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Chapter 8

Marine Transport

Marine activity can be divided into two distinct sectors spread across four regions:

Some 11% of Canada's domestic marine activity is located in the Atlantic region, 25% in the Pacific region, and 62% in the Great Lakes and St. Lawrence River. Passenger ferry services, under both public and private ownership, operate in three regions, all of which also have commercial fishing activity. Oil and gas exploration and development occur in the waters off the east coast and in the Arctic, activities that are expected to grow in coming decades.

Canada's marine industry continues to be heavily influenced by world economic conditions, the nature and stability of trade, and the local economies of North America. In international trade, marine export activities are defined to a great extent by U.S. and overseas (particularly Asian) demand for bulk raw materials, while marine imports increasingly reflect demand for value-added finished consumer goods, many of which are manufactured in other countries.

Marine Infrastructure and Services

As discussed in greater detail in Chapter 9, the Canada Marine Act of 1998 enabled the Minister of Transport to implement the 1995 national marine policy, including commercialization of ports and the St. Lawrence Seaway.

Ports

The guiding philosophy of the Canada Marine Act, while seeking to improve the overall efficiency of the ports system, was to induce more local governance in planning and operating the major ports and to cede control, and often ownership, of smaller regional ports to local interests. Commercialization of the major ports involved setting up Canada Port Authorities (CPAs). Other ports were divested to provincial, local (municipal) or user interests, while a number of remote northern ports continue to be administered by Transport Canada. In addition to establishing a framework for CPAs, the Canada Marine Act set up a legislative scheme for public ports and public port facilities. The government was left with a residual regulatory power.

CPAs are independently managed, self-sufficient ports, deemed essential to domestic and international trade. Collectively they make up the National Ports System, which now includes 18 CPAs, with more to be added soon. CPAs do not receive government appropriations. Each authority's financing abilities are set out in its letters patent. CPAs make lease payments to the Crown, which retains ownership of the lands occupied by the port, and the pledging of land or other assets for borrowing purposes is precluded.

CPAs include such major ports as Vancouver, Montreal, Halifax, Quebec City, Toronto, Fraser River and Saint John. They are by no means homogeneous, varying widely in terms of the size of operations, type and size of markets served, and financial and human resources. The ports designated as CPAs account for more than 50% of the total tonnage handled by the port system. Vancouver and Montreal are the busiest facilities, accounting for more than 56% of the revenues generated in 1999 by the 17 ports designated as CPAs in that year.

The program of divesting smaller and regional ports resulted in the reduction of subsidies to the port sector. The divestiture program, which included a one-time appropriation of $120 million to prepare ports for transfer from the Crown, is scheduled to end in March 2002.

Although the Canada Marine Act is still relatively new, concern has been expressed in several quarters that the commercialization process, particularly for the CPAs, did not go far enough in allowing fuller autonomy.

St. Lawrence Seaway

As a second key element of its commercialization policy, the government transferred management and operations of the St. Lawrence Seaway to a private sector not-for-profit management group. The St. Lawrence Seaway Management Corporation (SLMC) — made up of a group of companies that are Seaway users — assumed responsibility for operating the Seaway in October 1998.

The SLMC is required to protect the integrity of the Seaway, promote a commercial approach to its operation, protect the long-term viability of the Seaway as an integral part of national transportation infrastructure, promote use of the Seaway, and encourage user involvement in the Seaway's operation. The SLMC also sets toll policy and levels.

The Panel found intervener views on governance of the St. Lawrence Seaway generally positive; interveners saw commercialization as successful. Results to date — which include meeting revenue targets in each of the first three years of commercialization — bear out this view.

Marine Navigation, Ice-Breaking and Dredging

Marine navigation services — including the provision and setting of buoys and signals and traffic control in busy channels — plus ice-breaking services for channels and ports are provided by the Canadian Coast Guard, under the authority of the Minister of Fisheries and Oceans.

In 1996 the government introduced user fees to recover part of the cost of Canadian Coast Guard navigation services to shipping. Fees for ice-breaking services were instituted in certain areas in 1998. Simultaneously, there was a general withdrawal from channel dredging. Dredging now depends on the payment of fees that are assessed through the ports.

