Legislative Assembly of Ontario

PRE-BUDGET CONSULTATION
ONTARIO HOME BUILDERS' ASSOCIATION

ONTARIO GOOD ROADS ASSOCIATION

EXECUTIVE FURNITURE GROUP

CO-OPERATIVE HOUSING ASSOCIATION OF ONTARIO

AFTERNOON SITTING

AUTOMOTIVE PARTS MANUFACTURERS' ASSOCIATION

ONTARIO TRUCKING ASSOCIATION

PHARMACEUTICAL MANUFACTURERS ASSOCIATION OF CANADA

MOTOR VEHICLE MANUFACTURERS' ASSOCIATION

CONTENTS

Wednesday 23 January 1991

Pre-budget consultation

Ontario Home Builders' Association

Ontario Good Roads Association

Executive Furniture Group

Co-operative Housing Association of Ontario

Afternoon sitting

Automotive Parts Manufacturers' Association

Ontario Trucking Association

Pharmaceutical Manufacturers Association of Canada

Motor Vehicle Manufacturers' Association

Adjournment

STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS

Chair: Wiseman, Jim (Durham West NDP)

Vice-Chair: Hansen, Ron (Lincoln NDP)

Christopherson, David (Hamilton Centre NDP)

Jamison, Norm (Norfolk NDP)

Kwinter, Monte (Wilson Heights L)

Phillips, Gerry (Scarborough-Agincourt L)

Sterling, Norm W. (Carleton PC)

Stockwell, Chris (Etobicoke West PC)

Sullivan, Barbara (Hamilton Centre L)

Sutherland, Kimble (Oxford NDP)

Ward, Brad (Brantford NDP)

Ward, Margery (Don Mills NDP)

Substitutions:

Coppen, Shirley (Niagara South NDP) for Ms M. Ward

Fletcher, Derek (Guelph NDP) for Mr Christopherson

MacKinnon, Ellen (Lambton NDP) for Mr Sutherland

Clerk: Decker, Todd

Staff:

Anderson, Anne, Research Officer, Legislative Research Service

Rampersad, David, Research Officer, Legislative Research Service

The committee met at 1004 in room 228.

PRE-BUDGET CONSULTATION
ONTARIO HOME BUILDERS' ASSOCIATION

The Chair: We have a quorum, so we can begin. Before we begin with the Ontario Home Builders' Association, everybody should note that we have a new updated version of the agendas for the next two weeks.

Without any more ado I would like to welcome Al Libfeld from the Ontario Home Builders' Association. We have half an hour.

Mr Libfeld: I am the president of the Ontario Home Builders' Association. I am also the president of Tribute Corp, a large home builder in the Toronto area. Over the last eight years we have built over 4,000 homes.

Ontario Home Builders' Association is a province-wide organization of 4,000 members. We have 33 locals, locals being Toronto, Sudbury, Windsor, Ottawa, etc, and Kingston of course. We pretty well cover the province. We build over 80% of the new homes within the province. We also represent the renovation market within the province. I appreciate the opportunity to speak with you today. You have, I guess, our budget submission and we hope that you will read it through carefully.

As we all know, we are in some tough economic times. There is a recession going on, there is a war going on and there was a lot of uncertainty in the marketplace which caused a lot of construction not to be built last year and, we regretfully predict, this coming year as well. Interest rates were a concern; the matter of the GST was a concern; free trade was a concern, and the war is also a concern. All those first items are basically removed or being removed. Hopefully, the war will end soon and that will be removed as well and get the buyers back to work.

Last year, the starts in the province were 62,000, which was a 33% drop from the year before. Just to give you a bit more framework, in the very buoyant times of 1987 and 1988, we built over 100,000 units in the province. Last year and this year we lost a lot of jobs. We, as builders, laid off many of our workers, our subtrades laid off workers, the suppliers of course had to lay off workers, and it went further. It went into the manufacturers of appliances, of furniture, up and down the line, and a lot of these jobs were lost permanently and some of them temporarily.

We did a survey recently that predicted that, if the economy does not turn around in the next six months, 20% of the builders in the province who responded suggested that they will not make it through the next six months. So it is a tough economy and hopefully it will turn soon. We are optimistic that it will turn. We have not had good sales in the Toronto area now for two years and the rest of the province for about a year and a half.

So there is some pent-up demand. Immigration is coming in and we are optimistic that, with the end of the war and the remainder of the uncertainties going and interest rates dropping, it will turn around. But we want to work with this government to help things turn around. We do not want to be caught in the same problems that we had in the last boom-and-bust cycle. It is no good to jump around from 100,000 down to 60,000 and back to 100,000. There are problems with that, getting the men in the good times and laying them off, which is even a tougher situation, in the bad times.

We want to develop a partnership with this government. We want to work continuously. We are on call and we will answer any questions or come to speak to you. We want to educate as well, quickly. I want to emphasize "quickly." As builders, we are very impatient people. If the house is sold and the lot is ready, we will go throw up a home in three or four months. That is not thrown up; please excuse that. It is put together properly and livable, and we are very proud of the product we build in Ontario. But it does go up in three or four months because that is our psychology and housing is important around the province. So in all the items I put in front of you today and everything else, we want to emphasize "quickly."

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I would like to highlight some of the items to get us out of the recession and possibly stop the problems once we go a little further down the line and demand comes back.

The first group of items is regarding economics, and I am only picking several of the items due to the time frame that we have here this morning. The first one is we want to urge the present government to maintain a strong commitment to deficit control and, thereby, responsible, good fiscal management. We think that is quite important for now and for the future.

The second in regard to economics is we are very interested in promoting apprenticeship programs in construction for young people. Young people, for whatever reason, do not look to the trades until they are a little later on in years, especially women. There is an education gap, for whatever reason, and we want to push that so that they get into it earlier on and they realize in high school that there is a very viable career alternative, that the dollars that qualified tradesmen can make are significant, $30,000, $40,000, $50,000, $100,000, depending on the craft and the level of skill and how hard the person works. It is quite appealing, and we want to ask for an advisory council for the construction industry to identify the labour shortages so that the apprenticeship programs get put into place quickly.

We would like the government to further its commitment to infrastructure. We were very pleased to see the $700 million in the throne speech a couple of months ago.

The equation between infrastructure and development was made, and we were quite pleased to see that as well. But we want you to understand and the government to understand that infrastructure is the basis for everything getting done. You cannot build houses, you cannot build apartments, you cannot build schools, hospitals, anything without the infrastructure. It is the raw material. You need the roads and the sewers, and whatever further commitment the government can make towards that will solve a bunch of problems.

First of all, it will get people back to work. It is projected that the $700 million will create 14,000 jobs, but the spinoff after that will probably be even more significant because we can build the homes, we can build the apartments, we can build the social housing, all those things, and house the people and whatever else. We would like you to seriously consider increasing and continually looking at the infrastructure around the province, because it is becoming in short supply.

Right now, we have a lack of demand because of the uncertainties in the market. Down the road the lack of demand will turn. There are people now knocking at all our sales offices. They are not ready to buy yet but they will be in the near future, once they think their job is secure. They need the bigger home or they want to move out of the apartments or whatever the situation. We also have big immigration numbers coming in over the next five years, so we have to plan for growth and deal with growth in the future.

The province previously announced the sewer and water corporation. It got a little bit of fanfare when it was announced about a year ago. We would urge you to dust it off, bring it forward again and basically push the agenda on it. We only got brief details on what it would do and what it would look like. I believe there is only one gentleman and one secretary running this water and sewer corporation as of now. It makes a lot of sense to deal with this cross-jurisdictionally, to put in water lines through many regions and whatever else, economies of scale. It makes a lot of sense and it helps deal with the infrastructure problems.

Our number one recommendation on housing is we want to urge the government to drop or rescind part III of the Development Charges Act. Part III, as you are probably all aware, is the part of the Development Charges Act that deals with education. We firmly believe, as the majority of you do as well, that education is everyone's concern, everyone's responsibility, and it should not be placed on the backs of new home purchasers. It hurts the affordability situation and it is just unfair for a new home purchaser to pay for something that his next-door neighbour, moving into an existing home, does not have to pay for.

We are committed to going to court. Again, this is not news to any of you, but we have committed ourselves to go to court because we do believe it is unfair, and we will be going to court on constitutional grounds, subject to your not pulling the plug on this faulty bit of legislation.

We made the argument when the bill was passed that you cannot count on the housing industry; it is boom and bust and we go through cycles. We are right in the middle of a bust. Eight thousand homes were sold in the greater Toronto area last year. The numbers are much too low to put an appropriate figure to building the schools or helping build the schools. We urge you to live up to your ideals on this situation and remove the Development Charges Act before we have to spend our good dollars in the courts and the government has to spent taxpayers' dollars in the courts.

The next housing recommendation is we would like the land approvals process streamlined. It is cumbersome. We have been involved in several studies with the government over the last bunch of years. It takes a good 10 years for a piece of farm land to become a piece of production land. We do not want to step on anyone's toes. We want all the environmental things to be taken care of properly. We want everything else to be taken care of properly. But we want the time frames shrunk. Ten years is ridiculous for a municipality that wants to go forward on a piece of land to not be able to. It just takes that amount of time to go through the process.

We have a parcel of land in Ajax now that has been designated. We want to build homes and social housing on it and we have another two years to go. The draft plan is not approved yet, which is part of the problem, but the parcel has been designated that way for over three years now. It is five years to create something that will create jobs, create housing, all the good things that we all want and need.

What we are suggesting there is put together an umbrella policy to do it quickly. We are talking about six months. I can build a subdivision of 200 homes in six months. This government can go through the paper and decide what to do within that same time frame. We really think it is doable. We really think it is important for all our sakes so that the next time the demand comes back, as I said before, we will have the quantities of land so that the price escalations will not be there. People will not be paying huge dollars and it will smooth out the situation. We would like the Ministry of Municipal Affairs to be the quarterback of this. We think it is in their bailiwick and that they can do it. Again, it is extremely important.

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Other recommendations for short-term measures to speed up the approvals process are:

We would like rationalization of the condominium and land titles registration process. It takes a year now to get a condo registered, and it takes 12 to 18 months to get a parcel of land through land titles.

We would like the establishment of the Seaton development as a model for fast-track approvals. Seaton is great, but we have got to get going on it. Seaton has been talked about for ever and no homes are getting built there. It is a shame to waste that parcel of land when we are going to need the housing units in the next little while.

We would like nomination of more members and greater resources to the Ontario Municipal Board. Things, for whatever reason, get bogged down in the OMB, and I do not believe they have the capacity to deal with them expeditiously. It takes six months to a year to get to trial sometimes and sometimes it takes three to four months to get a transcript for the judgement typed afterwards, which is much too long a time, and it slows down everything.

Our other recommendations are that we would like to revamp the non-profit housing. Basically, we want to get more involved in it. We want, possibly, to go out to tender; decide in this location we want 1,000 units and let all the builders, all the developers, everyone, go out and tender the project and forget the performance bonds. We all have parcels of land, but performance bonds are expensive and they are prohibitive to a lot of our smaller members around the province. We want to build these units.

We were very upset to see that the first piece of legislation regarding housing was the rent control legislation, because of the retroactive nature of it as well as that it ignores supply. We are concerned with supply more than anything else. That is why we are upset.

To summarize, we urge you to read the document that we placed in front of you. I believe at the beginning of your terms we mailed to you all a copy of Housing: Restoring the Dream. It is very comprehensive and it outlines pretty well all our issues and all our beliefs, and it packages them very well. If you have not received that or you would like another copy, please give us a call and we would make as many as you need available

We have the experience to build -- as I suggested, I build -- and our members make up engineers, architects, surveyors; we have municipal governments as members; we have lawyers, builders, contractors, suppliers, up and down the gamut, renovators and developers.

Next week we have the pleasure of meeting with the Treasurer, and I thank you for the opportunity of meeting with you. The door is open. I would appreciate meeting individually, collectively, at any time or with any of our people. We have presidents around the province. If there are any questions, I would love to entertain them at this time.

Mr Stockwell: I note that you are suggesting there are going to be 55,000 new home starts in 1991. How many of those would be non-profit units?

Mr Libfeld: It was a tough one. We doubled that this week. We know the government is committed to the 20,000 units and we hope you are successful in it because we will become a part of building it, but we think that is overly optimistic. We know how to build and we are in January now and it is going to take a little longer to get going.

The gross number was 55,000, which included the social housing. We are only guesstimating that they will be successful in the 10,000 to 15,000 range, but it is a guess. We hope you build them all: we really do.

Mr Kwinter: The 55,000 does include the 20,000?

Mr Libfeld: Yes, it includes what we believe will be within the 20,000. We do not think you will make the 20,000.

Mr Kwinter: That is the point I am making. Does it include the 10,000 or 15,000, or does it include 20,000?

Mr Stockwell: That is the point I was making.

Mr Libfeld: It is 10,000 to 15,000.

Mr Stockwell: So it is 10,000 or 15 you are putting in. You are saying you are not going to do 5,000 or 10,000?

Mr Libfeld: Yes. I am not sure where it is going to drop.

Mr Stockwell: Then yourselves -- let's call it 15,000, you think -- from the private sector you are going to do 40,000?

Mr Libfeld: Correct.

Mr Stockwell: That is off from the 1990 numbers -- I saw them in here -- 62,600?

Mr Libfeld: There was some social housing there, about 4,000 or 5,000, so 58,000 in comparison.

Mr Stockwell: You are expecting the social housing to double?

Mr Libfeld: At least double; hopefully, we will do more.

Mr Stockwell: I do not think so. Next one: lot levies. With respect to the sewer improvement, schools, etc, you have taken a hard line on lot levies.

Mr Libfeld: On the education portion.

Mr Stockwell: Only the education portion?

Mr Libfeld: The education portion is the one we are attacking.

Mr Stockwell: You have regional councils weaselling in on that money as well.

Mr Libfeld: We have alternatives. We are suggesting municipal bond financing. We are suggesting doing things more in advance instead of retroactive levies dealing with the situation after the fact. You know, you have the need, then you get the levy and then you build the school, but people are already living there. We are suggesting that all governments deal with things beforehand.

Mr Stockwell: So you build the school before you build the houses?

Mr Libfeld: No. You build it in conjunction with the houses. You raise the dollars beforehand with municipal bond financing, general revenues, previously with the province's dollars or a larger proportion of the province's dollars.

Mr Stockwell: You are not really fussed with municipalities floating bonds, then?

Mr Libfeld: That is what we are attempting to push.

Mr Stockwell: You think that is a proper and sound financing method when it comes to infrastructure?

Mr Libfeld: Yes; pay it off over a longer period of time.

Mr Stockwell: Much like debenturing?

Mr Libfeld: Yes.

Mr Stockwell: Except the difference is that you would not have lot levies.

Mr Libfeld: No, we have no objections to lot levies for services.

Mr Stockwell: Like sewers and sidewalks.

Mr Libfeld: Sewers and water, roads and whatever.

Mr Stockwell: You just do not want to pay for the schools?

Mr Libfeld: No, nothing like that.

Mr Stockwell: Let me go to the next house, the 25% affordable housing component and how you are following that rule or guideline -- I am not even sure if it is law or not. I do not think it is because I know that some municipalities are enforcing it, others are not, some have higher, others have lower. Do you find it difficult in certain instances to meet that and do you take your 25% offsite in most instances when you are building single-family residential?

Mr Libfeld: It is relatively new. There are a couple of plans going through that have been outside. There are a couple of municipalities I have dealt with and within the general area of the municipalities this section will be 25%. Everyone is doing it a little bit differently, from what we understand at this point.

Mr Stockwell: We had a group in yesterday from legal services suggesting that in fact it is going offsite. The good development goes in this spot, then you take your 25% and put it beside a highway. Do you find that to be the case?

Mr Libfeld: Not specifically, no.

Mr Stockwell: Is there much going onsite or is most of it going offsite?

Mr Libfeld: I am familiar with a couple of projects onsite, yes.

Mr Stockwell: Are you familiar with more offsite? I would like to know how this is working from your point of view. I do not think it is working.

Mr Libfeld: Where I am developing, the municipality is doing it in areas, but it is not necessarily onsite. There is not one area less desirable than the other area. There are no major roads or trains or anything like that. So I do not believe it is a problem as of now.

Mr Stockwell: Are you in fact meeting that 25%?

Mr Libfeld: In co-operation with the towns. The towns are attempting to enforce it, and under their --

Mr Stockwell: Definition of "affordable."

Mr Libfeld: -- definition we are meeting it as an industry around the province.

Mr Stockwell: But the difficulty, again, is what is affordable.

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Mr Libfeld: Every town has a different idea.

Mr Stockwell: Metro's definition of "affordable" is certainly different than some areas outside of southern Ontario, at least, anyway.

Mr Libfeld: Everything is affordable in some of our areas in the province.

Mr Stockwell: The other point is, with efficiencies in the system, etc, you are suggesting that the cost of houses would in fact be reduced, the cost of construction, the delays, etc. I am curious about that. I have always been a believer in the free market system, but I am also a firm believer that those who build are going to charge what the market will bear. Do you not? Regardless of how efficient the system is, if you are going to make $100,000 a house, you are going to make $100,000 a house. You are not simply going to drop the price because, "Gee, it's more efficient and we can make more money here." If a house is worth $300,000, you are going to sell it for $300,000 regardless of whether or not $250,000 is a reasonable return.

Mr Libfeld: We are in the business to make a dollar, but with quantities of lands competition will take over. You do not have that problem in the majority of locations in the United States where they do not have the infrastructural problem. They put in the roads and sewers way in advance. For a very large home, you pay a third of what we pay in the Toronto market.

That is not the problem. We want to build more. We want to build for less money. It is the quantity of land that can get into the system, because there is not the infrastructure and that is the basic problem. There are only so many lots in the next year and a half or two years that can be built. If demand comes back, we are going to be faced with the same thing we faced in 1986, 1987 and 1988. We as an industry do not want that. We would rather have a smoother playing field, have the quantities there, have people have more of a choice and bring down the prices.

Mr Stockwell: Really, in a nutshell, you are suggesting that during this economic slowdown the best thing for a government to be doing would be building the infrastructure, creating the lots earlier and then when the market heats up again there will be enough on the market so we are not driving the price out of people's affordable range.

Mr Libfeld: Exactly.

Mr Jamison: I just want to get a feel for the impact you feel your industry will have concerning the GST and its effect on your ability to provide housing at a reasonable cost.

Mr Libfeld: The GST was more expensive than the federal government suggested because of the land component that is presently being taxed. There is a rebate on inexpensive homes of 2.5% and there is a removal of the other tax, the manufacturers' sales tax. In the Toronto area it is suggested that it will cost 1.5% to 2% more. Outside of the Toronto area in the rest of the province, in the smaller locations there will not be a significant cost because the land component is not that significant. That is basically where the difference is. So there is a cost of 1.5% to 2%, but the problem with the GST is twofold. Number one, they put an artificial cutoff date of 31 December and the majority of the builders, suppliers and manufacturers basically delivered everything on 31 December. Now we are all walking into the new year stop-start, so to speak, and everyone is getting comfortable with using it so it is not going to be the issue it was before. It is on the back burner, so to speak.

Mr Kozman: My name is Brian Kozman. I am the director of policy and research. I think it is fair to say that there was an anticipation on the part of the industry that the GST would skew some buyers into the end of 1990. That did not occur because of the obvious economic downturn. Builders who had hoped for that skewing, people bringing forward their buying decisions, brought a lot of product on stream so there is a lot of unsold inventory sitting out there.

That created problems for us in so far as you now have product on the market, but no buyers. The carrying costs of those houses and that land were very difficult and it has posed problems for builders. We were quite pleased with the statements made by the Minister of Finance just before Christmas that they were extending the deadlines for getting back the rebates on some of that unsold inventory, because I think there was a recognition that there were a lot of homes sitting out there that were posing problems for builders and developers in terms of carrying costs.

Mr Kwinter: One of the statements you make is that unless the economy improves, 20% of the home builders are going to go out of business. What is your definition of an improved economy? What things are you looking for? Are interest rates the key? What is the key?

Mr Libfeld: Interest rates are probably at the top of the list, and they are coming down. We did a survey among our members. We sent out to about 300 members and 116 responded. Of those who responded, 20% said they were in dire straits and if it did not turn around in the near future they would be out of business. That gives you an idea. I think interest rates are a key, but we would like this government to consider a lot of the proposals that we place before you today in the remainder of the document we are placing in front of you.

Mr Kwinter: We have had two of the major banks in here and they are saying the economy is going to improve in mid-1991 and will continue to improve in 1992 and 1993. There are some questions as to whether the interest rates are going to change because of the government's desire to put a cap and dampen inflation, so you could have this anomaly of the economy improving but interest rates not. What I am really trying to determine is, if the interest rates stay high and the economy improves, is that going to solve your problem or is it still going to be a problem?

Mr Libfeld: That is fine, but high interest rates cost more to produce a home. It is part of the component. It takes time to build a home and whatever else and the purchasers have to pay more for their mortgages, so it is part of the equation. Of course we would like lower interest rates, but a good economy with high rates is a catch-22. I am not exactly sure. Normally it does not happen that way.

Mr Kozman: High interest rates are only one component of why the consumers out there do not have confidence in the economy. They are uncertain about what their job situation is going to be. They are uncertain about job opportunities. They are uncertain about what the war is going to hold. All of those things interact, I guess, to influence their buying decisions. They are making the biggest decision, in terms of a purchase, in their life and all of those things combine. Interest rates are a big component of that. In the mindset of the consumer, "I can't get into the market if I'm looking at 13% interest rates."

Part of our concern is that that artificial barrier is blocking them from making a decision. Right now the industry is starting to get smaller-sized units on the market, looking at a lot of multifamily stuff, town homes, that sort of thing. The market has responded to the tough times by trying to put out a product that is more in line with the buying power of the consumer. I think if we have some of the things we are asking for in terms of a more streamlined land approvals process, more land on the market, more infrastructure upon which you can base the foundation for new communities, that is all going to help in terms of getting that buyer a bit more confident about his being able to follow through on his decision to buy a house.

Mr Kwinter: The interest rates are more than artificial because the higher the interest rates the higher your income has to be to meet the mortgage qualifications. You may be ready to buy a house tomorrow and then find that the interest rates have gone up 1% and you are no longer qualified, because the mortgage company does not determine that your income is enough to carry the higher interest rate mortgage.

Mr Libfeld: That is definitely part of the equation.

Mr Kwinter: You talked about one of your recommendations dealing with the fact -- I know this to be true -- that the work force is aging in the construction business because not enough young people are coming in. You are suggesting that the government has to really address that. One of the problems is that there is a social sort of hangup. The average mother would not be thrilled if her daughter came home and said, "I'm going to marry a bricklayer," only because there is this kind of lack of appreciation of the value of manual trades and skills and what they contribute to society. I think that is something everybody has to sort of contribute to changing, to give a social value to the fact that there are people out there doing these jobs.

