Tuesday, May 29, 2007

 

Price CN paid for BC Rail didn't reflect annual $45 million increase in coal shipments

From Paul Willcocks Jan. 11/05 column, Paying Attention:


COAL BOOM RAISES NEW BC RAIL SALE QUESTIONS

VICTORIA - Score one round for Carole James in what will be a long political brawl over the BC Rail deal.

James met the press in the legislature's Hemlock Room this week to complain that the government did a poor job of getting the best price for BC Rail. The railway was about to make a lot of money from a coal revival, but the price CN paid didn't reflect the windfall, James charged.

She had a point, one that stood up even after Transportation Minister Kevin Falcon came to the Liberals' defence.

James said the price CN Rail paid for the Crown corporation didn't reflect a big expected increase in coal shipments from B.C.'s northeast. That could easily add $45 million a year to CN's revenues, but the government negotiated on the sale as if there would be no coal shipments. Taxpayers lost as a result, James said.

Good point.

Falcon, not surprisingly, disagreed when he called into the Press Gallery an hour later - but not that effectively.

He confirmed that the coal revenues weren't reflected in the sale price. BC Rail had been carrying less coal, he noted, almost none in 2004. The projections of future business were unproven. No coal contracts were signed at the time of the sale, he said. "People don't pay for what-ifs."

But of course they do. My past life includes time as a corporate guy, and when it came to buying a business the 'what-ifs' were the important part. Looking ahead, anticipating changes and reflecting them in the valuation, those were the real challenges.

Anyway, the Liberals were pretty positive about the coal mining resurgence. Energy Minister Richard Neufeld spoke glowingly about the coming boom in the legislature almost two years ago. Companies had announced their development plans long before the sale closed.

The government has pointed to the evaluation by a Boston 'fairness advisor' to show that B.C. got the best price for the railway. But the Fairness Evaluation report notes that it assumed no coal shipping revenues. Based on a coal revival, using the report's numbers, British Columbians could have expected another $70 million to $120 million for BC Rail.

It's reasonable to expect CN would have balked at including any potential coal revenues in establishing the value of BC Rail. Coal prices could fall, and the mines close - or never open, CN would argue. (Falcon made the same argument - what if coal prices fall and the industry tanks?)

But the government's role was to push the potential and try to get more money for the railway. There's no guarantee that the effort would have been successful, but the seller's job is to paint the prettiest picture.

What struck me, listening to Falcon on a balky speakerphone in the Press Gallery, was how the Liberals have been wounded on the BC Rail deal.

Falcon should have been able to say look, we had three serious bidders for BC Rail, and CN offered the highest price. That's the market value. End of argument.

Except that one bidder, CP Rail, pulled out, complaining the process was unfair. Another, OmniTRAX, has been named in the corruption indictments filed against three Liberal political staffers in connection with the sale. (OmniTRAX has not been charged with any wrongdoing.) The end result doesn't look like a real competitive auction - as Falcon acknowledged with his chosen defence.

The Liberals' problem is that they have so many vulnerabilities on this issue.
Some people are mad because they broke their promise not to sell BC Rail. Others are angry about the corruption charges. And now others will be mad because the price wasn't good enough.

The questions threaten to overshadow the deal's significant benefits, and so far the government has done a poor job of answering them.

The result is that even people - like me - who don't believe government should really be in the railway business are left questioning how this deal unfolded.

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