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• INTRODUCTION
• PASSENGER RAIL SERVICES IN CANADA
• 1. The Canadian Network
• 1.1 VIA Rail Services
• 1.2 Tourist Services
• 1.3 Commuter Services
• 2. VIA Rail's Metamorphosis
• 3. Competition For Track Access: Freight vs. Passenger
• THE CHALLENGE AHEAD FOR VIA RAIL
• 1. VIA Rail's Role in Passenger Rail
• 2. The Financial Question
• 3. Service Characteristics: Frequency, Speed and Capacity
• 4. Environmental Considerations
• 5. Issues of Governance
• THE GOVERNANCE OPTIONS
• 1. Crown Enterprise: Preserving the Network
• 2. Crown Corporation: Passenger Rail with a Long-term Commitment
• 3. Franchising: Public-Private Railroad Partnerships
• 4. Privatization
• HIGH-SPEED RAIL
• CONCLUSIONS
• RECOMMENDATIONS
• Policy
• Policy Objectives
• VIA Rail's Role
• Subsidy Level
• Remote Services
• Competition
• Track Access
• Governance
• The Lynx Project

THE RENAISSANCE OF PASSENGER RAIL IN CANADA

INTRODUCTION

VIA Rail Canada Inc. (VIA Rail) was established in 1977 without a legislative mandate and, in 1978, became a Crown Corporation by Order in Council. It was given the responsibility for intercity passenger rail transportation previously operated by the Canadian National Railway Company (CN Rail) and the Canadian Pacific Railway Company (CP Rail). Since its inception, VIA Rail has been plagued with serious and continuing problems: antiquated and inefficient equipment; bad on-time performance; poor customer service and marketing; outdated work rules; and low employee morale.

Over the years, VIA Rail has been promised new equipment, a legislative mandate and predictable subsidy levels. Numerous studies have cited VIA Rail's problems and recommended solutions: a legislative mandate, new equipment, and a stable funding base. Regardless of the fact that such recommendations were not implemented, VIA Rail has persevered under very difficult circumstances. During the past five years, VIA Rail has been pursuing a business strategy aimed at shifting its corporate culture from a top-heavy bureaucracy, focused on the size of the government subsidy, to a lean structured, customer-oriented business focused on passengers.

In spite of these efforts and improvements, VIA Rail is at a crossroads. While costs have been reduced and efficiencies have been gained, VIA Rail is at the point where it needs new equipment and infrastructure as well as a larger passenger base to grow its business in a significant way. Coupled with this is the fact that the government is striving to increase system efficiency in all transport modes by providing competitive transportation for the movement of people and goods. While VIA Rail has contributed to this process by streamlining its operations, it, and passenger rail in general, has not been subject to a recent policy review as has been the case with other modes of transport.

The Committee believes that a new vision for passenger rail needs to be developed. The projected subsidy level for 1998-99 is $170 million. There is no guarantee how long this will last and the vital issue of new equipment and infrastructure will have to be addressed in the very near future. The Committee realizes that innovative ways will have to be found to revitalize passenger rail in Canada or there will be a gradual withering away of passenger rail services in Canada. Given that increases in federal subsidies for VIA Rail are not likely in the foreseeable future, we need to assess how new financing options can best be applied to passenger rail services in Canada.

To this end, the Minister of Transport requested the House of Commons Standing Committee on Transport to undertake a review of passenger rail services and to develop recommendations to revitalize them. To assist in this exercise, the Minister provided the Committee with a guidance document outlining the fundamental issues that confront VIA Rail. These include VIA Rail's role within the industry, the governance framework, subsidy levels, financing options, the use of infrastructure with the freight railways, and contemplated high-speed passenger rail service.

In fulfilling this mandate, the Committee looked at these issues in a number of contexts. It looked at financing options in the United Kingdom (U.K.), France and the United States (U.S.); how passenger trains can integrate their operations with freight railways; as well as governance models that could be applicable in Canada. In doing so, the Committee has tried to address the fundamental questions and key policy issues that must be resolved in dealing with passenger rail services: What do we want to do with passenger rail services and how do we do it? What should be the government's long-term policy objective for passenger rail service and how can it be attained? In this report, the Committee has attempted to offer the government a number of options it can draw on to answer these vital questions.

PASSENGER RAIL SERVICES IN CANADA

1. The Canadian Network

1.1 VIA Rail Services

VIA Rail, as Canada's provider of national passenger rail services, carried approximately 3.8 million passengers in 1997. It operates 430 trains weekly on 14,000 kilometres of track, serving over 450 Canadian communities. VIA Rail's network comprises three main products (see Exhibit 1):

• Corridor Services: These operate between Quebec City and Windsor, running 355 trains weekly and accounting for approximately 85% of the total ridership and 70% of total revenue.
• Transcontinental Trains: Western services comprise three trains running weekly between Toronto and Vancouver, while Eastern services comprise three trains running weekly between Montreal and Gaspé and six trains per week between Montreal and Halifax.
• Remote Services: There are eight remote services operated by VIA Rail as directed by the government. They include:

VIA Rail maintains its fleet of light-rapid-comfortable trains (LRC), stainless steel cars and locomotives at maintenance centres in Montreal, Winnipeg and Vancouver.

