Blog: The Wheat Sheaf

Submission to CGC's consultation on accumulated surplus funds 1 of 2

Ms. Patti Miller
Chief Commissioner
c/o: User Fees Comments
Canadian Grain Commission
600-303 Main Street
Winnipeg, MB R3C 3G8 

Via Email: discussions@grainscanada.gc.ca

Re: Consultation on Potential Use of Accumulated Surplus

Dear Ms. Miller,

As of September 30th, 2016 the surplus accumulated by the CGC reached $107.2 million.  We recognize that this amount has since increased and will continue to increase until the end of the current five-year cycle which ends March 31st, 2018. It is therefore expected that the “accumulated surplus” will be adjusted to reflect the final total at that time. While AWC acknowledges that a portion of the accumulated fees, ($35.6 million) will be set aside to meet the requirements of a contingency operating reserve, the expectation is that anything above and beyond that amount will be returned to producers within the next five-year cycle. 

AWC has reviewed the options as presented in the CGC’s “Potential Use of Accumulated Surplus” discussion document which was issued in March, 2017. With a view to ensuring the greatest possible return to the producers who contributed to the surplus, AWC would like to offer the following comments on the options outlined in the discussion document.

Section 5.1 (A) of the discussion document offers the option to direct a portion of the producer surplus to “provide initial funding for a Producer Compensation Fund.”  Creating a producer compensation fund as described in the discussion document creates a classic “moral hazard” and could lead to an increase in high risk business behavior by licensees.  In order to incentivize proper business behavior, grain companies need to be held individually responsible for their actions and the risks they take. Any design that promotes a pooling of risk among companies, will create a situation where lower risk firms are subsidizing the higher risk behavior of other licensees and ultimately the commercial consequences of that higher risk behavior. Any system that seeks to reduce the initial obligations of licensees with regards to bonding requirements will also tend to reduce the costs of high risk behavior in the industry and lead to commercial consequences for producers.

Private insurance options are in place for producers who wish to seek payment protection and see value in this investment.  Therefore, AWC is of the opinion that directing any portion of the surplus to finance a producer protection program of any kind is not only an inappropriate use of these funds from a producer perspective, it would be well outside the scope and intention of the User Fees Act.

Section 5.1 (B): outlines the option to “Reduce the Canadian Grain Commission’s prescribed fee for a fixed period of time.” AWC is of the view that this option is the the only way to ensure the greatest return to those that paid into the producer surplus and most closely aligns with the original intention of the user fee. The User Fees Act which indicates that the service fees charged should directly reflect the cost of the service being provided while ensuring a direct benefit to those being charged. AWC would also argue that in the absence of any clarity around what would constitute an appropriate use of the surplus funds (as articulated in the Considerations portion of the discussion paper, pgs. 8-9), reducing the fees for users of the service is the only efficient, effective and appropriate mechanism to rightfully return these funds to the producers who were over charged.

It was recently announced that the CGC intends to reduce user fees to $1.35/tonne effective August 1st, 2017. While we acknowledge that a fee reduction was necessary in order to reduce the continued accumulation of the surplus, there is still a formal consultation underway to determine what the user fees should be for the next five-year cycle which commences on April 1st, 2018.  AWC’s expectation is that the surplus (less $35.6 million in contingency) should be used to reduce the fees below whatever the fee is determined to be for the next cycle.

Section 5.2 (A): With respect to the option of “Investing in infrastructure and the future:” which would see a portion of the producer surplus be dedicated to “upgrade the CGC Grain Research Laboratory, office space and base building systems;” every year the CGC receives a public benefit appropriation of $5.37 million. According to the CGC’s “User Fees Consultation and Pre-proposal Notification” document issued in March 2017, “the annual appropriation is used to cover the costs associated with Governor-in Council appointments and fund a portion of the Grains Research Laboratory, since these are considered public benefit activities” (p. 20). 

The public benefit appropriation is intended to cover the portion of CGC services as being deemed in the interest of the public good.  AWC would argue that the public benefit derived from the services provided by the CGC is significantly higher than the 9% reflected in the current annual appropriation. 

In the US, approximately one-third of inspection service costs are publicly funded, while in Australia 40 percent of costs are covered by the government. This disparity puts Canada at a competitive disadvantage in export markets.

In addition, greater clarity is needed to determine if this type of allocation/redirection meets the requirements as outlined in the User Fees Act. As stated in the CGC’s “Potential use of Accumulated Surplus” document, “The surplus may only be spent on programs and activities that are related to services that the Canadian Grain Commission is authorized to provide under the Canada Grain Act. We are continuing to clarify relevant procedures regarding the use of the accumulated surplus” (pgs. 8-9). Not knowing the viability of this option, nor its direct benefit to producers, AWC is recommending that the CGC seek an increase, if required, in the annual appropriation to cover any and all costs associated with the “public benefit activities” including the upgrading of infrastructure related to the Grains Research Laboratory.

With respect to the “office space and base building systems,” an investment in this area would not offer any direct benefit to producers who are the primary source of the surplus, therefore AWC, cannot support directing any portion of these funds towards this option.

With respect to option 5.2 (B): “Establish laboratories and real-time analytical testing at licensed terminal elevators or other locations to improve and enhance services to the industry;” AWC would invite the opportunity to consider strategic investments if there was a direct benefit to producers.  In all likelihood however, those opportunities would be limited considering their role in delivering some form of public benefit and/or their ability to be more effectively and efficiently delivered by the private sector. AWC believes the primary role of the CGC should be as a regulator versus that of a service provider.

To reiterate AWC’s position on this matter: we are of the opinion that the option presented in section 5.1 (B) of the discussion paper, to “Reduce the Canadian Grain Commission’s prescribed fees for a fixed period of time is the most efficient and effective way to return the funds to those who contributed to the surplus, producers. This option also most closely aligns with the original intent of the User Fees Act.

Furthermore, we recommend that rates be set at a level that eliminates the accumulated surplus, while maintaining a minimum reserve, as quickly as possible.

AWC is pleased to have the opportunity to participate in this consultation and invite you to contact us should you have any questions with respect to this submission.   

Sincerely,

Kevin Auch
Chair, Alberta Wheat Commission

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