Original Release BC Rail Giveaway

2003OTP0103-001046 Nov. 25, 2003		Office of the Premier Ministry of Transportation
THE BC RAIL INVESTMENT PARTNERSHIP

The BC Rail Investment Partnership will provide $1 billion in new investment to B.C. and help create jobs and new opportunities for railway communities.

Investing in the BC Rail System

Continued Public Ownership

New legislation will legally protect BC Rail’s rights-of-way, railbed and tracks under public ownership. In addition:

· CN will pay the Province $1 billion in cash to acquire the outstanding shares of BC Rail Ltd., along with the right to operate over BC Rail’s railbed under a 60-year-lease, which is renewable for a further 30 years.

· BC Rail’s railbed will remain in public hands – under the BC Railway Company, which remains a provincial Crown corporation – with CN assuming responsibility for rail transportation and infrastructure maintenance.

· Railway infrastructure will be returned to the Province in present condition at the end of the lease.

No More Public Debt

The BC Rail Investment Partnership will eliminate BC Rail’s current debt of more than $500 million, saving $30 million a year in interests costs. This will free resources to be reinvested in the rail system. In addition:

· The partnership will eliminate taxpayer risk for new investments, and protect taxpayers from asset write-downs that have cost the Province $860 million over the past 15 years – ensuring that taxpayers’ money is available for vital public services like health care and education.

· CN will assume responsibility for maintenance of the railway and cars, which costs BC Rail $40 million a year – representing $3.6 billion in avoided costs to the BC Railway Company over the next 90 years in today’s dollars.

· CN will pay a forecast $8.3 million in municipal taxes, based on current assessment values, beginning in the year the partnership is completed – four-and-a-half times the $1.8 million currently paid by BC Rail in lieu of taxes. This will provide $750 million of revenue for communities over 90 years in today’s dollars.

600 New Cars

CN will purchase 600 new centrebeam cars to increase capacity for forest shippers, and upgrade 1,500 boxcars, to help ensure customers have access to rail cars when and where they need them. Faster transit time will also improve car availability by 800 cars.

Lower Rates and Costs

CN will establish an Open Gateway Rate and Service Commitment, to ensure shippers will retain access to competing railroad alternatives at Vancouver at rates lower in aggregate than current BC Rail rates. The Open Gateway rates are backed up by a service commitment that will ensure shippers using BC Rail to reach competing railways in Vancouver receive the same service as shippers using CN – all with the added benefit of a 30 per cent reduction in transit times between Prince George and Vancouver. In addition:

· Shippers will receive an average rate reduction of seven per cent for interline rate shipments.

· Combined savings to interline shippers from rate reductions of $7 million annually.

· Shippers using the BC Rail system will no longer be subject to additional switching at the Vancouver interchange, helping further reduce transit times from Prince George.

· CN has committed to establish future rates using the “rail cost adjustment factor” calculated by the Association of American Railroads and approved by the U.S. Surface Transportation Board. This will provide greater certainty for shippers.

· Improved shipping times will also reduce operating costs, helping to secure jobs in the forest products sector.

Improved Access to Markets

B.C. resource industries and shippers will have access for the first time ever to an integrated, continental rail network that will open up markets in the U.S. and Asia, reduce operating costs, and transform Prince George into a major new continental gateway.

CN is the only railroad connecting directly with BC Rail at Prince George and North Vancouver, and offers BC Rail shippers the shortest and fastest route to key U.S. markets – 700 miles less to Toronto and Memphis than competing carriers, and 650 miles less to Chicago. The partnership will mean:

· A new Chicago Express will be established in the first quarter of 2004 by integrating the CN and BC Rail networks at Prince George, providing access from Prince George to Chicago in four days, reducing transit times by up to two days or 35 per cent, and making B.C.’s resource industries more competitive in the U.S. market.

· Grain shippers and the forest industry will now have improved access to Asia through the container terminal expansion at the Port of Prince Rupert. Located 440 miles closer to Asia than other North American ports, the Port of Prince Rupert offers shipping times 1.5 days closer to markets, significantly reducing travel costs for shippers.

Long-Term Protection of the Rail Network

CN is committed to strengthening BC Rail’s rail system.

