BC Business
In March 2011, BC Ferries won preliminary approval to again raise fares. Is the invisible hand of the marketplace giving British Columbians the finger?
Fifty years after its creation, ?has BC Ferries lost its way? In keeping with its mission to get people onboard, British Columbia Ferry Services Inc. has a come-hither slogan: “Experience the difference.” There’s no doubt the organization popularly known as BC Ferries isn’t what it used to be, but whether or not that’s a good thing is up for debate. ?
In keeping with its mission to get people onboard, British Columbia Ferry Services Inc. has a come-hither slogan: “Experience the difference.” There’s no doubt the organization popularly known as BC Ferries isn’t what it used to be, but whether or not that’s a good thing is up for debate.
Under president and CEO David Hahn – who took over BC Ferries in 2003 with a mandate to run it at arm’s length from government – there have been outrages aplenty. With help from fuel surcharges, fares have increased anywhere from 60 per cent to more than 120 per cent, depending on the route. In 2004, unionized workers fumed over the decision to have three ships built in Germany; two years later, the Queen of the North sank, killing two passengers and raising broader safety questions about the BC Ferries fleet. And the optics of Hahn’s pay package, which has doubled to $1 million since 2004, certainly haven’t helped.
Then there are concerns about the accountability and transparency of the corporation, a publicly supported monopoly that got a seven-year exemption from provincial freedom-of-information laws. Last year, on the recommendation of the comptroller general, the province brought BC Ferries back under FOI legislation. Victoria also introduced salary caps, but only for future executives and directors.
But Hahn wasn’t done grabbing headlines: A few months ago, he warned that more big fare hikes may be necessary. In late March, BC Ferries won preliminary approval from its independent regulator to raise rates again. Between 2012 and 2016, the price of a ferry ride could climb almost 18 per cent on the three Lower Mainland-Vancouver Island routes and the Horseshoe Bay-Langdale route, and more than 37 per cent on the other 21.
Watching these events, British Columbians could be forgiven for thinking that the invisible hand of the marketplace is giving them the finger. They might also ask what role coastal ferry transportation should play in their lives. Is BC Ferries simply a business, or is it a vital public institution that is part of the province’s connective tissue?
Some observers say the corporation, which turned 50 last June, has changed for the better since the Gordon Campbell government took it semi-private with the Coastal Ferry Act of 2003. The province was right to shift more of the burden of cost increases onto users, they contend. A financial mess under the NDP – don’t forget those fast ferries – BC Ferries now operates like a real company. Today, with a manageable $1.4 billion in debt, BC Ferries has credit ratings of A and A+ from DBRS and Standard and Poor’s, respectively, with net earnings in fiscal 2010 of $3.4 million. The ships run on time, and customers are seemingly happy: an independent survey by Vancouver-based Mustel Group saw customer satisfaction reach a record 91 per cent in 2009, compared to 82 per cent in 2003.
“In terms of the shift, I think that it was a positive move,” says David Gillen, director of the Centre for Transportation Studies at UBC’s Sauder School of Business. “Governments should not be in that particular type of business.” Gillen says his research on airports shows that the BC Ferries model – privatization with a price cap – is probably the best mix of governance and regulation.
Admitting that fares are high, he wonders how much responsibility the provincial government has to link its citizens through ferry access the way it does with roadways in rural B.C. “Are we required to perform that same service for people who are living on, say, the Gulf Islands?” Gillen asks. “That’s debatable, because the cost of that service is really quite remarkable.”
Others strongly disagree. According to the NDP’s deputy critic for Transportation and Infrastructure, Gary Coons, “skyrocketing” fares and falling ridership are stifling economic growth in coastal communities. The MLA for the North Coast, which includes Prince Rupert and Haida Gwaii, calls the new BC Ferries a failed experiment in privatization.
“David Hahn keeps talking about how clean the washrooms are,” Coons says. “But thousands of people in dozens of communities just want a service to get them from Point A to Point B, and something that is affordable and safe and reliable.”
For Coons, though, the real villain isn’t Hahn; it’s an ideologically motivated BC Liberal government. As far as he’s concerned, there’s no long-term vision or strategy for BC Ferries. And to make matters worse, Coons says, no one is looking out for the public interest. “I believe the social and economic contract that we’ve had for 50 years has been severed.” [pagebreak]
BC Ferries began life in 1960 as a state enterprise launched by Social Credit premier W.A.C. Bennett. Today, with 4,500 employees, it describes itself as the world’s largest independently owned ferry company. Covering 27,000 kilometres of coastline, BC Ferries’ 36 vessels sail to 47 destinations on 25 routes. In the 2010 fiscal year, they carried 21 million passengers and 8.3 million vehicles.