1.2 Tourist Services

VIA Rail is not the only provider of passenger rail services in Canada. There are others, for example, the Great Canadian Railtour Company, which operates the Rocky Mountaineer, provides a tourist train service through the Canadian Rockies between Vancouver and Calgary through Kamloops and Banff and from Vancouver to Jasper through Kamloops. This service is provided by a private sector operator that purchased the service when it was offered in public bidding by the government. By all accounts, the Rocky Mountaineer has proved to be a success, with ridership growing every year. This example of private sector involvement in passenger rail services was of great interest to the Committee since part of our mandate is to examine alternate delivery systems for passenger rail.

1.3 Commuter Services

Commuter rail services are provided in some of our major urban centres. These services are a provincial and municipal responsibility and, as such, do not fall directly within the mandate of this Committee. Nevertheless, the Committee would like to note that there may be some areas where there can be coordination of such services with an intercity passenger rail network. One example might be the creation of intermodal facilities funnelling passengers between commuter rail and intercity rail to alleviate congestion and provide better access to a variety of transportation nodes, such as airports.

2. VIA Rail's Metamorphosis

As noted in the introduction, VIA Rail has made progress over the past five years. Through its corporate streamlining it has reduced its dependence on annual government subsidies by $160 million between 1992 and 1997 or by 41% in just five years, while maintaining service levels. The amount of government subsidy has fallen from $389 million in 1992 to $229 million in 1997 and the target for 1998-99 is $170 million. At the same time, VIA Rail has increased revenues by 31% and improved its ratio of revenues to operating costs by 77%. In addition, while drastic cuts to subsidies were being achieved, VIA Rail did not discontinue any services and passenger-miles actually increased from 817 million in 1992 to 884 million in 1997.

Despite this progress, all services or segments of VIA Rail's entire network operated at a deficit and required a subsidy in 1997. The Eastern Transcontinental lost $27.6 million; the Western Transcontinental $29.6 million; the Corridor $108.1 million; and Remote and Regionals lost $30.7 million for a total loss of $196 million. In short, every time a train leaves the station, VIA Rail loses money.

During VIA Rail's testimony before the Committee, its former President, Mr. Terry Ivany said:

We have reached a crossroads in the evolution of passenger rail. We have achieved remarkable results. But now we have done all we can do under the current conditions. We can't go any further because we lack the means to improve infrastructure and the means to exploit the opportunities that exist in the marketplace.1

VIA Rail also felt that if it was not able to make the necessary investments in the next few years, the cost of maintaining and operating an aging rolling stock would rise and the level and quality of service as well as ridership would decline. The result would be the inevitable demise of VIA Rail. For the Minister of Transport and VIA Rail management, the status quo, which is in effect a "death spiral" for VIA Rail, is not an option. The Committee agrees.

3. Competition For Track Access: Freight vs. Passenger

When it comes to the railroad business, Canada is unlike any other country. In Japan, for instance, the proportion of total rail revenues derived from passenger rail services is 95%. In Great Britain, passenger rail revenue represents 80% of total rail revenue and, in Germany, it accounts for 67%. However, in Canada, freight rail revenue dominates the landscape, with passenger rail revenue making up only 3% of the total. Unlike any other country, in Canada freight is paramount.

Needless to say, without dedicated track, passenger trains must share the tracks with freight trains, and these tracks are owned by the two mainline carriers as well as shortline operators. VIA Rail paid approximately $50 million for track usage in 1997, $46 million to CN Rail, $14 million of which was on an on-time incentive basis, and $4 million to CP Rail. In general, there is adequate track capacity to handle current train movements in Canada. The Montreal-Toronto corridor, particularly between Brockville and Pickering, and the Calgary-Vancouver corridor are probably approaching their capacity levels, but some witnesses disagreed.

THE CHALLENGE AHEAD FOR VIA RAIL

VIA Rail management believes that there is ample room to grow and this is the key to its future viability. Numerous witnesses told the Committee that VIA Rail had improved its "bottom line" through significant cost-cutting measures and that it had gone as far as it can in this area. What is now required is to "grow the business" through increasing ridership and yield. VIA Rail recognizes this but outlines a number of impediments that must be addressed to realize this objective. These are:

1. VIA Rail's Role in Passenger Rail

Since VIA Rail's creation, its mandate has been to provide a national passenger rail service. What this means has not been clearly defined. As presently structured, VIA Rail provides three core services: corridor, transcontinental, and the remotes / regionals. The basic issue is: Should VIA Rail continue to provide such services and, if so, under what conditions? Does the present mandate hinder VIA Rail in attaining a sound business footing and becoming a more efficient and cost-effective operator?

The Committee is of the view that there may be a better way to structure VIA Rail's mandate. Passenger rail services in Canada, given our geography and population density, may have to be "tailored" to the varying situations we face. It would be unrealistic to assume that passenger rail services can be identical across the country. The Committee has examined passenger rail operations in other countries and observed how a variety of options must be put into play to attain the proper mix of services in the passenger rail system. For example, the U.K. has long-haul services integrated with medium-haul and commuter trains. Under the U.K.'s train franchising system, examined in more detail in Appendix B of the report, each service is financed somewhat differently to take into account the type of service provided and the passenger loads that can be expected. In France, where the state controls the passenger rail network, the government is exploring options to have the regional governments more involved in the financing and provision of train services (see Appendix C). In the U.S., under a new reorganization plan, AMTRAK is being split into three separate business units and is exploring options for operating regional and transcontinental services (see Appendix A).

A further observation the Committee would like to make in this area deals with who should operate passenger rail services. At the present time, VIA Rail has this mandate. Should this be the case in the future? Perhaps not in all instances. For example, can remote and regional services, which might be required to be operated "for the public good" be better provided by subsidized private operators at less cost to the taxpayer? Should the transcontinental service be privatized and operated as a tourist operation? The question of who provides passenger rail services in Canada will have to be carefully examined by the government to ensure that the best possible provider of service is in place.

