Privitizing BC Ferries

December 12, 2002

Bankrupt Policy Sinks Ferry Promise

What would happen if the new "private" operating company for BC Ferries went bankrupt? The answer to that question tests the government's rhetoric about fare and service guarantees. It also influences the accounting treatment for debt arising as the result of new capital spending. The promise of "no new public debt" might not survive after the Auditor General examines how accounting will be handled by government for the new company.

Failed public-private partnerships in both the UK, and recently between BC Hydro and the company that was to partner on generation on Vancouver Island, demonstrate that when the private partner gets into trouble, the public partner steps in and fills the gap. The government of British Columbia cannot afford to allow coastal communities to go without ferry service. It may make great politics to picture the fast cats being auctioned off, but try picturing significant portions of the fleet being sold so as to cover a bankrupt operating company.

David Emerson has argued that crown corporations are different from private companies in their treatment of debt and the cost of capital. It is true that BC Ferries have benefited by the taxpayer picking up the full costs of the fast ferries. It is not true that private companies lack techniques for wiping the slate clean. That is what bankruptcy is all about - corporations continue with clean balance sheets as their creditors take pennies on the dollar, sometimes forcing asset sales in the process.

The complicated new arrangement, in which the government will hold convertible preferred shares and debt against the new operating company, is fundamentally different than investments in private companies that governments have made in the past. In the case of the ferries, government would step in and assure continued operation if the operating company could not honour its commitments. That is the reason the Auditor General will probably refuse to let government keep the operating company's debt off of the government's books. For years the Auditor General has argued that the debt of school boards should be reported as part of government's debt. Effective April 1, 2004, government will adopt generally accepted accounting principles and include school boards, universities, health authorities, and probably the ferry operating company in its summary financial statements In other words, there will be new public debt as the result of the ferry operating company. To deny that is to say that rate and service guarantees are not worth the price of a dog eared copied of the "New Era Document".

December 10, 2002

BC Ferries - No Longer a Public Highway

"…continued public ownership of ferry terminals, no new public debt …"
Transportation Minister Judith Reid, December 9, 2002

Is there a reason the Minister mentioned ferry terminals but not ferries? "No new public debt" answers that question. The Campbell government is privatizing BC Ferries using the same formula that it applied to BC Hydro - freezing the public asset, shifting new capital construction to private corporations, and claiming that a government appointed regulator will protect the public. That model comes from a government that has failed to attract private sector investors for any of its pet projects. Maybe private companies will build ferries although it is doubtful whether they can assure adequate new construction when rates of return are constrained by a five year limit on fare changes and no further public subsidy.

The "service plan" for the British Columbia Ferry Corporation 2002/03 - 2004/05 will have to be replaced with new plans for the British Columbia Ferry Authority. Comparisons are made to the Vancouver Airport Authority but air travelers know that the "genius" of that Authority was nothing more than a tax grab called an "improvement fee" levied on every person passing through YVR.

Public access to information on the new BC Ferry Services, a company to be incorporated like any private company, may depend on the good will of the new regulatory authority. Don't be surprised if much of that information is treated as private so as not to jeopardize the competitive position of the company. Until government provides more information on the restructured coastal ferry operation, it remains worthwhile to look at a key line in the "service plan" for the existing Crown Corporation.

British Columbia Ferry Corporation has been treated as part of the province's highway system. The two main routes to Vancouver Island were the only part of the system that operated in the black. Subsidies from the motor fuel tax have been provided to BC Ferries just as subsidies have been provided for the operation of roads and bridges in every corner of BC. The Crown Corporation's "service plan" (http://www.bcferries.bc.ca/corporate/BCF-Service_Plan2002.pdf) shows that it expects to receive a provincial grant of $73.85 million in fiscal year 2002/03; $75.95 million in 2003/04; and $78.05 million in 2004/05. Not one word can be found on the government's website on the "restructuring" as to whether the new operating authority can count on those and continued grants from the motor fuel tax. It is possible that some form of grant will continue with the new arrangement, but the size and reliability of that grant will determine future fares and service levels. To put it in perspective, the grant is almost 25% of the amount of revenue raised through ferry fares; it is more than the gross catering income.

Minister Judith Reid's speech said the new approach will provide "…safe and reliable ferry system that provides superior service to British Columbians while ensuring no financial risk to taxpayers". If the taxpayers don't bear the financial risk, who will? Is it possible to provide a five year rate guarantee at the same time that taxpayers are protected and service is guaranteed? Government announced "Starting Nov. 1, 2003, rate increases will be capped at an average of 2.8 per cent a year for the three major routes connecting Vancouver Island to the mainland and 4.4 per cent a year for the remaining minor, northern and Sunshine Coast routes for five years." The deregulation of wholesale power rates in California at the same time that retail rate guarantees were in place resulted in chaos. BC may find that it is not possible to guarantee rates as well as guarantee both service levels and protection for taxpayers. If costs go up or the traditional fuel tax subsidy goes down, something in that formula has to break.