmin Ratansi : Thank you. Mr. Spear, you talked about different venues that Canada Post could adopt, and postal banking is out. We understand, with regard to the concentration in different parts of the world that have adopted it, that ours is a totally different phenomenon, but we have a rural and urban divide.

If we were to have social cohesion, what in your presentation or in some of the recommendations—you said they were not recommendations, but suggestions—would be more profitable for Canada Post, with its wide network at the moment, for it to survive or to offer better services?

(1120) Mr. Bruce Spear : We did evaluate several different business models for postal banking, just to be clear, including going it alone, payday lending, going into postal banking as a consortium play, and more of a real estate play with Canada Post retail branches. By and large, what we found with regard to postal banking was that it required too many capabilities that were non-core to Canada Post and would require a significant amount of risk in terms of getting into the lending side of the business.

The one business model that might be worth discussing is as a real estate play, leveraging the footprint of Canada Post in markets where banks are retreating, but where there can be consolidation of branches and they can be served by the post office. We identified this as several hundred branches, not the thousands of post offices that exist, so we don't view that as inconsistent with the post office rationalization or footprint rationalization conversion to franchises, which is one of the more economically significant initiatives for Canada Post. [ Translation ] The Chair : Mr.

Clarke, you have seven minutes, please. Mr. Alupa Clarke : Thank you, Mr. Chair. Good morning, gentlemen. Thank you for joining us today. We appreciate it very much. I have a series of questions that I can ask in quick succession. Then I will have some more in-depth questions. I really liked reading your report. On page 13, you say that the Canada Post mission has “a dual mandate”. [ English ] The Chair : I have a question. If you're quoting from the report— Mr. Alupa Clarke : No, I mean the task force. The Chair : The task force report. Thank you, let's clarify. Mr.

Alupa Clarke : In the task force report, [ Translation ] It says that part of Canada Post's mandate is to “provide the same basic and customary service to all Canadians”. In reality, that has never been the case. Two-thirds of Canadians already pick up their mail at a mailbox and the other third receives it at their doors. So it might be said that the mandate has never truly been observed. What is your opinion? Mr. Charles-Antoine St-Jean : Thank you for the question. Canada Post's services are provided in the entire country, from sea to sea to sea.

There are different service levels, depending on population density. That is a business reality: Canada Post has to tailor its service to the demand. That is what we considered in our analysis. Mr. Alupa Clarke : Okay. Is it normal that, for a workforce of 50,000 employees, there should be 2,500 senior managers? I’m just asking. Mr. Charles-Antoine St-Jean : We didn’t really look into that specifically. Mr.

Alupa Clarke : On page 4 of the task force report, there is this comment: “Since 2011, despite having reduced its headcount by about 10% or approximately 5,800 employees, the corporation’s overall labour costs have remained stable at $4.4 billion.” What would explain that? Mr. Pierre Lanctôt : Essentially, at Canada Post, salaries increase annually. The number of employees was also reduced. In the five-year period that we assessed, the dollar costs therefore were relatively stable. Mr. Alupa Clarke : Okay, I understand. Thank you very much.

If I am not mistaken, the study done a few years ago by the Conference Board of Canada forecast a deficit of $1 billion. Three years later, in your most recent study, you forecast a deficit of $700 million, give or take. Would you say that the five-point plan allowed the forecast deficit to be decreased by $300 million? Is it the five-point plan that has made for savings of that magnitude? Mr. Pierre Lanctôt : We did not really study that specifically. We did not compare Canada Post’s performance in the last five years to the Conference Board of Canada’s forecasts. That was not part of our mandate.

However, in our report, and in the working group’s report, it can be seen that the savings achieved in recent years brought with them a reduction in costs. Some actions were also taken that brought in additional revenue. That may explain the differences. Whatever the case, we did not specifically study the difference between the two.

(1125) Mr. Alupa Clarke : So you do not know exactly which steps— Mr. Charles-Antoine St-Jean : May I add something? Mr. Alupa Clarke : Yes, I am sorry. Go ahead, Mr. St-Jean. Mr. Charles-Antoine St-Jean : As we mentioned in our presentation, the figure of $700 million is at the optimistic end of the range of estimates. So it could be higher. Mr. Alupa Clarke : I understand. I think that Ms. Ratansi partly addressed the topic I would like to talk about now. On what were your quantitative analyses based? Which figures, which sources, do they use?

If I recall correctly, you said that you were dealing more with forecasts than with prior data. Last week, in western Canada, most of Canada Post workers’ union representatives said that you used Conference Board of Canada figures. We heard that over and over again. Are you able to confirm or deny that statement? Mr. Pierre Lanctôt : We did not use the Conference Board of Canada figures. We conducted two types of primary analyses. We used historical results from the last five years and 10-year forecasts up to 2026.

For the historical data, we used the corporation’s audited financial statements and internal management reports. We also validated some of the information with external public information or with some research that we conducted ourselves. For the future data, once again, we took information that exists in Canada Post. We created our own information. We validated the figures, such as those dealing with projected revenue and projected volume, and compared them with some existing analyses or with analyses that we conducted ourselves, to confirm that the estimates were reasonable.