They are very lucrative. You know the standard gag about the doctor who comes to the plumber and says: "How come you're charging so much? I only charge so much." The plumber says, "When I was a doctor. I used to charge that much too, but now that I'm a plumber this is what I charge." They make a great deal of money, but there is not that social acceptability. I think this is something the industry has a responsibility to work on as well, because it has to be shown that these are valuable jobs both in an economic and in a social context and that they make a valuable contribution.

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That then carries on to the next concern I have. You are talking about the apprenticeship program. There are problems because there are barriers to entry into the apprenticeship program because there are controls put on by the people who are already in it. It is a matter of controlling their industry. How do you deal with that?

Mr Libfeld: We suggested to the government as early as last week -- we were in to see the Ministry of Skills Development -- that we want the ratios to be changed. Anyone who wants to learn a trade should be able to get into it. It is tough when the ratios are four or five to one, five journeymen to one apprentice. The access should be there. Not all firms, subtrades and contractors have teaching organizations, so you have four or five to one, but in essence maybe you have 20 to one and things like that. A lot of our trades and a lot of our workers in slow times and whatever go into the manufacturing industry. They go into all sorts of different aspects of our economy, but they are qualified electricians. they are qualified plumbers. We are a great training ground. We probably do more training than any other industry in the province and we are the largest employers, as of now, of any industry in the province. That is the way around it: reduce the numbers and we will get the people in there.

Mr Phillips: I would like your estimate of what is the right number of new households each year that we should create. I know it is difficult. We know how many households have been formed. What is the right number? Otherwise, in bad times you will be here looking for more roads and in good times you will be here looking for something else.

My second question is, your advice to us here is, I think, during difficult times the temptation is to spend your way out of a recession but you do not believe this is the answer to Ontario's current problem. Your advice to the committee, I think, is to spend more money on infrastructure and to go further into debt by funding, through debt, schools and things like that. So both of those recommendations are kind of, "Cut somewhere else, but spend here." Knowing that almost 90% of our budget is health, education, community and social services, debt servicing and the stuff we are talking about, if we cannot cut elsewhere, would your recommendation still be to spend here and take the debt up?

Mr Libfeld: It is very difficult to tell an unemployed bricklayer or electrician today, "You're sitting home because we have other responsibilities." The most important thing to him right now is to get out and get to work. Infrastructure will solve that problem, not only short term but long term. If we have the infrastructure in place, you will not need to know the quantities of housing units. The industry will build the quantities of housing units. When the demand is there, we will be able to build them because the infrastructure will be there; when the demand is not there, we will not build them. But we will not come to the boom-and-bust cycle with prices, because there will always be competition.

Mr Phillips: The problem is, you say, "Maintaining control of our deficit must continue to be a top priority with the government of Ontario." I would think you are saying to us a higher priority than that is what you are recommending.

Mr Libfeld: Municipal bond financing is spreading it all over a longer period of time.

Mr Kozman: We are not talking about willy-nilly spending and going into debt in the province. We are talking about a co-ordinated system whereby this government can get back into the business of providing infrastructure, upon which the growth of this province depends. In our opinion, that responsibility has not been there in the past little while. I think we would have liked to see more investment in the infrastructure, in the foundations of the communities, upon which we have to build.

Obviously there seems to be a dichotomy of saying, "We want deficit control on the one hand, but on the other hand we want to put in place more spending on infrastructure." We view that infrastructure as an investment. It is an investment in the future of the province. It allows us to get more homes built and it allows the province to get a more attractive commercial base and industrial base. I do not think they are mutually exclusive things. I think they can work together and I think that if we take a look at streamlining some of the problems we have identified, we can cut costs in other areas.

Mr Phillips: As you know, we will wrestle with it here. Well, the Treasurer will. We will give him a nice little report, but he will wrestle with what size the deficit is going to be. I just want to make sure that when you look at that you realize your recommendations to us are going kind of two ways.

Mr Kozman: I agree.

Mrs Sullivan: I am going to be all over the place in questions. I wonder, first of all, if you could give us any indication of whether you have seen a move in your workforce out of new home building into renovation, among your membership.

Mr Libfeld: Some of the members; my own firm has a renovation wing. The economy was such that renovation did not grow last year. Actually, people were concerned about even renovating last year. It could be the case in the near future, but as of last year there was no move.

Mrs Sullivan: Are you seeing any indication that the GST rules will mean that renovation becomes more attractive as a portion of the activity of your industry over the next period of time?

Mr Libfeld: All the surveys and all the economists suggest that it will reverse itself with new home construction. New home construction was the larger of the two. They will reverse over the next little while.

Mrs Sullivan: What impact would you see that having on your labour force?

Mr Libfeld: Our labour force does the new homes and the renovation. We represent both industries. Our subtrades do the work on both new and old product.

Mrs Sullivan: Basically what you are saying is that although there may be a change in what the industry is in fact doing, the labour force would be constant, no matter what it is.

Mr Libfeld: Yes. A plumber is a plumber. He can work in a new home or an old home.

Mrs Sullivan: I was interested in some of your comments on Seaton. I wondered if you had entered into any discussions with the Ministry of Municipal Affairs relating to the R-2000 component in that Seaton project, if you talked at any length with those people and whether you thought it might be worth while to look at the budget initiative, at things like district heating.

Mr Libfeld: I am not that familiar with district heating, but it was very preliminary with the previous government. We had several consultations with them and R-2000 was never mentioned.

Mrs Sullivan: The third aspect relates to demographic change and the impact that will have on housing starts over the next period of time, not immediately, but we certainly know the impact of housing starts as an economic indicator. Is the OHBA looking at, say within the next 10 or 15 years, a change in the nature of housing development as a result of changes in demographics that may in fact change the economic indicators over a long period of time?

Mr Libfeld: We had a couple of speakers yesterday. We had the presidents' and CEOs' conference in Toronto, where all of the 33 presidents from around the province come in for a two-day seminar. The economic speaker suggested it is going to be changed. The baby-boomers are getting older. They are going to possibly want move-up homes or condominiums and there are fewer people following us who are in the starter field, so yes, the demographics will change. The only wild card in the equation is immigrants and where they come from and what kind of dollars they are going to be either creating here or bringing with them.

Mr Kozman: While there are going to be more move- up buyers in the market, it is also important to realize that there is only so much land out there to build upon. Boundaries are changing to try to meet the needs, but I think you are going to be looking at more compact development, higher-density development, hopefully if the municipalities are willing. I think you are looking at more multifamily housing. The industry is equipped to deal with that, but we need a partnership with the municipalities to bring that about. The not-in-my-backyard syndrome that prevails out there in many cases prejudices our ability to move towards that higher-density type of housing and development. I think that is going to have an influence as well, in addition to the demographics that are going to be coming.

The Chair: We would like to thank you for coming today. We appreciate your brief.

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ONTARIO GOOD ROADS ASSOCIATION

The Chair: Our next presentation is the Ontario Good Roads Association, David Murray, president. To the members of the committee, we are now running behind time. If we could keep our questions brief and to the point, we could still be out of here at a reasonable time. Please begin.

Mr Murray: We recognize by the clock that we did run a little over with the last delegation. We will try to be as brief as possible. I think you have been circulated a copy of the brief from Ontario Good Roads, and with your permission I would like to just go through it quickly. At the end of the presentation, if there are any questions of the committee, we have some members of the board of directors here and we would try to briefly answer those or clarify.

My name is David Murray. I am president of the Ontario Good Roads Association. I would like to introduce my co-directors. With me are Dan Zakula, area superintendent, roadways division, regional municipality of Niagara and OGRA first vice-president; Robert Dempsey, OGRA second vice-president, and Len Rach, director of engineering, transportation department, municipality of Metropolitan Toronto and an OGRA director. Also present with us this morning are Sheila Richardson, our OGRA executive director, and Diana Summers, OGRA policy adviser.

On behalf of the Ontario Good Roads Association, we are pleased to be here this morning and discuss those issues that OGRA feels should be considered by this committee as it develops recommendations for consideration in the preparation of the upcoming provincial budget. Mr Chairman, it did not go unnoticed this morning that your last delegation, the Ontario Home Builders' Association, made some mention of the importance of roads infrastructure, and I thank them for bringing that to your attention.

OGRA is a municipal association with 750 member municipalities, both urban and rural, large and small. Municipal representatives who sit on our committees and the board of directors include both elected representatives and appointed municipal officials, so the interests of municipal road and bridge infrastructures are well represented.

OGRA's mandate is to present the road-related concerns of the municipalities to the provincial government. We are aware that the government is facing a large deficit that is expected to grow even larger. We also know that during the course of these hearings, this committee will hear repeated pleas for funding from a variety of deputations, all requesting urgently needed funds for a variety of deserving causes. Yours is not an easy task and we wish you well in your deliberations.

We have come today, as in years past, to remind members of the importance of a road system in good repair and capable of meeting demands placed upon it. The throne speech provided an indication that this government is prepared to address the needs of the public infrastructure, and we of course welcome that initiative.

As municipalities, we are ready and anxious to take on the challenge of meeting transportation needs and demands and placing these demands in the context of other, broader expectations of today's society. We know, for example, that environmental concerns rank high on the public agenda and that the municipalities must keep this in mind as they embark on road-related projects. We are also aware that public transit will play an ever-increasing role in the movement of people, at least in our larger urban centres. OGRA recognizes and supports this role that public transit must play in our efforts to protect the enhancement of our environment. We believe that a balanced approach to the provision and maintenance of both roads and public transit will best serve our economic, social and environmental priorities.

The problem, of course, remains where to find the necessary funds. We would like to reiterate our recommendation that a one cent per litre fuel tax be introduced and the revenue generated dedicated to road needs. We recognize that dedicated taxes reduce the availability of funds for those sectors that do not have an obvious source of revenue, but we believe that public acceptance of increased taxes will result if the specific target and use of the funds is indicated.

Revenue from fuel taxes has been mentioned as a source for several possible initiatives, but OGRA believes that road needs are the legitimate recipient of those funds. We calculate that revenues from this source would go a long way to addressing the road needs in Ontario.

I would like to emphasize that this is not a plea for more roads, but for better roads. Roads in good repair could help both our economy and our environment by moving goods and people quickly and efficiently. It also makes economic sense to spend public funds on road repair and maintenance, which is far cheaper than road construction. It also protects the investment of public funds that we have in our infrastructure. Perhaps we should also note that there is a high labour component of road projects, which will surely be important during the recessionary times ahead.

Insufficient funding for roads is not going unnoticed. Today road funding is less than 10% of the provincial budget. Municipalities are doing what they can to help offset inadequate assistance from the provincial government. Almost 75% of the municipalities in Ontario are undertaking significant road work without the benefit of provincial subsidies, resulting in increased local taxes or increased lot levies. In fact, the full impact of government underfunding of roads has been cushioned by municipal decisions to provide road construction and maintenance beyond that covered by provincial subsidies. Compounding this are indications that the government will look to municipalities to assume certain roads or portions of roads that are no longer deemed to serve a provincial purpose.

In general terms, we would like to caution the government that this is not the time to introduce new policies and programs which are to be paid for by municipalities. Simply, if the government cannot afford them, neither can the municipalities.

Another area that we would like to mention briefly is that of deconditionalization of road grants. As some of you may be aware, AMO -- that is, the Association of Municipalities of Ontario -- has issued a discussion paper entitled New Dimensions, which recommends that municipal road grants and other conditional grant programs be eliminated and the funding allocated through a new municipal general support grant.

OGRA is opposed to deconditionalization and believes that the road grant should be improved, not replaced. Right now, payments to municipalities are based on road needs and are responsive to municipal needs and the ability to pay. Within this grant, municipalities can determine their level of expenditure on roads, as well as their road needs priorities. We recognize that the existing grant system has many shortfalls that should be remedied and we have offered to work with the Ministry of Transportation to eliminate inconsistencies and duplication in the grant structure.

OGRA recommends in the strongest possible terms the need to improve the existing road grant, not replace it. Some 160 member municipalities of OGRA have passed resolutions supporting this position. The issue of possible deconditionalization will likely be debated in the coming months and we wanted to take this opportunity to put OGRA's position on the record.

Another issue of prime importance to OGRA is the need for grade separations and improvements to level crossings. The federal government seems intent on abdicating its responsibility to participate in the funding of grade separation projects. There are currently over 80 outstanding projects awaiting approval in Ontario and we would like to hear what action the provincial government intends to take in the absence of leadership from the federal government on this issue.

OGRA appreciates the opportunity to have these discussions with you. We wish you well in your deliberations and hope that our comments will be of some use to the committee.

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Mr Kwinter: In the years I travelled the province, literally from end to end, I would say the most common request I had from municipalities outside of the greater Toronto area was for four-laning the highways in their particular area. The feeling was that if they could only have a four-lane highway, all great things would happen to them; industries would locate there and they would have economic activity, everything would be greater.

What are your feelings about that? Do you think this is a priority and this is something the government should be doing?

Mr Murray: I do not think, in a simple form, that is the total answer to what municipalities in the province want. As an elected official -- I realize that all of you are elected officials -- certainly what I am hearing as the first complaint, after dogs and loud music next door, is the condition of roads that people drive day to day to go to work. That seems to be priority 1.

Some of the social things that were mentioned a few minutes ago in the other presentation are what I choose to call motherhood issues, and they are very important. As far as the roads are concerned, in the north four-lane roads seem to be a high priority; I am talking about the true north of Ontario. In the central southern section, I am not so sure that four-lane roads are really the answer. The infrastructure and the condition of those roads, to get to work and for services, seems to be top priority with the people I talk to.

Mr Christopherson: My personal background is city and regional council for five years, so I am familiar with this issue at that level and understand the funding problems. Aside from positions taken by councils, the one cent per litre fuel tax is something that at least has intrigued me.

I would like to ask a quick question, and I am just suggesting this hypothetically. If the price of oil should skyrocket as a result of the war and it were to stay at extremely high levels for a sustained period, would you still feel that this is the best way to go? Or would that mitigate your recommendation and would you feel that with that situation happening perhaps this idea should be held off a little? What are your thoughts on that, if that scenario were to happen? Or do you still think this is a sound, fundamental structure as to how we ought to be funding roads and the costs?

Mr Dempsey: If I could answer that, my name is Bob Dempsey. I certainly appreciate the opportunity to talk to you. The one cent a litre fuel tax we calculate would generate $80 million to $100 million a year. Interestingly enough, that almost coincides with the dollars of deficiencies which the present Ministry of Transportation budget does not fund. Municipalities, the upper tier in the counties especially, kick in close to $75 million a year in additional funding over and above what is subsidized, 100% municipal tax dollars if you wish.

The Canadian Automobile Association and all of those types, the Ontario Trucking Association, have all said there is a fuel efficiency related to fewer potholes. If we can make the roads more efficient and move goods and people quicker, as opposed to idling on the Don Valley parking lot at 5 o'clock, then we are going to spend an awful lot less money on fuel and the cost of fuel. If your government can see its way clear to allowing the roads to be better quality and higher capacity to move goods and people, then the price of fuel is not going to have as big an impact on your economy.

Mr Christopherson: Let me very briefly follow up on that. Are you suggesting that the automobile associations and those organizations would be supportive of this move?

Mr Dempsey: I am not sure what their official position is on a dedicated fuel tax, to be honest. I should not go on record as saying what they feel. I do know they support better quality and higher capacity road systems, naturally.

Mr Christopherson: It is how we fund it that has always been the bugaboo.

Mr Stockwell: On the one cent per litre, I can see your argument. How long do you think before some government comes along and steals your one cent, though, and applies it elsewhere? That is famous, for governments to dedicate it for about a year and then steal it and put it someplace else, and then you are back here telling us, "Gee, if we could only get that one cent back, life would be wonderful again."

It never seems to work that way. Some government dedicates it for a year, then something comes along that is so much more important and everyone cries they need money and someone says, "Gee, we have about $100 million from the one cent a litre." I would like to hear your comments. Do you really think that is going to stick with good roads? Do you believe governments down the road will buy into this dedicated one cent for ever? It will just be another form of tax applied to the general revenues, just like the tire tax was the first year it was introduced.

Mr Dempsey: That is exactly what I was going to address, the tire tax. The fishing licence was dedicated towards restocking our streams.

Mr Stockwell: The air conditioning tax on cars in the 1970s. I am not blaming one government. They all do it.

Mr Dempsey: The commercial concentration levy in downtown Toronto: I do not know whether that is dedicated to specifically relieving that problem --

Mr Stockwell: It is dedicated to general revenue.

Mr Dempsey: We feel it can generate $80 million to $100 million per year to the present approximately $725 million a year subsidization budget that the MTO distributes to municipalities. If that is increased by $80 million to $100 million and you wish to abandon the one cent a litre dedicated tax, as long as the $80 million to $100 million stays so that municipalities can do their long-range planning of projects and you do not, all of a sudden, cut their transfer payments by $80 million to $100 million in the future, then I think our concerns are allayed.

But I have the same fears that you do, that they would take away the one cent and then drop our transfer payments by the equivalent amount. That would be disastrous.

Mr Stockwell: In your recommendations, there is no guarantee that that one cent would stay.

Mr Dempsey: I do not think we can guarantee what government is going to be sitting in power either.

Mr Stockwell: Exactly. The difficulty I have is that I believe the only way you stop governments from spending is not to give them the money. I think if you generated another $80 million to $100 million on one cent a litre, you guys would not be getting it inside of two years.

Mr Dempsey: The one thing the government of Ontario has to remember is that for every dollar it spends, the municipalities pretty well match it dollar for dollar.

Mr Stockwell: Not any more.

Mr Dempsey: In order for us to qualify for the $80 million to $100 million you would add to the budget, we would have to come up with $80 million to $100 million on average. The subsidization rate for transportation is about 50% across the board. So you are getting a $2 bang for a $1 buck, because the municipalities are coming up from the other direction to match your dollar.

Mr Stockwell: It is kind of nice to be at the provincial level and be able to see the municipalities picking up the responsibility. At Metro we picked up responsibility for road improvements, etc, at 100-cent dollars. The comment I always made as a Metro representative was that the biggest mistake we made was committing the 100-cent dollars, because it took the provincial government off the hook. Have you canvassed your members and asked them what their plans are in the future? If they keep picking up the 100-cent dollar programs, then really the provincial government can say, "Well, it's getting done without our money."

What is their position on the 100-cent dollars? Are they going to continue to pick it up? If so, I think you are arguing against your case. I have always thought that way: "If you're going to pick up the 100-cent dollar programs, then don't coming crying poor to me."

Mr Dempsey: I dare say you could avoid repairing the Gardiner Expressway. You had to spend whatever it took to repair it. You cannot abandon your duties.

Mr Stockwell: You could have avoided it. I was on council. You could have avoided repairing it: you close it down. And you expanded it by a lane.

Mr Rach: The argument in terms of spending 100-cent dollars is quite valid. On the other hand, even with the 100-cent dollar expenditures that the municipalities in Ontario are throwing into their road programs, we are still falling behind on rehabilitating the system. In Metropolitan Toronto, there is a long list of roads slated for reconstruction but there just is not the funding to reconstruct those roads at present.

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Mr Stockwell: Municipally?

Mr Rach: Municipally. The money just is not there.

Mrs Sullivan: In the NDP Agenda for People there was a recommendation made that the Trans-Canada Highway be four-laned and there was a budget figure attached to that of $100 million. Could you tell me how many miles that would buy?

Mr Murray: It is difficult to say. In some areas of northern Ontario $100 million would not go very far. In other areas of flatlands, you can buy a lot more four-lane highway on a flat terrain than you can through a rocky terrain that curves around lakes, etc. So it is difficult to transfer $100 million into kilometres. It depends on what sections you are talking about.

Mrs Sullivan: What would the range be -- 10 miles to 50, or 1,000?

Mr Murray: If I can just expound our position on that, we have talked to the Ministry of Transportation on this issue. What it is attempting to do is to develop truck passing lanes in certain areas and maximize the bang for the buck in that area, not an entire four-lane Trans-Canada from one end of the province to the other, realizing that is financially difficult to ever achieve. But there are sections where it would make sense that you could put in truck passing lanes, etc, to increase and improve the flow of traffic around people hauling campers and heavy truck traffic. So the $100 million, on our recommendation, should be studied very carefully and built as passing lanes in certain sections.

Mrs Sullivan: How much does it cost to build on flat land, say, a kilometre of highway?

Mr Murray: I am not sure of the budget figures, but to build something like a 401-type of cross-section would likely be a million dollars a kilometre, would it not, Len? Or would it be more?

Mr Rach: I think it would be more. Generally speaking, to widen the metropolitan urban arterials is running anywhere from $2.5 million to $3 million per kilometre.

The Chair: Is that just for a two-lane road?

Mr Rach: We are talking of, say, widening a four-lane to six lanes or a five-lane road to seven lanes.

The Chair: The numbers in the budget from last year have cost of highway construction in southern Ontario at $1 million per kilometre for two lanes, $6 million for four lanes and $15 million for six lanes. So these numbers are incorrect?

Mr Rach: We are talking of generally reconstructing the pavement and widening and moving utilities. We are not looking at property acquisitions or very expensive items.

The Chair: Of course, you are talking about a different type of construction with the 401. It has, what, a 16-inch to 18-inch concrete base, with a two-inch to three-inch layer of asphalt on top?

Mr Rach: Yes.

The Chair: If you are talking about a northern road, you are talking about different grades of asphalt and so on because of freezing. Also, you are talking probably about two layers of three-inch asphalt, which makes it a different cost, does it not?

Mr Dempsey: The one thing you have to recall, and what I do not think any of us talked about, is interchanges. They are really where the money gets poured in, because you do not know whether you want multilevel interchanges like the 400-401 or whether you can have at-grade interchanges. That is where you can chew up an awful lot of your dollars. To estimate dollar per kilometre to build a piece of road is really an individual estimate on each case.

Mr Phillips: I just make the observation, because you mentioned 50-cent dollars, that I think that era is gone. The new government has committed that it will not impose on municipalities programs like that, where they fund part of it and then expect the municipality to pick up the other part of it. So I would not count on that in the future, because I think they said that if they launched a new initiative they would not impose that on the municipalities but rather will fund it. It may not be as easy to leverage those dollars in the future.

Mr Dempsey: What I am quoting is the historical nature of the amount of money spent by municipalities and the amount of money spent by the government in the roads and infrastructure in municipalities. It works out to somewhere around 50-cent dollars.

Mr Murray: To take your question a little further, we are finding, for example, in our municipality that our grant rate is 53%, 53-cent dollars. Our municipal council is throwing into that pot, if you will, for strictly roads purposes another $100,000 to $150,000 of tax dollars straight from our taxpayers. Our experience in our road programs is that even with that influx of funds, direct tax dollars, we are just managing to hold our own relative to the roads with almost no new construction. It is almost a break-even situation in our small municipality of 10,000 people.

