Government Operations Committee on Oct. 31st, 2016

[Alupa Clarke, Conservative, Beauport—Limoilou, QC]

Okay. Thank you.

[The Chair, Conservative, Tom Lukiwski]

Thank you very much.

Thank you, Ms. Stairs.

I have one question, because we have a couple more minutes. You mentioned that, in your opinion, it would be beneficial for your clients to have an economy level of service from Canada Post—slower service—but only if it contained tracking. Based on the fact that Canada Post already has a tracking system for their premium products, it seems to me that this would be a fairly easy fix to employ.

Am I missing something here?

[Andrea Stairs]

I am not an expert on this, but I think that the infrastructure has been set up in order to facilitate speedy delivery. Is there supporting infrastructure that can actually do slower delivery, or do you have to put the lower-priced packages into that speedy service and just hold them somewhere? How do you do that on the back end? I think that's the question. How do you match the revenue that you are deriving from the economy service with the cost to deliver?

I think those are the concerns that Canada Post would have, but I would say—to your point—that the tracking piece has been figured out. I would think that these obstacles are not insurmountable.

[The Chair, Conservative, Tom Lukiwski]

Have you suggested that formally to Canada Post? If so, what has their response been?

[Andrea Stairs]

I'm not sure if we've suggested it formally. We've suggested it informally, and they've answered that it's interesting, that they appreciate where it's coming from, and that they'll take it under advisement and look into it.

[The Chair, Conservative, Tom Lukiwski]

Thank you very much, Ms. Stairs, for participating in our review. I know you probably have a lot of better things to do with your time.

We will suspend for a few moments while our next witnesses approach the table.

[The Chair, Conservative, Tom Lukiwski]

Thank you, colleagues. I think we'll start again.

Before we commence, I have just a couple of comments to the committee members. We will have opening statements from our witnesses, which will be in public. We've also—if you notice on the agenda—tentatively scheduled one hour for public testimony and one hour in camera. However, we have the ability as a committee to go in camera for as long as we wish. For example, if all of the questions that you have for our witnesses pertain to commercially sensitive information, you can certainly mention that to us. We'll gauge the committee's willingness, and we could go in camera almost immediately after the opening statements, if that's something that the committee members would like. I want you to be aware of that. We're not forced to have one hour public and one hour in camera. We can have as much of the testimony in camera as we would like.

We will have the opening statements on the public record, and for that, Mr. St-Jean, you have five minutes, please. Then we'll go to Mr. Spear.

[Charles-Antoine St-Jean, Partner, Advisory Services, Ernst & Young]

Thank you very much.

Good morning, Mr. Chair and members of the committee. Thank you very much for the invitation to testify today. Here with me are partners Uros Karadzic and Pierre Lanctôt. Pierre is here to conduct the financial assessment, and Uros is here to review all of the pension issues.

The mandate that we received from the task force was to review four streams of work.

Our analysis focused on four areas. First, to review and validate Canada Post's financial performance in the last five years. Second, to evaluate the financial impact of the resumption of payments on the pension plan solvency deficit. Third, to provide an independent assessment of Canada Post's projections to 2026, including the measures in the five-point action plan. And finally, to validate the annual savings target of $400 million to $500 million from the move to community mailboxes and to assess the possibility of keeping door-to-door delivery.

If I may make this point to the committee, the major findings that we would like to bring to your attention will be dealing with three issues. First is the financial position of the corporation; second is the cost savings associated with the CMB, or community mailbox program; and the final one is the pension situation.

Starting with the financial position of the corporation, as we recall, the one-time strategic price increase of April 2014 and the growth in partial volumes have briefly curtailed the ongoing weakening of Canada Post's financial position. Looking ahead, the financial position projection to 2026 paints an unsustainable future, with over $700 million per year of run rate loss. Drivers for these negative results are multiple, but include the continuing mail erosion driven by electronic communications; inflationary cost pressures; the network growth linked to the Canadian population increase; competition, including new service providers, lower-cost service providers, and disruptive technologies; and the funding requirements of the pension plan. Our analysis leads us to believe that Canada Post's projected loss is at the optimistic end of the acceptable range of estimates. It could be higher.

A major element of the negative financial results is the labour cost structure. When we looked at the productive hours for Canada Post's inside employees, it's approximately 68% more expensive than that of competitors. The cost of delivery agents is approximately 26% higher. Labour accounts for 70% of the cost of Canada Post. Making up such differences is very challenging, especially at a time when the future of the corporation is dependent on its ability to compete in the parcel delivery business.

Maybe I'll say a few words on the

community mailbox program.

