Priming bad incentive pump

By Ken Green

The decision to nationalize the Trans Mountain pipeline is not a victory, it's a failure.

Back in April, Kinder Morgan announced it was halting all "non-essential" operations on its Trans Mountain expansion pipeline project pending an establishment of certainty that the project would continue despite entrenched opposition by the British Columbia government.

In a news release on April 8, Kinder Morgan CEO Steve Kean said, "If we cannot reach agreement by May 31, it is difficult to conceive of any scenario in which we would proceed with the project."

Just two days before Kinder Morgan's drop-dead date for certainty, Finance Minister Bill Morneau announced that the federal government will buy the project outright for $4.5 billion. The government plans to manage the construction of the pipeline through a Crown corporation, with an expectation of selling it or otherwise transferring ownership of the pipeline to the private sector in the future.

This announcement will certainly come as good news for some people: oil producers, construction companies, skilled workers and governments who will see revenues from oil sales grow with added production.

But the nationalization of a project with massive profit potential is an admission that Canada's regulatory system is badly - if not entirely - broken. After a five-year (or longer) regulatory assessment to ensure the protection of Canada's environment, Kinder Morgan spent $1 billion and still faced months to years of delays due to court action and social protests.

The federal government still faces obstacles.

B.C. Premier John Horgan has said the nationalization doesn't allay his concerns over the pipeline and he will continue his legal campaign to obstruct it. Aboriginal groups and environmentalists who oppose the pipeline have also said they will continue to oppose it.

The signal this sends to potential investors in Canada is breathtaking.

While the federal buyout might salvage some of the expected value of the project, the nationalization of the project is far from an ideal solution. The federal proposal turns what should have been a private project - risking private funds to generate private earnings - on its head.

Instead, taxpayers (whether they oppose the pipeline or not) will take the risk of failure should the project's building costs exceed budget, timelines drag out and/or projected earnings not pan out as expected. It's also unclear who will reap the benefits, as the government has not specified who will buy the project while it's being built or once it's completed. Morneau mentioned the potential for First Nations to assume ownership or the Canada Pension Plan, but details were not offered.

Nor do we know how taxpayers will be repaid for this new "investment."
It's absolutely critical that Canada finds a way to fix a badly broken regulatory approval system. While the Trans Mountain expansion project is needed, it would have been far better if the normal order of good governance had worked.

In a healthy regulatory system, a company proposes an activity, it's deemed safe by a reputable governmental entity, approved by the government and gets built.

We need to get back to that formula, for the sake of Canadians.

Kenneth Green is senior director of natural resource studies at the Fraser Institute.

– Troy Media


Putting a price on mobility

By David Suzuki

By 2002, drivers in London, England, were spending as much as half their commuting time stalled in traffic, contributing to much of the city centre’s dangerous particulate pollution. To deal with a growing population, increasing gridlock and air quality concerns, the city implemented a congestion charge, using a photo-based licence-recognition system.

Between 7 a.m. and 6 p.m. on weekdays, drivers entering a 21-square-kilometre zone in Central London are charged a fee, which has risen from about C$8.50 in 2003 to $20 now. The city offers discounts or exemptions for zone residents, people with disabilities, emergency vehicles, motorcycles and taxis.

Congestion pricing is a solution that works. But politically, it’s a difficult sell. Drivers don’t like to pay tolls on top of what they already pay to buy, maintain, fuel and park their vehicles. They often forget, though, the less visible costs of congestion: arriving late, having to leave early and burning fuel while stalled or moving at a crawl. Most people end up better off with a well-designed congestion pricing plan.

Although London’s plan faced opposition and debate — even a legal challenge — its success has led to widespread acceptance. Almost overnight, drivers who could change behaviour did, travelling at off-peak hours, carpooling or taking transit. Those who chose to drive despite the charge benefited from less congested roads. Within just three years, traffic went down by 15 per cent, and congestion — the extra time to make a trip because of impeded traffic flow — was reduced by 30 per cent. Businesses saw immediate gains, as costs of shipping delays and paying drivers stuck in traffic fell.

Benefits continue. More people take buses to the centre and fewer rely on private automobiles. Shorter commuting times mean more time with family and friends, less aggravation and saving money on gas and vehicle maintenance. The fees also generate about C$300 million a year, which are invested in non-car transportation improvements.