Mr Dempsey: One document you may wish to look at, and unfortunately we do not have it here to present to you, is a brief done by the Federation of Canadian Municipalities. In it they tried to calculate the economic impact of spending $1 on roads to what it does for the economy. I believe it was a factor of about two, but I am not sure. It is something that in recessionary times the provincial government should look at, because, as we said in our brief, road projects are very labour-intensive projects. It will definitely help an unemployment situation. A healthy economy is an employed economy. For every dollar you spend on roads you are going to get it back in sales tax and income tax and fuel tax, because your people are going to be busy and they are going to be back out spending again, as opposed to trying to maximize the impact of UIC cheques and just being able to exist.

The Chair: If you could send that brief along to the clerk, I am sure he would distribute it to the members of the committee. I would like to thank you for coming today and giving us this brief. The construction of roads is a very complex, complicated and expensive topic, so it is nice to have some input on this. Thank you very much.

EXECUTIVE FURNITURE GROUP

The Chair: Our next presentation is the Executive Furniture Group, Mark Miller, president. If you could begin, please.

Mr Miller: I would like to thank you for this opportunity to give a presentation to you on a topic that has been of some great concern for me and my business for the last two to three years.

Instead of reading my brief verbatim, I wish to summarize it and expound on some major points. I wish to describe the nature of my business, furniture rental, describe a particular problem with the provincial sales tax as it is related to my business and recommend certain solutions which I hope in turn will be suggested for review by the honourable Treasurer of Ontario.

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I am the president of three furniture rental companies, two in Toronto and one in Ottawa, and we have been in business for well over 40 years. In case you may not know, a furniture rental company rents furniture for residential use and also to companies, but I am here before you to really speak to you about the residential side of my business. My company rents to individuals who wish to acquire furniture for their living room, bedroom or dining room. I also supply homemaker packages which include utensils for the kitchen. I do carpeting, I do vertical blinds, I even do maid service. I do everything.

In the past it has been very popular because little credit is required to do so; second, it is very flexible for individuals to do so; and it eases personal financial pressures of money tied up in other things. It is helping quite a lot of people these days, especially through the recession.

I also rent to middle- and upper-middle-income people. The gamut would include newly arrived immigrants, students, victims of home disasters, separated or divorced people, relocated employees, including diplomats, and I do have quite a few politicians in the city.

Furniture rentals have always been subject to provincial sales tax, and as a businessman opening in Ontario I have always collected provincial sales tax and gladly considered it my duty to do so. However, over the last 8 to 10 years, a new service industry, which I do have respect for, has gained predominance in the housing rental market, especially in the larger urban centres. This can be described as the furnished suite or apartment hotel or furnished condominium, in other words, units that rent furniture for the living room, the dining room, the bedroom, that have kitchen utensils, that have maid service and supply everything else, but with one added feature, a shell to put that furniture in. They rent exactly as we do, but they are not subject to provincial sales tax. Often this industry achieves a substantially greater amount of rent because they are furnished suites.

Five minutes from here, on Bay Street, there is a building which, when the building was first created, I rented furniture to in a number of the units. Then the units were gradually converted into furnished suites. Right now, a non-furnished suite in this building you can rent for, say, $1,200 a month for a one-bedroom apartment. But now, with the furniture in it, it rents for $2,500 a month. They are not subject to provincial sales tax. This exists in an area -- and I am only quoting as of April -- where there is a 0.5% vacancy rate in Metro Toronto and it is lower in the city of Toronto.

Therefore, as a business renting furniture and paying provincial sales tax, I feel discriminated against as a business offering the same service. Furnished suites are converting vacant units and transforming them into a business on which provincial sales tax collection is not required, provincial sales tax without the government knowing it has taken on a regressive nature. I say this because the provincial sales tax seems to be encouraging furnished suites by not putting on the provincial sales tax, and is encouraging apartments or condominiums away from the marketplace where the lower- or middle-income people cannot afford to move into these units.

I have two solutions, and I have a feeling I know which one would be preferred if it was taken. The first one is to really make our business equal to their business. When I purchase my furniture from the manufacturers and I pay the GST, I would like to be allowed to pay the provincial sales tax also at that time. I will pay the provincial sales tax so that my customers will not have to pay the provincial sales tax when they rent furniture. Or make it mandatory that landlords, condominium owners or management companies that are renting furnished suites collect from their tenants or from their clients a provincial sales tax which makes up the portion of the furnished suite. Or I should say, they could calculate just how much they are overcharging on the suite for the furniture and collect the provincial sales tax on that portion. That too would make their industry equal with mine. They are in the furniture rental business; I am in the furniture rental business. I am collecting provincial sales tax; they are not.

I feel quite emotional about this only because I know the industry very well, I know the people who run it and they are very nice people. The thing is, I know that when they purchase their furniture, which may be one of the questions you may raise, they often get their furniture from the manufacturer too, but they do pay the provincial sales tax at that point. I just want to have their industry recognized. It is such a new industry here in Ontario that really statistics are very difficult to find out. CMHC just has not done anything to really focus on the furnished suite market. I believe that with further study, this probably will become quite an issue.

In conclusion, my plea is for equality. Let us be equal. We are doing the same service and it should be considered equal under the provincial sales tax.

Mr B. Ward: I would like to thank you for coming before us and presenting your concerns from your point of view in your particular service sector. I think part of our committee's mandate is to provide opportunities for individuals and organizations such as yourself and we appreciate your taking the time to come forth.

One avenue for you to take -- and you have expressed your concerns before us in a very articulate manner -- would you consider perhaps preparing a brief for the Fair Tax Commission so it could evaluate your concerns as well?

Mr B. Ward: You can take that under advisement.

Mr Miller: Absolutely.

Mr Hansen: What about apartments that have fridges and stoves? Are you going to call those furnishings or would you call them appliances? There are a lot of apartment buildings here in Toronto and all of Ontario. Are you including that in the 8%?

Mr Miller: Let me put it this way. Often clients of mine need to have stoves, refrigerators, dishwashers and microwave ovens and I collect provincial sales tax for that. Yes, I would include that.

Mr Hansen: I just wanted to get clarification there, because this would affect just about everybody in Ontario.

Mr Miller: Yes, it would. Or exempt me from charging.

Mr Hansen: So the landlord that has two apartments with a fridge and stove would be required to remit to the government for that fridge and stove even though he only has maybe two units like that.

Mr Miller: Yes. Again, I feel, for the appliances themselves, that would make up a very minimal part of it. If it was suggested that be exempt from taxation, certainly that would not bother me, because that is very minimal in comparison to what the complete furnished service offers.

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Mr Hansen: I think the other thing too is that with a landlord possibly with a fridge and stove, let's say the law came in on 1 May, does he take the valuation of that fridge as being worth $100 and the stove is $100 and you charge 8% on that? These are just some questions referred to in the brief and it is something new to me.

Mr Miller: Absolutely. When you talk about appliances, though, because that is not really my business --

Mr Hansen: It is all part of it.

Mr Miller: -- and that is a completely different lobby. I was making a comparison of just one apartment before and when I said unfurnished. it did include a refrigerator and a stove. But adding the furniture and the extra services on, it increased by well over 100% in value on a rental basis and still no provincial sales tax was collected on that. That furniture will continue to be rented for well over five, six, seven years before it is renovated.

The Chair: Are there any other questions from the committee? Seeing none, I would like to thank you for your brief and for sending it in early enough for us to have a chance to read it.

CO-OPERATIVE HOUSING ASSOCIATION OF ONTARIO

The Chair: Our next presentation is the Co-operative Housing Association of Ontario. Dale Reagan and Penny Bethke, if you could begin with your presentation, please.

Ms Bethke: Certainly. We would like to thank the committee for offering us another opportunity to make a presentation to you this year. My name is Penny Bethke. I am the executive director of the Labour Council Development Foundation here in Toronto. I am also the president of the Co-operative Housing Association of Ontario. Dale Reagan is executive director of the Co-operative Housing Association of Ontario.

The Co-operative Housing Association of Ontario, which we refer to in short form as CHAO, represents the co-operative movement at the provincial level in Ontario. Our organization is made up of members of the Co-operative Housing Association of Ontario which include currently the 12 resource groups that develop non-profit housing co-operatives across the province, the seven federations of existing housing co-operatives and a staff association largely based here in Toronto at the moment, and there are other emerging federations and staff associations across the province that we represent.

We currently represent approximately 25,000 households of co-operative housing in the province, which are scattered among 400 housing co-operatives across the province to date. There are several areas that I guess we would like to highlight in our presentation. I am going to spend my time talking about our first major recommendation on non-profit housing supply and Dale will talk about the other recommendations that we would like to make to the committee.

In our brief, our first point under the issue of non-profit housing supply is that beginning in the 1991-92 fiscal year the government should include funds in the provincial budget for a non-profit housing program to follow up on the successful but now exhausted Homes Now program.

We know that the NDP government has indicated its intention of initiating a large-scale non-profit housing program in 1992, and currently is undertaking an affordable housing supply strategy planning process within the Ministry of Housing until 1992. But as some people would say, until the real thing comes along, we need a strong initiative in the coming fiscal year for a variety of reasons.

I will speak of something that remains very close to my heart. Given that the Homes Now program units have largely been allocated to projects across the province and that all our resource groups have to look forward to in the coming year is an increasingly diminishing federal support for the development of co-op housing, whether it is at the national level or through their cost-sharing agreements with the provincial government, in order to have a supply framework, an infrastructure that continues to exist across the province in regions like London and Sudbury and Ottawa and Windsor, we need to have additional initiatives coming from the provincial government to get us through to the point in time when a new provincial housing program is developed in the course of the next year and in effect implemented in 1992.

Also, given my own connection with the labour movement, I am particularly sensitive to the fact that we are experiencing a 60% to 70% unemployment rate in the construction trades right now and that housing traditionally, as an economic stimulus, can provide roughly 2.2 jobs created for every unit of housing built.

So it is particularly important, during the recessionary time, that we use a well-known, tried-and-true method that not only deals with the issue of job creation but deals with an incredible need for affordable housing in this province. The economic stimulation that can be provided has to be paired with the fact that in a time of recession, with a softening land market, particularly areas such as Toronto, we know that this will be a time where we can conceivably buy land more cheaply, build housing more cheaply, and if ever there was a time to invest more provincial money in the housing market, that this was it. We feel that this is the time, in the coming year, where the province stands to get more bang for its buck in terms of delivering housing units and creating jobs. Certainly this is a major reason for us to recommend that a special initiative is required for the coming fiscal year.

As I have indicated, we would hope that this initiative would be part of what would be a continuing non-profit supply program, that the government would choose the non-profit and co-operative sectors as a centrepiece of its initiatives in terms of providing affordable housing for Ontarians in the coming years.

Certainly the Ministry of Treasury and Economics has apparently provided projections that by the year 2000 there will be approximately 450,000 people requiring rental housing in Ontario. That would mean, in order to meet that need alone, just the sheer growth in population, we would need to develop an additional 18,000 rental units a year. That does not address the need that the continuing expansion of the public housing waiting list also has, that there has been a 60% growth in the last three to four years in the families on public housing waiting lists. The non-profit and co-operative tenure options provide a method for dealing with the full spectrum of need for those who cannot afford home ownership in the low and moderate income bands.

One of the ironic things, I guess the co-operative housing sector in particular, has not always seen itself as a major player in the market, but we are responsible for a large portion of the housing starts in the province now because there is effectively no rental housing market here, unless you consider condominiums that have been built and cannot be sold and are rented out because they just cannot be dealt with in any other way and would stand vacant otherwise. Non-profit housing has been one of the most significant providers of rental housing in the last few years.

I think what is particularly important as well for us as sponsors of co-operatives across the province is that we offer a choice in tenure for people in non-profit affordable housing initiatives. For some people. the non-profit landlord-tenant model that the municipal non-profits and the private non-profits provide would be their choice. We know, from the kind of demand that we have to attend information meetings for new housing co-operatives under development and the phone calls our housing co-operatives and our resource groups and our federations get, that there is a high demand for co-op housing as an alternative in the non-profit housing tenure form.

Last, one of the other initiatives that the co-operative housing association has been involved with in the last couple of years has been the conversion of existing rental stock. We see this as an important initiative for a variety of reasons. Again, part and parcel of our principles has been the notion that people should have some control in the decision-making about their housing. Tenants have a right to this as well. Allowing tenants to purchase their building from their landlords, do necessary renovations and manage the buildings themselves gives an opportunity for us to provide those tenants with the security of tenure that they have not known in the private rental sector and, second, to address the needs of our aging housing stock for some kind of rehabilitation and renovation, at the very least to try to address energy conservation issues.

In broad strokes, those are the reasons why we feel there has to be an initiative in the coming fiscal year in particular in the non-profit and co-operative housing area. Dale will talk about our other recommendations.

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Mr Reagan: In order to make sure that we have time for questions, I am going to only briefly highlight the additional areas where we have recommendations. I will touch in particular on housing on government lands and provide a little bit of background there. But I will only highlight without further comment the recommendations in the other areas, so we will simply leave it to any questions you may have for further background there.

Starting with housing on government land, just as a little bit of background, I think all members of this committee will remember that in 1987 the provincial government announced a Housing First policy under which any surplus provincial government land was to be made available for housing development if the land was suitable for housing development, and if it was not suitable for housing development, the funds generated through its sale should be targeted to a housing development fund which would be used for further housing initiatives.

Of course, this announcement was greeted very enthusiastically by ourselves and other housing advocates as providing a major opportunity for the development of affordable housing across the province. However, that enthusiasm soon began to diminish when the promise of this initiative failed to be realized. There are a variety of reasons for that, including a simple inability among the ministries concerned, especially Housing and Government Services, to actually bring the land on stream as quickly as was needed. We have so far to date seen very little of that government land actually made available.

We were also concerned when we heard the details that the policy actually had a de facto requirement that only 35% of the housing on provincial land be made available as affordable housing, and by that was meant the housing that is affordable to people up to the 60th percentile. The effect of this was that 65% of the homes created on government land could in fact be made available to people in the highest 40% of income within the population. So there was a major concern about that. Then we found in addition that the housing development fund which was to take the resources generated through sale of lands and make them available for further housing initiatives was never realized. It is simply a notional fund and those funds have never contributed to further housing development.

So our recommendations are that all surplus government land for housing should be used exclusively for non-profit housing, except on larger sites where we recognize that planning considerations will require some variation on that. But in that instance, all of the housing developed should be affordable, albeit with a component of ownership housing on it. However, any ownership housing developed on government land will need initial and long-term safeguards to guarantee its continued affordability, so it is not only available to meet the needs of the initial owner but continues to be available in the long term.

If this government policy is to have any practical effect, we feel that it is necessary that all provincial ministries and agencies should be instructed to compile detailed inventory of their land holdings and be directed to work with the Ministry of Government Services and the Ministry of Housing in a co-ordinated way to develop an action plan to bring those lands into housing use.

Finally, we are recommending that the government follow through with the initial intention of creating a dedicated housing development fund when land is sold for other purposes, that the funds go into this housing development fund which would be used to generate additional non-profit housing opportunities.

Those are our recommendations in the area of government land.

We have three other areas of recommendation, which I will simply refer you to. The first has to do with the land transfer tax, and our recommendation is that all non-profit housing projects should simply be exempted from the provincial land transfer tax. The current situation is that the government is charging the tax on the one hand and then subsidizing it on the other. The problem is they are subsidizing it with borrowed money, so it is actually costing the government more than it would simply to forgo the tax on non-profit housing. It would be a simple initiative and it would create significant savings.

In the area of how we target government housing resources, we feel that two earlier initiatives, the Ontario home ownership savings plan and the low-rise rehabilitation plan, were both ill conceived and have failed to live up to their original purposes and we do not feel they have a place within the current government housing strategy.

Finally, we feel that, even though it is not currently the issue that is most on people's minds in a soft real estate market, nevertheless it is timely to consider reintroduction of a speculation tax that would be directed at speculation in non-owner-occupied housing in Ontario. There is some background provided on each of those recommendations in our brief.

Mr B. Ward: I would like to thank the delegation for presenting such a progressive and forward-looking document. I just have two quick questions and then I will allow an opportunity for other questions. In today's economic climate -- we are in a deep recession and real estate prices are in fact falling in Toronto as well as other areas -- do you feel that a speculation tax is still relevant and that this committee should be recommending to the Treasury to explore the concept of a speculation tax in today's economic environment?

Ms Bethke: I think it is from the point of view that this is the second recession I will have worked through as a non-profit housing developer. We know what happened after the last recession. There was a great boom in real estate prices. So I would not immediately argue that introducing a speculation tax is inappropriate during a recession but is appropriate during a boom period.

In effect, having a speculation tax on non-owner-occupied housing or on land, if it is in fact the government's intention to provide the kind of stimulus in housing by developing 20,000 non-profit housing units a year, that kind of entry into the land market will fuel land prices. So whatever you can do prior to that significant entry in the market to hold the line on the softening land prices that we have now experienced would be of benefit.

One of the unfortunate timings of the Homes Now program was that it was introduced approximately a year before the peak in the land market. One of the difficulties that many co-operative organizations had when the government announced the program was in trying to go out and buy land once the government had made that announcement, because people thought: "It's the government. The pocket is always deep; therefore, whatever the market will bear is what we can charge these people."

Believe me, we are in a very different situation today with the daily calls from developers who have condominium projects that were ready to go and no market for them. Suddenly they have discovered the world of non-profit housing, which they discovered seven or eight years ago, and are back to talk to us again.

So I think what we would like to see is a way of dampening speculation in land, which will always remain one of the three fundamental components of the cost of developing non-profit housing. In order to reduce the initial capital cost and the long-term subsidy cost to financing those non-profit housing projects, we think you can do something about dampening speculation on land.

Mr B. Ward: Just to follow up on the two programs you recommend be eliminated, the home ownership and the low-rise, which you touch on at the back of your brief, is there anything else you would like to expand on about your feelings on those two programs? Are they simply not working or inadequate and the moneys could be spent better elsewhere?

Mr Reagan: Yes. We have not put these recommendations at the forefront of our brief. They are not very much on our minds. I do not have the figures on the takeup of the Ontario home ownership savings plan, but it has been very small compared to what was originally promised. We do not figure it is going to have a major impact. I guess our overall position is that government expenditures should be directed towards non-profit housing or should be directed to non-profit initiatives rather than providing assistance to housing which takes its place in the market and has no control on its ultimate cost.

This program has so many built-in deficiencies which account for the lack of take up. It is not a practical mechanism for actually accumulating a down payment on the kind of housing available, especially in the Metro Toronto market. We feel that it is being used largely not as a way to generate savings to purchase a home, but as a tax shelter and as a way to buy into the reduced land transfer tax that is available as part of the program. For a very nominal contribution you become eligible for the reduced land transfer tax, and it is a disproportionate kind of benefit. That the program was ill designed is our main concern, and so we feel it can usefully be eliminated.

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The low-rise rehab program brings us into the much larger area of discussion of how the private sector rental housing industry needs to deal with the aging housing stock. I am sure, as part of the rent control review process, those kinds of issues are going to be examined in depth, but the solution is not to have an open-ended kind of program where there are no tests as to whether the landlord has made an honest effort to maintain the housing over time and it is simply available as a grant if you want it. There have to be some kind of controls built into those programs to make sure that they are going to serve the intended purposes. Those controls simply do not exist in that program.

Mr B. Ward: And on that basis you recommend that the program be ended?

Mr Reagan: That is right.

Mr Phillips: Thank you for your presentation. I would like to get a dimension on the moneys that we should be thinking about. I think in An Agenda for People it was $190 million in year 1 and $380 million in year 2. Is that the kind of order of magnitude that we should be looking at in terms of including in our budget for your recommendation?

Mr Reagan: The figures that are associated with the Homes Now program, the 30,000-unit initiatives, when the operating subsidies involved under that program are mature, over a three- to five-year period in the case of Homes Now it will be something over $300 million a year, so for 20,000 units a year at maturity, using the Homes Now financing vehicle, we would be looking at $200,000 to $250,000 mature subsidies if the financing that was used for Homes Now is available.

In fact, we are very conscious of the very significant costs that are involved in the supply-side subsidies involved in constructing non-profit and co-operative housing and we are currently working with the provincial Minister of Housing to examine an index-linked mortgage instrument which we developed for the federal co-operative housing program, which has just completed a five-year experimental phase.

Canada Mortgage and Housing has evaluated the instrument and found it to be very successful in reducing the long-term costs of providing funding for housing, so we are recommending that it be introduced provincially. I do not have a direct comparison against the Homes Now financing, but as compared to conventional financing, Canada Mortgage and Housing found that it reduced, in net present dollar terms, the cost 20% over the life of the mortgage.

If the government were to follow through with that kind of initiative, then the annual costs would be reduced, but that is still under discussion. I would say $200 million to $250 million in that region, for operating subsidies using current program design.

Mr Phillips: I am just trying to get an idea of when we reach your objectives and we look at the budget. You think it would be an additional $200 million to $250 million. Is that the way we should think about it?

Mr Reagan: Using the ministry's cost figures for Homes Now.

Ms Bethke: Yes, and in particular and I am mindful that we are talking about this current 1991-92 fiscal year, if in fact there is a provincial index-linked mortgage instrument that becomes available to use with the future provincial program, then a recalculation of what the exposure in terms of long-term subsidy dollars would be.

We would also have to take account of the extent of our zero-dollar land leases on provincial government lands, and that impact on reducing the costs. There are a variety of ways of having it impact on reducing the costs on financing this program. Certainly, the province can do a great deal about land and about the cost of the money to finance projects.

Mr Phillips: But at this stage we should be thinking about $200 million or something like that.

Mrs Sullivan: The area that I represent has had experience over the past five years in a really enormous change of community interest in providing non-profit housing and an enormous surge in co-operative housing involvement. As well, we have gone through a very trying experience in bringing government land on stream and providing an affordability component on that land in that area that happened to be located in Glen Abbey which, as you understand, was planned development, but there were certain attitudes that existed there. That was a relatively small site in terms of government land that is available. How do you define a large site? Are you talking about a 200-acre site?

Ms Bethke: Yes, we would call that large. Normally a 10-acre site, I believe, in our policy is where we would say this constitutes a large-scale site. For example, there are half a dozen sites in Metro Toronto that have been identified as sites that the Ministry of Government Services is going to release. My own organization is doing a development on the former site of the chief election office on Lombard Street, which is a half-acre site. That is the smallest of the sites.

I am not sure exactly which is the largest of the sites, but I suspect it would be the Keele-Falstaff site, the Ministry of Transportation site, near Keele and Highway 401, and that is roughly 10 acres. Obviously, not all communities would see the development of neighbourhoods, for example, like the St Lawrence, coming into their neighbourhood, that scale of non-profit housing development as being appropriate, and even in the St Lawrence there has been mixed development. There is condominium development there as well as non-profit housing development. On that large-scale a site we are not looking to create what people will rationally or irrationally perceive as ghettos. We are trying to create natural communities, and natural communities have an income mix and a wide range of income mix, not in a very narrow income band either for the very well-to-do or for the very poor.