Fee structures were modified in 1998, and a three-year moratorium was placed on fee increases. This was accompanied by a 50% reduction in the proposed revenue target for ice-breaking fees. The Department of Fisheries and Oceans has struck an internal task group to examine marine navigation and ice-breaking fees in light of the end of the moratorium later this year.

At present, the overall cost of these public services is still met mostly — about 80% — by government rather than users.1 This contrasts with full cost recovery in air navigation operations.

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Concerns about Infrastructure

Several participants in the Panel's consultations, representing both public and private sectors, believe the government must give immediate attention to the difficult competitive circumstances facing the marine industry and ensure that funding of public marine infrastructure is provided on a sustained basis.

Interveners' concerns about future competitiveness centre on the availability of adequate funding for marine and port infrastructure, as well as fiscal and regulatory requirements. Contributing to the uncertain financial future facing shipping are pilotage costs, marine navigation and ice-breaking services fees, and taxation of CPAs by various levels of government.

Some parties argued that fee changes, specifically the reduced revenue targets for ice-breaking, serve to unbalance the impact between navigation fees and ice-breaking fees, to the alleged detriment of ports and shipping services operating in eastern non-ice regions.

Issues and Concerns about Ports

Some interveners — mainly but not exclusively from the port community — identified several concerns about governance of the newly commercialized ports. In particular, they argued that conditions placed on CPAs in their letters patent — especially on levels of borrowing, disposition of lands, and the requirement to make payments to various levels of government — impede the effectiveness and financial viability of the CPAs. This has placed certain ports at a competitive disadvantage, they argued, contrary to the spirit of the national marine policy.

The other major concern was increasing competition for Canada's container ports from U.S. ports and the need to upgrade facilities to meet it. Lack of a funding commitment in Canada, coupled with recently announced government funding of U.S. marine infrastructure, principally ports, under the TEA-21 initiative, might exacerbate an already unlevel playing field. Several solutions were suggested, particularly with regard to funding:

Given the number and relative complexity of these issues, as well as other more minor issues related to particular sections of the Canada Marine Act, some parties (both port and non-port) urged the Minister of Transport to authorize an earlier review of the CMA than the 2003 exercise now mandated by Parliament. These parties also argued that the Canada Marine Act does not give CPAs the necessary tools to meet the goals of national marine policy; waiting for the 2003 review would place some CPAs in a severely disadvantaged situation relative to U.S. ports.

On the issue of transborder competition, although it is true that Vancouver competes with Seattle and Tacoma for container cargoes and Halifax and Montreal compete with New York, Baltimore and Philadelphia, it is probably too early to determine whether the Canada Marine Act has had a negative effect. On the evidence to date, Montreal, Halifax and Vancouver have enjoyed strong years of growth in both containerized and non-containerized cargoes. More to the point, Vancouver has succeeded consistently in recapturing Canadian container cargo from Puget Sound ports in Washington, while Montreal continues to enjoy a large volume of U.S. traffic. The state-of-the-art terminal at Vancouver's Deltaport has much to do with that port's recent success, and improved rail services and rates have contributed to the success of all three Canadian ports.

Modern, efficient terminal facilities are essential if ports are to be competitive in the container and, increasingly, in the bulk business. Future trade flows and attendant unit costs of imported or exported goods dictate that ports be able to move quickly to upgrade, modernize and develop new handling capabilities. Ports also need access to capital for dredging, environmental compliance and other facilities-related projects. A flexible administrative system appears critical to achieving these objectives.

In the larger matter of port access to funding, the U.S. decision to support public port investment shows recognition of the role of ports as generators of economic activity and facilitators of trade. Such recognition has arguably been lacking in Canadian transportation policy, notwithstanding the designation of CPAs as the National Ports System.

The Panel believes that U.S. government expenditures on marine infrastructure do, in the longer term, represent a competitive threat to Canada's largest ports. About half of all U.S. ports receive some form of funding assistance, while others have the ability to levy a municipal tax on local citizens to fund port improvements. Still others can use revenues generated from non-port activities. The Panel suggests that the government should continually scrutinize the performance of Canadian ports relative to U.S. competitors and be prepared to take policy action if U.S. government funding seriously distorts competitive traffic patterns.

