TRAN Committee Meeting

STANDING COMMITTEE ON TRANSPORT

LE COMITÉ PERMANENT DES TRANSPORTS

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, March 17, 1998

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[English]

The Chairman (Mr. Raymond Bonin (Nickel Belt, Lib.)): We'll call the meeting to order. Welcome, this afternoon, for our continuation of seeking information, assistance and input on passenger rail.

As you saw, with the many cuts we've had in Ottawa, I have just used the gavel and now it's gone on the other side. We've cut to the extent where we have to share gavels now.

I want to welcome you, Hugh MacDiarmid and Sandy McFadzean. Thank you for being here with us. We look forward to your input.

The beginning is yours. You can use the time any way you wish. Then we'll open up for questions, and we'll have closing remarks if you wish. The floor is yours.

Mr. Hugh MacDiarmid (Executive Vice-President, Commercial, Canadian Pacific Railway): Thank you very much, Mr. Chairman.

[Translation]

Ladies and gentlemen, I will speak in English because I am more at ease in that language. However, I will try to answer your questions in English or in French.

[English]

Ladies and gentlemen, I'd like to begin by introducing myself and my colleague.

My name is Hugh MacDiarmid. I'm executive vice-president, commercial, for Canadian Pacific Railway. As such, I have responsibility for our marketing and sales activities across our network, customer service, management of our freight car fleet, and also our commercial development activity, which includes responsibility for our passenger and commuter activities.

Sandy McFadzean is our manager of passenger and commuter services and has prime responsibility for our liaison with VIA and with other passenger service providers at the local level.

I am a member of the executive committee of Canadian Pacific Railway and report directly to Rob Ritchie, our president. I also serve as chairman of our internal board of directors that we've set up for the St. Lawrence and Hudson Railway, which is our eastern operating subsidiary in eastern Canada and the northeastern United States, so I have direct management accountability for a number of areas of our property where we have a number of passenger and commuter opportunities.

I certainly do appreciate the opportunity to come and speak with you today. We do have a number of issues and concerns that surround the future of passenger transportation, and I'll make a few remarks to build on the written brief we are submitting.

By the way, we do have copies for all the members. I regret that it's in English only at this moment because we had a technical difficulty with printing out our translated version. I apologize and will deliver a French-language version as soon as it's available. But we do have a written submission, so my remarks are simply an amplification on that.

To begin, let me just say that at CPR we do believe it is a good time for a reappraisal of passenger transportation. Over the past 50 years, since the end of the Second World War, there has been a substantial migration of passenger traffic, passenger transportation, away from the rail mode due to changes in the marketplace, technology, and investments in competing infrastructure, and that has had an impact on that mode of transportation, to operate viably, as is quite evident with the situation with VIA today.

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It is also five years since the Royal Commission on National Passenger Transportation reported, and there has been a tremendous change in our transportation environment, in the rail industry in particular, in that five-year period. Certainly you've heard already from the management of VIA about the position they find themselves in and the difficulties they have in finding a sustainable way forward. We certainly agree this is a good time to take stock and look for new directions, particularly given how complex and thorny some of the public policy issues are, surrounding passenger transportation.

Before I get into the substance of what I want to say, I have just a brief profile on CPR and its role. We are not quite the same mainstream player in this area as CN is, for instance, particularly with VIA. Moving freight is clearly our primary business. At this time our total involvement with VIA amounts to less than $5 million of revenue to our system. Of course VIA has a much greater involvement with Canadian National, working on their property.

We do, however, beyond VIA, participate in a number of areas that involve passenger and commuter activities, including operating passenger or commuter services in greater Montreal, the Toronto area, and Vancouver. We are participating in a study of commuter rail in the greater Ottawa area, which we're supportive of and hope will proceed. We also operate one tourist service, the Rocky Mountaineer, which operates on our network west of Calgary. In total, when you take all those activities in combination, it represents almost $50 million in revenue for us annually.

So despite a relatively small presence with VIA, it would be fair to say passenger business, particularly at the local level, is an important business. We believe it's good business, conducted on commercial terms. In areas such as Toronto and Montreal it makes good, positive use of infrastructure that is perhaps not as important to the freight operations today as it once was.

Let me begin by trying to describe some elements we see as being very positive in today's discussion, some of the areas on which we have a positive outlook or which we believe are positive factors relating to passenger. One is certainly the progress VIA has made. The management of VIA has come to you and described the progress they have made over the last five years in reducing the degree to which they draw on the public purse and the manner in which they have done that, retaining service, improving service, and improving the quality of product they are delivering to the public. So I do want to begin by congratulating and commending VIA management on that progress, because it certainly is in the public interest.

The second point is simply to remind you of something I'm sure many of you have heard. The rail mode is one that has many positive benefits to offer in the Canadian public policy context. It has tangible benefits relative to other modes of transportation that use public road infrastructure. It has fewer emissions in the environmental world, it is fuel efficient, and it is safe. To the extent that it can be used, there are many positive features.

A third point to mention is that the Canadian freight rail system is strengthening. For the last 10 to 15 years Canada's freight railways have lagged behind their counterparts in the United States in investing in infrastructure, equipment, and technology. There are a whole host of reasons why, but we're now finding that both Canadian Pacific and Canadian National, our newly privatized competitor, are investing and we are modernizing our systems and becoming as competitive as we can to support our freight transportation business.

It's worth mentioning that in Canada the structure of our economy is different from that in many other countries in the relative magnitude of freight versus passenger. With over $7 billion in freight business just between CN and CP, that clearly dwarfs the total amount of intercity passenger transportation in our country.

A fourth positive is certainly the use of commuter services, the expansion of commuter services at the local level, and the exploration of concepts such as the shuttle between Dorval Airport and downtown Montreal, ways to get better access between downtown Toronto and Pearson Airport. Those all strike us as being very sensible avenues to pursue in making the maximum use of the infrastructure that exists, or corridors that exist, and getting better linkages there. I'm very supportive of that.

Point 5 I would register on the positive side. I guess you can see the other shoe will drop. I'll have a few negatives after I go through the positives.

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Point 5 is that we do see a very positive CTA, a policy framework, when we look at the basic foundations of public policy as represented in the Canada Transportation Act. It talks about making the best use of all modes of transportation at the lowest possible cost. It says we should be seeking advantages of harmonized federal and provincial approaches wherever possible. It points out that all modes should bear a fair share of the real costs of providing transportation, particularly at public expense. And it does basically say that where possible, competition and market forces should dictate how we move forward in providing transportation to the public.

Those four foundations are ones that we at CPR are very mindful of, and we believe they're the right framework.

The last point on the positive side is that I know you have had the idea advanced of franchising as a way of restructuring the world in which VIA operates. Advancing new and creative ideas like this is a good thing. While we might all debate the specifics and the workability of specific proposals, it's excellent that this forum is bringing together those kinds of ideas.

Turning over to areas I might characterize as negatives or issues that are going to be challenges for us to address, I'd like to talk about three. First is the VIA situation. Second is the issue surrounding creating a balanced policy between modes of transportation, particularly rail and truck. Third is translating policy into practice, because we see some areas where, despite the fact that we have a strong policy framework, we're not convinced it's being translated into practice efficiently.

As relates to the VIA situation, there are several points to be made. One is that VIA management has come to you and said that, despite all the progress they've made in recent years, they don't see themselves being able to make much further progress. They've essentially plateaued in their ability to take the business forward.

Second, they're plateauing at a level where the business is nowhere near commercially viable. It generates 50¢ of revenue for every $1 of expense, and that is not a business that will pass the private sector test. So it is plateauing at a level of performance that will continue to require ongoing public sector support.

Third, the asset base of VIA is eroding. They have terminal infrastructure and they have in particular their rolling stock fleet, which is in a state of maintenance and repair and will continue to get more and more expensive. It is in need of modernization, and yet they do not have the capital resources to do so.

One illustration of this that is of particular concern to the freight industry is the management of human waste on passenger trains. The inability to fund the capital investment in holding tanks is creating a very significant labour relations problem for us and even more so perhaps for CN. I don't want us focusing on that specific issue, but it's simply an illustration of the fact that even very basic capital expenditures that should be made are not being made. That's simply a symptom of the difficulty the management of VIA is trying to cope with in terms of their financial dilemma.

The fourth point I'd like to make is that we do not believe high-speed trains are going to be a saviour or the salvation of VIA or of passenger transportation in this country. We have done our own independent studies of the high-speed rail opportunities, and to be honest, from Canadian Pacific's perspective, we believe the published studies are more optimistic than our own internal studies with respect to ridership and with respect to the revenue potential of high-speed rail. From where we sit, high-speed rail may well be a concept that has its time and will go forward with substantial public support, but we believe it's important that it not be viewed in some way as being the silver bullet that is going to be the saviour of VIA.

The second point is on modal balance. I won't dwell on it in great depth, because it's more of a concern to us in our freight business rather than passenger, but the two really are intertwined.

