[Recorded by Electronic Apparatus]
Wednesday, May 17, 1995
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[English]
The Chairman: Good afternoon, colleagues. The committee will today resume consideration of Bill C-89, An Act to provide for the continuance of the Canadian National Railway Company under the Canada Business Corporations Act and for the issuance and sale of shares of the Company to the public, also known as the CN Commercialization Act.
With us today, colleagues, is the president and CEO from the CNR, Paul Tellier, who is no stranger to this committee.
Welcome, Paul.
We also have with us Yvon Masse, executive vice-president and chief financial officer, and Jack McBain, who is the senior vice-president of operations. Gentlemen, welcome back to the committee. I suppose you have a statement to make, Mr. Tellier.
Mr. Paul Tellier (President and Chief Executive Officer, Canadian National Railway): Yes, Mr. Chairman. I don't have a text, but if you'll allow me, I would like to make a few opening comments.
First, over the next few minutes I would like to review the progress we have made over the last couple of years. Then I'll deal with the whole question of privatization and why we think this is the wise course of action.
As you know, Mr. Chairman, I've been with CN since October 1992.
If we go back and look at where we were, the costs were too high, and every time we went through a recession we had no choice but to borrow very heavily. As a result we moved into the red in a very significant fashion.
In addition, CN was quite inward-looking. It was a very good railroad but did not have enough of a focus on the customers and had very much a culture of caution and of not reacting quickly enough.
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I think if privatization is possible today it is because there has been a significant turnaround.
Over the next couple of minutes I will very quickly bring to your attention a certain number of developments that have occurred.
First of all, in terms of downsizing, we said in early 1993 that over a three-year period we were going to downsize by a total of 11,000 jobs - 10,000 in Canada and 1,000 in the U.S. We are right on target. At this point we have almost completed that downsizing. The last 2,000 jobs are going to be abolished in the course of this year.
Very often in many places - for instance, in front of Mr. Nault's committee at one time - CN was accused of being top-heavy. It was true. As a result, in that downsizing, about 2,500 of these jobs being eliminated are administrative or management positions. So a very significant portion of that downsizing had to do with non-scheduled, non-unionized employees.
We have reduced the layers of management from ten to five across the corporation. From the first line supervisor on the shop floor or in the yard to the CU, there are now never more than five levels of management. As a result, our labour cost has declined from close to 50% of our operating costs three years ago to 41% now. It's very significant progress.
Another area in which there's been very significant progress is labour agreements. As you know, first we were looking for greater flexibility in the collective agreements. We were also looking at better control of wages and at some reforming of employment security.
I'm pleased to report that as a result of the mediation and arbitration process put in place in the back-to-work legislation, we have succeeded in making significant progress in the mediation stage. It was completed last May 5 with some of the larger unions, such as the running trades, and I think it's a win-win situation. Both parties made a lot of progress in increasing flexibility, enabling us to improve the quality of service.
In terms of the network, in addition to downsizing and to changing the labour regime, we have made a lot of progress over the last couple of years in terms of network rationalization. As you know, CN is one of the lightest-density railroads in North America. We have abandoned a certain number of miles of track, but abandonment is the last resort. More importantly, we have succeeded either in creating external short-lines, like the one we have created in Nova Scotia, or in creating internal short-lines.
I'm very pleased with the deal we signed with the unions in terms of the northern Quebec lines. There are 1,200 miles of lines out of 2,600 in Quebec where we succeeded in putting in place a new five-year labour contract, which will enable us to operate these northern lines in Quebec in a profitable fashion.
Another area where there's been significant improvement is in the strong focus on the customer. For instance, we have redesigned the way we are putting trains together, trying to avoid hump yards. Mr. McBain, who is the senior railroader in the company, has put in place unit trains, destination-to-destination trains that avoid yards in order to speed up the service.
We are about to complete the implementation of a huge information management system. It's a $100-million investment that will enable us to better track down the commitments we enter into with our customers. Instead of only following the movement of cars and trains, we'll be able to know exactly the kind of commitments we give to a customer in terms of dates of delivery and so on. The implementation of this new information system is about three-quarters complete. It was a two-year project, and by July it will be completed.
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All this is to say that the results are there to demonstrate that it's moving in the right direction. Two years ago CN was losing. In 1992 CN was losing $100 million. In 1993 this was reduced to $79 million. Last year we had $245 million of net profits, and the first quarter of 1995 is just as good. For instance, since 1992 the volume is up by 15%, and we managed that with a reduction in the labour force of roughly 33%. It was a very significant increase in productivity.
What I would like to do in a minute, Mr. Chairman, is I have some charts, and if they could be distributed to the members.... I would like to be able to describe what I have just said using the U.S. railroads as a benchmark.
The last point I want to make before we look at these charts is why privatization. We very strongly support that initiative of the Minister of Transport, because we think privatization is the next step in the transformation of CN.
Why do we say that? First of all, it would introduce market discipline. Secondly, it would strengthen the momentum of change that has been created over recent years. It would provide a possibility for our employees to take an equity position to become shareholders. I'm a strong believer that when an employee gets up in the morning and has a chance to look at how the stock of his or her company is doing, this is a good incentive.
Perhaps more importantly than all this, it would give access for the company to the equity market. The big difference today between CP and CN is that when we need some financing in CN, we have no choice but to borrow, whereas in CP they can borrow but they can also sell shares and raise equity. Therefore we think the company is now ready for privatization.
My last point, Mr. Chairman, if I may ask you and your colleagues to look at these charts, which are in a bilingual format - you have a set in French and a set in English - and I'm looking now at the CN turnaround overview, what I want to show here is that the turnaround, the rate of change in CN as compared with that in the North American industry, has been faster than that of the American railroads.
We compare ourselves with the U.S. railroads because as you know, there are two large railroads in Canada. CN is the largest; about 30% larger than CP. You have the Mexican railroads. Then you have seven big class 1 railroads in the U.S.
If you look at this, if I may ask you to turn to the second page, on significant cost reductions.... For instance, if you look at that first chart, about how the CN unit cost is declining, our cost on a gross tonne-mile basis, which is the performance indicator in the industry, how much it costs to move $1 of freight over a mile of track...if you look at this, our decline has been 10.7% over the last three years. Compare that with the line in the U.S., and our decline in reducing costs in CN, on a unit basis, has been faster than that of the U.S. roads.
If you turn the page and look at the page on volume growth and how CN volume is increasing, again our volume has increased, as I just said, in 1994 by 11%, and over a three-year period by 16%. If you compare this with the U.S. roads, our growth in traffic has been faster than that of the seven large railroads in the U.S.
If you look at profits, the next one - producing a substantial profit improvement - I am talking here about operating income. Basically this is the income you have left from your operations when you have paid your expenses. So it is strictly operating income here. Again, the rate of growth has been faster than in the U.S.
Of course I'm not saying there is not a lot of room for improvement. This is what the last page on these charts is all about. We came from way behind, as you know. As a result of the deregulation of the rail industry in the U.S. and the introduction by Congress of the Staggers Act in 1980, the major roads in the U.S. went through a major rail renewal. Canada has been lagging anywhere between five and seven years behind; therefore, we still have a long way to go.
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But I was using these charts basically to make the point that when we compare ourselves with the U.S. roads, the train lines are very good and in many cases better than where they are.
