[Recorded by Electronic Apparatus]
Wednesday, June 14, 1995
The Chairman: Order.
We're back on our study of Bill C-82, An Act to amend the Royal Canadian Mint Act. With us today is our lead-off witness, a representative of the Canadian Soft Drink Association. His name is Bill Casey. He is the president of Coca-Cola Beverages here in Canada. I can assure you he is not the Bill Casey of Watergate fame; that Bill Casey has long departed.
We're very glad to have you here, Mr. Casey. We look forward to what you are about to say, and then we'll resort to some questioning.
Mr. Bill Casey (Director, Canadian Soft Drink Association): Thank you, Mr. Chairman.
Bonjour, mesdames et messieurs, and good afternoon.
My name is Bill Casey. I'm president and CEO of Coca-Cola Beverages. Coca-Cola Beverages is the bottling company that services all of our consumers across Canada. I'm a director of the Canadian Soft Drink Association. With me is Paulette Vinette; she's the president and CEO of the Canadian Soft Drink Association.
The Canadian Soft Drink Association represents manufacturers and distributors of carbonated flavoured beverages commonly known as soft drinks. As such, in CSDA our members distribute many of their products through some 100,000 vending machines across Canada. On behalf of the association, we are pleased to have this opportunity to appear today to discuss the impact of the introduction of the $2 coin, as well as to comment on the interrelated changes to the alloy content of other coins for use in our 100,000 vending machines across Canada.
We plan to keep our remarks very brief in order to provide some time for questions and answers. I would know like to invite Paulette to outline the position of the Canadian Soft Drink Association.
Ms Paulette Vinette (President and Chief Executive Officer, Canadian Soft Drink Association): Merci.
First, let me state clearly that we support the government's plan to introduce the $2 coin in order to reduce production costs. However - and this point is critical to us - along with other vending industries, we are requesting that the federal government delay the introduction of the new coins by one year in order to provide adequate time for all of us to convert existing coin mechanisms to new ones.
We estimate that our industry will require as much as $200 per machine to convert existing mechanisms to accept the new coins, and as much as $600 to replace an existing mechanism. Thus, the overall cost to our total industry could be as much as $30 million.
Therefore having an additional twelve months to accomplish the conversion process would not only make the scheduling manageable but should ease and spread the financial burden on us to incorporate such additional costs.
We feel the extension is further justified given the fact that our vending machine suppliers have not yet received the technical specifications - the weight, size, etc. - of the new $2 coin nor the alloy changes planned to take effect during the same phase-in period.
I am sure you can appreciate there will be considerable time required to carry out these changes. The sought after extension would provide a more reasonable timeframe to engineer and develop the mechanisms we require. Without this extra time, our industry - including many retailers - could face unfair financial hardship. In addition to the conversion costs, there will be other associated costs such as lost sales while the equipment is being converted, and transportation expenses, just to name a few.
In summary, we hope this committee will recommend that the introduction of Canada's new $2 coin scheduled for January 1, 1996, be delayed an additional twelve months. We presume the timing of the alloy changes to existing coins will match the timing of the introduction of the $2 coin.
We thank the committee for providing us the opportunity to appear, and we would pleased to answer your questions.
The Chairman: Thank you.
We will start our round of questioning with Mr. Brien, from the Bloc.
Mr. Brien (Témiscamingue): Thank you and welcome to the Committee. At the start of your presentation you said that you support the introduction of the $2 coin. How is a $2 coin good for your industry?
Mrs. Vinette: It's not an advantage for our industry. It won't make much of a difference. We know that the federal government wants to save money to reduce the deficit. We agree with that. Whether there is a $2 coin or not doesn't bother our industry.
Mr. Brien: If there were no $2 coin, would that affect your industry?
Mrs. Vinette: No, not in our case.
Mr. Brien: We've heard that companies will have to absorb the costs. Generally speaking, I imagine that consumers will have to pay for those costs; otherwise, profits go down. It's possible that sales might ultimately fall, but when the company invests in equipment, it must sooner or later slightly increase its prices. So the consumer will have to pay for the introduction of the coin. Is that correct?
Mrs. Vinette: I could answer in French, but I think it might be better to ask the president of Coca-Cola to respond.
Mr. Casey: There would be additional costs as we go to a $2 coin and as we change the alloy in the existing coins. However, our industry, the total soft drink industry, is one that's had pressure on costs - we look at this as pressure on costs - before. Our goal would be to increase productivity in the marketplace, just as we incur some other costs.
The key here is to give the industry time to implement the change so we don't have an anomaly that would cause the rapid increase of costs and costs that are disproportionate to those costs relevant to giving us more time. The longer the time we have, the less cost we would have. Yes, we will have costs, but in my opinion the industry will be able to absorb these costs if we can manage the implementation of the $2 coin and the change in the alloy.
Mr. Brien: Are you usually able to pass on those costs to the customers in the end?
Mr. Casey: You don't look at it just as a cost by itself at the vending machine. You look at it as a cost for your total business, and then you have to apply the cost of your product to your whole business. So in the particular environment of the vending machines we would not raise the cost as a result of that. We would take a look at the cost of implementation and spread it over all of our costs.
If you look at soft drink pricing on a cost per millilitre basis, it is cheaper than it was some five years ago, because we're constantly increasing productivity.
Let me just summarize by saying that the cost will not go up in this particular segment by itself as it relates to this issue. We take a look at how much it does cost us, and then we spread that across our total business.