The result is a mixture of Canada Post’s public information. The Conference Board report was not used in our analysis at all. Mr. Alupa Clarke : Thank you. The moratorium on rural Canada Post office closures has been in effect since 1996, if I am not mistaken. Do you think that, if the moratorium were ended, it would cause an erosion of Canada Post’s infrastructure and would be the beginning of the end of Canada Post? Do you believe that the moratorium is a tool being used to preserve the very existence of Canada Post’s public service? Mr. Charles-Antoine St-Jean : Thank you for the question.

No, I do not think that that would be the case. If the moratorium—which dates from 1996 or 1994—were lifted, corrected or amended, Canada Post could continue its presence in a number of areas. Currently, the business model is quite rigid. Lifting or modifying the moratorium could give Canada Post more flexibility, which could work better financially. Mr. Alupa Clarke : Thank you. [ English ] The Chair : Thank you very much. Mr. Weir, you have seven minutes, please. Mr. Erin Weir : Thank you. Mr. Lanctôt, you are a former senior manager with Canada Post. Is that correct? Mr.

Pierre Lanctôt : Yes, that's correct, as my colleague mentioned at the beginning, although it was reported that I was a chief financial officer, which was not the case. I was actually a general manager in finance. I'm glad that people gave me a promotion, but that was not the case. Voices: Oh, oh! Mr. Erin Weir : Thanks for clarifying that. Clearly that background does give you a lot of insight and expertise, which are very much welcomed by the committee. I bring it up because the rationale for having management consultants, of course, is to get an independent and fresh perspective.

It's important to be clear that you also have the perspective of Canada Post management, which is certainly an important perspective for this committee. I wanted to make sure that we had it clearly on the record. Mr. Pierre Lanctôt : I appreciate that. Mr. Erin Weir : Mr. Spear, your firm, Oliver Wyman, also produced a report entitled “Shipping and Logistics 2016”, which I believe projected a huge increase globally in grocery purchases online and presented this as a huge business opportunity. You didn't see it as being an opportunity for Canada Post, and I wonder why that is.

(1130) Mr. Bruce Spear : Without referring to the report specifically—I would have to refresh myself on that one—we look at the grocery business as particularly competitive and also more challenging to serve because of the perishability of the goods being shipped. Therefore, the logistics systems required to serve grocery and those required to serve parcel and mail are not necessarily compatible. Mr. Erin Weir : Okay. Just to clarify, the report in question was called “Transport & Logistics 2016”. I think I may have used the word “shipping” a moment ago.

Certainly, the grocery business itself is very competitive, but we're talking about the logistics of delivering groceries. Canada Post does have some very quick delivery, but is it your sense that perhaps it's just not quick enough to get into that business in an effective way? Mr. Bruce Spear : It's not just a matter of speed, and it's not out of the question, but it is a matter of the needs of perishable goods versus dry goods, retail, parts, industrial products, and apparel, the primary commodity groups that Canada Post is shipping, versus perishable goods. Mr. Erin Weir : Okay. That's fair enough.

One of the things that I wondered about in reading your report is that often it seemed that you would conclude that Canada Post lacked a capability to do something and therefore shouldn't pursue that option.

Whereas at other times you would observe that Canada Post actually had an advantage in a certain area, but you then concluded that it shouldn't use that advantage because it would be unfair to private competitors. It seemed that Canada Post couldn't win. Either they lacked the capability, or if they had the capability, you didn't want them to use it. Mr. Bruce Spear : You'd have to point to a specific advantage that you're referring to.

I do agree that there were a number of potential market opportunities or potential initiatives that would involve subsidizing Canada Post and putting them in competition with private market participants, which we did question as to the fairness, but it's certainly a policy decision and not our decision. If there are specific initiatives you want to refer to, I can try to address them. Mr. Erin Weir : Sure. To get into specifics, maybe let's talk about payday lending.

It seemed that two objections were that Canada Post wouldn't have a source of funds, which struck me as a very strange objection given that it's a federal crown corporation. The second objection was that it wouldn't have the capacity to make collections, which again seems very strange in view of the fact that it's part of the federal government. Canada student loans has very good collections because it's done by the Canada Revenue Agency. It seems to me that Canada Post would actually be exceptionally well positioned to engage in payday lending.

It's just that you don't think it would be appropriate for it to utilize those advantages. Mr. Bruce Spear : I have a couple of points of clarification. One, Canada Post today isn't a bank. While it is a government crown corporation, it doesn't have open access to borrow. That could be a change, and that would require a change to the banking regulation for this industry and this country, but that is an option, certainly.

I wouldn't comment on its ability to make collections per se, but it's also true that making loans, assessing consumer credit risk, are not activities that are part of the capabilities that Canada Post has today. There's also some question about the practices of payday lending as an industry and whether that would be of interest to Canada Post as a crown corporation. Mr. Erin Weir : I guess, by definition, it's true that Canada Post doesn't have that expertise right now because it's not currently in the business.

There are other post offices around the world that have postal banking as a big part of their enterprises. I think in your report you consulted with La Poste and Royal Mail. Is that right? Mr. Bruce Spear : We're familiar with La Poste and Royal Mail from their own success in the market, or activities in the market. We've also done work with some of the post offices around the world, and in certain cases, even some of the banks. We certainly have one of the largest banking practices among management consultancies in the world.