We in the railway business feel very strongly that there is not a sound modal balance in terms of both federal and provincial policies governing transportation. That includes fuel tax, where we are paying taxes on fuel to reinvest in the road infrastructure to subsidize our competition in trucks, and we build and maintain our own infrastructure. That includes capital cost allowances whereby the rail industry does not have the ability to accelerate depreciation of its asset base on a par with other modes of transportation, which does put us at a disadvantage. I can also talk about the issue of truck sizes and weights and the growth in those areas, and the pressure for increasing vehicle dimensions, and so on, which is basically making trucks have a longer economic reach and diverting freight away from rail onto road. All that is at a time when we in the rail industry believe, from a public policy perspective, we have much to offer in terms of environmental and other factors.

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So that's not the kind of modal balance or level playing field we would like to see, and that does have some ramifications in terms of the passenger business.

The last point is the issue of translating policy into practice. We see a number of areas of federal and provincial jurisdiction that have some overlap, and we'd like to see a much more harmonized set of environments for us to work in.

I'd like to close off in terms of going from, again, a description of some of the positive features that we see at work, then three areas of concern that I've just described, and then touch specifically on two issues that I think are at the forefront of this committee's mind: the future of VIA; and secondly, the issue of capacity and access to the network of the freight railways.

With respect to VIA and its future, management has clearly outlined a vision that's very compelling and talks about a rejuvenated and revitalized passenger rail system, with a new asset base, tourist services and a very positive picture.

They have also said they believe the level of government support that currently exists should not be increased. I frankly find A and B don't add. So the major question I would ask is, if we look at the fulfilment of VIA's mission and of it's vision, who's going to pay?

We do not see at this point in time an ability for the vision to be realized without some substantial increase in funding from the public purse or some other vehicle that's going to put VIA in a position where it can achieve its goals. It's of very great concern to us that one of the means by which this might be achieved is on the backs of Canadian freight railways, by virtue of access to our networks.

We believe there needs to be a very simple three-step test in terms of looking at the provision of public funds in the sector.

The first test is: is any service or any product commercially viable? If it is commercially viable, we believe it should be allowed to occur and operate on commercial terms. I think the Rocky Mountaineer service is perhaps a good example of that and currently in play in our network, where we have negotiated commercial terms and they're operating a service without subsidy.

The second test is: is the service required in the public interest? That's not an issue I'm going to comment on; I'm simply saying it's a question that needs to be asked and the decision made.

If there is a service that's required in the public interest, then you need to ask question three, which is: what's the best way to deliver that service? What's the most cost-effective way to ensure the appropriate service level is provided?

We think there needs to be some consistency in the application of that three-step process, and we need to be very careful in terms of how this is applied in the case of VIA and its future way forward.

The CTA says that competition and market forces ought to prevail as the prime agent in providing services, and this is the key. We want to do business on a commercial basis with all our customers, including VIA, but we do not want to be put in a position where we are not able to do that on a commercial basis.

That really brings me to the capacity issue. We have a very demanding competitive and commercial environment. Particularly since the privatization of CN, we now have two equally sized railways that are in direct competition with one another, and also in direct competition with trucking, to secure as viable a future as they can in freight transportation.

We do not have lots of idle capacity sitting around. When we have idle capacity, we try to take it out of the system because it costs money for us to maintain it. Therefore, we maintain a very tight balance in terms of the capacity of our network, locomotive fleet, crews, you name it—all elements of our equation. So when we look at the provision of passenger service, we believe passenger service needs to operate in the same environment as that.

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I don't turn away customers. I'm responsible for getting customers. But I want customers to be coming to me on a level playing field in terms of ability to pay for the capacity they consume and the ability to do business commercially. In a sense, I guess we need to ask the passenger industry to compete with freight for access to and share of the networks we operate.

I have one last comment about the VIA proposals and the franchising concept in particular. We do believe VIA could be a vehicle for implementing the concept of franchising. It could serve in effect as an intermediary between government policy and the desire to provide government funds to support certain services in the public interest. It could be the bridge or the intermediary between the government and a series of private sector operators who would bid for and operate certain franchises. VIA could also well be the vehicle for delivering certain funding or subsidies. But we believe that in that role it must pass the same test as any other intermediary, which is does it add value and is it the most effective means for delivering the government policy into that kind of marketplace? We believe it also needs to pass the test of not creating a monopoly with unreasonable powers, one that would operate in a way that would not necessarily serve our overall interest.

I will conclude by saying three things. We do hope for a future environment where there is a greater reconciliation between federal and provincial jurisdictions and some of the regulations that govern transportation. Second, we do want to urge that there be recognition of the real cost of doing business and the real total costs of doing business and providing transportation services in the way we set policy, so the modal choice can be based on preference and utility, not subsidy. Third, we certainly encourage a balanced tax environment to act as a base against which we make all the other decisions.

Those are my remarks in preparation for and elaboration of our written brief, Mr. Chairman.

The Chairman: Thank you very much.

Colleagues, we have the brief in English only, and a member would prefer that it not be distributed until we have it in two languages. What is your wish? If this is acceptable to the committee, fine. If not, I need a motion to request that it be distributed. In any event, the brief will be distributed. In addition, it will be presented to our researchers, who will condense it, and both will be part of our book of information.

We're now open for questions. At our last meeting we were able to field 22 questions because members were precise and witnesses were also precise and direct. We're hoping to have as many questions or more.

Mr. Morrison.

Mr. Lee Morrison (Cypress Hills—Grasslands, Ref.): Thank you, Mr. Chairman.

Welcome, Mr. MacDiarmid.

I wonder if you could help me with something here. I think I see a bit of a contradiction in your presentation. On the one hand you say each carrier or mode of transportation should bear a fair proportion of real costs. Then you tell us that rail passenger transportation is fine as long as we pick up the shortfall to run it on your railroads. But on the other hand you say you are in agreement with the general policy terms of the CTA, which talk about the best use of all available modes of transportation at lowest total cost, and you talk about seeking the advantages of harmonized federal and provincial approaches.

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Out west, where perhaps passenger transportation is not as big an issue as it is in this part of the world, you're also going against that particular CTA policy, or against what you say is your support of that CTA policy, because both CP and CN are moving very rapidly to get rid of their branch line operations, which don't pay too well for the railroad. But you're going to be unloading enormous costs onto society in general when you do this, because roads will have to be built to haul the goods that you won't be hauling on your railroads.

So can you help me through this? How can you talk about a market economy on one side and not on the other? Is it fish or is it fowl?

Mr. Hugh MacDiarmid: I could be a long time answering that question. I'd like to say, first of all, that I do believe there is a consistent thread through there, which is the desire to operate on a commercial basis. I believe that when we look at the process of rationalizing prairie branch lines, we see that it is driven by marketplace forces, commercial forces, and the desire to have an absolutely world-competitive grain handling and distribution system in support of the prairie economy.

There are issues about road infrastructure that are causing significant debate and discussion with federal and provincial jurisdictions—for sure. We believe it has to be handled in an integrated way and we want to be part of that solution, so I don't see us as acting independently of any kind of process.

We're simply saying that we believe the right answer for the export grain business is a more concentrated and efficient grain handling system and is one that is operated on commercial terms. We're being very direct in our inputs to Judge Estey in the grain review and very direct in our inputs to other jurisdictions. We are telling them that we want a more commercially oriented grain system.

As it relates to the passenger environment, again, I believe the basic touchstone for us is commercial, it's in terms of trade. At this time we're being asked to operate commercially in a very demanding marketplace, and we size our asset base and our resource base to compete most cost-effectively in that world.

If we need to adjust our cost base or our capacity in order to expand our services to customers, we have to do that on a cost-justified basis, and that's the same if a coal customer comes to me and wants to expand a business, or a grain customer or a steel mill. As long as the economics are there, I want to do it. So if the economics are there, I want to do it with VIA too, but right now, if we're being asked to operate on less than sound economic terms, we believe it creates distortions.

Mr. Lee Morrison: I appreciate that you are not, nor should you be, a philanthropic organization, Mr. MacDiarmid. But this is not what the CTA is all about. The CTA does make many references to service to the economy and service to the public. You've been almost completely deregulated, and as much as it pains me as a free enterpriser to say so, I'm beginning to wonder if maybe we deregulated a little bit too far and too fast.

Some hon. members: Oh, oh!

Some hon. members: Hear, hear!

Mr. Stan Keyes (Hamilton West, Lib.): Highlight that on the record, Mr. Chairman! I want it highlighted.

A voice: Bite your tongue, Lee.

Mr. Stan Keyes: See? Everybody is still awake, Lee.

Some hon. members: Oh, oh!

Mr. Lee Morrison: Yes.

Mostly I'm really concerned about the rail line abandonment problem, because this is going to devastate large sections of the western economy. You're going to see towns abandoned. You're going to see an awful lot of farmers going broke, and if they go broke or have to turn their land back to grass, which is what's more likely to happen, you're not going to have the grain to haul and in the end it may not be productive for you to be quite this hard-nosed.