Issues and Concerns about the St. Lawrence Seaway

Participants in the Panel's consultations generally approved of commercialization arrangements for the Seaway. Although Seaway traffic declined in both 1999 and 2000 and vessel transits fell, business plan expenditure targets were met, and a rebate against the scheduled toll increase was announced. An economic downturn in the United States, coupled with increasing tariff action by Canadian and U.S. governments on imported steel, suggests that reduced levels of shipping activity and vessel transits can be anticipated in the short term. The Seaway might therefore face difficulties in revenue generation.

At the same time, the St. Lawrence Seaway Management Corporation's forecast for funding required for asset renewal is $126 million for the five years 1998-2003, an average of $25 million annually. The Corporation's plans call for this to be met from revenues, with no call on government assistance.

To encourage increased use of the waterway, the SLMC, together with other prominent marine operators and interested parties, has undertaken or joined in several initiatives, including the Waterway Strategic Issues Forum, involving Canadian and U.S. interests, and A 20/20 Vision for the Future, whose twelve recommendations are aimed at enhancing the competitive future of the waterway and restoring the Seaway's attractiveness for grain and other commodities.

The Panel was encouraged to learn that the revenues allocated to asset renewal are expected to be sufficient to retain the current capacity of the Seaway, given the Seaway's importance in trade and economic development. The generally positive results of the commercialization initiative to date were noted.

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Domestic Shipping Sector

Much of Canada's domestic shipping activity is concentrated in the Great Lakes and St. Lawrence waterway, where marine operations are conducted largely by vessels owned and operated by the nine member companies of the Canadian Shipowners Association. In 1999 these firms operated some 87 vessels — a mix of bulk carriers, self-unloaders and tankers — that together carried 73.9 million tonnes of cargo. A decade earlier, 124 vessels carried 77.3 million tonnes. Total domestic cargo handled by marine carriers in 1999 was 105.8 million tonnes, a modest increase from the previous year.

Domestic marine traffic serves several established traffic flows. Movements of bulk commodities — coal, grain, stone, iron ore, forest products and minor bulks — continue to dominate domestic shipping, particularly in the Great Lakes-St. Lawrence. In Atlantic Canada, shipments of gypsum and forest products have been relatively consistent, but on the west coast, the tug and barge industry, strongly associated with the forest products/lumber sector, has seen contractions. In the east, there are containerized freight operations between Montreal, Halifax and Newfoundland and burgeoning supply activities to offshore explorations.

Canada-U.S. marine trade is conducted by either U.S. or Canadian domestic carriers with operations centred mainly in the Great Lakes-Seaway system, although some transborder marine trade is conducted on both the Atlantic and Pacific coasts. In 1999 waterborne transborder trade amounted to some 91.9 million tonnes.

The Coasting Trade Act

The Coasting Trade Act prohibits foreign or non-duty paid ships from engaging in coasting trade unless it can be demonstrated that no Canadian vessel was available for the specific activity. This means that domestic marine commerce is restricted to Canadian registered vessels, owned and operated by Canadian domiciled companies and using Canadian crews. Vessels must either be built in Canada or, if built abroad, have paid a 25% import duty on the full vessel price.

Issues and Concerns in the Domestic Shipping Sector

Participants from the marine and port communities identified the current state of marine infrastructure as a source of concern. Commercialization of marine entities and divestiture of public ports and properties have led to concerns about infrastructure maintenance and replacement costs, particularly in Atlantic Canada and on the Great Lakes waterway. Participants also cited Seaway maintenance and dredging of access channels in the Atlantic, St. Lawrence and Pacific regions and on the Mackenzie as areas of concern. In the North, a particular additional concern is that official marine charts remain imprecise or incomplete.

Despite some fairly strong years between 1995 and 2000, Canada's marine sector faces several imminent challenges. They include traffic volatility, because of its susceptibility to changes in economic activity in key sectors and markets; rising fuel costs and lower water levels in the Great Lakes and St. Lawrence, necessitating lighter loading of vessels; the continuing move toward larger vessels that cannot enter the Seaway (now some 80% of world shipping); and reduced grain exports, particularly eastbound — a trend that is forecast to continue well into the decade.

Industry participants identified two competitive threats to the domestic shipping sector:

In view of forecasts of continued growth in foreign trade, much of which will be containerized, and the increasing size of the container vessels themselves, demands on marine infrastructure capacities can also be expected to multiply.