Mr. Brien: That's all for now. Thank you.
Mr. Epp (Elk Island): My apologies for not being able to be at more than one place at a time. I'd like to begin by asking you, if this had never been proposed - I know you're not opposed to the $2 coin - is it so desirable from your point of view that you would have asked for it?
Mr. Casey: We would not have thought of this idea, so we wouldn't be here as an industry proposing we go to this idea. Conversely, we support the move because we understand, in putting the motion forward, it would save money for Revenue Canada and Canada. Based on that, we support the move. It's a supportive move as opposed to a proactive move.
Mr. Epp: As a typical Canadian, then - just take off your hat as chairman of Coca-Cola involved in the Soft Drinks Association - how much do you think it's going to save per person, per year?
Mr. Casey: I don't know. That's up to those who are putting forward the recommendation. You're asking me how much it saves the whole industry. I have only heard from those who are proposing the action that there's going to be substantial savings. I take that for the merit of the proposal. I have no idea.
Mr. Epp: If we take the numbers the ministry has provided, some $420 million over a 20-year period, and divide that out per year and per Canadian, it works out to about 40¢ per Canadian per year. I'm just wondering, as a taxpayer, whether you would just as soon keep the 40¢ in your pocket. It's going to save you 40¢ as a taxpayer per year, but if you use a vending machine more than ten times a year, and prices are increased by 10¢ in order to cover the cost of the rescheduling, it's going to cost you more. The saving isn't as great as they're trying to put out here.
Mr. Casey: I don't know the magnitude of the savings, but let me just be perfectly clear on the comment you made. I think it was that there will be an increase of 10¢. My point is we're looking at it very proactively as business folks. There will be an increase in cost for our total business, and then we have to look at our total costs for our business.
We don't know the magnitude of the cost yet because we don't know what the alloy changes will be or what investment we will have to make in changing the coin mix. Those things are still very unknown to us.
I really question the responsibility of asking the industry across Canada to implement something like this in such a short period of time.
Mr. Epp: The best information we have now is that it's going to involve changing coin identifiers from being able to accept four coins to accepting a minimum of eight.
There will probably be some pretty subtle differences between the old quarter and the new quarter. They'll probably have the same size with a difference in weight and so on. So I think there are some technical problems that will have to be worked out. I certainly concur with your request that you ask for another 12 months. Otherwise, you're going to be caught not being ready to accept the new coin.
Members of a group here the other day indicated they were concerned because their machines would now run out of coins. In other words, with the $1 coin they find enough people are still using quarters, nickels and dimes that can be used to produce change, whereas if you go to the $2 coin, they would have additional costs in hiring people to replenish the supplies of quarters in the machines, since more would be going out than coming in. Have you given that any study or thought?
Mr. Casey: We have. We're concerned about that because to increase productivity we may end up having to change the total coin mechanism so we end up with more carriages of quarters. That's a very technological change that has to be made. Therein lies the reason why we need more time.
Mr. Epp: Would this produce an overall inflation? For example, if products in the coin machines have to go up in price because you have to recoup your cost of investment in having to redo 100,000 vending machines across the country, obviously someone has to pay for it. I could see you raising your price per purchase by 5¢, 10¢, or whatever. Would that then justify grocery store owners who are selling soft drinks outside the vending machines in putting up their prices by the same amount, so this would have an inflationary effect?
Mr. Casey: The principle of economics is that you take a look at this cost, then look at what productivity moves you can put in place and how much your overall cost is going up, and then, assuming costs go up, you spread that cost across all cases. What we don't know is how much it is going to cost us. We don't know what changes we will have to make.
When you change the weight of a coin, that is not an insignificant decision. The coin mechanisms read both the size, or dimensions, and weight. When you change anything in the weight some investment needs to be made, but we don't know what that is yet.
Mr. Epp: We haven't been told either, as far as I know. I'm just assuming the new alloy in the nickels, dimes and quarters is going to change the weight of those coins. I'm just assuming that.
Mr. Casey: I'm assuming the same thing.
Mr. Epp: That's straight physics, unless they somehow change the thickness of the coin to compensate for the weight or whatever, in which case you will then have another size problem.
Mr. Casey: Any change in the coins' dimensions or weight has a significant bearing on the decisions. That's why we ask for time.
Mr. Epp: Does a division of your company produce the coin identifiers, or is that done by a third party?
Mr. Casey: All the representatives in the Canadian Soft Drink Association buy from third parties. There are other companies we buy from.
Mr. Epp: Are the companies that provide this service from inside or outside Canada?
Mr. Casey: There's one company in Canada and there are about three or four players outside Canada.
Mr. Epp: So there's a good chance that this business would leave the country.
Mr. Casey: There's no incremental chance of it leaving the country. It will probably stay wherever it is now.
The Chairman: With an accent like that, Mr. Casey, you wouldn't be rooting for the New Jersey Devils or anything like that, would you?
Mr. Casey: Well, Mr. Chairman, I'm glad you asked. I'm very disappointed my team lost to the New Jersey Devils. I'm from Boston.
The Chairman: I figured you were fairly close. Anyway, don't ever lose it, it's a nice accent.
Mr. Casey: Thank you. I appreciate it.
Mr. Duhamel (Saint-Boniface): Thank you for your presentation.
Roughly when did you find out there would be a change to the coinage?