2. The Financial Question

VIA Rail will receive $170 million in federal subsidies in 1998-99. Of this, only $24.7 million will be applied to capital expenditures on its asset base of stations, rolling stock and infrastructure. This is not enough to renew VIA Rail's aging fleet and, if this is not done, its services will be marginalized and its operating costs negatively affected to the point where passenger rail transportation will be a thing of the past.

Clearly the status quo is not an option if we want to retain existing passenger rail services in Canada. Some options have been put forward as possible solutions to this problem such as public/private partnerships for the purchase of rolling stock and provision of services, as in the U.K. Another option is having the train operator enter into a service agreement with an equipment manufacturer to build and service an asset (such as rolling stock) over the life of the contract.

All of these scenarios are potentially workable, but what is critical to their success and VIA Rail's long-term viability is the need for a credible business plan together with a long-term government commitment of stable funding for passenger rail services in Canada. No passenger rail system in the world operates without government subsidy and Canada is no exception. It has been stated many times before, in Parliamentary reports and independent studies, that without a long-term financial commitment by government, the provision of passenger rail services will limp from one crisis to the next with no resolution of its ongoing problems.

3. Service Characteristics: Frequency, Speed and Capacity

One of the most critical issues facing VIA Rail is gaining more train frequency for its operations in the Quebec City-Windsor corridor. At the present time, VIA Rail has contracts with CN Rail and to a lesser extent with CP Rail to operate passenger trains over their tracks. In the corridor, the majority of VIA Rail's services are operated over CN Rail's tracks. As a major part of VIA Rail's business strategy, it must increase train frequency in the corridor from one express each way to three in each direction. According to VIA Rail testimony the express trains would achieve an average speed of 160 km/h and make few stops between Montreal and Toronto. VIA Rail envisages using CN Rail's mainline between Montreal and Toronto for faster and more frequent passenger trains and time-sensitive freight, with all other traffic routed on CP Rail's track.

Testimony by the freight railways revealed that they were not sympathetic to providing more access to VIA Rail over their tracks, particularly in the corridor. CN Rail presented four conclusions to the Committee regarding VIA Rail's proposal for more and faster passenger trains on its time-sensitive freight lines. These are:

1. Increased speed and frequency require more track maintenance, resulting in higher costs. Issues of track safety, track capacity and service reliability would arise because trains that operate at speeds in the 160 km/h range should do so on dedicated track rather than in a mixed freight operation;

2. Passenger trains utilize far greater track capacity than freight trains (CN Rail states this to be a ratio of approximately 5 to 1). An additional 4 trains per day in the corridor would consume capacity equal to as many as 20 additional freight trains;

3. CP Rail's infrastructure would require extensive expansion and alteration, at significant cost (in the $500 million range), before it could handle the freight workload VIA Rail suggests; and

4. VIA Rail's proposal would deny CN Rail access to important marshalling yards in the corridor. These yards are crucial to CN Rail's service reliability in the all-important Halifax-Chicago corridor.

CN Rail stated that its ability to serve its freight customers would be seriously impaired if it was required to provide more access to passenger rail.

For these reasons the freight railways believe that VIA Rail's plan is not workable and would severely jeopardize their competitiveness in Canada. They do not believe that you can have additional passenger trains travelling at speeds in excess of 160 km/h operating on the same tracks as freight trains. The Committee must be confident that any expansion of passenger rail services does not jeopardize a $7 billion freight business in order to remedy a problem with VIA Rail's $400 million business.

The Committee understands that railway capacity depends on a number of factors. The concept of capacity itself needs some definition. Railways generally define capacity by calculating the number of trains that can utilize a given rail line with an acceptable amount of delay. The factors that influence capacity of a given section of railway line include:

• the configuration of the route, including curvature, gradient, number of tracks, location and length of sidings, and the configuration of at-grade road crossings;
• the condition of the track;
• the signalling and control systems in place;
• the make-up of trains in terms of lengths, power-to-weight ratios, braking capability, etc.; and
• the mix and speed of trains.

Capacity is maximized when all trains on the line have similar characteristics, particularly in terms of speed. For example, the Rocky Mountaineer travels at the same speed as freight trains on the same line. As CN Rail told the Committee, if all freight trains were uniform in operating characteristics, the introduction of a higher speed (160 km/h) passenger train uses up the capacity of five channels or possible paths for freight trains. One must compare the number of channels (estimated at 53 per day) with the number of trains actually operated on each section of the corridor. In North American circles, one passenger train uses up the capacity that could be available for three freight trains. Alternatively, three freight trains use up the capacity of one passenger train.

Exhibit 2 provides a diagram of the contentious Quebec City-Windsor corridor, demonstrating the weekly passenger and freight train movements over each section. The Committee heard that, for the present, the Montreal-Toronto corridor is not running at capacity. CN Rail track can accept more VIA Rail trains on this line, up to a point. After such a point, which has yet to be defined, capacity constraints become a problem, particularly between Brockville and Pickering, necessitating innovative solutions. These are: (1) the construction of additional track (additional or longer sidings); (2) improved signalling systems; (3) improved scheduling of services (freight trains could increasingly be shifted from a demand to a scheduled basis); (4) improved station configurations; (5) the diversion of freight trains (slower freight trains to the CP Rail line); and (6) the creation of an infrastructure authority (private company that would coordinate all train traffic on a commercial basis).

