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Chapter 11

Ferries, Intercity Buses and Passenger Trains

In its submission, a group of four bus industry associations called on the Panel "to consider whether the government has formulated an all-inclusive, well-defined vision and strategy for [passenger] transportation in Canada." More than a decade ago, the government of the day acknowledged the absence of a coherent national passenger policy in appointing the Royal Commission on National Passenger Transportation. Many of the Commission's recommendations have been implemented, and the federal government continues to support the passenger system in various ways, but a national passenger policy has not been enunciated.

This chapter reviews the status and subsidization of ferries, intercity buses and intercity passenger trains. The federal government provides (or until recently provided) financial support for passenger travel and infrastructure under a variety of circumstances. Support includes the provision and subsidy of railway passenger and ferry services, airports and a few federal roads and bridges. Provincial and municipal passenger subsidies go to intercity rail, some ferries and airports, a few intercity and rural bus services, and urban transit. To the extent that attributable revenue might not cover the cost of roads used by automobiles — and this is particularly the case for remote areas and less used roads — that infrastructure and mode are also subsidized.

The Canadian passenger sector has matured substantially, and federal subsidies of passenger travel are a small fraction of the level that prevailed a decade ago. The deficit on passenger services provided by VIA Rail has been halved to $170 million annually, the number of federally subsidized ferry services has been drastically reduced, and airport divestiture has been the rule. For the most part, subsidy is now restricted to ensuring accessibility for uniquely remote communities.

The Panel is impressed by the improved efficiency and cost recovery orientation of the services the government has continued to operate, and by the extent to which costly and dated operations have been replaced by more effective and economical modes and institutional arrangements.

The Panel recognizes that funds available to subsidize passenger travel are limited and that requirements for and relative benefits from government support have been shifting. For example, while a more mature aviation sector should now be better able to support itself and thus require less subsidy, other low-density passenger services require subsidy. The Panel therefore believes a mechanism is needed for disciplined periodic review of the cost of and the social and economic benefits from existing passenger subsidies and other candidates for subsidy.

There is also the question of an appropriate institutional mechanism or mechanisms to implement the review and reallocation processes. The Panel suggests that some subsidized passenger services could be devolved from the federal government, with a negotiated initial transfer of funds and subsequent funding from the roads and transport funding agencies proposed in Chapter 10. Decisions about the mode to be used, service levels and even carrier selection would likely achieve better results if local and regional interests participated more directly than is now the case.

Ferry Services

Trends and Current Status

There are more than 200 ferry routes in Canadian waters, including domestic and international services. Major Canadian ferry operators carried approximately 39.2 million passengers and 15.3 million vehicles in 1999, only marginally higher than in 1989. On a regional basis, ferry traffic is higher in the West, mainly because of the presence of Canada's largest ferry operator, BC Ferries, which transported 54% of the country's passenger traffic and 51% of vehicle traffic.

Industry Structure

The federal government, largely through the medium of Marine Atlantic, had long supported ferry services in Atlantic Canada. During the late 1990s, however, change was dramatic:

West coast ferry services, delivered by BC Ferries, are subsidized in part by the federal government in the form of an annual grant to the province of British Columbia (currently $22 million).

Since 1997, the government has been able to reduce subsidies substantially while maintaining service to travellers — and in some cases even improving it. Some operators of now commercialized ferry services have been able to deliver them at a lower (subsidy) cost to the government and have increased ridership and reported some profit.

Most of the remaining subsidies are to the services between Newfoundland and Nova Scotia, for which — at least for the main year-round route — there is a constitutional obligation.1 Nevertheless, it seems likely there are opportunities to inject further entrepreneurship and innovation into these services as well (through tendering, for example, including consideration of alternative routings). The Panel suggests such possibilities should be explored.

Recommendation 11.1
The Panel endorses initiatives to reduce subsidies to ferry services and recommends that commercialization and divestiture of responsibility for local service decisions to other levels of government continue.