Ms Vinette: I recall it was probably a year ago, when the former president of the mint retired. He came to Toronto in a consulting capacity and asked to meet with the association to ask us how we felt about a $2 coin and changes to the alloy content. At that time we answered exactly the same as we have today.
Mr. Duhamel: That was roughly a year ago. What have you done since then? What have you been able to do? Has anything been accomplished in the meantime? Could anything have been done?
Ms Vinette: No, because as we've tried to convey, if I can describe it, we are neutral on the $2 coin from the point of view of our needs. There was nothing to be done until we did the cost implications. I did attend on behalf of the industry the consultation that followed Paul Martin's announcement of the coin, to try to get the information.
Mr. Duhamel: As I understand your brief tonight - I looked at it very quickly - there are roughly 100,000 machines out there, ball-park. Conversions would cost about $200 each. That's the estimate. Replacement of the mechanism would be $600. Do you have a total cost for the conversion and replacements, or do you have a breakdown against the number of machines that are conversion versus replacement, ball-park again? Can you give me an estimate?
Mr. Casey: That would be $30 million in total.
Mr. Duhamel: About $30 million. What are the total sales of these 100,000 machines, roughly?
Mr. Casey: I represent the industry here, but I'll give you one bottling company's experiences on a percentage basis. It's the leading soft drink company in Canada. Of our total business, about 20% to 25% is done in vending machines.
Mr. Duhamel: Yes, but when we talk about these 100,000 machines, they are machines that dispense soft drinks. Those machines...I don't know; on average, is it $10,000 a year they would gross? What are the total sales? Do you have any sense of that?
Mr. Casey: I don't know what the total sales would be on those.
Mr. Duhamel: It was an important figure for me, because I wanted to have a sense of what the $30 million was in relation to the whole. Perhaps you could get that for us.
Mr. Casey: I think it's a very good question.
Paulette, if you could get that from the industry....
It's a good question. We're not hiding from it. We just don't know the answer.
Mr. Duhamel: If it were $10,000, and we're talking about millions of dollars of sales here, we're talking big bucks.
Ms Vinette: I can tell you the industry's value is approximately $3 billion. If you did the math, if the dollar were equal on all types of sales...but that is not exactly the case, so I'll get back to you.
Mr. Duhamel: That would be appreciated.
Mr. Chairman, with your permission, perhaps I could get a clarification from the parliamentary secretary. There's one thing I'm having difficulty understanding. First of all, it was confirmed yesterday that, look, people are sympathetic to the idea of delay, but it's a budgetary measure, so we have a real problem; you know all about the deficit, the debt.
So we have a problem here. I want to try to understand something I just realized I don't understand. I wish I could exchange what I don't understand for what I do understand. I'd be much richer, I assure you.
This question is for Mr. Bélair. Let's assume for a moment the $2 coin came to be in January 1996. Let's assume as well that the other coins were not done at that particular time. Do they have to be done at the same time? Can they be done later? Is it necessary to do the metallic content changes in all coins at the same time?
So the January 1996 date is not just the $2 coin. It's all coins, is it?
Mr. Bélair (Parliamentary Secretary to Minister of Public Works and Government Services): Yes, it is. It would be ideal to have all coins changed at the same time, so the calibrating would be done at the same time for all coins - which does not mean before the implementation of the $2 coin the machine operators can continue. But eventually all the metallic coins will be coded in such a way that the machines in use today will not be able to take them any more. This is why the government is trying...and an Order in Council was issued to have the 1¢, 5¢, 10¢, and 25¢ pieces all coded the same way as the new $2 coin will be, in order to accommodate the machine operators, all at the same time.
Ms Vinette: When consulted by the Royal Mint most recently we agreed to that. We said look, if you're going to have to change more than one thing, could you plan it and phase it in together? Otherwise, it's obvious: you go and you fix one thing on the machine, you go back....
This will not surprise you, but the highest cost in retrofitting the mechanism is the labour, not the piece.
Mr. Duhamel: Obviously there's a flaw in the analysis I was trying to make.
Let's assume for a moment that the $2 coin will come to be in January 1996. Let's assume that it is possible. No one has said that it is. We'll say that we won't do anything to the other coins for another 12 months, for example. No machines need to be recalibrated. We still get the $2 coin in January 1996. Over time we make the adjustments that are necessary. All of sudden, 12 months or whatever later, all of the other coins would be done.
Has anyone looked at that? Is that possible? Is that feasible? It seems to be such a simple solution that it can't be workable.
Ms Vinette: The $2 coin would require recalibration.
Mr. Duhamel: I understand that. Let's assume you don't use the $2 coin. The $2 coin comes out, but you couldn't use it. It would have been recalibrated. So you don't use the $2 coin for another 6 or 12 months, or whatever it is. You keep on using the other coins. We'll say that on January 1, 1997, all of the other coins suddenly come out, they're all redone. All of a sudden your machines are recalibrated on that particular, momentous, historical day - January 1, 1997.
Ms Vinette: When the mint consulted with all vending parties, they made the suggestion that we didn't have to use the coin. But Mr. Casey can tell you that there isn't a soft-drink person in Canada who would miss a sale if they could avoid it. It would compel us to get in there and do everything for our customer and consumer, as it were.
Mr. Duhamel: So that option was given to the industry?
Ms Vinette: Yes.
Mr. Duhamel: That is, to come out with a $2 coin and then to do all of the other coins later and then calibrate the machines on X day in order to respond to the $2 coin plus the changes in the old coins. Is that correct?