Mrs Sullivan: It is interesting representing a riding from outside of Metro Toronto, as I think most of the people in this room do, to see the different concepts of what a large parcel of government land is in comparison with what is considered a large parcel in downtown Toronto. Land holdings in my area are in the 100-acre to 200-acre size.

One of the things that struck me this morning was the Ontario Home Builders' Association's estimate of housing starts. Their estimate was that realistically perhaps 10,000 to 15,000 units of non-profit or social housing would come on stream in the current fiscal year. The government has announced its intention to allocate 20,000 non-profit housing units. Those of us who were involved in really encouraging and working within our communities to get the Homes Now program moving ahead saw that in fact what we had anticipated occurring and hoped would occur over a very short period of time is taking a lot longer period. Are we building too many expectations in the community on the government side by saying, "Yes, we're going to have 20,000"? When do you see that delivered?

Ms Bethke: Part of this has to do with having a supply framework that can deliver those units, and 30,000 units projected to be delivered over three years would have been 10,000 units a year. I suspect that in the municipal non-profit and the co-operative sectors, we were better able to move on that. We did not have the advantage that the municipal non-profits have of land banking, for example, so I know one of the major hindrances for the co-operative movement in responding to the initial proposal call was that we did not always have land to attach to our non-profit sponsors, that we had to go out in a very hot market and try to acquire it.

As a consequence, the co-operatives did not get as large a share of the unit allocations under the Homes Now as we thought we could have reasonably expected. The minister at the time, Chaviva Ho_ek, said to us that the reason for this was that private non-profit groups, like church groups, came forward and surprisingly had land available. My own suspicion is that there may have been a lot of well-meaning but inexperienced sponsors who wanted to do something and, as neophytes in the housing market, had no idea how complex a process this was going to be.

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I am not sure that even with the most co-operative municipal government -- I use the city of Toronto as an example. We have historically seen it being favourable to the development of non-profit and co-operative housing, but the planning processes in the city of Toronto are longer than anywhere else. With two- or three-year development time frames to get a shovel in the ground, that is a lot of energy for volunteers to track a process. If there is not an experienced group of people, such as I know exists in the co-operative housing resource groups across the province, to assist groups in getting through that process, it does take a long time to get through. But it is fundamentally a very complicated process and the mere announcement of the program during a boom period did not give us fast-track municipal approval and did not immediately give us experienced people who could manage their non-profit projects through the process.

Mrs Sullivan: You have not particularly put any emphasis on streamlining the process, but it seems to me that the cry has been not only for the money and commitment but also a streamlined process. I assume you want to underline that again.

Ms Bethke: Yes. We made a presentation to the Ministry of Housing several years ago on how at least the administration of the Ministry of Housing could be streamlined. At the time, we were remarkably smug, because basically the ministry turned around and announced what we had suggested it do.

I do not think there is a resource group across the province that has see any evidence of streamlining in the processes of the ministry. It has been the most galling thing for me, to have spent the energy we did in saying, "This is how you could make things work easier," but I guess it is the way of bureaucracy. They were not prepared to take more of a hands-off attitude to let things move along a little more quickly. I do not know what the province can do about streamlining the municipal approvals process; that is Ministry of Municipal Affairs turf. I am assuming that carrot-and-stick methods need to be used to facilitate the achievement of the provincial objectives in the housing policy statement.

Mrs Sullivan: You talked about maintaining affordability over the longer period on ownership of housing on government land. Has your organization looked at land trusts such as are used in some of the American states and in Britain?

Ms Bethke: Yes. It happens that I am the secretary of the board of directors of the Inner City Land Trust in Metro Toronto. There are currently two co-op housing land trusts, one based in Toronto, one based in Ottawa. We are currently having a major debate with the Ministry of Housing around certain fundamental issues. They are not sure the co-operative housing movement can be trusted to have a land trust, in effect to create out of our land a co-operative of co-operatives so that our housing remains affordable and non-profit after the mortgages are paid off down the road.

There are many legal impediments in the incorporations of co-operatives currently and in the agreements with government, but when the agreements with government are terminated we want to see a way of maintaining that asset in a non-profit co-operative sector. The issue of land trusts has been discussed by our movement nationally for the last eight to 10 years. Finally, two land trusts have been created in Ontario and our national organization is continuing to try to develop a policy about what the ground rules for land trusts across the country would be.

At the moment they seem to be primarily a vehicle related to new housing development. When co-operatives already own their land, like any other Canadian they do not know why it should be put into a land trust. The idea of owning the land is good. We have not yet entirely sold the existing housing sector on deeding their lands to a land trust, but certainly some major work has been done so that a little over 2,000 units currently of co-op housing in the Metro Toronto region are in a land trust.

Mr Christopherson: If you have already acknowledged this during your presentation, I apologize. I was trying to read it at the same time as listening; I am partially successful at that. Thank you very much for coming today. Given the time constraints we are under, I will move quickly to a question.

Under II, item 2, "Ownership housing developed on government lands must initially be affordable (as defined in the Planning Act policy statement) and measures should be taken to safeguard the long-term affordability of such housing." What type of measures did you see? Most things I have heard about so far have been a time period. The criticism of just a time period -- three, five years -- has been that at the end of that time period you still have the original problem and over the long term will negate the benefits of the original initiative. Did you have anything in mind? Have you thought of any mechanisms that should be looked at?

Mr Reagan: Quite frankly, we have not. We have been making exactly those kinds of points to government since the initiative around government land was introduced. There was no target for non-profit housing set on government land, simply the notion that it would be 35% affordable, all of which could be ownership housing with no built-in mechanism for guaranteeing its long-term affordability.

We are not aware of any sure-fire way of controlling speculation on ownership housing over the long term. We know that various kinds of shared-equity approaches have been introduced so that some of the gain that comes upon resale is recaptured and perhaps directed back into further development. That kind of approach might merit exploration, where if there is an increase some of it is used for social purposes.

That is exactly our concern and we are not sure there is a ready answer.

Mr Christopherson: Did you give any thought to the idea of the leasing of the land, a 99-year lease, where in effect the province still maintains control over the land and therefore can put certain attachments to it in terms of what can be done? I did not throw that out initially to see if you came back with it. That was probably the closest thing to an idea that might work that I have heard, and I wonder what your thoughts might be on that.

Mr Reagan: Leasing was our preferred model. We prefer leasing to property sector land trusts in the case of co-ops and land trusts in the case of non-profit. We were told that leasing of ownership housing was not on the table, that it would not be achieving the purposes the government had in mind in creating an ownership housing opportunity for people. I think there is some merit there, but at least in our discussions with the previous government -- we have not had any discussions with the current government on this -- we were told it would have to be a pure ownership model.

Mrs Sullivan: Where was that resistance from -- MGS or Housing?

Mr Reagan: We have dealt with Housing on this. As you know, there is a deputy minister responsible for government lands who has been dealing with this area, and most of our dealings have been with him.

Mr Hansen: My question is sort of an answer: that the Ontario home ownership savings plan should be eliminated. It has only been in for two years. After talking to the Ontario Home Builders' Association, taking a look at people who are saving money here in Ontario to get into the private market -- I know we all have interest groups. Your interest would see that this be discontinued and go into co-op housing. I am not against co-op housing. I started back in the late 1970s involved right at the very beginning in the Niagara area. It is one of the largest items down there and they want to get more into the rural areas also.

The question comes that we take this money out of the private sector and give it back as RHOSPs or, as it happened once, that you could go out and buy furnishings, and then wind up folding the plan. Do you have any thoughts on this? You said to eliminate it.

Ms Bethke: Our sense is that whenever the government -- and this includes the federal government -- has created home ownership schemes, if the scheme allows $5,000, $10,000, $20,000, what you have effectively done is add $5,000, $10,000, $20,000 to the price of the home. That, for us, is the fundamental difficulty. We do not believe you are reducing the cost of the housing to the first-time home buyer by creating these schemes. All you are doing is raising the ceiling of the price those people are going to have to pay. I think that is part of our very simple sentiments in the matter.

To reiterate our concern, we are very cognizant of the limited financial resources the government has. If you want to invest in housing that will remain permanently affordable, we do not know how you do that is the private ownership market where there is an opportunity for a tax-free capital gain at the end of the day.

Fundamentally, the initiatives for first-time home buyers have always been good for the initial group that has been able to buy those homes. They have won the lottery.

For everybody else, the prices of those homes have risen to market. The people who were involved in the assisted home ownership program schemes 10 to 15 years ago were able to hang on when interest rates went through the roof and their loans became due after five years when their mortgage rolled over. They are the ones who profited from that. But those homes have not remained entry-level homes after the first-time home buyer had gotten them.

We have a fundamental intellectual problem in figuring out how to solve that, because that is the way the market works. It could be that a 99-year land lease, if you could find a mortgage lender who would lend people money on that basis to finance the cost of the home -- that was our understanding at some level, that leasing land and condominium ownership did not mix, that you had to have freehold title if you were going to have some kind of condominium ownership.

I think those two things are just fundamental in our attitude. I certainly recognize the desire of people to own their own home. We would like them to think about co-op housing as a way of owning their own home without the opportunity for speculative gain on an investment.

The Chair: I would like to thank you for coming today and giving us this brief on the co-operative movement. If there are any further questions, we could perhaps talk to you a little later on?

Ms Bethke: Absolutely.

The Chair: This committee is now adjourned until 2 o'clock this afternoon.

The committee recessed at 1212.

AFTERNOON SITTING

The committee resumed at 1406 in room 228.

AUTOMOTIVE PARTS MANUFACTURERS' ASSOCIATION

The Chair: I am going to include myself in this and see a quorum here. We will begin with the Automotive Parts Manufacturers' Association. Steve Van Houten is president and Jim Carter is the director of policy development.

Mr Van Houten: Thank you very much for the opportunity to appear before the committee and to present to you information about the state of the automotive industry in Canada as we see it, and the ways in which that bears upon or should bear upon the financial, economic and legislative planning of the Ontario government.

I have made arrangements to have a slide projector here and a screen and we are fully equipped. With your indulgence, Mr Chairman, I will use the slides as I go through the discussion. Of course I would be pleased to entertain questions or interruptions throughout or after, as you or committee members wish.

First of all, just to size the industry for you, to profile the industry a little bit, the automotive industry in Canada is one of the very largest industries in this nation. The industry total. the vehicle sector and the parts sector together -- these are 1989 vintage figures -- produced approximately $43 billion worth of goods, vehicles and parts. Most of that is vehicles and about $15 billion worth of parts. Although these are national totals, approximately 90% of the production in both the parts sector and the vehicle sector in Canada is in the province of Ontario. So we are a $12-billion or $13-billion industry in this province.

You should also know that 80% or better of that production total is exported. So we are a major generator of foreign exchange, foreign currency. Almost all of our exports are to the United States. There are from time to time exports to other countries as well.

The employment figures are interesting. Direct employment of 160,000 was shown for 1989 and again 90% of that would be in the province of Ontario. That is direct employment. The spinoff impacts in sectors that produce goods that we consume or provide services that we consume etc, would be about triple that figure. Again, 90% of it would be in Ontario.

You should know, however, that it is a measure or an indicator of the way in which events are moving very rapidly in our industry that those numbers are already substantially out of date. In the parts sector alone, we have lost approximately 10,000 jobs from that figure. We are no higher than 75,000 direct jobs currently.

Mr Kwinter: Are those permanent losses?

Mr Van Houten: Almost all of them are. There will be very few that will return. Some of course are the result of plant closures, bankruptcies, companies rationalizing or constricting their production and closing down plants in Canada and Ontario as part of that kind of program. Some are layoffs of parts of the companies' employment staff in the effort to improve productivity.

Basically the trend is downward in our employment. That 85,000 figure is clearly a peak that we are unlikely to reach again for, I would say, many years, not just several years. When the shake-out that is under way currently in the industry is completed, I would guess that instead of 75,000 jobs we will be somewhere around 50,000 jobs, hopefully generating the same level of production adjusted for inflation, etc, as we have now.

In fact, as one noted industry analyst in the United States at the University of Michigan puts it: "Think of it this way: If you employ two people in your business now to generate a certain level of production, you'd better figure out how you are going over the next handful of years to generate the same level of production with one person. But do not be deceived. Your choice isn't between two or one employees, your choice is between one or zero, because if you endeavour to remain at two you will be uncompetitive and you will go broke." That is certainly a reality in our business. There is no doubt of it.

This is really where the automotive industry is located in Ontario. There is a corridor 25 miles or so either side of Highway 401 from Windsor out past Oshawa, with another branch along the Queen Elizabeth Way down towards Niagara Falls in the Niagara area, where probably 90% of that 90% of the Canadian industry in Ontario is located.

This is very clearly the industrial heartland for Ontario. It is certainly the industrial heartland for the auto parts industry and there are a number of towns, cities, communities, counties, villages and townships in that area which depend to a very high degree on automotive parts production. There are not too many cities where vehicles are assembled in quantity, although where there are there are high concentrations of vehicle assembly employment, of course. There are many communities in Ontario where parts production is located in a substantial way.

If you look at what has been happening in the market, this too is out of date. Again, for calendar year 1989 the Canadian automotive market was about a million cars -- you see there 999,000 passenger cars -- and about half a million trucks. The truck market has peaked out and indeed softened a little bit and the car market in fact in calendar year 1990 is down about 10% from those figures. That is a very substantial drop, very substantial indeed. I would suggest to you that it would be surprising indeed, despite what my colleagues from the vehicle sector may say to you later this afternoon, I will be mightily surprised if we return to 1989 levels of sales in 1991 or if we have any increase at all in sales in 1991 compared to 1990. We are after all in a recession.

This is a very complicated chart, but I can simplify it for you. One of the major problems we have in our industry right now is overcapacity. It is a term that people have been talking about for a number of years in the industry. It was always referred to as a threat. It is no longer a threat: it is a reality. There are about two million units of assembly capacity in North America which are not needed to satisfy current demand for motor vehicles. That is a lot of jobs and of course a lot of jobs in the parts sector that supports those two million assembly jobs that just are not necessary.

A big part of that phenomenon, the overcapacity problem, has been the advent of the transplants through the 1980s. The left-hand side of the chart summarizes the transplants in the United States. The right-hand side of the chart summarizes the transplants in Canada. If you just look at the column farthest to the right is each half of the chart, that tells you quite a lot, the column that is titled "Jobs per Hour." That is auto industry lingo; it means units of production per hour. It is not a reference to a job that a person has: it refers to the car or the truck.

Looking at the first one, 60 jobs per hour, Nissan's plant in Tennessee in the United States. That means one car or truck per minute comes out the end of the assembly plant. It does not mean it takes a minute to make a car or truck -- it takes hours -- but they are a minute apart on the assembly line.

The interesting point is this, and from our point of view in the parts industry a very significant point: In the Big Three plants in the United States a typical production rate would be about 60 vehicles per hour, 60 jobs an hour, or a quarter of a million vehicles a year on straight time, steady state production. A Big Three plant in Canada, the same thing, about 60 jobs an hour, sometimes more than that. It depends on the type of vehicle, how it is equipped etc. Out in Oshawa, General Motors is building trucks at 60 per hour. They have the capacity to build cars in each of their two car plants in Oshawa at over 70 jobs per hour. Those are full-sized plants in Canada.

The transplants is the United States are also full-sized plants for the most part. You see job per hour figures in and around 60 or pretty close to it, in some cases exceeding it. If you look at the transplants in Canada, a very different story is told. These are one-half, one-third or one-quarter size plants. They are not economic plants and frankly we have a major problem in trying to sell to them. In fact, we have a major problem indeed trying to sell to the transplants in the United States, because they tend to want to source very locally first before they entertain bids from foreign suppliers, ie, Canadian suppliers.

Thinking about the Canadian transplants, think of it this way. You are a Canadian supplier. You want to bid on a part for, let's say, the first on the list, Toyota, Cambridge. You have to make investments. maybe add a new bay on the plant for the new widget you are going to make for them, reorganize your production system, tool up, buy some new equipment, train your people etc, all for 60,000 widgets per year. You are competing against the domestic supplier of Toyota in Japan who is probably making a couple of million of those widgets a year and he can make the 60,000 during lunch-hour on Friday. You are probably not going to be competitive pricewise, and very often we are not competitive pricewise.

There is an interesting phenomenon that is related to this one. The transplant assemblers have in many cases brought their domestic suppliers from Japan, primarily, to North America to accompany them and set up shop around their assembly facilities. About 400 parts companies from Japan have set up shop in the United States and only 19 in Canada.

If you look at the grey bars there, you can see there is 1.7 million units of assembly capacity among the transplants in the United States and a little less than half a million in Canada, but that still means we have significantly more than our fair share of 10% of the transplant assembly investment in business. However, it is divided up into too many pieces that are much too small and are not economic. We do not have 10% of the parts plants. We have 5% of the number of parts plants, but in fact those 19 plants are on average a whole lot smaller than the average size of those 400 in the United States.

What it adds up to is that about 99% of the Japanese parts investment in production in North America has gone to the US; 1% has gone to Canada. Why? They know that those assembly plants are not economic customers and they are not going to ask their suppliers to come over and make non-economic investments in support of them.

It is a big problem for us, though.

Mr Kwinter: You have 400 parts manufacturers supplying 1.7 million.

Mr Van Houten: Right.

Mr Kwinter: On the other side, you have 19 supplying nearly half a million.

Mr Van Houten: Yes.

Mr Kwinter: Those 19 are not serving the same purpose as the 400?

Mr Van Houten: No. What happens is that when a transplant company is deciding what parts to source locally, there is kind of a natural order of things and you are a getting a little bit, from my point of view, into the content question, which of course I would like to discuss.

The first thing they are going to buy locally is glass, because if you ship it from Japan it will be broken by the time it gets here. The next thing you are going to buy is tires and seats because they are full of air and it costs a lot to freight them, so you are going to buy those locally.

After that, it starts to thin out really quickly. Even with the low volumes, glass, tires, seats and probably carpeting, and maybe the occasional doodad, you will buy locally. Once it gets past that, the economies of scale just are not there. Those 19 parts plants in Canada are all making either very low value added components or else very freight-intensive components.

With the 400 plants in the United States, you start to get into a little bit more serious value added type of production -- suspension parts, steering system parts, air-conditioning system parts and the like. They are qualitatively different as well as in sizing.

Here is another thing that is going on in the parts industry and it distinguishes us very much, I must emphasize, from the vehicle industry. The yellow line shows the consumer price index. This is in the United States, by the way, but the trends would be similar in Canada. The green line shows the retail price of new cars. Those two lines interweave one another. In other words, vehicle prices have been more or less tracking CPI over the past several years. The red line at the bottom shows parts prices. We are not making the same kinds of gains at all. We have suffered since 1982 -- that goes to 1988 so by 1990 -- more than a 15% real decline in prices compared to vehicle prices, and in fact now our prices are going down in absolute terms.

The quid pro quo of the long-term contract you get is that your price is going to go down every year in absolute terms. If you sell a part for $1 this year, you will get 97 cents for it next year and 94 cents the year after that. The vehicle company does not want to hear about your labour costs going up. They should not have gone up. They do not want to hear about your material costs going up. "That's your problem. Deal with it. Get more productive." That is the kind of pressure we are under.

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The latest innovation on this, by the way, is that effective January of this year, a few weeks ago, Ford has set up a system with its suppliers throughout North America whereby in addition to the price decline that is built into your long-term contract, there is a further provision -- unilaterally imposed I might add -- that for every dollar you invoice them, they will pay you 99 cents. Why? Because they think it is a good idea. You do not get a choice other than to give up the business entirely.

The Chair: That is free enterprise.

Mr Stockwell: That is exactly the question I was going to put to you. It is free enterprise. Obviously if you are not making money, somebody is going to go out of business, but somebody has to be supplying that part to them at that price and still making money, so what is the point?

Mr Van Houten: Sometimes they do it and still make money. Sometimes they do not. For example, I use a different example: At General Motors right now there is a provision in its labour contract in the United States with the UAW that has bearing upon some of this. Right now GM is reintegrating. Instead of out-sourcing, they are in sourcing. Why are they in-sourcing? Frankly, they are taking business away from Canadian independent suppliers and putting that business back into internal GM plants in the United States. Why? Two reasons: One is that those internal GM component plants in the US are underutilized in some cases. They have excess capacity so they want to fill it up. Sometimes that is an economic decision.

The major reason, though, has to do with what is called the jobs bank in the UAW contract in the United States. What it says was put into their collective agreement for the first time in 1987 -- maybe it was 1984; frankly, I forget which, but it is still there now. Basically it is a job security program which says that with regard to this issue the company and the union will get together, make a list of parts which are purchased from outside and consult with one another and agree on which parts should be taken away from outside suppliers and brought back in-house.

When they do that, they are in many cases actually increasing their cost. The reason they are doing it is because if they do not do it, they have to pay those UAW workers on the jobs bank anyway. Simplistically, it is like this: They make a part with $30-an-hour labour. We can do it for $15. Therefore they should out-source, right? Except that they have discovered that if they do that, in many cases they will have to pay the $30 to their internal worker in the United States anyway. So it becomes $45. They pay him the $30 to do nothing; they pay us the $15 to make the part. It is a short-sighted kind of solution and certainly a second-best solution, but they are doing it.

Mr Stockwell: That is an interesting thing you have told us. What that has to do with this, I am not sure. The question is, you are producing a product. They are buying that product. They are saying, "We're not going to pay you unless you build it for this." Somebody is supplying it to them for that price. Therefore, I assume somebody is making money.

Mr Van Houten: No. In some cases, yes. In cases where they in-source it, as I just told you, they will lose money in a lot of cases.

Mr Stockwell: So your 15% decline on billings, what has that got to do with in-sourcing? You are billing them X amount of money. You are losing 15% in the last so many years because your billings have in fact dropped.

Mr Van Houten: Correct.

Mr Stockwell: So your billings have dropped.

Mr Van Houten: Yes.

Mr Stockwell: You are still billing them, you have lost 15% and somebody is still making money.

Mr Van Houten: We are not making money. Our industry is about a break-even industry right now. The parts industry in other countries may be making some money. The Big Three in the United States, who are our customers and have contributed to our reduction in billings. if you will, may be making some money, but they are making a lot less than they were a few years ago. And they are taking some decisions which are not in their long-term economic interest. They are clearly not in our short- or long-term economic interest and that is why I raise it with you.

Mr Stockwell: Finally, then, if I assume that what you are saying is correct, in the next couple of years I should see a lot of those businesses such as yours going out of business.

Mr Van Houten: Yes.

Mr Stockwell: Because they are asking you to supply it too cheaply.

Mr Van Houten: Yes.

Mr Stockwell: Then when you go out of business they will be able to find that product elsewhere at the price they want to pay.

Mr Van Houten: At least in the short term.