The last one is the operating ratio, which is, as you know, the critical performance indicator in a railroad. The operating ratio, as you know, is how much money you have to spend in order to collect $1 of revenue. In 1992, in order to collect $1 of revenue, CN had to spend 97¢. The U.S. railroad at that point in time was spending 85¢. I'm talking about the U.S. class 1, the large one. The average was 85¢, so the gap was 12¢. At the end of 1994, our operating ratio was down to 90¢. They continue to improve in the U.S. and they were down to 84¢, but the gap was narrowed from 12% to 6%.
Why is this important? Sometimes that question is asked. You know, $245 million is a very good story. Well, it is true that it is good in terms of net profits, but if you look at that operating ratio, for instance, last year we had 10¢ left once we had paid our operating expenses.
What do you do with that 10¢? First, you have to finance your capital budget, which was in excess of $400 million last year. Second, you have to pay your interest charges, which were close to $200 million last year. In addition, at one point in time you have to reimburse the debt.
Therefore, $245 million of profit last year is moving in the right direction, but given the size of our revenues, i.e., $4.2 billion last year, we need year in and year out anywhere between $400 million and $500 million of net income in order to meet, to be able to be self-financing, pay for our capital budget, pay for the interest charges and, in addition, to start reducing the debt.
Mr. Chairman, my colleague and I would be delighted to answer any questions about what I have said or any other subject-matter you would like to raise. Thank you.
The Chairman: Thank you very much, Mr. Tellier, for your presentation and your submission.
We will begin our questioning with Mr. Mercier, please.
[Translation]
Mr. Mercier (Blainville - Deux-Montagnes): Mr. Tellier, the Bloc Quebecois does not have any objections in principle to Bill C-89 providing for the continuance of the CN nor concerning the minister's intention to buy the CN's property which is not part of the rail network and to put up the network for sale.
We do however have certain objections concerning clauses 8 and 16 as well as concerns regarding clause 6. As you know, the aim of clause 8 is to preclude a group or a person from taking control of the CN by limiting to 15% the number of voting shares that can be bought by a person or a group of associates.
We wonder about the fact that for valid reasons, the clause permits a group of associates not to be subject to this 15% restriction if they submit to CN a statutory declaration.
We wonder how the managers of CN could in fact make sure that those having made this statutory declaration would abide by it.
How do you see the managers of the future company being able to make sure that the conditions set in the statutory declaration are being met?
Mr. Tellier: Mr. Mercier, this is a very good question. The act basically permits such a statutory declaration to be made. The presumption is that the individuals making the declaration will abide by the act.
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Secondly, you and I both know that the board of directors reforms have shouldered administrators with an increasing number of extremely stringent legal and regulatory responsibilities. Accordingly, I can only believe that the administrators who represent the shareholders will conduct themselves in a manner that is in keeping with the law.
Mr. Mercier: Do you not see that such controls will be particularly difficult when you are dealing with foreign buyers?
Mr. Tellier: No. As you know, the government advisedly decided not to impose restrictions on the foreign ownership of shares in a privatized Canadian National. The shareholder, whether he be American, French, British or Japanese, must conduct himself in exactly the same way. I do not think that this clause 8 provision will pose a different problem with respect to foreign investors. I would remind you that in the case of CP, there were no restrictions placed on our competitor; nor were there any restrictions placed on CP share transactions. And yet, control and ownership of this organization did not wind up in foreign hands. Consequently, I can't see why this should happen to the control or ownership of Canadian National.
Mr. Mercier: Since the domestic market is not big enough to absorb two billion dollars, we have to issue shares for the international market. Do you not think that there is any risk that Canadians may lose control over CN?
Mr. Tellier: I don't think so.
Mr. Mercier: In clause 16, CN and its subsidiaries are declared to be of national interest. First of all, do you feel that it would be in the interest of the company to create joint ventures with its lines and to have co-ownership of its lines? If so, what would be the status of these lines? Should these lines not cross over provincial borders, do you feel that these lines would remain under provincial jurisdiction although they are co-owned by CN which, because of this declaration of national interest, would be under federal jurisdiction?
Mr. Tellier: As the Minister of Transport said yesterday, lines serving local or regional needs will be under provincial jurisdiction. As you know, Mr. Mercier, this is the situation right now. In each of the provinces where there is a railway serving local needs, be it in Nova Scotia, Ontario or Alberta, it is under provincial jurisdiction. We will continue to operate in the same way.
Now, your question is very relevant. If, for example, Canadian National were to form a consortium, in order for the railway to remain under provincial jurisdiction, if it were in Quebec, we would have to sign a strategic agreement. This is how we would proceed. Instead of forming a partnership with the entrepreneur who establishes a private line, such as RailTex, in Nova Scotia, an agreement would be signed at the time of sale that would detail how revenues and expenditures were to be shared, when it's appropriate, etc. This is how things would be done and the regional or local operator would continue to run his railway under provincial jurisdiction.
I would draw your attention to the fact that all of the parties would like this local railway to remain under provincial jurisdiction because otherwise, the person who buys our lines, or the new corporation, would wind up having to comply with all our collective agreement obligations, which would in turn, in most cases, increase its operating costs.
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There is already an incentive to leave it under provincial jurisdiction, as is the case everywhere it has been done.
Mr. Mercier: But I wonder if there are, or if there could be in the future some interprovincial CFILs in league with CN?
Mr. Tellier: Yes, and in such cases, I suppose it would be under federal jurisdiction. You are absolutely right.
Mr. Mercier: I have one last question.
Under clause 6, the minister will have the power to buy himself any branch entreprise outside the network. His intent is to put them up for sale.
Don't you think that breaking the organic link between CN and these entreprises could put them at risk because they would lose, among other things, some maintenance or procurement contracts with CN?
Mr. Tellier: No, because the main transfer between CN and CN shareholders, and this means the Canadian government, is a real estate division. Therefore, it will be a straight transfer in exchange of compensation. I don't see how this could impact on the real estate portfolio.
Mr. Mercier: What about IMF and Canac?
[English]
Mr. Tellier: Do you want me to deal with the IMF?
[Translation]
In the case of IMF, essentially, as you know, we were trying to save jobs. We are talking about a thousand jobs in the west end of Montreal. We are looking for a buyer. We are currently negotiating with GEC Alshtom, the largest manufacturer of rolling stock in the world. The negotiations are going well.
At the same time, IMF management is currently negotiating with the local unions in order to put in place new collective agreements with a view to reducing costs and boosting profitability. This should all be settled before privatization.
Now, would the prospective buyer be ready to continue working at IMF? You are quite right to wonder about that. This is currently part of the negotiation between GEC Alshtom and IMF Technotransport Inc.
Mr. Mercier: Thank you, Mr. Tellier.
[English]
Mr. Gouk (Kootenay West - Revelstoke): Mr. Tellier, could you give me some idea of what the debt-to-asset value change was between 1992 and 1994?
Mr. Tellier: The debt has gone up by roughly $400 million. It begs the question, why? The answer is simple and twofold.
First of all, when we decided to abolish 11,000 jobs, a great many of these people, as you know, were enjoying full employment security and could therefore remain on the payroll until the retirement age of 65. We had to offer these employees buy-outs, on the average of around $75,000. This is a ballpark number. Sometimes it is lower, sometimes it is higher. As a result, we have spent just over $200 million over the last two years in separation payments to our employees. This had to be financed and we had to borrow to do that.
Secondly, we had to borrow to finance the tunnel that we built between Port Huron, Michigan and Sarnia, Ontario. This was opened officially by Mr. Fontana two weeks ago. That tunnel was a $200-million Canadian project. This is where the money went. These are the two main reasons why the debt went up during that period.
