LEGISLATIVE ASSEMBLY OF MA NITOBA THE STANDING COMMITTEE ON ECONOMIC DEVELOPMENT Tuesday, 18 June, 1985 TIME - 10:00 a.m. LOCATION - Winnipeg, Manitoba. CHAIRMAN - Mr. S. Ashton (Thompson) ATTEND ANCE - QUORUM - 6 Members of the Committee present: Hon. Messrs. Cowan, Harapiak, Kostyra, Hon. Mrs. Smith, Hon. Mr. Storie Messrs. Ashton, En ns, Harp er, Graham, Johnston, Ransom APPEARING: Murray 0. Harvey, Chairman of the Board J.B. Sweeney, President and Chief Executive Officer MATTERS UNDER DISCUSSION: Manfor - 1984 Annual Report CLERK OF COMMITTEES, Ms. T. Manikel: Committee, please come to order.

Our former Chairman, Mr. Santos, is no longer a member of this committee so we must elect a new Chairman. Are there any nominations? Mr. Kostyra. HON. E. KOSTYRA: I would nominate Mr. Ashton. MS. CLERK: Are there any further nominations? Seeing none, Mr. Ashton, would you please take the Chair? MR. CHAIRMAN: May we have a statement from the Minister? HON. J. STORIE: Thank you, Mr. Chairperson. By way of opening statement, the Clerk of Committees is passing out a statement for members and others. Mr.

Chairperson, I wish to share with the committee a few remarks which briefly highlights the activities of Manfor Ltd., since we last met, to review its operations. During the year under review, the company was called upon to meet a number of significant challenges in terms of modernization of the company's physical plant facilities at The Pas; maintaining a strong, permanent position in a highly competitive international forest products industry; managing and developing the co mpany's human resources; and reducing the company's operating losses while working towards long­ term commercial viability.

Programs and efforts mounted to meet these challenges by management and staff were not without their frustrations and, in some instances, less than fully 38 satisfactory in the actual, compared with anticipated results. Management and staff, for example, are less than enthusiastic in having to report a net loss for the year of $9.387 million. They ought, however, to be proud of their significant accomplishment in substantially reducing the company's losses by $15.361 million from the previous year.

This represents an incremental improvement in the financial performance for the company which has not been achieved in any of the previous 10 years of the company's existence. Last year we reviewed with this committee in some detail the company's goals and philosophy statement and Manfor's strategy for corporate recovery, being mounted around the three "R 's" of retrofit, reorganization and recapitalization.

I will not dwell in detail on these at this time, save to emphasize that progress in all these areas simultaneously over the past year and continuing in the current year is satisfactory and bodes well for Manfor's future. The retrofit or modernization program, while not finalized in the fiscal year under review, proceeded well and is being completed in the current fiscal year. The modernization of the pulp and paper mill has been a success in terms of timely completion and meeting the targeted quality and increased productivity objectives.

The rebuild of the company's sawmill experienced some delays in completion, but it appears that the completed sawmill will reach its target of design capacity by the end of this sum mer. But again, as we emphasized to the committee last year, the dynamic nature of the forest products industry emphasizes the need for a continuing adaptive ability on the part of companies hoping to remain successful in this sector.

For Manfor's part, the modernization program was but one link in the numb er of interdependent factors which require constant vigilance and effort to ensure market penetration/maintenance, and minimal production costs - both factors are key to the sound financial . performance and stability of employment and income generation, both locally and throughout the province.

In order to minimize the company's vulnerability to a totally uncontrollable international market situation, all levels of company's management and staff have been involved in a cost-cutting program geared to attempting to have Manfor's production costs kept to a minimal level, so that in times of even poor markets lower manufacturing costs will allow financially attractive sales of our products. I expect to learn of very positive and innovative recommendations arising out of this and look forward to sharing with committee members next year, the results of the implementation of agreed upon recommendations.

Manfor Ltd., with 1983-84 sales of almost $74 million, direct employment of some 800 workers and a payroll of $33.2 million, is an important component of the provincial economy and will remain so for many years to come. As a Manitoban and an elected representative from a Northern constituency, I recognize and applaud

Tuesday, 18 June, 1985 the su bstantial contribution Manfor ma kes to the local and provi ncial eco no my. As a Cabine t member with responsi bility for Manfor, I have every confidenc e in the posit ive future of Manfor and the su ccess of its opera tions. The efforts already under way and th ose yet to be mounted will, I am satisfied, allow the company to experience even a greater fina ncial turnaround than was recorded in the year under review.

This go vernm ent and myself, as an elected member of the Le gisla ti ve Asse mbly, are comm itted to the cont inu ed opera tion and su ccess of Manf or as a positiv e major influ ence on the provi ncial and local economies. Th at's by way of open ing state ment. I'd like to in troduc e to the commi ttee, for tho se who aren't fam iliar with the two gentlemen on my left, the Chairman of the Board, Mr. Mu rray Ha rvey, and the Ch ief Exec utiv e Officer, Mr. Jack Sween ey. Also with us tod ay, in an advisor y capacity are Mr. Alien Bourgeois , the Di rect or of Marketing and Mr.

Derek Betts, the Di rect or of Fina nce. Open for qu estions. MR. CHAIRMAN: Perhaps before gett ing into the qu est ions , what is the wish of the comm itt ee? Should I proc eed page-by-page through the repor t or wh at's the verdict? MR. CHAIRMAN: Mr. Gourla y. MR. D. GOURLAY: Mr. Chair man, I have a num ber of quest ions and I'm sure other mem bers of the comm ittee have ques tions dealing with all aspects of the report. 1 would hope tha t we cou ld do it in tha t fashion and then at the end, pass the report. MR. CHAIRMAN: All rig ht, perhaps then we will proceed to general ques tions. HON. J. STORIE: Mr.

Chairman, we have tra ditionally been quite in formal and I think we'll have to deal with all of the quest ions, one way or another . I think we should jus t proc eed with the qu estions mem bers have. MR. D. GOURLAY: Mr. Cha irman, normally we receive a report from the Chairma n of the Board . Is tha t no t goi ng to be made this year? HON. J. STORIE: Mr. Chairman, if Mr. Har vey has anyth ing to add, he is certainly prepar ed to do that. MR. CHAIRMAN: Mr. Ha rvey. MR. M. HARVEY: Mr.

Chai rman, I think it' s trad itional for me to go over the letter in front of the Annual Report and I will do so no w if tha t's your wish, di sregard ing the fi rst paragraph, which is merely a transm ittal paragraph. The com pany year 1983-84 saw some major chan ges for Manfor Ltd . Work was well under way in two major retrofit projects. Sign ificant market changes in the pric e of pulp and paper had allowed the company to sur pass its object ive of cutting the previous year's deficit in half. By Dece mber 1984, the pric e of mar ket pulp had slump ed and there was downward pressure on paper 39 pric es.

These de velopmen ts, while no t in line with the comp any's 10-year project ion, confirmed the absol ute necessity of Manfor developing a new produc t, Sup erior Performance Kra ft, and achievi ng a ni che in tha t specialty market. The compa ny is particularly wlne rable to mark et forc es, and chang es in product prices have a dou ble-barrelled effect on the compa ny's bottom line. This fact is central to the comp any's shor t-term recovery in itia tiv es.

The company is det ermi ned to continue to reduce its opera ting deficit even though tha t means some dev elopmental plans may have to be mo ved forward in time. Est ablishing a sound track record maintains a fi rst prior ity. The company remains comm itted to an in itial market strategy which will see it obtain and hold a portion of the North American mu ltiwall market. This will serve as the company 's "b read and butter" account and will be the foundation upon which the company will build. The forest produc ts ind ustr y is not enjo yi ng the recovery to the deg ree tha t other man ufacturing sectors are.

Ma rkets remain turbu lent and signif ic ant in terna tional events, inc luding unfor eseen currenc y realign ments are occu rring which may have the effect of cha nging the face of the forest products ind ustr y forever. However, the se are the hard realitie s of markets faced by this comp any. The y requir e us to work harder and work smar ter. Market forces can only be add ressed and with some dil igenc e, antici pat ed ; the y cannot be controlled. Only costs can be controlled .

We expect some considerable cost imp rovement as the result of the retrofit but new and inno vative ways of control ling costs will have to be the next chap ter in the compa ny's his tor y if this firm is to su rvive. Acco rdingl y , an intensiv e analysis of cost reduction pos sibili ties over both the shor t and long term has been under way for several months. At this ti me, it is also appropria te to acknowledge the con tinuing contributions made through out the year by all Manfor emplo yees. The dedication, support and partici pation make s the achie vement of Manfor goals pos sibl e.

I remain confident tha t gi ven reasonable markets and continued shareholder support in the tough days ahead, Manfor will su rvive into the forest prod ucts' world of the future. MR. CHAIRMAN: Mr. Rans om. MR. B. RANSOM: Mr. Chairman, I had been able to read tha t state ment tha t Mr. Har vey jus t read because it ap peared with the Annual Report of Manf or.

Traditional ly, we have receiv ed a stat ement fr.om the chairman giving us an upda te because the report tha t we have before us is for the year ending Sept em ber 30, 1984. lt's not much more than thr ee months now until the end of the fiscal year th at we are in. Trad itional ly, in this commit tee and in the Hyd ro comm ittee and other comm ittees, we receive an upda te because we're dealing with the report th at really is his torical to qui te an extent now. We do have some fairly positiv e ach ievements in this report and some fairly posit ive state ments from the chairman and from the Min ister.

I think the commit tee wou ld appreciate receiving an upda te as to where we're at as of June 18, 198 5.

Tuesday, 18 June, 1985 MR. M. HARVEY : Mr. Chairma n, through you to Mr. Ran som. In my short term as chairman I have done that tradit ionally. I am prep ared to talk about the situation as it stands tod ay. lt's ind ic ated in my letter in the Annua l Report. Markets for pulp and paper have not recovered to the extent tha t was antici pated, in fact, after several years of five-year cycles, there has been a slump in the market. Sign ificantly, this took place inside of two years. The basic situation worldwide seems to have considerable effect on our produc ts.

Several years ago, Sweden devalued its cu rrency and th at's allowed it to do some th ings in the Euro pean mark et which has cau sed some of the exporters in Canada di fficulty and they are coming back into the North Americ an and even the Canad ian marke t. The strong American dol lar caus es American manufacturers di fficulty in selling offshore and pushes th em also into the North American ma rket, particularly the American marke t. We have had sign ificant dif ficulty as evi denc ed by our announc ements of shutdo wn in mai ntai ning both pric e and volu me.

If this situation is to cont inue over the next five periods that we have left in our operating year, then our fortunes will be basically much worse than they are at the moment - the year under review, I should say. We do n't expect any immedia te relief, although there have been some sign ificant change s tha t I' ll talk about in a moment. If things are to cont inue the way the y are at the moment, the n we could antici pate a loss in the order of $1 7 million to $1 8 million in this curr ent year.

Now, it seems to me, tha t the di ffi cu lty in the forest prod ucts indus try generally is basically too much prod uctive capaci ty. Tha t is why Manfor deli berately emb arked on a stra tegy that wou ld take it into a specialty market. That market is mu ltiwall market which is the paper used in producing mult iwall sacks , cement, feed, tho se kinds of thin gs. We ha ve very rece ntly heard tha t our major compet itor in the United States has annou nced its intention to get out of the st ress kraft mar ket. They have been purch ased by a fine paper compa ny. You wou ld remember it as St. Reg is, now Champion.

That frees up app roxi mately 250,000-300,000 tons of what the y call st ress kraft which is a simila r product to our Sup erior Perform ance Kraft in the mark et. At the moment, that announc ement is not going to do us much good in the shor t term because of the fact tha t they 'll continue to produc e for the next 18 months and may even lower the pric e in order to hang on to the customers tha t will be looking forward new places to buy.

We have some early ind ica tions of orders com ing our way as a result, but in this particular fiscal year, we don' t believe it's going to help us very much. lt is, at least, one of the things tha t needs to happen and tha t is the amo u nt of produc tiv e capacity in the brown paper ind us try is being lowered which gi ves us a wider market opportun ity than we had originally antici pated. So tha t's the situation as we see it at the moment. With respect to the tech nologic al imp rovemen ts, the pulp mill has met all the expectat ions. We've even go t a bit mor e produc tive capacity than we expected.