At present, BC Rail and the Province can arbitrarily discontinue routes and impose rate increases, with no avenue for appeal. For the first time, BC Rail shippers will have access to new regulatory protection under the Canada Transportation Act, which will now apply to the BC Rail system. In addition:

· CN will re-open the Dawson Creek-to-Hythe line, to facilitate grain handling from the Peace region. Maintenance and repair work will be conducted in the spring, with a planned re-opening next fall. If future traffic on this subdivision increases, CN has committed to investing in the track to accommodate increased capacity.

· CN will continue the D’Arcy-Lillooet and Takla shuttle services.

· The track to Tumbler Ridge, which BC Rail was intending to dismantle, will be kept on the ground for a minimum of five years, allowing time for communities and industries to plan future operating options.

· Access to existing routes will be guaranteed through a moratorium on any operational discontinuance for at least five years.

Investing in Jobs and Opportunities

$135 Million for Northern Communities

Proceeds from the partnership will be used to establish a $135-million Northern Development Initiative to support investments in forestry, pine beetle recovery, transportation, tourism, mining, Olympic opportunities, small business and sustainable economic development:

· $25 million for an operating endowment, with the interest used to support the operations of the Northern Development Initiative, centred in Prince George.

· $60 million divided equally among four regions – $15 million each for Prince George, the Peace, the Northwest and Cariboo-Chilcotin/Lillooet.

· $50 million for a general trust to support cross-regional investments, economic development and job creation.

The initiative will be administered by a board, to be established by future legislation, and assisted by a regional advisory committee for each of the four regions to provide input to spending priorities. The Province will make the initial appointments to the board. It will include people with the range of skills required, along with representatives selected by the regional advisory committees. The regional advisory committees will include community representatives that may include mayors and MLAs.

Prince George Gateway to the North

The BC Rail Investment Partnership will open up the Northern Corridor from Alberta to Prince Rupert, transforming Prince George into a major new continental gateway and creating new economic opportunities across the North in resource industries and tourism:

· Head office for the new Northern Development Initiative.

· The Province will provide $4 million to the Prince George Airport Authority to support its $10 million worth of improvement to the terminal and runway. These improvements will create up to 75 direct jobs over three years at the airport and a further 300 jobs in the region.

· A new B.C. North Division office will be established, ensuring better service and improved responsiveness to northern shippers, particularly in the forest and grain industries – 75 per cent of B.C. forest shippers are located within 200 miles of Prince George.

· CN will establish a new $1-million state-of-the-art wheel shop at the BC Rail mechanical complex. The new wheel shop will allow CN to bring back wheel repairs that it currently contracts out to U.S. suppliers, and to repatriate BC Rail wheel work that is now outsourced in Tacoma, Washington. CN will perform wheel work from its Western Canada operations in Prince George. Its Eastern Canada wheel work will continue to be performed in Winnipeg.

· CN will bring new locomotive and freight car repair work to the Prince George mechanical complex.

· Together, the new B.C. North Division office and wheel shop will help retain a total of 580 jobs in Prince George for the combined CN and BC Rail workforce – a decrease of only 25 BC Rail positions, including 15 involuntary departures.

· CN will begin paying municipal taxes in the year in which the partnership is completed. Based on current assessment levels, the City of Prince George would receive over $825,000 compared to the current amount of $372,000 paid by BC Rail in lieu of taxes.

· CN would work closely with city on redevelopment plans for its downtown yard. CN would continue service to nearby shippers, but also create opportunities to improve the quality of life in Prince George.

· Surplus rail yard land would be available for commercial development in the downtown core.

· CN would donate part of the existing yard to the city to expand the scenic Cottonwood Park, thereby expanding the city’s recreational system.

· A smaller CN yard would reduce the city’s cost to build a new crossing of the Nechako River. Currently, the preferred route calls for a bridge to span the width of CN’s Prince George yard.

· The Province will also negotiate with the community on the transfer of other non-railway lands currently held by BC Rail, to help meet local needs.

Major New Expansion to the Port of Prince Rupert

The BC Rail Investment Partnership will help transform the Port of Prince Rupert into a major new North American gateway, fuelling new economic and tourism opportunities:

· The Province will provide $17.2 million to the Port Authority to support the port’s $62-million redevelopment plan, including development of a container terminal facility.

