Government Operations Committee on Oct. 31st, 2016

[Erin Weir, NDP, Regina—Lewvan, SK]

I remember as a young New Democrat at university being outraged that UPS had launched an investor-state challenge against the Canadian government under NAFTA concerning Canada Post. In recent days, we've seen the Canada-Europe trade deal stalled by objections to the investor-state provisions. Now we have UPS here seeking to work more closely with Canada Post. I think that we're making progress. That's excellent.

I did want to ask about the proposal to have Canada Post parcel services made available through UPS locations. What I don't completely understand about it is that Canada Post currently has far more outlets than UPS, far greater coverage of the Canadian market. What would be the key advantage to Canada Post to have those services available through the UPS locations, as well?

[David Druker]

To clarify, they're not UPS locations. They're the UPS Store which are branded franchisee locations.

[Erin Weir, NDP, Regina—Lewvan, SK]

Sure.

[David Druker]

Currently, a Canadian consumer could walk into those stores and say that they're looking for a service to get a parcel from A to B. Frankly, Canada Post just isn't part of those conversations. We have a very good flow of customers, the same as a Staples does or anyone else that has a multiple selection available. It's the same as if you walked into a grocery store. Some people want juice with pulp; some people want juice without pulp. We're just looking to make it convenient for Canadians to get access to the Canada Post product, which certainly has a value in the marketplace, has a value proposition to consumers.

We are not UPS. We are independent individuals who have put up money to build their storefronts, and they are a multi-carrier.

[Erin Weir, NDP, Regina—Lewvan, SK]

I appreciate the distinction.

For better or for worse, Canada Post does a lot of franchising. Have your stores applied to become Canada Post franchises so that they could deliver these services?

[David Druker]

We can't get anywhere on those conversations.

[Erin Weir, NDP, Regina—Lewvan, SK]

Okay, so that's something you've tried to do.

[David Druker]

No, we've actually tried to have conversations, and we can't really get past the “thank you, but no thank you, not at this time.” We've never really had the opportunity to sit down at a table and explore what the options are that could be mutually beneficial to Canada Post and to our network.

I would also like to point out that Staples currently offers Canada Post and Purolator services with a similar type of network distribution, and chances are, the same type of crossover of locations to existing Canada Post locations. I think it's really just an opportunity to make the product more easily accessible at a more varied selection of places than where the current Canada Post facilities might be located.

[Erin Weir, NDP, Regina—Lewvan, SK]

Thank you.

Ms. Falcone, you made the point that we need to stop Canada Post from cross-subsidizing its more competitive businesses, and I opened with a tongue-in-cheek comment about the UPS case under NAFTA. In this current environment of declining letter mail volumes but increasing parcel volumes, is there really still a concern that Canada Post is using the letter mail business to subsidize the parcel business?

[Cristina Falcone]

I think the bigger question is that we don't know. Because there is not this independent oversight to see how costs are being allocated and how the business is being managed, it's a big question mark right now. The task force saw the same issue and they raised in their recommendation paper that the only way we are really to know that the business is being managed effectively is by putting in a regulatory body to ensure that overhead costs are broken down by business line. I think it's more of an issue to say that if we're looking into how viable Canada Post is going to be in the long term, this would be a tool to help with that oversight.

[Erin Weir, NDP, Regina—Lewvan, SK]

I think it would be our committee's impression that it's the parcel business at Canada Post that's growing and probably supporting the letter mail delivery at this point. I appreciate that it might have been different a decade and a half ago when this NAFTA case occurred, but I'm just not sure how relevant a concern that is anymore.

To move on to the question of last-mile delivery, clearly Canada Post is already involved in doing a certain amount of that for different courier companies. Canada Post is really the only service that goes everywhere in the country. What specific policy changes would you be looking for at Canada Post to get into that line of business in a bigger way?

[Cristina Falcone]

I would confirm again that the main opportunity we see is in the infrastructure that was originally meant to support letter mail delivery. We feel that there is an opportunity to open that up to industry to innovate and allow some cost sharing for Canada Post and also create a more sustainable model that would benefit Canadians who are picking up these e-commerce parcels in their neighbourhoods. Right now, everyone is challenged to meet that final-mile delivery. We're working with local businesses to drop it off, or they're coming to a UPS operations facility to pick it up. You have, for example, three or four different courier trucks, including Canada Post's, driving in the same neighbourhood to make the deliveries. That's where we see an opportunity that's worth some further dialogue.

[Erin Weir, NDP, Regina—Lewvan, SK]

Okay. It seemed that a moment ago you were suggesting that Canada Post should not be allowed to use its letter mail infrastructure to deliver parcels, and now it sounds as though you're saying that Canada Post should allow private companies to use its letter mail infrastructure to deliver parcels.

[Cristina Falcone]

I would not say that they should not be able to access the infrastructure for parcels. If they are, the appropriate way to manage that cost would be to allocate to the parcel line of business the cost for use of the real estate in that infrastructure.