Early last decade, the BC Liberal government decided to change the status of BC Ferries, which had been a Crown corporation since 1977. After conducting a review, the province and BC Ferries’ board of directors found that the ferry service leaned too heavily on government to be an effective long-term business. At the same time, they concluded, BC Ferries suffered from political influence.
The province and the board looked at a range of options, from keeping the existing business model to privatizing the whole operation. In 2003, their compromise was to turn BC Ferries into an independent, regulated company governed by the B.C. Ferry Authority, which is also independent. The ferry authority holds the lone voting share in BC Ferries, while the province holds all preferred shares. As it ushered in the new corporate structure, the Ministry of Transportation said that annual fare increases would be “modest and predictable.”
Ostensibly free of government interference, BC Ferries is still beholden to taxpayers. The company operates through a 60-year contract with the province – divided into four-year performance terms – whereby it receives an annual “service fee” to keep unprofitable routes going. Only the three routes between the Lower Mainland and Vancouver Island sustain themselves on fares alone. In the 2010 fiscal year, these so-called major routes yielded 58 per cent of BC Ferries’ revenues, compared to 10 per cent for the northern routes. The other two route groups – Horseshoe Bay-Langdale and the minor routes, which include the Gulf Islands – accounted for 31 per cent of revenues.
Every four years, after considering BC Ferries’ cost of delivering services, the B.C. Ferry Commission – yet another independent body – sets a maximum fare level or price cap for each route group. (Although the ferry commission is not an ombudsperson or public advocate, the government requires it to consider ferry users’ interests in regulating fares and service levels.) By law, the commission must allow BC Ferries – which doesn’t pay income tax – to earn a 12.7 per cent return on equity. Ferry Commissioner Martin Crilly explains that because BC Ferries has to finance its business on the bond market, it needs a balance sheet that bond investors regard as sufficiently healthy.
Hahn would argue that, both fiscally and operationally, BC Ferries is in much better shape than when he started there. “It was very clear in 2003 that the ferry system was very, very screwed up,” says the Buffalo, New York, native. Among the problems he saw: late sailings, frequent breakdowns, dirty ships and terminals, grumpy employees and grumpier customers.
The former COO of New Jersey-based multinational Ogden Aviation Inc. says he enjoyed more freedom than the previous BC Ferries administration to bring about change: “The legislation made it clear that there would be no interference from government, and so we brought in a lot of private-sector thinking.”
Hahn says the changes have produced results: customer satisfaction ratings are high, on-time performance is “outstanding,” and the four vessels BC Ferries has built offshore since 2003 have come in $150 million under budget. And although there have been conflicts with the B.C. Ferry and Marine Workers’ Union, Hahn also points to a nine-year labour agreement. “The whole thing across the board works a hell of a lot better than it ever did,” he says.
But for all of Hahn’s free-market reforms, taxpayer-owned BC Ferries still has one hand in the public purse. This year alone, according to the transportation ministry, the corporation will receive $200 million in government support. (The total for fiscal 2010 was $178 million or 24 per cent of its $732 million in revenues.) Of that $200 million, just $92 million comes from the province in the form of the annual service fee (though northern routes do get some help above and beyond that). The rest includes a federal contribution, cash for new ferries and terminals, and a social program reimbursement for passengers such as seniors and students.
Brian Hollingshead is chair of the Southern Gulf Islands Ferry Advisory Committee, one of 12 such groups representing ferry-dependent communities. He thinks the new business model for BC Ferries is right, but he doesn’t like the fact that the province has kept its basic $92-million service fee fixed since 2003. As a result, he adds, BC Ferries’ fuel, inflationary and other costs all fall on the customer.
“The whole package isn’t that unreasonable,” Hollingshead says. “What we find to be unreasonable is the government’s insistence on an ideological basis from the get-go there’s going to be more user pay.”
Hahn counters that BC Ferries’ job is not to go out and earn huge sums of money, but rather to run the system “efficiently and effectively, reinvest and make sure it works.” He says rising fares are simply a reaction to higher fuel costs and weak ridership numbers. Hahn points out that when he started at BC Ferries in 2003, a litre of fuel cost about 64 cents and the Canadian dollar was worth US$0.68; early this March, fuel cost $1.23 a litre and the loonie was trading at US$1.03. “If I had known that ahead of time, you and I wouldn’t be talking on the phone,” he says.