Are you having active conversations and negotiations on this question with the various provincial governments concerned, with the people who are going to have to provide the roads to haul the products that will no longer be hauled on your railroads?

The Chairman: I'll ask you to be brief because that question has very little rapport with passenger rail. The question is not related to the study that we're making, but we'll ask you to be brief and answer.

Mr. Hugh MacDiarmid: I'll simply say that we do our very best to dialogue with all provincial jurisdictions. Politically it's a very sensitive issue. We appreciate that, and we do our best to entertain discussions, proposals, and ideas from all parties, including provincial jurisdictions and our customers and producers.

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So while we may seem to be hard-nosed, what I'm really doing is being hard-nosed in the belief that we need to get the right answer to provide the most efficient export distribution system we can so that we keep that economy healthy.

The Chairman: Mr. Guimond.

[Translation]

Mr. Michel Guimond (Beauport—Montmorency—Orléans, BQ): A brief question: what was the volume of business of the Canadian Pacific in 1997? What was the net profit?

Mr. Hugh MacDiarmid: I don't understand your question.

Mr. Michel Guimond: What are the sales figures? $1.8 billion?

Mr. Hugh MacDiarmid: Closer to $3.5 billion.

Mr. Michel Guimond: Okay, $3.5 billion.

Mr. Hugh MacDiarmid: Yes.

Mr. Michel Guimond: This sounds to me like the second or third biggest company in Canada.

Mr. Hugh MacDiarmid: I don't know; it may be 20th or 30th.

Mr. Michel Guimond: I was asking you that as a starter. I think it's really unfortunate, Mr. Chairman, that a company which has sales of $3.5 billion cannot present a brief to an important committee of the House of Commons in both official languages. I think you're proud of your country; you have the Canadian flag on your lapel. You're proud to be Canadian.

The Chairman: You have made your point.

Mr. Michel Guimond: You mentioned the three possibilities that Mr. Ivany presented when he appeared before the Transport Committee about two weeks ago, namely franchising, commercialization or privatization.

I appreciate the fact that your recommendations are a bit more precise. We could read the transcript of that meeting and your memory may be more precise, but you seem to have said, that is what we expect from our witnesses, that franchising could be an interesting possibility for the future of VIA. I'd like you to give more details about your recommendation. Can you put some meat on that bone? I would like to hear you more about franchising. This is not a trap; it is a compliment.

Mr. Chairman, I'd like Mr. MacDiarmid to talk about the comment the Minister of Transport made to us and which was picked up by the president of VIA Rail. He said that we could strengthen our railway passenger transport system by using the CN network for passenger trains and rush freight and CP lines for other freight trains. I am putting myself in the shoes of the CP. Do you agree with that into account? Is that a good suggestion? Should we take that recommendation to strengthen railway passenger service in Canada?

These were my questions, Mr. Chairman.

Mr. Hugh MacDiarmid: Mr. Guimond, I hope it's alright to answer in English, because my answer will be clearer that way.

[English]

I hope I understood the questions properly. The first was with respect to more of an explanation of the franchising concept and how that might work. The second was with regard to the proposal of apportioning traffic between the CN and CP lines between Montreal and Toronto.

With respect to franchising, in a sense, I don't believe that I'm speaking from a base of a great detailed study or understanding of the proposal. We can only respond to information that's been give to us.

When we look at alternatives such as a crown corporation or full privatization, we do not believe those are viable or appropriate for the future of VIA. We don't see a way forward with its current structure that doesn't continue to have the current problems that exist.

So we feel that the franchising concept is worth investigating. We do feel there the range of services being provided has varying degrees of commercial viability and varying degrees of subsidy required. As such, it's probably best to segment those into different natural pockets of business and contract for the franchise separately, as opposed to having one master franchise that each should.... It makes sense to us that you would look at the businesses differently.

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I guess what we're saying is that we could see a situation where VIA could continue to exist but in a radically different form. It could be, in effect, the intermediary between those franchisees, who are private sector operators, and the Government of Canada. If that were the concept, it might end up being one that would be workable, but it would have to pass the test of whether it's the most cost-effective and best way of doing it.

I can't really go into much more detail than that in terms of saying we'd support further investigation, but it really needs somebody to come forward with a much more detailed proposal.

With respect to the apportionment of traffic between CN and CP lines, we share the very serious concerns expressed by CN.

First, it has ramifications with respect to capital investment that would be required on our line in particular. Mr. McBain's estimate is a number that he constructed. We have not done a study, so I can't give you a CP-definitive capital estimate, but I can say that his number is not unreasonable; it's a reasonable estimate. Also, that type of capital investment would be required to handle the increased traffic on our line.

Second, there are very significant commercial ramifications in trying to segment the traffic between those two lines. How do you define slow and fast? How do we apportion the commercial gain, benefit, or harm that results from designating one type of traffic for one line and another type of traffic for another line?

We operate a service today between Toronto and Montreal called the Iron Highway, which is a very direct response to over-the-road trucking. It's a product that I would dearly love to operate on Mr. Tellier's lines between Toronto and Montreal at higher speeds, but I can assure you that he would not be all that thrilled. It would be a situation where he would feel that commercial harm was done to CN by virtue of reallocating. You can imagine those types of judgments going back and forth between the two organizations. That would be very difficult to unravel in terms of the commercial harm or benefit that would arise from that.

Last, in terms of commingling freight and passenger traffic, there are safety considerations. There are needs for the redesign of level crossings. Innumerable issues would need to be addressed in terms of mingling that traffic.

So we have a lot of concerns. We're certainly prepared to listen to suggestions or engage in examinations of it, but our current view is that it's not a feasible proposal.

The Chairman: Mr. Fontana.

Mr. Joe Fontana (London North Centre, Lib.): Thank you, Mr. Chairman. Thank you, Mr. MacDiarmid, for your presentation.

If this committee and this government determines that in the public interest it makes sense to promote and enhance passenger rail because it's good economic policy, transportation policy, or in fact, good environmental policy—Mr. Morrison, to a certain extent, talked about it one way or another—then governments pay. Unless we are prepared to turn every highway into a toll road in order to make sure that everybody was paying their fair share, that's what you get into.

So what we take off the highways is hopefully a benefit. What we don't take off the highways.... In fact, I read a report that our country, North America in general, in terms of highway upgrading, will spend something in the magnitude of $14 billion to $20 billion in the next 10 years just to accommodate the increasing number of vehicles on our highways and urbanization, and so on and so forth. So one way or another, we're going to have to make a decision in the public interest as to which way we go.

I want to talk about capacity, because we talked about it at length with CN. I think you started to address it now. Is there an overcapacity in the eastern part of the country?

You and CN are two private sector companies, and obviously you've been talking. I know it might be inappropriate for you to share those discussions with governments, but at the same time, in terms of trying to deal with the public interest, Mr. Tellier led us to believe that there have been a number of meetings to look at the possibility of CN and CP, call it what you will, merging, co-producing—you name it—in order to maximize your capacity. That's because, at the end of the day, you want to lower your costs. If there's a way of doing that in a creative fashion by co-production, one should look at that.

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Then I hear that perhaps there is no capacity to accommodate passenger rail, because passenger trains take a lot more than freight trains, and that's why you say we have to look at whether or not you start to mix and match. That private sector infrastructure obviously should not be given for nothing. Obviously you want a price. You addressed that very well.

So I need you to address the question of capacity in the system. I even talked to someone from the Rocky Mountaineer yesterday, and in fact he tells me there are no problems with capacity at all, as long as you're prepared to pay the price. Therefore, if he were running the passenger rail system in this country, there would be no problem, because he's never experienced any problems with CN or CP in getting capacity to run his tourist trains and everything else in western Canada. So I want to deal with capacity and who should pay for this infrastructure.

You said it's probably going to cost $500 million to upgrade your CP infrastructure so that we can move fast trains over there and put passenger rail someplace else. You want a lot from the taxpayer of Canada too. You want better capital cost allowance, you want less tax, you want less excise tax, etc. Well, you tell me, if we give you all that, what in the heck are you prepared to do for the people of Canada in terms of helping us create a better passenger rail service?

I know it's a convoluted question, Mr. Chairman, but I think it's—

Mr. Hugh MacDiarmid: I'm not sure which part to respond to.

Mr. Joe Fontana: All of them, of course.

The Chairman: Mr. Fontana, I come from the airline industry, and I understood the question, so it should be acceptable.

Some hon. members: Oh, oh!

Mr. Roy Cullen (Etobicoke North, Lib.): That's why the planes are always late.

Mr. Joe Fontana: That's why we deregulated both of you.

Some hon. members: Oh, oh!

Mr. Hugh MacDiarmid: I guess the first thing I have to do is talk to Mr. Armstrong, because the fact that we run his trains 97% on time is clearly giving him a view of how simple it is out there, but it's not, in terms of operating in that particular part of our network.

