Government Operations Committee on Oct. 31st, 2016

[The Chair, Conservative, Tom Lukiwski]

Absolutely, we can go back to public, but for the next few questions we will be in camera.

We'll suspend for a few minutes to allow that process to take place.

[Proceedings continue in camera]

[Public proceedings resume]

[The Chair, Conservative, Tom Lukiwski]

We have resumed.

Mr. Clarke, you have seven minutes.

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

Thank you, Mr. Chair.

Mr. St-Jean, you said that a $700 million deficit is an optimistic figure. What is the less optimistic view? Is it much higher?

[Charles-Antoine St-Jean]

We looked at all the variables. Canada Post put an estimate on the table that looked plausible to us, but our report indicated that the figure could be higher. It would be hard for me to suggest a figure, but that is the optimistic end of the deficit we forecast.

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

I would also like to know if your firm has conducted financial analyses on the postal services in other countries or whether this is the first time that you have done so.

[Charles-Antoine St-Jean]

Over the years, our office has worked with various postal organizations in Japan, in Germany and in England. My colleague has also worked with postal corporations like Canada Post. Earlier in my career, I worked with Canada Post. I dealt with Canada Post when I was here in Ottawa. So we have a good understanding of the postal business.

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

Very good, thank you.

Various suggestions have been made about adding services. In your opinion, which of those services could most likely put Canada Post back on a profitable footing and—at least hopefully—remove its deficit difficulties once and for all?

[Charles-Antoine St-Jean]

Perhaps I could ask

my colleague, Bruce, from Oliver Weyman, because they looked at more cities, what the options are to generate more revenue and more bottom line.

[Bruce Spear]

Thank you for the question.

We looked at business opportunities along a number of different lines, including ways to leverage the available labour capacity and the assets of Canada Post. By and large, any incremental or adjacent opportunities were marginal improvements, and sometimes they ran into some of the same issues we were discussing earlier, such as potential acquisitions of a subsidized market participant.

That said, a handful of opportunities were potential new business gainers. Advertising was one of them. I think it was around $20 million. Certainly, the largest though was not on the new business opportunity, it was more on changing the business model to meet the public need, which was rationalizing the retail footprint.

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

In European countries, a postal banking service is currently in operation. Does it work well? What could you tell the committee about it?

[Bruce Spear]

They are really country specific. Bear with me. There are success stories and there are failures in postal banking across Europe and in Asia. Those that have been established for many decades are significant aggregators of deposits such as in Japan and Italy, which was an underserved market where the post bank has been in existence for quite some time; in others, a post bank launched in 2007 was closed in 2010.

In Brazil, it's a significant bank, but it's a money-loser. By and large, the post banks that have been most successful have been subsidized where they have been in existence for decades.

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

Okay.

[Bruce Spear]

There are very few unmet needs that would justify a state-sponsored entry into postal banking in Canada today.

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

We heard testimony from officials of the Canadian Union of Postal Workers, Canada Post’s biggest trade union. They constantly said that your figures were in error or were based on other figures that were in error.

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

[Charles-Antoine St-Jean]

We can confirm that our analysis was done independently. We are satisfied with the figures that we have submitted in our report.

We are used to conducting due diligence analyses for major companies, specifically in connection with transactions. Like ourselves, the colleagues with whom we work in this kind of analysis are definite: the figures on the table are valid.

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

Thank you.

[The Chair, Conservative, Tom Lukiwski]

Mr. Weir, we're still in public. Seven minutes, please.

[Erin Weir, NDP, Regina—Lewvan, SK]

Thanks very much.

I'd like to pick up where I left off with Mr. Spear about postal banking options in Europe. Mr. Clarke broached this topic as well.

I want to ask you specifically about Swiss Post. It's been suggested that postal banking only works where the private banking sector is underdeveloped, and that's clearly not the case in Switzerland. I wonder what your thoughts are on the success of Swiss Post as an integrated post office and banking operation.

[Bruce Spear]

I can't comment specifically in any detail on Swiss Post, not being an authority on Swiss Post per se. I can apply the broader lessons that we've been talking about across multiple geographies, such as the success of the banks that are serving unmet needs.

Depending on the source you choose to cite, the under-banked population of Canada is either 6% or 1%. In our view, it leaves relatively little opportunity to go after new market space with essentially the same capabilities as an established industry and try to compete for that business.

[Erin Weir, NDP, Regina—Lewvan, SK]

No, fair enough, but I guess my suggestion is that Switzerland didn't suffer from a lack of banking services, and yet Swiss Post has been very successful in that sector. I take your point that perhaps you're not an expert on Swiss Post, so I've sort of put you on the spot, but I just wonder why, in this research for the task force, there was so much focus on La Poste and Royal Mail rather than on Swiss Post, which seems like a really positive example.

[Bruce Spear]

If there's an opportunity or lesson to be learned from Swiss Post, we'd be happy to follow up. I'm not in the position to state definitively why it was successful there and not in some of the other markets.

[Erin Weir, NDP, Regina—Lewvan, SK]

Okay.

I'd like to ask Ernst & Young about the pension situation at Canada Post. I think you identified it as one of the major financial challenges facing the corporation.

It really comes down to an accounting choice. If we view the pension in terms of a solvency valuation, then there's this huge unfunded liability, but it's not very realistic that Canada Post would have to shut down its pension tomorrow and pay out all the benefits. A far more relevant accounting metric would be a going concern valuation, which actually shows a surplus.

Do you think it would be reasonable for the federal government to simply exempt Canada Post as a federal crown corporation from solvency valuation? Would that address a lot of the challenge that you identified?

[Uros Karadzic, Partner, People Advisory Services, Ernst & Young]

That in fact is one of the alternatives listed as a possible alternative to making the contributions. Essentially, extending the current exemptions or making them permanent would be an alternative.

Again, that changes the cash contributions into the plan, which is what's at issue. It also decreases the contributions to the plan, so from the perspective of benefit security, to the extent that the plan is wound up at some point, then there would be a risk.

[Erin Weir, NDP, Regina—Lewvan, SK]

Do you see that type of exemption as a viable option that would materially improve Canada Post's financial outlook?

[Uros Karadzic]

Sure. If the exemption continues or is made permanent, then those large contributions that we're discussing would not have to be made.