I think we were expect ing an 8 percent imp rovement and got some thin g like a 12 percent imp rovement. The sheet 40 is being well recei ved even though the market as to volume in pric e is not tha t great. The sheet is being well received by the people who have had it out into the field and tested it and tho se are all positiv e signs . Unfortun ately, they won' t impa ct on us this fiscal year. On the sawm ill side , we are no w opera ting in automatic mode. We've got the majorit y of the comput er problems beat.

We're backu p on two shif ts, I thi nk, this week; and the planer mill will be star ting up mom entari ly, so tha t basic ally brings us up to where we are. We have some imp rovement in the order book, star ting to mo ve back towards a more comf ort able level of days of productio n, but it' s not going to be ther e, we do n't thi nk, in time to allow us to avoid the July shutdo wn.

Once we get in to a shutdo wn mode th ere are certain things comm itted and we won' t avoid the shutdo wn, and tha t figur e of fo recast deficit tha t I mentioned to you inc ludes the two shutdo wns tha t were announc ed, because when we shut down we do n't save mon ey, we lose mon ey. MR. D. GOURLAY: Mr. Chairma n, I'm, to say the least, dis appointed with respect to - the Minis ter had led us to believe that there would be, I thoug ht, a more detai led Annual Report in the mak ing and we were provided with this temporar y do cu ment, which provides some in formation.

In comparis on to last year, I believe we crit ic ized the very expensive, glossy $30, 000 report, ho wever it did contain a lot of in forma ti on. This year, we ha ve the do cument th at's fin e as far as the cons truct ion of it, but it doesn't con tain any in forma tion.

We were led to bel ie ve tha t with the inco ming president, the compa ny would be tu rned around and this year we do n't see any message from the president with respect to the turna round tha t we were expect ing to occur , and I'm sur e there is some defi ni te imp rovement in the red uction in expense, but when a company has been ru nning at milli ons of dollars in the red and then it comes out to $9 mi llion in the red, I gu ess it do esn' t seem too bad. lt sh ows an imp rovement, but I'm just wonderin g, the Mi nister ind ic ated in qu estion period or at least intima ted, tha t the Annual Report had gone to prin ting and it wasn't ready and we were getting this tem porary document.

Is this the situa tion? · HON. J. STORIE: Mr. Chairma n, what I th ink I said was that we had intended to inc lude the Audit or's Report, and so forth, in an Annual Report tha t would be tabled. We publis hed, as the member acknowledged, a rather expensive Annual Report the previous year, a 10th Ann iversary Report. The Board of Di rectors reviewed the necessity for an Annual Report and the benef its tha t accrued to the corpor ati on, because of tha t repo rt.

Given the ur gency and the requests from mem bers for the annual opera ting stateme nt, a decision was made to provide the brie f overview with the Audit or's Report, rather tha n include it in a much broader publ ic ati on, which wou ld be an Annual Report and sales do cum ent. Given tha t the requir ed do cuments were table d, a decision was then made to produc e what will be, in effect, a sales broch ur e report on Manfor; so th ey're two separate items as of this poin t. When I was asked

Tuesday, 18 June, 1985 earlier, it was the intention originally to produce them together , much in the same fashion as was produc ed the previ ous year. it was felt tha t by breaking them up we could do , perh aps, both things as effect ively, if not more effect ively. MR. D. GOURLAY: Mr. Chai rma n, the Aud itor 's Repor t was dated Novem ber 30th. I believe the fi rst requ est for the tabling of the Annual Report wasn't made till the latter part of the April.

Now I do n't think that tha t's pres sing the Min ister too much for tabling the Annua l Repo rt, becaus e normally we deal with the Annua l Report during the Session. I can' t say for su re, but I think it was arou nd April 24th, when the fi rst reque st was made for tabl ing of the report. In view of what the Minis ter is saying, the Annua l Report publ ication should have been well advanced by tha t time and this was the inti mation I thought tha t the Min is ter had made.

In view of the fact tha t we wanted the Annual Report sooner than he was prepared to table it, we ended up get ting the one tha t was tabled subsequent. HON. J. STORIE: Mr. Chair man, I wasn' t sugges ting that the pressure from the mem bers opposite was solely the reason for tabling this particular document. I had indi cated tha t we had in tended to amalgama te the report tha t you got, or a facsi mile ther eof, with some thing a little more in lin e with a sales document. lt was the intention orig inally to do that.

A decision was made, because I un derstood tha t mem bers opp osite wanted the financial in forma tion , to sepa rate them and I think tha t was a good decision, in tha t the document tha t will now be produc ed deal ing with Man for's opera tions , along the lines of what was produc ed last year, will be mor e useful as a marke ting to ol. Tha t decision was ma de. I'm not blaming the member op posit e or anyone else for tha t decision . I think tha t the inf ormation you go t, wh ile plain, is the in formation that you requi red and tha t is requi red we table.

Hop efu lly the other document tha t is still being produc ed, which I refer to and which we in tended to amalgama te, will be produc ed and will serve its own particular pur pose. MR. M. HARVEY: Maybe I could jus t add a little bit to that. The di fficu lty was that we had origi nally in tended to produc e a more mode st version of the 10-year repo rt, with a specific purp ose of introducing our new product. As we worked through it, we had in tended origina lly to make it all in to one document.

We were very close to go in to printing when the request came for the Annua l Report and we made a decision, based on our fina ncial situation and the need to do a good job on the sales prod uct, the broch ure for the new produc t, to split the two reports and concent rate on producing a sales kit on the special performa nce or super performanc e krait ; and at the same ti me, provi ding the requir ed in formation to the Leg islature on the opera tions of the compa ny. But the origi nal in tention was to do that in a combin ed way. HON. J. STORIE: Yes, I just add to Mr.

Gourlay's earlier com ments about his di sap pointme nt, I sup pos e, in the cu rrent loss, the loss tha t we're reviewi ng in the 1983- 41 84 year. lt is di sapp ointing tha t tha t loss is there. I had projected in our previous com mit tee hearings tha t we would reduce by 50 percent, the losses of the com pany from 19 82-83 . We have done that. I also predic ted tha t we would be in a much better position in the curr ent fiscal year. That has not happen ed and obviously ther e are a numb er of reaso ns why tha t hasn't happ ened . The chairman mentioned the soft ma rkets and the ext remely low prices.

I gu ess tha t, all things being equal, some of the measures that the chairman outli ned tha t are being unde rtaken have been ongoing for th e last num ber of months are going to create a situation whereby , even when the markets are low, we can come forward with a better perfo rm ance than what we're bringing to comm itte e or projec ting for the cu rrent year, and th at's the goal.

Again, I reiterate some thing I said last year, that we are no t alone as a fo rest produc ts company in experiencing ext reme financial vulnerabil ity, ext reme financial volatili ty, I gu ess. it's some thing tha t's sp read across the indus try and whether it's major in terna tional companies like MacMill an Bloedel or smaller ones like Cantor , they're all experiencing the same problems , the same di ffi cult y in predicting, never mind from year to year, but from month to month, what pric es are going to be.

I think as everyo ne at this Commit tee kno ws th at's, by and large, the determ ining factor on the financial performanc e of the company , what the markets will bring and what kind of volume can be sus tained. MR. D. GOURLAY: Mr. Chairman, I do n't want to dwell on this at great length but jus t to sum up. lt was my im pres sion, from listening to comments during various ques tioning of the Minis ter, tha t ther e was great news ahead ; th ere was a big turnaround in Manfor and tha t we could see nothing but optimism in the future.

We get the Annual Report and it looks like it's a com pany going out of busi ness. Th ere's not mu ch in forma tion; it's doom and gloom. As I mention ed earlier, there is no ind ication from the president with respect to what he sees do wn the road with respe ct to making this a viable paying company in the futur e. I accept the comments by the Min ister as to what has happened, but I jus t want to put on the record tha t we were being led to belie ve tha t there was much more information tha t would be forthco ming at this meeting to show the posit ive steps and the brigh t outlook for the imm edia te future.

Now we're told tha t the situation do esn' t look very bright for the coming year or the next couple of years and tha t we can expect a loss of some thin g like $1 8 million on the curr ent year's opera tions. I jus t want to put tha t on the record. In the Annual Report there do esn' t make any refere nce to who is on the board of di rect ors at the present time, although Robert R. Wilson has sig ned as one of the direct ors and on the last Annual Report tab led last year, Mr. Wilson's name does not show as a director.

I wonder if the Min ister can ind icate the makeup of the board of di rectors at the present tim e. HON. J. STORIE: Mr. Chairman, I wouldn' t want the member to leave with the impr ession tha t all is doom and gloom. I don 't think tha t either my comments or the chairma n's comm ents ind icated that. Wha t I did say, qu ite clearly, was tha t my pred iction last year for the next two years were only 50 percent

Tuesday, 18 June, 1985 right. I said tha t we wou ld reduce the opera ting deficit of Manfor by 50 perce nt; from 24 million to 12. We went do wn to 9. I had assu med, again rememb ering tha t we were June last year, I made the prediction based on a fo recast tha t was prepa red by Manfor for a 10- year period indic at ing where the pric es were goi ng, where th ey felt our costs would be. Our cost did n't change; our cost, if anyth ing , went do wn. We're ob viously deal ing with vo lume and pric e tha t are affect ing dr ama tic ally the outcome for 1984 -85.

This year is going to be a lot more di ffi cult than we antici pated some year- and- a-half ago . That do esn' t mean th at the outlook is bad . Wha t we're saying is tha t we have two of the th ree major pie ces in place for wha t we hope wi ll be a sound base for Manfor; tha t is the upg rad ing and the refi nancing. The reorganization is taking place. The chairman has indic ated, and I've indic ated in the Hous e, tha t we're un derg oing a major review of our costs and ways of red ucing our costs tha t go from the people in the bush to sen ior mana g ement.

They're pr epari ng a set of reco mm enda tions tha t's being done in co-opera tion with all the people at Manfor, some thing th at has to be done so tha t we can reduce our costs sign ificant ly. All of th ose thi ngs and the somewhat brig hter outlook in marke ts, the fact th at one of our major com petitor s, the St. Regis Com pany , is wi thdr awi ng from the unb leached kraft marke t bodes well for the compan y. All is not do om and gloom, on the contr ary, we've had a min or setback, some thin g tha t I obviously could n't pred ict last year and no one in the market cou ld have pred icted it.

Remember tha t,

part icul ariy in terms of lum ber, we're I believe, in North Americ a, experien cing the hi ghest volume of lumb er sales ever. Ho using starts are up. Unfor tuna tely, pric es are not and ther e are many, many com panies who are, in effect I gue ss, dumping lum ber, so the pric es are down there are many people comp et ing for tha t volume; whe reas you might expect in creased pri ces, with all the activity it hasn't happened .

The markets have been soft for other Manfor produc ts like unb leached kraft . it's not doom and gloom, it's a setback and some thin g tha t we are no w ge aring up to be able to handle in the future. it's going to req uir e some tough decis ions. Cert ainly I have every confide nce th at the current board whom I will name mo mentarily are going to deal with th ose problems in a forth right way.

We're not going to du ck the issue; we haven' t duc ked the issue on the other major decisions tha t we've had to make and we're no t go ing to duck this one. lt will be the responsi bility, and it is their manda te, both the board and the manag ement, to deal with those problems. The curr ent Board of Di rectors consis ts of Chairman Mr. Mu rray Ha rvey, Mr. Ken Cassan, Mr. Lloyd Sch reyer, Mr. L. Rogows ki, Mr. Wayne Halverson, Mr. Bob Wilson, Mr. John Mil ner, and Mr. Garth Cham bers. There is one vacancy as well. MR. B. RANSOM: Just a qu estion ari sing out of the Mi nis ter's comments , Mr. Chairm an .