· CN will also directly invest up to $15 million to construct terminal trackage and upgrade rail infrastructure to accommodate double-stack operations.

· The Province will continue to work aggressively with the federal government to secure additional funding toward the port’s redevelopment plan.

· The port redevelopment will create up to 500 direct jobs in the northwest region.

· This opens the door for new opportunities to enhance B.C.’s northern transportation and trade corridor with Alberta.

New Benefits for Squamish

The Province will help facilitate a major new redevelopment of the Squamish waterfront and downtown core by transferring 71 acres of BC Rail’s non-railway lands that were leased to Nexen. The Province will also continue working to identify other adjacent parcels that could potentially be made available to Squamish.

In addition:

· CN will actively support the introduction of new tour trains between Vancouver, Squamish, Whistler, Pemberton and northern B.C., beginning with a request for proposals for new partnerships to operate passenger-tourist services.

· CN will work with the Province to facilitate the upgrading of the Sea-to-Sky Highway and ensure rail alternatives for a successful 2010 Olympics.

· CN will begin paying municipal taxes. Based on current assessment levels, the District of Squamish would receive over $650,000 compared to the current amount of $321,000 paid by BC Rail in lieu of taxes. The Resort Municipality of Whistler would receive $55,000, compared to the current amount of $27,000. And the Squamish-Lillooet Regional District would receive over $495,000, compared to the current amount of $56,000.

· In addition to the Nexen site, the Province will also negotiate with the community on the transfer of other non-railway lands currently held by BC Rail, to help meet local needs.

$15-Million First Nations Benefits Trust

A $15-million BC Rail First Nations Benefits Trust will be established, to support economic development, educational advancement and cultural renewal for the 25 First Nations along the BC Rail corridor. This may include funding to: build capacity and provide seed-capital for aboriginal enterprises and joint partnerships; protect and promote First Nations’ languages; and support initiatives for aboriginal youth apprenticeship training.

The trust will be administered by a board to be established by future legislation. The Province will make the initial appointments to the board. It will include First Nations representatives and others with expertise to meet the priorities of the trust.

In addition:

· All railbeds, rights-of-way and tracks will remain legally protected under continued public ownership, with no change in ownership or use of the railway line.

· As operating partner, CN has extensive experience in working with First Nations, supports the treaty process and will respect existing agreements and protocols with BC Rail.

· BC Rail’s real estate subsidiary owns a considerable amount of non-railway related land. First Nations, communities and tenants have expressed an interest in these lands. The Province will work with these groups to negotiate transfer of these lands.

· CN will retain BC Rail’s First Nations programming and current staff, and will also continue the D’Arcy-Lillooet and Takla shuttle services currently operated by BC Rail.

New Tourism/Passenger Services

CN and BC Rail are issuing a request for proposals for passenger-tourist train services. CN will provide access to the rail line on reasonable commercial terms to accommodate these services. New passenger-tourist train services would create hundreds of new jobs in B.C.’s tourism and hospitality industry.

THE NEED TO REVITALIZE BC RAIL

The Importance of Rail Services

Operating across the province from Fort Nelson to North Vancouver, BC Rail consists of 2,315 km of mainline, 740 km of industrial, yard and track sidings throughout the province, 121 locomotives and 9,002 rail cars.

Northern communities, resource industries, shippers and potential tourism operators require a competitive, sustainable railway system that helps ship goods efficiently and affordably. This is particularly true for the forest industry, which accounts for 75 per cent of BC Rail’s traffic.

They also require access to an integrated, continental rail network that enables them to competitively carry goods to markets in North America and Asia.

The Debt Challenge

Long-term financial challenges are impacting BC Rail’s ability to deliver efficient, affordable and competitive service to communities and shippers.

Over the past 15 years, BC Rail has cost taxpayers almost $860 million in asset write-downs, on top of its current debt of more than $500 million. These write-downs were as follows:

· 1989 – $81-million write-down for the Dease Lake extension project;

· 1999 – $617-million write-down for lines north of Prince George;

· 2001 – $36.4-million write-down for equipment related to passenger and intermodal rail; and

· 2002 – $124-million write-down for the business value of the Vancouver wharves.

These ongoing challenges, combined with the current debt, prevent BC Rail from providing the infrastructure improvements, efficient services and competitive rates that are required. Interest costs alone now total more than $30 million – roughly half of BC Rail’s net income.