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Intercity Bus Services

A carrier whose operations extend beyond the bounds of a single province or territory is considered an extra-provincial bus undertaking and falls under federal jurisdiction; however, the provinces have been delegated authority to regulate these operators under the Motor Vehicle Transport Act, 1987. The extra-provincial (i.e., intercity) bus industry is subject to varying degrees of economic regulation, depending on the province or territory.

Resolving the regulatory fragmentation characterizing the inter-city bus industry is hampered by the divergence of views among jurisdictions and industry on appropriate public policies. In April 2001 the Minister of Transport referred a set of questions about the intercity bus industry and its regulation to the Standing Senate Committee on Transport and Communications. The Panel did not want to duplicate the Committee's work, but ignoring the bus mode would have left a conspicuous hole in the consistent approach to transport policy the Panel recommends. Bus industry representatives made submissions and appeared before the Panel, urging members to recognize the importance of the bus mode and to consider the modal and intermodal issues affecting the future of the industry.

Regulating the Intercity Bus Industry

The key questions posed by the Minister of Transport to the Senate Committee on Transport and Communications in April 2001 included:
  • Is economic regulation of the industry still appropriate? Should some or all of the industry be deregulated now, or at some point in the foreseeable future?
  • Are the differences between the provincial bus regimes that have developed over the last decade detrimental to the industry and/or the travelling public? If they are, what is the appropriate remedy? Which level of government should implement it?
  • Is the traditional scheduled bus industry the appropriate tool for providing public mode rural and small community service? What alternatives are available? Which public policy would best support rural and small community service?
  • What are the prospects for reversing the long-term decline in scheduled bus ridership?
  • What has been the impact of the industry consolidation over the last decade? Is this apparently continuing consolidation of the industry an issue requiring government attention?
  • What is the role of the bus industry in Canada's overall strategy for dealing with environmental issues relating to transportation?
  • Is there a need for changes to national motor carrier safety standards to reflect bus industry safety needs?

Policy Issues

A federal policy initiative to create a harmonious national regulatory regime for intercity bus would almost certainly gravitate to a choice between

The Panel decided not to offer a recommendation about whether the Motor Vehicle Transport Act, 1987 should be amended to remove or ease regulatory constraints on intercity bus market entry. This is effectively the central question the Minister asked the Senate Committee to examine, and the Panel will not pre-empt its answer. Should the government decide to take this step, however, the Panel offers some observations relevant to the debate.

In their submissions, the intercity bus industry and the provinces expressed various concerns about deregulating intercity bus. Should deregulation proceed, the Panel's recommendations with respect to other modes, and for roads and passenger transportation generally, would resolve or alleviate these concerns:

The regulatory fragmentation facing the bus industry is clear cause for concern.

Recommendation 11.2
The Panel recommends that the Minister of Transport continue the process already initiated to address regulatory fragmentation in the bus industry.

At the same time, the Panel believes that safety must not be compromised.

Recommendation 11.3
The Panel recommends that the National Safety Code be structured such that all vehicles carrying paying passengers are subject to a consistent pattern of safety regulation that takes into account the scale of the operation and risk exposure but does not rest entirely on vehicle size.

Finally, the Panel notes that all this can be achieved without changing the delegation of regulatory powers to the provinces.

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Intercity Passenger Rail Services

Intercity passenger rail is in long-term decline. Globally, few rail services remain truly profitable, and the proceeds from them are often used to cross-subsidize others that are not. Many of the world's rail passenger services have been discontinued. In some cases their continuation can be attributed to inertia, but in other instances passenger rail has been retained, or new or improved rail services instituted, by deliberate decision.

The development of high-speed rail is an impressive technological achievement. In Europe and Japan high-speed ventures have been considered successful even where revenues cannot provide an economic return on their capital cost. At least implicitly, the value of consequent reductions in air and road congestion and other external environmental and social benefits is deemed to exceed the financial (subsidy) cost.

