Ottawa, Monday, May 6, 1996
The Special Senate Committee on the Cape Breton Development Corporation met this day, at 2:30 p.m., to begin its study on the annual report and corporate plan of the Cape Breton Development Corporation and related matters.
Mr. Timothy Ross Wilson, Clerk of the Committee: Honourable senators, I see a quorum.
As clerk of your committee, I have the honour to preside over the election of the chair of the committee. The floor is now open to receive motions to that effect.
Senator MacEachen: I move that Senator Rompkey be appointed chair.
Mr. Wilson: There being no other motions, it is moved by the Honourable Senator MacEachen that the Honourable Senator Rompkey do now take the chair of this committee. Is it your pleasure, honourable senators, to adopt the motion?
Hon. Senators: Agreed.
Mr. Wilson: I declare the motion carried, and I invite Senator Rompkey to take the chair.
Senator Bill Rompkey (Chairman) in the Chair.
The Chairman: Honourable senators, I wish to thank you for the great confidence you have shown in me. I can only hope it will continue to be displayed throughout our hearings.
I look forward to this exercise, and I take it quite seriously. I believe that we can make a contribution and that there is something to be learned.
Our next duty is to elect a deputy chair. Are there nominations for deputy chair?
Senator Buchanan: I move that Senator Murray be appointed deputy chair.
The Chairman: There being no other nominations, it is moved by the Honourable Senator Buchanan that the Honourable Senator Murray be elected as deputy chair. Is it your pleasure, honourable senators, to adopt the motion?
Hon. Senators: Agreed.
The Chairman: I declare the motion carried.
Our next duty is to form a Subcommittee on Agenda and Procedure, which is composed of the Chair, the Deputy Chair and one other member.
Senator Stanbury: I move that Senator MacEachen be the third member of that committee.
The Chairman: There being no other nominations, it is moved by the Honourable Senator Stanbury that the Honourable Senator MacEachen be the third member on the Subcommittee on Agenda and Procedure. Is it your pleasure, honourable senators, to adopt the motion?
Hon. Senators: Agreed.
The Chairman: I declare the motion carried.
Honourable senators, I was hoping that the subcommittee could have its first meeting tomorrow afternoon at 1:30 to discuss the future life of the committee.
Senator MacEachen: We could meet in my office.
Senator Murray: I was about to suggest that.
The Chairman: Fine. We shall meet there at 1:30.
Honourable senators, do you wish to proceed with the standard motions today or shall we hold them until after our subcommittee meeting tomorrow? I suggest that we have our subcommittee meeting tomorrow, decide on all the motions we want to put before the committee, and then debate those motions at our first meeting. Is it agreed?
Hon. Senators: Agreed.
The Chairman: Is there any further business?
Senator Buchanan: Have we given any thought -- and I guess we will do this in the subcommittee -- as to whether we will hold hearings other than here in Ottawa? Will we hold hearings in Cape Breton?
The Chairman: We will want to explore a number of issues in the subcommittee meeting tomorrow and then put a recommendation in front of the committee. Clearly, there will be a number of important issues to decide.
Senator MacEachen: Mr. Chairman, I take it that the subcommittee can talk about possible witnesses tomorrow. If any other member of the committee has ideas, it would be good to hear them now so we could consider them.
Senator Buchanan: There is one witness that I think Senator MacEachen would agree with. I know he would be anxious to come to the committee. I am thinking of Alastair Gillespie. In fact, he asked me if he could be a witness. That is with respect to Synfuels, a very important project that Senator MacEachen and I signed way back in 1980.
Senator MacEachen: That is a good suggestion. We can consider that tomorrow.
Senator Murray: Mr. Chairman, you are aware that I believe that in addition to hearing from the minister responsible and the present management, consideration should be given to one or more of the previous presidents or chief executive officers of the Crown corporation. Obviously we would want to hear from the union. My mind is not made up, but perhaps we should at some point hear from Nova Scotia Power and from the Government of Nova Scotia. I think we will need expert opinion on such matters as present and projected world coal markets in terms of what would be realistic markets for Devco. It is pretty clear that the municipalities in Cape Breton would want to be heard from. At least, they should be given the opportunity.
Senator Buchanan: I have a few other names I would like to submit. One of them is a person who probably knows as much if not more about the Sydney coal fields than anyone else. He is familiar to Senator MacEachen. I am speaking, of course, of Dr. William Shaw from Antigonish.
Senator Murray: He used to be a deputy minister.
Senator Buchanan: Yes. He prepared the first energy plan for Nova Scotia in 1980-81. At least 40 or 50 per cent of that plan is on the coal industry in Cape Breton.
If you want a few other names, Mr. Chairman, I will give them to you.
The Chairman: Would you like to put them on paper?
Senator Buchanan: I will put forward the names of Coady Marsh of Glace Bay and Steve Farrell of Glace Bay.
Senator MacEachen: Mr. Chairman, on the matter of municipalities, there is only one municipality now to replace a number of municipalities. I know that the mayor, Mr. John Coady, would be a good witness. I think he would appear. Senator Murray mentioned the possibility of considering the former president or chairman of the corporation.
Senator Murray: One or more. If he were willing to come, I would want to hear from Ernest Boutillier, who is the immediate past president. There may be others.
Senator Rompkey: Derek Rance is now president of Iron Ore Company of Canada. He was formerly president of Devco.
Senator Murray: He was there for some time. Tom Kent was the first, second or third. I do not know how many we need to get in here.
Senator Buchanan: Now that you mention Tom Kent, I also had a request from a former mayor of Glace Bay that he be invited to appear in the personage of one Donald MacInnis, former Member of Parliament.
Senator MacEachen: They are all good names. We ought to consider a name like Tom Kent, who has a certain perspective of the past.
Senator Murray: And of the future.
Senator MacEachen: Even more of the future.
Senator Murray: He is writing extensively.
Senator MacEachen: He is more futuristic than anything.
The Chairman: Is it agreeable that we meet tomorrow to discuss these names and others?
Senator Stanbury, do you have anything to add?
Senator Stanbury: No. I am the token Upper Canadian at the moment. I am completely innocent of knowledge at the moment.
Senator Rompkey: That will not last long.
Senator Murray: We expect you to deploy your forensic skills on certain witnesses whom we will identify for you.
The Chairman: If there is no further business, senators, I am open to a motion to adjourn.
Senator MacEachen: I move that we adjourn.
The committee adjourned.
Ottawa, Tuesday, May 7, 1996
The Special Senate Committee on the Cape Breton Development Corporation met this day, at 2:30 p.m., to continue its study on the annual report and corporate plan of the Cape Breton Development Corporation and related matters.
Senator Bill Rompkey (Chairman) in the Chair.
The committee proceeded in camera.
The Chairman: To confirm on the record what we have decided regarding the scheduling of meetings, we have agreed to meet on the evening of May 27 and all day on May 28. We will then try to find meeting spaces on May 31 and June 3.
The steering committee recommends that the committee not travel but that we hold our hearings here in Ottawa, and that we budget for bringing witnesses to Ottawa. Is it agreed?
Hon. Senators: Agreed.
The Chairman: The budget that we are proposing is a bare-bones budget of $66,900. It has not been put in front of you but we should like to have your agreement. There is $38,000 for professional and special services; transportation and communications, $28,000; and all other expenditures, $200.
Senator Murray: Must we include the transportation in our committee budget? I thought there was a separate pot.
Mr. Tim Wilson, Clerk of the Committee: There used to be a separate amount, but no longer.
Senator Murray: Thank you.
Senator Gigantès: Are you saying that the transportation of witnesses is no longer in the committee budget?
The Chairman: It is in the committee budget.
Senator Murray: There used to be another pool of money from which those expenses were taken.
The Chairman: Is that agreeable as a budget?
Senator Finlay MacDonald (Halifax): What about the professional costs?
The Chairman: For professional and other special services, we have proposed an amount of $38,500. We will talk about that now. We can table the budget until we have talked about that, or we can simply agree to the budget. What is in mind there is staff to help us in putting together the committee. I believe that we should have some help with communications and writing. Everyone around this table is very able to do his or her own communications, but there may be a function there with which we can have help. Moreover, it would be useful if we had someone on staff for the duration making some notes and actually putting together a draft report that we could consider fairly early. That is what I had in mind there.
Senator MacDonald (Halifax): And not using the Library of Parliament?
The Chairman: We are using the Library of Parliament for research. The job of the Library of Parliament will be to prepare us for meetings, to prepare questions for us, and perhaps to do resumes for us at the end of the meeting or before the next meeting, to provide an ongoing service of that sort. What might be useful over and above that is to have someone who has an overview of the whole thing and can actually start to do some writing for consumption purposes. That is what I had in mind for that function.
If we build in an amount for that and decide on it, we can always debate later on how we will spend that money.
Senator Murray: Yes, or whether we do so.
The Chairman: That is right.
Senator Murray: How did we arrive at that figure?
Mr. Wilson: We looked at the time-frame we had available and felt that, due to the early reporting date, we might have to build in some extra assistance.
Senator Murray: But how was the actual figure arrived at?
Mr. Wilson: For communications, we estimated 30 days at $500 a day for $15,000; and for professional services, research, writing, editing, revising, we estimated a figure of $20,000.
Senator Ghitter: That is a lot of communications. I do not know how you would spend $15,000 on that. Do you have in mind someone here all the time at $500 a day? Would you explain how you come to that number?
Mr. Wilson: It is a fairly arbitrary number, which can be reduced. We felt that this might be an issue where extensive communication with the area involved might be required since the committee will not be travelling.
Senator Murray: I do not have a view as to the amount because I am not entirely sure about it. I would have no objection to authorizing the chairman to enter into a contract with a supplier for specific terms of reference concerning what the person will do and let it go, rather than approving $38,500, which would probably be spent. Perhaps, Mr. Chairman, you could negotiate a contract for what you intend here, which is essentially a writing job, as I understand it. We can then approve the contract that you propose before you enter into it.
Senator Gigantès: I am interested in that point of communications, since we will not travel. The regional media concerned will want to be fully informed, but they do not all necessarily have correspondents here or their correspondents are overworked. Perhaps we should hire someone to ensure the provision to those media, through faxing, of an ongoing story of what the committee is doing and the witnesses are saying. That might be a service to the region.
Senator Murray: Do you want a list?
The Chairman: I can certainly put a proposal in front of you in that regard.
Senator Murray: That might be the best approach.
Senator Stanbury: Senator Gigantès' point is well taken. There is not much point in doing this work unless it is communicated to the people in the area. It is not an area that is heavily represented in the Press Gallery. You should not short-change the communications side of it.
Senator Bonnell: Have you considered contacting CPAC to come in with television cameras to record what the witnesses will say?
The Chairman: We were coming to that. That is another item.
Senator Bonnell: That is free, and it gets right to the householder, right down to Cape Breton Island, almost in the mines.
The Chairman: That is a separate item that we will have to discuss. Apart from that, I had in mind a staffer who would help the committee with whatever communications we decide upon, and who would have a writing function.
Senator Murray: Rather than simply putting a number in, you should obtain a proposal.
The Chairman: Is it agreed that I obtain a proposal to put in front of you?
Hon. Senators: Agreed.
The Chairman: Carried.
The next item concerns television. The steering committee is recommending that we permit televised broadcasting, with the least possible disruption of committee hearings, and that the hearings to be televised would be those at which we hear, first, the minister; second, the management; third, the unions; and, fourth, the municipalities. We will decide thereafter where we go from there.
We are suggesting to you that the committee today authorize the televised broadcasting of at least these witnesses: the minister, the management, the unions, and the municipalities. We can revisit the issue later on to decide where we go, but we are suggesting that we take that decision today.
Senator Bonnell: It is great to authorize it here today, but do we have the authority to do so?
The Chairman: No.
Senator Bonnell: We must refer our decision to the Senate and get their permission to do this.
The Chairman: That is right, we do, but I am attempting to get the support of the committee at this time to go to the Senate and ask them for authority. I do not want to go to the Senate unless I have all the troops behind me. I do not want to be out on a limb. I thought the democratic thing to do would be to ask the committee first and then the Senate second. Is that agreeable?
Hon. Senators: Agreed.
The Chairman: Carried.
Can we simply approve now a budget for $28,400? We need to be able to pay for witnesses, and so on. Let us leave the professional and special services aside.
Senator MacEachen: On that question of witnesses, do we offer to pay for witnesses whose organizations are capable of paying, or is it on the basis of need?
The Chairman: What is the usual practice, Mr. Wilson? I would think that if we can get someone other than the taxpayer of Canada to pay, then perhaps we should. What is the guideline?
Mr. Wilson: Normally, we do not offer to reimburse reasonable travelling and living expenses. Normally, we wait until we are asked.
Senator MacEachen: That is what we should do here.
Senator Gigantès: The taxpayer of Canada, in the long run, pays for everything.
The Chairman: That is true.
Senator Bonnell: There are only two witnesses per organization. You cannot have a whole car load or plane load.
The Chairman: In the case of the unions, there is more than one person. We are suggesting that the unions appear as a group. They may want to bring one person representing each union, I would suspect.
Is it agreed that we approve a budget of $28,400?
Senator MacEachen: It seems odd to approve $28,400 when we know that every organization is capable of paying. Is that not right? Devco is not a union.
The Chairman: We do not have to pay $28,400. We simply need approval to spend it if required. This is not a decision to spend $28,400 but only to seek approval for that amount. We can then decide on a case-by-case basis.
Senator MacEachen: All right.
Senator Murray: Once someone is on our list as a witness, if they ask, I think we are bound to pay them under the policy, whatever we may think of their means.
The Chairman: It is not unusual to pay for services.
Senator Murray: The union may very well ask for it. If so, we will have to tell them how many we are willing to pay for.
Senator Stanbury: That has been the policy. We do not invite them to ask for it, but if they ask for it, we do not argue with them.
Senator Murray: What do we do? Is it two people per group?
The Chairman: The Clerk of the Senate is authorized to pay every witness invited or summoned to attend before a select committee a reasonable sum for living and travelling expenses. It does not say he must, but he is authorized to pay. You must be invited or summoned.
We are asking for a notional budgetary sum so that we can start to operate as a committee. We can take decisions on who we pay and who we do not pay later on, but we must have something in the kitty.
Senator Bonnell: Can you spend that money before the Internal Economy Committee approves it?
The Chairman: No. This is just a committee approval.
Senator Bonnell: You will go to the Internal Economy Committee to approve it?
The Chairman: Absolutely.
Senator Stanbury: So moved.
The Chairman: Is it agreed?
Hon. Senators: Agreed.
The Chairman: That is all we need to cover today.
Senator Gigantès: What about meeting times?
The Chairman: We have agreed to meet on the evening of May 27 and all day on May 28.
Senator Murray: That is, assuming you get permission from the Senate.
The Chairman: Yes, assuming we receive permission. We are then looking at May 31 and June 3 as further meeting dates. Those are tentative dates, providing all the pieces fall into place.
Senator MacEachen: With respect to the meeting on the night of May 27, in view of the possibility that both Senator Buchanan and I will be travelling on that flight back, what time would you propose to begin?
The Chairman: We would propose to begin as soon as your flight gets back in the capital. When would you like us to meet? Is 7:30 satisfactory?
Senator MacEachen: That would be fine.
Senator Buchanan: Yes.
The Chairman: Agreed.
Are there any other questions to be deliberated on or decided today?
Senator MacDonald (Halifax): What material will be prepared for us before the first meeting? What does the chairman have in mind by way of nourishment for those who are not familiar with the background or the whole subject?
The Chairman: We should ask the Library of Parliament to put together a comprehensive document tracing the evolution of the issue we are facing, giving all sides of the debate as far as that can be done, setting out a background indicating where we are, and perhaps suggesting some questions. Do we need more than that? If you want, we could also do a compilation of news reports, and we could add to that, if you like, speeches that have been made. We can provide as much as you want.
I think first we need a comprehensive overview or paper that the Library of Parliament would put together, and then, if you like, a compilation of salient newspaper reports would perhaps be in order. If you should like to have some speeches included, we can do that.
Senator MacEachen: To follow up on Senator MacDonald's question, it would be helpful if the Library of Parliament could give the committee some sense of the history of each of these mines or collieries. We will hear about Prince, Lingan, Phalen, Donkin, and maybe others that I have missed. It would be helpful if we had some sort of history, particularly with respect to the various plans -- some realized, some unrealized -- where the disputes are, where the future possibilities lie, and so on.
It would require someone with a good background to do something like that. It will not be easy. The Library of Parliament would have to go beyond the library.
Senator Buchanan: It is important that we get all the history about the mines that Senator MacEachen spoke about in that research. The Department of Energy, EMR, would have all the information on the amount of coal in the Sydney coal fields in the various seams and where they are located. It is important that we know the amount of coal that can be mined in the next 25 or 40 years and the quality of that coal in various seams.
Senator Gigantès: I am an ignoramus, but what about the form of burning the coal underground?
Senator Murray: You have come to the right place for that.
Senator Buchanan: We have experts on that on the committee.
Senator Gigantès: May I return to that?