The Min ister said tha t a numb er of companies are dumpin g lumb er on the market. Is Manfor dump ing lumb er on the market? HON. J. STORIE: I'l l let the chairman answer that. 42 MR. M. HARVEY: Yes, Mr. Chai rman, through you to Mr. Ransom. No, we are jus t bringing up our in ventories because of not manuf acturing lumb er for awh ile. We're esse ntially jus t re-entering the market.

I think what the Min ister was referring to is the fact tha t, in the forest produc ts busi ness, th ere seems to be an over capacity every time you turn around, so while all of the signs tha t would indic ate a fai rly hi gh pric e for lumb er are in exis tenc e at this time, the market pric e of lumb er has not risen to the degree that it should ris e given the sign . My only answer to th at is tha t what happened when the ma rket started to come back is tha t every body started up their mills again and, in essence, plugged the pi pe.

Market prices for lumb er are rising at the moment and we are now up and running and we're gett ing a reasonable pric e for our produc t, but tha t's something of very recent vi ntage. I think the signific ant thin g is th at back when the decision was made to go through the ret rofit, all of the signs on the lumb er side have come to pass, but what hasn't been appr ecia ted is the effect of overcapaci ty. On the paper and pulp si de, what wasn't I guess seen clearly was the effect of currenci es on the way overcapacity is managed in the in ternational market .

Most recent forecasts in tha t area indic ate that we st ill have an overcapacity in paper. There are thi ngs developing in the Third World tha t are certai nly some thin g we have to look at,

part icu larly the use of some souther n hardwoods for producing various gr ades of paper, so the market is fai rly turbu lent, even yet . Ho wever, with respect, if I may take this mome nt to jus t talk about the reason for a lack of in forma tion in this report, responding to Mr. Gourla y's com ment, this is only basic in forma tion. There was an in tention to provide some further in forma tion in our promoti onal in forma tion and tha t will be available to you as soon as it comes out, but we weren't trying to prod uce a gloom and doom do cument by looking at the compar isons of the two.

We were merely trying to respond in the best way we coul d. The president did have a message th at will go into the promo tion al package and it was a decision - basic ally my decision - to try and get this out to you and leave the rest for the promoti onal package . I do n't believe it 's all gloom and doom, but I think tha t this year we're not goin g to app recia te any of the effects of the ret rofit to any great degree, or the effects of chang es in the marke t like our main comp etitor , comin g out of stress paper . MR. B.

RANSOM: Wha t's the Minis ter's defi ni tion of dumpin g, when he says companies are dumpin g lumb er on the marke t? Wha t do es he mean by that? HON. J. STORIE: I simply meant coming back on to the market and selling at a somewhat reduced price. I do n't think I can say, with any degree of accu racy, to wha t extent the y're selling below their cost simply to create cash flow, but I simply note tha t despit e the fact th at housing starts, which are usually a pretty good indic ator of where pric es will be, have not been a very firm indic ator in the past, so ther e's been a mor e than suf ficient supp ly. MR.

B. RANSOM: Does Manfor sell lumb er below its cost?

Tuesday, 18 June, 1985 HON. J. STORIE: Not if we can help it. MR. M. HARVEY: Through you to Mr. Ransom, the lumber market is a spot ma rket and there are ti mes when we wou ld sell below man ufac turing costs. In fact, if you recall, one of the reasons for rebuild ing the sawmill was to get our costs mor e in line with what we could ant icipa te the market .

So th ere are ti mes when lumb er is sold belo w manufac turi ng costs by us, and I assu me by ot he rs, but what we are hoping to accomplish by rebuil ding the sawmill is to make th ose incid ents fewer because our costs will be mo re in line with the mar ket, which incidentally is what we're trying to do with the overall company . My apprecia tion of this indus try, and I'm very young in it, is tha t the compan ies, generally, seem to be very very whipla shed by ch anges in market, and Manfor, more tha n any of the other ones.

So what we need to do, in my view, and what we're att empting to do is to get our costs to a point where even in poor mar kets we would have some better performance; but both mills at certain time s, in order to su stai n the losses or contain the losses wou ld sell below costs because the cost of shutt ing do wn is horren dous. MR. B. RANSOM: lt wou ld appear then from the answers tha t the Mi nis ter ha s given and Mr.

Har vey has giv en is tha t Manfor engages in the same type of act ivi ty, of dump ing lum ber, and I would suggest the same thin g applies to pulp and paper as well, because the taxpayers have been subsid izing this for some period of time. lt mu st surely then have been selling at less tha n cost or else we wou ldn't be ru nnin g up the lo sses tha t we have. Perhaps tha t has some thing to do with why one of your comp etitors is going to get out. They do n't have taxpayers behind them to su bsid ize them for tha t lengt hy period of time. MR. M. HARVEY: With respect to the last remark of Mr.

Rans om, the competitor , my un ders tandin g is tha t this mill was built in very recent ti mes at a cost of $350 mi llion, and I can't speak for them, but I would guess tha t their experience has been tha t the return on tha t investment just hasn't been ther e and I would think tha t would be one reason for them to get out. The other reaso n, we suspect, is tha t Champion is a fine paper company and their in ter est is in fine paper and tha t would be the second reason to get out.

I wou ld admit tha t there's always the quest ion, when somebody gets out of a produc t line, but we believe tha t we're right in sta ying in, tha t the mu ltiwall mar ket is st ill ther e and will be ther e to the best of our project ions and tha t in the final analysis it will be a larger mar ket than we had originally antici pated . With respect to costs, I think tha t people who are in business appreci ate tha t there are cycles in busine ss, that sometimes you don' t make mone y in every year. If you 'll permit a little homespun wisdom, I have a friend who lives in Bows man, which is in Mr.

Gourla y's constituenc y, and he rais es pi gs. I sold some pigs once and lost a lot of mone y on them, not a very great deal, and I went to see him to see if he could console me. He said, well, you do n't worry about spot pric es in my busin ess, you worry about what you can do over a period of time and th ere are ti mes when you lose mo ney 43 and time s when you make mone y. But if on average your making mone y exceeds your losses then you can stay in busi ness.

Essentially , altho ugh tha t's a minor story, the wisdom is ther e, tha t if we can get the costs do wn to the point where we do n't get hurt so bad in poor markets, then in the good markets our costs and revenues will average out. I agree with Mr. Ransom tha t if you look at the 10-y ear perfo rmanc e, then it's obvio us tha t costs qui te often, mor e often than not, do exceed revenues and th at's what we're attempting to get at, both with the retrofit and, like every other forest prod ucts company , att ention to costs. We have to reduce the costs of our raw materials and the costs of our conv ersion .

If you look at the market in ret ros pect, over ti me, you'll see th at the abili ty to sus tain such costs is not there. - (Interject ion) - Th at's true , but only in the sense tha t if your job , as we consider ours to be, is to make this thing work, then we don' t con sider a $9 .3 milli on loss a su ccess story. Wha t we will con sider a su ccess story is a situation where the revenues from the good years will offset any losses in the poor years on a continuous basis , and I thin k most compan ies would opera te tha t way as well. MR. D.

GOURLAY: The Chairman, in his letter to the Minis ter, indic ated - and he made reference to it here toda y - devel oping new super perfor manc e kraft. Wha t is in volved in actually achieving this kind of product? MR. M. HARVEY: Mr. Chairman, th rough you to Mr. Gou rlay, what we needed to do is we needed to really stream line a pro cess tha t we already had. Strength in paper comes from two places, the fibr e tha t you start with, and the way the fibr e is tr eated as it goes th rough the mill on the paper mach ine. We had the right kind of machin e, but not the right kind of press section.

We had to imp rove the press sect ion and we also had to im prove on the way the process was controlled; in other words , we could n't get our controls as precis e as we needed to do that. Our results of tha t retrofit ind icate tha t we have ach ieved it. Our paper strength is superior to St. Regis no w. There are two ways paper can be strong; one is the way the mach ine runs and the other way is across the mach ine; we have been able to achieve better tensile strength in both cases.

This is im portant from the point of view of a bag becau se, when you th row a bag do wn with some thing in it, the test is on the sides. So to ans wer you r ques tion, what is needed is a better control and a good raw product. Our tests out in the field have come back all positiv e and I thi nk, in all cases, superior to the St. Reg is produc t . MR. D. GOURLAY: Wh at you're sayi ng then, Mr . Chairma n, is tha t you are in a pos ition now to start produci ng this in mass production; and was this part of the retrofit program to be able to prod uce this spec ial MR. M. HARVEY: Yes, Mr.

Chair man, the objective of the pulp mill retrofit was to allow us to bring our multiwall paper up to and beyond the spec ifications of the com pet itor . We have done so; we can now make it; we have been ma king it. We've had test sheets out to a

Tuesday, 18 June, 1985 number of users, and they have put it through their tests and we are now just beginning to get some volume orders for the product, but the market is a little flat. In other words, it's not as good as we expected it to be, but our technical specifications have been met and our volume specifications have been exceeded. MR. D. GOURLAY: I believe it was mentioned that the modernization is almost completed, if not completed, other than just cleaning up some of the loose ends? MR. M. HARVEY: Yes, the first paper was run on January 14th, our first new product paper; it's all run in.

There are some loose ends there of a minor nature that we'll clean up during this July shut down. The sawmill, we had more difficulty but we were working with a much bigger rebuild, not in terms of dollars, but in terms of the mill itself. We had some difficulty getting the computerized controls to work on the head rigs, the main breakdown equipment. That's all pretty well resolved and we're now operating two shifts at the sawmill and just about to start the planer . So while the technological improvements are complete, the effects of them are not being received in a revenue sense as yet. MR. DEPUTY CHAIRMAN, E.

Harper: Mr. Gourlay . MR. D. GOURLAY: There was indication that the automatic mode or the computerized part of the lumber mill that malfunctioned and had not operated proper ly, that has been worked on and you've indicated that pretty well all the bugs are out of it now? MR. M. HARVEY: As recently as Monday, they were running on automatic mode. The problem dealt with the way the sensors that rigged the log as it comes into the saw, feed information to the computer and they couldn't get the two things to talk to each, if you want to use computer language; they've overcome that.

There are some other programs that are not up and running yet, but they're mainly report programs as to find out how much wood went through on a shift and that kind of thing. The major difficulty though has been overcome, but it was a significant difficulty for us because we couldn't get it to do it and the computer had to be sent back out and retested and then brought back into The Pas. MR. D. GOURLAY: lt was indicated at the start of the modernization that the project was going to cost some $40 million, and the Annual Report indicates something like I believe close to $50 million.

What will the actual cost of the modernization end up? What will the total figure be? MR. M. HARVEY: I have the actual figures here, in rough figures. I'll give the other one to you, momentarily. The original $40 million was an estimate based on five options. If you will recall the process at the time, they had consultants looking at a number of ways that might be used to make the mill more profitable, and there were five options, which I believe ranged all the way from $20 million to $500 million.

The $40 million option was chosen as the most likely and last year, 44 when we talked about this, we indicated that the figure would be closer to $50 million, in fact, I think I said that last year at committee. Our actual budget, once we refined the figures, once we picked that option and went back, the budget approved by the government was $48 million, $48.6 million, I believe, and the actual figures are around $50 million. MR. D. GOURLAY: Why was the decision made to shut down the operation while the modernization was taking place, rather than phasing it in to keep the shut down time or down time to a minimum?

MR. M. HARVEY: Mr. Chairman, in the pulp mill, we did run right up until the last minute, and then pulled the centre out of the mill and shoved it back in, and he virtually couldn't run the mill with the thing out of it, so that was the minimum time. With the sawmill it was a major rebuild, and we had to pull everything apart. We did experience more downtime than we anticipated mainly because of the problems we had with the automatic controls but I think our intention in the sawmill was for a lengthier shutdown than in the pulp mill. lt seems to me it was six weeks if I remember correctly. Our whole production

schedule got set back in the sawmill due to a strike with a major supplier , but the rebuild in the sawmill you virtually couldn't run it after a certain stage. We had to shut it down, pull everything out and then put everything back in. But we didn't anticipate that it would be as long as it was in getting it up and running again. MR. D. GOURLAY: The employees, as I understand it - maybe you can correct me if I am wrong - most of the employees were kept on even though the mill was not operating or doing other functions at the plant? MR. M. HARVEY: Yes, Mr. Chairman.