However, one of the key observations we made in the report was that in other countries where postal banking had really taken root, we saw a tendency towards either direct subsidization, as in the case of La Poste where it has an exclusive franchise on certain types of bond, or they had established themselves in markets long ago with a physical branch presence, which was much more of a necessity and an underserved need than we see today in Canada. The cost of banking was significantly higher than we see today in Canada.

Also, it predated the move to electronic banking, which now negates some of the value of having a significant branch presence.

(1135) Mr. Erin Weir : What about— The Chair : I'm sorry, Mr. Weir, we're out of time, but we will have other opportunities. These gentlemen are with us for the next hour and a half or so. Mr. Whalen, you're up next on my list. I understand that you'll be asking questions that you prefer to be in camera. Mr. Nick Whalen : Yes, please. The Chair : Mr. Grewal, you will get a five-minute round in camera as well. Mr. McCauley, I understand you'd like yours in public? Mr. Kelly McCauley : No, in camera. The Chair : We will suspend then for just a few moments— Mr. Erin Weir : Mr. Chair, can we go back to public?

The Chair : Absolutely, we can go back to public, but for the next few questions we will be in camera. We'll suspend for a few minutes to allow that process to take place. [ Proceedings continue in camera ] (1135) (1215) [ Public proceedings resume ] The Chair : We have resumed. [ Translation ] Mr. Clarke, you have seven minutes. Mr. Alupa Clarke : Thank you, Mr. Chair. Mr. St-Jean, you said that a $700 million deficit is an optimistic figure. What is the less optimistic view? Is it much higher?

(1220) Mr. Charles-Antoine St-Jean : We looked at all the variables. Canada Post put an estimate on the table that looked plausible to us, but our report indicated that the figure could be higher. It would be hard for me to suggest a figure, but that is the optimistic end of the deficit we forecast. Mr. Alupa Clarke : I would also like to know if your firm has conducted financial analyses on the postal services in other countries or whether this is the first time that you have done so. Mr.

Charles-Antoine St-Jean : Over the years, our office has worked with various postal organizations in Japan, in Germany and in England. My colleague has also worked with postal corporations like Canada Post. Earlier in my career, I worked with Canada Post. I dealt with Canada Post when I was here in Ottawa. So we have a good understanding of the postal business. Mr. Alupa Clarke : Very good, thank you. Various suggestions have been made about adding services.

In your opinion, which of those services could most likely put Canada Post back on a profitable footing and—at least hopefully—remove its deficit difficulties once and for all? Mr. Charles-Antoine St-Jean : Perhaps I could ask [ English ] my colleague, Bruce, from Oliver Weyman, because they looked at more cities, what the options are to generate more revenue and more bottom line. Mr. Bruce Spear : Thank you for the question. We looked at business opportunities along a number of different lines, including ways to leverage the available labour capacity and the assets of Canada Post.

By and large, any incremental or adjacent opportunities were marginal improvements, and sometimes they ran into some of the same issues we were discussing earlier, such as potential acquisitions of a subsidized market participant. That said, a handful of opportunities were potential new business gainers. Advertising was one of them. I think it was around $20 million. Certainly, the largest though was not on the new business opportunity, it was more on changing the business model to meet the public need, which was rationalizing the retail footprint. [ Translation ] Mr.

Alupa Clarke : In European countries, a postal banking service is currently in operation. Does it work well? What could you tell the committee about it? [ English ] Mr. Bruce Spear : They are really country specific. Bear with me. There are success stories and there are failures in postal banking across Europe and in Asia. Those that have been established for many decades are significant aggregators of deposits such as in Japan and Italy, which was an underserved market where the post bank has been in existence for quite some time; in others, a post bank launched in 2007 was closed in 2010.

In Brazil, it's a significant bank, but it's a money-loser. By and large, the post banks that have been most successful have been subsidized where they have been in existence for decades. [ Translation ] Mr. Alupa Clarke : Okay. [ English ] Mr. Bruce Spear : There are very few unmet needs that would justify a state-sponsored entry into postal banking in Canada today. [ Translation ] Mr. Alupa Clarke : We heard testimony from officials of the Canadian Union of Postal Workers, Canada Post’s biggest trade union. They constantly said that your figures were in error or were based on other figures that were in error.

Despite that, are you comfortable that the task force report is reliable and that the Ernst & Young study was independent? Is the union being dishonest? Can Ernst & Young state that the figures really were obtained independently and they are not in error?

(1225) Mr. Charles-Antoine St-Jean : We can confirm that our analysis was done independently. We are satisfied with the figures that we have submitted in our report. We are used to conducting due diligence analyses for major companies, specifically in connection with transactions. Like ourselves, the colleagues with whom we work in this kind of analysis are definite: the figures on the table are valid. Mr. Alupa Clarke : Thank you. [ English ] The Chair : Mr. Weir, we're still in public. Seven minutes, please. Mr. Erin Weir : Thanks very much. I'd like to pick up where I left off with Mr.

Spear about postal banking options in Europe. Mr. Clarke broached this topic as well. I want to ask you specifically about Swiss Post. It's been suggested that postal banking only works where the private banking sector is underdeveloped, and that's clearly not the case in Switzerland. I wonder what your thoughts are on the success of Swiss Post as an integrated post office and banking operation. Mr. Bruce Spear : I can't comment specifically in any detail on Swiss Post, not being an authority on Swiss Post per se.