This is another part of our problem, the exchange rate. As I said, we export 80% of what we make. When the dollar goes up, as it has done very substantially over the last three years, that has a very direct, immediate and negative impact on our profitability. What happens is that when you sell your part, which 80% of the time you do to your US customer, he pays you in US dollars. You bring the US dollars back to your bank in Canada. When you take them to your bank, your banker converts them to Canadian before he deposits them and guess what? Your revenue is not as high as it was before the Canadian dollar appreciated. Nevertheless, we incur our costs in Canadian, and they have been increasing apace.

We did a study about a year ago of the cost-competitiveness of our industry. This chart is taken from that study. What it indicates is that for a typical steel part stamper in Canada, if at a 75-cent Canadian dollar his gross margin was 20%, it is cut in half when the dollar moves to 85 cents or 86 cents, which of course is what it has done.

Canada traditionally was by far the number one foreign source of parts for the United States. This chart is in US billions because it is looking at the situation from the American point of view, our major customer's point of view. We have been shipping them, in US dollar terms, around or about $10 billion worth of parts every year for a lot of years.

In 1989 we lost our first-rank position to Japan. A lot of those Japanese parts are coming to the United States, of course, to go into the transplant vehicles assembled in quantity in the United States.

Mexico is also a growth area on the horizon, which in the next few years, a short number of years, frankly, is going to be a very substantial and important competitor for us. They are ramping up the scale of their industry considerably in Mexico, and they are also trying to increase the value added quotient, if you will, for their industry.

Historically, and still to some degree today, if you examine the industry in value added terms, this is what you see. The really high-tech stuff, the antilock braking systems, active suspension systems and the like, tend to be manufactured in Japan, the United States and Europe. Historically, and until now, Mexico has been chiefly a source of very labour-intensive parts. Their labour, after all, costs about $2 an hour in our industry, all in, including benefits.

Canada -- it overlaps with each, the up side and the down side -- tends to be somewhere in the middle. We have a high percentage and high quantity of stampers, casters, plastic moulders, etc.

Now, Mexico wants to move up. When they do and as they do, among the first people they bump into, primarily in the US market, will be Canadian suppliers. We have to move up too. The reason it is a pyramid is because it indicates that there is less room at the top. It is not easy to do.

Some people have the view that our industry is a rust bucket or a rust-built industry. Let me assure you that is not the case. Across the bottom is a list of many different types of computer-based technologies that are in use in our industry. The pink bars show the percentage usage of those technologies in our industry five years ago, the blue bars show the percentage usage a year ago, and as you can see, in every instance it has gone up very significantly.

Another way of expressing that is to examine our engineering expenditure as a per cent of our sales. In Canada, even compared to our competitors in the United States, through the latter part of the 1980s we increased our engineering expenditures quite significantly.

As we get into a more high-tech industry with more sophisticated technologies, we need the skills base to go with it. In 1985, a little less than two thirds of our industry was composed of unskilled workers and a little more than 10% skilled. By the mid-l990s, just a few years from now, it will be about equal blocks, equal components of unskilled, semiskilled and skilled. Only one third will be unskilled at that time, down by about half from where we are today.

Where do you get the people who have those skills? You sure cannot hire them. Here the bottom axis of the chart shows a variety of skilled trades and skilled occupations. The blue band shows the percentage of firms that cannot find people within at least a two-month period to fill roles in things like the mechanical trades, engineering trades, foundry workers, millwrights etc. Just looking at the first one, mechanical skilled trades, more than half of the people in our industry right now, our companies, take at least two months to find a skilled tradesman in that area and another 10%, 15% or 20% take at least two weeks to two months to find somebody with that type of skill.

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Mr Fletcher: What is your industry doing to get more skilled people into the workforce? What apprenticeship programs do you have?

Mr Van Houten: It is a big problem that is being addressed in a variety of ways. Until recently we were able in some cases to get people from overseas, from western or eastern Europe, to fill some of these jobs. You cannot really do that any more, at least not from western Europe, because our standard of living is not relatively a whole lot more attractive than theirs. They do not feel a great desire to come to the promised land of Canada any longer. So that is a problem. A solution that used to be available to us really is not any longer in a practical sense.

Training of our existing workforce is and has to be a very major piece of the solution for us. Our workforce, after all, in total terms is declining in size. On a net basis we are shedding people, not hiring people, and even in absolute terms we are not hiring a whole lot of people. So really it has to be training from within.

Mr Fletcher: I realize that.

Mr Van Houten: That is a major initiative for us.

Mr Fletcher: You have told me what the problem is again and my question was, what has your industry done to try to fix the problem?

Mr Van Houten: I believe I told you two things that we have done. One is to bring workers from overseas. That is a solution but it has gone away. Another solution is to train. That is something we are doing and trying to do more of. In fact, we are in discussion and negotiation with the Ministry of Skills Development, Ontario, and Canada Employment and Immigration with regard to new sectorally based training programs.

Mr Fletcher: I realize that also. Twenty years ago we knew the problem was that there was a shortage of skilled workers, and we have always been going to Europe. Yet industry -- even now -- did not 20 years ago start implementing programs so that we would not be in the situation we are in now. You missed the boat when it came to trying to train the available workforce we had.

Mr Van Houten: You may well be right. I decline to apologize for misjudgments that may have taken place 20 years ago.

Mr Fletcher: I am not looking for apologies.

Mr Van Houten: I was not working in the industry at that time. However, this is 1991. We still have a 75,000-person industry. We would like to keep it as high as we can and be as competitive as we can and we are doing things now and in the future to ensure that we maintain a strong and competitive industry in Canada and in this province, with some difficulty, I must confess.

Mr Jamison: What you are saying is that you are willing to work with various partners as far as skills development is concerned at this point, recognizing the ongoing need.

Mr Van Houten: We are willing to and in fact we are doing it. We would like to do more. When you are a non-profit industry, which is what we are, and you are in the competitive battle of your life, which we are -- and this recession for us is a lot different from the one 10 years ago, which was really a declining demand-based recession; this is a restructuring recession, at least in our industry -- there is not a lot of money to spread around. We are going to have some companies die because they have great intentions, great plans and no cash to deliver.

Mr Kwinter: Just to comment on that, and you can correct me, I do not know the exact status recently, but Magna, which is the largest auto parts producer in Canada, had its own school and I think it has closed it down.

Mr Van Houten: Yes, they have. In fact, we looked at trying to take it over on an industry basis, in co-operation with a couple of government agencies. The timing did not fit and we failed to do it. I wish we had. We are still working on comparable initiatives and hope to bring something to fruition, and in fact expect to this year. But yes, they did have one and they closed it down. It was a great facility. It is too bad they did it. Why did they close it down? They did not have any money. They could not afford it.

Mr Kwinter: There is one other problem and that problem is that companies like Magna, Devtek and some of the others go to the trouble of training people and as soon as they get trained they go somewhere else because they now have a marketable skill. Once they have it they can take it and shop around. That is another problem. How you deal with that, I do not know.

Mr Van Houten: No question. In fact, that is a direct result of this shortage. When you have that kind of difficulty in hiring people, it takes you two months to find somebody who has any skill. Then you want to enhance it further, but for another 50 cents or $1.50 hour you can get another job really easily down the street. A lot of poaching, as it is called, does in fact take place.

Mr Fletcher: If we trained our medical staff or our doctors the same way that industry is training for the future we would be in a lot of trouble with skilled people to take care of our medical profession. I think that industry has been over the years -- and I do not mean just over the last 20 years, but before that they were saying, "What we need are more skilled workers, more skilled people to do the job," and they did not get involved then, and now again I hear the same story. I am hearing it every 10 years, the same story, "What we need are skilled people." Yet industry is not pitching in to try to get people. No matter what Magna did as far as one company, it has to be a corporate decision and it has to go across the whole spectrum of industry, not just in the auto parts programs.

Mr Van Houten: I do not disagree with you. You are absolutely right. I would not argue that we have done everything that we should have done; we have not. Again, with all due respects I think the educational system has some responsibility to bear for this. In fact, for examples in dealing with the Canadian Auto Workers and Skills Development and the Canada Employment and Immigration Commission and so on with regard to specific training initiative for our industry right now, one of the key questions is whether or not we should be targeting it at things like literacy skills, numeracy skills, reading and writing. With all due respect, if we have to design a training program that is targeted at that, then that tells me the educational system has made a major mistake, has failed to discharge its responsibility, because I do not believe or accept that it is the business community's responsibility to redo grade 8 or 10 or whatever it may be because it was fumbled in high school.

Mr Fletcher: I would tend to disagree with you on the education system because I know the education system is second to none, as far as I am concerned personally. Coming from an educational background, I know what the education system is doing. As far as trying to help out the business community, there are many boards throughout Ontario that already have implemented apprenticeship programs which go through the system.

Mr Van Houten: Yes, I agree. I understand that.

Mr Fletcher: Now, I think it is partly industry's turn to start taking the ball from there. There has to be a partnership, but not everyone who comes out of our educational system is illiterate.

Mr Van Houten: We have a lot of people who do not know how to read and write or count, unfortunately, so I am afraid I have to disagree with you.

The Chair: Could we move along with the presentation, because we are running out of time and I would like to get to the end of that.

Mr Van Houten: Okay. A lot of other problems and issues and pressures are afoot in our industry. Another source of fresh cost for the parts industry -- I will only look at one halfway down the left-hand side: black-box capability. It used to be that the car company would deliver to you a set of blueprints and specifications and ask you to quote the part, how much per part for, say, half a million a year. Black-box capability -- that is something a supplier now has to have -- means that the car company comes and says: "Look, I want you to provide me with an air-conditioning system, about two and a half pounds, delivering so many BTUs of air-conditioning power for a car of such-and-such a size. Go away and design it, engineer it, prototype it, validate it, test it. Then, by the way, quote it. If I decide to give you the business, then you can make me half a million a year at the new improved declining schedule of prices which I may decide unilaterally to take down further." The point is that it is tough to make a buck in our industry and it is tough to stay alive in our industry in Canada right now.

We need to be competitive. What does that mean? It means we have to be good, a lot better than we are, at creating and applying and protecting new technology in Canada. I would say in our industry we are mediocre and not better on average at that.

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We need a strong supply of low-cost capital. We do not have any low-cost capital in Canada for our industry. We need a skilled, flexible and motivated workforce. Again, we are probably okay, but that is not good enough. Trade needs to be a national priority. I think it is in our industry. We export 80% of what we make. Trade policy needs to be a national priority for us and I do not think it is.

A few indicators of competitiveness: You could draw up many lists and the story would probably not vary a whole lot. Corporate income taxes: In Ontario we are about as good as the traditional US jurisdictions, slightly worse. Personal taxes on management are a whole lot higher in Canada than they are in the United States. Our wages in Canada are higher than they are in the United States by a significant amount. We are the high-cost jurisdiction here in Ontario as far as wages are concerned. That is partly offset by the fact that social costs are a little bit less expensive in Canada for the company than they are in the United States because the government picks up more of the tab, if you will, but that in turn rebounds back into personal income taxes.

When you look at that chart, the only area where Canada is appreciably ahead of the United States is in social costs. In other words, we lost three and won one. That tends to be the case in most charts of indicators that tend to be used in our business.

The Chair: Are those all quoted in American dollars?

Mr Van Houten: No, those were all Canadian dollars.

Mr B. Ward: I have a question. Are we going to flow through and then ask questions or are we going to ask questions as we go along?

The Chair: Sorry, you are right. I just needed a clarification on that.

Mr Van Houten: Shall I stop or go ahead?

The Chair: How much do you have left?

Mr Van Houten: Not too much.

The Chair: Okay, if you could finish and then we will have a few minutes for questions.

Mr Van Houten: This chart indicates relative changes in manufacturing labour productivity, output per person, zeroed on the US, the US remaining constant at 100 since 1951. For many years Canada had the second-highest degree of productivity in industry among the G-7 countries. We lost that status in the mid-1970s. We are now in fifth place, with the US still at the top, so our labour cost is the highest. Our productivity is fifth best. It used to be better. It has been declining in real terms since.

Manufacturing unit labour cost performance: Labour cost performance means that the lower your performance, the higher your costs. Again, compared to the other G-7 countries, Canada has had a labour cost deterioration. In other words, our cost has increased relative to our major competing industrial nations.

This is a difficult chart to read. It makes, I think, a simple point. Across the bottom are many, many areas which impact directly or indirectly on our competitiveness, everything from wages to pension costs to legislation in areas such as pay and employment equity, environmental regulation, things like exchange rates, interest rates and so on and so forth. The point is this. Using any of those bands, say the orange band, one jurisdiction might decide: "All right, we're going to be high wage and high pension and related costs. We're going to have to make up for that in order to be competitive by being lower than average in some other areas. The green jurisdiction -- I cannot read it from here exactly: maybe that is California -- has decided that it is going to have very stringent environmental regulations. But if they are, then if they are going to be competitive overall they have to make up for it in some other way.

I get the feeling that in Ontario we are trying to be that reddish-coloured band across the top. We want to be the leader in everything. We want to have indexed pensions when no other industrial jurisdiction with which we compete in North America has that. We want to have pay equity when nobody else has it. We want to have very stringent environmental regulations. We want to have very stringent health-care regulations. We want to have high wages and we do have high taxes. Our interest rate is high and our exchange rate is unfavourable. You cannot be the leader in all of these fields on a sustainable basis. It is not possible and it will not take place. We are shedding jobs as a consequence.

All right. This is the last chart I have, Mr Chairman. There are a number of things that I think our industry needs to remain competitive. Not very many of them cost very much money. With regard to people, we do need assistance, I think, with training. That means we need financial assistance from government because we do not have enough money to do everything we need to do.

We also need a good integrated program, which we are in the course of developing with government and with the labour movement. I think our educational system does not yet have a sufficiently technical focus. We need to increase the supply, in other words, of people who have the kinds of skills that industry is going to require over the next many years.

Flexibility: That is an item I have not talked about yet in this presentation, but it is something which we need desperately and which we lack. When the CAW, for example, issues a policy statement, which it did a year ago, saying that team concepts and quality circles and the like are bad because they are instruments of management propaganda and are against workers' interests, that is desperately bad news for our industry. It is absolutely the wrong way to go. If we are not going to make our labour force productivity quotient higher in terms of the price of labour per hour, we have to get better in terms of flexibility. We are nowhere near where we need to be.

Technology: Yes, we need a greater focus on that. I should say that with the federal government, we have been successful in rearranging and in some cases liberalizing the system of R and D tax credits as they apply to our industry. That is good.

With regard to trade policy, I think we need to change the North American content requirement in the free trade agreement. The former provincial government in Ontario agreed with that position. I should say that all of the major constituencies in the industry in both countries agree with that position with two exceptions. One is the group of companies which own transplant firms in Canada -- not those in the United States that I am aware of -- and the other is the federal government of Canada, which obviously is hewing to the interests of the companies that own transplant assembly operations in this country. We think that is a mistake. We are not competitive with the Canadian dollar at the level it is when we have the other elements in our cost profile at the level they are at.

With regard to our social policy, frankly we cannot afford the social packages and regulatory packages that we are burdened with right now. I fear that our province and our country are on the course of embedding an entitlement mentality, if you will, that is going to ensure that we are permanently uncompetitive with countries with which we must compete and do compete every day, and we are losing a lot more than we are winning.

With regard to the finances of the province, the reason I think much of this has some relevance for you is that our industry, employing the number of people it does, generating the revenues, taxes and foreign exchange that it does, is under severe pressure, is losing ground a lot faster than it is gaining ground and is not going to be the strong source of employment and production and technology in the future it has been in the past unless some changes are made.

That is the end of the presentation. I will be happy to take any questions or comments.

Mr B. Ward: I would like to thank you for the fine presentation from your association's perspective on the ramifications of this year's budget on your industry.

Just a quick question. You mentioned the lack of skills in our labour force. I concur that we do have a long way to go. As parliamentary assistant in Skills Development, I am very interested in promoting that aspect where we have a highly skilled work force. The only problem is, how do we get from where we are to where the future should be?

Mr Van Houten: Correct.

Mr B. Ward: It was through the work of the previous Liberal government that we signed a sectoral agreement with the electronics industry, which I think is a major achievement. It is one of the few times where the industries and the organized agents who represent labour as well as government have managed to agree that there is a problem, let's work together and solve it.

Do you feel there is that level of trust in your industry as there is in the electronics industry between the industries and the organizations that represent the workers so that we can achieve this type of agreement? I know we are working towards it. The concern I have here is that level of trust.

Mr Van Houten: I cannot evaluate the question about the comparison of the level of trust. There is sufficient trust that we are in fact working together in the development of a program that I think will be similar in structure to the electrical industry one, that I hope will be at least as effective as the electrical industry one. The proof ultimately will be in the pudding, I suppose, but I am confident that we will do it successfully. My colleagues at the Canadian Auto Workers share that confidence, I believe. We have had a number of discussions with them. As I say, we hope to have something in place in calendar 1991 along the lines of what was done in the electrical industry.

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Mr B. Ward: What can I say? That should have an immediate or short-term influence on upgrading the skills level as well as working with labour, government and business towards an overall, long-term strategy of upgrading our skills.

Mr Van Houten: Yes. That does not mean we do not have a long-term supply problem, because we do.

Mr Stockwell: We were reasonably competitive in the early 1980s, it seems to me.

Mr Van Houten: Yes, I agree with you.

Mr Stockwell: Now we are in the early l990s, and you are telling us we are not competitive. It seems that is the bottom line.

Mr Van Houten: That is right.

Mr Stockwell: I am not disagreeing with you. I do not think we are competitive either, frankly. The question I have is, how did it happen? Did we lose our competitive edge or did everyone else simply become more competitive, or is it maybe a combination of both?

Mr Van Houten: I think it is both.

Mr Stockwell: In fact we have suffered through a process that has cut through our competitive edge, and everyone else has decided to get in the ball game and has become more competitive. It is just that simple?

Mr Van Houten: No question, yes, it is just that simple. We have lost our competitive edge in a couple of ways. One has to do with the dollar. Frankly, when we had a 72-cent dollar, we were banging out parts like crazy and having fun and making a lot of money doing it. It was not difficult, in fact it was easy to turn to our workforces -- which, by the way, had made concessions and the like and had gone through some tough times in the very early 1980s -- it was easy in the mid-1980s to turn to them and say: "All right. You are asking us to share the wealth? We will." Our labour costs increased significantly.

Frankly, when boom times are on, governments begin to think, "Now is probably a pretty good time to think about implementing some new social programs," which the economy can afford to bear and to provide. That is all great. But when the dollar goes up, demand goes down. Other new competitors with some pretty impressive capabilities make their presence felt. That begins to look like a house of cards that you have built. Your competitive profile deteriorates. That has certainly happened.

Mr Stockwell: One quick point. I agree it is a house of cards. To a great extent, that is what it has been built on through the 1980s, a house of cards. What if the dollar just jammed back four, five, six cents tomorrow? If the dollar jammed back four, five, six cents, would you be immediately competitive?

Mr Van Houten: No. If the dollar does back up four, five, six cents, that does not mean that we instantly have black-box capability, which we do not have enough of, and until quite recently were not asked or required to offer. Neither does it mean that all of a sudden there are a couple hundred thousand new tool and die makers available to us. Those guys are not there. Yes, it would help, but it is only part of the solution.

The Chair: I would like to thank you for your presentation.

Mr Van Houten: Thank you very much, Mr Chairman, for your time and that of the committee.

ONTARIO TRUCKING ASSOCIATION

The Chair: Our next presentation is the Ontario Trucking Association, Raymond Cope, president. You may begin.

Mr Cope: Thank you, Chairman. My name is Raymond Cope. I am president of the Ontario Trucking Association. I have with me today David Bradley, who is vice-president and general manager of the association. He is president-designate. He will succeed me in the month of June. With us is John Sanderson, a vice-president of CP Trucks.

We are here today to talk to the submission we have made to this committee. I take it that copies of this submission have been circulated to members of the committee. We are not going to go through it page by page, but we are going to talk about the issues and their overall basis.

Right now, the trucking industry in Ontario is hurting, hurting very badly. A couple of years ago we undertook a study of the trucking industry and we found out a number of things, some of which are referred to in this brief. It showed how important the industry was to the province of Ontario. It revealed to us that there is a work force in the trucking industry numbering some 230,000 and that generally it was an important cog in the Ontario wheel.

We do not have 230,000 employees in the trucking industry any more. We are losing jobs at a fairly large rate. We have not got the exact count for the past year, but we feel that the number is something over 5,000 jobs which have been lost. They have been lost basically in the transport or trucking sector and lost to competition with American carriers who have sizeable advantages over Canadian carriers in terms of costs.

The American carriers have lower equipment costs, lower interest costs, lower labour costs. They have better depreciation rate schedules. They have lower fuel costs. Right across the board, they have an advantage, and when we sum those figures, we find that the American trucking industry has a 15% to 20% cost advantage to Canadian carriers.

Of course, with the deregulation that came into the province two years ago and at the federal level three years ago -- and we are not here to protest deregulation any more; we fought that battle and lost -- one of the things that was clear is that those who put the deregulation packages together did not really build the economic safety nets that were going to be required by a trucking industry as it came face to face with the increasing competition. Thus it is in the transport or trucking industry where at one time Ontario carriers were a majority, we are no longer the majority in terms of the trucks moving across the border. The majority has swung clearly to the advantage of the Americans, and that is growing day by day.

In the trucking industry in Ontario, the response to this has been for companies to try to improve their productivity and they worked very hard at that. But to overcome a 15% to 20% cost disadvantage is a serious challenge indeed. What we find today is more and more Canadian companies are becoming American companies. Companies are either moving south of the border or they are developing subsidiaries south of the border and operating the services from American points.

This is not one or two companies. We have a whole host of companies that have done this. We can think of Canada Transport in Belleville that is moving progressively south of the border. We can look at Frederick Transport down in Dundas. We can look at Bill Thompson in St Thomas. CP Trucks have been putting more and more of their faith into CP America because they can operate from a lower cost base.

These are factors that we think are important not only to the trucking industry but to the provincial economy. The trucking industry has contributed in an important way to the economy, and now its chance to do that is being eroded by this competition. We are looking and we have been before the provincial government, both the previous government and the current government, to draw their attention to this phenomenon and point to things that we think they can do and they should do to assist the industry in offsetting this American cost advantage.

Things we have pointed to, as are revealed in this green book, we have asked for a temporary reduction in fuel tax of a cent a litre, we have asked for the removal of the sales tax on equipment and labour, at least for a period of time. We have asked at the federal level and we have asked the provincial government to assist us at the federal level in securing removal of the four-cent-a-litre excise tax on fuel and we have asked them for assistance in getting a depreciation rate schedule, capital cost allowances equivalent to Americans.