Most of Canada's intercity rail services are provided by the federal government through VIA Rail Canada. Other substantial public and private sector passenger services are offered by four Class II carriers — BC Rail, Ontario Northland, Algoma Central, and the Quebec North Shore and Labrador Railway (the latter three still receiving federal payments to cover their costs). A different style of service is provided on a fully commercial basis by Rocky Mountaineer Railtours Ltd.

In 1999, rail passenger traffic amounted to just over 4.1 million passenger-trips. VIA Rail carried almost 92% of these passengers; the Class II carriers transported the rest.2 In 2000, VIA carried 3.95 million passengers, generating revenue of more than $240 million — an increase of 9% over 1999.3 VIA's 72 locomotives and 309 passenger cars operate 462 trains a week.

Intercity rail use has declined substantially from the middle of the last century, with increasing car ownership and the development of aviation. Funding cuts to VIA Rail in 1990 are responsible for the large drop in passenger-kilometres; since these reductions ridership has risen slowly. Figure 11.1 demonstrates this overall general decline between 1954 and 1999.

Over the period 1990-2000, VIA increased revenues by 69% and ridership by 20% and improved its revenue/operating expense ratio more than twofold. Over the same period, government operating funding (excluding capital) was reduced from $410 million to $170 million, a decline of 59%.4

Fig 11-1

VIA uses a yield management system to allocate available seat inventory to various fare plans in a way that maximizes revenue. Using this strategy between 1990 and 2000, VIA reports a yield growth of 36%. Over the same period, total passenger revenues increased by 63%, while passenger miles increased by 20%.

VIA Rail's management has recommended legislation to improve its governance arrangements and more clearly articulate the government's passenger rail objectives. The Panel understands that giving VIA's management a longer-term commitment would allow the organization to plan more effectively and believes that such legislation should proceed as soon as the preliminary steps, outlined below, have been taken.

Under the Panel's proposal, each of the services now provided by VIA, and new services that might be assigned to it, would be evaluated along with other possible uses for the funds. Further, where feasible, service delivery should be awarded through a tender process that entertains bids involving any mode that could meet specified service parameters. (This might or might not incidentally limit proposals effectively to the rail mode.)

Canada's passenger rail services represent a thin shadow of the network that prevailed into the 1950s. Although rail used to be the choice of the cost-conscious longer-distance traveller, it has been unable to match transcontinental air fares for two decades. Now, VIA has great difficulty trying to match air fares on its moderate-distance service between central Canada and the Maritimes. This is a market that rail is bound to lose.

With air's greater speed and lower labour cost per passenger-kilometre, it is difficult to envisage this trend being reversed. For example, the Montreal-Halifax service might be successfully recast as a tourist experience or as local services competing with bus for travellers within the Maritimes and within Quebec, but it is unlikely that it will again become a force in the Montreal-Maritimes intercity market. Similar conclusions could be drawn for the western transcontinental service.

Rationale for VIA Rail Subsidies

The question of why intercity passenger rail that competes with commercial alternatives (air and bus) should be subsidized has not been addressed explicitly in government documentation of VIA funding decisions. Among the arguments advanced to support continued subsidy are environmental benefits relative to alternative modes, infrastructure cost subsidies received by private vehicles and intercity buses, and service to travellers with lower incomes. Available evidence does not support such claims.

The Royal Commission on National Passenger Transportation (set up mainly to resolve the future of passenger rail) concluded in 1992 that rail's system-wide cost per passenger-kilometre is three times that for private cars and more than four times the total social cost of intercity bus — even when estimates of the social cost of accidents and environmental damage, along with infrastructure costs, are included. Even for Montreal-Toronto, the rail cost was more than 50% greater than the car cost and more than triple the bus cost. While the exact valuations of social costs are open to debate, the conclusion is inescapable: subsidies cannot be justified by social cost differences among modes.