Although the number of vessels in the Canadian lake fleet has continued to decline slowly, the level of traffic carried by the domestic fleet has remained relatively stable. Interveners nevertheless expressed serious concern about the domestic bulker fleet, the capacity of which has fallen by 35% since 1988, the remaining vessels finding only partial utilization each season. The average age of the fleet, particularly the bulkers, is over 27 years (compared to a world average for bulk vessels of 14 years), and decisions on replacement are pressing. But any future guarantee of employment and earnings is questionable. The industry preference to date has been to convert bulkers to more employment-flexible self-unloaders; bulker replacement costs for vessels built in Canada are considered prohibitive.

The Canadian shipbuilding industry continues to suffer a decline in business. Many shipowners now find it significantly cheaper to have ships built abroad, even after the 25% import duty is factored in. Vessel refitting and repair now constitute the core business of Canadian shipyards. The National Partnership Project Committee recently reported to the Minister of Industry with proposed solutions to these issues. The report ruled out direct subsidies and declared the 25% duty ineffective, but proposed other forms of assistance. It also urged the government to pressure the United States to amend its legislation (known as the Jones Act), thus allowing U.S. vessels to be built and repaired in Canada.2

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International Shipping Sector

In international commerce, Canada is served by a large number of foreign shipping services as well as Canadian companies operating foreign flag vessels. In 1999 this commerce amounted to 280.7 million tonnes, of which 64% was for export.

Canada continues to be a principal supplier of raw materials in the form of bulk shipments of coal, grain, sulphur, potash, iron ore and forest products. Primary markets include the United States and Japan, followed by other Asian nations. This overseas trade has exhibited continuing uncertainty of demand since 1997, coupled with relatively low commodity prices, but it began to show some increase by the end of 1999. Imports using the marine mode include petroleum products and consumer goods.

Economic slowdown in the United States, Canada's principal trading partner, and continuing weakness in Japan, the second largest partner, illustrates the volatility that characterizes marine trade and can be expected to continue.

Significant growth in international trade in consumer and industrial goods has been responsible for consistent increases in international containerized cargo. Chief beneficiaries of this business have been the ports of Vancouver, Halifax and Montreal. At one time all were seen as major bulk export ports, but now all are strongly associated with container cargo traffic. Total container throughput for the three ports in 1999 was 2.4 million twenty-foot equivalent units, compared to 1.2 million a decade earlier, and forecasts indicate further growth.

Technology and infrastructure improvements in the past five years have spurred the use of Canadian intermodal routings through both Atlantic and Pacific gateways, while the St. Lawrence remains a popular route for U.S. midwest container cargo.

The Shipping Conferences Exemption Act, 1987

Much of the container cargo now routed through Canadian gateways is handled by shipping lines that belong to one or more 'shipping conferences' — voluntary associations of carriers on a particular trade route that participate in service agreements, including the capacity to be provided and rates to be charged.

The Shipping Conferences Exemption Act, 1987 (SCEA) exempts certain practices of shipping conferences from the Competition Act, including agreements on common prices and sharing of capacity. SCEA was first enacted in 1970 and has been renewed periodically thereafter; in the spring of 2001, Parliament was considering amendments to SCEA. The government introduced the amendments following a Transport Canada consultation paper in 1999. The amendments are intended to streamline SCEA while maintaining a harmonized position with Canada's principal trading partners, notably the United States, where the equivalent legislation — the Ocean Shipping Reform Act — was renewed in 1999.

Some observers believe that the influence of conferences is diminishing, as changes in the nature of the shipping business and greater sophistication on the part of the shippers have encouraged more negotiations. Conference shipping lines have increasingly agreed to lower rates with shippers outside the conferences. Adoption of electronic business will also continue to erode the influence of conferences.

Issues and Concerns in the International Shipping Sector

Internationally, the trend is to ever larger container vessels and concentration of trans-ocean shipping services, featuring fewer large carriers operating in alliances or consortia and serving fewer ports. Opportunities for feeder services and niche operations nevertheless remain significant. Most world shipping routes continue to demonstrate severe over-capacity, causing rate restraint, while new shipbuilding will likely only exacerbate this trend. Adoption of e-business in international shipping can be expected to lead to further concentration as smaller lines are driven out of the market.