In relation to the issue of capacity and train frequency as a condition of passenger rail growth, the Committee has some concern over the issue of speed. While recognizing that increasing the frequency of express trains will likely gain VIA Rail more ridership, the Committee is not totally convinced that this is the entire solution to VIA Rail's problems. Throughout the Committee's hearings there was a consistent theme that travel time was the crucial element in attracting and retaining greater ridership. On-time departures and not more than three hours in the Montreal-Toronto corridor will be pivotal in this debate. In order to do this, speeds in the 240 km/h range seem to be the most appropriate to achieve this goal. This was clearly the case with AMTRAK in developing its higher speed service in the Northeast corridor between Boston-New York-Washington. In order to take market share from the airlines, it has to achieve an average speed of 240 km/h. Speed in conjunction with frequency would likely provide VIA Rail with a more workable solution for growing its business.

4. Environmental Considerations

There has been considerable discussion on the role of passenger rail in contributing to Canada's commitment to stabilize and reduce pollutant gas emissions through reducing our dependency on automobiles. When consulting the work of the Royal Commission on National Passenger Transportation, the Committee found that the train, on short routes like that in the Montreal-Toronto corridor, using current occupancy rates, performs considerably better than the car in terms of carbon monoxide (CO), carbon dioxide (CO2) and volatile organic compounds (VOCs) emissions, but is more harmful in terms of nitrous oxide (NOx) emissions. On longer trips, like that between Saskatoon, Sask., and Halifax, N.S., the train, in general, continued to fare better than the car, although CO2 emissions rose by train relative to the car because of the addition of sleeper cars. In general, the airplane was much kinder to the environment than the train, particularly as the length of the trip increases (see Table 1). Rail, therefore, offers an environmentally sound alternative to cars. The critical issue is whether rail can attract passengers from the automobile.

During the Committee's study, we looked at passenger rail services in the U.K., France and the U.S. From the information the Committee has examined, it would appear that the major shift of passengers to rail comes from the air mode. This is especially true with regard to high-speed rail. High-speed rail competes directly with the air mode for passengers, not the automobile. When we look at lower or intermediate speed rail services, it seems unlikely that significant "modal bleed" will come from the automobile because the speeds are just too slow to be an attractive alternative to the car. We are faced with a dilemma. If train speeds are too slow, rail is not a viable option for many automobile users. If higher speed rail is introduced, the target market is the air passenger, and the desired goal of getting people out of their cars may not be achieved. Another inherent conflict is the fact that while it makes good policy to shift some freight from trucks to trains, such a move would inhibit the growth of passenger rail services in Canada without significant investments in infrastructure.

Table 1
Examples of Emissions by Mode on Two Intercity Routes

Emissions per Passenger-Kilometre in Grams, 1989 - Toronto to Montreal
Type of Emission		Public Transportation with Current Occupancy Ratesa			Public Transportation with All Seats Full
	Car	Bus	Train	Airplane	Bus	Train	Airplane
CO	5.20	0.18	0.34	0.17	0.14	0.21	0.11
VOCs	0.94	0.05	0.14	0.10	0.04	0.09	0.07
NOx	0.75	0.40	1.54	0.34	0.31	0.96	0.23
CO2	128	30	76	220	23	47	148
Emissions per Passenger-Kilometre in Grams, 1989 - Saskatoon to Halifax
Type of Emission		Public Transportation with Current Occupancy Ratesb			Public Transportation with All Seats Full
	Car	Bus	Train	Airplane	Bus	Train	Airplane
CO	5.20	0.24	0.77	0.13	0.14	0.54	0.09
VOCs	0.94	0.07	0.32	0.08	0.04	0.23	0.05
NOx	0.75	0.54	3.52	0.26	0.31	2.46	0.17
CO2	128	41	173	167	23	121	113

a) Rates at which seats are currently occupied on public transport vehicles are estimated for the Toronto to Montreal route at 77% for bus, 62% for train and 67.5% for airplane. For cars, the occupancy is 1.8.

b) On the Saskatoon to Halifax route, the estimated occupancy rates are 57% for bus, 70% for train and 67.5% for airplane.

Source: The Final Report of the Royal Commission on National Passenger Transportation Directions, Volume 1, Supply and Services Canada, Ottawa, Canada, 1992, p. 167.

5. Issues of Governance

In the federal government's recent decisions to commercialize marine ports and harbours, airports, the air navigation system and CN Rail, there was a spectrum of options open to it: ranging from a Crown agency to a Crown corporation to a local not-for-profit authority, combining private and public representatives on its Board of Directors, and, finally, to a private for-profit corporation. Not surprisingly, the government chose all of these governance structures, depending on the specific circumstances and according to what it perceived was best suited to the public interest at that time and for the foreseeable future. Thus, remote marine ports remain Crown agencies; Canada's largest airports are largely not-for-profit authorities; Marine Atlantic, which provides ferry services on Canada's east coast and was formerly a subsidiary of CN Rail, is a Crown corporation; CN Rail is now a private for-profit corporation. Essentially, the same spectrum of governance structures for VIA Rail services, with subtle but notable differences, remains open to the government.