Mr. Gouk: Okay, but how was that done? Has there been any change in your asset value during that period of time, would you say, or has it been fairly stable?
Mr. Tellier: Obviously, the asset values have increased by $200 million because of the cost of the tunnel, which was done within the budget.
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Mr. Gouk: Presuming that was in fact a good expenditure.
Mr. Tellier: We already know it was a good expenditure. We feel very strongly that Canadian National has to build on the fact that it is the only transcontinental railroad in North America. As you know, CP is no longer a pan-Canadian road. CP has decided to pull out of Atlantic Canada.
On the contrary, CN has decided to remain in Atlantic Canada. We think our success and the success of the port of Halifax are intertwined. We think if we are going to enable the port of Halifax to benefit from carrying goods, exports and imports through the U.S. midwest, it is very important to shorten the journey, and that tunnel will shorten the journey of a double-stacked train by as much as twelve hours. Although the tunnel has been officially open for ten days, the first train went through there about six weeks ago and the volume is already up by something like 14%. The number of trains going across the St. Clair River is going up from 16 to 24 a day.
So the last four weeks are demonstrating that the business case that was put forward before the board for approving this was dead-on.
Mr. Gouk: I certainly think that a tunnel allowing double stacking is probably a worthwhile venture. What was the primary decision/factor in CN deciding to go with the Sarnia tunnel as opposed to a joint venture Windsor-Detroit tunnel?
Mr. Tellier: As you know, we jointly own the Windsor-Detroit tunnel. The engineering work came to the conclusion that the Detroit-Windsor tunnel could be enlarged but only in a limited fashion and therefore it could accommodate double-stacked containers, but only the domestic models and not the high cube model, the international model that is being carried on shipping lines and so on. Therefore, we decided it was in CN's commercial interest to go it alone.
As you know, Chicago is the hub of rail transportation in North America. Sixty percent of rail traffic in North America goes to or through Chicago, and on our tracks CN goes all the way to Chicago through our subsidiary, the Grand Trunk Corporation, and therefore it was a wise decision.
Mr. Gouk: What is the state of your debenture with the Canadian government right now? Is there principal and/or interest being paid on that?
Mr. Tellier: Our debt is strictly commercial debt. It is not guaranteed by the government. We borrow on the financial markets, strictly on the strength of our business plan. Our debt is basically held first and foremost in the U.S., and then also in some Euro-dollars.
Yvon, what proportion of the debt would be held outside of the U.S.?
Mr. Yvon H. Masse (Executive Vice-President and Chief Financial Officer, Canadian National Railway): I would say about 40%.
Mr. Gouk: What I'm interested in is the seven-eighth debenture held by the Canadian government.
Mr. Masse: There is about $80 million left and it is being paid in semi-annual instalments at the rate of $13 million. It's going to be fully amortized by 1998.
Mr. Gouk: Thank you. That's what I was looking for.
In terms of the debt, when you say you go to the commercial market, what responsibility in terms of the debt do you feel the government has in order to market CN? What is the responsibility, in your opinion, of the government with regard to the debt figure that CN owes?
Mr. Tellier: Let me make sure I understand your question. In terms of making this privatization successful, it's very important that the capital structure of the company, the day it goes public, be the right one and that the debt-equity ratio be the right one. As the minister said yesterday, and as you yourself said a minute ago, our debt is currently $2.5 billion and it has to be reduced to around $1.5 billion. This would give us a debt-equity ratio that would be comparable to the large U.S. railroads with which we will have to compete in order to raise equity.
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Mr. Gouk: CN has had major recapitalizations three times throughout its history. This is something of course that a private rail system is not open to. You're certainly open to it; you just don't have the access to it.
How can CN justify going out into the marketplace to compete with other rail companies that have not had this advantage of being able to be recapitalized periodically throughout their history, with yet another case of what amounts to recapitalization, in terms of the Canadian government - which means the taxpayers - recapitalizing for a fourth time, so they can compete against a private company that has never been recapitalized?
Mr. Tellier: I would make a couple of points in this regard. You're perfectly right that CN was recapitalized three times, and some are saying this is a bail-out, but it is not a bail-out and it is not recapitalization. First of all, we are not reducing our debt by selling non-core assets. We were very successful in selling CNX, Canadian National Exploration, the oil and gas company that you're familiar with, in Saskatchewan, and the money is being applied to reduce the debt. We sold the Central Vermont Railroad and the money is being applied to reduce the debt.
As I said to Mr. Mercier, we are trying to sell AMF, where we have been losing money in recent years, and then there are other non-core assets we'll be selling. For instance, when we were in the passenger business, CN had bought a piece of real estate in Paris, France. We are trying to sell this, and negotiations in this regard are going extremely well.
Therefore, what would be transferred to the government for compensation are the real estate assets, including the CN Tower. I don't think this is unfair. As a matter of fact, I have a copy here of a letter from Canadian Pacific, which is our main competitor, in which the CEO of Canadian Pacific Limited is saying, ``I wish to confirm to you that Canadian Pacific supports the privatization of CN and a reasonable recapitalization of CN as required by capital markets for a successful share issue''. So one has to keep in mind that CP Limited has a credit rating of 1-A plus, or something like that, and what we are looking at is an investment rating. So I don't think anybody could argue that our capital structure, as a result of what the government would do to make sure we have that capital structure, could be seen as a bail-out, because it isn't. We would be transferring assets to the government, to the Minister of Finance, for that purpose.
Mr. Gouk: You talked at length, though, of your asset disposal, whether to the marketplace or to the government for later disposal. If you could, through disposal of assets alone, reduce your debt to a substantially better debt-to-asset ratio than CP, I wouldn't have an argument with that. Where I have a concern is that you're reducing your debt-to-asset ratio using what amounts to the taxpayers' dollars beyond the asset value, and we've been led to understand that we're looking in the range of $4 million to $5 million worth of debt reduction beyond property asset values. Now, that figure may be incorrect but that's the one we've been given.
Mr. Tellier: I don't want to argue with you over the number because the number has not been determined yet, because a professional assessment or evaluation of the real estate portfolio is going to be done.
But I would like to add that, over the years, Canadian National has invested a lot in real estate. For instance, if you look only at the city lands in downtown Toronto - and as you know, from the CN Tower, going under the Skydome, the land belongs to us, all the way west to in front of The Globe and Mail building and so on - all of this belongs to CN. For the zoning and development of this alone, Canadian National spent in excess of $80 million. So it's only fair that, having spent that kind of money, we would be compensated for it.
I think it's a good decision for the government because if we were forced to sell this, with the state of the real estate market today - except in your province - there would be very few places where we could get good returns for these assets. Therefore, it is much better for the government to realize the value in due course.
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The last point I want to make to you is that over the years we have invested very often as a result of discharging a public policy role from the day the board of directors of Canadian National decided to terminate its train services in Newfoundland. The day the transaction was completed, $700 million was invested in the losses in the province of Newfoundland.
I am not arguing whether it was good or bad public policy, but I'm saying if you look at the balance sheet of CN today, it's because some of these commitments were made over the years. Since 1978, CN has run 100% on a commercial basis, but I don't think it is unfair to balance the balance sheet the way the Minister of Transport is talking about because I think it is totally justified in light of these numbers.
