BC Ferries restructuring will increase costs and reduce accountability

December 1, 2002

The provincial government has just announced a major transformation of ferry services, promising better service, better access to capital for needed improvements, all without any new public debt and an end to political "meddling".

BC Ferries, the long-standing Crown Corp., is to be replaced by a private company--BC Ferry Services. The company will be owned in turn by an independent capital authority, which will oversee the delivery of ferry services under a long-term contract with the province. An independent regulator will be charged with protecting the public interest as well as the financial viability of the new set-up.

After the fast-ferry debacle, British Columbians would be excused for assuming that any change in the way ferries operate is bound to be an improvement. But there are worrying aspects of the proposed transformations that should give us all pause.

Let's start with the issue of capital financing and debt. BC Ferries are facing significant capital costs in the coming years to replace aging boats and upgrade terminals and operating systems. But the government wants to avoid the appearance of increasing provincial debt, and as things currently stand, money borrowed by BC Ferries for such improvements would show up on the government's books. So, voila, we create a new "private" company (albeit one in which the province is the only shareholder, for now), to do the borrowing, and hold the debt for us.

Such creative accounting does little to actually shield taxpayers--if the new company runs into financial trouble you can bet that the province will have to bail it out somehow rather than see such a vital part of our transportation system go under. What it does do, paradoxically, is ensure that the cost of borrowing for capital improvements is much higher. The new ferry authority will be charged a higher interest rate than if the government, with its excellent credit rating, borrowed the money itself.

A small difference in interest rates means a big difference in cost when you are talking about an estimated $2 billion that is needed to replace old ships and upgrade terminals. The vice-president of finance and corporate services for BC Ferries estimates the new company will face borrowing costs of .6 to 1.25 percentage points more than the corporation currently enjoys. This translates into approximately $20 million more on the $2 billion needed.

But this is not the only extra cost--the new company will also now have to pay GST to the federal government, at about $19 million per year. This alone is substantially more than the $11.6 million the company will receive as a result of fare increases this year.

So where will the new money necessary to finance higher debt costs and taxes come from? The provincial government is staking its hopes on the presumed greater innovativeness and efficiency of the private sector, waxing poetic about, among other things, the prospect of chi chi boutiques and cappuccino stands in glamorous new terminals. This is all very well. If more shops increase revenue and amuse some ferry-goers, great (although it should also be said that it is hardly necessary to change the whole structure of BC Ferries to bring this about), but the amount of revenue such activity is likely to generate for the ferries is small. The Vancouver Airport Authority, the stated model for BC Ferries' transformation, is successful not because it brings in bucket-loads of cash from Starbucks, but because it charges passengers an "improvement fee" every time they pass through the airport.

Nor is private ownership per se a guarantee against "bad management decisions" and for greater efficiency and creativity. One only has to think about the losses incurred by Nortel, Enron, or a host of others to realize that the private sector does not have a monopoly on good performance.

Of course what the new structure does protect against is the government being held accountable for bad or unpopular decisions. If, after the five years of guaranteed service levels and modest fare increases the new corporation finds itself in a difficult financial situation (a not unlikely outcome), and decides to drastically hike fares or cut services to remain financially viable, don't complain to the province. And don't expect to use the power of the Freedom of Information Act to find out how decisions were made - the new company may well be exempt from its provisions.

There is no question that BC Ferries experienced difficulties and is facing significant financial challenges. Changes in reporting and operating structure to ensure greater accountability and mindfulness of commercial realities would be a good thing. But we should not lose sight of the fact that the ferries are not simply commercial ventures, but also an important part of our public transportation infrastructure. As such, government must remain ultimately accountable for how they are run--not in terms of the day-to-day operation, which is properly left to the board of directors, but for the overall purpose and direction.

Sylvia Fuller is the Public Interest Researcher at the BC Office of the Canadian Centre for Policy Alternatives.