I can apply the broader lessons that we've been talking about across multiple geographies, such as the success of the banks that are serving unmet needs. Depending on the source you choose to cite, the under-banked population of Canada is either 6% or 1%. In our view, it leaves relatively little opportunity to go after new market space with essentially the same capabilities as an established industry and try to compete for that business. Mr.

Erin Weir : No, fair enough, but I guess my suggestion is that Switzerland didn't suffer from a lack of banking services, and yet Swiss Post has been very successful in that sector. I take your point that perhaps you're not an expert on Swiss Post, so I've sort of put you on the spot, but I just wonder why, in this research for the task force, there was so much focus on La Poste and Royal Mail rather than on Swiss Post, which seems like a really positive example. Mr. Bruce Spear : If there's an opportunity or lesson to be learned from Swiss Post, we'd be happy to follow up.

I'm not in the position to state definitively why it was successful there and not in some of the other markets. Mr. Erin Weir : Okay. I'd like to ask Ernst & Young about the pension situation at Canada Post. I think you identified it as one of the major financial challenges facing the corporation. It really comes down to an accounting choice. If we view the pension in terms of a solvency valuation, then there's this huge unfunded liability, but it's not very realistic that Canada Post would have to shut down its pension tomorrow and pay out all the benefits.

A far more relevant accounting metric would be a going concern valuation, which actually shows a surplus. Do you think it would be reasonable for the federal government to simply exempt Canada Post as a federal crown corporation from solvency valuation? Would that address a lot of the challenge that you identified? Mr. Uros Karadzic (Partner, People Advisory Services, Ernst & Young) : That in fact is one of the alternatives listed as a possible alternative to making the contributions. Essentially, extending the current exemptions or making them permanent would be an alternative.

Again, that changes the cash contributions into the plan, which is what's at issue. It also decreases the contributions to the plan, so from the perspective of benefit security, to the extent that the plan is wound up at some point, then there would be a risk. Mr. Erin Weir : Do you see that type of exemption as a viable option that would materially improve Canada Post's financial outlook? Mr. Uros Karadzic : Sure. If the exemption continues or is made permanent, then those large contributions that we're discussing would not have to be made. Mr. Erin Weir : Okay.

To go back to the topic of postal banking, the case has been made that Canada has a very strong private banking sector, and hence there is maybe not as much need or demand for postal banking. But is it also not the case that in part because of restrictions on foreign ownership of banks, the Canadian banking sector could be characterized as an oligopoly, with five big banks dominating the market earning very good profits, and doesn't that open the opportunity for other Canadian-owned competitors such as, potentially, Canada Post?

(1230) Mr. Bruce Spear : It's certainly a fair challenge to ask is Canada the lowest cost to consumers market for banking services? The answer is it is not the lowest cost. It is a very heavily banked country. It isn't the lowest cost, but it's far from the highest. That said, there's little to say that the banks wouldn't respond to the entry by Canada Post in the market with more aggressive pricing— Mr. Erin Weir : Wouldn't that be a good outcome? Mr. Bruce Spear : —or they could do that today. I guess the question is, is that the necessary catalyst? If that's what's deemed good policy, then that is a basis. Mr.

Erin Weir : I take your point that the banks might respond with lower pricing, which might reduce the opportunity for Canada Post to make money off postal banking, but I think, as you also suggest, there's a really strong public policy argument for provoking the banks to lower their fees. To me, that would be one of the strong points for postal banking. Perhaps it's beyond the scope of the study you did. Mr. Bruce Spear : It's a very fair question and a challenge to the observations of the report, as opposed to the recommendations.

I would simply point out that doing so would require significant investment on the part of Canada Post and the government in building skills and capabilities that clearly are not present today and in taking a significant amount of risk. If the goal is to lower the cost of banking services to Canadians, then there are other policy measures one might explore. Mr. Erin Weir : Fair enough. We could let American banks into the Canadian market, but there are other policy reasons we might not choose to do that.

It's true that getting Canada Post into banking would require some big investments and some capabilities that aren't there now. I guess that's one of the reasons that I think it would be very interesting to look a bit more closely at examples like Swiss Post, where you have post offices that have done so, seemingly, with a great deal of success. The Chair : Thank you very much We're now going to Monsieur Ayoub. Monsieur Ayoub, do you wish to be in public or in camera? In public. You have seven minutes, please. [ Translation ] Mr. Ramez Ayoub : Thank you, Mr. Chair. Thank you for joining us. I have seven minutes.

In that amount of time, it is not always easy to ask questions and get complete answers. I am going to try to make my questions short and more direct, without too much

preamble. Different approaches are possible. Depending on the studies conducted or the vision used to reach a result, Canada Post can be seen as a service or as a commercial enterprise that provides a service using the user-pay principle. You can see it like that. Would your study have produced a different vision or different recommendations if you had used a different philosophy or approach—an approach not strictly focused on the business aspects, the profitability, the lack of subsidies, the overall viability?