While recognizing that there are serious impediments that must be addressed if VIA Rail is to succeed, the next section sets forth some structural options that should be explored to revitalize passenger rail services. The Committee has evaluated the merits and demerits of the following governance options: (1) the current Crown enterprise structure, where VIA Rail continues as a non-commercial Crown corporation without a legislative mandate and with limited operating autonomy and borrowing authority as rigidly governed by the Financial Administration Act (FAA); (2) a commercial Crown corporation with the Government of Canada providing a legislative mandate and a long-term financial commitment, also governed by the FAA but less stringently; (3) the franchising option, where private operators provide VIA Rail's existing services, in whole or in part, according to minimum levels and patterns of service determined contractually with the Government of Canada while largely receiving a subsidy as determined by a competitive bidding process; or (4) outright privatization, where VIA Rail assets are put up for sale to the highest bidder under a competitive bid tendering process. Service levels and patterns would then be determined by private operators either under prevailing financial constraints dictated by market forces or under contract with the government for subsidy as may be required for the retention of some obviously unprofitable services.

THE GOVERNANCE OPTIONS

There are four governance options considered in this section. While this seems to suggest that there are only four possible governance models from which to choose, sub-sets or alternative choices on the types of services or combinations of financing vehicles within each option are, within certain parameters, interchangeable between options. That is, each option is not mutually exclusive; they can be combined in different ways. Indeed, there may be other options.

The Committee also believes that the Government of Canada should consider each of these options in light of VIA Rail's three principal businesses: (1) corridor services, (2) transcontinental / tourist services, and (3) remote / regional services.

Furthermore, for public policy reasons, the Committee agrees that the Government of Canada should, when considering these four options, respect the following guiding principles:

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? . . . 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?2

1. Crown Enterprise: Preserving the Network

In the second section of this report, the Committee described the status quo that incorporated a government operating appropriation of approximately $170 million on a continuing annual basis but with no significant capital appropriation for fleet renewal as a "death spiral." The Committee means to prevent this from happening. Thus, this first scenario includes a commensurate capital appropriation that would enable VIA Rail to renew its rolling stock on a timely basis in order to maintain existing service levels and patterns. In this way, VIA Rail's funding formula would be adjusted to ensure that the current service offerings to the public can be sustained indefinitely. This scenario would require an additional amount of approximately $800 million over the next few years for capital expenditures.

This scenario means that VIA Rail would retain its non-commercial Crown corporation status, determine the types, levels and patterns of service offerings to the public in consultation with the Minister of Transport and his departmental officials, report annually its five-year plan to Parliament, and retain its line item funding from Transport Canada while possessing very limited borrowing authority. In this way, Parliament could maintain an active hands-on policy approach in all aspects of passenger rail services in Canada through pro-active oversight by Transport Canada and Finance Canada.

There are two principal benefits that flow from the preceding scenario. First, the access to tracks controversy disappears as a policy issue since any new frequencies required by VIA Rail in the Montreal-Toronto corridor would have to be privately negotiated. Second, this scenario would appear to offer the least financial risk exposure to the government of the two Crown corporation proposals. Two principal detractions are: (1) continued costly administration of government provided services by Transport Canada and Finance Canada; and (2) relatively simple market opportunities that are foregone, such as diversification into complimentary services, including equipment maintenance and carriage of mail and express goods.

2. Crown Corporation: Passenger Rail with a Long-term Commitment

This option is similar to the first scenario in many respects but offers additional operational and financial autonomy, flexibility and capacity to VIA Rail management. Here, the Government of Canada provides VIA Rail with a legislative mandate, shifts its funding status from a Transport Canada line item to its own permanent budget item and offers a long-term financial commitment to VIA Rail in the order of $170 million a year for approximately 10 years. These actions would permit VIA Rail management a longer business and financial planning horizon and more borrowing options, possibly resulting in greater operational efficiency. However, track access now becomes an important issue to resolve. VIA Rail commented on the basic ingredients of this scenario:

We have no legislative mandate. To restructure VIA as a commercial Crown corporation, you need to do more than change the name. We would need to find a way to give the new corporation all the power it needs to access the market effectively, with a higher level of autonomy, both to make effective business decisions and to earn credibility in the marketplace. . . . This market access would be especially important for VIA's efforts to develop new partnerships between private and public sectors. . . . The management of rolling stock is a prime example. The private sector could assume the responsibility for designing, building, financing, and maintaining rolling stock up to the quality, safety, and performance standards set by VIA. In addition, we could generate much needed capital for infrastructure improvements through the sale and lease-back of existing rolling stock and maintenance shops.

All options require ongoing government funding for capital expenditures, but at a level no greater than that of today. All require access to existing tracks, along with significant infrastructure improvements. Access to tracks that we do not use at present would be needed for new routes and connections to airports. Infrastructure improvements, track improvements, better switching and signalling, and better stations and facilities would be essential to provide services at the level of quality, safety, and reliability we need. . . . This means more than a government mandate-to-mandate commitment. The future of passenger rail depends on a long-term commitment that allows for long-term private sector involvement.3

From the Government of Canada's perspective, then, this second option exposes it to more financial risk than the first scenario as it offers VIA Rail greater borrowing capacity, with the government as guarantor or de facto guarantor. Additionally, there is no assurance that the application of these funds will payoff in more efficient passenger rail operations and less financial dependence on the government in the future. Lower expected maintenance and repair costs from new rolling stock and other capital investments do not necessarily translate into less financial dependence on the government if other factors are not kept in check. Needless to say, a sound and realistic business plan becomes critical.