The Transportation Table of the National Climate Change Strategy Development process reported that intercity rail, system-wide, uses slightly more fuel and produces slightly more greenhouse gases per passenger-kilometre than intercity car and nearly five times as much as intercity bus.5 The estimate for intercity car was 110 grams/passenger-kilometre, based on assumptions and modelling conducted for the Table.6 For intercity bus, the estimate was 26 grams/passenger-kilometre. For intercity rail the report quoted an average of 123 grams/passenger-kilometre, based on published statistics for passenger train fuel use and passenger-kilometres in 1997.7 Recent Transport Canada data suggest that the system-wide average was actually about 130 grams in 1997, and they allow an estimate for VIA's corridor services alone of about 118 grams per passenger-kilometre, still surprisingly worse than the intercity car estimate.8 These comparisons reflect VIA's equipment and its average load factors, compared to much improved passenger car technology. Assuming about 70% of the average corridor car's seats are filled,9 emissions per seat-kilometre would be about 80 grams. That would still be about triple the average for intercity buses, and it could also be achieved by intercity cars if their average occupancy rose to 3.

The income distribution of rail travellers can be inferred from Statistics Canada's household spending estimates: 40% of rail revenues are from households in the highest income quintile and just 7% from households in the lowest quintile.10 Those in the highest quintile actually spend a larger proportion of their income on passenger rail than those in the lowest quintile. Rail subsidies are therefore received disproportionately by higher-income households.

In support of subsidizing passenger rail, it should be noted that some services provide accessibility to persons and communities without practical travel alternatives. Also, because of the physical characteristics of rail vehicles, it is practical for rail to accommodate travellers with special needs more suitably and comfortably than aircraft or buses.

A Future for VIA Rail Services

Although some VIA trains serve more than one purpose, a forward looking analysis of Canadian railway passenger services might divide them into three categories:

Services with Tourism Potential
VIA created the Rocky Mountaineer tourist service in 1988. It was privatized following a financially successful year in 1989 and now shares the Alberta-British Columbia tourist market with VIA's intercity service. Rocky Mountaineer is a tourism product that goes far beyond a train ride through the mountains. Nonetheless, the presence of the public sector carrier in this market has given rise to assertions by Rocky Mountaineer Railtours that most of VIA's traffic base for its Edmonton-West Coast service, especially during peak summer months, consists of tourists, and that VIA has enjoyed access to CN and CPR lines at rates that are not fully compensatory.

If VIA were operating strictly a tourist service, it would be easy for the Panel to accept Rocky Mountaineer's assertion of unfair competition without qualification; however, VIA must move at least some local passengers. At the same time, it would not be surprising to find that VIA's Edmonton-Vancouver service had moved substantially toward becoming a tourist product. In this case its subsidy should be called into question.

Recommendation 11.4
The Panel recommends that VIA's current services be reviewed to ascertain the extent to which they have become tourism products; if they have, they should be designated as such.

A review would collect and consider data on travellers other than tourists and assess modal alternatives available to those passengers. Routes designated as essentially tourist routes should be commercialized (sold off, tendered to the private sector, or operated as a discrete business without subsidy) on the Rocky Mountaineer model. VIA, of course, should be able to compete on an equitable basis to provide such services. Tourist route designations would almost certainly include Edmonton-Vancouver and Victoria-Courtenay. Other candidates include all or part of Jasper-Prince Rupert. Montreal-Halifax and the Gaspé service might well be recast successfully as tourism-focused operations with changes in scheduling, equipment modifications and ancillary tourism services.

New rail tourism services should not be precluded. Toronto-Sudbury-Thunder Bay-Winnipeg, or part of it, could offer tourism prospects second only to Rocky Mountaineer operations. The scenery along the CPR line north of Lake Superior is spectacular, rivalling the Rockies. VIA does not run there now; it operates over the CN route to the north, where transcontinental service is combined with access to local remote communities.