The Chairman: First, we should finish on the document that the Library of Parliament will produce.
Senator MacEachen: From time to time, there have been proposals to undertake drilling programs, development programs and exploration programs. I do not want to be definitive about this, but I believe somewhere in my mind is the notion that from time to time drilling programs have been proposed, not undertaken and not completed. I should like to have a good fix on all of that because there will be references to it. If the mining industry in Cape Breton is to be continued, what are the future possibilities? To what mine or mines do we look to provide employment that can be expected to be economical? It would be good to have some background on that. Otherwise, when the discussion begins, we will not be fully informed.
Senator Buchanan: Mention to whomever will be doing this research that I have most of this information in my office. I have information on the exploratory tunnels that have been drilled, as well as the quality and the amount of the coal.
The Chairman: Kevin Kerr from the Library of Parliament could attack that. He will canvass the members of the committee to see what they can provide him with in terms of information.
Senator MacDonald (Halifax): I have a précis of the Boyd report, Mr. Chairman. I also have a chronology of the synfuels situation, as well as ten years' worth of annual reports.
The Chairman: One of the points made in the report that I saw is that there is no corporate memory in Ottawa with regard to Devco.
Senator Murray: That is what they think.
Senator MacEachen: I wish to add one further point which might be useful to members of the committee. Since the beginning of the Cape Breton Development Corporation, there have been able men and women, chairmen and president, of that corporation. It would be interesting to have a list from the beginning of those who have headed up the corporation and their terms.
The Chairman: We have that now.
Senator MacEachen: It would be good to have that circulated. There have been some rather important people responsible from time to time for this operation.
Senator MacDonald (Halifax): Were you thinking of them as possible witnesses?
Senator MacEachen: Some might be useful, yes.
Senator Murray: When I was trying to refresh my memory on some of these matters before I spoke in the Senate, I sent for the annual reports of the corporation dating back almost to its beginning. I had to send to the library for them. I do not imagine that the library has numerous copies on hand. It might be helpful for the senators who are interested if at least the part that is the president's report -- that is, a narrative that the president puts out every year summarizing what is contained in the report, as well as a financial spread sheet that goes back 11 years, which tells one about the production and the sales -- were photocopied and distributed to senators.
Second, concerning witnesses, I wish to place on the record what I stated at the steering committee. We have agreed to hear the management of Devco first, followed by the unions and the municipality. If, as rumoured, an announcement is made about the future of Devco in the next few days by the government, then we should call the minister to appear because that puts the whole situation in a somewhat new context. If an announcement is made before we meet, then we should invite her to come first to discuss the matter with us. If not, we will pick the right time for her to come before the committee at a later date.
The Chairman: Let us finish off the discussion on the background paper that is to be done. The Library of Parliament will do a comprehensive background for us, including the points that have been made today. They will seek out the information that has been indicated, as well as talk to members of the committee who have sources that will be useful to us. Certainly, I am on a learning curve. I want to do some reading. I do not know enough about the background of Devco. If we are to do a serious job -- and we all want to do so -- then we must know about how the situation evolved.
Senator MacEachen: Mr. Chairman, I hope I am on the same subject. My concern is with the background preparation. The first witness will not be called until May 27. We have some considerable time. It would be helpful if we could get to these potential witnesses immediately and ask them to file their representations or briefs with the committee as soon as possible so that we can all study them and so that questions can be prepared and the business can be completed as quickly as possible.
Senator Gigantès: Can they touch upon their views concerning environmental issues?
The Chairman: We will ask the library researchers to do that, as well as the witnesses.
Senator Ghitter: With respect to the documentation, I should like to see the most recent report from Devco concerning their five-year plan. That is probably on what we will be focusing. I understand from what I read in the newspapers that in January they released a five-year plan under Mr. Shannon. It would be important to read what they think.
What are our duties if the cabinet makes a decision to bail out the corporation, as has been suggested in the media, and they settle on what they will do? What is the role of this committee if decisions have already been made? Do we have guidelines that are beyond what the cabinet may be doing, or will the rug be pulled from under us right when we are in the middle of our deliberations and a decision is rendered? May I have some clarification on that point?
The Chairman: We must proceed as planned. Whatever happens in the future, that will be a bridge that we will have to cross when we come to it.
Thus far, we are talking about rumours, media reports, and so on. We all have our opinion as to how such reports can be verified.
We must proceed on course, unless we hit an iceberg, in which case we will have to take a change in course at that time.
Senator Ghitter: Could we make representations to the government stating that we are looking at it and, perhaps, our work might be of some use to them before they make a final decision?
The Chairman: The normal course would be to do our work first. Obviously, we will be making recommendations. The sensible course of action would be to let us have our deliberations and then make that report.
Senator Gigantès: I think Senator Ghitter has a good point, Mr. Chairman. You should endeavour to find out if the proverbial rug is likely to be yanked out from under our feet.
Senator Murray: Mr. Chairman, I can only speak for myself on this matter. However, if the government decides to lend itself to what Senator Ghitter calls a "bail out" or to try to solve the financial problem at the moment, there are still a lot of questions that should be asked of the management, the union and, indeed, of the government as to the future of the coal industry there and as to the future of Devco. We all know that putting some more money in it will tide them over for another period; but we should like to get at what the realistic prospects for a coal industry are in Cape Breton over the long term.
The mandate of the government, since the days of the Conservative government, has been that, as of fiscal 1994-95 or 1995-96, there would be no more subsidy. The business plan put forward by the management of Devco has been with a view to accommodating itself to that reality. The disagreement which some of us have is whether the only way they can accommodate themselves to that reality and be self-supporting is by laying off almost half the work force. That is what we want to get at here.
If the government puts some more money into it, that will tide the operation over for a little while, but it will not answer the questions raised by the plan of management as to the longer-term future.
I want to go ahead, no matter what the government may decide to do as an interim measure.
Senator Buchanan: I understood that our mandate was two-fold. I also understood that if the federal government were to make an announcement, it would not be an announcement about the future of the coal industry in Cape Breton but an announcement of how it will deal, through severance packages or early retirement deals of some kind, with 200 of the people who are scheduled to be laid off.
As Senator Murray says, that does not satisfy the committee's major mandate.
Senator MacEachen: What is the mandate? Can we have it read?
Senator Buchanan: Our mandate is:
...to examine and report upon the annual report and corporate plan of the Cape Breton Development Corporation and related matters;
That would include looking at the future and longevity of the present Prince and Phalen collieries and the future of the new coal mine at Donkin. That is why we need the information on all the various seams; the harbour seam and all the Sydney coal fields. If the federal government develops a plan to look after a few hundred miners through severance or early retirement, that will not even touch on our mandate to look at the full corporate plan, the future of these two existing collieries and the markets for coal to the Power Corporation and others, as well as looking at the new mine.
I believe the new mine is very important because $80 million has already been spent on it. I know a lot about that because we brought in the first vessel in the early 1980s. In 1979, we brought in the first drill ship to locate the seams and the quality of coal in the Donkin mine and the harbour seam. Later, the federal government took it over and proceeded to drill those two tunnels at an expense of $80 million. The tunnels are there. They are flooded, which is the right thing to do. You must flood the tunnels to preserve them. We must look at that to discover the feasibility of moving ahead with the new Donkin mine, which has very good coal, by the way.
Senator Gigantès: The more I hear the experts talk, the more I wonder whether we have enough time. Are we to do all this between now and June 15 as well as doing our other jobs?
I know people think we have nothing to do in the Senate, but all of you know that is not true.
Senator Murray: When we get into it, you will find it so fascinating that you will not want to deal with anything else!
Senator Gigantès: Tell that to my whip.
Presumably you will ask one or more communications contractors to give you a plan. Could you ask them to discuss in that plan supplying material -- approved, of course, by both sides of the committee -- for weekly newspapers? I am told that weekly newspapers are read by more people than are daily newspapers.
The Chairman: That is because the TV Guide is in them and they sit on the coffee table all week.
Senator Gigantès: We should also have reports for short radio broadcasts, both verbal and written, and we must determine which of those publications and radio stations can be reached by fax. The fax numbers must be gathered. We must learn the time at which copy must arrive in order that it can make the next issue. They must undertake to do all those things.
Senator Buchanan: I can assure you that when this gets under way, it will be the number one news item in all of Cape Breton. There is no question about it. There are three radio stations and one daily newspaper, and they are already getting ready for it.
The Chairman: Is it your wish that I go to the Senate for authority to hire such staff as we are currently talking about?
Senator Murray: Is that not covered under authority to engage such staff as is required?
The Chairman: That is correct.
Is it agreed?
Hon. Senators: Agreed.
The Chairman: Are there any other points on communications? Are there any other topics to cover?
Senator MacDonald (Halifax): It should not be difficult to put out a press release because this is not an adversarial committee.
Senator Murray: Not yet.
The committee adjourned.
Ottawa, Monday, May 27, 1996
The Special Senate Committee on the Cape Breton Development Corporation met this day, at 7:30 p.m., to continue its study on the annual report and corporate plan of the Cape Breton Development Corporation and related matters.
Senator Bill Rompkey (Chairman) in the Chair.
The Chairman: Honourable senators, ladies and gentlemen, I would welcome you to the first meeting of the Special Senate Committee on the Cape Breton Development Corporation.
Our order of reference is to examine and report on the annual report and corporate plan of the Cape Breton Development Corporation and related matters. "Related matters" opens up a lot of latitude for questioning, and I am sure we will want to examine commercial viability. We will also want to consider the human potential and the impact on the whole community of Cape Breton. Environmental concerns will be included in our examination. From a financial and social point of view, we will want to consider the future of miners currently with the organization as well as those who are not. All of these areas will be covered in our questioning.
I would welcome as our first witness Mr. Joe Shannon, Chairman of the Board of the Cape Breton Development Corporation. Mr. Shannon, perhaps you would introduce your colleagues.
Mr. Joseph P. Shannon, Chairman of the Board, Cape Breton Development Corporation: With me this evening are Mr. George White, President, and Mr. Merrill Buchanan, vice-president of finance.
The Chairman: We are delighted to have you with us. I understand you have a presentation to make, following which we will ask you some questions. Please proceed.
Mr. Shannon: Mr. Chairman, ladies and gentlemen, I do not know whether I should thank you for giving me the opportunity to appear before you this evening, but I will give you the benefit of the doubt and thank you for giving us this opportunity to come from Cape Breton to tell you the story, as we know it, about the Cape Breton Development Corporation, the importance of the Cape Breton Development Corporation and the need for us to continue to have your support for our company, our community and our region of the province.
Mr. Chairman, I would like to make it clear to you, sir, and to other members of your committee that I am not an engineer; I am not a coal miner. I fancy myself as a truck driver from Port Hawkesbury who happens to have gotten into a situation where I became chairman of the board and acting president of the Cape Breton Development Corporation about 10 or 11 months ago. I would like to take you through my experience, one which caused quite a bit of commotion and, I would expect, is the cause of this committee being formed. I will take you from the time I joined the company until today. We will then attempt to answer questions on any issue you want to raise. If we cannot answer your questions, we will suggest where you can find the answer, or we will provide it later.
My involvement in the company began as a result of a discussion I had with Minister Dingwall, the minister from Cape Breton. Obviously, I am a Cape Bretoner, born and bred. I live in Cape Breton. I have tracked the development of the Cape Breton Development Corporation over the years and recognize its importance to Cape Breton. I was concerned, as we all are in Cape Breton, about the future of the company and the direction it was taking. I Minister Dingwall shared that concern.
As a result of that discussion, I started receiving phone calls from Minister MacLellan, the minister responsible for the Cape Breton Development Corporation at the time. We struck up several conversations. We met and finally made an arrangement whereby I believed that the minister was sincere and honest in her approach to the Cape Breton Development Corporation in trying to solve the problem and not just provide a political fix for the company.
I agreed some time ago -- May or June -- to come on board as the chairman of the board and acting president of the corporation. I indicated to her that I would try to stabilize the company and restructure it.
In order to do that, I felt we had to do three things. First, we had to rebuild our relationship with the Nova Scotia Power Corporation, our major customer. In the last couple of years, that company has taken almost all of the coal that we mine. Last year we mined about 2.6 or 2.8 million tonnes, and the Nova Scotia Power Corporation took about 2.6 tonnes. They are a very important customer, but our relationship was bad. Second, we had to rebuild the management team in the company. Third, we had to develop a corporate plan that made some sense, one that would take the company into the 21st century along with the mandate that was given to the company by the federal government of Canada in 1991, which was to become financially self-sufficient.
I will start with our first challenge. As I indicated, the relationship between the Nova Scotia Power Corporation and Devco was somewhat strained, to say the least. It was at the point where the president of the Nova Scotia Power Corporation and the president of Devco would not even talk to each other. That developed over a period of years and sifted all the way down through the system.
We had been supplying the Nova Scotia Power Corporation with coal that met the standards. It met all the targets on an annual basis, but it was not meeting the targets on a consistent basis. On most days, we were providing them with very bad coal. We were shipping our good coal overseas at a fraction of the price Nova Scotia Power was paying us. That led to the deterioration of the relationship because of the additional maintenance costs to Nova Scotia Power for running bad coal in their boilers.
We have a 33-year contract with the Nova Scotia Power Corporation, but three items are open for discussion every five years. One is the quantity of coal for the next five years; the second is the tolerance on that quantity, plus or minus; and the third is price.
If you agree on the first issue, which is quantity, and if you agree on the tolerance, but you cannot agree on the price, there is a provision in the contract where you can go to arbitration with a third party to settle the issue of price. However, if you cannot agree on the quantity or the tolerance of that quantity, there is a provision in the contract that gives either party an opportunity to give two year's notice to quit the contract.
The Nova Scotia Power Corporation gave us two year's notice because they said that they could not reach agreement with our company on the quantity or the tolerance. They filed notice to quit the contract in two years. Based on their interpretation of the contract, it was properly legal for them to do that. That is the situation in which we found ourselves.
At the same time, they were refusing to pay the invoice price for the coal. They were paying us somewhere around 70 per cent of the invoices that we were sending them. As you can appreciate, that was causing us horrendous cash flow problems.
I went to the Nova Scotia Power Corporation's board of directors' meeting and, before I left their meeting, they had asked the president to meet with me to start some serious negotiations with respect to concluding the outstanding issues and to bring the contract to a successful conclusion. It took us some time to do that. At the outset, they were looking for about a 35-per-cent discount, and then they were asking for 25 per cent. We settled on an 18-per-cent reduction in the price over a three-year period. In the last two years of the five-year agreement, inflation has built up to a maximum of 4 per cent. If the inflation rate stays under 4 per cent, we will be acceptable, and we hope Canada will be able to do that or we will all be in trouble. The contract was signed and set aside.
One of the problems we ran into is that, during the negotiations to build the Westray mine, the Government of Canada opened our 33-year contract with the Nova Scotia Power Corporation and gave the Westray company a contract to supply 700,000 tonnes of coal to Nova Scotia Power at the Trenton power plant. Unfortunately, there was no provision in that agreement that, in the event the Westray project did not go forward as anticipated, the contract would revert to the Cape Breton Development Corporation. There was no such clause in that agreement. Nova Scotia Power Corporation continue to use that as a lever against us in the negotiations and, for the last number of years, the price at which we have had to supply coal to Trenton is substantially less than we are selling coal to them at all other generating plants.
That was the first exercise that we went through, and we came to a conclusion on that.
The second step we had to take was to rebuild the management team of the company. By this time, the president and chairman had left, and I was appointed to both positions. As a result of some examinations, we decided we would change the way the company operated. We eliminated about seven senior positions in the company. We did away with a whole series of vice-presidents whose positions fell between the operations section and the president of the company. We made the mine managers at Prince and Phalen the two most important people in the company, because if they did not produce, there was no reason for the rest of us to be there. We drew a direct line between the president and the mine managers.
We started to decentralize the operations. We moved the geologists and all of the people associated with the operation of the mine out to the mine site so that they could be close to the action and have a better understanding of the problems and of what was happening in the mines. They could talk to the miners in the parking lot and, as a result, perform a little bit better. We took that approach.
We tried to appoint a new president. We advertised the position, but we were unsuccessful. I approached George White sometime in July or August and asked him if he would be interested in coming back to the Cape Breton Development Corporation where he had worked for 10 years. He left in the late 1980s or early 1990's and became a senior vice-president at the Nova Scotia Power Corporation. When I talked to George in August, he was not interested in returning to the corporation because he was not satisfied that the government was serious about trying to find a long-term solution for the corporation. That went by the way, but we waited in the bushes for George to weaken, and we stayed on his tail.
We finally convinced George to join the company in February or March of this year. We are pleased to have him come back. He was born and bred on a farm over on the north side of Cape Breton. He obtained an engineering degree and joined the Cape Breton Development Corporation. He became a successful mine manager of the Prince mine for three years in the mid 1980s, and went on to become the manager of our Phalen mine, which is a troubled mine. He did a great job there and then left to join the Nova Scotia Power Corporation. We were very pleased to have George come home to Cape Breton and accept the responsibility of president and chief executive officer of the company. We know full well the company is in good hands. If there is a chance of survival for this company, George is the man who can make it work. In my heart of hearts I knew we would persuade George to return, although he did not know it at the time. However, I was satisfied we had a strategy and a plan that we would pursue. It then came time to understand what we had in the company. In that regard, I have a series of slides which I will take you through which, I hope, will not be too boring.