Canada Post could instead have been seen as a service like health care, meaning that there are always costs, but there is no deficit because it is an essential service. Would the approach substantially change the results? Mr. Pierre Lanctôt : Thank you for the question. We conducted a relatively independent study. We considered Canada Post's financial situation without looking at its funding formula or at it being a public service. In that sense, our study has no impact on the model chosen. The principle that the review panel used was that Canada Post had to continue to be self-sufficient.

In terms of the financial projections and financial analysis, it had very little impact. I am talking about future projections.

(1235) Mr. Ramez Ayoub : We talk about economic impacts, but there are also social impacts. We were able to see that when we toured the whole country. We visited urban areas, but also rural ones. Yes, there are immediate financial impacts, but there are also social impacts. Have you considered those in your analysis? Mr. Pierre Lanctôt : That was not part of our mandate. We looked strictly at the financial aspect. Mr. Ramez Ayoub : I'm looking at my notes. You talk about cost centres compared to service centres. There's a difference there. Those are two different visions, philosophies.

Later, when the time comes to make political decisions, we look at the various service options to create new sources of revenue. As I see it, we look at ways to downsize, to streamline processes, and we look for new revenue, whether through marketing strategies or advertising revenue. The idea is to go beyond Canada Post's main activity, which is first and foremost a mail and parcel delivery company. We are even looking at telecommunications possibilities, a postal banking service, and all sorts of other approaches.

Do we not weaken the corporation when your mandate is very focused on finance and we are trying to break out of the main activity? Mr. Pierre Lanctôt : We studied the financial side. I'm not sure whether Mr. Spear has any comments on revenue. [ English ] Mr.

Bruce Spear : On the revenue side, what we found by and large, on any of the incremental...what's called the new lines of business, was that potential game-changers like postal banking were evaluated on the merits of the capabilities of the company and the needs of Canadians and whether or not the competitive environment would be conducive to Canada Post as a market participant.

On other potential new lines of business that were more built around asset leverage or leveraging the existing personnel, we were unable to come up with new activities or new lines of business that generated higher returns than managing the business to its proper scale and its proper network structure to meet the needs of the future, which is declining mail volumes and increasing parcel volumes. [ Translation ] Mr. Ramez Ayoub : Should a second phase be added to the study? It is certain that, as consultants, you are happy to hear that, but that's not the goal.

The second phase would look at merging some government services. We heard about the prospect of merging services and taking advantage of Canada Post's establishment to save elsewhere. I see a lot of work is being done in silos. Canada Post is seen vertically,

whereas there are government services across Canada. Have you looked at that in your study? Can you shed a bit more light on that for me? Mr. Pierre Lanctôt : Yes. Mr. Spear can talk about the study that was done. [ English ] Mr. Bruce Spear : It's a fair question. We were focused principally on Canada Post, but we did look at the Service Canada centres, particularly in the more rural areas, as an opportunity to potentially both increase service to Canadians in those areas as well as to reduce costs.

The typical staffing level of a Service Canada centre, given the amount of traffic, was fairly modest, so we were looking to consolidate different government services into one physical entity and with the necessary staff requirement. That, in fact, was one of the savings initiatives that we identified. [ Translation ] Mr. Ramez Ayoub : If we want to go a bit further, the socio-economic aspect is still missing. What is the impact of cuts or changes to the services? For instance, we talked about mail being delivered once or twice a week.

Your study needs the socio-economic side to know what impact those new options would have. It is a financial report, but the socio-economic side is missing. At any rate, that answers my questions. Thank you. [ English ] The Chair : You have virtually no time left, Mr. Ayoub. Mr. Ramez Ayoub : Maybe 15 seconds, but it's okay. The Chair : We'll go to Mr. McCauley, for five minutes, please. Mr. Kelly McCauley : Gentlemen, I want to bounce back to the pension solvency. You mentioned that if we just extended the holiday, forever changed the legislation.... How do you view that from competition like the private sector?

Would that not be an unfair advantage for Canada Post over FedEx, or other companies that have to follow the solvency rules?

(1240) Mr. Uros Karadzic : Thank you for that question. I think it's a fair question and a fair perspective. Again, it would depend on where the different plans are registered. I talked about, for example, the difference in the level of solvency. If you're a federally registered plan, that might include indexing;

whereas, for example, if you were registered in Ontario, indexing would not be included in that solvency deficit. There would be jurisdictional differences as well. It's not all absolutely equal. I think the other perspective to take is that Canada Post.... Certainly, this plan is a legacy public sector plan, and the private sector competitors do not have plans like this. There is that dimension to it as well. Canada Post has a legacy plan that the private sector competitors did not originate with. Mr.

Kelly McCauley : This is where we're in a current surplus, but I understand that is because Canada Post has poured in a present value of about an added $2.5 billion, or along those lines, for the solvency payments they're required to do. Is that correct? Mr. Uros Karadzic : The plan is in a solvency deficit. Mr. Kelly McCauley : The current surplus is a catch-22, because Canada Post has been required to pour money in for the solvency, so the only reason we're in a current surplus is because of that money they've poured in to match the solvency requirements. Mr.