In the sawmill side we did keep our workers on. They were engaged in doing work that had never been done over the life of the sawmill, probably never had been done in the very beginning. We kept them on to a certain point and then we started to run the new mill in which case we had them working and learning in the start-up of the operations.

Now if we hadn't had these serious difficulties with the computer controls, we probably would have avoided any layoff whatsoe ver, but when the computer wouldn't work and we began to build up a list of things that needed to be attended to while the mill was down, at that stage we did go through some layoffs in the sawmill. But we were hoping originally not to lay the people off and we did the same thing in the pulp mill. There was an extensive training program on both sides to bring our operators up to snuff on the new equipment which is quite a bit different than what they had been used to operating.

In fact, if you go to the mill you will find that some of the operators' booths look almost like a Star Wars thing. They have very very sophisticated controls. We had hoped to run the sawmill in with training, which we did, but in the end because we couldn't get

Tuesday, 18 June, 1985 the compu ter opera ting properly , we did have to lay off. MR. D. GOURLAY: In order to keep the staff working and on the job , was the Jobs Fund mo ney used for this purpo se? I notic e there was in the News Release - I don't have a copy handy , I thought I had - but it men ti oned there was X num ber of million dol lars through the Jobs Fund tha t was part of the modern ization. Was this mo ney for salaries of tho se workers? MR. M. HARVEY: Not specifical ly.

The Jobs Fund mo ney was for capital, but the cost of keeping worker s or trai ning workers and engag ing them in the way we did durin g the retrofit wou ld be set up as a capital cost - our development cost I should say, to be more precis e - and amor tiz ed over time. But I believe, to ans wer your question more di rect ly, the Jobs Fund contribution was used as part of the capital pur chasing for the ret rofit. MR. D. GOURLAY: So the mone y paid to the employees would sho w as an opera ting expense and not part of the capital ization of the modern ization part? MR. M.

HARVEY: Well, tha t's not qu ite corr ect . In the modern izat ion or ret rofit you have capital costs which are the actual acquiring of the assets, and then as you put the mill together and start it up again and run it in, you also occa sion things called development costs which you can charge labou r to up to a certain point and tha t's amor tiz ed in the same way as capital is amor ti zed - the capital costs are amort ized over a particular length of time - but us ually it appears on the sta tement as dev elopment co sts, it doe sn't appear as capital costs.

Developme nt costs are the costs of gett ing the new asset running and would include tha t labour tha t we used in the cont ext of the project. Now at a certain time tha t stops and then it go es on !O opera ting expen ses, which I think in the case of the sawmill, it was about mi d-F ebruar y. MR. D. GOURLAY: Is all the mone y now paid out or is ther e st ill hold back mo ney bei ng held till everything is work ing properly? MR. M. HARVEY: Mr. Chairma n, I think the majority of mo ney is paid out. There are some hold backs on some of the items in the sa wmill for certai n.

I don't kno w whether ther e is any mo ney left in hold back in the pulp mill. · Oh yes, we have a winder that has to be comp leted in the pulp mill; ther e is probably some mone y held back on that. But in the sawm ill there are certain dollars bei ng held back on some of the compone nts tha t are not qui te up to sn uff yet. MR. D. GOURLAY: With respect to the construc tion details , are there any problems outs tanding in tha t area? MR. M. HARVEY: I think the majority of the di ffi cu lties tha t we were having have been rect ified .

We do ha ve a court case at the mom ent with Kra ft, but I wouldn't want to comment on that because it's in cou rt, and 45 tha t was with one of the original contr act ors at the sawm ill. MR. D. GOURLAY: Mr. Chairman, if this is before the cour ts, please corr ect me if I am get ting into an area where it may jeopard ize the situa tion. Is there a prob lem with the concr ete situa tion? Is this part of the lawsuit, concr ete in st allation? MR. M. HARVEY: Mr. Chairman, I just want to check on what tha t is.

I am advis ed tha t I can 't comment on tha t becaus e of the natur e of where it is with respect to the court case . MR. D. GOURLAY: The Min ister ind icated tha t there were conflic t-of -i nterest guideli nes tha t ha ve been adopted by the company and put in place this past year? MR. M. HARVEY: Yes, we went through a fai rly extensive review of confl ict of int erest . I went to several places for gui dance on conflic t of int erest and we have adop ted a conflic t-of -int erest policy tha t we hope will protect both our empl oyees and ours elves from confl ict of in terest .

I would gu ess tha t it is possi bly even mor e st ringent than normal, but we felt tha t in view of the fact tha t we were a public corpora tion that there was mor e pot ential for misun derstan ding in this area, so the board passed a policy sometime last winter , I believe. Informa tion has gone out to the empl oyees and has been reviewed with them . I don't think we are comp lete in tha t process yet, but many of them have gone through the process and we asked them that they sign a document tha t they unde rstand the implic at ions of confl ict of int erest and what we have asked them to be conc erned about.

MR. D. GOURLAY: Would it be possible for the Min ister or you rself to table a copy of th ose guideli nes? MR. M. HARVEY: I don't see why not. They are fairly stan dard. lt is up to the Minis ter. I can get a guideline to him if he do esn 't already have one. HON. J. STORIE: I can 't think of any reason why I couldn't share with the member the guid elin es. Again , it is corpo rate polic y but I think a well thoug ht-out set of guideli nes, and I would be more than happy to sh are them with the mem ber at his convenience. MR. D. GOURLAY: Sometime ago ther e was an

article in I believe it was the Free Press regarding confl ict of interest charged with one of the employees in the lumb er di vision . Is tha t situation final ized or is it st ill before the cou rts? MR. M. HARVEY: Mr. Chai rman, tha t matter is st ill before the courts. MR. D. GOURLAY: With respect to the supp lier of concr ete to the plant, I un derstand one of the owners is also an emplo yee of Manfor. Is th ere any probl em with a confl ict of in ter est in tha t situa tion? MR. M. HARVEY: We have taken note of that. The emplo yee has declar ed his in terest as required by the

Tuesday, 18 June, 1985 conflict-of-interest guidelines, and we had made certain that he would not be involved in any decision-making with respect to the awarding of contracts that would accrue to the company that he is involved with. So the answer is no. We are aware of the situation. He has declared himself and we have made certain that he doesn't involve himself in any process of purchasing that would involve him in a conflict situation. MR. D.

GOURLAY: I believe the article, dealing with the conflict-of-interest situation in the lumber section, that there was some decision made that there was no basis for the conflict of interest. Were those conflict­ of-interest guidelines followed in that particular case? MR. M. HARVEY: I think they were just about coincidental with the situation. In fact, I think they came out about the same time as that situation arose. So they would be in place in the latter stages of that, yes. MR. D. GOURLAY: Going back to the chairman of the board's letter , there is some reference made to marketing.

Does the corporation have any plans to change the method of marketing their products from an in-house operation to that of turning it over to a selling agency? MR. M. HARVEY: With respect to the lumber sales organization, the consideration was outside agents or brokers rather than our own staff and we have elected at present to use in-house staff already in place, but we are still considering the possibilities of marketing our lumber through some sort of a brokerage n<:!twork. We haven't made any changes in that regard. MR. D.

GOURLAY: Manfor, in the past, did they not use a brokerage firm to market their products, I believe through MacMillan Bloedel, perhaps? MR. M. HARVEY: I'm advised that when the company was first formed we did do that - MacMillan Bloedel, yes. HON. J. ST ORIE: Not when it was Manfor. MR. M. HARVEY: Well, it wasn't Manfor. MR. D. GOURLAY: Looking at the balance sheet on Statement 1, I notice the rental housing properties shows an increase of $59,000 over the last year. What would that include? MR. M.

HARVEY: Well, the rental housing, the only acquisition I am aware of in the recent years, a house that is currently being used by our president and it would be in about that order of cost, about a $60,000 house, I believe. · MR. D. GOURLAY: In the current year, did Manfor purchase an office facility in The Pas and, if so, at what cost? MR. M. HARVEY: Yes, Mr. Chairman, we purchased a building that is known locally as the Lamb Building. lt was the former headquarters of Lambair and our 46 purchase price was in the $60,000 range - I believe $65,000.00. Then we did some extensive renovation on the building.

That is now the headquarters of the company. it is fairly modest but it has two functions, actually it serves as an employment office downtown, and we also have our internal auditor, some of our planning people there and the president has an office there. There is a provision for a chairman's office and there is a boardroom. MR. D. GOURLAY: How much was spent on the renovations to the Lambair Building? MR. M. HARVEY: I believe the precise figure, it escapes me, but I think it was around $40,000.00. it would be in that area, maybe $50,000.00. We actually rebuilt the office building.

Nevertheless, it is a good space and I think the investment was a wise investment not only from terms of the economics of the thing but also in terms of cutting down our space here by about 13,000 feet I believe. We are having most of our board meetings, in fact, the majority of them in The Pas now, which allows us considerable savings in the cost of travelling. MR. D. GOURLAY: Is there a corporate suite in the building? MR. M. HARVEY: No, there is not. We do have a suite that we use from time to time I think for that purpose. I believe Mr.

Balmer is in it at the moment, but it is in one of the blocks that Manfor owns. MR. D. GOURLAY: Mr. Chairman, I wonder if the chairman of the board could indicate what difficulties were encountered in the renovation of the Lambair Building. I understand that some renovations had to be redone; was that a major problem or was it rather insignificant? MR. M. HARVEY: No, Mr. Chairman, there was a major problem in the building that had to do with the roof.

We knew that the roof was defective, we expected though that it merely needed to be resealed and we found after that someone, in the course of the building's rental history, had pulled out a bearing wall and we had a major rebuild to do on the roof as a result. That would probably be the renovation problem that you're referring to. MR. D. GOURLAY: All the renovations are completed on that building and it's being used? MR. M. HARVEY: That's correct. We've had several board meetings in that building now. Mr.

Sweeney is in it, and the employment office is in it, and it has been used since about last February, I believe. MR. D. GOURLAY: On the Statement of Operations, Statement 3, it shows an increase of $989,000.00. I wonder if we could be advised as to what would constitute that increase, almost $1 million. MR. M. HARVEY: General Administrative expense? I am not certain, I'll ask the comptroller if he can find that for us, if you would give me a minute.

Tuesday, 18 June, 1985 MR. D. GOURLAY: Well, perhaps we can go on to other ques tions and we can get the detai ls on th at a littl e later. I und erstand tha t Manfor has pu rcha sed wha t is known as the Prendivi lle timber rights, and I wonder if the chai rman could indic ate if this is so and at wha t pric e. MR. M. HARVEY: Yes, it is so. We pu rchased the Pren di ville timber rig hts - I'll get the price in a minute - Prendi ville had a timber holding adjacent to Cran berry, ind icated tha t he wanted to get out of th at

part icular area and the people in our Wood lands did a cost-be nefit study on the pu rcha se of this holding. The wood in th at lease is very desirable wood and is also very close to the mill; and based on the price tha t he was asking and the savings tha t would accrue to us, as a resu lt of being able to get at th at wood , from a commercial point of view it was a good pu rchase.

We were, however, cqncerned about the im plic ations of a Crown-owned corporation dealing on such a matter because of the nature of the lease, which is essentially a quo ta assig ned to him by the go vernm ent, so we made inquir ies, both thro ugh our Min ister and the Min ister of Natur al Reso ur ces, whether it wou ld be in order for to purcha se this lease, and we were also conc erned because there were two other people who were showing int erest at the tim e. Based on the advice we received from the two Min isters, we proceeded with the pu rchase and the price of the purcha se was $700,000.00 . MR. D.

GOURLAY: Could the chairman indic ate what other comp anies or firms would be in terested in this lease in tha t area? MR. 1111. HARVEY: I believe the only name th at I have is the Spr uce Produc ts opera tion because they have a mill at Clearwater . I don't know who the other one was, it escapes me at this tim e. MR. D. GOURLAY: Well, I would question Spr uce Prod ucts were not int erested from my inf ormat ion. I happ ened to talk to the owner some time ago and he ind icated to me tha t he was not int erested in th at lease. MR. M. HARVEY: Tha t could well be the case.