Mr. Nault (Kenora - Rainy River): Could we, for a moment, get into an issue that hasn't been talked about a great deal? When the transfer takes place, as you know, the shareholders will choose the board and then will choose the CEO and the new team. Do you, the three gentlemen in front of us today, feel uncomfortable with the fact that you might be putting yourself out of a job? When this is put over to the private sector, of course, they'll make the final decision. It's not to say they won't choose you three gentlemen, but they may decide to choose somebody else.
I am interested, of course, in management's morale as we go through this transfer and this changeover, because we still have to run trains and we still have to keep working on the bottom line, as you have been doing for the last number of years. I'd be interested in knowing what management thinks about this transition.
Mr. Tellier: First of all, Mr. Nault, I would make a difference between the situation of my two colleagues and myself. They are officers of the corporation and they are not members of the board and so on; therefore they are being assessed on a yearly basis - as a matter of fact, on a quarterly basis - on the basis of their performance. I am sure the day after privatization, Jack is going to perform just as well, if not better, than he is today.
In terms of Mr. Masse, he's been serving this company for 35 years. I have been trying to convince him to stay with us much longer, but I may not be successful, so I'm sure he's pretty relaxed about the whole thing.
The Chairman: He probably wants a golden handshake.
Mr. Tellier: You may be right, Mr. Chairman.
Seriously, the only guy whose job is on the line is mine, and I am ready to be judged on my performance. I think the description of the turnaround I have described over the last two and one-half years...I got into CN two and one-half years ago and I knew exactly what I wanted to do, and I think the results are there. There is a provision in the act that says six months after the end of the calendar year during which the IPO is done...if, as the Minister of Transport was saying yesterday, the issue is done in October of this year, in the first six months of 1996 we will have to have the first annual shareholders' meeting.
All of us directors, myself and the other directors who have been appointed more recently, will have to resign. There will be the election of new directors by the shareholders and the same will apply to the CEO. If the board of directors considers that I have done a good job, I expect to be reappointed as both CEO and director. Otherwise, I'll be looking for a job elsewhere. I am ready to take the gamble.
Mr. Nault: So what you're telling me then is that it's your intention to offer your services under a privatized CN?
Mr. Tellier: Yes.
Mr. Nault: I think it's important to know that the transition is not in the sense that you're just going to do what you have to do and then you'll be out of it, and that you're intending to stay on. I think that's important for everyone to know.
I want to change subjects for a moment then, and find out about two issues that are of concern, I suppose, to the employees themselves. We heard from the minister yesterday, who suggested to us that collective agreements would follow to privatize CN. My understanding is that you've concluded negotiations pretty well with all the employees now, except maybe for CAW, if I am not mistaken.
Mr. Tellier: This is correct.
Mr. Nault: So that's pretty well finished for CN.
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I wanted to ask you about the collective agreements and whether in fact what the minister told us yesterday is correct. Also, is the pension plan itself, which I understand is worth close to $8 billion, going to be maintained whole with this privatization? Of course that's of concern to CN pensioners. They'd like to know whether they have to be worried about it through this whole privatization business.
Mr. Tellier: If I can go back to your previous question before I deal with these two, in terms of morale, I think the average employee.... I spend a fair amount of time, as you know, and so do my colleagues, talking directly to employees on the shop floor, in terminals, and what have you. I would say that the majority of our employees are quite positive and supportive of privatization once it is explained to them and when we talk to them about employee participation, acquiring shares, and so on. Overall, it is quite positive.
You mentioned morale. I don't have to explain to you that when you downsize an organization by 11,000 people, it creates a lot of anxiety. People are asking if their jobs are going to be there tomorrow or next year. They want to know exactly where it's going to stop.
Therefore I would say that the morale is good, but if you're asking me whether there is a level of anxiety within the company, I answer yes, very much so, at all levels, including the most senior levels in the company.
In terms of the pension fund, privatization is not going to change anything. As you know, our pension fund is supervised by the Superintendent of Financial Institutions. It is supervised by the board and, perhaps more importantly, there is a unique pension board, which consists of representatives of the pensioners, five of them if I'm not mistaken, five representatives of the unions, and then representatives of the employees and representatives of management. So it's a large pension board and it is co-chaired by a senior executive and a general chairperson of BMWE, the Brotherhood of Maintenance of Way Employees, at this point in time. The privatization is not going to change anything at all.
Could I ask what was the other question you had, Mr. Nault?
Mr. Nault: Whether the pension plan would stay whole.
Mr. Tellier: Yes, it would, completely.
Mr. Nault: That's a major concern and it's been brought up before.
The other issue is the one that deals with VIA, which is more related to the public interest. When we get into the regulations themselves and the changes in them, this is going to make CN even more competitive. At least it is a belief of myself and many I've talked to that they go hand in glove. Without the regulatory changes that the railway industry needs, selling CN really isn't going to get you very far if we don't get on a level playing field with North American railways.
Based on that, there still is an interest of parliamentarians to look at the public interest. It's been a perception for a number of years, or possibly a reality, that we've used CN for a lot of public interest scenarios.
I'll use Churchill as an example. It can be argued that if it wasn't in the public interest and it was based just on a business plan, then Churchill and that line wouldn't exist, because you don't make any money on it and it's a very expensive venture.
What I'm trying to find out are the effects on the public policy as it relates to VIA, because most of the trains run on CN. What is your assessment of the privatization and the effects it will have on VIA and the agreement that you have with VIA now?
Mr. Tellier: Privatization should have no effect on our relationship with VIA. VIA is a good customer of ours. Year in, year out, VIA gives us anywhere between $50 million and $55 million of revenue, and this is good revenue. I think the relationship is very good.
I am very aware that from time to time VIA says we are charging them too much for the use of our tracks. I am very aware of the allegation, and my answer to it is that, although it is a source of revenue, it is also services that from time to time come into conflict with our freight trains.
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For instance, Mr. McBain was telling me that two weeks ago, as a result of a broken wheel on a VIA train locomotive just east of Kamloops, because passenger trains are longer than freight trains, it took four days in that difficult terrain to clear the tracks. As a result we had a tremendous backlog of coal trains on our main line. I don't have to explain to you that moving a 6,000-foot-long coal train is good money for us and much better than having to wait because a VIA train is blocking the track. On the Kingston subdivision, between Montreal and Kingston, where there are the fastest VIA trains, a VIA train occupied the equivalent of five freight trains in terms of track capacity.
So on the one hand they are a good customer. On the other hand they are getting a hell of a good bargain in their rates. A couple of derailments like the one we had east of Kamloops and the margin we are getting out of that transaction goes down the drain. I'm ready to argue with the management of VIA Rail that they are being extremely well treated and the rates we are charging them to run their trains on our tracks are very reasonable.
[Translation]
Mr. Guimond (Beauport - Montmorency - Orleans): Good morning, Mr. Tellier. This is the first time that we have had the pleasure of seeing each other since we spoke together at the press conference, when I informed Canadians and Quebecers about your conditions of work, including the generous interest-free $300,000 loan that was given to you so that you could purchase your house in Westmount. I'm pleased to see you again, Mr. Tellier.
Mr. Tellier, you are probably familiar with the saying that it takes years to build credibility and only a few minutes to destroy it. I would like to follow up on something I raised earlier. I have a reputation for being hard-headed and for following up on issues.
On March 15th, 1994, you made a commitment to both the Transport Committee and me that you would send regional financial statements to us. It is becoming more and more essential that we receive these figures, given this privatization, so that we can fulfill our role effectively. We could already foresee that this would happen at that time.
