There has been lots of interest in Highway 99 since the Ministry of Transportation released its list of options for upgrading the road back in June, but railway may still play a role in the final solution.
The Liberals promised in the 1996 election to sell BC Rail, and they figure that promise was one of the things that cost them that election. They didn’t make that promise last year, but the writing may be on the wall for BC Rail.
As recently as two years ago the BCR Group of companies had three main divisions: BC Rail, BCR Marine and BCR Properties. In 2000, it was decided BCR Properties should divest itself of all properties not related to the group’s transportation business.
In March of this year the BCR Group announced it was going to sell off BCR Marine, its second major division. That left only BC Rail, including the pesky passenger service that kept sucking money out of freight revenues. Earlier this year, without making a public announcement, BC Rail decided to end the Cariboo Prospector passenger service.
But even after selling off BCR Properties, BCR Marine and cancelling the passenger rail service, the prospects for BC Rail are still not bright. A report, released in February of this year, notes that in 1997 the business of carrying coal provided 19 per cent of BC Rail’s revenue. With the closure of the Quintette coal mine in 2000 – two-and-a-half years ahead of schedule –the railway lost two-thirds of its coal business. The remaining coal business is expected to dry up next year, when the last mine shuts down.
And of course forest products, the other major commodity carried by BC Rail, have nose-dived in the wake of the softwood lumber tariff and the economic malaise across North America and Asia.
Currently, the BCR Group has a debt level 115 per cent of equity, whereas most railways and transportation companies have a debt/equity ratio of 30-40 per cent. The BCR Group needs an injection of capital to reduce its debt/equity ratio, but being a crown corporation, the only way it can reduce this ratio is to sell assets, which it has already done, increase revenues, or ask the provincial government for more money.
According to the February report: "The challenge has been made worse by shrinking business and revenues, particularly at BC Rail. The corresponding reduced level of free cash flow is no longer adequate to cover historic levels of sustaining capital, resulting in growing debt just to sustain the physical plant."
The situation looks bleaker and bleaker as you read through the report. Due to deregulation in the trucking industry freight rates have declined across the whole transportation industry in recent years. And consolidation among major railways across North America is creating "new strategic pressure on BC Rail and its ability to provide competitive freight rates…"
So what to do with this turkey that is BC Rail? Who would want it? Well, Paul Tellier certainly sounds interested.
Tellier, president and CEO of Canadian National Railway, was at the Vancouver Club in June to tell the B.C. business community about the virtues of CN. Tellier noted that CN used to be a crown corporation, which brought in $2.4 billion to the federal treasury when it was sold in 1995. The company, whose rail lines extend through the U.S. and into Mexico, is now worth $15 billion and is the largest shipper of forest products in North America.
"And we will work with Premier Campbell and his government to find ways where CN can help this province obtain the kind of rail service British Columbia industry needs to compete globally," Tellier said, and then added helpfully: "One suggestion that I would make to the premier and the cabinet is to keep the CN turnaround story in mind when it comes time to look at the future of the province’s railroad."
Tellier referred to the "proud history" of BC Rail and how the railway was "the economic lifeline" for a number of communities. But in case anyone missed his earlier inference he added "…at a time when the province faces tough times, BC Rail faces difficulties all its own – just as CN faced problems while it was a crown corporation."
And, in the event anyone missed his first two references to BC Rail Tellier concluded: "I do not want to prejudge what the premier might want to do about BC Rail, but I can see where CN’s turnaround from crown corporation to a successful North American railroad has some relevance to the situation here."
You only have to look at a map of the two railways’ lines to understand how a CN-BC Rail merger or partnership would be a good fit. BC Rail’s main line runs north from North Vancouver, through Prince George and terminates at Fort Nelson. CN’s northern line runs from the port of Prince Rupert, through Prince George and on to Edmonton and the rest of its international network.
Such a partnership would work with several of the province’s stated goals, including improving infrastructure to open up markets, integrating transportation systems, public-private partnerships, and possibly even oil and gas extraction.
The partnership could even produce some solutions to the perceived problems of Highway 99 and passenger rail. More on that next week.