We first analyzed the company to try to find out what the problems were and to better understand them. Some of you may have a copy of the paper which is the model we used to take the company apart. We divided the whole process into a series of small processes, and we started to analyze each one of them with respect to the manpower and the labour costs for each of those components. I will give you an example of some of the things we did.
The chart I am showing you has three columns showing the manpower volumes at the Phalen mine. The blue column is the actual for 1994-95, the red one is the budget for 1995-96, and the yellow one is the actual for 1995-96.
Senator MacEachen: Mr. Chairman, we do not have the slides, and we cannot see the chart.
The Chairman: Do you have this on paper, Mr. Shannon?
Mr. Shannon: We can make it available to you afterwards, but we do not have it now.
The Chairman: If you could stand to the side, Mr. Shannon, we could have a clearer view of the chart. Because of the TV cameras, we cannot have the lights turned down.
Mr. Shannon: As I said, the chart shows the actual for 1994-95, the budget for 1995-96, and the year-to-date for 1995-96. These are the different components on the chart we handed out. You can see the development area, the wallface, as well as an analysis of coal transportation and the transportation of men and materials.
We analyzed the company in order to ascertain what was wrong. The important relationship here is the one between the budget, the red line, and the actual figure, the yellow line.
We show the average wage cost at the Phalen mine for all the different components. Again, the red line is the budget, and the yellow line is the actual expenditure. Again, it is important to consider the budget in relation to what is actually happening.
Senator MacEachen: With respect to the Phalen mine you show a series of bars beginning at the left. What do these bars at this end of the table represent?
Mr. Shannon: Those represent the average wage cost, senator, for the development component at the Phalen mine. This chart shows the actual for last year, the budget for this year, and the actual for this year.
We show the development component, the wallface component, the transportation of coal in and out of the mine, and the transportation of men and material in and out of the mine. This is the Phalen average wage cost for each component.
Senator Murray: When you talk about "this year," are you talking about the year that is a month and a half old?
Mr. Shannon: I am talking about the year ending March 1996, because we were doing this last June or July.
Senator Murray: I understand. We are six weeks into a new fiscal year.
Mr. Shannon: I guess we are a little bit behind you in Cape Breton.
As I said, it is important to notice the relationship between the budget and the actual.
We also went back in the development at the Phalen mine to April of 1991. We have a chart for April of 1991. The dark line is the budget by the month from April of 1991 through to June of 1995. The red line is what was achieved. As you can see from the chart, there was not one month during that period when they met the budget in development at the Phalen mine.
Senator MacEachen: What does "development" mean?
Senator De Bané: Does "development" mean production?
Mr. Shannon: "Development" means building the roadways to get the coal out.
The chart shows the cost of the development for the year ending March 1995. The red bar is the budget and the blue one is the actual. Again, you see the difference between the budget and the actual. They do not keep within the budget very often.
Senator MacEachen: What does that mean, Mr. Chairman? I hesitate to interrupt, but when Mr. Shannon presents a bar for budget, is this a budget expenditure that is proposed by the management of the company?
Mr. Shannon: Yes, sir. It is the business plan.
Senator MacEachen: It is the proposed outlay of funds, proposed by the company. That is shown in one bar, and is the other bar the actual realization?
Mr. Shannon: Yes, sir.
Senator MacEachen: As I saw it, in all cases, the realization was less than what was planned.
Mr. Shannon: In actual work, yes, sir. However, when it came to spending money, it was just the opposite. When they were talking about metres, they were under budget, and when they were talking about spending money, they were over budget -- just the opposite to what it should have been.
Senator MacEachen: That went on from 1991?
Mr. Shannon: Yes, sir. The chart demonstrates the Phalen budget. On one chart you can see what was actually achieved, and what was budgeted for. We are not making budget.
As we were considering all of this information we were starting to become concerned about the quality of the budgeting process.
Senator Ghitter: What does that mean in dollars?
Mr. Shannon: The dollar figure is shown.
The Chairman: We are having trouble seeing the numbers along the side.
Mr. Shannon: The chart shows that $53 million was budgeted, and that we spent $33 million, so we were under budget on our expenditures in development by $20 million.
Senator Forrestall: Because you could not spend it?
Mr. Shannon: I do not know the reason, but they were under budget. That means there is a serious problem with development at the Phalen mine, and that the budgeting figures are not accurate.
The next chart is the company total for company last year. It shows our sales and our costs of operation. Our costs of operation were $245 million and our sales were $224 million.
The next chart is a breakdown of our two customers, the Nova Scotia Power Corporation and the export market.
This chart relates to our customer, the Nova Scotia Power Corporation. The blue line shows our sales, and the red line is our cost of sales.
Senator Graham: Mr. Shannon, would you give us the actual numbers on those two items?
Mr. Shannon: Yes, sir. It is about $175 million for sales, and about $177 million for costs.
Our export sales were about $45 million, and our costs were about $65 million.
The next slide illustrates what happens to the actual money. We lost about $2 million selling coal to the Nova Scotia Power Corporation, and we lost about $23 million selling coal offshore.
If we had stockpiled the 851,000 tonnes of coal that we sold offshore last year, and then sold it to the Nova Scotia Power Corporation at the Nova Scotia Power Corporation prices, we would have made a profit of $3 million instead of a loss of $20 million. That is the difference in the price for selling coal offshore and selling it to the Nova Scotia Power Corporation.
Senator Forrestall: Is that the world price?
Mr. Shannon: Yes. That is the difference between the Nova Scotia Power Corporation contract price and the world price. It is a substantial difference.
The next slide shows the 1994 actual numbers, as well as the situation in March of 1995, and the 1996 budget. That is the budget we were working with last year when we were trying to ascertain what was wrong with the company.
We operate two coal mines, the Prince mine and the Phalen mine. Actual production at the Prince mine for the year ending March 1995 was 1,373,000 tonnes. For the following year they were budgeting 1,427,000 tonnes, an increase of 54,000 tonnes in production at Prince. The cost for operating the Prince mine was $49,727,000 to produce the 1.3 million tonnes, and it will cost $47,300,000 to produce the 1.4 million tonnes, a reduction of $2.5 million.
In the year ending March 1995, the Phalen mine produced 1,880,000 tonnes, and they were budgeting to produce 2.4 million tonnes the following year, an increase of 558,000 tonnes. The cost for running the Phalen mine to produce the 1.8 million tonnes was $73,500,000. The budgeted cost for producing the 2.4 million tonnes, or 558,000 tonnes more, was going to be $9.5 million less.
That tells me that there is obviously something wrong. I went through the figures with you because it was a budget of convenience, in my view, developed to convince the people in Ottawa that we were going to make money this year.
Senator Buchanan: Who prepared the budget?
Mr. Shannon: The budget would have been prepared by the corporation. You make the budget work. I am sure Devco is not the only place where that happens.
I want to show you three key indicators which we will pay a lot of attention to in the future. I am referring to the Prince mine. The three indicators are: overtime, worker's compensation and absenteeism. For the year ending March 1995, we were budgeted to spend $850,000 on overtime but we actually spent $3,300,000; for worker's compensation, we were budgeted to spent $1.7 million but we actually spent $2.3 million; and our absenteeism was budgeted at 10 per cent but we it was actually 18 per cent.
The following year we were budgeted to spend $1.7 million in overtime but by July -- which was four or five months into the year -- and we had already spend $931 million; the worker's compensation figure was $1.6 million, but we actually spent $655,000; and, although we were budgeted at 10 per cent for absenteeism, we were running at 17 per cent.
The same kind of information holds true for the Phelan mine. On overtime we were budgeted to spend $2.7 million, but we actually spent $5.5 million; on worker's compensation we were budgeted to spend $2.1 million, but we spent $3.4 million; and our absenteeism was budgeted at 10 per cent, but we were running at 20 per cent.
In drafting our business plan for the following year, we knew we had to cut those figures back. Therefore, we budgeted $2.1 million for overtime; $1.9 for worker's compensation; and 10 per cent for absenteeism. However, in July 1995, the absenteeism rate was 21 per cent.
Senator MacEachen: To make sure that I understand you, these are glimpses into the past showing us how the planning process worked, is that right? In other words, when you say "budgeted", you mean that management estimated that there would be 10 per cent absenteeism, and that figure was worked into the cost estimates, and so on, in their budget.
For the benefit of those who are not as familiar with these matters, it is important to understand the point Mr. Shannon is making.
Mr. Shannon: Yes. To conclude, after going through that process, you could not have much confidence in either the business plan or the budgeting process.
What did we do? We invited all the general managers to a meeting where we sat down and started to rebuild each operation as if it had been closed down. The managers were asked how many men they needed for each process. We then started to try to figure out where we stood with this company.
One of our responsibilities is to provide the government -- that is, the shareholder -- with a fall update of our business plan. We were now approaching the fall and we had to have a new plan in place to carry us through the balance of the year.
We then did a corporate update for November 1995. When we were doing this corporate update, the minister asked us to consider a series of options that the government could consider for the corporation. We did that. We considered two options: the status quo and a shutdown. Part A of the shutdown would be an immediate shutdown, which would have occurred in the spring of 1995; or an orderly shutdown, which would have meant that the mine would run out and probably last until approximately 1998. It would then be shut down in 1998. We also had to establish a profitability plan and a privatization plan.
For each of those options, we did a series of pros and cons and we costed each one of them. We went into each area of the operation and did the cost of running one shift, two shifts and three shifts, and combined them to see how the company would operate. We went through that process in the fall.
By this time, our management at the various sites was starting to make some progress. Returning to the three indicators that we talked about earlier -- that is, overtime, absenteeism and accident frequency -- in April of 1995, overtime was running at 9 per cent and by December it was down to 9 per cent; the absenteeism rate which was running at 23 per cent went down to 16 per cent; and the accident frequency rate, which was 38 per cent, went down to 14 per cent.
In those three areas, the management system we were trying to put in place was starting to have an impact on the company, convincing people that, with the proper management structure, there was an opportunity to make the company work.
I am now referring to the financial picture of the company in December of 1995. We show the budget and the actual expenditure.
We were budgeted to have a cash and operating surplus of $2.5 million, but we had an operating loss of $11 million. The figures are for December. We also show a depreciation expense of $29 million, and a capital expenditure of $4.8 million. If you eliminate the depreciation so that you can deal directly with cash, there is a cash loss at the end of December in the amount of $16 million.
You must remember that at this point in 1991, the Government of Canada had mandated that the Cape Breton Development Corporation would be financially self-sufficient in five years. The company needed $155 million to accomplish that goal. They said, "As of April 1, 1995, there will be no more money for Devco."
We are now in a situation where we have a cash loss of $16 million. We tell the government in Ottawa about this, but they have no idea where that money will come from. There is no provision anywhere in the huge system you have here in Ottawa to pick up that shortfall.
We did a projection to the end of the year to see what it would look like. You must keep in mind that we had a roof fall at the Phelan mine, which complicated the issue, around the end of November. With the understanding in December that the roof fall in 7 East would be back in operation much quicker than it actually happened, the original budget was projecting to finish the year with a $500,000 cash surplus. Our revised budget in our November update projected a $9.3 million cash loss, and now we were projecting a $20 million cash loss. We are losing about $1.5 million cash per month. That figure does not include depreciation; it represents the cash loss per month.
There is still no provision in Ottawa to pay that bill. That is why we had to take the terrible action that we took on January 9, when we had to layoff 1,200 employees. We arranged with our employees to lay off 1,200 of them for period of 8 to 10 weeks. We were then looking for about $1 million or $200,000 per week in cost reductions to make up the difference between the $9.4 million that we told the minister we would lose, and the $20 million that it looked like we were on target to lose. That is why we had to layoff 1200 people in January. We had no choice.
You saw the budgeting process. I told you a little bit about the conditions with our main customer, the Nova Scotia Power Corporation which was, basically, our only customer for the last two years because our production was not high enough to get into the international market and supply coal to anyone else. Along with that, we had all kinds of other problems.
We asked the Auditor General's department to do a financial update as of October 31, 1995 because we had totally lost confidence in the company's position and we wanted to know firsthand, straight-up, what was going on.
The Auditor General did that. Rather than present a new annual report, or an October report, they said that they would roll that audit into the year-end audit which was to be done for March 31 and that was is in the preparatory stages then. We received a draft statement at the audit committee and some of the changes which were made enabled us to understand the position of the company.
At the same time as that was going on, there was a fairly major investigation going on by our in-house security people, the regional police department and the RCMP into an activity on Cape Breton Island which included the Cape Breton Development Corporation. That was ongoing simultaneously for a three- or four-month period. I do not want to go into details because it is still being worked on, but as a result of that, employees of ours were charged and dismissed and will be going to court for stealing and that sort of thing.
To give you an indication of some of the findings of the investigation, at the Victoria Junction wash plant we had 3,665 pairs of gloves and 121 employees, or 29 pairs of gloves per employee. At the Phalen colliery we had 11,000 pairs of gloves, or 13 pairs per employee. On February 28, the Victoria Junction wash plant was idle. However, $1,000 worth of boots was issued by warehouse personnel on that day. In 1995, 252 pairs of burner pants were issued. A maximum of 30 people perform work which would require that type of pants.
That gives you an indication of what was going on. Just about anyone, including a senator, could access one of our computer systems, order $10,000 of welding rods, for example, enter them as received, and put the order through for payment. That is how loose our system was.
It would be fair to say that the company had a lot of holes in it. There were few controls. It was wide open. Maybe that is why I was asked to go there; because you could drive a truck through any part of the company. You could get through any process of the company with an 18-wheeler.
At the outset, the minister told me that she wanted to find out whether there was a viable coal industry in Cape Breton. If there was not, she wanted to take the appropriate action; shut down the coal industry, and replace it with something. If there is, she wanted to find the configuration that would work.
She was convinced by the first of the year that there was, in fact, an opportunity for a viable industry in Cape Breton, because we have the coal, we have the work force, and we have a customer. It is just a matter of getting those three things together. It does not sound very complicated.
She also felt that, if the federal government were going to continue to participate in the coal industry in Cape Breton, the stakeholders should be playing a bigger role in the development of the future of the company. As part of that process, we went through a huge public debate. I used to have information sessions with the media every two weeks to stimulate interest and create discussion. The minister wanted to have a serious consultation process with the stakeholders. We began that process.
That consultation process involved six sections; the United Mine Workers, CUPE, the IAM, the CAW, and the Confidential Employees, as well as the provincial government, the municipalities, business leaders and the community. The idea was to have a meeting with each one of those groups and provide them with a plan. We established a draft plan. If we were Upper Canadians, we would call it a white paper. Included in that draft plan were a series of options which I mentioned earlier. We analyzed all the options, mixed and matched the various ingredients, and came up with a plan. We established a draft plan and gave a series of options to each of those groups. They all returned a week later with their views and recommendations. We had a good response and good discussions.
The corporation was then to redraft the corporate plan taking into consideration the input of all the stakeholders. The board of directors was to consider and approve the redrafted plan and we would submit that to the minister for the approval of the federal government. That was the process we were to go through.
Some of the considerations for drafting the corporate plan were as follows: The primary customer focus was to be on the Nova Scotia Power Corporation. We had to rebuild our relationship with the Nova Scotia Power Corporation so that, when our contract expired in the year 2000 -- you must remember that every five years they have to come back and discuss those three items -- we would have a better relationship with them.
The second concern was that we would be competing not only with international prices from offshore for coal but, most likely, against offshore gas or methane gas.
As I said, we know what the revenues will be from the Nova Scotia Power Corporation until 2000, but there will be tough discussions then. We have to become a profitable coal mining company and we have to reduce our costs.
Those were some of the considerations, but our focus would be on the Nova Scotia Power Corporation. We were not going to get out of the export market, but we were not going to focus on it. In the past three or four years, the whole energy of the company was on the export market. We would continue to sell into the export market when we had coal available and when the price was right. We were going to have to sell, based on our production levels, 3,000 to 5,000 tonnes of coal per year to the export market.
Another consideration was a series of proposals we got from the union and the employees. We put all this information out to all the groups we met with, including the clergy, the business community and the municipal leaders. They recommended a relationship by objective; that is, an issues-oriented process of problem solving through joint union-management action. Their view was that the government should absorb the annual pension debt, revisit the pre-retirement leave plan and defer part of the annual payments toward unfunded pension liability, and develop a Phalen mine plan and full engineering assessment.
Their other proposals included coal bed methane extraction, energy efficiency audit, purchasing policy, Donkin mine to re-establish a 20-year lease with the Nova Scotia government, and the Prince mine to develop the north-south option.
Other recommendations made by the union and the employees related to export technology, and by that they mean training, subcontracting, and consulting; standardization of equipment, which is a serious problem at Devco; and methane utilization and methane air utilization. Those were the recommendations from the union employees.