I asked you the following question and I would like to now quote from the minutes. ``Would it be possible to receive the figures broken down on a regional basis?'' You said that you could. I then asked you whether or not you could send it to us and you said that you could. I said: ``Very well.''
I asked you for this fourteen months ago. I realize that I neglected to ask you to specify in which year I could expect to receive them. Mr. Tellier, when will I get this information?
Mr. Tellier: I would be pleased to follow up on this, Mr. Guimond. I will check whether or not this has been done. If this has not been done, I will be very happy to look into this.
Mr. Guimond: I have another point that I would like to raise. I believe that you met with workers from Charny on December 6 or 8, 1993, and that you made a commitment to these workers that you would offer the line to them before going to someone outside. With your permission, they recorded everything on a video cassette. This did not stop you from selling Murray Bay, from Limoilou to Clermont. What have you got to say about this episode where you made a commitment to these workers?
Mr. Tellier: First of all, let's get the story straight about this meeting with the employees. Initially, an employee representative had asked me whether or not we would take a look at an employee offer to purchase a certain line in Quebec. We said that we would.
They also asked me whether or not I would be willing to finance them and help them prepare an offer. We said yes. Not only did we say yes, but we also invested several hundred thousand dollars in order to finance the preparation of an offer to possibly purchase some of our lines.
As far as the Murray Bay subdivision is concerned, the transaction had already been done. Discussions had already been held. Had the deal already been signed? We would have to check on the dates, but as far as the discussions are concerned, I can say that the discussions were already well under way with private sector partners to sell 90 miles of track.
Mr. Guimond: Before the Charny meeting?
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Mr. Tellier, I have here a memorandum of agreement signed last May 5th and I would refer you to page 35 and the following pages which deal with the Atlantic Region Issues. I'm referring to appendix 14, where reference is also made to Atlantic Canada. Throughout this memorandum of understanding, Atlantic Canada is now defined as being east of Joffre. Joffre, for those who do not know, is the marshalling yard in Charny. Does this mean that now, in the light of this new memorandum of understanding, the Atlantic Region, is, in CN's mind before its privatization, ``everything that is east of Joffre''? Is this what we are to understand by this?
Mr. Tellier: Before Mr. Masse provides you with some clarifications, I would say that in negotiating with travelling staff, we used two tables. One table which is, essentially, for the West, starting from Winnipeg and going to Pacific, and another table for the East, meaning the rest of the country. This is how you should be interpreting things. These tables do not really concern themselves with the specific regions, as Quebec, the St. Lawrence Region or the Great Lakes Region. This was essentially an agreement made for the East because the bargaining table concerned itself with the East and there was another bargaining table for the West.
Mr. Masse: The term Atlantic Canada in this particular context has nothing to do with regional administrative responsibilities. In Northern Quebec, we negotiated a separate agreement for the lines in Northern Quebec. This agreement favors a particular system for the management of trains running from Joffre to Halifax. This is a labour relations definition that has been agreed to with our unions. We call it the Atlantic Region because the operating conditions and traffic density require the same performance and the same efficiencies and we negotiated with our union on this basis. It is a matter of managing the way that we run trains.
Mr. Guimond: Yes, but does that mean that there will be a new regional office where everything will be done?
Mr. Masse: Not at all!
Mr. Guimond: Meaning that labour relations for...
Mr. Masse: It's a train management zone.
Mr. Guimond: Okay. And it will continue in the same way.
Mr. Masse: As far as labour relations are concerned.
Mr. Guimond: Hence the labour relations aspect will continue to be done in Montreal?
Mr. Masse: The regulation of trains is done in our Montreal office, of course.
Mr. Guimond: Does that mean that there will not be a new regional office or a new regional headquarters in the division east of Joffre.
Mr. Masse: Not at all.
Mr. Guimond: Okay.
[English]
I would like more questions. I will come back.
The Chairman: Thank you, Michel.
Mr. Gouk.
Mr. Gouk: That was an interesting session. But maybe we could get back to CN privatization.
I would like to talk a little more about this idea of asset disposal. My concern is the amount of money the government is going to spend beyond the acquisition of the properties. That in itself I find an interesting paradox.
Basically, CN is owned 100% by the government on behalf of the taxpayers of Canada. If the government buys CN's assets from them, it's the taxpayers buying the assets from themselves. So we're going to do a little paper shuffle and we're going to put the money up.
Are you proposing they buy them at fair market value - is that the understanding and intent of this - or that they buy them at some future value that may be realized at some time in the future?
Mr. Tellier: That number has not been determined yet.
Mr. Gouk: Not the dollar value but rather the method of determining it. Are we talking about market value or some unknown future value?
Mr. Tellier: This is one of the questions being discussed at this time, Mr. Gouk.
Mr. Gouk: Just to determine the general concept.
Mr. Tellier: Yes.
Mr. Gouk: Do you see a problem with the concept of debt reduction beyond the asset purchase? If someone opens a store and someone else opens another one in the same vicinity and does a better job of it and wipes the first store out, then that's called free enterprise. But if the second store gets the property, for example, free from the government and the first one didn't, then they've been given an unfair advantage. Do you see the debt reduction as an unfair advantage against the previous head-on competition between yourselves and other private companies, specifically CP?
.1630
Mr. Tellier: Not at all. As I have said, Canadian National had to discharge a certain number of obligations in the past, which was not the case for CP. Secondly, if you have a capital structure where the debt ratio in CN would be 45%, if you want to pick a number, to say that this would constitute an unfair advantage of CN over CP I think is a very far-fetched argument. I suppose the letter I read to you from the new man at the top of CP Limited reflects the fact that he's not concerned at all.
If we're talking about reducing recapitalization and if we're talking about a $1 billion debt reduction at taxpayers' expense and so on.... But that's not what we're talking about; therefore I think it's perfectly reasonable and I don't think it would be an unfair advantage.
I know the media have been talking about the example of Air Canada and Canadian, but I think the situation here is quite different and I think one must not lose sight of the objective. Mr. Young was stating the objective very clearly yesterday. The question here is to have, in the private sector, an investor-owned railroad that is viable, profitable and competitive. Therefore, we have to put this balance sheet, this capital structure, right at the outset because otherwise it won't be able to survive.
Mr. Gouk: When we look at your operating income - and you talk about how that is rising but you still have this debt load so you still have to do better - if privatization weren't being talked about right now, can you see CN moving the point of overall profitability, raising their operating income to the point where they would break even and turn a real genuine profit in the foreseeable future?
Mr. Tellier: Yes. Given the very significant impact our cost reductions have produced, we would expect the cashflow to turn positive and then we would be able to be self-financing.
Mr. Masse: I think the traditional problem of Canadian National has been that whenever we had a recession after some good years, we incurred deficits and we didn't have the financial cushion to really absorb the bad times. In the future, we must have a proper financial structure, one that will re-establish and equalize what we have invested in Terra Transport.
We can demonstrate and we can have audited financial statements that demonstrate that we have accumulated a deficit that has had an impact on our balance sheets of $700 million. So to use your example, if you provide free goods to Canadian citizens, it is only normal that in these circumstances these goods be paid for.
Into the future, the new financial structure will give us the comfort to accumulate cash reserves, to have a return to the investors, to be able to go back to the financial markets for additional equity investment for growth and so on, and to pay down the debt and have the financial ratio to make it on the financial markets. Our problem has been too much debt in the past. That was the only way we could finance our losses and our investment.