Capacity is both a theoretical and a practical dilemma. On the theoretical side, our people who worry about these kinds of things basically say that the capacity of a particular segment of track is really the volume of trains of a given mix of traffic that you can handle with an acceptable delay. So if I say the capacity of the Calgary to Golden line is 22 trains a day and the capacity of Montreal to Toronto is 26 trains or 18 trains, that's the yardstick or the rule of thumb we're using.

That is in the context of the freight business, which is what's an acceptable delay to a freight service customer. In certain segments of our business in intermodal containers, some of our customers want us to meet a 15-minute delivery window to a store in Saskatoon from a warehouse in Toronto in a three-day period. In other parts of our business same-day is okay, and in other parts of our business same-week is okay. So that reflects the freight business.

There's no question that passenger transportation represents the absolute far end of the spectrum in terms of lack of flexibility on service and the need for service consistency and scheduling flexibility around it. So it is, in our minds, a very important notion for people to accept.

Again, we can study it. We'd be happy to engage in studies. But very clearly in our mind, adding one passenger train is not the same as adding one freight train. It's a very different beast. They do consume inordinate amounts of capacity because of the scheduling rigidity, in particular for our network between Toronto and Montreal, which is a single-track system.

From Toronto to Montreal on the CN, you have double-track, CTC-controlled, 100-mile-an-hour track, so you do have quite a bit of flexibility there. But on our system, it's single-track with sidings, and the sidings are spaced in a way that allows us to weave our traffic together. If you have six or eight or ten trains going in opposite directions, you have to weave them together. We run them at an average of 35 miles an hour to 45 miles an hour. If all of a sudden you run a 70- or 80-mile-an-hour express train with total priority through that system, the whole things bogs down.

It doesn't lend itself to mathematics; it lends itself to practical considerations of how that would work. That's why we look at it. Although the numbers may seem extreme in terms of quoting numbers such as $500 million—and I don't care to confirm it, but it's not unreasonable—that's simply to say it is not a trivial exercise to put that in. It will require a lot of thinking and a lot of capital.

• 1615

Again, I don't want to sound so hard-nosed about what our view is. We are here to serve the Canadian public, and we recognize that rail is an important part of our economy and our infrastructure. But we have been asked to operate as commercial enterprise, and my job is to give you the straight answers in terms of what's economic and what isn't. And right now we are sizing our system and we have taken capacity out because it costs money.

One last issue in terms of eastern Canada and a lot of the talk about excess assets and overcapacity is that a lot of that duplication is in areas that serve the main lines but not the main lines themselves. In other words, when you look at redundancy, it's in intermodal terminals, it's in rail yards, it's in mechanical facilities and engineering shops, all of the infrastructure that supports the main line operations. So the kind of cooperation and collaboration that you would find in a merged entity, if that were ever to happen, would not necessarily be in taking those main lines out of operation. It would be to merge the support infrastructure that deals with them. Although it seems contradictory, it is true that, yes, we have surplus facilities but, no, we do not have tremendous amounts of surplus main line track capacity, particularly in Montreal to Detroit.

The Chairman: Mr. Mark.

Mr. Inky Mark (Dauphin—Swan River, Ref.): Thank you, Mr. Chairman. I want to thank Mr. MacDiarmid for his report.

Last week CN gave their presentation and indicated that 90% of VIA's trackage comes from CN. My question to you is is it possible for VIA to run 100% on CN rail, in your estimate?

Mr. Hugh MacDiarmid: I would say there are a couple of areas where we may have the most logical route between two points. Sandy would be better equipped than I am to comment on that, but it's possible that with a couple of exceptions....

Mr. Sandy McFadzean (Manager, Commuter Services, Canadian Pacific Railway): Yes, the only places that VIA could not operate on CN is on the E & N between Victoria and Courtenay, that's CP Rail track. And there's a remote service that runs from Sudbury to White River, which also runs over our track. Other than that, VIA operates for about 30 miles of track into Vancouver, and they use our track. Now, that they could operate on Canadian National. Great Canadian operates the Rocky Mountaineer service on CN, so that could take place. The other place they operate is their Ottawa-Toronto service, which runs on CP track from Smiths Falls down to Brockville. I presume this would continue. There are about 47 trains a week there. Essentially, other than the terminals in the Toronto area and the Ottawa area, that's our involvement for VIA right now.

Mr. Inky Mark: My second question really relates to Mr. Fontana in terms of freeing capacity. If you did not have VIA to run on your tracks, obviously this should improve the opportunity to create more business. How much of a hindrance has VIA been from a business point of view?

Mr. Sandy McFadzean: Right now, because it's very small, there has not been much of a hindrance at all. Since 1990, with the reductions, we've become a very small player in terms of VIA.

Mr. Inky Mark: Do you have any figures on how much you're actually losing because you have to deal with VIA?

Mr. Hugh MacDiarmid: I don't think it's fair to say that; we are not losing money because we do VIA. We do less than $5 million of revenue. In other words, we charge them less than $5 million for the services we provide them, which is a very small proportion of our overall revenues. And we do so on a basis that might be below what we would ideally like to get for the services, but it's commercially negotiated and we're doing business on those terms. So we're not losing money on VIA.

Mr. Inky Mark: No, it's not the question of losing money but from a capacity perspective in terms utilizing a track the best way you know how. How much money would you generate if you didn't have to deal with VIA?

Mr. Hugh MacDiarmid: I wouldn't say that we're turning away freight business today because of the business we do with VIA. I think all of my comments are in the context of a much more substantial presence of theirs on our network as opposed to today's world. We want their business and we're happy to have it, and there are no instances about which I could say we're being forced to operate our service at a substandard level or turn away business because we have VIA operations.

The Chairman: Is it fair to say there would be room for more with franchisees?

Mr. Hugh MacDiarmid: Room for more with franchisees?

The Chairman: For more use of passenger rail?

• 1620

Mr. Hugh MacDiarmid: It really does depend on the route. There are certain areas where we have substantial freight volumes and not a lot of excess capacity. There are others where we might be—

The Chairman: Would there be lots of room outside the Montreal-Windsor corridor?

Mr. Hugh MacDiarmid: I would say there is one significant exception, which is west of Calgary. West of Calgary is our western main line. About 30% of our revenue goes through the port of Vancouver, and it's an extremely busy corridor.

The Chairman: Mr. Cullen.

Mr. Roy Cullen: Thank you, Mr. Chairman.

Thank you, Mr. MacDiarmid and Mr. McFadzean, for your presentation. I have two questions. I would like to come back to one of them.

You had mentioned that in any sort of franchising arrangement VIA could be an intermediary. I would like to explore what other options there might be.

One of the things that frustrate me is that when we look at passenger rail service we sometimes talk about it as a homogeneous product, whereas in fact it disaggregates into a number of different services. We have commuter traffic, corridor traffic, transcontinental, tourism, and then services to, let's say, more remote areas of Canada. CP has a lot of experience in passenger rail in the institution, and currently you obviously have some passenger rail experience. If we were to put these types of services through a franchising arrangement as you have intimated, chunking it up into some business segments, which of those business segments would have any appeal? What kind of interest might there be? What services would be viable, what services wouldn't?

Part of that is do we really know what subsidies we're paying now; what services and what types of passengers? If we're paying $170 million to VIA rail now, do we know where that is largely going to, in the context of these segments?

Mr. Sandy McFadzean: I think that's a question you should address to VIA. You're paying the money to VIA. You're obviously paying that. There is obviously a shortfall in capital. VIA is not replacing its asset base, so the losses exceed that. But I think you should address that question to VIA.

On the other part of your question, yes, you're very correct. Our belief is there are a number of different segment services, and some might be more attractive for franchisees than others. Providing government were willing to relax the characteristics of service conditions, private operators might find them very attractive.

Mr. Roy Cullen: Mr. Chairman, I think that's a good point. VIA Rail must have this type of information. I would request that with the consent of the committee, we ask VIA for any information that segments the business, or any kind of market research they have which better identifies what that is.

Let's look at transcontinental, for example. Would you see many takers for passenger trains from eastern Canada across the prairies to Edmonton or Vancouver? That seems to be an area that is a tough nut to make viable. Is that going to be a viable operation?

Mr. Hugh MacDiarmid: This is more Hugh MacDiarmid speaking than the CPR speaking, because I think my careful response would be to say we're not qualified to respond to this. Maybe I should say that. But just from our experience in this industry, when you look at the types of ridership you have in relation to the total cost of operating that service, it's very hard to see it becoming commercially viable.

It's an investment in our heritage. We think in some respects we can understand a public interest would be served by protecting that heritage. But I think we have to make sure we don't confuse ourselves about what we're doing. I would think it's very hard to develop a commercially viable service which would earn an adequate return on capital from the transcontinental service.

It appears even in the heartland business of Toronto-Montreal-Ottawa, the heart of the franchise, given current ridership, given the modal alternatives customers have, given freedom of choice, consumers will go in their automobile, they will get on a bus, or they will climb on a plane, for different reasons. The train service seems to fall somewhere in between and is not able to generate the levels of ridership it needs to operate economically.