We met three times with each group. At the first meeting, we gave them a draft plan and some ideas that were out there, a series of options and information. At the second meeting, they responded with their views and specific plans. The third time we met with them was when the board and the government developed the corporate plan. That takes us to the spring of this year.
The federal government's mandate to Devco management is to achieve commercial viability. That means we must become a profitable coal mining company. It means we must be able to compete with private sector companies and with alternative fuels. It is not good enough for us to be a profitable coal mining company. We must be competitive in order to survive. There are many examples around this country of companies that were profitable but not competitive. When they were put in a competitive environment, they failed. One company with which I am sure most of you are familiar is the Dennison mine company. They had a favourable contract with Ontario Hydro, and when competition came along, they could not compete, they went broke.
There is a lot of information in the corporate plan details, and George White, the president of the company, will have to deal with that, but there are several items to which the board will pay particular attention in the implementation of the corporate plan. The company and the board are committed to the implementation of a multiple-entry development at Phalen. That was a very strong recommendation by the Boyd people who were hired by the federal government to come in and do a study on the coal mines of Devco. They felt very strongly that was the way to go into the future, and it was also a recommendation followed up by the municipal government to the new regional government in Cape Breton.
The next item to which we are committed is to have $300,000 set aside to study selective mining at the Prince mine. That recommendation was made by the Canadian Auto Workers Union. Perhaps Mr. White could explain that further.
Mr. George R. White, President and Chief Executive Officer, Cape Breton Development Corporation: The CAW is the union which represents the mine examiners, the people who do the inspections in the mines. In 1984, we had some problems at the Prince colliery relating to too much ash in the coal. We asked the workers at that time if we could modify our operations somewhat in order to improve the quality of the coal. I think the CAW people remembered that process, so, as part of this consultation process, they came up with the idea that perhaps we could do something at the operating level to improve the quality of the product we were producing. They made that recommendation, and we picked up on that.
There are many examples of mining companies, and not just in the coal industry, where, by properly organizing your activities at the work face, you can control the output from your colliery operation. That saves you money at the coal face because you do not have to bring the ash and the sulphur to the surface. You end up with a better quality of feedstock going into your wash plant, and ultimately you reduce costs.
This involves quite a bit of technology in a coal mining operation. It is not as simple as it is in some kinds of mining operations. We feel that, if our people could learn how to do this by using computers and mechanization at the coal face, it would not only augur well for us in the existing operations but also for the future. As the company is successful, and as we grow and want to expand into new mining operations such as the Donkin mine, we would have to be able to use this technology to be successful in that mining operating.
We picked up on that information. You may hear from the CAW in the next few of days on that. Their idea was a good one. That is the kind of cooperation we expect from our employees.
Mr. Shannon: The next item to which we are committed is the introduction of a quality management program, as recommended by the union and the employees in their proposal. Continued emphasis on standardization of equipment and consolidation of inventories is very important. Over the past few years, the company has been able to reduce its inventory by about $12 million but, based on the information that I gave you earlier about the gloves and overalls, we can reduce it further. We will continue to monitor that.
We will also continue the ongoing pursuit of savings on energy usage.
The last item is a quarterly progress report on key indicators. That recommendation came from several groups, but mainly the clergy, as they were interested in the process. They were interested in staying involved in the process to monitor the progress we were making in the company. Public companies do quarterly reports, so we will do a quarterly report, and it will be available to the public or anyone interested in obtaining it. It will be a series of key indicators. We have not yet finalized the format but, hopefully, it will be prepared pretty soon and we will be able to submit it.
One of the suggestions made by Steve Drake is that, because of the level of trust in the community and in the company, some kind of outside group should be involved. An annual report of a public company is often signed off by an accounting firm. We are discussing this with an independent accounting firm now to see how much they would charge and what would be involved in preparing that report on a quarterly basis for distribution. That was another example of the discussion that evolved as a result of the consultative process.
As was pointed out by several people, one of the problems at the Cape Breton Development Corporation, relates to training. It was a key part of the municipality's planning. We will spend substantial energy on management and supervisory skills training. A problem at Devco is that our first-line supervisors are in CUPE, and the people working for them are in the United Mine Workers Union. From time to time, both groups are caught in a conflict and, over the years, they have had a very difficult relationship. However, we need to enhance our management and supervisory skills.
We need to do a lot of work in preparation of the introduction of the multiple-entry technology over the next couple of years. We will spend some money on establishing a quality management training program to introduce the quality management that the union has suggested we should have.
Production at the Phalen mine will be at 1.9 million tonnes, stabilizing at 2.3 million tonnes in the out years. Development in the first couple of years will be 8,000 to 10,000 metres, then levelling off at 7,400 metres. That is because we are a year and-a-half to two years behind in our development. We have a lot of catching up to do. The annual development rates must improve substantially for the mine to be competitive. We want to implement the multiple entry training program that we talked about, at 9 East bottom and 10 East top, and that should happen in about a year and-a-half or so. The success of the Phalen mine is essential to the survival of the company.
Senator Murray asked for comparisons. I have a picture of the draft plan and, on the second line there is an indication of the changes we made to the draft plan to arrive at the final plan.
As you can see from the draft plan, we were planning on producing 1.6 million tonnes. We will now produce 1.9 million tonnes. That comes about as a timing issue.
Senator Murray: Is that this year, Mr. Shannon?
Mr. Shannon: Yes, sir. This is the plan for this year, starting April 1996 through to March 1997.
Senator Murray: When I read the spring plan, the plan you took out for consultation, and the plan approved by the government a little later, I noticed there was a five-year projection. I have the numbers here and I will ask you about them later.
Mr. Shannon: The difference in these two numbers is a matter of timing, as to when 7 East would come on. In the draft plan, we had 7 East coming on earlier, so part of it would have been in last year's business and part of it would have been this year's. The only other change we have is output per man-shift. The remainder of the five-year plan stays the same. The output for man-shift goes from 9.9 in the original plan to 11.5 because we are going to produce 300,000 tonnes more with the same number of people.
The only other issue is costs which was $48 per tonne in the first year and, under the plan with the additional 300,000 tones, the cost is reduced to $41 per tonne in the first year.
I will not turn to some of the alternatives we put forward in the consultative program. We had several options for the Prince mine. One option was to run three shifts for four months, which was the example we used in the base case, to mine about 380,000 tonnes of coal. Another option was to mine the same amount of coal by running one shift for 10 months. Alternatively, we could run two shifts continuously with normal development activity. That is the one we put in the plan. You have the north/south layout. I took you through some of the employee proposals and the Boyd study. Those were some of the alternatives in the white paper, if you will.
At the Prince mine this year, 1996-97, we will produce 688,000 tonnes. In the next fiscal year, starting in April, we will go to a two-shift production operation, producing 1 million tonnes of coal per year. We will do development on two shifts of 3,800 metres annually, and we will do the north/south option which was recommended in the union proposal. More work remains to be done on that. The money is in the budget for that. The only decision that needs to be made is a technical one confirming the engineering plans that were drawn up. That decision can be made as late as March 1997.
Senator De Bané: Compared to last year, how much of an increase in production at the Prince mine are you planning for? If your targets are met, what would be the percentage of increase?
Mr. Shannon: An increase over what?
Senator De Bané: You have talked about the production you are planning for Prince. Compared to last year's production, what will be the increase?
Mr. Shannon: For the year ending March 1996, we produced about 1.4 million tonnes. We were running three shifts at Prince last year. We are saying that, starting next year, we will run two shifts, so we will reduce from 1.4 million tonnes to 1 million tonnes. That is a reduction. As we continue to reduce our costs, there is still an opportunity to increase production at Prince and put on the extra shift.
This is a comparison between the draft plan and the new plan. Senator Murray probably knows more about this than I do. The draft plan called for 659,000 tonnes; we will produce 688,000. Also, instead of 387, which is the figure we were at before, we will run 1 million tonnes.
Our work force will go from 550 to 384 and then stabilize at 376. Our costs at Prince for 1996-97 will increase substantially because we will be doing development that we did not plan on doing before. Our costs will go from $43 per tonne to $48 per tonne. However, the balance of the program will be fairly close to the numbers in the draft plan.
As for surface operations, we will try to minimize costs while remaining flexible to react to profit-making opportunity. Work force activities will be adjusted to reflect reduction in sales levels. Facilities will be maintained in standby mode. There are opportunities to increase surface activities as we reduce our costs, become more competitive, and sell more coal.
This whole plan is developed on the basis of unwashed coal. It is based on exporting 700,000 tonnes of run-of-mine coal. The surface operation costs are basically the same as those in the draft plan. There is a difference of 80 cents to $1 per tonne because we are handling more tonnes and getting more volume through.
I also have our sales and production forecast. In the first year, we will sell about 2.6 million tonnes. Then that figure increases to 3.2 million and 3.3 million tonnes. The Nova Scotia Power Corporation will be taking anywhere from 2.2 million to 2.4 million tonnes per year and the balance will go into the export market.
Senator Buchanan: Will that balance be run-of-mine coal?
Mr. Shannon: Yes. We based our numbers on that premise. If there are opportunities to sell metallurgical coal at a higher price, which we hope will be the case, then we will wash that coal.
The next slide shows the five-year financial picture of the company. We have various lines showing our revenue, our operating cost, our operating surplus, our capital, and our cash flow from operations, which is a very important line. That is the money we generate from mining coal.
The Chairman: Some senators do not seem to have a copy of that document.
Mr. Shannon: We will ensure that everyone receives a copy.
Senator MacEachen: Mr. Chairman, can you identify the document for us?
The Chairman: The document is the Cape Breton Development Corporation corporate plan summary, 1996 to 2000.
Senator MacDonald (Halifax): That is the government plan.
Senator Murray: No. It is the one approved by the government.
Senator MacDonald (Halifax): Let us call it "the government plan" if it is approved by the government.
Senator Murray: All right.
Mr. Shannon: As I said, cash flow before pensions is a very important figure.
If we meet the plan's objectives this year, we will have an operating cash flow of $20 million; the following year, it will be $30 million; the year after that, $49.5 million; and the year after that it will be $58.5 million. For the last year of the business plan, if we continue to meet the objectives of the plan, we will have an operating cash flow of $61 million.
We also have an additional responsibility, namely, the pensions that we are paying for all the former employees of the company. This year, we will pay out $55.5 million for those pensions. For the following year, the amount will be $57 million; $58 million the next year; then $35 million; and, finally, $34 million, for a total of $241 million over the five-year period. That will cause the company to lose $80 million cash in the first three years of operation because we will be paying out pensions.
We have $20 million in cash. We must pay out $55 million. Consequently, we will have a $35 million loss in year one. We will go to the minister's department and draw down $35 million. The following year, we will lose $26 million after we pay $57 million in pensions, and we will draw down an additional $26 million. It will be the same the year after. We will then draw down $9 million for a total of approximately $79 million, which we will have to draw down. That was the loan the Government of Canada gave to the corporation -- that is, the $79 million loan with interest that must be repaid.
If we conform to the corporate plan, after we pay our pensions, in the fourth year we will have a surplus of $23 million.
Senator Murray: Mr. Shannon, I am comparing what I think I see on the slide with the corporate plan summary. What we may be missing in the corporate plan summary is the breakdown of pensions and human resources strategy. You are giving us that now. You are breaking down the $55,567,000 number into its components, are you not?
Mr. Shannon: Yes. I am breaking that into three components. Do you want me to go through them?
The Chairman: Mr. Shannon, do you have those slides on paper?
Mr. Shannon: We will make copies of them before we leave the city.
The first line on the slide indicates $30 million, the next one is $29 million, then $29.5 million, $6.5 million and, finally, $6.3 million. This is money for pensions. In the first three years it will be approximately $30 million. However, in the last two years, it will only be $6.5 million.
We have a compassionate disability pension program at Devco. It is an unfunded pension. In the late 1980s, the management of the company decided to do some downsizing. They used the compassionate disability pension as a vehicle to downsize the company. The Superintendent of Financial institutions found out about this practice some years later, and he stopped it. In 1991, as part of the business plan, he said that the company had to fully fund that compassionate disability program. As a result, we have been paying about $23 million or $24 million extra per year to make that pension fund fully funded.
In March of 1999, the pension fund will be fully funded. Our pension responsibility will then go from $30 million to $6.2 million. That is why we must pay that money out.
We tried to go to OSFI on many occasions, particularly when the Nova Scotia Power Commission was not paying its bill. We were starved for cash. We went to the Superintendent of Financial Institutions, and asked for an extension -- that is, reduce the amount by $10 or $12 million per year and give us more years to pay. However, they would have no part of that request. We had a very long discussion, but we got nowhere. They wanted it to be fully funded.
The next line on the chart deals with worker's compensation.
Senator Murray: Mr. Shannon, perhaps I should wait to ask questions about this item, but since you have the information at hand, I will address it now.
I am puzzled by the extent of the unfunded pension liabilities. I heard what you told us about the compassionate leave fund and the views of the Superintendent of Financial Institutions, and so forth, but I have a note here -- and I think it is from one of the documents produced by our researchers -- stating that there are two pension plans to which the corporation contributes. One is a non-contributory industry plan, which existed prior to 1982.
Mr. Shannon: Yes.
Senator Murray: That plan is said to have a liability of $67.5 million.
Mr. Shannon: That would be a lifetime liability, until those people who receive it stop drawing their pensions.
Senator Murray: There is another contributory plan that was introduced in comparatively recent years, and that shows a small surplus.
I am trying to get at the total amount of the unfunded liabilities. Other numbers I have seen include environmental costs that the corporation inherited. Do you want to touch on that now, or do you want to wait until later?
Mr. Shannon: We can deal with it now, if you wish. This is the picture for the five-year period that we are talking about. There will be responsibilities for pensions beyond the period that we are dealing with. That is why I said it was a lifetime liability. The burden is heavy now because this plan was presented by the Superintendent of Financial Institutions in 1991. He gave us only so much time. He wants that pension plan to be fully funded by March of 1999, and he gave us a schedule by which to do that. That is why we are paying $24 or $30 million more per year for the first three years of this business plan than we are for the last two years. However, we still have pensions beyond that for as long as these people draw down their pensions. There will be an ongoing liability in that respect.
Are you trying to quantify the total pension liability of the company in the event of a shut down?
Senator Murray: My question is much simpler than that. Last fall when you prepared your corporate update you made the statement that one of the prerequisites to getting things back on track was to transfer "social costs" to the federal government. This raises the question: How much of this really belongs on your bottom line? I suspect you have an opinion on that.
In the next bullet on that corporate plan, you indicate that, without a transfer of those social costs to Ottawa, you would need $70 million funding over the period in order to cope. I am struck by the coincidence of the $70 million with the $78 or $79 million loan that you are getting now from the federal government, of which $8 or $9 million is to pay last year's loss. The figure of $70 million seems to coincide neatly with what you were trying to get rid of last fall. Do you understand what I am saying?
Mr. Shannon: I do not know if I totally understand your question, because you went sideways on me.
When I came here last fall, I put everything I could on the table and ask the people in Ottawa to find the money to continue to fund the company. One of the options that they presented -- and I suggested it -- was to eliminate the social costs. That is what I was referring to, the social costs.
Senator Murray: What was your rationale for eliminating the social costs?
Mr. Shannon: The common terminology is "social costs."
Senator Murray: I understand that, but what would be your rationale for transferring those to the federal government? Would it be that these were costs that the company inherited from its predecessor private sector company, or that these were costs that the company undertook which it would not have if it were not a Crown corporation?
Mr. Shannon: I do not know whether they would have undertaken those if it were not a Crown corporation.
Senator Murray: Do they belong on your bottom line?
Mr. Shannon: It depends on the negotiation.
I was looking for any vehicle to convince Ottawa to continue to support the company. To be perfectly honest, that would have been my last choice. I also suggested that they eliminate this problem; that they take this $90 million out of here, the OSFI money.
We have a $50 million operating line in the legislation with a very narrow definition. The other suggestion I made was to broaden that definition and increase the operating line from $50 million to $70 million. I was grasping at any straw when I came to Ottawa in the fall. Clearly, if it meant we were going down the drain and would get no money, I would support doing something with the social costs, but that would clearly be my last choice.
Senator Murray: You listed that as one of the prerequisites to getting back on track, Mr. Shannon. I will come back to that later.
I want to know whether all those numbers properly belong on your bottom line.
Mr. Shannon: I think they do belong on the bottom line inasmuch as all of the people who are getting benefits worked for the company. Most of them have been with the company since the government took it over.
There is an item for pensions and one for Workers Compensation. With regard to Workers Compensation at Devco, we are self-insured. When someone is injured at the Cape Breton Development Corporation, they go through the same process everyone else goes through. They go to Workers Compensation which does an assessment and issues a pension. Workers Compensation sends us a bill for that pension plus a 15-per-cent administration fee.
Senator Murray: Mayor Coady will be one of our witnesses tomorrow. The proposal of the regional municipalities for the future of Devco suggests that the Government of Canada should take that on and a lot more besides, that it should assume a lot of those costs into a separate division in order to wipe the slate clean for you. Perhaps, before you conclude your remarks, you would comment on that.