The initial proposal was to find savings in the order of $450 million per year. We reviewed the hypotheses and tested them. We also reviewed the partial implementation of the program up until it was suspended in the fall of 2015. We believe that the figure of $450 million makes sense.

Making those savings is essential to temporarily stabilizing Canada Post's financial situation. If the program were not relaunched in a form more or less in conformity with the initial proposal, Canada Post would quickly run out of funds, requiring it to borrow an estimated $2.9 billion by 2026.

Now, I would like to say a few words about the pension.

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

In addition, Canada Post's exemption to make solvency payments in recent years has released some funding pressure in the corporation, but has resulted in fewer assets in the plan and, hence, a larger pension liability.

Most employers in Canada with pension plans have moved to defined contribution plans. While Canada Post has moved in a similar direction in recent years for some of its management and all of its executive employees, the vast majority of employees are covered under a defined benefit plan with indexation. Changing the plan for future employees will only contain the growth of the challenge. It will not yield any meaningful relief to the corporation's financial position in the short or medium term. The current deficit is a problem that will not go away by itself.

Finally, we propose a number of ways to deal with the solvency deficit. They all have pros and cons. Some are easier to implement than others. None are without consequences. The decision to choose one or another solution is an issue of equity between pensioners, employees, taxpayers, and future generations. It's clearly a policy issue.

On this note, we thank you, Mr. Chair, as well as on behalf of our colleagues.

[The Chair, Conservative, Tom Lukiwski]

Thank you very much.

Mr. Spear, you have five minutes, please.

[Bruce Spear, Partner, Transportation Practice, Oliver Wyman]

Good afternoon, Mr. Chairman and committee members. Thank you for inviting us to appear before you today.

Oliver Wyman is a leading global management consulting firm. We're part of Marsh & McLennan, which is a $13-billion global risk management and advisory services firm. We combine deep industry knowledge and specialized expertise in strategy, operations, risk management, and organizational transformation. We help companies optimize and improve their business performance and accelerate organizational effectiveness in the most attractive areas of opportunity. Our firm's credibility is established by more than 40 years of experience serving “Global 1000” clients. We have a staff of more than 4,000 and offices and operations in more than 50 cities in 26 countries.

Specifically, we're organized by industry vertical, which means we bring domain expertise to each project. I'm representing a team of two other partners who were involved. I'm part of our transportation practice. We had a lead from commercial banking, as well as our European global transportation practice leader and three full-time consultants on the project.

Oliver Wyman was engaged by the task force to assess the planned and potential business operations in both traditional and new lines of business. Simply put, my colleagues from EY were focused on the core business and baseline performance, while we were focused on the potential new areas of opportunity for Canada Post.

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

Here are a few key findings in terms of the value drivers, in terms of where we would see these areas of opportunity. The key value drivers are as follows. The first is shifting demand; mail volume continues to decline, while parcel volume is increasing primarily in response to the growth of e-commerce. Next is growing competition; the competition for parcel delivery, as well as adjacent services that replace paper communication is growing fiercely. There's a split business model. Although letter and parcel delivery share assets, they are fundamentally different business models. Further, one has the government exclusivity guarantee, and the other is highly competitive, which is further complicated by the split between Canada Post and the Purolator parcel businesses. Last is the high-cost workforce; labour agreements establish labour cost rates at roughly 20% over private sector rates, which adds further constraints to business flexibility and limits the ability to adapt or change current operations.

The overall findings were that there are no silver bullets. Some of the options have value and have been deemed worth pursuing. There are no credible game-changing initiatives that would stem the demand trends that we're seeing. Of the highest potential initiatives evaluated, the best opportunities focused on improving or optimizing the current CPC operations in response to declining volumes. Most of these opportunities, however, would require flexibility on the part of the government, policy, and labour.

There are a few opportunities to increase profitable revenue. Most are insufficient, even in combination, to compensate for the reduction in volumes. Some of those opportunities are advertising and consolidation with Service Canada centres. Many opportunities also fall short based on their fit with CPC capabilities or its cost to serve, and also due to competitive concerns, such as the government putting a subsidized entity in against what is already established private market competition.

A consistent challenge across many of the areas identified are the labour constraints, especially for initiatives where adjustments to the current labour agreement would be required. Implementation could be as long as five to 10 years in order to match with the schedules for contract negotiations.

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

The results of the detailed options analysis are as follows. These are proposed opportunities, not specific recommendations, and they need to be balanced against the other priorities. The first is changing mail delivery service to alternate-day delivery, which would save $74 million per year. Another is easing the 1994 moratorium and the CUPW agreement, which would allow CPC to convert more post offices to franchises. That would save $177 million per year. Then there is rationalizing depots and sort centres to adapt the network to changes in volume and product mix, which would save roughly $66 million per year and would likely require capital expenditures.

