Market sounding could be part of privatization process

What exactly is a market sounding? Based on government’s news release, you might assume it is just a fancy term for public consultation. In fact, it’s a tool used in the Public-Private Partnership (P3) process.

According to the World Bank:

The market-sounding process provides a government with an opportunity to cross-check its thinking about a project with that of private-sector specialists including contractors, lenders, and equity investors. It gives the private sector an essential opportunity to deliver feedback on how the packaging and scope of the project could be developed to ensure private sector participation and improve competition. It may also give useful insight into the likely level of market interest, ensuring a better fit between the outcomes required by the public sector and those that the private sector can deliver.

So the market sounding process is not about what the people of Newfoundland and Labrador need – it’s about what the private sector needs to make decisions about buying our ferry service.

oGovernment assuming many risks for private operators

So while the private sector may operate 7 ferry routes, it is still taxpayers who pay most of the bills. And if the contract between the provincial government and Labrador Marine Inc. (which operates the Strait of Belle Isle ferry) is anything to go by, taxpayers also assume many of the risks since government protects Labrador Marine Inc. against inflation, rising fuel costs, and crossings cancelled because of bad weather. 

The private sector couldn’t operate ferries in Newfoundland and Labrador without those subsidies because government also sets fares and establishes crossing schedules.

In effect, the only sense in which there are privatized ferry routes in Newfoundland & Labrador is that there are private-sector ferry operators who generate profit from 7 ferry routes. Without government subsidies, none of these private operators could stay in business without giant fare increases and massive cuts to services.

What has happened since BC ‘privatized’ its ferry system?

• Six years after privatization, BC Ferries Inc. had taken on $1.2 billion in long-term debt.
• In response to cuts to northern routes, a report concluded the cuts endangered the northern BC economy and that the economic benefits of the service far outweighed its cost.
• And in 2021, BC Ferries couldn’t find mariners to fill vacancies because of a global shortage, resulting in the cancellation of some crossings.

Report for Alaska state government concludes privatization of ferry system ‘not feasible’

The situation isn’t unique to Canada. In 2019, the State of Alaska faced massive cuts to public funding of its public ferry system. A government-funded study of privatizing its ferry system looked at 11 different options. The study concluded privatization wasn’t feasible as long as government continued to make decisions about minimum levels of service. According to the study, “The only buyer that might be willing to accept the assets would resell them … [for scrap, etc.] instead of providing ferry services.”

Private sector ferries also heavily subsidized

The provincial government pays to operate the public-sector ferries, and it heavily subsidizes the private-sector ferries. Government receives the revenue for fares from both the public- and private-sector ferries. But with the exception of the privately operated Strait of Belle Isle ferry, which last year received an 85.7% subsidy, all ferries – both public and private – received a subsidy in excess of 90.0%.

Who owns the ferries and employs the crew?

Ferry vessels operated by the public sector are owned by the provincial government. Their crews are employees of the provincial government. The government is responsible for all associated costs (e.g., fuel, maintenance, insurance, refitting) and keeps all revenue generated by the sale of tickets.

Private-sector operators own the vessels on the ferry services they operate.  Crews on those vessels are employees of the private-sector operator. The Government of Newfoundland & Labrador has a contract with the private-sector operator that sets out things like the schedule and ticket prices. The private-sector operator is responsible for providing a vessel that meets the government’s requirements. It is responsible for vessel maintenance, insurance, refitting, providing and operating the booking system, providing food service (where appropriate), and so on. The government receives the revenue for ticket sales, and the private-sector operator retains the revenue from food service (if any). The government pays the private-sector contractor a vessel (at-sea) daily rate and a shore-based daily rate. The government also covers the cost of fuel. 

Many intra-provincial ferries in the province operate on a reduced schedule during the winter, with Labrador ferries (aside from the ferry on the Straits of Belle Isle) ceasing operation in the winter.

Both public- and private-sector ferries lose a lot of money

The table below shows the costs associated with operating Newfoundland & Labrador’s intra-provincial ferry service in fiscal year 2020-21. Even a cursory glance will show that revenue from ticket sales came nowhere near meeting the cost of operating either of the ferries. Ferries operated by the private sector – just like those operated by the government – can only function because of substantial subsidies from the provincial government.

Should the private sector be forced to cover the cost of operation through ticket sales, it wouldn’t survive. Ferry users are unable to pay anything near to the amount required to make the intra-provincial ferries self-supporting – let alone being able to pay enough for a private-sector ferry operator to generate a profit.