Senator Ghitter: Mr. Shannon, I am a little confused as to numbers. I have before me a document entitled "Summary of the Draft Corporate Plan, Cape Breton Development Corporation, Spring 1996". It contains numbers which are different from those you have shown us. Is this a more recent document? This one shows a loss of $44 million as compared to $35 million. The numbers are different on the pensions. Which one am I to follow?
The Chairman: Senator Ghitter, if you look at page 23 of the document provided to us by the Library of Parliament, the figures will be clearer.
Mr. Shannon: I will come back to Workers Compensation which is on the second line; $13 million per year. That is not current Workers Compensation; those are pensions. The current Workers Compensation numbers are on the "operating costs" line. They run from between $4 million and $6 million per year. These are ongoing pensions which have been awarded by Workers Compensation to employees of the company. There is a lifetime liability associated with this line.
The third line is an HR strategy of $15 million. It refers to the closure of the Lingan mine and the ongoing downsizing. All of those costs are on that line.
Those are the three categories: the pensions, the Workers Compensation pensions, and then the new pensions for Lingan and the current exercise we are going through.
On the bottom line you will see that our costs of operation this year will be $77 a tonne, $67 a tonne, $62 a tonne and $53 per tonne. That is why it was important for us, in the negotiations with the Nova Scotia Power Corporation, to get them to accept the reductions over a three-year period as opposed to taking them all in one hit. You can see the impact that a 6-per-cent reduction is having on us. If we had taken a 15-per-cent or an 18-per-cent reduction in the first year, it would have been so substantial that it would have been difficult to get support in Ottawa for the continuing operation of the company.
Senator Buchanan: Mr. Shannon, do you have a figure for the cost per tonne excluding the pensions, Workers Compensation and the HR strategy?
Mr. Shannon: I do not have the cost per tonne, but it would not be hard to figure out.
Senator MacEachen: Perhaps we should permit Mr. Shannon to conclude his main presentation so that we can move into the second phase.
Mr. Shannon: I now want to talk about the work force adjustment. Under federal labour legislation there is a facility to establish a joint planning committee program. That joint planning committee was made up of members of the United Mine Workers, all the other unions, the Confidential Employees and the management of the company. They established this plan down to a certain point. I am referring to the 411 people you hear spoken of who went out in the first phase of the operation. That is made up of attrition and volunteer severance from November 1995 to March 1996. Fifty-seven people went out of the company in the last fiscal year.
The normal attrition in years one and two is 65. The early retirement program in this phase is for 230 people over the five-year period. Severance in one year took care of 59 people.
In the balance of the plan, which is year three to year five, normal attrition and severance will take care of about 151 people, using average numbers. That gives you a total of 562 employees.
One of the issues raised as a concern in the company was the age of our work force. In April 1996, the average age was 45.5 years. This is a young man's business. In March, five years later, the average will be 49 years.
Under our collective agreements, we would lay off on the basis of seniority. It is important in this business to keep as many young people as possible. Therefore, the government allowed us to put in an additional early retirement program beginning in year two which will include 153 employees.
In the legislation and under the terms of the collective agreements, the company has a responsibility to provide anyone who was employed in this company in August of 1968 with a pension or a job. One hundred and eight employees who qualify under that pre-1968 clause are still in the company. Part of the rationale was to try to incorporate as many of those employees as we could.
We also have a number of older employees, in their late 50s and early 60s, who do not have 30 years of service. They have 27 years, 28 years or perhaps slightly less. We wanted a provision which would give them an opportunity to leave the company with a pension. That is the rationale for the 153. The company, along with the joint planning committee, will have to work out the terms of reference for those 153 employees. Those are two areas of concern that we wanted to draw attention to.
All of the ideas and proposals we put on the table cannot work unless we have the support and the cooperation of all of our employees. We will be discussing the concessions with the unions. We want a full commitment from the unions to a quality management program. We want to have a roster for scheduling vacations. We want hot seat changes. We want cross-trade flexibility in the workplace. We want to discuss the structuring of the pay scales and the bonus arrangement, and we want to discuss flexibility in site transfers for bridging arrangements. We must sit down and have serious discussions about those things in the collective agreement process that is ongoing in the corporation.
We will also be asking our employees, as individuals, to start accepting some responsibility. We are asking each employee to accept the responsibility for his own job. We are also asking each employee to start accepting some responsibility for his pension benefits. That is important because we have about 1,600 people in the company who do not participate in the contributory pension program. After 1982, joining the contributory pension program was a condition of employment. We cannot backdate that. These people, for whatever reason, have not been participating in the pension program. If these people retire at age 55, they will receive a pension of $170 a month. If they retire at age 65, they will receive $375 a month. We are asking our employees to start accepting some responsibility for their pensions and start contributing. We will immediately put in place an education program for the husbands and wives or sisters or daughters of our employees so that they understand the benefits of joining the pension plan. The company matches their contribution of 5 per cent. I am sure most of our employees do not understand that, or else they would be contributing. It is a good program.
We are asking the union executive to accept responsibility and provide leadership to their members. In this company, the management has blamed the unions for all the problems, and the unions have blamed management for all the problems. It is time to stop doing that and to go forward working together to try to make this company work. Assigning blame is no longer good enough, whether it is management blaming the union because they cannot get along with them or it is the union blaming the management. It is no longer acceptable.
I will stop there and try to answer any questions you might have.
The Chairman: Thank you very much for a thorough presentation.
It is no secret that around this table are many members with a great deal of experience and knowledge about the Cape Breton Development Corporation. I am sure their questioning will be thorough and based on that experience and knowledge. I will be just as flexible in this question period as I was in the presentation, because I think the objective is to be clear in our own minds as to the situation. However, I would also remind you that brevity is the soul of wit. Although we have this room all evening, I personally do not want to take advantage of that. I think we can strike a balance between exploring issues fully and trying to be as concise as we possibly can.
Senator MacDonald (Halifax): Mr. Shannon, you are well and favourably known to most members of this committee. Certainly, as a very successful businessman, you do not need this job. I would like to ask you, though, a couple of personal questions.
The Devco board of directors is made up of a chairman, a president who is the Chief Executive Officer, and five directors. There have been 10 presidents since Devco was established in 1967. You have been acting president twice, in 1984-85 and in 1995-96. What induced you to get involved in 1984, and what induced you to leave after a year?
Mr. Shannon: I do not know what induced me to become involved. I was asked to do so, and people convinced me that I had something to offer. When I became president, I recall that Ed Lumley was the minister in charge of the Cape Breton Development Corporation at the time, and he cut off funding to the corporation because of huge losses. I think Senator Buchanan was around at the time. The company was in a state of turmoil. I was asked by Senator MacEachen to meet with Mr. Lumley, which I did in Ottawa, and we had a fight for the first half hour, as I guess everyone does with Mr. Lumley. Then we managed to see eye to eye.
I agreed to do basically the same kind of thing I am doing now. I went in, cleaned the place out, and tried to bring in some entrepreneurial spirit, some business sense and commercial stability to the company.
Senator MacDonald (Halifax): But you were not naive 10 years after that, the second time around.
Mr. Shannon: No, but I guess it was the same kind of situation, senator. No one else was doing it, and I guess they got down to the "S"s in the phone book.
Senator MacDonald (Halifax): I am curious about what happened last January. I remember the mine roof fall and the necessity of laying off half of your labour force, approximately 1,200 people. However, at the same time, you announced that you would lay off 400 people permanently in April -- that is last month -- with the aim of getting the number eventually up to 800, if the government accepted the plan.
Now, you seem to have had a lot of advice. There seem to be at least three other plans for Devco besides the corporate plan which the government has adopted. There is the Boyd plan to which you referred, the plan of the unions, and the corporate plan struck by your board of directors.
Incidentally, that decision made in January last with respect to not only the layoffs because of the mine roof but the permanent layoffs, was that decision taken by the board?
Mr. Shannon: It would have been, yes.
Senator MacDonald (Halifax): Then the Cape Breton regional municipalities got in on the act, and you had consultations with all the stakeholders. With all of that what you might call "interference" -- that is not the word I want, but they were meddling in your plan -- you still come up with an amazingly similar number. Instead of 800, you have it down to 656.
Mr. Shannon: I want to finish answering your first question. You asked me why I left. I went there to do a specific job in 1984. We restructured the company and built a business plan at that time. We built a new management team and my work was finished and I left.
I was asked, this time, to stay on as chairman of the board after we appointed a president, and I will stay on a little longer in the position of chairman. I left the last time only because my expected short period was up and I wanted to return to running my own business.
Senator MacDonald (Halifax): The thrust of my question was simply this: In any consultation with other people involved in this matterg, for instance, in the Boyd report, did you find anybody meddling in your affairs to a point where you would be incapable of carrying out the optimistic plan that you have for the future?
Mr. Shannon: No, sir. As I said earlier, the minister wanted the stakeholders to be more involved and to have some ownership in the plan, to try to get people to support the company and to be stronger in the company. That is why we went out with our draft plan. There were several other suggestions out there. We took some ideas from the municipal plan. We took some concepts out of the Boyd study. We took some from the proposals of the employees' unions. We got ideas from other areas, too.
We cherry-picked all the ideas and made the best into one corporate plan. Please remember, senator, that this company had been coming to Ottawa for 30 years claiming that it had a plan. The level of confidence in the bureaucracy in Ottawa was not very high. We had to build a plan which was conservative and believable for the people in Ottawa; it had to be achievable and supportable, but yet aggressive enough to keep us in the coal mining business.
Senator MacDonald (Halifax): Yet you were prepared to abandon your export business?
Mr. Shannon: No, we were never planning to abandon our export business.
Senator MacDonald (Halifax): Was that not in your original draft plan?
Mr. Shannon: No, and I want to straighten out the numbers for you.
In the original numbers, we referred to 800, but the actual figure was 781. In this five-year period beginning April 1, 1996, 658 people will go out of the company. There were however, 57 additional people who left from November to March, which takes us to 715. If the plan is followed throughout the five-year program from November of 1995, the number will be 715 at the end of the plan. However, the five-year plan which was just approved states 658. Both numbers are correct. The difference arises in the November-to-March period.
Senator MacDonald (Halifax): I have a newspaper quotation here, which I should be able to identify but cannot. It represents you as stating: "We have established that we will have a healthy, viable company, self-sufficient, and we will not have to depend on Ottawa on whether we survive or not. We will do it ourselves. We will have 1,300 to 1,400 people working and that is a pretty good-sized industry."
Mr. Shannon: Yes, I believe that. We obviously had to have some help because, as I indicated earlier, there was no provision for losses in the company after March of 1995.
The government agreed to lend the company $79 million because of the shortfall for the first three years of the business plan. If you look at the business plan, we will be able to repay that over the following three years. Then the company will be totally self-sufficient.
Senator MacDonald (Halifax): It sounds like an invitation to privatization, does it not?
Mr. Shannon: That is for the shareholder to decide. That is not something for us to decide.
Senator MacEachen: I do not know where to begin, because, in a sense, we are re-entering this problem once more after quite a number of previous re-entries, including after the events of 1984, when Mr. Shannon became chairman of the board and performed the tasks that he has described.
Quite a number of important issues have been mentioned, but the most important is whether we can establish a viable industry in Cape Breton over the long term. We know that this industry is a cornerstone of the economy of Nova Scotia and certainly of Cape Breton. If we lost these 1,300, 1,400 or 1,500 jobs -- whichever is the correct number -- through a shutdown, it would create a major catastrophe and a social disaster for communities and families. It would be the end of the industry in Cape Breton. From my point of view, we are trying to save communities and to protect families and their breadwinners and to build for the future.
Mr. Shannon has presented a revised plan. It certainly shows an improvement, in the sense that there are two shifts now at the Prince mine. There is a development program at the Prince mine. As I understand it, you will look into the possibilities at the Phalen mine. There is some prospect there. Perhaps the most important resolve which everyone needs is the resolve to make this plan work and to ensure that these numbers that have been put forward do not come back to mock us five years from now. We do not want someone else to come here and say, "This was the budget, but this was the result." That is the worst possible scenario.
I am very interested in the development. When the Cape Breton Development Corporation was begun, there was a strong force in cabinet toward creating a corporation that would have no authority to open a new mine. That was not a farseeing strategy, however, because, if you cannot open new mines and if you cannot develop, you are finished. The subsequent history was that the corporation's ability to open new mines allowed it to survive.
Here we have two mines, Phalen and Prince; we have five years and a possibility for three shifts at Prince if the right things happen, presumably employing more people. What are the factors that would bring about three shifts at Prince? How long is Prince good for? How long will it last?
Mr. Shannon: The Prince mine will probably last 15 to 18 years depending on the number of tonnes of coal which are taken out. If we continue to operate it at 11 million tonnes per year, it will last about 15 to 18 years.
Senator MacEachen: How long will Phalen last and with what employment?
Mr. White: Depending on production rates, we should be able to do 20 years at Prince and 25 years at Phalen. Our costs will increase as time goes on. There is no question about that. The farther we get from the surface, the more the costs will go up. Also, the smarter we become and the better our use of technology, the closer we can come to keeping our costs constant over those periods of time. We should be able to get that many years from those mines.
Senator MacEachen: Mr. White, you made a slight or passing reference to the Donkin mine.
Mr. White: Yes.
Senator MacEachen: We have the two mines, which you say now have a potential life of 20 years, with the production levels for those projected and the workforce for those projected. Is that all we can look forward to? Is that the best we can do? Is there room for further development? That is why I thought you brought up Donkin. What about after the 20 years? Is there any advanced planning about new operations?
When we started Devco, the preamble of the bill that was introduced said that the estimated life of the Cape Breton coal industry was 15 years. We beat the odds. Here it is 30 years later and we are looking to 20 years. Do we anticipate that in 20 years, with the death of these two mines, there will be no more mining in Cape Breton?
Mr. White: One of the things that executives in companies today struggle with is what will happen in five years' time, what will happen in ten years' time, and what will happen in 20 years' time. With the changes that take place in the marketplace, in the economy and in the world today, it gets harder and harder to predict what will take place. However, if the company is viable -- in other words, if we can generate confidence in the shareholder, in this case the federal government -- and if we can demonstrate that we can implement the plan that we have put together now over the next five years, I feel strongly that that will augur well for the coal industry.
As far as markets are concerned, whether or not there will be sales for that coal domestically, for example, over the next 15 or 20 years, will be dictated by what takes place externally, apart from the company. However, if we are efficient and if we are effective in our operations, there is a greater potential that we will realize the full value of that industry.
I feel that if we can demonstrate here over the next five years that the company can survive and succeed, that will augur well for the industry in the future.
Senator MacEachen: Will that future include more than Phalen and Prince? Could it include more?
Mr. White: Of course it could include more. It could include many options for growth for the company. If the company becomes viable and gains the respect of all of the stakeholders, then it will have a potential greater than it has today, and that is what we are really trying to get to.
Senator MacEachen: Do you need new mines to realize that?
Mr. White: If we run out of coal in the short run, yes, we will need new mines.
Senator MacEachen: And it is there?
Mr. White: It is there.
Senator Murray: Mr. Shannon mentioned in his opening presentation an Auditor General's update as of October 31, 1995. Mr. Shannon told us that this will ultimately be folded into the annual report of the corporation, which of course will be presented to Parliament. I think it would be helpful if, on behalf of this committee you were to ask the government to produce that update as of October 31, 1995. I will not make a formal motion on that, unless there is some objection to it. I think you could make inquiries in the right places about getting that document.
Speaking of the Auditor General, every five years the Auditor General does a study or an examination of corporations such as Devco, as to the economy, the efficiency and the assets of the corporations. My information is that the last such five-year examination for Devco was presented to the government in 1992. There again, I would ask you to see if this committee can obtain a copy of that report, which is in the hands of the government.
Finally, some of us will recall that in the 1992 budget, the then Minister of Finance listed Devco as one of a number of Crown corporations and agencies that would be reviewed with a view to their possible privatization. I made some inquiries within the past few weeks on how the review went forward and whether it was completed. I am informed that there is a document, which is of the nature of an internal document of the Department of Finance or of Treasury Board, although perhaps not a completed document. There again, it would be interesting if the committee could get a copy of that and examine it, because it might give us some useful background on the corporation.
Senator MacDonald (Halifax): I believe Nesbitt Burns did it.
Senator Murray: I do not know about Nesbitt Burns, but in any case I am told there is a document in the hands of the government, at least a partial study of the possible privatization of the corporation. I would like to look at the background of that document.
Mr. Shannon, earlier we were talking about two plans. One is the plan that you took out for consultation in Cape Breton last spring, and the other is the plan that has since been approved by the federal cabinet. If you have those in front of you, I would like to make a couple of comments or ask a couple of questions about them leading to a conclusion which I may be jumping to, but there again I will ask for your comments.
Over the five-year period, as between what I will call plan 1 and plan 2, you are adding 3 million tonnes of saleable production; correct? It is the difference between 12.4 million tonnes in plan 1 and 15.4 million tonnes in plan 2.