Mr. Roy Cullen: In this franchising model, and with VIA as a possible intermediary, I wonder if you could describe how that might work in concept. If VIA was seen, let's say, as an intermediary, a franchisor, and was not operating any part of the passenger rail system...that's one scenario. I'm just thinking it's possible that VIA may not be the best intermediary. They might have some history. They might not be the best people. I'm putting that question out on the floor as a devil's advocate, to sort of chunk the business up in a way and put it out to the market to see what kind of interest there is, because they may not be totally objective about it; they may have another axe to grind, and so on.

• 1625

Mr. Hugh MacDiarmid: I really am venturing a long way beyond our own field of human expertise in this one. We simply wanted to contribute something to the discussion about franchising. We haven't done a lot of detailed analysis of the concept, but we're looking for a positive way to say, could it work?

The answer is yes, it could, under certain circumstances. But I think the point to reinforce here is that it won't create something out of nothing. If there isn't an underlying commercial proposition there, it won't create it by virtue of being a franchise, just calling it that, and the intermediary, if that's the role...and that's only a concept that we sort of float out, not anything that has any substance; VIA management might be totally opposed to that kind of term.

So I'd only say that it may make sense so long as it were properly constituted, but you'd have to make sure it was set up in the right context so it did not have a set of unreasonable powers that would allow it to act like a monopolist or that it would somehow not carry out the government's policy objectives.

Mr. Roy Cullen: Thank you. I appreciate what you're saying.

You use the term “intermediary”. I was using it in the context that if we look at a franchising-type model, there's going to be a need for a franchisor, either a national franchisor or some segmented franchisor. VIA could possibly be one of them, but if we move in that direction, it might be in the government's best interest and the public's best interest to put that franchisor role up for grabs.

Mr. Hugh MacDiarmid: That's right. There's certainly nothing there that says you wouldn't want to put that right up for bid in itself. It's more a question of where do you want to shake hands between the public interest and public policy and the private sector operation of the system? I think there are probably several different models you could look at.

The Chairman: Mr. Borotsik.

Mr. Rick Borotsik (Brandon—Souris, PC): That was a very interesting conversation. I apologize, I'm not a full-time member of this committee, but I do know Hugh and I've had some conversations with him.

I have a couple of questions. First, let me clarify: $3.5 billion in gross sales, $50 million of which is generated from all sectors of the passenger service, of which $5 million is generated from service sales, if you will, to the VIA portion of that. Maybe it's an unfair question, but with one-tenth of one percent of the total revenues being generated by the VIA side, in your opinion or CP's opinion, would you be better off not providing that service to VIA and perhaps developing other lines of revenue that amount to the other $3,495,000,000?

Mr. Hugh MacDiarmid: Rick, I'd guess I'd say it this way: I don't turn away $5 million customers.

I don't mean to be cute about it. I'm just saying we do business with them voluntarily. We sign a contract. Nobody twists our arm. At $5 million, they'd be in my hundred largest customers, and so I'm happy to do business with them.

Mr. Rick Borotsik: But you did say quite specifically that freight was the major portion of what your business is today. If you increased your freight service by slightly over one percent, you've more than assumed any of the losses you may well have on VIA. So I ask my question again. It's an unfair question, and I appreciate it.

I've heard your comments about the challenges with VIA and about the positives, and quite frankly, the challenges seem to outweigh the positives. Do you believe CP would be better off developing what they see to be their core-based businesses, which is freight as opposed to trying to develop the VIA transportation in the future?

Mr. Hugh MacDiarmid: I'm going to answer you a little tangentially on that.

Mr. Rick Borotsik: I know you are. I know it was an unfair question, but I would like an answer.

Mr. Hugh MacDiarmid: Put it this way. I am aggressively out looking for opportunities to build my freight transportation franchise, and I am actively working with customers and across all of Canada's economy to build my market share, relative to CN and relative to trucks, and to fill my capacity. I am not actively making sales calls on VIA to put more trains on their network.

Mr. Rick Borotsik: I don't know the system here, but normally at committees I do get a couple of questions. So cut me off when you will, Mr. Chairman.

The Chairman: We'll keep it around five minutes.

• 1630

Mr. Rick Borotsik: Perfect.

I'll get into another issue, VIA, particularly in western Canada. We've talked about high-speed rail, and we've talked about the major transportation nodes. Not long ago in western Canada CP actually was a major player in VIA when in fact it ran on the southerly route, as opposed to the northerly route.

I have mounds of statistics and studies that can tell me that the wrong decision was made to go to the northerly route, as opposed to retaining it on the southerly route. Has there been any direction from your company, CP, to look at a change of VIA transcontinental passenger transportation, to go back on a southerly route?

Mr. Hugh MacDiarmid: I'll defer to my colleague.

Mr. Rick Borotsik: I'm sure you will.

Mr. Sandy McFadzean: As Mr. MacDiarmid indicated, we have serious capacity concerns, particularly west of Calgary. We've also developed business with Rocky Mountaineer. They've expanded their business on our tracks by a factor of three times with that type of growth.

To bring VIA back today would be extremely difficult. I guess that Rocky Mountaineer has essentially filled the capacity that used to be used by VIA.

Mr. Rick Borotsik: And there's a conflict there between passenger service and the freight service that we talked about—

Mr. Sandy McFadzean: Exactly.

Mr. Rick Borotsik: —with respect to the southerly line. That is unfortunate, because I do have a particular interest in that southerly line.

Franchisee is a very interesting concept, although from what I can understand right now, it hasn't been fleshed out all that well in your own mind. Franchisee, privatization...whichever you wish to call it, but franchising is a much softer word.

It is a very interesting concept. How does it go forward from here, from the committee?

The Rocky Mountaineer service is a prime service. In fact, as you've indicated before, it is a commercially viable service. As the owner of the rail beds and the rail, however, you would still have control of what that cost would be to the franchisee, should they wish to put forward a service. What kind of controls would there be from from you and CP, tying into a realistic cost to that service you would be providing?

Mr. Hugh MacDiarmid: The contract.

Mr. Rick Borotsik: But you can put the contract price so high that the franchisee would not be viable at that point.

Mr. Hugh MacDiarmid: Yes, that correct—

Mr. Rick Borotsik: And we've just seen that it's one-tenth of one percent of your total business, so is it worth that kind of aggravation to have a franchisee operating on your line?

Mr. Hugh MacDiarmid: Clearly it's worth it for the Rocky Mountaineer. We have them on our lines, we welcome them on our lines, and it's done on terms we're comfortable with.

We want to do business, and we also want to try to support the public interest where we can. But all I can say is that we would want to do business under the terms of the contract, and we want to get adequate compensation for the use of our assets. That is from whoever would come to us.

You need to have some sort of negotiating balance there. In this case, is there a commercial proposition coming forward that says, I'm going to give you this much revenue if you let me run trains?

I can assure you that I want revenue-producing volume on my system.

The Chairman: Mr. Nault.

Mr. Robert D. Nault (Kenora—Rainy River, Lib.): Thank you, Mr. Chairman.

Mr. MacDiarmid, I'm having a really tough time here believing that CN and CP are really happy about VIA being on their track. I know you're trying really hard to be polite about this, but let's cut to the chase.

If in fact you really want VIA's business, you would have made some sort of bid or proposal to VIA in the last five years to get VIA back on your track somewhere, since the Tory government put pretty well 90% of it on CN track. So if in fact the Rocky Mountaineer is a commercially viable business.... Let's stay out of the corridor for a minute, because that's a unique problem, and a lot of capacity discussion relates to that. But in some parts of Canada where you're operating, you're in fact tearing up track on the main line simply because you have no need for that capacity. And one place, of course, that comes to mind is northern Ontario. You're tearing up part of the double-track there.

Now, if I was working for CP, I would at least ask myself, would I not want to bid on the transcontinental that used to run through that line, and make some money back, if there's all that excess capacity? But CP has chosen not to do so, even though we know there's a lot of that capacity. So let's be quite frank. We all understand that CP or CN would wish that VIA would go away.

Now, considering the fact that this is public policy, and the intent of governments—no matter of what stripe—is to continue with some form of passenger service, either it's going to be legislated or we're going to ask for some cooperation from the main rail lines. Let's assume that we don't legislate you. If we do legislate, you won't like the result because you'll be very restricted on how this will all work.

• 1635

There are many people in the country who would like to see VIA passenger service legislated, with a crown corporation created. I know Mr. Mazankowski came awfully close one time, to the point where the legislation was there but he pulled it. There are other people who would think that was the biggest mistake that VIA has had to live through, because now you have the problem of it dying a slow death because its capital assets are not being replaced.

Let's cut to the chase. If we say that outside of the unique problem of the corridor we're willing to have a crown corporation with the ability to franchise this out in different parts of the country—but VIA would still be there—would you be willing to bid? So far you haven't proven that you're interested in VIA's business because you haven't bid on a single line.

