Decision No. 285-W-2007

June 6, 2007

File No. W9125/G22/07-01

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APPLICATION

[1] Great Lakes Feeder Lines Inc. (hereinafter the applicant) has applied to the Minister of National Revenue for a licence to operate the service set out in the title. The matter was referred to the Canadian Transportation Agency (hereinafter the Agency) on March 2, 2007.

[2] The Agency conducted a search of the relevant portion of the marine industry and on March 15 and 19, 2007, McKeil Marine Limited (hereinafter McKeil Marine) and Transport Desgagnés inc. (hereinafter Transport Desgagnés) respectively filed objections to the granting of the application, claiming that they have suitable and available Canadian flagged vessels that could perform the proposed work.

[3] Following the completion of the written pleadings in accordance with the notice of the application, the Agency requested additional information from the applicant as well as from McKeil Marine and Transport Desgagnés on April 11, 2007. On April 18, 2007, McKeil Marine and the applicant filed the requested information under a claim of confidentiality. Transport Desgagnés withdrew the offer of its vessel. On April 23, 2007, the Agency ruled that the information provided by McKeil Marine and the applicant on April 18, 2007 would not be placed on the public record and would remain confidential.

[4] As Transport Desgagnés withdrew the offer of its vessel, the Agency will only consider the submissions of the applicant and McKeil Marine in its assessment of the application.

ISSUE

[5] The issue to be addressed is whether there are suitable Canadian vessels available to provide the proposed service or perform the activity described in the application.

POSITIONS OF THE PARTIES

Applicant

[6] The applicant states that the "CFL PROSPECT" will be used for a newly established container feeder line service between Halifax and Montréal, which will be operated on a weekly rotation. The vessel will primarily load containers carried by an international container carrier starting a new service in Halifax. The international carrier will rely upon the proposed feeder service as part of the world service network to serve clients with inland destinations. In Montréal, the vessel will load containers for export. The container feeder service may be extended to Hamilton when the Seaway is open. The availability of the proposed service for an uninterrupted period of 12 months is essential and according to the applicant, based on research of Canadian operators and their vessels, there were no suitable Canadian vessels available for the proposed service.

[7] The applicant indicates that to be able to offer an efficient and economic container feeder service, a vessel must be able to carry 20-foot, 40-foot, 45-foot, 53-foot, oversize, high cube, open top and refrigerated containers (i.e., all sizes and types of containers that will be handled by the international container carrier) within fully rectangular, box-shaped holds. In addition, the vessel must be able to handle 200 to 300 twenty foot equivalent units (hereinafter TEU), have a watertight and fully enclosed hold, strengthened tank tops and weather deck to be able to carry containers stacked 3 high on deck and have a minimum Finnish/Swedish Ice Class rating of 1B to be able to operate between Halifax and Montréal on a year-round basis. The applicant states that for manoeuvrability, the vessel must have a bow thruster and either a stern thruster or an active rudder to avoid the necessity of using tugs when docking or leaving a dock. A vessel must be operated with no more than 10 crew members and must maintain a speed of 12 knots.

[8] The applicant advises that the "CFL PROSPECT" will be a new, purpose built, state of the art container feeder vessel which will meet all of these requirements and will be highly manoeuvrable and able to operate under all weather conditions.

[9] The applicant asserts that in order to establish a competitive service, the overall cost per TEU is the cost driver and to be able to keep costs to an affordable level, the optimization of the vessel power rating, crew size and efficient loading and unloading of containers is essential.

McKeil Marine's offer

[10] In response to the application, McKeil Marine offered the use of the "KATHRYN SPIRIT", a recently acquired vessel which McKeil Marine argues is more than capable of entering this kind of trade. McKeil Marine states that its vessel has capacity for about 320 TEUs with 216 TEUs in its five holds and 104 TEUs on deck. McKeil Marine adds that the "KATHRYN SPIRIT" is a Finnish Ice Class 1A vessel and is capable of a speed of more than 15 knots.

[11] McKeil Marine argues that while there is an occasional need to bring in foreign ships, this is certainly not the case in this instance as there are a number of Canadian operators with vessels that have similar characteristics to the "CFL PROSPECT". McKeil Marine contends that the economic restrictions, crew size restrictions and requirements such as thrusters are unacceptable and should not be considered in the assessment of the application.

[12] McKeil Marine submits that everyone understands that the cost of operating a Canadian vessel is significantly higher than the cost of operating a foreign ship, but this is the situation that all Canadian operators are faced with. Moreover, if the applicant intends to use the vessel domestically in Canada, then the vessel should be registered in Canada, crewed with Canadians and all duties should be paid.