Next, providing services on behalf of the government, enabling consolidation of some Service Canada centres may save roughly $11.5 million per year. Expanding CPC's interliner offering, providing last-mile delivery service for third parties, is worth roughly $10 million per year. Further pursuing synergies with Purolator beyond the ongoing efforts that have already been identified would generate roughly $16.5 million per year. Finally, selling advertising space in the retail locations and on the delivery fleet would generate almost $20 million per year.

We did do a study of postal banking options and it appears that postal banking is just a marginal opportunity for Canada Post, and when compared to other higher-yielding, lower-risk initiatives explored in the main report, such as adjusting the retail footprint, we did not come down supportive of postal banking as a particularly good opportunity for Canada Post.

Please note that this report and the related review of CPC's strategic business options contain a substantial amount of information deemed commercially sensitive by Canada Post.

I'll be more than happy to answer whatever questions I can now, and further in the in camera session.

[The Chair, Conservative, Tom Lukiwski]

Thank you very much, Mr. Spear, and thank you very much, Mr. St-Jean.

To the committee members, do the questions you will be posing to our witnesses deal with the commercially sensitive information as contained in the report?

Mr. Weir, I see you shaking your head. Do you have some questions you would like to be in public?

[Erin Weir, NDP, Regina—Lewvan, SK]

Absolutely, and I think we have enough time with these witnesses that it would be reasonable to have a fair bit of discussion in public before we go in camera.

[The Chair, Conservative, Tom Lukiwski]

Your point is well taken, Mr. Weir.

As I mentioned in my opening remarks, we can determine exactly how much time we wish to spend in camera versus public. If there are committee members who want to have questions on the public record, that will absolutely be how we proceed. If, however, you do have questions of a commercially sensitive nature, we will have to suspend and then go in camera.

I'd like to hear some commentary first, though, if any committee members besides Mr. Weir have other questions you would like to be held in public.

Go ahead, Mr. Whalen.

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

Almost all my questions relate to the documentation, but if Mr. Weir is amenable to doing one seven-minute round in public....

[The Chair, Conservative, Tom Lukiwski]

Do you mean initially?

Am I getting the sense correctly that, on the government side, you would prefer all of the questions to be in camera?

[Yasmin Ratansi, Liberal, Don Valley East, ON]

There are some questions that have appeared because of their presentations, but I think most of our questions—if I speak for all of my members—are on the report itself.

[The Chair, Conservative, Tom Lukiwski]

Mr. Clarke and Mr. McCauley, what are your preferences?

[Alupa Clarke, Conservative, Beauport—Limoilou, QC]

Personally, I would choose seven minutes in public first and then we would go in camera to discuss the report.

[The Chair, Conservative, Tom Lukiwski]

If that is the case, may I make a suggestion just to amend the order of questioning, then, since my understanding is that we will have public questioning on one side of the bench and in camera on the other?

[Yasmin Ratansi, Liberal, Don Valley East, ON]

I'll have a public question.

[The Chair, Conservative, Tom Lukiwski]

Madam Ratansi, you will be in public, and you're on for seven minutes.

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

[Yasmin Ratansi, Liberal, Don Valley East, ON]

Absolutely, and I'll try not to ask for any commercially sensitive information.

Thank you, all, for coming and thank you for your presentations.

I'm trying to figure out what sort of Canada Post we have for the future, because basically from your quantitative analysis, it appears that Canada Post is doomed for failure. We need to understand that we have to do qualitative analyses as well.

Mr. St-Jean, your mandate was to validate, basically, the financial statements, so how far did you go? You made statements that on the labour cost—if I got it right—there was something around 68%, but then I hear from the task force report that one says 45% higher than the competition, and the other says 41%. I'm a little confused.

Could you explain to me what the real figure is of the labour cost in relation to the competition?

[Charles-Antoine St-Jean]

Thank you very much, Mr. Chair and committee members.

Maybe I could ask my colleague, Pierre Lanctôt, who conducted the detailed financial review, to give you the detailed answers to those questions.

[Pierre Lanctôt, Partner, Advisory Services, Ernst & Young]

Thank you.

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

[Yasmin Ratansi, Liberal, Don Valley East, ON]

Okay. Canada Post's financial statements show profits for the past 19 years. When you're projecting, when you're doing the extrapolation, and I know you looked at declining volumes in mail, etc., there is.... As we've been in the field, there's a constant challenge. If Canada Post is making profits in all these years, where is this $700 million coming from?

As Ernst & Young is a very reputable firm, I would like to hear where that disconnect is between what people see as a profitable organization versus a non-profitable organization.