I'll give you the perfect example. The CP line that ran through northern Ontario, the transcontinental, was running at capacity. The VIA train itself was at something like 80% to 90% of full capacity. The line could have used more cars on it, quite frankly, because it was so busy. The Tories decided to put it on another line, and nobody uses it any more because it's way up north where there's no population. Unfortunately, those decisions were made for political reasons, not commercial ones.

I want to ask that question, point-blank: would you be willing to bid on those kinds of commercially viable runs if you in fact had excess capacity—we know you do outside the corridor; you've proven it because you're tearing up track on the main line—and if it was made available to you at a commercial price?

Mr. Hugh MacDiarmid: Frankly, it's unlikely, and the main reason is that we're in the freight transportation business. I believe very strongly that organizations need to focus, and the direction of my organization is to be a freight railway.

Mr. Robert Nault: Based on that, then, how can you come before the committee to say you're all in favour of franchising? In certain parts of the country, franchising would have to be on CP track. There is no other track, so we have no choice but to put it on your track. You're totally opposed to passenger service even if it makes money on particular pieces of your track that have such excess capacity that you can afford to tear up main lines, because you say you're running at 35% capacity in some parts of the country. We well know that's a fact. If you have 65% to 70% excess capacity, surely to God you can run one passenger train a day and make a few dollars off it versus tearing the track up. Am I wrong?

Mr. Sandy McFadzean: I think there's a bit of confusion. First of all, I think Mr. MacDiarmid is indicating that we do not want to be one of the franchisees. We don't want to operate the passenger train. We can see some private organization that is focused on doing that—

Mr. Robert Nault: Don't get me wrong. I don't want you to be the franchisee, I want the franchisee to run on your track.

Mr. Hugh MacDiarmid: To come to us.

Mr. Robert Nault: So far, though, you've not been a big supporter of having VIA running on your track, when VIA in fact has the potential to make money for you in an area in which you have so much excess capacity that you're tearing up track. As a business person, why wouldn't you go after that business when you have so much excess capacity?

I'm not talking about the corridor now. We all get mixed up in the corridor. Everybody says there's no capacity in the corridor, so you get off the hook. I can give you many rail lines in this country, both CN and CP, that are outside of the corridor and on which you have so much excess capacity that you don't know what to do. You are in fact looking to get rid of that track to some extent.

Mr. Hugh MacDiarmid: Again, I'm going to quarrel a little bit with the view that there's a lot of excess capacity lying around, because there isn't. You're referring to one specific decision, which was to tear up some track in a portion of our network that is double-tracked, that doesn't need double-tracking and was incurring excessively high maintenance costs. We have redeployed the assets productively in other parts of our network where we need the capacity.

So that was a decision that was not driven by anything other than trying to make the most efficient use of the assets we have on the ground. It really isn't linked at all to the issue of whether we do or don't want VIA. We could put VIA on the network that exists if we wanted that business or if it was commercially appealing to us. I think it would be fair to say we have not at this point in time been approached by VIA to come back and put it onto that segment of the network, and if we were approached by them, we'd want to have commercial terms to do it.

Mr. Robert Nault: Part of my point is that both VIA and the railroads.... VIA is coming to this committee saying, we've hit the max; we can't go any further unless you either give us more money or switch alignments around a bit. They haven't even attempted to bid, to put their trains on certain tracks that were moved, when the Tories moved them, in places where they make no money.

• 1640

And no wonder they are not making any money. No passengers are going to go, for example, out in Timbuktu, drive two hours by car in the middle of the night, at 3 a.m., to get on a train. Let's get real. They are not going to do that. Therefore no passengers are running there any more, and they say, well, passenger ridership is way down. Certainly it would be. But if they moved it to a track where the population exists, then their ridership would be up. If it goes up even 100,000, it's a big improvement over saying they are running at capacity.

So I'm a little surprised that both VIA and the two railroads we've talked to so far think things aren't going very well for VIA and there's nowhere to go but.... “But not on my track. I'm very supportive, but not on my track.” It's like “not in my backyard”.

So you've left the committee and Parliament with very little choice but to decree what will happen; and I think that's a very dangerous thing for CN and CP, because I think everybody here who has been around for a while and knows anything about what governments will do as it relates to railway knows they can muck it up pretty badly.

We've come a long way in cleaning up things in the last five years, with a pretty good act. Now you are giving politicians who know nothing about railroads, if you want my honest assessment of this, an opportunity to change the rules of the game for you; whereas—and I tell you this with all due respect—if CN and CP were both intelligent, they would come with a game plan with VIA, a serious game plan, notwithstanding the niceties so far. The niceties are not my affair, but the problem is, you see, VIA has no track. Without your track VIA doesn't exist, and unless these folks decree that VIA no longer exists it will be running on one of those tracks.

So what would you propose we do, based on that particular summation? Do nothing and let VIA die, which is really what the option of CN and CP has been so far.... If you want a blunt assessment of the two presentations of CN and CP, it's “Let VIA die; it's not my problem; I'm a commercial private enterprise now”.

Mr. Hugh MacDiarmid: With respect, sir, I don't think that's fair, I believe what we've said is let's not kid ourselves about who is paying for what needs to get done. No ownership restructuring concept, franchising or you name it, is going to change the underlying fundamental economics of operating intercity passenger transportation today. It is not making money. We don't see any way forward for that, and we don't want to end up with the freight railways of Canada in some way being used to try to solve that problem. We have a mandate, we have a job to do in our business, and we are doing our level best to do it.

About our decision to come here today, I don't see it as our position to come in and try to come up with the master plan. It's only to try to comment on the issues that affect us and remind the committee of the very serious issues that revolve around capacity, revolve around the competitive and commercial impacts of some actions you might take.

About the franchising issue, I began by saying we think the creative ideas coming forward are a good idea. We welcome them. We made a couple of comments, trying to come up with something positive, saying yes, of all the things we've heard it seems to have the most appeal, because it does create the potential to segment the business into chunks and you deal with each of them differently, because they are quite different, and VIA might be a suitable intermediary to be a vehicle of public policy.

That's where our commentary ends. I'm receptive to trying to have people come forward with propositions, with ideas, but I don't believe I need to be the one who is responsible for bringing forward the solution to VIA. I believe I need to be responsible for making our resources available on appropriate terms, which we consider to be commercial, in response to demands from them as a potential user.

The Chairman: Mr. Keyes.

Mr. Stan Keyes: To follow up on Mr. Nault's questioning and Mr. MacDiarmid's answer, Mr. Chairman, this is in no way a threat, but if I were working for CP or CN I would be involved—in fact, Mr. MacDiarmid, I would get heavily involved—in trying to work with this committee, and beyond this committee, on how it might work to put passenger rail transportation back on the agenda in Canada.

You said yourself passenger rail doesn't make money. Well, no wonder it doesn't make money. You have such ancient equipment that you still flush a toilet on the railroad track when you are going down the track. You have a rail line that's trying to be on time, and it can't be on time. You're trying to create passenger rail with some frequency for this country and you can't get frequency. And then everybody sits back and says, gee, passenger rail doesn't make any money. No wonder it doesn't make any money!

• 1645

How can we help passenger rail in this country make money? It needs more on-time performance, it needs better equipment, etc., and that's what we're trying to accomplish here. And I in no way know what the outcome of this committee's report will be, but when I hear the Reform Party say that maybe we've gone too far with deregulation, the alarm bells should start to ring—

A voice: It scares the hell out of me.

Mr. Stan Keyes: —because maybe one of the options this committee will put forward is a revisit of regulating the rail industry. That means going to CN and CP and saying that we believe for environmental reasons, for the reasons of public expenditure, blah, blah, blah, we're going to say that a certain percentage of rail traffic, whether it's in the corridor or not in the corridor, will have to accommodate passenger rail transportation.

We know that if we do that and if we supply the funds necessary through franchising or partnership or whatever, they'll have better equipment and, as a result, more time on the track. And with the regulation that happens and the track time that flows through, they'll be on time more, there'll be more frequency and better equipment, passenger loads will increase, and therefore, in maybe three to five years, passenger rail will be making money and we can turn around and say, good thing we regulated, because we have passenger rail in this country that works.

A voice: And we even have Reform support.

Mr. Stan Keyes: Yes. And we even have Reform saying, “We're with you.” So yes, I would say the alarm bells should start to ring.

Mr. Hugh MacDiarmid: I guess all I can say is I don't believe my remarks have...at least I hope my remarks haven't indicated that I don't want passenger trains on my system. What I have said is—

Mr. Stan Keyes: The question, Mr. MacDiarmid...and I don't want to interrupt, but you've answered questions when asked. Mr. Nault even put forward a question to you that put every star in alignment. I even turned to my assistant and said, “I'll bet he says yes to that, because given that scenario of Mr. Nault's, where this and that happens, how could you say no?” And you said no. You said, “I'm only interested in freight transportation.”

Mr. Hugh MacDiarmid: I said my primary business is operating freight network—

Mr. Stan Keyes: You said no.