Uros Karadzic : The plan is not in surplus, other than the small surplus— Mr. Kelly McCauley : Current. Mr. Uros Karadzic : —on an ongoing concern basis, if that's what you're referring to. Mr. Kelly McCauley : That's because Canada Post has thrown in a couple of extra billion.... Mr. Uros Karadzic : Canada Post had the exemption from solvency contributions, so it's not the solvency contributions that led it there. I think the biggest difference is the way these valuations are done.

We're assuming a much higher discount rate on an ongoing concern basis, which reduces the liability, and we're assuming a very low discount rate on solvency, which inflates the liability. That is the difference that is accounting for a small surplus here and a large deficit there. Mr. Kelly McCauley : One of the items you mentioned, not on the pension, but just on door to door, on page 98 of your report you talk about— The Chair : Which report, Mr. McCauley? Mr. Kelly McCauley : Sorry, the Ernst & Young report, you talked about— The Chair : Mr.

McCauley, I believe we would need to be in camera if we want to discuss any of that. Mr. Kelly McCauley : All right, I will skip that question, then. I want to follow up on Mr. Ayoub's question. Mr. Spear, you've mentioned quite a few items for revenue raising, but in the grand scheme of things, on a $6 billion a year giant company, they're almost like rounding error items. One of the things we heard from a witness this morning from eBay was to stick to your core, and stick to what you know.

Do you think that's a valid way to go rather than chasing a panacea, such as postal banking, or a couple of million dollars here and a couple of million there? Mr. Bruce Spear : I do think there is a lot of merit in the strategy of sticking to your knitting and core focus. I think there was a legitimate risk of misinterpretation of our report, which cast a wide net and evaluated almost 40 potential opportunities, which clearly this group did not misinterpret.

We purposefully narrowed down those that we felt would not be in the long-term interest of Canada Post or necessary to Canadians, and we settled on around seven or so ideas for consideration. Even within those, there are a few that are relatively modest. If we thought that postal banking was going to be a billion dollar idea for profit generation, then it would have been one of our strong recommendations. It's simply that we don't think the core capabilities are present today with Canada Post. Mr.

Kelly McCauley : Very quickly, if we went to full postal banking, how many dollars would be required to capitalize us, if we were to go with full services across the country in all 6,000.... What's a ballpark figure, in the billions? Mr. Bruce Spear : It's a fair question, but it really depends on the line of business that Canada Post gets into. As we've contemplated postal banking, it's more of a storefront services provider and interface to other major banks. Mr. Kelly McCauley : It's almost like renting out to the other banks. Mr. Bruce Spear : That's right. The Chair : We'll have to cut it off there.

Madam Ratansi, you have five minutes. Do you wish to be in public? Ms. Yasmin Ratansi : In public, please. Thank you all again. I'll make some statements, and then you'll all have chance to respond. We hear from the ground, and we have been consulting widely, that for 19 of the past 20 years Canada Post has been making profit, giving dividends, and paying taxes, and it's billions of dollars. The assumptions you've made are probably a little skewed because you had to take data, which was sometimes consistent and sometimes was not consistent.

You have answered that in your previous questions, but what I also understood from the ground was that Canada Post management is not thinking outside the box, and it does not have an integrated approach to thinking. Now that's not your mandate, because your mandate was totally different. We have to find a fine balance. When you say to stick to your knitting, if you stick to your knitting and the wool is going, what the hell do you do then? You have to think creatively and outside the box. My question is, what other strategic areas would you look at?

You're suggesting that Canada Post in its current format might just about disintegrate. Should it? Mr. Spear, the question I have for you specifically is about Australia. I looked at Australia, and it is in the same ballpark figure as us with a large land mass and a high rural population, but it has very successful postal banking. With a population of 24 million, it seems to be making $6.6 billion in revenue. What can we learn, and have you had the opportunity for lessons learned? We cannot just pooh-pooh it because maybe in 1968 the postal bank was successful, and then the banking lobby came.

We need to be balanced. Give me your analysis of it, and then I'll ask the other question.

(1245) Mr. Bruce Spear : To your first question, I certainly agree that sticking to your knitting if the wool is running out is not a viable long-term strategy. While we certainly were not mandated to do a managerial assessment of Canada Post, there is certainly no shortage of ideas being explored by Canada Post within the context of that business about how they can leverage it further and make it more profitable.

As part of the study, we did get, in some detail, into some of their past investigations of specific business opportunities and where there might be opportunities for both cost reductions and incremental revenue, and we found them to be fairly comprehensive. Ms. Yasmin Ratansi : Okay. Because it is referred to in the report, perhaps we won't talk about it at the moment. Therefore, my question is for the accountants here. You are EY. Would you give your business to PwC? Mr. Pierre Lanctôt : Would we give our business to a competitor? No. Ms. Yasmin Ratansi : Good.

Why is the corporation opening franchise stores next to the corporate stores and passing on retail business to them? Did anybody talk to them about why this is the strategy? They do not charge a franchise fee. Those are the questions we are hearing from the ground, and we need to know. Mr. Charles-Antoine St-Jean : I think my colleague who is here from Oliver Wyman can answer that very specific question. Mr. Bruce Spear : I'll do my best. Thank you for the question. The question is why Canada Post is franchising in areas that might otherwise have a post office to serve the public need.