Applicant's response to the offer

[13] The applicant argues that based on the limited technical data available about the "KATHRYN SPIRIT", the vessel is not suitable for the proposed service. In this regard, the onboard cranes will interfere with loading and unloading containers, the onboard cranes cannot handle 40-foot and larger containers, the 5-hold design versus the 2-hold design of the "CFL PROSPECT" will cause loading and unloading delays, and the fuel consumption and crew size of the "KATHRYN SPIRIT" are much greater. The applicant asserts that these factors result in costs that may be 200 to 300 percent higher than the costs associated with the use of the "CFL PROSPECT". In addition, the "KATHRYN SPIRIT" may not be available to maintain a weekly schedule as the applicant understands that the vessel has long term cargo commitments to transport bulk concentrate from an east coast location to Sorel, Quebec.

[14] An attempt was made to have vessels built in Canada at Port Weller Drydocks; however, the actual cost of building the ships was higher than the contract cost with the result that the shipyard went bankrupt. The order for building the vessels was transferred to the Netherlands.

[15] The applicant argues that it wishes to use a newly constructed, high tech vessel to provide a fast, reliable and economic service. The proposed service is consistent with Transport Canada's policies on short sea shipping and will serve a new market and, as such, it will not compete with existing services. Furthermore, the applicant confirmed that the "CFL PROSPECT" will be crewed with Canadians and that a crew complement of 10 persons will meet the Transport Canada manning requirements for the vessel.

[16] The applicant maintains that the Coasting Trade Act should not be used to prevent a shipowner with Canadian operations from establishing a new market that has not been serviced by Canadian operators.

McKeil Marine's reply

[17] McKeil Marine argues that the gantry cranes on the "KATHRYN SPIRIT" will not interfere with loading or unloading containers and that, with minor modifications, the vessel will be able to handle all containers as described in the application. In addition, all the holds of the "KATHRYN SPIRIT" are box shaped and, as such, 5 holds versus 2 holds is inconsequential. McKeil Marine further asserts that the "KATHRYN SPIRIT" meets or exceeds all of the requirements for the proposed Halifax - Montréal service and the vessel is available for year-round service.

[18] McKeil Marine states that the comments about commercial suitability are of most concern to it. McKeil Marine notes that it is a well known fact that a cargo ship has not been built in a Canadian shipyard since 1985 as the cost of doing so is prohibitive; as such, Canadian operators have been forced to build offshore or to purchase existing foreign tonnage and have been subjected to paying the applicable duty.

[19] McKeil Marine indicates that in 2005 it invested over $10 million for the purposes of converting a vessel that can carry aluminum ingots. McKeil Marine maintains that using the example of this application, it could have had the vessel converted offshore and foreign flagged, making it more competitive than other operators, while claiming that there are no other suitable vessels for the trade.

[20] McKeil Marine argues that the application is intended to avoid paying duty on a foreign vessel and to take advantage of all of the associated cost savings based solely on economic factors that should not be taken into consideration. According to McKeil Marine, Canadian operators have found that the current economic burden of Canadian regulations and requirements makes domestic container movements cost prohibitive; if this were not the case, Canadian operators would have been moving containers domestically some time ago.

ANALYSIS AND FINDINGS

[21] Under the Coasting Trade Act, the Agency has the responsibility to determine if there is a suitable Canadian ship available to provide a service or perform an activity that has been described in an application for the use of a foreign vessel in Canadian waters.

[22] Although the Coasting Trade Act contains a provision that the Governor in Council may make regulations prescribing the criteria to be applied when the Agency makes its determination, no such criteria were prescribed when the legislation came into effect in 1992 and none have been prescribed since. Accordingly, the Agency developed criteria that are used when assessing the suitability of Canadian vessels that have been offered in response to a coasting trade application. The Agency established three criteria: technical, economic and commercial suitability. These three criteria have been used by the Agency since 1992 and are contained in the Agency's current guidelines regarding coasting trade applications. In this regard, the current coasting trade guidelines state as follows:

The Coasting Trade Act does not state that an offered Canadian registered ship must be identical to the foreign ship proposed in an application. The suitability of the Canadian registered ship is not assessed in relation to the foreign ship but rather in relation to the requirements of the activity and to whether the Canadian registered ship is capable of performing the activity. The assessing factors may include:

a) technical suitability - technical characteristics of the ship and equipment;

b) operational and commercial suitability - the operational and/or economic implications of using the foreign ship versus the Canadian ship offered.

With respect to operational and commercial suitability, the operation of Canadian registered and crewed ships implies costs and operating conditions that are not applicable to foreign ships and the onus is on the applicant to demonstrate the impact of using a Canadian ship on the viability of the project.