But beyond accepting these risks as a fait accompli, the government could better assure itself of promised efficiencies by demanding significantly improved operational and financial performances in return. This quid pro quo approach should alleviate concerns of uncompensated financial risk if there are penalties or negative consequences for failure to perform; these consequences must be credible. For example, the Minister of Transport could table a "glidepath" to absolute or partial operational self-sufficiency, at least on the non-mandatory services, whereby the government would gradually reduce the operational portion of overall appropriations of $170 million to VIA Rail to a more comfortable and prudent level. Failure to satisfactorily meet the stated operational criteria would result in a suspension of the remaining financial commitment and alternative options would then be explored.

3. Franchising: Public-Private Railroad Partnerships

The franchising scenario involves a very different philosophical approach than the previous two scenarios. Franchising passenger rail services in Canada means, at the very least, not being wedded to the "one-service provider" model and "the-one-size-fits-all" passenger rail services formula that is often characteristic of VIA Rail offerings. Indeed, franchising is one of the most intriguing of the public-private partnership concepts or models. It is premised on private-sector provision of services that are directly regulated by government agency and/or by contract, involving either a premium paid to the government for exclusive rights to render services that are clearly profitable, or government subsidy in the absence of such profitability.

The franchising scenario may be a more appropriate solution because passenger rail service requirements are different across the country: some being dominated by travellers demanding the most basic or cheapest transportation options, some by commuters, some by tourists and still others by more balanced mixes of these different types of users. In this circumstance, it may be more effective and efficient to have several providers, with specific local knowledge of market size, variety and sensitivities to the price/quality spectrum, as well as specialized talents, delivering these services.

Balanced against these arguments for small regionally based operators is the possibility of fragmenting the network. Two issues that would need to be resolved at the outset of establishing franchised passenger rail services: the optimal size and duration of a franchise licence. While the U.K. chose 7 years as the standard term, the Committee agrees with VIA Rail that a minimum 15-year term would be necessary to attract the private sector. Canada's lower density traffic levels would undoubtedly require longer periods to realize an adequate rate of return on investment for private sector interests, while holding down the amount of subsidy. The Committee believes that these franchise contracts would need to contain very specific requirements to meet agreed service standards such as train frequencies, ticketing between regions, and maintaining, participating and paying for a telephone and Internet consumer information service to avoid needless market confusion. Failure to comply with the contract requirements would result in the franchise being revoked.

The Committee holds the view that private-sector participation in passenger rail could unleash a spectrum of innovative ideas and creativity that could result in a more customer-oriented service. From the consumer's perspective, better matched service levels, patterns, frequencies and prices made possible with the franchising option may prove worthwhile. From the government's perspective, more effective and efficient services delivered by these franchisees may mean a lower overall subsidy, as well as a shift of revenue and debt risks to the private sector. With the right business plan, private sector capital might be forthcoming to finance any infrastructure requirements. A win-win situation is, therefore, clearly possible.

The Committee learned from the franchising of passenger rail services in the U.K., that a win-win proposition is possible with the presence of two criteria: (1) a competitive bidding process for optimally designed franchise rail networks; and (2) a vigilant and empowered franchisor and independent regulator, possibly merged into one government agency, ensures the capital assets are maintained at national standards, thereby protecting good passenger service at reasonable rates. Franchising could be implemented on a full or partial basis.

In the opinion of the Committee, confiscating or nationalizing the rail infrastructure in Canada is not a desirable option. The Committee also believes that reasonable negotiated track access agreements are imperative.

In the end, this scenario would provide some of the benefits of privatization, such as private sector management skills required to attract investment capital, but it would also retain public control over services (i.e. frequencies, schedules, minimum service levels, etc.). The disadvantages of franchising would be that the government would have to establish a monitoring agency to exercise control and act as a "guardian of the network." Here again, it must be noted, that franchising does not entirely do away with government subsidies. The theory is that franchising may reduce the reliance on subsidies and provide for more efficient provision of passenger services. However, in the final analysis, the government is still responsible for the ultimate success of the service at the end of the franchise period. If it fails, the government is still "on the hook" for the provision of the service. It can take over the service, put it out for other successful bidders to operate or, in the worst case scenario, shut down the operation. The basic policy question for the government under this scenario is which services to franchise and what happens if the franchise is not successful?

4. Privatization

The privatization of VIA Rail services and routes is also a scenario to consider. It offers the transfer of all operational and financial risks from the Government of Canada to the private sector. The government would no longer assume these responsibilities and the market would decide what passenger rail services are needed, including their levels and patterns across the country. The Government of Canada would also save on the cost of administrating these services. Indeed, they could potentially disappear altogether. Against these administration savings the government must weigh VIA Rail wind-down costs, possibly involving the writing-off of substantial book asset values and debts.

Several routes would be put at risk, particularly the remote lines, as it is inconceivable that even the private sector could not sufficiently revitalize these markets. For example, the transcontinental service may not operate year-round, but instead, only when there is sufficient demand to warrant service; winter service could be out the window. Politically, some may interpret this scenario as abandoning passenger rail as a national institution; others would interpret it as creating a "level playing field" with other modes of transportation as rational passenger rail services would ensue, like that offered by all other modes.

However, as mentioned earlier, no passenger rail system in the world operates totally without government subsidy in one form or another. This would also be the case with the privatization concept. Private operators would require some form of subsidy whether it be tax concessions, improved capital depreciation allowances, or an outright government contribution to cover capital and/or operating deficits. Full or partial privatization is also an option. The question that must be addressed is whether this scenario can provide the level of service identified as necessary by the government at the least cost to the taxpayer.