The Need for Change

In September 2002, the Northern Priorities 2002 Transportation Symposium brought together a comprehensive group of stakeholders including local governments and industry representatives from across northern British Columbia to identify solutions to regional transportation challenges, including those associated with BC Rail.

A report of final conclusions and recommendations was presented to Premier Gordon Campbell by Prince George Mayor Colin Kinsley. It concluded that B.C.’s transportation infrastructure needed urgent renewal. One of the recommendations ensuing from this symposium was to seek an experienced partner to operate BC Rail.

The report noted, “A balanced solution to B.C. Rail’s financial difficulties could be a private-public partnership, with the provincial government as a partner. This would resolve some of B.C. Rail’s financial challenges and provide necessary infrastructure investment, while preserving the regional integrity of railway.”

In November 2002, the Province held a Northern Rail Conference in Prince George, bringing together shippers, railway community representatives and other stakeholders to further discuss the current and future state of BC Rail.

Concerns identified by mayors and shippers included:

· Declining services;

· Lack of available and reliable railcars;

· Uncompetitive freight rates; and

· Declining economic opportunities.

Conference delegates resoundingly agreed that maintaining the status quo is no longer an option. In order to become sustainable into the future, BC Rail must implement a new business model that will revitalize the railway and ensure it can compete in the North American market.

The Process to Secure a New Partner

Based on input from these consultations, the Province launched a process to develop the BC Rail Investment Partnership to eliminate the railway’s debt, provide new services and infrastructure improvements, help restore competitive rates and bring shippers back to the railway line, by seeking an experienced partner to manage the operations of the railway – one able to compete in the North American market.

The Province consulted further with mayors of railway communities and shippers and to develop a request for proposals that reflected stakeholders’ priorities in such a partnership. According to these priorities, each prospective partner needed to demonstrate how they would fulfil the following criteria:

· Community benefits – proponents needed to demonstrate how stakeholder groups such as employees, communities and First Nations would benefit from the proposal.

· Growth opportunities – proponents needed to accommodate access to the railway line for third-party passenger rail services on reasonable economic terms and identify any new opportunities for freight rail services.

· Sustainability– proponents needed to promote a robust and well-maintained transportation infrastructure that supports the long-term economic development and diversification of B.C. communities.

· Competitiveness– proponents needed to recognize industrial customers’ need for competitive freight rail services and rates while ensuring access to preferred markets and carriers for interline rail shipments.

The Evaluation Process

A request for proposals was issued on May 15, and on July 14 the evaluation committee shortlisted four proponents to submit more detailed business plans. Three detailed proposals were subsequently submitted by CN, CPR and OmniTRAX. Rail America, the fourth shortlisted proponent, formally withdrew from the competitive process.

The evaluation committee was comprised of four members:

· John McLernon, Chair of the Board, British Columbia Railway Company;

· Brian Kenning, Director, British Columbia Railway Company;

· Chris Trumpy, Deputy Minister, Ministry of Provincial Revenue; and

· David Morhart, Assistant Deputy Minister, Ministry of Finance.

Fairness Adviser’s Findings

The Province also appointed an independent fairness advisor, to independently assess and ensure that the process for launching BC Rail Investment Partnership is fair. Founded in 1965, Charles River Associates is a multidisciplinary consulting firm with internationally recognized skills and experience in economics, finance and transportation.

The independent fairness advisor was mandated to:

· Determine if competitive processes were undertaken; and

· Ensure that the Province received a fair value for the opportunities provided to operate and manage the freight railway and the Port Subdivision.

The fairness advisor conducted 46 interviews with BC Rail employees, shippers, community and First Nations representatives as well as provincial staff and the evaluation committee. In an interim report to the Province, the advisor concluded that “the process established and implemented by the Province, the evaluation committee and its advisors was fair and impartial.”

It also found that “the evaluation committee struck an appropriate balance between sharing information with those who needed to know and protecting the confidentiality of the participants and ensuring the neutrality of the process.”

The report concludes “the Province designed and executed the process with considerable effort to achieve a result that will sustain economic development of the province, preserve competition among freight rail service providers, enable future access for passenger rail services, maintain positive community relationships, and minimize impacts to employees.”

