Monday, July 05, 2004

CN the winner in BC Rail deal

VICTORIA - More questions about the BC Rail deal, as new information emerges just as the federal Competition Bureau approves the sale.
The government has always acknowledged that it might have to give back about $255 million of the $1-billion purchase price to CN Rail. Now it has revealed that the potential refunds come to $629 million, while adding confidently that it doesn't expect to have to hand any money back.
CN isn't just paying isn't for the railway. The company is also buying past tax losses, which it hopes to use to reduce its own tax bill.
But Revenue Canada gets the last word on whether thats legit. So CN negotiated a provision that will force the province to refund the money if the taxman says no.
That's all the government ever mentioned in terms of strings attached to the deal, until now.
But the just released final report on last year's finances bumped that potential refund on tax issues up to $367 million (plus interest). And the documents disclosed for the first time that CN negotiated clauses that could see the province return another $262 million.
That's $629 million in indemnities, as the accountants call them, that could be knocked off the $1-billion sale price.
Routine, the government says, and that's broadly true. Most major transactions provide for adjustments, or dispute resolution. CN may decide that some of the rail cars included in the sale are junk, for example, and want some money back. The government's willingness to offer refund protection may reflect its confidence that the assets being sold are as described.
But CN certainly negotiated well. Any buyer emerging from a deal with more than 60 per cent of its payment subject to refund has done a great job.
And the government has - again - cast a cloud over the deal by keeping the numbers from the public until now.
The newly revealed $262-million indemnity shouldn't be a huge worry. It's almost certain that CN will attempt to negotiate some sort of refund, but it's is hard to see what real surprises could lurk within the sales agreement.
But the jump in the potential refund over tax issues, from $255 million to $367 million, is important.
That means that CN is getting the business and all its assets for $633 million, not the $750 million the government claimed.
And that makes it look a very good deal for CN. BC Rail made a $66-million profit last year and is being sold without any debt. CN can make a 10-per-cent return on its investment without batting an eye. Once it begins cutting staff - about 400 jobs are expected to go - and working to increase traffic, the return soars.
This has been a bungled sale by the Liberals.
First, Gordon Campbell promised not to sell BC Rail. His claim that because the tracks and the ground under them weren't part of the deal the promise hasn't been broken is ludicrous. CN owns the business and the equipment. It's sold. Read the financial press, which talks only of the "deal to buy BC Rail."
Then the government's unnecessary attempt to impose secrecy have meant details of the deal have trickled out, each more damaging because of the way they emerged.
The odd thing is that the sale - though maybe not the price - is entirely defensible.
There arlots of good reasons government shouldn't be in the railway business.
And CN appears to have a genuine enthusiasm for the new business opportunities. CEO Hunter Harrison wasn't just being polite when he talked about the potential of rail service from B.C.'s northwest to Chicago. China's economy is growing rapidly; shipping to Prince Rupert saves a day; and CN believes that creates a great opportunity.
The details of the deal are supposed to be released once the papers are signed later this month. The questions are going to be around for a lot longer.
Footnote: One advantage of selling BC Rail is removing temptation from governments. Trasportation Minister Kevin Falcon makes much of BC Rail's past losses; but they were overwhelmingly produced by Socred governments that considered the railway an economic development tool.

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