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All of these things now are under active study. There are seven different studies going on at the federal level in the trucking industry, and there is one study being undertaken here at the provincial level. We expect that we are going to start seeing some of the results of those studies soon. The majority of the studies, though, will not be complete until the summer, and by the summer more companies will have gone. A company we just heard from the other day, which has been a major name in the province of Ontario, Laidlaw Carriers, has indicated that it is placing its bets on developing its operation from the American side.

So all of this is going on and is to some extent irreversible, but there are still companies that are in the process of making up their minds. A lot of companies in the industry would go out of business today if they could but they find they cannot sell their equipment. Nobody wants to buy their equipment.

Combined with the deregulation phenomena and the increased competition phenomena we have the recession phenomena. We go through these from time to time and we expect that we will come out of this one, but when you combine the three of them together, you have an excess supply and a reduced demand. When you have excess supply and reduced demand for services, the prices go down, and if the prices go down, your profits go down.

The average trucking company in Ontario is losing money today. Most trucking companies are losing money and, as I say, a lot of them would like to go out of business if they could sell their equipment.

We have set forth in this brief some of the things that we would like this committee to focus on in terms of the things that government should do if it wants to maintain the trucking industry in the province of Ontario.

We have talked about the tax measures that I have already mentioned. We have also pointed to what we call compensation for loss of value of operating authorities. That is a situation brought about by the fact that a lot of companies that are in the business today have on their books authorities, licences, which they purchased by buying up other companies in days gone by to get the access to the routes that those authorities would convey to them. They might have paid $300,000, $400,000, $500,000 for a licence, and that had value. When you went to the bank, you could borrow money against the value of that asset. But with deregulation, those assets became worthless and the bankers said, "Hey, you don't have anything now to secure any loan that you are asking for."

We have suggested both to the federal government and the provincial government over the past two or three years that they do the same thing in Canada they did in the United States when they deregulated. When they deregulated, they compensated the carriers for the loss of value of their operating authorities. They allowed the carriers to write off their losses against income tax otherwise payable over a five-year period. We thought that seemed to be a reasonably good formula and we have recommended that that get consideration here.

We have brought that argument before the federal government in connection with the deregulation that they gave rise to, and you should understand -- and I imagine there are some people who are new to the committee -- the trucking industry is made up of carriers that are federally regulated. Those who operate across borders are federally regulated; those who operate solely within the province of Ontario are provincially regulated. You have the federal rules applying to one group of carriers and the provincial rules applying to another group of carriers.

There were carriers who were deregulated provincially and carriers who were deregulated federally, but in both cases they lost the value of their operating authorities through deregulation. We have looked at both levels of government to bring forward some compensation scheme. Thus far, we have not been able to secure that objective, although both the Treasury people and the Transportation people have shown some interest in the argument.

But a lot of carriers, the small carrier, the small family-owned company, have looked at those operating authority values as their pension, just as taxi drivers who operate in the city of Toronto look at their licences as their pension. When they come to the day that they can no longer operate their service and they sell their licence, it provides them their pension. It is the same thing in the trucking industry. That is gone.

We point in our brief to other things that we feel you should be aware of. We talk about the railway tax lobby. The railways are in bad shape, in as bad a shape as the trucking industry, and they have been trying to retrench, reduce their costs and improve their marketing capability. Part of their plan, though, is focused on trying to jack up taxes on the trucking industry. We think the arguments they brought forward do not prove the point. Even their own studies show they would have to triple the taxes on the trucking industry to even come close to bringing about a diversion of freight back to the railways.

When you look at the fact that something like 90% of the freight carried by the trucking industry is not divertible, if you increase the taxes on the trucking industry the only thing you are doing is increasing the cost to the shippers and manufacturers and the cost to consumers. In a North American free trade market, that would certainly be disadvantageous for Ontario.

We talked about highway infrastructure. Ontario at one time was a leader in roads and highway development and had a fine network of roads and highways. This was certainly true in the period 1960 through to 1975. People from all over the world would come here to see how we had created and sustained such a fine network of roads and highways. Back in the early 1970s, the amount of money put into highways and roads started declining and it stayed that way for about 15 years. It was only in 1988 that the previous government decided, "Hey, the congestion problems out in the roads are growing" -- there were problems of maintenance, the infrastructure -- and started to put some money back into it. We only hope the current government sees fit to give high priority to highway development because it is badly needed. One only has to travel on any of the major routes in the province to see that there is a need for additional capacity or a need for improvements.

Environment is a high priority with the new government, and we share the views of society in general that improvements have to be made in the environment. John Sanderson, who is to my right, has been leading a team within the trucking industry to map out a program where the trucking industry can fully contribute to the improvement of the environment. I am sure he will be glad to respond to questions on that, but it comes to the point where the question is: How do you fund all of these environmental programs?

Some people started talking about carbon fuel taxes. We have cautioned them in terms of determining the kind of programs that achieve their objectives. Just to increase taxes on fuels, for example, is not necessarily going to clean up the contribution the trucking industry made to air pollution. The program should be directed towards the fuel itself and to the equipment that is used to burn those fuels.

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We also pointed out in our brief that we saw where the current government felt a need to provide $5 million of financial assistance to the Algoma Central Railway because they wanted to protect 400 jobs in the railway industry. We had to point out to the government that if you are going to start protecting transportation jobs, a trucking job is just as important as a railway job. We have lost, as I said at the outset, over 5,000 jobs in this past year, and we have been looking for government programs that might stem that tide. We recommend to government that when it comes forward with programs of assistance or subsidies to the transportation industry, it does not look at it just one mode at a time: Look at it across all of the modes to see how they interrelate and how they combine to serve Ontario.

These are the opening remarks I wanted to make. As I say, the important thing for the trucking industry is some kind of action now. Without action the trucking industry is going downhill very quickly. A lot of companies are going out of business. I was looking at a list the other day of the 20 biggest trucking companies in Ontario in 1979, and out of those 20 companies, 12 are gone. I project that by the year 2000, out of that list of 20, 17 will have gone; that is the rate of attrition of companies in a very, very competitive world.

The trucking industry has always been competitive. We do not back away from competition as long as we are playing on a level playing field. But the Americans, in the case of the transporter trucking market -- and they are making inroads even into the intraprovincial services in Ontario -- have these advantages that somehow have to be put right if the Canadian industry is going to survive.

Mr Hansen: I was in the trucking industry myself quite a few years ago, and I had the same problems with insurance and fuel costs and cost of equipment. It is something that is really affected, especially with the deregulation now in Ontario. I take it, and I have not been in that industry for a while, that you lost your so-called milk runs, is that not correct?

Mr Cope: We have lost a lot.

Mr Hansen: I am talking about the main, profitable runs. In some places in the north you still need trucking, but they are mainly concentrated down in the southern part of Ontario; coming in from the States, fuelling in the States without having to fuel here in Ontario, and going back across the border. This is what I can see is a big problem. In Quebec, if I am not mistaken, you show a fuel bill of how much fuel was purchased in Quebec to run in Quebec.

We are listening here. You have some ideas down here. I do not know whether they would help in the short term; it says each one is temporary. I do not know if you have some other ideas not in here. I have not been able to read the whole thing; maybe you can relate to us some of these other points.

Mr Cope: We have proposed to the Minister of Transportation that he give consideration to putting a moratorium on the issuance of licences. Deregulation has given everybody a chance to get licences to where they want to operate, within Ontario, or across from Ontario to another province or to the United States. That has been going on. There have been a lot of licences handed out in the last couple of years, probably more in the last two years than the decade previous to that.

This increase in competition has really come so fast that very few companies have been able to digest it. As I say, the average trucking company today is losing money. Some of them are going out of business and others are just living as long as the bank keeps them in there. We have asked the minister to look at introducing a moratorium, freeze the licence situation for two years, let the economy catch up with the capacity that is now out in the marketplace. The capacity is huge and there is no shortage of competition. Any shipper in the province can get no end of quotes to provide the service he is capable of providing.

Mr B. Ward: I do not know if you can answer this. You may have the stats in front of you. Since the province went down the road of deregulation, how many trucking companies that were based in Ontario have disappeared? Do you have the ballpark figure?

Mr Cope: The best we can say is that it is dozens. Any of the major transporter carriers will have shifted all or part of their operations to the States. If you look at bankruptcies, which are only part of the picture, for instance, in the first 11 months of last year bankruptcies were up 132% over all of 1989. We see that accelerating now that we are mired deep in a recession.

Mr B. Ward: You feel in the short term that if a moratorium is placed perhaps the trucking companies that are on the border may survive or at least give them one aspect of survivability?

Mr Bradley: It will provide some breathing space, but I think a lot more needs to be done. The reason we have characterized the tax measures we are talking about as temporary is because we see that if, after a certain period, we are able to introduce other programs and make other adjustments as the market settles, then perhaps we can start to lift those off or do other things. The new Ontario government has embarked on, as Mr Cope has mentioned, a major study of operating costs and the tax competitiveness of our industry. It is hoped that arising out of that we can start to seek some meaningful longer-term solutions. They may not all be tax measures. There may be some programs in terms of enhancing productivity or what not.

But the fact is, we cannot wait until next June or July when the studies are done, because at that point the patient will be dead.

Mr Kwinter: I want to follow up on that same thought. You tell me that of the 20 top companies 12 have gone, and you figure that by the year 2,000, 17 of them are going to be gone. Is that all through attrition or are there some consolidations taking place?

Mr Cope: A lot of them are through mergers. Some companies merge because it is a meaningful fit between their root structures and it makes sense to do that. Some companies merge because they are on the slippery slope to bankruptcy, and to merge with another company that has some deeper capital reserves can maintain that relationship. The list I am talking about is made up a lot of companies that have merged. There is a great number of them. TNT took over Dominion Consolidated a few years ago; Dominion Consolidated was a big company, it was on that list. Reimer purchased Inter-City; Inter-City was on that list. The Motorways organization acquired Direct Transport, which was on that list; it has acquired Kingsway, which was on that list: it absorbed Consolidated Fast Freight, which was on that list. So a lot of that has been through mergers. Another one I would mention is that Glengarry absorbed Thibodeau-Finch. That is where these major companies are mainly exiting.

Mr Bradley: But it is not just the majors. Look at the family-owned establishments. Just in the past year we have seen Hendrie Transportation in Brampton sold out; Cronkwright Transport in Simcoe sold out; Corneil Transport in eastern Ontario sold out to Canada Transport. We are seeing, I think, much the same situation we saw with the family farm. The family trucking firms are getting out of business or trying to get out of business. The sad part of it is that a lot of our members would like to get out. They are holding auctions on their equipment and nobody shows up to buy it, and they have no choice but to stay in business. They are watching their retirement just vanish before their eyes.

Mr Fletcher: Two quick points. The safety of the vehicles on the road is a major concern to a lot of people, especially driving along the 401 or any other busy highway; and also the amount of environmental impact. I understand have some things you are working on. We can work together to alleviate these problems.

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Mr Cope: I think Mr Sanderson can respond to that.

Mr Sanderson: In the area of environment, this has in the last six months or so become a major interest of the industry in terms of perceptions about trucking and what it does to the environment. We have been working to adopt an environmental code of practice for the trucking industry that deals with the areas of energy conservation, with effective waste management, with environmental preservation in general, as well as safety, which is tied into our environmental program. We have been holding meetings, not just within the industry but with environmental groups in Ontario, in Toronto particularly, and are now beginning to look for meetings with the government to deal in the whole area of environmental practice.

In the area of safety, we have in the last couple of years worked with both federal and provincial governments to establish a very substantial safety system that deals with driver training, hours of service, equipment maintenance, general equipment practices. We believe that in general we have a much stronger basis for safety in the industry now than we have ever had before.

Increasingly, there is a serious question about whether all of us can continue to maintain those safety programs, whether we can in fact live within those standards we have all developed and ascribed to, because our financial situation is deteriorating very rapidly in the trucking industry. We are probably the largest carrier in the province at the moment, but our volumes are slipping, we are losing business to American-based carriers. Our profitability has slipped from a 1.5% loss in 1989 to a 3.5% loss in 1990, and that is a very substantial sum. We just cannot carry on on that basis.

The safety question is very vital, as is our ability to implement the environmental things we want to do. We have provided many ministries, particularly Transportation, with options that would improve our productivity and our profitability without direct tax relief or government money assisting the industry, and we are very hopeful that some of those will be implemented. Environmental changes are one of the major areas.

The Chair: I am going to be a little arbitrary here. I am sorry to have to cut off the questioning at this point. These are very good questions, but our delegations are starting to back up. It is beginning to look like Pearson International Airport. I would like to thank you for coming with your presentation and your handouts and say that your concerns will be noted and looked into. Perhaps if others have questions they could mail the questions to you or phone you and have their questions answered.

PHARMACEUTICAL MANUFACTURERS ASSOCIATION OF CANADA

The Chair: The next presentation is the Pharmaceutical Manufacturers Association of Canada, the Honourable Judy Erola, president.

Hon Mrs Erola: Good afternoon, and a special hello to some of the familiar faces on the committee. It is good to see you. We are pleased that you have offered this opportunity to present our views in this committee.

With me today is Gordon Postlewaite, who is our director of scientific research at the Pharmaceutical Manufacturers Association; Jacques Lapointe, who is the chief executive officer of Glaxo, located here in Ontario, and chairman of our Ontario committee; and John Pye, who is our director of public affairs. We will try to skim through our opening remarks very quickly in order that we have some time for questions.

The Pharmaceutical Manufacturers Association represents 66 of the research-based companies of varying sizes engaged in research, development, production, marketing and servicing of original, brand name pharmaceutical products. Forty-one of these companies are based in Ontario, employing 10,000 highly skilled workers. We contribute an estimated $1 billion annually to the Ontario economy, according to Statistics Canada. A 1989 PMAC survey showed that 29 of these Ontario-based companies reported $1.5 billion in assets, almost $100 million incurred in income taxes against sales of $606 million in Ontario and $895 million in the rest of Canada, so I would say that Ontario is the most direct beneficiary in terms of the research-based pharmaceutical industry.

We are very proud of our contributions to Canadian health care. The dramatic declines in mortality and morbidity statistics in the past few decades are due, in part, to the availability of new and effective drug therapies brought on to the market by our industry. For example, new medicines have helped to reduce death from strokes by 40% and death from heart attacks by 40% in the last decade alone.

Data from the Department of National Health and Welfare on approvals of new chemical entities between 1985 and 1989 demonstrate that over 90% of all new medicines were developed on a global basis by members of PMAC, and we have an appendix which shows this.

Quite apart from the incalculable people benefit of these therapies, they have made a significant contribution to the bottom line of Canadian health care. Numerous studies have documented the relative advantage of drug therapies compared to surgical and chronic care alternatives which take up a substantially larger share of Ontario's health bill, as you are well aware.

Even though medicine is increasingly more able to meet the health care needs of the public, per capita annual increases in health care costs have not increased substantially. Canadian health care expenditures, as a percentage of gross national product, have increased by only 1.5% over the past 10 years. I think that is a very important statistic to bear in mind. However, we do realize that the public's increasing demand for medical service is placing an upward pressure on the health budgets of all provinces and of Ontario is particular.

We have noted the concerns of Dr Martin Barkin, Ontario Deputy Minister of Health, as recorded in the 1989-90 annual report, that it is estimated that health will take up more than half the province's budget by the turn of the century. He further commented that Ontario cannot continue the spending pattern that has emerged in the last 10 years in health care spending.

In this presentation we will focus principally on that portion of the budget which pertains to the Ontario drug benefit plan, which we will refer to by ODB from here on in. In fiscal year 1989-90, $647 million was expended on the ODB. This constitutes 4.6% of the $14 billion spent by the Ministry of Health. When pharmacists' dispensing fees are extracted from the ODB costs, the actual cost of the medicines goes down to $446 million. This is 3.2% of the Ministry of Health budget or 0.18% of the provincial gross domestic product, which we explain because a relatively small amount is really the bottom line, given the significant therapeutic benefits and cost-effectiveness of modern medicines.

It is, however, the case that the costs for the ODB program have increased by 64% between 1985-86 and 1989-90. According to the Ministry of Health data, the cost of actual drug products has increased 68%, while pharmacists' dispensing fees have increased 55% in this five-year period. But it is very important to note that the cost of drug products to the ODB program is not the manufacturers' selling price. For one thing, there is a 10% upcharge payable to pharmacists on top of the manufacturers' selling price. I think that we have to balance these out when we look at gross figures and when we begin to analyse those figures and where the actual money is spent.

It is also important for us to come to terms with the growth and the costs of actual drug products in this period. In the first place, there has been an increase in the number of claims in the ODB program, reflecting the increased demand on the system. Price increases would make up some of the difference, approximately 46% growth over four years or almost 12% per year. Again, this includes a 10% upcharge.

This increase occurred, we should point out, while there was a 50% increase in the use of generic products on the ODB in this period. The substantial increase in the use of generics was substantially brought about by the passage of the Ontario Drug Benefit Act at the end of 1986, although it should be noted that the generic sector since 1969 was also benefiting from the absence of any effective intellectual property patent protection of brand name products.

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The ODB program uses a method called best available price, or BAP, in an effort to provide purchasers with the lowest selling price, net of discounts and incentives, for a given pharmaceutical product. The product, listed as having BAP on the ODB formulary, is the product of choice not only for ODB prescriptions, but by the provisions of the provincial drug cost regulation act it is also the product which will invariably be used in the cash or non-ODB market, which creates quite a problem.

As it pertains to those products which have been assessed by the Therapeutic Quality Review Committee of Ontario as interchangeable, the manufacturer with the BAP for such a product is assured market dominance regardless of the absolute value of the difference in price between competing products. Even if product B is only one cent more than product A, market ownership goes to product A.

We believe that the BAP method of setting prices has failed to provide the benefits of fair and rigorous competition between products. In our opinion, this has been a contributory factor in the significant increase in the cost of pharmaceutical products in the ODB program. The result has been for generic companies to be able to dominate the interchangeable drug marketplace by virtue of their lower cost structures. It has furthermore resulted in generic drug companies being able to price their products closer to the brand name price and still be listed as having the best available price.

The report of the Pharmaceutical Inquiry of Ontario, chaired by Fred Lowy, estimated that a generic version of a brand name product will "generally fall between 75% and 85% of that of the innovator's product." Given this, the price of a generic drug can theoretically eclipse the introductory price of a brand name within a few years.

The inquiry was categorical in saying that "since costs and marketing expenses of generic products are relatively low, and the market can be sizeable, the committee feels that recent initial generic prices have been unnecessarily high."

The inquiry also commented that more favourable differentiation of brand name and generic prices occurs when more than one generic copy is on the market and competition between the generics supposedly exists. However, a careful examination will reveal a tendency for different generic versions of a brand name product to virtually equalize over time. We have an appendix that shows that as well.

In order to create a more competitive environment, two key factors must be considered. The first is that a fair and competitive pricing system must replace the current BAP system, which only encourages rising prices. The most feasible system, in the opinion of this association, is one of actual acquisition cost, whereby the government and cash customers pay the actual cost of acquisition of the product by the pharmacist plus a reasonable inventory charge and the dispensing fee. This system provides transparency and accountability, two factors which we feel are essential to the responsible management of a government program. We feel that this transparency and accountability are lacking at the moment.

The second factor in creating a competitive environment is to eliminate effective mandatory substitution of generic products by ensuring that consumers are given the opportunity to choose between available products, and in the case of ODB recipients to have the right to pay the difference. Increased participation by health care consumers is a stated goal of the Ministry of Health and the element of choice, and informed choice, must be a key factor in achieving this goal.

We consider it encouraging that the Lowy inquiry, although stating its support for the BAP system, recommended that brand name products be available to ODB beneficiaries, even if they are priced above the best available price. We are not suggesting that the ODB should be paying anything but the lowest price -- as taxpayers we support that -- but we feel that consumers ought to have the freedom of choice and the right to pay the difference.

It should also be pointed out that the producers of brand name, patented products are bound by the regulations of the Patented Medicines Prices Review Board. This agency, enacted with the passage of Bill C-22 which restored partial patent protection for products, is responsible for ensuring that increases in the price of patented products are kept within the rate of inflation.

The second annual report of the PMPRB demonstrated that the prices for existing patented products, in other words those that were on the market when the board was created in 1987, "have increased," -- I am quoting directly from the board's report -- "at an average annual rate of only 3.2%, considerably lower than the CPI." The introductory prices for patented products are also regulated by the PMPRB and are conforming to the standards of the board, according to the report. We would remind you that generic prices are not subject to the regulations of the PMPRB. Given the steadily declining price increases for patented medicines, we see as completely unjustified the recommendations of the Lowy inquiry pertaining to rollbacks and restrictions onwards to less than 50% of the CPI.

The introductory price of new medicines reflects the considerable time and money involved in bringing a new product to market. It has been calculated by Tufts University in Boston, based on a rigorous economic evaluation of almost 100 products, that the cost exceeds C$200 million over a 10- to 12-year period.

The services offered by pharmaceutical companies in the introduction and marketing of a new product are also not widely understood. Our industry provides a unique and indispensable role in providing health care professionals with detailed product information, post-marketing surveillance which provides useful information on adverse drug reactions, and support of continuing medical education activities. These activities are underwritten by brand name companies. Importantly, revenues from the sale of brand name products are used in the continuing search for tomorrow's pharmaceutical therapies.

Mr Postlewaite: Maybe I can switch the focus a bit here and look at some possible opportunities for future savings in Ontario's health care system and building on Ontario's strengths for research and development investment in the province.

First, addressing access to future medicines, it was stated earlier that the work of our industry has made substantial contributions to modern medicine. The future of pharmaceutical research is even brighter as advances in biotechnology open new vistas on our understanding of the causes of disease and our ability to develop therapies for them.

There are over 200 new medicines in development at this moment. This list includes 87 for cardiovascular diseases such as hypertension, angina and stroke, 65 medicines for various forms of cancer and 15 for Alzheimer's disease. More than 50% of the industry's R and D investment is focused on diseases that afflict the elderly.

The cost-effective impact of these new medicines on Ontario's health care bill will be sizeable. Alzheimer's disease is just one example. There are an estimated 42,500 cases of Alzheimer's in Ontario. The annual direct and indirect costs are $24,000 per patient for a total cost to the Ontario health care system of $510 million. That probably eclipses what was spent for the entire Ontario drug benefit plan in the last fiscal year.

We therefore do not accept the recommendations of the Lowy inquiry which would restrict access to new pharmaceutical therapies such as those in development. The suggestion has been made, recommendation 4.2 of the Lowy report, that the Ontario Drug Benefit Formulary should be frozen indefinitely. This is not the only recommendation or measure which has been made by the Ministry of Health or already instituted to limit access to new therapies and technologies in Ontario. It is our position that such policies cannot be defended as either good economics or good medicine.