Mr. Hugh MacDiarmid: —and we probably would not be a bidder on a franchise. I did not say that we will stand in the way of our network being made available on appropriate commercial terms for passenger service. Again, I guess all I'm saying is that I have a business to run, and if we can do business whereby passenger transportation operates on our network in a way that's consistent with my meeting my freight business objectives, that's great.

Nobody has shown me a blueprint for making that happen. I believe there needs to be a very serious investigation of what kind of concepts are out there that would provide us with a viable intercity passenger transportation business based on rail. There isn't any evidence that such a one exists. If the government chooses, if the public interest is served by providing certain subsidies to whoever wants to operate that kind of service, and if those subsidies allow those individuals to come and operate on commercial terms with us, that's great. We'll be there to do it.

But right now, can you get viable simply by wishing for it to happen? No. What does granting VIA statutory access to the rail networks accomplish? What that accomplishes is that it asks the freight railways to in effect pay for this service. Let's make sure that we understand what is in the public interest and what's the real cost of providing the kind of service you want to provide.

Mr. Stan Keyes: You see, Mr. Chairman, I think where we lack some information, too...and I don't know if Mr. MacDiarmid can provide us with this information, but it's important, I think, to our evaluation of what we're going to do or how we would proceed in this area.

For example, how much track does CP have in Canada? How many trains run on that track? What is the saturation point on those particular lines? All the bills being paid and profitability demonstrated, could CP run a franchised operation on any given track in Canada? Could CP answer those kinds of questions, or are they going to say, “Well, that would be divulging too much of our corporate...”?

• 1650

Mr. Hugh MacDiarmid: I can certainly answer those kinds of questions generally today. I don't think we view our volume of trains within a general range as being all that competitively sensitive. CN can stand by the track and count just as well as we can, so that's not that big a deal.

However, we'd have to focus on what the purpose of any analysis was.

Mr. Stan Keyes: Well, Mr. Chairman, maybe we could get our researchers to prepare a list of questions that deal with those things: we want to see your network map, we want to know how many trains you're running, we want to know when they run, we want to know what the saturation point is on them to see if we could run passenger trains on those particular lines, blah, blah, blah.

We'll put those questions in writing to CP, we'll put those questions in writing to CN, we'll see what kinds of answers we get, and, hey, maybe we can find passenger rail traffic in this country without a problem. But without those kinds of answers, Mr. Chairman, we're talking in a box here, and we'll never get out of the box, because we don't know what the numbers are, where the track is, or how many trains we could run.

Mr. Hugh MacDiarmid: Nor would the data you just asked for give you the answers, because as I said earlier, adding one freight train is not the same as adding one passenger train.

As for the current capacity utilization of a certain segment of track and the number of trains we're running on it in relation to the capacity, there are literally dozens of variables that go into the effective throughput capacity in a particular part of the line, whether it's the number of sidings, the signalling systems, the spacing, the length of the sidings, the curvature of the rail, the speed you can operate at, etc. All sorts of dimensions go into effective capacity. If you add a passenger train to that, it changes the equation, and it just doesn't lend itself to an easy answer.

Mr. Stan Keyes: But we're not asking you to tell us what happens if you add a passenger train. We're asking you to tell us those other details, and we'll decide, or we'll have a look at the information that's provided to us. We're not asking you to give us an evaluation of “What happens if...?” We're just asking for the information so we can have a look at it to see whether this thing is viable or not viable.

Are you prepared to give us the answers to those kinds of questions?

Mr. Hugh MacDiarmid: In general I'd say give us the list and we'll be happy to respond.

The Chairman: Mr. Keyes, I can say this is the first meeting we have with individuals. We must do the analysis you are mentioning, and it certainly is the intent of the chair, providing the committee supports it, that we do that analysis. Whether we hire someone to do it or we do it ourselves, it must be done. It is the intent that it be done in the next phase of our consultation.

Mr. Calder.

Mr. Murray Calder (Dufferin—Peel—Wellington—Grey, Lib.): Thank you very much, Mr. Chairman. My line of questioning is very similar to Stan's.

Hugh, you said you're in the business of hauling freight. I think maybe we look at this passenger service issue as, currently you're hauling material freight and what we're talking about here is people freight.

People freight needs a higher speed than your material freight, it needs to run on an exact schedule, and it needs to run on a schedule the people need, or obviously the service is redundant. That's one of the reasons we ran into problems with passenger service in the past: the schedule was there, but it was a schedule nobody could use, so they turned around and went to their cars.

Obviously there is a need for people freight in this country, because we're looking at the 400-series of highways, which are totally packed right now. So the question is, are the railways capable of taking a look at people freight? Are you capable of putting together schedules that would in fact facilitate the passenger service coming back?

I notice one thing right here where we're drawn in: you want us to reconcile issues of federal and provincial jurisdiction so one consistent set of policies can emerge. I understand that, because obviously when you're hauling people freight, there's a different safety standard, too, that you're dealing with.

So are the railways capable of answering all those questions?

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Mr. Hugh MacDiarmid: I guess my response to it is going to sound a little familiar in the sense that there is no law of nature that says we can't set up a system that would deliver a highly consistent passenger service between major cities. There's certainly nothing that says that we can't deliver a safe, reliable intercity product.

You rightly, though, start with the question, is there a marketplace there? Are people prepared to pay? Is it going to be commercially viable?

So I think the evidence to this point is that there is difficulty achieving commercial viability for the passenger rail mode in light of competitive modal alternatives. So it would not be a business that I would undertake as a private sector business enterprise.

The Government of Canada might want to, for public interest reasons, have intercity passenger rail. We believe it can be done, but the appropriate financial support is going to have to be forthcoming in order to make it happen. It will require real capital and dollars in terms of assets and systems, and everything else, to get there.

My simple question is who pays? I don't know that there's an answer as to how that's going to work, but there's nothing fundamental that stands in the way of operating an absolutely world class intercity passenger system, other than the money to build the system.

Mr. Murray Calder: I think actually we're dealing with the logistics of how people freight is handled on your line, whether or not it's a full-sized train, a rail liner, or whatever—however you're establishing and building that service—because obviously that's what has to be done.

In the past, when I was on the CN task force, we dealt with this issue. Railways in the past have actually de-marketed lines. They did not really want to proceed with that type of service that was there. It was done in numerous ways, with scheduling or whatever, until finally the service died because it wasn't being used because it wasn't fitting the need of the customer at that point in time.

We obviously now see that this trend has to be turned around, and I'm in full support of that.

In this situation, you're saying that the railways could come up with proper scheduling and everything to handle people freight. How then do you envision both the railways and the two levels of government working together to achieve this?

Mr. Hugh MacDiarmid: It seems to me that the Government of Canada and the management and direction of VIA have to come to an accommodation as to how they are going to take that enterprise forward. There's a need to engage with the freight railways to establish the most appropriate means to get the capacity necessary to operate on our networks.

Back to the earlier question, I don't see that as a process being driven by the freight railways, I see it being driven by some combination of VIA and the government, or the successor to VIA, in terms of the franchise holder or whoever it is that you believe is the right vehicle to implement the public policy.

Given my views about financial viability, my presumption here is that there is going to be a public interest, and so there's going to be public funding; therefore, it's going to be some combination of the government and the passenger rail entity or entities.

But frankly, we see ourselves as being cooperative and receptive, but on the receiving end of trying to make that work. We will cooperate and work with whoever comes to us to try to find ways that will make a sensible accommodation.

But we hope that we're very clear in our message that says it has to be done in a way that reflects the realities of capacity and the costs to provide it, and some of the real challenges of commingling freight with passengers and the competitive ramifications of trying to make some of these things happen on the freight business, which is just now starting to get healthy.

It's not an easy challenge. We're receptive and ready to talk, but we don't see ourselves as the people leading the parade, we see ourselves as responding when asked to try to figure a way forward.

The Chairman: Ms. Desjarlais.

Ms. Bev Desjarlais (Churchill, NDP): I know you're not seriously considering passenger service as your main goal, but in your expert opinion, if we end up in a situation where certain areas of the passenger service are franchised out, do you see the areas where they aren't commercially viable, such as in some of the remote communities where rail is the only service in...? Do you see the cost of maintaining those rail lines increasing and the amount of dollars that we have to put in through the public purse increasing?

• 1700

Mr. Hugh MacDiarmid: I wouldn't say there's any reason that the dollars would need to increase from what they are today unless there were to be.... For instance, in a lot of the lines you're going to have a combination of freight and passenger service. If there were a line that was today viable by virtue of a freight business, and a mine were to close or something were to happen to a paper mill or whatever, that eroded the traffic base on that line, then it would be more difficult to support the passenger service on it. Of course, if you get below a certain level of density, then it becomes uneconomic and you just can't offer service.

So it really comes down to what's the underlying traffic base of both freight and passengers. It's dominantly freight; that is the base-load traffic to keep the line open and justified and economic, and so long as that freight business is there, there's no reason that there's some escalation of cost of serving—

Ms. Bev Desjarlais: What I was looking at was if you took the whole passenger service that VIA operates and their profitable lines, or more profitable than others—

A voice: Less unprofitable.