Government sets the fares because it knows the ferries are a public service. In 2020-21, all 5 of the ferry services operated by the public-sector received subsidies totaling more than 90% – but so did 6 out of the 7 ferry services operated by the private-sector. The exception, St. Barbe – Blanc Sablon, received a 85.7% subsidy.

Labrador Marine received 85.7% subsidy from provincial government

In the first year of the contract, Labrador Marine Inc. carried 94,100 passengers and 45,200 vehicles. The cost of operating the service for that year was $15,218,188. Labrador Marine collected $3,118,732 through the sale of tickets, which it remitted to the government. Thus the service lost $12,088,456. The government in effect provided Labrador Marine Inc. with a 85.7% subsidy for providing the ferry service across the Strait of Belle Isle. And according to the contract, Labrador Marine Inc. gets to keep the revenue from food services offered on board. No wonder the vessel’s signage identifies it is part of the provincial government’s ferry service – government (taxpayers) are the single largest source of revenue for Labrador Marine.

Highlights of government’s contract with Labrador Marine

You can read the portion of the contract released in response to a request for access to information here, but these are the highlights:

What happened when BC privatized its coastal ferry service?

Up until 1977, British Columbia’s coastal ferry service was the responsibility of the province’s Department of Highways. At that time BC Ferries, a crown corporation, was created to assume control.

According to the report:

Since 2003 when the Coastal Ferry Act was passed and BC Ferry Services Inc. was incorporated as a regulated company independent of the provincial government, a series of service cuts, sky rocketing fare increases, and issues like executive compensation and building vessels outside Canada have been the topic of public debate.

In the three years leading up to the report, demand increased – and BC Ferries generated healthy net revenues (not to be confused with profits). Overloads, sailing waits, and capacity constraints became a concern. And yet, BC Ferries continued to require an annual subsidy from the BC government that hovered around $200 million.

The federal government also provides BC Ferries with an annual inflation-adjusted grant for the west coast ferry service of about $30 million per year. It has recently started to provide grants for capital projects.

According to the report, many people felt the answer to these various challenges was to operate ferries as a direct provincial government service – a view the provincial government did not share.

BC Budget 2018 recognized BC Ferries as part of the provincial highway system and provided funding to reduce fares on minor routes by 15%, freeze fares on major routes, and restore the 100% discount for seniors from Monday to Thursday. This fare affordability initiative was cost-shared with BC Ferries.

Since most of the report was completed before the release of BC Ferries’ 2017-18 Annual Financial Statements, its analysis is based on 2016-17 data. But according to the author, the trends for 2017-18 were consistent with the previous few years – an increase in vehicle and passenger traffic as well as strong net earnings. The company generated consolidated net earnings of $59.9 million in 2017-18 after a year of record vehicle traffic and the highest levels of passenger traffic in 20 years. And yet, they still required a massive subsidy from the BC government.

The report’s examination of historical trends showed that fares and provincial government funding had risen consistently since 2003. Fares increased at a much higher rate than the provincial Consumer Price Index for most of the preceding 15 years.

Annual provincial government funding for BC Ferries now exceeds $200 million per year. These funds are provided under the terms of the Coastal Ferry Services Contract, which stipulates the particular routes and services the company must provide. Provincial funding takes the form of a service fee as well as funding for specific social programs such as medical transport.

The report concluded that a publicly funded, legislated, and regulated coastal ferry service is in the public interest because it:

• connects and supports communities.
• brings families together
• serves diverse passenger needs
• helps build and strengthen the economy
• moves goods reliably
• supports numerous economic sectors such as agriculture and tourism

The Coastal Ferry Act also gives the Commissioner a mandate to encourage BC Ferries to take a ‘commercial approach’ to delivery of ferry services. As the report pointed out, a commercial approach has the potential to be at odds with the primary role of the regulator, which is to balance the interests of ferry users and taxpayers with the financial sustainability of the ferry operator.

Some other recommendations from the report:

• Establish an independent advisory council to provide feedback about the ferry system as a whole (there are already ways to provide feedback about local ferry issues)
• Improve BC Ferries’ engagement with front-line workers regarding new vessel design and operational issues
• End the practice of providing a special pensionable salary to the CEO after retirement
• Permit local governments to make optional contributions to local ferry needs on a voluntary basis

Just one year later, the Capital Daily reported that “What really drove fares into overdrive, however, was the corporation’s semi-privatization in 2002.” They went on to provide the following example: Since the Crown Corporation was dissolved in 2003, taking a car and driver to Tsawwassen has risen the equivalent of $14.