I was und er the impr ession th at th ere were other people who were in ter ested in it, whether the y did any mor e than show a lukewarm int erest , I don't kn ow. The point I'm trying to make is, not so much tha t th ere are other people int erested in it, tha t th ose .kinds of things take place all the tim e in the forest indus try. In other words, thos e leases are bought and traded as a comm odi ty. Wh ether or not the y would have purcha sed it or not, I don't know. We would have st ill wanted to pu rch ase it because it was a good deal for us, in our opinion, to get hold of th at wood. MR. D.

GOURLAY: Was the com pany, Manfor , running dangerously low of quo ta area, to requir e th at kind of expe nd itur e for Pren diville's lease? MR. M. HARVEY: No, Mr. Chai rman. If you look at the allowable cuts in the areas held by Manfor you 'll find 47 th at we are not usin g our allowable cuts, but tha t's only one dim ension of the proble m. The further you get from the mi ll the more expensiv e the wood is and , because we're operat ing a saw mill , it requir es us to try and make certai n th at we have a certai n am ount of saw logs in the mix . lt was th at

part icu lar thi nking th at made this Prend iville situa tion desi rable. The Prendivi lle lease is in wha t is cal led the Saskatche wan River Forest Mana geme nt Area , which is the closest forest manageme nt area to the mill and, as you kno w, each management area has its own allowable cut We can go to dif ferent places and take di fferent wood , but the wood closest to the mill in that management area only has so much wood. The closer we can get it and the more sawmill mix, the cheaper the wood is. MR. D. GOURLAY: Mr. Chair man , the Pren di vi lle Saw Mills, was their mill in opera tion this past while? MR.

M. HARVEY: I am no t certai n of tha t, but I don't think it has been in oper ation this past whi le. My in for ma tion at the tim e we were conside ring the pu rcha se was th at the y were in terested in get ting out of tha t area. They buil t a fairly new mill in Cr an berry but I don't think tha t's been opera ting. I'm not certai n of tha t. MR. D. GOURLAY: So, Prend ivi lle, in your estima tion, were probably not utilizing their lease to the ful lest? MR. M. HARVEY: I am not cert ain of that, the y did have opera tions in the area.

Whether they were tak ing out what they were allowed to take out, I don't know. I think there is some requir ement in the manag ement of the forest tha t you do some work in your lease, but I'm not certai n of what they were doing. MR. D. GOURLAY: Well, did Manfor not check with the Depar t ment of Resou rces to ascertai n what the situation was with the Pren diville lease, in effect? If they weren't utilizing it, my und erstan ding is th at the lease holding would have been graded do wnward as far as the volume th at would be assig ned to Prendivi lle. Was this not checked out by Manfor? MR. M. HARVEY: Mr.

Chai rman , I ha ve already ind icated tha t we checked with Resources, both at the officials level and at the minis terial level, to see if ther e was any dif ficulty or any reason why we should not be negotia ting to pu rchase tha t lease from Pren divil le. I believe Mr.

Jonas, who is the Wood lands manager, is a very tho rough manager , and I am sure he wou ld have conside red all of the other detaiL When I raised the ques tion about the situation with respect to buying what amou nts to material tha t's on Crown land , I was assu red tha t tho se things were tr aded act ively, p eople did buy the m and there was no reason why Manfor , if it was in their comme rcial best int erests to do so, sho uldn't buy it. MR. D.

GOURLAY: Now I think tha t Manfor can justif y the need for it and the question is thoug h, how tho rough did Manfor check out the leaseh olding tha t was held by Prendiville's because my und erstan ding is tha t it's

Tuesday, 18 June, 1985 reviewed peri odi cally and if they're not fully utilizing it and ind ica tions are Pren diville's were no t utilizing their lease, then there would have been an adjustment made either this year or next year at the latest. We kno w that the ma rket situation with respect to lumber has been at a depr essed state and I' m not certain tha t ther e'd be a big lineup to pur ch ase the timb er rights tha t were held by Prend iville, in view of the fact tha t their ho ld in gs may have been adjus ted do wnwards. MR. M. HARVEY: Mr.

Chairman, if you asked if we gave conside ration to waiting until he lost the lease for lack of util izati on, the ans wer is no. We exami ned the thing in terms of its commercial viability for Manfor. I assume tha t tha t's one of the processes tha t Mr. Jonas would go through to deter mine whether or not what he was buyi ng was actua lly of that mar ket value and havi ng done tha t, then I wou ld be certa in tha t he went th rough the other alte rnativ e of saying , what happens if we don't get this wood? After doing tha t, made reco mm endations to the board tha t the thin g be purchased. MR. B. RANSOM: Is Mr.

Har vey and the board , or the ch ief execut ive officer , are the y famili ar with the leasi ng arrang ements tha t the Department of Natu ral Resou rces us es in giving out tim ber rights to priv ate compan ies? MR. M. HARVEY: Well, I believe we have a familiarity with it. My un derstan din g is that the pr ocess has not chang ed all tha t much over the years. A block of timb er is leased by an operator with the unde rst anding tha t th ey use it to a certain deg ree each year or have some form of pena lty assessed him.

Manfor has, except for a few gran dfather operators, pretty well all tha t tim ber in Northern Man ito ba, but as far as the board making the de cision, the way leases are operated and the detail by which they' re ope rated on, we would depend a lot on our managers to advise us as to whether this was a good in vest ment at this time and whether we should be considering buying it or petitioning the gov ernment to get it, or whatever. The understan din g at the board level was, it was a good in vest ment; it was a good commercial investment.

The thin g was tradea ble in the mark et sense and the value to us exceeded the cost tha t Prendiville was asking for. MR. B. RANSOM: But did you specifi cally look at the option of allowing the lease to revert to the hands of the gov ernment and then com pete for get ting a lease from the government, rather than from Pre ndiville? MR. M. HARVEY: Mr.

Chairman , I have already said tha t we did not consider , to my kno wledge, we did no t consider the option of sitting back and wait ing to see if Prend iville would lose the lease for non-utiliza tion or if somebody else would buy it or if ther e were other in terests in it. We took the vie w tha t it was a good com mercial deal for the comp any. I would imagine that Mr. Jonas would have conside red tha t idea and came to the conclusion that it was not the right thing to do at this time .

The only other thing we did with respect to it, as I'v e already said, was to 48 check with the Depart ment of Min es and Resou rces as to the propr iety of a Crown owned company pu rchasing somet hin g tha t in many respects was st ill the prop erty of the Crown. MR. B. RANSOM: Mr. Chairman, we have no dif ficult y with tha t concept becaus e, of cou rse, it was a Con servat ive gov ernment tha t brought in the system of leasin g.

When I was Min ister of Natu ral Resources, we cha nged the system to ma ke it so tha t a compa ny in effect had an ongoing tenur e lease if the y were using the produc t and if it was st ill availa ble, and if it wasn 't availab le, then it began to run do wn or if the company didn't need it, th ey were going to lose it, and it wou ld revert back to the gov ern ment.

There is no di fficulty in princip le with the company making a deal from another indi vidua l, or another corpora tion, and if that was the qu estion put to the Department of Natural Resourc es, then I can well under stand why th ey would ans wer, no problem. The chairman may feel tha t it was worth $700,000 to get the rights. The real quest ion is, could they have had the rights for $300,000 or $1 00,000 and I don't think we can, for the sake of this comm itte e, simpl y accept the chairman 's statement tha t he imagi nes that certain thi ngs have been looked at.

I think we' re going to need the assurance as to whether th ose thin gs were looked at, becau se it seems to me it's very dou btful that th ere were other ind ividua ls, other compan ies line d up to spend $700,000 to buy into an indus try tha t is as com pet it ive as this ind ustr y is and where as many peo ple and individua ls are losi ng mone y as th ey are. So, Mr.

Chairma n, I would request tha t the chair man make specific inquir ies before this com mit tee meets the next time as to why this decision was made; what the other options were; and find out from Natural Resou rces what was happ ening to tha t lease and wha t might have happened to it a year from now if Prendiv ille had not been fully utilizing it. If the chairman is prepared to do tha t, then I think we would sim ply wait to have tha t in formation.

But we're talking about a very substantial expen diture of mo ney here and I think we want to be assu red tha t it has been spent in the wisest fash ion; not just tha t it may have been a good deal, but tha t it could have been a lot better deal. MR. M. HARVEY: Yes, I will undertake to do tha t. I want to add a cou ple of comments th ough. The fi rst one being tha t it seems to me tha t Prend ivil le had in very recent ti mes, bu ilt a new sawm ill on the Cran berry site which is adja cent to tha t wood. I believe he wou ld have kept opera ting in order to maintain the lease if he didn't find a buyer.

So that's one thin g. I would also add tha t this particular item, although I can 't recall the exact details of it at this ti me, received considerab le dis cussion at the board and in addition to the policy question, was consi dered as to whether it would be a good dea l for the compa ny at the ti me. So the decision, and I'm only makin g the point to Mr. Ransom, tha t the decision was not taken lig htly. If we figured we could have got it cheaper , we certainly would have so di rected.

Tuesday, 18 June, 1985 But in any case, I will undertake to review the case to see just what the circumstances were at the time of the purchase with respect to the possibility of the lease being downgraded or made less valuable by some kind of non-utilization by Prendiville. MR. B.

RANSOM: First of all, let me say I appreciate the fact that he's going to come back with the details, but those remarks simply heighten my concern because the chairman has said that it was discussed at length at the board, but yet the chairman can't specifically answer some of the questions as to whether or not the other options were thoroughly examined. lt seems to me that if it had received extensive discussion of another option, that the chairman would be aware of that now. MR. M. HARVE Y: Mr.

Chairman, I did not say I wasn't aware of the other option; I said I was not aware of the precise question of whether the information, as to sitting back and letting the lease expire was a consideration of the board. I know the process would have went that those questions would have been raised, and we would have asked what Prendiville was doing at present. My recollection of the thing was that Prendiville was operating the lease and was looking for a buyer so he could get out of there. HON. J.

ST ORIE: Just two points, No. 1, I think that it stretches one's credulity to suggest that an operation like Prendiville was going to let a lease of that relative value expire for want of cutting a few thousand cords. So I don't think that was going to happen. The second thing was that it was our understanding that there were, and I'm sure there would have been in any case, people interested in that particular lease, given the value and the quality of the timber in the area. I think it's important to know that. The member suggests his concern was that we could have had a better deal.

He's not saying that we didn't get a good deal, but he's sa ying we could have got a better deal. I suppose it's quite obvious that we were not party to any other negotiations and discussions that were ongoing with other people. I think the chairman's indicated that those leases are traded, purchased, and I assume there is a fairly standard format for assessing the value of a lease. That was undertaken by Manfor officials before a decision was made. MR. B. RANSOM: Again, Mr. Chairman, we are simply getting assertions on behalf of the Minister without any facts.

He says he is sure there are other people who would have been interested in buying it. Well who are the other people who would have been interested in buying it? He says he is sure that Prendiville's would have gone ahead and, for the sake of cutting a few thousand cords, they wouldn't have allowed their rights to expire. Wh at information does he have that indicates that is the case? Does he have any information, or is that simply another of the Minister's off-the-cuff kind of statements that he makes frequently about the operation of this company?

Is he not aware that the value is going to be determined by the marketplace? Were there other people in the marketplace trying to buy these rights from Prendiville? If the company can tell us, yes, they were in competition with other 49 people, fine. That's why I say it may have been a good deal, but so far the Minister and the chairman haven 't provided us with any of the hard facts that would indicate that they really examined all of the options. That's all we're asking is to be certain that the options have all been examined.

Perhaps the Minister, or the chairman, would be prepared to show us some of the documentation, some of the recommendations from Mr. Jonas, the minutes from the board meeting. We might be entirely satisfied that they made a good deal but, at the moment, there are a number of unanswered questions that can't be dealt with simply by assertions by the Minister. HON. J. STORIE: Well, first of all, Mr. Chairman, we're not party to any sale that Prendiville would make.