Quebec City-Windsor Corridor
Some 85% of VIA Rail's passengers travel on the southern Ontario and Quebec network known as the Quebec City-Windsor corridor. Here, VIA competes essentially with air for longer-distance traffic between the larger cities and with bus to attract moderate- and shorter-distance travellers. Market shares among the public carriers (i.e., excluding private vehicles, the most commonly used mode), as provided by VIA in its submission, are as follows:

Fig 11-SB2

The bus industry in particular expressed concern that subsidized passenger rail, especially in the corridor, constitutes unfair competition.

In its submission, VIA told the Panel that $176 million of the $402 million in new capital monies from the government will be invested in growth (expansion of service). Investments will include upgrading infrastructure and acquiring new rolling stock to permit additional train services. In the Quebec-Windsor corridor, VIA's plan calls for hourly or close to hourly service in major markets, faster trains and more express trains. Increases in the number of daily trains will range from 25% (Windsor-Toronto and Montreal-Quebec City) to 60% (Ottawa-Toronto). Clearly rail will emerge as a stronger competitor in the corridor, and at least the shorter-term effect of this on the private sector bus industry is disturbing. Yet, this may be a practical necessity if the rail operation is ever to rise beyond its current uneconomic status.

In terms of cost recovery, VIA anticipates that these investments will result in a 25% increase in the number of trains, a seat capacity increase of 40%, and a ridership increase (passenger miles) of 38% by 2006. In the same period, VIA projects revenue growth of 70% — 22% from basic market growth and 40% as a result of new train services and growth initiatives.

The Panel is concerned that, unless the rail bed, rolling stock and operating practices are improved to permit higher speed of operation in the corridor, the services will remain uneconomic. We urge the government and VIA seriously to review any future proposed investments in the light of the following recommendation.

Recommendation 11.5
The Panel recommends a full cost recovery policy for Quebec City-Windsor corridor rail and its commercialization.

As a first step, corridor operations as a whole should be separated organizationally from VIA's other services. Management should be directed to pursue commercialization and to report cost recovery progress for each of the corridor services on a fully allocated basis. Management should be given full authority to terminate services that prove unsuccessful.

The corridor operation will succeed only with continued focused management. Other possibilities include divestiture of uneconomic services, leaving a smaller corridor operation. Should it not prove possible to maintain the full existing corridor network as a viable commercial system, however, a successful and profitable though smaller corridor carrier would still be an outcome the government could view with pride.

Recommendation 11.6
The Panel recommends that, after Quebec City-Windsor corridor services have been separated from the other routes that VIA Rail now operates, legislation be enacted to give the entity providing VIA corridor services the commercial freedom required to become and remain self-sufficient.

Services to Remote Communities
VIA Rail operates a number of services that have been retained because they provide access for communities that lack practical alternatives. In other instances, such as the transcontinental trains west of Capreol (near Sudbury), remote community service is provided essentially as a by-product. The general criterion used to define 'remote' is lack of an all-weather public road connection to the continental highway system. The companion criterion is, of course, the presence of a rail line with historical passenger service. In many instances the communities concerned are very small. The only substantial centre involved is Churchill (population 800 in winter, 1200 in summer). In some cases (such as Churchill) communities have effective scheduled air service. Some are accessible only by helicopter and float/ski plane.

There is no formal definition of what constitutes adequate accessibility for remote communities, but governments have established a pattern of giving communities access to medical, educational and other services on a less than cost recovery basis as necessary. Some continued subsidy of rail service to remote communities is essential. The pertinent questions are what level of subsidy is reasonable and whether there are more economical means of providing adequate accessibility.

VIA Rail's service-specific cost and revenue data are considered confidential. Using 1990 data, however, the Royal Commission on National Passenger Transportation reported subsidies ranging from $0.78 to $11 per passenger-kilometre, with an average of $1.44.11 Operating cost recovery ranged from 2% to 10%, with an average of 7%. The remote service for which the Royal Commission reported $11 per passenger-kilometre has since been terminated. This would change the subsidy range $0.78 to $3.45, with the latter figure representing Sudbury-White River. Cost recovery may have improved since 1990, but the subsidies no doubt remain substantial.