London now has new congestion challenges. To improve safety, health and the environment, and to move more people, road space has been allocated to walking and cycling, which are surging in popularity. For-hire vehicles like Uber, taxis and minicabs — which are exempt from the fee — have also increased significantly. London is looking to a number of solutions, including expanding the fee zone and studying congestion pricing in places like Stockholm, Sweden, where rates vary according to zone and time of day.

As cities grow, challenges around pollution, traffic congestion and automobile infrastructure increase. Studies show you can’t build your way out of congestion. More roads and bridges bring more cars. 

Cities worldwide have implemented or are considering congestion pricing, including Singapore, New York and my hometown of Vancouver. Metro Vancouver’s Mobility Pricing Independent Commission recently released a report that concluded, “Region-wide road usage charging is the most effective tool to provide a systematic, meaningful and lasting reduction in traffic congestion.”

The report recommends point- or distance-based charges which “could generate enough revenue to re-assess our broader approach for funding transportation in the region,” including “the potential to shift or reduce taxation away from other existing revenue sources, including the regional fuel sales tax.”

The commission acknowledged that more study is needed to ensure the system is fair and effective. For example, London already had a good public transportation system and added 300 buses to the Central London fleet on the day the congestion fee came into effect. Because the charge is designed to encourage people to use other forms of transportation, viable alternatives must be available.

The report says congestion pricing could cost an average household that doesn’t alter commuting behaviour anywhere from $5 to $8 a day, not accounting for savings from reduced congestion. Charges would reduce congestion by 20 to 25 per cent — an hour or more a week for the average city commuter. Costs can be offset by reducing or eliminating gas or other taxes, and revenues can be invested in transit improvements to make getting around without a car easier.

Reducing congestion and pollution and tackling the climate crisis require getting people out of their cars. Congestion pricing is a fair, effective way to reduce reliance on private automobiles, improve traffic flow and help fund public transportation. Let’s do it.

– David Suzuki is a scientist, broadcaster, author and co-founder of the David Suzuki Foundation.

How to cut wait times

By David Urbach

Long wait times are the vulnerable soft underbelly of the Canadian health system.

Canadians treasure our single-payer, publicly-funded program of physician and hospital care, virtually as a defining part of our national identity. And yet, increasing legal and political pressure over quick access to elective surgeries - cataract extraction and joint replacement, for example - threaten to undermine that support.

The Commonwealth Fund 2017 report ranked Canada last among 11 countries in timeliness of care.

And a case before the British Columbia Supreme Court aims to topple provincial regulations that limit private payment for medically necessary services, claiming that surgical wait times for elective procedures such as arthroscopic knee surgery violate the Canadian Charter of Rights and Freedoms.

The truth is that few people anywhere in the world are in love with their health-care system. Canada is no exception. Why? 

Modern health care is expensive - so expensive, at C$5,900 per person per year in Canada, US$9,900 in the U.S. and £2,900 in the U.K., that it costs more than many people are happy to pay, whether through taxation, insurance premiums or out-of-pocket.

Many Americans still lack health insurance and even insured Americans may not be approved for every treatment they desire. Among developed countries, Germany has the highest public support for their health system but even there, 40 per cent believe the system requires fundamental changes or a complete rebuild. Sound familiar?

But this doesn't mean Canadians are doomed to long waits for elective surgery forever. There's actually much that can be done fairly easily without resorting to private payment. We can address the supply of surgical procedures, the demand for surgery and improve co-ordination within the system to gain significant improvements.

Increasing the supply of surgery can be achieved by paying hospitals using "activity-based funding" payments for each procedure they do for surgeries like joint replacements, rather than receiving an annual global budget in the hope that they will meet the demand. Reimagining the way we use hospitals, incorporating new anesthesia techniques and virtual care to transform common procedures like joint replacement to day surgery can reduce costs and free hospital beds to further increase the supply of surgical procedures.

The demand for surgery is also elastic. Removing people who aren't in dire need of surgery from waiting lists improves access for those in greater need of services. It also prevents the overtreatment of healthy people, which is rampant in many areas of medicine - 32 per cent of patients waiting for cataract surgery in B.C. had near-perfect vision, in just one example.

Ironically, the case before the B.C. court - the most pressing legal challenge to the constitutionality of Canadian medicare - is in part about access to arthroscopic knee surgery, a procedure that might actually cause more harm than benefit in some patient groups.

Wait times in Canada may be long on average, but they're not long everywhere. Take the example of knee replacement surgery in Ontario. At first glance, the waits certainly seem long: in 2017, only 78 per cent of people had their knee replacement within the recommended six months and 10 per cent waited longer than nine months. In spite of this, half of all people actually had their surgery within three months.