[Erin Weir, NDP, Regina—Lewvan, SK]

You're just looking for a clearer accounting of what Canada Post does. You're not necessarily objecting to using the same infrastructure for multiple purposes to save money; you just want a different type of accounting.

[Cristina Falcone]

There should be appropriate accounting by product line. If it's infrastructure built for letter mail, for example, if there's a parcel that's going to have access to that infrastructure, then the cost should be allocated to that parcel, just as any business would allocate costs by the product line, so that when shareholders or Canadian taxpayers are looking at the annual report, they can be confident that costs are being managed appropriately and they understand where the revenue and costs are being allocated for the postal services versus the competitive courier services.

[The Chair, Conservative, Tom Lukiwski]

Thank you very much.

Mr. Whalen, for seven minutes, please.

[Nick Whalen, Liberal, St. John's East, NL]

Ms. Falcone, thanks for joining us remotely today. It's very informative.

I seem to be convinced now from Mr. Weir that the issue is complicated, and I can see a benefit to a postal regulator perhaps.

On the increased terminal dues and the notion that they are too low, we've heard in different parts of the country that some foreign importers into Canada will actually use a low-cost country where they can ship their goods and then ship their goods from there into Canada to get a lower terminal distribution rate. I'm wondering if you can describe this situation a little more, how it affects UPS, how it affects the industry as a whole, and what types of opportunities and timeline would there be to increase these terminal dues under the Universal Postal Union and what an appropriate recommendation might be.

[Cristina Falcone]

I would say from UPS's experience, we are a global carrier; we move shipments around the world into over 220 countries. When we move a shipment across a border, there's a higher fee for that shipment than when we're moving it within a domestic area, typically.

What we're seeing is that Canada Post, as it accepts import shipments from other international postal entities, the rate that it's charging is not matching its cost to serve. The impact that has on Canadian small to medium-sized businesses, for example, is they're having a tougher time competing with international companies with very low rates for imports into the country. This is a disadvantage for Canada Post, because if they were to raise those rates, they could help cover some of their costs. It's a revenue loss for them. Also, it would help Canadian companies to compete more fairly with these international businesses that are shipping goods into Canada.

In fact, some other countries, like the U.S., have seen the same issue. For example, the U.S. is looking at raising its terminal dues to some international postal entities because they've seen the same issue where there's been a shortfall on what it's costing them to serve versus what they're collecting.

[Nick Whalen, Liberal, St. John's East, NL]

Ms. Falcone, my understanding is that these negotiations don't necessarily happen between the postal offices themselves but between national governments and their membership in the Universal Postal Union. Is it operating in a different fashion in the U.S. when the U.S. determines that its terminal dues aren't sufficiently high? Are they brokering different agreements? How is the United States addressing this? Do you know?

[Cristina Falcone]

They're presenting this through the Universal Postal Union as well.

We're tracking to see how that follows, but essentially Canada would go through the same process that the U.S. does. They're taking a look at what it's costing them to accept these packages. The U.S. is recommending an increase to create a better representation of what it costs them to that final delivery. We would recommend Canada do the same, and through the same channels and methods.

[Nick Whalen, Liberal, St. John's East, NL]

What might explain why the rates were lower for developing countries? Was there a social justice aspect to it? Is there some other type of policy consideration that you think might be driving lower rates for developing countries to access our postal network?

[Cristina Falcone]

I can't speak to that right now. I can try to find out what the rationale was behind it. I'm assuming this hasn't been looked at for some time and, in fact, is maybe not even lining up to the trade patterns and where they've come along.

I think you're probably along the right lines in what the answer back would be, but I can confirm.

[The Chair, Conservative, Tom Lukiwski]

Thank you.

Mr. Ayoub, do you want the rest of the time? You have about three minutes left.

[Ramez Ayoub, Liberal, Thérèse-De Blainville, QC]

Thank you.

I have the Purolator results in front of me. I am a bit surprised by your testimony today. In fact, we were told that the parcel post business was expanding at Canada Post. Moreover, Mr. Weir talked about this. However, this is what the working group's report from this summer has to say:

Purolator net income has fluctuated over the past five years, from a low of $28 million in 2012, to a high of $53 million in 2014. Facing strong competition from private sector companies, including FedEx, UPS and Deutsche Post (DHL) [...]

So there is a considerable challenge. I see that you want to establish a partnership with Canada Post, but you do not have its attention. So this tells me that something is wrong somewhere. If it is a win-win situation, either you have not sold your position properly to Canada Post, or it would be paying attention to you, as it is definitely looking for new sources of income, or there is something that escapes me, and that I would like to understand.

What sort of commercial partnership did you have in mind? Would you be interested in privatizing part of Canada Post's activities, particularly the parcel post segment? Is that the objective?

Mr. Druker, could you answer?