If you're suggesting that Prendiville would sit down and say, well, Jerry, yeah, we've got a sale for this much, that simply isn't going to happen and the member knows that. Those discussions and the possibility of a sale are always there. If the member is suggesting that we should overlook what was an analysis, and the member hasn't suggested that there's anything wrong with the analysis, that commercially this was a good deal for Manf or. He's saying it could have been better , I understand that.

So the implication is that we should sit back and not make a deal which is in the financial best interests of Manfor on a wait and see basis to see whether Prendiville did come up with someone else who would purchase it at a price lower than what we were offering. Those are the intangibles that there is no simple answer to. You assess the risks and the costs and the benefits and you make a decision. I don't think that we were party to, nor is it reasonable to expect that we would be party to, the discussions that Prendiville had with other potential purchasers or his own internal plans.

So obviously he's going to make the best case. We're going to do an assessment, and a decision will be made. it's quite possible that, if we hadn't made the decision, it would have ended up costing us more. Are we going to get into discussing what the outcome might have been if we had not purchased those particular timber rights? lt may have ended up, in the long run, costing us significantly more. MR. M. HARVEY: Through you to Mr. Ransom, I would just like to add a couple of things. First, we would undertake, in fact, to get the original proposition from Mr. Jonas back here. I have just been told that Mr.

Jonas did go to Resources and inquire whether there was any potential that the lease might be downgraded and he was told, at the time, that most of the operations were cutting less than the allowable cut because of market conditions, and they were allowed to do that. There didn't appear to be any change in that particular situation forthcoming. I add that, because it indicates to me that he did do his homework. If Mr. Ransom would be prepared to accept my word that we will get the original material together and prepare a report for Mr. Storie who can take it to him or to this committee. MR. B. RANSOM: Mr.

Chairman, I am prepared to accept the cha irman 's assurance th<?,t he 's going to get

Tuesday, 18 June, 1985 the in forma tion. Wha t I am not prepared to accept are some of the offhand sta tements com ing from the Min ister . I would, first of all, like to put on the record that I did not say, as the Min ister has indic ated, tha t this was a good deal . Wha t I said was tha t I am prep ared to accept the assu ranc e from Mr. Ha rvey tha t his analysis showed tha t this wou ld be a bene ficial deal for the company to make. Tha t do es not mean tha t there is no possi bili ty tha t there co uldn't have been a better deal.

I have not looked at the figur es; I have no way of kno wing beyo nd accepting Mr. Har vey's assuranc e tha t tha t is the case. I would apprecia te if the Minis ter would stick to the facts and not try and dis tort the stat ements tha t have been made. If Mr . Ha rvey would bring in forma tion to this commit tee when it next meets, then I think tha t wou ld be valuable and wou ld allow the commit tee to have a reasonable dis cussion of an im portant issue here.

We are ta lkin g about a company tha t costs the taxpayers $30 mil lion a year to own righ t now, and a $700,000 expenditur e is not an insi gnificant item to want some in for mation with respect to. MR. M. HARVEY: Mr. Chai rman, through you to Mr. Ransom, I would und ertake to deliver tha t in forma tion at the next time this comm ittee meets. I wou ld like to say some thi ng, tho ugh, about the idea of the tax payer paying $30 million a year.

I recogn ize tha t the company has not been performing as well as we would like it to perform in the com mercial sens e, but I would also like to have it enter ed in to the record tha t this compa ny ma kes a considerable contribution to the Province of Manitoba even in its di ffi cult tim es. The total inv est ment in Manfor in the past 10 years is about $1 84 million. Tha t includ es fundin g all of the opera ting deficits and it in cludes the capital expen ditur es. At the same time we have had, si nce '74, a net cash operating loss of $27 milli on.

In tha t same period of time we have contri buted, by way of back to the province in expense items, in excess of $50 million. We have also the deduc tions made for personal in come tax for the emplo yees in the last 10 years, which have been a total of $1 9 million. So the net posit iv e cash flow from opera tions from this company to the province is in the order of $42 million. Now I recog ni ze tha t if we were able to take tha t mone y and put it in the bank for 10 years, we might be able to get $1 8 mill ion a year, based on a 10 percent in vest ment. Nobody do es tha t and I am not taking exce ption to Mr.

Rans om's remarks, but I wou ld like it cl arified tha t the compa ny, while it do es have some di ffi cultie s, all of the se loss figur es qu oted in our financial state ments do not reflect the true worth of this com pany to this province. We wou ld like to do bett er; we wou ld like to en hanc e tha t. But, cert ainly , if you consider a $1 84 mil lion in vest ment, and while pulp mills aren't the ho ttest thing on the marke t at this ti me, the replacement value of tha t mill is in the order of $350 million. The cash flow from opera tions are considerab le.

We paid back $33 million worth of in terest in the last 10 years. I jus t want it un derstood tha t the idea tha t this is a drain on the taxpayer is an ina ccurate idea. MR. B. RANSOM: Well, Mr. Chairman, I am sure tha t a lot of taxpayers would think tha t it was a dr ain. The 50 fact of the matter is tha t when the taxpayers have $1 84 milli on inv ested in this company , there is an in terest cost.

Accord ing to the Provi ncial Auditor , in hi s report deal ing with McKenzie Seeds coveri ng the year ended October 31 , 1984, which is not much dif ferent from the year end of Manfor, he said that the long-term borrowing rate of the provinc e was 13 .54 percent for tha t peri od; 13 .54 percent on $1 84, 020,000 come s to $24.91 6 mill ion. Tha t is an ou t-of-pocket cost to the taxpayers of Man itoba; add to tha t the $9 million tha t with in the com pany was lost, and you have over $30 million. Now that's the start ing point of the cost to the taxpayers, the cost to the shareholders of this comp any.

Now if there are some other benefits coming back to the provi nce, to the taxpayers, as there are - there have to be some coming back - but there is absolutely no way tha t Mr. Ha rvey or the gov ernment or anyone else can demons trate tha t at the moment we are gett ing over $30 mill ion more in benefits back to the taxpayers of Man itoba. it 's over $30 milli on tha t it is cost ing the taxpayers in the year under review to own this com pany, and in the present year, un fortun ately, it looks like it's going to go much hi gher than tha t. Ind eed, we will probabl y be back to where we were two years ago.

When one looks at the $1 7 million to $1 8 million projected loss, plus the in terest costs on the two years of losses in between, tha t, un fortun ately, puts us back to where we were. lt ap peared as tho ugh th ere was some progress being made with respect to this year , and we certa inl y commend the mana gement for making some prog ress, but let's not overlook the fact tha t this company is still a huge cost to the taxpayers of Manitoba , and until it's turn ed around it is going to continue tha t way.

In the chairman 's own commen ts in his letter add ressed to the Minis ter, he talks about new and inno vat ive ways of contr ollin g costs will have to be the next ch apter in the com pany's his tor y if this firm is to su rvive. The chairman hi mseH is rai sing the qu estion of "i f this firm is to su rvive." Now, surely, if it is not a drain on the taxpayers, the chairman would not be raising the qu estion of "if this firm is to su rvive." MR. M. HARVEY: Yes, Mr. Ransom, I agree with you in the commercial sens e is the way in which I meant th at message.

In the comm erc ial sen se, if the firm is to su rvive, then it has to find a way of making its losses consis tently less than its revenues. Tha t's what we 're about; that's my job. If the firm is to su rvive, there mu st be some feeling of confi denc e among st the people who own it, which is the people of Man ito ba, tha t it can do the se things and tha t it is a benefit to the provinc e. I am not saying tha t I am satis fied with the way it is.

I am merely saying tha t the cost of losing Manfor is consider ably more than just shutting it down, which there wou ld be a capital cost, tha t the contribution tha t the firm is making now to the provinc e is a considerable one in terms of taxes. An example would be, for examp le, although it's no t di rectly the provi nce, in the past 10 years we have paid $1 0 milli on in taxes to the Town of The Pas. Now, these are all costs tha t we exper ience. Th ey all come off the bot tom. If you r bottom line is in the red, the y add to it.

Tuesday, 18 June, 19 85 The point I was only trying to make was that if you add these payments that we make into the Provincial Treasury back in, then there is a different picture. I am not talking about ancillary benefits or things that you can't put a finger on, I am talking about money that flows from the province to the corporation, which is the taxpayers' money, and money that flows back from the corporation to the province, which also becomes part of the provincial budget. 1 have no desire for the firm to continue in a loss position. I do not see that as my job.

What I see as my job is making it commercially viable, and that is what we are trying to do. But I find that job difficult if the people that the general public sees Manfor as an impossible situation, one that can't be turned around, probably if the opportunity to make an investment in pulp and paper right now were ours, we would not do so. But it is not our job and not our opportunity to do that. We have to try and manage the investment that has already been made and that is what we're trying to do to the best of our ability. I'm not trying to smudge the loss; the loss is there.

Commercial ly, we are in a lot of trouble and we are trying to get out of that. But in the broader sense, there has to be an appreciation that if the mill stops then there is more loss than just what appears on the company's balance sheet and that, of course, would be true of any private sector company as well. HON. J. STORIE: Well, I want to echo some of the comments of the chairman of the board. We have said, and I have said at the beginning, that we don't find it satisfactory that there was a $9 million loss at this point. Mr. Harvey went over some of the benefits that accrue to the problem.

I suppose that is part of the rationale or the justification for continuing with our efforts to improve the situation. The Member for Turtle Mountain is well aware of the fact that before the incorporation of Manfor that there were some difficulties. The investment was already over the $1 00 million mark, that in the intervening years there has been additional investment and all of this was in an effort to improve the situation.

But the picture isn't as black and white as the member would have us believe, it never has been, and we've been through this argument I suppose at each of the last committee hearings over the last 10 years. lt is quite likely that this debate has taken place. I think there are improvements in the last 12 years. There have been at least five years - I believe it is five years that Manfor has reported an operating surplus - we believe that some of the things that we are doing are going to put us in that situation again. MR. B. RANSOM: Mr.

Chairman, I know we've been through this argument before and that's why I was not prepared to belabour the point and was prepared to let it rest with Mr. Harvey's final assertion because I know that philosophically we have a difference of view.

I'm looking at it from the point of view of the cost to the taxpayers and I consider that there are certain social benefits that may flow from that, but the cost - the bottom line - really is the bottom line because the taxpayers cannot pull themselves up by their own boot straps and support the economy of this province by 51 having a number of OP.erations like Manfor and try and make believe that that's a net benefit to the province. lt isn't, Mr. Chairman.

The Minister of Co -op Development says, will you shut it down? lt isn't the question that's been raised, other than by the chairman, in the chairman's letter of transmittal in which he says, "If this firm is to survive." Those are his words, not mine. I think it is the best way to make a company like this survive, or Flyer Industries, or McKenzie Seeds or Manitoba Oil and Gas Corporation or any other corporation of that nature is to have the facts laid out clearly so the public is in a position to judge whether or not certain subsidies are in the public interest.

To try and make a company appear to be making a profit for the taxpayers when it is not is not helpful in the long run and that is what happens when one completely capitalizes all of the debt that a Crown corporation has. lt certainly can make the books of the corporation appear much better. I'm certain that is not in the best interests of public policy and understanding what sort of public policy decision should be made. That's the reason I raise these points, Mr. Chairman, for the benefit of the Minister of Co-op Development.

The Minister also raises the question of $50 million of previous losses with respect to the corporation. I point out to the Minister and for the record that that has already been written off. The fact that the initial deal was made with people who were less than honest has been written off. That cost is not reflected in the $1 84 million that is here now. lt is still reflected in the fact that the people of Manitoba are paying about $300 million a year in debt servicing costs, or the various long-term debt that they have incurred.

But I'm not even talking about that, so I wish the Minister would not cloud the issue by injecting that particular piece of history into this now because the goverment wrote that off over a year ago and it's not reflected in here at all. HON. J. STORIE: Well, by injecting a piece of history, I think it's important. We're talking about investment that has been made, an investment that was initiated not by myself or the current government, that's an important piece of history. What we have to determine now is what we are going to do with that investment.

For four years, and I read into the committee record last year, what the record of the previous government was with respect to that investment and it's a dismal record. The board minutes testified to the fact that the previous government could not make up its mind, would not make decisions in the best interests of that corporation. - (I nterjection) - The member asks how much it looses, I'll deal with that in a minute. Mr.