WHY CN WAS SELECTED

CN’s proposal most fully met the evaluation criteria by providing the following benefits:

Growth opportunities

· Making Prince George home to a new B.C. North Division office for transportation, customer service, engineering, mechanical and general management employees

· Providing new work for the city’s BC Rail shops.

· Using the Prince George office to provide the forest products industry with high levels of service.

· Investing $1 million in a new state-of-the-art system wheel shop in Prince George.

· Relocating CN system freight car and locomotive work to Prince George.

· Leveraging its unique position in the North to take advantage of the strategic position of the Port of Prince Rupert and the Northern Development Corridor.

· Working actively with the Port of Prince Rupert to support a new container terminal.

· Supporting the introduction of new third-party passenger-tourist train tours on BC Rail and CN railway networks.

Sustainability

· Providing the shortest and fastest route to key North American markets for BC Rail customers.

· Strengthening the railway by ensuring competitive connections with U.S. carriers operating in key western U.S. markets.

· Creating a new Prince George-Chicago Express Train for B.C.’s forest products industry, shipping two days faster than BC Rail or any competitors.

· Making a significant new investment to serve customers with the purchase of 600 new centrebeam cars and 1,500 refurbished rail cars.

Competitiveness

· Sharing significant cost-savings from integrated and expanded rail with shippers.

· Ensuring shippers have competitive options through an Open Gateway policy to ensure competitive access to other interline carriers in Vancouver.

· Creating new choices for shippers, including CN’s single-line services to key markets and continued competitive access to other railroads at Vancouver at lower average rates than now charged by BC Rail.

· Providing shippers with non-discriminatory traffic routing via competitive railroads at Vancouver at pre-established, public rates and service equal to what CN charges its own traffic.

Community benefits

· Demonstrating a comprehensive plan to minimize the impact of its operational plan on communities, including early retirement, attrition, relocation and retraining opportunities and generous severance.

· Demonstrating a capacity to find innovative opportunities to create new economic development and job opportunities in communities.

· Substantially increasing money for community services by providing $8.3 million in revenues to local governments.

· Demonstrating extensive experience in working with First Nations.

· Supporting the B.C. treaty process and honouring BC Rail’s existing agreements and protocols with First Nations.

· Ensuring rail alternatives for a successful 2010 Winter Olympics and successful upgrade of Sea-to-Sky Highway.

· Freeing up new lands for local economic development, community recreation.

NEXT STEPS

Now that CN has been selected, the Province will introduce legislation to enact the BC Rail Investment Partnership and will conduct due diligence. Other steps include:

· Final report from the fairness adviser due in December.

· Review by Canada’s Competition Bureau.

It is important to note that all the new benefits and investments that will be generated are dependent on completion of the partnership. The partnership is expected to be complete and ready for implementation in the first quarter of 2004.

JOB IMPACTS AND BENEFITS

BC Rail has already reduced 650 positions over the past two years, due to ongoing financial challenges, and up to 300 additional positions would have been terminated without a partnership. The BC Rail Investment Partnership will result in just 180 involuntary departures provincewide over three years. This will be more than offset by significant new job benefits for the North:

Employment Impacts:

Job Benefits:

· Excluding 115 employees who are already inactive, BC Rail currently has a workforce of 1,380 employees. · CN’s plan will require a workforce of 950, resulting in 430 BC Rail employees affected over three years. · Of these, 250 are eligible for early retirement, resulting in only 180 involuntary departures over three years, through attrition and severance. · The majority of involuntary departures will be in the Lower Mainland. · There will be a combined CN/BC Rail workforce of 580 in Prince George, a decrease of only 25 positions, including just 15 involuntary departures. · This limited impact is due to CN’s mitigation initiative to in-source and repatriate significant mechanical work in BC Rail’s shop.

· New passenger-tourist train services carry the potential to create hundreds of new jobs in the tourism and hospitality industry. · Reduced rates and faster shipping times will help secure vital jobs in the forest products sector. · A major new expansion of the Port of Prince Rupert will create up to 500 direct jobs in the Northwest. · The $10-million Prince George Airport expansion will create up to 75 direct jobs at the airport over three years, and an estimate 300 further jobs in the region. · The $135-million Northern Development Initiative will create hundreds of new jobs in forestry, transportation, tourism, small business and community development.