Efforts are being made by the Ministry of Health to move to more community-oriented health care delivery systems. This can be an effective strategy to achieve more cost efficiencies vis-à-vis existing acute and chronic care facilities. It is perhaps not fully realized that the achievement of this strategy, however, and its goal of improved cost-efficiency will to a large degree depend on the availability of effective medicine which will allow patients to be adequately and quickly treated in these facilities and then enjoy a better quality of life in their own home environments. I think this cannot be overemphasized, the importance to our seniors of maintaining their independence in the home setting.

The producers of these effective medicines, today and tomorrow, are the makers of brand name products, the members of PMAC. The Lowy inquiry, among others, wrestled with the concept of assessing the cost-benefit of these new products. The problem is that at present no consensus exists on a standard formula to determine what is a favourable cost-benefit ratio or the criteria that should be used to measure it. However, PMAC does support the inquiry's call for more research into the question of pharmaco-economics and we would be fully prepared to participate in this process with you.

Pharmaceutical research and development: What we all agree on is that medicines as a whole are very cost beneficial in the health care system. By implication, pharmaceutical research, which will produce new and effective medicines, is of unquestioned value. It is a common misconception that little of this research is done in Canada and even less by the private sector of our industry. In point of fact, however, pharmaceutical research conducted by PMAC member companies is recording the fastest growth of any industry in the country. Eight of the top 50 individual R and D performers in Canada are pharmaceutical companies.

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The Patented Medicines Prices Review Board, which also monitors R and D investment by our industry, noted that in 1989 total pharmaceutical research expenditures increased by 47.7% from those in 1988. Almost 47% of this total, almost $107 million, was spent in Ontario.

Investments in basic research were up 76.6% over 1988, dispelling another common myth that no basic research is done in Canada. R and D expenditures by companies to universities and hospitals were up 47.3% over 1988. I need not remind you that you that you have six faculties of medicine and affiliated teaching hospitals and a college of pharmacy in the province of Ontario.

PMAC members have already announced plans for over $1.4 billion in new long-term R and D as a direct result of the passage of Bill C-22, and added to current expenditures that will have an accumulative total of $3 billion by 1996.

Let us look at building on Ontario health research. The value of pharmaceutical R and D to Ontario cannot be underestimated.

In a submission to the Ontario government by the deans of Ontario's five faculties of medicine in December 1989, they noted that the policies in Ontario affecting the pharmaceutical industry have the effect of creating a climate which "is perceived as unfriendly to innovative R and D and will result in Ontario continuing to lose significant growth opportunities in the health care industry," and those losses are to other areas of the country. They urged the government of the day to "consider ways of creating a positive investment environment and improved relationship with an industry committed to R and D for the future growth of Ontario and Canada."

To make long-term investment decisions, however, the industry requires a predictable and supportive investment environment. With legislation in Ontario which effectively mandates substitution of generic products, our perception is that this environment is not as supportive as in some other provinces in Canada, or most other countries for that matter.

The submission of the deans of medicine indicates that real opportunities exist for a strengthened R and D presence in Ontario. You have an excellent infrastructure for it. Pharmaceutical companies account for about 21 cents of every health research dollar spent is Canada. This outstrips the contributions of provincial governments as a whole.

Let us just take a quick look at how Ontario compares with other provinces in their support for funding and medical R and D at their universities: $2.39 per capita compared with $11.69 in Alberta and $5.10 in Quebec. For a high technology based province such as Ontario. that is not a very good record.

Also, the deans have addressed the problem of not having access to the federal transfer payments under Bill C-22 which totalled $36 million to Ontario and not one penny has been made available to the universities.

Because of rapid developments in pharmaceutical research, many of our members are forging closer links and joint ventures with those universities in order to exploit their respective strengths and resources. This is timely, given that the many universities and research faculties are in financial need due to the dropping off of public sector funding.

It was pointed out that $106.7 million of current expenditures have gone to Ontario; that is, 46.6% of the Canadian total. Twenty-three million dollars of that is extramural in Ontario universities and their affiliated research institutes direct from the industry, direct from PMAC members.

In the university-industry program. Ontario has 31 of the total 73 awards and grants offered for a total of $13.5 million, again, cost sharing between the federal government and our members is Ontario. Our health research foundation has 28 researchers in Ontario universities who are being funded, totalling over $300,000 per annum.

If Ontario is to remain competitive in the global marketplace, it must build a stronger research and development infrastructure. This is a basic principle that has been recognized by the current and past government of Ontario. What we need is a new pharmaceutical policy in this province.

The Lowy report noted the potential for increased investment as well as the requirement on industry's part for a favourable climate for this investment. It called for a political decision to deal with the tradeoff in balancing the advantages of "keeping drug costs and prices low against the advantage of creating a climate in which drug manufacturers will wish to invest in research and manufacturing activities in Ontario.

As stated earlier, we are of the position that a policy which intervenes to discriminate in the marketplace in favour of the generic sector does not automatically keep drug prices low.

The report also comments that "policies that encourage the growth of one segment have tended to be detrimental to the other." I refer you to page 65 of the report. Certainly it is clear which segment of the pharmaceutical industry current policies in Ontario are encouraging.

The two major privately owned generic pharmaceutical companies in Canada rank number one and number two in terms of the number of prescriptions filled with their products and they rank number two and number three in terms of sales in 1988 in Ontario. Of ODB prescriptions, 45% are generic products.

The Dr Lowy committee also observed, "While the entire Canadian market grew by only 1% in 1988, the two leading generic firms grew by 6% and 4% respectively," far ahead of the industry average. It has been estimated that, as existing patents expire over the years ahead, the generic sector will be able to grow three times as fast as it has in the past in Canada.

But opportunities exist for the research-based pharmaceutical industry to expand not only its R and D presence in Ontario but also its manufacturing potential. Given the international or global structure of most of our member companies, there is considerable potential on the basis of regional and global product mandates to export volumes equal to 30 times the level of sales for that product in the Canadian market alone and Ontario, which serves as a sizeable base for that export business.

Before concluding. I would like to make reference to and to table a totally independent study PMAC has commissioned by the Inter-University Working Group on Prescription Drug Use, entitled Benefits and Costs of Prescription Drugs in Ontario. It is appendix C of our presentation. Submitted to the Lowy commission on November 1988 and chaired by Dr Walter Spitzer of McGill University, the submission was one of the most expert reports presented to the Lowy commission, and we regret very much that its recommendations were virtually ignored by the Lowy commission. We encourage you to consider them carefully. Mrs Erola, back to you.

Hon Mrs Erola: I think there really is a need to examine the pharmaceutical industry in this province from a number of perspectives. The cost benefits in new medicines need to be examined, and access to new medicine should not be restricted for purely short-term cost-containment measures. These medicines may in the long run prove as beneficial economically as they are therapeutically.

It is clear to us that the goals of improved economic performance in the province as well as achieving better health for Ontarians are not mutually exclusive. Their reconciliation, however, requires vision and the willingness of both stakeholders to work together, and we are especially anxious to work with all of the players here in Ontario, because we feel that the strength of Ontario in the field of research and development and manufacturing is critical to the growth of Ontario generally. This is where the bulk of the industry is, and as citizens of Ontario we, too, would like to see it grow and see it helping Ontario.

Mr B. Ward: Two quick questions, just for elaboration: When Bill C-22 was passed, what benefits did your association receive? Second, given that the introductory price of new medicine always seems to be higher than what the generic companies can produce, could you give us an elaboration of why that is and go into a little about the R and D, etc?

Hon Mrs Erola: Let's answer the first question. What benefits came to the pharmaceutical industry with the passage of C-22? In the immediate term, very few, because the legislation itself carried pipeline protection which assured a steady flow of generic products coming on to the market. We probably will not receive the full benefits of the bill for another five years, and even then the protection will be fairly limited in that it only provides seven to 10 years, as compared to the kind of patent protection which is enjoyed by all of the other developed countries such as the United States and the European Community and Japan, which is 17 years, and they are now looking at patent restoration. So in the short term very little.

Mr Postlewaite: Can I add that that protection is conditional upon prices not increasing faster than the consumer price index and the introductory prices not being deemed excessive by the board?

Hon Mrs Erola: Which brings me to the Patented Medicines Prices Review Board. It is what I call carrot-and-stick legislation, and that is the stick. The industry, and it is no secret, is not happy about the Patented Medicines Prices Review Board, because it has two big teeth. It can deem a price to be excessive, upon which it can withdraw the patent protection and issue a compulsory licence on that product; the other tooth, or the other shoe, if you like, is as well on another product from the company. That product does not necessarily have to be a product on the market today; it could be a product that is coming down. They can decide. "Maybe this company is going to have a big blockbuster down the line and we will withdraw protection for that."

What did it provide the industry in the short term? Very little.

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Mr Lapointe: I can probably give you an example of our company and make it very succinct. Since the introduction of Bill C-22, our company has lost the potential of more than $100 million in sales to generics, on products that have been genericized since then. We have increased our research spending by $25 million and have yet to see a product that is protected by Bill C-22 coming out of our pipeline. It is short-term pain for, hopefully, some long-term gain.

Hon Mrs Erola: Hopefully.

The second part of the question is: Why are the generics cheaper? That is the easy one to answer. That is because, of course, a copy is always cheaper, when you have no research and development costs, when you have no marketing costs and when you can, as they say, cherry-pick: You will find a copy only in a market where it is extremely profitable; you will not find a generic copy of a product with very limited therapeutic use.

Mr Lapointe: Probably 80% of our products do not make a substantial return, probably never do better than break even, if that. So 20% of our products carry most of the burden for the others. They are, of course, the ones that get cherry-picked, as Judy mentioned, those that develop a large market. When we have to balance our expenditures, each of our products cost $200 million, on average, to develop. For the equivalent cost for a generic to be put on the market, you can take a couple of zeros out and you will probably have an approximate development and introduction cost. So we have to recover those on both the successful and the non-successful products; the generics only large ones.

Mr Postlewaite: Once the market is developed, if you do not have a slow growth in volume, within the first six months a product becomes genericized the innovative product loses 30% of the market and within the first 12 months it has lost 50%. There is a very rapid commencement of return on very low investment for the generic copy once it is on the market.

Mr Pye: Notwithstanding that, as was commented on earlier, Dr Lowy's report says generic products tend to be priced within 75% to 85% of the innovators. I think that is a telling remark.

Hon Mrs Erola: He felt, given the limited costs of bringing the product to market, that their costs should be a lot lower than they are relative to the innovative product.

Mr Kwinter: First, I want to say how appreciative I am of the CPMA and its member companies and the contribution they have made to Ontario. This is an area I have been following for some time, and I have had many discussions with the people who are appearing before us. I have a concern that I have expressed to them, but I would certainly like to get it on the record.

I still in my mind have not quite come to terms with why this is not a particular solution, the solution I am going to propose. I recognize that member companies of the CPMA under Bill C-22 have an opportunity, either seven or 10 years, to recoup their R and D, their marketing, their clinical trials. all of those things, but that at a given period that protection runs out and the generics cherry-pick and they jump right on it.

What I do not understand is why a company like Glaxo, or anyone else, would not anticipate that in the first year it is going to lose 30% of that market and in the second year it is going to lose 50%, why it would not say: "We are going to put on the market a competitive product to the generics. It's going to be a no-name, no-frills, private-label product to at least make sure that if they're going to compete with us. they're going to compete on an even playing field," which in fact will not even be even because you are the guys who invented the product. You should be in the best position, if they are going to compete, to be really competitive and not just edge up to just below your product so they get the best price available.

I have not quite come to terms with why that cannot happen, and I would like to hear an explanation.

Mr Lapointe: I could probably start an answer on that one. First, patent protection does not run out after seven years on all of the products that are currently marketed. There are only a few, as I mentioned, that are covered by the new rules.

In the case of our largest product, it was genericized after four years on the market, with no advance warning. It is very difficult to make plans to put together a no-frills product overnight. What you have is a generic product that can come in two cents below the price of ours and overnight take the market, because by regulation that is how the system works in Ontario. Some of our companies have indeed eventually come up with a no-frills product but it has taken time. The distribution system is a very important part of our marketing capability. Once that distribution system, through the pharmacies, is well into the hands of a specific brand of generics, it becomes very difficult to penetrate it, because we are talking about pennies on either side really making the whole difference as to who gets all of the business, simply because of the best available price system.

Our problem is that best available price was put there to try to encourage competition, and by the admission of those people who came up with this thing, it is not working. It is not creating competition; it has done just the opposite. It has created a regulated system where a one cent price difference on a prescription will determine who fills that prescription.

Hon Mrs Erola: For the record, two of our member companies have embarked on subsidiaries which do produce the products. They have done it, as one of them stated very clearly to another committee not so long ago, not to compete on a price basis, because they said you will never recapture the market, but to protect the integrity of their product, because that particular product is genericized only in Canada and their product is distributed worldwide.

It was their feeling that if they were going to market this product worldwide, they had to ensure that the same quality of product was going to be marketed here in Ontario and that any problem with the product would not reflect on the originator's brand, because as it stands now, whenever there is generally an adverse drug reaction it is traced to the originator's product. Therefore, the integrity of that product has to be maintained.

That was one of the reasons they went into the field. They knew they were not really going to recoup any of the investment in it. It was simply to protect the integrity of the product.

Mr Postlewaite: That is also a very risky approach to the marketplace, in this respect -- I think the generic companies have already admitted it in a presentation to the federal Senate hearing. They are the first to admit that once you start on this slide, you effectively commence a process of cannibalizing the market. That was their own problem. As soon as there was more than one generic on the market, it gets into a price war and cannibalizes the market prematurely, before that market offers a fair opportunity to return costs on investment in it. So it is hazardous.

Mrs Sullivan: I wanted to pursue the argument you made related to the drug benefit plan, particularly asking if your proposal for the actual acquisition cost would mean there would be a geographical distortion in your pricing of products based, say, on nearness to -- talking about the acquisition and buying out of pharmacies.

Hon Mrs Erola: I see what you mean. Yes, they do think those who have access to larger volume discounts would have a competitive edge.

Mrs Sullivan: Or geographically.

Hon Mrs Erola: Or geographically, yes. I cannot see that that would happen in any way. Jacques is the one who actually markets products. Do you see the disadvantages of that?

Mr Lapointe: Most of us have a single price policy right through the country, and more than half of the industry ships directly to pharmacies as long as they have something like a $100 order, which is probably the size of three prescriptions on average. So I cannot see it happening too many times. I am trying to think of circumstances where there would be that kind of distortion and I cannot think of any.

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Mrs Sullivan: But on the volume discount question, there would be no difference for the chain operation that can purchase in larger quantity than --

Mr Lapointe: As I said, most of the companies do not have volume discounts on prescription medicines. It is a one-price policy.

Hon Mrs Erola: And if that were to occur, that should reflect in the cost, at any rate.

Mr Lapointe: Maybe this is why you do not have volume discounts: As soon as you do that, your best available price goes down and you get penalized by the current system.

Hon Mrs Erola: If the volume discount is indeed noted and used, which is why we feel that actual acquisition cost, where those volume discounts should be clearly reflected in an invoice, is the transparent and accountable way to deliver.

Mrs Sullivan: I have a second question relating to that. Have you done an analysis of what the projected impact of your proposal, the AAC versus the best available price, would be, say, in current year dollars?

Hon Mrs Erola: It has not been done in Ontario, but there was an analysis done of Nova Scotia and British Columbia which are in actual acquisition cost. British Columbia, which has the lowest drug cost program in Canada per capita, is on actual acquisition cost.

Mr Postlewaite: The Nova Scotia study is an interesting one and might be useful to you, because it was done independently out of Carleton University. They started to measure the province a year before they moved to actual acquisition cost, from artificially listed formulary prices to reimbursement based on actual acquisition cost, and they compared the cost to the drug program in the two years. They came up with some startling findings on how cost-effective actual acquisition cost can be to the system.

Hon Mrs Erola: British Columbia follows that and so does Saskatchewan. There are variations of it, but actually the BAP as it exists in Ontario is really unique to Ontario and most restrictive.

Mr Postlewaite: I think the point Mrs Erola made earlier about actual acquisition cost is most important. It is transparent and accountable. In any of the other systems, there may be savings in there but they are elusive. You do not know where they go into the system; they just evaporate. They certainly do not go back into creating savings for the province's plan.

Hon Mrs Erola: I think I alluded in my introductory remarks to the fact that there was a cost of 68% they noted in terms of drug costs, but the fact is that these were not strictly drug costs in terms of cost to the manufacturer. The manufacturer was one, but then there is your 10% up charge and then there is that rather grey area that falls between the cracks.

Mr Postlewaite: If you do not reimburse on actual acquisition cost, then you have to list a price at which you are going to reimburse, an artificial price. The tendency and the experience in Ontario -- it is on the public record -- is that when you have an artificially listed price, manufacturers, highly competitive, will sell below. The margin between what you are paying for it and what the pharmacist actually pays for it is called spread, price spreading. It is an inherent problem in the way the ODB is structured now. It certainly does not create cost savings for the government.

Hon Mrs Erola: Which is why we feel that when it is clear, when an invoice shows this is the actual acquisition cost, no matter what the discounts have been, that is what the taxpayer is actually paying for that product.

Mrs Sullivan: Basically, by regulation or legislation, a margin of profit to the pharmacist plus a dispensing fee.

Mr Postlewaite: They need an operating overhead and they need a professional fee, and that has to be added on top of the actual acquisition cost, but that could be negotiated with organized pharmacists and they can tell you what their costs are.

The provinces that do have it do spot audits, the way you make sure you are only paying what the pharmacy actually paid plus that markup in fee, and it is very effective.

Mr Phillips: Just a quick comment. By the way, the Ontario drug benefit plan is another $150 million, probably funded by the Ministry of Community and Social Services, as you probably know.

Hon Mrs Erola: That is right.

Mr Phillips: I know there is a battle between Ontario and Quebec for your industry. Two things: Can you give us any insight on trends, where the industry is heading, to Quebec or Ontario? Second, is the amount of product and revenue that you now export growing as an industry, because I gather one of the hopes of the bill was to develop a big export industry?

Hon Mrs Erola: I will answer the first part, and I am afraid I am going to have to leave right after that, because I have a flight to catch.

The Chair: We do have another deputation in a couple of minutes, so we will be wrapping up.

Hon Mrs Erola: The Quebec government a couple of years ago took a look at those industries which it felt had the highest potential for growth and payback in the province. They said, "Which are the industries we want to target as growth industries?" and they targeted the pharmaceutical industry. All of their government policies, both from the Minister of Health and the Minister of External Trade level, have been geared to making sure that the province creates an environment that welcomes the industry and brings more dollars in terms of research and development into the industry as well. That was a conscious, very real act on behalf of the Quebec government. That has been very helpful and it is one of the reasons you are seeing a much larger growth in R and D dollars going into Quebec. They have created an infrastructure.

I would like to add to that just a couple of examples. In Quebec they have the Fonds de la recherche en santé du Québec, a federation that we call the mini-research council of Canada: it is a counterpart to the Medical Research Council of Canada. It in turn has made a whole series of connections with the teaching hospitals and the universities, creating a network that responds instantly to the needs of the pharmaceutical industry in terms of research and development.

We are at the fledgling stage with the universities here in Ontario, but the support that is given directly by the Quebec government is very real and tangible.

Mr Postlewaite: We consider Quebec to have about two thirds of the population of Ontario, but if you use the federal Patented Medicines Prices Review Board's second annual report for 1989, you will see a total of $106.7 million in Ontario, which is 46% of the Canadian total. Quebec has 43%, with only two thirds of the population, at $98.3 million. This is R and D dollars. If you look at laboratory research, bricks and mortar research, Quebec gets 67.8% of the share, compared with 23% in Ontario. Ontario gets 50% of the clinical research, which is largely extramural, done in the clinical setting, human testing. Quebec gets 30%. But there is a peril in that for Ontario, because clinical research is very portable and it can be started and stopped and picked up and moved much more easily with shifting political winds.

Hon Mrs Erola: Does that answer your question?

Mr Phillips: The only one is jobs, but if you have something you can send me that would be useful.

Hon Mrs Erola: We would be very happy to follow up.

Mr Phillips: In trends, I know where we are now. That was one of the things. The other was just Bill C-22, to develop export business, I would not mind knowing if that is working or not.

Hon Mrs Erola: I would like to make one brief comment on that. When you looked at the original legislation of 1969, that was designed to create a Canadian industry with exports. That was the thinking of the time: I know something of the history of the bill, having been very involved in it. The thrust of the 1969 legislation was to offer the generic industry a toehold to come into Canada, begin to develop an industry in Canada that would do that. What we have seen is the growth of a generic industry that has not gone into the innovative sector, although it has in some ways been successful to a small degree in exporting to the Third World countries, again, but only in those countries where patent protection does not exist.

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Mr Jamison: You mentioned R and D, from the time you start to work on a product to the time it hits the market, being at about $200 million on average.

Mr Postlewaite: Over.

Mr Jamison: Obviously, that is an average price per product. What was the breakdown beyond that? For my own benefit, is that something you possibly could get to me, where the moneys are actually spent?

Mr Postlewaite: That is a global cost. New medicines today are developed by a company globally around the world, in its operations around the world. One in 10,000 discoveries in the research bench make it to the marketplace. That one success, that about $268 million Canadian, covers all the losses along the way.

Mr Jamison: That is part of it, and that is fine. What I would like is a better breakdown of that figure.

Mr Lapointe: How much is basic, how much is clinical? On average, and we can provide you the numbers, the discovery part is somewhere between 25% and 33% of the total cost of bringing a product to market. The development -- that is, to test it and prove its effectiveness and its safety in human beings and prepare all the documentation for the regulatory authorities -- is about two thirds to three quarters. That is in a well-run company.

Hon Mrs Erola: And growing, given the number of regulatory authorities in the system.

Mr Jamison: I would like that information so I can get a better handle on it, rather than just the figure itself.

The Chair: I can see you are ready to go. On behalf of the committee, I would like to thank you for your presentation.

MOTOR VEHICLE MANUFACTURERS' ASSOCIATION

The Chair: The next deputation is the Motor Vehicle Manufacturers' Association, Norm Clark. Would you like to introduce your other guests?

Mr Holman: I am Jack Holman, Ford Motor Co of Canada. I am supervisor of customs and trade, and under that avenue comes commodity taxation.

Mr Adams: I am David Adams, from the Motor Vehicle Manufacturers' Association. I work with the taxation committee.

Mr Clark: We have a brief statement. I will not give a lot of background.

The Motor Vehicle Manufacturers' Association has eight member companies, the Big Three and four truck builders and Volvo Canada Ltd. We are responsible for something in the order of 80,000 direct jobs in Canada, about 30,000 of which are in the parts area and the balance in supervisory and white-collar jobs and assembly. So we cover two major sectors. The spinoffs. if you use the Statistics Canada input-output model, would probably bring us up to something like 550,000 jobs in the country. Beyond that, there are many levels of activity. I would like to go into the remarks very quickly and then save as much time as we can for questions.

