Sale of assets could outperform Ottawa's franchise option.

Mark Bunting

(As published in the Financial Post, March 13, 1999)

Canada's ailing passenger rail system may see a dramatic restructuring later this year, with its final shape depending on the winner in a high-stakes rail debate. The battle pits federal Transport Minister David Collenette, among other advocates for rail franchising, against those, who want VIA Rail to try public/private partnerships while continuing as a national public carrier.

Since the federal government formed VIA Rail two decades ago, train services have shrunk by almost 60%, and now account for less than 1% of Canada's inter-city travel market. Moreover, despite cost cutting and fare increases, VIA's passengers pay less than half the cost of serving them, and this with an aging fleet that could soon cost $700 million to replace. A public carrier offers little prospect of market gain, while requiring substantial infusions from the public treasury.

Taxpayers who pay for trains they do not ride might prefer to terminate VIA, a move that would have saved $229 million in subsidies in 1997. More or less, this was the advice of the Royal Commission on National Passenger Transportation, which in 1992 called for phasing-out VIA's subsidies. However, this option is not politically saleable.

Ottawa is leaning toward rail franchising, which involves competitively tendering VIA's services to the private sector. Successful rail privatisations in other countries have seen private operators cut costs, invest in new equipment and improve marketing, thereby attracting the travelling public and cutting subsidies.

If VIA's present system were preserved in a single Canada-wide franchise, Ottawa could become vulnerable to future claims for subsidy. If, to guard against this prospect, Ottawa gets involved in its business strategy, the franchisee may not behave just as VIA now does. Political compromises would detract from business effectiveness, costs and franchise payments would rise, and eventually services would be cut.

More likely, VIA will be carved into several franchises, as in Britain, where 13 distinct companies run trains under 25 franchise agreements. Canada might have three or four franchises, perhaps one each for Atlantic Canada and Western Canada, and one or two franchises for the Quebec-Windsor Corridor. Ottawa would set terms -- routes, minimum train numbers and service standards -- then call for bids from qualified operators, awarding franchises to those able to operate at least subsidy. By diversifying the railway passenger market, Ottawa could avoid relying on one operator, and induce more efficient and innovative service.

In Britain, the merits of rail franchising are hotly debated. In the mid-1990s, rail passenger subsidies exceeded 2 billion: private rail franchises will cut this to less than 1 billion by 2003, with overall service levels growing by roughly 10%. Opponents claim British Rail required less subsidy in the early 1980s -- 600 million in 1989 -- but these figures do not reflect the full capital costs of equipment and infrastructure. Properly analyzed, rail franchising shows significant financial gains.

Rail franchisees are often criticized for late trains, but on average they do as well as British Rail's 90% on-time performance in the early 1990s (and better than VIA, which ran only 84% of trains on-time in 1997). Moreover, performance incentives and mandated public reporting of late and cancelled trains encourage improvements, while franchising provides stable funding to upgrade equipment and deal with train delays.

Doubts about franchising may lead Ottawa to test the waters with one or two pilot franchises, but this would be an ill-advised move. Experienced international companies may not want a small part of an already-small railway, especially if VIA has a role in franchising while continuing to run trains. VIA could be in a position of conflict, with much to lose if the initial franchises performed well.

Franchising is not the only privatization option. The government could sell VIA's assets and open the railway passenger market to any qualified train operator. If this were combined with a subsidy geared to market performance (say an amount per passenger trip or kilometer travelled), operators would be rewarded, not for running trains, but for market success. As with rail franchising, Ottawa would need to ensure fair access to CN and CP tracks, but it would would not specify service levels or quality.

An open market system could be tested on western transcontinental trains, which might be run with little, if any, support if private operators were allowed serve the market according to demand (mostly for summer travel), rather than the year-round schedule maintained by VIA. And even if Ottawa prefers franchising, limited open competition could help keep franchise holders on their toes.

Dr. Bunting, principal consultant for P.M. Bunting & Associates in Kingston, is a transport policy and economics specialist, and author of Changing Trains, a report on railway passenger strategy.

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