BC Rail Investment Partnership
Restructuring the British Columbia Railway Company
Early in 2003, the Province of British Columbia (Province)
undertook to restructure the British Columbia Railway Company
(BCRC). This restructuring initiative was aimed at seeking
investment by third party operators in the freight railway.
The Freight Railway
The objectives for seeking investment in the freight railway
were developed in consultation with communities along the
railway line as well as British Columbia's shippers. The objectives
- Sustainability — proponents had to promote a robust
and well-maintained transportation infrastructure, which
supports the long-term economic development and diversification
of communities throughout British Columbia;
- Competitiveness — proponents had to recognize industrial
customers' desire for competitive freight rail services
and rates while ensuring integrated North American access
to preferred markets and carriers for interline rail shipments;
- Growth Opportunities — proponents had to accommodate
access to the railway line for third party passenger rail
services on reasonable economic terms and identify any new
opportunities for freight rail services; and
- Community Specific Issues — proponents had to demonstrate
how they would benefit key groups, such as employees, communities,
and First Nations and ensure continuation of the rail shuttle
service between D'Arcy and Lillooet.
On November 25, 2003, the province announced that
the Canadian National Railway Company (CN) was the successful
proponent to invest in the railway and assume operations of
BCRC's freight railway as they best responded to the objectives
identified by the Province, communities and shippers.
CN will pay the Province $1.005 billion for the opportunity
to operate the freight railway. CN will acquire the outstanding
shares of BC Rail Ltd. and all of the interests in the BCR Partnership.
BCRC, which will remain a Crown corporation, will retain ownership
of the right-of-way, railbed and track. The railway right-of-way
and infrastructure will be leased on a long-term basis to
CN. The term of the lease is 60 years with an initial
renewal of term of 30 years.
Charles River Associates, in their December 17, 2003,
report entitled "Fairness Evaluation of the Restructuring
of the BC Rail Freight Division," confirmed that the Province
and its advisors designed and managed the partnership process
in a fair and impartial manner and ensured the best proposals
were put forward for consideration. The report concluded that
the Province will receive fair value from CN for the opportunity
to operate the freight railway.
It is anticipated that the investment partnership will be
finalized prior to the end of the 2003/04 fiscal year. However,
the investment partnership is currently under review by the
federal government's Competition Bureau and will not conclude
until that review has been completed.
Investing in Jobs and Opportunities
As a result of the partnership between BCRC and CN, the Province
will be in a position to directly invest in northern communities
and provide opportunities for First Nations along the railway
line to undertake economic development initiatives.
$135 Million for Northern Communities
Proceeds from the investment partnership will be used to
establish a $135 million Northern Development Initiative
to support investments related to forestry, pine beetle recovery,
transportation, tourism, mining, Olympic opportunities, small
business, economic development, energy and sustainable communities.
Headquartered in Prince George, the Initiative will be established
in legislation and structured as follows:
- $25 million for an operating endowment account, with
the interest used to support the operations of the Northern
- Four $15 million regional development accounts –
Prince George, Peace, Northwest and Cariboo-Chilcotin/Lillooet
- $50 million for a cross-regional account to support
investments, economic development and job creation in one
or more regions.
A board, also established in legislation, will administer
the Northern Development Initiative. The board, with a majority
appointed from the regions, will be assisted by a regional
advisory committee for each of the four regions to provide
input on spending priorities. The regional advisory committees
will include locally elected community officials as well as
members of the Legislative Assembly.
$15 Million First Nations Benefits Trust
A $15 million BC Rail First Nations Benefits Trust will
be established by legislation to support economic development,
educational advancement and cultural renewal for the 25 First
Nations along the freight railway corridor. This may include
funding to: build capacity and provide seed-capital for aboriginal
enterprises and joint partnerships; protect and promote First
Nations' languages; support initiatives for aboriginal youth
apprenticeship training; and other initiatives. Final objectives
for Trust funding, structure and governance will be based
on consultation with the 25 First Nations along the railway
Other transportation related infrastructure projects will
also be supported from proceeds related to the investment
partnership, examples include BCTFA capital program initiatives
such as the $4 million for expansion to the Prince George
Airport, and $17.2 million for container terminal development
at the Port of Prince Rupert. A $13 million contribution
will be made to Legacies Now to support the development of
sport, recreation, arts, music and volunteer initiatives.