Chairman, it is important to recognize the history of this company. lt's important to recognize that when we took over in 198 1, we were faced with the serious decisions and one of the most important ones was, what are we going to do with this investment? lt is an investment that has been made by previous governments, commitments on behalf of the people of the province, significant commitmnnts in terms of the community of The Pas and the surrounding communities, and we were left with a difficult decision.

Tuesday, 18 June, 1985 With the assistanc e of the Federal Government, a :lecision was made to do an upgra ding. We said there is comm ercial viabil ity with in this pro ject . lt can be a success. A numb er of things have to be done. In suc cess ion, we have taken on tho se challenges. Clear ly, the current year - no t the one we are consider ing, but the current year - has not followed in any way actually the project ions tha t we made. There are a varie ty of ci rcu ms tan ces surrou nding those particular problems and the y have been di scu ssed before.

But I put the challenge back to the Mem ber for Turtle Mount ain. Coming into office, facing essent ially two deci sions, two choic es, what do you do? Do you turn your back on the in vest ment? Do you make some decisions tha t you think are going to be in the best int erests of the corpora tion in the long run and the ta xp ayers? We ch ose the latter . We will be here de fen ding the decision we have made.

I think tha t throug hout the last th ree years, we have taken the tough decisions tha t are necessa ry, in cluding the board of dir ectors commit ting to layoffs and so forth, to ugh decisi ons, decisions tha t should have been taken by the previous ad min istra tion but weren' t. We can rehash his tor y and decry the fact tha t we go t in volved in the fi rst place back in 1967, 1968 or 1969, but tha t do es us little good at this point. Wha t we have to concern ou rselves no w with is turning this int o a commer cially viable operat ion and tha t's wha t we are trying to do.

The chair man's comments in his letter of transm ittal refer to the fact tha t tha t's our objective, and in terms of the corp orate policy and the shareholder 's objectives, the y're one and the same and tha t is to do those things tha t are necessary to allow us to sho w under current ci rcumstances, giving the curr ent financi ng, an opera tin g surplus. We're doing thos e things as we can. So me of the m are going to be painful decisions, but th ey will be made and th at's part of the commit ment as well. MR. B.

RANSOM: The Min is ter us es the term "c ommerc ially viable." By commercially viable then, do es he mean tha t he wants the fina ncial statement of Manfor to sho w a break-even posi tion? Is tha t what he considers to be a commerciall y viable opera tion, even though at the end of this year the taxpayers will have, if the projec tion holds, in the range of over $200 million inv ested?

Now is the Min ister saying tha t he will consider it a commercially viable opera tion if the taxpa yers are get ting no return on their in vest ment as shareholders, but that the comp any's balance sh eet will show at least a break-even posi tion? HON. J. STORIE: We've been thr ough this at the last commit tee and I said before tha t obviously the shar es tha t we hold we would hope tha t there is some return. Our immedia te objective obviously is to create an opera ting surplus on the bud get and tha t's why I go back in to the his tory.

I'm not a fina ncial analyst nor an accou ntant, but I guess at some point you consider previous in vest ments, th ose in vest ments tha t were made in the previous 16 years, some costs, there isn' t a lot you can do without it. What we have to do is go from this point forward 52 and say can we turn this in to a corporation tha t achieves the best resu lt and tha t's what we're tr yi ng to do. MR. B. RANSOM: Achie ve the best pos sible result is rather a nebulous goal. I'm asking the Minis ter if he would consider Manfor to be commercially viable if the balance sh eet sho ws at least a break-even posi tion?

If he comes here and sho ws, ins tead of a $9 mi llion­ and-some loss, he sho ws a one-d ollar profit on the books of Ma nfor , will he consider tha t to be a com mercially viable opera tion? HON. J. STORIE: Well, Mr. Chai rperson, I wo uld certainly say tha t's a sign ificant impr oveme nt. As I ind icated earlier, tha t we would like to see a return on our inv est ment and th ere is provi sion for it. We have sh ares outstan ding and dividends can be paid on th ose sh ares.

The ult imate goal is I sup pose to have Manfor return to the shareholder and to the provi nce all of tha t which has been inv ested in it over the years. I don' t know, and I don' t know whether the mem ber's sugges ting tha t that's a realistic possibil ity, but obviously tha t is a goal. MR. B. RANSOM: I'm not the one tha t's th rowing these terms about, Mr. Chairman, it's the Min ister who is thr owi ng th ese terms about and talking about comme rcial viabilit y. So I'm simply trying to und erstand wha t the Min ister me ans, becaus e if I do n't under stand what the Min ister mea ns, how can I deba te it?

So if he talks about commerc ial viab ilit y, I would jus t like him to tell the comm ittee what that means. If it means tha t the balance she et shows at least a one­ do llar profit, fine; tha t's one position tha t the Min ister can take. If it means tha t the taxpayers should at least get 13 .5 4 percent or whatever, the going cost of mone y is to the taxpayers for their debt, if th ey're to get at least tha t return on the $200 millio n-and-some inv ested in the corporation at the end of this year, then tha t could be another measure of commer cia l via bility.

So I would ju st ask the Min ister once mor e if he could simply tell us what his defi nition is? I can even tell him tha t I don' t int end to deba te his defi nition. We can do tha t at other ti mes and we do n't have to do it before this commit tee. We're here to find out some thing from the mana gement of the company more than we are to deba te with the Min ister , so if he could jus t tr y and tell us his defi nition of commer cial viabi lit y, then we wou ld apprecia te having tha t on the record . HON. J. STORIE: My defi ni tion of viabil ity is a corporation tha t can repor t an opera ting surplus.

The member is obviously concerned about the in vestment th at is made and whether th ere's any return to the people over the long term of tha t inv estm ent. We believe, and we said last year at the committee, tha t the projec tions are tha t the cu rrent opera tions, in cluding the upgr ad ing, can be recou ped over a 10- year period . And commercial viabil ity, I supp ose, from the point of view of taking the corporation where it exists tod ay, gi ven the refina ncing, giv en the upgr ading, is certainly at a minimum showing an operating surplus. MR. M. HARVEY: Mr.

Ransom , as far as the board is concerned , what we are trying to achie ve is a company

Tuesday, 18 June, 19 85 th at is performin g - I was goin g to say as we ll as other forest products' companies, but that's probably not a very good stand ard nowadays. I don't con sider my job wou ld be well do ne unless we were returnin g some di vide nds to the owner. I sup pose my definition wou ld be is could you sell it? Cou ld you sell it as a commerc ial concern? - that's what we would be tar get ing for at the board level.

I realize tha t you addressed the Mini ster, but I wanted you to know what my th inkin g is as chair man with respect to comme rcial viabil ity because I didn't want this busin ess of re turns to the pr ovince to be misin terpr eted by me.

I'm not tryin g to cover up the comm ercial performance of the comp any in any way, shape or form, but I do belie ve tha t there's going to be tough sleddin g ahead for this comp any and that we all should unde rstand what is it doing now in ter ms of the Manitoba econo my, without losin g sight of wha t my intent ion and the board 's in tent ion are, is to make it as good as any other investment of tha t natu re. Now, I hesita te to use those terms because of forest products' investment.

The ma jorit y of the m right now are not tha t att ract ive, but I would hope tha t in the futur e tha t Manfor will come into its own and be able to carr y its way with an opera ting surplus that's somewhere related to the si ze of the in vestment. MR. B. RANSOM: Just to follo w up on the statement then tha t Mr. Har vey jus t made about being able to sell it. Cou ld he get more for it this year than he could last year? Is it worth more now, aside from the additional in vestment tha t went in to it? MR. M. HARVEY: In my view, ther e are two things tha t have to deal with what it's worth.

One is what is the market potent ial in tha t particu lar indus try which I think is extremely dou btfu l right now because of overcapacity . lt's worth more in terms of replacement value, if you 're going to build tha t mill, of cou rse. We already indi cated to you tha t St. Reg is built a mill simila r to ours in recent tim es at a cost of about $350 mill ion.

But un less the market imp roves, un less the thin gs turn arou nd in the marke tpl ace, no I don't think it's worth - it's hard to tell what the market pric e would be - but I guess it wou ld be very difficult to sell a forest produc ts' company at the mom ent, until the mar ket st abil izes in some way. Replacement value, yes, it's worth mor e. MR. B. RANSOM: Well, the sh ares of Abiti bi-Price and Con solida ted Bat hur st and MacM illan Bloedel are all selling hi gher, some su bst antially high er than the y were on the 52-week low. MR. M.

HARVEY: Yes, I'v e read the same thi ng, and I've also read the analysis to tha t. lt seems to me tha t, if I remember the market letter tha t I read, the head ing was, "F orest Pr od uct Sh ares Turn Out The Lig hts. " I had some di fficu lty in deter mi ning any analytical reason why those sh ares should be up, and I believe tha t's what the analyst was telling me. The larger com panies may be able to make a profit on curr ency relationship s, I don't kno w tha t.

With respect to a one mill Manfor opera tion which was a fairly narrow product band, I would gu ess tha t un less the pr ospectiv e inv estor could see some futu re, 53 con siderably tha t wou ld take care of his investment, un less he could see tha t definite ly, it wou ld be dif ficult to see a mi ll of this natu re at this tim e. MR. CH AIRMAN: Mr. Johnst on. MR. F. JOH NSTON: Mr.

Chai rman, the statements in the letter fr om the Chai rman, and some of the statements he made this mornin g, would ind icate th at there is going to be, although it won 't hap pen in the next while he says, the performance of the mi ll is goin g to depend on awful lot on the Sup er Performance Kraft, the SPK . He ind icated tha t ther e was a comp any, I believe St. Regis, who had gone out of this busin ess. Are th ere other companies or mills in this particula r busine ss? MR. M. HARVEY: There are other companies tha t manu fact ur e flat multiwall, which is not quite the same as St. Reg is.

The dif ference between our product and St. Regis produc t and the other ones is one of strength. If you can manufact ure a multiwall sat she et tha t is strong enough, then the bag maker can reduce the bag by one ply. Tha t's a significant red uction in cost to him and makes the paper more valuable. But to answer Mr. Johnst on's quest ion mor e dir ectly, there are other fi rms tha t make multiwall sheets. We believe our edge comes in our strength. MR. F. JOHNSTON: The fact tha t St.

Regis is go ing out of the bus iness, has th ere been any research done to see if ther e were other people enteri ng in to this market because th ey have got out of the market? MR. M. HARVEY: Mr. Chai rman, thr ough you to Mr. Johnston, we don't ha ve the capacity for act ive resea rch. We have done some enqu irie s. The point that seems to be the most persuasive is tha t to get in to the kin d of paper we make wou ld requ ire an investment in the order of the one tha t St. Reg is made, possi bly more. We don't anticipa te th at there wou ld be many fi rms who are willing to do tha t at this time. MR. F.

JOHNSTON: I wond er if the chair man wou ld make tha t a little clearer for me. You me ntioned the in vestment was about 365 mi llion. As I und erstand it, Manfor hasn 't spent tha t much to get into this busi ness, to make the cha nge to tha t specially . Or are you speak in g of the investme nts before the latest ones ? MR. M. HARVEY: Mr. Chai rman, tha t's co rrect. Manf or was alr eady in the multiwall busi ness and did manufact ure a she et at one ti me which, prior to St. Regis, was probably the strongest she et arou nd in the North American cont inent.

So our process of gett in g up there again was not as expensive as it would have been, had we been requ ired to build a new mill. The St. Reg is process was a new mill. One of the thin gs tha t we are considering at this time is tha t, if someo ne were to build a mill like ou rs, it wou ld cost in tha t neigh bourh ood. But, becaus e we already had the pro cess, had the fi bre and were only requi red to upgr ade some of the equipmen: in order to she et back up to !ho se kinds of specifi cat ions , our investment was considerably lower. Had we started from scratch though it would have been in the order of tha t.