The Panel did not investigate the specific circumstances of VIA's remote services in sufficient depth to render an opinion on whether further service cuts should be considered. One observation is possible, however. Transportation has developed a great deal since subsidized remote rail services were established. Air travel is relatively more available and affordable. A large number of roads have been built, including logging roads that could provide access to some communities presumed to depend on rail.

Recommendation 11.7
The Panel recommends that each rail service now subsidized to provide access to remote communities be reviewed to determine
  • the present level of remoteness;
  • whether a federal contribution toward development of road access (by the province in question) might constitute a more effective and efficient solution to the access issue;
  • whether an air, bus or other service, provided by the private sector, might prove superior to rail; and
  • whether the private sector could provide an adequate rail service more economically under contract than is possible for VIA Rail.

Clearly the relevant provincial governments should have major input in these decisions, as should the other parties concerned. The Panel believes there is an opportunity for more rational comparison of subsidies for remote services with alternatives to those services — and more general comparisons with provincial priorities for transport spending — if responsibility for and funding of remote services were passed to the provinces. The Panel's proposals in Chapter 10 included the potential to transfer this responsibility to the recommended provincial/territorial roads and transport funding agencies.

The Panel believes these innovations in passenger rail service could be implemented independently of our recommendations in other modes. However, with the proposed provincial/territorial roads and transport funding agencies, a more integrated solution to passenger rail services would be possible. This might include devolution of intraprovincial services to the relevant provinces. Subsequent decisions on the future of the services and of modal alternatives would then be the responsibility of the province concerned.

The Panel also suggests that continued subsidies to VIA's commuter services, or even long-distance corridor services, could be justified now — and possibly to a greater extent in future — by their ability to reduce or avoid congestion costs associated with private vehicle use. As alternatives to providing road capacity, proposals for such support should also be eligible to compete for funds administered by the proposed funding and management agencies.

Recommendation 11.8
The Panel recommends that the policy of commercializing passenger services, including divestiture to the private sector and other levels of government, continue. Further, where federal subsidy of passenger travel is deemed desirable, federal financial support should be reassessed periodically and carrier- and mode-neutral mechanisms to allocate the subsidies in a manner that least distorts the commercial market should be used.

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Notes

1 It has also been suggested that the obligation might eventually be superseded by provision of a fixed link between Newfoundland and the mainland, across the Strait of Belle Isle, when warranted by traffic volumes.

2 Transport Canada Annual Report, 2000, p. 155.

3 VIA Rail, "VIA's Pricing Strategies", submission to CTAR, April 2001, p. 1.

4 VIA Rail, submission, p. 6.

5 Transportation Climate Change Table: Transportation and Climate Change: Options for Action, Transport Canada, November 1999, Table 2.6.

6 The modelling accounted for both passenger cars and light trucks, at plausible fuel consumption rates and occupancies: Some 69% of intercity use was estimated to be by car, using 8.4 litres/100 km, with an occupancy of 2.1 persons/vehicle, with the remaining 31% by light truck, at 11.6 litres/100 km and 2.2 persons/vehicle.

7 Statistics Canada, cat. no. 52-216, 1997.

8 Fuel and passenger-kilometre figures from Transport Canada, Economic Analysis Directorate, April 2001. Figures for 2000 show essentially the same system-wide and corridor fuel use and emissions per pass-km.

9 VIA's load factor for the corridor is not published, but a system average of 59% is reported in VIA Rail Canada, 1999 Annual Report.

10 Statistics Canada, "Detailed Average Household Expenditure by Household Income Quintile", in Survey of Household Spending, 1997, 1998, 1999, 2000. The average for 1996-1999 is cited.

11 Volume 1, p. 268, Table 12-5.

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