The shift in container trade structure and reduced tolerance for congestion and delay are putting pressure on ports, in terms of requirements for both landside efficiencies in container handling and onward movement and physical infrastructure and equipment.

The coming of larger vessels raises the issue of natural deep water availability, a consideration that would seem to favour Atlantic Canada ports over U.S. ports. Likewise, recent investments in state-of-the-art terminal operations, with congestion-free inland access and egress, confer competitive advantages.

Finally, a choice of continental gateways, particularly in the Pacific via the Northwest Corridor using under-used rail and port capacities, seems to augur well for the efficiency and competitiveness of the Canadian national system.

Container shipping is of growing importance, particularly to Montreal, where Canadian Pacific Railway and sister companies involved in terminal operations and shipping have forged a successful intermodal chain that moves large numbers of U.S. containers through the port. The port of Halifax, working with Canadian National, has now opened a second Atlantic gateway to the U.S. midwest. In both cases, efficiency in operations and modern, streamlined facilities, coupled with a lower dollar, cheaper costs and a U.S. legislative deterrent (a harbour maintenance tax) have combined to favour the Canadian routes. Recent draught problems in the St. Lawrence and an aggressive marketing and infrastructure program in the U.S. east coast ports, particularly New York, have reduced the Montreal advantage somewhat, although volumes continue to grow.

Issues and Concerns about the Shipping Conferences Exemption Act

Carriers and ports largely support the policy of continuing the exemption for liner conferences under SCEA and oppose introduction of a sunset clause. Although shipping conferences' share of international liner traffic has been declining steadily for a decade, they argued that introducing such a clause would represent a significant divergence from U.S. policy. It was also argued, however, that eliminating the exemption for collective pricing would have far less impact on carriers than would have been the case when SCEA was first enacted.

Critics of current Canadian policy, including growing numbers of shippers, complain that SCEA constrains competition among members and limits the influence of competition from non-members. Although shippers acknowledge the decline of conference power, some remain concerned about shipping line use of 'discussion agreements'. These can include both conference and non-conference lines and are aimed at stabilizing trade by various means, including the non-marketing of capacity, slot sharing, and space chartering. When filed in Canada, these agreements are regarded as conference agreements and therefore have SCEA protection.

Some shippers argued that Canada should take an international leadership role in moving toward eventual elimination of protections by including a sunset clause in SCEA. The carriers, who oppose such a clause, say it would place them in a different regulatory environment than competitors in the United States and could lead to withdrawals of service at Canadian ports. While experts consider this outcome unlikely — especially given the significant volume of U.S. cargo now routed through Canada, all of which is non-conference — the Panel acknowledges the potential risk to Canadian ports and shipping activity.

In seeking greater competition in international shipping, larger-volume shippers now see ocean carriers as integral partners in their global supply chains and therefore favour a less regulated environment, where negotiated confidential service contracts replace transaction-based rate and service offerings. Interveners pointed to the large number of such contracts signed in the U.S. following the Ocean Shipping Reform Act of 1999.

In addition, they argue for including an explicit, obligatory confidentiality requirement for any service contract negotiated between a shipper and a carrier. Such a provision would go well beyond the U.S. legislation, which permits confidentiality provisions in service contracts to be negotiated between the contracting parties.

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Considerations and Recommendations

Marine Services

Marine navigation and ice-breaking services are the responsibility of the Canadian Coast Guard, under the authority of the Minister of Fisheries and Oceans and therefore beyond the Panel's main focus. The Panel did no specific research on these services but is aware of the continuing debate between government providers and marine industry users about the extent and cost of services, the proportion of costs that should be assigned to non-commercial objectives, the allocation of costs among users, and the fees charged to them. The Panel is also aware that the issues are being analyzed in a study commissioned by the Treasury Board Secretariat. Nevertheless, the Panel believes it is appropriate to make the following observations and recommendations.

An integrated transportation policy requires consistency of treatment of all modes and users, so far as practical. The Panel accepts that efficiency and equity are normally both served best when users pay the full cost of services provided to them by government. The continuing substantial subsidies for marine services are an anomaly in national transportation policy. They stand in stark contrast to air navigation services — probably the closest comparison that can be made — where the policies of the last decade have achieved complete cost recovery from users.