Our remarks today are these: In terms of the Canadian industry generally, and this comes as a result of meetings we have had with other sectors recently, there is agreement that during the upbeat economic times following the 1980-82 recession, governments imprudently refrained from taking the hard decisions to curb their spending to the degree necessary. Now, with recession once again visited upon us, the ability of governments to cushion its effect is lost without further increasing their deficits and debt. Tax revenues went up during the expansion, but so did tax rates in Ontario and indeed in Ottawa.

On industry's part, during the expansion years of the middle 1980s, Canadian firms enjoyed success in large measure due to a low Canadian dollar. The question was whether to forgo immediate profits in order to restructure for the future or to take the chance that restructuring and the investments necessary could be carried out later. Some industries and companies delayed the inevitable; others such as ours and others also facing intense international competition made massive investments in facilities, technology, product development, raising productivity and quality, while also increasing production volumes.

A variety of factors have now converged upon us all, requiring that both governments and industries convince Canadians of the gravity of the deficits and debts problem. Governments could then reduce spending, Canada could increase national productivity, and industry could take better advantage of the Canada-US free trade agreement and better meet global competition at home and abroad.

In terms of federal and provincial sales taxes, we would like to remark that the goods and services tax will assist Canadian manufacturers and therefore the national economy by eliminating federal sales tax from production costs and from export prices for Canadian goods. It ends the sales tax advantage of imports over domestic Canadian goods.

Industry and the economy now needs to have those same advantages extended to the provincial sales tax regime. While we are pleased that the Ontario sales tax will not be levied on the GST, the MVMA urges Ontario to respond to the insistent need for integration of the retail sales tax with the goods and services tax. Benefits would include lower production costs, added to significantly by reduced administrative complexity and the costs that represents.

In terms of Ontario's competitive position -- that is a phrase I am sure Mr Kwinter recognizes from past days -- it is clear that for some time Ontario's competitive advantages as a capital investment host have been slipping away in comparison with project costs in other Canadian and US jurisdictions. Industry is attending to its costs, productivity, product design, quality, safety, environmental protection, skills development, training and customer service performance, but governments must attend to those of its activities and costs which do not add to the ability of industry to meet global competition.

We are pleased to acknowledge the Treasurer's statement in the Legislature on December 4 in which he committed to proceed to implement the R and D super allowance and the Ontario current cost adjustment and its enrichment to a 30% rate. We recommend that the R and D super allowance be also set at an enriched level to emphasize the need for R and D projects in Ontario.

Among the Ontario taxation measures which we believe are contrary to this precept of lowering costs are, first, the grouping of the gas-guzzler, the tire and the gasoline taxes. MVMA member companies have doubled the fuel efficiency of their products since the mid-1970s. Progress continues across a broad front of technologies to continue to improve motor vehicle capability. Tax penalties on vehicles will not hasten that process and will likely work against it. If the objective is to conserve fuel, we maintain that drivers must be persuaded to take advantage of the vehicles' fuel efficiency by operating them more energy-conservatively. If the tax system is to be used to convey that message, much more use of incentives is advocated, not the bludgeon of punitive tax rates.

If we are correct in stating that the market is already aware of the need and the objective of conserving fuel or reducing fuel consumption, we contend that no purpose is served by increasing the cost of vehicles via ad hoc taxation measures.

With regard to the employer health tax, increases in the cost of producing goods in Ontario through this type of tax measure also constrain the drive to be globally competitive. Because companies have no control over the effect of these types of levy, we urge that they be avoided by governments. Until the EHT is evaluated as to its economic competitiveness effects, the MVMA will continue to recommend that it be limited by applying it only up to a maximum salary or wage remuneration of $30,000 per employee per year. This would go a long way to remove the distorting influence of the employer health tax on the design and development of company employee benefit programs. We would also urge the government to hold the EHT at its initial rate.

On the corporate tax rate, we note that Quebec has employed a lower rate of corporation income tax to attract industry and to promote the expansion and productivity improvements of businesses already there. The MVMA recommends that course for Ontario as well to redress some of its lost competitiveness as a business environment. The MVMA also urges that consideration be given to reintroducing an inventory allowance to offset inflationary effects, removal of the half-year rule in claiming capital cost allowance, and the elimination of the unrealistic effects of the 120-day rule for investments to be eligible for reducing the base for Ontario capital tax.

There are probably many other things we might have included in a budget submission which we intend to put forward to the Treasurer, but we thought we would limit ourselves today to those items, and hope to respond to any questions that you have.

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Mr Stockwell: I am curious. Did you have an opportunity to read An Agenda for People?

Mr Clark: Yes.

Mr Stockwell: It appears that your recommendations are running very contrary to some of the recommendations and concepts that are being put forward by this government, particularly when it comes to the corporate tax rates, talking flat tax, talking a few programs that appear to be instituted. Tell me how this will affect your particular industry, and do you see it as another blow to your competitiveness?

Mr Clark: I think I would like Jack to talk to this too because he is more familiar with the taxation than I am per se, but we have not given it a great deal of investigation at all. We are more, I guess, incrementalists than looking for an analysis right away of a brand-new concept and we have been wrestling so hard with trying to administer or getting ready to administer the new goods and services tax and so on that we have not really gotten into any evaluation of something like a flat tax or a minimum corporate tax or any of those projects. I think we generally feel that there should be, and there is, a reasonable mix of taxes. We think some should be on income, we think some should be on consumption, then it becomes a case of dealing with those basic forms. We have not been very innovative in our thinking. Jack, do you have anything?

Mr Holman: The impact of taxation hitting the province or an industry adversely comes when you are in a site search for a new facility and that becomes very competitive against facing states around Mexico or Europe. So that is where we have to be very careful in having a tough sell at times. At the present time, there are no new major facilities on line. There may be expanding present facilities and if you have a facility, bricks and mortar in place, you already have a leg up over a greenfield site; but where there is a greenfield site up for grabs, then if your tax regime is not competitive, you would have a tough sell, from a Canadian financial analyst's position in the industry, in selling your counterparts that this should be the location for a facility.

Mr Stockwell: I guess then you are the specialist and the next question goes, I suppose, to the specialist. What about now? How are we shaping up, Ontario, in competitiveness with respect to taxation? I suppose debt enters into it, not really a lot but more from a tax point of view. Are we competitive? Are we going to attract growth, new industry or expansion compared, let's say, with (a) the world and (b) even just our closest neighbours?

Mr Holman: Our competitive position has declined. We have not had a greenfield site to study, and when a new greenfield site comes up, that is when you get into your in-depth study. But I know our competitive position has declined, say, from the time we went out and won the Essex Manufacturing facilities which created about 2,500 jobs in Windsor and also attracted a few other businesses.

Mr Clark: Mr Stockwell, if I might, there are a couple of studies that might yield some information I can leave with the researchers. One is the study that Mr Kwinter's group commissioned for the parts manufacturers, and maybe they have already given a copy out, but it was done earlier this year. It indicates some of the loss of competitive investment Ontario is facing. But it really comes down more to: an old plant in Canada has problems, an old plant in the US has problems. The costs in those plants, because they are old, because the workforce is older and the costs are higher for such an older workforce, it means that you can compare better an old plant to an old plant.

I think we suffer a little bit in relation to those two. The big problem comes when you are dealing with an old plant in the US versus a new plant in the US. The costs are totally different, and the same up here. So it gets very difficult to try to sort out exactly where you stand, especially if you only look at the taxation side. Everything gets folded in, the workforce, the training, the skills development, the education system, the health care system, all of those things. This will help a little.

Then Michigan did its own study in July 1990 called A Review of Michigan and Ontario Taxes; they took a pro forma capital project and tried to sort out what the major taxes were at least in each jurisdiction for that same project and it came out mixed. The first couple of years one jurisdiction had an advantage, the middle years somebody else and then it reverted and indeed, the 10th year it is back to the other one. So again, it is very difficult. It is almost a qualitative rather than a quantitative arrangement, but I will be glad to leave those with the staff.

Mr Stockwell: Good. Being in the car business, it always astounds me, when eventually you go and finish selling a car, the number of taxes you add on, from the air-conditioning, gas-guzzler tax, your tire tax and so on and so forth. By the time you end up actually writing the car up, you see the customer's eyes pop. One last quick question is, has there ever been a study done with respect to the after-sale taxes, or some are pre-sale taxes, that are built in with respect to selling a vehicle, say, in Ontario as opposed to New York or Manitoba, etc?

Mr Clark: I cannot recall anything offhand on that basis.

Mr Holman: I cannot recall a study like that, no.

Mr Clark: Because of the federal sales tax having been so high --

Mr Stockwell: I know, the 13%.

Mr Clark: Yes, 13.5%. We figured that under the old manufacturers' sales tax, with its possible application at various levels of transaction in getting to a completed vehicle, even though the nominal rate was 13.5% on the sale from the manufacturer to the dealer, it is probably closer to 16% because of the taxes that are buried in it. That will go away over time now, thank goodness, although there are still some buried in older plant properties where you did pay manufacturers' sales tax and it is still buried in the cost.

Mr Stockwell: Of course it was all compounded too, when you added on these other taxes.

Mr Clark: That is right.

Mr Phillips: I have a couple of observations and then a question. The employer health tax you have some problem with, but to me it is potentially one of the big competitive edges you have versus US plants, in the sense that you are paying maybe $1,000 a year per employee for health care and my perception is it may be $3,000 in the US. My first question would be, what is the competitive edge on that? Second, I know all the business community comes and wants us to reduce debt and deficits as long as it is not impacted. For example, the current government, by eliminating the sales tax on top of the GST, is going to forgo $500-million worth of revenue and it is probably $250 million of revenue it would have gotten by taxes on top of the old manufacturers' tax. I would think the auto industry benefits a fair bit by that and I just make that observation to you.

But my big question is one that Mr Stockwell asked a little bit and that is the one that is on all of our minds: just how competitive the Ontario industry is versus elsewhere. I kind of hope that an industry as sophisticated as yours, that must on a daily basis be comparing versus your US counterparts -- what help you might provide us in terms of how we stack up, everything in. I am talking about labour costs and management costs and all those sorts of things. You may not have it with you today, but is there anything that --

Mr Clark: Yes. there is something coming up, Mr Phillips, that we hope will give us some of that data in our sector. This parts study did that kind of thing, trying to figure out what the cost difference drivers were between Canadian and US --

Mr Phillips: My impression of that is that that was an attitudinal thing as opposed to an analytical thing.

Mr Clark: It was a survey, there is no question about that, but there were some hard data in it as well. We hope that the analysis the same consultant is carrying out for matched plants on each side of the border in three different member companies of ours will yield some of that information. I have not seen the data yet. It is still being sorted out. But that will come out within a few weeks, I would think.

Mr Phillips: That is a public document?

Mr Clark: It will be. But generally, I guess the best way to say it is, go back to the auto pact in 1965. That integrated the North American industry. It made possible all the objectives, one of which was to make sure the market forces worked. Another one was to make sure that you get the economies of scale. That was skewed purposely at the time in order to get assembly jobs, because what we wanted was jobs. We have gotten them. We have also, by the way, gotten tremendously modern, large branch plants of multinational corporations. That has stood us in good stead over the whole operation of the auto pact since 1965.

We think each company could come up with data which show that their plants in Canada are still at the very top of the ladder in terms of productivity, quality, whatever. One of the ways they do it, I understand -- and Jack, correct me if I am wrong -- is to relate warranty costs, for example, back to the plant that finally assembled the vehicle. So there is a great deal of information that goes into monthly reports which are put out plant by plant. That is the way each company individually designs its method of tracking where each plant in the system is in those things it wants to know about.

Mr Holman: Track it back to the parts supplier.

1630

Mr Phillips: What would be an equivalent number to health premiums for a US plant?

Mr Holman: I think it would vary, because some of them are self-insured. Some of them have very good records in terms of workers' compensation and some of them have very poor ones. The poor one is going to get charged an awful amount more in terms of insurance. I do not have it. I do not know whether the US would have it. I think we will get it out of this study with the assembly plants involved, which will be at least a better indication than we have had up to date. Agreed: There is no question that on the surface at least, Canada's universal health care system is an advantage for Canada. It is slip pin away. It is costing us more. It is raising the deficit. It is causing interest rates to be higher. Where do you go with all of this stuff?

Finally you come back down to, well, where does Ontario sit? We are sitting in a moving vehicle. It is going backwards. It has been going that way for a long, long time now. It is not going at a horrendous rate just yet. We still have advantages over the US. We do not have advantages over the Japanese and we do not have advantages over the Mexicans in terms of flat-out nominal costs. But we do have some qualitative advantages. Those are difficult to sell when there is a new project coming down the pipe, the decision for where it is going resting with someone else.

Mr Phillips: I for one would be interested in that study because I hear a lot of comments like you have given. When I say, "What are the facts?" it is tough to come up with.

Mr Clark: We will certainly table a copy of that study as soon as we can get our hands on it with the committee.

Mrs Sullivan: I have some figures relating to the competitive aspect of the tax and other input structure. One of the things that strikes me in fact is that although perhaps not in the particular sector, but across, generally, in manufacturing, Ontario is in a position, at most current studies -- we are in late 1990 -- that shows us to be singularly competitive in terms of all of those government costs, whether they are corporate income tax -- certainly highly comparable for manufacturers, employer health tax and UIC, WCB and so on. They are in fact quite comparable. On the employer health tax figures, the US chamber of commerce has estimated that their costs are 8% of their gross payroll, whereas of course for large manufacturers in Ontario they are under 2% and significantly lower here than even in Quebec, which is next door.

I think that it would be useful, as we are looking at competitive issues -- we are looking at other things as well as the costs that are placed by government, whether through inputs or through corporate taxes, including the speed at which innovation is introduced into industries and so on. One of the things that kind of struck me about your presentation related to the suggestion that the research and development superallowance be set at an enriched level. I wonder if you could expand on that and say what rate you would like to see that will be beneficial for the industry.

Mr Clark: I am not sure what rate we would set on it, but as high as possible. I think the main intention there, certainly on my part, was to try to suggest that, although in all of the comparisons that have been done that I have seen, anyway, of research and development expenditure nationally or by industry or whatever and the tax rates that apply to those expenditures, Canada looks not only to be in great shape; we are competitive in terms of rates of taxation on R and D expenditures.

None of the studies that I have seen takes into account the programs of assistance outside the tax system which many, many countries have in place. They are extremely generous. They want R and D, they get R and D. But, by George, they buy it. We do not do that in Canada. Again, go back to the inception of the auto industry in Canada, which was over a high tariff wall. A couple of companies came in and brought parts in from the US and assembled them here. The cost of the vehicles was extravagantly high until the auto pact in 1964. Then we wind up with a skewing of policy towards getting jobs in assembly operations and indeed lowering costs both at the factory and for the retail customer. All of those things were done.

Now we are into: "Wouldn't it be nice to have R and D?" Yes, it would, I guess. But we have the advantages of R and D. We have the jobs coming from applied R and D. Do you go on a sector-by-sector basis and say. "Whatever R and D is, would a facility really help in whatever term you want it to help that particular sector?" or do you go to a generic program, which is probably what would have to be done at the federal level and say, "Okay, we want just more R and D"?

We have worked this incrementalism thing I have talked about before. We have been successful to a fairly large degree, working with other groups, to make sure that the definition of scientific R and D in the Income Tax Act, upon which our data as to what amounts are expended on R and D in Canada is based, is generous enough to allow inside those items of expenditure which we figure are R and D. There is a great deal still left outside. We are working on that.

But to attract a chunk of automotive R and D to this country is going to be very difficult if it is going on some place else already. There is a lot of testing work that is done here: cold weather. alternative fuels. The mix of alternative fuels in Canada rather than in the United States probably offers an opportunity for us. So far the companies have done a lot of work in those areas, but it has been test programs, which probably do not fall within the income tax definition.

I would say that if we are really serious, there is going to have to be, to put it bluntly, a purchasing of a R and D capability for Canada.

Mrs Sullivan: Does MVMV support the corn producers' request for higher oxygen content --

Mr Clark: Oxygenated fuels? Again, the public is going to be the final arbiter in this thing, and we, along with the corn growers and the other groups, the Canadian Oxygenated Fuels Association, hope we can get enough information to them to have them make a decent decision. Right now, the costs are not in line, the range of the vehicle on those types of fuels is not in line, the storage of the fuel is much too bulky. Whether we can get it down, we do not know. The possibility exists for all kinds of things, but none of them is as convenient as the system we know right now, which is gasoline-based. If an edict comes, that is one thing. We do not think it is necessary. There is so much work being done by each of the companies to ensure that they know precisely what they have to do in order to get into some other fuel than gasoline or diesel fuel that that is not the problem. The problem is still economics and customer demand.

Mr Kwinter: Just a bit of information. Lee Iacocca has been quoted as saying that the cost of fringe -- I cannot remember the exact number -- is $200-plus in Ontario and $700 in Michigan per car. That is offset by a lot of other things, but that is what is happening.

Jack, I would like to ask you a couple of questions based on your comments about a greenfield operation. Ken Harrigan had told me relatively recently, certainly within the last year, that Ontario enjoyed about a $10-per-hour advantage in labour cost over its counterpart in the States. Second, and I do not know what happened because I have been removed from it a little, but when the negotiations were going on about the van plant that was going to go into either St Louis or into Oakville, obviously, from the information I got from Ford, we were able to be competitive. Has that deteriorated?

Mr Holman: It has deteriorated somewhat. Again, that study was done at that time, and to say we would have to revisit a study complete -- when we look at a study, there are labour dollars, the cost of the fringes, transportation issues for the market you are serving, interest rates, the fuel, operating the plant. It goes right down to the bottom line. The comments say we have deteriorated significantly. I could not answer that question properly.

Mr Clark: One of the things that is very difficult for us as well as for you, I am sure, from Mr Stockwell's comments and Mr Phillips's and everybody else, is trying to deal with the thing in a very studied and objective way, because you cannot get the data. We hope this study that I mentioned earlier will give us a little better handle on it, but it is incrementalism again. If you look at one aspect of it that turns out to be a disadvantage for Ontario, then you are liable to get somebody who has made his mind up on that discrete item, and it has nothing to do with the overall. That is the dilemma. I will give you two examples.

Federally, my understanding is that there is an internationally accepted, tested and reciprocally recognized listing of chemicals used in industrial facilities. Canada has chosen, federally, not to recognize some of that testing that has gone on. I do not know what their reasons are. The point is that if you have now the need for that chemical in Canada in your operations and it is not going to be approved automatically because it has been tested somewhere else, then to test it in Canada vis-à-vis the United States, I am told, costs 20 or 25 times as much.

It is the same thing with building permits. The tape you have to cut in order to get through to get the approval to do the sewage treatment plant, the electrical facilities, the transformers, the roads, the whole thing on an expansion to a plant, are 20, 25 times as high as they are in the United States. All you need is one of those and we are in big trouble when somebody in the United States is making a decision on the placement of a facility.

Labour situations: One of our member companies tells me, and it was a fascinating story and I wish I could take the time to repeat it, but in essence it was that during last fall's negotiations the facilities were going to be overhauled and you either brought in new product to put in that facility or you lost that facility. In order for there to be a real possibility of bringing that product in -- and it is now in, by the way -- there had to be changes within the collective agreement to allow for changes in classification and seniority rights and a whole bunch of other things in order to make it fly. I do not know what the detail was. That was done. The union saw it had to go through with that agreement, and the agreement was struck on the basis with the full knowledge of the people in Employment and Immigration Canada that it would come forward and assist with training, etc, etc, in order to take this new product on. We very nearly lost it. Had we lost it, I think there were several thousand jobs in an already depressed area that were going to go. But we have retained them. We have not expanded them, we just retained them, but the fight you had to go through in order to get there was monumental, multifaceted and, thank God, successful. But all you need is that one implication that, "Hey, there's a negative here that we don't have some place else," and it could be that you have lost a project.

Mr Hansen: The latest figure I heard was that the difference between the auto worker in Canada and the United States was approximately $6 to $8. I do not know whether I am too far off. I hear $10 mentioned.

Mr Clark: I think that is way too high right now, the $10 --

Mr Hansen: We get into the Canadian dollar as it is right now; things have changed. I came from auto.

I see the point of the employer health tax. You put a figure of $30,000. I know this became a problem, that in the auto industry, when things are good, there is a lot of overtime involved. I can see your point. This is the place to bring it up and air these particular things.

The other thing -- talking to some of the representatives from General Motors in one of the last meetings I had with them -- was on the auto insurance. They did not have any figures, but if we do come in with the public auto insurance, which is supposed to be coming up this spring, this will reduce the operating costs. They feel that insurance costs were going up for the auto industry, because if a person was in an accident the auto manufacturing would pick it up rather than the private insurance.

These were some points I just wanted to clarify with you, that we are looking at some of these areas to reduce costs and I hope we can do something for you.

Mr Clark: We appreciate it very much. The situation, again, is that from an assembly point of view I do not think there is a big problem about where you assemble a vehicle. It is extremely critical to the country about where the devil you get the parts. That has always been the case. In our sector, there are 30,000 people involved in parts production as well as the 50,000 in assembly, but it is critical as to where you get your value added, which in our case is largely from the parts area. It is that parts area, too, which is extremely vulnerable. I do not want to speak for them: I know they have either been before you or will be coming but, believe me, they are the meat in the sandwich right now.

The Chair: There is an issue I do not need comment on. In my riding and others I am starting to experience that some people are moving their parts manufacturing because we are bringing in environmental controls and there are jurisdictions in the United States that are not, and this is going to become a problem. Do we continue to pollute our environment or lose the jobs to somebody who will continue? This is a very interesting question.

Mr Clark: Wait until Mexico comes along.

The Chair: My understanding is that the Rio Grande is just like a big open sewer.

Mr Clark: It is -- and Europe. I was in Germany in the Ruhr Valley last September and, I tell you, you cannot breathe. It is unbelievable. Everything they do there is for the benefit of maintaining industry. That is great up to a point, but we think there is no particular conflict between controlling our plant sources of pollution as well as the vehicle sources and the economic viability or the value of our industry to the country. There is no problem in meeting those two goals.

The Chair: My understanding is that California is going to have some very stringent controls by the year 2007 and that these are going to have to be met if you are going to sell a car in California.

Mr Clark: That is right. They have a unique problem. It is really starting to get better. I understand that the days of notice where you should not go outside and so on and so forth for those who are susceptible are way down from where they were. The whole global warming, CO₂, ozone, fossil-fuel-related situation is being given such a tremendous amount of attention right now that I venture to say that it will be overcome, and it will be that we will be into alternative fuels not too far down the pike, that people will find them quite acceptable as alternatives to what they are using now. We are going to have to market like we have never marketed before. The standards are going to have to be reasonable and over a time frame that allows us to make the adjustments.

So far, so good. But the important thing in my mind is that we can do it because government, industry and the public are all for it at the same time. So you do not need regulation. All you need is a consensus as to where we want to go and how quickly we can get there and we have made it.

The Chair: On behalf of the committee, I would like to thank you for coming.

The committee adjourned at 1646.