Ms Vinette: That was an unofficial suggestion of how we could get around the difficulties that we were painfully reporting on.
Mr. Duhamel: I just need to know why it was rejected. I'm sorry; I don't understand that.
Ms Vinette: I'll grant you it was a casual exchange of possibilities, but all of the people in that consultation room - including the Retail Council of Canada, the vending industry that you had here yesterday, CAMA, which represents everything that's vended - said what I've just said. We don't want to lose a sale. We don't want a customer of ours going up to a machine having only a $2 coin and saying, ``Gee, that's what they think of me and my needs''.
It's an unacceptable marketing reality to introduce a coin that we can't use. We don't want that. We think the compromise of a year is rational.
Mr. Duhamel: But can you use a $2 bill now?
Mr. Casey: You cannot use a $2 bill now. You have to use coins, loonies.
Mr. Duhamel: Thank you for your indulgence, Mr. Chairman - your great generosity.
Mr. Bélair: I'd just like to make more precise the statement I made a while ago. The Order in Council has not been passed. The consultation has been done over the last two or three months with the vending machine operators. Their suggestion was to introduce the $2 coin at the same time as the new coins, the 1¢ to 25¢ coins, will be coded differently. So the Order in Council will be made as soon as this legislation is passed in order for all the coins to be coded in the same way, similarly, at the same time.
That was upon your request.
The Chairman: So we would not be in a situation where at least the old machines could use some coins but perhaps not the new $2 coin.
Mr. Bélair: That's right. They would all have to be recalibrated with the new coding.
The Chairman: If they're all changed at the same time, then the old machines wouldn't take any of the old coins whatsoever.
Mr. Bélair: That's right.
The Chairman: You're either all in or all out. Am I right?
Mr. Bélair: Yes.
Mr. Casey: As I understand it, effective on a day, January 6, 1996, the machines would go with either one coin or the other. Is that right?
Mr. Bélair: If you want to use it, yes.
Mr. Casey: But you have to calibrate; you have to change the existing mechanisms to accept the new coin.
Mr. Bélair: Maybe we should just ask....
The Chairman: We're asking someone from the mint, I gather, Mr. Bélair.
Mr. Bélair: Yes. Maybe she could approach the table.
The Chairman: Bring her right up.
Mrs. Chamberlain (Guelph - Wellington): We might as well get to the bottom of this.
The Chairman: Can I have unanimous consent to bring this lady to the table?
Some hon. members: Agreed.
Mrs. Chamberlain: From the mint, to find out the information.
The Chairman: This is Mrs. Diana Beatty.
I hope we're not embarrassing you. We're just fumbling around here for some information.
Ms Diana Beatty (Vice-President, Corporate Affairs, Royal Canadian Mint): I will clarify a few points. On April 1, 1995, the government published its intent in the Canada Gazette, part I, to change the metallic composition of the 1¢, 5¢, 10¢, 25¢ and 50¢ coins, and to have that change implemented for all coins issued in 1996.
That intent was published and provided an opportunity for Canadians to make their comments known. The notice period expired on May 30. The government will now review any representations that were made and then make a decision.
Presuming the government decides to go ahead, an Order in Council would be approved.
The Chairman: So the whole thing will be done in one fell swoop.
Ms Beatty: That's correct.
I could clarify just one other point, Mr. Chairman. For the industry, this also means coins of the current composition would continue. The government would not withdraw those coins.
There would be two types of coins the industry would have to accommodate, those of the current composition and the newly plated compositions. Those would require an adjustment to the machines because, as someone mentioned, the weight would be different. The weights were published as part of the Canada Gazette notice.
The Chairman: Let me get this straight. When the new machines are brought in, if I can put it that way, they would have to accommodate both old coins and new coins.
Ms Beatty: That's correct.
The Chairman: Is that right, Mr. Casey?
Mr. Casey: That's the way it sounds to me.
Ms Beatty: Yes. For the industry, that means the 5¢, 10¢ and 25¢ coins. As I understand it, neither the 1¢ nor the 50¢ coin is really used in vending.
The Chairman: Can I ask a question of Mr. Casey at this point? If it's true you're going to have to introduce new machines that are adaptable or can use both the old coins and the new coins, what would be the rush in converting? Why would you have to convert them all at one time?
It seems to me the worst situation would be that you would have some old machines able to use all the old coins, but not able to use the new $2 coin. As your conversion process moves on, there will be a point where all your machines will take old and new coins. Am I right? What's the rush?
Mr. Casey: What's the rush? Do you mean would it mean that we had to postpone it until -
The Chairman: No. What would it matter if it took two, three or four years for you to convert all your machines? So what if two or three years from now, I came to a machine that didn't take the $2 coin? I'd just pull out two loonies.
Mr. Casey: The frustration of the consumer is the issue. Here's what happens. You have a coin in your hand and you're going to put it in the vending machine. Something negative is going to happen. It gets caught in the machine, you lose your coin, and you start doing all kinds of dangerous things to my machine.
You have consumer issues out there from the get-go. You want to satisfy the consumer who puts his or her coin in that machine. That machine has to accept that coin at that time.
I'm hearing that we have changes: yes, you can use the new coins, and yes, you can use the old coins. That's the monetary system. We have to know what the new coins weigh or look like. We have to adjust the machines now to accept both the old and the new. That takes a lot of time.