Mr. Shannon: If you added up the numbers --
Senator Murray: I did not.
Mr. Shannon: I did not add up the numbers either, but I will agree with that.
Senator Murray: I believe that is correct.
Mr. Shannon: Go ahead. We will assume that you are correct. After all, you are from New Waterford.
Senator Murray: I will try not to disgrace the New Waterford school system with my arithmetic. Your bottom line, that is cash flow before pensions, which as you have said is a very important number, improves as between plan 1 and plan 2 by $16.6 million. It is the difference between $203.2 million over the five-year period and $219.9 million. Your very bottom line, which is net funding from the federal government, improves as well. Your operating costs will be up, of course, to produce the extra tonnage, but your operating surplus is also up as between plan 1 and plan 2, and you are doing that with a smaller workforce reduction than you anticipated. That is, in the approved government plan, there is a smaller workforce reduction than you had originally contemplated.
What I am coming at here is that it seems to me, eye-balling these numbers, that last spring you were going to produce, over the five-year period, 12.4 million tonnes. You will now produce 15.4 million tonnes. You have that approved by the government and your bottom line improves considerably. In other words, the more coal you sell, the better your bottom line appears to be. Is that not what is indicated by the plan that was approved by the government, as contrasted with your earlier plan of this past spring?
Mr. Shannon: I will continue to go along with that, if that is what the numbers say. I have a copy of this year's plan, but I do not have a copy of the old one with me.
Senator Murray: Take my word for it.
Mr. Shannon: We are going from 12 to 15 million tonnes. The workforce number is decreased by 66.
Senator Murray: As between plan 1 and plan 2, plan 2 being the plan approved by the federal cabinet, you are increasing your total saleable tonnes by 3 million.
Mr. Shannon: Yes.
Senator Murray: That will affect you by another $125.3 million in revenue. Your operating costs will go up almost $100 million. We are talking about two plans now. Your operating surplus would go up by $21 million; your capital expenditures would rise by $4 million, more or less; and -- again this important number -- your cash flow before pensions would improve by about $16 million. That is almost your bottom line. You then must take the pensions and human resources strategy into it. Your bottom, bottom, bottom line -- that is, the bottom line that the Minister of Finance looks at -- has improved as between the spring plan and the plan that has been approved by the government.
I simply make the point that this seems to work. The more coal you sell, the better your bottom line.
What were the strategic considerations that led you to make the changes you have made as between plan 1 and plan 2? Is it the decision to become more active in the export markets? You decided to go from a part-time operation at Prince mine, which is what you proposed in the spring, to two shifts around the year. There is a strategic consideration behind that. What is it?
Mr. Shannon: Mr. Buchanan can deal with some of those numbers. The strategic difference was that, during the consultation process in the base-case plan, we put out the option that was considered at the top by the board: namely, three shifts for four months of the year and then the operation would be shut down.
From a technical point of view, it was decided that that was not acceptable. The risk in leaving the mines shut down for an eight-month period was too high. There was a big discussion on that issue and there were strong views on both sides. Ultimately, the board decided that the risks associated with doing that were too great.
We then looked at the economics of running the one-shift operation. If I remember it correctly, over the five-year plan it would cost $7 million more to operate one shift to produce the same amount of coal on a year-round basis. That did not make any sense. We were not going to get one tonne more of coal, but it would cost us $7 million more. The most economic way to go was with two shifts and with development. That is why we did that.
Because of the sulphur requirements of the Nova Scotia Power Corporation, we can only put in a certain amount of the low-quality, high sulphur coal from the Prince mine. We can only blend so much of that coal in. At a million tonnes, this is almost maximizing the number of tonnes of Prince coal that we can blend and sell to the Nova Scotia Power Corporation and continue to meet the environmental commitment that we have to the Power Corporation.
Senator Murray: On the question of the export markets, Mr. Shannon, you say that the plan that you have had approved by the government calls for the export of about 700,000 tonnes annually. When I look at these numbers, I see that you will be selling 2.4 million tonnes of coal a year for the first couple of years to the Nova Scotia Power Corporation, going down to 2.1 or 2.2 million tonnes.
Mr. Shannon: Yes, somewhere around there.
Senator Murray: You will be producing as much as 3.1 or 3.2 million saleable tonnes of coal, which suggests to me, but perhaps I am wrong here, that you will have to sell not 700,000 tonnes on export markets but anywhere from 800,000 to 1 million tonnes plus on export markets. The obvious question is, if, as you tell us, you lost $23 million in the export markets, is it worth it? Why are you doing it?
Mr. Shannon: We are working with the Nova Scotia Power Corporation. So far, we have made three joint tenders with the Nova Scotia Power Corporation for the export of power. Rather than export our coal, we sell our coal to the Nova Scotia Power Corporation, and they have opportunities from time to time to sell power down into the New England states and their deregulated market. We have bid on three of those opportunities and have been successful on two so far. We hope to be able to deliver more coal to the Lingan power plant. That will be going into the export market because they will be exporting the power.
Our exports this year and last year are very low. You saw that on the board, senator, when we were going through the financial figures. You have them in front of you. If you look at your costs per tonne, on an annual basis it goes from $77 to $67 to $62. We are becoming much more competitive.
Senator Murray: As your production increases, yes.
Mr. Shannon: As our production increases, as we downsize the corporation and as we build in efficiencies all the way around. As we get into quality-management programs and become more efficient with our purchasing and our materiel-handling costs and ensure that people are not stealing from us, all of those things will help us to reduce our costs. As we reduce our costs, we can become more competitive. The $20 million that we lost in the export market will clearly shrink.
Senator Murray: As between the spring plan and the plan approved by the government, you decided that you could produce more and you could sell more. Could you produce still more and sell still more than you project in the five-year plan?
Mr. Shannon: Of the various scenarios that we went through -- namely, running two shifts, three shifts, or one shift; washing or not washing; exporting or not exporting -- the most favourable combination was the one we presented and was approved by Ottawa. We had to keep in mind that we had to develop a plan that the management, under George White's leadership, would be able to deliver on, and one that was at the same time, as I said earlier, conservative enough to convince Ottawa that we could do it.
Senator Murray: What is the purpose of the loan you are getting from the federal government? The reason I ask that question is that I have seen several statements about it. According to a news release of May 9, the minister said that:
The Government of Canada will provide the corporation with the repayable loans needed to implement this plan over the next three years, with a mandate of financial self-sufficiency. These funds must be fully repaid with interest, Minister MacClellan added.
At the same time, the government statement on the approved plan says that:
The first three years of the planning period require funding totalling $70.3 million, with the last two years generating a total of $49.3 million cash surplus. The turn to positive cash is due mainly to the elimination of the unfunded pension liability and improved operating results.
These are all from May 9 and 10. Mr. Dingwall's press conference speaks of a federal loan of $79 million for various capital expenditures. Finally, the Chronicle Herald attributes to you, Mr. Shannon, the statement that the $78 million repayable loan will offset the unfunded pension liabilities accumulated since 1967.
At the end of this period you still have $79 million more in liabilities, do you not? The government is adding to your liabilities.
Mr. Shannon: No. Over the first three years of the plan we will draw down the $79 million; $10 million of that is for last year, and the balance is for the next three years -- the year we are in and following two years. Then we will have a surplus of $23 million and $26 million that we will repay. At the end of this plan about which we are speaking, which was approved in Ottawa, the balance on the debt owed to the government will be $21 million.
Senator Murray: And the unfunded pension liability will have been brought down?
Mr. Shannon: It will be substantially reduced by the payments we have paid out. The unfunded liability will be fully funded on March of 1999, which is three years into this five-year plan.
Senator Murray: I will not pursue it now, because I think I need some help with it.
Mr. Shannon: Senator, the document shows that the existing pensions are $30 million, $30 million and $30 million, and then it goes down to $6 million. That means that when the $30 million payment is finished in March of 1999, the pension plan is fully funded, and then we go to $6 million to meet our current liabilities.
Senator Murray: And you are getting the $79 million from the government?
Mr. Shannon: If we meet the targets in the plan, the $79 million will then be, in March of 2001, $21 million.
Senator Murray: You will have repaid that much after five years.
Mr. Shannon: Yes, sir. Do you understand that?
Senator Murray: I think I can grasp it, Mr. Shannon. I will want to consider it a bit more and ask some questions of other witnesses about it.
You were going to comment on this proposal that we heard, partly from the union but also from the Cape Breton Regional Municipality, and I expect we will be hearing more about it tomorrow when the mayor is here, to the effect that the only way to give you a fighting chance of becoming viable is to have the federal government assume a lot of the unfunded liabilities and other costs -- what you called social costs last November -- and to wipe the slate clean to that extent. What do you have to say about that?
Mr. Shannon: As I indicated to you, senator, we have to become a financially viable company. To do that, we have to accomplish three things. We have to become profitable, we have to become competitive, and we have to be able to compete with other forms of energy.
We can become profitable if the government wipes out what we call the social costs: the pensions, the workers compensation and the HR strategy. If we wiped that out, we could become a profitable company, because the bottom line would then be a surplus of $20 million, $30 million, and so on right through the piece. We would be profitable.
Senator Murray: Your bottom line would be what is now identified as cash flow of pensions.
Mr. Shannon: That would be the bottom line.
The reason for the $55 million in pensions is that we have pensioned off a number of people who worked with the company and we are giving them pension benefits. That is a responsibility of this company. It is an operational decision to lay them off and to pay them. That is what we do, to the tune of $55 million. We will have an operating surplus of $20 million this year. I think we have a responsibility as a corporation to pay our pension liabilities, in exactly the same way as anyone else would have to pay their pension liabilities or their social costs. As a company, this year we will be contributing $20 million to those pension costs. We are asking the Government of Canada, through its loan, to pick up the balance, or $35 million. Eventually, we will become self-sufficient and we will be able to pay our own responsibilities. It is important for us to do that. If we can achieve the objectives set out in the plan, we will be able to do that.
Senator Murray: In fairness, I should raise one other question to which I referred in a speech I made in the Senate. It has to do with the numbers in the financial statement for the fiscal year ending March 31, 1995. I noted in my speech that, in the 11-year statistical summary tabled with the annual report that year, mining income was shown as $13.7 million. Subsequently, that $13.7 million income turned into a $7 million loss.
I think some comments were attributed in the media to you, Mr. Shannon, about how this happened. I am still puzzled about how it happened or who decided that this number had to be changed in that way, whether it was the Auditor General or management.
Mr. Buchanan is at the table. Either you or he, or perhaps both of you, can clarify that.
Mr. Shannon: I am not very experienced at talking to the media. However, I believe that from time to time I may have been misquoted or that things I have said may have been taken out of context. I suggest that you do not believe everything you read in a newspaper that is attributed to me, regardless of which paper you read it in.
Senator Murray: That is fair enough.
Mr. Shannon: I would have said that there was a reduction in the development budget at the Phalen mine of $20 million in the fiscal year you are talking about. I would have then said that there was a $13 million operating profit in the company. Therefore, if they had met the budget and did the work on development at the Phalen mine, there would not have been a $20 million reduction in that budget and there would not have been a $13 million profit. There would have been a $7-million loss. That was the rationale for my comment.
Senator Murray: However, the number for 1995 is $13.7 million. It has not been changed.
Mr. Shannon: It has not been changed. That was just a comment I made.
Senator Murray: This report is tabled in Parliament and I am concerned that the report --
Mr. Shannon: The report was never changed. I just made a comment about the $20 million. If we had spent the money on development at Phalen, we probably would not have had a $13 million profit but a $7 million loss.
Senator Murray: So to some extent that is speculative on your part.
Mr. Shannon: Yes, of course it is.
Senator Murray: There is no occasion for you to tell Parliament that that number was wrong when it was tabled?
Mr. Shannon: No.
Senator Murray: Have you discussed this matter with the Auditor General or whoever the appropriate official is?
Mr. Shannon: I cannot remember if I did or not.
Senator Graham: I want to welcome Mr. Shannon, Mr. White and Mr. Buchanan to the table and thank them for the thoroughness of their presentation.
Mr. Shannon, when you began, you said that when you went back to Devco you had three objectives. One was to rebuild relations with the Nova Scotia Power Commission, the second was to rebuild the management team, and the third was to develop a corporate plan to take the company into the twenty-first century, if I remember correctly.
I was a bit astonished that you had not mentioned a fourth, and that was to improve relations with the unions. However, I was very happy that, at the end, your final bottom line is to share the responsibility. You said quite categorically that it was time for management to stop blaming the unions and for the unions to stop blaming management.
Against that background, has the level of trust improved between management and the unions in the past few months? How would you categorize the relationship at the present time between management and the unions?
Mr. Shannon: That is a tough question, senator. The reason I did not specifically talk in the opening remarks about the relations between the management and the unions and the company is that that is part of the business plan. There is a very detailed effort in the plan to build a quality management program between the management and the union of the company. It is part of the plan, and it is a central part of the plan, and it must happen in order for the plan to work. If it does not happen, the plan will not work, and we will not be able to achieve the success outlined in the plan, and then someone else will be here talking to you about an orderly shut down of the company.
How do I categorize it? I do not know. The indicators that I showed you earlier about the improvement in overtime, absenteeism and accident rates, and, therefore, workers' compensation, are going in the right direction.
They are going in that direction for several reasons. One is that we are managing a little bit better. The second is that there is an attitude change in the company. Many more people are more understanding about what is happening in the company, know more about it, know the seriousness of the situation, and understand some of the details because of all of the public discussion that went on. The third reason is that there was a change in the workers' compensation program in the province of Nova Scotia. The workers' compensation program is not as generous as it once was. I do not know if that is one of the reasons or not, but probably it would be. Those are some of the reasons why there is an improvement.
Senator Graham: You alluded several times to your cash flow problems. I am curious as to how you handle them. Are you people ever called in by the banks and asked, "What is going on? What will happen?" Do the banks say, "They rely on the good old government, and they know that the government is there"?
Mr. Shannon: We do not rely on the banks. We just rely on the federal government. We get our money from you guys, from Ottawa. You keep sending us cheques. The taxpayers send their money to Ottawa, and Ottawa sends it to us in the form of appropriations.
Senator Graham: And they say you will not get a penny more.
Mr. Shannon: This time we got it in the form of a loan, senator. If we meet our business plan, we will be able to repay it.
Senator Graham: You mentioned that on the offshore sales of coal you lost $23 million in the last fiscal year, and on sales to Nova Scotia Power you lost about $2 million. Is that due to the world price of coal or to shipping costs or a combination of both? What are the shipping costs? Are they very heavy?
Mr. Shannon: Shipping costs are running between $5 and $10 a tonne. It is the international price of coal that is the killer. I do not know if it is the international price of coal or if our mining costs are too high.
Senator Buchanan: I was writing something here. What was the last comment?
Mr. Shannon: The shipping costs, transportation costs, will probably be between $5 and $10 a tonne, depending on where the coal is going on the boat.
Senator Graham: I believe you suggested that there were a lot of problems at Phalen. Relatively speaking, are there more problems at Phalen than there are at Prince?
Mr. Shannon: Yes, sir.
Senator Graham: Why?
Mr. White: First of all, Prince colliery is a relatively mature operation. It has been in operation since 1975. It was not successful right off the bat. It was started as a roman pillar operation as one mining method and then went to a second method, but it has been very successful as a retreat long-wall operation right from the beginning.
There are number of factors there. First of all, the conditions in the mine are predictable and have been predictable over a long period of time. The equipment that was selected for the operation in the beginning is the same equipment that we use today. There has not been a lot of change in regard to the mining techniques. The workforce there has been cooperative over the entire period of time. We had some startup problems, but that mine is very consistent and has been very consistent.
Senator Graham: Does that mean that the workforce at Prince, in your judgment, is more cooperative than the workforce at Phalen?
Mr. White: No, senator, I would not put it that way. I would say there has been less reason to change things at Prince than there has been at Phalen. The thing that taxes our relationships with the unions and with all of our employees is the requirement for change in our operation.
Senator Graham: In one of the documents that were circulated, the unions talked about purchasing policy and standardization of equipment. Mr. Shannon, you mentioned that that was something that would be reviewed. They also talked about contracting out, and I believe they suggested that 75 per cent of the work that is contracted out could be done by present Devco employees. Would either one of you care to comment?
Mr. White: I should like to finish the first question with just a little point on the difference between Prince and Phalen.
Phalen has had a number of geotechnical issues associated with its operation right from the beginning. The operation has been complicated by the existence of another mine above it which causes operational problems. It has been complicated by the control of water, which is part of that operation, which is not a part of the Prince operation. It has been complicated by our inability to select the proper mining equipment for the operation. There have been many changes in mining equipment as we try to work towards getting it right. Also, at Phalen, we have changed the method of holding the roof up. We are using roof bolts at Phalen as opposed to steel beams in the roof. Phalen has undergone a tremendous amount of change since the beginning. As I said, that is what taxes our relationships with our employees.