Ms. Bev Desjarlais: —less unprofitable lines...are offsetting costs of another area, if we then franchise out the ones that even become the least bit profitable, is the cost going to increase on the other end? That is what I was getting to.

Mr. Hugh MacDiarmid: I don't think so. I guess it comes back to the comments made earlier about the fact that there really are quite different business segments out there. Within the portfolio of services VIA offers there are transcontinental services, there are remote services, there are tourist and specialty services and there is the mainstream. Each of them has different characteristics. I don't know that there's an interrelationship between them. So if you go and franchise a certain part that's viable, that's great, but I guess there's going to need to be a public interest test and a decision made as to what is the appropriate level of financial subsidy needed to keep a certain service operating—and that's not my job.

Ms. Bev Desjarlais: I wanted to make a comment. Mr. Keyes mentioned needing information, and I agree, we need it. You said you didn't know if it was possible to say what would happen if a passenger service was added to a line, and I find it kind of strange that you wouldn't be able to give us that scenario. I would suggest it would be in the best interest of both CP and CN to come up with some of those scenarios as to what would happen when we add one passenger train or two passenger trains in a number of lines that would be looked at for passenger rail services.

Mr. Hugh MacDiarmid: Sure. It's just that, again, I'm always reluctant to make generalizations in our business, it's so darned complicated.

Again, Mr. Tellier gave you a rule of thumb when he made his presentation, in terms of one passenger train being four or five freight trains or something. That's one rule of thumb. There are lots of different other ways you could think about it, and honestly it is going to differ on each and every segment, and each and every piece of infrastructure, given its specific characteristics. It certainly can be studied. Do I want to invest a lot of my resources in studying it? No, unless asked. But, you know—

Ms. Bev Desjarlais: I just want to say it would probably be in your best interests because, as Mr. Keyes said, if you prefer that the judgment is made over here, so be it.

The Chairman: Thank you. Everyone has had a question, all 10 of us, except me.

Mr. Stan Keyes: You had one.

The Chairman: I did at the beginning.

The average time for each question was 8.2 minutes, so I think that's reasonable. There will be a vote at 5.30 p.m. and bells at 5.15 p.m. We have about 10 or 12 minutes. We'll do a second round. I'll be very strict and allow less than a minute for the question, and then a minute for the answer.

Mr. Morrison, Mr. Cullen, Mr. Nault. Anyone else?

Mr. Morrison.

Mr. Lee Morrison: Mr. MacDiarmid, I noticed that the conversation here has pretty well zeroed in on only one means of moving people on railway tracks. I would like to explore what you mentioned about your Iron Highway. The best passenger train trip I ever took was from Adelaide to Perth, Australia, when they didn't have a highway. They had a very simple device at that time. I would hope you could come up with something better, but they had flat cars with beaver tails on them. Every passenger loaded his own vehicle and then you walked up front. They had a very nice lounge car, a diner, a sleeping car, the whole bit, and it was a wonderful way to cross Australia. Time was not a factor because you were gaining time no matter what happened. It didn't matter how fast or how slow they went, because you weren't driving. You could sleep and you could eat. When you got to your destination, you went and got your car, and you drove off. Have you ever looked at this type of service for, say, the prairies or northern Ontario?

• 1705

Mr. Hugh MacDiarmid: I can give you the answer, and it's no. But I think it's a fascinating concept.

Mr. Lee Morrison: Why? If it works in Australia, why wouldn't it work in Canada?

Mr. Hugh MacDiarmid: I'd certainly recommend to VIA management that they look into that kind of a concept.

The Chairman: Mr. Cullen.

Mr. Roy Cullen: Mr. MacDiarmid, I'll be so bold as to submit that I think you can sense some frustration over the complexity of the issue. It's very hard to run a passenger rail service without tracks. To my mind, the issue is that although they're separate businesses—CN is a separate business and you're a separate business—the two issues come together, they merge. It seems to me that we need more information from VIA as well, but with the information we have, it seems we're looking at the possibility....

If we have a franchisor and the business is segmented, and some operator comes along saying that he wants to do this chunk of line, and if he then goes to CN and CP and asks what you are going to charge him, I think we need to be very careful. I mean, freight meets your objective, but it's not only your objective, because it's serving the economy of Canada. If we can't move freight, if we destroy the freight service, we'll be back here in five years asking how we can fix the freight.

We're talking about just-in-time and a whole bunch of other things, because that's the world we're living in, so I suspect that you or CN would come back with the fact that it's really an opportunity-cost question, right? How much is it going to take to move freight off your line, or what kind of infrastructure are you going to need to meet your freight objectives and still make...? I think you're looking at big numbers, so let's be realistic about this.

So if we're looking at that, I think we need to be really looking at excess capacity as one thing, but we also need to look at opportunity cost. Some of that will be a commercial transaction, but the dilemma we're in is that if we look at a franchising model, the chunks of the business may not be feasible based on the kind of pricing that you or CN would be looking at. How do we start a process, then, when we don't know where it's going?

Mr. Hugh MacDiarmid: The franchising model won't change the fundamental underlying economics of operating on certain segments. All it will do is give you greater granularity on the problem. You won't have one problem. You'll have six problems, or maybe one opportunity and five problems. But I can't—and I don't think we can—address the dilemma of viability of intercity passengers.

We are ready and able to try to contribute to the solution if the public interest says so. But I believe my job is to ensure that there is the appropriate economics and commercial framework applied to this while asking you to please not kid yourselves that simply mandating some sort of access is going to solve the problem. It's just going to create another problem.

The Chairman: Mr. Nault.

Mr. Robert Nault: Mr. Chairman, I guess the most obvious question that needs to be asked of CP and CN both is what kind of business structure they see VIA operating under.

Franchisees are easy to see in certain areas, like the Rocky Mountaineer. As for VIA itself, in answer to one of the questions earlier, you mentioned that you were opposed to a crown corporation. If you're opposed to a crown corporation, what do you see as VIA's business management process? How would it be structured versus its present structure? I'd be interested in knowing what your position is on that.

Mr. Hugh MacDiarmid: I guess we just feel that when we look at the crown corporation model in our world, we've moved away from it in freight transportation. We've also moved away from it in airlines. We don't see it as being a model that will solve any of the issues that face VIA. I guess I come back to the basic issue, which is that the Government of Canada needs to decide what the public interest is, and what level of financial support it is prepared to provide in order to keep an intercity passenger transportation system alive in our country.

If the government determines that it wants to do that, we could certainly see an entity existing as the vehicle for granting the franchises, for putting them out for competitive bid, and for being the vehicle for determining what level of funding is appropriate to support each and every service, because they're going to be different. That could be VIA or it could be done in a government department, if you chose.

• 1710

We don't know. I don't know the answer as to what's right. All I know is that if you go with that model, it's going to obviously be a very different business structure.

The Chairman: Mr. Borotsik.

Mr. Rick Borotsik: In your opinion, Mr. MacDiarmid, is there a passenger service that could actually be commercially viable?

Mr. Hugh MacDiarmid: There are very limited niche markets.

Mr. Rick Borotsik: Okay, I'm going to talk about the Rocky Mountaineer later, but—

Mr. Hugh MacDiarmid: There are limited niche markets where it's possible.

Mr. Rick Borotsik: What about a typical VIA passenger service? Can it ever be commercially viable?

Mr. Hugh MacDiarmid: My impression right now is it's very difficult to see that happening in Canada within the foreseeable future.

Mr. Rick Borotsik: Okay. As for niche markets, the Rocky Mountaineer, I take it, is that tourism component that goes into the Rocky Mountains to Vancouver from Calgary, a market that certainly does have a lot of attraction to Europeans, I would expect. It is commercially viable?

Mr. Hugh MacDiarmid: High-income individuals.

Mr. Rick Borotsik: I was going to say that, yes. Certainly it's a specific market.

Mr. Hugh MacDiarmid: Yes.

Mr. Rick Borotsik: It is commercially viable, correct?

Mr. Hugh MacDiarmid: Yes. I won't comment on Mr. Armstrong's behalf, but nonetheless, we do business with him on commercial terms.

The Chairman: Thank you very much to you and to members for your cooperation. If you have closing remarks, I invite you to give them.

Mr. Hugh MacDiarmid: I have no closing remarks other than to say we appreciate the opportunity to come.

Despite the fact that I may be seeming hard-nosed in my approach, I'm simply doing my job. We are in fact prepared to engage in whatever dialogue needs to take place in order to find a solution, because there is no do-nothing strategy here. Something needs to happen, and we'd like to be part of the solution, not the problem.

The Chairman: We appreciate that. To you and all other witnesses, we may be contacting you for further information. We'll do that if we need to. Thank you very much.

To committee members, I need you for four or five minutes in camera. The bells will start ringing in three minutes. I'm not usually this way, but I invite everyone to leave the room very quickly so we can proceed to in an camera meeting.

Thank you. We're suspended for one minute.

[Proceedings continue in camera]