The Chairman: But you're saying that the customer insists on instant gratification. If I'm dying for a Coke and I go to a machine and find that it doesn't take the new $2 coin, suddenly I become what - no longer interested in buying Coke? What do I do then? What do I do when I find out this darn machine doesn't take a new $2 coin?
Mr. Duhamel: You vandalize it.
Mr. Casey: You vandalize the machine. That's one. Two, in most cases when you have a coin that's not standard, you don't get the coin back. If the coin gets caught in the mechanism, it puts the machine out of order: true story. It puts the machine out of order, and you don't get your money back. We have frustrated consumers calling all the time, and we have lost sales, because by the time I send my mechanics out to fix the machine, which is some two to three days later, we've lost tremendous revenue from those vending machines.
That's what happens when you put in the machine a coin that doesn't work. It happens every once in a while.
Mrs. Chamberlain: He is right on this. When I was -
The Chairman: No confessions, please.
Mrs. Chamberlain: No.
He is talking about the ignorance of the customers to be able to really know the difference. This winter I was away and there were machines - I hate to tell you, gaming machines - and the same thing happened. One would take a Dutch coin and one would take a U.S. coin. People were forever getting the wrong coins in the machine.
So I want to ask this question, probably of the mint. Is it possible the new coin could be made so it wouldn't fit into the machine? It simply would not fit. I don't think it's a terrible thing. I understand from the marketing point of view that you don't want anybody to be unable to access the machine. On the other hand, you can't use a $2 bill now, so if you couldn't use a $2 coin....
But I can understand why you'd be upset if they can get that coin into the slot and jam your machine. That's precisely what happened with the gaming machines. They always had to have attendants because people like me didn't pay attention.
Can we find out if the coins can be made so they would not go into the slot? I think that's the issue here.
Mr. Casey: You're on to one particular part of the issue, and I appreciate the support. The 100,000 vending machines in the course of three days work one time, and literally, to have 100,000 vending machines out of order at the end of one week, it's impossible for the industry to handle. You answered the question.
However, I don't understand the industries coming and saying that they want to work with us on the change. We just ask a slight few months to find out what kind.
We were asking questions here today, and we're finding out from the mint. We don't even know what size it is. We don't know the alloy, nor the mechanics. We have to go to Coinco, located maybe in Quebec City. Tool up? You can't make a bottle-making machine in less than 18 months.
Mrs. Chamberlain: Just in fairness, I think we do know the size. We did see it. But I don't know if they fit into those slots.
Mr. Bélair: As a point of information, the new $2 coin will weigh 7.31 grams, and it will be 28 millimetres in size. To put it in perspective, in comparison, the loonie is 26.5 millimetres in size. The composition of the new coin will be nickel on the outside with bronze aluminum on the inside.
Ms Vinette: Why is it, then, that in the industry they are not committing to these specs? We heard specs at the consultation meeting when I met you. There's a sense among the user group that it is not final. We haven't actually seen the sample. They haven't worked with the engineers. That's what they tell us - because they're not giving us the quotes yet.
Mr. Bélair: Well, it's not final until Parliament approves it, but on the other hand, this was published in the Canada Gazette on April 1, 1995.
Ms Vinette: But the engineers are not making the plates until they know.
Mr. Bélair: Yes, until it's approved. They are also in the process of adjusting the alloys, the composition.
Ms Vinette: Yes.
The Chairman: I think Mr. Brien wants an intervention, and then we'll have to move on to our next witness.
Mr. Brien: We have to make sure that both types of coins can be used, otherwise it is clearly going to be a disadvantage. It's a very competitive industry. So they are going to race in order to invest quickly, and they will see their costs soaring in the very short term.
We also had questions concerning electronic money, meaning the smart card. Is your industry going to adjust in order to allow the use of smart cards in the machines? Could the two changes be made all at once, because as machines will have to be converted anyway?
Mr. Casey: We are looking at the smart card - what we call a debit card - and we've converted some accounts, mainly captive accounts. There are universities that use debit cards for books and things at the bookstore and things like that, plus the vending machines.
It's a process that is independent from the coin. You have the use of a coin and a debit card, so the coin mechanism will still be there. The debit card function is a different kind of function. Yes, we're looking at that.
I can tell you, the way the process is going on the utilization of debit cards, I think it's a four- or five-year-out kind of thing before it happens. But yes, we like that technology, it's going to have to be consumer-friendly, and I see that being a longer term.
The Chairman: Just wrapping this up, then, Mr. Casey, are you suggesting some day we'll have drink machines that will take both debit cards and coin?
Mr. Casey: Some day we will have available debit cards and coins. I think it will be, say, five years. I don't know.
Mr. Epp: I wanted to ask one last quick question. What would be the response of your industry if you found out that due to the overwhelming evidence indicated, the government decided to scrap the idea? Would you be happy?
Mr. Casey: Well, I have to look at it from a business standpoint, and if the government said no, then I'm sure they'd recommend that based on the economics. They found out it just cost too much money. I would applaud the government for making that decision, based on the economics, because that's why they would make that decision.
The Chairman: Okay, but we're told that the economics runs in the other direction.
Mr. Casey: It was a hypothetical question, and I gave a hypothetical answer.
The Chairman: Around here we should never answer hypothetical questions - very dangerous business.
At any rate, thank you, Mr. Casey. It was good of you to come.
Mr. Casey: Thank you, Mr. Chairman and members, for allowing us to appear.
The Chairman: Colleagues, we're going to invite our next witness. The gentleman's name is Clyde Wetmore. He's the vice-president and general manager of Domtar Security Papers.