In addition, $6 million will be invested in Asia Pacific
Market Outreach initiatives and fuel cell research. Up to
an additional $13 million will be invested in projects/initiatives
to be identified once the investment partnership has been
BCRC is a commercial Crown corporation able to fund itself
from sources outside of government. BCRC's financial statements
are consolidated into the province's Summary Financial Statements
on the modified equity basis of consolidation, meaning the
original investment by the Province in BCRC is recorded at
cost. The Province's investment is adjusted annually to include
earnings and losses and other net equity changes of BCRC.
BCRC prepares its financial statements in accordance with
Generally Accepted Accounting Principles for commercial entities.
Under these principles, assets and liabilities of the corporation's
subsidiaries are shown on its balance sheet as assets and
liabilities of BCRC.
The gross cash proceeds of the transaction to BCRC will be
$1 billion. In addition, debt with a present value of
$5 million will remain outstanding and be payable by
CN to BCRC in 90 years, resulting in a gross transaction
value of $1.005 billion. The investment partnership will
mean CN will prepay rent for the long-term lease of the railway
right-of-way. The investment partnership is expected to conclude
by March 31, 2004.
The investment partnership with CN is estimated to result
in a net gain of $182 million which will be recognized
in the fiscal year in which it is concluded. Table One shows
how that gain has been determined and how the positive impact
on BC Rail net income is offset by an equal amount of expenditures
as the gain is reinvested in northern and First Nations' communities.
As the investment partnership has not yet concluded and is
subject to review by the Competition Bureau, the estimates
contained in the table are subject to finalization.
Table Two outlines the disposition of the $1 billion
The monies payable to the Northern Development Initiative
and the BC Rail First Nations Trust are subject to the investment
partnership with CN concluding and net proceeds being received.
Legislation will be introduced to create both the Northern
Development Initiative and the First Nations Benefits Trust,
to authorize applicable expenditures and the transfer of proceeds
from BCRC to the Province. The payments to the Northern Development
Initiative and the First Nations Benefits Trust will represent
an expense in the year they are made. In addition to funding
these initiatives, $200 million will be provided to the
British Columbia Transportation Financing Authority (BCTFA)
for the multi-year capital program. This BCTFA transfer represents
the redistribution of cash from one part of the government
reporting entity to another, and has no impact on the government's
BCRC and the Province have provided commercial indemnities
to CN with respect to the purchase of the subsidiary and partnership,
including indemnities related to tax attributes. BCRC and
the Province, based on independent legal advice, believe there
is a very low risk these indemnities will be called upon.
The Province will report indemnities that have an amount
identified with them as guaranteed debt in the notes to the
Summary Financial Statements. The amount of the guarantee
will also be included as part of total taxpayer-supported
debt reported in the Budget, Summary of Provincial Debt and
Quarterly Reports. The indemnities are a non-cash debt item
and do not incur interest. Those indemnities without a specific
amount identified will be reported as contingent liabilities
in the notes to the Summary Financial Statements.
Following completion of the investment partnership, BCRC
will remain a Provincial Crown corporation. Its primary function
will be to own the railway right-of-way, railbed and track
and administer the lease agreement with CN. In addition, BCRC
will continue to operate several non-railway related subsidiaries,
such as Vancouver Wharves.
Impact of a Delay in Concluding the Investment Partnership
Legislation establishing the Northern Development Initiative
and the First Nations Benefits Trust will be introduced before
March 31, 2004 and will anticipate the possibility
that the Competition Bureau review will extend into fiscal
year 2004/05. The legislation therefore ties the provincial
commitments to reinvest to the completion of the investment
partnership. This means that the $182 million in revenues
from the proceeds and associated expenditures will occur within
the same fiscal year. This will result in no impact on the
Province's bottom line. However, if the investment partnership
does not conclude until fiscal 2004/05, the planned debt reduction
would be delayed. While provincial debt as of March 31, 2004,
would be higher than currently forecast, debt would return
to forecast levels upon completion of the partnership transaction.