Mr. Fontana (London East): Thank you.
Welcome, gentlemen. One of the things this committee has learned long and hard over the past eighteen months, as we've dealt with a whole bunch of transportation issues in every sector, is that the ultimate beneficiary of what we do in transportation has to be the shippers. If we can't compete in this country by rail or by road or by water, and if we can't sell our products, nobody is going to benefit at all.
Therefore, one of the main reasons, obviously, for the privatization of Canadian National - and I think my colleague Mr. Nault did a fine job on the task force - was to distinguish the public interest, which obviously is the responsibility of the government and not of a railroad...and let's get back to the basics of moving people and goods as efficiently and effectively as we possibly can.
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I wonder, Mr. Tellier, if you can tell me what the benefit to the shipper is going to be. The bottom line is that's what we need. We need to have a competitive transportation system, integrated, which is going to benefit the shipper and in turn support those communities and jobs and drive our exports. What benefits can you see that a privatized CN is going to have for the shippers of this country?
Mr. Tellier: Mr. Fontana, the first benefit is that CN would have access to equity financing as opposed to only debt financing. As Mr. Gouk was saying a few minutes ago, unfortunately, too many times since 1923 the debt level of CN came to a dangerously high level. Therefore it will be possible to have access to the equity market and therefore to finance what has to be financed.
The point you're making, Mr. Fontana, is very important. Let me use coal as an example. There are some members here from British Columbia and Alberta. If a tonne of coal is going to be competitive.... You're aware that roughly 92% of our coal ends up on the Japanese market, for steel making. Well, if the cost of moving a tonne of coal between western Canada and Japan...if the rail transportation costs and the marine transportation costs equal almost, and sometimes more than, 50% of the price of that commodity, competition in the rail structure is extremely important.
So we have to invest. We have to speed up the car cycle and what have you. You need some cash to do this. You have to invest in the property, in the plants, in the facilities, and what have you, and so on.
So CN will have access if we do perform...and I like to believe we will. We'll be able to sell shares. We'll be able to pay dividends. We'll be able to raise more equity on the equity markets. And so on. In the final analysis, the shippers and the country...if shippers are successful, we are successful, and this is good for Canada. So that's the key point.
Mr. Fontana: My colleague also mentioned the regulatory package, along with the minister. We hope that will be coming down the pipe awfully soon, because they are hand in glove, or parallel, not only for CN but also for CP, if we are going to be able to compete with the American railroads.
I must admit the performance sheets you've given on what CN has been able to do has been very impressive. How much of that 6% gap...how much of a competitive advantage do the U.S. railroads have because of the regulatory framework we have in this country? If we fix up our regulatory regime, we hope that is going to make us much more competitive and CN much more viable from the standpoint of an investor who wants to buy shares. A lot of things are interconnected with the regulatory framework we want to introduce, and shortly will.
Mr. Tellier: Jack, maybe you want to try to assess where our operating issue would be if the regulatory reform the minister and the department have been working on had been in place two years ago. It's crystal clear the point you're making is very important.
Without that kind of regulatory reform, privatizing CN would make our task far more difficult. This is a critical element. Our investment bankers have been saying this. In order to succeed in that privatization, first, good labour relations and new labour contracts and stability in our labour relations.... As a result of the back-to-work legislation, we are going to have that stability, because these collective agreements are going to be in place until December 31, 1997.
Second is a strong economy, obviously, because we're very dependent on exports.
Third is the regulatory reform the Minister of Transport is about to table in Parliament.
Jack, if you had to operate within the new American regulatory regime, by how much do you think we could reduce our operating costs?
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Mr. Jack T. McBain (Senior Vice-President, Operations, Canadian National Railway): That's a really tough question to quantify. But certainly, if we had the ability to rationalize the network, one.... Secondly, the other part of the U.S. regulatory environment that is far better than ours is not having the provincial fuel tax. To run a train from Vancouver to Chicago through Canada involves roughly $7,000 in additional fuel tax compared to what our U.S. competitors have to bear. So that element has a very major hit on our operating ratio, plus the ability to rationalize the network.
Mr. Fontana: If you could summarize, because it's important - I think you've mentioned it: what are the key elements going to be in order for this to be a successful share sale when in fact we'll be ready to do it in the fall?
Mr. Tellier: First, we've got to continue to deliver on our business plan. This is what we're going to be judged on. For instance, we've got to complete the downsizing of the labour force. We've got to continue to rationalize the network. This has just started. We still have some progress to make. We've got to put in place the new collective agreements.
I think it was Mr. Nault who said that most of these collective agreements are in place. They are not in place yet for one of the big players; i.e., the Canadian Auto Workers union. They represent 44% of our labour force. The job is not finished in terms of the BMWE, the Brotherhood of Maintenance of Way Employees, and so on. So this is critical. On June 15, when the arbitrator will have completed his decision, we'll know exactly where we stand.
Then you've got the regulatory framework. Hopefully, you and your colleagues in Parliament will adopt that legislation, if not before the summer break, then early in the fall, so that when the IPO, this initial public offering, is done we will be able to point out to the investors what kind of regime CN will be operating under.
[Translation]
Mr. Guimond: My friend from the Reform Party said earlier: ``We should come back to matters relative to the privatization of the CN.'' I was under the impression that my questions were relevant to railways and I would remind him that his party has had a history of complaining about the size of the muffins in the Parliamentary restaurant and the number of Christmas lights around the Hill. For these reasons I consider my questions to be quite relevant.
Mr. Tellier, we have already met and you told me that there were more or less 1,100 miles of lines that were for sale or abandoned in the Quebec network. Has anybody realized that there was a moratorium? Can we safely say that there are going to be other abandonments before privatization is finalized, or has it been frozen? Do we know what is going to be privatized?
Mr. Tellier: Concerning Quebec, it is more or less the status quo. Your figures are accurate. We have approximately 2,600 miles of railway lines in Quebec. The agreement we have signed concerning our lines in Northern Quebec concerns approximately 1,200 miles. Most of the lines in the agreement are local lines owned by CN. This agreement benefits both parties, our employees and the company. I'm not aware of anything else.
[English]
I'm not aware of major line abandonment or anything like this that would take place in Quebec between now and, let's say, mid-fall.
Mr. McBain: No. In fact, the entire plans right across the country amount to only about 400 miles, maximum.
Mr. Guimond: Where?
Mr. McBain: Spread across the country.
[Translation]
Mr. Guimond: I have here a working paper prepared by Transport Canada and dated May 15th concerning some draft regulations. I'm referring you to regulation B entitled: Facilitate Rail Line Sale Abandonment.
In the New Testament, and I'm talking about Transport Canada's proposals, do you believe that the new privatized CN will have an easier time or a harder time abandoning lines than the present CN?
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Mr. Tellier: It will be much easier, not necessarily to abandon lines, but to rationalize the network. The Transport Minister advocates, and we are in full agreement, that we promote local interest lines. This should step up the process in no small way. As far as I know, the proposed abandonment scheme is not completely finalized. The bill is not finalized. If I understand correctly, the new regulatory framework will force us to offer a line for sale before we abandon it. Is anybody, locally or regionally, interested in buying it or ready to use it to some end? If not, it can be abandoned.
But the new policy is to encourage competition and also local or regional railroads. In that way, the legislation should make things easier.
Let me give you an example. In Nova Scotia, once we agreed with RailTex to sell them 225 miles of rail between Sydney and Truro, we still needed a year to finalize the deal. The new legislation that the Transport Minister is working on is going to step up the process considerably.