The Agency will only consider the suitability factors in a) and b) if they have been raised and substantiated during the pleadings.

[23] Based on the foregoing, there are circumstances where the Agency will consider economic and commercial aspects of using Canadian vessels. When doing so, the Agency must decide what importance or weight to attach to these aspects. In Decision No. 500-W-2002 dated September 6, 2002, the Agency examined the matter of requirements set out by an applicant for a service or an activity. In Decision No. 500-W-2002, the Agency stated as follows:

... the Agency is of the view that the words "the service or ... the activity described in the application" must be read so that they only refer to the actual task. This interpretation is necessary to ensure the purpose of the Act by preventing applicants from circumventing the Act by imposing artificial conditions on the work in their applications. Having said that, the Agency recognizes that restrictions with respect to deadlines for completion of the work, specific equipment that is needed, etc. are often legitimate requirements for the task that needs to be completed. The onus is on the applicant to prove to the Agency, however, that any such requirement is necessary for the work. Where the applicant is able to convince the Agency that such requirements are necessary, the Agency will take them into account in determining whether an offered Canadian vessel is suitable and available. This approach is consistent with the purpose and scheme of the Act. It is also consistent with previous decisions where the Agency was convinced of the necessity of such requirements, ...

[24] The Agency is therefore of the opinion that there are instances when specific requirements must legitimately be met by Canadian vessels in order for a service or an activity to be completed successfully.

[25] With respect to the present service proposal of the applicant, the Agency finds that the economic and commercial requirements that need to be met are necessary conditions for a container feeder service between Halifax and Montréal. If the economic conditions are not met, the proposed service will not be commercially viable and will not be implemented.

[26] The applicant and McKeil Marine provided detailed cost information for the use of their respective vessels. In addition, both provided information on docking/undocking time, loading/unloading time and voyage time between the two ports. An examination of this information for the "KATHRYN SPIRIT" and the "CFL PROSPECT" revealed that the "KATHRYN SPIRIT" is technically capable of maintaining a weekly scheduled service between Halifax and Montréal. As well, the Agency accepts McKeil Marine's statement that with minor modifications, the "KATHRYN SPIRIT" would be able to handle all of the different sizes and types of containers described in the application.

[27] A comparison of the costs of operating the "CFL PROSPECT" and the "KATHRYN SPIRIT" revealed that the Canadian vessel was much more costly to operate. This result was not unexpected by the Agency as Canadian duty paid vessels with Canadian crews are more costly to own and operate than foreign vessels with Canadian crew.

[28] However, based on the cost comparison, the Agency concludes that the "KATHRYN SPIRIT" is not able to meet the cost threshold that is necessary for a commercially viable container feeder service between Halifax and Montréal. Only through the use of the "CFL PROSPECT" is there a possibility of meeting the required cost threshold for a viable service. In other words, there is no possibility that a new, commercially viable container feeder service can be implemented between Halifax and Montréal to serve a new market with the use of the "KATHRYN SPIRIT". Consequently, the Agency concludes that the "KATHRYN SPIRIT" is not economically or commercially suitable for the proposed service.

[29] In reaching the conclusion that the "KATHRYN SPIRIT" is not economically or commercially suitable for the proposed service, the Agency balanced the interests and concerns of an existing Canadian operator with the aspirations of a Canadian company pioneering a new service with a purpose built ship that none of the existing Canadian operators have in their fleets. The Agency concludes that this is not a situation where an activity or service would or could be established with existing Canadian vessels, but a situation where the service can only be implemented with a purpose built, modern ship crewed with Canadians that can meet the cost threshold for a commercially viable service.

[30] In exercising its mandate under the Coasting Trade Act, the Agency is mindful of the federal government's intent and purpose of having the legislation, i.e., to reserve marine activity in domestic Canadian waters for Canadian vessels. The Agency is of the opinion that the fact that there is an application process for the use of foreign vessels in Canadian waters indicates recognition on the part of the federal government, that there is not always a suitable Canadian ship available or capable of carrying out a proposed activity. The Agency has carefully examined all the information presented by the parties and concludes that this application represents one such case where a Canadian vessel is not suitable.

DETERMINATION

[31] In light of the foregoing, the Agency has determined, pursuant to subsection 8(1) of the Coasting Trade Act, that there are no suitable Canadian ships available to provide the service or perform the activities described in the application.

[32] This determination will be provided to the Minister of National Revenue for any necessary action as provided for in the Coasting Trade Act.

[33] This Decision does not constitute an authority to commence operations in respect of the service for which application has been made.

Members

• Raymon J. Kaduck
• Beaton Tulk