Tuesday, 18 June, 1985 MR. F. JOHNSTON: Mr. Chairman, what I'm really trying to find out is it would sound as if Manfor is giving the indic at ion - and I use the word "sound" because I don't think that th ey are doing tha t - tha t the y are going to be the only people in this busi ness at this price, which means th ere is no com pet ition and you 're going to get all th e busi ness. I have never seen tha t happen before, I have always rec ogn ized tha t th ere is comp etition.

Wha t percentage of this mar ket do you feel you will have with the comp etition that's out there present ly, and possi bly new compe tition? There has been a large in vest ment put forward . Wha t is the research on the percentage of market you expect to have when, as you mention, it starts to pay off? You said it won't ha ppen in the next while. You'r e indic ating it will open in Janua ry of next year; you have said you 're work ing in-h ouse; you have not made a decision as to who your sales pers onnel will be througho ut North America, which is very im portant as far as cont act is concer ned.

On what basis do you feel tha t this produc t is going to have the effect on the company tha t you say it will, taking in to consideration the fact tha t other people are in the busi ness as well? MR. M. HARVEY: Mr. Chairma n , Mr. Joh nst on, we are targe ting about 10 percent of the mu ltiwall market. We are not fortuna te enough to be the only ones tha t can make mul tiwall paper. Wha t I was att empting to project was tha t the stra tegy was based on making a strong mul tiwall paper.

Other peop le will continue to make mu ltiwall paper; we are hoping to get 10 percent of the mar ket which would be all the mul tiwall paper we could produce. The St. Reg is people took about 250,0 00 tons which is, of course, greater than Manfor's total produc tion, but the particular produc t tha t we 're looking at is 10 percent of the market we're looking for. MR. D.

GOUR LAY: Getting back to the Prendiville situa tion, I wonder if the chairman, when he brings back in forma tion , can tel l us who ini tia ted the di scus sions with respect to this deal , and also the production from the timb er from the Prendiville plant in the last couple of years, and de tai ls on the negotiation of the price. Did it start at 700, 000 and end th ere, or did it start much high er and end up at 700,000.00? MR. M. HARVEY: Tha t was the nego tia ted price; who opened dis cussions; and what produc tion Prendiville had? MR. D.

GOUR LAY: Yes, some tr ack record of the last few years on tho se tim ber quo tas as to what produc tion Prendiville was actually turning out, and the state of the mill itself tha t the y were using, whether it needed a lot of upgra ding, whether it was in a posi tion to be able to produce if the ma rkets warranted . Also, with respect to the possi bility of the lumb er sales being hand led by a central selling who lesale agency, I wonder if the Minis ter or the chairman can indic ate what companies have been approached .

Is this in formation avai lable as to who might be able to handle this selling agenc y for the production of lum ber? MR. M. HARVEY: Mr. Chairman , with respect to trying to find a com pany tha t might market our lumb er 54 produc tion, I und erstand tha t there have only been in formal dis cus sions. I don't know the sensit ivity of the situa tion, or whether th ere is any reason tha t we should be quie t about them. I would like to defe r answering, no t in the sens e tha t th ey' re sensitiv e with respect to the company's name, but with respect to whether we can make a deal with them or not. MR. D.

GOUR LAY: Perhaps we could pur sue tha t matter the next time we meet . MR. M. HARVEY: I just wanted to make sure tha t we had the se things. We can prepare a report . 11 it's your wish to wait until the next meeting, we can do that, or we can prepare a written report for the Min ister which he can sh are with you with respect to wha t we can find out about this Pren divill e opera tion. MR. D. GOURLA Y: Well I think tha t we would like to have some in forma tion at the next sitting of this commit tee ... MR. M. HARVEY: When wou ld that be? MR. D. GOUR LAY: . . . to answer some of the concerns tha t we have. MR.

M. HARVEY: I wasn 't certain whether you were asking for th at or asking to hear next year when I appear agai n. So we will get some thing in the Minis ter's hand prior to your next meeting, which would be when ? MR. CHAIRMAN: The next meet ing of the commit tee is scheduled for Thur sday, two days, Thu rsday the 20th. The origi nal intention was to consider McK enzie Seeds at tha t time but if it is the will of the commit tee we could receive tha t information at tha t ti met .. MR. M. HARVEY: When was the request . . . HON. J. STORIE: Mr.

Chairman, if tho se are the only two outstan ding issues tha t mem bers wish to raise at this time, I wou ld un dertake to gi ve, in wri ting, to all mem bers of the commit tee, responses to th ose partic ular qu estions, gi ven tha t we have to return - (Interjec tion) - pardon me? MR. D. GOUR LAY: We're not near fin ished yet . MR. M. HARVEY: So can I have a da te tha t thi s informa tion is requir ed, Mr. Chairman? MR. CHAIRMAN: The next mee ting of the commit tee is Thu rsda y of this week. MR. B. RANSOM: Point of order , Mr. Chair man.

I believe tha t the com mit tee ha s been called to consider McK enzie Seeds on Thu rsda y. MR. CHAIRMAN: Perha ps for the benefit of the comm ittee, I'll read what was said in Ha nsard. lt was as sumed that, if the commit tee comp leted its consi dera tions of Manfor, McKenzie Seeds would be called. If not, it wou ld continue with Manfor.

Tuesday, 18 June, 19 85 HON. J. STORIE: We're schedu led for Thur sda y, then. MR. CHAIRMAN: Th at's what it says in the state ment in the House. So I wou ld assume from tha t if we don' t comp lete Manfor toda y we would continue on Thu rsd ay. Mr. Har vey. MR. M. HARVEV: We wou ld under take to have tha t in formation in our Minis ter's hands by Thur sd ay. MR. B. RANSOM: Mr.

Chai rman, I wou ld like to ret urn in the eight minu tes or so tha t are left here now to the di scu ssion we were having earlier about the cost to the taxpayers of ownin g the corpora tion, because I conti nue to hear across the table the comments off the record by the Minis ter in ch ar ge of Co -op Developme nt, ta lkin g about the Tories closing it do wn and tha t sort of thi ng. Perhaps it needs to be und erstood what the sign ificanc e of this in forma tion is .

When we're talking about a cost to the taxpaye rs, this is some thin g tha t is going to be very relevant for any gov ernment that is seeking a partn er, for example, because if the company was to be operated by someone in the priv ate sector, all of the benefits tha t Mr. Har vey referred to earlier would still flow. The taxes would st ill be paid to The Pas; the in come taxes would st ill come to the Government of Manito ba. All tho se benefits would st ill be ther e.

So the amount of mone y tha t the gov ernment and the taxpayers have now in vested in it is, of cou rse, ext remely relevant to any kind of conside ration tha t the gov ernment mi ght gi ve to seeking a partn er, a priv ate sector partn ,er or whether the government was considering to sell it. As the Min is ter kno ws, there were di scussi ons un dertaken previously in terms of seeking a partner . I believe tha t the gov ernment is, itself, seeking either buyers or partners for other Crown corpora tio ns. I believe I'm corr ect, the gov ernment has been looking for tha t with respect to Flyer Ind ustr ies.

So I take it that is not a principle that the go vernment will not examine . I think both the go vernme nt and ou rselves are in terested in seeing the corpora tion continue to func tion, continue to emplo y people, continue to put all of th ose benefits in to the commun ity, but at the minimum cost to the taxpa yers of Man itoba. My qu es tion th en for the Min is ter is: is the gov ernment pursuing any kind of pr iv ate sector in volvement in Ma nfor? Are ther e any negotia tions goin g on to seek a partner , or perhaps even to look at the sale of the corpora tion? HON. J.

STORIE: Obviou sly, the decision to seek a partner or to find someone to pu rchase, take over resp onsibil ity for Manfor is some thing tha t we would be prepared to consi der, assu ming tha t someone came forward and cou ld offer the appropria te rewards to the province; also tha t there is some consi dera tion to the effect tha t cha nges would have to The Pas and its com muni tie s. I have said, and say consis tent ly, tha t the comm itment has been made on the part of the government to Manfor.

We see tha t as a long-term commitment, both in t8rms of the opera tions ther e and their con tinuing positiv e im pact on the outlyi ng com mun ities. I think tha t's why 55 it is important tha t Mr. Harv ey, as chairman, put on the record the other side of the ques tion of the cost to the taxpayers. Certainly if you go to The Pas or you go to Cran berry or Wanless or Wabowden or any of th ose commun ities, the benefits tha t accrue because of the opera tions there are felt much beyond the com mun ity of The Pas.

So I certainly would n't rule out the pos sibili ty of a joint venture, of other private participation in Manfor, given tha t certain funda mental issues are resolved tha t wou ld support the com mun ities tha t exis t there and the activities tha t are ongoi ng. Essen tially, tha t's the bottom line. I think Mr. Ha rvey has a further contri bution. MR. M. HARVEV: Mr.

Ranso m, I believe I indi cated it last year - I may be wrong, I th ought I had - tha t one of the di fficu lties facing the mill is related to the econom ies of scale and one of the opportu nit ies tha t exists in the mill is the si ze of the annual allowable cut. If you put those two thi ngs toget her, ther e appears to be a pote ntial to incr ease the si ze of the paper mill, but the cost of doing tha t we believe, and the wisdom of doin g tha t would probably be better done if we could come to some conclusions with a partner in order to do tho se kinds of thi ngs.

We have been, not actively purs uing for some of the very reaso ns tha t you talked about earlier until we can get our own hous e in some kind of order , but we are always, of cou rse, on the lookout for people who may be in ter ested in some kind of a joint ventur e tha t would allow us to talk about thi ngs of such magn itude as a second paper mach ine, or maybe even white paper . So th at's about where we are on it.

I think there are some of us who believe tha t's what the final solution to some of the di fficulties tha t we have mig ht be, the fact tha t we have more wood there and if we can find a mor e efficient way of capitalizing on it, then tha t would be desirable but ther e is a fairly large price tag on tha t and maybe some market in g impl ications tha t a partner mi ght be able to ma ke a little less oner ous. MR. B. RANSOM: Would Mr.

Ha rvey agree then tha t the taxpayers of Manitoba wou ld be better off if th ey could someho w reduce that cost of carrying the $200 million inv estment, speak ing at the end of the fiscal year we are in, and at the same time if the y cou ld st ill be guarant eed to the extent tha t guara ntees of th ose kinds of thi ngs are pos sible, tha t the company would continue to operate; tha t what we're looking at is if we can reduce tha t cost of inv est ment and have tha t company continue to operate, tha t the province and the taxpayers would be better off? MR. M. HARVEV: Mr.

Chairman, no, I have no hesita ncy in agree ing with tha t. Our objectiv e is jus t tha t. I said, when I was talking to you about the other thin gs th at flow from the company to the province, tha t th ey wou ld also flow from a priv ate company and if we cou ld get this compa ny, either th rough a joint venture or th rough some other way, into the position of having an operating surplus each year, then certainly we would get th ose benefits and then some . My concern was really the reverse. I wasn' t trying to do anything mor e than say t'1et this com pany is worth a lot o! me -"Y io the Provi nce

Tuesday, 18 June, 1985 of Manitoba. lt could be worth a lot more if we could make it ope rate effi ciently and return a profit. MA. CHAIRMAN: Mr. Cow an, 10 seconds. HON . J. COWAN: For 10 seco nds, I haven't said very much. Perhaps we can wait until the next meeting on that, although I do app reci ate being recog niz ed by anyone. MA. CHAIRMAN: Do you want the comm ittee to ris e? The chai rma n has one other corr ection. MA. M. HAAVEY: Yes, I have a co rrection for Mr. Gourlay. I und erest ima ted the cost of the Lam b Building 56 by a considerable amount and I would like to cor rect that.

Our origi nal cost to the Lamb Building was $80,000 and the renova tion and repai r was $1 06,000, for a total of $1 86,000.00 and we chose tha t over another buildin g in the town, the LGD Building, which the y were looking to sell, but the y wanted I think in the order of $250 ,000 for it and it was about a simil ar siz ed space. So I did und erest ima te tha t and I wanted to gi ve you the cor rect inf orma tion on it. HON. J. STOAIE: Commi ttee ris e. MA. CHAIRMAN: Comm it tee rise. COM MITTEE ROSE AT: 12 :30 p.m.