Why is it that some people have surgery quickly and others wait?

Mostly because there's little co-ordination of surgical practices. Long ago, other industries adopted effective queue-management strategies that prevent situations where some people wait much longer than others. Single-entry models - where all people enter one queue and take the next available slot once they get to the front of the line - smooth out the waits and increase efficiency in banks, fast-food restaurants and at Disneyland.

Centralized intake, triage and referral of patients to appropriate heath-care providers - taking advantage of inter-disciplinary teams including nurses and physiotherapists - would go a long way to reducing variation in wait times and improving access to surgery.

Medicare is not perfect, but it's still very good at providing excellent quality care to all Canadians who become ill and require hospital and physician services. Decisive action to improve wait times is necessary to maintain the public confidence required to preserve our unique health-care system for future generations.

The good news is that this can be done by fixing medicare's problems with surgical precision, without killing the patient in the process.

David R. Urbach, MD is an expert adviser with EvidenceNetwork.ca, surgeon-in-chief at Women's College Hospital, Toronto and professor of Surgery and Health Policy at the University of Toronto.

– Troy Media

Shrinkflation - what's that?

By Sylvain Charlebois

Rough estimates suggest that anywhere from 15 to 20 per cent of packaged food products in Canada have shrunk over the last five years. Consumers find this irritating, but given the economics of the food industry, the industry can hardly be blamed.

Most consumers worry about the cost of food. We constantly look for bargains and the food industry knows it. According to a recent survey by Dalhousie University, almost 60 per cent of all Canadian consumers say price is one of the top three criteria when deciding what to buy at the grocery store. Grocers play around with prices to keep us on our toes.

Pricing in the food processing sector is intricate. Ingredients, energy costs, wages and so forth can weigh heavily on food manufacturers as they try to cultivate relationships with grocers and retain market shares.

For decades, to keep price points low, the shrinking package strategy has been part of the food industry. This can be seen in items such as chips, ice cream, cookies, pasta and chocolate bars. Some of us notice and have seen media reports on the issue in recent years. But now packages are shrinking even faster. The tactic is so widespread that some have even given it a name: shrinkflation.

Food packages are shrinking all over the world.

A recent United Kingdom study suggests that almost 3,000 food products that have been downsized since 2012 can be found in a typical grocery store. This came as the annual food inflation hit a whopping six per cent and the food industry was being blamed for gouging consumers.

Similar numbers are coming out of the U.S. Many U.S. food manufacturers admit to shrinking packages to maintain competitive prices. And many of these products enter the Canadian market.

Food companies are simply trying to defend their profit margins.

Shrinkflation, or downsizing, is almost the norm and many consumers find the practice to be irritating. Yet food companies aren't really misleading the public. Weight and volume information can easily be found on any labelled package. It's just habit that makes us believe we're purchasing the same thing as we focus on the one constant that motivates our behaviour when shopping: price.

When costs rise in food manufacturing, a company has basically three options: raise the price, make smaller packages or change the ingredients.

Given how competitive the food industry is, raising prices can be challenging. In fact, since early 2018, prices in food stores have dropped.

Changing ingredients can be deadly. Before the 2008 bump in commodity prices, companies egregiously reformulated food products. Taste and the quality of ingredients weren't deemed nearly as important. But some manufacturers paid the ultimate price for changing the taste of products just to save a few pennies. And today, the prevalence of social media means companies are one poor decision away from seeing an entire product line vanish.

The only viable option is to downsize portions. With the arrival of many non-food investment firms and conglomerates that value food as much as bolts, tires or buildings, recalibrating ingredients and changing packages is almost second nature. 3G Capital, the Brazilian giant that gobbled up Kraft Heinz, Burger King and Tim Hortons in recent years, is one good example. Most of these new players don't know the nuances of food products. They just look at the numbers. And they know that consumers are looking for the best price.

As food consumers, we value the lowest price and it's challenging to get past this way of thinking.

But instead of downsizing products and hoping no one will notice, higher prices could become a selling point for manufacturers. Studies show that consumers who remember how good a product tastes are willing to pay more for less if given no other choice. Selling flavour over quantity and being more transparent about packaging could let consumers appreciate that things get complicated and some adjustments are required.

But we all know that won't happen.

What's unclear is how shrinkflation is captured by the Statistics Canada consumer price index. Protocols show certain quantities but there is no explanation of how data collection is adjusted as quantities change rapidly. This contributes to food inflation in a subtle way. StatsCan could assist in monitoring shrinkflation to help consumers be more vigilant and assess how it affects our food budget.