The Panel acknowledges that rapid growth in air traffic contributed to the success of this policy. Equal treatment of the modes remains desirable nonetheless. The Panel also recognizes that policy must take account of the extent to which marine services are provided at no charge to users of competing facilities in other countries — notably the United States. Negotiations on harmonized actions might then be essential. But the eventual goal should be full recovery of costs occasioned by users.

Recommendation 8.1
The Panel recommends that full recovery of the costs of marine services attributable to users be pursued as a long-term goal.

The other aspect of efficiency to be sought from transport policy is that only services that are needed should be provided, and their cost should be minimized. Recent policy has sought a better match between services and needs and better cost control through commercialization, with involvement of users in decisions on spending and charges. Again, marine navigation and ice-breaking services are an anomaly, as they continue to be provided almost exclusively by the Coast Guard. Some aspects of the services undoubtedly require government delivery — asserting national sovereignty, for example. But again, the new approach to providing air navigation services shows that policy innovation is possible.

Services directed to commercial and private transport could be distinguished and commercialized, for example, and possibly even sold to a 'corporatized' agency like NAV Canada. Alternatively, less sweeping injections of market competition could no doubt achieve cost savings, through tendering for services for example. Users could also become more involved in decisions, at the very least through transparency of costs and tendering processes.

Recommendation 8.2
The Panel recommends that opportunities to commercialize marine services be sought.

The Panel believes that the other concerns about marine infrastructure — ports and the Seaway — can be dealt with through governance processes. Our recommendations therefore appear in the next chapter, in our discussion of governance of the newly commercialized infrastructure providers.

With regard to competition in marine transportation, the Panel offers the following assessment and recommendations. These are consistent with our objective of an integrated intermodal strategy.

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The Shipping Conferences Exemption Act, 1987

The Panel recognizes that shipping conferences are likely to continue to lose influence as increasing amounts of traffic are carried under independent contracts or by non-conference carriers. Nevertheless, the Panel favours removing artificial barriers to competition, as the guarantee of cost efficiency among carriers and of service and price to users. In principle, therefore, the Panel favours eliminating the exemptions provided by SCEA. As with the international aviation regulatory regime, however, the Panel recognizes the extent of commitment among trading partners to the existing conditions and acknowledges that unilateral action is not likely to provoke any general relaxation.

Recommendation 8.3
The Panel recommends that the government make clear its commitment to eventual elimination of the liner conference exemptions from competition law and that it actively pursue multilateral agreement among international partners to do so.

The Coasting Trade Act

Similarly, the Panel believes that the restrictions in the Coasting Trade Act should be eliminated, at least for North American carriers, to encourage cost-efficiency among carriers and thereby benefit users. We recognize, however, that the United States shows no signs of removing similar restrictions in its legislation.

Recommendation 8.4
The Panel recommends that the government make clear to the government of the United States its preference for eliminating the restrictions on entry to domestic shipping in the Coasting Trade Act and offer to negotiate bilateral elimination of equivalent restrictions.

The Coasting Trade Act also imposes a 25% duty designed originally to protect Canadian shipbuilding. The measure now amounts to an impediment to efficiency for Canadian carriers, however, distorting competition between domestic shipping and other freight modes and impeding acquisition of specialized vessels needed for certain trades (notably Arctic re-supply and development). The Panel believes that aid to shipbuilding companies — if this is to be government policy — should be provided directly to them.

Recommendation 8.5
The Panel recommends that the 25% duty on vessels built or purchased outside Canada be eliminated.

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Notes

1 Under the Coast Guard's fee policy, announced in 1998, out of total marine navigation services costs of $251 million in 1997, $87 million was allocated to industry, and the target for cost recovery was set for three years at $28.1 million. In 1999-2000, actual recovery was $26.7 million, or 31% of the amount allocated to industry. Of total ice-breaking costs of $163 million, $61 million for services north of 60 was exempted from cost recovery; of the remaining $102 million, $76 million was allocated to industry, with the cost-recovery target set for three years at $6.9 million. In 1999-2000, actual recovery was $5.2 million, or 7% of the amount allocated to industry.

2 The Merchant Marine Act of 1920 is commonly known as the Jones Act.

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