Mr. Guimond: My last question is not strictly about privatization, but it might save me from saying something that isn't exactly true.
Recently, we received some documentation from a lady called Marie Tellier, who is assistant vice-president. In order to avoid any rumors or hearsay, would you tell us if you are related?
Mr. Tellier: No. Marie Tellier is her married name. She's married to a Mr. Tellier who is, as far as I know, a university professor. I don't know her personally, she was already working for CN before I arrived and we are in no way related. This being said, she's doing excellent work as vice-president.
Mr. Guimond: She has penned an excellent document that we have received recently, and I would like to congratulate her.
Mr. Tellier: Yes, on the subject of equity programs. She is very good.
Mr. Guimond: Exactly.
Mr. Tellier: And she has been working for CN for 10 or 15 years, I think.
Mr. Guimond: Thank you very much.
[English]
The Chairman: Mr. Gouk, please.
Mr. Gouk: Thank you, Mr. Chairman.
I don't at all dispute the Bloc's right to ask questions. It's just that there are a time and place for everything, and this isn't muffin time.
Could you tell me what CP Rail's operating ratio was in 1994? I assume since you know the Big Seven in the United States, you would know your own Canadian competitors.
Mr. Tellier: In 1994 we did better than they did.
Mr. Masse: In the 90% to 92% range, I would say.
Mr. Tellier: I think it is about 92%, but I stand to be corrected here. I don't have the number at my fingertips. Of course, to be fair to CP, I'm sure if they were here at the table they would say they did suffer a strike on the Soo Line in the U.S.
Mr. Gouk: I can understand. I was just curious to see where you have placed them on this particular scale. I find it interesting that you feel you're doing better than they are with your current level of debt.
Mr. Tellier: If you're asking me whether we are running a better railroad than is CP, I would say yes with no hesitation whatsoever.
Mr. Gouk: It'll be interesting to hear what they have to say, when the time comes.
Mr. Nault: I wouldn't agree with that; I'm a CP man.
Mr. Gouk: I'd like to go to something that's been discussed already, this 15% limitation. Reform, like the Bloc, has some concerns and reservations on it, except ours go in the other direction.
Do you see a need to restrict ownership or purchase of shares to 15%? Is there any reason for that other than that obviously that would prevent a hostile take-over at some future point? Is there any other reason for that restriction, to your mind?
Mr. Tellier: The only other reason that comes to mind is if you believe it is healthy to have a broadly held stock.... That's the reason for doing it. Having 15% means you can always end up with seven or eight shareholders. That's the line of reasoning.
It is not a unique provision. You're aware, for instance, that in the Bank Act it is 10%. You have other sectors of the economy where you have a similar provision in federal legislation. So this is the line of reasoning, making sure that in the end it does not fall to a very small number of investors.
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Mr. Gouk: I understand the concept of it. What I am asking you is, as the head of a rail company, do you see a need for that to be there?
Mr. Tellier: Well, it's a government decision. Our concern was if this would be a constraint in terms of making a success of this equity issue and selling, promoting that stock both in Canada and the U.S, but especially in the U.S. We are being told by our investors that this is a provision that should not have any impact on the transaction, on the dealing on CN stocks in the future, either in the initial public offering or subsequently.
Mr. Gouk: But you yourself don't see a specific need for that to be there?
Mr. Tellier: I'm a strong believer that it is a good thing - I surely agree with the government - to have the stock of CN as broadly held as possible.
If you're asking me whether 15% would produce an entrenched management, I don't think so at all. If it was a very low limit, then I suppose management could believe that they can relax, because there are so many shareholders that they wouldn't feel the pressure through the board or otherwise. But at 15% I don't think any member of our team would feel entrenched, because, for all practical purposes, it would not require a great many shareholders to kick us out if this was justified.
Mr. Gouk: Currently, CN is mandated to provide the full provisions of the official languages policy, but CP isn't. Could you put a rough dollar value on the cost of following that provision?
Mr. Tellier: We could get you the numbers, how much we have. If my memory serves me well, we had something like 22 employees involved in translation and in linguistic services. We have decided recently to outsource this, because we don't see why we should be in that business. There are a lot of competent people who can do this on the outside.
I know that some people have raised concerns about this. Our approach is a very practical one. Today we serve the public. We serve the shippers. We deal with governments in a bilingual fashion. The capability is there. Therefore we think it is good business. Strictly from the business point of view, it's good business.
In law, as you know, we have to provide services in a bilingual format. We have to be able to work in French in certain parts of the country or in a bilingual fashion in other parts. We think it's good business.
For instance, we have just opened a new customer service centre in Winnipeg. One of the factors that came into play was that Winnipeg has a pool of bilingual people and so on. Therefore it's good business.
So we are doing it. Again, being very practical, we don't see any constraint in operating in the two languages. On the contrary, we think it's an advantage.
Mr. Gouk: Could I just clear up a supplemental to this?
The Chairman: Sure.
Mr. Gouk: The question I asked was not what the justification is. If it's a good business decision, that's fine. What I would like to know is the cost of running that particular program.
Mr. Tellier: We'll be glad to provide -
The Chairman: He said off the top that he'll try to get those numbers for you -
Mr. Gouk: Okay, that's fine. I accept that. Thank you.
The Chairman: - if I heard it correctly.
Mr. Tellier: Yes.
Mrs. Cowling (Dauphin - Swan River): My question relates to the volumes of growth within CN and the fact that you are very dependent on exports.
As someone who is from western Canada and has a large constituency of producers who produce very high volumes of grain, I am wondering what percentage of grain moves through the system. Also, what impact might privatization have on grain transportation?
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My other question is how, in your opinion, should car allocation be dealt with? You've dealt with that issue before.
Mr. Tellier: On the first question, last year it was a bumper crop, and because there was a fair amount of grain in the elevators, grain was extremely good for Canadian National. We had in excess of $700 million of revenue from grain, so it was a very good year. So far this year it is proving to be another very good year. Grain is very critical to us. In terms of the proportion, as you know, the allocation of where that grain for export goes is done by the Canadian Wheat Board. Roughly, the Wheat Board is treating the two main railroads in an equitable fashion. So if I'm not mistaken, last year we moved about 52% of the grain through the Canadian Wheat Board, which was slightly higher than CP. As you're aware, we're the only railroad with access to all the ports. We have access to Prince Rupert; CP is not there, so it's our lines going to Prince Rupert. We have boat access to Vancouver, and we do a lot of business in Thunder Bay. We have the only access to Churchill, and we ship east. Therefore, it's slightly larger and so on.
To your second question, on the impact of privatization, I would answer none whatsoever. I think the movement of grain is going to be impacted by the review of the Western Grain Transportation Act, by what was announced in the last budget, and, secondly, by the National Transportation Act reform, but not by the privatization bill.
Thank you very much for raising the issue of car allocation. As you know, we would like to do the car allocation because we think it's very difficult to match the supply and demand when you don't control all the various parts of the puzzle. This is a complex issue and my understanding is that the government has decided that car allocation, and who should own the car fleet, is something that should be resolved in the next phase, whereas at this point in time, August 1, it's the elimination of the subsidy and so on.
This is the second round of issues, but I cannot resist using this opportunity to tell you that the sooner the two railroads get car allocation, the better it will be, because I think we could provide a better service, and sometimes we could reduce the car cycle and we could be far more efficient.
Mrs. Cowling: Thank you.
