Privatization of BC Rail

November 20, 2003

Fairness Advisor used to Keep BC Rail Deal Secret

The Campbell government has taken a concept developed in business law, fairness opinions, and has turned it into a political shield - a device to hide from openness and accountability.

The fairness advisor for the sale of BC Rail is Charles River Associates Inc. (CRA). The respected international firm should in no way be criticized for how the Campbell government is using its services because to do so would allow the government to further shield itself from accountability.

The concept of "fairness opinions" stems from a 15 year old Delaware Supreme Court case, Smith v. Van Gorkom, in which the court's ruling set rigorous standards for firms considering mergers or acquisitions. An Internet search on "fairness opinion" or "fairness advisor" reveals the extent of the industry that has grown out of that court decision.

Compared to the complex task that the Campbell government contracted to CRA, it is a relatively simple matter to offer an opinion to minority shareholders as an independent financial advisor. In its interim report, CRA commented that:

"The complexity and enormity of the task at hand is underscored by the fact that this transaction is not just a straightforward sale of one business to another; rather, BCRC needed to restructure the BC Rail business model to facilitate the transfer of railroad operations rather than the transfer of assets, and the Province had to design a process that reconciled its strategic objectives as Government with its financial objectives as Stockholder. To accomplish these goals, the Evaluation Committee, with support from a number of expert advisors, performed in-depth analysis in a variety of areas: public policy, shipper industry economics, regulatory economics, transportation network analysis, railroad operations, financial modeling, forecasting, capital planning, and legal opinions, to name a few."

It would be useful for the public to have access to those detailed analyses rather than having to rely on the assessment of the fairness advisor. It is the public's job to determine the fairness of public policy. It is the public's job to hold government accountable. It is not fair for government to tell the public that it has contracted out the public's right to have access to information and its right to hold government to account.

In legislative Question Period on Wednesday November 18th, the day after the release of CRA's interim report, opposition leader Joy MacPhail asked Premier Campbell questions regarding the leak of information mentioned in the report. MacPhail asked "If the leak was to one proponent, were the other proponents advised immediately, or did the government simply think this matter could be swept under the carpets? To the Premier. Were the other proponents told what was leaked, and who received the information?" Campbell remained seated while Transportation Minister Judith Reid sprang to her feet, filibustered and concluded by saying that the fairness advisor found nothing wrong. If government is going to employ a fairness advisor, then the work of that advisor should be used to help the public hold the government accountable just as it would be used by minority shareholders to hold directors accountable.

No one would accept a "voting advisor" appointed to tell people which party to support. Political pundits try to put themselves in that position; voters are smart enough to look at all the information and form their own opinion. The same is true when it comes to assessing government's actions with respect to a major policy decision, a major broken promise, the selling of BC Rail. The Campbell government must stop hiding behind its advisor and start answering legitimate questions.

November 18, 2003

Who Pays the Sale Price for BC Rail?

Imagine that you are a significant shareholder of CN, or that CN stock is part of the mutual funds that make up your retirement package. What do you expect by way of return if CN buys the "operating contract" for BC Rail?

Investors might overlook the broken promises in Campbell's New Era document, but they cannot forgive unacceptably low rates of return. Pundits have suggested that the successful "partner" will pay as much as $1 billion for the privilege of taking over BC Rail. As usual, the devil is in the details. It is not credible to think that the government will simply hand over the assets of BC Rail in exchange for an "operating company" assuming the liabilities - $553.7 million in long term debt.

BC Rail is able to service its debt and earn a profit. This means that the purchase price for the railroad, including a 30 year lease on the track and rail bed, will have to cover the current net worth and the "good will", an expression used to describe how much over assessed value one can realize on the sale of an asset. Guess who pays for the difference between the net worth and the sales price (as much as $500 million)? - Answer: the shippers, users of the railroad, forest companies other resource industries. (The yellow pile people see across the harbour from Stanley Park is sulphur, a by-product of gas extraction, which is shipped out of Vancouver Harbour after being transported by rail. The windfall in gas profits is linked to BC Rail.)

There is only one source of revenue for BC Rail or the new "operating company" - freight tariffs. It is possible to calculate the increase in freight rates necessary in order to rationalize the purchase of the "operating agreement" for BC Rail, or in other words, how much the users of the railroad will pay to privatize its operations. The precise numbers will have to wait for what little information will become available after the sale, but one thing is certain, users of BC Rail will pay the price for the purchase by CN or any other "operating company".

It is a good thing for the forest companies and other resource industry bosses that their shareholders aren't voting on how they are about to subsidize the Campbell government for the sale of BC Rail.

November 15, 2003

Privatization of BC Rail

Those who spin the government line on the sale of BC Rail are pleased by the language used by some reporters. That is not necessarily the reporter's fault; it just shows how effective government "briefings" can be. "Debt laden", "operating agreement", and "economic development opportunity" (rather than privatization) are some of the terms being used to describe the Campbell government's biggest broken promise so far. The language used to describe an issue plays a key role in determining the winner in a political debate.

Since government communications was centralized under Andy Orr in the Premier's Office, no story goes more than 24 hours without a government response. Letters to the editor space, usually reserved for ordinary citizens, is frequently used to carry letters from cabinet ministers. The language being used by the media to describe the BC Rail debate is yet another sign of the power of government communications.

BC Rail's 2002 annual report shows $553.7 million in long term debt. In just one year, the Campbell government added almost 6 times that much debt to the provincial books as a result of its budget deficit. Despite its image as being fiscally prudent, the Campbell government spills more than the total BC Rail long term debt without admitting it. As a commercial crown corporation, BC Rail is able to service its debt from its revenue and still earn a profit. The Campbell government is borrowing to pay interest on its debt.

The government constantly denies that it is privatizing or selling BC Rail; they insist that they are just entering into a thirty year "operating agreement" where they retain ownership of the rails and rail bed. That is like selling a house with a 99 year lease on the land and then claiming that the house really wasn't sold. Everyone outside of the Campbell caucus can see that the promise not to sell BC Rail has been broken.

A particularly mischievous spin is the suggestion that the sale of BC Rail creates an economic development opportunity. With a thousand fewer workers, the closure of the North Vancouver head office and rail yards, the closure of the southern portion of the line, the loss of provincial control and the likelihood of higher freight rates, it is hard to imagine how the sale of BC Rail creates any opportunity. The claim seems to be based on the government refusing to let BC Rail invest in additional rail cars while the new owner will be able to let the market determine how many cars it needs to lease or buy. The only barrier to economic development is the political interference of the Campbell government in BC Rail.