Volume Nine, Number Three    May 2004    www.columbiajournal.ca

 

All Aboard: 30 Points West and North to Disaster
Bob Smith

1    BC Rail sold to C.N. Rail for $1Billion.

2    $750 M of this is for the right to operate freight operations for 60 years and options for an additional 930 years on B.C. owned rails and rights of way and for ownership of the BC Rail company itself and its name and trademarks.

3    Of this total amount, $250 M will go to acquire for CN tax credits on the accumulated (for tax purposes, losses, capital expenditures, and deductible expenditures over 70 years) of BC Rail worth an estimated $2 Billion or more. The credit may be as much as $250 M. There is a qualifier: If the federal tax department agrees that BC Rail’s tax debt credit (useless for a crown corporation which pays no taxes) can be transferred to CN then BC gets the $ Billion from CN, if not BC gets $750 million plus what amount CN is able to get from the federal tax department. There is no certainty that Canada will agree to accept directly in lost future income tax, $250 Million of BC’s indirect debt, payable by a corporation which now does not pay income taxes at all as a transfer to one that does pay taxes.

4    BC to pay off all the current $500 M B.C. Rail debt from the money CN Pays BC.

5    BC will pay $17.2 million for part of the Prince Rupert terminal facility.

6    BC will pay $15 million into a First Nations Trust, not necessarily divided equitably between the 20 Bands through whose reserves BC Rail track runs. The trustees of this fund are to be mostly Native people appointed by the Liberals.

7    BC will pay $4 million for airport improvements in Prince George.

8    BC will pay $135 million into a Northern Developments Initiative.

9    BC will pay $1 million for terminal and runway improvements in Prince George.

10    BC will pay $50 million into a general trust to support economic development across Northern BC.

11    BC Rail rolling stock is estimated to be worth $600 million which CN gets as part of deal.

12    At the time of sale, BC Rail had about $1.2 BILLION worth of undepreciated capital assets, much of this in industrial land which does not depreciate, on it’s tax books.

13    BC Rail had operating losses over its approximately seventy years of existence that can be carried forward for tax deductions. This value was about $800 M. This may result in a tax credit against CN Rail’s present and future earnings of about $250 M. This is entirely contained in # 3 above.

14    The firm hired to access fairness was explicitly disallowed any capacity to assess the real value of tax shelters as part of sale. It was not allowed to determine if CN or BC got value for its contribution.   

15    The firm hired to assess the “fairness” of the sale had to rely solely on what the government said about it’s own transactions and it was given a strictly limited framework in which to assess the “fairness” of the bidding process. Both other bidders for BC Rail have claimed publicly that the process was unfair.

16    CN is not required to give any accounting of the BC Rail line’s costs, profits or benefits to anyone, ever.
It is a public company and must report general operating results to its shareholders. It does not have to report any specifics about parts of its operations.

17    BC Government to be partly responsible for the cost of a 7% rate reduction promised to major BC Rail customers. There is no promise to small customers.

18    Approximately half of BC Rail employees are to be laid off, including almost all maintenance workers in Squamish and Prince George. The work will be done at existing CN Rail shops in Winnipeg and elsewhere by existing CN staff. 60% of BC Rail’s head office staff are to go too. CN has made no promise to keep any of the BC Rail workers. CN will acquire and operate a wheel refurbishing shop in Prince George. Transfer of workers’ seniority, if any, seems unclear at best.

19    BC Rail has a debt now because it was required by the Bennett Governments to absorb the whole cost of the spur lines to the North-East coal mines, now abandoned. Previous construction on the BC Rail was charged to Provincial General Revenue in most cases like the Dease Lake Extension, now about half unfinished and/or abandoned. BC Rail has been paying these off ever since, in full, and on time, from BC Rail’s before-net earnings.

20    The projects in #5-10 will be paid for from the amount of money above that required to pay off the BC Rail debt and only after the debt has been paid. That could be years.

21    BC can sell any BC Rail land to CN at any time and CN must take it for $1.00. This is intended to force CN to accept responsibility for any environmental damage. BC can sell any BC Rail lands to CN, at any price CN agrees to pay, at any time. This includes specifically the tracks and the land under them.

22    CN may increase freight rates on the line as it sees fit but not until just after the 2009 election. There is no limit or formula to determine the amount of the rates after that, other than an appeal to the Federal Competition Review Board or Parliament. CN may abandon rail lines (stop using them) but again, not until just after the 2009 election.

23    CN and BC Rail’s current industrial shippers are currently in dispute about whether the base freight cost today should be stated in US dollars (CN is US owned and is primarily a US carrier) or Canadian. If US, the promised 7% reduction has already largely been achieved at little additional cost to CN or BC. The freight bill has usually been charged in Canadian dollars by BC Rail but not always.

24    CN has its own debt of several $ Billion from some operating losses and the acquisition of other railroads in the US. When Canada sold CN, Canada paid the banks which had held the CN debt all the accumulated debt of CN and its predecessor railroads since 1910, before CN was sold.

25    The sale contract runs to more than 1500 pages.

26    CN is to provide a number of new railcars to work on BC Rail tracks but gets to sell current BC Rail cars to partly offset the cost.

27    If BC wants to buy BC Rail back there is no provision in the agreement to set a price in advance. BC will have to pay what CN wants to get at that time. It is never required to sell at all. The price will be unlimited.

28    The Magna Carta (The English speaking world’s longest standing contract) has only been in effect for 789 years. Technically, a series of 60 year renewals is legal. A single 990 year lease would not be valid, even between corporations which, unlike the rest of us, never die. The CPR negotiated 999 year leases on rail track in the 1880s when such long terms were legal. CN and its predecessors may have done the same before WW 1. These extensions commit BC and CN Rail until June of the year 2994.

29    At current rates of interest and earnings at BC Rail and without allowance for major staff reductions and other economies of scale, CN should have recovered its purchase price in a decade. Making allowance for these lay-offs and savings, CN could be in the black on this in about seven years. ($250 Million from income tax, BC Rail currently makes about $100 Million a year, staff cost cut by at least a third, other less quantifiable savings from running  single unified company under only federal railroad regulations.)

30    Passenger service is not included in the agreement but it would have to be organized to not disrupt CN Freight movements. CN will own the running rights on the BC Rail tracks and will not have to allow any passenger rail use.
 
The purpose of this agreement by the BC Government was to get BC out of the railway business. For CN it is a huge windfall and gives CN monopoly control of all the railways in BC except for a very limited amount along the right of way of the CPR from Banff to Kamloops to Vancouver.

The value of having control of a railway to the resources of the Interior of BC, the skilled jobs involved, railway competition, value for the taxpayers as well as for the citizens, and any future passenger, tourism or other options was deliberately set at zero by the Liberal Cabinet. The net benefit to BC and its people is neutral at best, horribly negative at worst. The facts that CN was such a huge contributor to the federal and provincial  Liberal Parties, that CN Rail is mostly American and does not use the term “Canadian” in describing itself, and that the RCMP are still investigating whether vital information was leaked to CN Rail but not to the competing bidders will be footnotes that increase public resentment.

Once done, this deal can never be undone. Ideology, in the guise of reducing Government operations to the bare essentials, will have triumphed over the BC dream of controlling our own future economic development.