In fiscal 2010, BC Ferries’ vehicle and passenger traffic increased a mere 1.5 per cent after dropping about five per cent the previous year. On the heavily subsidized Prince Rupert-Skidegate route, which costs about $360 round trip for car and driver, the number of passengers fell to 37,670 from 39,591 – a five per cent decline.
Hahn says it’s up to Victoria to decide how much it wants to support lower fares. In the meantime, BC Ferries must look for new revenue sources. Until recently, it was also legally required to seek alternative service providers for some routes as a way to lighten its financial burden. That mandate was quietly dropped last year, as the private sector has shown little interest in the opportunity.
“The [routes] you’d want to contract out the most don’t make money, so who’s going to buy them?” says Hahn, who is leaving BC Ferries in 2013, when his 10-year contract expires. “The math just doesn’t work.”
Shirley Bond, who until mid-March was B.C.’s minister of transportation and infrastructure, defends the decision to make BC Ferries a standalone company. “Our view was that you need to create an independent model that actually tries to serve British Columbians better, and certainly with no political interference,” Bond says. “We want to have an organization that maximizes the benefits for the travelling public, but also runs successfully from a fiscal imperative.”
In a 2009 report, Bond says, the comptroller general found BC Ferries to be generally well-run. “Are we facing challenges related to things like the increase in the price of fuel and looking at how you balance fares against other investments across the province? Of course we are,” Bond says. “But let’s be clear: We’re at the highest level of funding that the taxpayers have provided to BC Ferries in British Columbia’s history.” (On March 14, Bond was replaced as transportation minister by Blair Lekstrom, who has ordered a review of the proposed fare increases.) [pagebreak]
BC Ferries’ move toward quasi-private status is at odds with Premier W.A.C. Bennett’s vision for the ferry system. In the 1950s, several private companies handled ferry transportation along the coast. Among them were the B.C. division of the Washington State-based Black Ball Line and the Canadian Pacific Railway’s B.C. Coast Steamship Service. These two operators provided the only surface links between Vancouver and Victoria.
Communications consultant Gary Bannerman, a BC Ferries board member from 1988 to 1991 and co-author of the 1985 book The Ships of British Columbia: An Illustrated History of the British Columbia Ferry Corporation, says Bennett saw ferry services as part of a bigger plan. The premier was no socialist, but he realized that seizing control of key infrastructure would give B.C.’s small and geographically dispersed population some economic clout. That’s why Bennett created BC Hydro by turning British Columbia Electric Co. into a Crown corporation. It’s also why in 1960, using the opportunity of strikes by Black Ball and CP, he created what became known as BC Ferries.
At first, the corporation operated alongside its private competitors, but the Socreds bought Black Ball in 1961, and CP later bowed out. Starting with just two boats, BC Ferries swiftly embarked on an ambitious expansion led by Minister of Highways Philip Gaglardi. On its way to becoming the world’s largest fleet of vehicle ferries, “Bennett’s Navy” built 10 vessels in B.C. between 1962 and 1965. In 1985, BC Ferries took over the ferry services to smaller coastal communities from the Ministry of Transportation and Highways.
In Bannerman’s opinion, the Coastal Ferry Act of 2003 was no watershed. Because the province is its only shareholder, he points out, BC Ferries is still essentially a Crown corporation. “They love to boast about independence and arm’s length from government,” says Bannerman, who consulted to BC Ferries throughout the 1990s. “Whatever the hell they call it or how they structure it corporately or how they set up the tax relationship is just completely meaningless, because in fact it’s owned by the people of British Columbia.”
Despite their impulses to cut the money-losing routes, Bannerman says, BC Ferries and the province have kept them all going. To him, those runs are the only reason there is a BC Ferries fleet. “Anybody with the IQ above that of a doorknob could run the Lower Mainland routes,” Bannerman says. “The whole point of BC Ferries is everything else,” he adds, lamenting the effect of fare increases on the rest of the system. “It’s life and death for a lot of the communities that BC Ferries serves.”
Phillip Vannini, an associate professor in the School of Communication and Culture at Victoria’s Royal Roads University, agrees and argues that there’s a neglect of social responsibilities to B.C.’s more isolated communities. But he lays most of the blame at the political level. “The corporation itself has much less onus in all of this than the provincial Liberal government, which in 2003 said, ‘We don’t want to deal with transportation to the islands anymore.’”