HIGH-SPEED RAIL

Since the Tokaido high-speed rail line between Tokyo and Osaka, Japan, was opened in 1964 and the development of high-speed train technologies in Sweden, Germany and France, there have been questions as to whether this type of investment would be viable in Canada. The common features of these technologies are dedicated track, electrification and few or no level crossings. If there is an opportunity in Canada for high-speed rail, the obvious location is the Quebec City-Windsor corridor which contains approximately half of the total population of the country. The first major study on this subject was conducted by the Canadian Transport Commission in 1970. Since that time there have been several other studies.

The last major study was sponsored jointly by the governments of Canada, Quebec and Ontario and was completed in April 1995. This study concluded that high-speed rail would be technically feasible and desirable from a number of points of view but, from a financial point of view, would not achieve a rate of return high enough to attract private sector investment for the whole investment required. In fact, the study concluded that 75% of the investment would have to be supplied by the public sector. In view of the economic circumstances at the time, the study suggested that the initiatives for the next stage of the project should lie with the private sector.

This challenge was taken up by a consortium of private firms including system suppliers and rolling stock constructors, engineers and construction firms. These firms have joined together to form the Lynx Consortium, which has undertaken a number of studies and has now come forward with an outline of a proposal that it has presented to the three governments. This proposal is outlined in Appendix D.

CONCLUSIONS

Throughout our study of passenger rail services in Canada we have been struck by the fact that almost every witness that appeared before us said that VIA Rail could not continue in its present state. To do so would be to signal its slow death. To prevent this from happening we were presented with a number of issues that must be addressed in order for VIA Rail in particular, and passenger rail services in general, to flourish. These include: clarification of VIA Rail's role in the provision of passenger rail services; allowing alternate service providers into the passenger rail market; the level of federal subsidy allocated for passenger rail services in Canada; the issue of increased capacity for passenger trains operating over the freight railways' infrastructure; the provision of mandatory and remote passenger rail services; high-speed rail in the Quebec City-Toronto corridor; and future governance options for VIA Rail. Above all, the Committee believes that passenger rail service has a major role to play in Canada and should include service coast to coast.

Of all of these issues, the only new one that has arisen during the last 10 years is that of capacity. The other issues have all been noted, studied and had recommendations come forward for their resolution. Yet, we are again reexamining the same problems with passenger rail services and how to resolve them. The very serious question has to be asked: Why are we doing this? The clear answer is that governments have not addressed these issues and we are yet again faced with a crisis in passenger rail service. How long can this precarious condition be allowed to continue? We have been told that this is the last chance to do something and that if the government does not act now, VIA Rail is on its last legs and passenger rail services in Canada are in severe jeopardy.

We believe that this situation cannot continue. VIA Rail in particular, and passenger rail in general, must be given the necessary tools to provide an efficient, reliable and cost-effective service to the travelling public. Without this we will again face the same situation that we face today. The Committee, therefore, makes the following recommendations that provide the government with a variety of options to address the current issues in passenger rail.

RECOMMENDATIONS

Policy

Policy Objectives

Since VIA Rail's creation there has been a serious policy void, especially with regard to what the government expects from VIA Rail. The Committee unanimously agrees that the status quo is not acceptable. The fundamental question and key policy issue that must be addressed is: What do we want to do with passenger rail services and how do we do it?

Therefore, the Committee recommends:

1. That the government define and commit to long-term support, not less than 10 years, for passenger rail objectives in Canada, including the route network, level of service and long-term stable funding to allow stakeholders to recapitalize rolling stock and infrastructure and enhance passenger rail services.

2. That the government announce its new long-term policy objectives no later than September 30, 1999.

VIA Rail's Role

Throughout our study the Committee was convinced that passenger rail services must evolve to meet the changing demands of the marketplace, the economic climate of the country and the varied needs of Canada's regions. Our passenger rail services have to be adaptable and flexible enough to address the variety of needs that are demanded by the travelling public. If this is not done, the passenger rail market will disappear. In order to achieve this goal we believe it is time to reassess VIA Rail's role and look at the possibility of allowing other service providers into the passenger rail market. There may be opportunities for the private sector, especially with regard to tourist trains, to develop and grow markets while relying less on government subsidies than is presently the case.

The Committee therefore recommends:

3. That the government allow for and encourage innovative public and/or private partnerships on segments of the rail network so that all services might be delivered in a cost-effective and efficient manner.

Subsidy Level

In relation to subsidies, we heard that VIA Rail required a long-term commitment in terms of money from the federal government. This is no different from any other country when it comes to the provision of passenger rail services. They are all subsidized. The questions that must be answered are: How much should the subsidy be? Can it be lowered under the current situation? Can the private sector provide a more efficient service at a lower subsidy level? And, how long of a financial commitment should be made to VIA Rail or passenger services by the government?

While we cannot say for certain what the subsidy level should be, we are of the opinion that this financial commitment cannot be open-ended. Some control has to be placed on the passenger rail operator receiving the subsidy. Great Britain is attempting to do this through its franchising agreements, where subsidy levels are scheduled to decline over the term of the franchise. Without this type of discipline, the subsidy levels could rise to truly unacceptable levels for a very long period of time.

Therefore, the Committee recommends:

4. That the government commit to stable funding for passenger rail in the amount of $170 million annually, to be reviewed every two years.

Remote Services

During our study we heard testimony regarding the definition of what constitutes a remote service. Some witnesses pointed out that the generally accepted concept of a remote service was one that operated in an area where the population had no reasonable access to alternate modes of transportation. If this is the accepted view, then what may be required is a reexamination of the eight remote services operated by VIA Rail to ensure that they are truly remote and required to be provided in the public interest. If they do not meet these criteria then the government must address the question of whether or not they should be subsidized.