With respect to contracting out, we could hire the people and buy the trucks and do these kinds of things ourselves, but it would be quite difficult to do that for the same cost as you can from the private sector. In a normal unionized operation such as ours, there would be a certain amount of work which is done by the regular employees and then other work which is done by outside people. A proper combination of that makes a stronger company in the long run. That benefits the employees and the company ultimately.
Senator Graham: Just looking at the charts, it seems that production per person has gone up at least four times since Devco was created. To me, that is an interesting figure. How does your production per person compare with other mines in Canada or the U.S. or in other countries? I recognize that there are different mining techniques and that there are difficulties in being, in some cases, five miles out under the ocean. How does it compare?
Mr. White: It would not be unusual for a competitor in the United States to produce four times as much product per person as we do. It could be even higher than that. There are some mines in America that produce 7 to 10 million tonnes per year with 500 people which is three times our production with one-third the workforce. Those are also underground operations, not strip mines.
Senator Graham: Is it all because of the nature of the mining?
Mr. White: There are a number of factors, but mining conditions vary greatly. If you look at mines in Europe that are under-ocean or in Germany, where mines are deep and conditions are quite difficult, or in Britain, you will find that many mines with outputs similar to ours have gone out of existence. The mines which are left have outputs that are equal to or better than ours.
Our coal miners must work harder than the average coal miners in order to compete. I think they recognize that. The challenge is to develop an organization which is capable of doing that.
Senator Graham: Mr. Gillespie, the president of Scotia Synfuels, will appear before this committee tomorrow night. Has Devco looked at synfuels in a serious way, and how do you feel about it?
Mr. Shannon: We have not looked at synfuels since I got involved in this the last time, senator. We looked at it in 1984-85 and it did not seem viable at the time. I do not know where it is today.
Senator Graham: But you might look at it as one of the options?
Mr. Shannon: We might.
Senator Graham: Senator MacEachen and Mr. White raised in passing the whole question of the Donkin mine. It comes up every time we hear the United Mine Workers talk about the future of the mining and coal industry in Cape Breton.
Mr. Shannon or Mr. White, what would you do, if the government said, "Yes, go ahead; here is the money for Donkin, because the estimates range from $100 million to $600 million."
Mr. Shannon: How much will you give us, the $100 million or the $600 million?
Senator Graham: Supposing someone said, "Here is $100 million," would you take it and say that Donkin is viable?
Mr. Shannon: Perhaps Mr. White would want to answer this. The problem is that we have a market for the coal we are mining. We must learn how to mine coal at Phalen. We need to reduce our costs. We must increase our output per man-shift. We need to compete on the international market. We must sell, as Senator Murray said, about 700,000 tonnes into the international market and be profitable doing that.
We also have this exercise which we want to do as a recommendation of the Canadian Auto Workers Union, the selective mining process. In order to mine coal at the Donkin mine, we would have to do it using a selective mining process. We have to learn how to do that first. The coal at the top and the bottom of the seam is bad coal. The coal in the centre is good coal, I am told. If we can get that good coal out of the centre without taking the top and the bottom, then we will have a product that we can sell.
We must learn to use the selective mining process at Donkin, but we must also learn how to run a company. We must learn how to become a viable, competitive, coal mining company in order to do that.
Senator Graham: My final question follows on Senator MacEachen's comment on the life of the coal mining in the area. We talk about 20 and 25 years at Prince and Phalen. What are the reserves in the area? If everything works, what are your projections after this five-year plan and on into 20 years or 25 years? What are the reserves if the world markets are there and if Nova Scotia Power continues to live?
Mr. Shannon: There are two kinds of reserves, senator. There is the economic reserve and there is the reserve of the coal mass. Mr. White will speak about the coal mass.
Senator Graham: Will you give us the economic reserves?
Mr. White: The figure that I always use in my mind is that only 5 per cent of the coal in the country is in the Sydney coal fields. Ninety-five per cent of the coal in Canada is not in Cape Breton; it is elsewhere. That is the size of our operation relative to the potential in the rest of the country.
The Phalen colliery, for example, has recoverable reserves of 70 million tonnes. At 3 million tonnes a year, that is 20 to 25 years. The recoverable reserves at Prince are listed as 45 million tonnes. At 1 million tonnes per year, that is 45 years. You are getting pretty deep when you get into that.
We have 70 and 45; that is 115 million tonnes of coal from both operations over the next 20 to 25 years. I do not have the number for what is available in the Donkin mine, but I think it is more than that.
Senator Buchanan: Mr. Shannon knows and others know that, for a long period of time, I lived, slept and dreamt about Devco and the Power Corporation and SISCO. I know a bit about all three.
I want to say at the outset that I have looked at all these figures and I have looked at the various plans. It seems to me that, if you achieve the objectives you have demonstrated tonight, then by the year 2000 your pension liabilities will be reduced; absenteeism will be reduced -- and that has been a chore for Devco forever, but you are probably on the right track; and overtime will be reduced -- and that, too, has been a long-term problem for Devco. Moreover, new technology and techniques, as Mr. Shannon indicated, will move into Devco.
Years ago Devco was a leader in new technology, as you know, but somewhere in the middle years that dropped off. People like John Terry and his brother started new techniques way back in the 1950s and the 1960s; that was new technology. If you continue with new technologies into the year 2000 and if you carry out everything that you have proposed, there is no doubt that you can achieve the objective of moving from a net funding of minus-$35 million to a positive of $23 million and even better than that. Those figures can be achieved if you do all of that.
Over the years, I have sat in on others meetings like this one. Senator MacEachen would have been there. Ed Lumley would have been there. Devco presidents would have been there. Various federal ministers over the years were there. We talked about these things all the time, along with various presidents of the Power Corporation.
Everyone agreed that the future at Devco would be very good. New techniques would be developed. Absenteeism would be reduced and overtime would be reduced. We did not spend too much time on it. Perhaps that is the problem. I did not have much to do with it except as an observer, but we really did not put in too much time on this pension liability. I guess that was something which was not considered at the time. However, there is no doubt in my mind, and I have taken a lot of time to look at all this, that this plan would achieve the objective of going from that negative to a positive.
Just going back a bit, for years the great concern in Cape Breton, as Senator MacEachen pointed out, has been the longevity of the coal industry. That is still a matter of grave concern. For instance, I was in Cape Breton on Saturday attending a 90th birthday party. There were people there from New Waterford, Glace Bay, and Sydney Mines, and they were not talking about these plans. They were talking about whether or not there would be a coal industry in the next five to ten years.
Will the industry be there and will it be producing coal, or will Devco be moving over the next number of years to an orderly shutdown of the industry? And we heard that term used tonight. I am not saying you used the term with respect to the next five years, but that phrase was used because that is what people talked about back in the eighties, an orderly shutdown of the coal industry.
That is the biggest concern down in Cape Breton -- not all of these figures. The biggest concern is will there be a coal industry in Cape Breton? Will it be viable and will it be there for a long time? The age of the average miner, I think you said, was 45 years. In "X" number of years, it will be up to 49 or 50 years. As those people retire, there will be more people, because, like it or not, mining is a way of life in Cape Breton. It has been since the 1800s. My grandfathers worked in the old Port Morien and Dominion 1A. That goes back a long time. Those mines have all been closed down and replaced by new mines over the years, replaced by number 12, number 11, number 16, Caledonia. They have always been replaced by new mines.
Back in 1979, 1980 and 1981, the concern was whether there would be a viable coal industry. The Power Corporation was moving quickly to get off high-priced oil. Oil had been $1.50 a barrel and suddenly it shot up to $10 a barrel and then $15 a barrel and the cost of electricity in Nova Scotia just skyrocketed. So the question was whether there would be a enough coal to fire up the boilers of Lingan 1, 2, 3, 4, Point Tupper and the Trenton power plant, and eventually, another plant, which had been planned through the eighties for somewhere in Cape Breton and ended up as the fluidized bed plant at Point Aconi. The question was: "Will there be enough coal?"
Everyone at that time was saying that No. 26 would eventually close, and it did, unfortunately because of that disastrous explosion and fire where a lot of people were killed. Everyone knew that the life span of the Lingan colliery was limited. So the question in 1979-80 -- and Senator MacEachen will remember this -- was whether there would be coal mining in Cape Breton sufficient to look after the needs of the Nova Scotia Power Corporation. The answer was no, there would not be, because Lingan would close in "X" number of years and the new Prince mine, which opened in approximately 1971, only had a life expectancy of about 25 or 30 years. So, to look into the future, everyone said there had to be a new mine.
I am not disputing Mr. Shannon's figures, but I have figures here that indicate that, if you could mine coal between Cape Breton and Newfoundland, there are about 20 billion tonnes of coal out there. It will never be mined.
Mr. White: I used the word "recoverable."
Senator Buchanan: Unless you do it with islands somewhere between Cape Breton and Newfoundland. That will not happen. However in the Donkin block, in total resources, there are about 3 billion tonnes of coal. It is my understanding that the recoverable amount of that 3 billion tonnes of coal in the Harbour seam of the Donkin block would be somewhere around 25 or 30 per cent of that; so you are looking at a substantial amount of coal in the Donkin block. It is fairly low sulphur coal, about 3.5 to 4 per cent sulphur and about 6 or 7 per cent ash. Is that within the ballpark?
Mr. White: By world standards, that is fairly high sulphur coal.
Mr. Shannon: What you need in order to sell it is 1 per cent.
Senator Buchanan: However, at the wash plant you can wash it down to 1.5 or 1 per cent. That has been done in the past. As I understand, those are the amounts. Having looked at that, we asked the federal government at the time to do some cores off the Donkin seam. At first they did not want to do it, so the province brought in the drill ship in 1979, and the province paid for the drill ship -- it was about $5 million -- and drilled all the cores and found the quantity of coal that was there in the Donkin block.
I must say to Senator MacEachen that the province did get the $4 million or $5 million back in 1981. I think you repaid the province the amount of money, which was right for you to do.
Senator MacEachen: Naturally.
Senator Buchanan: We did all those core drillings.
The Chairman: I hesitate to interrupt. I just want to remind honourable senators that we do have some time constraints.
Senator Buchanan: I will quit pretty soon. As I recall it, and Senator MacEachen may have a better memory, between 1981 and 1983, two tunnels were drilled to reach coal. The tunnels are there now. The coal is there. Then the tunnels were flooded, which was the right thing to do, to preserve the tunnels or else they would have deteriorated. All I am saying is back then the concern was that coal mines would close, and that in the future, if coal mining was to continue in Cape Breton, there had to be alternatives to those coal mines that were closing.
Tonight you mentioned that Prince has an expectancy of 25 years.
Mr. White: Twenty.
Senator Buchanan: And Phalen about 25 years. I did not think it was that high. I have heard figures ranging anywhere from 10 years to 15 years for each one.
I have been down in mines. We went down in No. 26 and it took us two hours to get to the coal face. The next time I went down, about four years later, it took us 2 and-a-half to three hours to get out there. The cost of operating those mines was incredible because of the distance you had to travel even to get to the coal face. You are getting to that point now with Prince and Phalen: as you move out, the costs increase substantially.
Mr. White: It is true that the costs will increase, but we have better transportation systems and better ventilation systems at the new mines, so you cannot compare even Phalen or Prince to the situation at 26.
Senator Buchanan: I am a promoter of the Donkin mine, perhaps because back in 1979-80 we brought the drill ships in. I was convinced, as everyone in the federal and provincial departments were convinced, that it was the right thing to do to have this mine ready to go so that when other mines were closing down this would be the alternative. If what you are saying tonight works, that is fine, over a certain period of time.
The big concern, I think, is what happens after five years? What happens after ten years as the coal peters out in Prince and Phalen and the costs get very high as you move further out under the ocean? Have you examined the costs of mining coal per tonne in Donkin, where you are right at the coal now and it is very close to the surface from the end of these tunnels? When will the cost per tonne of coal to be mined at Donkin be at a point where it is reasonable and right to shut down Phalen and to start at Donkin?
Mr. White: If you included the capital cost of getting Donkin up to where you need to put the transportation systems in, to put the coal haulage systems in, to buy the equipment to get it going, it would not compete right now with the coal at Phalen.
Senator Buchanan: I know that.
Mr. White: We have coal faces staring us right in the face today. We can walk right to them with all the mechanization and all the people, so this plan is designed to capitalize on those two resources that we have today. If we know that the total recoverable reserves from those two operations are in the order of 45 million tonnes and 70 million tonnes for at least 25 years, and if we can mine those two operations efficiently according to this plan over the next five years, then there is no reason to do anything except that in the next five years.
Senator Buchanan: As I mentioned a moment ago, I was down in the tunnels in Donkin when they were drilled. They are flooded now. How long can those tunnels remain flooded and still be viable, if the Donkin mine is to be opened?
Mr. White: Those two tunnels are like two great big cement pipes. They will last a long time in that kind of condition.
Senator Buchanan: I am glad to hear you say that. I think you know that at the time Devco determined the flooding, there was a lot of controversy centred around it. People said, "That is the end of Donkin. They are flooding the tunnels." I did a little research and checked with a few people who told me what you just said, namely that the right thing to do was to flood the mines. It was right to flood those two tunnels and keep them ready.
I am rather pleased -- and I know that Senator MacEachen is interested in hearing this tonight -- that Devco has not forsaken the Donkin mine. It is my understanding now that it is the most viable new mine that could be opened in Cape Breton.
Mr. White: There are two intake tunnels there that are as good as any in the world. There is no question about that. There is a lot of coal at the end of them. For example, if there was a problem and they were absolutely needed, they would be much more available than any other resource.
Senator Buchanan: I am glad to hear you say that. I understand that there is a good possibility that in the near future a new mine may be required. Going back into the history of Devco, no one ever thought there would be more than the new Lingan colliery required, but that was false because they had to do Prince. Now you look at the near future and there is a good possibility that the new Donkin mine may be required.
With development coal coming out as a plus, it is anticipated that the cost of completing the Donkin mine ranges up to $400 million. Back in 1980, the total cost of developing three walls was going to be something in the area of $240 million, of which I understand about $100 million has already been spent on the tunnels. You will reduce that through depreciation, but where do you get the figure of $400 million for a new Donkin mine?
Mr. White: The cost of developing the Phalen colliery, for example, when it was developed, was $254 million. How many years ago was that? That was in the mid-eighties. It cost $254 million in the mid-eighties to develop an operation that could produce 2 to 3 million tonnes a year.
Senator Buchanan: However, Donkin can produce up to 3 million tonnes on three walls producing.
Mr. White: But costs have escalated since then. There is a significant cost associated with opening that colliery.
Mr. Shannon: The difference was that we had a different banker in the old days than we have in Ottawa today.
Senator Ghitter: Mr. Shannon and Mr. White, I come from the other side of the country. As a result, I operate with the limitation or disadvantage -- or perhaps it is an advantage -- of having little knowledge of your area. Although we have lots of coal in Alberta, I have little knowledge of the coal business and specifically the undersea coal business. Furthermore, I have not stayed awake at night, as Senator Buchanan has, worrying about Cape Breton, because I do not know that much about it.
I found it very interesting going through the information that we were given. I think if I read one of the old corporate reports of about ten years ago, produced by others before you, as indeed I have, it would probably differ little from what you said tonight from the point of view of the ingrained optimism in those corporate reports. Those same reports talked in terms of more efficiencies and less labour costs; they said that the next year would be a better year, and on and on.
During the course of the period since 1968, while each next year would be a "better year," I calculate that since 1968 the taxpayers of Canada have paid approximately $1.5 billion in order to look forward to that next better year. I then look at your numbers tonight. I appreciate how candid you have been with us and the difficulties that you have had as you have come into this scenario for the second time. However, in trying to understand your numbers, I think there are assumptions in your numbers that are not supported, just as there were many assumptions in the numbers before that were never supported.
I see in your revenue and expenditure forecast, for example, increased revenues. You suggest that revenues will go from $165 million to $188 million to $191 million, and so on, but I do not see any supporting material concerning where those increased revenues are coming from. On top of that, I see that your revenues from your prime source, namely, your sales revenues, will drop in the next few years by 18 per cent. I see that your exports are also dropping. In fact, one of the diagrams we have here shows that your export revenues will be dropping precipitately by choice over the next few years. Under your contract with Nova Scotia Power, I do not know what their commitment is, but the contract comes up for renewal every five years. If they are your main customer and the production is dropping, what production levels will they need? I look at your statements as being based on unverified assumptions. I see no backup in any of the material that I have read up to this point in time. Yet you are now coming forward to say that there is approximately $70 million that you should like the federal government to pick up in order either to meet your losses or to pay up your social costs. What that really means is that you are replacing one debt with another. You will pay off the funding on your social cost, but that will be a debt to the federal government. I do not see any interest calculations for carrying that loan with the federal government; nor do I see any contingencies within your financial statements.
Every report I have seen has talked in terms such as, "We were looking forward to a good year, but the Phalen mine had this problem. This capital cost came and we were not expecting this." I would expect your financial statement to include a 10 per cent contingency fund for operating costs, because that is probably what you have been facing.