A resident of Gabriola Island, Vannini has spent the past four years interviewing some 400 people up and down the coast about the role of BC Ferries in their lives. “Just about everyone has told me that the marine highways that connect islands and remote coastal communities to the rest of B.C. should be public,” says the sociology PhD, whose book Ferry Tales: An Ethnography of Mobility, Place, and Technoculture on Canada’s Wet Coast comes out this fall. One possible fix that Vannini offers would be for BC Ferries to shed certain routes and let communities run them as co-operatives. He also says it’s time to get serious about preparing the ferry service for oil scarcity.
Transportation expert Anthony Perl, director of the Urban Studies Program at SFU, says B.C.’s need for marine transportation will only grow. Locally and regionally, Perl explains, moving people by water is the least energy-intensive choice. That’s important in a world where oil isn’t getting any cheaper and carbon emissions can’t be ignored.
BC Ferries has adopted environmental measures that include low-sulphur fuel and new energy-efficient vessels. But it has the potential to become a much greener transportation option, Perl says. One major flaw is that its high-volume routes are set up to move cars rather than foot passengers. The ferry terminals have excellent road connections, but they’re poorly integrated with public transit.
Predicting that more people will seek to ride ferries without the aid of a car, Perl says the province might have to step in and provide some policy direction. Should that move alone fail to bring change, there’s always the option to take a more hands-on approach with BC Ferries, he adds. “If we wait for the market to come up with the solutions, it may be later than it should.”
As Perl and others consider BC Ferries’ future, Gary Bannerman is nostalgic. He accuses the current provincial government of failing to grasp how important the ferry service is to this province’s social and economic fabric. Bannerman recalls standing in the village of Alert Bay, off the northern tip of Vancouver Island, with the chief of the local native band. The chief said that while Lower Mainland residents fretted about whether BC Ferries would get them to their meeting in Victoria on time, for him it was the bearer of milk for his children.
“That’s what it meant to W.A.C. Bennett – it meant milk for the kids,” Bannerman says. “It meant that this wild coast had some umbilical cord tying it together, that there was a continuity of transportation on the water that went as far as Alaska.”
It’s a vision that has captivated politicians and engineers for decades: a fixed link between the Lower Mainland and Vancouver Island. But the B.C. Ministry of Transportation and Infrastructure hasn’t revisited the idea since 2003, when it published a report weighing the feasibility of such a connection.
Drawing on preliminary studies, the report lists four ways to span the blustery Strait of Georgia: a floating pontoon bridge, a series of cable-stayed bridges on anchored piers, a bored tunnel and a submerged floating tunnel. Aside from the fact that the latter structure doesn’t exist anywhere, geography is a major hurdle for all of these projects. “There would be no crossing like it in the world, and the costs are obviously extremely high given the significant technical challenges involved,” says Dave Duncan, an assistant deputy minister with the Transportation Ministry.
Among those challenges is the width of the crossing – as much as 26 kilometres – in a region prone to earthquakes. The bridge-and-tunnel crowd would have to contend with water up to 365 metres deep and soft sediment as thick as 450 metres on the ocean floor. Also, the strait is a busy shipping lane where waves hit seven metres and winds can reach 180 kilometres per hour.
As a result, 2003 cost estimates were steep: from $12 billion for a bridge to between $40 billion and $50 billion for a tunnel. In its report, the ministry says the province would need a private partner to share the expense. Just to break even on a $12-billion bridge, the 2003 estimated tariff for a one-way vehicle trip was $260. Prince Edward Island’s 13-kilometre-long Confederation Bridge, which opened in 1997, cost about $1 billion. Privately built and operated, it charges a round-trip car toll of $43.
Peter Buckland, a principal at North Vancouver bridge engineering firm Buckland & Taylor, isn’t optimistic about a fixed link. It doesn’t help that BC Ferries’ routes to Swartz Bay and Nanaimo turn a profit. “The bridge is expensive and there’s no money to be saved by the government, and you’d have to pay a pretty colossal fare,” Buckland says. “So I can’t see it happening in the short term.”
Barring a huge increase in the population of Vancouver Island, Buckland thinks a bridge or tunnel will stay on the drawing board. “If I sound negative, it’s only because I’m disappointed,” he says. “It would be a real showpiece.”