Therefore, the Committee recommends:

5. That the government undertake an immediate review of all services that have been designated remote in order to ascertain which of these are truly remote. Those routes designated as remote must be protected in the public interest and funded through a separate federal allocation.

Competition

In relation to private sector ownership of passenger rail services, one issue that arose was that of competition between the private sector and a subsidized rail service (i.e. VIA Rail). Depending upon the model chosen for the provision of passenger rail services in Canada, this issue would have to be addressed to ensure a "level playing field'' is attained between the private sector and a subsidized public service. We believe, that as far as practical, competition should be fair and reasonable.

Therefore, the Committee recommends:

6. That the government ensure that, with regard to competition in the passenger rail sector, no undue hardship be placed on the private passenger rail operator by a passenger rail subsidy, thus ensuring a level playing field.

Track Access

One of the key issues for the Committee to deal with was that of track access. In order for a passenger service to be more viable, especially in the Montreal-Toronto corridor, it must have adequate access to the track so that more travellers will be attracted to the service. We believe there is additional track capacity in the corridor and that passenger services should have adequate access to it.

If it is accepted that there is some additional capacity available in the corridor for passenger trains, we are faced with the question of how to obtain the right to use it. Basically, there are three approaches that the government can take to address this issue: (1) negotiation; (2) legislation that would provide rights of access; or (3) legislation that would divorce track ownership from freight carrier operations.

The option of track ownership by a third party would be tantamount to nationalization of the roadbed. A private or public body could be created to own, manage and allocate space on the track. However, this seems to be a rather cumbersome and intrusive approach to allocating track capacity and an unnecessary encroachment on private property rights. It would likely be more efficient to let train operators manage the infrastructure as this is part of their core business.

Having said this, the Committee believes that the optimum solution to track access is through meaningful negotiation between the freight railways and passenger operators. An atmosphere must be created whereby passenger operators can negotiate reasonable terms of access with a track owner. Perhaps one such tool for improving the environment for negotiations would be legislative provision of "running rights" for passenger rail operators. In effect, running rights provide legal permission for one railway to operate over the track of another railway company. The rationale for these rights is to allow a railway to avoid constructing costly infrastructure when underutilized capacity is available on another railway's lines, allowing for more efficient railway operations and to ensure that the public interest overrides competitive private interests.

Most agreements for running rights are voluntary. That is, they are voluntary commercial agreements between two railway companies. However, when a voluntary agreement cannot be reached, there are provisions for running rights in the Canada Transportation Act (s.138), whereby a railway company may apply to the Canadian Transportation Agency (CTA) for the right to operate over the lines of another. The Agency may grant the right, subject to any conditions it may impose, if it deems access to be in the public interest. If the railways cannot agree on the amount of compensation to be paid by the railway obtaining the right, the CTA may set the amount of compensation. Running rights, therefore, provide the necessary catalyst to "kick start" meaningful negotiations between passenger and freight railways on the capacity issue.

Therefore, the Committee recommends:

7. That the government encourage the freight and passenger railways to negotiate reasonable track access agreements within 18 months, ensuring that passenger rail providers can grow their business and deliver cost-effective and efficient services; and

8. That the government make it explicitly clear that, in the event that "good faith" negotiations for infrastructure access are not forthcoming, the access provisions for running rights contained in the Canada Transportation Act will be invoked to ensure fair and reasonable access for passenger rail services to essential rail infrastructure.

Governance

The models we have looked at each have their pros and cons and, as we stated in the report, the four options are not mutually exclusive. The contents of each can be combined in different ways to multiply the number of options that are under consideration.

While not being specific, the Committee believes that whatever option is chosen, it should contain a number of key elements to ensure its success. These include: greater flexibility for the operator; the ability to provide a variety of services to meet the market demands of the travelling public; a clear definition of the passenger rail network to be operated and at what service levels; the ability to accommodate public/private partnerships in the provision of passenger rail services; and a mechanism to ensure that the passenger rail operator adheres to a solid business plan in the provision of its services.

Therefore, the Committe recommends:

9. That the government confer commercial Crown corporation status to VIA Rail to provide greater operational flexibility and access to capital; and

10. Furthermore, the government, through an independent government agency, should, within two years, pilot-test the franchising of selected segments within the VIA Rail system.

The Lynx Project

The Committee is attracted to the concept of a major improvement in intercity transportation in Canada as would be the case with high-speed rail in the Quebec City-Toronto corridor. Because of the scale of government contribution required, we believe that the Minister of Transport should very carefully consider federal government participation in the Lynx Project.

Therefore, the Committe recommends:

11. Given the potential for high-speed rail in the corridor, the government should participate with the governments of Quebec and Ontario in Phase II of the Lynx proposal to a maximum of $25 million over 41 months, with the balance of government funds coming from the provinces of Quebec and Ontario.

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1 Terry Ivany, President and CEO, VIA Rail Canada, Minutes of Proceedings of the House of Commons Standing Committee on Transport, February 26, 1998, p. 2.

2 Hugh McDiarmid, Executive Vice-President, Commercial, Canadian Pacific Railway, Minutes of Proceedings of the House of Commons Standing Committee on Transport, March 17, 1998, p. 5.

3 Terry Ivany, President and CEO, VIA Rail Canada, Minutes of Proceedings of the House of Commons Standing Committee on Transport, February 26, 1998, p. 6.