The Chairman: Thank you, Marlene.
Do you want to pick up there, Anna?
Mrs. Terrana (Vancouver East): You said they want to pick up on the WGTA. That's what I was concerned about. You talked about having a certain number of needs in order to be profitable, and you are also anticipating that if you stayed you would be profitable in the next few years. You gave some elements like a strong economy and stability in the labour force. What about the WGTA? You brought it up and that's exactly what I wanted to ask.
I have a lot of concerns, and I've heard it across the country, that because the railways are not getting the subsidy any more - and there was a big subsidy for grain - the business might go south. How would that impact on the profitability of a railway like CN?
Mr. Tellier: We think once all these changes are implemented it could have a negative impact. Strictly the elimination of the subsidy and the possibility of alternative means of transportation being used could have an impact of about $50 million in terms of our revenues.
At the same time we are hopeful, and we believe that as a result of the deregulation of the transportation of that commodity there will be a fair amount of rationalization of the grain elevators and as a result a movement towards high output elevators.
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As a result, we could be compensated, or the losses of revenues we would face as a result of deregulation could be compensated, otherwise; compensated in the sense that we could be able to run a more effective business and compensate for some of these losses.
This is why we have been very supportive and we see eye to eye with CP on this. We have been very supportive of the reform of the WGTA and we think the move to market forces is the right way to go.
Mrs. Terrana: So that was part of your business plan. It has been taken into consideration.
Mr. Tellier: Very much so.
Mrs. Terrana: Also, congratulations for concluding some contracts with labour. I know there was a lot of concern. Are these contracts satisfactory, in what has been concluded and what has been finalized?
Mr. Tellier: I'm very pleased with what we have succeeded in doing with the running trades; very pleased. I think it's a win-win situation and we've made a lot of progress. It was long in the making. We negotiated for eighteen months. These collective agreements expired, as you know, on December 31, 1993, and we started negotiations three months before their expiration.
We think it's very well balanced, and I'm very glad we were able to negotiate that, as opposed to having to live with an arbitration decision. To the best of my knowledge, there are good feelings also among the union leadership. I think at long last we're able to come to grips with that.
Mrs. Terrana: Must be.
Mr. Tellier: At the same time, there is some disappointment...and I think it is on both sides. I ran into Buzz Hargrove the other day and I expressed to him my disappointment that we did not succeed in this case, the case of his union, and he felt the same. But I trust the arbitrator is going to come out with a decision that makes sense for both parties.
Mrs. Terrana: Good luck to you all.
The Chairman: You wanted a supplementary, Mr. Nault.
Mr. Nault: Yes, I have one question about the American railroad you own, the Grand Trunk. Is any real estate going to be siphoned off that particular railroad when the decision is made? Are non-rail assets included with that portion of CN's business?
Mr. Tellier: No, it's basically rail assets. Real estate dimensions that are not directly involved in the operation of the railroad are almost non-existent. It's basically rail.
Mr. Nault: The other question...a lot of people of course may not have thought about this, but because I have so much rail of my own through my riding, one of the issues we've being trying to deal with in Sioux Lookout is the sale of some of that real estate to people who have been leasing those properties for a number of years. What effect do you think this will have on those ongoing negotiations? Is property like that going to be transferred to the government and then it will be up to the government to deal with that? Or will that kind of property, which, it could be suggested, is still part of the rail assets...? I'm concerned a lot of those people are going to be left out of the whole equation for a number of months until we get this all sorted out.
Mr. Tellier: The land that is directly related to the operating of the railroad will not be transferred. Therefore if you're talking of lands falling into that category, it should not affect the outcome of these discussions at all.
Mr. Nault: Another example is that some land down in the Rainy River district goes through a community that used to be...when there was a yard there years ago, it was part of the yard. Now, of course, we have no yards there any more, because when we went from steam to...you had all these yards kicking around, because you had to switch over a shorter distance. Now, with diesel, you don't do that.
Are those particular pieces of property going to be transferred to the government? Of course they're not, to my mind, at least, a rail asset any longer, because they're part of old yards that have been sitting there and that should probably be sold to the municipalities they go through.
Mr. Tellier: The general rule of thumb we've used is to retain those properties that have had in the past or could have in the future some industrial development possibilities; in other words, some ability to provide real estate to potential customers. The rest of the real estate would form the package that would then be made available to the government.
The Chairman: In closing, gentlemen...I suppose, then, if for my constituents and myself I would put it in a nutshell, privatization is not necessarily the panacea. It's going to take regulatory reform and the labour concessions, in combination with your efforts, to see better revenue projections that I assume you see flat-lined between now and the next five years.
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Mr. Tellier: No, as a matter of fact, we see some growth in our revenues and a continuing decline in our expenditures.
The Chairman: Have you been doing any guestimates? That's a hell of a question, because you don't really know what the regulations are going to look like or what the labour concessions are going to give you just yet. But have you been doing any guesswork on this?
Mr. Tellier: On the regulatory reform, no, we have not done any evaluation or forecasts on this. In terms of the new labour agreements and labour contracts, yes, and basically it is an improvement over our current business plan. As you know, we have to table a five-year business plan with Parliament, and it is an improvement over our business plan.
You used the word concession, Mr. Chairman. Because we are trying to build a new partnership with unions, I prefer to talk about more flexibility in these collective agreements. Very often it's not a concession; it's a question of changing the way we work together.
For instance, the running trades agreed they were not going to stop trains so they could eat their second meal, if by doing so it would delay a freight train. This is not a concession; it's good common sense, and it's more flexibility on the part of union leadership. This is why I strongly believe it's a win-win situation.
The Chairman: Certainly, that example is not a concession.
Mr. Tellier: Yes.
The Chairman: In closing, on behalf of the member for Durham, will a new privatized, safe, cost-effective, efficient, competitive Canadian National retain its name?
Mr. Tellier: Oh, yes. As a matter of fact, Mr. Chairman, I'm sure members of Parliament would be pleased to note that we're trying to clean this up. We're using too many names now: CN North America and Canadian National; we're using Grand Trunk, which is an historical name, and what have you.
We are going to use two letters, CN, and two words, Canadian National, and retain that in promoting that stock, both in Canada and in the U.S. To underline the word ``Canadian'' is a very strong asset.
The Chairman: Terrific. Mr. Tellier, thank you for your comments and your submission, and for answering our questions.
Mr. Masse and Mr. McBain, thank you very much for joining us today.
Mr. Tellier: Thank you very much.
The Chairman: Colleagues, we reconvene after our break, which our illustrious colleagues in the opposition don't want to work through. So we'll have to come back -
Mr. Gouk: A point of order, Mr. Chairman. If you're going to say that on record, I would point out that it's not a break; it's the period where members of Parliament are expected to work in their constituency -
The Chairman: It's a House break.
Mr. Gouk: - after four weeks' work in Parliament.
The Chairman: It's a House break, Mr. Gouk.
Mr. Gouk: Yes, but it is not a break, per se, and it's not that we chose not to be here. It's a time to do constituency work.
The Chairman: But the choice can be made to stay.
Mr. Gouk: Yes, it can be, but the point was given. I made it plainly.
Mr. Guimond: He made it plainly. I make the same -
The Chairman: All I said was, it's a House break, and it's been asked if you would like to work and you're not available. So we have to wait until after the break.
Mr. Gouk: Your clarification is much clearer than your original preamble.
The Chairman: Thank you.
The meeting is adjourned.