I believe we have a paper from you, Mr. Wetmore. I gather you're just going to run down the points quickly and then we'll ask questions. You may begin any time.
Mr. Clyde Wetmore (Vice-President and General Manager, Domtar Security Papers): First of all, on behalf of Domtar, ladies and gentlemen, I would like to thank you for the opportunity to speak to this group today and to give our views on Bill C-82.
Our views are those of a manufacturer of security paper that has manufactured banknote paper for Canada for longer than the inception of Canada's central bank.
Domtar security papers is a division of the larger parent company, and we manufacture in Canada although we sell worldwide. We sell banknote papers and travel documents - passport papers and travellers' cheques and so on.
The mill that produces this paper is in Beauharnois, Quebec, on the south shore of the St. Lawrence. It produces about 12,000 tonnes a year of specialty and security papers. It has two very small paper machines; it has a pulp mill that produces the rag or cotton pulp that we need for that paper; and it employs about 140 to 160 people.
We've supplied, as I mentioned, Canada's banknote paper for over 60 years. The volumes of Canada's banknote paper have dropped over 40% in the last 36 months, largely led by the automatic teller machines and their capability to handle these notes in older and older condition. So they no longer need the crisp new notes they once did when they started. As well, the Bank of Canada has implemented some optimization of inventory control.
While this has happened, Domtar has incurred massive research and technological costs to try to reposition the mill in the business. By ``massive'' I'm talking about approximately 10% of sales in each of the last two years having been invested in this.
We are motivated by the public's clear preference for paper currency. Our research and development efforts recently, in April of this year, achieved a patented technology for a more durable banknote paper. This represents a high export potential for Canada. It's currently being evaluated by a number of international banks, including the Bank of Canada. I'd like to underline that our relationship with the Bank of Canada has been extremely positive in doing this, as it has been with the forensic labs of the RCMP.
To document the impact of the $2 coin on Domtar, it represents a loss of annual sales revenue of about $1.2 million. The employment impact is about 1,400 person-days. Also, in light of the diminishing volume, the technical and research overhead is becoming extremely burdensome. I speak to that which is associated with maintaining paper production and the extremely stiff standards of the Bank of Canada.
The timing of this event is critical. It happens at a time when we're absorbing costs while trying to commercialize a new technology...and at the same time the volume reductions in the last 36 months, as I mentioned.
Our proposal is to delay the implementation and at the same time perhaps compare the economics of the coin with what could be called a more durable substrate than the traditional paper banknote.
The Chairman: Thank you.
Mr. Brien: You speak of delaying the implementation of the $2 coin. Which means, that you already agree that one day we will have a $2 coin.
Mr. Wetmore: Yes, we believe the $2 bill, with inflation, is ultimately proceeding towards the coin. Our main issue is the timing of the decision.
Mr. Brien: You also talk about more durable paper with new technology of yours. Could you give us some figures so that we could make comparisons? What would be the cost to the government with the paper they are using now, compared to the more durable paper?
Mr. Wetmore: I'm not aware of the government figures for the cost of production of a million banknotes, for instance. But the product we're proposing in the technology - and I'll come back to that in a moment - is approximately double the price of the current paper.
That didn't answer your question. I don't know the data that respond to your question, what it costs the Government of Canada to produce a million banknotes. But the issue we have is not that we're proposing the Bank of Canada accept our product. That's up to their evaluation and whether they do it or not, just as it is for any international bank. Our issue is the timing of this particular piece of legislation.
Mr. Brien: You mentioned decreasing volumes of production. As electronic money and credit cards will be used more and more, people will use paper money less and less, and your situation is bound to get worse.
Mr. Wetmore: Our study of international markets has indicated that while some very developed countries are moving rapidly towards smart cards and debit cards and so on and that has a downward impact on circulating paper currency, at the same time on the international market developing countries are switching to higher and higher utilization of currency, and some are still moving from barter to currency. So overall there is a growth in paper currency in the market. The percentages are very small; but it's still growth.
Mr. Brien: So, for you, developing countries are the market of the future.
Mr. Wetmore: It relies on the international market, of which developing countries are part. It's not solely dependent on developing countries, but in part.
Mr. Brien: You suggest delaying, but for how long?
Mr. Wetmore: I was hesitant to specify what sort of delay would be appropriate. To answer your question, I would believe a one- to two-year delay would be compatible with us being able to move in what I'll call replacement volume and not suffer a significant economic downturn in our business.
Mr. Brien: Merci.
Mr. Epp: I'm intrigued by your development of a more durable paper. Do you have R and D on this? If the current $2 bill lasts an average of one year, as we are told, how long do you expect the $2 bill printed on the new paper would last? What is the durability quotient or whatever?
Mr. Wetmore: The final answer on that would come from the banks' evaluations, the banks that are out there evaluating the product. Our lab and research evaluations indicate that it is orders of magnitude of improved durability, and orders of magnitude are in the area of two to four times as long.
Mr. Epp: Are you aware if $2 bills printed on this new paper are still recognizable by the coin-changing machines?
Mr. Wetmore: Yes.
Mr. Epp: So there would be no modifications required to the change-making machines with the new paper.
Mr. Wetmore: No.
Mr. Epp: Are you in a position to produce that paper, or would it require a bunch of start-up costs for your company?
Mr. Wetmore: We are in a position to produce it now, following the evaluations of the banks.
Mr. Epp: So your start-up costs wouldn't be high.