There are a number of reasons. One is that certain areas don't provide as much coverage within a certain distance radius, so there is a strong case for franchising in those areas. The second is that the franchisees' hours are actually longer than those of a particular post office. While I accept your point that they are creating competition, I would also submit that they are improving service to Canadians by increasing their amount of franchising. Ms.

Yasmin Ratansi : The next thing I want to know is, what do we do in rural and remote areas that do not have a franchise post office, if we want social cohesion and economic growth? Mr. Bruce Spear : I would argue that some of the best opportunities for franchising are in the rural and remote areas, because it doesn't require significant real estate investment and other staffing for thinly used services that Canada Post would offer, and instead allows you to piggyback on investment made by others in that market to provide better service to Canadians.

(1250) Ms. Yasmin Ratansi : Thank you. The Chair : Mr. McCauley, you have five minutes, please. Mr. Kelly McCauley : I want to follow up on the retail question. My understanding is that, if you have a Canada Post store and a retail next door, and the retail is selling stamps, etc., that's not shared profit. That's not profit going to Shoppers Drug Mart. They are selling Canada Post services. The more retail you have selling your services.... The monies all go into Canada Post anyway for these services and stamps sold, do they not? Mr.

Bruce Spear : There is a split, and Canada Post is earning a profit on the services sold by the franchisees. That's correct. Mr. Kelly McCauley : I'm short on time, so quickly.... A lot of the issues you brought up, and you mentioned a report, seem to come back to labour and the labour agreement. Going forward, do you see this as a stumbling block, perhaps, for a lot of the ideas that you mentioned, whether it's shared or new services? Mr. Bruce Spear : Thank you for the question.

I'll address it in the context of the two most significant opportunities—the first being alternate-day delivery and the other being the retail footprint—and maybe turn it over to my colleagues. On alternate-day delivery, there is certainly a significant number of restrictions as to how Canada Post can adjust its service footprint and achieve savings by making a change from daily to alternate-day delivery. I want to point out that we did evaluate alternate-day delivery across the board and alternate-day delivery only for mail services, and the latter was what survived as an option.

Parcel delivery would remain daily and might even go to six days a week, given the market demand and the profit motive. Yes, there are significant constraints, but those constraints are timing issues as to when those savings can be realized, as opposed to whether or not they can be done. On the retail footprint, there is the CUPW agreement and the moratorium, which materially limits the number of physical branches that can be rationalized or converted to franchises today. That would require policy action in order to achieve those savings. Mr. Kelly McCauley : Gentlemen, we're really short of time.

I've asked before, but now we're in public. Is switching over to community mailboxes the number one thing that we can do to help rationalize costs and continue services to Canadians at a reasonable price? Mr. Pierre Lanctôt : When fully implemented, conversion should provide $400 million to $500 million of annual savings. That's certainly an important measure that could be implemented in a relatively short time. Mr. Kelly McCauley : It's tough to use a crystal ball, but do you see any massive disrupter coming along that could significantly negatively affect Canada Post parcel delivery?

We're seeing that in a couple of years it's going to be 50% of the revenue. Uber is talking about getting into parcel drones. How big a risk is it that in two, three, or five years from now we're going to have a massive problem because of this? Mr. Pierre Lanctôt : It is a big risk. We're seeing changes in technology: 3-D printing will have a significant impact on parcels as goods are being produced or printed closer to reality, and drones.... It's very hard to assess how fast and how— Mr.

Kelly McCauley : It really underlines just how important it is that we as a group come up with some immediate solutions to address these looming losses. Mr. Pierre Lanctôt : Yes. It's an important business. Mr. Kelly McCauley : You're right. The $700 million could be very optimistic. It could be $1 billion if some disrupter comes along and wipes out parcel service delivery. The Chair : Mr. Whalen, you have five minutes, and we're in public. Mr. Nick Whalen : Mr.

Chair, before I ask questions of the witnesses, I'd like to know whether you would consider it fair game for me to ask them about things that specifically aren't in the report. The Chair : I would; however, I would also ask the witnesses to comment on whether they think it would be breaching any confidentiality. Proceed with the question, please. Mr. Nick Whalen : Mr. Spear, I'll start with you. In the in camera session, we had some discussions.

It appears from my perspective that there was no analysis done on whether or not Canada Post should pursue a digital or a future services-style bank at the higher end of the market, accessing SMEs that are already their customers in packaging. Are you limited in your ability to assess those aspects of future banking growth by the corporation, or was Oliver Wyman given free rein to assess all possibilities of a profitable bank?

(1255) Mr. Bruce Spear : That's a good question. I would submit to you that we did evaluate all different types of business banking models, as well as retail banking models. Our first filter was the strategic assessment and fit assessment, and the second was the business case. On that basis, it wasn't deemed to be a particularly compelling opportunity or a public necessity, in our view, for Canada Post to get into small and medium-sized banking. Mr. Nick Whalen : We've heard a lot about the United States subsidizing its postal service to the tune of $5 billion a year.

From your assessment as an international postal expert, do you feel that this provides their industry and their digital marketplace with an advantage that Canada does not enjoy because we don't have a similar subsidy? Mr. Bruce Spear : I really couldn't comment on whether the USPS enjoys a superior level of subsidy and whether that translates directly into market advantage. Mr. Nick Whalen : Okay, fair enough. Now I'll turn to the folks from Ernst & Young. Mr.