Now, however, most of us wouldn't know. In some cases, quantities have been reduced by 15 per cent in three years. By compounding real inflation, food prices may have gone up by more than six per cent in many cases, when the reported food inflation rate was anywhere from 1.5 to 2.0 per cent.

In the end, consumers can be outraged and condemn the shrinking of food products. But food companies are just delivering what consumers are asking for.

Sylvain Charlebois is dean of the Faculty of Management at Dalhousie University, and a senior fellow with the Atlantic Institute for Market Studies.

– Troy Media

Who's minding Site C?

By Dermod Travis

Lost in the news over the Trans Mountain pipeline is that B.C. Hydro will be cutting a cheque to Flatiron/Graham, principal contractors on the Lower Mainland Transmission Line, for approximately $100 million following arbitration.

Announced in 2009, the then-$602 million line was to be completed by 2014. It came in “on budget and on time” in 2015, at a cost of $743 million or – in the words of then-president and CEO Jessica McDonald – “about $18 million higher than Hydro's original budget of $725 million.”

The line was riddled with errors from the get-go: failure to consult with First Nations, sub-standard steel imported from India and frustrations that led the utility to complete one section of the line itself.

In 2015, reacting to the growing litany of problems plaguing the line, former energy minister Bill Bennett cut to the chase: "Hydro has characterized [the problem] as a failure to perform." 

The utility was more nuanced a few months later, stating: "The contractor faced scheduling pressures during construction and, based on feedback from the contractor, BC Hydro pushed the in-service date to late 2015.” 

The current cost for the line now stands at $828 million.

Flatiron has also run into “scheduling pressures” in Montreal, along with SNC-Lavalin, ACS Grupo (ACS), Hochtief, Dragados Canada and EBC Inc., all members of the consortium building that city's new Champlain bridge. Pressures that an additional $235 million from the federal government somehow managed to fix. 

Flatiron is getting another kick at the can on Site C. 

In March, the utility announced that it had awarded AFDE Partnership a $1.6 billion contract for “the generating station and spillways civil works component” of the project.”

AFDE is made up of Aecon, Flatiron, Dragados and EBC Inc. 

Construction highlights of the contract include: “installation of 34,000 tonnes of rebar.”

Rebar can be tricky, as the Windsor Essex Mobility Group consortium learned in 2013, when it had to replace “500 pre-stressed concrete bridge girders due to the use of tack welding” on the Detroit River International Crossing project.

Scheduling pressures too, as the Windsor Star reported in March 2015.

WEMG had bid $200 million less than the Ontario government's estimate for the project and likely won the contract as a result of that bid and its promise to meet the targeted opening at the end of 2014. 

It didn't. The penalty of $100,000 a day ran into the the “millions of dollars.”

WEMG is a partnership between Fluor Canada Ltd., Acciona Concessions and ACS (Dragados' parent company).

Despite working alongside them on the Windsor project, Acciona is actually a competitor of ACS and has its own Site C contract, which hasn't worked out so well.

In 2015, Hydro awarded the main civil works contract to Peace River Hydro Partners (PRHP), which was then made up of Acciona, Petrowest Corp. and Samsung C&T Ltd. It was the lowest bid at $1.75 billion.

In its report for the B.C. Utilities Commission, Deloitte LLP felt that PRHP's “ability to meet critical milestones poses a major risk to the Project.”

It noted that PRHP “may have significantly underbid the project, by $285 million to $345 million.”

Fellow PRHP member Samsung C&T “was widely believed to have underbid” for work on an Australian iron ore project, Roy Hill Mine, in 2013. In 2016, the company reported a $1 billion loss on the project.

Petrowest filed for bankruptcy in August 2017.

After Deloitte submitted its report, news broke that the project had missed a key deadline and the river diversion would be delayed by one year, at a cost of $610 million. A sum not included in the Deloitte report.

Scheduling pressures come with an additional price tag: every month of delay will result in an additional $21 million in interest costs.

The government won't get much flack from one group of power brokers, though. 

Of the $1.25 million unions donated to the B.C. NDP between July 1 and December 31, 2018, $860,000 of it came from vocal supporters of the government's decision to proceed with Site C. 

We'll see how their members react in a few years to their monthly utility bills, because the chances that Site C will come in at $10.7 billion are about the same as pigs flying.

– Dermod Travis is the executive director of IntegrityBC.

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