Mr. Wetmore: If we were to optimize the production of that note, we would want to invest in the Beauharnois mill to make it more state of the art.
Mr. Epp: You indicated that if that happened it would also increase your around-the-world competitiveness.
Mr. Wetmore: Very much so.
Mr. Epp: Do you think the old style of note papers will soon be gone and you'll be forced to it anyway?
Mr. Wetmore: I would like to think so, but in reality, the central banks of countries are very cautious in moving to new substrates, and they do very, very thorough evaluations. So there will be a change, I believe, but it will not be a rapid one.
Mr. Epp: So it will take five or ten years or thereabouts.
Mr. Wetmore: Or longer.
Mr. Epp: If the $2 coin replaces the $2 bill, that's going to have obviously a further impact on your business. Do you expect that it will result in people being laid off?
Mr. Wetmore: As we see the situation now, that alternative is very real in the short term. If it happens with the speed that the government legislation is currently asking, we have an identified replacement tonnage that could come in.
Mr. Epp: If it were to go more slowly, would you then probably be able to retain your employees?
Mr. Wetmore: That's our strategy, to keep that volume at a constant level so as to maintain the critical mass of the mill.
Mr. Epp: So you'd be able to diversify on your international market and other things.
Mr. Wetmore: Right.
Mr. Epp: I have one last question, which is, if everything stays the way it is now and we don't have a $2 coin, do you view that as being good for your company, or neutral?
Mr. Wetmore: On the timing, it would be good if it were delayed for a while. In the long term, if our business strategy delivers the results we anticipate, at a later date we would be neutral to the $2 note changing to a coin.
We'd naturally like most currencies to stay with paper, but we recognize the need for a proportion of a country's currency and purchasing power to be in coinage.
Mr. Epp: Mr. Chairman, those are all my questions.
Mr. Murray (Lanark - Carleton): Mr. Wetmore, I want to pick up on some of the points in your background paper.
You mentioned that the volumes had dropped over 40% in last three years, and you indicated that this was partly or largely due to the changes in the automated teller machines able to use older notes. Therefore, on that comparison of 40%, if you look back, say, five or six years - if you follow what I'm getting at - would the drop not be as significant as that 40% measured over 36 months? I wonder if the 40% is a bit of an aberration.
Mr. Wetmore: I guess there have been two events on which I could focus - the elimination of the $1 note in the 1980s, followed by what I've described as ``the last 36 months''. Both of these have had a significant impact on the volume of banknote paper we have supplied to the printers and to the Bank of Canada.
Mr. Murray: You made another point about incurring massive research and technological costs in order to reposition the mill and the business. We had the president of British American Bank Note Inc. here yesterday. His company is looking at offshore markets for growth. The question this raises in my mind is, why wouldn't you work hand in hand with the banknote companies to go after those markets so that the paper they use is the same kind of paper you're producing now, rather than those incurring those R and D costs? Why would you have to switch to different kinds of paper as a result of the government dropping the $2 bill?
Mr. Wetmore: In selling banknote in the international markets, the central bank of country X will very frequently demand competitive bids from a series of printers. For instance, in Brazil the latest issue demanded quotes from no less than twelve international banknote printers. So to link ourselves into a joint venture with Ottawa's two banknote printers would narrow our business focus too much.
Mr. Murray: So you are already involved with printers from other countries who buy that paper.
Mr. Wetmore: Yes. Through them, we give quotes on our products. That's what necessary. In terms of the volume I speak of, it's necessary to build on more than just the Ottawa printers.
Mr. Murray: That makes sense.
The only other question I have is in regard to your comment that the public has a clear preference for paper currency. Is that based on polling? How did you arrive at such a conclusion?
Mr. Wetmore: It's not the result of a poll that we have taken. In our travels and in our sales - we have sales organizations spread across the world, with four major sales offices - and in any of the presentations we have made, the preference for paper usually comes out. It's recognized that coin is necessary and is an effective way to deal with small purchases, but the public's preference for paper is clearly obvious to our people in our marketing strategies.
I don't know whether that answers your question or not, but it's not based on a poll. It's a subjective evaluation.
Mr. Murray: That's all I have for now, Mr. Chairman.
The Chairman: Thank you.
Does anybody else have questions?
Mr. Duhamel: You mentioned $1.2 million in lost sales, as I recall, as a potential impact, along with 1,400 person-days. Explain to me, if you will, what 1,400 person-days means in terms of regular employment.
Mr. Wetmore: I mentioned in my introductory comments - it's not in the hard copy - that there are 140 to 160 people employed at the mill. The impact of taking that volume out without replacement volume will be closure of the mill for the equivalent of ten days. That's 1,400 person-days of work.
Mr. Duhamel: There are about 250 work days in a year, so is dividing 1,400 by 250 another way of doing it?
Mr. Wetmore: No. That would equal seven or eight people being laid off, and that's not the case. There's the pulp mill involved, the paper machine, the finishing - a whole support group that makes this happen. So without the volume, the economics move it down.
Mr. Duhamel: All right, I think I have it now.
I have a final question. Have you known for a long time that this would no doubt happen?
Mr. Wetmore: Through the newspapers, we've been aware for a year or so that the possibility of a $2 coin has certainly been there. Officially, we were advised at the time of the budget.
Mr. Duhamel: Would you have been able to take any actions to counteract some of the negative impacts of that from the time you heard about it until now?