I look at the information and I have a lot of trouble with it, in the sense of understanding it and looking at the veracity of the numbers and the background information. Am I missing something in this context, or are we going on a wing and a prayer on these numbers? Do you have a backup that can be substantiated to support all the numbers you have brought forward?
Mr. Shannon: Mr. Buchanan will deal with the last part of your question. We do have the backup for it. He can deal with that.
Obvioulsly, it is difficult for us to come to Ottawa yet again with cap in hand from Cape Breton to try to get the Canadian taxpayers to continue to support this industry after we have been coming here for 30 years and have never achieved what we said we would achieve. It has been a difficult argument to make in Ottawa with the people in the Department of Natural Resources, with the people at Treasury Board, and with the people at the Department of Finance. I will give you two examples of the arguments that we have had.
There was a bad accident at the Phalen mine in November. The roof fell, and immediately a number of people, employees of the company and others in the community, went on a public campaign to open the Donkin mine because of the problems at Phalen. They said that the Phalen mine was not worth continuing to support. They were using that as an argument to encourage the shareholders to support the Donkin mine. At the same time, we were trying to convince the bureaucracy and the political people here in Ottawa to support the company. We were telling them that the Phalen mine would get back into production and would work. That was one difficulty.
People have told me that one of the major problems in this company over the years has been union-management relations. If that is the attitude in the company, how will we ever resolve our problems?
These are some of the arguments we have had with the people. That is why we had to build a plan which was conservative enough and believable enough to convince the people in Ottawa that this can work.
It has not been an easy argument, senator. You have hit the nail on the head. We have had this discussion with many people in this city. We are here tonight because we believe that this plan will work. We believe that we will build a management system that can deliver on this plan. However, it can only happen if two things are achieved. First, we have to get the full cooperation and support of every employee in the company. There is no room in this plan for slackers. Everyone must be working toward the same objective. Second, the federal government of Canada, the provincial government of Nova Scotia and the regional government of Cape Breton have to keep their noses out of it. We have to keep politics out of providing solutions to this company. The solution must be based on the business plan that was accepted and approved by Ottawa without interference from politicians at the federal, provincial or municipal levels.
Those two things must happen. I am here today because I believe that the management of this company can deliver. I believe that the employees of this company will work to support the company in this plan in this time of crisis.
I will now ask Merrill Buchanan to talk to you about the supporting documentation, to explain how we developed all these numbers and why there were increases and decreases in some of the numbers.
Senator Ghitter: I am anxious to hear that, Mr. Shannon, but I think, with the greatest respect, that you would be naive if you expected to keep politics out of this, because one of the reasons for the very existence and continuation of the mine is the social aspect and the impact it has on the Cape Breton community. If there was no concern from the political side for the jobs and the societal-cultural aspect of this, which is the political aspect, perhaps the mine would not be in business today. You will never make that divorce. If that is a precondition of your being here, I suggest that it ain't going to fly.
Mr. Shannon: I disagree with that, senator, with due respect. At one time, your argument was valid. However, the circumstances have changed significantly in this country, in our region and in our community. Hospitals and schools are closing and bureaucrats are being laid off across the country. More people are being laid off in Ottawa than in any other town in this country. People who work for the Government of Canada and for the Governments of Nova Scotia and Ontario are being laid off. There is a different attitude now. There is a different atmosphere.
I believe that Minister MacLellan has the resolve to ensure that this company is operated on sound business principles. She has supported the chairman, the president and the board of directors of this company in doing their jobs. If that kind of support continues, I believe that we have a chance to make it work, notwithstanding everything you have said. In the past that was totally true. I believe that Senators Graham, MacEachen and Buchanan would agree with that. There is no question that it was true, but the circumstances have changed.
Senator Ghitter: Then convince me, if you would, that the revenues of this operation in 1997-98 will be somewhere in the area of $188 million.
Mr. Merrill D. Buchanan, Vice-President, Finance, Development Corporation of Cape Breton: I will comment on three factors in relation to the budget. In terms of the development of the budgets and the supporting detail, when the work was undertaken through last fall and winter, we had gone through the decentralization of the corporation that was mentioned earlier this evening. The development of the budgets for the three operating units -- the Prince and Phalen mines and the surface operation -- was undertaken at those units. Therefore, the operating people who are going to be responsible for delivering on these budgets have had first-hand involvement in the development of the budgets. All the detail is done site by site and then carried through to bring it into a corporate budget.
In terms of the revenue, the decreases that have been described in respect of Nova Scotia Power pricing are reflected. Those decreases started in 1995-96. We are into the second year now and the projections for 1997-98 reflect the third year of reduction. The dollar increases are really associated with the additional volume that we are showing.
You have commented as well on the matter of contingency. I guess the flip side of that would be what enhancements could be made to the budget. There we did not build in all of the enhancements or items that we think are possible in the corporation. Total quality management was mentioned. If we can put programs such as that in place, there are certainly opportunities for further improvements to these budgets. We see that as the contingency that is available in these budgets. There are further measures in the corporation that are possible and not reflected in these budgets.
Senator Ghitter: Would it be possible to get the back-up material that supports this increase in sales? Where will these additional revenues come from, these step-ups? Could you provide us with the back-up material in writing? Could we see the salient details of your agreement with Nova Scotia Power which would be supportive of these increased sales in order that this committee could have a sense of those relationships?
Mr. Chairman, I ask for that information. I think it would be useful.
Senator Stanbury: One of the advantages in my coming on late in the questioning is that most of my questions have been answered. However, I would like to take the opportunity to agree with my colleague Senator Ghitter. He was pointing out how much support George White will need if he is going to pull this off. There is no doubt that he has the ability to do it, from what we have been told about him. We are depending on him, as is everyone else. Mr. Shannon, as chairman, will have to give him a lot of support to ensure that he gets the systems and the management techniques in place to make it possible to carry this forward. It is a major task, perhaps a daunting task, but one that I hope and certainly believe he will be able to fulfil.
Someone else may already have asked this question, but I am concerned about the contract with Nova Scotia Power because of some aspects we have already mentioned, such as the reduction in price toward the end and then the possibility of an alternative fuel being used by them after this contract is over or buying their coal from somebody else because of a lower price. I believe we have already referred to the fact that productivity in the United States is about five times what it is here and that in Australia it is about three times, and so on. There must be a lot of coal out there that is cheaper than what we can produce. The competitive position for Devco in relationship to its one big customer, Nova Scotia Power, is just critical.
There is also the whole question of the environmental problems stemming from the sulphur content and whether we can come up to the environmental standards that have to be met in this modern age. We could also start talking a bit about that relationship with Nova Scotia Power. I am not sure if Senator Murray or someone else wished to get into that, but I will ask the lead question.
Mr. White: We do have a strategic advantage in accordance with sales to that market because there are significant transportation costs from the central United States and up the eastern seaboard in order for our North American competitors to get into the domestic market. Our company also has a strategic advantage in relation to international markets because we are on the Atlantic Ocean. We do not have many things to our advantage, but those two factors are to our advantage.
I know quite a bit about Nova Scotia Power. I worked there for almost six years. I also know quite a bit, or I think I do anyway, about customer service, because that is what I did there for a good part of the time. Whatever we do over the next five years, we cannot allow ourselves or our employees or our stakeholders to take that customer for granted. We must provide, and we are providing, I believe, better service now than we ever have to that company. We intend to try to improve that in the future.
We maintain constant contact with the company. I talked to the president of Nova Scotia Power this morning because we had a problem in our operation and I was worried he might have heard something on the news and would not know what was taking place. That happens throughout the entire belly of both organizations. There is a lot of contact there.
Ultimately, coal will represent a commodity to that company, and there will be pressures from an environmental standpoint, not just for sulphur reduction, but for CO2 reduction and the use of gas and that kind of thing. As the chairman indicated, the Trenton contracts with Nova Scotia Power have been held separately from our main contracts. That has given us a lot of grief. It means that if a gas deal was developed somewhere in the province, that part of our contract would be at risk. They would have the mechanism to do that today if the gas were available.
I do not think those things will strain our relationship, because we will work to develop a very good working relationship. We have a good relationship today, much better than we had a year and a half ago, and that will improve, but there will be major requirements from a number of different perspectives.
As the utility industry deregulates, there will also be financial implications there. The costs of the power plant at Point Aconi, which takes 400,000 or so tonnes of our Prince product, are not on stream yet and are not reflected yet to the full extent in the power bills in Nova Scotia. That must be paid for, and that will put the rates up. They will also try to drive prices down, because they have a big tax bill coming up.
Their cost structure will make a big change. That will be reflected in their trying to push our product price lower. We must be prepared for that. That will typify the relationship. We will try to work to provide better customer service, but ultimately it will come down to whether or not we can provide the commodity they need to run their business at a price they can afford to pay, because they are the customer.
When we were talking about the ability of the workforce to deliver on some of the issues and whether there are any contingencies built into the plan, you might take this as a leap of faith, but the chairman mentioned the problems we had with 7 East, our main production wallface at Phalen. It represents almost two-thirds of the coal we will produce at the mine this year. That wallface had a major incident back in the fall of 1995. An average workforce would have given that situation up for lost.
In fact, a few years ago, we did abandon a wall that was probably not in as bad shape as 7 East was. Our workforce recognized that the life of their operation was at stake. That place was cleaned up. It is ready to go now. It took a long time to get cleaned up. It was not a highly mechanized operation. People worked day and night with shovels and using old-fashioned techniques to get that place cleaned up. Management and unions worked together on that project, but I would bet that the senators in this room did not get one telephone call in relation to that particular project. That work was done, and it was done quietly and reasonably over a long period of time.
I know that deep down in the belly of the organization, the people are there and the will is there to get the job done. You cannot reflect that in these kinds of numbers. As Senator Buchanan said, it is a way of life, and people do step up to the plate, and they have in the past, and they will in the future. You will hear from the unions in the next few days. I would ask you to ask them that question: "Will you step up to the plate?" The time is now for them, and for management as well.
You cannot build that into these kinds of statements, but if you come to Cape Breton, I will take you and show you. If I cannot convince you with the numbers, and we will get you the numbers, I would like to take you there and show you what the people are capable of. That will make the difference. That approach to things, I believe, is the way we have been successful in the past.
Senator Stanbury: That is very encouraging. Thank you very much.
Senator Murray: I support Senator Ghitter's request for more background information on some of these matters. I understand and appreciate what Mr. Shannon has said about political interference and the role of politicians and all the rest of it, but the decision to lend you another $79 million was essentially a political decision. I say that in defence of politicians, including the ones who are running the show now.
My concern is not with whether it is a political decision or not, but rather whether the decision is well based or is simply more improvisation. I support Senator Ghitter's request for more information because, between the plan that you took to consultation in the spring and the plan you had approved by the government, you found that you could produce 3 million tonnes more in the second plan and sell it. From a de-emphasis on export markets, you are now going to sell somewhere between 700,000 and 1 million tonnes in export markets.
I must say that the first thought that came to my mind when I saw the approved plan was, "Well, they bought a little bit more time." I am not against buying time under the circumstances, but we would all like to think that what is being done here is not improvisation, is not buying time, but rather has a real chance of putting the industry on a basis of long-term viability.
Mr. Shannon: The only thing I could say to you, senator, is that we will provide the supporting information on the financial statements. When you read through it, you will see that there is justification for the numbers that have been put down.
Senator Murray: Besides the fact that you would have lost money on a part-time operation at Prince, there is a broader strategic objective behind the decision to produce 3 million more tonnes over the period than you intended to produce in the spring consultation.
Mr. Shannon: The plan that we put out for discussion was a draft plan. It was a base-case plan put out for discussion. Several options could have been included in that plan. That plan was never approved by the government. The plan approved by the government was the plan that came about as a result of the discussions around that base case, including some of the options that we outlined.
Senator Murray: The question is: Is it the extra $79 million that makes plan B possible? Is that the strategic consideration?
Mr. White: From a strategic point of view, if you are looking at a corporate plan and a strategic plan for the Cape Breton Development Corporation, I guess we would have to say that our strategy over the next five years is one of survival. We would all like to grow. We would like to have a bigger company. We would like to be able to set up the company for the future.
Most companies sit down with a group of people, executives, and come up with a strategy to achieve those kinds of objectives. Our strategy revolves around viability, making sure that the company is sound over that five-year period of time, and making sure that the shareholder has confidence in our ability to move into the future. From that perspective, the extra production adds to the company's revenues over the period of time, and it will make the company stronger.
However, from a technical, day-to-day operations point of view, there are only so many things you can do. You could say, "Let us produce more coal," but there are limitations on how you can do that. Development has to be carried out. There are logistics associated with how many machines you have, how many places you can operate in, what the ventilating requirements of the operations are. There are all kinds of limitations. It just so happened in the Prince situation that we were able to select an option which provided revenue to the company at the same time as providing some employment benefits to some of our employees. That suggestion came from consultation, so that is what we decided to do.
In addition to that, the production from Prince, if Phalen does well, also can be leveraged in our organization. It not only benefits the 66 extra people working in Prince; if we get some improvements in the operations at Phalen, it also allows us some leverage at the wash plant and at the international piers, and so on. So we think that was a good decision. That is the strategy behind it.
Senator Murray: I was glad to hear you say earlier, Mr. White, that Devco does have some competitive advantages in dealing with its primary customer, one of which is that Nova Scotia Power's power plants are --
Mr. White: Strategically located.
Senator Murray: -- are very close to your pit-heads for the most part. There is a perception around some places in Nova Scotia that Nova Scotia Power buys Cape Breton coal out of Christian charity, that there is some benevolent attitude on the part of that company towards the Cape Breton coal miner, and that Nova Scotia Power consumers have been subsidizing Nova Scotia coal miners these many years. We do not have time to get into the history of the thing, but I suspect that the relationship has been, like all business relationships, quite up and down over the years, and that you have quite a few competitive advantages, certainly over imported coal, even on price. Is that not true?
Mr. White: We certainly have some competitive advantages in relationship to our ability to serve that customer. We have long-standing contracts with the customer. We have been in business together for many, many years. We understand each other's operations very well. We have never failed to deliver, to my knowledge. That is worth something nowadays in customer-vendor relationships. We already mentioned the transportation. We also work hard to deliver the quality, and we work together with them on the environmental side of things. There are many, many advantages to working together.
Senator Murray: Mr. Shannon looked a bit sceptical when I made the point, and I suppose if you are selling more than 70 per cent of your output to one customer, you know that customer's economics as well as he does. If you do not, Mr. White is there to help you with it, having served on both sides of the table. However, there would surely be some considerable disadvantage for Nova Scotia Power in trying to rely on contracts which would probably be short-term contracts, would there not, with United States coal dealers? There is an exchange rate that we know about. There are shipping costs. There is the reliability factor and so forth.
Mr. Shannon: There are quite a number of people on the board of directors in the Nova Scotia Power Corporation who would disagree with you on that. They have legitimate offers from reputable companies that would supply them with coal on a regular basis for much less than they are paying the Cape Breton Development Corporation.
Senator Murray: So it is Christian charity.
Mr. Shannon: I am not admitting to you that it is Christian charity on behalf of any mainlanders to Cape Bretoners, with all due respect to Senator MacDonald sitting next to you. I still consider him to be from Mabou, although some people have his address as Halifax.
It is not Christian charity. I would not say that at all. I am just saying that some people on the board of directors think they can get coal supplied to their power plants in Nova Scotia cheaper than they can get coal from the Cape Breton Development Corporation.
Senator Buchanan: Do you really believe that, Mr. Shannon?
Mr. Shannon: I am not here to believe it or disbelieve it. I will not comment on it.
Senator Murray: I have one final question about the famous "social costs."
Mr. Shannon: Yes, sir.
Senator Murray: If Devco were a candidate for privatization today, how much of those social costs do you think the government could realistically expect to be assumed by a purchaser?
Mr. Shannon: Senator, I really do not know much about being in public life, but I do know you really should not comment on hypotheticals.
Senator Murray: You used a number at one point about the cost of an immediate shutdown as being $900 million. A more orderly shutdown would be $643 million. How much of that amount would be in ongoing costs which would end up in the lap of the shareholder -- pensions and that sort of thing?
Mr. Shannon: Probably about $380 million, I would think.
Senator Murray: The government would be saddled with that?
Mr. Shannon: That would be a lifetime liability to those people.
Senator Murray: It would be $380 million out of the $643 million that it would cost to have what you called an orderly shutdown?
Mr. Shannon: It was listed. Do you have the list there, or do you just have the total?
Senator Murray: I just have the total, but I would be glad to see the list also.
Mr. Shannon: It is around somewhere. It is a public document. We shared it with everyone with whom we talked, senator. It is strange that you would not have a copy of it.
The Chairman: That brings us to the end of our questioning. I want to thank our witnesses for being so patient and thorough and determined in their answers. This information will be very helpful to us in our deliberations. Thank you for coming all this way and for spending this time.
Senators, we reconvene at 9:30 tomorrow morning. Tonight's session was taped by CPAC to be broadcast tomorrow morning. However, because of the length of the session, the broadcast will be postponed to a later date. Tomorrow's session will also be taped.
The committee adjourned.