St-Jean, when we looked at community mailboxes as a delivery model, we heard different numbers in terms of how much cost savings could actually be generated. When we tried to determine whether there would be any net effect on revenues, we didn't see any analysis in that regard. When I think of people in suburban Canada who have community mailboxes, they might have a preference to order packages that would be delivered to their door by FedEx or UPS,

whereas Canada Post is only going to send it to the community mailbox. Did you examine any market differentials between community mailbox delivery versus door-to-door delivery as it relates to future market opportunities and future revenue opportunities for Canada Post? Mr. Pierre Lanctôt : When we looked at the community mailbox, we focused on the conversion. We didn't assess its impact on the revenue side. Mr. Nick Whalen : So, you didn't examine the revenue side. Mr. Pierre Lanctôt : We didn't look at the revenue side because when we looked at the existing population, some are door to door and some are parcel.

It was hard to establish any difference between behaviours. Mr. Nick Whalen : What length of a pilot do you think Canada Post would need to run to determine whether or not there were any negative impacts on their overall revenue, from a service perspective, on these converted homes? Is it something that they could figure out in a year? Would it require two years to figure out whether or not this reduced service level of community mailboxes has caused attrition in other lines of their business to privatized players? How long should we pilot or examine such a scenario? Mr.

Pierre Lanctôt : It's very hard to respond. I don't necessarily know how long it would take to validate that assumption, but certainly Canada Post has been looking at the impact on the people they have converted from 2014. However, the take on parcel delivery for community mailboxes is typically positive. People can get their parcels in their mailbox and they see that as a benefit. So it would have to be— Mr. Nick Whalen : Okay, so we see it as a benefit, and yet in all the analysis we have, it's net neutral on the revenue line.

Was revenue examined, or was revenue simply not examined at all as it pertains to community mailbox conversion? Mr. Pierre Lanctôt : We didn't look at the revenue. My comment was more about how people are satisfied with the service delivery, not necessarily from ordering more or quantitative— Mr. Nick Whalen : But they wouldn't know about the packages delivered by a competitor. Mr. Pierre Lanctôt : Canada Post? Mr. Nick Whalen : Yes. Mr. Pierre Lanctôt : They may know. Mr. Nick Whalen : They may know. Okay. The Chair : Thank you very much. Mr. Weir, you have three minutes. Very quickly, please. Mr.

Erin Weir : I have a question for Ernst & Young. How much revenue does Canada Post currently earn from the sale of collectors' items or commemorative stamps? Mr. Pierre Lanctôt : That's a good question. It's marginal, but I don't have the exact information. It's bundled with the other revenue. Mr. Erin Weir : Okay. We did hear from a witness in Yellowknife who suggested that Canada Post is not doing enough to support that hobby, and that if it did more, there is the potential for additional revenue.

Specifically, he pointed to a recent stamp collecting convention in New York City that drew thousands of people from all over the world. His sense was that if we could attract events like that to Canada, it would be a significant source of new revenue for Canada Post and also a source of tourism and economic development for the country. I wonder if you have any thoughts on that. I'd also open it up to Mr. Spear.

(1300) Mr. Charles-Antoine St-Jean : As my colleague said, those additional revenues are truly marginal, and they are bundled into the other revenue. It would be truly a rounding error. To put this to rest, that's not a major source of revenue, capital— Mr. Erin Weir : It's not a major source of revenue right now, but I take it you also don't see it as a significant source of potential revenue. Mr. Charles-Antoine St-Jean : I agree with that. We don't see it as a major source of revenue. Mr. Erin Weir : Okay.

We heard there hasn't been one of these big international stamp collecting conventions in Canada for a long time. Is that something we should be pursuing? Is there a significant opportunity there, if not for Canada Post, then for Canadian tourism in general? Mr. Charles-Antoine St-Jean : I would ask that question more to tourism Canada. Mr. Erin Weir : Okay, but no particular.... I just note that many options were touched on by the report. This wasn't one of them, so I thought I should put it on the table to see if there were any thoughts. Mr.

Charles-Antoine St-Jean : I would ask tourism Canada to answer that question. The Chair : Gentlemen, thank you very much for being here. Your testimony has been excellent and very informative, and I think very helpful for our committee. Should there be additional information that committee members are looking for, would you accept any written questions? A voice: Of course. The Chair: Subsequently and conversely, should there be any additional information that you wish to transfer to us, please get hold of our clerk and get that into us as quickly as possible. Thank you so much.

We will suspend for a few moments while we get our next witnesses. (1300)

(1310) The Chair : Colleagues, I think we'll start so we can try to get close to completion on time. Thank you to all our witnesses for being here. I'm quite sure that all of you are familiar with the process that we follow. We'll be asking those making presentations to do so in five minutes or less. Following all opening statements, we will have a round of questions from our committee members. With that brief introduction, we will start. I have the Department of Finance up first with a presentation. Ms. Hemmings, you have five minutes. Please proceed. Ms.

Lynn Hemmings (Senior Chief, Payments and Pensions, Financial Sector Policy Branch, Department of Finance) : Thank you very much, Mr. Chair. Good afternoon. My name is Lynn Hemmings. I'm the senior chief of the pensions team in the financial sector policy branch