Mr. Wetmore: More than what we were doing? No. Our reaction on the development side was in part motivated by the previous reductions of Canadian currency, as well as wishing to expand and take market share away from our competitors. So that activity was already under way. My continued emphasis has been on the timing of this decision and government legislation because it happens on the heels of an already reduced volume, and it happens at a time when we are not as strongly positioned as I would wish to be in order to be able to undertake a further reduction.
Mr. Duhamel: Finally, sir, if the government were to proceed with a $5 coin and a $10 coin - and I don't know that this will necessarily happen - what would be the impact of that on your company?
Mr. Wetmore: Our business plan is not underpinned by just being a supplier to the Bank of Canada.
Mr. Duhamel: I understand that.
Mr. Wetmore: We believe we have to be an international competitor, both technically and competitively, in terms of costs. If Canada was to have $5 and $10 coins, I assume that would be five or ten years down the road. Our business plan would have us positioned strongly enough to be neutral to that.
Mr. Duhamel: So you try to expand your international markets at such a rate that international demand would hopefully surpass any decrease in demand from Canada.
Mr. Wetmore: Yes, but I'll leave that with a comment. In our business it's very important that we be perceived as a supplier of paper to our own country. When we market our products out there, the question that invariably comes up is, ``Does your own country use your paper?'' If the coinage was to go so far that it reduced that to a minimal volume, it would significantly hurt our market strength.
Mr. Duhamel: I appreciate that.
Thank you very much, Mr. Chairman.
The Chairman: Thank you, Mr. Wetmore, for coming.
Colleagues, I just want to mention one thing before you go. Tomorrow we are going to have at least one more witness. There is a possibility of having a second witness for a short time - half an hour, or something like that. He's written a book on coins. I wouldn't want him to be talking about all different kinds of issues relating to this, just on the $2 coin.
What I'm leading up to is that I'd really like to get to clause by clause tomorrow.
Mr. Epp: We meet tomorrow?
The Chairman: We sure do, at 11 a.m.
Mr. Epp: Were we notified?
The Chairman: Yes, you were notified, Mr. Epp. The little green sheets have been out since I would say Monday.
Mr. Epp: Well, that one must have got lost.
The Chairman: I'm just saying to you that if everything goes according to Hoyle, we'll go right into clause by clause - it's only one clause, so I don't know what to anticipate - and with a little bit of luck, we may be able to wrap this up by the end of tomorrow's meeting. Is that fair?
Mr. Epp: Does this committee also have the power to recommend to the government that the idea should just be scrapped?
The Chairman: Well, I suppose if you want to just simply defeat the bill then, yes, it would be a message about scrapping it.
Mr. Epp: That is a possibility?
The Chairman: Sure. If the committee was to, say, defeat the bill then, yes, it's within our purview.
Mr. Epp: I don't know whether the committee members are amenable to that at this stage.
The Chairman: I would doubt it.
Mr. Epp: I would doubt it too. Notwithstanding, it's obviously going to be good for the mint. It'll probably save the Canadian government some money, because I think there's an advantage to -
The Chairman: How about the Canadian people?
Mr. Epp: I think the Canadian people will lose in terms of the coin vending machines. As well, as I said in my speech in the House, if you look at the savings - and if any of you didn't hear that speech, although this may sound arrogant on my part, I would encourage you -
The Chairman: Boastful.
Mr. Epp: - to read it, because in that speech I did point out that the savings per Canadian is 40¢ per year.
If the costs are going to go up 10¢ per purchase in order to pay for the re-machining costs, which I think is a reasonable assumption, unless Canadians use a machine less than four times per year they will basically end up paying more. They'll save 40¢ as taxpayers but they will spend 50¢ or 60¢, or probably $10, as users of the vending machines. So I'm not convinced at all that the taxpayers are going to save money on it.
The Chairman: Perhaps we're getting ahead of ourselves.
Mr. Duhamel: Just very briefly, I did look at your speech. I heard it, in fact, and with all due respect, I looked at your arguments and at the arguments from the mint and other associated sources, and I'm more convinced of their correctness. I don't say that in a denigrating way. I simply put more stock in their figures and in the evidence they brought forward in terms of savings to the government and Canadians. So you know I would disagree with such a motion, but it is your right to put it forward.
Mr. Epp: I'm not challenging your numbers at all. They're saying this is how much they're going to save and this is how much the government is going to save, and I'm not challenging those numbers. I'm just saying if you break it down as a savings per taxpayer, he will pay more as a consumer than what he saves as a taxpayer. That's all I'm saying; that's my argument.
Mr. Bélair: The witnesses yesterday admitted very clearly that the competition that exists today will exist again tomorrow. When my colleague says that, to my mind it means that if those prices go up by as much as he's saying, there will be collusion between the companies. There's a law against that, too. So I don't think the argument stands.
The Chairman: Let's debate it tomorrow.
Mrs. Chamberlain: I think one of the issues that still does remain is whether we are prepared to delay it or not.
The Chairman: Well, let's deal with that tomorrow.
Mr. Epp: I have one more thing that's totally unrelated. I received a letter from A.F.I. Automatic Vending Company Limited that I think is fairly useful for our deliberations. I would merely like to ask whether the rest of you received it. There's no indication. It just says ``Ken Epp, MP''.
Did you get it?
The Chairman: I didn't.
Mr. Epp: I'll make copies and distribute them tomorrow.
The Chairman: Okay.
Thank you very much. This meeting is adjourned.